Our business is subject to the risk of customer and supplier concentration.
For the years ended December 31, 2004 and 2003, a U.S. government agency (via a subcontract
agreement with IBM) and Xerox Corporation (Xerox) represented approximately 40%, and 15%,
respectively, of our total service fee revenue for both periods. The loss of, or non-payment of
invoices by, either or both of such U.S. agency or Xerox as clients would have a material adverse
effect upon our business. In particular, the agreement under which we provide services to such
clients are terminable at will upon notice by such clients.
Substantially all of our product revenue was generated by sales of product purchased under
master distributor agreements with IBM and is dependent on IBMs business. Our product revenue
business is dependent upon our master distributor relationship with IBM and the continuing market
for IBM products. A termination of the relationship with IBM or a decline in customer demand for
such products could have a material adverse effect on our business. Sales to two customers
accounted for approximately 12% and 11% of our total product revenues for the year ended December
31, 2004. Sales to three customers accounted for approximately 13%, 12% and 10% of our total
product revenues for the year ended December 31, 2003. The loss of any one or more of such
non-payment of any material amount by these or any other customer, would have a material
adverse effect upon our business.
Changes to financial accounting standards may affect our reported results of operations.
We prepare our financial statements to conform to generally accepted accounting principles, or
GAAP. GAAP are subject to interpretation by the American Institute of Certified Public Accountants,
the SEC and various bodies formed to interpret and create appropriate accounting policies. A change
in those policies can have a significant effect on our reported results and may even affect our
reporting of transactions completed before a change is announced. Accounting rules affecting many
aspects of our business, including rules relating to accounting for asset impairments, revenue
recognition, arrangements involving multiple deliverables, employee stock purchase plans and stock
option grants have recently been revised or are currently under review. Changes to those rules or
current interpretation of those rules may have a material adverse effect on our reported financial
results or on the way we conduct our business.
We operate with significant levels of indebtedness and are required to comply with certain
financial and non-financial covenants; we are required to maintain a minimum level of subordinated
loans to our subsidiary Supplies Distributors; and we are obligated to repay any over-advance made
to Supplies Distributors by its lenders.
As of December 31, 2004, our total credit facilities outstanding, including debt, capital
lease obligations and our vendor accounts payable related to financing of IBM product inventory,
was approximately $66.4 million. Certain of the credit facilities have maturity dates in calendar
year 2006 or after, but are classified as current liabilities in our consolidated financial
statements. We cannot provide assurance that our credit facilities will be renewed by the lending
parties. Additionally, these credit facilities include both financial and non-financial covenants,
many of which also include cross default provisions applicable to other agreements. We cannot
provide assurance that we will be able to maintain compliance with these covenants. Any non-renewal
or any default under any of our credit facilities would have a material adverse impact upon our
business and financial condition. In addition we have provided $7.0 million of subordinated
indebtedness to Supplies Distributors, the minimum level required under certain credit facilities
as of December 31, 2004. The maximum level of this subordinated indebtedness to Supplies
Distributors that may be provided without approval from our lenders is $8.0 million. The
restrictions on increasing this amount without lender approval may limit our ability to comply with
certain loan covenants or further grow and develop Supplies Distributors business. We have
guaranteed most of the indebtedness of Supplies Distributors. Furthermore, we are obligated to
repay any over-advance made to Supplies Distributors by its lenders to the extent Supplies
Distributors is unable to do so.
We face competition from many sources that could adversely affect our business.
Many companies offer, on an individual basis, one or more of the same services we do, and we
face competition from many different sources depending upon the type and range of services
requested by a potential client. Our competitors include vertical outsourcers, which are companies
that offer a single function, such as call centers,