Table of Contents
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31,
2008
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission
File Number:
1-13792
Systemax Inc.
(Exact name of registrant as specified in its
charter)
Delaware
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11-3262067
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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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
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class
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Name of each exchange on which registered
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Common Stock, par value $ .01 per share
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New York Stock Exchange
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Securities registered pursuant to
Section 12(g) of the Act:
NONE
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Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes
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No
x
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
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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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best knowledge of the registrant, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment of this Form 10-K.
x
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 the definitions of large accelerated filer, accelerated filer,
and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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(Do
not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes
o
No
x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2008, which is the last business day of the
registrants most recently completed second fiscal quarter, was approximately
$148,811,545. For purposes of this computation, all executive officers and
directors of the Registrant and all parties to the Stockholders Agreement dated
as of June 15, 1995 have been deemed to be affiliates. Such determination
should not be deemed to be an admission that such persons are, in fact,
affiliates of the Registrant.
The number of shares outstanding of the registrants common stock as of March 6,
2009 was 36,223,720 shares.
Documents incorporated by reference: Portions of the Proxy Statement of
Systemax Inc. relating to the 2008 annual meeting of stockholders are
incorporated by reference in Part III hereof.
Table
of Contents
PART I
Unless otherwise indicated, all references
herein to Systemax Inc. (sometimes referred to as Systemax, the Company or
we) include its subsidiaries.
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 report, the
words anticipates, believes, estimates, expects, intends, and plans
and variations thereof and similar expressions are intended to identify forward
looking statements.
Forward looking statements are
inherently subject to risks and uncertainties, some of which cannot be
predicted or quantified based on current expectations. Consequently, future events and results could
differ materially from those set forth in, contemplated by, or underlying the
forward looking statements contained in this report. Statements in this report, particularly in
Item 1. Business, Item 1A. Risk Factors, Item 3. Legal Proceedings, Item
7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, and the Notes to Consolidated Financial Statements describe
certain factors, among others, that could contribute to or cause such
differences.
Other factors that may affect our future
results of operations and financial condition include, but are not limited to,
unanticipated developments in any one or more of the following areas, as well
as other factors which may be detailed from time to time in our Securities and
Exchange Commission filings:
·
the effect on us
of volatility in the price of paper and periodic increases in postage rates
·
significant
changes in the computer products retail industry, especially relating to the
distribution and sale of such products
·
timely
availability of existing and new products
·
risks involved
with e-commerce, including possible loss of business and customer
dissatisfaction if outages or other computer-related problems should preclude
customer access to us
·
risks associated
with delivery of merchandise to customers by utilizing common delivery services
·
borrowing costs
or availability
·
pending or
threatened litigation and investigations
·
the availability
of key personnel
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.
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of Contents
Item 1. Business.
General
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 Software Solutions. Our Technology
Products segment sells computers, computer supplies and consumer electronics
which are marketed in North America and Europe. Except for certain personal
computer (PC) products that we assemble ourselves and sell under the
trademarks
Systemax
and
Ultra
,
substantially all of our products are manufactured by other companies. We also sell certain computer-related
products manufactured for us to our own design under the trademark
Systemax
and
Ultra
. Technology Products accounted for 92% of our
net sales in 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. Substantially all 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 2008.
Our Software Solutions segment participates in the emerging market for
on-demand, web-based business software applications through the marketing of our
PCS ProfitCenter Software
application.
See Note 10 to the Consolidated Financial Statements included in Item 15 of
this Form 10-K for additional financial information about our business
segments as well as information about our geographic operations.
The Company was incorporated in Delaware in
1995. Certain predecessor businesses which now constitute part of the Company
have been in business since 1955. Our headquarter office is located at 11
Harbor Park Drive, Port Washington, New York.
Recent Developments
On
January 5, 2008 the Company entered into an asset purchase agreement with
CompUSA Inc. Under the agreement the Company acquired CompUSAs e-commerce
business and 16 of its retail leases and related fixtures for consideration of
approximately $30.6 million. This acquisition accelerated the Companys planned
expansion into the retail market place in North America and Puerto Rico.
Products
We offer more than 100,000 brand name and
private label products. We endeavor to expand and keep current the breadth of
our product offerings in order to fulfill the increasingly wide range of
product needs of our customers.
Our computer sales include desktops,
laptops and notebooks and are primarily offerings of brand name original
equipment manufacturers, as well as our own Systemax and Ultra brands. Computer
supplies and consumer electronics related products include supplies such as
laser printer toner cartridges and ink jet printer cartridges; media such as
flash memory, recordable disks and magnetic tape cartridges; peripherals such
as hard disks, CD-ROM and DVD drives, printers and scanners; memory upgrades;
data communication and networking equipment; monitors; digital cameras; plasma
and LCD TVs; MP3 and DVD players; PDAs; and packaged software.
We assemble our Systemax and Ultra brand
PCs in our 297,000 square foot, ISO-9001:2000 certified facility in Fletcher,
Ohio. We purchase components and
subassemblies from suppliers in the United States as well as overseas. Certain
parts and components for our PCs are obtained from a limited group of
suppliers. We also utilize licensed
technology and computer software in the assembly of our PCs. For a discussion
of risks associated with these licenses and suppliers, see Item 1A, Risk
Factors.
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Our industrial products include storage
equipment such as wire and metal shelving, bins and lockers; light material
handling equipment such as hand carts, pallet jacks and hand trucks; ladders,
furniture, small office machines and related supplies; and consumable
industrial products such as first aid items, safety items, protective clothing
and OSHA compliance items.
We began to market our PCS ProfitCenter
Software
suite of business applications in
2004. PCS ProfitCenter Software
is a
web-based application which is delivered as an on-demand service over the
internet. The product helps companies automate and manage their entire customer
life-cycle across multiple sales channels (internet, call centers, outside
salespersons, etc.).
Sales and Marketing
We market our products to both business
customers and individual consumers. Our business customers include for-profit
businesses, educational organizations and government entities. We have
developed numerous proprietary customer and prospect databases. We consider our
business customers to include the various individuals who work within an
organization rather than just the business itself.
We have established a multi-faceted direct
marketing system to business customers, consisting primarily of relationship
marketers, catalog mailings and proprietary internet websites, the combination
of which is designed to maximize sales. Our relationship marketers focus their
efforts on our business customers by establishing a personal relationship
between such customers and a Systemax account manager. The goal of the
relationship marketing sales force is to increase the purchasing productivity
of current customers and to actively solicit newly targeted prospects to become
customers. With access to the records we maintain of historical purchasing
patterns, our relationship marketers are prompted with product suggestions to
expand customer order values. In certain countries, we also have the ability to
provide such customers with electronic data interchange (EDI) ordering and
customized billing services, customer savings reports and stocking of specialty
items specifically requested by these customers. Our relationship marketers
efforts are supported by frequent catalog mailings and e-mail campaigns, both
of which are designed to generate inbound telephone sales, and our interactive
websites, which allow customers to purchase products directly over the Internet.
We believe that the integration of our multiple marketing methods enables us to
more thoroughly penetrate our business, educational and government customer
base. We believe increased internet exposure leads to more internet-related
sales and also generates more inbound telephone sales; just as we believe
catalog mailings and email campaigns which feature our websites results in
greater internet-related sales.
We continue to have strong growth in sales to
individual consumers, particularly through e-commerce means. To reach our
individual consumer audience, we use online methods such as website campaigns,
banner ads and e-mail campaigns. We are able to monitor and evaluate the
results of our various advertising campaigns to enable us to execute them in
the most cost-effective manner. We combine our use of e-commerce initiatives
with catalog mailings, which generate online orders and calls to inbound sales
representatives. These sales representatives use our information systems to
fulfill orders and explore additional customer product needs. Sales to
individual consumers are generally fulfilled from our own stock, requiring us
to carry more inventory than we would for our business customers. We also
periodically take advantage of attractive product pricing by making
opportunistic bulk inventory purchases with the objective of turning them
quickly into sales. We have also successfully increased our sales to individual
consumers by using retail outlet stores. As of December 31, 2008 we had 29
retail locations open in North America and Puerto Rico.
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E-commerce
The worldwide growth in active internet users has made e-commerce a
significant opportunity for sales growth.
The increase in our internet-related sales enables us to leverage our
advertising spending. We currently operate multiple e-commerce sites,
including:
Technology Products:
·
www.tigerdirect.com
·
www.compusa.com
·
www.compusagoved.com
·
www.compusabusiness.com
·
www.misco.co.uk
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www.tigerdirect.ca
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www.misco.de
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www.misco.fr
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www.infotelusa.com
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www.misco.nl
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www.globalcomputer.com
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www.misco.it
·
www.misco.es
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www.globalgoved.com
·
www.misco.se
·
www.systemaxpc.com
·
www.misco.at
·
www.misco.ch
·
www.misco.be
·
www.misco.pt
·
www.misco.ie
Industrial Products:
·
www.globalindustrial.com
We continually upgrade the capabilities and performance of these web
sites. Our internet sites feature on-line catalogs of thousands of products,
allowing us to offer a wider variety of computer and industrial products than
our printed catalogs. Our customers have
around-the-clock, on-line access to purchase products and we have the ability
to create targeted promotions for our customers interests. Many of our
internet sites also permit customers to purchase build to order PCs
configured to their own specifications.
In addition to our own e-commerce web sites, we have partnering
agreements with several of the largest internet shopping and search engine
providers who feature our products on their web sites or provide
click-throughs from their sites directly to ours. These arrangements allow us
to expand our customer base at an economical cost.
Catalogs
We currently produce a total of 16 full-line
and targeted specialty catalogs in North America and Europe under distinct
titles. Our portfolio of catalogs includes such established brand names as
TigerDirect.com, Global Computer Supplies, CompUSA, TigerDirect.ca,
Misco®, Global
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Industrial, ArrowStar and
Nexel.
Full-line computer product catalogs offer
products such as PCs, notebooks, peripherals, computer components, magnetic
media, data communication, networking and power protection equipment, ergonomic
accessories, furniture and software. Full-line industrial product catalogs
offer products such as material handling products and industrial supplies.
Specialty catalogs contain more focused product offerings and are targeted to
individuals most likely to purchase from such catalogs. We mail catalogs to
both businesses and individual consumers. In the case of business mailings, we
mail our catalogs to many individuals at a single business location, providing
us with multiple points-of-entry. Our in-house staff designs all of our
catalogs. In-house catalog design helps reduce overall catalog expense and
shortens catalog production time. This allows us the flexibility to alter our
product offerings and pricing and to refine our catalog formats more quickly.
Our catalogs are printed by third parties under fixed pricing arrangements. The
commonality of certain core pages of our catalogs also allows for
economies of scale in catalog production.
With the CompUSA acquisition, the
distribution of our catalogs increased to 63 million in 2008, which was 9.5%
more than in the prior year. In 2008, we mailed approximately 47 million
catalogs in North America, a 16.2% increase from last year and approximately 16
million catalogs, or 6.5% fewer than 2007, were distributed in Europe.
Customer Service, Order Fulfillment and
Support
We generally provide toll-free telephone
number access for our customers. Certain of our domestic call centers are
linked to provide telephone backup in the event of a disruption in phone
service. In addition to telephone orders, we also receive orders by mail, fax,
electronic data interchange and through the internet.
A large number of our products are
carried in stock, and orders for such products are fulfilled on a timely basis
directly from our distribution centers, typically on the day the order is
received. We operate out of multiple sales and distribution facilities in North
America and Europe. The locations of our distribution centers enable us to
provide our customers next day or second day delivery. Orders are generally
shipped by third-party delivery services in the United States and in Europe.
The locations of our distribution centers in Europe have enabled us to market
into additional countries with limited incremental investment. We maintain
relationships with a number of large distributors in North America and Europe
that also deliver products directly to our customers.
We provide extensive technical telephone
support to our Systemax and Ultra brand PC customers. We maintain a database of commonly asked
questions for our technical support representatives, enabling them to respond
quickly to similar questions. We conduct regular on-site training seminars for
our sales representatives to help ensure that they are well trained and
informed regarding our latest product offerings.
Suppliers
We purchase substantially all of our products
and components directly from manufacturers and large wholesale distributors.
One vendor accounted for 12.0%, 14.4% and 12.8% of our purchases in 2008, 2007
and 2006, respectively. The loss of
this vendor, or any other key vendors, could have a material adverse effect on
us.
Certain private label products are
manufactured by third-parties to our specifications. Many of these private
label products have been designed or developed by our in-house product design
and development teams.
Competition and Other Market Factors
Technology Products
The North American and European technology
product markets are highly competitive, with many U.S., Asian and European
companies vying for market share. There
are few barriers of entry, with these
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products being sold through multiple channels
of distribution, including direct marketers, local and national retail computer
stores, computer resellers, mass merchants, over the internet and by computer
and office supply superstores. In North America, our major competitors operate
in all these sales channels; in Europe, our major competitors are regional or
country-specific retail and direct-mail distribution companies and
internet-based resellers.
Timely introduction of new products or
product features are critical elements to remaining competitive. Other
competitive factors include product performance, quality and reliability,
technical support and customer service, marketing and distribution and price.
Some of our competitors have stronger brand-recognition, broader product lines
and greater financial, marketing, manufacturing and technological resources
than us. Additionally, our results could
also be adversely affected should we be unable to maintain our technological
and marketing arrangements with other companies, such as Microsoft®, Intel® and
Advanced Micro Devices®.
With conditions in the market for technology
products remaining highly competitive, continued reductions in retail prices
may adversely affect our revenues and profits. Additionally, we rely in part
upon the introduction of new technologies and products by other manufacturers
in order to sustain long-term sales growth and profitability. There is no
assurance that the rapid rate of such technological advances and product
development will continue.
Current
economic conditions raise additional factors as the loss of consumer confidence
in the Companys markets could result in a decrease of spending in the
categories of products we sell. It is also possible that as
manufacturers react to the marketplace they may reduce manufacturing capacity
and create shortages of product.
Industrial Products
The market for the sale of industrial
products in North America is highly fragmented and is characterized by multiple
distribution channels such as retail outlets, small dealerships, direct mail
distribution, internet-based resellers and large warehouse stores. We also face
competition from manufacturers own sales representatives, who sell industrial
equipment directly to customers, and from regional or local distributors. Many
high volume purchasers, however, utilize catalog distributors as their first
source of product. In the industrial products market, customer purchasing
decisions are primarily based on price, product selection, product
availability, level of service and convenience.
We believe that direct marketing via catalog, the internet and sales
representatives is an effective and convenient distribution method to reach
mid-sized facilities that place many small orders and require a wide selection
of products. In addition, because the industrial products market is highly
fragmented and generally less brand oriented, it is well suited to private
label products.
Software Solutions
Software
Solutions offers a software application for the multi-channel commerce
industry. The software distribution model in which a software application is
hosted by a software vendor or a service provider and made available to
customers over the internet is also known as software as a service (SaaS). Traditional software licensing is being supplemented
with on-demand delivery models that increase the predictability of information
technology financial expenditures while making it easier for multi-channel
commerce companies to manage their customers, products and services regardless
of sales channel.
The
increasing replacement of obsolete software solutions by multi-channel
retailers for newer technologies provides our Software Solutions business with
an opportunity to market its products and services. The advantages of having a
single solution, single database to manage all sales channels (eCommerce, call
center, catalog, mail order, retail) with web-based accessibility and faster
implementation cycles is anticipated to fuel penetration into the multi-channel
software market space.
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Employees
As of December 31, 2008, we employed a
total of 4,452 employees, of whom 3,251 were in North America and 1,201 were in
Europe.
Seasonality
Net sales have historically been modestly weaker during the second and
third quarters as a result of lower business activity during those months. See Item 7,
Managements Discussions
and Analysis of Financial Condition and Results of Operations; Seasonality.
Environmental Matters
Under various national, state and local
environmental laws and regulations in North America and Europe, a current or
previous owner or operator (including the lessee) of real property may become
liable for the costs of removal or remediation of hazardous substances at such
real property. Such laws and regulations often impose liability without regard
to fault. We lease most of our facilities. In connection with such leases, we
could be held liable for the costs of removal or remedial actions with respect
to hazardous substances. Although we have not been notified of, and are not
otherwise aware of, any material real property environmental liability, claim
or non-compliance, there can be no assurance that we will not be required to
incur remediation or other costs in connection with real property environmental
matters in the future.
Financial Information About Foreign and
Domestic Operations
We
conduct our business in North America (the United States, Puerto Rico and
Canada) and Europe. Approximately 37.9%
of our net sales during 2008 were made by subsidiaries located outside of the
United States. For information pertaining to our international operations, see
Note 10, Segment and Related Information, to the Consolidated Financial
Statements included in Item 15 of this Form 10-K. The following sets forth
selected information with respect to our operations in those two geographic
markets (in thousands):
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North
America
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Europe
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Total
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2008
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Net sales
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$
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2,092,372
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$
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940,589
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$
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3,032,961
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Operating income
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$
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62,268
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$
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21,099
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$
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83,367
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Identifiable assets
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$
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553,263
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$
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150,000
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$
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703,263
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2007
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Net sales
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$
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1,847,477
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$
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932,398
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$
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2,779,875
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Operating income
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$
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82,365
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$
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11,577
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$
|
93,942
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Identifiable assets
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$
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488,761
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$
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185,110
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$
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673,871
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|
|
|
|
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|
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2006
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|
|
|
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Net sales
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$
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1,601,259
|
|
$
|
743,906
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|
$
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2,345,165
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Operating income
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$
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45,297
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$
|
15,433
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$
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60,730
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Identifiable assets
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$
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426,451
|
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$
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157,710
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$
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584,161
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|
See Item 7, Managements Discussions and
Analysis of Financial Condition and Results of Operations, for further
information with respect to our operations.
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Available Information
We maintain an internet
website at www.systemax.com. We file reports with the Securities and Exchange
Commission 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 listing standards of the
New York Stock Exchange, each of the Corporate Governance Documents is
available on our Company web site (www.systemax.com) and can be obtained upon
request by writing to Systemax Inc., Attention: Board of Directors (Corporate
Governance), 11 Harbor Park Drive, Port Washington, NY 11050.
Item 1A. Risk Factors.
There are a number of factors and variables described below that may
affect our future results of operations and financial condition. Other factors
of which we are currently not aware or that we currently deem immaterial may
also affect our results of operations and financial position.
Risks Related to the Economy and Our
Industries
·
Economic conditions have affected and could continue to adversely
affect our revenues and profits.
Current
economic conditions may cause the loss of consumer confidence in the Companys
markets which may result in a decrease of spending in the categories of
products we sell. It is also possible that as manufacturers react
to the marketplace they may reduce manufacturing capacity, creating shortages
of product.
Both we and our customers are subject to global political,
economic and market conditions, including inflation, interest rates, energy
costs, the impact of natural disasters, military action and the threat of
terrorism. Our consolidated results of operations are directly affected by
economic conditions in North America and Europe. We may experience a decline in
sales as a result of poor economic conditions and the lack of visibility
relating to future orders. Our results of operations depend upon, among other
things, our ability to maintain and increase sales volumes with existing
customers, our ability to attract new customers and the financial condition of
our customers. A decline in the economy that adversely affects our customers,
causing them to limit or defer their spending, would likely adversely affect us
as well. We cannot predict with any certainty whether we will be able to
maintain or improve upon historical sales volumes with existing customers, or
whether we will be able to attract new customers.
In response to economic and market conditions, from time to time we
have undertaken initiatives to reduce our cost structure where appropriate.
These initiatives, as well as any future workforce and facilities reductions,
may not be sufficient to meet current and future changes in economic and market
conditions and allow us to continue to achieve the growth rates and levels of
profitability we have recently experienced. In addition, costs actually
incurred in connection
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with our restructuring actions may be higher than our estimates of such
costs and/or may not lead to the anticipated cost savings.
·
Competitive pressures could harm our revenue and gross margin.
We may not be able to compete effectively with current or future
competitors. The markets for our products and services are intensely
competitive and subject to constant technological change. We expect this
competition to further intensify in the future. Competitive factors include
price, availability, service and support. We compete with a wide variety of
other resellers and retailers, as well as manufacturers. Many of our
competitors are larger companies with greater financial, marketing and product
development resources than ours. In addition, new competitors may enter our
markets. This may place us at a disadvantage in responding to competitors
pricing strategies, technological advances and other initiatives, resulting in
our inability to increase our revenues or maintain our gross margins in the
future.
In many cases our products compete directly with those offered by other
manufacturers and distributors. If any of our competitors were to develop
products or services that are more cost-effective or technically superior,
demand for our product offerings could decrease.
Our gross margins are also dependent on the mix of products we sell and
could be adversely affected by a continuation of our customers shift to
lower-priced products.
·
State and local sales tax collection may affect demand for our
products.
Our United States subsidiaries collect and remit sales tax in states in
which the subsidiaries have physical presence or in which we believe nexus
exists which obligates us to collect sales tax. Other states may, from time to
time, claim that we have state-related activities constituting a sufficient
nexus to require such collection. Additionally, many other states seek to
impose sales tax collection obligations on companies that sell goods to
customers in their state, or directly to the state and its political
subdivisions, even without a physical presence.
Such efforts by states have increased recently, as states seek to raise
revenues without increasing the tax burden on residents. We rely on United
States Supreme Court decisions which hold that, without Congressional
authority, a state may not enforce a sales tax collection obligation on a
company that has no physical presence in the state and whose only contacts with
the state are through the use of interstate commerce such as the mailing of
catalogs into the state and the delivery of goods by mail or common
carrier. We cannot predict whether the
nature or level of contacts we have with a particular state will be deemed
enough to require us to collect sales tax in that state nor can we be assured
that Congress or individual states will not approve legislation authorizing
states to impose tax collection obligations on all direct mail and/or
e-commerce transactions. A successful assertion by one or more states that we
should collect sales tax on the sale of merchandise could result in substantial
tax liabilities related to past sales and would result in considerable
administrative burdens and costs for us and may reduce demand for our products
from customers in such states when we charge customers for such taxes.
·
Business disruptions could adversely impact our revenue and financial
condition.
We insure for certain property and casualty risks consisting primarily
of physical loss to property, business interruptions resulting from property
losses, workers compensation, comprehensive general liability, and auto
liability. Insurance coverage is obtained for catastrophic property and casualty
exposures as well as those risks required to be insured by law or contract.
Although we believe that our insurance coverage is reasonable, significant
events such as acts of war and terrorism, economic conditions, judicial
decisions, legislation, natural disasters and large losses could materially
affect our insurance obligations and future expense.
11
Table of Contents
·
Changes in financial accounting standards may affect our results of
operations.
A change in accounting standards or practices
can have a significant effect on our reported
results of operations. New accounting pronouncements and interpretations
of existing accounting rules and practices have occurred and may occur in
the future. Changes to existing rules may adversely affect our reported
financial results.
Risks Related to Our Company
·
Our reliance on information and communications technology requires
significant expenditures and entails risk.
We rely on a variety of information and telecommunications systems in
our operations. Our success is dependent in large part on the accuracy and
proper use of our information systems, including our telecommunications
systems. To manage our growth, we
continually evaluate the adequacy of our existing systems and procedures. We
anticipate that we will regularly need to make capital expenditures to upgrade
and modify our management information systems, including software and hardware,
as we grow and the needs of our business change. In particular, our financial and retail point
of sale systems will be replaced during
the coming years. The occurrence of a
significant system failure, electrical or telecommunications outages or our
failure to expand or successfully implement new systems could have a material
adverse effect on our results of operations.
Our information systems networks, including our web sites, and
applications could be adversely affected by viruses or worms and may be
vulnerable to malicious acts such as hacking.
Although we take preventive measures, these procedures may not be
sufficient to avoid harm to our operations, which could have an adverse effect
on our results of operations.
·
We are dependent on third-party suppliers.
We purchase substantially all of our computer products from major
distributors such as Ingram Micro Inc. and Tech Data and directly from
large manufacturers such as Hewlett Packard and Acer, who may deliver those
products directly to our customers. These relationships enable us to make
available to our customers a wide selection of products without having to
maintain large amounts of inventory. The
termination or interruption of our relationships with any of these suppliers
could materially adversely affect our business.
Our PC products contain electronic components, subassemblies and
software that in some cases are supplied through sole or limited source third-party
suppliers, some of which are located outside of the U.S. Although we do not
anticipate any problems procuring supplies in the near-term, there is no
assurance that parts and supplies will be available in a timely manner and at
reasonable prices. Any loss of, or interruption of, supply from key suppliers
may require us to find new suppliers. This could result in production or
development delays while new suppliers are located, which could substantially
impair operating results. If the availability of these or other components used
in the manufacture of our products was to decrease, or if the prices for these
components were to increase significantly, operating costs and expenses could
be adversely affected.
We purchase a number of our products from vendors outside of the United
States. Difficulties encountered by one or several of these suppliers could
halt or disrupt production and delay completion or cause the cancellation of
our orders. Delays or interruptions in the transportation network could result
in loss or delay of timely receipt of product required to fulfill customer
orders.
Many product suppliers provide us with co-op advertising support in
exchange for featuring
12
Table of Contents
their products in our catalogs and on our internet sites. Certain
suppliers provide us with other incentives such as rebates, reimbursements,
payment discounts, price protection and other similar arrangements. These incentives are offset against cost of
goods sold or selling, general and administrative expenses, as applicable. The
level of co-op advertising support and other incentives received from suppliers
may decline in the future, which could increase our cost of goods sold or
selling, general and administrative expenses and have an adverse effect on
results of operations and cash flows.
·
Goodwill and intangible assets may become impaired resulting in a
charge to earnings.
The acquisition of certain assets of CompUSA resulted in the recording
of significant intangible assets and goodwill. We are required to test goodwill
and intangible assets to determine if the carrying values of these assets are
impaired annually or on a more frequent basis if indicators of impairment
exist. If any of our goodwill or intangible assets are determined to be
impaired we may be required to record a significant charge to earnings in the
period during which the impairment is discovered.
·
We have substantial international operations and we are exposed to
fluctuations in currency exchange rates and political uncertainties.
We operate internationally and as a result, we are subject to risks
associated with doing business globally. Risks inherent to operating overseas
include:
·
Changes in a
countrys economic or political conditions
·
Changes in
foreign currency exchange rates
·
Difficulties
with staffing and managing international operations
·
Unexpected
changes in regulatory requirements
For example, we currently have operations located in numerous countries
outside the United States, and non-U.S. sales (Europe, Canada and Puerto Rico)
accounted for approximately 37.9% of our revenue during 2008. To the extent the U.S. dollar strengthens
against foreign currencies, our foreign revenues and profits will be reduced
when translated into U.S. dollars.
·
We are exposed to inventory risks.
A substantial portion of our inventory is subject to risk due to
technological change and changes in market demand for particular products. If
we fail to manage our inventory of older products we may have excess or obsolete
inventory. We may have limited rights to return purchases to certain suppliers
and we may not be able to obtain price protection on these items. The
elimination of purchase return privileges and lack of availability of price
protection could lower our gross margin or result in inventory write-downs.
We also take advantage of attractive product pricing by making
opportunistic bulk inventory purchases; any resulting excess and/or obsolete
inventory that we are not able to re-sell could have an adverse impact on our
results of operations. Any inability to make such bulk inventory purchases may
significantly impact our sales and profitability.
·
Restrictions and covenants in our credit facility may limit our ability
to enter into certain transactions.
Our United States/United Kingdom combined
revolving credit agreement contains covenants restricting or limiting our
ability to, among other things:
·
incur additional
debt
13
Table of Contents
·
create or permit
liens on assets
·
make capital
expenditures or investments
·
pay dividends
If we fail to comply with the covenants and other requirements set
forth in the credit agreement, we would be in default and would need to
negotiate a waiver agreement with the lenders. Failure to agree on such a
waiver could result in the lenders terminating the credit agreement and
demanding repayment, which would adversely affect our cash position and
adversely affect the availability of financing to us, which could materially
impact our operations.
·
We
have experienced rapid growth in retail stores
The
acquisition of CompUSA in 2008 added 16 retail stores, more than double the
then existing number of stores. The addition of these stores requires the
Company to effectively manage its cost structure in order to maintain
profitability including the additional inventory needs, retail point of sales
IT systems, retail personnel and leased facilities. Future growth in retail
will also be dependent on the ability to attract customers and build brand loyalty.
The retail computer and consumer electronics business is highly competitive and
has narrow gross margins. If we fail to manage our growth and cost structure
while maintaining high levels of service and meeting competitive pressures
adequately, our business plan may not be achieved and may lead to reduced
profitability
.
·
Rebate Processing
Similiar to other companies in the technology products industry, we
advertise manufacturers mail-in rebates on many products we sell and, in some
cases, offer our own rebates. These
rebates are processed through third party vendors and in house. If these
rebates are not processed in a timely and satisfactory manner by either third
party vendors or our in house operations, our reputation in the marketplace
could be negatively impacted. See Item
3, Legal Proceedings.
·
Gross
profit margins in Technology Products are narrow and variable
The
computer and consumer electronics industry is highly price competitive and
gross profit margins are narrow and variable. The Companys ability to reduce
prices in reaction to competitive pressure may be limited. Additionally, gross
profit margins and operating margins are affected by changes in factors such as
vendor pricing, vendor rebate and or price protection programs, product return
rights, and product mix. Pricing pressure was prevalent in the second half of
2008 as a result of the significant decline in economic activity in the markets
we serve and we expect this to continue during this or any period of sustained
economic decline. We may not be able to mitigate these pricing pressures and
resultant declines in sales and gross profit margin with cost reductions in
other areas or expansion into new product lines. If we are unable to
proportionately mitigate these conditions our operating results and financial
condition may suffer.
·
We
may be liable for misuse, loss or theft of our customers personal information
In
processing our sales orders we often collect personal information and credit
card information from our customers. The Company has comprehensive privacy and
data security policies in place which are designed to prevent security
breaches, however, if a third party or a rogue employee or employees are able
to bypass our network security or otherwise compromise our customers personal
information or credit card information, we could be subject to liability. This
liability may include claims for identity theft, unauthorized purchases, claims
alleging misrepresentation of our privacy and data security practices or other
related claims.
14
Table of Contents
·
Increased costs associated with corporate governance compliance may
impact our results of operations.
As a public company, we incur significant legal, accounting and other
expenses that we would not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by
the Securities and Exchange Commission and listing requirements subsequently
adopted by the New York Stock Exchange in response to Sarbanes-Oxley, have
required changes in corporate governance practices of public companies. These
developments have substantially increased our legal compliance, auditing and
financial reporting costs and made them more time consuming. These developments
may also make it more difficult and more expensive for us to obtain directors
and officers liability insurance and we may be required to accept reduced
coverage or incur substantially higher costs to obtain coverage, possibly
making it more difficult for us to attract and retain qualified members of our
board of directors, particularly to serve on our audit committee.
·
Our success is dependent upon the availability of credit and financing.
We require significant levels of capital in our business to finance
accounts receivable and inventory. We maintain credit facilities in the United
States and in Europe to finance increases in our working capital if available
cash is insufficient. The amount of
credit available to us at any point in time may be adversely affected by the
quality or value of the assets collateralizing these credit lines. In addition,
if we are unable to renew or replace these facilities at maturity our liquidity
and capital resources may be adversely affected. However, we currently have no
reason to believe that we will not be able to renew or replace our facilities
when they reach maturity.
·
Sales to individual consumers exposes us to credit card fraud, which
could adversely affect our business.
Failure to adequately control fraudulent credit card transactions could
increase our expenses. Increased sales to individual consumers, which are more
likely to be paid for using a credit card, increases our exposure to fraud. We
employ technology solutions to help us detect the fraudulent use of credit card
information. However, if we are unable to detect or control credit card fraud,
we may suffer losses as a result of orders placed with fraudulent credit card
data, which could adversely affect our business.
·
Our income tax rate and the value of our deferred tax assets are
subject to change.
Changes in our income tax expense due to changes in the mix of U.S. and
non-U.S. revenues and profitability, changes in tax rates or exposure to
additional income tax liabilities could affect our profitability. We are
subject to income taxes in the United States and various foreign jurisdictions.
Our effective tax rate could be adversely affected by changes in the mix of
earnings in countries with differing statutory tax rates, changes in the
valuation of deferred tax assets and liabilities, changes in tax laws or by
material audit assessments. The carrying value of our deferred tax assets,
which are primarily in the United States and the United Kingdom, is dependent
on our ability to generate future taxable income in those jurisdictions. In
addition, the amount of income taxes we pay is subject to ongoing audits in
various jurisdictions and a material assessment by a tax authority could affect
our profitability.
15
Table of Contents
·
We may encounter risks in connection with sales of our web-hosted
software application.
In 2004, we introduced our web-based and hosted, on-demand software
suite of products, marketed as PCS ProfitCenter Software. We have a limited
operating history with this type of product offering and may encounter risks
inherent in the software industry, including but not limited to:
·
failure to
implement effective general and application controls
·
errors or
security flaws in our product
·
technical
difficulties which we can not resolve on a timely or cost-effective basis
·
inability to
provide the level of service commitment
·
inability to
deliver product upgrades and enhancements
·
delays in
development
·
inability to
hire and retain qualified technical personnel
·
impact of
privacy laws on the use of our product
·
exposure to
claims of infringement of intellectual property rights
16
Table
of Contents
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
Our primary facilities, which are leased
except where otherwise indicated, are as follows:
Facility
|
|
Location
|
|
Approximate
Square Feet
|
|
Expiration
of Lease
|
|
|
|
|
|
|
|
|
|
Headquarters, Sales and Distribution Center (1)
|
|
Port Washington, NY
|
|
86,000
|
|
2017
|
|
|
|
|
|
|
|
|
|
Sales and Distribution Center
|
|
Buford, GA
|
|
647,000
|
|
2021
|
|
|
|
|
|
|
|
|
|
Sales, Distribution Center and Retail Store
|
|
Naperville, IL
|
|
330,000
|
|
2026
|
|
|
|
|
|
|
|
|
|
PC Assembly, Sales and Distribution Center
|
|
Fletcher, OH
|
|
297,000
|
|
Owned
|
|
|
|
|
|
|
|
|
|
Sales and Administrative Center
|
|
Miami, FL
|
|
80,000
|
|
2010
|
|
|
|
|
|
|
|
|
|
Distribution Center
|
|
Las Vegas, NV
|
|
90,000
|
|
2010
|
|
|
|
|
|
|
|
|
|
Sales Center
|
|
Markham, Ontario
|
|
23,000
|
|
2013
|
|
|
|
|
|
|
|
|
|
Sales and Administrative Center
|
|
Richmond Hill, Ontario
|
|
20,296
|
|
2017
|
|
|
|
|
|
|
|
|
|
Sales, Administrative and Distribution Center
|
|
Verrieres le Buisson, France
|
|
48,000
|
|
2010
|
|
|
|
|
|
|
|
|
|
Sales, Administrative and Distribution Center
|
|
Langen, Germany
|
|
92,000
|
|
2013
|
|
|
|
|
|
|
|
|
|
Sales, Administrative and Distribution Center
|
|
San Agustin del Guadalix, Spain
|
|
38,000
|
|
2009
|
|
|
|
|
|
|
|
|
|
Sales, Administrative and Distribution Center
|
|
Lacchiarella, Italy
|
|
102,000
|
|
2009
|
|
|
|
|
|
|
|
|
|
Sales and Distribution Center
|
|
Greenock, Scotland
|
|
78,000
|
|
Owned
|
|
|
|
|
|
|
|
|
|
Sales and Administrative Center
|
|
Wellingborough, England
|
|
75,000
|
|
Owned
|
|
|
|
|
|
|
|
|
|
Sales and Administrative Center
|
|
Amstelveen, Netherlands
|
|
21,000
|
|
2012
|
|
|
|
|
|
|
|
|
|
Sales, Administrative and Distribution Center
|
|
Lidkoping, Sweden
|
|
20,000
|
|
2009
|
|
|
|
|
|
|
|
|
|
Sales and Administrative Center
|
|
Uniondale, NY
|
|
22,719
|
|
2012
|
|
(1)
For information about this facility, leased
from related parties, see Item 13 Certain Relationships and Related
Transactions and Director Independence.
We also lease space for other smaller
offices and retail stores in the United States, Canada, Puerto Rico and Europe
and certain facilities leased by the Company are subleased to others. We
believe our current facilities provide adequate capacity for our current and
projected needs. We intend to renew the leases for our space which would
otherwise terminate in 2009.
For further information regarding our
lease obligations, see Note 9 to the Consolidated Financial Statements.
17
Table
of Contents
Item 3. Legal Proceedings.
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 statutes, conspiracy, and unfair rebate practices. On February 11, 2009 the Court dismissed
Vuksons complaint with leave to file an amended complaint by February 19,
2009 but ordered that any amended complaint not include a request for punitive
damages. On February 19, 2009 Vukson filed an amended complaint with no
request for punitive damages, as ordered by the Court. The Company will
continue 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.
Other Matters
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 4. Submission of Matters to a Vote of
Security Holders.
None.
18
Table of Contents
PART II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and
Issuer
Purchases of
Equity Securities
Systemax common stock is traded on the New
York Stock Exchange under the symbol SYX.
The following table sets forth the high and low closing sales price of
our common stock as reported on the New York Stock Exchange for the periods
indicated.
|
|
High
|
|
Low
|
|
2008
|
|
|
|
|
|
First Quarter
|
|
$
|
20.32
|
|
$
|
9.01
|
|
Second Quarter
|
|
20.89
|
|
12.06
|
|
Third Quarter
|
|
18.43
|
|
14.04
|
|
Fourth Quarter
|
|
15.10
|
|
8.75
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
First Quarter
|
|
$
|
30.13
|
|
$
|
18.10
|
|
Second Quarter
|
|
21.75
|
|
16.22
|
|
Third Quarter
|
|
22.12
|
|
17.60
|
|
Fourth Quarter
|
|
24.47
|
|
17.95
|
|
On January 3, 2009, the last reported
sale price of our common stock on the New York Stock Exchange was $10.87 per
share. As of January 3, 2009, we
had 230 shareholders of record.
On March 3, 2008, the Companys Board of
Directors declared a special dividend of $1.00 per share payable on April 2,
2008 to shareholders of record on March 21, 2008. This special dividend is
the second dividend we have paid since our initial public offering. Depending
in part upon profitability, the strength of our balance sheet, our cash
position and the need to retain cash for the development and expansion of our
business, we may decide to declare another special dividend in the future.
On March 14, 2007, the Companys Board
of Directors declared a special dividend of $1.00 per share payable on April 12,
2007 to shareholders of record on April 2, 2007. This special dividend was
the first dividend we have paid since our initial public offering.
In May 2008, the Companys Board of
Directors authorized the repurchase of up to 2,000,000 shares of the Companys
common stock. During 2008 the Company repurchased 475,301 common shares. Detail
of those purchases is as follows:
Fiscal Month
|
|
Total Number of
Shares Purchased
|
|
Average Price
Paid Per Share
|
|
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
|
|
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
August
|
|
228,401
|
|
$
|
15.04
|
|
228,401
|
|
1,771,599
|
|
December
|
|
246,900
|
|
$
|
9.67
|
|
475,301
|
|
1,524,699
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
475,301
|
|
$
|
12.25
|
|
|
|
|
|
Information regarding securities authorized for issuance under equity
compensation plans and a performance graph relating to the Companys common
stock is set forth in the Companys Proxy Statement relating to the 2009 annual
meeting of shareholders and is incorporated by reference herein.
19
Table of Contents
Item 6. Selected Financial Data.
The following selected financial
information is qualified by reference to, and should be read in conjunction
with, the Companys Consolidated Financial Statements and the notes thereto,
and Managements Discussion and Analysis of Financial Condition and Results of
Operations contained elsewhere in this report. The selected statement of
operations data for fiscal years 2008, 2007 and 2006 and the selected balance
sheet data as of December 2008 and 2007 are derived from the audited consolidated
financial statements which are included elsewhere in this report. The selected
balance sheet data as of December 2006, 2005 and 2004 and the selected
statement of operations data for fiscal years 2005 and 2004 are derived from
the audited consolidated financial statements of the Company which are not
included in this report.
|
|
Years Ended December 31,
|
|
|
|
|
|
(In millions, except per share data)
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,033.0
|
|
$
|
2,779.9
|
|
$
|
2,345.2
|
|
$
|
2,115.5
|
|
$
|
1,928.1
|
|
Gross profit
|
|
$
|
464.1
|
|
$
|
426.3
|
|
$
|
342.9
|
|
$
|
307.3
|
|
$
|
286.5
|
|
Operating income
|
|
$
|
83.4
|
|
$
|
93.9
|
|
$
|
60.7
|
|
$
|
37.2
|
|
$
|
17.6
|
|
Net income
|
|
$
|
52.8
|
|
$
|
69.5
|
|
$
|
45.1
|
|
$
|
11.4
|
|
$
|
10.2
|
|
Per Share Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
Net income diluted
|
|
$
|
1.41
|
|
$
|
1.84
|
|
$
|
1.22
|
|
$
|
.31
|
|
$
|
.29
|
|
Weighted average common shares
diluted
|
|
37.4
|
|
37.8
|
|
36.9
|
|
36.5
|
|
35.5
|
|
Cash dividends declared per
common share
|
|
$
|
1.00
|
|
$
|
1.00
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
250.6
|
|
$
|
274.4
|
|
$
|
229.4
|
|
$
|
169.8
|
|
$
|
148.0
|
|
Total assets
|
|
$
|
703.3
|
|
$
|
677.6
|
|
$
|
584.1
|
|
$
|
504.5
|
|
$
|
483.2
|
|
Long-term debt, excluding
current portion
|
|
$
|
1.4
|
|
$
|
.3
|
|
$
|
.5
|
|
$
|
8.0
|
|
$
|
8.6
|
|
Shareholders equity
|
|
$
|
334.0
|
|
$
|
335.8
|
|
$
|
289.5
|
|
$
|
232.8
|
|
$
|
222.6
|
|
20
Table of Contents
Item 7.
Managements Discussion and Analysis of Financial Condition and 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 Software Solutions.
Our Technology Products segment sells computers, computer supplies and consumer
electronics which are marketed in North America, Puerto Rico and Europe. Except
for certain PC products that we assemble ourselves and sell under the
trademarks
Systemax
and
Ultra
,
substantially all of our products are manufactured by other companies. We also sell certain computer-related
products manufactured for us to our own design under the trademark
Systemax and Ultra.
Technology products accounted for 92%
of our net sales in 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. Substantially all 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 2008. In both
of these product groups, we offer our customers a broad selection of products,
prompt order fulfillment and extensive customer service. Our Software Solutions 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 10 to the Consolidated
Financial Statements included in Item 15 of this Form 10-K 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 companies utilizing multiple distribution channels. Distribution of our
technology products and 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 supplement our on-hand product availability by maintaining
relationships with major distributors and manufacturers, utilizing a
combination of stocking and drop-shipment fulfillment.
The
primary component of our operating expenses historically has been employee
related costs, which includes items such as wages, commissions, bonuses,
employee benefits and stock option expenses. We continually assess our
operations to ensure that they are efficient, aligned with market conditions
and responsive to customer needs.
During
the first quarter of 2008 the Company acquired CompUSAs e-commerce business
and 16 of its retail leases and related fixtures for direct consideration of
approximately $30.6 million. This acquisition accelerated the Companys planned
expansion into the retail market place for Technology Products in North America
and Puerto Rico.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 to the
consolidated financial statements.
Certain accounting policies require the application of significant
judgment by management in selecting the appropriate assumptions for calculating
financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty, and as a
result, actual results could differ from those estimates. These judgments are based on historical
experience
,
observation of trends in the industry,
information provided by customers and information available from other outside
sources, as appropriate. Management
believes that full consideration has been given to all relevant circumstances
that we may be subject to, and the 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 years
presented.
We
identify below a number of policies that entail significant judgments or
estimates. Actual results may
differ from these estimates under different conditions or assumptions.
21
Table of Contents
Revenue Recognition.
We recognize product
sales when persuasive evidence of an order arrangement exists, delivery has
occurred, the sales price is fixed or determinable and collectibility is
reasonably assured. Generally, these criteria are met at the time of receipt by
customers when title and risk of loss both are transferred. Sales are shown net
of returns and allowances, rebates and sales incentives. Reserves for estimated returns and allowances
are provided when sales are recorded, based on historical experience and current
trends.
Accounts Receivable and Allowance for Doubtful Accounts
.
We record an allowance for doubtful accounts to reflect our estimate of the
collectibility of our trade accounts receivable. We evaluate the collectibility
of accounts receivable based on a combination of factors, including an analysis
of the age of customer accounts and our historical experience with accounts
receivable write-offs. The analysis also includes the financial condition of a
specific customer or industry, and general economic conditions. In circumstances where we are aware of
customer charge-backs or a specific customers inability to meet its financial
obligations, a specific reserve for bad debts applicable to amounts due to
reduce the net recognized receivable to the amount management reasonably
believes will be collected is recorded. In those situations with ongoing
discussions, the amount of bad debt recognized is based on the status of the
discussions. While bad debt allowances have been within expectations and the
provisions established, there can be no guarantee that we will continue to
experience the same allowance rate we have in the past.
Inventories
.
We value our inventories at the lower of cost or market, cost being
determined on the first-in, first-out method except in Europe and retail
locations where an average cost is used. Excess and obsolete or unmarketable
merchandise are written down based on historical experience, assumptions about
future product demand and market conditions. If market conditions are less
favorable than projected or if technological developments result in accelerated
obsolescence, additional write-downs may be required. While obsolescence and
resultant markdowns have been within expectations, there can be no guarantee
that we will continue to experience the same level of markdowns we have in the
past.
Goodwill and, Intangible Assets
We apply the provisions of Statement of
Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other
Intangible Assets, in our valuation of goodwill and other intangible assets.
FAS 142 requires that goodwill be reviewed at least annually for potential
impairment. The amount of an impairment loss would be recognized as the excess
of the assets carrying value over its fair value.
Long-lived Assets.
Management exercises
judgment in evaluating our long-lived assets for impairment. We believe we will
generate sufficient undiscounted cash flow to more than recover the investments
made in property, plant and equipment. Our estimates of future cash flows
involve assumptions concerning future operating performance and economic
conditions. While we believe that our
estimates of future cash flows are reasonable, different assumptions regarding
such cash flows could materially affect our evaluations.
Accruals.
Management exercises judgment in estimating
various period end liabilities such as costs related to vendor drop shipments,
sales returns and allowances, cooperative advertising and customer rebate
reserves, and other vendor and employee related costs. While we believe that
these estimates are reasonable, any significant deviation of actual costs as
compared to these estimates could have a material impact on the Companys
consolidated financial statements.
Income Taxes.
We are
subject to taxation from federal,
state and
foreign jurisdictions and the determination of our tax provision is complex and
requires significant management judgment.
Management judgment is also applied in the determination of deferred tax
assets and liabilities and any valuation allowances that might be required in
connection with our ability to realize deferred tax assets.
Since we conduct operations in numerous US states and internationally,
our effective tax rate has and will continue to depend upon the geographic
distribution of our pre-tax income or losses among locations with varying tax
rates and rules. As the geographic mix of our pre-tax results among various tax
jurisdictions changes, the effective tax rate may vary from period to period.
We are also subject to periodic
22
Table of Contents
examination from domestic and foreign tax authorities regarding the
amount of taxes due. These examinations include questions regarding the timing
and amount of deductions and the allocation of income among various tax
jurisdictions. We have established, and periodically reevaluate, an estimated
income tax reserve on our consolidated balance sheet to provide for the
possibility of adverse outcomes in income tax proceedings. While management
believes that we have identified all reasonably identifiable exposures and that
the reserve we have established for identifiable exposures is appropriate under
the circumstances, it is possible that additional exposures exist and that
exposures may be settled at amounts different than the amounts reserved.
We recognize deferred tax assets and liabilities
for the effect of temporary differences between the book and tax bases of
recorded assets and liabilities and for tax loss carry forwards. The
realization of net deferred tax assets is dependent upon our ability to
generate sufficient future taxable income. Where it is more likely than not
that some portion or all of the deferred tax asset will not be realized, we have
provided a valuation allowance. If the realization of those deferred tax assets
in the future is considered more likely than not, an adjustment to the deferred
tax assets would increase net income in the period such determination is made.
In the event that actual results differ from these estimates or we adjust these
estimates in future periods, an adjustment to the valuation allowance may be
required, which could materially affect our consolidated financial position and
results of operations.
Restructuring charges.
We have taken
restructuring actions in the past and could in the future commence further
restructuring activities which result in recognition of restructuring charges
if events make it necessary. These actions require management to make judgments
and utilize significant estimates regarding the nature, timing and amounts of
costs associated with the activity. When we incur a liability related to a
restructuring action, we estimate and record all appropriate expenses,
including expenses for severance and other employee separation costs, facility
consolidation costs (including estimates of sublease income), lease
cancellations, asset impairments and any other exit costs. Should the actual
amounts differ from our estimates, the amount of the restructuring charges
could be impacted, which could materially affect our consolidated financial
position and results of operations.
Recently Adopted and Newly Issued 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. Effective January 1,
2008 the Company adopted the provisions of SFAS No. 157, which did not
have a material impact on the Companys consolidated financial statements.
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2,
which provides for a one-year deferral of the provisions of SFAS No.
157
until fiscal years beginning after December 15, 2008 for non-financial assets and liabilities that
are recognized or disclosed at fair value in the consolidated financial
statements on a non-recurring basis. The
Company is currently evaluating the potential impact, if any, of FSP 157-2.
In
April 2008, the FASB issued FSP FAS 142-3 Determination of the Useful
Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset. The standard applies prospectively to
intangible assets acquired and/or recognized on or after January 1, 2009.
The Company is currently evaluating the impact, if any, the adoption of this
FSP may have on the Companys consolidated financial statements.
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. This FSP was issued to clarify that instruments
granted in share-based payment transactions can be participating securities
prior
23
Table of Contents
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 non-forfeitable 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 does
not expect the adoption of this FSP to have a material impact 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 No. 141R
establishes principles and requirements for how an acquirer 1) recognizes and
measures identifiable assets acquired, the liabilities assumed and any
non-controlling 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.
The impact of SFAS No. 141R will depend on the nature and terms of
any future business combinations, if any.
In
December 2007, the FASB issued SFAS No. 160, Accounting and
Reporting of Non-controlling Interest. The objective of SFAS No. 160 is
to improve the relevance, comparability and transparency of the financial
information that reporting entities provide related to non-controlling
interests, sometimes referred to as minority interests. SFAS No. 160 requires,
among other things, that non-controlling 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
non-controlling interest, for consistency in accounting for changes in a
parents ownership interest when the parent retains a controlling interest, for
the valuation of retained non-controlling 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 non-controlling
owners. SFAS No. 160 is effective beginning January 1, 2009. The
Company does not expect the adoption of SFAS No.160 to have a material impact
on its consolidated financial statements.
Highlights from 2008
The
discussion of our results of operations and financial condition that follows
will provide information that will assist in understanding our financial
statements and information about how certain accounting principles and
estimates affect the consolidated financial statements. This discussion should
be read in conjunction with the consolidated financial statements included
herein.
·
Sales increase
of 9% in 2008 over 2007
·
CompUSA.com and
CompUSA retail contributed $226.3 million in sales
·
Movements in
exchange rates positively impacted European and Canadian sales by approximately
$13 million and $5 million, respectively
·
Revenue growth
slowed in the second half of 2008
24
Table of Contents
Results of Operations
Key
Performance Indicators (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
2007
|
|
2006
|
|
%
Change
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
$
|
2,795,441
|
|
$
|
2,553,716
|
|
9.5
|
%
|
$
|
2,553,716
|
|
$
|
2,148,104
|
|
18.9
|
%
|
Industrial products
|
|
237,027
|
|
225,746
|
|
5.0
|
%
|
225,746
|
|
196,860
|
|
14.7
|
%
|
Software solutions
|
|
493
|
|
413
|
|
19.4
|
%
|
413
|
|
201
|
|
105.5
|
%
|
Total net sales
|
|
$
|
3,032,961
|
|
$
|
2,779,875
|
|
9.1
|
%
|
$
|
2,779,875
|
|
$
|
2,345,165
|
|
18.5
|
%
|
Net sales by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,092,372
|
|
$
|
1,847,477
|
|
13.3
|
%
|
$
|
1,847,477
|
|
$
|
1,601,259
|
|
15.4
|
%
|
Europe
|
|
940,589
|
|
932,398
|
|
.9
|
%
|
932,398
|
|
743,906
|
|
25.3
|
%
|
Total net sales
|
|
$
|
3,032,961
|
|
$
|
2,779,875
|
|
9.1
|
%
|
$
|
2,779,875
|
|
$
|
2,345,165
|
|
18.5
|
%
|
Gross margin
|
|
15.3
|
%
|
15.3
|
%
|
|
|
15.3
|
%
|
14.6
|
%
|
.7
|
%
|
SG&A costs
|
|
$
|
380,778
|
|
$
|
332,359
|
|
14.6
|
%
|
$
|
332,359
|
|
$
|
282,189
|
|
17.8
|
%
|
SG&A costs as % of sales
|
|
12.6
|
%
|
12.0
|
%
|
.6
|
%
|
12.0
|
%
|
12.0
|
%
|
(.
|
)%
|
Operating income
|
|
$
|
83,367
|
|
$
|
93,942
|
|
(11.3
|
)%
|
$
|
93,942
|
|
$
|
60,730
|
|
54.7
|
%
|
Operating margin
|
|
2.7
|
%
|
3.4
|
%
|
(.7
|
)%
|
3.4
|
%
|
2.6
|
%
|
.8
|
%
|
Effective income tax rate
|
|
36.9
|
%
|
30.5
|
%
|
6.4
|
%
|
30.5
|
%
|
35.2
|
%
|
(4.7
|
)%
|
Net income
|
|
$
|
52,843
|
|
$
|
69,481
|
|
(23.9
|
)%
|
$
|
69,481
|
|
$
|
45,147
|
|
53.9
|
%
|
Net margin
|
|
1.7
|
%
|
2.5
|
%
|
(.8
|
)%
|
2.5
|
%
|
1.9
|
%
|
.6
|
%
|
NET SALES
Net sales grew 9% to $3 billion driven by growth in both technology and
industrial products segments. Excluding
the effects of exchange rate changes, sales would have grown 8%. North American
technology products sales grew 14% to $1.9 billion. Exchange rate changes did
not impact full year sales growth. European technology products sales grew 1%
to $940.6 million. Excluding exchange rate benefits, European sales would have
been flat.
Sales increased in all three reporting business segments and in both
geographies during 2008 over 2007. 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 $226.3 million for the
year. Excluding CompUSA revenue, total Technology Products revenues increased
0.6% compared to the prior year. In the United States, Technology Products
sales excluding CompUSA declined 1.0% for the year. The decline over the year
is the result of slower business to business IT and consumer electronics sales
as United States economy activity slowed in the second half of 2008. In Europe
sales increased .9% compared to a year ago. Movements in foreign exchange rates
positively impacted the European sales comparison by approximately $13 million
for the year. Excluding exchange rate benefits, European sales would have been
flat year over year. Sales in Canada (Other North America) increased by 13.9%
compared to the prior year. Excluding exchange rate benefits, sales would have
increased 10.9% for the year. 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. As in the United States, sales slowed in the second half of
2008 in Europe and Canada for both consumer and business to business sales as
the result of a slowdown in economic activity.
The growth in Industrial Products sales resulted from the Company
increasing its market share through aggressive acquisition of customers via web
and catalog, increased web advertising by expanding and refining advertisements
for existing product lines and adding new advertising for new product lines via
search engines, shipping engines and vertical market sites.
In our Software Solutions segment, revenues continue to be
insignificant relative to consolidated revenues. In the fourth quarter of 2008,
the Company reorganized its Software business to reduce its net
25
Table of Contents
loss and negative cash flow. The
actions taken resulted in a charge to earnings of approximately $1.7
million. The Company expects to realize
savings of approximately $2.6 million annually.
Sales increased in all three reporting business segments and in both
geographies during 2007 over 2006. The
growth in Technology Products sales was driven primarily by increased internet
and retail store sales, private label product sales and expanded product
offerings. The growth in Industrial
Products sales resulted from the Company increasing its market share through
competitive pricing advantages and increased internet sales. The growth in North American sales reflected
the above factors in both segments. The growth in European sales was driven by
strong business to business gains and by the effect of a weaker US dollar. Exchange rates positively impacted the
European sales comparison by approximately $78 million in 2007 as compared to
2006. Excluding the movements in foreign
exchange rates, European sales would have increased 12% from the prior
year. Sales as measured in local
currencies increased in all of the European markets we served in 2007. Sales in
our Software segment were not material in 2007 and 2006 due to early stage of
operations.
GROSS MARGIN
Consolidated gross margin remained
consistent year over year at 15.3%, although in the fourth quarter of 2008 the
Companys gross margin declined to 14.4% as the Company lowered certain product
prices and offered freight incentives in order to gain market share and respond
to competitive pricing pressures. 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 of cost of sales,
freight discounting and other variables,
any or all of which may result in fluctuations in gross margin.
Gross
margin increased 70 basis points during 2007 over 2006, due primarily to
decreased competitive pricing
pressures
in the Technology Products segment
.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased in 2008 over
2007 primarily as a result of the increase in sales volume, added personnel,
facility and other operating costs associated with the CompUSA acquisition, as
well as increased accounting, auditing, legal and professional expenses and
reorganization charges incurred in our Software segment. Significant expense
increases include approximately $27.0 million of increased sales and other
salaries and related costs related to the increased sales volume; rent and real
estate tax increases of $10.6 million;
$5.8 million of increased professional and telephone/computer
maintenance costs; and $4.3 million of increased credit card fees. CompUSA operations accounted for $23.6
million of these cost increases. Included in 2007 is a gain of approximately
$2.4 million from a lawsuit that was settled favorably.
Selling, general and administrative expenses increased in 2007 over
2006 primarily as a result of the increase in sales volume as well as increased
accounting, auditing, legal and consulting costs related to the Company being
subject to Sarbanes Oxley section 404 requirements. Significant expense
increases include approximately $26 million of increased internet advertising
costs, $8 million of increased sales salaries related to the increased sales
volume and an increase in other salaries and related costs of approximately $15
million due to increased staff in areas such as finance, marketing and
information technology.
INTEREST AND OTHER INCOME
AND INTEREST
EXPENSE
Interest expense was $.3 million, $1.0
million and $1.7 million in 2008, 2007 and 2006. Interest expense decreased in
2008 and 2007 as a result of decreased short-term borrowings in the United
Kingdom and the Netherlands. The extinguishment of mortgage debt related to our
Georgia warehouse sale in the first quarter of 2006 also contributed to the
decreased interest expense. Interest and other income, net was $2.0 million,
$5.5 million and $9.5 million in 2008, 2007 and 2006. The increase in other
income in 2006 mainly resulted from the gain on sale of the Georgia location.
26
Table of Contents
INCOME TAXES
The
Companys effective tax rate was 36.9% in 2008 as compared to 30.5% in 2007.
The higher tax rate in 2008 is primarily attributed to a higher effective tax
rate in the United Kingdom in 2008 as the result of the reversal of the
valuation allowance in 2007. The lower effective tax rate in 2007 resulted
primarily from the reversal of a valuation allowance of approximately $5.9
million against deferred tax assets in the United Kingdom partially offset by
the recording of a valuation allowance of approximately $1.7 million against
the deferred tax assets of Germany. The United Kingdom valuation allowance,
originally recorded at $10.2 million, had been established in 2005 as the
result of a cumulative loss position in the United Kingdom.
During
2008, 2007 and 2006, we did not recognize certain foreign tax credits, certain
state deferred tax assets in the United States and certain benefits on losses
in foreign tax jurisdictions due to our inability to carry such credits and
losses back to prior years and our determination that it was more likely than
not that we would not generate sufficient future taxable income in those tax
jurisdictions to realize these assets. Accordingly, valuation allowances were recorded
against the deferred tax assets associated with those items. If we are able to
realize all or part of these deferred tax assets in future periods, it will
reduce our provision for income taxes by a release of the corresponding
valuation allowance.
Seasonality
Net sales have historically been modestly
weaker during the second and third quarters as a result of lower business
activity during those months. The 2008 amounts were impacted by the CompUSA
acquisition. The following table sets forth the net sales, gross profit and
income from operations for each of the quarters since January 1, 2006
(amounts in millions)
.
|
|
Three Months Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
725
|
|
$
|
756
|
|
$
|
739
|
|
$
|
813
|
|
Percentage of years net sales
|
|
23.9
|
%
|
24.9
|
%
|
24.4
|
%
|
26.8
|
%
|
Gross profit
|
|
$
|
115
|
|
$
|
116
|
|
$
|
116
|
|
$
|
117
|
|
Operating income
|
|
$
|
26
|
|
$
|
21
|
|
$
|
20
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
676
|
|
$
|
647
|
|
$
|
687
|
|
$
|
769
|
|
Percentage of years net sales
|
|
24.3
|
%
|
23.3
|
%
|
24.7
|
%
|
27.7
|
%
|
Gross profit
|
|
$
|
97
|
|
$
|
99
|
|
$
|
111
|
|
$
|
120
|
|
Operating income
|
|
$
|
22
|
|
$
|
20
|
|
$
|
24
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
575
|
|
$
|
547
|
|
$
|
575
|
|
$
|
648
|
|
Percentage of years net sales
|
|
24.5
|
%
|
23.3
|
%
|
24.5
|
%
|
27.6
|
%
|
Gross profit
|
|
$
|
90
|
|
$
|
77
|
|
$
|
92
|
|
$
|
83
|
|
Operating income
|
|
$
|
21
|
|
$
|
10
|
|
$
|
19
|
|
$
|
11
|
|
27
Table of Contents
Financial Condition, Liquidity and Capital
Resources
Selected liquidity data (in thousands):
|
|
December 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
Cash and cash equivalents
|
|
$
|
115,967
|
|
$
|
128,021
|
|
$
|
(12,054
|
)
|
Accounts receivable, net
|
|
$
|
190,909
|
|
$
|
207,460
|
|
$
|
(16,551
|
)
|
Inventories
|
|
$
|
282,217
|
|
$
|
250,222
|
|
$
|
31,995
|
|
Prepaid expenses and other current
|
|
$
|
12,667
|
|
$
|
13,902
|
|
$
|
(1,235
|
)
|
Accounts payable
|
|
$
|
284,378
|
|
$
|
248,673
|
|
$
|
35,705
|
|
Accrued expenses
|
|
$
|
75,603
|
|
$
|
81,637
|
|
$
|
(6,034
|
)
|
Short term debt
|
|
$
|
773
|
|
$
|
4,302
|
|
$
|
(3,529
|
)
|
Working capital
|
|
$
|
250,564
|
|
$
|
274,353
|
|
$
|
(23,789
|
)
|
Our
primary liquidity needs are to support working capital requirements in our
business, to fund capital expenditures, to fund the payment of interest on
outstanding debt and to effect small acquisitions. We rely principally upon
operating cash flow to meet these needs.
In addition we have available a credit facility of approximately $120
million We believe that cash flow
available from these sources will be sufficient to meet our working capital
requirements, projected capital expenditures and interest and debt repayments
in the foreseeable future.
Our
working capital decreased in 2008 as the result of 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 $5.8 million and an
increase in inventory, primarily related to purchasing inventory for the 16
CompUSA retail stores. Accounts payable balances increased by approximately
$35.7 million offset by a decrease of approximately $6.0 million in accrued
expenses and a reduction in short term debt in Europe. Inventory turnover was at 9 times during 2008
and 10 times at 2007. Our accounts receivable days outstanding was at 21 in
2008 down from 24 in 2007. We expect that future accounts receivable and
inventory balances will fluctuate with growth in net sales and the mix of our
net sales between consumer and business customers.
We maintain our cash and cash equivalents
primarily in money market funds or their equivalent. As of December 31,
2008, all of our investments mature in less than three months. Accordingly, we
do not believe that our investments have significant exposure to interest rate
risk.
Net
cash provided by operating activities was $82.4 million, $93.1 million and
$34.3 million during 2008, 2007 and 2006. The decrease in cash provided by
operating activities in 2008 over 2007 resulted from a $3.3 million decrease in
net income adjusted by other non-cash items, such as depreciation expense, and
a decrease of $7.4 million in cash used for changes in our working capital
accounts. The increase in cash provided by operating activities in 2007 over
2006 resulted from a $27.0 million increase in net income adjusted by other
non-cash items, such as depreciation expense, and an increase of $31.7 million
in cash used for changes in our working capital accounts.
Net
cash used in investing activities was $47.7 million during 2008, primarily for
the CompUSA acquisition and for capital expenditures. Net cash used in
investing activities was $8.0 million during 2007, primarily for capital
expenditures. Net cash provided by investing activities during 2006 consisting
of proceeds from disposals of property and equipment of $18.9 million from the sale
of our distribution facility in Suwanee, Georgia offset by cash used for
capital expenditures of $6.7 million. Capital expenditures in 2008, 2007 and
2006 included upgrades and enhancements to our information and communications
systems hardware and facilities costs for the opening of additional retail
outlets stores in North America.
Net
cash used in financing activities was $42.8 million during 2008. We repaid
approximately $3.9 million in short-term debt, paid a special dividend of $37.1
million, and repurchased Company stock of approximately $5.8 million. Proceeds
and excess tax benefits from stock option exercises and proceeds
28
Table of Contents
from
debt and capital leases obligations provided approximately $4.0 million of
cash. Net cash used in financing activities was $42.5 million during 2007,
attributable to dividends paid of $36.6 million, repayment of short term debt
of $9.0 million, offset by proceeds of stock option exercises, related excess
tax benefits and share repurchases of $3.1 million. Net cash of $22.1 million
was used in financing activities for 2006. Repayment of short and long-term
borrowings used approximately $24.8 million of cash and proceeds from stock
option exercises and excess tax benefits from stock option exercises provided
approximately $2.6 million of cash.
We
have a $120.0 million secured revolving credit agreement (which may be
increased by up to an additional $30.0 million, subject to certain
conditions). The facility expires in October 2010. Borrowings under the agreement are subject to
borrowing base limitations of up to 85% of eligible accounts receivable and 40%
of qualified inventories and are secured by accounts receivable, inventories
and certain other assets. The undrawn availability under the facility may not
be less than $15.0 million until the last day of any month in which the
availability net of outstanding borrowings is at least $70.0 million. The
revolving credit agreement requires that we maintain a minimum level of
availability. If such availability is not maintained, we will then be required
to maintain a fixed charge coverage ratio (as defined). The agreement contains
certain other covenants, including restrictions on capital expenditures and
payments of dividends. As of December 31, 2008, the Company was in
compliance with all of the covenants under the credit facility. Eligible
collateral under the facility was $103.5 million, total availability was $94.4
million, outstanding letters of credit of were $9.1 million and there were no
outstanding advances.
The
Companys Netherlands subsidiary maintained a 5.0 million credit facility with
a local financial institution. This facility expired in November 2008 and
was not renewed.
In
April 2002, we entered into a ten year, $8.4 million mortgage loan on our
Suwanee, Georgia distribution facility.
During the first quarter of fiscal 2006, we sold this facility and
repaid the remaining balance on the loan. The facility was replaced by a
larger, leased distribution center in a nearby area.
We
are obligated under non-cancelable operating leases for the rental of most of
our facilities and certain of our equipment which expire at various dates
through 2026. We have sublease
agreements for unused space we lease in Wellingborough, England. In the event
the sublessee is unable to fulfill its obligations, we would be responsible for
rent due under the lease.
Following
is a summary of our contractual obligations for future principal payments on
our debt, minimum rental payments on our non-cancelable operating leases and minimum
payments on our other purchase obligations as of December 2008 (in
thousands):
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
2,451
|
|
$
|
905
|
|
$
|
1,421
|
|
$
|
125
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating leases, net of
subleases
|
|
135,609
|
|
19,034
|
|
47,880
|
|
31,794
|
|
36,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase & other obligations
|
|
28.483
|
|
21,093
|
|
4,531
|
|
2,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax contingencies
|
|
1,195
|
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
167,738
|
|
$
|
42,227
|
|
$
|
53,832
|
|
$
|
34,778
|
|
$
|
36,901
|
|
29
Table of Contents
Our
purchase and other obligations consist primarily of certain employment
agreements and service agreements.
In
addition to the contractual obligations noted above, we had $9.1 million of
standby letters of credit outstanding as of December 2008.
Our
operating results have generated cash flow which, together with borrowings
under our debt agreements, has provided sufficient capital resources to finance
working capital and cash operating requirements, fund capital expenditures, and
fund the payment of interest on outstanding debt. Our primary ongoing cash
requirements will be to finance working capital, fund the payment of principal
and interest on indebtedness, fund capital expenditures and fund small
acquisitions. We believe future cash flows from operations and availability of
borrowings under our lines of credit will be sufficient to fund ongoing cash
requirements for at least the next twelve months.
We are party to certain litigation, the
outcome of which we believe, based on discussions with legal counsel, will not
have a material adverse effect on our consolidated financial statements.
Tax contingencies are related to
uncertain tax positions taken on income tax returns that may result in
additional tax, interest and penalties being paid to taxing authorities.
Off-Balance Sheet Arrangements
We
have not created, and are not party to, any special-purpose or off-balance
sheet entities for the purpose of raising capital, incurring debt or operating
our business. We do not have any arrangements or relationships with entities
that are not consolidated into the financial statements that are reasonably
likely to materially affect our liquidity or the availability of capital
resources.
The
Company currently leases its facility in Port Washington, NY from Addwin Realty
Associates, an entity owned by Richard Leeds, Bruce Leeds, and Robert Leeds,
Directors of the Company and the Companys three senior executive officers and
principal stockholders.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks, which include
changes in U.S. and international interest rates as well as changes in currency
exchange rates (principally Pounds Sterling, Euros and Canadian Dollars) as
measured against the U.S. Dollar and each other.
The translation of the financial statements
of our operations located outside of the United States is impacted by movements
in foreign currency exchange rates. Changes in currency exchange rates as
measured against the U.S. dollar may positively or negatively affect income
statement, balance sheet and cash flows as expressed in U.S. dollars. Sales
would have fluctuated by approximately $112 million and pre tax income would
have fluctuated by approximately $2.3 million if average foreign exchange rates
changed by 10% in 2008. We have limited
involvement with derivative financial instruments and do not use them for
trading purposes. We may enter into foreign currency options or forward
exchange contracts aimed at limiting in part the impact of certain currency
fluctuations, but as of December 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 consists of short-term
borrowings under our credit facilities.
As of December 2008, there were no outstanding balances under our
variable rate credit facility. A hypothetical change in average interest rates
of one percentage point is not expected to have a material effect on our
financial position, results of operations or cash flows over the next fiscal
year.
30
Table of Contents
Item 8. Financial Statements and
Supplementary Data.
The information required by Item 8 of Part II
is incorporated herein by reference to the Consolidated Financial Statements
filed with this report; see Item 15 of Part IV.
Item 9. Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under
the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer,
the Company carried out an evaluation of the effectiveness of the design and
operation of the Companys disclosure controls and procedures as of December 31,
2008.
Based upon this evaluation, the Companys
Chief Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures are effective.
Inherent Limitations of
Internal Controls over Financial Reporting
The
Companys internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Companys internal control over
financial reporting includes those policies and procedures that: (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Companys assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that the Companys receipts and expenditures are
being made only in accordance with authorizations of the Companys management
and directors; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
Companys assets that could have a material effect on the Companys financial
statements.
Management, including the Companys Chief Executive
Officer and Chief Financial Officer, does not expect that the Companys
internal controls will prevent or detect all errors and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of internal controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected. Also, any evaluation
of the effectiveness of controls in future periods are subject to the risk that
those internal controls may become inadequate because of changes in business
conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Managements Report on
Internal Control Over Financial Reporting
The Companys management is responsible for
establishing and maintaining adequate internal control over financial
reporting.
Under the supervision and
with the participation of Companys management, including the Chief Executive
Officer and Chief Financial Officer, the Company evaluated the effectiveness of
the design and operation of its internal control over financial reporting based
on the framework established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys internal control over financial reporting
was effective as of December 31, 2008.
31
Table of Contents
The Companys independent registered public
accounting firm, Ernst & Young, has issued an attestation report on
the effectiveness of the Companys internal control over financial reporting as
of December 31, 2008, a copy of which is included in this report.
Changes in Internal Control Over
Financial Reporting
In conjunction with the
Companys Section 404 compliance efforts, the Company has continued to
make improvements to its internal control over financial reporting, including
remediation of the significant deficiency in the consolidation process
previously noted. The nature of these improvements was incremental, and the
impact was not material both individually and in the aggregate.
There
have been no changes in the Companys internal controls over financial
reporting during the quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
Item 9B. Other Information.
None.
32
Table of Contents
PART III
Item 10. Directors, Executive Officers and
Corporate Governance.
The
information required by Item 10 of Part III is hereby incorporated by
reference to the Companys Proxy Statement for the 2009 Annual Meeting of
Stockholders. (the Proxy Statement).
Item 11. Executive Compensation.
The
information required by Item 11 of Part III is hereby incorporated by
reference to the Proxy Statement.
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters.
The
information required by item 12 of Part III is hereby incorporated by
reference to the Proxy Statement.
Item 13. Certain Relationships and Related
Transactions, and Director Independence
The information required by Item 10 of Part III is hereby
incorporated by reference to the Proxy Statement
.
Item 14. Principal Accounting Fees and
Services.
The information required by Item 14 of Part III is hereby incorporated
by reference to the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement
Schedules.
33
Table of Contents
|
|
Schedules not included with this additional financial data have been
omitted because they are not applicable or the required information is shown
in the consolidated financial statements or notes thereto.
|
Exhibit
|
|
No.
|
|
Description
|
3.1
|
Certificate of Incorporation of Registrant, as amended (incorporated
by reference to the Companys registration statement on Form S-1
(33-92052))
|
3.2
|
Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to the Companys report on
Form 8-K dated May 18, 1999)
|
3.3
|
Amended and Restated By-laws of Registrant (effective as of
December 29, 2007, incorporated by reference to the Companys annual
report on Form 10-K for the year ended December 31, 2007)
|
3.4
|
Amendment to the Bylaws of the Registrant (incorporated by reference
to the Companys report on Form 8-K dated March 3, 2008)
|
4.1
|
Stockholders Agreement (incorporated by reference to the Companys
quarterly report on Form 10-Q for the quarterly period ended
September 30, 1995)
|
10.1
|
Form of 1995 Long-Term Stock Incentive Plan* (incorporated by
reference to the Companys registration statement on Form S-1)
(Registration No. 333-1852)
|
10.2
|
Form of 1999 Long-Term Stock Incentive Plan as amended*
(incorporated by reference to the Companys report on Form 8-K dated
May 20, 2003)
|
10.3
|
Lease Agreement dated September 20, 1988 between the Company and
Addwin Realty Associates (Port Washington facility) (incorporated by
reference to the Companys registration statement on Form S-1)
(Registration No. 33-92052)
|
10.4
|
Amendment to Lease Agreement dated September 29, 1998 between
the Company and Addwin Realty Associates (Port Washington facility)
(incorporated by reference to the Companys annual report on Form 10-K
for the year ended December 31, 1998)
|
10.5
|
Lease Agreement dated as of July 17, 1997 between the Company
and South Bay Industrials Company (Compton facility)
(
incorporated by reference to
the Companys annual report on Form 10-K for the year ended
December 31, 1997)
|
10.6
|
Build-to-Suit Lease Agreement dated April, 1995 among the Company,
American National Bank and Trust Company of Chicago (Trustee for the original
landlord) and Walsh, Higgins & Company (Contractor) (Naperville
Illinois Facility Lease) (incorporated by reference to the Companys
registration statement on Form S-1) (Registration No. 33-92052)
|
10.7
|
Lease Agreement dated September 17, 1998 between Tiger
Direct, Inc. and Keystone Miami Property Holding Corp. (Miami facility)
(incorporated by reference to the Companys quarterly report on
Form 10-Q for the quarterly period ended September 30, 1998)
|
10.8
|
Royalty Agreement dated June 30, 1986 between the Company and
Richard Leeds, Bruce Leeds and Robert Leeds, and Addendum thereto
(incorporated by reference to the Companys registration statement on
Form S-1) (Registration No. 33-92052)
|
|
|
|
34
Table of Contents
10.9
|
Form of 1995 Stock Plan for Non-Employee Directors*
(incorporated by reference to the Companys registration statement on
Form S-1) (Registration No. 333-1852)
|
10.10
|
Employment Agreement entered into on October 12, 2004 but
effective as of June 1, 2004 between the Company and Gilbert Fiorentino*
(incorporated by reference to the Companys report on Form 8-K dated
October 12, 2004)
|
10.11
|
Restricted Stock Unit Agreement entered into on October 12, 2004
but effective as of June 1, 2004 between the Company and Gilbert
Fiorentino* (incorporated by reference to the Companys report on
Form 8-K dated October 12, 2004)
|
10.12
|
Amended and Restated Credit Agreement, dated as of October 27,
2005, between JPMorgan Chase Bank, N.A. and affiliates, General Electric
Capital Corporation, and GMAC Commercial Finance LLC (as Lenders) with the
Company and certain subsidiaries of the Company (as Borrowers) (the Amended
and Restated JP Morgan Chase Loan Agreement) (incorporated by reference to
the Companys report on Form 8-K dated October 27, 2005)
|
10.13
|
Amendment No. 1, dated as of December 19, 2005, to the
Amended and Restated JP Morgan Chase Loan Agreement
(incorporated
by reference to the Companys annual report on Form 10-K for the year
ended December 31, 2005)
|
10.14
|
Lease agreement, dated December 8, 2005, between the Company and
Hamilton Business Center, LLC (Buford, Georgia facility) (incorporated by
reference to the Companys annual report on Form 10-K for the year ended
December 31, 2005)
|
10.15
|
First Amendment, dated as of June 12, 2006, to the Lease Agreement
between the Company and Hamilton Business Center, LLC (Buford, Georgia
facility) (incorporated by reference to the Companys annual report on
Form 10-K for the year ended December 31, 2005)
|
10.16
|
First Amendment, dated as of February 1, 2006, to the Naperville
Illinois Facility Lease between the Company and Ambassador Drive LLC (current
landlord) (incorporated by reference to the Companys annual report on
Form 10-K for the year ended December 31, 2005)
|
10.17
|
Employment Agreement, dated as of January 17, 2007, between the
Company and Lawrence P. Reinhold*(incorporated by reference to the Companys
annual report on Form 10-K for the year ended December 31, 2006).
|
10.18
|
Form of 2006 Stock Incentive Plan for Non-Employee
Directors*(incorporated by reference to the Companys annual report on
Form 10-K for the year ended December 31, 2006).
|
10.19
|
Form of 2005 Employee Stock Purchase Plan* (incorporated by
reference to the Companys annual report on Form 10-K for the year ended
December 31, 2006).
|
10.20
|
Second Amendment to Lease Agreement dated September 20, 1988
between the Company and Addwin Realty Associates (Port Washington facility)
(incorporated by reference to the Companys annual report on Form 10-K
for the year ended December 31, 2007).
|
10.21
|
Asset Purchase Agreement between the Company and CompUSA dated
January 5, 2008 (incorporated by reference to the Companys annual
report on Form 10-K for the year December 31, 2007).
|
35
Table of Contents
10.22
|
Amendment to Asset Purchase Agreement between the Company and CompUSA
dated February 14, 2008 (incorporated by reference to the Companys
annual report on Form 10-K for the year ended December 31, 2007).
|
14
|
Corporate Ethics Policy for Officers, Directors and Employees
(revised as of March 30, 2005) (incorporated by reference to the
Companys report on Form 8-K dated March 30, 2005)
|
21
|
Subsidiaries of the Registrant (filed herewith)
|
23
|
Consent of Independent Registered Public Accounting Firm (filed
herewith)
|
31.1
|
Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2
|
Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
32.1
|
Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
99.1
|
Charter of the Audit Committee of the Companys Board of Directors,
as revised February 23, 2009 (filed herewith)
|
99.2
|
Charter of the Compensation Committee of the Companys Board of
Directors, as revised February 23, 2009 (filed herewith)
|
99.3
|
Charter of the Nominating/Corporate Governance Committee of the
Companys Board of Directors, as revised February 23, 2009 (filed
herewith)
|
*
Management contract or compensatory plan or arrangement
36
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
SYSTEMAX INC.
|
|
|
|
By: /s/ RICHARD LEEDS
|
|
|
|
Richard Leeds
|
|
Chairman and Chief Executive Officer
|
|
|
|
Date: March 18, 2009
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ RICHARD LEEDS
|
|
Chairman and Chief Executive Officer
|
|
March 18, 2009
|
Richard Leeds
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ BRUCE LEEDS
|
|
Vice Chairman and Director
|
|
March 18, 2009
|
Bruce Leeds
|
|
|
|
|
|
|
|
|
|
/s/ ROBERT LEEDS
|
|
Vice Chairman and Director
|
|
March 18, 2009
|
Robert Leeds
|
|
|
|
|
|
|
|
|
|
/s/ LAWRENCE P. REINHOLD
|
|
Executive Vice President, Chief Financial
Officer
|
|
March 18, 2009
|
Lawrence P. Reinhold
|
|
and Director
|
|
|
|
|
(Principal Financial Officer)
|
|
|
|
|
|
|
|
/s/ THOMAS AXMACHER
|
|
Vice President and Controller
|
|
March 18, 2009
|
Thomas Axmacher
|
|
(Principal Accounting Officer)
|
|
|
|
|
|
|
|
/s/ GILBERT FIORENTINO
|
|
Chief Executive, Technology Products Group
|
|
March 18, 2009
|
Gilbert Fiorentino
|
|
and Director
|
|
|
|
|
|
|
|
/s/ ROBERT D. ROSENTHAL
|
|
Director
|
|
March 18, 2009
|
Robert D. Rosenthal
|
|
|
|
|
|
|
|
|
|
/s/ STACY DICK
|
|
Director
|
|
March 18, 2009
|
Stacy Dick
|
|
|
|
|
|
|
|
|
|
/s/ ANN R. LEVEN
|
|
Director
|
|
March 18, 2009
|
Ann R. Leven
|
|
|
|
|
37
Table of Contents
Report of Independent Registered Public
Accounting Firm
The
Board of Directors and Shareholders of Systemax Inc.
We
have audited the accompanying consolidated balance sheets of Systemax Inc. as
of December 31, 2008 and 2007, and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the three years in
the period ended December 31, 2008.
Our audits also included the financial statement schedule listed in the
index at Item 15(a). These financial
statements and schedule are the responsibility of the Companys
management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Systemax Inc. at December 31,
2008 and 2007, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008,
in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As
discussed in Note 8 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109
as of January 1, 2007.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Systemax Inc.s internal control
over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 16,
2009 expressed an unqualified opinion thereon.
|
/s/
Ernst & Young LLP
|
|
New
York, New York
|
March 16,
2009
|
38
Table of Contents
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of Systemax Inc.
We
have audited Systemax Inc.s internal control over financial reporting as of December 31,
2008, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Systemax Inc.s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Managements Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the companys internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A
companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
In
our opinion, Systemax Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008 based on
the COSO criteria.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Systemax Inc. as of December 31, 2008 and 2007 and the related
consolidated statements of operations, shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2008 of Systemax
Inc. and our report dated March 16, 2009 expressed an unqualified opinion
thereon.
|
/s/
Ernst & Young LLP
|
|
New
York, New York
|
March 16,
2009
|
39
Table of Contents
SYSTEMAX INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
115,967
|
|
$
|
128,021
|
|
Accounts receivable, net of
allowances of $9,146 and $12,122
|
|
190,909
|
|
207,460
|
|
Inventories
|
|
282,217
|
|
250,222
|
|
Prepaid expenses and other
current assets
|
|
12,667
|
|
13,902
|
|
Deferred income taxes
|
|
10,423
|
|
10,657
|
|
Total current assets
|
|
612,183
|
|
610,262
|
|
|
|
|
|
|
|
Property, plant and equipment,
net
|
|
48,465
|
|
47,580
|
|
Deferred income taxes
|
|
11,452
|
|
18,652
|
|
Goodwill and intangibles
|
|
30,326
|
|
|
|
Other assets
|
|
837
|
|
1,150
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
703,263
|
|
$
|
677,644
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings,
including current portion of capitalized
lease obligations
|
|
$
|
773
|
|
$
|
4,302
|
|
Accounts payable
|
|
284,378
|
|
248,673
|
|
Accrued expenses and other
current liabilities
|
|
75,603
|
|
81,637
|
|
Deferred income taxes
|
|
865
|
|
1,297
|
|
Total current liabilities
|
|
361,619
|
|
335,909
|
|
|
|
|
|
|
|
Capitalized lease obligations
|
|
1,411
|
|
254
|
|
Deferred income taxes
|
|
254
|
|
3
|
|
Other liabilities
|
|
6,024
|
|
5,643
|
|
Total liabilities
|
|
369,308
|
|
341,809
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock, par value $.01
per share, authorized 25 million shares;
issued none
|
|
|
|
|
|
Common stock, par value $.01
per share, authorized 150 million shares;
issued 38,855,989 and 38,332,990 shares; outstanding 36,223,747 and
36,092,067 shares
|
|
389
|
|
383
|
|
Additional paid-in capital
|
|
179,241
|
|
173,381
|
|
Common stock in treasury at
cost 2,632,242 and 2,240,923 shares
|
|
(31,158
|
)
|
(26,324
|
)
|
Retained earnings
|
|
192,401
|
|
176,684
|
|
Accumulated other comprehensive
(loss) income, net of tax
|
|
(6,918
|
)
|
11,711
|
|
Total shareholders equity
|
|
333,955
|
|
335,835
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
703,263
|
|
$
|
677,644
|
|
See notes to consolidated financial
statements.
40
Table
of Contents
SYSTEMAX INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Net sales
|
|
$
|
3,032,961
|
|
$
|
2,779,875
|
|
$
|
2,345,165
|
|
Cost of sales
|
|
2,568,816
|
|
2,353,574
|
|
2,002,246
|
|
Gross profit
|
|
464,145
|
|
426,301
|
|
342,919
|
|
Selling, general and
administrative expenses
|
|
380,778
|
|
332,359
|
|
282,189
|
|
Operating income
|
|
83,367
|
|
93,942
|
|
60,730
|
|
Foreign currency exchange loss
(gain)
|
|
1,300
|
|
(1,562
|
)
|
(1,174
|
)
|
Interest and other income, net
|
|
(1,981
|
)
|
(5,505
|
)
|
(9,475
|
)
|
Interest expense
|
|
305
|
|
986
|
|
1,684
|
|
Income before income taxes
|
|
83,743
|
|
100,023
|
|
69,695
|
|
Provision for income taxes
|
|
30,900
|
|
30,542
|
|
24,548
|
|
Net income
|
|
$
|
52,843
|
|
$
|
69,481
|
|
$
|
45,147
|
|
Net income per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.45
|
|
$
|
1.93
|
|
$
|
1.29
|
|
Diluted
|
|
$
|
1.41
|
|
$
|
1.84
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
Weighted average common and
common equivalent shares:
|
|
|
|
|
|
|
|
Basic
|
|
36,450
|
|
35,968
|
|
34,960
|
|
Diluted
|
|
37,411
|
|
37,688
|
|
36,881
|
|
See notes to consolidated financial
statements.
41
Table
of Contents
SYSTEMAX INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
52,843
|
|
$
|
69,481
|
|
$
|
45,147
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
10,387
|
|
8,780
|
|
8,185
|
|
Provision (benefit) for
deferred income taxes
|
|
6,197
|
|
(6,106
|
)
|
2,254
|
|
Provision for returns and
doubtful accounts
|
|
2,424
|
|
4,575
|
|
1,503
|
|
Compensation expense related to
equity compensation plans
|
|
3,869
|
|
4,159
|
|
2,330
|
|
Excess tax benefit from
exercises of stock options
|
|
(1,380
|
)
|
(2,160
|
)
|
(1,030
|
)
|
Loss (gain) on dispositions and
abandonment
|
|
89
|
|
(1,032
|
)
|
(7,721
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(2,058
|
)
|
(37,849
|
)
|
(3,917
|
)
|
Inventories
|
|
(40,547
|
)
|
(13,229
|
)
|
(36,216
|
)
|
Prepaid expenses and other
current assets
|
|
(16
|
)
|
15,916
|
|
(10,060
|
)
|
Income taxes payable/receivable
|
|
602
|
|
1,925
|
|
(3,204
|
)
|
Accounts payable, accrued
expenses and other current liabilities
|
|
50,009
|
|
48,623
|
|
37,055
|
|
Net cash provided by operating
activities
|
|
82,419
|
|
93,083
|
|
34,326
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase of certain CompUSA
assets
|
|
(30,649
|
)
|
|
|
|
|
Purchases of property, plant
and equipment
|
|
(17,094
|
)
|
(7,950
|
)
|
(6,701
|
)
|
Proceeds from disposals of
property, plant and equipment
|
|
72
|
|
28
|
|
18,938
|
|
Net cash (used in) provided by
investing activities
|
|
(47,671
|
)
|
(7,922
|
)
|
12,237
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
Repayments of borrowings from
banks
|
|
(3,880
|
)
|
(8,708
|
)
|
(16,473
|
)
|
Proceeds (repayments) of
long-term debt and capital lease obligations
|
|
1,481
|
|
(328
|
)
|
(8,305
|
)
|
Dividends paid
|
|
(37,126
|
)
|
(36,588
|
)
|
|
|
Proceeds from issuance of
common stock, net of repurchases
|
|
1,133
|
|
972
|
|
1,602
|
|
Purchase of treasury stock
|
|
(5,824
|
)
|
|
|
|
|
Excess tax benefit from
exercises of stock options
|
|
1,380
|
|
2,160
|
|
1,030
|
|
Net cash used in by financing
activities
|
|
(42,838
|
)
|
(42,492
|
)
|
(22,146
|
)
|
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATES ON
CASH
|
|
(3,964
|
)
|
(1,612
|
)
|
(744
|
)
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS
|
|
(12,054
|
)
|
41,057
|
|
23,673
|
|
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR
|
|
128,021
|
|
86,964
|
|
63,291
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS END
OF YEAR
|
|
$
|
115,967
|
|
$
|
128,021
|
|
$
|
86,964
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
291
|
|
$
|
1,182
|
|
$
|
1,861
|
|
Income taxes paid
|
|
$
|
29,514
|
|
$
|
30,275
|
|
$
|
26,465
|
|
Supplemental disclosures of
non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Acquisitions of equipment
through capital leases
|
|
$
|
1,688
|
|
$
|
251
|
|
$
|
779
|
|
See notes to consolidated financial
statements.
42
Table
of Contents
SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
(in thousands)
|
|
Common Stock
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Number
of Shares
Out-
standing
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Treasury
Stock,
At Cost
|
|
Retained
Earnings
|
|
Other
Comprehensive
Income (Loss),
Net of Tax
|
|
Unearned
Restricted
Stock
Compensation
|
|
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2006
|
|
34,761
|
|
$
|
382
|
|
$
|
177,574
|
|
$
|
(40,772
|
)
|
$
|
98,927
|
|
$
|
893
|
|
$
|
(4,162
|
)
|
$
|
|
|
Reversal of
unamortized unearned restricted stock compensation
|
|
|
|
|
|
(4,162
|
)
|
|
|
|
|
|
|
4,162
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
2,330
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted stock,net
|
|
100
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock
options
|
|
480
|
|
|
|
(4,039
|
)
|
5,641
|
|
|
|
|
|
|
|
|
|
Income tax
benefit on stock-based compensation
|
|
|
|
|
|
1,280
|
|
|
|
|
|
|
|
|
|
|
|
Change in
cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
6,288
|
|
|
|
6,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
45,147
|
|
|
|
|
|
45,147
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,435
|
|
Balances,
December 31, 2006
|
|
35,341
|
|
383
|
|
172,983
|
|
(35,131
|
)
|
144,074
|
|
7,181
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
4,009
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted stock
|
|
205
|
|
|
|
(2,843
|
)
|
2,406
|
|
|
|
|
|
|
|
|
|
Exercise of stock
options
|
|
546
|
|
|
|
(3,569
|
)
|
6,401
|
|
|
|
|
|
|
|
|
|
Income tax
benefit on stock-based compensation
|
|
|
|
|
|
2,801
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect
of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
(283
|
)
|
|
|
|
|
|
|
Change in
cumulative translation adjustment net
|
|
|
|
|
|
|
|
|
|
|
|
4,530
|
|
|
|
4,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
(36,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
69,481
|
|
|
|
|
|
69,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,011
|
|
Balances,
December 31, 2007
|
|
36,092
|
|
383
|
|
173,381
|
|
(26,324
|
)
|
176,684
|
|
11,711
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
3,794
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted stock
|
|
104
|
|
1
|
|
283
|
|
46
|
|
|
|
|
|
|
|
|
|
Exercise of stock
options
|
|
503
|
|
5
|
|
184
|
|
944
|
|
|
|
|
|
|
|
|
|
Repurchase of
treasury stock
|
|
(475
|
)
|
|
|
|
|
(5,824
|
)
|
|
|
|
|
|
|
|
|
Income tax
benefit on stock-based compensation
|
|
|
|
|
|
1,599
|
|
|
|
|
|
|
|
|
|
|
|
Change in
cumulative translation adjustment net
|
|
|
|
|
|
|
|
|
|
|
|
(18,629
|
)
|
|
|
(18,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
(37,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
52,843
|
|
|
|
|
|
52,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,214
|
|
Balances,
December 31, 2008
|
|
36,224
|
|
$
|
389
|
|
$
|
179,241
|
|
$
|
(31,158
|
)
|
$
|
192,401
|
|
$
|
(6,918
|
)
|
$
|
|
|
|
|
See notes to consolidated financial
statements.
43
Table of Contents
SYSTEMAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Systemax Inc. and its wholly-owned subsidiaries (collectively, the Company or
Systemax). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Reclassifications
Certain balances have been reclassified among current assets and current
liabilities in prior year to conform to current year presentation on the
consolidated balance sheets. Foreign
exchange loss (gain) has been reclassified from selling, general and administrative
expense to its own separate income statement account in prior years to conform
to current year presentation on the consolidated statements of operations.
Use of Estimates In Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results could differ from those
estimates.
Fiscal Year
Effective the fourth quarter of 2007, the Company changed its fiscal year end
from a calendar year ending on December 31 to a fiscal year ending at
midnight on the Saturday closest to December 31. Fiscal years will
typically include 52 weeks, but every few years will include 53 weeks which was
the case in 2008. For clarity of presentation herein, all fiscal years are
referred to as if they ended on December 31. The fiscal year will be
divided into four fiscal quarters that each end at midnight on a Saturday.
Fiscal quarters will typically include 13 weeks, but the fourth quarter will
include 14 weeks in a 53 week fiscal year. For clarity of presentation herein,
all fiscal quarters are referred to as if they ended on the traditional
calendar month.
Foreign Currency Translation
The Company has operations in numerous foreign countries. The functional currency of each foreign
country is the local currency. The
financial statements of the Companys foreign entities are translated into U.S.
dollars, the reporting currency, using year-end exchange rates for assets and
liabilities, average exchange rates for the statement of operations items and
historical rates for equity accounts.
Translation gains or losses are recorded as a separate component of
shareholders equity.
Cash and Cash Equivalents
The Company considers amounts held in money market accounts and other
short-term investments, including overnight bank deposits, with an original
maturity date of three months or less to be cash equivalents
.
Inventorie
s
Inventories consist primarily of finished goods and are stated at the lower
of cost or market value. Cost is
determined by using the first-in, first-out method except in Europe and retail
locations where an average cost is used. Allowances are maintained for
obsolete, slow-moving and non-saleable inventory.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation of furniture, fixtures and
equipment, including equipment under capital leases, are depreciated using the
straight-line or accelerated method over their estimated useful lives ranging
from three to ten years. Depreciation of
buildings is on the straight-line method over estimated useful lives of 30 to
50 years. Leasehold improvements are
amortized over the lesser of the useful lives or the term of the respective
leases.
Evaluation of Long-lived Assets
Long-lived assets are evaluated for recoverability whenever events or
changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability,
the Company estimates the future cash flows expected to result from the use of
the asset and eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss,
equal to the excess of the carrying amount over the fair market value of the
asset is recognized.
Goodwill and intangible assets
Goodwill represents the excess of the cost
of acquired assets over the fair value of assets acquired. The Company tests
goodwill and indefinite lived intangibles for impairment annually or more
frequently if indicators of impairment exist. In addition, goodwill is required
to be tested for impairment after a portion of the goodwill is allocated to a
business targeted for disposal. The Companys identifiable intangible assets
consist of trademarks, trade and domain names, retail leases and customer lists
(See Note 2).
Accruals
Management makes estimates and assumptions
that affect amounts reported in the consolidated financial statements and
accompanying notes. These estimates are based upon various factors such as the
number of units sold, historical and anticipated results and data received from
third party vendors. Actual results could differ from these estimates. Our most
significant estimates include those related to the costs of vendor drop
shipments, sales returns and allowances, cooperative advertising and customer
rebate reserves, and other vendor and employee related costs.
44
Table of Contents
Product Warranties
Provisions for estimated future expenses relating to product warranties for
the Companys assembled PCs are recorded as cost of sales when revenue is
recognized. Liability estimates are determined based on management judgment
considering such factors as the number of units sold, historical and
anticipated rates of warranty claims and the likely current cost of corrective
action. The changes in accrued product
warranties were as follows:
|
|
Year ended December 31
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Balance, beginning of year
|
|
$
|
914
|
|
$
|
1,061
|
|
$
|
1,316
|
|
Charged to expense
|
|
1,145
|
|
1,400
|
|
1,556
|
|
Deductions
|
|
(1,366
|
)
|
(1,547
|
)
|
(1,811
|
)
|
Balance, end of year
|
|
$
|
693
|
|
$
|
914
|
|
$
|
1,061
|
|
Income Taxes
Deferred tax assets and liabilities are recognized for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities
and for tax loss carry forwards. The realization of net deferred tax assets is
dependent upon our ability to generate sufficient future taxable income. Where
it is more likely than not that some portion or of the deferred tax asset will
not be realized, we have provided a valuation allowance. If the realization of
those deferred tax assets in the future is considered more likely than not, an
adjustment to the deferred tax assets would increase net income in the period
such determination is made.
The
Company provides for uncertain tax positions and related interest and penalties
based upon managements assessment of whether a tax benefit is more likely than
not to be sustained upon examination by tax authorities. To the extent the Company prevails in matters
for which a liability for an unrecognized tax benefit is established or is
required to pay amounts in excess of the liability, the Companys effective tax
rate in a given financial statement period may be affected.
Revenue
Recognition and Accounts Receivable
The Company
recognizes sales of products, including shipping revenue, when persuasive
evidence of an order arrangement exists, delivery has occurred, the sales price
is fixed or determinable and collectability is reasonably assured. Generally,
these criteria are met at the time the product is received by the customers
when title and risk of loss have transferred.
Allowances for estimated subsequent customer returns, rebates and sales
incentives are provided when revenues are recorded. Costs incurred for the shipping and handling
of its products are recorded as cost of sales. Revenue from extended warranty
and support contracts on the Companys assembled PCs is deferred and recognized
over the contract period. The Company
evaluates collectability of accounts receivable based on numerous factors,
including past transaction history with customers and their credit rating and
provides a reserve for accounts that are potentially uncollectible. Trade receivables
are generally written off once all collection efforts have been exhausted.
Accounts receivable are shown in the consolidated balance sheets net of
allowances for doubtful collections and subsequent customer returns.
Advertising Costs
Expenditures for internet, television and local radio advertising are
expensed in the period the advertising takes place. Catalog preparation,
printing and postage expenditures are amortized over the period of catalog
distribution during which the benefits are expected, generally one to six
months.
Net advertising expenses were $40.0 million,
$47.2 million and $37.4 million during 2008, 2007 and 2006, respectively and
are included in the accompanying Consolidated Statements of Operations. The Company utilizes advertising programs to
support vendors, including catalogs, internet and magazine advertising, and
receives payments and credits from vendors, including consideration pursuant to
volume incentive programs and cooperative marketing programs. The Company accounts
for consideration from vendors as a reduction of cost of sales unless certain
conditions are met showing that the funds are used for specific, incremental,
identifiable costs, in which case the consideration is accounted for as a
reduction in the related expense category, such as advertising expense. The amount of vendor consideration recorded
as a reduction of selling, general and administrative expenses totaled $60.4
million, $42.6 million and $39.6 million during 2008, 2007 and 2006,
respectively.
Prepaid expenses as of December 2008 and
2007 include deferred advertising costs of $4.1 million and $3.9 million which
are reflected as an expense during the periods benefited, typically the
subsequent fiscal quarter.
Stock based compensation
The Company records
share-based payment awards exchanged for employee services at fair value on the
date of grant and expenses the awards in the consolidated statement of
operations over the requisite employee service period. Stock-based compensation expense includes an
estimate for forfeitures and is recognized over the expected term of the award
on a straight-line basis. The Company
recorded, as a component of selling, general and administrative expenses,
amortization of stock-based compensation of $3,220,000, $3,435,000, and
$1,756,000 in 2008, 2007 and 2006, respectively. (See Note 7)
Net Income Per Common Share
Net income per common share basic is calculated based upon the weighted
average number of common shares outstanding during the respective periods presented.
Net income per common share diluted is calculated based upon the weighted
average number of common shares outstanding and included the equivalent shares
for dilutive securities outstanding during the respective periods, where the
effect is anti-dilutive. The dilutive effect of outstanding options issued by
the Company is reflected in net income per share - diluted using the treasury
stock method. Under the treasury stock method, options will only have a
dilutive effect when the average market price of common stock during the period
exceeds the exercise price of the options. Equivalent common shares of 941,000,
1,087,000, and 989,000
45
Table of Contents
in 2008, 2007 and 2006, respectively were
included for the diluted calculation. The weighted average number of stock
options outstanding excluded from the computation of diluted earnings per share
was 622,000, 0, and 36,000 in 2008, 2007 and 2006, respectively due to their
antidilutive effect.
Comprehensive Income
Comprehensive income consists of net income and foreign currency translation
adjustments and is included in the Consolidated Statements of Shareholders
Equity. Comprehensive income was
$34,214,000, $74,011,000 and $51,435,000 in 2008, 2007 and 2006, respectively.
Employee Benefit Plans
-
The Companys U.S. subsidiaries participate in a defined contribution 401(k) plan
covering substantially all U.S. employees.
Employees may invest 1% or more of their eligible compensation, limited
to maximum amounts as determined by the Internal Revenue Service. The Company
provides a matching contribution to the plan, determined as a percentage of the
employees contributions. Aggregate
expense to the Company for contributions to such plans was approximately
$730,000, $614,000 and $514,000 in 2008, 2007 and 2006, respectively.
Fair Value of Financial Instruments
- Financial instruments consist primarily of investments in cash and cash
equivalents, trade accounts receivable, accounts payable and debt
obligations. The Company estimates the
fair value of financial instruments based on interest rates available to the
Company and by comparison to quoted market prices. At December 31, 2008 and 2007, the carrying amounts of cash
and cash equivalents, accounts receivable, income taxes receivable and payable
and accounts payable are considered to be representative of their respective
fair values due to their short-term nature.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash, cash equivalents and accounts
receivable. The Companys excess cash
balances are invested with money center banks such as Wachovia and JP Morgan
Chase. Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers and their geographic dispersion
comprising the Companys customer base. The Company also performs on-going
credit evaluations and maintains allowances for potential losses as warranted.
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. Effective January 1,
2008 the Company adopted the provisions of SFAS No. 157, which did not
have a material impact on the Companys consolidated financial statements.
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2,
which provides for a one-year deferral of the provisions of SFAS No. 157
until fiscal years beginning after December 15, 2008 for non-financial
assets and liabilities that are recognized or disclosed at fair value in the
consolidated financial statements on a non-recurring basis. The Company is currently evaluating the
potential impact, if any, of FSP 157-2.
In
April 2008, the FASB issued FSP FAS 142-3 Determination of the Useful
Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets
.
The intent of this FSP is to improve the consistency between the useful life of
a recognized intangible asset and the period of expected cash flows used to
measure the fair value of the asset. The
standard applies prospectively to intangible assets acquired and/or recognized
on or after January 1, 2009. The Company is currently evaluating the
impact, if any, the adoption of this FSP may have on the Companys consolidated
financial statements.
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. 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 non-forfeitable 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 does
not expect the adoption of this FSP to have a material impact 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 No. 141R
establishes principles and requirements for how an acquirer 1) recognizes and
measures identifiable assets acquired, the liabilities assumed and any
non-controlling 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
46
Table of Contents
annual
periods beginning after December 15, 2008 and will be applied
prospectively for all business combinations entered into after the date of
adoption. The impact of SFAS No. 141R
will depend on the nature and terms of any future business combinations, if
any.
In
December 2007, the FASB issued SFAS No. 160, Accounting and
Reporting of Non-controlling Interest. The objective of SFAS No. 160 is
to improve the relevance, comparability and transparency of the financial
information that reporting entities provide related to non-controlling
interests, sometimes referred to as minority interests. SFAS No. 160
requires, among other things, that non-controlling 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 non-controlling interest, for consistency in accounting for
changes in a parents ownership interest when the parent retains a controlling
interest, for the valuation of retained non-controlling 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 non-controlling owners. SFAS No. 160 is effective beginning January 1,
2009. The Company does not expect the adoption of SFAS No.160 to have a
material impact on its consolidated financial statements.
2.
ACQUISITION
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 16 store leases and fixtures for an aggregate purchase
price of approximately $11.7 million. This acquisition accelerated the Companys
planned expansion into the retail market place in North America and Puerto
Rico. A final purchase price allocation based on the fair market value of
acquired assets 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, $3.4 million for Retail Store Leases, $0.4 million for Client
Lists, $0.9 million for fixed assets and $0.9 million for Goodwill. These
assets were recorded in the Companys Technology Products business segment. The
Company expects to amortize its Retail Store Leases over the remaining weighted
average life of the leases, 12.9 years, the Client Lists over a 5 year period
and depreciate its fixed assets over a similar period. All other intangible
assets are indefinite lived. All of the Companys goodwill at December 31,
2008 is deductible for tax purposes on a straight line basis over 15 years. The
gross carrying amount and accumulated amortization for amortizable intangible
assets at December 31, 2008 was as follows (in thousands):
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Retail store leases
|
|
$
|
3,410
|
|
$
|
220
|
|
Client lists
|
|
400
|
|
103
|
|
|
|
$
|
3,810
|
|
$
|
323
|
|
The aggregate amortization expense was approximately $0.3 million in
2008. The estimated amortization for future years ending December 31 is as
follows (in thousands):
2009
|
|
$
|
484
|
|
2010
|
|
322
|
|
2011
|
|
278
|
|
2012
|
|
269
|
|
2013
|
|
264
|
|
Thereafter
|
|
1,870
|
|
Total
|
|
$
|
3,487
|
|
47
Table of Contents
3.
PROPERTY, PLANT
AND EQUIPMENT
Property, plant and equipment, net consist of
the following (in thousands):
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Land and buildings
|
|
$
|
26,556
|
|
$
|
32,724
|
|
Furniture and fixtures, office, computer
and other equipment and software
|
|
92,377
|
|
82,838
|
|
Leasehold improvements
|
|
14,839
|
|
12,748
|
|
|
|
133,772
|
|
128,310
|
|
Less accumulated depreciation and
amortization
|
|
85,307
|
|
80,730
|
|
Property, plant and equipment, net
|
|
$
|
48,465
|
|
$
|
47,580
|
|
Included in property, plant and equipment are
assets under capital leases, as follows (in thousands):
|
|
2008
|
|
2007
|
|
Furniture and fixtures, office, computer
and other equipment
|
|
$
|
4,300
|
|
$
|
2,612
|
|
Less: Accumulated amortization
|
|
2,564
|
|
1,798
|
|
|
|
$
|
1,736
|
|
$
|
814
|
|
Depreciation charged to
operations for property, plant and equipment in 2008, 2007, and 2006 was $10.1
million, $8.8 million and $8.2 million, respectively.
4.
CREDIT
FACILITIES
The Company maintains a revolving credit agreement with a group of
financial institutions at an amount of $120 million (which may be increased by
up to $30 million, subject to certain conditions). The borrowings are secured
by all of the domestic and United Kingdom accounts receivable, the domestic
inventories of the Company, the Companys United Kingdom headquarters building
and the Companys shares of stock in its domestic and United Kingdom
subsidiaries. The credit facility expires and outstanding borrowings thereunder
are due on October 26, 2010. The borrowings under the agreement are
subject to borrowing base limitations of up to 85% of eligible accounts
receivable and up to 40% of qualified inventories. The interest on outstanding
advances is payable monthly, at the Companys option, at the agent banks base
rate (at December 31, 2008) plus 0.25% or the banks daily LIBOR rate (at December 31,
2008) plus 1.25% to 2.25%. The undrawn availability under the facility may not
be less than $15 million until the last day of any month in which the
availability net of outstanding borrowings is at least $70 million. The
facility also calls for a commitment fee payable quarterly in arrears of 0.375%
of the average daily unused portions of the facility. The revolving credit agreement requires that
a minimum level of availability be maintained. If such availability is not
maintained, the Company will be required to maintain a fixed charge coverage
ratio (as defined). The agreement contains certain other covenants, including
restrictions on capital expenditures and payments of dividends. We were in
compliance with all of the covenants as of December 31, 2008. As of December 31,
2008, eligible collateral under the agreement was $103.5 million and total
availability was $94.4 million. There were outstanding letters of credit of
$9.1 million and there were no outstanding advances.
The Companys
Netherlands subsidiary maintained a 5 million credit facility with a local
financial institution. Borrowings under the facility were secured by the
subsidiarys accounts receivable and are subject to a borrowing base limitation
of 85% of the eligible accounts. The facility expired during 2008. At December 31, 2007 there was 2.6
million ($3.9 million) of borrowings outstanding under this line with interest
payable at a rate of 7.05%.
The weighted average
interest rate on short-term borrowings was
5.1%, 7.5%,
and 7.8% in 2008, 2007 and 2006.
5.
ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current
liabilities consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Payroll and employee benefits
|
|
$
|
25,669
|
|
$
|
21,850
|
|
Income taxes payable
|
|
733
|
|
2,297
|
|
Freight
|
|
6,820
|
|
10,908
|
|
Deferred revenue
|
|
5,683
|
|
5,704
|
|
Advertising
|
|
5,286
|
|
4,785
|
|
Sales and VAT tax payable
|
|
8,061
|
|
2,140
|
|
Other
|
|
23,351
|
|
33,953
|
|
|
|
$
|
75,603
|
|
$
|
81,637
|
|
48
Table of Contents
6.
LONG-TERM
DEBT
Long-term debt consists of (in thousands):
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Capitalized equipment lease obligations
|
|
$
|
2,184
|
|
$
|
703
|
|
Less: current portion
|
|
773
|
|
449
|
|
|
|
$
|
1,411
|
|
$
|
254
|
|
The aggregate maturities of long-term debt
outstanding at December 31, 2008 are as follows (in thousands):
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Maturities
|
|
$
|
773
|
|
$
|
666
|
|
$
|
471
|
|
$
|
152
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
SHAREHOLDERS
EQUITY
Stock based compensation plans
The Company currently has four equity
compensation plans which reserve shares of common stock for issuance to key
employees, directors, consultants and advisors to the Company. The following is a description of these
plans:
The 1995 Long-term Stock Incentive Plan
- This plan, adopted in 1995, allowed the Company to issue qualified,
non-qualified and deferred compensation stock options, stock appreciation
rights, restricted stock and restricted unit grants, performance unit grants
and other stock based awards authorized by the Compensation Committee of the
Board of Directors. Options issued under
this plan expire ten years after the options are granted. The ability to
grant new awards under this plan ended on December 31, 2005 but awards
granted prior to such date continue until their expiration. A total of 762,688
options were outstanding under this plan as of December 31, 2008.
The 1995 Stock Option Plan for Non-Employee
Directors
- This plan, adopted in 1995, provides
for automatic awards of non-qualified options to directors of the Company who
are not employees of the Company or its affiliates. All options granted under
this plan will have a ten year term from grant date and are immediately
exercisable. A maximum of 100,000 shares may be granted for awards under this
plan. The ability to grant
new awards under this plan ended on October 12, 2006 but awards
granted prior to such date continue until their expiration. A total of 39,000
options were outstanding under this plan as of December 31, 2008.
The
1999 Long-term Stock Incentive Plan, as amended (1999 Plan)
- This plan was adopted on October 25, 1999 with substantially the same
terms and provisions as the 1995 Long-term Stock Incentive Plan. The Company increased the number of shares
that may be granted under this plan to a maximum of 7.5 million from 5.0
million shares. The maximum number of
shares granted per type of award to any individual may not exceed 1,500,000 in
any calendar year and 3,000,000 in total.
The Company extended the expiration date under this plan that no grants
shall be granted under this plan after December 31, 2010. The original
date was after December 31, 2009. Restricted stock grants and common stock
awards reduce stock options otherwise available for future grant. A total of
1,385,896 options and 600,000 restricted stock units were outstanding under
this plan as of December 31, 2008.
The 2006 Stock Incentive Plan For Non-Employee
Directors
This plan, adopted by the Companys stockholders on October 11, 2006,
replaces the 1995 Stock Option Plan for Non-Employee Directors. The Company
adopted the plan so that it could offer directors of the Company who are not
employees of the Company or of any entity in which the Company has more than a
50% equity interest (independent directors) an opportunity to participate in
the ownership of the Company by receiving options to purchase shares of common
stock at a price equal to the fair market value at the date of grant of the
option and restricted stock awards. Awards for a maximum of 200,000 shares may
be granted under this plan. A total of 15,000 options were outstanding under
this plan as of December 31
, 2008.
Shares issued
under our share-based compensation plans are usually issued from shares of our
common stock held in the treasury.
Adoption of SFAS 123(R)
Effective January 1,
2006, the Company adopted the provisions of SFAS 123(R), using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized for the year ended December 31, 2006
includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of SFAS 123, and (b) compensation
cost for the vested portion of share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R).
49
Table of Contents
The fair value of employee share options is recognized in expense over
the vesting period of the options, using the graded attribution method. The fair value of employee share options is
determined on the date of grant using the Black-Scholes option pricing model.
The Company has used historical volatility in its estimate of expected
volatility. The expected life represents the period of time (in years) for
which the options granted are expected to be outstanding. The Company used the
simplified method for determining expected life as permitted in SEC Staff
Accounting Bulletin 107 for options qualifying for treatment (plain-vanilla
options) due to the limited history the Company currently has with option
exercise activity. The risk-free interest rate is based on the U.S. Treasury
yield curve.
Compensation cost related to non-qualified stock options recognized in
operating results (selling, general and administrative expense) for 2008, 2007
and 2006 was $3,220,000, $3,435,000, and $1,756,000 respectively. The related
future income tax benefits recognized for 2008, 2007 and 2006 were $1,219,000,
$1,147,000 and $599,000, respectively.
Stock options
The following
table presents the weighted-average assumptions used to estimate the fair value
of options granted in 2008, 2007 and 2006:
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Expected annual dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Risk-free interest rate
|
|
3.17
|
%
|
4.93
|
%
|
4.76
|
%
|
Expected volatility
|
|
63.8
|
%
|
71.2
|
%
|
78.2
|
%
|
Expected life in years
|
|
6.3
|
|
6.2
|
|
6.0
|
|
The following table summarizes information concerning outstanding and
exercisable options:
|
|
Weighted Average
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Shares
|
|
Exercise
Price
|
|
Shares
|
|
Exercise
Price
|
|
Shares
|
|
Exercise
Price
|
|
Outstanding at beginning of year
|
|
2,655,937
|
|
$
|
7.95
|
|
2,629,076
|
|
$
|
4.69
|
|
2,657,419
|
|
$
|
3.93
|
|
Granted
|
|
110,000
|
|
$
|
12.90
|
|
699,050
|
|
$
|
19.45
|
|
479,334
|
|
$
|
8.01
|
|
Exercised
|
|
(503,078
|
)
|
$
|
2.25
|
|
(545,815
|
)
|
$
|
5.19
|
|
(480,203
|
)
|
$
|
3.33
|
|
Cancelled or expired
|
|
(60,275
|
)
|
$
|
17.77
|
|
(126,374
|
)
|
$
|
15.64
|
|
(27,474
|
)
|
$
|
12.84
|
|
Outstanding at end of year
|
|
2,202,584
|
|
$
|
9.23
|
|
2,655,937
|
|
$
|
7.95
|
|
2,629,076
|
|
$
|
4.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year end
|
|
1,560,804
|
|
|
|
1,645,639
|
|
|
|
1,891,426
|
|
|
|
Weighted average fair value per option
granted during the year
|
|
$
|
7.94
|
|
|
|
$
|
13.19
|
|
|
|
$
|
5.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options
exercised and share based payments made was $4,088,000, $6,517,000 and
$3,501,000, respectively, for 2008, 2007 and 2006.
The following table summarizes information
about options vested and exercisable or nonvested that are expected to vest
(nonvested outstanding less expected forfeitures) at December 31, 2008:
Range of Exercise Prices
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
|
$
|
1.76
|
to
|
$ 5.00
|
|
527,703
|
|
$
|
2.25
|
|
3.43
|
|
$
|
4,547
|
|
$
|
5.01
|
to
|
$ 15.00
|
|
1,037,331
|
|
$
|
6.75
|
|
5.72
|
|
4,324
|
|
$
|
15.01
|
to
|
$ 20.00
|
|
484,764
|
|
$
|
18.77
|
|
8.34
|
|
|
|
$
|
20.01
|
to
|
$ 20.15
|
|
100,000
|
|
$
|
20.15
|
|
7.91
|
|
|
|
$
|
1.76
|
to
|
$ 20.15
|
|
2,149,798
|
|
$
|
8.98
|
|
5.85
|
|
$
|
8,871
|
|
The aggregate intrinsic value in the tables above represents the total
pretax intrinsic value (the difference between the closing stock price on the
last day of trading in 2008 and the exercise price) that would have been
received by the option holders had all options been exercised on December 31,
2008. This value will change based on the fair market value of the Companys
common stock.
50
Table of Contents
The following table reflects the activity for all unvested stock
options during 2008:
|
|
Shares
|
|
Weighted
Average Grant-
Date Fair Value
|
|
Unvested at January 1, 2008
|
|
1,097,798
|
|
$
|
9.99
|
|
Granted
|
|
110,000
|
|
$
|
7.94
|
|
Vested
|
|
(429,518
|
)
|
$
|
6.94
|
|
Forfeited
|
|
(136,500
|
)
|
$
|
12.34
|
|
Unvested at December 31, 2008
|
|
641,780
|
|
$
|
11.18
|
|
At December 31, 2008, there was approximately $2,810,000 of
unrecognized compensation costs related to unvested stock options, which is
expected to be recognized over a weighted average period of 1.21 years. The
total fair value of stock options vested during 2008, 2007 and 2006 was
$2,981,000, $671,000 and $1,502,000, respectively.
Restricted Stock and Restricted Stock Units
In October 2004, the Company granted 1,000,000 restricted stock
units under the 1999 Plan to a key employee who is also a Company director. A
restricted stock unit represents the right to receive a share of the Companys
common stock. The restricted stock units have none of the rights as other
shares of common stock until common stock is distributed, other than rights to
cash dividends. The restricted stock unit award was a non-performance award
which vests at the rate of 20% on May 31, 2005 and 10% per year on April 1,
2006 and each year thereafter. The share-based expense for restricted stock
awards was determined based on the market price of the Companys stock at the
date of the award. Compensation expense related to the restricted stock award
was approximately $574,000 in each of 2008, 2007 and 2006. Share-based
compensation expense for restricted
stock issued to Directors was $75,000 in each of 2008, 2007 and 2006.
Share repurchase plan
In May 2008, the Companys Board of
Directors authorized the repurchase of up to 2,000,000 shares of the Companys
common stock. During 2008 the Company repurchased 475,301 common shares at a cost
of approximately $5.8 million, an average of $12.25 per share. Theses shares
are included in Common stock in treasury at cost in the Companys consolidated
balance sheet.
8.
INCOME TAXES
The components of income before income taxes
are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
United States
|
|
$
|
61,220
|
|
$
|
81,832
|
|
$
|
53,587
|
|
Foreign
|
|
22,523
|
|
18,191
|
|
16,108
|
|
Total
|
|
$
|
83,743
|
|
$
|
100,023
|
|
$
|
69,695
|
|
The provision for income taxes consists of
the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
15,753
|
|
$
|
26,174
|
|
$
|
15,437
|
|
State
|
|
4,106
|
|
4,842
|
|
3,179
|
|
Foreign
|
|
4,844
|
|
5,632
|
|
3,678
|
|
Total current
|
|
24,703
|
|
36,648
|
|
22,294
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
|
2,242
|
|
(1,004
|
)
|
1,235
|
|
State
|
|
154
|
|
277
|
|
511
|
|
Foreign
|
|
3,801
|
|
(5,379
|
)
|
508
|
|
Total deferred
|
|
6,197
|
|
(6,106
|
)
|
2,254
|
|
TOTAL
|
|
$
|
30,900
|
|
$
|
30,542
|
|
$
|
24,548
|
|
Income taxes are accrued and paid by each
foreign entity in accordance with applicable local regulations.
51
Table of Contents
A
reconciliation of the difference between the income tax expense and the
computed income tax expense based on the Federal statutory corporate rate is as
follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Income tax at Federal statutory rate
|
|
$
|
29,311
|
|
$
|
35,008
|
|
$
|
24,407
|
|
State and local income taxes and changes in
valuation allowances, net of federal tax benefit
|
|
3,036
|
|
3,332
|
|
2,577
|
|
Foreign taxes at rates different from the
U.S. rate
|
|
(940
|
)
|
(2,260
|
)
|
1,199
|
|
Changes in valuation allowances for foreign
deferred tax assets
|
|
(120
|
)
|
(6,184
|
)
|
(2,260
|
)
|
Tax credits
|
|
|
|
|
|
(718
|
)
|
Refunds- prior years
|
|
(872
|
)
|
|
|
|
|
Non-deductible items
|
|
|
|
963
|
|
|
|
Adjustment for prior year taxes
|
|
253
|
|
(593
|
)
|
(760
|
)
|
Other items, net
|
|
232
|
|
276
|
|
103
|
|
|
|
$
|
30,900
|
|
$
|
30,542
|
|
$
|
24,548
|
|
The deferred tax assets and liabilities are
comprised of the following (in thousands):
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Assets:
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
8,524
|
|
$
|
8,379
|
|
Inventory
|
|
1,899
|
|
2,374
|
|
Valuation allowances
|
|
|
|
(96
|
)
|
Total current assets
|
|
$
|
10,423
|
|
$
|
10,657
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
Net operating loss and credit carryforwards
|
|
$
|
8,834
|
|
$
|
12,462
|
|
Accelerated depreciation
|
|
1,089
|
|
3,494
|
|
Intangible and other assets
|
|
4,606
|
|
6,791
|
|
Other
|
|
5,300
|
|
3,196
|
|
Valuation allowances
|
|
(8,377
|
)
|
(7,291
|
)
|
Total
non-current assets
|
|
$
|
11,452
|
|
$
|
18,652
|
|
|
|
|
|
|
|
Liabilities
:
|
|
|
|
|
|
Current :
|
|
|
|
|
|
Deductible assets
|
|
$
|
753
|
|
$
|
773
|
|
Other
|
|
112
|
|
524
|
|
Total current liabilities
|
|
$
|
865
|
|
$
|
1,297
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
Accelerated depreciation
|
|
$
|
248
|
|
$
|
|
|
Other
|
|
6
|
|
3
|
|
Total
non-current liabilities
|
|
$
|
254
|
|
$
|
3
|
|
The Company
has not provided for federal income taxes applicable to the undistributed
earnings of its foreign subsidiaries of approximately $39.6 million as of December 31,
2008, since these earnings are considered indefinitely reinvested. The Company
has foreign net operating loss carryforwards which expire through 2022 except
for carryforwards in the United Kingdom which have no expiration. The Company records these benefits as assets
to the extent that utilization of such assets is more likely than not;
otherwise, a valuation allowance has been recorded. The Company has also provided valuation
allowances for certain state deferred tax assets and net operating loss
carryforwards where it is not likely they will be realized.
In the fourth
quarter of 2007 the Companys United Kingdom subsidiary emerged from its
cumulative loss position and the previously established valuation allowance
against the deferred tax assets of the United Kingdom of approximately $5.9
million was reversed. In the fourth quarter of 2007 the Company recorded a
valuation allowance of approximately $1.7 million against the deferred tax
assets of its German subsidiary as the result of the German subsidiary entering
a cumulative loss position and uncertainty as to whether or not future earnings
will be sufficient to enable utilization of those assets.
As of December 31,
2008, the valuation allowances of approximately $8.4 million related to net
operating loss carryforwards in foreign jurisdictions of $6.4 million, $2.0
million for state net operating loss carryforwards and $0.2 million for other
state deductible temporary differences. During 2008, valuation allowances
increased $1.4 million as a
52
Table of Contents
result of
additional losses incurred in foreign and state jurisdictions. Valuation allowances decreased $.7 million
in 2008 for carryforward losses utilized for which valuation allowances had
been previously provided. As of December 31, 2007, the valuation
allowances of $7.4 million included $6.0 million related to net operating loss
carryforwards in foreign jurisdictions, $1.2 million for state net operating
loss carryforwards and $0.2 million for other state deductible temporary
differences. During 2007, valuation allowances decreased $10.5 million
primarily as a result of the reversal of the valuation allowance in the United
Kingdom, utilization of net operating losses and timing differences in the
United Kingdom and utilization of state net operating loss deductions in the
United States. During 2006, valuation
allowances increased $2.6 million as a result of additional losses incurred in
certain state jurisdictions and adjustments of prior years allowances in
foreign jurisdictions.
The Company is
routinely audited by federal, state and foreign tax authorities with respect to
its income taxes. The Company regularly reviews and evaluates the likelihood of
audit assessments and believes it has adequately accrued for exposures for tax
liabilities resulting from future tax audits. To the extent the Company would
be required to pay amounts in excess of reserves or prevail on matters for
which accruals have been established, the Companys effective tax rate in a
given period may be materially impacted. The Companys federal income tax
returns for fiscal years 2005 and 2006 are currently under audit by the
Internal Revenue Service. The Company does not expect the outcome of the audit
to have a material impact on the Companys consolidated financial statements.
The Company has not signed any consents to extend the statute of limitations
for any subsequent years. The Companys significant state tax returns have been
audited through 2005. The Company considers its significant tax jurisdictions
in foreign locations to be the United Kingdom, Canada, France, Italy and
Germany. The Company remains subject to examination in the United Kingdom for
years after 2001, in
Canada for
years after 2000, in France for years after 2004, in Italy for years after
2002. Audits are currently ongoing in the Netherlands for 2006 and in Germany
for 2005 and 2006.
Effective January 1, 2007, the Company
adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty
in Income Taxes (FIN 48). FIN 48
clarifies the accounting and reporting for uncertainties in income tax
law. This interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. For those
benefits to be recognized, a tax position must be more-likely-than-not to be
sustained upon examination by taxing authorities. At January 1, 2007, the Company had a
liability for unrecognized tax benefits of $3,379,000 (including interest and
penalties of $731,000) of which $283,000 was charged to retained earnings at January 1,
2007. Of this total, $2,586,000 (net of
the federal benefit on state issues) represents the amount of unrecognized tax
benefits that, if recognized, would favorably affect the effective income tax
rate in any future periods. At December 31, 2007 the Company had a
liability for unrecognized tax benefits of $1,547,000 (including interest and
penalties of $631,000). Of this total, $1,467,000 (net of the federal benefit
on state issues) represents the amount of unrecognized tax benefits that, if
recognized, would favorably affect the effective income tax rate in any future
periods. The following table details activity of the Companys uncertain tax
positions during 2008 and 2007:
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Balance beginning of year
|
|
$
|
916
|
|
$
|
2,648
|
|
Decreases related to settlements with
taxing authorities
|
|
|
|
(1,732
|
)
|
Balance end of year
|
|
$
|
916
|
|
$
|
916
|
|
Interest and penalties
of approximately $46,000 and $69,000 related to unrecognized tax benefits were
expensed in 2008 and 2007 and are included in income tax expense. Additionally,
included in income tax expense in 2008 is an interest and penalty reserves
reversal of approximately $399,000 related to a state tax audit that was
settled favorably. Within the next twelve months the Company believes it
reasonably possible that these tax positions, related to foreign tax audits,
will be reduced.
9.
COMMITMENTS,
CONTINGENCIES AND OTHER MATTERS
Leases
- The Company is obligated under operating lease agreements for the rental
of certain office and warehouse facilities and equipment which expire at
various dates through September 2026. The Company currently leases its
headquarters office/warehouse facility in New York from an entity owned by the
Companys three principal shareholders and senior executive officers. The
Company believes that these payments were no higher than would be paid to an
unrelated lessor for comparable space. The Company also acquires certain
computer and communications equipment pursuant to capital lease obligations.
53
Table of Contents
At December 31,
2008, the future minimum annual lease payments for capital leases and related
and third-party operating leases were as follows (in thousands):
|
|
Capital
Leases
|
|
Operating
Leases
|
|
Total
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
905
|
|
$
|
19,131
|
|
$
|
20,036
|
|
2010
|
|
746
|
|
17,176
|
|
17,922
|
|
2011
|
|
508
|
|
15,960
|
|
16,468
|
|
2012
|
|
167
|
|
14,769
|
|
14,936
|
|
2013
|
|
125
|
|
13,066
|
|
13,191
|
|
2014-2018
|
|
|
|
38,602
|
|
38,602
|
|
2019-2023
|
|
|
|
13,476
|
|
13,476
|
|
Thereafter
|
|
|
|
3,552
|
|
3,552
|
|
Total minimum lease payments
|
|
2,451
|
|
135,732
|
|
138,183
|
|
Less: sublease rental income
|
|
|
|
122
|
|
122
|
|
Lease obligation net of subleases
|
|
2,451
|
|
$
|
135,610
|
|
$
|
138,061
|
|
Less amount representing interest
|
|
267
|
|
|
|
|
|
Present value of minimum capital lease
payments (including current portion of $773)
|
|
$
|
2,184
|
|
|
|
|
|
Annual rent expense aggregated approximately $24,993,000, $14,760,000
and $13,198,000 in 2008, 2007 and 2008, respectively. Included in rent expense
was $860,000, $612,000, and $612, 000 in 2008, 2007 and 2006, respectively, to
related parties.Rent expense is net of sublease income of $355,000, $853,000
and $937,000 for 2008, 2007 and 2006, respectively.
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. On February 11, 2009 the Court
dismissed Vuksons complaint with leave to file an amended complaint by February 19,
2009 but ordered that any amended complaint not include a request for punitive
damages. On February 19, 2009 Vukson filed an amended complaint with no
request for punitive damages, as ordered by the Court. 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.
Other matters
The Company has also been named as a defendant in other lawsuits in the
normal course of its business, including those involving commercial, tax,
employment and intellectual property related claims. Based on discussions with
legal counsel, management believes the ultimate resolution of these lawsuits
will not have a material effect on the Companys consolidated financial statements.
10.
SEGMENT AND RELATED
INFORMATION
The Company operates and
is internally managed in three operating segments, Technology Products,
Industrial Products and Software Solutions. The Companys chief operating
decision-maker is the Companys Chief Executive Officer. The Company evaluates
segment performance based on income from operations before net interest,
foreign exchange gains and losses, restructuring and other charges and income
taxes. Corporate costs not identified with the disclosed segments and
restructuring and other charges are grouped as Corporate and other expenses.
The chief operating decision-maker reviews assets and makes significant capital
expenditure decisions for the Company on a consolidated basis only. The
accounting policies of the segments are the same as those of the Company
described in Note 1.
54
Table of Contents
Financial information relating to the Companys operations by
reportable segment was as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Net Sales:
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
2,795,441
|
|
$
|
2,553,716
|
|
$
|
2,148,104
|
|
Industrial Products
|
|
237,027
|
|
225,746
|
|
196,860
|
|
Software Solutions
|
|
493
|
|
413
|
|
201
|
|
Consolidated
|
|
$
|
3,032,961
|
|
$
|
2,779,875
|
|
$
|
2,345,165
|
|
|
|
|
|
|
|
|
|
Depreciation Expense:
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
8,219
|
|
$
|
6,818
|
|
$
|
6,395
|
|
Industrial Products
|
|
986
|
|
1,023
|
|
1,040
|
|
Software Solutions
|
|
1,111
|
|
904
|
|
683
|
|
Corporate
|
|
71
|
|
35
|
|
67
|
|
Consolidated
|
|
$
|
10,387
|
|
$
|
8,780
|
|
$
|
8,185
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
96,177
|
|
$
|
100,958
|
|
$
|
68,843
|
|
Industrial Products
|
|
24,621
|
|
20,595
|
|
13,947
|
|
Software Solutions
|
|
(17,948
|
)
|
(15,813
|
)
|
(10,092
|
)
|
Corporate and other expenses
|
|
(19,483
|
)
|
(11,798
|
)
|
(11,968
|
)
|
Consolidated
|
|
$
|
83,367
|
|
$
|
93,942
|
|
$
|
60,730
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
400,037
|
|
$
|
331,033
|
|
$
|
230,512
|
|
Industrial Products
|
|
98,670
|
|
76,634
|
|
59,239
|
|
Software Solutions
|
|
3,531
|
|
3,783
|
|
3,068
|
|
Corporate
|
|
201,025
|
|
266,194
|
|
291,342
|
|
Consolidated
|
|
$
|
703,263
|
|
$
|
677,644
|
|
$
|
584,161
|
|
Financial information relating to the Companys operations by
geographic area was as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Net Sales:
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
1,660,902
|
|
$
|
1,451,046
|
|
$
|
1,268,579
|
|
Industrial Products
|
|
237,027
|
|
225,746
|
|
196,860
|
|
Software Solutions
|
|
493
|
|
413
|
|
201
|
|
United States total
|
|
1,898,422
|
|
1,677,205
|
|
1,465,640
|
|
Other North America (Technology Products)
|
|
193,950
|
|
170,272
|
|
135,619
|
|
Europe
|
|
940,589
|
|
932,398
|
|
743,906
|
|
Consolidated
|
|
$
|
3,032,961
|
|
$
|
2,779,875
|
|
$
|
2,345,165
|
|
|
|
|
|
|
|
|
|
Long-lived Assets:
|
|
|
|
|
|
|
|
North America principally United States
|
|
$
|
30,188
|
|
$
|
21,978
|
|
$
|
21,347
|
|
Europe
|
|
18,277
|
|
25,602
|
|
27,239
|
|
Consolidated
|
|
$
|
48,465
|
|
$
|
47,580
|
|
$
|
48,586
|
|
Net sales are attributed to countries based
on location of selling subsidiary.
55
Table of Contents
11.
QUARTERLY FINANCIAL DATA
(UNAUDITED)
Quarterly financial data is as follows (in thousands, except for per
share amounts):
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
(1
)
|
|
2008:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
724,737
|
|
$
|
756,035
|
|
$
|
739,479
|
|
$
|
812,710
|
|
Gross profit
|
|
$
|
114,680
|
|
$
|
116,048
|
|
$
|
116,469
|
|
$
|
116,948
|
|
Net income
|
|
$
|
18,061
|
|
$
|
13,541
|
|
$
|
11,273
|
|
$
|
9,968
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.50
|
|
$
|
.37
|
|
$
|
.31
|
|
$
|
.27
|
|
Diluted
|
|
$
|
.48
|
|
$
|
.36
|
|
$
|
.30
|
|
$
|
.27
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
676,122
|
|
$
|
647,102
|
|
$
|
687,317
|
|
$
|
769,334
|
|
Gross profit
|
|
$
|
96,674
|
|
$
|
99,318
|
|
$
|
110,653
|
|
$
|
119,656
|
|
Net income
|
|
$
|
13,895
|
|
$
|
13,762
|
|
$
|
17,644
|
|
$
|
24,180
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.39
|
|
$
|
.38
|
|
$
|
.49
|
|
$
|
.67
|
|
Diluted
|
|
$
|
.37
|
|
$
|
.37
|
|
$
|
.47
|
|
$
|
.64
|
|
(1) During the fourth quarter of 2007 the Company recorded a write
down of certain assets in Europe of approximately $6.7 million and a reversal
of certain liabilities in a domestic location of approximately $3.9 million.
56
Table of Contents
SYSTEMAX
INC.
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS
For the years ended December:
(in thousands)
Description
|
|
Balance at
Beginning of
Period
|
|
Charged to
Expenses
|
|
Write-offs
|
|
Other
|
|
Balance at
End of Period
|
|
Allowance for sales returns and doubtful
accounts
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
12,122
|
|
$
|
2,424
|
|
$
|
(5,400
|
)
|
|
|
$
|
9,146
|
|
2007
|
|
$
|
11,585
|
|
$
|
4,575
|
|
$
|
(4,038
|
)
|
|
|
$
|
12,122
|
|
2006
|
|
$
|
12,686
|
|
$
|
1,503
|
|
$
|
(2,604
|
)
|
|
|
$
|
11,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
96
|
|
|
|
|
|
$
|
(96
|
)
|
$
|
|
|
Noncurrent (1)
|
|
$
|
7,291
|
|
$
|
1,996
|
|
$
|
(64
|
)
|
$
|
(846
|
)
|
$
|
8,377
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
738
|
|
|
|
$
|
(467
|
)
|
$
|
(175
|
)
|
$
|
96
|
|
Noncurrent (1)
|
|
$
|
17,141
|
|
$
|
2,842
|
|
$
|
(11,408
|
)
|
$
|
(1,284
|
)
|
$
|
7,291
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
527
|
|
$
|
136
|
|
|
|
$
|
75
|
|
$
|
738
|
|
Noncurrent (1)
|
|
$
|
14,779
|
|
$
|
2,743
|
|
$
|
(2,260
|
)
|
$
|
1,879
|
|
$
|
17,141
|
|
(1) Charges to expense are net of
reductions resulting from changes in deferred tax assets due to changes in tax
laws.
57
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