<PAGE> 1
As filed with the Securities and Exchange Commission on May 9, 1997
Registration Statement No. 333-25339
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DATAFLEX CORPORATION
(Exact name of registrant as specified in its charter)
--------------------
<TABLE>
<CAPTION>
<S> <C>
New Jersey 5081 22-2163376
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
2145 CALUMET STREET
CLEARWATER, FLORIDA 34625
(813) 562-2200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
ANTHONY G. LEMBO
PRESIDENT
DATAFLEX CORPORATION
2145 CALUMET STREET
CLEARWATER, FLORIDA 34625
(813) 562-2200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------------
Copies of communications to:
ROBERT J. GRAMMIG, ESQ.
HOLLAND & KNIGHT LLP
400 NORTH ASHLEY DRIVE, SUITE 2300
TAMPA, FLORIDA 33602
(813) 227-8500
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statements for the same offering. [ ] _____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ] __________________
<TABLE>
<CAPTION>
==========================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) FEE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value
per share . . . . . . . 270,000 $3.3125 $894,375 $280.00
==========================================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 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.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION - DATED May 9, 1997
PROSPECTUS
================================================================================
270,000 SHARES
DATAFLEX CORPORATION
COMMON STOCK
================================================================================
The 270,000 shares of common stock, no par value per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by certain shareholders
of the Company (the "Selling Shareholders"). The Common Stock may be sold from
time to time by the Selling Shareholders or by their transferees. No
underwriting arrangements have been entered into by the Selling Shareholders.
The distribution of the securities by the Selling Shareholders may be effected
in one or more transactions that may take place on The Nasdaq National Market
(the "Nasdaq National Market") or otherwise, including ordinary brokers'
transactions, privately negotiated transactions or through sales to one or more
dealers for resale of such shares as principals at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage
fees or commissions may be paid by the Selling Shareholders in connection with
sales of such Common Stock.
The Selling Shareholders and intermediaries through whom such securities may be
sold may be deemed "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
and any profits realized or commissions received may be deemed underwriting
compensation. The Company will not receive any of the proceeds from the sale
of shares of Common Stock by the Selling Shareholders. See "Principal and
Selling Shareholders."
The Common Stock of the Company is included in the Nasdaq National Market under
the symbol "DFLX." On May 8, 1997, the last reported sales price of the
Common Stock on the Nasdaq National Market was $2.9375 per share. See "Price
Range of Common Stock."
SEE "RISK FACTORS" ON PAGES 5 TO 8 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May __, 1997.
<PAGE> 3
PROSPECTUS SUMMARY
The following is a summary of the more detailed information and
financial statements appearing elsewhere in this Prospectus. This
Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934 (the "1934 Act"). The
words "expect," "estimate," "anticipate," "predict," "believe" and similar
expressions and variations thereof are intended to identify
forward-looking statements. Such statements appear in a number of places
in this Prospectus and include statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with
respect to, among other things: (i) trends affecting the Company's
financial condition or results of operations; (ii) the Company's financing
plans; (iii) the Company's business strategies; and (iv) the declaration
and payment of dividends. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance
and involve risks and uncertainties, and that actual results may differ
materially from those projected in the forward-looking statements as a
result of various factors. The accompanying information contained in this
Prospectus, including without limitation the information set forth under
the headings "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as
information contained in the Company's 1934 Act filings with the
Securities and Exchange Commission (the "Commission"), identify important
factors that could cause such differences.
THE COMPANY
Dataflex Corporation (the "Company"), incorporated in New Jersey in
1976, is a direct marketer of microcomputer equipment, related products
and computer services. The Company markets computer equipment and related
products supplied primarily by major manufacturers, including Compaq,
Hewlett-Packard, IBM and Toshiba. The Company's customers are business
organizations with diverse desktop computing requirements located
throughout the United States, with a primary concentration in the
Southeast. The Company provides its customers with single-source,
value-added desktop computing solutions and services, including product
sales, system integration, network installations, help desk support,
training, consultation services and equipment repair maintenance. The
Company is also a certified Novell Education Center and a certified
Microsoft Authorized Technical Education Center capable of providing
on-site or off-site manufacturer authorized education.
The computer services business continues to be the fastest growing
segment of the Company's operations and includes dedicated on-site
remedial and nonremedial maintenance support to the Company's customers
through the Company's Mainsite(TM) program, field service repairs and
maintenance, system configuration, asset management, authorized training
centers, LAN/WAN consulting and system integration, help desk support
through its toll-free support line for all computer and computer related
problems, and FlexStaff, which provides dedicated high-end technical
support on a contract basis to customers for short and long-term
requirements. In addition, the Company is a member of a national network
of service partners to enhance its ability to deliver nationwide, on-site
services to its customers.
The Company focuses its efforts on customer service. The Company
conducts ongoing training for its associates, monitors response and repair
time regarding customer requests and concerns, measures delivery time for
services and conducts customer surveys to determine the level of customer
satisfaction.
2
<PAGE> 4
Over the past twelve months, the Company has divested its Eastern
(New Jersey-based), Midwestern (Chicago-based), and Western (California-
and Arizona-based) regions in a series of transactions. These divestitures
are a reversal of the Company's expansion strategy implemented in 1994 and
1995 and resulted from the Company's inability to successfully integrate
these acquisitions promptly and effectively. Additionally, management
determined that the Company lacked adequate capital (or access to adequate
capital) to support its expanded infrastructure, to make necessary
additional capital expenditures and to service the significant indebtedness
incurred in connection with the acquisitions. Management concluded that it
was necessary to reduce the burden of this indebtedness. The divestitures
have reduced the Company's indebtedness and allowed it to focus on its core
competencies. In particular, management believed that the Company's best
opportunities were in the Southeastern United States and therefore
concentrated the Company's efforts in this region. As a result, the
Company disposed of its other operations, including its Eastern region (the
original business of the Company) in 1996. The Company also recently sold
its Kindergarten through 12th Grade Education business to Computer Plus,
Inc. ("Computer Plus").
The Company has offices in Tallahassee, Maitland (Orlando), Hollywood
(Miami-Ft. Lauderdale) and Clearwater (Tampa Bay), Florida, as well as in
Smyrna (Atlanta), Georgia. The Company's headquarters are located at
2145 Calumet Street, Clearwater, Florida 34625, and its telephone number
is (813) 562-2200.
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Common Stock Offered by the Selling Shareholders . . . . . . . . . . . . . . . . 270,000 shares
Common Stock Outstanding(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,847,199 shares
Nasdaq National Market Symbol . . . . . . . . . . . . . . . . . . . . . . . . . . DFLX
</TABLE>
- --------------------
(1) Based upon the number of shares outstanding as of March 31, 1997.
Excludes (i) 1,089,222 shares of Common Stock issuable upon the exercise of
options outstanding which had a weighted average exercise price of $3.725 per
share and of which 421,813 shares were exercisable at a weighted average
exercise price of $4.966 per share and (ii) 849,116 shares of Common Stock
reserved for future issuance under the Company's Stock Option Plans. See
"Description of Capital Stock."
3
<PAGE> 5
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Nine Months
Ended
For the Years Ended March 31, December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992 1996 1995
-------- --------- ---------- -------- ----------- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue . . . . . . . . $472,102 $273,851 $ 122,348 $ 77,306 $ 99,031 $ 210,899 $ 340,804
Cost of Revenue . . . . 419,592 242,564 108,818 65,555 80,733 185,327 302,462
-------- -------- --------- --------- ---------- ----------- -----------
Gross Profit . . . . . 52,510 31,287 13,530 11,751 18,298 25,572 38,342
Selling, General and
Administrative
Expenses . . . . . . 42,995 24,259 10,675 10,272 11,116 21,594 30,632
Amortization of
Goodwill . . . . . . 1,265 594 0 0 0 530 932
Restructuring and Other
Charges . . . . . . . 5,353 0 0 0 0 0 0
-------- -------- --------- --------- ---------- ----------- -----------
Operating Income . . . 2,897 6,434 2,855 1,479 7,182 3,448 6,778
Interest (Expense)
Income . . . . . . . (8,063) (2,677) 4 (13) (123) (4,051) (5,717)
Loss on Dispositions of
Businesses . . . . . (4,632) 0 0 0 0 (6,230) 0
Litigation Settlement
and Related Costs . . 0 0 (847) 0 0 0 0
-------- -------- --------- --------- ---------- ----------- -----------
(Loss) Income Before
Income Taxes. . . . . (9,798) 3,757 2,012 1,466 7,059 (6,833) 1,061
(Benefit from)
Provision for
Income Taxes . . . . (3,463) 1,617 884 653 2,931 (2,412) 456
-------- -------- --------- --------- ---------- ----------- -----------
Net (Loss) Income . . . (6,335) 2,140 1,128 813 4,128 (4,421) 605
======== ======== ========= ========= ========== =========== ===========
(Loss) Earnings per
Common Share. . . . . (1.22) .45 .28 .20 .95 (.78) .11
======== ======== ========= ========= ========== =========== ===========
Weighted Average Common
Shares . . . . . . . 5,214 4,733 4,085 4,080 4,335 5,644 5,422
======== ======== ========= ========= ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: March 31, December 31,
-------------------------------------------------- ------------
1996 1995 1994 1993 1992 1996
------------------ ---------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Working Capital . . . . $ 57,531 $ 46,971 $ 22,629 $20,973 $20,722 $ 9,363
Total Assets . . . . . 170,313 146,581 56,337 37,943 42,179 68,982
Long-Term Debt . . . . 54,062 52,510 228 -0- 213 4,687
Total Shareholders'
Equity . . . . . . . . 31,849 34,140 26,680 25,338 24,970 27,915
</TABLE>
4
<PAGE> 6
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information contained in this
Prospectus, in connection with an investment in the Common Stock offered
hereby. This Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the 1934 Act. The words "expect," "estimate," "anticipate," "predict,"
"believe" and similar expressions and variations thereof are intended to
identify forward-looking statements. Such statements appear in a number of
places in this Prospectus and include statements regarding the intent, belief
or current expectations of the Company, its directors or its officers with
respect to, among other things: (i) trends affecting the Company's financial
condition or results of operations; (ii) the Company's financing plans; (iii)
the Company's business strategies; and (iv) the declaration and payment of
dividends. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors.
The accompanying information contained in this Prospectus, including without
limitation the information set forth below, as well as under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as information contained in the Company's
1934 Act filings with the Commission, identify important factors that could
cause such differences.
DEPENDENCE UPON PRINCIPAL SUPPLIERS. Compaq, Hewlett-Packard and IBM
supplied approximately 19%, 17% and 3%, respectively, of the Company's
Southeastern region purchases for the nine months ended December 31, 1996. No
other supplier accounted for more than 3% of the Company's Southeastern region
purchases during this period. The Company's authorized dealership agreements
with Compaq, Hewlett-Packard and IBM are renewable annually and are subject to
termination by Compaq, Hewlett-Packard, IBM or the Company with or without cause
upon three months prior written notice, or immediately, under certain
circumstances. The non-renewal or termination by Compaq, Hewlett-Packard or IBM
of the Company's authorized dealer status would have a material adverse effect
on the Company's business. Additionally, any significant reduction in
promotional sales concessions by such suppliers could have a material adverse
effect on the Company's business and its ability to compete. See
"Business--Products and Principal Suppliers."
COMPETITION. The sale of microcomputer equipment, related products and
computer services is highly competitive. The Company competes with local,
regional, national and international resellers and distributors and mail order
providers of microcomputer equipment, related products and computer services,
including network integrators and retail stores. Many of the Company's
competitors are substantially larger, have more personnel, have substantially
greater financial and marketing resources, and operate within a larger
geographic area than the Company. The microcomputer distribution and support
industry continues to experience a significant amount of consolidation. In the
future, the Company may experience further competition from new market entrants
and possible alliances between existing competitors. Additionally, the
Company's recent reduction in size and geographic reach may make it a less
desirable supplier for some of its customers. As a result of competition among
microcomputer resellers, higher discounts given to large corporate customers
and other factors, the Company's gross margins have continued to decline over
the past several years, and there can be no assurance that such decreases will
not continue.
The Company is also increasingly competing with microcomputer
manufacturers which market through direct sales forces and distributors. More
aggressive competition by manufacturers of microcomputer products, such as
offering a full range of services in addition to products, could have a
material adverse effect on the Company's business. There can be no assurance
that the Company will be able to compete successfully with its competitors in
the future. See "Business--Competition."
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL. The Company's future success
also depends largely on its ability to attract, hire, train and retain highly
qualified technical personnel to provide the Company's services.
5
<PAGE> 7
Competition for such personnel is intense. There can be no assurance that the
Company will be successful in attracting and retaining the technical personnel
it requires to conduct and expand its operations successfully and to
differentiate itself from its competition. The Company's results of operations
and growth prospects could be materially adversely affected if the Company were
unable to attract, hire, train and retain such qualified technical personnel.
See "Business--Employees."
MANAGEMENT OF GROWTH AND REDEPLOYMENT OF THE COMPANY'S RESOURCES. The
Company's future performance will depend in part on its availability to
redeploy its resources to its remaining core business and to finance and manage
any expansion of these operations. Additionally, the Company must adapt its
management information system to changes in its business, including those
related to the changing scope of its operations and the redirection of its
efforts to its core business. The failure of the Company to effectively
redeploy its resources, to manage growth effectively, or to successfully adapt
its management information systems, could have a material adverse effect upon
its business, financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES. The Company has historically relied upon
credit lines and trade credit from its vendors to satisfy its capital needs.
The inability to obtain and retain such sources of capital could have an adverse
affect on the Company's business, financial condition and results of operations.
INVENTORY MANAGEMENT. The microcomputer distribution and support industry
is characterized by rapid product improvement and technological change
resulting in relatively short product life cycles and rapid product
obsolescence. While most of the inventory stocked by the Company is for
specific customer orders, inventory devaluation or obsolescence could have a
material adverse effect on the Company's operations and financial results.
Current industry practice among manufacturers is to provide price protection
intended to reduce the risk of inventory devaluation, although such policies
are subject to change at any time and there can by no assurance that such price
protection will be available to the Company in the future. Also, the Company
currently has the option of returning inventory to certain manufacturers and
distributors, subject to certain limitations. The amount of inventory that can
be returned to manufacturers without a restocking fee varies under the
Company's agreements and such return policies may provide only limited
protection against excess inventory. There can be no assurance that new
product developments will not have a material adverse effect on the value of
the Company's inventory or that the Company will successfully manage its
existing and future inventory. In addition, the Company stocks parts inventory
for its service business. Parts inventory is more likely to experience a
decrease in valuation as a result of technological change and obsolescence, and
there are no price protection practices offered by manufacturers with respect
to parts. See "Business--Products and Principal Suppliers."
PRODUCT SUPPLY. The computer distribution industry is dependent upon the
supply of products available from its vendors. The industry is characterized
by periods of severe product shortages due to vendors' difficulty in projecting
demand for certain products distributed by the Company. When such product
shortages occur, the Company typically receives an allocation of product from
the vendor. There can be no assurance that vendors will be able to maintain an
adequate supply of products to fulfill all of the Company's customer orders on
a timely basis. Failure to obtain adequate product supplies, if available to
competitors, could have an adverse affect on the Company's business, financial
condition, and results of operations.
VENDOR REBATES AND VOLUME DISCOUNTS. The Company's profitability has been
favorably affected by its ability to obtain rebates and volume discounts from
manufacturers and through aggregators and distributors. Because of the
divesture of the Company's Eastern, Midwestern and Western regions, the Company
has experienced a reduction in its volume discounts. Any additional reduction
or elimination of rebates, volume discount schedules or other marketing
programs offered by manufacturers and currently received by the Company could
have a material adverse effect on the Company's operations and financial
results. In particular, a reduction or elimination of rebates relating to
government customers could adversely effect the Company's ability to serve
government agencies in a highly competitive marketplace. See
"Business--Products and Principal Suppliers".
MANUFACTURER MARKET DEVELOPMENT FUNDS. Several manufacturers offer market
development funds, cooperative advertising and other promotional programs to
computer resellers. These funds are accounted for as reductions in selling,
general and administrative expenses, thereby increasing net income. While such
programs have been available to the Company in the past, there is no assurance
that these programs will be continued. Any discontinuation or material
reduction of these programs could have an adverse effect on the Company's
operations and financial results. See "Business--Products and Principal
Suppliers."
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE. The market for the
Company's products and services is characterized by rapidly changing technology
and frequent new product and service introductions. The development and
commercialization of new technologies and the introduction of new products can
render existing products and services obsolete or unmarketable. The Company's
business depends on its ability to attract and retain highly capable technical
personnel, to enhance existing services and to package newly developed and
introduced
6
<PAGE> 8
service offerings of its own with products and services from vendors, on a
timely and cost-effective basis, that keep pace with technological developments
and address increasingly sophisticated client requirements. There can be no
assurance that the Company will be successful in identifying and marketing
service enhancements or supporting new products and services introduced by
vendors that respond to technological change. In addition, the Company may
experience contractual or technical difficulties that could delay or prevent it
from successfully deploying new product and service offerings. See
"Business--Industry."
DEPENDENCE ON INDUSTRY ALLIANCES AND RELATIONSHIPS. The Company depends
in part upon its alliances and relationships with leading hardware and software
vendors, telecommunications carriers and Internet access service providers,
particularly Compaq, Hewlett-Packard and IBM. Any adverse change in these
relationships could have a materially adverse effect on the Company's results
of operations and financial condition while it seeks to establish alternative
relationships. Also, the Company will likely need to establish additional
alliances and relationships in order to keep pace with evolutions in technology
and enhance its service offerings, and there can be no assurance that such
additional alliances will be established. See "Business--Products and
Principal Suppliers."
DEPENDENCE ON TELESALES CENTER. The Company's product sales network is
dependent upon the Company's ability to protect its computer and
telecommunications equipment and the information stored in its Clearwater,
Florida, Telesales Center against damage from fire, hurricanes, power loss,
telecommunications failures, unauthorized intrusion, computer viruses and
disabling devices and similar events. There can be no assurance that an
unforeseen event will not result in a prolonged disruption of the Company's
product sales or that the Company can recover the full amount of its lost
revenues from its insurance policies for business interruption. See
"Business--Services."
SUBSTANTIAL RELIANCE ON KEY CLIENTS. The Company estimates that its
current top 25 clients accounted for approximately 29% of revenues in the
nine months ended December 31, 1996. No one customer accounted for more than 5%
of the Company's business during this period. The loss of any of its top 25
clients or any other large client or a significant reduction in purchases by
any of the top 25 clients could have a materially adverse effect on the
Company's results of operations. The Company's contracts to provide
professional services to its clients generally do not obligate the client to
purchase any minimum level of services and are terminable upon relatively short
notice, often 30 days. There can be no assurance that the Company's largest
clients will continue to enter into new contracts with the Company at current
levels of business, if at all, or that existing contracts will not be
terminated.
VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be
subject to significant fluctuations in response to the Company's operating
results and other factors, and there can be no assurance that the market price
of the Common Stock will not decline below the current market price.
Developments in the high technology industries or changes in general economic
conditions could adversely affect the market price of the Common Stock. In
addition, the stock market has from time to time experienced extreme price and
volume volatility. These fluctuations may be unrelated to the operating
performance of particular companies whose shares are traded and may adversely
affect the market price of the Common Stock. See "Price Range of Common
Stock."
DEPENDENCE ON SENIOR MANAGEMENT. The Company is largely dependent upon
its senior management team. The loss of the services of any member of its
senior management for any reason could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management."
DEPENDENCE ON THE ECONOMY OF THE SOUTHEASTERN UNITED STATES. Although the
Company still operates on a nationwide basis, the vast majority of its sales
are concentrated in the Southeastern United States (Florida, Alabama,
Mississippi, Louisiana, South Carolina, North Carolina, Tennessee, Georgia and
Arkansas.) Accordingly, the Company could be adversely affected by economic
downturns and other conditions that may occur from time to time in the region,
which may not significantly affect its more geographically diversified
competitors.
7
<PAGE> 9
CUSTOMER CREDIT EXPOSURE. The Company sells its products to an active
customer base. The Company's business could be adversely affected in the event
of the deterioration of the financial condition of its customers, resulting in
the customers' inability to repay the Company.
8
<PAGE> 10
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders.
PRICE RANGE OF COMMON STOCK
The Common Stock is included in the Nasdaq National Market under the
symbol "DFLX." The following table sets forth, for the periods indicated, the
high and low sales prices of the Common Stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
----------- ------------
1995
<S> <C> <C> <C>
First Quarter (Beginning January 1, 1995) . . . . . . . . . . . . $ 10.125 $ 7.25
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 10.125 7.25
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 8.25 5.50
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 6.750 3.00
1996
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.125 $ 3.125
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 7.625 2.688
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 7.375 2.625
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 3.875 2.063
1997
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.125 $ 2.3125
Second Quarter (through May 8, 1997) . . . . . . . . . . . . . . . $ 3.875 $ 2.625
</TABLE>
On May 8, 1997, the last reported sales price of the Common Stock on
the Nasdaq National Market was $2.9375 per share. As of March 31, 1997, there
were 529 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
After the consummation of the Offering, the Company does not intend in the
foreseeable future to declare or pay any cash dividends and intends to retain
earnings, if any, for the future operation and expansion of the Company's
business.
Any determination to declare or pay dividends in the future will be at the
discretion of the Company's Board of Directors and will depend upon the
Company's results of operations, financial condition, any contractual
restrictions, considerations imposed by applicable law and other factors deemed
relevant by the Board of Directors. The Company's current line of credit
prohibits the Company, under certain conditions, from making cash dividends in
excess of $1.0 million in any fiscal year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
9
<PAGE> 11
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996. See "Principal and Selling Shareholders." This table
should be read in conjunction with the Consolidated Financial Statements and
Notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
December 31,
1996
---------------
(In thousands)
<S> <C>
Current debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,085
-------
Long-term debt, less current installments . . . . . . . . . . . . . . . . 4,687
-------
Shareholders' equity:
Preferred Stock, no par value; 10,000,000 shares
authorized, no shares issued . . . . . . . . . . . . . . . . . . . . --
Common Stock, no par value; 20,000,000 shares
authorized, 5,587,661 shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,443
Less: Loans Receivable for Exercise of Stock Options . . . . . . . . . . (194)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,269
Less: Treasury Stock at Cost; 113,901 . . . . . . . . . . . . . . . . . (603)
-------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 27,915
-------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . $60,687
=======
</TABLE>
10
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL DATA
Selected consolidated financial data is set forth below as of and for each
of the five fiscal years ended March 31, 1992, 1993, 1994, 1995 and 1996. The
financial data for periods prior to fiscal year 1996 have been restated to
include the results of operations and financial position of Sunland Computer
Services, Inc. ("Sunland"), which was acquired in August 1994 and accounted for
under the pooling of interests method. This data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
For the Nine Months
Ended
For the Years Ended March 31, December 31,
-------------------------------------------------- ----------------------
1996 1995 1994 1993 1992 1996 1995
--------- --------- --------- --------- ---------- ----------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue . . . . . . . . . $472,102 $273,851 $122,348 $ 77,306 $ 99,031 $ 210,899 $ 340,804
Cost of Revenue . . . . . 419,592 242,564 108,818 65,555 80,733 185,327 302,462
-------- -------- -------- -------- --------- ---------- ---------
Gross Profit . . . . . . 52,510 31,287 13,530 11,751 18,298 25,572 38,342
Selling, General and
Administrative Expenses 42,995 24,259 10,675 10,272 11,116 21,594 30,632
Amortization of Goodwill 1,265 594 0 0 0 530 932
Restructuring and Other
Charges . . . . . . . . 5,353 0 0 0 0 0 0
-------- -------- -------- -------- --------- ---------- ---------
Operating Income . . . . 2,897 6,434 2,855 1,479 7,182 3,448 6,778
Interest (Expense) Income (8,063) (2,677) 4 (13) (123) (4,051) (5,717)
Loss on Dispositions of
Businesses . . . . . . (4,632) 0 0 0 0 (6,230) 0
Litigation Settlement and
Related Costs . . . . . 0 0 (847) 0 0 0 0
-------- -------- -------- -------- --------- ---------- ---------
Income (Loss) Before
Income Taxes . . . . . (9,798) 3,757 2,012 1,466 7,059 (6,833) 1,061
(Benefit from) Provision
for Income Taxes. . . . (3,463) 1,617 884 653 2,931 (2,412) 456
-------- -------- -------- -------- --------- ---------- ---------
Net Income (Loss) . . . (6,335) 2,140 1,128 813 4,128 (4,421) 605
======== ======== ======== ======== ========= ========== =========
(Loss) Earnings per Common
Share . . . . . . . . . (1.22) .45 .28 .20 .95 (0.78) .11
======== ======== ======== ======== ========= ========== =========
Weighted Average Common
Shares . . . . . . . . 5,214 4,733 4,085 4,080 4,335 5,644 5,422
======== ======== ======== ======== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: March 31, December 31,
-------------------------------------------------- --------------------
1996 1995 1994 1993 1992 1996
--------- --------- --------- --------- ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Working Capital . . . . . $ 57,531 $ 46,971 $ 22,629 $ 20,973 $ 20,722 $ 9,363
Total Assets . . . . . . 170,313 146,581 56,337 37,943 42,179 68,982
Long-Term Debt . . . . . 54,062 52,510 228 -0- 213 4,687
Total Shareholders' Equity 31,849 34,140 26,680 25,338 24,970 27,915
</TABLE>
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
Prospectus.
GENERAL
During 1996, the Company substantially changed the focus of its
operations. During the period 1994-1995, the Company acquired substantially all
of the assets of the following entities: Granite Computer Products, Inc.
("Granite"), Advantage Systems, Inc. ("Advantage"), Sunland, Hagen Computer
Systems, Inc. ("Hagen"), National Data Products, Inc. ("NDP") and Valtron
Technologies, Inc. ("Valtron"). During 1996, the Company divested its Eastern,
Midwestern, and Western regions in a series of transactions. Additionally, the
Company recently sold its Kindergarten through 12th Grade Education business to
Computer Plus. Accordingly, all of the acquired operations (except NDP), as
well as the Company's original operations in the Northeastern United States,
have been divested. These divestitures are a reversal of the Company's
expansion strategy and resulted from the Company's inability to successfully
integrate these acquisitions in a prompt and effective manner. Additionally,
management determined that the Company lacked adequate capital (or access to
adequate capital) to support its expanded infrastructure, to make necessary
additional capital expenditures and to service the significant indebtedness
incurred in connection with the acquisitions. Management concluded that it was
necessary to sell these operations to reduce the Company's indebtedness to an
appropriate level. The divestitures have reduced the Company's indebtedness and
allowed it to focus on its core competencies. In particular, management
believed that the Company's best opportunities were in the Southeastern United
States and therefore concentrated the Company's efforts in this region
(originally the NDP operating area). Management does not currently intend to
make any other significant divestitures.
The historical financial information contains financial information for
Granite, Advantage, Hagen, NDP and Valtron from the date of their respective
acquisitions. The Sunland acquisition, which was accounted for as a pooling of
interests, resulted in a restatement of all periods presented.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to total revenues of the items listed in the Company's
Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Percentage of
Revenue
Nine Months
Percentage of Revenue Ended
Years ended March 31, December 31,
------------------------------------- -----------------------
1996 1995 1994 1996 1995
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Revenue . . . . . . . . . . . . . . . . 88.9 88.6 88.9 87.9 88.7
----- ----- ----- ----- -----
Gross Profit . . . . . . . . . . . . . . . . . 11.1 11.4 11.1 12.1 11.3
Selling General and Administrative Expenses . . 9.1 8.9 8.7 10.2 9.0
Amortization of Goodwill . . . . . . . . . . . 0.3 0.2 0.0 0.3 0.3
Restructuring and Other Charges . . . . . . . . 1.1 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
Operating (Loss) Income . . . . . . . . . . . . .6 2.3 2.4 1.6 2.0
Interest (Expense) Income, Net . . . . . . . . (1.7) (0.9) 0.0 (1.9) (1.7)
Loss on Dispositions of Business . . . . . . . (1.0) 0.0 0.0 (2.9) 0.0
Litigation Settlement and Related Costs . . . . 0.0 0.0 (0.7) 0.0 0.0
----- ----- ----- ----- -----
(Loss) Income Before Income Taxes . . . . . . . (2.1) 1.4 1.7 (3.2) 0.3
(Benefit from) Provision for Income Taxes . . . (0.7) 0.6 0.8 (1.1) 0.1
----- ----- ----- ----- -----
Net (Loss) Income . . . . . . . . . . . . . . . (1.4)% 0.8% 0.9% (2.1)% 0.2%
===== ===== ===== ===== =====
</TABLE>
12
<PAGE> 14
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1995
For the nine months ended December 31, 1996, revenues decreased by 38.1%
or $129,905,000, to $210,899,000, as compared with $340,804,000 for the nine
months ended December 31, 1995. The decrease in revenues is due to the sale of
the Western region operations on April 1, 1996 and the sale of the Midwestern
and Eastern region operations on October 4, 1996. On a comparable basis,
excluding revenues for the Western, Midwestern and Eastern regions, revenues
increased by 19.3% or $19,809,000, for the nine months ended December 31, 1996,
as compared with the nine months ended December 31, 1995.
For the nine months ended December 31, 1996, gross profit decreased by
33.3% or $12,770,000, to $25,572,000, as compared with $38,342,000 for the nine
months ended December 31, 1995. This decrease relates to the exclusion of
gross profit contribution for the Western region for the nine months ended
December 31, 1995. On a comparable basis, excluding the Western, Midwestern
and Eastern regions, gross profit increased by $4,469,000, or 34.5% for the
nine months ended December 31, 1996.
As a percentage of revenues, gross profit was 12.1% for the nine months
ended December 31, 1996, as compared to 11.3% for the nine months ended
December 31, 1995. The increase in gross profit as a percentage of sales in the
third quarter reflects an increase in services sales, which have a higher gross
margin. The increase in gross profit as a percentage of sales for the nine
months ended December 31, 1996, as compared with the prior year, is due to the
disposition of less profitable computer services business in the Western region
and the increase in computer services business in the Southeastern region.
Selling, general and administrative expenses decreased by 29.5% or
$9,038,000 to $21,594,000, as compared with $30,632,000 for the nine months
ended December 31, 1995. This decrease primarily relates to the sale of the
Western region on April 1, 1996 and the sale of the Midwestern and Eastern
regions on October 4, 1996.
As a percentage of revenues, selling, general and administrative expenses
were 10.2% for the nine months ended December 31, 1996, as compared with 9.0%
for the nine months ended December 31, 1995. The increase in selling, general
and administrative expenses as a percentage of revenues for the nine months
ended December 31, 1996, as compared with the prior year, reflects additional
administrative expenses associated with the sales of the Western, Midwestern
and Eastern regions, as well as the sale of the Valtron division (part of the
Western region operations). The increase also reflects a difference in
customer base and product mix in the Southeastern region, as compared to the
Midwestern and Eastern regions.
Amortization of goodwill decreased by 43.2% or $403,000 to $529,000, as
compared with $932,000 for the nine months ended December 31, 1995, due
primarily to the disposition of the Western region on April 1, 1996 and the
disposition of the Midwestern and Eastern regions on October 4, 1996.
Interest expense decreased by 29.1% or $1,665,000 to $4,052,000, as
compared to $5,716,000 for the nine months ended December 31, 1995. The
decrease primarily relates to reduced average borrowings resulting from the pay
down of debt from the proceeds of the sale of the Western, Midwestern and
Eastern regions.
The loss on disposition of business recorded in the nine months ended
December 31, 1996 represents the aggregate difference between the carrying
value of the net assets of the sale of the Midwestern and Eastern region
operations and the net realizable value of these net assets. The Company
recorded a loss of $6,230,000 on the disposition of these businesses.
SUBSEQUENT EVENTS
In March 1997, the Company settled certain litigation (See "Legal
Proceedings") with former shareholders of Sunland. This settlement will have
no material effect on the Company's financial position or results of operations.
13
<PAGE> 15
The Company recently sold its Kindergarten through 12th Grade Education
business for approximately $4.4 million, and returned approximately $3.1
million in accounts receivable relating to this business. In connection with
decision to sell this business, the company recorded a pre-tax loss of
approximately $2.7 million in the fourth quarter of Fiscal 1997. Sales for this
business for the nine months ended December 31, 1996 were approximately $14.5
million.
On May 5, 1997, the Company received approximately $2.7 million of $5.0
million escrowed funds relating to the sale of the Company's Midwest and
Eastern divisions. Distribution of the remaining escrowed funds and the
collection of certain related receivables is being disputed by the acquirer.
The outcome of this dispute is not presently known.
1996 COMPARED TO 1995
Revenues increased by 72.4% or $198,251,000, from $273,851,000 for the
fiscal year ended March 31, 1995 ("Fiscal 1995") to $472,102,000 for the fiscal
year ended March 31, 1996 ("Fiscal 1996"). The increase primarily related to a
full year of revenues contributed by the companies acquired during Fiscal 1995
of $190,000,000. Product revenues, which included desktop computers, printers,
displays, LAN products, software and other peripherals, accounted for
approximately 89.5% of total revenues and increased by $176,001,000 or 71.4%.
Service revenues, which include consulting, training, on-site maintenance and
project management, accounted for approximately 10.5% of total revenues and
increased by $22,250,000 or 81.4%.
Gross profit increased by 67.8% or $21,233,000, from $31,287,000 in Fiscal
1995 to $52,510,000 in Fiscal 1996. This increase during Fiscal 1996 primarily
related to the gross profit contribution provided by the acquired companies.
As a percentage of revenues, gross profit decreased to 11.1% in Fiscal 1996 as
compared to 11.4% in Fiscal 1995. This decrease reflects lower margins in the
computer services business due to incremental costs associated with the
continued investment in the development of the computer services business.
Hardware margins were consistent with those for Fiscal 1995.
Selling, general and administrative expenses increased by 77.2% or
$18,736,000, from $24,259,000 in Fiscal 1995 to $42,995,000 in Fiscal 1996,
primarily due to the recent acquisitions and increases in corporate
infrastructure to support the growth of the Company. As a percentage of
revenues, selling, general and administrative expenses increased from 8.9% in
Fiscal 1995 to 9.1% in Fiscal 1996. This increase was primarily due to the
acquisition of Valtron (part of the Western region's operations), which had
higher selling, general and administrative expenses as a percentage of
revenues.
Amortization of goodwill of $1,265,000 in Fiscal 1996, as compared to
$594,000 in Fiscal 1995, reflects a full year of amortization in Fiscal 1996,
whereas Fiscal 1995 includes a partial year of amortization due to the timing
of recent acquisitions.
Restructuring and other charges represented the estimated costs to enhance
the Company's operational and administrative efficiencies through
consolidations of operations and information systems. The charges related
primarily to dispositions and write-downs of inventory and spare parts of
$2,700,000, employee termination benefits of $1,200,000, write-offs of computer
systems of $1,000,000 and other charges of $400,000. Inventory write-offs
related primarily to a reduction in the net realizable value of inventory
product lines in which the Company no longer intends to conduct business.
Employee termination benefits related largely to one-time payments to former
Company executives resulting from the termination of their contracts and other
benefits to be provided to line employees terminated due to consolidation and
elimination of certain positions. Systems write-offs related primarily to the
replacement of older computer systems with new, upgraded systems.
Loss on dispositions of businesses represented the aggregate difference
between the carrying value of the net assets of the businesses to be sold and
the estimated net realizable value of these net assets. As described
previously, the Company sold substantially all the assets and transferred
substantially all the liabilities of its Western Region (including its Valtron
operation) subsequent to its Fiscal 1996 year-end. The Company recorded a loss
of approximately $4.6 million in Fiscal 1996 on the dispositions of these
businesses.
14
<PAGE> 16
Interest expense, net of interest income, was $8,064,000 in Fiscal 1996 as
compared to $2,677,000 in Fiscal 1995. The increase primarily related to
increased borrowings in connection with the acquisitions in Fiscal 1995 and
Fiscal 1996 and higher average interest rates during Fiscal 1996 relative to
Fiscal 1995.
1995 COMPARED TO 1994
Revenues increased by 123.8% or $151,502,000, from $122,349,000 for the
fiscal year ended March 31, 1994 ("Fiscal 1994") to $273,851,000 for Fiscal
1995. The increase primarily related to revenues contributed by the acquired
companies during Fiscal 1995 of $148,005,000. Product revenues, which included
desktop computers, printers, displays, LAN products, software and other
peripherals, accounted for over 90% of total revenues and increased by
$138,353,000 or 127.9%. Service revenues, which included consulting, training,
on-site maintenance and project management, accounted for approximately 10% of
total revenues and increased by $13,163,000 or 93.0%.
Gross profit increased by 131.2% or $17,757,000, from $13,530,000 in
Fiscal 1994 to $31,287,000 in Fiscal 1995. This increase primarily related to
the gross profit contribution provided by the acquired companies during Fiscal
1995. As a percentage of revenues, gross profit increased to 11.4% in Fiscal
1995 as compared to 11.1% in Fiscal 1994. This increase reflected slight
improvement in hardware margins, partially offsetting lower margins in the
computer services business due to incremental costs associated with the
continued investment in the development of a nationwide computer services
business.
Selling, general and administrative expenses increased by 127.2% or
$13,584,000, from $10,675,000 in Fiscal 1994 to $24,259,000 in Fiscal 1995,
primarily due to the recent acquisitions and increases in corporate
infrastructure to support the Company's growth. As a percentage of revenues,
selling, general and administrative expenses increased from 8.7% in Fiscal 1994
to 8.8% in Fiscal 1995.
Amortization of goodwill of $594,000 in Fiscal 1995 reflects amortization
of the excess of purchase price over net assets acquired for the related
acquisitions. There was no amortization of goodwill in Fiscal 1994.
Interest (expense) income, net was ($2,677,000) in Fiscal 1995 as compared
to $4,800 in Fiscal 1994. The net increase in expense as compared to income in
the prior fiscal year primarily related to the use of funds available for
investment and increased borrowings in connection with the acquisitions in
Fiscal 1995.
Litigation settlement and related costs in Fiscal 1994 represented
expenses associated with the settlement of the class action lawsuit. See Note
15 to the Consolidated Financial Statements.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table presents unaudited quarterly operating results for the
Company for the four calendar quarters of each of 1995 and 1996. In the
opinion of management, this information has been prepared on the same basis as
the audited Consolidated Financial Statements included in this Prospectus and
includes all adjustments (consisting of only normal recurring accruals) that
management considers necessary for a fair presentation of the results for such
periods. Such quarterly results are not necessarily indicative of the results
of operations for any future period.
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------------------------------
1995 1996
--------------------------------------------- ---------------------------------------------
March 31, June 30, Sept.30, Dec. 31, March 31, June 30, Sept. 30, Dec.31,
--------- -------- -------- -------- --------- -------- --------- -------
(in thousands, except for per share data)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue . . . . . .$ 70,743 $110,325 $107,844 $122,635 $ 131,298 $ 86,031 $ 83,875 $40,993
Gross profit . . . 11,051 11,900 12,774 13,674 14,162 10,369 9,531 5,672
Net income . . . . 272 309 142 153 (6,999) (534) (4,145) 257
Net earnings per
share . . . . . .$ .05 $ .06 $ .03 $ .03 $ (1.34) $ (.10) $ (.75) $ .04
</TABLE>
15
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements increased significantly as a result of the
Company's acquisitions during the period 1994-1996. A significant debt burden
was placed upon the Company in connection with these acquisitions, and
management determined that the Company lacked adequate capital (or access to
adequate capital) to support its expanded infrastructure, to make necessary
capital expenditures and to service its debt. Accordingly, management
concluded that it was necessary to divest the Company's Eastern, Midwestern and
Western regions. As a result of the sale of its Eastern, Midwestern, and
Western Regions, the bulk of the Company's cash flow in 1996 resulted from
proceeds of these sales.
Historically, IBM Credit Corporation was the Company's primary lender.
During 1996, the Company replaced IBM Credit Corporation with NationsBank, N.A.
(South) and NationsCredit Commercial Corporation of America (the "Line of
Credit"). Currently, the Line of Credit provides that the Company may borrow
up to $38.0 million, at an interest rate of LIBOR plus 2 1/2% per annum. This
Line of Credit has an initial term through December 17, 1998. Borrowings under
the Line of Credit are collateralized by all of the Company's inventory and
accounts receivables. Currently, approximately $23.6 million is outstanding
under the Line of Credit.
The Line of Credit contains certain financial covenants, including
covenants requiring the Company to maintain a minimum tangible net worth,
maintain a minimum interest coverage ratio, maintain various minimum financial
ratios and limit the amount of capital expenditures. In addition, the Line of
Credit prohibits the Company, under certain conditions, from making cash
dividends and distributions and from redeeming shares of its capital stock for
cash in excess of $1,000,000 in any fiscal year.
The Company intends to use the bulk of the cash proceeds from the sale of
its Kindergarten through 12th Grade Education business to Computer Plus
(approximately $4.4 million) to further reduce the balance due under the Line of
Credit. The Company has retained approximately $3.1 million in accounts
receivable. Additionally, on May 5, 1997, the Company received approximately
$2.7 million of $5.0 million escrowed funds relating to the sale of the
Company's Midwestern and Eastern divisions, which will be used to decrease
amounts outstanding under the Line of Credit. Distribution of the remaining
escrowed funds and the collection of certain related receivables is being
disputed by the acquiror and, there can be no assurance that the Company will
receive any of such funds.
During Fiscal 1996 and Fiscal 1997, the Company's Southeast Division
invested approximately $1.2 million and $827,000, respectively, for capital
equipment expenditures. The majority of the capital expenditures were for
computer equipment and software. For the year ending March 31, 1998, the
Company expects its capital expenditures to be approximately $8.5 million, with
approximately $7.5 million to be spent on a new 73,000 square foot facility
that will allow the Company to consolidate all of its Clearwater-based
personnel into one facility and provide space for additional expansion. The
Company is currently negotiating with developers for the construction of this
new facility and is in the process of seeking appropriate mortgage financing
for construction.
The Company believes that the cash flow from operations, the Line of
Credit and trade credit from its vendors will be sufficient for its
requirements through the expiration of the term of the Line of Credit in
December 1998.
IMPACT OF INFLATION
The Company has not been adversely affected by inflation as technological
advances and competition within the microcomputer industry have generally
caused prices of the products sold by the Company to decline. Management
believes that any price increases could be passed onto its customers as prices
charged by the Company are not set by long-term contracts.
16
<PAGE> 18
NEW-ACCOUNTING PRONOUNCEMENTS
In Fiscal 1997, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 121, Accounting For the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of. The adoption of this standard had no
effect on the Company's financial statements.
In Fiscal 1997, the Company elected to continue to apply the prior
accounting rules by adopting SFAS No. 123, Accounting for Stock-Based
Compensation. Additional disclosures relating to the pro forma net income and
earnings per share will be required in the Company's annual financial
statements for Fiscal 1997.
The effect, if any, of recently issued SFAS No. 128, Earnings Per Share
and SFAS No. 129, Disclosure of Information About Capital Structure, is not
presently known.
17
<PAGE> 19
BUSINESS
GENERAL
The Company, established in 1976, is a direct marketer of microcomputer
equipment, related products and computer services. The Company markets
equipment and products supplied primarily by major manufacturers, including
Compaq, Hewlett-Packard, IBM and Toshiba. The Company's customers are business
organizations with diverse desktop computing requirements located throughout
the United States, with a primary concentration in the Southeast. The Company
provides its customers with single-source, value-added desktop computing
solutions and services, including product sales, system integration, network
installations, help desk support, training, consultation services and equipment
repair maintenance. The Company is also a certified Novell Education Center
and a Microsoft Authorized Technical Education Center capable of providing
on-site or off-site manufacturer authorized education.
The computer services business continues to be the fastest growing segment
of the Company's operations and includes dedicated on-site remedial and
nonremedial maintenance support to the Company's customers through the
Company's Mainsite(TM) program, field service repairs and maintenance, system
configuration, asset management, authorized training centers, LAN/WAN
consulting and system integration, help desk support through its toll-free
support line for all computer and computer related problems, and FlexStaff,
which provides dedicated high-end technical support on a contract basis to
customers for short and long-term requirements. In addition, the Company is a
member of a national network of service partners to enhance its ability to
deliver nationwide, on-site services to its customers.
The Company focuses its efforts on customer service. The Company conducts
ongoing training for its associates, monitors response and repair time
regarding customer requests and concerns, measures delivery time for services
and conducts customer surveys to determine the level of customer satisfaction.
Over the past twelve months, the Company has divested its Eastern (New
Jersey-based), Midwestern (Chicago-based), and Western (California- and
Arizona-based) regions in a series of transactions. These divestitures are a
reversal of the Company's expansion strategy implemented in 1994 and 1995 and
resulted from the Company's inability to successfully integrate these
acquisitions promptly and effectively. Additionally, management determined that
the Company lacked adequate capital to support its expanded infrastructure, to
make necessary additional capital expenditures and to service the significant
indebtedness incurred in connection with the acquisitions. Management concluded
that it was necessary to reduce the burden of this indebtedness. The
divestitures have reduced the Company's indebtedness and allowed it to focus on
its core competencies. In particular, management believed that the Company's
best opportunities were in the Southeastern United States and therefore
concentrated the Company's efforts on this region. As a result, the Company
disposed of its other operations, including its Eastern region (the original
business of the Company) in 1996. The Company also recently sold its
Kindergarten through 12th Grade Education business to Computer Plus.
The Company has offices in Tallahassee, Maitland (Orlando), Hollywood
(Miami-Ft. Lauderdale) and Clearwater (Tampa Bay), Florida, as well as in
Smyrna (Atlanta), Georgia. The Company's headquarters are located at
2145 Calumet Street, Clearwater, Florida 34625 and its telephone number
is (813) 562-2200.
INDUSTRY OVERVIEW
Since 1988, the microcomputer distribution and support industry's rate of
revenue growth has been affected by the introduction of many lines of low
priced clones, significant price reductions by major competitors, increasing
support costs and complexity and the introduction of networking technology.
The Company believes the microcomputer distribution and support industry does
not function along the traditional supply and demand principle, as in many
cases product shortages result in lower pricing to customers. The industry has
been consolidating since the early 1990's, as larger resellers acquire smaller,
strategically-located resellers to increase their market share.
18
<PAGE> 20
Dataquest reports that the demand for microcomputer products and related
services are expected to grow approximately 10-13% from 1996 to the year 2000.
Dataquest estimates that approximately 80% of the five-year cost of businesses
owning personal computers is in the maintenance, training and support, not the
hardware and software acquisition costs. Consequently, the Company believes
future growth will come not only from a continuing demand for computer
hardware, but also from an increasing demand for related computer services,
such as internet and intranet applications, as well as for integration services
and training.
MARKETING AND SALES STRATEGY
The Company's objective is to continue as a direct marketer of
microcomputer equipment, related products and computer services, with a primary
focus on the Southeastern United States. The key elements of the Company's
marketing and sales strategy in seeking to achieve this objective include:
Focus on Medium-to-Large Organizations and Government Agencies. The
Company's marketing focus is primarily on medium-to-large organizations and
government agencies. The Company believes that these customers are
dependent on their suppliers to provide, in addition to competitive pricing,
a consultative approach to their microcomputer equipment needs. This
approach addresses purchasing, software selection, compatibility,
maintenance, support, networking, training and obsolescence. The Company
utilizes this approach, seeking to help customers analyze costs, improve
user satisfaction and maintain administrative control over their desktop
computer equipment. The Company markets solutions to both existing and
potential customers with the objective of becoming the customers' "preferred
provider" of desktop microcomputer services and product acquisition.
Target Client Needs. The Company may benefit from its clients'
needs, particularly in the areas of internet-working, client/server
applications, and network management through targeted telemarketing,
strategic alliances with major personal computer and network vendors,
client referrals and promotional programs that offer hardware and service
tie-ins. The need to outsource for technical expertise in these areas may
provide growth for the Company and offer cost savings, improved flexibility
and high-end user satisfaction for its customers.
Develop Internal Information Systems. The Company believes that its
ability to provide accurate and timely information to customers is integral
to the success of its marketing efforts. Accordingly, the Company is
continuing to develop its internal information systems. These internal
information systems are intended to provide members of the Company's
marketing and sales staff, as well as customers, with current information
regarding the products offered for sale, including information on
availability, pricing, order status and purchasing requests. See
"Business--Management Information Systems."
Utilize Various Marketing Strategies. To market its products and
services, the Company utilizes telemarketing, strategic alliances with
major vendors, customer referrals and various promotional activities. The
Company also makes joint sales presentations with certain of its major
vendors to existing and prospective customers.
PRODUCTS AND PRINCIPAL SUPPLIERS
The Company offers over 50,000 PC/Networking hardware and software SKU's
from over 500 vendors, including Compaq, Hewlett-Packard, IBM, Toshiba,
Microsoft and Novell. Products include desktop and laptop PCs, servers,
monitors, peripherals, operating system and application software and individual
components. The Company continually evaluates new products from existing
vendors and seeks out new products and new vendors, as technology develops and
needs arise.
Sales of Compaq, Hewlett-Packard and IBM products constituted
approximately 18%, 16% and 5% of the Company's Southeastern region revenue
during Fiscal 1997. No other manufacturer's products accounted for more
19
<PAGE> 21
than 5% of the Company's revenues. No one customer accounted for more than 10%
of the Company's revenues during Fiscal 1997.
The Company receives discretionary subsidies, including rebates and volume
discounts, from certain manufacturers and through aggregators and distributors
to promote sales and support activities relating to their products. Some of
these subsidies have been used to expand the array of sales and support
services and to reimburse the Company for, and to accelerate its expansion
into, additional areas relating to those manufacturers' products and services.
The loss of a significant amount of rebates, volume discounts or other
marketing programs offered by manufacturers that result in the reduction or
elimination of subsidies currently received by the Company could have a
material adverse effect on the Company's operations and financial results. In
particular, a reduction or elimination of rebates relating to government
customers could adversely affect the Company's ability to serve government
agencies in a highly competitive marketplace. See "Risk Factors-Vendor Rebates
and Volume Discounts" and "--Manufacturer Market Development Funds."
The Company's authorized dealership agreements may be terminated by the
manufacturer or the Company without cause upon notice with periods ranging from
30 to 90 days, and immediately, under certain circumstances. In addition,
while each agreement is generally subject to renewal on an annual basis, there
can be no assurance that such agreements will be renewed. The termination or
non-renewal of the Compaq, Hewlett-Packard or IBM dealership agreements would
have a material adverse effect on the Company's business. The Company believes
that its relationships with its major suppliers are good. See "Risk
Factors-Dependence on Principal Suppliers."
The microcomputer distribution and support industry is characterized by
rapid product improvement and technological change resulting in relatively
short product life cycles and rapid product obsolescence. While most of the
inventory stocked by the Company is for specific customer orders, inventory
devaluation (whether as a result of vendor price reductions or otherwise) or
obsolescence is a potential problem for the Company. Current industry practice
among manufacturers is to provide price protection intended to reduce the risk
of devaluation, although such policies are subject to change at any time and
there can be no assurance that such price protection will be available to the
Company in the future. The Company currently has in place stock rotation
arrangements with many of its vendors, enabling it to return all or a part of
inventory items purchased within a designated period. The Company also stocks
parts inventory for its service business, which is not subject to price
protection and stock rotation protection. This inventory may be especially
susceptible to technological changes and obsolescence. See "Risk
Factors-Inventory Management."
SALES ACTIVITIES AND ORDER FULFILLMENT
The Company is dependent, in large part, on the account executives that
locate and service customers via telephone communications. These account
executives develop a customer base through a combination of outbound calling
and direct mail. The Company's account executives are well-trained, product
knowledgeable and motivated to maximize sales and customer service. These
account executives are organized in teams to provide a customer with several
knowledgeable representatives. The account representatives strive to have an
individual answer telephone calls and to avoid automated telephone responses.
The teams are geographically segmented and are responsible for developing
sales for their territory. The account executives utilize on-line computers to
retrieve information regarding product characteristics, cost and availability
and to enter customer orders. At the time of order entry, the account
executive has access to information from four major suppliers and the Company's
own warehouse. Processing of the order is performed immediately following a
credit check and either a "pick ticket" is generated for products in the
Company's warehouse or electronic purchase orders are created for distribution
orders. The Company ships product via UPS, Federal Express, common carrier or
any other acceptable manner requested by the customer. The customer is billed
either at the time the order ships from the Company's warehouse or at the time
an electronic invoice is received from its distributor for orders drop shipped
directly to its customer.
20
<PAGE> 22
The Company's account executives are compensated based upon the amount of
gross profit generated. The account executives have the authority to negotiate
and adjust prices for products, provided that the account executives sell at a
price that meets established guidelines. The account executives can achieve
relatively high compensation levels. There can be no assurance that the
Company can continue to attract and retain qualified account executives to
assist in expanding the business.
SERVICES
The Company provides services to support product sales. Services are
offered on a per PC or complete project basis. Some of the services offered by
the Company are:
Technology Management Services. The Company offers contracts to
customers for both on-site ("MainSite(TM)") and off-site product
maintenance. These maintenance contracts generally require the Company to
maintain microcomputer equipment at the customer's location during regular
business hours. Most maintenance contracts are renewable annually. In
addition, the Company provides authorized warranty service and repair for
equipment sold by it and by others.
FlexStaff. The Company offers to its customers its resources for
on-site technical consulting assignments. These contracts are generally
for less than one year and provide customers with resources to meet their
internal technical needs such as project management, application
development, hardware maintenance, help desk, network design and
implementation and systems integration.
Training. The Company offers authorized training for Microsoft and
Novell at both customer sites and its regional training locations. All
trainers must be certified instructors prior to teaching any course.
Instructors also develop applications with the products they are
authorized to teach.
Professional Services. The Company provides professional consulting
services to help customers define, design, implement and support local and
wide-area networks ("LAN/WAN"). The Company professionals and the
customer develop a needs analysis and agree upon an implementation plan
for the LAN/WAN systems and then work together in implementing and
supporting the LAN/WAN systems.
COMPETITION
The microcomputer distribution and support industry is highly competitive.
Distribution has evolved from manufacturers selling through direct sales forces
to sales by manufacturers to wholesalers, resellers and value-added resellers.
Competition, especially the pressure on pricing, has resulted in industry
consolidation. In response to continuing competitive pressures, including
specific price pressure from the direct telemarketing and mail order
distribution channels, the microcomputer distribution channel is currently
undergoing segmentation into value-added resellers that emphasize advanced
systems together with service and support for business networks, as compared to
computer "superstores" who offer retail purchasers a relatively low cost, low
service alternative and limited service. Certain "superstores" have expanded
their marketing efforts to target segments of the Company's customer base,
which could have a material adverse impact on the Company's business.
The Company believes that competition in its industry is based upon a
combination of price and quality of service. The Company's recent reduction in
geographic reach may make the Company a less attractive supplier to certain
customers. Among the Company's most significant competitors are Entex,
Vanstar, Compucom, Comp USA, and Pomeroy.
The Company competes for sales with local, national and international
distributors and resellers. Many of these resellers may sell products at lower
prices than the Company. Many of the Company's competitors are substantially
larger, have more personnel, materially greater financial and marketing
resources, and operate within a larger geographic area than the Company.
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<PAGE> 23
The Company believes that the growth rate of the market for microcomputer
equipment, related products and computer services has decreased in recent
years. The Company believes that this will create further competitive
pressures within the industry. There can be no assurance that the Company will
continue to successfully compete. See "Risk Factors--Competition."
CUSTOMERS
The Company's target customers are middle to large sized entities and
governments located primarily in the Southeastern United States. The Company's
customers typically have between 200 and 1,000 workstations and can benefit
from the full range of the Company's services. The Company has over 4,000
customers in diverse industries, including healthcare, utilities and
manufacturing.
MANAGEMENT INFORMATION SYSTEMS
The Company uses proprietary, real-time management information systems,
which centralize key functions of management and provide real-time access to
inventory levels of its key suppliers. The Company's just-in-time inventory
process allows it to minimize its investment in inventory, reduce inventory
discrepancies and the risk of obsolescence, while meeting customer needs. The
Company expects to introduce an Internet order entry system by July 1997, which
will allow customers access to order and inventory information over the World
Wide Web.
The Company relies upon the accuracy and proper utilization of its
management information system to provide timely distribution services, manage
its inventory and track its financial information. To manage its growth, the
Company is continually implementing changes and modifications to its existing
systems. The Company expects that it will need to regularly make capital
expenditures to upgrade and modify its management information system, including
software and hardware, as the Company grows and the needs of its business
change. There can be no assurance that the Company will predict all of the
demands which its expanding operations will place on its management information
systems. The occurrence of a significant system failure or the Company's
failure to expand or successfully implement its systems could have a materially
adverse effect on the Company's financial results and business. See "Risk
Factors--Management of Growth and Redeployment of the Company's Resources."
PERSONNEL
On March 31, 1997, the Company employed 377 full-time personnel of which
166 are responsible for marketing and sales, 135 for services, 26 for
operations, 20 for finance, 10 for management information systems and 20 for
administrative functions. None of the Company's personnel is represented by a
union, and the Company believes its relationships with its personnel to be
satisfactory.
The Company needs to locate, hire, train and retain a number of highly
qualified technical personnel. Competition for the services of such
individuals is intense. Although the Company has been successful in locating,
hiring, training, and retaining such personnel to date, there can be no
assurance that it will continue to successfully do so in the future. See "Risk
Factors--Competitive Market For Technical Personnel."
22
<PAGE> 24
PROPERTIES
The Company's corporate headquarters and eastern regional office are
located in Clearwater, Florida. The Company owns land and property in
Clearwater, Florida. The buildings owned are comprised of 44,400 square feet
and are used for office and warehouse space. Mortgages on the property are due
on January 10, 2000, bearing interest at the rate of prime plus 1% per annum.
The outstanding balance of such mortgages as of March 31, 1997 was $1,099,930.
The following office locations are currently leased by the Company:
<TABLE>
<CAPTION>
Regional Office Square Footage Principal Use Expiration Date
--------------- -------------- ------------- ---------------
<S> <C> <C> <C>
Tallahassee, FL 3,173 Sales/Service September 30, 1999
Hollywood, FL 4,500 Sales/Service May 31, 1998
Maitland, FL 7,103 Sales/Service December 14, 2001
Smyrna, GA 6,426 Sales/Service January 31, 2001
</TABLE>
The Company also leases space in Nashville, Tennessee which relates to a
closed office. The term of this lease extends through May, 1998 and the Company
is currently seeking to sublet this space. Generally, the Company is
responsible for all real estate taxes, insurance, utilities and maintenance
expenses payable with respect to these leased premises.
LEGAL PROCEEDINGS
In 1996, the Company was named as defendant in a suit filed in state court
in Maricopa County, Arizona (the "Lawsuit"), by former shareholders
(collectively, the "Plaintiffs") of Sunland. The Plaintiffs alleged that the
Company breached a registration rights agreement requiring the Company to
register with the Commission shares of its common stock issued to the
Plaintiffs in connection with the Company's acquisition of all of Sunland's
outstanding capital stock pursuant to a Stock Purchase Agreement dated August
19, 1994.
In March, 1997, the Company and the Plaintiffs agreed to settle the
Lawsuit pursuant to a Settlement Agreement and Release (the "Settlement
Agreement"). In exchange for the voluntary dismissal of the Lawsuit with
prejudice by the Plaintiffs, the Settlement Agreement required the Company to
(i) issue 270,000 shares of common stock (the "Shares") to the Plaintiffs, (ii)
file a registration statement with the Commission covering the Shares on or
before April 15, 1997, and use reasonable efforts to have such registration
statement declared effective as soon as possible, (iii) pay $300,000 to the
Plaintiffs and (iv) forgive indebtedness owed to the Company by certain of the
Plaintiffs in the amount of $101,010.30. The Settlement Agreement also
included a mutual release of claims among the parties.
In August 1996, the Company and Richard C. Rose were named as defendants
in a suit filed in state court in New Jersey, by Gordon McLenithan, a former
executive officer of the Company. Mr. McLenithan alleges that the Company
failed to pay him an amount allegedly owed to Mr. McLenithan upon a change in
control of the Company. Mr. McLenithan also charges Mr. Rose with defamation
and interference with contractual relations. The lawsuit is in the initial
stages of litigation. The Company has denied Mr. McLenithan's allegations and
intends to vigorously contest the suit.
In November 1996, the Company was named in a suit filed in state court in
New Jersey, by a former employee of the Company. The former employee seeks
damages for breach of the duty of good faith and fair dealing, and for sex
discrimination in violation of the New Jersey Law Against Discrimination,
alleging that the Company terminated her from her position as an Account
Executive on or about January 15, 1996 to avoid paying her commissions to which
she was entitled under her Compensation Plan, and because of her gender. The
lawsuit is in the initial stages of litigation. The Company has denied the
former employee's allegations and intends to vigorously contest the suit.
23
<PAGE> 25
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to each
person who is currently a director or executive officer of the Company.
<TABLE>
<CAPTION>
Year First
Became a
Name Position(s) Age Director
---- ----------- --- --------
<S> <C> <C> <C>
Richard C. Rose . . . . . . . . Chief Executive Officer and Director, Class V 49 1984
Anthony G. Lembo . . . . . . . President, Chief Operating Officer, Chief 44 1996
Financial Officer and Director, Class II
Philip Doganiero . . . . . . . Chairman & Director, Class III 40 1995
W. Keith Schilit . . . . . . . Director, Class IV 42 1997
Barry M. Alpert . . . . . . . . Director, Class V 55 1997
</TABLE>
Richard C. Rose has served as Chief Executive Officer of the Company since
April 1990. Mr. Rose has served as a director of the Company since October
1984 and Chairman of the Board of Directors from September 1993 to December
1996. Prior to April 1990, Mr. Rose served as President of the Company (April
1987 - September 1993), Chief Operating Officer of the Company (July 1986 -
April 1990) and as Vice President - Sales and Marketing of the Company (July
1984 - April 1987).
Anthony G. Lembo has served as President, Chief Operating Officer, Chief
Financial Officer and a director of the Company since October 1996. Prior to
October 1996, Mr. Lembo served as Vice President of the Company (1995 - 1996).
Mr. Lembo's previous experience includes nine years as Chief Operating Officer
of NDP, prior to the Company's acquisition of NDP (1986 - 1995).
Philip Doganiero has served as a director of the Company since January
1995 and as Chairman of the Board of Directors since December 1996. Prior to
December 1996, Mr. Doganiero served as President of the Company (April 1996 -
December 1996) and Co-President of the Company (January 1995 - April 1996),
following the Company's acquisition of NDP. Prior to 1995, Mr. Doganiero was a
founder and President of NDP (1972-1995).
W. Keith Schilit has served as a director of the Company beginning in
April 1997. Dr. Schilit is a professor of management and the director of the
Program in Entrepreneurship at the University of South Florida, Tampa, Florida,
having served on the faculty of the university since 1985. Dr. Schilit, who
holds an MBA and Ph.D. in strategic planning, is also an author, consultant and
lecturer. He has been the principal owner of Catalyst Ventures (and its
predecessors), a business consulting firm, since before 1982. From 1982 until
1985, he was on the faculty of Syracuse University. From 1979 until 1982, he
was on the faculty of University of Maryland. He also is a director of Chico's
FAS, Inc. and ASM Fund, Inc.
Barry M. Alpert has served as a director of the Company since April 1997.
Mr. Alpert has served as Managing Director, Investment Banking for Raymond
James & Associates, Inc. since January 1997, as director of Reptron
Electronics, Inc. since 1995 and as President and Chief Executive Officer of
Alpert Financial Group, Inc. (a family investment holding company) since 1989.
Prior to January 1997, Mr. Alpert served as Vice President, and as Senior Vice
President - Investment Banking for Robert W. Baird & Co. Incorporated (1991 -
1997). From 1989 until 1993, Mr. Alpert served as Vice Chairman of Colony Bank.
Mr. Alpert served from 1989 until 1991 as Vice Chairman and director of Western
Reserve Life Assurance Co. of Ohio and as President of Pioneer Western
Corporation. Prior to 1989, Mr. Alpert served as President and Chief Executive
Officer of United Insurance Companies, Inc. (1988-1989); Chairman of the Board
24
<PAGE> 26
of Directors, President and Chief Executive Officer of Home Life Financial
Assurance Corporation (1982-1988); Chairman of the Board of Directors,
President and Chief Executive Officer of Orange State Life Insurance Company
(1977-1989) and Chairman of the Board of Directors of Life Savings Bank
(1979-1983).
COMPOSITION OF THE BOARD OF DIRECTORS
Pursuant to the terms of the Company's Certificate of Incorporation (the
"Certificate of Incorporation") and Bylaws, the Board of Directors has the
power to set the number of directors (but not more than 12 members) by
resolution adopted by the directors of the Company. The directors are divided
into five classes, as nearly equal in number as possible. Each director in a
particular class is elected to serve a five-year term or until his or her
successor is duly elected and qualified. The classes are staggered so that
their terms expire in successive years. Currently, the number of directors is
set at five. The Company intends to maintain at all times at least two
independent directors on its Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Company has established an Audit Committee composed
of Messrs. Schilit and Alpert. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plan and results of the audit engagement,
approves professional services provided by the accountants, reviews the
independence of the accountants, considers the range of audit and non-audit
fees, and reviews the adequacy of the Company's internal accounting controls.
Compensation Committee. The Company has established a Compensation
Committee, consisting of Messrs. Schilit and Alpert. The Compensation
Committee determines the compensation of the Company's executive officers and
sets financial targets to be used in determining executive bonuses.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are paid $12,000 annually.
All directors receive reimbursement for reasonable out-of-pocket expenses
incurred in connection with meetings of the Board of Directors. No director
who is an employee of the Company receives separate compensation for services
rendered as a director.
25
<PAGE> 27
EXECUTIVE OFFICER COMPENSATION
The following table sets forth certain information concerning the
compensation earned during fiscal years 1995, 1996 and 1997 by the Company's
Chief Executive Officer and each of the other executive officers of the Company
whose total annual salary and bonus for Fiscal 1997 exceeded $100,000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------
Annual Compensation Awards Payouts
----------------------------------- ---------------------------- -------
Other Securities
Name Annual Restricted Under- All Other
and Compen- Stock lying LTIP Compen-
Principal Fiscal sation Awards(s)(2) Options Payouts sation
Position Year Salary($)(1) Bonus($) ($) ($) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard C. Rose
Chief Executive 1995 $ 329,400 $254,416 ---- ---- ---- ---- $ 1,913 (3)
Officer 1996 $ 329,400 ---- ---- $ 31,525 ---- ---- $153,550 (4)
1997 $ 354,600 ---- ---- ---- 97,022 ---- $ 380 (3)
Anthony G. Lembo
President, Chief
Operating Officer 1995 ---- ---- ---- ---- ---- ---- ----
and Chief Financial 1996 $ 125,000 ---- ---- ---- ---- ---- $ 1,100 (3)
Officer 1997 $ 175,000 ---- ---- ---- ---- ---- $ 914 (3)
Philip Doganiero
Chairman of the Board 1995 ---- ---- ---- ---- ---- ---- ----
of Directors 1996 $ 225,000 ---- ---- ---- ---- ---- $ 2,187
1997 $ 103,800 (5) ---- $15,000(5) ---- ---- ---- $ 1,052 (3)
- -----------
</TABLE>
(1) Includes deferred compensation.
(2) Represents the value of the vested portion of the stock grants issued to
who was granted 27,022 shares of Common stock in April 1995, pursuant to
a restricted stock agreement (the "Agreement"). Pursuant to the terms of
the Agreement, the shares are subject to certain restrictions which expire
on March 31, 1998. The restrictions lapse equally each year for the term
of the grant and with respect to all shares in the event of termination of
employment for any reason other than "cause," voluntary termination for
"good reason" and death or disability, as defined in the Agreement. If at
any time prior to the expiration of the restriction period, employment is
terminated "for cause" or any other reason not provided for under the
Agreement, any such shares still subject to restrictions, as previously
described, shall be transferred to the Company, without monetary
consideration.
(3) All other compensation represents 401(k) matching contributions.
(4) Includes a one-time lump sum distribution to Mr. Rose of $152,000 on
April 1, 1995.
(5) Mr. Doganiero voluntarily reduced his base salary to $1.00 effective
October 1, 1996. However, he is entitled to an annual base salary of
$225,000 under the terms of his employment agreement. The Company
pays premiums for a split dollar key-man life insurance policy, for which
Mr. Doganiero's estate is the beneficiary.
26
<PAGE> 28
OPTION GRANTS IN FISCAL 1997
The following table contains information concerning the grant of
stock options pursuant to the Company's several stock option plans to the Named
Executive Officers during Fiscal 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Individual Grants
- -----------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Number of Assumed Annual Rates of
Securities Percent of Stock Price Appreciation For
underlying Total Options/ Option Term(3)
option/SARs SARs Granted Exercise of -----------------------------
Granted to Employees Base Price Expiration
Name (#)(1) in Fiscal Year ($/Sh)(2) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
- ----------------------------------- ---------- -------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard C. Rose . . . . . . . . . . 97,022 16.4% $ 2.06 11/15/06 $42,971 $ 92,150
Anthony G. Lembo . . . . . . . . . 40,000 6.76% $ 2.06 11/15/06 17,720 38,000
Philip Doganiero . . . . . . . . . 40,000 6.76% $ 2.06 11/15/06 17,720 38,000
</TABLE>
(1) On November 15, 1996, an option to purchase 97,022 shares at $2.06 per
share was granted to Mr. Rose in exchange for cancellation of the options
previously granted on April 1, 1995 and August 11, 1995 (options to
purchase 27,022 shares at $8.125 per share and 70,000 shares at $5.75 per
share, respectively).
(2) All stock options were granted at the fair market value on the date of
grant.
(3) The amounts set forth are based on assumed appreciation of 5% and 10%
rates as prescribed by the Commission rules and are not intended to
forecast future appreciation, if any, of the stock price. The Company did
not use an alternative formula for a grant date valuation as it is not
aware of any formula which will determine with reasonable accuracy a
present value based on future unknown or volatile factors. Actual gains,
if any, on stock option exercises and common stock holdings are dependent
on the future performance of the Company's Common Stock. There can be no
assurance that the amounts reflected in this table will be achieved.
27
<PAGE> 29
AGGREGATE OPTION TABLE
The following table shows information concerning options exercised during
Fiscal 1997 and options held by the Named Executive Officers at the end of
Fiscal 1997.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Securities In-the-Money
Underlying Unexercised Options at
Options at Fiscal Fiscal Year-
Year-End(#) End($)(2)
Shares Acquired Value Exercisable(E)/ Exercisable(E)/
Name on Exercise(#) Realized($)(1) Unexercisable(U) Unexercisable(U)
- ---- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Richard C. Rose -- -- 271,813(E)/ $0(E)/
134,209(U) $66,945(U)
0(E)/ $0(E)/
Philip Doganiero -- -- 40,000(U) $27,600(U)
Anthony G. Lembo -- -- 0(E)/ $0(E)/
40,000(U) $27,600(U)
</TABLE>
- --------------
(1) Represents the dollar value of the difference between the value (measured
on the date exercised) and the option exercise price.
(2) Represents the dollar value of the difference between the value at the end
of Fiscal 1997 and the option exercise price of unexercised options at the
end of Fiscal 1997.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with executive officers Richard C.
Rose and Philip Doganiero. Mr. Rose's agreement, as amended, provides for a
minimum annual base salary of $329,400, a one-time lump sum distribution of
$152,000 on April 1, 1995, discretionary bonuses awarded by the Company's Board
of Directors and awards of restricted stock and stock options that vest over
three years. Mr. Rose's amended employment agreement expires December 31,
1999. Mr. Doganiero's agreement provides for an annual base salary of $225,000
or such greater amount as may be approved from time to time by the Company's
Board of Directors.
Pursuant to their respective employment agreements, Messrs. Rose and
Doganiero each agree not to compete, directly or indirectly, with the Company
in the states in which the Company does or may do business during the terms of
their employment and for a period of one year after the termination of their
employment. If either Mr. Rose or Mr. Doganiero is terminated without cause,
the Company is required to pay his remaining base salary and any additional
compensation earned in excess of his base salary until the date of termination,
plus an amount equal to his then annual base salary for the period through and
including the expiration of the employment agreement. If either Mr. Rose or
Mr. Doganiero is terminated with cause, the Company is required to pay only his
base salary up to the date of termination. If either Mr. Rose or Mr.
Doganiero dies during the term of his employment, the Company is required: (a)
to pay to his estate the base salary otherwise payable until the later of (i)
three years from the date of death or (ii) the end of the term of his employment
agreement; and (b) to pay his estate an additional $5,000.
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<PAGE> 30
Under their respective employment agreements, if there is a "change in
control" of the Company and, subsequent to such change in control, either Mr.
Rose's or Mr. Doganiero's employment agreement (or any subsequent employment
agreement then in effect which expires prior to the time they have attained 65
years of age) is terminated or is not renewed by the Company at the expiration
of its term, or any renewals, extensions or modifications, then he would
receive compensation in an amount equal to 299% of his annual base salary in
effect at the time of his termination (the "Severance Amount"). This Severance
Amount would be payable in one single payment within 60 days after the
termination of his employment. The Severance Amount, however, may not exceed
three times the "base amount" as determined under Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"). In the event the Severance
Amount is reduced for the reason set forth in the preceding sentence, the
Severance Amount would be reduced prior to the reduction of any other payments
due under each of Mr. Rose's and Mr. Doganiero's employment agreements. A
"change in control" is defined in both employment agreements as a transfer of
more than 50% of the Company's Common Stock in a single transaction or series
of transactions in concert with each other (excluding transfers made by persons
who were officers or were related to officers of the Company immediately prior
to the change in control).
The Company has also entered into an employment agreement with Anthony G.
Lembo, its President, effective January 11, 1995. Mr. Lembo's employment
agreement is for a period of three years and provides for an annual base salary
of $125,000 or such greater amount as may be approved from time to time by the
Company's Board of Directors. Upon Mr. Lembo's election as President of the
Company, the Board of Directors approved an increase of Mr. Lembo's annual base
salary to $175,000 ("Base Salary") and an amount equal to $50,000 per year, or
such greater amount as may be approved from time to time by the Company's Board
of Directors, if the Company's Southeast division meets or exceeds certain
financial targets ("Performance Bonus"). Pursuant to his employment agreement,
Mr. Lembo agrees not to compete, directly or indirectly, with the Company in the
states in which the Company does or may do business during the term of his
employment and for a period of one year after the termination of his employment.
The employment agreement also provides that Mr. Lembo shall receive severance
benefits if his employment is terminated by the Company "without cause" (as
defined in the employment agreement). In such a case, Mr. Lembo would receive
his Base Salary, as in effect upon termination, for the remaining term of his
employment agreement and his Performance Bonus for the last full fiscal year
completed prior to the date of his termination. Mr. Lembo's employment
agreement expires January 11, 1998.
STOCK OPTION PLANS
The Company maintains two incentive stock option plans (the "ISO Plans")
and five incentive and nonqualified stock option plans. The 1989, 1990, 1991,
1992 and 1994 incentive and nonqualified stock option plans (the "NQSO Plans")
provide for the grant of both incentive stock options and nonqualified stock
options to employees of the Company.
Shares of Common Stock have been reserved and issued under the above plans
as follows:
<TABLE>
<CAPTION>
Stock Option Plan Shares Reserved Shares Granted
----------------- --------------- --------------
<S> <C> <C>
1984 and 1987 ISO Plans 700,000 700,000
1989 NQSO Plan 400,000 400,000
1990 NQSO Plan 160,000 160,000
1991 NQSO Plan 200,000 200,000
1992 NQSO Plan 400,000 400,000
1994 NQSO Plan 800,000 769,074
</TABLE>
The ISO Plans and the NQSO Plans, excluding the 1990 NQSO Plan, provide
for the discretionary grant of options to purchase Common Stock at a price
determined by the Compensation Committee of the Board of Directors but, in the
case of incentive stock options, at a price not less than the fair market value
thereof on the date of grant. The options, by their terms, must be exercised
within ten years from the date on which they are granted or within 90 days of
employment termination.
29
<PAGE> 31
All options fully vest at date of grant except for stock options granted
under the 1989, 1991 and 1992 NQSO Plans, which vest 25% per year beginning one
year after grant date, and the 1994 NQSO Plan, which provides the board of
directors with discretion to determine vesting.
30
<PAGE> 32
CERTAIN TRANSACTIONS
The Company has made loans from time to time during the fiscal years 1987
through 1996 to its employees, including Richard C. Rose, the Company's Chief
Executive Officer, primarily to enable them to exercise stock options to
purchase the Company's Common Stock. During Fiscal 1996, the amount of
indebtedness owed on such loans was evidenced by promissory notes from the
appropriate employees. These loans bear interest at rates ranging from 7% per
annum to prime plus 1.5% per annum and are payable upon demand. As of March
31, 1996 and 1997, Mr. Rose's outstanding loan balance was $329,927 and
$309,370, respectively.
The Company acquired substantially all the assets of NDP, a reseller of
computer products based in Clearwater, Florida in 1995. Philip Doganiero and
Anthony G. Lembo held a 60% and 15% ownership interest in NDP, respectively.
The Company acquired NDP for $6,200,00 in cash, $3,500,000 in subordinated
notes with an interest rate of 9%, 625,000 shares of the Company's Common Stock
with an aggregate market value at the time of the acquisition of approximately
$4,200,000, and a contingent payment based on the future earnings of the
Company's Southeastern region over a seven-year period. These contingent
payments totalled $0 in Fiscal 1996 and approximately $350,000 in Fiscal 1997.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 31, 1997 and as adjusted
to reflect consummation of the Offering by (i) each person who is known to the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each of the Named Executive Officers, (iii) each of the directors
of the Company, (iv) the Selling Shareholders and (v) all directors and
executive officers of the Company as a group. Except as set forth below, the
shareholders named below have sole voting and investment power with respect to
all shares of Common Stock shown as being beneficially owned by them.
<TABLE>
<CAPTION>
Shares Shares Beneficially
Beneficially Owned After
Owned Before Shares to Offering, Assuming
Name Offering(1) be Offered All Shares Are Sold
- ---- ----------------------- ------------ ----------------------
Number Percent Number Percent
---------- ---------- ----------------------
<S> <C> <C> <C> <C> <C>
DIRECTORS, EXECUTIVE OFFICERS AND
PRINCIPAL SHAREHOLDERS
Anthony G. Lembo(2) . . . . . . . . . . . 7,500 * -- 7,500 *
Richard C. Rose(2)(3) . . . . . . . . . . 298,156 4.7% -- 298,156 4.7%
Philip Doganiero(2) . . . . . . . . . . . 18,000 * -- 18,000 *
U.S. Bankcorp(4) . . . . . . . . . . . . 551,000 9.4% -- 551,000 9.4%
Pioneering Management Corporation(5) . . 423,500 7.2% -- 423,500 7.2%
W. Keith Schilit . . . . . . . . . . . . -- * -- -- *
Barry M. Alpert . . . . . . . . . . . . . -- * -- -- *
All Directors and Executive Officers as a
Group (5 persons) . . . . . . . . . . . 314,656 5.1% -- 314,656 5.1%
SELLING SHAREHOLDERS
Arlen Westling, as Trustee for
the Westling Family Trust,
dated February 1, 1995 . . . . . . . . 22,065 * 9,200 12,865 *
Roger F. Powell . . . . . . . . . . . . . 48,470 * 31,470 17,000 *
Jeff Abreu . . . . . . . . . . . . . . . 11,737 * 11,737 -- *
David Riley, as Trustee
for the David and Tamara Riley Family
Trust, dated December 4, 1992 . . . . . 152,992 2.6% 67,500 85,490 1.5%
Leonard and Leslie Sickman, as Trustees
for the Sickman Family Trust, dated
December 22, 1992 . . . . . . . . . . . 82,800 1.4% 82,800 -- *
Robert G. Kreisheimer, as Trustee
for the Kreisheimer Family Trust,
dated December 11, 1992 . . . . . . . . 62,293 1.1% 67,293 -- *
</TABLE>
- ----------------------
* Less than 1%.
(1) Beneficial ownership of shares, as determined in accordance with
applicable Securities and Exchange Commission rules, includes shares as to
which a person shares voting power and/or investment power. The
31
<PAGE> 33
Company has been informed that all shares shown are held of record with
sole voting and investment power, except as otherwise indicated.
(2) The business address for Messrs. Doganiero, Lembo and Rose is 2145 Calumet
Street, Clearwater, Florida 34625.
(3) The number of shares shown in the table above includes 271,813 shares
that are subject to options that are currently exercisable.
(4) The number of shares shown is based on a Schedule 13G filed with the
Securities and Exchange Commission, dated February 13, 1997. The business
address for U.S. Bankcorp is 111 Southwest Fifth Avenue, Portland, Oregon
99204.
(5) The number of shares shown is based on a Schedule 13G filed with the
Securities and Exchange Commission, dated January 14, 1997. The business
address for Pioneering Management Corporation is 60 State Street, Boston,
Massachusetts 02108.
32
<PAGE> 34
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 20,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock, no par value ("Preferred Stock"). As of
March 31, 1997, 5,847,199 shares of Common Stock were outstanding, and such
shares were held by approximately 529 holders of record and no shares of
Preferred Stock were outstanding.
The following descriptions of the Common Stock and the Preferred Stock are
based on the Company's Certificate of Incorporation, Bylaws and applicable New
Jersey law.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share owned
of record on all matters presented to the shareholders. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share equally and ratably in the assets of the Company,
if any, remaining after the payment of all debts and liabilities of the
Company. The Common Stock has no preemptive rights, no cumulative voting
rights and no redemption, sinking fund or conversion provisions.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Board of Directors out of funds legally available therefor,
subject to the dividend and liquidation rights of any Preferred Stock that may
be issued and outstanding and subject to any dividend restrictions in the
Company's credit facilities. No dividends or other distributions (including
redemptions or repurchases of shares of capital stock) may be made if after
giving effect to any such dividends or distributions, the Company would not be
able to pay its debts as they become due in the usual course of business or the
Company's total assets would be less than the sum of its total liabilities plus
the amount that would be needed at the time of a liquidation to satisfy the
preferential rights of any holders of Preferred Stock. See "Dividend Policy."
All of the shares of Common Stock offered hereby are validly issued, fully
paid and nonassessable.
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
PREFERRED STOCK
The Board of Directors of the Company is authorized, without further
shareholder action, to designate and issue from time to time one or more series
of Preferred Stock. The Board of Directors may fix and determine the
designations, preferences and relative rights and qualifications, limitations
or restrictions of any series of Preferred Stock so established, including
voting powers, dividend rights, liquidation preferences, redemption rights and
conversion privileges. Because the Board of Directors has the power to
establish the preferences and rights of each series of Preferred Stock, it may
afford the holders of any series of Preferred Stock preferences and rights,
voting or otherwise, senior to the rights of holders of Common Stock. As of
the date of this Prospectus, the Board of Directors has not authorized any
series of Preferred Stock and has no plans to issue any shares of Preferred
Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The Bylaws provides that special meetings of shareholders may be called
only by: (i) the President; (ii) the Board of Directors; or (iii) the Chairman
of the Board of Directors. Any action required or permitted to be taken at a
meeting of Shareholders may be taken without a meeting of all Shareholders
entitled to vote consent to such action in writing.
The Certificate of Incorporation provides for a classified Board of
Directors and permit removal of directors only for cause by the shareholders of
the Company at a meeting by the affirmative vote of at least 60% of the
33
<PAGE> 35
outstanding shares of Common Stock. See "Management--Executive Officers and
Directors." The Certificate of Incorporation establishes an advance notice
procedure for the nomination of candidates for election as directors, as well
as for other shareholder proposals to be considered at shareholders' meetings.
Nominations may be made at shareholders' meetings by or at the direction of the
Board of Directors, by any nominating committee or person appointed by the
Board or by any shareholder entitled to vote for the election of directors.
Notice of shareholder proposals and nominations of directors by shareholders
must be given timely in writing to the Secretary of the Company before the
meeting at which such matters are to be acted upon or directors are to be
elected. Such notice, to be timely, must be received at the principal
executive offices of the Company with respect to shareholder proposals and
elections to be held at the annual meeting, not less than 60 days before the
date of the meeting at which the director(s) are to be elected; however, if
less than 70 days' notice or prior public disclosure of the date of the
scheduled meeting is given or made, notice by the shareholder, to be timely,
must be so delivered or received not later than the close of business on the
tenth day following the earlier of the day on which notice of the date of such
meeting is mailed to shareholders or public disclosure of the date of such
meeting is made.
Notice to the Company from a shareholder who intends to present a proposal
or to nominate a person for election as a director at a meeting must contain
certain information about the shareholder giving such notice and, in the case
of director nominations, all information that would be required to be included
in a proxy statement soliciting proxies for the election of the proposed
nominee (including such person's written consent to serve as a director if so
elected). If the presiding officer of the meeting determines that a
shareholder's proposal or nomination is not made in accordance with the
procedures set forth in the Certificate of Incorporation, such proposal or
nomination, at the direction of such presiding officer, may be disregarded.
The notice requirement for shareholder proposals contained in the Certificate
of Incorporation does not restrict a shareholder's right to include proposals
in the Company's annual proxy materials pursuant to rules promulgated under the
1934 Act.
The preceding provisions of the Certificate of Incorporation may be
changed only upon the affirmative vote of holders of 60% of the outstanding
Common Stock.
The provisions of the Certificate of Incorporation summarized in the
preceding four paragraphs and the provisions of the New Jersey Shareholders
Protection Act described under "Certain Provisions of New Jersey Law" may have
certain anti-takeover effects. Such provisions, individually or in
combination, may discourage other persons, or make it more difficult, without
the approval of the Board of Directors, for other persons to make a tender
offer or acquisitions of substantial amounts of the Common Stock or from
launching other takeover attempts that a shareholder might consider in such
shareholder's best interest, including attempts that might result in the
payment of a premium over the market price for the Common Stock held by such
shareholder.
CERTAIN PROVISIONS OF NEW JERSEY LAW
The Company is subject to the New Jersey Shareholder Protection Act
("NJSPA"), which prohibits certain New Jersey corporations such as the Company
from engaging in business combinations (including mergers, consolidations,
significant asset dispositions and certain stock issuances) with any Interested
Shareholder (defined to include, among others, any person that after the
Offering becomes a beneficial owner of 10% or more of the affected
corporation's voting power) for five years after such person becomes an
Interested Shareholder, unless the business combination is approved by the
Board of Directors prior to the date the shareholder became an Interested
Shareholder. In addition, the NJSPA prohibits any business combination at any
time with an Interested Shareholder other than a transaction that: (i) is
approved by the Board of Directors prior to the date the Interested Shareholder
became an Interested Shareholder; or (ii) is approved by the affirmative vote
of the holders of two-thirds of the voting stock not beneficially owned by the
Interested Shareholder; or (iii) satisfies certain "fair price" and related
criteria. The NJSPA does not apply to certain business combinations, including
those with persons who acquired 10% or more of the voting power of the
corporation prior to the time the corporation was required to file periodic
reports pursuant to the 1934 Act, or prior to the time the corporation's
securities began to trade on a national securities exchange.
34
<PAGE> 36
PLAN OF DISTRIBUTION
The sale of the shares of Common Stock offered hereby is not being
underwritten. Sales may be made by the Selling Shareholders in the Nasdaq
National Market, or otherwise, at prices and on terms then prevailing or at
prices related to the then current market price of the Common Stock, or in
negotiated transactions. In this regard, the shares may be sold in one or more
of the following types of transactions: (i) a block trade, in which the broker
or dealer so engaged will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(ii) purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (iii) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and (iv)
directly in private transactions at negotiated prices. In effecting sales,
brokers or dealers engaged by the Selling Shareholders may arrange for other
brokers or dealers to participate. Brokers or dealers will receive commissions
or discounts from the Selling Shareholders in amounts to be negotiated prior to
any sale. The Selling Shareholder and any broker or dealer participating in
any such distribution may be deemed to be "underwriters" (as defined in the
Securities Act) with respect to such sales.
The Company has agreed to furnish the Selling Shareholders a reasonable
number of copies of this Prospectus.
35
<PAGE> 37
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Greenbaum, Rowe, Smith, Ravin, Davis & Himmel,
Woodbridge, New Jersey.
EXPERTS
The Consolidated Financial Statements of the Company as of March 31, 1996
and 1995 and for each of the three years in the period ending March 31, 1996,
included in this Prospectus and the Consolidated Financial Statements included
in the Registration Statement have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the 1934 Act
and in accordance therewith files periodic reports and other information with
the Commission. Reports, proxy and information statements and other
information filed by the Company may be inspected and copies may be obtained
(at prescribed rates) at the Commission's Public Reference Section, 450 5th
Street, N.W., Washington, D.C. 20549, as well as the following Regional Offices
of the Commission: Seven World Trade Center, 13th Floor, New York, New York
10048 and at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can also be obtained by
mail from the Public Reference Section, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington D.C. 20549, upon payment of prescribed rates.
In addition, electronically filed documents, including reports, proxy and
information statements and other information regarding the Company, can be
obtained from the Commission's Web site at: http://www.sec.gov. The Company's
Common Stock is quoted on the Nasdaq National Market, and reports, proxy
statements and other information concerning the Company can also be inspected
at the offices of the National Association of Securities Dealers, Inc. at 1735
K Street, Washington, D.C. 20006.
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in the
Prospectus with respect to the contents of any contract or other document filed
as an exhibit to the Registration Statement are not necessarily complete, and
in each such instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement. Each such
statement is qualified in all respects by such reference to such exhibit.
Copies of all or any part of the Registration Statement, including the
documents incorporated by reference therein or exhibits thereto, may be
obtained upon payment of the prescribed rates at the offices of the Commission
set forth above.
36
<PAGE> 38
DATAFLEX CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1995 and 1996 F-3
Consolidated Statements of Earnings for the years ended
March 31, 1994, 1995 and 1996 F-4
Consolidated Statement of Shareholders' Equity for the years
ended March 31, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT ACCOUNTANTS
ON SCHEDULE II II-7
Schedule II -- Valuation and Qualifying Accounts for
the years ended March 31, 1994, 1995 and 1996 II-8
</TABLE>
F-1
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Dataflex Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Dataflex Corporation and its subsidiary at March 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1996, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Morristown, New Jersey
July 2, 1996
F-2
<PAGE> 40
DATAFLEX CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
------------------------- -------------
1996 1995 1996
------------ ------------ -------------
ASSETS (unaudited)
(In thousands)
<S> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . $ 499 $ 5,590 $ 429
Accounts Receivable, Net . . . . . . . . . . . . . . . . . . . 57,333 56,834 22,735
Inventory, Net . . . . . . . . . . . . . . . . . . . . . . . . 25,755 32,029 8,679
Net Assets Held for Sale . . . . . . . . . . . . . . . . . . . 45,229 -- --
Deferred Tax Asset . . . . . . . . . . . . . . . . . . . . . . 3,288 312 300
Income Taxes Receivable . . . . . . . . . . . . . . . . . . . . 829 -- 2,665
Other Current Assets . . . . . . . . . . . . . . . . . . . . . 8,428 11,493 10,735
----------- ----------- -------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . 141,361 106,258 45,543
Property and Equipment, Net . . . . . . . . . . . . . . . . . . 9,437 11,617 4,441
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 799 963 982
Deferred Tax Asset . . . . . . . . . . . . . . . . . . . . . . -- -- 3,294
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,716 27,743 14,522
----------- ----------- -------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . $ 170,313 $ 146,581 $ 68,782
=========== =========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt . . . . . . . . . . . . . . . $ 32,967 $ 7,249 $ 240
Short-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . -- -- 27,846
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . 42,478 45,199 3,346
Accrued Expenses and Other Payables . . . . . . . . . . . . . . 8,385 6,663 4,748
Income Taxes Payable . . . . . . . . . . . . . . . . . . . . . -- 176 --
----------- ----------- -------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . 83,830 59,287 36,180
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 54,062 52,510 4,687
Deferred Tax Liability . . . . . . . . . . . . . . . . . . . . . 348 428 --
Other Long-Term Liabilities . . . . . . . . . . . . . . . . . . . 224 216 --
----------- ----------- -------------
Total Liabilities . . . . . . . . . . . . . . . . . . . 138,464 112,441 40,867
----------- ----------- -------------
Commitments and Contingencies (Notes 11 and 15)
Shareholders' Equity:
Common Stock-No Par Value; Authorized 20,000,000 Shares;
Issued 5,961,169, 5,587,661, 4,867,184 Shares at
December 31, 1996, March 31, 1996 and March 31, 1995,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . 23,065 19,045 23,443
Less: Loans Receivable for Exercised Stock Options . . . . . . (311) (413) (194)
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . 9,690 16,025 5,269
Less: Treasury Stock - At Cost; 115,382, 113,901 and 104,237
shares at December 31, 1996, March 31, 1996 and March 31,
1995, respectively . . . . . . . . . . . . . . . . . . . . . . (595) (517) (603)
----------- ----------- -------------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . 31,849 34,140 27,915
----------- ----------- -------------
Total Liabilities and Shareholders' Equity . . . . . . . . . . . $ 170,313 $ 146,581 $ 68,782
=========== =========== =============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 41
DATAFLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months
Ended
For the Years Ended March 31, December 31,
--------------------------------- -------------------
1996 1995 1994 1996 1995
---------- ---------- ----------- --------- ---------
(Unaudited)
Revenue (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Equipment . . . . . . . . . . . . . . . . . $ 422,533 $ 246,532 $ 108,192 $186,833 $ 305,326
Services . . . . . . . . . . . . . . . . . 49,569 27,319 14,156 24,066 35,478
--------- --------- ---------- -------- ---------
Total Revenue . . . . . . . . . . . . . . . . 472,102 273,851 122,348 210,899 340,804
--------- --------- ---------- -------- ---------
Cost of Revenue
Equipment . . . . . . . . . . . . . . . . . 378,490 220,711 98,008 166,060 273,414
Services . . . . . . . . . . . . . . . . . 41,102 21,853 10,810 19,267 29,048
--------- --------- ---------- -------- ---------
Total Cost of Revenue . . . . . . . . . . . . 419,592 242,564 108,818 185,327 302,462
--------- --------- ---------- -------- ---------
Gross Profit . . . . . . . . . . . . . . . 52,510 31,287 13,530 25,572 38,342
Selling, General and Administrative Expenses 42,995 24,259 10,675 21,594 30,632
Amortization of Goodwill . . . . . . . . . . 1,265 594 -- 530 932
Restructuring and Other Charges . . . . . . . 5,353 -- -- -- --
--------- --------- ---------- -------- ---------
Operating Income . . . . . . . . . . . . . 2,897 6,434 2,855 3,448 6,778
Other Income (Expenses):
Interest (Expense) Income, Net . . . . . . (8,063) (2,677) 4 (4,051) (5,717)
Loss on Dispositions of Businesses . . . . (4,632) -- -- (6,230) --
Litigation Settlement and Related Costs . . -- -- (847) -- --
--------- --------- ---------- -------- ---------
(Loss) Income Before Income Taxes . . . . . . (9,798) 3,757 2,012 (6,833) 1,061
(Benefit from) Provision for Income Taxes . . (3,463) 1,617 884 (2,412) 456
--------- --------- ---------- -------- ---------
Net (Loss) Income . . . . . . . . . . . . . $ (6,335) $ 2,140 $ 1,128 $ (4,421) $ 605
========= ========= ========== ======== =========
(Loss) Earnings Per Common Share . . . . . . $ (1.22) $ 0.45 $ 0.28 (0.78) .11
========= ========= ========== ======== =========
Weighted Average Common Shares Outstanding . 5,214 4,733 4,085 5,644 5,422
========= ========= ========== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 42
DATAFLEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Earnings Treasury Stock
--------------------------------------- --------------------------
Issued
Shares Amount Amount Shares Cost
---------- ------------- -------------- ------------- ------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1993 . . . . . . . 4,126,187 $ 13,196 $ 12,758 125,759 $ 617
Exercise of Stock Options . . . . . . . 15,837 86 -- -- --
Sale of Treasury Stock . . . . . . . . -- -- -- (10,007) (48)
Issuance of Officers Loans . . . . . . -- (50) -- -- --
Reductions of Loans Receivable for
Exercised Stock Options . . . . . . . -- 131 -- -- --
Net Income . . . . . . . . . . . . . . -- -- 1,128 -- --
--------- ------------- ------------- ------------ ------------
Balance at March 31, 1994 . . . . . . . 4,142,024 13,363 13,886 115,752 569
Exercise of Stock Options and Warrants 28,763 153 -- -- --
Sale of Treasury Stock . . . . . . . . -- 32 -- (11,515) (52)
Issuance of Common Stock . . . . . . . 696,397 5,028 -- -- --
Issuance of Notes Receivable for
Warrants . . . . . . . . . . . . . . -- (102) -- -- --
Capitalized Tax Benefit for Exercise of
Stock Options . . . . . . . . . . . . -- 26 -- -- --
Reductions of Loans Receivable for
Exercised Stock Options . . . . . . -- 131 -- -- --
Net Income . . . . . . . . . . . . . . -- -- 2,139 -- --
--------- ------------- ------------- ------------ ------------
Balance at March 31, 1995 . . . . . . . 4,867,184 18,631 16,025 104,237 517
Exercise of Stock Options and Warrants 6,000 30 -- -- --
Purchase of Treasury Stock . . . . . . -- -- -- 9,664 78
Issuance of Restricted Stock . . . . . 72,225 240 -- -- --
Issuance of Common Stock . . . . . . . 642,252 3,750 -- -- --
Reductions of Loans Receivable for
Exercised Stock Options . . . . . . -- 103 -- -- --
Net Loss . . . . . . . . . . . . . . . -- -- (6,335) -- --
--------- ------------- ------------- ------------ ------------
Balance at March 31, 1996 . . . . . . . 5,587,661 $ 22,754 $ 9,690 113,901 $ 595
Purchase of Treasury Stock . . . . . . -- -- -- 1,481 8
Exercise of Stock Options . . . . . . . 373,508 378 -- -- --
Reductions of Loans Receivable . . . . -- 117 -- -- --
Net Loss . . . . . . . . . . . . . . . -- -- (4,421) -- --
--------- ------------- ------------- ------------ ------------
Balance at December 31, 1996
(unaudited) . . . . . . . . . . . . . . 5,961,169 $ 23,249 $ 5,269 115,382 $ 603
========= ============= ============= ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 43
DATAFLEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended
For the Years Ended March 31, December 31,
------------------------------------------------------------
1996 1995 1994 1996 1995
------------- ------------------------------------- --------
(Unaudited)
Operating Activities: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net (Loss) Income . . . . . . . . . . . . . . $ (6,335) $ 2,139 $ 1,128 $ (4,421) $ 605
Adjustments to Reconcile Net (Loss) Income to
Net Cash and Cash Equivalents:
Depreciation and Amortization . . . . . . . . 4,895 2,594 1,224 1,977 3,513
Amortization of Restricted Stock Grants . . . 62 --
Deferred Taxes . . . . . . . . . . . . . . . (3,057) 40 56 41 3
Loss on Dispositions of Businesses . . . . . . 4,632 -- -- 6,230 --
Restructuring and Other Charges . . . . . . . . 5,353 -- -- -- --
Changes in Assets and Liabilities:
Accounts Receivable . . . . . . . . . . . . . 704 (2,775) (7,208) 34,598 (18,288)
Income Taxes Receivable . . . . . . . . . . . (829) -- 360 (1,836) (176)
Inventory . . . . . . . . . . . . . . . . . . 4,255 (9,839) (1,933) 17,076 (24,952)
Net Assets Held for Sale . . . . . . . . . . (36,622) -- -- -- --
Other Current Assets . . . . . . . . . . . . 3,105 (7,514) (1,068) (2,307) 423
Other Assets . . . . . . . . . . . . . . . . 89 (368) (118) (179) 28
Accounts Payable . . . . . . . . . . . . . . (3,487) 8,111 14,850 (39,131) 10,357
Accrued Expenses and Other Payables . . . . . 507 (924) 761 (3,637) 2,134
Income Taxes Payable . . . . . . . . . . . . (176) (9) 211 -- --
Accrued Settlement . . . . . . . . . . . . . -- (712) 712 -- --
Other Long-Term Liabilities . . . . . . . . . (209) 65 -- (225) 321
------------ ------------ ------------ ---------- --------
Net Cash and Cash Equivalents - Operating . . . (27,175) (9,192) 8,975 8,248 (26,032)
------------ ------------ ------------ ---------- --------
Investing Activities:
Capital Expenditures . . . . . . . . . . . . (4,687) (5,270) (1,352) (1,477) (2,699)
Net Assets Held for Sale . . . . . . . . . . 45,229 --
Acquisition of Businesses, Net of Cash and
Cash Equivalents Acquired . . . . . . . . . (1,215) (19,604) -- -- (1,145)
------------ ------------ ------------ ---------- --------
Net Cash and Cash Equivalents - Investing . . . (5,902) (24,874) (1,352) 43,752 (3,844)
------------ ------------ ------------ ---------- --------
Financing Activities:
Proceeds from Issuance of Notes Payable . . . 267,825 72,831 2,369 88,995 197,944
Payments of Notes Payable . . . . . . . . . . (239,702) (49,461) (2,120) (141,423) (172,594)
Payments of Long-Term Borrowings . . . . . . (88) (29) -- (160) (66)
Proceeds from Common Stock and Options . . . 30 153 30 290 30
Sale of Treasury Stock . . . . . . . . . . . -- 84 54 -- --
Purchase of Treasury Stock . . . . . . . . . (79) -- -- (8) (79)
Payments on Officers Loans Receivable for
Exercised
Stock Options . . . . . . . . . . . . . . . -- 131 201 236 --
------------ ------------ ------------ ---------- --------
Net Cash and Cash Equivalents - Financing . . . 27,986 23,709 534 (52,070) 25,235
------------ ------------ ------------ ---------- --------
Net (Decrease) Increase in Cash and Cash
Equivalents . . . . . . . . . . . . . . . . . . (5,091) (10,357) 8,157 (70) (4,641)
Cash and Cash Equivalents - Beginning of Year . 5,590 15,947 7,790 499 5,590
------------ ------------ ------------ ---------- --------
Cash and Cash Equivalents - End of Year . . . . $ 499 $ 5,590 $ 15,947 $ 429 $ 949
============ ============ ============ ========== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Dataflex Corporation ("Dataflex" or "the Company") was incorporated in
the State of New Jersey in April 1976. Dataflex provides desktop computing
solutions and services including product sales, system integration, network
installation, help desk support, training, consultation services and equipment
repair maintenance. The Company serves primarily large business organizations
with diverse desktop computing requirements located throughout the United
States.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary. All
significant intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION--Sales of computer equipment are recorded when the
customer accepts title. Services contract revenue is recognized ratably over
the terms of the contracts. The operating history of the Company is such that
the allowance for doubtful accounts represents an insignificant percentage of
total receivables.
INCOME TAXES--The Company accounts for income taxes using an asset and
liability approach that requires the recognition of deferred tax consequences
of events that have been recognized in the Company's financial statements or
tax returns.
EARNINGS (LOSS) PER SHARE--Earnings (loss) per share are calculated by
dividing net income (loss) by the weighted average common shares and, when
their effect is dilutive, common share equivalents outstanding during the year.
Weighted average common shares outstanding for the years ended March 31, 1996,
1995 and 1994 were 5,213,711, 4,732,571 and 4,085,049, and included common
stock equivalents of 0, 485,797 and 72,077, respectively.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash
flows, the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
INVENTORY--Inventory is stated at the lower of cost or market. Cost
is determined on a specific cost basis for equipment and average cost for spare
parts. Discretionary subsidies received from manufacturers are recorded as
reductions in the inventory value or, if the product to which the subsidy
relates has been sold, as reductions in the cost of revenue. The Company
amortizes its spare parts over their estimated useful lives ranging from three
to eight years on a straight-line basis.
NET ASSETS HELD FOR SALE--Net assets held for sale represents the
estimated fair market value of the net assets of the Western Region and its
Valtron Division. Management decided to exit these businesses in March 1996
(Note 3).
PROPERTY AND EQUIPMENT, NET--Property and equipment are stated at
cost. Depreciation and amortization are computed by use of the straight-line
method. Depreciation is based on the estimated useful life of the various
assets which range from three to forty years. Leasehold improvements are
amortized over the shorter of the life of the lease or their estimated useful
life.
GOODWILL--Goodwill represents the excess of purchase price over the
fair value of net assets acquired and liabilities assumed and is being
amortized over 25 years using the straight-line method. Accumulated
amortization was $1,023,354 and $589,629 at March 31, 1996 and 1995,
respectively.
NEW ACCOUNTING PRONOUNCEMENT--The Financial Accounting Standards Board
recently issued two standards which will be applicable to the Company but which
the Company has not yet adopted: No. 121, Accounting for
F-7
<PAGE> 45
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
and No. 123, Accounting for Stock-Based Compensation. The impairment standard
is not expected to have a significant impact on the Company. The Company has
not yet determined which of the acceptable approaches it will use under the
stock compensation standard. Adoption of certain approaches under the stock
compensation standard could result in noncash charges, which if made are not
expected to be material. At a minimum, the standard will require disclosures
about the fair value of the employee stock options.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash equivalents--The carrying amount approximates fair value because
of the short maturity of those instruments.
Long-term debt--The carrying amount approximates fair value because of
the variable interest rate charged on substantially all of this debt
and the relatively short maturity of the debt instruments.
USE OF ESTIMATES--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL DATA. The interim financial data at December 31,
1996 and for the nine months ended December 31, 1995 and 1996 are unaudited;
however, in the opinion of management, such interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results of the interim periods.
NOTE 2: ACQUISITIONS
Effective April 1, 1994, the Company acquired substantially all of the
assets and assumed substantially all of the liabilities of Granite Computer
Products, Inc. ("Granite"), a reseller of computer products located in Alameda,
California, for $9,514,200 in cash.
Effective June 1, 1994, the Company acquired substantially all of the
assets and assumed substantially all of the liabilities of Advantage Systems,
Inc. ("Advantage"), an Entre Computer franchise of Intelligent Electronics, in
exchange for $2,250,000 in cash, a $1,000,000 convertible redeemable note,
71,397 shares of the Company's common stock with an aggregate market value of
$500,000 and a contingent payment based upon the future earnings of Advantage
for a three-year period. The $1,000,000 convertible redeemable note bears
interest at 6% per annum and may be converted at any time through the maturity
date of May 31, 1997 into 100,000 shares of the Company's common stock, which
would be valued at the closing price on the date of conversion.
Effective November 1, 1994, the Company (through its wholly-owned
subsidiary Dataflex Southwest Corporation) acquired substantially all of the
assets and assumed substantially all of the liabilities of Hagen Computer
Systems, Inc. ("Hagen"), an Entre Computer franchise of Intelligent
Electronics, located in Tucson, Arizona, for $416,000 in cash.
Effective January 1, 1995, the Company acquired substantially all of
the assets and assumed substantially all of the liabilities of National Data
Products Inc. ("NDP"), a reseller of computer products based in Clearwater,
Florida, for $6,200,000 in cash, $3,500,000 in subordinated notes with an
interest rate of 9%, 625,000 shares of the Company's common stock with an
aggregate market value of approximately $4,200,000, and a contingent payout
based on the future earnings of NDP over a seven year period.
F-8
<PAGE> 46
Effective July 1, 1995, the Company acquired substantially all of the
assets and assumed substantially all of the liabilities of Valtron
Technologies, Inc., a disk drive repair and reseller located in Valencia,
California, for 642,252 shares of the Company's common stock with an
approximately aggregate market value of $3,400,000 and two subordinated notes
aggregating $1,000,000. The notes bear interest at 9% per annum.
These acquisitions have been accounted for under the purchase method
and, accordingly, the operating results of Granite, Advantage, Hagen, NDP and
Valtron have been included in the consolidated operating results since the
dates of their respective acquisitions.
The cost of the acquisitions has been allocated on the basis of the
fair market value of the assets acquired and the liabilities assumed. The
allocation resulted in goodwill of approximately $34,086,000 which is being
amortized over 25 years on a straight-line basis. Net goodwill associated with
the assets sold was $13,110,000 (Note 3).
The unaudited pro forma consolidated condensed results of operations
listed below give effect to certain adjustments, and assume the acquisitions
occurred at the beginning of each period presented.
<TABLE>
<CAPTION>
For the Years Ended March 31,
--------------------------------------
1995 1994
-------------- ------------
(In thousands, except per share data)
<S> <C> <C>
Revenue $ 383,984 $ 271,258
Gross Profit 46,393 34,359
Net Income 3,777 2,466
Earnings Per Common Share $ .72 $ .52
</TABLE>
The pro forma information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the Granite, Advantage, Hagen and NDP acquisitions been
consummated as of the beginning of the periods above, nor are they necessarily
indicative of future operating results.
On August 19, 1994, the Company acquired all of the issued and
outstanding common stock of Sunland Computer Services, Inc. ("Sunland"), a
reseller and service provider of computer products based in Tempe, Arizona, in
exchange for 640,013 shares of the Company's common stock with an aggregate
market value of $4,800,000. The acquisition was accounted for as a pooling of
interests and, accordingly, the accompanying consolidated financial statements
have been restated to include the accounts and operations of Sunland for all
periods presented.
NOTE 3: DISPOSITIONS OF BUSINESSES
In March 1996, the Company decided to exit its operations in its
Western Region, which consists primarily of the Granite, Hagen and Sunland
acquisitions completed during Fiscal 1995, and its Valtron division, an
acquisition completed in Fiscal 1996 (Note 2). The Western Region had combined
revenues of $155,343,000, $98,816,000 and $19,968,000 for fiscal years 1996,
1995 and 1994, respectively.
In connection with these planned dispositions, the Company recorded a
loss on disposal of $4,632,000, representing the aggregate difference between
the carrying value of the net assets of these businesses and the estimated fair
value of these businesses. The estimated fair market value of the net assets
of the businesses to be disposed of are included in "Net Assets Held for Sale"
in the March 31, 1996 Consolidated Balance Sheet.
On May 24, 1996, the Company completed the sale of substantially all
the assets and the transfer of substantially all the liabilities of the Western
Region, excluding Valtron, to Vanstar Corporation for approximately
F-9
<PAGE> 47
$42 million in cash, including $5 million placed in escrow pending future
adjustments as described in the agreement. The cash received was used to
reduce the Company's accounts payable and interest-bearing obligations on its
credit facility with IBM Credit Corporation in the amount of $9.3 million and
$27.7 million, respectively (Note 10). The purchase price is subject to
adjustment based primarily on the expected realizability of certain assets as
defined in the agreement. The Company has included its best estimate of these
adjustment in its determination of the estimated fair market value of the net
assets held for sale and of the loss on disposition of businesses. The Company
does not expect these adjustments to be material relative to the total purchase
price.
On June 5, 1996, the Company announced an agreement to sell
substantially all the assets and the transfer of substantially all the
liabilities of its Valtron division to Valtron's President and a group of
investors. The agreement, finalized in July, is for $2,900,000 in cash,
$750,000 in forgiveness of a Note payable to Valtron and receipt of a note of
$850,000, bearing interest at 9%. The note is payable in two installments in
July 1998 and July 1999. The estimated loss on this sale, based on the
purchase price outlined in the agreement, is included in the Consolidated
Statement of Operations for the fiscal year ended March 31, 1996 described
above.
NOTE 4: INVENTORY
Inventory consists of:
<TABLE>
<CAPTION>
March 31,
-------------------------------------
1996 1995
-------------- -----------
(In thousands)
<S> <C> <C>
Finished Goods $ 21,989 $ 25,744
Spare Parts, Net 3,766 6,285
------------- -----------
$ 25,755 $ 32,029
============= ===========
</TABLE>
Accumulated amortization of spare parts inventory is $801,428 and
$1,554,217 at March 31, 1996 and 1995, respectively. Amortization expense
amounted to $2,065,000, $1,005,000 and $493,000 for the years ended March 31,
1996, 1995 and 1994, respectively.
NOTE 5: OTHER CURRENT ASSETS
The balance in other current assets at March 31, 1996 and 1995
includes receivables from major vendors for returned goods, marketing and other
programs of $7,309,000 and $9,896,000, respectively.
F-10
<PAGE> 48
NOTE 6: PROPERTY AND EQUIPMENT, NET
Property and equipment, is as follows:
<TABLE>
<CAPTION>
March 31,
--------------------------------------
1996 1995
--------------- ------------
(In thousands)
<S> <C> <C>
Land $ 684 $ 684
Buildings 1,912 1,693
Rental Equipment -- 88
Furniture and Equipment 10,422 11,398
Transportation Equipment 174 171
Leasehold Improvements 1,244 1,215
Construction in Progress -- 495
-------------- ------------
$ 14,436 $ 15,744
Less: Accumulated Depreciation (4,999) (4,127)
-------------- ------------
$ 9,437 $ 11,617
============== ============
</TABLE>
Depreciation and amortization expense amounted to $3,315,000,
$1,968,000 and $1,218,000 for the years ended March 31, 1996, 1995 and 1994,
respectively.
NOTE 7: LOANS RECEIVABLE FROM EMPLOYEES
Loans receivable from employees of $533,000 and $697,000 at March 31,
1996 and 1995, respectively, includes various loans made to certain employees
during fiscal years 1987 through 1996, of which $311,000 at March 31, 1996 and
1995 are related to the exercise of stock options. These loans bear interest
at rates ranging from 6% to prime plus 1.5% per annum and are payable upon
demand.
Total interest income from employees' loans amounted to $41,000,
$45,000 and $40,000 for the years ended March 31, 1996, 1995 and 1994,
respectively.
F-11
<PAGE> 49
NOTE 8: SUPPLEMENTARY CASH FLOW INFORMATION
The following is a summary of supplementary cash flow information:
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------------------
1996 1995 1994
--------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Interest Paid $ 7,381 $ 2,403 $ 230
Income Taxes Paid 624 1,636 365
Noncash Investing and Financing Activities:
Issuance of Notes Receivable for -- 102 --
Common Stock
Issuance of Common Stock in Exchange -- 208 --
for Notes Payable
Capitalized Tax Benefit for Exercise -- 26 --
of Options
Accounts Receivable Acquired 1,503 34,346 --
Inventory Acquired 899 9,784 --
Fixed Assets Acquired 858 4,322 --
Other Assets Acquired 40 925 --
Debt Issued and Liabilities Assumed 2,339 51,479 --
Common Stock Issued 3,750 4,719 --
</TABLE>
NOTE 9: CREDIT FACILITY
On December 28, 1994, the Company and its former wholly-owned
subsidiary, Dataflex Southwest Corporation ("Dataflex Southwest"), executed
Inventory and Working Capital Agreements with IBM Credit Corporation (the
"Agreements"). The Agreements have been subsequently amended to expand the
available line from a maximum of $110.0 million secured by substantially all of
the assets of the Company and Dataflex Southwest to $120.0 million including a
$5.0 million unsecured promissory note. Interest charged under the Agreements
ranges from LIBOR plus 4.25% to LIBOR plus 4.875% on outstanding borrowings.
Other charges include monthly fees of $3,750 and an annum renewal fee of
$25,000. The Agreements expire on December 28, 1997 and can be renewed by the
parties for an additional year on each anniversary date. Effective July 1,
1996, as a result of the sale of the Western Region, IBM Credit Corporation has
reduced the line of credit to $85 million.
The Agreements include several covenants requiring, among other
things, minimum levels of tangible net worth, earnings as a percentage of
revenue, current ratio and leverage ratio requirements. At March 31, 1996, the
Company was not in compliance with certain of these covenants. Waiver of
default of certain financial covenants was received from IBM Credit Corporation
and the Agreements were subsequently amended to revise certain financial
covenants to reflect the Company's current and future business environment.
F-12
<PAGE> 50
NOTE 10: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
---------------------------------------
1996 1995
-------------- -------------
(In thousands)
<S> <C> <C>
Mortgage note payable to a bank, payable in $ 851 $ 920
monthly installments of $5,267 plus interest at
the bank's prime rate plus 1% (9.25% at March
31, 1996) with the remaining balance due January
10, 2000, collateralized by land and buildings
Mortgage note payable to a bank, payable in 337 362
monthly installments of $2,066 plus interest at
the bank's prime rate plus 1% (9.25% at March
31, 1996) with the remaining balance due January
10, 2000, collateralized by land and buildings
Convertible Promissory Note, payable in full on 1,000 1,000
June 1, 1997, with interest due quarterly at an
interest rate of 6%. This note is convertible
to 100,000 shares of Dataflex common stock
through the date of the note
Promissory Note, payable in full on January 10, 2,000 2,000
2002, with interest due quarterly at an interest
rate of 9%
Promissory Note, payable in full on January 10, 1,500 1,500
1998, with interest due quarterly at an interest
rate of 9%
Promissory Note, payable to IBM Credit Corp. 5,000 7,000
(Note 9)
The IBM Agreement (Note 9) 76,236 46,816
Miscellaneous Notes Payable 105 161
------------- -------------
87,029 59,759
Less: Current portion of long-term debt 32,967 7,249
------------- -------------
$ 54,062 $ 52,510
============= =============
</TABLE>
F-13
<PAGE> 51
Aggregate principal payments for the next five years subsequent to March 31,
1996 are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
(In thousands)
<S> <C>
1997 $ 32,967
1998 51,050
1999 88
2000 88
2001 836
Thereafter 2,000
---------
$ 87,029
=========
</TABLE>
NOTE 11: LEASES
The Company leases various facilities and equipment under
noncancelable lease arrangements which expire at various dates during the next
eight years, excluding renewal options. In addition, the Company is generally
responsible for real estate taxes, utilities, insurance and maintenance
expenses which relate to its facilities.
Future minimum lease payments applicable to noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
Operating
Year Ended March 31, Leases
---------------------------------------------------- -----------
(In thousands)
<S> <C>
1997 $ 1,663
1998 1,188
1999 1,131
2000 1,085
2001 584
Thereafter 351
</TABLE>
Rental expense amounted to $1,482,857, $1,147,325 and $811,143 for the
years ended March 31, 1996, 1995 and 1994, respectively.
NOTE 12: INCOME TAXES
The composition of the (benefit from) provision for income taxes is as
follows:
<TABLE>
<CAPTION>
For the Years Ended March 31,
-------------------------------------------------
1996 1995 1994
--------------- ------------- -------------
<S> <C> <C> <C>
Current Taxes: (In thousands)
Federal $ (407) $ 1,235 $ 623
State -- 320 250
-------------- ------------ ------------
(407) 1,555 873
Deferred Taxes:
Federal (2,682) 46 9
State (374) 16 2
-------------- ------------ ------------
(Benefit from) Provision for Incomes Taxes $ (3,463) $ 1,617 $ 884
============== ============ ============
</TABLE>
F-14
<PAGE> 52
A reconciliation of the federal statutory rate with the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------------------
1996 1995 1994
--------------- ------------- ------------
<S> <C> <C> <C> <C>
(In thousands)
Income Taxes at Federal Statutory Rate $ (3,331) $ 1,277 $ 684
State Taxes, Net of Federal Tax
(Provision) Benefit (77) 221 166
Other (55) 119 34
-------------- ------------ ------------
(Benefit from) Provision for Income Taxes $ (3,463) $ 1,617 $ 884
============== ============ ============
</TABLE>
Deferred tax assets (liabilities) arise due to the recognition of
income and expense items for tax purposes in periods which differ from those
used for financial statement purposes. The tax effects of significant
temporary differences which comprise the net deferred tax liability at March
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------------
1996 1995
-------------- -----------
(In thousands)
<S> <C> <C>
Accounts Receivable Reserves $ 177 $ 124
Vacation Reserve 110 43
Uniform Inventory Capitalization 172 145
Loss on Dispositions of Businesses 1,850 --
Restructuring and Other Charges 2,138 --
Other Deferred Tax Assets 140 --
------------- -----------
Deferred Tax Assets 4,587 312
------------- -----------
Accelerated Depreciation (543) (267)
Accelerated Amortization of Goodwill (604) (161)
------------- -----------
Deferred Tax Liabilities (1,147) (428)
------------- -----------
Deferred Tax Assets Valuation (500) --
------------- -----------
Net Deferred Tax Asset (Liability) $ 2,940 $ (116)
============= ===========
</TABLE>
NOTE 13: SIGNIFICANT CUSTOMERS AND VENDORS
No single customer accounted for greater than 10% of the Company's
revenue during the years ended March 31, 1996, 1995 and 1994.
Sales of products from one vendor constituted approximately 31%, 23%
and 58% of the Company's revenue during the years ended March 31, 1996, 1995,
and 1994, respectively. Another vendor's products comprised 13%, 13% and 15%
of the Company's revenue during the same three year period.
NOTE 14: RESTRUCTURING AND OTHER CHARGES
During the fourth quarter of Fiscal 1996, the Company recorded
restructuring and other charges of $5,352,809, primarily related to write-downs
of inventory and spare parts, employee termination benefits and write-offs of
the value of computer systems to be replaced. The restructuring program was
driven by the need to refocus operations along more profitable business lines,
consolidate operations and implement upgraded computer systems. The Company
plans personnel reductions of approximately 30 individuals in operational,
administrative and executive areas. The Company has recorded a provision of
$1,200,000 for the estimated level of employee termination benefits in the
accompanying March 31, 1996 Consolidated Balance Sheet. Due to the proximity
of the
F-15
<PAGE> 53
announcement to the balance sheet date, no employees have been terminated and
no termination benefits have been paid as of March 31, 1996.
NOTE 15: COMMITMENTS AND CONTINGENCIES
The Company's employment contracts with three employees provide for
base annual salaries aggregating approximately $750,000 per year. The
contracts for the employees expire between January 1998 and December 1999.
Subsequent to March 31, 1996, in connection with the sale of the
Western Region (Note 3), the Company terminated its employment contract with
the President of this business unit. This termination resulted in a one-time
payment of approximately $300,000 which is included in the loss of dispositions
of this business.
Certain contracts referred to above include provisions for payment of
severance and in the event of a change of control. The maximum amount that
could be required to be paid under these contracts, if such events occur,
approximates $2,500,000.
A class action complaint was filed in March 1992 by shareholders of
the Company alleging that the Company and certain of its officers and directors
violated federal securities laws. The Company included a charge of $847,500
against earnings for the year ended March 31, 1994, which included $110,000 in
legal fees. Although management believed it had meritorious defenses, expenses
to defend and the time and disruption of Company resources led the Company to
agree to a full settlement of all claims for $900,000. This amount, of which
$162,500 was reimbursed from the Company's insurance carrier in Fiscal 1995,
was paid by the Company in the first quarter of Fiscal 1995.
Other claims, suits and complaints arise in the ordinary course of the
Company's business. In the opinion of Company management, such pending matters
are without merit or are of such kind, or involve such amounts, as would not
have a material adverse effect on the financial position or results of
operations of the Company.
NOTE 16: STOCK OPTIONS
The Company maintains two incentive stock option plans (the "ISO
Plans"), and five incentive and nonqualified stock option plans (the "NQSO
Plans"). The 1989, 1990, 1991, 1992 and 1994 Plans provide for the grant of
both incentive stock options and nonqualified stock options to employees of the
Company. The grant prices of the various stock option plans range from $2.03
to $8.75.
Shares of Common Stock have been reserved and issued under the above
plans as follows:
<TABLE>
<CAPTION>
Stock Option Plan
Granted Shares Reserved Shares Granted
----------------- --------------- --------------
<S> <C> <C>
1984 and 1987 ISO 700,000 700,000
1989 Plan 400,000 400,000
1990 Plan 160,000 160,000
1991 Plan 200,000 200,000
1992 Plan 400,000 400,000
1994 Plan 800,000 769,000
</TABLE>
The ISO Plans and the 1989, 1991, 1992 and 1994 Plans provide for the
discretionary grant of options to purchase Common Stock at a price determined
by the Compensation Committee of the Board of Directors but, in the case of
incentive stock options, at a price not less than the fair market value thereof
on the date of grant. The
F-16
<PAGE> 54
options, by their terms, must be exercised within ten years from the date on
which they are granted or within 90 days of employment termination.
All options fully vest at date of grant except for stock options
granted under the 1989, 1991, 1992 Plans, which vest 25% per year beginning one
year after grant date, and the 1994 Plan, which vests 25% on the grant date and
25% each year beginning one year after grant date. Under certain
circumstances, options can vest immediately at the discretion of the Company's
Board of Directors.
The Company has occasionally granted to officers, directors and
certain key employees, stock options in addition to the ISO and NQSO stock
option plans.
On November 15, 1993, in connection with the appointment of a member
to the Company's Board of Directors, the Company granted options for 300,000
shares of common stock to the board member at its then fair market value of
$5.00 per share.
On September 2, 1994, in connection with the appointment of another
member to the Company's Board of Directors, the Company granted options for
10,000 shares of common stock to the board member at its then fair market value
of $7.125 per share.
These options vest 25% per year beginning one year after date of
grant. The options, by their terms, must be exercised within ten years from
the grant date or within 90 days of termination from the Board of Directors.
On April 6, 1994, in connection with the acquisition of Granite
Products, Inc. (see Note 2), the Company granted a total of 300,000 shares to
four Granite associates. The options were granted at their then fair market
value of $7.00 per share. These options vest 25% per year beginning one year
after date of grant. The options, by their terms, must be exercised within ten
years from the date of grant or within 90 days of employment termination.
Information concerning options outstanding as of March 31, 1996, 1995
and 1994 is as follows:
<TABLE>
<CAPTION>
For the Years Ended March 31,
-------------------------------------
1996 1995 1994
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
Outstanding at Beginning $ 1,713 $ 1,147 $ 533
Granted 516 639 795
Exercised (6) (29) (16)
Cancelled (153) (44) (165)
-------- ------- --------
Outstanding at End 2,070 1,713 1,147
-------- ------- --------
Exercisable $ 1,001 $ 534 $ 280
</TABLE>
Options exercised during the years ended March 31, 1996 and March 31,
1995 ranged in exercise prices from $4.50 to $5.85.
NOTE 17: EMPLOYEE BENEFITS
The Company has a 401(k) Plan which covers all employees who have
completed ninety days of service and are at least twenty-one years of age.
Employees may contribute from 1% to 15% of their annual compensation subject to
the limitation imposed by law. Employee contributions of up to 6% of each
covered employees' compensation are matched at a percentage determined each
year by the Company. The maximum matching percent during fiscal years 1996,
1995 and 1994 was 20%, resulting in Company contributions of $235,000, $85,000
and $40,000, respectively.
F-17
<PAGE> 55
NOTE 18: SHAREHOLDERS' EQUITY
In September 1995, the Company's shareholders approved the resolution
proposed by the Board of Directors to amend Article Fourth of the Company's
Certificate of Incorporation to authorize the Company to issue 10,000,000
shares of Preferred Sock, without par value, and to increase the number of
authorized shares of common stock, no par value, from 10,000,000 shares to
20,000,000 shares.
As of March 31, 1996, there are no issued shares of Preferred Stock.
NOTE 19: QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data for the fiscal years ended March
31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
--------------- ---------------- --------------- -----------------
FY 1996: (In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue $ 110,325 $ 107,844 $ 122,635 $ 131,298 (1)
Gross Profit 11,900 12,774 13,674 14,162
Net Income (Loss) 309 142 153 (6,939)
Earnings (Loss) Per Share $ 0.06 $ 0.03 $ 0.03 $ (1.34)
FY 1995:
Revenue $ 53,774 $ 57,880 $ 64,135 $ 98,062
Gross Profit 5,800 6,880 7,556 11,051
Net Income 521 661 685 272
Earnings Per Share $ 0.11 $ 0.15 $ 0.15 $ 0.05
</TABLE>
(1) Includes $9,985,000 pre-tax charges for restructuring and loss on
disposition as further discussed in Notes 2 and 14.
F-18
<PAGE> 56
<TABLE>
<S> <C>
No dealer, salesman or any other person has been
authorized to give any information or to make any 270,000 SHARES
representations other than those contained in this
Prospectus in connection with the offer made by
this Prospectus and, if given or made, such DATAFLEX CORPORATION
information or representations must not be relied
upon as having been authorized by the Company or
the Selling Shareholders. This Prospectus does not
constitute an offer to sell or a solicitation of Common Stock
an offer to buy any security other than the shares
of Common Stock offered by this Prospectus, nor
does it constitute an offer to sell or a
solicitation of an offer to buy the shares of
Common Stock by anyone in any jurisdiction in
which such an offer or solicitation is not --------------------
authorized, or in which the person making such
offer or solicitation is not qualified to do so,
or to any person to whom it is unlawful to make PROSPECTUS
such offer or solicitation. Neither the delivery
of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any ---------------------
implication that the information contained herein
is correct as of any time subsequent to the date
hereof.
</TABLE>
___________________
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C> <C>
Prospectus Summary . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . 5
Use of Proceeds . . . . . . . . . . . . . . 9
Price Range of Common Stock . . . . . . . . 9
Dividend Policy . . . . . . . . . . . . . . 9 __________ ___, 1997
Capitalization . . . . . . . . . . . . . . 10
Selected Consolidated Financial Data . . . 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . 12
Business . . . . . . . . . . . . . . . . . 18
Management . . . . . . . . . . . . . . . . 24
Certain Transactions . . . . . . . . . . . 31
Principal and Selling Shareholders . . . . 31
Description of Capital Stock . . . . . . . 33
Plan of Distribution . . . . . . . . . . . 35
Legal Matters . . . . . . . . . . . . . . . 36
Experts . . . . . . . . . . . . . . . . . . 36
Available Information . . . . . . . . . . . 36
Index to Financial Statements
and Schedule . . . . . . . . . . . . . .
F-1
</TABLE>
<PAGE> 57
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. -- Other Expenses of Issuance and Distribution.
The following table sets forth the fees and expenses in connection
with the issuance and distribution of the securities being registered
hereunder.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee . . . . . . . . . . . . . . . . . . $ 280
Copying and engraving expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000*
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000*
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000*
Blue Sky fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,135
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,585*
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000*
=======
</TABLE>
- ----------------
* Estimated
ITEM 14. -- Indemnification of Directors and Officers.
The Company is a New Jersey corporation. The New Jersey Business
Corporation Act ("NJBCA") provides that, in general, a business corporation may
indemnify any person who is or was a party to any proceeding (other than an
action by, or in the right of, the corporation) by reason of the fact that he
is or was a director or officer of the corporation, against liability incurred
in connection with such proceeding, including any appeal thereof, provided
certain standards are met, including that such officer or director acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation, and provided further that, with respect
to any criminal action or proceeding, the officer or director had no reasonable
cause to believe his conduct was unlawful. In the case of proceedings by or in
the right of the corporation, the NJBCA provides that, in general, a
corporation may indemnify any person who was or is a party to any such
proceeding by reason of the fact that he is or was a director or officer of the
corporation against expenses and amounts paid in settlement actually and
reasonably incurred in connection with the defense or settlement of such
proceeding, provided that such person acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification shall be made in respect of any
claim as to which such person is adjudged liable to the corporation unless a
court of competent jurisdiction determines upon application that such person is
fairly and reasonably entitled to indemnity. To the extent that any officers
or directors are successful on the merits or otherwise in the defense of any of
the proceedings described above, the NJBCA provides that the corporation is
required to indemnify such officers or directors against expenses actually and
reasonably incurred in connection therewith. However, the NJBCA further
provides that, in general, indemnification or advancement of expenses shall not
be made to or on behalf of any officer or director if a judgment or other final
adjudication establishes that his actions, or omissions to act, were: (i) in
breach of his duty of loyalty to the corporation or its shareholders, (ii) not
in good faith or involved a knowing violation of law or (iii) resulted in
receipt by the officer or director of an improper personal benefit. The
Company's Certificate of Incorporation provides that the Company shall
indemnify any director, officer, employee or agent, or any former director,
officer, employee or agent to the full extent permitted by New Jersey law.
II-1
<PAGE> 58
The Company has purchased insurance with respect to, among other
things, any liabilities that may arise under the statutory provisions referred
to above.
ITEM 15. -- Recent Sales of Unregistered Securities.
In March 1997, 270,000 shares of common stock were issued to six
former shareholders of Sunland Computer Services, Inc. in settlement of certain
litigation, in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 16. -- Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 The Company's Certificate of Incorporation, as amended.*
3.2 Certificate of Amendment to the Certificate of Incorporation.*
3.3 The Company's Restated and Amended Bylaws.*
4 Specimen of stock certificate for shares of Common Stock.*
5 Opinion of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel.+
10.1 Dealer Agreement entered into February 7, 1997, between International Business Machines Corporation and
the Company.+
10.2 Dealer Agreement between Hewlett-Packard Company and the Company.+
10.3 Dealer Agreement entered into August 26, 1996, between Apple Computer, Inc. and the Company.+
10.4 Dealer Agreement dated January 14, 1997 between Apple Computer, Inc. and the Company.+
10.5 Dealer Agreement dated August 2, 1990 between COMPAQ Computer Corporation and the Company.+
10.6 1987 Incentive Stock Option Plan.*
10.7 1989 Incentive and Non-Qualified Stock Option Plan.*
10.8 Salary Savings Plan and Trust of Dataflex Corporation dated December 21, 1989.*
10.9 1990 Senior Management Incentive and Non-Qualified Stock Option Plan.*
10.10 Form of Stock Option Agreement for 1989 Incentive and Non-Qualified Stock Option Plan by and between the
Company and Richard C. Rose.*
10.11 Form of Stock Option Agreement for 1989 Incentive and Non-Qualified Stock Option Plan by and between the
Company and Gordon J. McLenithan.*
</TABLE>
II-2
<PAGE> 59
<TABLE>
<S> <C>
10.12 Form of Stock Option Agreement for 1990 Senior Management Incentive and Non-Qualified Stock Option Plan
by and between the Company and Richard C. Rose.*
10.13 Form of Stock Option Agreement for 1990 Senior Management Incentive and Non-Qualified Stock Option Plan
by and between the Company and Gordon J. McLenithan. *
10.14 Asset Purchase Agreement between the Company and Granite Computer Products, Inc. dated March 21, 1994.**
10.15 Asset Purchase Agreement between the Company and Advantage Systems, Inc. dated May 23, 1994.***
10.16 1991 Incentive and Non-Qualified Stock Option Plan.****
10.17 Asset Purchase Agreement between Dataflex Corporation and National Data Products, Inc. dated November 17,
1994.*****
10.18 Stock Purchase Agreement between Dataflex Corporation, the sellers named therein and Sunland Computer
Services, Inc. dated August 19, 1994.******
10.19 1992 Incentive and Non-Qualified Stock Option Plan.*******
10.20 1994 Incentive and Non-Qualified Stock Option Plan.********
10.21 Employment Agreement dated April 1, 1993 by and between the Company and Richard C. Rose.*********
10.22 Amendment to Employment Agreement dated April 1, 1993 by and between the Company and Richard C.
Rose.*********
10.23 Asset Purchase Agreement by and among Vanstar Corporation, VST West, Inc., Dataflex Corporation and
Dataflex Southwest Corporation dated May 24, 1996.**********
10.24 Employment Agreement, dated January 11, 1995, by and between the Company and Philip Doganiero.+
10.25 Amendment to Employment Agreement, dated April 1, 1995, by and between the Company and Philip Doganiero.+
10.26 Employment Agreement, dated January 11, 1995 by and between the Company and Anthony G. Lembo.+
10.27 Settlement Agreement and Release dated March 1, 1997.+
10.28 Loan and Security Agreement by and between the Company and NationsBank, N.A. (South).+
10.29 Loan and Security Agreement by and between the Company and Nationscredit Commercial Corporation
of America.+
21 Subsidiaries.**********
23.1 Consent of Price Waterhouse LLP.
</TABLE>
II-3
<PAGE> 60
<TABLE>
<S> <C>
* Filed as an exhibit to the Company's Registration Statement on Form S-1 filed February 23, 1990, and
amendments thereto, Registration No. 33033472.
** Filed as an Exhibit to the Company's Form 8-K filed April 23, 1994.
*** Filed as an Exhibit to the Company's Form 8-K filed June 16, 1994.
**** Filed as an Exhibit to the Company's Annual Proxy Statement filed September 1, 1991.
***** Filed as an Exhibit to the Company's Form 8-K filed January 24, 1995.
****** Filed as an Exhibit to the Company's Form 8-K filed August 31, 1994.
******* Filed as an Exhibit to the Company's Annual Proxy Statement filed September 1, 1992.
******** Filed as an Exhibit to the Company's Annual Proxy Statement filed September 1, 1994.
********* Filed as an Exhibit to the Company Form 10-K filed June 29, 1995.
********** Filed as an Exhibit to the Company's Form 8-K filed June 13, 1996.
*********** Filed as an Exhibit to the Company's Form 10-K filed July 30, 1996.
+ Previously Filed
</TABLE>
(b) Financial Schedule: the financial statement schedule filed as
part of this report are listed separately in the Index to Financial Statements
and Schedule beginning on page F-1 of this report.
ITEM 17. -- Undertakings.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described in Item 14, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. 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 whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the 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, 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> 61
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment No. 1 to the Registration Statement on Form S-1 to
be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Clearwater, State of Florida, on May 9, 1997.
DATAFLEX CORPORATION
By: /s/ RICHARD C. ROSE*
---------------------------------
Richard C. Rose,
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment No.
1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ ANTHONY G. LEMBO* President, Chief Operating Officer, May 8, 1997
----------------------------------------------- Chief Financial Officer, Principal
Anthony G. Lembo Accounting Officer and Director
/s/ RICHARD C. ROSE* Chief Executive Officer and Director May 8, 1997
-----------------------------------------------
Richard C. Rose
/s/ PHILIP DOGANIERO* Chairman of the Board and Director May 8, 1997
-----------------------------------------------
Philip Doganiero
/s/ W. KEITH SCHILIT* Director May 8, 1997
-----------------------------------------------
W. Keith Schilit
/s/ BARRY M. ALPERT* Director May 8, 1997
-----------------------------------------------
Barry M. Alpert
*By: /s/ Anthony G. Lembo
------------------------------------------
Anthony G. Lembo
Attorney-in-fact
</TABLE>
II-5
<PAGE> 62
Report Of Independent Accountants On Schedule
Board of Directors and Shareholders of
Dataflex Corporation
In connection with our audit of the consolidated financial statements of
Dataflex Corporation, referred to in our report dated July 2, 1996, which is
included in this Registration Statement, we have also audited Schedule II for
each of the three years in the period then ended. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
PRICE WATERHOUSE, LLP
Morristown, New Jersey
July 2, 1996
II-6
<PAGE> 63
SCHEDULE II
DATAFLEX CORPORATION
Valuation and Qualifying Accounts
For the Years Ended March 31, 1994, March 31, 1995 and March 31, 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to Accounts Balance
Beginning Costs and Written Off, at End
Description of Year Expenses Net of Year
----------- ---------- ---------- ------------ -------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended March 31, 1994 $ 60,988 $ 170,098 $ (0) $ 231,086
Year Ended March 31, 1995 $ 231,086 $ 399,918 $ (177,693) $ 453,311
Year Ended March 31, 1996 $ 453,311 $ 213,711 $ ( 51,595) $ 615,427
</TABLE>
II-7
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 2, 1996 relating
to the financial statements of Dataflex Corporation, which appears in such
Prospectus. We also consent to the application of such report to the Financial
Statement Schedule for the three years ended March 31, 1996 listed under
Schedule II when such schedule is read in connection with the financial
statements referred to in our report. The audits referred to in such report
also included this schedule. We also consent to the references to us under the
headings "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Tampa, Florida
May 6, 1997
