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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, 1999 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)
7171 FOREST LANE, DALLAS, TX 75230
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 856-3600
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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 the Nasdaq National Market) on
February 23, 2000 was approximately $88.5 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 February
23, 2000 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 February
23, 2000 was 48,412,446 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relative to the May 18, 2000 annual
meeting of stockholders of registrant, to be filed within 120 days after the end
of the year covered by this report on Form 10-K, are incorporated by reference
into Items 10, 11, 12 and 13 (Part III) of this Report. Such Proxy Statement,
except for the parts therein which have been specifically incorporated by
reference, shall not be deemed "filed" for the purposes of this report on Form
10-K.
PART I
ITEM 1 BUSINESS
(A) GENERAL DEVELOPMENT OF THE BUSINESS
INTRODUCTION
Founded in 1987, CompuCom Systems, Inc., together with its subsidiaries
("CompuCom" or "the Company"), is a leading provider of technology management
services and information technology products 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.
Technology management services and products are sold through a direct sales
force to over 5,200 business customers nationwide.
To meet its customers' needs, CompuCom offers a variety of technology
management services including LAN/WAN project services, consulting, asset
tracking, network management, help desk, field engineering, configuration,
software management, distribution, and procurement utilizing network
applications such as Novell Netware, Windows NT, Windows 95 and Windows 98. In
addition, CompuCom is an authorized dealer of major personal computer products,
networking and related products, computer-related peripheral equipment and
software for a number of manufacturers, including Compaq Computer Corporation
("Compaq"), International Business Machines Corporation ("IBM"), Hewlett-Packard
Company ("HP"), Toshiba America Information Systems ("Toshiba"), Intel
Corporation ("Intel"), and Microsoft Corporation ("Microsoft").
The Company has been profitable on a full year basis since its
inception and has achieved net revenue growth of 19% compounded over the past
five years. However, during 1998, the Company experienced a significant decline
in its level of profitability, recording its first quarterly net loss in the
fourth quarter 1998 as a result of a $16.4 million (pretax) restructuring
charge. During the first quarter of 1999, the Company recorded its first net
loss from operations, but returned to profitability during the second quarter of
1999. CompuCom believes the key to improving its net earnings performance is the
expansion of its higher margin services business, as well as focusing on
lowering its cost structure through expense control and participation in
programs designed to increase inventory turns. 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
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 addition,
many of the Company's clients are enhancing their technology infrastructure to
implement and enhance their ability to communicate and transact business over
the Internet.
CompuCom operates primarily in three business segments - 1) sales of
computer products, 2) services - which include technology support services,
network integration and configuration, and 3) customized application programming
primarily through its majority-owned subsidiary ClientLink, Inc. In April 1999,
the Company completed the merger of ClientLink with E-Certify Corporation (the
"E-Certify merger"). The combined operations of ClientLink and E-Certify will be
conducted under the name E-Certify, Inc. The Company accounts for the ongoing
operation of E-Certify using the equity method. Separate business segment
information is presented for each of these segments.
RECENT DEVELOPMENTS
To implement its strategy to focus on the growth of the services
business, the Company hired J. Edward Coleman in December of 1999 as its chief
executive officer. Prior to joining CompuCom, Mr. Coleman was employed by
Computer Sciences Corporation as its Business Development Executive and Director
of Marketing from 1995 until joining the Company in 1999.
In May 1999, the Company purchased the Technology Acquisition Services
Division ("TASD acquisition") from ENTEX Information Services, Inc. ("ENTEX")
for approximately $137 million. As part of the acquisition, the Company hired
certain of ENTEX's national sales force located throughout major US markets, and
acquired its corporate account center personnel in Mason, Ohio.
During 1999, the Company continued its restructuring plan, implemented
in the fourth quarter of 1998, by closing 65 facilities and reducing the
Company's work force by 10%. Under this new business strategy, the Company
moved to a virtual office model, where its sales and service personnel are
equipped with remote communications tools, including internet access, pagers,
and cellular telephones, which enable them to remotely access and communicate
with the Company's systems.
On April 13, 1999, the Company completed the merger of its majority-
owned subsidiary, ClientLink, Inc. ("ClientLink") with E-Certify Corporation
("E-Certify"). The combined operations of ClientLink and E-Certify will be
conducted under the name E-Certify, Inc.
FORWARD LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 regarding revenues,
margins, operating expenses, earnings, growth rates and certain business trends
that are subject to risks and uncertainties that could cause actual results to
differ materially from the results described herein. Specifically, the ability
to grow product and service revenue may not continue; the improvement in service
margins may not continue; the ability to continue to decrease costs may not
continue; the Company may not be able to find additional ways to leverage costs
and reduce costs further; the expansion of the services business may not
continue or be as great as anticipated. Other factors that could cause actual
results to differ materially are: competitive pricing and supply, the impact of
the manufacturer's shift to direct fulfillment programs may be more significant
than anticipated, short-term interest rate fluctuations, general economic
conditions, employee turnover and possible future litigation, the impact of Y2K
and the related uncertainties may have on future revenue and earnings as well as
the risks and uncertainties set forth from time to time in the Company's other
public reports and filings and public statements. Recipients of this document
are cautioned to consider these risks and uncertainties and to not place undue
reliance on these forward-looking statements. See "General Description of
Business", "Competition", "Principal Suppliers" and "Dependence Upon Major
Vendors and Other Suppliers" 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.
ITEM 1(b) Financial Information about Operating Segments
Revenues from external customers, gross margin, operating earnings and
total assets for each segment of the Company's business for the three-year
period ended December 31, 1999 is contained in Footnote 6 to the Consolidated
Financial Statements titled "Segment Information" on page F-11 of this Form 10-K
and is incorporated herein by reference.
ITEM 1(c) Narrative Description of Business
GENERAL DESCRIPTION OF BUSINESS
CompuCom is a leading single-source provider of technology management
services and products designed to enhance the productivity of information
technology products primarily for Fortune 1000 clients. CompuCom markets its
product procurement, configuration, field engineering, network management,
remote help desk and technology management services primarily through its direct
sales force and service personnel. The Company focuses on meeting the business
objectives of large and medium corporate businesses, which accounted for the
majority of the Company's net revenue in 1999. However, no one customer
accounted for greater than 10% of such revenues in the sale of distributed
desktop computer products or services segments. Order backlog is not considered
to be a meaningful indicator of future business prospects due to the short order
fulfillment cycle.
CompuCom is authorized by various vendors to sell computer products
through its virtual, direct sales force located in or near major metropolitan
areas throughout the United States. Each geographic area typically includes
direct sales representatives, support personnel, system engineers and
technicians who are authorized to repair and maintain Compaq, IBM, HP and
certain other manufacturers' products as well as provide other technology
services the customer may require. As of December 31, 1999, the Company employed
approximately 220 full-time direct sales representatives who sell both services
and products. The Company's sales force is compensated with a base salary and
commissions based on net revenue, gross margin and other relevant factors.
CompuCom's corporate headquarters and operations campus is located in
Dallas, Texas. Essentially all the Company's financial and administrative
functions, including information services, service and sales support, help desk
services, human resources, product management, finance, executive management,
and one of the two corporate account centers, are located in the two buildings
that comprise this facility.
The Company has expanded and enhanced its use of information systems
for its internal operations as well as in providing services to its customers.
The Company's integrated information systems ("IS") utilize client/server,
distributed and Internet technologies. Internal systems are supported by a
proactively managed wide area network based on frame relay technology. During
1999, CompuCom deployed a virtual private network (VPN) capability that allows
its employees to remotely access CompuCom's systems using secure network
connections.
To further enhance the quality and efficiency of its information
systems, CompuCom has implemented and continued to enhance its award winning,
state-of-the-art data warehouse. The data warehouse provides a repository of
information which increases the accessibility of summarized, historical
information about services, products, customer activity and vendors to both
customers and employees. The Company continues a strong commitment to the
utilization of Internet technology for both its internal use and its customers'
use. Increasing volumes of its data warehouse access and operational
transactions are conducted via Internet and Intranet web pages.
Through the use of CompuCom's information systems, its customers may
create custom configurations and price quotations from internet-based catalogs
and place orders over the Internet. Customers may look up information regarding
previously placed orders and check the status of product orders being processed
and shipped. In addition, its customers may also access help desk and service
dispatch information regarding problem tickets and work orders. CompuCom also
provides "datamarts" that allow its customers to obtain ongoing data downloads
of activity relating to assets, product catalogs, accounts payable tracking,
invoice history and order tracking.
CompuCom's information systems include support for electronic
"business-to-business" transactions with customers and suppliers using
electronic data interchange (EDI) technology. During 1999, CompuCom deployed
its first customer interface using Open Buying on the Internet (OBI) standards.
This technology allows a customer to create an order using CompuCom's Web
Services Internet pages, deliver the order to the customer's purchasing
systems for approval, and then submit the order over the Internet using
EDI-based data formats. CompuCom is currently working to extend its Web
Services offering to include XML (Extensible Markup Language) capabilities and
interfaces to commercial procurement engines such as Ariba and Commerce One.
All CompuCom employees are provided access to the Company's Intranet.
This capability provides rapid access to organization charts, policies,
procedures and reports. The Intranet is also used to communicate and distribute
information to employees about Company events and news.
During 1999, the Company continued the implementation of its airtime
system, through which field service engineers are able to directly report time
and activities from remote locations using special wireless communication
features. The use of this system helps ensure more timely and accurate reporting
of each engineer's hours spent on a work order or project.
COMPETITION
The Company's industry is characterized by intense competition,
primarily in the areas of price, product availability and breadth of services
and product line. The Company's marketing network competes for potential clients
with numerous service providers, resellers and distributors. Many established
original equipment manufacturers (including some of the Company's vendors),
direct marketers, systems integrators and resellers of distributed desktop or
networking products, including InaCom Corporation and Microage, Inc., compete
with the Company in the configuration and distribution of computer systems and
equipment. In addition, direct marketers have had a pricing advantage over
resellers such as CompuCom. To help combat the direct marketers' pricing
advantage, the Company and its major vendors have continued to focus on
developing and implementing strategies designed to reduce costs. In response to
the increased competition, particularly from direct marketers, a number of the
Company's competitors have sought to increase their market share through
acquisitions. The Company expects this consolidation will continue in 2000.
CompuCom also expects the major manufacturers of the products CompuCom resells
will continue to pursue a more direct selling model. As a result of both of
these factors, CompuCom may face fewer but larger and better-financed
competitors, possibly resulting in a reduction in product revenue. In the highly
fragmented computer services business, the Company competes with several larger
competitors (including some of the Company's vendors) in addition to other
corporate resellers pursuing service opportunities, and smaller computer
services companies. Some of these competitors have financial, technical,
manufacturing, sales, marketing and other resources that are substantially
greater than those of CompuCom. There can be no assurance the Company will be
able to continue to compete successfully with new or existing competition.
THE COMPANY'S EMPLOYEES
The Company employed approximately 5,000 full-time employees as of
December 31, 1999. The Company offers its full-time employees health, long-term
disability, dental and life insurance benefits and has a 401(k) plan and an
employee stock purchase plan for eligible employees. None of the employees is
covered by a collective bargaining agreement. The Company considers its
relations with employees to be good.
SALE OF COMPUTER PRODUCTS SEGMENT
The Company provides procurement services for sophisticated
technologies consisting of personal computer products, networking products,
peripherals, software and management technology services to its customers. It is
an authorized dealer of Cisco, Compaq, HP, IBM, Intel, Microsoft, Novell, 3Com
and Toshiba as well as other major manufacturers and software suppliers. The
Company sources over 5,000 different desktop products, components and
accessories, consisting of leading as well as alternative brands.
CompuCom integrates a variety of manufacturers' products into various
desktop and server configurations to meet customers' individual needs. The
Company provides value to its customers by allowing them to choose products or
components from various manufacturers that best suit their desktop, mobile
computing, WEB computing and network needs as opposed to manufacturers' direct
sales organizations which typically configure or market desktop, mobile
computing, WEB computing and network systems that include products only from
that particular manufacturer.
The Company provides product support to its customers primarily through
its two Corporate Account Centers ("CAC") located in Dallas, Texas and Mason,
Ohio. CAC personnel, called inside sales representatives ("ISRs"), 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 CAC is to
provide greater support to CompuCom's customers while allowing the direct sales
force to focus on soliciting new business and providing the necessary support
for customers' more complex service needs. At the end of 1999, the Company
employed approximately 685 CAC personnel.
During 1996, to meet customers' global business needs, CompuCom helped
form GlobalServe, an alliance of international computer service suppliers. The
objective of the GlobalServe alliance is to provide customers a single point of
contact for accessing computer products and technology management services
worldwide.
CompuCom's primary configuration and distribution center is located in
Paulsboro, New Jersey. The center is composed of two sites, one of 300,000
square feet and the other, opened in October 1999, of 148,000 square feet. In
addition, in April 1999 the Company began operating a 97,000 square foot
configuration and distribution center in Raleigh, North Carolina located near
IBM's manufacturing facility. This facility was expanded to 168,000 square feet
in September 1999. Also, in May 1999, the Company opened a 12,800 square foot
facility in Irvine, California located near the Toshiba manufacturing facility.
During 1999, the Company operated a 104,000 square foot facility in Stockton,
California until it was closed in May 1999, and a 78,000 square foot co-location
facility on the Compaq campus in Houston, Texas. In February 2000, the Company
closed its Houston co-location facility. The configuration and distribution
center personnel 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 the Company believes has resulted in
improved overall inventory integrity and bin accuracy.
CompuCom's distribution, configuration, return merchandise and product
management departments are ISO 9002 certified. 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 products and services being
delivered.
Principal Suppliers
A significant part of CompuCom's net revenues are derived from sales of
personal computer and networking products including Compaq, IBM and HP products.
The Company's agreements with these vendors contain provisions providing for
periodic renewals and permitting termination by the vendor without cause,
generally upon 30 to 90 days written notice. 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 could 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 IBM and HP at pricing levels that the
Company believes are the lowest prices available to those vendors' respective
resellers, with the exception of special bid pricing for specific large customer
accounts. The Company purchases the majority of its Compaq products from other
suppliers through Compaq's Distributor Alliance Program (DAP), which became
effective in August 1999. 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 incentives 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 2000 or that the Company will continue to participate in any of
these programs at the same level as in 1999.
Sales of Compaq, IBM and HP products accounted for approximately 30%,
21% and 16%, respectively, of the Company's 1999 product revenues compared to
32%, 18% and 18%, respectively, in 1998 and 32%, 19% and 14%, respectively, in
1997.
Due to the rapid delivery requirements of its customers and to assure
itself of a sufficient allotment of products from suppliers, the Company
maintains inventory funded through its credit facilities and vendor credit.
CompuCom's major suppliers at times provide price protection programs that are
intended to reduce the risk of inventory devaluation by absorbing price declines
associated with aging product life cycles. However, the suppliers have reduced
the number of days price protection is generally in effect. CompuCom has
focused on ways to reduce its costs by reducing its inventory levels and
improving inventory turns. As part of this cost control focus, in February
2000, the Company closed its 78,000 square foot co-location facility in Houston,
Texas. CompuCom 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%. CompuCom did not incur significant restocking fees in 1999.
Dependence upon Major Vendors and Other Suppliers
The Company is dependent upon the continued supply of products and
components from its suppliers, particularly Compaq, IBM and HP. Historically,
certain suppliers occasionally experience shortages of select products that
render components unavailable or necessitate product allocations among
resellers. While certain shortages existed throughout 1999, the Company
believes the product availability issues are a result of the present dynamics of
the personal computer industry as a whole, which include shortened product life
cycles and increased frequency of new product introductions into the
marketplace. While the Company believes that product unavailability or product
allocations will not be materially disruptive to the Company due to the breadth
of alternative product lines available to it, there can be no assurance that
unexpected levels of such interruptions will not have a material adverse effect
on the Company's business.
The Company's product margins as a percentage of product revenue
decreased to 8.1% in 1999 as compared to 9.8% in 1998, due primarily to
heightened competition from direct marketers and other resellers. The Company
believes that gross margins will continue to be reactive to industry-wide
changes and pricing strategies. As a result, CompuCom anticipates further
decline in product gross margins in 2000. Future profitability will depend upon
the Company's ability to focus on and grow its services business profitably,
effectively manage inventory levels in response to changes in its major
suppliers' price protection and return programs, the Company's ability to
attract and retain quality services personnel while effectively managing the
utilization of those service personnel, and the Company's ability to respond to
increased competition from its suppliers' direct selling initiatives. Future
profitability also depends on the Company's increased focus on providing
technical service and support to customers, product demand, competition,
manufacturer product availability and pricing strategies, effective utilization
of vendor programs, as well as the Company's ability to reduce operating
expenses at a pace at least equal to the decline in product gross margin
percentages.
SERVICES SEGMENT
During 1999, net service revenue increased 16% from 1998 levels as a
result of the Company's continued efforts to increase sales of technology
management services to meet customer needs and to improve profitability. Service
revenue has grown at a compounded annual rate of 31% over the past five years
as a result of the Company's strategic efforts, which include: the development
of additional service offerings; additional training for its engineers; enhanced
management support to the services business; and more emphasis on sales of
services in the sales representatives compensation plan. In addition, the
Company emphasized the hiring of quality service personnel. To further enhance
its service growth, CompuCom employs an ongoing program in which college
graduates are hired and placed in various engineering training and certification
programs. At the completion of these programs, these engineers become a part of
the Company's billable workforce. The technology management services business is
an integral part of CompuCom's strategy to provide customers with value-added
service solutions to meet their technology needs.
Service revenue is primarily derived from field engineering, LAN/WAN
projects, consulting, configuration, help desk, asset tracking, network
management, and software management. CompuCom continues to focus on expanding
its presence in technology management. This commitment is reflected in the
increase in its service personnel. As of December 31, 1999, the Company
employed over 2,900 service personnel, including system engineers, network
engineers, configuration technicians and field engineers, compared to
approximately 800 as of the beginning of 1995. These service
personnel provide configuration, field engineering, network management, help
desk services and technology management to the Company's customers.
CompuCom currently maintains three configuration centers, one in each
of the Company's three configuration and distribution centers, located in
Paulsboro, New Jersey, Raleigh, North Carolina and Irvine, California. These
centers contain configuration systems that have the ability to set up and
configure product that includes both standard and nonstandard components or
software to enable CompuCom to meet increasing customer demand for advanced,
complex system and network configuration technologies.
CompuCom provides hardware maintenance services ranging from simple
desktop, mobile computing, and WEB computing repairs, installations, moves,
adds, and changes to complex network repairs, application setups and software
upgrades. These services are performed based upon the specific customer needs,
such as on-site support, warranty support, change and upgrade management,
contracted response or time and material.
The Company's systems 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 Paulsboro, N.J.
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 and
event tracking. 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 help
desk solution is tightly integrated with the Company's other service offerings.
CompuCom is committed to increasing its help desk customer's access to
information. During 1999, the Company expanded its Internet product procurement
capabilities with new support services information access. Beginning in early
2000, help desk customers' technical support staff and service management will
have the ability to access technical bulletins and service documents through the
use of the Internet.
CUSTOMIZED APPLICATION PROGRAMMING SEGMENT
Through its majority-owned subsidiary, ClientLink, located in Atlanta,
Georgia, the Company offered software application development services.
ClientLink designed, developed, and implemented enterprise-wide information
technology (IT) solutions for Fortune 500 companies. ClientLink's primary focus
was in development and support of client/server and Internet based applications.
This was accomplished through custom application development for critical
business functions and consulting and implementing IT support solutions. These
solutions were normally offered on a fixed-price and fixed-time frame basis.
ClientLink focused its marketing efforts on establishing and
maintaining relationships with Fortune 1000 companies in various industries with
intensive information access and processing needs, including telecommunications,
financial services, utilities, health care services, manufacturing, and retail.
On April 13, 1999, the Company completed the merger of ClientLink, Inc.
with E-Certify Corporation. The combined operations of ClientLink and E-Certify
are conducted under the name E-Certify, Inc. The Company accounts for the
ongoing operation of E-Certify, Inc. using the equity method.
ITEM 1(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
The Company does not have any foreign operations nor does it engage in any
material export sales.
ITEM 2 PROPERTIES
The Company's principal executive and administrative offices are
located on a 20-acre campus-type setting consisting of two buildings containing
approximately 250,000 square feet of office space in Dallas, Texas. The Company
purchased this facility during 1996, refurbished it, and fully occupied the
facility by the end of 1997. During March 1999, the Company completed a
sale/leaseback transaction for the entire headquarters facility. The lease is
for a 20-year period commencing in April 1999, with two five-year renewal
options. One of the buildings is an eight-story structure and contains executive
offices, a corporate account center, finance, purchasing, sales and service
support, facilities, marketing and human resources. An adjoining three-story
building contains the Company's information systems group and its remote help
desk and dispatch personnel.
Acquired as part of the 1999 TASD acquisition, the Company leases
42,500 square feet of office space in Mason, Ohio, which houses its second
corporate account center. The lease expires in July 2005 with a renewal option
for five years.
During 1999, the Company distributed products primarily from five
leased configuration and distribution 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. In addition to
warehousing space, this facility contains a state-of-the-art 90,000 square foot
configuration center, allowing CompuCom to meet increasing customer demand for
advanced complex system integration and network technologies. In October 1999,
the Company leased an additional 148,000 square feet in an adjacent building in
Paulsboro, New Jersey. The lease is for a five-year term, expiring in 2004, with
an early termination provision effective 2002. In March 1999, the Company
entered into a five-year lease with two five-year renewal options for 97,000
square feet of warehouse space in Raleigh, North Carolina near the IBM
manufacturing facility, which is used primarily for configuration, channel
assembly and distribution activities of IBM products. This warehouse space was
expanded to 168,000 square feet in September 1999. In March 1999, the Company
entered into a two-year lease, with a renewal option for an additional 18
months, for 12,800 square feet of warehouse space in Irvine, California near
Toshiba's manufacturing facility. This space is used primarily for
configuration, channel assembly and distribution activities of Toshiba products.
In May 1999, CompuCom closed its 104,000 square foot configuration and
distribution center in Stockton, California, upon the expiration of the lease.
In February 2000, the Company closed its 78,000 square foot co-location facility
located at Compaq's headquarters and manufacturing campus in Houston, Texas.
See Note 16 to the accompanying Notes to Consolidated Financial
Statements for additional information regarding lease costs.
ITEM 3 LEGAL PROCEEDINGS
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
None have been submitted in the fourth quarter 1999.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK
The Company's common stock is listed on the Nasdaq National Market
(Symbol: CMPC). As of December 31, 1999, there were approximately 8,000
beneficial holders of the Company's common stock. The high and low sales prices
reported within each quarter for the years ended December 31, 1999 and 1998 are
as follows:
1999 1998
----------------------------- -----------------------------
High Low High Low
----------- ----------- ----------- -----------
First quarter $5.63 $2.88 $9.75 $7.50
Second quarter 4.52 2.75 8.50 5.88
Third quarter 5.63 3.50 7.13 3.56
Fourth quarter 4.81 2.94 5.25 2.25
The last sale price reported for the Company's common stock on February
23, 2000 was $3.875.
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 current credit facilities restrict the amount of dividends the Company
may pay on its common stock.
ITEM 6 SELECTED FINANCIAL DATA
Selected financial data for the Company is presented below:
For the Years Ended December 31,
--------------------------------------------------------------------------------------
Operating Results 1999 1998 1997 1996 1995
- ----------------- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
Net revenues $2,911,889 $2,254,465 $1,949,802 $1,995,191 $1,441,597
Gross margin 314,150 283,960 267,545 240,963 174,908
Earnings before income taxes 18,977 668 * 58,658 ** 50,616 *** 34,335
Net earnings 11,574 401 * 35,194 ** 30,471 *** 20,670
Earnings/(loss) per common share:
Basic .22 (.01) * .75 ** .66 *** .54
Diluted .22 (.01) * .71 ** .61 *** .45
Balance Sheet Data
- ------------------
Total assets $ 498,052 $ 545,489 $ 462,590 $ 692,985 $ 508,704
Long-term debt 81,929 97,400 236,450 120,364
Convertible subordinated notes 3,000 3,000 3,000
Stockholders'equity 222,972 210,281 210,200 171,098 138,341
* Includes restructuring related charges of $16.4 million ($9.9 million, net of tax) or ($.21) per share
** Includes nonrecurring gains on prepayment of secured note related to sale of subsidiary in 1994 of $1.6 million
($1.0 million, net of tax) and gain on sale of Company's former headquarters of $4.0 million ($2.4 million, net
of tax) or $.07 per share
*** Includes nonrecurring gain on sale of securities of $8.7 million ($5.2 million, net of tax)
(Basic - $.12 per share, Diluted - $.10 per share)
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATIONS
The following table presents the Company's total revenue, gross margin
and gross margin percentage by revenue source. Operating expenses, financing
expenses, nonrecurring gains, income taxes and net earnings are shown as a
percentage of total net revenue for the three years ended December 31:
1999 1998 1997
----------------------------------------------------------
($ in millions)
Revenue:
Product $ 2,608 $ 1,980 $ 1,699
Service 300 259 237
Other 4 15 14
-------------------------------------------------------
Total revenue $ 2,912 $ 2,254 $ 1,950
=======================================================
Gross margin:
Product $ 211 $ 194 $ 176
Service 101 83 85
Other 2 7 7
-------------------------------------------------------
Total gross margin $ 314 $ 284 $ 268
========================================================
Gross margin percentage:
Product 8.1% 9.8% 10.4%
Service 33.7% 32.0% 35.9%
Other 50.0% 46.7% 50.0%
--------------------------------------------------------
Total gross margin percentage 10.8% 12.6% 13.7%
--------------------------------------------------------
Operating expenses:
Selling 3.8% 4.9% 4.0%
Service 1.6% 2.4% 2.5%
General and administrative 3.1% 3.0% 3.1%
Depreciation and amortization 0.8% 0.7% 0.6%
Restructuring related charges 0.0% 0.7%
--------------------------------------------------------
Total operating expenses 9.3% 11.7% 10.2%
--------------------------------------------------------
Earnings from operations 1.5% 0.9% 3.5%
Interest (0.8%) (0.8%) (0.8%)
Nonrecurring gain 0.3%
--------------------------------------------------------
Earnings before income taxes 0.7% 0.1% 3.0%
Income taxes 0.3% 0.1% 1.2%
--------------------------------------------------------
Net earnings 0.4% 0.0% 1.8%
========================================================
OVERVIEW
On April 13, 1999, the Company completed the merger of its majority-
owned subsidiary, ClientLink, Inc. with E-Certify Corporation.
On May 10, 1999, the Company acquired the Technology Acquisition
Services Division ("TASD") of ENTEX Information Services, Inc.
On May 13, 1998, the Company acquired Computer Integration Corporation
("CIC") and on June 26, 1998, the Company acquired Dataflex Corporation
("Dataflex"), (collectively "the acquisitions").
On October 22, 1998 the Company's Board of Directors approved a
restructuring plan designed to reduce the Company's cost structure by closing
branch facilities and reducing the Company's workforce by approximately 10%. By
moving to a virtual office model, the Company retained local presence in all
existing geographic markets. As a result, the Company recorded a restructuring
charge in the fourth quarter of 1998 of $16.4 million (pretax), primarily
consisting of costs associated with the closing of certain facilities and
disposing of related fixed assets, as well as employee severance and benefits
related to the reduction in workforce. Of the $16.4 million (pretax),
approximately $2.3 million was paid through December 31, 1998.
During 1999, approximately $5.2 million was paid related to facilities
lease termination costs. At December 31, 1999, the remaining accrual of
approximately $1.2 million for these costs is not expected to differ
significantly from actual amounts to be paid. In addition, during 1999,
approximately $2.3 million was paid related to employee severance and related
benefits. As of December 31, 1999, the remaining employee severance and related
benefits accrual of approximately $560,000 relates to severance payments to a
former executive officer and are expected to be paid during 2000.
During 1999, approximately $2.9 million in non-cash charges were
incurred related to the disposal of assets associated with the closing of
facilities and approximately $1.8 million was paid primarily related to costs of
closing branch facilities, costs incurred to ship fixed assets to the Company's
Dallas headquarters and legal expenses. Both the disposal of assets and other
categories of the restructuring accrual are fully depleted as of December 31,
1999. Based on revised estimates during 1999, $133,000 of the severance related
accrual was reversed. Also, additional expenses related to the disposal of fixed
assets of approximately $295,000 and additional expenses for other charges of
approximately $225,000 were recorded during 1999.
1999 COMPARED TO 1998
Product revenue, which is primarily derived from the sale of desktop,
mobile computing, WEB computing, and network computer products to corporate
customers, increased approximately 31.7% to $2.6 billion in 1999 from $1.98
billion in 1998. This increase is primarily due to the TASD acquisition. The
increase in product revenues is primarily due to an approximately 27% increase
in desktop, laptop and server units shipped and increased software license
sales. Relative to 1998, the average sales price of units sold in 1999
stabilized. However, the Company expects the recent historical trend of
declining average sales prices to be a factor in the short term. Product gross
margin as a percentage of product revenue decreased to 8.1% in 1999 from 9.8% in
1998. This decrease is primarily due to heightened competition from direct
marketers and other corporate resellers and a reduction in the level of
manufacturer sponsored incentives. The Company expects to continue to
experience declining product gross margins in the short term.
Service revenue increased approximately 15.8% to $300 million in 1999
from $259 million in 1998. Service revenue is primarily derived from field
engineering, LAN/WAN projects, consulting, configuration, help desk, asset
tracking, network management and software management. 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 was primarily due to increases in field engineering, which is typically
driven in part by product unit sales volume, and the TASD acquisition. Service
gross margin as a percentage of service revenue increased to 33.7% in 1999 from
32.0% in 1998. This increase was primarily due to improved performance in field
engineering. In the short term, the Company expects its service gross margin
percentage to be consistent with its recent performance.
Operating expenses increased approximately 2.8% in 1999 as compared to
1998, primarily due to the TASD acquisition. As a percentage of revenue,
operating expenses were 9.3% in 1999 versus 11.7% in 1998. This decline is
primarily due to increased leverage of the Company's infrastructure resulting
from the TASD acquisition and its own cost reduction efforts.
Selling expense increased approximately $1.9 million in 1999 versus
1998. This increase is primarily due to the
TASD acquisition, which resulted in an increase in sales and sales
support personnel, which was partially offset by the Company's own cost
reduction efforts. Although the TASD acquisition resulted in an increase in the
dollar amount of selling expense, selling expense as a percentage of revenue
declined to 3.8% in 1999 compared to 4.9% in 1998. Service expenses decreased
approximately $7.1 million in 1999 compared to 1998. This decrease is primarily
due to the Company's own cost reduction efforts and the E-Certify merger which
resulted in the Company no longer consolidating ClientLink in the Company's
financial statements. Consequently, ClientLink's operating expenses subsequent
to the E-Certify merger are not reflected as service expense. General and
administrative expense increased approximately $22.7 million in 1999 versus
1998. This increase is primarily due to expenditures to continue expansion of
the Company's electronic commerce capabilities as well as increases in
distribution and administrative personnel to support the Company's revenue
growth and expenses resulting from the TASD acquisition. General and
administrative expense, as a percentage of revenue, increased to 3.1% in 1999
compared to 3.0% for 1998. 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 approximately $6.0
million in 1999 compared to 1998. The increase primarily relates to amortization
of goodwill on two business combinations that were completed during the second
quarter of 1998, and the TASD acquisition completed during the second quarter of
1999.
Financing expense remained flat as a percentage of revenue but
increased approximately $4.5 million in 1999 compared to 1998. This increase was
primarily related to higher borrowing levels due to the TASD acquisition, as
well as an increase in the Company's 1999 effective interest rate to 7.7%
compared to 6.6% in 1998.
Primarily as a result of the factors discussed above, net earnings
increased approximately $11.2 million in 1999 compared to 1998.
1998 COMPARED TO 1997
Product revenue, which is primarily derived from the sale of desktop,
mobile computing, WEB computing, and network computer products to corporate
customers, increased approximately 16.5% to $1.98 billion in 1998 from $1.70
billion in 1997. The majority of the increase in product revenue was due to the
acquisitions, which contributed approximately $219 million in product revenue.
Excluding the acquisitions, product revenue for the Company increased
approximately 3.6% in 1998 compared to 1997. This increase in product revenues,
excluding the acquisitions, was primarily due to an increase in desktop, laptop,
and server units shipped and increased software sales. Excluding the
acquisitions, the Company shipped approximately 26% more of these units in 1998
compared to 1997. This increase was partially offset by a decrease in the
average sales price of units sold resulting from manufacturer price reductions.
Product gross margin as a percentage of product revenue decreased to 9.8% in
1998 from 10.4% in 1997. The decline in product gross margins was primarily due
to heightened competition from other corporate resellers and direct marketers.
Service revenue increased approximately 9.2% to $259 million in 1998
from $237 million in 1997. Service revenue is primarily derived from field
engineering, LAN/WAN projects, consulting, configuration, help desk, asset
tracking, network management and software management. 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 was primarily due to increases in field engineering, which is typically
driven in part by product unit sales volume, and the acquisitions. Excluding the
acquisitions, service revenue increased approximately 4.9%. Service gross margin
as a percentage of service net revenue decreased to 32.0% in 1998 compared to
35.9% in 1997. The decrease was primarily caused by lower billing per engineer
for the Company's service personnel, particularly in the systems engineering
group.
Operating expenses increased approximately 32.6% or approximately
$65.0 million for 1998 compared to the same prior year period. As a percentage
of net revenue, operating expenses increased to 11.7% in 1998 compared to 10.2%
in 1997. The percentage and dollar increases resulted primarily from increased
selling expenses and restructuring charges.
Selling expense increased approximately $30.1 million or approximately
38.1% in 1998 compared to 1997. As a percentage of net revenues, selling expense
increased to 4.9% in 1998 from 4.0% in 1997. These increases resulted from an
increase in the Company's sales force as a result of the acquisitions, the
hiring of additional sales representatives, and higher commission expense.
Service expense increased in absolute dollars in 1998 compared to 1997 primarily
due to the growth in the Company's service business and increased spending on
training as a result of an increase in the size of the Company's engineering
force. However, as a percentage of net revenues for 1998 compared to 1997,
service expense decreased slightly. General and administrative expense increased
in absolute dollars in 1998 compared to 1997 primarily due to expenditures to
broaden the Company's electronic commerce capabilities, costs related to the
Company's
ongoing campus recruiting program and the integration of the acquisitions.
However, as a percentage of net revenues for 1998 compared to 1997, general and
administrative expense decreased slightly. 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 for 1998 both in
absolute dollars and as a percentage of net revenue when compared to 1997. The
increase in depreciation expense was associated with upgrading the Company's
hardware and software and increased depreciation as a result of the acquisitions
completed during 1998. Increased amortization expense was the result of an
increase in goodwill from the acquisitions completed during the second quarter
of 1998.
Financing expense increased approximately 25.4% for 1998 compared to
1997, primarily as a result of increased borrowings due to the acquisitions. The
Company's effective interest rate was 6.6% for 1998 compared to 6.7% in 1997.
The Company increased the availability in its working capital facility from $125
million to $165 million in June of 1998 to accommodate the acquisitions. The
interest rate on the working capital facility was subject to adjustment based on
certain performance criteria. The Company's effective interest rate was 7.5% at
December 31, 1998.
During the third quarter of 1997, the Company recognized a previously
deferred nonrecurring after-tax gain of $1.0 million. Recognition of the gain
was due to the early payment of a secured note related to the 1994 sale of the
Company's former subsidiary, PC Parts Express, Inc. (known as PC Service Source,
Inc.).
During the fourth quarter of 1997, the Company recognized a
nonrecurring after-tax gain of $2.4 million on the sale of the Company's former
headquarters.
Primarily as a result of the factors discussed above, net earnings,
excluding the restructuring charge in 1998 and the nonrecurring gains in 1997,
decreased 68% to $10.3 million in 1998 from $31.8 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1999 was $96.7 million compared to
$164.2 million at December 31, 1998. This net decrease was primarily the result
of a decrease in accounts receivable and inventory, partially offset by an
increase in accounts payable. The decrease in accounts receivable is mainly due
to the sale of an additional $75 million of receivables under the securitization
facility. The proceeds from the sale were used to pay down the revolver. As a
result, there was a reduction in both accounts receivable and long-term debt.
The decrease in inventory is primarily due to the Company's effort to reduce its
risk associated with changes in its suppliers' price protection and return
programs through increasing its inventory turns. The Company increased its
inventory turns from 11.5 in 1998 to 18.5 in 1999. The Company's accounts
payable balance fluctuates relative to the timing of product receipts and the
mix of vendors.
The Company's liquidity has been negatively impacted by the dollar
volume of vendor rebate programs. Under these programs, the Company is required
to pay a higher initial price for product and claim a rebate to reduce the
price. The collection of these rebates can take several months. Due to these
programs, the Company's initial price for the product is often higher than the
sales price the Company can obtain from its customers. As of December 31, 1999,
these programs are a material factor in the Company's financing needs. As of
December 31, 1999 and 1998, the Company was owed approximately $66 million and
$64 million respectively, under these vendor rebate programs.
The Company's capital asset requirements are generally funded through
financing arrangements and internally generated funds. During 1999, the Company
increased the size of its credit facilities to finance the TASD acquisition. As
of December 31, 1999, the Company's financing arrangements consist of a $250
million securitization facility ("Securitization"), and a $200 million working
capital facility ("Revolver"). The term of both facilities is three years. As of
December 31, 1999, the Securitization was fully utilized. Availability under the
Revolver is subject to a borrowing base calculation. As of December 31, 1999,
availability under the Revolver was approximately $82 million with no
outstanding amounts. The Company's effective interest rate for 1999 was 7.7%.
The Company's 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. Capital expenditures were
approximately $7 million in 1999 as compared to approximately $14 million in
1998. The majority of both the 1999 and 1998 expenditures were related to the
upgrading of Company hardware and software. The Company does not expect its
capital expenditure requirements in 2000 to be materially different from its
1999 expenditures.
YEAR 2000 COMPLIANCE
The Company has evaluated and adjusted all known date-sensitive systems
and equipment for Year 2000 compliance. The assessment, remediation and testing
phases of the Year 2000 project are complete. The project
was divided into five areas of the Company's systems - its core information
systems and components, distributed desktop systems, non-IS systems, new
information systems purchases, and mergers and acquisitions. The Company's three
acquisitions in 1998 and the TASD acquisition in 1999 were integrated into
the Company and the major processes of the acquired systems were replaced
with the Company's core information systems and components prior to 2000.
Through 2000 the Company will continue to use a Year 2000 compliance software
package that generates audit reports on a regular basis to report any
noncompliant distributed desktop systems.
As part of its Year 2000 readiness assessment, the Company utilized
questionnaires to obtain verification from its vendors and suppliers that the
Company's hardware, software and tools that they supplied were Year 2000 ready.
By the end of June 1999, the Company upgraded or replaced any noncompliant
vendors and suppliers of hardware, software and tools then in use by the
Company. As a reseller of computer products, the Company only passes through to
its customers the applicable vendor's warranties; it generally makes no
warranties regarding Year 2000 compliance on any of the products it resells.
Company personnel performed virtually all of the compliance project.
The total estimated cost to assess, remediate and test for Year 2000 compliance
was approximately $1.4 million and was expensed as incurred.
Although the Company to date has not experienced any significant
problems associated with Year 2000 issues, the Company cannot be certain that
unexpected Year 2000 compliance problems of its products, computer systems or
the systems of its vendors, customers and service providers, will not occur. Any
such problems could have a material adverse affect on the Company's business,
financial condition or operating results.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
Securitization and Revolver. The Company utilizes its Securitization and
Revolver for its working capital and other borrowing needs. If the Company's
effective interest rate were to increase by 75 basis points (.75%), the
Company's annual financing expense would increase by approximately $2.3 million
based on the average outstandings under the Securitization and Revolver during
the twelve months ended December 31, 1999. The Company did not experience a
material impact from interest rate risk during 1999.
Currently, the Company does not enter into financial investments for
trading or other speculative purposes or to manage interest rate exposure.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and schedule filed with this
report appear on pages F-2 through F-24, and are listed on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of February 23, 1999 are as
follows:
Name Age Position
---- --- --------
J. Edward Coleman (1) 48 Chief Executive Officer
Thomas C. Lynch (2) 57 President and Chief Operating Officer
M. Lazane Smith (3) 45 Senior Vice President, Finance and Chief Financial Officer
David A. Loeser (4) 45 Senior Vice President, Human Resources
John F. McKenna (5) 36 Senior Vice President, Services
(1) Mr. Coleman was hired as Chief Executive Officer on December 1, 1999.
Prior to joining the Company, he served as Business Development Executive
and Director of Marketing for Computer Sciences Corporation (CSC), from
March 1995 to December 1999. From 1993 until joining CSC, Mr. Coleman was
Executive Vice President of McCollister's Technical Services, Inc.(MTS).
Prior to joining MTS, Mr. Coleman spent 17 years with IBM Corporation,
including five years with IBM Credit Corporation serving as Vice
President and General Manager of Channel Financing.
(2) Mr. Lynch joined the Company as Executive Vice President and Chief
Operating Officer in October 1998. In 1999 he was promoted to President,
Chief Operating Officer. Prior to joining the Company, he served as
Senior Vice President of Safeguard Scientifics, Inc. from 1996 until
1998. Prior to his association with Safeguard, he was a Rear Admiral in
the United States Navy, serving on active duty for 31 years.
(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.
(4) Mr. Loeser joined CompuCom in April 1999 as Senior Vice President of
Human Resources. Prior to joining CompuCom, Mr. Loeser served as Senior
Vice President of Human Resources for Quaker State, Inc. from 1996 to
1998. From 1994 to 1996, Mr. Loeser held the position of Senior Vice
President of Human Resources with Continental Airlines.
(5) Mr. McKenna joined the Company in January 1999 as Vice President, Managed
Desktop Services and was promoted to Senior Vice President, Services in
September 1999. Prior to joining CompuCom, Mr McKenna served as Senior
Vice President, Services for Oracle Corp. during 1998. From 1995 to 1998,
Mr. McKenna served as a Partner with Deloitte Consulting.
DIRECTORS
The Company incorporates by reference the information contained under
the caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement relative
to its May 18, 2000 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 18, 2000 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 "EXECUTIVE COMPENSATION AND OTHER ARRANGEMENTS" in its definitive
Proxy Statement relative to its May 18, 2000 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 "STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND GREATER THAN
5% STOCKHOLDERS" in its definitive Proxy Statement relative to its May 18, 2000
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 "RELATIONSHIPS AND RELATED TRANSACTIONS WITH MANAGEMENT AND OTHERS"
in its definitive Proxy Statement relative to its May 18, 2000 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.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
The financial statements and financial statement schedule filed with
this report are listed on page F-1.
(b) Reports on Form 8-K.
On July 26, 1999 the Company filed a Current Report on Form 8-K/A to
amend the Current Report on Form 8-K filed by the Company on May 25, 1999, to
announce its acquisition of certain assets of the Technology Acquisition
Services Division of ENTEX Information Services, Inc. The amendment was filed to
include financial statements that were not available at the time of filing the
initial report.
(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.
Exhibit
No. Description
------- -----------
2(a) Asset Purchase Agreement, dated as of May 10, 1999, by and between CompuCom Systems, Inc. and ENTEX
Information Services, Inc. (21) (Exhibit 2.1)
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 (14) (Exhibit A)
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)** Stock Option Grant Agreement between CompuCom Systems, Inc. and Thomas C. Lynch,
dated as of October 22, 1998 (19) (Exhibit 10.1)
4(h)** CompuCom Systems, Inc. Employee Stock Purchase Plan (16) (Appendix A)
4(i) Certificate of Designation dated March 31, 1994, establishing Series B Cumulative
Convertible Preferred Stock of CompuCom Systems, Inc. (8) (Exhibit 4(i))
4(j) Form of Stock Certificate evidencing Series B Cumulative Convertible
Preferred Stock, $.01 par value, of CompuCom Systems, Inc. (9) (Exhibit 4(h))
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 (11) (Exhibit 10.9)
10(c)** Amendment No. 1 to CompuCom Systems, Inc. 401(k) Matched Savings Plan, effective
January 1, 1998 (exhibits omitted) (17) (Exhibit 10.1)
10(d)** Amendment No. 2 to CompuCom Systems, Inc. 401(k) Matched Savings Plan, effective
January 26, 1998 (exhibits omitted) (17) (Exhibit 10.2)
10(e)** Amendment Three to CompuCom Systems, Inc. 401(k) Matched Savings Plan, effective
May 28, 1999 *
10(f)** Amendment Four to CompuCom Systems, Inc. 401(k) Matched Savings Plan, dated
July 29, 1999, with attached Appendix A *
10(g)** Amendment Five to CompuCom Systems, Inc. 401(k) Matched Savings Plan, effective
December 30, 1999 *
10(h) Amended and Restated Credit Agreement, dated as of November 3, 1997, among CompuCom Systems, Inc., certain
lenders party hereto, and NationsBank of Texas, N.A., as administrative lender (exhibits and schedules
omitted) (15) (Exhibit 16(t))
10(i) Amendment #1 to Amended and Restated Credit Agreement, dated as of June 26, 1998, among
CompuCom Systems, Inc., certain lenders party hereto, and NationsBank of Texas, N.A., as
Administrative Lender (exhibits omitted) (18) (Exhibit 10.1)
10(j) CompuCom Receivables Master Trust I Pooling and Servicing Agreement, dated as of May 7, 1999, as
amended and restated as of August 20, 1999, between Norwest Bank Minnesota, National Association,
CompuCom Systems, Inc., and CSI Funding, Inc. (exhibits omitted)*
10(k) CompuCom Receivables Master Trust I Pooling and Servicing Agreement 1999-1 Supplement, dated as of May 7,
1999, as amended and restated as of August 20, 1999, among PNC Bank, National Association, Market Street
Capital Corporation, Norwest Bank Minnesota, National Association, CompuCom Systems, Inc., and CSI Funding,
Inc. (exhibits omitted) *
10(l) Inventory and Working Capital Financing Agreement, dated as of May 11, 1999, between IBM Credit
Corporation and CompuCom Systems, Inc. (22) (Exhibit 10.3)
10(m) Attachment A to Inventory and Working Capital Financing Agreement dated May 11, 1999
(22) (Exhibit 10.4)
10(n) Receivables Contribution and Sale Agreement dated May 7, 1999 between CompuCom Systems, Inc. and CSI
Funding, Inc. (exhibits omitted) *
10(o) Non-Competition, Referral and Non-Disclosure Agreement dated as of May 10, 1999, by and between CompuCom
Systems, Inc. and ENTEX Information Services, Inc. (21) (Exhibit 10.1)
10(p) 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(q) 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 (13) (Exhibit 10(r))
10(r) Agreement for Participation in the IBM Business Partner - PC, Authorized Assembler Program, dated
January 16, 1997 between IBM Corporation and CompuCom Systems, Inc. (15) (Exhibit 10(y))
10(s) Agreement to Extend Participation in the IBM Business Partner - PC, Authorized Assembler Program,
dated November 18, 1997 between IBM Corporation and CompuCom Systems, Inc. to December 31,
1998 (15) (Exhibit 10(z))
10(t) U.S. Reseller Agreement, dated January 23, 1993, between Compaq Computer Corporation
and CompuCom Systems, Inc. (7) (Exhibit 10(l))
10(u) Software License Agreement, dated January 15, 1998, between Compaq Computer Corporation and
CompuCom Systems, Inc. (15) (Exhibit 10(bb))
10(v) Channel Installation Agreement for Microsoft Products, dated January 15, 1998, between Compaq
Computer Corporation and CompuCom Systems, Inc. (15) (Exhibit 10(cc))
10(w) U.S. Reseller Agreement, dated March 1, 1996, between Hewlett-Packard Company
and CompuCom Systems, Inc. (11) (Exhibit 10.8)
10(x) U.S. Agreement for Authorized Reseller Participation in Channel Assembly Program, dated March 1,
1997, between Hewlett-Packard Company and CompuCom Systems, Inc. (15) (Exhibit 10(ee))
10(y) U.S. Agreement for Authorized Solutions Direct Resellers, dated August 12, 1999 between
Hewlett-Packard Company and CompuCom Systems, Inc. *
10(z) 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(aa) 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) (12) (Exhibit 10.8)
10(bb) Lease Agreement dated September 27, 1999, between CompuCom Systems, Inc. and Riggs & Company, a division of
Riggs Bank N.A., for premises at 1245 Forest Parkway, Paulsboro, New Jersey (exhibits omitted) *
10(cc) Industrial Lease Agreement, dated February 11, 1999, between Dames & Moore / Brookhill Durham I, LLC, as
lessor, and CompuCom Systems, Inc., as lessee, for premises at 2910 Weck Drive, Durham, North Carolina
(exhibits omitted) *
10(dd) Modification of Lease, dated October 1, 1999, between DMB Durham I, LLC, for premises at 2910 Weck Drive,
Durham, North Carolina *
10(ee) Contract of Sale between CompuCom Systems, Inc., as seller, and MacFarlan Realty Partners, L.L.C.,
as purchaser, for property located at 10100 North Central Expressway, Dallas, Texas, dated effective
October 23, 1997 (15) (Exhibit 10(jj))
10(ff) First Amendment to Contract of Sale between CompuCom Systems, Inc., as seller, and MacFarlan
Realty Partners, L.L.C., as purchaser, for property located at 10100 North Central Expressway, Dallas,
Texas, dated effective December 9, 1997 (15) (Exhibit 10(kk))
10(gg) $7,840,000 Secured Promissory Note, dated December 30, 1997, from MacFarlan Realty Partners, L.L.C., to
CompuCom Systems, Inc. (15) (Exhibit 10(ll))
10(hh) Note Modification Agreement and Settlement Agreement, dated as of November 30, 1998, between MacFarlan
Realty Partners L.L.C. and CompuCom Systems, Inc. (20) (Exhibit 10(ee))
10(ii) Special Warranty Deed dated as of March 31, 1999, from CompuCom Systems, Inc., as grantor, to Delaware Comp
LLC, as grantee, for property located at 7171 Forest Lane, Dallas, Texas (exhibits omitted) *
10(jj) Lease Agreement dated as of March 31, 1999, between CompuCom Systems, Inc., as tenant, and Delaware
Comp LLC, as landlord, for premises located as 7171 Forest Lane, Dallas, Texas, including Exhibit D - Basic
Rent Payments (other exhibits omitted) *
10(kk) Contract of Sale between CompuCom Systems, Inc., as seller, and MCSi Realty Co., LLC, as purchaser for
property located at 4281 Olympic Boulevard, Erlanger, Kentucky, dated as of December 9, 1999
(exhibit omitted) *
10(ll)** $1,181,250 Amended and Restated Secured Term Note, dated February 12, 1997, from Edward R. Anderson to
CompuCom Systems, Inc. (13) (Exhibit 10(ff))
10(mm)** First Amendment, dated February 19, 1999, to Amended and Restated Secured Term Note from Edward
R. Anderson to CompuCom Systems, Inc. (20) (Exhibit 10(gg))
10(nn)** Pledge Agreement, dated August 31, 1994, between Edward R. Anderson and CompuCom
Systems, Inc. (9) (Exhibit 10(nn))
10(oo)** $661,251 Secured Term Note, dated June 16, 1997, from Daniel F. Brown to CompuCom Systems,
Inc. (15) (Exhibit 10(pp))
10(pp)** Pledge Agreement, dated June 16, 1997, from Daniel F. Brown and CompuCom Systems, Inc. (15) (Exhibit 10(qq))
10(qq)** $796,875 Secured Term Note, dated December 23, 1998, from Thomas C. Lynch to CompuCom
Systems, Inc. (20) (Exhibit 10(kk))
10(rr)** Pledge Agreement, dated December 23, 1998, between Thomas C. Lynch and CompuCom Systems,
Inc. (20) (Exhibit 10(ll))
10(ss)** $2,021,875 Secured Term Note, dated October 22, 1998, from Edward R. Anderson to
CompuCom Systems, Inc. (20) (Exhibit 10(mm))
10(tt)** Pledge Agreement, dated October 22, 1998, between Edward R. Anderson and CompuCom
Systems, Inc. (20) (Exhibit 10(nn))
10(uu)** Executive Employment Agreement, dated October 24, 1997, between M. Lazane Smith and CompuCom Systems,
Inc. (15) (Exhibit 10(ss))
10(vv) Executive Employment Agreement, dated November 1, 1999, between J. Edward Coleman and CompuCom Systems, Inc.*
10(ww)** Employment Separation Letter Agreement, dated January 18, 1999, between William Barry and
CompuCom Systems, Inc., with attached General Release and Agreement, and Employee Non-
Disclosure, Non-Solicitation and Non-Competition Agreement (20) (Exhibit 10(rr))
10(xx)** Employment Separation Letter Agreement, dated April 30, 1999, between Daniel F. Brown and
CompuCom Systems, Inc., with attached General Release and Agreement, and Employee Non-
Disclosure, Non-Solicitation and Non-Competition Agreement *
10(yy)** Employment Separation Letter Agreement, dated January 24, 2000, between John Lyons and
CompuCom Systems, Inc. *
21 List of Subsidiaries *
23 Consent of KPMG LLP *
27.1 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 May 13, 1996 as an exhibit to the Quarterly Report on Form 10-Q (No. 0-14371) and
incorporated herein by reference.
(12) Filed on November 12, 1996 as an exhibit to the Quarterly Report on Form 10-Q (No. 0-14371) and
incorporated herein by reference.
(13) Filed on March 31, 1997 as an exhibit to the Annual Report on Form 10-K (No. 0-14371) and
incorporated herein by reference.
(14) Filed on April 9, 1997 as an exhibit to the 1997 Annual Meeting Proxy Statement and
incorporated herein by reference.
(15) Filed on March 31, 1998 as an exhibit to the Annual Report on Form 10-K (No. 0-14371) and
incorporated herein by reference.
(16) Filed on April 7, 1998 as an exhibit to the 1998 Annual Meeting Proxy Statement and
incorporated herein by reference.
(17) Filed on May 14, 1998 as an exhibit to the Quarterly Report on Form 10-Q (No. 0-14371) and
incorporated herein by reference.
(18) Filed on August 14, 1998 as an exhibit to the Quarterly Report on Form 10-Q (No. 0-14371) and
incorporated herein by reference.
(19) Filed on November 16, 1998 as an exhibit to the Quarterly Report on Form 10-Q (No. 0-14371) and
incorporated herein by reference.
(20) Filed on March 31, 1999 as an exhibit to the Annual Report on Form 10-K (No. 0-14371) and
incorporated herein by reference.
(21) Filed on May 25, 1999 as an exhibit to the Current Report on Form 8-K (No. 0-14371) and
incorporated herein by reference.
(22) Filed on August 16, 1999 as an exhibit to the Quarterly Report on Form 10-Q (No. 0-14371) and
incorporated herein by reference.
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-24
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, 1999 and 1998, 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,
1999. In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule as listed in the accompanying
index. The consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the 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 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 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,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Dallas, Texas
February 14, 2000
F-2
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(In thousands, except share amounts)
Assets 1999 1998
------ --------- ---------
Current assets:
Cash $ 14,060 $ 4,526
Receivables, less allowance for doubtful accounts
of $5,095 in 1999 and $3,507 in 1998 218,522 262,380
Inventories 129,076 138,551
Deferred tax asset 1,507 6,718
Other 7,731 3,247
--------- ---------
Total current assets 370,896 415,422
Property and equipment:
Land, building and improvements 780 39,422
Furniture, fixtures and other equipment 56,536 57,703
Leasehold improvements 8,388 9,893
--------- ---------
65,704 107,018
Less accumulated depreciation and amortization (35,986) (35,014)
--------- ---------
Net property and equipment 29,718 72,004
Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 85,086 54,786
Other 12,352 3,277
--------- ---------
$ 498,052 $ 545,489
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 182,247 $ 160,524
Accrued liabilities 91,993 89,218
Current portion of long-term debt 1,500
--------- ---------
Total current liabilities 274,240 251,242
Long-term debt 81,929
Deferred income taxes 840 1,378
Other 659
Stockholders' equity:
Series B preferred stock, $10 stated value. Authorized 3,000,000
shares; issued and outstanding 1,500,000 shares 15,000 15,000
Common stock, $.01 par value. Authorized 70,000,000 shares;
issued and outstanding 48,016,950 shares in 1999
and 47,441,820 shares in 1998 480 474
Additional paid-in capital 72,765 70,380
Retained earnings 139,152 128,478
Notes receivable for the sale of stock (4,425) (4,051)
--------- ---------
Total stockholders' equity 222,972 210,281
--------- ---------
$ 498,052 $ 545,489
========= =========
See accompanying notes to consolidated financial statements.
F-3
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
(In thousands, except per share amounts)
1999 1998 1997
----------- ----------- -----------
Revenue:
Product $ 2,607,967 $ 1,980,578 $ 1,699,268
Service 300,105 258,806 237,042
Other 3,817 15,081 13,492
----------- ----------- -----------
Total revenue 2,911,889 2,254,465 1,949,802
----------- ----------- -----------
Cost of revenue:
Product 2,396,720 1,786,851 1,523,034
Service 198,921 175,451 151,894
Other 2,098 8,203 7,329
----------- ----------- -----------
Total cost of revenue 2,597,739 1,970,505 1,682,257
----------- ----------- -----------
Gross margin 314,150 283,960 267,545
Operating expenses:
Selling 111,178 109,322 79,188
Service 47,828 54,940 49,563
General and administrative 90,655 67,928 59,539
Depreciation and amortization 21,930 15,923 11,274
Restructuring charges 387 16,437
----------- ----------- -----------
Total operating expenses 271,978 264,550 199,564
----------- ----------- -----------
Earnings from operations 42,172 19,410 67,981
Financing expenses (23,195) (18,742) (14,947)
Nonrecurring gains 5,624
----------- ----------- -----------
Earnings before income taxes 18,977 668 58,658
Income taxes 7,403 267 23,464
----------- ----------- -----------
Net earnings $ 11,574 $ 401 $ 35,194
=========== =========== ===========
Earnings/(loss) per common share:
Basic $ .22 ($ .01) $ .75
Diluted $ .22 ($ .01) $ .71
Average common shares outstanding:
Basic 47,657 46,346 45,686
Diluted 48,274 46,346 50,034
See accompanying notes to consolidated financial statements.
F-4
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
(In thousands, except share amounts)
Preferred Stock Common Stock Additional Notes Total
---------------------- ---------------------- Paid-in Retained Receivable for Stockholders'
Shares Amount Shares Amount Capital Earnings Sale of Stock Equity
---------- ---------- ---------- ---------- ---------- ---------- -------------- -------------
Balances at December 31, 1996 1,500,000 $ 15,000 44,927,571 $ 449 $ 60,966 $ 94,683 $ 171,098
Exercise of options 1,184,249 12 5,128 5,140
Notes receivable for sale
of stock (332) (332)
Preferred stock dividend (900) (900)
Net earnings 35,194 35,194
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 1,500,000 15,000 46,111,820 461 66,094 128,977 (332) 210,200
Exercise of options 1,330,000 13 4,286 4,299
Notes receivable for sale
of stock (3,719) (3,719)
Preferred stock dividend (900) (900)
Net earnings 401 401
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1998 1,500,000 15,000 47,441,820 474 70,380 128,478 (4,051) 210,281
Exercise of options 575,130 6 2,385 2,391
Notes receivable for sale
of stock (374) (374)
Preferred stock dividend (900) (900)
Net earnings 11,574 11,574
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1999 1,500,000 $ 15,000 48,016,950 $ 480 $ 72,765 $ 139,152 ($ 4,425) $ 222,972
========== ========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 11,574 $ 401 $ 35,194
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 21,930 15,923 11,274
Restructuring related charges 16,437
Deferred income taxes 4,637 (3,711) 1,527
Nonrecurring gains (5,624)
Changes in assets and liabilities, excluding effects from acquisitions:
Receivables 41,500 (13,050) 207,397
Inventories 101,744 68,745 35,506
Other current assets (1,795) 856 628
Accounts payable 31,660 23,950 (144,949)
Restructuring accrual (9,381) (2,349)
Accrued liabilities and other (7,369) (7,819) 12,970
----------- ----------- -----------
Net cash provided by operating activities 194,500 99,383 153,923
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (6,867) (14,330) (22,418)
Business acquisitions, net of cash acquired (141,253) (49,679)
Proceeds from sale of buildings 45,466 1,960
Proceeds from sale of securities 2,724
----------- ----------- -----------
Net cash used in investing activities (102,654) (64,009) (17,734)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under revolver 996,065 611,250 735,100
Repayment of revolver (1,079,494) (644,134) (875,061)
Issuance of common stock 2,017 1,480 4,808
Repayment of convertible debt (3,000)
Preferred stock dividend (900) (900) (900)
----------- ----------- -----------
Net cash used in financing activities (82,312) (35,304) (136,053)
----------- ----------- -----------
Net increase in cash 9,534 70 136
Cash at beginning of year 4,526 4,456 4,320
----------- ----------- -----------
Cash at end of year $ 14,060 $ 4,526 $ 4,456
=========== =========== ===========
Supplemental disclosure of cash flow information
Income taxes paid $ 824 $ 7,074 $ 16,078
Financing expenses paid 24,997 20,034 14,904
Supplemental disclosure of noncash financing activities
Receipt of note receivable on sale of building $ 7,800
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 technology management
services and information technology products to large and
medium-sized corporate customers, as well as state and local
governmental agencies. The Company's services include field
engineering, LAN/WAN projects, consulting, configuration, help
desk, asset tracking and network management.
Principles of Consolidation
The consolidated financial statements include the
accounts of CompuCom Systems, Inc. and its subsidiaries. All
significant intercompany balances and transactions have been
eliminated. Minority interest expense for consolidated
subsidiaries is reflected in operating expense in the
Consolidated Statements of Operations. Minority interest
liability is reflected in other long-term liabilities in the
Consolidated Balance Sheets.
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 nonsalable
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
30 years; furniture and equipment, 5 years) and is computed
using the straight-line method.
Cost in Excess of Fair Value of Tangible Net Assets Purchased
Cost in excess of fair value of tangible net assets
purchased represents goodwill and customer lists and is
amortized using the straight-line method over a 3 to 20 year
period. Accumulated amortization at December 31, 1999 and 1998
was $24,733,000 and $17,140,000, respectively.
The Company assesses the recoverability of goodwill
by determining whether the amortization of the asset balance
over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not
achieved.
(continued)
F-7
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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
reimbursement for certain training, promotional and marketing
activities that offset the expenses incurred by the Company.
Financing Expenses
Financing expenses consist of interest incurred on
borrowings under the Company's financing arrangements and
discounts on the sale of receivables.
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
Basic 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. Diluted earnings per common share assumes
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 expense
and/or dividends, as required. Diluted earnings per common
share also assumes the exercise of all options with an
exercise price below the average market price of the Company's
stock for the year, at the later of the beginning of the year
or date of issuance, regardless of whether the options are
vested or not.
Financial Instruments
The Company's financial instruments, principally
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<