UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
COMMISSION FILE NUMBER 1-13792
Systemax Inc.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
11-3262067 (I.R.S. Employer Identification No.) |
11 Harbor Park Drive
Port Washington, New York 11050
(Address of registrant's principal executive offices)
(516) 608-7000
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The number of shares outstanding of the registrant's Common Stock as of November 5, 2004 was 34,405,080.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Systemax Inc.
Condensed Consolidated Balance Sheets
(In Thousands, except share data)
September 30, December 31,
2004 2003
---- ----
(Unaudited)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $57,291 $38,702
Accounts receivable, net 153,811 152,435
Inventories 137,907 133,905
Prepaid expenses and other current assets 33,267 26,849
Deferred income tax assets 11,442 10,132
------ ------
Total current assets 393,718 362,023
PROPERTY, PLANT AND EQUIPMENT, net 64,173 68,647
DEFERRED INCOME TAXES AND OTHER ASSETS 12,617 14,982
------ ------
TOTAL ASSETS $470,508 $445,652
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Short-term borrowings, including current portions of long-term debt $14,812 $20,814
Accounts payable 157,137 141,106
Accrued expenses and other current liabilities 60,119 51,037
------ ------
Total current liabilities 232,068 212,957
------- -------
LONG-TERM DEBT 17,116 18,353
------ ------
OTHER LIABILITIES 1,648 1,768
----- -----
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
38,231,990 shares; outstanding 34,405,080 (2004) and 34,288,068 shares
(2003) 382 382
Additional paid-in capital 175,180 175,343
Accumulated other comprehensive income, net 2,273 2,157
Retained earnings 86,797 81,022
------ ------
264,632 258,904
Less: common stock in treasury at cost - 3,826,910 (2004) and 3,943,922 (2003)
shares 44,956 46,330
------ ------
Total shareholders' equity 219,676 212,574
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $470,508 $445,652
======== ========
See notes to condensed consolidated financial statements.
Systemax Inc.
Condensed Consolidated Statements of Income (Unaudited)
(In Thousands, except per share amounts)
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------------- ------------------------------------
2004 2003 2004 2003
--------------- --------------- ----------------- -----------------
Net sales $1,376,997 $1,220,270 $460,271 $405,011
Cost of sales 1,161,135 1,017,156 387,047 337,900
--------------- --------------- ----------------- -----------------
Gross profit 215,862 203,114 73,224 67,111
Selling, general and administrative expenses 196,092 190,305 66,416 64,822
Restructuring and other charges (reversals) 6,041 (1,160) 1,026 (1,272)
Goodwill impairment 2,560
--------------- --------------- ----------------- -----------------
Income from operations 13,729 11,409 5,782 3,561
Interest and other expense, net 1,788 1,075 715 542
--------------- --------------- ----------------- -----------------
Income before income taxes 11,941 10,334 5,067 3,019
Provision for income taxes 6,166 5,256 2,375 1,112
--------------- --------------- ----------------- -----------------
Net income $5,775 $5,078 $2,692 $1,907
=============== =============== ================= =================
Net income per common share:
Basic $.17 $.15 $.08 $.06
=============== =============== ================= =================
Diluted $.16 $.15 $.08 $.05
=============== =============== ================= =================
Weighted average common and common equivalent shares:
Basic 34,358 34,124 34,399 34,159
=============== =============== ================= =================
Diluted 35,243 34,672 35,272 35,128
=============== =============== ================= =================
See notes to condensed consolidated financial statements.
Systemax Inc.
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
(In Thousands)
Common Stock Accumulated
-------------------- Other
Additional Comprehensive Treasury Comprehensive
Number of Paid-in Retained Income, Stock, Income,
Shares Amount Capital Earnings Net of Tax At Cost Net of Tax
---------- --------- ------------- ----------- ------------- ---------- ---------------
Balances, January 1, 2004 34,288 $382 $175,343 $81,022 $2,157 $(46,330)
Exercise of stock options 117 (963) 1,374
Change in cumulative translation
adjustment, net 116 $116
Compensation expense related to
stock option plans 800
Net income 5,775 5,775
------ ----- -------- ------- ------ -------- ------
Total comprehensive income $5,891
======
Balances, September 30, 2004 34,405 $382 $175,180 $86,797 $2,273 $(44,956)
====== ==== ======== ======= ====== =========
See notes to condensed consolidated financial statements.
Systemax Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Nine Months
Ended September 30,
--------------------------------
2004 2003
--------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $5,775 $5,078
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for deferred income taxes 358 (1,941)
Depreciation and amortization 8,623 9,995
Provision for returns and doubtful accounts 2,069 3,627
Loss on dispositions and abandonment 525 132
Compensation expense related to stock option plans 800
Goodwill impairment 2,560
Changes in operating assets and liabilities:
Accounts receivable (3,764) 764
Inventories (4,160) (10,509)
Prepaid expenses and other current assets (5,803) 6,378
Accounts payable, accrued expenses and other current liabilities 25,027 (15,695)
--------------- ---------------
Net cash provided by operating activities 29,450 389
--------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Investments in property, plant and equipment (5,528) (6,597)
Proceeds from disposals of property, plant and equipment 978 90
Purchase of minority interest (2,560)
--------------- ---------------
Net cash used in investing activities (4,550) (9,067)
--------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Repayments of borrowings from banks (6,079) (6,263)
Issuance of long-term borrowings and capital lease obligations 1,330
Repayments of long-term debt and capital lease obligations (1,322) (938)
Exercise of stock options 412 1,318
--------------- ---------------
Net cash used in financing activities (6,989) (4,553)
--------------- ---------------
EFFECTS OF EXCHANGE RATES ON CASH 678 (4,283)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,589 (17,514)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 38,702 62,995
--------------- ---------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $57,291 $45,481
=============== ===============
See notes to condensed consolidated financial statements.
Systemax Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| 1. | Basis of Presentation |
| The accompanying condensed consolidated financial statements of the Company, its wholly-owned subsidiaries and all Variable Interest Entities (VIEs) of which the Company is deemed to be the primary beneficiary (see Note 8) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America are not required in these interim financial statements and have been condensed or omitted. All significant intercompany accounts and transactions have been eliminated in consolidation. |
| In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of September 30, 2004 and the results of operations for the three and nine month periods ended September 30, 2004 and 2003, cash flows for the nine month periods ended September 30, 2004 and 2003 and changes in shareholders’ equity for the nine month period ended September 30, 2004. The December 31, 2003 Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. |
| These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of December 31, 2003 and for the year then ended included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. The results for the nine months ended September 30, 2004 are not necessarily indicative of the results for an entire year. |
| 2. | Stock-based Compensation |
| The Company has three stock-based compensation plans, two of which are for employees, consultants and advisors and the third of which is for non-employee Directors. The Company has elected to follow the accounting provisions of Accounting Principles Board Opinion 25 for stock-based compensation and to provide the pro forma disclosures required under Statement of Financial Accounting Standards (“SFAS”) 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Accordingly, the Company does 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. 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): |
Nine Months Ended Three Months Ended
Sept. 30, Sept. 30,
----------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income - as reported $5,775 $5,078 $2,692 $1,907
Stock-based employee compensation expense determined
under fair value based method, net of related
tax effects 308 387 94 129
--- --- -- ---
Pro forma net income $5,467 $4,691 $2,598 $1,778
====== ====== ====== ======
Net income per common share:
Basic:
Net income - as reported $.17 $.15 $.08 $.06
==== ==== ==== ====
Net income - pro forma $.16 $.14 $.08 $.05
==== ==== ==== ====
Diluted:
Net income - as reported $.16 $.15 $.08 $.05
==== ==== ==== ====
Net income - pro forma $.16 $.14 $.07 $.05
==== ==== ==== ====
| The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: |
2004 2003
---- ----
Expected dividend yield 0% 0%
Risk-free interest rate 5.0% 5.0%
Expected volatility 50.0% 68.0%
Expected life in years 2.29 2.42
| 3. | Net Income per Common Share |
| Net income per common share - basic was calculated based upon the weighted average number of common shares outstanding during the respective periods presented. Net income per common share – diluted was calculated based upon the weighted average number of common shares outstanding and included the equivalent shares for dilutive options outstanding during the respective periods. The dilutive effect of outstanding options issued by the Company are 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. Stock options for the following number of shares in the period noted were excluded from the computation of diluted earnings per share due to their antidilutive effect. |
Nine Months Ended Sept. 30, Three Months Ended Sept. 30,
--------------------------- ----------------------------
2004 2003 2004 2003
---- ---- ---- ----
601,000 702,000 553,000 683,000
| 4. | Comprehensive Income |
| Comprehensive income consists of net income and foreign currency translation adjustments, net of tax and is included in the Condensed Consolidated Statement of Shareholders’ Equity. For the nine month periods ended September 30, comprehensive income was $5,891,000 in 2004 and $8,316,000 in 2003 net of tax effects on foreign currency translation adjustments of $(66,000) in 2004 and $(2,445,000) in 2003. For the three month periods ended September 30, comprehensive income was $3,505,000 in 2004 and $2,660,000 in 2003, net of tax effects on foreign currency translation adjustments of $(453,000) in 2004 and $(484,000) in 2003. |
| 5. | Credit Facilities |
| The Company maintains a $70 million secured revolving credit agreement with a group of financial institutions which provides for borrowings in the United States. The borrowings are secured by all of the domestic accounts receivable and inventories of the Company, general intangibles and the Company’s shares of stock in its domestic subsidiaries. The revolving credit agreement contains certain financial and other covenants, including restrictions on capital expenditures and payments of dividends. The Company was in compliance with all of the covenants as of September 30, 2004. The credit facility expires and outstanding borrowings thereunder are due on March 31, 2005. As of September 30, 2004, availability under the agreement was $60.4 million. There were outstanding letters of credit of $10.1 million and there were no outstanding advances as of September 30, 2004. |
| Under the Company’s £15 million ($27.1 million at the September 30, 2004 exchange rate) United Kingdom credit facility, which is available to its United Kingdom subsidiaries, at September 30, 2004 there were £4.4 million ($8.0 million) of borrowings outstanding with interest payable at a rate of 5.87%. The facility does not have a termination date, but may be canceled by either party with six months notice. Borrowings under the facility are secured by certain assets of the Company’s United Kingdom subsidiaries. |
| Under the Company’s €5 million ($6.2 million at the September 30, 2004 exchange rate) Netherlands credit facility, there were €4.1 million ($5.1 million) of borrowings outstanding at September 30, 2004, with interest payable at a rate of 5.0%. 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. The facility expires in November 2005. |
| 6. | Accrued Restructuring Costs |
| The Company periodically assesses its operations to ensure that they are efficient, aligned with market conditions and responsive to customer needs. During the nine months ended September 30, 2004 and the years ended December 31, 2003 and 2002, management approved and implemented restructuring actions which included workforce reductions and facility consolidations. |
| 2004 United States Streamlining Plan In the first quarter of 2004, the Company implemented a plan to streamline the back office and warehousing operations in its United States computer businesses. The Company recorded $3.7 million of costs related to this plan, including $3.2 million for severance and benefits for approximately 200 terminated employees and $483,000 of non-cash costs for impairment of the carrying value of fixed assets. |
| The following table summarizes the components of the restructuring charges, the cash payments, non-cash activities, and the remaining accrual as of September 30, 2004 (in thousands): |
Severance and Asset Other
Personnel Costs Write-downs Exit Costs Total
--------------- ----------- ---------- -----
Charged to expense in 2004 $3,153 $483 $263 $3,899
Amounts utilized (2,292) (483) (42) (2,817)
------- ----- ---- -------
Accrued at September 30, 2004 $861 - $221 $1,082
==== ===== ==== ======
| 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. In the third quarter of 2004, the Company recorded $399,000 of additional exit costs related to this plan. The table below displays the activity and liability balance of the reserve for this initiative (in thousands): |
Severance and Asset Other
Personnel Costs Write-downs Exit Costs Total
--------------- ----------- ---------- -----
Accrued at December 31, 2003 $ 63 $233 $417 $713
Charged to expense in 2004 97 302 399
Amounts utilized (63) (122) (392) (577)
---- ----- ----- -----
Accrued at September 30, 2004 - $208 $327 $535
==== ===== ==== ====
| 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. In the third quarter of 2004, the Company recorded additional costs related to this plan. The table below displays the activity and liability balance of the reserve for this initiative (in thousands): |
Asset Other
Write-downs Exit Costs Total
----------- ---------- -----
Accrued at December 31, 2003 $630 $1,682 $2,312
Charged to expense in 2004 181 181
Amounts utilized (630) (1,189) (1,819)
----- ------- -------
Accrued at September 30, 2004 - $674 $674
===== ======= =======
| 7. | Segment Information The Company is engaged in a single reportable segment, the marketing and sales of various business products. Financial information relating to the Company's operations by geographic area was as follows (in thousands): |
Nine Months Ended Three Months Ended
Sept. 30, Sept. 30,
------------------------ ----------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Sales:
North America $871,990 $761,092 $301,007 $260,092
Europe 505,007 459,178 159,264 144,919
------- ------- ------- -------
Consolidated $1,376,997 $1,220,270 $460,271 $405,011
========== ========== ======== ========
Revenues are attributed to countries based on location of selling subsidiary.
| 8. | Recent Accounting Pronouncements |
| In December 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation issues. This interpretation clarifies the application of Accounting Research Bulletin 51, “Consolidated Financial Statements”, for companies that have interests in entities that are VIEs (as defined in Note 1) as defined under FIN 46. According to this interpretation, if a company has an interest in a VIE and is at risk for a majority of the VIE's expected losses or receives a majority of the VIE's expected gains it shall consolidate the VIE. FIN 46-R also requires additional disclosures by primary beneficiaries and other significant variable interest holders. For entities acquired or created before February 1, 2003, this interpretation is effective no later than the end of the first interim or reporting period ending after March 15, 2004, except for those VIE's that are considered to be special purpose entities, for which the effective date is no later than the end of the first interim or annual reporting period ending after December 15, 2003. For all entities that were acquired subsequent to January 31, 2003, this interpretation is effective as of the first interim or annual period ending after December 31, 2003. The Company has adopted FIN 46-R and began consolidating a 50%-owned joint venture in the first quarter of 2004. This consolidation did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. |
| 9. | Subsequent Event |
| On October 12, 2004, the Company entered into an employment agreement with Gilbert Fiorentino, the Chief Executive Officer of its subsidiary, Tiger Direct, Inc., and a director of the Company. The agreement is effective as of June 1, 2004 and expires on December 31, 2013 unless terminated sooner under the terms of the agreement. |
| The agreement provides for annual compensation and
bonus payments. The agreement also accelerates the vesting schedule of options
previously granted to Mr. Fiorentino. In addition, new options were granted
under the Company's 1999 Long-term Stock Incentive Plan (the “1999
Plan”) for 166,667 shares, and the agreement obligates the Company to issue
additional options of 166,667 shares in each of August 2005 and 2006, at the
then fair market value. Options will vest in five annual cumulative installments
of 20% each. Mr. Fiorentino also was granted, pursuant to a restricted stock unit agreement, restricted stock units under the 1999 Plan representing the right to receive a total of 1,000,000 shares of restricted stock of the Company. The grant is conditioned upon shareholder approval at the next annual meeting and satisfaction of certain performance conditions based on earnings before interest, taxes and depreciation and amortization expense in fiscal 2004 or fiscal 2005. Such restricted stock units generally vest at the rate of 20% on May 31, 2005 (or, if the performance conditions are only satisfied in 2005, the date in 2006 when they are determined to have been satisfied) and 10% per year on April 1, 2006 and each year thereafter. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
This report contains forward looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward looking statements may be made by the Company from time to time, in filings with the Securities Exchange Commission or otherwise. Statements contained in this report that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, financing needs, compliance with financial covenants in loan agreements, plans for acquisition or sale of assets or businesses and consolidation of operations of newly acquired businesses, and plans relating to products or services of the Company, assessments of materiality, predictions of future events and the effects of pending and possible litigation, as well as assumptions relating to the foregoing. In addition, when used in this discussion, the words “anticipates”, “believes”, “estimates”, “expects”, “intends”, “plans” and variations thereof and similar expressions are intended to identify forward looking statements.
Forward-looking statements in this report are based on the Company’s beliefs and expectations as of the date of this report and are subject to risks and uncertainties which may have a significant impact on the Company’s business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of the risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Many of these risk factors are discussed below in “Factors That May Affect Future Results and Financial Condition”.
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.
Overview
Systemax is a direct marketer of brand name and private label products, including personal desktop computers (PCs), notebook computers, computer related products and industrial products, in North America and Europe. We market these products through an integrated system of distinctively branded, full-color direct mail catalogs, proprietary e-commerce internet sites and personalized relationship marketing. We assemble our own PCs and sell them under our own trademarks, which we believe gives us a competitive advantage. We also sell computers manufactured by other leading companies, such as IBM and Hewlett Packard. We offer more than 100,000 products and continuously update our product offerings to address the needs of our customers, which include large, mid-sized and small businesses, educational and government entities as well as individual consumers. Computers and computer related products account for more than 90% of our net sales, and, as a result, we are dependent on the general demand for information technology products.
The market for computer products is subject to intense price competition and is characterized by narrow gross profit margins. Distribution of information technology 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 tracking systems, and employing personnel to perform the associated tasks. We supplement our product availability by maintaining relationships with major distributors, utilizing a combination of stocking and drop-shipment.
During fiscal 2002 and 2003, our performance and that of the industry as a whole was impacted negatively by a global economic downturn and cautious information technology spending. As it became evident that the industry was experiencing a prolonged economic downturn, we took measures to align our cost structure with lower revenues and decreasing gross margins. The primary component of our operating expenses historically has been employee related costs, which includes items such as wages, commissions, bonuses, and benefits. We have made substantial reductions in our workforce and closed or consolidated several facilities. In the first quarter of 2004 we announced and began the implementation of a plan to streamline our United States computer business, consolidating duplicative back office and warehouse operations. We have substantially completed this plan, with the benefits evidenced by a continued decline in selling, general and administrative expense as a percentage of net sales.
Economic conditions in North America have improved in 2004, with increased demand for both our computer products, particularly from our consumer customers, and industrial products. We will continue to focus on growth in our internet sales, which allows us to leverage our advertising spending and lower our order processing costs. We see unsettled economic conditions continuing to adversely affect several of the European markets we serve.
Results of Operations
Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003
Net sales for the three months ended September 30, 2004 increased 13.6% to $460.3 million compared to $405.0 million in the year-ago quarter. North American sales were $301.0 million, an increase of 15.7% from $260.1 million in the prior year. Sales increased in North America in both our computer and industrial products, led by increased e-commerce sales, which were up 17.5% from last year’s third quarter, reflecting strength in our consumer business. European sales increased 9.9% to $159.3 million (representing 34.6% of worldwide sales) compared to $144.9 million (35.8% of worldwide sales) in the year-ago quarter, principally as a result of the impact of a weakening U.S. Dollar on the translation of our European financial statements. Excluding the movements in foreign exchange rates, European sales would have been unchanged from the prior year, reflecting the continuing difficult economic environment in certain of our European markets and its affect on demand from corporate customers.
Gross profit was $73.2 million compared to $67.1 million in the year-ago quarter, an increase of $6.1 million. The gross profit margin was 15.9% in the current quarter, compared to 16.6% in the year-ago quarter. The decline in the gross profit margin was due to competitive pricing pressures and lower unit selling prices, both in Europe and in North American computer products, and changes in the mix of products sold from a year ago.
Selling, general and administrative expenses for the quarter increased $1.6 million, or 2.5%, to $66.4 million compared to $64.8 million in the third quarter of 2003. This increase resulted from increased dollar-denominated costs in Europe due to the impact of the weakening U.S. Dollar on the translation of our European financial statements. Savings resulting from previously completed workforce reductions in North America were offset by an unanticipated increase in professional fees and increased other operating expenses, including credit card fees related to increased sales volume. Selling, general and administrative expenses as a percentage of net sales decreased to 14.4% compared to 16.0% in the year-ago quarter.
During the third quarter of 2004, we incurred $1.0 million of additional restructuring charges in the United States and Europe in connection with facility exit costs and workforce reductions.
As a result of the above factors, we had income from operations for the current quarter of $5.8 million compared to $3.6 million in the year-ago quarter. In North America, we had income from operations of $8.4 million in the current quarter compared to income from operations of $4.8 million last year. Europe had a loss from operations of $2.6 million in the third quarter of 2004 compared to a loss from operations of $1.2 million in the year-ago quarter.
Interest and other expense - net consists principally of interest expense. Interest expense was $887,000 in the third quarter of 2004 and $638,000 in 2003 as a result of higher average borrowings in Europe. Interest income on invested funds increased in 2004 because more funds were available for investment.
Income tax expense was $2.4 million in the third quarter of 2004, an effective tax rate of 46.9%, and $1.1 million in the year-ago quarter, an effective tax rate of 36.8%. The effective tax rate for the third quarter of 2004 was higher than the comparable period in the prior year due to losses in tax jurisdictions for which no benefit is currently recognized, but was lower than the effective rate for the first nine months of 2004 as it reflects a year-to-date adjustment to the rate used in the first half of the year.
As a result of the above, net income for the third quarter was $2.7 million, or $.08 per basic and diluted share, compared to $1.9 million, or $.06 per basic and $.05 per diluted share, in the third quarter of 2003.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003
Net sales for the nine months ended September 30, 2004 increased 12.8% to $1.38 billion compared to $1.22 billion in the year-ago period. North American sales were $872.0 million, a 14.6% increase from last year’s $761.1 million. European sales increased 10.0% to $505 million for the first nine months of 2004 (representing 36.7% of worldwide sales) compared to $459.2 million (representing 37.6% of worldwide sales) in the year-ago nine-month period. The impact of the weakening U.S. Dollar on the translation of our European financial statements accounted for $53.3 million of the increase. Excluding the movements in foreign exchange rates, European sales would have decreased 1.6% from the prior year. The increase in North American sales resulted from increased sales of computer products to consumer customers, driven by increased internet purchases and increased sales in our industrial products division. These were partially offset by weakness in demand for information technology products by corporate customers. European sales were lower in local currencies as a result of continued weak market conditions in many of the local markets.
Gross profit was $215.9 million, or 15.7% of net sales, compared to $203.1 million, or 16.6% of net sales, in the year-ago period, an increase of $12.7 million. The decline in gross profit margin was due to continued pricing pressure, increased customer discounting and a change in the mix of products sold.
Selling, general and administrative expenses for the nine months increased $5.8 million, or 3.0%, to $196.1 million compared to $190.3 million in the first nine months of 2003. This increase resulted from the impact of the weakening U.S. Dollar on the translation of our European costs. Decreases in selling, general and administrative expenses resulting from workforce reductions in the U. S. associated with the first quarter 2004 computer business streamlining plan described below were offset by an unanticipated increase in professional fees and increased other operating expenses, including credit card fees related to increased sales volume. As a percentage of sales, these expenses were 14.2% compared to 15.6% in the year-ago period.
In the first quarter of 2004 we implemented a plan to streamline the activities of our United States computer businesses’ back office and warehouse operations, resulting in the elimination of approximately 200 jobs. We incurred $3.7 million of restructuring costs associated with this plan, including $3.2 million for staff severance and benefits for terminated employees and $0.5 million of non-cash costs for impairment of the carrying value of fixed assets. During the third quarter of 2004 we recorded $600,000 of additional costs related to facility exit costs for previously implemented plans to consolidate warehouse locations. We incurred $1.7 million of restructuring charges in Europe in connection with facility exit costs and workforce reductions during the first nine months of 2004, including a consolidation of United Kingdom sales offices in the first quarter of 2004, resulting in the elimination of 50 jobs.
During the second quarter of 2003, we purchased the minority ownership of our Netherlands subsidiary pursuant to the terms of the original purchase agreement for $2.6 million. All of the purchase price was attributable to goodwill and, as a result of an impairment analysis, was written off in accordance with SFAS 142.
The Company had income from operations for the current nine month period of $13.7 million compared to $11.4 million in the year-ago nine month period. The Company had income from operations of $15.4 million in its North American operations in the current nine month period compared to $11.9 million last year. We had a loss from operations in Europe of $1.7 million compared to a loss from operations of $0.5 million in the year-ago period.
Interest and other expense - net consists principally of interest expense. Interest expense was $2.3 million in the first nine months of 2004 and $1.7 million in 2003 as a result of higher average borrowings in Europe. Interest income on invested funds was $0.5 million in both years.
The income tax provision was $6.2 million for the first nine months of 2004, an effective tax rate of 51.6%, compared to a $5.3 million tax provision, an effective tax rate of 50.9%, for the comparable period in 2003. The high effective tax rate in 2004 was due to losses in tax jurisdictions for which no benefit is currently recognized. The effective tax rate in 2003 was affected by non-deductible costs incurred and losses in tax jurisdictions for which no benefit is recognized.
As a result of the above, net income for the first nine months of 2004 was $5.8 million, or $.17 per basic and $.16 per diluted share, compared to $5.1 million, or $.15 per basic and diluted share, in the year ago period.
Liquidity and Capital Resources
Our primary liquidity needs are to support working capital requirements in our business and to fund capital expenditures. We rely principally upon operating cash flow and borrowings under our credit facilities to meet these needs. We believe that cash flow available from these sources will be sufficient to meet our working capital requirements, projected capital expenditures and interest and debt repayments in the foreseeable future.
Our cash balance increased to $57.3 million during the nine months ended September 30, 2004 from $38.7 million at the end of 2003. Net cash provided by operating activities was $29.5 million in 2004, compared with $0.4 million in 2003. The increase in cash provided by operations in 2004 resulted from changes in our working capital accounts, which provided $11.3 million in cash compared to using $19.1 million of cash in 2003. The improvement resulted primarily from a $25.0 million increase in accounts payable, accrued expenses and other current liabilities in the first nine months of 2004, compared to a $15.7 million decrease for the same period of the prior year. Cash generated from net income adjusted by other non-cash items provided $18.2 million in 2004, compared to $19.5 million provided by these items in 2003.
Our working capital was $162 million at September 30, 2004, an increase of $13 million from $149 million at the end of 2003. This was due principally to a $19 million increase in cash, a $1 million increase in accounts receivable, a $4 million increase in inventories, an $8 million increase in prepaid expenses and other current assets and a $6 million decrease in short-term debt, offset by a $16 million increase in accounts payable and a $9 million increase in accrued expenses and other current liabilities. Our inventories increased in anticipation of traditionally strong fourth quarter sales, which are heavily influenced by individual consumer purchases. Future accounts receivable and inventory balances will continue to fluctuate with changes in sales volume and the mix of our net sales between consumer and business customers.
We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of September 30, 2004, 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.
In 2004 $4.6 million of cash was used in investing activities, principally for the purchase of property, plant and equipment. Capital expenditures in 2004 consisted primarily of upgrades and enhancements to our information and communications systems hardware and facilities costs for the opening of several new retail stores. Cash of $9.1 million was used in investing activities in 2003, including $6.5 million for capital expenditures and $2.6 million for the acquisition of the minority interest in our Netherlands subsidiary.
Net cash of $7.0 million was used in financing activities in 2004. Cash of $6.1 million was used to repay short-term borrowings under our European credit facilities. We used cash of $1.3 million for payments under long-term borrowing agreements. Exercises of stock options provided $412,000 of cash in 2004. Cash of $4.6 million was used by financing activities in 2003, including $7.2 million used to repay short and long-term obligations, $1.3 million provided by the issuance of a capital lease and $1.3 million provided by the exercise of stock options.
Under our $70 million United States secured revolving credit agreement, which expires on March 31, 2005, availability as of September 30, 2004 was $60.4 million. There were outstanding letters of credit of $10.1 million and there were no outstanding advances as of September 30, 2004. Under our £15 million ($27.1 million at the September 30, 2004 exchange rate) multi-currency United Kingdom credit facility, which is available to our United Kingdom subsidiaries, at September 30, 2004 there were £4.4 million ($8.0 million) of borrowings outstanding with interest payable at a rate of 5.87%. The facility does not have a termination date, but may be canceled by either party on six months notice. Borrowings under the facility are secured by certain assets of our United Kingdom subsidiaries. Under our Netherlands €5 million ($6.2 million at the September 30, 2004 exchange rate) credit facility, at September 30, 2004 there were €4.1 million ($5.1 million) of borrowings outstanding under this line with interest payable at a rate of 5.0%. This facility expires in November 2005.
We have begun discussions with our lenders to replace the current United States and United Kingdom credit facilities with a single multi-currency borrowing facility. We expect that a new agreement will be completed in the next three months.
We also have certain obligations with various parties that include commitments to make future payments. Our principal commitments at September 30, 2004 consisted of repayments of borrowings under our credit agreements and long-term borrowings and payments under operating leases for certain of our real property and equipment.
Off-balance Sheet Arrangements
The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.
Factors That May Affect Future Results and Financial Condition
There are a number of factors and variables that affect our results of operations and financial condition. Following is a description of some of the important factors that may affect future results.
| • | Economic conditions have affected and could continue to adversely affect our revenues and profits. |
| Both we and our business customers are subject to global political, economic and market conditions, including military action and the threat of terrorism. Economic conditions in the United States have improved after several years of adverse conditions. Economic conditions in Europe continue to be unsettled. If the strengthening of general economic conditions does not continue and if conditions in Europe remain weak, our results could continue to be adversely affected. We may experience a decline in sales as a result of poor economic conditions and the lack of visibility relating to future orders. Our consolidated 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 market for our products and services is 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 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. |
| • | We are dependent on third-party suppliers. |
| We purchase a significant portion of our computer products from major distributors such as Tech Data Corporation and Ingram Micro Inc. and directly from large manufacturers such as IBM and Hewlett Packard, who 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 maintaining 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. |
| A portion of our revenue is derived from the sale of products manufactured using licensed patents, software and/or technology. Failure to renew these licenses on favorable terms or at all could force us to stop manufacturing and distributing these products and our financial condition could be adversely affected. |
| 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 are exposed to inventory risks. |
| Our inventory is subject to risk due to technological change and changes in market demand for particular products. Certain of our suppliers offer limited price protection from the loss in value of inventory and we have limited right to return purchases to suppliers. The decrease or elimination of price protections or purchase returns could lower our gross margin or result in inventory write-downs. We also periodically 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 enter into such arrangements may significantly impact our sales and profitability. |
| • | 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 other appropriate nexus to obligate such collection exists. Other states may, from time to time, claim that we have state-related activities constituting a sufficient nexus to trigger 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, as do other direct mail retailers, 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 for 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. |
| • | We have substantial international operations and we are exposed to fluctuations in currency exchange rates and political uncertainties. |
| We currently have operations located in nine countries outside the United States, and non-U.S. sales accounted for 40.0% of our revenue during the first nine months of 2004. Our future results could be materially adversely affected by a variety of factors, including changes in foreign currency exchange rates, changes in a country’s economic or political conditions, unexpected changes in regulatory requirements and natural disasters. |
| • | 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, is dependent on our ability to generate future taxable income in the United States. 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. |
| • | Business disruptions could adversely impact our revenue and financial condition. |
| It is our policy to 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 and large losses could materially affect our insurance obligations and future expense. |
| • | Reliance on technology |
| We rely on a variety of information and telecommunications systems in our operations. Our success is dependent in large part on the accuracy and proper use of our information systems, including our telecommunications systems. To manage our growth, we continually evaluate the adequacy of our existing systems and procedures. We anticipate that we will regularly need to make capital expenditures to upgrade and modify our management information systems, including software and hardware, as we grow and the needs of our business change. The occurrence of a significant system failure or our failure to expand or successfully implement our 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. |
| • | 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 cash available 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. Such agreements require that we satisfy certain financial and other covenants. In addition, if we are unable to renew or replace these facilities at maturity, or if we are in breach of covenants, our liquidity and capital resources may be adversely affected. However, we have no reason to believe that we will not be able to renew our facilities. |
| • | Sales to individual consumers exposes us to credit card fraud, which could adversely affect our business. |
| Failure to adequately control fraudulent credit card transactions could increase our expenses. Increased sales to individual consumers, which are more likely to be paid for using a credit card, increases our exposure to fraud. We employ technology solutions to help us detect the fraudulent use of credit card information. However, if we are unable to detect or control credit card fraud, we may in the future suffer losses as a result of orders placed with fraudulent credit card data, which could adversely affect our business. |
| • | 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. We expect these developments to increase our legal compliance and financial reporting costs and make some activities more costly and time consuming. These developments may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage, possibly making it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee. We presently cannot estimate the timing or magnitude of additional costs we may incur as a result; however, to the extent these costs are significant, our general and administrative expenses are likely to increase as a percentage of revenue and our results of operations will be negatively impacted. |
| • | In the event we are unable to satisfy regulatory requirements requiring companies to evaluate internal controls under Section 404 of the Sarbanes-Oxley Act of 2002, or if these internal controls are not effective, our business could suffer. |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report on our internal controls over financial reporting and have our registered public accountant attest to such evaluation beginning with our fiscal year ending December 31, 2005. We have prepared a plan of action for compliance and we are in the process of documenting and testing our systems of internal controls. Due to the ongoing evaluation and testing of our internal controls we cannot be assured that no significant deficiencies or material weaknesses would be required to be reported. We have already identified a number of deficiencies in our internal controls over financial reporting. We are diligently working to implement enhancements to eliminate these deficiencies. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to regulatory sanctions and we might suffer a loss of public confidence in our reported financial information. Any such action could adversely affect our business and financial results. |
Other factors that could contribute to or cause such differences include, but are not limited to, unanticipated developments in any one or more of the following areas: (i) the effect on us of volatility in the price of paper and periodic increases in postage rates, (ii) the operation of our management information systems, (iii) significant changes in the computer products retail industry, especially relating to the distribution and sale of such products, (iv) timely availability of existing and new products, (v) 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, (vi) 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, (vii) borrowing costs or availability, (viii) pending or threatened litigation and investigations and (ix) the availability of key personnel, as well as other risk factors which may be detailed from time to time in our Securities and Exchange Commission filings.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the period. Significant accounting policies employed by the Company, including the use of estimates, were presented in the Notes to Consolidated Financial Statements of the Company's 2003 Annual Report on Form 10-K.
Critical accounting policies are those that are most important to the presentation of our financial condition and results of operations, require management's most difficult, subjective and complex judgments, and involve uncertainties. The accounting policies that have been identified as critical to our business operations and understanding the results of operations pertain to revenue recognition, net accounts receivable, inventories, long-lived assets, income taxes and restructuring charges and accruals. The application of each of these critical accounting policies and estimates was discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. There have been no significant changes in the application of critical accounting policies or estimates during 2004. Management believes that full consideration has been given to all relevant circumstances that we may be subject to, and the condensed consolidated financial statements of the Company accurately reflect management’s best estimate of the consolidated results of operations, financial position and cash flows of the Company for the periods presented. Because of the uncertainty in these estimates, actual results could differ from estimates used in applying the critical accounting policies. We are not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect its financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates as measured against the U.S. dollar and each other.
We have limited involvement with derivative financial instruments and do not use them for trading purposes. Changes in currency exchange rates as measured against the U.S. dollar may positively or negatively affect sales, gross margins, operating expenses and retained earnings as expressed in U.S. dollars. We may enter into foreign currency options or forward exchange contracts aimed at limiting in part the impact of certain currency fluctuations, but as of September 30, 2004 we had no outstanding forward exchange contracts.
Our exposure to market risk for changes in interest rates relates primarily to our variable rate debt. In connection with our United Kingdom term loan agreement, effective April 30, 2002 we entered into an interest rate collar agreement to reduce our exposure to market rate fluctuations. At September 30, 2004 the notional amount of the interest rate collar was £5.3million ($9.5 million at the September 30, 2004 exchange rate) with an interest rate cap of 6.0% and a floor of 4.5%. The interest rate collar expires on April 30, 2005.
Item 4. Controls and Procedures
The Company has carried out an evaluation under the supervision of management, including the Chairman and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2004, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is assembled and reported to the Company’s management, including the Chairman and Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
The Company previously disclosed in its Form 10-Q for the quarter ended June 30, 2004 that management identified and reported to the Audit Committee of the Company’s Board of Directors certain matters involving internal control deficiencies. These included internal control deficiencies arising from the consolidation of its U.S. computer businesses with separate accounting systems to a single accounting system. These internal control deficiencies affected the timeliness and accuracy of recording certain transactions and included the lack of formal procedures to reconcile intercompany accounts and transactions. We have addressed these deficiencies with the hiring and training of additional accounting staff.
We also identified deficiencies related to policies and procedures and systems interfaces and are undertaking measures to remediate them. Management and the Audit Committee believe that those internal control deficiencies, as mitigated by substantial manual procedures and account reconciliations, individually or in the aggregate, did not have a material effect on the financial statements of the Company for the period ended September 30, 2004.
Other than arising from the review described above, there have been no changes in internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
| 3.1 | Composite Certificate of Incorporation of Registrant, as amended. (Incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.) |
| 3.2 | By-laws of Registrant. (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, File No. 33-92052.) |
| 4.1 | Stockholders Agreement. (Incorporated herein by reference to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 1995.) |
| 4.2 | Specimen Stock Certificate. (Incorporated herein by reference to Exhibit 19.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.) |
| 31 | Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K.
| (i) A report on Form 8-K was filed by the Company on August 11, 2004 regarding the Company's financial results for the six months ended June 30, 2004. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SYSTEMAX INC. |
| Date: November 12, 2004 | By: /s/ RICHARD LEEDS Richard Leeds Chairman and Chief Executive Officer By: /s/ STEVEN GOLDSCHEIN Steven Goldschein Senior Vice President and Chief Financial Officer |