Table of
Contents
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended December 31,
2009
or
o
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TRANSITION REPORT PURSUANT TO
SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period
from to
Commission File Number: 1-13792
Systemax
Inc.
(Exact name of registrant as
specified in its charter)
Delaware
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11-3262067
|
(State or other jurisdiction of
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(I.R.S. Employer
|
incorporation or organization)
|
|
Identification No.)
|
11
Harbor Park Drive
Port
Washington, New York 11050
(Address
of principal executive offices, including zip code)
Registrants
telephone number, including area code:
(516) 608-7000
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
|
Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
o
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
o
No
x
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
o
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 (Check one):
Large Accelerated Filer
o
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|
Accelerated Filer
x
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Non-Accelerated Filer
o
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|
Smaller reporting company
o
|
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, 2009, which
is the last business day of the registrants most recently completed second
fiscal quarter, was approximately $117,681,986. 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 5,
2010 was 36,457,941 shares.
Documents incorporated by reference: Portions of the Proxy Statement of
Systemax Inc. relating to the 2010 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:
·
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
·
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 associated
with delivery of merchandise to customers by utilizing common delivery services
·
the effect on
us of volatility in the price of paper and periodic increases in postage rates
·
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.
3
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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) and related products that we assemble ourselves and
sell on a private label basis,
substantially
all of our products are manufactured by other companies.
Technology
Products accounted for 94%, 92% and 92% of our net sales in 2009, 2008, and
2007, respectively.
Our
Industrial Products segment sells a wide array of material handling equipment,
storage equipment and consumable industrial items which are marketed in North
America. Most of these products are manufactured by other companies. Some products are manufactured for us to our
own design and marketed on a private label basis
.
.
Industrial products accounted for 6%, 8% and 8% of our net sales in
2009, 2008, and 2007, respectively.
In
June, 2009, the Company announced plans to exit the Software Solutions segment
as the result of economic conditions and difficulties in marketing the segments
products successfully (See Note 7
to the Consolidated
Financial Statements included in Item 15 of this Form 10-K.
). Our Software
Solutions segment participated in the emerging market for on-demand, web-based
business software applications through the marketing of our PCS ProfitCenter
Software
application. As of December 31,
2009, substantially all of the third party business activities of the Software
Solutions segment had been ended.
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 1949. Our
headquarters office is located at 11 Harbor Park Drive, Port Washington, New
York.
Recent
Developments
On
September 18, 2009, the Company acquired WStore Europe SA and its
subsidiaries, (WStore), a European supplier of business IT products and
software solutions with operations in France and the United Kingdom. The
purchase price (after giving effect to the conversion of Euros to U.S. dollars)
was approximately $4.4 million in cash, $2.2 million of which was placed into
an escrow account for one year to secure the sellers indemnification
obligations under the purchase agreement. This acquisition expands the Companys
business in France and, to a lesser extent, the United Kingdom.
On
April 5, 2009, the Company acquired certain intellectual property and
ecommerce assets owned Circuit City Stores, Inc. and Circuit City Stores
West Coast, Inc. (the Sellers) for $14.0 million in cash. In addition,
the Company will pay the Sellers a royalty based on a percentage of sales over
a thirty month period dependent upon levels of sales achieved from the acquired
assets, with a minimum payment of $3.0 million. This acquisition expands the
Companys ecommerce market.
Products
We
offer hundreds of thousands of 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.
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Our
computer product include desktops, laptops and notebooks and are primarily
offerings of brand name original equipment manufacturers, as well as our own
private label 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 private label PCs in our 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.
Our
industrial products include material handling equipment, storage and
shelving equipment, work benches, packaging supplies, furniture and office
products, food service equipment and supplies, janitorial and maintenance
supplies, HVAC, electrical and plumbing supplies and consumable industrial
products such as first aid items, safety items, protective clothing and OSHA
compliance items.
Sales and Marketing
We
market our products to both individual consumers and business customers. Our
business customers include for-profit businesses, educational organizations and
government entities. We have developed numerous proprietary customer and
prospect databases.
We
continue to have strong growth in sales to individual consumers, through
e-commerce means and retail stores. 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. Over the past several years, the Company has expanded its brick and
mortar retail operations through the CompUSA acquisition and by opening new
stores.
We
have established a multi-faceted direct marketing system to business customers,
consisting primarily of our 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, 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.
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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:
North
America
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Europe
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www.tigerdirect.com
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www.misco.co.uk
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www.compusa.com
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www.misco.de
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www.circuitcity.com
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www.misco.fr
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www.compusagoved.com
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www.misco.nl
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www.compusabusiness.com
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www.misco.it
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www.tigerdirect.ca
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www.misco.es
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www.infotelusa.com
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www.misco.se
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www.globalcomputer.com
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www.misco.at
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www.globalgoved.com
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www.misco.ch
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www.systemaxpc.com
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www.misco.be
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www.dealopro.com
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www.globalindustrial.com
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www.misco.ie
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www.wstore.co.uk
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www.inmac-wstore.com
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www.wstore.fr
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www.inmac-wstore.eu
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www.inmac-wstore.fr
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www.inmac.com
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www.dealopro.com
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www.dealopro.fr
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We
are continually upgrading the capabilities and performance of these websites.
Our internet sites feature on-line catalogs of hundreds 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 websites, we have partnering agreements with
several of the largest internet shopping and search engine providers who
feature our products on their websites 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 15 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 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
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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, which reduces overall catalog expense and
shortens catalog production time. . 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
increased focus on internet advertising, the distribution of our catalogs
decreased to 46 million in 2009, which was 26.9% less than in the prior year.
In 2009, we mailed approximately 38 million catalogs in North America, a 18.5%
decrease from last year and approximately 8 million catalogs in Europe, or
51.3% fewer than 2008.
Customer Service, Order Fulfillment and Support
We
receive orders through the internet, by telephone, electronic data interchange
and by fax. We generally provide toll-free telephone number access for our
customers in countries where it is customary. Certain domestic call centers are
linked to provide telephone backup in the event of a disruption in phone
service.
Certain
of our products are carried in stock, and orders for such products are
fulfilled on a timely basis directly from our distribution centers, typically
within one the day of the order. We operate out of multiple sales and
distribution facilities in North America and Europe. Orders are generally
shipped by third-party delivery services. 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 private label 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. In 2009, one vendor accounted
for 12.0% of our purchases and another vendor accounted for 11.3% of our
purchases. One vendor accounted for 12.0% and 14.4% of our purchases in 2008
and 2007, respectively. The loss of these vendors, 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
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.
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-
7
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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,
reductions in retail prices, as we experienced in 2009, would 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 small
dealerships, direct mail distribution, internet-based resellers, large warehouse
stores and retail outlets. 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 sales representatives, catalog and the internet are effective and
convenient distribution methods 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
In
June 2009, the Company announced plans to exit the Software Solutions segment
as the result of economic conditions and difficulties in marketing the segments
products successfully (See Note 7
to the Consolidated
Financial Statements included in Item 15 of this Form 10-K
). Our Software
Solutions segment participated in the emerging market for on-demand, web-based
business software applications through the marketing of our PCS ProfitCenter
Software
application. As of December 31,
2009 substantially all of the third party business activities of the Software
Solutions segments had been ended.
Employees
As
of December 31, 2009, we employed a total of approximately 5,000
employees, of whom 3,500 were in North America and 1,500 were in Europe.
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Seasonality
As the Companys consumer channel sales have grown significantly in the
past few years, the fourth quarter has represented a greater portion of annual
sales than historically. 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 Western 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 33.5%,
37.9% and 39.7% of our net sales during 2009, 2008 and 2007, respectively 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):
|
|
North
America
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Europe
|
|
Total
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|
2009
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,317,475
|
|
$
|
848,520
|
|
$
|
3,165,995
|
|
Operating income
|
|
$
|
62,070
|
|
$
|
11,321
|
|
$
|
73,391
|
|
Identifiable assets
|
|
$
|
591,990
|
|
$
|
224,911
|
|
$
|
816,901
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,092,372
|
|
$
|
940,589
|
|
$
|
3,032,961
|
|
Operating income
|
|
$
|
62,268
|
|
$
|
21,099
|
|
$
|
83,367
|
|
Identifiable assets
|
|
$
|
552,459
|
|
$
|
149,994
|
|
$
|
702,453
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,847,477
|
|
$
|
932,398
|
|
$
|
2,779,875
|
|
Operating income
|
|
$
|
82,365
|
|
$
|
11,577
|
|
$
|
93,942
|
|
Identifiable assets
|
|
$
|
488,761
|
|
$
|
185,110
|
|
$
|
673,871
|
|
See Item 7, Managements Discussions and Analysis of Financial
Condition and Results of Operations, for further information with respect to
our operations.
9
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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 website 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 website (www.sec.gov). The information on our website
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 website (www.systemax.com).
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
·
General
economic conditions, such as decreased consumer confidence and spending,
reductions in manufacturing capacity, and inflation could result in our failure
to achieve our historical sales growth rates and profit levels.
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. With conditions in the market for technology products
remaining highly competitive, reductions in our retail prices, as we
experienced in 2009, would adversely affect our revenues and profits. It
is also possible that as manufacturers react to the marketplace they may reduce
manufacturing capacity or allocations to their customers 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
limit price reductions and maintain our margins,
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
our sales, prices and
profitability
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
10
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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 with our restructuring actions may be higher
than our estimates of such costs and/or may not lead to the anticipated cost
savings.
·
The
markets for our products and services are extremely competitive and if we are
unable to successfully respond to our competitors strategies our sales and
gross margins will be adversely affected.
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
most 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 sales tax laws may be changed which could
result in ecommerce and direct mail retailers having to collect sales taxes in
states where the current laws do not require us to do so. This could reduce demand for our products in
such states and could result in us having substantial tax liabilities for past
sales.
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 e-commerce and/or direct mail 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.
11
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·
Events such as acts of war or terrorism, natural
disasters, changes in law, or large losses could adversely affect our insurance
coverage and insurance expense, resulting in an adverse affect on our
profitability 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.
·
Changes in accounting standards or practices, as
well as new accounting pronouncements or interpretations, may require us to account
for and report our financial results in a different manner in the future, which
may be less favorable than the manner used historically.
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
·
We rely to a great extent on our information and
telecommunications systems, and significant system failures or outages, or our
failure to properly evaluate, upgrade or replace our systems, or the failure of
our security/safety measures to protect our systems and websites, could have an
adverse affect on our results of operations.
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 websites, and applications could be
adversely affected by viruses or worms and may be vulnerable to malicious acts
such as hacking.
The availability and efficiency of sales via our
websites could also be adversely affected by denial of service attacks and
other unfair competitive practices.
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 rely on third party suppliers for most of our
products and services. The loss or interruption of these relationships could
impact our sales volumes, the levels of inventory we must carry, and/or result
in sales delays and/or higher inventory costs from new suppliers. Coop advertising and other sales incentives
provided by our suppliers could decrease in the future thereby increasing our
expenses and adversely affecting our results of operations and cash flows.
12
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We
purchase substantially all of our computer products from major distributors and
directly from large manufacturers 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 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, CircuitCity and the purchase of the
stock of WStore Europe SA resulted in the recording of significant intangible
assets and or goodwill. We are required to test goodwill and intangible assets
annually to determine if the carrying values of these assets are impaired 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.
·
Our substantial international operations are
subject to risks such as fluctuations in currency rates (which can adversely
impact foreign revenues and profits when translated to US Dollars), foreign
regulatory requirements, political uncertainty and the management of our
growing international operations
.
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
13
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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 33.5% of our revenue during 2009. 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 various inventory risks, such
as
being unable to profitably
resell excess or obsolete inventory and/or the loss of product return rights
and price protection from our vendors; such events could lower our gross
margins or result in inventory write-downs that would reduce reported future
earnings.
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.
·
If we fail to observe certain restrictions and
covenants under our credit facilities the lenders could refuse to waive such
default, terminate the credit facility and demand immediate repayment, which
would adversely affect our cash position and materially adversely affect our
operations.
Our United States/United Kingdom combined revolving credit agreement
contains covenants restricting or limiting our ability to, among other things:
·
incur additional debt
·
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 of any
outstanding borrowings, which could 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
in North America and to maintain their profitability we must effectively manage
our growth and cost structure, such as inventory needs, point of sales systems,
personnel and lease expense.
We
have 34 retail stores in North America at December 31 2009, a significant
increase over 2008. The Company needs 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
.
14
Table of
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·
The failure to timely and satisfactorily process
manufacturers and our own rebate programs could negatively impact our customer
satisfaction levels
.
Similar
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.
·
We may
be unable to reduce prices in reaction to competitive pressures, or implement
cost reductions or new product line expansion to address gross profit and
operating margin pressures; failure to mitigate these pressures could adversely
affect our operating results and financial condition
.
The
computer and consumer electronics industry is highly price competitive and
gross profit margins are narrow and variable. The Companys ability to further
reduce prices in reaction to competitive pressure is limited. Additionally,
gross 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 continued to be prevalent in 2009 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
depend on bank credit facilities to address our working capital and cash flow
needs from time to time, and if we are unable to renew or replace these
facilities, or borrowing capacity were to be reduced our liquidity and capital
resources may be adversely affected.
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.
We would be exposed to liability, including substantial fines and penalties
and, in extreme cases, loss of our ability to accept credit cards, in the event
our privacy and data security policies and procedures are inadequate to prevent
security breaches of our consumer personal information and credit card
information records.
In
processing our sales orders we often collect personal information and credit
card information from our customers. The Company has 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
15
Table of
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of
our privacy and data security practices or other related claims. Further, the
Company has not yet achieved full compliance with the Payment Card Industry (PCI)
security standards. Without full compliance any breach involving the loss of
credit card information may lead to PCI related fines of up to $500,000. In the
event of a severe breach credit card providers may prevent the accepting of
credit cards. Any such liability related to the aforementioned risks could lead
to reduced profitability and damage our brand(s) and or reputation.
·
Sales to individual customers expose us to credit
card fraud, which impacts our operations.
If we fail to adequately protect ourselves from credit card fraud, our
operations could be adversely impacted.
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 profitability can be adversely affected by
increases in our income tax exposure due to, among other things, changes in the
mix of U.S. and non-U.S. revenues and earnings, changes in tax rates or laws,
changes in our effective tax rate due to changes in the mix of earnings among
different countries and changes in valuation of our deferred tax assets and
liabilities.
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.
16
Table
of Contents
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We
operate our business from numerous facilities in North America and
Europe. These facilities include our headquarters location,
administrative offices, telephone call centers, distribution centers, computer
assembly and retail stores. Certain facilities handle multiple
functions. Most of our facilities are leased; certain are owned by the
Company.
North America
As
of December 31, 2009 we have 6 distribution centers in North America which
aggregate approximately 1.2 million square feet, all of which are leased.
Our headquarters, administrative offices and call centers aggregate
approximately 250,000 square feet, all of which are leased. Our computer
assembly facility is 297,000 square feet and is owned by the Company.
The
following table summarizes the geographic location of our North America stores
at the end of 2009:
Location
|
|
Stores Open 12/31/08
|
|
Store Openings
|
|
Stores Open 12/31/09
|
|
Delaware
|
|
|
|
1
|
|
1
|
|
Florida
|
|
15
|
|
3
|
|
18
|
|
Illinois
|
|
3
|
|
|
|
3
|
|
North
Carolina
|
|
2
|
|
|
|
2
|
|
Puerto
Rico
|
|
1
|
|
|
|
1
|
|
Texas
|
|
3
|
|
1
|
|
4
|
|
Ontario,
Canada
|
|
5
|
|
|
|
5
|
|
|
|
29
|
|
5
|
|
34
|
|
All
of our retail stores are leased. The retail stores average 21,700 square
feet.
Europe
As
of December 31, 2009 we have 7 distribution centers in Europe which
aggregate approximately 300,000 square feet. Six of these, aggregating
approximately 224,000 square feet, are leased; one distribution center of
approximately 76,000 square feet is owned by the Company. Our
administrative offices and call centers aggregate approximately 254,000 square
feet, of which 176,000 square feet are leased and 78,000 square feet are owned
by the Company.
Please refer to Note 10 to the Consolidated Financial Statements for
additional information about leased properties.
17
Table of Contents
Item 3. Legal Proceedings.
State of Florida, Office of
the Attorney General
On September 4, 2009,
the Office of the Attorney General, Department of Legal Affairs for the State
of Florida filed a lawsuit against OnRebate.com Inc, TigerDirect Inc. and
Systemax Inc. in the Circuit Court of the Eleventh Judicial Court for
Miami-Dade County, Florida alleging deceptive and unfair trade practices under
Florida law relating to the offering and processing of customer rebates.
The lawsuit seeks injunctive relief, damages, civil penalties and other
equitable relief. The Company denies the allegations in the lawsuit and
intends to vigorously defend the case.
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 NYSE Euronext 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
|
|
2009
|
|
|
|
|
|
First Quarter
|
|
$
|
14.19
|
|
$
|
9.12
|
|
Second Quarter
|
|
17.30
|
|
11.25
|
|
Third Quarter
|
|
14.29
|
|
11.34
|
|
Fourth Quarter
|
|
16.46
|
|
12.00
|
|
|
|
|
|
|
|
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
|
|
On January 2, 2010, the last reported sale price of our common
stock on the New York Stock Exchange was $15.71 per share. As of January 2, 2010, we had 215
shareholders of record.
On November 16, 2009, the Companys Board of Directors declared a
special dividend of $.75 per share payable on December 15, 2009 to
shareholders of record on December 1, 2009. This special dividend is the
third 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 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.
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 2009
the Company repurchased 98,934 common shares. Details of all repurchases are as
follows:
19
Table of Contents
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 2008
|
|
228,401
|
|
$
|
15.04
|
|
228,401
|
|
1,771,599
|
|
December 2008
|
|
246,900
|
|
$
|
9.67
|
|
475,301
|
|
1,524,699
|
|
March 2009
|
|
32,444
|
|
$
|
11.63
|
|
507,745
|
|
1,492,255
|
|
May 2009
|
|
29,200
|
|
$
|
12.02
|
|
536,945
|
|
1,463,055
|
|
June 2009
|
|
37,290
|
|
$
|
11.97
|
|
574,235
|
|
1,425,765
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
574,235
|
|
$
|
12.19
|
|
|
|
|
|
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 2010 annual
meeting of shareholders and is incorporated by reference herein.
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 2009, 2008 and 2007 and the selected balance
sheet data as of December 2009 and 2008 are derived from the audited
consolidated financial statements which are included elsewhere in this report.
The selected balance sheet data as of December 2007, 2006 and 2005 and the
selected statement of operations data for fiscal years 2006 and 2005 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)
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
Statement
of Operations Data
:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,166.0
|
|
$
|
3,033.0
|
|
$
|
2,779.9
|
|
$
|
2,345.2
|
|
$
|
2,115.5
|
|
Gross profit
|
|
$
|
460.2
|
|
$
|
458.6
|
|
$
|
426.3
|
|
$
|
342.9
|
|
$
|
307.3
|
|
Operating income
|
|
$
|
73.4
|
|
$
|
83.4
|
|
$
|
93.9
|
|
$
|
60.7
|
|
$
|
37.2
|
|
Net income
|
|
$
|
46.2
|
|
$
|
52.8
|
|
$
|
69.5
|
|
$
|
45.1
|
|
$
|
11.4
|
|
Per Share
Amounts
:
|
|
|
|
|
|
|
|
|
|
|
|
Net income diluted (1)
|
|
$
|
1.24
|
|
$
|
1.40
|
|
$
|
1.84
|
|
$
|
1.22
|
|
$
|
.31
|
|
Weighted average common
shares diluted
|
|
37.3
|
|
37.7
|
|
37.8
|
|
36.9
|
|
36.5
|
|
Cash dividends declared per common share
|
|
$
|
.75
|
|
$
|
1.00
|
|
$
|
1.00
|
|
$
|
|
|
$
|
|
|
Balance
Sheet Data
:
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
250.1
|
|
$
|
253.1
|
|
$
|
274.4
|
|
$
|
229.4
|
|
$
|
169.8
|
|
Total assets
|
|
$
|
816.9
|
|
$
|
702.5
|
|
$
|
677.6
|
|
$
|
584.1
|
|
$
|
504.5
|
|
Long-term debt, excluding
current portion
|
|
$
|
1.2
|
|
$
|
1.4
|
|
$
|
.3
|
|
$
|
.5
|
|
$
|
8.0
|
|
Shareholders equity
|
|
$
|
364.7
|
|
$
|
334.0
|
|
$
|
335.8
|
|
$
|
289.5
|
|
$
|
232.8
|
|
(1)
previous years have been restated in accordance with accounting guidance
concerning participating securities
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 and related products that we assemble
ourselves and sell on a private label basis, substantially all of our products
are manufactured by other companies. We
also sell private label brands.
Technology products accounted for
94%, 92% and 92% of our net sales in 2009, 2008 and 2007, respectively.
Our Industrial Products
segment sells a wide array of material handling equipment, storage equipment,
and consumable industrial items which are marketed in North America. Most of these products are manufactured by other
companies. Some products are
manufactured for us to our own design and marketed under the trademarks
Global
,
GlobalIndustrial.com
and
Nexel.
Industrial products accounted
for 6
%,
8% and 8%
, of our net sales in
2009,
2008 and 2007, respectively
. In both of these product groups, we offer our
customers a broad selection of products, prompt order fulfillment and extensive
customer service.
The Company announced plans
to exit the Software Solutions segment during the second quarter of 2009 as a
result of economic conditions and difficulties in marketing the segments
products successfully. (See Note 7 to the
Consolidated Financial
Statements included in Item 15 of this Form 10-K
). As of December 31,
2009 substantially all of the third party business activities of the Software
Solutions segments had been ended
.
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 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 third quarter of 2009, the Company acquired WStore Europe SA and its
subsidiaries, (WStore), a European supplier of business IT products and
software solutions with operations in France and the United Kingdom for
approximately $4.4 million in cash (see Financial Condition, Liquidity and
Capital Resources and Note 2 to the Consolidated Financial Statements included
in Item 15 of this Form 10-K).
During
the second quarter of 2009, the Company purchased certain intellectual property
and ecommerce assets owned by Circuit City Stores, Inc. and Circuit City
Stores West Coast, Inc for $14.0 million in cash plus a sales-based royalty
over 30 months (See Note 2 to the Consolidated Financial Statements included in
Item 15 of this Form 10-K).
21
Table of
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Critical
Accounting Policies and Estimates
Our
significant accounting policies are described in Note 1 to the
Consolidated
Financial Statements included in Item 15 of this Form 10-K
. 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.
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.
Allowance
for Doubtful Accounts Receivable
. 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.
Inventory
valuation
. 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 relevant accounting guidance in our valuation of goodwill,
trademarks, domain names, client lists and other intangible assets. Relevant
accounting guidance requires that goodwill and indefinite lived intangibles be
reviewed at least annually for impairment or more frequently if indicators of
impairment exist. 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 and in their depreciation and amortization methods and lives. 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.
22
Table of
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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 depends 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
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 the entire
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
Public companies in the
United States are subject to the accounting and reporting requirements of
various authorities, including the Financial Accounting Standards Board
(FASB) and the Securities and Exchange Commission (SEC). These authorities
issue numerous pronouncements, most of which are not applicable to the
Companys current or reasonably foreseeable operating structure. Below are the
new authoritative pronouncements that management believes are relevant to the
Companys current operations.
In
October 2009, the FASB issued amended guidance related to revenue
recognition in multiple-deliverable revenue arrangements and certain arrangements
that include software elements. This standard
23
Table of
Contents
eliminates
the residual method of revenue allocation by requiring entities to allocate
revenue in an arrangement to all of the deliverables based upon the relative
selling prices of the delivered goods and services The FASB also issued a new accounting
standard in October 2009, which changes revenue recognition for tangible
products containing software and hardware elements. Under this standard,
tangible products containing software and hardware that function together to
deliver the tangible products essential functionality are scoped out of the
existing software revenue recognition guidance and will be accounted for under
the multiple-element arrangements revenue recognition guidance discussed above.
Both standards are effective for fiscal years beginning on or after June 15,
2010. The Company is currently evaluating the impact, if any, of the adoption
of this standard on our consolidated financial position and results of
operations.
Effective January 1,
2009, the Company adopted authoritative guidance that establishes principles
and requirements for how an acquirer in a business combination (i) recognizes
and measures in its financial statements the identifiable assets acquired,
liabilities assumed, and any non-controlling interest in the acquiree, (ii) recognizes
and measures goodwill acquired in a business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to
enable users of financial statements to evaluate the nature and financial
effects of the business combination. This guidance is applied prospectively for
all business combinations entered into after the date of adoption. In the third
quarter of 2009 the Company expensed approximately $0.8 million of costs that
would have been capitalized under previous guidance.
In June 2008, FASB
issued authoritative guidance to clarify that instruments granted in
share-based payment transactions can be participating securities prior to the
requisite service having been rendered. The guidance applies to the calculation
of Earnings Per Share (EPS) 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 guidance became
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 is adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data). The Company adopted this
authoritative guidance in January 2009 and it did not have a material
impact on its condensed consolidated financial statements.
Highlights from 2009
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 4.4% to $3.2 billion in
2009 over 2008.
·
Completed CircuitCity.com asset purchase and
WStore Europe SA and Subsidiaries (WStore) stock purchase.
·
Opened five new retail stores.
·
Exited unprofitable Software Solutions
segment.
·
Diluted earnings per share declined to
$1.24 from $1.40 in 2008.
·
Movements in exchange rates negatively impacted
European and Canadian sales by approximately $103.6 million and $17.3 million,
respectively.
·
52 weeks in 2009 and 2007 vs. 53 weeks in
2008.
24
Table of Contents
Results of
Operations
Key Performance
Indicators (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
%
Change
|
|
2008
|
|
2007
|
|
%
Change
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
$
|
2,967,896
|
|
$
|
2,795,441
|
|
6.2
|
%
|
$
|
2,795,441
|
|
$
|
2,553,716
|
|
9.5
|
%
|
Industrial products
|
|
196,129
|
|
237,027
|
|
(17.3
|
)%
|
237,027
|
|
225,746
|
|
5.0
|
%
|
Software solutions
|
|
1,970
|
|
493
|
|
299.6
|
%
|
493
|
|
413
|
|
19.4
|
%
|
Total net sales
|
|
$
|
3,165,995
|
|
$
|
3,032,961
|
|
4.4
|
%
|
$
|
3,032,961
|
|
$
|
2,779,875
|
|
9.1
|
%
|
Net sales by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,317,475
|
|
$
|
2,092,372
|
|
10.8
|
%
|
$
|
2,092,372
|
|
$
|
1,847,477
|
|
13.3
|
%
|
Europe
|
|
848,520
|
|
940,589
|
|
(9.8
|
)%
|
940,589
|
|
932,398
|
|
.9
|
%
|
Total net sales
|
|
$
|
3,165,995
|
|
$
|
3,032,961
|
|
4.4
|
%
|
$
|
3,032,961
|
|
$
|
2,779,875
|
|
9.1
|
%
|
Consolidated gross profit
|
|
$
|
460,248
|
|
$
|
458,559
|
|
.4
|
%
|
$
|
458,559
|
|
$
|
426,301
|
|
7.6
|
%
|
Consolidated gross margin
|
|
14.5
|
%
|
15.1
|
%
|
(.6
|
)%
|
15.1
|
%
|
15.3
|
%
|
(.2
|
)%
|
Consolidated selling, general and administrative costs
|
|
$
|
386,857
|
|
$
|
375,192
|
|
3.1
|
%
|
$
|
375,192
|
|
$
|
332,359
|
|
12.9
|
%
|
Consolidated
selling,
general and administrative
costs as % of sales
|
|
12.2
|
%
|
12.4
|
%
|
(.2
|
)%
|
12.4
|
%
|
12.0
|
%
|
.4
|
%
|
Operating income (loss) by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
$
|
87,127
|
|
$
|
96,177
|
|
(9.4
|
)%
|
$
|
96,177
|
|
$
|
100,958
|
|
(4.7
|
)%
|
Industrial products
|
|
15,415
|
|
24,621
|
|
(37.4
|
)%
|
24,621
|
|
20,595
|
|
19.5
|
%
|
Software solutions
|
|
(6,457
|
)
|
(17,948
|
)
|
64.0
|
%
|
(17,948
|
)
|
(15,813
|
)
|
(13.5
|
)%
|
Consolidated operating income
|
|
$
|
73,391
|
|
$
|
83,367
|
|
(12.0
|
)%
|
$
|
83,367
|
|
$
|
93,942
|
|
(11.3
|
)%
|
Operating margin by segment
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
2.7
|
%
|
3.2
|
%
|
(.5
|
)%
|
3.2
|
%
|
3.6
|
%
|
(.4
|
)%
|
Industrial products
|
|
.5
|
%
|
.8
|
%
|
(.3
|
)%
|
.8
|
%
|
.7
|
%
|
.1
|
%
|
Software solutions
|
|
(.2
|
)%
|
(.6
|
)%
|
.4
|
%
|
(.6
|
)%
|
(.6
|
)%
|
|
|
Consolidated operating margin
|
|
2.3
|
%
|
2.7
|
%
|
(.4
|
)%
|
2.7
|
%
|
3.4
|
%
|
(.7
|
)%
|
Effective income tax rate
|
|
36.8
|
%
|
36.9
|
%
|
(.1
|
)%
|
36.9
|
%
|
30.5
|
%
|
6.4
|
%
|
Net income
|
|
$
|
46,185
|
|
$
|
52,843
|
|
(12.6
|
)%
|
$
|
52,843
|
|
$
|
69,481
|
|
(23.9
|
)%
|
Net margin
|
|
1.5
|
%
|
1.7
|
%
|
(.2
|
)%
|
1.7
|
%
|
2.5
|
%
|
(.8
|
)%
|
NET
SALES
SEGMENTS:
The
growth in Technology products sales in 2009 is attributable to increased retail
and internet sales in the consumer channel, opening 5 retail stores and the two
acquisitions completed during 2009. Sales attributable to Circuit City and
WStore Europe SA and subsidiaries (acquired in the second and third quarters of
2009, respectively) totaled approximately $131.1 million for the year. On a
constant currency basis, translating 2009 foreign results at 2008 exchange
rates, sales would have grown 10.5%. or $120.9 million. Adjusting for the
impact of the number of weeks, Technology products sales increased 8.3% for the
year.
North
American technology products sales increased 14.3% in 2009 compared to 2008
benefiting from the opening of 5 retail stores and the Circuit City acquisition
which contributed $67.3 million in sales. On a constant currency basis,
translating 2009 Other North America results at 2008 exchange rates, North
American technology products sales would have grown to 15.2%. The movement in
the exchange rates negatively impacted sales by approximately $17.3 million.
Adjusting for the impact of the number of weeks, North American technology
products sales increased 16.7%.
European
technology products sales declined 9.8% to $848.5 million as the result of
slower business to business sales. The trend of declining sales in Europe is
expected to reverse as global economic conditions improve and as a result of
the WStore acquisition. Sales attributable to the WStore acquisition totaled
approximately $63.8 million in 2009. On a constant currency basis, translating
2009 foreign results at 2008 exchange rates, European sales would have
increased 1.2%. The movement in foreign exchange rates accounted for $103.6
million of the revenue decline in Europe for the year. Adjusting for the impact
of the number of weeks, European sales would have declined 8.3%.
The
decline in Industrial products sales is attributable to the slowdown in
business to business economic activity which started in the second half of 2008
and continued into 2009. Adjusting for the impact of the number of weeks,
Industrial products sales decreased 15.9%. The Company has implemented
strategies to improve sales growth such as expanding its product offerings and
launching an improved customer website.
The
Company announced plans to exit its Software solutions segment during the
second quarter of 2009. As of December 31, 2009 substantially all of the
third party business activities of ProfitCenter Software had ended.
25
Table of
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GEOGRAPHIES:
North
American sales increased 10.8% to $2.3 billion compared to 2008. North American
sales benefited from increased retail and internet sales in the consumer
channel, opening 5 retail stores and the Circuit City acquisition, which
contributed $67.3 million of sales offset by the declining sales in the
Industrial products segment. On a
constant currency basis, translating 2009 Other North America results at 2008
exchange rates, North American sales would have grown to 11.6%. The movement in
the exchange rates negatively impacted sales by approximately $17.3 million.
Adjusting for the impact of the number of weeks, North American sales increased
13.1%.
European
technology products sales declined 9.8% to $848.5 million. On a constant
currency basis, European sales would have increased 1.2%. Sales attributable to
the WStore acquisition totaled approximately $63.8 million for the year.
Movement in foreign exchange rates accounted for $103.6 million of the sales
decline in Europe for the year. The trend of declining sales in Europe is
expected to reverse as global economic conditions improve and as a result of
the WStore acquisition.
Worldwide
consumer-channel revenue, defined as revenues from retail stores, consumer
websites, inbound call centers and, shopping channels, were $1.8 billion
compared to $1.6 billion in the same period in 2008, an increase of 12.2%.
Growth was driven primarily by volume increases in computers, including laptops
and netbooks and consumer electronics, including televisions. Worldwide
business to business channel sales were $1.3 billion for 2009 compared to $1.4
billion in the prior year, a 4.9% decrease. Worldwide business to business
sales declined as the result of the global economic slowdown. The acquisition
of WStore in September 2009 partially offset the decline.
2008
vs. 2007:
Sales
increased in all reporting business segments and in both geographies during
2008 over 2007. The growth in Technology Products sales increase was driven by
increased internet and retail store sales as the result of the acquisition of
the CompUSA. The growth in Industrial Products sales resulted from the Company
increasing its market share through aggressive acquisition of customers via web
and catalog advertising. Sales
attributable to CompUSA web and retail were $226.3 million for the year. In
Europe sales increased .9% compared to 2007. 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. 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. Sales in the
Software Solutions segment were not material in 2008 and 2007. The Company
reorganized this segment in the fourth quarter of 2008 which resulted in a
charge to earnings of approximately $1.7 million.
GROSS
MARGIN
Consolidated gross margin
declined in 2009.as the Company lowered certain product prices and offered
freight incentives in order to maintain and grow market share and to respond to
competitive pricing pressures that started in 2008. Additionally, consolidated
gross margin has been impacted by a shift in mix, as higher margin Industrial
Products accounted for a smaller percentage of consolidated revenues than in
previous years. Gross margin is dependent on variables such as product mix,
vendor price protection and other sales incentives, competition, pricing
strategy, cooperative advertising funds required to be classified as a
reduction to cost of sales, freight discounting and other variables, any or all
of which may result in fluctuations in gross margin.
Consolidated gross margin
declined during 2008 over 2007 due primarily to competitive pricing pressures
in the Technology Products segment.
26
Table of
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SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
Selling,
general and administrative expenses increased in 2009 over 2008 primarily as a
result of the increased sales volume, facility and other operating costs
related to opening additional retail stores, costs related to winding down the
Software Solutions segment and costs related to the WStore acquisition.
Significant expense increases include approximately $7.8 million in charges for
severance costs, litigation and contractual lease terminations of which approximately
$2.9 million of winding down costs related to Software Solutions segment, $4.3
million of increased credit card fees, and $1.8 million of increased consulting
services primarily incurred for new software implementation offset by savings
in other various expenses. Also included in 2009 is a gain of approximately
$1.8 million from a lawsuit that was settled favorably.
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.
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.
OPERATING
MARGIN
Technology
products operating margin decreased in 2009 compared to 2008 due to decline in
business to business sales as the result of the global economic slowdown, price
promotions and freight discounts offered during the year and costs related to
the WStore acquisition.
Industrial
products operating margin decreased in 2009 compared to 2008 due to the
slowdown in sales coupled with additional information technology staffing and
other costs for the support of new products added and the newly launched
e-commerce website.
Software
solutions segment operating margin increased due to revenue recognized from
contract terminations. This segment has been winding down operations since the
second quarter of 2009.
Corporate
and other expenses operating costs increased 16.5% in 2009 as compared to 2008
due to increased expenses for new software implementation, acquisition related
costs and additional staffing and overhead costs to support the growth in the
Companys business.
INTEREST
AND OTHER INCOME
AND INTEREST EXPENSE
Interest expense was $.9
million, $.3 million, and $1.0 million in 2009, 2008 and 2007, respectively.
The interest expense increase in 2009 compared to 2008 is primarily
attributable to the WStore acquisition assumed short term debt and interest on
capital lease obligations. Interest expense decreased in 2008 and 2007 as a
result of decreased short-term borrowings in the Companys subsidiaries in the
United Kingdom and the Netherlands. Interest and other income, net was $.8
million, $2.0 million, and $5.5 million in 2009, 2008 and 2007, respectively.
INCOME TAXES
The Companys effective tax
rate was 36.8% in 2009 flat as compared to 36.9% in 2008. Included in the 2009
rate was a reversal of tax reserves of approximately $0.9 million, as a result
of statute expirations. If excluded, the Companys effective tax rate would
have been 38.4%. The higher tax rate in 2009 is primarily attributed to a
higher percentage of taxable income in countries that have higher corporate tax
rates. The Companys effective tax rate will vary as the mix of pre tax income
from the countries the Company does business in varies.
The higher tax rate in 2008
compared to 2007 is primarily attributable 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
27
Table of Contents
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 2009, 2008, and 2007,
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
As the Companys consumer
channel sales have grown significantly in the past few years, the fourth
quarter has represented a greater portion of annual sales than
historically.
Net sales have
historically been modestly weaker during the second and third quarters as a
result of lower business activity during those months. The following table sets
forth the net sales, gross profit and income from operations for each of the
quarters since January 1, 2007
(amounts in millions)
.
|
|
Quarter Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2009
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
752
|
|
$
|
722
|
|
$
|
754
|
|
$
|
938
|
|
Percentage of years net sales
|
|
23.8
|
%
|
22.8
|
%
|
23.8
|
%
|
29.6
|
%
|
Gross profit
|
|
$
|
108
|
|
$
|
107
|
|
$
|
113
|
|
$
|
132
|
|
Operating income
|
|
$
|
15
|
|
$
|
9
|
|
$
|
19
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
725
|
|
$
|
756
|
|
$
|
739
|
|
$
|
813
|
|
Percentage of years net sales
|
|
23.9
|
%
|
24.9
|
%
|
24.4
|
%
|
26.8
|
%
|
Gross profit
|
|
$
|
114
|
|
$
|
115
|
|
$
|
115
|
|
$
|
115
|
|
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
|
|
28
Table
of Contents
Financial Condition, Liquidity and Capital Resources
Selected
liquidity data (in thousands):
|
|
December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
Cash
|
|
$
|
58,309
|
|
$
|
115,967
|
|
$
|
(57,658
|
)
|
Accounts receivable, net
|
|
$
|
241,860
|
|
$
|
182,841
|
|
$
|
59,019
|
|
Inventories
|
|
$
|
365,725
|
|
$
|
290,594
|
|
$
|
75,131
|
|
Prepaid expenses and other current assets
|
|
$
|
20,066
|
|
$
|
12,667
|
|
$
|
7,399
|
|
Accounts payable
|
|
$
|
346,362
|
|
$
|
285,410
|
|
$
|
60,952
|
|
Accrued expenses and other current liabilities
|
|
$
|
80,945
|
|
$
|
72,352
|
|
$
|
8,593
|
|
Current portion of capitalized lease obligations
|
|
$
|
1,029
|
|
$
|
773
|
|
$
|
256
|
|
Short term debt
|
|
$
|
14,168
|
|
|
|
$
|
14,168
|
|
Working capital
|
|
$
|
250,082
|
|
$
|
253,092
|
|
$
|
(3,010
|
)
|
Our primary liquidity needs are
to support working capital requirements in our business, including working
capital for new retail stores, to fund capital expenditures, to fund the
payment of interest on outstanding debt, to fund special dividends declared by
our Board of Directors and for acquisitions. We rely principally upon operating
cash flow to meet these needs. We believe that cash flow from operations and
our availability under credit facilities will be sufficient to fund our working
capital and other cash requirements for the next twelve months.
Our working capital
decreased in 2009 as the result of using cash balances of approximately $14.5
million for the purchase of the Circuit City assets, payment of $27.6 million
for a special dividend, the $4.5 million cash purchase of WStore and common
stock repurchases of $1.2 million. Inventory balances increased related to
warehousing additional products as a result in the growth of sales and the
stocking our retail stores. Accounts receivable balances increased as the
result of growth in open account business to business sales, the WStore
acquisition and slight growth in accounts receivable days outstanding. Accounts
payable and accrued expense balances increased due to inventory growth and the
WStore acquisition. The increase in short term debt was attributable to the
assumption of the outstanding debt of WStore. Inventory turnover was consistent
at 9 times during 2009 and 2008. Our accounts receivable days outstanding were
at 24 in 2009 up from 21 in 2008. 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.
Net cash provided by
operating activities was $4.8 million, $82.4 million, and $93.1 million during
2009, 2008, and 2007. The decrease in cash provided by operating activities in
2009 over 2008 resulted from a $3.0 million decrease in net income adjusted by
other non-cash items, such as depreciation expense, and a decrease of $74.6
million in cash used for changes in our working capital accounts. The decrease
in cash provided by operating activities in 2008 compared to 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 working capital accounts.
Net cash used in investing
activities was $32.3 million during 2009, primarily for the CircuitCity.com
acquisition and capital expenditures. The WStore acquisition used approximately
$4.5 million and provided $5.4 million in cash acquired. Cash flows used in investing activities
during 2008 totaled $45.5 million primarily for the CompUSA acquisition and for
capital expenditures. Net cash used in investing activities was $7.7 million
during 2007, primarily for capital expenditures. Capital expenditures in 2009,
2008, and 2007 included upgrades and enhancements to our information and
communications systems hardware and software and expenditures in retail stores
in North America.
Net cash used in financing
activities was $31.5 million during 2009.
We repaid approximately $3.6 million in short term debt, repaid
approximately $0.8 million in capital lease obligations, paid a special
dividend of $27.6 million and repurchased Company stock of approximately $1.2
million. Proceeds from stock option exercises provided approximately $1.7
million of cash. Net cash used in financing activities
29
Table of Contents
was $45.0 million during
2008. We repaid approximately $3.9 million in short-term debt, repaid
approximately $0.7 million in capital lease obligations, 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 provided
approximately $2.5 million of cash. Net cash used in financing activities was
$42.7 million during 2007, attributable to dividends paid of $36.6 million, repayment
of short term debt of $8.7 million, repayment of $0.6 million in capital lease
obligations, repurchase of common stock of approximately $1.8 million, offset
by proceeds of stock option exercises and related excess tax benefits of $5.0
million.
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 and
the Company expects to renew the facility on or before that date. 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, 2009, the Company was in
compliance with all of the covenants under the credit facility. Eligible
collateral under the facility was $110.8 million, total availability was $98.7
million, outstanding letters of credit of were $12.1 million and there were no
outstanding advances.
The Companys Inmac WStore
subsidiary maintains a secured revolving credit agreement with a financial
institution in France which is secured by WStore Europe SA accounts receivable
balances. Available amounts for borrowing under this facility includes all
accounts receivable balances not over 60 days past due reduced by the greater
of 4.0 million or 10% of the eligible accounts receivable. As of December 31,
2009, there was availability under this credit facility of approximately 6.0
million ($8.6 million) and there was 9.9 million ($14.2 million) of
outstanding borrowings. Outstanding
balances under this agreement carry interest at 1.5% as of December 31,
2009. The credit facility duration is
indefinite; however either party may cancel the agreement with ninety days
notice. Under this agreement the Company is subject to certain non-financial covenants
which it was in compliance with at December 31, 2009.
The Companys WStore UK
subsidiary maintains a £2 million secured resolving credit agreement with a
financial institution in the United Kingdom which is secured by WStore UKs
accounts receivable balances. Available amounts for borrowing under this
facility includes accounts receivable balances less 30% retention. As of December 31,
2009, there was availability under this credit facility of approximately £.5
million ($.8 million). Outstanding
balances under this agreement carry interest at 2.5% above the overnight daily
LIBOR rate (0.5% at December 31, 2009).
The credit facility duration is indefinite; however either party may
cancel the agreement with ninety days notice. Under this agreement the Company
is subject to certain non-financial covenants which it was in compliance with
at December 31, 2009.
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.
Our earnings and cash flows
are seasonal in nature, with the fourth quarter of the fiscal year generating
higher earnings and cash flows than the other quarters. Levels of earnings and
cash flows are dependent on factors such as consolidated gross margin and
selling, general and administrative costs as a percentage of sales, product mix
and relative levels of domestic and foreign sales. Unusual expense items, such
as one time charges and settlements, may impact earnings and are separately
disclosed. We expect that past performance may not be indicative of future
performance due to the competitive nature of our Technology Products segment
where the need to adjust prices to gain or hold market share is prevalent.
Macroeconomic conditions,
such as business and consumer sentiment, may affect our revenues, cash flows or
financial condition. However, we do not believe that there is a direct
correlation between any specific macroeconomic indicator and our revenues, cash
flows or financial condition. We are not currently interest rate
sensitive, as we have significant cash balances and minimal debt.
We anticipate cash needs to
support our growth and expansion plans, continued investment in upgrading and
expanding our technological capabilities and information technology
infrastructure, opening of new retail stores, and in building out and expanding
our distribution center facilities and inventory systems.
30
Table of Contents
These expenses and capital expenditures will
require significant levels of liquidity, which we believe can be adequately
funded from our currently available cash resources. We have recently engaged in
several opportunistic acquisitions, choosing to pay the purchase price in cash,
and may do so in the future as favorable situations arise. However, a
deep and prolonged period of reduced consumer and or business to business
spending could adversely impact our cash resources and force us to either
forego future acquisition opportunities or to pay the purchase price in shares
of our common stock, which could have a dilutive effect on the our earnings per
share. In addition we anticipate cash needs for implementation of financial and
retail point of sale systems. We believe that our cash balances, future cash
flows from operations and our availability under credit facilities will be
sufficient to fund our working capital and other cash requirements for the next
twelve months.
We maintain our cash and cash equivalents
primarily in money market funds or their equivalent. As of December 31,
2009, all of our investments had maturities of less than three months.
Accordingly, we do not believe that our investments have significant exposure
to interest rate risk.
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 and Uniondale, New York. In the event the sub lessee is unable to
fulfill its obligations, we would be responsible for rents due under the
leases.
Following is a summary of our contractual
obligations for future principal payments on our debt, minimum rental payments
on our non-cancelable operating leases and minimum payments on our other
purchase obligations as of December 2009 (in thousands):
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
2,423
|
|
$
|
1,145
|
|
$
|
1,278
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating leases, net of subleases
|
|
187,951
|
|
23,849
|
|
67,127
|
|
47,213
|
|
49,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term debt
|
|
14,168
|
|
14,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase & other obligations
|
|
26,854
|
|
17,191
|
|
6,870
|
|
2,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
231,396
|
|
$
|
56,353
|
|
$
|
75,275
|
|
$
|
50,006
|
|
$
|
49,762
|
|
Our purchase and other obligations consist
primarily of certain employment agreements and service agreements.
In addition to the contractual obligations noted
above, we had $11.0 million of standby letters of credit outstanding as of December 2009.
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.
31
Table of Contents
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,
senior executives, Directors and controlling shareholders of the Company.
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
$109.3 million and pre tax income would have fluctuated by approximately $1.8
million if average foreign exchange rates changed by 10% in 2009. 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 31,
2009 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 31, 2009, 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.
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,
2009.
Based upon this
evaluation, the Companys Chief Executive Officer and Chief Financial Officer
have concluded that the Companys disclosure controls and procedures are
effective.
32
Table of Contents
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, 2009.
The Companys independent
registered public accounting firm, Ernst & Young LLP, has issued an
attestation report on the effectiveness of the Companys internal control over
financial reporting as of December 31, 2009, a copy of which is included
in this report.
Changes in Internal Control Over
Financial Reporting
There
have been no changes in the Companys internal controls over financial
reporting during the quarter ended December 31, 2009 that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
Item 9B. Other Information.
None.
33
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 2010 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.
34
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.
|
|
|
|
|
|
|
|
Item 15. Exhibits and Financial
Statement Schedules.
|
|
|
|
|
|
|
3.
|
Exhibits.
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
3.1
|
|
Composite
Certificate of Incorporation of Registrant, as amended (incorporated by
reference to the Companys annual report on Form 10-K for the year ended
December 31, 2001)
|
3.2
|
|
Amended
and Restated By-laws of Registrant (effective as of December 29, 2007, incorporated
by reference to the Companys annual report on Form 10-K for the year
ended December 31, 2007)
|
3.3
|
|
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
1995 Stock Plan for Non-Employee Directors* (incorporated by reference to the
Companys registration statement on Form S-1) (Registration
No. 333-1852)
|
10.3
|
|
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)
|
10.4
|
|
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)
|
10.5
|
|
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)
|
10.6
|
|
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)
|
10.7
|
|
First
Amendment to Lease Agreement dated September 20, 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)
|
10.8
|
|
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)
|
10.9
|
|
Build-to-Suit
Lease Agreement dated April, 1995 among the Company, American National Bank
and Trust Company of Chicago (Trustee for the
|
35
Table of Contents
|
|
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)
|
10.10
|
|
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)
|
10.11
|
|
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)
|
10.12
|
|
First
Amendment, dated as of September 5, 2003, to the Lease Agreement between
Tiger Direct, Inc. and Keystone Miami Property Holding Corp. (Miami
facility) (filed herewith)
|
10.13
|
|
Second
Amendment, dated March 22, 2007, to the Lease Agreement between Tiger
Direct, Inc. and Keystone Miami Property Holding Corp. (Miami facility)
(filed herewith)
|
10.14
|
|
Third
Amendment, dated as of June 26, 2009, to the Lease Agreement between
Tiger Direct, Inc. and Mota Associates Limited Partnership (successor in
interest to landlord Keystone Miami Property Holding Corp.) (Miami facility)
(filed herewith)
|
10.15
|
|
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)
|
10.16
|
|
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)
|
10.17
|
|
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)
|
10.18
|
|
Amendment
No. 1, dated December 30, 2009, to Employment Agreement between the
Company and Gilbert Fiorentino* (incorporated by reference to the Companys
report on Form 8-K dated December 30, 2009).
|
10.19
|
|
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).
|
10.20
|
|
Amendment
No. 1, dated December 30, 2009, to the Restricted Stock Unit
Agreement between the Company and Gilbert Fiorentino* (incorporated by
reference to the Companys report on Form 8-K dated December 30,
2009).
|
10.21
|
|
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).
|
10.22
|
|
Amendment
No.1, dated December 30, 2009, to the Employment Agreement between the
Company and Lawrence P. Reinhold* (incorporated by reference to the Companys
report on Form 8-K dated December 30, 2009).
|
36
Table of Contents
10.23
|
|
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)
|
10.24
|
|
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)
|
10.25
|
|
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)
|
10.26
|
|
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)
|
10.27
|
|
Asset
Purchase Agreement, as amended, dated as of April 5, 2009 and
May 14, 2009, by and among Systemax Inc., as Buyer and Circuit City
Stores West Coast, Inc. and Circuit City Stores, Inc, as Sellers
(incorporated by reference to the Companys report on Form 8-K dated
May 20, 2009).
|
14
|
|
Corporate
Ethics Policy for Officers, Directors and Employees (revised as of March,
2010)
|
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
(filed
herewith)
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(filed
herewith)
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(filed
herewith)
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(filed
herewith)
|
* Management contract or compensatory plan or arrangement
37
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, 2010
|
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, 2010
|
Richard Leeds
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/
BRUCE LEEDS
|
|
Vice Chairman and Director
|
|
March 18, 2010
|
Bruce Leeds
|
|
|
|
|
|
|
|
|
|
/s/
ROBERT LEEDS
|
|
Vice Chairman and Director
|
|
March 18, 2010
|
Robert Leeds
|
|
|
|
|
|
|
|
|
|
/s/
LAWRENCE P. REINHOLD
|
|
Executive Vice President, Chief Financial Officer
|
|
March 18, 2010
|
Lawrence P. Reinhold
|
|
and Director
|
|
|
|
|
(Principal Financial Officer)
|
|
|
|
|
|
|
|
/s/
THOMAS AXMACHER
|
|
Vice President and Controller
|
|
March 18, 2010
|
Thomas Axmacher
|
|
(Principal Accounting Officer)
|
|
|
|
|
|
|
|
/s/
GILBERT FIORENTINO
|
|
Chief Executive, Technology Products Group
|
|
March 18, 2010
|
Gilbert Fiorentino
|
|
and Director
|
|
|
|
|
|
|
|
/s/
ROBERT D. ROSENTHAL
|
|
Director
|
|
March 18, 2010
|
Robert D. Rosenthal
|
|
|
|
|
|
|
|
|
|
/s/
STACY DICK
|
|
Director
|
|
March 18, 2010
|
Stacy Dick
|
|
|
|
|
|
|
|
|
|
/s/
MARIE ADLER-KRAVECAS
|
|
Director
|
|
March 18, 2010
|
Marie Adler-Kravecas
|
|
|
|
|
38
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, 2009 and 2008, and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the three years in
the period ended December 31, 2009.
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,
2009 and 2008, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009,
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, present fairly in all material respects the
information set forth therein.
As
discussed in Note 2 to the consolidated financial statements, the Company
adopted the guidance issued in Financial Accounting Standards Board (FASB)
Statement No. 141(R), Business Combinations (codified in FASB Accounting
Standards Codification Topic 805, Business Combinations) on January 1,
2009.
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, 2009, 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 18,
2010 expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
New
York, New York
March 18,
2010
39
Table of
Contents
The
Board of Directors and Shareholders of Systemax Inc.
We
have audited Systemax Inc.s internal control over financial reporting as of December 31,
2009, 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, 2009 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, 2009 and 2008 and the related
consolidated statements of operations, shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2009 of Systemax
Inc. and our report dated March 18, 2010 expressed an unqualified opinion
thereon.
/s/
Ernst & Young LLP
New
York, New York
March 18,
2010
40
Table of Contents
SYSTEMAX INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash
|
|
$
|
58,309
|
|
$
|
115,967
|
|
Accounts receivable, net of
allowances of $22,532 and $17,523
|
|
241,860
|
|
182,841
|
|
Inventories
|
|
365,725
|
|
290,594
|
|
Prepaid expenses and other
current assets
|
|
20,066
|
|
12,667
|
|
Deferred income taxes
|
|
6,626
|
|
9,558
|
|
Total current assets
|
|
692,586
|
|
611,627
|
|
|
|
|
|
|
|
Property, plant and
equipment, net
|
|
65,598
|
|
48,465
|
|
Deferred income taxes
|
|
8,564
|
|
11,198
|
|
Goodwill and intangibles
|
|
48,127
|
|
29,366
|
|
Other assets
|
|
2,026
|
|
1,797
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
816,901
|
|
$
|
702,453
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
346,362
|
|
$
|
285,410
|
|
Accrued expenses and other
current liabilities
|
|
80,945
|
|
72,352
|
|
Short term debt
|
|
14,168
|
|
|
|
Current portion of
capitalized lease obligations
|
|
1,029
|
|
773
|
|
Total current liabilities
|
|
442,504
|
|
358,535
|
|
|
|
|
|
|
|
Capitalized lease
obligations
|
|
1,194
|
|
1,411
|
|
Other liabilities
|
|
8,518
|
|
8,552
|
|
Total liabilities
|
|
452,216
|
|
368,498
|
|
|
|
|
|
|
|
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 38,862,019 and 38,855,989
shares; outstanding 36,450,767 and 36,223,747 shares
|
|
389
|
|
389
|
|
Additional paid-in capital
|
|
180,508
|
|
179,241
|
|
Common stock in treasury at
cost 2,411,252 and 2,632,242 shares
|
|
(28,545
|
)
|
(31,158
|
)
|
Retained earnings
|
|
210,975
|
|
192,401
|
|
Accumulated other
comprehensive income (loss), net of tax
|
|
1,358
|
|
(6,918
|
)
|
Total shareholders equity
|
|
364,685
|
|
333,955
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
816,901
|
|
$
|
702,453
|
|
See notes to consolidated financial statements.
41
Table
of Contents
SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share data)
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Net sales
|
|
$
|
3,165,995
|
|
$
|
3,032,961
|
|
$
|
2,779,875
|
|
Cost of sales
|
|
2,705,747
|
|
2,574,402
|
|
2,353,574
|
|
Gross profit
|
|
460,248
|
|
458,559
|
|
426,301
|
|
Selling, general and
administrative expenses
|
|
386,857
|
|
375,192
|
|
332,359
|
|
Operating income
|
|
73,391
|
|
83,367
|
|
93,942
|
|
Foreign currency exchange
loss (gain)
|
|
187
|
|
1,300
|
|
(1,562
|
)
|
Interest and other income,
net
|
|
(768
|
)
|
(1,981
|
)
|
(5,505
|
)
|
Interest expense
|
|
887
|
|
305
|
|
986
|
|
Income before income taxes
|
|
73,085
|
|
83,743
|
|
100,023
|
|
Provision for income taxes
|
|
26,900
|
|
30,900
|
|
30,542
|
|
Net income
|
|
$
|
46,185
|
|
$
|
52,843
|
|
$
|
69,481
|
|
Net income per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.26
|
|
$
|
1.43
|
|
$
|
1.93
|
|
Diluted
|
|
$
|
1.24
|
|
$
|
1.40
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
Weighted average common and
common equivalent shares:
|
|
|
|
|
|
|
|
Basic
|
|
36,706
|
|
36,950
|
|
35,968
|
|
Diluted
|
|
37,343
|
|
37,705
|
|
37,688
|
|
See notes to consolidated financial
statements.
42
Table of Contents
SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
46,185
|
|
$
|
52,843
|
|
$
|
69,481
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
12,353
|
|
10,387
|
|
8,780
|
|
Provision (benefit) for
deferred income taxes
|
|
5,704
|
|
6,197
|
|
(6,106
|
)
|
Provision for returns and
doubtful accounts
|
|
4,698
|
|
2,424
|
|
4,575
|
|
Compensation expense related
to equity compensation plans
|
|
2,867
|
|
3,869
|
|
4,159
|
|
Excess tax benefit from
exercises of stock options
|
|
(576
|
)
|
(1,380
|
)
|
(2,160
|
)
|
Loss (gain) on dispositions
and abandonment
|
|
154
|
|
89
|
|
(1,032
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(20,907
|
)
|
6,010
|
|
29,450
|
)
|
Inventories
|
|
(69,618
|
)
|
(48,924
|
)
|
(21,628
|
)
|
Prepaid expenses and other
current assets
|
|
(5,490
|
)
|
(16
|
)
|
15,916
|
|
Income taxes
payable/receivable
|
|
3,983
|
|
602
|
|
1,925
|
|
Accounts payable, accrued
expenses and other current liabilities
|
|
25,414
|
|
50,318
|
|
48,623
|
|
Net cash provided by
operating activities
|
|
4,767
|
|
82,419
|
|
93,083
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase of Circuit City
assets
|
|
(14,494
|
)
|
|
|
|
|
Purchase of WStore Europe SA
|
|
(4,469
|
)
|
|
|
|
|
Cash acquired WStore Europe
SA
|
|
5,438
|
|
|
|
|
|
Purchase of certain CompUSA
assets
|
|
|
|
(30,649
|
)
|
|
|
Purchases of property, plant
and equipment
|
|
(18,855
|
)
|
(14,942
|
)
|
(7,699
|
)
|
Proceeds from disposals of
property, plant and equipment
|
|
84
|
|
72
|
|
28
|
|
Net cash used in investing
activities
|
|
(32,296
|
)
|
(45,519
|
)
|
(7,671
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
Repayments of borrowings from
banks
|
|
(3,614
|
)
|
(3,880
|
)
|
(8,708
|
)
|
Repayments of capital lease
obligations
|
|
(726
|
)
|
(673
|
)
|
(579
|
)
|
Dividends paid
|
|
(27,611
|
)
|
(37,126
|
)
|
(36,588
|
)
|
Proceeds from issuance of
common stock
|
|
1,082
|
|
1,133
|
|
2,830
|
|
Repurchase of common stock
|
|
|
|
|
|
(1,858
|
)
|
Purchase of treasury stock
|
|
(1,174
|
)
|
(5,824
|
)
|
|
|
Excess tax benefit from
exercises of stock options
|
|
576
|
|
1,380
|
|
2,160
|
|
Net cash used in by financing
activities
|
|
(31,467
|
)
|
(44,990
|
)
|
(42,743
|
)
|
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATES ON
CASH
|
|
1,338
|
|
(3,964
|
)
|
(1,612
|
)
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN
CASH
|
|
(57,658
|
)
|
(12,054
|
)
|
41,057
|
|
CASH BEGINNING OF YEAR
|
|
115,967
|
|
128,021
|
|
86,964
|
|
|
|
|
|
|
|
|
|
CASH END OF YEAR
|
|
$
|
58,309
|
|
$
|
115,967
|
|
$
|
128,021
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
756
|
|
$
|
291
|
|
$
|
1,182
|
|
Income taxes paid
|
|
$
|
13,909
|
|
$
|
29,514
|
|
$
|
30,275
|
|
Supplemental disclosures of
non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Acquisitions of equipment
through capital leases
|
|
$
|
765
|
|
$
|
2,152
|
|
$
|
251
|
|
See notes to consolidated financial statements.
43
Table of Contents
SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
Outstanding
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Treasury
Stock,
At Cost
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2007
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
)
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
2,818
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock
|
|
105
|
|
|
|
(754
|
)
|
1,183
|
|
|
|
|
|
|
|
Retired
restricted stock
|
|
|
|
|
|
(10
|
)
|
(15
|
)
|
|
|
|
|
|
|
Exercise
of stock options
|
|
221
|
|
|
|
(1,537
|
)
|
2,619
|
|
|
|
|
|
|
|
Repurchase
of treasury stock
|
|
(99
|
)
|
|
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
Income
tax benefit on stock-based compensation
|
|
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
Change
in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
8,276
|
|
8,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
|
|
|
|
|
|
|
(27,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
46,185
|
|
|
|
46,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,461
|
|
Balances,
December 31, 2009
|
|
36,451
|
|
$
|
389
|
|
$
|
180,508
|
|
$
|
(28,545
|
)
|
$
|
210,975
|
|
$
|
1,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
44
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 prior year amounts
were reclassified to conform to current year presentation. Additionally foreign exchange loss (gain) has
been reclassified from selling, general and administrative expense to a
separate income statement line item 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
The Companys fiscal year ends 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
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.
Inventories
Inventories
consist primarily of finished goods and are stated at the lower of cost or
market value. Cost is determined by
using the first-in, first-out method 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.
45
Table
of Contents
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 the entire 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, local
radio and newspaper 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 $38.9 million, $40.0 million and $47.2 million during 2009, 2008 and 2007,
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 $55.9 million, $60.4 million and $42.6 million
during 2009, 2008 and 2007, respectively.
Prepaid
expenses as of December 2009 and 2008 include deferred advertising costs
of $2.8 million and $4.1 million which are reflected as an expense during the
periods benefited, typically the subsequent fiscal quarter.
Stock based compensation
The Company recognizes the
fair value of share based compensation 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.
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 775,000, 941,000, and 1,087,000 in 2009, 2008 and 2007, 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 711,000, 622,000, and 0 in 2009, 2008 and 2007, 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 $54.5 million, $34.2 million and $74.0 million
in 2009, 2008 and 2007, 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 $0.9
million, $0.7 million and $0.6 million in 2009, 2008 and 2007, respectively.
46
Table
of Contents
Fair Value of Financial
Instruments
- Financial instruments consist primarily of
investments in cash, 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, 2009 and 2008, the
carrying amounts of cash, accounts receivable, debt 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, and accounts
receivable. The Companys excess cash
balances are invested with money center banks.
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
Public
companies in the United States are subject to the accounting and reporting
requirements of various authorities, including the Financial Accounting
Standards Board (FASB) and the Securities and Exchange Commission (SEC).
These authorities issue numerous pronouncements, most of which are not
applicable to the Companys current or reasonably foreseeable operating
structure. Below are the new authoritative pronouncements that management
believes are relevant to Companys current operations.
In October 2009, the FASB issued amended
guidance related to revenue recognition in multiple-deliverable revenue
arrangements and certain arrangements that include software elements. This
standard eliminates the residual method of revenue allocation by requiring
entities to allocate revenue in an arrangement to all of the deliverables based
upon the relative selling prices of the delivered goods and services. The FASB
also issued a new accounting standard in October 2009, which changes
revenue recognition for tangible products containing software and hardware
elements. Under this standard, tangible products containing software and
hardware that function together to deliver the tangible products essential
functionality are scoped out of the existing software revenue recognition
guidance and will be accounted for under the multiple-element arrangements
revenue recognition guidance discussed above. Both standards are effective for
fiscal years beginning on or after June 15, 2010. The Company is currently
evaluating the impact, if any, of the adoption of this standard on our
consolidated financial position and results of operations.
Effective
January 1, 2009 the Company adopted authoritative guidance that
establishes principles and requirements for how an acquirer in a business
combination (i) recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, and any non-controlling
interest in the acquiree, (ii) recognizes and measures goodwill acquired
in a business combination or a gain from a bargain purchase, and (iii) determines
what information to disclose to enable users of financial statements to
evaluate the nature and financial effects of the business combination. This
guidance is applied prospectively for all business combinations entered into
after the date of adoption. In the third quarter of 2009 the Company expensed
approximately $0.8 million of costs that would have been capitalized under
previous guidance.
In
June 2008, FASB issued authoritative guidance to clarify that instruments
granted in share-based payment transactions can be participating securities
prior to the requisite service having been rendered. The guidance applies to
the calculation of Earnings Per Share (EPS) 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 guidance became
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 is adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data). The Company adopted this
authoritative guidance in January 2009 and it did not have a material
impact on its condensed consolidated financial statements.
2.
ACQUISITIONS
On
September 18, 2009, the Company acquired all of the outstanding stock of WStore
Europe SA and its subsidiaries, (WStore), a European supplier of business IT
products and software solutions with operations in France and the United
Kingdom. The purchase price (after giving effect to the conversion of Euros to
U.S. dollars) was approximately $4.4 million in cash, $2.2 million of which was
placed into an escrow account for one year to secure the sellers indemnification
obligations under the purchase agreement. The Company completed a preliminary
allocation of the purchase price as of the acquisition date and recorded assets
of approximately $3.4 million for Client Lists, $1.4 million for Trademarks,
$1.0 million for Technology acquired and $0.1 million of residual goodwill.
These assets were recorded in the Companys Technology Products business
segment. The Company expects to amortize its Client Lists and Technology over a
weighted average 5 year period. All
other assets have indefinite lives. A
final purchase price allocation will be done in 2010. The operating results of
WStore are included in the accompanying condensed consolidated statements of
operations from the date of acquisition. WStore is included in the Companys
Technology Products business segment. The Company has determined that this was
not a material acquisition.
On
April 5, 2009, the Company entered into an Asset Purchase Agreement with
Circuit City Stores, Inc. and Circuit City Stores West Coast, Inc.
(the Sellers). Pursuant to the Asset Purchase Agreement, on May 19, 2009
the Company acquired certain intellectual property and ecommerce assets owned
by the Sellers for $14.0 million in cash. In addition, the Company
47
Table
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will
pay the Sellers a royalty based on a percentage of sales over a thirty month
period dependent upon levels of sales achieved from the acquired assets, with a
minimum payment of $3.0 million. The Company capitalized legal and other fees
incurred of approximately $0.5 million. The acquisition has been accounted for
as an asset purchase rather than a business combination as the acquisition does
not meet the definition of a business under applicable accounting principles.
The
Company has completed a purchase price allocation with respect to the Circuit
City asset acquisition and recorded assets of approximately $5.0 million for
Trademarks and Trade Names, $7.0 million for Domain Names and $2.5 million for
Client Lists. These assets were recorded in the Companys Technology Products
business segment. The Company expects to amortize its Client Lists over a
weighted average 5 year period. All
other assets have indefinite lives. The
gross carrying amount and accumulated amortization for amortizable intangible
assets related to this acquisition at December 31, 2009 and December 31,
2008 was as follows (in thousands):
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Client Lists
|
|
$
|
2,541
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
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. Pursuant to the Purchase Agreement, the Company also acquired sixteen
retail leases from CompUSA Inc. and certain fixtures located at these
locations. This acquisition accelerated the Companys planned expansion into
the retail market place in North America and Puerto Rico. 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 weighted average 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, 2009 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, 2009 was as
follows (in thousands):
|
|
2009
|
|
2008
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Retail store leases
|
|
$
|
3,410
|
|
$
|
484
|
|
$
|
3,410
|
|
$
|
220
|
|
Client lists
|
|
400
|
|
323
|
|
400
|
|
$
|
103
|
|
|
|
$
|
3,810
|
|
$
|
807
|
|
$
|
3,810
|
|
$
|
323
|
|
The
aggregate amortization expense for material acquisitions was approximately $0.9
million in 2009. The estimated amortization for material acquisitions for
future years ending December 31 is as follows (in thousands):
2010
|
|
823
|
|
2011
|
|
781
|
|
2012
|
|
771
|
|
2013
|
|
765
|
|
2014 and after
|
|
2,034
|
|
Total
|
|
$
|
5,174
|
|
|
|
|
|
|
3.
PROPERTY,
PLANT AND EQUIPMENT
Property, plant and
equipment, net consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Land and buildings
|
|
$
|
28,458
|
|
$
|
26,556
|
|
Furniture and fixtures, office, computer and other
equipment and software
|
|
123,876
|
|
92,137
|
|
Leasehold improvements
|
|
19,212
|
|
14,839
|
|
|
|
171,546
|
|
133,532
|
|
Less accumulated depreciation and amortization
|
|
105,948
|
|
85,067
|
|
Property, plant and equipment, net
|
|
$
|
65,598
|
|
$
|
48,465
|
|
48
Table of
Contents
Included
in property, plant and equipment are assets under capital leases, as follows
(in thousands):
|
|
2009
|
|
2008
|
|
Furniture and fixtures, office, computer and other
equipment
|
|
$
|
5,525
|
|
$
|
4,764
|
|
Less: Accumulated amortization
|
|
3,510
|
|
2,573
|
|
|
|
$
|
2,015
|
|
$
|
2,191
|
|
Depreciation charged
to operations for property, plant and equipment including capital leases in 2009, 2008, and 2007 was $11.2 million,
$10.1 million and $8.8 million, respectively.
4.
CREDIT
FACILITIES
The Company maintains a $120 million (which may be increased by up to
$30 million, subject to certain conditions) secured revolving credit agreement
with a group of financial institutions which provides for borrowings in the
United States and United Kingdom. The borrowings are secured by all of the
domestic and United Kingdom accounts receivable, all domestic inventories, the
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 prime rate (3.25% at December 31, 2009) plus 0.25% or the
overnight daily LIBOR rate (0.5% at December 31, 2009) 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
expenditure, acquisitions and payments of dividends. We were in compliance with
all of the covenants as of December 31, 2009. As of December 31,
2009, eligible collateral under the agreement was $110.8 million and total
availability was $98.7 million. There were outstanding letters of credit of
$12.1 million and there were no outstanding advances.
The Companys Inmac WStore subsidiary
maintains a secured revolving credit agreement with a financial institution in
France which is secured by WStore Europe SA accounts receivable balances.
Available amounts for borrowing under this facility includes all accounts
receivable balances not over 60 days past due reduced by the greater of 4.0
million or 10% of the eligible accounts receivable. As of December 31,
2009 there was availability under this credit facility of approximately 6.0
million ($8.6 million) and there was 9.9 million ($14.2 million) of
outstanding borrowings. Outstanding balances under this agreement carry
interest at 1.5% as of December 31. The credit facility duration is
indefinite; however either party may cancel the agreement with ninety days
notice. Under this agreement the Company is subject to certain non-financial
covenants which it was in compliance with at December 31, 2009.
The Companys WStore UK subsidiary maintains a
£2 million secured revolving credit agreement with a financial institution in
the United Kingdom which is secured by WStore UKs accounts receivable
balances. Available amounts for borrowing under this facility includes accounts
receivable balances less a 30% retention. As of December 31, 2009 there
was availability under this credit facility of approximately £0.5 million ($0.8
million).Outstanding balances under this agreement carry interest at 2.5% above
the overnight daily LIBOR rate (0.5% at December 31, 2009. The credit
facility duration is indefinite; however either party may cancel the agreement
with ninety days notice. Under this agreement the Company is subject to certain
non-financial covenants which it was in compliance with at December 31, 2009.
The
weighted average interest rate on short-term borrowings was
3.3%,
5.1%, and 7.5% in 2009, 2008 and 2007, respectively.
5.
ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
(in thousands):
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Payroll and employee benefits
|
|
$
|
27,715
|
|
$
|
25,669
|
|
|
|
|
|
|
|
Freight
|
|
9,171
|
|
6,820
|
|
Deferred revenue
|
|
1,064
|
|
5,683
|
|
Advertising
|
|
8,030
|
|
5,286
|
|
Sales and VAT tax payable
|
|
7,989
|
|
8,061
|
|
Other
|
|
26,976
|
|
20,833
|
|
|
|
$
|
80,945
|
|
$
|
72,352
|
|
49
Table
of Contents
6.
LONG-TERM
DEBT
Long-term debt consists of (in thousands):
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Capitalized equipment lease obligations
|
|
$
|
2,223
|
|
$
|
2,184
|
|
Less: current portion
|
|
1,029
|
|
773
|
|
|
|
$
|
1,194
|
|
$
|
1,411
|
|
The aggregate maturities of long-term debt outstanding at December 31,
2009 are as follows (in thousands):
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Maturities
|
|
$
|
1,029
|
|
$
|
737
|
|
$
|
307
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
BUSINESS
EXIT COSTS
The Company
announced
plans to exit its Software Solutions segment, in the second quarter of 2009, as
the result of economic conditions and difficulties in marketing the segments
products successfully. Total charges incurred for the year for severances,
estimated lease termination costs and other costs were $1.2 million, $1.6
million, and $0.1 million, respectively. These costs were recorded in selling, general and administrative expenses
and interest and other income, net in the accompanying condensed
consolidated statement of operations.
The following table reconciles the associated liabilities incurred (in
thousands):
|
|
Severance
and
Personnel
Costs
|
|
Lease
Termination
Costs
|
|
Other Exit Costs
|
|
Total
|
|
Balance, beginning of period
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Charged to expense
|
|
1,208
|
|
1,644
|
|
80
|
|
2,932
|
|
Paid or otherwise settled
|
|
(1,208
|
)
|
(697
|
)
|
(80
|
)
|
(1,985
|
)
|
Balance, end of period
|
|
$
|
|
|
$
|
947
|
|
$
|
|
|
$
|
947
|
|
8.
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 632,475 options were
outstanding under this plan as of December 31, 2009.
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,
2009.
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.
In 2009 the Company extended until December 31, 2010 the expiration
date under this plan after which no grants shall be made under this plan. The
original expiration date was December 31, 2009. Restricted stock grants
and common stock awards reduce stock options otherwise available for future
grant. A total of 1,410,984 options and 400,000 restricted stock units were
outstanding under this plan as of December 31, 2009.
50
Table
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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 20,000 options were
outstanding under this plan as of December 31
, 2009.
Shares issued
under our share-based compensation plans are usually issued from shares of our
common stock held in the treasury.
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 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 2009, 2008
and 2007 was $2.2 million, $3.2 million, and $3.4 million respectively. The
related future income tax benefits recognized for 2009, 2008 and 2007 were $0.9
million, $1.2 million and $1.1 million, respectively.
Stock options
The following table presents the weighted-average assumptions used to
estimate the fair value of options granted in 2009, 2008 and 2007:
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Expected annual dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Risk-free interest rate
|
|
2.64
|
%
|
3.17
|
%
|
4.93
|
%
|
Expected volatility
|
|
66.9
|
%
|
63.8
|
%
|
71.2
|
%
|
Expected life in years
|
|
7.7
|
|
6.3
|
|
6.2
|
|
The following table summarizes information concerning outstanding and
exercisable options:
|
|
Weighted Average
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Shares
|
|
Exercise
Price
|
|
Shares
|
|
Exercise
Price
|
|
Shares
|
|
Exercise
Price
|
|
Outstanding at beginning of year
|
|
2,202,584
|
|
$
|
9.23
|
|
2,655,937
|
|
$
|
7.95
|
|
2,629,076
|
|
$
|
4.69
|
|
Granted
|
|
164,000
|
|
$
|
13.46
|
|
110,000
|
|
$
|
12.90
|
|
699,050
|
|
$
|
19.45
|
|
Exercised
|
|
(221,225
|
)
|
$
|
4.89
|
|
(503,078
|
)
|
$
|
2.25
|
|
(545,815
|
)
|
$
|
5.19
|
|
Cancelled or expired
|
|
(42,900
|
)
|
$
|
16.46
|
|
(60,275
|
)
|
$
|
17.77
|
|
(126,374
|
)
|
$
|
15.64
|
|
Outstanding at end of year
|
|
2,102,459
|
|
$
|
9.87
|
|
2,202,584
|
|
$
|
9.23
|
|
2,655,937
|
|
$
|
7.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year end
|
|
1,558,229
|
|
|
|
1,560,804
|
|
|
|
1,645,639
|
|
|
|
Weighted average fair value per option granted
during the year
|
|
$
|
9.53
|
|
|
|
$
|
7.94
|
|
|
|
$
|
13.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised was $2.0 million, $4.1
million and $6.5 million respectively, for 2009, 2008 and 2007.
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, 2009:
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
|
|
427,378
|
|
$
|
2.28
|
|
2.53
|
|
$
|
5,739
|
|
$
|
5.01
|
to
|
$
|
15.00
|
|
1,063,317
|
|
$
|
7.68
|
|
6.07
|
|
8,538
|
|
$
|
15.01
|
to
|
$
|
20.00
|
|
472,174
|
|
$
|
18.76
|
|
7.40
|
|
28
|
|
$
|
20.01
|
to
|
$
|
20.15
|
|
100,000
|
|
$
|
20.15
|
|
7.05
|
|
|
|
$
|
1.76
|
to
|
$
|
20.15
|
|
2,062,869
|
|
$
|
9.70
|
|
5.69
|
|
$
|
14,305
|
|
51
Table
of Contents
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 2009 and the exercise price) that would have been
received by the option holders had all options been exercised on December 31,
2009. This value will change based on the fair market value of the Companys
common stock.
The following table reflects the activity for all unvested stock
options during 2009:
|
|
Shares
|
|
Weighted
Average Grant-
Date Fair Value
|
|
Unvested at January 1, 2009
|
|
641,780
|
|
$
|
11.18
|
|
Granted
|
|
164,000
|
|
$
|
9.53
|
|
Vested
|
|
(241,363
|
)
|
$
|
10.39
|
|
Forfeited
|
|
(20,187
|
)
|
$
|
12.80
|
|
Unvested at December 31, 2009
|
|
544,230
|
|
$
|
10.98
|
|
At December 31, 2009, there was approximately $2.6 million of
unrecognized compensation costs related to unvested stock options, which is
expected to be recognized over a weighted average period of 1.19 years. The
total fair value of stock options vested during 2009, 2008 and 2007 was $2.5
million, $3.0 million and $0.7 million, 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 $0.6 million in each of 2009, 2008 and 2007. Share-based
compensation expense for restricted stock issued to Directors was $0.1 million
in each of 2009, 2008 and 2007.
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 2009
the Company repurchased 98,934 common shares at a cost of approximately $1.2
million, an average of $11.87 per share. 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.
9.
INCOME
TAXES
The components of income before income taxes are as follows (in
thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
United States
|
|
$
|
54,468
|
|
$
|
61,220
|
|
$
|
81,832
|
|
Foreign
|
|
18,617
|
|
22,523
|
|
18,191
|
|
Total
|
|
$
|
73,085
|
|
$
|
83,743
|
|
$
|
100,023
|
|
52
Table of
Contents
The provision for income taxes consists of the following (in
thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,987
|
|
$
|
15,753
|
|
$
|
26,174
|
|
State
|
|
3,005
|
|
4,106
|
|
4,842
|
|
Foreign
|
|
6,204
|
|
4,844
|
|
5,632
|
|
Total current
|
|
21,196
|
|
24,703
|
|
36,648
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
4,271
|
|
2,242
|
|
(1,004
|
)
|
State
|
|
844
|
|
154
|
|
277
|
|
Foreign
|
|
589
|
|
3,801
|
|
(5,379
|
)
|
Total deferred
|
|
5,704
|
|
6,197
|
|
(6,106
|
)
|
TOTAL
|
|
$
|
26,900
|
|
$
|
30,900
|
|
$
|
30,542
|
|
Income
taxes are accrued and paid by each foreign entity in accordance with applicable
local regulations.
A
reconciliation of the difference between the income tax expense and the
computed income tax expense based on the Federal statutory corporate rate is as
follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Income tax at Federal statutory rate
|
|
$
|
25,580
|
|
$
|
29,311
|
|
$
|
35,008
|
|
State and local income taxes and changes in
valuation allowances, net of federal tax benefit
|
|
2,402
|
|
3,036
|
|
3,332
|
|
Foreign taxes at rates different from the U.S.
rate
|
|
(991
|
)
|
(940
|
)
|
(2,260
|
)
|
Changes in valuation allowances for foreign
deferred tax assets
|
|
965
|
|
(120
|
)
|
(6,184
|
)
|
Decrease in tax reserves
|
|
(1,195
|
)
|
|
|
|
|
Refunds- prior years
|
|
|
|
(872
|
)
|
|
|
Non-deductible items
|
|
|
|
|
|
963
|
|
Adjustment for prior year taxes
|
|
107
|
|
253
|
|
(593
|
)
|
Other items, net
|
|
32
|
|
232
|
|
276
|
|
|
|
$
|
26,900
|
|
$
|
30,900
|
|
$
|
30,542
|
|
The deferred tax assets and liabilities are comprised of the following
(in thousands):
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Assets:
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
7,612
|
|
$
|
8,524
|
|
Inventory
|
|
1,838
|
|
1,899
|
|
Valuation allowances
|
|
(1,507
|
)
|
|
|
Total current assets
|
|
$
|
7,943
|
|
$
|
10,423
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
Net operating loss and credit carryforwards
|
|
$
|
19,058
|
|
$
|
8,834
|
|
Accelerated depreciation
|
|
10,516
|
|
1,089
|
|
Intangible and other assets
|
|
2,264
|
|
4,606
|
|
Other
|
|
6,910
|
|
5,300
|
|
Valuation allowances
|
|
(28,326
|
)
|
(8,377
|
)
|
Total non-current
assets
|
|
$
|
10,422
|
|
$
|
11,452
|
|
|
|
|
|
|
|
Liabilities
:
|
|
|
|
|
|
Current :
|
|
|
|
|
|
Deductible assets
|
|
$
|
1,298
|
|
$
|
753
|
|
Other
|
|
19
|
|
112
|
|
Total current liabilities
|
|
$
|
1,317
|
|
$
|
865
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
Accelerated depreciation
|
|
$
|
1,858
|
|
$
|
248
|
|
Other
|
|
|
|
6
|
|
Total non-current
liabilities
|
|
$
|
1,858
|
|
$
|
254
|
|
53
Table of Contents
The
Company has not provided for federal income taxes applicable to the
undistributed earnings of its foreign subsidiaries of approximately $62.9
million as of December 31, 2009, since these earnings are considered
indefinitely reinvested. The Company has foreign net operating loss
carryforwards which expire through 2024. 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.
As
of December 31, 2009, the Company has recorded valuation allowances of
approximately $29.8 million including valuations against net operating loss
carryforwards incurred in foreign and state jurisdictions of $15.9 million and
$2.5 million, respectively, deductible temporary differences incurred in
foreign jurisdictions of $10.8 million, the majority of which relates to the
WStore acquisition, $0.5 million in foreign tax credit carryforwards, and $0.1
million for other state deductible temporary differences.
Valuation
allowances increased in 2009 by $20.9 million as a result of the WStore
acquisition and the valuation allowances recorded against acquired deferred tax
assets and net operating losses. Carryforward losses of $1 million were
utilized in 2009 for which valuation allowances had been previously provided.
The
Company has foreign tax credit carryforwards in the amount of $0.5 million
which begin to expire in 2017.
Valuation
allowances decreased $.4 million in 2008 for carryforward losses utilized for
which valuation allowances had been previously provided. As of December 31,
2008, the valuation allowances of $8.4 million included $6.4 million related to
net operating loss carryforwards in foreign jurisdictions, $2.0 million for
state net operating loss carryforwards and $0.2 million for other state
deductible temporary differences. During 2008, valuation allowances increased
approximately $1.4 additional losses incurred in foreign and state
jurisdictions. Valuation allowances
decreased $0.7 million in 2008 for carryforward losses utilized for which
valuation allowances had been previously provided.
The
Company is routinely audited by federal, state and foreign tax authorities with
respect to its income taxes. The Company regularly reviews and evaluates the
likelihood of audit assessments and believes it has adequately accrued for
exposures for tax liabilities resulting from future tax audits. To the extent
the Company would be required to pay amounts in excess of reserves or prevail
on matters for which accruals have been established, the Companys effective
tax rate in a given period may be materially impacted. The Companys federal
income tax returns have been audited through 2006. 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 2002, in Canada
for years after 2004, in France for years after 2007, in Italy for years after
2005, in Netherlands for years after 2004 and in Germany for years after 2007.
In
accordance with the guidance for accounting for uncertainty in income taxes the
Company recognizes the tax benefits from an uncertain tax position only if it
is more likely than not that the tax position will be sustained on examination
by the taxing authorities based on the technical merits of the position. The
tax benefit of an uncertain tax position that meets the more-likely-than-not
recognition threshold is measured as the largest amount that is greater than
50% likely to be realized upon settlement with the tax authority. To the extent
we prevail in matters for which accruals have been established or are required
to pay amounts in excess of accruals, our effective tax rate in a given
financial statement period could be affected. Accrued interest and penalties
related to unrecognized tax benefits are recorded in income tax expense in the
current year.
The
following table details activity of the Companys uncertain tax positions
during 2009 and 2008:
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Balance beginning of year
|
|
$
|
916
|
|
$
|
916
|
|
Decreases related to settlements with taxing
authorities
|
|
(916
|
)
|
|
|
Balance end of year
|
|
|
|
$
|
916
|
|
|
|
|
|
|
|
|
|
54
Table
of Contents
Interest
and penalties of approximately $0 and $0.1 million related to unrecognized tax
benefits were expensed in 2009 and 2008 and are included in income tax expense.
Additionally, included in income tax expense in 2008 is an interest and penalty
reserves reversal of approximately $0.4 million related to a state tax audit
that was settled favorably.
10.
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 October 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.
At
December 31, 2009, 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
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
1,145
|
|
$
|
24,004
|
|
$
|
25,149
|
|
2011
|
|
794
|
|
24,280
|
|
25,074
|
|
2012
|
|
329
|
|
22,793
|
|
23,122
|
|
2013
|
|
155
|
|
20,253
|
|
20,408
|
|
2014
|
|
|
|
16,367
|
|
16,367
|
|
2015-2019
|
|
|
|
66,413
|
|
66,413
|
|
2020-2024
|
|
|
|
11,767
|
|
11,767
|
|
Thereafter
|
|
|
|
2,428
|
|
2,428
|
|
Total minimum lease payments
|
|
2,423
|
|
188,305
|
|
190,728
|
|
Less: sublease rental income
|
|
|
|
354
|
|
354
|
|
Lease obligation net of subleases
|
|
2,423
|
|
$
|
187,951
|
|
$
|
190,374
|
|
Less amount representing interest
|
|
200
|
|
|
|
|
|
Present value of minimum capital lease payments
(including current portion of $1,029)
|
|
$
|
2,223
|
|
|
|
|
|
Annual
rent expense aggregated approximately $27.1 million, $25.0 million and $14.8
million in 2009, 2008 and 2007, respectively. Included in rent expense was $0.9
million, $0.9 million and $0.6 million in 2009, 2008 and 2007, respectively, to
related parties. Rent expense is net of sublease income of $0.1 million, $0.4
million and $0.9 million for 2009, 2008 and 2007, respectively.
Litigation
State of Florida, Office of
the Attorney General
On September 4, 2009 the
Office of the Attorney General, Department of Legal Affairs for the State of
Florida filed a lawsuit against OnRebate.com Inc, TigerDirect Inc. and Systemax
Inc. in the Circuit Court of the Eleventh Judicial Court for Miami-Dade County,
Florida alleging deceptive and unfair trade practices under Florida law
relating to the offering and processing of customer rebates. The lawsuit
seeks injunctive relief, damages, civil penalties and other equitable relief.
The Company denies the allegations in the lawsuit and intends to vigorously
defend the case.
55
Table of Contents
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 the consolidated financial
statements.
11.
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.
Financial
information relating to the Companys operations by reportable segment was as
follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Net Sales:
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
2,967,896
|
|
$
|
2,795,441
|
|
$
|
2,553,716
|
|
Industrial Products
|
|
196,129
|
|
237,027
|
|
225,746
|
|
Software Solutions
|
|
1,970
|
|
493
|
|
413
|
|
Consolidated
|
|
$
|
3,165,995
|
|
$
|
3,032,961
|
|
$
|
2,779,875
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense:
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
10,141
|
|
$
|
8,219
|
|
$
|
6,818
|
|
Industrial Products
|
|
1,476
|
|
986
|
|
1,023
|
|
Software Solutions
|
|
613
|
|
1,111
|
|
904
|
|
Corporate
|
|
123
|
|
71
|
|
35
|
|
Consolidated
|
|
$
|
12,353
|
|
$
|
10,387
|
|
$
|
8,780
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
87,127
|
|
$
|
96,177
|
|
$
|
100,958
|
|
Industrial Products
|
|
15,415
|
|
24,621
|
|
20,595
|
|
Software Solutions
|
|
(6,457
|
)
|
(17,948
|
)
|
(15,813
|
)
|
Corporate and other expenses
|
|
(22,694
|
)
|
(19,483
|
)
|
(11,798
|
)
|
Consolidated
|
|
$
|
73,391
|
|
$
|
83,367
|
|
$
|
93,942
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
521,900
|
|
$
|
400,340
|
|
$
|
331,033
|
|
Industrial Products
|
|
103,370
|
|
98,670
|
|
76,634
|
|
Software Solutions
|
|
149
|
|
3,531
|
|
3,783
|
|
Corporate
|
|
191,482
|
|
199,912
|
|
266,194
|
|
Consolidated
|
|
$
|
816,901
|
|
$
|
702,453
|
|
$
|
677,644
|
|
56
Table of Contents
Financial
information relating to the Companys operations by geographic area was as
follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Net Sales:
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
1,931,544
|
|
$
|
1,660,902
|
|
$
|
1,451,046
|
|
Industrial Products
|
|
196,129
|
|
237,027
|
|
225,746
|
|
Software Solutions
|
|
1,970
|
|
493
|
|
413
|
|
United States total
|
|
2,129,643
|
|
1,898,422
|
|
1,677,205
|
|
Other North America (Technology Products)
|
|
187,832
|
|
193,950
|
|
170,272
|
|
Europe
|
|
848,520
|
|
940,589
|
|
932,398
|
|
Consolidated
|
|
$
|
3,165,995
|
|
$
|
3,032,961
|
|
$
|
2,779,875
|
|
|
|
|
|
|
|
|
|
Long-lived Assets:
|
|
|
|
|
|
|
|
North America principally United States
|
|
$
|
39,860
|
|
$
|
30,188
|
|
$
|
21,978
|
|
Europe
|
|
25,738
|
|
18,277
|
|
25,602
|
|
Consolidated
|
|
$
|
65,598
|
|
$
|
48,465
|
|
$
|
47,580
|
|
Net sales are attributed to countries based on location of selling subsidiary.
12.
QUARTERLY
FINANCIAL DATA (UNAUDITED)
Quarterly financial data is as follows (in thousands, except for per
share amounts):
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
2009:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
752,268
|
|
$
|
721,599
|
|
$
|
753,880
|
|
$
|
938,248
|
|
Gross profit
|
|
$
|
107,550
|
|
$
|
107,054
|
|
$
|
112,763
|
|
$
|
132,881
|
|
Net income
|
|
$
|
8,698
|
|
$
|
6,491
|
|
$
|
12,598
|
|
$
|
18,398
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.24
|
|
$
|
.18
|
|
$
|
.34
|
|
$
|
.50
|
|
Diluted
|
|
$
|
.23
|
|
$
|
.17
|
|
$
|
.34
|
|
$
|
.49
|
|
|
|
|
|
|
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
724,737
|
|
$
|
756,035
|
|
$
|
739,479
|
|
$
|
812,710
|
|
Gross profit
|
|
$
|
113,749
|
|
$
|
114,754
|
|
$
|
115,419
|
|
$
|
114,637
|
|
Net income
|
|
$
|
18,061
|
|
$
|
13,541
|
|
$
|
11,273
|
|
$
|
9,968
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.49
|
|
$
|
.36
|
|
$
|
.30
|
|
$
|
.27
|
|
Diluted
|
|
$
|
.48
|
|
$
|
.36
|
|
$
|
.30
|
|
$
|
.27
|
|
57
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
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
17,523
|
|
$
|
4,698
|
|
$
|
(4,493
|
)
|
4,804
|
(2)
|
$
|
22,532
|
|
2008
|
|
$
|
20,521
|
|
$
|
2,424
|
|
$
|
(5,422
|
)
|
|
|
17,523
|
|
2007
|
|
$
|
18,176
|
|
$
|
4,575
|
|
$
|
(2,230
|
)
|
|
|
$
|
20,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Current (3)
|
|
$
|
|
|
$
|
|
|
|
|
$
|
1,507
|
|
$
|
1,507
|
|
Noncurrent (1)(3)
|
|
$
|
8,377
|
|
$
|
|
|
$
|
(2,125
|
)
|
$
|
22,074
|
|
$
|
28,326
|
|
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
|
|
(1)
Charges to
expense are net of reductions resulting from changes in deferred tax assets due
to changes in tax laws.
(2)
Other relates
to WStore acquisition allowance for sales returns and doubtful accounts as of
acquisition date.
(3)
Included in other
is allowances recorded for deferred tax assets and net operating losses
acquired in the WStore Europe SA acquisition.
58
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