Table of Contents
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
September 30, 2008
|
|
|
|
or
|
|
|
|
o
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|
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)
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|
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,
non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2
of the Exchange Act).
Large accelerated
filer
o
Accelerated filer
x
Non-accelerated filer
o
Smaller reporting company
o
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 October 31, 2008
was 36,470,620.
Table of Contents
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
Table of
Contents
PART I - FINANCIAL INFORMATION
Item
1.
Financial Statements
Systemax
Inc.
Condensed Consolidated
Balance Sheets
(In thousands)
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
73,373
|
|
$
|
128,021
|
|
Accounts receivable, net
|
|
207,446
|
|
206,940
|
|
Inventories, net
|
|
275,974
|
|
250,222
|
|
Prepaid expenses and other current assets
|
|
17,087
|
|
14,455
|
|
Deferred income tax assets, net
|
|
9,700
|
|
9,360
|
|
Total current assets
|
|
583,580
|
|
608,998
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
52,134
|
|
47,580
|
|
Deferred income tax assets, net
|
|
14,052
|
|
18,652
|
|
Goodwill, intangibles and other assets
|
|
31,536
|
|
1,150
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
681,302
|
|
$
|
676,380
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Short-term borrowings, including current portions of long-term debt
|
|
$
|
520
|
|
$
|
4,302
|
|
Accounts payable
|
|
262,670
|
|
248,673
|
|
Accrued expenses and other current liabilities
|
|
72,951
|
|
81,670
|
|
Total current liabilities
|
|
336,141
|
|
334,645
|
|
|
|
|
|
|
|
Long-term debt
|
|
501
|
|
254
|
|
Other liabilities
|
|
5,688
|
|
5,646
|
|
Total liabilities
|
|
342,330
|
|
340,545
|
|
|
|
|
|
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|
Commitments and contingencies
|
|
|
|
|
|
|
|
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|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
Common stock
|
|
389
|
|
383
|
|
Additional paid-in capital
|
|
178,079
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|
173,381
|
|
Treasury stock
|
|
(28,785
|
)
|
(26,324
|
)
|
Retained earnings
|
|
182,433
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|
176,684
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|
Accumulated other comprehensive income
|
|
6,856
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|
11,711
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|
Total shareholders equity
|
|
338,972
|
|
335,835
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
681,302
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|
$
|
676,380
|
|
See notes to
condensed consolidated financial statements.
4
Table of
Contents
Systemax Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net sales
|
|
$
|
739,479
|
|
$
|
687,317
|
|
$
|
2,220,251
|
|
$
|
2,010,541
|
|
Cost of sales
|
|
623,010
|
|
576,664
|
|
1,873,054
|
|
1,703,896
|
|
Gross profit
|
|
116,469
|
|
110,653
|
|
347,197
|
|
306,645
|
|
Selling, general & administrative expenses
|
|
97,887
|
|
84,847
|
|
280,026
|
|
239,233
|
|
Operating income
|
|
18,582
|
|
25,806
|
|
67,171
|
|
67,412
|
|
Interest and other income, net
|
|
(58
|
)
|
(1,113
|
)
|
(1,245
|
)
|
(2,811
|
)
|
Income before income taxes
|
|
18,640
|
|
26,919
|
|
68,416
|
|
70,223
|
|
Provision for income taxes
|
|
7,367
|
|
9,275
|
|
25,541
|
|
24,922
|
|
Net income
|
|
$
|
11,273
|
|
$
|
17,644
|
|
$
|
42,875
|
|
$
|
45,301
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.31
|
|
$
|
.49
|
|
$
|
1.18
|
|
$
|
1.26
|
|
Diluted
|
|
$
|
.30
|
|
$
|
.47
|
|
$
|
1.14
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
36,579
|
|
36,055
|
|
36,472
|
|
35,928
|
|
Diluted
|
|
37,524
|
|
37,734
|
|
37,483
|
|
37,667
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
$
|
|
|
$
|
|
|
$
|
1.00
|
|
$
|
1.00
|
|
See notes to
condensed consolidated financial statements.
5
Table of
Contents
Systemax
Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
42,875
|
|
$
|
45,301
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
7,591
|
|
6,675
|
|
Provision (benefit) for deferred income taxes
|
|
3,922
|
|
580
|
|
Provision (reduction) for returns and doubtful accounts
|
|
1,170
|
|
2,856
|
|
Compensation expense related to equity compensation plans
|
|
2,778
|
|
2,934
|
|
Excess tax benefit from exercises of stock options
|
|
(1,377
|
)
|
(1,810
|
)
|
(Gain) loss on dispositions and abandonment
|
|
13
|
|
1
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(6,016
|
)
|
(12,165
|
)
|
Inventories
|
|
(27,795
|
)
|
1,440
|
|
Prepaid expenses and other current assets
|
|
(3,171
|
)
|
577
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
11,321
|
|
17,031
|
|
Net cash provided by operating activities
|
|
31,311
|
|
63,420
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of CompUSA
|
|
(30,649
|
)
|
|
|
Purchases of property, plant and equipment
|
|
(13,159
|
)
|
(6,064
|
)
|
Proceeds from disposals of property, plant and equipment
|
|
47
|
|
13
|
|
Net cash used in investing activities
|
|
(43,761
|
)
|
(6,051
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of borrowings from banks
|
|
(3,989
|
)
|
(12,487
|
)
|
Proceeds from (repayments of) long-term debt and capital lease
obligations, net
|
|
298
|
|
(278
|
)
|
Dividends paid
|
|
(37,126
|
)
|
(36,588
|
)
|
Proceeds from issuance of common stock
|
|
1,125
|
|
2,645
|
|
Repurchase of treasury stock
|
|
(3,435
|
)
|
(1,860
|
)
|
Excess tax benefit from exercises of stock options
|
|
1,377
|
|
1,810
|
|
Net cash used in financing activities
|
|
(41,750
|
)
|
(46,758
|
)
|
|
|
|
|
|
|
Effects of exchange rates on cash
|
|
(448
|
)
|
209
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
(54,648
|
)
|
10,820
|
|
Cash and cash equivalents beginning of period
|
|
128,021
|
|
86,964
|
|
Cash and cash equivalents end of period
|
|
$
|
73,373
|
|
$
|
97,784
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
Acquisitions of equipment through capital leases
|
|
$
|
750
|
|
$
|
148
|
|
See notes to condensed consolidated financial
statements.
6
Table of
Contents
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
|
|
|
|
|
|
2,703
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted stock
|
|
104
|
|
1
|
|
283
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of
stock options
|
|
501
|
|
5
|
|
193
|
|
928
|
|
|
|
|
|
|
|
Repurchase of
treasury stock
|
|
(228
|
)
|
|
|
|
|
(3,435
|
)
|
|
|
|
|
|
|
Income tax
benefit on stock-based compensation
|
|
|
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
Change in
cumulative translation adjustment, net
|
|
|
|
|
|
|
|
|
|
|
|
(4,855
|
)
|
$
|
(4,855
|
)
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
(37,126
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
42,875
|
|
|
|
42,875
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
September 30, 2008
|
|
36,469
|
|
$
|
389
|
|
$
|
178,079
|
|
$
|
(28,785
|
)
|
$
|
182,433
|
|
$
|
6,856
|
|
|
|
See notes to condensed
consolidated financial statements.
7
Table
of Contents
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 September 30, 2008 and the results
of operations for the three and nine month periods ended September 30,
2008 and 2007, cash flows for the nine month periods ended September 30,
2008 and 2007 and changes in shareholders equity for the nine month period
ended September 30, 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 and nine months
ended September 30, 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 September 27, 2008. The third quarters of both 2008 and
2007 included 13 weeks, and the nine month periods of both 2008 and 2007
included 39 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 $11.7 million. This acquisition accelerates the
Companys planned expansion into the retail market place and gives the Company
29 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 $4.3 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
|
|
$
|
4,669
|
|
$
|
5,067
|
|
$
|
4,695
|
|
$
|
4,105
|
|
$
|
3,699
|
|
$
|
13,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Table of Contents
3.
Stock-based Compensation Plans
Pre-tax
stock-based compensation expense for the nine months ended September 30,
2008 and 2007 was $2,778,000 and $2,934,000 respectively.
The Company
continues to use the simplified method for determining expected life of a stock
option 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
599,000 and 100,000 shares for the three months ended September 30, 2008
and 2007, and 605,000 and zero shares for the nine months ended September 30,
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 September 30, 2008 and 2007,
comprehensive income was $4,603,000 and $20,847,000, respectively. For the nine
month periods ended September 30, 2008 and 2007, comprehensive income was
$38,020,000 and $50,831,000, 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 September 30, 2008. As of September 30,
2008, eligible collateral under the agreement was $120 million, total
availability was $109.3 million and there were outstanding letters of credit of
$10.7 million and there were no outstanding advances.
The Companys Netherlands
subsidiary maintains a 5.0 million ($7.3 million at the September 30,
2008 exchange rate) credit facility with a local financial institution. At September 30,
2008 there were approximately 14 thousand ($20 thousand) of borrowings
outstanding with interest payable at a rate of 8.15%. 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 November 2008. The Company will not be renewing this credit
facility.
7. Product Warranties
Provisions for
estimated future expenses relating to product warranties for the Companys
assembled proprietary products 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:
9
Table of Contents
|
|
Nine months
ended
September 30,
2008
(in thousands)
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
914
|
|
Charged to expense
|
|
819
|
|
Deductions
|
|
(993
|
)
|
Balance, end of
period
|
|
$
|
740
|
|
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
. 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.
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
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
September 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Technology
products
|
|
$
|
676,133
|
|
$
|
625,683
|
|
$
|
2,037,780
|
|
$
|
1,840,922
|
|
Industrial
products
|
|
63,187
|
|
61,523
|
|
182,166
|
|
169,232
|
|
Hosted software
|
|
159
|
|
111
|
|
305
|
|
387
|
|
Consolidated
|
|
$
|
739,479
|
|
$
|
687,317
|
|
$
|
2,220,251
|
|
$
|
2,010,541
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss):
|
|
|
|
|
|
|
|
|
|
Technology
products
|
|
$
|
21,316
|
|
$
|
27,693
|
|
$
|
75,030
|
|
$
|
72,078
|
|
Industrial
products
|
|
7,315
|
|
6,592
|
|
19,548
|
|
16,759
|
|
Hosted software
|
|
(3,775
|
)
|
(5,019
|
)
|
(12,379
|
)
|
(10,983
|
)
|
Corporate and
other expenses
|
|
(6,274
|
)
|
(3,460
|
)
|
(15,028
|
)
|
(10,442
|
)
|
Consolidated
|
|
$
|
18,582
|
|
$
|
25,806
|
|
$
|
67,171
|
|
$
|
67,412
|
|
10
Table of
Contents
Financial information
relating to the Companys operations by geographic area was as follows (in
thousands):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
Technology
products
|
|
$
|
401,297
|
|
$
|
356,642
|
|
$
|
1,168,353
|
|
$
|
1,045,283
|
|
Industrial
products
|
|
63,187
|
|
61,523
|
|
182,166
|
|
169,232
|
|
Hosted software
|
|
159
|
|
111
|
|
305
|
|
387
|
|
United States
total
|
|
464,643
|
|
418,276
|
|
1,350,824
|
|
1,214,902
|
|
Other North
America (Technology products)
|
|
47,661
|
|
41,191
|
|
145,754
|
|
116,033
|
|
North America
total
|
|
512,304
|
|
459,467
|
|
1,496,578
|
|
1,330,935
|
|
Europe
|
|
227,175
|
|
227,850
|
|
723,673
|
|
679,606
|
|
Consolidated
|
|
$
|
739,479
|
|
$
|
687,317
|
|
$
|
2,220,251
|
|
$
|
2,010,541
|
|
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 national class action complaint in U.S. District Court
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 (as amended) alleges that
since 2004 Systemax, TigerDirect and OnRebate engaged in a conspiracy to engage
in deceptive and unfair rebate practices.
Vukson alleges counts for violation of state consumer protection states,
conspiracy, and unjust enrichment.
Defendants have moved to dismiss the Complaint. 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. The
Company received subpoenas for additional documents on January 30, 2008
and on August 25, 2008. The Company
is cooperating with the Florida Attorney Generals investigation and has
provided a substantial number of documents in response to the subpoenas.
10.
Stock Repurchase
On May 12,
2008 the Companys Board of Directors authorized the repurchase of up to two
million shares of Company stock. During the third quarter of 2008 the Company
repurchased 228,401 shares for approximately $3.4 million.
11
Table
of Contents
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.
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
12
Table of Contents
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. For
the nine months ended September 30, 2008, Technology products accounted
for 92% of our net sales. 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 for the nine months ended September 30,
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 for 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 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
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 and
Nine Months Ended September 30, 2008 compared to the Three and Nine Months
Ended September 30, 2007
Key Performance
Indicators (in thousands):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
2008
|
|
2007
|
|
% Change
|
|
Net
sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
products
|
|
$
|
676,133
|
|
$
|
625,683
|
|
8.1
|
%
|
$
|
2,037,780
|
|
$
|
1,840,922
|
|
10.7
|
%
|
Industrial
products
|
|
63,187
|
|
61,523
|
|
2.7
|
%
|
182,166
|
|
169,232
|
|
7.6
|
%
|
Hosted software
|
|
159
|
|
111
|
|
43.2
|
%
|
305
|
|
387
|
|
(21.2
|
)%
|
Total net sales
|
|
$
|
739,479
|
|
$
|
687,317
|
|
7.6
|
%
|
$
|
2,220,251
|
|
$
|
2,010,541
|
|
10.4
|
%
|
Net
sales by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
512,304
|
|
$
|
459,467
|
|
11.5
|
%
|
$
|
1,496,578
|
|
$
|
1,330,935
|
|
12.4
|
%
|
Europe
|
|
227,175
|
|
227,850
|
|
(.3
|
)%
|
723,673
|
|
679,606
|
|
6.5
|
%
|
Total net sales
|
|
$
|
739,479
|
|
$
|
687,317
|
|
7.6
|
%
|
$
|
2,220,251
|
|
$
|
2,010,541
|
|
10.4
|
%
|
Gross
margin
|
|
15.8
|
%
|
16.1
|
%
|
(.3
|
)%
|
15.6
|
%
|
15.3
|
%
|
.3
|
%
|
Selling, general
and administrative costs
|
|
$
|
97,887
|
|
$
|
84,847
|
|
15.4
|
%
|
$
|
280,026
|
|
$
|
239,233
|
|
17.1
|
%
|
Selling, general
and administrative as a % of net sales
|
|
13.2
|
%
|
12.3
|
%
|
.9
|
%
|
12.6
|
%
|
11.9
|
%
|
.7
|
%
|
Operating income
|
|
$
|
18,582
|
|
$
|
25,806
|
|
(28.0
|
)%
|
$
|
67,171
|
|
$
|
67,412
|
|
(.4
|
)%
|
Operating
margin
|
|
2.5
|
%
|
3.8
|
%
|
(1.3
|
)%
|
3.0
|
%
|
3.4
|
%
|
(.4
|
)%
|
Effective income
tax rate
|
|
39.5
|
%
|
34.5
|
%
|
5.0
|
%
|
37.3
|
%
|
35.5
|
%
|
1.8
|
%
|
Net income
|
|
$
|
11,273
|
|
$
|
17,644
|
|
(36.1
|
)%
|
$
|
42,875
|
|
$
|
45,301
|
|
(5.4
|
)%
|
Net
margin
|
|
1.5
|
%
|
2.6
|
%
|
(1.1
|
)%
|
1.9
|
%
|
2.3
|
%
|
(.4
|
)%
|
13
Table of
Contents
The
Technology Products sales increase was driven by increased internet and retail
store sales as the result of the acquisition of the CompUSA ecommerce business and
re-opening sixteen retail stores. Sales
attributable to CompUSA web and retail were $63.0 million for the third quarter
of 2008 and $139.4 million for the first nine months of 2008. Excluding CompUSA
revenue, total Technology Products revenues declined approximately 2.0% in the
third quarter of 2008 and increased 3.1% for the first nine months of 2008 as
compared to the same periods in 2007. In the United States, Technology Products
sales excluding CompUSA declined 5% in the third quarter of 2008 and 1.5% for
the first nine months of 2008 as compared to the same periods in 2007. The
decline in the third quarter and nine month periods of 2008 is the result of
slower business to business IT and consumer electronics sales as United States
economic activity slowed. In Europe sales were flat in the third quarter of
2008 and increased 6.5% for the first nine months of 2008 as compared to the
same periods in 2007. Movements in foreign exchange rates positively impacted
the European sales comparison by approximately $8 million in the third quarter
and $44 million for the first nine months of 2008. Excluding exchange rate
benefits, European sales would have declined by 4% in the third quarter of 2008
and would have been flat in the first nine months of 2008 as compared to the
same periods in 2007. Measured in local
currencies, quarterly revenues in each of our European locations declined in
the third quarter as compared to the same period in 2007 as European economic
conditions deteriorated. The decline in sales for the quarter is primarily the
result of slowed consumer and business to business sales. Sales in Canada (Other North America)
increased by 15.7% in the third quarter of 2008 and 25.6% in the first nine
months of 2008 as compared to the same periods in 2007. Excluding exchange rate benefits sales would
have increased 12.3% for the quarter and 13.6% for the first nine months of
2008. The increased sales are primarily the result of the opening of one
additional retail store, increased business to business and web sales and
generally more stable economic conditions in Canada as compared to other
locations.
The
Industrial Products sales increase resulted from the Company increasing its
market share through competitive pricing advantages and increased internet
sales. Quarter over quarter growth in Industrial Products slowed in the third
quarter primarily the result of a slowing US economy. In our Hosted Software
segment revenues continue to be insignificant relevant to consolidated
revenues. Subsequent to the end of the third quarter of 2008 the Company is
reorganizing and refocusing its Hosted Software business to reduce its net loss
and negative cash flow. The actions taken to date will result in a charge to
earnings of approximately $.4 million. The Company expects to realize savings
of approximately $2 million annually.
Consolidated
gross margin declined for the three month period ended September 30, 2008
by 30 basis points and improved by 30 basis points for the nine months ending September 30,
2008 compared to the same periods in 2007. 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 in the third quarter
of 2008 was primarily the result of $5.6 million of increased salaries and
related costs, $2.5 million of increased rent and real estate taxes, $2.0
million of increased professional fees, telephone/computer maintenance and
utility charges, $1.1 million increase in bad debt expense and $.7 million of
increased credit card fees. Included in these cost increases are approximately
$7.2 million of costs related to CompUSA operations. As a percentage of sales
S, G &A increased in the third quarter to 13.2% compared to 12.3% in
the third quarter of 2007. This increase is primarily the result of the
addition to S, G&A of costs related to the CompUSA retail stores. The
Company expects S, G & A as a percentage of sales to decline as retail
store sales ramp up and as the Company realizes cost savings from the Hosted
Software segment reorganization .
The
increase in selling, general and administrative expenses in the first nine
months of 2008 was primarily the result of $23.7 million of increased salaries
and related costs, $6.7 million of increased rent and real estate costs, $3.8
million of professional fees and telephone/computer maintenance charges, and
$2.0 million of increased credit card fees. Included in these cost increases
are approximately $15.2 million of costs related to CompUSA operations and $.7
million in severance costs. Included in
the nine months of 2007 is a gain of approximately $2.4 million from a lawsuit
that was settled favorably. Excluding this gain selling, general and
administrative expenses would have increased 15.9% in 2008 as compared to 2007.
As a percentage of sales S, G &A increased in the first nine months of
2008 to 12.6% compared to 11.9% in the same period of 2007. This increase is
primarily the result of the addition to S, G&A of costs related to the
CompUSA retail stores. The Company expects S, G & A as a percentage of
sales to decline as retail store sales ramp up and as the Company realizes cost
savings from the Hosted Software segment reorganization.
The Companys effective
tax rate for the quarter was 39.5% up from 34.5% in the third quarter of 2007,
primarily the result of increased taxable income in the United Kingdom where we
had a deferred tax valuation allowance in the prior year. The effective tax
rate for the nine months was 37.3% in 2008, up from 35.5% in 2007.
Net income for the third
quarter of 2008 declined 35.8% to $11.3 million compared to $17.6 million in
the third quarter of
14
Table of Contents
2007. The decline in net
income is the result of slowing sales growth and increased fixed overhead
related to the ramp up of the Companys CompUSA retail stores. The Company has
implemented selected hiring freezes and targeted expense cuts in certain
business units as the result of general economic uncertainty worldwide. Net
income for the first nine months of 2008 declined 5.4% to $42.9 million
compared to $45.3 million in 2007.
Financial
Condition, Liquidity and Capital Resources
Our primary liquidity
needs are to support working capital requirements in our business, fund capital
expenditures, repurchases of Company stock, fund special dividends declared by
our Board of Directors and 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):
|
|
September 30,
2008
|
|
December 31,
2007
|
|
$ Change
|
|
Cash and cash
equivalents
|
|
$
|
73,373
|
|
$
|
128,021
|
|
$
|
(54,648
|
)
|
Accounts
receivable, net
|
|
$
|
207,446
|
|
$
|
206,940
|
|
$
|
506
|
|
Inventories, net
|
|
$
|
275,974
|
|
$
|
250,222
|
|
$
|
25,752
|
|
Prepaid expenses
and other current assets
|
|
$
|
17,087
|
|
$
|
14,455
|
|
$
|
2,632
|
|
Accounts payable
|
|
$
|
262,670
|
|
$
|
248,673
|
|
$
|
13,997
|
|
Accrued expenses
and other current liabilities
|
|
$
|
72,951
|
|
$
|
81,670
|
|
$
|
(8,719
|
)
|
Short term
borrowings
|
|
$
|
520
|
|
$
|
4,302
|
|
$
|
(3,782
|
)
|
Working capital
|
|
$
|
247,439
|
|
$
|
274,353
|
|
$
|
(26,914
|
)
|
Our working capital
decreased in the first nine months of 2008 as the result of the use of
approximately $30.6 million cash for the purchase of certain CompUSA assets,
payment of $37.1 million for a special dividend, stock repurchases of $3.4
million and an increase in inventory, primarily related to purchasing inventory
for the 16 CompUSA retail stores. Accounts payable balances increased by
approximately $14.0 million offset by a decrease of approximately $8.7 million
in accrued expenses and a reduction in short term debt in Europe. Our inventory turnover decreased from 10
times to 8.9 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.
The decrease in cash
provided by operations in the first nine months of 2008 resulted from changes
in our working capital accounts, which used $25.7 million in cash compared to
$6.9 million generated 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 $57.0 million for the nine months
ended September 30, 2008 compared to $56.5 million provided by these items
for the nine months ended September 30, 2007.
Cash flows used in
investing activities during the first nine months of 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.
Net cash of $41.8 million was used in financing activities for the nine months of 2008. We repaid approximately $4 million in short-term loans, repurchased Company stock of approximately $3.4 million and we paid $37.1 million for a special dividend. Proceeds and excess tax benefits from stock option exercises provided approximately $2.5 million of cash. In the first nine months of 2007, we repaid $12.5 million in short-term loans and paid $36.6 million for a special dividend. Proceeds from stock option exercises, net of repurchases and excess tax benefits, provided approximately $2.6 million of cash.
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 September 30, 2008, eligible collateral was $120 million and total availability was $109.3 million. There were outstanding letters of credit of $10.7 million and there were no outstanding advances as of September 30, 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
15
Table of Contents
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 September 30, 2008.
Under our Netherlands 5
million ($7.3 million at the September 30, 2008 exchange rate) credit
facility, at September 30, 2008 there was approximately 14 thousand
outstanding under this line ($20 thousand). This facility expires in November 2008. The Company will not be renewing this credit
facility.
We also have certain
obligations with various parties that include commitments to make future
payments. Our principal commitments at September 30, 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, capital
expenditures necessary for future growth in sales, repurchase of Company stock
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 September 30,
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 September 30, 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 September 30, 2008, the balance
outstanding on our variable rate debt was approximately $20 thousand. Based on
our market sensitive instruments as of September 30, 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 September 30, 2008. As part of
this evaluation we noted that the remediation and testing of the significant
deficiency identified as part of our December 31, 2007 review is not yet
complete as of September 30, 2008. This significant deficiency is
described below:
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.
16
Table of Contents
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.
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 September 30, 2008 that have materially affected,
or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
Recent
Accounting Pronouncements
Effective January 1,
2008, the Company adopted SFAS 157 and SFAS 159. 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. The Company is currently evaluating the potential
impact, if any, of FSP 157-2. 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. 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 June 2008, the
FASB issued FASB Staff Position No. EITF 03-6-1 Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF -3-6-1). This FSP was issued to clarify that instruments
granted in share-based payment transactions can be participating securities
prior to the requisite service having been rendered. The guidance in this FSP
applies to the calculation of Earnings Per Share (EPS) under Statement 128
for share-based payment awards with rights to dividends or dividend
equivalents. Unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of EPS
pursuant to the two-class method. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. All prior-period EPS data presented shall
be adjusted retrospectively (including interim financial statements, summaries
of earnings, and selected financial data) to conform with the provisions of
this FSP. The Company is currently evaluating the impact of this FSP on its
consolidated financial statements.
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 annual periods beginning after December 15, 2008 and will be applied
prospectively for all business combinations entered into after the date of
adoption.
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
17
Table of Contents
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.
PART II
- OTHER INFORMATION
Item 1.
Legal Proceedings
Litigation
Kevin Vukson v. TigerDirect, Inc.,
OnRebate.com Inc. and Systemax Inc.
On October 18, 2007, Kevin Vukson filed a
national class action complaint in U.S. District Court 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 (as amended) alleges that since 2004 Systemax,
TigerDirect and OnRebate engaged in a conspiracy to engage in deceptive and
unfair rebate practices. Vukson alleges
counts for violation of state consumer protection states, conspiracy, and
unjust enrichment. Defendants have moved
to dismiss the Complaint. 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. The Company received
subpoenas for additional documents on January 30, 2008 and on August 25,
2008. The Company is cooperating with
the Florida Attorney Generals investigation and has provided a substantial
number of documents in response to the subpoenas.
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
|
|
|
|
|
|
18
Table of
Contents
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.
|
SYSTEMAX INC.
|
|
|
|
|
Date:
November 6, 2008
|
By:
|
/s/ Richard
Leeds
|
|
|
|
Richard Leeds
|
|
Chairman and Chief Executive Officer
|
|
|
|
|
|
By:
|
/s/ Lawrence P.
Reinhold
|
|
|
|
Lawrence P. Reinhold
|
|
Executive Vice President and Chief Financial Officer
|
19
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