<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the three months ended SEPTEMBER 30, 1995 Commission File Number 0-14371
- --------------------------------------------- ------------------------------
COMPUCOM SYSTEMS, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 38-2363156
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10100 N. CENTRAL EXPRESSWAY, DALLAS, TX 75231
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 265-3600
----------------------
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
----- -----
The number of shares of the Registrant's common stock outstanding as of November
9, 1995 was 43,212,915.
- -------------------------------------------------------------------------------
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Condensed Consolidated Balance Sheets
September 30, 1995 (unaudited) and
December 31, 1994 3
Condensed Consolidated Statements of Operations
Three months and nine months ended September 30,
1995 and 1994 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1995 and 1994
(unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K 10
2
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
Assets (unaudited)
------
<S> <C> <C>
Current assets:
Cash $ 4,104 $ 4,076
Receivables 223,349 233,589
Inventories 171,736 155,561
Other 1,702 2,145
--------- ---------
Total current assets 400,891 395,371
Property and equipment, net 17,196 15,910
Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 12,111 12,498
Other assets 4,576 5,752
--------- ---------
$ 434,774 $ 429,531
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 162,669 $ 154,342
Accrued liabilities 38,271 37,623
--------- ---------
Total current liabilities 200,940 191,965
Long-term debt 101,508 118,974
Deferred income taxes 1,318 6,010
Convertible subordinated notes 18,500 18,214
Shareholders' equity:
Preferred stock 20,000 20,000
Common stock 346 337
Additional paid-in capital 33,944 28,164
Retained earnings from July 1, 1987 58,218 45,867
--------- ---------
Total shareholders' equity 112,508 94,368
--------- ---------
$ 434,774 $ 429,531
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
--------- --------- ----------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 347,899 $ 306,654 $ 1,022,096 $ 894,136
Cost of revenues 292,094 263,151 861,136 773,879
--------- --------- ----------- --------
Gross margin 55,805 43,503 160,960 120,257
--------- --------- ----------- --------
Expenses:
Selling and service 34,136 26,506 95,682 72,525
General and administrative 9,100 7,432 28,801 20,707
Interest 2,997 2,968 9,494 8,197
Depreciation and amortization 1,526 1,146 4,523 3,336
--------- --------- ----------- --------
47,759 38,052 138,500 104,765
--------- --------- ----------- --------
Earnings before income taxes 8,046 5,451 22,460 15,492
Income taxes 3,219 2,180 8,984 6,197
--------- --------- ----------- --------
Net earnings $ 4,827 $ 3,271 $ 13,476 $ 9,295
========= ========= =========== ========
Earnings per common share:
Primary $ .12 $ .09 $ .34 $ .25
Fully diluted $ .10 $ .08 $ .29 $ .22
Average common shares outstanding:
Primary 37,206 35,361 36,476 35,807
Fully diluted 45,808 43,802 45,661 44,216
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1995 1994
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 13,476 $ 9,295
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,523 3,336
Other (581)
Deferred income taxes (398) 2,294
Changes in assets and liabilities:
Receivables 11,477 7,623
Inventories (16,490) (36,430)
Other current assets 443 624
Accounts payable 9,179 (6,230)
Accrued liabilities and other 1,608 (1,105)
-------- --------
Net cash provided by (used in)
operating activities 23,818 (21,174)
-------- --------
Cash flows from investing activities:
Capital expenditures, net (4,023) (3,039)
Business acquisitions net of cash acquired (2,481)
-------- --------
Net cash used in investing activities (6,504) (3,039)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under bank
credit facility (17,524) 6,284
Issuance of preferred stock 15,000
Exercise of warrants and options 1,363 2,704
Preferred stock dividend (1,125)
-------- --------
Net cash provided by (used in)
financing activities (17,286) 23,988
-------- --------
Net increase (decrease) in cash 28 (225)
Cash at beginning of period 4,076 3,941
-------- --------
Cash at end of period $ 4,104 $ 3,716
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1995
(1) General
-------
These condensed interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and the summary
of significant accounting policies and notes thereto included in the
Company's 1994 Annual Report on Form 10-K. The information furnished is
unaudited but reflects all adjustments consisting only of normal recurring
accruals which are, in the opinion of management, necessary to present a
fair statement of the results for these interim periods. Interim results
are not necessarily indicative of results expected for the full year.
(2) Long-term Debt
--------------
During April 1995, the Company executed an amendment to the August 1993
Financing and Security Agreement increasing the availability under the
Company's bank revolving credit facility ("Credit Facility") from $150
million to $175 million. The other significant terms under the Credit
Facility remained the same.
(3) 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.
(4) Reclassifications
-----------------
Certain amounts in the 1994 condensed consolidated financial statements
have been reclassified to conform with the 1995 presentation.
(5) Subsequent Event
----------------
On September 25, 1995, the Company called for redemption $18.5 million
of 9% Convertible Subordinated Notes ("Notes"). The Notes, convertible into
8.4 million shares of the Company's common stock, were issued in September
1992 and were due in September 2002. The shares were converted on October
25, 1995, resulting in a decrease in the Company's long-term debt and a
corresponding increase in stockholders' equity. In an effort to assist the
holders of these shares to sell in the public market all or a portion of
the converted shares, the Company filed a registration statement with the
Securities and Exchange Commission for an underwritten public offering of
approximately 4.8 million of these shares. The public offering commenced
October 26, 1995 and resulted in the sale of all the shares offered.
6
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1995
Results of Operations
- ---------------------
The following table shows the Company's gross margin and expenses, as a
percentage of net revenues.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
1995 1994 1995 1994
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Gross margin 16.0% 14.2% 15.7% 13.4%
Operating expenses:
Selling 4.2 4.5 4.2 4.6
Service 5.6 4.1 5.2 3.5
General and administrative 2.6 2.4 2.8 2.3
Depreciation and amortization 0.4 0.4 0.4 0.4
---- ---- ---- ----
12.8 11.4 12.6 10.8
---- ---- ---- ----
Operating earnings 3.2 2.8 3.1 2.6
Interest 0.9 1.0 0.9 0.9
---- ---- ---- ----
Earnings before income taxes 2.3 1.8 2.2 1.7
Income taxes 0.9 0.7 0.9 0.7
---- ---- ---- ----
Net earnings 1.4% 1.1% 1.3% 1.0%
==== ==== ==== ====
</TABLE>
Net revenues for the quarter and nine months ended September 30, 1995 increased
13% and 14% from the same periods in 1994 to $348 million and $1,022 million,
respectively. The higher net revenues are a result of the continued demand by
corporate customers for personal computers, as well as the Company's strategy of
expanding its enterprise network integration capabilities through internal
growth and acquisitions. In addition, the Company believes the increase in net
revenues can be attributed to corporate customers continuing to consolidate
their outsourcing and outtasking needs. The Company's third quarter net revenues
reflect an increase of approximately 80% in service-related revenues over the
third quarter of 1994 and approximately 8% over the second quarter of 1995, and
includes revenue from several small strategic acquisitions in the service arena
which occurred in late 1994 and early 1995. Although net revenues continued to
exceed prior year, the Company experienced a slight decline in net revenues when
compared to
(Continued)
7
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
the second quarter of 1995, which the Company believes can be attributed to
corporate customers' delay in upgrading personal computers while evaluating the
impact of Pentium/Windows '95. Corporate demand for the remainder of 1995 and
the first part of 1996 will be influenced by the timing of acceptance of and
transition to Windows '95.
Gross margin as a percentage of net revenues for the third quarter 1995
increased when compared to the second quarter of 1995 and the same period in
1994, primarily as a result of increased service-related activity resulting from
the Company's continued emphasis on the growth of the service business,
partially offset by lower product margins. As service revenues increase at a
rate greater than product revenues, overall gross margin is favorably impacted
due to service margin as a percentage of service net revenues being higher than
product margin. Product margins were down slightly from both the third quarter
1994 as well as the previous quarter of 1995 and reflect increased pricing
competition in the computer reseller marketplace. Future product margins will be
influenced by manufacturers' pricing strategies together with competitive
pressures from other resellers in the industry. The Company participates in
certain manufacturer-sponsored programs designed to increase sales of specific
products. These programs, excluding volume rebates and specific product rebates
offered by certain manufacturers, are not material when compared to the
Company's overall financial results.
Operating expenses for the three month and nine month period ended September
30, 1995 increased $9.7 and $33.7 million, respectively, from the comparable
periods of 1994, to support the continued revenue growth. As a percentage of
net revenues, operating expenses also increased, principally as a result of the
growth of the service business. The significant increase in service expense,
both as a percentage of net revenues and in absolute dollars, reflects expenses
associated with the overall service revenue growth, including acquisitions, as
well as costs related to the planned development of an infrastructure necessary
to manage and expand the service business. Selling expense as a percentage of
net revenues improved when compared to 1994 primarily as a result of continued
improvement in product sales productivity. General and administrative expenses
increased over the prior year, primarily due to the Company's investment in
information systems resources required to enhance customer satisfaction,
particularly in the service segment, and other spending necessary to meet the
Company's objectives. The Company's operating expenses are reported net of
reimbursements by certain manufacturers for specific training, promotional and
marketing programs. These reimbursements offset the expenses incurred by the
Company.
Depreciation and amortization expense increased in absolute dollars but
remained relatively constant as a percentage of net revenues for the quarter and
nine months ended September 30, 1995. The dollar increase reflects amortization
expense associated with the Company's recent acquisitions, as well as increased
depreciation expense related to fixed asset purchases in 1994 and 1995.
Interest expense increased in absolute dollars by $1.3 million but remained
constant as a percentage of net revenues for the nine months ended September 30,
1995, primarily as a result of higher average interest rates and increased
borrowings to support revenue growth. For the quarter ending September 30, 1995,
interest expense remained relatively flat with prior year, but improved as a
percentage of net revenues primarily as a result of improved collections,
partially offset by higher average interest rates. The Company is continuing to
pursue additional alternatives it anticipates will reduce its cost of funds.
(Continued)
8
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
As a result of the factors discussed above, net earnings increased 48% to
$4.8 million in the third quarter of 1995 from $3.3 million in 1994 and as a
percentage of revenues improved from 1.1% to 1.4%. Future improved profitability
will depend on competition, manufacturer product pricing changes and product
availability, as well as the Company's control of operating expenses, increased
focus on providing technical service and support to customers, and effective
utilization of vendor programs, and ability to retain and hire quality service
personnel.
Liquidity and Capital Resources
-------------------------------
During recent years, the Company has utilized equity financing, operating
earnings, the bank credit facility and long-term subordinated notes to fund its
significant revenue growth and related operating asset requirements. The Company
maintains a satisfactory relationship with several banks. In April 1995, the
Company increased its bank revolving credit facility from $150 million to $175
million to support its revenue growth. The credit facility is subject to
certain collateral restrictions and matures in March, 1997. At September 30,
1995 approximately $99 million of this facility was outstanding, with an
additional $76 million available for borrowing. In addition, as of September
30, 1995, the Company had outstanding $18.5 million of 9% Convertible
Subordinated Notes ("Notes") issued in 1992. The Notes, convertible into 8.4
million shares of the Company's common stock, were due in September 2002. On
September 25, 1995, the Company called for redemption the entire principal
balance of the Notes. The shares were converted on October 25, 1995, resulting
in a decrease in the Company's long-term debt and a corresponding increase in
stockholders' equity. In an effort to assist the holders of these shares to
sell in the public market all or a portion of the converted shares, the Company
filed a registration statement with the Securities and Exchange Commission for
an underwritten public offering of approximately 4.8 million of these shares.
The public offering commenced October 26, 1995 and resulted in the sale of all
the shares offered.
Working capital at September 30, 1995 is $200 million compared to $203 million
at December 31, 1994 resulting in a 2.0 working capital ratio, constant from
December 31, 1994. Inventory levels were higher at September 30, 1995 when
compared to December 31, 1994, as the Company began to build stocking levels for
anticipated fourth quarter sales. Accounts receivable declined when compared to
December 1994 primarily due to seasonally lower net revenues in the third
quarter of 1995 compared to the fourth quarter of 1994.
During the third quarter 1995, the Company, through the utilization of certain
historical net operating losses, reduced its deferred tax liability and
increased stockholders' equity by approximately $4.3 million.
The business is not capital asset intensive, and capital expenditures in any
year normally would not be significant in relation to total assets. Capital
asset requirements are generally funded through internally generated funds, the
bank credit facility or leasing sources. Capital expenditures are expected to
be approximately $6 million in 1995, of which approximately $4 million was spent
during the first nine months of 1995. There are no material capital asset
purchase commitments at September 30, 1995.
9
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
Exhibit
No. Description
------- -----------
11 Computation of Per Share Earnings
27 Financial Data Schedule
No other exhibits are required to be filed by the Registrant during
the three months ended September 30, 1995.
(b) Reports on Form 8-K
-------------------
Current Report on Form 8-K dated October 27, 1995 was filed on
October 27, 1995, with respect to the underwriting agreement related to
the Company's underwritten public stock offering and included the
Company's third quarter earnings press release.
10
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUCOM SYSTEMS, INC.
------------------------------------------
(Registrant)
DATE: November 14, 1995 /s/ Edward R. Anderson
------------------------------------------
Edward R. Anderson,
President and Chief Executive Officer
DATE: November 14, 1995 /s/ Robert J. Boutin
------------------------------------------
Robert J. Boutin,
Senior Vice President, Finance and
Chief Financial Officer
11
<PAGE>
EXHIBIT 11
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Computation of Per Share Earnings
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
1995 1994 1995 1994
-------- ------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Primary earnings per common share
- ---------------------------------
Net earnings $ 4,828 $ 3,271 $ 13,476 $ 9,295
Preferred dividend (300) (150) (900) (225)
-------- ------- -------- --------
$ 4,528 $ 3,121 $ 12,576 $ 9,070
======== ======= ======== ========
Average common shares outstanding 34,428 33,258 34,115 32,971
Average common share equivalents:
Options 2,704 2,027 2,282 2,661
Warrants 74 76 79 175
-------- ------- -------- --------
Average number of common shares and
common share equivalents outstanding 37,206 35,361 36,476 35,807
======== ======= ======== ========
Primary earnings per common share $ .12 $ .09 $ .34 $ .25
======== ======= ======== ========
Fully diluted earnings per common share
- ---------------------------------------
Primary net earnings $ 4,828 $ 3,271 $ 13,476 $ 9,295
Preferred dividend (300) (150) (900) (225)
Interest expense, net of income tax benefit 250 250 750 750
-------- ------- -------- --------
$ 4,778 $ 3,371 $ 13,326 $ 9,820
======== ======= ======== ========
Average number of common shares and
common share equivalents outstanding 37,399 35,393 37,252 35,807
Additional shares issuable 8,409 8,409 8,409 8,409
-------- ------- -------- --------
Average number of common shares
assuming full dilution 45,808 43,802 45,661 44,216
======== ======= ======== ========
Fully diluted earnings per common share $ .10 $ .08 $ .29 $ .22
======== ======= ======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1995 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,104
<SECURITIES> 0
<RECEIVABLES> 227,695
<ALLOWANCES> 2,244
<INVENTORY> 171,736
<CURRENT-ASSETS> 400,891
<PP&E> 27,764
<DEPRECIATION> 10,568
<TOTAL-ASSETS> 434,774
<CURRENT-LIABILITIES> 200,940
<BONDS> 101,508
<COMMON> 346
0
20,000
<OTHER-SE> 92,162
<TOTAL-LIABILITY-AND-EQUITY> 434,774
<SALES> 1,022,096
<TOTAL-REVENUES> 1,022,096
<CGS> 861,136
<TOTAL-COSTS> 861,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,494
<INCOME-PRETAX> 22,460
<INCOME-TAX> 8,984
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,476
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.29
</TABLE>
