Financial Condition, Liquidity and Capital Resources
Selected
liquidity data (in thousands):
|
|
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
Cash and cash equivalents
|
|
$
|
128,021
|
|
$
|
86,964
|
|
$
|
41,057
|
|
Accounts receivable, net
|
|
$
|
197,397
|
|
$
|
164,615
|
|
$
|
32,782
|
|
Inventories
|
|
$
|
250,222
|
|
$
|
233,136
|
|
$
|
17,086
|
|
Prepaid expenses and other
current
|
|
$
|
20,589
|
|
$
|
26,919
|
|
$
|
(6,330
|
)
|
Accounts payable
|
|
$
|
249,117
|
|
$
|
201,486
|
|
$
|
47,631
|
|
Accrued expenses
|
|
$
|
82,570
|
|
$
|
75,688
|
|
$
|
6,882
|
|
Short term debt
|
|
$
|
4,302
|
|
$
|
12,788
|
|
$
|
(8,486
|
)
|
Working capital
|
|
$
|
273,453
|
|
$
|
229,399
|
|
$
|
44,054
|
|
Our
primary liquidity needs are to support working capital requirements in our
business, to fund capital expenditures and minimal acquisitions and fund the
special dividends declared by our Board in 2007 and 2008. We rely principally
upon operating cash flow and borrowings under our credit facilities to meet
these needs. We believe that cash flow available from these sources will be
sufficient to meet our working capital requirements, projected capital
expenditures and interest and debt repayments in the foreseeable future.
The growth of our working capital in 2007
over 2006 resulted primarily from higher cash, receivables, inventories and
lower debt, offset by increased payables and accrued expenses. The increase in our inventories was
principally in our domestic locations. Inventory turnover was at 10 times
during 2007 and 2006. Our accounts receivable days outstanding was at 24 in
2007 up slightly from 23 in 2006. We expect that future accounts receivable and
inventory balances will fluctuate with growth in net sales and the mix of our
net sales between consumer and business customers.
We maintain our cash and cash equivalents
primarily in money market funds or their equivalent. As of December 2007,
all of our investments mature in less than three months. Accordingly, we do not
believe that our investments have significant exposure to interest rate risk.
Net cash provided by operating activities was $93.1
million, $34.3 million and $27.3 million during 2007, 2006 and 2005. The
increase in cash provided by operating activities in 2007 over 2006 resulted from
a $28.2 million increase in net income adjusted by other non-cash items, such
as depreciation expense, and an increase of $30.6 million in cash used for
changes in our working capital accounts.
The
increase in cash provided by operating activities in 2006 over 2005 resulted
from a $14.1 million increase in net income adjusted by other non-cash items,
such as depreciation expense, and a decrease of $7.1 million in cash used for
changes in our working capital accounts.
Net cash used in investing activities was
$8.0 million during 2007, primarily for capital expenditures. Net cash of $12.2
million was provided by investing activities during 2006 consisting of proceeds
from disposals of property and equipment of $18.9 million from the sale of our
distribution facility in Suwanee, Georgia offset by cash used for capital
expenditures of $6.7 million. We used cash $5.8 million during 2005 in
investing activities, principally for the purchase of property, plant and
equipment. Capital expenditures in 2007, 2006 and 2005 included upgrades and
enhancements to our information and communications systems hardware and
facilities costs for the opening of additional retail outlets stores in North
America.
Net
cash used in financing activities was $46.3 million during 2007, attributable
to dividends paid of $36.6 million, repayment of short term debt of $12.9
million, offset by proceeds of stock option exercises, related excess tax
benefits and share repurchases of $3.1 million. Net cash of $22.1 million was
used in financing activities for 2006. Repayment of short and long-term
borrowings used approximately $24.8 million of cash and proceeds from stock
option exercises and excess tax benefits from stock option exercises provided
approximately $2.6 million of cash. Net cash of $4.7 million was provided by
financing activities in 2005, primarily as a result of an increase in our
short-term borrowings in Europe.
26
We
have a $120 million secured revolving credit agreement (which may be increased
by up to an additional $30 million, subject to certain conditions). The facility expires in October 2010. Borrowings under the agreement are subject to
borrowing base limitations of up to 85% of eligible accounts receivable and 40%
of qualified inventories and are secured by accounts receivable, inventories
and certain other assets. The undrawn availability under the facility may not
be less than $15 million until the last day of any month in which the
availability net of outstanding borrowings is at least $70 million. The
revolving credit agreement requires that we maintain a minimum level of
availability. If such availability is not maintained, we will then be required
to maintain a fixed charge coverage ratio (as defined). The agreement contains
certain other covenants, including restrictions on capital expenditures and
payments of dividends. As of December 31, 2007, the Company was in
compliance with all of the covenants under the credit facility. Eligible
collateral under the facility was $106.9 million, total availability was $97.0
million, outstanding letters of credit of were $9.7 million and there were no
outstanding advances.
The Companys Netherlands subsidiary
maintains a 5 million ($7.4 million as of December 2007 exchange rate)
credit facility with a local financial institution. At December 2007 there
was approximately 2.6 million ($3.9 million) outstanding under this line. The
facility carries interest at a rate of 7.05%. Borrowings under the facility are
secured by the subsidiarys accounts receivable and are subject to a borrowing
base limitation of 85% of the eligible accounts. This facility expires in September 2008.
In
April 2002, we entered into a ten year, $8.4 million mortgage loan on our
Suwanee, Georgia distribution facility.
During the first quarter of fiscal 2006, we sold this facility and
repaid the remaining balance on the loan. The facility was replaced by a
larger, leased distribution center in a nearby area.
We are obligated under non-cancelable
operating leases for the rental of most of our facilities and certain of our
equipment which expire at various dates through 2026. We currently lease one of our New York
facilities from an entity owned by Richard Leeds, Robert Leeds and Bruce Leeds,
the Companys three principal shareholders and senior executive officers. The
annual rental will total $860,000 for 2008 and the lease expires in 2017. We
have sublease agreements for unused space we lease Wellingborough, England. In
the event the sublessee is unable to fulfill its obligations, we would be
responsible for rent due under the lease. However, we expect the sublessee will
fulfill their obligations under the leases.
Following
is a summary of our contractual obligations for future principal payments on
our debt, minimum rental payments on our non-cancelable operating leases and
minimum payments on our other purchase obligations as of December 2007 (in
thousands):
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
After 2012
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
471
|
|
$
|
186
|
|
$
|
73
|
|
$
|
10
|
|
|
|
|
|
Non-cancelable operating leases, net of subleases
|
|
13,280
|
|
12,895
|
|
10,390
|
|
9,342
|
|
8,549
|
|
54,737
|
|
Purchase and other
obligations
|
|
6,945
|
|
3,437
|
|
3,523
|
|
3,368
|
|
3,471
|
|
3,632
|
|
Short term loans
|
|
3,853
|
|
|
|
|
|
|
|
|
|
|
|
Tax contingencies
|
|
1,547
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
obligations
|
|
$
|
26,096
|
|
$
|
16,518
|
|
$
|
13,986
|
|
$
|
12,720
|
|
$
|
12,020
|
|
$
|
58,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Our
purchase and other obligations consist primarily of certain employment
agreements and service agreements.
In
addition to the contractual obligations noted above, we had $9.7 million of
standby letters of credit outstanding as of December 2007.
Our
operating results have generated cash flow which, together with borrowings
under our debt agreements, has provided sufficient capital resources to finance
working capital and cash operating requirements, fund capital expenditures, and
fund the payment of interest on outstanding debt. Our primary ongoing cash
requirements will be to finance working capital, particularly working capital
requirements related to our purchase of CompUSA, provide payment of the special
shareholder dividend of approximately $37 million (based on shareholders of
record as of March 21,2008) declared in the first quarter of 2008, fund
the payment of principal and interest on indebtedness, fund capital
expenditures, fund minimal acquisitions and fund any future special shareholder
dividends that may be declared. We believe future cash flows from operations and
availability of borrowings under our lines of credit will be sufficient to fund
ongoing cash requirements for at least the next twelve months.
We are party to certain litigation, the
outcome of which we believe, based on discussions with legal counsel, will not
have a material adverse effect on our consolidated financial statements.
Tax contingencies are related to
uncertain tax positions taken on income tax returns that may result in
additional tax, interest and penalties being paid to taxing authorities.
Off-Balance Sheet Arrangements
The
Company currently leases its facility in Port Washington, NY from Addwin Realty
Associates, an entity owned by Richard Leeds, Bruce Leeds, and Robert Leeds,
Directors of the Company and the Companys three senior executive officers and
principal stockholders.
We
have not created, and are not party to, any special-purpose or off-balance
sheet entities for the purpose of raising capital, incurring debt or operating
our business. We do not have any arrangements or relationships with entities
that are not consolidated into the financial statements that are reasonably
likely to materially affect our liquidity or the availability of capital
resources.
Item 7A. Quantitative and
Qualitative Disclosure About Market Risk.
We are exposed to market risks, which include changes in U.S. and
international interest rates as well as changes in currency exchange rates
(principally Pounds Sterling, Euros and Canadian Dollars) as measured against
the U.S. Dollar and each other.
The translation of the financial statements of our operations located
outside of the United States is impacted by movements in foreign currency
exchange rates. Changes in currency exchange rates as measured against the U.S.
dollar may positively or negatively affect sales, gross margins, operating
expenses and retained earnings as expressed in U.S. dollars. Sales would have
fluctuated by approximately $102 million and pre tax income would have
fluctuated by approximately $1.6 million if average foreign exchange rates
changed by 10% in 2007. We have limited
involvement with derivative financial instruments and do not use them for
trading purposes. We may enter into foreign currency options or forward
exchange contracts aimed at limiting in part the impact of certain currency
fluctuations, but as of December 2007 we had no outstanding forward
exchange contracts.
Our exposure to market risk for changes in interest rates relates
primarily to our variable rate debt. Our
variable rate debt consists of short-term borrowings under our credit
facilities. As of December 2007,
there were no outstanding balances under our variable rate credit facility. A
hypothetical change in average interest rates of one percentage point is not
expected to have a material effect on our financial position, results of
operations or cash flows over the next fiscal year.
28
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 of Part II is incorporated herein
by reference to the Consolidated Financial Statements filed with this report;
see Item 15 of Part IV.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under
the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer,
the Company carried out an evaluation of the effectiveness of the design and
operation of the Companys disclosure controls and procedures as of December 31,
2007. As part of this evaluation we identified a significant deficiency, as
defined under Auditing Standard No. 5: An Audit of Internal Control Over
Financial Reporting That is Integrated With an Audit of Financial Statements,
in our internal controls over financial reporting as of December 31, 2007.
This significant deficiency is:
The
Company consolidates its worldwide financial results from disparate underlying
financial and operational systems that have various functional limitations and
few automated interfaces. This results in a consolidation process that is
heavily reliant on manual review procedures and manual adjustments. Our control
over this consolidation process primarily consists of corporate review
procedures. The design and operation of this control process may not prevent or
detect misstatements on a timely basis. This significant deficiency does not,
in our judgment, rise to the level of a material weakness in internal controls
over financial reporting because we believe that the controls in place would
prevent or detect a material misstatement. Based upon this evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures are effective.
Inherent Limitations of
Internal Controls
Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
(iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our assets that
could have a material effect on our financial statements.
Management, including our Chief Executive Officer
and Chief Financial Officer, does not expect that our internal controls will
prevent or detect all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute,
assurance that the objectives of the
29
control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of internal controls
can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected. Also, any evaluation of the effectiveness of
controls in future periods are subject to the risk that those internal controls
may become inadequate because of changes in business conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Managements Report on
Internal Control Over Financial Reporting
The Companys management is responsible for
establishing and maintaining adequate internal control over financial
reporting.
Under the supervision and
with the participation of Companys management, including the Chief Executive
Officer and Chief Financial Officer, the Company evaluated the effectiveness of
the design and operation of its internal control over financial reporting based
on the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys internal control over financial reporting was
effective as of December 31, 2007.
Our independent registered public accounting firm,
Ernst & Young, has issued an attestation report on the effectiveness
of our internal control over financial reporting as of December 31, 2007,
a copy of which is included in this report.
Changes in Internal Control Over
Financial Reporting
In
conjunction with our Section 404 compliance efforts, we have made numerous
significant improvements to our internal control over financial reporting,
including remediation of the significant deficiencies noted during previous
quarters, with the exception of the consolidation process. The scope of these improvements
was broad, impacting internal control over financial reporting throughout the
Company. However, the nature of these improvements was incremental and the
impact was not material both individually and in the aggregate.
There
have been no changes in the Companys internal controls over financial
reporting during the year ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
Item 9B. Other Information.
None.
30
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The
information required by Item 10 of Part III is hereby incorporated by
reference from the Companys Proxy Statement for the 2008 Annual Meeting of
Stockholders which we anticipate filing April 25, 2008 (the Proxy
Statement).
Item 11. Executive Compensation.
The
information required by Item 11 of Part III is hereby incorporated by
reference from the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The
information required by item 12 of Part III is hereby incorporated by
reference from the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by Item 10 of Part III is hereby
incorporated by reference from the Proxy Statement
.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 of Part III is hereby
incorporated by reference from the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) 1. Consolidated
Financial Statements of Systemax Inc.
31
|
2.
|
Financial Statement
Schedules:
|
|
|
|
|
|
The following financial
statement schedule is filed as part of this report and should be read
together with our consolidated financial statements:
|
|
|
|
|
|
Schedule
II Valuation and Qualifying Accounts
60
|
|
|
|
|
|
Schedules not included
with this additional financial data have been omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
|
|
|
|
|
3.
|
Exhibits.
|
Exhibit
|
|
|
No.
|
|
Description
|
3.1
|
|
Composite
Certificate of Incorporation of Registrant, as amended (incorporated by
reference to the Companys annual report on Form 10-K for the year ended
December 31, 2001)
|
|
|
|
3.2
|
|
Amended
and Restated By-laws of Registrant (effective as of December 29,2007)
4.1 Stockholders Agreement (incorporated by
reference to the Companys quarterly report on Form 10-Q for the
quarterly period ended September 30, 1995)
|
|
|
|
10.1
|
|
Form of
1995 Long-Term Stock Incentive Plan* (incorporated by reference to the
Companys registration statement on Form S-1) (Registration
No. 333-1852)
|
|
|
|
10.2
|
|
Form of
1999 Long-Term Stock Incentive Plan as amended* (incorporated by reference to
the Companys report on Form 8-K dated May 20, 2003)
|
|
|
|
10.3
|
|
Lease
Agreement dated September 20, 1988 between the Company and Addwin Realty
Associates (Port Washington facility) (incorporated by reference to the
Companys registration statement on Form S-1) (Registration
No. 33-92052)
|
|
|
|
10.4
|
|
Amendment
to Lease Agreement dated September 29, 1998 between the Company and Addwin
Realty Associates (Port Washington facility) (incorporated by reference to
the Companys annual report on Form 10-K for the year ended
December 31, 1998)
|
|
|
|
10.5
|
|
Lease
Agreement dated as of July 17, 1997 between the Company and South Bay
Industrials Company (Compton facility) (incorporated by reference to the
Companys annual report on Form 10-K for the year ended
December 31, 1997)
|
|
|
|
10.6
|
|
Build-to-Suit
Lease Agreement dated April, 1995 among the Company, American National Bank
and Trust Company of Chicago (Trustee for the original landlord) and Walsh,
Higgins & Company (Contractor) (Naperville Illinois Facility
Lease) (incorporated by reference to the Companys registration statement on
Form S-1) (Registration No. 33-92052)
|
|
|
|
10.7
|
|
Lease
Agreement dated September 17, 1998 between Tiger Direct, Inc. and
Keystone Miami Property Holding Corp. (Miami facility) (incorporated by
reference to the Companys quarterly report on Form 10-Q for the
quarterly period ended September 30, 1998)
|
|
|
|
10.8
|
|
Royalty
Agreement dated June 30, 1986 between the Company and Richard Leeds,
Bruce Leeds and Robert Leeds, and Addendum thereto (incorporated by reference
to the Companys registration statement on Form S-1) (Registration
No. 33-92052)
|
|
|
|
10.9
|
|
Form of
1995 Stock Plan for Non-Employee Directors* (incorporated by reference to the
Companys registration statement on Form S-1) (Registration
No. 333-1852)
|
32
10.12
|
|
Employment
Agreement dated as of December 12, 1997 between the Company and Steven
M. Goldschein* (incorporated by reference to the Companys annual report on
Form 10-K for the year ended December 31, 1997. See exhibit 10,23
for Amendment.)
|
|
|
|
10.15
|
|
Employment
Agreement entered into on October 12, 2004 but effective as of
June 1, 2004 between the Company and Gilbert Fiorentino* (incorporated
by reference to the Companys report on Form 8-K dated October 12,
2004)
|
|
|
|
10.16
|
|
Restricted
Stock Unit Agreement entered into on October 12, 2004 but effective as
of June 1, 2004 between the Company and Gilbert Fiorentino*
(incorporated by reference to the Companys report on Form 8-K dated
October 12, 2004)
|
|
|
|
10.17
|
|
Amended
and Restated Credit Agreement, dated as of October 27, 2005, between JP
Morgan Chase Bank, N.A. and affiliates, General Electric Capital Corporation,
and GMAC Commercial Finance LLC (as Lenders) with the Company and certain
subsidiaries of the Company (as Borrowers) (the Amended and Restated JP
Morgan Chase Loan Agreement) (incorporated by reference to the Companys
report on Form 8-K dated October 27, 2005)
|
|
|
|
10.18
|
|
Amendment
No. 1, dated as of December 19, 2005, to the Amended and Restated
JP Morgan Chase Loan Agreement
(incorporated by reference to
the Companys annual report on Form 10K for the year ended
December 31, 2005)
|
|
|
|
10.19
|
|
Lease
agreement, dated December 8, 2005, between the Company and Hamilton
Business Center, LLC (Buford, Georgia facility) (incorporated by reference to
the Companys annual report on Form 10K for the year ended
December 31, 2005)
|
|
|
|
10.20
|
|
First
Amendment, dated as of June 12, 2006, to the Lease Agreement between the
Company and Hamilton Business Center, LLC (Buford, Georgia facility)
(incorporated by reference to the Companys annual report on Form 10K
for the year ended December 31, 2005)
|
|
|
|
10.21
|
|
First
Amendment, dated as of February 1, 2006, to the Naperville Illinois
Facility Lease between the Company and Ambassador Drive LLC (current
landlord) (incorporated by reference to the Companys annual report on
Form 10K for the year ended December 31, 2005)
|
|
|
|
10.22
|
|
Agreement
of Purchase and Sale, dated December 9, 2005, between the Company (as
Seller) and Hewlett Packard Company (as Buyer) (Suwanee, Georgia facility)
(incorporated by reference to the Companys annual report on Form 10K
for the year ended December 31, 2005)
|
|
|
|
10.23
|
|
Amendment
No. 1 dated January 17, 2007, to Employment Agreement dated as
December 12, 1997 between the Company and Stephen M.
Goldschein*(incorporated by reference to the Companys report on
Form 10-K dated December 31, 2006).
|
|
|
|
10.24
|
|
Employment
Agreement, dated as of January 17, 2007, between the Company and
Lawrence P. Reinhold*(incorporated by reference to the Companys report on
Form 10-K dated December 31, 2006).
|
33
10.25
|
|
Form of
2006 Stock Incentive Plan for Non-Employee Directors*(incorporated by
reference to the Companys report on Form 10-K dated December 31,
2006).
|
|
|
|
10.26
|
|
Form of
2005 Employee Stock Purchase Plan* (incorporated by reference to the
Companys report on Form 10-K dated December 31, 2006).
|
|
|
|
10.27
|
|
Second
Amendment to Lease Agreement dated September 20, 1988 between the
Company and Addwin Realty Associates(filed herewith).
|
|
|
|
10.28
|
|
Asset
Purchase Agreement between the Company and CompUSA dated January 5, 2008
(filed herewith).
|
|
|
|
10.29
|
|
Amendment
to Asset Purchase Agreement between the Company and CompUSA dated
February 14, 2008 (filed herewith).
|
|
|
|
14
|
|
Corporate
Ethics Policy for Officers, Directors and Employees (revised as of
March 30, 2005) (incorporated by reference to the Companys report on
Form 8-K dated March 30, 2005)
|
|
|
|
21
|
|
Subsidiaries
of the Registrant
|
|
|
|
23
|
|
Consent
of experts and counsel: Consent of Independent Registered Public Accounting
Firm
|
|
|
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
99.1
|
|
Charter
of the Audit Committee of the Companys Board of Directors, as revised
August 29, 2006 (incorporated by reference to the Companys report on
Form 8-K dated August 29, 2006)
|
|
|
|
99.2
|
|
Charter
of the Compensation Committee of the Companys Board of Directors, as revised
August 29, 2006 (incorporated by reference to the Companys report on
Form 8-K dated August 29, 2006)
|
|
|
|
99.3
|
|
Charter
of the Nominating/Corporate Governance Committee of the Companys Board of
Directors, as revised August 29, 2006 (incorporated by reference to the
Companys report on Form 8-K dated August 29, 2006)
|
* Management contract or
compensatory plan or arrangement
34
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.
|
|
SYSTEMAX
INC.
|
|
|
|
|
|
By:
|
/s/
RICHARD LEEDS
|
|
|
|
|
|
Richard
Leeds
|
|
|
Chairman
and Chief Executive Officer
|
|
|
|
|
|
Date:
March 13, 2008
|
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ RICHARD LEEDS
|
|
Chairman and Chief Executive Officer
|
|
March 13, 2008
|
Richard Leeds
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ BRUCE LEEDS
|
|
Vice Chairman
|
|
March 13, 2008
|
Bruce Leeds
|
|
|
|
|
|
|
|
|
|
/s/ ROBERT LEEDS
|
|
Vice Chairman
|
|
March 13, 2008
|
Robert Leeds
|
|
|
|
|
|
|
|
|
|
/s/ LAWRENCE P. REINHOLD
|
|
Executive Vice President and Chief Financial Officer
|
|
March 13, 2008
|
Lawrence P. Reinhold
|
|
(Principal Financial Officer)
|
|
|
|
|
|
|
|
/s/ THOMAS AXMACHER
|
|
Vice President and Controller
|
|
March 13, 2008
|
Thomas Axmacher
|
|
(Principal Accounting Officer)
|
|
|
|
|
|
|
|
/s/ GILBERT FIORENTINO
|
|
Director
|
|
March 13, 2008
|
Gilbert Fiorentino
|
|
|
|
|
|
|
|
|
|
/s/ ROBERT D. ROSENTHAL
|
|
Director
|
|
March 13, 2008
|
Robert D. Rosenthal
|
|
|
|
|
|
|
|
|
|
/s/ STACY DICK
|
|
Director
|
|
March 13, 2008
|
Stacy Dick
|
|
|
|
|
|
|
|
|
|
/s/ ANN R. LEVEN
|
|
Director
|
|
March 13, 2008
|
Ann R. Leven
|
|
|
|
|
35
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of
Systemax, Inc.
We have audited the accompanying consolidated balance sheets
of Systemax, Inc. as of December 31, 2007 and 2006, and the related
consolidated statements of operations, shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2007. Our audits
also included the financial statement schedule included in the Index at Item
15. These financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion
.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Systemax, Inc. at December 31, 2007 and 2006, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles
.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2007, Systemax, Inc. adopted
Financial Accounting Standards Board Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109
and effective January 1, 2006, Systemax, Inc. adopted Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Systemax, Inc.s
internal control over financial reporting as of December 31, 2007, based
on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 12, 2008 expressed an unqualified opinion thereon
.
/s/ Ernst & Young LLP
New York, New York
March 12,
2008
36
Report of Independent Registered Public Accounting
Firm on Internal Control over Financial Reporting
The Board of Directors and Shareholders of
Systemax, Inc.
We have audited Systemax, Inc.s
internal control over financial reporting as of December 31, 2007, based
on criteria established in Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Systemax, Inc.s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Managements Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A companys internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Systemax, Inc.
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Systemax, Inc. as of December 31,
2007 and 2006, and the related consolidated statements of operations,
shareholders equity and cash flows for each of the three years in the period
ended December 31, 2007 of Systemax, Inc. and our report dated March 12,
2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
March 12,
2008
37
SYSTEMAX INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
128,021
|
|
$
|
86,964
|
|
Accounts receivable, net of allowances of $11,817 and
$11,370
|
|
197,397
|
|
164,615
|
|
Inventories, net
|
|
250,222
|
|
233,136
|
|
Prepaid expenses and other current assets
|
|
20,589
|
|
26,919
|
|
Deferred income tax assets, net
|
|
9,360
|
|
7,727
|
|
Total current assets
|
|
605,589
|
|
519,361
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
48,480
|
|
48,586
|
|
Deferred income tax assets, net
|
|
18,652
|
|
14,041
|
|
Other assets
|
|
1,150
|
|
2,173
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
673,871
|
|
$
|
584,161
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Short-term borrowings, including current portions of
long-term debt
|
|
$
|
4,302
|
|
$
|
12,788
|
|
Accounts payable
|
|
245,264
|
|
201,486
|
|
Accrued expenses and other current liabilities
|
|
82,570
|
|
75,688
|
|
Total current liabilities
|
|
332,136
|
|
289,962
|
|
|
|
|
|
|
|
Long-term debt
|
|
254
|
|
483
|
|
Other liabilities
|
|
5,646
|
|
4,226
|
|
Total liabilities
|
|
338,036
|
|
294,671
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock, par value $.01 per share, authorized
25 million shares; issued none
|
|
|
|
|
|
Common stock, par value $.01 per share, authorized 150
million shares; issued 38,332,990
and 38,331,990 shares; outstanding 36,092,067 and 35,341,377 shares
|
|
383
|
|
383
|
|
Additional paid-in capital
|
|
173,381
|
|
172,983
|
|
Common stock in treasury at cost 2,240,923 and
2,990,613 shares
|
|
(26,324
|
)
|
(35,131
|
)
|
Retained earnings
|
|
176,684
|
|
144,074
|
|
Accumulated other comprehensive income, net of tax
|
|
11,711
|
|
7,181
|
|
Total shareholders equity
|
|
335,835
|
|
289,490
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
673,871
|
|
$
|
584,161
|
|
See notes to consolidated
financial statements.
38
SYSTEMAX INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per share
amounts)
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net
sales
|
|
$
|
2,779,875
|
|
$
|
2,345,165
|
|
$
|
2,115,518
|
|
Cost
of sales
|
|
2,353,574
|
|
2,002,246
|
|
1,808,231
|
|
Gross
profit
|
|
426,301
|
|
342,919
|
|
307,287
|
|
Selling,
general and administrative expenses
|
|
330,797
|
|
281,015
|
|
268,327
|
|
Restructuring
and other charges
|
|
|
|
|
|
4,151
|
|
Operating
income
|
|
95,504
|
|
61,904
|
|
34,809
|
|
Interest
and other income, net
|
|
(5,505
|
)
|
(9,475
|
)
|
(735
|
)
|
Interest
expense
|
|
986
|
|
1,684
|
|
2,670
|
|
Income
before income taxes
|
|
100,023
|
|
69,695
|
|
32,874
|
|
Provision
for income taxes
|
|
30,542
|
|
24,548
|
|
21,433
|
|
Net
income
|
|
$
|
69,481
|
|
$
|
45,147
|
|
$
|
11,441
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.93
|
|
$
|
1.29
|
|
$
|
.33
|
|
Diluted
|
|
$
|
1.84
|
|
$
|
1.22
|
|
$
|
.31
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares:
|
|
|
|
|
|
|
|
Basic
|
|
35,968
|
|
34,960
|
|
34,646
|
|
Diluted
|
|
37,688
|
|
36,881
|
|
36,488
|
|
See notes to
consolidated financial statements.
39
SYSTEMAX INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
69,481
|
|
$
|
45,147
|
|
$
|
11,441
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
8,780
|
|
8,185
|
|
9,994
|
|
(Gain) loss on dispositions and abandonment
|
|
(1,032
|
)
|
(7,721
|
)
|
1,279
|
|
Provision (benefit) for deferred income taxes
|
|
(6,106
|
)
|
2,254
|
|
6,228
|
|
Provision for returns and doubtful accounts
|
|
4,575
|
|
1,503
|
|
7,620
|
|
Compensation expense related to equity compensation
plans
|
|
4,159
|
|
2,330
|
|
1,004
|
|
Tax benefit of employee stock plans
|
|
|
|
|
|
12
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(27,786
|
)
|
(3,917
|
)
|
(31,722
|
)
|
Inventories
|
|
(13,229
|
)
|
(36,216
|
)
|
(3,457
|
)
|
Prepaid expenses and other current assets
|
|
9,229
|
|
(10,060
|
)
|
3,989
|
|
Income taxes payable/receivable
|
|
(235
|
)
|
(4,234
|
)
|
527
|
|
Accounts payable, accrued expenses and other current
liabilities
|
|
45,247
|
|
37,055
|
|
20,430
|
|
Net cash provided by operating activities
|
|
93,083
|
|
34,326
|
|
27,345
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
(7,950
|
)
|
(6,701
|
)
|
(5,896
|
)
|
Proceeds from disposals of property, plant and
equipment
|
|
28
|
|
18,938
|
|
103
|
|
Net cash provided by (used in) investing activities
|
|
(7,922
|
)
|
12,237
|
|
(5,793
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
(Repayments) proceeds of borrowings from banks
|
|
(8,708
|
)
|
(16,473
|
)
|
13,889
|
|
Repayments of long-term debt and capital lease
obligations
|
|
(328
|
)
|
(8,305
|
)
|
(9,978
|
)
|
Dividends paid
|
|
(36,588
|
)
|
|
|
|
|
Proceeds from issuance of common stock, net of
repurchases
|
|
972
|
|
1,602
|
|
780
|
|
Excess tax benefit from exercises of stock options
|
|
2,160
|
|
1,030
|
|
|
|
Net cash provided by (used in) financing activities
|
|
(42,492
|
)
|
(22,146
|
)
|
4,691
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATES ON CASH
|
|
(1,612
|
)
|
(744
|
)
|
791
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
41,057
|
|
23,673
|
|
27,034
|
|
CASH
AND CASH EQUIVALENTS BEGINNING OF YEAR
|
|
86,964
|
|
63,291
|
|
36,257
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS END OF YEAR
|
|
$
|
128,021
|
|
$
|
86,964
|
|
$
|
63,291
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,182
|
|
$
|
1,861
|
|
$
|
2,498
|
|
Income taxes paid
|
|
$
|
30,275
|
|
$
|
26,465
|
|
$
|
15,522
|
|
Supplemental
disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Acquisitions of equipment through capital leases
|
|
$
|
251
|
|
$
|
776
|
|
|
|
Deferred stock-based compensation related to
restricted unit stock granted
|
|
|
|
|
|
|
|
See notes to consolidated
financial statements.
40
SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands)
|
|
Common
Stock
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
Other
|
|
Unearned
|
|
|
|
|
|
of Shares
|
|
|
|
Additional
|
|
Treasury
|
|
|
|
Comprehensive
|
|
Restricted
|
|
|
|
|
|
Out-
|
|
|
|
Paid-in
|
|
Stock,
|
|
Retained
|
|
Income
(Loss),
|
|
Stock
|
|
Comprehensive
|
|
|
|
Standing
|
|
Amount
|
|
Capital
|
|
At Cost
|
|
Earnings
|
|
Net of
Tax
|
|
Compensation
|
|
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2005
|
|
34,433
|
|
$
|
382
|
|
$
|
180,640
|
|
$
|
(44,630
|
)
|
$
|
87,486
|
|
$
|
3,920
|
|
$
|
(5,166
|
)
|
$
|
|
|
Change in
cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(3,027
|
)
|
|
|
(3,027
|
)
|
Exercise of stock options
|
|
328
|
|
|
|
(3,078
|
)
|
3,858
|
|
|
|
|
|
|
|
|
|
Tax benefit of
employee stock plans
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
Grant of
restricted stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
unearned restricted stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,004
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
11,441
|
|
|
|
|
|
11,441
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,414
|
|
Balances,
December 31, 2005
|
|
34,761
|
|
382
|
|
177,574
|
|
(40,772
|
)
|
98,927
|
|
893
|
|
(4,162
|
)
|
|
|
Reversal of
unamortized unearned restricted stock compensation
|
|
|
|
|
|
(4,162
|
)
|
|
|
|
|
|
|
4,162
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
2,330
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted stock, net
|
|
100
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
480
|
|
|
|
(4,039
|
)
|
5,641
|
|
|
|
|
|
|
|
|
|
Income tax
benefit on stock-based compensation
|
|
|
|
|
|
1,280
|
|
|
|
|
|
|
|
|
|
|
|
Change in
cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
6,288
|
|
|
|
6,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
45,147
|
|
|
|
|
|
45,147
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,435
|
|
Balances,
December 31, 2006
|
|
35,341
|
|
383
|
|
172,983
|
|
(35,131
|
)
|
144,074
|
|
7,181
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
4,009
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
205
|
|
|
|
(2,843
|
)
|
2,406
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
546
|
|
|
|
(3,569
|
)
|
6,401
|
|
|
|
|
|
|
|
|
|
Income tax
benefit on stock-based compensation
|
|
|
|
|
|
2,801
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect
of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
(283
|
)
|
|
|
|
|
|
|
Change in
cumulative translation adjustment net
|
|
|
|
|
|
|
|
|
|
|
|
4,530
|
|
|
|
4,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
(36,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
69,481
|
|
|
|
|
|
69,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,011
|
|
Balances,
December 31, 2007
|
|
36,092
|
|
$
|
383
|
|
$
|
173,381
|
|
$
|
(26,324
|
)
|
$
|
176,684
|
|
$
|
11,711
|
|
$
|
|
|
|
|
See notes to consolidated financial statements.
41
SYSTEMAX INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying
consolidated financial statements include the accounts of Systemax Inc. and its
wholly-owned subsidiaries (collectively, the Company or Systemax). All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year
balance sheet amounts have been reclassified to conform to current year
presentation.
Use of
Estimates In Financial Statements
The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
Fiscal
Year
Effective the fourth quarter of 2007, the Company
changed its fiscal year end from a calendar year ending on December 31 to
a fiscal year ending at midnight on the Saturday closest to December 31.
Fiscal years will typically include 52 weeks, but every few years will include
53 weeks which was the case in 2005. For clarity of presentation herein, all
fiscal years are referred to as if they ended on December 31. The fiscal
year will be divided into four fiscal quarters that each end at midnight on a
Saturday. Fiscal quarters will typically include 13 weeks, but the fourth
quarter will include 14 weeks in a 53 week fiscal year. For clarity of
presentation herein, all fiscal quarters are referred to as if they ended on
the traditional calendar month. The
effect of the change in year end in 2007 was de minimis.
Foreign
Currency Translation
The Company has operations in numerous
foreign countries. The functional
currency of in each foreign country is the local currency. The financial statements of the Companys
foreign entities are translated into U.S. dollars, the reporting currency,
using year-end exchange rates for assets and liabilities, average exchange
rates for the statement of operations items and historical rates for equity
accounts. The translation differences
are recorded as a separate component of shareholders equity.
Cash and Cash Equivalents
The Company
considers amounts held in money market accounts and other short-term
investments, including overnight bank deposits, with an original maturity date
of three months or less to be cash equivalents.
Inventories
Inventories
consist primarily of finished goods and are stated at the lower of cost or
market value. Cost is determined by
using the first-in, first-out method. Allowances are maintained for obsolete,
slow-moving and non-saleable inventory.
Property,
Plant and Equipment
Property, plant and equipment is stated at
cost. Depreciation of furniture,
fixtures and equipment, including equipment under capital leases, is on the
straight-line or accelerated method over their estimated useful lives ranging
from three to ten years. Depreciation of
buildings is on the straight-line method over estimated useful lives of 30 to
50 years. Leasehold improvements are
amortized over the lesser of the useful lives or the term of the respective
leases.
Capitalized
Software Costs
The Company capitalizes purchased software ready
for service and capitalizes software development costs incurred on significant
projects from the time that the preliminary project stage is completed and
management commits to funding a project until the project is substantially
complete and the software is ready for its intended use. Capitalized costs include materials and service
costs and payroll and payroll-related costs.
Capitalized software costs are amortized using the straight-line method
over the estimated useful life of the underlying system, generally five years.
Evaluation
of Long-lived Assets
Long-lived assets are evaluated for
recoverability whenever events or changes in circumstances indicate that an
asset may have been impaired. In
evaluating an asset for recoverability, the Company estimates the future cash
flows expected to result from the use of the asset and eventual
disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss, equal to the excess of the
carrying amount over the fair market value of the asset is recognized.
42
Accruals
Management makes estimates and
assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. These estimates are based upon various
factors such as the number of units sold, historical and anticipated results
and data received from third party vendors. Actual results could differ from
these estimates. Our most significant estimates include those related to the
costs of
vendor drop shipments, sales returns and allowances, cooperative
advertising and customer rebate reserves, and other vendor and employee related
costs.
Product
Warranties
Provisions for estimated future expenses relating
to product warranties for the Companys assembled PCs are recorded as cost of
sales when revenue is recognized. Liability estimates are determined based on
management judgment considering such factors as the number of units sold,
historical and anticipated rates of warranty claims and the likely current cost
of corrective action. The changes in
accrued product warranties were as follows (in thousands):
|
|
Year ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Balance, beginning of year
|
|
$
|
1,061
|
|
$
|
1,316
|
|
$
|
2,011
|
|
Charged to expense
|
|
1,400
|
|
1,556
|
|
21
|
|
Deductions
|
|
(1,547
|
)
|
(1,811
|
)
|
(716
|
)
|
Balance, end of year
|
|
$
|
914
|
|
$
|
1,061
|
|
$
|
1,316
|
|
Income
Taxes
Deferred tax assets and liabilities are
recognized for the effect of temporary differences between the book and tax
bases of recorded assets and liabilities and for tax loss carry forwards. The
realization of net deferred tax assets is dependent upon our ability to
generate sufficient future taxable income. Where it is more likely than not
that some portion or of the deferred tax asset will not be realized, we have
provided a valuation allowance. If the realization of those deferred tax assets
in the future is considered more likely than not, an adjustment to the deferred
tax assets would increase net income in the period such determination is made.
Revenue
Recognition and Accounts Receivable
The Company recognizes
sales of products, including shipping revenue, when persuasive evidence of an
order arrangement exists, delivery has occurred, the sales price is fixed or
determinable and collectibility is reasonably assured. Generally, these
criteria are met at the time the product is received by the customers when
title and risk of loss have transferred.
Allowances for estimated subsequent customer returns, rebates and sales
incentives are provided when revenues are recorded. Costs incurred for the shipping and handling
of its products are recorded as cost of sales. Revenue from extended warranty
and support contracts on the Companys assembled PCs is deferred and recognized
over the contract period.
Accounts
receivable are shown in the consolidated balance sheets net of allowances for
doubtful collections and subsequent customer returns.
Advertising Costs
Advertising costs,
consisting primarily of catalog preparation, printing and postage expenditures,
are amortized over the period of catalog distribution during which the benefits
are expected, generally one to six months.
Expenditures relating to television and local radio advertising are
expensed in the period the advertising takes place.
Net
advertising expenses were $47.2 million, $37.4 million and $39.4 million during
2007, 2006 and 2005 are included in the accompanying Consolidated Statements of
Operations. The Company utilizes
advertising programs to support vendors, including catalogs, internet and
magazine advertising, and receives payments and credits from vendors, including
consideration pursuant to volume incentive programs and cooperative marketing
programs. The Company accounts for consideration from vendors as a reduction of
cost of sales unless certain conditions are met showing that the funds are used
for specific, incremental, identifiable costs, in which case the consideration
is accounted for as a reduction in the related expense category, such as
advertising expense. The amount of
vendor consideration recorded as a reduction of selling, general and
administrative expenses totaled $42.6 million, $39.6 million and $39.1 million
during 2007, 2006 and 2005.
Prepaid
expenses as of December 2007 and 2006 include deferred advertising costs
of $3.9 million and $3.5 million which are reflected as an expense during the
periods benefited, typically the subsequent fiscal quarter.
Stock
based compensation
Effective January 1, 2006, the Company
adopted the provisions of SFAS 123(R), using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized for the year ended December 31, 2006
includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of, January 1, 2006, based on the grant-date
fair value estimated in accordance with the original provisions of SFAS 123,
and (b) compensation cost for the vested portion of share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). Results for prior
periods have not been restated.
The fair value of employee share options is
recognized in expense over the vesting period of the options, using the graded
attribution method. The fair value of
employee share options is determined on the date of grant using the
Black-Scholes option pricing model. The Company has used historical volatility
in its estimate of expected volatility. The expected life represents the period
of time (in years) for which the options granted are expected to be
outstanding. The Company used the simplified method for determining expected
life as permitted in SEC Staff Accounting Bulletin 107 for options qualifying for
such treatment (plain-vanilla options) due to the limited history the Company
currently has with option exercise activity. The risk-free interest rate is
based on the U.S. Treasury yield curve.
43
The Company receives an income tax deduction for
stock options exercised by employees in the United States equal to the excess
of the market value of our common stock on the date of exercise over the option
price. Prior to the adoption of SFAS 123(R), the income tax benefit from the
exercise of stock options was presented as a component of cash flow from
operating activities. SFAS 123(R) requires the excess tax benefits (tax
benefits resulting from tax deductions in excess of compensation cost
recognized) to be classified as a cash flow provided by financing activities.
In periods prior to 2006, the Company followed
the accounting provisions of Accounting Principles Board (APB) Opinion 25, Accounting
for Stock Issued to Employees for stock-based compensation and provided the
pro forma disclosures required under SFAS 148, Accounting for Stock-based
Compensation Transition and Disclosure.
No stock-based employee compensation was reflected in net income (loss),
as all options granted under the plans had an exercise price equal to the
market value of the underlying stock on the date of grant (See Note 7).
Net
Income Per Common Share
Net income per common
share basic is calculated based upon the weighted average number of common
shares outstanding during the respective periods presented. Net income per
common share diluted is calculated based upon the weighted average number of
common shares outstanding and included the equivalent shares for dilutive
securities outstanding during the respective periods, where the effect is
anti-dilutive. The dilutive effect of outstanding options issued by the Company
is reflected in net income per share - diluted using the treasury stock method.
Under the
treasury stock method, options will only have a dilutive effect when the
average market price of common stock during the period exceeds the exercise
price of the options. Equivalent common shares of 1,087,000, 989,000 and
842,000 in 2007, 2006 and 2005 were included for the diluted calculation. The
weighted average number of stock options outstanding excluded from the
computation of diluted earnings per share was 0, 36,000 and 503,000 in 2007,
2006 and 2005 due to their antidilutive effect.
Comprehensive
Income
Comprehensive income consists of net income and
foreign currency translation adjustments and is included in the Consolidated
Statements of Shareholders Equity.
Comprehensive income was $74,011,000, $51,435,000 and $8,414,000 in
2007, 2006 and 2005, respectively.
Employee Benefit Plans
-
The Companys U.S. subsidiaries participate in a defined contribution
401(k) plan covering substantially all U.S. employees. Employees may invest 1% or more of their
eligible compensation, limited to maximum amounts as determined by the Internal
Revenue Service. The Company provides a matching contribution to the plan,
determined as a percentage of the employees contributions. Aggregate expense to the Company for
contributions to such plans was approximately $614,000, $514,000 and $455,000
in 2007, 2006 and 2005.
Fair Value of Financial Instruments
- Financial instruments
consist primarily of investments in cash and cash equivalents, trade accounts
receivable, accounts payable and debt obligations. The Company estimates the fair value of
financial instruments based on interest rates available to the Company and by
comparison to quoted market prices. At December 31, 2007 and 2006, the carrying amounts of cash
and cash equivalents, accounts receivable, income taxes receivable and payable
and accounts payable are considered to be representative of their respective
fair values due to their short-term nature.
The carrying amounts of the notes payable to banks and the term loan
payable are considered to be representative of their respective fair values as
their interest rates are based on market rates. The estimated fair value of the
Companys mortgage loan payable was $8.8 million at December 31, 2005.
Concentration
of Credit Risk
Financial instruments that
potentially subject the Company to concentrations of credit risk consist of
cash, cash equivalents and accounts receivable.
The Companys excess cash balances are invested with high credit quality
issuers. Concentrations of credit risk
with respect to accounts receivable are limited due to the large number of
customers and their geographic dispersion comprising the Companys customer
base. The Company also performs on-going credit evaluations and maintains
allowances for potential losses as warranted.
Adoption of New Accounting Standard
Effective January 1,
2007, the Company adopted the provisions of FASB Interpretation 48, Accounting
for Uncertainty in Income Taxes (FIN 48).
FIN 48 clarifies the accounting and reporting for uncertainties in
income tax law. This interpretation
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns.
For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities. At January 1, 2007, the Company had a
liability for unrecognized tax benefits of $3,379,000 (including interest and
penalties of $731,000) of which $283,000 was charged to retained earnings at January 1,
2007. Of this total, $2,586,000 (net of
the federal benefit on state issues) represents the amount of unrecognized tax
benefits that, if recognized, would favorably affect the effective income tax
rate in any future periods.
The
Company or one of its subsidiaries file U.S. federal income tax returns and tax
returns in various state and foreign jurisdictions in Canada and Western
Europe. The Companys U.S. federal
income tax returns have been examined by the Treasury Department through
2001. State and local tax returns have
been examined through various dates from 2001 to 2005 with ongoing tax
examinations pending in several states.
Included in the Companys FIN 48 liability is a current liability of
$2,264,000 for the expected taxes and interest and penalties relating to
pending state tax examinations involving disputed allocations of income; no
issues have been raised to date with respect to the other pending state tax
examinations.
44
With
the exception of the current liability of $2,264,000, the Companys remaining
tax liabilities and interest with respect to unrecognized tax benefits have
been reclassified to other non-current liabilities on the balance sheet because
payment of cash is not anticipated within one year. This amount at January 1, 2007
aggregates to approximately $1,115,000, including $305,000 for interest and
penalties. The Companys continuing
practice is to record interest and penalties related to tax positions in income
tax expense in its consolidated statement of operations.
During 2007, the Company resolved a state
tax issue by paying an assessment of approximately $1,901,000 (including
$169,000 in interest) to a state taxing authority. As of December 2007 the Companys
liability for unrecognized tax benefits was approximately $1,547,000 (including
interest and penalties of approximately $632,000).
Recent
Accounting Pronouncements
In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157 Fair Value Measurements which is effective for
fiscal years beginning after November 15, 2007. This statement was issued
to increase consistency and comparability in fair value measurements and for
expanded disclosures about fair value measurements. The Company is currently
evaluating the potential impact, if any, of this pronouncement.
In February 2007, the FASB issued
SFAS No. 159 The Fair Value Option for Financial Assets and Financial
Liabilities (including an amendment of FASB Statement No. 115) which is
effective for fiscal years beginning after November 15, 2007. This
interpretation was issued to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The Company is currently evaluating the
potential impact, if any, of this pronouncement.
In December 2007, the FASB issued
SFAS No. 141R, Business Combinations, which replaces FASB Statement 141.
SFAS No.141R retains the requirement that the acquisition method of accounting
be used for business combinations. The objective of SFAS No. 141R is to
improve the relevance, representational faithfulness and comparability that
reporting entities provide in their financial reports about business
combinations and their effects. SFAS 141R establishes principles and
requirements for how an acquirer 1) recognizes and measures identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the acquiree,
2) recognizes and measures the goodwill acquired in the combination or a gain
from a bargain purchase and 3) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS No. 141R is effective for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning after December 15,
2008. The Company is currently evaluating the potential impact, if any, of this
pronouncement.
In December 2007, the FASB issued
SFAS No. 160, Accounting and Reporting of Noncontrolling Interest (SFAS
No. 160). The objective of SFAS 160 is to improve the relevance,
comparability and transparency of the financial information that reporting
entities provide related to noncontrolling interests, sometimes referred to as
minority interests. SFAS No. 160 requires, among other things, that
noncontrolling interests be shown separately in the consolidated entitys
equity section of the balance sheet. SFAS No. 160 also establishes
accounting and reporting standards for ownership interest in subsidiaries
held by parties other than the parent, for presentation of amounts of
consolidated net income attributable to the parent and the noncontrolling
interest, for consistency in accounting for changes in a parents ownership
interest when the parent retains a controlling interest, for the valuation of
retained noncontrolling equity interests when a subsidiary is deconsolidated
and for providing sufficient disclosure that identifies and distinguishes the
interests of the parent and the interests of the noncontrolling owners. SFAS No. 160
is effective beginning January 1, 2009. The Company is currently
evaluating the potential impact, if any, of this pronouncement.
2.
PROPERTY,
PLANT AND EQUIPMENT
Property, plant and
equipment, net consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Land and buildings
|
|
$
|
33,950
|
|
$
|
33,525
|
|
Furniture and fixtures,
office, computer and other equipment and software
|
|
82,838
|
|
77,478
|
|
Leasehold improvements
|
|
12,748
|
|
12,762
|
|
|
|
129,536
|
|
123,765
|
|
Less accumulated
depreciation and amortization
|
|
81,056
|
|
75,179
|
|
Property, plant and
equipment, net
|
|
$
|
48,480
|
|
$
|
48,586
|
|
Included in property,
plant and equipment are assets under capital leases, as follows (in thousands):
|
|
2007
|
|
2006
|
|
Furniture and fixtures,
office, computer and other equipment
|
|
$
|
2,609
|
|
$
|
2,358
|
|
Less: Accumulated
amortization
|
|
1,813
|
|
1,270
|
|
|
|
$
|
796
|
|
$
|
1,088
|
|
45
3.
RELATED
PARTY TRANSACTIONS
The
Company leased its headquarters office/warehouse facility from affiliates
during 2007, 2006 and 2005 (see Note 10). Rent expense under the lease
aggregated $612,000 in each of those years. The Company believes that these
payments were no higher than would be paid to an unrelated lessor for
comparable space.
4. CREDIT FACILITIES
In October 2005, the Company amended and restated its $70,000,000
revolving credit agreement with a group of financial institutions to increase
the amount available to $120,000,000 (which may be increased by up to $30
million, subject to certain conditions) and to provide for borrowings by the
Companys United States and United Kingdom subsidiaries. The borrowings are
secured by all of the domestic and United Kingdom accounts receivable, the
domestic inventories of the Company, the Companys United Kingdom headquarters
building and the Companys shares of stock in its domestic and United Kingdom
subsidiaries. The credit facility expires and outstanding borrowings thereunder
are due on October 26, 2010. The borrowings under the agreement are
subject to borrowing base limitations of up to 85% of eligible accounts
receivable and up to 40% of qualified inventories. The interest on outstanding
advances is payable monthly, at the Companys option, at the agent banks base
rate (at December 31, 2007) plus 0.25% or the banks daily LIBOR rate (at December 31,
2007) plus 1.25% to 2.25%. The undrawn availability under the facility may not
be less than $15 million until the last day of any month in which the
availability net of outstanding borrowings is at least $70 million. The
facility also calls for a commitment fee payable quarterly in arrears of 0.375%
of the average daily unused portions of the facility. The revolving credit agreement requires
that a minimum level of availability be maintained. If such availability is not
maintained, the Company will be required to maintain a fixed charge coverage
ratio (as defined). The agreement contains certain other covenants, including
restrictions on capital expenditures and payments of dividends. We were in
compliance with all of the covenants as of December 31, 2007. As of December 31,
2007, eligible collateral under the agreement was $106.9 million and total
availability was $97.0 million. There were outstanding letters of credit of
$9.7 million and there were no outstanding advances.
The
Companys Netherlands subsidiary maintains a 5 million ($7.4 million at the December 31,
2007 exchange rate) credit facility with a local financial institution.
Borrowings under the facility are secured by the subsidiarys accounts
receivable and are subject to a borrowing base limitation of 85% of the
eligible accounts. At December 31, 2007 and, 2006 was 2.6 million and
2.2 million ($3.9 million and $3.0 million) of borrowings outstanding under
this line with interest payable at a rate of 7.05%. The facility expires in September 2008.
The
weighted average interest rate on short-term borrowings was
7.5%,
7.8%, and 6.4% in 2007, 2006 and 2005.
5. ACCRUED EXPENSES AND OTHER
CURRENT LIABILITIES
Accrued expenses and
other current liabilities consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Payroll and employee
benefits
|
|
$
|
21,850
|
|
$
|
17,151
|
|
Income taxes payable
|
|
2,297
|
|
2,327
|
|
Freight
|
|
10,908
|
|
6,106
|
|
Deferred revenue
|
|
5,704
|
|
2,653
|
|
Other
|
|
41,811
|
|
47,451
|
|
|
|
$
|
82,570
|
|
$
|
75,688
|
|
6. LONG-TERM DEBT
Long-term debt
consists of (in thousands):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Capitalized equipment
lease obligations
|
|
$
|
703
|
|
$
|
1,031
|
|
Less: current portion
|
|
449
|
|
548
|
|
|
|
$
|
254
|
|
$
|
483
|
|
The aggregate maturities
of long-term debt outstanding at December 31, 2007 are as follows (in
thousands):
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Maturities
|
|
$
|
449
|
|
$
|
173
|
|
$
|
71
|
|
$
|
10
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
7. STOCK-BASED COMPENSATION PLANS
The Company currently has
four equity compensation plans which reserve shares of common stock for
issuance to key employees, directors, consultants and advisors to the
Company. The following is a description
of these plans:
The 1995 Long-term Stock Incentive Plan
- This plan,
adopted in 1995, allowed the Company to issue qualified, non-qualified and
deferred compensation stock options, stock appreciation rights, restricted
stock and restricted unit grants, performance unit grants and other stock based
awards authorized by the Compensation Committee of the Board of Directors. Options issued under this plan expire ten
years after the options are granted. The ability to grant new awards
under this plan ended on December 31, 2005 but awards granted prior to
such date continue until their expiration. A total of 862,867 options were
outstanding under this plan as of December 31, 2007.
The 1995 Stock Option Plan for Non-Employee Directors
- This plan,
adopted in 1995, provides for automatic awards of non-qualified options to
directors of the Company who are not employees of the Company or its
affiliates. All options granted under this plan will have a ten year term from
grant date and are immediately exercisable. A maximum of 100,000 shares may be
granted for awards under this plan.
The ability to grant new awards under this plan ended on October 12,
2006 but awards granted prior to such date continue until their expiration. A
total of 39,000 options were outstanding under this plan as of December 31,
2007.
The
1999 Long-term Stock
Incentive Plan, as amended (1999 Plan)
- This plan
was adopted on October 25, 1999 with substantially the same terms and
provisions as the 1995 Long-term Stock Incentive Plan. A maximum of 5.0 million shares may be
granted under this plan. The maximum
number of shares granted per type of award to any individual may not exceed
1,500,000 in any calendar year and 3,000,000 in total. No award shall be granted under this plan
after December 31, 2009. Restricted stock grants and common stock awards
reduce stock options otherwise available for future grant. A total of 1,739,070
options and 600,000 restricted stock units were outstanding under this plan as
of December 31, 2007.
The 2006 Stock Incentive Plan For Non-Employee
Directors
This plan, adopted by the Companys stockholders on October 11, 2006,
replaces the 1995 Stock Option Plan for Non-Employee Directors. The Company
adopted the plan so that it could offer directors of the Company who are not
employees of the Company or of any entity in which the Company has more than a
50% equity interest (independent directors) an opportunity to participate in
the ownership of the Company by receiving options to purchase shares of common
stock at a price equal to the fair market value at the date of grant of the
option and restricted stock awards. Awards for a maximum of 200,000 shares may
be granted under this plan. A total of 15,000 options were outstanding under
this plan as of December 31
, 2007.
Shares issued under our share-based
compensation plans are usually issued from shares of our common stock held in
the treasury.
Adoption of SFAS 123(R)
Effective
January 1, 2006, the Company adopted the provisions of SFAS 123(R), using
the modified-prospective-transition method. Under that transition method,
compensation cost recognized for the year ended December 31, 2006
includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of SFAS 123, and (b) compensation
cost for the vested portion of share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R). Results for prior periods have not been restated.
The fair value of employee share options is recognized in expense over
the vesting period of the options, using the graded attribution method. The fair value of employee share options is
determined on the date of grant using the Black-Scholes option pricing model.
The Company has used historical volatility in its estimate of expected
volatility. The expected life represents the period of time (in years) for
which the options granted are expected to be outstanding. The Company used the
simplified method for determining expected life as permitted in SEC Staff Accounting
Bulletin 107 for options qualifying for treatment (plain-vanilla options) due
to the limited history the Company currently has with option exercise activity.
The risk-free interest rate is based on the U.S. Treasury yield curve.
Compensation cost related to non-qualified stock options recognized in
operating results (selling, general and administrative expense) for the years
ended December 31, 2007 and 2006 was $3,435,000 and $1,756,000,
respectively. The related future income tax benefits recognized for the years
ended December 31, 2007 and 2006 were $1,147,000 and $599,000,
respectively.
47
Stock options
The
following table presents the weighted-average assumptions used to estimate the
fair value of options granted in 2007, 2006 and 2005:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Expected annual dividend
yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Risk-free interest rate
|
|
4.93
|
%
|
4.76
|
%
|
4.5
|
%
|
Expected volatility
|
|
71.2
|
%
|
78.2
|
%
|
79
|
%
|
Expected life in years
|
|
6.2
|
|
6.0
|
|
5.2
|
|
The following table summarizes information concerning outstanding and
exercisable options:
|
|
Weighted Average
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Shares
|
|
Exercise
Price
|
|
Shares
|
|
Exercise
Price
|
|
Shares
|
|
Exercise
Price
|
|
Outstanding at beginning of year
|
|
2,629,076
|
|
$
|
4.69
|
|
2,657,419
|
|
$
|
3.93
|
|
3,241,251
|
|
$
|
3.96
|
|
Granted
|
|
699,050
|
|
$
|
19.45
|
|
479,334
|
|
$
|
8.01
|
|
75,000
|
|
$
|
6.25
|
|
Exercised
|
|
(545,815
|
)
|
$
|
5.19
|
|
(480,203
|
)
|
$
|
3.33
|
|
(328,374
|
)
|
$
|
2.37
|
|
Cancelled or expired
|
|
(126,374
|
)
|
$
|
15.64
|
|
(27,474
|
)
|
$
|
12.84
|
|
(330,458
|
)
|
$
|
6.35
|
|
Outstanding at end of year
|
|
2,655,937
|
|
$
|
7.95
|
|
2,629,076
|
|
$
|
4.69
|
|
2,657,419
|
|
$
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year end
|
|
1,645,639
|
|
|
|
1,891,426
|
|
|
|
1,891,155
|
|
|
|
Weighted average fair value per option granted during the year
|
|
$
|
13.19
|
|
|
|
|
$
|
5.64
|
|
|
|
|
$
|
4.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of
options exercised and share based payments made was $6,517,000, $3,501,000 and
$679,000, respectively, for the years ended December 31 2007, 2006 and
2005.
The following table summarizes information about options vested and
exercisable or nonvested that are expected to vest (nonvested outstanding less
expected forfeitures) at December 31, 2007:
Range of Exercise Prices
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
WeightedAverage
Remaining
Contractual Life
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
$ 1.76 to $ 5.00
|
|
996,682
|
|
$
|
2.11
|
|
4.67
|
|
$
|
18,345
|
|
$ 5.01 to $ 15.00
|
|
1,005,330
|
|
$
|
6.40
|
|
6.50
|
|
14,282
|
|
$ 15.01 to $ 20.00
|
|
486,338
|
|
$
|
19.01
|
|
9.41
|
|
650
|
|
$ 20.01 to $ 20.15
|
|
100,000
|
|
$
|
20.15
|
|
9.11
|
|
37
|
|
$ 1.76 to $ 20.15
|
|
2,588,350
|
|
$
|
7.95
|
|
6.44
|
|
$
|
33,314
|
|
The aggregate intrinsic value in the tables above represents the total
pretax intrinsic value (the difference between the closing stock price on the
last day of trading in the year December 31, 2007 and the exercise price)
that would have been received by the option holders had all options been
exercised on December 31, 2007. This value will change based on the fair
market value of the Companys common stock.
The following table reflects the activity for all unvested stock
options during the year ended December 31, 2007:
|
|
For Shares
|
|
Weighted Average
Grant-Date Fair Value
|
|
Unvested at
January 1, 2007
|
|
737,650
|
|
$
|
3.71
|
|
Granted
|
|
699,050
|
|
$
|
13.19
|
|
Vested
|
|
(270,903
|
)
|
$
|
2.48
|
|
Forfeited
|
|
(67,999
|
)
|
$
|
4.68
|
|
Unvested at
December 31, 2007
|
|
1,097,798
|
|
$
|
9.99
|
|
At December 31, 2007, there was approximately $5,500,000 of
unrecognized compensation costs related to unvested stock options, which is
expected to be recognized over a weighted average period of 1.6 years. The
total fair value of stock options vested during the years ended December 31,
2007, 2006 and 2005 was $671,000, $1,502,000 and $761,000, respectively.
48
Restricted Stock and Restricted Stock Units
In October 2004, the Company granted 1,000,000 restricted stock
units under the 1999 Plan to a key employee who is also a Company director. A
restricted stock unit represents the right to receive a share of the Companys
common stock. The restricted stock units have none of the rights as other
shares of common stock until common stock is distributed, other than rights to
cash dividends. The restricted stock unit award was a non-performance award
which vests at the rate of 20% on May 31, 2005 and 10% per year on April 1,
2006 and each year thereafter. The share-based expense for restricted stock
awards was determined based on the market price of the Companys stock at the
date of the award. Compensation expense related to the restricted stock award
was approximately $574,000 in 2007 and 2006 and $1,005,000 in 2005. Share-based
compensation expense for restricted stock issued to Directors was $75,000 in
each of the years ended December 31, 2007 and 2006.
Under the provisions of SFAS 123(R), the balance sheet recognition of
unearned compensation is no longer allowed. As of January 1, 2006, the
balance of Unearned Restricted Stock Compensation was reversed into Additional
Paid-in Capital on the Companys balance sheet. As of December 31, 2007,
there was unrecognized stock-based compensation of $3.0 million related to the
restricted stock award, which is expected to be recognized over a
weighted-average period of 5.0 years.
Prior to the Adoption of SFAS 123(R)
Prior to 2006, the Company elected to follow the accounting provisions
of APB Opinion 25 for stock-based compensation and to provide the pro forma
disclosures required under SFAS 148, Accounting for Stock-Based Compensation
Transition and Disclosure. Accordingly, the Company did not recognize
compensation expense for stock option grants made at an exercise price equal to
or in excess of the market value of the underlying stock on the date of grant
for periods prior to January 1, 2006. The following table illustrates the
effect on net income per share had compensation costs of the plans been
determined under a fair value alternative method as stated in SFAS 123, Accounting
for Stock-Based Compensation (in thousands, except per share data):
|
|
2005
|
|
Net income as reported
|
|
$
|
11,441
|
|
Add: Stock-based employee compensation expense included in reported
net income, net of related tax effects
|
|
647
|
|
Deduct: Stock-based employee compensation expense determined under
fair value based method, net of related tax effects
|
|
915
|
|
Pro forma net income
|
|
$
|
11,173
|
|
|
|
|
|
Basic net income per common share:
|
|
|
|
Net income as reported
|
|
$
|
.33
|
|
Net income pro forma
|
|
$
|
.32
|
|
|
|
|
|
Diluted net income per common share:
|
|
|
|
Net income as reported
|
|
$
|
.31
|
|
Net income pro forma
|
|
$
|
.31
|
|
The weighted
average remaining contractual life of the stock options outstanding was 6.7
years at December 31, 2005.
49
8. RESTRUCTURING AND OTHER
CHARGES
The Company periodically assesses its operations to ensure that they
are efficient, aligned with market conditions and responsive to customer needs.
During the year ended December 31, 2005, management approved and implemented
restructuring actions which included workforce reductions and facility
consolidations. The following table summarizes the amounts recognized by the
Company as restructuring and other charges for the periods presented (in
thousands):
Years ended December 31,
|
|
2005
|
|
2003 United States
warehouse consolidation plan
|
|
$
|
122
|
|
2002 United Kingdom
consolidation plan
|
|
(93
|
)
|
Litigation settlements
|
|
300
|
|
Other severance and exit
costs
|
|
3,822
|
|
Total restructuring and
other charges
|
|
$
|
4,151
|
|
2003 United States Warehouse Consolidation Plan
In the fourth quarter of 2003, the Company implemented a plan to
consolidate the warehousing facilities in its United States computer supplies
business. The Company recorded $122,000 of additional severance costs in 2005 related
to this plan.
2002 United Kingdom Consolidation Plan
In 2002 the Company implemented a restructuring plan to consolidate the
activities of three United Kingdom locations into a new facility constructed
for the Company. During 2005 the Company recorded $93,000 of gain related to
this plan as actual costs were less than anticipated.
Litigation Settlements
In May 2006, the Company entered into a stipulation of settlement
with all of the plaintiffs who had filed derivative complaints in 2005 alleging
misconduct in connection with the Companys restatement of its 2004 financial
results (see Note 10).
Other Severance and Exit Costs
The Company recorded restructuring costs of $3.8
million during 2005 in Europe in connection with workforce reductions and facility
exit costs. In 2005, these costs were comprised of employee severance costs.
The following table summarizes the components of the accrued
restructuring charges and the movements within these components during 2007,
2006 and 2005 (in thousands). The balance of the restructuring reserves is
included in the Consolidated Balance Sheets within accrued expenses and other
current liabilities.
|
|
Severance and
Personnel Costs
|
|
Other
Exit Costs
|
|
Total
|
|
Balance as of
January 1, 2005
|
|
$
|
633
|
|
$
|
1,396
|
|
$
|
2,029
|
|
Charged to expense in 2005
|
|
3,945
|
|
(93
|
)
|
3,852
|
|
Amounts utilized
|
|
(4,325
|
)
|
(1,038
|
)
|
(5,363
|
)
|
Balance at
December 31, 2005
|
|
253
|
|
265
|
|
518
|
|
Amounts utilized
|
|
(253
|
)
|
(176
|
)
|
(429
|
)
|
Balance at
December 31, 2006
|
|
$
|
0
|
|
$
|
89
|
|
$
|
89
|
|
Amounts utilized
|
|
(0
|
)
|
(89
|
)
|
(89
|
)
|
Balance at
December 31, 2007
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
50
9.
INCOME
TAXES
The components
of income (loss) before income taxes are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
United States
|
|
$
|
81,832
|
|
$
|
53,587
|
|
$
|
38,912
|
|
Foreign
|
|
18,191
|
|
16,108
|
|
(6,038
|
)
|
Total
|
|
$
|
100,023
|
|
$
|
69,695
|
|
$
|
32,874
|
|
The provision
(benefit) for income taxes consists of the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
26,174
|
|
$
|
15,437
|
|
$
|
10,499
|
|
State
|
|
4,842
|
|
3,179
|
|
3,146
|
|
Foreign
|
|
5,632
|
|
3,678
|
|
1,560
|
|
Total current
|
|
36,648
|
|
22,294
|
|
15,205
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
(1,004
|
)
|
1,235
|
|
(265
|
)
|
State
|
|
277
|
|
511
|
|
(490
|
)
|
Foreign
|
|
(5,379
|
)
|
508
|
|
6,983
|
|
Total deferred
|
|
(6,106
|
)
|
2,254
|
|
6,228
|
|
TOTAL
|
|
$
|
30,542
|
|
$
|
24,548
|
|
$
|
21,433
|
|
Income
taxes are accrued and paid by each foreign entity in accordance with applicable
local regulations.
A
reconciliation of the difference between the income tax expense (benefit) and
the computed income tax expense based on the Federal statutory corporate rate
is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Income tax at Federal statutory rate
|
|
$
|
35,008
|
|
$
|
24,407
|
|
$
|
11,506
|
|
State and local income taxes (benefits) and changes in valuation
allowances, net of federal tax benefit
|
|
3,332
|
|
2,577
|
|
1,311
|
|
Foreign taxes at rates different from the U.S. rate
|
|
(2,260
|
)
|
1,199
|
|
1,703
|
|
Changes in valuation allowances for foreign deferred tax assets
|
|
(6,184
|
)
|
(2,260
|
)
|
10,194
|
|
Tax credits
|
|
|
|
(718
|
)
|
(197
|
)
|
Non-deductible items
|
|
963
|
|
|
|
|
|
Adjustment for prior year taxes
|
|
(593
|
)
|
(760
|
)
|
(3,205
|
)
|
Other items, net
|
|
276
|
|
103
|
|
121
|
|
|
|
$
|
30,542
|
|
$
|
24,548
|
|
$
|
21,433
|
|
51
The deferred
tax assets (liabilities) are comprised of the following (in thousands):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Current:
|
|
|
|
|
|
Deductible assets
|
|
$
|
(773
|
)
|
$
|
(876
|
)
|
Accrued expenses and other liabilities
|
|
8,379
|
|
8,063
|
|
Inventory
|
|
2,374
|
|
1,596
|
|
Other
|
|
(524
|
)
|
(318
|
)
|
Valuation allowances
|
|
(96
|
)
|
(738
|
)
|
Total current assets, net
|
|
9,360
|
|
7,727
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
Net operating loss and credit carryforwards
|
|
12,462
|
|
15,881
|
|
Accelerated depreciation
|
|
3,494
|
|
3,520
|
|
Intangible and other assets
|
|
6,791
|
|
8,453
|
|
Other
|
|
3,196
|
|
3,328
|
|
Valuation allowances
|
|
(7,291
|
)
|
(17,141
|
)
|
Subtotal non-current assets, net
|
|
18,652
|
|
14,041
|
|
TOTAL
|
|
$
|
28,012
|
|
$
|
21,768
|
|
The Company has
not provided for federal income taxes applicable to the undistributed earnings
of its foreign subsidiaries of approximately $33.8 million as of December 31,
2007, since these earnings are indefinitely reinvested. The Company has foreign
net operating loss carryforwards which expire through 2022 except for carryforwards
in the United Kingdom which have no expiration.
The Company records these benefits as assets to the extent that
utilization of such assets is more likely than not; otherwise, a valuation
allowance has been recorded. The Company
has also provided valuation allowances for certain state deferred tax assets
and net operating loss carryforwards where it is not likely they will be
realized.
In the fourth
quarter of 2005, the Company recorded a valuation allowance of $10.2 million
related to carryforward losses and deferred tax assets in the United Kingdom.
The Companys United Kingdom subsidiary had recorded losses and has been
affected by restructuring activities in recent years. These losses and the loss incurred for the
year ended December 31, 2005 represented evidence for management to
estimate that a full valuation allowance for the net deferred tax assets was
necessary. In the fourth quarter of 2005, the Company also recorded an income
tax benefit of $2.7 million as a result of a favorable decision received in
connection with a petition submitted in connection with audit assessments made
in 2002 and 2004 in a foreign jurisdiction. In the fourth quarter of 2007 the
Companys United Kingdom subsidiary emerged from its cumulative loss position and
the remaining valuation allowance against the deferred tax assets of the United
Kingdom of approximately $5.9 million was reversed. In the fourth quarter of
2007 the Company recorded a valuation allowance of approximately $1.7 million
against the deferred tax assets of its German subsidiary as the result of the
German subsidiary entering a cumulative loss position and uncertainty as to
whether or not future earnings will be sufficient to enable utilization of
those assets.
As of December 31,
2007, the valuation allowances of approximately $7.4 million related to net
operating loss carryforwards in foreign jurisdictions of $6.0 million, $1.2
million for state net operating loss carryforwards and $0.2 million for other
state deductible temporary differences. During the year ended December 31,
2007, valuation allowances decreased $10.5 million primarily as a result of the
reversal of the valuation allowance in the United Kingdom, utilization of net
operating losses and timing differences in the United Kingdom and utilization
of state net operating loss deductions in the United States. Valuation allowances decreased $2.3 million
in 2006 for carryforward losses utilized for which valuation allowances had
been previously provided. As of December 31, 2006, the valuation
allowances of $17.9 million included $11.4 million related to net operating
loss carryforwards and $3.2 million for other deductible temporary differences
in foreign jurisdictions, $3.0 million for state net operating loss
carryforwards and $0.3 million for other state deductible temporary
differences. During the year ended December 31, 2006, valuation allowances
increased $2.6 million as a result of additional losses incurred in certain
state jurisdictions and adjustments of prior years allowances in foreign
jurisdictions. As of December 31, 2005, the valuation allowances of $15.3
million included $11.1 million related to net operating loss carryforwards and
$2.3 million for other deductible temporary differences in foreign
jurisdictions and $1.5 million for state net operating loss carryforwards and
$0.4 million for other state deductible temporary differences. During the year
ended December 31, 2005, valuation allowances increased $5.6 million as a
result of additional losses incurred in foreign and state jurisdictions, net of
reductions resulting from changes in deferred tax assets due to changes in tax
laws. Valuation allowances decreased $1,301,000 in 2005 for carryforward losses
utilized for which valuation allowances had been previously provided.
The Company is
routinely audited by federal, state and foreign tax authorities with respect to
its income taxes. The Company regularly reviews and evaluates the likelihood of
audit assessments and believes it has adequately accrued for exposures for tax
liabilities resulting from future tax audits. To the extent the Company would
be required to pay amounts in excess of reserves or prevail on matters for
which accruals have been established, the Companys effective tax rate in a
given period may be materially impacted. The Companys federal income tax
returns for fiscal years 1996 through 2002
52
were audited by the Internal Revenue
Service. The outcome of the audit did not have a material impact on the Companys
consolidated financial statements. The
Company has not signed any consents to extend the statute of limitations for
any subsequent years. The Companys significant state tax returns have been
audited through 2005. The Company considers its significant tax jurisdictions
in foreign locations to be the United Kingdom, Canada, France, Italy and
Germany. The Company remains subject to examination in the United Kingdom for
years after 2001, in Canada for years after 2000, in France for years after 2004,
in Italy for years after 2002 and in Germany for years after 2004.
Effective January 1, 2007, the
Company adopted the provisions of FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes (FIN 48).
FIN 48 clarifies the accounting and reporting for uncertainties in
income tax law. This interpretation
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns.
For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities. At January 1, 2007,
the Company had a liability for unrecognized tax benefits of $3,379,000
(including interest and penalties of $731,000) of which $283,000 was charged to
retained earnings at January 1, 2007.
Of this total, $2,586,000 (net of the federal benefit on state issues)
represents the amount of unrecognized tax benefits that, if recognized, would
favorably affect the effective income tax rate in any future periods. At December 31,
2007 the Company had a liability for unrecognized tax benefits of $1,547,000
(including interest and penalties of $631,000). Of this total, $1,467,000 (net
of the federal benefit on state issues) represents the amount of unrecognized
tax benefits that, if recognized, would favorably affect the effective income
tax rate in any future periods. The following table details activity of the
Companys uncertain tax positions during 2007:
|
|
December 31,
|
|
|
|
2007
|
|
Opening balance
January 1,2007
|
|
$
|
2,648
|
|
Decreases related to
settlements with taxing authorities
|
|
(1,732
|
)
|
Closing balance
December 31, 2007
|
|
$
|
916
|
|
Interest
and penalties of approximately $69,000 related to unrecognized tax benefits
were expensed in 2007 and are included in income tax expense. Within the next
twelve months the Company believes it reasonably possible that certain tax
positions may be reduced. The specific positions that may be reduced are
related to certain ongoing state and foreign tax audits. The Company estimates
that the unrecognized benefits may be reduced by $1.5 million
.
10.
COMMITMENTS, CONTINGENCIES AND
OTHER MATTERS
Leases
- The Company
is obligated under operating lease agreements for the rental of certain office
and warehouse facilitiesand equipment which expire at various dates through September 2026.
The Company currently leases one facility in New York from an entity owned by
the Companys three principal shareholders and senior executive officers (see
Note 3). The Company also acquires certain computer and communications
equipment pursuant to capital lease obligations.
At December 31,
2007, the future minimum annual lease payments for capital leases and related
and third-party operating leases were as follows (in thousands):
|
|
Capital
Leases
|
|
Third Party
Operating
Leases
|
|
Related Party
Operating
Lease
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
471
|
|
$
|
13,589
|
|
$
|
860
|
|
$
|
14,920
|
|
2009
|
|
186
|
|
13,204
|
|
895
|
|
14,285
|
|
2010
|
|
73
|
|
10,699
|
|
932
|
|
11,704
|
|
2011
|
|
10
|
|
9,651
|
|
970
|
|
10,631
|
|
2012
|
|
|
|
9,089
|
|
1,010
|
|
10,099
|
|
2013-2017
|
|
|
|
32,269
|
|
5,706
|
|
37,975
|
|
2018-2022
|
|
|
|
17,644
|
|
|
|
17,644
|
|
Thereafter
|
|
|
|
4,823
|
|
|
|
4,823
|
|
Total minimum lease payments
|
|
740
|
|
110,968
|
|
10,373
|
|
122,081
|
|
Less: sublease rental income
|
|
|
|
1,775
|
|
|
|
1,775
|
|
Lease obligation net of subleases
|
|
740
|
|
$
|
109,193
|
|
$
|
10,373
|
|
$
|
120,306
|
|
Less amount representing interest
|
|
37
|
|
|
|
|
|
|
|
Present value of minimum capital lease payments (including current
portion of $449)
|
|
$
|
703
|
|
|
|
|
|
|
|
Annual rent
expense aggregated approximately $14,760,000, including $612,000 to related
parties, for 2007, $13,198,000, including $612,000 to related parties, for 2006
and $10,272,000, including $612,000 to related parties, for 2005. Rent expense
for 2007 is net of sublease income of $853,000.
53
Litigation
Kevin Vukson v.
TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc.
On October 18, 2007, Kevin Vukson filed a
class action complaint in U.S. District Court (E.D.N.Y.) against TigerDirect, Inc.,
OnRebate.com Inc. and Systemax Inc. on behalf of himself and all OnRebate
customers whose rebates were denied or delayed . (OnRebate.com Inc. is a rebate
processing company owned by Systemax.) Vuksons Complaint alleges that since 2004
Systemax, TigerDirect and OnRebate have conducted a deceptive and unlawful
enterprise by failing to pay rebates that should have been paid and delaying
unnecessarily the payment of other rebates that were paid. Vukson alleges
claims arising under Floridas Unfair, Deceptive Trade Practice Act, the
federal RICO statute, along with claims for breach of contract, conspiracy to
commit fraud and unjust enrichment. Systemax, TigerDirect and OnRebate have
moved to dismiss the Complaint and to transfer the matter to the Southern
District of Florida. The Court has not yet ruled on these motions and has not
yet certified a class. The Company intends to vigorously defend this case.
State
of Florida, Office of the Attorney General Subpoena
On January 2, 2008 the Company received a
subpoena for documents from the Florida Attorney Generals Office relating to
the payment and processing of rebates by the Company. On January 30, 2008
the Company received a second subpoena for additional documents. The Company is
cooperating with the Florida Attorney Generals Office to provide the requested
documents.
Other matters
Beginning
on May 24, 2005, three shareholder derivative lawsuits were filed against
various officers and directors of the Company and naming the Company as a
nominal defendant in connection with the Companys restatements of its fiscal
year 2003 and 2004 financial statements. The defendants and the Company denied
all of the allegations of wrongdoing contained in the complaints. During 2006,
the lawsuits were settled or dismissed.
Pursuant to the settlement the defendants are released from liability
and the Company adopted certain corporate governance principles including the
appointment of a lead independent director to, among other things, assist the
Board of Directors in assuring compliance with and implementation of the
Companys corporate governance policies and paid $300,000 of the legal fees of
the plaintiffs.
The
Company has also been named as a defendant in other lawsuits in the normal
course of its business, including those involving commercial, tax, employment
and intellectual property related claims. Based on discussions with legal
counsel, management believes the ultimate resolution of these lawsuits will not
have a material effect on the Companys consolidated financial statements.
Contingency
-
The Company is
required to collect sales tax on certain of its sales. In accordance with current laws,
approximately 17.3%, 17.9%, 17% of the Companys domestic sales in 2007, 2006
and 2005 were subject to sales tax.
Changes in law could require the Company to collect sales tax in
additional states and subject the Company to liabilities related to past sales.
11.
SEGMENT
AND RELATED INFORMATION
The
Company operates in one primary business as a reseller of business products to
commercial and consumer users. The Company operates and is internally managed
in three operating segments, Technology Products, Industrial Products and
Hosted Software. The Companys chief operating decision-maker is the Companys
Chief Executive Officer. The Company evaluates segment performance based on
income from operations before net interest, foreign exchange gains and losses,
restructuring and other charges and income taxes. Corporate costs not
identified with the disclosed segments and restructuring and other charges are
grouped as Corporate and other expenses. The chief operating decision-maker
reviews assets and makes significant capital expenditure decisions for the
Company on a consolidated basis only. The accounting policies of the segments
are the same as those of the Company described in Note 1.
54
Financial
information relating to the Companys operations by reportable segment was as
follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net Sales:
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
2,553,716
|
|
$
|
2,148,104
|
|
$
|
1,940,902
|
|
Industrial Products
|
|
225,746
|
|
196,860
|
|
174,616
|
|
Hosted Software
|
|
413
|
|
201
|
|
|
|
Consolidated
|
|
$
|
2,779,875
|
|
$
|
2,345,165
|
|
$
|
2,115,518
|
|
|
|
|
|
|
|
|
|
Depreciation Expense:
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
6,818
|
|
$
|
6,395
|
|
$
|
7,341
|
|
Industrial Products
|
|
1,023
|
|
1,040
|
|
1,995
|
|
Hosted Software
|
|
904
|
|
683
|
|
403
|
|
Corporate
|
|
35
|
|
67
|
|
255
|
|
Consolidated
|
|
$
|
8,780
|
|
$
|
8,185
|
|
$
|
9,994
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
86,986
|
|
$
|
58,318
|
|
$
|
41,521
|
|
Industrial Products
|
|
20,595
|
|
13,947
|
|
7,591
|
|
Hosted Software
|
|
(15,813
|
)
|
(10,092
|
)
|
(6,803
|
)
|
Corporate and other
expenses
|
|
3,736
|
|
(269
|
)
|
(7,500
|
)
|
Consolidated
|
|
$
|
95,504
|
|
$
|
61,904
|
|
$
|
34,809
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
328,557
|
|
$
|
230,512
|
|
$
|
172,534
|
|
Industrial Products
|
|
76,634
|
|
59,239
|
|
51,031
|
|
Hosted Software
|
|
3,783
|
|
3,068
|
|
1,819
|
|
Corporate and other
|
|
264,897
|
|
291,342
|
|
279,160
|
|
Consolidated
|
|
$
|
673,871
|
|
584,161
|
|
$
|
504,544
|
|
Financial information relating to the
Companys operations by geographic area was as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net Sales:
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
Industrial Products
|
|
$
|
225,746
|
|
$
|
196,860
|
|
$
|
174,616
|
|
Technology Products
|
|
1,451,459
|
|
1,268,780
|
|
1,147,230
|
|
United States total
|
|
1,677,205
|
|
1,465,640
|
|
1,321,846
|
|
Other North America
|
|
170,272
|
|
135,619
|
|
99,035
|
|
Europe
|
|
932,398
|
|
743,906
|
|
694,637
|
|
Consolidated
|
|
2,779,875
|
|
2,345,165
|
|
$
|
2,115,518
|
|
|
|
|
|
|
|
|
|
Long-lived Assets:
|
|
|
|
|
|
|
|
North America
principally United States
|
|
$
|
21,978
|
|
$
|
21,347
|
|
$
|
31,435
|
|
Europe
|
|
26,502
|
|
27,239
|
|
25,824
|
|
Consolidated
|
|
$
|
48,480
|
|
$
|
48,586
|
|
$
|
57,259
|
|
Net sales are attributed
to countries based on location of selling subsidiary.
12.
QUARTERLY
FINANCIAL DATA (UNAUDITED)
Quarterly financial data is as follows (in thousands, except for per
share amounts):
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
(1
)
|
|
2007:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
676,122
|
|
$
|
647,102
|
|
$
|
687,317
|
|
$
|
769,334
|
|
Gross profit
|
|
$
|
96,674
|
|
$
|
99,318
|
|
$
|
110,653
|
|
$
|
119,656
|
|
Net income
|
|
$
|
13,895
|
|
$
|
13,762
|
|
$
|
17,644
|
|
$
|
24,180
|
|
Net income per common
share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.39
|
|
$
|
.38
|
|
$
|
.49
|
|
$
|
.67
|
|
Diluted
|
|
$
|
.37
|
|
$
|
.37
|
|
$
|
.47
|
|
$
|
.64
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
574,908
|
|
$
|
547,242
|
|
$
|
575,041
|
|
$
|
647,974
|
|
Gross profit
|
|
$
|
90,763
|
|
$
|
77,370
|
|
$
|
91,514
|
|
$
|
83,272
|
|
Net income
|
|
$
|
17,557
|
|
$
|
7,106
|
|
$
|
12,451
|
|
$
|
8,033
|
|
Net income per common
share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.51
|
|
$
|
.20
|
|
$
|
.36
|
|
$
|
.23
|
|
Diluted
|
|
$
|
.48
|
|
$
|
.19
|
|
$
|
.33
|
|
$
|
.22
|
|
(1) During the fourth quarter of 2007 the Company recorded a write
down of certain assets in Europe of approximately $6.7 million and a reversal
of certain liabilities in a domestic location of approximately $3.9 million.
55
13.
SUBSEQUENT
EVENTS
On January 5,
2008, the Company, through various subsidiaries, entered into an asset purchase
agreement with CompUSA Inc., a Delaware corporation.
Pursuant to the
Purchase Agreement, the Company agreed to acquire certain assets and
liabilities related to the e-commerce business of CompUSA Inc., certain
intellectual property rights owned by CompUSA, and the E-Commerce Business for
$18.9 million in cash. The Company
completed its acquisition of the E-Commerce Business on January 10, 2008.
Pursuant
to the Purchase Agreement, the Company also agreed to acquire up to sixteen
retail leases from CompUSA Inc. and certain fixtures located at these
locations. The closing of the acquisition of each lease was subject to the
receipt of the consent of the landlord, if required under the terms of a
lease. During February and March 2008
the Company completed the acquisition of these sixteen store leases and
fixtures for an aggregate purchase price of approximately $11.5 million.
On March 3,
2008, the Companys Board of Directors declared a special dividend of $1.00 per
share payable on April 2, 2008 to shareholders of record on Mar 21, 2008.
This special dividend is the second dividend we will have paid since our
initial public offering.
56
SYSTEMAX INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December:
(in thousands)
Description
|
|
Balance at Beginning of Period
|
|
Charged to
Expenses
|
|
Write-offs
|
|
Other
|
|
Balance at
End of Period
|
|
Allowance for sales
returns and doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
11,370
|
|
$
|
4,575
|
|
$
|
(4,128
|
)
|
|
|
$
|
11,817
|
|
2006
|
|
$
|
12,508
|
|
$
|
1,503
|
|
$
|
(2,641
|
)
|
|
|
$
|
11,370
|
|
2005
|
|
$
|
11,318
|
|
$
|
7,316
|
|
$
|
(6,126
|
)
|
|
|
$
|
12,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for deferred tax
assets
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
738
|
|
|
|
$
|
(467
|
)
|
$
|
(175
|
)
|
$
|
96
|
|
Noncurrent (1)
|
|
$
|
17,141
|
|
$
|
2,842
|
|
$
|
(11,408
|
)
|
$
|
(1,284
|
)
|
$
|
7,291
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
527
|
|
$
|
136
|
|
|
|
$
|
75
|
|
$
|
738
|
|
Noncurrent (1)
|
|
$
|
14,779
|
|
$
|
2,743
|
|
$
|
(2,260
|
)
|
$
|
1,879
|
|
$
|
17,141
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
413
|
|
$
|
114
|
|
|
|
|
|
$
|
527
|
|
Noncurrent
|
|
$
|
10,643
|
|
$
|
5,828
|
|
$
|
(1,301
|
)
|
$
|
(391
|
)
|
$
|
14,779
|
|
(1) Charges to expense are net of reductions resulting from
changes in deferred tax assets due to changes in tax laws.
57
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