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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, 1998 Commission File Number 0-14371
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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)
7171 Forest Lane, Dallas, TX 75230
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 856-3600
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Securities registered pursuant to Section 12(b) of the Act: NONE
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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 29, 1999 was
approximately $82.9 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 29, 1999 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
29, 1999 was 47,634,949 shares.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement relative to the May 13, 1999 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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Item 1 Business
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(a) General Development of the Business
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Introduction
Founded in 1987, CompuCom Systems, Inc., together with its subsidiaries
("CompuCom" or "the Company"), is a leading provider of information technology
products and technology management 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. Products and
technology management services are sold through a direct sales force to over
6,000 business customers nationwide. Through its majority-owned subsidiary,
ClientLink, Inc. ("ClientLink"), the Company offers software application
development services. ClientLink designs, develops and implements customized
information technology solutions for organizations with mission-critical
business processing needs.
CompuCom is an authorized dealer of major personal computer products,
networking and related products, computer-related peripheral equipment and
software for a number of manufacturers, including Compaq Computer Corporation
("Compaq"), International Business Machines Corporation ("IBM"), Hewlett-Packard
Company ("HP"), Toshiba America Information Systems ("Toshiba"), Intel
Corporation ("Intel"), and Microsoft Corporation ("Microsoft"). To further meet
its customers' needs, CompuCom offers a variety of technology management
services including LAN/WAN project services, consulting, asset tracking, network
management, help desk, field engineering, configuration, software management,
distribution, and procurement utilizing network applications such as Novell
Netware, Windows NT, Windows 95 and Windows 98, and IBM OS/2 Warp.
The Company has been profitable since its inception and has achieved net
revenue growth of 12% compounded over the past five years. However, during
1998, the Company experienced a significant decline in its level of
profitability, recording its first quarterly net loss in the fourth quarter 1998
as a result of a $16.4 million (pretax) restructuring charge. CompuCom believes
the key to improving its net revenue and net earnings performance is the
expansion of its higher margin services business, both internally and through
strategic acquisitions, as well as focusing on lowering its cost structure
through expense control and participation in programs designed to increase
inventory turns. 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.
CompuCom operates primarily in three business segments 1) sale of computer
products, 2) services - which include technology support services, network
integration and configuration, and 3) customized application programming.
Separate business segment information is presented for each of these segments.
Recent Developments
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In the fourth quarter of 1998, the Company implemented a restructuring plan
designed to reduce the Company's cost structure by approximately 1.25% to 1.5%
of sales by closing certain facilities and reducing the Company's work force by
approximately 10%. As a result, the Company recorded a restructuring charge in
the fourth quarter of 1998 in the amount of $16.4 million, primarily consisting
of costs associated with the closing of 65 facilities, which had been used as
branch offices, and disposing of related fixed assets, as well as employee
severance and benefits related to the reduction in workforce. This reduction in
workforce included associates from the Company's sales, service and general and
administrative areas, and two executive officers of the Company. Under the new
business strategy, the Company has moved to a virtual office model, where its
sales and service personnel are equipped with remote communications tools,
including Internet access, pagers and portable telephones, which enable them to
remotely access and communicate with the Company's systems. Under its new
business model, the Company retains a presence in all of its markets through its
direct sales force and service personnel.
To implement its new business strategy, several management changes were
made. In October 1998 Thomas C. Lynch was appointed to the position of Executive
Vice President and Chief Operating Officer of the Company. Mr. Lynch has served
for the past three years as Senior Vice President of Safeguard Scientifics, Inc.
the majority shareholder of the Company, where he aided in the management of and
oversaw the operations of a number of associated companies engaged in the
information technologies business. Prior to that time, Mr. Lynch was a Rear
Admiral in the United State Navy, serving on active duty for 31 years.
This document contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 regarding revenues,
margins, operating expenses, earnings, growth rates and certain business trends
that are subject to risks and uncertainties that could cause actual results to
differ materially from the results described herein. Recipients of this
document are cautioned to consider these risks and uncertainties and to not
place undue reliance on these forward-looking statements. See "General
Description of Business", "Competition", "Principal Suppliers" and "Dependence
Upon Major Vendors and Other Suppliers" 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.
Item 1(b) Financial Information About Operating Segments
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Revenues from external customers, gross margin, operating earnings and
total assets for each segment of the Company's business for the three-year
period ended December 31, 1998 is contained in Footnote 5 to the Consolidated
Financial Statements titled "Segment Information" on page F-11 of this Form 10-K
and is incorporated herein by reference.
Item 1(c) Narrative Description of Business
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GENERAL DESCRIPTION OF BUSINESS
CompuCom markets its product procurement, configuration, field engineering,
network management, help desk services and technology management services
primarily through its direct sales force and service personnel. The Company
focuses on meeting the business objectives of large corporate businesses, which
accounted for the majority of the Company's net revenue in 1998. However, no one
customer accounted for greater than 10% of such revenues in the sale of computer
products or services segments. Order backlog is not considered to be a
meaningful indicator of future business prospects due to the short order
fulfillment cycle.
CompuCom is authorized by various vendors to sell computer products through
its virtual, direct sales force located in or near major metropolitan areas
throughout the United States. Each geographic area typically includes direct
sales representatives, support personnel, system engineers and technicians who
are authorized to repair and maintain Compaq, IBM, HP and certain other
manufacturers' products. As of December 31, 1998, the Company employed
approximately 335 full-time direct sales representatives who sell both products
and services. The Company's sales force is compensated with a base salary and
commissions based on net revenue, gross margin and other relevant factors.
CompuCom's corporate headquarters and operations campus is located in
Dallas, Texas. Essentially all the Company's financial and administrative
functions, including the customer center, information services, service and
sales support, help desk services, human resources, product services, finance,
and executive management are located in the two buildings that comprise this
facility.
The Company has expanded its use of information systems in its internal
operations and its services to customers. 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, the Service Information Management System, the
Customer Center System, the Warehouse Information Management System, and the
Financial Information Management System. All of these systems operate on mini-
computer platforms which afford the Company maximum system reliability,
availability, and growth capacity.
To further enhance the quality and efficiency of its information systems,
CompuCom 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. Customers are provided the ability to
create custom price quotations for new orders from an Internet-based catalog of
products and place orders over the Internet. Customers may also look up
previously purchased items using either the product serial number or the
customer's "asset tag", which the Company places on products at the customer's
request. Customers may also directly access order status and shipment history
over the Internet. Other improvements include enhanced product sales
information, reporting for principal vendors and real time open call status
reporting for service customers. In 1998, the use of "DataMarts", which allow
the definition and creation of data files that can be downloaded over the
Internet, were made available to both customers and CompuCom personnel on an
expanded basis. CompuCom's comprehensive Intranet application was significantly
enhanced during 1998. Accessible only to CompuCom personnel, the Intranet
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.
During 1998 CompuCom expanded the customer management and event tracking
system to include product services, credit and collections, remote help desk and
service dispatch areas, in addition to the customer center. This new
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system gives CompuCom a unified customer issue and activity tracking capability
which has improved interdepartmental communications regarding customer support
and customer satisfaction.
The Company continues to expand its Sales Force Automation ("SFA") package,
which provides sales representatives access to e-mail and key Company
applications from remote locations, allowing them to spend more time with
customers and improve productivity. During 1998, service engineers were given
access to the SFA tools that were previously available to the sales force. In
addition, field service engineers are able to directly report time and
activities from remote locations using special wireless communications features
("airtime"). CompuCom believes these new capabilities will help improve engineer
productivity and enhance customer service levels.
Competition
The Company's industry is characterized by intense competition, primarily
in the areas of price, product availability and breadth of product line and
service. The Company's marketing network competes for potential clients, with
numerous resellers and distributors. Many established desktop computer
manufacturers (including some of the Company's vendors), direct marketers,
systems integrators and resellers of distributed desktop or networking products
including Entex Information Services, Inc., InaCom Corp. (which recently merged
with Vanstar Corporation), and Microage, Inc. compete with the Company in the
configuration and distribution of computer systems and equipment. In addition,
direct marketers have had a pricing advantage over resellers such as CompuCom.
To help combat the direct marketers' pricing advantage, the Company and its
major vendors are in the process of developing and implementing strategies
designed to reduce costs. In response to the increased competition, particularly
from direct marketers, a number of the Company's competitors have sought to
increase their market share through acquisitions. The Company expects the
consolidation in the industry will continue in 1999. As a result of such
consolidation, CompuCom may face fewer but larger and better-financed
competitors. In order to keep pace, the Company expects to pursue additional
strategic acquisitions. In the highly fragmented computer services business, the
Company competes with several larger competitors; other corporate resellers
pursuing high-end service 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 that of
CompuCom. There can be no assurance that the Company will be able to continue to
compete successfully with new or existing competition.
The Company's Employees
The Company employed approximately 4,800 full-time employees as of December
31, 1998. The Company offers its full-time employees health, long-term
disability, dental and life insurance benefits and has a 401(k) plan and an
employee stock purchase plan for eligible employees. None of the employees is
covered by a collective bargaining agreement. The Company considers its
relations with employees to be good.
SALE OF COMPUTER PRODUCTS SEGMENT
The Company provides procurement services for sophisticated technologies
consisting of personal computer products, network products, peripherals,
software and management technology services to its customers. It is an
authorized dealer of Compaq, HP, IBM, Intel, Microsoft, 3Com and Toshiba as well
as other major manufacturers and software suppliers. The Company sources over
5,000 different desktop products, components and accessories, consisting of
leading as well as alternative brands.
CompuCom integrates of a variety of manufacturers' products into various
desktop and server configurations to meet customers' individual needs. The
Company provides value to its customers by allowing them to choose products or
components from various manufacturers that best suit their desktop and network
needs as opposed to manufacturers' direct sales organizations which typically
configure or market desktop and network systems that include products only from
that particular manufacturer.
The Company provides product support to its customers primarily through the
CompuCom Customer Center ("Customer Center") located in Dallas, Texas. Customer
Center personnel, called inside sales representatives ("ISRs"), 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 CompuCom's customers while allowing the direct sales
force to focus on soliciting new business and providing the necessary support
for customer's more complex service needs. At the end of 1998, the Company
employed approximately 400 customer center personnel.
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During 1996, to meet customers' global business needs, CompuCom helped form
GlobalServe, an alliance of international computer service suppliers. The
objective of the GlobalServe alliance is to provide customers a single point of
contact for accessing computer products and technology management services
worldwide.
CompuCom operates a 300,000 square foot distribution center in Paulsboro,
New Jersey, and a 104,000 square foot distribution center in Stockton,
California. In addition, in 1998 CompuCom opened a 78,000 square foot co-
location facility on the Compaq campus in Houston, Texas. All of these
facilities contain configuration centers. The distribution centers and co-
location facility personnel 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 the Company believes has
resulted in improved overall inventory integrity and bin accuracy.
CompuCom's distribution, configuration, return merchandise and product
services departments are ISO 9002 certified. 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.
Principal Suppliers
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A significant part of CompuCom's net revenues are derived from sales of
personal computer products including Compaq, IBM and HP products. 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
days written notice. 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 nonrenewal, of the Company's Compaq, IBM or HP
dealer agreements could materially adversely affect the Company's business. The
Company, however, is not aware of any reason for the termination, or nonrenewal,
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 resellers, 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
and incentives 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 1999 or that the Company will continue to
participate in any of these programs at the same level as in 1998.
Sales of Compaq, IBM and HP products accounted for approximately 32%, 18%
and 18%, respectively, of the Company's 1998 product revenues compared to 32%,
19% and 14%, respectively, in 1997 and 31%, 15% and 12%, respectively, in 1996.
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. CompuCom's major suppliers at times provide price protection
programs that are intended to reduce the risk of inventory devaluation by
absorbing price declines associated with aging product life cycles. However, the
suppliers have reduced the number of days price protection is generally in
effect. CompuCom has focused on ways to reduce its costs by reducing its
inventory levels. During 1998, the Company opened a co-location facility at
Compaq's manufacturing and headquarters campus in Houston, Texas. The Company
anticipates opening similar facilities close to the Toshiba and IBM
manufacturing facilities during the first half of 1999. CompuCom 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%. CompuCom did not incur
significant restocking fees in 1998 and expects returns to decrease upon the
opening of co-location facilities.
Dependence upon Major Vendors and Other Suppliers
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The Company is dependent upon the continued supply of products and
components from its suppliers, particularly Compaq, IBM and HP. Historically,
certain suppliers occasionally experience shortages of select products that
render components unavailable or necessitate product allocations among
resellers. While certain shortages existed throughout 1998, particularly in the
third quarter, the Company believes the product availability issues are a result
of the present dynamics of the personal computer industry as a whole, which
include shortened product life cycles and increased
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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 1999, the impact of such an interruption is not expected to be
materially disruptive due to the breadth of alternative product lines available
to the Company.
The Company's product margins as a percentage of product revenue decreased
to 9.8% in 1998 as compared to 10.4% in 1997, due primarily to heightened
competition from direct marketers and other resellers. The Company believes
that gross margins will continue to be reactive to industry-wide changes and
pricing strategies. As such, CompuCom anticipates further decline in product
gross margins in 1999. Future profitability will depend upon the Company's
ability to effectively manage inventory levels in response to changes in its
major suppliers' price protection and return programs, the Company's ability to
attract and retain quality services personnel while effectively managing the
utilization of such service personnel, and the Company's ability to respond to
increased competition from its suppliers' direct selling initiatives. It will
also depend on increased focus on providing technical service and support to
customers, product demand, competition, manufacturer product availability and
pricing strategies, effective utilization of vendor programs, as well as the
Company's ability to reduce operating expenses at a pace at least equal to the
decline in product gross margin percentages.
SERVICES SEGMENT
Service revenue is primarily derived from field engineering, LAN/WAN
projects, consulting, configuration, help desk, asset tracking, network
management, and software management. CompuCom continues to focus on expanding
its presence in the service market. This commitment is reflected in the
increase in its service personnel. As of December 31, 1998, the Company
employed over 2,900 service personnel, including system engineers, network
engineers, configuration technicians and field engineers, compared to
approximately 800 as of the beginning of 1995. These service personnel provide
configuration, field engineering, network management, help desk services and
technology management to the Company's customers.
During 1998, net service revenue increased 9% from 1997 levels as a result
of the Company's continued efforts to increase sales of technology management
services to meet customer needs and to improve profitability. Service revenue
has grown at a compounded annual rate of 37% over the past three years as a
result of the Company's strategic efforts, which include: the development of
additional service offerings; additional training for its engineers; enhanced
management support to the services business; and more emphasis on sales of
services in the sales representatives compensation plan. In addition, the
Company emphasized the hiring of quality service personnel, increasing the
number of its service employees from approximately 800 at the beginning of 1995
to over 2,900 by the-end of 1998. To further enhance its service growth,
CompuCom employs an ongoing program in which college graduates are hired and
placed in various engineering training and certification programs. At the
completion of these programs, these engineers become a part of the Company's
billable workforce. The technology management services business is an integral
part of CompuCom's strategy to provide customers with value-added service
solutions to meet their technology needs.
CompuCom maintains three configuration centers, one in each of the
Company's two distribution centers, located in Paulsboro, New Jersey and
Stockton, California, and in the Compaq co-location facility in Houston, Texas.
These centers contain configuration systems that have the ability to set up and
configure product that includes both standard and nonstandard components or
software to enable CompuCom to meet increasing customer demand for advanced,
complex system and network configuration technologies.
CompuCom provides hardware maintenance services ranging from simple desktop
repairs, installations, moves, adds, and changes to complex network repairs,
application setups and software upgrades. These services are performed based
upon the specific customer needs, such as on-site support, warranty support,
change and upgrade management, contracted response or time and material.
The Company's systems 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 Paulsboro, N.J.
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 and
event tracking. 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
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administrators. The help desk support group also has access to a "known
solutions database" to help solve common problems. The help desk solution is
tightly integrated with the Company's other service offerings.
CUSTOMIZED APPLICATION PROGRAMMING SEGMENT
Through its majority-owned subsidiary, ClientLink, located in Atlanta,
Georgia, the Company offers software application development services.
ClientLink designs, develops, and implements enterprise-wide information
technology (IT) solutions for Fortune 500 companies. ClientLink's primary focus
is in development and support of client/server and Internet based applications.
This is accomplished through custom application development for critical
business functions and consulting and implementing IT support solutions. These
solutions are normally offered on a fixed-price and fixed-time frame basis.
ClientLink's approach allows organizations to achieve their business objectives,
better control their budgets and delivery timeframes, and increase their
competitiveness in the marketplace by rapidly deploying the solution.
ClientLink focuses its marketing efforts on establishing and maintaining
relationships with Fortune 1000 companies in various industries with intensive
information access and processing needs, including telecommunications, financial
services, utilities, health care services, manufacturing, and retail.
The market for custom business systems is highly competitive. ClientLink
competes with consulting firms of all sizes, software integration firms, the
internal information systems groups of its clients and, to a lesser extent,
software vendor companies. ClientLink has competed directly with firms such as
Deloitte & Touche and SHL Systemhouse (a subsidiary of MCI) for some of its
larger projects.
During 1998, four customers accounted for 84% of ClientLink's revenues.
Individually, these customers accounted for 42%, 16%, 15% and 11% of
ClientLink's 1998 revenues. During 1997, two customers accounted for 91% of
ClientLink's revenues. Individually, these customers accounted for 56% and 35%
of ClientLink's 1997 revenues. During 1996, two customers accounted for 87% of
ClientLink's revenues. Individually, these customers accounted for 46% and 41%
of ClientLink's 1996 revenues.
Item 1(d) Financial Information About Foreign and Domestic Operations and Export
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Sales
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The Company does not have any foreign operations nor does it engage in
any material export sales.
Item 2 Properties
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The Company's principal executive and administrative offices are located
on a 20-acre campus-type setting consisting of two buildings containing
approximately 250,000 square feet of office space in Dallas, Texas. The Company
purchased this facility during 1996, refurbished it, and fully occupied the
facility by the end of 1997. One of the buildings is an eight-story structure
and contains executive offices, customer center, finance, purchasing, and human
resources. An adjoining three-story building contains the Company's information
systems group and its remote help desk personnel. The Company expects to
complete a sale/leaseback transaction on its headquarters facilities during the
first half of 1999.
The Company distributes products primarily from three 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 on July 31, 1999.
In addition to warehousing space, this facility contains a state-of-the-art
90,000 square foot configuration center, allowing CompuCom to meet increasing
customer demand for advanced complex system integration and network
technologies. It also provides adequate space for channel assembly. 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. In 1998,
CompuCom opened a 78,000 square foot co-location facility located at Compaq's
headquarters and manufacturing campus in Houston, Texas.
See Note 14 to the accompanying Notes to Consolidated Financial
Statements for additional information regarding lease costs.
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 1998.
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PART II
Item 5 Market for Registrant's Common Stock
The Company's common stock is listed on the NASDAQ National Market
(Symbol: CMPC). As of December 31, 1998, there were approximately 8,400
beneficial holders of the Company's common stock. The high and low sales prices
reported within each quarter for the years ended December 31, 1998 and 1997 are
as follows:
1998 1997
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High Low High Low
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First quarter $ 9.75 $ 7.50 $11.13 $ 4.00
Second quarter 8.50 5.88 7.88 5.75
Third quarter 7.13 3.56 11.00 6.25
Fourth quarter 5.25 2.25 10.88 8.25
The last sale price reported for the Company's common stock on March 29
1999 was $3.69.
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 current credit facilities restrict the amount of dividends the Company
may pay on its common stock.
Item 6 Selected Financial Data
Selected financial data for the Company is presented below:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------
Operating Results 1998 1997 1996 1995 1994
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(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net revenues $ 2,254,465 $ 1,949,802 $ 1,995,191 $ 1,441,597 $ 1,255,813
Gross margin 283,960 267,545 240,963 174,908 141,693
Earnings before income taxes 668 * 58,658** 50,616*** 34,335 24,432
Net earnings 401 * 35,194** 30,471*** 20,670 14,659
Earnings/(loss) per common share:
Basic (.01)* .75** .66*** .54 .43
Diluted (.01)* .71** .61*** .45 .34
Balance Sheet Data
Total assets $ 545,489 $ 462,590 $ 692,985 $ 508,704 $ 429,531
Long-term debt 81,929 97,400 236,450 120,364 118,974
Convertible subordinated notes 3,000 3,000 3,000 18,214
Stockholders' equity 210,281 210,200 171,098 138,341 94,368
</TABLE>
* Includes restructuring charges of $16.4 million ($9.9 million, net of
tax) or ($.21) per share
** Includes nonrecurring gains on prepayment of secured note related to
sale of subsidiary in 1994 of $1.0 million and gain on sale of Company's
former headquarters of $2.4 million or $.07 per share
*** Includes nonrecurring gain on sale of securities of $5.2 million
(Basic - $.12 per share, Diluted - $.10 per share)
8
<PAGE>
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table presents the Company's total revenue, gross margin
and gross margin percentage by revenue source. Operating expenses, financing
expenses, nonrecurring gains, income taxes and net earnings are shown as a
percentage of total net revenue for the three years ended December 31:
1998 1997 1996
-----------------------------------
($ in millions)
Revenue:
Product $ 1,980 $ 1,700 $ 1,817
Service 258 236 169
Other 16 14 9
-----------------------------------
Total revenue $ 2,254 $ 1,950 $ 1,995
===================================
Gross margin:
Product $ 194 $ 176 $ 181
Service 82 84 56
Other 8 7 4
-----------------------------------
Total gross margin $ 284 $ 267 $ 241
===================================
Gross margin percentage:
Product 9.8% 10.4% 10.0%
Service 32.0% 35.7% 33.3%
Other 48.6% 48.8% 39.2%
-----------------------------------
Total gross margin percentage 12.6% 13.7% 12.1%
-----------------------------------
Operating expenses:
Selling 4.9% 4.0% 4.0%
Service 2.4% 2.5% 2.0%
General and administrative 3.0% 3.1% 2.8%
Depreciation and amortization 0.7% 0.6% 0.5%
Restructuring charges 0.7%
-----------------------------------
Total operating expenses 11.7% 10.2% 9.3%
-----------------------------------
Earnings from operations 0.9% 3.5% 2.8%
Interest (0.8%) (0.8%) (0.7%)
Nonrecurring gain 0.3% 0.4%
-----------------------------------
Earnings before income taxes 0.1% 3.0% 2.5%
Income taxes 0.1% 1.2% 1.0%
-----------------------------------
Net earnings 0.0% 1.8% 1.5%
===================================
9
<PAGE>
OVERVIEW
On May 13, 1998, the Company acquired Computer Integration Corporation
("CIC") and on June 26, 1998, the Company acquired Dataflex Corporation
("Dataflex") (collectively "the acquisitions").
On October 22, 1998 the Company's Board of Directors approved a
restructuring plan designed to reduce the Company's cost structure by
approximately 1.25% to 1.5% of sales by closing branch facilities and reducing
the Company's workforce by approximately 10%. The Company retains local presence
in all existing markets. As a result, the Company recorded a restructuring
charge in the fourth quarter of 1998 of $16.4 million (pretax), primarily
consisting of costs associated with the closing of certain facilities and
disposing of related fixed assets, as well as employee severance and benefits
related to the reduction in workforce. See Note 4 to the Consolidated Financial
Statements.
1998 Compared to 1997
Product revenue, which is primarily derived from the sale of distributed
desktop computer products to corporate customers, increased approximately 17% to
$1.98 billion in 1998 from $1.70 billion in 1997. The majority of the increase
in product revenue was due to the acquisitions, which contributed approximately
$219 million in product revenue. Excluding the acquisitions, product revenue for
the Company increased approximately 3.6% in 1998 compared to 1997. This
increase in product revenues, excluding the acquisitions, is primarily due to an
increase in desktop, laptop, and server units shipped and increased software
sales. Excluding the acquisitions, the Company shipped approximately 26% more
of these units in 1998 compared to 1997. This increase was partially offset by
a decrease in the average sales price of units sold resulting from manufacturer
price reductions. Although the trend of declining average sales prices slowed
in 1998 relative to 1997, the Company expects this trend will continue in the
short term. Product gross margin as a percentage of product revenue decreased
to 9.8% in 1998 from 10.4% in 1997. The decline in product gross margins is
primarily due to heightened competition from other corporate resellers and
direct marketers. The Company expects to continue to experience declining
product gross margins in the short term.
Service revenue increased 9.2% to $257.9 million in 1998 from $236.2
million in 1997. Service revenue is primarily derived from field engineering,
LAN/WAN projects, consulting, configuration, help desk, asset tracking, network
management, and software management. 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
was primarily due to increases in field engineering, which is typically driven
in part by product unit sales volume, and the acquisitions. Excluding the
acquisitions, service revenue increased approximately 4.9%. Service gross
margin as a percentage of service net revenue decreased to 32.0% in 1998
compared to 35.7% in 1997. The decrease was primarily caused by lower billing
per engineer for the Company's service personnel, particularly in the systems
engineering group. The Company does not expect to see improvement in its
service gross margin percentage in the short term.
Operating expenses increased 32.6% or $65.0 million for 1998 compared to
the same prior year period. As a percentage of net revenue, operating expenses
increased to 11.7% in 1998 compared to 10.2% in 1997. The percentage and dollar
increases resulted primarily from increased selling expenses and restructuring
charges.
Selling expense increased $30.1 million or 38.0% in 1998 compared to
1997. As a percentage of net revenues, selling expense increased to 4.9% in 1998
from 4.0% in 1997. These increases resulted from an increase in the Company's
sales force as a result of the acquisitions, the hiring of additional sales
representatives, and higher commission expense. Service expense increased in
absolute dollars in 1998 compared to 1997 primarily due to the growth in the
Company's service business and increased spending on training as a result of an
increase in the size of the Company's engineering force. However, as a
percentage of net revenues for 1998 compared to 1997, service expense decreased
10
<PAGE>
slightly. General and administrative expense increased in absolute dollars in
1998 compared to 1997 primarily due to expenditures to broaden the Company's
electronic commerce capabilities, costs related to the Company's ongoing campus
recruiting program and the integration of the acquisitions. However, as a
percentage of net revenues for 1998 compared to 1997, general and administrative
expense decreased slightly. As a result of the Company's fourth quarter 1998
restructuring activities, management expects to realize reductions in operating
expenses from its fourth quarter 1998 levels. These reductions may not result in
lower operating expenses in comparison to the same period of the prior year. 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 for 1998 both in
absolute dollars and as a percentage of net revenue when compared to 1997. The
increase in depreciation expense is associated with upgrading the Company's
hardware and software and increased depreciation as a result of the acquisitions
completed during 1998. The Company also expects to realize a slight decrease in
depreciation expense associated with the closing of branch facilities and
disposal of those related depreciable assets. Increased amortization expense is
the result of an increase in goodwill from the acquisitions completed during the
second quarter of 1998.
Financing expense increased approximately 25.4% for 1998 compared to
1997, primarily as a result of increased borrowings due to the acquisitions. The
Company's effective interest rate was 6.6% for 1998 compared to 6.7% in 1997.
The Company increased the availability in its working capital facility from $125
million to $165 million in June of 1998 to accommodate the acquistions. The
interest rate on the working capital facility is subject to adjustment based on
certain performance criteria. The Company's effective interest rate was 7.5% at
December 31, 1998.
During the third quarter of 1997, the Company recognized a previously
deferred nonrecurring after-tax gain of $1.0 million. Recognition of the gain
was due to the early payment of a secured note related to the 1994 sale of the
Company's former subsidiary, PC Parts Express, Inc. (known as PC Service Source,
Inc.).
During the fourth quarter of 1997, the Company recognized a nonrecurring
after-tax gain of $2.4 million on the sale of the Company's former headquarters.
As a result of the factors discussed above, net earnings, excluding the
restructuring charge in 1998 and the nonrecurring gains in 1997, decreased 68%
to $10.3 million in 1998 from $31.8 million in 1997. Some of the factors that
may impact future profitability include the following: the Company's ability to
effectively manage inventory levels in response to changes in its major
suppliers' price protection and return programs, the Company's ability to
effectively manage the utilization of service personnel, the Company's ability
to respond to increased competition from its suppliers' direct selling
initiatives, the Company's ability to reduce operating expenses at a pace equal
to the decline in margin percentages, demand for product, competition,
manufacturer product availability, effective utilization of vendor programs, and
the Company's ability to implement its recently announced virtual office
strategy.
1997 Compared to 1996
Product revenue declined 7% to $1.70 billion in 1997 from $1.82 billion
in 1996. Although the Company shipped more desktop, laptop and server units in
1997 compared to 1996, the units were sold at a lower average sales price
primarily due to manufacturer price reductions, which contributed to the overall
decrease in product revenue. In addition, the Company believes the product
revenue decline was attributable to an increase in direct marketers' market
share and the Company's effort during much of 1997 to improve product margins by
reducing its low-margin product business.
Product gross margin as a percentage of product net revenue increased to
10.4% in 1997 from 10.0% in 1996. This increase was primarily due to the
Company's effort to reduce its low-margin product business, and an increase in
the amount of manufacturer-sponsored incentives in 1997 compared to 1996.
Service revenue increased 39% to $236 million in 1997 from $169 million
in 1996. The increase in service revenue reflected the Company's continued focus
on growing the service business. Also contributing to the revenue growth in
service was the increase in the number of units sold during 1997 as compared to
1996, which increased demand for services such as configuration and
installation. Service gross margin as a percentage of service net revenue
increased to 35.7% in 1997 from 33.3% in 1996, primarily due to an increase in
billing per engineer of the Company's service personnel and growth in the
Company's higher-end service offerings, such as systems engineering and
consulting, which typically have higher margins than some of the Company's other
services.
11
<PAGE>
As a percentage of net revenue, operating expenses for 1997 increased to
10.2% compared to 9.3% in 1996. On an absolute dollar basis, operating expenses
for 1997 increased approximately $15 million compared to 1996. These increases
were attributed to increases in service operating expenses, general and
administrative expenses and depreciation expense. Selling expenses decreased
due to the decline in product sales, but remained flat as a percentage of net
revenue when compared to 1996. Service expenses increased both as a percentage
of net revenue and in absolute dollars as a result of the growth in the
Company's service business. Service revenue represented 12% of total revenue in
1997 as compared to 8% in 1996. However, the Company's efforts to control
expenses resulted in a decrease in service expense as a percentage of service
revenue to 21.0% in 1997 as compared to 23.5% in 1996. General and
administrative expenses increased both in dollars and as a percentage of net
revenues. These increases were mainly due to the continued investment in the
Company's information system resources required to broaden the Company's
electronic commerce capabilities and improve efficiency within the Company's
customer center.
Depreciation and amortization expense increased in absolute dollars and
as a percentage of net revenue for 1997 compared to 1996. These increases
primarily reflected depreciation of enhancements to the Company's information
systems, facility improvements associated with the Company's new headquarters
and operations campus and furniture and fixtures required to support business
activity.
Financing expenses remained relatively flat in dollars when 1997 is
compared to 1996, but increased slightly as a percentage of revenue due to the
decrease in revenues. The Company's borrowing levels were slightly higher in
1997 as compared to 1996; however, these higher levels were offset by a lower
effective interest rate for 1997 due to changes the Company made in its
financing arrangements. The Company's effective interest rate for 1997 was 6.7%
as compared to 7.1% for 1996.
During the third quarter of 1997, the Company recognized a previously
deferred nonrecurring after-tax gain of $1.0 million. Recognition of the gain
was due to the prepayment of a secured note related to the 1994 sale of the
Company's former subsidiary, PC Parts Express, Inc. (now known as PC Service
Source, Inc.).
During the fourth quarter of 1997, the Company recognized a nonrecurring
after-tax gain of $2.4 million on the sale of the Company's former headquarters.
During the second quarter of 1996, the Company participated in the
secondary stock offering of PC Service Source, Inc. resulting in an after-tax,
nonrecurring gain on the sale of securities of $5.2 million.
As a result of the factors discussed above, net earnings, excluding the
nonrecurring gains in 1997 and 1996, increased 26% to $31.8 million in 1997
from $25.2 million in 1996. The earnings per share impact of the 1997
nonrecurring gains was $.07 on a diluted basis, while in 1996, the earnings per
share impact of the nonrecurring gain was $.10 on a diluted basis.
Liquidity and Capital Resources
Working capital at December 31, 1998 was $164 million compared to $235
million at December 31, 1997. This net decrease was primarily the result of an
increase in accounts payable and a decrease in inventory, partially offset by an
increase in accounts receivable. The Company's accounts payable balance
fluctuates relative to the timing of product receipts and the mix of vendors.
The decrease in inventory is primarily due to the Company's effort to reduce its
risk associated with changes in its suppliers' price protection and return
programs through increasing its inventory turns. The Company increased its
inventory turns from 8.5 in 1997 to 11.5 in 1998. The increase in accounts
receivable is mainly attributable to the acquisitions completed in 1998 which
resulted in higher revenues in the fourth quarter 1998 versus the fourth quarter
1997.
The Company's liquidity has been negatively impacted by the increase in
the dollar volume of vendor rebate programs. Under these programs, the Company
is required to pay a higher initial price for product and claim a rebate to
reduce the price. The collection of these rebates can take several months. Due
to the increased volume of product sold under these programs, the Company's
initial price for the product is often higher than the sales price the Company
can obtain from its customers. As of December 31, 1998, these programs are a
material factor in the Company's financing needs.
12
<PAGE>
The Company's capital asset requirements are generally funded through
financing arrangements and internally generated funds. During 1998, the Company
increased the size of its credit facilities in order to finance the acquisitions
completed during 1998. As of December 31, 1998, the Company's financing
arrangements consist of a $175 million Securitization Facility, a $165 million
working capital facility and a $25 million real estate loan (collectively, the
"Credit Agreements"). The term of the working capital facility is five years.
As of December 31, 1998, the Securitization Facility was fully utilized and the
Company had approximately $106 million of availability under the working capital
facility. The $25 million real estate loan is payable as follows: the first
quarterly payment of $500,000 is due on April 1, 1999, quarterly payments
increase to $1,000,000 on January 1, 2000, and then increase to $2,000,000 on
January 1, 2001, with a final payment of $3,500,000 due on November 2, 2002. The
Company expects to complete a sale/leaseback on its headquarters building during
the first half of 1999. The proceeds from the sale/leaseback would be used to
payoff the real estate loan and pay down a portion of the working capital
facility.
The Securitization Facility terminates on April 15, 1999. The Company is
currently negotiating a replacement securitization facility and expects to have
this agreement executed prior to April 15, 1999. For the month of February 1999,
the Company was out of compliance with one covenant ratio of its existing
Securitization Facility. The Company does not expect this violation to
negatively impact negotiations relative to the replacement securitization
facility or to negatively impact its liquidity. On December 31, 1998, the
Company was not in compliance with certain financial covenants under the Credit
Agreements. However, the Company has received an amendment related to such
covenants from its lenders for periods up to and including April 15, 1999. The
Company is also currently negotiating a replacement working capital facility and
expects to have this agreement executed prior to April 15, 1999. Although the
new facility is expected to contain provisions that could result in lower
interest rates as the Company's financial performance improves, the initial
interest rates are expected to be higher than the Company's current effective
interest rate. If the Company is not successful in implementing the replacement
credit agreements, management believes there are a number of viable alternatives
to ensure continued financing.
The Company's 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. Capital expenditures were
approximately $14 million in 1998 as compared to $22 million in 1997. The
majority of the 1998 expenditures were related to the upgrading of Company
hardware and software at both headquarters and branch locations. The majority of
the 1997 expenditures were related to facility improvements required to prepare
the Company's new headquarters and operations campus for occupancy, as well as
information systems enhancements. The Company does not expect its capital
expenditure requirements in 1999 to be materially different from its 1998
expenditures.
Year 2000 Readiness Disclosure
The Year 2000 issue results from the fact many computer programs were
previously written using two digits rather than four to define the applicable
year. Programs written in this way may recognize a date ending in "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing business delays and disruptions of operations. The
Company has developed a step-by-step plan which details the tasks, deliverables,
resources, and target dates necessary to monitor the Company's information
systems at the turn of the century and beyond. Assessment of the Company's
systems has been divided into five areas Core information systems and
components ("Core IS"), Distributed Desktop systems, Non-IS systems, new IS
purchases by the Company, and mergers and acquisitions.
The Company's Core IS include purchasing, order management, warehouse
management, distribution, service dispatch, service parts, engineer billing,
human resources and financial information systems. Distributed Desktop systems
include all desktop computers and related components used by the Company's
associates, wherever they are located. Initial assessment of these systems has
included the identification of each hardware, software, tool, and package
comprising these systems to determine whether or not they support Year 2000 date
codes. Testing, remediation, and validation of the Company's Core IS and
distributed desktop systems is planned to be completed by June 1999.
Remediation includes the enhancement, upgrading, migration, or replacement of
non-compliant hardware, software, tools and/or systems. Validation entails
testing of all systems including a "quality control" environment in which the
date is artificially set forward to the Year 2000 to simulate the turn of the
century and beyond. The Company has also purchased a Year 2000 compliance
software package that will generate audit reports on a regular basis to report
back any noncompliant Distributed Desktop systems. The Company began using this
software package in January 1999 and will produce and review the reports on a
regular basis through 2000.
Non-IS systems include all microcontroller systems and back-up processes of Core
IS. Microcontroller systems comprise all electronic systems such as telephones,
security systems, alarms, etc. Initial assessment and remediation of the
13
<PAGE>
Company's Non-IS systems is currently expected to be completed during the first
quarter of 1999. The Company reviews each of its new potential hardware and
software purchases to ensure they are Year 2000 compliant. The Company
completed three acquisitions during 1998; however, these acquisitions have been
integrated into the Company and the major processes of the acquired systems have
been replaced with the Company's Core IS.
As part of its Year 2000 assessment, the Company must also consider the
compliance of third parties with which the Company has a material relationship,
namely its vendors, suppliers, and customers. The Company relies on vendors and
suppliers for hardware, software, and tools used within its own business
environment. The Company has developed a Year 2000 questionnaire which has been
sent to its vendors and suppliers in order to ascertain whether vendors and
suppliers warrant their hardware, software, and tools to be Year 2000 compliant
and whether vendors and suppliers have adequately addressed the Year 2000 issue.
The Company has documented compliance via the questionnaire for approximately
85% of hardware, software, and tools currently in use. For the remaining 15% of
questionnaires, if documented compliance is not received, the Company's plan is
to upgrade or replace for compliance, or decommission if necessary during the
second quarter of 1999.
The Company is required to disclose a reasonable description of its most
reasonably likely worst case Year 2000 scenario. Although noncompliance could
result in a system failure, business delays, and/or disruptions in operations,
the Company is in the process of developing a contingency plan in case a Year
2000 problem occurs. As a reseller of computer products, the Company only passes
through to its customers the applicable vendor's warranties; it makes no
warranties regarding Year 2000 compliance on any of the products it resells.
However, if one of the Company's major vendors or suppliers is found to be Year
2000 noncompliant which is not corrected on a timely basis, it could have a
material adverse effect on the Company's results of operations. Due to that
fact, the Company is still in the process of obtaining assurances from its
vendors and suppliers regarding their readiness for Year 2000.
The Company's plan also includes the availability of a test team that will test
the Company's information systems on an on-going basis to further validate that
additions or modifications to any of the Company's systems do not create Year
2000 compliance issues. The Company's expectations with respect to the Year 2000
issues noted above are based on the premise there will be no material general
failure of external systems (including power, communications, transportation or
financial systems) necessary for the ordinary conduct of business. At the
present time, the company is developing a contingency plan to operate in the
event its computer systems or those of its vendors, suppliers, or customers are
not Year 2000 compliant. The Company expects to have this contingency plan
completed by June 1999.
The Company currently anticipates it will spend approximately $1,400,000 on Year
2000 compliance, of which approximately $800,000 has been spent through December
31, 1998. The majority of the remaining expense is expected to be for
previously identified desktop equipment and full-time associates dedicated to
the Year 2000 compliance effort. All previous as well as future expenditures on
Year 2000 compliance have or will come from operating cash flow.
Item 7a Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to interest rate risk primarily through its
Securitization Facility, working capital facility and real estate loan. The
Company utilizes the Securitization Facility and working capital facility
borrowings to meet its working capital needs. The term loan was used to finance
the purchase of the Company's headquarters and operations campus. Under the
Securitization Facility, the Company had borrowings of approximately $173.0
million outstanding at December 31, 1998 which have a variable interest rate of
4.95% plus an agreed upon spread. Under the working capital facility, the
Company had $56.1 million outstanding at December 31, 1998 with an effective
interest rate of 7.5%. Under the real estate loan, the Company had borrowings of
approximately $25.0 million with an effective interest rate of 7.5%. If the
Company's effective interest rate were to increase from 7.5% to 8.25% (a 10%
increase), the effect on the Company's financial statements would be immaterial.
Currently, the Company does not enter into financial instruments for trading or
other speculative purposes or to manage interest rate exposure.
Item 8 Financial Statements and Supplementary Data
The consolidated financial statements and schedule filed with this
report appear on pages F-2 through F-22, and are listed on page F-1.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
14
<PAGE>
None.
PART III
Item 10 Directors and Executive Officers of the Registrant
The executive officers of the Company as of March 29, 1999 are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Edward Anderson /(1)/ 52 President and Chief Executive Officer
Thomas C. Lynch /(2)/ 56 Executive Vice President and Chief Operating Officer
M. Lazane Smith /(3)/ 44 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.
/(2)/ Mr. Lynch joined the Company as Executive Vice President and Chief
Operating Officer in October 1998. Prior to joining the Company, he
served as Senior Vice President of Safeguard Scientifics, Inc. from
1996 until 1998. Prior to his association with Safeguard, he was a Rear
Admiral in the United States Navy, serving on active duty for 31 years.
/(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.
Directors
The Company incorporates by reference the information contained under
the caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement relative
to its May 13, 1999 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 13, 1999 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 "EXECUTIVE COMPENSATION AND OTHER ARRANGEMENTS" in its definitive
Proxy Statement relative to its May 13, 1999 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
15
<PAGE>
The Company incorporates by reference the information contained under
the caption "STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND GREATER THAN
5% STOCKHOLDERS" in its definitive Proxy Statement relative to its May 13, 1999
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 "RELATIONSHIPS AND RELATED TRANSACTIONS WITH MANAGEMENT AND OTHERS"
in its definitive Proxy Statement relative to its May 13, 1999 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.
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.
No reports on Form 8-K have been filed by the Registrant during the
twelve months ended December 31, 1998.
(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.
16
<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 (14)
(Exhibit A)
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)** Stock Option Grant Agreement between CompuCom Systems, Inc. and
Thomas C. Lynch, dated as of October 22, 1998 (19) (Exhibit
10.1)
4(h)** CompuCom Systems, Inc. Employee Stock Purchase Plan (16)
(Appendix A)
4(i) Certificate of Designation dated March 31, 1994, establishing
Series B Cumulative Convertible Preferred Stock of CompuCom
Systems, Inc. (8) (Exhibit 4(i))
4(j) Form of Stock Certificate evidencing Series B Cumulative
Convertible Preferred Stock, $.01 par value, of CompuCom
Systems, Inc. (9) (Exhibit 4(h))
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 (11) (Exhibit 10.9)
10(c)** Amendment No. 1 to CompuCom Systems, Inc. 401(k) Matched Savings
Plan, effective January 1, 1998 (exhibits omitted) (17) (Exhibit
10.1)
10(d)** Amendment No. 2 to CompuCom Systems, Inc. 401(k) Matched Savings
Plan, effective January 26, 1998 (exhibits omitted) (17)
(Exhibit 10.2)
10(e) Amended and Restated Agreement for Inventory Financing, dated
September 20, 1996, between CompuCom Systems, Inc. and IBM
Credit Corporation (13) (Exhibit 10(d))
10(f) IBM Credit Corporation agreement with CompuCom Systems, Inc. to
extend the terms of the Agreement for Inventory Financing to
March 21, 1999 *
10(g) Security Agreement for Wholesale Financing, dated December 27,
1993, between CompuCom
17
<PAGE>
Systems, Inc. and Compaq Computer Corporation (7) (Exhibit
10(e))
10(h) Intercreditor Agreement, dated December 27, 1993, among
NationsBank of Texas, N.A., CompuCom Systems, Inc. and Compaq
Computer Corporation (7) (Exhibit 10(f))
10(i) 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(j) Intercreditor Agreement, dated as of April 1, 1996, among
NationsBank of Texas, N.A., CompuCom Systems, Inc. and IBM
Credit Corporation (11) (Exhibit 10.4)
10(k) Amended and Restated Credit Agreement, dated as of November 3,
1997, among CompuCom Systems, Inc., certain lenders party
hereto, and NationsBank of Texas, N.A., as administrative lender
(exhibits and schedules omitted) (15) (Exhibit 16(t))
10(l) Amendment #1 to Amended and Restated Credit Agreement, dated as
of June 26, 1998, among CompuCom Systems, Inc., certain lenders
party hereto, and NationsBank of Texas, N.A., as Administrative
Lender (exhibits omitted) (18) (Exhibit 10.1)
10(m) Amended and Restated Receivables Purchase Agreement, dated as of
November 3, 1997, between CompuCom Systems, Inc. and CSI
Funding, Inc. (exhibits omitted) (15) (Exhibit 10(u))
10(n) Amended and Restated Transfer and Administration Agreement,
dated as of November 3, 1997, among CSI Funding, Inc., CompuCom
Systems, Inc., Enterprise Funding Corporation and NationsBank,
N.A. (exhibits omitted) (15) (Exhibit 10(v))
10(o) 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(p) 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 (13) (Exhibit 10(r))
10(q) Agreement for Participation in the IBM Business Partner PC,
Authorized Assembler Program, dated January 16, 1997 between IBM
Corporation and CompuCom Systems, Inc. (15) (Exhibit 10(y))
10(r) Agreement to Extend Participation in the IBM Business Partner
PC, Authorized Assembler Program, dated November 18, 1997
between IBM Corporation and CompuCom Systems, Inc. to December
31, 1998 (15) (Exhibit 10(z))
10(s) U.S. Reseller Agreement, dated January 23, 1993, between Compaq
Computer Corporation and CompuCom Systems, Inc. (7) (Exhibit
10(l))
10(t) Software License Agreement, dated January 15, 1998, between
Compaq Computer Corporation and CompuCom Systems, Inc. (15)
(Exhibit 10(bb))
10(u) Channel Installation Agreement for Microsoft Products, dated
January 15, 1998, between Compaq Computer Corporation and
CompuCom Systems, Inc. (15) (Exhibit 10(cc))
10(v) U.S. Reseller Agreement, dated March 1, 1996, between Hewlett-
Packard Company and CompuCom Systems, Inc. (11) (Exhibit 10.8)
10(w) U.S. Agreement for Authorized Reseller Participation in Channel
Assembly Program, dated March 1, 1997, between Hewlett-Packard
Company and CompuCom Systems, Inc. (15) (Exhibit 10(ee))
10(x) 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(y) 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)
18
<PAGE>
(12) (Exhibit 10.8)
10(z) 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(aa) 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) (12) (Exhibit 10.7)
10(bb) Contract of Sale between CompuCom Systems, Inc., as seller, and
MacFarlan Realty Partners, L.L.C., as purchaser, for property
located at 10100 North Central Expressway, Dallas, Texas, dated
effective October 23, 1997 (15) (Exhibit 10(jj))
10(cc) First Amendment to Contract of Sale between CompuCom Systems,
Inc., as seller, and MacFarlan Realty Partners, L.L.C., as
purchaser, for property located at 10100 North Central
Expressway, Dallas, Texas, dated effective December 9, 1997 (15)
(Exhibit 10(kk))
10(dd) $7,840,000 Secured Promissory Note, dated December 30, 1997,
from MacFarlan Realty Partners, L.L.C., to CompuCom Systems,
Inc. (15) (Exhibit 10(ll))
10(ee) Note Modification Agreement and Settlement Agreement, dated as
of November 30, 1998, between MacFarlan Realty Partners L.L.C.
and CompuCom Systems, Inc. *
10(ff)** $1,181,250 Amended and Restated Secured Term Note, dated
February 12, 1997, from Edward R. Anderson to CompuCom Systems,
Inc. (13) (Exhibit 10(ff))
10(gg)** First Amendment, dated February 19, 1999, to Amended and
Restated Secured Term Note from Edward R. Anderson to CompuCom
Systems, Inc. *
10(hh)** Pledge Agreement, dated August 31, 1994, between Edward R.
Anderson and CompuCom Systems, Inc. (9) (Exhibit 10(nn))
10(ii)** $661,251 Secured Term Note, dated June 16, 1997, from Daniel F.
Brown to CompuCom Systems, Inc. (15) (Exhibit 10(pp))
10(jj)** Pledge Agreement, dated June 16, 1997, from Daniel F. Brown and
CompuCom Systems, Inc. (15) (Exhibit 10(qq))
10(kk)** $796,875 Secured Term Note, dated December 23, 1998, from Thomas
C. Lynch to CompuCom Systems, Inc. *
10(ll) Pledge Agreement, dated December 23, 1998, between Thomas C.
Lynch and CompuCom Systems, Inc. *
10(mm) $2,021,875 Secured Term Note, dated October 22, 1998, from
Edward R. Anderson to CompuCom Systems, Inc. *
10(nn) Pledge Agreement, dated October 22, 1998, between Edward R.
Anderson and CompuCom Systems, Inc. *
10(oo)** Executive Employment Agreement, dated October 24, 1997, between
Edward R. Anderson and CompuCom Systems, Inc. (15) Exhibit
10(rr))
10(pp)** Employment Agreement Amendment, dated February 19, 1999, between
Edward R. Anderson and CompuCom Systems, Inc. *
10(qq)** Executive Employment Agreement, dated October 24, 1997, between
M. Lazane Smith and CompuCom Systems, Inc. (15) (Exhibit 10(ss))
10(rr)** Employment Separation Letter Agreement, dated January 18, 1999,
between William Barry and CompuCom Systems, Inc., with attached
General Release and Agreement, and Employee
19
<PAGE>
Non-Disclosure, Non-Solicitation and Non-Competition Agreement *
21 List of Subsidiaries *
23 Consent of KPMG LLP *
27.1 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 May 13, 1996 as an exhibit to the Quarterly Report on
Form 10-Q (No. 0-14371) and incorporated herein by reference.
(12) Filed on November 12, 1996 as an exhibit to the Quarterly Report
on Form 10-Q (No. 0-14371) and incorporated herein by reference.
(13) Filed on March 31, 1997 as an exhibit to the Annual Report on
Form 10-K (No. 0-14371) and incorporated herein by reference.
(14) Filed on April 9, 1997 as an exhibit to the 1997 Annual Meeting
Proxy Statement and incorporated herein by reference.
(15) Filed on March 31, 1998 as an exhibit to the Annual Report on
Form 10-K (No. 0-14371) and incorporated herein by reference.
(16) Filed on April 7, 1998 as an exhibit to the 1998 Annual Meeting
Proxy Statement and incorporated herein by reference.
(17) Filed on May 14, 1998 as an exhibit to the Quarterly Report on
Form 10-Q (No. 0-14371) and incorporated herein by reference.
(18) Filed on August 14, 1998 as an exhibit to the Quarterly Report
on Form 10-Q (No. 0-14371) and incorporated herein by reference.
(19) Filed on November 16, 1998 as an exhibit to the Quarterly Report
on Form 10-Q (No. 0-14371) and incorporated herein by reference.
20
<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-22
<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, 1998 and 1997, 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, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. The consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the 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 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 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,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Dallas, Texas
February 10, 1999
F-2
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Assets 1998 1997
------ ---------- ----------
<S> <C> <C>
Current assets:
Cash $ 4,526 $ 4,456
Receivables, less allowance for doubtful accounts
of $3,507 in 1998 and $2,672 in 1997 262,380 177,141
Inventories 138,551 197,958
Deferred tax asset 6,718
Other 3,247 2,880
---------- ----------
Total current assets 415,422 382,435
Property and equipment:
Land, building and improvements 39,422 38,441
Furniture, fixtures and other equipment 57,703 41,338
Leasehold improvements 9,893 7,099
---------- ----------
107,018 86,878
Less accumulated depreciation and amortization (35,014) (23,519)
---------- ----------
Net property and equipment 72,004 63,359
Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 54,786 13,569
Other 3,277 3,227
---------- ----------
$545,489 $462,590
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $160,524 $ 72,475
Accrued liabilities 89,218 71,791
Current portion of long-term debt 1,500 3,000
---------- ----------
Total current liabilities 251,242 147,266
Long-term debt 81,929 97,400
Deferred income taxes 1,378 7,198
Other 659 526
Stockholders' equity:
Series B preferred stock, $10 stated value. Authorized 3,000,000
Shares; issued and outstanding 1,500,000 shares. 15,000 15,000
Common stock, $.01 par value. Authorized 70,000,000 shares;
Issued and outstanding 47,441,820 shares in 1998
And 46,111,820 shares in 1997 474 461
Additional paid-in capital 70,380 66,094
Retained earnings 128,478 128,977
Notes receivable for sale of stock (4,051) (332)
---------- ----------
Total stockholders' equity 210,281 210,200
---------- ----------
$545,489 $462,590
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
(In thousands, except per share amounts)
1998 1997 1996
----------- ----------- -----------
Revenue:
Product $ 1,980,578 $ 1,699,268 $ 1,816,504
Service 257,930 236,221 169,600
Other 15,957 14,313 9,087
----------- ----------- -----------
Total revenue 2,254,465 1,949,802 1,995,191
----------- ----------- -----------
Cost of revenue:
Product 1,786,851 1,523,034 1,635,653
Service 175,451 151,894 113,046
Other 8,203 7,329 5,529
----------- ----------- -----------
Total cost of revenue 1,970,505 1,682,257 1,754,228
----------- ----------- -----------
Gross margin 283,960 267,545 240,963
Operating expenses:
Selling 109,322 79,188 80,105
Service 54,940 49,563 39,876
General and administrative 67,928 59,539 55,580
Depreciation and amortization 15,923 11,274 8,760
Restructuring charges 16,437
----------- ----------- -----------
Total operating expenses 264,550 199,564 184,321
----------- ----------- -----------
Earnings from operations 19,410 67,981 56,642
Financing expenses (18,742) (14,947) (14,764)
Nonrecurring gains 5,624 8,738
----------- ----------- -----------
Earnings before income taxes 668 58,658 50,616
Income taxes 267 23,464 20,145
----------- ----------- -----------
Net earnings $ 401 $ 35,194 $ 30,471
=========== =========== ===========
Earnings/(loss) per common share:
Basic ($.01) $ .75 $ .66
Diluted ($.01) $ .71 $ .61
Average common shares outstanding:
Basic 46,346 45,686 44,616
Diluted 46,346 50,034 49,887
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
(In thousands, except share amounts)
<TABLE>
Preferred Stock Common Stock Additional Notes Total
-------------------- ------------------ Paid-in Retained Receivable for Stockholder
Shares Amount Shares Amount Capital Earnings Sale of Stock Equity
---------- -------- ---------- ------ ---------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of options 1,184,249 12 5,128 5,140
Loans to officers for sale of stock (332) (332)
Preferred stock dividend (900) (900)
Net earnings 35,194 35,194
---------- -------- ---------- ------ ---------- -------- -------------- ----------
Balances at December 31, 1997 1,500,000 15,000 46,111,820 461 66,094 128,977 (332) 210,200
Exercise of options 1,330,000 13 4,286 4,299
Loans to officers for sale of stock (3,719) (3,719)
Preferred stock dividend (900) (900)
Net earnings 401 401
---------- -------- ---------- ------ ---------- -------- -------------- ----------
Balances at December 31, 1998 1,500,000 $15,000 47,441,820 $474 $70,380 $128,478 ($ 4,051) $210,281
========== ======== ========== ====== ========== ======== ============== ==========
</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, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 401 $ 35,194 $ 30,471
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 15,923 11,274 8,760
Deferred income taxes (3,711) 1,527 1,719
Restructuring charges 16,437
Nonrecurring gains (5,624) (8,738)
Changes in assets and liabilities:
Receivables (13,050) 207,397 (111,936)
Inventories 68,745 35,506 (36,933)
Other current assets 856 628 (1,357)
Accounts payable 23,950 (144,949) 28,244
Accrued liabilities and other (10,168) 12,970 8,715
-------------- ------------- -------------
Net cash provided by (used in) operating activities 99,383 153,923 (81,055)
-------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures, net (14,330) (22,418) (42,135)
Business acquisitions, net of cash acquired (49,679) (6,479)
Proceeds from sale of building 1,960
Proceeds from sale of securities 2,724 11,368
-------------- ------------- -------------
Net cash (used in) investing activities (64,009) (17,734) (37,246)
-------------- ------------- -------------
Cash flows from financing activities:
Net bank credit facility and other borrowings (32,884) (139,961) 116,086
Issuance of common stock 1,480 4,808 3,186
Repayment of convertible debt (3,000)
Preferred stock dividend (900) (900) (900)
-------------- ------------- -------------
Net cash provided by (used in) financing activities (35,304) (136,053) 118,372
-------------- ------------- -------------
Net increase in cash 70 136 71
Cash at beginning of year 4,456 4,320 4,249
-------------- ------------- -------------
Cash at end of year $ 4,526 $ 4,456 $ 4,320
============== ============= =============
Supplemental disclosure of cash flow information
Income taxes paid $ 7,074 $ 16,078 $ 19,397
Interest paid 20,034 14,904 15,268
</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 network integration services and computer products
for both large and medium-sized corporate customers, as well as state
and local governmental agencies. The Company's services include field
engineering, LAN/WAN projects, consulting, configuration, help desk,
asset tracking, and network management.
Principles of Consolidation
The consolidated financial statements include the accounts of
CompuCom Systems, Inc. and its subsidiaries. All significant
intercompany balances and transactions have been eliminated. Minority
interest expense for consolidated subsidiaries is reflected in
operating expense in the Consolidated Statements of Operations.
Minority interest liability is reflected in other long-term
liabilities in the Consolidated Balance Sheets.
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
nonsalable 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 30 years; furniture and
equipment, 5 years) and is computed using 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 5 to 20 year period. Accumulated
amortization at December 31, 1998 and 1997 was $17,140,000 and
$12,715,000, respectively.
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.
(continued)
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 reimbursement for certain training, promotional
and marketing activities that offset the expenses incurred by the
Company.
Financing Expenses
Financing expenses consist of interest incurred on borrowings
under the Company's financing arrangements and discounts on the sale
of receivables.
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
Basic 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. Diluted
earnings per common share assumes 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
expense and/or dividends, as required. Diluted earnings per common
share also assumes the exercise of all options with an exercise price
below the average market price of the Company's stock for the year, at
the later of the beginning of the year or date of issuance, regardless
of whether the options are vested or not.
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.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
of
The Company has adopted the provisions of Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." 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 exceeds 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.
(continued)
F-8
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Comprehensive Income
The Financial Accounting Standards Board issued Statement No.
130, "Reporting of Comprehensive Income", in June of 1997. This
Statement established standards for reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. The Company adopted the provisions of
Statement 130 during 1998. For all periods presented, the Company's
comprehensive income is equal to the net earnings shown on the
Consolidated Statements of Operations.
Recent Accounting Pronouncements
The American Institute of Certified Public Accountants has issued
Statements of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" and No. 98-
5, "Reporting on the Costs of Start-Up Activities." The new
accounting rules, which have been adopted, did not have a material
impact on the Company's results of operations.
Stock-Based Compensation
The Company accounts 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 related interpretations. In accordance with
Statement No. 123, "Accounting for Stock-Based Compensation," the
Company 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 1997 consolidated financial statements
have been reclassified to conform to the 1998 presentation.
(2) Inventories
Inventory is comprised of product inventory and service parts. At
December 31, 1998 and 1997, total inventory was $138.6 million and $198.0
million, respectively, net of inventory reserves of $7.8 million and $9.9
million as of the same dates. Gross product inventory was $136.1 million
and $195.5 million at December 31, 1998 and 1997, respectively, and gross
service parts inventory as of the same dates was $10.3 million and $12.4
million.
(3) Nonrecurring gain on sale of building
During the fourth quarter of 1997, the Company sold its former
headquarters building, recognizing a nonrecurring after-tax gain of
approximately $2.4 million. As part of the sale, the Company accepted cash
of $2.0 million and a note receivable in the amount of $7.8 million.
Interest accrues on the note at an annual rate of 6.8%. The note is secured
by the Company's former headquarters building and was due and payable in
full on October 31, 1998, with accrued interest. In November of 1998, the
original note was modified such that accrued interest was paid through
November 30, 1998, and the maturity of the note was extended to March 30,
1999, to be payable in full with accrued interest from December 1998
through March 1999. The note receivable is included in receivables on the
Consolidated Balance Sheets.
(4) Restructuring Charge
On October 22, 1998 the Company's Board of Directors approved a
restructuring plan designed to reduce the Company's cost structure by
closing certain facilities and reducing the Company's workforce. As a
result, the Company recorded a restructuring charge in the fourth
quarter of 1998 in the amount of $16.4 million, primarily consisting of
costs associated with the closing of facilities and disposing of related
fixed assets as well as employee severance and benefits related to the
reduction in workforce. The entire $16.4 million charge is reflected as a
separate line of operating expense in the Company's Consolidated Statement
of Operations. Of the total amount expensed in the fourth quarter of 1998,
approximately $2.4 million was paid through December 31, 1998. The
following table provides a detail of the charges by category as well as the
amounts accrued as of December 31, 1998.
(continued)
F-9
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands)
Expense in Accrual at
1998 12/31/98
----------- ----------
Lease termination costs $ 7,259 $ 6,415
Employee severance and related benefits 3,804 2,986
Disposal of assets, net of estimated proceeds 3,044 2,907
Other 2,330 1,780
----------- ----------
Total $ 16,437 $ 14,088
=========== ==========
The $14.1 million accrued at December 31, 1998 is reflected in accrued
liabilities on the Company's Consolidated Balance Sheet.
Severance is paid based on associates' years of service as well as
their level within the organization. The reduction in workforce included
457 associates, of which 2 were executive officers. The reduction in
workforce included associates from the following areas: sales, service, and
general and administrative.
The amount accrued at December 31, 1998 for lease termination costs is
the estimated cost for 65 facilities throughout the country to either
fulfill the Company's obligation under a signed lease contract, the net
expense expected to be incurred to sublet certain facilities, or the
estimated amount to be paid to terminate the lease contract before the end
of its term. The Company has consulted with a professional real estate firm
with knowledge of market rent rates in all applicable markets where the
Company has space. Assumptions have been used for market rent rates and the
estimated amount of time to sublet certain facilities. Payments, net of
proceeds derived from subleases, are being charged against the accrual as
incurred.
The amount accrued at December 31, 1998 for disposal of fixed assets
includes an estimate of proceeds to be received from the sale of those
assets. The assets primarily consist of furniture, fixtures, and computer
equipment. The Company is in the process of transferring the majority of
those assets to its headquarters in Dallas for ultimate disposition.
Other restructuring charges primarily include amounts such as the
write-off of leasehold improvements, estimated legal expense, estimated
costs to ship fixed assets to the Company's headquarters in Dallas, and
estimated commissions to be paid to the real estate firm for subleasing
activity.
As the majority of the Company's restructuring charges in 1998 are
estimates and have not yet been paid, the actual amounts paid could differ
from those estimates. Any differences between the estimated amounts and
actual amounts paid will be reflected in operating expenses in future
periods.
(5) Segment Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which the Company has adopted in the current year. Statement
No. 131 requires the reporting of information about operating segments
determined by using the "management approach," as opposed to the "industry
approach" as was previously required.
(continued)
F-10
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company defines its operations as three distinct businesses sales
of computer products ("product"); services, which includes configuration,
network integration, and technology support and ClientLink. ClientLink, a
majority owned subsidiary of the Company, designs, develops, and implements
customized information technology solutions for organizations with mission-
critical business processing needs.
The Company measures segment earnings as operating earnings, defined
as income before restructuring charges, interest expense, and income taxes.
All significant intersegment activity has been eliminated. Business assets
are the owned or allocated assets used by each business. The majority of
revenue in the "Other" column is royalties the Company receives from
previously sold businesses and other miscellaneous revenue. The "Other"
column also includes all assets not specifically allocated to a segment.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
Operating Results Product Service ClientLink, Inc. Other Total
- ----------------- ------- ------- --------------- ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues $1,980,478 $257,930 $15,182 $ 875 $2,254,465
Gross margin 193,727 82,479 6,906 848 283,960
Operating earnings 17,852 14,097 3,049 848 35,846
Total assets $ 339,778 $ 45,209 $ 3,007 $157,495 $ 545,489
For the Year Ended December 31, 1997
Operating Results Product Service ClientLink, Inc. Other Total
- ----------------- ------- ------- --------------- ----- -----
(in thousands)
Net revenues $1,699,268 $236,221 $13,492 $ 821 $1,949,802
Gross margin 176,234 84,327 6,361 623 267,545
Operating earnings 39,121 25,669 2,568 623 67,981
Total assets $ 323,970 $ 38,215 $ 6,449 $93,956 $ 462,590
For the Year Ended December 31, 1996
Operating Results Product Service ClientLink, Inc. Other Total
- ----------------- ------- ------- --------------- ----- -----
(in thousands)
Net revenues $1,816,504 $169,600 $8,528 $ 559 $1,995,191
Gross margin 180,851 56,554 2,999 559 240,963
Operating earnings 56,483 (1,797) 1,397 559 56,642
Total assets $ 542,970 $ 69,928 $2,758 $77,329 $ 692,985
</TABLE>
(continued)
F-11
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Financing Arrangements
The Company has financing arrangements which total $365 million,
consisting of a $175 million receivable securitization ("Securitization"),
a $165 million working capital facility ("Revolver"), and a $25 million
real estate loan ("Term Loan").
Under the Securitization, the Company has an agreement with a
financial institution that allows the Company to sell, at a discount, an
interest in a portion of its trade accounts receivable ("receivables") to a
commercial paper conduit sponsored by that financial institution. As
collections reduce receivables balances sold to the conduit, the Company
may sell interests in new receivables to bring the amount available up to
the maximum allowed. In accordance with SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," the Company has recorded this transaction as a sale of
accounts receivable. This sale is reflected as a reduction of accounts
receivable on the Consolidated Balance Sheets and is included in the net
cash provided by operating activities in the Consolidated Statement of Cash
Flows for 1997 when the original sale took place. The proceeds from the
sale of receivables were used to pay down long-term debt. The Company is
retained as servicer of the receivables; however, the cost of servicing is
not material. Discounts associated with the sale of receivables are based
on a designated commercial paper rate plus an agreed upon spread and
totaled $10.8 million and $4.7 million for 1998 and 1997, respectively.
Amounts outstanding as sold receivables were $173.6 million and $173.0
million at December 31, 1998 and December 31, 1997, respectively. The
designated commercial paper rate at December 31, 1998 was 4.95%. The
Securitization Facility expires April 15, 1999. The Company is currently
negotiating a replacement securitization facility and expects to execute
this agreement prior to April 15, 1999. For the month of February 1999, the
Company was out of compliance with one covenant ratio of its existing
Securitization Facility. The Company does not expect this violation to
negatively impact negotiations relative to the replacement securitization
facility or to negatively impact its liquidity.
The Revolver bears interest at a rate of LIBOR plus a spread which is
subject to adjustment based on certain performance criteria, and is secured
by certain assets of the Company, as defined. As of December 31, 1998, the
interest rate on the Revolver was LIBOR plus 137.5 basis points. The
Revolver is fully available subject to compliance with certain covenants
related to, among others, debt to capital, tangible net worth, asset and
fixed charge coverage ratios. On December 31, 1998, the Company was not in
compliance with certain financial covenants under the working capital
facility. However, the Company has received an amendment related to such
covenants from its lenders for periods up to and including April 15, 1999.
The Company is currently negotiating and expects to enter into a
replacement working capital facility prior to April 15, 1999. Terms of the
Revolver limit the amounts available for capital expenditures and
dividends. The amount outstanding under the Revolver at December 31, 1998
was $56.1 million. As of December 31, 1998, the effective interest rate on
the Revolver was 7.5%. The Revolver matures on November 2, 2002.
The Term Loan was used to finance the purchase of the Company's new
headquarters and operations campus. The amount outstanding under the Term
Loan at December 31, 1998 was $25.0 million. The Term Loan bears interest
at the same rate as the Revolver, and matures on November 2, 2002.
Principal maturities of the Term Loan at December 31, are as follows: 1999
- $1,500,000; 2000 - $4,000,000; 2001 - $8,000,000; 2002 - $11,500,000.
The Company's weighted-average interest rate on borrowings was
approximately 6.6%, 6.7% and 7.1%, in 1998, 1997 and 1996, respectively.
The Company capitalized interest costs of $1.0 million and $0.5
million in 1997 and 1996, respectively, as part of the refurbishment of its
corporate headquarters and operations campus. Construction was
substantially completed in 1997.
(continued)
F-12
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Accrued Liabilities
-------------------
Accrued liabilities consist of the following as of December 31:
<TABLE>
<CAPTION>
(Amounts in thousands)
1998 1997
-------- --------
<S> <C> <C>
Accrued payroll and payroll taxes $21,754 $22,848
Accrued cost of software and licenses 18,903 16,805
Accrued restructuring charges 14,088
Accrued sales tax payable 7,812 8,448
Other 26,661 23,690
-------- --------
Total $89,218 $71,791
======== ========
</TABLE>
(8) Income Taxes
------------
The provision for income taxes is comprised of the following (in
thousands):
1998 1997 1996
------- ------- -------
Current:
Federal $ 3,271 $19,422 $16,826
State 707 2,211 1,600
Deferred, primarily federal (3,711) 1,831 1,719
------- ------- -------
$ 267 $23,464 $20,145
======= ======= =======
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 34% in 1998 and 35% in 1997 and 1996 to
earnings before income taxes as a result of the following (in thousands):
1998 1997 1996
--------- -------- ---------
Computed "expected" tax expense 227 20,530 17,716
State taxes, net of U.S. Federal
income tax benefit (848) 1,989 1,547
Other, net 888 945 882
--------- -------- ---------
Actual income tax provision 267 23,464 20,145
========= ======== =========
Effective tax rate 40.0% 40.0% 39.8%
========= ======== =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are presented below (in thousands).
(continued)
F-13
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards $ 7,564
Inventories, principally due to reserves and additional
costs inventoried for tax purposes 640 746
Accounts receivable, principally due to allowance for
doubtful accounts 1,228 935
Restructuring accrual 4,931
Other accrued expenses 4,123 2,227
------- --------
Deferred tax assets 18,486 3,908
------- --------
Deferred tax liabilities:
Intangible assets 1,767 166
Accelerated depreciation 3,575 3,949
Section 481a adjustment 1,966
Other 5,838 6,991
------- --------
Deferred tax liabilities 13,146 11,106
------- --------
Net deferred tax asset/(liabilit) $ 5,340 ($ 7,198)
======= ========
</TABLE>
The Company has available net operating loss carryforwards, resulting
from acquisitions, totaling approximately $21 million, which expire in the
years 2007 to 2012. The Company also has available alternative minimum tax
credit carryforwards of approximately $300,000, which may be carried
forward indefinitely. The utilization of these pre-acquisition tax loss
carryforwards and tax credits is limited to approximately $2.0 million each
year under Internal Revenue Code section 382.
(9) 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.
(10) Stock-Based Compensation
------------------------
The Company maintains four stock option plans covering certain key
employees and outside directors. The 1983 Stock Option Plan ("1983 Plan")
and the 1984 Non-Qualified Stock Option Plan ("1984 Plan") expired by their
terms in May 1993 and January 1994, respectively, and therefore no new
grants can be awarded out of those plans. All eligible option grants have
been made from the Stock Option Plan for Directors ("Directors Plan"),
although not all options have been exercised. Under the Directors Plan,
nonemployee directors were initially granted 10,000 options upon election
to the Board, with subsequent service grants awarded in accordance with
formulas based upon years of service. Options under the Directors Plan vest
25% each year and expire after 10 years. The Company adopted a 1993 Stock
Option Plan ("1993 Plan") under which the Company may grant qualified or
nonqualified stock options to eligible employees and outside directors.
The 1993 Plan was amended in 1995 and 1997 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 20-25% each year and expire after 10 years
under the 1983 Plan, the 1984 Plan, and the 1993 Plan. After May 1996, all
options granted to nonemployee directors have been issued from the 1993
Plan.
(continued)
F-14
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On October 22, 1998, the Company's Board of Directors approved a
measure enabling all employees who had been previously granted stock
options, with the exception of executive officers, the opportunity to
reprice the exercise price of their respective options to the Company's
stock price as of that date, which was $3.1875 per share. In exchange for
the repricing of options, those employees agreed to forfeit the ability to
exercise the options for one year, or until October 22, 1999. All vesting
was kept intact. As a result, a total of 1.51 million options with a
weighted average exercise price of $6.76 per share were repriced to $3.1875
per share. The Company accounted for this repricing as a cancellation of
old options and an issuance of new options.
On October 22, 1998, the Company's Board of Directors approved a stock
option grant agreement for 500,000 shares to a director and officer of the
Company. The option price is equal to the fair market value of the
Company's stock on the date of grant. Exercisability of the options was
immediate, although vesting occurs at 25% per year. All 500,000 options
were exercised on December 23, 1998. These options were issued outside of
the 1993 Plan.
At December 31, 1998, the Company has reserved approximately 4.4
million shares of its common stock for issuance under its stock option
plans.
In 1998, the Company created the CompuCom Systems, Inc. Employee Stock
Purchase Plan ("ESPP"). The ESPP provides eligible Company employees the
opportunity to purchase common stock of the Company through accumulated
payroll deductions. Participation in the ESPP is for periods of six
months, beginning on January 1 and July 1 of each year. The first such
period was July 1 (i.e., "the enrollment date") through December 31, 1998
(i.e., "the exercise date"). The exercise price, as defined, for each six
month period, is equal to the lower of 85% of the fair market value, as
defined, of the Company's stock price on the enrollment date or 85% of the
fair market value of the Company's stock price on the exercise date. Once
the shares have been purchased, each employee has the option of keeping
their shares or selling them at any time. For the six-month period July 1
through December 31, 1998, approximately 338 employees participated in the
ESPP resulting in the issuance of approximately 193,000 shares of the
Company's common stock at $2.975. A total of 1.0 million shares were
authorized for issuance under the ESPP.
The Company applies APB 25 and related interpretations in
accounting for its various fixed stock option plans and its stock purchase
plan. 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) 1998 1997 1996
--------- --------- --------
<S> <C> <C> <C> <C>
Net earnings/(loss) As reported $ 401 $35,194 $30,471
Pro forma $ (2,161) $34,639 $29,409
Basic earnings/(loss) per share As reported $ (.01) $ .75 $ .66
Pro forma $ (.07) $ .74 $ .65
Diluted earnings/(loss) per share As reported $ (.01) $ .71 $ .61
Pro forma $ (.07) $ .69 $ .60
</TABLE>
The per share weighted-average value of stock options issued by
the Company during 1998, 1997 and 1996 was $2.14, $4.20, and $4.91,
respectively, on the dates 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:
1998 1997 1996
----------- ------------ ------------
Dividend yield 0% 0% 0%
Expected volatility 59% 63% 64%
Average expected option life 5 years 5 years 5 years
Risk-free interest rate 4.4% to 5.8% 5.9% to 6.8% 5.8% to 6.5%
The fair value of the employees' purchase rights, which was estimated
using the Black Scholes model with the following assumptions for 1998: dividend
yield of 0%, an expected life of 6 months, expected volatility of 59%, and a
risk-free interest rate of 5.3%, granted in 1998 was $4.32.
Pro forma net earnings reflect only options granted subsequent to
January 1, 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro forma
net earnings 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-15
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Option activity under the Company's plans is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ------------------------
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 4,009 $5.51 4,021 $3.96 4,278 $2.81
Granted 3,458 3.91 1,642 7.07 845 8.28
Exercised (1,330) 3.17 (1,225) 2.39 (761) 1.90
Canceled (2,143) 6.89 (429) 5.82 (341) 5.82
------------ ----------- ------------
Outstanding at end of year 3,994 $4.16 4,009 $5.51 4,021 $3.96
============ =========== ============
Options exercisable at year-end 1,225 $3.97 1,343 $3.40 1,970 $2.40
Shares available for future grant 436 1,190 1,483
</TABLE>
The Company plans to ask its shareholders to approve an increase in
the number of authorized shares under the 1993 Plan by 3 million shares at its
May 13, 1999 annual shareholders' meeting.
The following summarizes information about the Company's stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------- ------------------------------------
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 - $ 1.25 308 1.0 $ 1.24 308 $ 1.24
2.25 - 3.19 2,411 8.5 3.17 472 3.08
3.50 - 4.75 242 5.9 3.72 101 3.86
5.50 - 8.13 982 7.9 7.30 319 7.43
8.63 - 12.50 51 8.0 10.36 25 10.36
-------------- -------------
$ 1.00 - $ 12.50 3,994 7.6 $ 4.16 1,225 $ 3.97
============== =============
</TABLE>
(11) Business Combinations
---------------------
During 1998, the Company consummated three business combinations. The
total consideration given for these business combinations was approximately
$49 million in cash. In addition, the Company assumed liabilities of
approximately $95 million, in aggregate. The business combinations were
accounted for as purchases and accordingly the consolidated financial
statements reflect the operations of the acquired entities since the
respective acquisition dates. The Company has not completed the final
allocation of the purchase price for these acquisitions. Therefore, the
amount of goodwill recorded could be adjusted once the allocation is
finalized.
(continued)
F-16
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following unaudited pro forma financial information presents the
combined results of operations as if the acquisitions had occurred as of
the beginning of 1998 and 1997, after giving effect to certain adjustments,
including amortization of goodwill, increased interest expense on debt
related to the acquisitions, and related income tax effects (amounts in
thousands, except per share data). The pro forma results do not
necessarily represent results which would have occurred if the acquisition
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
1998 1997
------------ ------------
Revenue $ 2,444,935 $ 2,520,886
============ ============
Net earnings (loss) $ (4,280) $ 21,989
============ ============
Diluted earnings (loss) per share $ (0.11) $ .44
=========== ============
(12) Related Party Transactions
--------------------------
The Company founded PC Service Source, Inc. ("PCSS") in 1990, then
known as PC Parts Express, Inc. In January 1994, the Company sold the
majority of its interest in PCSS in exchange for cash, a secured note
receivable ("secured note"), and warrants to purchase additional PCSS
common stock. In April 1994, the Company participated in an initial public
offering of PCSS common stock. During the second quarter of 1996, the
Company participated in a secondary stock offering of PCSS resulting in a
nonrecurring after-tax gain on the sale of securities of $5.2 million.
Concurrent with the secondary offering, 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. During the third
quarter of 1997, the Company received early payment of the secured note,
thus recognizing a previously deferred nonrecurring after-tax gain of $1.0
million.
In 1994, the Company loaned an officer and director of the Company
$1,181,250 evidenced by a term note receivable. The proceeds of the loan
were used to purchase shares of the Company's common stock. Interest on the
note accrues at the rate of 6% per annum and is payable at maturity. Terms
of the note were amended in February 1999 such that principal on the note
is due on October 22, 2001. The outstanding balance of the note at December
31, 1998 was $900,000, which is included in notes receivable from the sale
of stock on the Consolidated Balance Sheets.
In 1997, the Company loaned an officer and director of the Company
$661,251 evidenced by a term note receivable. Interest on the note accrues
at the rate of 6.25% per annum and is payable annually on June 17. A
portion of the loan proceeds was used to exercise stock options. This
portion of the loan is included in notes receivable from the sale of stock,
while the remainder of the loan is included in Other Assets on the
Consolidated Balance Sheets at December 31, 1998. Principal on the note is
due on June 17, 2000. This officer is no longer employed by the Company.
In 1998, the Company loaned an officer and director of the Company
$796,875 evidenced by a term note receivable. Interest on the note accrues
at the rate of 4.33% per annum and is payable upon maturity of the note.
The loan proceeds were used to exercise stock options and is included in
notes receivable from the sale of stock on the Consolidated Balance Sheets
at December 31, 1998. Principal on the note is due on December 31, 2001.
In 1998, the Company loaned an officer and director of the Company
$2,021,875 evidenced by a term note receivable. Interest on the note
accrues at the rate of 5.1% per annum and is payable at maturity. The loan
proceeds were used to exercise stock options and is included in notes
receivable from the sale of stock on the Consolidated Balance Sheets at
December 31, 1998. Principal on the note is due on October 22, 2001.
Each of the loans for the exercise of stock options are full recourse
loans. In addition, the Company has retained physical possession of the
resulting stock certificates.
(continued)
F-17
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Safeguard owns approximately 50% of the Company's outstanding common
stock as of December 31, 1998. 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 1998, 1997 and 1996.
(13) Earnings Per Share
------------------
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This
statement supersedes APB Opinion No. 15, "Earnings Per Share" and replaces
the presentation of primary earnings per share ("EPS") and fully diluted
EPS with a presentation of basic EPS and diluted EPS. SFAS No. 128 also
requires a reconciliation of the numerators and denominators of the basic
and diluted per share computations as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Year ended December 31, 1998
--------------------------------------
Income Shares
(Numerator) (Denominator) EPS
----------- --------------- -----
<S> <C> <C> <C>
Net earnings $ 401
Less: Preferred stock dividends (900)
Basic EPS
---------
Income available to common shareholders (499) 46,346 ($ .01)
--------- ---------
Diluted EPS
-----------
Income available + assumed conversions (499) 46,346 ($ .01)
========= ========= =========
Year ended December 31, 1997
--------------------------------------
Income Shares
(Numerator) (Denominator) EPS
----------- --------------- -----
Net earnings $35,194
Less: Preferred stock dividends (900)
Basic EPS
---------
Income available to common shareholders 34,294 45,686 $.75
Effect of dilutive securities
-----------------------------
Stock options 1,745
Convertible preferred stock 900 2,216
Convertible debt 92 387
--------- ---------
Diluted EPS
-----------
Income available + assumed conversions 35,286 50,034 $.71
========= ========= ========
</TABLE>
(continued)
F-18
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Year ended December 31, 1997
--------------------------------------
Income Shares
(Numerator) (Denominator) EPS
----------- --------------- -----
<S> <C> <C> <C>
Net earnings $30,471
Less: Preferred stock dividends (900)
Basic EPS
---------
Income available to common shareholders 29,571 44,616 $.66
Effect of dilutive securities
-----------------------------
Stock options 2,668
Convertible preferred stock 900 2,216
Convertible debt 92 387
-------- -------
Diluted EPS
-----------
Income available + assumed conversions 30,563 49,887 $.61
========= ========= ========
</TABLE>
The Company has excluded 4,239,001 shares from its calculations of diluted
earnings per share in 1998 as they are considered anti-dilutive. This
represents all of the Company's weighted average options outstanding for
the year, since the numerator used in calculating earnings per share is a
negative amount. The Company has excluded 150,325 and 35,281 shares from
its calculations of diluted earnings per share in 1997 and 1996,
respectively, as they are considered anti-dilutive.
(14) Leases
------
The Company has noncancelable operating leases for facilities and
equipment, which expire at various dates from 1999 to 2004. Total rental
expense for operating leases was $11.2 million, $8.9 million and $10.4
million in 1998, 1997 and 1996, respectively. Future minimum lease
payments under noncancelable operating leases as of December 31, 1998 are:
$8.8 million - 1999; $6.7 million - 2000; $4.0 million - 2001; $2.0 million
- 2002; $1.6 million - 2003; and $.6 million thereafter. These future
minimum lease payments include obligations under leases that are being
abandoned as part of the restructuring (the "Restructuring Leases"). The
future minimum lease payments of the Restructuring Leases are $4.7 million
1999; $3.5 million 2000; $2.0 million 2001; $1.3 million 2002; and $1.0
million 2003.
(15) Savings Plan
------------
The Company has a defined contribution plan (401(k) Matched Savings
Plan)("the 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 eligible compensation. The
Company matches 50% of each participant's qualifying contribution up to 4%
of compensation, and an additional 25% of the next 2% of the participant's
qualifying contributions. The Company modified the Plan in 1998 to allow
for the Company's matching payments to be made to each participating
employees account at the end of each calendar quarter, as opposed to the
end of the year as before. Amounts expensed relating to the Plan were $2.4
million, $1.6 million and $1.5 million in 1998, 1997 and 1996,
respectively.
(continued)
F-19
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Quarterly Financial Data (Unaudited)
------------------------------------
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
1998
---------
Revenue:
Product $376,778 $530,495 $531,640 $ 541,665
Service 57,128 63,127 67,488 70,187
Other 3,846 3,935 4,202 3,974
------------ ------------ ------------ ------------
Net revenue 437,752 597,557 603,330 615,826
Gross margin:
Product $ 43,880 $ 50,528 $ 49,586 $ 49,733
Service 18,370 19,755 21,772 22,582
Other 1,915 1,871 2,126 1,842
------------ ------------ ------------ ------------
Total gross margin 64,165 72,154 73,484 74,157
Net earnings/(loss) $ 3,843 $ 4,286 $ 1,063 ($ 8,791) *
Earnings/(loss) per common share:
Basic .08 .09 .02 (.19) *
Diluted .08 .09 .02 (.19) *
</TABLE>
* Includes Restructuring charges related to reorganization of $9.9
million or ($.21) per share (Basic and Diluted)
(continued)
F-20
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
1997
---------
Revenue:
Product $375,605 $428,353 $437,089 $458,221
Service 53,728 59,715 60,513 62,265
Other 2,556 3,152 3,902 4,703
------------ ------------ ------------ ------------
Net revenue 431,889 491,220 501,504 525,189
Gross
margin:
Product $ 38,932 $ 41,099 $ 44,023 $ 52,180
Service 19,362 22,144 21,972 20,849
Other 1,184 1,719 2,129 1,952
Total gross margin 59,478 64,962 68,124 74,981
------------ ------------ ------------ ------------
Net earnings $ 4,872 $ 7,980 $ 9,462 * $ 12,880 **
Earnings per common share:
Basic .10 .17 .20 * .28 **
Diluted .10 .16 .19 * .26 **
</TABLE>
* Includes nonrecurring gain on prepayment of secured note
related to sale of subsidiary in 1994 of $1.0 million or
$.02 per share (Basic and Diluted)
** Includes nonrecurring gain on sale of Company's former
headquarters of $2.4 million (Basic - $.06 per share,
Diluted -$.05 per share )
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.
(17) 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 or results of
operations, taken as a whole.
F-21
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
(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 doubtfulaccounts
1996 $2,234 900 860 $2,274
1997 $2,274 2,114 1,716 $2,672
1998 $2,672 1,856 1,021 $3,507
Inventory reserves
1996 $9,524 15,529 16,119 $8,934
1997 $8,934 14,844 13,854 $9,924
1998 $9,924 14,204 16,326 $7,802
</TABLE>
F-22
<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.
CompuCom Systems, Inc.
By: /s/ M. Lazane Smith
-----------------------
M. Lazane Smith
Senior Vice President, Finance and Chief Financial
Officer (Chief Accounting Officer)
Dated: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated: March 29, 1999
/s/ Warren V. Musser /s/ Delbert W. Johnson
- ------------------------ -------------------------
Warren V. Musser Delbert W. Johnson
Chairman of the Board and Director Director
/s/ Edward R. Anderson /s/ John D. Loewenberg
- ------------------------ ------------------------
Edward R. Anderson John D. Loewenberg
President and Chief Executive Director
Officer and Director
/s/ Harry Wallaesa /s/ Thomas C. Lynch
- ---------------------- ---------------------
Harry Wallaesa Thomas C. Lynch
Director Chief Operating Officer
and Director
/s/ Michael J. Emmi /s/ John C. Maxwell III
- ------------------------- --------------------------
Michael J. Emmi John C. Maxwell, III
Director Director
/s/ Richard F. Ford /s/ Edward N. Patrone
- ---------------------- -------------------------
Richard F. Ford Edward N. Patrone
Director Director
/s/ Anthony J. Paoni
- ---------------------
Anthony J. Paoni
Director
<PAGE>
EXHIBIT 10(f)
September 21, 1998
CompuCom Systems, Inc.
Mr. Daniel Celoni
Vice President, Finance
7171 Forest Lane
Dallas, TX 75230
Reference: Agreement for Inventory Financing, dated September 20, 1996 (the
"Agreement")
Dear Dan,
IBM Credit Corporation ("IBM Credit") is pleased to offer CompuCom Systems, Inc.
("CompuCom") as an extension of the terms of the Agreement for the period
specified below.
Please indicate your acceptance of this extension of the Termination date (as
defined in the Agreement) from September 21, 1998 to March 21, 1999 by signing
this letter, where indicted, and returning it to IBM Credit on or before
September 21, 1998.
CompuCom acknowledges that the Agreement has been in full force and effect for
the period December 21, 1997 through and including the date that this letter is
executed by both IBM Credit and CompuCom.
Except as specifically modified by this letter, the terms and conditions of the
Agreement shall remain in full force and effect.
IBM Credit wants to provide CompuCom with quality financial services as an
enhancement to CompuCom's business activities. IBM Credit therefore appreciates
this opportunity to respond to CompuCom's financing needs.
Sincerely, Acknowledged and Agreed to:
IBM CREDIT CORPORATION COMPUCOM SYSTEMS, INC.
By: [ILLEGIBLE] By: /s/ DANIEL CELONI
---------------------- --------------------------
Title: AOM - Credit Title: VP - Finance
------------------- -----------------------
Date: Sept. 21, 1998 Date: Sept 21, 1998
------------------- -----------------------
<PAGE>
EXHIBIT 10(ee)
NOTE MODIFICATION AGREEMENT
NOTE MODIFICATION AGREEMENT made as of November 30, 1998 (the "Agreement"),
between MACFARLAN REALTY PARTNERS, L.L.C., a Texas limited liability company
having its principal place of business at 3838 Oak Lawn Avenue, Suite 400,
Dallas, Texas 75219, referred to herein as the "Borrower," and COMPUCOM
SYSTEMS, INC., a Delaware corporation having its principal place of business at
7171 Forest Lane, Dallas, Texas 75230, referred to herein as the "Lender."
R E C I T A L S
- - - - - - - -
A. The Lender has extended the Borrower a term loan which is presently
evidenced by a Promissory Note in the original principal sum of $7,840,000 made
by the Borrower payable to the order of the Lender dated December 30, 1997 (the
"Note").
B. The Note and all of the obligations of the Borrower thereunder and all
documents and instruments and agreements executed in connection therewith are
secured by, among other things, liens against certain real property commonly
known as 10100 North Central Expressway, Dallas, Texas, pursuant to the terms of
a Deed of Trust (with Security Agreement, Assignment of Rents and Leases and
Financing Statement) made by the Borrower in favor of Frederick J. Fowler, as
trustee for the use and benefit of the Lender dated as of December 30, 1997 (the
"Deed of Trust"), which has been recorded at Volume 98001, Page 6731 of the Deed
of Trust records of the Dallas County, Texas.
C. The Lender is the holder and beneficial owner of the Note and the Deed
of Trust.
D. The Note matured on October 31, 1998. The parties have agreed (a) to
extend the maturity date of the Note as hereinafter provided, and (b) to modify
the terms of payment as hereinafter provided.
NOW THEREFORE, in consideration of the above recitals and the mutual
covenants and agreements of the parties hereto and for other good and valuable
consideration, the receipt, sufficiency and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Extension of Maturity Date of Note. The maturity date of the Note is
----------------------------------
hereby changed and extended to March 30, 1999.
2. Amendment of Payment Provision of Note. Section 3 of the Note is
--------------------------------------
hereby amended to read in its entirety as it follows:
"3. Payment of Principal and Interest. The principal and accrued
---------------------------------
interest of this Note shall be due and payable in one installment on March
30, 1999. The principal and interest due hereunder shall be evidenced by
the Lender's records which, absent
NOTE MODIFICATION AGREEMENT - Page 1
- ---------------------------
<PAGE>
manifest error, shall be conclusive evidence of the computation of
principal and interest balances owed by the Borrower to the Lender."
3. Acknowledgment of Payment of Interest. The Lender acknowledges that
-------------------------------------
the Borrower has paid interest on the Note through November 30, 1998.
4. Limitation on Agreements. The agreements set forth herein are limited
------------------------
precisely as written and shall not be deemed (i) to be a waiver or waivers of or
a consent or consents to the modification of or deviation from any other term or
condition of the Note or of any of the other instruments or agreements referred
to therein, or (ii) to prejudice any right or rights which the Lender may now
have or may have in the future under or in connection with the Note or any of
the other instruments, agreements or other documents referred to therein.
5. Confirmation of Continued Effectiveness of Security. The Borrower
---------------------------------------------------
hereby confirms and agrees that the Deed of Trust shall continue to secure, in
the same manner and to the same extent provided therein, the payment and
performance of the Note as modified by this Agreement. The Borrower further
confirms that the Deed of Trust is hereby renewed in favor of the trustee
thereunder for the use and benefit of the Lender and in favor of the Lender.
6. Representation and Warranties. The Borrower hereby represents and
-----------------------------
warrants that (a) it is the sole legal and beneficial owner of the property
described in the Deed of Trust; (b) the lien, security interest and rights under
the Deed of Trust constitute a first lien security interest and right against
the property therein described; (c) the Borrower has the full power and
authority to make the agreements contained in this instrument without the
joinder or consent of any other person or entity, and the execution hereof by
the Borrower has been authorized by all required action; (d) the execution,
delivery and performance of this Agreement will not contravene or constitute a
default under any agreement to which the Borrower is a party or by which the
Borrower or any of its property is or may be bound; and (e) there exists no
default under the Note or the Deed of Trust (other than the payment default as
of October 31, 1998, which has been cured by the execution of this Agreement).
The Borrower agrees to indemnify and hold the Lender harmless from and against
any loss, claim, damage, liability, or expense (including without limitation
attorneys' fees) incurred as a result of any representation or warranty made by
it herein proving to be untrue or incorrect in any material respect.
7. Counterpart Execution. This Agreement may be executed in one or more
---------------------
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
8. Notice of Final Agreement. THIS WRITTEN AGREEMENT REPRESENTS THE
-------------------------
FINAL AGREEMENT BETWEEN THE BORROWER AND THE LENDER AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE
BORROWER AND THE LENDER. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
BORROWER AND THE LENDER.
NOTE MODIFICATION AGREEMENT - Page 2
- ---------------------------
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.
MACFARLAN REALTY PARTNERS, L.L.C.
By /s/ D. Dean MacFarlan
-------------------------------------
D. Dean MacFarlan
Chairman and Chief Executive Officer
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
This instrument was acknowledged before me on the 30th day of November,
1998, by D. Dean MacFarlan, the Chairman and Chief Executive Officer of
MacFarlan Realty Partners, L.L.C., a Texas limited liability company, on behalf
of said limited liability company.
/s/ Margaret A. Koch
Notary Public, State of Texas
NOTE MODIFICATION AGREEMENT - Page 3
- ---------------------------
<PAGE>
COMPUCOM SYSTEMS, INC.
By /s/ Daniel L. Celoni
------------------------------
Daniel L. Celoni
Vice President, Finance
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
This instrument was acknowledged before me on the 30th day of November,
1998, by Daniel L. Celoni, Vice President Finance of Compucom Systems, Inc., a
Delaware corporation on behalf of said corporation.
/s/ Shelly K. Christenson
Notary Public, State of Texas
SETTLEMENT AGREEMENT - Page 4
<PAGE>
SETTLEMENT AGREEMENT
SETTLEMENT AGREEMENT made as of November 30, 1998 (the "Agreement"),
between MACFARLAN REALTY PARTNERS, L.L.C., a Texas limited liability company
having its principal place of business at 3838 Oak Lawn Avenue, Suite 400,
Dallas, Texas 75219, referred to herein as the "Borrower," and COMPUCOM
SYSTEMS, INC., a Delaware corporation having its principal place of business at
7171 Forest Lane, Dallas, Texas 75230, referred to herein as the "Lender."
R E C I T A L S
- - - - - - - -
A. The Lender has extended the Borrower a term loan which is presently
evidenced by a Promissory Note in the original principal sum of $7,840,000 made
by the Borrower payable to the order of the Lender dated December 30, 1997 (the
"Note").
B. The Note and all of the obligations of the Borrower thereunder and all
documents and instruments and agreements executed in connection therewith are
secured by, among other things, liens against certain real property commonly
known as 10100 North Central Expressway, Dallas, Texas (the "Property"),
pursuant to the terms of a Deed of Trust (with Security Agreement, Assignment of
Rents and Leases and Financing Statement) made by the Borrower in favor of
Frederick J. Fowler, as trustee for the use and benefit of the Lender dated as
of December 30, 1997 (the "Deed of Trust"), which has been recorded at Volume
98001, Page 6731 of the Deed of Trust records of the Dallas County, Texas.
C. The Lender is the holder and beneficial owner of the Note and the Deed
of Trust.
D. The Note matured on October 31, 1998. The Borrower did not pay the Note
at maturity, and the Lender posted the Property for a Tuesday, December 1, 1998,
foreclosure sale pursuant to the provisions of the Deed of Trust. The parties
have now reached agreement to extend the maturity of the Note and modify the
terms of payment thereof and provide additional security therefore, all as
hereinafter provided.
NOW THEREFORE, in consideration of the above recitals and the mutual
covenants and agreements of the parties hereto and for other good and valuable
consideration, the receipt, sufficiency and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. When used herein, the following terms have the
-----------
respective meanings set forth below or in the section or recital referred to:
"Bill of Sale" means a blanket conveyance, bill of sale and assignment
of assets in the form of Exhibit B executed by the Borrower conveying to
---------
the Lender all Personal Property located on the Property and not owned by
tenants of the Property, and the other personal property therein described.
SETTLEMENT AGREEMENT - Page 5
- --------------------
<PAGE>
"Conveyance Date": See Section 12.
"Conveyance Documents" mean the General Warranty Deed and the Bill of
Sale.
"Deed of Trust": See Recital B.
"Escrow Agreement" means that certain escrow agreement among the
Borrower, the Lender and Strasburger & Price, L.L.P. dated as of November
30, 1998, in the form of Exhibit D attached hereto.
---------
"General Warranty Deed" means a general warranty deed in the form of
Exhibit A attached hereto, executed by the Borrower conveying to the Lender
---------
good and indefeasible fee simple title to the Property, subject only to the
permitted encumbrances therein specified.
"Loan Documents" mean the Note and Deed of Trust.
"Modification Papers" mean this Agreement, the Note Modification
Agreement, the General Warranty Deed, the Bill of Sale, the Release, the
Escrow Agreement, and all of the other documents, certificates and
instruments executed or delivered in connection with the transactions
contemplated by this Agreement.
"Note": See Recital A.
"Note Modification Agreement": See Section 3.
"Personal Property" means all personal property located on the
Property and not owned by tenants of the Property, and all of the
Borrower's rights, title and interest in and to all warranties and
guaranties relating to any portion of the Property or the Personal
Property.
"Release" means a release in the form of Exhibit C attached hereto.
---------
2. Payment of Interest Due on Note. Simultaneously with its execution of
-------------------------------
this Agreement, the Borrower has paid the Lender the sum $489,301.92 which
represents the interest due and payable under the Note at the rate of 6.8% per
annum for the period from December 30, 1997 through and including November 30,
1998.
3. Note Modification Agreement. Simultaneously with their execution of
---------------------------
this Agreement, the parties have executed an agreement of even date herewith
(the "Note Modification Agreement") which extends the maturity date of the Note
to March 30, 1999, and which provides for payment of principal and interest in
one installment on such date.
4. Payment of Taxes. Simultaneously with its execution of this
----------------
Agreement, the Borrower has delivered to the Lender receipts evidencing full and
final payment by the Borrower
SETTLEMENT AGREEMENT - Page 6
- --------------------
<PAGE>
of $215,878.63, which represents the aggregate of all city, county and school
taxes assessed against the Property for 1998.
5. Payment of the Lender's Legal Fees and Expenses. Simultaneously with
-----------------------------------------------
its execution of this Agreement, the Borrower has delivered to the Lender the
sum of $11,500, which represents reimbursement to the Lender of the reasonable
fees and out-of-pocket expenses incurred by the Lender through the date hereof
in connection with posting of the Property for foreclosure and the negotiation,
execution and delivery of the Modification Papers.
6. Waiver of Default Interest. The Note provides that all past due
--------------------------
payments of principal and interest are entitled to bear interest at the rate of
15% per annum from maturity until paid. Accordingly, the Borrower is obligated
to pay the Lender interest at the default rate of 15% per annum commencing
November 1, 1998. The Lender hereby irrevocably waives the obligation of the
Borrower to pay and the right of the Lender to collect interest at the default
rate of 15% per annum for the period from November 1, 1998 through November 30,
1998.
7. Conveyance Documents. Simultaneously with their execution of this
--------------------
Agreement, the parties and Strasburger & Price, L.L.P., have entered into the
Escrow Agreement. Simultaneously with its execution of this Agreement, the
Borrower has executed and delivered to the Escrow Agent the Conveyance
Documents. The parties agree that if the Borrower defaults in the payment of
the Note:
(a) The Lender shall be entitled to direct the Escrow Agent to deliver
the Conveyance Documents to the Lender.
(b) The conveyance of the Property and the Personal Property to the
Lender in accordance with the Conveyance Documents is an absolute
conveyance of all of the right, title and interest of the Borrower in and
to the Property and the Personal Property and is not intended as a deed of
trust, mortgage, trust conveyance, or other security agreement of any
nature whatsoever, and the Borrower shall not have any further interest
(specifically including, without limitation, any right of redemption) or
claims in and to the Property, the Personal Property or the rents, issues
or profits or other proceeds that may be derived therefrom.
(c) The Conveyance Documents are being executed and delivered to the
Escrow Agent and the conveyances effected upon their release to the Lender
will be accepted by the Lender in lieu of a foreclosure upon the Property.
The Conveyance Documents shall be interpreted and construed the same as a
foreclosure, and as an absolute conveyance to the Lender of the Property
and the Personal Property, including specifically without limitation any
equity or rights of redemption of the Borrower therein or thereto.
(d) Notwithstanding the cancellation and extinguishment of the
indebtedness evidenced by the Note, the Lender's liens in the Property,
including without limitation, the lien of the Deed of Trust, are NOT
RELEASED or RELINQUISHED in any manner
SETTLEMENT AGREEMENT - Page 7
<PAGE>
or respect to whatsoever. All liens against the Property benefitting the
Lender shall remain valid and continuous and in full force and effect,
unless and until released by written agreement executed by the Lender
recorded in the real property records of Dallas County, Texas, which
release may be made as, if and when the Lender shall determine in the
exercise of its sole discretion.
(e) Neither the Lender nor the Borrower intend that there shall be,
and there shall not in any event be, a merger of any liens benefitting the
Lender against the Property or the title or other interest of the Lender in
the Property by virtue of the conveyance to be evidenced by the General
Warranty Deed and Bill of Sale, and the parties expressly provide that the
liens against the Property benefitting the Lender on the one hand and title
on the other, shall be and remain at all times SEPARATE and DISTINCT.
(f) For purposes of priority as between intervening or inferior liens
or encumbrances, if any, on or against the Property, and liens against the
Property benefitting the Lender, any and all rights of the Lender to
exercise its remedies by foreclosure by private power of sale pursuant to
non-judicial foreclosure or by judicial foreclosure and all other remedies
are expressly preserved hereby and for purposes of limitations and any
other applicable time bar defense, are expressly extended by this
instrument.
(g) The priority of liens against the Property benefitting the Lender
is intended to be and shall remain in full force and effect and nothing
herein or in any instrument executed in connection herewith shall be
construed to subordinate the priority of those liens from any other liens
or encumbrances whatsoever.
(h) Subject to the provisions of this Agreement, the Lender will
accept the General Warranty Deed and Bill of Sale from the Escrow Agent in
cancellation, full satisfaction and extinguishment of indebtedness of the
Borrower under the Note, the Note Modification Agreement and the Deed of
Trust.
8. Bankruptcy, Avoidance, Etc. The Borrower waives its right to seek
--------------------------
protection from any bankruptcy court to block the conveyance of the Property to
the Lender described above. Notwithstanding the foregoing, in the event a
petition commencing a voluntary case or an involuntary case concerning the
Borrower under any chapter of the United States Bankruptcy Code is filed, the
Borrower agrees in any such proceeding not to oppose any motion the Lender may
file to lift or modify the automatic stay of actions against a debtor or
debtor's estate provided by 11 U.S.C. (S) 362 either (a) to permit the Lender to
foreclose its lien against the Property, or (b) to permit the Escrow Agent to
deliver, and the Lender to accept, the Conveyance Documents pursuant to the
terms of this Agreement. If the conveyance of the Property and the Personal
Property from the Borrower to the Lender pursuant to the Conveyance Documents is
voided, avoided, or set aside for any reason whatsoever whether on account of
any action taken or caused to be taken by the Borrower or anyone claiming by,
through, or under the Borrower, or otherwise (a) the indebtedness and the liens
evidenced by the Note and the Deed of Trust will automatically be revived and
reinstated if the same shall have been previously released by the
SETTLEMENT AGREEMENT - Page 8
<PAGE>
Lender, (b) the Lender shall have the right to foreclose the liens and take such
other action as is permitted under the Note and Deed of Trust and applicable
law, and (c) all costs incurred by the Lender in connection with this Agreement
and any other costs of enforcement of the rights or remedies of the Lender
hereunder or under the Note, the Deed of Trust or any of the Modification Papers
may, at the Lender's sole discretion, be deemed part of the indebtedness
evidenced and secured by the Deed of Trust and shall be due and payable by the
Borrower upon the demand of the Lender.
9. Release of the Lender. Simultaneously with its execution of this
---------------------
Agreement, the Borrower has executed the Release.
10. Leases, Contracts, Security Deposits, Etc. The Borrower acknowledges
-----------------------------------------
that the Bill of Sale covers, among other things, the rights of the Borrower in
all leases and contracts affecting the Property, all security deposits from or
relating to the Property and all escrow accounts of any nature for ad valorem
taxes, and casualty and other insurance premiums and hold backs. Promptly
following its execution of this Agreement, the Borrower shall deposit with the
Escrow Agent executed originals of all leases, contracts, commitments and
agreements relating to the Property and shall furnish the Escrow Agent with a
complete listing of all security deposits held by the Borrower as of the date
hereof. As long as the Escrow Agreement is in force and effect, the Borrower
shall furnish to the Escrow Agent to hold pursuant to the provisions of this
Agreement the executed originals of all leases, contracts, commitments and
agreements relating to the Property which are entered into after the date
hereof, and the Borrower shall also furnish the Lender with any updated list of
security deposits and escrows held by the Borrower from time to time.
11. Representations and Warranties of the Borrower. As an inducement to
----------------------------------------------
the Lender to enter into this Agreement, the Borrower represents and warrants to
the Lender as follows:
A. Authority. The Borrower is duly authorized to execute and deliver
---------
this Agreement, the other Modification Papers, Conveyance Documents and
each of the other related documents and instruments, and to consummate the
transactions and perform the obligations contemplated hereby and thereby.
B. Binding Authority; No Breach. This Agreement constitutes the
----------------------------
legal, valid and binding obligation of the Borrower enforceable in
accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws or by legal or
equitable principles relating to or limiting creditors' rights generally.
Neither the execution and delivery of this Agreement, nor the consummation
of the transactions contemplated hereby will (i) violate any judgment,
order, ruling, injunction, decree or award of any court, administrative
agency or governmental body against, or binding upon, the Borrower; or (ii)
constitute a violation by the Borrower of any law or regulation of any
jurisdiction as such law or regulation relates to or affects the Borrower
or its properties or businesses.
SETTLEMENT AGREEMENT - Page 9
<PAGE>
C. Mechanics' Liens. To the Borrower's best knowledge and belief, no
----------------
action has been taken, suffered or permitted by or on behalf of the
Borrower, the effect of which would be to establish or cause the inception
or priority of any mechanics' or materialmen's lien, statutory,
constitutional or otherwise, or other lien, charge or encumbrance upon the
Property or any part thereof or interest therein, other than the liens
evidenced by the Deed of Trust in favor of the Lender.
D. Advice of Counsel. This Agreement and the Conveyance Documents
-----------------
were reviewed by the Borrower who acknowledges and agrees that it (i)
understands fully the terms of the Modification Papers and the Conveyance
Documents and the consequences of the issuance hereof and thereof, (ii) has
been afforded an opportunity to have the Modification Papers and the
Conveyance Documents, reviewed by, and to discuss all such documents with
its counsel, and (iii) has entered the Modification Papers and executed and
delivered the Conveyance Documents of its own free will and accord and
without threat or duress.
E. Full Disclosure. No representation or warranty by the parties
---------------
contained in the Modification Papers, the Conveyance Documents or any other
instrument in connection herewith, delivered on behalf of the Borrower,
contains any untrue statement of any material fact or omits any material
fact or statement necessary to make the facts or statements contained
herein or therein not false or misleading.
F. True and Correct. All information and documents furnished to the
----------------
Lender pursuant to the Modification Papers, are true, accurate and
complete.
G. Title. The Borrower owns record and beneficial indefeasible title
-----
in fee simple absolute, in and to the Property, free and clear of any
encumbrances, encroachments, overlaps, special assessments, claims, leases,
tenancies, other adverse interest or defects upon or affecting the Property
other than those permitted by the Deed of Trust.
H. Good Faith. This Agreement and each of the Modification Papers
----------
and Conveyance Documents and all information furnished to the Lender, is
made and furnished in good faith, for value and valuable consideration, and
have not been made under or induced by any fraud, duress or undue influence
exercised by the Lender or any other person.
I. Currently Subsisting Liens. The liens of the Loan Documents are
--------------------------
currently valid and subsisting liens, and are in full force and effect. To
the knowledge of the Borrower, there are no liens, security interests, or
other encumbrances of any nature intervening between the Loan Documents and
the Conveyance Documents.
J. Taxes. No federal, state or municipal taxes are due with respect
-----
to the Property or the Personal Property and no liens for such taxes are in
effect against the Property or the Personal Property.
SETTLEMENT AGREEMENT - Page 10
<PAGE>
K. Expenses. The Borrower has paid all taxes and expenses relating to
--------
the Property and the Personal Property and/or the operation and maintenance
thereof, that have been billed through the date hereof.
L. Affirmations Concerning Covenants, Etc. To the best of the
---------------------------------------
Borrower's knowledge and belief, there have been no violations of any
covenants, conditions, exceptions, encumbrances, restrictions, restrictive
covenants, zoning or land use ordinances, environmental laws and
regulations, or other reservations which pertain to or affect the Property.
12. Pre-Conveyance Claims. The Borrower agrees that the Lender's
---------------------
acceptance of title to the Property and Personal Property under the Conveyance
Documents will not create any liability on the Lender's part to third parties
that have claims of any kind against the Borrower in connection with the
Property or the Personal Property. The Lender does not, under this Agreement,
the Conveyance Documents, or otherwise, assume or agree to discharge any
liabilities pertaining to the Property or Personal Property that accrued prior
to the date the Conveyance Documents are delivered by the Escrow Agent to the
Lender (the "Conveyance Date"). The Borrower agrees to indemnify and hold the
Lender harmless and defend the Lender, from and against any losses, damages or
expenses (including attorneys' fees and court costs) pertaining to claims
arising out of the Property, and arising from events that occurred prior to the
Conveyance Date. This Agreement does not confer any third party benefits on
persons not a signatory to this Agreement.
13. Misrepresentation. The Borrower shall indemnify and hold the Lender
-----------------
harmless and defend the Lender from and against any losses, damages, costs or
expenses (including attorneys' fees) incurred by the Lender as a direct or
indirect result of (i) breach of any representation or warranty of the Borrower
contained in this Agreement, or (ii) any breach or default by the Borrower under
any of the covenants or agreements contained in this Agreement to be performed
by the Borrower, all of which shall survive the Conveyance Date.
14. Other Indemnified Expenses. The Borrower shall indemnify and hold the
--------------------------
Lender harmless and defend the Lender from and against any and all liability,
loss, cost, damage, or expense, including reasonable attorneys' fees, arising
out of or in connection with any of the following: (i) the breach of any
warranties of title set forth in the Modification Papers or the Conveyance
Documents; (ii) any lien, charge, or encumbrance on the Property in existence as
of the Conveyance Date; (iii) the breach of any representation or warranty of
the Borrower set forth in this Agreement; (iv) the failure of the Borrower to
perform any covenant or agreement of the Borrower set forth in this Agreement;
and (v) any and all claims of third parties relating to claims arising out of
the Property, and from events that occurred prior to the Conveyance Date,
including, without limitation, any claim, by whoever asserted, arising from the
deposit, disposal, spillage, leakage or storage of any hazardous substance or
hazardous waste (as such terms, or similar terms, are used or defined under or
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), the Resource
SETTLEMENT AGREEMENT - Page 11
<PAGE>
Conservation and Recovery Act of 1976, as amended ("RCRA"), the Texas Solid
Waste Disposal Act, the Texas Water Code, and under other applicable
environmental laws).
15. Survival. All representations, warranties, covenants and agreements
--------
of the parties made in this Agreement shall survive the execution and delivery
hereof and the Conveyance Date hereunder.
16. Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall insure to the benefit of the parties hereto and their respective heirs,
successors and assigns. No assignment of this Agreement or the rights hereunder
may be made by the Borrower without the written consent of the Lender. No
assignment of this Agreement or of any rights hereunder by the Borrower shall be
effective unless and until said assigning party receives the prior written
consent of the Lender to such assignment, and no such assignment shall relieve
such assigning party of any of its obligations or liabilities hereunder.
17. Modifications and Waivers. No delay on the part of the Lender in
-------------------------
exercising any right, power or privilege hereunder, shall operate as a waiver
thereof, nor shall any waiver of any right, power or privilege hereunder operate
as a waiver of any other right, power of privilege hereunder. All rights and
remedies herein provided are cumulative and are not exclusive of any rights or
remedies which the parties hereto may otherwise have at law or in equity. The
Lender shall have the right to waive any of the conditions precedent to its
obligations under this Agreement. No such waiver, or modification, discharge or
amendment of this Agreement, will be valid in the absence of the written and
signed consent of the party against which enforcement of such is sought.
18. Notices. All notices, consents, waivers and other communications
-------
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of receipt), (b)
sent by telecopier (with written confirmation of receipt) provided that a copy
is mailed by registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
If to the Borrower: MacFarlan Realty Partners, L.L.C.
3838 Oak Lawn Avenue, Suite 400
Dallas, Texas 75219
Telecopier No. 214-559-4606
with a copy to: Frederick J. Rerko, Esq.
Jones, Day, Reavis & Pogue
2300 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Telecopier No. 214-969-5100
SETTLEMENT AGREEMENT - Page 12
- --------------------
<PAGE>
If to the Lender: CompuCom Systems, Inc.
7171 Forest Lane
Dallas, Texas 75230
Telecopier No. 972-856-5395
with a copy to: Frederick J. Fowler, Esq.
Strasburger & Price, L.L.P.
901 Main Street, Suite 4300
Dallas, Texas 75202
Telecopier No. 214-651-4330
19. Captions. All section titles or captions contained in this Agreement,
--------
in any exhibit annexed hereto, or in any schedule referred to herein are for
convenience only, shall not be deemed a part of this Agreement, and shall not
affect the meaning or interpretation of this Agreement.
20. Exhibits and Schedules. All exhibits referred to herein are hereby
----------------------
incorporated and made a part of this Agreement as if set forth in full herein.
21. Governing Law. This Agreement shall be construed in accordance with
-------------
the applicable laws of the State of Texas and applicable federal law.
22. Counterpart Execution. This Agreement may be executed in one or more
---------------------
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
23. Written Agreement. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL
-----------------
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[The next page is the signature page.]
SETTLEMENT AGREEMENT - Page 13
- --------------------
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
LENDER:
COMPUCOM SYSTEMS, INC.
By: /s/ Daniel L. Celoni
-------------------------------------------
Daniel L. Celoni
Vice President, Finance
BORROWER:
MACFARLAN REALTY PARTNERS, L.L.C.
By: /s/ D. Dean MacFarlan
------------------------------------------
D. Dean MacFarlan
Chairman and Chief Executive Officer
SETTLEMENT AGREEMENT - Page 14
- --------------------
<PAGE>
LIST OF EXHIBITS
A .......... General Warranty Deed................................. (S)1
B .......... Bill of Sale ......................................... (S)1
C .......... Release............................................... (S)1
D .......... Escrow Agreement...................................... (S)1
SETTLEMENT AGREEMENT - Page 15
- --------------------
<PAGE>
EXHIBIT 10(gg)
FIRST AMENDMENT TO TERM NOTE
This is an amendment to that certain Term Note dated February 12, 1997 in
the original principal amount of $1,181,250.00 payable by Edward R. Anderson to
the order of CompuCom Systems, Inc. (the ANote=). The parties agree that
Section 3.3(a) of the Note is hereby amended in its entirety to read as follows:
Aa. The principal amount outstanding under this Note (currently $900,000)
shall be due and payable on October 22, 2001. Accrued interest shall
be payable at the same time as the payment of principal on this Note,
and upon payment of this Note in full.=
The parties hereby acknowledge and agree that except as amended as provided
above, all other terms and provisions of the Note remain in full force and
effect.
Agreed to as of this 19th day of February, 1999.
CompuCom Systems, Inc.
/s/ Edward R. Anderson By: /s/ M.L. SMITH
- ------------------------------ -----------------------------
Edward R. Anderson Its: SVP/CFO
-----------------------------
<PAGE>
EXHIBIT 10(kk)
TERM NOTE
(Thomas C. Lynch)
CompuCom Systems
$796,875 December 23, 1998
In consideration of the loan (hereinafter referred to as a "Loan")
CompuCom Systems, Inc., a Delaware corporation (the "Lender"), has made to
Thomas C. Lynch, (the "Borrower"), and for value received, the Borrower hereby
promises to pay to the order of the Lender, at the Lender's office located at
7171 Forest Lane, Dallas, Texas, 75230 or at such other place in the continental
United States as the Lender may designate in writing, in lawful money of the
United States, and in immediately available funds, the principal sum of
$796,875.
The unpaid principal balance of the Note shall be paid in full on
December 31, 2001. The Borrower hereby further promises to pay to the order of
the Lender interest on the outstanding principal amount from the date hereof, at
a per annum rate equal to 4.33% (the "Loan Rate"). The Borrower shall pay on
demand interest on any overdue payment of principal and interest (to the extent
legally enforceable) at the Loan Rate plus three percent (3%). In the event of
Borrower's termination of employment, the unpaid principal balance and all
accrued interest thereon shall be paid in full.
Interest shall be paid upon maturity or early repayment of the entire
outstanding principal balance of the Note.
All payments made on this Note (including, without limitation,
prepayments) shall be applied, at the option of the Lender, first to late
charges and collection costs, if any, then to accrued interest and then to
principal. Interest payable hereunder shall be calculated for actual days
elapsed on the basis of a 360-day year. All accrued and unpaid interest shall be
due and payable upon maturity of this Note. After maturity or in the event of
default, interest shall continue to accrue on the Note at the rate set forth
above and shall be payable on demand of the Lender.
The outstanding principal amount of this Note may be prepaid in whole or
in part without any prepayment penalty or premium at any time or from time to
time by Borrower upon notice to the Lender; provided, that any prepayment shall
be applied first to any interest due to the date of such prepayment on this
Note.
Notwithstanding anything in this Note, the interest rate charged hereon
shall not exceed the maximum rate allowable by applicable law. If any stated
interest rate herein exceeds the maximum allowable rate, then the interest rate
shall be reduced to the maximum allowable rate, and any excess payment of
interest made by Borrower at any time shall be applied to the unpaid balance of
any outstanding principal of this Note.
An event of default hereunder shall consist of:
(i) a default in the payment by the Borrower to the Lender of
principal or interest under this Note as and when the same shall become due
and payable or failure to perform any agreements hereunder; or
(ii) an event of default under the Pledge Agreement dated, as of
December 23, 1998 between Borrower and the Lender or an event of default
under the Security Agreement, dated as of December 23, 1998 between Borrower
and Safeguard Scientifics, Inc.; or
<PAGE>
(iii) institution of any proceeding by or against the Borrower under
any present or future bankruptcy or insolvency statute or similar law and, if
involuntary, if the same are not stayed or dismissed within sixty (60) days,
or the Borrower's assignment for the benefit of creditors or the appointment
of a receiver, trustee, conservator or other judicial representative for the
Borrower or the Borrower's property or the Borrower's being adjudicated a
bankrupt or insolvent.
Upon the occurrence of an event of default hereunder, this Note shall
automatically without any action or notice by Lender, be accelerated and become
immediately due and payable, and Lender shall have all of the rights and
remedies provided for herein or otherwise available at law or in equity, all of
which remedies shall be cumulative.
Neither the reference to nor the provisions of any agreement or document
referred to herein shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
herein provided.
Any action, suit or proceeding where the amount in controversy as to at
least one party, exclusive of interest and costs, exceeds $1,000,000 ("Summary
Proceeding"), arising out of or relating to this Agreement, the Pledge Agreement
or the Security Agreement or the breach, termination or validity thereof, shall
be litigated exclusively in the Superior Court of the State of Delaware (the
"Delaware Superior Court") as a summary proceeding pursuant to Rules 124-131 of
the Delaware Superior Court, or any successor rules (the "Summary Proceeding
Rules"). Each of the parties hereto hereby irrevocably and unconditionally (i)
submits to the jurisdiction of the Delaware Superior Court for any Summary
Proceeding, (ii) agrees not to commence any Summary Proceeding except in the
Delaware Superior Court, (iii) waives, and agrees not to plead or to make, any
objection to the venue of any Summary Proceeding in the Delaware Superior Court,
(iv) waives, and agrees not to plead or to make, any claim that any Summary
Proceeding brought in the Delaware Superior Court has been brought in an
improper or otherwise inconvenient forum, (v) waives, and agrees not to plead or
to make, any claim that the Delaware Superior Court lacks personal jurisdiction
over it, (vi) waives its right to remove any Summary Proceeding to the federal
courts except where such courts are vested with sole and exclusive jurisdiction
by statute and (vii) understands and agrees that it shall not seek a jury trial
or punitive damages in any Summary Proceeding based upon or arising out of or
otherwise related to this Agreement waives any and all rights to any such jury
trial or to seek punitive damages.
In the event any action, suit or proceeding where the amount in
controversy as to at least one party, exclusive of interest and costs, does not
exceed $1,000,000 (a "Proceeding"), arising out of or relating to this Agreement
or the breach, termination or validity thereof is brought, the parties to such
Proceeding agree to make application to the Delaware Superior Court to proceed
under the Summary Proceeding Rules. Until such time as such application is
rejected, such Proceeding shall be treated as a Summary Proceeding and all of
the foregoing provisions of this Section relating to Summary Proceedings shall
apply to such Proceeding.
If a Summary Proceeding is not available to resolve any dispute
hereunder, the controversy or claim shall be settled by arbitration conducted on
a confidential basis, under the U.S. Arbitration Act, if applicable, and the
then current Commercial Arbitration Rules of the American Arbitration
Association (the "Association") strictly in accordance with the terms of this
Agreement and the substantive law of the State of Delaware. The arbitration
shall be conducted at the Association's regional office located closest to the
Lender's principal place of business by a single arbitrator. Judgment upon the
arbitrator's award may be entered and enforced in any court of competent
jurisdiction. Neither party shall institute a proceeding hereunder unless at
least 60 days prior thereto such party shall have given written notice to the
other party of its intent to do so.
Neither party shall be precluded hereby from securing equitable remedies
in courts of any jurisdiction, including, but not limited to, temporary
restraining orders and preliminary injunctions to protect its rights and
interests but shall not be sought as a means to avoid or stay arbitration or
Summary Proceedings.
<PAGE>
Each of the parties hereto hereby irrevocably designates and appoints
Corporation Service Company (the "Service Agent") with offices on the date
hereof at 1013 Centre Road, Wilmington, Delaware 19805, as its agent to receive
service of process in any Proceeding or Summary Proceeding. Each of the parties
hereto further covenants and agrees that, so long as this Agreement or the
Pledge Agreement shall be in effect, each such party shall maintain a duly
appointed agent for the service of summonses and other legal processes in the
State of Delaware and will notify the other parties hereto of the name and
address of such agent if it is no longer the Service Agent.
The Borrower hereby waives presentment, demand, protest and notice of
dishonor and protest, and also waives all other exemptions; and agrees that
extension or extensions of the time of payment of this Note or any installment
or part thereof may be made before, at or after maturity by agreement by the
Lender. Upon default hereunder the Lender shall have the right to offset the
amount owed by the Borrower against any amounts owed by the Lender in any
capacity to the Borrower, whether or not due, and the Lender shall be deemed to
have exercised such right of offset and to have made a charge against any such
account or amounts immediately upon the occurrence of an event of default
hereunder even though such charge is made or entered on the books of the Lender
subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs
and expenses, including, without limitation, attorneys' fees and legal expenses,
that may be incurred by the Lender in connection with the enforcement of this
Note.
Notices required to be given hereunder shall be deemed validly given (i)
three business days after sent, postage prepaid, by certified mail, return
receipt requested, (ii) one business day after sent, charges paid by the sender,
by Federal Express Next Day Delivery or other guaranteed delivery service, (iii)
when sent by facsimile transmission, or (iv) when delivered by hand:
If to the Lender: CompuCom Systems, Inc.
Attn: Chief Financial Officer
7171 Forest Lane
Dallas, TX 75230
If to the Borrower: Thomas C. Lynch
1236 Denbigh Lane
Radnor, PA 19087
or to such other address, or in care of such other person, as the holder or the
Borrower shall hereafter specify to the other from time to time by due notice.
Any failure by the Lender to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon the
Lender unless in writing and signed by it. Any provision hereof found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
validity, legality or enforceability of the remainder hereof. This Note shall
apply to and bind the successors of the Borrower and shall inure to the benefit
of the Lender, its successors and assigns.
This Note shall be governed by and interpreted in accordance with the
laws of the State of Delaware.
IN WITNESS WHEREOF, the Borrower has duly executed this Term Note as of
the date first written above.
/s/ THOMAS C. LYNCH
------------------------------------
THOMAS C. LYNCH
<PAGE>
EXHIBIT 10(ll)
PLEDGE AGREEMENT
----------------
For good and valuable consideration and intending to be legally bound,
Thomas C. Lynch ("Pledgor") hereby assigns, pledges and grants to CompuCom
Systems, Inc., a Delaware corporation ("Lender"), a security interest in the
shares of capital stock and/or other securities of Lender, now owned by or
standing in the name of Pledgor or in which Pledgor has a legal or beneficial
interest, which are described on Schedule A attached hereto and made a part
----------
hereof (collectively, the "Securities"), together with all (a) additional
property issued by Lender in respect of or related to the Securities and from
time to time acquired by Pledgor in any manner, and the certificates or
instruments representing such additional property, and all dividends, interest,
cash, instruments, and other property from time to time received, receivable, or
otherwise distributed or distributable in respect of or in exchange for any or
all of such additional property; and (b) cash and non-cash proceeds,
distributions, additions, substitutions, exchanges, redemptions and replacements
of, on or by reason of any of the foregoing (collectively, the "Collateral"), as
security for the payment and performance of all indebtedness, liabilities and
obligations of Pledgor (primary, secondary, direct, contingent, related,
unrelated, sole, joint or several) to Lender, whether for principal, interest,
fees, expenses or otherwise, (the "Obligations"), arising under that certain
promissory note, dated of even date herewith, issued by Lender in the principal
amount of $798,875 (the "Note"), all on the following terms and conditions.
A. Representations and Warranties. Pledgor represents and warrants that:
------------------------------
1. Pledgor has good title to the Securities free and clear of all
liens and encumbrances except the security interest created hereby.
2. Pledgor has delivered to Lender all stock certificates representing
or evidencing the Securities, accompanied by corresponding assignment or
transfer powers duly executed in blank by Pledgor, and this Pledge Agreement and
such powers have been duly and validly executed and are binding and enforceable
against Pledgor in accordance with their terms; and the pledge of the Securities
in accordance with the terms hereof creates a valid and perfected first priority
security interest in the Securities securing payment of the Obligations.
3. No authorization, approval, consent, or other action by, and no
notice to or filing with, any governmental authority, regulatory body or other
person or entity is required either (i) for the pledge by Pledgor of the
Collateral pursuant to this Pledge Agreement or for the execution, delivery or
performance of this Pledge Agreement by Pledgor, or (ii) for the exercise by
Lender of the voting or other rights provided for in this Pledge Agreement or
the remedies in respect of the Collateral pursuant to this Pledge Agreement
(except as may be required in connection with such disposition by laws affecting
the offering and sale of securities generally).
B. Negative Pledge. Pledgor agrees not to (i) sell or otherwise dispose
---------------
of, or grant any option with respect to, any of the Collateral, or (ii) create
or permit to exist any lien, security interest or other charge or encumbrance
upon or with respect to any of the Collateral, except the security interest
under this Pledge Agreement.
<PAGE>
C. Additional Collateral. Prior to the full payment and performance of
---------------------
the Obligations, Pledgor shall pledge hereunder, as additional Collateral, and
shall forthwith transfer and deliver to Lender immediately upon acquisition
(directly or indirectly) thereof, any and all additional shares of stock or
other securities of Borrower and any other property of any kind received,
receivable, or otherwise distributed or distributable on or by reason of the
Collateral, whether in the form of or by way of stock dividends, warrants,
partial liquidation, conversion, prepayments or redemptions (in whole or in
part), liquidation or otherwise with the sole exception of normal, regularly
declared cash dividends or cash interest payments (as the case may be) paid in
respect of the Collateral.
D. Pledgor's Rights in the Pledged Collateral Before Default. So long as
---------------------------------------------------------
no Event of Default (as such term is defined in the Note) shall have occurred
and be continuing and Pledgor is in full compliance with the terms hereof:
1. Pledgor shall be entitled to receive and retain any normal,
regularly declared cash dividends or cash interest payments (as the case may be)
paid in respect of the Collateral, if such dividends and payments are permitted
under the Note.
2. Pledgor may exercise all voting rights, if any, pertaining to the
Collateral for any purpose not inconsistent with the terms hereof or of the
Obligations or Note. In the event any Collateral has been transferred into the
name of Lender or a nominee or nominees of Lender prior to the occurrence of
such Event of Default, Lender or its nominee shall execute and deliver upon
request of Pledgor an appropriate proxy in order to permit Pledgor to vote, if
applicable, the same.
E. Further Assurances. Pledgor shall from time to time promptly take all
------------------
actions (and execute, deliver and record all instruments and documents)
necessary or appropriate or requested by Lender, to continue the validity,
enforceability and perfected status of the pledge of the Collateral hereunder or
to enable Lender to exercise and enforce the rights and remedies hereunder with
respect to any of the Pledged Collateral.
F. Lender's Duties Toward Collateral. Lender shall be under no obligation
---------------------------------
to take any actions and shall have no liability (except for gross negligence or
willful misconduct) with respect to the preservation or protection of the
Collateral or any underlying interests represented thereby as against any prior
or other parties. In the event Pledgor requests that Lender take or omit to
take action(s) with respect to the Collateral, Lender may refuse so to do with
impunity if Pledgor does not, upon request of Lender, post sufficient,
creditworthy indemnities with Lender which, in Lender's sole discretion, are
sufficient to hold it harmless from any possible liability of any kind in
connection therewith.
G. Waivers by Pledgor. Pledgor agrees that Lender, at any time and
------------------
without affecting its rights in the Collateral and without notice to Pledgor,
may grant any extensions, releases or other modifications of any kind respecting
the Note, the Obligations and any Collateral. Pledgor, except as otherwise
provided herein or in the Note, waives all notices of any kind in connection
with the Obligations, the Note and any changes therein or defaults or
enforcements proceedings thereunder, whether against Pledgor or any other party.
Pledgor hereby waives any rights it has at equity or in law to require Lender to
apply any rights of marshalling or other equitable doctrines in such
circumstances.
2
<PAGE>
H. Remedies Upon Default. After the occurrence of any Event of Default
---------------------
(as defined in the Note) or if any representation, warranty or agreement of
Pledgor hereunder is breached or proves to be false, erroneous or misleading in
any material respect:
1. Lender may transfer or cause to be transferred any of the
Collateral into its own or a nominee's or nominees' names.
2. Lender shall be entitled to receive and apply in payment of the
Obligations any cash dividends, interest or other payment on the Collateral.
3. Lender shall be entitled to exercise in Lender's discretion all
voting rights, if any, pertaining to the Collateral, and in connection therewith
and at the written request of Lender, Pledgor shall promptly execute any
appropriate dividend, payment or brokerage orders or proxies.
4. Pledgor shall promptly take any action necessary or required or
requested by Lender, in order to allow Lender fully to enforce the pledge of the
Collateral hereunder and realize thereon to the fullest possible extent
including, but not limited to, the filing of any claims with any court,
liquidator or trustee, custodian, receiver or other like person or party.
5. Lender shall have all the rights and remedies granted or available
to it hereunder, under the Uniform Commercial Code as in effect from time to
time in Delaware, under any other statute or the common law, or under any of the
Loan Documents, including without limitation the right to sell the Collateral or
any portion thereof at one or more public or private sales upon ten (10) days'
written notice and to bid thereat or purchase any part or all thereof in its own
or a nominee's or nominees' names, free and clear of any equity of redemption;
and to apply the net proceeds of the sale, after deduction for any expenses of
sale, including without limitation the payment of all Lender's reasonable
attorneys' fees in connection with the Obligations and the sale, to the payment
of the Obligations in any manner or order which Lender in its sole discretion
may elect, without further notice to or consent of Pledgor and without regard to
any equitable principles of marshalling or other like equitable doctrines.
6. Lender may increase, in its sole discretion, but shall not be
required to do so, the Obligations by making additional advances or incurring
expenses for the account of Pledgor deemed appropriate or desirable by Lender in
order to protect, enhance, preserve or otherwise further the sale or disposition
of the Collateral or any other property it holds as security for the
Obligations.
3
<PAGE>
I. Dispositions of Collateral. Pledgor recognizes that Lender may be
--------------------------
unable to effect a sale to the public of all or part of the Collateral by reason
of certain prohibitions or restrictions in the federal or state securities laws
and regulations (collectively, the "Securities Laws"), or the provisions of
other federal and state laws, regulations or rulings, but may be compelled to
resort to one or more private sales to a restricted group of purchasers who will
be required to agree to acquire the Collateral for their own account, for
investment and not with a view to the further distribution or resale thereof
without restriction. Pledgor agrees that any sales(s) so made may be at prices
and on other terms less favorable to Pledgor than if the Collateral was sold to
the public, and that Lender has no obligation to delay sale of the Collateral
for period(s) of time necessary to permit the issuer thereof to register the
Collateral for sale to the public under any of the Securities Laws. Pledgor
agrees that negotiated sales whether for cash or credit made under the foregoing
circumstances shall not be deemed for that reason not to have been made in a
commercially reasonable manner. Pledgor shall cooperate with Lender and shall
satisfy any requirements under the Securities Laws applicable to the sale or
transfer of the Collateral by Lender.
In connection with any sale or disposition of the Collateral, Lender is
authorized to comply with any limitation or restriction as it may be advised by
its counsel is necessary or desirable in order to avoid any violation of
applicable law or to obtain any required approval of the purchaser(s) by any
governmental regulatory body or officer and it is agreed that such compliance
shall not result in such sale being considered not to have been made in a
commercially reasonable manner nor shall Lender be liable or accountable by
reason of the fact that the proceeds obtained at such sale(s) are less than
might otherwise have been obtained.
Lender may elect to obtain the advice of any independent nationally-
known investment banking firm, which is a member firm of the New York Stock
Exchange, with respect to the method and manner of sale or other disposition of
any of the Collateral, the best price reasonably obtainable therefor, the
consideration of cash and/or credit terms, or any other details concerning such
sale or disposition. Lender, in its sole discretion, may elect to sell on such
credit terms which it deems reasonable.
J. Lender's Expenses. Pledgor shall pay Lender on demand all costs and
-----------------
expenses incurred by Lender (including, without limitation, counsel fees and
expenses) in connection with (i) the preparation, negotiation, and closing of
this Pledge Agreement, and any modifications hereto, (ii) the custody,
preservation, sale or collection or realization of the Collateral, and (iii) the
exercise or enforcement of Lender's rights hereunder.
K. Successors and Assigns. This Pledge Agreement shall be binding upon
----------------------
and shall inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns and shall be governed as to its
validity, interpretation and effect by the laws of the State of Delaware; and
any terms used herein which are defined in the Uniform Commercial Code as
enacted in Delaware shall have the meanings therein set forth.
4
<PAGE>
L. Amendments and Waivers. No amendment or waiver of any provision of
----------------------
this Agreement nor consent to any departure by Pledgor herefrom shall in any
event be effective unless the same shall be in writing and signed by Lender, and
then such amendment, waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given. No failure or delay on
the part of Lender in the exercise of any right, power, or remedy under this
Pledge Agreement or the Note shall under any circumstances constitute or be
deemed to be a waiver thereof, or prevent the exercise thereof in that or any
other instance.
M. Attorney-in-Fact. Pledgor hereby irrevocably appoints Lender as its
----------------
attorney-in-fact, in the name of Pledgor or otherwise, from time to time in
Lender's discretion and at Pledgor's expense, to take any action and to execute,
deliver and record any instruments or documents in connection with the
Collateral which Lender may deem necessary or advisable to accomplish the
purposes of this Pledge Agreement including, without limitation, to receive,
endorse, and collect all instruments made payable to Pledgor representing any
dividend, interest, or other distribution in respect of the Pledged Collateral
or any part thereof and to give full discharge for the same. Lender shall not,
in its capacity as such attorney-in-fact, be liable for any acts or omissions,
nor for any error of judgment or mistake of fact or law, but only for gross
negligence or willful misconduct.
N. Entire Agreement. This Pledge Agreement, and all agreements and
----------------
instruments to be delivered by the parties pursuant hereto or in connection
herewith, represent the entire understanding of the parties with respect to the
subject matter hereof. Except as otherwise indicated, all agreements defined
herein refer to the same as from time to time amended or supplemented or the
terms thereof waived or modified in accordance herewith and therewith. Any
provision hereof found to be illegal, invalid or unenforceable for any reason
whatsoever shall not affect the legality, validity or enforceability of the
remainder hereof.
P. Joint and Several Obligations. If more than one Pledgor signs this
-----------------------------
Pledge Agreement, all references herein to Pledgor shall include all such
Pledgors and each shall be jointly and severally bound by the terms and
provisions hereof.
Q. Notices. All notices, demands or other communications required or
-------
permitted hereunder shall be in writing and shall be given as provided in the
Note, using Pledgor's address as indicated below.
R. Partial Releases; Termination. Any of the Collateral may be released
-----------------------------
from this Pledge Agreement without altering, varying, or diminishing in any way
this Pledge Agreement or the security interest granted hereby as to the
Collateral not expressly released, and this Pledge Agreement and such security
interest shall continue in full force and effect as to all of the Collateral not
expressly released. This Pledge Agreement and Lender's rights in the Collateral
shall cease, terminate and be void upon the repayment in full of the
Obligations. Upon such repayment and termination, Lender shall execute such
documents as may reasonably be required by Pledgor to release Lender's security
interest in the Collateral.
5
<PAGE>
IN WITNESS WHEREOF, Pledgor has executed this Pledge Agreement as of the
23rd day of December, 1998.
WITNESS OR ATTEST: PLEDGOR:
/s/ LAZARE SMITH /s/ Thomas C. Lynch
- ----------------------------- --------------------------------
Name: Thomas C. Lynch
Address: 1236 Denbigh Lane
Radnor, PA 19087
Fax No.: 972-856-5395
6
<PAGE>
Schedule A
Description of Pledged Securities
==============================================================================
| | | Stock | No. of |
| Issuer | Class of Stock | Certificate No. | Shares |
|=======================|====================|====================|============|
|CompuCom Systems, Inc. | Common Stock | | 500,000 |
==============================================================================
1
<PAGE>
EXHIBIT 10(mm)
TERM NOTE
$2,021,875.00 Dallas, Texas October 22, 1998
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
Two Million, Twenty-one Thousand, Eight Hundred, Seventy-five Dollars
($2,021,875.00), 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 October 22, 1998, 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 BankAmerica Corp. (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 weekly ceiling as described in
Tex.Rev.Civ.Stat.Ann. art. 5069-ID.003, 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 5.1%.
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 October 22, 2003. Interest shall be payable annually on
October 22nd of each year during the term hereof, commencing
October 22, 1999, and upon payment of this Note in full.
Initialed for Identification
/s/ ERA
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, notice of intent to accelerate or notice of acceleration, all 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.
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.
Initialed for Identification
/s/ ERA
Page 2 ----------------------------
<PAGE>
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 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 346 of the Texas Finance Code 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. Pledge Agreement. This Note is the Note referred to in the Pledge
----------------
Agreement dated October 22, 1998, and is entitled to the benefits thereof and
the security as provided for therein. Reference is made to the Pledge 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.
/s/ EDWARD R. ANDERSON
------------------------------------
Edward R. Anderson
Initialed for Identification
/s/ ERA
Page 3 ----------------------------
<PAGE>
EXHIBIT 10(nn)
PLEDGE AGREEMENT
PLEDGE AGREEMENT ("Pledge Agreement") made as of the 22nd day of October,
1998, between Edward R. Anderson ("Pledgor"), and CompuCom Systems, Inc., a
Delaware corporation ("Secured Party").
1. Definitions. In addition to the terms defined elsewhere in this Pledge
------------
Agreement, the following terms shall have the following meanings for
purposes of this Pledge Agreement:
(a) The term "Event of Default" shall have the meaning ascribed thereto in
Section 9 of this Pledge Agreement.
---------
(b) The term "Note" means and includes that certain Note, dated of even
date herewith, in the original principal amount of $2,021,875, which
Pledgor has executed, or is in the process of executing payable to the
order of Secured Party, together with any and all concurrent or
subsequent extensions, amendments, or modifications thereto.
(c) The term "Obligations" means and includes all obligations of Pledgor
to Secured Party pursuant to the terms of the Note and this Pledge
Agreement.
(d) The term "Option Shares" means 647,000 shares of capital stock of
Secured Party being purchased by Pledgor with the proceeds of the Note
pursuant to the exercise of certain Non Qualified Stock Options and
Incentive Stock Options granted to Pledgor by Secured Party.
2. Pledge. Upon the terms hereof, Pledgor hereby pledges and grants to
-------
Secured Party a lien on and security interest (the "Security Interest") in
and to all of the following instruments and property of Pledgor (all of the
following being herein sometimes called the "Collateral"):
(a) Six hundred forty-seven thousand shares of capital stock of Secured
Party as described on Exhibit A attached hereto and incorporated
---------
herein for all purposes representing the Option Shares being purchased
by Pledgor with the proceeds of the Note, together with all
certificates, options, rights or other distributions issued as an
addition to, in substitution or in exchange for, or on account of, any
such shares (collectively, the "Stock");
(b) All securities and other property, rights or interests of any
description at any time issued or issuable as an addition to, in
substitution or exchange for, with respect to, incident to or in lieu
of such shares described in Section 2(a) hereof or with respect to,
------------
incident to or in lieu of the Collateral (i) due to any dividend,
stock-split, stock dividend or distribution on dissolution, on partial
or total liquidation, or other corporate reorganization or for any
other reason; (ii) in connection with a reduction of capital, capital
surplus or paid-in surplus; or (iii) in connection with any spin-off,
split-off, reclassification, readjustment, merger, consolidation, sale
of assets, combination of shares or any other plan of distribution
affecting the companies which have issued the shares described in
Section 2(a) hereof;
------------
(c) Any and all proceeds, monies, income and benefits arising from or by
virtue of, and all dividends and distributions (cash or otherwise)
payable and/or distributable with respect to, all or any of the shares
or other securities and rights and interests described in clauses (a)
through (c) of this Section 2.
---------
3. Obligations Secured. This Pledge Agreement and the Security Interest
-------------------
granted hereby secure the prompt satisfaction of the Obligations.
4. Warranties. Pledgor represents and warrants that each of the following
----------
statements is true and
Page1
<PAGE>
correct: (a) Pledgor is the legal and beneficial owner of the Stock; (b)
the Collateral is owned by Pledgor free of any pledge, mortgage,
hypothecation, lien, charge, encumbrance or security interest or purchase
right or option on the part of any third person in such Collateral, except
the Security Interest; (c) Pledgor has the full power, authority and legal
right to transfer and pledge the Collateral free of any encumbrances and
without obtaining the consent of any other person or entity; and (d) upon
delivery of the Collateral to Secured Party, this Pledge Agreement will
create a valid and perfected first priority lien upon, and security
interest in, the Collateral and the proceeds thereof, securing the payment
of the Obligations. The delivery at any time by Pledgor to Secured Party of
Collateral shall constitute a representation and warranty by Pledgor under
this Pledge Agreement that, with respect to the Collateral and each item
thereof, Pledgor is the owner of the Collateral and the matters heretofore
warranted in clauses (a) through (d) of this Section 4 are true and
---------
correct.
5. Covenants. Pledgor covenants to do or not to do, as the case may be, each
---------
of the following; provided, however, in the case of a negative covenant,
Pledgor will not undertake any of the proscribed activities without the
prior written consent of Secured Party: (a) from time to time to do all
other acts or things as Secured Party may reasonably request in order more
fully to evidence and perfect the Security Interest; (b) after the
occurrence of an Event of Default, to promptly pay to Secured Party the
amount of all court costs and reasonable attorneys' fees incurred by
Secured Party hereunder; and (c) except as otherwise provided herein, to
promptly deliver to Secured Party, in the exact form received, all
securities and other property described in Section 2(b) and Section 2(c)
------------ ------------
hereof which come into the possession, custody or control of Pledgor.
Pledgor further covenants and agrees that, without the prior written
consent of Secured Party, Pledgor shall not assign or transfer Pledgor's
rights in the Collateral, or create any other lien or security interest in
or otherwise encumber any of the Collateral, or permit any of the
Collateral to ever be or become subject to any lien, attachment, execution,
sequestration, other legal or equitable process, or any lien or encumbrance
of any kind. Notwithstanding anything contained in the preceding sentence
to the contrary, Pledgor shall be free to sell the Stock provided that
Pledgor complies with all applicable laws in effecting such sale and in the
event of any such sale the shares of Stock will be released from the
Security Interest created pursuant to this Pledge Agreement upon payment to
Secured Party of $3.125 for each share of Stock sold. All assignments and
endorsements by Pledgor shall be in such form and substance as may be
satisfactory to Secured Party. Should any covenant, duty or agreement of
Pledgor fail to be performed in accordance with its terms hereunder,
Secured Party may, but shall never be obligated to, perform or attempt to
perform such covenant, duty or agreement on behalf of Pledgor, and any
amount expended by Secured Party in such performance or attempted
performance shall become part of the Obligations, except to the extent
prohibited by applicable law, and Pledgor agrees to pay such amount
promptly to Secured Party.
6. Adjustments and Distributions Concerning Collateral. Should the Collateral,
---------------------------------------------------
or any part thereof, ever be converted in any manner by its issuer into
another type of property or any money or other proceeds ever be paid or
delivered to Pledgor as a result of Pledgor's rights in the Collateral,
then in any such event (except as provided in Section 7 hereof), all such
---------
property, money and other proceeds shall immediately be and become part of
the Collateral, and Pledgor covenants to forthwith pay and deliver all such
property, money or other proceeds so received to Secured Party; and, if
Secured Party deems it necessary and so requests, to endorse properly or
assign any and all such other proceeds to Secured Party and to deliver to
Secured Party any and all such other proceeds which require perfection by
possession under the Uniform Commercial Code of the State of Texas or other
appropriate jurisdiction (the "UCC"). With respect to any of such property
of a kind requiring an additional security agreement, financing statement
or other writing to perfect a security interest therein in favor of Secured
Party, Pledgor will forthwith execute and deliver to Secured Party whatever
Secured Party shall deem necessary or proper for such purpose.
Page2
<PAGE>
7. Cash Dividends and Voting Rights. Unless an Event of Default has occurred
--------------------------------
and shall not have been waived by Secured Party, Pledgor is entitled, (a)
to exercise all voting rights with respect to the Collateral and (b) to
receive for his own use cash dividends on the Collateral. Upon the
occurrence of an Event of Default, Secured Party may exercise all voting
rights with respect to the Collateral subject to all applicable rules and
regulations and may require any such cash dividends to be delivered to
Secured Party as additional Collateral hereunder or applied toward the
satisfaction of the Obligations.
8. Registration of Collateral in Name of Secured Party. Upon the occurrence
---------------------------------------------------
of an Event of Default, Secured Party, at its option, may have any or all
of the Collateral registered in its name or that of its nominee.
Immediately and without further notice, upon the occurrence of an Event of
Default, whether or not the Collateral has been registered in the name of
Secured Party or its nominee, Secured Party or its nominee shall have, with
respect to the Collateral, the right to exercise all voting rights and all
conversion, exchange, subscription or other rights, privileges or options
pertaining thereto including, without limitation, the right to exchange any
or all of the Collateral upon the merger, consolidation, reorganization,
recapitalization or other readjustment of the issuer thereof, or upon the
exercise by such issuer of any right, privilege, or option pertaining to
any of the Collateral, and, in connection therewith, to deliver any of the
Collateral to any committee, depositary, transfer agent, registrar or other
designated agency upon such terms and conditions as it may determine, all
without liability except to account for property actually received by it;
but Secured Party shall have no duty to exercise any of the aforesaid
rights, privileges or options and shall not be responsible for any failure
to do so, delay in doing so, or depreciation in the value of the Collateral
by reason of doing so. Thereafter, at such time as (a) all Events of
Defaults have been cured, and (b) there exists no condition, event or act
which, with the giving of notice or lapse of time, or both, would
constitute an Event of Default, then the right to exercise all voting
rights with respect to the Collateral shall revert to Pledgor.
9. Events of Default. The occurrence of any one or more of the following
-----------------
shall constitute an Event of Default: (a) the failure of Pledgor to make
timely payment of any portion of the principal or interest of the Note or
any portion of the Obligations when due subject to any applicable cure
periods; (b) the failure of Pledgor to perform fully, faithfully and
promptly any material agreements, covenants and conditions contained in
this Pledge Agreement; (c) the levy against the Collateral, or any
substantial part thereof, or any execution, attachment, sequestration,
distraint warrant or other like or similar writ or the attachment to the
Collateral of any lien other than the Security Interest; (d) the entry of a
decree or order for relief by a court having jurisdiction in the premises
in respect of Pledgor in an involuntary case under the United States
bankruptcy laws, as now or hereafter constituted, or any other applicable
federal or state bankruptcy, insolvency or other similar law, or appointing
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or
similar official) of Pledgor or of any substantial part of Pledgor's
property, or ordering the winding-up or liquidation of the affairs of
Pledgor and the continuance of any such decree or order unstayed and in
effect for a period of thirty (30) consecutive days; or (e) the
commencement by Pledgor of a voluntary case under the United States
bankruptcy laws, as now constituted or hereafter amended, or any other
applicable federal or state bankruptcy, insolvency or other similar law, or
the consent by Pledgor to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian, sequestrator (or other
similar official) of Pledgor for any substantial part of Pledgor's
property, or the making by Pledgor of any assignment for the benefit of
creditors, or the inability of Pledgor generally to pay his debts as such
debts become due, or the taking of any action by Pledgor in furtherance of
any of the foregoing.
10. Remedies. Upon the occurrence of an Event of Default, Secured Party may
--------
then exercise any and all rights to which it is entitled under the UCC or
otherwise. Pledgor hereby grants to Secured Party an irrevocable proxy
coupled with an interest to exercise as to such Collateral, upon the
occurrence of an Event of Default, all rights, powers and remedies of an
owner and all of the rights, powers and remedies hereinabove set forth, the
proxy herein granted to exist until all of the Obligations have been paid
and performed in full.
Page3
<PAGE>
11. Application of Proceeds. The proceeds of any disposition of the Collateral
-----------------------
or other action by Secured Party shall be applied (a) first, to the cost
and expenses incurred in connection therewith or incidental thereto or to
the care or safekeeping of any of the Collateral or in any way relating to
the rights of Secured Party hereunder, including reasonable attorneys' fees
and legal expenses; (b) then, to the satisfaction of the Obligations in
such order and to such portions as Secured Party may elect; (c) then, to
the payment of any other amounts required by applicable law; and (d) then,
to Pledgor to the extent of any surplus proceeds. Secured Party shall be
under no duty to exercise or to withhold the exercise of any of the rights,
powers, privileges and options expressly or implicitly granted to Secured
Party in this Pledge Agreement, and shall not be responsible for any
failure to do so or delay in so doing.
12. Notification of Sale. Reasonable notification of the time and place of any
--------------------
public sale of the Collateral, or reasonable notification of the time after
which any private sale or other intended disposition of the Collateral is
to be made, shall be sent to Pledgor and to any other person entitled under
the UCC to notice; provided that if any of the Collateral threatens to
decline speedily in value or is of the type customarily sold on a
recognized market, Secured Party may sell or otherwise dispose of the
Collateral without notification, advertisement, or other notice of any
kind. It is agreed that notice sent or given not less than five (5)
calendar days prior to the taking of the action to which the notice relates
is reasonable notification and notice for the purposes of this paragraph.
13. Satisfaction of Obligations and Release of Collateral. Upon the
-----------------------------------------------------
satisfaction in full of the Obligations, and the satisfaction of all
additional costs and expenses of Secured Party as provided herein, this
Pledge Agreement shall terminate, and Secured Party shall deliver to
Pledgor, at Pledgor's expense, such of the Collateral as shall not have
been sold or otherwise applied pursuant to this Pledge Agreement which
Secured Party shall have in its possession. In addition and
notwithstanding any provision contained in this Pledge Agreement to the
contrary, Pledgor shall be entitled to obtain the release of shares of
Stock from the Security Interest created hereby by paying to Secured Party
the sum of $3.125 for each share of Stock which Pledgor desires be released
from the terms hereof and upon receipt of such payment, Secured Party will
promptly release the applicable number of shares of Stock to Pledgor.
14. Notices. Any notice required or permitted by this Pledge Agreement shall
-------
be deemed to have been given or made when deposited in the United States
Mail, postage prepaid, certified mail, return receipt requested, addressed
to the parties at the addresses set forth opposite their respective
signatures below, or, if hand delivered, upon actual receipt.
15. Duties of Secured Party. Secured Party's duty with respect to any
-----------------------
Collateral now or hereafter in the possession of Secured Party is solely to
use reasonable care in the custody and preservation of the Collateral.
Secured Party shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral if the Collateral is accorded
treatment substantially equal to that which Secured Party accords its own
property, its being understood that Secured Party shall not have any
responsibility for ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to
any Collateral or for informing Pledgor of such matters whether or not
Secured Party has or is deemed to have any knowledge of such matters.
Secured Party shall not be required to take any steps necessary to preserve
any rights in the Collateral against prior parties or to protect, perfect,
preserve or maintain any security interest given to secure the Collateral,
nor to invest any cash constituting Collateral in any account or security
or otherwise.
16. Indemnification. Pledgor hereby agrees to indemnify and to hold Secured
---------------
Party harmless from and against any loss (excluding any loss attributable
to a diminution in the value of the Stock), claim, demand or expense
(including attorneys' fees) by reason, or in any manner related to, the
Collateral, including any such claim as may arise by reason of any alleged
breach of warranty concerning the
Page4
<PAGE>
Collateral, by reason of the failure of Pledgor to comply with any
applicable state, federal or foreign statute, rule, regulation, order or
decree, or by reason of Secured Party's efforts to enforce payment of the
Obligations, including expenses incurred in satisfying any applicable
securities laws.
17. Expenses. Pledgor will upon demand pay to Secured Party the amount of any
--------
and all reasonable expenses, including the reasonable fees and expenses of
its counsel and of any experts and agents, which Secured Party may incur in
connection with the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Collateral, the exercise or
enforcement of any of the rights of Secured Party hereunder, or the failure
by Pledgor to perform or observe any of the provisions hereof.
18. Security Interest Absolute. All rights of Secured Party and the pledge and
--------------------------
Security Interest hereunder, and all obligations of Pledgor hereunder,
shall be absolute and unconditional in all respects and shall not be
released, diminished, impaired, or affected for any reason, including
without limitation the occurrence of any one or more of the following
events: (a) the taking or accepting of any other security or assurance for
any or all of the Obligations; (b) any change in the time, manner or place
of payment of, or in any other term of, all or any of the Obligations; (c)
any exchange, release, subordination, surrender, loss or nonperfection of
any other collateral at any time existing in connection with any or all of
the Obligations, or any release or amendment or waiver of or consent to
departure from any guaranty, or other security, for all or any of the
Obligations; (d) any neglect, delay, omission, failure, or refusal of
Secured Party to take or prosecute any action in connection with this
Pledge Agreement; (e) the insolvency or bankruptcy of Pledgor; or (f) any
other circumstance which might otherwise constitute a defense available to
a discharge of Pledgor in respect of the Obligations of Pledgor in respect
of this Pledge Agreement.
19. Waivers. Except as otherwise required by the terms hereof or by applicable
-------
law, Pledgor hereby waives all notices, including but not limited to
demand, presentment for payment, notice of nonpayment, protest, notice of
protest, notice of intent to accelerate, notice of acceleration and all
other notices.
20. Remedies Cumulative. The rights and remedies provided herein are
-------------------
cumulative and are in addition to and not exclusive of any rights or
remedies provided by law, including, but without limitation, the rights and
remedies of a secured party under the UCC.
21. Amendment. This Pledge Agreement may be amended only by written instrument
---------
signed by all parties.
22. Invalidity of Any Provision. The invalidity of any one or more phrases,
---------------------------
sentences, clauses, paragraphs or sections hereof shall not affect the
remaining portions of this Pledge Agreement, all of which are being
inserted conditionally on its being held legally valid. In the event that
any one or more of the phrases, sentences, clauses, paragraphs or sections
contained herein should be invalid, or should operate to render this Pledge
Agreement invalid, then this Pledge Agreement shall be construed as if such
invalid phrase or phrases, sentence or sentences, clause or clauses,
paragraph or paragraphs, or section or sections had not been inserted.
23. Assignment. This Pledge Agreement shall apply to, inure to the benefit of
----------
and be binding upon and enforceable against the parties hereto and their
respective legal representatives, successors and assigns, except that the
rights and obligations of Pledgor contained herein shall not be assignable.
24. Governing Law. The substantive laws of the State of Texas shall govern the
-------------
validity, construction, enforcement and interpretation of this Pledge
Agreement, unless the laws of another state or jurisdiction require the
application of the laws of such state or jurisdiction. This Pledge
Agreement is performable in Dallas County, Texas.
Page5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Pledge Agreement as of
the date and year first above written.
PLEDGOR:
/s/ EDWARD R. ANDERSON
Address: ___________________________________
Edward R. Anderson
7171 Forest Lane
Dallas, Texas 75230
SECURED PARTY:
Address: COMPUCOM SYSTEMS, INC.
7171 Forest Lane
Dallas, Texas 75230 By: M. LAZARE SMITH
-------------------------------
Its: SVP/CFO
-------------------------------
Page6
<PAGE>
EXHIBIT A
---------
STOCK NUMBER OF
CERTIFICATE NO. SHARES
- --------------- ---------
#0405 10/22/98 615,000
#0404 10/22/98 32,000
Page7
<PAGE>
EXHIBIT 10(pp)
EMPLOYMENT AGREEMENT AMENDMENT
This is an amendment to that certain employment agreement between Edward R.
Anderson and CompuCom Systems, Inc. dated October 24, 1997. It is agreed that
the provision in Section 2.1 pertaining to additional compensation of $175,000
each year during the first three years of employment shall be deleted. It is
also agreed that Mr. Anderson's base salary shall be increased by $175,000
effective January 1, 1999 and that he will receive a lump sum payment of
$109,375 representing the prorated amount due from May 16, 1998 through
December 31, 1998.
Agreed to this 19th day of February, 1999.
CompuCom Systems, Inc.
/s/ EDWARD R. ANDERSON By: /s/ M. L. SMITH
- ---------------------- ---------------------------
Edward R. Anderson Its: SVP/CFO
---------------------------
<PAGE>
EXHIBIT 10(rr)
January 18, 1999
Bill Barry
5617 Risborough Dr.
Plano, TX 75093
Dear Bill:
This letter agreement sets forth the terms of the separation agreement
package between you and your employer, CompuCom Systems, Inc. (the "Company").
Please sign one of the two copies of this letter where indicated and return it
to me, keeping the other one for your own personal files. You have been given
an opportunity to review the terms of this agreement with your own attorney and,
indeed, are encouraged to do so. You and the Company are entering this
agreement with knowledge of the consequences and voluntarily.
The terms of the Agreement are as follows:
I. The Company and you have agreed to the following terms with respect to your
separation from the Company's employment. Several of the below benefits to
you, including the amount of severance pay, are over and above what would
be required for a terminating employee in your situation. In exchange for
these additional elements of the separation package, you have waived and
released the Company with respect to any claims you might have, as set
forth in the attached General Release and Agreement and you understand that
this letter agreement only is effective upon the effectiveness of that
General Release and Agreement.
The terms of your remaining employment and separation are as follows:
1. You have resigned from the Company, effective October 22, 1998
2. Severance will be 12 months of base salary of 1998, payable at times
regular salary otherwise would be paid from October 22, 1998 through
November 22, 1999 (the "Severance Period").
3. Your health insurance benefits will continue through the Severance
Period unless in the interim you find new employment which provides
comparable health insurance benefits. Your COBRA notice will be given
and benefit conversion privilege will begin as of October 22, 1998,
the date of your employment
<PAGE>
termination. You will thus have only 6 months COBRA coverage which you
will be required to pay on your own if you elect the conversion
privilege.
Please be advised that you may request a Certificate of Creditable
Coverage at the following times: (i) immediately upon termination of
your employment with the Company, (ii) at the time you elect not to
extend your health insurance coverage under COBRA and (iii) at the
time you terminate your health insurance coverage under COBRA..
4. Remaining Vacation Pay: This severance package covers all back
vacation days not taken by you.
5. We will pay reasonable relocation expenses for you to move from Dallas
if such move occurs before October 22, 1999; we will also pay for the
courses you are presently enrolled in to obtain a business degree,
which courses are listed on an attachment to this letter in Attachment
A. No other benefits will be provided including participation in the
Employee Stock Purchase Plan, the 401(k) Plan or other insurance
programs, or payment of any club dues or course tuition.
II. Options
1. You were granted options as set forth in the attached schedule.
Normally, the options must be exercised within 3 months of the
termination of your employment. However, we will extend this time of
exercise for the severance period. As a result all of your options
will be treated as Non-Qualified Stock Options and you will be deemed
a consultant of the Company during the severance period, being
available on reasonable notice and with your consent, and for
reasonable cost and expense payments to provide consultation services
to the Company.
III. Non-Compete and Confidentiality
1. In further consideration of this severance package, you will execute
the Confidentiality, Non-Compete and Non-Solicitation Agreement which
is attached.
The Company's obligations under this Severance Agreement are
conditioned on your adherence to the Confidentiality, Non-Compete and
Non-Solicitation Agreement.
IV. Miscellaneous terms of our agreement are as follows:
1. The Company and you agree that the terms of this agreement will be kept
confidential by both parties except that you may advise your family and
confidential advisers, and the Company may advise those people needing to know
in implementation of the above terms.
<PAGE>
2. Any questions that you may have respecting details or implementation of the
agreement should be directed to Lazane Smith as CFO of the Company.
4. This letter agreement and the General Release and Agreement contain all the
terms relevant to your termination and the benefits of termination and
replaces or supersedes any previous agreements or terms that may have
existed with respect to these subject matters. This agreement can only be
amended by a written amendment executed by both parties.
5. The letter agreement will be governed in accordance with the laws of the
State of Delaware.
I convey the very best wishes for your future career efforts. My signature
below is the Company's commitment to the terms above.
Sincerely yours,
CompuCom Systems, Inc.
By: /s/ M. L. SMITH
------------------------------
Title: SRVP/CFO
---------------------------
Agreed as to the separation package
and other terms set forth above:
/s/ BILL BARRY
- ------------------------
Bill Barry
<PAGE>
GENERAL RELEASE AND AGREEMENT
-----------------------------
NOTICE:
- -------
Various state and federal laws, including the Civil Rights Acts of 1964 and
1991 and the Age Discrimination in Employment Act, prohibit employment
discrimination based on age, sex, race, color, national origin, religion,
disability and veteran status. These laws are enforced through the Equal
Employment Opportunity Commission (EEOC), the Department of Labor and state
civil rights agencies.
If you sign this General Release and Agreement and accept the agreed-upon
special severance allowance and other termination benefits described in the
letter addressed to you which accompanies this release, you are giving up your
right to file a lawsuit pursuant to the aforementioned federal, state and local
laws in local, state or federal courts against [Safeguard Scientifics, Inc.]
with respect to any claims relating to your employment or termination therefrom
which arise up to the date this Agreement is executed.
We encourage you to discuss the following release language with an attorney
prior to executing this Agreement. In any event, you should thoroughly review
and understand the effect of the release before acting on it. Therefore, please
take this release home and consider it for twenty-one (21) days before you
decide to sign it.
<PAGE>
GENERAL RELEASE AND AGREEMENT
-----------------------------
As consideration for the special severance allowance and other termination
benefits offered to me by CompuCom Systems, Inc. (hereinafter referred to as the
"Company") specified in the letter that accompanies this General Release and
Agreement, I release and discharge the Company, its directors, officers, agents,
employees, subsidiaries, divisions and any and all affiliate companies,
including Safeguard Scientifics, Inc. as well as any successor to the Company,
from all claims, liabilities, demands and causes of action, arising up to the
date of execution of this Agreement, fixed or contingent, known or unknown,
which I may have or claim to have against the Company arising from my employment
or as a result of my termination from employment, and do hereby covenant not to
file a lawsuit to assert such claims. This includes but is not limited to
claims arising pursuant to the Age Discrimination in Employment Act, or any
other federal, state or local law or regulation relating to discrimination in
employment or equal opportunity or any claims growing out of any legal
restriction on the Company's right to terminate its employees.
I agree that I will not at any time publicize, write about, divulge or
discuss the existence of the General Release and Agreement, with any person or
entity whatsoever, other than my attorneys in this matter.
I understand that this Agreement is revocable by me for a period of 7 days
following execution of the Agreement. This Agreement shall not become effective
or enforceable until this 7 day revocation period has ended.
I have carefully read and fully understand all the provision of the Notice,
General Release and Agreement which set forth the entire agreement between me
and, and I acknowledge that I have not relied upon any representation or
statement, written or oral, not set forth in this document.
IN WITNESS WHEROF, I have set my hand and seal this 18th day of
January 1999.
/s/ BILL BARRY
--------------------------------
Bill Barry
<PAGE>
CompuCom Systems, Inc.
EMPLOYEE NON-DISCLOSURE
NON-SOLICITATION AND NON-COMPETITION AGREEMENT
In consideration of the letter agreement providing for my termination of
employment with CompuCom Systems, Inc.(the "Company"), I hereby agree with the
Company as follows:
1. I will not at any time reveal to any person or entity any of the
trade secrets or confidential information of the Company or of any third party
which the Company is under an obligation to keep confidential (including but not
limited to trade secrets or confidential information respecting inventions,
products, designs, methods, know-how, techniques, systems, processes, software
programs, works of authorship, customer lists, projects, plans and proposals),
and I shall keep secret all matters that have been entrusted to me and shall not
use or attempt to use any such information in any manner which may injure or
cause loss or may be calculated to injure or cause loss whether directly or
indirectly to the Company.
The above restrictions shall not apply to: (i) information that at the time
of disclosure is in the public domain through no fault of mine; (ii) information
received from a third party outside of the Company that was disclosed without a
breach of any confidentiality obligation; (iii) information approved for release
by written authorization of the Company; or (iv) information that may be
required by law or an order of any court, agency or proceeding to be disclosed;
provided, I shall provide the Company notice of any such required disclosure
once I have knowledge of it and will help the Company to the extent reasonable
to obtain an appropriate protective order.
Further, I represent that during my employment I have not taken, used or
permitted to be used any notes, memoranda, reports, lists, records, drawings,
sketches, specifications, software programs, data, documentation or other
materials of any nature relating to any matter within the scope of the business
of the Company or concerning any of its dealings or affairs otherwise than for
the benefit of the Company. I further agree that I shall not, after the
termination of my employment, use or permit to be used any such notes,
memoranda, reports, lists, records, drawings, sketches, specifications, software
programs, data, documentation or other materials, it being agreed that all of
the foregoing shall be and remain the sole and exclusive property of the Company
and that immediately upon the termination of my employment I shall deliver all
of the foregoing, and all copies thereof, to the Company, at its main office.
2. For a period of 12 months after termination of my employment,
which is October 22, 1998, I agree that I will not:
(i) directly or indirectly solicit, entice or induce any
Customer (as defined below) to become a client, customer, OEM distributor or
reseller of any other person, firm or corporation with respect to products
and/or services then sold or under development by the Company or to cease doing
business with the Company, and I shall not approach any such person, firm or
corporation for such purpose or authorize or knowingly approve the taking of
such actions by any other person;
<PAGE>
(ii) directly or indirectly solicit, recruit or hire any
employee of the Company to work for a third party other than the Company or
engage in any activity that would cause any employee to violate any agreement
with the Company; or
(iii) whether alone or as a partner, officer, director,
consultant, agent, employee or stockholder of any company or other commercial
enterprise, directly or indirectly engage in any business or other activity in
the United States or Canada which is or may be competitive with or render
services to any firm or business organization which competes with the Company
in, the products or services being manufactured, marketed, distributed, planned
in writing or developed by the Company at the time of termination of such
employment; provided, however, that my employment by a corporation named Banctec
as Vice President of Sales specifically to sell imaging software products to
various institutions shall not be deemed to be a violation of this subparagraph
(iii). I shall be permitted to own securities of a public company not in excess
of five percent (5%) of any class of such securities and to own stock,
partnership interests or other securities of any entity not in excess of five
percent (5%) of any class of such securities and such ownership shall not be
considered to be in competition with the Company.
For purposes of this Paragraph 2, a Customer means any person or entity
which at the time of determination shall be, or shall have been within two (2)
years prior to such time, a client, customer, OEM, distribution or reseller of
the Company.
3. I agree that any breach of this Agreement by me will cause
irreparable damage to the Company and that in the event of such breach the
Company shall have, in addition to any and all remedies of law, the right to an
injunction, specific performance or other equitable relief to prevent the
violation of my obligations hereunder.
4. Any waiver by the Company of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent breach
of such provision or any other provision hereof.
5. I hereby acknowledge that the type and periods of restriction
imposed in the provisions of this Agreement are fair and reasonable and are
reasonably required for the protection of the Company and the goodwill
associated with the business of the Company. I further agree that each provision
herein shall be treated as a separate and independent clause, and the
unenforceability of any one clause shall in no way impair the enforceability of
any of the other clauses herein. Moreover, if one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to scope, activity or subject so as to be unenforceable at law, such
provision or provisions shall be construed by the appropriate judicial body by
limiting and reducing it or them, so as to be enforceable to the maximum extent
compatible with the applicable law as it shall then appear.
<PAGE>
6. My obligations under this Agreement shall survive the termination
of my employment regardless of the manner of such termination and shall be
binding upon my heirs, executors, administrators and legal representatives.
7. The term "Company" shall include CompuCom Systems, Inc., and any
of its subsidiaries, subdivisions or affiliates. The Company shall have the
right to assign this Agreement to its successors and assigns, and all covenants
and agreements hereunder shall inure to the benefit of and be enforceable by
said successors or assigns.
8. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as a sealed
document as of the 18th day of January, 1999.
/s/ BILL BARRY
-------------------------------
Signature
BILL BARRY
-----------------------------------
Name - Please Print
-----------------------------------
-----------------------------------
Address
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Exhibit 21
Subsidiaries of the Registrant
Exclusive of inactive subsidiaries, the Registrant as of March 29, 1999 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
Dataflex Corporation Florida
Computer Integration Corporation 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, No. 33-85268, No. 333-58623, No. 333-69051
and No. 333-69043) 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 February 10, 1999,
related to the consolidated balance sheets of CompuCom Systems, Inc. and
subsidiaries as of December 31, 1998 and 1997, 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,
1998, which report appears in the December 31, 1998 annual report on Form 10-K
of CompuCom Systems, Inc.
KPMG LLP
Dallas, Texas
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,526
<SECURITIES> 0
<RECEIVABLES> 265,887
<ALLOWANCES> 3,507
<INVENTORY> 138,551
<CURRENT-ASSETS> 415,422
<PP&E> 107,018
<DEPRECIATION> 35,014
<TOTAL-ASSETS> 545,489
<CURRENT-LIABILITIES> 251,242
<BONDS> 81,929
0
15,000
<COMMON> 474
<OTHER-SE> 194,807
<TOTAL-LIABILITY-AND-EQUITY> 545,489
<SALES> 1,980,578
<TOTAL-REVENUES> 2,254,465
<CGS> 1,786,851
<TOTAL-COSTS> 1,970,505
<OTHER-EXPENSES> 264,550
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,742
<INCOME-PRETAX> 668
<INCOME-TAX> 267
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 401
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
