<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
May 10, 1999
Date of Report (Date of earliest event reported)
COMPUCOM SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 0-14371 38-2363156
- ------------------------------- ------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Commission File Number) 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
----------------------
(Not applicable)
(Former name or former address, if changed since last report)
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EXPLANATORY NOTE
This Form 8-K/A amends Item 7 of the current report on Form 8-K filed by
CompuCom Systems, Inc. ("CompuCom") on May 25, 1999 to include financial
statements that were not available at the time of the filing of the initial
report. The financial statements are required as a result of the May 10, 1999
acquisition by CompuCom of certain assets of ENTEX Information Services, Inc.
("ENTEX") whereby Compucom acquired certain assets of ENTEX's Technology
Acquisition Services Division ("TASD").
Item 7. FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
Item 7(a). FINANCIAL STATEMENTS OF ENTEX INFORMATION SERVICES, INC. TECHNOLOGY
ACQUISITION SERVICES DIVISION COMBINED FINANCIAL STATEMENTS AS OF JUNE 28, 1999
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ENTEX Information Services, Inc.:
We have audited the combined balance sheets of ENTEX Information Services,
Inc. Technology Acquisition Services Division as of June 28, 1998 and June 29,
1997 and the related combined statements of operations and cash flows for each
of the years in the three-year period ended June 28, 1998. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express our opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of ENTEX Information
Services, Inc. Technology Acquisition Services Division as of June 28, 1998 and
June 29, 1997, and the results of their operations and their cash flows for each
of the years in the three-year period ended June 28, 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
Stamford, Connecticut
May 17, 1999
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ENTEX INFORMATION SERVICES, INC.
TECHNOLOGY ACQUISITION SERVICES DIVISION
COMBINED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 28, June 29, March 28,
1998 1997 1999
------------ --------- ----------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash......................................................................... $ 10,724 $ 12,494 $ 9,034
Trade receivables, net of allowance for doubtful
accounts of $3,659, $3,721 and $3,867, respectively.......................... 289,802 261,247 255,746
Vendor receivables, net of allowance of $3,787, $2,000
and $3,461, respectively................................................... 47,592 37,789 39,518
Finished goods inventories................................................... 180,105 175,151 111,593
Other current assets......................................................... 4,160 3,494 3,368
----------- ---------- ---------
Total current assets....................................................... 532,383 490,175 419,259
Property, plant and equipment, net............................................. 26,360 18,969 17,155
Goodwill, net of accumulated amortization of $9,076, $6,102
and $11,476, respectively.................................................. 30,076 33,083 27,677
Other assets, net.............................................................. 656 545 4,585
---------- ---------- ----------
Total assets............................................................. $ 589,475 $ 542,772 $ 468,676
========== ========== ==========
LIABILITIES AND NET ACCUMULATED DEFICIT
Current liabilities
Accounts payable............................................................. $ 323,313 $ 257,913 $ 282,256
Accrued liabilities.......................................................... 25,354 19,673 28,778
Notes payable and current installments of long-term debt..................... 220,101 268,703 130,444
---------- ---------- ----------
Total current liabilities................................................... 568,768 546,289 441,478
---------- ---------- ----------
Long-term debt................................................................. 42,207 44,075 102,276
Other long-term liabilities.................................................... 661 1,172 --
---------- ---------- ----------
Total long-term liabilities................................................. 42,868 45,247 102,276
---------- ---------- ----------
Total liabilities......................................................... 611,636 591,536 543,754
---------- ---------- ----------
Net accumulated deficit...................................................... (22,161) (48,764) (75,078)
---------- ---------- ----------
$ 589,475 $ 542,772 $ 468,676
</TABLE>
See accompanying notes to combined financial statements.
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ENTEX INFORMATION SERVICES, INC.
TECHNOLOGY ACQUISITION SERVICES DIVISION
COMBINED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
------------------------------------- -----------------------
June 28, June 29, June 30, March 28, March 29,
1998 1997 1996 1999 1998
----------- ----------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues................................................... $2,020,271 $2,140,893 $1,947,298 $1,377,058 $1,534,153
----------- ----------- ---------- ---------- ----------
Cost and expenses:
Cost of products sold......................................... 1,807,478 1,930,873 1,770,351 1,265,303 1,371,674
Inventory charges............................................. -- -- -- 4,000 --
Selling, general and administrative expenses.................. 169,215 182,885 154,182 115,528 123,046
Restructuring costs........................................... -- -- -- 12,000 --
Unusual charges............................................... -- -- -- 12,000 --
Nonrecurring stock compensation costs......................... -- -- 14,548 -- --
----------- --------- -------- -------- --------
Income (loss) from operations................................ 43,578 27,135 8,217 (31,773) 39,433
---------- --------- -------- --------- --------
Interest expense, net.......................................... 27,497 27,859 24,970 21,897 20,773
---------- --------- -------- --------- --------
Income (loss) before income taxes............................. 16,081 (724) (16,753) (53,670) 18,660
Provision for income taxes..................................... 351 25 28 23 13
---------- --------- -------- --------- --------
Net income (loss)............................................. $ 15,730 $ (749) $ (16,781) $ (53,693) $ 18,647
========== ========= =========== =========== ==========
</TABLE>
See accompanying notes to combined financial statements.
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ENTEX INFORMATION
SERVICES, INC.
TECHNOLOGY ACQUISITION SERVICES DIVISION
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
------------------------------------ --------------------------
June 28, June 29, June 30, March 28, March 29,
1998 1997 1996 1999 1998
----------- --------- -------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $15,730 $(749) $(16,781)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Stock compensation costs.......................... -- -- 12,948
Depreciation and amortization..................... 11,814 9,694 6,956
Provision for doubtful trade and vendor
receivables....................................... 1,725 2,071 1,465
Accretion on long-term debentures and notes....... 1,812 1,524 1,497
Other............................................. (111) 563 6,361
Changes in working capital, net of effects of
acquisitions:
Trade receivables................................... (28,493) 1,242 (83,647)
Inventories........................................ (4,954) (10,591) (32,778)
Vendor receivables................................. (11,590) (18,449) (11,463)
Other current assets............................... (666) 87 2,326
Accounts payable and accrued liabilities........... 71,081 (3,157) 44,807
Other long-term liabilities........................ (511) 996 (9,606)
-------- ------- -------
Net cash provided by (used in) operating
activities........................................ 55,837 (16,769) (77,915) $ 41,382 $ 57,985
----------- ---------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures................................ (16,198) (11,467) (16,016) (12,061) (6,207)
Cash paid for acquisitions......................... - (6,014) (18,491) - -
Sale of assets, net of expenses.................... - 1,002 4,250 - -
----------- ---------- --------- --------- ---------
Net cash used in investing activities............. (16,198) (16,479) (30,257) (12,061) (6,207)
----------- ---------- --------- --------- ---------
Cash flows from financing activities:
Net transactions with ENTEX........................ (41,409) 35,534 107,990 (31,011) (57,367)
----------- ---------- --------- --------- ---------
Increase (decrease) in cash......................... (1,770) 2,286 (182) (1,690) (5,589)
Cash at beginning of period......................... 12,494 10,208 10,390 10,724 12,494
----------- ---------- --------- --------- ---------
Cash at end of period............................... $10,724 $12,494 $10,208 $9,034 $6,905
=========== ========= ========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid....................................... $ 25,799 $ 27,344 $ 23,588 $ 16,914 $ 20,500
=========== ========= ========= ======== =========
Taxes paid/(refunded)............................... $(35) $( 9,065) $7,647 $1,278 $(372)
=========== ========= ========= ======== =========
</TABLE>
See accompanying notes to combined financial statements.
5
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ENTEX INFORMATION SERVICES, INC.
TECHNOLOGY ACQUISITION SERVICES DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information and amounts relating to the periods March 1999 and 1998 are
unaudited)
(Dollars in thousands)
(1) Summary of Significant Accounting Policies
(A) Description of the Business
The Technology Acquisition Services Division (the "TAS Division") is an
operating unit of ENTEX Information Services, Inc. ("ENTEX" or the "Company").
ENTEX was formed for the purpose of acquiring, on August 6, 1993, the net
assets of the personal computer and systems integration business of JWP
Information Services, Inc. On June 28, 1996, the Company's former parent,
ENTEX Holdings, Inc., ("Holdings") was merged with and into the Company.
Holdings' investment in the Company represented its only substantive assets
and operations, and accordingly, was accounted for like a pooling-of-interests
transaction.
The Company has two principal sources of revenue: product revenues and
service revenues. Product revenues, which represent the revenues of the TAS
Division, include acquisition and procurement of personal computer and network
products, software, peripherals and configuration. Service revenues include
network services, professional services, outsourcing services, PC and network
operation support services, on-site and centrally located help desk services,
as well as asset management services.
In November 1998, the Company's Board of Directors authorized management
actions that resulted in the reorganization of ENTEX's business to create two
operating units: the TAS Division and the Services Division, each functioning
as a separate operating division within ENTEX. Prior to the reorganization,
these units operated together, and as such, many items were commingled.
Therefore, the accompanying combined financial statements of the TAS Division
have been prepared using the allocation methodologies described below under
"Basis of Presentation."
Effective May 10, 1999, the Company sold certain assets (inventory, land
and building, and fixed assets) of its TAS Division to CompuCom Systems, Inc.
("CompuCom"). The transaction was structured as an asset sale for cash.
Included in the sale were all of the inventory and equipment in the Company's
Erlanger, Kentucky Integration Center and its Corporate Account Call Center in
Mason, Ohio.
(B) Fiscal Year
The Company maintains its accounting records on a fifty-two week basis
ending on the Sunday closest to June 30. The accompanying financial
statements present the results of operations for the fiscal years June 30,
1997 to June 28, 1998, July 1, 1996 to June 29, 1997 and July 3, 1995 to June
30, 1996.
(C) Basis of Presentation
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
The TAS Division's combined financial statements include allocations of
corporate expenses from ENTEX including SG&A and interest. Additionally, the
TAS Division's combined financial statements include allocations of cash,
goodwill and debt. Management believes the allocations have been made on a
reasonable basis. The following describes the allocation methodologies used
by management in the preparation of the TAS Division's combined financial
statements:
SG&A, excluding depreciation and amortization, was allocated to the TAS
Division using an efforts-based methodology giving consideration to headcount
allocations and other information.
Depreciation and amortization associated with the fixed assets used by
the TAS Division has been allocated to it. Amortization associated with
goodwill has been allocated to the TAS Division based on the proportional
allocation of goodwill between ENTEX's operating segments (see below for
goodwill allocation).
Entex's consolidated interest expense has been allocated to the TAS
Division based on a net asset ratio. The net asset ratio is based on the
assets and liabilities that are specifically identifiable with or allocated to
a particular segment of ENTEX's consolidated operations.
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Cash was allocated between ENTEX's operating segments based on the
relative allocation of floor-plan financing indebtedness between these
segments. The nature of ENTEX's operations is such that available cash is used
to pay down floor-plan financing indebtedness.
ENTEX made certain acquisitions of businesses that included both product
and service operations. In connection with these acquisitions, ENTEX recorded
goodwill, which was allocated between ENTEX's operating segments based on
revenue and gross profit projections of each respective business made at the
acquisition date.
Acquisition indebtedness was allocated to the TAS Division based on its
proportional share of the total assets, including goodwill, associated with
the acquired entity. Certain mortgage indebtedness exclusively associated with
the operations of the TAS Division was identified as TAS Division
indebtedness. Floor-plan financing indebtedness associated with ENTEX's
operations was allocated to the TAS Division based on the assets and
liabilities that are specifically identifiable with or allocated to a
particular segment of ENTEX's consolidated operations.
The accompanying unaudited condensed combined financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-K. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Interim results are not necessarily
indicative of results for a full year.
(D) Inventories
Inventory for resale is stated at the lower of cost or market value. The
TAS Division assesses the appropriateness of the inventory valuations giving
consideration to obsolete, slow moving or non-saleable inventory.
(E) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation expense is calculated using the straight-line
method over the estimated useful lives of the assets. Such useful lives range
from 25 years for buildings to three to seven years for furniture and
equipment. Leasehold and capital improvements are amortized using the
straight-line method over the estimated useful life of the property of four
years or over the term of the lease, whichever is shorter.
The Company systematically reviews the recoverability of its long-lived
assets by comparing their unamortized carrying value to their related
undiscounted future cash flows. Any impairment is charged to expense when
such determination is made.
(F) Capitalized Software
As of June 30, 1997 the TAS Division adopted the provisions of SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires that certain costs related to the development
or purchase of internal-use software be capitalized and amortized over the
estimated useful life of the software. The SOP also requires that costs
related to the preliminary project stage and the post-
implementation/operations stage of an internal-use computer software
development project be expensed as incurred. The impact of adopting SOP 98-1
did not have a significant impact on previously recorded amounts.
(G) Goodwill
Goodwill relates to the excess of cost over the net assets of acquired
businesses as allocated to the TAS Division, and is being amortized on a
straight-line basis from ten to 20 years.
The Company reviews the recoverability of goodwill by comparing the
unamortized balance to the related anticipated undiscounted future cash flows
and measures any impairment based on the excess of the unamortized balance
over the present value of future cash flows, discounted using the Company's
average cost of funds.
(H) Revenue Recognition
Revenue from the sale of computer equipment and peripherals is recognized
at the time of shipment to the customer.
In October 1997, the AICPA issued Statement of Position ("SOP") 97-2,
"Software Revenue Recognition", which supersedes SOP 91-1. SOP 97-2, which
the TAS Division adopted as of June 30, 1997, generally requires revenue
earned on software arrangements involving multiple elements, such as
additional software products, upgrades or enhancements, to be allocated to the
various elements of such sale based on "vendor-specific objective evidence of
fair values" allocable to each such element. The TAS Division's software
sales primarily consist of shrink wrap and volume license agreement software
sales. The TAS Division recognizes software revenue when all elements of the
arrangement are complete.
7
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(I) Vendor Programs
The TAS Division receives volume incentives and rebates (i.e. marketing
development funds) from certain manufacturers related to sales of certain
products, which are recorded as a reduction of cost of sales when related
products are sold. Other incentives may require specific incremental action
on the part of the Company such as training, advertising or other pre-approved
market development activities and are recognized as an offset to the related
costs when the required action is performed.
(J) Risks & Uncertainties
The TAS Division's business is dependent in large measure upon its
relationship with key vendors since a substantial portion of the TAS
Division's revenue is derived from the sales of the products of such key
vendors. Changes in the dynamics of the industry, including the manner in
which vendors approach the marketplace, or the termination of, or a material
changes to, the TAS Division's agreements with these vendors would have a
material adverse effect on the TAS Division. In addition, a material decrease
in the level of marketing development programs offered by manufacturers, or an
insufficient or interrupted supply of vendors' product would also have a
material adverse effect on the TAS Division's business. In addition, the TAS
Division's asset based borrowings are exposed to market risk due to
fluctuations in interest rates.
(K) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability 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 and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in the tax rates
is recognized in income in the period that includes the enactment date.
(L) Financial Instruments
The TAS Division's financial instruments, principally cash, accounts
receivable and accounts payable, are carried at cost, which approximates fair
value due to the short-term maturity of these instruments. As amounts
outstanding under the TAS Division's credit agreements bear interest
approximating current market rates, their carrying amounts approximate fair
value.
(M) Stock-Based Compensation
The TAS Division accounts for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued To
Employees." No compensation expense relating to stock compensation has been
recognized in 1999, 1998 or 1997 because the options had an exercise price
equal to or greater than the market value of the common stock on the date of
the grant.
(N) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 requires companies to recognize all derivatives as assets or liabilities
measured at their fair value. Gains and losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. This statement is
effective for fiscal years beginning after June 15, 2000 and based on current
events the TAS Division does not believe the statement will have a significant
impact on the financial statements.
On April 3, 1998, the Accounting Standards Executive Committee of the
AICPA released SOP 98-5, "Reporting on the Costs of Start-Up Activities." The
SOP, which is effective for periods beginning after December 15, 1998,
requires that at the beginning of the fiscal year of adoption, the unamortized
portion of deferred start up costs should be written off and reported as a
change in accounting principle. Future costs of start-up activities should
then be expensed as incurred. This statement is not expected to have a
significant impact on the financial statements.
(2) Special Charges
In November 1998, the Company's Board of Directors authorized management
actions that resulted in the reorganization of ENTEX's business to create two
operating units: the TAS Division and a Services Division, each functioning as
a separate operating division within ENTEX Information Services. The
reorganization was intended to reduce costs and increase operational focus to
respond to new market dynamics.
8
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As a result, income for the nine months ended March 28, 1999 includes a
restructuring charge of $12 million, which the TAS Division recorded during
the second fiscal quarter ended December 27, 1998. The restructuring charge
includes $5 million to cover costs related to involuntary severance benefits
in connection with a workforce reduction affecting approximately 300
employees, all of whom had left the Company at March 28, 1999. In addition,
the restructuring charge includes $7 million in connection with branch office
consolidations, facilities reductions and other costs. As of March 28, 1999,
$6.3 million of costs had been charged against the reserve.
The remaining liability of $5.7 million at March 28, 1999, primarily
relates to future lease obligations, net of estimates of sublease income and
remaining severance payments, and is classified as accrued liabilities in the
combined balance sheet.
In addition, results for the nine months ended March 28, 1999 include
unusual items totaling $16 million in connection with the reorganization.
These unusual items consist of $10.7 million related to the abandonment of
implementation of the R3TM Enterprise Requirements Planning System ("ERP")
from SAP, $4 million, recorded as cost of revenues, to expedite the
liquidation of excess finished goods, and $1.3 million primarily related to
incentives to employees during the restructuring effort.
(3) Acquisitions
On September 19, 1995 the Company purchased all of the outstanding shares
of Random Access, Inc. ("Random Access") for $21,970. Random Access was a
provider of information technology solutions through the sale of
microcomputers and technical services to corporate and institutional clients
in the western United States. The Company issued a $20,000 four-year
interest-bearing note payable to IBM Credit Corporation to fund this purchase.
The acquisition has been accounted for as a purchase, and the results of
operations of Random Access have been included in the accompanying financial
statements since the date of acquisition. The excess of the aggregate
purchase price over the fair value of the net assets acquired was $28,317, of
which $21,521 has been allocated to the TAS Division.
On July 12, 1996, the Company acquired all the issued and outstanding
stock of FCP Technologies Inc. ("FCP") for $7,216, including direct
acquisition costs. FCP was a systems integrator based in Frederick, Maryland
specializing in network integration, migration and consulting services. The
acquisition has been accounted for as a purchase, and the allocated results of
operations of FCP have been included in the accompanying financial statements
since the date of acquisition. The excess of the aggregate purchase price
over the fair market value of the net assets acquired was $14,077, of which
$5,490 has been allocated to the TAS Division.
(4) Property, Plant and Equipment
Property, plant and equipment consist of the following:
June 28, June 29,
1998 1997
--------- --------
Land........................ $1,155 $1,155
Building and building
improvements.............. 6,204 6,204
Office and computer equipment
and related software....... 19,565 15,031
Allocated assets.............. 9,757 2,081
--------- --------
Accumulated depreciation and
amortization.................. (10,321) (5,502)
--------- --------
$ 26,360 $ 18,969
========= ========
(5) Debt
As indicated in Note 1, debt has been allocated to the TAS Division using
three basic allocation methodologies, depending on the nature of the
indebtedness. None of the debt allocated to the TAS Division has been assumed
by CompuCom in connection with the transaction described in Note 1. Asset
based financing consists of both interest bearing and non-interest bearing
indebtedness. At June 28, 1998 and June 29, 1997, approximately 76.4% and
80.3%, respectively, of the Company's outstanding asset based financing
indebtedness was interest bearing at rates approximating prime plus 1/2%.
Other short-term debt and long-term debt include an allocation of
acquisition indebtedness and a mortgage note on the Erlanger, Kentucky
facility. The weighted average interest rate on other short-term and long-
term debt was approximately 9.0% and 9.2% at June 28, 1998 and June 29, 1997,
respectively.
(6) Income Taxes
9
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The provision for income taxes for the year ended June 28, 1998,
represented $351 of alternative minimum tax. The provision for income taxes
for the years ended June 29, 1997 and June 30, 1996, represented foreign taxes
of $25 and $28, respectively.
For the year ended June 28, 1998, the provision for income taxes was
offset by the utilization of a net operating loss carryforward. Realization
of the remaining deferred tax asset associated with the net operating loss
carryforward is dependent on the likelihood of generating sufficient taxable
income prior to its expiration. In determining the need for a deferred tax
asset valuation allowance, the Company considered the weight of available
evidence to determine whether it was more likely than not that the deferred
tax assets would be utilized. Due to the uncertainty of future results, it
was concluded that realization of deferred tax assets was not "more likely
than not" and, accordingly, a valuation allowance to reduce net deferred tax
assets to zero was recorded.
Deferred tax assets and liabilities have not been allocated to the TAS
Division.
(7) Employee Benefit Plans
The Company has three stock options plans: the ENTEX Holdings 1996 Stock
Option Plan (the "Holdings Plan") adopted February 1996, EIS Stock Option Plan
(the "EIS Plan") adopted July 1996, and the Performance Incentive Plan (the
"PIP") adopted August 1996 (collectively, the "Plans").
The Company has a Non-Employee Director Stock Plan, adopted August 1996,
which provides for the crediting of stock units representing the right to
receive common stock at not less than 100% of the fair market value at the
time of the credit.
In fiscal year 1996, certain managers and employees owned common stock of
the Company pursuant to Securities Purchase and Stockholders' Agreements
("Management Shares"), and share units pursuant to the 1993 Employee Share
Unit Plan ("SharePlan Shares"). Effective June 28, 1996, as a result of an
amendment to such plans, ownership was vested in the management shares, common
stock was issued for share units, and the Company recorded compensation
expense of $18,185, of which $14,548 was allocated to the TAS Division. In
addition, the Company assumed the obligation for the tax withholding
requirement for the SharePlan Shares of $2,000, of which $1,600 was allocated
to the TAS Division and was recorded as compensation expense. No compensation
expense was recognized in connection with the Management Shares or SharePlan
Shares for the years ended June 28, 1998 and June 29, 1997.
Pro forma information regarding net income is required by SFAS No. 123
"Accounting for Stock Based Compensation", and has been determined as if the
Company had accounted for its stock option plan under the fair value method of
that statement. Pro forma net income and compensation expense for the TAS
Division are as follows:
June 28, June 29,
1998 1997
------- -------
(In thousands,
except per share data)
Net income (loss)........ As reported $15,730 $(749)
Pro forma 14,987 (1,325)
Compensation Expense..... Pro forma 743 576
For purposes of pro forma disclosures only, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
fair value for all options was estimated at the date of grant using the Black-
Scholes multiple option model with the following assumptions: Risk-free
interest rates of 5.08% to 6.22%, for fiscal year 1998 and 6.22% to 6.39% for
fiscal year 1997; expected dividend yield of 0.0%; and expected life of 3.0 to
8.8 years. The per share weighted-average fair value of options granted was
$1.11 during fiscal year 1998 and $1.40 during fiscal 1997. Volatility was
not a factor in calculating the fair value of options since the Company's
stock is not publicly traded.
The Company has a 401(k) Plan that covers all employees effective the
first day of the month following 30 days of employment and who are at least 21
years of age. Employees may contribute between 1% and 15% of compensation
subject to the limitations imposed by law. The Company will match up to 3% of
the employee's eligible contribution. The amount charged to expense for the
matching contribution, as allocated to the TAS Division, was $1,406 and $1,158
for the years ended June 28, 1998 and June 29, 1997, respectively. There was
no matching contribution for the year ended June 30, 1996.
(8) Leases
The Company routinely leases office buildings, equipment and automobiles.
These leases expire at various dates through July 2005. Certain leases
contain renewal provisions and generally require the Company to pay utilities,
insurance, taxes, and
10
<PAGE>
other operating expenses. None of these leases, or the obligations thereunder,
were assumed by CompuCom as a part of the sale of the TAS Division.
Expenses under operating leases, as allocated to the TAS Division,
totaled $6,933, $6,311 and $4,988 for the years ended June 28, 1998, June 29,
1997, and June 30, 1996, respectively.
11
<PAGE>
Item 7(b).
COMPUCOM SYSTEMS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
On May 10, 1999, CompuCom finalized an Asset Purchase Agreement with
ENTEX whereby CompuCom acquired certain assets of ENTEX's Technology
Acquisition Services Division ("TASD"). Under the terms of the Asset
Purchase Agreement, CompuCom purchased product inventory, certain fixed
assets and ENTEX's Erlanger, Kentucky distribution center for approximately
$137.2 million in cash. The unaudited pro forma combined financial
statements have been prepared from and should be read in conjunction with
the consolidated financial statements and notes thereto for CompuCom
included in its Annual Report on Form 10-K for the year ended December 31,
1998, and the combined financial statements of ENTEX as of June 28, 1998
which are included in this Current Report on Form 8-K.
The combining companies have different quarterly periods. ENTEX
maintains its accounting records on a fifty-two week basis ending on the
Sunday closest to June 30. CompuCom maintains its accounting records on a
calendar basis, ending on December 31.
The pro forma combined balance sheet assumes that the acquisition took
place on March 31, 1999 and combines CompuCom's unaudited March 31, 1999
consolidated balance sheet and ENTEX's TASD unaudited March 28, 1999
combined balance sheet.
The pro forma combined statement of operations assume the acquisition
took place as of the beginning of the periods presented. The combined
statement of operations for the three months ended March 31, 1999 combines
CompuCom's unaudited condensed consolidated statement of operations for the
three months ended 3/31/99 and ENTEX's TASD unaudited combined statement of
operations for the three months ended March 28, 1999. The combined
statement of operations for the year ended December 31, 1998 combines
CompuCom's audited consolidated statement of operations for the year ended
December 31, 1998 and ENTEX's TASD unaudited combined statement of
operations for the year ended December 27, 1998.
In management's opinion, the pro forma results of operations are not
indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of the periods presented and
is not intended to be a projection of future results. Pro forma adjustments
that give effect to actions taken by management or other efficiencies
expected to be realized as a result of the transactions, are not reflected
in the following pro forma results of operations. CompuCom has not
completed the allocation of the purchase price for this acquisition.
Therefore, the amount of cost in excess of fair value of tangible net
assets purchased could be adjusted once the allocation is finalized.
12
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
CompuCom TASD Pro Forma
3/31/99 3/28/99 Adjustments Combined
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Assets
------
Current assets:
Cash $ 4,513 $ 9,034 $ (9,034)(a) $ 4,513
Receivables 215,636 255,746 (255,746)(a) 215,636
Inventories 132,398 111,593 (18,686) 225,305
Vendor receivables 39,518 (39,518)(a)
Deferred tax asset 5,108 5,108
Other 3,743 3,368 (3,368)(a) 3,743
------------ ------------ ------------ ------------
Total current assets 361,398 419,259 (326,352) 454,305
Property and equipment, net 33,665 17,155 (4,655)(a) 46,165
Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 53,873 27,677 4,151 (c) 85,701
Other 4,036 4,585 (4,585)(a) 4,036
------------ ------------ ------------ ------------
$ 452,972 $ 468,676 $ (331,441) $ 590,207
============ ============ ============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 164,073 $ 282,256 $ (282,256)(a) $ 164,073
Accrued liabilities 63,391 28,778 (28,778)(a) 63,391
Current portion of long-term debt 130,444 (130,444)(a)
------------ ------------ ------------ ------------
Total current liabilities 227,464 441,478 (441,478) 227,464
Long-term debt 15,293 102,276 34,959 (b) 152,528
Deferred income taxes 1,133 1,133
Other 741 741
Shareholders' equity:
Preferred stock 15,000 15,000
Common stock 476 476
Additional paid-in capital 70,952 70,952
Retained earnings 125,964 (75,078) 75,078 (a) 125,964
Notes receivable for sale of stock (4,051) (4,051)
------------ ------------ ------------ ------------
Total shareholders' equity 208,341 (75,078) 75,078 208,341
------------ ------------ ------------ ------------
$ 452,972 $ 468,676 $ (331,441) $ 590,207
============ ============ ============ ============
</TABLE>
See notes to unaudited pro forma combined financial statements.
13
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
CompuCom TASD
3 Months 3 Months Pro Forma
Ended 3/31/99 Ended 3/28/99 Adjustments Combined
--------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Revenue:
Product $ 421,292 $ 432,240 $ 853,532
Service 68,559 68,559
Other 3,469 3,469
--------------- --------------- --------------- ---------------
Total revenue 493,320 432,240 925,560
--------------- --------------- --------------- ---------------
Cost of revenue:
Product 387,744 398,185 785,929
Service 45,238 45,238
Other 1,867 1,867
--------------- --------------- --------------- ---------------
Total cost of revenue 434,849 398,185 833,034
--------------- --------------- --------------- ---------------
Gross margin 58,471 34,055 92,526
Total operating expenses 57,956 28,265 (63) (d) 86,158
--------------- --------------- --------------- ---------------
Earnings from operations 515 5,790 63 6,368
Financing expenses 4,330 7,865 (5,463)(e) 6,732
--------------- --------------- --------------- ---------------
Earnings/(loss) before income taxes (3,815) (2,075) 5,526 (364)
Income taxes (1,526) 7 1,373 (f) (146)
--------------- --------------- --------------- ---------------
Net earnings/(loss) $ (2,289) $ (2,082) $ 4,153 $ 218
=============== =============== =============== ===============
Earnings/(loss) per common share:
Basic $ (.05) $ (.01)
Diluted $ (.05) $ (.01)
Average common shares outstanding:
Basic 47,635 47,635
Diluted 47,635 47,635
</TABLE>
See notes to unaudited pro forma combined financial statements.
14
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
CompuCom TASD
12 Months 12 Months Pro Forma
Ended 12/31/98 Ended 12/27/98 Adjustments Combined
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Product $ 1,980,578 $ 1,913,590 $ 3,894,168
Service 257,930 257,930
Other 15,957 15,957
------------- ------------- ------------- -------------
Total revenue 2,254,465 1,913,590 4,168,055
------------- ------------- ------------- -------------
Cost of revenue:
Product 1,786,851 1,737,639 3,524,490
Service 175,451 175,451
Other 8,203 8,203
------------- ------------- ------------- -------------
Total cost of revenue 1,970,505 1,737,639 3,708,144
------------- ------------- ------------- -------------
Gross margin 283,960 175,951 459,911
Total operating expenses 264,550 198,853 (254)(d) 463,149
------------- ------------- ------------- -------------
Earnings from operations 19,410 (22,902) 254 (3,238)
Financing expenses 18,742 27,282 (17,676)(e) 28,348
------------- ------------- ------------- -------------
Earnings/(loss) before income taxes 668 (50,184) 17,930 (31,586)
Income taxes 267 357 (13,258)(f) (12,634)
------------- ------------- ------------- -------------
Net earnings/(loss) $ 401 $ (50,541) $ 31,188 $ (18,952)
============= ============= ============= =============
Earnings/(loss) per common share:
Basic $ (.01) $ (.43)
Diluted $ (.01) $ (.43)
Average common shares outstanding:
Basic 46,346 46,346
Diluted 46,346 46,346
</TABLE>
See notes to unaudited pro forma combined financial statements.
15
<PAGE>
COMPUCOM SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following adjustments give pro forma effect to the transaction:
(a) Adjustments to reflect both TASD assets not acquired and TASD liabilities
not assumed by CompuCom as part of the acquisition. CompuCom purchased
inventory, selected fixed assets, and the Erlanger, Kentucky distribution
center from TASD for approximately $137.2 million in cash.
(b) Adjustment to reflect the net addition to long-term debt as a result of the
incurrence of approximately $137.2 million in debt to finance the purchase
price of the acquisition offset by the amount of long-term debt reflected
on TASD combined balance sheet as of March 28, 1999. CompuCom assumed no
TASD debt as a part of the acquisition.
(c) Adjustment to reflect the net addition to cost in excess of fair value of
tangible net assets purchased, resulting from a preliminary allocation of
the purchase price.
(d) Adjustment to reflect amortization of the cost in excess of fair value of
tangible net assets acquired by CompuCom as part of the acquisition over an
estimated life of 20 years.
(e) Adjustment to reflect the increase in financing expense resulting from the
incurrence of debt to finance the purchase price of the acquisition. The
interest rate on this debt of approximately $137.2 million is assumed to be
7 percent. A change of 1/8 percent in the interest rate would result in a
change in interest expense and net income of $171,000 and $103,000 before
and after taxes, respectively.
(f) Adjustment to reflect CompuCom's effective tax rate of 40% on the pro forma
combined loss before income taxes for the three months ended March 31, 1999
and the year ended December 31, 1998.
Item 7(c) Exhibits.
23.1 Consent of KPMG LLP, with respect to the combined financial statements of
ENTEX Information Services, Inc.-Technology Acquisition Services Division.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CompuCom Systems, Inc.
(Registrant)
Date: July 26, 1999 By: /s/ M. Lazane Smith
____________________________
M. Lazane Smith, Senior Vice
President Finance and Chief
Financial Officer
17
<PAGE>
EXHIBIT 23.1
Independent Auditors' Consent
-----------------------------
The Board of Directors
Entex Information Services, Inc.:
We consent to the inclusion of our report dated May 17, 1999, with respect to
the combined balance sheets of Entex Information Services, Inc. - Technology
Acquisition Services Division as of June 28, 1998 and June 29, 1997 and the
related combined statements of operations and cash flows for each of the years
in the three-year period ended June 28, 1998, which report appears in the Form
8-K of CompuCom Systems, Inc. dated July 26, 1999.
/S/ KPMG LLP
Stanford, Connecticut
July 26, 1999
