<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the three months ended March 31, 1999 Commission File Number 0-14371
- ----------------------------------------- ------------------------------
COMPUCOM SYSTEMS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 38-2363156
-------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7171 FOREST LANE, DALLAS, TX 75230
------------------------------ -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 856-3600
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
The number of shares of the Registrant's common stock outstanding as of May 14,
1999 was 47,639,949 shares.
________________________________________________________________________________
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C> <C>
Item 1. Condensed Consolidated Balance Sheets
March 31, 1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
- -------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
Assets (unaudited)
------
<S> <C> <C>
Current assets:
Cash $ 4,513 $ 4,526
Receivables 215,636 262,380
Inventories 132,398 138,551
Deferred tax asset 5,108 6,718
Other 3,743 3,247
----------- -----------
Total current assets 361,398 415,422
Property and equipment, net 33,665 72,004
Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 53,873 54,786
Other 4,036 3,277
----------- -----------
$ 452,972 $ 545,489
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 164,073 $ 160,524
Accrued liabilities 63,391 89,218
Current portion of long-term debt 1,500
----------- -----------
Total current liabilities 227,464 251,242
Long-term debt 15,293 81,929
Deferred income taxes 1,133 1,378
Other 741 659
Shareholders' equity:
Preferred stock 15,000 15,000
Common stock 476 474
Additional paid-in capital 70,952 70,380
Retained earnings 125,964 128,478
Notes receivable for sale of stock (4,051) (4,051)
----------- -----------
Total shareholders' equity 208,341 210,281
----------- -----------
$ 452,972 $ 545,489
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Revenue:
Product $ 421,292 $ 376,778
Service 68,559 57,128
Other 3,469 3,846
------------ ------------
Total revenue 493,320 437,752
------------ ------------
Cost of revenue:
Product 387,744 332,898
Service 45,238 38,758
Other 1,867 1,931
------------ ------------
Total cost of revenue 434,849 373,587
------------ ------------
Gross margin 58,471 64,165
Operating expenses:
Selling 23,662 21,130
Service 10,908 14,665
General and administrative 19,299 14,880
Depreciation and amortization 4,087 3,330
------------ ------------
Total operating expenses 57,956 54,005
------------ ------------
Earnings from operations 515 10,160
Financing expenses 4,330 3,755
------------ ------------
Earnings/(loss) before income taxes (3,815) 6,405
Income taxes (1,526) 2,562
------------ ------------
Net earnings/(loss) ($ 2,289) $ 3,843
============ ============
Earnings/(loss) per common share:
Basic ($ .05) $ .08
Diluted ($ .05) $ .08
Average common shares outstanding:
Basic 47,635 46,133
Diluted 47,635 50,182
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
---------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings/(loss) ($ 2,289) $ 3,843
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,080 3,330
Deferred income taxes 1,365 334
Changes in assets and liabilities:
Receivables 46,365 10,236
Inventories 6,153 (34,522)
Other current assets ( 3,185) (318)
Accounts payable 3,549 45,547
Accrued liabilities and other (26,930) (11,075)
---------- -----------
Net cash provided by operating activities 29,108 17,375
---------- -----------
Cash flows from investing activities:
Capital expenditures, net (1,125) (4,099)
Proceeds from sale of building 39,791
Business acquisitions, net of cash acquired (4,023)
---------- -----------
Net cash provided by (used in) investing activities 38,666 (8,122)
---------- -----------
Cash flows from financing activities:
Net bank credit facility and other borrowings (43,136) (9,200)
Repayment of real estate loan (25,000)
Issuance of common stock 574 138
Preferred stock dividend (225) (225)
---------- -----------
Net cash (used in) financing activities (67,787) (9,287)
---------- -----------
Net decrease in cash (13) (34)
Cash at beginning of period 4,526 4,456
---------- -----------
Cash at end of period $ 4,513 $ 4,422
========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(1) General
-------
These condensed interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
summary of significant accounting policies and notes thereto included in
the 1998 Annual Report on Form 10-K for CompuCom Systems, Inc. and
subsidiaries (the Company). The information furnished is unaudited but
reflects all adjustments consisting only of normal recurring accruals which
are, in the opinion of management, necessary to present a fair statement of
the results for these interim periods. Interim results are not necessarily
indicative of results expected for the full year.
(2) Contingencies
-------------
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position and results of operations, taken
as a whole.
(3) Earnings per share
------------------
In accordance with SFAS No. 128, "Earnings Per Share," basic earnings
per common share have been computed based on net earnings after preferred
stock dividend requirements, if any, and the weighted-average number of
common shares outstanding during each period. Diluted earnings per common
share assumes conversion of dilutive convertible securities into common
stock at the later of the beginning of the period or date of issuance and
includes the add-back of related interest expense and/or dividends, as
required. Earnings per common share have been computed as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended March 31, 1999
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Net earnings/(loss) ($ 2,289)
Less: Preferred stock dividends (225)
Basic EPS
---------
Income available to common shareholders (2,514) 47,635 ($ .05)
Diluted EPS
-----------
Income available (2,514) 47,635 ($ .05)
=========== ============= ==========
</TABLE>
The Company has excluded 4,111,586 shares from its calculations of
diluted earnings per share in 1999 as they are considered anti-dilutive.
This represents all of the Company's weighted-average options outstanding
for the quarter, since the numerator used in calculating earnings per share
is a negative amount. The Company has excluded 230,867 shares from its
calculation of diluted earnings per share in 1998 as they are considered
anti-dilutive.
6
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 1999
<TABLE>
<CAPTION>
Three months ended March 31, 1998
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Net earnings $ 3,843
Less: Preferred stock dividends (225)
Basic EPS
---------
Income available to common shareholders 3,618 46,133 $.08
Effect of dilutive securities
-----------------------------
Stock options 1,446
Convertible preferred stock 225 2,216
Convertible debt 23 387
----------- -------------
Diluted EPS
-----------
Income available + assumed conversions 3,866 50,182 $.08
=========== ============= ==========
</TABLE>
(4) Sale-Leaseback of Company's Headquarters
----------------------------------------
During the quarter ended March 31, 1999 the Company sold its corporate
headquarters bulding in a sale/leaseback transaction. The proceeds from the
sale were used to pay down long-term debt. As part of the transaction, the
Company entered into a 20-year operating lease on the building.
(5) Restructuring Accrual
---------------------
During the fourth quarter of 1998, the Company recorded a $16.4
million restructuring charge, primarily consisting of costs associated with
the closing of facilities and disposing of related fixed assets as well as
employee severance and benefits related to a reduction in workforce. The
following table provides a summary of the restructuring charge by category
as well as a rollforward of the restructuring accrual through March 31,
1999:
<TABLE>
<CAPTION>
Restructuring Accrual at Cash Accrual at
Charge 12/31/98 Outlays 3/31/99
------------------------------------------------------
<S> <C> <C> <C> <C>
Lease termination costs $ 7,259 $ 6,415 $ 3,215 $ 3,200
Employee severance and related benefits 3,804 2,986 1,315 1,671
Disposal of assets, net of estimated proceeds 3,044 2,907 2,907
Other 2,330 1,780 213 1,567
------------ -------- --------- ----------
Total $ 16,437 $ 14,088 $ 4,743 $ 9,345
</TABLE>
The Company expects the restructuring activities to be substantially completed
by the end of 1999 and believes the restructuring accrual is adequate.
7
<PAGE>
(6) Business Combinations
---------------------
During 1998, the Company consummated three business combinations. The
total consideration given for these business combinations was approximately
$49 million in cash. In addition, the Company assumed liabilities of
approximately $95 million, in aggregate. The business combinations were
accounted for as purchases and accordingly the consolidated financial
statements reflect the operations of the acquired entities since the
respective acquisition dates. The Company has not completed the allocation
of the purchase price for these acquisitions. Therefore, the amount of
goodwill recorded could be adjusted once the allocation is finalized.
The following unaudited proforma financial information presents the
combined results of operations for the three months ended March 31, 1998 as
if the acquisitions had occurred as of the beginning of 1998, after giving
effect to certain adjustments, including amortization of goodwill,
increased interest expense on debt related to the acquisitions, and related
income tax effects. The proforma results do not necessarily represent
results which would have occurred if the acquisition had taken place on the
basis assumed above, nor are they indicative of the results of future
combined operations.
(in thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C>
Revenue $558,548
Net earnings $ 564
Diluted earnings per share $ .01
</TABLE>
(7) Segment Information
-------------------
The Company defines its operations as three distinct businesses -sales
of computer products ("product"); services, which includes configuration,
network integration, and technology support ("service") and ClientLink.
ClientLink, which is a majority owned subsidiary of the Company, designs,
develops, and implements customized information technology solutions for
organizations with mission-critical business processing needs.
The Company measures segment earnings as operating earnings, defined
as income before restructuring charges, financing expenses, and income
taxes. All significant intersegment activity has been eliminated. Business
assets are the owned or allocated assets used by each business. The
majority of revenue in the "Other" column is royalties the Company receives
from previously sold businesses and other miscellaneous revenue. The
"Other" column also includes all assets not specifically allocated to a
segment.
For the Quarter ended March 31, 1999
<TABLE>
<CAPTION>
Operating Results Product Service ClientLink, Other Total
Inc.
- ----------------------- ---------------- ---------------- ----------------- ------------------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues $ 421,292 $ 68,559 $ 3,469 $ 493,320
Gross margin 33,548 23,321 1,602 58,471
Operating earnings (8,777) 8,549 743 515
Total assets $ 292,046 $ 35,337 $ 9,316 $ 117,178 $ 453,877
</TABLE>
8
<PAGE>
For the Quarter ended March 31, 1998
<TABLE>
<CAPTION>
Operating Results Product Service ClientLink, Other Total
Inc.
- ----------------------- ---------------- ---------------- ----------------- ------------------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues $ 376,778 $ 57,128 $ 3,801 $ 45 $ 437,752
Gross margin 43,880 18,370 1,870 45 64,165
Operating earnings 7,314 2,180 621 45 10,160
Total assets $ 350,065 $ 29,762 $ 9,552 $ 103,725 $ 493,104
</TABLE>
(8) Subsequent Events
-----------------
On April 15, 1999, the Company announced the merger of its majority
owned subsidiary, ClientLink, Inc., with E-Certify Corporation, an internet
security services company.
On May 7, 1999, the Company entered into a $175 million receivables
securitization facility that replaced its previous receivables
securitization.
On May 11, 1999, the Company entered into a $225 million working
capital facility. This facility replaced the Company's existing $165
million working capital facility.
On May 11, 1999, the Company purchased from ENTEX Information
Services, Inc. ("Entex") certain assets of its Technology Acquisition
Services Division ("TASD") in a cash transaction. This acquisition was
structured as an asset purchase. Under the terms of the agreement, the
Company paid approximately $135 million. The acquired assets primarily
consisted of inventory, certain fixed assets, and the Erlanger, Kentucky
distribution center. In addition, the Company hired approximately 1,000
employees, primarily sales, sales support and distribution personnel
previously part of TASD.
9
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
March 31, 1999
Results of Operations
- ---------------------
The following table shows the Company's total revenue, gross margin and
gross margin percentage by revenue source. Operating expenses, financing
expenses, income taxes and net earnings are shown as a percentage of total net
revenue for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
March 31,
1999 1998
-----------------------------------
($ in thousands)
<S> <C> <C>
Revenue:
Product $ 421,292 $ 376,778
Service 68,559 57,128
Other 3,469 3,846
-----------------------------------
Total revenue $ 493,320 $ 437,752
===================================
Gross margin:
Product $ 33,548 $ 43,880
Service 23,321 18,370
Other 1,602 1,915
-----------------------------------
Total gross margin $ 58,471 $ 64,165
===================================
Gross margin percentage:
Product 8.0% 11.6%
Service 34.0% 32.2%
Other 46.2% 49.8%
-----------------------------------
Total gross margin percentage 11.9% 14.7%
-----------------------------------
Operating expenses:
Selling 4.8% 4.8%
Service 2.2% 3.4%
General and administrative 3.9% 3.4%
Depreciation and amortization 0.8% 0.8%
-----------------------------------
Total operating expenses 11.7% 12.4%
-----------------------------------
Operating earnings 0.1% 2.3%
Financing expenses 0.9% 0.8%
-----------------------------------
Earnings/(loss) before income taxes (0.8%) 1.5%
Income taxes (0.3%) 0.6%
-----------------------------------
Net earnings/(loss) (0.5%) 0.9%
===================================
</TABLE>
(Continued)
10
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Product revenue, which is primarily derived from the sale of distributed
desktop computer products to corporate customers, increased to $421.3 million
for the first quarter of 1999, compared to $376.8 million for the same period in
1998. The increase in product revenue was due to the second quarter 1998
acquisitions of Computer Integration Corporation ("CIC") and Dataflex
Corporation ("Dataflex"), (collectively "the Acquisitions"). The number of
desktop, laptop and server units shipped during the first quarter 1999 increased
approximately 15% compared to the same period of 1998. Product gross margin as
a percentage of product net revenues for the first quarter of 1999 was 8.0%,
compared to 11.6% for the same period in 1998. The Company attributes this
decline primarily to heightened competition from other corporate resellers and
direct marketers and a reduction in manufacturer sponsored incentives. The
Company expects to continue to experience declining product gross margins in the
short term.
Service revenue for the first quarter of 1999 increased 20% to $68.6
million compared to $57.1 million for the same period 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 due to increases in
field engineering, which is typically driven in part by product unit sales
volume, and the Acquisitions. Service gross margin as a percentage of service
net revenue was 34.0% for the first quarter of 1999 as compared to 32.2% for the
same period in 1998. The increase was primarily a result of increased
productivity from the Company's engineers. The Company does not expect to see
improvement in its service gross margin percentage in the short term.
Operating expenses increased $7.3 million in absolute dollars for the first
quarter of 1999 as compared to the same period in 1998, but decreased as a
percentage of net revenue to 11.7% compared to 12.4% in the same period in 1998.
The increase in absolute dollars in operating expenses is due primarily to an
increase in general and administrative expenses.
Selling expense increased to approximately $23.7 million for the first
quarter of 1999 compared to $21.1 million for the same period in 1998. Although
the Company has focused on reducing its selling expenses, the cost reductions
from its previously announced restructuring plan were offset by marketing
expenses for its e-commerce unit, PCSave, and consulting fees associated with
the design and implementation of its new sales model. Excluding these expenses,
selling expenses decreased slightly compared to the prior year. However,
compared to the quarter ending December 31, 1998, selling expense decreased by
approximately $6.2 million. The Company plans to reduce the level of marketing
expenses incurred for its e-commerce unit. However, as a result of the recently
announced acquisition of Entex's product division, the Company plans to incur
additional consulting fees during the second and third quarters of 1999. Selling
expense amounted to 4.8% of revenues during the first quarter of 1998 and 1999.
Excluding the consulting fees and PCSave marketing costs, selling expense
decreased to 4.3% of revenue for the quarter ending March 31, 1999.
Service expense decreased in both dollars and as a percentage of revenue as
a result of the Company's efforts to reduce its operating expenses and the
restructuring effort completed in 1998.
(Continued)
11
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General and administrative expense, as a percentage of net revenue,
increased to 3.9% during the first quarter of 1999 as compared to 3.4% for the
same period in 1998. This increase was primarily due to expenditures to continue
expansion of the Company's electronic commerce capabilities. The Company's
operating expenses are reported net of reimbursements by certain manufacturers
for specific training, promotional and marketing programs. These reimbursements
offset the expenses incurred by the Company.
Depreciation and amortization expense increased in absolute dollars but
remained at 0.8% of net revenues for the first quarter of 1999 as compared to
the same period in 1998. The increase in absolute dollars is due primarily to
the increase in goodwill amortization related to the acquisitions completed
during 1998.
Financing expenses increased to $4.3 million for the first quarter of 1999
as compared to $3.8 million for the same period in 1998, primarily due to
increased amortization of fees resulting from the early termination of the
Company's financing agreements. The Company's effective interest rate was 6.9%
during the first quarter of 1999 and 6.5% in the first quarter of 1998.
As a result of the factors discussed above, the company recorded a net loss
of $2.3 million compared to net earnings of $3.8 million in 1998.
(Continued)
12
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
- -------------------------------
Working capital at March 31, 1999 was $135 million compared to $164 million
at December 31, 1998. The slight decrease is primarily due to decreases in
accounts receivable and inventory, which were partially offset by a decrease in
accrued liabilities.
The Company's working capital requirements are generally funded through
financing arrangements and internally generated funds. During the quarter ended
March 31, 1999, the Company completed a sale/leaseback on its corporate
headquarters. The proceeds of the sale/leaseback were used to pay down long
term debt by $36 million. As of March 31, 1999, the Company's financing
arrangements consisted of a $157 million Securitization Facility, which was
fully utilized, and a $165 million working capital facility (collectively, the
"Credit Agreements"). However, in May 1999 the Company replaced the Credit
Agreements with new credit facilities consisting of a $175 million receivables
securitization and a $225 million working capital facility. The Company does not
expect its effective interest rate under the new facilities to be materially
different from the levels experienced in 1998. The Company utilized these new
facilities to provide working capital financing and to finance the purchase of
certain assets from Entex.
Regarding the new $175 million receivables securitization, discounts
associated with the sale of receivables are based on a designated commercial
paper rate plus an agreed upon spread. This securitization has a term of 3
years, subject to certain covenant compliance.
The $225 million working capital facility bears interest at a rate of LIBOR
plus 175 basis points and is secured by certain assets of the Company. This
facility is fully available subject to a borrowing base and compliance with
certain covenants related to, among others, funded debt to EBITDA, the current
ratio, and minimum profitability and tangible net worth levels. Terms of the
working capital facility limit the amounts available for capital expenditures
and dividends. This facility matures in May 2002.
The Company's liquidity continues to be negatively impacted by 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 March 31, 1999 these programs are a
material factor in the Company's financing needs. As of March 31, 1999 the
Company was owed approximately $62 million under these programs.
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 $1.1 million during the first quarter of 1999, and $4.0 million
during the first quarter of 1998. Excluding the recently announced TASD
acquisition, the Company does not expect to incur capital expenditures
materially different from its 1998 levels.
Year 2000 Readiness Disclosure
The Year 2000 issue results from the fact many computer programs were
previously written using two digits rather than four to define the applicable
year. Programs written in this way may recognize a date ending in "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing business delays and disruptions of operations. The
Company has developed a step-by-step plan which details the tasks, deliverables,
resources, and target dates necessary to monitor the Company's information
systems at the turn of the century and beyond. Assessment of the Company's
systems has been divided into five areas - Core information systems
13
<PAGE>
and components ("Core IS"), Distributed Desktop systems, Non-IS systems, new IS
purchases by the Company, and mergers and acquisitions.
The Company's Core IS include purchasing, order management, warehouse
management, distribution, service dispatch, service parts, engineer billing,
human resources and financial information systems. Distributed Desktop systems
include all desktop computers and related components used by the Company's
associates, wherever they are located. Initial assessment of these systems has
included the identification of each hardware, software, tool, and package
comprising these systems to determine whether or not they support Year 2000 date
codes. Testing, remediation, and validation of the Company's Core IS and
Distributed Desktop systems is planned to be completed by June 1999. Remediation
includes the enhancement, upgrading, migration, or replacement of non-compliant
hardware, software, tools and/or systems. Validation entails testing of all
systems including a "quality control" environment in which the date is
artificially set forward to the Year 2000 to simulate the turn of the century
and beyond. The Company has also purchased a Year 2000 compliance software
package that will generate audit reports on a regular basis to report back any
noncompliant Distributed Desktop systems. The Company began using this software
package in January 1999 and will produce and review the reports on a regular
basis through 2000.
Non-IS systems include all microcontroller systems and back-up processes of Core
IS. Microcontroller systems comprise all electronic systems such as telephones,
security systems, alarms, etc. Initial assessment and remediation of the
Company's Non-IS systems is currently expected to be completed during the first
quarter of 1999. The Company reviews each of its new potential hardware and
software purchases to ensure they are Year 2000 compliant. The Company completed
three acquisitions during 1998; however, these acquisitions have been integrated
into the Company and the major processes of the acquired systems have been
replaced with the Company's Core IS.
As part of its Year 2000 assessment, the Company must also consider the
compliance of third parties with which the Company has a material relationship,
namely its vendors, suppliers, and customers. The Company relies on vendors and
suppliers for hardware, software, and tools used within its own business
environment. The Company has developed a Year 2000 questionnaire which has been
sent to its vendors and suppliers in order to ascertain whether vendors and
suppliers warrant their hardware, software, and tools to be Year 2000 compliant
and whether vendors and suppliers have adequately addressed the Year 2000 issue.
The Company has documented compliance via the questionnaire for approximately
95% of hardware, software, and tools currently in use. For the remaining 5% of
questionnaires, if documented compliance is not received, the Company's plan is
to upgrade or replace for compliance, or decommission if necessary during the
second quarter of 1999.
The Company is required to disclose a reasonable description of its most
reasonably likely worst case Year 2000 scenario. Although noncompliance could
result in a system failure, business delays, and/or disruptions in operations,
the Company is in the process of developing a contingency plan in case a Year
2000 problem occurs. As a reseller of computer products, the Company only passes
through to its customers the applicable vendor's warranties; it makes no
warranties regarding Year 2000 compliance on any of the products it resells.
However, if one of the Company's major vendors or suppliers is found to be Year
2000 noncompliant which is not corrected on a timely basis, it could have a
material adverse effect on the Company's results of operations. Due to that
fact, the Company is still in the process of obtaining assurances from its
vendors and suppliers regarding their readiness for Year 2000.
The Company's plan also includes the availability of a test team that will test
the Company's information systems on an on-going basis to further validate that
additions or modifications to any of the Company's systems do not create Year
2000 compliance issues. The Company's expectations with respect to the Year 2000
issues noted above are based on the premise there will be no material general
failure of external systems (including power, communications, transportation or
financial systems) necessary for the ordinary conduct of business. At the
present time, the company is developing a contingency plan to operate in the
event its computer systems or those of its vendors, suppliers, or customers are
not Year 2000 compliant. The Company expects to have this contingency plan
completed by June 1999.
The Company currently anticipates it will spend approximately $1,400,000 on Year
2000 compliance, of which approximately $900,000 has been spent through March
31, 1999. The majority of the remaining expense is expected to be for previously
identified desktop equipment and full-time associates dedicated to the Year 2000
compliance effort. All previous as well as future expenditures on Year 2000
compliance have or will come from operating cash flow.
14
<PAGE>
This document contains certain forward-looking statements regarding
revenues, margin, earnings, growth rates and certain business trends that
involve risks and uncertainties that could cause actual results to differ
materially from the results discussed herein, specifically, the recent sales
training may not continue or be sufficient to increase service growth
acceleration; the restructuring cost reductions may not be adequate to offset
costs needed for other operations; and additional product cost reductions may
continue to reduce revenues, margins, and earnings. Other factors that could
cause actual results to differ materially are: the Company's ability to
successfully integrate the TASD acquisition into its operations, the Company's
ability to effectively manage inventory levels in response to changes in its
major suppliers' price protection and return programs, the Company's ability to
effectively manage the utilization of service personnel, the Company's ability
to respond to increased competition from its suppliers' direct selling
initiatives, the Company's ability to reduce operating expenses at a pace equal
to the decline in margin percentages, competitive pricing and supply, short-term
interest rate fluctuations, general economic conditions, employee turnover and
possible future litigation, 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.
15
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 13,
1999. At the meeting, the shareholders voted in favor of electing as directors
the eleven nominees named in the Proxy Statement dated April 13, 1999, and for
an amendment to the Company's 1993 Stock Option Plan. The number of votes cast
for, against or withheld, as well as, the number of abstentions and broker
nonvotes were as follows:
<TABLE>
<CAPTION>
Election of Directors:
FOR WITHHELD
--- --------
<S> <C> <C>
Edward R. Anderson 52,641,012 2,072,424
Michael J. Emmi 52,684,895 2,028,541
Richard F. Ford 52,697,163 2,016,273
Delbert W. Johnson 52,694,147 2,019,289
John D. Loewenberg 52,684,447 2,028,989
Thomas C. Lynch 52,692,317 2,021,119
John C. Maxwell 52,682,963 2,030,473
Warren V. Musser 52,674,877 2,038,559
Anthony J. Paoni 52,695,623 2,017,813
Edward N. Patrone 52,637,131 2,076,305
Harry Wallaesa 52,692,673 2,020,763
Proposal to amend the 1993 Stock Option Plan:
For Against Abstain Broker Nonvotes
--- ------- ------- --------------
34,485,653 3,237,377 102,143 -
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
Exhibit
No. Description
------- --------------------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed by the Registrant during the
three months ended March 31, 1999.
16
<PAGE>
COMPUCOM SYSTEMS, INC, AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Services Exchange Act of 1934, the Registant
has duly caused this report to be signed on its behalf by the undersignes
thereunto duly authorized.
COMPUCOM SYSTEMS, INC.
-------------------------------------
(Registrant)
DATE: May 17, 1999 /s/ Edward Anderson
-------------------------------------
Edward Anderson
President and Chief Executive Officer
DATE: May 17, 1999 /s/ M. Lazane Smith
--------------------------------------
M. Lazane Smith,
Senior Vice President, Finance and
Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule summary contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of March 31, 1999 and the Condensed
Consolidated Statement of Operations for the three months ended March 31, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,513
<SECURITIES> 0
<RECEIVABLES> 216,531
<ALLOWANCES> 3,166
<INVENTORY> 132,398
<CURRENT-ASSETS> 361,398
<PP&E> 69,501
<DEPRECIATION> 35,836
<TOTAL-ASSETS> 452,972
<CURRENT-LIABILITIES> 227,464
<BONDS> 15,293
0
15,000
<COMMON> 476
<OTHER-SE> 192,865
<TOTAL-LIABILITY-AND-EQUITY> 452,972
<SALES> 421,292
<TOTAL-REVENUES> 493,320
<CGS> 387,744
<TOTAL-COSTS> 434,849
<OTHER-EXPENSES> 57,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,330
<INCOME-PRETAX> (3,815)
<INCOME-TAX> (1,526)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,289)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
