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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1995 Commission File Number 0-14371
- ------------------------------------------- ------------------------------
COMPUCOM SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 38-2363156
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10100 N. CENTRAL EXPRESSWAY, DALLAS, TX 75231
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 265-3600
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
-----------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock, $.01 par value, held by non-
affiliates (based on the closing price on NASDAQ) on March 18, 1996 was
approximately $169.1 million. For purposes of determining this amount only,
Registrant has defined affiliates as including (a) the executive officers named
in Part III of this 10-K report, (b) all directors of Registrant, and (c) each
stockholder that has informed Registrant by March 18, 1996 that it is the
beneficial owner of 10% or more of the outstanding common stock of Registrant.
The number of shares of the Registrant's Common Stock outstanding as of
March 18, 1996 was 44,359,338 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relative to the May 21, 1996 annual
meeting of stockholders of registrant, to be filed within 120 days after the end
of the year covered by this report on Form 10-K, are incorporated by reference
into Items 10, 11, 12 and 13 (Part III) of this Report. Such Proxy Statement,
except for the parts therein which have been specifically incorporated by
reference, shall not be deemed "filed" for the purposes of this report on Form
10-K.
PART I
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ITEM 1 BUSINESS
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(A) GENERAL DEVELOPMENT OF THE BUSINESS
-----------------------------------
INTRODUCTION
CompuCom Systems, Inc., together with its subsidiaries ("CompuCom" or "the
Company"), is a leading provider of personal computer ("PC") products and
services to large and medium sized businesses throughout the United States.
CompuCom teams with its customers, which include primarily Fortune 1000
companies and other large businesses, to apply PC technology to meet their
business objectives, which range from product procurement and configuration to
network project management and support. Product and services are sold by a
direct sales force to over 2,000 business customers through approximately 40
sales and service centers located in and serving large metropolitan areas
nationwide.
The Company is an authorized dealer of major personal computer products for
a number of manufacturers, including Compaq Computer Corporation ("Compaq"),
International Business Machines Corporation ("IBM"), Hewlett-Packard Company
("HP"), Toshiba America Information Systems ("Toshiba"), and Apple Computer
Corporation ("Apple"). CompuCom also offers a broad selection of networking and
related products, computer-related peripheral equipment and a range of computer
equipment and software from a number of vendors, including 3Com Corporation
("3Com"), Digital Equipment Corporation ("Digital"), Intel Corporation
("Intel"), Kingston Technology Corporation ("Kingston"), Lotus Development
Corporation ("Lotus"), Microsoft Corporation ("Microsoft"), NEC Technologies,
Inc. ("NEC"), and Novell, Inc. ("Novell"). To further meet the needs of its
customers, CompuCom provides a variety of services including custom
configuration of PC systems, field engineering, network management, help desk
services and network project management utilizing network applications such as
Novell Netware, Windows NT Server, Windows and Windows 95, IBM's OS/2 Warp and
LAN Server.
Net revenues for the Company have grown at a compounded rate of 29% over
the past five years, while net earnings have grown by 42% compounded annually
over the same period. CompuCom's strong revenue and net earnings performance is
a result of the Company's continued focus on customer satisfaction, along with
the enhancement of its product and services capabilities created by a strategy
of growth through existing operations and strategic acquisitions. The Company's
target customers are becoming increasingly dependent on information technology
to compete effectively in today's markets. As a result, the decision making
process that organizations face when planning, selecting and implementing
technology solutions is becoming more complex and requires many of these
organizations to outsource the management and support of their PC technology
needs. In an effort to enhance the Company's ability to provide customers with
value-added services designed to meet their PC technology service requirements,
the Company acquired several small regional service companies during 1994 and
1995. These acquisitions have broadened the variety of the Company's network
management platforms, increased the Company's remote network monitoring
capabilities and greatly expanded the Company's systems engineer resources.
RECENT DEVELOPMENTS
Customer support, prompt delivery, product variety and availability, and
price are key elements in attracting new and retaining current customers. In
particular, knowledgeable, experienced sales and services personnel who
understand customer needs are important factors in the growth of the Company's
services business. During 1995, the Company continued to place emphasis on
expanding the service portion of its business through internal and external
growth. In 1996, the Company expects to continue to expand its services and
support organization, train sales and services personnel, and develop its vendor
relationships to provide customer-driven product lines at competitive prices.
In addition, CompuCom plans to continue its expansion of its integrated,
comprehensive information system to enable the Company to track and respond to
its customers' requirements more efficiently.
On September 25, 1995, the Company called for redemption $18.5 million of
9% Convertible Subordinated Notes which were converted to 8.4 million shares of
common stock prior to their October redemption date. In an effort to assist the
holders of these shares to sell in the public market a portion of the converted
shares, the Company completed an underwritten public offering of approximately
4.8 million of these shares in November 1995. The Company received no proceeds
from the offering. The redemption will result in an annualized after tax
interest savings of approximately $1 million.
2
In 1995, the Company increased the availability under the Company's bank
revolving credit facility ("credit facility") from $150 million to $175 million.
During October 1995, the Company executed an amendment to the credit facility
lowering the interest rate from the London Interbank Offered Rate ("LIBOR") plus
2.75% per annum to LIBOR plus 1.5% per annum and reduced the prime based portion
of the credit facility from the prime rate plus 0.5% to the prime rate, subject
to certain limitations. The fixed interest portion of the credit facility ($60
million at 7.18% per annum) remained unchanged. Negotiations are currently
underway to extend the maturity date of the credit facility. In addition, the
Company is currently negotiating to expand its credit sources to include asset
securitization, to lower the effective borrowing rate and increase its borrowing
capacity to support the Company's projected net revenue growth.
In the first quarter of 1996, Mr. Charles A. Root, who has been a member of
the Board since 1986 and who served as Vice-Chairman of the Board from June 1988
until March 1991, was elected to the position of Chairman of the Board of
Directors. Mr. Root replaces Mr. James W. Dixon who has joined ClientLink, Inc.,
a subsidiary of CompuCom, as president and CEO.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
---------------------------------------------
The Company operates in only one industry segment -- sales and services of
personal computers, configuration, network integration and technology support
services to businesses nationwide -- and no separate industry segment
information is presented.
(C) NARRATIVE DESCRIPTION OF BUSINESS
---------------------------------
SALES AND MARKETING
The Company markets its product procurement, configuration, field
engineering, network management, help desk services and network project
management primarily through its direct sales force and service personnel,
operating through approximately 40 sales and service centers. The Company
focuses on meeting the needs of large corporate businesses, which account for
the majority of the Company's net revenue in 1995. However, no one customer
accounted for in excess of 10% of such revenues.
The Company is generally authorized by various vendors to sell PC products
through its sales centers, which are located strategically near major
metropolitan areas to provide convenient access for sales and service personnel
to a significant customer base. Each location generally is staffed by direct
sales representatives, support personnel, system engineers and technicians who
are authorized to repair and maintain Compaq, IBM, HP, and certain other
manufacturer's products. In 1995, the Company realigned its field locations
into four regions, East, Central, West and Northwest.
The Company provides support to its customers primarily through the
CompuCom Customer Center ("customer center"), located in Dallas, Texas.
Customer center personnel, called inside sales representatives ("ISR's"), may be
assigned to specific customer accounts or to customers in a certain geographical
area, and are knowledgeable about computer technology. Each ISR works closely
with the customer and the CompuCom sales representative to keep up to date on
the business needs of that customer, and provides the customer with information
about product availability, services, pricing, shipping and invoicing via a
toll-free telephone number. The primary goal of the customer center is to
provide greater support to the Company's customers while allowing the Company's
direct sales force to focus on soliciting new business and providing the
necessary support for the customer's more complex service needs.
As of December 31, 1995, the Company employed 258 full-time direct sales
representatives. The sales force is compensated with a base salary, at one of
three levels, and commissions based on gross margin related to their sales. In
1995, a larger portion of the sales representatives compensation was based on
service sales and gross margin as part of the Company's strategy of growing its
service business. The number of ISR's at the end of 1995 was 338, of which
approximately 280 were located at the customer center in Dallas, and
approximately 58 were on-site at certain customer locations.
3
During 1995, services net revenues increased approximately 80% due to the
Company's continued efforts to focus on increased sales of services to meet
customer needs and to improve profitability. These efforts took many forms:
additional training was provided for system engineers; existing management
provided greater support to the services group; additional corporate resources
were allocated to support the services group; the compensation plan of branch
general managers and sales representatives placed greater emphasis on sales of
services; and several acquisitions were made to expand the service business and
to help build a service infrastructure. In addition, the Company also
emphasized the hiring of quality services personnel, increasing the number of
its services employees from approximately 800 at the end of 1994 to almost 1,200
by year-end 1995. Although the Company's revenues from its services business
currently represent 7% of total revenues, such services business is an integral
part of the Company's strategy to provide customers with the value-added service
solutions to meet their technology needs. The Company intends to continue to
make strategic acquisitions and make investments internally to enhance the
Company's ability to satisfy the constantly changing technology requirements of
its customers.
Order backlog is not considered to be a meaningful indicator of the
Company's future business prospects due to the short order fulfillment cycle.
OPERATIONS
The Company's corporate headquarters is located in Dallas, Texas.
Currently, the Company's financial and administrative functions, including
information services, service support, marketing, human resources, and finance,
are located at this facility. During 1995, the customer center, collections
department, product services, and order processing relocated from the corporate
headquarters to nearby leased facilities in Dallas.
The Company's integrated, comprehensive, internally-designed information
system ("IS") utilizes client/server distributed relational database technology
running on a wide area network based on superframe relay. The system consists
of five major components: the Distribution Information Management Systems
("DIMS"), the Services Information Management System ("SIMS"), the Customer
Center System ("CCS"), the Warehouse Information Management System ("WIMS"), and
the Financial Information Management System ("FIMS"). In addition, the network
and database capabilities of the Company's purchase order and order management
systems provide its customers and sales representatives with product
availability information. In 1995, the Company implemented a new customer
procurement system which allows customer's to place orders that automatically
interface with the Company's core system applications, thereby enhancing the
customer's ability to control the order management process while at the same
time reducing the overall order to delivery timeline.
To further enhance the quality and efficiency of its management information
systems, the Company developed a state-of-the-art data warehouse which allows
for the quick and easy generation of custom reports by Company personnel. With
implementation scheduled for the first half of 1996, the data warehouse will be
updated with current information on a daily basis and will provide a wide range
of information from which to generate customized reports, such as timeliness of
customer shipments, status of orders, and customer accounts receivable aging.
During 1995, the Company successfully completed the conversion of its DIMS
application from a PC based system to a mini-computer platform, significantly
enhancing system reliability, response time, and growth capacity. In the first
quarter of 1996, the Company performed similar conversions of the SIMS and CCS
applications.
The Company utilized two product distribution centers in 1995, one located
in Woolwich, New Jersey (near Philadelphia) and the second in Stockton,
California (near San Francisco). These bi-coastal distribution centers allow the
Company to efficiently service its nationwide customers, reducing both shipment
time and expense.
The Company's distribution centers are highly automated and employ advanced
inventory management and order processing technologies that allow the Company to
configure PC products and receive, process and ship customer orders accurately
and efficiently. The distribution centers utilize hand-held, radio frequency
devices to stock, pick and update the status and location of inventory. In
addition, these devices play a key role in enabling the Company to efficiently
handle increasing volume. During 1995, the distribution centers expanded the
use of these radio frequency devices to implement a daily cycle counting
process, resulting in improved overall inventory integrity and bin accuracy.
The Company also uses an on-line freight metering program, which helps lower
order fulfillment time and provides more reliable and timely freight
information.
4
In 1995, the distribution, configuration, Project Integration Networking
Group ("PING"), and product services department's completed ISO 9002
certification. ISO 9002 is part of the ISO 9000 set of standards developed by
the International Organization of Standardization ("ISO") which represent common
international business quality standards designed to help demonstrate the
capability of a supplier to control the processes that determine the
acceptability of the product being delivered. In 1996, the Company plans to
complete ISO 9002 certification for its returned merchandise center.
PRODUCTS
The Company provides for procurement of sophisticated technologies
consisting of PC's, peripherals, software and services to its customers. It is
an authorized dealer for PC products of Apple, Compaq, Digital, HP, IBM,
Kingston, NEC, 3Com, Toshiba, and other major manufacturers, as well as a dealer
for software products of Lotus, Microsoft, Novell, WordPerfect and other
principal software suppliers. By stocking approximately 1,700 products, and
procuring approximately 17,000 special order products monthly, consisting of
leading as well as alternative brands, the Company offers "one-stop-shopping" to
its customers.
CompuCom provides the integration of a variety of manufacturers' products
into various PC system configurations to meet each customer's needs. The
Company provides value to its customers by allowing them to choose products from
various manufacturers which best suit their PC and network needs as opposed to
manufacturers' direct sales organizations which typically configure or market PC
systems which include only products from that particular manufacturer.
NETWORK AND TECHNOLOGY SERVICES
The Company is focusing on expanding its presence in the service market.
This commitment is reflected in the increase in its service personnel during
1995. As of December 31, 1995, the Company employed 1,196 service personnel,
including system engineers, field technicians, service support and engineers
on-site at customer locations, compared to 809 as of December 31, 1994. These
service personnel provide configuration, field engineering, network management,
help desk services and network project management services to the Company's
customers.
CompuCom maintains two configuration centers, one in each of the Company's
distribution centers. These centers contain configuration systems that have
the ability to set up and install product that includes both standard and non-
standard components or software. Also located in each of these centers is the
PING group, which is dedicated to the development, staging and configuration of
large network projects while providing the flexibility to quickly adapt to
changing technologies.
Through its field engineering group, the Company provides hardware
maintenance services ranging from high-end servers, intelligent hubs and
routers to everyday workstations to remote and laptop computing products.
These services are provided through the Company's sales and service centers,
and are performed based upon the specific customer needs such as on-site
support, warranty support, change and upgrade management, contingency
management, annual contract, or time and material.
CompuCom's Network Management Group focuses on the development, testing
and implementation of network management systems. The network management
service offerings include: network audits, which consist of an on-site detailed
analysis of the current configuration and health of the customer's network
environment; network control center design, which includes building a network
control center at the customer's location; and remote network monitoring of the
customer's network performed by CompuCom's network control center located at
the Company's headquarters in Dallas, Texas.
CompuCom offers help desk support through its Support Center Services
located at the Company's headquarters in Dallas, Texas and at customer
locations. These help desk services address various areas of help desk
operations, including call flow processes, call management, report systems,
resources, and customer relations. The Company's help desk support group
consists of personnel with expertise in software applications, network
operating systems, and hardware who provide technical support to end users and
system administrators.
5
The Company offers network project management services by providing
consulting services that focus on the integration of new and existing computing
technologies into existing corporate computing environments. Such services
include technology selection and strategic planning, technology briefings,
systems analysis, system design services, and design of support
infrastructures. By combining the expertise of its consultant personnel with
strategic manufacturer partnerships, the Company is able to provide solutions
for complex network integration projects.
PRINCIPAL SUPPLIERS
A major portion of the Company's revenues are derived from sales of
computer systems and related peripherals, including Compaq, IBM and HP personal
computer products. During 1995, the Company's principal suppliers were Compaq,
IBM and HP. The Company's agreements with these vendors contain provisions
providing for periodic renewals and permitting termination by the vendor without
cause, generally upon 30 to 90 days written notice, depending upon the vendor.
Since 1987, Compaq, IBM and HP have regularly renewed their respective dealer
agreements with the Company, although there can be no assurance that the regular
renewals of the Company's dealer agreements will continue. The termination, or
non-renewal, of the Company's Compaq dealer agreement or IBM dealer agreement,
or both, would materially adversely affect the Company's business. The loss of
HP as a supplier would adversely affect the Company's ability to continue its
expansion. The Company, however, is not aware of any reason for the termination,
or non-renewal, of any of those dealer agreements and believes that its
relationships with Compaq, IBM and HP are satisfactory.
The Company purchases products from Compaq, IBM and HP at pricing levels
which the Company believes are the lowest prices available to those vendor's
respective dealers with the exception of special bid pricing for specific large
customer accounts. All of the Company's principal suppliers require that the
Company purchase certain minimum volumes of products in a specified period to
maintain favorable pricing levels. The Company also obtains favorable terms
from Compaq, IBM and HP by participating in certain vendor programs offered by
those suppliers. The Company has certain selling, promotional and related
expenses reimbursed by vendors under dealer programs offered by those and other
suppliers. However, there can be no assurance that any of these programs will
continue in 1996 or that the Company will continue to participate in any of
these programs at the same level as in 1995.
Sales of Compaq, IBM and HP accounted for approximately 28%, 16% and 11%,
respectively, of the Company's 1995 net revenues compared to 27%, 20% and 11%,
respectively, in 1994 and 23%, 24% and 10%, respectively, in 1993.
Due to rapid delivery requirements of customers and to assure itself of
continuous allotment of products from suppliers, the Company maintains adequate
levels of inventory funded through its line of credit and vendor credit. These
major suppliers at times provide price protection programs to the Company which
are intended to reduce the risk of inventory devaluation by absorbing temporary
price reductions and long-term price declines associated with aging product life
cycles. The Company also has the option of returning a certain percentage of
its current product inventories each quarter to these principal suppliers as it
assesses each product's current and forecasted demand schedule. If such returns
exceed certain specified levels, the Company may be charged restocking fees
ranging up to 5%. The Company has not incurred any significant restocking fees
in 1995.
DEPENDENCE UPON MAJOR VENDORS AND OTHER SUPPLIERS
The Company is dependent upon the continued supply of products from its
suppliers, particularly Compaq, IBM and HP. Historically, certain suppliers
occasionally experience shortages of select product which render components
unavailable or necessitate product allocations among resellers. While certain
shortages did exist throughout 1995, the Company believes the product
availability issues are a result of the present dynamics of the PC industry as
a whole, which include high customer product demand, shortened product life
cycles and increased frequency of new product introductions into the
marketplace. While there can be no assurance that product unavailability or
product allocations, or both, will not increase in 1996, the impact of such an
interruption is not expected to be unduly troublesome because of the breadth of
alternative product lines available to the Company and the Company's
established programs to accelerate configuration and delivery times when such
events occur.
6
COMPETITION
The Company is engaged in fields within the computer industry characterized
by a high level of competition. Many established personal computer
manufacturers (including some of the Company's own vendors), systems integrators
and other resellers of personal computer or networking products including
AmeriData Technologies, Inc., Entex Information Services Inc., InaCom Corp.,
Microage, Inc. and Vanstar Corporation, compete with the Company in the
configuration and distribution of computer systems and equipment. In addition,
the PC reseller industry is characterized by intense competition primarily in
the areas of price, product availability and breadth of product line. In the
highly fragmented computer services area, the Company competes with several
larger competitors, other corporate resellers pursuing high-end services
opportunities, as well as several smaller computer services companies. Some of
these competitors have financial, technical, manufacturing, sales, marketing and
other resources which are substantially greater than those of the Company.
Although the Company believes it currently competes favorably within the PC
reseller industry, there can be no assurance that the Company will be able to
continue to compete successfully with new or existing competition.
The Company experienced an improvement in product margins during the first
half of 1995, partially due to the Company's decision not to do business with
the lowest margin customers as well as certain manufacturer price reductions.
Product margins declined in the second half of the year, compared to the first
half, reacting to increasing pricing pressure from competition. The Company
believes that gross margins will continue to be reactive to industry-wide
changes. Future improved profitability will depend on competition, manufacturer
product pricing changes, increased focus on providing technical service and
support to customers, as well as the Company's control of operating expenses,
ability to retain and hire quality service personnel, product availability, and
effective utilization of vendor programs.
THE COMPANY'S EMPLOYEES
The Company employed 2,615 full-time employees as of December 31, 1995.
The Company offers its full-time employees health, long-term disability, dental
and life insurance benefits, and has a 401(k) plan for eligible employees. None
of the Company's employees are represented by a union, and the Company considers
its employee relations to be good.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
----------------------------------------------------------------------
SALES
-----
The Company does not have any foreign operations nor does it engage in any
material export sales.
(E) EXECUTIVE OFFICERS
------------------
Information about the Company's executive officers can be found in Part III
of this report under "Item 10 Directors and Executive Officers of the
Registrant".
7
ITEM 2 PROPERTIES
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The Company's principal executive and administrative offices are located in
a commercial office building in Dallas, Texas, comprised of approximately
100,000 square feet of space, which it purchased in May 1992. In December 1993,
the Company secured a ten-year $3.9 million mortgage on the headquarters
building which is payable in 120 monthly installments of principal plus interest
at a rate of 8.1%. In late 1994, the Company leased approximately 50,000 square
feet of additional office space in Dallas near its headquarters, for a term of
sixty months commencing March 1995. In early 1995, the Company relocated the
customer center and credit/collection departments to this new leased facility.
In addition, the Company has leased 26,000 square feet in a commercial office
building adjacent to the Company's headquarters for a term of thirty-six months
expiring in 1998. During 1995, the Company's Dallas sales office and product
services department were relocated to this facility.
The Company distributes products primarily from two leased warehouse
facilities. In March 1993, the Company entered into a lease for approximately
145,000 square feet of warehouse space located in Woolwich, New Jersey, which
has a five year term, with a cancellation option exercisable at any time after
February 1996. Its western distribution center has approximately 104,000 square
feet of leased warehouse space in Stockton, California, under a lease which
expires in May 1999, with a cancellation option exercisable beginning May 1995
and each year thereafter.
The Company also has noncancelable operating leases for its sales and
service centers, expiring at various dates between 1996 and 2004. See Note 10
to the accompanying Notes to Consolidated Financial Statements for additional
information regarding lease costs. The Company believes there will be no
difficulty in negotiating the renewal of its real property leases as they expire
or in finding other satisfactory space. In the opinion of management, the
properties are in good condition and repair and are adequate for the particular
operations for which they are used. Due to the continued product revenue
growth, the Company is in the process of reviewing alternatives to expand its
distribution center capacity through acquiring additional space at the existing
facilities or leasing warehouse space at a new location. In addition, the
growth of the services business may require the Company to obtain additional
office space in Dallas, Texas, during late 1996 or early 1997.
ITEM 3 LEGAL PROCEEDINGS
- ------ -----------------
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. Management believes that
the ultimate disposition of these matters, singly or in the aggregate, will not
have a material adverse effect on the Company's consolidated financial
position and results of operations, taken as a whole.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None have been submitted in the fourth quarter.
8
PART II
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ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------ ---------------------------------------------------------------------
The Company's common stock is listed on the NASDAQ National Market System
(Symbol: CMPC). As of December 31, 1995, there were approximately 9,000
beneficial stockholders of the Company's common stock. The high and low last
sales prices reported within each quarter for the years ended December 31, 1995
and 1994 are as follows:
1995 1994
--------------------- ---------------------
High Low High Low
---------- ---------- ---------- ----------
First quarter $ 4.25 $ 3.13 $ 7.25 $ 3.88
Second quarter 5.13 3.13 6.25 3.50
Third quarter 6.88 4.75 4.13 2.75
Fourth quarter 10.63 5.50 4.13 2.88
The last sale price reported for the Company's common stock on March 18,
1996 was $8.00.
The Company has historically reinvested earnings in the growth of its
business and has not paid cash dividends on its common stock. In addition, the
Company's credit facilities limit the amount of dividends the Company may pay.
While the Company currently has no plans to pay dividends on common stock,
payment of dividends in the future will depend upon the Company's financial
performance and other relevant factors.
9
ITEM 6 SELECTED FINANCIAL DATA
- ------ -----------------------
Selected financial data for the Company is presented below:
For the Years Ended December 31
---------------------------------------------------------------------------
Operating Results 1995 1994 1993 1992 1991
- ----------------- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
Net revenues $ 1,441,597 $ 1,255,813 $ 1,015,482 $ 713,035 $ 528,560
Gross margin 174,908 141,693 127,875 94,551 70,966
Earnings before income taxes 34,335 24,432 18,908 11,714 8,229
Net earnings 20,670 14,659 11,439 7,263 5,020
Earnings per common share:
Primary .51 .40 .34 .23 .16
Fully diluted .44 .34 .29 .22 .16
Balance Sheet Data
- ------------------
Total assets $ 508,704 $ 429,531 $ 365,071 $ 252,958 $ 229,461
Long-term debt 120,364 118,974 107,316 70,734 79,724
Convertible subordinated notes 3,000 18,214 17,880 17,779
Stockholders' equity 138,341 94,368 55,730 41,602 35,501
10
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
The following table presents the Company's total revenue, gross margin and
gross margin percentage by revenue source. Operating expenses, interest and net
earnings are shown as a percentage of total net revenue, for the three years
ended December 31:
1995 1994 1993
---------------------------------------------
($ in millions)
Revenue:
Product $ 1,334 $ 1,197 $ 933
Service 101 56 44
Other 6 3 38
---------------------------------------------
Total revenue $ 1,441 $ 1,256 $ 1,015
=============================================
Gross margin:
Product $ 141 $ 122 $ 106
Service 31 18 11
Other 3 2 11
---------------------------------------------
Total gross margin $ 175 $ 142 $ 128
=============================================
Gross margin percentage:
Product 10.6% 10.2% 11.4%
Service 30.5% 32.7% 25.3%
Other 51.2% 65.7% 27.4%
---------------------------------------------
Total gross margin 12.1% 11.3% 12.6%
---------------------------------------------
Operating expenses:
Selling 4.3% 4.4% 5.6%
Service 1.5% 1.4% 1.0%
General and administrative 2.6% 2.3% 2.8%
Depreciation and amortization 0.4% 0.4% 0.4%
---------------------------------------------
Total operating expenses 8.8% 8.5% 9.8%
---------------------------------------------
Operating earnings 3.3% 2.9% 2.8%
Interest 0.9% 0.9% 0.9%
---------------------------------------------
Earnings before income taxes 2.4% 2.0% 1.9%
Income taxes 1.0% 0.7% 0.8%
---------------------------------------------
Net earnings 1.4% 1.3% 1.1%
=============================================
11
1995 COMPARED WITH 1994
-----------------------
Product revenue increased 11% to $1.33 billion in 1995 compared to $1.20
billion in 1994. The increase in product revenue reflects increased demand by
corporate customers for personal computers, particularly Pentium-based systems
and laptops. Product revenue is primarily derived from the sale of computer
hardware, software and peripherals to corporate customers. Also favorably
impacting the Company's net product revenue was corporate customers continuing
to consolidate the number of suppliers to only one or two.
Product gross margin as a percentage of product net revenues increased to
10.6% in 1995 from 10.2% in 1994. The Company experienced an improvement in
product margins during the first half of 1995, partially due to the Company's
decision not to do business with the lowest margin customers as well as certain
manufacturer price reductions. Product margins declined in the second half of
the year, compared to the first half, reacting to increasing pricing pressure
from competition. Future product margins will be influenced by manufacturers'
pricing strategies together with competitive pressures from other resellers in
the industry. The Company participates in certain manufacturer-sponsored
programs designed to increase sales of specific products. These programs,
excluding volume rebates and specific product rebates offered by certain
manufacturers, are not material when compared to the Company's overall financial
results. Due to the short order fulfillment cycle, the Company's backlog is not
considered to be a meaningful indicator of future business prospects.
Service revenue increased 80% to $101 million in 1995 from $56 million in
1994. The increase in service revenue reflects the Company's continued focus on
expanding its network and technology services at competitive prices. Service
revenue is primarily derived from systems integration services, including
product configuration, field engineering, network management, help desk services
and network project management. Service revenue reflects revenue generated by
the actual performance of specific services and does not include product sales
associated with service projects. The Company's service business has increased
primarily through internal growth augmented by a series of small strategic
acquisitions. These acquisitions have broadened the variety of network
management platforms, increased remote network monitoring capabilities and
greatly expanded the Company's systems engineer resources. Service gross margin
as a percentage of service net revenue decreased to 30.5% in 1995 from 32.7% in
1994, primarily as a result of increasing costs related to the relative
scarcity of system engineers and the Company's continuing investment in its
service business.
As a percentage of net revenue, operating expenses for 1995 increased to
8.8% compared to 8.5% in 1994, to support the continued revenue growth and the
expansion of the service business. On an absolute dollar basis, operating
expenses increased approximately $22 million, principally as a result of an
increase in general and administrative expenses related to the Company's
investment in information systems resources required to enhance customer
satisfaction, particularly in the service business, and other spending necessary
to meet the Company's objectives. Service expenses, which increased both as a
percentage of net revenues and in absolute dollars, primarily reflect costs
related to the planned development of an infrastructure necessary to manage and
expand the service business. Selling expense, as a percentage of net revenues,
decreased when compared to 1994 primarily as a result of continued improvement
in product sales productivity. The Company's operating expenses are reported net
of reimbursements by certain manufacturers for specific training, promotional
and marketing programs. These reimbursements offset the expenses incurred by the
Company.
Depreciation and amortization expense increased in absolute dollars but
remained constant as a percentage of net revenue for 1995. The dollar increase
reflects amortization expense associated with the Company's recent acquisitions,
as well as increased depreciation expense related to fixed asset purchases in
1995 and 1994.
Interest expense increased in absolute dollars by $0.9 million but remained
constant as a percentage of net revenue for 1995, primarily as a result of
higher average interest rates and increased borrowings to support revenue
growth. The Company is continuing to pursue additional alternatives it
anticipates will reduce its cost of funds.
As a result of the factors discussed above, net earnings increased 41% to
$20.7 million in 1995 from $14.7 million in 1994. Future improved profitability
will depend on competition, manufacturer product pricing changes, increased
focus on providing technical service and support to customers, as well as the
Company's control of operating expenses, ability to retain and hire quality
service personnel, product availability, and effective utilization of vendor
programs.
12
1994 COMPARED WITH 1993
-----------------------
Product revenue increased 28% to $1.20 billion in 1994 compared to $0.9
billion in 1993. The increase reflected increased demand by corporate customers
for personal computers, particularly 486-based machines. Also favorably
impacting the Company's product revenue was the weakened financial condition of
certain competitors. Product gross margin as a percentage of product net
revenue decreased to 10.2% in 1994 from 11.4% in 1993. This decrease was
principally due to an industry-wide decline in product margins resulting from
pricing pressures created by intense competition. Service revenue increased 26%
to $56 million in 1994 from $44 million in 1993. The increase in service
revenue reflected the Company's strategy of focusing on increasing its service
business.
Other revenue was $2.6 million in 1994, compared to $38.3 million in 1993,
as a result of the sale of various non-core businesses, primarily PC Parts
Express, Inc., in January 1994. The increase in other gross margin as a
percentage of other revenue was a result of the divestitures mentioned above, as
those non-core business gross margins were less than the gross margins related
to customized software applications reflected as other revenue and other gross
margin in 1994.
Operating expenses increased 6%, or $5.7 million, from the comparable
period of 1993, to support the continued revenue growth. As a percentage of net
revenue, operating expenses decreased primarily as a result of improved
efficiencies, increased sales productivity, and the fixed cost components of
general and administrative expenses being spread over a larger revenue base.
Service expenses increased as a percentage of net revenue compared to 1993 due
to the Company's focus on expanding the technical services business.
Depreciation and amortization remained constant as a percentage of net
revenue but increased in absolute dollars principally as a result of the
Company's growth in facilities over the last three years, as well as leasehold
improvements and related warehouse equipment for its distribution facilities.
Interest expense increased in absolute dollars by $2.6 million in 1994 as a
result of higher working capital needed to support the significant growth in net
revenue and slower asset turns. As a percentage of net revenue, however,
interest expense remained constant as compared to the 1993 level primarily due
to the Company's success in mitigating increased interest rates through the
renegotiation of the bank credit facility in early 1994.
As a result of the factors discussed above, net earnings increased 28% to
$14.7 million in 1994 from $11.4 million in 1993.
13
LIQUIDITY AND CAPITAL RESOURCES
During recent years, the Company has utilized operating earnings, the bank
credit facility, equity financing and long-term subordinated notes to fund its
significant revenue growth and related operating asset requirements. The
Company maintains a satisfactory relationship with several banks. In 1995, the
Company increased the availability under the Company's bank revolving credit
facility ("credit facility") from $150 million to $175 million. During October
1995, the Company executed an amendment to the credit facility lowering the
interest rate from the London Interbank Offered Rate ("LIBOR") plus 2.75% per
annum to LIBOR plus 1.5% per annum and reduced the prime based portion of the
credit facility from the prime rate plus 0.5% to the prime rate, subject to
certain limitations. The fixed interest portion of the credit facility ($60
million at 7.18% per annum) remained unchanged. The credit facility is subject
to certain collateral restrictions and matures in March 1997. Negotiations are
currently underway to extend the maturity date of the credit facility. In
addition, the Company is currently negotiating to expand its credit sources to
include asset securitization, to lower the effective borrowing rate and increase
its borrowing capacity to support the Company's projected net revenue growth.
On September 25, 1995, the Company called for redemption $18.5 million of
9% Convertible Subordinated Notes which were converted to 8.4 million shares of
common stock prior to their October redemption date. In an effort to assist the
holders of these shares to sell in the public market a portion of the converted
shares, the Company completed an underwritten public offering of approximately
4.8 million of these shares in November 1995. The Company received no proceeds
from the offering. The redemption will result in an annualized after tax
interest savings of approximately $1 million.
Working capital at December 31, 1995 is $225 million compared to $203
million at December 31, 1994. Contributing to the increase in working capital
was higher accounts receivable and inventory, principally related to the revenue
growth and a slight decline in current asset turns from 3.4 in 1994 to 3.3 in
1995. Although working capital increased during 1995, the working capital ratio
of 1.9 slightly decreased from 2.1 in 1994.
The business is not capital asset intensive, and capital expenditures in
any year normally would not be significant in relation to total assets. Capital
asset requirements are generally funded through internally generated funds, the
bank credit facility or leasing sources. Capital expenditures were
approximately $6 million in 1995, and are expected to be approximately $7
million in 1996. There are no material capital asset purchase commitments at
December 31, 1995.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The consolidated financial statements and schedule filed with this report
appear on pages F-2 through F-15, and are listed on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
14
PART III
--------
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
The executive officers of the Company as of March 18, 1996 are as follows:
Name Age Position
---------------------- --- ---------------------------------------------
Edward Anderson (1) 49 President and Chief Executive Officer
Daniel F. Brown (2) 50 Executive Vice President, Sales
Robert J. Boutin (3) 38 Senior Vice President, Finance and Chief
Financial Officer
(1) Mr. Anderson has served as President and Chief Executive Officer since
January 1994. Mr. Anderson joined the Company in August 1993 as Chief
Operating Officer. Prior to joining the Company, he held the position of
President and Chief Operating Officer of Computerland Corporation from 1989
until 1993.
(2) Mr. Brown has held the position of Executive Vice President, Sales since
February 1989, when he was promoted from Vice President, Sales, a position
he had held since joining the Company in 1987.
(3) Mr. Boutin has held the position of Senior Vice President, Finance and
Chief Financial Officer since January 1991. Mr. Boutin joined the Company
in June 1984 and served as Controller from February 1985 to November 1989,
when he was elected Vice President and Chief Financial Officer.
15
DIRECTORS
The Company incorporates by reference the information contained under the
caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement relative to
its May 21, 1996 annual meeting of stockholders, to be filed within 120 days
after the end of the year covered by this Form 10-K Report pursuant to
Regulation 14A under the Securities Exchange Act of l934, as amended.
DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K
The Company incorporates by reference the information contained under the
caption "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934"
in its definitive Proxy Statement relative to its May 21, 1996 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
The Company incorporates by reference the information contained under the
captions "Directors' Compensation" and "EXECUTIVE COMPENSATION" in its
definitive Proxy Statement relative to its May 21, 1996 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The Company incorporates by reference the information contained under the
caption "Securities Ownership of Certain Beneficial Owners and Management" in
its definitive Proxy Statement relative to its May 21, 1996 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Company incorporates by reference the information contained under the
caption "CERTAIN TRANSACTIONS" in its definitive Proxy Statement relative to its
May 21, 1996 annual meeting of stockholders, to be filed within 120 days after
the end of the year covered by this Form 10-K Report pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.
16
PART IV
-------
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------- ---------------------------------------------------------------
(a) Financial Statements and Schedules.
The financial statements and financial statement schedule filed with this
report are listed on page F-1.
(b) Reports on Form 8-K.
On October 27, 1995, the Company filed a Form 8-K disclosing under "Item 5
- - Other Events" the commencement of an underwritten public offering of 4.8
million shares of its common stock and the underwriting agreement among the
Company, the Robinson-Humphrey Company, Inc. and Hambrecht & Quist LLC, as
representatives of several underwriters named in Schedule II to such agreement,
and the selling shareholders named in Schedule I to such agreement. This report
included the Company's press release dated October 16, 1995 regarding results of
operations for the period ended September 30, 1995.
(c) Exhibits.
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Report. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous filing is indicated in
parentheses. The page numbers listed refer to the page numbers where such
exhibits are located using the sequential numbering system specified by Rules 0-
3 and 403.
17
Exhibit
No. Description
- ------- -----------
3(a) Certificate of Incorporation of CompuCom Systems, Inc. (1)
(Exhibit B)
3(b) Certificate of Amendment of the Certificate of Incorporation of
CompuCom Systems, Inc. (4) (Exhibit 3(b))
3(c) Certificate of Amendment of the Certificate of Incorporation
of CompuCom Systems, Inc., filed November 30, 1992 (7)
(Exhibit 4(c))
3(d) Certificate of Amendment of the Certificate of Incorporation
of CompuCom Systems, Inc., filed July 1, 1993 (7) (Exhibit 4(d))
3(e) Bylaws of CompuCom Systems, Inc., revised April 1, 1991 (4)
(Exhibit 3(c))
4(a) Form of Stock Certificate evidencing Common Stock, $.01 par value,
of CompuCom Systems, Inc. (2) (Exhibit 4(b))
4(b)** CompuCom Systems, Inc. 1983 Stock Option Plan, as amended (6)
(Exhibit 4(k))
4(c)** CompuCom Systems, Inc. 1993 Stock Option Plan, as amended *
4(d)** CompuCom Systems, Inc. 1984 Non-Qualified Stock Option Plan, as
amended (3) (Exhibit 4(g))
4(e)** CompuCom Systems, Inc. Stock Option Plan for Directors (12)
(Exhibit 4(g))
4(f)** Stock Option Agreement dated July 21, 1995 between CompuCom
Systems, Inc. and Delbert W. Johnson (12) (Exhibit 4(i))
4(g)** Form of Securities Purchase Agreement, dated as of April 29, 1991,
between CompuCom Systems, Inc. and certain members of its management
as listed on the schedule attached thereto, and including as exhibits
the Form of 15% Subordinated Debenture due October 29, 1992 and Form
of Common Stock Purchase Warrant (6) (Exhibit 4(o))
4(h) Note Agreement and sample note representing the $18.5 million 9%
Convertible Subordinated Notes due September 24, 2002, issued by
CompuCom Systems, Inc. in September, 1992 (5) (Exhibit 4)
4(i) Certificate of Designation dated March 31, 1994, establishing Series B
Cumulative Convertible Preferred Stock of CompuCom Systems, Inc.
(9) (Exhibit 4(i))
4(j) Form of Stock Certificate evidencing Series B Cumulative Convertible
Preferred Stock, $.01 par value, of CompuCom Systems, Inc. (10)
(Exhibit 4(h))
4(k) $3 Million Subordinated Convertible Note dated October 31, 1995 from
CompuCom Systems, Inc. to Network Compatibility Group, Inc. *
10(a) Stock Purchase Agreement between Safeguard Scientifics (Delaware),
Inc. and CompuCom Systems, Inc., dated March 31, 1994, regarding the
sale of Series B Cumulative Convertible Preferred Stock of CompuCom
Systems, Inc. (9) (Exhibit 10(mm))
10(b)** CompuCom Systems, Inc. 401(k) Matched Savings Plan, as amended and
restated effective January 1, 1989 (8) (Exhibit 10(a))
18
Exhibit
No. Description
- ------- -----------
10(c) Security Agreement for Wholesale Financing, dated August 2, 1991,
between CompuCom Systems, Inc. and IBM Credit Corporation, with
Addendum dated as of October 24, 1991 (4) (Exhibit 10(b))
10(d) Security Agreement for Wholesale Financing, dated June 5, 1991 between
CompuCom Systems, Inc. and ITT Commercial Finance Corp., with
Amendment dated as of June 5, 1991 and Addendum dated June 14, 1991
(4) (Exhibit 10(c))
10(e) Addendum dated August 20, 1992 to Agreement for Wholesale Financing
between CompuCom Systems, Inc. and ITT Commercial Finance Corp.
(6) (Exhibit 10(d))
10(f) Security Agreement for Wholesale Financing, dated December 27, 1993,
between CompuCom Systems, Inc. and Compaq Computer Corporation
(8) (Exhibit 10(e))
10(g) Intercreditor Agreement, dated December 27, 1993, among NationsBank of
Texas, N.A., CompuCom Systems, Inc., and Compaq Computer Corporation
(8) (Exhibit 10(f))
10(h) Subordination Agreement, dated August 22, 1994, among Hewlett-Packard
Company, NationsBank of Texas, N.A., and IBM Credit Corporation,
pertaining to certain assets of CompuCom Systems, Inc.
(10) (Exhibit 10(h))
10(i) Revolving Credit Financing and Security Agreement, dated as of
August 4, 1993, between NationsBank of Texas, N.A. and CompuCom
Systems, Inc. (exhibits omitted) (8) (Exhibit 10(i))
10(j) First Amendment to Financing and Security Agreement, dated March 31,
1994, between NationsBank of Texas, N.A., and CompuCom Systems, Inc.
(9) (Exhibit 10(nn))
10(k) Second Amendment to Financing and Security Agreement, dated
December 12, 1994, between NationsBank of Texas, N.A., and CompuCom
Systems, Inc. *
10(l) Third Amendment to Financing and Security Agreement, dated April 26,
1995, between NationsBank of Texas, N.A. and CompuCom Systems, Inc.
(11) (Exhibit 10.1)
10(m) $175,000,000 Master Revolving Note due March 31, 1997 to NationsBank
of Texas, N.A., dated as of April 26, 1995 (11) (Exhibit 10.2)
10(n) Fourth Amendment to Financing and Security Agreement, dated as of
October 1, 1995, between NationsBank of Texas, N.A. and CompuCom
Systems, Inc. *
10(o) Business Partner Agreement, dated September 15, 1994, between IBM
Corporation and CompuCom Systems, Inc., with Dealer Profile,
Remarketer General Terms, and attachments (10) (Exhibit 10(n))
10(p) IBM Corporation memorandum, dated September 13, 1994, modifying its
Business Partner Agreement with CompuCom Systems, Inc. to have 24
month term *
10(q) U.S. Reseller Agreement, dated January 23, 1993, between Compaq
Computer Corporation and CompuCom Systems, Inc. (8) (Exhibit 10(l))
10(r) U.S. Reseller Agreement, dated February 28, 1995, between Hewlett-
Packard Company and CompuCom Systems, Inc., with attached U.S. Dealer
Addendum and Amendment of same date *
10(s) Administrative Services Agreement, dated January 1, 1988, between
CompuCom Systems, Inc. and Safeguard Scientifics, Inc., with Letter
Amendment dated as of April 1, 1991 (4) (Exhibit 10(z))
10(t) Lease dated December 29, 1992, between CompuCom Systems, Inc. and
Commodore North Associates Limited Partnership for premises at 100
Dartmouth Drive, Woolwich Township, New Jersey (6) (Exhibit 10(w))
19
Exhibit
No. Description
- ------- -----------
10(u) Addendum No. 1, dated July 30, 1993, to lease dated December 29, 1992,
between CompuCom Systems, Inc. and Commodore North Associates Limited
Partnership for premises at 100 Dartmouth Drive, Woolwich Township,
New Jersey (8) (Exhibit 10(q))
10(v) Ratification Agreement dated January 9, 1992 between CompuCom Systems,
Inc. and The Arch Street Group with respect to assignment of Lease
dated November 1, 1988 between The Arch Road Group and Photo & Sound
Company (attached) for premises at 4686 Frontier, Stockton, California
(4) (Exhibit 10(dd))
10(w) Order of the United States Bankruptcy Court, Northern District of
California, dated April 6, 1992, granting final approval of the
assignment to CompuCom Systems, Inc. of the Lease for 4686 Frontier,
Stockton, California (6) (Exhibit 10(y))
10(x) Substitute Trustee's Deed, dated and recorded May 5, 1992, granting
CompuCom Systems, Inc. title to the property located at 10100 North
Central Highway, Dallas, Texas (6) (Exhibit 10(aa))
10(y) Deed of Trust, Assignment, Security Agreement and Financing Statement,
dated December 29, 1993, from CompuCom Systems, Inc., to Comerica
Bank - Texas, for 10100 North Central Expressway, Dallas, Texas
(8) (Exhibit 10(v))
10(z) $3,900,000 Promissory Note, dated December 29, 1993, to Comerica
Bank - Texas, secured by premises at 10100 North Central Expressway,
Dallas, Texas (8) (Exhibit 10(w))
10(aa) Lease dated December 2, 1994 between CompuCom Systems, Inc. and ZML-
Glen Lakes Tower Limited Partnership for premises at 9400 North
Central Expressway, Dallas Texas. (10) (Exhibit 10(aa))
10(bb) Stock Purchase Agreement between CompuCom Systems, Inc. and Rosetta
Stone Corporation, dated January 5, 1994, regarding sale of common
stock of PC Parts Express, Inc. (exhibits omitted), with attached
$3,500,000 Promissory Note, Pledge and Security Agreement, and PC
Parts Express, Inc. Common Stock Purchase Warrant (8) (Exhibit 10(x))
10(cc) Asset Purchase Agreement among Rosetta Stone Corporation, Teknowlogy
Corp., and CompuCom Acquisition Corporation, d/b/a/ MicroSolutions,
dated January 5, 1994, regarding sale of MicroSolutions' Network
Training Group division (exhibits omitted), with attached $1,000,000
Installment Promissory Note, and Pledge and Security Agreement
(8) (Exhibit 10(y))
10(dd)** Confidentiality, Non-competition and Non-solicitation Agreement dated
January 1, 1989 between CompuCom Systems, Inc. and James W. Dixon
(2) (Exhibit 10(gg))
10(ee)** $210,000 Secured Promissory Note dated November 1, 1994 from James W.
Dixon, to CompuCom Systems, Inc. (10) (Exhibit 10(ff))
10(ff)** Stock Purchase Agreement between CompuCom Systems, Inc. and James W.
Dixon, dated July 15, 1995, regarding sale of shares of common stock
of ClientLink, Inc. to Mr. Dixon, with attached $112,500 Secured Term
Note and Pledge Agreement of even date *
10(gg)** $1,181,250 Secured Term Note, dated August 31, 1994, from Edward R.
Anderson to CompuCom Systems, Inc. (10) (Exhibit 10(mm))
20
Exhibit
No. Description
- ------- -----------
10(hh)** Pledge Agreement, dated August 31, 1994, between Edward R. Anderson
and CompuCom Systems, Inc. (10) (Exhibit 10(nn))
11 Computation of Per Share Earnings *
21 List of Subsidiaries *
23 Consent of KPMG Peat Marwick LLP *
27 Financial Data Schedule *
- -------------------------
* Filed herewith
** These exhibits relate to management contracts or to compensatory
plans, contracts or arrangements in which directors and/or executive
officers of the registrant may participate, required to be filed as
exhibits to this Form 10-K.
(1) Filed on April 19, 1989 as an exhibit to the 1989 Annual Meeting Proxy
Statement and incorporated herein by reference.
(2) Filed on April 2, 1990 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(3) Filed on March 29, 1991 as an exhibit to the Annual Report on Form 10-
K (No. 0-14371) and incorporated herein by reference.
(4) Filed on March 30, 1992 as an exhibit to the Annual Report on Form 10-
K (No. 0-14371) and incorporated herein by reference.
(5) Filed on November 13, 1992 as an exhibit to the Quarterly Report on
Form 10-Q (No. 0-14371) and incorporated herein by reference.
(6) Filed on March 31, 1993 as an exhibit to the Annual Report on Form 10-
K (No. 0-14371) and incorporated herein by reference.
(7) Filed on March 14, 1994 as an exhibit to the Registration Statement on
Form S-8 (No. 33-76382) and incorporated herein by reference.
(8) Filed on March 31, 1994 as an exhibit to the Annual Report on Form 10-
K (No. 0-14371) and incorporated herein by reference.
(9) Filed on May 15, 1994 as an exhibit to the Quarterly Report on Form
10-Q (No. 0-14371) and incorporated herein by reference.
(10) Filed on March 31, 1995 as an exhibit to the Annual Report on Form 10-
K (No. 0-14371) and incorporated herein by reference.
(11) Filed on August 14, 1995 as an exhibit to the Quarterly Report on Form
10-Q (No. 0-14371) and incorporated herein by reference.
(12) Filed on October 10, 1995 as an exhibit to the Registration Statement
on Form S-8 (No. 33-63309) and incorporated herein by reference.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 18, 1996 COMPUCOM SYSTEMS, INC.
By: /s/ Edward R. Anderson
-----------------------------------
Edward R. Anderson, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 18, 1996 /s/ Charles A. Root
----------------------------------------
Charles A. Root, Chairman of the Board
Dated: March 18, 1996 /s/ Edward R. Anderson
----------------------------------------
Edward R. Anderson, President, Chief
Executive Officer and Director
(Principal Executive Officer)
Dated: March 18, 1996 /s/ Robert J. Boutin
----------------------------------------
Robert J. Boutin, Senior Vice President-
Finance (Principal Financial and
Accounting Officer)
Dated: March 18, 1996 /s/ Daniel F. Brown
----------------------------------------
Daniel F. Brown, Director
Dated: March 15, 1996 /s/ James W. Dixon
----------------------------------------
James W. Dixon, Director
Dated: March 18, 1996 /s/ Michael J. Emmi
----------------------------------------
Michael J. Emmi, Director
Dated: March 19, 1996 /s/ Richard F. Ford
----------------------------------------
Richard F. Ford, Director
Dated: March 15, 1995 /s/ Delbert W. Johnson
----------------------------------------
Delbert W. Johnson, Director
Dated: March 17, 1996 /s/ John D. Loewenberg
----------------------------------------
John D. Loewenberg, Director
Dated: March 18, 1996 /s/ Ira M. Lubert
----------------------------------------
Ira M. Lubert, Director
Dated: March 18, 1996 /s/ Warren V. Musser
----------------------------------------
Warren V. Musser, Director
Dated: March 18, 1996 /s/ Edward N. Patrone
----------------------------------------
Edward N. Patrone, Director
Index to Consolidated Financial Statements
------------------------------------------
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts F-15
F-1
Independent Auditors' Report
----------------------------
The Stockholders and Board of Directors
CompuCom Systems, Inc.:
We have audited the accompanying consolidated balance sheets of CompuCom
Systems, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CompuCom
Systems, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Dallas, Texas
January 31, 1996
F-2
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
(In thousands, except share and per share amounts)
1995 1994
------------ ------------
Assets
------
Current assets:
Cash $ 4,249 $ 4,076
Receivables, less allowance for doubtful accounts
of $2,234 in 1995 and $1,942 in 1994 265,071 233,589
Inventories 196,531 155,561
Other 2,151 2,145
------------ ------------
Total current assets 468,002 395,371
Property and equipment:
Land, building and improvements 6,245 5,842
Furniture, fixtures and other equipment 20,564 15,302
Leasehold improvements 3,091 2,414
------------ ------------
29,900 23,558
Less accumulated depreciation and amortization (11,647) (7,648)
------------ ------------
Net property and equipment 18,253 15,910
Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 18,146 12,498
Other assets 4,303 5,752
------------ ------------
$ 508,704 $ 429,531
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 189,180 $ 154,342
Accrued liabilities 53,867 37,623
------------ ------------
Total current liabilities 243,047 191,965
Long-term debt 120,364 118,974
Deferred income taxes 3,952 6,010
Convertible subordinated notes 3,000 18,214
Stockholders' equity:
Series B preferred stock, $10 stated value. Authorized 3,000,000
shares; issued and outstanding 1,500,000 in 1995
and 2,000,000 in 1994. 15,000 20,000
Common stock, $.01 par value. Authorized 70,000,000 shares;
issued and outstanding 44,100,732 shares in 1995
and 33,694,764 shares in 1994 441 337
Additional paid-in capital 57,788 28,164
Retained earnings from July 1, 1987 65,112 45,867
------------ ------------
Total stockholders' equity 138,341 94,368
------------ ------------
$ 508,704 $ 429,531
============ ============
See accompanying notes to consolidated financial statements.
F-3
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
(In thousands, except per share amounts)
1995 1994 1993
---------- ---------- -----------
Revenue
Product $1,334,442 $1,197,278 $ 932,862
Service 100,868 55,895 44,272
Other 6,287 2,640 38,348
---------- ---------- -----------
Total revenue 1,441,597 1,255,813 1,015,482
---------- ---------- -----------
Cost of revenue
Product 1,193,513 1,075,624 826,713
Service 70,107 37,590 33,065
Other 3,069 906 27,829
---------- ---------- -----------
Total cost of revenue 1,266,689 1,114,120 887,607
---------- ---------- -----------
Gross margin 174,908 141,693 127,875
Operating expenses:
Selling and service 84,270 72,157 67,853
General and administrative 37,722 29,137 28,214
Depreciation and amortization 6,291 4,621 4,178
---------- ---------- -----------
Total operating expenses 128,283 105,915 100,245
---------- ---------- -----------
Earnings before interest and income taxes 46,625 35,778 27,630
Interest 12,290 11,346 8,722
---------- ---------- -----------
Earnings before income taxes 34,335 24,432 18,908
Income taxes 13,665 9,773 7,469
---------- ---------- -----------
Net earnings $ 20,670 $ 14,659 $ 11,439
========== ========== ===========
Earnings per common share:
Primary $ .51 $ .40 $ .34
Fully diluted $ .44 $ .34 $ .29
Average common shares outstanding:
Primary 38,449 35,714 33,888
Fully diluted 49,301 44,123 42,958
See accompanying notes to consolidated financial statements.
F-4
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
(In thousands, except share amounts)
Preferred Stock Common Stock Additional Total
------------------ ----------------- Paid-in Stockholders'
Shares Amount Shares Amount Capital Retained Equity
------- ------ ------ ------ ---------- -------- -------------
Balances at December 31, 1992 29,943,029 $300 $ 21,308 $19,994 $ 41,602
Issuance of common stock 430,000 4 1,249 1,253
Exercise of convertible
notes/common
stock warrants 566,666 5 1,094 1,099
Exercise of options 391,550 4 333 337
Net earnings 11,439 11,439
---------- ---- -------- ------- --------
Balances at December 31, 1993 31,331,245 313 23,984 31,433 55,730
Issuance of preferred stock 2,000,000 $20,000 20,000
Issuance of common stock 335,665 3 1,197 1,200
Exercise of common stock
warrants 1,426,666 14 2,213 2,227
Exercise of options 601,188 7 770 777
Preferred stock dividend (225) (225)
Net earnings 14,659 14,659
--------- ------- ---------- ---- -------- ------- --------
Balances at December 31, 1994 2,000,000 20,000 33,694,764 337 28,164 45,867 94,368
Conversion of preferred
stock (500,000) (5,000) 738,552 7 4,993 0
Conversion of convertible
debt 8,409,087 84 18,366 18,450
Exercise of common stock
warrants 53,331 1 79 80
Exercise of options 1,204,998 12 1,886 1,898
Pre-restructuring tax
benefit 4,300 4,300
Preferred stock dividend (1,425) (1,425)
Net earnings 20,670 20,670
--------- ------- ---------- ---- -------- ------- --------
Balances at December 31, 1995 1,500,000 $15,000 44,100,732 $441 $ 57,788 $65,112 $138,341
========= ======= ========== ==== ======== ======= ========
See accompanying notes to consolidated financial statements.
F-5
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
----------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 20,670 $ 14,659 $ 11,439
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 6,291 4,621 4,178
Deferred income taxes 355 2,525 1,667
Changes in assets and liabilities:
Receivables (28,450) (25,546) (82,375)
Inventories (41,290) (34,207) (25,159)
Other current assets 20 (145) 75
Accounts payable 35,111 4,899 45,387
Accrued liabilities and other 13,890 7,127 14,638
----------- ----------- -----------
Net cash provided by (used in) operating activities 6,597 (26,067) (30,150)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (5,999) (5,018) (6,584)
Business acquisitions net of cash acquired (2,310) (2,741)
----------- ----------- -----------
Net cash used in investing activities (8,309) (7,759) (6,584)
----------- ----------- -----------
Cash flows from financing activities:
Net bank credit facility and other borrowings 1,332 11,332 37,031
Issuance of preferred stock 20,000
Issuance of common stock 1,978 2,854 351
Preferred stock dividend (1,425) (225)
----------- ----------- -----------
Net cash provided by financing activities 1,885 33,961 37,382
----------- ----------- -----------
Net increase in cash 173 135 648
Cash at beginning of year 4,076 3,941 3,293
----------- ----------- -----------
Cash at end of year $ 4,249 $ 4,076 $ 3,941
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
(1) Summary of Significant Accounting Policies
------------------------------------------
Description of Business
-----------------------
CompuCom Systems, Inc. and subsidiaries (the "Company") is a
provider of personal computer product and network integration services
for large corporate customers nationwide. CompuCom's services include
LAN/WAN projects, help desk design and implementation, network
management, field engineering, asset and procurement management,
configuration, and product distribution.
Principles of Consolidation
---------------------------
The consolidated financial statements include the financial
statements of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates
----------------
The preparation of the consolidated financial statements in
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.
Inventories
-----------
Inventories are stated at the lower of average cost or market.
Substantially all inventories are finished goods. Periodically, the
Company assesses the appropriateness of the inventory valuations
giving consideration to obsolete, slow-moving and nonsalable
inventory.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized over the lesser
of the estimated useful lives of the assets or the remaining term of
the lease using the straight-line method.
Cost in Excess of Fair Value of Tangible Net Assets Purchased
-------------------------------------------------------------
Cost in excess of fair value of tangible net assets purchased
represents goodwill and customer lists and is amortized using the
straight-line method over a 7 or 10 year period. Accumulated
amortization at December 31, 1995 and 1994 was $7,686,000 and
$5,142,000, respectively. The Company continually evaluates goodwill
for indications of impairment based on projected undiscounted net cash
flows from operations of the related business unit.
Revenue Recognition
-------------------
Product revenues are recognized upon shipment with provisions
made for anticipated returns, which historically have been immaterial.
Service revenues are recognized when the service is rendered or on a
straight-line basis if performed over a service contract period.
F-7
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Vendor Programs
---------------
The Company receives volume rebates from certain manufacturers
related to sales of certain products which are recorded as a reduction
of cost of goods sold when earned. The Company also receives
manufacturer reimbursements for certain training, promotional and
marketing activities, which are recorded as a reduction of general and
administrative expense as earned.
Income Taxes
------------
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Earnings Per Common Share
-------------------------
Primary earnings per common share is based on net earnings after
preferred stock dividend requirements, if any, and the weighted
average number of common shares outstanding during each year,
including stock options and warrants considered to be dilutive common
stock equivalents. Fully diluted earnings per common share assumes
full conversion of dilutive convertible securities into common stock
at the later of the beginning of the year or date of issuance and
includes the add-back of related interest and/or dividends, as
required.
Restructuring
-------------
In connection with the redirection of the Company and the
effective discontinuation of its previous business activities, the
accumulated deficit as of July 1, 1987 was reclassified as a reduction
of additional paid-in capital to better reflect the financial position
and new operating focus of the Company. Retained earnings represent
the cumulative net earnings of the Company since July 1, 1987, less
dividends.
Financial Instruments
---------------------
The Company's financial instruments, principally cash, accounts
receivable, accounts payable and accrued liabilities, are carried at
cost which approximates fair value due to the short-term maturity of
these instruments. As amounts outstanding under the Company's credit
agreement bear interest approximating current market rates, their
carrying amounts approximate fair value. The fair value of the
Company's Convertible Subordinated Notes approximates cost based upon
quoted market prices.
New Accounting Pronouncements
-----------------------------
The Financial Accounting Standards Board recently issued two
standards which will be applicable to the Company but which the
Company has not yet adopted. No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" is
not expected to have a significant impact on the Company. No. 123,
"Accounting for Stock-Based Compensation", which is effective for the
Company beginning in 1996, gives companies the option to adopt the
fair value method for expense recognition of employee stock options or
to continue to account for stock options and stock based awards using
the intrinsic value method as outlined under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and to make pro forma disclosures of net income and net income
per share as if the fair value method had been applied. The Company
has elected to continue to apply APB 25 for future stock options and
stock based awards.
F-8
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reclassifications
-----------------
Certain amounts in the 1994 and 1993 consolidated financial
statements have been reclassified to conform with the 1995
presentation, the most significant of which is the reclassification of
direct expenses related to the service business from operating expense
to cost of goods sold.
(2) Inventories
-----------
Inventory is comprised of product inventory and spare parts. At
December 31, 1995 and 1994, total inventory was $196.5 million and $155.6
million, respectively, net of inventory reserves of $9.5 million and $9.8
million for the same periods. Product inventory was $191.8 million and
$152.8 million at December 31, 1995 and 1994, respectively, and spare parts
inventory for the same periods was $14.2 million and $12.6 million.
(3) Long-term Debt
--------------
In 1995, the Company increased the availability under the Company's
bank revolving credit facility ("credit facility") from $150 million to
$175 million. During October 1995, the Company executed an amendment to
the Agreement lowering the interest rate from the London Interbank Offered
Rate ("LIBOR") plus 2.75% per annum to LIBOR plus 1.5% per annum and
reducing the prime based portion of the credit facility from the prime rate
plus 0.5% to the prime rate, subject to certain limitations. The fixed
interest portion of the credit facility ($60 million at 7.18%) remained
unchanged. Total borrowings are based on certain limits, as defined, and
secured by substantially all the assets of the Company. The credit facility
subjects the Company to certain restrictions and covenants related to,
among others, tangible net worth, debt to tangible net worth, net earnings,
and limits the amount available for capital expenditures and dividends. All
unpaid principal borrowed and unpaid accrued interest thereon, under the
credit facility, are due March 1997. Negotiations are currently underway to
extend the maturity date of the credit facility. In addition, the Company
is currently negotiating to expand its credit sources to include asset
securitization, to lower the effective borrowing rate and increase its
borrowing capacity to support the Company's projected net revenue growth.
The Company's highest level of borrowing was $156 million and $132
million in 1995 and 1994, respectively. The outstanding balance on the
bank credit facility at December 31, 1995 is $117.5 million.
A $3.9 million mortgage term loan on the corporate headquarters
building in Dallas, Texas is payable in monthly installments of $32,500
plus interest at 8.1%.
The Company paid interest of $12,083,000, $10,905,000 and $8,302,000,
and the weighted average interest rate on the bank credit facility was
approximately 7.9%, 7.3% and 7.2%, in 1995, 1994, and 1993, respectively.
(4) Convertible Subordinated Notes
-------------------------------
On September 25, 1995, the Company called for redemption $18.5 million
of 9% Convertible Subordinated Notes which were converted into 8.4 million
shares of common stock prior to their October redemption date. In an
effort to assist the holders of these shares to sell in the public market a
portion of the converted shares, the Company completed an underwritten
public offering of approximately 4.8 million of these shares in November
1995. The Company received no proceeds from the offering. The redemption
will result in an annualized after tax interest savings of approximately $1
million.
In conjunction with an acquisition in 1995, the Company issued
$3,000,000 of 5% Convertible Subordinated Notes due in 1998, with a call
option in late 1996, convertible into approximately 387,600 shares of the
Company's common stock at $7.74 per share.
F-9
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Income Taxes
------------
The provision for income taxes is comprised of the following (in
thousands):
1995 1994 1993
--------- --------- ---------
Current:
Federal $ 11,991 $ 6,437 $ 4,849
State 1,319 655 953
Deferred 355 2,681 1,667
--------- --------- ---------
$ 13,665 $ 9,773 $ 7,469
========= ========= =========
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% in 1995, 1994 and 1993 to earnings
before income taxes as a result of the following (in percentages):
1995 1994 1993
------ ------ ------
Computed "expected" tax expense 35.0% 35.0% 35.0%
State taxes, net of U.S. Federal
income tax benefit 2.5% 1.7% 3.3%
Other, net 2.3% 3.3% 1.2%
----- ----- -----
39.8% 40.0% 39.5%
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are presented below (in thousands).
1995 1994
------- -------
Deferred tax assets:
Inventories, principally due to additional costs
inventoried for tax purposes and reserves $ 609 $ 2,064
Accounts receivable, principally due to
allowance for doubtful accounts 782 679
Other 1,712 849
------- -------
Deferred tax assets 3,103 3,592
------- -------
Deferred tax liabilities:
Tax net operating losses in excess of book 7,230
Accelerated depreciation 1,549 265
Other 5,506 2,107
------- -------
Deferred tax liabilities 7,055 9,602
------- -------
Net deferred tax liability $ 3,952 $ 6,010
======= =======
(continued)
F-10
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The valuation allowance decreased from $1,067,000 to zero in 1994 as a
result of the 1994 utilization of net operating losses for tax purposes.
There were $9,717,000, $9,934,000 and $3,040,000 of income taxes paid
in 1995, 1994 and 1993, respectively, net of refunds. Taxes payable at
December 31, 1995 was approximately $1,994,000.
(6) Preferred Stock
---------------
The Company has authorized three million shares of preferred stock,
stated value $10. In 1994, Safeguard Scientifics, Inc., ("Safeguard")
purchased from the Company $20,000,000 (2,000,000 shares) of its Series B
Cumulative Convertible Preferred Stock ("Series B Shares"). The Series B
Shares are convertible into shares of Common Stock based on a conversion
price of $6.77 per share subject to anti-dilutive adjustments. The Series
B Shares are entitled to a 6% per annum cumulative dividend payable out of
legally available funds. The Series B Shares are entitled to one vote for
each share of Common Stock into which such Series B Shares may be
converted, except that in the election of directors (as long as Safeguard
owns at least 40% of the Company's then outstanding voting securities,
excluding the Series B Shares), the Series B Shares will be entitled to
five votes for each share of Common Stock into which the Series B Shares
may be converted. On December 29, 1995, Safeguard converted 500,000 of its
Series B Shares into 738,552 shares of the Company's Common Stock. In
1995, the Company paid $1,425,000 of Series B dividends, of which $225,000
related to 1994 and $1,200,000 related to 1995.
(7) Stock Options and Warrants
--------------------------
The Company maintains four stock option plans covering certain key
employees and outside directors. The 1983 Stock Option Plan and the 1984
Non-Qualified Stock Option Plan expired by their terms in May 1993 and
January 1994, respectively, and therefore no new grants can be awarded out
of those plans. The Company adopted a 1993 Stock Option Plan under which
the Company may grant qualified or non-qualified stock options which was
amended in 1995 to increase the number of shares available. To the extent
allowable, all grants are incentive stock options. All options granted
under the plans to date have been at prices which have been equal to the
fair market value at the date of grant. Generally, options vest five years
after the date of grant and expire ten years after the date of grant.
Under the Stock Option Plan for Directors, options to non-employee
directors are required to be granted at fair market value with an initial
10,000 share grant upon election to the Board. Subsequent service grants
will be awarded to all non-employee directors in accordance with formulas
based upon years of service. Options under this plan vest 25% each year
commencing on the first anniversary of the grant date and expire after 10
years.
At December 31, 1995, the Company has reserved 6,262,000 shares of its
common stock for issuance under its stock option plans. There are 1,904,000
shares available for future grant under the 1993 Stock Option Plan and
80,000 shares under the Stock Option Plan for Directors.
F-11
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of the status of the Company's stock option plans follows:
Shares Price range
-------- -----------
(In thousands)
Outstanding at December 31, 1993 4,914 $ .50-3.13
Granted 612 3.94-4.75
Exercised (981) .50-3.13
Canceled (128) 1.00-4.13
------
Outstanding at December 31, 1994 4,417 $ .50-4.75
Granted 1,407 3.50-6.50
Exercised (1,246) .50-4.13
Canceled (300) 1.00-4.63
------
Outstanding at December 31, 1995 4,278 $ .50-6.50
======
Exercisable at December 31, 1995 2,048 $ .50-4.75
======
In conjunction with certain subordinated debentures issued in 1991,
and repaid in 1992, warrants were issued to acquire approximately 1.4
million shares of common stock at a purchase price of $1.50 per share,
exercisable through April 1996. During 1995 and 1994, approximately 53,000
and 1,177,000 of these warrants were exercised, respectively, leaving
approximately 75,000 of the warrants remaining.
(8) Related Party Transactions
--------------------------
In 1994, the Company loaned an officer and director of the Company
$1,181,250 secured by a term note receivable, of which $590,625 was
included in other current assets at December 31, 1995. Interest on the note
accrues at the rate of 6% per annum and is payable annually beginning
January 1, 1996. Principal is payable in two annual installments of
$590,625 each on August 31, 1996 and August 31, 1997.
In 1994, the Company sold the majority of its interest in a
subsidiary, PC Parts Express, Inc. ("PCPE"), which subsequently changed its
name to PC Service Source ("PCSS"), to a venture capital company primarily
owned by a former officer and director of the Company, in exchange for
cash, a secured note receivable, and warrants to purchase additional PCSS
common stock. Separately, the Company sold substantially all of the assets
with respect to its network training business to this same venture capital
company in exchange for a secured note receivable and royalty agreement.
Safeguard owns approximately 50% of the Company's common stock as of
December 31, 1995. The Company pays Safeguard a fee for providing certain
administrative, legal and financial services to the Company. General and
administrative expenses include fees paid to Safeguard of $600,000 in 1995,
1994 and 1993.
F-12
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Investments
-----------
In 1994, the Company sold the majority of its interest in a
subsidiary (See Note 8). In April 1994, PCSS completed an initial public
offering. After this transaction, the Company's ownership of PCSS common
stock was approximately 24%. The PCSS common stock owned by the Company is
unregistered and the sale of the stock is subject to certain restrictions.
The Company owned approximately 21% and 24% of the outstanding common
shares of PCSS at December 31, 1995 and 1994, respectively, and accounted
for this investment using the equity method in 1995 and 1994. At December
31, 1995, the Company's carrying value of the PCSS stock was $1,238,000 and
the market value was approximately $6,994,000. In addition, the Company
owns warrants for the purchase of 250,000 shares of PCSS common stock at an
exercise price of $2.25.
(10) Leases
------
The Company has noncancelable operating leases for facilities and
equipment which expire at various dates from 1996 to 2004. Total rental
expense for operating leases was $6,204,000, $4,804,000 and $5,430,000 in
1995, 1994 and 1993, respectively. Future minimum lease payments under
noncancelable operating leases as of December 31, 1995 are $5,934,000 -
1996; $4,170,000 - 1997; $3,633,000 - 1998; $3,148,000 - 1999; $1,557,000 -
2000; and $2,041,000 - thereafter.
(11) Savings Plan
------------
The Company has a contributory 401(k) Plan for its employees and
matches one-half of the first 4% and one-fourth of the next 2% of employee
compensation, and employer participation is subject to certain vesting
requirements. Amounts expensed relating to the Plan were $1,009,000,
$597,000 and $501,000 in 1995, 1994 and 1993, respectively.
(12) Contingencies
-------------
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position and results of
operations, taken as a whole.
F-13
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Quarterly Financial Data (Unaudited)
------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share amounts)
1995
- ----
Revenue
Product $ 302,401 $ 324,427 $ 319,562 $ 388,052
Service 19,668 25,204 26,988 29,008
Other 1,418 1,079 1,349 2,441
--------- --------- --------- ---------
Net revenue 323,487 350,710 347,899 419,501
Gross margin
Product $ 31,751 $ 33,789 $ 33,134 $ 42,255
Service 5,571 8,240 8,261 8,689
Other 856 524 747 1,091
--------- --------- --------- ---------
Total gross margin 38,178 42,553 42,142 52,035
Net earnings $ 3,835 $ 4,814 $ 4,827 $ 7,194
Earnings per common share:
Primary .10 .12 .12 .16
Fully diluted .09 .11 .10 .15
1994
- ----
Revenue
Product $ 269,804 $ 292,806 $ 290,974 $ 343,694
Service 11,053 13,185 14,754 16,903
Other 634 926 1,080
--------- --------- --------- ---------
Net revenue 280,857 306,625 306,654 361,677
Gross margin
Product $ 26,902 $ 29,264 $ 30,238 $ 35,250
Service 3,589 4,353 4,918 5,445
Other 389 613 732
--------- --------- --------- ---------
Total gross margin 30,491 34,006 35,769 41,427
Net earnings $ 2,765 $ 3,259 $ 3,271 $ 5,364
Earnings per common share:
Primary .08 .09 .09 .15
Fully diluted .07 .08 .08 .12
Earnings per common share calculations are based on the weighted average
number of shares outstanding in each period. Therefore, the sum of the
quarters does not necessarily equal the year to date earnings per common
share.
Certain amounts in the 1994 consolidated financial statements have been
reclassified to conform with the 1995 presentation, the most significant of
which is the reclassification of direct expenses related to the service
business from operating expense to cost of revenue.
F-14
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
(In thousands)
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- --------------------------------- ------------ ----------- ------------ ----------
Trade receivables-
Allowance for doubtful accounts
1993 $ 1,603 767 498 $ 1,872
1994 $ 1,872 963 893 $ 1,942
1995 $ 1,942 900 608 $ 2,234
Inventory reserves
1993 $ 10,090 11,108 7,415 $ 13,783
1994 $ 13,783 14,597 18,608 $ 9,772
1995 $ 9,772 13,333 13,581 $ 9,524
F-15