<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the three months ended September 30, 2000 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 (972) 856-3600
code: ----------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
-----
The number of shares of the Registrant's common stock outstanding as of November
13, 2000 was 48,960,126 shares.
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
------- --------------------- ----
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
PART II. OTHER INFORMATION
------- -----------------
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets
------
Current assets:
Cash $ 4,513 $ 14,060
Receivables 252,419 218,522
Inventories 90,182 129,076
Other 1,328 9,238
------------ -----------
Total current assets 348,442 370,896
Property and equipment, net 24,190 29,718
Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 79,796 85,086
Other non-current assets 12,677 12,352
------------ -----------
$ 465,105 $ 498,052
============ ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 121,646 $ 182,247
Accrued liabilities 87,496 91,993
------------ -----------
Total current liabilities 209,142 274,240
Long-term debt 34,600 -
Deferred income taxes - 840
Shareholders' equity:
Preferred stock 15,000 15,000
Common stock 490 480
Additional paid-in capital 74,787 72,765
Retained earnings 135,910 139,152
Accumulated comprehensive loss (160) -
Treasury stock (3,160) -
Notes receivable for sale of stock (1,504) (4,425)
------------ -----------
Total shareholders' equity 221,363 222,972
------------ -----------
$ 465,105 $ 498,052
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2000 and 1999
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Product $ 644,087 $806,191 $ 1,773,975 $ 1,955,526
Service 68,493 83,151 196,710 225,914
Other - - - 3,817
-------------- -------------- --------------- ---------------
Total revenue 712,580 889,342 1,970,685 2,185,257
-------------- -------------- --------------- ---------------
Cost of revenue:
Product 594,658 740,576 1,642,317 1,799,826
Service 41,206 54,102 130,089 148,306
Other - - - 2,098
-------------- -------------- --------------- ---------------
Total cost of revenue 635,864 794,678 1,772,406 1,950,230
-------------- -------------- --------------- ---------------
Gross margin 76,716 94,664 198,279 235,027
Operating expenses:
Selling 20,172 33,068 63,118 85,346
Service 12,985 13,057 37,377 35,664
General and administrative 25,467 24,936 70,711 69,100
Depreciation and amortization 5,265 5,848 16,344 16,237
Restructuring charges - - 5,169 -
-------------- -------------- --------------- ---------------
Total operating expenses 63,889 76,909 192,719 206,347
-------------- -------------- --------------- ---------------
Earnings from operations 12,827 17,755 5,560 28,680
Financing expenses (4,326) (6,909) (11,797) (17,446)
Gain on sale of investment - - 1,958 -
-------------- -------------- --------------- ---------------
Earnings (loss) before income taxes 8,501 10,846 (4,279) 11,234
Income taxes (benefit) 3,401 4,338 (1,712) 4,494
-------------- -------------- --------------- ---------------
Net earnings (loss) $ 5,100 $ 6,508 ($ 2,567) $ 6,740
============== ============== =============== ===============
Earnings (loss) per common share:
Basic $.10 $.13 ($ .07) $.13
Diluted $.10 $.13 ($ .07) $.13
Average common shares outstanding:
Basic 48,909 47,660 48,615 47,647
Diluted 49,238 50,634 48,615 48,311
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ($ 2,567) $ 6,740
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 16,344 16,237
Restructuring charges 2,620 -
Gain on sale of investment (1,958) -
Deferred income taxes (217) 2,285
Changes in assets and liabilities:
Receivables (34,957) (74,807)
Inventories 38,894 76,317
Other current assets 1,194 (4,357)
Accounts payable (60,601) 21,337
Accrued liabilities and other (1,938) (6,559)
--------------- ----------------
Net cash provided by (used in) operating activities (43,186) 37,193
--------------- ----------------
Cash flows from investing activities:
Capital expenditures, net (5,815) (5,644)
Proceeds from sale of securities 2,880 -
Proceeds from sale of land and building 617 39,791
Business acquisitions, net of cash acquired - (138,872)
--------------- ----------------
Net cash used in investing activities (2,318) (104,725)
--------------- ----------------
Cash flows from financing activities:
Borrowings under revolver 851,200 807,565
Repayment of revolver (816,600) (715,584)
Repayment of real estate loan - (25,000)
Issuance of common stock 2,032 1,206
Preferred stock dividend (675) (675)
--------------- ----------------
Net cash provided by financing activities 35,957 67,512
--------------- ----------------
Net decrease in cash (9,547) (20)
Cash at beginning of period 14,060 4,526
--------------- ----------------
Cash at end of period $ 4,513 $ 4,506
=============== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
(1) General
-------
These condensed consolidated interim 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 1999
Annual Report on Form 10-K for CompuCom Systems, Inc. (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 for a fair presentation 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
------------------
Basic earnings (loss) per common share have been computed based on net
earnings (loss) after preferred stock dividend requirements and the
weighted average number of common shares outstanding during each period.
Diluted earnings (loss) 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 (loss) per common
share have been computed as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three months ended September 30, 2000 Nine months ended September 30, 2000
-------------------------------------------- ------------------------------------------
Income Shares Loss Shares
(Numerator) (Denominator) EPS (Numerator) (Denominator) EPS
-------------- ----------------- ----------- -------------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $ 5,100 ($ 2,567)
Less: Preferred stock dividends (225) (675)
Basic EPS
---------
Income (loss) available to common
shareholders 4,875 48,909 $ .10 (3,242) 48,615 ($ .07)
Effect of dilutive securities
-----------------------------
Stock options 241
Employee stock purchase plan 88
----------- -------------- ---------- ----------
Diluted EPS
-----------
Income (loss) available + assumed
conversions $ 4,875 49,238 $ .10 $ (3,242) 48,615 ($ .07)
=========== ============== ========== ========== ========== ========
</TABLE>
6
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, 1999 Nine months ended September 30, 1999
---------------------------------------------- -----------------------------------------
Income Shares Income Shares
(Numerator) (Denominator) EPS (Numerator) (Denominator) EPS
---------------- ----------------- ---------- --------------- ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net earnings $ 6,508 $ 6,740
Less: Preferred stock dividends (225) (675)
Basic EPS
---------
Income available to common shareholders 6,283 47,660 $.13 6,065 47,647 $ .13
Effect of dilutive securities
-----------------------------
Stock options 734 646
Employee Stock Purchase Plan 24 18
Convertible preferred stock 225 2,216
------------ ----------- ---------- ----------
Diluted EPS
-----------
Income available + assumed conversions $ 6,508 50,634 $.13 $ 6,065 48,311 $ .13
============ =========== ======= ========== ========== =======
</TABLE>
The Company has excluded 2,215,657 and 2,704,976 shares from its
calculations of diluted earnings per share for the three and nine months
ended September 30, 2000, respectively, and has excluded 2,215,657 shares
from its calculations of diluted earnings per share for the nine months
ended September 30, 1999, as they are considered anti-dilutive.
(4) Business Combinations
---------------------
On May 10, 1999, the Company consummated the acquisition of the TASD
division of ENTEX Information Services, Inc ("the TASD acquisition"). The
total consideration given for the TASD acquisition was approximately $137
million in cash. The TASD acquisition was accounted for as a purchase and
accordingly the condensed consolidated financial statements reflect the
operations of the acquired entity since the acquisition date.
The following unaudited proforma financial information presents the
combined results of operations for the nine months ended September 30, 1999
as if the TASD acquisition had occurred as of the beginning of 1999, after
giving effect to certain adjustments, including amortization of goodwill,
increased financing expense on debt related to the acquisition, and related
income tax effects. The proforma results do not necessarily represent
results which would have occurred if the TASD acquisition had taken place
on the basis assumed above, nor are they indicative of the results of
future combined operations.
7
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
(in thousands, except per share data)
Nine Months Ended
September 30, 1999
------------------
Revenue $2,804,997
Net loss $ (304)
Diluted loss per share ($0.02)
(5) Restructuring Charges
---------------------
During the first quarter of 2000, the Company effected a restructuring plan
designed to reduce the Company's cost structure by closing its distribution
facility located in Houston, Texas, closing and consolidating three office
facilities, and reducing the Company's workforce. As a result, the Company
recorded a restructuring charge of $5.2 million in the first quarter of
2000. The $5.2 million charge is reflected as a separate line of operating
expense in the Company's Condensed Consolidated Statement of Operations.
The following table provides a detail of the charges and cash payments made
by category as well as the amounts accrued as of September 30, 2000:
<TABLE>
<CAPTION>
(in thousands)
--------------
Restructuring Cash Accrual at
Charge Payments Other 9/30/00
----------------------------------------------------------
<S> <C> <C> <C> <C>
Lease termination costs $ 2,904 $ (771) $ - $ 2,133
Employee severance and related benefits 1,800 (1,691) - 109
Other 465 (87) (318) 60
----------------------------------------------------------
Total $ 5,169 $ (2,549) $ (318) $ 2,302
==========================================================
</TABLE>
The $2.3 million accrued at September 30, 2000 is reflected in Accrued
liabilities on the Company's Condensed Consolidated Balance Sheet.
Lease termination costs include the estimated cost to close the three
office facilities and represents the amount required to fulfill the
Company's obligations under signed lease contracts, the net expense
expected to be incurred to sublet the facilities, or the estimated amount
to be paid to terminate the lease contracts before the end of their terms.
In developing the estimated costs, the Company has consulted with a
professional real estate firm with knowledge of market rent rates in all
applicable markets where the Company has space. Assumptions have been used
for market rent rates and the estimated amount of time necessary to sublet
the facilities. Payments, net of proceeds derived from subleases, are
charged against the accrual as incurred. The remaining accrual at September
30, 2000 relates to two leases for the office facilities that have not been
sublet or terminated.
8
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
Severance is paid based on associates' years of service as well as their
level within the organization. The reduction in workforce included 308
associates, of which one was an executive officer. The reduction in
workforce included associates from the following areas: sales, service, and
general and administrative, who were located at certain of the Company's
locations, corporate offices, and the Houston distribution center. The
remaining accrual at September 30, 2000 relates to severance payments which
are being paid to the former executive officer and are expected to be
substantially complete by the end of 2000.
Other restructuring charges primarily include the write-off of leasehold
improvements at the Houston distribution center.
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 by category and rollforward of the
changes in this restructuring accrual for the nine months ended September
30, 2000:
<TABLE>
<CAPTION>
(in thousands)
Accrual at -------------- Accrual at
12/31/99 Cash Payments 9/30/00
-----------------------------------------------
<S> <C> <C> <C>
Lease termination costs $ 1,240 $ (924) $ 316
Employee severance and related benefits 560 (448) 112
-----------------------------------------------
Total $ 1,800 $ (1,372) $ 428
===============================================
</TABLE>
The Company expects all restructuring activities relating to both
restructuring accruals to be substantially complete by the end of 2000 and
believes the restructuring accruals are adequate.
(6) Segment Information
-------------------
The Company defines its operations as two distinct businesses - sales of
personal computer-related products ("product"), which includes desktop,
mobile computing, WEB computing, and network computer products and services
("service"), which includes field engineering, LAN/WAN projects,
consulting, configuration, help desk, asset tracking, network management,
software management, and services provided in support of certain
manufacturers' direct fulfillment initiatives. ClientLink, Inc.
("ClientLink"), a majority-owned subsidiary of the Company until April
1999, provided customized application programming services and was
previously defined as a third distinct business. In April 1999, ClientLink
was merged with E-Certify Corporation ("E-Certify"). The combined
operations of ClientLink and E-Certify are conducted under the name E-
Certify, Inc. The Company has recorded its minority investment in E-
Certify, Inc. at the net carrying amount of its investment in ClientLink
and is accounting for the ongoing operations of E-Certify, Inc. using the
equity method. The Company's investment is included in Other non-current
assets on the Company's Condensed Consolidated Balance Sheet as of
September 30, 2000.
The Company measures segment earnings as operating earnings, defined as
income before restructuring charges, financing expenses and income taxes.
All significant inter-segment activity has been eliminated. Business assets
are the assets owned or allocated to each business. The "Other" column
includes all assets not specifically allocated to a segment. The Company's
investment in E-Certify, Inc. is reflected in the "Other" column for the
three and nine months ended September 30, 2000, and for the three months
ended September 30, 1999.
9
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
<TABLE>
<CAPTION>
For the Quarter ended September 30, 2000
Operating Results Product Service Other Total
--------------------------------- ------------------- ------------ --------------- -------------------
<S> <C> <C> <C> <C>
(in thousands)
Net revenues $ 644,087 $ 68,493 $ - $ 712,580
Gross margin 49,429 27,287 - 76,716
Operating earnings (loss) 1,313 11,806 (292) 12,827
Financing expense (4,326)
-------------------
Earnings before income taxes $ 8,501
===================
Total assets $ 299,764 $ 36,386 $ 128,955 $ 465,105
=================== ============ =============== ===================
For the Quarter ended September 30, 1999
Operating Results Product Service Other Total
--------------------------------- ------------------- ------------ --------------- -------------------
(in thousands)
Net revenues $ 806,191 $ 83,151 $ - $ 889,342
Gross margin 65,615 29,049 - 94,664
Operating earnings 6,508 11,169 78 17,755
Financing expense (6,909)
-------------------
Earnings before income taxes $ 10,846
===================
Total assets $ 443,487 $ 46,728 $ 148,283 $ 638,498
=================== ============ =============== ===================
</TABLE>
10
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
For the Nine Months ended September 30, 2000
<TABLE>
<CAPTION>
Operating Results Product Service Other Total
---------------------------------- ----------------- --------------- --------------- ----------------
(in thousands)
<S> <C> <C> <C> <C>
Net revenues $1,773,975 $196,710 $ - $1,970,685
Gross margin 131,658 66,621 - 198,279
Operating earnings (loss) (7,031) 18,859 (1,099) 10,729
excluding restructuring charges
Restructuring charges (5,169)
Financing expense (11,797)
Gain on sale of investment 1,958
----------
Loss before income taxes $ (4,279)
==========
Total assets $ 299,764 $ 36,386 $128,955 $ 465,105
========== ======== ======== ==========
</TABLE>
For the Nine Months ended September 30, 1999
<TABLE>
<CAPTION>
Operating Results Product Service ClientLink, Inc. Other Total
---------------------------------- ----------------- --------------- -------------------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues $1,955,526 $225,914 $ 3,817 $ - $2,185,257
Gross margin 155,700 77,608 1,719 - 235,027
Operating earnings (loss) (396) 28,603 473 - 28,680
Financing expense (17,446)
----------
Earnings before income taxes $ 11,234
==========
Total assets $ 443,487 $ 46,728 $ - $ 148,283 $ 638,498
========== ======== ======== ========== ==========
</TABLE>
11
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
(7) Financing Arrangements
----------------------
The Company has financing arrangements which total $350 million, consisting
of a $175 million receivable securitization facility ("Securitization") and
a $175 million working capital facility ("Revolver"). Consistent with the
Company's financing requirements, during the third quarter 2000, the
Company reduced the Securitization from $200 million to $175 million.
The Securitization, which matures in May 2002 and has pricing based on a
designated short-term interest rate plus an agreed-upon spread, allows the
Company to sell an interest in its accounts receivable on a revolving basis
and is accounted for as a sale of accounts receivable in accordance with
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". As of September 30, 2000, the Securitization was fully
utilized.
The Revolver, which matures in May 2002, bears interest at LIBOR plus an
agreed-upon spread and is secured by a lien on the Company's assets.
Availability under the Revolver is subject to a borrowing base calculation.
As of September 30, 2000, availability under the Revolver was approximately
$139.1 million, of which $34.6 million was outstanding.
Both the Securitization and the Revolver are subject to the Company's
compliance with selected financial covenants and ratios.
(8) Gain on Sale of Investment
--------------------------
In September 1999, the Company made a minority equity investment of $2.0
million in OPUS360 Corporation ("OPUS"). In April 2000, the Company
participated in the initial public offering of OPUS, recognizing a pretax
gain of approximately $2.0 million from the sale of a portion of its
investment in OPUS. The Company's investment in OPUS is defined as an
"available-for-sale" security in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The investment in OPUS is carried at fair value,
based on quoted market prices, with any unrealized gain or loss, net of
tax, reported as a separate component of shareholders' equity. As of
September 30, 2000, the Company has a remaining investment in OPUS,
recorded at fair value, of approximately $0.8 million which is included in
Other non-current assets on the Company's Condensed Consolidated Balance
Sheet.
(9) Related-Party Transactions
--------------------------
In January 2000, a former officer and director of the Company transferred
685,635 shares of the Company's common stock to the Company in satisfaction
of two notes receivable plus accrued interest. The notes were issued for
the purchase of the Company's common stock and were reflected as Notes
receivable for the sale of stock in the Condensed Consolidated Balance
Sheet at December 31, 1999. The number of shares transferred was based on
the calculated ten day trailing average price of the Company's common
stock. As a result, the Company recorded a non-cash equity transaction of
approximately $3.2 million to record treasury stock, at cost.
12
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
(10) Reclassifications
-----------------
Certain amounts in the 1999 condensed consolidated financial statements
have been reclassified to conform with the 2000 presentation.
13
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 30, 2000
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,
gain on sale of investment, income taxes (benefit) and net earnings (loss) are
shown as a percentage of total net revenue for the three and nine months ended
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Product $644,087 $806,191 $1,773,975 $1,955,526
Service 68,493 83,151 196,710 225,914
Other - - - 3,817
---------------- ----------------- ---------------- ----------------
Total revenue $712,580 $889,342 $1,970,685 $2,185,257
================ ================= ================ ================
Gross margin:
Product $ 49,429 $ 65,615 $ 131,658 $ 155,700
Service 27,287 29,049 66,621 77,608
Other - - - 1,719
---------------- ----------------- ---------------- ----------------
Total gross margin $ 76,716 $ 94,664 $ 198,279 $ 235,027
================ ================= ================ ================
Gross margin percentage:
Product 7.7% 8.1% 7.4% 8.0%
Service 39.8% 34.9% 33.9% 34.4%
Other - - - 45.0%
---------------- ----------------- ---------------- ----------------
Total gross margin percentage 10.8% 10.6% 10.1% 10.8%
Operating expenses:
Selling 2.8% 3.7% 3.2% 3.9%
Service 1.8% 1.5% 1.9% 1.6%
General and administrative 3.6% 2.8% 3.6% 3.2%
Depreciation and amortization 0.7% 0.7% 0.8% 0.7%
Restructuring charges - - 0.3% -
---------------- ----------------- ---------------- ----------------
Total operating expenses 9.0% 8.6% 9.8% 9.5%
---------------- ----------------- ---------------- ----------------
Earnings from operations 1.8% 2.0% 0.3% 1.3%
Financing expenses (0.6%) (0.8%) (0.6%) (0.8%)
Gain on sale of investment - - 0.1% -
---------------- ----------------- ---------------- ----------------
Earnings (loss) before income taxes 1.2% 1.2% (0.2%) 0.5%
Income taxes (benefit) 0.5% 0.5% (0.1%) 0.2%
---------------- ----------------- ---------------- ----------------
Net earnings (loss) 0.7% 0.7% (0.1%) 0.3%
================ ================= ================ ================
</TABLE>
14
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 2000 TO THE QUARTER ENDED
SEPTEMBER 30, 1999
Product revenue, which is primarily derived from the sale of desktop, mobile
computing, WEB computing, and network computer products to corporate customers,
decreased approximately 20.1% to $644.1 million in the third quarter of 2000
from $806.2 million in the third quarter of 1999. The Company believes product
revenue was negatively impacted by manufacturer direct selling and fulfillment
strategies as well as lower product demand when compared to last year's higher
than normal spending by the Company's clients as part of their preparation for
the Year 2000. However, on a sequential basis relative to the second quarter of
2000, product revenue increased approximately 3%. Product gross margin as a
percentage of product revenue for the third quarter of 2000 was 7.7% compared to
8.1% for the third quarter of 1999. This decrease is primarily due to increased
competition from direct marketers and other companies who sell personal computer
products. However, on a sequential basis relative to the second quarter of 2000,
product gross margin as a percentage of product revenue increased to 7.7% from
7.5%. The Company expects to experience continued pressure on both product
revenue and product gross margin, the result of which may be to report lower
product revenue and related product gross margin when compared to the comparable
prior year period.
Service revenue declined 17.6% to $68.5 million for the third quarter of 2000
from $83.2 million for the third quarter of 1999. Service revenue is primarily
derived from field engineering, LAN/WAN projects, consulting, configuration,
help desk, asset tracking, network management, software management, and services
provided in support of certain manufacturers' direct fulfillment initiatives.
Service revenue reflects revenue generated by the actual performance of specific
services and does not include product sales associated with service projects.
The decrease in service revenue was primarily due to lower demand for the
Company's consulting services. The Company believes the decline in consulting
services revenue can be partially attributed to its clients' higher spending on
Year 2000 related projects that occurred in 1999 and not in 2000. However, on a
sequential basis relative to the second quarter of 2000, service revenue
increased approximately 6.8%. Service gross margin as a percentage of service
net revenue for the quarter ended September 30, 2000 was 39.8% compared to 34.9%
for the same period in 1999. In addition, third quarter of 2000 service gross
margin of 39.8% compared favorably to second quarter of 2000 service gross
margin of 31.8%. The increase in service gross margin was due primarily to
improvements in the management and utilization of service-related resources and
a greater mix of services being performed that generally have a higher gross
margin. The Company expects to experience continued pressure on both service
revenue and service gross margin, the result of which may be to report lower
service revenue and related service gross margin when compared to the comparable
prior year period.
Selling expense decreased approximately $12.9 million for the three months
ended September 30, 2000 as compared to the same period in the prior year.
Selling expense as a percentage of revenue declined to 2.8% for the three months
ended September 30, 2000 from 3.7% for the same period a year ago. The Company
attributes this decrease primarily to its own cost reduction efforts and
integration costs incurred in 1999 as part of the TASD acquisition.
Service expense was approximately $13.0 million for both the three months
ended September 30, 2000 and 1999. As a percentage of revenue, service expense
increased to 1.8% for the three months ended September 30, 2000 from 1.5% for
the same period a year ago. The increase as a percentage of revenue was due to
the decline in total revenue for the three months ended September 30, 2000 as
compared to the same period in 1999.
15
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General and administrative expense increased to approximately $25.5 million
for the quarter ended September 30, 2000 from $24.9 million for the same period
in the prior year. General and administrative expense increased as a percent of
revenue from 2.8% to 3.6% for the comparable period due primarily to the decline
in total revenue for the three months ended September 30, 2000 as compared to
the same period in 1999. 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 decreased approximately $0.6 million for
the three months ended September 30, 2000, but remained flat as a percentage of
net revenue as compared to the same period in the prior year.
Financing expense of approximately $4.3 million decreased approximately $2.6
million for the three months ended September 30, 2000, as compared to the same
period in 1999. As a percentage of revenue, financing expense declined to 0.6%
for the three months ended September 30, 2000 from 0.8% for the same period a
year ago. The decrease in financing expense is primarily the result of higher
borrowing levels in the third quarter of 1999, associated with the TASD
acquisition, as compared to the third quarter of 2000, partially offset by an
increase in the Company's effective interest rate.
As a result of the factors discussed above, the Company recorded net earnings
for the quarter ended September 30, 2000 of $5.1 million compared to net
earnings of $6.5 million for the same period in 1999.
16
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Product revenue decreased approximately 9.3% to $1.8 billion for the nine
months ended September 30, 2000 from approximately $2.0 billion in the same
period of 1999. The Company believes product revenue was negatively impacted by
manufacturer direct selling and fulfillment initiatives as well as lower product
demand when compared to last year's higher than normal spending by the Company's
clients as part of their preparation for the Year 2000. These factors were
partially offset by the positive impact of the May 1999 TASD acquisition.
Product gross margin as a percentage of product revenue for the nine months
ended September 30, 2000 was 7.4% compared to 8.0% for the same period in 1999.
This decrease is primarily due to increased competition from direct marketers
and other companies who sell personal computer products. The Company expects to
experience continued pressure on both product revenue and product gross margin,
the result of which may be to report lower product revenue and related product
gross margin when compared to the comparable prior year period.
Service revenue decreased approximately 12.9% to $197 million for the nine
months ended September 30, 2000 from $226 million during the same period of
1999. Service gross margin as a percentage of service net revenue was 33.9% for
the first nine months of 2000 compared to 34.4% for the same period in 1999. The
decline in service revenue was primarily due to lower demand for the Company's
consulting services. This lower demand led to lower utilization in consulting
services and was the primary reason for the decline in service gross margin. The
Company believes the decline in consulting services revenue can be partially
attributed to its clients' Year 2000 concerns and higher spending on Year 2000
related projects that occurred in 1999 and not in 2000. The Company expects to
experience continued pressure on both service revenue and service gross margin,
the result of which may be to report lower service revenue and related service
gross margin when compared to the comparable prior year period.
Selling expense decreased approximately $22.2 million for the nine months
ended September 30, 2000 as compared to the same prior year period. Selling
expense as a percentage of revenue declined to approximately 3.2% of revenue for
the nine months ended September 30, 2000 from approximately 3.9% for the same
prior year period. The Company attributes this decrease primarily to its own
cost reduction efforts, integration costs incurred in 1999 as part of the TASD
acquisition, and professional fees incurred in 1999 associated with the design,
implementation, and transition to a more services-focused sales model.
Service expense increased approximately $1.7 million to $37.4 million for the
nine months ended September 30, 2000 from $35.7 million for the same period in
the prior year. As a percentage of revenue, service expense increased to 1.9%
for the nine months ended September 30, 2000 from 1.6% for the same period in
1999. The increase is due primarily to personnel costs and investments in the
service infrastructure associated with supporting the service business,
partially offset by the impact of the April 1999 E-Certify merger whereby
ClientLink is no longer a consolidated subsidiary. Consequently, service expense
for the first nine months of 2000 does not reflect ClientLink's operating
expenses as compared to the first nine months of 1999.
17
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General and administrative expense increased to $70.7 million for the nine
months ended September 30, 2000 from $69.1 million for the same period in the
prior year. General and administrative expense increased as a percent of revenue
from 3.2% to 3.6% for the comparable periods due primarily to the decline in
total revenue for the nine months ended September 30, 2000 as compared to the
same period in 1999. 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 was relatively flat for the nine months
ended September 30, 2000 in both absolute dollars and as a percentage of net
revenue when compared to the same period in 1999. Reflected in depreciation and
amortization expense is the impact of goodwill amortization related to the May
1999 TASD acquisition for the full nine months ended September 30, 2000.
However, this impact was offset by additional goodwill amortization recorded in
the nine months ended September 30, 1999 related to the completion of the
allocation of the purchase price of two business combinations. A portion of the
purchase price was allocated to customer lists which were deemed to have a
shorter useful life than the associated goodwill. As a result, the Company
recorded approximately $0.7 million in additional amortization expense to
accurately reflect amortization expense for the customer lists from the dates of
the respective business combinations.
During the first quarter of 2000, the Company effected a restructuring plan
designed to reduce the Company's cost structure by closing its distribution
facility located in Houston, Texas, closing and consolidating three office
facilities, and reducing the Company's workforce. As a result, the Company
recorded a restructuring charge of $5.2 million in the first quarter of 2000. Of
the $5.2 million charged to operations, approximately $2.5 million was paid
through September 30, 2000.
Financing expense decreased in absolute dollars and as a percentage of revenue
for the nine months ended September 30, 2000, as compared to the same period in
1999. This decline is primarily due to two factors. During the quarter ended
June 30, 1999, the Company incurred approximately $1.0 million in charges
related to the extension of its previous credit facilities until the new credit
facilities were finalized. These charges, along with greater financing
requirements in the nine months ended September 30, 1999 mainly due to the TASD
acquisition, were the primary reasons financing expenses for the nine months
ended September 30, 1999 were higher in relation to the nine months ended
September 30, 2000. These two factors were partially offset by an increase in
the Company's effective interest rate in 2000 relative to 1999.
During the second quarter of 2000, the Company recognized a pretax gain of
approximately $2.0 million on the sale of a portion of its investment in OPUS360
Corporation ("OPUS"). The gain was the result of the Company's participation in
the initial public offering of OPUS stock.
As a result of the factors discussed above, the Company recorded a net loss,
including an after-tax restructuring charge of approximately $3.1 million, for
the nine months ended September 30, 2000 of $2.6 million compared to net
earnings of $6.7 million for the same period in 1999.
Liquidity and Capital Resources
-------------------------------
Working capital at September 30, 2000 was $139.3 million compared to $96.7
million at December 31, 1999. The increase in working capital is primarily due
to an increase in receivables and a decrease in accounts payable, partially
offset by a decrease in inventories. The increase in receivables is mainly due
to a $75 million reduction in the amount of receivables utilized under the
Company's securitization facility partially offset by improvement in days sales
outstanding. The decrease in inventories is primarily due to the Company's
continued efforts to reduce its risk associated with its suppliers' price
protection and returns programs by maintaining lower inventory levels, thereby
increasing its inventory turns. The decrease in accounts payable is primarily a
result of fluctuations that occur relative to the timing of payments to vendors
and to lower inventory levels.
18
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's liquidity continues to be negatively impacted by the dollar
volume of certain manufacturers' rebate programs. Under these programs, the
Company is required to pay a higher initial amount for product and claim a
rebate from the manufacturers to reduce the final cost. The collection of these
rebates can take several months. Due to these programs, the Company's initial
cost for the product is often higher than the sales price the Company can obtain
from its customers. These programs are a material factor in the Company's
financing needs. As of September 30, 2000 the Company was owed approximately $66
million under these vendor rebate programs.
The Company's working capital requirements are generally funded through
financing arrangements and internally generated funds. As of September 30, 2000,
the Company's financing arrangements consisted of the $175 million
Securitization and $175 million Revolver facilities. Consistent with the
Company's financing requirements, during the third quarter 2000, the Company
reduced the Securitization from $200 million to $175 million. Both facilities
mature in May 2002. The Securitization pricing is based on a designated short-
term interest rate plus an agreed upon spread. As of September 30, 2000, the
Securitization was fully utilized. The Revolver bears interest at LIBOR plus an
agreed upon spread and is secured by a lien on the Company's assets.
Availability under the Revolver is subject to a borrowing base calculation. As
of September 30, 2000, availability under the Revolver was approximately $139.1
million, of which $34.6 million was outstanding. Both the Securitization and the
Revolver are subject to the Company's compliance with selected financial
covenants and ratios.
The Company's business is not capital intensive, and capital expenditures in
any year normally are not significant in relation to the overall financial
position of the Company. Capital expenditures were approximately $5.8 million
for the nine months ended September 30, 2000 as compared to $5.6 million for the
same period in 1999. The majority of both the 2000 and 1999 capital expenditures
were related to the upgrading of the Company's information technology systems
hardware and software. The Company does not expect to incur capital expenditures
for the remainder of 2000 materially different from its 1999 levels.
Recent Accounting Pronouncements
--------------------------------
In September 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", which
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". The Company does not expect the
adoption of SFAS #140 to have an impact on its financial condition or results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. The Company will adopt SFAS No. 133 as
required by SFAS No. 137, "Deferral of the Effective Date of the FASB Statement
No. 133," in fiscal year 2001. The Company has not identified any derivative
instruments subject to the provisions of SFAS No. 133.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". This was followed by Staff Accounting Bulletin No. 101A,
"Implementation Issues Related to SAB 101", in March 2000 and by Staff
Accounting Bulletin No. 101B, "Second Amendment: Revenue Recognition in
Financial Statements" ("SAB 101B"), in June 2000. These bulletins summarize
certain of the SEC's views about applying generally accepted accounting
principles to revenue recognition in financial statements. The impact of SAB
101B on the Company was to delay the implementation date of SAB 101 until the
fourth quarter of 2000. The SEC is providing this guidance due, in part, to the
large number of revenue recognition issues that registrants encounter. The
Company has reviewed the implications of these bulletins and does not expect
them to have any significant impact on its financial condition or results of
operations.
19
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 ability to grow product and service
revenue; the Company may not be able to increase its consulting revenue in the
remainder of the year; there may be fewer consulting projects to compete for in
the remainder of the year; the Company may not meet its expectations in
providing manufacturers assistance in implementing their direct fulfillment
initiatives the Company may not be able to find additional ways to leverage
costs and reduce costs further; the ability to continue the improvement in
product and service gross margin as well as in the balance sheet. 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; changes to manufacturers'
pricing, price protection, rebate and incentive programs; short-term interest
rate fluctuations; general economic conditions; employee turnover and possible
future litigation; the ability to collect accounts receivable and vendor rebates
receivable; and other uncertainties that may have an impact 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. Readers
of this document are cautioned to consider these risks and uncertainties and to
not place undue reliance on these forward-looking statements.
Item 3. Quantitative and Qualitative Disclosure 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. As of September 30,
2000, the Company had $175 million and $34.6 million outstanding under its
Securitization and Revolver, respectively. 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 $1.6 million based on the average
outstandings under the Securitization and Revolver during the nine months ended
September 30, 2000.
Currently, the Company does not enter into financial investments for trading
or other speculative purposes or to manage interest rate exposure.
20
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
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 September 30, 2000.
21
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUCOM SYSTEMS, INC.
--------------------------
(Registrant)
DATE: November 14, 2000 /s/ J. Edward Coleman
--------------------------------------
J. Edward Coleman,
President and Chief Executive Officer
DATE: November 14, 2000 /s/ M. Lazane Smith
--------------------------------------
M. Lazane Smith,
Senior Vice President, Finance and
Chief Financial Officer
22
