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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001 Commission File Number 0-14371
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COMPUCOM SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 38-2363156
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7171 Forest Lane, Dallas, TX 75230
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 856-3600
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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The aggregate market value of the Common Stock, $.01 par value, held by
non-affiliates (based on the closing price on the Nasdaq National Market) on
March 11, 2002 was approximately $69.5 million. For purposes of determining this
amount only, Registrant has defined affiliates as including (a) the executive
officers named in Part III of this 10-K report, (b) all directors of Registrant,
and (c) each stockholder that has informed Registrant by March 11, 2002 that it
is the beneficial owner of 10% or more of the outstanding common stock of
Registrant.
The number of shares of the Registrant's Common Stock outstanding as of March
11, 2002 was 48,381,552 shares.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement relating to the May 15, 2002 annual
meeting of stockholders of Registrant, to be filed within 120 days after the end
of the year covered by this Annual Report on Form 10-K, are incorporated by
reference into Items 10, 11, 12 and 13 (Part III) of this Annual Report. Such
Proxy Statement, except for the parts therein which have been specifically
incorporated by reference, shall not be deemed "filed" for the purposes of this
report on Form 10-K.
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PART I
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Item 1 Business
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Item 1(a) General Development of the Business
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Introduction
Founded in 1987, CompuCom Systems, Inc., together with its subsidiaries
("CompuCom" or "the Company") is a leading single-source provider of information
systems services and products designed to enhance the productivity of large and
medium-sized organizations throughout the United States. CompuCom provides
information technology outsourcing and system integration services that help
clients reduce the costs, complexities, obstacles and risks associated with new
technology adoption, operational transition and on-going management of their
information systems.
These services include application design, development and maintenance,
delivery of complex multi-vendor solutions, a full range of multi-vendor
hardware and software support, help desk, network management and security
services. Combining these services with CompuCom's ability to provide technology
products and product acquisition services, CompuCom simplifies the selection,
acquisition, deployment, implementation and ongoing management processes of
clients' information systems.
In 2001 CompuCom completed its 15th consecutive profitable year. Revenue
declined when compared to 2000, primarily as a result of economic conditions and
competitive pressure in the Company's product business. However, CompuCom
achieved revenue growth in its services business primarily as a result of
acquisitions completed during the year. During 2001, CompuCom completed four
acquisitions including MicroAge Technology Services, L.L.C. ("MTS"), a division
of MicroAge, Inc. in January, Excell Data Corporation ("Excell") in July, the
applications development division of E-Certify, Inc. ("ClientLink") in November
and Northern NEF, Inc. ("NNEF") in November. These acquisitions expanded
CompuCom's desktop outsourcing business (MTS), augmented the services business
with the addition of application design and development offerings (Excell and
ClientLink) and broadened CompuCom's customer base to include the Federal
government (NNEF). During 2001, CompuCom also focused on streamlining its
operations and processes, reducing its operating expense by almost $32 million
when compared to 2000 and strengthening its balance sheet, ending the year with
$123 million in cash.
CompuCom believes the key to improving its earnings performance is the
expansion of its higher margin services business and continued focus on
operating expense control and effective balance sheet management. CompuCom's
strategy is to focus on the growth of its services business organically as well
as through strategic acquisitions and alliances. CompuCom expects to experience
continued pressure in its product business, as major manufacturers expand their
plans to market and distribute products directly to the Company's clients and as
direct marketers' efforts to sell to the Fortune 1000 companies intensify. In
addition, general economic conditions remain soft. CompuCom believes these
factors may result in lower product revenue and product gross margin dollars in
the future. CompuCom believes that future profitability will depend on a number
of factors, including CompuCom's ability to: focus on and grow its service
business profitably; attract and retain quality services personnel while
effectively managing the utilization of those personnel; respond to increased
competition from its suppliers' direct selling initiatives; and control
operating expense. In addition, future profitability will also depend on overall
improvement in the economy, CompuCom's ability to effectively manage inventory
levels in response to changes in major suppliers' price protection and return
programs, product demand, competition, manufacturer product availability and
pricing strategies, and effective utilization of vendor programs.
CompuCom defines its operations as two distinct businesses - 1) sales of
personal computer-related products, which includes desktop, networking, storage,
and mobile computing products, as well as peripherals and software-related
products and licenses and 2) services, which is primarily derived from
application design, development and maintenance, all aspects of desktop
outsourcing, including field engineering, as well as help desk and LAN/WAN
network outsourcing, configuration, asset tracking, software management, mobile
computing services, IT consulting, training, and services provided in support of
certain manufacturers' direct fulfillment initiatives.
Item 1(b) Financial Information about Operating Segments
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Revenues from external clients, gross margin, operating earnings and total
assets for each segment of CompuCom's business for the three-year period ended
December 31, 2001 is contained in Footnote 6 to the Consolidated Financial
Statements titled "Segment Information" on page F-13 of this Form 10-K and is
incorporated herein by reference.
Item 1(c) Narrative Description of Business
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GENERAL DESCRIPTION OF BUSINESS
CompuCom is a leading single-source provider of information systems
services and products designed to enhance the productivity of large and
medium-sized organizations throughout the United States. CompuCom provides
information technology outsourcing and system integration services that help
clients reduce the costs, complexities, obstacles and risks associated with new
technology adoption, operational transition and on-going management of their
information systems.
These services include application design, development and maintenance,
delivery of complex multi-vendor solutions, a full range of multi-vendor
hardware and software support, help desk, network management and security
services. Combining these services with CompuCom's ability to provide technology
products and product acquisition services, CompuCom simplifies the selection,
acquisition, deployment, implementation and ongoing management processes of
clients' information systems.
CompuCom is an authorized fulfillment channel for major personal computer
("PC") products, networking and related products, computer-related peripheral
equipment, mobile computing products and software-related products and licenses
for a number of manufacturers, including, among others, Compaq Computer
Corporation ("Compaq"), International Business Machines Corporation ("IBM"),
Hewlett-Packard Company ("HP"), Microsoft Corporation ("Microsoft"), and Palm,
Inc. ("Palm").
CompuCom markets its service and product offerings primarily through its
national sales force and service personnel. CompuCom's clients include Fortune
1000 enterprises, Federal, state and local government, technology equipment
providers, system integrators and wireless technology providers.
CompuCom's target clients are becoming increasingly dependent on
information technology to compete effectively in today's markets. As a result,
the decision-making process organizations face when planning, selecting, and
implementing technology solutions is becoming more complex and requires many of
these organizations to outsource the management and support of their technology
needs. In addition, many of CompuCom's clients are enhancing their technology
infrastructure to improve their ability to communicate and transact business
over the Internet, as well as focus on reducing ongoing operational costs.
CompuCom believes that the broad range of services it offers helps organizations
simplify their digital infrastructures, thereby reducing the client's costs and
risks associated with new technology adoption, transition and on-going
management
During 2001, no customer accounted for greater than 10% of CompuCom's
revenues. Order backlog is not considered to be a meaningful indicator of future
business prospects due to the relatively short order fulfillment cycle.
CompuCom is authorized by various manufacturers to sell technology products
through its virtual, direct sales force located in or near major metropolitan
areas throughout the United States. Each geographic area typically includes
direct sales representatives, support personnel, consultants, field engineers
and technicians who are authorized to sell, repair and maintain Compaq, IBM, HP
and certain other manufacturers' products as well as provide other technology
services the client may require. As of December 31, 2001, CompuCom employed
approximately 251 full-time field sales associates who sell both services and
products. CompuCom's sales force is compensated with a base salary and
commissions based on net revenue, gross margin, attainment of quota and other
relevant factors.
CompuCom's corporate headquarters and operations campus is located at 7171
Forest Lane, Dallas, Texas 75230. Essentially all of CompuCom's financial and
administrative functions, including information services, service and sales
support, one of two enterprise help desk services centers, human resources,
supply chain management, finance, executive management, legal, marketing and one
of two client assistance centers, are located in the two buildings that comprise
this facility.
In addition to providing comprehensive services to its clients, CompuCom
has expanded and enhanced its use of information systems and communications
capabilities to support its core business operations. CompuCom's operations are
supported by a sophisticated, integrated information systems infrastructure
utilizing state-of-the-art wide area networks, client/server business
applications, and distributed and Web based technologies. CompuCom is committed
to the use of Internet technologies for supporting a wide range of internal and
customer enabling capabilities. Increasingly, CompuCom's operational
transactions are conducted using secure Internet and Intranet technologies.
These systems are accessible anytime, anyplace using a nation-wide virtual
private network ("VPN").
CompuCom's information systems enable its clients to create specific
product configurations and price quotations from internet-based catalogs and
place orders over the Internet. Clients may look up information regarding
previously placed orders and check the status of product orders being processed
and shipped. In addition, clients may also access, view, create, modify and
close help desk and service dispatch information specific to problem tickets and
work orders. CompuCom also provides datamarts that allow clients to obtain
ongoing data downloads of activity relating to assets, product catalogs,
accounts payable tracking, invoice history and order tracking.
CompuCom's information systems include support for electronic
"business-to-business" transactions with clients and suppliers using electronic
data interchange ("EDI") technology. During 1999, CompuCom deployed its first
client interface using Open Buying on the Internet ("OBI") standards. This
technology allows a client to create an order using CompuCom's Web Services
Internet pages, deliver the order to the client's purchasing systems for
approval and then submit the order over the Internet using EDI-based data
formats. CompuCom has since extended its Web Services offering to include XML
(Extensible Markup Language) capabilities and interfaces to commercial
procurement engines such as Ariba and Commerce One.
An integral part of CompuCom's information systems includes the use of its
proprietary "Airtime" software, through which field service engineers are able
to directly report time and activities from remote locations using specialized
wireless communication capabilities. The use of this system helps ensure more
timely and accurate reporting of each engineer's time spent on a work order or
project, thereby enhancing productivity and process efficiencies.
Warranty-related activity is also made more efficient through the use of
Airtime.
Additionally, CompuCom continues to rely on its state-of-the-art data
warehouse. The data warehouse provides a repository of information that
increases the accessibility of summarized, historical information about
services, products, client activity and vendors to both clients and associates.
All CompuCom associates are provided access to CompuCom's Intranet, known
as The Bridge. This capability, which was enhanced in 2001, provides rapid
access to organization charts, policies, procedures, reports, and knowledge as
well as various internal operational systems. The Bridge is also used to
communicate and distribute information to associates about CompuCom events and
news.
Competition
CompuCom's industry is characterized by intense competition, primarily in
the areas of price, product availability and breadth of services and product
line. Many established original equipment manufacturers (including some of
CompuCom's vendors), direct marketers, distributors, systems integrators and
resellers of distributed desktop or networking products compete with CompuCom in
the configuration and distribution of computer systems and equipment. Some of
these competitors have a pricing advantage over companies such as CompuCom. In
response to this increased competition, some of CompuCom's competitors have
sought to increase market share through acquisitions. CompuCom expects this
consolidation will continue in 2002. CompuCom also expects the major
manufacturers of the products CompuCom sells will continue to pursue a more
direct selling model. In the highly fragmented IT services business, CompuCom
competes with several larger IT service providers (including some of CompuCom's
vendors) in addition to other smaller computer services companies. Some of these
competitors have financial, technical, sales, marketing and other resources that
are substantially greater than CompuCom. As a result of these factors, CompuCom
may face fewer but larger and better-financed competitors, possibly resulting in
a reduction of both revenue and gross margin dollars.
CompuCom's Associates
CompuCom employed approximately 3,800 full-time associates as of December
31, 2001. CompuCom offers its full-time associates health, long-term disability,
dental and life insurance benefits and the ability to participate in a 401(k)
plan. In addition, CompuCom provides an employee stock purchase plan for
eligible associates. None of the associates are covered by a collective
bargaining agreement. CompuCom considers its relations with associates to be
good.
COMPUTER PRODUCTS SEGMENT
CompuCom provides procurement services for sophisticated technologies
consisting of personal computer products, networking and storage products,
peripherals, software-related products and licenses, mobile and wireless
computing devices and services and management technology services to its
clients. It is an authorized channel fulfillment partner for Cisco, Compaq, HP,
IBM, Intel, Microsoft, Novell, Palm, 3Com and Toshiba as well as other major
manufacturers and software suppliers. CompuCom sources over 30,000 different
products, components and accessories consisting of leading as well as
alternative brands.
As one of the largest national, multi-vendor hardware and software
providers, CompuCom believes one way it provides client value is by allowing
clients to choose products or components from various manufacturers that best
suit their particular needs. This is in contrast to direct manufacturers' sales
organizations that generally offer only that particular manufacturer's solutions
or products.
CompuCom provides product support to its clients primarily through its two
Client Assistance Centers ("CAC") located in Dallas, Texas and Mason, Ohio. CAC
personnel, called inside sales representatives ("ISR's"), may be assigned to
specific client accounts or to clients in a certain geographical area. ISR's
support each account and become experts in the client's infrastructure needs,
tools, culture, process and procedures. Working closely with the client and the
CompuCom field sales representative, ISR's provide pre-sales technical support,
keep up-to-date on the business needs of the client and provide information
regarding the availability of product, services, pricing, shipping and
invoicing. This information may be communicated via a toll-free telephone number
or electronically. Web-based client interaction includes detailed on-line IT
provisioning, product availability, real-time order tracking and asset
management information. Client-specific datamarts are also utilized to provide
clients access to account activity. The primary goal of the CAC is to provide
greater support for clients' more complex product and service needs while
allowing the direct sales force to focus on soliciting new business. At the end
of 2001, the Company employed approximately 190 CAC personnel.
To meet CompuCom's client requirements for product distribution, complex
configuration and imaging and systems integration needs, CompuCom currently
operates a configuration and distribution center located in Paulsboro, New
Jersey. With 300,000 square feet located in one building, this center
distributes, configures and manages images for various PC and mobile computing
products sold by CompuCom as well as providing distribution and configuration
services for hardware supplied by clients, system integrators and certain
manufacturers. CompuCom also operates its return and depot repair business in
the Paulsboro center. In addition, CompuCom operates a centralized, national
service logistics center in Dallas, Texas, consisting of 43,000 square feet. The
Company believes its Paulsboro and Dallas operations centers are adequate to
support its business needs for the foreseeable future.
The configuration and distribution center personnel utilize wireless
hand-held radio frequency devices to stock, pick and update the status and
location of inventory. These devices play a key role in enabling CompuCom to
efficiently handle daily transactions and are used in the daily cycle counting
process, which CompuCom believes has resulted in improved overall inventory
integrity and bin accuracy. CompuCom's distribution, configuration, repair
depot, return merchandise and supply chain management departments are ISO 9001
certified. ISO 9001 is part of the ISO 9000 set of standards developed by the
International Organization of Standardization ("ISO"), which represent common
international business quality standards designed to help demonstrate the
capability of a supplier to control the processes that determine the
acceptability of the products and services being delivered.
CompuCom experienced pressure from a product revenue standpoint during
2001, as product revenue declined 37% from 2000 levels. CompuCom believes the
decline in revenue is primarily attributable to a reduction in spending by
Fortune 1000 companies, which comprise the majority of CompuCom's client base,
resulting from the overall weak economic climate. In addition, the competitive
environment intensified as major manufacturers became increasingly aggressive in
selling their products directly to end-user companies, thereby circumventing the
reseller channel more often. In addition, direct marketers also increased their
focus in selling into the Fortune 1000 marketplace. Partially offsetting the
decline in product revenue was an increase in product gross margin as a
percentage of product revenue, which grew to 9.4% compared to 7.6% in 2000.
CompuCom believes a key contributor to this increase was the decline in revenue
generated by higher volume, lower margin clients. CompuCom anticipates further
downward pressure on product revenue and product gross margin dollars in 2002.
Principal Suppliers
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A significant part of CompuCom's revenues are derived from sales of
personal computer and networking products including Compaq, IBM and HP products.
CompuCom's agreements with these vendors contain provisions providing for
periodic renewals and permitting termination by the vendor without cause,
generally upon 30 to 90 days written notice. Since 1987, Compaq, IBM and HP have
regularly renewed their respective dealer agreements with CompuCom, although
there can be no assurance that the regular renewals of CompuCom's dealer
agreements will continue. The termination, or non-renewal, of CompuCom's Compaq,
IBM or HP dealer agreements could materially adversely affect CompuCom's
business. CompuCom, however, is not aware of any reason for the termination, or
non-renewal, of any of those dealer agreements and believes that its
relationships with Compaq, IBM and HP are satisfactory.
CompuCom purchases products from IBM and HP at pricing levels that CompuCom
believes are the lowest prices available to those vendors' respective resellers
who resell at similar volumes. CompuCom purchases the majority of its Compaq
products from other suppliers through Compaq's Distributor Alliance Program
("DAP"), which became effective in August 1999. All of CompuCom's principal
suppliers require that CompuCom purchase certain minimum volumes of products in
a specified period to maintain favorable pricing levels. CompuCom also obtains
incentives from Compaq, IBM and HP and other suppliers by participating in
certain vendor programs offered by those suppliers. CompuCom has certain
selling, promotional and related expenses reimbursed by vendors under dealer
programs offered by those and other suppliers. However, there can be no
assurance that any of these programs will continue in 2002 or that CompuCom will
continue to participate in any of these programs at the same level as in 2001.
Sales of Compaq, HP and IBM products accounted for approximately 23%, 22%
and 20%, respectively, of CompuCom's 2001 product revenues compared to 30%, 20%
and 26%, respectively, in 2000 and 30%, 16% and 21%, respectively, in 1999.
Due to the rapid delivery requirements of its clients and to assure itself
of a sufficient allotment of products from suppliers, CompuCom maintains
inventory funded through its credit facilities and vendor credit. CompuCom's
major suppliers at times provide price protection programs that are intended to
reduce the risk of inventory devaluation by absorbing price declines associated
with aging product life cycles. However, these price protection programs
generally are in effect for a limited number of days. CompuCom has focused on
ways to reduce its costs by reducing its inventory levels and improving
inventory turns. CompuCom also has the option of returning a certain percentage
of its current product inventories each quarter to these principal suppliers as
it assesses each product's current and forecasted demand schedule. If such
returns exceed certain specified levels, CompuCom may be charged restocking fees
ranging up to 5%. CompuCom did not incur significant restocking fees in 2001.
Dependence upon Major Vendors and Other Suppliers
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CompuCom is dependent upon the continued supply of products and components
from its suppliers, particularly Compaq, IBM and HP. Historically, certain
suppliers occasionally experience shortages of select products that render
components unavailable or necessitate product allocations among resellers. While
certain shortages existed throughout 2001, CompuCom believes the product
availability issues are a result of the present dynamics of the personal
computer industry as a whole, which include shortened product life cycles and
increased frequency of new product introductions into the marketplace. While
CompuCom believes that product unavailability or product allocations will not be
materially disruptive to CompuCom due to the breadth of alternative product
lines available, there can be no assurance that unexpected levels of such
interruptions will not have a material adverse effect on CompuCom's business.
SERVICES SEGMENT
CompuCom believes a key factor to improving its earnings performance is the
expansion of its higher margin services business. Services revenue increased
approximately 3.8% in 2001 compared to 2000, primarily as a result of the
acquisitions the Company completed during the year, partially offset by the
slowdown in the economy. CompuCom believes the economic softness resulted in the
postponement and cancellation of many IT projects in its Fortune 1000 customer
base. As a percentage of revenue, services represents approximately 16% of
revenue compared to approximately 10% in 2000, while gross margin dollars from
the services business account for 41% of CompuCom's total gross margin dollars,
up from 35% a year ago. Service revenue has grown at a compounded annual rate of
almost 11% over the past five years as a result of the Company's strategic
efforts, which include: the development of additional service offerings;
strategic acquisitions; the hiring of quality service personnel; additional
training for its engineers and sales representatives; enhanced management
support to the services business; and more emphasis on sales of services in the
sales representatives compensation plan. The technology management services
business is an integral part of CompuCom's strategy to provide clients with
value-added service solutions to meet their technology needs.
During 2001, CompuCom completed four acquisitions with the intent of
enhancing its service offerings and business. The acquisition of MTS in January
added new clients to CompuCom's outsourcing client base, while the November
acquisition of NNEF expanded the Company's marketing reach to the Federal
government. The acquisition of Excell and ClientLink in July and November,
respectively, broadened CompuCom's service offerings to include application
design, development and maintenance. At the end of the year, CompuCom employed
more than 300 associates in the area of application development and design.
Service revenue is primarily derived from application design, development
and maintenance, all aspects of desktop outsourcing, including field
engineering, as well as help desk and LAN/WAN network outsourcing,
configuration, asset management, software management, mobile and wireless
computing services and IT consulting, including enterprise infrastructure
solutions, storage area networks ("SANS"), server management, unified messaging
and e-business/information security, and services provided in support of certain
manufacturers' direct fulfillment initiatives. CompuCom continues to focus on
expanding its presence in technology management. This commitment is reflected in
the increase in its service personnel. As of December 31, 2001, the Company
employed over 2,700 service personnel, including application programmers, IT
consultants, system, field and network engineers, help desk agents and
configuration technicians compared to approximately 800 as of the beginning of
1995.
CompuCom currently maintains a configuration and systems integration center
located within the configuration and distribution center at Paulsboro, New
Jersey. The center provides a single point of integration for all standard and
nonstandard multi-vendor products and software, enabling CompuCom to meet client
demand for advanced complex systems and network configuration technologies, as
well as image management. The configuration center's process is ISO 9001
certified and provides 100% automated quality control. More complex requirements
involving distributed network configurations, SANS, point of sale devices,
routers, hubs, cable modems, customer server rack and kiosk builds, mass
customization and emerging technology services including PDAs and wireless LANs
are all processed through this center.
CompuCom's technology management service offerings include various aspects
of desktop outsourcing and LAN/WAN network outsourcing. Such offerings include
the following: asset management services from systems planning, tool selection,
implementation and reporting, including data-mining; multi-vendor hardware
support services, including break/fix, IMAC, and out of warranty hardware
support, server and network support, and technology refresh and integration;
mobile computing support services, including OEM wireless program support and
mobile hardware repair; depot repair; software support services, including
wintel software and enterprise support, as well as image certification and
management support; network and systems management services, including remote
network systems, applications monitoring and management, remote LAN
administration and intrusion detection and security monitoring. These services
are performed in accordance with specific needs of the client and may be based
upon contracting vehicles ranging from multi-year, SLA-based contracts to time
and material arrangements. In addition, CompuCom is authorized to provide
hardware warranty services for certain major manufacturers whose products
CompuCom sells.
Consulting and systems integration services intended to help clients
assess, plan, design and deploy applicable technologies are also offered by
CompuCom. These services focus on enterprise infrastructure solutions, SANs,
server management, unified messaging, e-business and information security.
Examples of such services offered include: application design, development and
maintenance; IT strategic consulting, E-business solutions, including enterprise
portal development and integration, web infrastructure, and content design,
implementation, and management; enterprise architecture and messaging solutions;
enterprise management solutions, including desktop, network and systems design,
implementation, and management; information security solutions, including
security strategy, assessment, architecture, and audit; enterprise data storage
services, including storage assessment and management and storage area network
and network attached storage solution design, configuration, and integration.
CompuCom's field engineers and consultants are located throughout the
United States, including Alaska and Hawaii. In addition, CompuCom maintains
approximately 40 service centers located in major metropolitan areas throughout
the United States. These service centers generally consist of approximately
1,200 square feet and primarily serve as service parts logistics centers, as
well as providing office space for service and sales personnel. Service
technical associates utilize proprietary software known internally as Airtime,
through which they are able to directly report time and activities from remote
locations using special wireless communication capabilities. The use of this
system helps ensure more timely and accurate reporting of each technician's time
spent on a work order or project, thereby enhancing productivity and billing
accuracy. In addition, Airtime is also utilized in the performance of equipment
repair and maintenance services, including identifying the replacement parts
necessary for equipment repair and the availability of those parts.
CompuCom offers help desk support through its award-winning enterprise help
desk located at CompuCom's headquarters in Dallas, Texas and in Tempe, Arizona.
These multi-vendor help desk services, tightly integrated with CompuCom's other
services offerings, offer information systems departments the skills, tools and
resources needed to assess, plan, design, implement and operate a single-point
of contact, resolution-oriented help desk to support client's information
technology investments. CompuCom's help desk services include call management,
problem management, knowledge management, event tracking, and remote desktop
control. During 2001, CompuCom employed e-support technology as a standard
element of its help desk service offering. By utilizing the
self-healing/self-help and diagnostic capabilities of this technology, CompuCom
has been able to reduce not only the need for end-users to call the help desk in
order to resolve problems and reduce the need for on-site service calls, but
also to shorten the call resolution time for calls that do require help desk
personnel for support. CompuCom believes faster resolution of these incidents
benefits its clients by increasing end-user productivity and satisfaction as
well as reducing help desk costs over time. CompuCom's help desk consists of
personnel with expertise in commercial and proprietary software applications,
network operating systems and hardware (including PDAs, Pocket PCs, Palms), who
provide technical support to end-users and system administrators.
CompuCom is committed to increasing its help desk clients' access to
information. During 1999, CompuCom expanded its Internet product procurement
capabilities with new support services and information access. Beginning in
early 2000, help desk clients' technical support staff and service management
were given the ability to access call and problem management data, technical
bulletins and service documents through the use of the Internet. Later in 2000,
clients' end-users were given the ability to view, create, modify and close
incidents through the use of the Internet. During 2001, CompuCom further
enhanced its help desk capabilities by integrating asset management and
self-help functionality into its overall help desk services offering.
FORWARD LOOKING STATEMENTS AND RISKS
Certain statements contained in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements may be identified by words such as "will," "believe,"
"anticipate," "intend," "estimate," "expect," "project" and similar expressions.
These forward-looking statements may include statements concerning, among other
things, CompuCom's strategy, future operations, financial position, estimated
revenues, projected costs, prospects, plans and management objectives. Although
CompuCom believes the expectations contained in the forward-looking statements
are reasonable, CompuCom can give no assurance that the expectations will prove
correct. In addition, the forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers, dispositions, joint
ventures, strategic investments or one-time events. As a result, readers should
not place undue reliance on these forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties. While
it is difficult to identify each factor and event that could affect CompuCom's
results, there are a number of important factors that could cause actual results
to differ materially from those indicated by the forward-looking statements, and
as a result could have an adverse impact on CompuCom's business, financial
condition and operating results. These factors include, but are not limited to,
the matters discussed in the following paragraphs.
Competition
The information technology management industry is highly competitive and
management believes competition will intensify in the future. The marketplace in
which CompuCom competes continues to experience a significant amount of
consolidation. In the future, CompuCom may face fewer, but larger and
better-financed competitors as a consequence of this consolidation. In addition,
the major manufacturers of the products CompuCom sells have expanded their
channels of distribution and now actively compete for CompuCom's clients with
direct fulfillment initiatives. These initiatives accelerated in 2001 and
management expects them to accelerate even further in 2002. In the highly
fragmented computer services business, CompuCom competes with several larger
competitors and corporate resellers pursuing services opportunities, as well as
many smaller computer services companies. As CompuCom continues to focus on the
growth of its services business, it also competes with service providers that
have marketed and delivered the services CompuCom provides on a much larger
scale and for a longer period of time. Some of these competitors have financial,
technical, manufacturing, sales, marketing and other resources that are
substantially greater than those of CompuCom. In addition, the computer products
and services industry is characterized by intense price competition, which may
adversely affect CompuCom's results of operations. There can be no assurance
CompuCom will be able to continue to compete successfully with new or existing
competitors.
Dependence on Major Vendors and Reliance upon Vendor Programs
CompuCom's business depends on its relationship with key vendors. A
substantial portion of CompuCom's revenues is derived from sales of hardware and
software, including Compaq, IBM and HP personal computer products. During 2001,
sales of products from these three suppliers represented 65% of total revenues.
In addition, a portion of the services CompuCom provides is directly related to
the sales of these products. CompuCom's agreements with these vendors contain
provisions that provide for periodic renewals and permit termination by the
vendor without cause, generally upon 30 to 90 days notice. In addition,
CompuCom's product business is dependent upon pricing and related terms, product
availability and dealer authorizations, including the ability to provide
warranty service, offered by its major vendors. A material adverse effect on
CompuCom's business would occur if a supply agreement with a key vendor was
materially revised, not renewed or terminated, if the supply of products was
insufficient or interrupted or if CompuCom was no longer allowed to provide
warranty service for the vendor.
In addition, CompuCom participates in certain vendor programs that provide
for incentive payments for promoting and marketing certain product offerings. A
material decrease in the level of funding or credits would have a material
adverse effect on CompuCom's business and financial results. CompuCom's
liquidity continues to be negatively impacted by the dollar volume of certain
manufacturers' rebate programs. Under these programs, CompuCom is required to
pay a higher initial amount for product and claim a rebate from the manufacturer
to reduce the final cost. The collection of these rebates can take an extended
period of time. There can be no assurance that the incentive programs will
continue at the same level in the future, which may have a material adverse
effect on CompuCom's business. In addition, an increase in the rebate programs,
or the Company's inability to collect outstanding rebates, could have a material
adverse effect on CompuCom's financial results.
Two of CompuCom's top three vendors, Compaq and HP, are currently proposing
to effect a merger. If this merger is consummated, CompuCom cannot predict the
impact, if any, it will have on its relationship with these vendors or on the PC
industry as a whole. There can be no assurance that CompuCom will continue to
have a relationship with the merged company in the same manner in which it did
with Compaq and HP prior to the merger or that there will be no significant
changes in the PC industry as a whole, both of which could have a material
adverse effect on CompuCom's business.
Significant Changes to Vendor Terms or Other Unforeseen Events
Rapid product improvement and technological change resulting in relatively
short product life cycles and rapid product obsolescence characterize the
personal computer industry. These factors can place inventory at considerable
valuation risk. CompuCom's key technology providers generally provide price
protection to reduce the risk of inventory devaluation, generally ranging from
five to 45 days. These vendors also generally allow CompuCom to return a certain
percentage of the product it purchases. However, over the past few years
suppliers have reduced the number of days for which they will provide price
protection and lowered the amount of product returns they will accept, requiring
CompuCom to adjust the number of days of inventory CompuCom stocks. If the
suppliers do not continue current price protection and return policies or if
there are unforeseen product developments, CompuCom's business and financial
results could be materially adversely affected.
Major Vendor's Direct Marketing Initiatives
As competition in the personal computer industry has intensified,
CompuCom's key personal computer suppliers have heightened their direct
marketing initiatives. These initiatives have resulted in some of CompuCom's
clients electing to purchase personal computer products directly from the
manufacturer, rather than through CompuCom. While CompuCom expects these
initiatives to continue to accelerate, there could be a material adverse impact
on CompuCom's business if the shift of clients to purchase directly from the
manufacturers occurs more quickly than anticipated. CompuCom also provides
certain fulfillment services to certain of the manufacturers to assist them in
their direct programs. In these instances, the client purchases the hardware
directly from the manufacturer and CompuCom provides certain services, including
configuration and shipping services, to the client on behalf of the
manufacturer, for which CompuCom receives a fee. There can be no assurance the
manufacturers will continue to purchase these services from CompuCom and the
failure to do so could have a material adverse impact on CompuCom's business and
financial results.
Working Capital Financing and Interest Rate Fluctuations
CompuCom finances a significant amount of working capital. CompuCom
finances working capital primarily through the use of a receivable
securitization program but may also utilize a revolving credit facility as
needed. CompuCom's working capital financing bears interest at a floating rate,
thereby subjecting CompuCom to interest rate fluctuations. In addition, there
can be no assurance that future financings, if necessary, will be available in
amounts and on terms acceptable to CompuCom.
Potential Fluctuations in Operating Results
CompuCom's financial results may vary significantly from quarter to quarter
depending on certain factors including, but not limited to, demand for personal
computers and related products, client order deferrals, availability of
products, client capital budgets and spending constraints, interest rate
fluctuations and general economic conditions. CompuCom seeks to control its
expense levels, but such expense levels are partially based upon anticipated
revenues. Therefore, CompuCom may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. As part of its
services business, CompuCom is required at times to estimate the resource
requirements and costs to complete certain projects. Due to a number of
circumstances, it may be necessary to revise these estimates, possibly
increasing the amount of expense recorded in any given quarter. Due to certain
economic factors, CompuCom may not only experience difficulty in collecting its
receivables on a timely basis but also may experience a loss due to client's
inability to pay. In addition, certain economic factors may impact the valuation
of certain investments CompuCom has made or may make in other businesses. As a
result of these and other factors, quarterly period-to-period comparisons of
CompuCom's financial results are not necessarily meaningful and should not be
relied upon as an indication of future performance.
Control by Safeguard Scientifics, Inc.
Safeguard Scientifics, Inc. ("Safeguard") beneficially owns approximately
50% of CompuCom's outstanding common stock and 1.5 million shares of Series B
Preferred Stock. The Series B Preferred Stock is convertible into shares of
common stock at a rate of $6.77 per share, subject to anti-dilution adjustments.
Generally the shares of Series B Preferred Stock are entitled to one vote for
each share of common stock into which such shares may be converted. However,
with respect to the election of CompuCom's Board of Directors, as long as
Safeguard owns at least 40% of CompuCom's outstanding voting securities, the
shares of Series B Preferred Stock are entitled to five votes for each share of
common stock into which such shares of Series B Preferred Stock may be
converted.
As a result, Safeguard has the ability to control the election of
CompuCom's Board of Directors and the outcome of all other matters submitted to
CompuCom's stockholders. In addition, Safeguard's influence may either deter any
acquisition of CompuCom or CompuCom's ability to acquire another entity and its
significant ownership position reduces the public float for CompuCom's common
stock. Consequently, this influence and significant ownership could adversely
affect the market price and liquidity of CompuCom's common stock.
Attraction and Retention of Key Management and Sales and Technical Personnel
CompuCom depends heavily on its senior management team, as well as other
key management and sales personnel. Further, CompuCom faces competition in
attracting and retaining qualified technical personnel to deliver the services
CompuCom sells. The failure to recruit and retain key management and sales and
technical personnel could have a material adverse impact on CompuCom, including
its ability to secure and retain clients.
Management of Growth and Future Acquisitions
CompuCom's goal is to increase the scale of its operations through internal
growth and through the acquisition of other businesses. Consequently, CompuCom
may experience periods of rapid growth with significantly increased staffing
requirements. CompuCom' ability to maintain and manage its growth effectively
will require it to continue to improve its management information system
capabilities, processes, and operational and financial systems and controls. In
order to effectively manage growth through acquisition, it will be necessary for
CompuCom to integrate the operations of acquired businesses in a timely and
orderly manner, as well as to attract, train, motivate and retain key management
and other personnel. Acquisitions involve a number of special risks, including
integrating the acquired business into CompuCom's operations, the potential loss
of key employees of acquired businesses, accurate valuation of acquired
businesses, incurrence of additional debt to finance acquisitions and the
financial impact of goodwill and other intangibles impairment. Although CompuCom
has no definite plans to acquire any particular business, it may issue CompuCom
common stock to consummate certain acquisitions in the future that may cause
dilution to current stockholders. In addition, CompuCom is in the process of
expanding its focus to emphasize growth in the services business. There can be
no assurance that CompuCom will be successful in these endeavors, and the
failure to do so could adversely impact CompuCom's financial position and
results of operations.
Low Margin Business
Gross margins for both product and services continue to be under pressure
due to the weak economy and intense competition. CompuCom has responded by
reducing operating expenses and by focusing on sales of higher margin services.
A material decrease in the gross margin for services or products or a failure by
CompuCom to successfully maintain the reduction of operating costs could have a
material adverse effect on CompuCom's business.
Decline in Product Revenue
CompuCom experienced a significant product revenue decline in 2001 when
compared to 2000. The Company responded to this decline by reducing its cost
structure and continuing to focus on the sale of higher margin services. There
can be no assurance that the product revenue decline will slow in the future or
that the Company will be able to compete effectively for the sale of products.
The inability of CompuCom to continue the reduction of operating expense and
sell more services to offset the decline in product revenue could have a
material adverse effect on CompuCom's financial position and results of
operations.
Management Information Systems
CompuCom depends on a variety of information systems to provide it with a
competitive advantage and to provide services to its clients. A failure of
CompuCom's procurement or delivery systems or any of its other information
systems could prevent CompuCom from taking orders and/or shipping product or
from delivering services to clients. Such failure could also prevent CompuCom
from determining appropriate product processing or the adequacy of inventory
levels, and prevent CompuCom from reacting to rapidly changing market
conditions.
Stock Price Volatility
CompuCom's stock price is subject to wide fluctuations in response to many
internal and external factors. Some of these factors include, but are not
limited to: quarterly variations in operating results and achievement of key
business metrics; changes in earnings estimates by securities analysts;
differences between reported results and securities analysts' published or
unpublished expectations; announcements of new contracts or service offerings by
CompuCom or its competitors; market reaction to acquisitions, joint ventures or
strategic investments announced by CompuCom or its competitors; actions taken by
Safeguard; and general economic or stock market conditions unrelated to
CompuCom's operating performance.
No Dividends
To date, CompuCom has not paid any cash dividends on its common stock, and
does not expect to declare or pay any cash or other dividends in the foreseeable
future. Further, CompuCom's lenders restrict CompuCom from declaring or paying
dividends or other distributions on its common stock.
Effects of Certain Provisions of CompuCom's Organizational Documents and
Delaware Law
Certain provisions of CompuCom's Certificate of Incorporation and Delaware
law could delay or make difficult a merger, tender offer or proxy contest
involving CompuCom.
Item 1(d) Financial Information about Foreign and Domestic Operations and Export
- --------- ----------------------------------------------------------------------
Sales
-----
CompuCom does not have any foreign operations nor does it engage in any material
export sales.
Item 2 Properties
- ------ ----------
CompuCom's principal executive and administrative offices are located on a
20-acre campus-type setting consisting of two buildings containing approximately
250,000 square feet of office space in Dallas, Texas. The Company purchased this
facility during 1996, refurbished it, and fully occupied the facility by the end
of 1997. During March 1999, the Company completed a sale/leaseback transaction
for the entire headquarters facility. The lease is for a 20-year period
commencing in April 1999, with two five-year renewal options. One of the
buildings is an eight-story structure and contains executive offices, a client
assistance center, finance, supply chain management, sales and service support,
facilities, marketing and human resources. An adjacent three-story building
contains CompuCom's information systems group and one of its two enterprise help
desk and dispatch teams. In 2000, CompuCom opened a facility in Tempe, Arizona
to house members of its second enterprise help desk team.
CompuCom leases two floors totaling 42,500 square feet of office space in
Mason, Ohio, which houses one of its two client assistance centers. The lease
expires in July 2005 with a renewal option for five years. As part of the first
quarter 2000 restructuring plan, CompuCom consolidated operations to one floor,
thereby vacating the other floor.
During 2001, CompuCom distributed products and provided integration and
configuration services from three leased facilities in two locations. In August
1996, the Company entered into a lease for approximately 300,000 square feet of
warehouse space located in Paulsboro, New Jersey, which has a five-year term. In
addition to warehousing space, this facility contains a state-of-the-art 90,000
square foot configuration center, allowing CompuCom to meet increasing customer
demand for advanced complex system integration and network technologies.
Effective August 2000, the Company exercised its option to extend the term of
the lease for an additional three years, commencing August 1, 2001 and ending
July 31, 2004. In October 1999, CompuCom leased an additional 148,000 square
feet in an adjacent building in Paulsboro, New Jersey. The lease is for a
five-year term, expiring in 2004, with an early termination provision effective
September 30, 2002. CompuCom exercised this right in October 2001 and will
terminate this lease no later than September 2002. In March 1999, the Company
entered into a five-year lease with two five-year renewal options for 97,000
square feet of warehouse space in Raleigh, North Carolina, which was used
primarily for configuration and distribution activities of IBM products. This
warehouse space was expanded to 168,000 square feet in September 1999. In July
2001, CompuCom closed this facility. CompuCom believes its facilities are
adequate to support its business for the foreseeable future.
See Note 15 to the accompanying Notes to Consolidated Financial Statements
for additional information regarding lease costs.
Item 3 Legal Proceedings
- ------ -----------------
CompuCom has been named in a putative class action proceeding which arises
out of the initial public offering of OPUS360 Corporation. Please refer to Note
18 -- Contingencies in the accompanying Notes to Consolidated Financial
Statements for a more detail discussion of this matter.
In addition to the matter described above, CompuCom is involved in various
pending legal proceedings that are of an ordinary and routine nature and that
are incidental to its business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on its
consolidated financial position or results of operations, taken as a whole.
Item 4 Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
None have been submitted in the fourth quarter 2001.
PART II
-------
Item 5 Market for Registrant's Common Stock
- ------ ------------------------------------
CompuCom's common stock is listed on the Nasdaq National Market (Symbol:
CMPC). As of December 31, 2001, there were approximately 7,000 beneficial
holders of the Company's common stock. The high and low sales prices reported
within each quarter for the years ended December 31, 2001 and 2000 are as
follows:
2001 2000
--------------- ---------------
High Low High Low
------ ------ ------ ------
First quarter $ 3.25 $ 1.38 $ 7.63 $ 3.75
Second quarter 3.27 1.72 5.63 1.38
Third quarter 3.75 2.21 4.44 1.53
Fourth quarter 2.60 1.85 2.94 .91
The last sale price reported for CompuCom's common stock on March 11, 2002 was
$2.99.
CompuCom has historically reinvested earnings in the growth of its business
and has not paid cash dividends on its common stock. In addition, its current
credit facilities restrict the amount of dividends CompuCom may pay on its
common stock.
Item 6 Selected Financial Data
- ------ -----------------------
Selected financial data for CompuCom is presented below:
For the Years Ended December 31,
-----------------------------------------------------------------------
Operating Results 2001 2000 1999 1998 1997
- ----------------- ---------- ---------- ---------- ----------- ----------
(in thousands, except per share amounts)
Revenues $1,815,504 $2,710,637 $2,952,263 $ 2,281,631 $1,971,762
Gross margin 243,997 284,220 319,069 285,214 271,909
Earnings before income taxes 11,102 8,530(1) 18,977 668(2) 58,658(3)
Net earnings 6,661 5,118(1) 11,574 401(2) 35,194(3)
Earnings (loss) per common share:
Basic .12 .09(1) .22 (.01)(2) .75(3)
Diluted .12 .09(1) .22 (.01)(2) .71(3)
Balance Sheet Data
- ------------------
Total assets $ 444,083 $ 436,360 $ 498,052 $ 545,489 $ 462,590
Long-term debt -- -- -- 81,929 97,400
Convertible subordinated notes -- -- -- -- 3,000
Stockholders' equity 235,312 229,552 222,972 210,281 210,200
(1) Includes a restructuring related charge of $5.2 million ($3.1 million,
after tax) and net gains on marketable securities of $$1.0 million
($0.6 million, after tax) or ($.05) per share
(2) Includes restructuring related charges of $16.4 million ($9.9 million,
after tax) or ($.21) per share
(3) Includes nonrecurring gains on prepayment of secured note related to sale
of subsidiary in 1994 of $1.6 million ($1.0 million, after tax) and gain on
sale of Company's former headquarters of $4.0 million ($2.4 million, after
tax) or $.07 per share
Item 7 Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
-------------
Founded in 1987, CompuCom Systems, Inc., together with its subsidiaries is
a leading single-source provider of information systems services and products
designed to enhance the productivity of large and medium-sized organizations
throughout the United States. CompuCom provides information technology
outsourcing and system integration services that help clients reduce the costs,
complexities, obstacles and risks associated with new technology adoption,
operational transition and on-going management of their information systems.
CompuCom markets and sells technology management services and products through a
direct sales force to approximately 4,400 business clients.
CompuCom's discussion and analysis of its financial condition and results
of operations are based upon CompuCom's Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires CompuCom to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. CompuCom bases its estimates on historical
experience and on other relevant assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates.
Critical Accounting Policies
- ----------------------------
The Securities and Exchange Commission ("SEC") recently released Financial
Reporting Release No. 60, which requires all companies to include a discussion
of critical accounting policies or methods used in the preparation of financial
statements. In addition, Financial Reporting Release No. 61 was recently
released by the SEC to require all companies to include a discussion to address,
among other matters, liquidity, off-balance sheet arrangements, contractual
obligations and commercial commitments. CompuCom's significant accounting
policies and methods used in the preparation of the Consolidated Financial
Statements are discussed in Footnote 1 of the Notes to Consolidated Financial
Statements. The following is a listing of CompuCom's critical accounting
policies and a brief discussion of each:
. Allowance for doubtful accounts;
. Revenue recognition;
. Intangible assets and goodwill; and
. Income taxes
Allowance for Doubtful Accounts. CompuCom's allowance for doubtful accounts
relate to trade and vendor accounts receivable. Footnote 2 of the Notes to
Consolidated Financial Statements summarize the activity in these accounts. The
allowance for doubtful accounts is an estimate prepared by management based on
identification of the collectibility of specific accounts and the overall
condition of the receivable portfolios. The Company specifically analyzes trade
and vendor receivables, and analyzes historical bad debts, customer credits,
customer concentrations, customer credit-worthiness, current economic trends,
changes in customer payment terms and the complexities of vendor-mandated
program requirements, when evaluating the adequacy of the allowance for doubtful
accounts. If the financial condition of the Company's customers or vendors were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Likewise, should the Company determine
that it would be able to realize more of its receivables in the future than
previously estimated, an adjustment to the allowance would increase income in
the period such determination was made. The allowance for doubtful accounts is
reviewed on a quarterly basis and adjustments are recorded as deemed necessary.
In the fourth quarter of 2001, after a thorough analysis of the above noted
criteria and the significant risk reduction in the Company's receivable
portfolios, the Company recorded a $2.1 million adjustment to reduce costs of
sales relating to the receivable portfolios.
Revenue Recognition. CompuCom derives revenue from primarily two sources-
1) product sales- which consist of sales of personal computer-related products,
including desktop, networking, storage, and mobile computing products, as well
as peripherals and software-related products and licenses and 2) services- which
consist primarily of application design, development and maintenance, all
aspects of desktop outsourcing, including field engineering, as well as help
desk and LAN/WAN network outsourcing, configuration, asset tracking, software
management, mobile computing services, IT consulting, training, and services
provided in support of certain manufacturers' direct fulfillment initiatives.
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
CompuCom recognizes product revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed and
determinable and collectibility is probable. Generally for product sales, these
criteria are met at the time of delivery to a common carrier. Provision is made
at the time the related revenue is recognized for estimated product returns,
which historically have been immaterial. The Company analyzes historical
returns, current economic trends, and changes in customer demand when evaluating
the adequacy of provisions for sales returns. At the time of the transaction,
the Company determines whether the fee associated with revenue transactions is
fixed and determinable and whether or not collection is reasonably assured. The
Company determines whether the fee is fixed and determinable based on the
payment terms associated with the transaction. If a significant portion of a fee
is due after the normal payment terms, which are generally 30 days from invoice
date, the Company recognizes revenue as the fees become due. The Company
assesses collectibility based on a number of factors, including past transaction
history with the customer and the credit-worthiness of the customer. The Company
does not request collateral from customers. If the Company determines that
collection of the fee is not reasonably assured, the Company defers the revenue
and recognizes revenue at the time collection becomes reasonably assured, which
is generally upon receipt of cash. For all sales, the Company generally uses
either a binding purchase order or signed sales agreement as evidence of an
arrangement. Shipping and handling revenues are included in product revenues and
costs are included in product costs. The Company's services revenue is primarily
billed based on hourly rates, and the Company generally recognizes revenue as
these services are performed or ratably over the contract term. CompuCom
receives volume incentives from certain vendors related to sales activity of
certain products which are recorded as a reduction of cost of goods sold when
deemed earned. These incentives are generally based on a particular quarter's
sales activity and are primarily formula based, but can significantly fluctuate
on a quarterly basis. The Company records these volume incentives when it is
reasonably certain as to the amount of the earned rebate/incentive.
Intangible Assets and Goodwill. CompuCom assesses the impairment of
identifiable intangibles and goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
that CompuCom considers important which could trigger an impairment review
include the following:
. significant underperformance relative to expected historical or projected
future operating results;
. significant changes in the manner or use of the acquired assets or the
strategy for the Company's overall business;
. significant negative industry or economic trends;
. significant decline in its stock price for a sustained period; and
. CompuCom's market capitalization relative to net book value
If CompuCom determines that the carrying value of identifiable intangibles
and goodwill may not be recoverable based upon the existence of one or more of
the above indicators of impairment, the Company assesses the recoverability of
the intangibles by determining whether the amortization of the asset balance
over its remaining life can be recovered through undiscounted future operating
cash flow of the acquired operations. Any impairment is measured based on a
projected discounted cash flow method using a discount rate reflecting the
Company's average cost of funds. Net intangible assets and goodwill amounted to
approximately $111 million as of December 31, 2001.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective, and as a result,
CompuCom will cease to amortize goodwill at January 1, 2002. CompuCom recorded
approximately $7.5 million of goodwill and intangible amortization during 2001.
In lieu of amortization, the Company is required to perform an initial
impairment review of goodwill in 2002 and an annual impairment review
thereafter. SFAS No. 142 will require the Company to test goodwill for
impairment at a level referred to as a reporting unit. Goodwill is considered
impaired and a loss is recognized when its carrying value exceeds its implied
fair value. The Company may use a number of valuation methods including quoted
market prices, discounted cash flows and revenue multiples. As an overall check
on the reasonableness of the fair values attributed to the Company's reporting
units, the Company will consider comparing and contrasting the aggregate fair
values for all reporting units with the Company's average total market
capitalization for a reasonable period of time. However, SFAS No. 142 states
that the fair value may exceed market capitalization due to factors such as
control premiums and synergies. The Company is required to complete the initial
impairment review during the first half of 2002. Any transitional impairment
loss, which could be significant, will be recognized as the cumulative effect of
a change in accounting principle in the Company's statement of operations.
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Income Taxes. CompuCom is required to estimate income taxes in each of the
jurisdictions in which the Company operates. This process involves estimating
the Company's actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within the Company's consolidated balance sheet. The Company must
then assess the likelihood that the deferred tax assets will be recovered from
future taxable income and to the extent that the Company believes recovery is
not likely, the Company must establish a valuation allowance. To the extent the
Company establishes a valuation allowance in a period, the Company must include
an expense within the tax provision in the statement of operations. CompuCom has
not recorded a valuation allowance to reduce the carrying amount of recorded
deferred tax assets representing future deductions, as the Company believes it
will have sufficient taxable income in the future to realize these deductions.
CompuCom considers future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance. In the
event CompuCom were to determine that it would not be able to realize its
deferred tax assets in the future, an adjustment to the deferred tax asset would
decrease income in the period such determination was made.
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
The following table presents CompuCom's total revenue, gross margin and
gross margin percentage by revenue source. Operating expenses, financing
expenses, income taxes and net earnings are shown as a percentage of total
revenue for the three years ended December 31:
2001 2000 1999
--------------------------------------------
($ in thousands)
Revenue:
Product $ 1,533,567 $ 2,439,106 $ 2,648,341
Service 281,937 271,531 300,105
Other -- -- 3,817
--------------------------------------------
Total revenue $ 1,815,504 $ 2,710,637 $ 2,952,263
============================================
Gross margin:
Product $ 144,150 $ 184,976 $ 216,166
Service 99,847 99,244 101,184
Other -- -- 1,719
--------------------------------------------
Total gross margin $ 243,997 $ 284,220 $ 319,069
============================================
Gross margin percentage:
Product 9.4% 7.6% 8.2%
Service 35.4% 36.5% 33.7%
Other -- -- 45.0%
--------------------------------------------
Total gross margin percentage 13.4% 10.5% 10.8%
--------------------------------------------
Operating expenses:
Selling 3.6% 3.1% 3.7%
Service 3.0% 1.8% 1.6%
General and administrative 4.8% 3.7% 3.3%
Depreciation and amortization 1.2% 0.8% 0.8%
Restructuring charges 0.0% 0.2% 0.0%
--------------------------------------------
Total operating expenses 12.6% 9.6% 9.4%
--------------------------------------------
Earnings from operations 0.8% 0.9% 1.4%
Financing expenses 0.2% 0.6% 0.8%
--------------------------------------------
Earnings before income taxes 0.6% 0.3% 0.6%
Income taxes 0.2% 0.1% 0.2%
--------------------------------------------
Net earnings 0.4% 0.2% 0.4%
============================================
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Business Combinations
- ---------------------
In January 2001, CompuCom purchased certain assets of MicroAge Technology
Services, L.L.C. ("MTS", or "the MTS acquisition"). The assets were purchased
out of bankruptcy court and primarily consisted of trade accounts receivable as
well as vendor accounts receivable and inventory. The purchase price of
approximately $79 million (after post-closing adjustments) was financed using
available cash. The purchased assets were used by MTS primarily in its business
as a systems integrator of personal computer products. As part of the MTS
acquisition, the Company also hired certain of MTS' national sales force,
technical service personnel and administrative personnel.
In July 2001, CompuCom purchased certain assets and assumed certain
liabilities of Excell Data Corporation ("Excell", or "the Excell acquisition")
for approximately $27 million in available cash, pursuant to the terms of the
Asset Purchase Agreement entered into by and among CompuCom, Excell and
Cambridge Technology Partners, Inc. ("Cambridge"), the parent of Excell. At the
time of the acquisition, Safeguard held a 16.5% equity ownership interest in
Cambridge. The net assets acquired were used by Excell primarily in its business
of high-end technical applications development, network infrastructure design
and deployment and worldwide event technical planning and support. Essentially
all of the Excell workforce, consisting of technical application developers,
consultants, and administrative personnel were hired as part of the Excell
acquisition. The purpose of the Excell acquisition was to expand the suite of
CompuCom's service offerings.
In November 2001, CompuCom purchased certain assets and assumed certain
liabilities associated with the application development division of E-Certify
Corporation ("ClientLink", or "the ClientLink acquisition") for approximately $2
million in available cash and the surrender of such number of E-Certify
Corporation's common stock to decrease the Company's percent ownership from 22%
to 19% of outstanding shares. ClientLink provides high-end technical consulting,
development, deployment and maintenance services. The ClientLink acquisition
further expands the suite of CompuCom's service offerings. Since 1999, the
Company accounted for their investment in E-Certify using the equity method.
In November 2001, CompuCom acquired Northern NEF, Inc. ("NNEF", or "the
NNEF acquisition") for approximately $15 million in available cash. NNEF is a
Federal systems integrator and solutions provider, whose services include
systems engineering, software development, integration, test and training as
well as related program management support services to various defense and
civilian agencies of the Federal government, as well as to state governments and
commercial accounts. The NNEF acquisition provides CompuCom with an entrance to
the Federal marketplace and expands the capabilities NNEF can provide primarily
to its Federal clients through CompuCom's existing service offerings.
2001 Compared to 2000
- ---------------------
Product revenue, which is primarily derived from the sale of desktop,
networking, storage, and mobile computing products, as well as peripherals and
software-related products and licenses to corporate and government clients,
decreased approximately 37.1% to $1.5 billion in 2001 from $2.4 billion in 2000.
This decrease was primarily a result of both a decline in units sold and lower
average selling prices. CompuCom believes this decrease can be primarily
attributed to general economic conditions which has resulted in lower demand for
personal computer products mainly from its Fortune 1000 client base. As a result
of this economic slowdown, product purchases and IT projects are being delayed,
downsized or cancelled. In addition, product revenue has been negatively
impacted not only by certain clients electing to participate in certain
manufacturers' direct fulfillment programs, thereby fulfilling their product
requirements directly from the manufacturer but also from increased competition
from other direct marketers. Partially offsetting the overall decrease in
product revenue was incremental product revenue realized as a result of the MTS
acquisition as well as a 17.3% increase in software license revenue from $202
million in 2000 to $237 million in 2001.
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Product gross margin is the difference between product revenue and the cost
of that product revenue. The cost of product revenue consists primarily of the
price CompuCom pays to acquire the product from the vendor. Product gross margin
as a percentage of product revenue increased to 9.4% in 2001 from 7.6% in 2000,
while 2001 product gross margin dollars declined $40.8 million to $144.2
million. The decline in product gross margin dollars was primarily a result of
the decline in product revenue. CompuCom believes the increase in product gross
margin as a percentage of product revenue was primarily due to the decline in
revenue generated by higher volume, lower margin clients. Also contributing to
the product gross margin percentage increase was an increase, as a percentage of
product revenue, in the amount of vendor volume incentives earned in 2001 as
compared to 2000. Each quarter CompuCom performs a risk assessment relating to
the collectibility of receivables, the realizability of inventories and the
likelihood of the collection of vendor rebate receivables. During 2001, the
balance sheet amounts relating to receivables, inventories and vendor rebate
receivables declined 26.2%, 51.8%, and 49.7%, respectively. As a result,
CompuCom believes its balance sheet risk also lessened, resulting in a fourth
quarter favorable adjustment to product cost of $2.1 million. Partially
offsetting the overall increase in product gross margin percentage was the
impact of the increase in software license revenue, which has a lower average
gross margin than other product sales. Due to both the weak overall economic
environment and competitive conditions, CompuCom expects to continue to
experience competitive pressure on both product revenue and product gross
margin, the result of which may be to report lower product revenue and product
gross margin when compared to the comparable prior year period or previous
quarter.
Service revenue increased approximately 3.8% to $282 million in 2001 from
$272 million in 2000. Service revenue is primarily derived from application
design, development and maintenance, all aspects of desktop outsourcing,
including field engineering, as well as help desk and LAN/WAN network
outsourcing, configuration, asset tracking, software management, mobile
computing services, IT consulting, network infrastructure and deployment, event
technical planning and support, 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 increase in service revenue
was primarily due to service revenue related to field engineering and the impact
of the Excell acquisition. The increase in service revenue related to field
engineering was primarily due to the MTS acquisition. Partially offsetting these
increases were declines in demand for services directly related to the sale of
desktop, networking, and mobile computing products, such as configuration and
installation services, and IT consulting services. Service gross margin as a
percentage of service revenue decreased to 35.4% in 2001 from 36.5% in 2000. The
decrease in service gross margin was primarily due to pricing pressure on the
Company's service offerings. In addition, service gross margin percentage
realized on Excell revenue is lower relative to the collective gross margin
percentage of the Company's other service-related offerings. CompuCom 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 or previous
quarter.
Selling expenses consist primarily of salary, commissions and benefits for
sales and sales-support personnel, along with other costs directly related to
such personnel. Selling expense decreased approximately $18.8 million in 2001 as
compared to 2000. CompuCom attributes this decrease to its own cost management
efforts, primarily related to sales-support personnel and related costs, chiefly
telecommunications expense, as well as reductions in selling expenses that vary
directly with the decline in product revenue. Selling expense as a percentage of
revenue increased to approximately 3.6% of revenue in 2001 from approximately
3.1% in 2000, due primarily to the decline in product revenue for the comparable
periods.
Service expenses consist primarily of salary and benefits cost for
personnel supporting the service business, along with other costs directly
related to such personnel. Service expenses increased approximately $4.4 million
in 2001 as compared to 2000. The increase was due primarily to personnel and
training costs, as well as investments in the service infrastructure associated
with supporting the service business. A portion of this increase relates to the
added personnel and infrastructure costs associated with the Excell acquisition.
As a percentage of revenue, service expense increased to 3.0% in 2001 from 1.8%
in 2000. Contributing to the increase in service expense as a percentage of
total revenue was the decline in product revenue.
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General and administrative expenses consist principally of salary and
benefit costs for executive, operations, information services, and
administrative personnel, along with certain infrastructure costs directly
related to such personnel, as well as professional services and other general
corporate activities. General and administrative expense decreased approximately
$12.8 million in 2001 versus 2000. The decrease is reflective of the Company's
ongoing cost management efforts which include personnel-related costs, as well
as certain infrastructure costs, primarily telecommunications expense. General
and administrative expense increased as a percentage of revenue from 3.7% in
2000 to 4.8% in 2001 due primarily to the decline in product revenue. Operating
expenses are reported net of reimbursements by certain manufacturers for
specific training, promotional and marketing programs. These reimbursements
offset certain expenses incurred.
Depreciation and amortization expense increased approximately $0.9 million
in 2001, a 4% increase over 2000. The increase was primarily due to depreciation
related to capital expenditures for upgrades to the Company's technology
infrastructure, personal computer deployments to certain personnel,
including those hired as part of the MTS acquisition, and certain other capital
investments associated with the MTS acquisition. As a percentage of revenue,
this expense increased from 0.8% in 2000 to 1.2% in 2001 primarily due to the
decline in product revenue.
Financing expense decreased in absolute dollars and as a percentage of
revenue in 2001 as compared to 2000. The decrease in financing expense was
primarily due to CompuCom's improved management of working capital, as well as
lower financing requirements due to the decline in product revenue. The decline
in financing expense was also due to the effect of higher interest income
generated from investing increased available cash as well as a decrease in
CompuCom's average effective interest rate in 2001 to 6.6% as compared to 8.2%
in 2000.
As a result of the factors discussed above, CompuCom recorded net earnings
in 2001 of $6.7 million, up 30.1% when compared to 2000. Net earnings in 2000
were $5.1 million, including an after-tax restructuring charge of $3.1 million.
2000 Compared to 1999
- ---------------------
Product revenue, which is primarily derived from the sale of desktop,
networking, storage, and mobile computing products, as well as peripherals and
software-related products and licenses to corporate and government clients,
decreased approximately 7.9% to $2.4 billion in 2000 from $2.6 billion in 1999.
CompuCom believes product revenue was negatively impacted by manufacturer direct
selling and fulfillment initiatives as well as lower product demand when
compared to higher than normal spending by CompuCom's clients in 1999 as part of
their preparation for the Year 2000. These factors were partially offset by the
positive impact of the acquisition of the Technology Acquisition Services
Division ("TASD") of Entex Information Services, Inc., which occurred in May
1999. Product gross margin as a percentage of product revenue decreased to 7.6%
in 2000 from 8.2% in 1999. This decrease was primarily due to increased
competition from direct marketers and other companies who sell personal computer
products.
Service revenue decreased approximately 9.5% to $272 million in 2000 from
$300 million in 1999. Service revenue is primarily derived from all aspects of
desktop outsourcing, including field engineering, as well as help desk and
LAN/WAN network outsourcing, configuration, asset tracking, software management,
mobile computing services, IT consulting, 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 decline in service
revenue was primarily due to lower demand for consulting services. CompuCom
believes the decline in consulting services revenue can be primarily attributed
to its clients' Year 2000 concerns and higher spending on Year 2000 related
projects that occurred in 1999 and not in 2000. This decline was partially
offset by increases in revenue related to field engineering and services
provided in support of certain manufacturers' direct fulfillment initiatives.
Service gross margin as a percentage of service revenue increased to 36.5% in
2000 from 33.7% in 1999. 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.
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Selling expense decreased approximately $24.1 million in 2000 as compared
to 1999. Selling expense as a percentage of revenue declined to approximately
3.1% of revenue in 2000 from approximately 3.7% for the same prior year period.
CompuCom attributes this decrease primarily to its own cost reduction efforts,
as well as that certain integration costs incurred in 1999 as part of the TASD
acquisition were not incurred in 2000.
Service expenses increased approximately $2.1 million in 2000 compared to
1999. As a percentage of revenue, service expense increased to 1.8% in 2000 from
1.6% in 1999. The increase was due primarily to personnel costs and investments
in the service infrastructure associated with supporting the service business,
as well as enhancements and additions of new service offerings, partially offset
by the impact of the April 1999 E-Certify merger whereby ClientLink was no
longer a consolidated subsidiary. Consequently, service expense in 2000 does not
reflect ClientLink's operating expenses.
General and administrative expense increased approximately $1.5 million in
2000 versus 1999. General and administrative expense increased as a percentage
of revenue from 3.3% in 1999 to 3.7% in 2000 due primarily to the decline in
total revenue for the comparable periods. Operating expenses are reported net of
reimbursements by certain manufacturers for specific training, promotional and
marketing programs. These reimbursements offset certain expenses incurred.
Depreciation and amortization expense was relatively flat in 2000 as
compared to 1999 in both absolute dollars and as a percentage of revenue.
Reflected in depreciation and amortization expense was the impact of goodwill
amortization related to the May 1999 TASD acquisition for the full year 2000.
However, this impact was offset by additional goodwill amortization of $0.7
million recorded in 1999 related to the completion of the allocation of the
purchase price of two 1998 acquisitions.
Financing expense decreased in absolute dollars and as a percentage of
revenue in 2000 as compared to 1999. This decline was primarily due to two
factors: greater financing requirements in 1999 mainly due to the TASD
acquisition, and CompuCom's ability to improve its management of working
capital, resulting in lower financing needs. This decline was partially offset
by an increase in CompuCom's effective interest rate in 2000 to 8.2% as compared
to 7.7% in 1999.
During the second quarter of 2000, CompuCom 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. In December 2000, CompuCom recognized
a $1.0 million impairment charge for its investment in OPUS as such investment
was judged to have experienced an other than temporary decline in value.
As a result of the factors discussed above, CompuCom recorded net earnings
in 2000 of $5.1 million, including an after-tax restructuring charge of
approximately $3.1 million, compared to net earnings of $11.6 million in 1999.
Liquidity and Capital Resources
- -------------------------------
Working capital at December 31, 2001 was $87.1 million, compared to $117.5
million at December 31, 2000. The decrease in working capital was primarily the
result of declines in receivables and inventories, offset by an increase in cash
and cash equivalents. The decrease in receivables was primarily due to the
decline in revenue, particularly in the fourth quarter, when revenue was 48%
less than fourth quarter 2000. Partially offsetting the impact of lower revenue
levels was a $76.0 million reduction in the amount of receivables utilized under
CompuCom's securitization facility. The decrease in inventories was primarily
due to lower product demand as well as the Company's ongoing efforts to minimize
risk associated with suppliers' price protection and returns programs by
maintaining lower inventory levels. These factors resulted in an improvement in
inventory turns from 22.0 in 2000 to 28.5 in 2001.
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
While CompuCom's liquidity continues to be negatively impacted by the
dollar volume of certain manufacturers' rebate programs, significant improvement
was realized during 2001. Under these programs, CompuCom is required to pay a
higher initial amount for product and claim a rebate from the manufacturer to
reduce the final cost. The collection of these rebates can take an extended
period of time. Due to these programs, CompuCom's initial cost for the product
is often higher than the sales price CompuCom can obtain from its clients. These
programs have been at times a material factor in CompuCom's financing needs. As
of December 31, 2001 and 2000, CompuCom was owed approximately $14 million and
$53 million, respectively, under these vendor rebate programs. These amounts are
included as a reduction to accounts payable on the Consolidated Balance Sheets.
CompuCom's working capital requirements are generally funded through
financing arrangements and internally generated funds. As of December 31, 2001,
financing arrangements consisted of a $125 million securitization
("Securitization") and a $50 million working capital line of credit
("Revolver"). Consistent with its financing requirements, during 2001 the
Company reduced the Securitization facility from $150 million to $125 million
and reduced the Revolver facility from $100 million to $50 million. The
Securitization pricing is based on a designated short-term interest rate plus an
agreed upon spread. Amounts outstanding as sold receivables as of December 31,
2001 consisted of two certificates totaling $74 million, one certificate for $24
million with an April 2002 maturity date and one certificate for $50 million
with an October 2003 maturity date. CompuCom expects the agreement relative to
the $24 million certificate to be renewed no later than its expiration in April
2002. The Revolver, which matures in May 2002 and is expected to be renewed no
later than its maturity date, bears interest at LIBOR plus an agreed upon spread
and is secured by a lien on CompuCom's assets. Availability under the Revolver
is subject to a borrowing base calculation. As of December 31, 2001,
availability under the Revolver was $50 million with no outstanding amounts.
Terms of the Revolver limit the amounts available for capital expenditures and
dividends. Both the Securitization and the Revolver require CompuCom to maintain
compliance with selected financial covenants and ratios. The weighted-average
interest rate on borrowings was approximately 6.6% and 8.2% in 2001 and 2000,
respectively.
CompuCom's business is not capital asset intensive, and capital
expenditures in any year normally would not be significant in relation to its
overall financial position. Generally, the Company's capital expenditures relate
to its information technology hardware and software and improvements in its
distribution centers. Capital expenditures were approximately $21 million in
2001 as compared to approximately $9 million in 2000. This increase was
primarily due to upgrades to the Company's technology infrastructure, system
deployments to certain personnel, including those hired as part of the MTS
acquisition, and certain other capital investments associated with the MTS
acquisition. CompuCom currently expects its capital expenditure requirements in
2002 to be in a range between $10 to $15 million.
Contractual Obligations
- -----------------------
CompuCom's contractual obligations consist of noncancelable operating
leases for facilities and equipment. Future minimum lease payments under
noncancelable operating leases as of December 31, 2001 are as follows (in
thousands):
2002 $ 9,971
2003 9,023
2004 6,286
2005 4,625
2006 4,154
2007 and thereafter 47,947
-------
$82,006
=======
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
2000 Restructuring
- ------------------
During the first quarter of 2000, CompuCom effected a restructuring plan
designed to reduce its cost structure by closing its distribution facility
located in Houston, Texas, closing and consolidating three office facilities,
and reducing its workforce. As a result, CompuCom recorded a restructuring
charge of $5.2 million in the first quarter of 2000. The $5.2 million charge is
included in a separate line of operating expense totaling $5.4 million in the
Company's 2000 Consolidated Statements of Operations. The following table
provides a summary by category and rollforward of the changes in the
restructuring accrual for the years ended December 31, 2001 and 2000:
(Amounts in thousands)
---------------------------------------------------------------------
Restructuring Cash Accrual at Cash Accrual at
Charge Payments Other 12/31/00 Payments 12/31/01
---------------------------------------------------------------------
Lease termination costs $2,904 $ (876) $(258) $ 1,770 $(361) $ 1,409
Employee severance and
related benefits 1,800 (1,774) (16) 10 (10) --
Other 465 (87) (378) -- -- --
---------------------------------------------------------------------
Total $5,169 $(2,737) $(652) $ 1,780 $(371) $ 1,409
=====================================================================
The $1.4 million and $1.8 million accrued at December 31, 2001 and 2000,
respectively, are reflected in accrued liabilities on the Consolidated Balance
Sheets.
Lease termination costs include the estimated cost to close the three
office facilities and represents the amount required to fulfill CompuCom'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, CompuCom 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 December 31, 2001 relates to two leases for office facilities that
have not been terminated, one of which has not been sublet.
Severance is paid based on associates' years of service as well as their
position within the organization. The reduction in workforce included 308
associates.
Other restructuring charges primarily include the write-off of leasehold
improvements at the Houston distribution center.
Based on revised estimates during 2000, $258,000 of the lease termination
cost accrual was reversed. In addition, the employee severance related accrual
and other expenses accrual were reduced by $16,000 and $57,000, respectively,
and are reflected in restructuring charges in the Consolidated Statements of
Operations. The remaining restructuring accrual at December 31, 2001 is expected
to be adequate to cover actual amounts to be paid. Differences, if any, between
the estimated amounts accrued and actual amounts paid will be reflected in
operating expense in future periods.
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
1998 Restructuring
- ------------------
During the fourth quarter of 1998, CompuCom 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 years ended December 31, 2001 and 2000:
(Amounts in thousands)
---------------------------------------------------------------------
Accrual at Cash Accrual at Cash Accrual at
12/31/1999 Payments Other 12/31/2000 Payments 12/31/2001
---------------------------------------------------------------------
Lease termination costs $1,240 $(1,155) $ 625 $710 $(258) $452
Employee severance and
related benefits 560 (514) (46) -- -- --
Asset disposals, net of
estimated proceeds -- -- -- -- -- --
Other -- -- -- -- -- --
---------------------------------------------------------------------
Total $1,800 $(1,669) $ 579 $710 $(258) $452
=====================================================================
The $0.5 million and $0.7 million accrued at December 31, 2001 and 2000,
respectively, are reflected in accrued liabilities on the Consolidated Balance
Sheets.
The amount accrued at December 31, 2001 for lease termination costs relates
to seven remaining leases, two of which have not been sublet, of the original 65
leases which have not been terminated. The accrual 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. Payments, net of proceeds derived from subleases, are charged against the
accrual as incurred.
Severance was determined based upon associates' years of service as well as
their position within the organization. The reduction in workforce included 457
associates.
Based on revised estimates during 2000, $46,000 of the severance related
accrual was reversed. Also, additional expenses related to lease termination
costs of approximately $625,000 were recorded during 2000 due to changes in
estimates on remaining properties and are reflected in restructuring charges in
the Consolidated Statements of Operations. The remaining restructuring accrual
at December 31, 2001 is expected to be adequate to cover actual amounts to be
paid. Differences, if any, between the estimated amounts accrued and actual
amounts paid will be reflected in operating expense in future periods.
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recent Accounting Pronouncements
- --------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for separately.
SFAS No. 142 changes the accounting for goodwill from an amortization method to
an impairment-only approach. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. SFAS No. 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
Upon adoption of SFAS No. 142, CompuCom will be required to reassess the
useful lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments by
the end of the first interim period after adoption. In addition, to the extent
an intangible asset is identified as having an indefinite useful life, the
Company will be required to test the intangible asset for impairment in
accordance with the provisions of SFAS No. 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with the transitional goodwill impairment evaluation, SFAS
No. 142 will require CompuCom to perform an assessment of whether there is an
indication that goodwill and equity-method goodwill is impaired as of the date
of adoption. To accomplish this, the Company must identify its reporting units
and determine the carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. CompuCom will then have up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step,
CompuCom must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities, to its carrying amount, both of
which would be measured as of the date of adoption. This second step is required
to be completed as soon as possible, but no later than the end of the year of
adoption. As an overall check on the reasonableness of the fair values
attributed to CompuCom's reporting units, the Company will consider comparing
and contrasting the aggregate fair values for all reporting units with the
Company's average total market capitalization for a reasonable period of time.
However, SFAS No. 142 states that the fair value may exceed market
capitalization due to factors such as control premiums and synergies. CompuCom
expects to complete the initial impairment review during the first half of 2002.
Any transitional impairment loss, which could be significant, will be recognized
as the cumulative effect of a change in accounting principle in the Company's
statement of operations.
As of December 31, 2001, CompuCom has unamortized goodwill and
identifiable intangible assets of approximately $111 million, all of which will
be subject to the transition provisions of SFAS No. 142. Amortization expense
related to goodwill was $7.5 million for the year ended December 31, 2001.
Because of the extensive effort needed to adopt SFAS No. 142, it is not
practicable to reasonably estimate the impact of adopting these pronouncements
on CompuCom's financial statements at the date of this report, including the
extent to which transitional impairment losses will be required to be recognized
as the cumulative effect of a change in accounting principle.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. The Company will adopt SFAS No. 143 in fiscal year 2003. The Company
does not expect the provisions of SFAS No. 143 to have any significant impact on
its financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The Company will adopt SFAS No. 144 in fiscal year 2002. The
Company does not expect the provisions of SFAS No. 144 to have any significant
impact on its financial condition or results of operations.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------
CompuCom is exposed to interest rate risk primarily through its
Securitization and Revolver. CompuCom utilizes its Securitization and Revolver
for its working capital and other financing needs. If CompuCom's effective
interest rate were to increase by 100 basis points (1.00%), CompuCom's annual
financing expense would increase by approximately $1.1 million based on the
average balances utilized under the Securitization and Revolver during the
twelve months ended December 31, 2001. CompuCom did not experience a material
impact from interest rate risk during 2001.
Currently, CompuCom does not have any significant financial investments for
trading or other speculative purposes or to manage interest rate exposure.
Item 8 Financial Statements and Supplementary Data
- ------ -------------------------------------------
The consolidated financial statements filed with this report appear on
pages F-2 through F-27, and are listed on page F-1.
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
- ------ -------------------------------------------------------------------------
Disclosure
----------
None.
PART III
--------
Item 10 Directors and Executive Officers of the Registrant
- ----------------------------------------------------------
The executive officers of CompuCom as of March 7, 2002 are as follows:
Name Age Position
---- --- --------
J. Edward Coleman /(1)/ 50 Chairman, President, Chief Executive Officer and Director
M. Lazane Smith /(2)/ 47 Senior Vice President, Finance, Chief Financial Officer,
Secretary and Director
Anthony F. Pellegrini /(3)/ 59 Senior Vice President, Sales
David A. Loeser /(4)/ 47 Senior Vice President, Human Resources
John F. McKenna /(5)/ 38 Senior Vice President, Services
/(1) Mr. Coleman was hired as Chief Executive Officer on December 1, 1999, was
elected to the Board of Directors in February 2000, was named President in
July 2000, and was elected Chairman of the Board of Directors in October
2001. Prior to joining CompuCom, he served as Business Development
Executive and Director of Marketing for Computer Sciences Corporation
("CSC"), from March 1995 to December 1999. From 1993 until joining CSC, Mr.
Coleman was Executive Vice President of McCollister's Technical Services,
Inc. ("McCollister's"). Prior to joining McCollister's, he spent 17 years
with IBM Corporation, including five years with IBM Credit Corporation
serving as Vice President and General Manager of Channel Financing./
/(2) Ms. Smith has held the position of Senior Vice President, Finance and Chief
Financial Officer since February 1997. Ms. Smith joined the Company in 1993
as Corporate Controller and was promoted to Vice President Finance and
Corporate Controller in 1994. She was elected to the Board of Directors and
Secretary in February 2001./
/(3) Mr. Pellegrini joined the Company as Senior Vice President, Sales in March
2000. Prior to joining CompuCom, he spent two years with CSC as Director of
Business Development. Prior to CSC, he spent 11 years with Digital
Equipment Corporation, serving as an Account Manager, Account Vice
President, and then Vice President of Outsourcing Services./
/(4) Mr. Loeser joined CompuCom in April 1999 as Senior Vice President of Human
Resources. Prior to joining CompuCom, he served as Senior Vice President of
Human Resources for Quaker State, Inc. from 1996 to 1998. From 1994 to
1996, Mr. Loeser held the position of Senior Vice President of Human
Resources with Continental Airlines./
/(5) Mr. McKenna joined the Company in January 1999 as Vice President, Managed
Desktop Services and was promoted to Senior Vice President, Services in
September 1999. Prior to joining CompuCom, he served as Senior Vice
President Services for Oracle Corp. during 1998. From 1995 to 1998, Mr.
McKenna served as a partner with Deloitte Consulting./
Directors
CompuCom incorporates by reference the information contained under the
caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement with respect
to its May 15, 2002 annual meeting of stockholders, to be filed within 120 days
after the end of the year covered by this Annual Report on Form 10-K Report
pursuant to Regulation 14A under the Securities Exchange Act of l934, as
amended.
Disclosure of Delinquent Filers Pursuant to Item 405 of Regulation S-K
CompuCom incorporates by reference the information contained under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in its
definitive Proxy Statement with respect to its May 15, 2002 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Annual Report on Form 10-K Report pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
Item 11 Executive Compensation
- ------- ----------------------
CompuCom incorporates by reference the information contained under the
captions "EXECUTIVE COMPENSATION AND OTHER ARRANGEMENTS" in its definitive Proxy
Statement with respect to its May 15, 2002 annual meeting of stockholders, to be
filed within 120 days after the end of the year covered by this Annual Report on
Form 10-K Report pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.
Item 12 Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
CompuCom incorporates by reference the information contained under the
caption "STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND GREATER THAN 5%
STOCKHOLDERS" in its definitive Proxy Statement with respect to its May 15, 2002
annual meeting of stockholders, to be filed within 120 days after the end of the
year covered by this Annual Report on Form 10-K Report pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended.
Item 13 Certain Relationships and Related Transactions
- ------- ----------------------------------------------
CompuCom incorporates by reference the information contained under the
caption "RELATIONSHIPS AND RELATED TRANSACTIONS WITH MANAGEMENT AND OTHERS" in
its definitive Proxy Statement with respect to its May 15, 2002 annual meeting
of stockholders, to be filed within 120 days after the end of the year covered
by this Annual Report on Form 10-K Report pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
PART IV
-------
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------- ---------------------------------------------------------------
(a) Financial Statements and Schedules.
The financial statements filed with this report are listed on page F-1.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by the Registrant during the three
months ended December 31, 2001.
(c) Exhibits.
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Annual Report on Form 10-K. Where so indicated by
footnote, exhibits, which were previously filed, are incorporated by reference.
For exhibits incorporated by reference, the location of the exhibit in the
previous filing is indicated in parentheses.
Exhibit
No. Description
- ------- -----------
2(a) Asset Purchase Agreement, dated as of May 10, 1999, by and between CompuCom Systems, Inc. and
ENTEX Information Services, Inc. (21) (Exhibit 2.1)
2(b) Purchase Agreement, dated as of December 22, 2000, by and between CompuCom Systems, Inc.,
MicroAge Technology Services, L.L.C. and MicroAge, Inc. (23) (Exhibit 2.1)
3(a) Restated Certificate of Incorporation of CompuCom Systems, Inc.*
3(b) Bylaws of CompuCom Systems, Inc., revised April 1, 1991 (4) (Exhibit 3(c))
4(a) Form of Stock Certificate evidencing Common Stock, $.01 par value, of CompuCom Systems,
Inc. (2) (Exhibit 4(b))
4(b)** CompuCom Systems, Inc. 1983 Stock Option Plan, as amended (5) (Exhibit 4(k))
4(c)** CompuCom Systems, Inc. 1993 Stock Option Plan, as amended (14) (Exhibit A)
4(d)** CompuCom Systems, Inc. 1984 Non-Qualified Stock Option Plan, as amended (3) (Exhibit 4(g))
4(e)** CompuCom Systems, Inc. Stock Option Plan for Directors (10) (Exhibit 4(g))
4(f)** Stock Option Agreement dated July 21, 1995 between CompuCom
Systems, Inc. and Delbert W. Johnson (10) (Exhibit 4(i))
4(g)** Stock Option Grant Agreement between CompuCom Systems, Inc. and Thomas C. Lynch,
dated as of October 22, 1998 (19) (Exhibit 10.1)
4(h)** CompuCom Systems, Inc. Employee Stock Purchase Plan (16) (Appendix A)
4(i) Form of Stock Certificate evidencing Series B Cumulative Convertible
Preferred Stock, $.01 par value, of CompuCom Systems, Inc. (9) (Exhibit 4(h))
4(j)** CompuCom Systems, Inc. 2000 Equity Compensation Plan (24) (Exhibit A)
4(k)** CompuCom Systems, Inc. Amended and Restated Employee Stock Purchase Plan (25) (Exhibit B)
10(a)** CompuCom Systems, Inc. 401(k) Matched Savings Plan, as amended and restated effective
January 1, 1989 (7) (Exhibit 10(a))
10(b)** Amendment 1996-1 to CompuCom Systems, Inc. 401(k) Matched Savings Plan, effective May 1,
1996 (11) (Exhibit 10.9)
10(c)** Amendment No. 1 to CompuCom Systems, Inc. 401(k) Matched Savings Plan, effective
January 1, 1998 (exhibits omitted) (17) (Exhibit 10.1)
10(d)** Amendment No. 2 to CompuCom Systems, Inc. 401(k) Matched Savings Plan, effective
January 26, 1998 (exhibits omitted) (17) (Exhibit 10.2)
10(e)** Amendment Three to CompuCom Systems, Inc. 401(k) Matched Savings Plan, effective
May 28, 1999 (26) (Exhibit 10.E)
10(f)** Amendment Four to CompuCom Systems, Inc. 401(k) Matched Savings Plan, dated
July 29, 1999, with attached Appendix A (26) (Exhibit 10.F)
10(g)** Amendment Five to CompuCom Systems, Inc. 401(k) Matched Savings Plan, effective
December 30, 1999 (26) (Exhibit 10.G)
10(h) Amended and Restated Credit Agreement, dated as of November 3, 1997, among CompuCom
Systems, Inc., certain lenders party hereto, and NationsBank of Texas, N.A., as administrative
lender(15) (Exhibit 16(t))
10(i) Amendment #1 to Amended and Restated Credit Agreement, dated as of June 26, 1998, among
CompuCom Systems, Inc., certain lenders party hereto, and NationsBank of Texas, N.A., as
Administrative Lender (18) (Exhibit 10.1)
10(j) CompuCom Receivables Master Trust I Pooling and Servicing Agreement, dated as of May 7, 1999, as
amended and restated as of August 20, 1999, between Norwest Bank Minnesota, National
Association, CompuCom Systems, Inc., and CSI Funding, Inc. (26) (Exhibit 10(J))
10(k) CompuCom Receivables Master Trust I Pooling and Servicing Agreement 1999-1 Supplement, dated as
of May 7, 1999, as amended and restated as of August 20, 1999, among PNC Bank, National Association,
Market Street Capital Corporation, Norwest Bank Minnesota, National Association, CompuCom Systems, Inc.,
and CSI Funding, Inc. (26)(Exhibit 10(K))
10(l) Inventory and Working Capital Financing Agreement, dated as of May 11, 1999, between IBM Credit
Corporation and CompuCom Systems, Inc. (22) (Exhibit 10.3)
10(m) Attachment A to Inventory and Working Capital Financing Agreement dated May 11, 1999
(22) (Exhibit 10.4)
10(n) Receivables Contribution and Sale Agreement dated May 7, 1999 between CompuCom Systems, Inc. and
CSI Funding, Inc. (26) (Exhibit 10(N))
10(o) Non-Competition, Referral and Non-Disclosure Agreement dated as of May 10, 1999, by and between
CompuCom Systems, Inc. and ENTEX Information Services, Inc. (21) (Exhibit 10.1)
10(p) Business Partner Agreement, dated September 15, 1994, between IBM Corporation
and CompuCom Systems, Inc., with Dealer Profile, Remarketer General Terms, and attachments
(9) (Exhibit 10(n))
10(q) IBM Corporation Remarketer Announcement, dated March 13, 1996, modifying its Business Partner
Agreement with CompuCom Systems, Inc. to automatically extend its term for an additional 12
months upon its expiration (13) (Exhibit 10(r))
10(r) Agreement for Participation in the IBM Business Partner - PC, Authorized Assembler Program, dated
January 16, 1997 between IBM Corporation and CompuCom Systems, Inc. (15) (Exhibit 10(y))
10(s) Agreement to Extend Participation in the IBM Business Partner - PC, Authorized Assembler Program,
dated November 18, 1997 between IBM Corporation and CompuCom Systems, Inc. to December 31,
1998 (15) (Exhibit 10(z))
10(t) U.S. Reseller Agreement, dated January 23, 1993, between Compaq Computer Corporation
and CompuCom Systems, Inc. (7) (Exhibit 10(l))
10(u) Software License Agreement, dated January 15, 1998, between Compaq Computer Corporation and
CompuCom Systems, Inc. (15) (Exhibit 10(bb))
10(v) Channel Installation Agreement for Microsoft Products, dated January 15, 1998, between Compaq
Computer Corporation and CompuCom Systems, Inc.(15) (Exhibit 10(cc))
10(w) U.S. Reseller Agreement, dated March 1, 1996, between Hewlett-Packard Company
and CompuCom Systems, Inc. (11) (Exhibit 10.8)
10(x) U.S. Agreement for Authorized Reseller Participation in Channel Assembly Program, dated March 1,
1997, between Hewlett-Packard Company and CompuCom Systems, Inc. (15) (Exhibit 10(ee))
10(y) U.S. Agreement for Authorized Solutions Direct Resellers, dated August 12, 1999 between
Hewlett-Packard Company and CompuCom Systems, Inc. (26) (Exhibit 10.Y)
10(z) Administrative Services Agreement, dated January 1, 1988, between CompuCom Systems, Inc.
and Safeguard Scientifics, Inc., with Letter Amendment dated as of April 1, 1991 (4) (Exhibit 10(z))
10(aa) Lease dated May 16, 1996, between CompuCom Systems, Inc. and The Riggs National Bank of
Washington, D.C. for premises at 1225 Forest Parkway, Paulsboro, New Jersey (12) (Exhibit 10.8)
10(bb) Lease Agreement dated September 27, 1999, between CompuCom Systems, Inc. and Riggs & Company,
a division of Riggs Bank N.A., for premises at 1245 Forest Parkway, Paulsboro, New Jersey
(26) (Exhibit 10.BB)
10(cc) Industrial Lease Agreement, dated February 11, 1999, between Dames & Moore / Brookhill Durham I, LLC, as
lessor, and CompuCom Systems, Inc., as lessee, for premises at 2910 Weck Drive, Durham, North Carolina (26)
(Exhibit 10.CC)
10(dd) Modification of Lease, dated October 1, 1999, between DMB Durham I, LLC, for premises at
2910 Weck Drive, Durham, North Carolina (26) (Exhibit 10.DD)
10(ee) Contract of Sale between CompuCom Systems, Inc., as seller, and MacFarlan Realty Partners, L.L.C.,
as purchaser, for property located at 10100 North Central Expressway, Dallas, Texas, dated
effective October 23, 1997 (15) (Exhibit 10(jj))
10(ff) First Amendment to Contract of Sale between CompuCom Systems, Inc., as seller, and MacFarlan
Realty Partners, L.L.C., as purchaser, for property located at 10100 North Central Expressway,
Dallas, Texas, dated effective December 9, 1997 (15) (Exhibit 10(kk))
10(gg) $7,840,000 Secured Promissory Note, dated December 30, 1997, from MacFarlan
Realty Partners, L.L.C., to CompuCom Systems, Inc.(15) (Exhibit 10(ll))
10(hh) Note Modification Agreement and Settlement Agreement, dated as of November 30, 1998, between
MacFarlan Realty Partners L.L.C. and CompuCom Systems, Inc.(20) (Exhibit 10(ee))
10(ii) Special Warranty Deed dated as of March 31, 1999, from CompuCom Systems, Inc., as grantor,
to Delaware Comp LLC, as grantee, for property located at 7171 Forest Lane,
Dallas, Texas (26) (Exhibit 10.II)
10(jj) Lease Agreement dated as of March 31, 1999, between CompuCom Systems, Inc., as tenant, and Delaware Comp LLC,
as landlord, for premises located at 7171 Forest Lane, Dallas, Texas, including Exhibit D - Basic Rent Payments
(26) (Exhibit 10.JJ)
10(kk) Contract of Sale between CompuCom Systems, Inc., as seller, and MCSi Realty Co., LLC, as
purchaser for property located at 4281 Olympic Boulevard, Erlanger, Kentucky, dated as of
December 9, 1999 (26) (Exhibit 10.KK)
10(ll)** $1,181,250 Amended and Restated Secured Term Note, dated February 12, 1997, from Edward R.
Anderson to CompuCom Systems, Inc. (13) (Exhibit 10(ff))
10(mm)** First Amendment, dated February 19, 1999, to Amended and Restated Secured Term Note from Edward
R. Anderson to CompuCom Systems, Inc. (20) (Exhibit 10(gg))
10(nn)** Pledge Agreement, dated August 31, 1994, between Edward R. Anderson and CompuCom
Systems, Inc. (9) (Exhibit 10(nn))
10(oo)** $661,251 Secured Term Note, dated June 16, 1997, from Daniel F. Brown to CompuCom Systems,
Inc. (15) (Exhibit 10(pp))
10(pp)** Pledge Agreement, dated June 16, 1997, from Daniel F. Brown and CompuCom Systems, Inc.(15)
(Exhibit 10(qq))
10(qq)** $796,875 Secured Term Note, dated December 23, 1998, from Thomas C. Lynch to CompuCom
Systems, Inc. (20) (Exhibit 10(kk))
10(rr)** Pledge Agreement, dated December 23, 1998, between Thomas C. Lynch and CompuCom Systems,
Inc. (20) (Exhibit 10(ll))
10(ss)** $2,021,875 Secured Term Note, dated October 22, 1998, from Edward R. Anderson to
CompuCom Systems, Inc. (20) (Exhibit 10(mm))
10(tt)** Pledge Agreement, dated October 22, 1998, between Edward R. Anderson and CompuCom
Systems, Inc. (20) (Exhibit 10(nn))
10(uu)** Executive Employment Agreement, dated October 15, 2001, between M. Lazane Smith and CompuCom
Systems, Inc. *
10(vv)** Executive Employment Agreement, dated October 15, 2001, between J. Edward Coleman and CompuCom
Systems, Inc. *
10(ww)** Employment Separation Letter Agreement, dated January 18, 1999, between William Barry and
CompuCom Systems, Inc., with attached General Release and Agreement, and Employee Non-
Disclosure, Non-Solicitation and Non-Competition Agreement (20) (Exhibit 10(rr))
10(xx)** Employment Separation Letter Agreement, dated April 30, 1999, between Daniel F. Brown and
CompuCom Systems, Inc., with attached General Release and Agreement, and Employee Non-
Disclosure, Non-Solicitation and Non-Competition Agreement (26) (Exhibit 10.XX)
10(yy)** Employment Separation Letter Agreement, dated January 24, 2000, between John Lyons and
CompuCom Systems, Inc. (26) (Exhibit 10.YY)
10(zz) Series 2000-1 Supplement, among CSI Funding, Inc., as the Transferor, CompuCom Systems, Inc., as
Servicer, Lloyds TSB Bank PLC, as Initial Series 2000-1 Certificateholder, and Wells Fargo, as
Trustee on behalf of the Certificateholders, dated as of October 2, 2000 (1) (Exhibit 10(zz))
10(ab) Second Amendment to Inventory and Working Capital Financing Agreement dated as of July 1, 2000
by and between CompuCom Systems, Inc. and IBM Credit Corporation (1) (Exhibit 10(ac))
10(ac) Third Amendment to Inventory and Working Capital Financing Agreement dated as of October 31,
2000 by and between CompuCom Systems, Inc. and IBM Credit Corporation (1) (Exhibit 10(ad))
10(ad) Fourth Amendment to Inventory and Working Capital Financing Agreement dated as of January 10,
2001 by and between CompuCom Systems, Inc. and IBM Credit Corporation (1) (Exhibit 10(ae))
10(ae)** Executive Employment Agreement, dated March 13, 2000, between Anthony F. Pellegrini and CompuCom
Systems, Inc. (27) (Exhibit 10.1)
10(af) Amendment Number 1, dated as of May 17, 2001 to the Series 2000-1 Supplement, dated as of
October 2, 2000, by and among CSI Funding, Inc., CompuCom Systems, Inc., Lloyds TSB Bank PLC and
Wells Fargo Bank Minnesota, National Association (f/k/a Norwest Bank Minnesota, National
Association) (6) Exhibit 10.1)
10(ag) Amendment Number 2, dated as of May 17, 2001 to the Series 1999-1 Supplement, dated as of May 7,
1999, as amended and restated as of August 20, 1999 and as amended by Amendment Number 1, dated
as of October 2, 2000, by and among CSI Funding, Inc., CompuCom Systems, Inc., PNC Bank, National
Association, Market Street Funding Corporation and Wells Fargo Bank Minnesota, National Association
(f/k/a Norwest Bank Minnesota, National Association) (6) (Exhibit 10.2)
10(ah) Fifth Amendment to Inventory and Working Capital Financing Agreement dated as of September 30,
2001 by and between CompuCom Systems, Inc. and IBM Credit Corporation *
10(ai)** Executive Employment Agreement, dated October 15, 2001, between David A. Loeser and CompuCom
Systems, Inc. *
10(aj)** Executive Employment Agreement, dated October 31, 2001, between John F. McKenna and CompuCom
Systems, Inc. *
10(ak) First Amendment to Inventory and Working Capital Financing Agreement dated as of July 28, 1999
by and between CompuCom Systems, Inc. and IBM Credit Corporation (1) (Exhibit 10(ab))
21 List of Subsidiaries *
23 Consent of KPMG LLP *
- ----------
* Filed herewith
** These exhibits relate to management contracts or to compensatory plans,
contracts or arrangements in which directors and/or executive officers of
the registrant may participate, required to be filed as exhibits to this
Form 10-K.
(1) Filed on March 26, 2001 as an exhibit to the Annual Report on Form 10-K
(No. 000-14371) incorporated herein by reference.
(2) Filed on April 2, 1990 as an exhibit to the Annual Report on Form 10-K (No.
0-14371) and incorporated herein by reference.
(3) Filed on March 29, 1991 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(4) Filed on March 30, 1992 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(5) Filed on March 31, 1993 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(6) Filed on August 14, 2001 as an exhibit to the Quarterly Report on Form 10-Q
(No. 0-14371) and incorporated herein by reference.
(7) Filed on March 31, 1994 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(8) Intentionally omitted.
(9) Filed on March 31, 1995 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(10) Filed on October 10, 1995 as an exhibit to the Registration Statement on
Form S-8 (No. 33-63309) and incorporated herein by reference.
(11) Filed on May 13, 1996 as an exhibit to the Quarterly Report on Form 10-Q
(No. 0-14371) and incorporated herein by reference.
(12) Filed on November 12, 1996 as an exhibit to the Quarterly Report on Form
10-Q (No. 0-14371) and incorporated herein by reference.
(13) Filed on March 31, 1997 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(14) Filed on April 9, 1997 as an exhibit to the 1997 Annual Meeting Proxy
Statement and incorporated herein by reference.
(15) Filed on March 31, 1998 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(16) Filed on April 7, 1998 as an exhibit to the 1998 Annual Meeting Proxy
Statement and incorporated herein by reference.
(17) Filed on May 14, 1998 as an exhibit to the Quarterly Report on Form 10-Q
(No. 0-14371) and incorporated herein by reference.
(18) Filed on August 14, 1998 as an exhibit to the Quarterly Report on Form 10-Q
(No. 0-14371) and incorporated herein by reference.
(19) Filed on November 16, 1998 as an exhibit to the Quarterly Report on Form
10-Q (No. 0-14371) and incorporated herein by reference.
(20) Filed on March 31, 1999 as an exhibit to the Annual Report on Form 10-K
(No. 0-14371) and incorporated herein by reference.
(21) Filed on May 25, 1999 as an exhibit to the Current Report on Form 8-K (No.
0-14371) and incorporated herein by reference.
(22) Filed on August 16, 1999 as an exhibit to the Quarterly Report on Form 10-Q
(No. 0-14371) and incorporated herein by reference.
(23) Filed on January 24, 2001 as an exhibit to the Current Report on Form 8-K
(No. 000-14371) and incorporated herein by reference.
(24) Filed on April 19, 2000 as Exhibit A to the Company's Definitive Revised
Proxy Statement (No. 000-14371) and incorporated herein by reference.
(25) Filed on April 19, 2000 as Exhibit B to the Company's Definitive Revised
Proxy Statement (No. 000-14371) and incorporated herein by reference.
(26) Filed on February 28, 2000 as an exhibit to the Annual Report on Form 10-K
(No. 000-14371) and incorporated herein by reference.
(27) Filed on May 15, 2000 as an exhibit to the Quarterly Report on Form 10-Q
(No.000-14371) and incorporated herein by reference.
Index to Consolidated Financial Statements
------------------------------------------
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
Independent Auditors' Report
----------------------------
The Stockholders and Board of Directors
CompuCom Systems, Inc.:
We have audited the accompanying consolidated balance sheets of CompuCom
Systems, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CompuCom
Systems, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Dallas, Texas
February 5, 2002
F-2
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(In thousands, except share and per share amounts)
Assets 2001 2000
------ --------- ---------
Current assets:
Cash and cash equivalents $ 123,150 $ 14,857
Receivables, less allowance for doubtful accounts
of $2,130 in 2001 and $3,538 in 2000 134,980 224,639
Inventories 29,608 77,207
Deferred income taxes 1,398 113
Other 6,733 7,513
--------- ---------
Total current assets 295,869 324,329
Property and equipment:
Furniture, fixtures and other equipment 82,308 62,044
Leasehold improvements 8,346 8,226
--------- ---------
90,654 70,270
Less accumulated depreciation and amortization (59,088) (45,966)
--------- ---------
Net property and equipment 31,566 24,304
Goodwill and other intangible assets, less
accumulated amortization 111,089 77,721
Other 5,559 10,006
--------- ---------
Total assets $ 444,083 $ 436,360
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 120,173 $ 112,485
Accrued liabilities 88,598 94,323
--------- ---------
Total current liabilities 208,771 206,808
Stockholders' equity:
Series B cumulative, convertible preferred stock, $10 stated value
Authorized 3,000,000 shares; issued and outstanding 1,500,000 shares 15,000 15,000
Common stock, $.01 par value. Authorized 70,000,000 shares;
issued 49,795,577 shares in 2001, and 49,205,638 shares in 2000 498 492
Additional paid-in capital 76,252 75,354
Retained earnings 149,131 143,370
Treasury stock, at cost, 1,431,525 common shares in 2001
and 685,635 common shares in 2000 (5,569) (3,160)
Notes receivable for the sale of stock -- (1,504)
--------- ---------
Total stockholders' equity 235,312 229,552
--------- ---------
Total liabilities and stockholders' equity $ 444,083 $ 436,360
========= =========
See accompanying notes to consolidated financial statements.
F-3
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2001, 2000 and 1999
(In thousands, except per share amounts)
2001 2000 1999
---------- ---------- ----------
Revenue:
Product $1,533,567 $2,439,106 $2,648,341
Service 281,937 271,531 300,105
Other -- -- 3,817
---------- ---------- ----------
Total revenue 1,815,504 2,710,637 2,952,263
---------- ---------- ----------
Cost of revenue:
Product 1,389,417 2,254,130 2,432,175
Service 182,090 172,287 198,921
Other -- -- 2,098
---------- ---------- ----------
Total cost of revenue 1,571,507 2,426,417 2,633,194
---------- ---------- ----------
Gross margin 243,997 284,220 319,069
Operating expenses:
Selling 65,411 84,224 108,333
Service 54,318 49,958 47,828
General and administrative 87,129 99,940 98,419
Depreciation and amortization 22,729 21,863 21,930
Restructuring charges -- 5,417 387
---------- ---------- ----------
Total operating expenses 229,587 261,402 276,897
---------- ---------- ----------
Earnings from operations 14,410 22,818 42,172
Financing expenses, net 3,308 15,278 23,195
Other income, net -- 990 --
---------- ---------- ----------
Earnings before income taxes 11,102 8,530 18,977
Income taxes 4,441 3,412 7,403
---------- ---------- ----------
Net earnings $ 6,661 $ 5,118 $ 11,574
========== ========== ==========
Earnings per common share:
Basic $ .12 $ .09 $ .22
Diluted $ .12 $ .09 $ .22
Average common shares outstanding:
Basic 48,034 48,703 47,657
Diluted 48,445 48,937 48,274
See accompanying notes to consolidated financial statements.
F-4
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999
(In thousands, except share amounts)
Preferred Stock Common Stock Additional
-------------------- ------------------- Paid in Retained Treasury Stock
Shares Amount Shares Amount Capital Earnings Shares Amount
--------- -------- ---------- ------ ---------- -------- --------- --------
Balances at December 31, 1998 1,500,000 $15,000 47,441,820 $ 474 $ 70,380 $128,478 -- $ --
Exercise of options 382,000 4 1,812
Issuances under employee stock
purchase plan 193,130 2 573
Notes receivable for sale of
stock
Preferred stock dividend (900)
Net earnings 11,574
--------- -------- ---------- ------ ---------- -------- --------- --------
Balances at December 31, 1999 1,500,000 15,000 48,016,950 480 72,765 139,152 -- --
Exercise of options 315,650 3 749
Issuances under employee
stock purchase plan 873,038 9 1,840
Settlement of notes receivable
for sale of stock 685,635 (3,160)
Preferred stock dividend (900)
Net earnings 5,118
--------- -------- ---------- ------ ---------- -------- --------- --------
Balances at December 31, 2000 1,500,000 15,000 49,205,638 492 75,354 143,370 685,635 (3,160)
Exercise of options 51,618 1 114
Issuances under employee stock
purchase plan 538,321 5 784
Settlement of notes receivable
for sale of stock 745,890 (2,409)
Preferred stock dividend (900)
Net earnings 6,661
--------- -------- ---------- ------ ---------- -------- --------- --------
Balances at December 31,2001 1,500,000 $ 15,000 49,795,577 $ 498 $ 76,252 $149,131 1,431,525 $ (5,569)
========= ======== ========== ====== ========== ======== ========= ========
Notes Total
Receivable for Stockholders'
Sale of Stock Equity
-------------- ------------
Balances at December 31, 1998 $ (4,051) $210,281
Exercise of options 1,816
Issuances under employee stock
purchase plan 575
Notes receivable for sale of
stock (374) (374)
Preferred stock dividend (900)
Net earnings 11,574
--------- -----------
Balances at December 31, 1999 (4,425) 222,972
Exercise of options 752
Issuances under employee
stock purchase plan 1,849
Settlement of notes receivable
for sale of stock 2,921 (239)
Preferred stock dividend (900)
Net earnings 5,118
--------- -----------
Balances at December 31, 2000 (1,504) 229,552
Exercise of options 115
Issuances under employee stock
purchase plan 789
Settlement of notes receivable
for sale of stock 1,504 (905)
Preferred stock dividend (900)
Net earnings 6,661
--------- -----------
Balances at December 31,2001 $ -- $235,312
========= ===========
See accompanying notes to consolidated financial statements.
F-5
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 6,661 $ 5,118 $ 11,574
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 22,729 21,863 21,930
Restructuring related charges -- 5,417 --
Other income, net -- (990) --
Deferred income taxes (1,440) (686) 4,637
Changes in assets and liabilities, excluding effects from acquisitions:
Receivables 168,151 (7,177) 41,500
Inventories 60,861 51,869 101,744
Other current assets (2,475) 1,218 (1,795)
Accounts payable 8,958 (69,762) 31,660
Accrued liabilities and other (13,573) (1,944) (16,750)
--------- ----------- -----------
Net cash provided by operating activities 249,872 4,926 194,500
--------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (20,900) (9,327) (6,867)
Business acquisitions, net of cash acquired (120,683) -- (141,253)
Proceeds from sale of land and buildings -- 617 45,466
Proceeds from sale of securities -- 2,880 --
--------- ----------- -----------
Net cash used in investing activities (141,583) (5,830) (102,654)
--------- ----------- -----------
Cash flows from financing activities:
Borrowings under revolver 8,000 1,183,300 996,065
Repayment of revolver (8,000) (1,183,300) (1,079,494)
Issuance of common stock 904 2,601 2,017
Preferred stock dividend (900) (900) (900)
--------- ----------- -----------
Net cash provided by (used in) financing activities 4 1,701 (82,312)
--------- ----------- -----------
Net increase in cash and cash equivalents 108,293 797 9,534
Cash and cash equivalents at beginning of year 14,857 14,060 4,526
--------- ----------- -----------
Cash and cash equivalents at end of year $ 123,150 $ 14,857 $ 14,060
========= =========== ===========
Supplemental disclosure of cash flow information
Income taxes paid $ 8,948 $ 1,241 $ 824
Financing expenses paid $ 6,387 $ 15,929 $ 24,997
See accompanying notes to consolidated financial statements.
F-6
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
------------------------------------------
Description of Business
-----------------------
CompuCom Systems, Inc. and subsidiaries ("CompuCom" or "the Company")
is a leading single-source provider of information systems services
and products designed to enhance the productivity of large and
medium-sized organizations throughout the United States. CompuCom
provides information technology outsourcing and system integration
services that help clients reduce the costs, complexities, obstacles
and risks associated with new technology adoption, operational
transition and on-going management of their information systems.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of CompuCom
Systems, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. Investments in
companies in which CompuCom exercises significant influence, but not
control, are accounted for using the equity method of accounting. The
Company's share of net earnings or loss from such investments is
reflected in operating expenses.
Accounting Estimates
--------------------
The preparation of the consolidated financial statements in accordance
with accounting principles generally accepted in the United States of
America requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities.
On an on-going basis, CompuCom evaluates its estimates, including
those related to vendor programs and incentives, allowance for
doubtful accounts, inventories, intangible assets and income taxes.
CompuCom bases its estimates on historical experience and on other
relevant assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates.
Cash Equivalents
----------------
Cash equivalents include highly liquid, temporary cash investments
having original maturity dates of three months or less.
Inventories
-----------
Inventories are stated at the lower of average cost or market. The
Company continually assesses the appropriateness of inventory
valuations giving consideration to obsolete, slow-moving and
nonsaleable inventory.
Property and Equipment
----------------------
Property and equipment are stated at cost less accumulated
depreciation and amortization. Provision for depreciation and
amortization is based on the estimated useful lives of the assets
(building and leasehold improvements, 3 to 30 years; furniture and
equipment, 3 to 5 years) and is computed using the straight-line
method.
Goodwill and Other Intangible Assets
------------------------------------
Goodwill and other intangible assets represents goodwill and customer
lists and is amortized using the straight-line method over a 3 to 20
year period. Accumulated amortization at December 31, 2001 and 2000
was $32,413,000 and $24,622,000, respectively.
(continued)
F-7
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company assesses the recoverability of goodwill by determining
whether the amortization of the asset balance over its remaining life
can be recovered through undiscounted future operating cash flows of
the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Revenue Recognition
-------------------
CompuCom's revenue is derived primarily from two sources - 1) product
revenue, which includes desktop, networking, storage, and mobile
computing products, as well as peripherals and software-related
products and licenses and 2) services revenue, which includes
application design, development and maintenance, all aspects of
desktop outsourcing, including field engineering, as well as help desk
and LAN/WAN network outsourcing, configuration, asset tracking,
software management, mobile computing services, IT consulting,
training, and services provided in support of certain manufacturers'
direct fulfillment initiatives.
The Company recognizes product revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed
and determinable and collectibility is probable. Generally, these
criteria are met at the time of shipment. Provision is made at the
time the related revenue is recognized for estimated product returns,
which historically have been immaterial. Revenue from the sale of
software licenses is recorded on a gross basis when the software
license is delivered to the customer and all other criteria for
revenue recognition have been met. Shipping and handling revenues are
included in product revenues and costs are included in product costs.
Revenue earned from services is recognized ratably over the
contractual period or as services are performed. Revenue in excess of
billings on service contracts is recorded as unbilled receivables.
Billings in excess of revenue recognized on service contracts are
recorded as deferred income until revenue recognition criteria are
met.
Vendor Programs
---------------
CompuCom receives volume incentives and rebates from certain
manufacturers related to sales of certain products which are recorded
as a reduction of cost of goods sold when earned. The Company also
receives vendor reimbursements that offset certain training,
promotional and marketing activities incurred by the Company.
Financing Expenses
------------------
Financing expenses consist of interest incurred on borrowings under
CompuCom's financing arrangements and discounts on the sale of
receivables.
Income Taxes
------------
CompuCom uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period the tax rates are changed.
(continued)
F-8
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Earnings Per Common Share
-------------------------
Basic earnings per common share is based on net earnings after
preferred stock dividend requirements, if any, and the
weighted-average number of common shares outstanding during each year.
Diluted earnings per common share assumes conversion of dilutive
convertible securities into common stock at the later of the beginning
of the year or date of issuance and includes the add-back of related
interest expense and/or dividends, as required. Diluted earnings per
common share also assumes the exercise of all options with an exercise
price below the average market price of the Company's stock, at the
later of the beginning of the year or date of issuance, regardless of
whether the options are vested or not.
Financial Instruments
---------------------
CompuCom's financial instruments, principally cash equivalents,
accounts receivable, accounts payable and accrued liabilities, are
carried at cost which approximates fair value due to the short-term
maturity of these instruments. As amounts outstanding under the
Company's credit agreements bear interest approximating current market
rates, their carrying amounts approximate fair value.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
--------------------------------------------------------------------
of
---
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of long-lived assets to be held
and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Long-lived assets to
be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
Comprehensive Income
--------------------
For all periods presented, CompuCom's comprehensive income is equal to
the net earnings shown on the Consolidated Statements of Operations.
Stock-Based Compensation
------------------------
CompuCom accounts for stock options and stock-based awards using the
intrinsic-value method and has provided in Note 11 the pro forma net
earnings and net earnings per share as if the fair value method had
been applied in measuring compensation expense.
Treasury Stock
--------------
Treasury stock transactions are accounted for using the cost method.
(continued)
F-9
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Recent Accounting Pronouncements
--------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies criteria intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for
separately. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. SFAS No. 142 will
require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at
least annually. SFAS No. 142 will also require that intangible assets
with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets."
Upon adoption of SFAS No. 142, CompuCom will be required to reassess
the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization
period adjustments by the end of the first interim period after
adoption. In addition, to the extent an intangible asset is identified
as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Any
impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting
principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
SFAS No. 142 will require CompuCom to perform an assessment of whether
there is an indication that goodwill and equity-method goodwill is
impaired as of the date of adoption. To accomplish this, the Company
must identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. CompuCom will then have up to six months
from the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount.
To the extent a reporting unit's carrying amount exceeds its fair
value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the
transitional impairment test. In the second step, CompuCom must
compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its
assets (recognized and unrecognized) and liabilities, to its carrying
amount, both of which would be measured as of the date of adoption.
This second step is required to be completed as soon as possible, but
no later than the end of the year of adoption. As an overall check on
the reasonableness of the fair values attributed to CompuCom's
reporting units, the Company will consider comparing and contrasting
the aggregate fair values for all reporting units with the Company's
average total market capitalization for a reasonable period of time.
However, SFAS No. 142 states that the fair value may exceed market
capitalization due to factors such as control premiums and synergies.
CompuCom expects to complete the initial impairment review during the
first half of 2002. Any transitional impairment loss, which could be
significant, will be recognized as the cumulative effect of a change
in accounting principle in the Company's statement of operations.
As of December 31, 2001, CompuCom has unamortized goodwill and
identifiable intangible assets of approximately $111 million, all of
which will be subject to the transition provisions of SFAS No. 142.
Amortization expense related to goodwill was $7.5 million for the year
ended December 31, 2001. Because of the extensive effort needed to
adopt SFAS No. 142, it is not practicable to reasonably estimate the
impact of adopting these pronouncements on CompuCom's financial
statements at the date of this report, including the extent to which
transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. The Company will adopt SFAS No. 143 in
fiscal year 2003. The Company does not expect the provisions of SFAS
No. 143 to have any significant impact on its financial condition or
results of operations.
(continued)
F-10
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Company will adopt SFAS No.
144 in fiscal year 2002. The Company does not expect the provisions of
SFAS No. 144 to have any significant impact on its financial condition
or results of operations.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(2) Trade and Vendor Accounts Receivable
------------------------------------
The following table summarizes the activity in the allowance for
doubtful accounts for the years ended December 31, 2001, 2000 and 1999:
(Amounts in thousands)
Trade Vendor
Receivables Receivables
----------- -----------
Balance, December 31, 1998 $3,507 $4,460
Charged to costs and expenses 2,344 888
Charge-offs 756 1,442
------ ------
Balance, December 31, 1999 5,095 3,906
Charged to costs and expenses 2,800 1,384
Charge-offs 4,357 2,863
------ ------
Balance, December 31, 2000 3,538 2,427
Charged to costs and expenses -- 975
Charge-offs 1,408 2,060
------ ------
Balance, December 31, 2001 $2,130 $1,342
====== ======
Vendor receivables, net of the allowance for doubtful accounts, are
recorded as a reduction to accounts payable on the Consolidated Balance
Sheets.
(3) Inventories
-----------
Inventory is comprised of product inventory and service parts. At
December 31, 2001 and 2000, total inventory was $29.6 million and $77.2
million, respectively. Product inventory was $26.8 million and $74.1
million at December 31, 2001 and 2000, respectively, and service parts
inventory as of the same dates was $2.8 million and $3.1 million,
respectively.
(4) Sale/Leaseback of Corporate Headquarters Building
-------------------------------------------------
During 1999, CompuCom sold its corporate headquarters building in a
sale/leaseback transaction for approximately $40 million. Proceeds, net of
transaction costs, of approximately $37 million were used to pay down
long-term debt. As part of the transaction, CompuCom entered into a 20 year
operating lease on the building. The book value and associated depreciation
on the building of approximately $38.6 million and $1.9 million,
respectively, were removed from the accounts. The gain realized on the sale
was not material.
(continued)
F-11
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Restructuring Charges
---------------------
During the first quarter of 2000, CompuCom effected a restructuring
plan designed to reduce its cost structure by closing its distribution
facility located in Houston, Texas, closing and consolidating three office
facilities, and reducing its workforce. As a result, CompuCom recorded a
restructuring charge of $5.2 million in the first quarter of 2000. The $5.2
million charge is included in a separate line of operating expense totaling
$5.4 million in the Consolidated Statements 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 December 31, 2001 and 2000:
(Amounts in thousands)
----------------------------------------------------------------------
Restructuring Cash Accrual at Cash Accrual at
Charge Payments Other 12/31/00 Payments 12/31/01
----------------------------------------------------------------------
Lease termination costs $2,904 $ (876) $(258) $ 1,770 $(361) $ 1,409
Employee severance and
related benefits 1,800 (1,774) (16) 10 (10) --
Other 465 (87) (378) -- -- --
----------------------------------------------------------------
Total $5,169 $(2,737) $(652) $ 1,780 $(371) $ 1,409
================================================================
The $1.4 million and $1.8 million accrued at December 31, 2001 and
2000, respectively, are reflected in accrued liabilities on the
Consolidated Balance Sheets.
Lease termination costs include the estimated cost to close the three
office facilities and represents the amount required to fulfill CompuCom'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, CompuCom 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 December 31, 2001 relates to two leases
for the office facilities that have not been terminated, one of which has
not been sublet.
Severance is paid based on associates' years of service as well as
their position within the organization. The reduction in workforce included
308 associates.
Other restructuring charges primarily include the write-off of
leasehold improvements at the Houston distribution center.
Based on revised estimates during 2000, $258,000 of the lease
termination cost accrual was reversed. In addition, the employee severance
related accrual and other expenses accrual were reduced by $16,000 and
$57,000, respectively, and are reflected in restructuring charges in the
Consolidated Statements of Operations. The remaining restructuring accrual
at December 31, 2001 is expected to be adequate to cover actual amounts to
be paid. Differences, if any, between the estimated amounts accrued and
actual amounts paid will be reflected in operating expenses in future
periods.
(continued)
F-12
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the fourth quarter of 1998, CompuCom 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 years ended December 31,
2001, 2000, and 1999:
(Amounts in thousands)
------------------------------------------------------------------------------------------------------
Accrual at Cash Accrual at Cash Accrual at Cash Accrual at
12/31/1998 Payments Other 12/31/1999 Payments Other 12/31/2000 Payments 12/31/2001
------------------------------------------------------------------------------------------------------
Lease termination costs $ 6,415 $(5,175) $ -- $1,240 $(1,155) $ 625 $710 $(258) $452
Employee severance and
related benefits 2,986 (2,293) (133) 560 (514) (46) -- -- --
Asset disposals, net of
estimated proceeds 2,907 -- (2,907) -- -- -- -- -- --
Other 1,780 (1,780) -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------
Total $14,088 $(9,248) $(3,040) $1,800 $(1,669) $ 579 $710 $(258) $452
=================================================================================================
The $0.5 million and $0.7 million accrued at December 31, 2001 and
2000, respectively, are reflected in accrued liabilities on the
Consolidated Balance Sheets.
The amount accrued at December 31, 2001 for lease termination costs
relates to seven remaining leases, two of which have not been sublet, of
the original 65 leases which have not been terminated. The accrual
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. Payments, net of proceeds derived
from subleases, are charged against the accrual as incurred.
Severance was determined based upon associates' years of service as
well as their position within the organization. The reduction in workforce
included 457 associates.
Based on revised estimates during 2000, $46,000 of the severance
related accrual was reversed. Also, additional expenses related to lease
termination costs of approximately $625,000 were recorded during 2000 due
to changes in estimates on remaining properties and are reflected in
restructuring charges in the Consolidated Statements of Operations. The
remaining restructuring accrual at December 31, 2001 is expected to be
adequate to cover actual amounts to be paid. Differences, if any, between
the estimated amounts accrued and actual amounts paid will be reflected in
operating expenses in future periods.
(6) Segment Information
-------------------
CompuCom defines its operations as two distinct businesses - 1) sales
of personal computer-related products ("product"), which includes desktop,
networking, storage, and mobile computing products, as well as peripherals
and software-related products and licenses and 2) services ("service"),
which is primarily derived from application design, development and
maintenance, all aspects of desktop outsourcing, including field
engineering, as well as help desk and LAN/WAN network outsourcing,
configuration, asset tracking, software management, mobile computing
services, IT consulting, training, and services provided in support of
certain manufacturers' direct fulfillment initiatives. CompuCom 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. Total assets are the assets
owned or allocated to each segment. Assets included in the "Other" column
include all assets not specifically allocated to a segment. CompuCom's
equity interest in unconsolidated subsidiaries is reflected in the "Other"
column for the years ended December 31, 2001, 2000 and 1999.
(continued)
F-13
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2001
Operating Results Product Service Other Total
- ----------------- ----------- -------- --------- ----------
(in thousands)
Revenues $ 1,533,567 $281,937 $ -- $1,815,504
Gross margin 144,150 99,847 -- 243,997
Operating earnings (loss) (11,703) 26,494 (381) 14,410
Financing expenses, net (3,308)
----------
Earnings before income taxes $ 11,102
==========
Total assets $ 136,892 $ 32,619 $ 274,572 $ 444,083
==========
For the Year Ended December 31, 2000
Operating Results Product Service Other Total
- ----------------- ----------- -------- --------- ----------
(in thousands)
Revenues $ 2,439,106 $271,531 $ -- $2,710,637
Gross margin 184,976 99,244 -- 284,220
Operating earnings (loss)
excluding restructuring charges (5,408) 34,785 (1,142) 28,235
Restructuring charge (5,417)
Financing expenses, net (15,278)
Other income, net 990
----------
Earnings before income taxes $ 8,530
==========
Total assets $ 265,707 $ 36,996 $ 133,657 $ 436,360
==========
For the Year Ended December 31, 1999
Operating Results Product Service Other Total
- ----------------- ----------- -------- --------- ----------
(in thousands)
Revenues $ 2,648,341 $300,105 $ 3,817 $2,952,263
Gross margin 216,166 101,184 1,719 319,069
Operating earnings (loss)
excluding restructuring charges 7,079 35,861 (381) 42,559
Restructuring charges (387)
Financing expenses, net (23,195)
----------
Earnings before income taxes $ 18,977
==========
Total assets $ 303,647 $ 35,522 $ 158,883 $ 498,052
==========
(continued)
F-14
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Financing Arrangements
----------------------
CompuCom has financing arrangements which total $175 million,
consisting of a $125 million receivable securitization ("Securitization")
and a $50 million working capital line of credit ("Revolver"). Consistent
with its financing requirements, during 2001 CompuCom reduced the
Securitization facility from $150 million to $125 million and the Revolver
facility was reduced from $100 million to $50 million.
The Securitization's pricing is based on a designated short-term
interest rate plus an agreed upon spread. The Securitization allows
CompuCom to sell, on an ongoing basis, its trade accounts receivable
("receivables") to a consolidated, wholly-owned bankruptcy-remote special
purpose subsidiary (the "SPS"). The risk that CompuCom bears from bad debt
losses on trade receivables sold is addressed in its allowance for doubtful
accounts. The SPS has sold and, subject to certain conditions, may from
time to time sell an undivided ownership interest in the pool of purchased
receivables to financial institutions. As collections reduce receivables
balances sold, CompuCom may sell interests in new receivables to bring the
amount available up to the maximum allowed. The sales are reflected as
reductions of Receivables in the Consolidated Balance Sheets and are
included in the net cash provided by operating activities in the
Consolidated Statements of Cash Flows. The proceeds from the sale of
receivables are used primarily to fund working capital requirements.
CompuCom is retained as servicer of the receivables; however, the cost of
servicing is not material. Discounts associated with the sale of
receivables totaled $5.5 million, $12.6 million, and $13.0 million for
2001, 2000, and 1999, respectively, and are included in financing expenses
in the Consolidated Statements of Operations. Amounts outstanding as sold
receivables as of December 31, 2001 consisted of two certificates totaling
$74 million, one certificate for $24 million with an April 2002 maturity
date and one certificate for $50 million with an October 2003 maturity
date. CompuCom expects the agreement relative to the $24 million
certificate to be renewed no later than its expiration in April 2002. The
amount outstanding as sold receivables as of December 31, 2000 consisted of
two certificates totaling $150 million, one certificate for $125 million
with an April 2002 maturity date and one certificate for $25 million with a
October 2003 maturity date. The designated short-term interest rate at
December 31, 2001 was 2.5%, inclusive of the spread.
The Revolver, which matures in May 2002, bears interest at a rate of
LIBOR plus an agreed-upon spread and is secured by a lien on CompuCom's
assets. CompuCom expects the Revolver to be renewed no later than its
expiration in May 2002. Availability under the Revolver is subject to a
borrowing base calculation. As of December 31, 2001, availability under the
Revolver was $50 million. No amounts were outstanding under the Revolver as
of December 31, 2001 and 2000. Terms of the Revolver limit the amounts
available for capital expenditures and dividends. Both the Securitization
and the Revolver require CompuCom to maintain compliance with selected
financial covenants and ratios.
The weighted-average interest rate on borrowings was approximately
6.6%, 8.2% and 7.7%, in 2001, 2000 and 1999, respectively.
Interest income of $4.1 million, $1.8 million and $1.8 million was
earned in 2001, 2000 and 1999, respectively, and is included in financing
expenses, net, on the Consolidated Statements of Operations.
(8) Accrued Liabilities
-------------------
Accrued liabilities consist of the following as of December 31:
(Amounts in thousands)
2001 2000
------- -------
Accrued payroll and payroll taxes $25,120 $28,510
Accrued cost of software and licenses 35,412 24,079
Other 28,066 41,734
------- -------
Total $88,598 $94,323
======= =======
(continued)
F-15
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Income Taxes
------------
The provision for income taxes is comprised of the following (in
thousands):
2001 2000 1999
------- ------ ------
Current:
Federal $ 5,288 $3,707 $2,401
State 593 391 365
Deferred, primarily federal (1,440) (686) 4,637
------- ------ ------
$ 4,441 $3,412 $7,403
======= ====== ======
Total income tax expense differed from the amounts computed by
applying the U.S. Federal income tax rates of 35% in 2001 and 34% in 2000
and 1999 to earnings before income taxes as a result of the following (in
thousands):
2001 2000 1999
----- ----- -----
Computed "expected" tax expense 3,886 2,900 6,452
State taxes, net of U.S. Federal
income tax benefit 261 251 401
Other, net 294 261 550
----- ----- -----
Actual income tax provision 4,441 3,412 7,403
===== ===== =====
Effective tax rate 40.0% 40.0% 39.0%
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000, are presented below (in thousands):
2001 2000
------- -------
Deferred tax assets:
Net operating loss and credit carryforwards $ 7,674 $ 8,292
Inventories, principally due to additional
costs inventoried for tax purposes 187 359
Accounts receivable, principally due to allowance for
doubtful accounts 712 1,238
Deferred revenue 653 1,706
Restructuring accrual 651 871
Other accrued expenses 2,692 2,893
------- -------
Deferred tax assets 12,569 15,359
------- -------
Deferred tax liabilities:
Intangible assets 2,010 2,894
Accelerated depreciation 1,541 2,842
Section 481(a) adjustment -- 655
Other 3,320 5,070
------- -------
Deferred tax liabilities 6,871 11,461
------- -------
Net deferred tax asset $ 5,698 $ 3,898
======= =======
(continued)
F-16
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The net deferred tax assets of $5.7 million and $3.9 million at
December 31, 2001 and 2000, respectively, are included in deferred income
taxes of $1.4 million and $0.1 million, and other assets of $4.3 million
and $3.8 million, respectively, on the Consolidated Balance Sheets as of
the same dates.
CompuCom has available net operating loss carryforwards, resulting
from acquisitions, totaling approximately $19 million, which expire in the
years 2010 to 2017. CompuCom also has available alternative minimum tax
credit carryforwards of approximately $982,000, which may be carried
forward indefinitely. The utilization of these pre-acquisition tax loss
carryforwards and tax credits is limited to approximately $2 million each
year under Internal Revenue Code section 382.
(10) Preferred Stock
---------------
CompuCom has authorized three million shares of Series B Cumulative
Convertible Preferred Stock ("Series B Shares"), stated value $10, of which
1,500,000 are beneficially owned by Safeguard Scientifics, Inc.
("Safeguard"). The Series B Shares are convertible into shares of common
stock based on a conversion price of $6.77 per share subject to
anti-dilution adjustments. The Series B Shares are entitled to a 6% per
annum cumulative dividend payable out of legally available funds. The
Series B Shares are entitled to one vote for each share of common stock
into which such Series B Shares may be converted, except that in the
election of directors (as long as Safeguard owns at least 40% of CompuCom's
then outstanding voting securities, excluding the Series B Shares), the
Series B Shares will be entitled to five votes for each share of common
stock into which the Series B Shares may be converted.
(11) Stock-Based Compensation
------------------------
CompuCom maintains five stock option plans covering certain key
employees and outside directors. The 1983 Stock Option Plan ("1983 Plan")
and the 1984 Non-Qualified Stock Option Plan ("1984 Plan") expired by their
terms in May 1993 and January 1994, respectively, and therefore no new
grants can be awarded out of those plans. All eligible option grants have
been made from the Stock Option Plan for Directors ("Directors Plan"),
although not all options have been exercised. Under the Directors Plan,
non-associate directors were initially granted 10,000 options upon election
to the Board, with subsequent service grants awarded in accordance with
formulas based upon years of service. CompuCom adopted a 1993 Stock Option
Plan ("1993 Plan") under which it may grant qualified or nonqualified stock
options to eligible associates and non-associate directors. The 1993 Plan
was amended in 1995, 1997, and 1999 to increase the number of shares
available. To the extent allowable, all grants are incentive stock options.
CompuCom adopted the 2000 Equity Compensation Plan ("2000 Plan") under
which it may grant stock options, stock appreciation rights, restricted
stock and performance units to eligible associates, individuals to whom
employment has been offered, non-associate directors and certain advisors
of CompuCom. All options granted under the plans to date have an exercise
price equal to the market price of the Company's common stock on the date
of grant. Generally, options vest 20-25% each year and expire after 10
years under all plans. At December 31, 2001, approximately 9.6 million
shares of common stock were authorized for issuance under these stock
option plans.
(continued)
F-17
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1998, CompuCom created the CompuCom Systems, Inc. Employee Stock
Purchase Plan ("ESPP"). The ESPP provides eligible Company associates the
opportunity to purchase common stock of the Company through accumulated
payroll deductions. Participation in the ESPP is for periods of six months,
beginning on January 1 and July 1 of each year. The first such period was
July 1 (i.e., "the enrollment date") through December 31, 1998 (i.e., "the
exercise date"). The exercise price, as defined, for each six month period,
is equal to the lower of 85% of the fair market value, as defined, of the
Company's common stock price on the enrollment date or the exercise date.
Once the shares have been purchased, each associate has the option of
keeping his shares or selling them at any time. For the six-month
withholding periods from January 1 through June 30, 1999 and July 1 through
December 31, 1999, associates purchased approximately 159,000 shares at an
average price of $3.43 per share and approximately 183,000 shares at an
average price of $3.50 per share, respectively, in January of 2000. For the
six-month withholding periods from January 1 through June 30, 2000 and July
1 through December 31, 2000, associates purchased approximately 291,000
shares at an average price of $1.38 per share and approximately 241,000
shares at an average price of $1.09 per share, in June and December of
2000, respectively. For the six-month withholding periods from January 1
through June 30, 2001 and July 1 through December 31, 2001, associates
purchased approximately 344,000 shares at an average price of $1.09 per
share and approximately 195,000 shares at an average price of $1.92 per
share, in June and December of 2001, respectively. A total of 1.0 million
shares were authorized for issuance under the ESPP. During 2000, the number
of shares authorized for issuance was increased to 2.0 million.
CompuCom applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its various fixed stock option plans and its stock purchase
plan. Had compensation cost been recognized consistent with SFAS No. 123,
"Accounting for Stock Based Compensation", the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below:
(In thousands, except per share amounts) 2001 2000 1999
------ ------ -------
Net earnings As reported $6,661 $5,118 $11,574
Pro forma $4,632 $3,110 $10,229
Basic earnings per share As reported $ .12 $ .09 $ .22
Pro forma $ .08 $ .05 $ .20
Diluted earnings per share As reported $ .12 $ .09 $ .22
Pro forma $ .08 $ .05 $ .19
The per share weighted-average value of stock options issued by the
Company during 2001, 2000, and 1999 was $1.56, $2.21 and $1.82,
respectively, on the dates of grant using the Black Scholes option-pricing
model. The following weighted-average assumptions were used to determine
the fair value of stock options granted:
2001 2000 1999
----------- ----------- -----------
Dividend yield 0% 0% 0%
Expected volatility 83% 74% 59%
Average expected option life 5 years 5 years 5 years
Risk-free interest rate 4.0% to 5.1% 5.0% to 6.3% 5.2% to 6.4%
(continued)
F-18
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value of the associates' purchase rights granted in
2001 was $0.72. This estimation of fair value was based on the Black
Scholes model with the following assumptions for 2001: dividend yield
of 0%, expected volatility of 83%, expected life of 6 months, and a
risk-free interest rate of 3.8%.
Stock option activity under CompuCom's plans is summarized below:
2001 2000 1999
-------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------- ------------------- -------------------
(In thousands) (In thousands) (In thousands)
Outstanding at beginning of year 6,426 $ 3.45 3,976 $ 3.78 3,994 $ 4.16
Granted 2,798 2.27 4,143 3.39 1,920 3.57
Exercised (52) 2.21 (316) 3.13 (382) 1.65
Canceled (1,638) 2.90 (1,377) 4.29 (1,556) 4.91
------ ------ ------
Outstanding at end of year 7,534 $ 3.14 6,426 $ 3.45 3,976 $ 3.78
====== ====== ======
Options exercisable at year-end 2,322 $ 3.67 1,188 $ 3.82 1,114 $ 4.13
Shares available for future grant 2,082 3,242 3,008
The following summarizes information about the Company's stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------- ---------------------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ------------- ------------- ---------------- --------- ------------- ----------
(In thousands) (years) (In thousands)
$1.47 - $2.13 1,468 8.9 $ 2.05 308 $ 2.10
2.19 - 2.19 1,575 9.3 2.19 0 0.00
2.30 -3.14 623 9.1 2.87 50 3.00
3.19 - 3.19 1,755 6.7 3.19 1,146 3.19
3.25 - 12.50 2,113 7.5 4.65 818 4.97
----- -----
$1.47 - $12.50 7,534 8.1 $ 3.14 2,322 $ 3.67
===== =====
(continued)
F-19
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Business Combinations
---------------------
During 2001, CompuCom consummated four business combinations (collectively,
"the 2001 acquisitions"). The 2001 acquisitions are described below and have
been accounted for as purchase transactions. Accordingly, the consolidated
financial statements reflect the operations of the acquired businesses from the
respective dates of acquisition. The aggregate purchase price of the 2001
acquisitions, net of cash acquired, was approximately $121 million. CompuCom's
preliminary allocation of the aggregate purchase price for the 2001 acquisitions
consists of approximately $93 million to current assets, $1 million to
non-current assets, $37 million to goodwill and other intangible assets, and $10
million to current liabilities. CompuCom used available cash to finance the 2001
acquisitions.
In January 2001, CompuCom purchased certain assets of MicroAge Technology
Services, L.L.C. ("MTS", or "the MTS acquisition") for approximately $79
million. The assets were purchased out of bankruptcy court and primarily
consisted of trade accounts receivable as well as vendor accounts receivable and
inventory. The purchased assets were used by MTS primarily in its business as a
systems integrator of personal computer products. As part of the MTS
acquisition, the Company also hired certain of MTS' national sales force,
technical service personnel and administrative personnel. The purchase price has
been allocated to identifiable assets acquired and liabilities assumed based on
their estimated fair market value at the date of acquisition. Approximately $1.3
million of negative goodwill was realized as a result of the MTS acquisition and
is included in goodwill and other intangible assets in CompuCom's Consolidated
Balance Sheet at December 31, 2001. In accordance with the transition provisions
of SFAS No. 142, CompuCom expects this amount to be written-off in the first
quarter of 2002 as a cumulative effect of a change in accounting principle.
In July 2001, CompuCom purchased certain assets and assumed certain
liabilities of Excell Data Corporation ("Excell", or "the Excell acquisition")
for approximately $27 million. The net assets acquired were used by Excell
primarily in its business of high-end technical applications development,
network infrastructure design and deployment and worldwide event technical
planning and support. Essentially all of the Excell workforce, consisting of
technical application developers, consultants, and administrative personnel were
hired as part of the Excell acquisition. CompuCom is in the process of obtaining
an independent third party valuation to determine any amount to be allocated to
identifiable intangible assets. CompuCom will make the required adjustments, if
any, upon completion of such valuation. Any remaining goodwill in connection
with the Excell acquisition is expected to be deductible for tax purposes. In
accordance with SFAS No. 141, the Company is not amortizing goodwill related to
this acquisition.
In November 2001, CompuCom purchased certain assets and assumed certain
liabilities associated with the application development division of E-Certify
Corporation ("ClientLink", or "the ClientLink acquisition") for approximately $2
million and the surrender of such number of E-Certify Corporation's common stock
to decrease the Company's percent ownership from 22% to 19% of outstanding
shares. ClientLink provides high-end technical consulting, development,
deployment and maintenance services. The ClientLink acquisition further expands
the suite of CompuCom's service offerings. Since 1999, the Company accounted for
its investment in E-Certify using the equity method. CompuCom is in the process
of obtaining an independent third party valuation to determine any amount to be
allocated to identifiable intangible assets. CompuCom will make the required
adjustments, if any, upon completion of such valuation. Any remaining goodwill
in connection with the E-Certify acquisition is expected to be deductible for
tax purposes. In accordance with SFAS No. 141, the Company is not amortizing
goodwill related to this acquisition.
(continued)
F-20
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In November 2001, CompuCom acquired Northern NEF, Inc. ("NNEF", or "the
NNEF acquisition") for approximately $15 million. NNEF is a Federal systems
integrator and solutions provider, whose services include systems engineering,
software development, integration, test and training as well as related program
management support services to various defense and civilian agencies of the
Federal and state governments and commercial accounts. The NNEF acquisition
provides Compucom with an entrance to the Federal marketplace and expands the
capabilities NNEF can provide primarily to its Federal clients through
CompuCom's existing service offerings. CompuCom is in the process of obtaining
an independent third party valuation to determine any amount to be allocated to
identifiable intangible assets. CompuCom will make the required adjustments, if
any, upon completion of such valuation. Any remaining goodwill in connection
with the NNEF acquisition is not expected to be deductible for tax purposes. In
accordance with SFAS No. 141, the Company is not amortizing goodwill related to
this acquisition.
The following unaudited pro forma financial information presents the
combined results of operations as if the 2001 acquisitions had occurred as of
the beginning of 2000, after giving effect to certain adjustments, including
amortization of goodwill, increased financing expense on debt assumed to have
been incurred in relation to the 2001 acquisitions and related income tax
effects. The pro forma results do not necessarily represent results which would
have occurred if the 2001 acquisitions had taken place on the basis assumed
above, nor are they indicative of the results of future combined operations.
(in thousands, except per share data)
-------------------------------------
2001 2000
----------- -----------
Revenue $ 1,862,853 $ 3,882,406
Earnings (loss) before extraordinary loss $ 7,779 $ (31,020)
Diluted earnings (loss) per share before
extraordinary loss $ 0.14 $ (0.65)
(continued)
F-21
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Related Party Transactions
--------------------------
In 1994, CompuCom loaned an officer and director $1,181,250 evidenced by a
term note receivable, bearing interest at 6% per annum. The proceeds of the loan
were used to purchase shares of the Company's common stock. In addition, in
1998, CompuCom loaned this individual $2,021,875 evidenced by a term note
receivable, bearing interest at 5.1% per annum. The loan proceeds were used to
exercise stock options. In January 2000, the individual transferred 685,635
shares of the Company's common stock to the Company in satisfaction of the two
notes receivable plus accrued interest. As a result, CompuCom recorded a
non-cash equity transaction of approximately $3.2 million to record treasury
stock, at cost. This officer is no longer employed by the Company.
In 1997, CompuCom loaned an officer and director $661,251 evidenced by a
term note receivable, bearing interest at 6.25% per annum and payable annually.
A portion of the loan proceeds were used to exercise stock options. Principal on
the note was due on June 17, 2000. Terms of the note were amended such that
principal and accrued interest were due on November 30, 2001. In addition, in
1999, CompuCom loaned this individual $625,950 evidenced by a term note
receivable, bearing interest at 5.74%, with both accrued interest and principal
due November 30, 2000. A portion of the loan proceeds was used to exercise stock
options. Terms of the note were amended such that principal and accrued interest
were due on November 30, 2001. In connection with the severance arrangement with
this former officer, CompuCom modified the terms of the original stock option
grant and as a result recorded compensation expense of approximately $529,000
which is reflected in general and administrative expense in the Consolidated
Statements of Operations for the year ended December 31, 1999. In February 2001,
the individual transferred 473,418 shares of CompuCom's common stock to the
Company in satisfaction of the notes receivable plus accrued interest. This
officer is no longer employed by the Company.
In 1998, CompuCom loaned an officer and director $796,875 evidenced by a
term note receivable, bearing interest at 4.33% per annum, with both accrued
interest and principal due December 31, 2000. The loan proceeds were used to
exercise stock options. This officer is no longer employed by the Company. In
February 2001, the individual transferred 272,472 shares of the Company's common
stock to CompuCom in satisfaction of the note receivable plus accrued interest.
All of the loans were full recourse loans. In addition, CompuCom retained
physical possession of the applicable stock certificates to be held as
collateral. Since February 2001, there have been no loans outstanding to any
current or former officers or directors.
CompuCom has transactions in the normal course of business with Safeguard
or companies affiliated with Safeguard. CompuCom recorded total revenues of
approximately $0.8 million, $4.2 million, and $1.4 million in 2001, 2000, and
1999, respectively, with Safeguard and companies affiliated with Safeguard. As
of December 31, 2001, Safeguard owned approximately 50% of CompuCom's
outstanding common stock. Under a contractual agreement, CompuCom historically
paid Safeguard a fee for providing certain administrative, legal and financial
services. Effective April 1, 2000, that agreement was mutually terminated.
General and administrative expenses include charges from Safeguard pertaining to
the terminated arrangement of $150,000 in 2000 and $600,000 in 1999. In
addition, CompuCom incurred consulting-related expenses of approximately $0.1
million in 2001, $1.1 million in 2000, and $3.5 million in 1999, respectively,
with affiliates of Safeguard.
In July 2001, CompuCom purchased certain assets and assumed certain
liabilities of Excell Data Corporation ("Excell") for approximately $27 million
in cash, pursuant to the terms of the Asset Purchase Agreement entered into by
and among CompuCom, Excell and Cambridge Technology Partners, Inc.
("Cambridge"), the parent of Excell. At the time of the acquisition, Safeguard
held a 16.5% equity ownership interest in Cambridge.
(continued)
F-22
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In September 1999, CompuCom made a minority equity investment of $2.0
million in OPUS360 Corporation ("OPUS"). At the time of the investment,
Safeguard held an approximate eight percent equity ownership interest in OPUS.
In April 2000, CompuCom 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. In December 2000, CompuCom recorded a $1.0
million impairment charge for its investment in OPUS as such investment was
judged to have experienced an other than temporary decline in value. Both the
sale and impairment charge are reflected in Other income, net on the Company's
Consolidated Statements of Operations for the year ended December 31, 2000. As
of December 31, 2000, CompuCom had a remaining investment in OPUS, recorded at
fair value, of approximately $0.1 million, which was included in Other assets on
the Consolidated Balance Sheets. During 2001, the Company recorded a $0.1
million impairment charge for its remaining investment in OPUS as such
investment was judged to have experienced an other than temporary decline in
value.
(continued)
F-23
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Earnings Per Share
------------------
In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per
common share have been computed based on net earnings after preferred stock
dividend requirements 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 dividends, as required. Earnings per common share have been computed as
follows (in thousands, except per share amounts):
Year ended December 31, 2001
------------------------------------
Income Shares
(Numerator) (Denominator) EPS
---------- ------------- -------
Net earnings $6,661
Less: Preferred stock dividends (900)
------
Basic EPS
- ---------
Income available to common shareholders 5,761 48,034 $ .12
Effect of dilutive securities
- -----------------------------
Stock options -- 411
------ ------
Diluted EPS
- -----------
Income available + assumed conversions $5,761 48,445 $ .12
====== ====== ======
Year ended December 31, 2000
------------------------------------
Income Shares
(Numerator) (Denominator) EPS
---------- ------------- -------
Net earnings $5,118
Less: Preferred stock dividends (900)
------
Basic EPS
- ---------
Income available to common shareholders 4,218 48,703 $ .09
Effect of dilutive securities
- -----------------------------
Stock options -- 234
------ ------
Diluted EPS
- -----------
Income available + assumed conversions $4,218 48,937 $ .09
====== ====== =====
Year ended December 31, 1999
--------------------------------------
Income Shares
(Numerator) (Denominator) EPS
----------- ------------- --------
Net earnings $11,574
Less: Preferred stock dividends (900)
-------
Basic EPS
- ---------
Income available to common shareholders 10,674 47,657 $ .22
Effect of dilutive securities
- -----------------------------
Stock options -- 617
------- ------
Diluted EPS
- -----------
Income available + assumed conversions $10,674 48,274 $ .22
======= ====== =====
(continued)
F-24
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
CompuCom has excluded from its calculations of diluted earnings per
share 6,844,414 shares in 2001, 7,179,193 shares in 2000, and 3,453,249
shares in 1999, as they are considered anti-dilutive.
(15) Leases
------
CompuCom has noncancelable operating leases for facilities and
equipment, which expire at various dates from 2001 to 2006, with the
exception of the operating lease on CompuCom's headquarters facility, which
expires in 2019. Total rental expense for operating leases was $9.3
million, $12.1 million, and $10.4 million in 2001, 2000, and 1999,
respectively. Future minimum lease payments under noncancelable operating
leases as of December 31, 2001 are as follows (in thousands):
2002 $ 9,971
2003 9,023
2004 6,286
2005 4,625
2006 4,154
2007 and thereafter 47,947
--------
$ 82,006
========
(16) Savings Plan
------------
CompuCom modified its defined contribution plan (401(k) Matched
Savings Plan) ("the Plan") in 1999. Previously, the Plan covered
substantially all associates who had completed at least six months of
qualifying service and allowed participant contributions in an amount
between 1% and 10% of their eligible compensation. The modified Plan allows
associates to participate in the Plan on the first day of employment and
contribute up to 15% of eligible compensation. CompuCom matches 50% of each
participant's qualifying contribution up to 4% of compensation, and an
additional 25% of the next 2% of the participant's qualifying
contributions. Amounts expensed relating to the Plan were $1.8 million,
$2.3 million, and $2.6 million in 2001, 2000, and 1999, respectively.
(continued)
F-25
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Quarterly Financial Data (Unaudited)
------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share amounts)
2001
- ----
Revenue:
Product $482,361 $419,718 $332,877 $298,611
Service 71,927 68,991 71,883 69,136
-------- -------- -------- --------
Total revenue 554,288 488,709 404,760 367,747
Gross margin:
Product 42,090 37,894 33,085 31,081
Service 23,593 25,581 26,245 24,428
-------- -------- -------- --------
Total gross margin 65,683 63,475 59,330 55,509
Net earnings $ 1,773 $ 2,065 $ 1,162 $ 1,661
Earnings per common share:
Basic 0.03 0.04 0.02 0.03
Diluted 0.03 0.04 0.02 0.03
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share amounts)
2000
- ----
Revenue:
Product $511,645 $637,460 $656,383 $633,618
Service 64,066 64,151 68,493 74,821
-------- -------- -------- --------
Total revenue 575,711 701,611 724,876 708,439
Gross margin:
Product 35,518 48,622 51,979 48,857
Service 18,956 20,378 27,287 32,623
-------- -------- -------- --------
Total gross margin 54,474 69,000 79,266 81,480
Net earnings (loss) $(10,261)(1) $ 2,594(2) $ 5,100 $ 7,685(3)
Earnings (loss) per common share:
Basic (.22)(1) .05(2) .10 .15(3)
Diluted (.22)(1) .05(2) .10 .15(3)
(1) Includes after-tax restructuring charges designed to reduce the Company's
cost structure of $3.1 million or $.06 per share
(2) Includes after-tax gain on sale of marketable securities of $1.2 million or
$.02 per share
(3) Includes after-tax loss on write-down of marketable securities of $0.6
million or $.01 per share (continued)
F-26
COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) Contingencies
-------------
CompuCom has been named in a putative class action proceeding which arises
out of the initial public offering of OPUS. Beginning in April 2001, CompuCom
was named in putative class actions filed in Federal court in New York. The
plaintiffs allege material misrepresentations and/or omissions in connection
with the initial public offering of OPUS stock on April 7, 2000. The cases are
brought against OPUS, its officers and directors, Safeguard, CompuCom, and
OPUS's underwriters. In these cases, the plaintiffs allege, among other things,
that the prospectus and registration statement for OPUS's initial public
offering contained misrepresentations and/or omissions regarding: (1) OPUS's
products, including Opus Xchange; (2) OPUS's cash flow and liquidity, including
its "cash burn" rate; and (3) OPUS's relationships with its customers.
Plaintiffs assert claims under Sections 11, 12 and 15 of the Securities Act of
1933. Plaintiffs seek damages in an amount in excess of $70 million. CompuCom
and the other defendants have moved to dismiss this complaint for failure to
state a claim upon which relief may be granted. While the outcome of this
litigation is uncertain, CompuCom believes that it has valid defenses to
plaintiffs' claims and intends to defend the lawsuits vigorously.
CompuCom is involved in various other 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 its
consolidated financial position or results of operations, taken as a whole.
F-27
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By: /s/ M. Lazane Smith
-------------------
M. Lazane Smith
Senior Vice President, Finance, Chief Financial
Officer (Chief Accounting Officer), Secretary and Director
Dated: March 7, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated: March 7, 2002
/s/ J. Edward Coleman /s/ Delbert W. Johnson
- --------------------- ----------------------
J. Edward Coleman Delbert W. Johnson
Chairman of the Board, President, Director
Chief Executive Officer, and Director
/s/ Anthony L. Craig /s/ John D. Loewenberg
- -------------------- ----------------------
Anthony L. Craig John D. Loewenberg
Director Director
/s/ Michael J. Emmi /s/ Warren V. Musser
- ------------------- --------------------
Michael J. Emmi Warren V. Musser
Director Director
/s/ Richard F. Ford /s/ Anthony J. Paoni
- ------------------- --------------------
Richard F. Ford Anthony J. Paoni
Director Director
/s/ Edwin L. Harper /s/ Edward N. Patrone
- ------------------- ---------------------
Edwin L. Harper Edward N. Patrone
Director Director
/s/ M. Lazane Smith
-------------------
M. Lazane Smith
Director