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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
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<C> <S>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
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COMMISSION FILE NUMBER: 0-20732
COMPUTER INTEGRATION CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0506623
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7900 GLADES ROAD,
BOCA RATON, FLORIDA 33434
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (561) 482-6678
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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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 / /
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. / /
AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NONAFFILIATES OF THE REGISTRANT
Common Stock, par value $.001 per share ("Common Stock"), was the only
class of voting stock of the Registrant outstanding on September 20, 1996. At
such date, the aggregate market value of the 2,102,683 shares of Common Stock
held by persons other than officers, directors and persons known to the
Registrant to be the beneficial owner (as that term is defined under the rules
of the Securities and Exchange Commission, the "Commission") of more than five
percent of the Common Stock, was approximately $2,365,518.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distributions of securities under a plan
confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: 6,953,038 shares of
Common Stock were outstanding as of September 20, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement of Computer Integration Corp.
for the 1996 Annual Meeting of Stockholders
Incorporated in Part III
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PART I
ITEM 1. BUSINESS
GENERAL
The Company (which term includes Computer Integration Corp. and its
wholly-owned operating subsidiary, CIC Systems, Inc., hereafter "Systems") is
one of the largest volume resellers of microcomputers, workstations and related
products to large and medium-sized corporations, federal, state and local
government entities and colleges and universities in the United States. The
Company distributes a broad range of microcomputer-related products from major
hardware manufacturers and software developers such as Hewlett-Packard Company
("HP"), Compaq Computer Corporation ("Compaq"), Sun Microsystems Computer
Corporation ("Sun"), Toshiba America Information Systems, Inc. ("Toshiba"),
International Business Machines ("IBM"), Lexmark International ("Lexmark"),
Epson America, Inc. ("Epson"), NEC Technologies, Inc. ("NEC"), 3COM, Inc.
("3COM"), Canon Computer Systems, Inc. ("Canon"), Novell, Inc. ("Novell") and
Microsoft Corporation ("Microsoft"). The Company is one of the largest resellers
of computer products manufactured by HP in the United States and during the year
ended June 30, 1996 ("Fiscal 1996"), sales of HP products accounted for
approximately 65% of the Company's net sales.
The Company has experienced rapid growth. On March 30, 1993, the Company
acquired Copley Systems Corporation ("Copley") of Westwood, Massachusetts. Net
sales of the Company and Copley increased from $103.9 million for the fiscal
year ended June 30, 1993 to $450.0 million in Fiscal 1996. Effective July 1,
1994, the Company acquired Dataprint, Inc. ("Dataprint") of Charlotte, North
Carolina, and effective July 1, 1995, the Company acquired substantially all of
the assets of Cedar Computer Center, Inc. ("Cedar") of Des Moines, Iowa (the
"Cedar Acquisition"). At the time of their acquisitions, Copley and Dataprint
were two of the largest dealers of HP computer products in the northeastern and
southeastern United States, respectively. Cedar was one of the largest dealers
of HP computer products in the midwestern and western United States. Cedar's
products complemented the Company's existing product lines and increased the
Company's market share of Compaq products.
The microcomputer industry has grown dramatically over the past several
years as a result of equipment price reductions, significant improvements in
hardware performance and software applications, increased use of microcomputers
by governments and businesses and increased product familiarity by end users.
The microcomputer distribution industry has experienced related growth in the
use of wholesale distribution channels by manufacturers for the distribution of
their products. The Company has distinguished itself from its competitors by
focusing primarily on the direct delivery of personal computer ("PC") hardware,
peripherals and software, from selected manufacturers, to a broad range of
customers through a low-cost, efficient method of distribution. The Company
configures PCs and printers with memory, operating systems and software at
strategically located distribution centers throughout the United States.
Management believes that the Company's focus on a limited number of
manufacturers, its expertise with their product lines, commitment to servicing
of its customers and efficient distribution and delivery of products provide the
Company a competitive advantage and enable it to operate with relatively low
operating costs. The Company's decentralized distribution system enables it to
reduce product delivery costs and rapidly respond to customer orders.
The Company's operating strategy is to (i) exploit its competitive
advantage realized from its low cost distribution system, (ii) increase its
market share of products of selected manufacturers such as HP, Compaq, IBM and
Sun, (iii) build customer loyalty and satisfaction, (iv) expand its nationwide
sales and distribution network through additional acquisitions and internal
growth and (v) expand its systems integration and support services. The Company
intends to acquire other companies whose product lines would complement the
Company's existing products or markets, including both resellers and providers
of systems integration and support services.
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INDUSTRY
Significant technological advances have transformed the microcomputer
industry during the past ten years. Once dominated by several large
manufacturers, the market now consists of several hundred manufacturers offering
products ranging from hand-held computers to sophisticated UNIX-based
workstations. During the same period, demand for microcomputers and related
products has increased substantially, as a result of several factors, including:
(i) decreases in the prices of microcomputers, peripherals and software,
primarily as a result of intense competition among manufacturers, retailers and
resellers; (ii) improvements in microcomputer hardware performance and
development of new software applications; (iii) increased use of microcomputers
by business, government and education institutions; and (iv) the development of
industry standards and component compatibility. While the technology and level
of product sophistication continue to improve, the cost of products has
continued to decline. Over the last several years, the industry has experienced
an aggressive series of price reductions by brand name personal computer
manufacturers such as IBM and Compaq, which have exerted additional pressure on
the profit margins of all manufacturers and distributors. However, the lower
prices have also stimulated demand, resulting in increased sales to both
existing and first-time buyers. In addition, as user familiarity with
microcomputers has increased, demand for more sophisticated hardware, software
and related products has increased the average total purchase price for personal
computer systems.
As the microcomputer products industry has grown, parallel growth has
occurred in the microcomputer products distribution industry in response to
increased demand for products and the increased use of wholesale distribution
channels by manufacturers. Microcomputer products are delivered to the ultimate
consumer through a combination of distribution channels including manufacturers,
wholesale distributors, aggregators and resellers. Wholesale distributors and
aggregators sell directly to resellers. Resellers, such as the Company, sell
directly to consumers, including corporations, government entities, education
institutions, small and medium-sized businesses and individuals, integrate
computer systems and provide technical support services.
There are various categories of resellers, including retailers such as
computer superstores, office supply chains, mail-order firms and systems
integrators. The larger computer manufacturers such as HP, Compaq and IBM,
historically, have required resellers to purchase their products from an
affiliated aggregator or designated distributors. However, over the past several
years, these manufacturers have also authorized wholesale distributors and
resellers to purchase their products directly. The Company purchases the
majority of the products it sells, including HP products, directly from
manufacturers and purchases the balance of such products, including Compaq, Sun
and IBM, from aggregators.
Due to significant changes in technology, the industry has experienced
rapid product obsolescence. The average life cycle of personal computers is
approximately six months, while peripheral product life cycles range up to an
average of 12 to 18 months. As technology advances, customers generally desire
to purchase the newest and fastest products to gain a competitive advantage.
Therefore, inventory management is critical to profitability.
Technological advances in the microcomputer industry typically result in
increased demand for the products sold by the Company. For example, Windows
95(TM), an operating system software introduced by Microsoft, has generated
increased sales of memory chips, hard drives, new computers and 32-bit software,
to make existing hardware systems compatible with the new operating system and
to upgrade existing hardware systems to take advantage of all of the features of
the new operating system.
The networking segment of the microcomputer industry is also currently
experiencing rapid growth. In addition to increased purchases of local and wide
area networks by the Company's target customers, new, previously undeveloped
markets may also be created by developments such as the Internet, an informal
world-wide network of proprietary computer networks and individuals
interconnected by various telecommunications systems.
In recent years, companies such as Oracle Corporation, Sybase, Inc., and
Informix Software Corp. have generated several billion dollars in annual
revenues by selling and developing tools which have enabled companies to reduce
their technical staff, upgrade their computer equipment and commensurately
reduce operating expenses by increasing the efficiency of their management
information systems. In addition,
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hardware manufacturers have developed products to interface with other hardware
systems. These trends in the microcomputer industry have created additional
demand and markets for the products sold by the Company.
STRATEGY
The Company's long-term objective is to become one of the leading resellers
and systems integrators in the United States in terms of sales volume of
microcomputers, work stations and related products and services. The Company's
business strategy is to:
- Expand its nationwide sales and distribution network;
- Exploit its competitive advantage realized from its low-cost distribution
system;
- Increase its market share of products of selected manufacturers such as
HP, Compaq, IBM and Sun;
- Build customer loyalty and satisfaction; and
- Expand its systems integration and support services.
National Sales and Distribution Network. The acquisitions of Copley,
Dataprint and Cedar, respectively, have increased sales of the Company and its
predecessor from $103.9 million for the fiscal year ended June 30, 1993 to
$450.0 million for Fiscal 1996. Those acquisitions have positioned the Company
to achieve its long-term objective by providing the Company a nationwide network
of 29 offices in 24 states for the sales and distribution of products and
services. In addition to these recent acquisitions, the Company intends to
continue to review potential acquisitions of hardware and software distributors
whose product and service mix complement the Company's existing operations and
whose personnel and management philosophy could be integrated into the Company.
Although the Company continuously reviews potential acquisition candidates, it
has not entered into any agreement, understanding or commitment with respect to
any additional acquisitions at this time.
Exploitation of Competitive Advantage Realized from Distribution
System. The Company's decentralized distribution system enables it to reduce
product delivery costs and rapidly respond to customer orders. Orders are filled
and shipped from distribution centers located in Boston, Massachusetts,
Charlotte, North Carolina, and Los Angeles, California for delivery to customers
anywhere in the continental United States. Orders are typically filled within 24
hours of receipt. In conjunction with product ordering and shipment, the Company
offers various services to customers to meet their specific needs. Such services
include expedited delivery, vendor direct shipment and deferred shipment.
Increase in Market Share of Products from Selected Manufacturers. Although
the Company primarily sells products from a limited number of manufacturers, it
believes that it carries a wider range of products from such manufacturers than
its primary competitors. The Company's success has been attributable, in large
part, to the success of its low cost distribution system for HP and Sun
products. The Company will continue to concentrate on sales of those products,
but will also evaluate its product line in order to emphasize sales of those
products that make the greatest contribution to the Company's gross profit
margins. The Company is an authorized reseller of IBM and Compaq computer
products. The Company believes that increased emphasis on these product lines
may also generate additional systems integration business by introducing
potential customers to the Company's expertise in integrating IBM and Compaq
systems into its network connectivity solutions.
Building Customer Loyalty and Satisfaction. The Company believes that the
development of long-term relationships with its customers will encourage repeat
purchases and foster overall customer satisfaction. Management believes that the
key to building customer loyalty is providing products and services, in a timely
fashion, which meet customers' technological and organizational needs. The
Company has assembled a dedicated sales team which is knowledgeable and
continuously trained and kept current on the products and services offered by
the Company and their application to specific customer needs. The Company's
sales force is supported by a strong technical staff whose expertise in the
Company's product lines enables the Company to efficiently and timely (usually
within 24 hours) process customers' orders, configure computer systems, deliver
products and render consultation and technical support services. The Company has
approximately 13,000 active customers. During the past year, the Company has
committed increased resources and emphasis
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on services such as toll-free ordering and technical support, direct Internet
communications with customers and enhanced product warranty programs, all of
which are designed to further enhance customer loyalty and satisfaction.
Expansion of Systems Integration and Support Services. Management believes
that two factors will contribute to the growth of the Company's systems
integration and support services business: (i) government, education and
commercial needs for local and wide area networks are expanding as such
end-users continue to upgrade their technology and right-size their information
processing systems; and (ii) the trend toward retaining third parties for
network design, configuration and integration is accelerating, particularly as a
result of the reduction of in-house technical staffs. The Company intends to
focus on developing computer networks that maximize the productivity of its
clients' technology. The Company's expertise in networking technology permits it
to integrate existing hardware and software more efficiently and effectively.
The Company's system integration services include physical installation,
customized configuration, testing, software loading, applications training,
continuing education, telephone and on-site consulting and complete maintenance
and repair services. Over the past several years, the Company has redirected
certain of its marketing activities in an effort to offer technical services to
entities that have not purchased equipment from the Company. Over that period of
time, the Company substantially increased the size of its technical services
staff to 77 employees. The Company plans to continue to increase its systems
integration and support capabilities and anticipates that additional technical
service personnel will be hired.
SALES AND MARKETING
The Company has historically conducted its sales operations, for both goods
and services, through its Copley and Dataprint divisions from regional sales
offices located in Westwood, Massachusetts and Charlotte, North Carolina, and
local sales offices in various locations in the eastern United States. The
Company is divided into four national regions: the Northeast, with headquarters
in metropolitan Boston, Massachusetts; the Southeast, with headquarters in
Charlotte, North Carolina; the Midwest, with headquarters in metropolitan
Minneapolis, Minnesota; and the West, with headquarters in metropolitan Los
Angeles, California. The Company will continue to conduct decentralized sales
activities throughout the United States, but will centralize marketing
activities at the four regional headquarters. In each sales office, the Company
will maintain specific sales groups that specialize in serving the corporate,
government and education markets. The Company intends to hire additional sales
and technical service personnel for its regional offices, relocate employees as
necessary to meet the Company's personnel requirements and increase the
productivity of its existing sales and technical staff.
The Company divides its sales personnel into two sections: "house" and
"field" sales staffs. House sales staff receive a fixed salary and productivity
bonuses. Field sales staff are compensated primarily through commissions. The
Company's house sales staff are located in the regional headquarters and
primarily use telemarketing and other direct marketing techniques. All of the
Company's sales and service centers have field sales staffs, who visit with
potential customers. The Company conducts frequent sales training programs and
allocates sales and gross profit quotas per office and per employee.
The Company markets its products and services directly to large and
medium-sized end-user customers in the corporate, government and education
markets. The Company believes that this large account sales approach is a highly
effective method for distributing, serving and supporting large end-user
customers by providing name brand product assortment and low-cost distribution
and technical service capabilities, while delivering a high level of local
customer service and support. In addition, the Company has established a
marketing program directed at currently inactive customers and educates
salespeople on features of new product lines which are currently offered by the
Company but have not yet generated significant sales.
Certain of the Company's major suppliers provide marketing and advertising
credits or allowances, the amount of which is based on a percentage of purchases
that the Company makes. Such arrangements typically allow the Company, at its
discretion, to participate in various advertising campaigns and marketing
strategies and subsequently seek reimbursement, by request, for all or a portion
of the related costs. However, the Company must expend advertising or marketing
funds before suppliers will allow the utilization of advertising
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or marketing credits. The total amount of such credits funded by the suppliers
by means of credits has historically been less than 2.0% of net sales.
CUSTOMERS
The Company has two major target customer groups: large and medium-sized
corporations; federal, state and local governments and their various divisions
(the "government market") and colleges and universities. The Company maintains
specialty marketing groups to focus specifically on the corporate, government
and education markets. The Company believes that such specialty groups have made
the Company more knowledgeable about specific industry needs, thereby allowing
it to become more responsive in providing desired products and services. During
Fiscal 1996, no single customer accounted for more than 10.0% of the Company's
net sales.
PRODUCTS AND MANUFACTURERS
Product Selection. The Company distributes a broad range of
microcomputer-related products including printers, desk top computers,
workstations, lap-top computers, peripherals and software. Workstations are
desk-top computers. Peripherals are printers, plotters, modems, storage devices
and memory. Substantially all of the Company's products are purchased from
suppliers located in the United States. The Company's main products are printers
made by HP; Intel-based desk top computers made by HP and Compaq; UNIX-based
workstations made by Sun; lap-top computers made by HP, Compaq and Toshiba;
microcomputing peripherals, other than printers, made by HP; printers made by
Canon and Epson; software developed by Microsoft and Sun; and networking
products developed by Sun.
The Company evaluates its product assortment based on technological
advances and market demand for information technology products. The Company also
continuously evaluates its existing product lines to determine whether such
products are achieving their market potential. If sales volume declines with
respect to a particular product, or a product is determined to be obsolete, of
poor quality or is subject to delays in delivery, the product is discontinued.
The Company obtains the majority of the products its sells from its major
supplier, HP. During Fiscal 1996 and Fiscal 1995, 65.0% and 68.7%, respectively,
of the Company's net sales were derived from products manufactured by HP.
Supplier Agreements. The Company has resale agreements with most of its
suppliers, which, in the opinion of management, reflect terms and conditions
customarily used by each manufacturer. With the exception of its agreement with
HP, the Company's distribution agreements generally allow distribution of
products on a non-exclusive basis with no geographic restrictions. Such
agreements usually contain provisions that allow either party to terminate the
agreement, without cause, upon 30 to 60 days notice and do not restrict the
Company from selling competing products from different manufacturers. In
addition, such agreements typically provide the Company the right to terminate
or curtail sales of one product line in favor of another product line as a
result of technological change, pricing considerations, customer demand or
supplier distribution policy.
The Company's current resale agreement with HP has a one-year term and
expires on February 28, 1997. The agreement allows either party to terminate the
agreement without cause upon 30 days written notice, or with cause upon 15 days
written notice. The agreement authorizes the Company, on a non-exclusive basis,
to sell HP personal computers, peripherals and other computer-related products
in those metropolitan areas in the United States in which the Company has office
locations. Some specific HP products have no geographical resale restrictions
and may be sold anywhere in the United States. The Company may resell HP
products to any education institution in the United States and to any state
government if the Company has an office in such state.
Since August 1994, the total combined purchases of HP products by the
Company have qualified it for the Level II Discount. The Level II Discount is
currently available to HP distributors who have attained gross purchases of HP
products of at least $200.0 million during a contract year. Qualification for
the Level II
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Discount enables the Company to decrease its cost of HP products by an
incremental 2.0%. The Company's total purchases of HP products for the contract
year ending February 28, 1997 are expected to substantially exceed $200.0
million.
The Company became an authorized, non-exclusive, reseller of Sun hardware
and software products in February 1990. In January 1994, the Company entered
into an exclusive sales agent agreement with Sun for the sale and marketing of
Sun products in the education marketplace in New England, including Vermont, New
Hampshire, Maine, Rhode Island and Eastern Massachusetts. Such agreement covers
grades K through 12 and universities, with the exception of certain designated
universities to which Sun sells directly.
Most of the Company's U.S. suppliers, including HP and Sun, provide price
protection, by way of credits, against price reductions by the supplier between
the time of the initial sale to the Company and the Company's subsequent sale to
its customers. Historically, credits, refunds or other payments to which the
Company has been entitled by reason of price protection offset any inventory
write-downs the Company made as a result of such price reductions.
The Company believes that its relationships with its suppliers are
excellent. Through its participation in supplier-dealer councils, committees and
conferences, the Company enhances relationships with its suppliers by advising
them on products and customer preferences. The Company also assists its
suppliers in developing marketing programs and offers suppliers the opportunity
to provide customer seminars.
CUSTOMER SERVICES
The Company offers a wide range of technical and customer support services,
including hardware configuration, software installation, CPU burn-in (product
testing), project management and training. Before any project begins, the
Company assembles a project team which consists of several client
representatives. All project details are agreed upon in advance and referenced
in a project contract. In addition, control and project reporting procedures are
established. Prior to the shipment of any equipment from the Company's
distribution center, technical personnel perform as much of the necessary
configurations, software installation and CPU burn-in as is possible to minimize
installation and service expenses charged to its customers or incurred by the
Company.
In addition to providing initial technical and support services, the
Company also offers on-going technical and support services on all products,
including training, telephone support, including toll-free 800 numbers, hardware
and software support contracts which require the Company to dispatch technical
personnel to the customers' offices, and consulting. The Company provides
warranty repair work at customers' offices for all hardware it sells and also
offers extended warranties for many of the products it sells. The Company
anticipates that depot warranty work (returns of defective equipment directly to
the Company, which is then repaired by the Company at the expense of the
equipment manufacturer) is likely to increase due to the equipment configuration
of its customers' network environments, the convenience of the Company's repair
facilities and the Company's ability to repair equipment in an efficient and
timely manner.
The microcomputer industry is characterized by the existence of numerous
hardware and software systems utilizing different, and often incompatible,
operating components. The Company provides systems integration services which
focus on developing computer environments that maximize the efficient
utilization of its clients' equipment, platforms, applications, protocols, user
preferences and ultimate project output. A systems integrator offers extensive
technical background and expertise in the development of computer environments
that coordinate a client's existing hardware and software to maximize efficient
equipment utilization in a user-friendly manner. The Company's engineers and
consultants provide advice and technical assistance with respect to office
automation, electronic publishing, image processing, relational databases,
database publishing, network integration, wide-area networking, right-sizing and
application integration. The Company's staff provides five primary areas of
support to its systems integration clients: connectivity, networking,
consulting, project management, and configuration and installation services.
Such support is provided in the form of hardware maintenance and warranty
repair, technical inquiry assistance via telephone and software/systems
training.
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DISTRIBUTION
The Company typically fills its orders within 24 hours of receipt. In
addition, the Company has the ability to ship products that require testing,
customization or configuration within five days of the receipt of an order. Upon
request, the Company provides expedited delivery via an overnight or courier
service for an additional cost. The Company performs the majority of its
testing, customization and configuration at its locations in Boston,
Massachusetts, Charlotte, North Carolina and Los Angeles, California.
The Company believes that it can process and deliver orders more quickly
and efficiently than many of its competitors due to its four distribution
centers strategically located to cover the entire United States. In addition,
the Company's order processing and inventory controls allow the Company to
forecast and order products only when needed for shipping. The Company
communicates electronically and by fax with its suppliers to further reduce
overhead. Additionally, the Company manages its inventory levels by providing
for the "drop shipment" of products directly from certain manufacturers or
distributors to customers. Drop shipments reduce physical handling, inventory,
storage by, and shipping costs of the Company, avoid delays in completing orders
and expedite delivery of products to customers. This inventory management
technique enables the Company to offer a greater range of products without
increasing inventory requirements.
The Company has historically attempted to maximize product availability and
delivery response times while minimizing inventory levels to reduce the risk of
product obsolescence and price fluctuations. Most products are stocked to
provide only a 20 to 30 day supply. During Fiscal 1996, the Company turned its
inventory an average of every 23 days compared to every 24 days in Fiscal 1995.
The Company's management information system provides perpetual inventory
management and real-time transaction processing for all product receipts and
shipments. The Company conducts frequent physical inventory cycle counts and
reconciles such inventory to the Company's perpetual inventory records.
Historically, the Company's inventory shrinkage has been less than 0.5% of net
sales.
MANAGEMENT INFORMATION SYSTEMS
The Company's operations are computerized with respect to inventory,
accounts receivable, accounts payable, order entry, payroll and general ledger
software systems, and such information is continuously updated. Each of the
Company's locations operate on an interactive basis. The Company utilizes its
management information systems ("MIS") to monitor inventory levels and sales
trends, assist in purchase decisions, monitor customer credit status and provide
product availability, order status and pricing information to customers.
The Company has allocated approximately $5.0 million to significantly
upgrade its MIS, including installation of new MIS hardware and software;
installation of local area networks in all branch offices; installation of a
wide area network to connect all offices, distribution centers and the Company's
administrative offices; establishing a company-wide electronic mail system; and
installing a new, integrated telephone system in all offices. Management
believes that these upgrades are necessary for the Company to take advantage of
technological MIS improvements, facilitate the integration of Cedar's operations
and enhance its competitive position. In addition, the Company uses the Internet
network to enhance customer support and interbusiness correspondence. Internet
access provides a convenient communication device enabling customers to contact
their sales, customer service and technical support representatives via
text-based messages.
EMPLOYEES
As of June 30, 1996, the Company employed 500 full-time employees,
consisting of 62 in management (including executive officers), 102 in
administration, 165 in sales and marketing, 77 in technical support and
engineering, 48 in customer service, and 46 in warehouse operations. The Company
considers its relations with its employees to be excellent. The Company has no
employees who are represented by unions.
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PATENTS AND TRADEMARKS
The Company does not have any patents or material trademarks and does not
consider patents or trademarks to be significant to its operations.
ITEM 2. PROPERTIES
The Company currently maintains its executive and main administrative
offices in Boca Raton, Florida. The Company also maintains administrative
offices in Boston, Massachusetts, Charlotte, North Carolina, and Los Angeles,
California, which also serve as the primary sales offices and distribution
centers for the Company's four regional divisions. The Company distributes most
of the products that it sells from these three distribution centers. The Company
also has 25 sales offices and a total of 29 offices in 24 states, leasing
approximately 210,000 total square feet at an annual base rent of approximately
$1.9 million. Early in calendar 1997, the Company will relocate its corporate
headquarters to Atlanta, Georgia. The new, approximately 112,500 square-foot
facility, will also serve as the Company's primary sales and distribution
headquarters. The Company believes that its current facilities are adequate for
its current level of operations and foreseeable needs and has the physical
capacity at most locations to substantially increase its sales staff.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq SmallCap Market
since June 1996 under the symbol "CICC." During the fiscal quarter ended June
30, 1996, the high and low prices for the Common Stock were $5.00 and $4.1875,
respectively.
On September 20, 1996, the closing price of the Common Stock as reported by
Nasdaq was $1.125 per share. The number of record holders of the Common Stock as
of September 20, 1996 was 626.
The Company has never paid any dividends on its Common Stock. Pursuant to
the revolving credit agreement between Systems and its principal lender, the
ability of Systems to transfer funds to the Company, and the resulting
availability of funds to the Company for the payment of dividends, is restricted
and, therefore, the Company's ability to pay dividends on its Common Stock is
effectively prohibited. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for each of the
fiscal years ended June 30, 1994, 1995 and 1996 have been derived from the
audited financial statements of the Company appearing elsewhere herein. This
data should be read in conjunction with such financial statements and other
financial information, including the notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
COPLEY SYSTEMS
CORPORATION
(PREDECESSOR) COMPUTER INTEGRATION CORP. AND SUBSIDIARY
------------------------ -----------------------------------------------------
PERIOD FROM
PERIOD INCEPTION
JULY 1, (JULY 29,
1992 1992)
YEAR ENDED THROUGH THROUGH YEAR ENDED JUNE 30,
JUNE 30, MARCH 30, JUNE 30, ---------------------------------------
1992 1993 1993(1) 1994 1995 1996
---------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net sales.............................. $ 80,754 $76,770 $ 27,134 $ 103,786 $ 209,226 $ 449,954
Cost of goods sold..................... 71,885 69,563 24,290 93,068 188,685 407,313
---------- ----------- ----------- ---------- ---------- ----------
Gross profit........................... 8,869 7,207 2,844 10,718 20,541 42,641
Selling, general and administrative
expenses............................. 7,079 5,484 2,351 8,755 15,975 37,563
---------- ----------- ----------- ---------- ---------- ----------
Income from operations................. 1,790 1,723 493 1,963 4,566 5,078
Interest and other expenses(2)......... 487 224 218 1,611 2,565 5,325
---------- ----------- ----------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item................... 1,303 1,499 275 352 2,001 (247)
Provision for income taxes(3).......... 500 569 125 265 868 156
---------- ----------- ----------- ---------- ---------- ----------
Income (loss) before extraordinary
item................................. 803 930 150 87 1,133 (403)
Extraordinary item, net of taxes....... -- -- -- 165 -- --
---------- ----------- ----------- ---------- ---------- ----------
Net income (loss)...................... 803 930 150 252 1,133 (403)
Required dividends on convertible
preferred stock...................... -- -- 93 171 202 (218)
---------- ----------- ----------- ---------- ---------- ----------
Income (loss) applicable to
common stock......................... $ 803 $ 930 $ 57 $ 81 $ 931 $ (621)
=========== =========== =========== ========= ========= =========
PER SHARE DATA(4):
Income (loss) before extraordinary
item............................... $ .01 $ (.02) $ .15 $ (.09)
Extraordinary item................... -- .03 -- --
----------- ---------- ---------- ----------
Income (loss) applicable to
common stock....................... $ .01 $ .01 $ .15 $ (.09)
=========== ========= ========= =========
Common shares and equivalents
outstanding(4)....................... 5,034,181 5,900,000 6,409,000 6,916,383
=========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
JUNE 30, -----------------------------------------------------
1992 1993 1994 1995 1996
---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ 3,460 $ 6,566 $ 4,614 $ 9,222 $ 22,149
Total assets........................... 17,441 24,457 29,785 54,755 114,665
Total short-term debt.................. 4,739 2,378 8,936 9,955 19,315
Term note, less current portion........ 175 5,101 5,037 12,508 28,008
Subordinated note, less current
position............................. 877 2,481 11 -- 1,611
Total long-term debt................... 1,052 7,582 5,048 12,508 29,619
Shareholders' equity................... 3,487 2,583 2,780 6,591 10,245
</TABLE>
- ---------------
(1) The Company acquired all of the outstanding capital stock of Copley
effective as of March 30, 1993. Includes the operating results of Copley
from March 31, 1993 through June 30, 1993.
(2) For the years ended June 30, 1994 and 1996, respectively, includes $509,000
and $486,000, respectively, of costs associated with public offerings.
(3) For all periods presented prior to March 31, 1993, Copley was taxed as an S
Corporation pursuant to Subchapter S of the Internal Revenue Code of 1986,
as amended. Net income reflects a provision for income taxes as if Copley
were subject to regular corporate income taxes based on the tax laws in
effect during such periods.
(4) Prior to its acquisition by the Company, Copley had 1,088 shares of Common
Stock outstanding, Earnings per share data has not been presented for
Copley for all periods presented prior to March 31, 1993, as such
historical information would not be meaningful.
9
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company began operations in 1992 with the organization of Systems, and
acquired Copley on March 30, 1993 and Dataprint effective July 1, 1994.
Effective July 1, 1995, the Company acquired substantially all the assets and
operations of Cedar, which acquisition increased the Company's net sales, on a
pro forma basis, for Fiscal 1995 by 121.1%. All historical financial information
relates to the Company.
RESULTS OF OPERATIONS
All financial results related to operations of the Company include
historical results for Fiscal 1995 and Fiscal 1996 and pro forma results for the
year ended June 30, 1994 ("Pro Forma Fiscal 1994"), as if the acquisition of
Dataprint had occurred on July 1, 1993. The pro forma information for Fiscal
1995 ("Pro Forma Fiscal 1995") relates to the Company's and Cedar's operations,
combined on a pro forma basis, as if the acquisition of Cedar had occurred on
July 1, 1994. The following summary tables have been presented to set forth
certain income statement data, in dollars and as a percentage of net sales, to
assist in the understanding of the explanation of operations for the periods
ended June 30, 1996, 1995 and 1994. The pro forma consolidated financial
information does not purport to represent what the Company's financial position
or results of operations would have been if the acquisition had in fact occurred
on such date or as of the beginning of such period.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1994 1995 1995 1996
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Sales...................................... $165,216 $209,226 $462,543 $449,954
Gross Profit................................... 17,979 20,541 40,641 42,641
Selling, General & Administrative Expense...... 13,306 15,975 28,396 37,563
Income from Operations......................... 4,673 4,566 12,245 5,078
Interest Expense............................... 1,733 2,565 5,092 4,838
Net Income (loss).............................. $ 1,492 $ 1,133 $ 4,255 $ (403)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1994 1995 1995 1996
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
--------- ---------- --------- ----------
(AS A PERCENT OF NET SALES)
<S> <C> <C> <C> <C>
Net Sales...................................... 100.0% 100.0% 100.0% 100.0%
Gross Profit................................... 10.9 9.8 8.8 9.5
Selling, General & Administrative Expense...... 8.1 7.6 6.1 8.3
Income from Operations......................... 2.8 2.2 2.6 1.1
Interest Expense............................... 1.0 1.2 1.1 1.1
Net Income (loss).............................. 0.9% 0.5% 0.9% (0.1)%
</TABLE>
FISCAL 1996 COMPARED TO PRO FORMA FISCAL 1995
Net sales for Fiscal 1996 were $450.0 million compared to $462.5 million
for Pro Forma Fiscal 1995, a decrease of $12.5 million or 2.7%. This decrease
was primarily due to reduced sales volume at existing locations in the mid-west
acquired as a result of the Cedar Acquisition.
Gross profits increased to $42.6 million in Fiscal 1996 from $40.6 million
in Pro Forma Fiscal 1995, an increase of $2.0 million or 4.9%. Gross profit
margins increased to 9.5% in Fiscal 1996 compared to 8.8% in Pro Forma Fiscal
1995 as a result of increased emphasis by the Company's sales organization on
transactions involving products with relatively higher profit margins, such as
PCs, and decreased reliance on high volume, marginally profitable transactions.
10
<PAGE> 12
Selling, general and administrative expenses increased by $9.2 million or
32.0% to $37.6 million in Fiscal 1996 compared to $28.4 million in Pro Forma
Fiscal 1995. The primary components of the Company's selling, general and
administrative expense (66.9%) are salaries and benefits. Salaries and benefits
were $25.1 million in Fiscal 1996, an increase of 19.5% or $4.1 million from Pro
Forma Fiscal 1995. The majority of the increase was attributable to a 9.9%
increase in employee headcount during the year to 500 at June 30, 1996. This
increase was a direct result of putting in place a new executive management team
and increased sales representatives during the year, along with redundant
positions required as a result of relocating distribution and administration
functions from the midwest to Boston during the fourth quarter of 1996. In
January 1996, the Company began offering health and other benefits to employees
acquired in connection with the Cedar Acquisition, resulting in additional
salaries and benefit costs of approximately $200,000 during Fiscal 1996.
Occupancy cost, which consists of rent and related utility costs, increased
23.5% to $2.1 million in Fiscal 1996 compared to $1.7 million in Pro Forma
Fiscal 1995. This increase is primarily attributable to relocating the Company's
distribution facility in Los Angeles to a new free standing facility, and more
than doubling the size of the Company's largest warehouse in Boston. The balance
of the increase was a result of increased rents for existing locations.
Depreciation and amortization increased to $1.5 million in Fiscal 1996 from
$1.2 million in Pro Forma Fiscal 1995, primarily as a result of increased
depreciation expense related to current year additions of fixed assets.
Other selling, general and administrative expenses increased $2.1 million
to $6.6 million in Fiscal Year 1996 compared to $4.5 million in Pro Forma Fiscal
1995. The increase was attributable to increased legal, professional and
recruiting fees, higher than expected travel costs associated with the
consolidation of distribution and administrative functions in Boston and overall
higher other selling and administrative costs.
During the fourth quarter of 1996, the Company recorded a special charge of
$2.3 million for restructuring costs associated with the planned relocation and
consolidation of the Company's headquarters, sales and distribution facilities
to Atlanta, Georgia. Management believes that these actions, once completed,
will result in improvements in operational efficiency. These costs include
approximately $1.7 million for severance benefits for approximately 125 affected
employees, $400,000 for the write-off of property and equipment which will no
longer be required, and approximately $200,000 for lease extension and
termination costs and other activities to close the existing facilities. As of
June 30, 1996, none of the charge has been utilized. Based on management's plan,
it is anticipated that a substantial portion of the charge will be expended
during fiscal 1997 and the remainder during the first half of fiscal 1998.
During Fiscal 1996, the Company incurred costs of approximately $486,000
related to expenses incurred in connection with the registration of the
Company's securities for a public offering which was not completed. There were
no such costs in Pro Forma Fiscal 1995.
As a result of the foregoing, the Company incurred a net loss of $(403,209)
compared to net income of $4.1 million in Pro Forma Fiscal 1995.
FISCAL 1995 COMPARED TO PRO FORMA FISCAL 1994
Net sales for Fiscal 1995 were $209.2 million compared to $165.2 million
for Pro Forma Fiscal 1994, an increase of $44.0 million or 26.6%. This increase
was primarily due to increased revenues from large to medium-sized corporate
customers, a result of increased marketing emphasis beginning in Fiscal 1994.
The Copley Division contributed $37.5 million or 85.2% of the increase with the
balance attributable to the Dataprint Division.
Gross profits increased to $20.5 million in Fiscal 1995 from $18.0 million
in Pro Forma Fiscal 1994, an increase of $2.5 million or 13.9%. However, gross
profit margins declined to 9.8% in Fiscal 1995 compared to 10.9% in Pro Forma
Fiscal 1994. The decrease in gross profit margins primarily resulted from price
reductions on hardware products brought about by competitive market pressures
during Fiscal 1995. These price
11
<PAGE> 13
reductions were proportionately in excess of reductions in product costs.
Competitive market pressures were more significant to the Copley Division which
competes in the Northeast market.
Selling, general and administrative costs were $16.0 million in Fiscal 1995
compared to $13.3 million in Pro Forma Fiscal 1994. However, selling, general
and administrative expenses, as a percentage of net sales, decreased to 7.6% in
Fiscal 1995 compared to 8.1% in Pro Forma Fiscal 1994. This decrease is
primarily due to a reduction of salaries and benefits as a percentage of net
sales during Fiscal 1995 to 5.6%, as compared to 5.9% for Pro Forma Fiscal 1994.
Occupancy costs, which consists of rent and related utility costs,
increased by 5.1% to $802,000 in Fiscal 1995 compared to $763,000 in Pro Forma
Fiscal 1994 as a result of the opening of a new sales office in Boca Raton,
Florida during 1995. As a percentage of net sales, occupancy costs decreased by
17.4% during Fiscal 1995 as compared with Pro Forma Fiscal 1994.
Depreciation and amortization totaled $866,000 in Fiscal 1995, an increase
of $150,000 from the $716,000 incurred during Pro Forma Fiscal 1994. The
majority of the increase relates to depreciation on capital equipment acquired
during Fiscal 1995.
Interest expense increased to $2.6 million for Fiscal 1995 from $1.8
million during Pro Forma Fiscal 1994, as a result of (i) increased outstanding
indebtedness incurred to finance greater levels of accounts receivable and
inventory associated with the 26.6% increase in net sales and (ii) significantly
higher interest rates on the Credit Facility.
During Pro Forma Fiscal 1994, there were three non-recurring events: (i) a
charge of $190,000 for expenses incurred in connection with the registration of
the Company's securities for a public offering which was not completed; (ii) a
charge of $319,000 against earnings related to costs associated with the
Company's merger with NEG; and (iii) a gain of approximately $165,000 (net of
tax effect) related to the extinguishment of certain debt associated with the
Company's restructuring of a $1.2 million subordinated note, which was
classified as an extraordinary item. See "Certain Capital
Transactions -- Changes in Control -- Exchange Offer."
As a result of the foregoing, the Company's net income decreased by
approximately $400,000 to $1.1 million in Fiscal 1995 from $1.5 million in Pro
Forma Fiscal 1994.
FINANCIAL CONDITION
Primarily as a result of the acquisition of Cedar, the Company's total
assets increased $59.9 million to $114.7 million as of June 30, 1996 compared to
$54.8 million as of June 30, 1995. Of that increase, $31.4 million represented
additional accounts receivable and $12.2 million represented an increase in
inventory. Costs in excess of net assets acquired, net of amortization
(goodwill) related to the Cedar acquisition increased total other assets by $4.6
million from June 30, 1995 to June 30, 1996.
Total current liabilities increased to $74.4 million as of June 30, 1996
from $35.3 million at June 30, 1995, primarily due to additional accounts
payable of $23.3 million, increased accrued expenses of $4.4 million and the
additional $2.3 million liability recorded as a result of the Company's
restructuring. Simultaneously with the closing of the Cedar Acquisition, Cedar's
line of credit of approximately $9.4 million was satisfied from the long-term
portion of the Company's credit facility.
The Company's total noncurrent liabilities increased to $30.0 million as of
June 30, 1996 from $12.8 million at June 30, 1995, primarily as a result of
additional long term debt of $15.0 million and the issuance of $1.9 million of
subordinated notes ($302,000 of which is classified in current liabilities)
incurred in connection with the acquisition of Cedar.
Additional paid in capital increased by $4.3 million from June 30, 1995 to
June 30, 1996 primarily as a result of the issuance of 515,000 shares of Common
Stock in connection with the acquisition of Cedar. During Fiscal 1996, retained
earnings decreased to $0.4 million from $1.0 million as a result of a loss from
operations and dividends of $218,000 declared on preferred stock.
12
<PAGE> 14
On March 12, 1996, the Company's Board of Directors approved a
restructuring plan which involves a relocation of the Company's corporate
headquarters to Atlanta, Georgia. The Company has signed a five-year lease,
providing for monthly rental payments of approximately $44,000, on the new
headquarters and sales and distribution facility in Atlanta which is scheduled
for completion in late 1996. The Company has recognized a restructuring charge
of $2.3 million and believes that, when completed, the restructuring will result
in improvements in operational efficiency.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through the private
sale of equity securities and borrowings under the Credit Facility. As of June
30, 1996, the Company had cash of $7.6 million, accounts receivable of $62.7
million, working capital of $22.1 million and available funds under the Credit
Facility of approximately $10.7 million.
Net cash used in operating activities during Fiscal 1996 was $4.9 million
primarily as a result of the operating loss and payments on accounts payable at
a greater rate than the reduction in accounts receivable and inventory. Included
in the reduction of accounts payable was approximately $6.0 million paid to the
Company's principal inventory supplier in connection with the acquisition of
Cedar.
Net cash used in investing activities during Fiscal 1996 was approximately
$11.6 million as a result of the purchase of substantially all of the assets of
Cedar, purchases of office and computer equipment and net cash acquired in the
acquisition of Dataprint. Financing activities provided approximately $23.4
million primarily as a result of advances under the Company's line of credit to
complete the acquisition of Cedar.
In connection with the Cedar Acquisition, Systems and Congress amended the
Credit Facility to provide increased available borrowings of up to $70.0
million. On September 30, 1996, that Credit Facility was further amended to
increase the available credit to $77 million, effective June 30, 1996. The
Credit Facility is collateralized by Systems' accounts receivable and inventory
and consists of a $27.5 million, 3-year term loan and a $49.5 million revolving
line of credit. Interest on the Credit Facility accrues at 1.0% over the prime
rate of CoreStates Bank, N.A. (effective rate of 9.25% at September 20, 1996).
The Credit Facility, which is used for inventory financing and working capital,
will expire in July 1998 and will be automatically renewable for one year at the
option of Congress, upon certain terms and conditions. The Credit Facility
requires that Systems maintain, at all times, certain net worth and working
capital levels, and restricts acquisitions or dispositions of property and the
payment of dividends by CIC and Systems. The Credit Facility is guaranteed by
CIC.
During Fiscal 1996, the Company incurred net borrowings of $23.8 million
under the Credit Facility. The Company utilized $9.8 million of the Credit
Facility to finance the acquisition of Cedar in Fiscal 1996. At September 20,
1996, the Company had an outstanding balance under the Credit Facility of $46.2
million.
The Company's future capital requirements for operations include financing
the growth of working capital items such as accounts receivable and inventory,
purchasing equipment and upgrading management information and inventory control
systems. The Company believes that cash flow from operations and borrowings
under the Credit Facility will provide sufficient cash to fund its operations
and meet current obligations for the fiscal year ending June 30, 1997. The
Company is attempting to improve cash flow from operations and maintain
flexibility in financing both interim and long-term working capital requirements
by reducing inventory levels. By centralizing purchases from one location,
improving the scheduling and timing of purchases, and utilizing the services of
regional aggregators, the Company expects to reduce inventory levels of certain
products. In the event the Company expands its operations or makes acquisitions
that would require funds in addition to its existing liquid assets, cash flows
and proceeds from this Offering, it would have to seek additional debt or equity
financing. There can be no assurance that the Company could obtain such
financing or that such financing would be available on terms acceptable to the
Company.
The Company has historically attempted to maximize product availability and
delivery response times while minimizing inventory levels to reduce the risk of
product obsolescence and price fluctuations. Most products are stocked to
provide only a 20 to 30 day supply. During Fiscal 1996, the Company turned its
13
<PAGE> 15
inventory an average of every 23 days compared to every 24 days in Fiscal 1995.
The Company's management information system provides perpetual inventory
management and real-time transaction processing for all product receipts and
shipments. The Company conducts frequent physical inventory cycle counts and
reconciles such inventory to the Company's perpetual inventory records.
Historically, the Company's inventory shrinkage has been less than 0.5% of net
sales.
During the fiscal years ended June 30, 1996, 1995 and 1994, the Company's
capital expenditures were approximately $3.4 million, $917,000 and $576,000,
respectively.
Most of the Company's major suppliers, including HP and Sun, provide price
protection, in the form of credits, against price reductions by the supplier
between the initial sale to the Company and the subsequent sale by the Company
to the ultimate consumer. Credits, refunds or other payments to which the
Company has been entitled to historically by reason of price protection, offset,
in part, any inventory write-downs the Company has incurred as a result of such
price reductions. Net inventory write-downs after credits or refunds by
suppliers amounted to less than 0.1% of net sales for each of Fiscal 1996 and
Fiscal 1995, respectively. Such suppliers accept defective merchandise returned
within three to six months after shipment to the Company and its major suppliers
permit the Company to return slow-moving current inventory in exchange for other
inventory, subject to certain volume limitations.
The Company attempts to control losses on credit sales by closely
monitoring customers' creditworthiness through its credit department, which
maintains detailed, computerized, current information on each customer's payment
history and other relevant credit information. The Company also subscribes to a
national credit reporting service that provides credit rating information
regarding customers on an on-line basis. Bad debt expense as a percentage of net
sales was less than 0.4% for each of Fiscal 1996 and 1995.
SEASONAL FACTORS
Because of the broad range of markets served by the Company, the Company's
sales have not historically been subject to seasonal fluctuations.
INFLATION
Inflation has not had a significant impact on the Company's operations as
technological advances and industry competition have generally caused
microcomputer equipment prices to decline. The Company has experienced few price
increases and, historically, has passed them on to its customers, since prices
charged by the Company are generally not fixed by long-term contracts.
14
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
I. AUDITED FINANCIAL STATEMENTS
COMPUTER INTEGRATION CORP.
Report of Independent Certified Public Accountants............................... 16
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1995................ 17
Consolidated Statements of Operations for the Years Ended June 30, 1996, 1995 and
1994............................................................................ 18
Consolidated Statements of Shareholders' Equity for the Years Ended June 30,
1996, 1995 and 1994............................................................. 19
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1995 and
1994............................................................................ 20
Notes to Consolidated Financial Statements....................................... 21
Schedule I -- Condensed Financial Information of Registrant...................... 32
Schedule II -- Valuation and Qualifying Accounts................................. 35
</TABLE>
15
<PAGE> 17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Computer Integration Corp.
We have audited the accompanying consolidated balance sheets of Computer
Integration Corp. and subsidiary as of June 30, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 30, 1996. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Computer Integration Corp. and subsidiary at June 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth herein.
West Palm Beach, Florida
August 22, 1996, except for
Note 12 as to which the date
is September 30, 1996
16
<PAGE> 18
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................... $ 7,599,051 $ 797,678
Accounts receivable, less allowance of $1,350,988 in 1996 and $495,000 in 1995
for doubtful accounts........................................................ 62,743,319 31,355,179
Inventories.................................................................... 23,705,565 11,547,902
Deferred income taxes.......................................................... 1,843,283 513,272
Prepaid expenses and other current assets...................................... 658,247 353,688
------------ -----------
Total current assets..................................................... 96,549,465 44,567,719
Furniture and office equipment, net of accumulated depreciation of $1,634,758 in
1996 and $770,462 in 1995...................................................... 3,176,755 1,693,723
Management information system.................................................... 1,833,935 --
Other assets:
Goodwill, less accumulated amortization of $1,137,491 in 1996 and $508,704 in
1995......................................................................... 12,446,491 7,705,754
Deferred income taxes.......................................................... -- 51,026
Other.......................................................................... 658,279 736,423
------------ -----------
13,104,770 8,493,203
------------ -----------
Total assets............................................................. $114,664,925 $54,754,645
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable under line of credit............................................. $ 18,746,703 $ 9,920,603
Accounts payable............................................................... 46,171,003 22,829,019
Accrued expenses............................................................... 5,862,461 1,497,338
Restructuring accrual.......................................................... 2,300,000 --
Income taxes payable........................................................... 132,371 215,077
Current portion of subordinated notes payable.................................. 302,440 --
Current portion of capital lease obligations................................... 265,625 34,655
Other current liabilities...................................................... 619,872 849,110
------------ -----------
Total current liabilities................................................ 74,400,475 35,345,802
Noncurrent liabilities:
Term note payable.............................................................. 27,500,000 12,500,000
Subordinated notes payable, less current portion............................... 1,610,560 --
Capital lease obligations, less current portion................................ 508,392 7,753
Other.......................................................................... 400,000 310,260
------------ -----------
Total noncurrent liabilities............................................. 30,018,952 12,818,013
COMMITMENTS
Shareholders' equity:
Preferred stock, $.001 par value, total authorized 2,000,000 shares, issued and
outstanding as follows:
Series A, 9% cumulative, convertible, redeemable preferred stock; 40,000
shares authorized, -0- and 19,250 issued and outstanding at June 30, 1996
and 1995, respectively...................................................... -- 19
Series B, 9% cumulative, convertible preferred stock; 250 shares authorized,
-0- issued and outstanding at June 30, 1996 and 1995, respectively.......... -- --
Series C, 9% cumulative, convertible, redeemable preferred stock; 250 shares
authorized, -0- and 125 issued and outstanding at June 30, 1996 and 1995,
respectively................................................................ -- --
Series D, 9% cumulative, convertible, redeemable preferred stock; 40,000 and
-0- shares authorized and 19,250 and -0- issued and outstanding at June 30,
1996 and 1995, respectively................................................. 19 --
Series E, 9% cumulative, convertible, redeemable preferred stock; 250 and -0-
shares authorized and 125 and -0- issued and outstanding at June 30, 1996
and 1995, respectively...................................................... -- --
Common stock, $.001 par value, authorized 20,000,000 and 10,000,000 shares,
issued and outstanding 6,944,700 and 6,400,000 shares at June 30, 1996 and
1995, respectively........................................................... 6,945 6,400
Additional paid-in capital..................................................... 9,809,736 5,534,154
Retained earnings.............................................................. 428,798 1,050,257
------------ -----------
Total shareholders' equity............................................... 10,245,498 6,590,830
------------ -----------
Total liabilities and shareholders' equity............................... $114,664,925 $54,754,645
============ ===========
</TABLE>
See accompanying notes.
17
<PAGE> 19
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales........................................ $449,953,514 $209,225,759 $103,786,343
Cost of goods sold............................... 407,312,468 188,684,517 93,068,719
------------ ------------ ------------
Gross profit..................................... 42,641,046 20,541,242 10,717,624
Selling, general and administrative expenses:
Salaries and benefits.......................... 25,123,714 11,743,015 6,732,934
Other selling, general and administrative...... 6,587,542 2,563,828 1,202,715
Depreciation and amortization.................. 1,493,083 866,255 423,031
Occupancy costs................................ 2,058,673 801,888 396,237
Restructuring charge........................... 2,300,000 -- --
------------ ------------ ------------
37,563,012 15,974,986 8,754,917
------------ ------------ ------------
Income from operations........................... 5,078,034 4,566,256 1,962,707
Interest expense................................. 4,838,448 2,564,792 1,102,088
Other -- costs associated with public
offerings...................................... 486,098 -- 509,000
------------ ------------ ------------
(Loss) income before income taxes and
extraordinary item............................. (246,512) 2,001,464 351,619
Income taxes..................................... 156,697 868,572 265,195
------------ ------------ ------------
(Loss) income before extraordinary item.......... (403,209) 1,132,892 86,424
Extraordinary item -- gain on extinguishment of
debt (net of current income taxes of
$108,500)...................................... -- -- 165,300
------------ ------------ ------------
Net (loss) income................................ (403,209) 1,132,892 251,724
Less required dividends on convertible preferred
stock.......................................... (218,250) (202,296) (170,771)
------------ ------------ ------------
(Loss) income applicable to common stock......... $ (621,459) $ 930,596 $ 80,953
=========== =========== ===========
(Loss) income per common share:
(Loss) income before extraordinary item........ $ (.09) $ .15 $ (.02)
Extraordinary item -- gain on extinguishment of
debt........................................ -- -- .03
------------ ------------ ------------
Net (loss) income applicable to common stock... $ (.09) $ .15 $ .01
=========== =========== ===========
Common shares and common share equivalents
outstanding.................................... 6,916,383 6,409,000 5,900,000
=========== =========== ===========
</TABLE>
See accompanying notes.
18
<PAGE> 20
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ --------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993............. -- $ -- 5,302,035 $5,302 $2,443,414 $ 134,638
Exercise of stock purchase
warrants........................ -- -- 439,805 440 34,560 --
Issuance of common stock to acquire
NEG, Inc........................ -- -- 158,160 158 158,002 --
Net income......................... -- -- -- -- -- 251,724
Dividends declared on preferred
stock ($1.04 per share)......... -- -- -- -- -- (248,165)
------ ------ --------- ------ ---------- ----------
Balance at June 30, 1994............. -- -- 5,900,000 5,900 2,635,976 138,197
Proceeds from sale of Series A
preferred stock, less offering
costs of $26,303................ 19,250 19 -- -- 1,898,678 --
Issuance of Series B and Series C
preferred stock in connection
with the acquisition of
Dataprint, Inc.................. 250 -- -- -- 1,000,000 --
Conversion of Series B preferred
stock into common stock......... (125) -- 500,000 500 (500) --
Net income......................... -- -- -- -- -- 1,132,892
Dividends declared on preferred
stock ($8.94 and $390.57 per
share for Series A and Series C,
respectively)................... -- -- -- -- -- (220,832)
------ ------ --------- ------ ---------- ----------
Balance at June 30, 1995............. 19,375 19 6,400,000 6,400 5,534,154 1,050,257
Issuance of common stock in
connection with the acquisition
of substantially all of the
assets of Cedar Computer Center,
Inc., less present value
assigned to guarantee of
$903,573........................ -- -- 515,000 515 4,245,912 --
Exchange of Series A and Series C
preferred stock for Series D and
Series E preferred stock,
respectively.................... -- -- -- -- -- --
Exercise of stock options.......... -- -- 25,250 25 25,225 --
Common stock grants to employees... -- -- 4,450 5 4,445 --
Net loss........................... -- -- -- -- -- (403,209)
Dividends declared on preferred
stock ($9.00 and $360.00 per
share for Series D and Series E,
respectively)................... -- -- -- -- -- (218,250)
------ ------ --------- ------ ---------- ----------
Balance at June 30, 1996............. 19,375 $ 19 6,944,700 $6,945 $9,809,736 $ 428,798
====== ====== ========= ====== ========== ==========
</TABLE>
See accompanying notes.
19
<PAGE> 21
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.......................................................... $ (403,209) $ 1,132,892 $ 251,724
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Extraordinary item -- gain on extinguishment of debt..................... -- -- (273,800)
Depreciation expense..................................................... 864,296 502,354 305,177
Goodwill amortization.................................................... 628,787 363,901 117,854
Deferred loan cost amortization.......................................... 281,706 206,113 205,385
Provision for bad debts.................................................. 1,638,659 374,574 249,169
Restructuring charge..................................................... 2,300,000 -- --
Common stock grants to employees......................................... 4,450 -- --
Deferred income taxes.................................................... (1,278,985) (104,593) (135,106)
Costs associated with public offerings -- noncash portion................ -- -- 164,780
Changes in operating assets and liabilities, exclusive of effects of
purchase business combinations:
Accounts receivable.................................................... 6,296,334 (8,821,703) (2,435,650)
Inventories............................................................ 3,894,685 976,664 (3,247,131)
Prepaid expenses and other current assets.............................. (237,338) (195,939) 99,502
Other assets........................................................... (189,117) (355,718) 63,322
Accounts payable....................................................... (19,137,447) 4,764,746 457,130
Accrued expenses and other current liabilities......................... 329,751 (844,247) 253,676
Other noncurrent liabilities........................................... 89,740 (94,625) 404,889
------------ ------------ ------------
Net cash used in operating activities...................................... (4,917,688) (2,095,581) (3,519,079)
INVESTING ACTIVITIES
Purchase of substantially all of the assets of Cedar Computer Center,
Inc...................................................................... (9,591,647) (273,932) --
Purchase of Dataprint, Inc., net of cash acquired.......................... (462,000) 260,494 --
Purchase of Copley Systems Corporation, net of cash acquired............... -- -- (135,868)
Acquisition of property and equipment...................................... (1,582,741) (917,469) (576,254)
------------ ------------ ------------
Net cash used in investing activities...................................... (11,636,388) (930,907) (712,122)
FINANCING ACTIVITIES
Proceeds from sale of capital stock, net of offering costs................. -- 1,830,716 --
Proceeds from exercise of stock purchase warrants.......................... -- -- 35,000
Proceeds from exercise of stock options.................................... 25,250 -- --
Net increase (decrease) in notes payable under line of credit.............. 8,826,100 (484,254) 5,949,178
Proceeds received on term note payable..................................... 15,000,000 2,500,000 --
(Repayments) on subordinated notes payable................................. (164,220) (779,861) --
Payment of capital lease obligations....................................... (113,431) (39,635) (88,187)
Repayment of long-term debt................................................ -- -- (1,636,423)
Preferred stock dividends paid............................................. (218,250) (112,605) (189,618)
------------ ------------ ------------
Net cash provided by financing activities.................................. 23,355,449 2,914,361 4,069,950
------------ ------------ ------------
Net increase (decrease) in cash............................................ 6,801,373 (112,127) (161,251)
Cash at beginning of period................................................ 797,678 909,805 1,071,056
------------ ------------ ------------
Cash at end of period...................................................... $ 7,599,051 $ 797,678 $ 909,805
=========== =========== ===========
SUPPLEMENTAL INFORMATION
Interest paid.............................................................. $ 4,416,418 $ 2,355,083 $ 889,847
=========== =========== ===========
Income taxes paid.......................................................... $ 1,512,893 $ 1,201,638 $ 115,005
=========== =========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Preferred stock dividends accrued included in other current liabilities.... $ 108,228 $ 108,228 $ --
=========== =========== ===========
Costs associated with management information system included in accrued
expenses................................................................. $ 988,895 $ -- $ --
=========== =========== ===========
Costs associated with management information system under capital leases... $ 845,040 $ -- $ --
=========== =========== ===========
</TABLE>
See Note 2 for disclosure of noncash transactions associated with the
acquisition of substantially all of the assets of Cedar Computer Center, Inc.
and the acquisitions of Dataprint, Inc. and NEG, Inc.
See accompanying notes.
20
<PAGE> 22
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Computer
Integration Corp. (CIC), and its wholly-owned operating subsidiary, CIC Systems,
Inc. (CICS) (collectively the Company). All significant intercompany accounts
and transactions have been eliminated in consolidation.
On July 12, 1994, NEG, Inc.'s (NEG) shareholders approved a merger of NEG
with and into CIC for the purpose of reincorporating NEG in Delaware (see Note
2). CIC is the surviving corporation of the merger. As such, all references in
the consolidated financial statements will be made to CIC.
CIC is a reseller of microcomputers, workstations and related products to
large and medium-sized corporations, federal, state and local governmental
entities and colleges and universities throughout the United States. The Company
distributes a broad range of microcomputer related products from major hardware
manufacturers and software developers which include Hewlett-Packard Company (see
Note 3); Compaq Computer Corporation; Sun Microsystems Computer Corporation;
Toshiba America Information Systems, Inc.; International Business Machines
(IBM); Lex Mark International; Epson America, Inc.; NEC Technologies, Inc.;
3COM, Inc.; Canon Computer Systems, Inc.; Novell, Inc. and Microsoft
Corporation.
CONCENTRATION OF CREDIT RISK
Accounts receivable are primarily from business, governmental, educational
and individual customers located throughout the United States. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains an allowance for doubtful accounts at
a level which management believes is sufficient to cover probable credit losses.
INVENTORIES
Inventories, which consist of finished goods available for sale, are valued
at the lower of average cost or market value.
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of ordered merchandise and
as technical services are rendered.
FURNITURE AND OFFICE EQUIPMENT
Furniture and office equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
which range from three to seven years.
MANAGEMENT INFORMATION SYSTEM
The costs incurred by the Company in connection with the development of new
management information system have been capitalized and will be amortized over
five years. Management estimates that additional costs of approximately $2.5
million will be incurred before the system is completed in 1997. Management is
currently negotiating financing for the development costs through a third-party
lease arrangement.
GOODWILL
Goodwill related to acquired businesses is being amortized on the
straight-line method over a 20-year period.
21
<PAGE> 23
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company, at each balance sheet date, evaluates the recovery of the
carrying amount of goodwill by determining if any impairment indicators are
present. These indicators include duplication of resources resulting from
acquisitions, income derived from businesses acquired and other factors. If this
review indicates that goodwill will not be recoverable, as principally
determined based on the estimated undiscounted cash flows of the entity over the
remaining amortization period, the Company's carrying value of the goodwill is
reduced by the estimated shortfall of future cash flows.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount of cash approximates its fair value. The fair value of
the Company's notes payable and capital lease obligations are estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The carrying value
of these instruments approximates market value as of June 30, 1996.
EARNINGS PER COMMON SHARE
Earnings per common share are calculated by dividing net earnings
applicable to common stock by the weighted average of common shares and, if
dilutive, common share equivalents outstanding during the periods. Common share
equivalents represent the potentially dilutive effect of the assumed exercise of
certain outstanding stock options. The effect of convertible preferred stock is
not included in the calculation since it does not have a dilutive effect on the
earnings per common share. The shares used in the calculation have been
retroactively adjusted to give effect to the exchange ratio prescribed in the
reorganization agreement with NEG (see Note 2).
ACCOUNTING PRONOUNCEMENT ADOPTED IN CURRENT PERIOD
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which was implemented by the Company during the current fiscal year. The
adoption of SFAS No. 121 did not impact the financial condition or results of
operations of the Company.
ACCOUNTING PRONOUNCEMENT TO BE ADOPTED IN FUTURE PERIODS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which provides an alternative to APB Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation
issued to employees. The statement allows for a fair value based method of
accounting for employee stock options and similar equity instruments. However,
for companies that continue to account for stock-based compensation arrangements
under APB Opinion No. 25, SFAS No. 123 requires disclosure of the pro forma
affect on net income and earnings per share of its fair value based accounting
for those arrangements. These requirements are effective for fiscal year years
beginning after December 15, 1995, or upon initial adoption of the statement, if
earlier. The Company has determined that it will not adopt the recognition and
measurement provisions of that statement. Accordingly, the Company will continue
to account for stock-based compensation in accordance with APB Opinion No. 25
and will begin providing the pro forma disclosures required by SFAS No. 123 in
the Company's consolidated financial statements for the year ending June 30,
1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
22
<PAGE> 24
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
Effective July 1, 1995, the Company acquired substantially all of the
assets and assumed all of the trade payables and certain other liabilities of
Cedar Computer Center, Inc. (Cedar), an Iowa corporation, for a combination of
cash, notes and securities of the Company. The purchase price for the net assets
of Cedar and related acquisition costs consisted of approximately $9,865,579 in
cash, $3,760,000 of subordinated promissory notes, $515,000 representing the
fair value at the date of acquisition of 515,000 shares of the Company's common
stock and $3,731,427 representing the fair value of the Company's guarantee that
the common stock will have a market value of $10 per share at the end of three
years following the sale. The fair value of the Company's guarantee is included
in additional paid-in capital at June 30, 1996. Any payments required to be made
by the Company under the guarantee will first be applied against the amount
recorded and any excess will be charged against earnings in the period paid. The
cash portion of the purchase price was obtained from a $70 million revolving
credit facility from Congress Financial Corporation (New England).
The total purchase price of $17,872,006 was allocated to assets acquired
and liabilities assumed, based on their respective estimated fair values. The
excess of the purchase price over the aggregate amount assigned to the
identifiable net assets acquired was recorded as an intangible asset (goodwill)
which will be amortized using the straight-line method over 20 years. The
initial allocation of the purchase price is summarized as follows:
<TABLE>
<S> <C>
Accounts receivable.................................................... $ 40,773,369
Inventories............................................................ 16,052,348
Furniture and office equipment......................................... 764,587
Prepaid expenses....................................................... 155,598
Accounts payable and accrued expenses.................................. (44,063,184)
------------
Fair value of assets acquired, net of liabilities assumed.............. 13,682,718
Goodwill............................................................... 4,189,288
------------
$ 17,872,006
===========
</TABLE>
The asset purchase agreement related to the acquisition of Cedar provided
for adjustment of the purchase price based on the ultimate realization of
certain assets and the assumption of certain liabilities. As a result of such
adjustments, the asset purchase agreement was amended to reflect a reduction of
$2,025,016 in the net assets acquired and a corresponding reduction in the
purchase price of $1,682,780 through a reduction of subordinated seller notes.
Goodwill increased by $342,236 as a result of this purchase price adjustment.
At the time Cedar was acquired, management, with the approval of the Board
of Directors, was assessing the activities conducted at Cedar to determine which
functions, if any, were duplicative and should be eliminated. This assessment,
which was completed in the second quarter, resulted in a plan to exit certain
activities conducted by Cedar and resulted in the accrual of employee
termination benefits of $311,000, write-off of assets no longer required of
$200,000, lease termination payments of $52,000 and other costs associated with
the facility closing of $237,000. Goodwill was increased by $800,000. While
these actions have been substantially completed, due to the timing of the
pay-outs, approximately $500,000 of the liability remains to be paid at June 30,
1996.
The results of operations of Cedar have been included in the Company's
consolidated statement of operations since the effective date of acquisition,
July 1, 1995. The following summarizes unaudited pro forma results of operations
for the year ended June 30, 1995 assuming the acquisition occurred at July 1,
1994.
<TABLE>
<S> <C>
Sales.................................................. $462,543,000
Net income............................................. 4,255,000
Net income per common share............................ .57
</TABLE>
23
<PAGE> 25
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma results have been prepared for analysis only and do not
purport to be indicative of the results of operations which would have resulted
had the combination been in effect on the date indicated or which may result in
the future.
Effective July 1, 1994, the Company acquired all of the capital stock of
Dataprint, Inc. (Dataprint), a value added reseller of microcomputers and
related equipment and products, in a transaction that was accounted for as a
purchase business combination. The purchase price of $9,650,000 and acquisition
costs of $260,439 were paid with cash of $1,371,089, issuance of notes payable
of $250,000 and $1,000,000 in convertible preferred stock of CIC, direct
proceeds from CICS's revolving line of credit of $7,100,000 and other
liabilities incurred of $189,350. The total purchase price of $9,910,439 was
allocated to assets acquired and liabilities assumed, based on their respective
estimated fair values. The excess of the purchase price over the aggregate
amount assigned to the net tangible assets acquired was recorded as an
intangible asset that is being amortized using the straight-line method over 20
years. The allocation of the purchase price is summarized as follows:
<TABLE>
<S> <C>
Cash.................................................................... $ 1,631,583
Accounts receivable..................................................... 6,304,513
Inventories............................................................. 4,472,512
Furniture and office equipment.......................................... 177,730
Prepaid expenses........................................................ 17,645
Accounts payable and accrued expenses................................... (8,095,397)
-----------
Fair value of assets acquired, net of liabilities assumed............... 4,508,586
Goodwill................................................................ 5,401,853
-----------
$ 9,910,439
===========
</TABLE>
Based on operating results of Dataprint for the years ended June 30, 1996
and 1995, the Company incurred additional purchase price of $38,000 and
$462,000, respectively, related to performance against a maximum contingent earn
out of $500,000. Such amounts are included in goodwill at June 30, 1996.
The results of operations of Dataprint have been included in the Company's
consolidated statements of operations since the effective date of acquisition,
July 1, 1994. The following summarizes unaudited pro forma results of operations
for the year ended June 30, 1994 assuming the acquisition occurred at July 1,
1993.
<TABLE>
<S> <C>
Sales.................................................. $165,215,000
Income before extraordinary item....................... 1,327,000
Net income............................................. 1,492,000
Net income per common share:
Primary.............................................. .17
Fully diluted........................................ .16
</TABLE>
The pro forma results have been prepared for analysis only and do not
purport to be indicative of the results of operations that would have resulted
had the combination been in effect on the date indicated or which may result in
the future.
In connection with the Company's acquisition of Dataprint, the Company paid
an acquisition fee of $125,000 to R.G. Farrell, Inc., a company owned and
controlled by the president of the Company.
On May 23, 1994, CIC executed a Reorganization Agreement with NEG whereby
NEG exchanged shares of its common stock at a predetermined, negotiated exchange
ratio for all of the issued and outstanding shares of CIC's preferred and common
stock. Pursuant to the terms of the offer, CIC preferred and common shareholders
were offered in a private transaction 3 and 1.256585 shares, respectively, of
NEG's shares of
24
<PAGE> 26
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock for each outstanding share of CIC preferred and common stock. This
in-substance recapitalization has been retroactively reflected in the
consolidated financial statements.
After the exchange, CIC's and NEG's former shareholders owned approximately
97% and 3%, respectively, of the 5,900,000 shares of outstanding common stock.
As a result of the change in ownership and the fact that all of NEG's Board of
Directors resigned and were replaced by the existing directors of CIC, the
transaction was accounted for as a reverse acquisition, that is as an
acquisition of NEG by CIC. The value assigned to the stock held by shareholders
of NEG, along with net liabilities assumed and costs related to the acquisition
totaling approximately $319,000, were charged against earnings as costs
associated with becoming a public company (see Note 9).
3. INVENTORIES
The Company purchases a substantial portion of its inventory from one
supplier, with which the Company has a signed U.S. reseller agreement that
expires on February 28, 1997. The Company purchased approximately $264,800,000
for the year ended June 30, 1996 and $131,200,000 in 1995 from this single
supplier. At June 30, 1996 and 1995, amounts due to this supplier included in
accounts payable were approximately $33,000,000 and $15,600,000, respectively.
4. BORROWINGS
The Company's borrowings consist of the following:
NOTES PAYABLE
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1996 1995
----------- ----------
<S> <C> <C>
Revolving line of credit with a bank, due on demand, interest
payable at 1% over the prime rate of Philadelphia National
Bank (effective rate 9.25% at June 30, 1996 and 11.00% at
June 30, 1995)............................................. $18,746,703 $9,895,603
Note payable to shareholder with interest accruing at 10% per
annum, payable on August 1, 1995........................... -- 25,000
----------- ----------
$18,746,703 $9,920,603
=========== ==========
</TABLE>
During 1995, the Company entered into a $31.5 million bank-credit agreement
that provided a $19.0 million revolving line of credit and a $12.5 million term
loan through August 5, 1998. In 1996, the amount available under such agreement
was increased to $70 million in connection with the acquisition of substantially
all of the assets of Cedar and the due date was extended to July 1, 1998. The
allocation between the revolving line and the term loan was $42.5 million and
$27.5 million, respectively. This credit agreement is collateralized by all of
the Company's trade accounts receivable and inventory, which have a combined
carrying value of approximately $86,449,000 at June 30, 1996. Under the
revolving portion of the line of credit, the Company may borrow up to a maximum
of $42.5 million, including a $10 million irrevocable letter of credit that was
issued during 1996 to a major supplier of the Company. This irrevocable letter
of credit partially secures an account payable to this supplier of approximately
$33 million at June 30, 1996. The $27.5 million term note payable is discussed
below. At June 30, 1996, the Company has approximately $10.7 million available
under this credit agreement. The credit agreement prohibits the Company from
paying any dividends on its common stock and requires that the Company maintain
minimum levels of working capital and adjusted net worth, both as defined in the
agreement. (See Note 12.)
25
<PAGE> 27
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TERM NOTE PAYABLE
As discussed above, at June 30, 1996, the Company has a $27.5 million term
note payable to bank. This note requires monthly interest payments of 1% over
the prime rate of the Philadelphia National Bank (9.25% effective rate at June
30, 1996) and matures on July 1, 1998.
SENIOR SUBORDINATED DEBT
On June 25, 1993, the Company issued $1.2 million in 9% convertible senior
subordinated notes. On February 22, 1994, such note was canceled and a new
agreement was entered into requiring the Company to repay $1 million in monthly
installments through December 31, 1994. As a result of the new agreement, the
Company recorded a gain of $273,800, representing a reduction of $200,000 in
principal and forgiveness of $73,800 of accrued interest. This amount has been
classified as an extraordinary item (net of tax) in the June 30, 1994
consolidated statement of income.
SUBORDINATED DEBT
In connection with the acquisition of substantially all of the assets of
Cedar (see Note 2), subordinated promissory notes in the aggregate principal
amount of $3,510,000 and a short-term promissory note in the principal amount of
$250,000 were issued to the seller. The subordinated promissory notes are
payable in four annual installments of principal and interest at an interest
rate of 7.25% per annum, commencing on July 2, 1996 through July 2, 1999. The
short-term promissory note was payable in six equal monthly installments of
principal and interest rate of 10% per annum, and has been fully satisfied at
June 30, 1996.
As a result of the purchase price adjustments, described in Note 2, the
aggregate principal amount of the subordinated promissory notes was reduced to
$1,913,000 under the same terms and conditions. Future annual principal
maturities of the subordinated promissory notes for the year ended June 30 are
as follows: 1997 -- $302,440; 1998 -- $267,440; 1999 -- $671,560;
2000 -- $671,560.
The notes are subordinate and junior in right of payment to the prior
payment of all indebtedness of CICS to its senior lenders, secured by a pledge
of 15% of the issued and outstanding shares of common stock of CICS subject to
the prior security interest of CICS' senior lenders and is guaranteed by the
Company.
26
<PAGE> 28
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Significant components of the Company's deferred income tax assets and
liabilities at June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts........................... $ 724,622 $ 215,325
Inventory................................................. 421,124 249,983
Deferred revenue.......................................... 108,094 140,821
Restructuring charges..................................... 921,733 --
Net operating loss carryforwards.......................... 46,313 --
Other..................................................... -- 108,156
---------- ---------
Total deferred income tax assets.................. 2,221,886 714,285
Deferred income tax liabilities:
Goodwill.................................................. (143,865) --
Depreciation.............................................. (182,031) (149,987)
Other..................................................... (52,707) --
---------- ---------
Total deferred income tax liabilities............. (378,603) (149,987)
Net deferred income tax asset..................... $1,843,283 $ 564,298
========= =========
</TABLE>
The provision for income taxes as of June 30, 1996, 1995 and 1994 consists
of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Current:
Federal...................................... $ 1,145,589 $ 743,420 $ 408,801
State........................................ 290,093 229,745 100,000
----------- --------- ---------
1,435,682 973,165 508,801
Deferred:
Federal...................................... (1,014,435) (81,751) (130,747)
State........................................ (264,550) (22,842) (4,359)
----------- --------- ---------
(1,278,985) (104,593) (135,106)
----------- --------- ---------
$ 156,697 $ 868,572 $ 373,695
=========== ========= =========
</TABLE>
The reconciliation of income taxes attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense as of
June 30, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Tax (benefit) at statutory rates................... $(83,814) $680,498 $212,642
Increase resulting from:
Effect of state income taxes..................... 76,279 154,050 36,900
Amortization of goodwill......................... 138,830 120,088 28,769
Differences arising from acquisition of NEG...... -- -- 126,029
Other............................................ 25,402 (86,064) (30,645)
-------- -------- --------
Total.................................... $156,697 $868,572 $373,695
======== ======== ========
</TABLE>
27
<PAGE> 29
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITAL STOCK
On July 12, 1994, shareholders approved a proposal to amend the number of
authorized shares of preferred and common stock to 2,000,000 and 10,000,000,
respectively. The existing par value and number of shares outstanding remain
unchanged. At the same meeting, shareholders approved the adoption of the 1994
stock option plan and reserved 500,000 shares of common stock for future
issuance and issued three new classes of preferred stock as follows:
- Series A, 9% cumulative, convertible, redeemable preferred stock $.001
par value, 40,000 shares authorized, 19,250 shares issued and
outstanding, stated value $100 per share.
- Series B, 9% cumulative, convertible preferred stock $.001 par value,
250 shares authorized, 125 shares were issued and subsequently
converted into 500,000 shares of common stock during July 1994.
- Series C, 9% cumulative, convertible, redeemable preferred stock $.001
par value, 250 shares authorized, 125 shares issued and outstanding,
stated value $4,000 per share.
At the October 12, 1995 annual stockholders meeting, the stockholders
approved the following:
- An increase in the number of authorized shares of capital stock from
12,000,000 shares to 22,000,000 shares, including an increase in the
number of authorized shares of common stock from 10,000,000 shares to
20,000,000 shares.
- An amendment to the Company's 1994 Stock Option Plan (the Plan) to
increase the total number of shares reserved for issuance under the
Plan from 500,000 to 1,050,000 shares and modify the formula under the
Plan to grant each nonemployee director a nonqualified option to
purchase 10,000 shares of the Company's common stock upon election to
the Board of Directors or one year anniversary of election and
continued service on the Board.
On April 3, 1996, the Company's Board of Directors authorized the issuance
of two new series of cumulative convertible redeemable preferred stock,
designated Series D and Series E. The Series D preferred stock is identical to
the Company's existing Series A preferred stock, and Series E preferred stock is
identical to the Company's existing Series C preferred stock, with the single
exception that the mandatory conversion feature of the Series A and Series C
preferred stock has been modified to extend the date of that conversion from
five to ten days upon the completion of a public offering of common stock and
the trading of such stock at a price equal to or greater than $4.00 per share.
On May 5, 1996, the Company completed a private exchange offer with the
holders of its outstanding shares of Series A and Series C preferred stock. As a
result of the exchange offer, the Company issued 19,250 shares of Series D
preferred stock in exchange for 19,250 outstanding shares of Series A preferred
stock and 125 shares of Series E preferred stock in exchange for 125 outstanding
shares of Series C preferred stock.
Holders of the Series D and Series E cumulative, convertible, redeemable
preferred stock are entitled to receive, when, as and if declared by the Board,
cumulative annual dividends of 9% of their respective stated values per share of
$100 and $4,000, payable in cash or in kind. Such dividends are payable on
January 31 and July 31. Accrued but unpaid dividends shall be cumulative, but
shall not bear interest. Dividends paid during the year ended June 30, 1996 and
1995 totaled $218,250 and $112,605, respectively. So long as any shares of
Series D and Series E preferred stock are outstanding, no dividends may be paid
on the common stock or any series of preferred stock ranking junior to the
Series D and Series E preferred stock, until all dividends accrued on the Series
D and Series E preferred stock have been paid for the current and all prior
periods. Except as, and if required by law, and as herein described, the Series
D and Series E preferred stock are nonvoting. In the limited event the Company
fails to declare and pay dividends for two consecutive Dividend Payment Dates,
and for so long as such failure is continuing, the holders of a majority of each
of the Series D preferred stock
28
<PAGE> 30
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are entitled to vote separately as a class to elect one additional director per
series to the Board of Directors of the Company.
Following the effective date of a registration of securities by the Company
with the Securities and Exchange Commission, the shares of Series D preferred
stock will be convertible at any time and from time to time at the option of the
holder thereof into shares of common stock of the Company at a conversion rate
(the Series D Conversion Rate) of 40 shares of common stock for each share of
Series D preferred stock. The shares of Series E preferred stock are convertible
at any time and from time to time at the option of the holder thereof into
shares of common stock of the Company at a conversion rate (the Series E
Conversion Rate) of 4,000 shares of common stock for each share of Series E
preferred stock. The shares of Series D or Series E preferred stock will
automatically and mandatorily convert at the same Series D and Series E
Conversion Rate, as applicable, into common stock at such time as the Company
has completed a public offering of common stock and, thereafter, the common
stock has traded for ten consecutive days at a bid and ask price equal to or
greater than $4.00 per share.
The shares of Series D and Series E preferred stock are subject to
redemption by the Company at its option at any time and from time to time, after
one year from the date of issue at a redemption price of 110% of their
respective stated values of $100 and $4,000 per share of the Series D and Series
E preferred stock, respectively, plus all accrued and unpaid dividends as of the
date of redemption.
Prior to the July 1994 issuance of the three classes of preferred stock
discussed above and during May 1994, all prior outstanding convertible preferred
stock was exchanged for shares of common stock (see Note 2). There were no
shares of preferred stock outstanding at June 30, 1994.
During the year ended June 30, 1994, the Company paid its annual cash
dividend of 8% of the stated value per share of preferred stock of $10 to
holders of record on July 31, 1993 and January 31, 1994 in the amount of
$189,618. On July 12, 1994, the Board of Directors declared a special final
dividend to such holders from February 1, 1994 through May 23, 1994, the
exchange date. This dividend of $58,547 has been accrued and included in the
June 30, 1994 consolidated balance sheet and related earnings per share
computation.
Stock Options: The 1994 Stock Option Plan, as amended, permits the
granting of incentive and nonqualified stock options as provided in the relevant
sections of the Internal Revenue Code. Under the plan, options may be granted at
prices not less than the fair market value on the date of the grant. The term of
each option and the manner in which it may be exercised is determined by the
Board of Directors at the date of each grant, and options are for a period of no
more than ten years. A summary of stock option activity related the 1994 stock
option plan, as amended, is as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER
SHARES RESERVED NUMBER OF SHARES OPTION PRICE OF SHARES
FOR OPTIONS UNDER OPTIONS PER SHARE EXERCISABLE
--------------- ---------------- ------------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1993....... -- --
Shares issuable................ 500,000 --
Granted........................ -- 40,000 $.10 -- $1.00
--------- -------
Balance at June 30, 1994....... 500,000 40,000 $.10 -- $1.00
Granted........................ -- 460,000 $1.00 -- $1.10
Expired........................ -- (5,000) $.10
--------- -------
Balance at June 30, 1995....... 500,000 495,000 $.10 -- $1.10 180,000
Additional shares issuable..... 550,000 --
Granted........................ -- 437,750 $4.00
Exercised...................... -- (25,250) $1.00
Expired........................ -- (3,850) $1.00
--------- -------
Balance at June 30, 1996....... 1,050,000 903,650 $.10 -- $4.00 470,000
========= =======
</TABLE>
29
<PAGE> 31
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS
OPERATING LEASES
The Company is committed through 2000 under various leases relating to
facilities and equipment. Some leases have renewal clauses which may be
extended, at the option of the Company, beyond their respective terms. These
leases require fixed rental payments and require payments of property taxes and
insurance. Rent expense for the Company relating to all of the above
noncancelable lease agreements was approximately $1,788,000, $636,000 and
$305,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
Included in rent expense for the year ended June 30, 1996 and 1995 is
approximately $264,000 paid to a shareholder of the Company. At June 30, 1996,
the approximate future minimum annual rentals due under the noncancelable leases
are as follows:
<TABLE>
<S> <C>
1997..................................................................... $1,697,000
1998..................................................................... 1,133,000
1999..................................................................... 233,000
2000..................................................................... 32,000
---------
$3,095,000
=========
</TABLE>
In connection with the Company's planned relocation and consolidation (see
Note 11), the Company signed a ten-year lease on a new headquarters and sales
and distribution facility which commences upon substantial completion of the
facility and is scheduled for completion in fiscal 1997. The lease agreement
requires fixed monthly rental payments of approximately $44,000 increasing by 2%
each year following commencement and requires payments of property taxes and
insurance. The Company has the option to extend the lease for a five-year period
beyond the original term and may cancel the original lease following the end of
the fifth year, and anytime thereafter upon written notice, subject to the
payment of a cancellation fee, as defined.
CAPITAL LEASES
The Company has entered into capital equipment leases for approximately
$973,000 which expire at varying dates through March 1998. At June 30, 1996,
accumulated amortization on this equipment was approximately $99,000.
Amortization of property under these leases is included in depreciation and
amortization in the accompanying consolidated financial statements. At June 30,
1996, future minimum lease payments pursuant to these leases are as follows:
<TABLE>
<S> <C>
1997..................................................................... $ 345,286
1998..................................................................... 339,169
1999..................................................................... 225,322
---------
Total minimum lease payments............................................. 909,777
Less amounts representing interest of approximately 9%................... (135,760)
---------
Present value of minimum lease payments.................................. 774,017
Less current portion..................................................... (265,625)
---------
$ 508,392
=========
</TABLE>
OTHER
The Company is a guarantor of a mortgage note payable, with an outstanding
balance of approximately $480,000 which encumbers a building that is owned by
the former owner of Copley Systems Corporation.
30
<PAGE> 32
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PROFIT SHARING AND 401(K) PLANS
The Company had a profit sharing plan covering all qualified employees. As
of June 30, 1993, the profit sharing feature of the plan was frozen, and
effective September 1, 1993, the Company amended the plan by introducing a
401(k) plan. Future full-time employees shall be eligible to become participants
upon attaining age 21 and completing three months of service. Employer
contributions are at the sole discretion of the Board of Directors.
Contributions for the years ended June 30, 1996, 1995 and 1994 were $112,144,
$128,012 and $96,680, respectively.
9. COSTS ASSOCIATED WITH PUBLIC OFFERINGS
CIC became a public company through a merger with NEG in May 1994 (see Note
2). The costs associated with this transaction approximated $319,000 and were
charged against earnings during the year ended June 30, 1994.
In the first quarter of 1996 and 1994, the Company incurred approximately
$486,000 and $190,000, respectively, in connection with the preparation of
Registration Statements on Form S-1. These public offerings were terminated and
the related costs were charged against earnings during the year ended June 30,
1996 and 1994, respectively.
10. MAJOR CUSTOMER
A major customer accounted for approximately 10% and 17% of sales for the
years ended June 30, 1995 and 1994, respectively. No individual customer
accounted for greater than 10% of sales for the year ended June 30, 1996.
11. RESTRUCTURING CHARGE
During the fourth quarter of 1996, the Company recorded a special charge of
$2.3 million for restructuring costs associated with the planned relocation and
consolidation of the Company's headquarters, sales and distribution facilities.
Management believes that these actions, once completed, will result in
improvements in operational efficiency. These costs include approximately $1.7
million for severance benefits for approximately 125 affected employees,
$400,000 for the write-off of property and equipment which will no longer be
required and approximately $200,000 for lease extension and termination costs
and other activities to close the existing facilities. As of June 30, 1996, none
of the charge has been utilized. Based on management's plan, it is anticipated
that a substantial portion of the charge will be expended during fiscal 1997 and
the remainder during the first half of fiscal 1998.
12. SUBSEQUENT EVENT
On September 30, 1996, the Company amended its financing agreement with its
primary lender, effective June 30, 1996, including an increase in the available
credit from $70 million to $77 million and modification of certain financial
covenants.
31
<PAGE> 33
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 100,954 $ 147,085
Other........................................................... 1,713,267 193,161
----------- -----------
Total current assets.............................................. 1,814,221 340,246
Other assets (principally investment in CIC Systems, Inc.)........ 37,687,538 20,981,351
----------- -----------
$39,501,759 $21,321,597
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities............................................... $ 935,665 $ 288,224
Long-term debt.................................................... 1,610,560 --
Other noncurrent liabilities (principally amount due to CIC
Systems, Inc.).................................................. 26,710,036 14,442,543
----------- -----------
Total liabilities................................................. 29,256,261 14,730,767
Shareholders' equity:
Preferred stock................................................. 19 19
Common stock.................................................... 6,945 6,400
Other shareholders' equity...................................... 10,238,534 6,584,411
----------- -----------
Total shareholders' equity........................................ 10,245,498 6,590,830
----------- -----------
$39,501,759 $21,321,597
========== ==========
</TABLE>
See accompanying notes.
32
<PAGE> 34
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
Management fee from wholly-owned subsidiary.......... $ -- $ -- $ 600,000
Selling, general and administrative expenses:
Salaries and benefits.............................. 1,539,227 648,197 446,885
Other selling, general and administrative.......... 2,014,049 969,935 333,012
Occupancy costs.................................... 34,089 35,361 32,287
Restructuring charge............................... 2,300,000
----------- ----------- ---------
Total selling, general and administrative expenses... 5,887,365 1,653,493 812,184
----------- ----------- ---------
Loss from operations................................. (5,887,365) (1,653,493) (212,184)
Interest expense..................................... 879,593 12,965 132,124
Other -- costs associated with public offerings...... 486,098 -- 509,000
----------- ----------- ---------
Loss before income taxes, equity in net income of
subsidiary and extraordinary item.................. (7,253,056) (1,666,458) (853,308)
Income tax benefit................................... 2,943,664 490,110 167,277
----------- ----------- ---------
Loss before equity in net income of subsidiary and
extraordinary item................................. (4,309,392) (1,176,348) (686,031)
Equity in net income of subsidiary................... 3,906,183 2,309,240 772,455
----------- ----------- ---------
(Loss) income before extraordinary item.............. (403,209) 1,132,892 86,424
Extraordinary item -- gain on extinguishment of debt
(net of taxes)..................................... -- -- 165,300
----------- ----------- ---------
Net (loss) income.................................... $ (403,209) $ 1,132,892 $ 251,724
========== ========== =========
</TABLE>
See accompanying notes.
33
<PAGE> 35
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
CASH (USED)PROVIDED BY OPERATING ACTIVITIES........ $ (7,585,452) $(1,996,318) $ 157,995
INVESTING ACTIVITIES
Purchase of substantially all of the assets of
Cedar Computer Center, Inc....................... (9,591,647) (273,932) --
Purchase of Dataprint, Inc., net of cash
acquired......................................... (462,000) 260,494 --
Purchase of Copley Systems Corporation, net of cash
acquired......................................... -- -- (135,868)
Acquisition of equipment........................... (22,186) (57,581) --
------------ ----------- -----------
Net cash used in investing activities.............. (10,075,833) (71,019) (135,868)
FINANCING ACTIVITIES
Proceeds from sale of capital stock, net of
offering costs................................... -- 1,830,716 --
Proceeds from exercise of stock purchase
warrants......................................... -- -- 35,000
Net (repayments) proceeds from note payable........ (25,000) 25,000 --
Proceeds from exercise of stock options............ 25,250 -- --
Repayment of long-term debt........................ (164,220) (779,861) (1,636,423)
Dividends paid..................................... (218,250) (112,605) (189,618)
Advances from CIC Systems, Inc..................... 17,997,374 636,593 1,309,228
Other.............................................. -- -- 20,827
------------ ----------- -----------
Net cash provided (used) by financing activities... 17,615,154 1,599,843 (460,986)
------------ ----------- -----------
Net decrease in cash............................... (46,131) (467,494) (438,859)
Cash at beginning of period........................ 147,085 614,579 1,053,438
------------ ----------- -----------
Cash at end of period.............................. $ 100,954 $ 147,085 $ 614,579
=========== ========== ==========
</TABLE>
See accompanying notes.
34
<PAGE> 36
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
1. BASIS OF PRESENTATION
In the parent company-only financial statements, Computer Integration
Corp.'s (the Company) investment in subsidiary is stated at cost plus equity in
undistributed earnings of its wholly-owned subsidiary CIC Systems, Inc. (CICSI)
since the date of acquisition. The parent company-only financial statements
should be read in conjunction with the Company's consolidated financial
statements.
2. GUARANTEE
CICSI has a $70 million bank credit agreement that provides a $42.5 million
revolving line of credit and a $27.5 million term loan through July 1, 1998.
Under the terms of the agreement, the Company has guaranteed the payment of all
principal and interest.
3. DIVIDENDS FROM SUBSIDIARY
No cash dividends were paid to the Company from CICSI for the year ended
June 30, 1996, 1995 and 1994.
COMPUTER INTEGRATION CORP. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts........ $ 495,000 $1,638,659 $782,671(1) $1,350,988
======== ========= ======== =========
YEAR ENDED JUNE 30, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts........ $ 321,785 $ 374,574 $201,359(1) $ 495,000
======== ========= ======== =========
YEAR ENDED JUNE 30, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts........ $ 107,670 $ 249,169 $ 35,054(1) $ 321,785
======== ========= ======== =========
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
35
<PAGE> 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
Incorporated herein by reference to the Company's Definitive Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's Definitive Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's Definitive Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Incorporated herein by reference to the Company's Definitive Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
<TABLE>
<S> <C>
COMPUTER INTEGRATION CORP.
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1995
Consolidated Statements of Operations for the Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1996,
1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
</TABLE>
(a)(2) Financial Statement Schedules.
(1) Computer Integration Corp.:
Schedule I -- Condensed Financial Information of Registrant
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and have, therefore,
been omitted.
36
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------
<S> <C> <C>
(a)(3) -- Exhibits.
(3)(a) -- Certificate of Incorporation of Computer Integration Corp., as amended(1)
(3)(b) -- By-laws of Computer Integration Corp.(2)
(4) -- Form of Subscription Agreement between NEG, Inc. and Purchasers of Series A,
9% Cumulative Convertible Redeemable Preferred Stock(2)
(10)(a) -- *1994 Stock Option Plan(2)
(10)(b) -- Amendment to Asset Purchase Agreement between the Registrant and Cedar
Computer Center, Inc., dated July 1, 1995(3)
(10)(c) -- Amended and Restated Loan and Security Agreement between CIC Systems, Inc. and
Congress Financial Corporation (New England), dated July 1, 1995(3)
(10)(d) -- $27.5 million Term Promissory Note between CIC Systems, Inc. and Congress
Financial Corporation (New England), dated July 1, 1995(3)
(10)(e) -- Guarantee of Registrant in favor of Congress Financial Corporation (New
England), dated July 1, 1995(3)
(10)(f) -- *Executive Employment Agreement between CIC Systems, Inc. and Frank H.
Slovenec, dated August 7, 1995(4)
(10)(g) -- First Amendment to Financing Agreement between CIC Sytems, Inc. and Congress
Financial Corporation (New England), dated September 30, 1996(1)
(21) -- Subsidiary of Registrant(2)
(23) -- Consent of Ernst & Young LLP(1)
(27) -- Financial Data Schedule (for SEC use only).
</TABLE>
- ---------------
(1) Filed herewith.
(2) Incorporated by reference to the Exhibits to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-84472) as filed with the
Commission on September 28, 1994, and as amended by Amendments No. 1
through 8 thereto.
(3) Incorporated by reference to the Exhibits to the Registrant's Current Report
on Form 8-K, dated July 1, 1995 as filed with the Commission on July 11,
1995, Commission File No. 0-2073233.
(4) Incorporated by reference to the Exhibits to the Registrant's Annual Report
on Form 10-K, as filed with the Commission on September 27, 1995,
Commission File No. 0-20732.
* Compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
37
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 and 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, in the City of Boca
Raton, State of Florida on the 30th day of September, 1996.
COMPUTER INTEGRATION CORP.
By: /s/ RONALD G. FARRELL
Ronald G. Farrell
Chief Executive Officer
Chairman of the Board of Directors
Dated: September 30, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------------
<S> <C> <C>
/s/ RONALD G. FARRELL Chief Executive Officer September 30, 1996
Ronald G. Farrell (Principal Executive Officer)
/s/ JOHN F. CHISTE Chief Financial Officer September 30, 1996
John F. Chiste (Principal Financial and
Principal Accounting Officer)
/s/ ARALDO COSSUTTA Director September 30, 1996
Araldo Cossutta
/s/ FRANK J. ZAPPALA Director September 30, 1996
Frank J. Zappala
/s/ RONALD G. ASSAF Director September 30, 1996
Ronald G. Assaf
/s/ SAMUEL C. McELHANEY Director September 30, 1996
Samuel C. McElhaney
</TABLE>
38
<PAGE> 1
Exhibit 3(a)
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 10/23/1995
950243598-2412016
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Computer Integration Corp. (the "Corporation"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST: That on June 13, 1995, the Board of Directors of the Corporation
at a regularly called meeting, adopted the following resolution which sets
forth an amendment to the Corporation's Certificate of Incorporation, and the
Board of Directors directed that such amendment be submitted for approval by
the stockholders of the Corporation. The resolution setting forth the proposed
amendment is as follows:
RESOLVED, that the first sentence of ARTICLE FOURTH of the
Corporation's Certificate of Incorporation be amended to read in its
entirety as follows:
ARTICLE FOURTH. The total number of shares of all classes of stock
which the Corporation shall have authority to issue is 22,000,000
shares, consisting of 20,000,000 shares of Common Stock, par value
$.001 per share ("Common Stock"), and 2,000,000 shares of Preferred
Stock, par value $.001 per share ("Preferred Stock").
SECOND: That thereafter, pursuant to the resolution of its Board of
Directors, on October 12, 1995, the said amendment was duly adopted by the
stockholders of the Corporation in accordance with the provisions of Section
222 of the General Corporation Law of the State of Delaware, at a meeting of
the stockholders, at which meeting the necessary number of shares as required
by statute were voted in favor of the amendment.
THIRD: That the foregoing amendment was duly adopted in accordance with
Section 242 of the Delaware General Corporation Law of the State of Delaware.
FOURTH: Except as specifically amended hereby, all provisions of the
Certificate shall remain in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Certificate to be signed by Ronald G. Farrell, its
Chief Executive Office, and John F. Chiste, its Secretary, this 19th day of
October, 1995.
COMPUTER INTEGRATION CORP.
By: /s/ Ronald G. Farrell
--------------------------
Ronald G. Farrell
Chief Executive Officer
Attest:
By: /s/ John F. Chiste
--------------------------
John F. Chiste
Secretary
[Seal]
STATE OF FLORIDA )
) ss:
COUNTY OF PALM BEACH)
I HEREBY CERTIFY that on this day before me, an officer duly authorized
in the State and County aforesaid to take acknowledgements, personally appeared
Ronald G. Farrell and John F. Chiste, well known to me to be the Chief
Executive Officer and Secretary of Computer Integration Corp., a Delaware
corporation, and they severally acknowledge executing the same freely and
voluntarily under authority duly vested in them by said Corporation and that
the seal affixed thereto is the true Corporate Seal of the Corporation.
WITNESS my hand and official seal in the County and State last
aforesaid this 19th day of October, 1995.
/s/ Donn A. Beloff
------------------------------
Notary Public
[Seal] DONN A. BELOFF
My COMMISSION #CC 215033 EXPIRES
August 19, 1996
BONDED THRU TROY FAIN INSURANCE, INC.
My Commission Expires:
<PAGE> 3
COMPUTER INTEGRATION CORP.
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS, AND LIMITATIONS OF SERIES D, 9% CUMULATIVE
CONVERTIBLE REDEEMABLE PREFERRED STOCK
Computer Integration Corp., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), does
hereby certify:
That, pursuant to authority conferred upon the Board of
Directors of the Corporation ("Board of Directors") by the Certificate of
Incorporation of the Corporation (the "Certificate"), and pursuant to the
provisions of the Delaware General Corporation Law, said Board of Directors, on
April 3, 1996, duly adopted resolutions providing for the issuance of one
series, aggregating forty thousand (40,000) shares, of Series D, 9% Cumulative
Convertible Redeemable Preferred Stock (the "Series D Preferred Stock"), stated
value $100 and par value $.001 per share, which resolutions are as follows:
WHEREAS, Article Fourth of the Corporation's Certificate of
Incorporation, as amended, vests the authority in the Board of
Directors to issue shares of the Corporation's authorized preferred
stock in series with such rights, preferences and limitations as the
Board deems appropriate, without necessity of further action by the
stockholders of the Corporation;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors
hereby creates, from the authorized but unissued shares of preferred
stock, par value $.001 per share, a series of the preferred stock to
consist of forty thousand (40,000) shares, designated "Series D, 9%
Cumulative Convertible Redeemable Preferred Stock" (the "Series D
Preferred Stock") and hereby fixes the voting powers, designation,
preferences and relative, participating, optional and other special
rights, and the qualifications, limitations or restrictions thereof,
of the shares of such Series as follows:
1. Designation. The designation of the series of stock created
by this resolution shall be "Series D, 9% Cumulative Convertible Redeemable
Preferred Stock" (the "Series D Preferred Stock") and the number of shares
constituting the Series D Preferred shall be forty thousand (40,000). Each
share of the Series D Preferred Stock shall have a stated value equal to $100.
2. Dividends. The holders of the Series D Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors out
of the funds of the Corporation legally available therefore, cumulative
dividends at the annual rate of $9 per share, payable $4.50 per share on each
January 31st and July 31st, commencing July 31, 1996. Such dividends shall be
payable in cash or in kind. In the year in which shares of Series D Preferred
Stock are issued, in the event that the payment date for the purchase of shares
of Series D Preferred Stock shall be other than January 31st or July 31st, the
initial dividend shall accumulate and be payable pro rata only from the date of
payment to the Corporation for the respective shares of Series D
<PAGE> 4
Preferred Stock. If the dividend on the Series D Preferred Stock for any
dividend period shall not have been paid or set apart in full for the Series D
Preferred Stock, the aggregate deficiency shall be cumulative and shall be
fully paid or set apart for payment before any dividends shall be paid upon or
set apart for payment for any class of common stock of the Corporation or any
other class of preferred stock of the Corporation ranking junior thereto.
Accumulations of dividends on the Series D Preferred Stock shall not bear
interest.
3. Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the affairs of the Corporation, whether voluntary
or otherwise, after payment or provision for payment of the debts and other
liabilities of the Corporation, the holders of the Series D Preferred Stock
shall be entitled to receive, before the holders of any of the common stock or
other classes of preferred stock of the Corporation ranking junior thereto, out
of the remaining net assets of the Corporation, the amount of $100 in cash or
in kind for each share of Series D Preferred Stock, plus an amount equal to all
dividends accrued but unpaid, if any, with respect to each such share up to the
date fixed for distribution. After such payment shall have been made in full
to the holders of the outstanding Series D Preferred Stock, or funds or assets
necessary for such payment shall have been set aside in trust for the account
of the holders of the outstanding Series D Preferred Stock, so as to be and
continue to be available therefor, the holders of the outstanding Series D
Preferred Stock shall be entitled to no further participation in such
distribution of the assets of the Corporation.
In the event, after payment or provision for payment of the debts and
other liabilities of the corporation, the remaining net assets of the
Corporation are not sufficient to pay the liquidation preference of the holders
of the Series D Preferred Stock, no such distribution shall be made on account
of any shares of any other class or series of capital stock of the Corporation
ranking on a parity with the shares of the Series D Preferred Stock upon such
liquidation unless proportionate distributive amounts shall be paid on account
of each share of the Series D Preferred Stock, ratably, in proportion to the
full distributable amounts for which holders of all such parity shares,
including other shares of Series D Preferred Stock, are respectively entitled
upon such liquidation.
4. Conversion of Preferred Stock into Common Stock. Each share
of the Series D Preferred Stock shall be, under paragraph 4(a) below,
convertible at the option of the holder thereof and, under paragraph 4(b)
below, automatically and mandatorily converted upon the occurrence of the event
described therein; in either event, any such shares of Series D Preferred Stock
shall be converted into fully paid and nonassessable shares of the
Corporation's common stock, par value $.001 per share (the "Common Stock").
(a) Elective Conversion. Subject to any other provision
of this paragraph 4, each holder of record of any share(s) of Series D
Preferred Stock shall have the right to convert such holder's share(s) of
Series D Preferred Stock, in whole or in part, including all accrued but unpaid
dividends, if any, in accordance with the Conversion Ratio (defined below),
subject to the adjustments set forth below, at his or her option, at any time
and from time to time after the date on which a Registration Statement
(defined below) that includes the shares of the Common
2
<PAGE> 5
Stock issuable upon conversion of the Series D Preferred Stock is declared
effective by the U.S. Securities and Exchange Commission ("SEC"), or any other
Federal agency at the time administering the Securities Act of 1933, as
amended, or any similar Federal statute, and the rules and regulations of the
SEC issued under such Act, as they each may, from time to time, be in effect.
In case any shares of Series D Preferred Stock shall have been
called for redemption pursuant to paragraph 5 hereof, any election to convert
under this paragraph 4(a) with respect to the shares so called for redemption
shall cease and terminate at the close of business on the tenth day prior to
the date fixed for the redemption of such shares, unless default shall be made
in the payment of the redemption price.
Any holder of a share or shares of Series D Preferred Stock
electing to convert his or her Series D Preferred Stock into Common Stock shall
surrender the certificate(s) representing all of the share(s) of Series D
Preferred Stock so to be converted, duly endorsed to the Corporation or in
blank, at the principal office of the Corporation (or such other place as may
be designated by the Corporation), and shall give written notice to the
Corporation at said office that he or she elects to convert the same and
therein set forth the name or names (with the address or addresses) in which
the shares of Common Stock are to be issued.
If the last day of the exercise period of the conversion right
in the city where the principal place of business of the Corporation (or in the
city of the principal office of such other entity as the Corporation shall have
designated as the place so to surrender Series D Preferred Stock for
conversion, as aforesaid) shall be a legal holiday or a day on which banking
institutions are authorized by law to close, then such conversion right may be
exercised in such city on the next succeeding day not in such city a legal
holiday or a day on which banking institutions are authorized by law to close.
For purposes of this paragraph 4(a), the term "Registration
Statement" shall mean a registration statement filed by the Corporation with
the SEC for a public offering and sale of securities of the Corporation (other
than a registration statement on Form S-4 or Form S-8, or their successors, or
any other form for a limited purpose, or any registration statement covering
only securities proposed to be issued in exchange for securities or assets of
another corporation).
(b) Mandatory Conversion. Each share of the Series D
Preferred Stock, and all accrued but unpaid dividends, if any, shall
automatically and mandatorily convert, without the option of any holder of any
share(s) of Series D Preferred Stock or any action of the Corporation, to
shares of Common Stock in accordance with the Conversion Ratio (defined below)
as of the close of business on the date (the "Automatic Conversion Date"),
following a public offering of Common Stock by the Corporation, which ends a
ten (10) consecutive trading-day period during which a quote is available (such
trade dates need not occur an consecutive business days if no quote is
available for a given business day) and during which the average of the bid and
ask price of the Common Stock on the OTC Bulletin Board ("OTCBB") (or any
successor thereto) or on the NASDAQ Small-Cap Market(R), if then admitted for
trading thereon
3
<PAGE> 6
(or the average of the last reported sale price on the Nasdaq National
Market(R) System ("Nasdaq-NMS") or other national stock exchange on which the
Common Stock is principally traded, if the Common Stock is then listed or
admitted for trading on the Nasdaq-NMS or such other exchange), equals or
exceeds $4.00 per share (the "Automatic Conversion Price Level"). The term
"principally traded" as used in this paragraph shall refer to that national
securities exchange or Nasdaq-NMS, if any, on which the greatest number of
shares of Common Stock have been traded during such ten (10) day period.
As soon as practicable after the Automatic Conversion Date,
the Corporation shall provide each holder of record of Series D Preferred Stock
with notice of the automatic conversion and the Automatic Conversion Date and
call upon the holders to surrender to the Corporation, in the manner and at the
place designated, the certificate(s) representing shares of the Series D
Preferred Stock. Such notice shall be by mail to each holder of the Series D
Preferred Stock at the address last shown on the records of the Corporation for
such holder or given by such holder to the Corporation for the holder for the
purpose of notice or, if no such address appears or is given, at the place
where the principal executive office of the Corporation is located.
Notwithstanding any failure by a holder to deliver the certificates
representing his or her shares of Series D Preferred Stock, after the Automatic
Conversion Date all such certificates of the Series D Preferred Stock shall be
deemed to represent the appropriate number of shares of Common Stock.
Notwithstanding any provision contained in this paragraph
4(b), no share of the Series D Preferred Stock called for redemption pursuant
to paragraph 5 hereof shall automatically and mandatorily convert at any time
after the Corporation has provided notice of its intent to redeem such shares
pursuant to paragraph 5 hereof, unless the Corporation shall provide notice to
the holder on or before the date specified for redemption of such shares of
Series D Preferred Stock that it elects to have the mandatory conversion
provisions of this paragraph 4(b) apply and override the Corporation's notice
of redemption (the "Notice of Cancellation"). Unless such Notice of
Cancellation is provided, the automatic and mandatory conversion under this
paragraph 4(b) shall cease and terminate with respect to all shares of Series D
Preferred Stock so called for redemption at the close of business on the date
that the Corporation provides notice of such redemption pursuant to Paragraph 5
hereof. The Corporation's redemption, including any related notice to redeem,
of certain shares of the Series D Preferred Stock shall have no effect on the
automatic and mandatory conversion under paragraph 4(b) of those other shares
of Series D Preferred Stock with respect to which notice of redemption was not
provided.
(c) Additional Provisions Applicable to All Conversions.
Any conversion of Series D Preferred Stock into Common Stock pursuant to this
paragraph 4 shall be subject to the following additional terms and provisions:
(1) All shares of the Series D Preferred Stock
and all accrued but unpaid dividends, if any, shall be convertible (or, as the
case may be, automatically converted) into Common Stock at the rate of $2.50
per share of Common Stock (initially equivalent to a
4
<PAGE> 7
rate of forty (40) shares of Common Stock for each share of Series D Preferred
Stock based on the stated value of $100 of the Series D Preferred Stock) (the
"Conversion Ratio"), subject to the adjustments set forth in this paragraph
4(c) below.
(2) Subject to compliance with all applicable
securities laws, as soon as practicable after the surrender for conversion of
any certificate(s) representing Series D Preferred Stock (in the case of an
elective conversion) or after the Automatic Conversion Date (in the case of an
automatic conversion), the Corporation shall deliver or cause to be delivered
at the principal office of the Corporation (or such other place as may be
designated by the Corporation), to each holder of Series D Preferred Stock,
certificates representing the shares of Common Stock issuable upon such
conversion, issued in such name or names as such holder may direct. Except as
otherwise provided herein, shares of the Series D Preferred Stock shall be
deemed to have been converted, in the case of an elective conversion pursuant
to paragraph 4(a), as of the close of business on the date of the surrender for
conversion of the certificates representing Series D Preferred Stock, or in the
case of an automatic conversion pursuant to paragraph 4(b), as of the close of
business on the Automatic Conversion Date, and in either case the rights of
such holders of the Series D Preferred Stock shall cease, and the person(s) in
whose name(s) the certificates for such shares are to be issued shall be
treated for all purposes as having become the record holder(s) of such Common
Stock, at such time, or if such day shall not constitute a business day, then
the close of business on the next succeeding business day.
(3) The Corporation shall not be required to
issue any fractions of shares of Common Stock upon conversions of any shares of
Series D Preferred Stock. If more than one share of Series D Preferred Stock
shall be surrendered for conversion at one time by the same holder, the number
of full shares of Common Stock which shall be issuable upon conversion of such
Series D Preferred Stock shall be computed on the basis of the aggregate number
of shares of the Series D Preferred Stock so surrendered. If any interest in a
fractional share of Common Stock would otherwise be deliverable upon the
conversion of any shares of Series D Preferred Stock, the Corporation shall
make adjustment for such fractional share interest by payment of an amount in
cash equal to the same fraction of the value of a full share of Common Stock of
the Corporation as determined by the Corporation, which determination shall be
conclusive.
(4) In the event that the Corporation shall at
any time subdivide or combine in a greater or lesser number of shares the
outstanding shares of Common Stock, the number of shares of Common Stock
issuable upon conversion of any shares of Series D Preferred Stock prior to the
occurrence of such event shall be proportionately increased in the case of
subdivision or decreased in the case of a combination, effective in either case
at the close of business on the date when such subdivision or combination shall
become effective.
(5) In the event that the Corporation shall be
consolidated with or merged into any other corporation, provision shall be made
as part of the terms of such consolidation or merger so that any holder of
Series D Preferred Stock may thereafter receive in lieu of Common Stock
otherwise issuable to him upon conversion of his or her Series D
5
<PAGE> 8
Preferred Stock, but only in accordance with the conversion ratio stated in
this paragraph 4, the same kind and amount of securities as may be
distributable upon such consolidation or merger with respect to the Common
Stock.
(6) In the event that the Corporation shall at
any time pay to the holders of Common Stock a dividend in Common Stock, the
number of shares of Common Stock of the Corporation issuable upon any
conversion of the Series D Preferred Stock shall be proportionately increased,
effective following the close of business on the record date for determination
of the holders of Common Stock entitled to such dividend.
(7) Such adjustments shall be made successively
if more than one event listed in paragraphs 4(c)(4), (5) or (6) shall occur;
provided, however, that no adjustment need be made by the Corporation until
such adjustments cumulatively aggregate at least five percent (5%) of the then
current Conversion Ratio.
(8) No adjustment of the Conversion Ratio shall
be made by any event or occurrence other than those enumerated in this
paragraph 4(c).
(9) The issuance of certificates for shares of
Common Stock upon conversion of any shares of the Series D Preferred Stock
shall be made without charge for any tax in respect of such issuance. However,
if any certificate is to be issued in a name other than that of the holder of
record as the Series D Preferred Stock so converted, the person or persons
requesting the issuance thereof shall pay to the Corporation the amount of any
tax which may be payable in respect of any transfer involved in such issuance,
or shall establish to the satisfaction of the Corporation that such tax has
been paid or is not due and payable.
5. Redemption of Preferred Stock. The Series D Preferred Stock
of any holder shall be redeemable, in whole or in part, at the option of the
Corporation by resolution of its Board of Directors, from time to time and at
any time, after the date that the Series D Preferred Stock certificate was
issued to the original holder of such shares of Series D Preferred Stock. The
redemption price shall equal $110, plus all dividends accrued and unpaid on the
Series D Preferred Stock so redeemed up to the date fixed for redemption. The
Corporation shall give notice of redemption as hereinafter provided.
In the event that less than the entire amount of the Series D
Preferred Stock outstanding is redeemed at any one time, the shares to be
redeemed shall be selected by lot in a manner to be determined by the Board of
Directors of the Corporation.
The Corporation shall give notice of redemption not less than
thirty (30) nor more than sixty (60) days prior to the date fixed for
redemption of the Series D Preferred Stock or any part thereof. Such notice
shall specify the time and place thereof and shall be given by mail to each
holder of record of shares of Series D Preferred Stock chosen for redemption at
the address last shown on the records of the Corporation for such holder or
given by such holder to the Corporation for the purpose of notice or, if no
such address appears or is given, at the
6
<PAGE> 9
place where the principal executive office of the Corporation is located. Any
notice which was mailed in the manner herein provided shall be conclusively
presumed to have been duly given whether or not the holder received the notice.
Upon such redemption date, or upon such earlier date as the
Board of Directors shall designate for payment of the redemption price (unless
the Corporation shall default in the payment of the redemption price as set
forth in such notice), the holders of shares of Series D Preferred Stock
selected for redemption to whom notice has been duly given shall cease to be
stockholders with respect to such shares and shall have no interest in or claim
against the Corporation by virtue thereof and shall have no other rights with
respect to such shares except the right to convert such shares within the time
hereinafter set forth and except the right to receive the moneys payable upon
such redemption from, the Corporation or otherwise, without interest thereon,
upon surrender (and endorsement, if required by the Corporation) of the
certificates, and the shares represented thereby shall no longer be deemed to
be outstanding.
Upon redemption or conversion of any share of Series D
Preferred Stock in the manner set out herein, or upon purchase of any share of
Series D Preferred Stock by the Corporation, the shares so acquired by the
Corporation shall be cancelled.
After giving any notice of redemption and prior to the close
of business on the tenth day prior to the redemption date, as hereinafter
provided, the holders of the Series D Preferred Stock so called for redemption
may convert such stock into Common Stock of the Corporation in accordance with
the conversion privileges set forth in paragraph 4(a) hereof.
In the event that the Corporation shall at any time subdivide
or combine in a greater or lesser number of shares the outstanding shares of
Series D Preferred Stock or issue shares of Common Stock as the form of a
dividend paid with respect to its Common Stock, the consideration payable upon
redemption of the Series D Preferred Stock shall be proportionately decreased
in the case of subdivision or increased in the case of a combination or the
payment of such a stock dividend, effective in either case at the close of
business on the date when such subdivision or combination shall become
effective.
6. Voting Rights.
(a) Except as otherwise required by law or as otherwise
specifically provided herein, the holders of the Series D Preferred Stock shall
not be entitled to vote at any meeting of the stockholders for the election of
directors or for any other purpose or otherwise to participate in any action
taken by the Corporation or the stockholders thereof, or to receive notice of
any meeting of stockholders.
(b) If at any time, and from time to time, the
Corporation shall default in paying two consecutive dividends for a period of
more than thirty (30) days as to each dividend payment date (an "Event of
Default"), then the holders of the Series D Preferred Stock shall have the
exclusive right, voting separately as a class, to elect one additional director
to the Board
7
<PAGE> 10
of Directors of the Corporation in the manner provided in paragraph 6(d) below,
and the holders of shares entitled to vote thereon other than the Series D
Preferred Stock shall be entitled to elect the remaining members of the Board
of Directors. Such voting rights shall remain vested until all defaults
respecting dividends shall have been cured, whereupon (i) the holders of the
Series D Preferred Stock shall be divested of such voting right (subject,
however, to such voting right at any time or from time to time similarly
arising and being divested); (ii) the term of any director then in office
elected by the holders of the Series D Preferred Stock shall terminate; and
(iii) the number of directors constituting the Board of Directors of the
Corporation shall be reduced by the same number by which it was increased at
the time the voting rights of the holders of the Series D Preferred Stock
arose. Notwithstanding anything to the contrary in this paragraph 6(b), any
dividend payment date which forms the basis of an Event of Default subsequently
cured in the manner described in the preceding sentence, may not be counted for
purposes of determining a subsequent Event of Default. In each instance in
which the holders of the Series D Preferred Stock shall be entitled to vote for
directors as provided herein, each such holder shall be entitled to one vote
for each share of the Series D Preferred Stock held.
(c) Directors elected by the holders of the Series D
Preferred Stock shall serve for a term ending on the earlier to occur of (i)
the first annual meeting of stockholders of the Corporation following an Event
of Default or (ii) until all defaults respecting dividends shall have been
cured. At each annual meeting of the Corporation's stockholders following an
Event of Default, until such default shall have been cured, the holders of
Series D Preferred Stock shall be entitled to elect one director to the Board
of Directors of the Corporation.
(d) At any time when the holders of the Series D
Preferred Stock shall have thus become entitled to elect directors, any
provision of the by-laws of the Corporation to the contrary notwithstanding, a
special meeting of the holders of Series D Preferred Stock may be called by the
holders of 51% of the Series D Preferred Stock for the purpose of electing
directors, by notice being mailed, first class postage prepaid, not less than
ten (10) days prior to the proposed date of such meeting, to each holder of
record of Series D Preferred Stock at his address as the same appears on the
Corporation's record of holders of the Series D Preferred Stock.
At any such special meeting at which the holders of the Series
D Preferred Stock shall be entitled to elect directors, the holders of a
majority of the then outstanding Series D Preferred Stock present in person or
by proxy shall be sufficient to constitute a quorum for the election of such
director. The person elected by the holders of the Series D Preferred Stock at
any meeting held in accordance with the terms of the preceding sentence shall
become a director as of the date of such election and, together with the
directors remaining in office or such persons, if any, as may be elected by the
holders of voting shares other than Series D Cumulative Preferred Stock, shall
constitute the Board of Directors of the Corporation. Any director so elected
by the holders of the Series D Preferred Stock may be removed by, and shall not
be removed except by, the vote of the holders of record of a majority of the
shares of the Series D Preferred Stock, voting as a single class at a meeting
of the stockholders, or of the holders of the Series D Preferred Stock called
for that purpose. Any vacancy, whether as a
8
<PAGE> 11
result of removal or otherwise, in the office of a director elected by the
holders of the Series D Preferred Stock may be filled by, and shall only be
filled by, the majority vote of the holders of the Series D Preferred Stock,
voting as a separate class. A meeting for the removal of a director elected by
the holders of the Series D Preferred Stock and the filling of the vacancy
created thereby or otherwise shall be called, noticed and held in the same
manner as provided for in the initial election of such board members.
(e) Notwithstanding the provisions of paragraph 6(d), the
election or removal of such directors may be evidenced by one or more written
consents executed by the holders of a majority of the then outstanding Series D
Preferred Stock without the necessity of a meeting, prior notice, and a formal
vote. Within ten (10) days after any such meeting or written consent, the
holders of the Series D Preferred Stock shall provide written notice to the
Corporation of the election, or removal, as the case may be, of such directors.
(f) Notwithstanding anything herein to the contrary,
within thirty (30) days of the end of the calendar quarter in which the holders
of the Series D Preferred Stock shall have thus become entitled to elect
directors, holders of 51% of the Series D Preferred Stock may, by written
consent to the Corporation, irrevocably terminate said voting rights. After
such written termination, the holders of the Series D Preferred Stock shall not
be entitled to vote at any meeting of the stockholders for the election of
directors or for any other purpose or otherwise to participate in any action
taken by the Corporation or the stockholders thereof, or to receive notice of
any meeting of stockholders.
7. Ranking. As long as any shares of the Series D Preferred
Stock remain outstanding, the Corporation shall not, without obtaining the
prior written consent of the holders of at least a majority in number of the
shares of the Series D Preferred Stock then outstanding, create, authorize or
issue any other class or series of capital stock of the Corporation, the terms
of which provide that such class or series shall rank prior to the Series D
Preferred Stock in respect to dividend rights or rights upon dissolution,
liquidation or winding up of the Corporation; provided, however, the
Corporation may at any time create, authorize or issue, without the consent of
any of the holders of the Series D Preferred Stock, other classes or series of
capital stock which rank junior to, or on parity with, the Series D Preferred
Stock in respect to dividend rights and upon dissolution, liquidation or
winding up of the Corporation.
9
<PAGE> 12
IN WITNESS WHEREOF, Computer Integration Corp., a Delaware
corporation, has caused its corporate seal to be affixed hereto and this
Certificate of Designation to be signed by its President and Secretary this
15th day of April, 1996.
COMPUTER INTEGRATION CORP.
By:/s/ RONALD G. FARRELL
--------------------------------
Ronald G. Farrell, President
By:/s/ JOHN F. CHISTE
--------------------------------
John F. Chiste, Secretary
10
<PAGE> 13
COMPUTER INTEGRATION CORP.
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS, AND LIMITATIONS OF SERIES E, 9% CUMULATIVE
CONVERTIBLE REDEEMABLE PREFERRED STOCK
Computer Integration Corp., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), does
hereby certify:
That, pursuant to authority conferred upon the Board of
Directors of the Corporation ("Board of Directors") by the Certificate of
Incorporation of the Corporation (the "Certificate"), and pursuant to the
provisions of the Delaware General Corporation Law, said Board of Directors, on
April 3, 1996, duly adopted resolutions providing for the issuance of one
series, aggregating two hundred fifty (250) shares, of Series E, 9% Cumulative
Convertible Redeemable Preferred Stock (the "Series E Preferred Stock"), stated
value $4,000 and par value $.001 per share, which resolutions are as follows:
WHEREAS, Article Fourth of the Corporation's Certificate of
Incorporation, as amended, vests the authority in the Board of
Directors to issue shares of the Corporation's authorized preferred
stock in series with such rights, preferences and limitations as the
Board deems appropriate, without necessity of further action by the
stockholders of the Corporation;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors
hereby creates, from the authorized but unissued shares of preferred
stock, par value $.001 per share, a series of the preferred stock to
consist of two hundred fifty (250) shares, designated "Series E, 9%
Cumulative Convertible Redeemable Preferred Stock" (the "Series E
Preferred Stock") and hereby fixes the voting powers, designation,
preferences and relative, participating, optional and other special
rights, and the qualifications, limitations or restrictions thereof,
of the shares of such Series as follows:
1. Designation. The designation of the series of stock created
by this resolution shall be "Series E, 9% Cumulative Convertible Redeemable
Preferred Stock" (the "Series E Preferred Stock") and the number of shares
constituting the Series E Preferred shall be two hundred fifty (250). Each
share of the Series E Preferred Stock shall have a stated value equal to
$4,000.
2. Dividends. The holders of the Series E Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors out
of the funds of the Corporation legally available therefore, cumulative
dividends at the annual rate of $360 per share, payable $180 per share on each
January 31st and July 31st, commencing July 31, 1996. Such dividends shall be
payable in cash or in kind. In the year in which shares of Series E Preferred
Stock are issued, in the event that the payment date for the purchase of shares
of Series E Preferred Stock shall be other than January 31st or July 31st, the
initial dividend shall accumulate and be payable
<PAGE> 14
pro rata only from the date of payment to the Corporation for the respective
shares of Series E Preferred Stock. If the dividend on the Series E Preferred
Stock for any dividend period shall not have been paid or set apart in full for
the Series E Preferred Stock, the aggregate deficiency shall be cumulative and
shall be fully paid or set apart for payment before any dividends shall be paid
upon or set apart for payment for any class of common stock of the Corporation
or any other class of preferred stock of the Corporation ranking junior
thereto. Accumulations of dividends on the Series E Preferred Stock shall not
bear interest.
3. Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the affairs of the Corporation, whether voluntary
or otherwise, after payment or provision for payment of the debts and other
liabilities of the Corporation, the holders of the Series E Preferred Stock
shall be entitled to receive, before the holders of any of the common stock or
other classes of preferred stock of the Corporation ranking junior thereto, out
of the remaining net assets of the Corporation, the amount of $4,000 in cash or
in kind for each share of Series E Preferred Stock, plus an amount equal to all
dividends accrued but unpaid, if any, with respect to each such share up to the
date fixed for distribution. After such payment shall have been made in full
to the holders of the outstanding Series E Preferred Stock, or funds or assets
necessary for such payment shall have been set aside in trust for the account
of the holders of the outstanding Series E Preferred Stock, so as to be and
continue to be available therefor, the holders of the outstanding Series E
Preferred Stock shall be entitled to no further participation in such
distribution of the assets of the Corporation.
In the event, after payment or provision for payment of the
debts and other liabilities of the Corporation, the remaining net assets of the
Corporation are not sufficient to pay the liquidation preference of the holders
of the Series E Preferred Stock, no such distribution shall be made on account
of any shares of any other class or series of capital stock of the Corporation
ranking on a parity with the shares of the Series E Preferred Stock upon such
liquidation unless proportionate distributive amounts shall be paid on account
of each share of the Series E Preferred Stock, ratably, in proportion to the
full distributable amounts for which holders of all such parity shares,
including other shares of Series E Preferred Stock, are respectively entitled
upon such liquidation.
4. Conversion of Preferred Stock into Common Stock. Each share
of the Series E Preferred Stock shall be, under paragraph 4(a) below,
convertible at the option of the holder thereof and, under paragraph 4(b)
below, automatically and mandatorily converted upon the occurrence of the event
described therein; in either event, any such shares of Series E Preferred Stock
shall be converted into fully paid and nonassessable shares of the
Corporation's common stock, par value $.001 per share (the "Common Stock").
(a) Elective Conversion. Subject to any other provision
of this paragraph 4, each holder of record of any share(s) of Series E
Preferred Stock shall have the right to convert such holder's share(s) of
Series E Preferred Stock, in whole or in part, including all accrued but unpaid
dividends, if any, in accordance with the Conversion Ratio (defined below),
subject to
2
<PAGE> 15
the adjustments set forth below, at his or her option, at any time and from
time to time after the date of issuance of any share(s) of Series E Preferred
Stock.
In case any shares of Series E Preferred Stock shall
have been called for redemption pursuant to paragraph 5 hereof, any election to
convert under this paragraph 4(a) with respect to the shares so called for
redemption shall cease and terminate at the close of business on the tenth day
prior to the date fixed for the redemption of such shares, unless default shall
be made in the payment of the redemption price.
Any holder of a share or shares of Series E Preferred
Stock electing to convert his or her Series E Preferred Stock into Common Stock
shall surrender the certificate(s) representing all of the share(s) of Series E
Preferred Stock so to be converted, duly endorsed to the Corporation or in
blank, at the principal office of the Corporation (or such other place as may
be designated by the Corporation), and shall give written notice to the
Corporation at said office that he or she elects to convert the same and
therein set forth the name or names (with the address or addresses) in which
the shares of Common Stock are to be issued.
If the last day of the exercise period of the
conversion right in the city where the principal place of business of the
Corporation (or in the city of the principal office of such other entity as the
Corporation shall have designated as the place so to surrender Series E
Preferred Stock for conversion, as aforesaid) shall be a legal holiday or a day
on which banking institutions are authorized by law to close, then such
conversion right may be exercised in such city on the next succeeding day not
in such city a legal holiday or a day on which banking institutions are
authorized by law to close.
(b) Mandatory Conversion. Each share of the Series E
Preferred Stock, and all accrued but unpaid dividends, if any, shall
automatically and mandatorily convert, without the option of any holder of any
share(s) of Series E Preferred Stock or any action of the Corporation, to
shares of Common Stock in accordance with the Conversion Ratio (defined below)
as of the close of business on the date (the "Automatic Conversion Date"),
following a public offering of Common Stock by the Corporation, which ends a
ten (10) consecutive trading-day period during which a quote is available (such
trade dates need not occur on consecutive business days if no quote is
available for a given business day) and during which the average of the bid and
ask price of the Common Stock on the OTC Bulletin Board ("OTCBB") (or any
successor thereto) or on the NASDAQ Small-Cap Market(R), if then admitted for
trading thereon (or the average of the last reported sale price on the Nasdaq
National Market(R) System ("Nasdaq-NMS") or other national stock exchange on
which the Common Stock is principally traded, if the Common Stock is then
listed or admitted for trading on the Nasdaq- NMS or such other exchange),
equals or exceeds $4.00 per share (the "Automatic Conversion Price Level").
The term "principally traded" as used in this paragraph shall refer to that
national securities exchange or Nasdaq-NMS, if any, on which the greatest
number of shares of Common Stock have been traded during such ten (10) day
period.
3
<PAGE> 16
As soon as practicable after the Automatic Conversion
Date, the Corporation shall provide each holder of record of Series E Preferred
Stock with notice of the automatic conversion and the Automatic Conversion Date
and call upon the holders to surrender to the Corporation, in the manner and at
the place designated, the certificate(s) representing shares of the Series E
Preferred Stock. Such notice shall be by mail to each holder of the Series E
Preferred Stock at the address last shown on the records of the Corporation for
such holder or given by such holder to the Corporation for the holder for the
purpose of notice or, if no such address appears or is given, at the place
where the principal executive office of the Corporation is located.
Notwithstanding any failure by a holder to deliver the certificates
representing his or her shares of Series E Preferred Stock, after the Automatic
Conversion Date all such certificates of the Series E Preferred Stock shall be
deemed to represent the appropriate number of shares of Common Stock.
Notwithstanding any provision contained in this
paragraph 4(b), no share of the Series E Preferred Stock called for redemption
pursuant to paragraph 5 hereof shall automatically and mandatorily convert at
any time after the Corporation has provided notice of its intent to redeem such
shares pursuant to paragraph 5 hereof, unless the Corporation shall provide
notice to the holder on or before the date specified for redemption of such
shares of Series E Preferred Stock that it elects to have the mandatory
conversion provisions of this paragraph 4(b) apply and override the
Corporation's notice of redemption (the "Notice of Cancellation"). Unless such
Notice of Cancellation is provided, the automatic and mandatory conversion
under this paragraph 4(b) shall cease and terminate with respect to all shares
of Series E Preferred Stock so called for redemption at the close of business
on the date that the Corporation provides notice of such redemption pursuant to
Paragraph 5 hereof. The Corporation's redemption, including any related notice
to redeem, of certain shares of the Series E Preferred Stock shall have no
effect on the automatic and mandatory conversion under paragraph 4(b) of those
other shares of Series E Preferred Stock with respect to which notice of
redemption was not provided.
(c) Additional Provisions Applicable to All Conversions.
Any conversion of Series E Preferred Stock into Common Stock pursuant to this
paragraph 4 shall be subject to the following additional terms and provisions:
(1) All shares of the Series E Preferred Stock
and all accrued but unpaid dividends, if any, shall be convertible (or, as the
case may be, automatically converted) into Common Stock at the rate of $1.00
per share of Common Stock (initially equivalent to a rate of four thousand
(4,000) shares of Common Stock for each share of Series E Preferred Stock based
on the stated value of $4,000 of the Series E Preferred Stock) (the "Conversion
Ratio"), subject to the adjustments set forth in this paragraph 4(c) below.
(2) Subject to compliance with all applicable
securities laws, as soon as practicable after the surrender for conversion of
any certificate(s) representing Series E Preferred Stock (in the case of an
elective conversion) or after the Automatic Conversion Date (in the case of an
automatic conversion), the Corporation shall deliver or cause to be delivered
4
<PAGE> 17
at the principal office of the Corporation (or such other place as may be
designated by the Corporation), to each holder of Series E Preferred Stock,
certificates representing the shares of Common Stock issuable upon such
conversion, issued in such name or names as such holder may direct. Except as
otherwise provided herein, shares of the Series E Preferred Stock shall be
deemed to have been converted, in the case of an elective conversion pursuant
to paragraph 4(a), as of the close of business on the date of the surrender for
conversion of the certificates representing Series E Preferred Stock, or in the
case of an automatic conversion pursuant to paragraph 4(b), as of the close of
business on the Automatic Conversion Date, and in either case the rights of
such holders of the Series E Preferred Stock shall cease, and the person(s) in
whose name(s) the certificates for such shares are to be issued shall be
treated for all purposes as having become the record holder(s) of such Common
Stock, at such time, or if such day shall not constitute a business day, then
the close of business on the next succeeding business day.
(3) The Corporation shall not be required to
issue any fractions of shares of Common Stock upon conversions of any shares of
Series E Preferred Stock. If more than one share of Series E Preferred Stock
shall be surrendered for conversion at one time by the same holder, the number
of full shares of Common Stock which shall be issuable upon conversion of such
Series E Preferred Stock shall be computed on the basis of the aggregate number
of shares of the Series E Preferred Stock so surrendered. If any interest in a
fractional share of Common Stock would otherwise be deliverable upon the
conversion of any shares of Series E Preferred Stock, the Corporation shall
make adjustment for such fractional share interest by payment of an amount in
cash equal to the same fraction of the value of a full share of Common Stock of
the Corporation as determined by the Corporation, which determination shall be
conclusive.
(4) In the event that the Corporation shall at
any time subdivide or combine in a greater or lesser number of shares the
outstanding shares of Common Stock, the number of shares of Common Stock
issuable upon conversion of any shares of Series E Preferred Stock prior to the
occurrence of such event shall be proportionately increased in the case of
subdivision or decreased in the case of a combination, effective in either case
at the close of business on the date when such subdivision or combination shall
become effective.
(5) In the event that the Corporation shall be
consolidated with or merged into any other corporation, provision shall be made
as part of the terms of such consolidation or merger so that any holder of
Series E Preferred Stock may thereafter receive in lieu of Common Stock
otherwise issuable to him upon conversion of his or her Series E Preferred
Stock, but only in accordance with the conversion ratio stated in this
paragraph 4, the same kind and amount of securities as may be distributable
upon such consolidation or merger with respect to the Common Stock.
(6) In the event that the Corporation shall at
any time pay to the holders of Common Stock a dividend in Common Stock, the
number of shares of Common Stock of the Corporation issuable upon any
conversion of the Series E Preferred Stock shall be
5
<PAGE> 18
proportionately increased, effective following the close of business on the
record date for determination of the holders of Common Stock entitled to such
dividend.
(7) Such adjustments shall be made successively
if more than one event listed in paragraphs 4(c)(4), (5) or (6) shall occur;
provided, however, that no adjustment need be made by the Corporation until
such adjustments cumulatively aggregate at least five percent (5%) of the then
current Conversion Ratio.
(8) No adjustment of the Conversion Ratio shall
be made by any event or occurrence other than those enumerated in this
paragraph 4(c).
(9) The issuance of certificates for shares of
Common Stock upon conversion of any shares of the Series E Preferred Stock
shall be made without charge for any tax in respect of such issuance. However,
if any certificate is to be issued in a name other than that of the holder of
record as the Series E Preferred Stock so converted, the person or persons
requesting the issuance thereof shall pay to the Corporation the amount of any
tax which may be payable in respect of any transfer involved in such issuance,
or shall establish to the satisfaction of the Corporation that such tax has
been paid or is not due and payable.
5. Redemption of Preferred Stock. The Series E Preferred Stock
of any holder shall be redeemable, in whole or in part, at the option of the
Corporation by resolution of its Board of Directors, from time to time and at
any time, after the date that the Series E Preferred Stock certificate was
issued to the original holder of such shares of Series E Preferred Stock. The
redemption price shall equal $4,400, plus all dividends accrued and unpaid on
the Series E Preferred Stock so redeemed up to the date fixed for redemption.
The Corporation shall give notice of redemption as hereinafter provided.
In the event that less than the entire amount of the Series E
Preferred Stock outstanding is redeemed at any one time, the shares to be
redeemed shall be selected by lot in a manner to be determined by the Board of
Directors of the Corporation.
The Corporation shall give notice of redemption not less than
thirty (30) nor more than sixty (60) days prior to the date fixed for
redemption of the Series E Preferred Stock or any part thereof. Such notice
shall specify the time and place thereof and shall be given by mail to each
holder of record of shares of Series E Preferred Stock chosen for redemption at
the address last shown on the records of the Corporation for such holder or
given by such holder to the Corporation for the purpose of notice or, if no
such address appears or is given, at the place where the principal executive
office of the Corporation is located. Any notice which was mailed in the
manner herein provided shall be conclusively presumed to have been duly given
whether or not the holder received the notice.
Upon such redemption date, or upon such earlier date as the
Board of Directors shall designate for payment of the redemption price (unless
the Corporation shall default in the payment of the redemption price as set
forth in such notice), the holders of shares of Series E
6
<PAGE> 19
Preferred Stock selected for redemption to whom notice has been duly given
shall cease to be stockholders with respect to such shares and shall have no
interest in or claim against the Corporation by virtue thereof and shall have
no other rights with respect to such shares except the right to convert such
shares within the time hereinafter set forth and except the right to receive
the moneys payable upon such redemption from, the Corporation or otherwise,
without interest thereon, upon surrender (and endorsement, if required by the
Corporation) of the certificates, and the shares represented thereby shall no
longer be deemed to be outstanding.
Upon redemption or conversion of any share of Series E
Preferred Stock in the manner set out herein, or upon purchase of any share of
Series E Preferred Stock by the Corporation, the shares so acquired by the
Corporation shall be cancelled.
After giving any notice of redemption and prior to the close
of business on the tenth day prior to the redemption date, as hereinafter
provided, the holders of the Series E Preferred Stock so called for redemption
may convert such stock into Common Stock of the Corporation in accordance with
the conversion privileges set forth in paragraph 4(a) hereof.
In the event that the Corporation shall at any time subdivide
or combine in a greater or lesser number of shares the outstanding shares of
Series E Preferred Stock or issue shares of Common Stock as the form of a
dividend paid with respect to its Common Stock, the consideration payable upon
redemption of the Series E Preferred Stock shall be proportionately decreased
in the case of subdivision or increased in the case of a combination or the
payment of such a stock dividend, effective in either case at the close of
business on the date when such subdivision or combination shall become
effective.
6. Voting Rights.
(a) Except as otherwise required by law or as otherwise
specifically provided herein, the holders of the Series E Preferred Stock shall
not be entitled to vote at any meeting of the stockholders for the election of
directors or for any other purpose or otherwise to participate in any action
taken by the Corporation or the stockholders thereof, or to receive notice of
any meeting of stockholders.
(b) If at any time, and from time to time, the
Corporation shall default in paying two consecutive dividends for a period of
more than thirty (30) days as to each dividend payment date (an "Event of
Default"), then the holders of the Series E Preferred Stock shall have the
exclusive right, voting separately as a class, to elect one additional director
to the Board of Directors of the Corporation in the manner provided in
paragraph 6(d) below, and the holders of shares entitled to vote thereon other
than the Series E Preferred Stock shall be entitled to elect the remaining
members of the Board of Directors. Such voting rights shall remain vested
until all defaults respecting dividends shall have been cured, whereupon (i)
the holders of the Series E Preferred Stock shall be divested of such voting
right (subject, however, to such voting right at any time or from time to time
similarly arising and being divested); (ii) the term of any director then in
office elected by the holders of the Series E Preferred Stock shall terminate;
and (iii) the
7
<PAGE> 20
number of directors constituting the Board of Directors of the Corporation
shall be reduced by the same number by which it was increased at the time the
voting rights of the holders of the Series E Preferred Stock arose.
Notwithstanding anything to the contrary in this paragraph 6(b), any dividend
payment date which forms the basis of an Event of Default subsequently cured in
the manner described in the preceding sentence, may not be counted for purposes
of determining a subsequent Event of Default. In each instance in which the
holders of the Series E Preferred Stock shall be entitled to vote for directors
as provided herein, each such holder shall be entitled to one vote for each
share of the Series E Preferred Stock held.
(c) Directors elected by the holders of the Series E
Preferred Stock shall serve for a term ending on the earlier to occur of (i)
the first annual meeting of stockholders of the Corporation following an Event
of Default or (ii) until all defaults respecting dividends shall have been
cured. At each annual meeting of the Corporation's stockholders following an
Event of Default, until such default shall have been cured, the holders of
Series E Preferred Stock shall be entitled to elect one director to the Board
of Directors of the Corporation.
(d) At any time when the holders of the Series E
Preferred Stock shall have thus become entitled to elect directors, any
provision of the by-laws of the Corporation to the contrary notwithstanding, a
special meeting of the holders of Series E Preferred Stock may be called by the
holders of 51% of the Series E Preferred Stock for the purpose of electing
directors, by notice being mailed, first class postage prepaid, not less than
ten (10) days prior to the proposed date of such meeting, to each holder of
record of Series E Preferred Stock at his address as the same appears on the
Corporation's record of holders of the Series E Preferred Stock.
At any such special meeting at which the holders of the Series
E Preferred Stock shall be entitled to elect directors, the holders of a
majority of the then outstanding Series E Preferred Stock present in person or
by proxy shall be sufficient to constitute a quorum for the election of such
director. The person elected by the holders of the Series E Preferred Stock at
any meeting held in accordance with the terms of the preceding sentence shall
become a director as of the date of such election and, together with the
directors remaining in office or such persons, if any, as may be elected by the
holders of voting shares other than Series E Cumulative Preferred Stock, shall
constitute the Board of Directors of the Corporation. Any director so elected
by the holders of the Series E Preferred Stock may be removed by, and shall not
be removed except by, the vote of the holders of record of a majority of the
shares of the Series E Preferred Stock, voting as a single class at a meeting
of the stockholders, or of the holders of the Series E Preferred Stock called
for that purpose. Any vacancy, whether as a result of removal or otherwise, in
the office of a director elected by the holders of the Series E Preferred Stock
may be filled by, and shall only be filled by, the majority vote of the holders
of the Series E Preferred Stock, voting as a separate class. A meeting for the
removal of a director elected by the holders of the Series E Preferred Stock
and the filling of the vacancy created thereby or otherwise shall be called,
noticed and held in the same manner as provided for in the initial election of
such board members.
8
<PAGE> 21
(e) Notwithstanding the provisions of paragraph 6(d), the
election or removal of such directors may be evidenced by one or more written
consents executed by the holders of a majority of the then outstanding Series E
Preferred Stock without the necessity of a meeting, prior notice, and a formal
vote. Within ten (10) days after any such meeting or written consent, the
holders of the Series E Preferred Stock shall provide written notice to the
Corporation of the election, or removal, as the case may be, of such directors.
(f) Notwithstanding anything herein to the contrary,
within thirty (30) days of the end of the calendar quarter in which the holders
of the Series E Preferred Stock shall have thus become entitled to elect
directors, holders of 51% of the Series E Preferred Stock may, by written
consent to the Corporation, irrevocably terminate said voting rights. After
such written termination, the holders of the Series E Preferred Stock shall not
be entitled to vote at any meeting of the stockholders for the election of
directors or for any other purpose or otherwise to participate in any action
taken by the Corporation or the stockholders thereof, or to receive notice of
any meeting of stockholders.
7. Ranking. As long as any shares of the Series E Preferred
Stock remain outstanding, the Corporation shall not, without obtaining the
prior written consent of the holders of at least a majority in number of the
shares of the Series E Preferred Stock then outstanding, create, authorize or
issue any other class or series of capital stock of the Corporation, the terms
of which provide that such class or series shall rank prior to the Series E
Preferred Stock in respect to dividend rights or rights upon dissolution,
liquidation or winding up of the Corporation; provided, however, the
Corporation may at any time create, authorize or issue, without the consent of
any of the holders of the Series E Preferred Stock, other classes or series of
capital stock which rank junior to, or on parity with, the Series E Preferred
Stock in respect to dividend rights and upon dissolution, liquidation or
winding up of the Corporation. Without limiting the generality of the
foregoing, the Series E Preferred Stock shall rank on parity with: (i) the
Corporation's Series A, 9% Cumulative Convertible Redeemable Preferred Stock
with respect to dividends and the dissolution, liquidation or winding up of the
affairs of the Corporation, whether voluntary or otherwise; (ii) the
Corporation's Series B, Convertible Preferred Stock with respect to the
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or otherwise; and (iii) the Corporation's Series C, 9%
Cumulative Convertible Redeemable Preferred Stock with respect to dividends and
the dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or otherwise.
9
<PAGE> 22
IN WITNESS WHEREOF, Computer Integration Corp., a Delaware
corporation, has caused its corporate seal to be affixed hereto and this
Certificate of Designation to be signed by its President and Secretary this
15th day of April 1996.
COMPUTER INTEGRATION CORP.
By: /s/ RONALD G. FARRELL
----------------------------
Ronald G. Farrell, President
By: /s/ JOHN F. CHISTE
----------------------------
John F. Chiste, Secretary
10
<PAGE> 23
STATE OF FLORIDA )
) SS:
COUNTY OF PALM BEACH )
The foregoing instrument was acknowledged before me this _____ day of
April, 1996, by Ronald G. Farrell as president of COMPUTER INTEGRATION CORP., a
Delaware corporation, on behalf of the corporation. He is (check one) X
personally known to me or _______ has produced ___________________________ as
identification.
Notary Public:
Signature /s/ Amy Beck
------------------------------
Amy Beck
(Notarial Seal) State of Florida at Large
Commission #: My Commission Expires:
STATE OF FLORIDA )
) SS:
COUNTY OF PALM BEACH )
The foregoing instrument was acknowledged before me this _____ day of
April, 1996, by John Chiste as secretary of COMPUTER INTEGRATION CORP., a
Delaware corporation, on behalf of the corporation. He is (check one) X
personally known to me or _______ has produced ___________________________ as
identification.
Notary Public:
Signature /s/ Amy Beck
------------------------------
Amy Beck
(Notarial Seal) State of Florida at Large
Commission #: My Commission Expires:
11
<PAGE> 1
EXHIBIT 10(g)
Congress Financial Corporation
One Post Office Square Suite 3600
Boston, Massachusetts 02109
617 338 1998 Fax 617 338 1497
September 30, 1996
CONGRESS FINANCIAL
CIC Systems, Inc.
7900 Glades Road, Suite 440
Boca Raton, FL 33434
Re: First Amendment to Financing Agreements - Financial Covenants
("First Amendment")
-------------------------------------------------------------
Gentlemen:
Reference is made to the Amended and Restated Loan and Security
Agreement dated July 1, 1995, between you and the undersigned (the "Loan
Agreement"). All capitalized terms not otherwise defined herein shall have the
meanings given such terms in the Loan Agreement.
Borrower has requested that Lender increase the Maximum Credit from
$70,000,000.00 to $77,000,000.00 and agree to modify certain financial
covenants. Subject to the terms and conditions hereof and effective as of
June 30, 1996, the Lender agrees with the Borrower as follows:
(1) Section 1.21 of the Loan Agreement is deleted in its entirety and
replaced with the following:
"1.21 "Maximum Credit" shall mean $77,000,000.00."
(2) Section 9.13 of the Loan Agreement is deleted in its entirety and
replaced with the following:
"9.13 WORKING CAPITAL. Borrower shall, at all times, maintain
Working Capital of not less than $38,000,000."
(3) Section 9.14 of the Loan Agreement is deleted in its entirety and
replaced with the following:
"9.14 ADJUSTED NET WORTH. Borrower shall, at all times, maintain
Adjusted Net Worth of not less than $11,000,000."
(4) The Borrower agrees to pay to the Lender a facility fee of
$70,000, which fee shall be fully earned and non-refundable by the execution of
this First Amendment by Lender and Borrower.
CONGRESS FINANCIAL Offices In Major Cities Throughout The Country
<PAGE> 2
CIC Systems, Inc.
September 30, 1996
Page 2
(5) In connection with the execution and delivery of this First
Amendment the Borrower and Guarantor shall furnish to the Lender certified
copies of all requisite corporate action and proceedings of the Borrower and
Guarantor in connection with this First Amendment and a legal opinion of
Borrower's and Guarantor's counsel as to the due authorization of this First
Amendment and the enforceability hereof.
(6) Borrower confirms and agrees that (a) all representations and
warranties contained in the Loan Agreement and in the other Financing
Agreements are on the date hereof true and correct in all material respects
(except for changes that have occurred as permitted by the covenants in Section
9 of the Loan Agreement or as permitted under this First Amendment), and (b) it
is unconditionally liable for the punctual and full payment of all Obligations,
including, without limitation, all charges, fees, expenses and costs (including
attorneys' fees and expenses) under the Financing Agreements, and that Borrower
has any defenses, counterclaims or setoffs with respect to full, complete and
timely payment of all Obligations.
(7) Guarantor, for value received, hereby assents to the Borrower's
execution and delivery of this First Amendment, and to the performance by the
Borrower of its agreements and obligations hereunder. This First Amendment and
the performance or consummation of any transaction or matter contemplated under
this Amendment, shall not limit, restrict, extinguish or otherwise impair the
Guarantor's liability to Lender with respect to the payment and other
performance obligations of the Guarantor pursuant to the Guarantee, dated July
1, 1995 executed for the benefit of Lender. Guarantor acknowledges that it is
unconditionally liable to Lender for the full and complete payment of all
Obligations including, without limitation, all charges, fees, expenses and
costs (including attorney's fees and expenses) under the Financing Agreements
and that Guarantor has no defenses, counterclaims or setoffs with respect to
full, complete and timely payment of any and all Obligations.
(9) Borrower hereby agrees to pay to Lender all reasonable attorney's
fees and costs which have been incurred or may in the future be incurred by
Lender in connection with the negotiation and preparation of this First
Amendment and any other documents and agreements prepared in connection with
this First Amendment. The undersigned confirm that the Financing Agreements
remain in full force and effect without amendment or modification of any kind,
except for the amendments explicitly set forth herein. The undersigned further
confirm that after giving effect to this First Amendment, no Event of Default
or events which with notice or the passage of time or both would constitute an
Event of Default have occurred and are continuing. The execution and delivery
of this First Amendment by Lender shall not be construed as a waiver by Lender
of any Event of Default under the Financing Agreements. This First Amendment
shall be deemed to be a Financing Agreement and, together with the other
Financing Agreements, constitute the entire agreement between the parties with
respect
CONGRESS FINANCIAL
<PAGE> 3
CIC Systems, Inc.
September 30, 1996
Page 3
to the subject matter hereof and supersedes all prior dealings, correspondence,
conversations or communications between the parties with respect to the subject
matter hereof.
If you accept and agree to the foregoing please sign and return the
enclosed copy of this letter. Thank you.
Very truly yours,
CONGRESS FINANCIAL CORPORATION
(NEW ENGLAND)
By: /s/ Marc E. Swartz
---------------------------
Name: Marc E. Swartz
Title: Vice President
AGREED:
CIC SYSTEMS, INC.
By: /s/ Ronald G. Farrell
---------------------------
Name: Ronald G. Farrell
Title: President
COMPUTER INTEGRATION CORP.
By: /s/ Ronald G. Farrell
----------------------------
Name: Ronald G. Farrell
Title: President
CONGRESS FINANCIAL
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-84472 and Form S-8 No. 33-04123) of Computer Integration Corp.
of our report dated August 22, 1996, with respect to the consolidated financial
statements and schedules of Computer Integration Corp. included in the Annual
Report (Form 10-K) for the year ended June 30, 1996.
West Palm Beach, Florida
September 30, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COMPUTER INTEGRATION CORP. FOR THE YEAR ENDED JUNE 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 7,599,051
<SECURITIES> 0
<RECEIVABLES> 64,094,307
<ALLOWANCES> 1,350,988
<INVENTORY> 23,705,565
<CURRENT-ASSETS> 96,549,465
<PP&E> 6,645,448
<DEPRECIATION> 1,634,758
<TOTAL-ASSETS> 114,664,925
<CURRENT-LIABILITIES> 74,400,475
<BONDS> 0
0
19
<COMMON> 6,945
<OTHER-SE> 10,238,534
<TOTAL-LIABILITY-AND-EQUITY> 114,664,925
<SALES> 449,953,514
<TOTAL-REVENUES> 449,953,514
<CGS> 407,312,468
<TOTAL-COSTS> 37,563,012
<OTHER-EXPENSES> 486,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,838,448
<INCOME-PRETAX> (246,512)
<INCOME-TAX> 156,697
<INCOME-CONTINUING> (403,209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (403,209)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> 0
</TABLE>
