<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1996 Commission File Number 0-14371
- ------------------------------------------- ------------------------------
COMPUCOM SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 38-2363156
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10100 N. CENTRAL EXPRESSWAY, DALLAS, TX 75231
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 265-3600
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
----------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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(Title of Class)
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 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
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Indicate 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. [__]
The aggregate market value of the Common Stock, $.01 par value, held by non-
affiliates (based on the closing price on NASDAQ) on March 14, 1997 was
approximately $111.5 million. For purposes of determining this amount only,
Registrant has defined affiliates as including (a) the executive officers named
in Part III of this 10-K report, (b) all directors of Registrant, and (c) each
stockholder that has informed Registrant by March 14, 1997 that it is the
beneficial owner of 10% or more of the outstanding common stock of Registrant.
The number of shares of the Registrant's Common Stock outstanding as of March
14, 1997 was 45,502,013 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relative to the May 14, 1997 annual
meeting of stockholders of registrant, to be filed within 120 days after the end
of the year covered by this report on Form 10-K, are incorporated by reference
into Items 10, 11, 12 and 13 (Part III) of this Report. Such Proxy Statement,
except for the parts therein which have been specifically incorporated by
reference, shall not be deemed "filed" for the purposes of this report on Form
10-K.
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<PAGE>
PART I
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ITEM 1 BUSINESS
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INTRODUCTION
CompuCom Systems, Inc., together with its subsidiaries ("CompuCom" or "the
Company"), is a leading provider of distributed desktop computer products and
network integration services to large and medium sized businesses throughout the
United States. CompuCom helps Fortune 1000 companies manage information
technology to achieve their business goals by providing a wide range of services
in provisioning, support and technology management. Product and services are
sold by a direct sales force to over 5,000 business customers through
approximately 40 sales and service centers located in and serving large
metropolitan areas nationwide.
The Company is an authorized dealer of major distributed desktop computer
products for a number of manufacturers, including Compaq Computer Corporation
("Compaq"), International Business Machines Corporation ("IBM"), Hewlett-Packard
Company ("HP"), Toshiba America Information Systems ("Toshiba"), and Apple
Computer Corporation ("Apple"). CompuCom also offers a broad selection of
networking and related products, computer-related peripheral equipment and a
range of computer equipment and software from a number of vendors, including
3Com Corporation ("3Com"), Digital Equipment Corporation ("Digital"), Intel
Corporation ("Intel"), Kingston Technology Corporation ("Kingston"), Lotus
Development Corporation ("Lotus"), Microsoft Corporation ("Microsoft"), NEC
Technologies, Inc. ("NEC"), and Novell, Inc. ("Novell"). To further meet the
needs of its customers, CompuCom provides a variety of services including
LAN/WAN project services, consulting, network management, help desk, field
engineering, configuration and product procurement utilizing network
applications such as Novell Netware, Windows NT Server, Windows and Windows 95,
IBM's OS/2 Warp and LAN Server.
Net revenues for the Company have grown at a compounded rate of 29% over
the past five years, while net earnings have grown by 43% compounded annually
over the same period. Excluding an after tax non-recurring securities-related
gain of $5.2 million, net earnings over that period have grown at a compounded
rate of 37%. CompuCom's strong revenue and net earnings performance is a result
of the Company's continued focus on customer satisfaction, along with the
enhancement of its product and services capabilities created by a strategy of
growth through existing operations and strategic acquisitions. The Company's
target customers are becoming increasingly dependent on information technology
to compete effectively in today's markets. As a result, the decision-making
process that organizations face when planning, selecting and implementing
technology solutions is becoming more complex and requires many of these
organizations to outsource the management and support of their technology
needs.
In the first quarter of 1997, M. Lazane Smith, who has been with the
Company since 1993 and previously served as Vice-President of Finance and
Corporate Controller, was promoted to the position of Senior Vice President and
Chief Financial Officer. Ms. Smith replaces Mr. Robert J. Boutin, who resigned.
The Company operates in only one industry segment -- sales and services of
distributed desktop computer products, configuration, network integration and
technology support services to businesses nationwide -- and no separate industry
segment information is presented.
This document may contain "forward -looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve risks and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in such forward-looking
statements. See "Product", "Principal Suppliers", "Dependence Upon Major
Vendors and Other Suppliers" and "Competition" in this Item and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 of this report for a discussion of important factors that could
affect the validity of any such forward-looking statement.
2
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SALES AND MARKETING
The Company markets its product procurement, configuration, field
engineering, network management, help desk services and technology management
primarily through its direct sales force and service personnel, operating
through approximately 40 sales and service centers. The Company focuses on
meeting the business objectives of large corporate businesses, which accounted
for the majority of the Company's net revenue in 1996. However, no one customer
accounted for in excess of 10% of such revenues. Order backlog is not
considered to be a meaningful indicator of the Company's future business
prospects due to the short order fulfillment cycle.
The Company is generally authorized by various vendors to sell desktop
computer products through its sales centers, which are located in major
metropolitan areas in order to provide convenient access for sales and service
personnel to a significant customer base. Each location typically is staffed by
direct sales representatives, support personnel, system engineers and
technicians who are authorized to repair and maintain Compaq, IBM, HP and
certain other manufacturers' products.
The Company provides support to its customers primarily through the
CompuCom Customer Center ("customer center") located in Dallas, Texas. Customer
center personnel, called inside sales representatives ("ISR's"), may be assigned
to specific customer accounts or to customers in a certain geographical area and
are knowledgeable about computer technology. Each ISR works closely with the
customer and the CompuCom sales representative to keep up to date on the
business needs of that customer, and to provide the customer with information
about product availability, services, pricing, shipping and invoicing via a
toll-free telephone number. The primary goal of the customer center is to
provide greater support to the Company's customers while allowing the Company's
direct sales force to focus on soliciting new business and providing the
necessary support for the customer's more complex service needs. At the end of
1996, the Company employed approximately 450 customer center personnel, of whom
approximately 325 worked at the customer center in Dallas, and approximately 125
worked on-site at certain customer locations.
As of December 31, 1996, the Company employed approximately 240 full-time
direct sales representatives. The sales force is compensated with a base salary
and commissions based on gross margin related to their sales. In 1996, a larger
portion of the sales representatives compensation was based on service sales and
gross margin as part of the Company's strategy of growing its service business.
During 1996, services net revenues increased 68% due to the Company's
continued efforts to focus on increased sales of services to meet customer needs
and to improve profitability. These on-going efforts included: additional
training was provided for system engineers; management provided greater support
to the services group; additional corporate resources were allocated to support
the services group; and the compensation plan of branch general managers and
sales representatives placed greater emphasis on sales of services. In
addition, the Company emphasized the hiring of quality services personnel,
increasing the number of its services employees from approximately 1,200 at the
end of 1995 to almost 2,000 by year-end 1996. To further enhance its service
growth, in mid-1996 the Company hired approximately 120 technology college
graduates and placed them in a six-month engineering training program. Although
the Company's revenues from its services business currently represent 9% of its
total revenues, its services business is an integral part of the Company's
strategy to provide customers with the value-added service solutions to meet
their technology needs.
During 1996, in order to meet customers' ever increasing global business
needs, the Company helped to create GlobalServe, an alliance of international
computer service suppliers. The GlobalServe alliance provides customers a single
point of contact for accessing the distributed desktop computer products and
services they need worldwide.
3
<PAGE>
OPERATIONS
The Company's corporate headquarters is located in Dallas, Texas.
Currently, the Company's financial and administrative functions, including
information services, service support, marketing, human resources and finance,
are located at this facility. The customer center, collections department and
order processing are presently located in a leased facility near the Company's
corporate headquarters. In late 1996, the Company purchased 20 acres of real
property with two office buildings in Dallas to be used as its new corporate
headquarters and operations campus. While the Dallas sales office and product
services department relocated from a separate leased facility to the new campus
in early 1997, the Company expects the majority of its remaining Dallas
operations to relocate to the new campus by the third quarter.
The Company's integrated information systems ("IS") utilize client/server
distributed relational database technology running on a proactively managed wide
area network based on frame relay technology. The system contains five major
components: the Distribution Information Management System ("DIMS"), the Service
Information Management System ("SIMS"), the Customer Center System ("CCS"), the
Warehouse Information Management System ("WIMS"), and the Financial Information
Management System ("FIMS"). During 1996, in an effort to provide increased
system reliability, availability, and growth capacity, the Company completed the
conversion of four of the five "IS" systems from PC-based hardware to mini-
computer platforms.
To further enhance the quality and efficiency of its information systems,
the Company has developed a state-of-the-art data warehouse, which increases the
ease with which Company personnel can access historic information and create
customized customer and vendor reports. During 1996, the Company made
significant enhancements to its data warehouse by implementing Internet-based
capabilities, which give its customers the ability to directly access order
status and shipment history. This electronic commerce tool, which won a Best
Practices award from the Data Warehouse Institute, also gives customers the
ability to create custom-priced quotations for new orders from an Internet-based
catalog of products, and gives the Company's principal vendors access to product
sales history and inventory levels. In addition, the Company implemented a
comprehensive Intranet application, accessible only to Company personnel, which
provides rapid access to Company organization charts, policies, procedures and
other corporate information and has a user-friendly query interface to locate
answers to frequently asked questions. The Company plans to extend its Internet
capabilities during 1997 by implementing Internet-based order placement and
purchased asset lookup using either product serial number or customer asset
tags. Plans also include improved product sales information reporting for
principal vendors, real time open call status reporting for service customers
and implementation of a customer management and event tracking system to be used
by customer center personnel.
The Company continues to implement its client server-based Customer
Procurement System ("CPS") in key customer accounts, which allows customer's to
place orders that automatically interface with the Company's core system
applications. The Company also began the implementation of its new Sales Force
Automation package, which provides Company sales representatives access to email
and key Company applications from remote locations, allowing them to spend more
time with customers and improve productivity.
The Company's two distribution centers are highly automated and employ
advanced inventory management and order processing technologies that allow the
Company to configure desktop products and receive, process and ship customer
orders accurately and efficiently. During 1996, the Company tripled its
configuration capacity by relocating its eastern distribution center to a
300,000 square feet facility in Paulsboro, New Jersey. The distribution centers
utilize hand-held, radio frequency devices to stock, pick and update the status
and location of inventory. These devices play a key role in enabling the
Company to efficiently handle increasing volume and are used in the daily cycle
counting process, which has resulted in improved overall inventory integrity and
bin accuracy. The Company also uses an on-line freight metering program, which
helps lower order fulfillment time and provides more reliable and timely freight
information.
The distribution, configuration, and product services departments completed
ISO 9002 certification in 1995. ISO 9002 is part of the ISO 9000 set of
standards developed by the International Organization of Standardization
("ISO"), which represent common international business quality standards
designed to help demonstrate the capability of a supplier to control the
processes that determine the acceptability of the product being delivered.
During 1996, the Company's returned merchandise center completed ISO 9002
certification.
4
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PRODUCTS
The Company provides for procurement of sophisticated technologies
consisting of distributed desktop computer products, peripherals, software and
services to its customers. It is an authorized dealer for desktop products of
Apple, Compaq, Digital, HP, IBM, Kingston, NEC, 3Com, Toshiba and other major
manufacturers, as well as a dealer for software products of Lotus, Microsoft,
Novell and other principal software suppliers. The Company stocks over 5,000
different desktop products and accessories, consisting of leading as well as
alternative brands.
CompuCom provides the integration of a variety of manufacturers' products
into various desktop system configurations to meet each customer's needs. The
Company provides value to its customers by allowing them to choose products from
various manufacturers that best suit their desktop and network needs as opposed
to manufacturers' direct sales organizations which typically configure or market
desktop systems that include products only from that particular manufacturer.
NETWORK AND TECHNOLOGY SERVICES
The Company continues to focus on expanding its presence in the service
market. This commitment is reflected in the increase in its service personnel
during 1996. As of December 31, 1996, the Company employed approximately 2,000
service personnel, including system engineers, field technicians, service
support and engineers on-site at customer locations, compared to approximately
1,200 as of December 31, 1995. These service personnel provide configuration,
field engineering, network management, help desk services and technology
management to the Company's customers.
CompuCom maintains two configuration centers, one in each of the Company's
distribution centers. These centers contain configuration systems that have
the ability to set up and install product that includes both standard and non-
standard components or software to enable the Company to meet increasing
customer demand for advanced system and network configuration technologies.
Through its field engineering group, the Company provides hardware
maintenance services ranging from simple desktop repairs, installations, moves
and adds to changes to complex network repairs, application setups and software
upgrades. These services are provided through the Company's sales and service
centers and are performed based upon the specific customer needs, such as on-
site support, warranty support, change and upgrade management, contingency
management, annual contract, or time and material.
CompuCom's Network Management Group focuses on the development, testing
and implementation of network management systems. The network management
service offerings include: network audits, which consist of an on-site detailed
analysis of the current configuration and health of the customer's network
environment; network control center design, which includes building a network
control center at the customer's location; and remote network monitoring of the
customer's network performed by CompuCom's network control center located at
the Company's headquarters in Dallas, Texas.
CompuCom offers help desk support through its Remote Help Desk Services
located at the Company's headquarters in Dallas, Texas and at customer
locations. These help desk services offer information systems departments the
skills and resources needed to design, implement and operate a consolidated,
resolution-oriented help desk to support a customer's information technology
investments. CompuCom's help desk services include call management, problem
management, report systems, resources and customer relations. The Company's
help desk support group consists of personnel with expertise in software
applications, network operating systems and hardware, who provide technical
support to end users and system administrators.
The Company offers technology management services by providing LAN/WAN
project and consulting services that focus on the integration of new and
existing computing technologies into existing corporate computing environments.
These services include technology selection and strategic planning, technology
briefings, systems analysis, system design services, and design of support
infrastructures. By combining the expertise of its consultant personnel with
strategic manufacturer partnerships, the Company is able to provide solutions
for complex network integration projects.
5
<PAGE>
PRINCIPAL SUPPLIERS
A major portion of the Company's revenues are derived from sales of
distributed desktop computer products including Compaq, IBM and HP products.
During 1996, the Company's principal suppliers were Compaq, IBM and HP. The
Company's agreements with these vendors contain provisions providing for
periodic renewals and permitting termination by the vendor without cause,
generally upon 30 to 90 day's written notice, depending upon the vendor. Since
1987, Compaq, IBM and HP have regularly renewed their respective dealer
agreements with the Company, although there can be no assurance that the regular
renewals of the Company's dealer agreements will continue. The termination, or
non-renewal, of the Company's Compaq, IBM or HP dealer agreements, or all, would
materially adversely affect the Company's business. The Company, however, is
not aware of any reason for the termination, or non-renewal, of any of those
dealer agreements and believes that its relationships with Compaq, IBM and HP
are satisfactory.
The Company purchases products from Compaq, IBM and HP at pricing levels
that the Company believes are the lowest prices available to those vendors'
respective dealers, with the exception of special bid pricing for specific large
customer accounts. All of the Company's principal suppliers require that the
Company purchase certain minimum volumes of products in a specified period to
maintain favorable pricing levels. The Company also obtains favorable terms
from Compaq, IBM and HP by participating in certain vendor programs offered by
those suppliers. The Company has certain selling, promotional and related
expenses reimbursed by vendors under dealer programs offered by those and other
suppliers. However, there can be no assurance that any of these programs will
continue in 1997 or that the Company will continue to participate in any of
these programs at the same level as in 1996.
Sales of Compaq, IBM and HP products accounted for approximately 31%, 15%
and 12%, respectively, of the Company's 1996 net revenues compared to 28%, 16%
and 11%, respectively, in 1995 and 27%, 20% and 11%, respectively, in 1994.
Due to the rapid delivery requirements of its customers and to assure
itself of a continuous allotment of products from suppliers, the Company
maintains adequate levels of inventory funded through its credit facilities and
vendor credit. These major suppliers at times provide price protection programs
to the Company that are intended to reduce the risk of inventory devaluation by
absorbing temporary price reductions and long-term price declines associated
with aging product life cycles. The Company also has the option of returning a
certain percentage of its current product inventories each quarter to these
principal suppliers as it assesses each product's current and forecasted demand
schedule. If such returns exceed certain specified levels, the Company may be
charged restocking fees ranging up to 5%. The Company did not incur any
significant restocking fees in 1996.
DEPENDENCE UPON MAJOR VENDORS AND OTHER SUPPLIERS
The Company is dependent upon the continued supply of products from its
suppliers, particularly Compaq, IBM and HP. Historically, certain suppliers
occasionally experience shortages of select product that render components
unavailable or necessitate product allocations among resellers. While certain
shortages existed throughout 1996, the Company believes the product
availability issues are a result of the present dynamics of the desktop
computer industry as a whole, which include high customer product demand,
shortened product life cycles and increased frequency of new product
introductions into the marketplace. While there can be no assurance that
product unavailability or product allocations, or both, will not increase in
1997, the impact of such an interruption is not expected to be unduly
troublesome due to the breadth of alternative product lines available to the
Company and the Company's established programs to accelerate configuration and
delivery times when such events occur.
6
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COMPETITION
The Company is engaged in fields within the desktop computer industry which
is characterized by a high level of competition. Many established desktop
computer manufacturers (including some of the Company's own vendors), systems
integrators and other resellers of distributed desktop or networking products
including Vanstar Corporation, InaCom Corp. and Microage, Inc., compete with the
Company in the configuration and distribution of computer systems and equipment.
In addition, the desktop computer reseller industry is characterized by intense
competition, primarily in the areas of price, product availability and breadth
of product line. In the highly fragmented computer services area, the Company
competes with several larger competitors, other corporate resellers pursuing
high-end services opportunities, as well as smaller computer services companies.
Some of these competitors have financial, technical, manufacturing, sales,
marketing and other resources that are substantially greater than those of the
Company. Although the Company believes it currently competes favorably within
the desktop computer industry, there can be no assurance that the Company will
be able to continue to compete successfully with new or existing competition.
Product margins declined in the second half of the year, compared to the
first half, primarily due to pricing to win new business and increased pricing
pressures from competition. The Company believes that gross margins will
continue to be reactive to industry-wide changes. Future profitability will
depend on the Company's ability to retain and hire quality service personnel
while effectively managing the utilization of such personnel. It will also
depend on increased focus on providing technical service and support to
customers, competition, manufacturer pricing strategies, as well as the
Company's control of operating expenses, product availability, and effective
utilization of vendor programs.
THE COMPANY'S EMPLOYEES
The Company employed approximately 3,700 full-time employees as of December
31, 1996. The Company offers its full-time employees health, long-term
disability, dental and life insurance benefits and has a 401(k) plan for
eligible employees. None of the Company's employees are represented by a union,
and the Company considers its employee relations to be good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
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The Company does not have any foreign operations nor does it engage in any
material export sales.
EXECUTIVE OFFICERS
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Information about the Company's executive officers can be found in Part III
of this report under "Item 10 Directors and Executive Officers of the
Registrant."
7
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ITEM 2 PROPERTIES
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The Company's principal executive and administrative offices are located in
a commercial office building in Dallas, Texas, comprised of approximately
100,000 square feet of space, which it purchased in May 1992. In December 1993,
the Company secured a ten-year $3.9 million mortgage on the headquarters
building which is payable in 120 monthly installments of principal plus interest
at a rate of 8.1%. In late 1994, the Company leased approximately 50,000 square
feet of additional office space in Dallas near its headquarters, for a term of
60 months commencing March 1995. In early 1995, the Company relocated the
customer center and credit/collection departments to this new leased facility.
In addition, the Company leased 26,000 square feet in a commercial office
building adjacent to the Company's headquarters for a term of 36 months expiring
in 1998. During 1996, the Company's Dallas sales office and product services
department were relocated to this facility. In the third quarter of 1996, the
Company purchased real property in Dallas, Texas to be used as its new corporate
headquarters and operations campus for approximately $26 million, which has been
funded on an interim basis through the Credit Facility pending permanent
mortgage financing. This new campus consists of two buildings containing
approximately 250,000 square feet of office space, situated on 20 acres, and
will allow the Company to centralize most of its Dallas area operations while
providing expansion capability for future growth. The Company expects to be
substantially moved into the new campus by the third quarter of 1997.
The Company distributes products primarily from two leased warehouse
facilities. In August 1996, the Company entered into a lease for approximately
300,000 square feet of warehouse space located in Paulsboro, New Jersey, which
has a five-year term, with a cancellation option exercisable at any time after
August 1999. This new facility doubled warehouse space and contains a state-of-
the-art 90,000 square foot configuration center, which tripled the Company's
configuration capacity, allowing the Company to meet increasing customer demand
for advanced system and network technologies. Its western distribution center
has approximately 104,000 square feet of leased warehouse space in Stockton,
California, under a lease that expires in May 1999, with a cancellation option
exercisable in May of each year.
The Company also has noncancelable operating leases for its sales and
service centers, expiring at various dates between 1997 and 2004. See Note 10
to the accompanying Notes to Consolidated Financial Statements for additional
information regarding lease costs. The Company believes there will be no
difficulty in negotiating the renewal of its real property leases as they expire
or in finding other satisfactory space. In the opinion of management, the
properties are in good condition and repair and are adequate for the particular
operations for which they are used.
ITEM 3 LEGAL PROCEEDINGS
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The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position and results of
operations, taken as a whole.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None have been submitted in the fourth quarter 1996.
8
<PAGE>
PART II
-------
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK
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The Company's common stock is listed on the NASDAQ National Market (Symbol:
CMPC). As of December 31, 1996, there were approximately 10,000 beneficial
holders of the Company's common stock. The high and low sales prices reported
within each quarter for the years ended December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
High Low High Low
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
First quarter $ 9.63 $ 6.25 $ 4.25 $ 3.13
Second quarter 13.88 8.13 5.13 3.13
Third quarter 12.25 7.13 6.88 4.75
Fourth quarter 12.38 8.00 10.63 5.50
</TABLE>
The last sale price reported for the Company's common stock on March 14,
1997 was $5.25.
The Company has historically reinvested earnings in the growth of its
business and has not paid cash dividends on its common stock. In addition, the
Company's credit facilities limit the amount of dividends the Company may pay.
While the Company currently has no plans to pay dividends on common stock,
payment of dividends in the future will depend upon the Company's financial
performance and other relevant factors.
9
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
- ------ -----------------------
Selected financial data for the Company is presented below:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------------
Operating Results 1996 1995 1994 1993 1992
- ----------------- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,995,191 $ 1,441,597 $ 1,255,813 $ 1,015,482 $ 713,035
Gross margin 240,963 174,908 141,693 127,875 94,551
Earnings before income taxes 50,616 * 34,335 24,432 18,908 11,714
Net earnings 30,471 * 20,670 14,659 11,439 7,263
Earnings per common share:
Primary .63 * .51 .40 .34 .23
Fully diluted .61 * .44 .34 .29 .22
Balance Sheet Data
- ------------------
Total assets $ 692,985 $ 508,704 $ 429,531 $ 365,071 $ 252,958
Long-term debt 236,450 120,364 118,974 107,316 70,734
Convertible subordinated notes 3,000 3,000 18,214 17,880 17,779
Stockholders' equity 171,098 138,341 94,368 55,730 41,602
</TABLE>
* Includes a pre-tax and after tax non-recurring gain on sale of securities
of $8.7 million and $5.2 million, respectively, or $.10 per share.
10
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
The following table presents the Company's total revenue, gross margin and
gross margin percentage by revenue source. Operating expenses, interest and net
earnings are shown as a percentage of total net revenue for the three years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
($ in millions)
<S> <C> <C> <C>
Revenue:
Product $ 1,817 $ 1,334 $ 1,197
Service 169 101 56
Other 9 6 3
-----------------------------------------
Total revenue $ 1,995 $ 1,441 $ 1,256
=========================================
Gross margin:
Product $ 181 $ 141 $ 122
Service 56 31 18
Other 4 3 2
-----------------------------------------
Total gross margin $ 241 $ 175 $ 142
=========================================
Gross margin percentage:
Product 10.0% 10.6% 10.2%
Service 33.3% 30.5% 32.7%
Other 39.2% 51.2% 65.7%
-----------------------------------------
Total gross margin 12.1% 12.1% 11.3%
-----------------------------------------
Operating expenses:
Selling 4.0% 4.3% 4.4%
Service 2.0% 1.5% 1.4%
General and administrative 2.8% 2.6% 2.3%
Depreciation and amortization 0.5% 0.4% 0.4%
-----------------------------------------
Total operating expenses 9.3% 8.8% 8.5%
-----------------------------------------
Earnings from operations 2.8% 3.3% 2.9%
Interest (0.7%) (0.9%) (0.9%)
Non-recurring gain on sale of securities 0.4%
-----------------------------------------
Earnings before income taxes 2.5% 2.4% 2.0%
Income taxes 1.0% 1.0% 0.7%
-----------------------------------------
Net earnings 1.5% 1.4% 1.3%
=========================================
</TABLE>
11
<PAGE>
1996 COMPARED TO 1995
---------------------
Product revenue increased 36% to $1.82 billion in 1996 compared to $1.33
billion in 1995. Product revenue is primarily derived from the sale of
distributed desktop computer products to corporate customers. The increase in
product revenue reflects the Company's efforts in establishing new relationships
with several large customers during the year, as well as higher demand for
distributed computing technologies. The strong product results also reflect the
advancements the Company has made in customer procurement systems, data
warehouse queries and Web-based order statusing, which have reduced customers'
overall procurement costs. Although product revenue growth was strong in 1996,
the Company anticipates slower revenue growth during the first quarter of 1997
as part of an overall industry-wide demand softness caused by smaller than
anticipated manufacturers' price reductions and the anticipated upgrade to
Pentium Pro technology.
Product gross margin as a percentage of product net revenue decreased to
10.0% in 1996 from 10.6% in 1995. The Company experienced lower product margins
principally due to pricing to win new business and increased pricing pressures
from competition. Future product margins will be influenced by competitive
pressures from other resellers in the industry together with manufacturers'
pricing strategies. The Company participates in certain manufacturer-sponsored
programs designed to increase sales of specific products. These programs,
excluding volume incentive programs and specific product rebates offered by
certain manufacturers, are not material when compared to the Company's overall
financial results. Due to the short order fulfillment cycle, the Company's
backlog is not considered to be a meaningful indicator of future business
prospects.
Service revenue increased 68% to $169 million in 1996 from $101 million in
1995. Service revenue is primarily derived from systems integration services,
including field engineering, LAN/WAN projects, consulting, product
configuration, network management and help desk services. Service revenue
reflects revenue generated by the actual performance of specific services and
does not include product sales associated with service projects. The increase
in service revenue reflects the Company's continued focus on expanding its
network and technology services at competitive prices to meet increased customer
demand for the Company's value-added desktop network services, as well as the
full year impact of various small service acquisitions which occurred during
1995. Service gross margin as a percentage of service net revenue increased to
33.3% in 1996 from 30.5% in 1995, primarily due to increased productivity of the
Company's service engineers and improved management of spare parts inventory.
As a percentage of net revenue, operating expenses for 1996 increased to
9.3% compared to 8.8% in 1995, to support the continued revenue growth and
expansion of the service business. On an absolute dollar basis, operating
expenses increased approximately $56 million, primarily due to the continued
investment in the Company's service business and information systems
enhancements. Selling expenses, as a percentage of net revenue, decreased when
compared to 1995 primarily due to the fixed component of expense being spread
over higher volume and increased sales productivity. Service expenses, which
increased both as a percentage of net revenue and in absolute dollars, primarily
reflect costs related to the infrastructure, established starting in 1995,
necessary to manage and expand the service business. General and administrative
expenses increased due to the continued investment in the Company's information
system resources required to enhance customer satisfaction particularly through
data warehousing, improved customer procurement systems, enhanced reporting for
the service business, and expenses related to its campus recruiting program
whereby the Company hired approximately 120 technology college graduates and
placed them in a six-month engineering training program. The Company's operating
expenses are reported net of reimbursements by certain manufacturers for
specific training, promotional and marketing programs. These reimbursements
offset the expenses incurred by the Company.
Depreciation and amortization expense increased in absolute dollars and as
a percentage of net revenue for 1996. The dollar increase is primarily related
to facility improvements and warehouse equipment for the Company's new eastern
distribution facility, enhancements to the Company's information systems, and
furniture and fixtures required to support business activity. The Company will
commence depreciation on its new corporate headquarters and operations campus
when it is substantially placed in service.
Interest expense decreased as a percentage of net revenue for 1996, but
increased in absolute dollars by $2.5 million, primarily due to increased
borrowing to support the significant revenue growth, partially offset by a lower
effective interest rate resulting from its new Credit Facility, specifically the
use of LIBOR tranches, receivable securitization, and redemption in October 1995
of the Company's $18.5 million 9% Convertible Subordinated Notes ("Notes"). The
Notes were converted into 8.4 million shares of the Company's common stock
resulting in an interest expense savings of almost $1.7 million annually.
12
<PAGE>
During the second quarter of 1996, the Company participated in the
secondary stock offering of PC Service Source, Inc. ("PCSS") resulting in an
after tax, non-recurring gain on the sale of securities of $5.2 million. The
Company founded PCSS in 1990 and, after participation in the secondary offering,
owns less than 5% of the outstanding common shares of PCSS.
As a result of the factors discussed above, net earnings increased 47% to
$30.4 million in 1996 from $20.7 million in 1995. Excluding the non-recurring
gain, net earnings increased 22% to $25.2 million. The net earnings growth rate
for the second half of 1996 was less than the first half of 1996 primarily due
to the Company's continued investment in the service business as well as the
Company's decision to make additional investments to exploit opportunities with
customers. The Company anticipates the slower net earnings growth rate will
continue through the first quarter of 1997. Future profitability will depend on
the Company's ability to retain and hire quality service personnel while
effectively managing the utilization of such personnel. It will also depend on
increased focus on providing technical service and support to customers,
competition, manufacturer pricing strategies, as well as the Company's control
of operating expenses, product availability, and effective utilization of vendor
programs.
1995 COMPARED TO 1994
---------------------
Product revenue increased 11% to $1.33 billion in 1995 compared to $1.20
billion in 1994. The increase in product revenue reflected increased demand by
corporate customers for personal computers, particularly Pentium-based systems
and laptops. Also favorably impacting the Company's net product revenue was
corporate customers continuing to consolidate the number of suppliers to only
one or two.
Product gross margin as a percentage of product net revenues increased to
10.6% in 1995 from 10.2% in 1994. The Company experienced an improvement in
product margins during the first half of 1995, partially due to the Company's
decision not to do business with the lowest margin customers as well as certain
manufacturer price reductions. Product margins declined in the second half of
the year, compared to the first half, as a result of increased pricing pressure
from competition.
Service revenue increased 80% to $101 million in 1995 from $56 million in
1994. The increase in service revenue reflected the Company's continued focus
on expanding its network and technology services at competitive prices. The
Company's service business increased primarily through internal growth augmented
by a series of small strategic acquisitions. Service gross margin as a
percentage of service net revenue decreased to 30.5% in 1995 from 32.7% in 1994,
primarily as a result of increased costs related to the relative scarcity of
system engineers and the Company's continued investment in its service business.
As a percentage of net revenue, operating expenses for 1995 increased to
8.8% compared to 8.5% in 1994, to support the continued revenue growth and
expansion of the service business. On an absolute dollar basis, operating
expenses increased approximately $22 million, principally as a result of an
increase in general and administrative expenses related to the Company's
investment in information systems resources required to enhance customer
satisfaction, particularly in the service business, and other spending necessary
to meet the Company's objectives. Service expenses, which increased both as a
percentage of net revenues and in absolute dollars, primarily reflected costs
related to the planned development of an infrastructure necessary to manage and
expand the service business. Selling expense, as a percentage of net revenue,
decreased when compared to 1994 primarily as a result of continued improvement
in product sales productivity.
Depreciation and amortization expense increased in absolute dollars but
remained constant as a percentage of net revenue for 1995. The dollar increase
reflected amortization expense associated with the Company's acquisitions, as
well as increased depreciation expense related to fixed asset purchases in 1995
and 1994.
Interest expense increased in absolute dollars by $0.9 million but remained
constant as a percentage of net revenue for 1995, primarily as a result of
higher average interest rates and increased borrowings to support revenue
growth.
As a result of the factors discussed above, net earnings increased 41% to
$20.7 million in 1995 from $14.7 million in 1994.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financing arrangements which total $325 million, consisting
of a $200 million working capital facility, $25 million real estate loan and a
$100 million receivable securitization. During 1996, the Company replaced the
August 1993 Financing and Security Agreement with a new Credit Agreement
("Credit Facility"), increasing the amount of the Company's credit facility to
$225 million from $175 million, extending the maturity date, and making
substantially all of the facility LIBOR-based. The $225 million Credit Facility
is comprised of two elements: a $200 million working capital facility which
matures in September 1999, and a $25 million facility used solely to purchase
real property to be utilized as the Company's corporate headquarters and
operations campus which is payable in equal installments of $12.5 million in
September of 1998 and 1999. The Company is currently in the process of seeking
alternative permanent financing for the $25 million real estate loan. Pricing on
the $200 million component is LIBOR plus 1% while pricing on the $25 million
component is LIBOR plus 1.25%. All pricing on the Credit Facility is subject to
adjustment based on certain performance criteria. Total borrowings are based on
certain limits, as defined, and secured by substantially all the assets of the
Company. The Credit Facility subjects the Company to certain restrictions and
covenants related to, among others, tangible net worth, debt to tangible net
worth and net earnings, and limits the amount available for capital expenditures
and dividends.
In 1996, the Company entered into a receivable securitization agreement,
whereby a portion of trade receivables are pledged to a third party as
collateral for up to $100 million, which matures in September 1999, subject to
certain conditions. The interest rate applicable to the receivable
securitization is based upon the bank's commercial paper rate plus 55 basis
points.
Working capital at December 31, 1996 was $342 million compared to $225
million at December 31, 1995, resulting in a working capital ratio of 2.2 in
1996 and 1.9 in 1995. The increase in working capital was funded from the
increased borrowings under the Company's credit facilities. Contributing to the
increase in working capital was higher accounts receivable primarily related to
the Company's significant revenue growth and higher levels of inventory
allocated to specific customers, partially offset by an increase in accounts
payable.
The Company's capital asset requirements are generally funded through the
Credit Facility, receivables securitization, internally generated funds or
leasing sources. The business is not capital asset intensive, and capital
expenditures in any year normally would not be significant in relation to the
overall financial position of the Company. However, during the third quarter of
1996, the Company purchased real property to be utilized as a new corporate
headquarters and operations campus for approximately $26 million which will be
funded on an interim basis through the Credit Facility pending permanent
mortgage financing. This new facility, located in Dallas, Texas, consists of
two buildings containing approximately 250,000 square feet of office space,
situated on 20 acres, and will allow the Company to centralize most of its
Dallas area operations while providing expansion capability for future growth.
The Company has begun to refurbish and update the new facility and currently
anticipates the consolidation of its existing Dallas headquarters and operations
from two leased facilities to the new site by the third quarter of 1997. In
addition, during the third quarter of 1996, the Company relocated its eastern
distribution center to a new leased facility in Paulsboro, New Jersey. This
300,000 square foot facility contains a state-of-the-art 90,000 square foot
configuration center that will enable the Company to meet increasing customer
demand for advanced system and network configuration technologies. Capital
expenditures were $42 million in 1996, of which approximately $26 million was
related to the purchase of the new corporate headquarters and operations campus
and related capitalized interest costs and $6 million related to the new eastern
distribution center. Excluding anticipated spending in 1997 related to the new
corporate headquarters and operations campus, the Company expects capital
expenditures to return to historical levels which are not significant to the
overall financial position of the Company.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The consolidated financial statements and schedule filed with this report
appear on pages F-2 through F-15, and are listed on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
14
<PAGE>
PART III
--------
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
The executive officers of the Company as of March 14, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Edward Anderson (1) 50 President and Chief Executive Officer
Daniel F. Brown (2) 51 Executive Vice President, Sales
M. Lazane Smith (3) 42 Senior Vice President, Finance and Chief Financial Officer
</TABLE>
(1) Mr. Anderson has served as President and Chief Executive Officer since
January 1994. Mr. Anderson joined the Company in August 1993 as Chief
Operating Officer and has been a Director of the Company since 1993. Prior
to joining the Company, he held the position of President and Chief
Operating Officer of Computerland Corporation from 1989 until 1993.
(2) Mr. Brown has held the position of Executive Vice President, Sales since
February 1989, when he was promoted from Vice President, Sales, a position
he had held since joining the Company in 1987. Mr. Brown has been a
Director of the Company since 1990.
(3) Ms. Smith has held the position of Senior Vice President, Finance and Chief
Financial Officer since February 1997. Ms. Smith joined the Company in
1993 as Corporate Controller and was promoted to Vice President Finance and
Corporate Controller in 1994. Prior to joining the Company, she held the
position of Vice President Finance of Score Group, Inc. from 1992 to 1993
and worked with Coca-Cola Enterprises from 1986 to 1992, serving in her
final role there as Regional Vice President Finance and Chief Financial
Officer.
15
<PAGE>
DIRECTORS
The Company incorporates by reference the information contained under the
caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement relative to
its May 14, 1997 annual meeting of stockholders, to be filed within 120 days
after the end of the year covered by this Form 10-K Report pursuant to
Regulation 14A under the Securities Exchange Act of l934, as amended.
DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K
The Company incorporates by reference the information contained under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in its
definitive Proxy Statement relative to its May 14, 1997 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
The Company incorporates by reference the information contained under the
captions "Directors' Compensation" and "Executive Compensation" in its
definitive Proxy Statement relative to its May 14, 1997 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The Company incorporates by reference the information contained under the
caption "Securities Ownership of Certain Beneficial Owners and Management" in
its definitive Proxy Statement relative to its May 14, 1997 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Company incorporates by reference the information contained under the
caption "Certain Transactions" in its definitive Proxy Statement relative to its
May 14, 1997 annual meeting of stockholders, to be filed within 120 days after
the end of the year covered by this Form 10-K Report pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.
16
<PAGE>
PART IV
-------
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------- ---------------------------------------------------------------
(a) Financial Statements and Schedules.
The financial statements and financial statement schedule filed with this
report are listed on page F-1.
(b) Reports on Form 8-K.
None filed during the fourth quarter of 1996.
(c) Exhibits.
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Report. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous filing is indicated in
parentheses.
17
<PAGE>
Exhibit
No. Description
- ------- -----------
3(a) Certificate of Incorporation of CompuCom Systems, Inc. (1) (Exhibit B)
3(b) Certificate of Amendment of the Certificate of Incorporation of
CompuCom Systems, Inc. (4) (Exhibit 3(b))
3(c) Certificate of Amendment of the Certificate of Incorporation of
CompuCom Systems, Inc., filed November 30, 1992 (6) (Exhibit 4(c))
3(d) Certificate of Amendment of the Certificate of Incorporation of
CompuCom Systems, Inc., filed July 1, 1993 (6) (Exhibit 4(d))
3(e) Bylaws of CompuCom Systems, Inc., revised April 1, 1991 (4) (Exhibit
3(c))
4(a) Form of Stock Certificate evidencing Common Stock, $.01 par value, of
CompuCom Systems, Inc. (2) (Exhibit 4(b))
4(b)** CompuCom Systems, Inc. 1983 Stock Option Plan, as amended (5) (Exhibit
4(k))
4(c)** CompuCom Systems, Inc. 1993 Stock Option Plan, as amended (11) Exhibit
4(c))
4(d)** CompuCom Systems, Inc. 1984 Non-Qualified Stock Option Plan, as amended
(3) (Exhibit 4(g))
4(e)** CompuCom Systems, Inc. Stock Option Plan for Directors (10) (Exhibit
4(g))
4(f)** Stock Option Agreement dated July 21, 1995 between CompuCom Systems,
Inc. and Delbert W. Johnson (10) (Exhibit 4(i))
4(g) Certificate of Designation dated March 31, 1994, establishing Series B
Cumulative Convertible Preferred Stock of CompuCom Systems, Inc. (8)
(Exhibit 4(i))
4(h) Form of Stock Certificate evidencing Series B Cumulative Convertible
Preferred Stock, $.01 par value, of CompuCom Systems, Inc. (9) (Exhibit
4(h))
4(i) $3 Million Subordinated Convertible Note dated October 31, 1995 from
CompuCom Systems, Inc. to Network Compatibility Group, Inc. (11)
(Exhibit 4(k))
10(a)** CompuCom Systems, Inc. 401(k) Matched Savings Plan, as amended and
restated effective January 1, 1989 (7) (Exhibit 10(a))
10(b)** Amendment 1996-1 to CompuCom Systems, Inc. 401(k) Matched Savings Plan,
effective May 1, 1996 (12) (Exhibit 10.9)
10(c) Security Agreement for Wholesale Financing, dated August 2, 1991,
between CompuCom Systems, Inc. and IBM Credit Corporation, with
Addendum dated as of October 24, 1991 (4) (Exhibit 10(b))
10(d) Amendment to Security Agreement for Wholesale Financing, dated
September 20, 1996, between CompuCom Systems, Inc. and IBM Credit
Corporation. *
18
<PAGE>
Exhibit
No. Description
- ------- -----------
10(e) Security Agreement for Wholesale Financing, dated December 27, 1993,
between CompuCom Systems, Inc. and Compaq Computer Corporation (7)
(Exhibit 10(e))
10(f) Intercreditor Agreement, dated December 27, 1993, among NationsBank of
Texas, N.A., CompuCom Systems, Inc., and Compaq Computer Corporation
(7) (Exhibit 10(f))
10(g) Subordination Agreement, dated August 22, 1994, among Hewlett-Packard
Company, NationsBank of Texas, N.A., and IBM Credit Corporation,
pertaining to certain assets of CompuCom Systems, Inc. (9) (Exhibit
10(h))
10(h) Intercreditor Agreement, dated as of April 1, 1996, among NationsBank
of Texas, N.A., CompuCom Systems, Inc. and IBM Credit Corporation (12)
(Exhibit 10.4)
10(i) Credit Agreement, dated as of September 26, 1996, between NationsBank
of Texas, N.A. and CompuCom Systems, Inc. (exhibits and schedules
omitted) (13) (Exhibit 10.1)
10(j) Amended and Restated Master Security Agreement and Administration
Agreement, dated as of September 25, 1996, among CompuCom Systems,
Inc., NationsBank of Texas, N.A., CSI Funding, Inc. and Enterprise
Funding Corporation (exhibits omitted) (13) (Exhibit 10.2)
10(k) Amendment No. 1 to Amended and Restated Master Security Agreement and
Administration Agreement, dated as of December 5, 1996, among CompuCom
Systems, Inc., NationsBank of Texas, N.A., CSI Funding, Inc. and
Enterprise Funding Corporation (exhibits omitted) *
10(l) Receivables Purchase Agreement, dated as of April 1, 1996, between
CompuCom Systems, Inc. and CSI Funding, Inc. (exhibits omitted) (12)
(Exhibit 10.6)
10(m) First Amendment to Receivables Purchase Agreement, dated as of
September 25, 1996, between CompuCom Systems, Inc. and CSI Funding,
Inc. (exhibits omitted) (13) (Exhibit 10.3)
10(n) Transfer and Administration Agreement, dated as of April 1, 1996, among
CSI Funding, Inc., CompuCom Systems, Inc., Enterprise Funding
Corporation and NationsBank, N.A. (exhibits omitted) (12) (Exhibit
10.7)
10(o) First Amendment to Transfer and Administration Agreement, dated as of
September 25, 1996, among CSI Funding, Inc., CompuCom Systems, Inc.,
Enterprise Funding Corporation and NationsBank, N.A. (exhibits omitted)
(13) (Exhibit 10.4)
10(p) Amendment No. 2 to Transfer and Administration Agreement, dated as of
December 5, 1996, among CSI Funding, Inc., CompuCom Systems, Inc.,
Enterprise Funding Corporation and NationsBank, N.A. (exhibits
omitted) *
10(q) Business Partner Agreement, dated September 15, 1994, between IBM
Corporation and CompuCom Systems, Inc., with Dealer Profile, Remarketer
General Terms, and attachments (9) (Exhibit 10(n))
10(r) IBM Corporation Remarketer Announcement, dated March 13, 1996,
modifying its Business Partner Agreement with CompuCom Systems, Inc. to
automatically extend its term for an additional 12 months upon its
expiration *
19
<PAGE>
Exhibit
No. Description
- ------- -----------
10(s) U.S. Reseller Agreement, dated January 23, 1993, between Compaq
Computer Corporation and CompuCom Systems, Inc. (7) (Exhibit 10(l))
10(t) U.S. Reseller Agreement, dated March 1, 1996, between Hewlett-Packard
Company and CompuCom Systems, Inc. (12) (Exhibit 10.8)
10(u) Administrative Services Agreement, dated January 1, 1988, between
CompuCom Systems, Inc. and Safeguard Scientifics, Inc., with Letter
Amendment dated as of April 1, 1991 (4) (Exhibit 10(z))
10(v) Lease dated May 16, 1996, between CompuCom Systems, Inc. and The Riggs
National Bank of Washington, D.C. for premises at 1225 Forest Parkway,
Paulsboro, New Jersey (exhibits omitted) (13) (Exhibit 10.8)
10(w) Ratification Agreement dated January 9, 1992 between CompuCom Systems,
Inc. and The Arch Street Group with respect to assignment of Lease
dated November 1, 1988 between The Arch Road Group and Photo & Sound
Company (attached) for premises at 4686 Frontier, Stockton, California
(4) (Exhibit 10(dd))
10(x) Deed of Trust, Assignment, Security Agreement and Financing Statement,
dated December 29, 1993, from CompuCom Systems, Inc., to Comerica
Bank - Texas, for 10100 North Central Expressway, Dallas, Texas (7)
(Exhibit 10(v))
10(y) $3,900,000 Promissory Note, dated December 29, 1993, to Comerica Bank -
Texas, secured by premises at 10100 North Central Expressway, Dallas,
Texas (7) (Exhibit 10(w))
10(z) Deed of Trust, Assignment of Leases and Rents, Security Agreement and
Financing Statement, dated as of September 27, 1996, from CompuCom
Systems, Inc. to Nationsbank of Texas, N.A. (exhibits omitted) (13)
(Exhibit 10.7)
10(aa) Lease dated December 2, 1994 between CompuCom Systems, Inc. and ZML -
Glen Lakes Tower Limited Partnership for premises at 9400 North Central
Expressway, Dallas Texas (9) (Exhibit 10(aa))
10(bb) Stock Purchase Agreement between CompuCom Systems, Inc. and Rosetta
Stone Corporation, dated January 5, 1994, regarding sale of common
stock of PC Parts Express, Inc. (exhibits omitted), with attached
$3,500,000 Promissory Note, Pledge and Security Agreement, and PC Parts
Express, Inc. Common Stock Purchase Warrant (7) (Exhibit 10(x))
10(cc) Asset Purchase Agreement among Rosetta Stone Corporation, Teknowlogy
Corp., and CompuCom Acquisition Corporation, d/b/a/ MicroSolutions,
dated January 5, 1994, regarding sale of MicroSolutions' Network
Training Group division (exhibits omitted), with attached $1,000,000
Installment Promissory Note, and Pledge and Security Agreement (7)
(Exhibit 10(y))
10(dd)** $210,000 Secured Promissory Note dated November 1, 1994 from James W.
Dixon, to CompuCom Systems, Inc. (9) (Exhibit 10(ff))
10(ee)** Stock Purchase Agreement between CompuCom Systems, Inc. and James W.
Dixon, dated July 15, 1995, regarding sale of shares of common stock of
ClientLink, Inc. to Mr. Dixon, with attached $112,500 Secured Term Note
and Pledge Agreement of even date (11) (Exhibit 10(ff))
20
<PAGE>
Exhibit
No. Description
- ------- -----------
10(ff)** $1,181,250 Amended and Restated Secured Term Note, dated February 12,
1997, from Edward R. Anderson to CompuCom Systems, Inc. *
10(gg)** Pledge Agreement, dated August 31, 1994, between Edward R. Anderson and
CompuCom Systems, Inc. (9) (Exhibit 10(nn))
11 Computation of Per Share Earnings *
21 List of Subsidiaries *
23 Consent of KPMG Peat Marwick LLP *
27 Financial Data Schedule *
_______________
* Filed herewith
** These exhibits relate to management contracts or to compensatory plans,
contracts or arrangements in which directors and/or executive officers
of the registrant may participate, required to be filed as exhibits to
this Form 10-K.
(1) Filed on April 19, 1989 as an exhibit to the 1989 Annual Meeting Proxy
Statement and incorporated herein by reference.
(2) Filed on April 2, 1990 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(3) Filed on March 29, 1991 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(4) Filed on March 30, 1992 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(5) Filed on March 31, 1993 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(6) Filed on March 14, 1994 as an exhibit to the Registration Statement on Form
S-8 (No. 33-76382) and incorporated herein by reference.
(7) Filed on March 31, 1994 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(8) Filed on May 15, 1994 as an exhibit to the Quarterly Report on Form 10-Q
(No. 0-14371) and incorporated herein by reference.
(9) Filed on March 31, 1995 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(10) Filed on October 10, 1995 as an exhibit to the Registration Statement on
Form S-8 (No. 33-63309) and incorporated herein by reference.
(11) Filed on March 29, 1996 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(12) Filed on May 13, 1996 as an exhibit to the Quarterly Report on Form 10-Q
(No. 0-14371) and incorporated herein by reference.
(13) Filed on November 12, 1996 as an exhibit to the Quarterly Report on Form
10-Q (No. 0-14371) and incorporated herein by reference.
21
<PAGE>
Index to Consolidated Financial Statements
------------------------------------------
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts F-16
F-1
<PAGE>
Independent Auditors' Report
----------------------------
The Stockholders and Board of Directors
CompuCom Systems, Inc.:
We have audited the accompanying consolidated balance sheets of CompuCom
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CompuCom
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Dallas, Texas
January 29, 1997
F-2
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Assets 1996 1995
------ --------- ---------
<S> <C> <C>
Current assets:
Cash $ 4,320 $ 4,249
Receivables, less allowance for doubtful accounts
of $2,274 in 1996 and $2,234 in 1995 377,598 265,071
Inventories 233,464 196,531
Other 3,508 2,151
--------- ---------
Total current assets 618,890 468,002
Property and equipment:
Land, building and improvements 33,067 6,245
Furniture, fixtures and other equipment 31,556 20,564
Leasehold improvements 6,502 3,091
--------- ---------
71,125 29,900
Less accumulated depreciation and amortization (16,817) (11,647)
--------- ---------
Net property and equipment 54,308 18,253
Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 16,513 18,146
Other assets 3,274 4,303
--------- ---------
$ 692,985 $ 508,704
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 217,424 $ 189,180
Accrued liabilities 59,342 53,867
--------- ---------
Total current liabilities 276,766 243,047
Long-term debt 236,450 120,364
Deferred income taxes 5,671 3,952
Convertible subordinated notes 3,000 3,000
Stockholders' equity:
Series B preferred stock, $10 stated value. Authorized 3,000,000
shares; issued and outstanding 1,500,000 shares in 1996 and 1995 15,000 15,000
Common stock, $.01 par value. Authorized 70,000,000 shares;
issued and outstanding 44,927,571 shares in 1996
and 44,100,732 shares in 1995 449 441
Additional paid-in capital 60,966 57,788
Retained earnings from July 1, 1987 94,683 65,112
--------- ---------
Total stockholders' equity 171,098 138,341
--------- ---------
$ 692,985 $ 508,704
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Revenue
Product $ 1,816,504 $ 1,334,442 $ 1,197,278
Service 169,600 100,868 55,895
Other 9,087 6,287 2,640
----------- ----------- -----------
Total revenue 1,995,191 1,441,597 1,255,813
----------- ----------- -----------
Cost of revenue
Product 1,635,653 1,193,513 1,075,624
Service 113,046 70,107 37,590
Other 5,529 3,069 906
----------- ----------- -----------
Total cost of revenue 1,754,228 1,266,689 1,114,120
----------- ----------- -----------
Gross margin 240,963 174,908 141,693
Operating expenses
Selling and service 119,981 84,270 72,157
General and administrative 55,580 37,722 29,137
Depreciation and amortization 8,760 6,291 4,621
----------- ----------- -----------
Total operating expenses 184,321 128,283 105,915
----------- ----------- -----------
Earnings from operations 56,642 46,625 35,778
Interest expense (14,764) (12,290) (11,346)
Non-recurring gain on sale of securities 8,738
----------- ----------- -----------
Earnings before income taxes 50,616 34,335 24,432
Income taxes 20,145 13,665 9,773
----------- ----------- -----------
Net earnings $ 30,471 $ 20,670 $ 14,659
=========== =========== ===========
Earnings per common share
Primary $ .63 $ .51 $ .40
Fully diluted $ .61 $ .44 $ .34
Average common shares outstanding
Primary 47,289 38,449 35,714
Fully diluted 50,050 49,301 44,123
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
----------------- ----------------- Paid-in Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 31,331,245 $313 $23,984 $31,433 $ 55,730
Issuance of preferred stock 2,000,000 $20,000 20,000
Issuance of common stock 335,665 3 1,197 1,200
Exercise of common stock warrants 1,426,666 14 2,213 2,227
Exercise of options 601,188 7 770 777
Preferred stock dividend (225) (225)
Net earnings 14,659 14,659
--------- ---------------------------- ----------------------------
Balances at December 31, 1994 2,000,000 20,000 33,694,764 337 28,164 45,867 94,368
Conversion of preferred stock (500,000) (5,000) 738,552 7 4,993
Conversion of convertible debt 8,409,087 84 18,366 18,450
Exercise of common stock warrants 53,331 1 79 80
Exercise of options 1,204,998 12 1,886 1,898
Pre-restructuring tax benefit 4,300 4,300
Preferred stock dividend (1,425) (1,425)
Net earnings 20,670 20,670
---------- -------- ---------- ---- ------- -------- ---------
Balances at December 31, 1995 1,500,000 15,000 44,100,732 441 57,788 65,112 138,341
Exercise of common stock warrants 71,666 1 107 108
Exercise of options 755,173 7 3,071 3,078
Preferred stock dividend (900) (900)
Net earnings 30,471 30,471
---------- -------- ---------- ---- ------- -------- ---------
Balances at December 31, 1996 1,500,000 $15,000 44,927,571 $449 $60,966 $94,683 $171,098
========== ======== ========== ==== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 30,471 $ 20,670 $ 14,659
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 8,760 6,291 4,621
Deferred income taxes 1,719 355 2,525
Gain on sale of securities (8,738)
Changes in assets and liabilities:
Receivables (111,936) (28,450) (25,546)
Inventories (36,933) (41,290) (34,207)
Other current assets (1,357) 20 (145)
Accounts payable 28,244 35,111 4,899
Accrued liabilities and other 8,715 13,890 7,127
--------- --------- ---------
Net cash provided by (used in) operating activities (81,055) 6,597 (26,067)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures, net (42,135) (5,999) (5,018)
Business acquisitions, net of cash acquired (6,479) (2,310) (2,741)
Proceeds from sale of securities 11,368
--------- --------- ---------
Net cash (used in) investing activities (37,246) (8,309) (7,759)
--------- --------- ---------
Cash flows from financing activities:
Net bank credit facility and other borrowings 116,086 1,332 11,332
Issuance of preferred stock 20,000
Issuance of common stock 3,186 1,978 2,854
Preferred stock dividend (900) (1,425) (225)
--------- --------- ---------
Net cash provided by financing activities 118,372 1,885 33,961
--------- --------- ---------
Net increase in cash 71 173 135
Cash at beginning of year 4,249 4,076 3,941
--------- --------- ---------
Cash at end of year $ 4,320 $ 4,249 $ 4,076
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
------------------------------------------
Description of Business
-----------------------
CompuCom Systems, Inc. and subsidiaries (the "Company") is a
leading provider of distributed desktop computer products and network
integration services for large corporate customers. CompuCom's
services include LAN/WAN projects, consulting, network management,
help desk, field engineering, configuration, product distribution and
procurement.
Principles of Consolidation
---------------------------
The consolidated financial statements include the financial
statements of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates
----------------
The preparation of the consolidated financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Inventories
-----------
Inventories are stated at the lower of average cost or market.
The Company continually assesses the appropriateness of the inventory
valuations giving consideration to obsolete, slow-moving and non-
salable inventory.
Property and Equipment
----------------------
Property and equipment are stated at cost less accumulated
depreciation and amortization. Provision for depreciation and
amortization is based on the estimated useful lives of the assets
(building and leasehold improvements, 3 to 20 years; furniture and
equipment, 5 years) and is computed primarily on the straight-line
method.
Cost in Excess of Fair Value of Tangible Net Assets Purchased
-------------------------------------------------------------
Cost in excess of fair value of tangible net assets purchased
represents goodwill and customer lists and is amortized using the
straight-line method over a 7 to 10 year period. Accumulated
amortization at December 31, 1996 and 1995 was $9,846,000 and
$7,686,000, respectively. The Company continually evaluates goodwill
for indications of impairment based on projected undiscounted net cash
flows from operations of the related business unit (including possible
proceeds from the sale of the business).
Revenue Recognition
-------------------
Product revenues are recognized upon shipment, with provisions
made for anticipated returns, which historically have been immaterial.
Service revenues are recognized when the service is rendered or
ratably if performed over a service contract period.
F-7
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Vendor Programs
---------------
The Company receives volume incentives and rebates from certain
manufacturers related to sales of certain products which are recorded
as a reduction of cost of goods sold when earned. The Company also
receives manufacturer reimbursements for certain training, promotional
and marketing activities that offset the expenses incurred by the
Company.
Income Taxes
------------
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Earnings Per Common Share
-------------------------
Primary earnings per common share is based on net earnings after
preferred stock dividend requirements, if any, and the weighted-
average number of common shares outstanding during each year,
including stock options and warrants considered to be dilutive common
stock equivalents. Fully diluted earnings per common share assumes
full conversion of dilutive convertible securities into common stock
at the later of the beginning of the year or date of issuance and
includes the add-back of related interest and/or dividends, as
required.
Restructuring
-------------
In connection with the redirection of the Company and the
effective discontinuation of its previous business activities, the
accumulated deficit as of July 1, 1987 was reclassified as a reduction
of additional paid-in capital to better reflect the financial position
and new operating focus of the Company. Retained earnings represent
the cumulative net earnings of the Company since July 1, 1987, less
dividends.
Financial Instruments
---------------------
The Company's financial instruments, principally cash, accounts
receivable, accounts payable and accrued liabilities, are carried at
cost which approximates fair value due to the short-term maturity of
these instruments. As amounts outstanding under the Company's credit
agreements bear interest approximating current market rates, their
carrying amounts approximate fair value. The fair value of the
Company's Convertible Subordinated Notes approximates cost based upon
quoted market prices.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
--------------------------------------------------------------------
of
--
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", on
January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell. The adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
F-8
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock-Based Compensation
-------------------------
In 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which gives companies the option to adopt
the fair-value method for expense recognition of employee stock
options or to continue to account for stock options and stock-based
awards using the intrinsic-value method as outlined under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and to make pro forma disclosures of net
earnings and net earnings per share as if the fair-value method had
been applied. The Company has elected to continue to apply APB 25 for
stock options and stock-based awards and has disclosed pro forma net
earnings and net earnings per share as if the fair-value method had
been applied.
Reclassifications
-----------------
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform with the 1996
presentation.
(2) Inventories
-----------
Inventory is comprised of product inventory and spare parts. At
December 31, 1996 and 1995, total inventory was $233.5 million and $196.5
million, respectively, net of inventory reserves of $8.9 million and $9.5
million for the same periods. Gross product inventory was $227.6 million
and $186.2 million at December 31, 1996 and 1995, respectively, and gross
spare parts inventory as of the same date was $14.8 million and $19.8
million.
(3) Long-Term Debt
--------------
The Company has financing arrangements which total $325 million,
consisting of a $200 million working capital facility, $25 million real
estate loan and a $100 million receivable securitization. During 1996, the
Company replaced the August 1993 Financing and Security Agreement with a
new Credit Agreement ("Credit Facility"), increasing the amount of the
Company's credit facility to $225 million from $175 million, extending the
maturity date, and making substantially all of the facility LIBOR-based.
The $225 million Credit Facility is comprised of two elements: a $200
million working capital facility which matures in September 1999, and a $25
million facility used solely to purchase real property to be utilized as
the Company's corporate headquarters and operations campus, which is
payable in equal installments of $12.5 million in September 1998 and 1999.
Pricing on the $200 million component is LIBOR plus 1% while pricing on the
$25 million component is LIBOR plus 1.25%. The interest rate on the $200
million working capital facility at December 31, 1996 was 6.6%. All
pricing on the Credit Facility is subject to adjustment based on certain
performance criteria. Total borrowings are based on certain limits, as
defined, and secured by substantially all the assets of the Company. The
Credit Facility subjects the Company to certain restrictions and covenants
related to, among others, tangible net worth, debt to tangible net worth
and net earnings, and limits the amount available for capital expenditures
and dividends.
In 1996, the Company entered into a receivable securitization
agreement, whereby a portion of trade receivables are pledged to a third
party as collateral, for up to $100 million, which matures in September
1999, subject to certain conditions. The interest rate applicable to the
receivable securitization is based upon the bank's commercial paper rate
(which at December 31, 1996 was 5.42%) plus 55 basis points.
The Company's highest level of borrowing was $271 million and $156
million in 1996 and 1995, respectively. Of the $325 million of
availability, $234 million was outstanding at December 31, 1996.
F-9
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A $3.9 million mortgage term loan on the Company's existing corporate
headquarters building in Dallas, Texas is payable in monthly installments
of $32,500 plus interest at 8.1%. At December 31, 1996, the balance
outstanding on the mortgage loan was $2.7 million.
The Company paid interest of $15.3 million, $12.1 million and $10.9
million, and the weighted-average interest rate on the Credit Facility and
receivables securitization was approximately 6.7%, 7.9% and 7.3%, in 1996,
1995 and 1994, respectively.
(4) Convertible Subordinated Notes
-------------------------------
In 1995, the Company called for the redemption of $18.5 million of 9%
Convertible Subordinated Notes which were converted into 8.4 million shares
of common stock.
In conjunction with an acquisition in 1995, the Company issued $3
million of 5% Convertible Subordinated Notes which are due in 1998 and
convertible at any time into approximately 387,600 shares of the Company's
common stock at $7.74 per share.
(5) Income Taxes
------------
The provision for income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal $ 16,826 $ 11,991 $ 6,437
State 1,600 1,319 655
Deferred 1,719 355 2,681
----------- ---------- ---------
$ 20,145 $ 13,665 $ 9,773
=========== ========== ========
</TABLE>
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% in 1996, 1995 and 1994 to earnings
before income taxes as a result of the following (in percentages):
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense 35.0% 35.0% 35.0%
State taxes, net of U.S. Federal
income tax benefit 2.1% 2.5% 1.7%
Other, net 2.7% 2.3% 3.3%
----------- ----------- -----------
39.8% 39.8% 40.0%
=========== =========== ===========
</TABLE>
(continued)
F-10
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below (in thousands).
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Inventories, principally due to reserves and additional
costs inventoried for tax purposes $ 713 $ 609
Accounts receivable, principally due to allowance for
doubtful accounts 796 782
Other 2,069 1,712
------ ------
Deferred tax assets 3,578 3,103
------ ------
Deferred tax liabilities:
Accelerated depreciation 3,104 1,549
Other 6,145 5,506
------ ------
Deferred tax liabilities 9,249 7,055
====== ======
Net deferred tax liability $5,671 $3,952
====== ======
</TABLE>
There were $19.4 million, $9.7 million and $9.9 million of income
taxes paid in 1996, 1995 and 1994, respectively, net of refunds.
(6) Preferred Stock
---------------
The Company has authorized three million shares of Series B Cumulative
Convertible Preferred Stock ("Series B Shares"), stated value $10. In
1994, Safeguard Scientifics, Inc., ("Safeguard") purchased from the Company
$20 million (2,000,000 shares) of its Series B Shares. The Series B Shares
are convertible into shares of Common Stock based on a conversion price of
$6.77 per share subject to anti-dilutive adjustments. The Series B Shares
are entitled to a 6% per annum cumulative dividend payable out of legally
available funds. The Series B Shares are entitled to one vote for each
share of Common Stock into which such Series B Shares may be converted,
except that in the election of directors (as long as Safeguard owns at
least 40% of the Company's then outstanding voting securities, excluding
the Series B Shares), the Series B Shares will be entitled to five votes
for each share of Common Stock into which the Series B Shares may be
converted. Safeguard has up to a 60% voting interest as a result of its
ownership of the Series B Shares. On December 29, 1995, Safeguard
converted 500,000 of its Series B Shares into 738,552 shares of the
Company's Common Stock.
(7) Stock-Based Compensation
------------------------
The Company maintains four stock option plans covering certain key
employees and outside directors. The 1983 Stock Option Plan and the 1984
Non-Qualified Stock Option Plan expired by their terms in May 1993 and
January 1994, respectively, and therefore no new grants can be awarded out
of those plans. The Company adopted a 1993 Stock Option Plan under which
the Company may grant qualified or non-qualified stock options. This plan
was amended in 1995 to increase the number of shares available. To the
extent allowable, all grants are incentive stock options. All options
granted under the plans to date have an exercise price equal to the market
price of the Company's stock on the date of grant. Generally, options vest
20% each year and expire after 10 years.
(continued)
F-11
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under the Stock Option Plan for Directors, options to non-employee
directors are granted with an exercise price equal to the market price of
the Company's stock on the date of grant. Non-employee directors are
initially granted 10,000 shares upon election to the Board, with subsequent
service grants awarded in accordance with formulas based upon years of
service. Options under this plan vest 25% each year and expire after 10
years. At December 31, 1996, the Company has reserved approximately 5.5
million shares of its common stock for issuance under its stock option
plans.
The Company applies APB 25 and related interpretations in accounting
for its various stock option plans. Had compensation cost been recognized
consistent with SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1996 1995
<S> <C> <C> <C>
Net earnings As reported $ 30,471 $ 20,670
Pro forma $ 29,409 $ 20,228
Primary earnings per share As reported $ .63 $ .51
Pro forma $ .60 $ .49
Fully diluted earnings per share As reported $ .61 $ .44
Pro forma $ .59 $ .43
</TABLE>
The per share weighted-average value of stock options issued by the
Company during 1996 and 1995 was $4.91 and $2.43, respectively, on the date
of grant using the Black Scholes option-pricing model. The Company used the
following weighted-average assumptions to determine the fair value of stock
options granted:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 64% 62%
Average expected option life 5 years 5 years
Risk-free interest rate 5.8% to 6.5% 5.4% to 7.1%
</TABLE>
Pro forma net earnings reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period and compensation cost for options granted prior to
January 1, 1995 is not considered.
(continued)
F-12
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Option activity under the Company's plans is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ------------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- -------- ------------- --------- ------------- ---------
(In thousands) (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 4,278 $2.81 4,417 $2.07 4,914 $1.90
Granted 845 8.28 1,407 4.10 612 3.68
Exercised (761) 1.90 (1,246) 1.64 (981) 2.18
Canceled (341) 5.82 (300) 2.81 (128) 2.43
----- ------ -----
Outstanding at end of year 4,021 $3.96 4,278 $2.81 4,417 $2.07
===== ===== =====
Options exercisable at year-end 1,970 $2.40 2,048 $1.80 2,874 $1.60
Shares available for future grant 1,483 2,014 244
</TABLE>
The following summarizes information about the Company's stock
options outstanding at December 31, 1996 :
<TABLE>
<CAPTION>
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ----------------- --------------- ------------------ ------------- --------------- -------------
(In thousands) (years) (In thousands)
<S> <C> <C> <C> <C> <C>
$1.00 - $ 2.00 1,018 1.8 $1.42 1,013 $1.42
2.25 - 3.13 1,008 6.5 3.00 608 2.99
3.50 - 4.63 1,037 8.0 3.79 301 3.72
4.75 - 12.50 958 9.0 7.86 48 7.31
----- ----- -----
$1.00 - $ 12.50 4,021 6.3 $3.96 1,970 $2.40
===== =====
</TABLE>
In conjunction with certain subordinated debentures issued in
1991, and repaid in 1992, warrants were issued to acquire approximately 1.4
million shares of common stock at a purchase price of $1.50 per share,
exercisable through April 1996. During 1996, 1995 and 1994, approximately
72,000, 53,000 and 1,177,000 of these warrants were exercised,
respectively. There are no warrants outstanding at December 31, 1996.
F-13
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Related Party Transactions
--------------------------
During the second quarter of 1996, the Company participated in the
secondary stock offering of PC Service Source, Inc. ("PCSS") resulting in
an after tax, non-recurring gain on the sale of securities of $5.2 million.
Concurrently, the Company exercised warrants for 250,000 shares of PCSS
common stock at an exercise price of $2.25, selling those shares in
conjunction with the secondary offering. The Company founded PCSS in 1990,
then known as PC Parts Express, Inc., and in January 1994, sold the
majority of its interest in PCSS to a venture capital company primarily
owned by a former officer and director of the Company in exchange for cash,
a secured note receivable, and warrants to purchase additional PCSS common
stock. In April 1994, the Company participated in an initial public
offering of PCSS common stock. At December 31, 1995, the Company owned
approximately 21% of the outstanding common shares of PCSS and accounted
for this investment using the equity method until the completion of the
secondary stock offering, after which the Company owned less than 5% of the
outstanding common shares of PCSS.
In 1994, the Company sold substantially all of the assets of its
network training business to the aforementioned venture capital company in
exchange for a secured note receivable and royalty agreement.
In 1994, the Company loaned an officer and director of the Company
$1,181,250 secured by a term note receivable, which was included in
receivables at December 31, 1996. Interest on the note accrues at the rate
of 6% per annum and is payable annually on January 1 of each year. Terms
of the note were amended in February 1997 such that principal on the note
is due on February 15, 1999.
Safeguard owns approximately 50% of the Company's common stock as of
December 31, 1996. The Company pays Safeguard a fee for providing certain
administrative, legal and financial services to the Company. General and
administrative expenses include fees paid to Safeguard of $600,000 in 1996,
1995 and 1994.
(9) Leases
------
The Company has noncancelable operating leases for facilities and
equipment which expire at various dates from 1997 to 2004. Total rental
expense for operating leases was $10.4 million, $6.2 million and $4.8
million in 1996, 1995 and 1994, respectively. Future minimum lease
payments under noncancelable operating leases as of December 31, 1996 are:
$7.4 million - 1997; $6.6 million - 1998; $5.7 million - 1999; $4.0 million
- 2000; $2.2 million - 2001; and $1.9 million - thereafter.
(10) Savings Plan
------------
The Company has a defined contribution plan (401(k) Matched Savings
Plan) covering substantially all employees who have completed at least six
months of qualifying service. Participants may contribute to the Plan an
amount between 1% and 10% of their total annual compensation. The Company
matches 50% of each participant's qualifying contribution up to 4%, and an
additional 25% of the next 2% of the participants qualifying contributions.
Amounts expensed relating to the Plan were $1.5 million, $1.0 million and
$0.6 million in 1996, 1995 and 1994, respectively.
(11) Contingencies
-------------
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position and results of
operations, taken as a whole.
F-14
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Quarterly Financial Data (Unaudited)
------------------------------------
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1996
- ----
Revenue
Product $ 377,983 $ 467,817 $ 449,950 $ 520,754
Service 32,937 38,760 46,570 51,333
Other 2,414 2,178 1,961 2,534
--------- --------- --------- ---------
Net revenue 413,334 508,755 498,481 574,621
Gross margin
Product $ 38,169 $ 47,073 $ 46,088 $ 49,521
Service 12,237 11,630 14,470 18,217
Other 845 588 748 1,377
--------- --------- --------- ---------
Total gross margin 51,251 59,291 61,306 69,115
Net earnings $ 5,762 $ 12,334 * $ 4,945 $ 7,430
Earnings per common share
Primary .12 .25 * .10 .15
Fully diluted .12 .25 * .10 .15
1995
- ----
Revenue
Product $ 302,401 $ 324,427 $ 319,562 $ 388,052
Service 19,668 25,204 26,988 29,008
Other 1,418 1,079 1,349 2,441
--------- --------- --------- ---------
Net revenue 323,487 350,710 347,899 419,501
Gross margin
Product $ 31,751 $ 33,789 $ 33,134 $ 42,255
Service 5,571 8,240 8,261 8,689
Other 856 524 747 1,091
--------- --------- --------- ---------
Total gross margin 38,178 42,553 42,142 52,035
Net earnings $ 3,835 $ 4,814 $ 4,827 $ 7,194
Earnings per common share
Primary .10 .12 .12 .16
Fully diluted .09 .11 .10 .15
</TABLE>
Earnings per common share calculations are based on the weighted-
average number of shares outstanding in each period. Therefore, the sum of
the quarters may not necessarily equal the year-to-date earnings per common
share.
* Includes non-recurring gain on sale of securities of $5.2 million or
$.10 per share.
F-15
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- ---------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Trade receivables-
Allowance for doubtful accounts
1994 $ 1,872 963 893 $ 1,942
1995 $ 1,942 900 608 $ 2,234
1996 $ 2,234 900 860 $ 2,274
Inventory reserves
1994 $ 13,783 14,597 18,608 $ 9,772
1995 $ 9,772 13,333 13,581 $ 9,524
1996 $ 9,524 15,529 16,119 $ 8,934
</TABLE>
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28 , 1997 COMPUCOM SYSTEMS, INC.
------
By: /s/ Edward R. Anderson
------------------------------------------------
Edward R. Anderson, President
and Chief Executive Officer
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
Registrant and in the capacities and on the dates indicated.
Dated: March 28 , 1997 /s/ Charles A. Root
----- ---------------------------------------------------
Charles A. Root, Chairman of the Board
Dated: March 28 , 1997 /s/ Edward R. Anderson
----- ---------------------------------------------------
Edward R. Anderson, President, Chief Executive
Officer and Director (Principal Executive Officer)
Dated: March 28 , 1997 /s/ M. Lazane Smith
----- ---------------------------------------------------
M. Lazane Smith, Senior Vice President-Finance
(Principal Financial and Accounting Officer)
Dated: March 28 , 1997 /s/ Daniel F. Brown
----- ---------------------------------------------------
Daniel F. Brown, Director
Dated: March 28 , 1997 /s/ James W. Dixon
----- ---------------------------------------------------
James W. Dixon, Director
Dated: March 28 , 1997 /s/ Michael J. Emmi
----- ---------------------------------------------------
Michael J. Emmi, Director
Dated: March 28 , 1997 /s/ Richard F. Ford
----- ---------------------------------------------------
Richard F. Ford, Director
Dated: March 28 , 1997 /s/ Delbert W. Johnson
----- ---------------------------------------------------
Delbert W. Johnson, Director
Dated: March 28 , 1997 /s/ John. D. Loewenberg
----- ---------------------------------------------------
John D. Loewenberg, Director
Dated: March 28 , 1997 /s/ Ira M. Lubert
----- ---------------------------------------------------
Ira M. Lubert, Director
Dated: March 28 , 1997 /s/ Warren V. Musser
----- ---------------------------------------------------
Warren V. Musser, Director
Dated: March 28 , 1997 /s/ Edward N. Patrone
----- ---------------------------------------------------
Edward N. Patrone, Director
<PAGE>
AGREEMENT FOR INVENTORY FINANCING
This AGREEMENT FOR INVENTORY FINANCING (as amended, supplemented or otherwise
modified from time to time, this "Agreement") amends and restates that Agreement
for Wholesale Financing dated August 27, 1991 (as amended from time to time, the
"AWF") and is hereby made this 20 day of September, 1996, by and between IBM
----
CREDIT CORPORATION, a Delaware corporation with a place of business at 1500
Riveredge Parkway, Atlanta, Georgia 30328 ("IBM Credit"), and COMPUCOM SYSTEMS,
INC, a Delaware corporation with a place of business at 10100 North Central
Expressway, Dallas, Texas 75231 ("Customer").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, IBM Credit and Customer are parties to that certain AWF pursuant
to which IBM Credit finances Customer's acquisition of inventory and equipment;
WHEREAS, in the course of Customer's operations, Customer intends to purchase
from Persons approved in writing by IBM Credit for the purposes of this
Agreement (the "Authorized Suppliers") computer hardware and software products
manufactured or distributed by or bearing any trademark or trade name of such
Authorized Suppliers for distribution throughout the United States (the
"Products") (as of the date hereof the Authorized Suppliers are as set forth on
Attachment E hereto);
WHEREAS, Customer has agreed to utilize IBM Credit to finance its purchase of
Products from such Authorized Suppliers and IBM Credit is willing to provide
such financing to Customer subject to the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree that the AWF is hereby amended and
restated in its entirety as follows:
Section 1. DEFINITIONS; ATTACHMENTS
1.1 Special Definitions. The following terms shall have the following
respective meaning in this Agreement:
"Advance": any loan or other extension of credit by IBM Credit to, or on behalf
of, Customer pursuant to this Agreement including, without limitation, Product
Advances.
"Affiliate": with respect to the Customer, any Person, excluding Teknowlogy,
Inc., International Micronet Systems, Inc. ("IMS"),
<PAGE>
PC Service Source, Inc., Safeguard Scientifics, Inc. and ClientLink, Inc.,
meeting one of the following: (i) at least 10% of such Person's equity is owned,
directly or indirectly, by Customer; (ii) at least 10% of Customer's equity is
owned, directly or indirectly, by such Person; or (iii) at least 10% of
Customer's equity and at least 10% of such Person's equity is owned, directly or
indirectly, by the same Person or Persons. All of Customer's officers,
directors, joint venturers, and partners shall also be deemed to be Affiliates
of Customer for purposes of this Agreement .
"Agreement": as defined in the caption.
"Auditors": Customer will use KPMG Peat, Marwick to audit its accounting
records or another nationally recognized firm of independent certified public
accountants as agreed to in writing by IBM Credit.
"Average Daily Balance": the sum of the Outstanding Product Advances as of the
end of each day during a calendar month, divided by the number of days in the
calendar month.
"Business Day": any day other than a Saturday, Sunday or other day on which
commercial banks in New York, New York are generally closed or on which IBM
Credit is closed.
"Closing Date": the date on which the conditions precedent to the effectiveness
of this Agreement set forth in Section 5.1 hereof are satisfied or waived in
writing by IBM Credit.
"Code": the Internal Revenue Code of 1986, as amended or any successor statute.
"Collateral": as defined in Section 4.1.
"Collateral Management Report": a report to be delivered by Customer to IBM
Credit from time to time, as provided herein, signed by the Treasurer or
Controller of Customer in the form of Attachment F hereto, detailing and
certifying, at a minimum:
(i) all IBM Credit Inventory (as defined in Section 4.1) in Customer's
actual possession as of the last day of the immediately preceding month
excluding any inventory on rent or lease ("Inventory Report"). The
Inventory Report will indicate model number, Customer's corresponding item
identification number, the quantity in Customer's possession, the unit cost
reflecting the original purchase price, and the extended cost which is the
product of the unit cost multiplied by the quantity. A total of extended
costs will also be indicated;
(ii) all IBM Credit Inventory which has been shipped by
2
<PAGE>
an Authorized Supplier, but not received as of the last day of the
immediately preceding month ("In-Transit Inventory") by invoice number,
purchase order number, shipment date and total dollar amount of each
invoice; and
(iii) a "Monthly Collateralization Report" indicating the current
Outstanding Product Advances owed by Customer to IBM Credit and the
aggregate wholesale invoice price of the inventory financed by IBM Credit
that is in Customer's possession and any Shortfall Amount as of a specified
date.
"Common Due Date": (1) the fifth day of a calendar month if the Product
Financing Period expires on the first through tenth of such calendar month; (2)
the fifteenth day of a calendar month if the Product Financing Period expires on
the eleventh through twentieth of such calendar month; and (3) the twenty-fifth
day of a calendar month if the Product Financing Period expires on the twenty-
first through the last day of such calendar month.
"Compliance Certificate": a certificate substantially in the form of Attachment
C.
"Credit Line": as defined in Section 2.1.
"Customer": as defined in the caption.
"Default": either (1) an Event of Default or (2) any event or condition which,
but for the requirement that notice be given or time lapse or both, would be an
Event of Default.
"Delinquency Fee Rate": as defined on Attachment A.
"Environmental Laws": all statutes, laws, judicial decisions, regulations,
ordinances, and other governmental restrictions relating to pollution, the
protection of the environment, occupational health and safety, or to emissions,
discharges or release of pollutants, contaminants, hazardous substances or
wastes into the environment.
"Environmental Liability": any claim, demand, obligation, cause of action,
allegation, order, violation, injury, judgment, penalty or fine, cost or
expense, resulting from the violation or alleged violation of any Environmental
Laws or the imposition of any Lien pursuant to any Environmental Laws.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended, or
any successor statutes.
"Event of Default": as defined in Section 9.1.
"Financial Statements": the consolidated and balance sheets, statements of
operations, statements of cash flows and statements of changes
3
<PAGE>
of changes in shareholder's equity of Customer and its Subsidiaries for the
period specified, prepared in accordance with GAAP and consistent with prior
practices.
"Floor Plan Lender": any Person who now or hereinafter provides inventory
financing to Customer, provided that such Person executes an Intercreditor
Agreement (as defined in Section 5.1 of this Agreement) or a subordination
agreement with IBM Credit in form and substance satisfactory to IBM Credit.
"Free Financing Period": for each Product Advance, the period, if any, in which
IBM Credit does not charge Customer a financing charge. IBM Credit shall
calculate the Customer's Free Financing Period utilizing a methodology that is
consistent with the methodologies used for similarly situated customers of IBM
Credit. The Customer understands that IBM Credit may not offer or may cease to
offer a Free Financing Period for the Customer's purchases of Products.
"GAAP": generally accepted accounting principles in the United States as in
effect from time to time.
"Governmental Authority": any nation or government, any state or other
political subdivision thereof, and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled (through stock or
capital ownership or otherwise) by any of the foregoing.
"Hazardous Substances": all substances, wastes or materials, to the extent
subject to regulation as "hazardous substances" or "hazardous waste" under any
Environmental Laws.
"IBM Credit": as defined in the caption.
"Indebtedness": with respect to any Person, (1) all obligations of such Person
for borrowed money or for the deferred purchase price of property or services
(other than trade liabilities incurred in the ordinary course of business and
payable in accordance with customary practices) or which is evidenced by a note,
bond, debenture or similar instrument, (2) all obligations of such Person under
capital leases, (3) all obligations of such Person in respect of letters of
credit, banker's acceptances or similar obligations issued or created for the
account of such Person, (4) liabilities arising under any interest rate
protection, future, option swap, cap or hedge agreement or arrangement under
which such Person is a party or beneficiary, (5) all obligations under
guaranties of such Person and (6) all liabilities secured by any Lien on any
property owned by such Person even though such Person has not assumed or
otherwise become liable for the payment thereof.
4
<PAGE>
"Investment": with respect to any Person (the "Investor"), (1) any investment
by the Investor in any other Person, whether by means of share purchase, capital
contribution, purchase or other acquisition of a partnership or joint venture
interest, loan, time deposit, demand deposit or otherwise, and (2) any guaranty
by the Investor of any Indebtedness or other obligation of any other Person.
"Lien(s)": any lien, claim, charge, pledge, security interest, deed of trust,
mortgage, other encumbrance or other arrangement having the practical effect of
the foregoing, including the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Material Adverse Effect": a material adverse effect (1) on the business,
operations, results of operations, assets, or financial condition of the
Customer, (2) on the aggregate value of the Collateral or the aggregate amount
which IBM Credit would be likely to receive (after giving consideration to
reasonably likely delays in payment and reasonable costs of enforcement) in the
liquidation of such Collateral to recover the Obligations in full, or (3) on the
rights and remedies of IBM Credit under this Agreement.
"Obligations": all covenants, agreements, warranties, duties, representations,
loans, advances, interest (including interest accruing on or after the filing of
any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to Customer, whether or not a claim
for post-filing or post-petition interest is allowed in such proceeding), fees,
reasonable expenses, indemnities, liabilities and Indebtedness of any kind and
nature whatsoever now or hereafter arising, owing, due or payable from Customer
to IBM Credit.
"Other Documents": all security agreements, mortgages, leases, instruments,
documents, guarantees, schedules of assignment, contracts and similar agreements
executed by Customer and delivered to IBM Credit, pursuant to this Agreement or
otherwise, and all amendments, supplements and other modifications to the
foregoing from time to time.
"Other Charges": as set forth in Attachment A.
"Outstanding Advances": at any time of determination, the sum of (1) the unpaid
principal amount of all Advances made by IBM Credit under this Agreement; and
(2) any finance charge, fee, expense or other amount related to Advances charged
to Customer's account with IBM Credit.
"Outstanding Product Advances": at any time of determination, the sum of (1)
the unpaid principal amount of all Product
5
<PAGE>
Advances made by IBM Credit under this Agreement; and (2) any finance charge,
fee, expense or other amount related to Product Advances charged to Customer's
account with IBM Credit.
"Payment Dates": the fifth, fifteenth and twenty-fifth day of each calendar
month.
"Permitted Indebtedness": any of the following:
(1) Indebtedness to IBM Credit;
(2) Indebtedness described in Section VII of Attachment B;
(3) Indebtedness to any Floor Plan Lender;
(4) Purchase Money Indebtedness;
(5) guaranties in favor of IBM Credit; and
(6) for Customer's subsidiary, CSI Funding, Inc., transactions under that
certain Receivables Purchase Agreement dated April 1, 1996 (as amended,
supplemented or otherwise modified from time to time) and that certain Transfer
and Administration Agreement dated April 1, 1996 (as amended, supplemented or
otherwise modified from time to time) subject to Section 8.13 of this Agreement.
(7) other Indebtedness consented to by IBM Credit in writing prior to incurring
such Indebtedness.
"Permitted Liens": any of the following:
(1) Liens which are the subject of an Intercreditor Agreement, in effect from
time to time between IBM Credit and any other secured creditor;
(2) Purchase Money Security Interests;
(3) Liens described in Section I of Attachment B;
(4) Liens of warehousemen, mechanics, materialmen, workers, repairmen, common
carriers, landlords and other similar Liens arising by operation of law or
otherwise, not waived in connection herewith, for amounts that are not yet due
and payable or being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted if an adequate reserve or other appropriate
provisions shall have been made therefor as required to be in conformity with
GAAP and an adverse determination in such proceedings could not reasonably be
expected to have a Material Adverse Effect;
(5) attachment or judgment Liens individually or in the
6
<PAGE>
aggregate not in excess of Two Million Dollars ($2,000,000.) (exclusive of (A)
any amounts that are duly bonded to the satisfaction of IBM Credit or (B) any
amount fully covered by insurance as to which the insurance company has
acknowledged its obligation to pay such judgment in full);
(6) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate, are not
substantial in amount and which do not materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of Customer;
(7) extensions and renewals of the foregoing permitted Liens; provided that (A)
the aggregate amount of such extended or renewed Liens do not exceed the
original principal amount of the Indebtedness for which it secures, (B) such
Liens do not extend to any property other than property already previously
subject to the Lien and (C) such extended or renewed Liens are on terms and
conditions no more restrictive than the terms and conditions of the Liens being
extended or renewed;
(8) Liens arising from deposits or pledges to secure bids, tenders, contracts,
leases, surety and appeal bonds and other obligations of like nature arising in
the ordinary course of the Customer's business;
(9) Liens for taxes, assessments or governmental charges not delinquent or
being contested, in good faith, by appropriate proceedings promptly instituted
and diligently conducted if an adequate reserve or other appropriate provisions
shall have been made therefor as required in order to be in conformity with GAAP
and an adverse determination in such proceedings could not reasonably be
expected to have a Material Adverse Effect;
(10) Liens arising out of deposits in connection with workers' compensation,
unemployment insurance or other social security or similar legislation;
(11) Liens arising pursuant to this Agreement; and
(12) other Liens consented to by IBM Credit in writing prior to incurring such
Lien.
"Person": any individual, association, firm, corporation, partnership, trust,
unincorporated organization or other entity whatsoever.
"Policies": all policies of insurance required to be maintained by Customer
under this Agreement or any of the Other Documents.
"Prime Rate": as of the date of determination, the average of
7
<PAGE>
the rates of interest announced by Citibank, N.A., The Chase Manhattan Bank,
N.A. and Bank of America National Trust & Savings Association as their prime or
base rate, as of the last Business Day of the calendar month immediately
preceding the date of determination, whether or not such announced rates are the
actual rates charged by such banking institutions to their most creditworthy
borrowers.
"Product Advance": any advance of funds made or committed to be made by IBM
Credit for the account of Customer to an Authorized Supplier in respect of an
invoice delivered by such Authorized Supplier to IBM Credit describing Products
purchased by Customer, including any such advance made or committed to be made
as of the date hereof pursuant to the AWF.
"Product Financing Charge": as defined on Attachment A.
"Product Financing Period": for each Product Advance, a period of days equal to
that set forth in Attachment A from time to time, commencing on the invoice date
of such Product Advance.
"Purchase Money Indebtedness": any Indebtedness (including capital leases)
incurred to finance the acquisition of assets (other than assets manufactured or
distributed by or bearing any trademark or trade name of any Authorized
Supplier) to be used in the Customer's business not to exceed the lesser of (1)
the purchase price or acquisition cost of such asset and (2) the fair market
value of such asset.
"Purchase Money Security Interest": any security interest securing Purchase
Money Indebtedness, which security interest applies solely to the particular
asset acquired with the Purchase Money Indebtedness.
"Requirement of Law": as to any Person, the articles of incorporation and by-
laws of such Person, and any law, treaty, rule or regulation or determination of
an arbitrator or a court or other governmental authority, in each case
applicable to or binding upon such Person or any of its property or to which
such Person or any of its property is subject.
"Shortfall Amount": as defined in Section 2.5.
"Subsidiary": with respect to any Person, excluding PC Service Source, Inc.
Teknowlogy, Inc. and Safeguard Scientifics, Inc., any corporation or other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other Persons performing
similar functions are at the time directly or indirectly owned by such Person.
"Termination Date": shall mean (i) the first anniversary of the
8
<PAGE>
date of this Agreement or such other date as IBM Credit and Customer may agree
to in writing from time to time.
"Voting Stock": securities, the holders of which are ordinarily, in the absence
of contingencies, entitled to elect the corporate directors (or persons
performing similar functions).
1.2 Other Defined Terms. Terms not otherwise defined in this Agreement which
are defined in the Uniform Commercial Code as in effect in the State of New York
(the "U.C.C.") shall have the meanings assigned to them therein.
1.3 Attachments. All attachments, exhibits, schedules and other addenda
hereto, including, but not limited to, Attachment A and Attachment B, are
specifically incorporated herein by reference and made a part of this Agreement.
Section 2. CREDIT LINE; FINANCE CHARGES; OTHER CHARGES
2.1 Credit Line. Subject to the terms and conditions set forth in this
Agreement, on and after the Closing Date to but not including the date that is
the earlier of (i) the date on which this Agreement is terminated pursuant to
Section 10.1 and (ii) the date on which IBM Credit terminates the Credit Line
pursuant to Section 9.2, IBM Credit agrees to extend to the Customer a credit
line ("Credit Line") in the amount set forth in Attachment A pursuant to which
IBM Credit will make to the Customer, from time to time, Advances in an
aggregate amount at any one time outstanding not to exceed the Credit Line.
Notwithstanding any other term or provision of this Agreement, IBM Credit may,
at any time and from time to time, in its sole and absolute discretion (x)
temporarily increase the amount of the Credit Line set forth in Attachment A and
decrease the amount of the Credit Line to the amount of the Credit Line set
forth in Attachment A, in each case upon notice to the Customer, and (y) make
Advances pursuant to this Agreement in an aggregate amount at any one time
outstanding in excess of the Credit Line.
2.2 Product Advances. (A) Subject to the terms and conditions of this
Agreement, IBM Credit shall make Product Advances in connection with Customer's
purchase of Products from Authorized Suppliers. Customer hereby authorizes and
directs IBM Credit to pay the proceeds of Product Advances directly to the
applicable Authorized Supplier in respect of invoices delivered to IBM Credit
for such Products by such Authorized Supplier and acknowledges that each such
Product Advance constitutes a loan by IBM Credit to Customer pursuant to this
Agreement as if the Customer received the proceeds of the Product Advance
directly from IBM Credit.
(B) No finance charge shall accrue on any Product Advance during the Free
Financing Period, if any, applicable to such
9
<PAGE>
Product Advance. Customer shall repay each Product Advance no later than the
Common Due Date for such Product Advance. Nothing contained herein shall relieve
Customer of its obligation to repay Product Advances when due. Each Product
Advance shall accrue a finance charge on the Average Daily Balance thereof from
the end of the Free Financing Period, if any, for such Product Advance, or if no
such Free Financing Period shall be in effect, from the date of invoice for such
Product Advance, in each case, until such Product Advance shall become due and
payable in accordance with the terms of this Agreement, at a per annum rate
equal to the lesser of (a) the finance charge set forth in Attachment A to this
Agreement as the "Product Financing Charge" and (b) the highest rate from time
to time permitted by applicable law. If it is determined that amounts received
from Customer were in excess of the highest rate permitted by law, then the
amount representing such excess shall be considered reductions to principal of
Advances.
(C) Customer acknowledges that IBM Credit does not warrant the Collateral.
Customer shall be obligated to pay IBM Credit in full even if the Collateral is
defective or fails to conform to the warranties extended by the Authorized
Supplier. The Obligations of Customer shall not be affected by any dispute
Customer may have with any manufacturer, distributor or Authorized Supplier.
Customer will not assert any claim or defense which it may have against any
manufacturer, distributor or Authorized Supplier against IBM Credit.
(D) Customer hereby authorizes IBM Credit to receive any credits, rebates,
bonuses or discounts owed by such Authorized Supplier to Customer which
Authorized Supplier sends directly to IBM Credit("Supplier Credits") and
Customer agrees that any such Supplier Credits received by IBM Credit may be
applied by IBM Credit to the Outstanding Advances. Any Supplier Credits
received by IBM Credit shall in no way reduce Customer's debt to IBM Credit in
respect of the Outstanding Advances until such Supplier Credits are applied by
IBM Credit which application by IBM Credit shall not be unreasonably withheld.
(E) IBM Credit may apply any payments and Supplier Credits received by IBM
Credit to reduce finance charges first and then to principal amounts of Advances
owed by Customer. IBM Credit may apply principal payments to the oldest
(earliest) invoices (and related Product Advances) first, but, in any case, all
principal payments will be applied in respect of the Outstanding Product
Advances made for Products which have been sold, lost, stolen, destroyed,
damaged or otherwise disposed of prior to any other application thereof.
(F) Customer will indemnify and hold IBM Credit harmless from and against any
claims or demands asserted by any Person relating to or arising from the
Collateral for any reason
10
<PAGE>
whatsoever, including, without limitation, the condition of the Collateral, any
misrepresentation made about the Collateral by any representative of Customer,
or any act or failure to act by Customer except to the extent such claims or
demands are directly attributable to IBM Credit's gross negligence or willful
misconduct. Nothing contained in the foregoing shall impair any rights or claims
which the Customer may have against any manufacturer, distributor or Authorized
Supplier.
2.3 Finance and Other Charges. (A) Finance charges shall be calculated by
multiplying the applicable Delinquency Fee Rate or Product Financing Charge
provided for in this Agreement by Customer's applicable Average Daily Balance.
The Delinquency Fee Rate or the Product Financing Charge provided for in this
Agreement are each computed on the basis of an actual day, 360 day year.
(B) The Customer hereby agrees to pay to IBM Credit the charges set forth as
"Other Charges" in Attachment A. The Customer also agrees to pay IBM Credit
additional charges for any returned items of payment received by Customer. The
Customer hereby acknowledges that any such charges are not interest but that
such charges, if unpaid, will constitute part of the Outstanding Product
Advances.
(C) The finance charges and Other Charges owed under this Agreement, and any
charges hereafter agreed to in writing by the parties, are payable monthly on
receipt of IBM Credit's bill or statement therefor or IBM Credit may, in its
sole discretion, add unpaid finance charges and Other Charges to the Customer's
Outstanding Product Advances.
(D) If any amount owed under this Agreement, including, without limitation,
any Advance, is not paid when due (whether at maturity, by acceleration or
otherwise), the unpaid amount thereof will bear a late charge from and including
its due date to but not including the date IBM Credit receives payment thereof,
at a per annum rate equal to the lesser of (a) the amount set forth in
Attachment A to this Agreement as the "Delinquency Fee Rate" and (b) the highest
rate from time to time permitted by applicable law.
2.4 Statements Regarding Customer's Account. IBM Credit will send statements
of each transaction hereunder as well as monthly billing statements to Customer
with respect to Advances and other charges due on Customer's account with IBM
Credit. Each statement of transaction and monthly billing statement shall be
deemed, absent manifest error, to be correct and shall constitute an account
stated with respect to each transaction or amount described therein unless
within seven (7) calendar days after such statement of transaction or billing
statement is received by Customer, Customer provides IBM Credit written notice
objecting
11
<PAGE>
that such amount or transaction is incorrectly described therein and specifying
the error(s), if any, contained therein. IBM Credit will adjust such statements
of transaction or billing statements to comply with applicable law and this
Agreement or to correct any agreed upon error within a reasonable time period
provided that Customer has notified IBM Credit of such error as set forth above.
2.5 Shortfall. If IBM Credit determines that the current Outstanding Advances
owed by Customer to IBM Credit exceeds the aggregate wholesale invoice price of
the inventory financed by IBM Credit that is in Customer's possession (such
excess, the "Shortfall Amount"), Customer shall pay to IBM Credit an amount
equal to such Shortfall Amount within two (2) Business Days of notice by IBM
Credit.
2.6 Application of Payments. The Customer hereby agrees that all checks and
other instruments delivered to IBM Credit on account of Customer's Obligations
shall constitute conditional payment until such items are actually collected by
IBM Credit. The Customer waives the right to direct the application of any and
all payments at any time or times hereafter received by IBM Credit on account of
the Customer's Obligations. Customer agrees that IBM Credit shall have the
continuing exclusive right to apply and reapply any and all such payments to
Customer's Obligations in such manner as IBM Credit may deem advisable
notwithstanding any entry by IBM Credit upon any of its books and records. The
Obligations of Customer shall not be affected by any dispute Customer may have
with any manufacturer, distributor or Authorized Supplier. Notwithstanding the
immediately preceding sentence, any delay in payment resulting from Customer's
using a process, approved by IBM Credit and in effect at the time of such
delayed payment, for requesting an adjustment related to an invoice for
Products, shall be governed by such approved process.
2.7 Prepayment and Reborrowing By Customer. (A) Customer may at any time
prepay, without notice or penalty, in whole or in part amounts owed under this
Agreement. IBM Credit may apply payments made to it (whether by the Customer or
otherwise) to pay finance charges and other amounts owing under this Agreement
first and then to the principal amount owed by the Customer.
(B) Subject to the terms and conditions of this Agreement, any amount prepaid
or repaid to IBM Credit in respect to the Outstanding Advances may be reborrowed
by Customer in accordance with the provisions of this Agreement.
Section 3. CREDIT LINE ADDITIONAL PROVISIONS
3.1 Power of Attorney. Customer hereby irrevocably appoints IBM Credit, with
full power of substitution, as its true and lawful
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attorney-in-fact with full power, in good faith and in compliance with
commercially reasonable standards, in the discretion of IBM Credit, to:
(A) sign the name of Customer on any document or instrument that IBM Credit
shall deem necessary or appropriate to perfect and maintain perfected the
security interest in the Collateral contemplated under this Agreement and the
Other Documents;
(B) endorse the name of Customer upon any of the items of payment of any
insurance proceeds and checks from Authorized Suppliers and deposit the same in
the account of IBM Credit for application to the Obligation; and
upon the occurrence and during the continuance of an Event of Default as defined
in Section 9.1 hereof:
(C) subject to any Intercreditor Agreement, demand payment, enforce payment
and otherwise exercise all Customer's rights and remedies with respect to the
Collateral;
(D) prepare, file and sign Customer's name on any notice of lien, claim of
mechanic's lien, assignment or satisfaction of lien or mechanic's lien, or
similar document in connection with the Collateral;
(E) endorse the name of Customer upon any chattel paper, document,
instrument, invoice, freight bill, bill of lading or similar document or
agreement relating to the Collateral;
(F) sign the name of Customer on any document or instrument that IBM Credit
shall deem necessary or appropriate to enforce any and all remedies it may have
under this Agreement, at law or otherwise; and
(G) make, settle and adjust claims under the Policies with respect to the
Collateral and endorse Customer's name on any check, draft, instrument or other
item of payment of the proceeds of the Policies with respect to the Collateral;
and
The power of attorney granted by this Section is for value and coupled with an
interest and is irrevocable so long as this Agreement is in effect or any
Obligations remain outstanding. Nothing done by IBM Credit pursuant to such
power of attorney will reduce any of Customer's Obligations other than
Customer's payment Obligations to the extent IBM Credit has received monies.
Section 4. SECURITY -- COLLATERAL
4.1 Grant. (A) To secure Customer's full and punctual payment and
performance of the Obligations when due (whether at the stated maturity, by
acceleration or otherwise), Customer hereby
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grants IBM Credit a security interest in all of Customer's right, title and
interest in and to the following property, whether now owned or hereafter
acquired or existing and wherever located:
(i) all inventory and equipment manufactured or sold by, or bearing the
trademark or trade name of International Business Machines Corporation or
Lexmark International, Inc., and all parts thereof, attachments,
accessories and accessions thereto, products thereof and documents therefor
("IBM Credit Inventory");
(ii) all credits, rebates, discounts, refunds and incentive payments
relating to the foregoing; and
(iii) all substitutions and replacements for all of the foregoing, all
identifiable cash proceeds, specifically excluding accounts, of all of the
foregoing and, to the extent not otherwise included, all payments under
insurance or any indemnity, warranty or guaranty, payable by reason of loss
or damage to or otherwise with respect to any of the foregoing.
All of the above assets shall be collectively defined herein as the
"Collateral".
Customer covenants and agrees with IBM Credit that: (a) the security constituted
to by this Agreement is in addition to any other security from time to time held
by IBM Credit and (b) the security hereby created is a continuing security
interest and will cover and secure the payment of all Obligations both present
and future of Customer to IBM Credit pursuant to this Agreement and the Other
Documents.
4.2 Further Assurances. Customer shall, from time to time upon the request
of IBM Credit, execute and deliver to IBM Credit, or cause to be executed and
delivered, at such time or times as IBM Credit may request such other and
further documents, certificates and instruments that IBM Credit may reasonably
deem necessary to perfect and maintain perfected IBM Credit's security interests
in the Collateral and in order to fully consummate all of the transactions
contemplated under this Agreement and the Other Documents. Customer shall make
appropriate entries on its books and records disclosing IBM Credit's security
interests in the Collateral.
Section 5. CONDITIONS PRECEDENT
5.1 Conditions Precedent to the Effectiveness of This Agreement. The
effectiveness of this Agreement is subject to the receipt by IBM Credit of, or
waiver in writing by IBM Credit of compliance with, the following conditions
precedent:
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(A) this Agreement executed and delivered by Customer and IBM Credit;
(B) (i) a certificate of the secretary or an assistant secretary of Customer,
in form and substance satisfactory to IBM Credit, certifying the names and true
signatures of the officers of Customer authorized to sign this Agreement and the
Other Documents and (ii) copies of the articles of incorporation and by-laws of
Customer certified by the secretary or assistant secretary of Customer;
(C) copies of all approvals and consents from any Person, in each case in
form and substance satisfactory to IBM Credit, which are required to enable
Customer to authorize, or required in connection with, (a) the execution,
delivery or performance of this Agreement and each of the Other Documents, and
(b) the legality, validity, binding effect or enforceability of this Agreement
and each of the Other Documents;
(D) intercreditor agreements ("Intercreditor Agreement"), in form and
substance satisfactory to IBM Credit, executed by each other secured creditor of
Customer as set forth in Attachment A;
(E) UCC-1 financing statements for each jurisdiction reasonably requested by
IBM Credit executed by Customer and each guarantor whose guaranty to IBM Credit
is intended to be secured by a pledge of its assets;
(F) the statements, certificates, documents, instruments, financing
statements, agreements and information set forth in Attachment A and Attachment
B; and
(G) all such other statements, certificates, documents, instruments,
financing statements, agreements and other information with respect to the
matters contemplated by this Agreement as IBM Credit shall have reasonably
requested.
5.2 Conditions Precedent to Each Advance. No Advance will be required to be
made or renewed by IBM Credit under this Agreement unless, on and as of the date
of such Advance, the following statements shall be true to the satisfaction of
IBM Credit:
(A) The representations and warranties contained in this Agreement or in any
document, instrument or agreement executed in connection herewith, are true and
correct in all material respects on and as of the date of such Advance as though
made on and as of such date;
(B) No event has occurred and is continuing or after giving effect to such
Advance or the application of the proceeds thereof
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would result which would constitute a Default;
(C) No event has occurred and is continuing which could reasonably be expected
to have a Material Adverse Effect;
(D) Both before and after giving effect to the making of such Advance, no
Shortfall Amount exists.
Except as Customer has otherwise disclosed to IBM Credit in writing prior to
each request, each request for an Advance hereunder shall be deemed to be a
representation and warranty by Customer that, as of and on the date of such
Advance, the statements set forth in (A) through (D) above are true statements.
No such disclosures by Customer to IBM Credit shall in any manner be deemed to
satisfy the conditions precedent to each Advance that are set forth in this
Section 5.2.
Section 6. REPRESENTATIONS AND WARRANTIES
To induce IBM Credit to enter into this Agreement, Customer represents and
warrants to IBM Credit as follows:
6.1 Organization and Qualifications. Customer and each of its Subsidiaries
(i) is a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, (ii) has the power and
authority to own its properties and assets and to transact the businesses in
which it presently is engaged and (iii) is duly qualified and is authorized to
do business and is in good standing in each jurisdiction where it presently is
engaged in business and is required to be so qualified.
6.2 Rights in Collateral; Priority of Liens. Customer and each of its
Subsidiaries owns the property granted by it respectively as Collateral to IBM
Credit, free and clear of any and all Liens in favor of third parties except for
the Liens otherwise permitted pursuant to Section 8.1. The Liens granted by the
Customer and each of its Subsidiaries pursuant to this Agreement and the Other
Documents in the Collateral constitute the valid and enforceable first, prior
and perfected Liens on the Collateral, except to the extent any Liens that are
prior to IBM Credit's Liens are (i) the subject of an Intercreditor Agreement or
(ii) Purchase Money Security Interests in product of a brand that is not
financed by IBM Credit.
6.3 No Conflicts. The execution, delivery and performance by Customer of
this Agreement and each of the Other Documents (i) are within its corporate
power; (ii) are duly authorized by all necessary corporate action; (iii) are not
in contravention in any respect of any Requirement of Law or any indenture,
contract, lease, agreement, instrument or other commitment to which it is a
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party or by which it or any of its properties are bound; (iv) do not require the
consent, registration or approval of any Governmental Authority or any other
Person (except such as have been duly obtained, made or given, and are in full
force and effect); and (v) will not, except as contemplated herein, result in
the imposition of any Liens upon any of its properties.
6.4 Enforceability. This Agreement and all of the other documents executed
and delivered by the Customer in connection herewith are the legal, valid and
binding obligations of Customer, and are enforceable in accordance with their
terms, except as such enforceability may be limited by the effect of any
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or similar laws affecting creditors' rights generally or the general
equitable principles relating thereto.
6.5 Locations of Offices, Records and Inventory. The address of the
principal place of business and chief executive office of Customer is as set
forth on Attachment B or on any notice provided by Customer to IBM Credit
pursuant to Section 7.7(C) of this Agreement.
There is no jurisdiction in which Customer has any Collateral (except for
vehicles and inventory in transit for processing) other than those jurisdictions
identified on Attachment B or on any notice provided by Customer to IBM Credit
pursuant to Section 7.7(C) of this Agreement. Attachment B, as amended from
time to time by any notice provided by Customer to IBM Credit in accordance with
Section 7.7(C) of this Agreement, also contains a complete list of the legal
names and addresses of each warehouse at which the Customer's inventory is
stored. None of the receipts received by Customer from any warehouseman states
that the goods covered thereby are to be delivered to bearer or to the order of
a named person or to a named person and such named person's assigns, other than
Customer.
6.6 Fictitious Business Names. Customer has not used any corporate or
fictitious name during the five (5) years preceding the date of this Agreement,
other than those listed on Attachment B.
6.7 Organization. All of the outstanding capital stock of Customer has been
validly issued, is fully paid and nonassessable.
6.8 No Judgments or Litigation. Except as set forth on Attachment B, no
judgments, orders, writs or decrees are outstanding against Customer nor is
there now pending or, to the best of Customer's knowledge after due inquiry,
threatened, any litigation, contested claim, investigation, arbitration, or
governmental proceeding by or against Customer which could
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reasonably be expected to have a Material Adverse Effect.
6.9 No Defaults. To the best of Customer's knowledge, Customer is not in
default under any term of any indenture, contract, lease, agreement, instrument
or other commitment to which it is a party or by which it, or any of its
properties are bound. Customer has no knowledge of any dispute regarding any
such indenture, contract, lease, agreement, instrument or other commitment. No
Default or Event of Default has occurred and is continuing.
6.10 Labor Matters. Except as set forth on any notice provided by Customer to
IBM Credit pursuant to Section 7.1(F) of this Agreement, the Customer is not a
party to any labor dispute. There are no strikes or walkouts or labor
controversies pending or threatened against the Customer which could reasonably
be expected to have a Material Adverse Effect.
6.11 Compliance with Law. Customer has not violated or failed to comply with
any Requirement of Law or any requirement of any self regulatory organization.
6.12 ERISA. Each "employee benefit plan", "employee pension benefit plan",
"defined benefit plan", or "multi-employer benefit plan", which Customer has
established, maintained, or to which it is required to contribute (collectively,
the "Plans") is in compliance with all applicable provisions of ERISA and the
Code and the rules and regulations thereunder as well as the Plan's terms and
conditions. There have been no "prohibited transactions" and no "reportable
event" has occurred within the last 60 months with respect to any Plan.
Customer has no "multi- employer benefit plan". As used in this Agreement the
terms "employee benefit plan", "employee pension benefit plan", "defined benefit
plan", and "multi-employer benefit plan" have the respective meanings assigned
to them in Section 3 of ERISA and any applicable rules and regulations
thereunder. The Customer has not incurred any "accumulated funding deficiency"
within the meaning of ERISA or incurred any liability to the Pension Benefit
Guaranty Corporation (the "PBGC") in connection with a Plan (other than for
premiums due in the ordinary course).
6.13 Compliance with Environmental Laws. Except as otherwise disclosed in
Attachment B:
(A) The Customer has obtained all government approvals required with respect
to the operation of their businesses under any Environmental Law.
(B) (i) the Customer has not generated, transported or disposed of any
Hazardous Substances; (ii) the Customer is not currently generating,
transporting or disposing of any Hazardous Substances; (iii) the Customer has no
knowledge that (a) any of
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its real property (whether owned, leased, or otherwise directly or indirectly
controlled) has been used for the disposal of or has been contaminated by any
Hazardous Substances, or (b) any of its business operations have contaminated
lands or waters of others with any Hazardous Substances; (iv) the Customer and
its respective assets are not subject to any Environmental Liability and, to the
best of the Customer's knowledge, any threatened Environmental Liability; (v)
the Customer has not received any notice of or otherwise learned of any
governmental investigation evaluating whether any remedial action is necessary
to respond to a release or threatened release of any Hazardous Substance for
which the Customer may be liable; (vi) the Customer is not in violation of any
Environmental Law; (vii) there are no proceedings or investigations pending
against Customer with respect to any violation or alleged violation of any
Environmental Law; provided however, that the parties acknowledge that any
generation, transportation, use, storage and disposal of certain such Hazardous
Substances in Customer's or its Subsidiaries' business shall be excluded from
representations (i) and (ii) above, provided, further, that Customer is at all
times generating, transporting, utilizing, storing and disposing such Hazardous
Substances in accordance with all applicable Environmental Laws and in a manner
designed to minimize the risk of any spill, contamination, release or discharge
of Hazardous Substances other than as authorized by Environmental Laws.
6.14 Licenses and Permits. Customer has obtained and holds in full force and
effect all franchises, licenses, leases, permits, certificates, authorizations,
qualifications, easements, rights of way and other rights and approvals which
are necessary for the operation of its businesses as presently conducted.
Customer is not in violation of the terms of any such franchise, license, lease,
permit, certificate, authorization, qualification, easement, right of way, right
or approval.
6.15 Investment Company. The Customer is not (i) an investment company or a
company controlled by an investment company within the meaning of the Investment
Company Act of 1940, as amended, (ii) a holding company or a subsidiary of a
holding company, or an Affiliate of a holding company or of a subsidiary of a
holding company, within the meaning of the Public Utility Holding Company Act of
1935, as amended, or (iii) subject to any other law which purports to regulate
or restrict its ability to borrow money or to consummate the transactions
contemplated by this Agreement or the Other Documents or to perform its
obligations hereunder or thereunder.
6.16 Taxes and Tax Returns. To the best of Customer's knowledge, Customer has
timely filed all federal, state, and local tax returns and other reports which
it is required by law to file, and has either duly paid all taxes, fees and
other governmental charges indicated to be due on the basis of such reports and
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returns or pursuant to any assessment received by the Customer, or made
provision for the payment thereof in accordance with GAAP. The charges and
reserves on the books of the Customer in respect of taxes or other governmental
charges are in accordance with GAAP. To the best of Customer's knowledge, no
tax liens have been filed against Customer or any of its property.
6.17 Affiliate/Subsidiary Transactions. Customer is not a party to or bound by
any agreement or arrangement (whether oral or written) to which any Affiliate or
Subsidiary of the Customer is a party except (i) in the ordinary course of and
pursuant to the reasonable requirements of Customer's business and (ii) upon
fair and reasonable terms no less favorable to Customer than it could obtain in
a comparable arm's-length transaction with an unaffiliated Person.
6.18 Accuracy and Completeness of Information. All factual information
furnished by or on behalf of the Customer to IBM Credit or the Auditors for
purposes of or in connection with this Agreement or any of the Other Documents,
or any transaction contemplated hereby or thereby is or will be true and
accurate in all material respects on the date as of which such information is
dated or certified and not incomplete by omitting to state any material fact
necessary to make such information not misleading at such time.
6.19 Recording Taxes. All recording taxes, recording fees, filing fees and
other charges payable in connection with the filing and recording of this
Agreement have either been paid in full by Customer or arrangements for the
payment of such amounts by Customer have been made to the satisfaction of IBM
Credit.
6.20 Indebtedness. Customer (i) has no Indebtedness, other than Permitted
Indebtedness; and (ii) has not guaranteed the obligations of any other Person
other than ClientLink, Inc. (except as permitted by Section 8.4).
Section 7. AFFIRMATIVE COVENANTS
Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations:
7.1 Financial and Other Information. Customer shall cause to be furnished to
IBM Credit the following information within the following time periods:
(A) within ninety (90) days after the end of each fiscal year of Customer, a
10-K and a Compliance Certificate along with a schedule, in substantially the
form of Attachment C hereto, of the calculations used in determining, as of the
end of such fiscal year, whether Customer is in compliance with the financial
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covenants set forth in Attachment A;
(B) within forty-five (45) days after the end of each fiscal quarter of
Customer a 10-Q and a Compliance Certificate along with a Schedule, in
substantially the form of Attachment C hereto, of the calculations used in
determining, as of the end of such fiscal quarter, whether Customer is in
compliance with the financial covenants set forth in Attachment A;
(C) promptly after Customer obtains knowledge of (i) the occurrence of a
Default or Event of Default, or (ii) the existence of any condition or event
which would result in the Customer's failure to satisfy the conditions precedent
to Advances set forth in Section 5, a certificate of the chief executive
officer, chief financial officer, treasurer or controller of Customer specifying
the nature thereof and the Customer's proposed response thereto, each in
reasonable detail;
(D) promptly after Customer obtains knowledge of (i) any material
proceeding(s) being instituted or threatened to be instituted by or against
Customer in any federal, state, local or foreign court or before any commission
or other regulatory body (federal, state, local or foreign), or (ii) any actual
or prospective change, development or event which, in any such case, has had or
could reasonably be expected to have a Material Adverse Effect, a certificate of
the chief executive officer, financial officer, treasurer or controller of
Customer specifying the nature thereof and the Customer's proposed response
thereto, each in reasonable detail;
(E) promptly after Customer obtains knowledge that (i) any order, judgment or
decree in excess of Two Million Dollars ($2,000,000) shall have been entered
against Customer or any of its properties or assets, or (ii) it has received any
notification of a material violation of any Requirement of Law from any
Governmental Authority, a certificate of the chief executive officer, chief
financial officer, treasurer or controller of Customer specifying the nature
thereof and the Customer's proposed response thereto, each in reasonable detail;
(F) promptly after Customer learns of any material labor dispute to which
Customer may become a party, any strikes or walkouts relating to any of its
plants or other facilities, and the expiration of any labor contract to which
Customer is a party or by which it is bound, a certificate of the chief
executive officer, chief financial officer, treasurer or controller of Customer
specifying the nature thereof and the Customer's proposed response thereto, each
in reasonable detail;
(G) within five (5) Business Days after request by IBM Credit, any written
certificates, schedules and reports together with all supporting documents as
IBM Credit may reasonably
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request relating to the Collateral or the Customer's or any guarantor's business
affairs and financial condition;
(H) by the fifth (5th) day of each month, or as otherwise agreed in writing,
a Collateral Management Report as of a date no earlier than the last day of the
immediately preceding month;
(I) if, after the Closing Date, Customer and another institutional creditor
agree to modify any financial covenant in any financing agreement between the
Customer and such institutional creditor that is similar to any financial
covenant contained in Attachment A to this Agreement, Customer agrees that it
shall notify IBM Credit as soon as Customer becomes aware of such modification.
IBM Credit agrees that if it does not object to Customer in writing within sixty
(60) days of being notified by Customer of the terms of such modification, IBM
Credit shall agree to modify the applicable financial covenant contained in
Attachment A of this Agreement to the same extent. If IBM Credit does object to
such modification to the financial covenant and an acceptable resolution is not
reached between Customer and IBM Credit within such sixty (60) day period, IBM
Credit may immediately cease financing inventory purchases by Customer or IBM
Credit may, in its sole discretion, continue to provide financing pursuant to
the terms of this Agreement.
Each certificate, schedule and report provided by Customer to IBM Credit shall
be signed by an authorized officer of Customer, and which signature shall be
deemed a representation and warranty that the information contained in such
certificate, schedule or report is true and accurate in all material respects on
the date as of which such certificate, schedule or report is made and does not
omit to state a material fact necessary in order to make the statements
contained therein not misleading at such time. Each financial statement
delivered pursuant to this Section 7.1 shall be prepared in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods.
7.2 Location of Collateral. The inventory, equipment and other tangible
Collateral shall be kept or sold at the addresses as set forth on Attachment B
or on any notice provided by Customer to IBM Credit in accordance with Section
7.7(C). Such locations shall be certified quarterly to IBM Credit substantially
in the form of Attachment G.
7.3 Changes in Customer. Customer shall provide thirty (30) days prior
written notice to IBM Credit of any change in Customer's name, chief executive
office and principal place of business, organization, form of ownership or
corporate structure; provided, however, that Customer's compliance with this
covenant shall not relieve it of any of its other obligations or any other
provisions under this Agreement or any of the Other Documents limiting actions
of the type described in this Section.
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7.4 Corporate Existence. Customer shall (A) maintain its corporate
existence, maintain in full force and effect all licenses, bonds, franchises,
leases and qualifications to do business, and all contracts and other rights
necessary to the profitable conduct of its business, (B) continue in, and limit
its operations to, those in the information technology industry unless otherwise
permitted in writing by IBM Credit and (C) comply with all Requirements of Law.
7.5 ERISA. Customer shall promptly notify IBM Credit in writing after it
learns of the occurrence of any event which would constitute a "reportable
event" under ERISA or any regulations thereunder with respect to any Plan, or
that the PBGC has instituted or will institute proceedings to terminate any
Plan. Notwithstanding the foregoing, the Customer shall have no obligation to
notify IBM Credit as to any "reportable event" as to which the 30-day notice
requirement of Section 4043(b) has been waived by the PBGC, until such time as
such Customer is required to notify the PBGC of such reportable event. Such
notification shall include a certificate of the chief financial officer of
Customer setting forth details as to such "reportable event" and the action
which Customer proposes to take with respect thereto, together with a copy of
any notice of such "reportable event" which may be required to be filed with the
PBGC, or any notice delivered by the PBGC evidencing its intent to institute
such proceedings. Upon request of IBM Credit, Customer shall furnish, or cause
the plan administrator to furnish, to IBM Credit the most recently filed annual
report for each Plan.
7.6 Environmental Matters. (A) Customer and any other Person under
Customer's control (including, without limitation, agents and Affiliates under
such control) shall (i) comply with all Environmental Laws in all material
respects, and (ii) undertake to use commercially reasonable efforts to prevent
any unlawful release of any Hazardous Substance by Customer or such Person into,
upon, over or under any property now or hereinafter owned, leased or otherwise
controlled (directly or indirectly) by Customer.
(B) Customer shall notify IBM Credit, promptly upon its obtaining knowledge
of (i) any non-routine proceeding or investigation by any Governmental Authority
with respect to the presence of any Hazardous Substances on or in any property
now or hereinafter owned, leased or otherwise controlled (directly or
indirectly) by Customer, (ii) all claims made or threatened by any Person or
Governmental Authority against Customer or any of Customer's assets relating to
any loss or injury resulting from any Hazardous Substance, (iii) Customer's
discovery of evidence of unlawful disposal of or environmental contamination by
any Hazardous Substance on any property now or hereinafter owned, leased or
otherwise controlled (directly or indirectly) by
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Customer, and (iv) any occurrence or condition which could constitute a
violation of any Environmental Law.
7.7 Collateral Books and Records/Collateral Audit. (A) Customer agrees to
maintain books and records pertaining to the Collateral in such detail, form and
scope as is consistent with good business practice.
(B) Customer agrees that IBM Credit or its agents may enter upon the premises
of Customer at any time, during normal business hours and upon reasonable notice
under the circumstances, and at any time at all on and after the occurrence and
during the continuance of an Event of Default for the purposes of (i) inspecting
the Collateral, (ii) inspecting and/or copying (at Customer's expense) any and
all records pertaining thereto, and (iii) discussing the affairs, finances and
business of Customer with any officers, employees and directors of Customer or
with the Auditors. Customer also agrees to provide IBM Credit with such
reasonable information and documentation that IBM Credit deems necessary to
conduct the foregoing activities.
Upon the occurrence and during the continuance of an Event of Default which has
not been waived by IBM Credit in writing, IBM Credit may conduct any of the
foregoing activities in any manner that IBM Credit deems reasonably necessary.
(C) Customer shall give IBM Credit thirty (30) days prior written notice of
any change in the location of any Collateral, the location of its books and
records or in the location of its chief executive office or place of business
from the locations specified in Attachment B, and will execute in advance of
such change and cause to be filed and/or delivered to IBM Credit any financing
statements, landlord or other lien waivers, or other documents reasonably
required by IBM Credit, all in form and substance reasonably satisfactory to IBM
Credit.
(D) Customer agrees to advise IBM Credit promptly, in reasonably sufficient
detail, of any substantial change relating to the type, quantity or quality of
the Collateral, or any event which could reasonably be expected to have a
Material Adverse Effect on the value of the Collateral or on the security
interests granted to IBM Credit herein.
7.8 Insurance; Casualty Loss. (A) Customer agrees to maintain with
financially sound and reputable insurance companies: (i) insurance on its
properties, (ii) public liability insurance against claims for personal injury
or death as a result of the use of any products sold by it and (iii) insurance
coverage against other business risks, in each case, in at least such amounts
and against at least such risks as are usually and prudently insured against in
the same general geographical area by companies of established repute engaged in
the same or a
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similar business. Customer will furnish to IBM Credit, upon its written request,
the insurance certificates with respect to such insurance. In addition, all
Policies relating to the Collateral so maintained are to name IBM Credit as an
additional insured as its interest may appear.
(B) Without limiting the generality of the foregoing, Customer shall keep and
maintain, at its sole expense, the Collateral insured for an amount not less
than the amount set forth on Attachment A from time to time opposite the caption
"Collateral Insurance Amount" against all loss or damage under an "all risk"
Policy with companies mutually acceptable to IBM Credit and Customer, with a
lender's loss payable endorsement or mortgagee clause in form and substance
reasonably satisfactory to IBM Credit designating that any loss payable
thereunder with respect to such Collateral shall be payable to IBM Credit. Upon
receipt of proceeds by IBM Credit the same shall be applied on account of the
Customer's Outstanding Advances. Customer agrees to instruct each insurer to
give IBM Credit, by endorsement upon the Policy issued by it or by independent
instruments furnished to IBM Credit, at least ten (10) days written notice
before any Policy shall be altered or cancelled and that no act or default of
Customer or any other person shall affect the right of IBM Credit to recover
under the Policies. Customer hereby agrees to direct all insurers under the
Policies to pay all proceeds with respect to the Collateral directly to IBM
Credit. If Customer fails to pay any cost, charges or premiums, or if Customer
fails to insure the Collateral, IBM Credit may pay such costs, charges or
premiums. Any amounts paid by IBM Credit hereunder shall be considered an
additional debt owed by Customer to IBM Credit and are due and payable
immediately upon receipt of an invoice by IBM Credit.
7.9 Taxes. Customer agrees to pay, when due, all taxes lawfully levied or
assessed against Customer or any of the Collateral before any penalty or
interest accrues thereon unless such taxes are being contested, in good faith,
by appropriate proceedings promptly instituted and diligently conducted and an
adequate reserve or other appropriate provisions have been made therefor as
required in order to be in conformity with GAAP and an adverse determination in
such proceedings could not reasonably be expected to have a Material Adverse
Effect.
7.10 Compliance With Laws. Customer agrees to comply with all Requirements of
Law applicable to the Collateral or any part thereof, or to the operation of its
business.
7.11 Intellectual Property. Customer shall do and cause to be done all things
necessary to preserve and keep in full force and effect all registrations of
Intellectual Property which the failure to do or cause to be done could
reasonably be expected to have a Material Adverse Effect.
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7.12 Maintenance of Property. Customer shall maintain all of its material
properties (business and otherwise) in good condition and repair (ordinary wear
and tear excepted) and pay and discharge all costs of repair and maintenance
thereof and all rental and mortgage payments and related charges pertaining
thereto.
7.13 Collateral. Customer shall:
(A) promptly notify IBM Credit of any material loss, theft or destruction of
or damage to any of the Collateral. Customer shall diligently file and
prosecute its claim for any award or payment in connection with any such loss,
theft, destruction of or damage to Collateral. Customer shall, upon demand of
IBM Credit, make, execute and deliver any assignments and other instruments
sufficient for the purpose of assigning any such award or payment relating to
the Collateral to IBM Credit, free of any encumbrances of any kind whatsoever;
(B) consistent with reasonable commercial practice, observe and perform all
matters and things necessary or expedient to be observed or performed under or
by virtue of any lease, license, concession or franchise forming part of the
Collateral in order to preserve, protect and maintain all the rights of IBM
Credit thereunder;
(C) consistent with reasonable commercial practice, maintain, use and operate
the Collateral and carry on and conduct its business in a proper and efficient
manner so as to preserve and protect the Collateral and the earnings, incomes,
rents, issues and profits thereof; and
(D) at any time and from time to time, upon the request of IBM Credit, and at
the sole expense of Customer, Customer will promptly and duly execute and
deliver such further instruments and documents and take such further action as
IBM Credit may reasonably request for the purpose of obtaining or preserving the
full benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing or continuation
statements under the Uniform Commercial Code in effect in any jurisdiction with
respect to the security interests granted herein and the payment of any and all
recording taxes and filing fees in connection therewith.
7.14 Subsidiaries. IBM Credit may require that any Subsidiaries of Customer
other than PC Service Source, Inc., ClientLink, Inc. and CFI become parties to
this Agreement or any other agreement executed in connection with this Agreement
as guarantors or sureties. Customer will comply, and cause all Subsidiaries of
Customer to comply with Sections 7 and 8 of this Agreement, as if such sections
applied directly to such Subsidiaries.
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7.15 Financial Covenants; Additional Covenants. Customer acknowledges and
agrees that Customer shall comply with the financial covenants and other
covenants set forth in the attachments, exhibits and other addenda incorporated
herein and made a part of this Agreement.
Section 8. NEGATIVE COVENANTS
Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations due hereunder:
8.1 Liens. The Customer will not, directly or indirectly mortgage, assign,
pledge, transfer, create, incur, assume, permit to exist or otherwise permit any
Lien or judgment to exist on any of its property, assets, revenues or goods,
whether real, personal or mixed, whether now owned or hereafter acquired, except
for Permitted Liens and those permitted in Section 4.1 (B) of this Agreement.
8.2 Disposition of Assets. The Customer will not, directly or indirectly,
sell, lease, assign, transfer or otherwise dispose of the Collateral other than
(i) sales of inventory in the ordinary course of business and short term rental
of inventory as demonstrations in amounts not material to Customer, (ii)
voluntary dispositions of individual assets and obsolete or worn out property in
the ordinary course of business.
8.3 Corporate Changes. The Customer will not, without the prior written
consent of IBM Credit, directly or indirectly, merge, consolidate, liquidate,
dissolve or enter into or engage in any operation outside of the information
technology industry.
8.4 Guaranties. The Customer will not, directly or indirectly, assume,
guaranty, endorse, or otherwise become liable upon the obligations of any other
Person in an aggregate amount greater than One Million Dollars ($1,000,000),
except (i) by the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business, (ii) by
the giving of indemnities in connection with the sale of inventory or other
asset dispositions permitted hereunder including those idemnities given in
conjunction with the execution by Customer and its Subsidiary of that certain
Receivables Purchase Agreement dated April 1, 1996 (as amended, supplemented or
otherwise modified from time to time) and that certain Transfer and
Administration Agreement dated April 1, 1996 (as amended, supplemented or
otherwise modified from time to time) iii) for guaranties in favor of IBM
Credit, and (iv) guaranties on behalf of ClientLink, Inc. in an aggregate amount
not to exceed Ten Million Dollars ($10,000,000).
8.5 Restricted Payments. Upon the occurrence of and during the continuance
of an Event of Default, the Customer will not,
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directly or indirectly: (i) declare or pay any dividend (other than dividends
payable solely in common stock of Customer and preferred stock dividends to
Safeguard Scientifics, Inc.) on, or make any payment on account of, or set apart
assets for a sinking or other analogous fund for, the purchase, redemption,
defeasance, retirement or other acquisition of, any shares of any class of
capital stock of Customer or any warrants, options or rights to purchase any
such capital stock, whether now or hereafter outstanding, or make any other
distribution in respect thereof, either directly or indirectly, whether in cash
or property or in obligations of Customer; or (ii) make any optional payment or
prepayment on or redemption (including, without limitation, by making payments
to a sinking or analogous fund) or repurchase of any Indebtedness (other than
the Obligations).
8.6 Investments. The Customer will not, directly or indirectly, make,
maintain or acquire any Investment in any Person which could reasonably be
expected to have a Material Adverse Effect.
8.7 Affiliate/Subsidiary Transactions. The Customer will not, directly or
indirectly, enter into any transaction with any Affiliate or Subsidiary,
including, without limitation, the purchase, sale or exchange of property or the
rendering of any service to any Affiliate or Subsidiary of Customer except in
the ordinary course of business and pursuant to the reasonable requirements of
Customer's business upon fair and reasonable terms no less favorable to Customer
than could be obtained in a comparable arm's-length transaction with an
unaffiliated Person.
8.8. ERISA. The Customer will not (A) terminate any Plan so as to incur a
material liability to the PBGC, (B) permit any "prohibited transaction"
involving any Plan (other than a "multi-employer benefit plan") which would
subject the Customer to a material tax or penalty on "prohibited transactions"
under the Code or ERISA, (C) fail to pay to any Plan any contribution which they
are obligated to pay under the terms of such Plan, if such failure would result
in a material "accumulated funding deficiency", whether or not waived, (D) allow
or suffer to exist any occurrence and during the continuance of a "reportable
event" or any other event or condition, which presents a material risk of
termination by the PBGC of any Plan (other than a "multi-employer benefit
plan"), or (E) fail to notify IBM Credit as required in Section 7.5. As used in
this Agreement, the terms "accumulated funding deficiency" and "reportable
event" shall have the respective meanings assigned to them in ERISA, and the
term "prohibited transaction" shall have the meaning assigned to it in the Code
and ERISA. For purposes of this Section 8.8, the terms material liability, tax,
penalty, accumulated funding deficiency and risk of termination shall mean a
liability, tax, penalty, accumulated funding deficiency or risk of termination
which could reasonably be expected to have a Material Adverse Effect.
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8.9 Additional Negative Pledges. Customer will not, directly or indirectly,
create or otherwise cause or permit to exist or become effective any contractual
obligation which may restrict or inhibit IBM Credit's rights or ability to sell
or otherwise dispose of the Collateral or any part thereof after the occurrence
and during the continuance of an Event of Default.
8.10 Storage of Collateral with Bailees and Warehousemen. Collateral shall not
be stored with a bailee, warehouseman or similar party without the prior written
consent of IBM Credit unless Customer will, concurrently with the delivery of
such Collateral to such party, cause such party to issue and deliver to IBM
Credit, warehouse receipts in the name of IBM Credit evidencing the storage of
such Collateral.
8.11 Indebtedness. The Customer will not create, incur, assume or permit to
exist any Indebtedness, except for Permitted Indebtedness.
8.12 Loans. Upon the occurrence of and during the continutaion of an Event of
Default, Customer will not make any loans, advances, contributions or payments
of money or goods to any Subsidiary, Affiliate or parent corporation or to any
officer, director or stockholder of Customer or of any such corporation in
excess of Two Hundred Fifty Thousand Dollars $250,000. other than otherwise
approved by Customer's Board of Directors (except for compensation for personal
services actually rendered), and except for transactions expressly authorized in
this Agreement.
8.13 Restriction on Accounts. Customer will not, without IBM Credit's prior
written consent, cause the "Maximum Net Investment", as defined in that certain
Transfer and Administration Agreement dated April 1, 1996 (as amended,
supplemented or otherwise modified from time to time) to exceed One Hundred
Forty Million Dollars ($140,000,000).
Section 9. DEFAULT
9.1 Event of Default. Any one or more of the following events shall
constitute an Event of Default by the Customer under this Agreement and the
Other Documents:
(A) The failure to make timely payment of the Obligations or any part thereof,
within the earlier of (i) one Business Day after receiving written notice that
such payment has not been made when due in accordance with the terms of any
documents evidencing same and (ii) three days after such payment becomes due in
accordance with the terms of any documents evidencing same;
(B) Customer fails to comply with or observe any term, covenant or agreement
contained in this Agreement or any of the
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Other Documents;
(C) Any representation, warranty, statement, report or certificate made or
delivered by or on behalf of Customer or any of its officers, employees or
agents or by or on behalf of any guarantor to IBM Credit was false in any
material respect at the time when made or deemed made;
(D) The occurrence of any event or circumstance which could reasonably be
expected to have a Material Adverse Effect;
(E) Customer, any Subsidiary or any guarantor shall generally not pay its
debts as such debts become due, become or otherwise declare itself insolvent,
file a voluntary petition for bankruptcy protection, have filed against it any
involuntary bankruptcy petition, cease to do business as a going concern, make
any assignment for the benefit of creditors, or a custodian, receiver, trustee,
liquidator, administrator or person with similar powers shall be appointed for
Customer, any Subsidiary or any guarantor or any of its respective properties or
have any of its respective properties seized or attached, or take any action to
authorize, or for the purpose of effectuating, the foregoing, provided, however,
that Customer, any Subsidiary or any guarantor shall have a period of forty-five
(45) days within which to discharge any involuntary petition for bankruptcy or
similar proceeding;
(F) The use of any funds borrowed from IBM Credit under this Agreement for any
purpose other than as provided in this Agreement;
(G) The entry of any judgment against Customer or any guarantor in an amount
in excess of Two Million Dollars ($2,000,000) and such judgment is not
satisfied, dismissed, stayed or superseded by bond within thirty (30) days after
the day of entry thereof (and in the event of a stay or supersedeas bond, such
judgment is not discharged within thirty (30) days after termination of any such
stay or bond) or such judgment is not fully covered by insurance as to which the
insurance company has acknowledged its obligation to pay such judgment in full;
(H) The dissolution or liquidation of Customer or any guarantor, or Customer
or any guarantor or its directors or stockholders shall take any action to
dissolve or liquidate Customer or any guarantor;
(I) Any "going concern" or like qualification or exception, or qualification
arising out of the scope of an audit by an Auditor of his opinion relative to
any Financial Statement delivered to IBM Credit under this Agreement;
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(J) There issues a warrant of distress for any rent or taxes with respect to
any premises occupied by Customer in or upon which the Collateral, or any part
thereof, may at any time be situated and such warrant shall continue for a
period of ten (10) Business Days from the date such warrant is issued;
(K) Customer suspends business;
(L) The occurrence of any event or condition which enables the holder of any
Indebtedness arising in one or more related or unrelated transactions, in an
aggregate principal amount exceeding Two Hundred Fifty Thousand Dollars
($250,000.) to accelerate the maturity thereof or the failure of Customer to pay
when due any such Indebtedness and Customer does not remedy the acceleration
either by payment in full of the Indebtedness or by other acceptable means to
the holder of the Indebtedness within 15 days;
(M) Any guaranty of any or all of the Customer's Obligations executed by any
guarantor in favor of IBM Credit, shall at any time for any reason cease to be
in full force and effect or shall be declared to be null and void by a court of
competent jurisdiction or the validity or enforceability thereof shall be
contested or denied by any such guarantor, or any such guarantor shall deny that
it has any further liability or obligation thereunder or any such guarantor
shall fail to comply with or observe any of the terms, provisions or conditions
contained in any such guaranty;
(N) Customer is in default under the material terms of any of the Other
Documents after the expiration of any applicable cure periods;
(O) There shall occur a "reportable event" with respect to any Plan, or any
Plan shall be subject to termination proceedings (whether voluntary or
involuntary) and there shall result from such "reportable event" or termination
proceedings a liability of Customer to the PBGC which in the reasonable opinion
of IBM Credit will have a Material Adverse Effect;
(P) Any "person" other than Safeguard Scientifics, Inc. (as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended) acquires a
beneficial interest in 50% or more of the Voting Stock of Customer.
9.2 Acceleration. Upon the occurrence and during the continuance of an Event
of Default which has not been waived in writing by IBM Credit, IBM Credit may,
in its sole discretion, take any or all of the following actions, without
prejudice to any other rights it may have at law or under this Agreement to
enforce its claims against the Customer: (a) declare all Obligations to be
immediately due and payable (except with
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respect to any Event of Default set forth in Section 9.1(E) hereof, in which
case all Obligations shall automatically become immediately due and payable
without the necessity of any notice or other demand) without presentment,
demand, protest or any other action or obligation of IBM Credit; and
(b) immediately terminate the Credit Line hereunder.
9.3 Remedies. (A) Upon the occurrence and during the continuance of any
Event of Default which has not been waived in writing by IBM Credit, IBM Credit
may exercise all rights and remedies of a secured party under the U.C.C.
Without limiting the generality of the foregoing, IBM Credit may: (i) remove
from any premises where same may be located any and all documents, instruments,
files and records (including the copying of any computer records) relating to
the Collateral, or IBM Credit may use (at the expense of the Customer) such of
the supplies or space of the Customer at Customer's place of business or
otherwise, as may be necessary to properly administer and control the
Collateral; and (ii) foreclose the security interests created pursuant to this
Agreement by any available judicial procedure, or to take possession of any or
all of the Collateral without judicial process and to enter any premises where
any Collateral may be located for the purpose of taking possession of or
removing the same.
(B) Upon the occurrence and during the continuance of any Event of Default
which has not been waived in writing by IBM Credit, IBM Credit shall have the
right to sell, lease, or otherwise dispose of all or any part of the Collateral,
whether in its then condition or after further preparation or processing, in the
name of Customer or IBM Credit, or in the name of such other party as IBM Credit
may designate, either at public or private sale or at any broker's board, in
lots or in bulk, for cash or for credit, with or without warranties or
representations, and upon such other terms and conditions as IBM Credit in its
sole discretion may deem advisable, and IBM Credit shall have the right to
purchase at any such sale. If IBM Credit, in its sole discretion determines
that any of the Collateral requires rebuilding, repairing, maintenance or
preparation, IBM Credit shall have the right, at its option, to do such of the
aforesaid as it deems necessary for the purpose of putting such Collateral in
such saleable form as IBM Credit shall deem appropriate. The Customer hereby
agrees that any disposition by IBM Credit of any Collateral pursuant to and in
accordance with the terms of a repurchase agreement between IBM Credit and the
manufacturer or any supplier (including any Authorized Supplier) of such
Collateral constitutes a commercially reasonable sale. The Customer agrees, at
the request of IBM Credit, to assemble the Collateral and to make it available
to IBM Credit at places which IBM Credit shall select, whether at the premises
of the Customer or elsewhere, and to make
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available to IBM Credit the premises and facilities of the Customer for the
purpose of IBM Credit's taking possession of, removing or putting such
Collateral in saleable form. If notice of intended disposition of any Collateral
is required by law, it is agreed that ten (10) Business Days notice shall
constitute reasonable notification.
(C) Unless expressly prohibited by the licensor thereof, if any, IBM Credit
is hereby granted, upon the occurrence and during the continuance of any Event
of Default which has not been waived in writing by IBM Credit, an irrevocable,
non-exclusive license to use, assign, license or sublicense all computer
software programs, data bases, processes and materials used by the Customer in
its businesses or in connection with any of the Collateral.
(D) The net cash proceeds resulting from IBM Credit's exercise of any of the
foregoing rights (after deducting all charges, costs and expenses, including
reasonable attorneys' fees) shall be applied by IBM Credit to the payment of
Customer's Obligations, whether due or to become due, in such order as IBM
Credit may in it sole discretion elect. Customer shall remain liable to IBM
Credit for any deficiencies, and IBM Credit in turn agrees to remit to Customer
or its successors or assigns, any surplus resulting therefrom.
(E) The enumeration of the foregoing rights is not intended to be exhaustive
and the exercise of any right shall not preclude the exercise of any other
rights, all of which shall be cumulative.
9.4 Waiver. If IBM Credit seeks to take possession of any of the Collateral
by any court process Customer hereby irrevocably waives to the extent permitted
by applicable law any bonds, surety and security relating thereto required by
any statute, court rule or otherwise as an incident to such possession and any
demand for possession of the Collateral prior to the commencement of any suit or
action to recover possession thereof. In addition, Customer waives to the
extent permitted by applicable law all rights of set-off it may have against IBM
Credit. Customer further waives to the extent permitted by applicable law
presentment, demand and protest, and notices of non-payment, non-performance,
any right of contribution, dishonor, and any other demands, and notices required
by law.
Section 10. MISCELLANEOUS
10.1 Term; Termination. (A) This Agreement shall remain in force until the
earlier of (i) the Termination Date, (ii) the date specified in a written notice
by the Customer that they intend to terminate this Agreement which date shall be
no less than ninety (90) days following the receipt by IBM Credit of such
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written notice, and (iii) termination by IBM Credit after the occurrence and
during the continuance of an Event of Default. Upon the date that this
Agreement is terminated, all of Customer's Obligations shall be immediately due
and payable in their entirety, even if they are not yet due under their terms.
(B) Until the indefeasible payment in full of all of Customer's Obligations,
no termination of this Agreement or any of the Other Documents shall in any way
affect or impair the Customer's Obligations to IBM Credit including, without
limitation, any transaction or event occurring prior to such termination, and
IBM Credit's security interest in the Collateral.
10.2 Indemnification. The Customer hereby agrees to indemnify and hold
harmless IBM Credit and each of its officers, directors, agents and assigns
(collectively, the "Indemnified Persons") against all losses, claims, damages,
liabilities or other expenses (including reasonable attorneys' fees and court
costs now or hereinafter arising from the enforcement of this Agreement, the
"Losses") to which any of them may become subject insofar as such Losses arise
out of or are based upon any event, circumstance or condition (a) occurring or
existing on or before the date of this Agreement relating to any financing
arrangements IBM Credit may from time to time have with (i) Customer, (ii) any
Person that shall be acquired by Customer or (iii) any Person that Customer may
acquire all or substantially all of the assets of, or (b) directly or
indirectly, relating to the execution, delivery or performance of this Agreement
or the consummation of the transactions contemplated hereby or thereby or to any
of the Collateral or to any act or omission of the Customer in connection
therewith. Notwithstanding the foregoing, the Customer shall not be obligated
to indemnify IBM Credit for any Losses incurred by IBM Credit which are a result
of IBM Credit's gross negligence or willful misconduct. The indemnity provided
herein shall survive the termination of this Agreement.
10.3 Additional Obligations. IBM Credit, without waiving or releasing any
Obligation or Default of the Customer, may perform any Obligations of the
Customer that the Customer shall fail or refuse to perform and IBM Credit may,
at any time or times hereafter, but shall be under no obligation so to do, pay,
acquire or accept any assignment of any security interest, lien, encumbrance or
claim against the Collateral asserted by any person. All sums paid by IBM
Credit in performing in satisfaction or on account of the foregoing and any
expenses, including reasonable attorney's fees, court costs, and other charges
relating thereto, shall be a part of the Obligations, payable on demand and
secured by the Collateral.
10.4 LIMITATION OF LIABILITY. NEITHER IBM CREDIT NOR ANY OTHER INDEMNIFIED
PERSON SHALL HAVE ANY LIABILITY WITH RESPECT TO ANY
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SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES SUFFERED BY CUSTOMER IN CONNECTION
WITH THIS AGREEMENT, ANY OTHER AGREEMENT OR ANY CLAIMS IN ANY MANNER RELATED
THERETO. NOR SHALL IBM CREDIT OR ANY OTHER INDEMNIFIED PERSON HAVE ANY LIABILITY
TO CUSTOMER OR ANY OTHER PERSON FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY
IT OR THEM HEREUNDER, EXCEPT FOR ITS OR THEIR OWN GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.
10.5 Alteration/Waiver. This Agreement and the Other Documents may not be
altered or amended except by an agreement in writing signed by the Customer and
by IBM Credit. No delay or omission of IBM Credit to exercise any right or
remedy hereunder, whether before or after the occurrence of any Event of
Default, shall impair any such right or remedy or shall operate as a waiver
thereof or as a waiver of any such Event of Default. In the event that IBM
Credit at any time or from time to time dispenses with any one or more of the
requirements specified in this Agreement or any of the Other Documents, such
dispensation may be revoked by IBM Credit at any time and shall not be deemed to
constitute a waiver of any such requirement subsequent thereto unless otherwise
agreed to in writing by the parties hereto. IBM Credit's failure at any time or
times to require strict compliance and performance by the Customer of any
undertakings, agreements, covenants, warranties and representations of this
Agreement or any of the Other Documents shall not waive, affect or diminish any
right of IBM Credit thereafter to demand strict compliance and performance
thereof unless otherwise agreed to in writing by the parties hereto. Any waiver
by IBM Credit of any Default by the Customer under this Agreement or any of the
Other Documents shall not waive or affect any other Default by the Customer
under this Agreement or any of the Other Documents, whether such Default is
prior or subsequent to such other Default and whether of the same or a different
type. None of the undertakings, agreements, warranties, covenants, and
representations of the Customer contained in this Agreement or the Other
Documents and no Default by the Customer shall be deemed waived by IBM Credit
unless such waiver is in writing signed by an authorized representative of IBM
Credit.
10.6 Severability. If any provision of this Agreement or the Other Documents
or the application thereof to any Person or circumstance is held invalid or
unenforceable, the remainder of this Agreement and the Other Documents and the
application of such provision to other Persons or circumstances will not be
affected thereby, the provisions of this Agreement and the Other Documents being
severable in any such instance.
10.7 One Loan. All Advances heretofore, now or at any time or times hereafter
made by IBM Credit to the Customer under this Agreement or the Other Documents
shall constitute one loan secured by IBM Credit's security interests in the
Collateral and by all other security interests, liens and encumbrances
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heretofore, now or from time to time hereafter granted by the Customer to IBM
Credit or any assignor of IBM Credit.
10.8 Additional Collateral. All monies, reserves and proceeds received or
collected by IBM Credit with respect to the Collateral in possession of IBM
Credit at any time or times hereafter are hereby pledged by Customer to IBM
Credit as security for the payment of Customer's Obligations and shall be
applied promptly by IBM Credit on account of the Customer's Obligations;
provided, however, IBM Credit may release to the Customer such portions of such
monies, reserves and proceeds as IBM Credit may from time to time determine, in
its sole discretion.
10.9 No Merger or Novations. (A) Notwithstanding anything contained in any
document to the contrary, it is understood and agreed by the Customer and IBM
Credit that the claims of IBM Credit arising hereunder and existing as of the
date hereof constitute continuing claims arising out of the Obligations of
Customer under the AWF. Customer acknowledges and agrees that such Obligations
outstanding as of the date hereof have not been satisfied or discharged and that
this Agreement is not intended to effect a novation of the Customer's
Obligations under the AWF.
(B) Neither the obtaining of any judgment nor the exercise of any power of
seizure or sale shall operate to extinguish the Obligations of the Customer to
IBM Credit secured by this Agreement and shall not operate as a merger of any
covenant in this Agreement, and the acceptance of any payment or alternate
security shall not constitute or create a novation and the obtaining of a
judgment or judgments under a covenant herein contained shall not operate as a
merger of that covenant or affect IBM Credit's rights under this Agreement.
10.10 Paragraph Titles. The Section titles used in this Agreement and the Other
Documents are for convenience only and do not define or limit the contents of
any Section.
10.11 Binding Effect; Assignment. This Agreement and the Other Documents shall
be binding upon and inure to the benefit of IBM Credit and the Customer and
their respective successors and assigns; provided, that the Customer shall have
no right to assign this Agreement or any of the Other Documents without the
prior written consent of IBM Credit.
10.12 Notices. Except as otherwise expressly provided in this Agreement, any
notice required or desired to be served, given or delivered hereunder shall be
in writing, and shall be deemed to have been validly served, given or delivered
(A) upon receipt if deposited in the United States mails, first class mail, with
proper postage prepaid, (B) upon receipt of confirmation or answerback if sent
by telecopy, or other similar facsimile
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transmission, (C) one Business Day after deposit with a reputable overnight
courier with all charges prepaid, or (D) when delivered, if hand-delivered by
messenger, all of which shall be properly addressed to the party to be notified
and sent to the address or number indicated as follows:
(i) If to IBM Credit at:
IBM Credit Corporation
5000 Executive Parkway, Suite 450
San Ramon, CA 94583
Attention: Remarketer Finance Center Manager
Telecopy: 770-644-4816/4840
(ii) If to Customer at:
Compucom Systems, Inc.
10100 North Central Expressway
Attention: Mr. D. L. Celoni
Telecopy: 214-265-5449
or to such other address or number as each party designates to the other in the
manner prescribed herein.
10.13 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto were upon the same instrument.
10.14 ATTACHMENT A MODIFICATIONS. IBM Credit may modify the Product Financing
Period set forth in Attachment A and the Collateral Insurance Amount set forth
in Attachment A from time to time, in each case, by providing Customer with a
new Attachment A. Any such new Attachment A shall be effective as of the date
specified in the new Attachment A.
10.15 SUBMISSION AND CONSENT TO JURISDICTION AND CHOICE OF LAW. TO INDUCE IBM
CREDIT TO ACCEPT THIS AGREEMENT AND THE OTHER DOCUMENTS, THE CUSTOMER HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT AND ANY OTHER AGREEMENT, OR FOR THE RECOGNITION AND
ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND ANY FEDERAL DISTRICT
COURT IN NEW YORK.
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS
AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREINAFTER HAVE TO THE VENUE OF ANY
SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING
WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME.
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(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE
EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO CUSTOMER AT ITS ADDRESS
SET FORTH IN SECTION 10.12 OR AT SUCH OTHER ADDRESS OF WHICH IBM CREDIT SHALL
HAVE BEEN NOTIFIED PURSUANT THERETO;
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN
ANY OTHER JURISDICTION.
(E) AGREES THAT THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT AND THE OTHER DOCUMENTS SHALL BE GOVERNED BY THE LAWS (WITHOUT GIVING
EFFECT TO CONFLICT OF LAW PROVISIONS) OF THE STATE OF NEW YORK.
10.16 JURY TRIAL WAIVER. EACH OF IBM CREDIT AND THE CUSTOMER HEREBY IRREVOCABLY
WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING ANY
COUNTERCLAIM) OF ANY TYPE IN WHICH IBM CREDIT AND THE CUSTOMER ARE PARTIES AS TO
ALL MATTERS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT OR ANY
DOCUMENT, INSTRUMENT OR AGREEMENT EXECUTED IN CONNECTION HEREWITH.
38
<PAGE>
IN WITNESS WHEREOF, the Customer has read this entire Agreement, and has caused
its authorized representatives to execute this Agreement and has caused its
corporate seal to be affixed hereto as of the date first written above.
IBM CREDIT CORPORATION COMPUCOM SYSTEMS, INC.
By: /s/ Salvatore Grasso By: /s/ Robert J. Boutin
------------------------------ -------------------------
Print Name: Salvatore Grasso Print Name: Robert J. Boutin
---------------------- ------------------
Title: Mgr of Credit & Operations Title: SVP-CFO
--------------------------- -----------------------
Date: 10/7/96 Date: 9/20/96
---------------------------- -----------------------
39
<PAGE>
10(K)
AMENDMENT NO. 1 TO AMENDED AND RESTATED MASTER
SECURITY AND ADMINISTRATION AGREEMENT
AMENDMENT NO. 1 (this "Amendment"), dated as of December 5, 1996, TO
---------
AMENDED AND RESTATED MASTER SECURITY AND ADMINISTRATION AGREEMENT dated as of
September 25, 1996 is executed and entered into by and among COMPUCOM SYSTEMS,
INC., a Delaware corporation, NATIONSBANK OF TEXAS, N.A., a national bank, in
its capacity as Administrative Secured Party, NATIONSBANK OF TEXAS, N.A., a
national bank, in its individual corporate capacity, CSI FUNDING, INC., a
Delaware corporation, and ENTERPRISE FUNDING CORPORATION, a Delaware
corporation.
W I T N E S S E T H :
--------------------
WHEREAS, the parties hereto have entered into an Amended and Restated
Master Security and Administration Agreement, dated as of September 25, 1996
(the "Agreement"); and
---------
WHEREAS, the parties hereto wish to amend the Agreement as hereinafter
provided.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Defined Terms. Unless otherwise defined herein, the terms
-------------
used herein shall have the meanings assigned to such terms in, or incorporated
by reference into, the Agreement.
<PAGE>
SECTION 2. Amendments to Agreement. The Agreement is hereby amended,
-----------------------
effective on the Effective Date, as follows:
(a) Section 2.1(c) of the Agreement is hereby deleted in its entirety
and replaced with the following (solely for convenience, language added to such
definition is italicized):
"(c) Unless and until agreed otherwise by Administrative Secured
Party and the Beneficial Secured Parties, all deposits to the
Concentration Account shall be disbursed simultaneously by Administrative
Secured Party as follows (subject to prior payment of Secured Obligations
due and payable by CompuCom to Administrative Secured Party as provided
by the Administration Documents):
If no Event of Default has occurred:
(1) If CFI elects not to reduce the Net Investment under
the TAA, or if the Net Investment under the TAA is not otherwise required
to be reduced pursuant to the terms thereof, a percentage of each dollar
thereof equal to the product of the Purchase Discount (as defined in the
RPA) and the RPA Interest Percentage as of the time of disbursement shall
be deposited to the CFI Account; and
(2) If CFI elects not to reduce the Net Investment under
the TAA, or if the Net Investment under the TAA is not otherwise required
to be reduced pursuant to the terms thereof, a percentage of each dollar
thereof equal to one minus the product of the Purchase Discount (as
defined in the RPA) and the RPA Interest Percentage as of the time of
disbursement
<PAGE>
shall be deposited to the CompuCom Account for the benefit of CFI in
satisfaction of certain of its obligations under the RPA.
(3) If CFI elects to reduce the Net Investment under the
TAA, or if the Net Investment under the TAA is otherwise required to be
reduced pursuant to the terms thereof, (i) a percentage of each dollar
thereof as designated by CFI (up to a maximum percentage equal to the RPA
Percentage) at the time of disbursement shall be paid to the Agent (under
and as defined in the TAA) and (ii) after giving effect to the deposit
described in clause (i), a percentage of each dollar equal to one minus
such percentage at the time of disbursement shall be deposited to the
CompuCom Account for the benefit of CFI in satisfaction of certain of its
obligations under the RPA.
If an Event of Default has occurred and is continuing:
(1) A percentage of each dollar thereof equal to the RPA
Interest Percentage as of the time of disbursement shall be deposited to
the Collection Account (under and as defined in the TAA); and
(2) A percentage of each dollar thereof equal to the CompuCom
Interest Percentage as of the time of disbursement shall be deposited
to the CompuCom Account; provided that at all times following receipt
--------
by the Administrative Secured Party of written instructions from the
Administrative Lender, all such funds described in this paragraph 2
shall be disbursed by the Administrative Secured Party in accordance
with such written instructions."
<PAGE>
SECTION 3. Effectiveness. This Amendment shall become effective on
-------------
the first date on which the parties hereto shall have executed and delivered one
or more counterparts to this Amendment and each shall have received one or more
counterparts of this amendment executed by the others.
SECTION 4. Execution in Counterparts. This Amendment may be executed
-------------------------
simultaneously in one or more multiple originals, each of which shall be deemed
an original, but all of which together shall constitute one and the same
Amendment.
SECTION 5. Consents; Binding Effect. This Amendment shall be binding
------------------------
upon and inure to the benefit of CompuCom, Administrative Secured Party and the
Beneficial Secured Parties, and their respective successors in interest. This
Amendment is intended for the benefit of CompuCom, Administrative Secured Party,
the Beneficial Secured Parties (and any Person properly claiming through any of
them as an assignee to the limited extent otherwise permitted by the Agreement),
and may not be relied upon by any other Person.
SECTION 6. GOVERNING LAW. THIS AMENDMENT, AND ALL DOCUMENTS AND
-------------
INSTRUMENTS EXECUTED IN CONNECTION HEREWITH, SHALL BE GOVERNED BY AND CONSTRUED
ACCORDING TO THE LAWS OF THE STATE OF TEXAS.
SECTION 7. Severability of Provisions. If any provision of this
--------------------------
Amendment is held to be illegal, invalid, or unenforceable under any present or
future laws effective during the Contract Term, such provisions shall be fully
severable, and this Amendment and the Agreement shall be construed and enforced
as if such illegal, invalid, or unenforceable provision had never comprised a
part of this Amendment or the Agreement, as applicable. In such case, the
remaining provisions of this Amendment or the Agreement, as applicable, shall
remain in full force and effect and shall not be effected thereby.
<PAGE>
SECTION 8. Captions. The captions in this Amendment are for
--------
convenience of reference only and shall not define or limit any of the terms or
provisions hereof.
SECTION 9. Agreement to Remain in Full Force and Effect. Except as
--------------------------------------------
amended hereby, the Agreement shall remain in full force and effect and is
hereby ratified, adopted and confirmed in all respects. This Amendment shall be
deemed to be an amendment to the Agreement. All references in the Agreement to
"this Agreement", "hereunder", "hereof", "herein", or words of like import, and
all references to the Agreement in any other agreement or document shall
hereafter be deemed to refer to the Agreement as amended hereby.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
1 to Amendment and Restated Master Security and Administration Agreement to be
executed as of the date and year first above written.
COMPUCOM SYSTEMS, INC.
By: /s/ Robert J. Boutin
-----------------------------------
Authorized Signatory
NATIONSBANK OF TEXAS, N.A.,
IN ITS CAPACITY AS
ADMINISTRATIVE SECURED PARTY
By: /s/ Michelle M. Health
-----------------------------------
Authorized Signatory
NATIONSBANK OF TEXAS, N.A.,
IN ITS CAPACITY AS ADMINISTRATIVE
LENDER ON BEHALF OF THE LENDERS
By: /s/ Brent W. Mellon
-----------------------------------
Authorized Signatory
CSI FUNDING, INC.
By: /s/ Dan Lane
-----------------------------------
Authorized Signatory
ENTERPRISE FUNDING CORPORATION
By: /s/ Stewart L.Cutler
-----------------------------------
Authorized Signatory
<PAGE>
EXHIBIT 10(P)
AMENDMENT NO. 2 TO TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NO. 2 (this "Amendment"), dated as of December 5, 1996, TO
---------
TRANSFER AND ADMINISTRATION AGREEMENT dated as of April 1, 1996, as amended as
of September 25, 1996, by and among CSI FUNDING INC., a Delaware corporation, as
transferor (hereinafter, together with its successors and assigns in such
capacity, called the "Transferor"), COMPUCOM SYSTEMS, INC., a Delaware
----------
corporation, as collection agent (hereinafter, together with its successors and
assigns in such capacity, called the "Collection Agent"), ENTERPRISE FUNDING
----------------
CORPORATION, a Delaware corporation (hereinafter, together with its successors
and assigns, called the "Company") and NATIONSBANK, N.A., a national banking
-------
association, as agent for the benefit of the Company and the Bank Investors
(hereinafter, together with its successors and assigns in such capacity, called
the "Agent").
-----
W I T N E S S E T H :
--------------------
WHEREAS, the Transferor, the Collection Agent, the Company and the
Agent have entered into a Transfer and Administration Agreement, dated as of
April 1, 1996 (such agreement, as amended to the date hereof, the "Agreement");
---------
and
WHEREAS, the parties hereto wish to amend the Agreement as hereinafter
provided.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Defined Terms. Unless otherwise defined herein, the terms
-------------
used herein shall have the meanings assigned to such terms in, or incorporated
by reference into, the Agreement.
<PAGE>
SECTION 2. Amendments to Agreement. The Agreement is hereby amended,
-----------------------
effective on the Effective Date, as follows:
(a) Section 1.1 of the Agreement shall be amended in the definition
of "Eurodollar Rate" by deleting the reference to "0.625%" in the second line
thereof and by replacing it with "1.00%".
(b) Section 1.1 of the Agreement shall be amended in the definition
of "Commitment Termination Date" by deleting the reference to "April 2, 1997"
and by replacing it with "March 31, 1997".
(c) The definition of "Net Receivables Balance" set forth in Section
1.1 of the Agreement is hereby deleted in its entirety and replaced with the
following (solely for convenience, language added to such definition is
italicized):
""Net Receivables Balance" means, at any time, (A) the RPA
-----------------------
Interest Percentage of (a) the Outstanding Balance of the Eligible
Receivables at such time reduced by (b) the sum of (i) the aggregate
Outstanding Balance of all Eligible Receivables which are Defaulted
Receivables, (ii) the aggregate Outstanding Balance of all Eligible
Receivables of each Obligor with respect to which 50% or more of such
Obligor's Receivables are more than ninety (90) days past due, (iii)
for a particular Obligor on any date of determination, the amount (if
positive) by which either (x) if the aggregate amount due and owing by
CompuCom to such Obligor exceeds the aggregate amount due and owing by
such Obligor to CompuCom, then the amount
<PAGE>
due and owing by such Obligor to CompuCom or (y) if the aggregate
amount due and owing by an Obligor to CompuCom exceeds the aggregate
amount due and owing by CompuCom to such Obligor, then the amount due
and owing by CompuCom to such Obligor, (iv) credits which are aged
more than ninety (90) days (this clause (iv) calculated in the
aggregate for all Designated Obligors) minus (B) for each Designated
-----
Obligor, the amount by which (x) the RPA Interest Percentage of the
aggregate Outstanding Balance of Eligible Receivables related to such
Designated Obligor exceeds (y) the Concentration Amount with respect
to such Designated Obligor."
SECTION 3. Effectiveness. This Amendment shall become effective on
-------------
the first date on which the parties hereto shall have executed and delivered one
or more counterparts to this Amendment and each shall have received one or more
counterparts of this amendment executed by the others.
SECTION 4. Execution in Counterparts. This Amendment may be executed
-------------------------
in any number of counterparts and by different parties hereto on separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together, shall
constitute but one and the same Amendment.
SECTION 5. Consents; Binding Effect. The execution and delivery by
------------------------
the Seller and the Purchaser of this Amendment shall constitute the written
consent of each of them to this Amendment. This Amendment shall be binding
upon, and inure to the benefit of, the parties hereto and their respective
successors and assigns.
<PAGE>
SECTION 6. Governing Law. This Amendment shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
SECTION 7. Severability of Provisions. Any provision of this
--------------------------
Amendment which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 8. Captions. The captions in this Amendment are for
--------
convenience of reference only and shall not define or limit any of the terms or
provisions hereof.
SECTION 9. Agreement to Remain in Full Force and Effect. Except as
--------------------------------------------
amended hereby, the Agreement shall remain in full force and effect and is
hereby ratified, adopted and confirmed in all respects. This Amendment shall be
deemed to be an amendment to the Agreement. All references in the Agreement to
"this Agreement", "hereunder", "hereof", "herein", or words of like import, and
all references to the Agreement in any other agreement or document shall
hereafter be deemed to refer to the Agreement as amended hereby.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
2 to Transfer and Administration Agreement to be executed as of the date and
year first above written.
ENTERPRISE FUNDING CORPORATION,
as Company
By /s/ Stewart L. Cutler
----------------------------------------------------
Name:Stewart L. Cutler
Title:Vice President
CSI FUNDING INC., as Transferor
By /s/ Robert J. Boutin
----------------------------------------------------
Name:Robert J. Boutin
Title:Senior Vice President
and Chief Financial Officer
COMPUCOM SYSTEMS, INC.,
as Collection Agent
By /s/ Robert J. Boutin
----------------------------------------------------
Name: Robert J. Boutin
Title: Senior Vice President
and Chief Financial Officer
NATIONSBANK, N.A., as Agent
and as Bank Investor
Commitment: By:/s/ Michelle M. Heath
$100,000,000 ----------------------------------------------------
Name:Michelle M. Heath
Title:Vice President
<PAGE>
EXHIBIT 10(R)
- --------------------------------------------------------------------------------
IBM PC
Remarketer
Announcement
--------------------------------------------
March 18, 1996
- --------------------------------------------------------------------------------
IBM Personal Computer Dealer Program Evaluation
Recently IBM has taken significant actions to strengthen our relationship with
our reseller channel by resolving those issues you told us were inhibitors to
our mutual success. We announced a change in our go-to-market strategy to depend
on you as the primary fulfillment channel for all personal computer products. We
also changed the mission of PC Direct to a consumer focused sales organization
and a demand generation operation to deliver sales leads to our Business
Partners. We stopped all IBM internal organizations from sourcing personal
computers for resale and we closed our Availability Services Customized
Operational Support (COS) centers. We implemented a compensation program for IBM
Sales and Services (S&S) representatives that compensates them fully for
Business Partner PC placements and educated them on the benefits of jointly
marketing products and services with you to the customer. Finally, we put it all
in writing through the Business Partner Charter.
Today we are continuing this commitment to you by automatically extending IBM
Personal Computer Dealer Agreements for twelve months upon their expiration.
This includes those Dealer Agreements about to expire for not achieving the end
user sales Minimum Renewal Criteria (MRC). We are taking this action while we
evaluate further improvements to our Dealer Program.
Thank you for your partnership and we look forward to building a new, mutually
successful, relationship with you for the future.
This announcement is provided for your information only and is subject to change
without notice. For additional information, contact your IBM representative
- --------------------------------------------------------------------------------
International Business Machines Corporation
IBM Personal Computer Company - Americas
3039 Corporate Road, Research Triangle Park, NC 27709
<PAGE>
EXHIBIT 10(FF)
TERM NOTE
$1,181,250.00 Dallas, Texas February 12,1997
FOR VALUE RECEIVED, Edward R. Anderson, an individual, referred to
herein as "Borrower", promises to pay to the order of CompuCom Systems, Inc., a
Delaware corporation and referred to herein as "Lender", the principal sum of
One Million, One Hundred Eighty One Thousand, Two Hundred Fifty Dollars
($1,181,250.00), together with interest on the unpaid principal balance as set
forth below. All sums hereunder are payable to Lender at its principal office
in Dallas, Dallas County, Texas.
1. DEFINITIONS. Unless the context hereof otherwise requires or
-----------
provides, the terms used herein defined in that certain Pledge Agreement between
Borrower and Lender dated August 31, 1994, as the same has been or may be
amended or supplemented from time to time (the "Agreement") have the same
meanings. In addition, the following terms shall have the following meanings:
a. "PRIME RATE" means that variable rate of interest per annum
established by NationsBank of Texas, N.A. (the "Bank") from time to time as its
"prime rate" (whether by that or any other name). The Bank sets such rate as a
general reference rate of interest and takes into account such factors as the
Bank may deem appropriate. Many of the Bank's commercial or other loans are
priced in relation to such rate, but it is not necessarily the lowest or best
rate actually charged to any customer.
b. "MAXIMUM RATE" means the higher of the maximum interest rate
allowed by applicable United States or Texas law as amended from time to time
and in effect on the date for which a determination of interest accrued
hereunder is made. The determination of the maximum rate permitted by
applicable Texas law shall be made pursuant to the indicated rate ceiling as
defined in Tex.Rev.Civ.Stat.Ann. art. 5069-1.04, but Lender reserves the right
to implement from time to time any other rate ceiling permitted by such law.
2. INTEREST RATE.
-------------
a. The unpaid principal balance from the date hereof until
maturity (whether by acceleration or otherwise) shall bear interest at a rate
per annum equal to 6%.
b. All past-due payments of principal and interest under this
Note shall bear interest at the Maximum Rate (or if there is no such Maximum
Rate, then at the Prime Rate plus 3%) from maturity until paid.
3. PAYMENT OF PRINCIPAL AND INTEREST.
---------------------------------
a. The principal amount outstanding under this Note shall be
due and payable on February 15, 1999. Interest shall be payable annually on
January 1st of each year during the term hereof, commencing January 1, 1998, and
upon payment of this Note in full.
TERM NOTE - Page 1
- ---------
<PAGE>
b. Unless Lender in its sole discretion elects to apply
payments differently, each payment shall be first credited to the discharge of
interest accrued on the unpaid principal balance to the date of the payment, and
the remainder shall be credited to the reduction of said principal.
c. The principal and interest due hereunder shall be evidenced
by Lender's records which, absent manifest error, shall be conclusive evidence
of the computation of principal and interest balances owed by Borrower to
Lender.
d. Notwithstanding anything contained in this Note or in the
Agreement to the contrary, in the event Borrower's employment with Lender is
terminated, whether such termination is voluntary or involuntary, this Note
shall be due and payable on the 30th day immediately following the effective
date of such termination. In the event this Note becomes payable pursuant to the
terms of this Section 3(d), Borrower at his option may elect to have Lender
offset any amounts owed to Lender by Borrower under this Note against any
severance or other payments to be made by Lender to Borrower as a result of
Borrower's termination of employment with Lender.
4. DEFAULT. Failure to pay this Note or any installment hereunder
-------
as it becomes due, or failure of Borrower or any other person to perform (after
the expiration of any applicable cure period) any of the terms or provisions set
forth in, or the occurrence of any default under the terms of the Agreement, or
the occurrence of any default under any other agreement between Borrower and
Lender shall, at the election of the holder hereof, without notice, demand or
presentment, which are hereby waived, mature the principal of this Note and all
interest then accrued, and the same shall at once become due and payable and
subject to those remedies of the holder hereof.
5.. PREPAYMENT. Borrower may at any time prepay in whole or in part
----------
the unpaid principal of this Note without premium or penalty, and the interest
shall immediately cease on any amounts so prepaid. Prepayments of principal
shall be applied in the inverse order of maturity.
6. WAIVER. Each surety, endorser, guarantor and any other party now
------
or hereafter liable for the payment of this Note in whole or in part ("Surety")
and Borrower hereby severally (a) waive grace, demand, presentment for payment,
notice of nonpayment, protest, notice of protest, non-payment or dishonor,
notice of intent to accelerate, notice of acceleration and all other notices
(except as provided in the Agreement), filing of suit and diligence in
collecting this Note or enforcing any other security with respect to same, (b)
agree to any substitution, surrender, subordination, waiver, modification,
change, exchange or release of any security or the release of the liability of
any parties primarily or secondarily liable hereon, (c) agree that Lender is not
required first to institute suit or exhaust its remedies hereon against
Borrower, any Surety or others liable or to become liable hereon or to enforce
its rights against them or any security with respect to same or to join any of
them in any suit against any others of them, and (d) consent to any extension or
postponement of time of payment of this Note and to any other indulgence with
respect hereto without notice thereof to any of them. No failure or delay on the
part of Lender in exercising any right, power or privilege hereunder shall
operate as a waiver thereof.
7. ATTORNEYS' FEES. If this Note is not paid at maturity,
---------------
regardless of how such maturity may be brought about, or is collected or
attempted to be collected through the initiation or prosecution of any suit or
through any probate, bankruptcy or any other judicial proceedings, or is placed
in the hands of an attorney for collection, Borrower shall pay, in addition to
all other amounts owing hereunder, all actual expenses of collection, all court
costs and reasonable attorney's fees incurred by the holder hereof.
8. LIMITATION ON AGREEMENTS. All agreements between Borrower and
------------------------
Lender, whether now existing or hereafter arising, are hereby limited so that in
no event shall the amount paid, or
TERM NOTE - Page 2
- ---------
<PAGE>
agreed to be paid to Lender for the use, forbearance, or detention of money or
for the payment or performance of any covenant or obligation contained herein or
in any other document evidencing, securing or pertaining to this Note, exceed
the Maximum Rate. If any circumstance otherwise would cause the amount paid to
exceed the Maximum Rate, the amount paid or agreed to be paid to Lender shall be
reduced to the Maximum Rate, and if Lender ever receives interest which
otherwise would exceed the Maximum Rate, such amount which would be excessive
interest shall be applied to the reduction of the principal of this Note and not
to the payment of interest, or if such excessive interest otherwise would exceed
the unpaid balance of principal of this Note such excess shall be applied first
to other indebtedness of Borrower to Lender, and the balance, if any, shall be
refunded to Borrower. In determining whether the interest paid or agreed to be
paid hereunder exceeds the highest amount permitted by applicable law, all sums
paid or agreed to be paid to Lender for the use, forbearance or detention of the
indebtedness of Borrower to Lender shall, to the extent permitted by applicable
law, (i) be amortized, prorated, allocated and spread throughout the full term
of such indebtedness until payment in full so that the actual rate of interest
on account of such indebtedness is uniform throughout such term, (ii) be
characterized as a fee, expense or other charge other than interest, and (iii)
exclude any voluntary prepayments and the effects thereof. The terms and
provisions of this paragraph shall control and supersede every other provision
of all agreements between Lender and Borrower in conflict herewith.
9. GOVERNING LAW AND VENUE. This Note and the rights and
-----------------------
obligations of the parties hereunder shall be governed by the laws of the United
States of America and by the laws of the State of Texas, and is performable in
Dallas, Dallas County, Texas. Chapter 15 of the Texas Credit Code (Tex. Rev.
Civ. Stat. Ann. art 5069.1501 et seq.) does not apply to this Note.
-- ----
10. BUSINESS DAY. If any action is required or permitted to be taken
------------
hereunder on a Sunday, legal holiday or other day on which banking institutions
in the State of Texas are authorized or required to close (a "Non-Business
Day"), such action shall be taken on the next succeeding day which is not a Non-
Business Day, and, to the extent applicable, interest on the unpaid principal
balance shall continue to accrue at the applicable rate.
11. AGREEMENT. This Note is the Note referred to in the Agreement,
---------
and is entitled to the benefits thereof and the security as provided for
therein. Reference is made to the Agreement for a statement of the rights and
obligations of Borrower, a description of the nature and extent of the security
and the rights of the parties in respect to such security, and a statement of
the terms and conditions under which the due date of this Note may be
accelerated.
12. RESTATEMENT. This Note is given in amendment and restatement
------------
and not in payment or satisfaction of and replaces that certain Promissory Note
dated August 31, 1994, in the original principal amount of $1,181,250 executed
by Edward R. Anderson and payable to the order of Lender.
Address:
/s/ Edward R. Anderson
---------------------------------------
Edward R. Anderson
TERM NOTE - Page 3
- ---------
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Exhibit 11
Computation of Per Share Earnings
Years ended December 31, 1996, 1995 and 1994
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
Primary earnings per common share
- ---------------------------------
<S> <C> <C> <C>
Net earnings $ 30,471 $ 20,670 $ 14,659
Preferred stock dividend (900) (1,200) (450)
----------- ----------- -----------
$ 29,571 $ 19,470 $ 14,209
=========== =========== ===========
Average common shares outstanding 44,615 35,857 33,091
Average common share equivalents 2,674 2,592 2,623
----------- ----------- -----------
Average number of common shares and
common share equivalents outstanding 47,289 38,449 35,714
=========== =========== ===========
Primary earnings per common share $ .63 $ .51 $ .40
=========== =========== ===========
Fully diluted earnings per common share
- ---------------------------------------
Primary net earnings 30,471 20,670 14,659
Preferred stock dividend (450)
Interest expense, net of income tax expense 92 846 1,000
----------- ----------- -----------
$ 30,563 $ 21,516 $ 15,209
=========== =========== ===========
Average number of common shares outstanding 44,615 35,857 33,091
Average common share equivalents outstanding 2,832 6,536 2,623
Additional shares issuable 2,603 6,908 8,409
----------- ----------- -----------
Average number of common shares
assuming full dilution 50,050 49,301 44,123
=========== =========== ===========
Fully diluted earnings per common share $ .61 $ .44 $ .34
=========== =========== ===========
</TABLE>
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Exhibit 21
Subsidiaries of the Registrant
Exclusive of inactive subsidiaries, the Registrant as of March 14, 1997 had
the following subsidiaries:
Place of
Name Incorporation
---- -------------
CompuCom Properties, Inc. Delaware
The Computer Factory Inc. New York
ClientLink, Inc. Delaware
International Micronet Systems California
CSI Funding, Inc. Delaware
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
CompuCom Systems, Inc.:
We consent to incorporation by reference in the Registration Statements
(No. 33-2304, No. 33-30175, No. 33-30056, No. 33-39914, No. 33-43275, No. 33-
63307, No. 33-63309, No. 33-76832 and No. 33-85268) on Form S-8 and the
Registration Statements (No. 33-43367, No. 33-47002, No. 33-64341, No. 33-
78746, No. 33-78756 and No. 333-12609) on Form S-3 of CompuCom Systems, Inc.
of our report dated January 29, 1997, related to the consolidated balance
sheets of CompuCom Systems, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows and related schedule for each of the years in the
three-year period ended December 31, 1996, which report appears in the
December 31, 1996 annual report on Form 10-K of CompuCom Systems, Inc.
KPMG PEAT MARWICK LLP
Dallas, Texas
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS .
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,320
<SECURITIES> 0
<RECEIVABLES> 379,872
<ALLOWANCES> 2,274
<INVENTORY> 233,464
<CURRENT-ASSETS> 618,890
<PP&E> 71,125
<DEPRECIATION> 16,817
<TOTAL-ASSETS> 692,985
<CURRENT-LIABILITIES> 276,766
<BONDS> 239,450
0
15,000
<COMMON> 449
<OTHER-SE> 155,649
<TOTAL-LIABILITY-AND-EQUITY> 692,985
<SALES> 1,816,504
<TOTAL-REVENUES> 1,995,191
<CGS> 1,635,653
<TOTAL-COSTS> 1,754,228
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 900
<INTEREST-EXPENSE> 14,764
<INCOME-PRETAX> 50,616
<INCOME-TAX> 20,145
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,471
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.61
</TABLE>
