SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2007

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to          

 

Commission File Number:  1-13792

 


 

Systemax Inc.

 (Exact name of registrant as specified in its charter)

 

Delaware

 

11-3262067

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

11 Harbor Park Drive

Port Washington, New York   11050

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code: (516) 608-7000

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

 

 

 

 

Name of each exchange on which registered

 

Common Stock, par value $ .01 per share

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: NONE

 


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   o       No   x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   o       No   x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x       No   o

 

Indicate by check mark 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.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large Accelerated Filer 

o

 

Accelerated Filer 

x

Non Accelerated Filer 

o

 

Smaller reporting company

o

(Do not check if smaller reporting company)

 

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes   o       No   x

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2007, which is the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $175,722,268. 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 February 29, 2008 was 36,102,783 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.

 

 



 

 

TABLE OF CONTENTS

 

Part I

 

 

Item 1.

Business

3

 

General

3

 

Products

4

 

Sales and Marketing

5

 

Customer Service, Order Fulfillment and Support

6

 

Suppliers

7

 

Competition and Other Market Factors

7

 

Employees

8

 

Environmental Matters

8

 

Financial Information About Foreign and Domestic Operations

9

 

Available Information

9

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

15

Item 2.

Properties

16

Item 3.

Legal Proceedings

16

Item 4.

Submission of Matters to a Vote of Security Holders

17

Part II

 

 

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters of Equity Securities

17

Item 6.

Selected Financial Data

18

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 8.

Financial Statements and Supplementary Data

29

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

29

Item 9A.

Controls and Procedures

29

Item 9B.

Other Information

30

Part III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

31

Item 11.

Executive Compensation

31

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

31

Item 13.

Certain Relationships and Related Transactions, and Director Independence

31

Item 14.

Principal Accountant Fees and Services

31

Part IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

31

 

 

 

 

Signatures

35

 

 

2



 

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.

 

Item 1. Business.

 

General

 

Systemax is primarily a direct marketer of brand name and private label products. Our operations are organized in three reportable business segments — Technology Products, Industrial Products and Hosted Software. Our Technology Products segment sells computers, computer supplies and consumer electronics which are marketed in North America and Western Europe.  Most of these products are manufactured by other companies.  We assemble our own personal computers (“PCs”) and sell them under the trademarks Systemax™ and Ultra™ .  We also sell certain computer-related products manufactured for us to our own design under the trademark Ultra™ .  Technology Products accounted for 92% of our net sales in 2007. Our Industrial Products segment sells a wide array of material handling equipment, storage equipment and consumable industrial items which are marketed in North America. Most of these products are manufactured by other companies.  Some products are manufactured for us to our own design and marketed under the trademarks Global™ , GlobalIndustrial.com™ and Nexel™. Industrial products accounted for 8% of our net sales in 2007. In both of these segments we offer our customers a broad selection of products, prompt order fulfillment and extensive customer service. Our Hosted Software segment, which became a reportable segment in 2006, participates in the emerging market for on-demand, web-based business software applications through the marketing of our PCS ProfitCenter Software application. See Note 11 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.

 

 

3



 

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.

 

Recent Developments

 

On January 5, 2008 the Company entered into an asset purchase agreement with CompUSA Inc. Under the agreement the Company acquired CompUSA’s e-commerce business and 16 of its retail leases and related fixtures for consideration of approximately $30.4 million. This acquisition accelerates the Company’s planned expansion into the retail market place and when consummated in early 2008 will give the Company approximately 26 retail storefronts operating in North America and Puerto Rico.

 

Effective the fourth quarter of 2007, the Company changed its fiscal year end from a calendar year ending on December 31 to a fiscal year ending at midnight on the Saturday closest to December 31.  Fiscal years will typically include 52 weeks, but every few years will include 53 weeks which was the case in 2005.  Fiscal 2007 ended on December 29 and included 52 business weeks.  For clarity of presentation herein, all fiscal years are referred to as if they ended on December 31.  The fiscal year will be divided into four fiscal quarters that each end at midnight on a Saturday.  Fiscal quarters will typically include 13 weeks, but the fourth quarter will include 14 weeks in a 53 week fiscal year.  For clarity of presentation herein, all fiscal quarters are referred to as if they ended on the traditional calendar month.  The effect of the change in year end in 2007 was de minimis.

 

Products

 

We offer more than 100,000 brand name and private label products. We endeavor to expand and keep current the breadth of our product offerings in order to fulfill the increasingly wide range of product needs of our customers.

 

Our computer sales are primarily offerings of brand name original equipment manufacturers, as well as our own Systemax and Ultra brands. Computer supplies and consumer electronics related products include supplies such as laser printer toner cartridges and ink jet printer cartridges; media such as flash memory, recordable disks and magnetic tape cartridges; peripherals such as hard disks, CD-ROM and DVD drives, printers and scanners; memory upgrades; data communication and networking equipment; monitors; digital cameras; plasma and LCD TVs; MP3 and DVD players; PDAs; and packaged software.

 

We assemble our Systemax and Ultra brand PCs in our 297,000 square foot, ISO-9001-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, pallet jacks and hand trucks; ladders, furniture, small office machines and related supplies; and consumable industrial products such as first aid items, safety items, protective clothing and OSHA compliance items.

 

We began to market our PCS ProfitCenter Software suite of business applications in 2004. PCS ProfitCenter Software is a web-based application which is delivered as an on-demand service over the internet. The product helps companies automate and manage their entire customer life-cycle across multiple sales channels (internet, call centers, outside salespersons, etc.).  We have recognized less than $1 million in revenues for this service to date.

 

 

4



 

Sales and Marketing

 

We market our products to both business customers and individual consumers. Our business customers include for-profit businesses, educational organizations and government entities. We have developed numerous proprietary customer and prospect databases. We consider our business customers to include the various individuals who work within an organization rather than just the business itself.

 

We have established a multi-pronged system of direct marketing to business customers, consisting primarily of relationship marketers, catalog mailings and proprietary internet websites, the combination of which is designed to maximize sales. Our relationship marketers focus their efforts on our business customers by establishing a personal relationship between such customers and a Systemax account manager. The goal of the relationship marketing sales force is to increase the purchasing productivity of current customers and to actively solicit newly targeted prospects to become customers. With access to the records we maintain of historical purchasing patterns, our relationship marketers are prompted with product suggestions to expand customer order values. In 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 our multiple marketing methods enables us to more thoroughly penetrate our business, educational and government customer base. We believe increased internet exposure leads to more internet-related sales and also generates more inbound telephone sales; just as we believe catalog mailings and email campaigns which feature our websites results in greater internet-related sales.

 

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 online methods such as website campaigns, banner ads and e-mail campaigns. We are able to monitor and evaluate the results of our various advertising campaigns to enable us to execute them in the most cost-effective manner. 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. As of December 31, 2007 we had eleven such retail locations open in North America and four in Europe, with several new retail locations under construction.  With the CompUSA acquisition, the Company will add approximately 16 retail outlets in 2008, bringing total retail outlets to approximately 26 in North America and Puerto Rico. The Company expects to selectively add to its North America retail network in the remainder of 2008.

 

E-commerce

 

The worldwide growth in active internet users has made e-commerce a significant opportunity for sales growth. In 2007, we had approximately $915 million in internet-related sales, an increase of $96 million, or 12%, from 2006. E-commerce sales represented approximately 33% of total revenue in 2007, compared to approximately 35% in 2006.  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.

 

 

5



 

We currently operate multiple e-commerce sites, including www.tigerdirect.com,  www.compusa.com, www.compusagoved.com, www.compusabusiness.com, www.misco.co.uk, www.globalindustrial.com, www.tigerdirect.ca,  www.misco.de, www.misco.fr, www.infotelusa.com, www.misco.nl, www.globalcomputer.com, www.misco.it, www.misco.es, www.globalgoved.com, www.misco.se and www.systemaxpc.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 18 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™,TigerDirect.ca™, 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 design helps reduce overall catalog expense and shortens catalog production time. This allows us the flexibility to alter our product offerings and pricing and to refine our catalog formats more quickly. Our catalogs are printed by third parties under fixed pricing arrangements. The commonality of certain core pages of our catalogs also allows for economies of scale in catalog production.

 

 As noted above, the increase in our internet-related sales allowed us to reduce the distribution of our catalogs to 57 million in 2007, which was 3.4% fewer than in the prior year. In 2007 we mailed approximately 40 million catalogs in North America, a 2.5% reduction from last year and approximately 17 million catalogs, or 5.6% fewer than 2006, were distributed in Europe.

 

Customer Service, Order Fulfillment and Support

 

We generally provide toll-free telephone number access for our customers. Certain of our domestic call centers are linked to provide telephone backup in the event of a disruption in phone service. In addition to telephone orders, we also receive orders by mail, fax, electronic data interchange and through the internet.

 

A large number of our products are carried in stock, and orders for such products are fulfilled on a timely basis directly from our distribution centers, typically on the day the order is received. We operate out of multiple sales and distribution facilities in North America and Europe. The locations of our distribution centers enable us to provide our customers next day or second day delivery. Orders are generally shipped by third-party delivery services in the United States and in Europe. The locations of our distribution centers in Europe have enabled us to market into additional countries with limited incremental investment. We maintain relationships with a number of large distributors in North America and Europe that also deliver products directly to our customers.

 

 

6



 

We provide extensive technical telephone support to our Systemax and Ultra brand PC customers.  We maintain a database of commonly asked questions for our technical support representatives, enabling them to respond quickly to similar questions. We conduct regular on-site training seminars for our sales representatives to help ensure that they are well trained and informed regarding our latest product offerings.

 

Suppliers

 

We purchase the majority of our products and components directly from manufacturers and large wholesale distributors. During 2007 and 2006, Ingram Micro accounted for 14.4% and 12.8% of our purchases.   During 2005, no vendor accounted for more than 10% of our purchases. The loss of this vendor, 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.

 

Competition and Other Market Factors

 

Technology Products

 

The North American and European technology product markets are highly competitive, with many U.S., Asian and European companies vying for market share.  There are few barriers of entry, with these products being sold through 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. 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 technology 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 technology products remaining highly competitive, continued reductions in retail prices may adversely affect our revenues and profits. Additionally, we rely in part upon the introduction of new technologies and products by other manufacturers in order to sustain long-term sales growth and profitability. There is no assurance that the rapid rate of such technological advances and product development will continue.

 

 

7



 

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.

 

Hosted Software

 

Hosted Software offers an on-demand software solution for the multi-channel commerce industry. The software distribution model in which a software application is hosted by a software vendor or a service provider and made available to customers over the Internet is also known as software as a service (SaaS).  Leading technology analysts generally agree that traditional software licensing is being replaced with on-demand delivery models that increase the predictability of information technology financial expenditures while making it easier for multi-channel commerce companies to manage their customers, products and services regardless of sales channel.

 

The increasing replacement of obsolete software solutions by multi-channel retailers for newer technologies provides Hosted Software with a competitive edge which is likely to give rise to greater deployments of its on-demand software. The advantages of having a single solution, single database to manage all sales channels (eCommerce, call center, catalog, mail order, retail) with web-based accessibility and faster implementation cycles will fuel continued penetration into the multi-channel software market space.

 

Employees

 

As of December 31, 2007, we employed a total of 3,535 employees, including 3,140 full-time and 395 part-time employees, of whom 2,343 were in North America and 1,192 were in Europe.

 

Environmental Matters

 

Under various national, state and local environmental laws and regulations in North America and Europe, a current or previous owner or operator (including the lessee) of real property may become liable for the costs of removal or remediation of hazardous substances at such real property. Such laws and regulations often impose liability without regard to fault. We lease most of our facilities. In connection with such leases, we could be held liable for the costs of removal or remedial actions with respect to hazardous substances. Although we have not been notified of, and are not otherwise aware of, any material real property environmental liability, claim or non-compliance, there can be no assurance that we will not be required to incur remediation or other costs in connection with real property environmental matters in the future.

 

 

8



 

Financial Information About Foreign and Domestic Operations

 

We conduct our business in North America (the United States and Canada) and Europe.  Approximately 39.7% of our net sales during 2007 were made by subsidiaries located outside of the United States. For information pertaining to our international operations, see Note 11, “Segment and Related Information,” to the consolidated financial statements included in Item 15 of this Form 10-K. The following sets forth selected information with respect to our operations in those two geographic markets (in thousands):

 

 

 

 

 

North

 

 

 

 

Europe

 

America

 

Total

2007

 

 

 

 

 

 

Net sales

 

$

932,398

 

$

1,847,477

 

$

2,779,875

Operating income

 

$

13,345

 

$

82,159

 

$

95,504

Identifiable assets

 

$

185,110

 

$

488,761

 

$

673,871

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

Net sales

 

$

743,906

 

$

1,601,259

 

$

2,345,165

Operating income

 

$

16,459

 

$

45,445

 

$

61,904

Identifiable assets

 

$

157,710

 

$

426,451

 

$

584,161

 

 

 

 

 

 

 

2005

 

 

 

 

 

 

Net sales

 

$

694,637

 

$

1,420,881

 

$

2,115,518

Operating income (loss)

 

$

(4,603

)

$

39,412

 

$

34,809

Identifiable assets

 

$

142,174

 

$

362,370

 

$

504,544

 

See Item 7, Management’s Discussions and Analysis of Financial Condition and Results of Operations, for further information with respect to our operations.

 

Available Information

 

 We maintain an internet website at www.systemax.com. We file reports with the Securities and Exchange Commission and make available free of charge on or through this web site our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including all amendments to those reports.  These are available as soon as is reasonably practicable after they are filed with the SEC.  All reports mentioned above are also available from the 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”):

 

·                   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.

 

 

9



 

Item 1A. Risk Factors.

 

There are a number of factors and variables described below that may affect our future results of operations and financial condition. Other factors of which we are currently not aware or that we currently deem immaterial may also affect our results of operations and financial position.

 

Risks Related to Our Industry

 

·       Economic conditions have affected and could continue to adversely affect our revenues and profits.

 

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.

 

·       Competitive pressures could harm our revenue and gross margin.

 

We may not be able to compete effectively with current or future competitors. The markets for our products and services are intensely competitive and subject to constant technological change. We expect this competition to further intensify in the future. Competitive factors include price, availability, service and support. We compete with a wide variety of other resellers and retailers, as well as manufacturers. 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.

 

10



 

·       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 may adversely affect our reported financial results.

 

Risks Related to Our Company

 

·       Increased costs associated with corporate governance compliance may impact our results of operations.

 

As a public company, we incur significant legal, accounting and other expenses that we would not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission and listing requirements subsequently adopted by the New York Stock Exchange in response to Sarbanes-Oxley, have required changes in corporate governance practices of public companies. These developments have substantially increased our legal compliance, auditing and financial reporting costs and made them more time consuming. These developments may also make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage, possibly making it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee.

 

11



 

·       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:

 

·       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 numerous countries outside the United States, and non-U.S. sales (Europe and Canada) accounted for approximately 40% of our revenue during 2007.  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.

 

·       We may not be successful in integrating the business of CompUSA.

 

Our acquisition of selected assets of CompUSA involves the integration of those assets into our existing business operating environment, including information systems. This will require us to devote significant management attention and resources to integrate these business practices and operations. There can be no assurance we will benefit from the addition of these retail stores. The potential difficulties we face include, but are not limited to, the following:

 

·       Integrating personnel from CompUSA and hiring new personnel while maintaining focus on providing high quality service to our customers.

·       Maintaining and building upon CompUSA’s existing customer base.

·       Operating retail stores in new and unfamiliar locations.

·       Complying with local laws and business practices.

 

12



 

·       Sales to individual consumers exposes us to credit card fraud, which could adversely affect our business.

 

Failure to adequately control fraudulent credit card transactions could increase our expenses. Increased sales to individual consumers, which are more likely to be paid for using a credit card, increases our exposure to fraud. We employ technology solutions to help us detect the fraudulent use of credit card information. However, if we are unable to detect or control credit card fraud, we may suffer losses as a result of orders placed with fraudulent credit card data, which could adversely affect our business.

 

·       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. 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.  In particular, our financial systems are disparate and will likely be replaced during the coming years.  The occurrence of a significant system failure, electrical or telecommunications outages or our failure to expand or successfully implement new systems could have a material adverse effect on our results of operations.

 

Our information systems networks, including our web sites, and applications could be adversely affected by viruses or worms and may be vulnerable to malicious acts such as hacking.  Although we take preventive measures, these procedures may not be sufficient to avoid harm to our operations, which could have an adverse effect on our results of operations.

 

13



 

·       We are dependent on third-party suppliers.

 

We purchase a significant portion of our computer products from major distributors such as Ingram Micro Inc. and Tech Data and directly from large manufacturers such as Hewlett Packard and Acer, who may deliver those products directly to our customers. These relationships enable us to make available to our customers a wide selection of products without having to maintain large amounts of inventory.  The termination or interruption of our relationships with any of these suppliers could materially adversely affect our business.

 

Our PC products contain electronic components, subassemblies and software that in some cases are supplied through sole or limited source third-party suppliers, some of which are located outside of the U.S. Although we do not anticipate any problems procuring supplies in the near-term, there 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

 

14



 

·       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.

 

Item 1B. Unresolved Staff Comments.

None.

 

15



 

Item 2. Properties.

 

Our primary facilities, which are leased except where otherwise indicated, are as follows:

 

Facility

 

Location

 

Approximate
Square Feet

 

Expiration
of Lease

 

 

 

 

 

 

 

Headquarters, Sales and Distribution Center (1)

 

Port Washington, NY

 

86,000

 

2017

 

 

 

 

 

 

 

Sales and Distribution Center

 

Buford, GA

 

647,000

 

2021

 

 

 

 

 

 

 

Sales 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

 

 

 

 

 

 

 

Canadian Headquarters and Sales Center

 

Richmond Hill, Ontario

 

21,250

 

2017

 

 

 

 

 

 

 

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

 

2012

 

 

 

 

 

 

 

Sales and Distribution Center

 

Lidkoping, Sweden

 

20,000

 

2008

 

 

 

 

 

 

 

Sales and Administrative Center

 

Uniondale, NY

 

11,494

 

2012

 


(1)   For information about this facility, leased from related parties, see Item 13 —“Certain Relationships and Related Transactions”

(2)   Terminable upon two months prior written notice.

 

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 10 to the Consolidated Financial Statements.

 

Item 3. Legal Proceedings.

 

Kevin Vukson v. TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc.

 

On October 18, 2007, Kevin Vukson filed a class action complaint in U.S. District Court (E.D.N.Y.) against TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc. on behalf of himself and all OnRebate customers whose rebates were denied or delayed. (OnRebate.com Inc. is a rebate processing company owned by Systemax.) Vukson’s Complaint alleges that since 2004 Systemax, TigerDirect and OnRebate

 

16



 

have conducted a deceptive and unlawful enterprise by failing to pay rebates that should have been paid and delaying unnecessarily the payment of other rebates that were paid. Vukson alleges claims arising under Florida’s Unfair, Deceptive Trade Practice Act, the federal RICO statute, along with claims for breach of contract, conspiracy to commit fraud and unjust enrichment. Systemax, TigerDirect and OnRebate have moved to dismiss the Complaint and to transfer the matter to the Southern District of Florida. The Court has not yet ruled on these motions and has not yet certified a class. The Company intends to vigorously defend this case.

 

State of Florida, Office of the Attorney General Subpoena

 

On January 2, 2008 the Company received a subpoena for documents from the Florida Attorney General’s Office relating to the payment and processing of rebates by the Company. On January 30, 2008 the Company received a second subpoena for additional documents. The Company is cooperating with the Florida Attorney General’s Office to provide the requested documents.

 

Other Matters

 

Systemax is a party to various pending legal proceedings and disputes arising in the normal course of business, including those involving commercial, employment, tax and intellectual property related claims, none of which, in 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.

 

 

PART II

 

Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters

 

Systemax common stock is traded on the New York Stock Exchange under the symbol “SYX.”  The following table sets forth the high and low closing sales price of our common stock as reported on the New York Stock Exchange for the periods indicated.

 

 

 

High

 

Low

 

2007

 

 

 

 

 

First Quarter

 

$

30.13

 

$

18.10

 

Second Quarter

 

21.75

 

16.22

 

Third Quarter

 

22.12

 

17.60

 

Fourth Quarter

 

24.47

 

17.95

 

 

 

 

 

 

 

2006

 

 

 

 

 

First Quarter

 

$

7.33

 

$

6.23

 

Second Quarter

 

7.99

 

5.87

 

Third Quarter

 

16.02

 

7.25

 

Fourth Quarter

 

18.80

 

9.93

 

 

 

17



 

On December 29, 2007, the last reported sale price of our common stock on the New York Stock Exchange was $20.52 per share.  As of December 29, 2007, we had 232 shareholders of record.

 

On March 3, 2008, the Company’s Board of Directors declared a special dividend of $1.00 per share payable on April 2, 2008 to shareholders of record on March 21, 2008. This special dividend is the second dividend we have paid since our initial public offering. Depending in part upon profitability, the strength of our balance sheet, our cash position and the need to retain cash for the development and expansion of our business, we may decide to declare another special dividend in the future, but we have no present plans of doing so

 

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 was the first dividend we have paid since our initial public offering.

 

Item 6. Selected Financial Data.

 

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 fiscal years 2007, 2006 and 2005 and the selected balance sheet data as of December 2007 and 2006 are derived from the audited consolidated financial statements which are included elsewhere in this report. The selected balance sheet data as of December 2005, 2004 and 2003 and the selected statement of operations data for fiscal years 2004 and 2003 are derived from the audited consolidated financial statements of the Company which are not included in this report.

 

 

 

Years Ended December 31,

 

 

 

(In millions, except per share data)

 

 

 

2007

 

2006

 

2005

 

2004*

 

2003*

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,779.9

 

$

2,345.2

 

$

2,115.5

 

$

1,928.1

 

$

1,655.7

 

Gross profit

 

$

426.3

 

$

342.9

 

$

307.3

 

$

286.5

 

$

264.9

 

Selling, general & administrative expenses

 

$

330.8

 

$

281.0

 

$

268.3

 

$

260.1

 

$

251.5

 

Restructuring and other charges

 

 

 

$

4.2

 

$

7.4

 

$

1.7

 

Operating income

 

$

95.5

 

$

61.9

 

$

34.8

 

$

19.0

 

$

9.2

 

Provision for income taxes

 

$

30.5

 

$

24.5

 

$

21.4

 

$

6.4

 

$

4.4

 

Net income

 

$

69.5

 

$

45.1

 

$

11.4

 

$

10.2

 

$

3.2

 

Per Share Amounts:

 

 

 

 

 

 

 

 

 

 

 

Net income — basic

 

$

1.93

 

$

1.29

 

$

.33

 

$

.30

 

$

.09

 

Net income — diluted

 

$

1.84

 

$

1.22

 

$

.31

 

$

.29

 

$

.09

 

Weighted average common shares — basic

 

36.0

 

35.0

 

34.6

 

34.4

 

34.2

 

Weighted average common shares — diluted

 

37.8

 

36.9

 

36.5

 

35.5

 

34.9

 

Cash dividends declared per common share

 

$

1.00

 

$

 

$

 

$

 

$

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

273.5

 

$

229.4

 

$

169.8

 

$

148.0

 

$

144.1

 

Total assets

 

$

673.9

 

$

584.1

 

$

504.5

 

$

483.2

 

$

445.3

 

Short-term debt

 

$

4.3

 

$

12.8

 

$

26.8

 

$

25.0

 

$

20.8

 

Long-term debt, excluding current portion

 

$

.3

 

$

.5

 

$

8.0

 

$

8.6

 

$

18.4

 

Shareholders’ equity

 

$

335.8

 

$

289.5

 

$

232.8

 

$

222.6

 

$

208.6

 

 


* As previously restated.

 

18



 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

Systemax is primarily a direct marketer of brand name and private label products. Our operations are organized in three reportable business segments — Technology Products, Industrial Products and Hosted Software. Our Technology Products segment sells computers, computer supplies and consumer electronics which are marketed in North America and Western Europe.  Most of these products are manufactured by other companies.  We assemble our own PCs and sell them under our own trademarks Systemax™ and Ultra™ .  We also sell certain computer-related products manufactured for us to our own design under the trademark Ultra™. Technology products accounted for 92% of our net sales in 2007.  Our Industrial Products segment sells a wide array of material handling equipment, storage equipment and consumable industrial items which are marketed in North America.  Most of these products are manufactured by other companies.  Some products are manufactured for us to our own design and marketed under the trademarks Global™ , GlobalIndustrial.com™ and Nexel™. Industrial products accounted for 8% of our net sales in 2007.  In both of these product groups, we offer our customers a broad selection of products, prompt order fulfillment and extensive customer service.  Our Hosted Software segment, which became a reportable segment in 2006, participates in the emerging market for on-demand, web-based business software applications through the marketing of our PCS ProfitCenter Software application.  See Note 11 to the consolidated financial statements included in Item 15 of this Form 10-K for additional financial information about our business segments as well as information about our geographic operations.

 

The market for computer products and consumer electronics is subject to intense price competition and is characterized by narrow gross profit margins. The North American industrial products market is highly fragmented and we compete against 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 and stock option expenses. We have made substantial reductions in our workforce and closed or consolidated several facilities over the past several years.  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 15.2% of net sales in 2003 to 11.9% of net sales in 2007. We will continue to monitor our costs and evaluate the need for additional actions.

 

During the first quarter of 2008 the Company entered into an asset purchase agreement with CompUSA Inc. and acquired CompUSA’s e-commerce business and 16 of its retail leases and related fixtures for direct consideration of approximately $30.4 million. This acquisition accelerates the Company’s planned expansion into the retail market place for Technology Products and gives the Company 26 retail outlets in North America and Puerto Rico.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are described in Note 1 to the consolidated financial statements.  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.

 

 

19



 

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.

 

 

20



 

We recognize deferred tax assets and liabilities for the effect of temporary differences between the book and tax bases of recorded assets and liabilities and for tax loss carry forwards. The realization of net deferred tax assets is dependent upon our ability to generate sufficient future taxable income. Where it is more likely than not that some portion or all of the deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made. In the event that actual results differ from these estimates or we adjust these estimates in future periods, an adjustment to the valuation allowance may be required, which could materially affect our consolidated financial position and results of operations.

 

Restructuring charges.  We have taken restructuring actions in the past, and 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.

 

Recently Adopted and Newly Issued Accounting Pronouncements

 

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 clarifies the accounting and reporting for uncertainties in income tax law.  This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.  For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.  At January 1, 2007, the Company had a liability for unrecognized tax benefits of $3,379,000 (including interest and penalties of $731,000) of which $283,000 was charged to retained earnings at January 1, 2007.  Of this total, $2,586,000 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.

 

The Company or one of its subsidiaries file U.S. federal income tax returns and tax returns in various state and foreign jurisdictions in Canada and Western Europe.  The Company’s U.S. federal income tax returns have been examined by the Treasury Department through 2001.  State and local tax returns have been examined through various dates from 2001 to 2005 with ongoing tax examinations pending in several states.  Included in the Company’s FIN 48 liability is a current liability of $2,264,000 for the expected taxes and interest and penalties relating to pending state tax examinations involving disputed allocations of income; no issues have been raised to date with respect to the other pending state tax examinations.

 

With the exception of the current liability of $2,264,000, the Company’s remaining tax liabilities and interest with respect to unrecognized tax benefits have been reclassified to other non-current liabilities on the balance sheet because payment of cash is not anticipated within one year.  This amount at January 1, 2007 aggregates to approximately $1,115,000, including $305,000 for interest and penalties.  The Company’s continuing practice is to record interest and penalties related to tax positions in income tax expense in its consolidated statement of operations.

 

During 2007, the Company resolved a state tax issue by paying an assessment of approximately $1,901,000 (including $169,000 in interest) to a state taxing authority.  As of December 31, 2007 the Company’s liability for unrecognized tax benefits was approximately $1,547,000 (including interest and penalties of approximately $632,000).

 

 

21



 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007. This statement was issued to increase consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements. The Company is currently evaluating the potential impact, if any, of this pronouncement.

 

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities (including an amendment of FASB Statement No. 115)” which is effective for fiscal years beginning after November 15, 2007. This interpretation was issued to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company is currently evaluating the potential impact, if any, of this pronouncement.

 

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which replaces FASB Statement 141. SFAS No.141R retains the requirement that the acquisition method of accounting be used for business combinations. The objective of SFAS No. 141R is to improve the relevance, representational faithfulness and comparability that reporting entities provide in their financial reports about business combinations and their effects. SFAS 141R establishes principles and requirements for how an acquirer 1) recognizes and measures identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, 2) recognizes and measures the goodwill acquired in the combination or a gain from a bargain purchase and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of this pronouncement.

 

In December 2007, the FASB issued SFAS No. 160, “Accounting and Reporting of Noncontrolling Interest” (“SFAS No. 160”). The objective of SFAS 160 is to improve the relevance, comparability and transparency of the financial information that reporting entities provide related to noncontrolling interests, sometimes referred to as minority interests. SFAS No. 160 requires, among other things, that noncontrolling interests be shown separately in the consolidated entity’s equity section of the balance sheet. SFAS No. 160 also establishes accounting and reporting standards for ownership interest in subsidiaries held by parties other than the parent, for presentation of amounts of consolidated net income attributable to the parent and the noncontrolling interest, for consistency in accounting for changes in a parent’s ownership interest when the parent retains a controlling interest, for the valuation of retained noncontrolling equity interests when a subsidiary is deconsolidated and for providing sufficient disclosure that identifies and distinguishes the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective beginning January 1, 2009. The Company is currently evaluating the potential impact, if any, of this pronouncement.

 

 

22



 

Highlights from 2007

 

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 19% in 2007 over 2006

·                   E-commerce sales increase of 12% in 2007 over 2006

·                   Operating income increase of 54% in 2007 over 2006

·                   Net income increase of 54% in 2007 over 2006

·                   Diluted earnings per share increase of 51% in 2007 over 2006

 

Results of Operations

 

Key Performance Indicators (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2007

 

2006

 

%
Change

 

2006

 

2005

 

%
Change

 

Net sales by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology products

 

$

2,553,716

 

$

2,148,104

 

18.9

%

$

2,148,104

 

$

1,940,902

 

10.7

%

Industrial products

 

225,746

 

196,860

 

14.7

%

196,860

 

174,616

 

12.8

%

Hosted software

 

413

 

201

 

105.5

%

201

 

 

%

Total net sales

 

$

2,779,875

 

$

2,345,165

 

18.5

%

$

2,345,165

 

$

2,115,518

 

10.9

%

Net sales by geography:

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

1,847,477

 

$

1,601,259

 

15.4

%

$

1,601,259

 

$

1,420,881

 

12.7

%

Europe

 

932,398

 

743,906

 

25.3

%

743,906

 

694,637

 

7.1

%

Total net sales

 

$

2,779,875

 

$

2,345,165

 

18.5

%

$

2,345,165

 

$

2,115,518

 

10.9

%

Gross margin

 

15.3

%

14.6

%

.7

%

14.6

%

14.5

%

.1

%

SG&A costs

 

$

330,797

 

$

281,015

 

17.7

%

$

281,015

 

$

272,478

 

3.1

%

SG&A costs as % of sales

 

11.9

%

12.0

%

(.1

)%

12.0

%

12.9

%

(7.0

)%

Operating income

 

$

95,505

 

$

61,904

 

54.3

%

$

61,904

 

$

34,809

 

77.8

%

Operating margin

 

3.4

%

2.6

%

.8

%

2.6

%

1.6

%

1.0

%

Effective income tax rate

 

30.5

%

35.2

%

(4.5

)%

35.2

%

65.2

%

(30.0

)%

Net income

 

$

69,481

 

$

45,147

 

53.9

%

$

45,147

 

$

11,441

 

294.6

%

Net margin

 

2.5

%

1.9

%

.6

%

1.9

%

.5

%

1.4

%

 

NET SALES

 

Sales increased in all three reporting business segments and in both geographies during 2007 over 2006.  The growth in Technology Products sales was driven by increased internet and retail store sales, private label product sales and expanded product offerings. The growth in Industrial Products sales resulted from the Company increasing its market share through competitive pricing advantages and increased internet sales. The growth in North American sales reflected the above factors in both segments.  The growth in European sales was driven by strong business to business gains and by the effect of a weaker US dollar.  Exchange rates positively impacted the European sales comparison by approximately $78 million in 2007 as compared to 2006. Excluding the movements in foreign exchange rates, European sales would have increased 12% from the prior year. Sales as measured in local currencies increased in all of the European markets we serve in 2007 .  Sales in our Hosted Software segment were not material in 2007 or 2006 due to early stage of operations.

 

Sales increased in all three reporting business segments and in both geographies during 2006 over 2005.  The growth in Technology Products sales was driven primarily by increased internet-related marketing initiatives targeting consumers.  The growth in Industrial Products sales resulted from the Company growing its market share through competitive pricing advantages and increased internet sales.  The growth in North American sales reflected the above factors in both segments. The growth in European sales was driven by strong business to business gains and by the effect of a weaker US dollar.  Exchange rates positively impacted the European sales comparison by approximately $4 million in 2006 as compared to 2005.  Sales in our Hosted Software segment were not material in 2006 and 2005 due to early stage of operations.

 

 

23



 

GROSS MARGIN

 

Consolidated gross margin increased 70 basis points during 2007 over 2006, due primarily to decreased competitive pricing pressures in the Technology Products segment.  Gross margin is dependent on variables such as product mix, vendor price protection and other sales incentives, competition, pricing strategy, rebates and other variables, any or all of which may result in fluctuations in gross margin.

 

Gross margin was relatively flat during 2006 over 2005, due to decreased competitive rebates and pricing pressures in the Company’s Technology Products segment.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

Selling, general and administrative expenses increased in 2007 over 2006 primarily as a result of the increase in sales volume as well as increased accounting, auditing, legal and consulting costs related to the Company being subject to Sarbanes Oxley section 404 requirements. Significant expense increases include approximately $26 million of increased internet advertising costs, $8 million of increased sales salaries related to the increased sales volume and an increase in other salaries and related costs of approximately $15 million due to increased staff in areas such as finance, marketing and information technology.

 

Selling, general and administrative expenses increased in 2006 over 2005 as a result of approximately $3 million of increased credit card fees, a $4 million increase in sales salaries related to the increased sales volume, an increase in other salaries and related costs of approximately $10 million due to increased staff in areas such as marketing and information technology as well as approximately $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.

 

RESTRUCTURING AND OTHER CHARGES

 

During 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 million in annual savings.

 

INTEREST AND OTHER INCOME AND INTEREST EXPENSE

 

Interest expense was $1.0 million, $1.7 million and $2.7 million in 2007, 2006 and 2005. Interest expense decreased in 2007 and 2006 as a result of decreased short-term borrowings in the United Kingdom. The extinguishment of mortgage debt related to our Georgia warehouse sale in the first quarter of 2006 also contributed to the decreased interest expense. Interest and other income, net was $5.5 million, $9.5 million and $0.7 million in 2007, 2006 and 2005. The increase in other income in 2006 mainly resulted from the gain on sale of the Georgia location.

 

 

24



 

INCOME TAXES

 

The low effective tax rate in 2007 resulted primarily from the reversal of a valuation allowance of approximately $5.9 million against deferred tax assets in the United Kingdom partially offset by the recording of a valuation allowance of approximately $1.7 million against the deferred tax assets of Germany. The United Kingdom valuation allowance, originally recorded at $10.2 million, had been established in 2005 as the result of a cumulative loss position in the United Kingdom and was the primary driver of the high effective tax rate in 2005. 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.

 

During 2007, 2006 and 2005, we did not recognize certain foreign tax credits, certain state deferred tax assets in the United States and certain benefits on losses in foreign tax jurisdictions due to our inability to carry such credits and losses back to prior years and our determination that it was more likely than not that we would not generate sufficient future taxable income to realize these assets. Accordingly, valuation allowances were recorded against the deferred tax assets associated with those items. If we are able to realize all or part of these deferred tax assets in future periods, it will reduce our provision for income taxes by a release of the corresponding valuation allowance.

 

Seasonality

 

Net sales have historically been modestly weaker during the second and third quarters as a result of lower business activity during those months. The following table sets forth the net sales, gross profit and income from operations for each of the quarters since January 1, 2005 (amounts in millions) .

 

 

 

March 31

 

June 30

 

September 30

 

December 31

 

2007

 

 

 

 

 

 

 

 

 

Net sales

 

$

676

 

$

647

 

$

687

 

$

769

 

Percentage of year’s net sales

 

24.3

%

23.3

%

24.7

%

27.7

%

Gross profit

 

$

97

 

$

99

 

$

111

 

$

120

 

Operating income

 

$

22

 

$

20

 

$

26

 

$

27

 

 

 

 

 

 

 

 

 

 

 

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

 

Operating income

 

$

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

 

Operating income

 

$

5

 

$

3

 

$

8

 

$

18

 

 

 

25



 

Financial Condition, Liquidity and Capital Resources

 

Selected liquidity data (in thousands):

 

 

 

December 31,

 

 

 

 

 

2007

 

2006

 

$ Change

 

Cash and cash equivalents

 

$

128,021

 

$

86,964

 

$

41,057

 

Accounts receivable, net

 

$

197,397

 

$

164,615

 

$

32,782

 

Inventories

 

$

250,222

 

$

233,136

 

$

17,086

 

Prepaid expenses and other current

 

$

20,589

 

$

26,919

 

$

(6,330

)

Accounts payable

 

$

249,117

 

$

201,486

 

$

47,631

 

Accrued expenses

 

$

82,570

 

$

75,688

 

$

6,882

 

Short term debt

 

$

4,302

 

$

12,788

 

$

(8,486

)

Working capital

 

$

273,453

 

$

229,399

 

$

44,054

 

 

Our primary liquidity needs are to support working capital requirements in our business, to fund capital expenditures and minimal acquisitions and fund the special dividends declared by our Board in 2007 and 2008. 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.

 

The growth of our working capital in 2007 over 2006 resulted primarily from higher cash, receivables, inventories and lower debt, offset by increased payables and accrued expenses.  The increase in our inventories was principally in our domestic locations. Inventory turnover was at 10 times during 2007 and 2006. Our accounts receivable days outstanding was at 24 in 2007 up slightly from 23 in 2006. We expect that future accounts receivable and inventory balances will fluctuate with growth in net sales and the mix of our net sales between consumer and business customers.

 

We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of December 2007, 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 $93.1 million, $34.3 million and $27.3 million during 2007, 2006 and 2005. The increase in cash provided by operating activities in 2007 over 2006 resulted from a $28.2 million increase in net income adjusted by other non-cash items, such as depreciation expense, and an increase of $30.6 million in cash used for changes in our working capital accounts. The increase in cash provided by operating activities in 2006 over 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.

 

Net cash used in investing activities was $8.0 million during 2007, primarily for capital expenditures. Net cash of $12.2 million was provided by investing activities during 2006 consisting of proceeds from disposals of property and equipment of $18.9 million from the sale of our distribution facility in Suwanee, Georgia offset by cash used for capital expenditures of $6.7 million. We used cash $5.8 million during 2005 in investing activities, principally for the purchase of property, plant and equipment. Capital expenditures in 2007, 2006 and 2005 included upgrades and enhancements to our information and communications systems hardware and facilities costs for the opening of additional retail outlets stores in North America.

 

Net cash used in financing activities was $46.3 million during 2007, attributable to dividends paid of $36.6 million, repayment of short term debt of $12.9 million, offset by proceeds of stock option exercises, related excess tax benefits and share repurchases of $3.1 million. Net cash of $22.1 million was used in financing activities for 2006. Repayment of short and long-term borrowings used approximately $24.8 million of cash and proceeds from stock option exercises and excess tax benefits from stock option exercises provided approximately $2.6 million of cash. 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.

 

 

26



 

We have a $120 million secured revolving credit agreement (which may be increased by up to an additional $30 million, subject to certain conditions).  The facility expires in October 2010.  Borrowings under the agreement are subject to borrowing base limitations of up to 85% of eligible accounts receivable and 40% of qualified inventories and are secured by accounts receivable, inventories and certain other assets. The undrawn availability under the facility may not be less than $15 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. As of December 31, 2007, the Company was in compliance with all of the covenants under the credit facility. Eligible collateral under the facility was $106.9 million, total availability was $97.0 million, outstanding letters of credit of were $9.7 million and there were no outstanding advances.

 

The Company’s Netherlands subsidiary maintains a €5 million ($7.4 million as of December 2007 exchange rate) credit facility with a local financial institution. At December 2007 there was approximately €2.6 million ($3.9 million) outstanding under this line. The facility carries interest at a rate of 7.05%. 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.  This facility expires in September 2008.

 

In April 2002, we entered into a ten year, $8.4 million mortgage loan on our Suwanee, Georgia distribution facility.  During the first quarter of fiscal 2006, we sold this facility and repaid the remaining balance on the loan. The facility was replaced by a larger, leased distribution center in a nearby area.

 

We are obligated under non-cancelable operating leases for the rental of most of our facilities and certain of our equipment which expire at various dates through 2026.  We currently lease one of our New York facilities 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 will total $860,000 for 2008 and the lease expires in 2017. We have sublease agreements for unused space we lease Wellingborough, England. In the event the sublessee is unable to fulfill its obligations, we would be responsible for rent due under the lease. However, we expect the sublessee 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 as of December 2007 (in thousands):

 

 

 

2008

 

2009

 

2010

 

2011

 

2012

 

After 2012

 

Contractual Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital lease obligations

 

$

471

 

$

186

 

$

73

 

$

10

 

 

 

 

 

Non-cancelable operating leases, net of subleases

 

13,280

 

12,895

 

10,390

 

9,342

 

8,549

 

54,737

 

Purchase and other obligations

 

6,945

 

3,437

 

3,523

 

3,368

 

3,471

 

3,632

 

Short term loans

 

3,853

 

 

 

 

 

 

 

 

 

 

 

Tax contingencies

 

1,547

 

 

 

 

 

 

 

 

 

 

 

Total contractual obligations

 

$

26,096

 

$

16,518

 

$

13,986

 

$

12,720

 

$

12,020

 

$

58,369

 

 

 

27



 

Our purchase and other obligations consist primarily of certain employment agreements and service agreements.

 

In addition to the contractual obligations noted above, we had $9.7 million of standby letters of credit outstanding as of December 2007.

 

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, particularly working capital requirements related to our purchase of CompUSA, provide payment of the special shareholder dividend of approximately $37 million (based on shareholders of record as of March 21,2008) declared in the first quarter of 2008, 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.

 

Tax contingencies are related to uncertain tax positions taken on income tax returns that may result in additional tax, interest and penalties being paid to taxing authorities.

 

Off-Balance Sheet Arrangements

 

The Company currently leases its facility in Port Washington, NY from Addwin Realty Associates, an entity owned by Richard Leeds, Bruce Leeds, and Robert Leeds, Directors of the Company and the Company’s three senior executive officers and principal stockholders.

 

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.

 

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk.

 

We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates (principally Pounds Sterling, Euros and Canadian Dollars) as measured against the U.S. Dollar and each other.

 

The translation of the financial statements of our operations 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 $102 million and pre tax income would have fluctuated by approximately $1.6 million if average foreign exchange rates changed by 10% in 2007.  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 2007 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 2007, there were no outstanding balances under our variable rate credit facility. A hypothetical change in average interest rates of one percentage point is not expected to have a material effect on our financial position, results of operations or cash flows over the next fiscal year.

 

 

28



 

Item 8. Financial Statements and Supplementary Data.

 

The information required by Item 8 of Part II is incorporated herein by reference to the Consolidated Financial Statements filed with this report; see Item 15 of Part IV.

 

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2007. As part of this evaluation we identified a significant deficiency, as defined under Auditing Standard No. 5: An Audit of Internal Control Over Financial Reporting That is Integrated With an Audit of Financial Statements, in our internal controls over financial reporting as of December 31, 2007. This significant deficiency is:

 

The Company consolidates its worldwide financial results from disparate underlying financial and operational systems that have various functional limitations and few automated interfaces. This results in a consolidation process that is heavily reliant on manual review procedures and manual adjustments. Our control over this consolidation process primarily consists of corporate review procedures. The design and operation of this control process may not prevent or detect misstatements on a timely basis. This significant deficiency does not, in our judgment, rise to the level of a material weakness in internal controls over financial reporting because we believe that the controls in place would prevent or detect a material misstatement. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

 

Inherent Limitations of Internal Controls

 

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

 

Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the

 

 

29



 

control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management’s Report on Internal Control Over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.  Under the supervision and with the participation of Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal control over financial reporting was effective as of December 31, 2007.

 

Our independent registered public accounting firm, Ernst & Young, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2007, a copy of which is included in this report.

 

Changes in Internal Control Over Financial Reporting

 

In conjunction with our Section 404 compliance efforts, we have made numerous significant improvements to our internal control over financial reporting, including remediation of the significant deficiencies noted during previous quarters, with the exception of the consolidation process. The scope of these improvements was broad, impacting internal control over financial reporting throughout the Company. However, the nature of these improvements was incremental and the impact was not material both individually and in the aggregate.

 

There have been no changes in the Company’s internal controls over financial reporting during the year ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

 

 

30



 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

The information required by Item 10 of Part III is hereby incorporated by reference from the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders which we anticipate filing April 25, 2008 (the “Proxy Statement”).

 

Item 11. Executive Compensation.

 

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.

 

Item 13. Certain Relationships and Related Transactions

 

The information required by Item 10 of Part III is hereby incorporated by reference from the Proxy Statement .

 

Item 14. Principal Accounting Fees and Services.

 

The information required by Item 14 of Part III is hereby incorporated by reference from the Proxy Statement.

 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

 

                              (a)     1.     Consolidated Financial Statements of Systemax Inc.

 

 

 

Reference

Reports of Ernst & Young LLP Independent Registered Public Accounting Firm

 

36

Consolidated Balance Sheets as of December 31, 2007 and 2006

 

38

Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005

 

39

Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005

 

41

Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2007, 2006 and 2005

 

40

Notes to Consolidated Financial Statements

 

42

 

31



 

 

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

 

Amended and Restated By-laws of Registrant (effective as of December 29,2007) 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)

 

32



 

10.12

 

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 10,23 for Amendment.)

 

 

 

10.15

 

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)

 

 

 

10.16

 

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)

 

 

 

10.17

 

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)

 

 

 

10.18

 

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)

 

 

 

10.19

 

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)

 

 

 

10.20

 

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)

 

 

 

10.21

 

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)

 

 

 

10.22

 

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)

 

 

 

10.23

 

Amendment No. 1 dated January 17, 2007, to Employment Agreement dated as December 12, 1997 between the Company and Stephen M. Goldschein*(incorporated by reference to the Company’s report on Form 10-K dated December 31, 2006).

 

 

 

10.24

 

Employment Agreement, dated as of January 17, 2007, between the Company and Lawrence P. Reinhold*(incorporated by reference to the Company’s report on Form 10-K dated December 31, 2006).

 

33



 

10.25

 

Form of 2006 Stock Incentive Plan for Non-Employee Directors*(incorporated by reference to the Company’s report on Form 10-K dated December 31, 2006).

 

 

 

10.26

 

Form of 2005 Employee Stock Purchase Plan* (incorporated by reference to the Company’s report on Form 10-K dated December 31, 2006).

 

 

 

10.27

 

Second Amendment to Lease Agreement dated September 20, 1988 between the Company and Addwin Realty Associates(filed herewith).

 

 

 

10.28

 

Asset Purchase Agreement between the Company and CompUSA dated January 5, 2008 (filed herewith).

 

 

 

10.29

 

Amendment to Asset Purchase Agreement between the Company and CompUSA dated February 14, 2008 (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

 

 

 

23

 

Consent of experts and counsel: Consent of Independent Registered Public Accounting Firm

 

 

 

31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

99.1

 

Charter of the Audit Committee of the 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

 

34



 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

SYSTEMAX INC.

 

 

 

 

 

By:

/s/ RICHARD LEEDS

 

 

 

 

 

Richard Leeds

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

Date: March 13, 2008

 

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 13, 2008

Richard Leeds

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/ BRUCE LEEDS

 

Vice Chairman

 

March 13, 2008

Bruce Leeds

 

 

 

 

 

 

 

 

 

/s/ ROBERT LEEDS

 

Vice Chairman

 

March 13, 2008

Robert Leeds

 

 

 

 

 

 

 

 

 

/s/ LAWRENCE P. REINHOLD

 

Executive Vice President and Chief Financial Officer

 

March 13, 2008

Lawrence P. Reinhold

 

(Principal Financial Officer)

 

 

 

 

 

 

 

/s/ THOMAS AXMACHER

 

Vice President and Controller

 

March 13, 2008

Thomas Axmacher

 

(Principal Accounting Officer)

 

 

 

 

 

 

 

/s/ GILBERT FIORENTINO

 

Director

 

March 13, 2008

Gilbert Fiorentino

 

 

 

 

 

 

 

 

 

/s/ ROBERT D. ROSENTHAL

 

Director

 

March 13, 2008

Robert D. Rosenthal

 

 

 

 

 

 

 

 

 

/s/ STACY DICK

 

Director

 

March 13, 2008

Stacy Dick

 

 

 

 

 

 

 

 

 

/s/ ANN R. LEVEN

 

Director

 

March 13, 2008

Ann R. Leven

 

 

 

 

 

35



 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders of

Systemax, Inc.

 

We have audited the accompanying consolidated balance sheets of Systemax, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule included in the Index at Item 15. These financial statements and schedule 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion .

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Systemax, Inc. at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles .

 

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2007, Systemax, Inc. adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” and effective January 1, 2006, Systemax, Inc. adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Systemax, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2008 expressed an unqualified opinion thereon .

 

/s/ Ernst & Young LLP

 

New York, New York

March 12, 2008

 

36



 

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

 

The Board of Directors and Shareholders of

Systemax, Inc.

 

We have audited Systemax, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Systemax, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Systemax, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Systemax, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007 of Systemax, Inc. and our report dated March 12, 2008 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

New York, New York

March 12, 2008

 

37


 

 

 


 

SYSTEMAX INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share data)

 

 

 

December 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

128,021

 

$

86,964

 

Accounts receivable, net of allowances of $11,817 and $11,370

 

197,397

 

164,615

 

Inventories, net

 

250,222

 

233,136

 

Prepaid expenses and other current assets

 

20,589

 

26,919

 

Deferred income tax assets, net

 

9,360

 

7,727

 

Total current assets

 

605,589

 

519,361

 

 

 

 

 

 

 

Property, plant and equipment, net

 

48,480

 

48,586

 

Deferred income tax assets, net

 

18,652

 

14,041

 

Other assets

 

1,150

 

2,173

 

 

 

 

 

 

 

Total assets

 

$

673,871

 

$

584,161

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings, including current portions of long-term debt

 

$

4,302

 

$

12,788

 

Accounts payable

 

245,264

 

201,486

 

Accrued expenses and other current liabilities

 

82,570

 

75,688

 

Total current liabilities

 

332,136

 

289,962

 

 

 

 

 

 

 

Long-term debt

 

254

 

483

 

Other liabilities

 

5,646

 

4,226

 

Total liabilities

 

338,036

 

294,671

 

 

 

 

 

 

 

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 38,332,990
and 38,331,990 shares; outstanding 36,092,067 and 35,341,377 shares

 

383

 

383

 

Additional paid-in capital

 

173,381

 

172,983

 

Common stock in treasury at cost — 2,240,923 and 2,990,613 shares

 

(26,324

)

(35,131

)

Retained earnings

 

176,684

 

144,074

 

Accumulated other comprehensive income, net of tax

 

11,711

 

7,181

 

Total shareholders’ equity

 

335,835

 

289,490

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

673,871

 

$

584,161

 

 

See notes to consolidated financial statements.

 

38



 

SYSTEMAX INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

Net sales

 

$

2,779,875

 

$

2,345,165

 

$

2,115,518

 

Cost of sales

 

2,353,574

 

2,002,246

 

1,808,231

 

Gross profit

 

426,301

 

342,919

 

307,287

 

Selling, general and administrative expenses

 

330,797

 

281,015

 

268,327

 

Restructuring and other charges

 

 

 

4,151

 

Operating income

 

95,504

 

61,904

 

34,809

 

Interest and other income, net

 

(5,505

)

(9,475

)

(735

)

Interest expense

 

986

 

1,684

 

2,670

 

Income before income taxes

 

100,023

 

69,695

 

32,874

 

Provision for income taxes

 

30,542

 

24,548

 

21,433

 

Net income

 

$

69,481

 

$

45,147

 

$

11,441

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

$

1.93

 

$

1.29

 

$

.33

 

Diluted

 

$

1.84

 

$

1.22

 

$

.31

 

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares:

 

 

 

 

 

 

 

Basic

 

35,968

 

34,960

 

34,646

 

Diluted

 

37,688

 

36,881

 

36,488

 

 

See notes to consolidated financial statements.

 

39



 

SYSTEMAX INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

69,481

 

$

45,147

 

$

11,441

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

8,780

 

8,185

 

9,994

 

(Gain) loss on dispositions and abandonment

 

(1,032

)

(7,721

)

1,279

 

Provision (benefit) for deferred income taxes

 

(6,106

)

2,254

 

6,228

 

Provision for returns and doubtful accounts

 

4,575

 

1,503

 

7,620

 

Compensation expense related to equity compensation plans

 

4,159

 

2,330

 

1,004

 

Tax benefit of employee stock plans

 

 

 

12

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(27,786

)

(3,917

)

(31,722

)

Inventories

 

(13,229

)

(36,216

)

(3,457

)

Prepaid expenses and other current assets

 

9,229

 

(10,060

)

3,989

 

Income taxes payable/receivable

 

(235

)

(4,234

)

527

 

Accounts payable, accrued expenses and other current liabilities

 

45,247

 

37,055

 

20,430

 

Net cash provided by operating activities

 

93,083

 

34,326

 

27,345

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(7,950

)

(6,701

)

(5,896

)

Proceeds from disposals of property, plant and equipment

 

28

 

18,938

 

103

 

Net cash provided by (used in) investing activities

 

(7,922

)

12,237

 

(5,793

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

(Repayments) proceeds of borrowings from banks

 

(8,708

)

(16,473

)

13,889

 

Repayments of long-term debt and capital lease obligations

 

(328

)

(8,305

)

(9,978

)

Dividends paid

 

(36,588

)

 

 

Proceeds from issuance of common stock, net of repurchases

 

972

 

1,602

 

780

 

Excess tax benefit from exercises of stock options

 

2,160

 

1,030

 

 

Net cash provided by (used in) financing activities

 

(42,492

)

(22,146

)

4,691

 

 

 

 

 

 

 

 

 

EFFECTS OF EXCHANGE RATES ON CASH

 

(1,612

)

(744

)

791

 

 

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

41,057

 

23,673

 

27,034

 

CASH AND CASH EQUIVALENTS — BEGINNING OF YEAR

 

86,964

 

63,291

 

36,257

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — END OF YEAR

 

$

128,021

 

$

86,964

 

$

63,291

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Interest paid

 

$

1,182

 

$

1,861

 

$

2,498

 

Income taxes paid

 

$

30,275

 

$

26,465

 

$

15,522

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

Acquisitions of equipment through capital leases

 

$

251

 

$

776

 

 

Deferred stock-based compensation related to restricted unit stock granted

 

 

 

 

 

See notes to consolidated financial statements.

 

40



 

SYSTEMAX INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

 

 

 

Common Stock

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

Other

 

Unearned

 

 

 

 

 

of Shares

 

 

 

Additional

 

Treasury

 

 

 

Comprehensive

 

Restricted

 

 

 

 

 

Out-

 

 

 

Paid-in

 

Stock,

 

Retained

 

Income (Loss),

 

Stock

 

Comprehensive

 

 

 

Standing

 

Amount

 

Capital

 

At Cost

 

Earnings

 

Net of Tax

 

Compensation

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2005

 

34,433

 

$

382

 

$

180,640

 

$

(44,630

)

$

87,486

 

$

3,920

 

$

(5,166

)

$

 

Change in cumulative translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(3,027

)

 

 

(3,027

)

Exercise of stock options

 

328

 

 

 

(3,078

)

3,858

 

 

 

 

 

 

 

 

 

Tax benefit of employee stock plans

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

Grant of restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(40,772

)

98,927

 

893

 

(4,162

)

 

 

Reversal of unamortized unearned restricted stock compensation

 

 

 

 

 

(4,162

)

 

 

 

 

 

 

4,162

 

 

 

Stock-based compensation expense

 

 

 

 

 

2,330

 

 

 

 

 

 

 

 

 

 

 

Issuance of restricted stock, net

 

100

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

480

 

 

 

(4,039

)

5,641

 

 

 

 

 

 

 

 

 

Income tax benefit on stock-based compensation

 

 

 

 

 

1,280

 

 

 

 

 

 

 

 

 

 

 

Change in cumulative translation adjustment

 

 

 

 

 

 

 

 

 

 

 

6,288

 

 

 

6,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

45,147

 

 

 

 

 

45,147

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

51,435

 

Balances, December 31, 2006

 

35,341

 

383

 

172,983

 

(35,131

)

144,074

 

7,181

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

4,009

 

 

 

 

 

 

 

 

 

 

 

Issuance of restricted stock

 

205

 

 

 

(2,843

)

2,406

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

546

 

 

 

(3,569

)

6,401

 

 

 

 

 

 

 

 

 

Income tax benefit on stock-based compensation

 

 

 

 

 

2,801

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of adoption of FIN 48

 

 

 

 

 

 

 

 

 

(283

)

 

 

 

 

 

 

Change in cumulative translation adjustment net

 

 

 

 

 

 

 

 

 

 

 

4,530

 

 

 

4,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

 

 

 

 

 

 

 

 

(36,588

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

69,481

 

 

 

 

 

69,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

74,011

 

Balances, December 31, 2007

 

36,092

 

$

383

 

$

173,381

 

$

(26,324

)

$

176,684

 

$

11,711

 

$

 

 

 

 

See notes to consolidated financial statements.

 

41



 

SYSTEMAX INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Systemax Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “Systemax”). All significant intercompany accounts and transactions have been eliminated in consolidation.    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 — Effective the fourth quarter of 2007, the Company changed its fiscal year end from a calendar year ending on December 31 to a fiscal year ending at midnight on the Saturday closest to December 31. Fiscal years will typically include 52 weeks, but every few years will include 53 weeks which was the case in 2005. For clarity of presentation herein, all fiscal years are referred to as if they ended on December 31. The fiscal year will be divided into four fiscal quarters that each end at midnight on a Saturday. Fiscal quarters will typically include 13 weeks, but the fourth quarter will include 14 weeks in a 53 week fiscal year. For clarity of presentation herein, all fiscal quarters are referred to as if they ended on the traditional calendar month.  The effect of the change in year end in 2007 was de minimis.

 

                          Foreign Currency Translation — The Company has operations in numerous foreign countries.  The functional currency of in each foreign country is the local currency.  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 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.

 

42



 

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 accrued product warranties were as follows (in thousands):

 

 

 

Year ended December 31

 

 

 

2007

 

2006

 

2005

 

Balance, beginning of year

 

$

1,061

 

$

1,316

 

$

2,011

 

Charged to expense

 

1,400

 

1,556

 

21

 

Deductions

 

(1,547

)

(1,811

)

(716

)

Balance, end of year

 

$

914

 

$

1,061

 

$

1,316

 

 

                        Income Taxes — Deferred tax assets and liabilities are recognized for the effect of temporary differences between the book and tax bases of recorded assets and liabilities and for tax loss carry forwards. The realization of net deferred tax assets is dependent upon our ability to generate sufficient future taxable income. Where it is more likely than not that some portion or of the deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made.

 

                        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 were $47.2 million, $37.4 million and $39.4 million during 2007, 2006 and 2005 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 $42.6 million, $39.6 million and $39.1 million during 2007, 2006 and 2005.

 

Prepaid expenses as of December 2007 and 2006 include deferred advertising costs of $3.9 million and $3.5 million which are reflected as an expense during the periods benefited, typically the subsequent fiscal quarter.

 

Stock based compensation 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.

 

43



 

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.

 

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 7).

 

                          Net Income Per Common Share — Net income per common share basic is calculated based upon the weighted average number of common shares outstanding during the respective periods presented. Net income per common share diluted is calculated based upon the weighted average number of common shares outstanding and included the equivalent shares for dilutive securities outstanding during the respective periods, where the effect is anti-dilutive. The dilutive effect of outstanding options issued by the Company is reflected in net income per share - diluted using the treasury stock method.

 

                          Under the treasury stock method, options will only have a dilutive effect when the average market price of common stock during the period exceeds the exercise price of the options. Equivalent common shares of 1,087,000, 989,000 and 842,000 in 2007, 2006 and 2005 were included for the diluted calculation. The weighted average number of stock options outstanding excluded from the computation of diluted earnings per share was 0, 36,000 and 503,000 in 2007, 2006 and 2005 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 $74,011,000, $51,435,000 and $8,414,000 in 2007, 2006 and 2005, respectively.

 

        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 1% or more of their eligible compensation, limited to maximum amounts as determined by the Internal Revenue Service. The Company provides a matching contribution to the plan, determined as a percentage of the employees’ contributions.  Aggregate expense to the Company for contributions to such plans was approximately $614,000, $514,000 and $455,000 in 2007, 2006 and 2005.

 

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,  2007 and 2006, 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.

 

                        Adoption of New Accounting Standard Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 clarifies the accounting and reporting for uncertainties in income tax law.  This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.  For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.  At January 1, 2007, the Company had a liability for unrecognized tax benefits of $3,379,000 (including interest and penalties of $731,000) of which $283,000 was charged to retained earnings at January 1, 2007.  Of this total, $2,586,000 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.

 

The Company or one of its subsidiaries file U.S. federal income tax returns and tax returns in various state and foreign jurisdictions in Canada and Western Europe.  The Company’s U.S. federal income tax returns have been examined by the Treasury Department through 2001.  State and local tax returns have been examined through various dates from 2001 to 2005 with ongoing tax examinations pending in several states.  Included in the Company’s FIN 48 liability is a current liability of $2,264,000 for the expected taxes and interest and penalties relating to pending state tax examinations involving disputed allocations of income; no issues have been raised to date with respect to the other pending state tax examinations.

 

44



 

With the exception of the current liability of $2,264,000, the Company’s remaining tax liabilities and interest with respect to unrecognized tax benefits have been reclassified to other non-current liabilities on the balance sheet because payment of cash is not anticipated within one year.  This amount at January 1, 2007 aggregates to approximately $1,115,000, including $305,000 for interest and penalties.  The Company’s continuing practice is to record interest and penalties related to tax positions in income tax expense in its consolidated statement of operations.

 

                        During 2007, the Company resolved a state tax issue by paying an assessment of approximately $1,901,000 (including $169,000 in interest) to a state taxing authority.  As of December 2007 the Company’s liability for unrecognized tax benefits was approximately $1,547,000 (including interest and penalties of approximately $632,000).

 

                          Recent Accounting Pronouncements

 

                        In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007. This statement was issued to increase consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements. The Company is currently evaluating the potential impact, if any, of this pronouncement.

 

                        In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities (including an amendment of FASB Statement No. 115)” which is effective for fiscal years beginning after November 15, 2007. This interpretation was issued to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company is currently evaluating the potential impact, if any, of this pronouncement.

 

                        In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which replaces FASB Statement 141. SFAS No.141R retains the requirement that the acquisition method of accounting be used for business combinations. The objective of SFAS No. 141R is to improve the relevance, representational faithfulness and comparability that reporting entities provide in their financial reports about business combinations and their effects. SFAS 141R establishes principles and requirements for how an acquirer 1) recognizes and measures identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, 2) recognizes and measures the goodwill acquired in the combination or a gain from a bargain purchase and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of this pronouncement.

 

                        In December 2007, the FASB issued SFAS No. 160, “Accounting and Reporting of Noncontrolling Interest” (“SFAS No. 160”). The objective of SFAS 160 is to improve the relevance, comparability and transparency of the financial information that reporting entities provide related to noncontrolling interests, sometimes referred to as minority interests. SFAS No. 160 requires, among other things, that noncontrolling interests be shown separately in the consolidated entity’s equity section of the balance sheet. SFAS No. 160 also establishes accounting and reporting standards for ownership interest in subsidiaries held by parties other than the parent, for presentation of amounts of consolidated net income attributable to the parent and the noncontrolling interest, for consistency in accounting for changes in a parent’s ownership interest when the parent retains a controlling interest, for the valuation of retained noncontrolling equity interests when a subsidiary is deconsolidated and for providing sufficient disclosure that identifies and distinguishes the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective beginning January 1, 2009. The Company is currently evaluating the potential impact, if any, of this pronouncement.

 

2.                 PROPERTY, PLANT AND EQUIPMENT

 

                          Property, plant and equipment, net consist of the following (in thousands):

 

 

 

December 31,

 

 

 

2007

 

2006

 

Land and buildings

 

$

33,950

 

$

33,525

 

Furniture and fixtures, office, computer and other equipment and software

 

82,838

 

77,478

 

Leasehold improvements

 

12,748

 

12,762

 

 

 

129,536

 

123,765

 

Less accumulated depreciation and amortization

 

81,056

 

75,179

 

Property, plant and equipment, net

 

$

48,480

 

$

48,586

 

 

                          Included in property, plant and equipment are assets under capital leases, as follows (in thousands):

 

 

 

2007

 

2006

 

Furniture and fixtures, office, computer and other equipment

 

$

2,609

 

$

2,358

 

Less: Accumulated amortization

 

1,813

 

1,270

 

 

 

$

796

 

$

1,088

 

 

45



 

3.                 RELATED PARTY TRANSACTIONS

 

                          The Company leased its headquarters office/warehouse facility from affiliates during 2007, 2006 and 2005 (see Note 10). 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.

 

4.     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, 2007) plus 0.25% or the bank’s daily LIBOR rate (at December 31, 2007) 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, 2007. As of December 31, 2007, eligible collateral under the agreement was $106.9 million and total availability was $97.0 million. There were outstanding letters of credit of $9.7 million and there were no outstanding advances.

 

The Company’s Netherlands subsidiary maintains a €5 million ($7.4 million at the December 31, 2007 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, 2007 and, 2006 was €2.6 million and €2.2 million ($3.9 million and $3.0 million) of borrowings outstanding under this line with interest payable at a rate of 7.05%. The facility expires in September 2008.

 

The weighted average interest rate on short-term borrowings was 7.5%, 7.8%, and 6.4% in 2007, 2006 and 2005.

 

5.     ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

         Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

December 31,

 

 

 

2007

 

2006

 

Payroll and employee benefits

 

$

21,850

 

$

17,151

 

Income taxes payable

 

2,297

 

2,327

 

Freight

 

10,908

 

6,106

 

Deferred revenue

 

5,704

 

2,653

 

Other

 

41,811

 

47,451

 

 

 

$

82,570

 

$

75,688

 

 

6.     LONG-TERM DEBT

 

         Long-term debt consists of (in thousands):

 

 

 

December 31,

 

 

 

2007

 

2006

 

Capitalized equipment lease obligations

 

$

703

 

$

1,031

 

Less: current portion

 

449

 

548

 

 

 

$

254

 

$

483

 

 

         The aggregate maturities of long-term debt outstanding at December 31, 2007 are as follows (in thousands):

 

 

 

2008

 

2009

 

2010

 

2011

 

2012

 

Maturities

 

$

449

 

$

173

 

$

71

 

$

10

 

$

0

 

 

46



 

7.     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 862,867 options were outstanding under this plan as of December 31, 2007.

 

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, 2007.

 

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 1,739,070 options and 600,000 restricted stock units were outstanding under this plan as of December 31, 2007.

 

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 , 2007.

 

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 treatment (“plain-vanilla” options) due to the limited history the Company currently has with option exercise activity. The risk-free interest rate is based on the U.S. Treasury yield curve.

 

Compensation cost related to non-qualified stock options recognized in operating results (selling, general and administrative expense) for the years ended December 31, 2007 and 2006 was $3,435,000 and $1,756,000, respectively. The related future income tax benefits recognized for the years ended December 31, 2007 and 2006 were $1,147,000 and $599,000, respectively.

 

47



 

Stock options

 

The following table presents the weighted-average assumptions used to estimate the fair value of options granted in 2007, 2006 and 2005:

 

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Expected annual dividend yield

 

0

%

0

%

0

%

Risk-free interest rate

 

4.93

%

4.76

%

4.5

%

Expected volatility

 

71.2

%

78.2

%

79

%

Expected life in years

 

6.2

 

6.0

 

5.2

 

 

The following table summarizes information concerning outstanding and exercisable options:

 

 

 

Weighted Average

 

 

 

2007

 

2006

 

2005

 

 

 

Shares

 

Exercise
Price

 

Shares

 

Exercise
Price

 

Shares

 

Exercise
Price

 

Outstanding at beginning of year

 

2,629,076

 

$

4.69

 

2,657,419

 

$

3.93

 

3,241,251

 

$

3.96

 

Granted

 

699,050

 

$

19.45

 

479,334

 

$

8.01

 

75,000

 

$

6.25

 

Exercised

 

(545,815

)

$

5.19

 

(480,203

)

$

3.33

 

(328,374

)

$

2.37

 

Cancelled or expired

 

(126,374

)

$

15.64

 

(27,474

)

$

12.84

 

(330,458

)

$

6.35

 

Outstanding at end of year

 

2,655,937

 

$

7.95

 

2,629,076

 

$

4.69

 

2,657,419

 

$

3.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at year end

 

1,645,639

 

 

 

1,891,426

 

 

 

1,891,155

 

 

 

Weighted average fair value per option granted during the year

 

$

13.19

 

 

 

 

$

5.64

 

 

 

 

$

4.21

 

 

 

 

 The total intrinsic value of options exercised and share based payments made was $6,517,000, $3,501,000 and $679,000, respectively, for the years ended December 31 2007, 2006 and 2005.

 

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, 2007:

 

Range of Exercise Prices

 

Number
Exercisable

 

Weighted
Average
Exercise
Price

 

WeightedAverage
Remaining
Contractual Life

 

Aggregate
Intrinsic
Value
(in thousands)

 

$   1.76   to  $   5.00

 

996,682

 

$

2.11

 

4.67

 

$

18,345

 

$   5.01   to  $ 15.00

 

1,005,330

 

$

6.40

 

6.50

 

14,282

 

$ 15.01   to  $ 20.00

 

486,338

 

$

19.01

 

9.41

 

650

 

$ 20.01   to  $ 20.15

 

100,000

 

$

20.15

 

9.11

 

37

 

$   1.76   to  $ 20.15

 

2,588,350

 

$

7.95

 

6.44

 

$

33,314

 

 

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, 2007 and the exercise price) that would have been received by the option holders had all options been exercised on December 31, 2007. This value will change based on the fair market value of the Company’s common stock.

 

The following table reflects the activity for all unvested stock options during the year ended December 31, 2007:

 

 

 

For Shares

 

Weighted Average
Grant-Date Fair Value

 

Unvested at January 1, 2007

 

737,650

 

$

3.71

 

Granted

 

699,050

 

$

13.19

 

Vested

 

(270,903

)

$

2.48

 

Forfeited

 

(67,999

)

$

4.68

 

Unvested at December 31, 2007

 

1,097,798

 

$

9.99

 

 

At December 31, 2007, there was approximately $5,500,000 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 years ended December 31, 2007, 2006 and 2005 was $671,000, $1,502,000 and $761,000, respectively.

 

48



 

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 in 2007 and 2006 and $1,005,000 in 2005. Share-based compensation expense for restricted stock issued to Directors was $75,000 in each of the years ended December 31, 2007 and 2006.

 

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, 2007, there was unrecognized stock-based compensation of $3.0 million related to the restricted stock award, which is expected to be recognized over a weighted-average period of 5.0 years.

 

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

 

Net income — as reported

 

$

11,441

 

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

 

647

 

Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax effects

 

915

 

Pro forma net income

 

$

11,173

 

 

 

 

 

Basic net income per common share:

 

 

 

Net income — as reported

 

$

.33

 

Net income — pro forma

 

$

.32

 

 

 

 

 

Diluted net income per common share:

 

 

 

Net income — as reported

 

$

.31

 

Net income — pro forma

 

$

.31

 

 

                          The weighted average remaining contractual life of the stock options outstanding was 6.7 years at December 31, 2005.

 

49



 

 

8.     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 year ended December 31, 2005, 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

 

2003 United States warehouse consolidation plan

 

$

122

 

2002 United Kingdom consolidation plan

 

(93

)

Litigation settlements

 

300

 

Other severance and exit costs

 

3,822

 

Total restructuring and other charges

 

$

4,151

 

 

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 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 2005 the Company recorded $93,000 of gain related to this plan as actual costs were less than anticipated.

 

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 10).

 

Other Severance and Exit Costs

The Company recorded restructuring costs of $3.8 million during 2005 in Europe in connection with workforce reductions and facility exit costs. In 2005, these costs were comprised of employee severance costs.

 

The following table summarizes the components of the accrued restructuring charges and the movements within these components during 2007, 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
Personnel Costs

 

Other
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

 

Amounts utilized

 

(0

)

(89

)

(89

)

Balance at December 31, 2007

 

$

0

 

$

0

 

$

0

 

 

 

50



 

 

9.                 INCOME TAXES

 

                          The components of income (loss) before income taxes are as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

United States

 

$

81,832

 

$

53,587

 

$

38,912

 

Foreign

 

18,191

 

16,108

 

(6,038

)

Total

 

$

100,023

 

$

69,695

 

$

32,874

 

 

                          The provision (benefit) for income taxes consists of the following (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

Current:

 

 

 

 

 

 

 

Federal

 

$

26,174

 

$

15,437

 

$

10,499

 

State

 

4,842

 

3,179

 

3,146

 

Foreign

 

5,632

 

3,678

 

1,560

 

Total current

 

36,648

 

22,294

 

15,205

 

Deferred:

 

 

 

 

 

 

 

Federal

 

(1,004

)

1,235

 

(265

)

State

 

277

 

511

 

(490

)

Foreign

 

(5,379

)

508

 

6,983

 

Total deferred

 

(6,106

)

2,254

 

6,228

 

TOTAL

 

$

30,542

 

$

24,548

 

$

21,433

 

 

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):

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

Income tax at Federal statutory rate

 

$

35,008

 

$

24,407

 

$

11,506

 

State and local income taxes (benefits) and changes in valuation allowances, net of federal tax benefit

 

3,332

 

2,577

 

1,311

 

Foreign taxes at rates different from the U.S. rate

 

(2,260

)

1,199

 

1,703

 

Changes in valuation allowances for foreign deferred tax assets

 

(6,184

)

(2,260

)

10,194

 

Tax credits

 

 

(718

)

(197

)

Non-deductible items

 

963

 

 

 

Adjustment for prior year taxes

 

(593

)

(760

)

(3,205

)

Other items, net

 

276

 

103

 

121

 

 

 

$

30,542

 

$

24,548

 

$

21,433

 

 

 

51



 

 

                          The deferred tax assets (liabilities) are comprised of the following (in thousands):

 

 

 

December 31,

 

 

 

2007

 

2006

 

Current:

 

 

 

 

 

Deductible assets

 

$

(773

)

$

(876

)

Accrued expenses and other liabilities

 

8,379

 

8,063

 

Inventory

 

2,374

 

1,596

 

Other

 

(524

)

(318

)

Valuation allowances

 

(96

)

(738

)

Total current assets, net

 

9,360

 

7,727

 

 

 

 

 

 

 

Non-current:

 

 

 

 

 

Net operating loss and credit carryforwards

 

12,462

 

15,881

 

Accelerated depreciation

 

3,494

 

3,520

 

Intangible and other assets

 

6,791

 

8,453

 

Other

 

3,196

 

3,328

 

Valuation allowances

 

(7,291

)

(17,141

)

Subtotal non-current assets, net

 

18,652

 

14,041

 

TOTAL

 

$

28,012

 

$

21,768

 

 

                          The Company has not provided for federal income taxes applicable to the undistributed earnings of its foreign subsidiaries of approximately $33.8 million as of December 31, 2007, since these earnings are indefinitely reinvested. The Company has foreign net operating loss carryforwards which expire through 2022 except for carryforwards in the United Kingdom which have no expiration.  The Company records these benefits as assets to the extent that utilization of such assets is more likely than not; otherwise, a valuation allowance has been recorded.  The Company has also provided valuation allowances for certain state deferred tax assets and net operating loss carryforwards where it is not likely they will be realized.

 

                          In the fourth quarter of 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. In the fourth quarter of 2007 the Company’s United Kingdom subsidiary emerged from its cumulative loss position and the remaining valuation allowance against the deferred tax assets of the United Kingdom of approximately $5.9 million was reversed. In the fourth quarter of 2007 the Company recorded a valuation allowance of approximately $1.7 million against the deferred tax assets of its German subsidiary as the result of the German subsidiary entering a cumulative loss position and uncertainty as to whether or not future earnings will be sufficient to enable utilization of those assets.

 

                          As of December 31, 2007, the valuation allowances of approximately $7.4 million related to net operating loss carryforwards in foreign jurisdictions of $6.0 million, $1.2 million for state net operating loss carryforwards and $0.2 million for other state deductible temporary differences. During the year ended December 31, 2007, valuation allowances decreased $10.5 million primarily as a result of the reversal of the valuation allowance in the United Kingdom, utilization of net operating losses and timing differences in the United Kingdom and utilization of state net operating loss deductions in the United States.  Valuation allowances decreased $2.3 million in 2006 for carryforward losses utilized for which valuation allowances had been previously provided. 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 year’s allowances in foreign jurisdictions. 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 1996 through 2002

 

 

52



 

                        were audited by the Internal Revenue Service. The outcome of the audit did not have a material impact on the Company’s consolidated financial statements.  The Company has not signed any consents to extend the statute of limitations for any subsequent years. The Company’s significant state tax returns have been audited through 2005. The Company considers its significant tax jurisdictions in foreign locations to be the United Kingdom, Canada, France, Italy and Germany. The Company remains subject to examination in the United Kingdom for years after 2001, in Canada for years after 2000, in France for years after 2004, in Italy for years after 2002 and in Germany for years after 2004.

 

                        Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 clarifies the accounting and reporting for uncertainties in income tax law.  This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.  For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.  At January 1, 2007, the Company had a liability for unrecognized tax benefits of $3,379,000 (including interest and penalties of $731,000) of which $283,000 was charged to retained earnings at January 1, 2007.  Of this total, $2,586,000 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. At December 31, 2007 the Company had a liability for unrecognized tax benefits of $1,547,000 (including interest and penalties of $631,000). Of this total, $1,467,000 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The following table details activity of the Company’s uncertain tax positions during 2007:

 

 

 

December 31,

 

 

 

2007

 

Opening balance January 1,2007

 

$

2,648

 

Decreases related to settlements with taxing authorities

 

(1,732

)

Closing balance December 31, 2007

 

$

916

 

 

                        Interest and penalties of approximately $69,000 related to unrecognized tax benefits were expensed in 2007 and are included in income tax expense. Within the next twelve months the Company believes it reasonably possible that certain tax positions may be reduced. The specific positions that may be reduced are related to certain ongoing state and foreign tax audits. The Company estimates that the unrecognized benefits may be reduced by $1.5 million .

 

10.          COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

 

                          Leases - The Company is obligated under operating lease agreements for the rental of certain office and warehouse facilitiesand 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 3). The Company also acquires certain computer and communications equipment pursuant to capital lease obligations.

 

                          At December 31, 2007, the future minimum annual lease payments for capital leases and related and third-party operating leases were as follows (in thousands):

 

 

 

Capital
Leases

 

Third Party
Operating
Leases

 

Related Party
Operating
Lease

 

Total

 

 

 

 

 

 

 

 

 

 

 

2008

 

$

471

 

$

13,589

 

$

860

 

$

14,920

 

2009

 

186

 

13,204

 

895

 

14,285

 

2010

 

73

 

10,699

 

932

 

11,704

 

2011

 

10

 

9,651

 

970

 

10,631

 

2012

 

 

 

9,089

 

1,010

 

10,099

 

2013-2017

 

 

 

32,269

 

5,706

 

37,975

 

2018-2022

 

 

 

17,644

 

 

 

17,644

 

Thereafter

 

 

 

4,823

 

 

 

4,823

 

Total minimum lease payments

 

740

 

110,968

 

10,373

 

122,081

 

Less: sublease rental income

 

 

 

1,775

 

 

 

1,775

 

Lease obligation net of subleases

 

740

 

$

109,193

 

$

10,373

 

$

120,306

 

Less amount representing interest

 

37

 

 

 

 

 

 

 

Present value of minimum capital lease payments (including current portion of $449)

 

$

703

 

 

 

 

 

 

 

 

                          Annual rent expense aggregated approximately $14,760,000, including $612,000 to related parties, for 2007, $13,198,000, including $612,000 to related parties, for 2006 and $10,272,000, including $612,000 to related parties, for 2005. Rent expense for 2007 is net of sublease income of $853,000.

 

 

53



 

                          Litigation

 

                          Kevin Vukson v. TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc.

 

On October 18, 2007, Kevin Vukson filed a class action complaint in U.S. District Court (E.D.N.Y.) against TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc. on behalf of himself and all OnRebate customers whose rebates were denied or delayed . (OnRebate.com Inc. is a rebate processing company owned by Systemax.) Vukson’s Complaint alleges that since 2004 Systemax, TigerDirect and OnRebate have conducted a deceptive and unlawful enterprise by failing to pay rebates that should have been paid and delaying unnecessarily the payment of other rebates that were paid. Vukson alleges claims arising under Florida’s Unfair, Deceptive Trade Practice Act, the federal RICO statute, along with claims for breach of contract, conspiracy to commit fraud and unjust enrichment. Systemax, TigerDirect and OnRebate have moved to dismiss the Complaint and to transfer the matter to the Southern District of Florida. The Court has not yet ruled on these motions and has not yet certified a class. The Company intends to vigorously defend this case.

 

State of Florida, Office of the Attorney General Subpoena

 

On January 2, 2008 the Company received a subpoena for documents from the Florida Attorney General’s Office relating to the payment and processing of rebates by the Company. On January 30, 2008 the Company received a second subpoena for additional documents. The Company is cooperating with the Florida Attorney General’s Office to provide the requested documents.

 

Other matters

 

Beginning on May 24, 2005, three shareholder derivative lawsuits were filed 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. During 2006, the lawsuits were settled or dismissed.  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 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 17.3%, 17.9%, 17% of the Company’s domestic sales in 2007, 2006 and 2005 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.

 

11.          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.

 

 

54



 

 

Financial information relating to the Company’s operations by reportable segment was as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

Net Sales:

 

 

 

 

 

 

 

Technology Products

 

$

2,553,716

 

$

2,148,104

 

$

1,940,902

 

Industrial Products

 

225,746

 

196,860

 

174,616

 

Hosted Software

 

413

 

201

 

 

Consolidated

 

$

2,779,875

 

$

2,345,165

 

$

2,115,518

 

 

 

 

 

 

 

 

 

Depreciation Expense:

 

 

 

 

 

 

 

Technology Products

 

$

6,818

 

$

6,395

 

$

7,341

 

Industrial Products

 

1,023

 

1,040

 

1,995

 

Hosted Software

 

904

 

683

 

403

 

Corporate

 

35

 

67

 

255

 

Consolidated

 

$

8,780

 

$

8,185

 

$

9,994

 

 

 

 

 

 

 

 

 

Operating Income (Loss):

 

 

 

 

 

 

 

Technology Products

 

$

86,986

 

$

58,318

 

$

41,521

 

Industrial Products

 

20,595

 

13,947

 

7,591

 

Hosted Software

 

(15,813

)

(10,092

)

(6,803

)

Corporate and other expenses

 

3,736

 

(269

)

(7,500

)

Consolidated

 

$

95,504

 

$

61,904

 

$

34,809

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

Technology Products

 

$

328,557

 

$

230,512

 

$

172,534

 

Industrial Products

 

76,634

 

59,239

 

51,031

 

Hosted Software

 

3,783

 

3,068

 

1,819

 

Corporate and other

 

264,897

 

291,342

 

279,160

 

Consolidated

 

$

673,871

 

584,161

 

$

504,544

 

 

Financial information relating to the Company’s operations by geographic area was as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

Net Sales:

 

 

 

 

 

 

 

United States:

 

 

 

 

 

 

 

Industrial Products

 

$

225,746

 

$

196,860

 

$

174,616

 

Technology Products

 

1,451,459

 

1,268,780

 

1,147,230

 

United States total

 

1,677,205

 

1,465,640

 

1,321,846

 

Other North America

 

170,272

 

135,619

 

99,035

 

Europe

 

932,398

 

743,906

 

694,637

 

Consolidated

 

2,779,875

 

2,345,165

 

$

2,115,518

 

 

 

 

 

 

 

 

 

Long-lived Assets:

 

 

 

 

 

 

 

North America — principally United States

 

$

21,978

 

$

21,347

 

$

31,435

 

Europe

 

26,502

 

27,239

 

25,824

 

Consolidated

 

$

48,480

 

$

48,586

 

$

57,259

 

 

        Net sales are attributed to countries based on location of selling subsidiary.

 

12.          QUARTERLY FINANCIAL DATA (UNAUDITED)

 

Quarterly financial data is as follows (in thousands, except for per share amounts):

 

 

 

First Quarter

 

Second Quarter

 

Third Quarter

 

Fourth Quarter (1 )

 

2007:

 

 

 

 

 

 

 

 

 

Net sales

 

$

676,122

 

$

647,102

 

$

687,317

 

$

769,334

 

Gross profit

 

$

96,674

 

$

99,318

 

$

110,653

 

$

119,656

 

Net income

 

$

13,895

 

$

13,762

 

$

17,644

 

$

24,180

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

.39

 

$

.38

 

$

.49

 

$

.67

 

Diluted

 

$

.37

 

$

.37

 

$

.47

 

$

.64

 

 

 

 

 

 

 

 

 

 

 

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

 

$

12,451

 

$

8,033

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

.51

 

$

.20

 

$

.36

 

$

.23

 

Diluted

 

$

.48

 

$

.19

 

$

.33

 

$

.22

 

 


(1) During the fourth quarter of 2007 the Company recorded a write down of certain assets in Europe of approximately $6.7 million and a reversal of certain liabilities in a domestic location of approximately $3.9 million.

 

 

55



 

 

13.          SUBSEQUENT EVENTS

 

                          On January 5, 2008, the Company, through various subsidiaries, entered into an asset purchase agreement with CompUSA Inc., a Delaware corporation.

 

                          Pursuant to the Purchase Agreement, the Company agreed to acquire certain assets and liabilities related to the e-commerce business of CompUSA Inc., certain intellectual property rights owned by CompUSA, and the E-Commerce Business for $18.9 million in cash.  The Company completed its acquisition of the E-Commerce Business on January 10, 2008.

 

Pursuant to the Purchase Agreement, the Company also agreed to acquire up to sixteen retail leases from CompUSA Inc. and certain fixtures located at these locations. The closing of the acquisition of each lease was subject to the receipt of the consent of the landlord, if required under the terms of a lease.  During February and March 2008 the Company completed the acquisition of these sixteen store leases and fixtures for an aggregate purchase price of approximately $11.5 million.

 

                        On March 3, 2008, the Company’s Board of Directors declared a special dividend of $1.00 per share payable on April 2, 2008 to shareholders of record on Mar 21, 2008. This special dividend is the second dividend we will have paid since our initial public offering.

 

 

56



 

 

SYSTEMAX INC.

 

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

 

For the years ended December:

(in thousands)

 

Description

 

Balance at Beginning of Period

 

Charged to
Expenses

 

Write-offs

 

Other

 

Balance at
End of Period

 

Allowance for sales returns and doubtful accounts

 

 

 

 

 

 

 

 

 

 

 

2007

 

$

11,370

 

$

4,575

 

$

(4,128

)

 

 

$

11,817

 

2006

 

$

12,508

 

$

1,503

 

$

(2,641

)

 

 

$

11,370

 

2005

 

$

11,318

 

$

7,316

 

$

(6,126

)

 

 

$

12,508

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for deferred tax assets

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

738

 

 

 

$

(467

)

$

(175

)

$

96

 

Noncurrent (1)

 

$

17,141

 

$

2,842

 

$

(11,408

)

$

(1,284

)

$

7,291

 

2006

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

527

 

$

136

 

 

 

$

75

 

$

738

 

Noncurrent (1)

 

$

14,779

 

$

2,743

 

$

(2,260

)

$

1,879

 

$

17,141

 

2005

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

413

 

$

114

 

 

 

 

 

$

527

 

Noncurrent

 

$

10,643

 

$

5,828

 

$

(1,301

)

$

(391

)

$

14,779

 


(1) Charges to expense are net of reductions resulting from changes in deferred tax assets due to changes in tax laws.

 

 

57


 

EXHITBIT 3.2

BYLAWS

 

OF

 

SYSTEMAX INC.


* * * * *

 

ARTICLE I

 

OFFICES

 

Section 1.               Registered Office . The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.

 

Section 2.               Other Offices . The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

 

Section 3.               Books . The books of the Corporation may be kept within or without of the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

 

ARTICLE II

 

MEETINGS OF STOCKHOLDERS

 

Section 1.                                             Time and Place of Meetings . All meetings of stockholders shall be held at such place, either within or without the State of Delaware, on such date and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a designation by the Board of Directors).

 

Section 2.                                             Annual Meetings . Annual meetings of stockholders, commencing with the year 1996, shall be held to elect the Board of Directors and transact such other business as may properly be brought before the meeting.

 

Section 3.                                             Special Meetings . Special meetings of stockholders may be called by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President of Domestic Operations or the President of International Operations and may not be called by any other person.

 

Section 4.                                             Notice of Meetings and Adjourned Meetings; Waivers of Notice . (a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by the General Corporation Law

 



 

of the State of Delaware as the same exists or may hereafter be amended (“Delaware Law”), such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Unless these bylaws otherwise require, when a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

 

(b)                                  A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

 

Section 5.                                             Quorum . Unless otherwise provided under the certificate of incorporation or these bylaws and subject to Delaware Law, the presence, in person or by proxy, of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business.

 

Section 6.                                             Voting . (a) Unless otherwise provided in the certificate of incorporation and subject to Delaware Law, each stockholder shall be entitled to one vote for each outstanding share of capital stock of the Corporation held by such stockholder. Unless otherwise provided in Delaware Law, the certificate of incorporation or these bylaws, the affirmative vote of a majority of the shares of capital stock of the Corporation present, in person or by proxy, at a meeting of stockholders and entitled to vote on the subject matter shall be the act of the stockholders. Unless a greater vote is otherwise required by  Delaware law, the certificate of incorporation or these bylaws, the affirmative vote of the holders of at least a majority of  the outstanding shares of Common Stock of the Corporation entitled to vote and present in person, or by properly executed proxy, at a meeting of stockholders at which a quorum is present shall be required to elect a Director to the Board of Directors at the first annual meeting of the stockholders to be held after May 15, 2006.

 

(b)                                  Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.

 

2



 

Section 7.                                             Action by Consent . (a) Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

 

(b)                                  Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this Section and Delaware Law to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested.

 

Section 8.                                             Organization . At each meeting of stockholders, the Chairman of the Board, if one shall have been elected, (or in his absence or if one shall not have been elected, the Chief Executive Officer, the President of Domestic Operations or the President of International Operations) shall act as chairman of the meeting. The Secretary (or in his absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof.

 

Section 9.                                             Order  of Business . The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting.

 

ARTICLE III

 

DIRECTORS

 

Section 1.                                             General Powers . Except as otherwise provided in Delaware Law or the certificate of incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

 

3



 

Section 2.                                             Number, Election and Term of Office . The number of directors which shall constitute the whole Board shall be fixed from time to time by resolution of the Board of Directors but shall not be less than three or more than nine. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 12 of this Article III, and each director so elected shall hold office until his successor is elected and qualified or until his earlier death, resignation or removal. Directors need not be stockholders.

 

Section 3.                                             Quorum and Manner of Acting . Unless the certificate of incorporation or these bylaws require a greater number, a majority of the total number of directors shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the directors present at meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of directors the directors present thereat may adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

 

Section 4.                                             Time and Place of Meetings . The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a determination by the Board of Directors).

 

Section 5.                                             Annual Meeting . The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III or in a waiver of notice thereof signed by any director who chooses to waive the requirement of notice.

 

Section 6.                                             Regular Meetings . After the place and time of regular meetings of the Board of Directors shall have been determined and notice thereof shall have been once given to each member of the Board of Directors, regular meetings may be held without further notice being given.

 

Section 7.                                             Special Meetings . Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer, the President of Domestic Operations or the President of International Operations and shall be called by the Chairman of the Board, Chief Executive Officer or Secretary on the written request of three directors. Notice of special meetings of the Board of Directors

 

4



 

shall be given to each director at least three days before the date of the meeting in such manner as is determined by the Board of Directors.

 

Section 8.                                             Committees . The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation’s property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the bylaws of the Corporation; and unless the resolution of the Board of Directors or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the. issuance of stock. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

 

Section 9.                                             Action by Consent . Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

 

Section 10.                                       Telephonic Meetings . Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

 

Section 11.                                       Resignation . Any director may resign at any time by giving written notice to the Board of Directors or to the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

 

Section 12.                                       Vacancies . Unless otherwise provided in the certificate of incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less

 

5



 

than a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Each director so chosen shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. If there are no directors in office, then an election of directors may be held in accordance with Delaware Law. Unless otherwise provided in the certificate of incorporation, when one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in the filling of other vacancies.

 

Section 13.                                       Removal . Any director or the entire Board of Directors may be removed, with or without cause, at any time by the affirmative vote of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote and the vacancies thus created may be filled in accordance with Section 12 of this Article III.

 

Section 14.                                       Compensation . Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have authority to fix the compensation of directors, including fees and reimbursement of expenses.

 

Section 15.                                       Independent Director.

 

(i)                                      The Board’s independent directors shall elect one of the independent directors to serve as a lead independent director (the “Lead Independent Director”).  The Lead Independent Director shall be reaffirmed annually by vote of a majority of the independent directors.

 

(ii)                                   The Board’s independent directors shall meet separately from the Chief Executive Officer in executive sessions, chaired by the Lead Independent Director, held on at least a quarterly basis.

 

 (iii)                             The Lead Independent Director is responsible for coordinating the activities of the independent directors.  In addition to the duties of all Board members (which shall not be limited or diminished by the Lead Independent Director’s role), the specific responsibilities of the Lead Independent Director shall be as follows:

 

(a) advise the Chairman of the Board as to an appropriate schedule of Board meetings, seeking to ensure that the independent directors can perform their duties responsibly while not interfering with the flow of the Corporation’s operations;

 

(b) provide the Chairman of the Board with input as to the preparation of agendas for the Board and committee meetings;

 

6



 

(c) advise the Chairman of the Board as to the quality, quantity, and timeliness of the flow of information from the Corporation’s management that is necessary for the independent directors to effectively and responsibly perform their duties, and although the Corporation’s management is responsible for the preparation of materials for the Board, the Lead Independent Director may specifically request the inclusion of certain material;

 

(d) recommend to the Chairman of the Board the retention of consultants who report directly to the Board;

 

(e) assist the Board and the Corporation’s officers in assuring compliance with and implementation of the corporate governance policies; and be principally responsible for recommending revisions to the corporate governance policies;

 

(f) coordinate and develop the agenda for, and moderate executive sessions of, the independent directors of  the Board, and act as principal liaison between the independent directors and the Chairman of the Board on sensitive issues; and

 

(g) recommend to the Chairman of the Board the membership of the various Board committees.

 

ARTICLE IV

 

OFFICERS

 

Section 1.                                             Principal Officers . The principal officers of the Corporation shall be a Chief Executive Officer, Chief Financial Officer, a President of Domestic Operations, a President of International Operations, one or more Senior Vice Presidents, a Treasurer, and a Secretary who shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Corporation may also have such other principal officers, including one or more Controllers, as the Board may in its discretion appoint. One person may hold the offices and perform the duties of any two or more of said offices, except that no one person shall hold the offices and perform the duties of Chief Executive Officer and Secretary.

 

Section 2.                                             Election . Term of Office and Remuneration. The principal officers of the Corporation shall be elected annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. The remuneration of all officers of the Corporation shall be fixed by the Board of Directors. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine.

 

Section 3.                                             Subordinate Officers . In addition to the principal officers enumerated in Section 1 of this Article IV, the Corporation may have one or more Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such other subordinate officers, agents and employees as the Board of Directors may deem

 

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necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees.

 

Section 4.                                             Removal . Except as otherwise permitted with respect to subordinate officers, any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors; provided that no such removal shall alter, void or otherwise effect any change in any written contractual relationship between the Corporation and any such officer thus removed from office.

 

Section 5.                                             Resignations . Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

 

Section 6.                                             Powers and Duties . The officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors.

 

ARTICLE V

 

GENERAL PROVISIONS

 

Section 1.                                             Fixing the Record Date . (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business an the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting.

 

(b)                                  In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board

 

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of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by Delaware Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by Delaware Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

 

(c)                                   In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

 

Section 2.                                             Dividends . Subject to limitations contained in Delaware Law and the certificate of incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, in property or in shares of the capital stock of the Corporation.

 

Section 3.                                             Fiscal Year . The fiscal year of the Corporation shall commence on the Sunday which follows the Saturday closest to December  31 each year and shall end on the Saturday closest to December 31 each year .

 

Section 4.                                             Corporate Seal . The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words “Corporate Seal, Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced.

 

Section 5.                                             Voting of Stock Owned by the Corporation . The Board of Directors may authorize any person, on behalf of the Corporation, to attend, vote at and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock.

 

Section 6.                                             Amendments . These bylaws or any of them, may be altered, amended or repealed, or new bylaws may be made, by the stockholders entitled to vote thereon at any annual or special meeting thereof or by the Board of Directors.

 

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Exhibit 10.27

 

AMENDMENT TO LEASE

11 HARBOR PARK DRIVE

PORT WASHINGTON, NY

 

That certain lease, dated September 20 1988 (the “Lease”), as amended on March 22, 1999, between ADDWIN REALTY ASSOCIATES, a New York general partnership (hereinafter referred to as the “Landlord”) and CONTINENTAL DYNAMICS CORPORATION, a New York corporation which on December 31, 2000 was merged into GLOBAL COMPUTER SUPPLIES INC., a New York corporation (hereinafter referred to as the “Tenant”) with respect to the premises located at 11 Harbor Park Drive, Port Washington, New York, is hereby amended as follows:

 

1.                                                        Section 1.03 of the Lease is amended such that the “Expiration Date” of the Lease is defined as December 31, 2017.

 

2.                                                        Section 1.04 of the Lease and Exhibit B thereto is amended such that effective January 1, 2008 the “Fixed Rent” of the Lease shall be defined as $860,000 per year ($10.00 per square foot) for the year beginning on January 1, 2008 (the “Amendment No. 2 Effective Date”) and ending December 31, 2008. Thereafter the Fixed Rent above shall be increased on the annual anniversary of the and on each successive annual anniversary of the Amendment No. 2 Effective Date during the term of the Lease (each such annual anniversary date being hereinafter referred to as the “Escalation Date”). Such increase in the Fixed Rent shall be an amount equal to the product of the Percentage Increase (as defined below) for the Escalation Date multiplied by the Fixed Rent charged for the year immediately preceding the Escalation Date. Such increased Fixed Rent shall be payable in 12 monthly installments in advance of the first day of each calendar month commencing on the Escalation Date and continuing until the next Escalation Date. Landlord shall notify Tenant in writing of such increased Fixed Rent as soon as such determination is reasonably possible. If notification is not given until after the Escalation Date, any increased amounts due but not paid since the Escalation Date shall be payable within 30 days after Tenant’s receipt of such notice. As used in this Section 1.04:

 

(a)           “Index” shall mean the Consumer Price Index for all Urban Consumers, All Cities Average, all items (1967 = 100), not seasonally adjusted, published and issued by the Bureau of Labor Statistics of the United States Department of Labor (the “Bureau of Labor Statistics”). In the event that the Consumer Price Index ceases to use the 1967 average of One Hundred (100) as the basis of calculation, or if a change is made in the terms of particular items contained in the Consumer Price Index, the Consumer Price Index shall, at the discretion of Landlord, be adjusted to the figure that would have been

 

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arrived at had the change in the manner of computing the Consumer Price Index in effect at the Amendment No. 2 Effective Date of the Lease term not been affected. In the event that such Consumer Price Index (or successor or substituted Consumer Price Index) is not available, a reliable governmental or other non-partisan publication, evaluating the purchase power of money, may be used at the discretion of Landlord.

 

(b)          “Comparative Month” shall mean the calendar month, which is completed immediately prior to 12 months before each Escalation Date during the Term.

 

(c)           “Percentage Increase” for each Escalation Date shall mean the increase in the Index (expressed as a percentage) during the 12-month period immediately preceding the Comparative Month.

 

3.                                                        Except as herein modified, all terms of the Lease shall remain in full force and effect.

 

Dated: December 4, 2007

 

 

 

ADDWIN REALTY ASSOCIATES

 

 

 

 

 

By: Richard Leeds

 

 

 

 

 

Title: Partner

 

 

 

 

 

GLOBAL COMPUTER SUPPLIES INC.

 

 

 

 

 

By: Lawrence P. Reinhold

 

 

 

 

 

Title: Executive Vice President

 

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EXHIBIT 10.28

 

EXECUTION VERSION

 

ASSET PURCHASE AGREEMENT

 

by and among

 

LONGHORN INC. ,

 

NEW SAH CORP.,

 

DOTDEAL INC.,

 

SYSTEMAX INC.

 

and

 

COMPUSA INC.

 

Dated as of January 5, 2008

 



 

EXECUTION VERSION

 

ASSET PURCHASE AGREEMENT

 

THIS ASSET PURCHASE AGREEMENT (this “ Agreement ”) is entered into as of January 5, 2008, by and among SYSTEMAX INC., a Delaware corporation (“ Systemax ”), New SAH Corp., a Delaware corporation and a wholly-owned subsidiary of Systemax (the “ Trade Name Buyer ”), DotDeal Inc., a Florida corporation and a wholly-owned subsidiary of Systemax (the “ Domain Name Buyer ”, and together with the Trade Name Buyer, the “ Internet Buyers ”, and each individually, an “ Internet Buyer ”), Longhorn Inc., a Delaware corporation and a wholly-owned subsidiary of Systemax (the “ Real Estate Buyer ” and, together with the Internet Buyers, the “ Buyers ”), and COMPUSA INC., a Delaware corporation (the “ Seller ”).

 

W I T N E S S E T H

 

WHEREAS, subject to the terms and conditions hereof, the Seller desires to sell, transfer and assign to the Buyers, and the Buyers desire to purchase from the Seller, certain assets of the Seller and its Subsidiaries (as defined below) (collectively, the “ Seller Group ”) used or held for use by the Seller Group in connection with the operation of the Transferred Businesses (as defined below), and the Seller desires to transfer and assign to the Buyers, and the Buyers desire to assume from the Seller certain liabilities and obligations of the Transferred Businesses as specifically provided in this Agreement; and

 

WHEREAS, subject to the terms and conditions hereof, the Seller desires to retain and not sell, transfer or assign to the Buyers certain assets used in connection with, and certain of the liabilities and obligations of, the businesses or portions of businesses conducted by the Seller Group other than the Transferred Businesses (collectively, the “ Retained Businesses ”).

 

NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

ARTICLE 1. INTERPRETATION.

 

1.1        Definitions .  In addition to the terms defined elsewhere herein, the following terms, as used herein, shall have the following meanings when used herein with initial capital letters:

 

Acquired Leases ” has the meaning ascribed to such term in Section 2.1(b) hereof.

 

Acquired Premises ” means the premises subject to any of the Acquired Leases.

 

Affiliate ” means, in relation to any Person, any other Person that directly or indirectly controls, that is directly or indirectly controlled by, or that is under the direct or indirect common control of, such Person.  For purposes of this definition, “ control ” means, in respect of any Person, the power or authority to direct, or cause the direction of, directly or indirectly, the

 



 

management, policies or actions of such other Person, whether through the ownership of equity securities or voting securities or by contract or otherwise.

 

Agreement ” has the meaning ascribed to such term in the Preamble hereof.

 

Allocation Schedules ” has the meaning ascribed to such term in Section 2.9 hereof.

 

Applicable Law ” means all applicable provisions of all statutes, laws, rules, regulations, administrative codes, ordinances, decrees, Orders, decisions, injunctions, awards and judgments of or from Governmental Authorities.

 

Assigned Contract ” means any Contract assigned to a Buyer pursuant to Section 2.1 hereof.

 

Assigned Internet Contracts ” means those Contracts listed on Exhibit 2(a)(i) or Exhibit 2(a)(ii).

 

Assigned Material Commitment ” means any Assigned Contract (other than a Lease) which is material in nature or could lead to a payment or Liability by or on the part of the Seller Group in excess of $200,000 per Assigned Contract or series of related Assigned Contracts for any one (1) year period.

 

Assignment and Assumption Agreement ” has the meaning ascribed to such term in Section 2.7 hereof.

 

Assignment Consent ” has the meaning ascribed to such term in Section 2.10(a) hereof.

 

Assumed Internet Liabilities ” has the meaning ascribed to such term in Section 2.3(a) hereof.

 

Assumed Liabilities ” means the Assumed Internet Liabilities and the Assumed Real Estate Liabilities.

 

Assumed Real Estate Liabilities ” has the meaning ascribed to such term in Section 2.3(b) hereof.

 

Bankruptcy Law ” means the Bankruptcy Reform Act of 1978, 11 U.S.C §§ 101, et seq ., as amended, or any other federal, state or foreign law or legal or equitable remedy relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, winding up or composition or adjustment of debts, creditors’ rights and/or the disposition of a legal estate for the benefit of creditors.

 

Bill of Sale ” has the meaning ascribed to such term in Section 2.7(a) hereof.

 

Business Day ” means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions located in New York, New York are permitted or required by Applicable Law to remain closed.

 

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Business Material Adverse Effect ” means an Internet Business Material Adverse Effect or a Real Estate Business Material Adverse Effect.

 

Buyers ” means the Trade Name Buyer, the Domain Name Buyer and the Real Estate Buyer and, subject to Section 10.7, any permitted assignees thereof.

 

Buyer Confidential Information ” means any Confidential Information relating to the Purchased Assets, the Assumed Liabilities or the Transferred Businesses.

 

Buyer Guaranteed Obligations ” has the meaning ascribed to such term in Section 10.16(a) hereof.

 

Buyer Indemnified Parties ” means the Buyers and Systemax and their respective Affiliates and persons serving as officers, directors, partners or employees thereof.

 

Buyer Losses ” has the meaning ascribed to such term in Section 9.2 hereof.

 

Buyer Material Adverse Effect ” means a material adverse effect on the ability of the Buyer to timely consummate the transactions contemplated by, or perform its obligations under, this Agreement.

 

Closing ” means the Internet Closing or a Real Estate Closing.

 

Closing Notice ” has the meaning ascribed to such term in Section 2.1(b) hereof.

 

Closing Date ” means the Internet Closing Date or a Real Estate Closing Date.

 

Code ” means the U.S. Internal Revenue Code of 1986, as amended.

 

Confidential Information ” means any information or data, whether or not in writing, pertaining to the business, financial condition, products, services, business plans, business methodologies, business strategies, technologies, processes, trade secrets, know-how, Intellectual Property, and customer lists of the applicable party, but shall not include (A) information which, as of the date hereof, is published or otherwise generally available to the public, (B) information which after the date hereof becomes available to the public other than through an act or omission of a party which is in violation of the provisions hereof, or (C) information rightfully acquired from a third party that did not obtain such information pursuant to an obligation of confidentiality.

 

Contract ” means any contract, lease, license, subcontract, binding understanding, binding instrument, indenture, note or other agreement, whether verbal or written, including any and all amendments thereto.

 

Domain Name Buyer ” has the meaning ascribed to such term in the Preamble hereof and, subject to Section 10.7, any permitted assignee thereof.

 

Domain Name Purchase Price ” has the meaning ascribed to such term in Section 2.5(a) hereof.

 

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Effect ” has the meaning ascribed to such term in the definition of Internet Business Material Adverse Effect.

 

Environmental Laws ” means all applicable federal, state, county or local laws, ordinances or regulations relating to the generation, discharge, Release, containment, storage, transportation, disposal, assessment or cleanup of Hazardous Materials or other contaminants or similar materials, including the following: (1) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. §9601 et seq.; (2) the Toxic Substances Control Act, 15 U.S.C. §2601 et seq.; (3) the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. §136; (4) the Hazardous Materials Transportation Act, 49 U.S.C. §§1801 to 1812; (5) the Federal Water Pollution Control Act, 32 U.S.C. §1251 et seq.; (6) the Federal Solid Waste Disposal Act, 42 U.S.C. §6901; (7) the Federal Clean Air Act, 42 U.S.C. §7401 et seq.; and (8) any other federal, state, county, or local statutes or implementing regulations (or any other statutes or implementing regulations of any other Governmental Authority) relating to, regulating, or having jurisdiction over, any environmental contamination, Hazardous Material, environmental condition or Release, or over any threat of a Release.

 

GAAP ” means generally accepted accounting principles as in effect from time to time in the United States.

 

Governmental Authority ” means any domestic or foreign court, government, governmental agency, authority, entity or instrumentality.

 

Hazardous Material ” means any pollutant, toxic substance, hazardous waste, hazardous material, hazardous substance or oil or other petroleum product that could result in the imposition of liability under any Environmental Law.

 

Intellectual Property ” means all worldwide intellectual property rights including, without limitation, all:

 

(i)                                      Domestic and foreign copyrights in any work of authorship, whether registered or unregistered, including but not limited to all copyright registrations or foreign equivalent, all applications for registration or foreign equivalent, all moral rights, all common-law rights, and all rights to register and obtain renewals and extensions of copyright registrations, together with all other copyright interests accruing by reason of international copyright convention (“ Copyrights ”);

 

(ii)                                   Domestic and foreign trademarks, trade dress, service marks, trade names, icons, logos, slogans, and any other indicia of source or sponsorship of goods and services, designs and logotypes related to the above, in any and all forms, all trademark registrations and applications for registration related to such trademarks (including, but not limited to intent to use applications), and all goodwill related to the foregoing (“ Trademarks ”);

 

(iii)                                Domestic and foreign patents and patent applications, and all inventions, processes, methods, techniques, observations, discoveries, apparatuses, machines, designs, theories and ideas, whether or not patentable (“ Patents ”);

 

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(iv)                               Domain name registrations (“ Domain Names ”);

 

(v)                                  the information and data described on Exhibit 1.1 (collectively, “ Specified Data ”);

 

(vi)                               Trade secrets and know how including, but not limited to, any formula, design, device or compilation, or other information or know how, which is used or held for use by a business, which gives the holder thereof an advantage or opportunity for advantage over competitors which do not have or use the same, and which is not generally known by the public (including, by way of example, scientific, engineering, mechanical, electrical, financial, marketing or practical knowledge or experience useful in the operation of a business, formulae, algorithms, market surveys, market research studies, information contained on drawings and other documents, and information relating to research, development or testing) (collectively, “ Trade Secrets ”);

 

(vii)                            (A) any and all computer programs and/or software programs (including all source code, object code, firmware, programming tools and/or documentation), (B) machine readable databases and compilations, including any and all data and collections of data, and (C) all content contained on Internet site(s) (collectively, “ Software ”);

 

(viii)                         all applications, registrations, documentation and media constituting, describing or relating to the above, including memoranda, manuals, technical specifications, schematics, and other records wherever created throughout the world; and

 

(ix)                                 the right to sue for past, present, or future infringement and to collect and retain all damages and profits related to the foregoing.

 

Intellectual Property Assignment Agreements ” has the meaning ascribed to such term in Section 2.7(a) hereof.

 

Internet Business Material Adverse Effect ” any material adverse change in, or material adverse effect on (any such change or effect, an “ Effect ”), the Transferred Internet Business, the Purchased Internet Assets or the Assumed Internet Liabilities taken as a whole; provided , however , that in no event shall any of the following, individually or in the aggregate, constitute, or be considered in determining whether there has occurred, an Internet Business Material Adverse Effect:

 

(i)                                      any Effect resulting from compliance with the terms and conditions of, or the taking of any action (or any failure to act) required by, this Agreement;

 

(ii)                                   any Effect resulting from general economic, political or financial market conditions, or from any acts of war or terrorism;

 

(iii)                                any Effect resulting from changes in Applicable Law or GAAP or the interpretation thereof;

 

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(iv)                               any Effect resulting from changes affecting the industry in which the Transferred Internet Business operates generally; and

 

(v)                                  any Effect resulting from the announcement of the execution of this Agreement or the announcement or pendency of the transactions contemplated hereby.

 

Internet Buyers ” means the Trade Name Buyer and the Domain Name Buyer and, subject to Section 10.7, any permitted assign thereof.

 

Internet Closing ” has the meaning ascribed to such term in Section 2.6(a) hereof.

 

Internet Closing Date ” has the meaning ascribed to such term in Section 2.6(a) hereof.

 

Internet Seller Group ” means the members of the Seller Group selling Purchased Internet Assets, including, without limitation, CompUSA Holdings II Inc., a Delaware corporation.

 

Internet Transfer Instruments ” has the meaning ascribed to such term in Section 2.7(a) hereof.

 

Knowledge ” means the actual knowledge of Roman Ross, Mohammod Huda, Amy Roberts, Ed Coder and Johnnie Goodner.

 

Lease ” has the meaning ascribed to such term in Section 4.10 hereof.

 

Lease Assignments ” has the meaning ascribed to such term in Section 2.7(b) hereof.

 

Legal Proceeding ” means any claim, action, suit, proceeding or investigation in or before any Governmental Authority, whether brought, initiated, asserted or maintained by a Governmental Authority or any other Person or entity.

 

Liabilities ” means any and all liabilities, obligations, guarantees (including, without limitation, lease guarantees) or commitments of any nature or kind, whether known or unknown, fixed, accrued, absolute or contingent, liquidated or unliquidated, matured or unmatured, including all costs and expenses relating thereto.

 

Lien ” means any lien, mortgage, security interest, charge, claim, pledge or encumbrance of any kind.

 

Losses ” means all damages, liabilities, losses, diminution in value, Taxes, fines, penalties, costs, and expenses (including, without limitation, reasonable fees of counsel) of any kind or nature whatsoever, whether or not arising out of third-party claims and including, without limitation, all amounts paid in investigation, defense or settlement of the foregoing but which, for the avoidance of doubt, shall in no event be assessed at an enterprise value or other method implying a multiple of such actual losses, damages, liabilities, charges, costs and expenses .

 

Neutral Accounting Firm ” has the meaning ascribed to such term in Section 2.9.

 

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Non-Assignable Asset ” has the meaning ascribed to such term in Section 2.10(a) hereof.

 

Operative Agreements ” has the meaning ascribed to such term in Section 10.6 hereof.

 

Order ” means any order, ruling, writ, judgment, injunction or decree.

 

Organizational Documents ” means as to any Person, its certificate or articles of incorporation, charter, by-laws or similar organizational documents, as amended to the date hereof.

 

Parties ” means, collectively, Systemax, the Buyers and the Seller.

 

Permitted Liens ” means all (a) Liens for Taxes not yet due and payable or that are being contested in good faith or that may thereafter be paid without penalty; (b) mechanics’, carriers’, worker’s, landlord’s and other similar Liens arising or incurred in the ordinary course of business; (c) Liens that secure obligations that are reflected as liabilities on, or that are otherwise disclosed in, the unaudited consolidated balance sheet of the Seller Group as of September 29, 2007, and that are listed in Section 3.1(b) of the Seller Disclosure Schedule (the “ Terminable Liens ”; (d) zoning, building codes, deed restrictions and other land use laws regulating the use or occupancy of such Purchased Assets; and (e) other imperfections of title or encumbrances, if any, that do not in the aggregate have a Business Material Adverse Effect or materially interfere with any current use or occupancy of the Purchased Assets in the operation of the Transferred Businesses, taken as a whole (the “ Non-Material Liens ”).

 

Person ” means any natural person, firm, partnership, association, corporation, company, trust, business trust, Governmental Authority or other entity.

 

Proprietary Rights Agreements ” has the meaning ascribed to such term in Section 10.1(b) hereof.

 

Purchased Assets ” means the Purchased Internet Assets and the Purchased Real Estate Assets.

 

Purchased Internet Assets ” has the meaning ascribed to such term in Section 2.1(a) hereof.

 

Purchased Real Estate Assets ” has the meaning ascribed to such term in Section 2.1(b) hereof.

 

Real Estate Business Material Adverse Effect ” means any Effect on the Transferred Real Estate Business, the Purchased Real Estate Assets or the Assumed Real Estate Liabilities taken as a whole; provided , however , that in no event shall any of the following, individually or in the aggregate, constitute, or be considered in determining whether there has occurred, a Real Estate Business Material Adverse Effect:

 

(i)                                      any Effect resulting from compliance with the terms and conditions of, or the taking of any action (or any failure to act) required by, this Agreement;

 

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(ii)                                   any Effect resulting from general economic, political or financial market conditions, or from any acts of war or terrorism;

 

(iii)                                any Effect resulting from changes in Applicable Law or GAAP or the interpretation thereof;

 

(iv)                               any Effect resulting from changes affecting the industry in which the Transferred Real Estate Business operates generally; and

 

(v)                                  any Effect resulting from the announcement of the execution of this Agreement or the announcement or pendency of the transactions contemplated hereby.

 

Real Estate Buyer ” has the meaning ascribed to such term in the Preamble hereof and, subject to Section 10.7, any permitted assignee thereof.

 

Real Estate Closing ” has the meaning ascribed to such term in Section 2.6(b) hereof.

 

Real Estate Closing Date ” has the meaning ascribed to such term in Section 2.6(b) hereof.

 

Real Estate Purchase Price ” has the meaning ascribed to such term in Section 2.5(b) hereof.

 

Real Estate Seller Group ” means the members of the Seller Group selling Purchased Real Estate Assets.

 

Real Estate Transfer Instruments ” has the meaning ascribed to such term in Section 2.7(b) hereof.

 

Release ” means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping into the soil, surface waters, groundwaters, land, stream sediments, surface or subsurface strata, ambient air or any other environmental medium.

 

Retained Businesses ” has the meaning ascribed to such term in the Preamble hereof.

 

Retained Liabilities ” has the meaning ascribed to such term in Section 2.4 hereof.

 

Seller ” has the meaning ascribed to such term in the Preamble hereof.

 

Seller Confidential Information ” means any Confidential Information owned or controlled by the Seller or any of its Affiliates other than Confidential Information relating solely to the Purchased Assets, the Assumed Liabilities or the Transferred Businesses.

 

Seller Disclosure Schedule ” has the meaning ascribed to such term in the introductory paragraph to Article 3 hereof.

 

Seller Group ” has the meaning ascribed to such term in the Preamble hereof.

 

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Seller Indemnified Parties ” means the Seller and its Affiliates and persons serving as officers, directors, partners or employees thereof.

 

Seller Losses ” has the meaning ascribed to such term in Section 9.3 hereof.

 

Seller Material Adverse Effect ” means a material adverse effect on the ability of the Seller to timely consummate the transactions contemplated by, or perform its obligations under, this Agreement.

 

Shared Assets ” has the meaning ascribed to such term in Section 2.8(e) hereof.

 

Subsidiary ” of a Buyer, the Seller or any other Person means any corporation, partnership or other legal entity of which a Buyer, Seller or such other Person, as the case may be (either alone or through or together with any other Subsidiary), owns, directly or indirectly, more than 50% of the stock or other equity interests the holder of which is generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity.

 

Systemax ” has the meaning ascribed to such term in the Preamble hereof.

 

Taxes ” means any and all taxes, charges, fees, levies or other similar assessments or liabilities, including, without limitation, income, gross receipts, ad valorem, premium, value-added, excise, real property, personal property, sales, use, services, license alternative or add-on minimum, transfer, withholding, employment, payroll and franchise taxes imposed by any Governmental Authority, and any interest, fines, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any tax or any contest or dispute thereof.

 

Threshold ” has the meaning ascribed to such term in Section 9.4(a)(i)(A) hereof.

 

Trade Name Buyer ” has the meaning ascribed to such term in the Preamble hereof and, subject to Section 10.7, any permitted assignee thereof.

 

Trade Name Purchase Price ” has the meaning ascribed to such term in Section 2.5(a) hereof.

 

Trademark License Agreement ” has the meaning ascribed to such term in Section 2.7(a) hereof.

 

Transfer Instruments ” means the Real Estate Transfer Instruments and the Internet Transfer Instruments.

 

Transferred Businesses ” means the Transferred Internet Business and the Transferred Real Estate Business.

 

Transferred Internet Business ” means the business conducted by the Seller Group in the retail and resale of personal computers and related products and services on the Internet, including, without limitation, the Seller Group’s websites identified by the URLs:

 

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CompUSA.com, Compusabusiness.com, Compusaauction.com and its auction business on Overstock.com, Ebay.com and other third party auction sites.

 

Transferred Real Estate Business ” means the business conducted by the Seller Group in the retail and resale of personal computers, consumer electronics and related products and services at the Acquired Premises.

 

United States ” or “ U.S. ” means the United States of America, its territories and possessions.

 

1.2        Currency .  Unless otherwise indicated, all dollar amounts referred to in this Agreement are expressed in U.S. dollars.

 

1.3        Sections; Cross References; Headings .  Unless the context requires otherwise, when reference is made in this Agreement to an Article, Section, Schedule or Exhibit, such reference shall be to an Article, Section, Schedule or Exhibit, respectively, of this Agreement.  Unless the context requires otherwise, the words “hereof”, “hereby” and “herein” and words of similar meaning when used in this Agreement refer to this Agreement in its entirety and not to any particular Section or provision of this Agreement.  The table of contents and headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement.

 

1.4        Rules of Construction .

 

(a)           The Parties acknowledge that this Agreement is the product of negotiation between sophisticated parties, all of whom were represented by counsel, and each of whom had an opportunity to participate in and did participate in, the drafting of each provision hereof.  Accordingly, ambiguities in this Agreement, if any, shall not be construed strictly or in favor of or against any Party but rather shall be given a fair and reasonable construction without regard to the rule of contra proferentem .

 

(b)          Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa.  The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined.

 

(c)           Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified, (ii) any reference herein to any Person shall be construed to include such Person’s successors and assigns and (iii) any reference to any law shall include all statutory and regulatory provisions consolidating, amending, replacing or interpreting such law.

 

1.5        Times of Day .  Unless otherwise specified, all references herein to times of day shall be references to Eastern time (daylight or standard, as applicable).

 

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ARTICLE 2. PURCHASE AND SALE OF ASSETS.

 

2.1        Sale of Assets .

 

(a)           On the Internet Closing Date and subject to the provisions of this Agreement, the Seller shall sell, transfer and assign or shall cause its Affiliates to sell, transfer and assign, free and clear from any and all Liens (other than Permitted Liens that are not Terminable Liens), and the applicable Internet Buyer shall purchase all right, title and interest the Seller Group possesses in and to the following property, assets, and Contracts (i) to the Trade Name Buyer the properties, assets and Contracts listed on Exhibit 2.1(a)(i)  attached hereto and any benefits of any insurance coverage (to the extent transferable) related to the foregoing properties, assets and Contracts and (ii) to the Domain Name Buyer the properties, assets and Contracts listed on Exhibit 2.1(a)(ii)  attached hereto and any benefits of any insurance coverage (to the extent transferable) related to the foregoing properties, assets and Contracts (collectively, clauses (i) and (ii), the “ Purchased Internet Assets ”).

 

(b)          Subject to Section 10.17 hereof, within five (5) Business Days following the receipt of a required landlord consent to the assignment of, or the satisfaction of a notice requirement under, any lease identified on the “Preferred List” on  Exhibit 2.1(b)(i)  attached hereto (each, an “ Acquired Lease ”), the Seller shall deliver to the Real Estate Buyer one or more notices stating that such consent has been received or such notice requirement has been satisfied (each, a “ Closing Notice ”); provided that with respect to any Acquired Lease for which no consent or notice to assignment is required, the Seller shall give the Closing Notice within ten (10) Business Days of the Internet Closing Date; provided , further, that in the event Seller has not by January 31, 2008 negotiated extensions to those leases on the Preferred List on Exhibit 2.1(b)(i) with lease expiration dates earlier than February 28, 2018, including any options to renew, to provide for lease expiration dates of later than February 28, 2018 and otherwise on substantially the same terms as the current lease or on terms consistent with fair market value, Real Estate Buyer shall have the option of (a) purchasing such leases at the amount set forth in Section 2.5(b)(i) hereto or (b) selecting a lease from the Alternate List on Exhibit 2.1(b)(i) and any leases so selected shall be deemed to be an “Acquired Lease” in lieu of the lease for which Seller was unable to receive an extension or (c) so long as the Real Estate Buyer purchases no fewer than fifteen (15) leases, terminating its obligation to purchase such lease.  Each Closing Notice shall specify the Real Estate Closing Date for the closing of the purchase of the applicable Acquired Lease (which Real Estate Closing Date shall be as soon as reasonably practicable but in no event later than February 29, 2008).  On such Real Estate Closing Date and subject to the provisions of this Agreement, the Seller shall sell, transfer and assign or shall cause its appropriate Affiliate to sell, transfer and assign to the Real Estate Buyer free and clear from any and all Liens (other than Permitted Liens that are not Terminable Liens), and the Real Estate Buyer shall purchase all right, title and interest the Seller Group possesses in and to the properties, assets and Contracts listed on Exhibit 2.1(b)(ii)  attached hereto and any benefits of any insurance coverage (to the extent transferable) related to the foregoing properties, assets and Contracts (collectively, the “ Purchased Real Estate Assets ”).

 

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2.2        Retained Assets .

 

(a)           The Purchased Internet Assets shall not include any assets, rights or properties not identified in Section 2.1(a).  Without limiting the generality of the foregoing sentence and notwithstanding anything to the contrary herein, the Seller or its Affiliates shall retain all of their respective right, title and interest in and to, and shall not, and shall not be deemed to, sell, transfer, assign, convey or deliver to the Internet Buyers, and the Purchased Internet Assets shall not, and shall not be deemed to, include, the assets, rights or properties described in Exhibit 2.2(a)  attached hereto.

 

(b)          The Purchased Real Estate Assets shall not include any assets, rights or properties not identified in Section 2.1(b).  Without limiting the generality of the foregoing sentence and notwithstanding anything to the contrary herein, the Seller or its Affiliates shall retain all of their respective right, title and interest in and to, and shall not, and shall not be deemed to, sell, transfer, assign, convey or deliver to the Real Estate Buyer, and the Purchased Real Estate Assets shall not, and shall not be deemed to, include, the assets, rights or properties described in Exhibit 2.2(b)  attached hereto.

 

2.3        Assumed Liabilities .

 

(a)           Upon the terms and subject to the conditions set forth in this Agreement, the applicable Internet Buyer hereby assumes and agrees to pay, perform and discharge when due all Liabilities of the Seller Group whether arising on, prior to or after the Internet Closing Date, to the extent arising out of or relating to, or incurred in connection with any sales by the Seller with respect to the Transferred Internet Business which result in the return of merchandise in accordance with the Seller’s return policy in effect as of the date of the sale of such merchandise, and all Liabilities of the Seller Group arising after the Internet Closing Date to the extent arising out of or relating to, or incurred in connection with the Assigned Internet Contracts or any of the other Purchased Internet Assets (collectively, the “ Assumed Internet Liabilities ”).  The assumption of the Assumed Internet Liabilities by the Internet Buyers shall not enlarge any rights of third parties under any Contract or arrangement with the Internet Buyers or the Seller, and nothing herein shall prevent any Party from contesting in good faith with any third party any Liability.

 

(b)          Upon the terms and subject to the conditions set forth in this Agreement, the Real Estate Buyer hereby assumes and agrees to pay, perform and discharge when due all Liabilities of the Seller Group arising after any Real Estate Closing Date, to the extent arising out of or relating to, or incurred in connection with any of the Assigned Contracts relating to or any of the other Purchased Real Estate Assets transferred on such Real Estate Closing Date (collectively, the “ Assumed Real Estate Liabilities ”).  The assumption of the Assumed Real Estate Liabilities by the Real Estate Buyer shall not enlarge any rights of third parties under any Contract or arrangement with the Real Estate Buyer or the Seller, and nothing herein shall prevent any Party from contesting in good faith with any third party any Liability.

 

2.4        Retained Liabilities .  The Buyers do not assume, or agree to pay, perform, discharge or be responsible for, any Liability (other than Assumed Liabilities and other Liabilities for which Buyers are responsible under the terms of this Agreement) of any member

 

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of the Seller Group or any Affiliates or predecessors thereof, whether known or unknown, accrued, absolute, fixed, contingent, or otherwise, and whether now existing or hereafter arising (collectively, the “ Retained Liabilities ”).  Without limiting the generality of the foregoing sentence, the Assumed Liabilities shall not, and shall not be deemed to, include any of the following Liabilities:

 

(a)           any outstanding royalties, accounts payable, warranty claims, rebate obligations, gift card obligations or Liabilities relating to the employment of employees;

 

(b)          any Liabilities for Taxes related to the Transferred Internet Business or the Purchased Internet Assets for any tax period ending on or prior to the Internet Closing (or attributable to the pre-closing period for tax periods beginning before but ending after the Internet Closing Date (but only for such portions of such periods prior to the Internet Closing Date)), any Liabilities for any Taxes related to the Transferred Real Estate Business or Purchased Real Estate Assets for any tax period ending on or prior to its applicable Real Estate Closing (or attributable to the pre-closing period for tax periods beginning before but ending after the applicable Real Estate Closing (but only for such portions of such periods prior to the applicable Real Estate Closing Date)), any Liabilities for Taxes with respect to any ongoing tax audits and any Taxes resulting from failure to comply with applicable bulk sales laws;

 

(c)           any Liabilities arising out of or resulting from (i) any legal proceeding related to the Transferred Internet Business or any Transferred Real Estate Business pending or threatened as of the Internet Closing Date or the applicable Real Estate Closing Date, respectively, (ii) any legal proceeding related to the Transferred Internet Business or the Transferred Real Estate Business filed after the Internet Closing Date or the applicable Real Estate Closing Date, as the case may be, relating to events occurring prior to such date or (iii) any actual or alleged violation of any Applicable Law related to the Transferred Internet Business or Transferred Real Estate Business relating to events occurring prior to the Internet Closing or the applicable Real Estate Closing Date, respectively; and

 

(d)          any Liability for any chargeback actually deducted prior to, on or after the date hereof, to the extent such chargeback relates to a transaction which occurred prior to the Internet Closing Date (with respect to any Purchased Internet Asset) or the applicable Real Estate Closing Date (with respect to any Purchased Real Estate Asset).

 

2.5        Purchase Price and Payment .

 

(a)           In addition to the assumption of the Assumed Internet Liabilities, the total aggregate purchase price of the Purchased Internet Assets shall be the sum of Eighteen Million Nine Hundred Thousand dollars ($18,900,000). The Trade Name Buyer and the Domain Name Buyer shall deliver to the Seller their respective portions of the purchase price of the Purchased Internet Assets (respectively, the “ Domain Name Purchase Price ” and the “ Trade Name Purchase Price ”) by wire transfer of immediately available funds, to an account or accounts designated in writing by the Seller to the Internet Buyers, no later than 4:00 p.m. on the Internet Closing Date.

 

(b)          In addition to the assumption of the applicable Assumed Real Estate Liabilities, the total aggregate purchase price of the Purchased Real Estate Assets with respect to

 

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each of the Acquired Premises shall be equal to the sum of: (i) the amount set forth opposite such Acquired Premises on Exhibit 2.1(b)(i)  hereto, which such amount shall be pro rated in accordance with the formula in Exhibit 2.1(b)(i)  in the event that the remaining term of such Acquired Lease is less than ten (10) years including any option to renew at substantially the same rent and conditions; and (ii) $60,000 (for each of the Acquired Premises, the “ Real Estate Purchase Price ”).  The Real Estate Buyer shall deliver to the Seller the applicable Real Estate Purchase Price by wire transfer of immediately available funds, to an account or accounts designated in writing by the Seller to the Real Estate Buyer, no later than 4:00 p.m. on the applicable Real Estate Closing Date.

 

2.6        Closing .

 

(a)           The closing of the purchase and sale of the Purchased Internet Assets and assumption of the Assumed Internet Liabilities (the “ Internet Closing ”) shall be held at the offices of Curtis, Mallet-Prevost, Colt & Mosle LLP at 101 Park Avenue, New York, NY 10178, at 4:00 p.m. on January 9, 2008, or at such other date, time or place as the Parties may mutually agree (the “ Internet Closing Date ”).

 

(b)          The closing of the purchase and sale of any Purchased Real Estate Assets and assumption of the applicable Assumed Real Estate Liabilities (a “ Real Estate Closing ”) shall be held at the offices of Curtis, Mallet-Prevost, Colt & Mosle LLP at 101 Park Avenue, New York, NY 10178, at 4:00 p.m. on the date set forth in the applicable Closing Notice, or at such other date, time or place as the Parties may mutually agree (a “ Real Estate Closing Date ”).

 

2.7        Transfer of the Purchased Assets .

 

(a)           At the Internet Closing, the Purchased Internet Assets shall be sold, conveyed, transferred, assigned and delivered, and the Assumed Internet Liabilities shall be assumed, pursuant to transfer and assumption agreements and such other instruments in such form as may be necessary or appropriate to effect a conveyance of the Purchased Internet Assets and an assumption of the Assumed Internet Liabilities in the jurisdictions in which such transfers and assumptions are to be made.  Such transfer and assumption agreements shall be jointly prepared by the Seller and the Internet Buyer and shall include (to the extent applicable): (i) a bill of sale in substantially the form attached hereto as Exhibit 2.7(a)(i)  (the “ Bill of Sale ”), (ii) an assignment and assumption agreement in substantially the form attached hereto as Exhibit 2.7(a)(ii)  (the “ Assignment and Assumption Agreement ”), (iii) assignments in substantially the form attached hereto as Exhibit 2.7(a)(iii)  (the “ Intellectual Property Assignment Agreements ”), (iv) a license in substantially the form attached hereto as Exhibit 2.7(a)(iv)  (the “ Trademark License Agreement ”), and (v) such other deeds, bills of sale, assignments, certificates of title, documents and other instruments of transfer and conveyance as may reasonably be required to effect the purchase and assignment of the Purchased Internet Assets and the assumption of the Assumed Internet Liabilities in form and substance reasonable satisfactory to the Internet Buyers and the Seller (collectively, clauses (i) through (v), the “ Internet Transfer Instruments ”).

 

(b)          At any Real Estate Closing, the applicable Purchased Real Estate Assets shall be sold, conveyed, transferred, assigned and delivered, and the applicable Assumed Real Estate Liabilities shall be assumed, pursuant to transfer and assumption agreements and such other

 

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instruments in such form as may be necessary or appropriate to effect a conveyance of the applicable Purchased Real Estate Assets and an assumption of the applicable Assumed Real Estate Liabilities in the jurisdictions in which such transfers and assumptions are to be made.  Such transfer and assumption agreements shall be jointly prepared by the Seller and the Real Estate Buyer and shall include (to the extent applicable): (i) a Bill of Sale, (ii) an Assignment and Assumption Agreement, (iii) lease assignments with respect to any Acquired Lease in form and substance reasonably acceptable to Real Estate Buyer and Seller (the “ Lease Assignments ”) or such other appropriate document or instrument of transfer, as the case may require, each in form and substance reasonably satisfactory to the Real Estate Buyer and the Seller, and (iv) such other deeds, bills of sale, assignments, certificates of title, documents and other instruments of transfer and conveyance as may reasonably be required to effect the purchase and assignment of the applicable Purchased Real Estate Assets and the assumption of the applicable Assumed Real Estate Liabilities in form and substance reasonable satisfactory to the Real Estate Buyer and the Seller (collectively, clauses (i) through (iv), the “ Real Estate Transfer Instruments ”).

 

2.8        Further Assurances; Shared Assets .

 

(a)           The Parties from time to time after the Internet Closing and any Real Estate Closing and without further consideration shall execute and deliver further instruments of transfer and assignment and take such other action as a Party may reasonably request to more effectively transfer and assign to, and vest in, the Internet Buyers the Purchased Internet Assets (excluding the Purchased Internet Assets described on Exhibit 1.1 hereof) and the Assumed Internet Liabilities and the Real Estate Buyer the Purchased Real Estate Assets and the Assumed Real Estate Liabilities, as the case may be.

 

(b)          On or after a Real Estate Closing Date with respect to an Acquired Premises, and at the request of the Real Estate Buyer, the Seller shall use commercially reasonable efforts to facilitate the transfer from a lessor of equipment to the Real Estate Buyer of leased equipment at such Acquired Premises subject, in each case, to the assignability of the lease with respect to such equipment, the Real Estate Buyer’s assuming liabilities under any such lease, and the Real Estate Buyer paying any expenses related to the transfer of the leased equipment and the lease.

 

(c)           The Seller shall, or shall cause its Affiliates to use commercially reasonable  efforts to obtain each landlord’s consent to the assignment to the Real Estate Buyer of the Acquired Leases, but shall not be required to commence judicial proceedings for a declaration that a required consent has been unreasonably withheld or delayed.  The Seller shall not, and shall not permit any of its Affiliates to, (i) take any action to solicit, initiate, encourage or assist the submission of any proposal, negotiation or offer from any person or entity other than the Real Estate Buyer to the sale of the Purchased Real Estate Assets or the assignment of the Acquired Leases or (ii) respond to any inquiry or enter into any discussions, negotiations or execute any agreement related to the foregoing (it being understood, for the avoidance of doubt, that the Seller’s obligations under this Section 2.8(c) shall terminate with respect to any Purchased Real Estate Assets and/or Acquired Lease, the sale of which is terminated pursuant to Section 10.17 hereof).

 

(d)          The Internet Buyers and the Seller agree to use commercially reasonable efforts to complete the Internet Transfer Instruments following the Internet Closing, including

 

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but not limited to the individual country trademark assignment documents necessary to pass title to the appropriate Internet Buyer.  The Seller agrees to execute such individual country trademark assignment documents at its own expense, and the Internet Buyers shall be responsible for all costs associated with any legalization and recording requirements for such assignment documents.

 

(e)           As of the date hereof, certain of the Purchased Assets are used by the Seller Group in connection with both the Transferred Businesses and the Retained Businesses (the “ Shared Assets ”).  The Buyers and the Seller agree to cooperate in good faith to execute by the Internet Closing Date such documents as are necessary to provide the Seller with reasonable access to, and use of, the Shared Assets for a period of up to ninety (90) days (or up to 12 months with respect to email addresses) following the Internet Closing Date.  For one year following the Internet Closing Date (the “ Initial Year ”), the Seller may retain a copy of the Specified Data and shall not use the Specified Data without the consent of the Buyers (such consent not to be unreasonably withheld) other than (i) to allow the Seller to comply with tax audits and tax reporting, (ii) to allow the Seller to respond to governmental inquires and reporting requirements and (iii) for reasonable use in connection with litigation (collectively, clauses (i) through (iii), the “ Permitted Uses ”); provided , however , that the Seller shall promptly notify the Buyers of any Permitted Use of the Specified Data.  Within the Initial Year and upon five (5) Business Days’ notice by the Buyers to the Seller, the Seller shall afford to the Buyers and their authorized personnel and representatives reasonable access during normal business hours for reasonable investigation of the use of the Specified Data and the measures used by the Seller to secure the Specified Data.  At the request of the Buyers and only to the extent that it is commercially reasonable, the Seller shall cure any defect identified by the Buyers with respect to the measures used by the Seller to secure the Specified Data.  In addition, within five (5) Business Days of the Internet Closing Date, the Seller will give to the Buyers documentation describing the measures used by the Seller to secure the Specified Data and, if the Buyers reasonably object to such measures, shall make such commercially reasonable improvements thereto that the Buyers reasonably request.  Prior to or on the first (1 st ) anniversary of the Internet Closing Date, the Seller shall store the Specified Data in, or otherwise transfer the Specified Data to, a mutually acceptable, commercially reasonable third party data security firm, escrow or similar security mechanism (a “ Data Escrow ”), and shall permanently erase, purge and otherwise destroy any and all other copies of the Specified Data.  After the first (1 st ) anniversary of the Internet Closing Date, the Seller may access the Specified Data only with the consent of the Buyers (such consent not to be unreasonably withheld or delayed); provided , that if the Seller requires access to the Specified Data for a Permitted Use and it is impractical to wait for the Buyers’ consent, the Seller may access the Specified Data upon five (5) Business Days’ notice to the applicable Data Escrow and the Buyers.  If the Buyers reasonably object to the Seller’s access to the Specified Data within such five-Business Day period, the Parties shall reasonably agree on reasonable terms for the Seller to access the Specified Data.  The Seller shall not at any time use the Specified Data to send, or cause to be sent, any correspondence to any Person.  The Parties will take reasonable steps that are at least consistent with the industry standard to secure the Specified Data.  From and after the Internet Closing Date, the Seller and the Seller Group shall discontinue all use of the Intellectual Property purchased by the Internet Buyers under this Agreement and neither the Seller nor any of its Affiliates shall infringe any trademark, tradename or other Intellectual Property transferred to the Internet Buyers hereunder; provided , however , that the

 

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Seller shall have a limited and non-exclusive right and license to use certain trademarks and tradenames for the purpose of conducting certain aspects of the Retained Businesses for a period of up to ninety (90) days following the Internet Closing Date pursuant to the terms of the Trademark License Agreement, which license shall provide for Seller’s use of “compusa.com” email addresses through Buyer’s servers.  Prior to or on the second (2 nd ) anniversary of the Internet Closing Date, Systemax and each of the Buyers shall, and shall cause their Affiliates to store the Specified Data in, or otherwise transfer the Specified Data to, a Data Escrow and permanently erase, purge and otherwise destroy all other copies of the Specified Data, other than such data relating to any individual who has accepted the provisions of any privacy policy or other contract that contains terms governing the collection, receipt, use, disclosure and transfer of such data and that is effective after the Internet Closing Date (whether by purchasing a product from the Internet Buyers or otherwise).

 

2.9        Allocation of Purchase Price .

 

(a)           Within ninety (90) days after each of the Internet Closing and any Real Estate Closing, the Internet Buyers and the Real Estate Buyer, as applicable, shall prepare an allocation of the Trade Name Purchase Price and Domain Name Purchase Price and the applicable Real Estate Purchase Price (and all other capitalized costs) among the Purchased Internet Assets and the applicable Purchased Real Estate Assets, respectively, in accordance with Section 1060 of the Code (the “ Allocation Schedules ”).

 

(b)          If the Seller gives written notice to a Buyer of its dissatisfaction with an Allocation Schedule within fifteen (15) Business Days after receipt thereof, such Buyer and the Seller shall cooperate in good faith with each other and negotiate in good faith for a period of ten (10) Business Days to resolve any disputed items.  If such Parties fail to agree on such allocation, the dispute shall be submitted to an independent Big Four accounting firm mutually acceptable to Seller and the applicable Buyer (the “ Neutral Accounting Firm ”), whose decision shall be binding on all parties. The Buyers, Systemax and the Seller shall file all Tax returns (including IRS form 8594) consistently therewith (to the extent such filing is required by Applicable Law).  The Seller shall cooperate with a Buyer’s or Systemax’s reasonable requests in connection with the preparation by a Buyer or Systemax of the Allocation Schedules.  No Party shall take any position (whether in a Tax return or otherwise) that is inconsistent with the finally determined Allocation Schedules, unless required to do so by Applicable Law or any Order.  All costs and expenses of any independent accountant shall be paid by the Internet Buyer or Real Estate Buyer which prepared the applicable Allocation Schedule; provided that the costs expenses of the Neutral Accounting Firm shall be shared equally by the applicable Buyer and Seller.

 

2.10                         Non-Assignable Assets .

 

(a)           Notwithstanding anything to the contrary contained in this Agreement, if any of the Assigned Contracts or other Purchased Assets or Assumed Liabilities (other than the Acquired Leases or Specified Data) are not assignable, assumable or transferable (each, a “ Non-Assignable Asset ”) without the consent of, or waiver by, a third party (each, an “ Assignment Consent ”), either as a result of the provisions thereof or of Applicable Law, and any of such Assignment Consents are not obtained on or prior to the applicable Closing Date, the applicable Buyer shall discharge and perform the obligations arising under any such Non-Assignable Asset

 

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from and after such Closing Date, to the extent provided under Section 2.3, but no Non-Assignable Asset shall be included in the Purchased Assets or Assumed Liabilities and transferred hereunder unless and until an Assignment Consent is obtained with respect thereto.

 

(b)          Following the Internet Closing Date and any Real Estate Closing Date, the Parties shall use commercially reasonable efforts, and shall cooperate with each other, to obtain promptly each Assignment Consent; provided , however , that neither Party nor any of its Affiliates shall be required to pay any consideration therefor.  Subject to Section 10.3(b), once such Assignment Consent is obtained, the Seller shall, or shall cause its Subsidiaries to, sell, transfer and assign such Non-Assignable Asset to the applicable Buyer for no additional consideration.

 

(c)           To the extent that any Non-Assignable Asset cannot be provided to the applicable Buyer following a Closing pursuant to this Section 2.10, the applicable Buyer and the Seller shall use commercially reasonable efforts to enter into such arrangements (including, without limitation, subleasing, sublicensing or subcontracting) and take such other commercially reasonable actions to provide to the applicable Parties the economic (taking into account Tax costs and benefits) and, to the extent permitted under Applicable Law, operational equivalent of obtaining such Assignment Consent and the performance by the applicable Buyer of its obligations thereunder.  To the extent permitted under Applicable Law, the Seller shall hold in trust for and pay to the applicable Buyer promptly upon receipt thereof, such Non-Assignable Assets and all income, proceeds and other monies received by the Seller to the extent related to any such Non-Assignable Asset in connection with the arrangements under this Section 2.10.  The Seller shall be permitted to set off against such amounts all direct costs and expenses associated with the retention and maintenance of such Non-Assignable Assets.

 

ARTICLE 3. REPRESENTATIONS AND WARRANTIES AND DISCLOSURES OF THE SELLER WITH RESPECT TO THE PURCHASED INTERNET ASSETS.

 

Except as set forth herein or in the Seller’s disclosure schedule accompanying this Agreement (the “ Seller Disclosure Schedule ”), the Seller represents and warrants to the Internet Buyers as follows (with each representation and warranty being made as of the date of this Agreement, other than those made as of a specified date, which shall be made as of such specified date):

 

3.1        Corporate Existence and Qualification of the Seller; Title to Purchased Assets; Due Execution, Stockholders, Etc.

 

(a)           The Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to conduct the business of the Transferred Internet Business through the Internet Closing Date and to own or lease and to operate the Purchased Internet Assets as and in the places where such business is conducted and where the Purchased Internet Assets are owned, leased or operated.

 

(b)          Except as set forth in Section 3.1(b) of the Seller Disclosure Schedule, the Seller Group owns all of the Purchased Internet Assets free and clear of all Liens, other than

 

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Permitted Liens.   The Seller and each member of the Internet Seller Group is duly qualified to transact business and is in good standing in jurisdictions where the nature of the properties owned or leased by it or the activities conducted by it make such qualifications necessary.

 

(c)           The Seller has all requisite corporate power and authority to enter into and deliver this Agreement and perform its obligations under this Agreement and to consummate the transactions contemplated hereby.  The execution, delivery and performance of this Agreement by the Seller and the consummation by the Seller of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Seller and its shareholder.  This Agreement has been duly executed and delivered by the Seller and, assuming the due authorization, execution and delivery by the Buyers and Systemax, this Agreement constitutes the legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and subject, as to enforceability, to general principles of equity, including, without limitation, principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity).

 

(d)          Each member of the Internet Seller Group has all requisite corporate or other power and authority to enter into and deliver the Internet Transfer Instruments to which it is a party and perform its obligations thereunder and to consummate the transactions contemplated thereby.  The execution, delivery and performance of such Internet Transfer Instruments by each member of the Internet Seller Group signatory thereto and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary corporate or other action on the part of such Person and its shareholder.  Each Internet Transfer Instrument has been duly executed and delivered by the appropriate members of the Internet Seller Group and, assuming the due authorization, execution and delivery by the Internet Buyer, such Internet Transfer Instrument constitutes the legal, valid and binding obligation of the member of the Internet Seller Group, enforceable against such Person in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and subject, as to enforceability, to general principles of equity, including, without limitation, principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity).

 

(e)           The Seller owns, directly or indirectly, all of the issued and outstanding capital stock or other equity interests in each member of the Internet Seller Group, in each case free and clear of any Lien and the Seller has all rights to vote and transfer such capital stock and equity interests without restriction.

 

3.2        No Violation .  Except as set forth in Section 3.2 of the Seller Disclosure Schedule, neither the execution and delivery by the Seller of this Agreement, the execution and delivery of the Internet Transfer Instruments, nor the consummation by the Seller of the transactions contemplated hereby: (i) violates or will violate any Applicable Law with respect to the Internet Seller Group; (ii) violates or will violate any Order of Governmental Authority applicable to the Internet Seller Group; (iii) conflicts or will conflict with, or results or will result in a breach of or default under, the Organizational Documents of any member of the Internet

 

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Seller Group; or (iv) requires any consent, authorization, or approval from, or registration or filing with, any Governmental Authority (not obtained or made as of the Closing Date), except for consents that, if not so authorized, approved, registered or filed, would not have an Internet Business Material Adverse Effect.

 

3.3        Taxes .

 

(a)           Except for certain ongoing state sales Tax audits listed on Section 3.3(a) of the Seller Disclosure Schedule, no Legal Proceeding or other claim for assessment or collection of Taxes relating to or otherwise affecting the Purchased Internet Assets is currently pending or, to the Seller’s Knowledge, has been asserted against the Internet Seller Group.

 

(b)          All Tax returns required to be filed on or before the Closing Date relating to the Purchased Internet Assets have been or will be filed on a timely basis in all jurisdictions in which such Tax returns are required to be filed (taking into account any extension of time to file granted or to be obtained on behalf of the Seller Group) and all Taxes shown as due and owing on each such Tax return have been paid in full.  All such Tax returns were correct and complete in all material respects.

 

(c)           The Seller Group has not entered into any agreement, whether or not written, providing for the payment of Taxes or entitlement to refunds and related matters with any other party relating to or otherwise affecting the Purchased Internet Assets.  None of the Purchased Internet Assets has in the past been held, and none of the Purchased Internet Assets will immediately prior to the Internet Closing Date be held, in an arrangement for which Tax returns as a partnership have been or may be filed.

 

(d)          Other than as disclosed on Section 3.3(d) of the Seller Disclosure Schedule, no claim, deficiency or adjustment has been asserted or proposed in writing against the Internet Seller Group with respect to any Tax relating to or otherwise affecting the Purchased Internet Assets.

 

(e)           The Purchased Internet Assets are free of any Tax Liens.

 

(f)             Each of the Seller and each member of the Internet Seller Group is a “United States Person” within the meaning of Section 7701(a)(30) of the Code of the U.S. Internal Revenue Service.

 

3.4        Compliance With Laws; Office of Foreign Assets Control .  Section 3.4 of the Seller Disclosure Schedule lists each potential violation of Applicable Law or series of related potential violations of Applicable Law by the Internet Seller Group relating to the Purchased Internet Assets as to which the aggregate Liability of the Internet Seller Group (with respect to each such violation or series of related violations) could reasonably be expected to exceed $100,000.  The Internet Seller Group (with respect to the Purchased Internet Assets) i s not in violation of any requirements of Applicable Law relating to money laundering, anti-terrorism, trade embargoes and economic sanctions, including, without limitation, Executive Order 13224 (66 Fed. Reg. 49079 (Sept. 23, 2001)).

 

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3.5        Commitments .  Section 3.5 of the Seller Disclosure Schedule lists (i) any Contract by the Seller or the Internet Seller Group gra nting to any person a first-refusal, first-offer or other right to purchase or acquire or assume, directly or indirectly, the Transferred Internet Business or any of the Purchased Internet Assets, (ii) any Assigned Material Commitment under which any party thereto is in default which default is material to the Purchased Internet Assets or the Transferred Internet Business and (iii) any Assigned Material Commitment under which a breach would occur, and any Lien that would be created, due to the execution and delivery by the Seller of this Agreement or the consummation by the Seller of the transactions contemplated hereby.

 

3.6        Intellectual Property (a)   Section 3.6(a) of the Seller Disclosure Schedule sets forth a list of (i) all Intellectual Property owned by the Seller and the Internet Seller Group and relating to the Transferred Internet Business that is filed or registered with the United States Patent and Trademark Office, the United States Copyright Office, or the Trademark, Patent or Copyright office (or other Intellectual Property registration authority) of a state in the United States, any country or any other jurisdiction; and (ii) all Domain Names owned by the Seller and the Internet Seller Group and relating to the Transferred Internet Business; (collectively with any material unregistered Trademarks and Copyrights owned by the Seller and the Internet Seller Group and relating to the Transferred Internet Business, the “ Seller Owned Intellectual Property ”).  The Internet Seller Group does not own any issued Patents or applications therefor.

 

(b)                                  There are no material Contracts pursuant to which any third party is authorized to use any Seller Owned Intellectual Property, including without limitation licenses of Software and except as otherwise set forth on Section 3.6(b) of the Seller Disclosure Schedule, there are no material Contracts pursuant to which the Seller or the Internet Seller Group is licensed to use Intellectual Property owned by a third party and relating to the Transferred Internet Business including without limitation licenses of Software (but not including generally available “off-the-shelf” software) (the “ Third Party Licenses ”; the Intellectual Property licensed pursuant to the Third Party Licenses together with the Seller Owned Intellectual Property, collectively the “ Seller Intellectual Property ”).  To the Knowledge of the Seller, each of the Third Party Licenses is valid and enforceable against the Seller and the other party or parties thereto, in accordance with its terms.  To the Knowledge of the Seller, neither the Seller nor any member of the Internet Seller Group is in default in the performance, observance or fulfillment of any material obligation, covenant or condition contained in any Third Party License.

 

(c)                                   E xcept as set forth on Section 3.6(c) of the Seller Disclosure Schedule:

 

(i)                                      Seller and the Internet Seller Group owns or is otherwise authorized or licensed to use all Seller Intellectual Property.  The Seller Intellectual Property is all Intellectual Property necessary for the conduct of the Transferred Internet Business as presently conducted, and is sufficient in all material respects for the conduct of such Transferred Internet Business.

 

(ii)                                   To the Knowledge of the Seller, no Person is infringing upon, misappropriating, or otherwise violating the Seller Intellectual Property.  To the Knowledge of the Seller, the use of the Seller Intellectual Property in connection with the operation of the Transferred Internet Business as presently conducted does not conflict with, infringe upon or

 

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violate any Intellectual Property of any Person.  There are no Legal Proceedings pending, or to the Knowledge of the Seller threatened, related to the Seller Intellectual Property.

 

(iii)                                Except as set forth in Section 3.6(c)(iii) of the Seller Disclosure Schedule, the execution, delivery and performance of this Agreement and the other Internet Transfer Instruments, and the consummation of the transaction contemplated hereby and thereby, will not, to Knowledge of the Seller, constitute a material breach of any Contract involving any Seller Intellectual Property, nor cause the forfeiture or termination of any Seller Intellectual Property.

 

(iv)                               The Seller and each member of the Internet Seller Group takes commercially reasonable efforts to maintain in confidence, and to ensure the physical and electronic protection of, its Software, technology, websites, Trade Secrets, Specified Data and other confidential Intellectual Property and information assets from unauthorized access, disclosure, use or modification.  To the Knowledge of the Seller, there has been no unauthorized access, disclosure, use or modification, or other breach of security involving any Software, technology, websites, Trade Secrets, Specified Data or other Confidential Information or information assets relating to the Transferred Internet Business.  To the Knowledge of the Seller, all data including Specified Data that has been collected, stored, maintained or otherwise used by the Internet Seller Group and relating to the Transferred Internet Business has been collected, stored, maintained and otherwise used in accordance with Applicable Law.  Neither Seller nor any member of the Internet Seller Group has received a notice of noncompliance with or other violation of Applicable Law relating to such data and Specified Data including without limitation applicable data protection and privacy laws, rules and regulations.  As of the Internet Closing Date, CompUSA Holdings II Inc. will be the sole owner of the Specified Data.  Other than as set forth in this Section 3.6(c)(iv), neither Seller nor any member of the Internet Seller Group has sold, transferred, licensed or otherwise distributed the Specified Data or any other Seller Intellectual Property to any Person prior to the Internet Closing Date.  The Specified Data shall include, but shall not be limited to, customer names, customer mail addresses, customer email addresses and customer purchase history of customers of the Transferred Internet Business.  Notwithstanding anything in this Agreement to the contrary, Specified Data shall not contain credit card information, social security numbers or driver’s license numbers.

 

3.7        Litigation .  Except with respect to any Legal Proceedings regarding which the aggregate Liability of the Internet Seller Group thereunder, after recovery by the Internet Seller Group of all available insurance proceeds with respect thereto, is reasonably expected to be less than $100,000, Section 3.7 of the Seller Disclosure Schedule lists (a) all Orders applicable to, and (b) all Legal Proceedings pending, or to the Seller’s Knowledge, threatened against, the Internet Seller Group with respect to the Transferred Internet Business.

 

3.8        Finder’s Fee .  Neither the Seller nor any member of the Internet Seller Group has incurred or become liable for any broker’s commission or finder’s fee relating to or in connection with the transactions contemplated by this Agreement.

 

3.9        No Undisclosed Liabilities .  As of the date hereof and as of the Internet Closing Date, CompUSA Holdings II Inc. has no liabilities (whether absolute, accrued, contingent or otherwise), other than (i) liabilities incurred in connection with this Agreement and

 

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the transactions contemplated hereby, (ii) liabilities set forth in Section 3.9 of the Seller Disclosure Schedule or (iii) the Terminable Liens.

 

ARTICLE 4. REPRESENTATIONS AND WARRANTIES AND DISCLOSURES OF THE SELLER WITH RESPECT TO THE PURCHASED REAL ESTATE ASSETS.

 

Except as set forth herein or in the Seller Disclosure Schedule, the Seller represents and warrants to the Real Estate Buyer as follows (with each representation and warranty being made as of the date of this Agreement, other than those made as of a specified date, which shall be made as of such specified date):

 

4.1        Corporate Existence and Qualification of the Seller; Title to Purchased Assets; Due Execution, Stockholders, Etc.

 

(a)           The Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to conduct the business of the Transferred Real Estate Business through the Internet Closing Date and to own or lease and to operate the Purchased Real Estate Assets as and in the places where such business is conducted and where the Purchased Real Estate Assets are owned, leased or operated.

 

(b)          Except as set forth in Section 4.1(b) of the Seller Disclosure Schedule, the Seller Group owns all of the applicable Purchased Real Estate Assets free and clear of all Liens, other than    The Seller and each applicable member of the Real Estate Seller Group is duly qualified to transact business and is in good standing in jurisdictions where the nature of the properties owned or leased by it or the activities conducted by it make such qualifications necessary.

 

(c)           The Seller has all requisite corporate power and authority to enter into and deliver this Agreement and perform its obligations under this Agreement and to consummate the transactions contemplated hereby.  The execution, delivery and performance of this Agreement by the Seller and the consummation by the Seller of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Seller and its shareholder.  This Agreement has been duly executed and delivered by the Seller and, assuming the due authorization, execution and delivery by the Buyer and Systemax, this Agreement constitutes the legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and subject, as to enforceability, to general principles of equity, including, without limitation, principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity).

 

(d)          The Seller owns, directly or indirectly, all of the issued and outstanding capital stock or other equity interests in each member of the Real Estate Seller Group, in each case free and clear of any Lien and the Seller has all rights to vote and transfer such capital stock and equity interests without restriction.

 

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4.2        No Violation .  Neither the execution and delivery by the Seller of this Agreement, the execution and delivery of the applicable Real Estate Transfer Instruments, nor the consummation by the Seller of the transactions contemplated hereby: (i) violates or will violate any Applicable Law with respect to the applicable members of the Real Estate Seller Group; (ii) violates or will violate any Order of Governmental Authority applicable to the applicable members of the Real Estate Seller Group; (iii) conflicts or will conflict with, or results or will result in a breach of or default under, the Organizational Documents of any applicable member of the Real Estate Seller Group; or (iv) requires any consent, authorization, or approval from, or registration or filing with, any Governmental Authority (not obtained or made as of the Closing Date), except

 

4.3        Taxes .

 

(a)           Except for certain ongoing state sales Tax audits listed on Section 4.3(a) of the Seller Disclosure Schedule, no Legal Proceeding or other claim for assessment or collection of Taxes relating to or otherwise affecting the applicable Purchased Real Estate Assets is currently pending or, to the Seller’s Knowledge, has been asserted against the applicable members of the Real Estate Seller Group.

 

(b)          All Tax returns required to be filed on or before the Closing Date relating to the Purchased Real Estate Assets have been or will be filed on a timely basis in all jurisdictions in which such Tax returns are required to be filed (taking into account any extension of time to file granted or to be obtained on behalf of the Seller Group) and all Taxes shown as due and owing on each such Tax return have been paid in full.  All such Tax returns were correct and complete in all material respects.

 

(c)           The applicable members of the Real Estate Seller Group have not entered into any agreement, whether or not written, providing for the payment of Taxes or entitlement to refunds and related matters with any other party relating to or otherwise affecting the Purchased Real Estate Assets.  None of the Purchased Real Estate Assets has in the past been held, and none of the Purchased Real Estate Assets will immediately prior to the Internet Closing Date be held, in an arrangement for which Tax returns as a partnership have been or may be filed.

 

(d)          Other than as disclosed on Section 4.3(d) of the Seller Disclosure Schedule, no claim, deficiency or adjustment has been asserted or proposed in writing against any applicable member of the Real Estate Seller Group with respect to any Tax relating to or otherwise affecting the Purchased Real Estate Assets.

 

(e)           The Purchased Real Estate Assets are free of any Tax Liens.

 

4.4        Compliance With Laws; Office of Foreign Assets Control .  Section 4.4 of the Seller Disclosure Schedule lists each potential violation of Applicable Law or series of related potential violations of Applicable Law by any applicable member of the Real Estate Seller Group relating to the Purchased Real Estate Assets as to which the aggregate Liability of the applicable members of the Real Estate Seller Group (with respect to each such violation or series of related violations) could reasonably be expected to exceed $100,000.  The applicable members of the

 

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Real Estate Seller Group (with respect to the Purchased Real Estate Assets) are not in violation of any requirements of Applicable Law relating to money laundering, anti-terrorism, trade embargoes and economic sanctions, including, without limitation, Executive Order 13224 (66 Fed. Reg. 49079 (Sept. 23, 2001)).

 

4.5        Commitments .  Section 4.5 of the Seller Disclosure Schedule lists (i) any Contract by the Seller or the applicable members of the Real Estate Seller Group gra nting to any person a first-refusal, first-offer or other right to purchase or acquire or assume, directly or indirectly, the Transferred Real Estate Business or any of the Purchased Real Estate Assets, (ii) any Assigned Material Commitment under which any party thereto is in default which default is material to the Purchased Real Estate Assets or the Transferred Real Estate Business and (iii) any Assigned Material Commitment under which a breach would occur, and any Lien that would be created, due to the execution and delivery by the Seller of this Agreement or the consummation by the Seller of the transactions contemplated hereby.

 

4.6        Intellectual Property .  Section 4.6 of the Seller Disclosure Schedule lists all Intellectual Property owned by the applicable members of the Real Estate Seller Group and relating to the Transferred Real Estate Business that is filed or registered with the United States Patent and Trademark Office, the United States Copyright Office, or the trademark or copyright office of another country, and certain domain names registered to the applicable members of the Real Estate Seller Group and used by the Real Estate Seller Group in connection with the Transferred Real Estate Business.

 

4.7        Litigation .  Except with respect to any Legal Proceedings regarding which the aggregate Liability of the applicable members of the Real Estate Seller Group thereunder, after recovery by the applicable members of the Real Estate Seller Group of all available insurance proceeds with respect thereto, is reasonably expected to be less than $100,000, Section 4.7 of the Seller Disclosure Schedule lists (a) all Orders applicable to, and (b) all Legal Proceedings pending, or to the Seller’s Knowledge, threatened against, the applicable members of the Real Estate Seller Group with respect to the Transferred Real Estate Business.

 

4.8        Finder’s Fee .  Neither the Seller nor any of the applicable members of the Real Estate Seller Group has incurred or become liable for any broker’s commission or finder’s fee relating to or in connection with the transactions contemplated by this Agreement.

 

4.9        Environmental Matters .  Except as disclosed in Section 4.9 of the Seller Disclosure Schedule or, in each case, as would not be reasonably likely to have a Real Estate Business Material Adverse Effect:

 

(a)           To the Knowledge of the Seller, the applicable members of the Real Estate Seller Group have conducted the Transferred Businesses in compliance with all Environmental Laws applicable to such members of the Real Estate Seller Group and, as of the date hereof, the applicable members of the Real Estate Seller Group are in compliance with all Environmental Laws applicable to the Transferred Real Estate Business.

 

(b)          To the Knowledge of the Seller, the applicable members of the Real Estate Seller Group have not received any written notice from any Governmental Authority or any other

 

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Person of any Liability under, violation or alleged violation of any Environmental Law applicable to the Transferred Real Estate Business.

 

(c)           The applicable members of the Real Estate Seller Group have not received any written information request, and there are no Orders or Legal Proceedings outstanding or pending, or to the Knowledge of the Seller, threatened, relating to compliance with or any Liability under any Environmental Law affecting the Transferred Real Estate Business.

 

(d)          To the Knowledge of the Seller, there has not been a Release of any Hazardous Material caused by the applicable members of the Real Estate Seller Group with respect to the Transferred Real Estate Business.

 

4.10        Leases .

 

(a)           To Seller’s Knowledge, each of the Leases set forth on Exhibit 2.1(b)(i) (“ Leases ”) is in full force and effect, none of the parties thereto is in default of any of its obligations thereunder, and no event has occurred that, with the giving of notice or passage of time, or both, would constitute a default thereunder.

 

(b)          Attached hereto as Section 4.10(b) of the Seller Disclosure Schedules is a true and complete list of all of the Leases, true and complete copies of which, including all amendments, supplements and modifications thereto,  have been delivered to Systemax.

 

(c)           No brokerage commission or other compensation is payable by Seller or any member of the Real Estate Seller Group with respect to any Lease.

 

(d)          Neither Seller nor any member of the Real Estate Seller Group has made any prior assignment of a Lease, or entered into any sublease, occupancy agreement, license agreement or other agreement relating to such Lease or premises leased thereby, and the applicable Real Estate Buyer will have full, unfettered, unencumbered right to use and occupy the premises leased under such Lease.  Other than the Permitted Liens, no Lease has been pledged, encumbered, hypothecated or otherwise transferred in any way.

 

ARTICLE 5. COVENANTS OF THE SELLER.

 

Seller hereby makes the following covenants and agreements:

 

5.1        Audited Financial Information .  The Seller shall cooperate with the Buyers’ or Systemax’s reasonable requests in connection with the preparation by the applicable Buyer or Systemax of any audited financial information relating to the Transferred Businesses, including, without limitation, the preparation, on behalf of a Buyer or Systemax, of a manually signed accountants’ report from nationally recognized independent certified public accountants, required to be filed by Systemax with the U.S. Securities and Exchange Commission.  All out-of-pocket costs sustained by any Party in connection therewith, including, without limitation, such costs in connection with auditing of the financial information of the Transferred Businesses, shall be borne by the Buyers.

 

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5.2        Retained Liabilities .  As among the Buyers, Systemax and the Seller, the Seller shall pay and perform any and all of the Retained Liabilities when and as they become due.

 

5.3        Conduct of the Businesses .  Without limiting the foregoing, between the date hereof and until the Internet Closing Date or a Real Estate Closing Date, as applicable, except as required or expressly permitted pursuant to the terms hereof or as the applicable Buyer shall have consented to in writing in advance, the Seller shall not, and shall not permit any of member of the Seller Group to:

 

(a)           enter into, terminate, amend, modify or waive any term of any material transaction, or any client contract or any similar contract or arrangement with respect to the Transferred Internet Business or the Transferred Real Estate Business conducted at any of the Acquired Premises, as applicable; provided, however, that the Seller Group shall be permitted to terminate, amend, modify or waive terms consistent with its plan to wind down its business and otherwise not inconsistent with the terms of this Agreement;

 

(b)          except as provided for herein, renew (unless requested in writing by the applicable Buyer or to extend the term of the lease beyond ten years), terminate, amend, modify or waive any term of the Leases;

 

(c)           mortgage, pledge or subject any of the Purchased Internet Assets or the applicable Purchased Real Estate Assets, or any part thereof, to any Lien or suffer to exist any such Lien, other than (x) Liens which shall be terminated at or before the respective Closing Date and (y) Permitted Liens;

 

(d)          perform any “going out of business sales” with respect to any of the Purchased Real Estate Assets at any of the Acquired Premises; or

 

(e)           commit to do any of the foregoing.

 

5.4        Access to Information .  From the date hereof until any Real Estate Closing, the Seller shall afford to the Real Estate Buyer and its authorized personnel and representatives reasonable access during normal business hours (except as restricted by any applicable confidentiality obligations of the Seller Group) to make such reasonable investigation of the assets, properties, business and operations of the Seller and the applicable members of the Real Estate Seller Group to the extent they relate to the applicable Transferred Real Estate Business or applicable Purchased Real Estate Assets, and such examination of the relevant books and records of the applicable Transferred Real Estate Business as the Real Estate Buyer may reasonably request and to discuss the affairs, finances and accounts of the applicable Transferred Real Estate Business with the personnel thereof.  Any such investigation or examination shall be conducted at times reasonably acceptable to the Seller and upon reasonable prior notice to the Seller identifying any personnel of the Seller and the applicable members of the Real Estate Seller Group with whom the Real Estate Buyer desires to discuss the above referenced matters.  The Seller may designate any person to be present for any such discussion.  To the extent reasonably practical, from the date hereof until any Real Estate Closing, the Seller shall promptly inform the Real Estate Buyer of any and all material matters that arise during such period affecting the

 

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business and operations of the Seller relating to such Transferred Real Estate Business or such Transferred Real Estate Assets.

 

5.5        Terminable Liens .  On or prior to the Internet Closing Date, the Seller shall, or shall cause its Affiliates to, terminate all Terminable Liens on the Purchased Internet Assets.  On or prior to any Real Estate Closing Date, the Seller shall terminate all Terminable Liens on the applicable Purchased Real Estate Assets.

 

5.6        Acquired Lease Consents .  Subject to Section 10.17 hereof, during the period commencing on the date of this Agreement and ending on any Real Estate Closing Date, the Seller shall act in good faith to obtain as soon as reasonably practicable any necessary consents or notices to assign the Acquired Leases and to the extend the remaining term of such leases, to no less than ten years from the applicable Closing Date, including any option to renew at substantially the same rent and conditions.

 

5.7        Satisfaction of Conditions Precedent .  During the period commencing on the date of this Agreement and ending on the Internet Closing Date or any Real Estate Closing Date, the Seller shall act in good faith to satisfy, or cause to be satisfied all of the conditions precedent to the Seller’s obligations to consummate the transactions contemplated by the Internet Closing and the applicable Real Estate Closing, respectively.

 

5.8        Confidential Materials .  The Seller shall use commercially reasonable efforts to remove all personally identifiable, confidential and similar information from the Acquired Premises prior to the applicable Real Estate Closing Date.

 

5.9        Pre-Closing Cooperation .  The Seller shall cooperate in good faith with the Internet Buyers to provide such data and other information and to take such other actions as reasonably requested by the Internet Buyers in order for the Internet Buyers to be able to conduct the Transferred Internet Business as of the Internet Closing Date.

 

5.10                         Gift cards . As early as reasonably practicable after the Internet Closing Date, the Seller shall, or shall cause one or more of its Affiliates to, establish procedures whereby customers holding gift cards issued by the Seller Group prior to the date hereof may receive cash payments of amounts on account with respect to such gift cards and use reasonable commercial efforts to provide such customers with substantially the same standard of service in connection with such procedures as is provided to such customers as of the date hereof.  Such procedures shall include, establishing a toll-free phone number to provide customers with information on how to redeem such gift cards for cash.  The Seller or its Affiliate shall provide such toll-free number at no cost to any such customer or to Real Estate Buyer and shall maintain such number for a period no less than six (6) months following February 29, 2008.  In the event any such customers for any reason request redemption of gift cards for cash or merchandise from the Real Estate Buyer at any of the Acquired Premises, Real Estate Buyer may redeem such gift cards by paying such customers for the amount on account with respect to such gift cards or by giving such customers merchandise having a price equal to such amount (or a combination) and shall be entitled to reimbursement from the Seller for such reimbursement;  provided that prior to redeeming such gift cards Real Estate Buyer shall have confirmed the validity of the gift card and the amounts owed to such customers under such gift cards by calling the toll-free number. 

 

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At the end of each month following the earliest Real Estate Closing until August 2008, Real Estate Buyer shall send a statement to the Seller setting forth in reasonable detail the amounts paid or delivered by the Real Estate Buyer to redeem such gift cards in such month along with the redeemed gift cards.  No later than five (5) Business Days following Seller’s receipt of such statement, Seller shall deliver to Real Estate Buyer the amount set forth on such statement in respect of valid gift cards.  Seller shall not be liable for any redemptions by the Real Estate Buyer of any gift cards after August 31, 2008.

 

ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF THE BUYERS.

 

Except as set forth herein, each of the Buyers represents and warrants to the Seller as follows (with each representation and warranty being made as of the date of this Agreement, other than those made as of a specified date, which shall be made as of such specified date):

 

6.1        Corporate Existence and Qualification of the Buyers and Systemax; Due Execution, Stockholders, Etc.

 

(a)           The Trade Name Buyer is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has the requisite corporate power and authority to conduct its business and to own or lease and to operate its properties and assets as and in the places where such business is conducted and where such properties and assets are owned, leased or operated.  The Domain Name Buyer is a corporation duly organized, validly existing and in good standing under the laws of Florida and has the requisite corporate power and authority to conduct its business and to own or lease and to operate its properties and assets as and in the places where such business is conducted and where such properties and assets are owned, leased or operated.  The Real Estate Buyer is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has the requisite corporate power and authority to conduct its business and to own or lease and to operate its properties and assets as and in the places where such business is conducted and where such properties and assets are owned, leased or operated.  Systemax is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to conduct its business and to own or lease and to operate its properties and assets as and in the places where such business is conducted and where such properties and assets are owned, leased or operated.

 

(b)          Each Buyer is duly qualified to transact business and is in good standing in jurisdictions where the nature of the properties owned or leased by it or the activities conducted by it make such qualifications necessary.

 

(c)           Each of the Buyers and Systemax has all requisite corporate power and authority to enter into and deliver this Agreement and perform its obligations under this Agreement and to consummate the transactions contemplated hereby.  The execution, delivery and performance of this Agreement by the Buyers and Systemax and the consummation by the Buyers and Systemax of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of each of the Buyers and Systemax.  This Agreement has been duly executed and delivered by each of the Buyers and Systemax and, assuming the due authorization, execution and delivery by the Seller, this Agreement constitutes the legal, valid

 

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and binding obligation of each of the Buyers and Systemax, enforceable against each of the Buyers and Systemax in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and subject, as to enforceability, to general principles of equity, including, without limitation, principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity).

 

(d)          Systemax owns, beneficially and of record, all of the outstanding shares of capital stock of each of the Buyers and there are no outstanding equity securities of or other equity interests in any Buyer (other than the shares of capital stock owned by Systemax) and there are no outstanding rights, warrants or options to acquire securities of or other equity interests in any Buyer, and no Buyer is subject to any obligation to issue, deliver, redeem, or otherwise acquire or retire any shares of capital stock or other equity interests.

 

6.2        No Violation .  Neither the execution and delivery by the Buyers and Systemax of this Agreement or the Transfer Instruments, nor the consummation by the Buyers and Systemax of the transactions contemplated hereby: (i) violates or will violate any Applicable Law with respect to any Buyer or Systemax; (ii) violates or will violate any Order of Governmental Authority applicable to any Buyer or Systemax; (iii) conflicts or will conflict with, or results or will result in a breach of or default under, the Organizational Documents of any Buyer or Systemax; or (iv) requires any consent, authorization, or approval from, or registration or filing with, any Governmental Authority (not obtained or made as of the Closing Date), except

 

6.3        Finder’s Fee .  No Buyer or Systemax has incurred or become liable for any broker’s commission or finder’s fee relating to or in connection with the transactions contemplated by this Agreement.

 

ARTICLE 7. COVENANTS OF THE BUYERS AND SYSTEMAX.

 

Each Buyer and Systemax hereby makes, jointly and severally, the following covenants and agreements:

 

7.1        Post-Closing Cooperation .  Each Buyer and Systemax agrees to provide (at the out-of-pocket expense of the Seller Group) to the Seller Group such information as they may reasonably request (i) in connection with accounting and Tax matters relating to the conduct of the Transferred Businesses prior to the applicable Closing Dates, and (ii) relating to the Retained Businesses which remains stored after the applicable Closing Dates in the computer systems purchased by the Buyer pursuant to this Agreement.

 

7.2        Satisfaction of Conditions Precedent .  During the period commencing on the date of this Agreement and ending on the Internet Closing Date and any Real Estate Closing Date, the Internet Buyers and the Real Estate Buyer, respectively, shall act in good faith to satisfy, or cause to be satisfied all the conditions precedent to the Internet Buyers’ and Real Estate Buyer’s obligations to consummate the transactions contemplated by the Internet Closing and the Real Estate Closing, as applicable.

 

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7.3  Consents .  During the period commencing on the date of this Agreement and ending on any Real Estate Closing Date, the Real Estate Buyer and Systemax shall cooperate in good faith with the Seller to obtain any necessary consents to assign the applicable Acquired Leases.

 

7.4  Confidential Materials .  The Real Estate Buyer shall promptly return to the Seller or destroy any personally identifiable, confidential and similar information that is discovered by any Person at the Acquired Premises, and which relates to the conduct of the business prior to the applicable Real Estate Closing Date.

 

7.5  Employees; Management .  The Real Estate Seller Group shall reasonably assist the Real Estate Buyer in its efforts to review and offer employment to the employees of the Real Estate Seller Group following a Real Estate Closing including, but not limited to, sharing employee data with respect to such employees that the Real Estate Seller Group is permitted to disclose to the Real Estate Buyer under Applicable Law; provided , however , that the Real Estate Seller Group shall not be obligated to share employee data that it is not permitted to share under Applicable Law with respect to any employee who has not consented to the sharing of such information.  Following a Real Estate Closing, the Real Estate Buyer shall notify the Real Estate Seller Group of which employees it has determined to offer continued employment.

 

7.6  Domain Name .  The Internet Buyers shall not and shall not permit any of their Affiliates to use the domain names “compusadialatech.com”, “compusadial-a-tech.com,” “compusatechpro.com,” “compusadial-a-tech.com,” “compusadialatech.com”, or URLs containing the names “dial-a-tech” or “dialatech” alone or in combination with the CompUSA name other than to direct the web traffic to such domain names or universal resource locators (URLs) to “compusa.com”.

 

ARTICLE 8. CONDITIONS .

 

8.1        Conditions to Obligations of the Parties .  The respective obligations of the Parties to consummate and cause the consummation of the transactions contemplated by the Internet Closing and any Real Estate Closing are subject to the fulfillment, prior to or at the applicable Closing, of the following conditions precedent:

 

(a)           No Governmental Authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any Applicable Law which is in effect on a Closing Date which has or would have the effect of prohibiting, enjoining or restraining the consummation of the transactions contemplated by this Agreement to occur on such Closing Date or otherwise making such transactions illegal; and

 

(b)          All licenses, certificates, permits, approvals, clearances, expirations, waivers or terminations of applicable waiting periods, authorizations, qualifications and orders of any Governmental Authorities listed in Schedule 8.1(b)  (if any) shall have been obtained and shall be in full force and effect, except as would not, individually or in the aggregate, be reasonably likely to result in a Business Material Adverse Effect, a Seller Material Adverse Effect or a Buyer Material Adverse Effect.

 

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The foregoing conditions are for the benefit of each of the Parties and any such condition may be waived, in whole or in part, by any Party at or prior to the Closing, and such Party shall have the right to proceed with the transactions contemplated hereby without waiving any other of its respective rights hereunder.

 

8.2        Conditions to Obligations of the Buyers and Systemax .  The obligation of each of the Buyers and Systemax to consummate and cause the consummation of the transactions contemplated by the Internet Closing and any Real Estate Closing are subject to the fulfillment, prior to or at the applicable Closing, of the following conditions precedent:

 

(a)           the Seller shall have performed, and complied with, in all material respects the covenants and obligations required to be performed by the Seller under this Agreement with respect to the Transferred Internet Business and the Purchased Internet Assets or the Transferred Real Estate Business and the Purchased Real Estate Assets, as applicable, on or prior to the Internet Closing Date or a Real Estate Closing Date, as the case may be;

 

(b)          the representations and warranties of the Seller contained in Article 3 and Article 4 hereof which are qualified by materiality or a material adverse effect shall be true on and as of the date hereof, except for any representations and warranties that are made as of a specified date, which shall be true on and as of such date.  All other representations and warranties of the Seller contained in Article 3 and Article 4 hereof shall be true in all material respects on and as of the date hereof, except for any representations and warranties that are made as of a specified date, which shall be true on and as of such date;

 

(c)           the Seller Group shall have executed and delivered to the applicable Buyer all applicable Transfer Instruments;

 

(d)          Gordon Brothers Group, LLC, a Delaware limited liability company, shall have executed and delivered to the Domain Name Buyer the letter agreement in the form attached hereto as Exhibit 8.2(d)  related to the covenant set forth in Section 5.10 hereto;

 

(e)           the Seller Group shall have received, in form and substance reasonably satisfactory to the applicable Buyer, all Assignment Consents required to be obtained in connection with the transactions contemplated by such Internet Closing or Real Estate Closing, as the case may be, except where the failure to obtain any such Assignment Consents would not, individually or in the aggregate, be reasonably likely to result in an Internet Business Material Adverse Effect or a Real Estate Business Material Adverse Effect, as applicable;

 

(f)             in connection with any Real Estate Closing, the Seller shall have delivered to the Real Estate Buyer the applicable Closing Notice; and

 

(g)          termination letters in the form attached hereto as Exhibit 8.2(g)  with respect to the termination of all Terminable Liens on the Purchased Internet Assets or the Purchased Real Estate Assets, as applicable, shall have been duly executed by the lienholder and delivered to the applicable Buyer.

 

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The foregoing conditions are for the exclusive benefit of each of the Buyers and Systemax and any such condition may be waived, in whole or in part, by the Buyers and Systemax at or prior to the Closing, and the Buyers and Systemax shall have the right to proceed with the transactions contemplated hereby without waiving any of their other rights hereunder.

 

8.3        Conditions to Obligations of the Seller .  The obligation of Seller to consummate and cause the consummation of the transactions contemplated by the Internet Closing and any Real Estate Closing are subject to the fulfillment, prior to or at the applicable Closing, of the following conditions precedent:

 

(a)                                   each Buyer and Systemax shall have performed, and complied with, in all material respects the covenants and obligations required to be performed by such Buyer or Systemax under this Agreement with respect to the Transferred Internet Business and the Purchased Internet Assets or the Transferred Real Estate Business and the Purchased Real Estate Assets, as applicable, on or prior to the Internet Closing Date or a Real Estate Closing Date, as the case may be;

 

(b)          the representations and warranties of the Buyers contained in Article 6 hereof which are qualified by materiality or a material adverse effect shall be true on and as of the date hereof, except for any representations and warranties that are made as of a specified date, which shall be true on and as of such date.  All other representations and warranties of the Buyers contained in Article 6 hereof shall be true in all material respects on and as of the date hereof, except for any representations and warranties that are made as of a specified date, which shall be true on and as of such date;

 

(c)           the applicable Buyer shall have executed and delivered to the Seller all applicable Transfer Instruments;

 

(d)          the Trade Name Buyer shall have delivered or caused to be delivered the Trade Name Purchase Price, the Domain Name Buyer shall have delivered or caused to be delivered the Domain Name Purchase Price or the Real Estate Buyer shall have delivered or caused to be delivered the applicable Real Estate Purchase Price, as the case may be; and

 

(e)           Systemax shall have executed and delivered to the Seller the letter agreement substantially in the form attached hereto as Exhibit 8.3(e) .

 

The foregoing conditions are for the exclusive benefit of the Seller and any such condition may be waived, in whole or in part, by the Seller at or prior to the applicable Closing, and the Seller shall have the right to proceed with the transactions contemplated hereby without waiving any of its other rights hereunder.

 

ARTICLE 9. INDEMNIFICATION .

 

9.1        Survival of Warranties .

 

(a)           Subject to Section 9.1(b) below, (i) the representations and warranties of the Seller in Article 3 and Article 4 of this Agreement shall survive the Internet Closing Date and the applicable Real Estate Closing Date, respectively, for one year and (ii) the representations and

 

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warranties of the Internet Buyers and the Real Estate Buyer in Article 6 hereof shall survive the Internet Closing Date and the applicable Real Estate Closing Date, respectively, for one year.  Notwithstanding the foregoing, if prior to the end of such period, a specific state of facts shall have become known which may constitute or give rise to a claim for which indemnity may be payable pursuant hereto, and the indemnified party shall have given written notice of such facts to the indemnifying party prior to such date of expiration, then the right to indemnification with respect thereto shall remain in effect until such matter shall have been finally determined and disposed of, and any indemnification due in respect thereof shall have been paid.

 

(b)          The right to indemnification hereunder by a Buyer Indemnified Party relating to any breach of Sections 3.1 and 4.1 (Corporate Existence and Qualification of the Seller; Title to Purchased Assets; Due Execution, Stockholders, Etc.) or 3.3 and 4.3 (Taxes) shall expire on the date which is ninety (90) calendar days after the expiration of the applicable statutes of limitations relating to such breach.  The right to indemnification hereunder by a Seller Indemnified Party relating to any breach of Section 6.1 (Corporate Existence and Qualification of the Buyer and Systemax; Due Execution, Stockholders, Etc.) shall expire on the date which is ninety (90) calendar days after the expiration of the applicable statutes of limitations relating to such breach.  The right to indemnification hereunder by a Seller Indemnified Party with respect to the matters set forth in Section 9.3(e) shall expire on the date which is ninety (90) calendar days after the expiration of the applicable statutes of limitations relating to such matters.

 

9.2        Indemnification by the Seller .  The Seller agrees to indemnify and hold the Buyer Indemnified Parties harmless from and against any Losses which may be sustained or suffered by any of them arising out of or based upon any of the following matters (the “ Buyer Losses ”):

 

(a)           any breach of any representation or warranty made by the Seller in Sections 3.1 through 3.4, 4.1 through 4.4, 4.9 and 4.10 of this Agreement;

 

(b)          any breach of any representation or warranty made by the Seller in Sections 3.5 through 3.8 and 4.5 through 4.8 of this Agreement;

 

(c)           any fraud or any knowing and deliberate breach (any such breach to be proven by clear and convincing evidence) by the Seller with respect to any of their representations or warranties in this Agreement or in any certificate or schedule delivered by the Seller pursuant hereto;

 

(d)          any breach by the Seller of any agreement or covenant set forth in this Agreement other than as set forth in Sections 5.2 and 5.10 hereof;

 

(e)           any failure by the Seller to perform the covenants set forth in Sections 5.2 and 5.10 hereof;

 

(f)             any breach of any representation or warranty made by the Seller in Section 3.9 of this Agreement

 

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(g)          any use of retained Specified Data by the Seller in violation of the restrictions set forth in Section 2.8(e).

 

9.3        Indemnification by the Buyers and Systemax .  Each of the Buyers and Systemax jointly and severally agree to indemnify and hold the Seller Indemnified Parties harmless from and against any Losses which may be sustained or suffered by any of them arising out of or based upon any of the following matters (the “ Seller Losses ”):

 

(a)           any breach of any representation or warranty made by a Buyer or Systemax in Article 6 of this Agreement;

 

(b)          any fraud or any knowing and deliberate breach (any such breach to be proven by clear and convincing evidence) by a Buyer or Systemax with respect to any of their representations or warranties in this Agreement or in any certificate or schedule delivered by a Buyer or Systemax pursuant hereto;

 

(c)           any breach by a Buyer or Systemax of any agreement or covenant set forth in this Agreement;

 

(d)          any failure by a Buyer or Systemax to perform and discharge any Assumed Liabilities as set forth in this Agreement; and

 

(e)           the sale, transfer or assignment to any Buyer of, or any Buyer’s or any of its affiliates’ acceptance of, access to or use of, Specified Data; notwithstanding anything to the contrary in this Agreement, the Seller is not obligated to indemnify or hold any Buyer Indemnified Party harmless from and against any Losses which may be sustained or suffered by any Buyer Indemnified Party arising out of or based upon the sale, transfer or assignment to any Buyer of, or any Buyer’sor any of its affiliates’ acceptance of, access to or use of, Specified Data.

 

9.4        Limits on Indemnification .  Notwithstanding anything contained herein to the contrary,

 

(a)     (i)  (A) the Seller shall not have any liability under Sections 9.2(a), 9.2(d) or 9.2(g) until the amount of indemnifiable Buyer Losses under such Sections, in the aggregate, exceeds Five Hundred Thousand dollars ($500,000) (the “ Threshold ”), at which time the total amount of such Buyer Losses shall be recoverable hereunder and (B) the Seller shall not have any liability under Section 9.2(b) until the amount of indemnifiable Buyer Losses thereunder, in the aggregate, exceeds Two Million dollars ($2,000,000), and (ii) no Buyer or Systemax shall have any liability under Sections 9.3(a) or 9.3(c) of this Agreement until the amount of indemnifiable Seller Losses thereunder, in the aggregate, exceeds the Threshold, at which time the total amount of such Seller Losses shall be recoverable hereunder;

 

(b)          the aggregate obligations of the Buyers and Systemax to indemnify, defend and hold the Seller Indemnified Parties harmless for indemnification claims made pursuant to Section 9.3(e) after the second anniversary of the Internet Closing Date shall be limited to Ten Million dollars ($10,000,000) (the “ Indemnity Cap Amount ”); provided , that the Indemnity Cap

 

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Amount shall not apply unless, on or before the second (2 nd ) anniversary of the Internet Closing Date, Systemax and each of the Buyers have, and have caused their Affiliates to, store the Specified Data in, or otherwise transfer the Specified Data to, a Data Escrow and permanently erase, purge and otherwise destroy all other copies of the Specified Data, other than such data relating to any individual who has accepted the provisions of any privacy policy or other contract that contains terms governing the collection, receipt, use, disclosure and transfer of such data and that is effective after the Internet Closing Date (whether by purchasing a product from the Internet Buyers or otherwise).

 

(c)           any indemnification payments required to be made pursuant to this Agreement shall be reduced by any insurance proceeds actually received by the indemnified party with respect to the item giving rise to the indemnification payment.  Upon the making of the full amount of the applicable indemnification payment to the indemnified party, the indemnifying party shall be subrogated to the rights of the indemnified party, up to the amount of such indemnification payment, to claim any insurance proceeds not yet recovered by the indemnified party with respect to the item which gave rise to the indemnification payment; and

 

(d)          in the event that any Buyer Indemnified Party has the right to indemnity with respect to any Buyer Losses under Section 9.2, the Seller shall have no liability to indemnify any Buyer Indemnified Party more than once with respect to any such Buyer Losses nor shall the Seller have any liability to indemnify more than one Buyer Indemnified Party for the same Buyer Losses.

 

9.5        Notice; Defense of Claims .  An indemnified party may make claims for indemnification hereunder by giving written notice thereof to the indemnifying party within the period in which indemnification claims can be made hereunder.  If indemnification is sought for a claim or liability asserted by a third party, the indemnified party shall also give written notice thereof to the indemnifying party promptly after it receives notice of the claim or liability being asserted, but the failure to do so shall not relieve the indemnifying party from any liability except to the extent that it is materially prejudiced by the failure or delay in giving such notice.  Such notice shall summarize the bases for the claim for indemnification and any claim or liability being asserted by a third party.  Within thirty (30) days after receiving such notice the indemnifying party shall give written notice to the indemnified party stating whether it disputes the claim for indemnification and whether it will defend against any third party claim or liability at its own cost and expense.  If the indemnifying party fails to give notice that it disputes an indemnification claim within thirty (30) days after receipt of notice thereof, it shall be deemed to have accepted and agreed to the claim, which shall become immediately due and payable.  The indemnifying party (provided such indemnifying party acknowledges its obligation to indemnify if adversely determined) shall be entitled to direct the defense against a third party claim or liability with counsel selected by it as long as the indemnifying party is conducting a good faith and diligent defense.  If the named parties to the action or proceeding include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate under applicable standards of professional conduct, the indemnified party may engage separate counsel at the expense of the indemnifying party.  The indemnifying party shall have the right to compromise or settle any such dispute if such settlement includes an unconditional release of all claims against the indemnified party.  If such settlement does not include an unconditional release of all claims against the indemnified party,

 

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the settlement shall be subject to the prior written consent of the indemnified party (which consent shall not be unreasonably withheld, delayed or conditioned).  If no such notice of intent to dispute and defend a third party claim or liability is given by the indemnifying party, or if such good faith and diligent defense is not being or ceases to be conducted by the indemnifying party, the indemnified party shall have the right, at the expense of the indemnifying party, to undertake the defense of such claim or liability (with counsel selected by the indemnified party), and to compromise or settle it, exercising reasonable business judgment.  If the third party claim or liability is one that by its nature cannot be defended solely by the indemnifying party, then the indemnified party shall make available such information and assistance as the indemnifying party may reasonably request and shall cooperate with the indemnifying party in such defense, at the expense of the indemnifying party.

 

9.6        Exclusive Remedy .  After the Internet Closing Date, the indemnification provisions set forth in this Article 9 shall constitute the exclusive remedies of the parties with respect to any breach of the representations, warranties, agreements, covenants and obligations set forth herein or in any certificate or schedule delivered by any party pursuant hereto (other than injunctive or other equitable relief), and with respect to any and all claims arising from or relating to any of the foregoing; provided , however , that nothing in this Section 9.6 shall limit in any way any claims brought by any party based on fraud or knowing and deliberate breach (any such breach to be proven by clear and convincing evidence).

 

9.7        Indemnification by the Prior Owners .  The Seller agrees to promptly pay, or cause to be paid, to the applicable Buyer by wire transfer of immediately available funds, to such account or accounts designated in writing by Systemax to the Seller, any amounts received by Specialty Equity, LLC, a Delaware limited liability company (“ Specialty Equity ”) or any of its Affiliates, pursuant to the Stock Purchase Agreement, dated December 7, 2007, among Specialty Equity, and the former stockholders of CompUSA Inc. (the “ Stock Purchase Agreement ”), solely to the extent that such amounts were recovered by the Seller under Article VIII (Indemnification) of the Stock Purchase Agreement and such amounts were paid in respect of claims with respect to the Purchased Internet Assets or the applicable Purchased Real Estate Assets.  The Seller shall cooperate in good faith with the Buyers and Systemax to cause to be made any claim for indemnification under the Stock Purchase Agreement which relates to the Purchased Internet Assets or the Purchased Real Estate Assets.  Any allocation of amounts received pursuant to the Stock Purchase Agreement between the Transferred Businesses and the Retained Businesses shall be made by the Seller in good faith.

 

ARTICLE 10. MISCELLANEOUS .

 

10.1                         Confidentiality .

 

(a)           Terms of the Agreement .  The terms of this Agreement shall be considered Confidential Information of all Parties; provided , that, notwithstanding anything herein to the contrary, any Party may disclose the terms of this Agreement and file a copy of this Agreement with appropriate regulatory authorities to the extent necessary to comply with any obligation it may have under any Applicable Law.

 

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(b)          Seller Obligations .  Following the Internet Closing Date, the Seller shall not disclose to any third party any Buyer Confidential Information, and shall exercise commercially reasonable efforts (at the expense of the Buyers) to enforce, and cause any of its existing or future Affiliates to enforce, any agreements with their respective employees or consultants relating to confidentiality and assignment of inventions (such agreements, “ Proprietary Rights Agreements ”) with respect to Buyer Confidential Information.

 

(c)           Buyer and Systemax Obligations . Following the Internet Closing Date, no Buyer or Systemax shall disclose to any third party any Seller Confidential Information, and each of the Buyers and Systemax shall exercise commercially reasonable efforts (at the expense of the Seller) to enforce, and cause any their existing or future Affiliates to enforce, any Proprietary Rights Agreements with their respective employees or consultants with respect to Seller Confidential Information.

 

(d)          Permitted Disclosure .  Notwithstanding the foregoing, the Seller may disclose Buyer Confidential Information, and a Buyer or Systemax may disclose Seller Confidential Information in a Legal Proceeding or to a government or other regulatory agency (including, without limitation, any securities regulatory agency or stock exchange) to the extent necessary to comply with any Applicable Law; provided that such party provides to the owner of such Confidential Information prior notice of the intended disclosure and shall permit the owner of such Confidential Information to intervene therein to protect its interests in its Confidential Information, and provide full cooperation and assistance to such owner in seeking to obtain such protection.

 

10.2                         Bulk Sales Law .  Each of the Buyers hereby waives compliance by the Seller with the provisions of any applicable bulk sales law in connection with the transfer of the Purchased Assets under this Agreement.

 

10.3                         Fees and Expenses .

 

(a)           Each of the Parties will bear its own fees and expenses in connection with the negotiation and the consummation of the transactions contemplated by this Agreement, including, without limitation, legal, accounting, finders/brokers or other professional fees and expenses.

 

(b)          The Internet Buyers and the applicable Real Estate Buyer will pay all Taxes or expenses (including, without limitation, reasonable attorneys’ fees) incurred subsequent to the Internet Closing and a Real Estate Closing, in connection with the transfer of the Purchased Internet Assets and the applicable Purchased Real Estate Assets, respectively, to the applicable Buyer as contemplated by this Agreement, including, without limitation, all sales, use, excise, and other transfer taxes and similar charges applicable to such transfer, and all expenses applicable to the recordation of any instruments of transfer (including, without limitation, expenses in connection with the recordation of any Intellectual Property Assignment Agreements); notwithstanding the foregoing, the Internet Buyer and the applicable Real Estate Buyer shall not be obligated to pay Taxes accrued as of the Internet Closing Date and the applicable Real Estate Closing Date, respectively, which are Retained Liabilities, including

 

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without limitation any sales tax payable as a result of any failure to comply with sales tax or bulk sales transfer tax.

 

10.4                         Governing Law .  This Agreement shall be construed under and governed by the laws of the State of New York.

 

10.5                         Notices .  Any notice, request, demand or other communication required or permitted hereunder shall be in writing and shall be deemed to have been given (i) if delivered personally or sent by facsimile transmission (receipt acknowledged), upon delivery, (ii) if sent by a nationally recognized overnight courier, properly addressed with postage prepaid, on the next business day, or (iii) if sent by registered or certified mail, upon the sooner of the date on which receipt is acknowledged or the expiration of three (3) days after deposit in United States post office facilities properly addressed with postage prepaid.  All notices to a party will be sent to the addresses set forth below or to such other address or person as such party may designate by notice to each other party hereunder:

 

TO A BUYER

 

 

OR SYSTEMAX :

 

Systemax Inc.

 

 

11 Harbor Park Drive

 

 

Port Washington, NY 11050

 

 

Attention: Richard Leeds, Chairman and CEO

 

 

Facsimile: (516) 608-3501

 

 

 

With a copy to:

 

Systemax Inc.

 

 

11 Harbor Park Drive

 

 

Port Washington, NY 11050

 

 

Attention: Curt Rush, General Counsel

 

 

Facsimile: (516) 625-0038

 

 

 

TO THE SELLER :

 

CompUSA Inc.

 

 

c/o Gordon Brothers Group, LLC

 

 

101 Huntington Avenue, 10 th Floor

 

 

Boston, MA 02199

 

 

Attn: Billy Weinstein

 

 

Facsimile: (617) 422-6211

 

 

 

With a copy to:

 

Curtis, Mallet-Prevost, Colt & Mosle LLP

 

 

101 Park Avenue

 

 

New York, New York 10178

 

 

Attn: Steven J. Reisman, Esq.

 

 

Facsimile: (212) 697-1559

 

Any notice given hereunder may be given on behalf of any Party by its counsel or other authorized representatives.

 

10.6        Entire Agreement .  This Agreement, together with the Seller Disclosure Schedule, the Transfer Instruments and the other Schedules and Exhibits referred to herein and

 

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the other documents specifically identified herein or contemplated hereby (collectively, the “ Operative Agreements ”), reflects the entire agreement of the Parties with respect to its subject matter, and supersedes all previous written or oral negotiations, commitments and writings relating thereto.  No promises, representations, understandings, warranties and agreements have been made by any of the Parties hereto except as referred to herein or in such Schedules and Exhibits or in such other documents; and all inducements to the making of this Agreement relied upon by the Parties have been expressed herein or in such Schedules or Exhibits or in such other documents.

 

10.7                         Assignability; Binding Effect .  Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by any of the Parties without the prior written consent of the other Parties (such consent not to be unreasonably withheld) and any such assignment without such prior written consent shall be null and void.  Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the Parties and their respective successors and permitted assigns.  Notwithstanding the foregoing, a Buyer may assign this Agreement to an Affiliate thereof so long as such assignment does not result in any Liability or any material detriment to the Seller (it being understood that any assignment which results in such Liability or material detriment shall be null and void).

 

10.8                         Severability .  Any provision of this Agreement that is deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction and subject to this Section 10.8, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal or unenforceable in any other jurisdiction.  If any covenant should be deemed invalid, illegal or unenforceable because its scope is considered excessive, either in time or in geographical range, such covenant shall be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable.

 

10.9                         Execution in Counterparts; Facsimile Signatures .  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document.  All signatures of the Parties to this Agreement may be transmitted by facsimile, and such facsimile will, for all purposes, be deemed to be the original signature of such Party whose signature it reproduces and will be binding upon such party.

 

10.10                  Amendments; Waiver .  This Agreement may not be amended or modified, nor may compliance with any condition or covenant set forth herein be waived, except by a writing duly and validly executed by each Party, or in the case of a waiver, the Party waiving compliance.  No delay on the part of any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any Party of any such right, power or privilege, or any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege.

 

40



 

10.11                  Publicity and Disclosures .  Except as may be required by Applicable law, no press releases or public disclosure, either written or oral, of the transactions contemplated by this Agreement, shall be made by a Party without the prior knowledge and written consent of the Buyer and the Seller, which consent shall not be unreasonably withheld.

 

10.12                  Submission to Jurisdiction .  Each of the Parties hereby agrees that any action or proceeding arising out of this Agreement or the transactions contemplated hereby shall be brought in the federal or state courts sitting in the County of New York, in the City of New York, New York, and each of the Parties hereby consents to submit itself to the personal jurisdiction of such courts in any such action or proceeding, and hereby waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other party with respect thereto.

 

10.13                  Service of Process .  Any party hereto may make service on another party by sending or delivering a copy of the process to the party to be served in the manner provided for the giving of notices in Section 10.5, provided , that this Section 10.13 shall not affect the right of any party to serve legal process in any other manner permitted by law.

 

10.14                  Waiver of Jury Trial .  EACH PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

 

10.15                  Relationship of the Parties .  Nothing in this Agreement shall be construed to place any of the Parties in an agency, employment, franchise, joint venture, or partnership relationship.  The Seller will not have the authority to obligate or bind a Buyer or Systemax and neither Systemax nor any Buyer will have the authority to obligate or bind the Seller in any manner, and nothing herein contained shall, or is intended to, give rise to any rights of any kind to any third parties; no Party will represent to the contrary, either expressly, implicitly or otherwise.

 

10.16                  Systemax Guarantee .

 

(a)           For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Systemax hereby guarantees to the Seller and its successors and assigns the prompt payment in full, and performance when due (whether at stated maturity, by acceleration or otherwise) of all amounts due and owing from time to time, or performance required, by each of the Buyers for the benefit of the Seller under the Operative Agreements, in each case strictly in accordance with the terms hereof and thereof (such obligations being herein collectively called the “ Buyer Guaranteed Obligations ”).  Systemax hereby further agrees that if a Buyer shall fail to pay in full, or perform when due (whether at stated maturity, by acceleration or otherwise) any of the Buyer Guaranteed Obligations, Systemax will promptly pay or perform the same, without any demand or notice of any kind whatsoever, and that in the case of any extension of time of payment or performance or renewal of any of the Buyer Guaranteed Obligations, the same will be promptly paid in full or performed when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal.  This is a guarantee of payment and performance and not merely of collection.

 

41



 

(b)          The obligations of Systemax hereunder are absolute and unconditional irrespective of  the value, genuineness, validity, regularity or enforceability of the obligations of a Buyer under the Operative Agreements, or any substitution, release or exchange of any other guarantee of or security for any of the Buyer Guaranteed Obligations and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 10.16 that the obligations of Systemax hereunder shall be absolute and unconditional under any and all circumstances.  Without limiting the generality of the foregoing in any respect, it is understood and agreed that the occurrence of any one or more of the following shall not alter or impair the liability of Systemax hereunder, which shall remain absolute and unconditional as described above:

 

(i)                                      at any time or from time to time, without notice to Systemax, the time for any performance of or compliance with any of the Buyer Guaranteed Obligations shall be extended, or such performance or compliance shall be waived;

 

(ii)                                   any change in the corporate existence, structure or ownership of a Buyer, or a Buyer becomes the subject of a Legal Proceeding under any Bankruptcy Law;

 

(iii)                                the maturity of any of the Buyer Guaranteed Obligations shall be accelerated, or any of the Buyer Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under this Agreement or any other agreement or instrument referred to herein shall be waived or any other guarantee of any of the Buyer Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with;

 

(iv)                               any Lien or security interest granted to, or in favor of, the Seller as security for any of the Buyer Guaranteed Obligations shall fail to be perfected;

 

(v)                                  the existence of any claim, set-off or other rights that Systemax may have at any time against a Buyer, whether in connection herewith or with any unrelated transactions, or any modification or amendment of or supplement to the Operative Agreements;

 

(vi)                               any invalidity or unenforceability in any jurisdiction relating to or against a Buyer for any reason of this Agreement, or any provision of any Applicable Law purporting to prohibit the performance by a Buyer of any of its obligations under the Operative Agreements; or

 

(vii)                            any other act or omission to act or delay of any kind whatsoever by a Buyer, or any other circumstance whatsoever that might, but for the provisions of this Section 10.16, constitutes a legal or equitable discharge of the obligations of a Buyer under the Operative Agreements.

 

(c)           Systemax hereby irrevocably and unconditionally waives, to the fullest extent permitted by applicable law: (i) notice of acceptance of the guaranty provided in this Section 10.16 and notice of any liability to which this guaranty may apply, (ii) all notices that may be required by Applicable Law or otherwise to preserve intact any rights of the Seller against a

 

42



 

Buyer, including any demand, presentment, protest, proof of notice of non-payment, notice of any failure on the part of the Seller to perform and comply with any covenant, agreement, term, condition or provision of any agreement and any other notice to any other party that may be liable in respect of the obligations guaranteed hereby (including a Buyer), and (iii) any right to the enforcement, assertion or exercise by the Seller of any right, privilege or remedy conferred upon a Buyer under the Operative Agreements, or otherwise.

 

(d)          The obligations of Systemax under this Section 10.16 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of a Buyer in respect of the Buyer Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Buyer Guaranteed Obligations, whether as a result of any Legal Proceedings in Bankruptcy Law or otherwise, and Systemax agrees that it will indemnify Seller on demand for all reasonable costs and expenses (including, without limitation, fees of counsel) incurred by Seller in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such rescinded or restored payment constituted a preference, fraudulent transfer or similar payment under any Bankruptcy Law. The obligations of Systemax hereunder shall remain in full force and effect until the first day on which all of the Buyer Guaranteed Obligations under the Agreement have been paid or otherwise performed in full.

 

(e)           Systemax hereby agrees that until the payment and satisfaction in full of all Buyer Guaranteed Obligations under this Agreement, it shall not exercise any right or remedy arising by reason of any performance by it of its guarantee in this Section 10.16, whether by subrogation or otherwise, against a Buyer or any other guarantor of any of the Buyer Guaranteed Obligations or any security for any of the Buyer Guaranteed Obligations.

 

(f)             Systemax agrees that the Buyer Guaranteed Obligations may be declared to be forthwith due and payable if not paid or performed when due, notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against a Buyer and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by a Buyer) shall forthwith become immediately due and payable Systemax for purposes of this Section 10.16.

 

(g)          The guarantee in this Section 10.16 is a continuing guarantee, and shall apply to all Buyer Guaranteed Obligations whenever arising and wherever located.

 

10.17                  Termination .

 

(a)           This Agreement may be terminated with respect to the sale of the Purchased Internet Assets at any time prior to the date of the Internet Closing:

 

(i)                                      by mutual agreement of the Seller and the Internet Buyer;

 

(ii)                                   by either the Seller or the Internet Buyer, by written notice to the other party if there is a material breach of the other party’s obligations under this Agreement with respect to the contemplated purchase of the Purchased Internet Assets and such breach

 

43



 

continues for a period of fifteen (15) days after written notice thereof has been given by the non-breaching party to the breaching party, and notwithstanding that the non-breaching party may have breached any obligations under this Agreement with respect to the contemplated purchase of the Purchased Real Estate Assets;

 

(iii)                                by either the Seller or the Internet Buyer, by written notice delivered to the other, if the Internet Closing shall not have been consummated on or before January 31, 2008; provided that the right to terminate this Agreement with respect to the sale of such Purchased Internet Assets under this Section 10.17(a)(iii) shall not be available to any party whose failure to take any action required hereunder to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Internet Closing to occur prior to such date.

 

(b)          This Agreement may be terminated with respect to the sale of the Purchased Real Estate Assets subject to any one or more of the Acquired Leases prior to the date of the applicable Real Estate Closing:

 

(i)                                      at any time by mutual agreement of the Seller and the Real Estate Buyer;

 

(ii)                                   at any time by either the Seller or the Real Estate Buyer, by written notice to the other party if there is a material breach of the other party’s obligations under this Agreement with respect to the contemplated purchase of the Purchased Real Estate Assets and such breach continues for a period of fifteen (15) days after written notice thereof has been given by the non-breaching party to the breaching party, and notwithstanding that the non-breaching party may have breached any obligations under this Agreement with respect to the contemplated purchase of the Purchased Internet Assets;

 

(iii)                                with respect to an Acquired Lease which requires the consent of the landlord to assign, by the Real Estate Buyer at any time after the relevant landlord of the applicable Acquired Lease refuses in writing to consent to the assignment of such lease to the Real Estate Buyer; or

 

(iv)                               at any time by either the Seller or the Real Estate Buyer, by written notice delivered to the other, if the Real Estate Closing with respect to such Transferred Real Estate Assets shall not have been consummated on or before February 29, 2008; provided that the right to terminate this Agreement with respect to the sale of such Real Estate Purchased Assets under this Section 10.17(b)(iv) shall not be available to any party whose failure to take any action required hereunder to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Real Estate Closing to occur prior to such date.

 

(c)           Effect of Termination .  If a termination provided for in this Section 10.17 is exercised, there shall be no liability on the part of any Party with respect to the contemplated sale of the Purchased Internet Assets or the applicable Purchased Real Estate Assets, as the case may be; provided that, (i) this Article 10 shall survive any such termination and (ii) no termination will relieve any Party from any liability for any breach of this Agreement occurring prior to such

 

44



 

termination.  For the benefit of doubt, it is understood that no termination pursuant to Section 10.17(a) shall affect the sale of any Purchased Real Estate Assets or the rights, liabilities and obligations of the Parties with respect thereto and no termination pursuant to Section 10.17(b) shall affect the sale of the Purchased Internet Assets or the rights, liabilities and obligations of the Parties with respect thereto.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

 

45



 

IN WITNESS WHEREOF the Parties have caused this Agreement to be executed as of the date set forth above by their duly authorized representatives.

 

SYSTEMAX INC.

 

 

By:

/s/ Richard Leeds

Name:

Richard Leeds

Title:

Chairman and Chief Executive Officer

 

 

NEW SAH CORP.

 

 

By:

/s/ Richard Leeds

Name:

Richard Leeds

Title:

President

 

 

DOTDEAL INC.

 

 

By:

/s/ Richard Leeds

Name:

Richard Leeds

Title:

President

 

 

LONGHORN INC.

 

 

By:

 /s/ Richard Leeds

Name:

Richard Leeds

Title:

President

 

{Signature Page to Asset Purchase Agreement}

 



 

IN WITNESS WHEREOF the Parties have caused this Agreement to be executed as of the date set forth above by their duly authorized representatives.

 

COMPUSA INC.

 

 

By:

/s/ William Weinstein

Name:

William Weinstein

Title:

President

 


 

 

Exhibit 10.29

 

CompUSA Inc.

c/o Gordon Brothers Group, LLC

101 Huntington Avenue, 10th Floor

Boston, MA 02199

 

February 14, 2008

 

Systemax, Inc.

11 Harbor Park Drive

Port Washington, NY 11050

Attention: Richard Leeds, Chairman and CEO

Facsimile: (516) 608-3501

 

Ladies and Gentlemen:

 

Reference is made to the Asset Purchase Agreement, dated January 5, 2008 (the “ Asset Purchase Agreement ”), by and among Systemax Inc., a Delaware corporation (“ Systemax ”), New SAH Corp., a Delaware corporation and a wholly-owned subsidiary of Systemax, DotDeal Inc., a Florida corporation and a wholly-owned subsidiary of Systemax, Longhorn Inc., a Delaware corporation and a wholly-owned subsidiary of Systemax (the “ Real Estate Buyer ”), and CompUSA Inc., a Delaware corporation.  Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Asset Purchase Agreement.

 

1.1        Amendment .   In accordance with Section 10.10 of the Asset Purchase Agreement, the Parties hereby agree to amend the Asset Purchase Agreement as follows:

 

Section 2.1(b) of the Asset Purchase Agreement is amended to add the following at the end thereof:

 

“Notwithstanding anything herein or in any Closing Notice to the contrary, (i) the Real Estate Closing for the Purchased Real Estate Assets and Assumed Real Estate Liabilities relating to the Acquired Premises located in Altamonte Springs, Florida, Orlando, Florida, Plano, Texas and Guaynabo, Puerto Rico shall occur on March 3, 2008, or such date or dates as the Parties may mutually agree, (ii) the Real Estate Closing for the Purchased Real Estate Assets and Assumed Real Estate Liabilities relating to the Acquired Premises located in Plantation, Florida shall occur on February 25, 2008, or such date as the Parties may mutually agree and (iii) the Real Estate Closing for the Purchased Real Estate Assets and Assumed Real Estate Liabilities relating to the Acquired Premises located in Clearwater, Florida, in Brandon, Florida and at 9041 Southside Blvd., Unit #118, Jacksonville, Florida 32256, shall occur on February 18, 2008, or such date or dates as the Parties may mutually agree; provided , that, with respect to the Real Estate Closings set forth in subparagraph (iii), the Real Estate Buyer shall be deemed to have satisfied its obligations set forth in Section 2.5(b) hereof and the closing condition set forth in Section 8.3(d) hereof if the Real Estate Buyer delivers the applicable Real Estate Purchase Price for these Acquired Premises by no later than 4:00 p.m. on February 19, 2008.”

 

1.2        Escrow Account .  The Parties hereby acknowledge and agree that, notwithstanding anything in the Asset Purchase Agreement or in any Closing Notice to the contrary, the amount set forth on Schedule I attached hereto of the applicable Real Estate

 

 



 

 

Purchase Price for the Purchased Real Estate Assets relating to the Acquired Premises located in Miami, Florida and Altamonte Springs, Florida (the “ Escrowed Amounts ”) shall be deposited into an escrow account (the “ Escrow Account ”) for such time and subject to the terms and conditions set forth in that certain Escrow Agreement, dated as of February     , 2008, among Wilmington Trust Company, the Seller and the Real Estate Buyer.  The Parties acknowledge that with respect to the Escrowed Amounts, and only with respect to the these amounts, the Escrow Account is the account designated by Seller to receive the Real Estate Purchase Price pursuant to Section 2.5(b) of the Asset Purchase Agreement.  The remaining amount of the applicable Real Estate Purchase Price for such Purchased Real Estate Assets shall be delivered to the Seller’s account previously designated by the Seller and otherwise as set forth in the Asset Purchase Agreement.

 

1.3        Governing Law .  This Letter shall be governed by and construed in accordance with the laws of the State of New York.

 

1.4        Headings .  The caption headings in this Letter are for convenience only and are not intended to be a part of this Letter and shall not be construed to modify, explain or alter any of the terms, covenants or conditions herein contained.

 

1.5        Counterparts and Signature .  This Letter may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document.  All signatures of the parties to this Letter may be transmitted by facsimile, and such facsimile will, for all purposes, be deemed to be the original signature of such party whose signature it reproduces and will be binding upon such party.

 

1.6        Effect on Asset Purchase Agreement . Except as modified hereby, the Asset Purchase Agreement shall continue in full force and effect in accordance with its terms.

 

[ Remainder of page intentionally left blank ]

 

 

2



 

 

 

Very truly yours,

 

 

 

COMPUSA INC.

 

 

 

By:

/s/ William Weinstein

 

Name: William Weinstein

 

Title: President

 

 

Acknowledged and Agreed as of this 14th day of February, 2008

 

 

 

 

 

 

SYSTEMAX INC.

 

 

 

By:

/s/ Curt Rush

 

Name: Curt Rush

 

Title: Secretary

 

 

 

NEW SAH CORP.

 

 

 

By:

/s/ Curt Rush

 

Name: Curt Rush

 

Title: Secretary

 

 

 

DOTDEAL INC.

 

 

 

By:

/s/ Curt Rush

 

Name: Curt Rush

 

Title: Secretary

 

 

 

LONGHORN INC.

 

 

 

By:

/s/ Curt Rush

 

Name: Curt Rush

 

Title: Secretary

 

 



 

 

SCHEDULE I

 

Escrowed Amounts

 

Acquired Premise

 

Escrowed Amount

1.  Store No. 607 located at 130 E. Altamonte Dr., Altamonte Springs, FL 32701.

 

$

200,000

2.  Store No. 615 located at 7440 North Kendall Dr., Miami, FL 33156.

 

$

375,000

 

 

4


 

Exhibit 21

 

SUBSIDIARIES OF SYSTEMAX INC.

 

Domestic Subsidiaries

 

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)

 

Misco Germany Inc. (a New York corporation)

 

CompUSA Realty Inc. (a Delaware corporation)

 

CompUSA.com Inc. (a Florida corporation)

 

New SAH Corp. (a Delaware corporation)

 

1



 

Foreign Subsidiaries

 

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)

 

Misco Netherlands BV (a Dutch corporation)

 

Misco AB (a Swedish corporation)

 

Misco Iberia Computer Supplies S.A. (a Spanish corporation)

 

2


 

Exhibit 23

 

Consent of Independent Registered Public Accounting Firm

 

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 reports dated March 12, 2008, with respect to the consolidated financial statements and schedule of Systemax Inc. and the effectiveness of internal control over financial reporting of Systemax Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2007.

 

New York, New York

March 12, 2008

 

 


 

Exhibit 31.1

 

CERTIFICATION UNDER SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

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 internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and 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)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)  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

 

d)  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 internal 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 13, 2008

 

/s/ RICHARD LEEDS

 

Richard Leeds, Chief Executive Officer

 

 


 

Exhibit 31.2

 

CERTIFICATION UNDER SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

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 internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and 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)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)  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 internal 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 13, 2008

 

/s/ LAWRENCE P. REINHOLD

 

Lawrence P. Reinhold, Chief Financial Officer

 

 


 

Exhibit 32.1

 

CERTIFICATION UNDER SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

 

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, 2007 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 13, 2008

 

 

 

/s/ RICHARD LEEDS

 

Richard Leeds, Chief Executive Officer

 

 


 

                                                                                                                                                                                Exhibit 32.2

 

CERTIFICATION UNDER SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

 

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, 2007 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 13, 2008

 

 

 

/s/ LAWRENCE P. REINHOLD

 

Lawrence P. Reinhold, Chief Financial Officer