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(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, 2006 or 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)
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Delaware
(State or other jurisdiction of incorporation or organization) |
11-3262067
(I.R.S. Employer Identification No.) |
11 Harbor Park Drive
Port Washington, New York 11050
(Address of principal executive offices, including zip code)
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Title of each class Common Stock, par value $ .01 per share |
Name of each exchange
on which registered New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] 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 [ ] 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 [ ]
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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large Accelerated Filer [ ]
Accelerated Filer [ ] Non Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2006, which is the last business day of the
registrant’s most recently completed second fiscal quarter, was
approximately $73,985,207. 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 registrant’s common stock as of
March 1, 2007 was 35,843,259 shares.
Documents incorporated by reference: Portions of the Proxy Statement
of Systemax Inc. relating to the 2007 annual meeting of stockholders are
incorporated by reference in Part III hereof.
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Part I
Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Part II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Part III Item 10. Item 11. Item 12. Item 13. Item 14. Part IV Item 15. |
Business
General Products Sales and Marketing Customer Service, Order Fulfillment and Support Suppliers Competition and Other Market Factors Employees Environmental Matters Financial Information About Foreign and Domestic Operations Available Information Risk Factors Unresolved Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders Market for Registrant's Common Equity and Related Stockholder Matters of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules Signatures |
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2 3 3 5 5 5 6 6 7 7 8 14 14 15 16 16 17 18 28 28 28 29 30 31 31 31 31 31 31 35 |
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 discussion, 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. Management’s 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.
Systemax is a direct marketer of brand name and private label products. Our operations are organized in three primary reportable business segments – Technology Products, Industrial Products and Hosted Software. Hosted Software became a reportable segment in 2006. Our Technology Products segment sells computers, computer supplies and consumer electronics which are marketed in North America and Europe. We assemble our own PCs and sell them under the trademarks Systemax™ and Ultra™ . In addition, we market and sell computers manufactured by other leading companies. Technology products accounted for 92% of our net sales in 2006. Our Industrial Products segment sells a wide array of material handling equipment, storage equipment and consumable industrial items which are marketed in North America. Industrial products accounted for 8% of our net sales in 2006. In both of these product groups we offer our customers a broad selection of products, prompt order fulfillment and extensive customer service. Our Hosted Software segment participates in the emerging market for on-demand, web-based business software applications through the marketing of our PCS ProfitCenter Software ™ of hosted software. See Note 12 to the consolidated financial statements included in Item 15 of this Form 10-K for additional financial information about our business segments as well as information about our geographic operations.
The Company was incorporated in Delaware in 1995. Certain predecessor businesses which now constitute part of the Company have been in business since 1955. Our headquarters office is located at 11 Harbor Park Drive, Port Washington, New York.
We offer more than 100,000 brand name and private label products. We endeavor to expand and keep current the breadth of our product offerings in order to fulfill the increasingly wide range of product needs of our customers.
Our computer sales include Systemax and Ultra PCs as well as offerings of other brand name PCs, servers and notebook computers. Computer supplies and consumer electronics related products include supplies such as laser printer toner cartridges and ink jet printer cartridges; media such as 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; PDA’s; and packaged software.
We assemble our Systemax and Ultra brand PCs in our 297,000 square foot, ISO-9001-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 storage equipment such as wire and metal shelving, bins and lockers; light material handling equipment such as hand carts, forklifts and hand trucks; ladders, furniture, small office machines and related supplies; and consumable industrial products such as first aid items, safety items, protective clothing and OSHA compliance items.
We began to market our PCS ProfitCenter Software ™ suite of business applications in 2004. PCS ProfitCenter Software ™ is a web-based application which is delivered as an on-demand service over the internet. The product helps companies automate and manage their entire customer life-cycle across multiple sales channels (internet, call centers, outside salespersons, etc.). We have not recognized any significant revenues for this service to date.
We market our products to both business customers and individual consumers. Our business customers include for-profit businesses educational organizations and government entities. We have developed a proprietary customer and prospect database. We consider our business customers to include the various individuals who work within an organization rather than just the business itself.
We have established a three-pronged system of direct marketing to business customers, consisting of relationship marketers, catalog mailings and propriety internet web sites, the combination of which is designed to maximize sales. Our relationship marketers focus their efforts on our business customers by establishing a personal relationship between such customers and a Systemax account manager. The goal of the relationship marketing sales force is to increase the purchasing productivity of current customers and to actively solicit newly targeted prospects to become customers. With access to the records we maintain of historical purchasing patterns, our relationship marketers are prompted with product suggestions to expand customer order values. In the United States, 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 these three marketing methods enables us to more thoroughly penetrate our business and government customer base. Increased internet exposure can lead to more internet-related sales and can also generate more inbound telephone sales; just as catalog mailings and email campaigns which feature our websites can result in greater internet-related sales.
Our growth in net sales continues to be supported by strong growth in sales to individual consumers, particularly through e-commerce means. To reach our consumer audience, we use 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 a cost-effective manner. As part of our marketing strategy we advertise manufacturers’ mail-in-rebates on many products we sell and, in some cases, offer our own rebates. We combine our use of e-commerce initiatives with catalog mailings, which generate calls to inbound sales representatives. These sales representatives use our information systems to fulfill orders and explore additional customer product needs. Sales to 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. We currently have eight such retail locations in North America and we have four in Europe, which are located in or near one of our existing sales and distribution centers, thereby minimizing our operating costs. We presently plan to add four more retail locations in 2007.
E-commerce
The worldwide growth in active internet users has made e-commerce a significant opportunity for sales growth. In 2006, we had approximately $819 million in internet-related sales, an increase of $169 million, or 26%, from 2005. E-commerce sales represented 34.9% of total revenue in 2006, compared to 30.7% in 2005. The increase in our internet-related sales enables us to leverage our advertising spending, allowing us to reduce our printed catalog costs while maintaining customer contact.
We currently operate multiple e-commerce sites, including www.systemaxpc.com , www.tigerdirect.com , www.tiger.ca , www.globalcomputer.com , www.globalgoved.com , www.infotelusa.com , www.misco.co.uk , www.misco.fr , www.misco.de , www.misco.se , www.misco.es , www.misco.it , www.misco.nl , www.profitcenter.com and www.globalindustrial.com , and we continually upgrade the capabilities and performance of these web sites. Our internet sites feature on-line catalogs of thousands of products, allowing us to offer a wider variety of computer and industrial products than our printed catalogs. Our customers have around-the-clock, on-line access to purchase products and we have the ability to create targeted promotions for our customers’ interests. Many of our internet sites also permit customers to purchase “build to order” PCs configured to their own specifications.
In addition to our own e-commerce web sites, we have partnering agreements with several of the largest internet shopping and search engine providers who feature our products on their web sites or provide “click-throughs” from their sites directly to ours. These arrangements allow us to expand our customer base at an economical cost.
Catalogs
We currently produce a total of 19 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 ™, Misco ®, HCS Misco ™, Global Industrial ™, ArrowStar ™ and 06 ™. Full-line computer product catalogs offer products such as PCs, notebooks, peripherals, computer components, magnetic media, data communication, networking and power protection equipment, ergonomic accessories, furniture and software. Full-line industrial product catalogs offer products such as material handling products and industrial supplies. Specialty catalogs contain more focused product offerings and are targeted to individuals most likely to purchase from such catalogs. We mail catalogs to both businesses and consumers. In the case of business mailings, we mail our catalogs to many individuals at a single business location, providing us with multiple points-of-entry. Our in-house staff designs all of our catalogs. In-house catalog production helps reduce overall catalog expense and shortens catalog production time. This allows us the flexibility to alter our product offerings and pricing and to refine our catalog formats more quickly. Our catalogs are printed by third parties under fixed pricing arrangements. The commonality of certain core pages of our catalogs also allows for economies in catalog production.
As noted above, the increase in our internet-related sales allowed us to reduce the distribution of our catalogs to 59 million, which was 9.5% fewer than in the prior year. We mailed approximately 41 million catalogs in North America, a 8% reduction from last year and approximately 18 million catalogs, or 12% fewer than 2005, were distributed in Europe.
We generally provide toll-free telephone number access to our customers. Certain of our domestic call centers are linked to provide telephone backup in the event of a disruption in phone service. In addition to telephone orders, we also receive orders by mail, fax, electronic data interchange and through the internet.
A large number of our products are carried in stock, and orders for such products are fulfilled on a timely basis directly from our distribution centers, typically on the day the order is received. We operate out of multiple sales and distribution facilities in North America and Europe. The locations of our distribution centers enable us to provide our customers next day or second day delivery. Orders are generally shipped by third-party delivery services in the United States and in Europe. The locations of our distribution centers in Europe have enabled us to market into four additional countries with limited incremental investment. We maintain relationships with a number of large distributors in North America and Europe that also deliver products directly to our customers.
We provide extensive technical telephone support to our Systemax brand PC customers. We maintain a database of commonly asked questions for our technical support representatives, enabling them to respond quickly to similar questions. We conduct regular on-site training seminars for our sales representatives to help ensure that they are well trained and informed regarding our latest product offerings.
We purchase the majority of our products and components directly from manufacturers and large wholesale distributors. For the year ended December 31, 2006, Ingram Micro accounted for 12.8% of our purchases. For the year ended December 31, 2005, no vendor accounted for more than 10% of our purchases. For the year ended December 31, 2004, Tech Data Corporation accounted for 12.2% and Ingram Micro Inc. accounted for 10.4% of our purchases. The loss of either of these vendors, or any other key vendors, could have an 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.
Technology Products
The North American and European computer markets are highly competitive, with many U.S., Asian and European companies vying for market share. There are few barriers of entry to the PC market, with PCs being sold through the direct market channel, 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 in the PC market. Other competitive factors include product performance, quality and reliability, technical support and customer service, marketing and distribution and price. Some of our competitors have stronger brand-recognition, broader product lines and greater financial, marketing, manufacturing and technological resources than us. Additionally, our results could also be adversely affected should we be unable to maintain our technological and marketing arrangements with other companies, such as Microsoft®, Intel® and Advanced Micro Devices®.
The North American computer related products market is highly fragmented and characterized by multiple channels of distribution including direct marketers, local and national retail computer stores, computer resellers, mass merchants, computer and office supply “superstores” and internet-based resellers. In Europe, our major competitors are regional or country-specific retail and direct-mail distribution companies and internet-based resellers.
With conditions in the market for computer related products remaining highly competitive, continued reductions in retail prices may adversely affect our revenues and profits. Additionally, we rely in part upon the introduction of new technologies and products by other manufacturers in order to sustain long-term sales growth and profitability. There is no assurance that the rapid rate of such technological advances and product development will continue.
Industrial Products
The market for the sale of industrial products in North America is highly fragmented and is characterized by multiple distribution channels such as retail outlets, small dealerships, direct mail distribution, internet-based resellers and large warehouse stores. We also face competition from manufacturers’ own sales representatives, who sell industrial equipment directly to customers, and from regional or local distributors. Many high volume purchasers, however, utilize catalog distributors as their first source of product. In the industrial products market, customer purchasing decisions are primarily based on price, product selection, product availability, level of service and convenience. We believe that direct marketing via catalog, the internet and sales representatives is an effective and convenient distribution method to reach mid-sized facilities that place many small orders and require a wide selection of products. In addition, because the industrial products market is highly fragmented and generally less brand oriented, it is well suited to private label products.
As of December 31, 2006, we employed a total of 3,287 employees, including 2,961 full-time and 326 part-time employees, of whom 2,119 were in North America and 1,168 were in Europe.
Under various national, state and local environmental laws and regulations in North America and Europe, a current or previous owner or operator (including the lessee) of real property may become liable for the costs of removal or remediation of hazardous substances at such real property. Such laws and regulations often impose liability without regard to fault. We lease most of our facilities. In connection with such leases, we could be held liable for the costs of removal or remedial actions with respect to hazardous substances. Although we have not been notified of, and are not otherwise aware of, any material 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 environmental matters in the future.
We conduct our business in North America (the United States and Canada) and Europe. Approximately 37.5% of our net sales for the year ended December 31, 2006 were made by subsidiaries located outside of the United States. For information pertaining to our international operations, see Note 12, “Segment and Related Information,” to the consolidated financial statements included in Item 15 of this Form 10-K. The following sets forth selected information with respect to our operations in those two geographic markets (in thousands):
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Europe
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North America
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Total
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| 2006 | |||
| Net sales | $ 743,906 | $1,601,259 | $2,345,165 |
| Income from operations | $ 16,459 | $ 45,445 | $ 61,904 |
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Identifiable assets
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$ 157,710
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$ 426,451
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$ 584,161
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| 2005 | |||
| Net sales | $ 694,637 | $1,420,881 | $2,115,518 |
| Income (loss) from operations | $ (4,603) | $ 39,412 | $ 34,809 |
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Identifiable assets
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$ 142,174
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$ 362,370
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$ 504,544
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| 2004 | |||
| Net sales | $ 695,695 | $1,232,452 | $1,928,147 |
| Income (loss) from operations | $ (12,376) | $ 31,375 | $ 18,999 |
| Identifiable assets | $ 169,912 | $ 313,284 | $ 483,196 |
See Item 7, Management’s Discussions and Analysis of Financial Condition and Results of Operations, for further information with respect to our operations.
We maintain an internet web site at www.systemax.com . We file reports with the Securities and Exchange Commission and make available free of charge on or through this web site our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including all amendments to those reports. These are available as soon as is reasonably practicable after they are filed with the SEC. All reports mentioned above are also available from the SEC’s web site ( www.sec.gov ). The information on our web site is not part of this or any other report we file with, or furnish to, the SEC.
Our Board of Directors has adopted the following corporate governance documents with respect to the Company (the “Corporate Governance Documents”):
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Corporate Ethics Policy for officers, directors and employees
Charter for the Audit Committee of the Board of Directors Charter for the Compensation Committee of the Board of Directors Charter for the Nominating/Corporate Governance Committee of the Board of Directors Corporate Governance Guidelines and Principles |
In accordance with the corporate governance rules of the New York Stock Exchange, each of the Corporate Governance Documents is available on our Company web site ( www.systemax.com ) or can be obtained by writing to Systemax Inc., Attention: Board of Directors (Corporate Governance), 11 Harbor Park Drive, Port Washington, NY 11050.
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.
| • | Economic conditions have affected and could continue to adversely affect our revenues and profits. |
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Both we and our customers are subject to global political, economic and market
conditions, including inflation, interest rates, energy costs, the impact of
natural disasters, military action and the threat of terrorism. Our consolidated
results of operations are directly affected by economic conditions in North
America and Europe. We may experience a decline in sales as a result of poor
economic conditions and the lack of visibility relating to future orders. Our
results of operations depend upon, among other things, our ability to maintain
and increase sales volumes with existing customers, our ability to attract new
customers and the financial condition of our customers. A decline in the economy
that adversely affects our customers, causing them to limit or defer their
spending, would likely adversely affect us as well. We cannot predict with any
certainty whether we will be able to maintain or improve upon historical sales
volumes with existing customers, or whether we will be able to attract new
customers.
In response to economic and market conditions, from time to time we have undertaken initiatives to reduce our cost structure where appropriate. The initiatives already implemented as well as any future workforce and facilities reductions undertaken may not be sufficient to meet the changes in economic and market conditions and to achieve future profitability. 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. |
| • | Increased costs associated with corporate governance compliance may impact our results of operations. |
| As a public company, we incur significant legal, accounting and other expenses that we would not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission and listing requirements subsequently adopted by the New York Stock Exchange in response to Sarbanes-Oxley, have required changes in corporate governance practices of public companies. These developments have already substantially increased our legal compliance, auditing and financial reporting costs and made them more time consuming. We anticipate that the Company will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act as of December 31, 2007, and that costs will further increase and make some compliance activities more time consuming. These developments may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage, possibly making it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee. We presently cannot estimate the timing or magnitude of additional costs we may incur as a result of the implementation of Section 404 of the Sarbanes-Oxley Act; however, to the extent these costs are significant, our general and administrative expenses are likely to increase as a percentage of revenue and our results of operations will be negatively impacted. |
| • | Competitive pressures could harm our revenue and gross margin. |
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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. Some of our competitors are larger
companies with greater financial, marketing and product development resources
than ours. In addition, new competitors may enter our markets. This may place us
at a disadvantage in responding to competitors’ pricing strategies,
technological advances and other initiatives, resulting in our inability to
increase our revenues or maintain our gross margins in the future.
In many cases our products compete directly with those offered by other manufacturers and distributors. If any of our competitors were to develop products or services that are more cost-effective or technically superior, demand for our product offerings could decrease. Our gross margins are also dependent on the mix of products we sell and could be adversely affected by a continuation of our customers’ shift to lower-priced products. As do most 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. We process these rebates through third party vendors and in house. If we are unable to fulfill these rebates in a timely and satisfactory manner, our reputation in the marketplace could be negatively impacted. |
| • | State and local sales tax collection may affect demand for our products. |
| Our United States subsidiaries collect and remit sales tax in states in which the subsidiaries have physical presence or in which we believe nexus exists which obligates us to collect sales tax. Other states may, from time to time, claim that we have state-related activities constituting a sufficient nexus to require such collection. Additionally, many other states seek to impose sales tax collection obligations on companies that sell goods to customers in their state, or directly to the state and its political subdivisions, even without a physical presence. Such efforts by states have increased recently, as states seek to raise revenues without increasing the tax burden on residents. We rely on United States Supreme Court decisions which hold that, without Congressional authority, a state may not enforce a sales tax collection obligation on a company that has no physical presence in the state and whose only contacts with the state are through the use of interstate commerce such as the mailing of catalogs into the state and the delivery of goods by mail or common carrier. We cannot predict whether the nature or level of contacts we have with a particular state will be deemed enough to require us to collect sales tax in that state nor can we be assured that Congress or individual states will not approve legislation authorizing states to impose tax collection obligations on all direct mail and/or e-commerce transactions. A successful assertion by one or more states that we should collect sales tax on the sale of merchandise could result in substantial tax liabilities related to past sales and would result in considerable administrative burdens and costs for us and may reduce demand for our products from customers in such states when we charge customers for such taxes. |
| • | Business disruptions could adversely impact our revenue and financial condition. |
| We insure for certain property and casualty risks consisting primarily of physical loss to property, business interruptions resulting from property losses, workers’ compensation, comprehensive general liability, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. Although we believe that our insurance coverage is reasonable, significant events such as acts of war and terrorism, economic conditions, judicial decisions, legislation, natural disasters and large losses could materially affect our insurance obligations and future expense. |
| • | Changes in financial accounting standards may affect our results of operations. |
| A change in accounting standards or practices can have a significant effect on our reported results of operations. New accounting pronouncements and interpretations of existing accounting rules and practices have occurred and may occur in the future. Changes to existing rules, such as the implementation of Financial Accounting Standard Board Interpretation No. 48 (“Fin 48”) “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)", may adversely affect our reported financial results. Fin 48 which is effective for fiscal years beginning after December 15, 2006, was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is currently evaluating the potential impact, if any, of this pronouncement. |
| • | We may not be able to comply with Section 404 of the Sarbanes-Oxley Act of 2002. |
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For the year ended December 31, 2006, we were not subject to the internal
controls certification and attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 because we were not an accelerated filer as defined
by the SEC. For the year ended December 31, 2007, we will be subject to the
requirements of Section 404 that management provide an assessment of the
effectiveness of the Company’s internal control over financial reporting
and the Company’s independent registered public accounting firm will be
required to audit that assessment.
We are working to achieve compliance with the requirements of Section 404. We will be dedicating substantial time and resources to documentation and review of our procedures and we will have to devote substantial time and resources to this effort in 2007. We may also need to engage outside consultants to assist us. We have not completed this process or its assessment, due to the complexities of our decentralized structure, the number of accounting systems in use, and the lack of qualified personnel to devote to the process. In addition to the significant deficiencies reported as of December 31, 2006 discussed under the caption “Disclosure Controls and Procedures” in Item 9A. Controls and Procedures; we have identified numerous other internal control deficiencies that may affect the timeliness and accuracy of recording transactions and which, individually or in the aggregate, could become material weaknesses in future periods if not remediated. If we are not successful in complying with Section 404 of the Sarbanes-Oxley Act of 2002, we could lose the confidence of our investors. |
| • | In the past we have been late filing our required financial reports. Any such delays in the future could affect the trading of our stock. |
| We were late in the filing of our 2005 quarterly and annual reports and our 2006 quarterly reports required under the Securities Exchange Act of 1934. Failure to file required reports on a timely basis could result in the de-listing of the Company’s common stock by the New York Stock Exchange. If we do not file our required annual and quarterly financial statements in the prescribed time frames we would also be ineligible to file certain registration statements and could be subject to SEC enforcement action. |
| • | Our success is dependent upon the availability of credit and financing. |
| We require significant levels of capital in our business to finance accounts receivable and inventory. We maintain credit facilities in the United States and in Europe to finance increases in our working capital if available cash is insufficient. The amount of credit available to us at any point in time may be adversely affected by the quality or value of the assets collateralizing these credit lines. In addition, if we are unable to renew or replace these facilities at maturity our liquidity and capital resources may be adversely affected. However, we currently have no reason to believe that we will not be able to renew or replace our facilities when they reach maturity. |
| • | We have substantial international operations and we are exposed to fluctuations in currency exchange rates and political uncertainties. |
| We operate internationally and as a result, we are subject to risks associated with doing business globally. Risks inherent to operating overseas include: |
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Changes in a country’s economic or political conditions
Changes in foreign currency exchange rates Difficulties with staffing and managing international operations Unexpected changes in regulatory requirements |
| For example, we currently have operations located in nine countries outside the United States, and non-U.S. sales (Europe and Canada) accounted for 37.5% of our revenue during 2006. To the extent the U.S. dollar strengthens against the Euro and British pound, our European revenues and profits will be reduced when translated into U.S. dollars. |
| • | Sales to individual consumers exposes us to credit card fraud, which could adversely affect our business. |
| Failure to adequately control fraudulent credit card transactions could increase our expenses. Increased sales to individual consumers, which are more likely to be paid for using a credit card, increases our exposure to fraud. We employ technology solutions to help us detect the fraudulent use of credit card information. However, if we are unable to detect or control credit card fraud, we may in the future suffer losses as a result of orders placed with fraudulent credit card data, which could adversely affect our business. |
| • | We are exposed to inventory risks. |
|
A substantial portion of our inventory is subject to risk due to technological
change and changes in market demand for particular products. If we fail to
manage our inventory of older products we may have excess or obsolete inventory.
We may have limited rights to return purchases to certain suppliers and we may
not be able to obtain price protection on these items. The elimination of
purchase return privileges and lack of availability of price protection could
lower our gross margin or result in inventory write-downs.
We also take advantage of attractive product pricing by making opportunistic bulk inventory purchases; any resulting excess and/or obsolete inventory that we are not able to re-sell could have an adverse impact on our results of operations. Any inability to make such bulk inventory purchases may significantly impact our sales and profitability. |
| • | Our income tax rate and the value of our deferred tax assets are subject to change. |
| Changes in our income tax expense due to changes in the mix of U.S. and non-U.S. revenues and profitability, changes in tax rates or exposure to additional income tax liabilities could affect our profitability. We are subject to income taxes in the United States and various foreign jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws or by material audit assessments. The carrying value of our deferred tax assets, which are primarily in the United States and the United Kingdom, is dependent on our ability to generate future taxable income in those jurisdictions. Our United Kingdom deferred tax assets currently have a full valuation allowance. 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. |
| • | Our reliance on information and communications technology requires significant expenditures and entails risk. |
|
We rely on a variety of information and telecommunications systems in our
operations. Our success is dependent in large part on the accuracy and proper
use of our information systems, including our telecommunications systems. To
manage our growth, we continually evaluate the adequacy of our existing systems
and procedures. We anticipate that we will regularly need to make capital
expenditures to upgrade and modify our management information systems, including
software and hardware, as we grow and the needs of our business change. The
occurrence of a significant system failure, electrical or telecommunications
outages or our failure to expand or successfully implement new systems could
have a material adverse effect on our results of operations.
Our information systems networks, including our web sites, and applications could be adversely affected by viruses or worms and may be vulnerable to malicious acts such as hacking. Although we take preventive measures, these procedures may not be sufficient to avoid harm to our operations, which could have an adverse effect on our results of operations. |
| • | We are dependent on third-party suppliers. |
|
We purchase a significant portion of our computer products from major
distributors such as Tech Data Corporation and Ingram Micro Inc. and
directly from large manufacturers such as Hewlett Packard and Acer, who may
deliver those products directly to our customers. These relationships enable us
to make available to our customers a wide selection of products without having
to maintain large amounts of inventory. The termination or interruption of our
relationships with any of these suppliers could materially adversely affect our
business.
Our PC products contain electronic components, subassemblies and software that in some cases are supplied through sole or limited source third-party suppliers, some of which are located outside of the U.S. Although we do not anticipate any problems procuring supplies in the near-term, there can never be any 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. |
| • | We may encounter risks in connection with sales of our web-hosted software application. |
| In 2004, we introduced our web-based and hosted, on-demand software suite of products, marketed as PCS ProfitCenter Software™. We have a limited operating history with this type of product offering and may encounter risks inherent in the software industry, including but not limited to: |
|
•
• • • • • • • • |
Failure to implement effective general and application controls
Errors or security flaws in our product Technical difficulties which we can not resolve on a timely or cost-effective basis, Inability to provide the level of service we commit to Inability to deliver product upgrades and enhancements Delays in development Inability to hire and retain qualified technical personnel Impact of privacy laws on the use of our product Exposure to claims of infringement of intellectual property rights |
| • | Restrictions and covenants in our credit facility may limit our ability to enter into certain transactions. |
| Our United States/United Kingdom combined revolving credit agreement contains covenants restricting or limiting our ability to, among other things: |
|
•
• • • |
incur additional debt
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 agreement, we will have to negotiate a waiver agreement with the lenders. Failure to enter into such a waiver agreement could adversely affect the availability of financing to us which could materially impact our operations. |
Other factors that may affect our future results of operations and financial condition include, but are not limited to, unanticipated developments in any one or more of the following areas, as well as other factors which may be detailed from time to time in our Securities and Exchange Commission filings:
| • | the effect on us of volatility in the price of paper and periodic increases in postage rates |
| • | significant changes in the computer products retail industry, especially relating to the distribution and sale of such products |
| • | timely availability of existing and new products |
| • | risks involved with e-commerce, including possible loss of business and customer dissatisfaction if outages or other computer-related problems should preclude customer access to us |
| • | risks associated with delivery of merchandise to customers by utilizing common delivery services such as the United States Postal Service and United Parcel Service, including possible strikes and contamination |
| • | 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.
None.
Our primary facilities, which are leased except where otherwise indicated, are as follows:
|
Facility
|
Location
|
Approximate
Square Feet |
Expiration
of Lease |
|---|---|---|---|
|
Headquarters, Sales and Distribution Center (1)
|
Port Washington, NY
|
86,000
|
2007
|
|
Sales and Distribution Center
|
Buford, GA
|
647,000
|
2021
|
|
Sales and Distribution Center
|
Naperville, IL
|
330,000
|
2026
|
|
PC Assembly, Sales and Distribution Center
|
Fletcher, OH
|
297,000
|
Owned
|
|
Sales and Administrative Center
|
Miami, FL
|
80,000
|
2010
|
|
Distribution Center
|
Las Vegas, NV
|
90,000
|
2010
|
|
Sales Center
|
Markham, Ontario
|
22,000
|
2013
|
|
Sales and Distribution Center
|
Verrieres le Buisson, France
|
48,000
|
2010
|
|
Sales and Distribution Center
|
Frankfurt, Germany
|
92,000
|
2013
|
|
Sales and Distribution Center
|
Madrid, Spain
|
38,000
|
(2)
|
|
Sales and Distribution Center
|
Milan, Italy
|
102,000
|
2009
|
|
Sales and Distribution Center
|
Greenock, Scotland
|
78,000
|
Owned
|
|
European Headquarters and Sales Center
|
Wellingborough, England
|
75,000
|
Owned
|
|
Sales Center
|
Amstelveen, Netherlands
|
21,000
|
2007
|
|
Sales and Distribution Center
|
Lidkoping, Sweden
|
20,000
|
2008
|
|
(1)
(2) |
For information about this facility, leased from related parties, see Item 13
— “Certain Relationships and Related Transactions”
|
We also lease space for other smaller offices and retail stores in the United States, Canada and Europe and certain additional facilities leased by the Company are subleased to others.
For further information regarding our lease obligations, see Note 11 to the Consolidated Financial Statements.
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 management’s 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.
Systemax common stock is traded on the New York Stock Exchange under the symbol “SYX.” The following table sets forth the high and low closing sales price of our common stock as reported on the New York Stock Exchange for the periods indicated.
|
2006
|
High
|
Low
|
|---|---|---|
| First quarter | $ 7.33 | $ 6.23 |
| Second quarter | 7.99 | 5.87 |
| Third quarter | 16.02 | 7.25 |
| Fourth quarter | 18.80 | 9.93 |
|
2005
|
High
|
Low
|
|---|---|---|
| First quarter | $ 7.60 | $ 5.16 |
| Second quarter | 7.68 | 5.58 |
| Third quarter | 7.40 | 6.51 |
| Fourth quarter | 7.35 | 5.65 |
On December 31, 2006, the last reported sale price of our common stock on the New York Stock Exchange was $17.45 per share. As of December 31, 2006, we had 235 shareholders of record.
On March 14, 2007, the Company’s 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 will be the first 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 pay a special dividend in the future, but we have no present plans of doing so.
The following selected financial information is qualified by reference to, and should be read in conjunction with, the Company’s Consolidated Financial Statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this report. The selected statement of operations data for the years ended December 31, 2006, 2005 and 2004 and the selected balance sheet data as of December 31, 2006 and 2005 are derived from the audited consolidated financial statements which are included elsewhere in this report. The selected balance sheet data as of December 31, 2004, 2003 and 2002 and the selected statement of operations data for the years ended December 31, 2003 and 2002 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 common share data
and number of catalog titles)
-------------------------------------------------------------
2006 2005 2004* 2003* 2002*
-------------------------------------------------------------
Statement of Operations Data:
----------------------------
Net sales $2,345.2 $2,115.5 $1,928.1 $1,655.7 $1,551.9
Gross profit $342.9 $307.3 $286.5 $264.9 $266.3
Selling, general & administrative expenses $281.0 $268.3 $260.1 $251.5 $256.1
Restructuring and other charges - $4.2 $7.4 $1.7 $17.3
Income (loss) from operations $61.9 $34.8 $19.0 $9.2 $(7.0)
Provision (benefit) for income taxes $24.5 $21.4 $6.4 $4.4 $(0.8)
Income (loss) before cumulative effect of change in accounting
principle, net of tax $45.1 $11.4 $10.2 $3.2 $(7.4)
Cumulative effect of change in accounting principle, net of tax - - - - $(51.0)
Net income (loss) $45.1 $11.4 $10.2 $3.2 $(58.4)
Per Share Amounts:
-----------------
Income (loss) before cumulative effect of change in accounting
principle, net of tax, basic $1.29 $.33 $.30 $.09 $(.21)
Cumulative effect of change in accounting principle, net of tax, basic - - - - $(1.50)
Net income (loss), basic $1.29 $.33 $.30 $.09 $(1.71)
Income (loss) before cumulative effect of change in accounting
principle, net of tax, diluted $1.22 $.31 $.29 $.09 $(.21)
Cumulative effect of change in accounting principle, net of tax, diluted - - - - $(1.50)
Net income (loss), diluted $1.22 $.31 $.29 $.09 $(1.71)
Weighted average common shares outstanding:
Basic 35.0 34.6 34.4 34.2 34.1
Diluted 36.9 36.5 35.5 34.9 34.1
Selected Operating Data:
-----------------------
Orders entered 7.2 6.2 5.2 4.4 4.0
Number of catalogs distributed 59 66 88 97 106
Number of catalog titles 19 22 22 30 37
Balance Sheet Data:
------------------
Working capital $229.4 $169.8 $148.0 $144.1 $132.0
Total assets $584.1 $504.5 $483.2 $445.3 $436.6
Short-term debt $12.8 $26.8 $25.0 $20.8 $21.2
Long-term debt, excluding current portion $.5 $8.0 $8.6 $18.4 $17.5
Shareholders' equity $289.5 $232.8 $222.6 $208.6 $200.6
* As previously restated – see Note 2 to the consolidated financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
We are a direct marketer of brand name and private label products. Our operations are organized in two primary reportable segments – Technology Products and Industrial Products. Our Technology Products segment markets personal desktop computers, notebook computers and computer supplies and consumer electronics related products in North America and Europe. We assemble our own PCs and sell them under our own trademarks, which we believe gives us a competitive advantage. We also sell personal computers manufactured by other leading companies. Our Industrial Products segment markets material handling equipment, storage equipment and consumable industrial items in North America. We offer more than 100,000 products and continuously update our product offerings to address the needs of our customers, which include large, mid-sized and small businesses, educational and government entities as well as individual consumers. We reach customers by multiple channels, utilizing relationship marketers, e-commerce web sites, mailed catalogues and retail outlet stores. We also participate in the emerging market for on-demand, web-based software applications through the marketing of our PCS ProfitCenter Software ™ suite of hosted software, which we began during 2004, and in which we have not yet recognized significant revenues and have incurred considerable losses to date. Technology Products related products account for 92% of our net sales, and, as a result, we are dependent on the general demand for information technology products and consumer electronics.
The market for computer products is subject to intense price competition and is characterized by narrow gross profit margins. The North American industrial products market is highly fragmented and we compete against multiple distribution channels. Distribution of information technology and our industrial products is working capital intensive, requiring us to incur significant costs associated with the warehousing of many products, including the costs of leasing warehouse space, maintaining inventory and inventory management systems, and employing personnel to perform the associated tasks. We 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, and employee benefits. We have made substantial reductions in our workforce and closed or consolidated several facilities over the past several years. In response to poor economic conditions in the United States, we implemented a plan in the first quarter of 2004 to streamline our United States computer business. This plan consolidated duplicative back office and warehouse operations, which resulted in annual savings of approximately $8 million excluding severance and other restructuring costs of approximately $3 million, which were recognized in fiscal 2004. With evidence of a prolonged economic downturn in Europe, we took measures to align our cost structure with expected potentially lower revenues and decreasing gross margins, initiating several cost reduction plans there during 2004 and 2005. Actions taken in 2005 to increase efficiency and profitability in our European operations resulted in the elimination of approximately 240 positions, and resulted in approximately $6.0 million in annual savings excluding severance and restructuring costs of approximately $3.7 million, which were recognized in fiscal 2005. Our restructuring actions and other cost savings measures implemented over the last several years resulted in reducing our consolidated selling, general and administrative expenses from 16.5% of net sales in 2002 to 12.0% of net sales in 2006. We will continue to monitor our costs and evaluate the need for additional actions.
Our significant accounting policies are described in Note 1 to the consolidated financial statements. The policies below have been identified as critical to our business operations and understanding the results of operations. 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 management’s best estimate of the consolidated results of operations, financial position and cash flows of the Company for the years presented. 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.
Accounts Receivable and Allowance for Doubtful Accounts . We record an allowance for doubtful accounts to reflect our estimate of the collectibility of our trade accounts receivable. We evaluate the collectibility of accounts receivable based on a combination of factors, including an analysis of the age of customer accounts and our historical experience with accounts receivable write-offs. The analysis also includes the financial condition of a specific customer or industry, and general economic conditions. In circumstances where we are aware of customer charge-backs or a specific customer’s inability to meet its financial obligations, a specific reserve for bad debts applicable to amounts due to reduce the net recognized receivable to the amount management reasonably believes will be collected is recorded. In those situations with ongoing discussions, the amount of bad debt recognized is based on the status of the discussions. While bad debt allowances have been within expectations and the provisions established, there can be no guarantee that we will continue to experience the same allowance rate we have in the past.
Inventories . We value our inventories at the lower of cost or market, cost being determined on the first-in, first-out method. Reserves for excess and obsolete or unmarketable merchandise are provided 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.
Long-lived Assets . Management exercises judgment in evaluating our long-lived assets for impairment. We believe we will generate sufficient undiscounted cash flow to more than recover the investments made in property, plant and equipment. Our estimates of future cash flows involve assumptions concerning future operating performance and economic conditions. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations.
Accruals . Management exercises judgment in estimating various period end liabilities such as costs related to vendor drop shipments, sales returns and allowances, cooperative advertising and customer rebate reserves, and other vendor and employee related costs. While we believe that these estimates are reasonable, any significant deviation of actual costs as compared to these estimates could have a material impact on the Company’s financial statements.
Income Taxes . We are subject to taxation from federal, state and foreign jurisdictions and the determination of our tax provision is complex and requires significant management judgment. Management judgment is also applied in the determination of deferred tax assets and liabilities and any valuation allowances that might be required in connection with our ability to realize deferred tax assets.
Since we conduct operations in numerous US states and internationally, our effective tax rate has and will continue to depend upon the geographic distribution of our pre-tax income or losses among locations with varying tax rates and rules. As the geographic mix of our pre-tax results among various tax jurisdictions changes, the effective tax rate may vary from period to period. We are also subject to periodic examination from domestic and foreign tax authorities regarding the amount of taxes due. These examinations include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. We have established, and periodically reevaluate, an estimated income tax reserve on our consolidated balance sheet to provide for the possibility of adverse outcomes in income tax proceedings. While management believes that we have identified all reasonably identifiable exposures and that the reserve we have established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved.
We recognize deferred tax assets and liabilities for the effect of temporary differences between the book and tax bases of recorded assets and liabilities and for tax loss carry forwards. The realization of net deferred tax assets is dependent upon our ability to generate sufficient future taxable income. Where it is more likely than not that some portion or all of the deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made. In the event that actual results differ from these estimates or we adjust these estimates in future periods, an adjustment to the valuation allowance may be required, which could materially affect our consolidated financial position and results of operations.
Restructuring charges . We have taken restructuring actions, and may commence further restructuring activities which result in recognition of restructuring charges. 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.
Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for the vested portion of share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.
The fair value of employee share options is recognized in expense over the vesting period of the options, using the graded attribution method. The fair value of employee share options is determined on the date of grant using the Black-Scholes option pricing model. The Company has used historical volatility in its estimate of expected volatility. The expected life represents the period of time (in years) for which the options granted are expected to be outstanding. The Company used the simplified method for determining expected life as permitted in SEC Staff Accounting Bulletin 107 for options qualifying for such treatment (“plain-vanilla” options) due to the limited history the Company currently has with option exercise activity. The risk-free interest rate is based on the U.S. Treasury yield curve.
In June 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The consensus requires disclosure of either the gross or net presentation, and any such taxes reported on a gross basis should be disclosed in the interim and annual financial statements. This Issue is effective for financial reporting periods beginning after December 15, 2006. The Company does not expect to change its presentation of such taxes, as its sales are currently recorded net of tax.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)", which is effective for fiscal years beginning after December 15, 2006. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is currently evaluating the potential impact, if any, of this pronouncement.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 provides interpretative guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This pronouncement is effective for fiscal years ending after November 15, 2006. This pronouncement had no impact on the Company’s consolidated financial statements for the year ended December 31. 2006.
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 10.9% to $2.3 billion in 2006 from $2.1 billion in 2005 |
| • | Continued growth (26.0%) in e-commerce sales to $819 million in 2006 from $650 million in 2005 |
| • | Decrease of selling, general and administrative expense to 12.0% of net sales in 2006 from 12.7% of net sales in 2005 |
| • | Increase in income from operations in 2006 of $27 million or 78% |
| • | Net Income: 45.1 million, up 295% from 2005 |
| • | Diluted Earnings Per Share: $1.22 up 294% from 2005 |
We had net income of $45.1 million for the year ended December 31, 2006, $11.4 million for the year ended December 31, 2005 and $10.2 million for the year ended December 31, 2004.
The following table represents our consolidated statement of operations data expressed as a percentage of net sales for our three most recent fiscal years:
| 2006 | 2005 | 2004 | |
|---|---|---|---|
| Net sales | 100% | 100.0% | 100.0% |
| Gross profit | 14.6% | 14.5% | 14.9% |
| Selling, general and administrative expenses | 12.0% | 12.7% | 13.5% |
| Restructuring and other charges | – | 0.2% | 0.4% |
| Income from operations | 2.6% | 1.6% | 1.0% |
| Interest expense | 0.1% | 0.1% | 0.2% |
| Provision for income taxes | 1.1% | 1.0% | 0.3% |
| Net income | 1.9% | 0.5% | 0.5% |
NET SALES
Net sales were $2.35 billion for the year ended December 31, 2006, an increase of 10.9% from $2.12 billion for the year ended December 31, 2005. Net sales in 2006 included approximately $819 million of internet-related sales, an increase of $169 million, or 26%, from 2005. North American sales increased to $1.6 billion, a 12.7% increase from $1.42 billion in 2005. The increase in North American sales resulted primarily from growth in both our Technology Products and our Industrial Products segments. Sales in our Technology Products segment increased 12.8% to $1.40 billion from $1.25 billion in 2005. This increase was largely a result of our successful internet-based marketing initiatives directed primarily at our consumer customers as reflected by an increase in our internet-related sales of approximately $169 million as well as an expansion of product offerings including private label products. Although our internet-related sales are not exclusively made to consumers, we believe that a large majority of these sales are made to consumers. We continued to see strong growth in our industrial product sales in 2006. Sales of industrial products increased 12.8% to $196.9 million from $174.6 million last year, representing 12.2% of the overall increase in North American sales. European sales, stated in US dollars, increased 7.1% to $743.9 million for 2006 (representing 31.7% of worldwide sales) compared to $694.6 million (representing 32.8% of worldwide sales) in the year-ago period. Movements in foreign exchange rates negatively impacted European sales for 2006 by approximately $.4 million. Sales in our Hosted Software segment were not material in 2006.
European economies began to recover during 2006 and we saw our sales improve in those markets as measured in local currencies. The table below reflects European sales for the three years as reported in this report at then-current exchange rates and at constant (2004) exchange rates (in millions):
| 2006 | 2005 | 2004 | |
|---|---|---|---|
| European sales as reported | $743.9 | $694.6 | $695.7 |
| European sales at 2004 exchange rates | $738.1 | $688.8 | $695.7 |
Net sales were $2.12 billion for the year ended December 31, 2005, an increase of 9.7% from $1.93 billion for the year ended December 31, 2004. Net sales in 2005 included approximately $650 million of internet-related sales, an increase of $135 million, or 26%, from 2004. North American sales increased to $1.42 billion in 2005, a 15.3% increase from 2004‘s $1.23 billion. The increase in North American sales resulted primarily from growth in both our Technology Products and our Industrial Products segments. Sales in our Technology Products segment increased 15.3% to $1.25 billion from $1.08 billion in 2004. This increase was largely a result of our successful internet-based marketing initiatives directed primarily at our consumer customers as reflected by an increase in our internet-related sales of approximately $100 million. Although our internet-related sales are not exclusively made to consumers, we believe that a large majority of these sales are made to consumers. We continued to see strong growth in our industrial product sales in 2005. Sales of industrial products increased 15.2% to $174.6 million from $151.6 million in 2004, representing 12% of the overall increase in North American sales. European sales, stated in US dollars, decreased 0.2% to $694.6 million for 2005 (representing 32.8% of worldwide sales) compared to $695.7 million (representing 36.1% of worldwide sales) in 2004. Movements in foreign exchange rates positively impacted European sales for 2005 by approximately $5.8 million. If currency exchange rates for 2004 had prevailed in 2005, however, European sales would have decreased 1.0% from the prior year. Continued weakness in demand for information technology products from business customers in Europe and the effect of exchange rate movements on product pricing in certain European markets for products whose cost is U.S. dollar based, resulted in decreased local currency denominated sales. Sales in our Hosted Software segment were not material in 2005 and 2004.
GROSS PROFIT
Gross profit, which consists of net sales less product cost, shipping, assembly and certain distribution center costs, was $342.9 million, or 14.6% of net sales, for the year ended December 31, 2006, compared to $307.3 million or 14.5% of net sales in 2005. In the fourth quarter of 2006 the Company’s gross margin was 12.9% compared to 14.7% in the fourth quarter of 2005. The decrease in gross margin was primarily attributable to price discounting for technology products.
Gross profit was $307.3 million, or 14.5% of net sales, for the year ended December 31, 2005, compared to $286.5 million or 14.9% of net sales in 2004. Our gross profit ratio declined in 2005 primarily as a result of approximately $7 million of increased costs for warehouse staff and supplies related to increased activity levels from the prior year. These increased costs were partially offset by favorable changes in product mix. Improvement in our gross profit ratio in North America was partially offset by a continued decline in our gross profit ratio in Europe.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $281.0 million, or 12.0% of net sales, for the year ended December 31, 2006, $268.3 million, or 12.7% of net sales, for 2005, and $260.1 million, or 13.5% of net sales, in 2004. Selling, general and administrative expenses increased $12.7 million, or 4.7%, in 2006 from a year ago. Significant expense changes include $3.1 million of increased credit card fees, a $4.0 million increase in sales salaries related to the increased sales volume, an increase in other salaries and related costs of approximately $10.0 million due to increased staff in areas such as marketing and information technology as well as $1.8 million of salary expense related to stock compensation expense recorded as the result of the adoption of SFAS 123(R). Rent expense increased $2.3 million due to the company’s expansion. These increases were partially offset by a decrease of approximately $6.1 million of bad debt expense and a positive impact of foreign exchange of approximately $3.5 million.
Selling, general and administrative expenses totaled $268.3 million, or 12.7% of net sales, for the year ended December 31, 2005 as compared to $260.1 million or 13.5% of net sales for 2004. Selling, general and administrative expenses increased $8.2 million, or 3.2%, in 2005 from 2004 as a result of $3.8 million of increased credit card fees related to the increased sales volume, increased legal and professional fees of $2.0 million related to the restatement of the 2004 and 2003 financial statements and $3.8 million of increased foreign exchange expenses. These increases were partially offset by increased funding of advertising expenses from vendors.
RESTRUCTURING AND OTHER CHARGES
During the year ended December 31, 2005, we incurred $4.2 million of restructuring and other charges. These costs were primarily related to further restructuring actions undertaken in Europe during the year as a result of continuing decline in profitability. The costs were comprised primarily of staff severance expense related to the elimination of approximately 240 positions, which resulted in approximately $6.0 million in annual savings.
We incurred $7.4 million of restructuring and other charges in 2004. In the first quarter of 2004 we implemented a plan to streamline the activities of our United States computer businesses’ back office and warehouse operations, resulting in the elimination of approximately 200 jobs. We incurred $3.7 million of restructuring costs associated with this plan, including $3.2 million for staff severance and benefits for terminated employees and $0.5 million of non-cash costs for impairment of the carrying value of fixed assets. We recorded $0.6 million of additional costs in 2004 related to facility exit costs for our 2003 plan to consolidate United States warehouse locations. We also implemented several cost reduction plans in Europe during 2004, including a consolidation of United Kingdom sales offices which resulted in the elimination of 50 jobs. We incurred $2.5 million of restructuring charges for facility exit costs and workforce reductions in connection with these actions and $0.5 million of additional costs resulting from adjustments to our estimates of lease and contract termination costs for our 2002 plan to consolidate our United Kingdom operations.
INCOME FROM OPERATIONS
We had income from operations of $61.9 million in 2006, $34.8 million in 2005 and $19.0 million in 2004. Income from operations for the year ended December 31, 2005 included restructuring and other charges of $4.2 million. For the year ended December 31, 2004, restructuring charges of $7.4 million were included in income from operations.
Income from operations in North America was $45.4 million for the year ended December 31, 2006, $39.4 million in 2005 and $31.4 million in 2004. Declining gross profit margin and increased selling, general and administrative expenses resulted in our implementation of the previously described restructuring activities in Europe in 2005 and 2004.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest expense was $1.7 million in 2006, $2.7 million in 2005 and $3.1 million in 2004. Interest expense decreased in 2006 as a result of decreased short-term borrowings in the United Kingdom as well as the extinguishment of mortgage debt related to our Georgia warehouse sale in the first quarter of 2006. The increased expense in 2004 resulted from increased short-term borrowings under our United Kingdom facility. Interest and other income, net was $9.5 million in 2006, $0.7 million in 2005 and $0.6 million in 2004. The increase in other income in 2006 mainly resulted from the gain on sale of the Georgia location.
INCOME TAXES
Our income tax provisions were $24.5 million for the year ended December 31, 2006, $21.4 million for the year ended December 31, 2005 and $6.4 million for 2004. The effective rates were 35.2% in 2006, 65.2% in 2005, and 38.5% in 2004. The high effective tax rate in 2005 was a result of our establishing valuation allowances of approximately $10.2 million for deferred tax assets in the United Kingdom in 2005. The Company’s United Kingdom subsidiary had recorded historical losses and had been affected by restructuring and other charges in recent years. These losses represented evidence for management to estimate that a full valuation allowance for the net deferred tax asset was necessary in 2005. In 2006 the United Kingdom subsidiary recorded a profit and the Company’s effective tax rate benefited by approximately 3.2% or $2.3 million.. The effective rate in 2005 also was unfavorably impacted by increased state and local taxes and losses in other foreign jurisdictions for which no tax benefit has been recognized. These increases were partially offset by an income tax benefit of $2.7 million we recorded in the fourth quarter of 2005 resulting from a favorable decision we received for a petition submitted in connection with audit assessments made in 2002 and 2004 in a foreign jurisdiction. The tax rate in 2004 was higher than the United States statutory rate of 35% primarily due to losses in foreign jurisdictions for which we recognized no tax benefit and losses in a foreign jurisdiction where the benefit rate is lower than the rate in the United States.
For the years ended December 31, 2006, 2005 and 2004, we have not recognized 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 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.
NET INCOME
Net income was $45.1 million, or $1.29 per basic share and $1.22 per diluted share, for the year ended December 31, 2006, $11.4 million, or $.33 per basic share and $.31 per diluted share, for the year ended December 31, 2005 and $10.2 million, or $.30 per basic share and $.29 per diluted share, for the year ended December 31, 2004.
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, 2004 (amounts in millions) .
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2006
----
Net sales $575 $547 $575 $648
Percentage of year's net sales 24.5% 23.3% 24.5% 27.6%
Gross profit $90 $77 $92 $83
Income from Operations $21 $11 $19 $11
2005
----
Net sales $538 $506 $489 $583
Percentage of year's net sales 25.4% 23.9% 23.1% 27.6%
Gross profit $80 $71 $70 $86
Income from operations $5 $3 $8 $18
2004
----
Net sales $485 $433 $458 $552
Percentage of year's net sales 25.1% 22.5% 23.8% 28.6%
Gross profit $76 $68 $71 $71
Income from operations $7 $2 $4 $6
Our primary liquidity needs are to support working capital requirements in our business, to fund capital expenditures and minimal acquisitions and fund the special dividend declared by our Board in March 2007. We rely principally upon operating cash flow and borrowings under our credit facilities to meet these needs. We believe that cash flow available from these sources will be sufficient to meet our working capital requirements, projected capital expenditures and interest and debt repayments in the foreseeable future.
Our working capital was $229.4 million at December 31, 2006, an increase of $59.6 million from $169.8 million at the end of 2005. This was the result of a $23.7 million increase in cash, a $14.0 million increase in accounts receivable, a $41.0 million increase in inventories, a $11.0 million increase in prepaid expenses and other current assets and a decrease in short term borrowings of $14.0 million offset by a $29.8 million increase in accounts payable, and a $12.8 million increase in accrued expense and other current liabilities, and a $1.5 million decrease in deferred tax assets. The $41.0 million increase in our inventories was principally in our domestic US locations. Inventory turnover increased slightly from 9.3 to 10 times in 2006. The increase in accounts receivable occurred in Europe, resulting from our increased sales. This also increased our days of sales outstanding from 22 in 2005 to 23 in 2006.We expect that future accounts receivable and inventory balances will fluctuate with the mix of our net sales between consumer and business customers, as well as geographic regions.
We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of December 31, 2006, all of our investments mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.
Net cash provided by operating activities was $34.3 million for the year ended December 31, 2006, $27.3 million for the year ended December 31, 2005 and $12.8 million for the year ended December 31,2004. The increase in cash provided by operating activities in 2006 of $7.0 million as compared to 2005 resulted from a $14.1 million increase in net income adjusted by other non-cash items, such as depreciation expense, and a decrease of $7.1 million in cash used for changes in our working capital accounts. The $14.6 million increase in cash provided by operating activities in 2005 as compared to 2004 resulted from an increase in cash provided by net income adjusted by other non-cash items, such as depreciation expense, and a decrease in cash used for changes in our working capital accounts. Cash provided by net income and other non-cash items was $37.6 million in 2005, an increase of $10.4 million, compared to $27.2 million in 2004, and was primarily attributable to the $8.6 million increase in the provision for deferred income taxes. The cash used for changes in our working capital accounts was $10.2 million in 2005 compared to $14.5 million in 2004.
Net cash of $12.2 million was provided by investing activities for the year ended December 31, 2006. Proceeds from disposals of property and equipment was $18.9 million primarily the result of the sale of our distribution facility in Suwanee, Georgia. We used cash of $6.7 million during 2006, $5.8 million during 2005 and $8.3 million during 2004 in investing activities, principally for the purchase of property, plant and equipment. Capital expenditures in both 2006, 2005 and 2004 included upgrades and enhancements to our information and communications systems hardware and facilities costs for the opening of additional retail outlet stores in North America.
Net cash of $22.1 million was used in financing activities for the year ended December 31, 2006. Repayment of short and long-term borrowings used approximately $24.7 million of cash and proceeds from stock option exercises and excess tax benefits from stock option exercises provided approximately $2.6 million of cash. Net cash of $4.7 million was provided by financing activities in 2005, primarily as a result of an increase in our short-term borrowings in Europe. Net cash of $6.8 million was used in financing activities in 2004, primarily for the repayment of short and long-term borrowings.
We amended our $70 million secured United States revolving credit agreement in October 2005 to increase the amount available to $120 million (which may be increased by up to an additional $30 million, subject to certain conditions), increase the number of lenders participating and to provide for borrowings by both our United States and United Kingdom businesses. The upgraded facility expires in October 2010. Borrowings under the agreement are subject to borrowing base limitations of up to 85% of eligible accounts receivable and 40% of qualified inventories and are secured by accounts receivable, inventories and certain other assets. The undrawn availability under the facility may not be less than $15 million until the last day of any month in which the availability net of outstanding borrowings is at least $70 million. The revolving credit agreement requires that we maintain a minimum level of availability. If such availability is not maintained, we will then be required to maintain a fixed charge coverage ratio (as defined). The agreement contains certain other covenants, including restrictions on capital expenditures and payments of dividends. We were in compliance with all of the covenants as of December 31, 2006, except for the required timely submission of certain financial statements, for which we have obtained a waiver. As of December 31, 2006, eligible collateral under the facility was $104.1 million, there were outstanding advances of $9.3 million (all in the United Kingdom), outstanding letters of credit of $11.0 million and total availability of $83.8 million.
In connection with the amendment to our revolving credit agreement in October 2005, we terminated our £15 million multi-currency credit facility with a financial institution in the United Kingdom, which was available to our United Kingdom subsidiaries. We also paid off the remaining £4.7 million balance on our United Kingdom term loan, which we had entered into in 2002 to finance the construction of our United Kingdom headquarters.
Our Netherlands subsidiary has a €5 million ($6.6 million at the December 31, 2006 exchange rate, which exchange rate applies to all other Euro denominated amounts below) credit facility. Borrowings under the facility are secured by the subsidiary’s accounts receivable and are subject to a borrowing base limitation of 85% of the eligible accounts. At December 31, 2006 there were €2.2 million ($3.0 million) of borrowings outstanding under this line with interest payable at a rate of 5.0%. The facility expires in August 2007.
In April 2002, we entered into a ten year, $8.4 million mortgage loan on our Suwanee, Georgia distribution facility. The mortgage had monthly principal and interest payments of $62,000 payable through May 2012, with a final additional principal payment of $6.4 million at maturity in May 2012. The mortgage loan bore interest at 7.04% and was collateralized by the underlying land and building. During the first quarter of fiscal 2006, we sold this facility and repaid the remaining balance on the loan. The facility was replaced by a larger, leased distribution center in a nearby area.
We are obligated under non-cancelable operating leases for the rental of most of our facilities and certain of our equipment which expire at various dates through 2026. We currently lease our New York facility from an entity owned by Richard Leeds, Robert Leeds and Bruce Leeds, the Company’s three principal shareholders and senior executive officers. The annual rental totals $612,000 and the lease expires in 2007. We have sublease agreements for unused space we lease in Compton, California and Wellingborough, England. In the event a sublessee is unable to fulfill its obligations, we would be responsible for rent due under the lease. However, we expect the sublessees will fulfill their obligations under the leases.
Following is a summary of our contractual obligations for future principal payments on our debt, minimum rental payments on our non-cancelable operating leases and minimum payments on our other purchase obligations at December 31, 2006 (in thousands):
After
2007 2008 2009 2010 2011 2011
---- ---- ---- ---- ----- -----
Contractual Obligations:
Payments on capital lease
obligations $573 $402 $81 $11 $10
Payments on non-cancelable
operating leases, net of
subleases 10,255 10,033 9,568 7,358 6,170 $51,719
Dividends payable 35,800
------
Purchase and other obligations 3,936 1,733 1,191 1,169 900 2,836
----- ----- ----- ----- --- -----
Total contractual obligations $50,564 $12,168 $10,840 $8,538 $7,080 $54,555
======= ======= ======= ====== ====== =======
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 31, 2006.
Our operating results have generated cash flow which, together with borrowings under our debt agreements, has provided sufficient capital resources to finance working capital and cash operating requirements, fund capital expenditures, and fund the payment of interest on outstanding debt. Our primary ongoing cash requirements will be to finance working capital, provide payment of the special shareholder dividend of approximately $35 million declared in the first quarter of 2007, fund the payment of principal and interest on indebtedness, fund capital expenditures, fund minimal acquisitions and fund any future special shareholder dividends that may be declared. We believe future cash flows from operations and availability of borrowings under our lines of credit will be sufficient to fund ongoing cash requirements for at least the next twelve months.
We are party to certain litigation, the outcome of which we believe, based on discussions with legal counsel, will not have a material adverse effect on our consolidated financial statements.
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.
We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates (principally Pounds Sterling, Euros and Canadian Dollars) as measured against the U.S. Dollar and each other.
The translation of the financial statements of our operations located outside of the United States is impacted by movements in foreign currency exchange rates. Changes in currency exchange rates as measured against the U.S. dollar may positively or negatively affect sales, gross margins, operating expenses and retained earnings as expressed in U.S. dollars. Sales would have fluctuated by approximately $80 million and income from operations would have fluctuated by approximately $1.4 million if average foreign exchange rates changed by 10% in 2006. 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, 2006 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, 2006, the balance outstanding on our variable rate debt was approximately $12.3 million. 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.
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.
Disclosure Controls and Procedures
The Company establishes and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to provide reasonable assurance that such information is accumulated and reported to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures will prevent 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 control systems, misstatements due to error or fraud may occur and not be detected. These limitations include the circumstances that breakdowns can occur as a result of error or mistake, the exercise of judgment by individuals or that controls can be circumvented by acts of misconduct. 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.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and the operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. As part of this evaluation we identified certain significant deficiencies in our internal controls over financial reporting as of December 31, 2006. These significant deficiencies are:
| • | The Company has internal control deficiencies in its information technology area including the lack of adequate general controls. The Company lacks program change and project management controls, has inadequate segregation of duties between information technology department development and production functions, needs formal information technology strategic planning, need formal documentation of information security procedures, needs security around user rights to certain application systems and needs to implement formal help desk procedures. |
| • | The Company has disparate operating and financial information systems at certain of the Company’s locations that have inherent limitations resulting in a control environment heavily reliant upon manual review procedures and adjustments. These deficiencies include inadequate or lack of systems interfaces and the preparation of numerous manual journal entries. In addition, there are additional adjustments entered into the general ledger from subsidiaries after submission by the subsidiary. |
| • | The Company has not developed adequate estimation processes to appropriately calculate fairly stated vendor drop shipments, sales returns and allowances, cooperative advertising and customer rebate reserves, and other vendor and employee related costs. |
| • | The Company has a manual process for estimating certain amounts for inventory in transit. There is inadequate review of the manual process to determine if the amounts are complete and properly valued. |
| • | The Company needs to increase headcount of adequately trained financial personnel to assist in executing timely financial closings, addressing non-routine accounting issues that arise in the normal course of business and ensure timely and accurate preparation of interim and annual financial statements. |
Although these significant deficiencies do not, in our judgment, rise to the level of a material weakness in internal controls over financial reporting, the Chief Executive Officer and the Chief Financial Officer have concluded, based on our evaluation as of December 31, 2006, that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were not effective to ensure that the information required to be disclosed by us in this annual report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
As a result of this determination and as part of the work undertaken in connection with this report, we have applied compensating procedures and processes as necessary to ensure the reliability of our financial reporting. Accordingly, management believes, based on its knowledge, that (i) this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report and (ii) the financial statements, and other financial information included in this report, fairly reflect the form and substance of transactions and fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the periods presented in this report.
Section 404 of the Sarbanes-Oxley Act
For the year ended December 31, 2006, we were not subject to the internal controls certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 because we were not an accelerated filer as defined by the SEC. For the year ended December 31, 2007, we will be subject to the requirements of Section 404 that management provide an assessment of the effectiveness of the Company’s internal control over financial reporting and the Company’s independent registered public accounting firm will be required to audit that assessment.
We are working to achieve compliance with the requirements of Section 404. We will be dedicating substantial time and resources to documentation and review of our procedures in 2007. We may also need to engage outside consultants to assist us. We have not completed this process or its assessment, due to the complexities of our decentralized structure, the number of accounting systems in use and the lack of qualified personnel to devote to the process. In addition to the weaknesses reported as of December 31, 2006 discussed under the caption “Disclosure Controls and Procedures,” we have identified numerous other internal control deficiencies that may affect the timeliness and accuracy of recording transactions and which, individually or in the aggregate, could become material weaknesses in future periods if not remediated.
We have a significant amount of work to do to remediate the items we have identified. In the course of completing our evaluation and testing we may identify further deficiencies and weaknesses that will need to be addressed and will require remediation. We may not be able to correct all such internal control deficiencies in a timely manner and may find that a material weakness or weaknesses exist. As a result, management may not be able to issue an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.
None.
The information required by Item 10 of Part III is hereby incorporated by reference from the Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders which we anticipate filing April 30, 2007 (the “Proxy Statement”).
The information required by Item 11 of Part III is hereby incorporated by reference from the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by item 12 of Part III is hereby incorporated by reference from the Proxy Statement.
The information required by Item 10 of Part III is hereby incorporated by reference from the Proxy Statement.
The information required by Item 14 of Part III is hereby incorporated by reference from the Proxy Statement.
| (a) | 1. | The Consolidated Financial Statements of Systemax Inc. | Reference |
|
Report of Ernst & Young, LLP, Independent
Registered Public Accounting Firm |
36 |
|
Report of Deloitte & Touche, LLP, Independent
Registered Public Accounting Firm |
37 |
|
Consolidated Balance Sheets as of December 31, 2006 and
December 31, 2005 |
38 |
|
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004 (as previously restated) |
39 |
|
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 2006, 2005 (as previously restated) |
40 |
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004 (as previously restated) |
41 |
| Notes to Consolidated Financial Statements | 42 |
2. Financial Statement Schedules:
| The following financial statement schedule is filed as part of this report and should be read together with our consolidated financial statements: |
Schedule II - Valuation and Qualifying Accounts 60
| Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. |
3. Exhibits.
| Exhibit No. | Description |
| 3.1 | Composite Certificate of Incorporation of Registrant, as amended (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2001) |
| 3.2 | By-laws of Registrant (incorporated by reference to the Company's registration statement on Form S-1) (Registration No. 33-92052) |
| 4.1 | Stockholders Agreement (incorporated by reference to the Company's 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 Company’s registration statement on Form S-1) (Registration No. 333-1852) |
| 10.2 | Form of 1999 Long-Term Stock Incentive Plan as amended* (incorporated by reference to the Company’s report on Form 8-K dated May 20, 2003) |
| 10.3 | Lease Agreement dated September 20, 1988 between the Company and Addwin Realty Associates (Port Washington facility) (incorporated by reference to the Company’s registration statement on Form S-1) (Registration No. 33-92052) |
| 10.4 | Amendment to Lease Agreement dated September 29, 1998 between the Company and Addwin Realty Associates (Port Washington facility)(incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 1998) |
| 10.5 | Lease Agreement dated as of July 17, 1997 between the Company and South Bay Industrials Company (Compton facility)(incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 1997) |
| 10.6 | Build-to-Suit Lease Agreement dated April, 1995 among the Company, American National Bank and Trust Company of Chicago (Trustee for the original landlord) and Walsh, Higgins & Company (Contractor) (“Naperville Illinois Facility Lease”) (incorporated by reference to the Company’s registration statement on Form S-1) (Registration No. 33-92052) |
| 10.7 | Lease Agreement dated September 17, 1998 between Tiger Direct, Inc. and Keystone Miami Property Holding Corp. (Miami facility) (incorporated by reference to the Company's quarterly report on Form 10-Q for the quarterly period ended September 30, 1998) |
| 10.8 | Royalty Agreement dated June 30, 1986 between the Company and Richard Leeds, Bruce Leeds and Robert Leeds, and Addendum thereto(incorporated by reference to the Company’s registration statement on Form S-1) (Registration No. 33-92052) |
| 10.9 | Form of 1995 Stock Plan for Non-Employee Directors* (incorporated by reference to the Company’s registration statement on Form S-1) (Registration No. 333-1852) |
| 10.10 | Employment Agreement dated as of December 12, 1997 between the Company and Steven M. Goldschein* (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 1997. See exhibit 10.19 for Amendment.) |
| 10.11 | 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 Company’s report on Form 8-K dated October 12, 2004) |
| 10.12 | 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 Company’s report on Form 8-K dated October 12, 2004) |
| 10.13 | Amended and Restated Credit Agreement, dated as of October 27, 2005, between JP Morgan Chase Bank, N.A. and affiliates, General Electric Capital Corporation, and GMAC Commercial Finance LLC (as Lenders) with the Company and certain subsidiaries of the Company (as Borrowers) (the “Amended and Restated JP Morgan Chase Loan Agreement”) (incorporated by reference to the Company’s report on Form 8-K dated October 27, 2005) |
| 10.14 | Amendment No. 1, dated as of December 19, 2005, to the Amended and Restated JP Morgan Chase Loan Agreement* (incorporated by reference to the Company's annual report on Form 10K for the year ended December 31, 2005) |
| 10.15 | Lease agreement, dated December 8, 2005, between the Company and Hamilton Business Center, LLC (Buford, Georgia facility) *(incorporated by reference to the Company’s annual report on Form 10K 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 Company’s annual report on Form 10K for the year ended December 31, 2005) |
| 10.17 | 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 Company’s annual report on Form 10K for the year ended December 31, 2005) |
| 10.18 | Agreement of Purchase and Sale, dated December 9, 2005, between the Company (as Seller) and Hewlett Packard Company (as Buyer) (Suwanee, Georgia facility) * (incorporated by reference to the Company’s annual report on Form 10K for the year ended December 31, 2005) |
| 10.19 | Amendment No. 1 dated January 17, 2007, to Employment Agreement dated as December 12, 1997 between the Company and Stephen M. Goldschein* (filed herewith) |
| 10.20 | Employment Agreement, dated as of January 17, 2007, between the Company and Lawrence P. Reinhold.* (filed herewith) |
| 10.21 | Form of 2006 Stock Incentive Plan for Non-Employee Directors* (filed herewith). |
| 10.22 | Form of 2005 Employee Stock Purchase Plan* (filed herewith). |
| 14 | Corporate Ethics Policy for Officers, Directors and Employees (revised as of March 30, 2005) (incorporated by reference to the Company’s report on Form 8-K dated March 30, 2005) |
| 21 | Subsidiaries of the Registrant (filed herewith) |
| 23 | Consent of experts and counsel: Consent of Independent Registered Public Accountants (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) |
| 99.1 | Charter of the Audit Committee of the Company’s Board of Directors, as revised August 29, 2006 (incorporated by reference to the Company’s report on Form 8-K dated August 29, 2006) |
| 99.2 | Charter of the Compensation Committee of the Company’s Board of Directors, as revised August 29, 2006 (incorporated by reference to the Company’s report on Form 8-K dated August 29, 2006) |
| 99.3 | Charter of the Nominating/Corporate Governance Committee of the Company’s Board of Directors, as revised August 29, 2006 (incorporated by reference to the Company’s report on Form 8-K dated August 29, 2006) |
* Management contract or compensatory plan or arrangement
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 30, 2007 |
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 30, 2007 |
| Richard Leeds | (Principal Executive Officer) | |
| /s/ BRUCE LEEDS | Vice Chairman | March 30, 2007 |
| Bruce Leeds | ||
| /s/ ROBERT LEEDS | Vice Chairman | March 30, 2007 |
| Robert Leeds | ||
| /s/ LAWRENCE P. REINHOLD | Executive Vice President and Chief Financial Officer | March 30, 2007 |
| Lawrence P. Reinhold | ||
| /s/ THOMAS AXMACHER | Vice President and Controller | March 30, 2007 |
| Thomas Axmacher | (Principal Accounting Officer) | |
| /s/ GILBERT FIORENTINO | Director | March 30, 2007 |
| Gilbert Fiorentino | ||
| /s/ ROBERT D. ROSENTHAL | Director | March 30, 2007 |
| Robert D. Rosenthal | ||
| /s/ STACY DICK | Director | March 30, 2007 |
| Stacy Dick | ||
| /s/ ANN R. LEVEN | Director | March 30, 2007 |
| Ann R. Leven |
Shareholders and Board of Directors of Systemax Inc.:
We have audited the accompanying consolidated balance sheets of Systemax Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the two years in the period ended December 31, 2006. Our audit also included the 2006 and 2005 financial statement schedules listed in the accompanying index in Item 15. These financial statements and schedules are the responsibility of the Company’s 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2006 and 2005, and the consolidated results of its operations and its cash flows each of the two years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related 2006 and 2005 financial statement schedules, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” effective January 1, 2006.
ERNST & YOUNG LLP
New York, New York
March 27, 2007
To the Shareholders and Board of Directors of Systemax Inc.:
We have audited the accompanying consolidated statements of operations, shareholders’ equity, and cash flows of Systemax Inc. and subsidiaries (the "Company") for the year ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15 for the period ended December 31, 2004. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the consolidated results of operations and cash flows of Systemax Inc. and subsidiaries for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule for year ended December 31, 2004, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the accompanying consolidated financial statements had been restated.
DELOITTE & TOUCHE LLP
New York, New York
April 13, 2005 (November 17, 2005 as to the effects of the restatement discussed in Note 2)
2006 2005
---- ----
ASSETS:
Current assets:
Cash and cash equivalents $86,964 $63,291
Accounts receivable, net of allowances of $11,370 (2006) and $12,508 (2005) 164,615 150,635
Inventories, net 233,136 192,102
Prepaid expenses and other current assets 26,919 15,877
Deferred income tax assets, net 7,727 9,227
-------- -------
Total current assets 519,361 431,132
Property, plant and equipment, net 48,586 57,259
Deferred income tax assets, net 14,041 14,100
Other assets 2,173 2,053
-------- -------
Total assets $584,161 $504,544
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Short-term borrowings, including current portions of long-term debt $12,788 $26,773
Accounts payable 201,486 171,667
Accrued expenses and other current liabilities 75,688 62,888
-------- -------
Total current liabilities 289,962 261,328
-------- -------
Long-term debt 483 8,028
Other liabilities 4,226 2,346
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 38,331,990 shares; outstanding 35,341,377 (2006) issued 38,231,990
shares; outstanding 34,761,174 (2005) shares 383 382
Additional paid-in capital 172,983 177,574
Accumulated other comprehensive income, net of tax 7,181 893
Retained earnings 144,074 98,927
Common stock in treasury at cost - 2,990,613 (2006) and 3,470,816 (2005) (35,131)
shares (40,772)
Unearned restricted stock compensation (4,162)
-------- -------
Total shareholders' equity 289,490 232,842
-------- -------
Total liabilities and shareholders' equity $584,161 $504,544
======== =======
2006 2005 2004*
---- ---- ----
Net sales $2,345,165 $2,115,518 $1,928,147
Cost of sales 2,002,246 1,808,231 1,641,681
------------------ ----------------- --------------
Gross profit 342,919 307,287 286,466
Selling, general and administrative expenses 281,015 268,327 260,111
Restructuring and other charges - 4,151 7,356
------------------ ----------------- --------------
Income from operations 61,904 34,809 18,999
Interest and other income, net (9,475) (735) (630)
Interest expense 1,684 2,670 3,073
------------------ ----------------- --------------
Income before income taxes 69,695 32,874 16,556
Provision for income taxes 24,548 21,433 6,368
------------------ ----------------- --------------
Net income $45,147 $11,441 $10,188
================== ================= ==============
Net income per common share, basic: $1.29 $.33 $.30
Net income per common share, diluted: $1.22 $.31 $.29
Weighted average common and common equivalent shares:
Basic 34,960 34,646 34,373
Diluted 36,881 36,488 35,489
* As previously restated – see Note 2.
See notes to consolidated financial statements.
Common Accumulated
Number Other Unearned
of Shares Additional Comprehensive Treasury Restricted
Out- Stock Paid-in Retained Income (Loss), Stock, Stock Comprehensive
Standing Amount Capital Earnings Net of Tax At Cost Compensation Income (Loss)
------------ ---------- ------------ ----------- --------------- ------------- ------------ --------------
Balances, January
1, 2004* $34,288 $382 $175,343 $77,298 $1,933 $(46,330) $- $-
-------- ---- -------- ------- ------ --------- -------- ------
Change in cumulative
translation
adjustment 1,987 1,987
Exercise of stock
options 145 (631) 1,700
Tax benefit of employee
stock plans 188
Grant of restricted
stock units 5,740 (5,740)
Amortization of unearned
restricted stock
compensation 574
Net income* 10,188 10,188
-------- ---- -------- ------- ------ --------- -------- ------
Total comprehensive
income* 12,175
Balances, December 31,
2004* 34,433 382 180,640 87,486 3,920 (44,630) (5,166)
Change in cumulative
translation (3,027) (3,027)
adjustment
Exercise of stock options 328 (3,078) 3,858
Tax benefit of employee
stock plans 12
Amortization of unearned
restricted stock
compensation 1,004
Net income 11,441 11,441
-------- ---- -------- ------- ------ --------- -------- ------
Total comprehensive
income $8,414
Balances, December 31,
2005 34,761 382 177,574 98,927 893 (40,772) (4,162)
Reversal of unamortized
unearned restricted
stock compensation
- Note 2 (4,162) 4,162
Stock-based compensation
expense 2,330
Issuance of restricted 100 1
stock
Exercise of stock options 480 (4,039) 5,641
Income tax benefit on
stock-based
compensation 1,280
Change in cumulative
translation adjustment
6,288 6,288
Net income 45,147 45,147
-------- ---- -------- ------- ------ --------- -------- ------
Total comprehensive
income $51,435
--------
Balances, December 31,
2006 35,341 $383 $172,983 $144,074 $7,181 ($35,131) $-
======== ==== ======== ======= ====== ========= ========
2006 2005 2004*
---- ---- ----
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $45,147 $11,441 $10,188
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization, net 8,185 9,994 11,314
(Gain) loss on dispositions and abandonment (7,721) 1,279 1,444
Provision (benefit) for deferred income taxes 2,254 6,228 (2,377)
Provision for returns and doubtful accounts 1,503 7,620 5,079
Compensation expense related to equity compensation plans 2,330 1,004 1,374
Tax benefit of employee stock plans - 12 188
Changes in operating assets and liabilities:
Accounts receivable (3,917) (31,722) (1,982)
Inventories (36,216) (3,457) (40,872)
Prepaid expenses and other current assets (10,060) 3,989 5,300
Income taxes payable/receivable (4,234) 527 6,335
Accounts payable, accrued expenses and other current liabilities 37,055 20,430 16,767
------------ ------------ ------------
Net cash provided by operating activities 34,326 27,345 12,758
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Investments in property, plant and equipment (6,701) (5,896) (8,583)
Proceeds from disposals of property, plant and equipment 18,938 103 247
------------ ------------ ------------
Net cash provided by (used in) investing activities 12,237 (5,793) (8,336)
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
(Repayments) proceeds of borrowings from banks (16,473) 13,889 (5,254)
Repayments of long-term debt and capital lease obligations (8,305) (9,978) (1,768)
Proceeds from issuance of common stock 1,602 780 269
Excess tax benefit from exercises of stock options 1,030 - -
------------ ------------ ------------
Net cash provided by (used in) financing activities (22,146) 4,691 (6,753)
------------ ------------ ------------
EFFECTS OF EXCHANGE RATES ON CASH (744) 791 (114)
------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23,673 27,034 (2,445)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 63,291 36,257 38,702
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $86,964 $63,291 $36,257
============ ============ ============
Supplemental disclosures:
Interest paid $1,861 $2,498 $3,385
Income taxes paid $26,465 $15,522 $4,676
Supplemental disclosures of non-cash investing and financing activities:
Acquisitions of equipment through capital leases $776 - -
Deferred stock-based compensation related to restricted unit stock -
granted - $5,740
* As previously restated – see Note 2.
See notes to consolidated financial statements
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Systemax Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “Systemax”). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year balance sheet amounts have been reclassified to conform to current year presentation. |
| Use of Estimates In Financial Statements — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
| Fiscal Year — The Company’s fiscal year ends on December 31. The Company’s North American computer business follows a fiscal year that ends on the last Saturday of the calendar year. Normally each fiscal year consists of 52 weeks, but every five or six years, their fiscal year consists of 53 weeks, which was the case in 2005. The sales recorded in the additional week of 2005 represented less than one percent of the year’s sales. Fiscal years 2006 and 2004 consisted of 52 weeks for this business. |
| Foreign Currency Translation — The financial statements of the Company’s foreign entities are translated into U.S. dollars, the reporting currency, using year-end exchange rates for assets and liabilities, average exchange rates for the statement of operations items and historical rates for equity accounts. The translation differences are recorded as a separate component of shareholders’ equity. |
| Cash and Cash Equivalents — The Company considers amounts held in money market accounts and other short-term investments, including overnight bank deposits, with an original maturity date of three months or less to be cash equivalents. |
| Inventories — Inventories consist primarily of finished goods and are stated at the lower of cost or market value. Cost is determined by using the first-in, first-out method. Allowances are maintained for obsolete, slow-moving and non-saleable inventory. |
| Property, Plant and Equipment – Property, plant and equipment is stated at cost. Depreciation of furniture, fixtures and equipment, including equipment under capital leases, is on the straight-line or accelerated method over their estimated useful lives ranging from three to ten years. Depreciation of buildings is on the straight-line method over estimated useful lives of 30 to 50 years. Leasehold improvements are amortized over the lesser of the useful lives or the term of the respective leases. |
| Capitalized Software Costs – The Company capitalizes purchased software ready for service and capitalizes software development costs incurred on significant projects from the time that the preliminary project stage is completed and management commits to funding a project until the project is substantially complete and the software is ready for its intended use. Capitalized costs include materials and service costs and payroll and payroll-related costs. Capitalized software costs are amortized using the straight-line method over the estimated useful life of the underlying system, generally five years. |
| Evaluation of Long-lived Assets – Long-lived assets are evaluated for recoverability in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” 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. |
| Accruals - Management makes estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. These estimates are based upon various factors such as the number of units sold, historical and anticipated results and data received from third party vendors. Actual results could differ from these estimates. Our most significant estimates include those related to the costs of vendor drop shipments, sales returns and allowances, cooperative advertising and customer rebate reserves, and other vendor and employee related costs. |
| Product Warranties – Provisions for estimated future expenses relating to product warranties for the Company’s assembled PCs are recorded as cost of sales when revenue is recognized. Liability estimates are determined based on management judgment considering such factors as the number of units sold, historical and anticipated rates of warranty claims and the likely current cost of corrective action. The changes in accrue product warranties were as follows: |
Years ended December 31,
2006 2005 2004
---- ---- ----
Balance, beginning of year $1,316 $2,011 $2,642
Charged to expense 1,556 21 168
Deductions (1,811) (716) (799)
------ ------- ------
Balance, end of year $1,061 $1,316 $2,011
| 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 all of the deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made. |
| Revenue Recognition and Accounts Receivable – The Company recognizes sales of products, including shipping revenue, when persuasive evidence of an order arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Generally, these criteria are met at the time the product is received by the customers when title and risk of loss have transferred. Allowances for estimated subsequent customer returns, rebates and sales incentives are provided when revenues are recorded. Costs incurred for the shipping and handling of its products are recorded as cost of sales. Revenue from extended warranty and support contracts on the Company’s assembled PCs is deferred and recognized over the contract period. |
| Accounts receivable are shown in the consolidated balance sheets net of allowances for doubtful collections and subsequent customer returns. |
| Advertising Costs — Advertising costs, consisting primarily of catalog preparation, printing and postage expenditures, are amortized over the period of catalog distribution during which the benefits are expected, generally one to six months. Expenditures relating to television and local radio advertising are expensed in the period the advertising takes place. |
| Net advertising expenses of $21.4 million in 2006, $39.4 million in 2005 and $43.8 million in 2004 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 $39.6 million for the year ended December 31, 2006, $39.1 million for the year ended December 31, 2005 and $34.1 million for the year ended December 31, 2004. |
| Prepaid expenses at December 31, 2006 and 2005 include deferred advertising costs of $3.5 million and $5.0 million, respectively, which are reflected as an expense during the periods benefited, typically the subsequent fiscal quarter. |
| Software Development Costs – Software development costs are expensed as incurred unless they meet GAAP criteria for deferral and amortization. Software development costs incurred prior to the establishment of technological feasibility do not meet these criteria. No costs were deferred during 2006, 2005 or 2004 because either no projects met the criteria for deferral or, if met, the period between achieving technological feasibility and the general availability of the product was short, rendering the associated costs immaterial. |
| Derivative Financial Instruments – In accordance with the provisions of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, all of the Company’s derivative financial instruments are recognized as either assets or liabilities in the consolidated balance sheets based on their fair values. Changes in the fair values are reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. Derivative instruments are designated and accounted for as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For derivatives designated as effective cash flow hedges, changes in fair values are recognized in other comprehensive income. Changes in fair values related to fair value hedges as well as the ineffective portion of cash flow hedges are recognized in earnings. The Company had no derivative instruments as of December 31, 2006 and 2005. |
| The Company does not use derivative instruments for speculative or trading purposes. Derivative instruments may be used to manage exposures related to changes in foreign currency exchange rates and interest rate risk on variable rate indebtedness. |
| 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 989,000 in 2006, 842,000 in 2005 and 1,116,000 in 2004 were included for the diluted calculation. The weighted average number of stock options outstanding excluded from the computation of diluted earnings per share was 36,000 in 2006, 503,000 in 2005 and 587,000 in 2004 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 $51,435,000 in 2006, $8,414,000 in 2005 and $12,175,000 in 2004. |
| Adoption of New Accounting Standard — Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for the vested portion of share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated. |
| The fair value of employee share options is recognized in expense over the vesting period of the options, using the graded attribution method. The fair value of employee share options is determined on the date of grant using the Black-Scholes option pricing model. The Company has used historical volatility in its estimate of expected volatility. The expected life represents the period of time (in years) for which the options granted are expected to be outstanding. The Company used the simplified method for determining expected life as permitted in SEC Staff Accounting Bulletin 107 for options qualifying for such treatment (“plain-vanilla” options) due to the limited history the Company currently has with option exercise activity. The risk-free interest rate is based on the U.S. Treasury yield curve. |
| In periods prior to 2006, the Company followed the accounting provisions of Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees” for stock-based compensation and provided the pro forma disclosures required under SFAS 148, “Accounting for Stock-based Compensation – Transition and Disclosure.” No stock-based employee compensation was reflected in net income (loss), as all options granted under the plans had an exercise price equal to the market value of the underlying stock on the date of grant (See Note 8). |
| Recent Accounting Pronouncements |
| In June 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The consensus requires disclosure of either the gross or net presentation, and any such taxes reported on a gross basis should be disclosed in the interim and annual financial statements. This Issue is effective for financial reporting periods beginning after December 15, 2006. The Company does not expect to change its presentation of such taxes, as its sales are currently recorded net of tax. |
| In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)", which is effective for fiscal years beginning after December 15, 2006. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is currently evaluating the potential impact, if any, of this pronouncement. |
| In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 provides interpretative guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This pronouncement is effective for fiscal years ending after November 15, 2006. This pronouncement had no impact on the Company’s consolidated financial statements for the year ended December 31. 2006. |
| 2. | RESTATEMENT OF PREVIOUSLY FILED FINANCIAL STATEMENTS |
| Subsequent to the issuance of the Company’s consolidated financial statements in its Form 10-K for the year ended December 31, 2004, the Company discovered errors related to accounting for inventory at its Tiger Direct, Inc. subsidiary. These errors had the effect of misstating the value of inventory and certain vendor-related liabilities as of December 31, 2004 and overstating net income for the year ended December 31, 2004. Such errors did not have any impact on the consolidated financial statements for any previous years. For the year ended December 31, 2004, an error was also corrected in the presentation of the Consolidated Statement of Cash Flows related to activity in the allowances for doubtful accounts and subsequent customer returns. The restatement affected cash flows provided by operations but did not affect previously reported net cash flows for the restated period or future periods. |
| The restated results also include changes resulting from a correction in the application of the Company’s revenue recognition policy. The Company determined during its internal review of 2004 results that a change in its revenue recognition policy for sales of product was required in order to comply with Staff Accounting Bulletin No. 104 “Revenue Recognition” (SAB 104), as interpreted by the SEC Staff. Based on the Company’s practices with respect to its terms of shipment, revenue that had been recognized at time of shipment based upon FOB shipping point terms should have been recognized at time of receipt by customers, when title and risk of loss both transferred. The effect of this change resulted in a restatement of the results of operations for the years ended December 31, 2004. |
| As a result, the accompanying financial statements for the year ended December 31, 2004 have been restated from the amounts previously reported to properly reflect these items. These restated financial statements were filed with the SEC in November 2005. A summary of the significant effects of the restatement is as follows (in thousands, except per share data): |
Years ended December 31: 2004 ---- As previously ------------- reported As restated -------- ----------- Net sales $1,927,835 $1,928,147 Cost of sales 1,637,452 1,641,681 Gross profit 290,383 286,466 Income from operations 22,916 18,999 Income before income taxes 20,473 16,556 Provision for income taxes 7,923 6,368 Net income 12,550 10,188 Net income per common share, basic: $.37 $.30 Net income per common share, diluted: $.35 $.29 The Company also previously restated its segment disclosures for the year ended December 31, 2004 - see Note 12.
| 3. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment, net consists of the following (in thousands):
2006 2005
---- ----
Land and buildings $33,525 $42,585
Furniture and fixtures, office, computer and other equipment and 77,478 71,719
software
Leasehold improvements 12,762 11,328
123,765 125,632
Less accumulated depreciation and amortization 75,179 68,373
------ ------
Property, plant and equipment, net $48,586 $57,259
======= =======
| 4. | RELATED PARTY TRANSACTIONS |
| The Company leased its headquarters office/warehouse facility from affiliates during the years ended December 31, 2006, December 31, 2005 and December 31, 2004 (see Note 11). Rent expense under the lease aggregated $612,000 in each of those years. The Company believes that these payments were no higher than would be paid to an unrelated lessor for comparable space. |
| 5. | CREDIT FACILITIES |
| In October 2005, the Company amended and restated its $70,000,000 revolving credit agreement with a group of financial institutions to increase the amount available to $120,000,000 (which may be increased by up to $30 million, subject to certain conditions) and to provide for borrowings by the Company’s United States and United Kingdom subsidiaries. The borrowings are secured by all of the domestic and United Kingdom accounts receivable, the domestic inventories of the Company, the Company’s United Kingdom headquarters building and the Company’s 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 Company’s option, at the agent bank’s base rate (at December 31, 2006) plus 0.25% or the bank’s daily LIBOR rate (at December 31, 2006) plus 1.25% to 2.25%. The undrawn availability under the facility may not be less than $15 million until the last day of any month in which the availability net of outstanding borrowings is at least $70 million. The facility also calls for a commitment fee payable quarterly in arrears of 0.375% of the average daily unused portions of the facility. The revolving credit agreement requires that a minimum level of availability be maintained. If such availability is not maintained, the Company will be required to maintain a fixed charge coverage ratio (as defined). The agreement contains certain other covenants, including restrictions on capital expenditures and payments of dividends. We were in compliance with all of the covenants as of December 31, 2006, except for the required timely submission of certain financial statements, for which we have obtained a waiver. The Company was not in compliance with the financial reporting requirement regarding timely submission of the Company’s forecasted financial statements under the agreement for periods subsequent to December 31, 2006 for which the lenders have approved a waiver. As of December 31, 2006, eligible collateral under the agreement was $104.1 million and total availability was $83.8 million. There were outstanding advances of $9.3 million (all in the United Kingdom) and outstanding letters of credit of $11 million. |
| In connection with the amendment to its revolving credit agreement, the Company terminated its £15,000,000 multi-currency credit facility with a United Kingdom financial institution in October 2005. The facility was available to the Company’s United Kingdom subsidiaries and at December 31, 2004 there were £5.3 million ($10.0 million at the December 31, 2004 exchange rate) of borrowings outstanding under this line with interest payable at a rate of 5.87%. |
| The Company’s Netherlands subsidiary maintains a €5 million ($6.6 million at the December 31, 2006 exchange rate) credit facility with a local financial institution. Borrowings under the facility are secured by the subsidiary’s accounts receivable and are subject to a borrowing base limitation of 85% of the eligible accounts. At December 31, 2006 there were €2.2 million ($3.0 million) of borrowings outstanding under the line with interest payable at a rate of 5%. At December 31, 2005 there were €3.8 million ($4.4 million) of borrowings outstanding under this line with interest payable at a rate of 5.0%. At December 31, 2004 there were €3.5 million ($4.8 million at the December 31, 2004 exchange rate) of borrowings outstanding under this line with interest payable at a rate of 5.0%. The facility expires in August 2007. |
| The weighted average interest rate on short-term borrowings was 7.8% in 2006, 6.4% in 2005, and 6.0% in 2004. |
| 6. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
| Accrued expenses and other current liabilities consist of the following (in thousands): |
2006 2005
---- ----
Payroll and employee benefits $17,151 $13,262
Income taxes payable 2,327 6,819
Other 56,210 42,807
------ ------
$75,688 $62,888
======= =======
| 7. | LONG-TERM DEBT |
| Long-term debt consists of (in thousands): |
2006 2005
---- ----
Mortgage note payable (a) -- $ 7,803
Term loan payable -- --
Capitalized equipment lease obligations 1,031 799
----- ---
1,031 8,602
Less: current portion 548 574
--- ---
$483 $ 8,028
==== =======
| (a) |
Mortgage note payable. The Company had a ten year, $8.4 million mortgage loan on its Georgia distribution facility. The mortgage had monthly principal and interest payments of $62,000 through May 2012, with a final additional principal payment of $6.4 million at maturity in May 2012. The mortgage bore interest at 7.04% and was collateralized by the underlying land and building. In March 2006, the Company sold its Georgia distribution facility and repaid the remaining balance on the mortgage (see Note 14). |
| The aggregate maturities of long-term debt outstanding at December 31, 2006 are as follows (in thousands): |
2007 2008 2009 2010 2011
---- ---- ---- ---- ----
Maturities $548 $385 $78 $10 $10
| 8. | 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 1,102,955 options were outstanding under this plan as of December 31, 2006. 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, 2006. |
| The 1999 Long-term Stock Incentive Plan, as amended (“1999 Plan”) — This plan was adopted on October 25, 1999 with substantially the same terms and provisions as the 1995 Long-term Stock Incentive Plan. A maximum of 5.0 million shares may be granted under this plan. The maximum number of shares granted per type of award to any individual may not exceed 1,500,000 in any calendar year and 3,000,000 in total. No award shall be granted under this plan after December 31, 2009. Restricted stock grants and common stock awards reduce stock options otherwise available for future grant. A total of 1,472,121 options and 900,000 restricted stock units were outstanding under this plan as of December 31, 2006. |
| The 2006 Stock Incentive Plan For Non-Employee Directors – This plan, adopted by the Company’s stockholders on October 11, 2006, replaces the 1995 Stock Option Plan for Non-Employee Directors. The Company adopted the plan so that it could offer directors of the Company who are not employees of the Company or of any entity in which the Company has more than a 50% equity interest (“independent directors”) an opportunity to participate in the ownership of the Company by receiving options to purchase shares of common stock at a price equal to the fair market value at the date of grant of the option and restricted stock awards. Awards for a maximum of 200,000 shares may be granted under this plan. A total of 15,000 options were outstanding under this plan as of December 31, 2006. |
| Shares issued under our share-based compensation plans are usually issued from shares of our common stock held in the treasury. |
| Adoption of SFAS 123(R) |
| Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for the vested portion of share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated. |
| The fair value of employee share options is recognized in expense over the vesting period of the options, using the graded attribution method. The fair value of employee share options is determined on the date of grant using the Black-Scholes option pricing model. The Company has used historical volatility in its estimate of expected volatility. The expected life represents the period of time (in years) for which the options granted are expected to be outstanding. The Company used the simplified method for determining expected life as permitted in SEC Staff Accounting Bulletin 107 for options qualifying for such treatment (“plain-vanilla” options) due to the limited history the Company currently has with option exercise activity. The risk-free interest rate is based on the U.S. Treasury yield curve. |
| The Company receives an income tax deduction for stock options exercised by employees in the United States equal to the excess of the market value of our common stock on the date of exercise over the option price. Prior to the adoption of SFAS 123(R), the income tax benefit from the exercise of stock options was presented as a component of cash flow from operating activities. SFAS 123(R) requires the excess tax benefits (tax benefits resulting from tax deductions in excess of compensation cost recognized) to be classified as a cash flow provided by financing activities. |
| Compensation cost related to non-qualified stock options recognized in operating results (selling, general and administrative expense) was $1,756,000 for the year ended December 31, 2006. The related future income tax benefits recognized were $599,000 for the year ended December 31, 2006. |
| Stock options |
| The following table presents the weighted-average fair value and the weighted-average assumptions used to estimate the fair value of options granted in 2006: |
2006
----
Fair value $5.64
Expected annual dividend yield 0%
Risk-free interest rate 4.76%
Expected volatility 78.2%
Expected life in years 6.0
| The following table summarizes information for the three years ended December 31, 2006 concerning outstanding and exercisable options: |
2006 2005 2004
---- ---- ----
Weighted-Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year 2,657,419 $3.93 3,241,251 $3.96 2,821,302 $3.70
Granted 479,334 $8.01 75,000 $6.25 780,267 $5.38
Exercised (480,203) $3.33 (328,374) $2.37 (144,168) $2.28
Cancelled (27,474) $12.84 (330,458) $6.35 (216,150) $6.82
------- -------- --------
Outstanding at end of year 2,629,076 $ 4.69 2,657,419 $3.93 3,241,251 $3.96
========= ========= =========
Options exercisable at year end 1,891,426 1,891,155 1,756,517
Weighted average fair value per
option granted during the year $4.24 $4.21 $1.61
| We received cash from option exercises for the years ended December 31, 2006, 2005 and 2004 of $1,602,000, $779,000 and $56,000, respectively. The federal tax benefits realized for the deductions from option exercises totaled approximately $1,225,000, $238,000 and $181,000, respectively, for the years ended December 31, 2006, 2005 and 2004. |
| The following table summarizes information about options outstanding at December 31, 2006: |
Weighted Weighted Average Aggregate
-------- ---------------- ---------
Number Average Remaining Intrinsic
------- ------- --------- ---------
Outstanding Exercise Contractual Life Value (in
----------- -------- ---------------- ---------
Range of Exercise Prices At 12/31/06 Price thousands)
------------------------ ----------- ----- ---------
$ 1.76 to $ 5.00 1,176,935 $2.10 5.56 18,063
$ 5.01 to $ 15.00 1,400,316 $6.45 7.26 15,441
$ 15.01 to $ 18.41 51,825 $15.72 7.81 60
------ --
$ 1.76 to $ 18.41 2,629,076 $4.69 6.51 $33,564
========= =======
| The following table summarizes information about options vested and exercisable at December 31, 2006: |
Weighted Weighted Average Aggregate
-------- ---------------- ---------
Number Average Remaining Intrinsic
------- ------- --------- ---------
Outstanding Exercise Contractual Life Value (in
----------- -------- ---------------- ---------
Range of Exercise Prices At 12/31/06 Price thousands)
------------------------ ----------- ----- ---------
$ 1.76 to $ 5.00 1,016,935 $2.15 5.47 15,557
$ 5.01 to $ 15.00 847,666 $6.36 6.37 9,435
$ 15.01 to $ 18.41 26,825 $16.36 5.97
-----
$ 1.76 to $ 18.41 1,891,426 $4.24 5.88 $24,992
========= =======
| 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, 2006: |
Weighted Weighted Average Aggregate
-------- ---------------- ---------
Number Average Remaining Intrinsic
------ ------- --------- ---------
Exercisable Exercise Contractual Life Value (in
----------- -------- ---------------- ---------
Range of Exercise Prices At 12/31/06 Price thousands)
------------------------ ----------- ----- ---------
$ 1.76 to $ 5.00 1,176,935 $2.10 5.56 $18,063
$ 5.01 to $ 15.00 1,383,616 $6.45 7.26 15,238
$ 15.01 to $ 18.41 51,825 $15.72 7.81 60
------ --
$ 1.76 to $ 18.41 2,612,376 $4.69 6.51 $33,361
========= =======
| The aggregate intrinsic value in the tables above represents the total pretax intrinsic value (the difference between the closing stock price on the last day of trading in the year December 31, 2006 and the exercise price) that would have been received by the option holders had all options been exercised on December 31, 2006. This value will change based on the fair market value of the Company’s common stock. |
| The total intrinsic value of options exercised in 2006 was $3,501,000. Total intrinsic value for options exercised in 2005 and 2004 was $679,000 and $516,000, respectively. |
| The following table reflects the activity for all unvested stock options during the year ended December 31, 2006: |
Weighted Average
----------------
For Shares Grant-Date Fair Value
---------- ---------------------
Unvested at January 1, 2006 840,189 $1.84
Granted 479,334 $5.64
Vested (577,875) $2.60
Forfeited (3,998) $2.25
------
Unvested at December 31, 2006 737,650 $3.71
=======
| At December 31, 2006, there was approximately $1,600,000 of unrecognized compensation costs related to unvested stock options, which is expected to be recognized over a weighted average period of 1.6 years. The total fair value of stock options vested during the year ended December 31, 2006 was approximately $1,502,000. The total fair value of options vested during the years ended December 31, 2005 and 2004 was $761,000 and $334,000, respectively. |
| Restricted Stock and Restricted Stock Units |
| In October 2004, the Company granted 1,000,000 restricted stock units under the 1999 Plan to a key employee who is also a Company director. A restricted stock unit represents the right to receive a share of the Company’s 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 Company’s stock at the date of the award. Compensation expense related to the restricted stock award was approximately $574,000 for the year ended December 31, 2006, $1,005,000 in 2005 and $574,000 in 2004. |
| Under the provisions of SFAS 123(R), the balance sheet recognition of unearned compensation is no longer allowed. As of January 1, 2006, the balance of Unearned Restricted Stock Compensation was reversed into Additional Paid-in Capital on the Company’s balance sheet. As of December 31, 2006, there was unrecognized stock-based compensation of $3.6 million related to the restricted stock award, which is expected to be recognized over a weighted-average period of 6.0 years. |
| The impact of SFAS 123 (R) with respect to stock options for the year ended December 31, 2006 was as follows (in thousands except per share amounts): |
2006
----
Stock based compensation expense $ 1,756
Tax effect on share based compensation (599)
-------
Net effect on net income $ 1,157
-------
Tax effect on cash flows from financing activities $ 1,030
-------
Effect on net income per common share, basic $.03
====
Effect on net income per common share, diluted $.03
====
| Prior to the Adoption of SFAS 123(R) |
| Prior to 2006, the Company elected to follow the accounting provisions of APB Opinion 25 for stock-based compensation and to provide the pro forma disclosures required under SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Accordingly, the Company did not recognize compensation expense for stock option grants made at an exercise price equal to or in excess of the market value of the underlying stock on the date of grant for periods prior to January 1, 2006. The following table illustrates the effect on net income per share had compensation costs of the plans been determined under a fair value alternative method as stated in SFAS 123, “Accounting for Stock-Based Compensation” (in thousands, except per share data): |
2005 2004
---- ----
Net income - as reported $11,441 $10,188
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 647 886
Deduct: Stock-based employee compensation expense
determined under fair value based method, net of
related tax effects 915 1,295
--- -----
Pro forma net income $11,173 $9,779
======= ======
Basic net income per common share:
Net income - as reported $.33 $ .30
==== =====
Net income - pro forma $.32 $ .28
==== =====
Diluted net income per common share:
Net income - as reported $.31 $ .29
==== =====
Net income - pro forma $.31 $ .28
==== =====
| The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: |
2005 2004
---- ----
Expected dividend yield 0% 0%
Risk-free interest rate 4.5% 5.5%
Expected volatility 79.0% 46.0%
Expected life in years 5.20 2.36
| The weighted average remaining contractual life of the stock options outstanding was 6.7 years at December 31, 2005 and 7.4 years at December 31, 2004. |
| 9. | RESTRUCTURING AND OTHER CHARGES |
| The Company periodically assesses its operations to ensure that they are efficient, aligned with market conditions and responsive to customer needs. During the years ended December 31, 2005, and 2004, management approved and implemented restructuring actions which included workforce reductions and facility consolidations. The following table summarizes the amounts recognized by the Company as restructuring and other charges for the periods presented (in thousands): |
Years ended December 31, 2005 2004
------------------------ ---- ----
2004 United States streamlining plan $- $3,743
2003 United States warehouse consolidation plan 122 642
2002 United Kingdom consolidation plan (93) 467
Litigation settlements (recoveries) 300
Other severance and exit costs 3,822 2,504
----- -----
Total restructuring and other charges $4,151 $7,356
====== ======
| 2004 United States Streamlining Plan |
| In the first quarter of 2004, the Company implemented a plan to streamline the back office and warehousing operations in its United States computer businesses. The Company recorded $3.8 million of costs related to this plan, including $3.2 million for severance and benefits for approximately 200 terminated employees and $483,000 of non-cash costs for impairment of the carrying value of fixed assets. |
| 2003 United States Warehouse Consolidation Plan |
| In the fourth quarter of 2003, the Company implemented a plan to consolidate the warehousing facilities in its United States computer supplies business. The Company recorded $122,000 of additional severance costs in 2005 and $642,000 of additional exit costs in 2004 related to this plan. |
| 2002 United Kingdom Consolidation Plan |
| In 2002 the Company implemented a restructuring plan to consolidate the activities of three United Kingdom locations into a new facility constructed for the Company. During the year ended December 31, 2004, the Company recorded $467,000 of additional exit costs related to this plan. |
| Litigation Settlements |
| In May 2006, the Company entered into a stipulation of settlement with all of the plaintiffs who had filed derivative complaints in 2005 alleging misconduct in connection with the Company’s restatement of its 2004 financial results (see Note 11). |
| Other Severance and Exit Costs |
| The Company recorded restructuring costs of $3.8 million during 2005 and $2.5 million during 2004 in Europe in connection with workforce reductions and facility exit costs. In 2005, these costs were comprised of employee severance costs. In 2004, these costs were comprised of $1.8 million of employee severance costs and $0.7 million of other exit costs, primarily asset write-downs. |
| The following table summarizes the components of the accrued restructuring charges and the movements within these components during the years ended December 31, 2006 and 2005 (in thousands). The balance of the restructuring reserves is included in the Consolidated Balance Sheets within accrued expenses and other current liabilities. |
Severance and Other
Personnel Costs Exit Costs Total
--------------- ---------- -----
Balance as of January 1, 2005 $633 $1,396 $2,029
Charged to expense in 2005 3,945 (93) 3,852
Amounts utilized (4,325) (1,038) (5,363)
------ ------ ------
Balance at December 31, 2005 253 265 518
--- --- ---
Amounts utilized (253) (176) (429)
---- ---- ----
Balance at December 31, 2006 $0 $89 $89
== === ===
| 10. | INCOME TAXES |
| The components of income (loss) before income taxes are as follows (in thousands): |
Years Ended December 31 2006 2005 2004
----------------------- ---- ---- ----
United States $53,587 $38,912 $33,268
Foreign $16,108 (6,038) (16,712)
------- ------- -------
Total $69,695 $32,874 $16,556
======= ======= =======
| The provision (benefit) for income taxes consists of the following (in thousands): |
Years Ended December 31 2006 2005 2004
----------------------- ---- ---- ----
Current:
Federal $15,437 $10,499 $8,622
State 3,179 3,146 565
Foreign 3,678 1,560 (442)
----- ----- ----
Total current 22,294 15,205 8,745
====== ====== =====
Deferred:
Federal 1,235 (265) 725
State 511 (490) (899)
Foreign 508 6,983 (2,203)
--- ----- ------
Total deferred 2,254 6,228 (2,377)
----- ----- ------
TOTAL $24,548 $21,433 $6,368
======= ======= ======
| Income taxes are accrued and paid by each foreign entity in accordance with applicable local regulations. |
| A reconciliation of the difference between the income tax expense (benefit) and the computed income tax expense based on the Federal statutory corporate rate is as follows (in thousands): |
Years Ended December 31 2006 2005 2004
----------------------- ---- ---- ----
Income tax at Federal statutory rate $24,407 $11,506 $5,795
State and local income taxes (benefits) and
changes in valuation allowances, net of
federal tax benefit 2,577 1,311 (172)
Foreign taxes at rates different from the U.S. rate 1,199 1,703 2,375
Changes in valuation allowances for foreign
deferred tax assets (2,260) 10,194 --
Tax credits (718) (197) (599)
Adjustment for prior year taxes (760) (3,205) (588)
Other items, net 103 121 (443)
--- --- ----
$24,548 $21,433 $6,368
======= ======= ======
| The deferred tax assets (liabilities) are comprised of the following (in thousands): |
2006 2005
---- ----
Current:
Deductible assets $ (876) $(1,197)
Accrued expenses and other liabilities 8,063 9,875
Inventory 1,596 1,201
Other (318) (125)
Valuation allowances (738) (527)
---- ----
Total current 7,727 9,227
----- -----
Non-current:
Net operating loss and credit carryforwards 15,881 14,543
Foreign currency translation adjustments - (511)
Accelerated depreciation 3,520 3,059
Intangible and other assets 8,453 10,031
Other 3,328 1,757
Valuation allowances (17,141) (14,779)
------- -------
Total non-current 14,041 14,100
------- -------
TOTAL $21,768 $23,327
======= =======
| The Company has not provided for federal income taxes applicable to the undistributed earnings of its foreign subsidiaries of approximately $21.8 million as of December 31, 2006, since these earnings are indefinitely reinvested. The Company has foreign net operating loss carryforwards which expire from 2006 through 2020 except for carryforwards in the United Kingdom and the Netherlands, which have no expiration. The Company records these benefits as assets to the extent that utilization of such assets is more likely than not; otherwise, a valuation allowance has been recorded. The Company has also provided valuation allowances for certain state deferred tax assets and net operating loss carryforwards where it is not likely they will be realized. |
| In the fourth quarter of 2005, the Company recorded a valuation allowance of $10.2 million related to carryforward losses and deferred tax assets in the United Kingdom. The Company’s United Kingdom subsidiary had recorded losses and has been affected by restructuring activities in recent years. These losses and the loss incurred for the year ended December 31, 2005 represented evidence for management to estimate that a full valuation allowance for the net deferred tax assets was necessary. In the fourth quarter of 2005, the Company also recorded an income tax benefit of $2.7 million as a result of a favorable decision received in connection with a petition submitted in connection with audit assessments made in 2002 and 2004 in a foreign jurisdiction. |
| As of December 31, 2006, the valuation allowances of $17.9 million included $11.4 million related to net operating loss carryforwards and $3.2 million for other deductible temporary differences in foreign jurisdictions, $3.0 million for state net operating loss carryforwards and $0.3 million for other state deductible temporary differences. During the year ended December 31, 2006, valuation allowances increased $2.6 million as a result of additional losses incurred in certain state jurisdictions and adjustments of prior years allowances in foreign jurisdictions. Valuation allowances decreased $2.3 million in 2006 for carryforward losses utilized for which valuation allowances had been previously provided. As of December 31, 2005, the valuation allowances of $15.3 million included $11.1 million related to net operating loss carryforwards and $2.3 million for other deductible temporary differences in foreign jurisdictions and $1.5 million for state net operating loss carryforwards and $0.4 million for other state deductible temporary differences. During the year ended December 31, 2005, valuation allowances increased $5.6 million as a result of additional losses incurred in foreign and state jurisdictions, net of reductions resulting from changes in deferred tax assets due to changes in tax laws. Valuation allowances decreased $1,301,000 in 2005 for carryforward losses utilized for which valuation allowances had been previously provided. |
| The Company is routinely audited by federal, state and foreign tax authorities with respect to its income taxes. The Company regularly reviews and evaluates the likelihood of audit assessments and believes it has adequately accrued for exposures for tax liabilities resulting from future tax audits. To the extent the Company would be required to pay amounts in excess of reserves or prevail on matters for which accruals have been established, the Company’s effective tax rate in a given period may be materially impacted. The Company’s federal income tax returns for fiscal years 2000 through 2004 are currently being audited by the Internal Revenue Service. Although proposed adjustments have not been received for these years and the outcome of in-progress tax audits is always uncertain, management believes the ultimate outcome of the audit will not have a material adverse impact on the Company’s consolidated financial statements. |
| 11. | COMMITMENTS, CONTINGENCIES AND OTHER MATTERS |
| Leases — The Company is obligated under operating lease agreements for the rental of certain office and warehouse facilities and equipment which expire at various dates through September 2026. The Company currently leases one facility in New York from an entity owned by the Company’s three principal shareholders and senior executive officers (see Note 4). The Company also acquires certain computer and communications equipment pursuant to capital lease obligations. |
| At December 31, 2006, the future minimum annual lease payments for capital leases and related and third-party operating leases were as follows (in thousands): |
Related
Third Party Party
Capital Operating Operating
Leases Leases Lease Total
------- ----------- ---------- -----
2007 $573 $11,083 $612 $12,268
2008 402 10,369 10,771
2009 81 9,871 9,952
2010 11 7,662 7,673
2011 10 6,473 6,483
2012-2016 24,635
24,635
2017-2021 18,808 18,808
Thereafter 8,807 8,807
------ ------- ---- -------
Total minimum lease payments 1,077 97,708 612 99,397
Less: sublease rental income 2,605 2,605
------ ------- ---- -------
Lease obligation net of subleases 1,077 $95,103 $612 $96,792
======= ==== =======
Less amount representing interest 46
------
Present value of minimum capital lease
payments (including current portion of $548) $1,031
======
| Annual rent expense aggregated approximately $13,198,000, including $612,000 to related parties, for 2006, $10,272,000, including $612,000 to related parties, for 2005 and $7,887,000, including $612,000 to related parties, for 2004. Rent expense for 2006 is net of sublease income of $937,000. |
| Litigation – Beginning on May 24, 2005, three shareholder derivative lawsuits were filed, one in the United States District Court for the Eastern District of New York and two in the Supreme Court of New York, County of Nassau, against various officers and directors of the Company and naming the Company as a nominal defendant in connection with the Company’s restatements of its fiscal year 2003 and 2004 financial statements. The defendants and the Company denied all of the allegations of wrongdoing contained in the complaints. On May 16, 2006, the parties entered into a stipulation of settlement of this case. By order dated July 6, 2006 the United States District Court for the Eastern District of New York approved the settlement and dismissed the federal complaint with prejudice. Pursuant to the settlement the defendants are released from liability and the Company adopted certain corporate governance principles including the appointment of a lead independent director to, among other things, assist the Board of Directors in assuring compliance with and implementation of the Company’s corporate governance policies and paid $300,000 of the legal fees of the plaintiffs. The State court actions were dismissed. |
| The Company has also been named as a defendant in other lawsuits in the normal course of its business, including those involving commercial, tax, employment and intellectual property related claims. Based on discussions with legal counsel, management believes the ultimate resolution of these lawsuits will not have a material effect on the Company’s consolidated financial statements. |
| Contingency — The Company is required to collect sales tax on certain of its sales. In accordance with current laws, approximately 17.9% of the Company’s 2006 domestic sales, 17% of the Company’s 2005 domestic sales and 17% of the 2004 domestic sales were subject to sales tax. Changes in law could require the Company to collect sales tax in additional states and subject the Company to liabilities related to past sales. |
| Employee Benefit Plans — The Company’s U.S. subsidiaries participate in a defined contribution 401(k) plan covering substantially all U.S. employees. Employees may invest a percentage 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 $514,000 in 2006, $455,000 in 2005 and $436,000 in 2004. |
| Foreign Exchange Risk Management — The Company has no involvement with derivative financial instruments and does not use them for trading purposes. The Company may enter into foreign currency options or forward exchange contracts to hedge certain foreign currency transactions. The intent of this practice would be to minimize the impact of foreign exchange rate movements on the Company’s operating results. As of December 31, 2006, the Company had no outstanding forward exchange contracts. |
| Fair Value of Financial Instruments — Financial instruments consist primarily of investments in cash and cash equivalents, trade accounts receivable, accounts payable and debt obligations. The Company estimates the fair value of financial instruments based on interest rates available to the Company and by comparison to quoted market prices. At December 31, 2006, 2005 and 2004, the carrying amounts of cash and cash equivalents, accounts receivable, income taxes receivable and payable and accounts payable are considered to be representative of their respective fair values due to their short-term nature. The carrying amounts of the notes payable to banks and the term loan payable are considered to be representative of their respective fair values as their interest rates are based on market rates. The estimated fair value of the Company’s mortgage loan payable was $8.8 million at December 31, 2005. |
| Concentration of Credit Risk – Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and accounts receivable. The Company’s excess cash balances are invested with high credit quality issuers. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers and their geographic dispersion comprising the Company’s customer base. The Company also performs on-going credit evaluations and maintains allowances for potential losses as warranted. |
| 12. | SEGMENT AND RELATED INFORMATION |
| The Company operates in one primary business as a reseller of business products to commercial and consumer users. The Company operates and is internally managed in three operating segments, Technology Products, Industrial Products and Hosted Software. The Company’s chief operating decision-maker is the Company’s 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 Company’s operations by reportable segment was as follows (in thousands): |
Year Ended December 31,
----------------------
2006 2005 2004*
---- ---- ----
Net Sales:
---------
Technology Products $2,148,104 $1,940,902 $1,776,444
Industrial products 196,860 174,616 151,630
Hosted Software 201 - 73
--- --
Consolidated $2,345,165 $2,115,518 $1,928,147
========== ========== ==========
Depreciation Expense:
--------------------
Technology Products $6,395 $7,341 $9,081
Industrial products 1,040 1,995 1,789
Hosted Software 683 403 178
Corporate 67 255 266
-- --- ---
Consolidated $8,185 $9,994 $11,314
====== ====== =======
Income (Loss) from Operations:
-----------------------------
Technology Products $59,374 $41,521 $16,873
Industrial products 13,957 7,591 10,782
Hosted Software (9,600) (6,803) (4,954)
Corporate and other expenses (1,827) (7,500) (3,702)
------ ------ ------
Consolidated $61,904 $34,809 $18,999
======= ======= =======
Total Assets
Technology Products $230,512 $172,534
Industrial products 59,239 51,031
Hosted Software 3,068 1,819
Corporate and other 291,342 279,160
------- -------
Consolidated 584,161 $504,544
======= ========
| Financial information relating to the Company’s operations by geographic area was as follows (in thousands): |
Year Ended December 31, ---------------------- 2006 2005 2004* ---- ---- ---- Net Sales: United States: Industrial products $196,860 $174,616 $151,630 Technology Products 1,268,780 1,147,230 1,011,118 --------- --------- --------- United States total 1,465,640 1,321,846 1,162,748 Other North America 135,619 99,035 69,704 Europe 743,906 694,637 695,695 ------- ------- ------- Consolidated 2,345,165 $2,115,518 $1,928,147 ========= ========== ========== Dec 31, 2006 Dec 31, 2005 ------------ ------------ Long-lived Assets: North America - principally United States $21,347 $31,435 Europe 27,239 25,824 ------ ------ Consolidated $48,586 $57,259 ======= ======= Net sales are attributed to countries based on location of selling subsidiary. * As previously restated – see Note 2.
| 13. | SUBSEQUENT EVENTS |
| On March 14, 2007, the Company’s 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. The Company expects to use approximately $35.8 million in cash to satisfy this dividend obligation. |
| 14. | 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
2006:
Net sales $574,908 $547,242 $575,041 $647,974
Gross profit $90,763 $77,370 $91,514 $83,272
Net income $17,557 $7,106 $12,541 $8,033
Net income per common share:
Basic $.51 $.20 $.36 $.23
Diluted $.48 $.19 $.33 $.22
2005:
Net sales $537,908 $506,142 $488,502 $582,966
Gross profit $79,775 $71,365 $70,480 $85,667
Net income $2,638 $1,522 $3,875 $3,406
Net income per common share:
Basic $.08 $.04 $.11 $.10
Diluted $.07 $.04 $.11 $.09
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the years ended
December 31:
(in thousands)
Balance at
Beginning of Charged to Balance at
Description Period Expenses Write-offs Other End of Period
------- -------- ---------- ----- -------------
Allowance for sales returns and doubtful
accounts
2006 $12,508 $1,503 $(2,641) $11,370
2005 $11,318 $7,316 $(6,126) $12,508
2004 $10,000 $5,079 $(3,761) $11,318
Allowance for deferred tax assets
2006
Current $527 $136 $75 $738
Noncurrent (1) $14,779 $2,743 $(2,260) $1,879 $17,141
2005
Current $413 $114 $527
Noncurrent $10,643 $5,828 $(1,301) $(391) $14,779
2004
Current $698 $(285) $413
Noncurrent $12,953 $1,147 $(3,683) $226 $10,643
| (1) | Charges to expense are net of reductions resulting from changes in deferred tax assets due to changes in tax laws. |
EXHIBIT INDEX
| 10.19 | Amendment No. 1 dated January 17, 2007, to Employment Agreement dated as December 12, 1997 between the Company and Stephen M. Goldschein. |
| 10.20 | Employment Agreement, dated as of January 17, 2007, between the Company and Lawrence P. Reinhold. |
| 10.21 | Form of 2006 Stock Incentive Plan for Non-Employee Directors. |
| 10.22 | Form of 2005 Employee Stock Purchase Plan. |
| 21 | Subsidiaries of the Registrant |
| 23 | Consent of experts and counsel: Consent of Independent Registered Public Accountants |
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
AMENDMENT NUMBER ONE TO GOLDSCHEIN EMPLOYMENT AGREEMENT
Whereas Systemax Inc. f/k/a Global DirectMail Corp. (the “Company”) and Steven M. Goldschein (the “Employee”) entered into an employment agreement dated as of December 19, 1997 (the “Employment Agreement”);
Whereas the parties desire to amend the terms of the Employment Agreement;
The parties hereto hereby amend the Employment Agreement as follows.
1. Section 4 of the Employment Agreement shall be amended by adding a new Section 4(g) as set forth below:
| (g) Retirement. If, on or after January 1, 2007, the Employee notifies the Company of the Employee’s voluntary resignation with the intent of retiring from full-time employment then, notwithstanding any contrary provision of this Agreement, but contingent upon the Company having hired a suitable replacement for the Employee as Chief Financial Officer on or prior to the Employee’s Date of Termination, the following terms and conditions shall apply: |
| (i) |
Notwithstanding Section 3(d) hereof the Employee shall be required to give only thirty 30) days prior written notice to the Company of the Employee’s resignation due to retirement. |
| (ii) |
Upon termination of the Employee’s full-time employment as Senior Vice President and Chief Financial Officer of the Company the Employee shall remain a part-time employee of the Company for a period of twelve (12) months (the “Part-Time Employment Period”). |
| (iii) |
During the Part-Time Employment Period the Employee will (a) report to the Chief Executive Officer and upon his request provide part-time employment services to the Company and the Company’s finance department not to exceed 30 hours per week, (b) fully cooperate with the Company, its officers, directors, employees, agents, independent auditors, legal representatives and, as necessary, any governmental representatives, concerning the Company’s business and financial operations, and (c) use his best efforts during normal business hours to ensure a smooth transition for the Company’s management including its new chief financial officer. As part of his part-time employment the Employee will answer any question any of aforementioned individuals or entities may have, and assist in providing any information they may require, concerning the Company’s business and operations, internal accounting/financial controls, financial statements, tax returns, etc. so as to resolve any outstanding Company business, accounting or tax issue. |
| (iv) |
In consideration for the part-time employment services to be provided by the Employee the Company shall pay the Employee during the Part-Time Employment Period, in equal bi-weekly payments, an amount equal to 105% of the Employee’s Base Salary at the rate in effect on the date of the Employee’s notice of voluntary resignation due to retirement (“Resignation Notice”). |
| (v) |
In addition to the foregoing payments, during the Part-Time Employment Period (a) the Employee shall continue to receive all benefits and perquisites the Employee previously received as a full-time employee of the Company including those under any disability or medical plan or other employee benefit plan or arrangement of the Company then in effect and (b) any stock option held by the Employee shall continue to be exercisable in accordance with its terms. |
| (vi) |
The Company shall pay to the Employee a Bonus for the 2006 fiscal year in an amount to be determined by the Company in its sole discretion. |
| (vii) |
Any press release, public notice or governmental filing by either party relating to the Employee’s voluntary resignation due to retirement shall describe such resignation as a “retirement”. |
| (viii) |
In the event the Employee is required to take legal action to enforce any of the provisions of this Section 4(g) against the Company, the Company shall reimburse the Employee for all reasonable attorneys’ fees and related costs incurred by the Employee relating to such enforcement. |
| (ix) |
During the Part-Time Employment Period (a) the Employee agrees not to defame or otherwise make any public statement regarding the Company or any director, officer or employee thereof which would materially injure the reputation of the Company or such director, officer or employee, and (b) the Company and its officers and directors agree not to defame or otherwise make any public statement regarding the Employee (except as required by law) which would materially injure the reputation of the Company or such director, officer or employee. |
| (x) |
The Non-Compete Period set forth in Section 6(b) hereof shall be extended to include the period beginning on the first day of the Part-Time Employment Period and ending one (1) year following the last day of the Part-Time Employment Period. |
2. All other terms of the Employment Agreement shall remain unchanged.
Dated: January 17, 2007
|
SYSTEMAX INC.
By /s/ Richard Leeds Richard Leeds, Chairman and CEO /s/ Steven M. Goldschien Steven M. Goldschein |
EMPLOYMENT AGREEMENT
AGREEMENT, made as of the 17 th day of January 2007, by and between Systemax Inc. (the “Company” or “Systemax”) and Lawrence P. Reinhold (the “Employee”).
RECITALS
The Company wishes to employ the Employee upon the terms and conditions set forth in this Agreement.
The Employee is willing to make his services available to the Company on the terms and conditions hereinafter set forth.
NOW, THEREFORE, it is mutually agreed as follows:
1. Employment .
(a) Employment ; Title . The Company hereby agrees to employ the Employee, as Executive Vice President and Chief Financial Officer of the Company, and the Employee hereby accepts such employment, effective on the date hereof, on the terms and conditions set forth herein.
(b). Term . The term of employment of the Employee by the Company under this Agreement shall commence on January 17, 2007 and shall continue until terminated as provided in Section 3 hereof (the “Employment Period”).
(c) Duties. The Employee shall have general responsibility for managing the financial affairs of the Company, subject to the authority and direction of the Chief Executive Officer and the Board of Directors, and such other duties as may be determined by the Board of Directors of the Company consistent with the duties stated herein. The Employee shall perform his duties primarily at the Company’s offices located in Port Washington, New York subject to travel and other duties outside of such location consistent with the Company’s business as the CEO shall reasonably determine. In performing his duties, the Employee shall report to the Chief Executive Officer and Board of Directors and shall be subject to the direction of the Chief Executive Officer and Board of Directors of the Company. The Employee shall devote his full working time, attention and skill to the business and affairs of the Company and shall use his best efforts to advance the best interests of the Company. Nothing in this Agreement shall be construed to prohibit the Employee from serving on the board of directors of any not-for profit or other corporation provided that (a) such service does not create an actual or apparent conflict of interest with the business of the Company, (b) such service is approved by the Board of Directors of the Company, and (c) such service does not conflict with any applicable federal or state law, regulation or NYSE rule.
2. Compensation .
(a) Base Salary and Bonus . For the performance of all duties, responsibilities and services by the Employee hereunder during the Employment Period, the Company shall pay to the Employee, and the Employee agrees to accept, a base salary (the “Base Salary”) at an annual rate of Four Hundred Thousand Dollars ($400,000), payable in accordance with the Company’s normal payroll practices. In addition, the Employee shall be eligible to earn a bonus during each year of the Employment Period in an amount to be determined by the Company, in its sole discretion, which is expected to be at least equal to fifty percent (50%) of the Employee’s Base Salary assuming the Employee meets the performance objectives (including Company financial performance objectives) established for him by the Company (the “Bonus”). The Bonus, if earned, shall be paid by the Company to Employee within 75 days following the end of each calendar year during the Employment Period. The Employee’s Base Salary and Bonus will be reviewed annually by the Company and may be increased in the discretion of the Company.
(b) Participation in Benefit Plans . The Employee shall be entitled to participate in and receive benefits under all medical plans or other employee insurance or benefit plans and arrangements that are made available to executive employees of the Company and on the terms that such plans, insurance and arrangements are made available to executive employees of the Company. To the extent that any such plan or arrangement generally permits the participation or coverage of dependents of the employees of the Company, the Employee’s dependents may participate in or be covered under such plan or program. Notwithstanding the foregoing, the Employee’s coverage under the Company’s medical and dental plans shall become effective immediately upon the date hereof.
(c) Expenses . During the Employment Period (except as limited by Section 2(f) and Section 2(g)) the Employee shall be entitled to receive reimbursement for all ordinary and necessary business expenses reasonably incurred by him in accordance with industry custom in performing services hereunder, provided that the Employee provides the Company with written documentation, satisfactory to the Company, evidencing such expenses.
(d) Vacations and Holidays . The Employee shall be entitled to four (4) weeks of paid vacation in each calendar year. At no time, however, shall Employee take more than two (2) weeks of vacation consecutively. The Employee shall have the holidays and sick days as determined by the Company’s policies in effect on the date hereof and as amended
(e) Options. Upon execution of this Agreement, subject to approval by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”), the Employee shall receive an option to purchase 100,000 shares of the Company’s common stock (in accordance with the Company’s 1999 Long Term Stock Incentive Plan) (a) exercisable at an exercise price per share equal to the market value on the date of grant, (b) vesting over a period of four years beginning one year from the date of grant at the rate of 25% per year and (c) containing such other terms and conditions as may be set forth in the Company’s standard stock option agreement for executive employees. Any subsequent option grants to the Employee will be considered annually and determined by the Company in its sole discretion, subject to approval by the Compensation Committee.
(f) Car Allowance. During the Employment Period the Employee shall receive a car allowance of up to twelve hundred dollars ($1200) per month to cover the Employee’s automobile expenses including any car lease or loan payment, insurance, maintenance, repairs, registration fees, etc. Alternatively, the Employee may elect to drive an automobile leased by the Company (the make and model of which shall be similar to those leased for the Company’s other executive employees as determined by the Company in its reasonable discretion) in which case the insurance, repair and maintenance costs shall be paid by the Company.
(g) Relocation Allowance . For a period of six weeks following the Employee’s commencement of employment, the Company shall provide temporary housing for the Employee in the vicinity of the Company’s Port Washington, New York office, and shall pay the travel expenses of the Employee for weekly roundtrip travel between his home in Clarence, New York and Port Washington, New York. In addition the Company shall reimburse the Employee for his actual expenses incurred in connection with the Employee’s relocation of his primary residence in an amount not to exceed $75,000 in the aggregate.
3. Termination of Employment . The Employee’s employment under this Agreement may be terminated under any of the circumstances set forth in this Section 3. Upon termination, the Employee (or his beneficiary or estate, as the case may be) shall be entitled to receive the compensation and benefits described in Section 4 below.
(a) Death . The Employee’s employment hereunder shall terminate upon his death.
(b) Termination Resulting from Total Disability . The Company may terminate the Employee’s employment upon his becoming “Totally Disabled” and thereafter providing Notice of Termination. For purposes of this Agreement, the Employee shall be “Totally Disabled” if the Employee is physically or mentally incapacitated so as to render the Employee incapable of performing the essential functions of his position under this Agreement with or without reasonable accommodation for a period of three (3) consecutive months or for an aggregate of ninety (90) days within any consecutive six month period. The Employee’s receipt of disability benefits under the Company’s long-term disability plan, if any, or receipt of Social Security disability benefits shall be deemed conclusive evidence of Total Disability for purpose of this Agreement; provided, however, that in the absence of the Employee’s receipt of such long-term disability benefits or Social Security benefits, the Board of Directors may, in its reasonable discretion (but based upon appropriate medical evidence), determine that the Employee is Totally Disabled.
(c) Cause . The Company may terminate the Employee’s employment at any time for “Cause”.. For the purposes of this Agreement, the Company shall have “Cause” to terminate the Employee’s employment hereunder upon (i) the continued failure by the Employee, for a period of fifteen (15) days after receipt of notice to comply with any policies of the Company or any directions of the Board of Directors consistent with the Employee’s duties hereunder (including the Employee’s responsibility to devote his full working time and attention to the business of the Company), other than any such failure resulting from the Employee’s incapacity due to disability, or (ii) the conviction of the Employee of a felony (or a plea of nolo contendere with respect thereto) or other conviction or judgment against the Employee involving the Employee’s dishonest or illegal actions, (iii) the Employee’s gross negligence or willful misconduct or breach of any of the material terms or conditions of this Agreement coupled, in the case of such breach, with the failure to cure the same within fifteen days after the receipt of notice thereof, (iv) Employee engaging in an act of theft, fraud or dishonesty, involving the Company, or (v) the Employee making any false, disparaging or malicious statement, oral or written, about the Company or its subsidiaries (collectively the “Systemax Companies”) or any director, officer or employee of the of the Systemax Companies which is injurious to the business or operations of any of the Systemax Companies, or which may in any material respect interferes with the goodwill of any of the Systemax Companies or its relations with customers or suppliers.
(d) Voluntary Resignation; Resignation for Good Reason . The Employee may terminate his employment (i.e. voluntarily resign) by providing the Company with Notice of Termination. If the Employee terminates his employment for “Good Reason” (as defined below) such termination shall be treated as a termination of the Employee’s employment by the Company without “Cause” and the Employee shall be entitled to receive compensation upon termination in accordance with Section 4(e) hereof.
For purposes of this Agreement, “Good Reason” shall mean the assignment to the Employee of duties substantially inconsistent in any material respect with the Employee’s position, authority, duties or responsibilities as contemplated by this Agreement (except as may otherwise be required by law or applicable regulation of any self-regulatory organization such as The New York Stock Exchange), or any other action by the Company which results in a material diminution in the Employee’s compensation, position (including job title), authority, duties or responsibilities, excluding for this purpose any action not taken in bad faith and which is remedied (to the extent remediable) by the Company promptly after receipt of notice thereof given by the Employee. A termination by the Employee shall not be deemed for Good Reason unless the Employee has notified the Company in writing of his intention to terminate for Good Reason within 30 days of the date on which the Employee learns that the event causing the alleged Good Reason has occurred and the Company fails to remedy such Good Reason within 15 days following the receipt of such notice. Any termination by the Employee for Good Reason has to be made promptly (and in any case within one month) after the end of the 15-day period within which the Company may remedy the events giving rise to the right to terminate for Good Reason.
(e) Without Cau se. The Company may terminate the Employee without “Cause” at any time after providing Notice of Termination.
(f) Notice of Termination . Any termination of Employee’s employment by the Company or by Employee (other by reason of Employee’s death) shall be communicated by written Notice of Termination to the other party in accordance with Section 10 below. For purposes of this Agreement, a “Notice of Termination” shall mean a notice in writing which shall indicate the applicable specific termination provision in this Agreement relied upon to terminate Employee’s employment and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee’s employment under the provision so indicated.
(g) Date of Termination . The effective date of Employee’s termination of employment (“Date of Termination”) shall be:
(i) in the event of his death, the date of death;
(ii) in the event of termination for Total Disability, thirty (30) days after Notice of Termination is given (provided that Employee shall not have returned to the performance of his duties on a full-time basis during such 30-day period);
(iii) in the event of termination for Cause , the date specified in the Notice of Termination;
(iv) in the event of termination without Cause, the last day of the fifteen (15) day period beginning on the date on which written Notice of Termination is given, or such earlier date as may be mutually agreed by the parties.
(v) in the event of resignation by the Employee (other than for Good Reason), the last day of the thirty (30) period beginning on the date on which written Notice of Termination is given, or such earlier date as may be mutually agreed by the parties.
(vi) in the event of the Employee’s resignation for Good Reason, the date of termination shall be the effective date of Employee’s termination of employment in accordance with Section 3 (d) hereof.
4. Compensation Following Termination of Employment
(a) Total Disability . If the Employee’s employment is terminated pursuant to Section 3(b) as a result of the Employee’s Total Disability, the Company shall pay to the Employee the applicable portion of his Base Salary due through the Date of Termination at the rate in effect at the time Notice of Termination is given, and following such payment have no further obligation (relating to the Employee’s status as an employee) to the Employee under this Agreement; provided, however, that the foregoing shall have no effect upon any benefits due the Employee under any disability or medical plan or other employee benefit plan or arrangement of the Company then in effect and provided further that any stock option held by the Employee shall continue to be exercisable in accordance with its terms. In addition, the Company shall pay to the Employee that portion of the Bonus, on the date set forth herein, that is equal to the number of days the Employee was employed by the Company (based on the Date of Termination), in the year that such termination occurred, divided by 365 and multiplying the result thereof by the Bonus otherwise payable through the end of the year in which such termination occurred (or based on the average Bonus paid to the Employee for the Employee’s two prior years of employment if the Employee has been employed two or more years), as if such termination had not occurred.
(b) Death . If the Employee’s employment shall be terminated by reason of his death, the Company shall pay to such person as the Employee shall have previously designated, in a notice filed with the Company, or, if no such person shall have been designated, to his estate, the applicable portion of his Base Salary due through the applicable Date of Termination at the rate in effect on the date of death and, following such payments, the Company shall have no further obligations (relating to the Employee’s status as an employee) to such designated person or the Employee’s estate, as the case may be, under this Agreement provided, however, that the foregoing shall have no effect upon any benefits due the Employee under any disability or medical plan or other employee benefit plan or arrangement of the Company then in effect and provided further that any stock option held by the Employee shall continue to be exercisable in accordance with its terms. In addition, the Company shall pay to such designated person or the estate that portion of the Bonus, on the date set forth herein, that is equal to the number of days the Employee was employed by the Company (based on the Date of Termination), in the year that such termination occurred, divided by 365 and multiplying the result thereof by the Bonus otherwise payable through the end of the year in which such termination occurred (or based on the average Bonus paid to the Employee for the Employee’s two prior years of employment if the Employee has been employed two or more years), as if such termination had not occurred.
(c) Cause . If the Employee’s employment shall be terminated pursuant to Section 3(c), the Company shall pay the Employee the applicable portion of his Base Salary due through the applicable Date of Termination at the rate in effect at the time Notice of Termination is given and, following such payments, the Company shall have no further obligation (relating to the Employee’s status as an employee) to the Employee under this Agreement provided, however, that the foregoing shall have no effect upon any benefits due the Employee under any disability or medical plan or other employee benefit plan or arrangement of the Company then in effect and provided further that any stock option held by the Employee shall continue to be exercisable in accordance with its terms.
(d) Voluntary Resignation . If the Employee voluntarily resigns pursuant to Section 3(d) (except for Good Reason) the Company shall pay Employee the applicable portion of his Base Salary due through the applicable Date of Termination at the rate in effect at the time Notice of Termination is given to the Company and, following such payments, the Company shall have no further obligation relating to the Employee’s status as an employee to the Employee under this Agreement; provided, however, that the foregoing shall have no effect upon any benefits due the Employee under any disability or medical plan or other employee benefit plan or arrangement of the Company then in effect and provided further that any stock option held by the Employee shall continue to be exercisable in accordance with its terms.
(e) Without Cause; For Good Reason . If the Employee’s employment shall be terminated without “Cause” pursuant to Section 3(e) or for “Good Reason” pursuant to Section 3(d), the Company shall pay the Employee the following compensation:
(i) The Company shall pay the Employee the applicable portion of his Base Salary due through the applicable Date of Termination at the rate in effect at the time Notice of Termination is given;
(ii) The Company shall pay the Employee, as severance pay his Base Salary in effect at the time Notice of Termination is given for a period of twelve (12) months (the “Severance Period”) following the applicable Date of Termination;
(iii) (A) If the Employee has been employed by the Company for less than two years through the Date of Termination the Company shall pay to the Employee a pro-rated bonus that is equal to the sum of the number of days the Employee was employed by the Company in the year that such termination occurred, divided by 365 and multiplying the result thereof by 50% of the Employee’s Base Salary then in effect.
(B) If the Employee has been employed by the Company for two years or more through the Date of Termination the Company shall pay to the Employee the Bonus that would otherwise be payable at the end of the year in which such termination occurred, based on the average Bonus paid to the Employee for the Employee’s two prior years of employment.
(iv) During the Severance Period the Company shall reimburse the Employee for any COBRA payments the Employee may be required to make in order to maintain the medical and dental benefits he received as an employee of the Company.
Following such payments, the Company shall have no further obligation (relating to the Employee’s status as an employee) to the Employee under this Agreement provided, however, that the foregoing shall have no effect upon any benefits due the Employee under any disability or medical plan or other employee benefit plan or arrangement of the Company then in effect and provided further that any stock option held by the Employee shall continue to be exercisable in accordance with its terms.
(f) Change of Control . Notwithstanding the foregoing in the event the Employee’s employment shall be terminated without “Cause” or resigns for ‘Good Reason” within sixty (60) days prior to or one (1) year following a “Change of Control” (as defined herein) the Severance Period shall be twenty four (24) months following the Date of Termination. For purposes of this Agreement “Change in Control” shall mean:
(i) Approval by the stockholders of the Company of (I) a reorganization, merger, consolidation or other form of corporate transaction or series of transactions, in each case, with respect to which the Majority Stockholders (as defined below) cease to own, directly or indirectly, in the aggregate at least forty percent (40%) of the then outstanding shares of the Parent’s common stock or the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company’s then outstanding voting securities, in substantially the same proportions as their ownership immediately prior to such reorganization, merger, consolidation or other transaction, or (II) the sale of all or substantially all of the assets of the Company.
(ii) The acquisition by any person, entity or “group”, within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act, of beneficial ownership within the meaning of Rule 13-d promulgated under the Securities Exchange Act which would result in the Majority Stockholders ceasing to own, directly or indirectly, in the aggregate, at least forty percent (40%) of the then outstanding shares of the Company’s common stock; or
(iii) The approval by the stockholders of the Company of the complete liquidation or dissolution of the Company.
For purposes of this Agreement, the Majority Stockholders shall include Richard Leeds, Robert Leeds, Bruce Leeds, any other member of the Leeds family and any trust for the benefit of any member of the Leeds family.
(g) Accrued Vacation Upon Termination . Upon termination the Employee shall be paid for all accrued but unused vacation up to a maximum of four (4) weeks based on the Base Salary then in effect.
5. Successors . This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. This Agreement and all rights and obligations of the Company hereunder shall inure and be binding on any person, firm or corporation which shall become the owner of substantially all of the assets or capital stock of the Company or which shall succeed to the business of the Company or with which the Company may be consolidated or merged; provided, however that in the absence of the express written agreement of the Employee, the Company shall not be released from its obligations to Employee in the event of any such transaction, and the Company shall be deemed to guaranty the obligations of such person, firm or corporation to the Employee under this Agreement in the event of such transaction.
6. Covenants .
(a) Confidential Information . During the course of the Employee’s employment with the Company, the Employee will acquire and have access to Confidential Information and Trade Secrets belonging to the Systemax Companies. Such Confidential Information and Trade Secrets relates both to the Systemax Companies, their customers and their employees, and consists of any information which is not generally known, that is or may be used in the Systemax Companies’ business and that could give competitors an advantage if they knew about it or could impact upon the Systemax Companies’ internal operations. Such Confidential Information includes, but is not limited to: (i) financial and business information, such as information with respect to costs, commission, fees, profits, sales, markets, mailing lists, strategies and plans for future business, new business, product or other development, potential acquisitions or divestitures, and new marketing ideas; (ii) product and technical information, such as devices, formulas and compositions of matter and processes relating to the manufacture of the Systemax Companies’ products, designs, drawings, specifications and blueprints of machinery and equipment, new and innovative product ideas, methods, procedures, devices, sourcing information, vendor information, supplier information, data processing programs, software, software codes, computer models, research and development projects; (iii) marketing information, such as information on markets, end users and applications, the identity of the Systemax Companies’ customers and distributors, their names and addresses, the names of representatives of the Systemax Companies’ customers and distributors responsible for entering into contracts with the Company, the Company’s financial arrangements with its customers and distributors, the amounts paid by such customers to the Company, specific customer needs and requirements, leads and referrals to prospective customers; and (iv) personnel information, such as the identity and number of the Systemax Companies’ other employees, their salaries, bonuses, benefits, skills, qualifications, and abilities. The Employee acknowledges and agrees that the Confidential Information and Trade Secrets are not generally known or available to the general public, but have been developed, complied or acquired by the Company at its great effort and expense and for commercial advantage and, therefore, takes ever reasonable precaution to prevent the use or disclosure of any part of it by or to unauthorized persons. Confidential Information and Trade Secrets can be in any form: oral, written or machine readable, including electronic files.
(b) Non-Disclosure of Confidential Information . The Employee agrees he will not, while associated with the Company and for so long thereafter as the pertinent information or documentation remains confidential, directly or indirectly use, disclose or disseminate to any other person, organization or entity or otherwise use any Confidential Information and Trade Secrets, except as specifically required in the performance of Employee’s duties on behalf of the Company or with prior written authorization of the Company’s Chairman and Chief Executive Officer.
(c) Return of Materials . The Employee further agrees to deliver to the Company, immediately upon termination from employment or at any time the Company so requests, (i) any and all documents, files, notes, memoranda, models, databases, computer files and/or other computer programs reflecting any Confidential Information whatsoever or otherwise relating to the Company’s business; (ii) lists of the Systemax Companies’ clients or leads or referrals to prospective clients; and (iii) any computer equipment, home office equipment, automobile or other business equipment belonging to the Company which Employee may then possess or have under his control.
(d) Non-competition . The Employee acknowledges and agrees that the Company is engaged in a highly competitive business and that by virtue of Employee’s position and responsibilities with the Company and Employee’s access to the Confidential Information and Trade Secrets, engaging in any business that is directly competitive with the Company will cause it great and irreparable harm. Accordingly, Employee covenants and agrees that so long as Employee is employed by the Company and for a period of one (1) year after such employment is terminated, whether voluntarily or involuntarily, Employee will not, without the express written consent of the Chairman and CEO of the Company, directly or indirectly, own, manage, operate, control, consult with or be employed in a capacity similar to the position(s) held by Employee with the Company by any company or other for-profit entity engaged in the sale of computer, consumer electronic and industrial products in direct and material competition with the Company. In recognition of the national nature of the Company’s business, which includes the sale of its products and services throughout the United States of America, this restriction shall apply throughout the United States of America.
(e) Non-Solicitation of Customers . The Employee acknowledges and agrees that solely by reason of employment by the Company, Employee has and will come into contact with some, most or all of the Company’s customers and will have access to Confidential Information and Trade Secrets regarding the Company’s customers, as set forth in this Agreement. Consequently, Employee covenants and agrees that in the event of separation from employment with the Company, whether such separation is voluntary or involuntary, the Employee will not, for a period of one (1) year following such separation, directly or indirectly, solicit or initiate contact with any customer, former customer or prospective customer of the Company for the purpose of selling computer, consumer electronic and industrial products of the type offered for sale by the Company during the Employee’s employment with the Company. This restriction shall apply to any customer, former customer or prospective customer of the Company with whom the Employee had contact or about whom Employee obtained Confidential Information or Trade Secrets during the last two (2) years of employment with the Company. For the purposes of this Section 6, “contact” means interaction between the Employee and the customer or prospective customer which takes place to further the business relationship, or making sales to or performing services for the customer or prospective customer on behalf of the Company.
(f) Non-Solicitation of Employees . The Employee acknowledges and agrees that solely as a result of employment with the Company, the Employee will come into contact with and acquire confidential information regarding some, most or all of the Company’s employees and consultants. Accordingly, both during the Employee’s employment and for a period of one (1) year following the cessation of the Employee’s employment with the Company, whether such cessation of employment is voluntarily or involuntarily, the Employee will not, directly or indirectly, induce or attempt to influence any employee or consultant of the Company to terminate his or her employment or refrain from providing services to the Company, or solicit or seek to retain the services of any person employed or providing services to the Company as an employee or a contractor.
(g) Restrictions on Employment With Company . The Employee affirms he is not presently subject to a restrictive covenant or other prior agreement, which would prohibit or restrict employment with the Company. If the Employee learns or is advised that he is subject to an actual or alleged restrictive covenant or other prior agreement, which may prohibit or restrict employment with the Company, the Employee must notify the Company immediately. The Employee agrees that he shall not disclose to the Company, use for the Company’s benefit, or induce the Company to use any trade secret or confidential information he may possess belonging to any former employer or other third party.
(h) Enforcement of Covenants . The Employee acknowledges and agrees that compliance with the covenants set forth in this Section 6 of this Agreement is necessary to protect the business and goodwill of the Company and that any breach of this Section 6 or any subparagraph hereof will result in irreparable and continuing harm to the Company, for which money damages may not provide adequate relief. Accordingly, in the event of any breach or threatened breach of Section 6 by Employee, the Company and Employee agree that the Company shall be entitled to the following particular forms of relief as a result of such breach, in addition to any remedies otherwise available to it at law or equity, specifically injunctions, both preliminary and permanent, enjoining or restraining such breach or threatened breach.
7. Conflict of Interest . The Employee may not use his position, influence, knowledge of Confidential Information and Trade Secrets or Company assets for personal gain. A direct or indirect financial interest, including joint ventures in or with a supplier, vendor, client or prospective client without disclosure and written approval from the Chairman and CEO of the Company is strictly prohibited and constitutes cause for dismissal. This provision shall not apply in respect of any publicly traded corporation of which the Employee is less than a one percent (1%) stockholder or with respect to any financial interest as a result of any investment by the Employee in a publicly traded mutual fund.
8. Intellectual Property .
(a) The Employee covenants and agrees that all inventions, improvements, products, designs, specifications, trademarks, service marks, discoveries, formulae, processes, software or computer programs, modifications of software or computer programs, data processing systems, analyses, techniques, trade secrets, creations, ideas, work product or contributions thereto, and any other intellectual property, regardless of whether patented, registered or otherwise protected or protectable, and regardless of whether containing or constituting Trade Secrets or Confidential Information as defined in Section 6 hereof (referred to collectively as “Intellectual Property”), that were conceived, developed or made by Employee during employment by the Company, including Intellectual Property related to the sale of computer, consumer electronic and industrial products (the “Proprietary Interests”), shall belong to and be the property of the Company.
(b) The Employee further covenants and agrees that he will: (i) promptly disclose such Intellectual Property to the Company; (ii) assign to the Company, without additional compensation, the entire rights to Intellectual Property for the United States and all foreign countries; (iii) execute assignments and all other papers and do all acts necessary to carry out the above, including enabling the Company to file and prosecute applications for, acquire, ascertain and enforce in all countries, letters patent, trademark registrations and/or copyrights covering or otherwise relating to Intellectual Property and to enable the Company to protect its proprietary interests therein; and (iv) give testimony, at the Company’s expense, in any action or proceeding to enforce rights in the Intellectual Property.
(c) The Employee further covenants and agrees that the Company shall be entitled to shop rights with respect to any Intellectual Property conceived or made by him during employment with the Company that is not related in any manner to the Proprietary Interests but which was conceived or made on the Company’s time or with the use of the Company’s facilities or materials.
(d) The Employee further covenants and agrees that it shall be conclusively presumed as against him that any Intellectual Property related to the Proprietary Interests described by the Employee in a patent, service mark, trademark, or copyright application, disclosed by the Employee in any manner to a third person, or created by the Employee or any person with whom he has any business, financial or confidential relationship, within one (1) year after cessation of his employment with the Company, was conceived or made by the Employee during the period of employment by the Company and that such Intellectual Property be the sole property of the Company.
9. Withholding . Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Employee or his estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provisions for payment of taxes and withholding as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold have been satisfied.
10. Notices . Any notice, request, instruction or other document to be given hereunder by any party hereto to any other party shall be in writing and delivered personally, sent by registered or certified mail, postage prepaid.
If to the Employee:
|
Lawrence P. Reinhold
PO Box 74 Clarence, NY 14031 |
If to the Company:
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Richard Leeds, CEO
Systemax Inc. 11 Harbor Park Drive Port Washington, N.Y. 11050 |
or at such other address for a party as shall be specified by like notice. Any notice which is delivered personally in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party. Any notice which is addressed and mailed in the manner herein provided shall be conclusively presumed to have been given to the party to whom it is addressed at the close of business, local time of the recipient, forty-eight hours after the day it is so placed in the mail.
11. Indemnification; D&O Insurance . The Employee shall be entitled to be indemnified and insured by the Company against liability and expense relating his employment to the same extent and subject to the same conditions and limitations as all other executive officers of the Company in accordance with and as authorized by the Company’s Certificate of Incorporation, by-laws, Board of Directors resolutions and applicable law.
12. Entire Agreement . This Agreement sets forth the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, written or oral, between them as to such subject matter. This Agreement may not be amended, nor may any provision hereof be modified or waived, except by an instrument in writing duly signed by the party to be charged.
13. Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York, without regard to the conflicts of law rules thereof.
14. Validity . The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
15. Counterparts . This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement.
16. Waivers . No waiver by either party of any breach or non-performance of any provision or obligation of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written.
|
Systemax Inc.
By: Richard Leeds Richard Leeds, Chairman and CEO /s/ Lawrence O, Reinhold Lawrence P. Reinhold |
SYSTEMAX INC.
The purpose of the Systemax Inc. 2006 Stock Incentive Plan for Non-Employee Directors (the “Plan”) is to promote the interest of Systemax Inc. (the “Company”) and its stockholders by increasing the proprietary interest of non-employee directors in the growth and performance of the Company by granting such directors restricted stock awards relating to, and options to purchase, shares of Common Stock, par value $0.01 per share (the “Shares”) of the Company (collectively, “Awards”).
The Plan shall be administered by the Company’s Board of Directors (the “Board”). Subject to the provisions of the Plan, the Board shall be authorized to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the Plan and to make all other determinations necessary or advisable for the administration of the Plan; provided, however, that the Board shall have no discretion with respect to the selection of directors to receive Awards, the number of Shares subject to any such Awards, the purchase price thereunder or the timing of grants of Awards under the Plan. The determinations of the Board in the administration of the Plan, as described herein, shall be final and conclusive. The Secretary of the Company (or, if the Secretary is unavailable, the Chief Financial Officer of the Company) shall be authorized to implement the Plan in accordance with its terms and to take such actions of a ministerial nature as shall be necessary to effectuate the intent and purposes thereof. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware.
The class of individuals eligible to receive grants of Awards under the Plan shall be directors of the Company who are not employees of the Company or any entity in which the Company has more than a 50% equity interest (“Eligible Directors”). Any recipient of an Award granted hereunder shall hereinafter be referred to as a “Participant.”
Subject to adjustment as provided in Section 6, an aggregate of 200,000 Shares shall be available for issuance under the Plan. The Shares deliverable pursuant to any Award may be made available from authorized but unissued Shares or treasury Shares. If any option granted under the Plan shall terminate for any reason without having been exercised, or without delivery of Shares in connection with such termination, or should any Restricted Shares (as defined below) be forfeited, the Shares subject to, but not delivered under, such option, or such forfeited Shares, shall again be available for issuance under the Plan.
Effective October 11, 2006 (the “Effective Date”), subject to approval of the Plan by the stockholders of the Company, each person who is then an Eligible Director will be granted, as of the Effective Date, an option to purchase 5,000 Shares.
Subject to approval of the Plan by the stockholders of the Company, each person who first becomes an Eligible Director after the Effective Date will be granted, on the date that such person becomes an Eligible Director, an option to purchase 5,000 Shares.
The options granted will be nonqualified stock options not intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) and shall have the following terms and conditions:
Price . The purchase price per Share deliverable upon the exercise of each option shall be 100% of the Fair Market Value per Share on the date the option is granted. For purposes of the Plan, Fair Market Value shall be the closing sales price per share as reported on the principal exchange on which the Shares are listed for the date in question, or if there were no sales on such date, on the first date prior thereto on which the Shares were so traded.
Payment . Options may be exercised only upon payment of the full purchase price (and any withholding taxes, if applicable) thereof. Such payment shall be made (a) in cash, or its equivalent, (b) by exchanging Shares which have been owned by the Participant for at least six months (which are not the subject of any pledge or other security interest), (c) by providing with the notice of exercise an order to a designated broker to sell part or all of the Shares and to deliver sufficient proceeds to the Company, in cash or by check payable to the order of the Company, to pay the full purchase price of the Shares, or (d) by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Shares so tendered to the Company as of the date of such tender is at least equal to such option price (and any withholding taxes, if applicable).
Exercisability and Term of Options . Options shall be exercisable immediately (but not before stockholder approval of the Plan) and shall be exercisable until the earlier of (A) ten years from the date of grant and (B) the expiration of the period provided in the paragraph below entitled Termination of Service as Eligible Director. If the Plan is not approved at the Annual Stockholders Meeting in 2006, any options granted before such meeting shall be void and of no force or effect.
Termination of Service as Eligible Director . Upon termination of a Participant’s service as a director of the Company for any reason, all outstanding options held by such Participant, to the extent then exercisable, shall be exercisable in whole or in part for a period of one year from the date upon which the Participant ceases to be a director, provided that in no event shall the options be exercisable beyond ten years from the date of grant.
Non-transferability of Options . No option may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant otherwise than by will or the laws of descent and distribution, and during the lifetime of the Participant to whom an option is granted it may be exercised only by the Participant or by the Participant’s guardian or legal representative. Notwithstanding the foregoing, options may be transferred pursuant to a qualified domestic relations order.
Option Agreement . Each option granted hereunder shall be evidenced by an agreement with the Company which shall contain the terms and provisions set forth herein and shall otherwise be consistent with the provisions of the Plan.
If the Plan is approved at the Annual Stockholders Meeting in 2006, then immediately following each Annual Stockholders Meeting (commencing with the Annual Stockholders Meeting in 2006), but only upon the registration of the common stock to be issued under the Plan with the Securities and Exchange Commission, each person who is an Eligible Director immediately following such meeting will be granted, as of the date of such meeting, a restricted stock award with respect to such number of shares as is determined by dividing (i) $25,000, by (ii) the average of the Fair Market Value per Share during the 20 trading days preceding the date of such meeting (rounded up to the nearest whole number of Shares). No fractional shares shall be issued. All Shares subject to a restricted stock award granted hereunder shall hereinafter be referred to as “Restricted Shares”.
All Restricted Shares granted pursuant to the Plan shall be subject to the following conditions:
| • | the Restricted Shares may not be sold, transferred, or otherwise alienated or hypothecated until the restrictions are removed or expire; |
| • | each certificate representing Restricted Shares shall bear a legend making appropriate reference to the restrictions imposed; and |
| • | such other conditions and restrictions as may be required under the requirements of any stock exchange upon which such Shares or shares of the same class are then listed, and under any securities law applicable to such Shares, shall be imposed on such Shares. |
The restrictions imposed on the transfer of the Restricted Shares subject to each restricted stock award granted to a Participant shall lapse, and said Restricted Shares shall become nonforfeitable and transferable twenty-four (24) months following the date on which each such restricted stock award is granted, if within such period the Participant’s service as a director of the Company has not ceased. If the Participant’s service as a director of the Company ceases before twenty-four (24) months following the date on which a restricted stock award is granted, then, except as provided below, the Restricted Shares subject to such restricted stock award shall be forfeited. Notwithstanding the preceding, all restrictions imposed on the transfer of the Restricted Shares subject to each restricted stock award granted pursuant to the Plan shall lapse, and all such Restricted Shares shall become non-forfeitable, (i) upon the death or disability of the Participant while serving as a director of the Company, or (ii) upon the Participant’s cessation of service as a director in connection with a Change in Control. For purposes of the Plan, a Change in Control shall mean an acquisition, merger or other transaction resulting in the Leeds family (including Richard Leeds, Robert Leeds and Bruce Leeds) directly or indirectly owning less than 50% of the then outstanding shares of the Company in the aggregate.
Prior to the expiration or lapse of all of the restrictions and conditions imposed upon Restricted Shares, a stock certificate or certificates representing such Restricted Shares shall be registered in the Participant’s name but shall be retained by the Company for the Participant’s account until the restrictions with respect to the Restricted Shares represented by such stock certificate or certificates have expired or lapsed, and the Restricted Shares become nonforfeitable, at which time such certificate or certificates (or a certificate or certificates reissued without the transfer restrictions noted in Section 6(b)(ii)) shall be delivered to the Participant. The Participant shall execute and deliver to the Company one or more undated stock powers signed in blank with signature guarantee which may be used to effect the transfer back to the Company for cancellation of any Restricted Shares as to which the restrictions had not expired or lapsed, and which are forfeited, at the time of the termination of the Participant’s service as a director of the Company. The Participant, shall while a director of the Company, have the right to vote such Restricted Shares prior to the receipt of the certificate for such Shares and shall have all other rights and privileges of a beneficial and record owner with respect thereto, including, without limitation, the right to receive dividends, distributions and adjustments with respect thereto; provided, however, that such dividends, distributions and adjustments shall be retained by the Company for the Participant’s account and for delivery to the Participant, together with the stock certificate or certificates representing such Restricted Shares, only if and when the restrictions and conditions on the Restricted Shares represented by such stock certificate or certificates shall have expired or lapsed and the Restricted Shares shall have become non-forfeitable.
Each restricted stock award granted hereunder shall be evidenced by an agreement with the Company which shall contain the terms and provisions set forth herein and shall otherwise be consistent with the provisions of the Plan.
In the event of a stock split, stock dividend, extraordinary cash dividend, reorganization, recapitalization, spinoff, partial liquidation, subdivision or combination of the Shares or other change in corporate structure affecting the Shares, the number of Shares authorized by the Plan shall be increased or decreased proportionately, as the case may be, and the number of Shares subject to any outstanding option shall be increased or decreased proportionately, as the case may be, with appropriate corresponding adjustment in the purchase price per Share thereunder in order to prevent enlargement or dilution of the benefits intended to be provided hereunder or under any outstanding Award agreement.
Neither a Participant nor a Participant’s legal representative shall be, or have any of the rights and privileges of, a stockholder of the Company in respect of any Shares issuable pursuant to any Award, in whole or in part, unless and until certificates for such Shares shall have been issued.
The Plan may be amended by the Board as it shall deem advisable or to conform to any change in any law or regulation applicable thereto; provided, that any such amendment shall be approved by the stockholders of the Company if such stockholder approval is necessary to comply with or qualify for any regulation or qualification requirement for which or with which the Board deems it necessary or desirable to comply or qualify. Without limiting the generality of the foregoing, the Board shall amend the Plan, and the terms and conditions of any outstanding Awards, if and to the extent necessary to comply with the applicable requirements of Section 409A of the Code, without requiring the consent of any affected Participant.
Each Share shall be subject to the requirement that if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Shares, no such Share may be disposed of unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any condition not acceptable to the Board.
The Plan shall terminate the day following the tenth Annual Stockholders Meeting at which Directors are elected succeeding the Annual Stockholders Meeting at which the Plan was approved by stockholders, unless the Plan is extended or terminated at an earlier date by stockholders or is terminated by exhaustion of the Shares available for issuance hereunder.
SYSTEMAX INC.
2005 Employee Stock Purchase Plan
| 1. |
Purpose. The purpose of the Systemax Inc. 2005 Employee Stock Purchase Plan (the “Plan”) is to provide eligible employees of Systemax Inc. (the “Company”) or a Designated Subsidiary (as defined in Section 11) with opportunities to purchase shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”). Two million (2,000,000) shares of Common Stock in the aggregate have been approved and reserved for this purpose. The Plan is intended to constitute an “employee stock purchase plan” within the meaning of Section 423(b) of the Internal Revenue Code of 1986, as amended (the “Code”), and shall be interpreted in accordance with that intent. |
| 2. |
Administration. The Plan will be administered by the person or persons (the “Administrator”) appointed by the Company’s Board of Directors (the “Board”) for such purpose. The Administrator has the authority to make rules and regulations for the administration of the Plan, in its sole discretion, and its interpretations and decisions with regard thereto shall be final and conclusive. If no person is appointed as the Administrator, then the Compensation Committee of the Board (or, as determined by the Compensation Committee, a subcommittee thereof) shall be the Administrator of the Plan. No member of the Board or individual exercising administrative authority with respect to the Plan shall be liable for any action or determination made in good faith with respect to the Plan or any option granted hereunder. |
| 3. |
Offerings. The Company will make one or more offerings to Eligible Employees (as defined below) to purchase Common Stock under the Plan (“Offerings”). Unless otherwise determined by the Administrator, the initial Offering will begin on the Effective Date and will end on the following September 30 (the “Initial Offering”). Thereafter, unless otherwise determined by the Administrator, an Offering will begin on the first business day occurring on or after the first day of each calendar quarter (October 1, January 1, April 1, July 1) and will end on the last business day occurring on or before the end of each calendar quarter (December 31, March 31, June 30, September 30, respectively). The Administrator may, in its discretion, designate a different period for any Offering, provided that no Offering shall exceed 12 months in duration or overlap any other Offering. |
| 4. |
Eligibility. Each individual classified as an employee (within the meaning of Section 3401(c) of the Code and the regulations thereunder) by the Company or a Designated Subsidiary on the Company’s or the Designated Subsidiary’s payroll records during the relevant participation period (each an “Eligible Employee”) is eligible to participate in any one or more of the Offerings under the Plan, provided that as of the first day of the applicable Offering (the “Offering Date”) he or she has been an employee for at least one (1) year and is customarily employed by the Company or a Designated Subsidiary for more than twenty (20) hours a week . |
| 5. |
Participation. |
(a) Any Eligible Employee may elect to become a Participant by submitting an enrollment form to the designated representative of the Company’s human resources department at least one (1) week before the applicable Offering Date (or such other deadline as shall be established by the Administrator for the Offering). The form will (i) state a whole percentage at a minimum of one percent (1%) and a maximum of ten percent (10%) to be deducted from his Compensation (as defined in Section 11) per pay period, (ii) authorize the purchase of Common Stock for him in each Offering in accordance with the terms of the Plan and (iii) specify the exact name or names in which shares of Common Stock purchased for him are to be issued pursuant to Section 10. The Company will maintain book accounts showing the amount of payroll deductions made by each Participant for each Offering. No interest will accrue or be paid on payroll deductions. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose and the Company shall not be obligated to segregate such payroll deductions. An employee who does not enroll in accordance with these procedures will be deemed to have waived his right to participate.
(b) Except as provided elsewhere in the Plan, a Participant’s election to participate in the Plan and payroll deduction election shall continue in effect until the Participant withdraws from the Plan or terminates employment.
(c) All Participants shall have the same rights and privileges under the Plan, except for differences that may be mandated by local law and that are consistent with Code Section 423(b)(5).
(d) In accordance with Section 423(b)(8) of the Code, the Administrator may reduce a Participant’s payroll deductions, but not below zero percent (0%), at any time during an Offering.
6. Deduction Changes. Except as may be determined by the Administrator in advance of an Offering, a Participant may not increase or decrease his payroll deduction during any Offering, but may increase or decrease his payroll deduction with respect to the next Offering (subject to the limitations of Section 5) by filing a new enrollment form at least one (1) week before the next Offering Date (or by such other deadline as shall be established by the Administrator for the Offering). The Administrator may, in advance of any Offering, establish rules permitting an employee to increase, decrease or terminate his payroll deduction during an Offering.
7. Withdrawal. A Participant may withdraw from participation in the Plan by delivering a written notice of withdrawal to the designated representative of the Company’s human resources department. The Participant’s withdrawal will be effective as of the next business day. Following a Participant’s withdrawal, the Company will promptly refund to him his entire account balance under the Plan (after payment for any Common Stock purchased before the effective date of withdrawal). Partial withdrawals are not permitted. The employee may not begin participation again during the remainder of the Offering, but may enroll in a subsequent Offering in accordance with Section 5.
8. Grant of Options. On each Offering Date, the Company will grant to each Participant an option (“Option”) to purchase on the last day of such Offering (the “Exercise Date”), at the Option Price hereinafter provided for, (a) a number of shares of Common Stock determined by dividing such employee’s accumulated payroll deductions on such Exercise Date by the Applicable Percentage (as defined in Section 11) of the lesser of the Fair Market Value of the Common Stock on the Grant Date or the Exercise Date; provided, however , that the Administrator may determine in advance of an Offering to use solely the Grant Date or the Exercise Date for such determination, or (b) such other lesser maximum number of shares as shall have been established by the Administrator in advance of the Offering; provided, however , that such Option shall be subject to the limitations set forth below. Each employee’s Option shall be exercisable only to the extent of such employee’s accumulated payroll deductions on the Exercise Date. The purchase price for each share purchased under each Option (the “Option Price”) will be the Applicable Percentage of the lesser of the Fair Market Value of the Common Stock on the Grant Date or the Exercise Date.
Notwithstanding the foregoing, no employee may be granted an Option hereunder if such employee, immediately after the Option was granted, would be treated as owning stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any Parent or Subsidiary (as defined in Section 11). For purposes of the preceding sentence, the attribution rules of Section 424(d) of the Code shall apply to determining the stock ownership of an employee, and all stock which the employee has a contractual right to purchase shall be treated as stock owned by the employee. In addition, no employee may be granted an Option which permits his rights to purchase stock under the Plan, and any other employee stock purchase plan of the Company and its Parents and Subsidiaries, to accrue at a rate which exceeds $25,000 of the fair market value of such stock (determined on the option grant date or dates) for each calendar year in which the Option is outstanding at any time. The purpose of the limitation in the preceding sentence is to comply with Section 423(b)(8) of the Code and shall be applied by taking Options into account in the order in which they were granted. The Administrator also has the right to impose an overall limit on the number of shares issued in any offering period.
9. Exercise of Option and Purchase of Shares. Each employee who continues to be a Participant in the Plan on the Exercise Date shall be deemed to have exercised his Option on such date and shall acquire from the Company such number of whole shares of Common Stock reserved for the purpose of the Plan as his accumulated payroll deductions on such date will purchase at the Option Price, subject to any other limitations contained in the Plan. Any amount remaining in a Participant’s account at the end of an Offering solely by reason of the inability to purchase a fractional share will be carried forward to the next Offering; any other balance remaining in a Participant’s account at the end of an Offering will be refunded to the employee promptly.
10. Issuance of Certificates; Transfer of Shares. Certificates representing shares of Common Stock purchased under the Plan may be issued only in the name of the employee, in the name of the employee and another person of legal age as joint tenants with rights of survivorship, or in the name of a broker authorized by the employee to be his, or their, nominee for such purpose. No Participant (or joint tenant or nominee) may sell, pledge or otherwise transfer the shares of Common Stock acquired by the Participant under the Plan until the expiration of the applicable Holding Period, except as permitted under Offering terms or rules adopted by the Administrator or for transfers to the estate or beneficiaries of deceased Participants (in which case such transferees shall be bound by this restriction). Certificates representing shares of Common Stock purchased under the Plan shall bear appropriate legends and be subject to appropriate stop transfer orders to reflect this restriction. Shares purchased under the Plan are non-forfeitable.
11. Definitions.
(a) The term “Applicable Percentage” means 95% (or such other percentage, not below 85%, as may be determined by the Administrator in advance of an Offering).
(b) The term “Compensation” means the amount of base pay prior to salary reduction pursuant to Sections 125, 132(f) or 401(k) of the Code, but excluding overtime, commissions, incentive or bonus awards, allowances and reimbursements for expenses such as relocation allowances or travel expenses, income or gains on the exercise of Company stock options, and similar items.
(c) The term “Designated Subsidiary” means any present or future Subsidiary (as defined below) that has been designated by the Board to participate in the Plan. The Board may so designate any Subsidiary, or revoke any such designation, at any time and from time to time, either before or after the Plan is approved by stockholders.
(d) The term “Effective Date” means January 1, 2006.
(e) The term “Fair Market Value of the Common Stock” on any given date means the fair market value of the Common Stock determined in good faith by the Administrator; provided, however, that if the Common Stock is traded on a national securities exchange or other primary trading market, the Fair Market Value of the Common Stock will equal the closing sales price as reported on the principal exchange or market for the Common Stock on such date. If there is no trading on such date, the determination shall be made by reference to the last date preceding such date for which there was trading.
(f) The term “Holding Period” means one year, or such other period of time as may be established by the Administrator, following the Exercise Date during which the Common Stock acquired pursuant to the Plan may not be sold, pledged or otherwise transferred by the Participant. The Holding Period may be changed by the Administrator with respect to any Offering and may apply to all or a designated portion of the shares of Common Stock purchased by each Participant in the Offering, subject to Section 5.
(g) The term “Parent” means a “parent corporation” with respect to the Company, as defined in Section 424(e) of the Code.
(h) The term “Participant” means an Eligible Employee who has complied with the provisions of Section 5.
(i) The term “Subsidiary” means a “subsidiary corporation” with respect to the Company, as defined in Section 424(f) of the Code.
12. Rights on Termination of Employment. If a Participant’s employment terminates for any reason before the Exercise Date for any Offering, no payroll deduction will be taken from any pay due and owing to the employee and the balance in his account will be paid to him or, in the case of his death, to his designated beneficiary as if he had withdrawn from the Plan under Section 7. An employee will be deemed to have terminated employment, for this purpose, if the corporation that employs him, having been a Designated Subsidiary, ceases to be a Designated Subsidiary or ceases to be a Subsidiary, or if the employee is transferred to any corporation other than the Company or a Designated Subsidiary. An employee will not be deemed to have terminated employment, for this purpose, if the employee is on an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee’s right to reemployment is guaranteed either by a statute or by contract (including under the policy pursuant to which the leave of absence was granted) or if the Administrator otherwise provides in writing.
13. Special Rules. Notwithstanding anything herein to the contrary, the Board or the Administrator may in its discretion amend or vary the terms of the Plan, establish one or more sub-plans or adopt special rules applicable to the employees of a particular Designated Subsidiary, whenever the Board or Administrator determines that such rules are necessary or appropriate for the implementation of the Plan in a jurisdiction where such Designated Subsidiary has employees provided that such rules are consistent with the requirements of Section 423(b) of the Code. Such special rules may include (by way of example, but not by way of limitation) the establishment of a method for employees of a given Designated Subsidiary to fund the purchase of shares other than by payroll deduction, if the payroll deduction method is prohibited by local law or is otherwise impracticable. Any special rules established pursuant to this Section 13 shall, to the extent possible, result in the employees subject to such rules having substantially the same rights as other Participants in the Plan.
14. Optionees Not Stockholders. Neither the granting of an Option to an employee nor the deductions from his pay shall constitute such employee a holder of the shares of Common Stock covered by an Option under the Plan until such shares have been purchased by and issued to him.
15. Rights Not Transferable. Rights under the Plan are not transferable by a participating employee other than by will or the laws of descent and distribution, and are exercisable during the employee’s lifetime only by the employee.
16. Application of Funds. All funds received or held by the Company under the Plan may be combined with other corporate funds and may be used for any corporate purpose.
17. Adjustment in Case of Changes Affecting Common Stock. In the event of a subdivision of outstanding shares of Common Stock, or the payment of a dividend in Common Stock, the number of shares approved for the Plan, and the share limitation set forth in Section 8, shall be increased proportionately, and such other adjustment shall be made as may be deemed equitable by the Administrator. In the event of any other change affecting the Common Stock, such adjustment shall be made as may be deemed equitable by the Administrator to give proper effect to such event.
18. Amendment of the Plan. The Board may at any time, and from time to time, amend the Plan in any respect, except that without the approval, within 12 months of such Board action, by the stockholders, no amendment shall be made increasing the number of shares approved for the Plan or making any other change that would require stockholder approval in order for the Plan, as amended, to qualify as an “employee stock purchase plan” under Section 423(b) of the Code.
19. Insufficient Shares. If the total number of shares of Common Stock that would otherwise be purchased on any Exercise Date plus the number of shares purchased under previous Offerings under the Plan exceeds the maximum number of shares issuable under the Plan, the shares then available shall be apportioned among Participants in proportion to the amount of payroll deductions accumulated on behalf of each Participant that would otherwise be used to purchase Common Stock on such Exercise Date.
20. Termination of the Plan. The Plan may be terminated at any time by the Board. Upon termination of the Plan, all amounts in the accounts of Participants shall be promptly refunded.
21. Governmental Regulations; Applicable Law. The Company’s obligation to sell and deliver Common Stock under the Plan is subject to obtaining all governmental approvals required in connection with the authorization, issuance, or sale of such stock. The Plan shall be governed by Delaware law except to the extent that such law is preempted by federal law.
22. Issuance of Shares. Shares may be issued upon exercise of an Option from authorized but unissued Common Stock, from shares held in the treasury of the Company, or from any other proper source.
23. Tax Withholding. Participation in the Plan is subject to any minimum required tax withholding on income of the Participant in connection with the Plan. Each employee agrees, by entering the Plan, that the Company and its Subsidiaries shall have the right to deduct any such taxes from any payment of any kind otherwise due to the employee, including shares issuable under the Plan.
24. Notification Upon Sale of Shares. Each employee agrees, by entering the Plan, to give the Company prompt notice of any disposition of shares purchased under the Plan where such disposition occurs within two years after the date of grant of the Option or one year after the Exercise Date pursuant to which such shares were purchased.
25. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares shall comply with all applicable provisions of law, whether domestic or foreign, including without limitation the Securities Act of 1933, as amended, the Securities Exchange Act of 1934 as amended, the rules and regulations of the Securities and Exchange Commission and the requirements of any stock exchange or automated quotation system upon which the shares of stock may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the applicable provisions of law.
26. Effective Date and Approval of Shareholders. The terms of the Plan were adopted by the Board of Directors on March 30, 2005 and shall take effect on the Effective Date, subject to approval, in accordance with applicable state law, by the holders of a majority of the votes cast at a meeting of stockholders at which a quorum is present.
_________________________________________________
SUBSIDIARIES OF SYSTEMAX INC.
Exhibit 21
Domestic Subsidiaries
|
1.
2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. |
Global Computer Supplies Inc. (a New York corporation)
Global Equipment Company Inc. (a New York corporation) Tiger Direct Inc. (a Florida corporation) Nexel Industries Inc. (a New York corporation) Systemax Manufacturing Inc. (a Delaware corporation) Profit Center Software Inc. (a New York corporation) Global Gov't/Education Solutions, Inc. (a Delaware corporation) Papier Catalogues Inc. (a New York corporation) Misco America Inc. (a Delaware corporation) Millennium Falcon Corp. (a Delaware corporation) Systemax Services Inc. (a New York corporation) SYX Distribution (a Delaware corporation) OnRebate.com (a Delaware corporation) Ultra Products Inc. (a Delaware corporation) |
FOREIGN SUBSIDIARIES
|
1.
2. 3. 4. 5. 6. 7. |
Misco Germany Inc. (a New York corporation)
Misco Italy Computer Supplies S.P.A. (an Italian corporation) H C S Global SA (a French corporation) Systemax Europe Ltd. (a U.K. corporation) Global Computer Products BV (a Dutch corporation) Dabus Dataproducktor AB (a Swedish corporation) Misco Iberia Computer Supplies S.A. (a Spanish corporation |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-21489, 333-21491 and 333-11618 on Form S-8 of our report dated April 13, 2005 (November 17, 2005, as to the effects of the restatement discussed in Note 2), which expresses an unqualified opinion and includes an explanatory paragraph relating to the Company’s restatement described in Note 2 to the consolidated financial statements, relating to the consolidated financial statements and financial statement schedule for the year ended December 31, 1002 of Systemax, Inc. and subsidiaries appearing in the Annual Report on Form 10-K of Systemax Inc. for the year ended December 31, 2006.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
March 27, 2007
Exhibit 23.2
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-21489, 333-21491 and 333-111618) pertaining to the 1995 Stock Plan for Non-Employee Directors, 1995 Long-Term Stock Incentive Plan and the 1999 Long-Term Stock Incentive Plan of Systemax Inc. of our report dated March 27, 2007 at and for the year ended December 31, 2006, with respect to the consolidated financial statements and schedule of Systemax Inc. in the Annual Report (Form 10-K) for the year ended December 31, 2006.
New York, New York
March 27, 2007
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Richard Leeds, Chief
Executive Officer of Systemax Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Systemax Inc. (the
“registrant”);
2. Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and (except as
disclosed in Item 9A of this annual report on Form 10-K) we have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to reasonably
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within these entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant’s internal control
over financial reporting that occurred during the registrant’s fourth
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s
board of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting known to me which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal controls
over financial reporting.
Date: March 30, 2007
/s/ RICHARD LEEDS
Richard Leeds, Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Lawrence P. Reinhold,
Chief Financial Officer of Systemax Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Systemax Inc. (the
“registrant”);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and (except as
disclosed in Item 9A of this annual report on Form 10-K) we have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to reasonably
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within these entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant’s internal control
over financial reporting that occurred during the registrant’s fourth
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s
board of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting known to me which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal controls
over financial reporting.
Date: March 30, 2007
/s/ LAWRENCE P. REINHOLD
Lawrence Reinhold, Chief Financial Officer
Exhibit 32.1
The undersigned, the Chief Executive Officer of Systemax Inc., hereby certifies that to the best of his knowledge Systemax Inc.’s Form 10-K for the Year Ended December 31, 2005 fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78 (o)(d)) and that the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Systemax Inc.
Dated: March 30, 2007
/s/ RICHARD LEEDS
Richard Leeds, Chief Executive Officer
Exhibit 32.2
The undersigned, the Chief Financial Officer of Systemax Inc., hereby certifies that to the best of his knowledge Systemax Inc.’s Form 10-K for the Year Ended December 31, 2005 fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78 (o)(d)) and that the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Systemax Inc.
Dated: March 30, 2007
/s/ LAWRENCE P. REINHOLD
Lawrence P. Reinhold, Chief Financial Officer