<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to
COMMISSION FILE NUMBER: 0-20732
COMPUTER INTEGRATION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0506623
(State of other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
15720 JOHN J. DELANEY DRIVE, SUITE 500, CHARLOTTE, NC 28277
(Address of principal executives offices) (Zip code)
Registrant's telephone number, including area code: 704/714-4000
Check 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
--- ---
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 distribution of securities under a plan
confirmed by a court. YES ____ NO_____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 14,036,010 shares of common
stock outstanding as of February 17, 1998.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed, consolidated financial statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been consolidated or omitted
pursuant to such rules and regulations; however, the Registrant believes that
the disclosures are adequate to make the information presented not misleading.
It is suggested that these condensed, consolidated financial statements be read
in conjunction with the financial statements, and the notes thereto, included in
the Registrant's consolidated financial statements for the year ended June 30,
1997.
The condensed, consolidated financial statements for the interim periods
included herein, which are unaudited, include, in the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position and results of operations for interim periods
presented. The results of operations for interim periods should not be
considered indicative of results to be expected for the full year.
2
<PAGE> 3
COMPUTER INTEGRATION CORP.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, 1997 JUNE 30, 1997
(NOTE)
<S> <C> <C>
Current assets:
Cash $ 1,027 $ 1,360
Accounts receivable, net 62,372 63,905
Inventory 10,832 17,350
Deferred income taxes 1,842 2,952
Prepaid expenses and other
current assets 655 2,881
------- --------
Total current assets 76,728 88,448
Property and equipment, net 2,322 2,145
Other assets:
Goodwill, net 11,431 11,770
Deferred income taxes 1,495 --
Other 242 298
------- --------
Total other assets 13,168 12,068
------- --------
Total assets $92,218 $102,661
======= ========
</TABLE>
Continued on next page.
3
<PAGE> 4
COMPUTER INTEGRATION CORP.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997
(NOTE)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable under line of credit $ 6,217 $ 8,717
Accounts payable 41,952 52,276
Accrued expenses 8,097 6,476
Restructuring accrual 886 --
Current portion of subordinated notes payable 672 268
Current portion of capital lease obligations 310 292
Other 516 860
-------- ---------
Total current liabilities 58,650 68,889
Noncurrent liabilities:
Term note payable 27,500 27,500
Subordinated notes payable, less current portion 672 1,343
Capital lease obligations, less current portion 56 216
Deferred income taxes -- 497
-------- ---------
Total noncurrent liabilities 28,228 29,556
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- issued and outstanding at June 30, 1997;
eliminated effective November 14, 1997 -- --
Series B, 9% cumulative, convertible, redeemable
preferred stock; 250 shares authorized,
-0- issued and outstanding at June 30, 1997;
eliminated effective November 14, 1997 -- --
Series C, 9% cumulative, convertible, redeemable
preferred stock; 250 shares authorized,
-0- issued and outstanding at June 30, 1997;
eliminated effective November 14, 1997 -- --
Series D, 9% cumulative, convertible, redeemable
preferred stock; 40,000 shares authorized,
19,036 issued and outstanding in both
periods -- --
Series E, 9% cumulative, convertible, redeemable
preferred stock; 250 shares authorized,
125 issued and outstanding in both periods -- --
Common stock, $.001 par value, 40,000,000 shares authorized,
14,034,810 and 7,084,810 shares issued and outstanding
at December 31, 1997 and June 30, 1997, respectively 14 7
Additional paid-in capital 17,083 9,854
Accumulated deficit (11,757) (5,645)
-------- ---------
Total shareholders' equity 5,340 4,216
-------- ---------
Total liabilities and shareholders' equity $ 92,218 $ 102,661
======== =========
</TABLE>
Note: The balance sheet at June 30, 1997 is derived from the Company's audited
consolidated financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
4
<PAGE> 5
COMPUTER INTEGRATION CORP.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
Net sales $ 95,839 $ 98,858
Cost of goods sold 88,055 88,988
------------ -----------
Gross profit 7,784 9,870
Selling, general and administrative expenses 11,489 10,505
Restructuring accrual (reversal) 392 (1,843)
------------ -----------
11,881 8,662
------------ -----------
(Loss) income from operations (4,097) 1,208
Interest expense 939 1,432
------------ -----------
Loss before income taxes (5,036) (224)
Income tax benefit -- (44)
------------ -----------
Net loss (5,036) (180)
Dividends on preferred stock (reversed) accrued (55) 55
------------ -----------
Loss applicable to common stock $ (4,981) $ (235)
============ ===========
Loss per common share (basic and diluted) $ (.35) $ (.03)
============ ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
COMPUTER INTEGRATION CORP.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
Net sales $ 208,609 $ 207,190
Cost of goods sold 191,112 185,607
------------ -----------
Gross profit 17,497 21,583
Selling, general and administrative expenses 21,464 20,022
Restructuring expense (reversal) 1,022 (1,843)
------------ -----------
22,486 18,179
------------ -----------
(Loss) income from operations (4,989) 3,404
Interest expense 1,841 2,581
------------ -----------
(Loss) income before income taxes (6,830) 823
Income tax (benefit) expense (718) 396
------------ -----------
Net (loss) income (6,112) 427
Less dividends on preferred stock -- 110
------------ -----------
(Loss) income applicable to common stock $ (6,112) $ 317
============ ===========
(Loss) income per common share:
Basic $ (.46) $ .05
============ ===========
Diluted $ (.46) $ .04
============ ===========
</TABLE>
See accompanying notes.
6
<PAGE> 7
COMPUTER INTEGRATION CORP.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1997 1996
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (6,112) $ 427
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 844 923
Restructuring accrual (reversal) 1,008 (1,843)
Changes in operating assets and liabilities:
Accounts receivable 1,533 647
Inventory 6,518 3,143
Prepaid expenses and other assets 1,793 654
Accounts payable (10,324) (4,560)
Accrued expenses and other liabilities 887 (831)
-------- -------
Net cash used in operating activities (3,853) (1,440)
INVESTING ACTIVITIES
Acquisition of property and equipment (700) (2,119)
-------- -------
Net cash used in investing activities (700) (2,119)
FINANCING ACTIVITIES
Proceeds from sale of capital stock, net of offering costs 7,236 --
Proceeds from exercise of stock options -- 12
Net repayments on line of credit (2,500) (1,056)
Principal payments on subordinated notes payable (267) (302)
Preferred stock dividends paid (107) (108)
Repayments of capital lease obligations (142) (129)
-------- -------
Net cash provided by (used in) financing activities 4,220 (1,583)
-------- -------
Net decrease in cash (333) (5,142)
Cash at beginning of period 1,360 7,599
-------- -------
Cash at end of period $ 1,027 $ 2,457
======== =======
SUPPLEMENTAL INFORMATION
Interest paid $ 1,841 $ 149
======== =======
Income tax (net refunds received) paid $ (2,199) $ 8
======== =======
</TABLE>
See accompanying notes.
7
<PAGE> 8
COMPUTER INTEGRATION CORP.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Computer
Integration Corp. and its wholly-owned operating subsidiary, CIC Systems, Inc.
("CIC"), collectively, the "Company". All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Certain information and footnote disclosures required by
generally accepted accounting principles for complete financial statements have
been condensed or omitted. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to present fairly
the financial position, results of operations and cash flows have been included.
The results of operations for the six months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for fiscal year 1998.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's consolidated financial statements for the year ended June 30, 1997.
2. COMMON STOCK SALE
On July 23, 1997, the Company completed the sale of 6,950,000 shares of its
common stock ("Common Stock") for an aggregate price of $7,436,500 to various
unaffiliated third parties. As a result of the sale, the buyers held 49.86% of
the shares of the Company's Common Stock outstanding. In connection with the
sale, the Company issued warrants to purchase 300,000 shares of Common Stock to
the individuals who facilitated the transaction. The warrants are immediately
exercisable at a price of $1.13 per share and expire in 2004. The fair value
assigned to the warrants was $1.09 per share. The total fair value of the
300,000 warrants, $327,000, was deducted from the proceeds received under the
sale of Common Stock, and was allocated to additional paid-in capital applicable
to stock warrants. The proceeds received by the Company, net of associated
expenses, of approximately $7.2 million were used to repay borrowings under the
Company's revolving line of credit. Assuming this repayment and stock sale had
occurred on July 1, 1997, the loss per Common Share (basic and diluted) for the
six months ended December 31, 1997 would have been ($.43) as a result of a
reduction of interest costs of approximately $25,000 after tax and an increase
in the weighted average common shares outstanding of 868,750.
8
<PAGE> 9
COMPUTER INTEGRATION CORP.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
3. RESTRUCTURING CHARGES
In September 1997, the Company announced a new logistics strategy and
consolidation of headquarters and distribution functions into new facilities in
Charlotte, NC. The consolidation was completed in January 1998. The
non-recurring costs associated with the consolidation were approximately $2
million. These costs include employee severance benefits, reimbursed employee
relocation expenses, recruiting, facility relocation expenses, and the write-off
of certain property and equipment. This amount also includes the costs
associated with the duplication of certain employee positions and redundant
facilities during the transition period. Additionally, expenditures for
furniture, fixtures and equipment for the new Charlotte facilities and a new
office facility in suburban Boston, Massachusetts were approximately $600,000
and have been capitalized.
In conjunction with this planned relocation and consolidation, during the first
half of fiscal 1998, the Company recorded a charge of $1.0 million for
restructuring costs of which $392,000 was recorded in the second quarter. This
charge, which is included in the $2 million total cost discussed above, includes
approximately $455,000 for severance benefits for approximately 90 affected
employees, $394,000 for lease payments on idle facilities, and $173,000 for the
write-off of property and equipment which will no longer be required. These
affected employees were primarily distribution, accounting, purchasing,
administrative, management, and professional services personnel. As of December
31, 1997, the remaining restructuring accrual balance was $886,000.
During the second quarter of fiscal 1997, the Company decided not to proceed
with a planned consolidation of some of the Company's headquarters, sales and
distribution facilities to Atlanta, Georgia. The relocation was originally
announced in the fourth quarter of fiscal 1996. Accordingly, during the second
quarter of fiscal 1997, the Company reversed $1.8 million of the original $2.3
million charge for restructuring costs.
9
<PAGE> 10
4. EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 (FAS 128), "Earnings per Share." FAS 128 replaced
the previously reported primary and fully diluted earnings per share (EPS) with
basic and diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive
effects of options and convertible securities. Diluted EPS is very similar to
the previously reported fully diluted EPS. EPS amounts for all periods have
been presented, and where necessary, restated to conform to the FAS 128
requirements.
The following table sets forth the computation of basic and diluted EPS (in
000's, except EPS). Common shares issuable upon conversion of convertible
preferred stock which were outstanding during the quarters ended December 31,
1997 and 1996 and for the six months ended December 31, 1997 and 1996, were not
included in the computation of diluted EPS because the effect would be
antidilutive. Also, common stock issuable upon exercise of stock options under
the Treasury Stock method for the quarters ended December 31, 1997 and 1996 and
for the six months ended December 31, 1997 were not included in the computation
of diluted EPS because the effect would be antidilutive.
<TABLE>
<CAPTION>
Three Months ended
December 31,
1997 1996
<S> <C> <C>
Numerator
(Loss) applicable to common stock $ (4,981) $ (235)
============ ==========
Denominator
Denominator for basic and diluted
EPS-Weighted Average common
shares outstanding 14,035 6,954
============ ==========
Basic and Diluted EPS $ (.35) $ (.03)
============ ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months ended
December 31,
1997 1996
<S> <C> <C>
Numerator
(Loss) income applicable to common stock $ (6,112) $ 317
============ ==========
Denominator
Denominator for basic EPS-
Weighted Average common
shares outstanding 13,166 6,951
Common shares issuable upon
exercise of stock options -- 201
------------ ----------
Denominator for diluted EPS-
adjusted weighted average
shares and assumed conversion 13,166 7,152
============ ==========
Basic EPS $ (.46) $ .05
============ ==========
Diluted EPS $ (.46) $ .04
============ ==========
</TABLE>
10
<PAGE> 11
COMPUTER INTEGRATION CORP.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
5. BORROWINGS
In November 1997, the Company amended its financing agreement with its primary
lender, Congress Financial Corporation ("Congress"), to extend the expiration
date of the credit facility from July 1, 1998 to October 1, 1998 and to change
the maximum credit amount from $77 million to $70 million. In February 1998, the
Company further amended its financing agreement with Congress to extend the
expiration date of the credit facility from October 1, 1998 to July 1, 1999.
6. INCOME TAXES
At December 31, 1997 the Company analyzed its net deferred tax asset position.
The net deferred tax assets before valuation allowance are approximately $5.4
million including approximately $2.1 million added during the quarter ended
December 31, 1997. The Company has provided a valuation allowance against the
net increase in the assets during the quarter thereby leaving net deferred tax
assets of approximately $3.3 million. Management believes that it is more likely
than not that the realization of the reported deferred tax assets will occur in
the future based on current earnings forecasts and reversals of book-tax
temporary differences. In coming to this conclusion, the Company considered its
historical profitability until recent quarters, the non-recurring nature of some
of its recent losses and the expected benefits of its consolidating, cost
cutting, and new management information system. The Company will continue to
assess the realization of the deferred tax assets on an ongoing basis.
7. CAPITAL STOCK
At the Company's annual meeting on November 4, 1997, the Company's shareholders
voted to increase the number of authorized shares of capital stock from
22,000,000 shares to 42,000,000, comprised of an increase in the number of
authorized shares of common stock from 20,000,000 shares to 40,000,000 shares.
8. PENDING ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"), effective for years beginning
after December 15, 1997. FAS 131 requires that a public company report financial
and descriptive information about its reportable operating segments pursuant to
criteria that differ from current accounting practice. Operating segments, as
defined, are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The financial information to be reported includes segment profit or
loss, certain revenue and expense items and segment assets and reconciliations
to corresponding amounts in the general purpose financial statements. FAS 131
also requires information about products and services, geographic areas of
operation, and major customers. The company has not completed its analysis of
the effect of adoption on its financial statement disclosure; however, the
adoption of FAS 131 will not affect results of operations or financial position.
9. SUBSEQUENT EVENTS
The Company currently has an agreement, originally entered into in November
1996, with a company to finance inventory purchases for selected suppliers. In
January 1998, the Company and the finance company amended the inventory
financing agreement such that the maximum credit limit is $1.5 million. The
Company and the finance company had been operating under interim arrangements
since November 1997 under which the facility was to expire in January 1998.
The Company's Board of Directors did not declare the preferred stock dividend
payments which it has historically declared on or about January 31. Under the
terms of the preferred stock agreements such dividends accrue and are payable
only when and if declared by the Board of Directors.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Computer Integration Corp. (the "Company") is a reseller of microcomputers,
workstations, and related products, services and solutions to large and
medium-sized corporations, federal, state, and local governmental entities and
colleges and universities throughout the United States. The Company, through its
wholly-owned subsidiary, CIC Systems, Inc. ("CIC"), distributes a broad range of
microcomputer-related products from major hardware manufacturers and software
developers which include Hewlett-Packard Company ("HP"), Compaq Computer
Corporation, Sun Microsystems Corporation, Toshiba America Information Systems,
Inc., International Business Machines, Lexmark International, NEC Technologies,
Inc., 3COM, Inc., Oracle Corporation, Netscape Communications Corporation,
Sterling Commerce, Inc., Novell, Inc. and Microsoft Corporation. The Company is
one of the largest resellers of computer products manufactured by HP in the
United States.
The Company began operations in 1992 with the organization of CIC and acquired
Copley Systems Corporation ("Copley"), a Massachusetts corporation, in March
1993. The Company acquired all of the outstanding capital stock of Dataprint,
Inc. ("Dataprint"), a North Carolina corporation, effective July 1, 1994.
Effective July 1, 1995, CIC acquired substantially all of the assets of Cedar
Computer Center, Inc., an Iowa corporation ("Cedar"), which was one of the
largest dealers of HP computer products in the midwestern and western United
States at that time.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Net sales for the three months ended December 31, 1997 (the "Fiscal 1998
Quarter") were $95.8 million compared to $98.9 million for the three months
ended December 31, 1996 (the "Fiscal 1997 Quarter"), a decrease of $3.1 million
or 3.1%. The decrease in sales was primarily due to a major manufacturer's
inability to produce and supply a sufficient quantity of selected products for
which the Company had customer orders.
Gross profit decreased to $7.8 million in the Fiscal 1998 Quarter from $9.9
million in the Fiscal 1997 Quarter. The gross profit margin decreased to 8.1% of
sales in the Fiscal 1998 Quarter compared to 10.0% in the Fiscal 1997 Quarter.
The decrease in gross profit margin was primarily the result of increased
competitive pressures in the marketplace resulting in reduced selling prices and
increased inventory losses and obsolescence. The decline in gross profit was
caused by the reduced gross profit margin and lower sales.
During the Fiscal 1998 Quarter, the Company recorded a charge of $392,000 ("1998
Quarter Restructuring Charge") associated with a planned consolidation of its
headquarters and distribution facilities to two new facilities in Charlotte, NC,
closing of certain branch offices and reductions in management and professional
services personnel. This charge includes approximately $105,000 for severance
benefits for approximately 32 affected employees, $154,000 for estimated future
costs of satisfying lease liabilities on idle facilities, and $133,000 for the
write-off of property and equipment which will no longer be required.
12
<PAGE> 13
During the second quarter of fiscal 1997, the Company decided not to proceed
with a planned consolidation of some of the Company's headquarters, sales and
distribution facilities to Atlanta, Georgia. The relocation was originally
announced in the fourth quarter of fiscal 1996. Accordingly, during the second
quarter of fiscal 1997, the Company reversed $1.8 million of the original $2.3
million charge for restructuring costs.
Excluding the Fiscal 1998 Quarter Restructuring Charge and the Fiscal 1997
Quarter restructuring charge reversal, selling, general and administrative
expenses ("SG&A") were $11.5 million in the Fiscal 1998 Quarter, compared to
$10.5 million in the Fiscal 1997 Quarter, an increase of approximately $1.0
million or 9.4%. The Fiscal 1997 Quarter included a charge of $786,000
associated with the costs of terminating a lease agreement. Excluding this
charge, SG&A increased $1.8 million or 18.2% from the Fiscal 1997 Quarter
primarily due to non-recurring costs such as employee and facility overlap,
recruiting, and relocation associated with the Company's consolidation into one
distribution center and one headquarters; higher salary expense due to increased
executive staff and system engineers; and increased travel, telephone and
computer network expenses.
Interest expense decreased to $939,000 for the Fiscal 1998 Quarter from $1.4
million during the Fiscal 1997 Quarter due to lower borrowings under the
Company's line of credit.
No income tax benefit is shown on the statement of income for the Fiscal 1998
Quarter because the Company recorded an income tax benefit of $2.1 million and a
valuation allowance of the same amount. This compares to an income tax benefit
of $44,000 reported in the Fiscal 1997 Quarter. At December 31, 1997 the Company
had deferred tax assets of approximately $5.4 million and a valuation allowance
of $2.1 million leaving net deferred tax assets of $3.3 million. Management
believes that it is more likely than not that the realization of the deferred
tax assets will occur in the future based on current earnings forecasts and
reversals of book-tax temporary differences. In coming to this conclusion the
Company considered its historical profitability until recent quarters, the
non-recurring nature of some of its recent losses and the expected benefits of
its consolidation, cost cutting, and new management information system. The
Company will continue to assess the realization of the deferred tax assets on an
ongoing basis.
As a result of the factors discussed above, the Company had a net loss of $5.0
million in the Fiscal 1998 Quarter compared to a net loss of $180,000 in the
Fiscal 1997 Quarter.
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
Net sales for the six months ended December 31, 1997 (the "Fiscal 1998 Period")
were $208.6 million compared to $207.2 million for the six months ended December
31, 1996 (the "Fiscal 1997 Period"), an increase of $1.4 million or 0.7%. The
increase in sales was primarily due to improved focus by the sales organization
and its impact on expanding the Company's customer base and regaining business
from previous customers offset by a major manufacturer's inablility to produce
and supply a sufficient quantity of selected products for which the Company had
customer orders.
Gross profit decreased to $17.5 million in the Fiscal 1998 Period from $21.6
million in the Fiscal 1997 Period. Gross profit margin decreased to 8.4% in the
Fiscal 1998 Period compared to 10.4% in the Fiscal 1997 Period. The decrease in
gross profit margin was primarily the result of increased competitive pressures
in the marketplace resulting in reduced selling prices and increased inventory
losses and obsolescence. The decline in gross profit was caused by the reduced
gross profit margin.
During the Fiscal 1998 Period, the Company recorded a charge of $1.0 million
("1998 Period Restructuring Charge"), including the $392,000 recorded in the
Fiscal 1998 Quarter, associated with a planned consolidation of its headquarters
and distribution facilities to two new facilities in Charlotte, NC, closing of
certain branch offices, and reductions in management and professional services
personnel. This charge includes approximately $455,000 for severance benefits
for approximately 90 affected employees, $394,000 for estimated future costs of
terminating lease liabilities on idle facilities, and $173,000 for the write-off
of property and equipment which will no longer be required.
The Fiscal 1997 Period included the impact of reversing $1.8 million of the
previously recorded $2.3 million restructuring accrual as previously discussed.
Excluding the 1998 Period Restructuring Charge and the Fiscal 1997 Period
restructuring charge reversal, SG&A expenses were $21.5 million in the Fiscal
1998 Period, compared to $20.0 million in the Fiscal 1997 Period, an increase of
$1.5 million or 7.2%. The SG&A increase in the Fiscal 1998 Period compared to
the Fiscal 1997 Period was caused by the same factors as discussed previously
for the SG&A increase in the Fiscal 1998 Quarter compared to the Fiscal 1997
Quarter.
13
<PAGE> 14
Interest expense decreased to approximately $1.8 million for the Fiscal 1998
Period from $2.6 million during the Fiscal 1997 Period as a result of lower
borrowings under the Company's line of credit.
For the Fiscal 1998 Half the Company recorded an income tax benefit of $718,000
compared with an income tax expense of $396,000 for the Fiscal 1997 Period. As
discussed above, this includes the impact of the Company recording a valuation
allowance during the fiscal 1998 Quarter.
As a result of the factors discussed above, the Company had a net loss of $6.1
million in the Fiscal 1998 Period compared to net income of approximately
$427,000 in the Fiscal 1997 Period.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its activities through the private sale of
equity securities and borrowings under its revolving line of credit, and, during
certain periods, through cash flow from operations. As of December 31, 1997, the
Company had cash of $1.0 million, net accounts receivable of $62.4 million,
working capital of $18.1 million and available funds under its credit facility
of approximately $8.8 million.
Net cash used in operating activities during the six months ended December 31,
1997 was $3.9 million primarily as a result of a reduction in accounts payable
of $10.3 million offset by reductions in inventory of $6.5 million and prepaid
expenses of $1.8 million.
Net cash used in investing activities for the six months ended December 31, 1997
was $700,000, which was related to the acquisition of office and
computer equipment and software. Financing activities for the six months ended
December 31, 1997 provided cash of $4.2 million primarily as a result of $7.2
million net proceeds from the sale of common stock offset by a $2.5 million
reduction in the outstanding balance on the Company's credit facility.
In November 1997, the Company amended its financing agreement ("Credit
Facility") with its primary lender, Congress Financial Corporation ("Congress"),
to extend the expiration date of the Credit Facility from July 1, 1998 to
October 1, 1998 and to change the maximum credit amount from $77 million to $70
million. In February 1998, the Company amended its financing agreement with
Congress to extend the expiration date of the Credit Facility from October 1,
1998 to July 1, 1999. The Credit Facility is collateralized by CIC's accounts
receivable and inventory and consists of a $27.5 million term loan and a $42.5
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 9.5% at
December 31, 1997). The Credit Facility is used for inventory financing and
working capital, and is subject to a borrowing base formula using eligible
inventory and accounts receivable balances. The Credit Facility requires that
CIC maintain, at all times, certain net worth and working capital levels and
restricts the payment of dividends by the Company.
14
<PAGE> 15
The Company currently has an agreement, originally entered into in November
1996, with a company to finance inventory purchases for selected suppliers. In
January 1998, the Company and the finance company amended the inventory
financing agreement such that the maximum credit limit is $1.5 million. The
Company and the finance company had been operating under interim arrangements
since November 1997 under which the facility was to expire in January 1998. The
finance company has a lien on the inventory financed under this facility, and a
$1.5 million irrevocable letter of credit has been issued on behalf of the
Company in favor of the finance company.
On July 23, 1997, the Company completed the sale of 6,950,000 shares of its
common stock for an aggregate price of $7,436,500 to various unaffiliated third
parties. As a result of the sale, the buyers held 49.86% of the shares of the
outstanding common stock. The proceeds received by the Company, net of related
expenses, of approximately $7.2 million were used to repay borrowings under the
Company's revolving line of credit.
In September 1997, the Company announced a new logistics strategy and
consolidation of headquarters and distribution functions into new facilities in
Charlotte, NC. The consolidation was completed in January 1998. The
non-recurring costs associated with the consolidation were approximately $2
million. These costs include employee severance benefits, reimbursed employee
relocation expenses, recruiting, facility relocation expenses, and the write-off
of certain property and equipment. This estimate also includes the costs
associated with the duplication of certain employee positions and redundant
facilities during the transition period. Additionally, expenditures for
furniture, fixtures and equipment for the new Charlotte facilities and a new
office facility in suburban Boston, Massachusetts were approximately $600,000
and have been capitalized.
The Company has allocated approximately $2.0 million to be expended in the
fiscal year ended June 30, 1998 to significantly upgrade its management
information system, including installation of a new integrated software system
for order entry, purchasing, inventory, distribution and accounting, equipping
virtually all sales executives and systems engineers with HP laptop computers,
upgrading desktop personal computer hardware and software, and enhancing its
company-wide electronic mail system. Management believes that these upgrades are
necessary for the Company to take advantage of technological information system
improvements, reduce ongoing operating costs, and enhance its competitive
position. The Company has received reimbursement from a vendor for some of these
capital expenditures and has financed a portion of these expenditures with an
operating lease. The Company's capital requirements this year, net of lease
financing and reimbursements, is expected to be approximately $500,000.
In connection with the acquisition of Cedar, the Company granted the seller a
contractual right pursuant to which it can require the Company to pay, with
respect to 515,000 shares of the Common Stock owned by the Seller, the
difference between $10 per share and the closing market price for the Common
Stock on July 2, 1998. The closing market price for the Common Stock on
February 17, 1998 was $1.3125. The Company has received notice of the seller's
intention to exercise that right on July 2, 1998. Should the satisfaction of
that obligation require funds in excess of the Company's then existing liquid
assets or cash flows, the Company will 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 was recently informed by HP that the credit line previously extended
to the Company for the purchases of products has been reduced. While this
reduction has affected the Company's ability to purchase HP products, the
Company believes that it has not had a significant impact on sales. The Company
is actively exploring alternatives which would increase its ability to acquire
HP products, including purchasing such products from authorized distributors and
acquiring additional capital. HP has indicated that, should the Company
negotiate an acceptable agreement with an authorized distributor, HP would
consent to and support such a change.
Although the reduced credit from HP has not yet had a material adverse effect on
the Company's performance, the Company believes that, unless it takes corrective
action, such a material adverse effect may occur. The reduced credit from HP has
also unfavorably affected the Company's ability to fund some of its operating
cash flow requirements. The Company is actively seeking other sources for HP
products, an increase in its credit line from HP and additional sources of
working capital. However, there can be no assurance that the Company will be
successful in implementing any such corrective strategies.
15
<PAGE> 16
The Common Stock is listed on the Nasdaq SmallCap Market. Effective February 23,
1998, new quantitative maintenance requirements for continued listing on that
market will become effective. Although the Company does not meet all of the
quantitative maintenance requirements, the Company believes that it may be
eligible for an exemption from those requirements and, in the event that it
receives a delisting notice, intends to appeal such decision. No assurance can
be given that the Company's appeal will be successful. In the event that the
Common Stock is delisted from the SmallCap market, trading, if any, in the
Common Stock may then continue to be conducted on the over-the-counter market
in what are commonly referred to as the "pink sheets," or on the OTC Electronic
Bulletin Board. As a result of trading in the over-the-counter market, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Common Stock.
In addition, delisting could result in the Common Stock being subject to
additional rules adopted by the Commission governing "penny stock," which is
generally defined by such rules as any equity security that has a market price
of less than $5.00 per share. As a result of the additional customer disclosure
requirements, the application of the penny stock rules to the Common Stock may
have an adverse effect on the ability of broker-dealers to sell the Common
Stock.
The Company is in the process of addressing the possible exposures related to
the impact of the Year 2000 on its computer systems, as well as on the products
and software it has purchased from third parties. Most of the Company's key
financial, information and operational systems have been assessed, and plans
have been developed to address systems modifications or replacements by December
31, 1999. The Company is also communicating with systems providers in an attempt
to ensure that purchased systems will handle the Year 2000 processing
implications. The Company expects to successfully implement the systems and
programming changes necessary to address Year 2000 issues and believes that the
future costs of such changes are not expected to be material to the Company's
consolidated financial position, results of operations or cash flows.
This Form 10-Q contains forward-looking statements that are subject to risks and
uncertainties. Statements indicating that the Company "expects," "estimates," or
"believes" are forward-looking as are all other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors that could cause actual results or events to
differ materially from those anticipated by the forward-looking statements
contained herein. Such factors include, but are not limited to: the growth rates
of the Company's market segments; the position of the Company's products in
those segments; the Company's ability to effectively manage its business, and
the growth of its business, in a rapidly changing environment; the timing of new
product introductions; inventory risks due to changes in market conditions; the
competitive environment in the computer industry; the Company's ability to
establish successful strategic relationships; and general economic conditions.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 4, 1997, the Company held its annual meeting of stockholders. At
that meeting the stockholders: elected seven directors; amended the Company's
1994 Stock Option Plan to increase the number of shares of Common Stock
reserved for issuance from 1.8 million to 4.0 million; amended the Company's
Certificate of Incorporation to increase its authorized shares of Common stock
from 20 million shares to 40 million shares; and ratified the Company's
selection of Ernst & Young LLP as the Company's independent certified public
accountants.
The seven directors who were elected at the annual meeting are: Samuel C.
McElhaney; John E. Paget; Araldo Cossutta; Donald Russell; Michael G. Santry:
Matthew S. Waller; and Frank J. Zappala, Jr. Each director received 10,219,371
votes and 1,021,585 votes were withheld with respect to each director.
The number of votes cast with respect to each other matter were:
FOR AGAINST ABSTAIN NOT VOTED
---------- ------- ------- ---------
Amendment to Stock Option Plan 10,626,453 7,570 35,174 571,759
Amendments to Certificate of
Incorporation 11,196,612 44,334 10 0
Ratify Selection of Accountants 11,203,772 37,174 10 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10(a) - Fourth Amendment to Financing Agreement between CIC
Systems, Inc./Computer Integration Corp. and
Congress Financial Corporation (New England), dated
November 13, 1997
Exhibit 10(b) - Fifth Amendment to Financing Agreement between CIC
Systems, Inc./Computer Integration Corp. and
Congress Financial Corporation (New England), dated
February 9, 1998
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on form 8-K were filed during the quarter for which this
report is being filed.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements 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.
COMPUTER INTEGRATION CORP.
By: /s/ EDWARD A. MELTZER
---------------------
Edward A. Meltzer
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
Dated: February 23, 1998
18
<PAGE> 19
EXHIBIT INDEX
Exhibit 10(a) -- Fourth Amendment to Financing Agreement between CIC
Systems, Inc./Computer Integration Corp.
and Congress Financial Corporation (New England),
dated November 13, 1997
Exhibit 10(b) -- Fifth Amendment to Financing Agreement between CIC
Systems, Inc./Computer Integration Corp.
and Congress Financial Corporation (New England),
dated February 9, 1998
Exhibit 27 -- Financial Data Schedule (for SEC use only)
19
<PAGE> 1
Computer Integration Corp.
and Subsidiary
Exhibit 10(a) - Fourth Amendment to Financing Agreement between CIC
Systems, Inc./Computer Integration Corp. and Congress Financial
Corporation
as of November 13, 1997
CIC Systems, Inc.
165 University Avenue
Westwood, MA 02090
Re: Fourth Amendment to Financing Agreements ("Fourth Amendment")
Gentlemen:
Reference is made to the Amended and Restated Loan and Security
Agreement dated July 1, 1995, between you and the undersigned as amended (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 agree to extend the term of the Loan
Agreement for three months and the Lender has agreed to do so, subject to the
terms and conditions of this Amendment. Subject to the terms and conditions
hereof, the Lender agrees with the Borrower as follows:
(1) Section 1.21 of the Loan Agreement is amended by deleting the
Section in its entirety and by substituting the following in lieu thereof:
"1.21" Maximum Credit shall mean the amount of $70,000,000.
(2) Section 12.1(a) of the Loan Agreement is amended by deleting the
the first sentence thereof and by substituting the following sentence in lieu
thereof:
"This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page
hereof and shall continue in full force and effect for a term
ending on October 1, 1998 (the "Renewal Date"), and from year
to year thereafter, unless sooner terminated pursuant to the
terms hereof; provided that Lender may, at its option, extend
the first Renewal Date for an additional year by giving
Borrower notice at least ninety (90) days prior to the first
Renewal Date.
The foregoing amendment to Section 12.1(a) was effective as of
September 1, 1997.
<PAGE> 2
(3) In connection with the execution and delivery of this Fourth
Amendment the Borrower and Guarantor shall furnish to the Lender upon Lender's
request certified copies of all requisite corporate action and proceedings of
the Borrower and Guarantor in connection with this Fourth Amendment and a legal
opinion of Borrower's and Guarantor's counsel as to the due authorization of
this Fourth Amendment and the enforceability hereof.
(4) 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 Fourth 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 no defenses, counterclaims or setoffs with respect to full, complete and
timely payment of all Obligations.
(5) Guarantor, for value received, hereby assents to the Borrower's
execution and delivery of this Fourth Amendment, and to the performance by the
Borrower of its agreements and obligations hereunder. This Fourth 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.
(6) 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 Fourth
Amendment and any other documents and agreements prepared in connection with
this Fourth Amendment. The Borrower confirms 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 Borrower further
confirms that after giving effect to this Fourth 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 Fourth Amendment by Lender shall not be construed as a waiver by Lender of
any Event of Default under the Financing Agreements. This Fourth 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 to
the subject matter hereof and supersedes all prior dealings, correspondence,
conversations or communications between the parties with respect to the subject
matter hereof.
<PAGE> 3
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
------------------------------------
Marc E. Swartz, First Vice President
AGREED:
CIC SYSTEMS, INC.
By: /s/ Edward A. Meltzer
------------------------------------
Edward A. Meltzer
Chief Financial Officer
COMPUTER INTEGRATION CORP.
By: /s/ Edward A. Meltzer
------------------------------------
Edward A. Meltzer
Chief Financial Officer
<PAGE> 1
Computer Integration Corp.
and Subsidiary
Exhibit 10(b) - Fifth Amendment to Financing Agreement between CIC Systems,
Inc./Computer Integration Corporation and Congress Financial
Corporation
as of February 9, 1998
CIC Systems, Inc.
165 University Avenue
Westwood, MA 02090
Re: Fifth Amendment to Financing Agreements ("Fifth Amendment")
Gentlemen:
Reference is made to the Amended and Restated Loan and Security
Agreement dated July 1, 1995, between you and the undersigned as amended (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 agree to extend the term of the Loan
Agreement and the Lender has agreed to do so, subject to the terms and
conditions of this Amendment. Subject to the terms and conditions hereof, the
Lender agrees with the Borrower as follows:
SECTION 3.3 OF THE LOAN AGREEMENT IS AMENDED BY DELETING THE AMOUNT "$20,000" IN
THE SECOND LINE THEREOF AND BY SUBSTITUTING THE AMOUNT "$15,000" IN LIEU
THEREOF. LENDER AND BORROWER AGREE THAT NOTWITHSTANDING ANY PROVISION OF THE
FINANCING AGREEMENTS TO THE CONTRARY, ALL LC ACCOMMODATIONS SHALL BEAR LETTER OF
CREDIT FEES PAYABLE TO LENDER AT A RATE EQUAL TO TWO PERCENT (2%) PER ANNUM AS
PROVIDED UNDER SECTION 2.2(B) OF THE LOAN AGREEMENT. SECTION 12.1(A) OF THE LOAN
AGREEMENT IS AMENDED BY DELETING THE FIRST SENTENCE THEREOF AND BY SUBSTITUTING
THE FOLLOWING SENTENCE IN LIEU THEREOF:
"This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page
hereof and shall continue in full force and effect for a term
ending on July 1, 1999 (the "Renewal Date"), and from year to
year thereafter, unless sooner terminated pursuant to the
terms hereof; provided
<PAGE> 2
that Lender may, at its option, extend the first Renewal Date
for an additional year by giving Borrower notice at least
ninety (90) days prior to the first Renewal Date.
SECTION 12.1(C) OF THE LOAN AGREEMENT IS AMENDED TO ADD AN ADDITIONAL CLAUSE
(IV) THERETO IMMEDIATELY FOLLOWING CLAUSE (III) AND TO DELETE THE PERIOD AT THE
END OF CLAUSE (III) AND TO SUBSTITUTE IN PLACE THEREOF A SEMI-COLON AND THE WORD
"AND": "(IV) 3/4% OF THE MAXIMUM CREDIT FROM THE DAY AFTER THE THIRD ANNIVERSARY
HEREOF TO AND INCLUDING THE FOURTH ANNIVERSARY OF THE DATE HEREOF." IN
CONNECTION WITH THE EXECUTION AND DELIVERY OF THIS FIFTH AMENDMENT THE BORROWER
AND GUARANTOR SHALL FURNISH TO THE LENDER UPON LENDER'S REQUEST CERTIFIED COPIES
OF ALL REQUISITE CORPORATE ACTION AND PROCEEDINGS OF THE BORROWER AND GUARANTOR
IN CONNECTION WITH THIS FIFTH AMENDMENT AND A LEGAL OPINION OF BORROWER'S AND
GUARANTOR'S COUNSEL AS TO THE DUE AUTHORIZATION OF THIS FIFTH AMENDMENT AND THE
ENFORCEABILITY HEREOF.
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 FIFTH 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 NO DEFENSES,
COUNTERCLAIMS OR SETOFFS WITH RESPECT TO FULL, COMPLETE AND TIMELY PAYMENT OF
ALL OBLIGATIONS.
GUARANTOR, FOR VALUE RECEIVED, HEREBY ASSENTS TO THE BORROWER'S EXECUTION AND
DELIVERY OF THIS FIFTH AMENDMENT, AND TO THE PERFORMANCE BY THE BORROWER OF ITS
AGREEMENTS AND OBLIGATIONS HEREUNDER. THIS FIFTH 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.
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 FIFTH AMENDMENT AND ANY
OTHER DOCUMENTS AND AGREEMENTS PREPARED IN CONNECTION WITH THIS FIFTH AMENDMENT.
THE BORROWER CONFIRMS THAT THE FINANCING AGREEMENTS REMAIN IN FULL FORCE AND
EFFECT WITHOUT AMENDMENT OR MODIFICATION OF ANY KIND,
2
<PAGE> 3
EXCEPT FOR THE AMENDMENTS EXPLICITLY SET FORTH HEREIN. THE BORROWER FURTHER
CONFIRMS THAT AFTER GIVING EFFECT TO THIS FIFTH 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 FIFTH AMENDMENT BY LENDER SHALL NOT BE CONSTRUED AS A WAIVER BY LENDER OF
ANY EVENT OF DEFAULT UNDER THE FINANCING AGREEMENTS. THIS FIFTH 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 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
--------------------------------------
Marc E. Swartz, Senior Vice President
AGREED:
CIC SYSTEMS, INC.
By: /s/ Edward A. Meltzer
--------------------------------------
Edward A. Meltzer
Chief Financial Officer
COMPUTER INTEGRATION CORP.
By: /s/ Edward A. Meltzer
--------------------------------------
Edward A. Meltzer
Chief Financial Officer
3
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