UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended March 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _____________ to ________________.
Commission File No. 0-15551
DATAFLEX CORPORATION
------------------------------------------------------
(Exact name of Registrant specified in its charter)
NEW JERSEY 22-163376
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2145 CALUMET STREET
CLEARWATER, FL 34625
- --------------------------------------- --------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (813) 562-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
Indecate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES [ ] NO [ ]
The aggregate market value of Common Stock held by non-affiliates based upon the
average price of such stock as quoted on NASDAQ for June 24, 1997, and reported
by the National Quotations Bureau, Inc. was $19,026,606.
As of June 24, 1997 there were 5,961,169 shares of the Registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III
(Items 10, 11, 12 and 13) is incorporated by reference to the Registrant's
Proxy Statement to be filed pursuant to Regulation 14A.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
PART 1
1. Business 1
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security
Holders 5
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
8. Consolidated Financial Statements and
Supplementary Data 12
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 12
PART III
10. Directors and Executive Officers of the
Registrant 12
11. Executive Compensation 12
12. Security Ownership of Certain Beneficial Owners
and Management 12
13. Certain Relationships and Related Transactions 12
<PAGE>
PART I
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of that term in Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Additional written or oral
forward-looking statements may be made by the Company from time to time, in
filings with the Securities Exchange Commission or otherwise. Statements
contained herein that are not historical facts are forward-looking statements
made pursuant to the safe harbor provisions described above. Forward-looking
statements may include, but are not limited to, projections of revenues, income
or losses, capital expenditures, plans for future operations, the elimination of
losses under certain programs, financing needs or plans, compliance with
financial convenants in loan agreements, plans for sales of assets or
businesses, plans relating to products or services of the Company, assessments
of materiality, predictions of future events, and the effects of pending and
possible litigation, as well as assumptions relating to the foregoing. In
addition, when used in this discussion, the words, "anticipates," " estimates,"
"expects," "intends," "plans," and variations thereof and similar expressions
are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified based on current expectations.
Consequently, future events and actual results could differ materially from
those set forth in, contemplated by, or underlying the forward-looking
statements contained herein. Statements in this Annual Report, particularly in
"Item 1. Business," "Item 3. Legal Proceedings," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Notes to Consolidated Financial Statements, describe factors, among others,
that could contribute to or cause such differences. Other factors that could
contribute to or cause such differences include, but are not limited to,
unanticipated increases in operating costs, labor disputes, capital
requirements, increases in borrowing costs, product demand, pricing, market
acceptance, intellectual property rights and litigation, risks in product and
technology development and other risk factors detailed in the Company's
Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unexpected
events.
1
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ITEM 1 - BUSINESS
GENERAL.
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 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, and FlexStaff, which provides
dedicated technical staff 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 (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 business. 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. On April 18, 1997 the Company sold
its Kindergarten through 12th Grade Education business to Computer Plus,
Inc.("Computer Plus"). Proceeds from the sale were used to further reduce the
Company's debt.
The Company has offices in Tallahassee, Maitland (Orlando), Hollywood (Miami-Ft.
Lauderdale) and Clearwater (Tampa Bay), Florida, and 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
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.
Dataquest, a computer research firm, 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:
2
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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 the internet, 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 "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.
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 Company strives to have an account representative answer
customer 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 computers to retrieve
information on-line 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 direct drop ship distribution orders.
The Company ships products 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.
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.
3
<PAGE>
FLEXSTAFF. The Company offers to its customers temporary staffing 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, as well as
software application training at customer sites.
PROFESSIONAL SERVICES. The Company provides professional consulting
services to help customers define, design, implement and support local and
wide-area networks ("LAN/WAN") implementation and migrations. 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.
Service contracts with customers are typically less than one year in duration
and require the Company's personnel to provide services upon demand, at various
times throughout the contract period. Service Contract revenue is generally
recognized when services are performed or ratably over the contract period,
dependent upon the nature of the service contract.
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 continues
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. 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 it 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.
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.
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, service industries, 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 relies upon the accuracy and proper utilization of its management
information systems 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 expenditures to upgrade
and modify its management information systems, 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 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.
PERSONNEL
4
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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.
ITEM 2 - PROPERTIES
The Company's corporate headquarters and eastern regional office are located in
Clearwater, Florida. The Company owns land and property in Clearwater, Florida
which are currently held for sale. 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 Company is negotiating the sale of certain office and warehouse
space in Clearwater although there can be no assurance that such sale will be
consummated (Note 4). As a result, the Company is currently locating suitable
office and warehouse space for the relocation of its corporate headquarters. The
following office locations are currently leased by the Company.
REGIONAL OFFICE SQUARE FOOTAGE PRINCIPAL USE EXPIRATION DATE
- --------------- -------------- ------------- ---------------
Edison, NJ* 50,000 Vacant March 31, 2000
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
* This office was part of the Company's Eastern region. This purchaser did not
assume this lease but is required to reimburse the Company for lease payments.
Generally, the Company is responsible for all real estate taxes, insurance,
utilities and maintenance expenses payable with respect to these leased
premises.
ITEM 3 - LEGAL PROCEEDINGS
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 and the Company has denied Mr. McLenithan's allegations and intends
to vigorously contest the suit. The Company is currently unable to predict the
outcome of this lawsuit.
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. The
Company is currently unable to predict the outcome of this lawsuit.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were sumitted during the fourth quarter of fiscal 1997 to a vote of
security holders.
5
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PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Common Stock is included in the Nasdaq Stock Market's 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.
HIGH LOW
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Year Ended March 31, 1997
First Quarter $ 7.625 $ 2.688
Second Quarter 7.375 2.625
Third Quarter 3.875 2.063
Fourth Quarter 4.125 2.3125
Year Ended March 31, 1996
First Quarter $ 10.125 $ 7.25
Second Quarter 8.25 5.5
Third Quarter 6.75 3.0
Fourth Quarter 5.125 3.125
STOCKHOLDERS
As of June 23, 1997, there were 546 holders of record of the Common Stock.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock. 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
Operation-Liquidity and Capital Resources."
ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data is set forth below as of and for each of the five fiscal
years ended March 31, 1997. The financial data for periods prior to fiscal 1996
have been restated to include the results of operations and financial position
of Sunland Computer Services, Inc., 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 report.
6
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Summary Consolidated Financial Data
Income Statement Data:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In thousands , except per share data)
<S> <C> <C> <C> <C> <C>
Revenue $ 255,075 $ 472,102 $ 273,851 $ 122,348 $ 77,306
Cost of Revenue 224,035 419,592 242,564 108,818 65,555
--------- --------- --------- --------- ---------
Gross Profit 31,040 52,510 31,287 13,530 11,751
Selling, General and Administrative
Expenses 25,943 42,995 24,259 10,675 10,272
Amortization of Goodwill 677 1,265 594 -- --
Loss on Impairment of Assets 3,280 -- -- -- --
Restructuring & Other Charges -- 5,353 -- -- --
--------- --------- --------- --------- ---------
Operating Income 1,140 2,897 6,434 2,855 1,479
Interest (Expense) Income (4,552) (8,063) (2,677) 4 (13)
Loss on Dispositions of Businesses (8,979) (4,632) -- -- --
Litigation Settlement and Related Costs -- -- -- (847) --
--------- --------- --------- --------- ---------
Income (Loss )Before Income Taxes (12,391) (9,798) 3,757 2,012 1,466
(Benefit from) Provision for Income
Taxes (4,636) (3,463) 1,617 884 653
--------- --------- --------- --------- ---------
Net (Loss) Income $ (7,756) $ (6,335) $ 2,140 $ 1,128 $ 813
========= ========= ========= ========= =========
(Loss) Earnings Per Common Share $ (1.35) $ (1.22) $ 0.45 $ 0.28 $ 0.20
========= ========= ========= ========= =========
Weighted Average Common Shares 5,731 5,214 4,733 4,085 4,080
========= ========= ========= ========= =========
MARCH 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Balance Sheet Data
Working Capital $ 8,715 $ 57,531 $ 46,971 $ 22,629 $ 20,973
Total Assets 61,075 170,313 146,581 56,337 37,943
Long-Term Debt 3,142 54,062 52,510 228 --
Total Shareholders' Equity 25,154 31,848 34,140 26,680 25,338
</TABLE>
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
During the Fiscal year ended March 31, 1997 ("Fiscal 1997"), 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 the
Fiscal year ended March 31, 1997 ("Fiscal 1997"), 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 divestures 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 divestures 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
Southestern United States and therefore concentrated the Company's efforts in
this region (originally the NDP operating area).
The historical financial information contains financial information for Granite,
Advantage, Hagen, and Valtron from the date of their respective acquisitions
until their disposition. Financial information for NDP is included from the date
of acquisition. 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:
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Summary Consolidated Financial Data
Income Statement Data: FOR THE YEARS ENDED MARCH 31
----------------------------
1997 1996 1995
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Cost of Revenue 87.8 88.9 88.6
------ ------ ------
Gross Profit 12.2 11.1 11.4
Selling, General and Administrative Expenses 10.2 9.1 8.8
Amortization of Goodwill 0.3 0.3 0.2
Loss on Impairment of Assets 1.3 - -
Restructuring & Other Charges - 1.1 -
------ ------ ------
Operating Income .4 0.6 2.3
Interest Expense (1.8) (1.7) (0.9)
Loss on Dispositions of Businesses (3.5) (1.0) -
------ ------ ------
(Loss) Income Before Income Taxes (4.9) (2.1) 1.4
(Benefit from) Loss Provision for Income Taxes (1.8) (0.7) 0.6
------ ------ ------
Net (Loss) Income (3.1%) (1.3%) 0.8%
====== ====== ======
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FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO MARCH 31, 1996
Revenues decreased by 46.0%, or $217,026,821, from $472,101,629 for the fiscal
year ended March 31, 1996 ("Fiscal 1996") to $255,074,808 for the fiscal year
ended March 31, 1997. The decrease relates to the sale of the
Western region operations on April 1, 1996 and the sale of the Midwestern and
Eastern regions operations on October 4, 1996. On a comparable basis, excluding
the Western, Midwestern and Eastern operations, revenues increased by
$24,763,896, or 17.5%. Product revenues, which include desktop computers,
printers, displays, software and other peripherals, accounted for 89.2% of total
revenues and decreased by $194,872,142, or 46.1%. Service revenues, which
include Technology Management Services, training and consulting accounted for
10.8% of total revenues and decreased by $22,154,679, or 44.7%. The decreases in
product and service revenues relate to the sales of the Western, Midwestern and
Eastern regions. On a comparable basis, excluding the disposed operating
regions, product revenues accounted for 91.6% of revenue and increased by
$20,362,822, or 15.4%. Service revenues accounted for 8.4% of total revenues and
increased by $4,401,074, or 45.9%.
Gross Profit decreased by 40.9%, or $21,469,915, from $52,510,047 in fiscal 1996
to $31,040,132 in Fiscal 1997. This decrease relates to the exclusion of the
gross profit for the entire year for the Western region and the exclusion of the
Midwestern and Eastern regions for six months. As a percentage of revenue, gross
profit increased from 11.1% in Fiscal 1996 to 12.2% in Fiscal 1997, or 9.9%.
There were gross profit percentage increases in both products and services
primarily due to the disposition of less profitable product and service business
in the Western, Midwestern and Eastern regions, whose customer base consisted of
primarily large businesses. On a comparable basis, excluding the Western,
Midwestern and Eastern operating regions, gross profit increased $5,008,137, or
28.0%, to $22,892,614 in fiscal 1997.
Selling, general and administrative expenses decreased by 39.7%, or $17,052,604,
from $42,995,259 in Fiscal 1996 to $25,942,655 in Fiscal 1997. The decrease
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 costs increased from 9.1% in Fiscal 1996 to
10.2% in Fiscal 1997. The increase reflects additional administrative expenses
associated with the sales of the Western, Midwestern and Eastern regions. The
increase also reflects a difference in customer base and product mix in the
Southeast. The Southeast division has a much larger customer base and completes
significantly more transactions than the other operating regions, although the
individual transactions tend to be smaller.
The loss on impairment of assets represents two separate transactions. The first
is the sale of the Kindergarten through 12th Grade Education division, which was
completed on April 18, 1997. The Company sold certain fixed assets and inventory
for approximately $4.2 million and reduced goodwill by $5.8 million to record a
loss on impairment of $2.9 million. The second transaction recorded was the
proposed sale of the Company's headquarters building. The Company has received
an offer to sell the property for approximately $1 million which will result in
a loss on impairment of $339,040.
Amortization of goodwill decreased by 46.5%, or $587,681, from $1,265,101 in
Fiscal 1996 to $677,420 in Fiscal 1997 due to the disposition of the Western
region on April 1, 1996 and the disposition of the Midwestern region on October
4, 1996.
Interest expense decreased by 43.5%, or $3,511,051, from $8,063,508 in Fiscal
1996 to $4,552,427 in Fiscal 1997. The decrease primarily relates to reduced
average borrowings resulting from the pay down of debt from the proceeds of the
sales of the Western, Midwestern and Eastern regions. The Company also realized
a 25.0% reduction in interest rates starting in December, 1996, with the
negotiation of a new line of credit.
The loss on disposition of business represents the aggregate difference between
the carrying value of net assets of the sale of the Midwestern and Eastern
regional operations and the net realizable value of these net assets. The
Company recorded a loss of $8,978,970 on these dispositions.
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO MARCH 31, 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 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.
10
<PAGE>
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.
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.
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 Company received approximately $83.5 million in proceeds in fiscal
1997 from these sales.
Historically, IBM Credit Corporation was the Company's primary lender. During
fiscal 1997, 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
receivable. On June 23, 1997 approximately $11.5 million was 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 sale of the Company's Kindergarten through 12th Grade Education business to
Computer Plus provided approximately $4.5 million in cash, which was received on
April 18, 1997, which was used to reduce the balance due under the Line of
Credit. The Company retained approximately $2.8 million in accounts receivable
in connection with this sale. The Company has collected approximately $2 million
of these receivables through June 15, 1997.
In January, 1997 the Company received approximately $1.1 million in cash and
$400,000 in vendor receivables in settlement of the $5.0 million escrow held by
Vanstar.
At March 31,1997 approximately $5.0 million was being held in escrow pursuant to
the agreement regarding the sale of the Company's Midwestern and Eastern
regions. In May, 1997, the Company reconciled amounts due under the agreement
with the buyer and received approximately $3.8 million from such escrow. The
funds were used to decrease amounts outstanding under the Line of Credit. The
Company also received $1.9 million in accounts receivable originating from the
former Midwestern and Eastern regions.
During Fiscal 1996 and Fiscal 1997, the Company invested approximately $4.7
million and $1.6 million, 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 has no material commitments for
capital expenditures.
11
<PAGE>
The Company believes that the cash flow from operations, the Line of Credit and
trade credit from its vendors will be sufficient to satisfy its working capital
and capital expenditure 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.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary financial information
required by this item are included herein.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant did not have any disagreements on accounting and financial
disclosures with its independent accountants.
PART III
Certain information required by Part III is omitted from this Report on Form
10-K because the Company will file a definitive Proxy Statement for its Annual
Meeting of Shareholders to be held on September 18, 1997, pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended (the "Proxy Statement"),
not later than 120 days after the end of the fiscal year covered by this Report,
and certain information included in the Proxy Statement is incorporated herein
by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from the
section entitled "Executive Officers and Directors" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section entitled "Security Ownership of Management and Certain Beneficial
Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
section entitled "Certain Transactions" in the Proxy Statement.
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
PAGE
----
1. Report of Independent Certified Public Accountants.............. F-1
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997
and 1996...................................................... F-2
Consolidated Statements of Operations for the
years ended March 31, 1997, 1996 and 1995..................... F-3
Consolidated Statements of Shareholders' Equity
for the years ended March 31, 1997, 1996 and 1995............. F-4
Consolidated Statements of Cash Flows for the
years ended March 31, 1997, 1996 and 1995..................... F-5
Notes to Consolidated Financial Statements...................... F-6
2. Exhibits
Report of Independent Certified Public Accountants on Financial
Statement Schedule
Financial Statement Schedule
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- The Company's Certificate of Incorporation, as amended (incorporated
by reference to Exhibit Number 3.1 to the Company's Registration
Statement on Form S-1 filed February 23, 1990 and amendments thereto
(File No. 330-33472)).
3.2 -- Certificate of Amendment to the Certificate of Incorporation
(incorporated by reference to Exhibit Number 3.2 to the Company's
Registration Statement on Form S-1 filed February 23, 1990 and
amendments thereto (File No. 330-33472)).
3.3 -- The Company's Restated and Amended Bylaws (incorporated by reference
to Exhibit Number 3.3 to the Company's Registration Statement on
Form S-1 filed February 23, 1990 and amendments thereto (File No.
330-33472)).
4 -- Specimen of stock certificate for shares of Common Stock
(incorporated by reference to Exhibit Number 4 to the Company's
Registration Statement on Form S-1 filed February 23, 1990 and
amendments thereto (File No. 330-33472)).
10.1 -- Dealer Agreement entered into February 7, 1997, between International
Business Machines Corporation and the Company (incorporated by
reference to Exhibit Number 10.1 to the Company's Registration
Statement on Form S-1 filed April 17,1997 and amendments thereto
(Registration No. 333-25339)).
10.2 -- Dealer Agreement between Hewlett-Packard Company and the Company
(incorporated by reference to Exhibit Number 10.2 to the Company's
Registration Statement on Form S-1 filed April 17, 1997 and
amendments thereto (Registration No. 333-25339)).
10.3 -- Dealer Agreement entered into August 26, 1996, between Apple
Computer, Inc., and the Company (incorporated by reference to Exhibit
Number 10.3 to the Company's Registration
13
<PAGE>
Statement on Form S-1 filed April 17, 1997 and amendments thereto
(Registration No. 333-25339)).
10.4 -- Dealer Agreement dated January 14, 1997 between Apple Computer, Inc.,
and the Company (incorporated by reference to Exhibit Number 10.4 to
the Company's Registration Statement on Form S-1 filed April 17, 1997
and amendments thereto (Registration No. 333-25339)).
10.5 -- Dealer Agreement dated August 2, 1990 between COMPAQ Computer
Corporation and the Company (incorporated by reference to Exhibit
Number 10.5 to the Company's Registration Statement on Form S-1 filed
April 17, 1997 and amendments thereto (Registration No. 333-25339)).
10.6 -- 1987 Incentive Stock Option Plan (incorporated by reference to
Exhibit Number 10.6 to the Company's Registration Statement on Form
S-1 filed February 23, 1990 and amendments thereto (File No.
330-33472)).
10.7 -- 1989 Incentive and Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit Number 10.7 to the Company's Registration
Statement on Form S-1 filed February 23, 1990 and amendments thereto
(File No. 330-33472)).
10.8 -- Salary Savings Plan and trust of Dataflex Corporation dated December
21, 1989 (incorporated by reference to Exhibit Number 10.8 to the
Company's Registration Statement on Form S-1 filed February 23, 1990
and amendments thereto (File No. 330-33472)).
10.9 -- 1990 Senior Management Incentive and Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit Number 10.9 to the Company's
Registration Statement on Form S-1 filed February 23, 1990 and
amendments thereto (File No. 330-33472)).
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
(incorporated by reference to Exhibit Number 10.10 to the Company's
Registration Statement on Form S-1 filed February 23, 1990 and
amendments thereto (File No. 330-33472)).
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
(incorporated by reference to Exhibit Number 10.11 to the Company's
Registration Statement on Form S-1 filed February 23, 1990 and
amendments thereto (File No. 330-33472)).
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 (incorporated by reference to Exhibit Number 10.12 to
the Company's Registration Statement on Form S-1 filed February 23,
1990 and amendments thereto (File No. 330-33472)).
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 (incorporated by reference to Exhibit Number
10.13 to the Company's Registration Statement on Form S-1 filed
February 23, 1990 and amendments thereto (File No. 330-33472)).
10.14 -- Asset Purchase Agreement between the Company and Granite Computer
Products, Inc. dated March 21, 1994 (incorporated by reference to
Exhibit Number 10.14 to the Company's 8-K filed April 23, 1994).
14
<PAGE>
10.15 -- Asset Purchase Agreement between the Company and Advantage Systems,
Inc. dated May 23, 1994 (incorporated by reference to Exhibit Number
10.15 to the Company's Form 8-K filed June 16, 1994).
10.16 -- 1991 Incentive and Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit Number 10.16 to the Company's Annual Proxy
Statement filed September 1, 1991).
10.17 -- Asset Purchase Agreement between Dataflex Corporation and National
Data Products, Inc. dated November 17, 1994 (incorporated by
reference to Exhibit Number 10.17 to the Company's Form 8-K filed
January 24, 1995).
10.18 -- Stock Purchase Agreement between Dataflex Corporation, the sellers
named therein and Sunland Computer Services, Inc. dated August 19,
1994 (incorporated by reference to Exhibit Number 10.18 to the
Company's Form 8-K filed August 31, 1994).
10.19 -- 1992 Incentive and Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit Number 10.19 to the Company's Annual Proxy
Statement filed September 1, 1992).
10.20 -- 1994 Incentive and Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit Number 10.20 to the Company's Annual Proxy
Statement filed September 1, 1994).
10.21 -- Employment Agreement dated April 1, 1993 by and between the Company
and Richard C. Rose (incorporated by reference to Exhibit Number
10.21 to the Company's Form 10-K filed June 29, 1995).
10.22 -- Amendment to Employment Agreement dated April 1, 1993 by and
between the Company and Richard C. Rose (incorporated by reference to
Exhibit Number 10.22 to the Company's Form 10-K filed June 29, 1995).
10.23 -- Asset Purchase Agreement by and among Vanstar Corporation, VST West,
Inc., Dataflex Corporation and Dataflex Southwest Corporation dated
May 24, 1996 (incorporated by reference to Exhibit Number 10.23 to
the Company's Form 8-K filed June 13, 1996).
10.24 -- Employment Agreement dated January 11, 1995, by and between the
Company and Philip Doganiero (incorporated by reference to Exhibit
Number 10.24 to the Company's Registration Statement on Form S-1
filed April 17, 1997 and amendments thereto (Registration No.
333-25339)).
10.25 -- Amendment to Employment Agreement dated April 1, 1995, by and
between the Company and Philip Doganiero (incorporated by reference
to Exhibit Number 10.25 to the Company's Registration Statement on
Form S-1 filed April 17, 1997 and amendments thereto (Registration
No. 333-25339)).
10.26 -- Employment Agreement dated January 11, 1995, by and between the
Company and Anthony G. Lembo (incorporated by reference to Exhibit
Number 10.26 to the Company's Registration Statement on Form S-1
filed April 17, 1997 and amendments thereto (Registration No.
333-25339)).
10.27 -- Settlement Agreement and Release dated March 1, 1997 (incorporated by
reference to Exhibit Number 10.27 to the Company's Registration
Statement on Form S-1 filed April 17, 1997 and amendments thereto
(Registration No. 333-25339)).
15
<PAGE>
10.28 -- Loan and Security Agreement by and between the Company and
NationsBank, N.A. (South) (incorporated by reference to Exhibit
Number 10.28 to the Company's Registration Statement on Form S-1
filed April 17, 1997 and amendments thereto (Registration No.
333-25339)).
10.29 -- Loan and Security Agreement by and between the Company and
Nationscredit Commercial Corporation of America (incorporated by
reference to Exhibit Number 10.29 to the Company's Registration
Statement on Form S-1 filed April 17, 1997 and amendments thereto
(Registration No. 333-25339)).
21 -- Subsidiaries (incorporated by reference to Exhibit Number 21 to the
Company's Form 8-K filed June 13, 1996).
23.1 -- Consent of Price Waterhouse LLP.
27.1 -- Financial Data Schedule.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on April 28, 1997, to report the sale of
certain assets constituting its K-12 Education Division to Computer Plus, Inc.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
DATAFLEX CORPORATION
By:
-------------------------------------
Anthony G. Lembo, President, Chief
Operating Officer, Chief Financial
Officer, Principal Accounting Officer
and Director
Date:
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
- ----------------------- President, Chief Operating Officer,
Anthony G. Lembo Chief Financial Officer, Principal
Accounting Officer and Director -----------------
- ----------------------- Chief Executive Officer and
Richard C. Rose Director -----------------
- ----------------------- Director
Philip Doganiero -----------------
- ----------------------- Director
W. Keith Schilit -----------------
- ----------------------- Director
Barry M. Alpert -----------------
17
<PAGE>
Report of Independent Certified Public 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1997, 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
Tampa, Florida
May 21, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
DATAFLEX CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31,
------------------------------
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 1,721,922 $ 499,144
Restricted Cash 3,875,202 --
Accounts Receivable, Net of Allowance
of $2,062,763 and $1,187,378 21,719,863 57,333,174
Inventory, Net 5,489,153 25,754,983
Assets Held for Sale 3,800,063 45,229,410
Deferred Tax Asset -- 3,287,647
Income Taxes Receivable 1,908,222 828,823
Other Current Assets 2,979,125 8,428,151
------------- -------------
Total Current Assets 41,493,550 141,361,332
Property and Equipment, Net 2,708,408 9,436,611
Other Assets 853,228 798,919
Deferred Tax Asset 6,183,780 --
Assets Held for Sale - Long-Term 1,150,000 --
Goodwill 8,685,745 18,715,751
------------- -------------
Total Assets $ 61,074,711 $ 170,312,613
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 1,730,362 $ 32,967,368
Short-Term Debt 20,374,713
Accounts Payable 5,938,021 42,477,509
Accrued Expenses and Other Payables 4,735,576 8,385,420
------------- -------------
Total Current Liabilities 32,778,672 83,830,297
Long-Term Debt 3,141,701 54,061,619
Deferred Tax Liability -- 347,640
Other Long-Term Liabilities -- 224,627
------------- -------------
Total Liabilities 35,920,373 138,464,183
------------- -------------
Commitments and Contingencies (Notes 4, 11 and 14)
Shareholders' Equity:
Common Stock-No Par Value; Authorized 20,000,000 Shares;
Issued 5,961,169 and 5,587,661 Shares respectively 24,017,343 23,064,542
Less: Loans Receivable for Exercised Stock Options (194,269) (311,024)
Retained Earnings 1,934,742 9,690,057
Less: Treasury Stock - At Cost; 115,382 and 113,901 Shares
at March 31, 1997 and March 31, 1996, respectively (603,478) (595,145)
------------- -------------
Total Shareholders' Equity 25,154,338 31,848,430
------------- -------------
Total Liabilities and Shareholders' Equity $ 61,074,711 $ 170,312,613
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
DATAFLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenue
Equipment $ 227,660,306 $ 422,532,448 $ 246,531,571
Services 27,414,502 49,569,181 27,319,425
------------- ------------- -------------
Total Revenue 255,074,808 472,101,629 273,850,996
------------- ------------- -------------
Cost of Revenue
Equipment 201,560,580 378,490,201 220,710,681
Services 22,474,096 41,101,381 21,853,257
------------- ------------- -------------
Total Cost of Revenue 224,034,676 419,591,582 242,563,938
------------- ------------- -------------
Gross Profit 31,040,132 52,510,047 31,287,058
Selling, General and Administrative Expenses 25,942,655 42,995,259 24,259,537
Amortization of Goodwill 677,420 1,265,101 593,659
Loss on Impairment of Assets 3,280,225 -- --
Restructuring and Other Charges -- 5,352,809 --
------------- ------------- -------------
Operating Income 1,139,832 2,896,878 6,433,862
Other Expenses
Interest Expense, Net 4,552,427 8,063,508 2,677,308
Loss on Dispositions of Businesses 8,978,970 4,631,820 --
------------- ------------- -------------
(Loss) Income Before Income Taxes (12,391,565) (9,798,450) 3,756,554
(Benefit from) Provision for Income Taxes (4,636,060) (3,463,245) 1,617,195
------------- ------------- -------------
Net (Loss) Income $ (7,755,505) $ (6,335,205) $ 2,139,359
============= ============= =============
(Loss) Earnings Per Common Share $ (1.35) $ (1.22) $ 0.45
============= ============= =============
Weighted Average Common
Shares Outstanding 5,731,368 5,213,711 4,732,571
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
DATAFLEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK TREASURY STOCK
----------------------- -----------------------
ISSUED RETAINED
SHARES AMOUNT EARNINGS SHARES COST
--------- --------- ---------- --------- ---------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
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 104,989 378 -- -- --
Reductions of Loans Receivable (1,481) 117 -- -- --
Issuance of Common Stock 270,000 574 -- -- --
Net Loss -- -- (7,755) -- --
--------- --------- --------- --------- ---------
Balance at March 31, 1997 5,961,169 $ 23,823 $ 1,935 115,382 $ 603
========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
DATAFLEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Net (Loss) Income $ (7,755,505) $ (6,335,205) $ 2,139,359
Adjustments to Reconcile Net
Income to Net Cash:
Depreciation and Amortization 2,306,433 4,894,724 2,594,442
Amortization of Restricted Stock Grants 62,164 -- 39,815
Loss on Disposition of Businesses 8,978,970 4,631,820 --
Loss on Impairment 3,280,225 -- --
Restructuring Charges -- 5,352,809 --
Changes in Assets and Liabilities:
Restricted Cash (3,875,202) -- --
Accounts Receivable 35,613,310 703,528 (2,775,491)
Income Taxes Receivable (1,079,399) (828,823) --
Inventory 20,265,830 4,255,333 (9,839,062)
Other Current Assets 5,449,026 3,104,851 (7,514,172)
Deferred Taxes (3,243,773) (3,056,596) --
Other Assets (54,309) 89,253 (367,689)
Accounts Payable (36,539,488) (3,486,204) 8,110,671
Accrued Expenses and Other Payables (3,076,094) 506,961 (923,908)
Income Taxes Payable -- (176,077) (8,885)
Accrued Settlement -- -- (712,500)
Other Long-Term Liabilities (224,627) (209,316) 64,943
------------ ------------ ------------
Net Cash - Operating 20,107,561 9,447,058 (9,192,477)
------------ ------------ ------------
Investing Activities:
Capital Expenditures (1,604,775) (4,687,084) (5,270,085)
Proceeds from Sale of Fixed Assets 5,048,914 -- --
Proceeds from Sale of Discontinued Operations 41,116,922 -- --
Assets Held for Sale (2,088,942) (36,622,075) --
Acquisition of Businesses, Net of Cash Acquired -- (1,214,718) (19,603,661)
------------ ------------ ------------
Net Cash - Investing 42,472,119 (42,523,877) (24,873,746)
------------ ------------ ------------
Financing Activities:
Payments (Proceeds) of Notes Payable/Short-Term
Debt (10,862,293) 28,122,801 23,370,563
Payments on Long-Term Borrowings (50,919,918) (87,996) (29,298)
Proceeds from Common Stock and Options 379,051 29,937 153,165
Purchase of Treasury Stock (8,333) (78,520) 84,273
Payments on Officers Loans Receivable
for Exercised Stock Options 54,591 -- 130,512
------------ ------------ ------------
Net Cash - Financing (61,356,902) 27,986,222 23,709,215
------------ ------------ ------------
Net Increase (Decrease) in Cash 1,222,778 (5,090,597) 10,357,008
Cash - Beginning of Year 499,144 5,589,741 15,946,749
------------ ------------ ------------
Cash - End of Year $ 1,721,922 $ 499,144 $ 5,589,741
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
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 primarily in the Southeastern 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 upon shipment to
customers. Services contract revenue is generally recognized when services are
performed or ratably over the contract period. The Company allows its customers
to return product for exchange or credit subject to certain limitations.
Provision for estimated losses on such returns are recorded at the time of sale
(see product warranty below). Funds received from vendors for marketing programs
and product rebates are accounted for as a reduction of selling, general and
administrative expenses or product cost according to the nature of the program.
PRODUCT WARRANTY--The Company does not offer warranty coverage. However, to
promote customer goodwill, the Company facilitates vendor warranty policies by
accepting for exchange (with the Company's prior approval) defective products
within 30 days of invoicing. Defective products received by the Company are
subsequently returned to the vendor for credit or replacement.
CONCENTRATION OF CREDIT RISK--The Company sells its products to a large base of
corporate and government agencies located throughout the Southeastern United
States. The Company performs on going credit evaluations of its customers and
generally does not require collateral. The Company makes provisions for
estimated credit losses at the time of sale.
No single customer accounted for greater than 10% of the Company's revenue
during the three years ended March 31, 1997.
Sales of products from one vendor constituted approximately 31%, 31% and 23% of
the Company's revenue during the years ended March 31, 1997, 1996, and 1995,
respectively. Another vendor's products comprised 13%, 13% and 15% of the
Company's revenue during the same three year period.
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, 1997, 1996 and
1995 were 5,731,368, 5,213,711 and 4,732,571 and included common stock
equivalents of 425,797, for the year ended March 31, 1995.
In February 1997, the Financial Accounting Standards Board issued two standards
which will be applicable to the Company in fiscal year 1998: No. 128, EARNING
PER SHARE and No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. The
effects of these standards are expected to result in the disclosure of Basic
Earnings Per Share of $(1.35) and $(1.22) for 1997 and 1996 respectively, and
Diluted Earnings Per Share of $(1.35) and $(1.22) for 1997 and 1996,
respectively. In addition, additional disclosure regarding the Company's capital
structure may be required.
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.
RESTRICTED CASH -- Restricted cash represents amounts held in escrow pending
final settlement of sales agreements involving the disposition of certain of the
Company's former operating divisions (Note 3).
F-6
<PAGE>
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.
ASSETS HELD FOR SALE--Assets held for sale represents the estimated fair market
value of the net assets of the Company's Apple, K-12 contract. Non-current
assets held for sale reflects land and buildings in Clearwater, Florida.
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 $1,661,214
and $1,023,354 at March 31, 1997 and 1996, respectively. The Company evaluates,
on a regular basis, whether events and circumstances have occurred that indicate
the carrying amount of goodwill may warrant revisions or may not be recoverable.
At March 31, 1997, the net unamortized balance of goodwill is not considered to
be impaired. A reduction in goodwill of $10,030,000 was recorded during Fiscal
1997 in connection with the disposition of certain assets and the payment of
certain amounts under previously executed purchase agreements. (Notes 2 and 3).
FAIR VALUE OF FINANCIAL INSTRUMENTS--Financial instruments that are subject to
fair value disclosure requirements (cash equivalents, accounts receivable,
accounts payable and debt) are carried in the consolidated financial statements
at amounts that approximate fair value.
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.
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 could have been converted at any time through the
maturity date of May 31, 1997 into 100,000 shares of the Company's common stock,
which would have been valued at the closing price on the date of conversion. The
note has been assumed by the purchaser of the Midwestern region.
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 the Company over a seven year period. The contingent payout for
fiscal 1997 was $320,000.
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.
F-7
<PAGE>
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.
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.
FOR THE YEAR ENDED MARCH 31, 1995
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue $383,984
Gross Profit 46,393
Net Income 3,777
Earnings Per Common Share $ .72
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 "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 $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. The
purchase price was subject to adjustment based primarily on the expected
realizability of certain assets as defined in the agreement. In January, 1997
the Company received approximately $1.1 million in cash and $400,000 in vendor
receivables in settlement of the $5.0 million escrow held by Vanstar.
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.
F-8
<PAGE>
On October 4, 1996, the Company sold substantially all of the assets and the
transfer of certain liabilities of its Midwestern and Eastern operating regions
to GE Capital for approximately $43.5 million, including $5 million placed in
escrow pending final settlement as provided for in the agreement. The Company
used the $38.5 million received in fiscal 1997 to reduce its accounts payable
and interest bearing debt with IBM Credit Corporation. The Company received
approximately $3.8 million of the escrow in fiscal 1998, which was used to
reduce the Company's short term debt. The Company also received approximately
$1.9 million in accounts receivable of the former Midwestern and Eastern
regions.
In connection with this disposition, the Company recorded a loss of $8,978,970
in Fiscal 1997, representing the aggregate loss on the disposition of these
businesses and the estimated fair value of these businesses. $2,748,995 of this
loss on disposition was recorded in the fourth quarter of fiscal 1997 after the
Company received a final settlement of the assets held for sale.
The unaudited pro forma consolidated condensed results of operations listed
below give effect to certain adjustments, and assume the dispositions occurred
at the beginning of each period presented.
FOR THE YEARS ENDED MARCH 31,
-----------------------------------
1997 1996
----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue $166,615 $141,851
Gross Profit 22,893 17,884
Net Income 1,497 682
Earnings Per Common Share $ .26 $ .13
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 Western, Midwestern and Eastern dispositions been consummated as of the
beginning of the periods above, nor are they necessarily indicative of future
operating periods.
NOTE 4: LOSS ON IMPAIRMENT OF ASSETS
On April 18, 1997, the Company completed the sale of certain assets of its
Kindergarten through 12th Grade Education division to Computer Plus, Inc. for
approximately $4.4 million, including a $150,000 escrow pending the future
settlement of contingencies as described in the agreement. The estimated fair
market value of the net assets of the business to be disposed are included in
"Assets Held for Sale" in the March 31, 1997 Consolidated Balance Sheet. The
proceeds from the sale were used to reduce the Company's short-term debt. The
Company recorded a loss on impairment of $2,941,185 related to this transaction.
The Company also recorded a loss on impairment of $339,040 on the proposed sale
of certain land and buildings. In June 1997, the Company preliminarily accepted
an offer of approximately $1 million to sell its headquarters located in
Clearwater, Florida. The estimated fair market value of the net assets to be
disposed are included in "Assets Held for Sale - Long-Term" at March 31, 1997.
NOTE 5: INVENTORY
Inventory consists of:
MARCH 31,
-----------------------------
1997 1996
------ --------
(IN THOUSANDS)
Finished Goods $ 5,303 $ 21,989
Spare Parts 186 3,766
------- --------
$ 5,489 $ 25,755
======= ========
F-9
<PAGE>
NOTE 6: PROPERTY AND EQUIPMENT, NET
Property and equipment, is as follows:
MARCH 31,
-------------------------
1997 1996
-------- -------
(IN THOUSANDS)
Land $ 209 $ 684
Buildings 811 1,912
Furniture and Equipment 3,658 10,422
Transportation Equipment 53 174
Leasehold Improvements 51 1,244
-------- --------
4,782 14,436
Less: Accumulated Depreciation (2,074) (4,999)
======== ========
$ 2,708 $ 9,437
======== ========
Depreciation and amortization expense amounted to $2,198,546, $3,315,000 and
$1,968,000 for the years ended March 31, 1997, 1996 and 1995, respectively.
NOTE 7: LOANS RECEIVABLE FROM EMPLOYEES
Loans receivable from employees of $386,533 and $533,000 at March 31, 1997 and
1996, respectively, includes various loans made to certain employees during
fiscal years 1987 through 1996 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 $14,790, $41,000 and
$45,000 for the years ended March 31, 1997, 1996 and 1995, respectively.
NOTE 8: SUPPLEMENTARY CASH FLOW INFORMATION
The following is a summary of supplementary cash flow information:
FOR THE YEARS ENDED MARCH 31
-----------------------------
1997 1996 1995
-------- ------- --------
Interest Paid $ 5,145 $ 7,381 $ 2,403
Income Taxes Paid -- 624 1,636
Non-cash Investing and Financing Activities:
Issuance of Notes Receivable for
Common Stock -- -- 102
Issuance of Common Stock in Exchange
for Notes Payable -- -- 208
Capitalized Tax Benefit for Exercise of Options -- -- 26
Business Acquisitions:
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
Common Stock Issued in Legal Settlement(shares) 270,000 -- --
F-10
<PAGE>
NOTE 9: CREDIT FACILITY
In December 1994, the Company executed Inventory and Working Capital Agreements
with IBM Credit Corporation (the "Agreements"). Secured by substantially all of
the assets of the Company. 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. This credit
facility was replaced during fiscal 1997.
On December 18, 1996 the Company executed a two year $38 million financing
agreement with Nation's Credit and Nations Bank. The new facility reduces
interest rates to LIBOR plus 2.25% for working capital loans. The structure of
the short-term debt includes a revolving line of credit and an inventory
financing agreement. The debt is collaterialized by the Company's accounts
receivable and inventory. Amounts due under the facility totalled $20,374,713
as of March 31, 1997.
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.
NOTE 10: LONG-TERM DEBT
Long-Term Debt Consists Of the Following:
MARCH 31,
-----------------
1997 1996
------- -------
(IN THOUSANDS)
Mortgage note payable to a bank, payable in monthly $ 793 $ 851
installments of $5,267 plus interest at the bank's
prime rate plus 1% (9.25% at March 31, 1997) with
the remaining balance due January 10, 2000,
collateralized by land and buildings
Mortgage note payable to a bank, payable in monthly 307 337
installments of $2,066 plus interest at the bank's
prime rate plus 1% (9.25% at March 31, 1997) with
the remaining balance due January 10, 2000,
collateralized by land and buildings
Convertible Promissory Note, payable in full on 0 1,000
June 1, 1997, with interest due quarterly at an
interest rate of 6%.
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%
Payable to IBM Credit Corp. (Note 9) 0 81,236
Miscellaneous Notes Payable 272 105
------- -------
4,872 87,029
Less: Current portion of long-term debt 1,730 32,967
------- -------
$ 3,142 $54,062
======= =======
Aggregate principal payments for the next five years subsequent to March 31,
1997 are as follows:
F-11
<PAGE>
YEAR ENDED MARCH 31,
--------------------------------
(IN THOUSANDS)
1998 $ 1,730
1999 139
2000 966
2001 37
2002 2,000
--------
$ 4,872
========
NOTE 11: LEASES
The Company leases various facilities and equipment under noncancelable lease
arrangements which expire at various dates during the next five 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:
YEAR ENDED MARCH 31, OPERATING LEASES
-------------------- ----------------
(IN THOUSANDS)
1998 $ 279
1999 238
2000 205
2001 174
2002 87
Rental expense amounted to $1,069,017, $1,482,857and $1,147,325 for the years
ended March 31, 1997, 1996 and 1995, respectively.
NOTE 12: INCOME TAXES
THE COMPOSITION OF THE (BENEFIT FROM) PROVISION FOR INCOME TAXES IS AS
FOLLOWS:
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1997 1996 1995
------- ------- -------
Current Taxes: (IN THOUSANDS)
Federal $(1,392) $ (407) $ 1,235
State -- -- 320
------- ------- -------
(1,392) (407) 1,555
Deferred Taxes:
Federal (2,902) (2,682) 46
State (342) (374) 16
------- ------- -------
(Benefit from) Provision for Incomes Taxes $(4,636) $(3,463) $ 1,617
======= ======= =======
A reconciliation of the federal statutory rate with the Company's
effective tax rate is as follows:
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Income Taxes at Federal Statutory Rate $(4,213) $(3,331) $ 1,277
State Taxes, Net of Federal Taxes (423) (77) 221
Other -- (55) 119
------- ------- -------
(Benefit from) Provision for Income Taxes $(4,636) $(3,463) $ 1,617
======= ======= =======
F-12
<PAGE>
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:
MARCH 31,
----------------------
1997 1996
------- -------
(IN THOUSANDS)
Net Operating Loss $ 6,124 --
Accounts Receivable Reserves 270 $ 177
Vacation Reserve 112 110
Uniform Inventory Capitalization 117 172
Loss on Dispositions of Businesses 1,190 1,850
Restructuring and Other Charges -- 2,138
Other Deferred Tax Assets 165 140
------- -------
Deferred Tax Assets 7,978 4,587
------- -------
Accelerated Depreciation (404) (543)
Accelerated Amortization of Goodwill (890) (604)
------- -------
Deferred Tax Liabilities (1,294) (1,147)
------- -------
Deferred Tax Assets Valuation (500) (500)
------- -------
Net Deferred Tax Asset (Liability) $ 6,184 $ 2,940
======= =======
A valuation allowance has not been recorded for deferred tax assets, other than
against certain state income tax net operating losses, as management believes
that the Company will generate sufficient future taxable income to utilize the
Federal deferred tax assets.
As of March 31, 1997 the Company has a net operating loss carryforward of
approximately $14.5 million which expires in 2012. If certain substantial
changes in the Company's ownership should occur, there could be an annual
limitation on the amount on the carryforward which can be utilized.
NOTE 13: 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 planned
personnel reductions of approximately 30 individuals in operational,
administrative and executive areas. The Company recorded a provision of
$1,200,000 for the estimated level of employee termination benefits in the
accompanying March 31, 1996 Consolidated Balance Sheet. At March 31, 1997, the
Company has completed its personnel reductions and other planned restructurings.
NOTE 14: COMMITMENTS AND CONTINGENCIES
The Company's employment contracts with three employees provide for base annual
salaries aggregating approximately $729,000 per year. The contracts for the
employees expire between January 1998 and December 1999. In Fiscal 1997, one
employee voluntarily reduced his compensation from $225,000 to $1 plus $60,000
in premiums on a life insurance policy.
Copy 1st A of Legal proceedings.
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 15: 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:
F-13
<PAGE>
STOCK OPTION PLAN SHARES
GRANTED RESERVED SHARES GRANTED
- ------------------ -------- --------------
1989 Plan 400,000 0
1990 Plan 160,000 110,250
1991 Plan 200,000 50,000
1992 Plan 400,000 372,750
1994 Plan 800,000 622,722
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 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.
On September 2, 1994, in connection with the appointment of a 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.
(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. These shares expired
90 days subsequent to the sale of the Western region.
Information concerning options outstanding as of March 31, 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,070,280 5.76 1,713,019 6.16 1,147,000 4.86
Granted 606,022 2.42 516,325 6.11 639,000 7.24
Exercised 67,432 4.28 6,000 4.81 29,000 5.11
Cancelled 1,452,148 6.00 153,064 7.34 44,000 4.95
--------- ---- --------- ---- --------- ----
Outstanding at end of year 1,156,722 3.79 2,070,280 5.76 1,713,000 5.65
========= ==== ========= ==== ========= ====
Options exercisable at year end 529,488 5.08 1,001,064 5.51 534,000 5.51
Available for grant at year end 803,278 -- 30,926 -- 388,206 --
</TABLE>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------- ---------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE 3/31/97 LIFE (YEARS) PRICE AT 3/31/97 PRICE
- -------------- -------------- ------------ -------- ----------- --------
$2.00 - $5.00 940,772 9.1 $3.30 386,563 4.82
$5.01 - $9.00 215,950 6.3 5.94 142,925 5.80
--------- --------
1,156,722 8.0 3.79 529,488 5.08
========= ========
Pro forma effect of stock compensation plans
Had the compensation cost for the Company's stock option plans and employee
stock purchase plan been determined based on the fair value at the grant dates
for awards under the plans consistent with the method prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and income per common share on a pro
forma basis would have been.
YEAR ENDED MARCH 31,
1997 1996
------ ------
(IN THOUSAND, EXCEPT PER SHARE DATA)
Net income (loss)......................... ($7,884) ($6,626)
Net income (loss) per common share........ (1.38) (1.27)
The preceding pro forma results were calculated with the use of the Black
Scholes option-pricing model. The following assumptions were used for the years
ended March 31, 1997 and 1996, respectively:(1) risk free interest rates of
6.08% and 6.96%; (2) dividend yield of 0.0% and 0.0%; (3) expected lives of and
2.5 years, and (4) volatility of 110% and 71%. Results may vary depending on
the assumptions applied within the model.
Options exercised during the years ended March 31, 1997 and March 31, 1996
ranged in exercise prices from $4.50 to $5.85.
NOTE 16: 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 1997, 1996 and 1995 was 20%,
resulting in Company contributions of $ 141,000, $235,000 and $85,000
respectively.
NOTE 17: PREFERRED STOCK
F-14
<PAGE>
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. As of March 31, 1997, there are no issued
shares of Preferred Stock.
NOTE 18: QUARTERLY FINANCIAL DATA (Unaudited)
Unaudited quarterly financial data for the fiscal years ended March 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1ST QTR 2ND QTR 3RD QTR 4TH QTR
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
FY 1997:
Revenue $ 86,031 $ 83,875 $ 40,993 $ 44,176
Gross Profit 10,369 9,531 5,672 5,468
Net Income (Loss) (533) (4,145)(1) 257 (3,335)(2)
Earnings (Loss) Per Share $ (0.10) $ (0.75) $ 0.04 $ (0.54)
FY 1996:
Revenue $ 110,325 $ 107,844 $ 122,635 $ 131,298
Gross Profit 11,900 12,774 13,674 14,162
Net (Loss) Income 309 142 153 (6,939)(3)
Earnings (Loss) Per Share $ 0.06 $ 0.03 $ 0.03 $ (1.34)
<FN>
- ----------
(1) Includes a $6,229,975 loss on disposition on the sale of the Company's
Midwestern and Eastern regions.
(2) Includes a $3,280,225 million write-off of impaired assets related to the
sale of the Company's kindergarden through 12th Grade Education division
and proposed sale of land and buildings and $2,748,905 million related to
the sale of the midwestern and Eastern regions.
(3) Includes $9,985,000 pre-tax charges for restructuring and loss on
disposition.
</FN>
</TABLE>
F-15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareholders of Dataflex Corporation
Our audits of the consolidated financial statements referred to in our report
dated May 21, 1997 appearing on page F-1 of this Form 10-K of Dataflex
Corporation also included an audit of the Financial Statement Schedule listed
in Item 14 of the Form 10-K. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PRICE WATERHOUSE LLP
Tampa, Florida
May 21, 1997
F-16
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-1 (333-25339) and S-8 (Nos.33-4817,33-16424,33-32996 and
33-51012)of Dataflex Corporation of our report dated May 21, 1997 appearing on
page F-1 of this Form 10-K.
PRICE WATERHOUSE LLP
Tampa, Florida
June 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> APR-01-1996
<CASH> 1,721,922
<SECURITIES> 0
<RECEIVABLES> 21,719,863
<ALLOWANCES> (2,062,763)
<INVENTORY> 5,489,153
<CURRENT-ASSETS> 41,493,550
<PP&E> 2,708,408
<DEPRECIATION> 1,629,013
<TOTAL-ASSETS> 61,074,711
<CURRENT-LIABILITIES> 32,778,672
<BONDS> 0
0
0
<COMMON> 24,017,343
<OTHER-SE> 1,136,995
<TOTAL-LIABILITY-AND-EQUITY> 61,074,711
<SALES> 227,660,306
<TOTAL-REVENUES> 255,074,808
<CGS> 201,560,580
<TOTAL-COSTS> 224,034,676
<OTHER-EXPENSES> 29,900,300
<LOSS-PROVISION> (2,062,763)
<INTEREST-EXPENSE> 4,552,427
<INCOME-PRETAX> (12,391,565)
<INCOME-TAX> (4,636,060)
<INCOME-CONTINUING> 4,420,057
<DISCONTINUED> 8,978,970
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,755,505)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> (1.35)
</TABLE>
