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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, 1996 Commission File Number 0-14371
- ------------------------------------------- ------------------------------
COMPUCOM SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 38-2363156
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10100 N. CENTRAL EXPRESSWAY, DALLAS, TX 75231
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 265-3600
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [__]
The aggregate market value of the Common Stock, $.01 par value, held by non-
affiliates (based on the closing price on NASDAQ) on March 14, 1997 was
approximately $111.5 million. For purposes of determining this amount only,
Registrant has defined affiliates as including (a) the executive officers named
in Part III of this 10-K report, (b) all directors of Registrant, and (c) each
stockholder that has informed Registrant by March 14, 1997 that it is the
beneficial owner of 10% or more of the outstanding common stock of Registrant.
The number of shares of the Registrant's Common Stock outstanding as of March
14, 1997 was 45,502,013 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relative to the May 14, 1997 annual
meeting of stockholders of registrant, to be filed within 120 days after the end
of the year covered by this report on Form 10-K, are incorporated by reference
into Items 10, 11, 12 and 13 (Part III) of this Report. Such Proxy Statement,
except for the parts therein which have been specifically incorporated by
reference, shall not be deemed "filed" for the purposes of this report on Form
10-K.
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PART I
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ITEM 1 BUSINESS
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INTRODUCTION
CompuCom Systems, Inc., together with its subsidiaries ("CompuCom" or "the
Company"), is a leading provider of distributed desktop computer products and
network integration services to large and medium sized businesses throughout the
United States. CompuCom helps Fortune 1000 companies manage information
technology to achieve their business goals by providing a wide range of services
in provisioning, support and technology management. Product and services are
sold by a direct sales force to over 5,000 business customers through
approximately 40 sales and service centers located in and serving large
metropolitan areas nationwide.
The Company is an authorized dealer of major distributed desktop computer
products for a number of manufacturers, including Compaq Computer Corporation
("Compaq"), International Business Machines Corporation ("IBM"), Hewlett-Packard
Company ("HP"), Toshiba America Information Systems ("Toshiba"), and Apple
Computer Corporation ("Apple"). CompuCom also offers a broad selection of
networking and related products, computer-related peripheral equipment and a
range of computer equipment and software from a number of vendors, including
3Com Corporation ("3Com"), Digital Equipment Corporation ("Digital"), Intel
Corporation ("Intel"), Kingston Technology Corporation ("Kingston"), Lotus
Development Corporation ("Lotus"), Microsoft Corporation ("Microsoft"), NEC
Technologies, Inc. ("NEC"), and Novell, Inc. ("Novell"). To further meet the
needs of its customers, CompuCom provides a variety of services including
LAN/WAN project services, consulting, network management, help desk, field
engineering, configuration and product procurement utilizing network
applications such as Novell Netware, Windows NT Server, Windows and Windows 95,
IBM's OS/2 Warp and LAN Server.
Net revenues for the Company have grown at a compounded rate of 29% over
the past five years, while net earnings have grown by 43% compounded annually
over the same period. Excluding an after tax non-recurring securities-related
gain of $5.2 million, net earnings over that period have grown at a compounded
rate of 37%. CompuCom's strong revenue and net earnings performance is a result
of the Company's continued focus on customer satisfaction, along with the
enhancement of its product and services capabilities created by a strategy of
growth through existing operations and strategic acquisitions. The Company's
target customers are becoming increasingly dependent on information technology
to compete effectively in today's markets. As a result, the decision-making
process that organizations face when planning, selecting and implementing
technology solutions is becoming more complex and requires many of these
organizations to outsource the management and support of their technology
needs.
In the first quarter of 1997, M. Lazane Smith, who has been with the
Company since 1993 and previously served as Vice-President of Finance and
Corporate Controller, was promoted to the position of Senior Vice President and
Chief Financial Officer. Ms. Smith replaces Mr. Robert J. Boutin, who resigned.
The Company operates in only one industry segment -- sales and services of
distributed desktop computer products, configuration, network integration and
technology support services to businesses nationwide -- and no separate industry
segment information is presented.
This document may contain "forward -looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve risks and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in such forward-looking
statements. See "Product", "Principal Suppliers", "Dependence Upon Major
Vendors and Other Suppliers" and "Competition" in this Item and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 of this report for a discussion of important factors that could
affect the validity of any such forward-looking statement.
2
SALES AND MARKETING
The Company markets its product procurement, configuration, field
engineering, network management, help desk services and technology management
primarily through its direct sales force and service personnel, operating
through approximately 40 sales and service centers. The Company focuses on
meeting the business objectives of large corporate businesses, which accounted
for the majority of the Company's net revenue in 1996. However, no one customer
accounted for in excess of 10% of such revenues. Order backlog is not
considered to be a meaningful indicator of the Company's future business
prospects due to the short order fulfillment cycle.
The Company is generally authorized by various vendors to sell desktop
computer products through its sales centers, which are located in major
metropolitan areas in order to provide convenient access for sales and service
personnel to a significant customer base. Each location typically is staffed by
direct sales representatives, support personnel, system engineers and
technicians who are authorized to repair and maintain Compaq, IBM, HP and
certain other manufacturers' products.
The Company provides support to its customers primarily through the
CompuCom Customer Center ("customer center") located in Dallas, Texas. Customer
center personnel, called inside sales representatives ("ISR's"), may be assigned
to specific customer accounts or to customers in a certain geographical area and
are knowledgeable about computer technology. Each ISR works closely with the
customer and the CompuCom sales representative to keep up to date on the
business needs of that customer, and to provide the customer with information
about product availability, services, pricing, shipping and invoicing via a
toll-free telephone number. The primary goal of the customer center is to
provide greater support to the Company's customers while allowing the Company's
direct sales force to focus on soliciting new business and providing the
necessary support for the customer's more complex service needs. At the end of
1996, the Company employed approximately 450 customer center personnel, of whom
approximately 325 worked at the customer center in Dallas, and approximately 125
worked on-site at certain customer locations.
As of December 31, 1996, the Company employed approximately 240 full-time
direct sales representatives. The sales force is compensated with a base salary
and commissions based on gross margin related to their sales. In 1996, a larger
portion of the sales representatives compensation was based on service sales and
gross margin as part of the Company's strategy of growing its service business.
During 1996, services net revenues increased 68% due to the Company's
continued efforts to focus on increased sales of services to meet customer needs
and to improve profitability. These on-going efforts included: additional
training was provided for system engineers; management provided greater support
to the services group; additional corporate resources were allocated to support
the services group; and the compensation plan of branch general managers and
sales representatives placed greater emphasis on sales of services. In
addition, the Company emphasized the hiring of quality services personnel,
increasing the number of its services employees from approximately 1,200 at the
end of 1995 to almost 2,000 by year-end 1996. To further enhance its service
growth, in mid-1996 the Company hired approximately 120 technology college
graduates and placed them in a six-month engineering training program. Although
the Company's revenues from its services business currently represent 9% of its
total revenues, its services business is an integral part of the Company's
strategy to provide customers with the value-added service solutions to meet
their technology needs.
During 1996, in order to meet customers' ever increasing global business
needs, the Company helped to create GlobalServe, an alliance of international
computer service suppliers. The GlobalServe alliance provides customers a single
point of contact for accessing the distributed desktop computer products and
services they need worldwide.
3
OPERATIONS
The Company's corporate headquarters is located in Dallas, Texas.
Currently, the Company's financial and administrative functions, including
information services, service support, marketing, human resources and finance,
are located at this facility. The customer center, collections department and
order processing are presently located in a leased facility near the Company's
corporate headquarters. In late 1996, the Company purchased 20 acres of real
property with two office buildings in Dallas to be used as its new corporate
headquarters and operations campus. While the Dallas sales office and product
services department relocated from a separate leased facility to the new campus
in early 1997, the Company expects the majority of its remaining Dallas
operations to relocate to the new campus by the third quarter.
The Company's integrated information systems ("IS") utilize client/server
distributed relational database technology running on a proactively managed wide
area network based on frame relay technology. The system contains five major
components: the Distribution Information Management System ("DIMS"), the Service
Information Management System ("SIMS"), the Customer Center System ("CCS"), the
Warehouse Information Management System ("WIMS"), and the Financial Information
Management System ("FIMS"). During 1996, in an effort to provide increased
system reliability, availability, and growth capacity, the Company completed the
conversion of four of the five "IS" systems from PC-based hardware to mini-
computer platforms.
To further enhance the quality and efficiency of its information systems,
the Company has developed a state-of-the-art data warehouse, which increases the
ease with which Company personnel can access historic information and create
customized customer and vendor reports. During 1996, the Company made
significant enhancements to its data warehouse by implementing Internet-based
capabilities, which give its customers the ability to directly access order
status and shipment history. This electronic commerce tool, which won a Best
Practices award from the Data Warehouse Institute, also gives customers the
ability to create custom-priced quotations for new orders from an Internet-based
catalog of products, and gives the Company's principal vendors access to product
sales history and inventory levels. In addition, the Company implemented a
comprehensive Intranet application, accessible only to Company personnel, which
provides rapid access to Company organization charts, policies, procedures and
other corporate information and has a user-friendly query interface to locate
answers to frequently asked questions. The Company plans to extend its Internet
capabilities during 1997 by implementing Internet-based order placement and
purchased asset lookup using either product serial number or customer asset
tags. Plans also include improved product sales information reporting for
principal vendors, real time open call status reporting for service customers
and implementation of a customer management and event tracking system to be used
by customer center personnel.
The Company continues to implement its client server-based Customer
Procurement System ("CPS") in key customer accounts, which allows customer's to
place orders that automatically interface with the Company's core system
applications. The Company also began the implementation of its new Sales Force
Automation package, which provides Company sales representatives access to email
and key Company applications from remote locations, allowing them to spend more
time with customers and improve productivity.
The Company's two distribution centers are highly automated and employ
advanced inventory management and order processing technologies that allow the
Company to configure desktop products and receive, process and ship customer
orders accurately and efficiently. During 1996, the Company tripled its
configuration capacity by relocating its eastern distribution center to a
300,000 square feet facility in Paulsboro, New Jersey. The distribution centers
utilize hand-held, radio frequency devices to stock, pick and update the status
and location of inventory. These devices play a key role in enabling the
Company to efficiently handle increasing volume and are used in the daily cycle
counting process, which has resulted in improved overall inventory integrity and
bin accuracy. The Company also uses an on-line freight metering program, which
helps lower order fulfillment time and provides more reliable and timely freight
information.
The distribution, configuration, and product services departments completed
ISO 9002 certification in 1995. ISO 9002 is part of the ISO 9000 set of
standards developed by the International Organization of Standardization
("ISO"), which represent common international business quality standards
designed to help demonstrate the capability of a supplier to control the
processes that determine the acceptability of the product being delivered.
During 1996, the Company's returned merchandise center completed ISO 9002
certification.
4
PRODUCTS
The Company provides for procurement of sophisticated technologies
consisting of distributed desktop computer products, peripherals, software and
services to its customers. It is an authorized dealer for desktop products of
Apple, Compaq, Digital, HP, IBM, Kingston, NEC, 3Com, Toshiba and other major
manufacturers, as well as a dealer for software products of Lotus, Microsoft,
Novell and other principal software suppliers. The Company stocks over 5,000
different desktop products and accessories, consisting of leading as well as
alternative brands.
CompuCom provides the integration of a variety of manufacturers' products
into various desktop system configurations to meet each customer's needs. The
Company provides value to its customers by allowing them to choose products from
various manufacturers that best suit their desktop and network needs as opposed
to manufacturers' direct sales organizations which typically configure or market
desktop systems that include products only from that particular manufacturer.
NETWORK AND TECHNOLOGY SERVICES
The Company continues to focus on expanding its presence in the service
market. This commitment is reflected in the increase in its service personnel
during 1996. As of December 31, 1996, the Company employed approximately 2,000
service personnel, including system engineers, field technicians, service
support and engineers on-site at customer locations, compared to approximately
1,200 as of December 31, 1995. These service personnel provide configuration,
field engineering, network management, help desk services and technology
management to the Company's customers.
CompuCom maintains two configuration centers, one in each of the Company's
distribution centers. These centers contain configuration systems that have
the ability to set up and install product that includes both standard and non-
standard components or software to enable the Company to meet increasing
customer demand for advanced system and network configuration technologies.
Through its field engineering group, the Company provides hardware
maintenance services ranging from simple desktop repairs, installations, moves
and adds to changes to complex network repairs, application setups and software
upgrades. These services are provided through the Company's sales and service
centers and are performed based upon the specific customer needs, such as on-
site support, warranty support, change and upgrade management, contingency
management, annual contract, or time and material.
CompuCom's Network Management Group focuses on the development, testing
and implementation of network management systems. The network management
service offerings include: network audits, which consist of an on-site detailed
analysis of the current configuration and health of the customer's network
environment; network control center design, which includes building a network
control center at the customer's location; and remote network monitoring of the
customer's network performed by CompuCom's network control center located at
the Company's headquarters in Dallas, Texas.
CompuCom offers help desk support through its Remote Help Desk Services
located at the Company's headquarters in Dallas, Texas and at customer
locations. These help desk services offer information systems departments the
skills and resources needed to design, implement and operate a consolidated,
resolution-oriented help desk to support a customer's information technology
investments. CompuCom's help desk services include call management, problem
management, report systems, resources and customer relations. The Company's
help desk support group consists of personnel with expertise in software
applications, network operating systems and hardware, who provide technical
support to end users and system administrators.
The Company offers technology management services by providing LAN/WAN
project and consulting services that focus on the integration of new and
existing computing technologies into existing corporate computing environments.
These services include technology selection and strategic planning, technology
briefings, systems analysis, system design services, and design of support
infrastructures. By combining the expertise of its consultant personnel with
strategic manufacturer partnerships, the Company is able to provide solutions
for complex network integration projects.
5
PRINCIPAL SUPPLIERS
A major portion of the Company's revenues are derived from sales of
distributed desktop computer products including Compaq, IBM and HP products.
During 1996, the Company's principal suppliers were Compaq, IBM and HP. The
Company's agreements with these vendors contain provisions providing for
periodic renewals and permitting termination by the vendor without cause,
generally upon 30 to 90 day's written notice, depending upon the vendor. Since
1987, Compaq, IBM and HP have regularly renewed their respective dealer
agreements with the Company, although there can be no assurance that the regular
renewals of the Company's dealer agreements will continue. The termination, or
non-renewal, of the Company's Compaq, IBM or HP dealer agreements, or all, would
materially adversely affect the Company's business. The Company, however, is
not aware of any reason for the termination, or non-renewal, of any of those
dealer agreements and believes that its relationships with Compaq, IBM and HP
are satisfactory.
The Company purchases products from Compaq, IBM and HP at pricing levels
that the Company believes are the lowest prices available to those vendors'
respective dealers, with the exception of special bid pricing for specific large
customer accounts. All of the Company's principal suppliers require that the
Company purchase certain minimum volumes of products in a specified period to
maintain favorable pricing levels. The Company also obtains favorable terms
from Compaq, IBM and HP by participating in certain vendor programs offered by
those suppliers. The Company has certain selling, promotional and related
expenses reimbursed by vendors under dealer programs offered by those and other
suppliers. However, there can be no assurance that any of these programs will
continue in 1997 or that the Company will continue to participate in any of
these programs at the same level as in 1996.
Sales of Compaq, IBM and HP products accounted for approximately 31%, 15%
and 12%, respectively, of the Company's 1996 net revenues compared to 28%, 16%
and 11%, respectively, in 1995 and 27%, 20% and 11%, respectively, in 1994.
Due to the rapid delivery requirements of its customers and to assure
itself of a continuous allotment of products from suppliers, the Company
maintains adequate levels of inventory funded through its credit facilities and
vendor credit. These major suppliers at times provide price protection programs
to the Company that are intended to reduce the risk of inventory devaluation by
absorbing temporary price reductions and long-term price declines associated
with aging product life cycles. The Company also has the option of returning a
certain percentage of its current product inventories each quarter to these
principal suppliers as it assesses each product's current and forecasted demand
schedule. If such returns exceed certain specified levels, the Company may be
charged restocking fees ranging up to 5%. The Company did not incur any
significant restocking fees in 1996.
DEPENDENCE UPON MAJOR VENDORS AND OTHER SUPPLIERS
The Company is dependent upon the continued supply of products from its
suppliers, particularly Compaq, IBM and HP. Historically, certain suppliers
occasionally experience shortages of select product that render components
unavailable or necessitate product allocations among resellers. While certain
shortages existed throughout 1996, the Company believes the product
availability issues are a result of the present dynamics of the desktop
computer industry as a whole, which include high customer product demand,
shortened product life cycles and increased frequency of new product
introductions into the marketplace. While there can be no assurance that
product unavailability or product allocations, or both, will not increase in
1997, the impact of such an interruption is not expected to be unduly
troublesome due to the breadth of alternative product lines available to the
Company and the Company's established programs to accelerate configuration and
delivery times when such events occur.
6
COMPETITION
The Company is engaged in fields within the desktop computer industry which
is characterized by a high level of competition. Many established desktop
computer manufacturers (including some of the Company's own vendors), systems
integrators and other resellers of distributed desktop or networking products
including Vanstar Corporation, InaCom Corp. and Microage, Inc., compete with the
Company in the configuration and distribution of computer systems and equipment.
In addition, the desktop computer reseller industry is characterized by intense
competition, primarily in the areas of price, product availability and breadth
of product line. In the highly fragmented computer services area, the Company
competes with several larger competitors, other corporate resellers pursuing
high-end services opportunities, as well as smaller computer services companies.
Some of these competitors have financial, technical, manufacturing, sales,
marketing and other resources that are substantially greater than those of the
Company. Although the Company believes it currently competes favorably within
the desktop computer industry, there can be no assurance that the Company will
be able to continue to compete successfully with new or existing competition.
Product margins declined in the second half of the year, compared to the
first half, primarily due to pricing to win new business and increased pricing
pressures from competition. The Company believes that gross margins will
continue to be reactive to industry-wide changes. Future profitability will
depend on the Company's ability to retain and hire quality service personnel
while effectively managing the utilization of such personnel. It will also
depend on increased focus on providing technical service and support to
customers, competition, manufacturer pricing strategies, as well as the
Company's control of operating expenses, product availability, and effective
utilization of vendor programs.
THE COMPANY'S EMPLOYEES
The Company employed approximately 3,700 full-time employees as of December
31, 1996. The Company offers its full-time employees health, long-term
disability, dental and life insurance benefits and has a 401(k) plan for
eligible employees. None of the Company's employees are represented by a union,
and the Company considers its employee relations to be good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
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The Company does not have any foreign operations nor does it engage in any
material export sales.
EXECUTIVE OFFICERS
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Information about the Company's executive officers can be found in Part III
of this report under "Item 10 Directors and Executive Officers of the
Registrant."
7
ITEM 2 PROPERTIES
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The Company's principal executive and administrative offices are located in
a commercial office building in Dallas, Texas, comprised of approximately
100,000 square feet of space, which it purchased in May 1992. In December 1993,
the Company secured a ten-year $3.9 million mortgage on the headquarters
building which is payable in 120 monthly installments of principal plus interest
at a rate of 8.1%. In late 1994, the Company leased approximately 50,000 square
feet of additional office space in Dallas near its headquarters, for a term of
60 months commencing March 1995. In early 1995, the Company relocated the
customer center and credit/collection departments to this new leased facility.
In addition, the Company leased 26,000 square feet in a commercial office
building adjacent to the Company's headquarters for a term of 36 months expiring
in 1998. During 1996, the Company's Dallas sales office and product services
department were relocated to this facility. In the third quarter of 1996, the
Company purchased real property in Dallas, Texas to be used as its new corporate
headquarters and operations campus for approximately $26 million, which has been
funded on an interim basis through the Credit Facility pending permanent
mortgage financing. This new campus consists of two buildings containing
approximately 250,000 square feet of office space, situated on 20 acres, and
will allow the Company to centralize most of its Dallas area operations while
providing expansion capability for future growth. The Company expects to be
substantially moved into the new campus by the third quarter of 1997.
The Company distributes products primarily from two leased warehouse
facilities. In August 1996, the Company entered into a lease for approximately
300,000 square feet of warehouse space located in Paulsboro, New Jersey, which
has a five-year term, with a cancellation option exercisable at any time after
August 1999. This new facility doubled warehouse space and contains a state-of-
the-art 90,000 square foot configuration center, which tripled the Company's
configuration capacity, allowing the Company to meet increasing customer demand
for advanced system and network technologies. Its western distribution center
has approximately 104,000 square feet of leased warehouse space in Stockton,
California, under a lease that expires in May 1999, with a cancellation option
exercisable in May of each year.
The Company also has noncancelable operating leases for its sales and
service centers, expiring at various dates between 1997 and 2004. See Note 10
to the accompanying Notes to Consolidated Financial Statements for additional
information regarding lease costs. The Company believes there will be no
difficulty in negotiating the renewal of its real property leases as they expire
or in finding other satisfactory space. In the opinion of management, the
properties are in good condition and repair and are adequate for the particular
operations for which they are used.
ITEM 3 LEGAL PROCEEDINGS
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The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position and results of
operations, taken as a whole.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None have been submitted in the fourth quarter 1996.
8
PART II
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ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK
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The Company's common stock is listed on the NASDAQ National Market (Symbol:
CMPC). As of December 31, 1996, there were approximately 10,000 beneficial
holders of the Company's common stock. The high and low sales prices reported
within each quarter for the years ended December 31, 1996 and 1995 are as
follows:
1996 1995
---------------------- ----------------------
High Low High Low
--------- --------- --------- ---------
First quarter $ 9.63 $ 6.25 $ 4.25 $ 3.13
Second quarter 13.88 8.13 5.13 3.13
Third quarter 12.25 7.13 6.88 4.75
Fourth quarter 12.38 8.00 10.63 5.50
The last sale price reported for the Company's common stock on March 14,
1997 was $5.25.
The Company has historically reinvested earnings in the growth of its
business and has not paid cash dividends on its common stock. In addition, the
Company's credit facilities limit the amount of dividends the Company may pay.
While the Company currently has no plans to pay dividends on common stock,
payment of dividends in the future will depend upon the Company's financial
performance and other relevant factors.
9
ITEM 6 SELECTED FINANCIAL DATA
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Selected financial data for the Company is presented below:
For the Years Ended December 31,
-------------------------------------------------------------------------
Operating Results 1996 1995 1994 1993 1992
- ----------------- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
Net revenues $ 1,995,191 $ 1,441,597 $ 1,255,813 $ 1,015,482 $ 713,035
Gross margin 240,963 174,908 141,693 127,875 94,551
Earnings before income taxes 50,616 * 34,335 24,432 18,908 11,714
Net earnings 30,471 * 20,670 14,659 11,439 7,263
Earnings per common share:
Primary .63 * .51 .40 .34 .23
Fully diluted .61 * .44 .34 .29 .22
Balance Sheet Data
- ------------------
Total assets $ 692,985 $ 508,704 $ 429,531 $ 365,071 $ 252,958
Long-term debt 236,450 120,364 118,974 107,316 70,734
Convertible subordinated notes 3,000 3,000 18,214 17,880 17,779
Stockholders' equity 171,098 138,341 94,368 55,730 41,602
* Includes a pre-tax and after tax non-recurring gain on sale of securities
of $8.7 million and $5.2 million, respectively, or $.10 per share.
10
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
The following table presents the Company's total revenue, gross margin and
gross margin percentage by revenue source. Operating expenses, interest and net
earnings are shown as a percentage of total net revenue for the three years
ended December 31:
1996 1995 1994
-----------------------------------------
($ in millions)
Revenue:
Product $ 1,817 $ 1,334 $ 1,197
Service 169 101 56
Other 9 6 3
-----------------------------------------
Total revenue $ 1,995 $ 1,441 $ 1,256
=========================================
Gross margin:
Product $ 181 $ 141 $ 122
Service 56 31 18
Other 4 3 2
-----------------------------------------
Total gross margin $ 241 $ 175 $ 142
=========================================
Gross margin percentage:
Product 10.0% 10.6% 10.2%
Service 33.3% 30.5% 32.7%
Other 39.2% 51.2% 65.7%
-----------------------------------------
Total gross margin 12.1% 12.1% 11.3%
-----------------------------------------
Operating expenses:
Selling 4.0% 4.3% 4.4%
Service 2.0% 1.5% 1.4%
General and administrative 2.8% 2.6% 2.3%
Depreciation and amortization 0.5% 0.4% 0.4%
-----------------------------------------
Total operating expenses 9.3% 8.8% 8.5%
-----------------------------------------
Earnings from operations 2.8% 3.3% 2.9%
Interest (0.7%) (0.9%) (0.9%)
Non-recurring gain on sale of securities 0.4%
-----------------------------------------
Earnings before income taxes 2.5% 2.4% 2.0%
Income taxes 1.0% 1.0% 0.7%
-----------------------------------------
Net earnings 1.5% 1.4% 1.3%
=========================================
11
1996 COMPARED TO 1995
---------------------
Product revenue increased 36% to $1.82 billion in 1996 compared to $1.33
billion in 1995. Product revenue is primarily derived from the sale of
distributed desktop computer products to corporate customers. The increase in
product revenue reflects the Company's efforts in establishing new relationships
with several large customers during the year, as well as higher demand for
distributed computing technologies. The strong product results also reflect the
advancements the Company has made in customer procurement systems, data
warehouse queries and Web-based order statusing, which have reduced customers'
overall procurement costs. Although product revenue growth was strong in 1996,
the Company anticipates slower revenue growth during the first quarter of 1997
as part of an overall industry-wide demand softness caused by smaller than
anticipated manufacturers' price reductions and the anticipated upgrade to
Pentium Pro technology.
Product gross margin as a percentage of product net revenue decreased to
10.0% in 1996 from 10.6% in 1995. The Company experienced lower product margins
principally due to pricing to win new business and increased pricing pressures
from competition. Future product margins will be influenced by competitive
pressures from other resellers in the industry together with manufacturers'
pricing strategies. The Company participates in certain manufacturer-sponsored
programs designed to increase sales of specific products. These programs,
excluding volume incentive programs and specific product rebates offered by
certain manufacturers, are not material when compared to the Company's overall
financial results. Due to the short order fulfillment cycle, the Company's
backlog is not considered to be a meaningful indicator of future business
prospects.
Service revenue increased 68% to $169 million in 1996 from $101 million in
1995. Service revenue is primarily derived from systems integration services,
including field engineering, LAN/WAN projects, consulting, product
configuration, network management and help desk services. Service revenue
reflects revenue generated by the actual performance of specific services and
does not include product sales associated with service projects. The increase
in service revenue reflects the Company's continued focus on expanding its
network and technology services at competitive prices to meet increased customer
demand for the Company's value-added desktop network services, as well as the
full year impact of various small service acquisitions which occurred during
1995. Service gross margin as a percentage of service net revenue increased to
33.3% in 1996 from 30.5% in 1995, primarily due to increased productivity of the
Company's service engineers and improved management of spare parts inventory.
As a percentage of net revenue, operating expenses for 1996 increased to
9.3% compared to 8.8% in 1995, to support the continued revenue growth and
expansion of the service business. On an absolute dollar basis, operating
expenses increased approximately $56 million, primarily due to the continued
investment in the Company's service business and information systems
enhancements. Selling expenses, as a percentage of net revenue, decreased when
compared to 1995 primarily due to the fixed component of expense being spread
over higher volume and increased sales productivity. Service expenses, which
increased both as a percentage of net revenue and in absolute dollars, primarily
reflect costs related to the infrastructure, established starting in 1995,
necessary to manage and expand the service business. General and administrative
expenses increased due to the continued investment in the Company's information
system resources required to enhance customer satisfaction particularly through
data warehousing, improved customer procurement systems, enhanced reporting for
the service business, and expenses related to its campus recruiting program
whereby the Company hired approximately 120 technology college graduates and
placed them in a six-month engineering training program. The Company's operating
expenses are reported net of reimbursements by certain manufacturers for
specific training, promotional and marketing programs. These reimbursements
offset the expenses incurred by the Company.
Depreciation and amortization expense increased in absolute dollars and as
a percentage of net revenue for 1996. The dollar increase is primarily related
to facility improvements and warehouse equipment for the Company's new eastern
distribution facility, enhancements to the Company's information systems, and
furniture and fixtures required to support business activity. The Company will
commence depreciation on its new corporate headquarters and operations campus
when it is substantially placed in service.
Interest expense decreased as a percentage of net revenue for 1996, but
increased in absolute dollars by $2.5 million, primarily due to increased
borrowing to support the significant revenue growth, partially offset by a lower
effective interest rate resulting from its new Credit Facility, specifically the
use of LIBOR tranches, receivable securitization, and redemption in October 1995
of the Company's $18.5 million 9% Convertible Subordinated Notes ("Notes"). The
Notes were converted into 8.4 million shares of the Company's common stock
resulting in an interest expense savings of almost $1.7 million annually.
12
During the second quarter of 1996, the Company participated in the
secondary stock offering of PC Service Source, Inc. ("PCSS") resulting in an
after tax, non-recurring gain on the sale of securities of $5.2 million. The
Company founded PCSS in 1990 and, after participation in the secondary offering,
owns less than 5% of the outstanding common shares of PCSS.
As a result of the factors discussed above, net earnings increased 47% to
$30.4 million in 1996 from $20.7 million in 1995. Excluding the non-recurring
gain, net earnings increased 22% to $25.2 million. The net earnings growth rate
for the second half of 1996 was less than the first half of 1996 primarily due
to the Company's continued investment in the service business as well as the
Company's decision to make additional investments to exploit opportunities with
customers. The Company anticipates the slower net earnings growth rate will
continue through the first quarter of 1997. Future profitability will depend on
the Company's ability to retain and hire quality service personnel while
effectively managing the utilization of such personnel. It will also depend on
increased focus on providing technical service and support to customers,
competition, manufacturer pricing strategies, as well as the Company's control
of operating expenses, product availability, and effective utilization of vendor
programs.
1995 COMPARED TO 1994
---------------------
Product revenue increased 11% to $1.33 billion in 1995 compared to $1.20
billion in 1994. The increase in product revenue reflected increased demand by
corporate customers for personal computers, particularly Pentium-based systems
and laptops. Also favorably impacting the Company's net product revenue was
corporate customers continuing to consolidate the number of suppliers to only
one or two.
Product gross margin as a percentage of product net revenues increased to
10.6% in 1995 from 10.2% in 1994. The Company experienced an improvement in
product margins during the first half of 1995, partially due to the Company's
decision not to do business with the lowest margin customers as well as certain
manufacturer price reductions. Product margins declined in the second half of
the year, compared to the first half, as a result of increased pricing pressure
from competition.
Service revenue increased 80% to $101 million in 1995 from $56 million in
1994. The increase in service revenue reflected the Company's continued focus
on expanding its network and technology services at competitive prices. The
Company's service business increased primarily through internal growth augmented
by a series of small strategic acquisitions. Service gross margin as a
percentage of service net revenue decreased to 30.5% in 1995 from 32.7% in 1994,
primarily as a result of increased costs related to the relative scarcity of
system engineers and the Company's continued investment in its service business.
As a percentage of net revenue, operating expenses for 1995 increased to
8.8% compared to 8.5% in 1994, to support the continued revenue growth and
expansion of the service business. On an absolute dollar basis, operating
expenses increased approximately $22 million, principally as a result of an
increase in general and administrative expenses related to the Company's
investment in information systems resources required to enhance customer
satisfaction, particularly in the service business, and other spending necessary
to meet the Company's objectives. Service expenses, which increased both as a
percentage of net revenues and in absolute dollars, primarily reflected costs
related to the planned development of an infrastructure necessary to manage and
expand the service business. Selling expense, as a percentage of net revenue,
decreased when compared to 1994 primarily as a result of continued improvement
in product sales productivity.
Depreciation and amortization expense increased in absolute dollars but
remained constant as a percentage of net revenue for 1995. The dollar increase
reflected amortization expense associated with the Company's acquisitions, as
well as increased depreciation expense related to fixed asset purchases in 1995
and 1994.
Interest expense increased in absolute dollars by $0.9 million but remained
constant as a percentage of net revenue for 1995, primarily as a result of
higher average interest rates and increased borrowings to support revenue
growth.
As a result of the factors discussed above, net earnings increased 41% to
$20.7 million in 1995 from $14.7 million in 1994.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company has financing arrangements which total $325 million, consisting
of a $200 million working capital facility, $25 million real estate loan and a
$100 million receivable securitization. During 1996, the Company replaced the
August 1993 Financing and Security Agreement with a new Credit Agreement
("Credit Facility"), increasing the amount of the Company's credit facility to
$225 million from $175 million, extending the maturity date, and making
substantially all of the facility LIBOR-based. The $225 million Credit Facility
is comprised of two elements: a $200 million working capital facility which
matures in September 1999, and a $25 million facility used solely to purchase
real property to be utilized as the Company's corporate headquarters and
operations campus which is payable in equal installments of $12.5 million in
September of 1998 and 1999. The Company is currently in the process of seeking
alternative permanent financing for the $25 million real estate loan. Pricing on
the $200 million component is LIBOR plus 1% while pricing on the $25 million
component is LIBOR plus 1.25%. All pricing on the Credit Facility is subject to
adjustment based on certain performance criteria. Total borrowings are based on
certain limits, as defined, and secured by substantially all the assets of the
Company. The Credit Facility subjects the Company to certain restrictions and
covenants related to, among others, tangible net worth, debt to tangible net
worth and net earnings, and limits the amount available for capital expenditures
and dividends.
In 1996, the Company entered into a receivable securitization agreement,
whereby a portion of trade receivables are pledged to a third party as
collateral for up to $100 million, which matures in September 1999, subject to
certain conditions. The interest rate applicable to the receivable
securitization is based upon the bank's commercial paper rate plus 55 basis
points.
Working capital at December 31, 1996 was $342 million compared to $225
million at December 31, 1995, resulting in a working capital ratio of 2.2 in
1996 and 1.9 in 1995. The increase in working capital was funded from the
increased borrowings under the Company's credit facilities. Contributing to the
increase in working capital was higher accounts receivable primarily related to
the Company's significant revenue growth and higher levels of inventory
allocated to specific customers, partially offset by an increase in accounts
payable.
The Company's capital asset requirements are generally funded through the
Credit Facility, receivables securitization, internally generated funds or
leasing sources. The business is not capital asset intensive, and capital
expenditures in any year normally would not be significant in relation to the
overall financial position of the Company. However, during the third quarter of
1996, the Company purchased real property to be utilized as a new corporate
headquarters and operations campus for approximately $26 million which will be
funded on an interim basis through the Credit Facility pending permanent
mortgage financing. This new facility, located in Dallas, Texas, consists of
two buildings containing approximately 250,000 square feet of office space,
situated on 20 acres, and will allow the Company to centralize most of its
Dallas area operations while providing expansion capability for future growth.
The Company has begun to refurbish and update the new facility and currently
anticipates the consolidation of its existing Dallas headquarters and operations
from two leased facilities to the new site by the third quarter of 1997. In
addition, during the third quarter of 1996, the Company relocated its eastern
distribution center to a new leased facility in Paulsboro, New Jersey. This
300,000 square foot facility contains a state-of-the-art 90,000 square foot
configuration center that will enable the Company to meet increasing customer
demand for advanced system and network configuration technologies. Capital
expenditures were $42 million in 1996, of which approximately $26 million was
related to the purchase of the new corporate headquarters and operations campus
and related capitalized interest costs and $6 million related to the new eastern
distribution center. Excluding anticipated spending in 1997 related to the new
corporate headquarters and operations campus, the Company expects capital
expenditures to return to historical levels which are not significant to the
overall financial position of the Company.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The consolidated financial statements and schedule filed with this report
appear on pages F-2 through F-15, and are listed on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
14
PART III
--------
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
The executive officers of the Company as of March 14, 1997 are as follows:
Name Age Position
---- --- --------
Edward Anderson (1) 50 President and Chief Executive Officer
Daniel F. Brown (2) 51 Executive Vice President, Sales
M. Lazane Smith (3) 42 Senior Vice President, Finance and Chief Financial Officer
(1) Mr. Anderson has served as President and Chief Executive Officer since
January 1994. Mr. Anderson joined the Company in August 1993 as Chief
Operating Officer and has been a Director of the Company since 1993. Prior
to joining the Company, he held the position of President and Chief
Operating Officer of Computerland Corporation from 1989 until 1993.
(2) Mr. Brown has held the position of Executive Vice President, Sales since
February 1989, when he was promoted from Vice President, Sales, a position
he had held since joining the Company in 1987. Mr. Brown has been a
Director of the Company since 1990.
(3) Ms. Smith has held the position of Senior Vice President, Finance and Chief
Financial Officer since February 1997. Ms. Smith joined the Company in
1993 as Corporate Controller and was promoted to Vice President Finance and
Corporate Controller in 1994. Prior to joining the Company, she held the
position of Vice President Finance of Score Group, Inc. from 1992 to 1993
and worked with Coca-Cola Enterprises from 1986 to 1992, serving in her
final role there as Regional Vice President Finance and Chief Financial
Officer.
15
DIRECTORS
The Company incorporates by reference the information contained under the
caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement relative to
its May 14, 1997 annual meeting of stockholders, to be filed within 120 days
after the end of the year covered by this Form 10-K Report pursuant to
Regulation 14A under the Securities Exchange Act of l934, as amended.
DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K
The Company incorporates by reference the information contained under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in its
definitive Proxy Statement relative to its May 14, 1997 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
The Company incorporates by reference the information contained under the
captions "Directors' Compensation" and "Executive Compensation" in its
definitive Proxy Statement relative to its May 14, 1997 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The Company incorporates by reference the information contained under the
caption "Securities Ownership of Certain Beneficial Owners and Management" in
its definitive Proxy Statement relative to its May 14, 1997 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Company incorporates by reference the information contained under the
caption "Certain Transactions" in its definitive Proxy Statement relative to its
May 14, 1997 annual meeting of stockholders, to be filed within 120 days after
the end of the year covered by this Form 10-K Report pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.
16
PART IV
-------
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------- ---------------------------------------------------------------
(a) Financial Statements and Schedules.
The financial statements and financial statement schedule filed with this
report are listed on page F-1.
(b) Reports on Form 8-K.
None filed during the fourth quarter of 1996.
(c) Exhibits.
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Report. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous filing is indicated in
parentheses.
17
Exhibit
No. Description
- ------- -----------
3(a) Certificate of Incorporation of CompuCom Systems, Inc. (1) (Exhibit B)
3(b) Certificate of Amendment of the Certificate of Incorporation of
CompuCom Systems, Inc. (4) (Exhibit 3(b))
3(c) Certificate of Amendment of the Certificate of Incorporation of
CompuCom Systems, Inc., filed November 30, 1992 (6) (Exhibit 4(c))
3(d) Certificate of Amendment of the Certificate of Incorporation of
CompuCom Systems, Inc., filed July 1, 1993 (6) (Exhibit 4(d))
3(e) Bylaws of CompuCom Systems, Inc., revised April 1, 1991 (4) (Exhibit
3(c))
4(a) Form of Stock Certificate evidencing Common Stock, $.01 par value, of
CompuCom Systems, Inc. (2) (Exhibit 4(b))
4(b)** CompuCom Systems, Inc. 1983 Stock Option Plan, as amended (5) (Exhibit
4(k))
4(c)** CompuCom Systems, Inc. 1993 Stock Option Plan, as amended (11) Exhibit
4(c))
4(d)** CompuCom Systems, Inc. 1984 Non-Qualified Stock Option Plan, as amended
(3) (Exhibit 4(g))
4(e)** CompuCom Systems, Inc. Stock Option Plan for Directors (10) (Exhibit
4(g))
4(f)** Stock Option Agreement dated July 21, 1995 between CompuCom Systems,
Inc. and Delbert W. Johnson (10) (Exhibit 4(i))
4(g) Certificate of Designation dated March 31, 1994, establishing Series B
Cumulative Convertible Preferred Stock of CompuCom Systems, Inc. (8)
(Exhibit 4(i))
4(h) Form of Stock Certificate evidencing Series B Cumulative Convertible
Preferred Stock, $.01 par value, of CompuCom Systems, Inc. (9) (Exhibit
4(h))
4(i) $3 Million Subordinated Convertible Note dated October 31, 1995 from
CompuCom Systems, Inc. to Network Compatibility Group, Inc. (11)
(Exhibit 4(k))
10(a)** CompuCom Systems, Inc. 401(k) Matched Savings Plan, as amended and
restated effective January 1, 1989 (7) (Exhibit 10(a))
10(b)** Amendment 1996-1 to CompuCom Systems, Inc. 401(k) Matched Savings Plan,
effective May 1, 1996 (12) (Exhibit 10.9)
10(c) Security Agreement for Wholesale Financing, dated August 2, 1991,
between CompuCom Systems, Inc. and IBM Credit Corporation, with
Addendum dated as of October 24, 1991 (4) (Exhibit 10(b))
10(d) Amendment to Security Agreement for Wholesale Financing, dated
September 20, 1996, between CompuCom Systems, Inc. and IBM Credit
Corporation. *
18
Exhibit
No. Description
- ------- -----------
10(e) Security Agreement for Wholesale Financing, dated December 27, 1993,
between CompuCom Systems, Inc. and Compaq Computer Corporation (7)
(Exhibit 10(e))
10(f) Intercreditor Agreement, dated December 27, 1993, among NationsBank of
Texas, N.A., CompuCom Systems, Inc., and Compaq Computer Corporation
(7) (Exhibit 10(f))
10(g) Subordination Agreement, dated August 22, 1994, among Hewlett-Packard
Company, NationsBank of Texas, N.A., and IBM Credit Corporation,
pertaining to certain assets of CompuCom Systems, Inc. (9) (Exhibit
10(h))
10(h) Intercreditor Agreement, dated as of April 1, 1996, among NationsBank
of Texas, N.A., CompuCom Systems, Inc. and IBM Credit Corporation (12)
(Exhibit 10.4)
10(i) Credit Agreement, dated as of September 26, 1996, between NationsBank
of Texas, N.A. and CompuCom Systems, Inc. (exhibits and schedules
omitted) (13) (Exhibit 10.1)
10(j) Amended and Restated Master Security Agreement and Administration
Agreement, dated as of September 25, 1996, among CompuCom Systems,
Inc., NationsBank of Texas, N.A., CSI Funding, Inc. and Enterprise
Funding Corporation (exhibits omitted) (13) (Exhibit 10.2)
10(k) Amendment No. 1 to Amended and Restated Master Security Agreement and
Administration Agreement, dated as of December 5, 1996, among CompuCom
Systems, Inc., NationsBank of Texas, N.A., CSI Funding, Inc. and
Enterprise Funding Corporation (exhibits omitted) *
10(l) Receivables Purchase Agreement, dated as of April 1, 1996, between
CompuCom Systems, Inc. and CSI Funding, Inc. (exhibits omitted) (12)
(Exhibit 10.6)
10(m) First Amendment to Receivables Purchase Agreement, dated as of
September 25, 1996, between CompuCom Systems, Inc. and CSI Funding,
Inc. (exhibits omitted) (13) (Exhibit 10.3)
10(n) Transfer and Administration Agreement, dated as of April 1, 1996, among
CSI Funding, Inc., CompuCom Systems, Inc., Enterprise Funding
Corporation and NationsBank, N.A. (exhibits omitted) (12) (Exhibit
10.7)
10(o) First Amendment to Transfer and Administration Agreement, dated as of
September 25, 1996, among CSI Funding, Inc., CompuCom Systems, Inc.,
Enterprise Funding Corporation and NationsBank, N.A. (exhibits omitted)
(13) (Exhibit 10.4)
10(p) Amendment No. 2 to Transfer and Administration Agreement, dated as of
December 5, 1996, among CSI Funding, Inc., CompuCom Systems, Inc.,
Enterprise Funding Corporation and NationsBank, N.A. (exhibits
omitted) *
10(q) Business Partner Agreement, dated September 15, 1994, between IBM
Corporation and CompuCom Systems, Inc., with Dealer Profile, Remarketer
General Terms, and attachments (9) (Exhibit 10(n))
10(r) IBM Corporation Remarketer Announcement, dated March 13, 1996,
modifying its Business Partner Agreement with CompuCom Systems, Inc. to
automatically extend its term for an additional 12 months upon its
expiration *
19
Exhibit
No. Description
- ------- -----------
10(s) U.S. Reseller Agreement, dated January 23, 1993, between Compaq
Computer Corporation and CompuCom Systems, Inc. (7) (Exhibit 10(l))
10(t) U.S. Reseller Agreement, dated March 1, 1996, between Hewlett-Packard
Company and CompuCom Systems, Inc. (12) (Exhibit 10.8)
10(u) Administrative Services Agreement, dated January 1, 1988, between
CompuCom Systems, Inc. and Safeguard Scientifics, Inc., with Letter
Amendment dated as of April 1, 1991 (4) (Exhibit 10(z))
10(v) Lease dated May 16, 1996, between CompuCom Systems, Inc. and The Riggs
National Bank of Washington, D.C. for premises at 1225 Forest Parkway,
Paulsboro, New Jersey (exhibits omitted) (13) (Exhibit 10.8)
10(w) Ratification Agreement dated January 9, 1992 between CompuCom Systems,
Inc. and The Arch Street Group with respect to assignment of Lease
dated November 1, 1988 between The Arch Road Group and Photo & Sound
Company (attached) for premises at 4686 Frontier, Stockton, California
(4) (Exhibit 10(dd))
10(x) Deed of Trust, Assignment, Security Agreement and Financing Statement,
dated December 29, 1993, from CompuCom Systems, Inc., to Comerica
Bank - Texas, for 10100 North Central Expressway, Dallas, Texas (7)
(Exhibit 10(v))
10(y) $3,900,000 Promissory Note, dated December 29, 1993, to Comerica Bank -
Texas, secured by premises at 10100 North Central Expressway, Dallas,
Texas (7) (Exhibit 10(w))
10(z) Deed of Trust, Assignment of Leases and Rents, Security Agreement and
Financing Statement, dated as of September 27, 1996, from CompuCom
Systems, Inc. to Nationsbank of Texas, N.A. (exhibits omitted) (13)
(Exhibit 10.7)
10(aa) Lease dated December 2, 1994 between CompuCom Systems, Inc. and ZML -
Glen Lakes Tower Limited Partnership for premises at 9400 North Central
Expressway, Dallas Texas (9) (Exhibit 10(aa))
10(bb) Stock Purchase Agreement between CompuCom Systems, Inc. and Rosetta
Stone Corporation, dated January 5, 1994, regarding sale of common
stock of PC Parts Express, Inc. (exhibits omitted), with attached
$3,500,000 Promissory Note, Pledge and Security Agreement, and PC Parts
Express, Inc. Common Stock Purchase Warrant (7) (Exhibit 10(x))
10(cc) Asset Purchase Agreement among Rosetta Stone Corporation, Teknowlogy
Corp., and CompuCom Acquisition Corporation, d/b/a/ MicroSolutions,
dated January 5, 1994, regarding sale of MicroSolutions' Network
Training Group division (exhibits omitted), with attached $1,000,000
Installment Promissory Note, and Pledge and Security Agreement (7)
(Exhibit 10(y))
10(dd)** $210,000 Secured Promissory Note dated November 1, 1994 from James W.
Dixon, to CompuCom Systems, Inc. (9) (Exhibit 10(ff))
10(ee)** Stock Purchase Agreement between CompuCom Systems, Inc. and James W.
Dixon, dated July 15, 1995, regarding sale of shares of common stock of
ClientLink, Inc. to Mr. Dixon, with attached $112,500 Secured Term Note
and Pledge Agreement of even date (11) (Exhibit 10(ff))
20
Exhibit
No. Description
- ------- -----------
10(ff)** $1,181,250 Amended and Restated Secured Term Note, dated February 12,
1997, from Edward R. Anderson to CompuCom Systems, Inc. *
10(gg)** Pledge Agreement, dated August 31, 1994, between Edward R. Anderson and
CompuCom Systems, Inc. (9) (Exhibit 10(nn))
11 Computation of Per Share Earnings *
21 List of Subsidiaries *
23 Consent of KPMG Peat Marwick LLP *
27 Financial Data Schedule *
_______________
* Filed herewith
** These exhibits relate to management contracts or to compensatory plans,
contracts or arrangements in which directors and/or executive officers
of the registrant may participate, required to be filed as exhibits to
this Form 10-K.
(1) Filed on April 19, 1989 as an exhibit to the 1989 Annual Meeting Proxy
Statement and incorporated herein by reference.
(2) Filed on April 2, 1990 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(3) Filed on March 29, 1991 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(4) Filed on March 30, 1992 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(5) Filed on March 31, 1993 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(6) Filed on March 14, 1994 as an exhibit to the Registration Statement on Form
S-8 (No. 33-76382) and incorporated herein by reference.
(7) Filed on March 31, 1994 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(8) Filed on May 15, 1994 as an exhibit to the Quarterly Report on Form 10-Q
(No. 0-14371) and incorporated herein by reference.
(9) Filed on March 31, 1995 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(10) Filed on October 10, 1995 as an exhibit to the Registration Statement on
Form S-8 (No. 33-63309) and incorporated herein by reference.
(11) Filed on March 29, 1996 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(12) Filed on May 13, 1996 as an exhibit to the Quarterly Report on Form 10-Q
(No. 0-14371) and incorporated herein by reference.
(13) Filed on November 12, 1996 as an exhibit to the Quarterly Report on Form
10-Q (No. 0-14371) and incorporated herein by reference.
21
Index to Consolidated Financial Statements
------------------------------------------
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts F-16
F-1
Independent Auditors' Report
----------------------------
The Stockholders and Board of Directors
CompuCom Systems, Inc.:
We have audited the accompanying consolidated balance sheets of CompuCom
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CompuCom
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Dallas, Texas
January 29, 1997
F-2
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands, except share and per share amounts)
Assets 1996 1995
------ --------- ---------
Current assets:
Cash $ 4,320 $ 4,249
Receivables, less allowance for doubtful accounts
of $2,274 in 1996 and $2,234 in 1995 377,598 265,071
Inventories 233,464 196,531
Other 3,508 2,151
--------- ---------
Total current assets 618,890 468,002
Property and equipment:
Land, building and improvements 33,067 6,245
Furniture, fixtures and other equipment 31,556 20,564
Leasehold improvements 6,502 3,091
--------- ---------
71,125 29,900
Less accumulated depreciation and amortization (16,817) (11,647)
--------- ---------
Net property and equipment 54,308 18,253
Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 16,513 18,146
Other assets 3,274 4,303
--------- ---------
$ 692,985 $ 508,704
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 217,424 $ 189,180
Accrued liabilities 59,342 53,867
--------- ---------
Total current liabilities 276,766 243,047
Long-term debt 236,450 120,364
Deferred income taxes 5,671 3,952
Convertible subordinated notes 3,000 3,000
Stockholders' equity:
Series B preferred stock, $10 stated value. Authorized 3,000,000
shares; issued and outstanding 1,500,000 shares in 1996 and 1995 15,000 15,000
Common stock, $.01 par value. Authorized 70,000,000 shares;
issued and outstanding 44,927,571 shares in 1996
and 44,100,732 shares in 1995 449 441
Additional paid-in capital 60,966 57,788
Retained earnings from July 1, 1987 94,683 65,112
--------- ---------
Total stockholders' equity 171,098 138,341
--------- ---------
$ 692,985 $ 508,704
========= =========
See accompanying notes to consolidated financial statements
F-3
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
(In thousands, except per share amounts)
1996 1995 1994
----------- ----------- ----------
Revenue
Product $ 1,816,504 $ 1,334,442 $ 1,197,278
Service 169,600 100,868 55,895
Other 9,087 6,287 2,640
----------- ----------- -----------
Total revenue 1,995,191 1,441,597 1,255,813
----------- ----------- -----------
Cost of revenue
Product 1,635,653 1,193,513 1,075,624
Service 113,046 70,107 37,590
Other 5,529 3,069 906
----------- ----------- -----------
Total cost of revenue 1,754,228 1,266,689 1,114,120
----------- ----------- -----------
Gross margin 240,963 174,908 141,693
Operating expenses
Selling and service 119,981 84,270 72,157
General and administrative 55,580 37,722 29,137
Depreciation and amortization 8,760 6,291 4,621
----------- ----------- -----------
Total operating expenses 184,321 128,283 105,915
----------- ----------- -----------
Earnings from operations 56,642 46,625 35,778
Interest expense (14,764) (12,290) (11,346)
Non-recurring gain on sale of securities 8,738
----------- ----------- -----------
Earnings before income taxes 50,616 34,335 24,432
Income taxes 20,145 13,665 9,773
----------- ----------- -----------
Net earnings $ 30,471 $ 20,670 $ 14,659
=========== =========== ===========
Earnings per common share
Primary $ .63 $ .51 $ .40
Fully diluted $ .61 $ .44 $ .34
Average common shares outstanding
Primary 47,289 38,449 35,714
Fully diluted 50,050 49,301 44,123
See accompanying notes to consolidated financial statements.
F-4
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands, except share amounts)
Preferred Stock Common Stock Additional Total
----------------- ----------------- Paid-in Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------- -------- ------
Balances at December 31, 1993 31,331,245 $313 $23,984 $31,433 $ 55,730
Issuance of preferred stock 2,000,000 $20,000 20,000
Issuance of common stock 335,665 3 1,197 1,200
Exercise of common stock warrants 1,426,666 14 2,213 2,227
Exercise of options 601,188 7 770 777
Preferred stock dividend (225) (225)
Net earnings 14,659 14,659
--------- ---------------------------- ----------------------------
Balances at December 31, 1994 2,000,000 20,000 33,694,764 337 28,164 45,867 94,368
Conversion of preferred stock (500,000) (5,000) 738,552 7 4,993
Conversion of convertible debt 8,409,087 84 18,366 18,450
Exercise of common stock warrants 53,331 1 79 80
Exercise of options 1,204,998 12 1,886 1,898
Pre-restructuring tax benefit 4,300 4,300
Preferred stock dividend (1,425) (1,425)
Net earnings 20,670 20,670
---------- -------- ---------- ---- ------- -------- ---------
Balances at December 31, 1995 1,500,000 15,000 44,100,732 441 57,788 65,112 138,341
Exercise of common stock warrants 71,666 1 107 108
Exercise of options 755,173 7 3,071 3,078
Preferred stock dividend (900) (900)
Net earnings 30,471 30,471
---------- -------- ---------- ---- ------- -------- ---------
Balances at December 31, 1996 1,500,000 $15,000 44,927,571 $449 $60,966 $94,683 $171,098
========== ======== ========== ==== ======= ======= ========
See accompanying notes to consolidated financial statements.
F-5
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net earnings $ 30,471 $ 20,670 $ 14,659
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 8,760 6,291 4,621
Deferred income taxes 1,719 355 2,525
Gain on sale of securities (8,738)
Changes in assets and liabilities:
Receivables (111,936) (28,450) (25,546)
Inventories (36,933) (41,290) (34,207)
Other current assets (1,357) 20 (145)
Accounts payable 28,244 35,111 4,899
Accrued liabilities and other 8,715 13,890 7,127
--------- --------- ---------
Net cash provided by (used in) operating activities (81,055) 6,597 (26,067)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures, net (42,135) (5,999) (5,018)
Business acquisitions, net of cash acquired (6,479) (2,310) (2,741)
Proceeds from sale of securities 11,368
--------- --------- ---------
Net cash (used in) investing activities (37,246) (8,309) (7,759)
--------- --------- ---------
Cash flows from financing activities:
Net bank credit facility and other borrowings 116,086 1,332 11,332
Issuance of preferred stock 20,000
Issuance of common stock 3,186 1,978 2,854
Preferred stock dividend (900) (1,425) (225)
--------- --------- ---------
Net cash provided by financing activities 118,372 1,885 33,961
--------- --------- ---------
Net increase in cash 71 173 135
Cash at beginning of year 4,249 4,076 3,941
--------- --------- ---------
Cash at end of year $ 4,320 $ 4,249 $ 4,076
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
------------------------------------------
Description of Business
-----------------------
CompuCom Systems, Inc. and subsidiaries (the "Company") is a
leading provider of distributed desktop computer products and network
integration services for large corporate customers. CompuCom's
services include LAN/WAN projects, consulting, network management,
help desk, field engineering, configuration, product distribution and
procurement.
Principles of Consolidation
---------------------------
The consolidated financial statements include the financial
statements of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates
----------------
The preparation of the consolidated financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Inventories
-----------
Inventories are stated at the lower of average cost or market.
The Company continually assesses the appropriateness of the inventory
valuations giving consideration to obsolete, slow-moving and non-
salable inventory.
Property and Equipment
----------------------
Property and equipment are stated at cost less accumulated
depreciation and amortization. Provision for depreciation and
amortization is based on the estimated useful lives of the assets
(building and leasehold improvements, 3 to 20 years; furniture and
equipment, 5 years) and is computed primarily on the straight-line
method.
Cost in Excess of Fair Value of Tangible Net Assets Purchased
-------------------------------------------------------------
Cost in excess of fair value of tangible net assets purchased
represents goodwill and customer lists and is amortized using the
straight-line method over a 7 to 10 year period. Accumulated
amortization at December 31, 1996 and 1995 was $9,846,000 and
$7,686,000, respectively. The Company continually evaluates goodwill
for indications of impairment based on projected undiscounted net cash
flows from operations of the related business unit (including possible
proceeds from the sale of the business).
Revenue Recognition
-------------------
Product revenues are recognized upon shipment, with provisions
made for anticipated returns, which historically have been immaterial.
Service revenues are recognized when the service is rendered or
ratably if performed over a service contract period.
F-7
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Vendor Programs
---------------
The Company receives volume incentives and rebates from certain
manufacturers related to sales of certain products which are recorded
as a reduction of cost of goods sold when earned. The Company also
receives manufacturer reimbursements for certain training, promotional
and marketing activities that offset the expenses incurred by the
Company.
Income Taxes
------------
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Earnings Per Common Share
-------------------------
Primary earnings per common share is based on net earnings after
preferred stock dividend requirements, if any, and the weighted-
average number of common shares outstanding during each year,
including stock options and warrants considered to be dilutive common
stock equivalents. Fully diluted earnings per common share assumes
full conversion of dilutive convertible securities into common stock
at the later of the beginning of the year or date of issuance and
includes the add-back of related interest and/or dividends, as
required.
Restructuring
-------------
In connection with the redirection of the Company and the
effective discontinuation of its previous business activities, the
accumulated deficit as of July 1, 1987 was reclassified as a reduction
of additional paid-in capital to better reflect the financial position
and new operating focus of the Company. Retained earnings represent
the cumulative net earnings of the Company since July 1, 1987, less
dividends.
Financial Instruments
---------------------
The Company's financial instruments, principally cash, accounts
receivable, accounts payable and accrued liabilities, are carried at
cost which approximates fair value due to the short-term maturity of
these instruments. As amounts outstanding under the Company's credit
agreements bear interest approximating current market rates, their
carrying amounts approximate fair value. The fair value of the
Company's Convertible Subordinated Notes approximates cost based upon
quoted market prices.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
--------------------------------------------------------------------
of
--
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", on
January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell. The adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
F-8
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock-Based Compensation
-------------------------
In 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which gives companies the option to adopt
the fair-value method for expense recognition of employee stock
options or to continue to account for stock options and stock-based
awards using the intrinsic-value method as outlined under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and to make pro forma disclosures of net
earnings and net earnings per share as if the fair-value method had
been applied. The Company has elected to continue to apply APB 25 for
stock options and stock-based awards and has disclosed pro forma net
earnings and net earnings per share as if the fair-value method had
been applied.
Reclassifications
-----------------
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform with the 1996
presentation.
(2) Inventories
-----------
Inventory is comprised of product inventory and spare parts. At
December 31, 1996 and 1995, total inventory was $233.5 million and $196.5
million, respectively, net of inventory reserves of $8.9 million and $9.5
million for the same periods. Gross product inventory was $227.6 million
and $186.2 million at December 31, 1996 and 1995, respectively, and gross
spare parts inventory as of the same date was $14.8 million and $19.8
million.
(3) Long-Term Debt
--------------
The Company has financing arrangements which total $325 million,
consisting of a $200 million working capital facility, $25 million real
estate loan and a $100 million receivable securitization. During 1996, the
Company replaced the August 1993 Financing and Security Agreement with a
new Credit Agreement ("Credit Facility"), increasing the amount of the
Company's credit facility to $225 million from $175 million, extending the
maturity date, and making substantially all of the facility LIBOR-based.
The $225 million Credit Facility is comprised of two elements: a $200
million working capital facility which matures in September 1999, and a $25
million facility used solely to purchase real property to be utilized as
the Company's corporate headquarters and operations campus, which is
payable in equal installments of $12.5 million in September 1998 and 1999.
Pricing on the $200 million component is LIBOR plus 1% while pricing on the
$25 million component is LIBOR plus 1.25%. The interest rate on the $200
million working capital facility at December 31, 1996 was 6.6%. All
pricing on the Credit Facility is subject to adjustment based on certain
performance criteria. Total borrowings are based on certain limits, as
defined, and secured by substantially all the assets of the Company. The
Credit Facility subjects the Company to certain restrictions and covenants
related to, among others, tangible net worth, debt to tangible net worth
and net earnings, and limits the amount available for capital expenditures
and dividends.
In 1996, the Company entered into a receivable securitization
agreement, whereby a portion of trade receivables are pledged to a third
party as collateral, for up to $100 million, which matures in September
1999, subject to certain conditions. The interest rate applicable to the
receivable securitization is based upon the bank's commercial paper rate
(which at December 31, 1996 was 5.42%) plus 55 basis points.
The Company's highest level of borrowing was $271 million and $156
million in 1996 and 1995, respectively. Of the $325 million of
availability, $234 million was outstanding at December 31, 1996.
F-9
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A $3.9 million mortgage term loan on the Company's existing corporate
headquarters building in Dallas, Texas is payable in monthly installments
of $32,500 plus interest at 8.1%. At December 31, 1996, the balance
outstanding on the mortgage loan was $2.7 million.
The Company paid interest of $15.3 million, $12.1 million and $10.9
million, and the weighted-average interest rate on the Credit Facility and
receivables securitization was approximately 6.7%, 7.9% and 7.3%, in 1996,
1995 and 1994, respectively.
(4) Convertible Subordinated Notes
-------------------------------
In 1995, the Company called for the redemption of $18.5 million of 9%
Convertible Subordinated Notes which were converted into 8.4 million shares
of common stock.
In conjunction with an acquisition in 1995, the Company issued $3
million of 5% Convertible Subordinated Notes which are due in 1998 and
convertible at any time into approximately 387,600 shares of the Company's
common stock at $7.74 per share.
(5) Income Taxes
------------
The provision for income taxes is comprised of the following (in
thousands):
1996 1995 1994
----------- ---------- ---------
Current:
Federal $ 16,826 $ 11,991 $ 6,437
State 1,600 1,319 655
Deferred 1,719 355 2,681
----------- ---------- ---------
$ 20,145 $ 13,665 $ 9,773
=========== ========== ========
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% in 1996, 1995 and 1994 to earnings
before income taxes as a result of the following (in percentages):
1996 1995 1994
----------- ----------- -----------
Computed "expected" tax expense 35.0% 35.0% 35.0%
State taxes, net of U.S. Federal
income tax benefit 2.1% 2.5% 1.7%
Other, net 2.7% 2.3% 3.3%
----------- ----------- -----------
39.8% 39.8% 40.0%
=========== =========== ===========
(continued)
F-10
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below (in thousands).
1996 1995
------ ------
Deferred tax assets:
Inventories, principally due to reserves and additional
costs inventoried for tax purposes $ 713 $ 609
Accounts receivable, principally due to allowance for
doubtful accounts 796 782
Other 2,069 1,712
------ ------
Deferred tax assets 3,578 3,103
------ ------
Deferred tax liabilities:
Accelerated depreciation 3,104 1,549
Other 6,145 5,506
------ ------
Deferred tax liabilities 9,249 7,055
====== ======
Net deferred tax liability $5,671 $3,952
====== ======
There were $19.4 million, $9.7 million and $9.9 million of income
taxes paid in 1996, 1995 and 1994, respectively, net of refunds.
(6) Preferred Stock
---------------
The Company has authorized three million shares of Series B Cumulative
Convertible Preferred Stock ("Series B Shares"), stated value $10. In
1994, Safeguard Scientifics, Inc., ("Safeguard") purchased from the Company
$20 million (2,000,000 shares) of its Series B Shares. The Series B Shares
are convertible into shares of Common Stock based on a conversion price of
$6.77 per share subject to anti-dilutive adjustments. The Series B Shares
are entitled to a 6% per annum cumulative dividend payable out of legally
available funds. The Series B Shares are entitled to one vote for each
share of Common Stock into which such Series B Shares may be converted,
except that in the election of directors (as long as Safeguard owns at
least 40% of the Company's then outstanding voting securities, excluding
the Series B Shares), the Series B Shares will be entitled to five votes
for each share of Common Stock into which the Series B Shares may be
converted. Safeguard has up to a 60% voting interest as a result of its
ownership of the Series B Shares. On December 29, 1995, Safeguard
converted 500,000 of its Series B Shares into 738,552 shares of the
Company's Common Stock.
(7) Stock-Based Compensation
------------------------
The Company maintains four stock option plans covering certain key
employees and outside directors. The 1983 Stock Option Plan and the 1984
Non-Qualified Stock Option Plan expired by their terms in May 1993 and
January 1994, respectively, and therefore no new grants can be awarded out
of those plans. The Company adopted a 1993 Stock Option Plan under which
the Company may grant qualified or non-qualified stock options. This plan
was amended in 1995 to increase the number of shares available. To the
extent allowable, all grants are incentive stock options. All options
granted under the plans to date have an exercise price equal to the market
price of the Company's stock on the date of grant. Generally, options vest
20% each year and expire after 10 years.
(continued)
F-11
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under the Stock Option Plan for Directors, options to non-employee
directors are granted with an exercise price equal to the market price of
the Company's stock on the date of grant. Non-employee directors are
initially granted 10,000 shares upon election to the Board, with subsequent
service grants awarded in accordance with formulas based upon years of
service. Options under this plan vest 25% each year and expire after 10
years. At December 31, 1996, the Company has reserved approximately 5.5
million shares of its common stock for issuance under its stock option
plans.
The Company applies APB 25 and related interpretations in accounting
for its various stock option plans. Had compensation cost been recognized
consistent with SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
(In thousands, except per share amounts) 1996 1995
Net earnings As reported $ 30,471 $ 20,670
Pro forma $ 29,409 $ 20,228
Primary earnings per share As reported $ .63 $ .51
Pro forma $ .60 $ .49
Fully diluted earnings per share As reported $ .61 $ .44
Pro forma $ .59 $ .43
The per share weighted-average value of stock options issued by the
Company during 1996 and 1995 was $4.91 and $2.43, respectively, on the date
of grant using the Black Scholes option-pricing model. The Company used the
following weighted-average assumptions to determine the fair value of stock
options granted:
1996 1995
----------------- -----------------
Dividend yield 0% 0%
Expected volatility 64% 62%
Average expected option life 5 years 5 years
Risk-free interest rate 5.8% to 6.5% 5.4% to 7.1%
Pro forma net earnings reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period and compensation cost for options granted prior to
January 1, 1995 is not considered.
(continued)
F-12
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Option activity under the Company's plans is summarized below:
1996 1995 1994
----------------------- ------------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- -------- ------------- --------- ------------- ---------
(In thousands) (In thousands) (In thousands)
Outstanding at beginning of year 4,278 $2.81 4,417 $2.07 4,914 $1.90
Granted 845 8.28 1,407 4.10 612 3.68
Exercised (761) 1.90 (1,246) 1.64 (981) 2.18
Canceled (341) 5.82 (300) 2.81 (128) 2.43
----- ------ -----
Outstanding at end of year 4,021 $3.96 4,278 $2.81 4,417 $2.07
===== ===== =====
Options exercisable at year-end 1,970 $2.40 2,048 $1.80 2,874 $1.60
Shares available for future grant 1,483 2,014 244
The following summarizes information about the Company's stock
options outstanding at December 31, 1996 :
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ----------------- --------------- ------------------ ------------- --------------- -------------
(In thousands) (years) (In thousands)
$1.00 - $ 2.00 1,018 1.8 $1.42 1,013 $1.42
2.25 - 3.13 1,008 6.5 3.00 608 2.99
3.50 - 4.63 1,037 8.0 3.79 301 3.72
4.75 - 12.50 958 9.0 7.86 48 7.31
----- ----- -----
$1.00 - $ 12.50 4,021 6.3 $3.96 1,970 $2.40
===== =====
In conjunction with certain subordinated debentures issued in
1991, and repaid in 1992, warrants were issued to acquire approximately 1.4
million shares of common stock at a purchase price of $1.50 per share,
exercisable through April 1996. During 1996, 1995 and 1994, approximately
72,000, 53,000 and 1,177,000 of these warrants were exercised,
respectively. There are no warrants outstanding at December 31, 1996.
F-13
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Related Party Transactions
--------------------------
During the second quarter of 1996, the Company participated in the
secondary stock offering of PC Service Source, Inc. ("PCSS") resulting in
an after tax, non-recurring gain on the sale of securities of $5.2 million.
Concurrently, the Company exercised warrants for 250,000 shares of PCSS
common stock at an exercise price of $2.25, selling those shares in
conjunction with the secondary offering. The Company founded PCSS in 1990,
then known as PC Parts Express, Inc., and in January 1994, sold the
majority of its interest in PCSS to a venture capital company primarily
owned by a former officer and director of the Company in exchange for cash,
a secured note receivable, and warrants to purchase additional PCSS common
stock. In April 1994, the Company participated in an initial public
offering of PCSS common stock. At December 31, 1995, the Company owned
approximately 21% of the outstanding common shares of PCSS and accounted
for this investment using the equity method until the completion of the
secondary stock offering, after which the Company owned less than 5% of the
outstanding common shares of PCSS.
In 1994, the Company sold substantially all of the assets of its
network training business to the aforementioned venture capital company in
exchange for a secured note receivable and royalty agreement.
In 1994, the Company loaned an officer and director of the Company
$1,181,250 secured by a term note receivable, which was included in
receivables at December 31, 1996. Interest on the note accrues at the rate
of 6% per annum and is payable annually on January 1 of each year. Terms
of the note were amended in February 1997 such that principal on the note
is due on February 15, 1999.
Safeguard owns approximately 50% of the Company's common stock as of
December 31, 1996. The Company pays Safeguard a fee for providing certain
administrative, legal and financial services to the Company. General and
administrative expenses include fees paid to Safeguard of $600,000 in 1996,
1995 and 1994.
(9) Leases
------
The Company has noncancelable operating leases for facilities and
equipment which expire at various dates from 1997 to 2004. Total rental
expense for operating leases was $10.4 million, $6.2 million and $4.8
million in 1996, 1995 and 1994, respectively. Future minimum lease
payments under noncancelable operating leases as of December 31, 1996 are:
$7.4 million - 1997; $6.6 million - 1998; $5.7 million - 1999; $4.0 million
- 2000; $2.2 million - 2001; and $1.9 million - thereafter.
(10) Savings Plan
------------
The Company has a defined contribution plan (401(k) Matched Savings
Plan) covering substantially all employees who have completed at least six
months of qualifying service. Participants may contribute to the Plan an
amount between 1% and 10% of their total annual compensation. The Company
matches 50% of each participant's qualifying contribution up to 4%, and an
additional 25% of the next 2% of the participants qualifying contributions.
Amounts expensed relating to the Plan were $1.5 million, $1.0 million and
$0.6 million in 1996, 1995 and 1994, respectively.
(11) Contingencies
-------------
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position and results of
operations, taken as a whole.
F-14
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Quarterly Financial Data (Unaudited)
------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------- --------- --------- ---------
(in thousands, except per share amounts)
1996
- ----
Revenue
Product $ 377,983 $ 467,817 $ 449,950 $ 520,754
Service 32,937 38,760 46,570 51,333
Other 2,414 2,178 1,961 2,534
--------- --------- --------- ---------
Net revenue 413,334 508,755 498,481 574,621
Gross margin
Product $ 38,169 $ 47,073 $ 46,088 $ 49,521
Service 12,237 11,630 14,470 18,217
Other 845 588 748 1,377
--------- --------- --------- ---------
Total gross margin 51,251 59,291 61,306 69,115
Net earnings $ 5,762 $ 12,334 * $ 4,945 $ 7,430
Earnings per common share
Primary .12 .25 * .10 .15
Fully diluted .12 .25 * .10 .15
1995
- ----
Revenue
Product $ 302,401 $ 324,427 $ 319,562 $ 388,052
Service 19,668 25,204 26,988 29,008
Other 1,418 1,079 1,349 2,441
--------- --------- --------- ---------
Net revenue 323,487 350,710 347,899 419,501
Gross margin
Product $ 31,751 $ 33,789 $ 33,134 $ 42,255
Service 5,571 8,240 8,261 8,689
Other 856 524 747 1,091
--------- --------- --------- ---------
Total gross margin 38,178 42,553 42,142 52,035
Net earnings $ 3,835 $ 4,814 $ 4,827 $ 7,194
Earnings per common share
Primary .10 .12 .12 .16
Fully diluted .09 .11 .10 .15
Earnings per common share calculations are based on the weighted-
average number of shares outstanding in each period. Therefore, the sum of
the quarters may not necessarily equal the year-to-date earnings per common
share.
* Includes non-recurring gain on sale of securities of $5.2 million or
$.10 per share.
F-15
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995 and 1994
(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
1994 $ 1,872 963 893 $ 1,942
1995 $ 1,942 900 608 $ 2,234
1996 $ 2,234 900 860 $ 2,274
Inventory reserves
1994 $ 13,783 14,597 18,608 $ 9,772
1995 $ 9,772 13,333 13,581 $ 9,524
1996 $ 9,524 15,529 16,119 $ 8,934
F-16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28 , 1997 COMPUCOM SYSTEMS, INC.
------
By: /s/ Edward R. Anderson
------------------------------------------------
Edward R. Anderson, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 28 , 1997 /s/ Charles A. Root
----- ---------------------------------------------------
Charles A. Root, Chairman of the Board
Dated: March 28 , 1997 /s/ Edward R. Anderson
----- ---------------------------------------------------
Edward R. Anderson, President, Chief Executive
Officer and Director (Principal Executive Officer)
Dated: March 28 , 1997 /s/ M. Lazane Smith
----- ---------------------------------------------------
M. Lazane Smith, Senior Vice President-Finance
(Principal Financial and Accounting Officer)
Dated: March 28 , 1997 /s/ Daniel F. Brown
----- ---------------------------------------------------
Daniel F. Brown, Director
Dated: March 28 , 1997 /s/ James W. Dixon
----- ---------------------------------------------------
James W. Dixon, Director
Dated: March 28 , 1997 /s/ Michael J. Emmi
----- ---------------------------------------------------
Michael J. Emmi, Director
Dated: March 28 , 1997 /s/ Richard F. Ford
----- ---------------------------------------------------
Richard F. Ford, Director
Dated: March 28 , 1997 /s/ Delbert W. Johnson
----- ---------------------------------------------------
Delbert W. Johnson, Director
Dated: March 28 , 1997 /s/ John. D. Loewenberg
----- ---------------------------------------------------
John D. Loewenberg, Director
Dated: March 28 , 1997 /s/ Ira M. Lubert
----- ---------------------------------------------------
Ira M. Lubert, Director
Dated: March 28 , 1997 /s/ Warren V. Musser
----- ---------------------------------------------------
Warren V. Musser, Director
Dated: March 28 , 1997 /s/ Edward N. Patrone
----- ---------------------------------------------------
Edward N. Patrone, Director