<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
<TABLE>
<S> <C>
For the three months ended June 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 code: (972) 856-3600
--------------------------------------
</TABLE>
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
August 11, 2000 was 48,948,605 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
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 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 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
PART II. OTHER INFORMATION
------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Assets
------
Current assets:
Cash $ 4,674 $ 14,060
Receivables 247,527 218,522
Inventories 115,317 129,076
Other 3,756 9,238
----------------- ------------------
Total current assets 371,274 370,896
Property and equipment, net 24,877 29,718
Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 81,789 85,086
Other non-current assets 12,896 12,352
----------------- ------------------
$ 490,836 $ 498,052
================= ==================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 195,126 $ 182,247
Accrued liabilities 67,700 91,993
----------------- ------------------
Total current liabilities 262,826 274,240
Long-term debt 11,800 -
Deferred income taxes - 840
Shareholders' equity:
Preferred stock 15,000 15,000
Common stock 487 480
Additional paid-in capital 74,353 72,765
Retained earnings 131,034 139,152
Treasury stock (3,160) -
Notes receivable for sale of stock (1,504) (4,425)
----------------- ------------------
Total shareholders' equity 216,210 222,972
----------------- ------------------
$ 490,836 $ 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 Six Months Ended June 30, 2000 and 1999
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Product $ 626,533 $ 728,043 $ 1,129,888 $ 1,149,335
Service 64,151 74,206 128,217 142,763
Other - 346 - 3,817
--------------- --------------- --------------- ---------------
Total revenue 690,684 802,595 1,258,105 1,295,915
--------------- --------------- --------------- ---------------
Cost of revenue:
Product 579,290 671,506 1,047,659 1,059,250
Service 43,773 48,967 88,883 94,204
Other - 230 - 2,098
--------------- --------------- --------------- ---------------
Total cost of revenue 623,063 720,703 1,136,542 1,155,552
--------------- --------------- --------------- ---------------
Gross margin 67,621 81,892 121,563 140,363
Operating expenses:
Selling 20,209 28,616 42,946 52,278
Service 12,995 11,699 24,392 22,607
General and administrative 23,434 24,865 45,244 44,164
Depreciation and amortization 5,413 6,302 11,079 10,389
Restructuring charges - - 5,169 -
--------------- --------------- --------------- ---------------
Total operating expenses 62,051 71,482 128,830 129,438
--------------- --------------- --------------- ---------------
Earnings (loss) from operations 5,570 10,410 (7,267) 10,925
Financing expenses (3,206) (6,207) (7,471) (10,537)
Gain on sale of investment 1,958 - 1,958 -
--------------- --------------- --------------- ---------------
Earnings (loss) before income taxes 4,322 4,203 (12,780) 388
Income taxes (benefit) 1,728 1,681 (5,112) 155
--------------- --------------- --------------- ---------------
Net earnings (loss) $ 2,594 $ 2,522 ($ 7,668) $ 233
=============== =============== =============== ===============
Earnings (loss) per common share:
Basic $ .05 $ .05 ($ .17) $ .00
Diluted $ .05 $ .05 ($ .17) $ .00
Average common shares outstanding:
Basic 48,657 47,647 48,466 47,641
Diluted 48,664 48,091 48,466 47,641
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ($ 7,668) $ 233
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 11,079 10,389
Restructuring charges 2,852 -
Gain on sale of investment (1,958) -
Deferred income taxes (518) 1,012
Changes in assets and liabilities:
Receivables (29,654) (151,880)
Inventories 13,759 18,357
Other current assets (251) (5,254)
Accounts payable 12,878 172,395
Accrued liabilities and other (23,125) (17,414)
------------ ------------
Net cash provided by (used in) operating activities (22,606) 27,838
------------ ------------
Cash flows from investing activities:
Capital expenditures (3,222) (4,002)
Proceeds from sale of securities 2,880 -
Proceeds from sale of land and building 617 39,791
Business acquisitions, net of cash acquired - (137,811)
------------ ------------
Net cash provided by (used in) investing activities 275 (102,022)
------------ ------------
Cash flows from financing activities:
Borrowings under revolver 498,900 402,765
Repayment of revolver (487,100) (303,803)
Repayment of real estate loan - (25,000)
Issuance of common stock 1,595 662
Preferred stock dividend (450) (450)
------------ ------------
Net cash provided by financing activities 12,945 74,174
------------ ------------
Net decrease in cash (9,386) (10)
Cash at beginning of period 14,060 4,526
------------ ------------
Cash at end of period $ 4,674 $ 4,516
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 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 per common share have been computed based on net earnings
after preferred stock dividend requirements and the weighted average
number of common shares outstanding during each period. Diluted earnings
per common share assumes conversion of dilutive convertible securities
into common stock at the later of the beginning of the period or date of
issuance and includes the add-back of related interest expense and/or
dividends, as required. Earnings per common share have been computed as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended June 30, 2000 Six months ended June 30, 2000
------------------------------------------ --------------------------------------
Income Shares Income Shares
(Numerator) (Denominator) EPS (Numerator) (Denominator) EPS
-------------- ---------------- --------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $ 2,594 ($ 7,668)
Less: Preferred stock dividends (225) (450)
Basic EPS
---------
Income (loss) available to common
shareholders 2,369 48,657 $ .05 (8,118) 48,466 ($ .17)
Effect of dilutive securities
-----------------------------
Stock options 7
------------- --------------- ------------ ----------
Diluted EPS
-----------
Income (loss) available + assumed
conversions $ 2,369 48,664 $ .05 $ (8,118) 48,466 ($ .17)
============= =============== ======== ============ ========== =========
</TABLE>
6
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, 1999 Six months ended June 30, 1999
--------------------------------------- --------------------------------------
Income Shares Income Shares
(Numerator) (Denominator) EPS (Numerator) (Denominator) EPS
-------------- -------------- --------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net earnings $ 2,522 $ 233
Less: Preferred stock dividends (225) (450)
Basic EPS
---------
Income (loss) available to common
shareholders 2,297 47,647 $ .05 (217) 47,641 $ .00
Effect of dilutive securities
-----------------------------
Stock options 439
Employee Stock Purchase Plan 5
-------------- -------------- ------------- -------------
Diluted EPS
-----------
Income (loss) available + assumed
conversions $ 2,297 48,091 $ .05 $ (217) 47,641 $ .00
============== ============== ========= ============= ============= ========
</TABLE>
The Company has excluded 2,152,496 and 2,772,835 shares from its
calculations of diluted earnings per share for the three and six months
ended June 30, 2000, and has excluded 1,928,886 and 1,732,395 shares from
its calculations of diluted earnings per share for the three and six
months ended June 30, 1999, respectively, 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 three and six months ended June
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
June 30, 2000
(unaudited)
(in thousands, except per share data)
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
Revenue $ 990,095 $ 1,915,655
Net loss $ (1,597) $ (6,812)
Diluted loss per share ($0.04) ($0.15)
(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 June 30, 2000:
<TABLE>
<CAPTION>
(in thousands)
--------------
Restructuring Cash Accrual at
Charge Payments Other 6/30/00
------------------------------------------------------------
<S> <C> <C> <C> <C>
Lease termination costs $ 2,904 $ (666) $ - $ 2,238
Employee severance and related benefits 1,800 (1,564) - 236
Other 465 (87) (318) 60
------------------------------------------------------------
Total $ 5,169 $(2,317) $ (318) $ 2,534
============================================================
</TABLE>
The $2.5 million accrued at June 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 obligation 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 term.
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
June 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
June 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 June 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 six months ended June 30,
2000:
<TABLE>
<CAPTION>
(in thousands)
--------------
Accrual at Cash Payments Accrual at
12/31/99 6/30/00
---------------------------------------------------
<S> <C> <C> <C>
Lease termination costs $ 1,240 $ (931) $ 309
Employee severance and related benefits 560 (185) 375
---------------------------------------------------
Total $ 1,800 $ (1,116) $ 684
===================================================
</TABLE>
The Company expects all restructuring activities 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
computer products ("product") and services, which includes field
engineering, LAN/WAN projects, consulting, configuration, help desk,
asset tracking, network management and software management ("service").
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 as of June 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 six months ended June 30, 2000.
9
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
For the Quarter ended June 30, 2000
Operating Results Product Service Other Total
--------------------------------------- ----------- ------------------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Net revenues $ 626,533 $ 64,151 $ - $ 690,684
Gross margin 47,243 20,378 - 67,621
Operating earnings (loss) 2,230 3,777 (437) 5,570
Financing expense (3,206)
Gain on sale of investment 1,958
--------------
Earnings before income taxes $ 4,322
==============
Total assets $ 318,518 $ 31,807 $ 140,511 $ 490,836
=========== ========== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
For the Quarter ended June 30, 1999
Operating Results Product Service ClientLink, Inc. Other Total
------------------------------ ----------- ------------ ----------------------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues $ 728,043 $ 74,206 $ 346 $ - $ 802,595
Gross margin 56,537 25,239 116 - 81,892
Operating earnings (loss) 2,060 8,619 (269) - 10,410
Financing expense (6,207)
---------
Earnings before income taxes $ 4,203
=========
Total assets $ 573,445 $ 54,636 $ - $147,790 $ 775,871
========= ========== ======= ======== =========
</TABLE>
10
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
For the Six Months ended June 30, 2000
Operating Results Product Service Other Total
------------------------------------------ ---------------- -------------- -------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Net revenues $ 1,129,888 $ 128,217 $ - $ 1,258,105
Gross margin 82,229 39,334 - 121,563
Operating earnings (loss) (8,322) 7,031 (807) (2,098)
excluding restructuring charges
Restructuring charges (5,169)
Financing expense (7,471)
Gain on sale of investment 1,958
------------
Loss before income taxes $ (12,780)
============
Total assets $ 318,518 $ 31,807 $ 140,511 $ 490,836
============= =========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
For the Six Months ended June 30, 1999
Operating Results Product Service ClientLink, Inc. Other Total
------------------------------------------ ---------------- -------------- ------------------------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,149,335 $ 142,763 $ 3,817 $ - $1,295,915
Gross margin 90,085 48,559 1,719 - 140,363
Operating earnings (loss) (6,717) 17,168 474 - 10,925
Financing expense (10,537)
-------------
Earnings before income taxes $ 388
=============
Total assets $ 573,445 $ 54,636 $ - $ 147,790 $ 775,871
================ ============== ================ ============ =============
</TABLE>
11
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(unaudited)
(7) Financing Arrangements
----------------------
The Company has financing arrangements which total $375 million,
consisting of a $200 million receivable securitization facility
("Securitization") and a $175 million working capital facility
("Revolver"). Consistent with the Company's financing requirements,
during the second quarter 2000, the Company reduced the Securitization
from $250 million to $200 million and the Revolver was reduced 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 June 30, 2000, $173 million of the Securitization was
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 June 30, 2000, availability under the Revolver was
approximately $92.2 million, of which $11.8 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 an 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. As of June 30, 2000, the Company has a remaining
investment in OPUS of approximately $1.1 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 from 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.
(10) Reclassifications
-----------------
Certain amounts in the 1999 condensed consolidated financial statements
have been reclassified to conform with the 2000 presentation.
12
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations June 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 six months ended
June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Product $ 626,533 $ 728,043 $ 1,129,888 $ 1,149,335
Service 64,151 74,206 128,217 142,763
Other - 346 - 3,817
--------------- -------------- --------------- ---------------
Total revenue $ 690,684 $ 802,595 $ 1,258,105 $ 1,295,915
=============== ============== =============== ===============
Gross margin:
Product $ 47,243 $ 56,537 $ 82,229 $ 90,085
Service 20,378 25,239 39,334 48,559
Other - 116 - 1,719
--------------- -------------- --------------- ---------------
Total gross margin $ 67,621 $ 81,892 $ 121,563 $ 140,363
=============== ============== =============== ===============
Gross margin percentage:
Product 7.5% 7.8% 7.3% 7.8%
Service 31.8% 34.0% 30.7% 34.0%
Other - 33.5% - 45.0%
--------------- -------------- --------------- ---------------
Total gross margin percentage 9.8% 10.2% 9.7% 10.8%
Operating expenses:
Selling 2.9% 3.6% 3.4% 4.0%
Service 1.9% 1.5% 1.9% 1.7%
General and administrative 3.4% 3.1% 3.6% 3.4%
Depreciation and amortization 0.8% 0.8% 0.9% 0.8%
Restructuring charges - - 0.4% -
--------------- -------------- --------------- ---------------
Total operating expenses 9.0% 8.9% 10.2% 10.0%
--------------- -------------- --------------- ---------------
Earnings (loss) from operations 0.8% 1.3% (0.6%) 0.8%
Financing expenses (0.5%) (0.8%) (0.6%) (0.8%)
Gain on sale of investment 0.3% - 0.2% -
--------------- -------------- --------------- ---------------
Earnings (loss) before income taxes 0.6% 0.5% (1.0%) 0.0%
Income taxes (benefit) 0.3% 0.2% (0.4%) 0.0%
--------------- -------------- --------------- ---------------
Net earnings (loss) 0.4% 0.3% (0.6%) 0.0%
=============== ============== =============== ===============
</TABLE>
13
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
COMPARISON OF THE QUARTER ENDED JUNE 30, 2000 TO THE QUARTER ENDED JUNE 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 13.9% to $626.5 million in the second quarter
of 2000 from $728.0 million in the second 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. These factors were partially offset by the
positive impact of the May 1999 acquisition of the Technology Acquisition
Services Division of Entex Information Services, Inc. ("TASD"). Product gross
margin as a percentage of product revenue for the second quarter of 2000 was
7.5% compared to 7.8% for the second quarter of 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 declined 13.6% to $64.2 million for the second quarter of
2000 from $74.2 million for the second quarter of 1999. Service revenue is
primarily derived from field engineering, LAN/WAN projects, consulting,
configuration, help desk, asset tracking, network management and software
management. Service revenue reflects revenue generated by the actual performance
of specific services and does not include product sales associated with service
projects. Service gross margin as a percentage of service net revenue for the
quarter ended June 30, 2000 was 31.8% compared to 34.0% 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' 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 $8.4 million for the three months
ended June 30, 2000 as compared to the same period in the prior year. Selling
expense as a percentage of revenue declined to 2.9% for the three months ended
June 30, 2000 from 3.6% 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 not incurred in 2000.
Service expense increased approximately $1.3 million to $13.0 million for
the three months ended June 30, 2000 from $11.7 million for the same period in
the prior year. As a percentage of revenue, service expense increased to 1.9%
for the three months ended June 30, 2000 from 1.5% for the same period a year
ago. The increase is due primarily to personnel costs associated with supporting
the service business.
14
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General and administrative expense decreased to approximately $23.4 million
for the quarter ended June 30, 2000 from $24.9 million for the same period in
the prior year. This decrease was primarily due to the Company's cost reduction
efforts. Although there was a decrease in the dollar amount of general and
administrative expense from the second quarter 1999 to the second quarter 2000,
general and administrative expense increased as a percent of revenue from 3.1%
to 3.4% for the comparable periods. 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 $0.9 million
for the three months ended June 30, 2000 when compared to the same period in
1999. This decline is primarily due to approximately $0.7 million in additional
amortization expense that was recorded in the three months ended June 30, 1999
and was not incurred in the three months ended June 30, 2000. During the three
months ended June 30, 1999, the Company completed the allocation of the purchase
price on 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.
Financing expense decreased approximately $3.0 million for the three months
ended June 30, 2000, as compared to the same period in 1999. As a percentage of
revenue, financing expense declined to 0.5% for the three months ended June 30,
2000 from 0.8% for the same period a year ago. This decline is primarily due to
two factors. During the three months ended June 30, 1999, the Company incurred
approximately $1.0 million in charges related to the extension of its previous
credit facilities until new credit facilities were finalized. These charges,
along with greater financing requirements in the second quarter 1999 mainly due
to the TASD acquisition, were the primary reasons financing expenses for the
three months ended June 30, 1999 were higher in relation to the three months
ended June 30, 2000.
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 common stock.
As a result of the factors discussed above, the Company recorded net
earnings for the quarter ended June 30, 2000 of $2.6 million compared to net
earnings of $2.5 million for the same period in 1999.
15
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 TO THE SIX MONTHS ENDED JUNE
30, 1999
Product revenue decreased approximately 1.7% to $1.13 billion for the six
months ended June 30, 2000 from approximately $1.15 billion in the same period
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. These factors were
partially offset by the positive impact of the May 1999 acquisition of the
Technology Acquisition Services Division of Entex Information Services, Inc.
("TASD"). Product gross margin as a percentage of product revenue for the six
months ended June 30, 2000 was 7.3% compared to 7.8% 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 10.2% to $128 million for the six
months ended June 30, 2000 from $143 million during the same period of 1999.
Service gross margin as a percentage of service net revenue was 30.7% for the
first half of 2000 compared to 34.0% 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.
Selling expense decreased approximately $9.3 million for the six months
ended June 30, 2000 as compared to the same prior year period. Selling expense
as a percentage of revenue declined to approximately 3.4% of revenue for the six
months ended June 30, 2000 from approximately 4.0% 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 not
incurred in 2000, and consulting fees incurred in 1999 associated with the
design and implementation of its new sales model not incurred in 2000.
Service expense increased approximately $1.8 million to $24.4 million for
the six months ended June 30, 2000 from $22.6 million for the same period in the
prior year. As a percentage of revenue, service expense increased to 1.9% for
the six months ended June 30, 2000 from 1.7% for the same period in 1999. The
increase is due primarily to personnel costs 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 half of 2000 does not reflect ClientLink's
operating expenses as compared to the first half of 1999.
16
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General and administrative expense increased to $45.2 million for the six
months ended June 30, 2000 from $44.2 million for the same period in the prior
year. General and administrative expense, as a percentage of net revenue,
increased for the six months ended June 30, 2000 to 3.6% compared to 3.4% for
the comparable period of the prior year. The Company's operating expenses are
reported net of reimbursements by certain manufacturers for specific training,
promotional and marketing programs. These reimbursements offset the expenses
incurred by the Company.
Depreciation and amortization expense increased for the six months ended
June 30, 2000 in absolute dollars and as a percentage of net revenue when
compared to the same period in 1999. The increase is due primarily to goodwill
amortization related to the May 1999 TASD acquisition and to software license
amortization. Partially offsetting the increase in goodwill amortization related
to the May 1999 TASD acquisition was approximately $0.7 million in additional
amortization expense that was recorded in the six months ended June 30, 1999.
During the six months ended June 30, 1999, the Company completed the allocation
of the purchase price on 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 $2.3 million was paid
through June 30, 2000.
Financing expense decreased in absolute dollars and as a percentage of
revenue for the six months ended June 30, 2000, as compared to the same period
in 1999. This decline is primarily due to two factors. During the six months
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 six months ended June 30, 1999 mainly due to the TASD
acquisition, were the primary reasons financing expenses for the six months
ended June 30, 1999 were higher in relation to the six months ended June 30,
2000.
During the six months ended June 30, 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
for the six months ended June 30, 2000 of $7.7 million compared to net earnings
of $0.2 million for the same period in 1999.
Liquidity and Capital Resources
-------------------------------
Working capital at June 30, 2000 was $108.4 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 total current liabilities,
partially offset by decreases in cash and inventories. The increase in
receivables is mainly due to a 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 total current
liabilities is primarily a result of fluctuations that occur relative to the
timing of payments to vendors.
17
<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 June 30, 2000 the Company was owed approximately $60
million under these vendor rebate programs.
The Company's working capital requirements are generally funded through
financing arrangements and internally generated funds. As of June 30, 2000, the
Company's financing arrangements consisted of the Securitization and Revolver.
Consistent with the Company's financing requirements during the second quarter
2000, the Company reduced the Securitization from $250 million to $200 million
and the Revolver was reduced 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 June 30, 2000, $173 million
of the Securitization was 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 June 30, 2000, availability under the Revolver was approximately $92.2
million, of which $11.8 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 $3.2 million
for the six months ended June 30, 2000 as compared to $4.0 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 hardware and software. The Company
does not expect to incur capital expenditures in 2000 materially different from
its 1999 levels.
Recent Accounting Pronouncements
--------------------------------
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. We 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. We do not expect the adoption of SFAS No. 133 to have a
significant impact on our financial condition or results of operations.
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 is in the process of analyzing the implications of these bulletins and
is anticipating that further implementation guidance will be forthcoming from
the SEC.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
establishes guidance for accounting for stock option grants. The Company does
not expect that the adoption of FIN 44 will have a material effect on the
consolidated financial statements.
18
<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 second half 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 the ability to implement
manufacturer direct fulfillment strategies; the Company may not be able to find
additional ways to leverage costs and reduce costs further. 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 June 30, 2000,
the Company had $173 million and $11.8 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 six months ended
June 30, 2000.
Currently, the Company does not enter into financial investments for
trading or other speculative purposes or to manage interest rate exposure.
19
<PAGE>
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 18, 2000.
At the meeting, the shareholders voted in favor of electing as directors the
eleven nominees named in the Company's Definitive Revised Proxy Statement dated
April 19, 2000, for adoption of the Company's 2000 Equity Compensation Plan, and
for an amendment to the Company's Employee Stock Purchase Plan to increase the
number of shares subject to the plan by 1,000,000. The number of votes cast for,
against or withheld, as well as the number of abstentions and broker nonvotes
were as follows:
Election of Directors:
For Withheld/Not Voted
--- ------------------
J. Edward Coleman 55,119,575 4,615,856
Michael J. Emmi 55,082,266 4,653,165
Richard F. Ford 55,084,252 4,651,179
Edwin L. Harper 55,111,779 4,623,652
Delbert W. Johnson 54,477,943 5,257,488
John D. Loewenberg 55,084,877 4,650,554
Thomas C. Lynch 55,106,979 4,628,452
Warren V. Musser 54,502,396 5,233,036
Anthony J. Paoni 55,113,009 4,622,422
Edward N. Patrone 55,064,483 4,670,948
Harry Wallaesa 54,517,719 5,217,712
Proposal to adopt the 2000 Equity Compensation Plan:
<TABLE>
<CAPTION>
For Against Abstain Not Voted Broker Nonvotes
--- ------- ------- --------- ---------------
<S> <C> <C> <C> <C>
43,630,532 2,671,485 73,765 4,497,021 -
</TABLE>
Proposal to amend the Employee Stock Option Plan:
<TABLE>
<CAPTION>
For Against Abstain Not Voted Broker Nonvotes
--- ------- ------- --------- ---------------
<S> <C> <C> <C> <C>
46,023,645 291,471 60,665 4,497,022 -
</TABLE>
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
------- -----------------------------------------
4.1* Compucom Systems, Inc. 2000 Equity Compensation
Plan
4.2** Compucom Systems, Inc. Amended and Restated
Employee Stock Purchase Plan
27 Financial Data Schedule
* Filed on April 19, 2000 as Exhibit A to the
Company's Definitive Revised Proxy Statement (No.
000-14371) and incorporated herein by reference.
** Filed on April 19, 2000 as Exhibit B to the
Company's Definitive Revised Proxy Statement (No.
000-14371) and incorporated herein by reference.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed by the Registrant during the
three months ended June 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: August 14, 2000 /s/ J. Edward Coleman
----------------------------------
J. Edward Coleman,
Chief Executive Officer
DATE: August 14, 2000 /s/ M. Lazane Smith
----------------------------------
M. Lazane Smith,
Senior Vice President, Finance and
Chief Financial Officer
22
