As filed with the Securities and Exchange Commission on January 12, 2001
Registration 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
WESTCON GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
DELAWARE 5045 13-3446153
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
520 White Plains Road
Tarrytown, NY 10591
(914) 829-7000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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PHILIP RAFFIANI
Secretary
Westcon Group, Inc.
520 White Plains Road
Tarrytown, NY 10591
(914) 829-7000
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(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
JEFFREY SMALL MICHAEL J. SCHIAVONE
Davis Polk & Wardwell Shearman & Sterling
450 Lexington Avenue 599 Lexington Avenue
New York, New York 10017 New York, New York 10022
(212) 450-4000 (212) 848-4000
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, please 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
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CALCULATION OF REGISTRATION FEE
==========================================================================================================
Title of Each Class Proposed Maximum Aggregate Amount of
of Securities to be Registered Offering Price (1) Registration Fee
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Common Stock, par value $0.01 per share........ $100,000,000 $25,000
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS (Subject to Completion) January 12, 2001
SHARES
Westcon Group, Inc.
COMMON STOCK
-----------------------
This is our initial public offering of shares of our common stock. No public
market currently exists for any shares of our common stock. We currently
estimate that the initial public offering price of our common stock will be
between $ and $ .
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We will apply to have our common stock listed for quotation on the Nasdaq
National Market under the symbol "WCON".
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Before buying any shares you should read the discussion of material risks of
investing in our common stock in "Risk Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
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Per Share Total
--------- -----
Public offering price................................. $ $
Underwriting discounts and commissions................ $ $
Proceeds, before expenses, to Westcon Group, Inc...... $ $
The underwriters may also purchase up to shares of common stock from us at the
public offering price, less the underwriting discounts and commissions, to
cover over-allotments, if any.
Delivery of the shares will be made on or about , 2001.
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UBS Warburg LLC
Bear, Stearns & Co. Inc.
CIBC World Markets
Robert W. Baird & Co.
The date of this prospectus is , 2001
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TABLE OF CONTENTS
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Page
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Prospectus Summary...........................................................1
Risk Factors.................................................................4
Special Note Regarding Forward-Looking
Statements............................................................10
Use of Proceeds.............................................................11
Dividend Policy.............................................................11
Capitalization..............................................................12
Dilution....................................................................13
Selected Consolidated Financial Data........................................14
Unaudited Pro Forma Consolidated Statements of Income.......................16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................20
Business....................................................................28
Management..................................................................38
Stock Option Plans..........................................................44
Related Party Transactions..................................................46
Principal Stockholders......................................................48
Description of Capital Stock................................................50
Shares Eligible for Future Sale.............................................53
Certain U.S. Federal Income Tax Considerations..............................54
Underwriting................................................................56
Legal Matters...............................................................59
Experts.....................................................................59
Change in Accountants.......................................................59
Additional Information......................................................59
Index to Financial Statements..............................................F-1
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In this prospectus, "Westcon Group," "we," "us" and "our" refer to Westcon
Group, Inc. and its subsidiaries. You should rely only on the information
contained in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We are offering
to sell, and seeking offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
common stock.
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PROSPECTUS SUMMARY
This is only a summary and does not contain all of the information that
may be important to you. You should read the entire prospectus, including the
risk factors section and the financial statements and related notes, before
making an investment decision.
WESTCON GROUP, INC.
We are a significant sales channel for Cisco Systems, a dominant vendor in
the communications and networking equipment market. We are also an important
sales channel for Nortel Networks, Avaya Communication and other leading
vendors of networking technology. We sell exclusively to reseller customers
throughout the U.S. and in selected international markets. We focus on our
vendors' technologically advanced products and provide our customers with the
necessary technical expertise, sales support and services required to sell
these products. We have developed significant technical competencies and a wide
array of support services, which allow us to complement or act as an extension
of our vendors' sales forces. We currently have a staff of more than 400
salespersons supported by more than 100 certified technical personnel. We
provide each of Cisco, Nortel and Avaya with a dedicated sales team by
marketing products and services through three branded divisions, each focused
on the products of one of these vendors.
In order to concentrate on their business objectives and meet growing
demand, Cisco and other leading vendors are increasingly directing their sales
through third party or indirect sales channels. According to a Gartner Group
report of June 2000, more than 75% of Cisco's revenues are generated through
indirect sales channels. Indirect channels allow these vendors to outsource
sales and support functions, especially those that are necessary to sell
complex products. As these vendors sell directly to only a limited number of
customers, many customers, including some of significant size, rely on us and
other distributors as authorized sources of our vendors' products. In the nine
months ended November 30, 2000, we sold $1.1 billion of Cisco products.
We target sales opportunities that require a high degree of specialization
and customization. Our customers are value-added resellers, systems integrators
and service providers that resell networking products and solutions to business
and government. They generally require additional expertise and/or resources to
sell highly complex communications products and solutions. Our sales and
technical personnel assist our customers with network design and consulting,
pre-sales and post-sales support, training, security consulting, and staging
and configuration services. These value-added sales and support services enable
our customers to design and provide solutions to end-user needs. These
solutions include the building of communications networks that enable
applications such as Internet access, e-commerce, remote access, virtual
private networks, video streaming and unified messaging. Our services enable
our customers to expand their geographic presence, enter new markets and offer
a more comprehensive set of networking services.
Our business has continuously evolved in response to changing demand in
the communications market. We were originally established in 1985 to develop
services for the local area network market and have evolved into a sales
channel for leading technology vendors in the communications and networking
equipment market. Prior to September 1998, we operated primarily as a sales
channel for Nortel. Through a series of business combinations, including our
acquisition of Comstor Corporation in August 1999, we became a substantial
sales channel for Cisco, which has allowed us to benefit from strong demand for
Cisco products. By acquiring Inacom Communications, Inc. and CCA Technologies,
Inc. in July and September 2000, respectively, we also became the leading sales
channel for Avaya (formerly the enterprise businesses of Lucent Technologies)
products.
Our principal executive office is located at 520 White Plains Road,
Tarrytown, New York 10591, and our telephone number is (914) 829-7000. Our
website address is www.westcongroup.com. We do not intend the information
contained in our website to be part of this prospectus.
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RELATIONSHIP WITH DATATEC LIMITED
Since August 1998, Datatec Limited, a networking technology and services
company incorporated in South Africa, has been our majority stockholder. All of
Datatec's worldwide sales of communications and networking equipment products
to resellers are conducted through us, except in South Africa. As of January 5,
2001, Datatec owned 85.2% of our outstanding common stock. After the completion
of this offering, Datatec will own approximately % of our outstanding common
stock. Datatec has entered into an agreement with us not to engage, for a
five-year period, in businesses that compete with ours, except in South Africa
and certain other African countries.
THE OFFERING
Common stock offered.................... shares
Common stock to be outstanding after
this offering......................... shares
Use of proceeds......................... We intend to use the net proceeds to
repay a portion of our indebtedness,
and for working capital and general
corporate purposes.
Proposed Nasdaq National Market symbol.. WCON
The common stock to be outstanding after this offering is based on
shares outstanding on , 2001. This number does not include 3,500,000
shares reserved for issuance under our stock option plan.
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On August 1, 1998, we effected a 2.227-for-one stock split of shares of
our common stock.
On January 10, 2001, we were reincorporated in Delaware by a merger of
Westcon Group, Inc., a New York corporation, with and into its wholly owned
Delaware subsidiary, Westcon Group (Delaware), Inc., the surviving Delaware
corporation, which changed its name to Westcon Group, Inc. upon the
effectiveness of the merger. Pursuant to the merger, the New York corporation
ceased to exist as a separate corporation and each outstanding share of its
Class A, Class B and Class C common stock was converted into 14.795 shares of
the surviving Delaware corporation. In addition, the share of common stock of
Westcon Group (Delaware), Inc. that had been outstanding prior to the merger
was cancelled.
Unless otherwise indicated, all information in this prospectus reflects
the stock split and the reincorporation, and assumes that the underwriters do
not exercise their over-allotment option.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The table below sets forth summary consolidated financial data for the
periods indicated. During Fiscal 2000, we changed our fiscal year-end from
March 31 to the last day of February. Accordingly, the following consolidated
income statement data compare our results of operations for the eleven months
ended February 29, 2000 to our results of operations for the twelve months
ended March 31, 1996, 1997, 1998 and 1999. It is important that you read the
information below together with the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the related notes included elsewhere in
this prospectus.
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Eleven
Twelve months ended months ended Nine months ended
-------------------------------------------------- ------------ --------------------------
March 31, March 31, March 31, March 31, February 29, November 30, November 30,
1996 1997 1998 1999 2000 1999 2000
---------- ----------- ----------- ----------- ----------- ----------- ------------
Consolidated Income
Statement Data
------------------- (in thousands, except for share data)
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Sales...................... $ 205,173 $ 258,080 $ 334,411 $ 587,427 $ 1,168,244 $ 934,432 $ 1,604,424
Gross profit............... 18,113 27,645 43,793 100,984 145,428 115,460 174,503
Income from operations..... 8,681 8,274 14,005 45,780 54,002 48,458 74,047
Net income................. 4,546 3,175 6,531 21,451 21,370 20,991 51,963
Net income per basic and
diluted share........... $ 0.15 $ 0.11 $ 0.22 $ 0.58 $0.47 $ 0.47 $ 1.12
Weighted average number
of basic and diluted
shares outstanding...... 29,663,975 29,663,975 29,663,975 36,994,132 45,213,357 44,350,655 46,448,296
November 30, 2000
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Actual As Adjusted
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(in thousands)
Consolidated Balance Sheet Data
-------------------------------
Working capital................................................................ $156,206 $
Total assets................................................................... 936,346
Total long-term debt, including current portion............................... 241,295
Due to Datatec................................................................. 29,232
Total stockholders' equity..................................................... 318,576
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(1) As adjusted amounts give effect to our issuance and sale of shares of
common stock in the offering at an assumed initial public offering price
of $ per share, the midpoint of the range set forth on the cover page of
this prospectus, and the application of the estimated net proceeds of the
offering, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, as set forth under "Use of
Proceeds."
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our common stock.
Risks Related to Our Business
Because we depend on Cisco Systems and a limited number of other key vendors
for products, the loss of a relationship with any of them, or the significant
reduction in demand for, or supply of, their products, would seriously harm our
business, financial condition and results of operations.
We derive a substantial portion of our revenues from the sale of products
from Cisco Systems, Nortel Networks and Avaya Communication, which collectively
accounted for 83.4% of our consolidated sales in the nine months ended November
30, 2000. We are especially dependent on Cisco, whose products contributed
67.3% of our consolidated sales in the same period. Our purchase agreements
with these vendors are generally subject to annual renewal and permit either
party to terminate without cause upon 30 to 90 days notice, depending on the
vendor. If Cisco or any other key vendor terminates or fails to renew its
agreement with us, our business, financial condition and results of operations
would be materially adversely affected. We would have difficulty finding a
comparable source of revenue to replace the products of a lost vendor. Even if
we could establish one or more new vendor relationships as alternative sources
of revenue, our operations would likely be seriously disrupted as we would
devote substantial resources to the development of new product lines, including
complementary products, modify our value-added sales and support services, and
hire and train staff to develop expertise in the technical and marketing
aspects of the products of these new vendors. This could prolong the material
adverse effect on our business, financial condition and results of operations.
Factors adversely affecting the demand for the products of Cisco and our
other key vendors, such as competition, technological change, failure of a
vendor to manufacture enough of its products to meet customer demand, or the
failure of any of these vendors to introduce new and enhanced products on a
timely basis, would seriously harm our business.
We expect to continue to be subject to these risks as we continue to rely
on a limited number of vendors to supply our products, although our key vendors
may change over time. In addition, our dependence on Cisco is likely to
increase as we expect Cisco's products to contribute an increasing proportion
of our consolidated sales, at least until the end of Fiscal 2002.
If we do not manage our inventory carefully, a decline in the value of our
inventory may lower our gross profit margins and have a material adverse effect
on our financial performance, especially since our ability to return products
to vendors for credit and our protection from vendor price reductions is
limited.
The value of our inventory may be adversely affected by changes in
technology affecting the usefulness or desirability of the products in our
inventory. The reserves we establish for potential losses due to obsolete
inventory may prove to be inadequate. Significant declines in inventory value
in excess of established inventory reserves would have a material adverse
effect on our financial performance.
Our purchase agreements with vendors generally provide protection from the
loss of value of inventory following vendors' price reductions only if we
comply with certain conditions. Under these agreements, our ability to return
products to vendors for credit or exchange is generally limited to a certain
percentage of the value of products shipped to us by the vendor during a
specified period, and this right can be exercised only a limited number of
times a year. If we do not timely make claims, or are otherwise unable to
manage our inventory in order to comply with the conditions necessary to take
advantage of these price reduction and stock rotation opportunities, our gross
profit margins may be adversely affected. Our purchase agreements with Cisco
and Nortel also do not require these vendors to repurchase their products from
us if they terminate the agreements.
If we experience problems in the implementation or operation of COMPASS, our
central information system, or our other information systems, our business and
operating results could be seriously harmed.
We depend on several information systems to manage our operations,
particularly our enterprise resource planning system known as COMPASS, which
currently supports approximately 25% of our consolidated sales. We are in the
process of implementing COMPASS across our operations. We expect that COMPASS
will support several of our key operations functions, including inventory
management, order processing, shipping, receiving and accounting. Any failure
or significant disruption in COMPASS or other information systems could prevent
us from taking customer orders or shipping products and could prevent customers
from accessing our price and product availability information. This could
undermine our customers' confidence in the reliability of our services and
place us at a severe disadvantage relative to our competitors in determining
appropriate product pricing or the adequacy of
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inventory levels or in reacting to rapidly changing market conditions, which
could have a material adverse effect on our business, financial condition, or
results of operations. We may experience difficulties in the implementation of
COMPASS. Such difficulties may cause our operating expenses to increase and/or
cause the implementation to be delayed, which could harm our business and
operating results. Also, if we fail to continuously expand and improve COMPASS
and our other information systems in order to adapt to changing market
conditions or the geographic expansion of our operations, our business could be
seriously harmed.
We may be unable to attract, train and retain qualified personnel, or lose
key personnel, which may harm our business and prospects of future growth.
Our ability to achieve revenue growth in the future will depend in large
part on our success in recruiting and training a sufficient number of qualified
personnel. There is a shortage in the supply of skilled sales and technical
personnel, especially those with the expertise required to sell the products
and services we offer. As a result, competition for these people is intense,
and the industry turnover rate for them is high. We are currently investing and
plan to continue to invest significant resources to increase the number of our
sales and technical personnel. We plan to add approximately 140 new sales
persons and 35 new technical personnel during Fiscal 2002, but we may not
achieve our goal. Moreover, even if we are able to increase the number of our
sales and technical personnel, the resources required to attract, train and
retain such employees may adversely affect our operating profit margins. In
addition, as we hire new sales personnel, we anticipate a delay before they
become productive, which could result in fluctuations in our operating results.
Our future success also depends on the continued employment of our senior
management team. Their personal relationships with our vendors and reseller
customers are particularly important to our business. Our senior management
team and key technical personnel would be very difficult to replace and the
loss of any of these key employees could seriously harm our business.
Our planned expansion of our international operations may be difficult and
costly.
We intend to enter new geographic markets. We will need to devote
significant management and financial resources to our international expansion.
In particular, we will have to attract experienced management, technical,
sales, marketing and support personnel with local expertise for our
international offices, which we may be unable to do. International operations
may be subject to a variety of additional risks that we do not have to address
to the same degree in our U.S. operations, including:
o Longer payment cycles;
o Protectionist laws and business practices that favor local
competitors;
o Diverse and changing regulatory requirements;
o Barriers to the repatriation of capital or profits;
o Restrictions on the import and export of certain technologies;
o Potentially adverse tax consequences; and
o Increases or other changes in tariffs, duties, price controls or
other restrictions on foreign currencies.
Acquisitions could be difficult to integrate, disrupt our business, dilute
stockholder value and adversely affect our operating results.
Following the offering, we intend to continue to pursue strategic
acquisitions that either complement or expand our existing business. These
acquisitions may be material in size and scope. If we are unable to make
acquisitions on attractive terms, we may not be able to achieve our planned
growth. Also, our existing stockholders could be diluted if we finance the
acquisitions by issuing equity securities.
Our recent acquisitions are still being integrated into our operations.
The integration of these entities, as well as any other future acquired entity,
complicates our management tasks, and could adversely affect our operating
results in a number of ways, including by:
o requiring us to assimilate widely dispersed operations that may have
different and unfamiliar corporate cultures;
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o requiring integration of the acquired companies' sales and marketing
organization, billing, accounting and management information systems,
and operating hardware and software, with our own; and
o diverting management's attention towards assimilation of the
operations and personnel of the acquired companies and away from our
existing business operations.
If we do not successfully integrate these businesses or any entity
acquired by us in the future, our business, results of operations and financial
condition could be materially adversely affected.
Our quarterly operating results may fluctuate significantly and may cause
our stock price to fluctuate.
Our quarterly operating results have varied significantly in the past and
may continue to do so in the future. It is possible that in some future quarter
or quarters our operating results will be below the expectations of public
market analysts or investors. In such an event, the market price of our common
stock may decline significantly. A number of factors independent of our control
are likely to cause our quarterly results to vary, including:
o shifts in market share among our primary vendors;
o the introduction of new technologies and product offerings;
o variations in the availability of products;
o variations in the demand for our vendors' products and services;
o the loss or consolidation of a significant vendor;
o changes in pricing policies by our competitors; and
o effects of acquisitions.
We forecast the volume and timing of orders for our operational planning,
but these forecasts are based on many factors and subjective judgments, and we
cannot assure you of their accuracy. We have hired and trained a large number
of sales and technical personnel based on our forecast of future revenues. As a
result, a significant portion of our personnel expenses, which represent a
significant proportion of our overall expenses, is fixed in the short term.
Therefore, failure to generate revenue according to our expectations in a
particular quarter could have a material adverse effect on our results of
operations for that quarter and for future periods.
We are exposed to fluctuations in the exchange rates of foreign currency,
which may harm our financial condition and results of operations.
We conduct business in countries outside the U.S., which exposes us to
fluctuations in foreign currency exchange rates. Sales in foreign locations are
denominated in the local currency, while a substantial portion of our purchases
of foreign inventory is denominated in U.S. dollars. To the extent that we are
unable to enter into short-term forward currency contracts on acceptable terms
that allow us to hedge our risks associated with currency fluctuations, we
expect that the carrying value of our assets, stated in U.S. dollars, will
fluctuate with changes in foreign currency exchange rates, resulting in
unrealized gains or losses.
We may not be able to secure additional capital to finance our accounts
receivable and inventory and to allow us to grow.
Our business requires substantial capital to finance accounts receivable
and product inventory. We have financed our growth and cash needs through
income from operations, borrowings under our credit agreement and additional
inventory purchase financing arrangements, and a combination of borrowings and
equity contributions from Datatec. In order to continue our expansion, we will
need additional financing, including debt financing, which may not be available
on terms acceptable to us, or at all. Following completion of the offering,
substantial amounts will remain outstanding under our credit agreement, the
terms of which may impede our ability to obtain additional financing. If
sufficient funds are not available, or are not available on acceptable terms,
our ability to fund our expansion, take advantage of acquisition opportunities
or maintain adequate levels of inventory would be significantly limited, and
our business would be adversely affected.
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The restrictive terms imposed by our indebtedness may prevent us from
achieving some of our business objectives and any failure to meet these terms
could lead to accelerated payments which we might not be able to make.
Our credit arrangements contain various covenants that limit our ability
to, among other things:
o borrow additional money and place liens on our assets;
o make investments, including the purchase of stock; and
o sell or purchase assets or merge with or into other companies.
Our business depends on independent shipping companies to perform various
logistical functions, and their services may be disrupted by circumstances
beyond our control.
We rely on arrangements with independent shipping companies for the
delivery of our products. Vendors ship products to us and we ship them to our
reseller customers or end-users using various independent shipping companies,
such as United Parcel Services and FedEx. The failure or inability of one or
more of these shipping companies to deliver products from vendors to us or from
us to our reseller customers or their end-user customers could have a material
adverse effect on our business, financial condition, or results of operations.
For instance, a work stoppage or slowdown at one or more of these independent
shipping companies could materially impair that shipping company's ability to
perform the services that we require. For example, the United Parcel Services
work stoppage in 1997 required us to make alternative shipping arrangements and
temporarily had an adverse effect on our results of operations. We cannot
assure you that the services of any of these independent shipping companies
will continue to be available to us.
Risks Relating to Our Industry
Competition from larger, better capitalized or emerging competitors
offering products and services similar to ours could result in price
reductions, reduced gross margins and loss of market share.
Competition in the market for distribution of communications and
networking equipment products and services in the U.S. and the foreign markets
in which we operate is intense, based primarily on:
o ability to tailor solutions to specific customer needs;
o service, support and training;
o vendor selection and product availability;
o ability to arrange for financial assistance;
o price; and
o speed of delivery.
We compete with a number of national and international value-added
distributors, including Azlan Group plc, Landis Group N.V. and ScanSource Inc.
(through its division Catalyst Telecommunications). We also compete, both in
the U.S. and abroad, with certain broadline distributors, such as Ingram Micro
and Tech Data, that are authorized to sell products that are the same as or
similar to the products we sell. In addition, we face competition from direct
sales by our vendors who offer certain resellers prices that are lower than the
prices they offer to us. Many of our current competitors have longer operating
histories and significantly greater financial resources than we do and thus may
be able to respond more quickly to new or changing opportunities and customer
requirements. In recent periods, our gross profit margins have narrowed, partly
as a result of pricing pressure from larger competitors that are able to
achieve greater economies of scale than we can, and market forces that seek to
eliminate our role as a sales channel by having vendors sell directly to end
users. We expect this pressure to continue.
Telecommunications carriers may decrease their level of capital spending for
an extended period of time, which could reduce the demand for the products and
services that we provide.
The growth in the market for communications products and services that we
provide depends upon the continued expansion of infrastructure being built by
telecommunications companies at a sufficient rate to support the growing demand
for network capacity. We cannot assure you that telecommunications companies
will continue to
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invest in the building of infrastructure at the same rate as in the past. If
these telecommunications companies decrease their rate of construction of
infrastructure for an extended period of time, the market for communications
products and services could grow more slowly than we anticipate, our revenues
could be lower than we anticipate and our operating results could be materially
adversely affected.
Risks Related to Our Offering and Capital Structure
Our stock price may be volatile because our shares have not been publicly
traded before this offering.
Prior to this offering, you could not buy or sell our common stock
publicly. Accordingly, we cannot assure you that an active public trading
market for our common stock will develop or be sustained after this offering.
The market price after this offering may vary significantly from the initial
offering price in response to the risk factors described in this section and to
the following factors, some of which are beyond our control:
o changes in financial estimates or investment recommendations by
securities analysts relating to our common stock;
o changes in market valuations of our competitors or communications and
networking businesses in general;
o announcements by Cisco, Nortel, Avaya or another key vendor that
affect the market price of shares of their common stock.
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and
o fluctuations in the stock market price and volume of traded shares
generally, especially fluctuations in the traditionally volatile
technology sector.
As a new investor, you will experience immediate and substantial dilution
in the value of the common stock.
The initial public offering price of our common stock will be
substantially higher than the net tangible book value per share of the
outstanding common stock. As a result, investors purchasing common stock in
this offering will incur immediate and substantial dilution in net tangible
book value of $ per share. See "Dilution".
We have substantial discretion as to how to spend the proceeds from this
offering.
Our management has broad discretion as to how to spend a substantial
portion of the proceeds from this offering and may spend these proceeds in ways
with which our stockholders may not agree. We cannot predict that the
investment of these proceeds will yield a favorable or any return.
Datatec, our controlling stockholder, may have interests that are adverse to
yours.
Upon completion of this offering, Datatec will own approximately % of our
outstanding shares of common stock. Datatec will control the outcome of actions
requiring the approval of our stockholders. Datatec's interests may conflict
with the interests of other holders of our common stock.
We have various mechanisms in place that may discourage takeover attempts,
even if they are in the best interests of Westcon Group and its stockholders.
Voting control by Datatec and certain provisions of our certificate of
incorporation and bylaws may discourage, delay or prevent a change in control
or changes in the management of Westcon Group that a stockholder may consider
favorable. Our charter and bylaws include provisions:
o authorizing the issuance of "blank check" preferred stock;
o prohibiting cumulative voting in the election of directors;
o limiting the ability to call special meetings of stockholders;
o prohibiting stockholder action by written consent; and
o establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted
upon by stockholders.
8
<PAGE>
Some provisions of Delaware law may also discourage, delay or prevent a
change in control of Westcon Group. See "Description of Capital
Stock--Anti-Takeover Effects of Provisions of Delaware Law, Our Certificate of
Incorporation and Bylaws" on page for more detailed information on these
provisions. If a change in control or a change in management is delayed or
prevented, the market price of our common stock could suffer or holders may not
receive a change in control premium over the then-current market price of our
common stock.
Substantial future sales of our common stock in the public market could
cause the market price of our common stock to fall.
Sales of a substantial number of shares of common stock after this
offering, including sales by Datatec, could adversely affect the market price
of the common stock and could impair our ability to raise capital through the
sale of additional equity securities. For a description of the shares of our
common stock that are available for future sale, see "Shares Eligible for
Future Sale."
9
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and in other sections of this prospectus
that are forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as "may," "might," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue," the negative of these terms and other comparable
terminology. These forward- looking statements, which are subject to risks,
uncertainties and assumptions about us, may include projections of our future
financial performance, based on our growth strategies and anticipated trends in
our business. These statements are only predictions based on our current
expectations and projections about future events. There are important factors
that could cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or implied by the forward- looking
statements. You should specifically consider the numerous risks outlined under
"Risk Factors."
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, level of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy or completeness of any of these
forward-looking statements. We are under no duty to update any of these
forward-looking statements after the date of this prospectus to conform our
prior statements to actual results or revised expectations.
10
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of common
stock we are offering will be approximately $ , assuming an initial public
offering price of $ per share, the midpoint of the range set forth on the
cover page of this prospectus, and after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
Of the net proceeds, we intend to use $75 million to repay amounts
outstanding under our acquisition loan facility and approximately $ to repay
a portion of amounts outstanding under loans from Datatec. Interest is payable
on amounts outstanding under the acquisition loan facility at the prime rate
plus 0.575%, or LIBOR plus 3.55%, per annum, at our monthly option. A principal
amount of $50 million is due on April 30, 2001 and a principal amount of $25
million is due on December 31, 2001, under the acquisition loan facility.
Interest is payable on amounts outstanding under the Datatec loans at the rate
of 6.0% per annum. We intend to use the remainder of the net proceeds for
working capital and general corporate purposes including expansion of our sales
force, expansion of our value-added sales and support services, expansion of
our operations outside the U.S., and funding acquisitions of businesses
complementary to ours. This offering will create a public market for our common
stock which we expect will facilitate our future access to the public markets
and enhance our ability to use stock as consideration for acquisitions. We are
not currently in negotiations regarding any acquisition and no portion of the
proceeds has been allocated for any acquisition.
Pending these uses, we intend to either invest the remainder of the net
proceeds of this offering in short-term, interest-bearing, investment grade
securities, or repay a portion of amounts outstanding under our revolving
credit facility. Interest is payable on amounts outstanding under our revolving
credit facility at the prime rate minus 0.50%, or LIBOR plus 2.50%, per annum,
at our monthly option. The revolving credit facility expires in September 2003
and we do not intend to voluntarily terminate the revolving facility prior to
that date.
DIVIDEND POLICY
We intend to retain our future earnings to finance the growth and
development of our business and therefore do not anticipate declaring or paying
cash dividends on our common stock for the foreseeable future. Any future
determination to declare or pay dividends will be at the discretion of our
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, and such other factors as our board of
directors deems relevant. In addition, our revolving credit facility places
certain restrictions on the declaration and payment of dividends during
continuing events of default.
11
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of November 30, 2000:
o on an actual basis;
o on an as adjusted basis to reflect our sale in this offering of
shares of common stock at an assumed initial public offering price of
$ per share, the mid-point of the range set forth on the cover page
of this prospectus, and the application of the estimated net proceeds
of this offering, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, as set
forth under "Use of Proceeds."
This table excludes 3,500,000 shares of common stock reserved for issuance
under our stock option plan.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
November 30, 2000
--------------------------------
Actual As Adjusted
----------- ---------------
(in thousands, except share data)
<S> <C> <C>
Short-term debt:
Lines of credit....................................... $ 216,295 $
Due to Datatec........................................ 29,232
----------- ------------
$ 245,527 $
----------- ------------
Long-term debt:
Line of credit........................................ $ 25,000 $
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000 shares
authorized, 46,448,296 issued and
outstanding actual, and issued
and outstanding as adjusted......................... $ 464 $
Additional paid-in capital............................ 216,619
Retained earnings..................................... 107,145 107,145
Accumulated other comprehensive loss.................. (5,652)
----------- ------------
Total stockholders' equity............................. $ 318,576 $
----------- ------------
Total capitalization $ 343,576
=========== ============
</TABLE>
12
<PAGE>
DILUTION
Our net tangible book value as of November 30, 2000 was $160.3 million, or
$3.45 per share of common stock. Net tangible book value per share of common
stock is determined by dividing our tangible net worth (total tangible assets
less total liabilities) by the aggregate number of shares of common stock
outstanding.
Dilution is determined by subtracting net tangible book value per share
after the offering from the initial public offering price per share. After
giving effect to the sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share, the
midpoint of the range set forth on the cover page of this prospectus, and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us and the application of the estimated net proceeds therefrom, our
adjusted net tangible book value as of November 30, 2000 would have been $ ,
or $ per share of common stock. This represents an immediate increase in
net tangible book value to existing investors of $ per share of common
stock and an immediate dilution to new investors of $ per share of common
stock. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................................ $
Net tangible book value per share of common stock before this
offering.................................................................... $ 3.45
Increase in net tangible book value per share of common stock
attributable to new investors...............................................
-------
Adjusted net tangible book value per share of common stock after this offering.. -------
Dilution per share of common stock to new investors............................. $
=======
</TABLE>
The following table sets forth, on an as adjusted basis, as of November
30, 2000, the number of shares of common stock purchased from us, the total
consideration paid and the average consideration per share paid by existing
stockholders and by the new investors, at an assumed initial public offering
price of $ per share, the midpoint of the range set forth on the cover page of
this prospectus, before deducting underwriting discounts and commissions and
estimated offering expenses payable by us:
<TABLE>
Shares Purchased Total Consideration Average
------------------------ ----------------------- Consideration
Number Percent Amount Percent Per Share
---------- ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 46,448,296 % (1) % $
New investors.............. %
---------- --- ---
Total..................... 100% 100%
</TABLE>
-------------------
(1) Includes cash consideration paid by existing stockholders, the net book
value of subsidiaries contributed to us by Datatec in exchange for shares
of our common stock, and the consideration paid by Datatec for the
purchase of our shares of common stock from Mirado Corp. See "Related
Party Transactions".
The foregoing tables assume no exercise of outstanding stock options after
November 30, 2000. At November 30, 2000, we had 3,500,000 shares of common
stock reserved for issuance under our stock option plan, and no shares of our
common stock were subject to outstanding options. To the extent options are
granted and exercised, there will be further dilution to new investors.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our selected consolidated financial data. The
information set forth below should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus. During Fiscal 2000, we changed our
fiscal year-end from March 31 to the last day in February. Accordingly, the
following consolidated income statement data compares our results of operations
for the eleven months ended February 29, 2000 to our results of operations for
the twelve months ended March 31, 1996, 1997, 1998 and 1999. The consolidated
income statement data set forth below for the twelve months ended March 31,
1998 and 1999, the eleven months ended February 29, 2000, and the nine months
ended November 30, 2000, and the consolidated balance sheet data as of March,
31 1999, February 29, 2000 and November 30, 2000, are derived from, and are
qualified by reference to, the audited consolidated financial statements and
related notes which are included in this prospectus.
The consolidated balance sheet data as of March 31, 1998 are derived from
audited consolidated financial statements not included in this prospectus. The
consolidated income statement data for the twelve months ended March 31, 1996
and 1997 and the consolidated balance sheet data as of March 31, 1996 and March
31, 1997 are derived from unaudited consolidated financial information not
included in this prospectus. The consolidated financial data for the nine
months ended November 30, 1999 have been derived from our unaudited
consolidated financial statements which are included in this prospectus. In the
opinion of management, the results of operations for the nine months ended
November 30, 1999 reflect all adjustments, consisting only of adjustments of a
normal and recurring nature, necessary for a fair presentation. The historical
consolidated financial data may not be indicative of our future performance.
<TABLE>
Eleven months
Twelve months ended ended Nine months ended
------------------------------------------------- ------------- ---------------------------
March 31, March 31, March 31, March 31, February 29, November 30, November 30,
1996 1997 1998 1999(1) 2000(2) 1999(2) 2000(3)
---------- ---------- ---------- ---------- ------------- ------------ ------------
(in thousands, except for share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Income
Statement Data
Sales........................ $ 205,173 $ 258,080 $ 334,411 $ 587,427 $ 1,168,244 $ 934,432 $ 1,604,424
Cost of goods sold........... 187,060 230,435 290,618 486,443 1,022,816 818,972 1,429,921
---------- ---------- ---------- ---------- ------------- ------------ ------------
Gross profit.......... 18,113 27,645 43,793 100,984 145,428 115,460 174,503
---------- ---------- ---------- ---------- ------------- ------------ ------------
Operating expenses:
Selling................. 4,985 9,284 10,129 21,248 35,441 25,630 36,741
General and administrative 3,839 8,906 16,938 26,616 42,105 31,527 47,755
Depreciation and
amortization 608 1,181 2,721 7,340 13,880 9,845 15,960
---------- ---------- ---------- ---------- ------------- ------------ ------------
Total operating expenses..... 9,432 19,371 29,788 55,204 91,426 67,002 100,456
---------- ---------- ---------- ---------- ------------- ------------ ------------
Income from operations....... 8,681 8,274 14,005 45,780 54,002 48,458 74,047
---------- ---------- ---------- ---------- ------------- ------------ ------------
Other (income) expense:
Interest income......... (48) (21) (96) (1,248) (3,116) (2,145) (3,469)
Interest expense........ 1,702 2,318 3,841 5,920 16,375 10,837 20,223
Interest expense - Datatec -- -- -- 1,979 2,299 2,209 1,322
Gain on sale of securities -- -- -- -- -- -- (32,359)
Other (income) expense.. (38) (46) (942) 1,810 973 750 325
---------- ---------- ---------- ---------- ------------- ------------ ------------
Total other (income) expense. 1,616 2,251 2,803 8,461 16,531 11,651 (13,958)
---------- ---------- ---------- ---------- ------------- ------------ ------------
Income before income taxes... 7,065 6,023 11,202 37,319 37,471 36,807 88,005
Provision for income taxes... 2,519 2,848 4,671 15,868 16,101 15,816 36,042
---------- ---------- ---------- ---------- ------------- ------------ ------------
Net income................... $ 4,546 $ 3,175 $ 6,531 $ 21,451 $ 21,370 $ 20,991 $ 51,963
========== ========== ========== ========== ============= ============ ============
Net income per basic and
diluted share.............. $ 0.15 $ 0.11 $ 0.22 $ 0.58 $ 0.47 $ 0.47 $ 1.12
========== ========== ========== ========== ============= ============ ============
Weighted average number
of basic and diluted
shares outstanding......... 29,663,975 29,663,975 29,663,975 36,994,132 45,213,357 44,350,655 46,448,296
========== ========== ========== ========== ============= ============ ============
14
</TABLE>
<PAGE>
<TABLE>
March 31, March 31, March 31, March 31, February 29, November 30, November 30,
1996 1997 1998 1999 2000 1999 2000
---------- ---------- ---------- ---------- ------------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data
Working capital................. $ 3,789 $ 2,473 $ (205) $ 94,373 $180,333 $170,151 $156,206
Total assets.................... 72,819 117,577 155,150 465,514 760,404 750,835 936,346
Total long-term debt, including
current portion.............. 9,019 29,689 61,264 117,319 234,205 276,871 241,295
Due to Datatec.................. -- -- -- 56,391 30,473 38,560 29,232
Total stockholders' equity...... 5,422 8,123 9,458 118,524 270,431 260,416 318,576
</TABLE>
-------------------
(1) Includes the operations of Westcon (UK) Limited and RBR Group Limited from
August 6, 1998 and September 26, 1998, their respective dates of common
ownership by us and Datatec, and Westcon Brasil Ltda. from October 22,
1998, the date of its acquisition.
(2) Includes the operations of RBR Networks GmbH (now Comstor Networks GmbH)
and RBR Networks Pte. Ltd. from April 1, 1999 and July 1, 1999, their
respective dates of common ownership by us and Datatec, and Comstor
Corporation from August 13, 1999, the date of its acquisition.
(3) Includes the operations of LAN Systems (Pty.) Ltd., Inacom Communications,
Inc. and CCA Technologies, Inc. from April 12, 2000, July 7, 2000 and
September 13, 2000, their respective dates of acquisition.
15
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The following unaudited pro forma consolidated statements of income are
for the eleven months ended February 29, 2000 and the nine months ended
November 30, 2000. The pro forma statements of income have been derived from
our historical statements of income and give effect to the acquisitions
completed on the dates indicated below. The unaudited pro forma consolidated
statements of income and accompanying notes should be read in conjunction with
the historical consolidated financial statements and the related notes to those
statements, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations", appearing elsewhere in this prospectus.
The financial information contained in the pro forma statements of income
gives effect to the following acquisitions, each of which was accounted for
under the purchase method of accounting, as if each acquisition had been
consummated on the first day of the period presented:
o the acquisition of Comstor Corporation, effective August 13, 1999;
o the acquisition of LAN Systems (Pty.) Ltd., effective April 12, 2000;
o the acquisition of Inacom Communications, Inc., effective July 7,
2000; and
o the acquisition of CCA Technologies, Inc., effective September 13,
2000.
The unaudited pro forma consolidated statements of income may not be
indicative of the results that would have been obtained had the transactions
been completed as of the assumed dates and for the periods presented or that
may be obtained in the future.
16
<PAGE>
<TABLE>
Westcon Group, Inc.
Unaudited Consolidated Pro Forma Statement of Income
For the nine months ended November 30, 2000
Inacom CCA
Historical LAN Systems Communications, Technologies,
Westcon Group, Inc. (Pty.) Ltd. (1) Inc. (1) Inc. (1) Adjustments Pro Forma
------------------- --------------- --------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Sales...................... $ 1,604,424,159 $8,339,098 $ 52,741,040 $32,334,750 $ -- $1,697,839,047
Cost of goods sold......... 1,429,920,857 7,452,564 46,269,562 28,937,684 -- 1,512,580,667
----------------- ---------- ------------ ----------- ------------ --------------
Gross profit.......... 174,503,302 886,534 6,471,478 3,397,066 -- 185,258,380
----------------- ---------- ------------ ----------- ------------ --------------
Operating expenses:
Selling............... 36,741,231 252,727 490,190 556,152 -- 38,040,300
General and
administrative...... 47,755,373 171,785 615,321 856,917 -- 49,399,396
Depreciation and
amortization........ 15,959,990 29,258 10,294 29,088 853,432 (2) 16,882,062
----------------- ---------- ------------ ----------- ------------ --------------
Total operating
expenses......... 100,456,594 453,770 1,115,805 1,442,157 853,432 104,321,758
----------------- ---------- ------------ ----------- ------------ --------------
Income from operations..... 74,046,708 432,764 5,355,673 1,954,909 (853,432) 80,936,622
----------------- ---------- ------------ ----------- ------------ --------------
Other (income) expense:
Interest expense, net. 16,754,405 48,596 971,689 186,235 1,259,784 (4) 19,220,709
Interest expense -
Datatec............. 1,321,588 -- -- -- -- 1,321,588
Gain on sale of
securities.......... (32,358,792) -- -- -- -- (32,358,792)
Other expense
(income)............ 324,973 (67,150) 207,052 (3,475) -- 461,400
----------------- ---------- ------------ ----------- ------------ --------------
Total other
(income) expense.. (13,957,826) (18,554) 1,178,741 182,760 1,259,784 (11,355,095)
----------------- ---------- ------------ ----------- ------------ --------------
Income before income
taxes................. 88,004,534 451,318 4,176,932 1,772,149 (2,113,216) 92,291,717
Provision for income
taxes................. 36,041,837 181,811 1,676,621 710,800 (848,245)(5) 37,762,824
----------------- ---------- ------------ ----------- ------------ --------------
Net income................. $ 51,962,697 $ 269,507 $ 2,500,311 $ 1,061,349 $(1,264,971) $ 54,528,893
================= ========== ============ =========== =========== ==============
Net income per basic
and diluted share..... $ 1.12 $ 1.17
================= ==============
Weighted average number
of basic and
diluted shares
outstanding........... 46,448,296 46,448,296
================= ==============
See accompanying notes to the unaudited pro forma consolidated financial information.
17
</TABLE>
<PAGE>
<TABLE>
Westcon Group, Inc.
Unaudited Consolidated Pro Forma Statement of Income
For the eleven months ended February 29, 2000
Historical Inacom CCA
Westcon Comstor LAN Systems Communications, Technologies,
Group , Inc. Corporation (1) (Pty.) Ltd. (1) Inc. (1) Inc. (1) Adjustments Pro Forma
-------------- --------------- --------------- --------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Sales................ $1,168,243,592 $ 181,051,130 $ 38,314,893 $ 117,698,445 $49,277,577 $ -- $1,554,585,637
Cost of goods sold... 1,022,815,675 172,088,609 33,233,718 105,776,646 44,765,194 -- 1,378,679,842
-------------- -------------- -------------- ------------- ----------- ---------- --------------
Gross profit........ 145,427,917 8,962,521 5,081,175 11,921,799 4,512,383 -- 175,905,795
-------------- -------------- -------------- ------------- ----------- ---------- --------------
Operating expenses:
Selling............ 35,440,598 3,539,887 1,648,448 1,636,285 1,166,918 -- 43,432,136
General and
administrative... 42,105,003 5,224,438 949,696 2,173,537 1,797,371 -- 52,250,045
Depreciation and
amortization..... 3,681,529 (2)
13,879,950 762,377 193,959 31,062 61,131 (534,906)(3) 18,075,102
-------------- -------------- -------------- ------------- ----------- ---------- ---------------
Total operating
expenses...... 91,425,551 9,526,702 2,792,103 3,840,884 3,025,420 3,146,623 113,757,283
-------------- -------------- -------------- ------------- ----------- ---------- --------------
Income (loss) from
operations......... 54,002,366 (564,181) 2,289,072 8,080,915 1,486,963 (3,146,623) 62,148,512
-------------- -------------- -------------- ------------- ----------- ---------- --------------
Other (income)
expense:
Interest expense,
net.............. 13,259,389 803,858 251,630 2,363,381 390,498 5,800,457 (4) 22,869,213
Interest expense -
Datatec ......... 2,298,993 -- -- -- -- -- 2,298,993
Other expenses
(income)......... 973,170 -- (313,909) 1,247,135 (10,687) -- 1,895,709
-------------- -------------- -------------- ------------- ----------- ----------- --------------
Total other
(income) expense 16,531,552 803,858 (62,279) 3,610,516 379,811 5,800,457 27,063,915
-------------- -------------- -------------- ------------- ----------- ----------- --------------
Income (loss) before
income taxes....... 37,470,814 (1,368,039) 2,351,351 4,470,399 1,107,152 (8,947,080) 35,084,597
Provision for income
taxes.............. 16,101,208 -- 943,598 1,920,930 475,743 (4,355,102)(5) 15,086,377
-------------- -------------- -------------- ------------- ----------- ----------- --------------
Net income (loss).... $ 21,369,606 $ (1,368,039) $ 1,407,753 $ 2,549,469 $ 631,409 $(4,591,978) $ 19,998,220
============== ============== ============== ============= =========== =========== ==============
Net income per basic
and diluted share.. $ 0.47 $ 0.44
============== ==============
Weighted average
number of basic
and diluted
shares
outstanding........ 45,213,357 45,213,357
============== ==============
See accompanying notes to the unaudited pro forma consolidated financial information.
18
</TABLE>
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statements of Income
The unaudited pro forma consolidated statements of income for the eleven
months ended February 29, 2000 and the nine months ended November 30, 2000
reflect the pro forma adjustments for the acquisitions previously mentioned.
(1) Represents operating activity for the acquired businesses for the periods
set forth below:
Eleven Months Ended Nine Months Ended
February 29, 2000 November 30, 2000
------------------- -----------------
Comstor Corporation........... 4 months -
LAN Systems (Pty.) Ltd........ 11 months 1 month
Inacom Communications, Inc.... 11 months 4 months
CCA Technologies, Inc......... 11 months 6 months
(2) Represents pro forma adjustments to goodwill amortization (over 15 years)
in connection with the acquired businesses as follows:
Eleven Months Ended Nine Months Ended
February 29, 2000 November 30, 2000
------------------- -----------------
Comstor Corporation........... $ 955,016 $ --
LAN Systems (Pty.) Ltd........ 1,108,448 142,455
Inacom Communications, Inc.... 1,182,980 456,103
CCA Technologies, Inc......... 435,085 254,874
------------ ---------
$ 3,681,529 $ 853,432
============ =========
(3) Represents the elimination of Comstor Corporation's goodwill amortization
expense relating to previous acquisitions.
(4) Represents pro forma adjustments to interest expense related to debt
incurred in connection with the acquisitions as follows:
Eleven Months Ended Nine Months Ended
February 29, 2000 November 30, 2000
------------------- -----------------
Comstor Corporation........... $2,413,356 $ --
LAN Systems (Pty.) Ltd........ 1,292,913 191,510
Inacom Communications, Inc.... 1,497,622 665,495
CCA Technologies, Inc......... 596,566 402,779
---------- ----------
$5,800,457 $1,259,784
========== ==========
(5) Represents the tax effect of pro forma adjustments and recognition of
income tax expense (benefit) for the acquisitions which had not recorded
income tax expense (benefit) at our historical effective income tax rates.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and the results of our operations together with our financial
statements and the notes to those financial statements included in this
prospectus.
The following discussion contains forward-looking statements that involve
potential risks and uncertainties. Our future results could differ materially
from results discussed in these forward-looking statements. Important factors
that could cause or contribute to such differences are discussed below and in
"Risk Factors."
Overview
We are a significant sales channel for Cisco Systems, a dominant vendor in
the communications and networking equipment market. We are also an important
sales channel for Nortel Networks, Avaya Communication and other leading
vendors of networking technology, many of whose products are complementary to
those of Cisco, Nortel and Avaya. We sell exclusively to reseller customers
throughout the U.S. and in selected international markets.
Our business has continuously evolved in response to changing demand in
the communications market. We were originally established in 1985 to develop
services for the local area network market and have evolved into a sales
channel for leading technology vendors in the communications and networking
equipment market. Prior to September 1998, we operated primarily as a sales
channel for Nortel's data division. Through a series of business combinations,
including our acquisition of Comstor Corporation in August 1999, we became a
substantial sales channel for Cisco, which has allowed us to benefit from
strong demand for Cisco products. By acquiring Inacom Communications, Inc. and
CCA Technologies, Inc. in July and September 2000, respectively, we also became
the leading sales channel for Avaya (formerly the enterprise businesses of
Lucent Technologies) products in anticipation of the opportunities that we
expect to be created by the convergence of voice and data networking products
and services.
The following chart lists chronologically the businesses that we acquired
from third parties or were contributed to us by Datatec.
Entity Date
------------------------------------------- ---------------------
Fiscal 1999
Westcon (UK) Limited August 6, 1998
RBR Group Limited (Comstor UK) September 26, 1998
Telsist Informatica, Ltda. (Westcon Brazil) October 22, 1998
Fiscal 2000
Comstor Networks GmbH (Comstor Germany) April 1, 1999
RBR Networks Pte. Ltd. (Comstor Singapore) July 1, 1999
Comstor Corporation August 13, 1999
Fiscal 2001
LAN Systems (Pty.) Ltd (Comstor Australia) April 12, 2000
Inacom Communications, Inc. (Voda One) July 7, 2000
CCA Technologies, Inc. (Voda One) September 13, 2000
Segments. Our business is organized into three branded divisions, each
with a single primary vendor focus. However, our three divisions consist of
multiple subsidiaries operating in diverse geographical markets that report on
their operations and are managed and evaluated individually by our chief
operating officer, who is our chief operating decision maker. As such, we do
not segment our business along divisional or geographical lines.
Revenues. We generate substantially all of our revenues through the sale
of communications and networking equipment products. We recognize revenue upon
shipment of product and accrue for sales returns and other allowances at the
time of shipment based upon our historical experience. We currently have over
9,450 reseller customers, with no one customer representing more than 5% of our
consolidated sales for the nine months ended
20
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November 30, 2000 or Fiscal 2000. Commencing in Fiscal 2001, our Comstor
division began to generate revenues by providing professional services,
including staff augmentation, project management, site evaluation, and
consulting and network design, generally charged on a per day or project basis.
Although such revenues are not expected to be significant in Fiscal 2001 (for
the nine months ended November 30, 2000 such sales represented less than 1% of
consolidated sales), we expect these services to provide an increasing
percentage of revenues in future periods. We recognize revenue for professional
services at the time the services are rendered.
A substantial portion of our historical revenues has been derived from the
sale of Cisco and Nortel products which accounted for 45.8% and 22.0%,
respectively, of our consolidated sales for Fiscal 2000 and 67.3% and 12.2%,
respectively, of our consolidated sales for the nine months ended November 30,
2000. In addition, during the nine months ended November 30, 2000, we commenced
sales of Avaya products through our Voda One division, which accounted for
$63.3 million, or 3.9%, of consolidated sales during that period. We market and
sell Cisco, Nortel and Avaya products through our three branded divisions,
Comstor, Westcon and Voda One, respectively.
Substantially all of Comstor division revenues consist of sales of Cisco
products, principally in the U.S., Western Europe and the Asia-Pacific region.
Comstor division sales were $1.1 billion, or 69.8% of our consolidated sales,
for the nine months ended November 30, 2000. For the same period, 54.2% of
Comstor division sales were in the U.S., with Western Europe and the
Asia-Pacific region accounting for 40.8% and 5.0%, respectively, of Comstor
division sales for that period. Comstor division sales were $569.5 million, or
48.7% of our consolidated sales, for Fiscal 2000. For Fiscal 2000, 43.6% of
Comstor division sales were in the U.S., with Western Europe and the Asia-
Pacific region accounting for 54.0% and 2.4%, respectively, of Comstor division
sales for Fiscal 2000.
A substantial portion of Westcon division revenues consist of sales of
Nortel products, principally in North America, Western Europe, the Asia-Pacific
region and Brazil. Westcon division sales were $405.1 million, or 25.2% of our
consolidated sales, for the nine months ended November 30, 2000. For the same
period, 48.2% of Westcon division sales were derived from sales of Nortel
products, with sales of complementary products representing 51.8% of Westcon
division sales for that period. For the nine months ended November 30, 2000,
71.6% of Westcon division sales were in North America, with Western Europe, the
Asia-Pacific region and Brazil accounting for 17.4%, 7.0% and 4.0%,
respectively, of Westcon division sales for that period. Westcon division
revenues were $598.8 million, or 51.3% of our consolidated sales, for Fiscal
2000. For Fiscal 2000, 42.9% of Westcon division sales were derived from sales
of Nortel products, with sales of complementary products representing 57.1% of
Westcon division sales for Fiscal 2000. For the same period, 76.5% of Westcon
division sales were in North America, with Western Europe, the Asia-Pacific
region and Brazil accounting for 16.1%, 5.2% and 2.2%, respectively, of Westcon
division sales for that period.
Voda One division revenues primarily consist of sales of Avaya products in
the U.S. The Voda One division was established following our acquisitions of
Inacom Communications, Inc. and CCA Technologies, Inc. in July and September
2000, respectively. The Voda One division positions us to capitalize on the
opportunities that we expect to be created by the growing demand for integrated
voice, video and data networking solutions. For the nine months ended November
30, 2000, 96.0% of Voda One division sales were derived from sales of Avaya
products, with sales of complementary products representing approximately 4.0%
of Voda One division sales for that period. We sell Avaya products outside the
U.S. through our Westcon division.
Gross Margin. Each division seeks to generate higher gross margins than
those that might be realized by selling less complex products primarily on the
basis of price and speed of delivery alone. In addition, we seek to further
increase the overall gross margin of each division by introducing and promoting
complementary products that generally carry higher gross margins than those of
the division's lead product line. As a result, the Westcon division generates
higher gross margins than the Comstor division due to its higher percentage of
complementary product sales.
Selling, General and Administrative Expense. The principal components of
our selling, general and administrative expense include personnel costs,
facilities expenses and other costs related to sales and marketing, executive
management, and support functions such as human resources, accounting and
finance.
Depreciation and Amortization Expense. Depreciation and amortization
expense includes depreciation expense relating to our property and equipment,
the amortization of goodwill, and the amortization of the discounts resulting
from the granting of Datatec stock options to our employees at exercise prices
below the fair market value of Datatec stock at the dates of grant. As a result
of our acquisitions and the subsidiaries contributed to us by Datatec, goodwill
amortization will continue to be a significant expense for us in the future. As
of November 30, 2000, we had approximately $157.3 million of unamortized
goodwill.
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Results of Operations
The following table sets forth the percent of consolidated sales
represented by items in our consolidated statements of income for the periods
presented.
<TABLE>
Eleven months
Twelve months ended ended Nine months ended
------------------------- ------------- -------------------------------
March 31, March 31, February 29, November 30, November 30,
1998 1999 2000 1999 2000
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 86.9 82.8 87.6 87.6 89.1
----- ----- ----- ----- -----
Gross profit 13.1 17.2 12.4 12.4 10.9
Operating expenses:
Selling 3.0 3.6 3.0 2.7 2.3
General and administrative 5.1 4.5 3.6 3.4 3.0
Depreciation and amortization 0.8 1.2 1.2 1.1 1.0
----- ----- ----- ----- -----
Total operating expenses 8.9 9.4 7.8 7.2 6.3
----- ----- ----- ----- -----
Income from operations 4.2 7.8 4.6 5.2 4.6
----- ----- ----- ----- -----
Other (income) expense:
Interest income 0.0 (0.2) (0.3) (0.2) (0.2)
Interest expense 1.1 1.0 1.4 1.2 1.3
Interest expense - Datatec 0.0 0.3 0.2 0.2 0.1
Gain on sale of securities 0.0 0.0 0.0 0.0 (2.0)
Other (income) expense (0.3) 0.3 0.1 0.1 0.0
----- ----- ----- ----- -----
Total other (income) expense 0.8 1.4 1.4 1.3 (0.9)
----- ----- ----- ----- -----
Income before income taxes 3.4 6.4 3.2 3.9 5.5
Provision for income taxes 1.4 2.7 1.4 1.7 2.2
----- ----- ----- ----- -----
Net income 2.0 3.7 1.8 2.2 3.3
===== ===== ===== ===== =====
</TABLE>
Nine months ended November 30, 2000 compared to Nine months ended November
30, 1999 Sales.
Sales increased by $670.0 million, or 71.7%, to $1.6 billion in the nine
months ended November 30, 2000. This was primarily due to our acquisition of
Comstor Corporation, which contributed $603.1 million in sales for the nine
months ended November 30, 2000. The increase was also due to growth in the
Comstor businesses in the United Kingdom, Germany and Singapore during that
period. Sales of our Westcon division declined by $133.3 million to $405.1
million for the nine months ended November 30, 2000, primarily due to a
reduction in Nortel product sales. The Comstor division accounted for 69.8%,
the Westcon division accounted for 25.2% and the newly formed Voda One division
accounted for 5.0% of our consolidated sales for the nine months ended November
30, 2000. This compares to 42.4% and 57.6% for the Comstor and Westcon
divisions, respectively, in the nine months ended November 30, 1999.
Cost of Goods Sold. Cost of goods sold increased by $610.9 million, or
74.6%, to $1.4 billion for the nine months ended November 30, 2000. Cost of
goods sold as a percentage of sales increased from 87.6% (12.4% gross margin)
in the nine months ended November 30, 1999 to 89.1% (10.9% gross margin) in the
nine months ended November 30, 2000. The decrease in gross margins was
primarily due to an increased contribution by the Comstor division, which
generally carries a lower overall gross margin than our other divisions, to
consolidated sales during the nine months ended November 30, 2000.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased by $27.3 million, or 47.8%, to $84.5 million
in the nine months ended November 30, 2000, but decreased as a percentage of
sales from 6.1% in the nine months ended November 30, 1999 to 5.3% in the nine
months ended November 30, 2000. The increase in expense is primarily
attributable to the impact of acquired businesses which in aggregate incurred
$25.8 million of such expense during the nine months ended November 30, 2000
compared to $7.1 million during the nine months ended November 30, 1999. The
decrease in selling, general and administrative expense as a percentage of
sales was primarily attributable to an increased contribution by the Comstor
division to consolidated sales. The Comstor division has substantially lower
general and administrative expense than our other divisions because the
substantial increase in its sales has resulted in significant economies of
scale.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased by $6.1 million, or
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62.1%, to $16.0 million in the nine months ended November 30, 2000, but
decreased slightly as a percentage of sales from 1.1% for the nine months ended
November 30, 1999 to 1.0% for the nine months ended November 30, 2000. The
increase in depreciation and amortization expense was primarily attributable to
a $3.4 million increase in goodwill amortization resulting from acquired
businesses. Fixed asset depreciation increased by $2.5 million to $5.7 million
in the nine months ended November 30, 2000 due to the impact of acquired
businesses.
Income from Operations. Income from operations increased by $25.6 million,
or 52.8%, to $74.0 million in the nine months ended November 30, 2000, due
primarily to the impact of acquired businesses. As a percentage of sales,
income from operations decreased from 5.2% in the nine months ended November
30, 1999 to 4.6% in the nine months ended November 30, 2000. This was due
primarily to the decrease in consolidated gross margins as a percentage of
sales, resulting from an increased contribution by the Comstor division, which
generally carries a lower overall gross margin than our other divisions, to
consolidated sales. The decrease in consolidated gross margins as a percentage
of sales was partially offset by a reduction in operating expenses as a
percentage of sales.
Other (Income) Expense. Other (income) expense changed $25.7 million to
income of $14.0 million in the nine months ended November 30, 2000, from
expense of $11.7 million in the nine months ended November 30, 1999. This was
primarily due to a gain on the sale of securities of $32.4 million and an
increase in interest income of $1.3 million, partially offset by an increase in
interest expense. Interest expense increased by $9.4 million in the nine months
ended November 30, 2000 due to higher levels of borrowings under our credit
agreement.
Provision for Income Taxes. The provision for income taxes increased by
$20.2 million, or 127.9%, to $35.6 million in the nine months ended November
30, 2000. Our effective tax rate declined from 43.0% in the nine months ended
November 30, 1999 to 41.0% in the nine months ended November 30, 2000, due
primarily to an increase in consolidated pre-tax income during the nine months
ended November 30, 2000, which had the effect of reducing the impact of
permanent differences on the effective tax rate. The effective tax rate is
higher than the statutory rate primarily due to the impact of state income
taxes and non-deductible goodwill.
Fiscal 2000 Compared to Fiscal 1999
During Fiscal 2000, we changed our fiscal year-end from March 31 to the
last day of February, so that our quarters and fiscal year-end would not
coincide with the quarters and fiscal year-end of two of our primary vendors.
Accordingly, the following discussion compares results of operations for the
eleven months ended February 29, 2000 to the twelve months ended March 31,
1999.
Sales. Sales increased by $580.8 million, or 98.9%, to $1.2 billion in
Fiscal 2000. This increase was primarily attributable to our acquisition in
August 1999 of Comstor Corporation, which contributed $248.3 million in sales
for Fiscal 2000. The increase was also due to an increase in sales of the
Comstor businesses in the United Kingdom, Germany and Singapore. Fiscal 2000
and a $99.7 million increase in sales by our Westcon division. The Comstor and
Westcon divisions accounted for 48.7% and 51.3%, respectively, of our
consolidated sales for Fiscal 2000. This compares to 15.0% and 85.0% for the
Comstor and Westcon divisions, respectively, in Fiscal 1999.
Cost of Goods Sold. Cost of goods sold increased by $536.4 million, or
110.3%, to $1.0 billion in Fiscal 2000. Cost of goods sold as a percentage of
sales increased from 82.8% (17.2% gross margin) in Fiscal 1999 to 87.6% (12.4%
gross margin) in Fiscal 2000. This is in part attributable to a reduction of
margins for our Westcon division businesses from 17.1% for Fiscal 1999 to 13.6%
in Fiscal 2000 resulting from the termination of an incentive program offered
by Nortel, a decline in Nortel's market share in the U.S. and lower gross
margins on sales of Lucent Technologies data products. In addition, the
acquisition of Comstor Corporation, which contributed 21.2% of consolidated
sales in Fiscal 2000, reduced our consolidated gross margin in Fiscal 2000.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $29.7 million, or 62.0%, to $77.5 million in
Fiscal 2000 but decreased as a percentage of sales from 8.1% in Fiscal 1999 to
6.6% in Fiscal 2000. The increase in expense is primarily attributable to the
impact of acquired businesses which in aggregate incurred $32.8 million of such
expense during Fiscal 2000 compared to $12.4 million during Fiscal 1999. In
addition, in Fiscal 2000 we incurred substantially higher general and
administrative expense relating to information systems support associated with
the implementation of our enterprise resource planning system, personnel and
expenses associated with added facilities. The decrease in selling, general and
administrative expense as a percentage of sales was primarily attributable to
an increased contribution by the Comstor division to consolidated sales.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased by $6.5 million, or 89.1%, to $13.9 million in Fiscal 2000.
This increase was primarily attributable to a $3.9 million increase in goodwill
amortization expense relating to acquired businesses and a $1.8 million
increase in the amortization of discounts on Datatec stock options granted to
our employees. Fixed asset depreciation increased by $906,000 to $4.8 million
in Fiscal 2000, primarily due to the impact of business combinations.
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<PAGE>
Income from Operations. Income from operations increased by $8.2 million
in Fiscal 2000. As a percentage of sales, income from operations decreased from
7.8% in Fiscal 1999 to 4.6% in Fiscal 2000, primarily as a result of reduced
consolidated gross margin, partially offset by a 1.6% decline in operating
expenses as a percentage of sales.
Other (Income) Expense. Other expense increased by $8.1 million in Fiscal
2000 due to interest incurred on higher levels of borrowings under our credit
agreement and interest incurred on $75 million of indebtedness incurred to
acquire Comstor Corporation. The increase in interest expense of $10.5 million,
or 176.6%, to $16.4 million in Fiscal 2000 was partially offset by a $1.9
million increase in interest income to $3.1 million in Fiscal 2000.
Provision for Income Taxes. The provision for income taxes increased by
$233,000, or 1.5%, to $16.1 million in Fiscal 2000. Our effective tax rate was
42.5% in Fiscal 1999 and 43.0% in Fiscal 2000.
Fiscal 1999 Compared to Fiscal 1998
Sales. Sales increased by $253.0 million, or 75.7%, to $587.4 million in
Fiscal 1999. This increase was primarily due to the expansion of product lines
with Nortel and other existing vendors and the addition of Cisco as a primary
vendor, partly as a result of businesses acquired in Fiscal 1999. In Fiscal
1999, the Comstor and Westcon divisions accounted for 15.0% and 85.0%,
respectively, of our consolidated sales.
Cost of Goods Sold. Cost of goods sold increased by $195.8 million, or
67.4%, to $486.4 million in Fiscal 1999. Cost of goods sold as a percentage of
sales declined from 86.9% (13.1% gross margin) in Fiscal 1998 to 82.8% (17.2%
gross margin) in Fiscal 1999. The increase in gross margin was primarily
attributable to improved margins realized on Nortel products and Lucent
Technologies products as a result of incentive programs offered by Nortel and
Lucent. In addition, acquired businesses generated gross margins at levels
higher than we had historically generated.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased by $20.8 million, or 76.8%, to $47.9 million
in Fiscal 1999 and as a percentage of sales remained unchanged at 8.1% in
Fiscal 1998 and Fiscal 1999. The increase in expense is attributable to the
impact of acquired businesses which incurred $11.5 million in selling, general
and administrative expense during Fiscal 1999 and incremental expenditures
incurred to support the growth of our existing businesses, including
incremental personnel and support costs, higher promotional expenses and costs
associated with added facilities and warehouse space.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased by $4.6 million, or 169.8%, to $7.3 million in Fiscal 1999.
This increase was primarily attributable to goodwill amortization expense of
$2.2 million resulting from acquired businesses and the amortization of
discounts on Datatec stock options granted to our employees of $906,000. Fixed
asset depreciation increased by $1.3 million to $3.9 million in Fiscal 1999 due
to an increase in depreciable assets consisting primarily of computer and
networking equipment.
Income from Operations. Income from operations increased by $31.8 million
in Fiscal 1999. As a percentage of sales, income from operations increased from
4.2% in Fiscal 1998 to 7.8% in Fiscal 1999, due primarily to improved operating
margins at subsidiaries operating during both periods and acquired businesses
generating gross margins at levels higher than we had historically generated.
Other (Income) Expense. Other expense increased by $5.7 million in Fiscal
1999, due primarily to interest incurred on higher levels of borrowings under
our credit agreement and interest incurred on outstanding indebtedness to
Datatec. The increase in interest expense of $2.1 million to $5.9 million in
Fiscal 1999 was partially offset by an increase in interest income to $1.2
million in Fiscal 1999.
Provision for Income Taxes. The provision for income taxes increased by
$11.2 million, or 239.7%, to $15.9 million in Fiscal 1999. Our effective tax
rate was 41.7% in Fiscal 1998 and 42.5% in Fiscal 1999.
Quarterly Data; Seasonality
The following table presents unaudited quarterly financial information for
our last eight quarters on a historical basis. In the opinion of management,
the quarterly financial information contains all adjustments, consisting of
only normal recurring adjustments, necessary to fairly present such
information. As a sales channel for our vendors, we are affected by factors
outside our control such as shifts in market share among our major vendors
based upon product cycles and other factors, the introduction of new
technologies and product offerings, and variations in the availability of
products. Typically, we experience a reduction in demand in Europe during the
summer months, increased purchases by academic institutions in Europe during
the fall months, and increased U.S. government purchases from September to
November. During the quarters ended November 30, 1999 and February 29, 2000,
our sales were adversely affected by the "Y2K" issue that caused end-users to
delay purchases of communications and networking equipment while preparing
existing systems for anticipated problems associated with the advent of
24
<PAGE>
the year 2000. Our quarterly operating results have varied significantly in the
past and may continue to do so in the future. The operating results for any
quarter are not necessarily indicative of the results for any future period.
<TABLE>
Quarter ended
February 28, May 31, August 31, November 30, February 29, May 31, August 31, November 30,
1999 1999 1999 1999 2000 2000 2000 2000
------------ -------- ---------- ------------ ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $188,467 $247,499 $308,857 $378,076 $338,118 $477,801 $563,201 $563,422
Cost of goods sold 152,989 216,380 267,753 334,839 298,017 428,999 504,221 496,701
Gross profit 35,478 31,119 41,104 43,237 40,101 48,802 58,980 66,721
Total operating
expenses 16,476 18,664 21,140 27,204 30,622 28,952 34,868 36,636
Income from operations 19,002 12,455 19,964 16,033 9,479 19,850 24,112 30,085
Total other (income)
expense 1,692 2,481 4,479 4,685 5,945 6,196 (26,963) 6,809
Income before
income taxes 17,310 9,974 15,485 11,348 3,534 13,654 51,075 23,276
</TABLE>
Liquidity and Capital Resources
We have financed our growth and cash needs through income from operations,
borrowings under our credit agreement and additional inventory purchase
financing arrangements, and a combination of borrowings and equity
contributions from Datatec. Our primary future cash needs, on a recurring
basis, will be for working capital and capital expenditures. We may need to
incur additional debt or issue equity to make strategic acquisitions or
investments.
Cash provided by operating activities increased to $19.5 million for the
nine months ended November 30, 2000 from $136.2 million used in operating
activities for the nine months ended November 30, 1999. This increase was
primarily attributable to higher net income, a significant reduction in the
growth of inventory and an increase in accounts payable during the nine months
ended November 30, 2000.
Net cash used in operating activities was $20.0, $92.1 and $40.6 million
in Fiscal 1998, Fiscal 1999 and Fiscal 2000, respectively. The $72.1 million
increase in cash used in operating activities in Fiscal 1999 compared to Fiscal
1998 was due to higher levels of accounts receivable and inventory, which
accounted for an increase of $138.0 million, offset by a $43.9 million increase
in accounts payable and accrued expenses in Fiscal 1999 compared to Fiscal
1998. Cash used in operating activities decreased by $51.5 million to $40.6
million in Fiscal 2000. This decrease was due to reductions in the growth of
inventory and accounts receivable levels, which declined by $66.4 million to an
aggregate use of $80.7 million in Fiscal 2000. The decrease resulted primarily
from our decision to change to a February fiscal year-end at which time we
typically carry lower levels of inventory and accounts receivable than at the
end of March.
Net cash used in investing activities was $5.9, $21.5 and $119.6 million
in Fiscal 1998, Fiscal 1999 and Fiscal 2000, respectively, due to an expansion
of warehouse and other facilities and improvements in information systems
during each year and, in Fiscal 1999, the contribution of businesses from
Datatec possessing net cash overdrafts on the dates of contribution. In
addition, during Fiscal 1999 and 2000, we expended $1.5 and $113.3 million, net
of cash acquired, respectively, for the acquisitions of Telsist Informatica,
Ltda. and Comstor Corporation. In addition, we expended $50.2 million, net of
cash acquired, during the nine months ended November 30, 2000, in conjunction
with the acquisitions of LAN Systems (Pty.) Ltd., Inacom Communications, Inc.
and CCA Technologies, Inc. and the payment of contingent consideration relating
to entities contributed by Datatec.
Net cash provided by financing activities was $35.1, $132.2 and $186.8
million in Fiscal 1998, Fiscal 1999 and Fiscal 2000, respectively, due
primarily to $35.1 million, $56.1 million and $41.9 million in borrowings under
our revolving facility during the respective periods. During Fiscal 2000, we
also borrowed $75.0 million under our acquisition facility. During Fiscal 1999
and Fiscal 2000, we obtained $76.4 million and $71.1 million, respectively,
through capital contributions and loans from Datatec, net of $10.0 and $31.2
million, respectively, repaid to Datatec during those periods.
We have a credit agreement with IBM Credit Corporation that provides a
revolving credit facility with an aggregate credit availability of $285.0
million for working capital purposes. Borrowings under the credit agreement are
secured by pledges of common stock of certain subsidiaries and liens on the
inventory and accounts receivable at subsidiaries that utilize funds borrowed
under the credit agreement. Borrowings are subject to levels of eligible
collateral at those subsidiaries. Certain other subsidiaries have an aggregate
of $115.0 million of credit available under inventory purchase arrangements
with financial institutions. We are required under our credit arrangements to
comply with certain covenants, including covenants limiting financial leverage,
establishing minimum liquidity and pre-tax earnings coverage, restricting asset
sales and purchases, restricting the payment of dividends during
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<PAGE>
continuing events of default and limiting additional borrowings and the
granting of liens. See note 5 to our consolidated financial statements.
We intend to use a portion of the net proceeds of this offering to repay
amounts outstanding under the acquisition loan facility in our credit agreement
and a portion of the amounts outstanding under loans from Datatec. We are
scheduled to repay $50.0 million on April 30, 2001 and $25.0 million on
December 31, 2001 for borrowings under the acquisition loan facility.
We presently expect to make capital expenditures of approximately $8.0
million in Fiscal 2002 to continue the expansion of our business.
We believe that the net proceeds from the sale of our common stock offered
hereby, together with net cash provided by operating activities, supplemented
as necessary with funds available under credit arrangements (including our
credit agreement with IBM Credit Corporation), will provide sufficient
resources to meet our working capital requirements and other cash needs for at
least the next 12 months. If we were to engage in any strategic acquisitions
not currently anticipated, additional debt or equity financing would likely be
required.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the ordinary course of business, which
consists primarily of interest rate risk associated with our variable rate debt
and foreign exchange rate risk. We do not have material equity price risk as
our equity investments are not significant.
Interest Rate Risk. All borrowings under our revolving credit facility and
amounts outstanding under our loans from Datatec bear interest at variable
rates. The revolving credit facility bears interest at the prime rate minus
0.50%, or LIBOR plus 2.50% per annum, at our option. Amounts due to Datatec
bear interest at the base rate in the United Kingdom. The interest rates
applicable to our variable rate debt increased over the nine months ended
November 30, 2000. As of November 30, 2000, the outstanding indebtedness under
the revolving credit facility and the loans from Datatec was $166.3 million and
$29.2 million, respectively. Based upon these amounts, our annual net income
would change by approximately $1.2 million for each one percentage point change
in the interest rates applicable to our variable debt. The level of our
exposure to interest rate movements may fluctuate significantly as a result of
changes in the amount of indebtedness outstanding under the revolving credit
facility.
Foreign Currency Exchange Rate Risk. We utilize forward currency contracts
to manage our currency exchange rate risk exposures. Forward currency contracts
are entered into for periods consistent with the specific underlying exposures
and do not constitute positions independent of those exposures. The use of
these derivative financial instruments allows us to reduce our overall exposure
to exchange rate movements, since the gains and losses on these contracts
substantially offset losses and gains on the underlying liabilities being
hedged. As of November 30, 2000, our primary foreign currency market exposures
were the British Pound, the Euro and the Australian Dollar.
The fair value of forward currency contracts is sensitive to changes in
foreign currency exchange rates. As of February 29, 2000 and November 30, 2000,
a 10% appreciation or depreciation in foreign currency exchange rates from the
prevailing market rates would change our related net unrealized gain or loss
for Fiscal 2000 and the nine months ended November 30, 2000 by approximately
$7.9 million and $13.1 million, respectively. Such unrealized gains or losses
would be partially offset by corresponding decreases or increases in the
underlying value of forward currency contracts.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instrument and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires that all derivative instruments be measured at
fair value and recognized in the balance sheet as either assets or liabilities.
As amended by SFAS Nos. 137 and 138, we are required to adopt SFAS No. 133
commencing March 1, 2001. We are in the process of evaluating the effects of
SFAS No. 133.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. On June 26, 2000, the SEC issued SAB 101B to defer the
effective date of implementation of SAB 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 31, 1999. The adoption
of SAB 101 had an immaterial effect on our consolidated financial statements.
26
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In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"). FIN 44, an interpretation of APB 25, provides
guidance on the application of APB 25 for stock compensation involving
employees. FIN 44 was effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12, 2000.
The adoption of FIN 44 did not have an effect on our consolidated financial
statements.
Impact of Inflation
We have not been adversely affected by inflation as technological advances
and competition within the communications and networking industry has generally
caused prices of the products sold by us to decline. Management believes that
we could pass on any price increases to our customers, as the prices that we
charge are not set by long-term contracts.
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BUSINESS
Overview
We are a significant sales channel for Cisco Systems, a dominant vendor in
the communications and networking equipment market. We are also an important
sales channel for Nortel Networks, Avaya Communication and other leading
vendors of networking technology. We sell exclusively to reseller customers
throughout the U.S. and in selected international markets. We focus on our
vendors' technologically advanced products and provide our customers with the
necessary technical expertise, sales support and services required to sell
these products. We have developed significant technical competencies and a wide
array of support services, which allow us to complement or act as an extension
of our vendors' sales forces. We currently have a staff of more than 400
salespersons supported by more than 100 certified technical personnel. We
provide each of Cisco, Nortel and Avaya with a dedicated sales team by
marketing products and services through three branded divisions, each focused
on the products of one of these vendors.
In order to concentrate on their business objectives and meet growing
demand, Cisco and other leading vendors are increasingly selling their products
through third party or indirect sales channels. According to a Gartner Group
report of June 2000, more than 75% of Cisco's revenues are generated through
indirect sales channels. Indirect channels allow these vendors to outsource
sales and support functions, especially those that are necessary to sell
complex products. As these vendors sell directly to only a limited number of
customers, many customers, including some of significant size, rely on us and
other distributors as authorized sources of our vendors' products. In the nine
months ended November 30, 2000, we sold $1.1 billion of Cisco products.
We target sales opportunities that require a high degree of specialization
and customization, rather than focusing our efforts on selling products like
commodities purchased off the shelf. Our customers are value-added resellers,
systems integrators and service providers that resell networking products and
solutions to business and government. They generally require additional
expertise and/or resources to sell highly complex communications products and
solutions. Our sales and technical personnel assist our customers with network
design and consulting, pre-sales and post-sales support, training, security
consulting, and staging and configuration services. These value- added sales
and support services enable our customers to design and provide solutions to
end-user needs. These solutions include the building of communications networks
that enable applications such as Internet access, e-commerce, remote access,
virtual private networks, video streaming and unified messaging. Our services
enable our customers to expand their geographic presence, enter new markets and
offer a more comprehensive set of networking services.
Industry Background
Continued Growth in the Use of the Internet and Internet-related
Applications. The demand for communications networks has increased
significantly over the past several years. This demand can be attributed to the
growth and widespread use of the Internet, as well as Internet-based
applications such as e-mail and e-commerce. Businesses and organizations are
now connecting to the Internet via dedicated network connections such as T1, T3
and DSL connections. These high-speed connections enable businesses and
organizations to deploy new services and applications such as video
conferencing, virtual private networks, remote data storage and remote wireless
access. According to the Gartner Group, the worldwide market for communications
and networking products in 1999 was $279.0 billion.
Convergence of Voice, Video and Data Communications. Voice, video and data
networks have historically been separate, using different switching or
transmission technologies because of the inherent differences in the
requirements of the traffic they support. Until recently, technology did not
exist to reliably carry voice, video and data traffic over a single network. We
expect the convergence of voice, video and data networks to accelerate over the
next few years. This convergence is likely to be driven by the development of
e-commerce and other applications that require converged networks. Enterprises
can gain significant cost and operational advantages by utilizing a single,
integrated network for their communications.
Upgrading of Networks. In order to remain competitive, enterprises across
different markets are upgrading their communications and networking
infrastructure. To meet increasing demand, communications service providers
have been upgrading their networks and expanding capacity, which has, in turn,
reduced the cost of communications services, resulting in even greater demand
for those services. In addition, the global deregulation of telecommunications
services has resulted in a rapidly growing number of alternative
telecommunications service providers. This has further contributed to the
reduction in the cost of communications services. We believe that these factors
will continue to drive demand for communications and networking products in the
future.
Sales Channels. Vendors of communications and networking equipment use
direct and indirect sales channels to deliver their products to end-user
customers. Direct sales channels involve vendors selling their products
directly
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to end-user customers without the assistance of distributors and resellers.
Indirect sales channels allow vendors to sell their products to end-user
customers through distributors and resellers.
Distributors. In general, there are two kinds of distributors in the
communications and networking industry, broadline and value-added. Both
purchase products directly from vendors, which they sell to resellers and
end-user customers. Broadline distributors carry a variety of products, many of
which are high-volume, low-dollar-cost or commodity-type products, such as
personal computers, connector cables, office supplies, office furniture and
printers. These distributors compete primarily on unit price, shipping costs
and product availability. Value-added distributors, by contrast, are generally
organized to address the needs of resellers that require the technical support
and understanding necessary to sell complex products and solutions, such as the
systems used in communications networks. They have sales and technical
personnel who are trained and/or certified by vendors in a manner similar to
the vendors' own staff. These distributors compete on the basis of their
ability to sell more advanced products, and sales and support services that
match the complexity of those products, as well as price.
Resellers. Resellers purchase products from vendors or distributors and
generally sell to end-users. Many resellers do not have direct purchasing
relationships with vendors. They depend on distributors with the necessary
vendor relationships, systems and infrastructure for purchasing and to provide
fulfillment and other services. Resellers generally purchase commodity-type
products that can be easily shipped, deployed, serviced or configured from
broadline distributors. For the technical expertise and support functions
necessary to sell more complex products and solutions, resellers generally rely
on value-added distributors.
Vendors' Growing Reliance on Indirect Sales Channels. Cisco, Nortel and
Avaya, and other leading vendors, have focused their efforts on marketing and
product research and development. Their direct sales channels are organized to
sell directly only to a limited number of customers. Communications and
networking equipment products have become increasingly complex and require
advanced technical understanding as to configuration, implementation and
interoperability. Demand for these products is growing among end-users and
resellers of all sizes, many of whom do not have the requisite technical
understanding to identify and operate the products and solutions best suited to
their needs. In order to efficiently meet these demands, vendors are
increasingly selling their products through indirect channels. We believe that
the importance of indirect sales channels to vendors will continue to grow.
Benefits to Vendors and Customers
We are well-positioned to take advantage of the opportunities created by
these industry trends.
Benefits to Vendors
We are a major sales channel for our vendors.
Expanded Sales Reach. With over 400 salespersons in the U.S., Canada, the
United Kingdom, Germany, Australia, Brazil and Singapore, we provide extensive
sales coverage for our vendors' products and services. We provide access to
customers that are not otherwise served by our vendors' direct sales force.
Through a variety of marketing, training and selling initiatives, we help
introduce new products of both leading and emerging vendors to our customers.
Vendor-focused Sales Organization. We have organized our sales and
marketing efforts in three distinct divisions. Each division is focused on
products of a single primary vendor - Cisco, Nortel or Avaya - as well as
selected complementary products from other vendors. Each division therefore
works to generate brand loyalty for its particular vendors, without
cross-selling competing products.
Product Support. Our sales staff is supported by our 107 technical
personnel. Of these, more than two thirds have vendor and/or other industry
certifications, including such accreditations as Cisco's Design Associate,
Network Professional and Internetworking Expert accreditations, and Nortel's
Certified Account Specialist, Design Specialist and Support Specialist
accreditations. By providing qualified technical support prior to and following
sales, we enable our vendors to rely on us for vital product support functions
without having to directly address the needs of multiple end-users or
resellers.
Logistics Management and Inventory Services. Through our 12 warehouses, we
serve as a point of systems aggregation for our vendors. We often perform final
product assembly functions. For example, we install software on routers as
requested by the customer, and configure and test products before shipping. We
also assist our vendors with the processing of warranty claims and the handling
of returned products.
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Benefits to Customers
We enable our customers to be more competitive by extending the benefits
of our focused relationships with our principal vendors to the reseller
marketplace.
Value-added Sales and Support Services. We offer a number of value-added
sales and support services to assist our customers throughout the sales
process. Our vendor- and industry-accredited sales and technical personnel
assist customers in the planning and design of solutions and advise them on the
optimal product or service configuration to match their needs. Our customers
rely upon us as a primary source of technical and other product support and can
purchase from us a variety of vendor and other third party support programs.
Training and Marketing Programs. We offer customized training and
marketing programs for our customers' sales and technical staff using a variety
of media including the Internet, video streaming and classroom instruction.
During calendar 2000, our courses were attended by more than 3,900 participants
in North America. Our programs offer, among other things, information on
products of our vendors, technical training, and training tailored to specific
markets such as the federal government, the education market and the
telecommunications market.
Technology Centers. We have two technology centers in the U.S. and one in
the United Kingdom. Each technology center is a laboratory facility equipped
with a wide array of fully configured Cisco products. At our technology
centers, customers can replicate networks and test products in a laboratory
environment before making purchase commitments. Customers also use our
technology centers to host product demonstrations for end-users, and to conduct
meetings and seminars. In addition, we use our technology centers to prepare
customers' staff for accreditation by Cisco.
Logistics and Inventory Management. Our logistics management functions
include pre-assembling, custom- building, testing and custom-labeling products.
As part of our inventory management functions, we allocate products for the
purposes of periodic shipment in accordance with multi-phase customer
implementation schedules. By shipping directly to end-users from our inventory
locations, or arranging for shipment directly from vendors, we are able to
reduce the need for our customers to hold inventory.
Strategy
Our objective is to continue to be a leading sales channel for the
dominant technology vendors in the communications and networking equipment
market. To achieve our objective, we intend to:
Continue to expand our relationships with Cisco, Nortel and Avaya. As
Cisco, Nortel and Avaya outsource an increasing number of sales and support
functions, we are expanding our capacity to provide those services, and further
developing our role as a sales channel. As new technologies are deployed at an
accelerated pace, our vendors are opening new categories of customer to us,
such as telecommunications companies and Internet service providers. We also
intend to continue to expand our operations in Europe and other markets outside
the U.S. in concert with our primary vendors.
Expand penetration in existing markets. We intend to continue to increase
sales in markets in which we currently participate by enhancing our value-added
sales and support services offerings, expanding our sales force, and adding new
products to our portfolio. This will allow us to provide greater market
coverage for vendors. We expect that our growth will enable us to reduce costs
as a percentage of sales by achieving greater economies of scale.
Pursue strategic acquisitions. We have significantly broadened our product
and geographic coverage by successfully completing and integrating several
acquisitions over the last three years. For example, our acquisition in August
1999 of Comstor Corporation enabled us to become a leading sales channel for
Cisco in the U.S., while our recent acquisitions of Inacom Communications, Inc.
and CCA Technologies, Inc. enabled us to become the leading sales channel for
Avaya products. We plan to continue to pursue strategic acquisitions to add
products to our portfolio, and expand our operations in international markets,
especially in sales territories of our primary vendors.
Continue to enhance our value-added sales and support services. We believe
that the quality and range of our value-added sales and support services is a
significant factor that differentiates us from our competitors and strengthens
our relationships with customers. We intend to continue to enhance existing
value-added sales and support services and develop new ones designed to
increase our significance as a sales channel for our vendors. For example, we
have recently introduced technology centers for Cisco products. We intend to
continue to build new technology centers for testing and demonstrating products
and for training customer staff. In addition, we currently offer fee-based
professional services in connection with sales of Cisco products. We intend to
make them available with sales of products from our other principal vendors.
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Continue to add new or emerging technologies to our product portfolio. We
believe that emerging or complementary technologies present significant growth
opportunities for us. These technologies expand the range of solutions our
reseller customers can provide to end-users. The complexity of the products and
solutions that are designed using these technologies creates demand for our
value-added sales and support services. These services generate higher gross
margins for us.
Achieve efficiencies by completing the implementation of COMPASS. We
intend to continue the implementation of COMPASS, our new centralized
processing and information system. COMPASS is designed to handle all aspects of
information management in our operations. It is web-enabled to allow our
customers to gain access to information such as pricing and availability of
products, and to place and track purchase orders online. We expect COMPASS will
allow us to achieve significant cost and operational efficiencies.
Sales and Marketing
We have three sales divisions that focus on marketing products from our
three primary vendors, as well as selected other vendors. Our sales divisions
are branded Comstor, Westcon and Voda One, each of which principally sells
products from one of our primary vendors. We generally refer to these as our
lead products. These products typically include the major components of
networks, such as hubs, routers, switches and private branch exchanges. Each
division also sells selected complementary products from other vendors, which
allow end-users to enhance the functionality of networks by providing
additional features such as security, wireless connectivity and caching.
As of November 30, 2000, we had 411 sales personnel and 62 marketing
personnel in 7 countries, serving more than 9,450 customers. Our sales and
marketing personnel are supported by 107 certified technical personnel. Our
sales staff is compensated on the basis of both revenues and margins generated,
as well as the achievement of specific objectives set by management.
To enhance our relationship with our primary vendors, the operations of
each of our sales divisions within a specific region are aligned with the sales
territories of its primary vendor. The primary-vendor focus of each division,
coupled with the fact that our divisions do not generally sell products that
compete with lead products, helps us develop strong relationships with our
primary vendors. Personnel in each division collaborate with their vendor
counterparts in pursuing sales opportunities, product rollouts, training of
staff and customers, and addressing mutual inventory requirements. We believe
that this collaboration gives us a significant competitive advantage.
Comstor
Our Comstor division offers a wide range of Cisco products in the U.S.,
the United Kingdom, Germany, Australia and Singapore. We are one of only three
authorized distributors for Cisco in the U.S., and we believe we are one of the
two largest distributors of Cisco products in all of our other countries of
operation. We sold $1.1 billion of Cisco products during the nine months ended
November 30, 2000. Comstor is our largest sales division, with 216 sales
personnel and 26 marketing personnel as of November 30, 2000, of which 109 are
located in North America and 133 are located in our foreign offices. As of the
same date, Comstor had 61 technical personnel, of which 23 are located in the
U.S. and 38 are located in our foreign offices.
Sales and Technical Personnel. Comstor's entire sales staff is certified
by Cisco to sell its products. We believe that Comstor's sales staff has the
same level of expertise as Cisco's own sales staff. Every member of Comstor's
sales staff completes the Cisco Small and Medium Business certification and/or
the Cisco Certified Design Associate accreditation, as well as in-house courses
on Cisco products. In addition, Comstor's sales staff receives ongoing training
conducted by other vendors in connection with complementary products, or by our
technical personnel. This training maintains core competencies and
understanding of new products and technologies offered by Cisco and other
vendors. Comstor's technical personnel include various highly-specialized
pre-sales, post-sales and field-based engineers who hold multiple vendor and
industry certifications, including Cisco's Design Associate, Network
Professional and Internetworking Expert accreditations.
Collaboration with Cisco Sales Force. Comstor's sales staff collaborates
with Cisco's own sales and marketing staff through numerous points of contact
to jointly target industry and market-specific sales opportunities. Regional
managers work with Cisco's manager of channel operations to support regional
business activities such as jointly pursuing significant sales opportunities
and forecasting inventory requirements. Product managers establish close ties
with their counterparts at Cisco to address product allocation, pricing and
prioritization issues. Comstor's government program director works with his
Cisco counterpart to manage sales of Cisco products to government at the
federal, state and local level.
Lead Products. Due primarily to the rapid growth of demand for Cisco's
products, Comstor has focused on selling lead products, which accounted for
96.5% of Comstor's sales in the nine months ended November 30, 2000. Comstor
sells Cisco products such as routers, switches, hubs and wireless connectivity
products. These include:
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o Catalyst 6000 Series Switches. These multi-layer switches are used in
both enterprise and service provider networks for a wide range of
switching solutions which facilitate convergence between local area
networks and wide area networks.
o Catalyst 8500 Series Switches. These multi-service switches are
designed for an enterprise network backbone. They deliver high
bandwidth, support voice and data integration, and enable the
unlimited extension of a wide area network.
o Cisco 7200 Series Routers. These multi-function routers enable
enterprise and service provider networks to reduce wide area network
provisioning costs and support differentiated services. From a single
platform, they provide value-added applications such as traffic
management, accounting and quality of service.
o Cisco Content Switching Products CSS 11000 (Arrowpoint). Arrowpoint
products automatically deliver content to servers by providing
transparent on-demand caching while saving bandwidth capacity.
Westcon
Our Westcon division offers a wide range of Nortel products in the U.S.,
Canada, the United Kingdom, Australia and Brazil. Sales of Nortel products
accounted for 48.2% of Westcon's total sales in the nine months ended November
30, 2000.
In recent years, complementary products have become a larger proportion of
Westcon's portfolio as part of our diversification strategy. Complementary
products accounted for 51.8% of Westcon's sales in the nine months ended
November 30, 2000. Westcon is a significant sales channel for vendors of
complementary products such as Check Point, selling $50.3 million of Check
Point products in the nine months ended November 30, 2000.
As of November 30, 2000, Westcon had 157 sales personnel and 32 marketing
personnel, of which 111 are located in North America and 78 are located in our
other offices. As of the same date, Westcon had 43 technical personnel, of
which 21 are located in North America and 22 are located in our other offices.
Sales and Technical Personnel. Westcon's sales personnel are certified by
Nortel and other vendors. They are regularly cross-trained on interoperability
of Nortel products with complementary products. Technical staff simulate
proposed designs and test products and solutions in a laboratory environment to
determine whether they meet end- users' requirements.
Collaboration with Vendors' Sales Force. Westcon's sales staff
collaborates with the sales forces of Nortel as well as several other major
vendors, including Check Point, PictureTel and RSA Security Inc. Through
several points of interaction, Westcon coordinates customer recruitment,
product promotions and training programs with vendors. There is a weekly
exchange of sales pipeline information in order to plan future marketing
activities and maximize product availability for Westcon customers. Regional
managers work with vendors' field sales organizations to support business
development activities such as jointly targeting new reseller customers through
telemarketing sales efforts focused on specific customer categories in
designated territories. Product managers work closely with their vendor
counterparts for the marketing and promotion of products.
Lead Products. We have recently expanded our operations to sell more
Nortel products that facilitate the convergence of voice and data. This allows
us to build on our strength in data networking products and solutions to enter
the market for convergence of voice, video and data networking solutions.
Westcon sells Nortel products such as routers, switches, hubs and wireless
connectivity products, including:
o Contivity VPN Systems. These systems are used by enterprises or
service providers building managed virtual private networks for
intranets, extranets and remote access. They provide routing,
firewall, bandwidth management, encryption, authentication and data
integrity across networks and the Internet.
o Business Communications Manager, or BCM. The BCM is a communications
system for small and medium businesses that combines voice and data
in a single box. BCM supports a wide set of features for telephone
use as well as an integrated router for voice over Internet protocol
applications, allowing toll- bypass for voice communications between
offices over the public Internet or dedicated connection.
o Passport 8600. This multi-service router switch is used in the core
of large corporate networks. It enables integration of routing switch
technology, multi-service technology and Internet protocol telephony.
Voda One
Voda One is focused on providing Avaya's products for the rapidly growing
market for convergence solutions. We created Voda One by combining the
operations of two distributors of Avaya voice products, Inacom Communications,
Inc., which we acquired in July 2000, and CCA Technologies, Inc., which we
acquired in September 2000, with our existing Avaya operations. As a result, we
believe that we have become a leading distributor of Avaya products.
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As of November 30, 2000, Voda One had 38 sales personnel and 8 technical
personnel located in Omaha, Nebraska and Pittsburgh, Pennsylvania. Voda One is
a U.S.-based operation. We sell Avaya products in international markets through
our Westcon division.
Sales and Technical Personnel. Voda One's entire sales staff has been
trained by Avaya to sell and configure Avaya's products. In addition, every
member of Voda One's sales staff must attend a 40-hour training course on
communications and computer telephony integration, as well as a minimum of two
days of monthly training in convergence solutions.
Technical personnel are trained in Microsoft NT, Netware, Internet
protocol and voice technology. In addition, they are qualified to design,
configure and install Avaya's circuit switch and packet switch voice offerings.
Lead Products. The lead products from Avaya that Voda One carries include:
o Avaya IP600 Internet Protocol Communications Server. The IP600 is a
server used in enterprises with 20 to 200 users. It enables
communication on an Internet protocol telephone on a desktop or
mobile laptop computer. It can accommodate over 12,000 Internet
protocol user end-points in a wide area network.
o DEFINITY(R) Enterprise Communications Server, or DEFINITY ECS.
DEFINITY ECS is intended for large locations with the functionality
for 25,000 telephones. DEFINITY ECS Solutions can process, switch,
transport and store multimedia communications, and enhance features
and control in all elements of a network.
o ECLIPS Enterprise Class IP Solutions. The ECLIPS product range is
comprised of Internet protocol servers that enable voice
communications over data connections.
Complementary Products
Comstor, Westcon and Voda One sell a selection of complementary products,
including:
o security products from vendors such as Check Point, RSA Security Inc.
and Intrusion.com, which enable secure and reliable communication
over a network and between networks;
o wireless access products from vendors such as Western Multiplex,
which facilitate the use of cost-effective high-speed communication
networks for mobile communication;
o caching products from vendors such as Infolibria and CacheFlow, which
improve organizational storage efficiency, reduce bandwidth costs and
increase control over access to content; and
o video communications products from vendors such as PictureTel.
Agreements with Vendors
We purchase products directly from our vendors, generally on a
nonexclusive basis. Our purchase agreements with vendors typically permit
either party to terminate upon 30 to 90 days' notice. They generally require us
to sell their products only to resellers and in specified territories. They
also generally contain stock rotation and price protection provisions which
help reduce our risk of loss due to slow-moving inventory, vendor price
reductions, product updates or obsolete products. As a matter of industry
practice, vendors generally repurchase their products if they terminate a
purchase agreement even in the absence of a contractual obligation to do so. We
are dependent on this industry practice in the event that any vendor terminates
our purchase agreement and the vendor is not contractually required to
repurchase our inventory upon such termination.
Value-added Sales and Support Services
We believe that our value-added sales and support services enable us to
compete on the basis of our ability to support complex solutions for specific
customer needs, rather than price. They are intended to link resellers and
vendors to us as a sales channel, while meeting the growing demand by vendors
and resellers to outsource non-core business activities. Our services assist
our reseller customers in offering more comprehensive network services in order
to increase their sales opportunities.
The value-added sales and support services we offer for our customers and
vendors include:
Pre-sales Support. We work closely with customers to assist in the
planning, design and configuration of the set of products that would provide
the optimal solution to the needs of the end-user. Our sales and technical
personnel also accompany customer sales staff on visits to end-user sites to
assess business and network requirements. Our staff advises our customers on
specific features, capabilities, configurations and interoperability of
different products.
Logistics and Inventory Management. We often perform final product
assembly functions, such as installing recent software upgrades on products
before shipping. We can reduce customer shipping and operating costs by
pre-assembling, custom-building, testing and custom-labeling products before
shipment. We enable customers to
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reduce inventory storage and freight costs, and achieve faster order
turnaround, by shipping products directly to the end-user. For example, the ISO
9002 registered channel assembly process that Voda One has developed with Avaya
significantly reduces the time it takes for an Avaya solution to reach the
end-user. In addition, our systems allow us to allocate inventory in advance
based on our relationship with the customer, rather than on a
first-come-first-served basis, which makes us a more reliable source of
products for our principal customers.
Post-sales Support and Technical Services. We serve as a primary source of
technical support following a sale, thereby substantially reducing the number
of service calls received by our vendors. We also offer customers after-sales
support contracts for services performed by us, or by third parties, including
vendors. Through WestView, our online program, customers can submit questions
to which our technical personnel generally respond via e-mail within 2 hours of
the request.
Professional Services. Our Comstor division offers customers a number of
fee-based services, which we refer to as professional services. These include:
o Product Preparation Services: Our configuration services include
assembling network equipment, installing and configuring software,
and documenting the network equipment configuration.
o Staff Augmentation: We enable resellers to take advantage of
opportunities or projects for which they may not have adequate staff,
by providing engineers with a variety of qualifications based on the
needs of the project. In addition, we assist resellers in producing
proposals or tenders for business.
o Network Design and Consulting Services: Our personnel are available
for consultation regarding decisions about network design,
performance and expansion. We assess the realized network performance
relative to the investment that has been made in equipment and
bandwidth. Based on our assessment, we identify problems and
recommend solutions. In addition, we assess network security,
locating weaknesses and recommending improvements.
o Technology Centers: Our technology centers are laboratory facilities
equipped with a wide range of fully configured Cisco products. We
provide the opportunity for customers to replicate networks and test
products in a laboratory environment without jeopardizing their own,
or end-users', networks. Customers subscribe to our laboratory
services in order to use our facilities to test prospective product
configurations, perform end-user demonstrations, and train their
staff.
o Customer Training: Our training assists customer staff in attaining
Cisco accreditations, and thereby enables customers to attain
accreditations such as Cisco Premier Certified Partner status. We
also develop customized training programs to meet the specific needs
of certain customers, in addition to the programs described below.
Marketing Programs and Customer Training. We have developed a detailed
database of past sales to identify new sales opportunities as our vendors
develop new products and solutions. We also recruit new customers through
extensive telemarketing, web-based marketing and trade publication advertising
programs. We conduct a range of customer training programs through a variety of
media, designed to develop customer awareness of new products and solutions
from our vendors. Our training programs include:
<TABLE>
Training Programs Content Medium of Instruction
-------------------------- -------------------------------------- ----------------------------------------
<S> <C> <C>
Fast Track Vendor Focus: Vendor-specific product Classroom instruction.
information and solutions, and
preparation for vendor certification.
Future Track Technology Focus: New technologies Seminars.
and selling strategies.
Tele Track Industry Focus: Recent trends in Monthly teleconferences hosted by our
networking industry and customer product managers and vendors.
opportunities.
Web Track Online Training: Course materials. Internet-based streaming video available
24 hours a day, seven days a week, on
our web site.
</TABLE>
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We also offer programs to educate resellers to enable them to take
advantage of opportunities in new vertical markets:
<TABLE>
Vertical Marketing Programs Content
---------------------------------- ----------------------------------------------------------
<S> <C>
Federal Edge Federal Government Market Focus: Training and events,
trade-show opportunities and other information relating to
sales opportunities with the federal government.
Smarter Edge Education Market Focus: Training, teleconferences and
other market information, including information on state and
local school construction and renovation.
Access Edge Telecommunications Companies Market Focus: Training,
seminars and events to develop partnerships between
customers and service providers.
</TABLE>
Warranty Services. We process warranty claims to the extent agreed to with
vendors, accepting returned products if warranty conditions are satisfied. We
resell vendors' extended warranty and service contracts, although we do not
provide our own warranties.
Customers
We serve over 9,450 customers, with no single customer accounting for more
than 5% of our consolidated sales in the nine months ended November 30, 2000.
Our customers are primarily value-added resellers, systems integrators and
service providers.
Value-added Resellers. Value-added resellers, or VARs, focus on selling
complex communications and networking products, and designing and providing
solutions using those products, to address the needs of end-users. Our most
significant VAR customers are those that target end-users in specific markets,
such as the hospitality, government and education markets.
Systems Integrators. Systems integrators provide end-users with
large-scale, project-based solutions. They work on projects that typically span
cities or states and are installed over a period of several months. They offer
extensive services including consulting and the development of software
applications. As compared to value-added resellers, a smaller portion of their
total revenues is derived from resale of products.
Service Providers. Service providers provide data, voice and video
communication services to businesses and consumers. They include regional,
national and international long distance telecommunications carriers, as well
as Internet, cable and wireless service providers. They resell products
purchased from us to end-users. Our service provider customers are generally
large companies focused on the delivery of communications services. They rely
on us for expertise related to customer premise equipment.
Below we list certain of our most significant customers by type:
<TABLE>
<S> <C> <C>
VARs Systems Integrators Service Providers
Annese & Associates, Inc. Alcatel UK Limited Cable & Wireless, Inc.
Computacenter plc Logical UK Limited Cincinnati Bell Wireless Co. Inc.
Daycom Systems Inc. Milgo Solutions Comcast Telecommunications, Inc.
The Presidio Corporation NEC Business Network Solutions, Inc. Qwest Internet Solutions, Inc.
Xeta Technologies Inc. Siemens Network Systems Limited Sprint Communication Co.
Williams Communications
Solutions LLC
</TABLE>
Logical UK Limited is a subsidiary of Datatec.
Information Systems
We are in the process of implementing COMPASS, our new information system,
across our operations. COMPASS is an enterprise-wide real-time information
system from J.D. Edwards that we have customized to address our needs. COMPASS
is intended to provide us with a single global platform for communication, both
internally and with our vendors and customers. Currently, 25% of our worldwide
sales run on COMPASS. We are implementing COMPASS in a planned rollout, one
business at a time, in order to minimize operational disruptions and accelerate
the realization of benefits offered by the system.
35
<PAGE>
COMPASS allows our customers and employees to access our systems via the
Internet. It allows us to provide our customers with information on pricing and
availability of our products in inventory. It enables them to place purchase
orders online and obtain tracking information on shipped products. COMPASS is
also designed to facilitate customers' access to our value-added sales and
support services online. By expanding the means of communication with our
customers and vendors, we plan to build on the efficiencies created by improved
access to information.
The portion of our operations not currently using COMPASS operates using a
variety of legacy software systems that provide the information required by
management to operate the business. We believe that all our existing
information systems have an appropriate level of functionality to continue to
operate until the implementation of COMPASS is completed. Once implemented, we
expect that COMPASS will provide significant opportunities to increase
efficiency.
Competition
Competition in the market for distribution of communications and
networking equipment products and services in the U.S. and the foreign markets
in which we operate is intense. We compete primarily on the basis of:
o ability to tailor solutions to specific customer needs;
o service, support and training;
o vendor selection and product availability;
o ability to arrange for financial assistance;
o price; and
o speed of delivery.
We compete with a number of national and international value-added
distributors, including Azlan Group plc, Landis Group N.V. and ScanSource Inc.
(through its division Catalyst Telecommunications). We also compete, both in
the U.S. and abroad, with certain broadline distributors, such as Ingram Micro
and Tech Data, that are authorized to sell products that are the same as or
similar to the products we sell. In addition, we face competition from direct
sales by our vendors who offer certain resellers prices that are lower than the
prices they offer to us.
Employees
As of November 30, 2000, we had 1,057 full-time employees, of which 535
are based in the U.S. and 242 are based in the United Kingdom. The remainder
are based in our operations in Canada, Germany, Australia, New Zealand, Brazil
and Singapore. We consider our relations with our employees to be good.
36
<PAGE>
Facilities
Our worldwide executive headquarters are located in Tarrytown, New York.
Our principal properties consist of the following:
<TABLE>
Approximate Floor Area in
Location Principal Use Square-Feet
-------------------------------------------- ---------------------------- -------------------------
<S> <C> <C>
NORTH AMERICA:
Elmsford, NY Warehouse 105,000
Tarrytown, NY Offices 95,000
Lachine, Quebec Offices/Warehouse 49,000
Chantilly, VA Warehouse 44,000
Chantilly, VA Offices 35,000
Pittsburgh, PA Warehouse 23,000
Broomfield, CO Offices 17,000
Pittsburgh, PA Offices 16,000
Omaha, NE Offices 11,000
Mississauga, Ontario Offices 7,000
Eastchester, NY Data Center 4,000
EUROPE:
Slough, United Kingdom Offices/Warehouse 27,000
Cirencester, United Kingdom Warehouse 18,000
Berlin, Germany Offices 13,000
Cirencester, United Kingdom Offices 10,000
ASIA-PACIFIC:
Sydney, Australia Offices/Warehouse 32,000
Singapore Offices 3,000
SOUTH AMERICA:
Rio de Janeiro, Brazil Offices/Warehouse 18,000
Sao Paulo, Brazil Offices 4,000
</TABLE>
All of our facilities are leased. We do not anticipate any material
difficulty in renewing any of our leases as they expire or securing replacement
facilities, in each case on commercially reasonable terms.
Legal proceedings
Neither we nor any of our subsidiaries are a party to any material legal
proceedings.
37
<PAGE>
MANAGEMENT
Management Structure
Executive Officers and Directors
The following table sets forth information with respect to our executive
officers and directors as of January 10, 2001:
<TABLE>
Name Age Position
----- ---- -------
<S> <C> <C>
Thomas Dolan................ 47 Director, President and Chief Executive Officer
Philip Raffiani............. 46 Director, Executive Vice President and General Manager,
Treasurer and Secretary
Alan Marc Smith............. 37 Executive Vice President and Chief Operating Officer
John P. O'Malley III........ 38 Vice President, Finance and Chief Financial Officer
John McCartney.............. 48 Chairman of the Board
Jens Montanana.............. 40 Director
Robin Rindel................ 38 Director
Jon James................... 38 Director
</TABLE>
Thomas Dolan, our co-founder, was elected a director in September 1996 and
has served as our President and Chief Executive Officer since November 2000.
From our inception in April 1985 to November 2000, Mr. Dolan served as our
Executive Vice President of Worldwide Sales and Marketing. Prior to founding
Westcon Group, Mr. Dolan was Manager of Systems Development at Avon Products,
Inc., a manufacturer of cosmetics, from May 1979 to March 1985. Mr. Dolan has a
B.S. in engineering from Tulane University. Following his graduation, Mr. Dolan
served as an officer in the U.S. Marine Corps.
Philip Raffiani, our co-founder, has served as our Executive Vice
President and General Manager since our inception in April 1985, as a director
since September 1996 and as our Treasurer and Secretary since November 2000.
Prior to founding Westcon Group, Mr. Raffiani operated his own consulting and
programming business on IBM mainframe systems from January 1981 to May 1985. He
served as Vice President of Operations for Datafast, Inc., an IBM mainframe
services bureau, from May 1977 to January 1981. Mr. Raffiani was a director of
Brightwork Development, Inc., a designer of software utilities, from May 1988
to March 1994. Mr. Raffiani has a B.S. in business administration from Rutgers
University.
Alan Marc Smith has served as our Executive Vice President and Chief
Operating Officer since January 1998. He joined us in February 1997 as Director
of Business Development and Planning, a position he held until January 1998.
Prior to joining us, Mr. Smith was Manager of the Business Management Group at
Bay Networks, Inc. (now the data division of Nortel Networks, Inc.), and its
predecessor, Synoptics Communications Corporation, from December 1993 to
February 1997. From June 1989 to December 1993, Mr. Smith held the position of
Manager of Contracts at Oracle Corporation. Mr. Smith has a B.A. in economics
from Union College.
John P. O'Malley III has served as our Vice President, Finance since March
1999 and as our Chief Financial Officer since November 2000. Prior to joining
us, Mr. O'Malley was self-employed as a financial consultant from November 1997
to March 1999. From September 1996 to November 1997, Mr. O'Malley served as
Executive Vice President, Finance, and Chief Financial Officer of Medical
Resources, Inc., a national provider of diagnostic imaging services. From
December 1992 to September 1996, Mr. O'Malley served as Executive Vice
President, Finance, Chief Financial Officer and Secretary of NMR of America,
Inc., another provider of diagnostic imaging services. He initially joined NMR
as Director of Finance in May 1992. From August 1984 to May 1992, Mr. O'Malley
was employed by the public accounting firm of Ernst & Young LLP and its
predecessors, most recently as an Audit Manager. Mr. O'Malley is a certified
public accountant with a B.S. in accounting from the University of Delaware.
John McCartney was elected a director in August 1998 and was elected
chairman of our board of directors in January 2001. Mr. McCartney has served as
vice chairman of the board of directors of Datatec Limited since October 1998.
From June 1997 to March 1998, he held the position of President of 3Com
Corporation's Client Access Unit. Mr. McCartney served as President and Chief
Operating Officer of from January 1996 to June 1997. He joined the executive
management team of US Robotics in March 1984 as Vice President and Chief
Financial Officer and served in various executive capacities until becoming
President and Chief Operating Officer of US Robotics in January 1996. From
April 1981 to March 1984, Mr. McCartney was Vice President of Operations of
Dur-o-wal, Inc. From July 1976 to April 1981, he held the position of Manager
at Grant Thornton & Company, a public accounting firm. Mr. McCartney is a
director of Datatec, A.M. Castle Corporation, a steel distributor,
Quotesmith.com, Inc., a web-based insurance agency, and Next Level
Communications, Inc., a manufacturer of
38
<PAGE>
telecommunications and networking equipment. Mr. McCartney is a certified
public accountant with a B.A. in philosophy from Davidson College and an M.B.A.
from the Wharton School.
Jens Montanana was elected a director in August 1998. Mr. Montanana
founded Datatec Limited in February 1986 and has served as Chief Executive
Officer of Datatec since its inception in February 1986 and as Chairman of the
board of directors of Datatec since December 1994. In December 1993, Mr.
Montanana co-founded Xedia Corporation, a provider of network switching
products. From August 1989 to September 1993, Mr. Montanana held the position
of Managing Director and Vice President of US Robotics UK Limited. Mr.
Montanana is a director of Vesatile Mobile Systems Inc., a developer of
wireless software applications. Mr. Montanana graduated with a degree in
electronic engineering from the University of Reading in the United Kingdom.
Robin Rindel was elected a director in August 1998. Mr. Rindel has served
as Group Commercial Director of Datatec Limited since September 1998. In this
capacity, he leads a team responsible for Datatec's corporate finance and
investor relations activities and is also responsible for overseeing Datatec's
acquisition activities. From September 1995 to September 1998, Mr. Rindel held
the position of Group Financial Director of Datatec. Prior to joining Datatec,
he was the Executive Director of Corporate Finance of Merhold Kirsh Capital
Limited, a company that provides advice relating to corporate finance and
investment banking, from May 1993 to August 1995. Mr. Rindel is a chartered
accountant. He graduated from the University of South Africa in Pretoria, South
Africa.
Jon James was elected a director in August 1998. Mr. James has served as
Group Finance Director of Datatec Limited since September 1998. Prior to
joining Datatec, Mr. James was a partner of Deloitte & Touche in their
Johannesburg, South Africa office from September 1993 to August 1998. Mr. James
is a chartered accountant. He graduated from the University of the
Witwatersrand in Johannesburg, South Africa.
Board Composition
Our bylaws allow for between six and eleven directors, with the exact
number of directors to be determined from time to time by the board of
directors. We currently have six directors.
Board Committees
The audit committee of our board of directors will be comprised of three
independent directors. The audit committee reviews and, as it deems
appropriate, recommends to the board of directors the internal accounting and
financial controls for Westcon Group and the accounting principles and auditing
practices and procedures to be used in preparation and review of our financial
statements. The audit committee also reviews the scope and results of the
professional services provided by our independent auditors and the fees charged
for these services and makes such recommendations to the board of directors as
it deems appropriate, including recommendations as to the appointment of
independent auditors.
The compensation committee of our board of directors will be comprised of
three independent directors. The compensation committee reviews and, as it
deems appropriate, recommends to the board of directors policies, practices and
procedures relating to the compensation of the officers and other managerial
employees and the establishment and administration of employee benefit plans.
The compensation committee also administers the Westcon Group Stock Option Plan
and advises and consults with our officers as may be requested regarding
policies relating to managerial personnel.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee.
Director Compensation
Directors receive no additional compensation for their services as
directors, but are reimbursed for their reasonable and necessary out-of-pocket
expenses incurred for attending board and board committee meetings. We have
established the Westcon Group Stock Option Plan pursuant to which our directors
are eligible to receive stock option grants.
39
<PAGE>
Employment Agreements
Thomas Dolan, Philip Raffiani and Alan Marc Smith
Through a wholly owned subsidiary, we have entered into employment
agreements with each of Thomas Dolan, Philip Raffiani and Alan Marc Smith,
under which each of these officers receives an annual base salary of $450,000
beginning on October 1, 1999. Each agreement will expire on . Under these
agreements, in addition to his base salary, each officer receives:
o an annual bonus of $50,000 upon achievement of performance objectives
determined by our board of directors;
o benefits that are made available to our other employees, including
401(k) plan benefits, stock options, medical insurance, life
insurance and vacation; and
o other benefits at the sole discretion of our board of directors,
including disability insurance and additional life insurance.
Each officer will continue to receive his annual base salary in the event
his employment is terminated for any reason other than for cause or as a result
of the officer's death. In addition, a terminated officer will receive an
annual termination payment of $150,000 for two years from the date of the last
payment of his annual base compensation, unless the officer voluntarily
terminates his employment, in which case the termination payments will be at
our option. A terminated officer, his spouse and any children will also
continue to receive comparable medical insurance coverage for two years from
the last payment of the officer's annual base compensation.
Each agreement contains covenants requiring the officer to disclose,
assign and transfer to us all work product and intellectual property created by
him during his employment with us, prohibiting disclosure of our proprietary
and confidential information, and restricting him from competing with us and
soliciting our employees, consultants, contractors, vendors and customers until
the date eighteen months after the later of:
o the final payment of his annual base salary; and
o the final termination payment.
40
<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation
paid during Fiscal 2000 to:
o our chief executive officer during our last fiscal year; and
o our four other most highly compensated executive officers who were
serving as executive officers at the end of Fiscal 2000;
who are collectively referred to below as the named executive officers, in all
capacities in which they served.
SUMMARY COMPENSATION IN LAST FISCAL YEAR
<TABLE>
Long-Term
Compensation
Annual Compensation Awards
-------------------- -------------
Securities
Underlying
Options(1) All Other
Name and Principal Position Salary Bonus (#) Compensation(2)
--------------------------- --------- ------ ------------- ---------------
<S> <C> <C> <C> <C>
Thomas Dolan $387,501 $20,833 30,000 $2,667
President and Chief Executive
Officer; Executive Vice President,
Worldwide Sales and Marketing
from April 1985 to November 2000
Philip Raffiani 387,501 20,833 30,000 2,667
Executive Vice President and
General Manager, Treasurer and
Secretary
Alan Marc Smith 387,501 20,833 30,000 2,667
Executive Vice President and
Chief Operating Officer
John P. O'Malley III 184,615 26,239 20,000 4,000
Vice President, Finance and
Chief Financial Officer
Roman Michalowski 387,501 20,833 30,000 2,667
President and Chief Executive
Officer until
November 2000
</TABLE>
-------------------
(1) Options represent the right to purchase ordinary shares of Datatec.
(2) Matching contributions and profit sharing contributions made by us on
behalf of the named executive officer under our 401(k) profit sharing
plan.
41
<PAGE>
Stock Option Grants in Last Fiscal Year
The following table sets forth information concerning grants of stock
options made to the named executive officers during our fiscal year ended
February 29, 2000. No stock appreciation rights were granted to the named
executive officers during that fiscal year. Each option represents the right to
purchase one ordinary share of Datatec. These options were granted on July 9,
1999 pursuant to Datatec's stock option plan. The options vest over a four-year
period, with 25% vesting after the first anniversary of the original award
date, and an additional 25% on each anniversary thereof. The options will be
fully vested in July 2003.
The table illustrates the hypothetical gains that could be achieved for
the respective options if exercised at the end of the option term. The 5% and
10% assumed annual rates of compounded stock price appreciation are mandated by
rules of the Securities and Exchange Commission and do not represent our
estimate or projection of future prices of Datatec's ordinary shares. These
amounts represent assumed rates of appreciation in the value of Datatec's
ordinary shares from their market price on the date of grant. Potential
realizable values are computed by (1) multiplying the number of Datatec
ordinary shares subject to a given option by their fair market value on the
date of the grant, (2) assuming that the aggregate stock value derived from
that calculation compounds annually for the entire term of the option, and (3)
subtracting from that result the aggregate option exercise price. Actual gains,
if any, on stock option exercises are dependent on the future performance of
Datatec's ordinary shares. The amounts reflected in the table may not
necessarily be achieved.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants(1) Appreciation for Option Term(1)
---------------------------------------------------------------------- -------------------------------------
Percent of
Number of Total Options Market
Securities Granted to Price on
Underlying Employees Exercise or Date of
Options in Fiscal Base Price Grant Expiration 0% 5% 10%
Name Granted (#) Year(2) ($/Sh) ($/sh) Date ($) ($) ($)
--------------------- ------------ ------------- ----------- -------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas Dolan......... 30,000 4.36% 5.55 11.10 7/9/04 166,516 258,526 369,834
Philip Raffiani...... 30,000 4.36 5.55 11.10 7/9/04 166,516 258,526 369,834
Alan Marc Smith...... 30,000 4.36 5.55 11.10 7/9/04 166,516 258,526 369,834
John P. O'Malley III. 20,000 2.91 5.55 11.10 7/9/04 111,010 172,351 246,556
Roman Michalowski.... 30,000 4.36 5.55 11.10 7/9/04 166,516 258,526 369,834
</TABLE>
-------------------
(1) Assumes a currency exchange ratio of 7.72 South African Rand to one U.S.
dollar as of January 9, 2001.
(2) Based on a total of 687,653 options granted under Datatec's stock option
plan to our employees, including the named executive officers.
42
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information concerning option exercises by
the named executive officers during our fiscal year ended February 29, 2000.
Options represent the right to purchase ordinary shares of Datatec. Options are
"in-the-money" if the value of Datatec's ordinary shares exceeds the exercise
price of the options. The value of the unexercised in-the-money options at
February 29, 2000 is based on the fair market value of Datatec's ordinary
shares on February 29, 2000, less the exercise price of the options, multiplied
by the number of shares underlying the options. The fair market value used in
the calculation was $22.71 per share, which was the closing price of Datatec's
ordinary shares on the Johannesburg Stock Exchange on February 29, 2000,
assuming a currency exchange ratio of 6.34 South African Rand to one U.S.
dollar as of that date.
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
Number of Value of
Securities Underlying Unexercised
Shares Unexercised Options In-the-Money Options
Acquired on Value At Fiscal Year End (#) At Fiscal Year End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
-------------------------- ----------- ----------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
Thomas Dolan.............. - - 10,000/60,000 178,391/1,013,801
Philip Raffiani........... 10,000 126,834 (1) 0/60,000 0/1,013,801
Alan Marc Smith........... 10,000 126,834 (1) 0/60,000 0/1,013,801
John P. O'Malley III...... - - 0/20,000 0/319,085
Roman Michalowski......... - - 10,000/60,000 178,391/1,013,801
</TABLE>
-------------------
(1) The value realized by the sale in the open market, by atec on behalf of
the officer exercising the option, of shares underlying the option
exercised, at a price of $17.62 per share, assuming a currency exchange
ratio of $6.34 South African Rand to one U.S. dollar as of January 28,
2000, the date of exercise.
43
<PAGE>
STOCK OPTION PLANS
Westcon Group Stock Option Plan
Our board of directors has adopted the Westcon Group Stock Option Plan.
The purposes of the plan are to promote the interests of Westcon Group and its
stockholders by helping us obtain and retain the services and advice of our
directors, officers, employees, consultants, contractors and advisers upon
whose judgment, initiative and efforts we depend and by providing those persons
with further incentives to advance our interests through the granting of
incentive and non-qualified stock options. Our stock option plan is intended to
serve as a successor equity incentive program to the Datatec Share Option
Scheme adopted by the Datatec board of directors and stockholders in 1994 and
subsequently amended. Our employees will no longer receive options under the
Datatec Share Option Scheme. The last options granted to our employees under
the scheme were granted on June 30, 2000.
Share Reserve. We have authorized 3,500,000 shares of common stock for
issuance pursuant to stock options to be granted to eligible individuals under
our stock option plan. Shares from lapsed or terminated options may be offered
under subsequent options and are not counted against the reserve amount.
Substitute options granted in assumption of, or in substitution for,
outstanding options previously granted by a company which we acquire or with
which we combine, will not reduce the number of shares available for issuance
under the plan.
Eligibility. Our directors, officers, employees, consultants, contractors
and advisors are eligible to receive awards under our plan.
Administration. Our board of directors has authorized the compensation
committee to administer the plan. The committee will have the power to
interpret the plan and the option agreements entered into under the plan, and
to make all other determinations necessary or advisable for administering the
plan. Decisions of the committee on these matters will be final and conclusive.
The compensation committee will have full power and authority, taking into
account accomplishments of the individual in furthering our interests and other
factors that it deems pertinent, to:
o select the individuals to whom options are granted, and whether the
options granted are incentive stock options or non-qualified stock
options; and
o determine the timing of the grant, the number of shares to be subject
to each option, the term of each option and the date it becomes
exercisable, whether it is exercisable in whole, or in part in
installments, and the exercise price for each option.
Any shares of common stock deliverable under the plan will be authorized
but unissued shares or treasury shares. The exercise price of an option may not
be less than the fair market value of the subject shares on the date the option
is granted, except in the case of substituted options referred to above.
However, if an incentive stock option is granted to any person who would, after
the grant, be deemed to own stock possessing more than ten per cent of the
total combined voting power of all classes of our stock or of any parent or
subsidiary of Westcon Group, the exercise price may not be less than 110% of
the fair market value of the subject shares on the date the option is granted.
Adjustments. In the event of a merger or consolidation of, or sale of all
or substantially all of the assets of, Westcon Group, or a dividend or other
distribution, recapitalization, stock split or other corporate transactions (as
more fully described in the plan), the committee may adjust:
o the number and type of shares (or other securities) that may be
issued upon the exercise of options yet to be granted;
o the exercise price per share to be paid for each outstanding option;
and
o the number and type of shares (or other securities) covered by each
outstanding option.
Term of Options. The compensation committee of our board of directors will
generally determine the date or dates on which the options become exercisable
and expire. However, no option may be exercised after 10 years from the date
that it was granted. The expiration date of an option will be accelerated in
the event that the beneficiary violates duties owed to us, dies or becomes
permanently disabled, or otherwise ceases to be eligible.
Nontransferability. An option granted under the plan may not be
transferred, assigned, pledged or hypothecated or otherwise disposed of except
by will or the laws of descent and distribution, and may be exercised only by
the person to whom it was granted during his or her lifetime.
44
<PAGE>
Termination or Amendment. Unless our board of directors previously
terminates our plan, our plan will terminate on the tenth anniversary of the
date the plan is approved by our board of directors and stockholders. Our board
may, at any time, suspend, amend or terminate the plan, but no amendment may
increase the share reserve without the approval of a majority of our
stockholders.
Datatec Stock Option Plan
Certain of our directors, officers and employees have been granted stock
options under the Datatec Share Option Scheme.
Exercise Price. The exercise price for options initially granted to our
employees under the Datatec Share Option Scheme is equal to 50% of the market
price of a Datatec ordinary share on the Johannesburg Stock Exchange for the
trading day immediately preceding the date of the grant. The exercise price for
options granted after January 2000 under the amended Datatec Share Option
Scheme is equal to 85% of the average of the closing market price of a Datatec
ordinary share on the Johannesburg Stock Exchange for the thirty days
immediately preceding the date of the grant. The exercise price may not be less
than 200 South African cents.
Exercise of Options. Each option may only be exercised in respect of
multiples of 100 Datatec ordinary shares or in full. Options generally vest at
the rate of 25% per year, beginning one year after the date of award, and have
a term of five years. An option may lapse and no longer be exercisable if:
o the beneficiary fails to exercise the option within one year after
the date that the employee retires, is terminated or dies;
o the employee ceases to be an employee for reasons other than
retirement, termination or death; or
o the interest of the beneficiary in the option becomes subject to a
claim of the beneficiary's creditors.
Changes in Control. In the event of a change of control of Datatec, the
Datatec board of directors may provide that each outstanding option will become
fully exercisable with respect to the total number of Datatec ordinary shares
subject to the option. The Datatec board of directors will use its best efforts
to arrange for a similar stock option plan after the change of control with
respect to beneficiaries holding outstanding options. If a change of control
occurs and the auditors of Datatec determine a new stock option plan has been
arranged that is equally favorable to the beneficiaries, the beneficiaries will
be required to accept options under the new plan in lieu of their existing
outstanding options under the Datatec Share Option Scheme.
45
<PAGE>
RELATED PARTY TRANSACTIONS
History of Ownership by Datatec
On August 6, 1998, Datatec purchased 10,328,554 shares of our common
stock, $0.01 par value, and $61.2 million principal amount of our outstanding
debt to Mirado Corp., from Mirado, at an aggregate purchase price of $72.8
million. Each of Thomas Dolan, Philip Raffiani and Roman Michalowski owned, and
continues to own, one third of the issued and outstanding voting common stock
of Mirado. On September 2, 1999, Datatec purchased from us 3,381,694 shares of
our common stock at an aggregate purchase price of $97 million. On February 29,
2000, Datatec acquired an additional 13,402,627 shares of our common stock in
connection with the following four transactions:
o Datatec contributed to us all of the issued and outstanding capital
stock of RBR Networks GmbH (now Comstor Networks GmbH), its German
subsidiary, in exchange for 217,604 shares of our common stock;
o Datatec contributed to us all of the issued and outstanding capital
stock of RBR Networks Pte. Ltd., its Singapore subsidiary, in
exchange for 205,000 shares of our common stock;
o Datatec contributed to us all of the issued and outstanding capital
stock of Westcon (UK) Limited, a United Kingdom subsidiary, in
exchange for 4,867,511 shares of our common stock; and
o Datatec contributed to us all of the issued and outstanding capital
stock of RBR Group Limited, a United Kingdom subsidiary, in exchange
for 8,112,512 shares of our common stock.
In addition, in connection with our acquisitions from Datatec of the
issued and outstanding capital stock of RBR Networks GmbH and RBR Networks Pte.
Ltd., we paid $5.7 million of contingent cash consideration during the nine
months ended November 30, 2000 and may be required to pay a contingent cash
consideration of up to $6.8 million if those subsidiaries achieve certain
financial objectives during Fiscal 2002.
Upon completion of this offering, Datatec will own approximately % of the
outstanding shares of our common stock. See "Risk Factors--Datatec, our
controlling stockholder, may have interests that are adverse to yours" on page
8 for additional information about Datatec's share ownership.
Agreements with Datatec
On occasion, Datatec has extended loans to us to allow us to meet our
working capital requirements. As of November 30, 2000, a principal amount of
$29.2 million was outstanding under loans from Datatec. Interest is payable on
this amount at the rate of 6.0% per annum. We intend to use a portion of the
net proceeds of this offering to repay a portion of this amount.
During Fiscal 2000, we paid Datatec $700,000 for management services and
$500,000 for acquisition-related services. During Fiscal 1999, Fiscal 2000 and
the nine months ended November 30, 2000, we sold products and services for
amounts totaling $9.7 million, $18.4 million and $28.6 million, respectively,
to subsidiaries of Datatec. We believe the terms of these sales transactions
are at least as favorable as those we could otherwise have obtained from
unrelated third parties and were negotiated on an arms-length basis.
Datatec has entered into an agreement with us not to engage, for a
five-year period, in businesses that compete with ours, except in South Africa
and certain other African countries.
Transactions with Affiliates Other than Datatec
In Fiscal 1998, Fiscal 1999, Fiscal 2000 and the nine months ended
November 30, 2000, we paid an aggregate of $92,241, $158,202, $283,980 and
$164,853, respectively, in connection with leases of office, warehouse,
temporary residence and parking space, from wholly owned subsidiaries of
Mirado.
In Fiscal 2000 and the nine months ended November 30, 2000, we paid an
aggregate of $92,126 to a subsidiary of Mirado for car services.
During Fiscal 1998, we prepaid $3.4 million under a lease for certain
facilities with a subsidiary of Mirado. In December 1999, the facilities were
sold to an unrelated third party, subject to the existing lease terms with us.
Also, in October, 2000, we subleased the facilities to an unrelated third
party. The sublease expires in Fiscal 2005. In Fiscal 2005, we may terminate
the lease, and be reimbursed by the lessor, in monthly installments, for the
portion of the prepayment that covers the remaining term of the lease.
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On November 6, 2000, we made a loan in the principal amount of $600,000 to
Alan Marc Smith, our Chief Operating Officer. Interest on the outstanding
principal balance on the loan is payable at the rate of 8.0% per annum, except
if the loan is repaid in full by February 15, 2001, in which case no interest
will be payable.
In Fiscal 1998, we recorded a capital distribution of $4 million to and on
behalf of an entity owned by our stockholders.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth the following information with respect to
the beneficial ownership of our common stock and of Datatec ordinary shares, as
of January 5, 2001:
o each person known by us to beneficially own more than five percent of
the outstanding shares of our common stock;
o the beneficial ownership of our common stock and of Datatec ordinary
shares by each of our directors and named executive officers;
o the beneficial ownership of our common stock and of Datatec ordinary
shares by all our executive officers and directors, as a group.
The following tables give effect to the shares of our common stock and of
Datatec ordinary shares issuable within 60 days of January 5, 2001 upon the
exercise of all options and other rights beneficially owned by the indicated
stockholders on that date. Beneficial ownership is determined in accordance
with the rules of the SEC and includes voting and investment power with respect
to shares. Unless otherwise indicated, the persons named in the table have sole
voting and sole investment control with respect to all shares beneficially
owned.
BENEFICIAL OWNERSHIP OF WESTCON GROUP COMMON STOCK
<TABLE>
<CAPTION>
Number of Shares Percentage of Shares
Beneficially Beneficially Owned(1)
Owned ---------------------------------------
Before the
Name and Address of Beneficial Owner Ofering Before the Offering After the Offering
-------------------------------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
5% Stockholders
Datatec Limited (2)............................... 39,566,254 85.2%
Mirado Corp.(3)................................... 5,207,884 11.2
Directors and Executive Officers
Thomas Dolan(4)................................... 5,207,884 11.2
Philip Raffiani(4)................................ 5,207,884 11.2
Alan Marc Smith(5)................................ 830,591 1.8
John McCartney (2)................................ 325,138 *
Jens Montanana (2)................................ 464,483 1.0
Robin Rindel (2).................................. 278,690 *
Directors and Executive Officers as a Group (8
persons)......................................... 7,160,786 15.3
</TABLE>
-------------------
* Less than one percent
(1) Percentage of beneficial ownership of our common stock prior to this
offering is based on 46,448,296 shares of our common stock outstanding as
of January 5, 2001. Percentage of beneficial ownership of our common stock
after this offering is based on shares of our common stock outstanding,
which includes the foregoing plus shares of our common stock to be sold
in this offering.
(2) Datatec has granted each of John McCartney, Jens Montanana and Robin
Rindel an option to purchase from Datatec 325,138, 464,483 and 278,690
shares, respectively, of our common stock. These options are currently
exercisable and may be exercised at any time prior to December 31, 2003.
(3) Each of Thomas Dolan, Philip Raffiani and Roman Michalowski owns one third
of the issued and outstanding voting common stock of Mirado Corp. Mr.
Dolan, Mr. Raffiani, Mr. Michalowski, their respective spouses, and trusts
for the benefit of their respective families own the issued and
outstanding non-voting common stock of Mirado.
(4) Includes 5,207,884 shares of our common stock held of record by Mirado
Corp. Each of Mr. Dolan and Mr. Raffiani owns one-third of the issued and
outstanding voting common stock of Mirado.
(5) Includes 355,968 shares of our common stock that Mr. Smith purchased from
Datatec pursuant to an agreement dated March 31, 2000. The shares are
subject to certain transfer restrictions. Mr. Smith may require Datatec
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<PAGE>
to repurchase the shares at any time and Datatec has an option to purchase
the shares which it may exercise in the event that Mr. Smith terminates
his employment with us and in certain other specified circumstances.
BENEFICIAL OWNERSHIP OF DATATEC ORDINARY SHARES
<TABLE>
Number of Shares
Beneficially Percentage of Shares
Name and Address of Beneficial Owner Owned Beneficially Owned(1)
------------------------------------ ---------------- --------------------
<S> <C> <C>
Thomas Dolan(2).......................................... 108,500 *
Philip Raffiani(3)....................................... 157,200 *
Alan Marc Smith(4)....................................... 17,500 *
John P. O'Malley III(5).................................. 5,000 *
John McCartney(6)........................................ 153,000 *
Jens Montanana(7)........................................ 6,894,955 5.4%
Robin Rindel(8).......................................... 132,807 *
Jon James(9)............................................. 25,200 *
Directors and Executive Officers as a Group (8 persons).. 7,444,162 5.8%
</TABLE>
-------------------
* Less than one percent
(1) Percentage of beneficial ownership of Datatec ordinary shares is based on
128,660,402 ordinary shares of Datatec outstanding as of January 5, 2001.
(2) Includes 27,500 ordinary shares of Datatec subject to options that Mr.
Dolan may exercise within 60 days of January 5, 2001.
(3) Includes (a) 139,700 ordinary shares of Datatec of which Mr. Raffiani is
the sole beneficial owner and (b) 17,500 ordinary shares of Datatec
subject to options that Mr. Raffiani may exercise within 60 days of
January 5, 2001.
(4) Includes 17,500 ordinary shares of Datatec subject to options that Mr.
Smith may exercise within 60 days of January 5, 2001.
(5) Includes 5,000 ordinary shares of Datatec subject to options that Mr.
O'Malley may exercise within 60 days of January 5, 2001.
(6) Includes 50,000 ordinary shares of Datatec subject to options that Mr.
McCartney may exercise within 60 days of January 5, 2001.
(7) Includes (a) 5,545,000 ordinary shares of Datatec held of record by
Business Venture Investments 201 (Pty) Ltd and Diablo Trade 236 (Pty) Ltd,
each a South African corporation of which Mr. Montanana is the sole
indirect shareholder, (b) an aggregate of 1,149,955 ordinary shares of
Datatec held of record by The Montanana Family Trust and the Montanana
Family Trust, of each of which Mr. Montanana is the trustee, and (c)
200,000 ordinary shares of Datatec subject to options that Mr. Montanana
may exercise within 60 days of January 5, 2001.
(8) Includes (a) 62,057 ordinary shares of Datatec held of record by the RS
Rindel Family Trust, of which Mr. Rindel is one of the trustees, and (b)
26,250 ordinary shares of Datatec subject to options that Mr. Rindel may
exercise within 60 days of January 5, 2001.
(9) Includes 25,000 ordinary shares of Datatec subject to options that Mr.
James may exercise within 60 days of January 5, 2001.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our common stock and preferred stock and the
relevant provisions of our certificate of incorporation and bylaws are
summaries thereof and are qualified by reference to our certificate of
incorporation and bylaws, copies of which have been filed with the SEC as
exhibits to our registration statement, of which this prospectus forms a part.
Our authorized capital stock consists of 200,000,000 shares of common
stock, $0.01 par value, and 15,000,000 shares of preferred stock, $0.01 par
value.
Common Stock
As of December 31, 2000, there were 46,448,296 shares of common stock
outstanding held of record by seven stockholders.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders and do not have cumulative voting
rights. The holders of outstanding shares of common stock are entitled to
receive dividends out of assets legally available at times and in amounts as
our board of directors may determine from time to time. Upon our liquidation,
dissolution or winding up, the holders of our common stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of any outstanding preferred stock. The common stock
has no preemptive or conversion rights and is not subject to redemption. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and nonassessable.
Preferred Stock
Under the terms of the certificate of incorporation, our board of
directors is authorized, subject to any limitations prescribed by law, to issue
the preferred stock in one or more series. Each series shall have the rights,
preferences, privileges and restrictions, such as dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the right to increase or decrease the
number of shares of any series, as the board of directors may determine. The
board of directors may issue preferred stock with voting or conversion rights
that may have the effect of delaying, deferring or preventing a change in
control of Westcon Group. This issuance could adversely affect the market price
of the common stock and the voting and other rights of the holders of common
stock. We currently have no plans to issue any of the preferred stock.
Anti-Takeover Effects Of Provisions Of Delaware Law, Our Certificate Of
Incorporation and Bylaws
Delaware Takeover Statute. We are subject to the provisions of Section 203
of the Delaware General Corporation Law. Subject to some exceptions, Section
203 prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:
o prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
o upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at
the time the transaction commenced (excluding certain shares); or
o on or subsequent to such date, the business combination is approved
by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders by the affirmative vote of
at least 66.67% of the outstanding voting stock that is not owned by
the interested stockholder.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Except as
otherwise specified in Section 203 of the Delaware General Corporation Law, an
interested stockholder is defined to include (x) any person that owns (or,
within the prior three years, did own) 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within three years immediately prior to the date of
determination and (y) the affiliates and associates of any such person. This
statute could prohibit or delay the accomplishment of mergers or other takeover
or change in control attempts with respect to us and, accordingly, may
discourage attempts to acquire us.
Board of Directors; Removal and Vacancies. Our certificate of
incorporation provides that directors may be removed only for cause by the
affirmative vote of holders of a majority of the shares of our stock that are
entitled to
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<PAGE>
vote. Any vacancy on the board of directors, regardless of the reason for the
vacancy, will be filled by vote of the majority of the directors then in office
unless there are less than four directors then in office, in which event, our
stockholders will fill the vacancy. These provisions may deter or discourage a
stockholder from removing incumbent directors and simultaneously gaining
control of our board of directors by filling the vacancies created by this
removal with its own nominees.
Stockholder Action; Advance Notice Requirements for Stockholder Proposals
and Directors Nominations. Our certificate of incorporation also provides that
all stockholder actions must be effected at a duly called meeting and may not
be taken by written action in lieu of a meeting. All stockholder action must be
properly brought before any stockholder meeting, which means, according to our
bylaws, that a stockholder must comply with provisions requiring that we
receive advance notice. Our bylaws also establish advance notice requirements
for nominations for election to the board of directors. In addition, special
stockholder meetings may only be called by the chairman of the board of
directors, our president or our secretary, or pursuant to a resolution adopted
by a majority of our entire board of directors. These provisions could have the
effect of delaying stockholder actions that are favored by the holders of a
majority of our outstanding voting securities until a meeting is called. This
provision could also discourage a potential acquiror from making a tender offer
for our common stock because even if able to acquire a majority of our
outstanding voting securities, a potential acquiror would only be able to take
actions such as electing new directors or approving business combinations or
mergers at duly called stockholder meetings, and not by written consent.
Amendments to Our Certificate of Incorporation and Bylaws. Our certificate
of incorporation requires the affirmative vote of not less than 66.67% of the
outstanding shares of our capital stock entitled to vote generally in the
election of directors (considered for this purpose as a single class) cast at a
meeting of our stockholders called for that purpose, to repeal, alter, amend or
rescind the provisions in our certificate of incorporation relating to:
o directors;
o stockholder meetings;
o limitations on director liability;
o indemnification; or
o amendments of our bylaws or certificate of incorporation.
Our certificate of incorporation requires the affirmative vote as
specified in the Delaware General Corporation Law to amend any other provision
of our certificate of incorporation.
To repeal, alter, amend or rescind our bylaws, our certificate of
incorporation and our bylaws require the affirmative vote of not less than
66.67% of the outstanding shares of our capital stock entitled to vote
generally in the election of directors (considered for this purpose as a single
class) cast at a meeting of our stockholders called for that purpose, or the
affirmative vote of a majority of our board of directors. This provision may
have the effect of making it difficult for a third party to acquire us.
Limitations on Liability
Our certificate of incorporation limits or eliminates the liability of our
directors to us or our stockholders for monetary damage to the fullest extent
permitted by the Delaware General Corporation Law. As permitted by the Delaware
General Corporation Law, our certificate of incorporation provides that our
directors will not be personally liable to us or our stockholders for monetary
damages for a breach of fiduciary duty as a director, except for liability:
o for any breach of such person's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
o for payment of dividends or approval of stock repurchases or
redemptions that are prohibited by Section 174 of the Delaware
General Corporation Law; and
o for any transaction resulting in receipt by such person of an
improper personal benefit.
Our certificate of incorporation also contains provisions indemnifying our
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law. We currently have directors' and officers' liability
51
<PAGE>
insurance to provide our directors and officers with insurance coverage for
losses arising from claims based on breaches of duty, negligence, errors and
other wrongful acts.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be .
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common stock
outstanding, assuming no exercise of outstanding options. Of these shares, the
shares sold in this offering will be available for immediate
sale in the public market as of the date of this prospectus. The remaining
shares of common stock, including the shares held by Datatec, are
"restricted securities" under Rule144 of the Securities Act of 1933, as amended.
Generally, restricted securities that have been owned for two years may be sold
immediately after the completion of this offering and restricted securities that
have been owned for at least one year may be sold 90 days after completion of
this offering subject to compliance with the volume and other limitations of
Rule144. Following this offering, shares will be eligible for
sale in the public market beginning 180days after the date of this prospectus,
or earlier with the consent of UBS Warburg LLC, and shares will
become eligible for sale in the public market at various times following 180
days after the date of this prospectus, subject in each case to the
limitations of Rule144. Sales of substantial amounts of our common stock in
the open market, or the availability of such shares for sale, could adversely
affect the price of our common stock.
Lock-Up Agreements
We, our directors and officers and substantially all of our stockholders,
including Datatec, have agreed not to offer, sell, pledge, purchase any option
to sell, grant any option for the purchase of, lend or otherwise dispose of,
any shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock, for a period of 180days after the date of this
prospectus, without the prior written consent of UBS Warburg LLC, subject to
limited exceptions. UBS Warburg LLC may, in its sole discretion, at any time
without notice, release all or a portion of the shares subject to the lock-up
agreements.
Rule 144
In general, under Rule144 as currently in effect, beginning 90days after
this offering, a person, or persons whose shares are aggregated, who owns
shares that were purchased from us, or any affiliate, at least one year
previously, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of our then-outstanding shares of
common stock, which will be approximately shares immediately
after this offering, or the average weekly trading volume of our common stock
on the Nasdaq National Market during the four calendar weeks preceding the
filing of a notice of the sale on Form144. Sales under Rule144 are also subject
to manner of sale provisions, notice requirements and the availability of
current public information about us. Any person, or persons whose shares are
aggregated, who is not deemed to have been one of our affiliates at any time
during the three months preceding a sale, and who owns shares that are
"restricted securities" under Rule144 that were purchased from us, or any
affiliate, at least two years previously, would be entitled to sell the shares
under Rule144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
Rule 701
Our employees, directors, officers, consultants or advisers who purchased
common stock from us prior to the date we become subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, under written
compensatory benefit plans or written contracts relating to the compensation of
these persons may rely on Rule701 with respect to the resale of that stock.
Rule701 will also apply to stock options we granted before we became subject to
the reporting requirements of the Exchange Act, along with the shares acquired
upon exercise of the options, including exercises after the date of this
prospectus. Shares of common stock we issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90days after the date of this prospectus, persons other than
affiliates may sell those shares, subject only to the manner of sale provisions
of Rule144. Persons who are affiliates under Rule144 may sell those shares
without compliance with its minimum holding period requirements.
Stock Options
We intend to file a registration statement on Form S-8 under the
Securities Act as soon as practicable following the date of this prospectus to
register shares of common stock issued or reserved for issuance under the
Westcon Group Stock Option Plan, thus permitting the resale of such shares by
nonaffiliates in the public market without restriction under the Securities
Act. This registration statement is expected to become effective upon filing.
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<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain U.S. federal income tax
considerations with respect to your acquisition, ownership and disposition of
common stock if you are a Non-U.S. Holder. A "Non-U.S. Holder" is a beneficial
owner of the common stock that, for U.S. Federal income tax purposes, is not:
o a citizen or resident of the U.S.;
o a corporation, partnership or other entity created or organized in,
or under the laws of, the U.S. or of any political subdivision of the
U.S.;
o an estate, the income of which is subject to U.S. federal income
taxation regardless of its source;
o a trust, if a court within the U.S. is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of
the trust; or
o a trust that existed on August 20, 1996 and elected to be treated as
a domestic trust as of that date.
This summary does not address all of the U.S. federal income tax
considerations that may be relevant to you in light of your particular
circumstances or if you are a holder subject to special treatment under U.S.
income tax laws (such as insurance companies, tax-exempt organizations,
financial institutions, brokers, dealers in securities, and certain US
expatriates). This summary does not discuss any aspects of state, local or
non-U.S. taxation. This summary is based on current provisions of the Internal
Revenue Code of 1986, as amended, U.S. Treasury regulations, judicial opinions,
published positions of the Internal Revenue Service, and all other applicable
authorities, all of which are subject to change, possibly with retroactive
effect.
We urge prospective investors to consult their tax advisors regarding the
U.S. federal, state, local, and non-U.S. income and other tax considerations of
acquiring, holding and disposing of shares of our common stock.
Dividends
As discussed under "Dividend Policy" above, we do not currently expect to
pay dividends. In the event that we do pay dividends, any dividends we pay to
you, as a Non-U.S. Holder, generally will be subject to U.S. withholding tax at
a rate of 30% (or a lower rate prescribed by an applicable income tax treaty)
of the gross amount of the dividends unless the dividends are effectively
connected with your conduct of a trade or business in the U.S. and you file IRS
Form W-8ECI with us.
For purposes of determining whether tax is to be withheld at a reduced
rate under an income tax treaty, you will be required to provide an Internal
Revenue Service Form W-8BEN certifying your entitlement to benefits under a
treaty. In addition, where dividends are paid to a Non-U.S. Holder that is a
partnership or other pass-through entity, persons holding an interest in the
entity may need to provide the certification.
Dividends effectively connected with a U.S. trade or business generally
will be subject to U.S. federal income tax on net income basis, in the same
manner as generally applied to U.S. persons. If you are a corporation,
effectively connected income may also be subject to branch profits tax at a
rate of 30% (or a lower rate as may be specified by an applicable income tax
treaty) on the repatriation from the U.S. of your "effectively connected
earnings and profits," subject to certain adjustments. You should consult any
applicable income tax treaties that may provide for a lower rate of tax or
other rules different from those described above.
Sale or Other Disposition of Our Common Stock
You, as Non-U.S. Holder, generally will not be subject to U.S. federal
income tax on any gain realized upon the sale or other disposition of your
shares of the common stock unless:
o the gain is effectively connected with your conduct of a trade or
business within the U.S. (or, if a tax treaty applies, is
attributable to a U.S. permanent establishment you maintain);
o you are an individual, you hold shares of common stock as a capital
asset, you are present in the U.S. for 183 days or more in the
taxable year of disposition and you meet other requirements;
o you are subject to tax pursuant to the provisions of the Internal
Revenue Code regarding the taxation of some U.S. expatriates; or
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<PAGE>
o we are or have been a "U.S. real property holding corporation" for
U.S. federal income tax purposes (which we do not believe that we are
or will become) and you hold or have held, directly or indirectly, at
any time within the shorter of the five-year period preceding
disposition or your holding period for the shares of the common
stock, more than 5% of our common stock outstanding.
Gain that is effectively connected with your conduct of a trade or
business within the U.S. generally will be subject to U.S. federal income tax
on a net income basis, in the same manner as generally applied to U.S. persons
(and if you are a corporation, the branch profits tax may also apply in some
circumstances), but you will not be subject to withholding. If you are
described in the second bullet point above, you generally will be subject to
tax at a rate of 30% on the gain realized, although the gain may be offset by
some U.S. source capital losses. You should consult any applicable income tax
treaties that may provide for a lower rate of tax or other rules different from
those described above.
Information Reporting and Backup Withholding
We must report annually to the IRS and to you the amount of dividends we
pay to you, and any tax we withhold. These reporting requirements apply
regardless of whether withholding is reduced by an applicable income tax
treaty. Pursuant to applicable tax treaties or other agreements, this
information also may be made available to the tax authorities in the country,
in which you reside or are established.
U.S. information reporting requirements and backup withholding tax at a
rate of 31% will generally apply to the dividends paid to you on the common
stock at an address inside the U.S. and to payments to you of the proceeds of a
sale of the common stock by a U.S. office of a broker unless you certify, under
penalties of perjury, that you are not a U.S. holder or otherwise establish an
exemption. Information reporting (but not backup withholding) generally will
also apply to payments of the proceeds of sales of the common stock by non-U.S.
offices of U.S. brokers, or non-U.S. brokers with some types of relationships
with the U.S., unless you comply with certain certification procedures to
establish that you are not a U.S. holder or you otherwise establish an
exemption.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding tax rules from a payment to you can be refunded or
credited against your U.S. federal income tax liability, if any, if the
required information is furnished to the IRS.
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<PAGE>
UNDERWRITING
We and the underwriters for the offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC, Bear, Stearns & Co.
Inc., CIBC World Markets Corp. and Robert W. Baird & Co. Incorporated are the
representatives of the underwriters.
Number of
Underwriters Shares
-------------------------------------------------------------------- -----------
UBS Warburg LLC.....................................................
Bear, Stearns & Co. Inc.............................................
CIBC World Markets Corp.............................................
Robert W. Baird & Co. Incorporated .................................
-----------
Total..........................................................
===========
The underwriters have agreed to purchase all of the shares sold under the
underwriting agreement if any of these shares are purchased. If an underwriter
defaults, the underwriting agreement provides that the purchase commitments of
the nondefaulting underwriters may be increased or the underwriting agreement
may be terminated.
If the underwriters sell more than the total number of shares set forth in
the table above, the underwriters have a 30-day option to buy from us up to an
additional shares at the initial public offering price, less the underwriting
discounts and commissions, to cover these sales. If any shares are purchased
pursuant to this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total public offering price,
underwriting discounts and commissions and proceeds before expenses to Westcon
Group. Total amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase up to an additional shares.
<TABLE>
Per Share No exercise Full exercise
--------------------------------------------- --------- ----------- -------------
<S> <C> <C> <C>
Public offering price........................ $ $ $
Underwriting discounts and commissions....... $ $ $
Proceeds, before expenses, to Westcon Group.. $ $ $
</TABLE>
We estimate that the total expenses of the offering payable by us,
excluding underwriting discounts and commissions, will be approximately
$ .
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
The underwriters have informed us that they do not expect sales to
discretionary accounts to exceed 5% of the shares of common stock offered.
We, our directors and officers and substantially all of our stockholders,
including Datatec, have entered into lock-up agreements with the
representatives. Pursuant to the lock-up agreements, we and these other persons
have agreed not to
o directly or indirectly offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any shares of our common stock or any
securities convertible into or exercisable or exchangeable for or
repayable with shares of our common stock, or
o file or cause to be filed any registration statement under the
Securities Act with respect to any shares of our common stock or any
securities convertible into or exercisable or exchangeable for or
repayable with shares of our common stock, or
56
<PAGE>
o enter into any swap or any other agreement or any transaction that
transfers, directly or indirectly, all or any portion of the economic
consequence of owning any of our common stock,
for a period of 180 days after the date of this prospectus without the prior
written consent of UBS Warburg LLC. The restrictions described in this
paragraph will not apply to our sale to the underwriters of the shares being
offered, the issuance by us of shares of common stock upon the exercise of any
option currently outstanding and described in this prospectus, or any grant of
options to purchase our common stock pursuant to the Westcon Group Stock Option
Plan.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of our common stock being offered for sale to our customers
and business partners. At the discretion of our management, other parties,
including our employees, may participate in the reserved shares program. The
number of shares available for sale to the general public in the offering will
be reduced to the extent these persons purchase reserved shares. Any reserved
shares not so purchased will be offered by the underwriters to the general
public on the same terms as the other shares in this offering.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price was negotiated by us and the
representatives. The principal factors considered in determining the initial
public offering price included:
o the information set forth in this prospectus and otherwise available
to the representatives;
o the history and the prospects for the industry in which we compete;
o the ability of our management;
o our prospects for future earnings, the present state of our
development and our current financial position;
o the general condition of the securities markets at the time of this
offering; and
o recent market prices of, and demand for, publicly traded common stock
of comparable companies.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
Short sales may be either "covered short sales" or "naked short sales."
Covered short sales are sales made in an amount not greater than the number of
additional shares that the underwriters can purchase pursuant to their over-
allotment option. The underwriters may close out any covered short position by
either exercising their over- allotment option or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they can purchase shares pursuant to the over-allotment option. The
underwriters must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter or selling group member repays to the underwriters a
portion of the underwriting discount received by it because the representatives
have repurchased shares sold by or for the account of that underwriter or
selling group member in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
We have agreed to indemnify the several underwriters against specified
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect of those
liabilities.
57
<PAGE>
Each underwriter has represented that it has not offered and sold, and has
agreed not to offer or sell, any shares, directly or indirectly, in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in violation of Canadian securities laws.
Each underwriter has represented that any offer or sale of shares in Canada
will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer or sale
is made. Each underwriter has further agreed to send to any dealer who
purchases any of the shares from it a notice stating that, by purchasing such
shares, such dealer represents that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in violation of Canada's securities laws. Each dealer
also represents that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each of
these dealers will deliver to any other dealer to whom it sells any of such
shares a notice containing substantially the same statement as is contained in
this sentence.
Each underwriter has agreed that:
o It has not offered or sold and will not offer or sell any shares of
our common stock to persons in the United Kingdom, except to persons
whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do
not constitute an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations of 1995;
o It has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the
United Kingdom; and
o It has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
issuance of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investments
Advertisements) (Exemptions) Order 1996 as amended by the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1997
or is a person to whom the document may otherwise lawfully be issued
or passed on.
No action has been or will be taken in any jurisdiction (except in the
U.S.) that would permit a public offering of shares of our common stock, or the
possession, circulation or distribution of this prospectus or any other
material relating to our company or common stock in any jurisdiction where
action for that purpose is required. Accordingly, the shares of our common
stock may not be offered or sold, directly or indirectly, and neither this
prospectus nor any other offering material or advertisements in connection with
the shares of common stock may be distributed or published, in or from any
country or jurisdiction except in compliance with any applicable rules and
regulations of that country or jurisdiction.
Purchasers of shares of our common stock offered by this prospectus may be
required to pay stamp taxes and other charges in accordance with the laws and
practices of the country of purchase in addition to the offering price on the
cover page of this prospectus.
Certain of the underwriters and their respective affiliates have engaged
in, and may in the future engage in, investment banking and other commercial
banking transactions with Datatec and its affiliates in the ordinary course of
their respective businesses, for which they have received customary fees and
commissions.
58
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Davis Polk & Wardwell, New York, New York. Shearman &
Sterling, New York, New York will pass upon certain legal matters relating to
this offering for the underwriters.
EXPERTS
The consolidated financial statements of Westcon Group as of March 31,
1999, February 29, 2000 and November 30, 2000 and for the twelve months ended
March 31, 1999, the eleven months ended February 29, 2000 and the nine months
ended November 30, 2000 included in this prospectus and the related financial
statement schedule included elsewhere in the registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the registration statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The consolidated statements of income, stockholders' equity and cash flows
of Westcon Group for the twelve months ended March 31, 1998 included in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by McGuigan & Company P.C.,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Comstor Corporation as of March
26, 1999 and March 27, 1998 and for the years then ended included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of RBR Group Limited as of September 25, 1998 and
July 31, 1998 and for the period from August 1, 1998 to September 25, 1998 and
the year ended July 31, 1998 included in this prospectus have been audited by
Deloitte & Touche Chartered Accountants and Registered Auditors, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The financial statements of RBR Group Limited as of August 1, 1997 and for
the period from October 2, 1996 to August 1, 1997 included in this prospectus
have been audited by Grant Thornton Chartered Accountants, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
CHANGE IN ACCOUNTANTS
During Fiscal 1999, our board of directors appointed Deloitte & Touche LLP
as our certifying accountants replacing McGuigan & Company P.C.
During Fiscal 1998, there were no disagreements with McGuigan & Company
P.C. on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of McGuigan & Company, would have caused them to
make reference to the subject matter of the disagreement in their report.
McGuigan & Company's report on our consolidated financial statements for Fiscal
1998 did not contain an adverse opinion or disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
ADDITIONAL INFORMATION
Prior to this offering, we have not been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended. We have filed
with the SEC a registration statement on Form S-1 under the Securities Act of
1933, as amended, with respect to the shares of common stock being offered
hereby. This prospectus, which is part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto, certain items of which are omitted as permitted
by the rules and regulations of the SEC. Statements contained in this
prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete, and in each instance in which a copy of
such contract or other document has been filed as an exhibit to the
registration statement, reference is made to such copy and each such statement
is qualified in all respects by such reference.
59
<PAGE>
A copy of the registration statement, including the exhibits and schedules
thereto, may be read and copied at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov, from which
you can electronically access the registration statement, including the
exhibits and any schedules thereto.
As a result of this offering, we will be subject to the information
requirements of the Exchange Act. We will fulfill our obligations with respect
to such requirements by filing periodic reports and other information with the
SEC. We intend to furnish our stockholders with annual reports containing
consolidated financial statements certified by an independent public accounting
firm.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Westcon Group, Inc. and Subsidiaries - Consolidated Financial Statements
Independent Auditors' Reports........................................F-2
Consolidated Balance Sheets..........................................F-4
Consolidated Statements of Income....................................F-5
Consolidated Statements of Changes in Stockholders' Equity...........F-6
Consolidated Statements of Cash Flows................................F-7
Notes to Consolidated Financial Statements...........................F-8
Comstor Corporation - Financial Statements
Independent Auditors' Report........................................F-19
Balance Sheets......................................................F-20
Statements of Operations............................................F-21
Statements of Changes in Stockholder's Equity.......................F-22
Statements of Cash Flows............................................F-23
Notes to Financial Statements.......................................F-24
RBR Group Limited - Consolidated Financial Statements
Report of Deloitte & Touche Chartered Accountants and
Registered Auditors...............................................F-29
Consolidated Profit and Loss Accounts...............................F-30
Consolidated Balance Sheets.........................................F-31
Consolidated Cash Flow Statements...................................F-32
Consolidated Cash Flow Statements...................................F-33
Notes to the Accounts...............................................F-34
Report of Grant Thornton Chartered Accountants......................F-44
Report of the Directors.............................................F-45
Principal Accounting Policies.......................................F-48
Consolidated Profit and Loss Account................................F-50
Consolidated Balance Sheet..........................................F-51
Company Balance Sheet...............................................F-52
Consolidated Cash Flow Statement....................................F-53
Notes to the Financial Statements...................................F-54
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Westcon Group, Inc.
Tarrytown, New York
We have audited the accompanying consolidated balance sheets of Westcon Group,
Inc. and Subsidiaries as of March 31, 1999, February 29, 2000 and November 30,
2000, and the related consolidated statements of income, stockholders' equity,
and cash flows for the twelve months ended March 31, 1999, the eleven months
ended February 29, 2000 and the nine months ended November 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Westcon Group, Inc. and
Subsidiaries as of March 31, 1999, February 29, 2000 and November 30, 2000, and
the results of their operations and their cash flows for the twelve months
ended March 31, 1999, the eleven months ended February 29, 2000 and the nine
months ended November 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 11, 2001
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Westcon Group, Inc.
Tarrytown, New York
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows for the twelve months ended March 31, 1998
of Westcon Group, Inc. and Subsidiaries. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated statements of
income, stockholders' equity, and cash flows based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
statements of income, stockholders' equity, and cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated statements of income,
stockholders' equity, and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated statements of
income, stockholders' equity, and cash flows. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated statements of income, stockholders' equity,
and cash flows referred to above, present fairly, in all material respects, the
results of operations, stockholders' equity and cash flows of Westcon Group,
Inc. and Subsidiaries for the twelve months ended March 31, 1998 in conformity
with accounting principles generally accepted in the United States of America.
MCGUIGAN & COMPANY P.C.
Wall, New Jersey
April 20, 2000
F-3
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, February 29, November 30,
1999 2000 2000
-------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $30,576,175 $57,461,186 $49,445,686
Accounts receivable, net of allowances of
$7,000,810, $10,923,391 and $11,859,714................ 161,461,846 255,392,319 367,985,815
Inventories.............................................. 177,116,980 279,931,194 300,802,848
Prepaid expenses and other current assets................ 13,154,838 20,701,379 29,115,509
------------ ------------ ------------
Total current assets................................... 382,309,839 613,486,078 747,349,858
PROPERTY AND EQUIPMENT - NET.............................. 13,393,259 20,579,399 26,401,205
GOODWILL - NET............................................ 61,480,802 118,892,715 157,291,976
OTHER ASSETS.............................................. 8,329,609 7,445,919 5,303,381
------------ ------------ ------------
TOTAL ASSETS.............................................. $465,513,509 $760,404,111 $936,346,420
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit.......................................... $117,318,655 $209,204,634 $216,295,059
Accounts payable ........................................ 140,328,681 189,383,599 285,558,260
Accrued expenses and other current liabilities........... 23,109,141 27,357,775 35,428,607
Income taxes payable..................................... 7,180,336 7,206,625 24,629,937
Due to Datatec........................................... -- -- 29,232,134
------------ ------------ ------------
Total current liabilities.............................. 287,936,813 433,152,633 591,143,997
DUE TO DATATEC............................................ 56,390,881 30,472,866 --
LINE OF CREDIT............................................ -- 25,000,000 25,000,000
OTHER LIABILITIES......................................... 2,661,518 1,347,209 1,626,260
------------ ------------ ------------
Total liabilities...................................... 346,989,212 489,972,708 617,770,257
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (See notes)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 15,000,000 shares
authorized, none issued................................ -- -- --
Common stock, $.01 par value, 200,000,000 shares
authorized, 42,643,998, 46,448,296 and 46,448,296
issued and outstanding................................. 426,440 464,483 464,483
Additional paid-in capital............................... 85,220,283 214,443,088 216,619,429
Retained earnings........................................ 33,812,330 55,181,936 107,144,633
Accumulated other comprehensive income (loss)............ (934,756) 341,896 (5,652,382)
------------ ------------ ------------
Total stockholders' equity............................. 118,524,297 270,431,403 318,576,163
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $465,513,509 $760,404,111 $936,346,420
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Twelve Months Twelve Months Nine Months Ended
Ended Ended Eleven Months Ended -------------------------------
March 31, March 31, February 29, November 30, November 30,
1998 1999 2000 1999 2000
-------------- ------------- ------------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(unaudited)
SALES............................... $334,411,472 $587,426,468 $1,168,243,592 $934,431,983 $1,604,424,159
COST OF GOODS SOLD.................. 290,618,086 486,442,756 1,022,815,675 818,971,718 1,429,920,857
------------ ------------ -------------- ------------ --------------
Gross profit................... 43,793,386 100,983,712 145,427,917 115,460,265 174,503,302
------------ ------------ -------------- ------------ --------------
OPERATING EXPENSES:
Selling.......................... 10,128,713 21,247,777 35,440,598 25,630,016 36,741,231
General and administrative....... 16,938,594 26,616,654 42,105,003 31,527,248 47,755,373
Depreciation and amortization.... 2,721,498 7,339,692 13,879,950 9,844,728 15,959,990
------------ ------------ -------------- ------------ --------------
Total operating expenses....... 29,788,805 55,204,123 91,425,551 67,001,992 100,456,594
------------ ------------ -------------- ------------ --------------
INCOME FROM OPERATIONS.............. 14,004,581 45,779,589 54,002,366 48,458,273 74,046,708
------------ ------------ -------------- ------------ --------------
OTHER (INCOME) EXPENSE:
Interest expense - net of interest
income of $95,703,
$1,247,739, $3,116,294,
$2,145,028 and $3,469,447...... 3,743,897 4,671,619 13,259,389 8,691,619 16,754,405
Interest expense - Datatec....... -- 1,978,592 2,298,993 2,209,096 1,321,588
Gain on sale of securities....... -- -- -- -- (32,358,792)
Other (income) expense........... (941,541) 1,810,384 973,170 750,548 324,973
------------ ------------ -------------- ------------ --------------
Total other (income) expense... 2,802,356 8,460,595 16,531,552 11,651,263 (13,957,826)
------------ ------------ -------------- ------------ --------------
INCOME BEFORE INCOME TAXES.......... 11,202,225 37,318,994 37,470,814 36,807,010 88,004,534
PROVISION FOR INCOME TAXES.......... 4,671,116 15,868,009 16,101,208 15,815,972 36,041,837
------------ ------------ -------------- ------------ --------------
NET INCOME.......................... $6,531,109 $21,450,985 $21,369,606 $20,991,038 $51,962,697
============ ============ ============== ============ ==============
NET INCOME PER BASIC AND
DILUTED SHARE....................... $0.22 $0.58 $0.47 $0.47 $1.12
============ ============ ============== ============ ==============
WEIGHTED AVERAGE NUMBER OF
BASIC AND DILUTED SHARES
OUTSTANDING......................... 29,663,975 36,994,132 45,213,357 44,350,655 46,448,296
============ ============ ============== ============ ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
---------------------- Paid-in Retained Comprehensive Comprehensive
Shares Amount Capital Earnings Income (Loss) Income
---------- -------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1997 29,663,975 $296,640 $ -- $8,143,252 $(171,441)
Net income......................... -- -- -- 6,531,109 -- $6,531,109
Other comprehensive income:
Translation adjustment........... -- -- -- -- (1,035,231) (1,035,231)
-----------
Total comprehensive income......... -- -- -- -- -- $5,495,878
===========
Capital distribution............... -- -- -- (4,029,506) --
---------- -------- ------------ ------------ -----------
BALANCE, MARCH 31, 1998............. 29,663,975 296,640 -- 10,644,855 (1,206,672)
Net income......................... -- -- -- 21,450,985 -- $21,450,985
Other comprehensive income:
Translation adjustment........... -- -- -- -- 271,916 271,916
-----------
Total comprehensive income......... -- -- -- -- -- $21,722,901
===========
Effect of contributed subsidiaries. 12,980,023 129,800 64,313,954 1,716,490 --
Capital contribution -- Datatec.... -- -- 20,000,000 -- --
Equity based compensation.......... -- -- 906,329 -- --
BALANCE, MARCH 31, 1999............. 42,643,998 426,440 85,220,283 33,812,330 (934,756)
Net income......................... -- -- -- 21,369,606 -- $21,369,606
Other comprehensive income:
Translation adjustment........... -- -- -- -- 264,513 264,513
Unrealized gain on marketable
securities..................... -- -- -- -- 1,012,139 1,012,139
-----------
Total comprehensive income......... -- -- -- -- -- $22,646,258
===========
Effect of contributed subsidiaries. 422,604 4,226 29,514,201 -- --
Capital contribution -- Datatec.... 3,381,694 33,817 96,966,183 -- --
Equity based compensation.......... -- -- 2,742,421 -- --
---------- -------- ------------ ------------ -----------
BALANCE, FEBRUARY 29, 2000.......... 46,448,296 464,483 214,443,088 55,181,936 341,896
Net income......................... -- -- -- 51,962,697 -- $51,962,697
Other comprehensive income:
Translation adjustment........... -- -- -- -- (6,105,431) (6,105,431)
Unrealized loss on marketable
securities....................... -- -- -- -- 111,153 111,153
-----------
Total comprehensive income......... -- -- -- -- -- $45,968,419
===========
Equity based compensation.......... -- -- 2,176,341 -- --
---------- -------- ------------ ------------ -----------
BALANCE, NOVEMBER 30, 2000.......... 46,448,296 $464,483 $216,619,429 $107,144,633 $(5,652,382)
========== ======== ============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Twelve Months Twelve Months Eleven Nine Months Ended
Ended Ended Months Ended -----------------------------
March 31, March 31, February, 29 November 30, November 30,
1998 1999 2000 1999 2000
------------- ------------- ------------ ------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............................. $6,531,109 $21,450,985 $21,369,606 $20,991,038 $51,962,697
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:.................
Depreciation and amortization......... 2,721,498 7,339,692 13,879,950 9,844,728 15,959,990
Deferred income taxes................. (596,436) (2,488,640) (3,605,422) (2,449,383) (4,581,196)
Gain on sale of securities............ -- -- -- -- (32,358,792)
Loss on sale of property and
equipment........................... -- -- 177,588 -- --
Write-off of equipment................ 228,361 96,125 -- -- --
Changes in assets and liabilities
(net of business acquisitions):
Accounts receivable................. (16,970,801) (55,656,709) (29,334,587) (70,147,282) (63,034,385)
Inventories......................... 7,922,604 (91,422,698) (51,377,456) (77,969,169) 5,328,455
Prepaid expenses and other current
assets............................. (878,489) (2,311,163) (9,488,837) (9,468,431) 1,263,623
Other assets........................ (1,892,759) (1,456,631) 883,682 5,949,138 2,328,009
Accounts payable.................... (13,373,618) 26,068,831 16,993,232 (25,212,691) 24,861,460
Accrued expenses and other
current liabilities................ 391,321 4,818,385 (778,271) 2,546,916 5,678,256
Income taxes payable................ (2,194,729) 3,171,446 26,289 4,924,356 15,942,021
Other liabilities................... (1,901,771) (1,731,483) 651,476 4,778,238 (3,800,153)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided
by operating activities............ (20,013,710) (92,121,860) (40,602,750) (136,212,542) 19,549,985
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures.................... (5,039,966) (8,353,875) (12,215,235) (5,284,370) (10,994,720)
Payments for business acquisitions, net
of cash acquired...................... -- (1,465,314) (113,274,323) (102,181,889) (50,238,471)
Cash (overdraft) from contributed
subsidiaries.......................... -- (10,823,000) 4,165,385 4,165,385 261,792
Proceeds from sale of securities........ -- -- -- -- 33,792,615
Proceeds from sale of property and
equipment............................. -- -- 1,700,708 -- --
Purchase of subsidiary minority interests (847,357) (900,000) -- -- --
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities......................... (5,887,323) (21,542,189) (119,623,465) (103,300,874) (27,178,784)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from lines of credit........... 331,222,751 414,995,161 610,487,506 584,330,473 980,285,973
Repayments of lines of credit........... (296,154,705) (358,940,406) (493,601,527) (401,468,283) (973,195,548)
Financing fees.......................... -- (282,500) (1,121,250) (1,121,250) (308,000)
Capital contributions from Datatec...... -- 20,000,000 97,000,000 97,000,000 --
Advances from Datatec................... -- 66,390,881 5,281,985 4,041,253 --
Repayments to Datatec................... -- (10,000,000) (31,200,000) (31,200,000) (1,240,732)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities......................... 35,068,046 132,163,136 186,846,714 251,582,193 5,541,693
------------ ------------ ------------ ------------ ------------
EFFECT OF FOREIGN EXCHANGE RATE
ON CASH AND CASH EQUIVALENTS............ (1,035,231) 271,916 264,512 86,555 (5,928,394)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.................... 8,131,782 18,771,003 26,885,011 12,155,332 (8,015,500)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD..................... 3,673,390 11,805,172 30,576,175 37,914,199 57,461,186
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.................................. $11,805,172 $30,576,175 $57,461,186 $50,069,531 $49,445,686
============ ============ ============ ============ ============
CASH PAID DURING THE PERIOD FOR:
Interest................................ $3,231,465 $5,081,406 $15,386,499 $11,060,239 $11,999,928
============ ============ ============ ============ ============
Income taxes............................ $5,864,505 $12,048,579 $17,071,362 $10,729,073 $22,658,774
============ ============ ============ ============ ============
BUSINESS ACQUISITIONS:
Fair value of assets acquired, including
goodwill.............................. $8,200,559 $144,978,059 $133,885,625 $130,193,998
Cash paid, net of cash acquired......... (1,465,314) (113,274,323) (102,181,889) (50,238,471)
------------ ------------ ------------ ------------
Liabilities assumed..................... $6,735,245 $31,703,736 $31,703,736 $79,955,527
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Business Description and Organization
Westcon Group, Inc. and Subsidiaries (the "Company") is a significant sales
channel for Cisco Systems, a dominant vendor in the communications and
networking equipment market. It is also an important sales channel for
Nortel Networks, Avaya Communication and other leading vendors of
networking technology. The Company sells exclusively to reseller customers
throughout the U.S. and in selected international markets. The Company
operates in a single industry segment across geographically diverse markets
throughout the world.
On August 6, 1998, Datatec Limited ("Datatec"), a publicly-owned
networking technology and services company with its principal executive
offices located in Johannesburg, South Africa and London, U.K., acquired
80% of the common stock of the Company.
During Fiscal 2000, Datatec contributed capital and its communications and
networking equipment sales channel subsidiaries to the Company in exchange
for an increase in its common stock ownership of the Company to 87.2%.
Accordingly, the accompanying consolidated financial statements reflect
the effect of the results of operations for these entities since the dates
of common ownership. The dates of common ownership for the contributed
subsidiaries were as follows: Westcon (UK) Limited - August 6, 1998, RBR
Group Limited - September 26, 1998, RBR Networks GmbH - April 1, 1999 and
RBR Networks Pte. Ltd. - July 1, 1999. See Note 3.
On March 31, 2000, Datatec sold 2.30% of its common stock interests in the
Company to affiliated individuals. The terms of the sale were at estimated
fair value. As a result, at November 30, 2000, Datatec owned 84.9% of the
common stock of the Company.
2. Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of Westcon Group, Inc. and its wholly owned
subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.
Fiscal Years - Effective Fiscal 2000, the Company changed its fiscal
year-end to a February year-end. The accompanying consolidated financial
statements are for the twelve months ended March 31, 1998 ("Fiscal 1998")
and March 31, 1999 ("Fiscal 1999"), the eleven months ended February 29,
2000 ("Fiscal 2000") and the nine months ended November 30, 2000.
Use of Estimates - The presentation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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.
Disclosure of Fair Value of Financial Instruments - The carrying amount
reported in the consolidated balance sheets for cash, accounts receivable,
accounts payable and accrued expenses approximates fair value because of
the short-term maturity of these financial instruments. The carrying value
of the lines of credit approximates fair value, which was based upon the
current rates offered to the Company for debt with similar remaining
maturities.
Concentration of Credit Risk - The Company sells products and services to
reseller customers who sell them to end-users in diversified industries.
The Company performs ongoing credit evaluations of the financial condition
of certain customers and generally does not require collateral. The
Company's ability to collect the amounts due from customers may be
affected by economic fluctuations in the communications and networking
industry. No single customer accounted for greater than 5% of consolidated
sales. The Company maintains its cash balances in various financial
institutions. Balances may exceed the amount of insurance provided on such
deposits.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Revenue Recognition - The Company recognizes revenue upon shipment of
product, which occurs when title passes to the customer. The Company
accrues for sales returns and other allowances at the time of shipment
based upon its historical experience. The Company recognizes revenue for
professional services
F-8
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
at the time the services are rendered. Revenue for professional services
for the nine months ended November 30, 2000 represented less than 1% of
consolidated sales.
Deferred Financing Costs - During Fiscal 1999, Fiscal 2000 and the nine
months ended November 30, 2000, the Company paid $282,500, $1,121,250 and
$308,000, respectively, in connection with debt financings (see Note 5).
These costs have been capitalized in other assets and are being amortized
over the terms of the financings. Amortization of financing costs,
including the write-off of financing costs related to prior financings, was
$211,411, $407,033, $303,378 and $453,790 in Fiscal 1998, Fiscal 1999,
Fiscal 2000, and the nine months ended November 30, 2000, respectively.
Income Taxes - Deferred income taxes have been provided for temporary
differences between the Company's financial statement and income tax basis
of the Company's assets and liabilities using presently enacted tax rates.
Foreign Currency - The functional currency of each of the Company's
foreign subsidiaries is its local currency. Assets and liabilities of
foreign operations are translated at the exchange rates in effect on the
balance sheet date. Revenues and expenses are translated at the average
rates of exchange prevailing during the period. Realized gains and losses
due to currency exchange rate fluctuations have been reflected in the
accompanying consolidated statements of income. Unrealized gains and
losses from the translation of the financial statements of the foreign
subsidiaries are reported as a separate component of stockholders' equity
and comprehensive income.
The Company uses derivative financial instruments to reduce its exposure
to fluctuations in foreign exchange rates by creating offsetting positions
through the use of forward currency contracts. The market risk related to
the foreign exchange agreements is offset by changes in the valuation of
the underlying items being hedged. Substantially all of the Company's
forward currency contracts have terms of 90 days or less. The Company does
not use derivative financial instruments for trading or speculative
purposes, nor is the Company a party to leveraged derivatives.
Forward currency contracts are accounted for on an accrual basis. Income
and expense are recorded in the same category as that arising from the
related liability being hedged. Gains and losses resulting from effective
hedges of liabilities are deferred and recognized when the offsetting gain
and losses are recognized on the related hedged items. The notional amount
of forward currency contracts and options is the amount of foreign
currency bought or sold at maturity. The estimated fair value of forward
currency contracts represents the amount required to enter into like
offsetting contracts with similar remaining maturities based on then
quoted market prices. Potential credit losses are minimized through
careful evaluation of counterparty credit standing, selection of
counterparties from a limited group of high quality institutions and other
contract provisions.
Forward currency contracts are as follows:
<TABLE>
<CAPTION>
March 31, 1999 February 29, 2000 Novermber 30, 2000
------------------------ -------------------------- --------------------------
Notional Estimated Notional Estimated Notional Estimated
Amounts Fair Value Amounts Fair Value Amounts Fair Value
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Forward currency
contracts............ $ -- $ -- $23,645,000 $(376,821) $48,564,505 $(53,895)
========= ========== =========== ========= =========== ========
</TABLE>
Property and Equipment - Property and equipment are stated at cost or fair
market value for acquisitions, less accumulated depreciation. Depreciation
is provided over the estimated useful lives of the assets by using the
straight-line method.
Inventories - Inventories represent finished goods stated at the lower of
cost or market, with cost determined by the average cost method.
Goodwill - Goodwill represents the excess of the purchase price over the
fair value of tangible and identifiable intangible net assets acquired and
is amortized on a straight-line basis.
Valuation of Long-Lived Assets - The Company periodically evaluates the
carrying value of long-lived assets, including goodwill, when events and
circumstances warrant such a review. The carrying value of a long-lived
asset is considered impaired when indicators of impairment are present and
undiscounted cash flows estimated to be generated by the asset are less
then than the asset's carrying amount. In that event, a
F-9
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
loss is recognized based on the amount by which the carrying value exceeds
the fair value of the long-lived asset. Fair value is determined primarily
using the anticipated cash flows discounted at a rate commensurate with
the risk involved.
Stock Split and Reincorporation - On August 1, 1998, the Company effected
a 2.227-for-one stock split of shares of its common stock. On January 10,
2001, Westcon Group, Inc., a New York corporation, was reincorporated in
Delaware by merging with and into its wholly owned Delaware subsidiary,
Westcon Group (Delaware), Inc., the surviving Delaware corporation, which
changed its name to Westcon Group, Inc. upon the effectiveness of the
merger. Pursuant to the merger, the New York corporation ceased to exist
as a separate corporation and each outstanding share of its Class A, Class
B and Class C common stock was converted into 14.795 shares of common
stock of the surviving Delaware corporation. In addition, the share of
common stock of Westcon Group (Delaware), Inc. that had been outstanding
prior to the merger was cancelled. The surviving Delaware corporation has
authorized 200,000,000 shares of common stock, $.01 par value per share,
and 15,000,000 shares of preferred stock, $.01 per share. All references
in the accompanying consolidated financial statements to the number of
common shares and per share amounts have been retroactively restated to
reflect the stock split and the reincorporation.
Earnings Per Share - Earnings per share (EPS) are computed in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Basic EPS is computed by dividing consolidated net income by the
weighted average number of common shares outstanding. Diluted EPS is
computed by dividing consolidated net income by the sum of the weighted
average number of common shares outstanding and the weighted average number
of potential common shares outstanding.
Recent Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instrument
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that all
derivative instruments be measured at fair value and recognized in the
balance sheet as either assets or liabilities. As amended by SFAS Nos. 137
and 138, the Company is required to adopt SFAS No. 133 commencing March 1,
2001. The Company is in the process of evaluating the effects of SFAS No.
133.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. On June 26, 2000, the SEC issued SAB 101B to
defer the effective date of implementation of SAB 101 until no later than
the fourth fiscal quarter of fiscal years beginning after December 31,
1999. The Company's adoption of SAB 101 had an immaterial effect on its
consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"). FIN 44, an interpretation of APB 25, provides
guidance on the application of APB 25 for stock compensation involving
employees. FIN 44 was effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12,
2000. The adoption of FIN 44 did not have an effect on the Company's
consolidated financial statements.
Interim Financial Statements - The accompanying consolidated statements of
income and cash flows for the nine months ended November 30, 1999 are
unaudited but, in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of results for this interim period. The results of operations
for the nine months ended November 30, 2000 are not necessarily indicative
of the results to be expected for the full year.
Reclassifications - Certain prior year balances have been reclassified to
conform with the current presentation.
3. Business Combinations
The five following acquisitions have been accounted for under the purchase
method and their results of operations have been included in the
statements of income from the respective dates of acquisition.
o On October 22, 1998, the Company acquired all of the outstanding
common stock of Telsist Informatica, Ltda., a Brazilian sales channel
for communications and networking equipment, for $2,598,695 including
acquisition costs and contingent consideration of $317,763 paid in
Fiscal 2000
F-10
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
and $377,856 paid in Fiscal 2001 (less $815,618 of cash acquired).
The excess of the purchase price over the fair value of the net
assets acquired of $2,706,972 has been recorded as goodwill and is
being amortized over 15 years.
o On August 13, 1999, the Company acquired the net assets of Comstor
Corporation, a domestic sales channel for communications and
networking equipment products, for $116,273,108 including acquisition
costs (less $199,786 of cash acquired). The excess of the purchase
price over the fair value of the net assets acquired of $34,823,973
has been recorded as goodwill and is being amortized over 15 years.
o On April 12, 2000, the Company acquired the net assets of LAN Systems
(Pty.) Ltd., a sales channel for communications and networking
equipment in Australia, for $19,839,188, including acquisition costs,
but excluding additional contingent consideration of up to
approximately $637,000 based upon the achievement of certain
financial objectives during the two years subsequent to the closing
of the transaction. The excess of the purchase price over the fair
value of the net assets acquired of $16,911,332 has been recorded as
goodwill and is being amortized over 15 years.
o On July 7, 2000, the Company acquired the net assets of Inacom
Communications, Inc., a sales channel for voice technology equipment,
for $22,800,773, including acquisition costs. The excess of the
purchase price over the fair value of the net assets acquired of
$16,478,752 has been recorded as goodwill and is being amortized over
15 years.
o On September 13, 2000, the Company acquired the net assets of CCA
Technologies, Inc., a sales channel for voice technology equipment,
for $9,485,000, including acquisition costs, but excluding additional
consideration of up to approximately $6,000,000 based on the
achievement of certain financial objectives during the year
subsequent to the closing of the transaction. The excess of the
purchase price over the fair value of the net assets acquired of
$6,511,698 has been recorded as goodwill and is being amortized over
15 years.
The contributions of the Datatec subsidiaries to the Company were
transfers of entities under common control which were accounted for in a
manner similar to a pooling-of-interests. In conjunction with the
contributions, the Company acquired goodwill of $61,638,709 and
$28,341,496 during Fiscal 1999 and Fiscal 2000, respectively. The goodwill
is being amortized over 15 years. In addition, in connection with the
contributions, the Company issued 13,402,627 shares of its common stock to
Datatec. Additionally, the Company may be required to pay contingent cash
consideration of up to approximately $6,800,000 based upon the contributed
subsidiaries achieving certain financial objectives during Fiscal 2002.
During the nine months ended November 30, 2000, the Company paid
$5,721,845 of contingent consideration in connection with subsidiaries
contributed by Datatec.
Any contingent consideration paid would be treated as direct acquisition
costs and recorded as goodwill.
Goodwill amortization relating to the foregoing business combinations was
$2,169,260, $6,071,319 and $7,588,280 in Fiscal 1999, Fiscal 2000 and the
nine months ended November 30, 2000, respectively. Accumulated amortization
was $2,169,260, $8,240,579 and $15,828,859 at March 31, 1999, February 29,
2000 and November 30, 2000, respectively.
The following unaudited pro forma summary represents the condensed
consolidated statements of income for Fiscal 2000, Fiscal 1999 and the
nine months ended November 30, 2000 as if the above business combinations
had been consummated on the first day of each period presented.
<TABLE>
<CAPTION>
Twelve Months Eleven Months Nine Months
Ended Ended Ended
March 31, February 29, November 30,
1999 2000 2000
------------- ------------- -------------
<S> <C> <C> <C>
Sales.......................................... $1,268,096,117 $1,554,585,637 $1,697,839,047
============== ============== ==============
Net income..................................... $ 12,817,229 $ 19,998,220 $ 54,528,893
============== ============== ==============
Net income per basic and diluted share......... $ 0.30 $ 0.44 $ 1.17
============== ============== ==============
</TABLE>
The significant accounting policies applied in these condensed consolidated
statements of income are similar to those described in Note 2 herein. The
pro forma results have been prepared for comparative
F-11
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
purposes only and do not purport to be indicative of what would have
occurred had the business combinations been consummated on the first day of
each period presented or of results that may occur in the future.
4. Property and Equipment
Property and equipment is as follows:
<TABLE>
<CAPTION>
Lives in March 31, February 29, November 30,
Years 1999 2000 2000
-------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Computer and office equipment......... 3-6 $13,605,076 $25,544,085 $34,775,738
Furniture and fixtures................ 6 689,265 2,144,682 2,682,354
Land.................................. - 2,314,316 1,904,762 1,904,762
Leasehold improvements................ 5-10 3,160,518 5,061,377 6,386,540
----------- ----------- -----------
19,769,175 34,654,906 45,749,394
Less accumulated depreciation......... 6,375,916 14,075,507 19,348,189
----------- ----------- -----------
$13,393,259 $20,579,399 $26,401,205
=========== =========== ===========
</TABLE>
For Fiscal 1998, Fiscal 1999, Fiscal 2000 and the nine months ended
November 30, 2000, depreciation and amortization expense related to
property and equipment was $2,510,087, $3,857,070, $4,762,832 and
$5,741,578, respectively.
5. Credit Facilities
The Company has a credit agreement (the "Facility") with a finance company
to provide a $285,000,000 revolving credit facility (the "Revolving
Facility") and a $75,000,000 acquisition loan facility (the "Acquisition
Facility"). The Revolving Facility expires September 2003 and the
Acquisition Facility is due $50,000,000 in April 2001 and $25,000,000 in
December 2001. Advances under the Revolving Facility are available up to
85% of the Company's eligible accounts receivable and up to 50% of the
Company's eligible inventory at certain subsidiaries. The Revolving
Facility bears interest at the prime rate minus 0.50%, or the London
Interbank Offer Rate ("LIBOR") plus 2.50%, while the Acquisition
Facility bears interest at the prime rate plus 0.575%, or LIBOR plus 3.55%,
at the Company's option. As of March 31, 1999, February 29, 2000 and
November 30, 2000, $117,318,655, $159,204,634 and $166,295,059,
respectively, was outstanding under the Revolving Facility and $75,000,000
was outstanding under the Acquisition Facility at February 29, 2000 and
November 30, 2000.
Borrowings under the Facility are collateralized by: (i) a pledge of common
stock and (ii) liens on the inventory and accounts receivable of the
Company and its subsidiaries that utilize funds borrowed under the
Revolving Facility. The Facility contains covenants including, but not
limited to, financial covenants limiting leverage, establishing minimum
liquidity and pretax earnings coverage, restricting asset sales and
purchases, restricting the payment of dividends during continuing events of
default, and limiting additional borrowings and the granting of certain
liens.
The prime rate and LIBOR were 9.5% and 6.6%, respectively, at November 30,
2000.
Certain subsidiaries of the Company have arrangements with financial
institutions to provide up to $115 million of inventory purchase
financing. Included in accounts payable as of March 31, 1999, February 29,
2000 and November 30, 2000 are $15,499,867, $69,905,261 and $117,042,467,
respectively, in amounts payable under these arrangements. The amounts are
collateralized by inventory and accounts receivable and are generally
guaranteed by Westcon Group, Inc. These arrangements generally contain
financial covenants limiting leverage, and establishing minimum liquidity
and pre-tax earnings coverage for subsidiaries that are parties to such
arrangements.
6. Transactions with Datatec
At March 31, 1999, February 29, 2000 and November 30, 2000, the Company
had amounts due to Datatec of $56,390,881, $30,472,866 and $29,232,134,
respectively, primarily for demand loans for working capital purposes. The
obligations bear interest at variable rates based upon the base rate in
the United Kingdom (6.0% as of November 30, 2000) and are due no earlier
than March 1, 2001. During Fiscal
F-12
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
1999, Fiscal 2000 and the nine months ended November 30, 2000, the Company
incurred $1,978,592, $2,298,993 and $1,321,588, respectively, of interest
expense related to these obligations.
During Fiscal 2000, the Company expensed $700,000 paid to Datatec for
management services and capitalized $500,000 paid to Datatec for
acquisition-related services.
During Fiscal 2000, Datatec contributed $97,000,000 to the Company to fund
the Company's business acquisitions and working capital in exchange for
3,381,694 shares of common stock. In conjunction with the acquisition of
the Company in Fiscal 1999, Datatec contributed $20,000,000 to fund working
capital. During Fiscal 2000, Datatec contributed its sales channel
subsidiaries to the Company in exchange for common stock as follows:
Number of
Subsidiary Shares
------------ -----------
Westcon (UK) Limited 4,867,511
RBR Group Limited 8,112,512
RBR Networks GmbH 217,604
RBR Networks Pte. Ltd. 205,000
During Fiscal 1999, Fiscal 2000 and the nine months ended November 30,
2000, the Company had sales of $9,709,637, $18,404,967 and $28,550,519,
respectively, to subsidiaries of Datatec, and had accounts receivable of
$2,640,639, $4,634,841 and $6,122,600 at March 31, 1999, February 29, 2000
and November 30, 2000, respectively, from these subsidiaries. The Company
believes the terms of these sales transactions are at least as favorable as
those it could otherwise have obtained from unrelated third parties and
were negotiated on an arms-length basis.
7. Related Party Transactions
In the ordinary course of business, the Company engages in transactions
with companies owned by certain minority stockholders of the Company.
During Fiscal 1998, Fiscal 1999, Fiscal 2000 and the nine months ended
November 30, 2000, affiliates charged the Company $92,241, $158,202,
$311,158 and $229,801, respectively, primarily for rent and car services.
During Fiscal 1998, the Company recorded a capital distribution of
$4,029,506 to and on behalf of an entity owned by its stockholders. During
Fiscal 1999, affiliates repaid $589,772 of advances from the Company. The
Company believes the terms of the transactions with these related parties
are at least as favorable as those it could otherwise have obtained from
unrelated third parties and were negotiated on an arms-length basis.
During Fiscal 1998, the Company prepaid $3,360,000 under a lease for
certain facilities with an affiliate. The prepayment is included in other
assets and is being charged to rent expense over the term of the lease.
The Company may terminate the lease beginning in Fiscal 2005 and receive
the unamortized portion of the prepaid lease amount in monthly
installments. In Fiscal 2000, the facilities were sold to an unrelated
third party, subject to the existing lease terms with the Company. During
the nine months ended November 30, 2000, the Company entered into a
sublease agreement for the facilities with an unrelated third party, which
expires in Fiscal 2005. The fair value of the consideration received
during the sublease period was less then the Company's related rent
amortization. As such, $225,000 has been expensed during the nine months
ended November 30, 2000.
On November 6, 2000, the Company made a loan in the principal amount of
$600,000 to the Company's Chief Operating Officer. Interest on the
outstanding principal balance on the loan is payable at the rate of 8.0%
per annum, except if the loan is repaid in full by February 15, 2001, in
which case no interest will be payable.
8. Significant Vendors
Vendors who have accounted for over 10% of the Company's consolidated
purchases are as follows:
F-13
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Twelve Months Twelve Months Eleven Months Nine Months
Ended Ended Ended Ended
March 31, March 31, February 29, November 30,
1998 1999 2000 2000
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Nortel Networks............. 85% 46% 24% 11%
Cisco Systems............... -- 16 43 70
Lucent Technologies......... -- 15 11 2
</TABLE>
9. Income Taxes
Income before income taxes is as follows:
<TABLE>
<CAPTION>
Twelve Months Twelve Months Eleven Months Nine Months
Ended Ended Ended Ended
March 31, March 31, February 29, November 30,
1998 1999 2000 2000
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Domestic.................... $11,570,050 $22,250,119 $1,040,665 $46,703,897
Foreign..................... (367,825) 15,068,875 36,430,152 41,300,637
----------- ----------- ----------- -----------
Total....................... $11,202,225 $37,318,994 $37,470,817 $88,004,534
=========== =========== =========== ===========
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Twelve Months Twelve Months Eleven Months Nine Months
Ended Ended Ended Ended
March 31, March 31, February 29, November 30,
1998 1999 2000 2000
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Federal:
Current................... $4,130,765 $9,648,398 $5,037,191 $20,456,980
Deferred.................. (500,050) (2,041,455) (1,972,985) (3,466,713)
---------- ----------- ----------- -----------
3,630,715 7,606,943 3,064,206 16,990,267
---------- ----------- ----------- -----------
State:
Current................... 796,219 3,078,956 1,280,813 6,579,696
Deferred.................. (96,386) (447,185) (601,814) (1,364,087)
---------- ----------- ----------- -----------
699,833 2,631,771 678,999 5,215,609
---------- ----------- ----------- -----------
Foreign:
Current................... 340,568 5,629,295 13,388,626 13,586,357
Deferred.................. -- -- (1,030,623) 249,604
---------- ----------- ----------- -----------
340,568 5,629,295 12,358,003 13,835,961
---------- ----------- ----------- -----------
Total:
Current................... 5,267,552 18,356,649 19,706,630 40,623,033
Deferred.................. (596,436) (2,488,640) (3,605,422) (4,581,196)
---------- ----------- ----------- -----------
$4,671,116 $15,868,009 $16,101,208 $36,041,837
========== =========== =========== ===========
</TABLE>
The items accounting for the difference between income taxes computed at
the Federal statutory rate and the effective rates used to calculate the
provision for income taxes are as follows:
<TABLE>
<CAPTION>
Twelve Months Twelve Months Eleven Months Nine Months
Ended Ended Ended Ended
March 31, March 31, February 29, November 30,
1998 1999 2000 2000
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Federal statutory rate................ 35.00% 35.00% 35.00% 35.00%
Effect of
State taxes, net of Federal benefit 4.10 4.58 1.14 3.87
Foreign tax rate differential...... .50 .81 (1.50) (.72)
Nondeductible goodwill amortization -- 2.02 4.45 2.16
Other.............................. 2.10 .11 3.88 .64
----- ----- ----- -----
Effective income tax rate............. 41.70% 42.52% 42.97% 40.95%
===== ===== ===== =====
</TABLE>
F-14
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
As of March 31, 1999, February 29, 2000 and November 30, 2000, the Company
had net deferred tax assets of $4,962,753, $7,931,940 and $12,417,251,
respectively. The components of the Company's deferred income tax assets
and (liabilities) are as follows:
<TABLE>
<CAPTION>
March 31, 1999 February 29, 2000 November 30, 2000
----------------------- ----------------------- ------------------------
Current Long-Term Current Long-Term Current Long-Term
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales returns and
allowances......... $981,715 $ - $1,182,065 $ - $1,214,811 $ -
Bad debt allowance..... 250,438 - 2,014,500 - 3,886,207 -
Inventory reserve...... 881,540 - 1,132,053 - 1,924,441 -
Compensatory
amortization....... 52,381 - 897,926 - 1,314,669 -
Other receivable
allowances......... - 380,665 - - 1,400,120
Depreciation........... - 449,063 - 193,609 - 127,110
Accrued interest ...... 771,986 - 1,130,475 - 1,161,873 -
Foreign reserves and
accruals........... 516,826 588,980 1,633,677 14,073 1,436,189 (66,190)
Unrealized gain on
marketable securities - - (676,837) - (772,720) -
Other.................. 55,038 34,121 438,545 - 790,741 -
---------- ---------- ---------- -------- ----------- --------
$3,509,924 $1,452,829 $7,752,404 $207,682 $12,356,331 $60,920
========== ========== ========== ======== =========== ========
</TABLE>
No provision has been made for U.S. Federal deferred income taxes on
approximately $67,800,000 of accumulated and undistributed earnings of
foreign subsidiaries at November 30, 2000 since it is the present intention
of management to reinvest the undistributed earnings in foreign operations
indefinitely. In addition, the determination of the amount of unrecognized
U.S. Federal deferred income tax liability for the unremitted earnings
related to the investments in the foreign subsidiaries is not practicable.
10. Commitments and Contingencies
Operating Leases - The Company has leases for office and warehouse
locations and equipment. The leases generally require the Company to pay
operating expenses.
Minimum annual lease payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year are as follows:
Year Ending
November 30,
------------
2001.................................. $ 6,714,000
2002.................................. 7,762,000
2003.................................. 7,293,000
2004.................................. 6,510,000
2005.................................. 6,299,000
Thereafter............................ 10,589,000
-----------
$45,167,000
Total rent expense was $2,308,089, $4,381,446, $7,566,894 and $6,647,453 in
Fiscal 1998, Fiscal 1999, Fiscal 2000 and the nine months ended November
30, 2000, respectively.
Litigation - The Company has certain contingent liabilities resulting from
litigation and claims, generally involving commercial and employment
matters, which are incidental to the ordinary conduct of its business.
Management believes that the probable resolution of such contingencies will
not materially affect the consolidated financial position or the results of
operations of the Company.
11. Stockholders' Equity
In September 1999, the Company and the minority stockholders entered into
a stock buy-out agreement (the "Agreement") giving both the Company and
the minority stockholders the right to have the Company purchase all
outstanding shares owned by the minority stockholders for a price based
upon an earnings formula defined in the Agreement. The right to exercise
the stock buy-out commences on April 1, 2001
F-15
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
and expires upon the earlier of October 1, 2002 or the completion of an
initial public offering by the Company.
On January 10, 2001, the Board of Directors of the Company adopted the
Westcon Group, Inc. Stock Option Plan (the "Plan"). The Plan provides for
grants to employees, board members and third parties who provide valuable
services to the Company of incentive stock options and non-qualified stock
options for the purchase of up to 3,500,000 shares of the Company's common
stock. Stock options will be granted at an exercise price of not less then
fair market value of the Company's common stock at the date of grant. The
Company's stock option committee will determine the vesting period of the
stock options. All stock options expire 10 years from the date of grant. No
stock options have been granted under the Plan.
12. Datatec Stock Option Plan
During Fiscal 1999, Fiscal 2000, the nine months ended November 30, 2000
and prior thereto, Datatec granted five-year options to purchase shares of
its common stock to certain employees of the Company. Certain of the
exercise prices of the options were below the fair market value of the
Datatec common stock at the dates of grant. Such discounts ($4,064,206,
$3,605,045 and $226,783 in Fiscal 1999, Fiscal 2000 and the nine months
ended November 30, 2000, respectively) are being amortized as compensation
expense and credited to additional paid-in capital by the Company over the
four-year vesting terms of the options. Amortization expense relating to
Datatec stock option discounts was $906,329, $2,742,421 and $2,176,341 in
Fiscal 1999, Fiscal 2000 and the nine months ended November 30, 2000,
respectively.
A summary of Datatec stock option transactions involving employees of the
Company is as follows:
Datatec Weighted Average
Stock Options Exercise Price
------------- ----------------
Outstanding April 1, 1998........... -- $ --
Effect of contributed subsidiaries 102,500 3.30
Granted.......................... 886,460 5.31
Exercised........................ -- --
Cancelled........................ (26,300) 5.24
--------- ---------
Outstanding March 31, 1999.......... 962,660 5.10
Granted.......................... 687,653 5.31
Exercised........................ (31,725) 5.23
Cancelled........................ (6,750) 5.24
--------- ---------
Outstanding February 29, 2000....... 1,611,838 5.19
Granted.......................... 1,258,383 6.21
Exercised........................ (23,025) 6.68
Cancelled........................ (289,430) 7.10
--------- ---------
Outstanding November 30, 2000....... 2,557,766 $5.46
========= =========
The following table summarizes information about Datatec stock options
granted to employees of the Company, outstanding at November 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices As of 11/30/00 Life (Years) Price As of 11/30/00 Price
------- -------------- ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$3.05-$4.63 419,600 3.2 $4.46 170,263 $4.22
4.64-5.52 836,713 3.3 5.25 311,065 5.30
5.53-7.16 1,220,103 4.4 6.57 57,126 7.03
14.64 81,350 4.2 14.64 -- --
------------ --------- --- ----- ------- -----
$3.05-$14.64 2,557,766 3.9 $5.46 538,453 $5.14
============ ========= === ===== ======= =====
</TABLE>
F-16
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the Datatec stock options granted to
employees of the Company. Had compensation cost for the Datatec stock
options been determined based on fair value at the option grant dates, in
accordance with the provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), the Company's net income for Fiscal 1999,
Fiscal 2000 and the nine months ended November 30, 2000 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Twelve Months Eleven Months Nine Months
Ended Ended Ended
March 31, February 29, November 30,
1999 2000 2000
------------- ------------- -------------
<S> <C> <C> <C>
Net income:
As reported.................................. $ 21,450,985 $ 21,369,606 $ 51,962,697
============= ============= =============
Pro forma.................................... $ 20,965,678 $ 20,044,738 $ 50,626,678
============= ============= =============
Net income per basic and diluted share:
As reported.................................. $ 0.58 $ 0.47 $ 1.12
============= ============= =============
Pro forma.................................... $ 0.57 $ 0.44 $ 1.09
============= ============= =============
</TABLE>
The weighted average fair value of the Datatec stock options was $9.31,
$10.01 and $5.03 in Fiscal 1999, Fiscal 2000 and the nine months ended
November 30, 2000, respectively, estimated on the dates of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for Fiscal 1999, Fiscal 2000 and the nine months ended
November 30, 2000, respectively: dividend yield of zero; expected
volatility of 82%, 66% and 90%; risk-free interest rate of 17.3%, 14.0% and
13.8% (represents the rate currently available on South Africa government
bonds); and expected lives of option grants of 5 years. The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
pro forma effects.
13. Segment Information
The Company has adopted the disclosure requirements of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" which
establishes standards for additional disclosure about operating segments
for interim and annual financial statements. This standard requires
financial and descriptive information be disclosed for segments whose
operating results are reviewed by the Company for decisions on resource
allocation. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
The Company operates in a single industry segment as a sales channel for
communications and networking equipment products and services. Its business
is organized into three branded divisions, each with a single major vendor
focus. However, the three divisions consist of multiple subsidiaries
operating in diverse geographical markets that report on their operations
and are managed and evaluated individually by the Chief Operating Officer,
who is the Company's chief operating decision maker. As such, the Company
does not segment its business along divisional or geographic lines. The
Company operates in three principle geographic areas. These geographic
areas are (1) the Americas (including the United States, Canada, and
Brazil), (2) Europe, and (3) Asia Pacific.
F-17
<PAGE>
WESTCON GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Financial information by geographic area is as follows:
<TABLE>
<CAPTION>
Americas Europe Asia Pacific Corporate Total
-------- ------ ------------ --------- -----
<S> <C> <C> <C> <C> <C>
Nine months ended November 30, 2000
Sales............................. $988,907,801 $512,002,714 $103,513,644 $ -- $1,604,424,159
Operating income (loss)........... 56,968,449 27,675,039 4,735,369 (15,332,149) 74,046,708
Identifiable assets............... 521,962,781 308,295,820 64,461,188 41,626,631 936,346,420
Fiscal 2000
Sales............................. $719,617,022 $404,063,708 $44,562,862 $ -- $1,168,243,592
Operating income (loss)........... 35,947,669 27,596,364 2,457,110 (11,998,777) 54,002,366
Identifiable assets............... 448,545,919 251,332,313 29,857,698 30,668,181 760,404,111
Fiscal 1999
Sales............................. $410,616,448 $155,839,732 $20,970,288 $ -- $587,426,468
Operating income (loss)........... 37,495,218 10,026,365 (505,805) (1,236,189) 45,779,589
Identifiable assets............... 267,421,239 151,821,596 11,294,528 34,976,146 465,513,509
Fiscal 1998
Sales............................. $321,521,363 $ -- $12,890,109 $ -- $334,411,472
Operating income (loss)........... 14,812,427 -- (807,846) -- 14,004,581
</TABLE>
14. Employee Benefit Plan
The Company has a profit sharing and 401(k) savings plan, which covers
substantially all U.S. employees who meet the plan's eligibility
requirements. The Company contributed $450,000 to the profit sharing plan
in Fiscal 1998. No contributions were made to the profit sharing plan
during Fiscal 1999, Fiscal 2000 and the nine months ended November 30,
2000. Employees of the Company participate in a 401(k) savings plan,
whereby eligible employees may elect to make contributions to the plan
subject to annual limitations established by the Internal Revenue Service.
The Company may make matching contributions at the discretion of
management. Matching contributions to the 401(k) savings plan were
$102,457, $277,249, $704,390 and $262,442 in Fiscal 1998, Fiscal 1999,
Fiscal 2000 and the nine months ended November 30, 2000, respectively.
15. Gain on Sale of Marketable Securities
As of February 29, 2000, the Company owned shares of common stock of a
vendor at a cost of $999,651. At that date, the Company had an unrealized
gain of $1,012,139 (net of taxes of $676,837) on this investment. The
investment, which is included in other assets, has been classified as
available for sale and the unrealized gain included as a component of
stockholders' equity. On March 31, 2000, the vendor became publicly listed
and was subsequently acquired by another entity. During July 2000, the
Company sold approximately 93% of its investment and realized a gain of
$19,716,064 (net of taxes of $13,144,042).
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Comstor Corporation.
Chantilly, Virginia
We have audited the accompanying balance sheets of Comstor Corporation as of
March 26, 1999 and March 27, 1998, and the related statements of operations,
changes in stockholder's equity, and cash flows for the fiscal years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of Comstor Corporation, as of March 26, 1999
and March 27, 1998, and the results of its operations and its cash flows for
the fiscal years then ended in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
McLean, Virginia
September 1, 2000
F-19
<PAGE>
COMSTOR CORPORATION
Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
March 27, March 26, August 13,
1998 1999 1999
--------- --------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 84 $ - $ -
Accounts receivable - net of allowances of
$732, $725, and $610, respectively................. 30,916 53,035 62,993
Due from Parent Company.............................. 1,161 93 1,006
Inventories.......................................... 39,169 31,632 47,547
Prepaid expenses and other current assets............ 217 145 191
------- -------- --------
Total current assets................................. 71,547 84,905 111,737
PROPERTY AND EQUIPMENT - Net............................... 1,615 1,733 1,554
GOODWILL - Net............................................. 20,226 20,622 20,087
------- -------- --------
TOTAL ASSETS............................................... $93,388 $107,260 $133,378
======= ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Revolving line of credit with Parent Company......... $58,719 $78,442 $94,317
Accounts payable..................................... 20,626 18,496 29,852
Accrued expenses and other current liabilities....... 1,225 2,068 2,323
------- -------- --------
Total current liabilities............................ 80,570 99,006 126,492
------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDER'S EQUITY:
Common stock, $.10 par value, 10,000 authorized,
issued and outstanding shares...................... 1 1 1
Additional paid-in capital........................... 11,528 11,528 11,528
Retained earnings (deficit).......................... 1,289 (3,275) (4,643)
------- -------- --------
Total stockholder's equity........................... 12,818 8,254 6,886
------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................. $93,388 $107,260 $133,378
======= ======== ========
</TABLE>
See notes to financial statements.
F-20
<PAGE>
COMSTOR CORPORATION
Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Years Ended Period from
------------------------- March 27, 1999
March 27, March 26, to August 13,
1998 1999 1999
--------- --------- --------------
(Unaudited)
<S> <C> <C> <C>
SALES........................................... $243,260 $450,196 $181,051
COSTS OF GOODS SOLD............................. (224,452) (426,660) (172,088)
-------- -------- --------
GROSS PROFIT.................................... 18,808 23,536 8,963
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................................ (14,959) (22,201) (8,193)
DEPRECIATION AND AMORTIZATION
EXPENSE......................................... (1,504) (1,966) (762)
PARENT COMPANY ALLOCATIONS...................... (1,199) (3,350) (612)
GAIN ON SALE OF ASSETS.......................... - 1,740 40
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS................... 1,146 (2,241) (564)
INTEREST INCOME (EXPENSE):
Interest income........................... 66 315 80
Interest expense to Parent Company........ (1,689) (2,638) (884)
-------- -------- --------
Total interest income (expense)........... (1,623) (2,323) (804)
NET LOSS........................................ $ (477) $ (4,564) $ (1,368)
======== ======== ========
</TABLE>
See notes to financial statements.
F-21
<PAGE>
COMSTOR CORPORATION
Statements of Changes in Stockholder's Equity
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Retained
Number Paid-In Earnings
of Shares Amount Capital (Deficit) Total
--------- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 29, 1997.................... 10,000 $ 1 $ 11,416 $ 1,766 $13,183
Net loss.............................. - - - (477) (477)
Push-down of Parent Company goodwill.. - - 112 - 112
--------- ------ ---------- --------- -------
BALANCE, MARCH 27, 1998.................... 10,000 1 11,528 1,289 12,818
Net loss.............................. - - - (4,564) (4,564)
--------- ------ ---------- --------- -------
BALANCE, MARCH 26, 1999.................... 10,000 1 11,528 (3,275) 8,254
Net loss (unaudited).................. - - - (1,368) (1,368)
--------- ------ ---------- --------- -------
BALANCE, AUGUST 13, 1999 (unaudited)....... 10,000 $ 1 $ 11,528 $ (4,643) $ 6,886
========= ====== ========== ========= =======
</TABLE>
See notes to financial statements.
F-22
<PAGE>
COMSTOR CORPORATION
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended Period from
------------------------- March 27, 1999
March 27, March 26, to August 13,
1998 1999 1999
--------- --------- --------------
(Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss...................................................... $ (477) $ (4,564) $ (1,368)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............................... 1,504 1,966 762
Deferred income taxes....................................... (33) - -
Gain on sale of assets...................................... - (1,740) (40)
Changes in assets and liabilities (net of
business acquisition):
Accounts receivable....................................... (6,065) (21,483) (10,871)
Inventories............................................... (11,526) 6,711 (15,915)
Prepaid expenses and other current assets................. (131) 72 (46)
Accounts payable.......................................... 3,827 (2,130) 11,356
Accrued expenses and other current liabilities............ 636 843 255
--------- --------- --------
Net cash used in operating activities................... (12,265) (20,325) (15,867)
--------- --------- --------
INVESTING ACTIVITIES:
Capital expenditures.......................................... (1,055) (1,649) (8)
Proceeds from sale of assets.................................. - 2,167 -
Payment for business acquisitions - net of cash acquired...... (35,188) - -
--------- --------- --------
Net cash (used in) provided by investing activities...... (36,243) 518 (8)
--------- --------- --------
FINANCING ACTIVITIES
Net borrowings on revolving line of credit with
Parent Company.............................................. 48,234 19,723 15,875
--------- --------- --------
Net cash provided by financing activities................ 48,234 19,723 15,875
--------- --------- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS..................................................... (274) (84) -
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD............................................. 358 84 -
--------- --------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD................................................... $ 84 $ - $ -
========= ========= ========
</TABLE>
See notes to financial statements.
F-23
<PAGE>
COMSTOR CORPORATION
Notes to Financial Statements
1. Business Description and Basis of Presentation
Comstor Corporation (the "Company") operates in a single segment and is a
sales channel for communications and networking equipment products
predominantly to resellers located in the United States.
In June 1996, the Company's parent, Ameridata Technologies, was purchased
by GE Capital (the "Parent Company") and became known as GE Capital IT
Solutions.
Effective September 1997, the Company purchased the net assets of Data
Storage Marketing, Inc. ("DSM"), a privately held company. During the year
ended March 26, 1999, the Company sold a service line of its business
focused on reselling Internet access. In August 1999, the net assets of the
Company were purchased by Westcon Group, Inc.
The financial statements of the Company reflect the historical financial
position, results of operations, and cash flows during ownership by the
Parent Company for each respective period. The financial statements have
been prepared using the Parent Company's historical bases for the assets
and liabilities and the historical results of operations of the Company.
The financial statements include allocations of certain Parent Company
expenses for the Parent Company's corporate services, infrastructure costs
and carrying costs. These expense allocations have been determined solely
by the Parent Company. The financial information included herein may not
reflect the financial position, operating results, changes in stockholder's
equity, and cash flows of the Company in the future or what they would have
been had the Company been a separate, stand-alone entity during the periods
presented.
2. Significant Accounting Policies
Fiscal Year-End - The Company's fiscal year ends on the last Friday in
March. Each of the fiscal years ended March 27, 1998 ("Fiscal 1998") and
March 26, 1999 ("Fiscal 1999"), was comprised of fifty-two weeks.
Interim Financial Information - The financial information as of August 13,
1999, and for the period from March 27, 1999, to August 13, 1999, is
unaudited and includes all adjustments, consisting only of normal and
recurring accruals, that management considers necessary for a fair
presentation of its financial position, operating results, and cash flows.
Results for the period from March 27, 1999, to August 13, 1999, are not
necessarily indicative of results to be expected for the full fiscal year
2000 or for any future period.
Use of Estimates - The presentation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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.
Push-Down Accounting - The Parent Company's acquisition of the Company
resulted in the application of push-down accounting. Push-down accounting
establishes a new accounting and reporting basis for financial statements
by revaluing a company's assets and liabilities, based on their fair market
value at the date of acquisition, which is then "pushed-down" to the
entity, including goodwill. The application of push-down accounting
resulted primarily in recording the Parent Company's goodwill associated
with the purchase transaction. At the date of acquisition, approximately
$11.4 million of goodwill was calculated and pushed-down to the Company and
within the year that followed, an additional $112,000 was pushed-down which
represented an adjustment to the initial amount. The amounts are included
in goodwill and additional paid-in capital in the accompanying balance
sheets and the goodwill is being amortized over 20 years.
Long-Lived Assets - The Company evaluates the carrying value of long-lived
assets, including goodwill, whenever events or changes in circumstances
indicate that the carrying value of the asset may be impaired. An
impairment loss is recognized when estimated future undiscounted cash flows
expected to result from the use of the asset, including disposition, is
less than the carrying value of the asset. The amount of the impairment
loss would be the difference between the estimated fair value of the asset
and its carrying value. No losses for impairment were necessary in Fiscal
1998 and Fiscal 1999.
Disclosure of Fair Value of Financial Instruments - The carrying amount
reported in the consolidated balance sheets for cash, accounts receivable,
accounts payable and accrued expenses approximates fair value because of
the short-term maturity of these financial instruments. The carrying value
of the revolving line of
F-24
<PAGE>
COMSTOR CORPORATION
Notes to Financial Statements (continued)
credit approximates fair value which was based upon the current rates
offered to the Company for debt with similar remaining maturities.
Concentration of Credit Risk - The Company sells its products and services
to customers in diversified industries. The Company performs ongoing credit
evaluations of its customers' financial condition and generally does not
require collateral. The Company is engaged predominantly in the
distribution of communications and networking equipment products;
consequently, the Company's ability to collect the amounts due from
customers may be affected by economic fluctuations in the computer
technology industry. No single customer accounted for greater than 10% of
sales. One vendor accounted for 28%, 41% and 77% (unaudited) of purchases
in Fiscal 1998, Fiscal 1999, and the period from March 27, 1999, to August
13, 1999, respectively. The Company maintains its cash balances in various
financial institutions. Balances may exceed the amount of insurance
provided on such deposits.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Revenue Recognition - The Company recognizes revenue upon shipment of
product which is when title passes to the customer. The Company accrues for
sales returns and other allowances at the time of shipment based upon its
historical experience.
Income Taxes - The Company's operations were included in the Parent
Company's federal consolidated income tax return. The accompanying
financial statements include a provision for income taxes and deferred
income taxes as if the Company is autonomous. Deferred income taxes have
been provided for temporary differences between the Company's financial
statement and income tax basis of the Company's assets and liabilities
using presently enacted tax rates. All amounts calculated as income for tax
liabilities or receivable and deferred taxes have been included in due from
Parent Company in the accompanying balance sheets.
Property and Equipment - Property and equipment are stated at cost, often
represented by fair value as of the date of acquisition. Depreciation is
provided over the estimated useful lives of the assets by using the
straight-line method, principally over a three to seven-year period.
Inventories - Inventories represent finished goods stated at the lower of
cost or market, with cost determined by the average cost method. Vendor
rebates and promotional allowances earned are used to reduce the cost of
the specific inventory to which they relate.
New Accounting Standards - In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. In May 1999,
SFAS No. 137 was issued to defer the implementation of SFAS No. 133 for one
year. SFAS No. 133 establishes standards for the accounting and reporting
of derivative instruments and hedging activities and requires that all
derivative instruments embedded in other contracts be measured at fair
value and recognized as assets or liabilities in the financial statements.
Also, in June 2000, SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB No. 133",
was issued. SFAS No. 138 amends the accounting and reporting standards of
SFAS No. 133 for certain derivative instruments and certain hedging
activities. These statements are effective for all annual and interim
periods beginning after June 15, 2000. The Company is currently evaluating
the impact of such adoption. However, the Company does not presently
believe the adoption of SFAS No. 133 and No. 138 will have a material
effect on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements",
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The guidelines in SAB No. 101 must be
adopted by the fourth quarter of calendar year 2000. The Company does not
expect the adoption of SAB 101 to have a material impact on the Company's
financial position, results of operations, or presentation of its financial
statements.
F-25
<PAGE>
COMSTOR CORPORATION
Notes to Financial Statements (continued)
3. Property and Equipment
Property and equipment is as follows (in thousands):
March 27, March 26, August 13,
1998 1999 1999
--------- --------- ----------
(Unaudited)
Computer and equipment......... $3,480 $4,075 $4,006
Furniture and fixtures......... 757 412 342
Vehicles....................... 70 116 116
Leasehold improvements......... 252 326 354
--------- --------- ---------
4,559 4,929 4,818
Less: Accumulated depreciation. (2,944) (3,196) (3,264)
--------- --------- ---------
$1,615 $1,733 $1,554
========= ========= =========
For Fiscal 1998 and Fiscal 1999, depreciation expense related to property
and equipment was $493,000 and $604,000, respectively. For the period from
March 27, 1999 to August 13, 1999 (unaudited), depreciation expense was
$228,000.
4. Goodwill
Goodwill is as follows (in thousands):
March 27, March 26, August 13,
1998 1999 1999
--------- --------- ----------
Description (Unaudited)
Pushed-down by Parent Company.. $11,528 $11,528 $11,528
Acquisition of DSM............. 10,203 11,961 11,961
Less: Accumulated amortization. (1,505) (2,867) (3,402)
--------- --------- ---------
$20,226 $20,622 $20,087
========= ========= =========
For Fiscal 1998 and Fiscal 1999, amortization expense related to goodwill
was $1,011,000, and $1,362,000, respectively.
5. Income Taxes
The items accounting for the difference between income taxes (benefit)
computed at the Federal statutory rate and the effective rates used to
calculate the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended Period from
-------------------------- March 27, 1999
March 27, March 26, to August 13,
1998 1999 1999
--------- --------- --------------
(Unaudited)
<S> <C> <C> <C>
Federal statutory rate (35)% (35)% (35)%
Effect of:
State taxes - net of Federal benefit........ (4) (4) (4)
Change in valuation allowance............... 39 39 39
--- --- ---
Effective income tax rate....................... -% -% -%
=== === ===
</TABLE>
F-26
<PAGE>
COMSTOR CORPORATION
Notes to Financial Statements (continued)
The components of the Company's deferred income tax assets and liabilities
are as follows (in thousands):
March 27, March 26, August 13,
1998 1999 1999
--------- --------- -----------
(Unaudited)
Depreciation and amortization... $ (151) $ (156) $ (124)
Accounts receivable reserves.... 248 248 204
Inventory reserves.............. 268 245 305
Operating tax loss carryforward. - 1,855 2,386
Warranty reserve................ 7 35 49
Valuation allowance............. (372) (2,227) (2,820)
--------- --------- ---------
$ - $ - $ -
========= ========= =========
A valuation allowance is provided for deferred tax assets if it is more
likely than not these items will either expire before the Company is able
to realize their benefit or that future deductibility is uncertain. The
Company's net deferred tax assets are fully offset by a valuation
allowance.
6. Commitments and Contingencies
Operating Leases - The Company has leases for office and warehouse
locations and equipment. The leases generally require the Company to pay
operating expenses.
Minimum annual lease payments under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year are as follows
(in thousands):
Fiscal Year Ending March
------------------------
2000....................................... $ 1,560
2001....................................... 1,564
2002....................................... 1,449
2003....................................... 1,407
2004....................................... 1,127
---------
$ 7,107
=========
Total rent expense was $1,052,000, and $1,506,000 in Fiscal 1998 and Fiscal
1999, respectively.
Litigation - The Company has certain contingent liabilities resulting from
litigation and claims, generally involving commercial and employment
matters, which are incidental to the ordinary conduct of its business.
Management believes that the probable resolution of such contingencies will
not materially affect the consolidated financial position or the results of
operations of the Company.
7. Employee Benefit Plans
The Company had a 401(k) savings plan, as part of GE Capital's 401(k) Plan,
whereby the employees could elect to make contributions to the plan subject
to annual limitations established by the Internal Revenue Service. The
Company may make a matching contribution based on the discretion of
management. Matching contributions to the plan were $108,000, $216,000, and
$83,000 in Fiscal 1998, Fiscal 1999, and the period from March 27, 1999, to
August 13, 1999 (unaudited), respectively.
F-27
<PAGE>
COMSTOR CORPORATION
Notes to Financial Statements (continued)
8. Related Party Transactions
The Company has transactions with its Parent Company in the normal course
of business. Sales and purchases with the Parent Company consisted of the
following (in thousands):
Years Ended Period from
------------------------ March 27, 1999
March 27, March 26, to August 13,
1998 1999 1999
--------- --------- --------------
(Unaudited)
Sales........... $ 30,868 $ 25,434 $ 1,121
Purchases....... 296 66 198
Parent Company allocations include management fees, interest on the Parent
Company's investment, and other expenses and consisted of $1,199,000 and
$3,350,000 for Fiscal 1998 and Fiscal 1999, respectively.
Interest expense to the Parent Company of $1,689,000 and $2,638,000 for
Fiscal 1998 and Fiscal 1999, respectively, represents a charge to the
Company from the Parent Company for interest on the Company's working
capital, which is being funded by the Parent Company. This monthly
calculation was computed using interest rates ranging from 6% to 8%.
The Company had a revolving line of credit with the Parent Company. This
line of credit had no formal written terms or repayment terms.
9. Acquisition of Business
Effective September 1997, the Company entered into an asset purchase
agreement with DSM. The purchase price, including acquisition costs was
approximately $35,188,000, net of cash acquired, and the Company accounted
for the acquisition using the purchase method of accounting. The
accompanying financial statements include the operations of DSM from
September 1997. The fair value of assets acquired and liabilities assumed
is summarized below (in thousands):
Current assets.................................... $30,768
Furniture and equipment........................... 451
Goodwill.......................................... 11,961
Liabilities assumed............................... (7,992)
The goodwill is being amortized over 15 years.
* * * * * *
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF RBR GROUP LIMITED
We have audited the accompanying consolidated balance sheets of RBR Group
Limited (the "Company") as at 25 September 1998 and 31 July 1998 and the
related profit and loss accounts, cash flow statements and reconciliation of
movements in shareholder's funds for the period from 1 August 1998 to 25
September 1998 and for the year ended 31 July 1998 (all expressed in pounds
sterling). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These 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 the Company at 25 September
1998 and 31 July 1998 and the results of its operations and cash flows in
conformity with generally accepted accounting principles in the United Kingdom
(which differ in certain material aspects from generally accepted accounting
principles in the United States of America - see note 21).
Deloitte & Touche
Chartered Accountants and Registered Auditors
Columbia Centre
Market Street
Bracknell
Berkshire RG12 1PA
England
14 January 2000
F-29
<PAGE>
RBR GROUP LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
Period from 1 August 1998 to 25 September 1998
Year ended 31 July 1998
<TABLE>
<CAPTION>
Period from
1 August 1998 to Year ended
25 September 1998 31 July 1998
------------------------------ -------------------------------
Pound Pound Pound Pound
Note Sterling'000 Sterling'000 Sterling'000 Sterling'000
---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
TURNOVER
Continuing operations 9,912 45,683
Discontinued operations 227 1,615
----- ------
2 10,139 47,298
Cost of sales (8,360) (39,643)
------ -------
Gross profit 1,779 7,655
Administrative expenses (1,194) (6,685)
OPERATING PROFIT/(LOSS)
Continuing operations 844 1,550
Discontinued operations (259) (580)
----- ------
4 585 970
Profit on disposal of discontinued operations 1,201 --
Interest receivable and similar income -- 9
Interest payable and similar charges 5 (161) (426)
PROFIT ON ORDINARY
ACTIVITIES BEFORE TAXATION
Continuing operations 1,884 1,133
Discontinued operations (259) (580)
----- ------
1,625 553
Tax on profit on ordinary activities 6 (274) (614)
------ -------
PROFIT/(LOSS) ON ORDINARY
ACTIVITIES AFTER TAXATION 1,351 (61)
Dividends 7 -- (1,960)
------ -------
PROFIT/(LOSS) TRANSFERRED
TO/(FROM) RESERVES 1,351 (2,021)
====== =======
</TABLE>
There are no recognised gains or losses for either the current financial period
or the preceding financial year other than as stated above.
F-30
<PAGE>
RBR GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
25 September 1998 and 31 July 1998
<TABLE>
<CAPTION>
25 Sept 31 July
1998 1998
Pound Pound
Note Sterling'000 Sterling'000
---- ------------ ------------
<S> <C> <C> <C>
FIXED ASSETS
Tangible Assets 8 478 1,026
Investments 9 5 5
------- -------
483 1,031
CURRENT ASSETS
Stocks 10 4,553 3,919
Debtors 11 14,536 13,384
Cash at bank and in hand 3,614 654
------- -------
22,703 17,957
CREDITORS: amounts falling due within one year 12 (20,665) (17,818)
------- -------
NET CURRENT ASSETS 2,038 139
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES 2,521 1,170
CREDITORS: amounts falling due after more than one year 13 (1,000) (1,000)
------- -------
1,521 170
======= =======
CAPITAL AND RESERVES
Called up share capital 14 1,050 1,050
Profit and loss account 18 471 (880)
------- -------
TOTAL SHAREHOLDERS' FUND 1,521 170
======= =======
Shareholders' funds are attributable to:
Equity shareholders (479) (1,830)
Non-equity shareholders 2,000 2,000
------- -------
</TABLE>
F-31
<PAGE>
RBR GROUP LIMITED
CONSOLIDATED CASH FLOW STATEMENTS
Period ended 25 September 1998 and
Year ended 31 July 1998
<TABLE>
<CAPTION>
Period from
1 August Year ended
1998 to 25 31 July
Sept 1998 1998
Pound Pound
Note Sterling'000 Sterling'000
---- ------------ ------------
<S> <C> <C> <C>
Net cash inflow from operating activities 1 2,747 375
----- -----
Returns on investments and servicing of finance
Interest received - 9
Interest paid (161) (426)
----- -----
Net cash outflow from returns on investments and servicing of finance (161) (417)
Taxation
Corporation tax paid (including advance corporation tax) - (533)
----- -----
Capital expenditure and financial investment
Payments to acquire tangible fixed assets (80) (892)
Receipts from sales of tangible fixed assets 601 24
----- -----
Net cash inflow/(outflow) from investing activities 521 (868)
----- -----
Net cash inflow/(outflow) before financing 3,107 (1,443)
----- -----
Financing
Issue of preference share capital - 1,000
Issue of convertible loan notes - 1,000
Net (outflow)/inflow from invoice factor 2 (147) 441
----- -----
Net cash (outflow)/inflow from financing (147) 2,441
----- -----
Increase in cash 3 2,960 998
===== =====
</TABLE>
F-32
<PAGE>
RBR GROUP LIMITED
CONSOLIDATED CASH FLOW STATEMENTS
Period ended 25 September 1998 and
Year ended 31 July 1998
1. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
Period from
1 August
1998 to 25 Year ended
Sept 1998 31 July 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
Operating profit 585 970
Depreciation charges 27 277
Profit on sale of tangible fixed assets - (3)
Increase in stocks (816) (992)
Increase in debtors (559) (5,816)
Increase in creditors 3,510 5,939
----- ------
2,747 375
===== ======
2. ANALYSIS OF CHANGES IN NET DEBT
At 1 August At 25 Sept
1998 Cashflow 1998
Pound Pound Pound
Sterling'000 Sterling'000 Sterling'000
------------ ------------ ------------
Cash at bank and in hand 654 2,960 3,614
Amounts due to invoice factor (3,802) 147 (3,655)
Debt due after one year (1,000) - (1,000)
------ ----- ------
(4,148) 3,107 (1,041)
====== ===== ======
3. RECONCILIATION OF NET CASH FLOW TO MOVEMENTS IN NET DEBT
Pound Pound
Sterling'000 Sterling'000
------------ ------------
Increase in cash in the year 2,960
Cash inflow from increase in debt 147
-----
Change in net debt resulting from cash flows 3,107
Net debt at 1 August 1998 (4,148)
Net debt at 25 September 1998 (1,041)
======
F-33
<PAGE>
RBR GROUP LIMITED
NOTES TO THE ACCOUNTS
Period ended 25 September 1998 and
Year ended 31 July 1998
1. ACCOUNTING POLICIES
Basis of preparation of financial statements
These financial statements are prepared in conformity with generally
accepted accounting principles in the United Kingdom ("UK GAPP"), which
differ in certain material respects from generally accepted accounting
principles in the United States of America ("US GAAP") - see note 21.
Basis of consolidation
The accounts have been prepared under the principles of acquisition
accounting and consolidate the results of RBR Group Limited and all of its
subsidiary undertakings, collectively "the Company". All intercompany
transactions and balances have been eliminated.
Accounting period
These financial statements present information about the Company for the
financial period from 1 August 1998 to 25 September 1998. Comparative
figures relate to the statutory accounting period from 2 August 1997 to 31
July 1998.
Accounting convention
The financial statements are prepared under the historical cost convention.
Tangible fixed assets
Depreciation is provided on cost in equal annual instalments over the
estimated useful lives of the assets. The rates of depreciation are as
follows:
Computer equipment for resale 25-50% per annum
Plant and machinery 25% per annum
Computer equipment 33% per annum
Office equipment 25% per annum
Furniture and fittings 15% per annum
Motor vehicles 25% per annum
Investments
Investments held as fixed assets are stated at cost less provision for any
impairment in value.
Stocks
Stocks are stated at the lower of cost or net realisable value on a
first-in, first-out basis.
Deferred taxation
Deferred taxation is provided on temporary timing differences, arising
from the different treatment of items for accounts and taxation purposes,
which are expected to reverse in the future, calculated at rates at which
it is estimated that tax will arise.
Leases
Operating lease rentals are charged to income in equal annual amounts over
the lease term.
Pension costs
The Company operates a defined contribution pension scheme. The assets of
the scheme are held separately from those of the Company in an
independently administered trust. Contributions payable by the Company are
charged to the profit and loss account as they fall due.
F-34
<PAGE>
RBR GROUP LIMITED
NOTES TO THE ACCOUNTS
Period ended 25 September 1998 and
Year ended 31 July 1998
2. TURNOVER
Turnover represents amounts derived from the provision of networking
products after deduction of value added tax. Turnover is attributable to
the following geographical destinations:
Period from
1 August Year ended
1998 to 25 31 July
Sept 1998 1998
Pound Sterling'000 Pound Sterling'000
------------------ ------------------
United Kingdom 8,600 43,782
Other European countries 600 3,516
Rest of the World 939 -
------ ------
10,139 47,298
====== ======
All turnover attributable to discontinued activities in both the current
and preceding financial periods is derived from sales made within the
United Kingdom.
3. INFORMATION REGARDING DIRECTORS AND EMPLOYEES
Period from
1 August Year ended
1998 to 25 31 July
Sept 1998 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
Directors' emoluments
Remuneration 186 848
Compensation for loss of office - 70
Pension contributions 9 66
--- ---
195 984
=== ===
Emoluments of the highest paid director:
Remuneration 129 325
Pension contributions 2 7
--- ---
131 332
=== ===
F-35
<PAGE>
RBR GROUP LIMITED
NOTES TO THE ACCOUNTS
Period ended 25 September 1998 and
Year ended 31 July 1998
<TABLE>
<CAPTION>
Period from
1 August Year ended
1998 to 25 31 July
Sept 1998 1998
Pound Sterling'000 Pound Sterling'000
------------------ ------------------
<S> <C> <C>
No. No.
The number of directors who were members of the Company's defined contribution
pension scheme was: 6 8
== ==
Average number of persons employed
Sales 15 22
Distribution 16 5
Administration 23 41
-- --
54 68
== ==
Pound Sterling'000 Pound Sterling'000
Staff costs during the year (including directors)
Wages and salaries 325 3,037
Social security costs 32 287
Pension costs 3 101
--- -----
360 3,425
=== =====
</TABLE>
4. OPERATING PROFIT/(LOSS)
Period from
1 August Year ended
1998 to 25 31 July
Sept 1998 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
Operating profit/(loss) is after charging:
Depreciation
Owned assets 27 277
Rentals under operating leases
Hire of plant and machinery 3 18
Other operating leases 19 172
Exceptional employee bonus 202 1,100
Group auditors' remuneration
Audit 4 26
Other -- 3
Other auditors' remuneration -- 8
=== =====
F-36
<PAGE>
RBR GROUP LIMITED
NOTES TO THE ACCOUNTS
Period ended 25 September 1998 and
Year ended 31 July 1998
5. INTEREST PAYABLE AND SIMILAR CHARGES
Period from
1 August Year ended
1998 to 25 31 July
Sept 1998 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
Bank loans, overdrafts and other loans 16 75
On invoice factoring 115 343
Other 30 8
--- ---
161 426
=== ===
6. TAX ON PROFIT ON ORDINARY ACTIVITIES
Period from
1 August Year ended
1998 to 25 31 July
Sept 1998 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
United Kingdom corporation tax at 31% 274 573
Adjustment in respect of prior year - 41
--- ---
274 614
=== ===
The disproportionate tax charge for the year arises due to the incidence of
disallowable charges, temporary timing differences not recognised as tax
assets, and trading losses for which no tax credit has been recognised.
There is no unprovided deferred taxation. All corporation tax expense
relates to continuing operations.
7. DIVIDENDS
<TABLE>
<CAPTION>
Period from
1 August Year ended
1998 to 25 31 July
Sept 1998 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
<S> <C> <C>
Interim proposed - Pound Sterling 1 per non-equity preference share - 1,000
Interim proposed - Pound Sterling 19.20 per ordinary equity share - 960
--- -----
- 1,960
--- -----
</TABLE>
8. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
Computer Computers and
equipment Plant and office Fixtures and Motor
Group for resale machinery equipment fittings vehicles Total
----- ------------ ------------ ------------ ------------ ------------ ------------
Pound Pound Pound Pound Pound Pound
Sterling'000 Sterling'000 Sterling'000 Sterling'000 Sterling'000 Sterling'000
<S> <C> <C> <C> <C> <C> <C>
Cost
At 1 August 1998 765 10 446 163 45 1,429
Additions -- -- 75 5 -- 80
Disposals (765) -- (49) (3) (45) (862)
---- ---- --- --- ---- -----
At 25 September 1998 -- 10 472 165 -- 647
---- ---- --- --- ---- -----
Accumulated depreciation
At 1 August 1998 215 4 139 21 24 403
Charge -- 1 22 4 -- 27
Disposals (215) -- (22) -- (24) (261)
---- ---- --- --- ---- -----
At 25 September 1998 -- 5 139 25 -- 169
---- ---- --- --- ---- -----
F-37
<PAGE>
RBR GROUP LIMITED
NOTES TO THE ACCOUNTS
Period ended 25 September 1998 and
Year ended 31 July 1998
Computer Computers and
equipment Plant and office Fixtures and Motor
Group for resale machinery equipment fittings vehicles Total
----- ------------ ------------ ------------ ------------ ------------ ------------
Pound Pound Pound Pound Pound Pound
Sterling'000 Sterling'000 Sterling'000 Sterling'000 Sterling'000 Sterling'000
<S> <C> <C> <C> <C> <C> <C>
Net book value
At 25 September 1998 -- 5 333 140 -- 478
==== ==== === === ==== =====
At 31 July 1998 550 6 307 142 21 1,026
==== ==== === === ==== =====
</TABLE>
9. INVESTMENTS
25 Sept 31 July
1998 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
Interests in associated undertakings (at cost) 5 5
--- ---
The Company's 100% interest in St@r Internet Limited was disposed of at
cost during the period. In accordance with FRS 3 "Reporting Financial
Performance", the results of St@r Internet Limited have been classified as
discontinued in the profit and loss account.
At 25 September 1998 RBR Group Limited had the following subsidiary
undertakings:
Proportion of share
capital and voting
Company rights held Nature of business
------- ------------------- -------------------
Distribution of
RBR Networks Limited 100% networking equipment
RBR Network Integration Limited 100% Non-trading
Property Sight Limited 100% Non-trading
All subsidiaries are registered in England and Wales.
10. STOCKS
25 Sept 1998 31 July 1998
Pound Sterling'000 Pound Sterling'000
------------------ ------------------
Stocks 4,553 3,919
===== =====
11. DEBTORS
25 Sept 1998 31 July 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
Trade debtors 12,855 11,836
Amounts owed by subsidiary undertaking:
Within one year -- --
After more than one year -- --
Other debtors 240 51
Advance corporation tax 250 250
Amounts due from directors (note 19) 21 187
Prepayments and accrued income 1,170 1,060
------ ------
14,536 13,384
====== ======
Other than as stated above, all amounts fall due within one year.
F-38
<PAGE>
RBR GROUP LIMITED
NOTES TO THE ACCOUNTS
Period ended 25 September 1998 and
Year ended 31 July 1998
12. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
25 Sept 1998 31 July 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
Trade creditors 10,800 8,566
Amounts due to factors 3,655 3,802
Corporation tax 847 573
Advance corporation tax 250 250
Other taxes and social security 1,490 746
Other creditors 1,144 1,166
Accruals and deferred income 519 755
Proposed dividend 1,960 1,960
------ ------
20,665 17,818
====== ======
Amounts due to factors are secured by a fixed and floating charge over the
assets of the company.
13. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
25 Sept 1998 31 July 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
Convertible loan notes 1,000 1,000
===== =====
Convertible loan notes to a value of (pound)1,000,000 are secured by a
floating charge over the Company's assets. They are redeemable in full on
31 October 2002 and bear interest at the rate of 2 1/2 above LIBOR.
At the lender's option, they are convertible into ordinary shares, so as to
constitute a maximum of 7% of the enlarged issued share capital of the
Company.
14. CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
25 Sept 1998 31 July 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
<S> <C> <C>
Authorised
1,000,000 ordinary shares of Pound Sterling1 each 1,000 1,000
10,000 ordinary 'A' shares of Pound Sterling1 each 10 10
1,000,000 deferred ordinary shares of Pound Sterling1 each 1,000 1,000
1,000,000 convertible preference shares of Pound Sterling1 each 1,000 1,000
----- -----
3,010 3,010
===== =====
Called up, allotted and fully paid
50,000 ordinary shares of Pound Sterling1 each 50 50
1,000,000 convertible preference shares of Pound Sterling1 each 1,000 1,000
----- -----
1,050 1,050
===== =====
</TABLE>
The holders of the convertible preference shares are entitled to a fixed
cumulative preferential dividend, which increases by 1% each year from 0%
in year one to a maximum rate of 10%.
The preference shares are redeemable at the shareholders' opinion from 31
October 2004, and at the company's option after 31 October 2007.
The preference shares are convertible into ordinary shares at the
shareholders' option from 31 October 2004.
F-39
<PAGE>
RBR GROUP LIMITED
NOTES TO THE ACCOUNTS
Period ended 25 September 1998 and
Year ended 31 July 1998
15. OPERATING LEASE COMMITMENTS
<TABLE>
<CAPTION>
25 September 1998 31 July 1998
------------------------------------- -------------------------------------
Land and Land and
buildings Other Buildings Other
Pound Pound Pound Pound
Sterling'000 Sterling'000 Sterling'000 Sterling'000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Leases which expire:
Within 2 to 5 years -- 35 -- 35
After 5 years 183 -- 183 --
--- ---- --- ----
183 35 183 35
=== ==== === ====
</TABLE>
16. CONTINGENT LIABILITIES
There were no contingent liabilities at 25 September 1998 or 31 July 1998.
17. CAPITAL COMMITMENTS
There were no capital commitments at 25 September 1998 or 31 July 1998.
18. COMBINED STATEMENT OF MOVEMENTS IN SHAREHOLDERS' FUNDS AND STATEMENT OF
MOVEMENTS ON RESERVES
<TABLE>
<CAPTION>
Issued Issued Total
ordinary preference Profit and loss 25 September Total
share capital share capital account 1998 31 July 1998
Pound Pound Pound Pound Pound
Sterling'000 Sterling'000 Sterling'000 Sterling'000 Sterling'000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
At 1 August 1998 50 1,000 (880) 170 2,191
Profit/(loss) for the period -- -- 1,351 1,351 (61)
Proposed dividend -- -- -- -- (1,960)
---- ----- ----- ----- ------
At 25 September 1998 50 1,000 471 1,521 170
==== ===== ===== ===== ======
</TABLE>
19. RELATED PARTY TRANSACTIONS
Balances due from directors at the beginning of the period, which included
the maximum amounts outstanding during the year, were:
25 Sept 1998 1 August 1998
Pound Pound
Sterling'000 Sterling'000
------------ ------------
Amounts due (from)/to directors:
R J W Sweet (10) 82
B V S White (4) 102
J C White (7) 3
--- ---
(21) 187
=== ===
No interest was charged on any amounts due from directors.
20. POST BALANCE SHEET EVENT
On 30 April 1999 the Company's entire issued share capital was transferred
to a new group intermediate holding company, Westcon (UK) Limited, a
company registered in England and Wales. Datatec Limited remains the
ultimate parent company.
F-40
<PAGE>
RBR GROUP LIMITED
NOTES TO THE ACCOUNTS
Period ended 25 September 1998 and
Year ended 31 July 1998
21. SUMMARY OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN THE UNITED KINGDOM AND THE UNITED STATES
The financial statements are prepared in accordance with generally accepted
accounting principles in the United Kingdom ("UK GAAP"), which differ in
certain material respects from those generally accepted in the United
States ("US GAAP"). The differences that are significant to the Company
relate to the following items.
Deferred taxation
Under UK GAAP deferred taxation is provided at the same rates at which
taxation is expected to become payable. No provision is made for amounts
which are not expected to become payable in the foreseeable future and no
account is taken of deferred tax assets in accordance with Statement of
Standard Accounting Practice 15.
Under US GAAP, deferred taxation is provided on all temporary differences
under the liability method at rates which the taxation would be payable in
the relevant future year as prescribed by Statement of Financial Accounting
Standard ("SFAS") No. 109 -- "Accounting for Income Taxes".
Dividends
Under UK GAAP, dividends are included in the financial statements when
recommended by the Board of Directors to the shareholders.
Under US GAAP, dividends are not included in the financial statements until
declared by the Board of Directors.
The dividends recommended by the Board of Directors in the prior year were
not paid in either the prior year or the current period, and accordingly
they affect the financial position as prepared under US GAAP.
Cash flow statements
The cashflow statements prepared under the UK GAAP differ in certain
presentational respects from the format required under SFAS 95 --
"Statement of Cash Flows". Under UK GAAP, a reconciliation of profit from
operations to cash flows from operating activities is presented in a note,
and cash paid for interest and income taxes is presented separately from
cash flows from operating activities. Under SFAS 95, cash flows from
operating activities are based on net profit, include interest and income
taxes, and are presented on the face of the statement.
Discontinued operations
Under US GAAP, the results of discontinued operations are reported
separately from continuing operations and any gain or loss from disposal
of a segment of a business is reported in conjunction with the related
results of discontinued operations. The results of discontinued operations
and the gain or loss from disposal of the segment are to be presented net
of applicable income taxes.
F-41
<PAGE>
RBR GROUP LIMITED
NOTES TO THE ACCOUNTS
Period ended 25 September 1998 and
Year ended 31 July 1998
22. SUMMARY OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
THE UNITED KINGDOM AND THE UNITED STATES (continued)
The approximate effects of the differences between UK GAAP and US GAAP on
net income, shareholders' equity, and fixed assets are as follows:
<TABLE>
<CAPTION>
Period from
1 August 1998 to Year ended
25 Sept 1998 31 July1998
Pound Sterling'000 Pound Sterling'000
------------------ ------------------
<S> <C> <C>
NET INCOME
Profit/(loss) for the financial period/year after
taxation (UK GAAP) 1,351 (2,021)
Reversal of proposed dividend -- 1,960
Recognition of deferred tax asset 70 183
Reverse loss from discontinued operations 259 580
Reverse profit on disposal of discontinued
operations (1,201) --
------ ------
Income for the financial period/year before
discontinued operations and taxation (US
GAAP) 1,680 702
Loss from discontinued operations (before and
after tax) (259) (580)
Profit on disposal of discontinued operations
(before and after tax) 1,201 --
------ ------
1,421 122
====== ======
Net income (US GAAP)
SHAREHOLDERS' FUNDS
Shareholders' funds (UK GAAP) 1,521 170
Reversal of proposed dividend -- 1,960
Recognition of deferred tax asset 70 183
------ ------
1,591 2,313
====== ======
Shareholders' funds (US GAAP)
TOTAL ASSETS
Total assets (UK GAAP) 23,186 18,988
------ ------
Total assets (US GAAP) 23,186 18,988
====== ======
</TABLE>
F-42
<PAGE>
RBR GROUP LIMITED
NOTES TO THE ACCOUNTS
Period ended 25 September 1998 and
Year ended 31 July 1998
Under US GAAP the following amounts would be reported:
Period from
1 August 1998 to Year ended
25 Sept 1998 31 July 1998
Pound Pound
Sterling'000 Sterling'000
---------------- ------------
Net cash provided/(used) by operating activities 2,586 (575)
Net cash provided/(used) in investing activities 521 (868)
Net cash (used)/provided by financing activities (147) 2,441
----- -----
Net increase in cash 2,960 998
Cash at beginning of period/year 654 (344)
----- -----
Cash at end of period/year 3,614 654
===== =====
A reconciliation between the statements of cash flows presented in accordance
with UK GAAP and US GAAP is set out below:
Period from
1 August 1998 to Year ended
25 Sept 1998 31 July 1998
Pound Pound
Sterling'000 Sterling'000
---------------- ------------
OPERATING ACTIVITIES
Net cash inflow from operating activities (UK GAAP) 2,747 375
Income taxes paid -- (533)
Interest paid (161) (417)
----- ----
Net cash provided by operating activities (US GAAP) 2,586 (575)
===== ====
F-43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
RBR GROUP LIMITED
We were engaged to audit the accompanying consolidated balance sheet of RBR
Group Limited as of August 1, 1997, and the related consolidated statements of
profit and loss account and cash flows for the year then ended (all expressed
in British pounds sterling). 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 audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. These 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to the above present fairly,
in all material respects the consolidated financial position of the RBR Group
Limited as of August 1, 1997 and the consolidated results of its operations and
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in certain
material respects from accounting principles generally accepted in the United
States of America. The application of the latter would not have affected the
determination of consolidated net profit of RBR Group Limited for the year
ended August 1, 1997, and the determination of consolidated shareholders'
equity at August 1, 1997, but would have affected consolidated cash flows for
the year ended August 1, 1997 to the extent summarised in Note 26 to the
consolidated financial statements.
GRANT THORNTON
CRAWLEY
ENGLAND
October 31, 1997
(Except for Note 26, as to which the date is November 24, 2000)
F-44
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
REPORT OF THE DIRECTORS
For the period ended 1 August 1997
-------------------------------------------------------------------------------
The directors present their report together with financial statements for the
period 2 October 1996 to 1 August 1997.
Incorporation and change of name
The company was incorporated in England on 2 October 1996 under the name of
Teething Opportunities Limited. On 18 March 1997 the company changed its name
to RBR Group Limited.
Principal activities
The principal activities of the group is that of reselling networking equipment
and the provision of internet services.
Business review
The results for the full year to 1 August 1997 show a profit after taxation of
899,119 pounds (1996: 293,761 pounds). The directors do not recommend payment
of a dividend and the profit has therefore been taken to reserves. The results
for statutory purposes for the period from incorporation to 1 August 1997 are
set out on page 7.
Acquisition of subsidiary
During the year 49,998 ordinary shares were allotted, credited as fully paid,
in order to acquire the entire issued share capital of RBR Networks Limited
(formerly RBR Group Limited). This share for share exchange was on the basis of
1 1 pound ordinary shares for each 1 pound ordinary share in RBR Networks
Limited.
Presentation of group results
The presentation of the accounts is somewhat complicated as a result of the
reconstruction of the group. The new holding company was not in existence for
the full year ended 1 August 1997 and the Companies Act 1985 requires that the
statutory accounts show consolidated Group results from the holding company's
date of incorporation, 2 October 1996 to 1 August 1997. Accordingly, the
statutory profit and loss account on page 6 reflects this requirement.
In order to present the results for the full year to 1 August 1997 with
comparatives for the preceding year, we have prepared a profit and loss account
on page 7 and notes relating thereto as additional information to that required
by statute. We believe that this additional information provides shareholders
with more meaningful information than that given in statutory accounts alone.
F-45
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
REPORT OF THE DIRECTORS
For the period ended 1 August 1997
-------------------------------------------------------------------------------
Directors
The directors in office during the year and their beneficial interests in the
issued share capital of the company were as follows:
Ordinary shares of 1 pound each
1 August 1997
R J W Sweet (appointed 31 January 1997) 26,500
B V S White (appointed 31 January 1997) 17,500
A M Peters (appointed 31 January 1997) 3,500
J C White (appointed 31 January 1997) 2,500
M Sunner (appointed 31 January 1997) --
R A Youngs (appointed 24 July 1997) --
T K Williams (appointed 24 July 1997) --
C J V White (appointed 24 July 1997) --
Directors' responsibilities for the financial statements
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that period. In preparing
those financial statements, the directors are required to:
o select suitable accounting policies and then apply them consistently
o make judgements and estimates that are reasonable and prudent
o prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records, for
safeguarding the assets of the company and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
F-46
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
REPORT OF THE DIRECTORS
For the period ended 1 August 1997
-------------------------------------------------------------------------------
Payment policy and practice
It is the group's policy to settle the terms of payment with suppliers when
agreeing the terms of the transaction, to ensure that suppliers are aware of
these terms and to abide by them. Trade creditors at the year end amount to 60
days of average supplies for the year (1996: 63 days).
Auditors
Grant Thornton were appointed auditors on 24 February 1997 to fill a casual
vacancy in accordance with section 388(1) of the Companies Act 1985.
Grant Thornton offer themselves for re-appointment as auditors in accordance
with section 385 of the Companies Act 1985.
ON BEHALF OF THE BOARD
Secretary
F-47
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
PRINCIPAL ACCOUNTING POLICIES
-------------------------------------------------------------------------------
Basis of preparation
The financial statements have been prepared in accordance with applicable
accounting standards and under the historical cost convention.
The consolidated financial statements as of and for the year ended 31 July 1996
were audited by another independent accounting firm and have been included for
comparative purposes in accordance with accounting principles generally
accepted in the United Kingdom.
Basis of consolidation
The principles of merger accounting have been applied. The statutory group
accounts have been prepared on the basis that RBR Networks Limited, St@r
Internet Limited and RBR Network Integration Limited which became subsidiaries
of the company on 31 January 1997, were wholly owned subsidiaries for the
period from incorporation of the company to 1 August 1997.
Turnover
Turnover represents net invoiced sales, exclusive of value added tax.
Depreciation
Depreciation is provided to write down the cost less estimated residual value
of all tangible fixed assets by equal annual instalments over their expected
useful lives. The rates generally applicable are:
Plant and machinery 25% on net book value
Office equipment 25% on net book value
Furniture and fittings 15% on net book value
Motor vehicles 25% on net book value
Computer equipment held for use
in operating leases 25%-50% on straight line basis
Computer equipment held for own use 33% on straight line basis
Stock
Stock is valued at the lower of cost and net realisable value.
Leased assets
Assets held under finance leases are capitalised and liabilities are set up for
the capital portions of the instalments. The interest portions of the
instalments are charged to the profit and loss account in the periods in which
they fall due.
Rentals on operating leases are charged to the profit and loss account in the
periods in which they fall due.
Deferred taxation
Provision is made for taxation in respect of all material timing differences
except to the extent that in the opinion of the directors there is reasonable
probability that the liability will not arise in the foreseeable future.
Contributions to pension funds
Defined contribution scheme
The group operates a defined contribution scheme. The assets of the scheme are
held separately from those of the group in an independently administered fund.
The pension cost charge represents contributions payable by the group to the
fund.
F-48
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
PRINCIPAL ACCOUNTING POLICIES
-------------------------------------------------------------------------------
Foreign currencies
Transactions in foreign currencies are translated at the exchange rate ruling
at the date of the transaction. Monetary assets and liabilities in foreign
currencies are translated at the rates of exchange ruling at the balance sheet
date.
All other exchange differences are dealt with through the profit and loss
account.
Software
Software purchased is written off to the profit and loss account in the year of
purchase.
Research and development
Expenditure on research and development is written off to the profit and loss
account in the year of expenditure.
Operating lease income
Operating lease income represents the net invoiced rentals, exclusive of value
added tax.
F-49
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the period ended 1 August 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
10 months to 1 August Year ended 1 August Year ended 31 July
Note 1997 1997 1996
---- --------------------- ------------------- ------------------
Pound Sterling Pound Sterling Pound Sterling
<S> <C> <C> <C> <C>
Turnover 1 19,863,124 24,090,682 7,775,487
Cost of sales (16,824,982) (20,152,410) (6,294,120)
----------- ----------- ----------
Gross profit 3,038,142 3,938,272 1,481,367
Administrative expenses (2,114,081) (2,425,381) (1,048,806)
----------- ----------- ----------
924,061 1,512,891 432,561
Interest receivable 4 1,759 2,176 556
Interest payable 5 (198,075) (218,484) (28,116)
----------- ----------- ----------
Profit on ordinary activities before
taxation 2 727,745 1,296,583 405,001
Taxation 6 (178,780) (397,464) (111,240)
----------- ----------- ----------
Profit on ordinary activities after
taxation 8 548,965 899,119 293,761
Dividends 7 0 0 (42,666)
----------- ----------- ----------
Profit retained 548,965 899,119 251,095
=========== =========== ==========
</TABLE>
There were no recognised gains or losses other than the profit for the year.
The accompanying accounting policies and notes form an integral part of these
financial statements.
F-50
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
CONSOLIDATED BALANCE SHEET AT 1 AUGUST 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Note 1 August 1997 31 July 1996
---- ------------- ------------
Pound Sterling Pound Sterling Pound Sterling Pound Sterling
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Fixed assets
Tangible assets 9 431,705 82,156
Investment 10 5,000 0
--------- -------
436,705 82,156
Current assets
Stock 11 2,927,249 1,155,284
Debtors 12 7,318,249 1,726,671
Cash at bank and in hand 45,503 78,511
---------- ----------
10,291,001 2,960,466
Creditors: amounts falling due
within one year 13 (9,537,110) (2,597,145)
---------- ----------
Net current assets 753,891 363,321
--------- --------
1,190,596 445,477
========= ========
Creditors: amounts falling due
after more than one year 14 0 (154,000)
--------- --------
1,190,596 291,477
========= ========
Capital and reserves
Called up share capital 15 50,000 1,000
Profit and loss account 16 1,140,596 290,477
--------- --------
Shareholders' funds
- equity interests 17 1,190,596 291,477
========= ========
</TABLE>
The accompanying accounting policies and notes form an integral part of these
financial statements.
F-51
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
COMPANY BALANCE SHEET AT 1 AUGUST 1997
-------------------------------------------------------------------------------
Note 1 August 1997
---- ------------------
Pound Sterling'000
Fixed assets
Investments 10 50,000
------
50,000
======
Capital and reserves
Called up share capital 15 50,000
Profit and loss account 16 0
------
Shareholders' funds 50,000
======
The accompanying accounting policies and notes form an integral part of these
financial statements.
F-52
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
CONSOLIDATED CASH FLOW STATEMENT
For the period ended 1 August 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
10 months to 1 Year ended 1 Year ended 31
Note August 1997 August 1997 July 1996
---- -------------- -------------- --------------
Pound Sterling Pound Sterling Pound Sterling
<S> <C> <C> <C> <C>
Net cash outflow from operating activities 18 (1,659,211) (2,341,356) (334,857)
---------- ---------- --------
Returns on investments and servicing of finance
Interest received 1,759 2,176 557
Interest paid (198,075) (218,484) (28,116)
---------- ---------- --------
Net cash outflow from returns on investments
and servicing of finance (196,316) (216,308) (27,559)
---------- ---------- --------
Taxation (10,000) (10,000) (27,743)
---------- ---------- --------
Investing activities
Purchase of tangible fixed assets (449,777) (475,445) (73,457)
Sale of tangible fixed assets 7,900 7,970 0
Purchase of fixed asset investments (5,000) (5,000) 0
---------- ---------- --------
Net cash outflow from investing activities (446,877) (472,475) (73,457)
---------- ---------- --------
Equity dividends paid 0 0 (42,666)
---------- ---------- --------
Decrease in cash 19 (2,312,404) (3,040,139) (506,282)
========== ========== ========
</TABLE>
The accompanying accounting policies and notes form an integral part of these
financial statements.
F-53
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
NOTES TO THE FINANCIAL STATEMENTS
For the period ended 1 August 1997
-------------------------------------------------------------------------------
1 TURNOVER
The turnover and profit before taxation are attributable to the principal
activities; that of reselling networking equipment and the provision of internet
services.
The group also acts as a lessor, leasing out computer equipment under operating
leases.
The aggregate rentals receivable for the year in respect of operating leases
were (pound)117,588 (1996:(pound)nil).
2 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
<TABLE>
<CAPTION>
Year ended Year ended
1 Aug 1997 31 Jul 1996
The profit on ordinary activities is stated after: -------------- --------------
Pound Sterling Pound Sterling
<S> <C> <C>
Auditors' remuneration 23,540 4,000
Depreciation
- tangible fixed assets, owned assets 117,271 14,835
Operating lease rentals
- plant and machinery 26,459 6,164
- other 39,217 34,315
======= ======
</TABLE>
3 STAFF COSTS
<TABLE>
<CAPTION>
Year ended Year ended
1 Aug 1997 31 Jul 1996
Staff costs during the year were as follows: -------------- --------------
Pound Sterling Pound Sterling
<S> <C> <C>
Wages and salaries 1,006,109 723,136
Social security costs 76,715 30,799
Other pension costs 79,508 12,605
--------- -------
1,162,332 766,540
========= =======
Year ended Year ended
1 Aug 1997 31 Jul 1996
The average number of employees during the year was as follows: -------------- --------------
Number Number
-------------- --------------
<S> <C> <C>
Sales 10 5
Distribution 2 1
Administration 18 18
--- ---
30 24
=== ===
Year ended Year ended
1 Aug 1997 31 Jul 1996
Remuneration in respect of directors was as follows: -------------- --------------
Pound Sterling Pound Sterling
<S> <C> <C>
Management remuneration 369,679 410,500
======= =======
Year ended Year ended
1 Aug 1997 31 Jul 1996
The emoluments of the highest paid director was as follows: -------------- --------------
Pound Sterling Pound Sterling
<S> <C> <C>
Chairman and highest paid director aggregate remuneration
(including benefits) 92,814 199,543
Pension contributions 24,500 2,000
------- -------
117,314 201,543
</TABLE>
F-54
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
NOTES TO THE FINANCIAL STATEMENTS
For the period ended 1 August 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4 INTEREST RECEIVABLE
Year ended Year ended
1 Aug 1997 31 Jul 1996
-------------- --------------
Pound Sterling Pound Sterling
<S> <C> <C>
Bank interest 2,176 556
===== ===
5 INTEREST PAYABLE
Year ended Year ended
1 Aug 1997 31 Jul 1996
-------------- --------------
Pound Sterling Pound Sterling
<S> <C> <C>
On overdraft repayable within five years, not by instalments 1,115 3,813
On factoring 214,657 21,204
Other 2,712 3,099
------- ------
218,484 28,116
======= ======
6 TAXATION
Year ended Year ended
1 Aug 1997 31 Jul 1996
-------------- --------------
Pound Sterling Pound Sterling
<S> <C> <C>
Corporation tax at 32.2% (1996: 27.7%) 397,464 111,165
Under provision for previous year 0 75
------- -------
397,464 111,240
======= =======
7 DIVIDENDS
Year ended Year ended
1 Aug 1997 31 Jul 1996
-------------- --------------
Pound Sterling Pound Sterling
<S> <C> <C>
Interim dividends 0 42,666
== ======
</TABLE>
8 PROFIT FOR THE FINANCIAL PERIOD
The preparation of the accounts is complicated as a result of the reconstruction
of the group. The new holding company was not in existence for the full year
ended 1 August 1997 and the Companies Act 1985 requires that the statutory
accounts show consolidated group results from the holding company's date of
incorporation to 1 August 1997. Accordingly, the statutory consolidated profit
and loss account reflects this requirement.
Additional information has been prepared on the basis of merger accounting and
as if the acquisition of RBR Networks Limited by the company took effect on 1
August 1995. It is the opinion of the directors that this additional
information provides the shareholders with more meaningful information.
In drawing up the accounts under merger accounting principles, the following
are the key dates:
Previous year end of RBR Networks Limited
(formerly RBR Group Limited) 31 July 1996
Incorporation of the company 2 October 1996
Acquisition of RBR Networks Limited 31 January 1997
Year end of the company and RBR Networks Limited 1 August 1997
F-55
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
NOTES TO THE FINANCIAL STATEMENTS
For the period ended 1 August 1997
-------------------------------------------------------------------------------
The accounts for the 10 months from incorporation of the company to the year end
cover 4 months before the acquisition and 6 months after the acquisition.
<TABLE>
<CAPTION>
Profit after
Turnover taxation
The turnover and profit for the period, after taxation, is as follows: -------------- --------------
Pound Sterling Pound Sterling
<S> <C> <C>
From 1 October 1996 to 31 January 1997 4,943,980 253,244
From 1 February 1997 to 1 August 1997 14,919,144 295,721
---------- -------
19,863,124 548,965
========== =======
</TABLE>
The consolidated profit and loss account drawn up to include the full 12 months
to 1 August 1997 is as follows:
<TABLE>
<CAPTION>
Profit after
Turnover taxation
-------------- --------------
Pound Sterling Pound Sterling
<S> <C> <C>
From 1 August 1996 to 31 January 1997 9,171,538 603,398
From 1 February 1997 to 1 August 1997 14,919,144 295,721
---------- -------
24,090,682 899,119
========== =======
</TABLE>
9 CONSOLIDATED FIXED ASSETS
<TABLE>
<CAPTION>
Computer Computer and
equipment held Plant and office Furniture and Motor
The group for rentals machinery equipment fittings vehicles Total
--------- -------------- -------------- -------------- -------------- -------------- --------------
Pound Sterling Pound Sterling Pound Sterling Pound Sterling Pound Sterling Pound Sterling
<S> <C> <C> <C> <C> <C> <C>
Cost
At 1 August 1996 0 292 48,497 34,251 20,500 103,540
Additions 179,280 9,494 180,157 61,851 44,663 475,445
Disposals 0 0 0 0 (11,500) (11,500)
------- ----- ------- ------ ------- -------
At 1 August 1997 179,280 9,786 228,654 96,102 53,663 567,485
======= ===== ======= ====== ======= =======
Depreciation
At 1 August 1996 0 6 13,477 4,276 3,625 21,384
Charge for the period 33,675 2,455 59,399 8,482 13,260 117,271
On disposals 0 0 0 0 (2,875) (2,875)
------- ----- ------- ------ ------- -------
At 1 August 1997 33,675 2,461 72,876 12,758 14,010 135,780
------- ----- ------- ------ ------- -------
Net book amount
at 1 August 1997 145,605 7,325 155,778 83,344 39,653 431,705
======= ===== ======= ====== ======= =======
Net book amount
at 31 July 1996 0 286 35,020 29,975 16,875 82,156
======= ===== ======= ====== ======= =======
</TABLE>
F-56
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
NOTES TO THE FINANCIAL STATEMENTS
For the period ended 1 August 1997
-------------------------------------------------------------------------------
10 FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
Group Company
1 Aug 1997 31 Jul 1996 1 Aug 1997
-------------- -------------- --------------
Pound Sterling Pound Sterling Pound Sterling
<S> <C> <C> <C>
Interests in associated undertakings 5,000 0 0
Shares in subsidiary undertakings at cost 0 0 50,000
----- -- ------
5,000 0 50,000
===== == ======
</TABLE>
At 1 August 1997 the group held 5,000 ordinary shares in Property Sight Limited,
a company registered in England and Wales. This represents one-third of that
company's total share capital. The results of Property Sight Limited are not
material to the group.
At 1 August 1997 the company held 100% of the ordinary shares in RBR Networks
Limited, St@r Internet Limited and RBR Network Integration Limited, all
registered in England and Wales. The business activities of RBR Networks Limited
and RBR Networks Integration Limited is that of reselling networking equipment
and that of St@r Internet Limited is the provision of internet services.
11 STOCK
Group
1 Aug 1997 31 Jul 1996
-------------- --------------
Pound Sterling Pound Sterling
Stock 2,927,249 1,155,284
========= =========
12 DEBTORS
Group
1 Aug 1997 31 Jul 1996
-------------- --------------
Pound Sterling Pound Sterling
Trade debtors 7,210,016 1,703,164
Other debtors 20,472 3,197
Prepayments and accrued income 87,761 20,310
--------- ---------
7,318,249 1,726,671
========= =========
13 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Group
1 Aug 1997 31 Jul 1996
-------------- --------------
Pound Sterling Pound Sterling
Bank overdraft 388,167 0
Trade creditors 4,582,950 1,082,324
Corporation tax 487,962 100,498
Advance corporation tax 4,000 4,000
Social security and other taxes 276,641 94,949
Other creditors 3,390,751 762,815
Directors' current accounts (see note 21) 171,823 73,937
Accruals and deferred income 234,816 478,622
--------- ---------
9,537,110 2,597,145
========= =========
F-57
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
NOTES TO THE FINANCIAL STATEMENTS
For the period ended 1 August 1997
-------------------------------------------------------------------------------
On 15 February 1996 the group granted a fixed and floating charge over all the
assets of the group to secure the factoring facility. The outstanding balance
due to the factoring company at 1 August 1997 was (pound)3,360,751 (1996:
(pound)741,787) and is shown in other creditors.
14 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Group
1 Aug 1997 31 Jul 1996
-------------- --------------
Pound Sterling Pound Sterling
Directors' current accounts (see note 21) 0 154,000
== =======
15 SHARE CAPITAL
Group
1 Aug 1997 31 Jul 1996
-------------- --------------
Pound Sterling Pound Sterling
Authorised
50,000 ordinary shares of Pound Sterling 1 each 50,000 1,000
Allotted, issued and fully paid
50,000 ordinary shares of Pound Sterling 1 each 50,000 1,000
On incorporation on 2 October 1996, under the name of Teething Opportunities
Limited, the company had an authorised share capital of (pound)2 divided into 2
ordinary shares of (pound)1 each. On 31 January 1997 49,998 (pound)1 ordinary
shares were allotted, credited as fully paid in order to acquire the entire
share capital of RBR Networks Limited (formerly RBR Group Limited). This share
for share exchange was on the basis of 1 (pound)1 ordinary share for each
(pound)1 ordinary share in RBR Networks Limited.
16 PROFIT AND LOSS ACCOUNT
Group
1 Aug 1997
--------------
Pound Sterling
At 1 August 1996 290,477
Profit for the 2 months to 1 October 1996 350,154
---------
At 1 October 1996 640,631
Profit for the 10 months to 1 August 1997 548,965
Share exchange (49,000)
---------
At 1 August 1997 1,140,596
=========
The company did not trade during the period and has taken advantage of section
230 of the Companies Act 1985 and has not included the company profit and loss
account.
17 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
1 Aug 1997
--------------
Pound Sterling
Shareholders' funds at 1 August 1996 291,477
Profit for the 2 months to 1 October 1996 350,154
---------
Shareholders' funds at 1 October 1996 641,631
F-58
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
NOTES TO THE FINANCIAL STATEMENTS
For the period ended 1 August 1997
--------------------------------------------------------------------------------
1 Aug 1997
--------------
Pound Sterling
Profit for the 10 months to 1 August 1997 548,965
Dividends 0
---------
Shareholders' funds at 1 August 1997 1,190,596
=========
18 NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
10 mths to Year ended Year ended
1 Aug 1997 1 Aug 1997 31 Jul 1996
-------------- -------------- --------------
Pound Sterling Pound Sterling Pound Sterling
<S> <C> <C> <C>
Operating profit 924,061 1,512,891 432,561
Depreciation 111,551 117,271 14,835
Loss on sale of fixed assets 655 655 0
Increase in stock (2,015,388) (1,771,965) (964,026)
Increase in debtors (4,478,649) (5,591,578) (1,198,080)
Increase in creditors 3,798,559 3,391,370 1,379,853
---------- ---------- ----------
Net cash inflow/(outflow) from
operating activities (1,659,211) (2,341,356) (334,857)
========== ========== ==========
</TABLE>
19 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
10 mths to Year ended Year ended
1 Aug 1997 1 Aug 1997 31 Jul 1996
-------------- -------------- --------------
Pound Sterling Pound Sterling Pound Sterling
<S> <C> <C> <C>
Change in net debt resulting from cash flows (2,312,404) (3,040,139) (506,282)
---------- ---------- ----------
Movement in net debt in the year (2,312,404) (3,040,139) (506,282)
Net debt at 1 August 1996/1 October 1996 (1,391,011) (663,276) (156,994)
---------- ---------- ----------
Net debt at 1 August 1997 (3,703,415) (3,703,415) (663,276)
========== ========== ==========
</TABLE>
20 ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
10 months to 1 August 1997 1 Oct 1996 Cash flow 1 Aug 1997
-------------------------- -------------- -------------- --------------
Pound Sterling Pound Sterling Pound Sterling
<S> <C> <C> <C>
Cash in hand and at bank 3,016 42,487 45,503
Overdrafts (238,907) (149,260) (388,167)
---------- ---------- ----------
(235,891) (106,773) (342,664)
Amounts due to factoring company (1,155,120) (2,205,631) (3,360,751)
---------- ---------- ----------
(1,391,011) (2,312,404) (3,703,415)
========== ========== ==========
12 months to 1 August 1997 1 Aug 1996 Cashflow 1 Aug 1997
-------------------------- -------------- -------------- --------------
Pound Sterling Pound Sterling Pound Sterling
<S> <C> <C> <C>
Cash in hand and at bank 78,511 (33,008) 45,503
Overdrafts 0 (388,167) (388,167)
---------- ---------- ----------
78,511 (421,175) (342,664)
Amounts due to factoring company (741,787) (2,618,964) (3,360,751)
---------- ---------- ----------
(663,276) (3,040,139) (3,703,415)
========== ========== ==========
</TABLE>
F-59
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
NOTES TO THE FINANCIAL STATEMENTS
For the period ended 1 August 1997
-------------------------------------------------------------------------------
21 CAPITAL COMMITMENTS
There were no capital commitments at 31 January 1997 or 31 July 1996.
22 CONTINGENT LIABILITIES
There were no contingent liabilities at 1 August 1997 or 31 July 1996.
23 RELATED PARTY TRANSACTIONS
The directors current account balances shown in notes 13 and 14 are made up as
follows:
<TABLE>
<CAPTION>
Group and company
------------------------------------
1 Aug 1997 31 Jul 1996
Pound Sterling Pound Sterling
<S> <C> <C>
Amounts falling due within one year:
R J W Sweet 65,908 28,425
B V S White 92,396 26,923
A M Peters 11,263 0
J C White 3,152 18,589
M Sunner (896) 0
------- -------
171,823 73,937
======= =======
Amounts falling due after more than one year:
R J W Sweet 0 72,000
B V S White 0 72,000
A M Peters 0 10,000
J C White 0 0
------- -------
0 154,000
======= =======
</TABLE>
24 LEASING COMMITMENTS
Operating lease payments, amounting to(pound)65,676 (1996:(pound)49,788) are due
within one year. The leases to which these amounts relate expire as follows:
<TABLE>
<CAPTION>
1 Aug 1997 31 Jul 1996
----------------------------------- -----------------------------------
Land and Land and
buildings Other buildings Other
-------------- -------------- -------------- --------------
Pound Sterling Pound Sterling Pound Sterling Pound Sterling
<S> <C> <C> <C> <C>
Between one and five years 0 26,459 0 10,571
In five years or more 39,217 0 39,217 0
------ ------ ------ ------
39,217 26,459 39,217 10,571
====== ====== ====== ======
</TABLE>
25 CONTROLLING RELATED PARTIES
R J W Sweet is the company's ultimate controlling related party by virtue of his
53% shareholding in RBR Group Limited (formerly Teething Opportunities Limited).
The only group of companies for which group accounts have been drawn up is that
headed by RBR Group Limited (formerly Teething Opportunities Limited),
incorporated in England and Wales.
F-60
<PAGE>
RBR GROUP LIMITED (FORMERLY TEETHING OPPORTUNITIES LIMITED)
NOTES TO THE FINANCIAL STATEMENTS
For the period ended 1 August 1997
-------------------------------------------------------------------------------
26 SUMMARY OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
THE UNITED KINGDOM AND THE UNITED STATES AND SUBSEQUENT EVENT
The financial statements are prepared in accordance with generally accepted
accounting principles in the United Kingdom ("UK GAAP"), which differ in certain
material respects from those generally accepted in the United States ("US
GAAP"). The difference that is significant to RBR Group Limited relates to the
following item:
Cashflow statements
The cashflow statements prepared under the UK GAAP differ in certain
presentational respects from the format required under Statement of Financial
Accounting Standard No. 95 ("SFAS No. 95") - "Statement of Cash Flows". Under UK
GAAP, a reconciliation of profit from operations to cash flows from operating
activities is presented in a note, and cash paid for interest and income taxes
is presented separately from cash flows from operating activities. Under SFAS
No. 95, cash flows from operating activities are based on net profit, include
interest and income taxes, and are presented on the face of the statement.
Under US GAAP the following amounts would be reported:
Year ended
1 Aug 1997
------------------
Pound Sterling'000
Net cash used in operating activities (2,567)
Net cash used in investing activities (472)
Net cash provided by financing activities 3,360
------
Net increase in cash 321
Cash at beginning of year (664)
------
Cash at end of year (343)
======
A reconciliation between the statements of cash flows presented in accordance
with UK GAAP and US GAAP is set out below.
Year ended
1 Aug 1997
------------------
Operating activities Pound Sterling'000
Net cash outflow from operating activities (UK GAAP) (2,341)
Tax paid (10)
Interest paid (216)
------
Net cash used in operating activities (US GAAP) (2,567)
======
Subsequent event
The Company has an outstanding claim for approximately 112,000 pounds against
one of their customers resulting from nonpayment for a purchase of computer
equipment. The defendant filed a counterclaim alleging that they sufferred
damages of approximately 1,000,000 pounds as a result of the equipment which
was claimed to be unsatisfactory and defective. The Company does not believe
there is any merit to the defendents claims and expects to vigourously defend
such actions. The Company and their attorneys are not able to determine the
likely outcome of these actions. Therefore, no provision has been made to the
financial statements as of and for the year ended 1 August 1997.
F-61
<PAGE>
-------------------------------------------------------------------------------
Westcon Group, Inc.
Until , 2001 (25 days after the date of this prospectus), all dealers
selling shares of our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement 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.
-------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Amount
To Be Paid
------------
Registration fee............................................. $ 25,000
NASD Filing fee.............................................. 10,500
Nasdaq National Market....................................... *
Transfer agent's fees........................................ *
Printing and engraving expenses.............................. *
Legal fees and expenses...................................... *
Accounting fees and expenses................................. *
Blue Sky fees and expenses................................... *
Miscellaneous................................................ *
----------
Total...................................................... $ *
==========
----------
* To be supplied by amendment.
Each of the amounts set forth above, other than the Registration fee and
the NASD filing fee, is an estimate.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Article Seventh of the Registrant's Certificate of Incorporation provides for
indemnification by the Registrant of its directors, officers and employees to
the fullest extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation 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 corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions, or (iv) for any transaction from which the
director derived an improper personal benefit. The Registrant's Certificate of
Incorporation provides for such limitation of liability.
The Registrant maintains standard policies of insurance under which
coverage is provided (a) to its directors and officers against loss rising from
claims made by reason of breach of duty or other wrongful act, while acting in
their capacity as directors and officers of the Registrant, and (b) to the
Registrant with respect to payments which may be made by the Registrant to such
officers and directors pursuant to any indemnification provision contained in
the Registrant's Certificate of Incorporation or otherwise as a matter of law.
The proposed form of underwriting agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification of directors and certain
officers of the Registrant by the underwriters against certain liabilities.
Item 15. Recent Sales of Unregistered Securities.
On August 1, 1998, the Registrant effected a 2.227-for-one stock split
of shares of its common stock. On January 10, 2001, the Registrant was
reincorporated in Delaware by a merger of Westcon Group, Inc., a New York
corporation, with and into its wholly owned Delaware subsidiary, Westcon Group
(Delaware), Inc., the surviving Delaware corporation, which changed its name to
Westcon Group, Inc. upon the effectiveness of the merger. Pursuant to the
merger, the New York corporation ceased to exist as a separate corporation and
each outstanding share of its Class A, Class B and Class C common stock was
converted into 14.795 shares of common stock (the "Common Stock"), par value
$0.01 per share, of the surviving Delaware corporation. In addition, the share
of common stock of Westcon Group (Delaware), Inc. that had been outstanding
prior to the merger was cancelled. The share amounts and purchase price per
share amounts set forth below give effect to the stock split and the
reincorporation.
II-1
<PAGE>
Since three years before the date of the initial filing of this
Registration Statement, the Registrant has sold the following securities
without registration under the Securities Act of 1933, as amended (the "Act"):
In December 1997, the Registrant issued an aggregate of 13,330,295 shares
of its Common Stock, consisting of: (i) 4,438,500 shares of Common Stock to
Philip Raffiani in exchange for 34 shares of common stock of Westcon, Inc., a
New York corporation; (ii) 4,438,500 shares of Common Stock to Roman
Michalowski in exchange for 33 shares of common stock of Westcon, Inc.; (iii)
4,438,500 shares of Common Stock to Thomas Dolan in exchange for 33 shares of
common stock of Westcon, Inc.; and (iv) 14,795 shares of Common Stock at a
purchase price per share of $0.68 for gross proceeds of $10,000 to Mirado Corp.
All such issuances were made under the exemption from registration provided by
Section 4(2) of the Act.
In February 2000, the Registrant issued 3,381,694 shares of its Common
Stock at a purchase price per share of $28.68 for gross proceeds of $97 million
to Datatec Limited. The issuance was made under the exemption from registration
provided by Section 4(2) of the Act.
In February 2000, the Registrant issued an aggregate of 13,402,627 shares
of its Common Stock to Datatec Limited, consisting of: (i) 217,604 shares of
Common Stock in exchange for all of the issued and outstanding capital stock of
RBR Networks GmbH, a corporation organized under the laws of Germany; (ii)
205,000 shares of Common Stock in exchange for all of the issued and
outstanding capital stock of RBR Networks Pte. Ltd., a corporation organized
under the laws of the Republic of Singapore; (iii) 4,867,511 shares of Common
Stock in exchange for all of the issued and outstanding capital stock of
Westcon (UK) Limited, a corporation organized under the laws of the United
Kingdom; and (iv) 8,112,512 shares of Common Stock in exchange for all of the
issued and outstanding capital stock of RBR Group Limited, a corporation
organized under the laws of the United Kingdom. All such issuances were made
under the exemption from registration provided by Section 4(2) of the Act.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this Registration
Statement:
<TABLE>
Exhibit
Number Description
--------- ------------
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2 By-Laws
4.1* Form of Common Stock Certificate
4.2* Form of Registration Rights Agreement
5.1* Opinion of Davis Polk & Wardwell
10.1* Distributor Agreement between RBR Networks, Inc. and Cisco Systems, Inc.
10.2* Credit Agreement between IBM Credit Corporation and Westcon Group, Inc.
10.3* Employment Agreement between Business Operation Services Corp. and Thomas Dolan
10.4* Employment Agreement between Business Operation Services Corp. and Alan Marc Smith
10.5* Employment Agreement between Business Operation Services Corp. and Philip Raffiani
10.6* Westcon Group Stock Option Plan
16.1 Letter of McGuigan & Company P.C.
21.1 Subsidiaries of the Registrant
23.1 Consent and Report on Schedule of Deloitte & Touche LLP
23.2 Consent and Report on Schedule of McGuigan & Company P.C.
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Deloitte & Touche, Chartered Accountants and Registered Auditors
23.5 Consent of Grant Thornton, Chartered Accountants and Registered Auditors
23.6* Consent of Davis Polk & Wardwell (included in Exhibit 5)
24.1 Power of Attorney (included on signature page)
99.1* Share Acquisition Agreement between Datatec Limited and Alan Marc Smith
</TABLE>
---------------
* To be filed by amendment.
(b) The following financial statement schedule is filed as part of this
Registration Statement:
Schedule II - Valuation and Qualifying Accounts.
All other schedules to which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
Item 17. Undertakings
The undersigned hereby undertakes:
(a) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
II-3
<PAGE>
(1) For purposes of determining any liability under the Securities Act of
1933, 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 Registrant 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 was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tarrytown, State of New
York, on the 12th day of January, 2001.
WESTCON GROUP, INC.
By /s/ Thomas Dolan
------------------------------------
Name: Thomas Dolan
Title: President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas Dolan and Alan Marc Smith, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement and any and all
additional registration statements pursuant to Rule 462(b) of the Securities
Act of 1933, as amended, and to file the same, with all exhibits thereto, and
all other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agents full power and
authority to do and perform each and every act in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them or
their or his substitute or substitutes 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 and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas Dolan Director, President and January 12, 2001
-------------------------- Chief Executive Officer
Thomas Dolan (principal executive officer)
/s/ Philip Raffiani Director, Executive Vice President and January 12, 2001
-------------------------- General Manager, Treasurer and Secretary
Philip Raffiani
/s/ Alan Marc Smith Executive Vice President and January 12, 2001
-------------------------- Chief Operating Officer
Alan Marc Smith
/s/ John P. O'Malley III Vice President, Finance and January 12, 2001
-------------------------- Chief Financial Officer
John P. O'Malley III (principal financial and accounting officer)
/s/ John McCartney
-------------------------- Chairman of the Board of Directors January 12, 2001
John McCartney
/s/ Jens Montanana
-------------------------- Director January 12, 2001
Jens Montanana
/s/ Robin Rindel
-------------------------- Director January 12, 2001
Robin Rindel
/s/ Jon James
-------------------------- Director January 12, 2001
Jon James
</TABLE>
II-5
<PAGE>
<TABLE>
Schedule II
WESTCON GROUP, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Additions
---------------------------------
Charged Charged
Balance at (Credited) to (Credited) to
Beginning of Costs and Other Balance at End
Accounts receivable allowances Period Expenses Accounts(A) Deductions (B) of Period
------------------------------ ------------ ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Twelve months ended March 31, 1998. $ 584,435 $ 3,075,000 $ -- $ 12,680 $ 3,646,755
Twelve months ended March 31, 1999. $ 3,646,755 $ 1,017,648 $ 2,796,952 $ 460,545 $ 7,000,810
Eleven months ended February 29,
2000.............................. $ 7,000,810 $ 5,378,903 $ 894,407 $ 2,350,729 $10,923,391
Nine months ended November 30,
2000.............................. $10,923,391 $ 5,807,816 $ 2,510,955 $ 7,382,448 $11,859,714
</TABLE>
---------------
(A) Represents valuation account balances related to entities contributed to
the Company by Datatec accounted for in a manner similar to a
pooling-of-interests.
(B) Represents uncollectible accounts written-off, net of recoveries,
including currency translation adjustments of $126, $118,090, $76,365 and
$358,346, for years ended March 31, 1998, March 31, 1999, the eleven
months ended February 29, 2000 and the nine months ended November 30,
2000, respectively.
S-1
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
-------- ------------ ------------
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2 By-Laws
4.1* Form of Common Stock Certificate
4.2* Form of Registration Rights Agreement
5.1* Opinion of Davis Polk & Wardwell
10.1* Distributor Agreement between RBR Networks, Inc.
and Cisco Systems, Inc.
10.2* Credit Agreement between IBM Credit Corporation
and Westcon Group, Inc.
10.3* Employment Agreement between Business Operation
Services Corp. and Thomas Dolan
10.4* Employment Agreement between Business Operation
Services Corp. and Alan Marc Smith
10.5* Employment Agreement between Business Operation
Services Corp. and Philip Raffiani
10.6* Westcon Group Stock Option Plan
16.1 Letter of McGuigan & Company P.C.
21.1 Subsidiaries of the Registrant
23.1 Consent and Report on Schedule of Deloitte &
Touche LLP
23.2 Consent and Report on Schedule of McGuigan &
Company P.C.
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Deloitte & Touche, Chartered Accountants
and Registered Auditors
23.5 Consent of Grant Thornton, Chartered Accountants and
Registered Auditors
23.6* Consent of Davis Polk & Wardwell (included in Exhibit 5)
24.1 Power of Attorney (included on signature page)
99.1* Share Acquisition Agreement between Datatec Limited
and Alan Marc Smith
---------------
* To be filed by amendment.
