UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
or
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
COMMISSION
FILE NUMBER 1-13792
Systemax
Inc.
(Exact name of
registrant as specified in its charter)
Delaware
|
|
11-3262067
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification
No.)
|
11 Harbor
Park Drive
Port
Washington, New York 11050
(Address of
principal executive offices, including zip code)
Registrants telephone
number, including area code:
(516) 608-7000
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
x
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|
|
|
Non-accelerated filer
o
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|
Smaller reporting
company
o
|
(Do not check if a
smaller reporting company)
|
|
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act)
Yes
o
No
x
The number of shares outstanding of the registrants Common Stock as of May 1,
2008 was 36,628,782
Available Information
We maintain an internet web site at www.systemax.com. We file reports
with the Securities and Exchange Commission (SEC) and make available free of
charge on or through this web site our annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K,
including all amendments to those reports.
These are available as soon as is reasonably practicable after they are
filed with the SEC. All reports
mentioned above are also available from the SECs web site (www.sec.gov). The
information on our web site is not part of this or any other report we file
with, or furnish to, the SEC.
Our
Board of Directors has adopted the following corporate governance documents
with respect to the Company (the Corporate Governance Documents):
·
Corporate
Ethics Policy for officers, directors and employees
·
Charter
for the Audit Committee of the Board of Directors
·
Charter
for the Compensation Committee of the Board of Directors
·
Charter
for the Nominating/Corporate Governance Committee of the Board of Directors
·
Corporate
Governance Guidelines and Principles
In
accordance with the corporate governance rules of the New York Stock
Exchange, each of the Corporate Governance Documents is available on our
Company web site (www.systemax.com) or can be obtained by writing to Systemax
Inc., Attention: Board of Directors (Corporate Governance), 11 Harbor Park
Drive, Port Washington, NY 11050.
3
PART I - FINANCIAL
INFORMATION
Item 1.
Financial Statements
Systemax
Inc.
Condensed Consolidated
Balance Sheets
(In thousands)
|
|
March 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
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|
(Unaudited)
|
|
|
|
ASSETS:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
98,731
|
|
$
|
128,021
|
|
Accounts receivable, net
|
|
215,654
|
|
206,940
|
|
Inventories, net
|
|
269,238
|
|
250,222
|
|
Prepaid expenses and other current assets
|
|
16,284
|
|
14,455
|
|
Deferred income tax assets, net
|
|
9,362
|
|
9,360
|
|
Total current assets
|
|
609,269
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|
608,998
|
|
|
|
|
|
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Property, plant and equipment, net
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|
51,069
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|
47,580
|
|
Deferred income tax assets, net
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|
18,764
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|
18,652
|
|
Goodwill, intangibles and other assets
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|
30,911
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|
1,150
|
|
|
|
|
|
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|
Total assets
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|
$
|
710,013
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|
$
|
676,380
|
|
|
|
|
|
|
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LIABILITIES AND SHAREHOLDERS EQUITY:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Short-term borrowings, including current portions of long-term debt
|
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$
|
2,110
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|
$
|
4,302
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|
Accounts payable
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|
262,952
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|
248,673
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|
Accrued expenses and other current liabilities
|
|
80,278
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|
81,670
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|
Dividends payable
|
|
37,126
|
|
|
|
Total current liabilities
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|
382,466
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|
334,645
|
|
|
|
|
|
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Long-term debt
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347
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|
254
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|
Other liabilities
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5,624
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|
5,646
|
|
Total liabilities
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|
388,437
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|
340,545
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|
|
|
|
|
|
|
Commitments and contingencies
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|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
Common stock
|
|
387
|
|
383
|
|
Additional paid-in capital
|
|
176,248
|
|
173,381
|
|
Treasury stock
|
|
(26,147
|
)
|
(26,324
|
)
|
Retained earnings
|
|
157,619
|
|
176,684
|
|
Accumulated other comprehensive income
|
|
13,469
|
|
11,711
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|
Total shareholders equity
|
|
321,576
|
|
335,835
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
710,013
|
|
$
|
676,380
|
|
See notes to
condensed consolidated financial statements.
4
Systemax
Inc.
Condensed Consolidated
Statements of Operations (Unaudited)
(In thousands, except per
share amounts)
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
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|
Net sales
|
|
$
|
724,737
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|
$
|
676,122
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|
Cost of sales
|
|
610,057
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|
579,448
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|
Gross profit
|
|
114,680
|
|
96,674
|
|
Selling, general & administrative expenses
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|
87,147
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|
75,137
|
|
Operating income
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|
27,533
|
|
21,537
|
|
Interest and other income, net
|
|
(728
|
)
|
(742
|
)
|
Income before income taxes
|
|
28,261
|
|
22,279
|
|
Provision for income taxes
|
|
10,200
|
|
8,384
|
|
Net income
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|
$
|
18,061
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|
$
|
13,895
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
Basic
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|
$
|
.50
|
|
$
|
.39
|
|
Diluted
|
|
$
|
.48
|
|
$
|
.37
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic
|
|
36,206
|
|
35,718
|
|
Diluted
|
|
37,628
|
|
37,701
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|
Dividends declared per common share
|
|
$
|
1.00
|
|
$
|
1.00
|
|
See notes to condensed consolidated financial
statements.
5
Systemax
Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
18,061
|
|
$
|
13,895
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
2,282
|
|
2,132
|
|
Provision (benefit) for deferred income taxes
|
|
(252
|
)
|
715
|
|
Provision (reduction) for returns and doubtful accounts
|
|
(894
|
)
|
1,222
|
|
Compensation expense related to equity compensation plans
|
|
863
|
|
832
|
|
(Gain) loss on dispositions and abandonment
|
|
13
|
|
(3
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(2,664
|
)
|
(18,064
|
)
|
Inventories
|
|
(17,813
|
)
|
(13,784
|
)
|
Prepaid expenses and other current assets
|
|
(338
|
)
|
7,896
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
9,895
|
|
23,859
|
|
Net cash provided by operating activities
|
|
9,153
|
|
18,700
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of CompUSA
|
|
(30,400
|
)
|
|
|
Purchases of property, plant and equipment
|
|
(6,059
|
)
|
(1,238
|
)
|
Proceeds from disposals of property, plant and equipment
|
|
43
|
|
|
|
Net cash used in investing activities
|
|
(36,416
|
)
|
(1,238
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Repayments of borrowings from banks
|
|
(2,344
|
)
|
(742
|
)
|
Proceeds from (repayments of)long-term debt and capital lease
obligations, net
|
|
80
|
|
(138
|
)
|
Proceeds from issuance of common stock, net of repurchases
|
|
887
|
|
878
|
|
Excess tax benefit from exercises of stock options
|
|
1,182
|
|
1,579
|
|
Net cash provided by (used in) financing activities
|
|
(195
|
)
|
1,577
|
|
|
|
|
|
|
|
Effects of exchange rates on cash
|
|
(1,832
|
)
|
(57
|
)
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
(29,290
|
)
|
18,982
|
|
Cash and cash equivalents beginning of period
|
|
128,021
|
|
86,964
|
|
Cash and cash equivalents end of period
|
|
$
|
98,731
|
|
$
|
105,946
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
Acquisitions of equipment through capital leases
|
|
$
|
255
|
|
$
|
|
|
See notes to condensed consolidated financial
statements.
6
Systemax Inc.
Condensed Consolidated Statement of Shareholders Equity (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Number of
|
|
|
|
Additional
|
|
Treasury
|
|
|
|
Comprehensive
|
|
|
|
|
|
Shares
|
|
|
|
Paid-in
|
|
Stock,
|
|
Retained
|
|
Income,
|
|
Comprehensive
|
|
|
|
Outstanding
|
|
Amount
|
|
Capital
|
|
At Cost
|
|
Earnings
|
|
Net of Tax
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2008
|
|
36,092
|
|
$
|
383
|
|
$
|
173,381
|
|
$
|
(26,324
|
)
|
$
|
176,684
|
|
$
|
11,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
Exercise of
stock options
|
|
437
|
|
4
|
|
706
|
|
177
|
|
|
|
|
|
|
|
Income tax
benefit on stock-based compensation
|
|
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
Change in
cumulative translation adjustment, net
|
|
|
|
|
|
|
|
|
|
|
|
1,758
|
|
$
|
1,758
|
|
Dividends
declared
|
|
|
|
|
|
|
|
|
|
(37,126
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
18,061
|
|
|
|
18,061
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
March 31, 2008
|
|
36,529
|
|
$
|
387
|
|
$
|
176,248
|
|
$
|
(26,147
|
)
|
$
|
157,619
|
|
$
|
13,469
|
|
|
|
See notes to condensed
consolidated financial statements.
7
Systemax
Inc.
Notes to Condensed
Consolidated Financial Statements (Unaudited)
1.
Basis of Presentation
The accompanying
condensed consolidated financial statements of the Company and its wholly-owned
subsidiaries are unaudited and have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and the rules and regulations of the Securities and
Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America are not required in these interim financial statements and have been
condensed or omitted. All significant intercompany accounts and transactions
have been eliminated in consolidation. Certain prior year amounts have been
reclassified to conform to current year presentation.
In the opinion of management, the
accompanying condensed consolidated financial statements contain all normal and
recurring adjustments necessary to present fairly the financial position of the
Company as of March 31, 2008 and the results of operations for the three
month periods ended March 31, 2008 and 2007, cash flows for the three
month periods ended March 31, 2008 and 2007 and changes in shareholders
equity for the three month period ended March 31, 2008. The December 31, 2007 condensed
consolidated balance sheet has been derived from the audited consolidated
financial statements included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2007.
These condensed consolidated financial statements
should be read in conjunction with the Companys audited consolidated financial
statements as of December 31, 2007 and for the year then ended included in
the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2007. The results for the three months
ended March 31, 2008 are not necessarily indicative of the results for an
entire year.
Systemax manages its business and reports
using a 52-53 week fiscal year that ends at midnight on the Saturday closest to
December 31. For clarity of presentation herein, fiscal years and quarters
are referred to as if they ended on the traditional calendar month. The actual fiscal quarter ended on March 29,
2008. The first quarters of both 2008 and 2007 included 13 weeks.
2.
Acquisition of CompUSA
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 acquired 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 acquired 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. This
acquisition accelerates the Companys planned expansion into the retail market
place and gives the Company 28 retail storefronts operating in North America
and Puerto Rico.
A preliminary
purchase price allocation has been completed and the Company has recorded
assets of approximately $17.0 million
for Trademarks and Trade Names, $8.0 million for Domain Names, $.4 million for
Client Lists, $.9 million for fixed assets and $4.1 million for Goodwill. The
Company expects to amortize its Client Lists over a 5 year period and
depreciate its fixed assets over a similar period. All other assets are
indefinite lived.
The Company was
assigned the rights and prospective obligations of the tenant for each of the
16 retail stores acquired. The following table details the contractual
obligations related to the assigned leases
(in thousands
):
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
After 2012
|
|
Retail store operating leases
|
|
$
|
4,115
|
|
$
|
4,633
|
|
$
|
4,311
|
|
$
|
3,671
|
|
$
|
3,373
|
|
$
|
13,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
3.
Stock-based Compensation Plans
Pre-tax
stock-based employee stock option compensation expense for the three months
ended March 31, 2008 and 2007 was $720,000 and $689,000 respectively.
The Company
continues to use the simplified method for determining expected life as
permitted in SEC Staff Accounting Bulletin 110 for options qualifying for
treatment (plain-vanilla options) due to the limited history the Company
currently has with option exercise activity.
4.
Net Income per Common Share
Net income per common share - basic was calculated
based upon the weighted average number of common shares outstanding during the
respective periods presented. Net income
per common share - diluted was calculated based upon the weighted average
number of common shares outstanding and included the equivalent shares for
dilutive options outstanding during the respective periods. 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. The
weighted average number of stock options outstanding excluded from the
computation of diluted earnings per share was 649,000 and zero shares for the
three months ended March 31, 2008 and 2007, respectively, due to their
antidilutive effect.
5. Comprehensive Income
Comprehensive income consists of net
income and foreign currency translation adjustments, net of tax, and is
included in the Condensed Consolidated Statement of Shareholders Equity. For
the three month periods ended March 31, 2008 and 2007, comprehensive
income was $19,819,000 and $14,388,000, respectively.
6. Credit Facilities
The Company maintains a
$120 million (which may be increased by up to $30 million, subject to certain
conditions) secured revolving credit agreement with a group of financial
institutions which provides for borrowings in the United States and United
Kingdom. The borrowings are secured by all of the Companys domestic and United
Kingdom accounts receivable, the domestic inventories of the Company, general
intangibles and the Companys shares of stock in its domestic subsidiaries and
the Companys United Kingdom headquarters building. The credit facility expires
and the outstanding borrowings thereunder are due on October 26, 2010. The
revolving credit agreement contains certain financial and other covenants,
including maintaining a minimum level of availability and restrictions on
capital expenditures and payments of dividends. The Company was in compliance
with all of the covenants as of March 31, 2008. As of March 31, 2008,
eligible collateral under the agreement was $118.7 million, total availability
was $107.7 million and there were outstanding letters of credit of $11.0
million and there were no outstanding advances.
The
Companys Netherlands subsidiary maintains a 5.0 million ($7.9 million at the March 31,
2008 exchange rate) credit facility with a local financial institution. At March 31,
2008 there were 1.1 million ($1.7 million) of borrowings outstanding with
interest payable 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. The facility expires in September 2008.
7. 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 accrue product warranties were as follows:
9
|
|
Three months
ended
March 31, 2008
|
|
|
|
|
|
Balance, beginning of
year
|
|
$ 914
|
|
Charged to
expense
|
|
279
|
|
Deductions
|
|
(341
|
)
|
Balance, end of
period
|
|
$852
|
|
8.
Segment Information
Systemax is primarily a direct marketer
of brand name and private label products. Our operations are organized in three
reportable business segments Technology Products, Industrial Products and
Hosted Software. Our Technology Products segment sells computers, computer
supplies and consumer electronics which are marketed in North America and
Western Europe. Most of these products
are manufactured by other companies. We
assemble our own personal computers (PCs) and sell them under the trademarks
Systemax
and
Ultra
. We also sell certain computer-related
products manufactured for us to our own design under the trademark
Ultra
. Technology
Products accounted for 92% of our net sales in 2007. Our Industrial Products
segment sells a wide array of material handling equipment, storage equipment
and consumable industrial items which are marketed in North America. Most of
these products are manufactured by other companies. Some products are manufactured for us to our
own design and marketed under the trademarks
Global
,
GlobalIndustrial.com
and
Nexel.
Industrial products accounted for 8% of our net
sales in 2007. In both of these segments we offer our customers a broad
selection of products, prompt order fulfillment and extensive customer service.
Our Hosted Software segment, which became a reportable segment in 2006,
participates in the emerging market for on-demand, web-based business software
applications through the marketing of our PCS ProfitCenter Software
application.
The Companys chief operating decision-maker
is the Companys Chief Executive Officer. The Company evaluates segment
performance based on operating income, 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 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.
Financial information
relating to the Companys operations by reportable segment was as follows (in
thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Net sales:
|
|
|
|
|
|
Technology
products
|
|
$
|
667,297
|
|
$
|
624,167
|
|
Industrial
products
|
|
57,362
|
|
51,874
|
|
Hosted software
|
|
78
|
|
81
|
|
Consolidated
|
|
$
|
724,737
|
|
$
|
676,122
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
Technology
products
|
|
$
|
30,323
|
|
$
|
21,249
|
|
Industrial
products
|
|
5,501
|
|
4,591
|
|
Hosted Software
|
|
(4,122
|
)
|
(3,017
|
)
|
Corporate and
other expenses
|
|
(4,169
|
)
|
(1,286
|
)
|
Consolidated
|
|
$
|
27,533
|
|
$
|
21,537
|
|
10
Financial information
relating to the Companys operations by geographic area was as follows (in
thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Net sales:
|
|
|
|
|
|
United States:
|
|
|
|
|
|
Industrial
products
|
|
$
|
57,362
|
|
$
|
51,874
|
|
Technology products
|
|
365,917
|
|
351,220
|
|
Hosted software
|
|
78
|
|
81
|
|
United States
total
|
|
423,357
|
|
403,175
|
|
Other North
America
|
|
48,999
|
|
37,214
|
|
North America
total
|
|
472,356
|
|
440,389
|
|
Europe
|
|
252,381
|
|
235,733
|
|
Consolidated
|
|
$
|
724,737
|
|
$
|
676,122
|
|
Revenues are attributed to
countries based on the location of the selling subsidiary.
|
9.
Contingencies
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.
Item 2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Forward
Looking Statements
This report contains
forward looking statements within the meaning of that term in the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward looking
statements may be made by the Company from time to time, in filings with the
Securities and Exchange Commission or otherwise. Statements contained in this report that are
not historical facts are forward looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements may include, but
are not limited to, projections of revenue, income or loss and capital
expenditures, statements regarding future operations, financing needs,
compliance with financial covenants in loan agreements, plans for acquisition
or sale of assets or businesses and consolidation of operations of newly
acquired businesses, and plans relating to products or services of the Company,
assessments of materiality, predictions of future events and the effects of
pending and possible litigation, as well as assumptions relating to the
foregoing. In addition, when used in
this discussion, the words anticipates, believes, estimates, expects, intends,
plans and variations thereof and similar expressions are intended to identify
forward looking statements.
11
Forward-looking
statements in this report are based on the Companys beliefs and expectations
as of the date of this report and are subject to risks and uncertainties which
may have a significant impact on the Companys business, operating results or
financial condition. Investors are cautioned that these forward-looking
statements are inherently uncertain. Should one or more of the risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results or outcomes may vary materially from those described herein.
Statements in this report, particularly in Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations and the Notes to
Condensed Consolidated Financial Statements, describe certain factors, among
others, that could contribute to or cause such differences.
Readers are cautioned not
to place undue reliance on any forward looking statements contained in this
report, which speak only as of the date of this report. We undertake no obligation to publicly
release the result of any revisions to these forward looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unexpected events.
Critical
Accounting Policies and Estimates
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 amounts of assets and liabilities at
the date of the financial statements, and revenues and expenses during the
period. Significant accounting policies employed by the Company, including the
use of estimates, were presented in the Notes to Consolidated Financial
Statements of the Companys 2007 Annual Report on Form 10-K.
Critical accounting
policies are those that are most important to the presentation of our financial
condition and results of operations, require managements most difficult,
subjective and complex judgments, and involve uncertainties. The accounting
policies that have been identified as critical to our business operations and
understanding the results of operations pertain to revenue recognition,
accounts receivable and allowance for doubtful accounts, inventories,
long-lived assets, income taxes and accruals. The application of each of these
critical accounting policies and estimates was discussed in Item 7 of the
Companys Annual Report on Form 10-K for the year ended December 31,
2007. There have been no significant changes in the application of critical
accounting policies or estimates during 2008. Management believes that full
consideration has been given to all relevant circumstances that we may be
subject to, and the condensed consolidated financial statements of the Company
accurately reflect managements best estimate of the consolidated results of
operations, financial position and cash flows of the Company for the periods
presented. Because of the uncertainty in these estimates, actual results could
differ from estimates used in applying the critical accounting policies. We are
not aware of any reasonably likely events or circumstances which would result
in different amounts being reported that would materially affect its financial
condition or results of operations.
Overview
Systemax is primarily a
direct marketer of brand name and private label products. Our operations are
organized in three reportable business segments Technology Products,
Industrial Products and Hosted Software. Our Technology Products segment sells
computers, computer supplies and consumer electronics which are marketed in
North America and Western Europe. Most
of these products are manufactured by other companies. We assemble our own PCs and sell them under our
own trademarks Systemax and Ultra. We
also sell certain computer-related products manufactured for us to our own
design under the trademark Ultra. Technology products accounted for 92% of our
net sales in the first quarter of 2008.
Our Industrial Products segment sells a wide array of material handling
equipment, storage equipment and consumable industrial items which are marketed
in North America. Most of these products
are manufactured by other companies.
Some products are manufactured for us to our own design and marketed
under the trademarks Global, GlobalIndustrial.com and Nexel. Industrial
products accounted for 8% of our net sales in the first quarter of 2008. In both of these product groups, we offer our
customers a broad selection of products, prompt order fulfillment and extensive
customer service. Our Hosted Software
segment, which became a reportable segment in 2006, participates in the
emerging market for on-demand, web-based business software applications through
the marketing of our PCS ProfitCenter Software application. See Note 8 to the consolidated financial
statements additional financial information about our business segments as well
as information about our geographic operations.
The
market for computer products and consumer electronics is subject to intense
price competition and is characterized by narrow gross profit margins. The
North American industrial products market is highly fragmented and we compete
against multiple distribution channels. Distribution of information technology
and our industrial products is working capital intensive, requiring us to incur
significant costs associated with the warehousing of many products, including
the costs of leasing warehouse space, maintaining inventory and inventory
management systems, and employing personnel to perform the associated tasks. We
12
supplement
our on-hand product availability by maintaining relationships with major
distributors and manufacturers, utilizing a combination of stocking and
drop-shipment fulfillment.
The
discussion of our results of operations and financial condition that follows
will provide information that will assist in understanding our financial
statements, the factors that we believe may affect our future results and
financial condition as well as information about how certain accounting
principles and estimates affect the consolidated financial statements. This
discussion should be read in conjunction with the condensed consolidated financial
statements included herein.
Results of Operations
Three Months Ended March 31, 2008 compared to the Three Months
Ended March 31, 2007
Key Performance Indicators (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
Net
sales by segment:
|
|
|
|
|
|
|
|
Technology
products
|
|
$
|
667,297
|
|
$
|
624,167
|
|
6.9
|
%
|
Industrial
products
|
|
57,362
|
|
51,874
|
|
10.6
|
%
|
Hosted software
|
|
78
|
|
81
|
|
(3.7
|
)%
|
Total net sales
|
|
$
|
724,737
|
|
$
|
676,122
|
|
7.2
|
%
|
Net
sales by geography:
|
|
|
|
|
|
|
|
North America
|
|
$
|
472,356
|
|
$
|
440,389
|
|
7.3
|
%
|
Europe
|
|
252,381
|
|
235,733
|
|
7.1
|
%
|
Total net sales
|
|
$
|
724,737
|
|
$
|
676,122
|
|
7.2
|
%
|
Gross
margin
|
|
15.8
|
%
|
14.3
|
%
|
1.5
|
%
|
Selling, general
and administrative expenses
|
|
$
|
87,147
|
|
$
|
75,137
|
|
16.0
|
%
|
Selling,
general and administrative costs as a % of net sales
|
|
12.0
|
%
|
11.1
|
%
|
.9
|
%
|
Operating income
|
|
$
|
27,533
|
|
$
|
21,537
|
|
27.8
|
%
|
Operating
margin
|
|
3.8
|
%
|
3.2
|
%
|
.6
|
%
|
Effective income
tax rate
|
|
36.1
|
%
|
37.6
|
%
|
(1.5
|
)%
|
Net income
|
|
$
|
18,061
|
|
$
|
13,895
|
|
30.0
|
%
|
Net
margin
|
|
2.5
|
%
|
2.2
|
%
|
.3
|
%
|
The
Technology Products sales increase was driven by increased internet and retail
store sales, private label product sales, expanded product offerings and the
acquisition of the CompUSA ecommerce business and sixteen retail stores. Sales attributable to CompUSA were $18.3
million. The Industrial Products sales
increase resulted from the Company increasing its market share through
competitive pricing advantages and increased internet sales. Both North America
sales and Europe sales increased in the first quarter as compared to the same
periods in the prior year. Movements in foreign exchange rates positively
impacted the European sales comparison by approximately $18 million in the
first quarter. Excluding the movements in foreign exchange rates, European sales
would have decreased .4% from the prior year. The increase in our North
American sales resulted from sales growth in both our Technology Products and
Industrial Products groups. This increase was primarily a result of our
continuing internet initiatives, increased retail sales, expansion of our
product offerings and the aforementioned acquisition of certain CompUSA assets.
Consolidated gross margin improved by over 150 basis points in the first
quarter as compared to the same period in 2007 due to decreased competitive
pricing pressures in 2008 as compared to the previous year. Gross margin is
dependent on variables such as product mix, vendor price protection and other
sales incentives, competition, pricing strategy, cooperative advertising funds
required to be classified as a reduction to cost of sales and other variables,
any or all of which may result in fluctuations in gross margin.
The increase in selling,
general and administrative expenses during 2008 was primarily the result of
$9.5 million of increased salaries, $1.5 million increased rent costs and $1.5
million of professional fees and telephone communication charges. Included in
these cost increases are approximately $2.5 million of costs related to CompUSA
operations and $.7 million in one time severance costs. Included in the first quarter of 2007 is a
gain of approximately $2.4 million from a lawsuit that was settled favorably.
Excluding this gain and the one time severance costs in 2008, selling, general
and administrative expenses would have increased 11.5% in 2008 as compared to
2007.
13
The Companys effective
tax rate for the first quarter of 2008 was 36.1% compared to 37.6% in 2007. The
reduced rate in 2008 is primarily the result of a reversal of a tax liability
of approximately $.4 million related to favorable settlement of an outstanding
tax issue.
Financial
Condition, Liquidity and Capital Resources
Our primary liquidity
needs are to support working capital requirements in our business, to fund
capital expenditures, and to fund special dividends declared by our Board of
Directors and to fund acquisitions. 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 as well as any interest and debt repayments in the
next twelve months and thereafter.
Selected liquidity
data (in thousands):
|
|
March 31,
2008
|
|
December 31,
2007
|
|
$ Change
|
|
Cash and cash equivalents
|
|
$
|
98,731
|
|
$
|
128,021
|
|
$
|
(29,290
|
)
|
Accounts
receivable, net
|
|
$
|
215,654
|
|
$
|
206,940
|
|
$
|
8,714
|
|
Inventories ,net
|
|
$
|
269,238
|
|
$
|
250,222
|
|
$
|
19,016
|
|
Prepaid expenses
and other current assets
|
|
$
|
16,284
|
|
$
|
14,455
|
|
$
|
1,829
|
|
Accounts payable
|
|
$
|
262,952
|
|
$
|
248,673
|
|
$
|
14,279
|
|
Accrued expenses
and other current liabilities
|
|
$
|
80,278
|
|
$
|
81,670
|
|
$
|
(1,392
|
)
|
Dividends
payable
|
|
$
|
37,126
|
|
|
|
$
|
37,126
|
|
Short term
borrowings
|
|
$
|
2,110
|
|
$
|
4,302
|
|
$
|
(2,192
|
)
|
Working capital
|
|
$
|
226,803
|
|
$
|
273,453
|
|
$
|
(46,650
|
)
|
Our working capital
decreased in the first quarter of 2008 as the result of the use of cash of
approximately $30.4 million for the purchase of certain CompUSA assets, an
increase in inventory, primarily related to purchasing inventory for the 16
CompUSA retail stores, an increase in accounts payable and accrued expenses and
an increase in dividends payable as the result of the dividend declared by our
Board in March 2008. Our inventory turnover decreased from 10 times to 9.5
times on an annual basis primarily the
result of the restocking of the 16 acquired CompUSA retail stores. Future
accounts receivable and inventory balances will continue to fluctuate with changes
in sales volume and the mix of our net sales between consumer and business
customers. These accounts will also be affected by the acquisition of CompUSA.
The decrease in cash
provided by operations in 2008 resulted from changes in our working capital
accounts, which used $10.9 million in cash compared to $.1 million of cash used
in 2007, primarily the result of an increase in inventories related to the
CompUSA acquisition. Cash generated from net income adjusted by other non-cash
items provided $20.1 million for the first quarter of 2008 compared to $18.8
million provided by these items in the first quarter of 2007.
Cash flows used in
investing activities during 2008 were primarily for the CompUSA acquisition and
for capital expenditures in retail stores and information technology. Cash flows
used in investing activities during 2007 consisted primarily of upgrades and
enhancements to our information and communications systems hardware and
facilities costs.
In the first quarter of 2008 we repaid $2.3 million in short-term loans in Europe and we had proceeds and excess tax benefits from stock option exercises that provided approximately $2.1 million of cash. In the first quarter of 2007 we had proceeds and excess tax benefits from stock option exercises of approximately $2.5 million. We used cash of $.9 million to repay long-term debt obligations, primarily in Europe.
Under our $120 million (which may be increased by up to $30 million, subject to certain conditions) secured revolving credit agreement for borrowings in the United States and United Kingdom, as of March 31, 2008, eligible collateral was $118.7 million and total availability was $107.7 million. There were outstanding letters of credit of $11.0 million and there were no outstanding advances as of March 31, 2008. The borrowings are secured by all of the domestic and United Kingdom accounts receivable, the domestic inventories of the Company, general intangibles, the Companys shares of stock in its domestic subsidiaries and the Companys United Kingdom headquarters building. The credit facility expires and the outstanding borrowings thereunder are due on October 26, 2010. The revolving credit agreement contains certain financial and other covenants, including maintaining a minimum level of availability and restrictions on capital expenditures and payments of dividends. We were in compliance with all of the covenants under this facility as of March 31, 2008.
14
Under our Netherlands 5
million ($7.9 million at the March 31, 2008 exchange rate) credit
facility, at March 31, 2008 there was approximately 1.1 million
outstanding under this line ($1.7 million). This facility expires in September 2008.
We also have certain
obligations with various parties that include commitments to make future
payments. Our principal commitments at March 31, 2008 consisted of
repayments of borrowings under our credit agreements, payments under operating
leases for certain of our real property and equipment and payments under
employment and other service agreements.
Our current and
anticipated needs for cash include funding growth in working capital, the
special dividend declared by our Board of Directors in 2008, capital
expenditures necessary for future growth in sales and potential expansion
through acquisitions. We believe that our cash balances and our availability
under credit facilities will be sufficient to fund our working capital and
other cash requirements for the next twelve months.
We maintain our cash and
cash equivalents primarily in money market funds or their equivalent. As of March 31,
2008, all of our investments had maturities of less than three months. Accordingly, we do not believe that our
investments have significant exposure to interest rate risk.
Off-balance Sheet Arrangements
The Company has not
created, and is not party to, except as described above, any special-purpose or
off-balance sheet entities for the purpose of raising capital, incurring debt
or operating the Companys business. The Company does not have any arrangements
or relationships with entities that are not consolidated into the financial
statements that are reasonably likely to materially affect the Companys
liquidity or the availability of capital resources.
Item 3.
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 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. 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 March 31, 2008 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 includes short-term borrowings in Europe
under our credit facilities. As of March 31, 2008, the balance outstanding
on our variable rate debt was approximately $1.7 million. Based on our market
sensitive instruments as of March 31, 2008, 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
for the fiscal year.
Item 4.
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 March 31, 2008. 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 March 31, 2008. 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
15
evaluation, the Companys
Chief Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures are effective.
Changes
in Internal Control Over Financial Reporting
There have been no
changes in the Companys internal controls over financial reporting during the
quarterly period ended March 31, 2008 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over
financial reporting.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No.157 Fair Value Measurements. This statement was issued to increase
consistency and comparability in fair value measurements and for expanded
disclosures about fair value measurements. In February 2008, the FASB
issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement
No. 157 (FSP 157-2) which amends SFAS 157 to delay the effective date of
SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for those
items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). FSP 157-2 delays the effective date of SFAS
157, for certain items, until fiscal years beginning after November 15,
2008.
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).
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.
Effective January 1, 2008, the Company
adopted SFAS 157 and SFAS 159. Since we do not have any financial assets and
liabilities that are required to be recorded at fair value, the only impact of
these adoptions will be on the disclosures required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments in our Annual Report on Form 10-K
for the year ended December 31, 2008.
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.
16
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
Systemax is a
party to various pending legal proceedings and disputes arising in the normal
course of business, including those involving commercial, employment, tax and
intellectual property related claims, none of which, in managements opinion,
is anticipated to have a material adverse effect on our consolidated financial
statements.
Item 6.
Exhibits
31 Certifications of the Chief Executive
Officer and Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certifications of the Chief Executive
Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
17
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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SYSTEMAX INC.
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Date: May 9, 2008
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By:
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/s/ RICHARD
LEEDS
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Richard Leeds
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Chairman and Chief Executive Officer
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By:
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/s/ LAWRENCE P. REINHOLD
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Lawrence P. Reinhold
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Executive Vice President and Chief Financial Officer
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18
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