Item 1 - Business
General
Dataflex Corporation, ("Dataflex" or the "Company"), established in 1976, is a nationally recognized direct marketer of desktop computer equipment and related products supplied primarily by major manufacturers, including IBM, Compaq, Hewlett-Packard and Apple. The Company provides its clients with single-source, value-added desktop computing solutions and services, including product sales, system integration, network installation, help desk support, training, consultation services and equipment repair maintenance. The Company is also a certified Lotus and Microsoft Education Center, capable of providing on or off-site manufacturer authorized education.
Subsequent to its fiscal 1996 year-end, the Company sold certain assets and transferred certain liabilities of its Western Region (comprising the Company's former offices in Alameda, Anaheim and San Diego, California and Tempe and Tucson, Arizona) and its Valtron Division, located in Valencia, California. The cash received from these divestitures, which is expected to be approximately $45.0 million based on the terms of the agreements, will be used to reduce the Company's debt. The Company recorded a pre-tax loss of approximately $4.6 million in fiscal 1996 on the disposition of these businesses.
The services business continues to be the fastest growing segment of the Company's operations and includes dedicated on-site remedial and nonremedial maintenance support to its customers through the Company's Mainsite program, field service repairs and maintenance, system configuration, asset management, authorized training centers, LAN/WAN consulting and system integration, help desk support through its toll-free support line for all computer and computer related problems, and FlexStaff, which provides dedicated high-end technical support on a contract basis to customers for short and long-term requirements. In addition, the Company has developed a national network of service partners to enhance its ability to deliver nationwide, on-site services to our customers.
The Company's customers are business organizations with diverse desktop computing requirements located throughout the United States. Dataflex focuses its efforts on customer service. In connection therewith, the Company conducts ongoing training for its associates, continuously 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.
Dataflex Corporation, headquartered in Edison, New Jersey, has offices in Bensenville, Illinois; Milwaukee, Wisconsin; Tallahassee, Orlando, Lake Wales, Hollywood and Clearwater, Florida; Memphis, Tennessee; Atlanta, Georgia and New York City.
Industry
Since 1988, the computer industry's rate of revenue growth has been affected by the introduction of many lines of low priced clones, significant price reductions by major manufacturers and the introduction of networking technology. The Company believes the computer industry does not function along the traditional supply and demand principle, as in many cases product shortages result in lower pricing to customers. Due to increasing supply shortages and decreasing profit margins, the industry has been consolidating since the early 1990's, as larger resellers acquire smaller, strategically-located resellers to increase their market share.
The industry continues to experience growth rates of 20-25%, however, prices and profit margins continue to decrease. Industry studies have shown that 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 industry believes future growth will come from a continuing demand for higher technology, such as wireless LAN's and multimedia, as well as for integration services and training.
Marketing and Sales
Dataflex's marketing focus is primarily on Fortune 2000 companies. The Company believes that these customers are increasingly dependent on their suppliers to provide, in addition to competitive pricing, a consultative approach to their desktop computer equipment needs. This approach addresses purchasing, compatibility, maintenance, support, networking, training and obsolescence. Dataflex 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 comprehensive information technology services and product acquisition. The Company believes that the range of services and solutions offered provides it with significant competitive advantages in the information technology marketplace.
Dataflex is positioned to benefit from client needs, particularly in the areas of internetworking, 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 is expected to provide continued growth for Dataflex and offer cost savings, improved flexibility and high-end user satisfaction for our customers.
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 will 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.
To market its products, Dataflex utilizes telemarketing, strategic alliances with major vendors, customer referrals and various promotional activities. Dataflex also makes joint sales presentations with certain of its major vendors to existing and prospective customers.
The Company maintains a product support group which provides technical training and support, new product information, and marketing advice to sales representatives with respect to technical matters concerning the products offered by the Company or otherwise available from manufacturers. The product support group also evaluates new products.
Products and Principal Suppliers
The Company offers over 25,000 PC/Networking hardware and software SKU's from over 500 vendors, including IBM, Compaq, Hewlett Packard, Apple, Microsoft and Lotus. Products include desktop and laptop PC's, servers, monitors, peripherals, operating system and application software and individual components. Due to the Company's purchasing power with its major vendors, the Company enjoys the greatest available discounts. In addition, the Company purchases direct from IBM to obtain its "C" level pricing, as well as from Compaq for its US level "1" pricing; both represent the highest discount level offered for their respective products. The Company continually evaluates new products from existing vendors, and seeks out new products and/or new vendors as technology develops and needs arise.
The Company's southeast region is an exclusive Apple sales agent to Kindergarten through 12th grade education accounts in Florida, Tennessee, Alabama, Louisiana, Arkansas, Mississippi, Georgia, North Carolina and South Carolina. Under this program, Apple is responsible for product distribution, inventories and carrying the customers' receivables. Apple is the primary product used by educational institutions in the United States and has authorized only 15 dealers nationwide.
Sales of IBM products constituted approximately 31%, 23% and 58% of the Company's revenue during the years ended March 31, 1996, 1995 and 1994, respectively. Sales of Compaq products constituted approximately 13%, 13% and 15% of the Company's revenue during the years ended March 31, 1996, 1995 and 1994, respectively. No other manufacturer's products accounted for more than 10% of the Company's revenues. No one customer accounted for more than 10% of the Company's revenues during the years ended March 31, 1996, 1995 and 1994.
The Company receives discretionary subsidies from certain manufacturers to promote sales and support activities relating to their products. Some of these subsidies have been used to expand the array of the Company's sales and support services and to reimburse the Company for, and to accelerate, its expansion into additional areas relating to those manufacturers' products and services.
The Company's authorized dealership agreements may be terminated by the manufacturer or the Company without cause upon notice with periods ranging from 30 to 90 days, and immediately, under certain circumstances. In addition, while each agreement is generally subject to renewal on an annual basis, there can be no assurance that such agreements will be renewed. The termination or non-renewal of the IBM and Hewlett-Packard dealership agreement would have a material adverse effect on the Company's business. The Company believes that its relationships with its major suppliers are excellent.
Services
The Company provides a vast array of services to support product sales. Services are offered on a per PC or complete project basis. Total services revenue for fiscal 1996, 1995 and 1994 were $49,569,000, $27,319,000 and $14,157,000, respectively.
Product Maintenance: The Company offers contracts to customers for both on-site ("MainSite ") and off-site product maintenance. These maintenance contracts generally require the Company to maintain desktop computer equipment at the customer's location during regular business hours. Most maintenance contracts are renewable annually. In addition, the Company provides authorized warranty service and repair for equipment sold by it and by others.
FlexStaff: Dataflex offers to its customers its resources for on-site technical consulting assignments. These contracts are generally for less than one year and provide customers with resources to meet their internal technical needs such as project management, application development, hardware maintenance, help desk, network design and implementation and systems integration.
HelpDesk: The Company provides unlimited help desk support to registered end users via a dedicated toll-free number. Support is provided for industry standard applications, utilities and operating system software.
Training: Dataflex offers authorized training for Microsoft and Lotus Notes at both customer sites and its regional training locations. All trainers must be certified instructors prior to teaching any course. To be certified, instructors must receive a minimum of 100 hours of training and satisfactory completion of multiple exams. Instructors also develop applications with the products they are authorized to teach.
LAN Support Plus: The Company provides consulting services to help customers define, design, implement and support local and wide-area networks. Dataflex professionals and the customer develop a needs analysis and agree upon an implementation plan for the LAN/WAN systems. Dataflex and customer professionals then work together in implementing and supporting the LAN/WAN.
Personnel
On March 31, 1996, excluding personnel assigned to the Western Region and the Valtron Division, the Company employed 811 full-time personnel of which 186 are responsible for marketing and sales, 374 for services, 99 for operations, 57 for finance, 16 for MIS and 79 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.
Competition
The market for desktop computer equipment and related products is highly competitive. The large business organizations that are the focus of the Company's marketing and sales efforts are highly visible to both the Company and its competitors.
The Company competes with other resellers, many of which may sell their products at lower prices than the Company, but may not offer the same full range of services after product delivery that the Company offers.
Backlog
The Company generally fulfills customers' orders within five business days after the receipt of product. At times, backlog of unfilled customers' orders has increased due to delivery constraints by major vendors.
Item 2
Item 2 - Properties
Generally, the Company is also responsible for all real estate taxes, insurance, utilities and maintenance expenses payable with respect to these premises.
The Company owns land and property in Clearwater, Florida. The buildings owned are comprised of 44,400 square feet and are used for office and warehouse space. Mortgages on the property are due on January 10, 2000, bearing interest at the rate of prime plus 1% per annum.
Item 3
Item 3 - Legal Proceedings
The Company is party to various claims, suits and complaints arising in the ordinary course of the Company's business. In the opinion of Company management, all 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 of the Company.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal 1996 to a vote of security holders.
Part II
Item 5
Item 5 - Market For the Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded under the symbol "DFLX" on the NASDAQ National Market System.
On July 2, 1996, the closing price of the Common Stock as reported on the NASDAQ National Market System was $7.125 per share. On July 2, 1996, there were 506 holders of record of the Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock. The Company intends to retain all of its future earnings to finance its operations and does not anticipate paying cash dividends in the foreseeable future. Any decision made by the Company's Board of Directors to declare dividends in the future will depend upon the Company's future earnings, capital requirements, financial condition and other factors deemed relevant by the Board of Directors.
Item 6
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, 1996. 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.
Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Background
During fiscal years 1995 and 1996, the Company acquired the assets of the following companies:
April 1994 - Granite Computer Products, Inc. ("Granite")
June 1994 - Advantage Systems, Inc. ("Advantage") August 1994 - Sunland Computer Services, Inc. ("Sunland")
November 1994 - Hagen Computer Systems, Inc. ("Hagen") January 1995 - National Data Products, Inc. ("NDP")
July 1995 - Valtron Technologies, Inc. ("Valtron")
The financial results of these acquisitions are included in the Company's results of operations from their respective dates of acquisition except for Sunland, which was accounted for under the pooling of interests method resulting in a restatement of all periods presented.
Subsequent to its March 31, 1996 year end, the Company sold substantially all the assets and transferred substantially all the liabilities of its Western Region (comprising the Granite, Hagen and Sunland acquisitions) and its Valtron Division. The divestitures are consistent with the Company's objective to improve its financial position, reduce interest expense and consolidate operations. The sale of the Western Region changed the strategic direction of the Company, thereby diminishing the need for its Valtron Division.
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:
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 the fiscal year ended March 31, 1996 ("fiscal 1996"). The increase primarily relates to a full year of revenues contributed by the companies acquired during fiscal 1995 of $190,000,000. Product revenues, which include 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 $21,223,000, from $31,287,000 in fiscal 1995 to $52,510,000 in fiscal 1996. This increase during fiscal 1996 primarily relates 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 services business due to incremental costs associated with the continued investment in the development of the services business. Hardware margins are consistent with those for fiscal 1995.
Selling, general and administrative expenses increased by 77.2%, or $18,736,000, from $24,259,000 in fiscal 1995 to $42,995,000 in fiscal 1996, primarily due to the recent acquisitions and increases in corporate infrastructure to support the growth of the Company. As a percentage of revenues, selling, general and administrative expenses increased from 8.9% in fiscal 1995 to 9.1% in fiscal 1996. This increase is primarily due to the acquisition of Valtron, which has 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 represent the estimated costs to enhance the Company's operational and administrative efficiencies through consolidations of operations and information systems. The charges relate 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 relate primarily to a reduction in the net realizable value of inventory product line in which the Company no longer intends to conduct business. Employee termination benefits relate 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 relate primarily to the replacement of older computer systems with new, upgraded systems.
Loss on dispositions of businesses represents 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 and its Valtron Division 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 relates 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.
Fiscal Year Ended March 31, 1995 Compared to March 31, 1994
Revenues increased by 123.8%, or $151,502,000, from $122,349,000 for the fiscal year ended March 31, 1994 ("fiscal 1994") to $273,851,000 for the fiscal year ended March 31, 1995 ("fiscal 1995"). The increase primarily relates to revenues contributed by the acquired companies during fiscal 1995 of $148,005,000. Product revenues, which include desktop computers, printers, displays, LAN products, software and other peripherals, accounted for over 90% of total revenues and increased by $138,353,000, or 127.9%. Service revenues, which include consulting, training, on-site maintenance and project management, accounted for approximately 10% of total revenues and increased by $13,163,000, or 93.0%.
Gross profit increased by 131.2%, or $17,757,000, from $13,530,000 in fiscal 1994 to $31,287,000 in fiscal 1995. This increase primarily relates to the gross profit contribution provided by the acquired companies during fiscal 1995. As a percentage of revenues, gross profit increased to 11.4% in fiscal 1995 as compared to 11.1% in fiscal 1994. This increase reflects slight improvement in hardware margins, partially offsetting lower margins in the services business due to incremental costs associated with the continued investment in the development of a nationwide services business.
Selling, general and administrative expenses increased by 127.2%, or $13,584,000, from $10,675,000 in fiscal 1994 to $24,259,000 in fiscal 1995, primarily due to the recent acquisitions and increases in corporate infrastructure to support the growth of the Company. As a percentage of revenues, selling, general and administrative expenses increased from 8.7% in fiscal 1994 to 8.8% in fiscal 1995.
Amortization of goodwill of $594,000 in fiscal 1995 reflects amortization of the excess of purchase price over net assets acquired for the related acquisitions. There was no amortization of goodwill in fiscal 1994.
Interest (expense) income, net was ($2,677,000) in fiscal 1995 as compared to $4,800 in fiscal 1994. The net increase in expense as compared to income in the prior fiscal year primarily relates to the use of funds available for investment and increased borrowings in connection with the acquisitions in fiscal 1995.
Litigation settlement and related costs in fiscal 1994 represents expenses associated with the settlement of a class action lawsuit. See Note 15 to the Consolidated Financial Statements.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $5,091,000 during fiscal 1996. This decrease primarily results from the use of available cash and cash equivalents to fund continuing operations.
Net cash used in investing activities of $5,902,000 reflects $1,215,000 in cash used for certain acquisitions and $4,687,000 for capital expenditures. The Company has no material commitments for capital expenditures for the fiscal year ending March 31, 1997.
Net cash provided by financing activities increased in fiscal 1996 primarily due to the net increase in notes payable of $28,122,801 under inventory and working capital agreements executed between the Company, Dataflex Southwest Corporation, a wholly-owned subsidiary of the Company ("Dataflex Southwest") and IBM Credit Corporation ("IBMCC").
On December 28, 1994, the Company and Dataflex Southwest executed inventory and working capital agreements with IBMCC (the "Agreements") for the purpose of providing sufficient funds available to the Company to finance a portion of the acquisition of NDP and to support its working capital needs. The Agreements had been subsequently amended to expand the available line from $110.0 million, secured by substantially all of the assets of the Company and Dataflex Southwest, to $120.0 million including a $5.0 million unsecured promissory note. The Agreements include several covenants requiring, among other things, minimum levels of tangible net worth, earnings as a percentage of revenue, current ratio and leverage ratio requirements. At March 31, 1996, the Company was not in compliance with certain of these covenants. Waiver of default of certain financial covenants was also received from IBMCC and the agreements have been subsequently amended to revise certain financial covenants to reflect the Company's current and future business environment. As of July 1, 1996, the credit line has been reduced to $85 million as a result of the sale of the Western Region.
As described previously, subsequent to its fiscal 1996 year-end, the Company sold its Western Region and its Valtron Division. The Company expects to receive approximately $45.0 million from these divestitures. These proceeds will be used to reduce the Company's debt and trade accounts payable with IBMCC.
Impact of Inflation
The Company does not believe that inflation has had a material impact on its operating results.
Item 8
Item 8 - Consolidated Financial Statements and Supplementary Data
The consolidated financial statements and supplementary financial information required by this item are attached.
Item 9
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
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.
Part IV
Item 14
Item 14 - Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Consolidated Financial Statements. The following consolidated financial statements are included in Part II, Item 8:
Page
Report of Independent Accountants
Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1996 and 1995
Consolidated Statements of Operations for years ended March 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for years ended March 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for years ended March 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a) (2) Incorporated Exhibits.
Exhibit Number Description of Document
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1 filed February 23, 1990, and amendments thereto, Registration No. 33033472.
3.1 The registrant's Certificate of Incorporation, as amended.
3.2 The registrant's restated and amended by-laws.
4 Specimen of stock certificate for shares of Common Stock.
10.8 Lease dated December 5, 1989 between 3920 Park Avenue Associates and the registrant.
10.9 Amendment to Lease dated January 29, 1990 between 3920 Park Avenue Associates and the registrant.
10.10 Dealer Agreement dated August 11, 1989 between International Business Machines Corporation and the registrant.
10.11 Dealer Agreement dated February 21, 1989 between Hewlett-Packard Company and the registrant.
10.12 Dealer Agreement dated April 1, 1989 between Apple Computer, Inc. and the registrant.
10.13 Dealer Agreement dated October 1, 1988 and extended to June 30, 1990 between Epson America, Inc. and the registrant.
10.14 Dealer Agreement dated April 7, 1989 between COMPAQ Computer Corporation and the registrant.
10.16 1987 Incentive Stock Option Plan.
10.17 1989 Incentive and Non-Qualified Stock Option Plan.
10.18 Salary Savings Plan and Trust of Dataflex Corporation dated December 21, 1989.
10.24 1990 Senior Management Incentive and Non-Qualified Stock Option Plan.
10.25 Form of Stock Option Agreement for 1989 Incentive and Non-Qualified Stock Option Plan by and between the registrant and Richard C. Rose.
10.26 Form of Stock Option Agreement for 1989 Incentive and Non-Qualified Stock Option Plan by and between the registrant and Gordon J. McLenithan.
10.27 Form of Stock Option Agreement for 1990 Senior Management Incentive and Non-Qualified Stock Option Plan by and between the registrant and Richard C. Rose.
10.28 Form of Stock Option Agreement for 1990 Senior Management Incentive and Non-Qualified Stock Option Plan by and between the registrant and Gordon J. McLenithan.
(2) Filed as an Exhibit to the Company's Form 8-K filed April 23, 1994.
10.29 Asset Purchase Agreement between the Company and Granite Computer Products, Inc. dated March 21, 1994.
(3) Filed as an Exhibit to the Company's Form 8-K filed June 16, 1994.
10.30 Asset Purchase Agreement between the Company and Advantage Systems, Inc. dated May 23, 1994.
(4) Filed as an Exhibit to the Company's Annual Proxy Statement filed September 1, 1991.
10.33 1991 Incentive and Non-Qualified Stock Option Plan.
(5) Filed as an Exhibit to the Company's December 31, 1994 Form 10-Q filed February 13, 1995.
10.34 Inventory and Working Capital Financing Agreement between Dataflex Corporation and IBM Credit Corporation dated December 28, 1994.
10.35 Inventory and Working Capital Financing Agreement between Dataflex Southwest Corporation and IBM Credit Corporation dated December 28, 1994.
(6) Filed as an Exhibit to the Company's Form 8-K filed January 24, 1995.
10.36 Asset Purchase Agreement between Dataflex Corporation and National Data Products, Inc. dated November 17, 1994.
(7) Filed as an Exhibit to the Company's Form 8-K filed August 31, 1994.
10.37 Stock Purchase Agreement between Dataflex Corporation, the sellers named therein and Sunland Computer Services, Inc. dated August 19, 1994.
(8) Filed as an Exhibit to the Company's Annual Proxy Statement filed September 1, 1992.
10.38 1992 Incentive and Non-Qualified Stock Option Plan.
(9) Filed as an Exhibit to the Company's Annual Proxy Statement filed September 1, 1994.
10.39 1994 Incentive and Non-Qualified Stock Option Plan.
(10) Filed as Exhibits to the Company Form 10-K filed June 29, 1995.
10.40 Employment Agreement dated April 1, 1993 by and between the Company and Richard C. Rose.
10.41 Amendment to Employment Agreement dated April 1, 1993 by and between the Company and Richard C. Rose.
10.42 Employment Agreement dated January 30, 1995 by and between the Company and Gordon J. McLenithan.
10.43 Amendment to Employment Agreement dated January 30, 1995 by and between the Company and Gordon J. McLenithan.
10.44 Amendment to Employment Agreement by and between the Company and Peter H. Jackson filed on April 23, 1994 as part of the Asset Purchase Agreement between the Company and Granite Products, Inc.
(11) Filed as an Exhibit to the Company's Form 8-K filed June 13, 1996.
10.45 Asset Purchase Agreement by and among Vanstar Corporation, VST West, Inc., Dataflex Corporation and Dataflex Southwest Corporation dated May 24, 1996.
(a) (3) Exhibits Filed Herewith
22 Subsidiaries.
23 Consent of Price Waterhouse concerning S-8 Registration Statements.
(b) Reports on Form 8-K.
(1) Report on Form 8-K reporting Item 5 dated January 25, 1996, filed January 31, 1996.
(2) Report on Form 8-K reporting Item 5 dated March 15, 1996, filed March 25, 1996.
Report of Independent Accountants
To the Board of Directors and Shareholders of Dataflex Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Dataflex Corporation and its subsidiary at March 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Morristown, New Jersey July 2, 1996
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Dataflex Corporation ("Dataflex" or "the Company") was incorporated in the State of New Jersey in April 1976. Dataflex provides desktop computing solutions and services including product sales, system integration, network installation, help desk support, training, consultation services and equipment repair maintenance. The Company serves primarily large business organizations with diverse desktop computing requirements located throughout the United States.
Principles of Consolidation--The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition--Sales of computer equipment are recorded when the customer accepts title. Services contract revenue is recognized ratably over the terms of the contracts. The operating history of the Company is such that the allowance for doubtful accounts represents an insignificant percentage of total receivables.
Income Taxes--The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax consequences of events that have been recognized in the Company's financial statements or tax returns.
Earnings (Loss) Per Share--Earnings (loss) per share are calculated by dividing net income (loss) by the weighted average common shares and, when their effect is dilutive, common share equivalents outstanding during the year. Weighted average common shares outstanding for the years ended March 31, 1996, 1995 and 1994 were 5,213,711, 4,732,571 and 4,085,049, and included common stock equivalents of 0, 485,797 and 72,077, respectively.
Cash and Cash Equivalents--For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Inventory--Inventory is stated at the lower of cost or market.
Cost is determined on a specific cost basis for equipment and average cost for spare parts. Discretionary subsidies received from manufacturers are recorded as reductions in the inventory value or, if the product to which the subsidy relates has been sold, as reductions in the cost of revenue. The Company amortizes its spare parts over their estimated useful lives ranging from three to eight years on a straight-line basis.
Net Assets Held for Sale--Net assets held for sale represents the estimated fair market value of the net assets of the Western Region and its Valtron Division. Management decided to exit these businesses in March 1996 (Note 3).
Property and Equipment, Net--Property and equipment are stated at cost. Depreciation and amortization are computed by use of the straight-line method. Depreciation is based on the estimated useful lives of the various assets which range from three to forty years. Leasehold improvements are amortized over the shorter of the life of the lease or their estimated useful life.
Goodwill-Goodwill represents the excess of purchase price over the fair value of net assets acquired and liabilities assumed and is being amortized over 25 years using the straight-line method. Accumulated amortization was $1,023,354 and $589,629 at March 31, 1996 and 1995, respectively.
New Accounting Pronouncement--The Financial Accounting Standards Board recently issued two standards which will be applicable to the Company but which the Company has not yet adopted: No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of and No. 123, Accounting for Stock-Based Compensation. The impairment standard is not expected to have a significant impact on the Company. The Company has not yet determined which of the acceptable approaches it will use under the stock compensation standard. Adoption of certain approaches under the stock compensation standard could result in noncash charges, which if made are not expected to be material. At a minimum, the standard will require disclosures about the fair value of the employee stock options.
Fair Value of Financial Instruments--The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash equivalents--The carrying amount approximates fair value because of the short maturity of those instruments.
Long-term debt--The carrying amount approximates fair value because of the variable interest rate charged on substantially all of this debt and the relatively short maturity of the debt instruments.
Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2: ACQUISITIONS
Effective April 1, 1994, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Granite Computer Products, Inc. ("Granite"), a reseller of computer products located in Alameda, California, for $9,514,200 in cash.
Effective June 1, 1994, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Advantage Systems, Inc. ("Advantage"), an Entre Computer franchise of Intelligent Electronics, in exchange for $2,250,000 in cash, a $1,000,000 convertible redeemable note, 71,397 shares of the Company's common stock with an aggregate market value of $500,000 and a contingent payment based upon the future earnings of Advantage for a three-year period. The $1,000,000 convertible redeemable note bears interest at 6% per annum and may be converted at any time through the maturity date of May 31, 1997 into 100,000 shares of the Company's common stock, which would be valued at the closing price on the date of conversion.
Effective November 1, 1994, the Company (through its wholly-owned subsidiary Dataflex Southwest Corporation) acquired substantially all of the assets and assumed substantially all of the liabilities of Hagen Computer Systems, Inc. ("Hagen"), an Entre Computer franchise of Intelligent Electronics, located in Tucson, Arizona, for $416,000 in cash.
Effective January 1, 1995, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of National Data Products Inc. ("NDP"), a reseller of computer products based in Clearwater, Florida, for $6,200,000 in cash, $3,500,000 in subordinated notes with an interest rate of 9%, 625,000 shares of the Company's common stock with an aggregate market value of approximately $4,200,000, and a contingent payout based on the future earnings of NDP over a seven year period.
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 approximate aggregate market value of $3,400,000 and two subordinated notes aggregating $1,000,000. The notes bear interest at 9% per annum.
These acquisitions have been accounted for under the purchase method and, accordingly, the operating results of Granite, Advantage, Hagen, NDP and Valtron have been included in the consolidated operating results since the dates of their respective acquisitions.
The cost of the acquisitions has been allocated on the basis of the fair market value of the assets acquired and the liabilities assumed. The allocation resulted in goodwill of approximately $34,085,654 which is being amortized over 25 years on a straight-line basis. Net goodwill associated with the assets sold was $13,110,285 (Note 3).
The unaudited pro forma consolidated condensed results of operations listed below give effect to certain adjustments, and assume the acquisitions occurred at the beginning of each period presented.
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 $4,631,820, representing the aggregate difference between the carrying value of the net assets of these businesses and the estimated fair value of these businesses. The estimated fair market value of the net assets of the businesses to be disposed of are included in "Net Assets Held for Sale" in the March 31, 1996 Consolidated Balance Sheet.
On May 24, 1996, the Company completed the sale of substantially all the assets and the transfer of substantially all the liabilities of the Western Region, excluding Valtron, to Vanstar Corporation for approximately $42 million in cash, including $5 million placed in escrow pending future adjustments as described in the agreement. The cash received was used to reduce the Company's accounts payable and interest-bearing obligations on its credit facility with IBM Credit Corporation in the amount of $9.3 million and $27.7 million, respectively (Note 10). The purchase price is subject to adjustment based primarily on the expected realizability of certain assets as defined in the agreement. The Company has included its best estimate of these adjustments in its determination of the estimated fair market value of the net assets held for sale and of the loss on disposition of businesses. The Company does not expect these adjustments to be material relative to the total purchase price.
On June 5, 1996, the Company announced an agreement to sell substantially all the assets and the transfer of substantially all the liabilities of its Valtron division to Valtron's President and a group of investors. The agreement, finalized in July, is for $2,900,000 in cash, $750,000 in forgiveness of a Note payable to Valtron and receipt of a note of $850,000, bearing interest at 9%. The note is payable in two installments in July 1998 and July 1999. The estimated loss on this sale, based on the purchase price outlined in the agreement, is included in the Consolidated Statement of Operations for the fiscal year ended March 31, 1996 described above.
NOTE 4: INVENTORY
Accumulated amortization of spare parts inventory is $801,428 and $1,554,217 at March 31, 1996 and 1995, respectively. Amortization expense amounted to $2,064,747, $1,004,572 and $492,959 for the years ended March 31, 1996, 1995 and 1994, respectively.
NOTE 5: OTHER CURRENT ASSETS
The balance in other current assets at March 31, 1996 and 1995 includes receivables from major vendors for returned goods, marketing and other programs of $7,309,277 and $9,895,946, respectively.
NOTE 6: PROPERTY AND EQUIPMENT, NET
Property and equipment, net is as follows:
Depreciation and amortization expense amounted to $3,315,076, $1,967,637 and $1,217,652 for the years ended March 31, 1996, 1995 and 1994, respectively.
NOTE 7: LOANS RECEIVABLE FROM EMPLOYEES
Loans receivable from employees of $533,478 and $697,364 at March 31, 1996 and 1995, respectively, includes various loans made to certain employees during fiscal years 1987 through 1996, of which $311,424 at March 31, 1996 and 1995 are related to the exercise of stock options. These loans bear interest at rates ranging from 6% to prime plus 1.5% per annum and are payable upon demand.
Total interest income from employees' loans amounted to $41,400, $45,300 and $40,300 for the years ended March 31, 1996, 1995 and 1994, respectively.
NOTE 8: SUPPLEMENTARY CASH FLOW INFORMATION
The following is a summary of supplementary cash flow information:
NOTE 9: CREDIT FACILITY
On December 28, 1994, the Company and its former wholly-owned subsidiary, Dataflex Southwest Corporation ("Dataflex Southwest"), executed Inventory and Working Capital Agreements with IBM Credit Corporation (the "Agreements"). The Agreements have been subsequently amended to expand the available line from a maximum of $110.0 million secured by substantially all of the assets of the Company and Dataflex Southwest to $120.0 million including a $5.0 million unsecured promissory note. Interest charged under the Agreements ranges from LIBOR plus 4.25% to LIBOR plus 4.875% on outstanding borrowings. Other charges include monthly fees of $3,750 and an annual renewal fee of $25,000. The Agreements expire on December 28, 1997 and can be renewed by the parties for an additional year on each anniversary date. Effective July 1, 1996, as a result of the sale of the Western Region, IBM Credit Corporation has reduced the line of credit to $85 million.
The Agreements include several covenants requiring, among other things, minimum levels of tangible net worth, earnings as a percentage of revenue, current ratio and leverage ratio requirements. At March 31, 1996, the Company was not in compliance with certain of these covenants. Waiver on default of certain financial covenants was received from IBM Credit Corporation and the agreements were subsequently amended to revise certain financial covenants to reflect the Company's current and future business environment.
NOTE 10: LONG-TERM DEBT
Aggregate principal payments for the next five years subsequent to March 31, 1996 are as follows:
NOTE 11: LEASES
The Company leases various facilities and equipment under noncancelable lease arrangements which expire at various dates during the next eight years, excluding renewal options. In addition, the Company is generally responsible for real estate taxes, utilities, insurance and maintenance expenses which relate to its facilities.
Future minimum lease payments applicable to noncancelable operating leases are as follows:
Rental expense amounted to $1,482,857, $1,147,325 and $811,143 for the years ended March 31, 1996, 1995 and 1994, respectively.
NOTE 12: INCOME TAXES
The composition of the (benefit from) provision for income taxes is as follows:
A reconciliation of the federal statutory rate with the Company's effective tax rate is as follows:
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:
NOTE 13: SIGNIFICANT CUSTOMERS AND VENDORS
No single customer accounted for greater than 10% of the Company's revenue during the years ended March 31, 1996, 1995 and 1994.
Sales of products from one vendor constituted approximately 31%, 23% and 58% of the Company's revenue during the years ended March 31, 1996, 1995, and 1994, respectively. Another vendor's products comprised 13%, 13% and 15% of the Company's revenue during the same three year period.
NOTE 14: RESTRUCTURING AND OTHER CHARGES
During the fourth quarter of fiscal 1996, the Company recorded restructuring and other charges of $5,352,809, primarily related to write-downs of inventory and spare parts, employee termination benefits and write-offs of the value of computer systems to be replaced. The restructuring program was driven by the need to refocus operations along more profitable business lines, consolidate operations and implement upgraded computer systems. The Company plans personnel reductions of approximately 30 individuals in operational, administrative and executive areas. The Company has recorded a provision of $1,200,000 for the estimated level of employee termination benefits in the accompanying March 31, 1996 Consolidated Balance Sheet. Due to the proximity of the announcement to the balance sheet date, no employees have been terminated and no termination benefits have been paid as of March 31, 1996.
NOTE 15: COMMITMENTS AND CONTINGENCIES
The Company's employment contracts with three employees provide for base annual salaries aggregating approximately $750,000 per year. The contracts for the employees expire between January 1998 and December 1999.
Subsequent to March 31, 1996, in connection with the sale of the Western Region (Note 3), the Company terminated its employment contract with the President of this business unit. This termination resulted in a one-time payment of approximately $300,000 which is included in the loss on dispositions of this business.
Certain contracts referred to above include provisions for payment of severance and in the event of a change of control. The maximum amount that could be required to be paid under these contracts, if such events occur, approximates $2,500,000.
A class action complaint was filed in March 1992 by shareholders of the Company alleging that the Company and certain of its officers and directors violated federal securities laws. The Company included a charge of $847,500 against earnings for the year ended March 31, 1994, which included $110,000 in legal fees. Although management believed it had meritorious defenses, expenses to defend and the time and disruption of Company resources led the Company to agree to a full settlement of all claims for $900,000. This amount, of which $162,500 was reimbursed from the Company's insurance carrier in fiscal 1995, was paid by the Company in the first quarter of fiscal 1995.
Other claims, suits and complaints arise in the ordinary course of the Company's business. In the opinion of Company management, such pending matters are without merit or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial position or results of operations of the Company.
NOTE 16: STOCK OPTIONS
The Company maintains two incentive stock option plans (the "ISO Plans"), and five incentive and nonqualified stock option plans (the "NQSO Plans"). The 1989, 1990, 1991, 1992 and 1994 Plans provide for the grant of both incentive stock options and nonqualified stock options to employees of the Company. The grant prices of the various stock option plans range from $2.03 to $8.75.
Shares of Common Stock have been reserved and issued under the above plans as follows:
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.
The Company has occasionally granted to officers, directors and certain key employees, stock options in addition to the ISO and NQSO stock option plans.
On November 15, 1993, in connection with the appointment of a member to the Company's Board of Directors, the Company granted options for 300,000 shares of common stock to the board member at its then fair market value of $5.00 per share.
On September 2, 1994, in connection with the appointment of another member to the Company's Board of Directors, the Company granted options for 10,000 shares of common stock to the board member at its then fair market value of $7.125 per share.
These options vest 25% per year beginning one year after date of grant. The options, by their terms, must be exercised within ten years from the grant date or within 90 days of termination from the Board of Directors.
On April 6, 1994, in connection with the acquisition of Granite Products, Inc. (see Note 2), the Company granted a total of 300,000 shares to four Granite associates. The options were granted at their then fair market value of $7.00 per share. These options vest 25% per year beginning one year after date of grant. The options, by their terms, must be exercised within ten years from the date of grant or within 90 days of employment termination.
Information concerning options outstanding as of March 31, 1996, 1995 and 1994 is as follows:
Options exercised during the years ended March 31, 1996 and March 31, 1995 ranged in exercise prices from $4.50 to $5.85.
NOTE 17: EMPLOYEE BENEFITS
The Company has a 401(k) Plan which covers all employees who have completed ninety days of service and are at least twenty-one years of age. Employees may contribute from 1 to 15% of their annual compensation subject to the limitation imposed by law. Employee contributions of up to 6% of each covered employees' compensation are matched at a percentage determined each year by the Company. The maximum matching percent during fiscal years 1996, 1995 and 1994 was 20%, resulting in Company contributions of $234,855, $85,222 and $39,779, respectively.
NOTE 18: SHAREHOLDERS' EQUITY
In September 1995, the Company's shareholders approved the resolution proposed by the Board of Directors to amend Article Fourth of the Company's Certificate of Incorporation to authorize the Company to issue 10,000,000 shares of Preferred Stock, without par value, and to increase the number of authorized shares of common stock, no par value, from 10,000,000 shares to 20,000,000 shares.
As of March 31, 1996, there are no issued shares of Preferred Stock.
NOTE 19: QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data for the fiscal years ended March 31, 1996 and 1995 is as follows:
Exhibit 22
DATAFLEX CORPORATION
SUBSIDIARIES
Dataflex Southwest Corporation, an Arizona corporation.
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 33-4817, 33-16424, 33-32996 and 33-51012) of Dataflex Corporation of our report dated June 28, 1996, appearing on page of this Form 10-K.
PRICE WATERHOUSE LLP
Morristown, New Jersey June 28, 1996