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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, 1997
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
------------------------
GLOBAL DIRECTMAIL CORP
(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.)
22 HARBOR PARK DRIVE
PORT WASHINGTON, NEW YORK 11050
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 625-1555
---------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS 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 whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of the registrant, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 23, 1998 was approximately $184,964,312. For purposes
of this computation, all executive officers and directors of the Registrant and
all parties to the Stockholders Agreement dated as of June 15, 1995 have been
deemed to be affiliates. Such determination should not be deemed to be an
admission that such persons are, in fact, affiliates of the Registrant.
The number of shares outstanding of the registrant's common stock, as of
March 23, 1998, was 38,231,990 shares.
Documents incorporated by reference: The definitive Proxy Statement of
Global DirectMail Corp relating to the 1998 Annual Meeting of Stockholders is
incorporated by reference in Part III hereof.
TABLE OF CONTENTS
Part I
Item 1. Business..........................................................1
General..........................................................1
Products.........................................................2
Sales and Marketing..............................................3
Distribution Centers.............................................5
Suppliers........................................................5
Management Information Systems...................................6
Research and Development.........................................7
Competition......................................................7
Employees........................................................9
Environmental Matters............................................9
Item 2. Properties.......................................................10
Item 3. Legal Proceedings................................................10
Item 4. Submission of Matters to a Vote
of Security Holders............................................10
Part II
Item 5. Market for Registrant's
Common Equity and Related
Stockholder Matters............................................11
Item 6. Selected Financial Data..........................................11
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations......................................13
Item 7A.Quantitative and Qualitative
Disclosures About Market Risk..................................17
Item 8. Financial Statements and
Supplementary Data.............................................18
Item 9. Changes in and Disagreements
With Accountants on Accounting
and Financial Disclosure.......................................18
Part III
Item 10. Directors and Executive Officers of the Registrant..............18
Item 11. Executive Compensation..........................................18
Item 12. Security Ownership of Certain Beneficial
Owners and Management..........................................18
Item 13. Certain Relationships and Related Transactions..................18
Part IV
Item 14.Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................18
Signatures......................................................20
PART I
UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN TO "GLOBAL DIRECTMAIL
CORP" ("GLOBAL" OR THE "COMPANY") INCLUDE ITS SUBSIDIARIES AND PREDECESSORS.
GLOBAL IS THE SUCCESSOR TO A NUMBER OF CORPORATIONS (THE "PREDECESSOR
COMPANIES") THAT OPERATED WITH RELATED OWNERSHIP.
ITEM 1. BUSINESS.
GENERAL
Global is a direct marketer of over 40,000 products including brand name
and private label personal desktop computers ("PCs"), notebook computers,
computer related products, office products and industrial products in North
America and Europe. In addition, the Company assembles build-to-order PCs in
North America, under the brand names MIDWEST MICRO(R), ULTRA(TM), TIGER(R) and
SYSTEMAX(TM). The Company emphasizes a broad selection of in-stock products,
frequent mailings of a variety of distinctively branded full color catalogs,
extensive customer service and prompt, complete order fulfillment. The Company's
portfolio of catalogs includes such established brand names as GLOBAL(TM),
MISCO(R), HCS GLOBAL(TM), HCS MISCO(TM), ARROWSTAR(TM), DARTEK(R), POWER UP!(R),
TIGER(R), 06 (TM), MIDWEST MICRO(TM) and INFOTEL(TM). GLOBAL HAS grown rapidly
as a result of internal growth and strategic acquisitions while maintaining a
high level of profitability. The Company's net sales have increased at a
compound annual growth rate of 31% to $1.15 billion in 1997 from $393.6 million
in 1993. During this same period, income from operations increased at a compound
annual growth rate of 19% from $29.8 million to $59.3 million.
The Company has positioned itself as a "corporate supplier" offering a
broad spectrum of business products. The Company believes that direct marketing
is the most effective and convenient distribution method to reach business
customers who place many small orders requiring a wide selection of products.
Computers and computer related products accounted for 80% of the Company's net
sales in 1997.
The Company markets its products to businesses through mailings of its
"full-line" and specialty catalogs and through outbound telemarketing. The
Company targets individuals at major account customers(more than 1,000
employees), mid-sized businesses (20 to 1,000 employees), small office/home
office customers ("SOHO") and value added resellers ("VARs"). VARs select,
install and maintain PCs and networks for business customers who do not have
their own computer technicians. Catalog mailings increased from approximately 98
million catalogs comprising 18 different titles in 1993 to approximately 162
million catalogs comprising 41 different titles in 1997. At December 31, 1997,
the Company had 1.8 million "active" customers (defined as individuals that have
purchased from the Company within the proceeding 12 months) and combined
customer and prospect files of more than 40 million names.
The Company operates in eight locations in North America. The Company's
North American operations contributed 76% of net sales in 1997. For some of the
Company's businesses, certain functions, such as merchandising, marketing,
purchasing and information systems, are performed centrally.
European operations, which represented 24% of net sales for 1997, are
generated from seven sales and distribution centers located across Europe: two
in the United Kingdom, and one each in France, Germany, Italy, Spain and the
Netherlands. For a more detailed geographic breakdown of the Company's
operations, see Note 10 to the Consolidated Financial Statements.
Most of the Company's products are carried in stock, and orders for such
products are fulfilled directly from the Company's distribution centers,
typically on the day on which the order was received. The strategic location of
the Company's distribution centers allows next day or second day delivery via
low cost ground carriers throughout the United States, Canada and Western
Europe. The strategic locations in Europe have enabled the Company to market
into four additional countries with limited incremental investment.
RECENT ACQUISITIONS
During 1997 the Company completed two strategic acquisitions. During the
first quarter, the Company acquired the assets of 06 Software Centre Europe B.V.
("06"), a direct marketer of computers and computer products in the Netherlands.
Although 06 does not materially increase the Company's European operations, it
adds an additional market to that region, bringing to 10 the number of countries
serviced there.
At the end of the third quarter the Company acquired the assets of Infotel,
Inc. ("Midwest Micro"), an assembler and direct marketer of private label
build-to-order PCs and a direct marketer of brand name PCs, notebook computers
and computer related products. See Footnote 3 to the Consolidated Financial
Statements.
PRODUCTS
In positioning itself as a "corporate supplier", the Company has
consistently expanded the breadth of its product offerings in order to fulfill
an increasingly wide range of business product needs. In total, Global offers
over 40,000 brand name and private label products.
The Company's computer related products include: supplies such as laser
printer toner cartridges, ink jet printer cartridges, and paper; media such as
floppy disks and magnetic tape cartridges; peripherals such as hard disk drives
and memory upgrades; data communication and networking equipment; ergonomic
accessories such as adjustable monitor support arms and antiglare screens;
packaged software; and hardware. Computer sales include a wide array of
build-to-order PCs complimented with offerings of the most popular brand named
PCs and notebook computers.
Office products include furniture, chairs, small office machines and
related supplies. The Company's industrial product lines focus primarily on
storage equipment such as metal shelving, bins, lockers, light material handling
equipment such as hand carts and hand trucks and consumable industrial products
such as first aid items, safety items, protective clothing and OSHA compliance
items. The table below summarizes the Company's mix of sales by product
category:
PRODUCT TYPE - YEAR ENDED DECEMBER 31 (PERCENTAGE OF TOTAL SALES)
1997 1996 1995
---- ---- ----
Computer and Computer Related Products ..... 80% 75% 66%
Office Products and Industrial Products...... 20 25 34
-- -- --
Total ................................. 100% 100% 100%
=== === ===
Historically, the Company focused primarily on non-branded or private label
products. Although the Company continues to experience strong growth in its
private label products, in recent years the Company made the strategic decision
to leverage its distribution and marketing strengths into the market for high
volume brand name products which the Company believes offer significant
opportunities to increase sales. In 1993 the Company expanded its offerings of
brand name computer related products, including peripherals, data communications
and networking equipment, software and supplies. In 1995 the Company further
expanded its offering of brand name products to include notebooks, desktops and
servers. In addition, in 1997 the Company entered the "build to order" PC market
through the acquisition of Midwest Micro. These strategies have impacted the
overall gross profit margin percentages as those incremental sales typically
have lower gross profit margin percentages than many of the Company's other
products. A significant amount of the decrease in gross profit margin has been
offset by reduced catalog production costs resulting from increased levels of
vendor supported advertising, improved catalog management, and increased cost
efficiencies.
SALES AND MARKETING
The Company produces a total of 41 "full-line" and targeted specialty
catalogs under distinct titles. "Full- line" computer related product catalogs
offer products such as computer supplies and magnetic media, peripherals, data
communication, networking and power protection equipment, ergonomic accessories,
furniture, software, PCs and hardware. "Full-line" industrial products 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. Global mails multiple
catalogs to many individuals at each location, providing the Company with
multiple points-of-entry into a business location. Once a prospect purchases a
particular product, however, the Company's customers have exhibited strong brand
loyalty resulting in limited customer overlap among the Company's various
catalog brands. This multiple brand strategy, and the accompanying customer
exposure to the Company's products, is a crucial factor in the Company's
strategy to increase sales volume through broader market coverage and improve
the productivity of its customer file through more focused marketing.
Global has invested consistently and aggressively in developing a
proprietary customer and prospect database. This database, which includes more
than 40 million names, represents a major asset of the Company. The Company
considers its customers to be the various individuals that work within an
organization rather than the business location itself. The customer and prospect
database includes detailed information, including company size, number of
employees, industry, various demographic and geographic characteristics and
purchase history. Management believes that this variety and depth of information
on its customers provides Global a significant competitive advantage.
During 1997, the Company distributed approximately 162 million catalogs of
which approximately 125 million catalogs were mailed in North America and
approximately 37 million catalogs were distributed in Europe. At December 31,
1997, the Company had 1.8 million "active" customers (defined as individuals
that have purchased from the Company within the preceding 12 months).
In its mailings, the Company seeks to maximize the response rates of its
catalogs. The Company calculates response rate as total catalogs mailed for the
period divided by the total number of orders entered for the same period. The
following table shows the approximate number of catalogs distributed by the
Company and the catalog response rates:
CATALOGS DISTRIBUTED - YEAR ENDED DECEMBER 31
(IN MILLIONS EXCEPT RESPONSE RATES) 1997 1996 1995
----------------------------------- ---- ---- ----
North America.................................... 125 120 90
Europe........................................... 37 40 32
---- ---- ----
Total........................................ 162 160 122
====== ====== ======
Response rates................................... 2.18% 2.12% 2.08%
The Company's in-house staff designs all of the Company's catalogs. Catalog
paper is purchased from various sources and has historically been subject to
price fluctuations. The printing of the catalogs is done by several sources
under fixed pricing arrangements. In-house catalog production helps reduce
overall catalog expense and shortens catalog production time. This allows the
Company the flexibility to alter its product offerings and pricing and refine
its catalog formats more quickly.
INBOUND SALES
Global's catalogs generate calls to the in-bound sales group. Sales
representatives use the capabilities of the Company's systems to fulfill orders
and explore additional customer product needs. Each sales representative has
immediate access to customer files, including usage and billing information, and
real-time inventory levels by distribution center. Using this data, inbound
sales personnel are also prompted by their computer screen to cross-sell
selected products and obtain specific information relating to customer-specific
purchasing habits and product needs.
MAJOR ACCOUNT MANAGEMENT
The Company has established a major accounts management program focused on
expanding penetration of larger businesses. In the United States, Global has the
ability to provide such customers with EDI ordering and customized billing
services, customer savings reports and stocking of specialty items specifically
requested by customers. The Major Account sales force's goal is to increase the
purchasing productivity of current customers and to actively solicit newly
targeted prospects to become customers.
OTHER MARKETING
The Company also uses targeted fax campaigns, special single-product "solo"
mailings and the Internet to generate incremental sales to business customers.
During 1997, the Company initiated Internet marketing with three build-to-order
PC configurator websites.
CUSTOMER SERVICE AND SUPPORT
Order entry and fulfillment occurs at each of the Company's 15 locations.
Global generally provides toll-free telephone number access to its customers.
The integration of the Company's call centers also provide some domestic
locations with telephone backup in the event of a disruption in phone service.
In addition to telephone orders, Global also receives orders by mail, by fax,
via electronic data interchange ("EDI") and on the Internet.
When an order is entered into the system, a credit check is performed, and,
if the credit is approved, the order is electronically transmitted to the
warehouse and a packing slip is printed for order fulfillment. Approximately 70%
of the Company's 1997 sales were on open account and the Company's bad debt
experience has traditionally been less than 1% of sales. Orders generally are
shipped by United Parcel Service in the United States and by similar national
small package delivery services in Europe, as well as by various freight lines
and local carriers. Air freight is also available. As a result of the regional
locations of the Company's warehouses, Global estimates that most customers
receive their orders (other than custom items, large furniture and large
industrial items shipped directly by the vendor) within one or two business days
of the order date. Customers are invoiced for merchandise, shipping and handling
promptly after shipment.
The Company conducts regular on-site training seminars for its sales
representatives and operates a separate customer service department which
responds to customer concerns. The Company also maintains a separate technical
support group dedicated to answering customer inquiries and assisting customers
with the operation of their products. Technical support questions are logged
into the computer, thus forming a database of commonly asked questions for each
product. This database helps sales representatives respond quickly to similar
questions from future customers and also allows product managers to monitor the
effectiveness of the information provided in the catalogs. The Company also
employs a fax-back system that allows customers to call directly into a computer
system that automatically faxes the requested information to the customer.
DISTRIBUTION CENTERS
NORTH AMERICA
The Company operates eight separate facilities in North America. Each sales
and distribution center has a general manager in charge of inbound sales,
outbound telemarketing, on-site operations, credit review, product fulfillment
and asset management.
Many of the facilities are linked by a wide area network management
information system. In the event of adverse delivery conditions (such as bad
weather) the Company can shift inbound calls and/or order fulfillment and
shipping to an alternative location. Management believes this provides Global
with important operating flexibility and protection from possible sales
interruptions for many of its North American businesses. See "Management
Information Systems."
A large number of the Company's products are carried in stock, and
consequently orders for such products are fulfilled from the distribution
center. Certain products (such as selected computer hardware and large furniture
and industrial items) are shipped directly by the supplier. The layout of the
Company's distribution centers is managed with a computer-based tracking system
which dictates the location of specific stock items. Individual product types
are consistently stocked in the same physical picking location, allowing ease of
picking and minimizing picking errors. Picking of products at the distribution
centers is done continuously throughout the day. Customer orders are packed and
shipped as they are received.
EUROPE
The Company has seven separate European market branch facilities in six
countries and a central office near London to direct their activities. The
central office is responsible for marketing support, catalog production,
financial reporting, logistics and computer programming support. In addition,
each market has a full service sales and distribution center to process orders
and reports to the respective country manager who has ultimate profit and loss
responsibility.
SUPPLIERS
In North America, the Company purchases the majority of its products and
components directly from manufacturers, except for certain peripherals, software
and hardware products which are purchased through wholesale distributors. In
Europe, products are sourced from a combination of local manufacturers and
wholesalers. Substantially all of the European catalog product content is
sourced in Europe. No single supplier accounted for more than 10% of Global's
total purchases in 1997.
Private label products are manufactured either by the Company or by third
parties to the Company's specifications. Many of these private label products
have been designed or developed by the Company's in-house research and
development team. See "Research and Development.
MANAGEMENT INFORMATION SYSTEMS
In North America, the Company operates a proprietary system that allows
centralized management of key management functions. These include communication
links between distribution centers, inventory and accounts receivable
management, purchasing, pricing, sales and distribution, and the preparation of
daily operating control reports which provide concise and timely information
regarding key aspects of its business. This proprietary management information
system enables the Company to enhance its flexibility by shipping customer
orders usually on a same-day basis, responding quickly to order changes and
providing a high level of customer service. The Company maintains a database of
over 40 million customer and prospect names and keeps records of historical
purchasing patterns in order to prompt sales personnel with product suggestions
to expand customer order values. In addition, the Company has developed a
customer prospecting function based upon geographic, economic and demographic
data which enables Global to utilize its information systems to maintain and
expand its customer data file. These applications enable the Company to achieve
cost savings, deliver extensive customer service and centrally manage its
operations.
In the United States, the Company's management information systems are
networked, real-time information systems. These allow each distribution center
to share information and monitor daily progress relating to sales activity,
credit approval, inventory levels, stock balancing, vendor returns, order
fulfillment and other measures of performance.
THE YEAR 2000 ISSUE
As is the case with virtually all companies and organizations, the Company
currently utilizes certain computer programs that store two digits in
identifying the year in the date field. Those programs were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected those computer programs could fail or create erroneous results
by or at the year 2000.
The Company currently believes it will be able to modify or replace any
affected computer program in time to minimize any potential harmful effects on
operations. While it is not possible, at present, to give an accurate estimate
of the impact on the Company's operations or the cost of correcting the affected
computer programs, the Company expects that the impact and associated costs will
not be material to the Company's operations. The Company is in the process of
contacting customers and vendors to determine which of them is affected by the
year 2000 problem, and to what extent, in order to assess the potential impact
on the Company.
System maintenance and modification costs to existing computer programs
will be expensed as incurred. The costs associated with new computer programs
that are year 2000 compliant will be capitalized and amortized over the
software's expected useful life.
RESEARCH AND DEVELOPMENT
The Company's research and development team designs and develops products
for Global's private label program. The individuals responsible for research and
development have backgrounds in engineering and industrial design.
This in-house capability provides important support to the private label
program. Many of the Company's private label products were designed or developed
by the in-house research and development team. Examples of products designed
in-house include: furniture, ergonomic monitor support arms, printer and monitor
stands, wrist rests and other durable computer related products, storage racks
and shelving systems, various stock and storage carts, work benches, plastic
bins and shop furniture. The Company owns the tooling for many of these
products, including plastic bins, computer accessories, furniture, and metal
alloy monitor arms. See "Research and Development Costs" in Footnote 1 to the
Consolidated Financial Statements.
COMPETITION
COMPUTER RELATED PRODUCTS
The North American computer related products market is highly fragmented
and characterized by multiple channels of distribution, including direct
response (mail order) distributors, local and national retail computer stores
that carry computer supplies, computer resellers, mass merchants, computer
"superstores" and the Internet. The tremendous growth in the computer related
products market during the past 10 years has been accompanied by substantial
changes in the nature of product distribution and sales. The decentralization of
computers throughout factory, business, engineering and office environments has
made it increasingly difficult and expensive for many suppliers to use
traditional direct sales methods to locate users, initiate sales contacts and
effectively provide service to customers. Average order values also tend to be
smaller than in the past, reflecting individual requirements rather than the
greater needs traditionally associated with centralized data processing
departments. These changes in the structure of the computer related products
market have placed traditional distributors with direct sales forces at a
competitive disadvantage due to their cost structures and established selling
methods. As a result, direct marketers have been able to increase sales to the
larger businesses that have traditionally been served by contract stationers and
VARs. They have also been able to capture sales volume and market share from the
numerous small retail computer stores.
In Europe, the Company's major competitors are regional or country-specific
retail and direct-mail distribution companies. The Company's presence in seven
major European countries provides Global with the flexibility to purchase large
volumes centrally. In addition, the commonality of certain core pages of the
European catalogs provides for economies in catalog production. The Company
believes that these factors allow it to take advantage of cost savings not
available to many of its competitors in Europe.
There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
PCS AND NOTEBOOK COMPUTERS
The computer industry is fiercely competitive with many U.S., Asian and
European companies vying for market share. There are few barriers to the PC
market with PCs being sold through the direct market channel, directly from
manufacturers, computer superstores, mass merchants and over the Internet.
Timely introduction of new products or product features are critical elements to
maintaining a competitive advantage. Other competitive factors include product
performance, quality and reliability, technical service and customer support,
marketing and distribution and price. There can be no assurance that the Company
will be able to maintain or improve its current competitive position with
respect to any of these or other competitive factors. Some of the Company's
competitors have stronger brand-recognition, broader product lines and greater
financial, marketing, manufacturing and technological resources than the
Company. Additionally, the Company's results could also be adversely affected
should it be unable to implement effectively its technological and marketing
arrangements with other companies, such as Microsoft(R) and Intel(R).
OFFICE PRODUCTS
The distribution of office products in the United States is highly
fragmented, with no one participant having more than a 10% market share.
Sourcing of products from vendors and distributors also has been through a
highly-fragmented supplier base without volume discounts or central purchasing
efficiencies. Office products are typically sold through one of three channels:
retail outlets, contract stationers and direct mail. However, due to the rapid
growth of the office products market, competition and consolidation in this
market are increasing, particularly with respect to the SOHO and large corporate
(companies with over 1,000 employees) segments. Large contract stationers,
direct mail distributors and office products superstores have grown at the
expense of small independent retail dealers. The companies leading this
consolidation have not, however, captured a large market position with the
mid-sized facilities which the Company targets. The Company believes that this
lack of penetration results from the fact that office products superstores and
direct mail marketers have focused on serving the SOHO segment while contract
stationers have focused on serving the large corporate sector. The Company
believes that direct mail will continue to be a growing channel of distribution
for office products and that price, breadth of product line and customer service
will be key factors in the success of direct mail distribution of office
products. There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
INDUSTRIAL PRODUCTS
The market for the sale of industrial products in the United States is
highly fragmented and is characterized by multiple distribution channels such as
retail outlets, small dealerships, direct mail distribution and large warehouse
stores. Global also faces 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 specifications. In the
industrial products market, customer purchasing decisions are, primarily, based
on price, product selection, product availability, level of service and
convenience. As is the case with the office products industry, the Company
believes that direct mail is one of the most effective and convenient
distribution methods to reach mid-sized facilities which place many small orders
and require a wide selection of products. In addition, because the industrial
product market is highly fragmented and generally less brand oriented, it is
well suited to private label products. The majority of the Company's industrial
products are high gross profit margin, private label products.
Competition, with respect to industrial products, in the United Kingdom is
similar to competition in the U.S. with the exception that most direct mail
companies in the United Kingdom drop ship the majority of their products from
the manufacturer, resulting in long delivery lead times. As Global intends to
stock the majority of its products, management believes it will have a
significant advantage over most of its direct mail competitors in the United
Kingdom.
There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
EMPLOYEES
As of December 31, 1997, the Company employed a total of 2,792 employees,
including 2,554 full-time and 238 part-time employees, of whom 2,137 were in
North America and 655 were in Europe.
None of the Company's North American employees is represented by a labor
union, except for approximately 60 warehouse and assembly employees in New York
who are covered by an "open-shop" agreement with the Company, which expires at
the end of 1998. These employees are not required to join the union. In Europe,
union membership and affiliations vary by country. In general, the European
unions tend to be national, rather than local, in scope and are industry
specific.
The Company considers its relationships with employees to be good and has
not experienced a work stoppage in 22 years.
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. The Company leases
most of its facilities. In connection with such leases, the Company could be
held liable for the costs of removal or remedial actions with respect to
hazardous substances. Although the Company has not been notified of, and is not
otherwise aware of, any material environmental liability, claim or
non-compliance, there can be no assurance that the Company will not be required
to incur remediation or other costs in connection with environmental matters in
the future.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
See "Geographic Information" contained in Footnote 10 to the financial
statements.
ITEM 2. PROPERTIES.
The Company's primary facilities, which are leased except where otherwise
indicated, are as follows:
APPROX EXPIRATION
FACILITY LOCATION SQ. FT. OF LEASE
Headquarters, Sales and
Distribution Center, Catalog
Operations(1).............................Port Washington, NY 178,000 2007
Sales and Distribution Center(1)............Suwanee, GA 130,000 1999
Sales and Distribution Center...............Compton, CA 140,000 2007
Sales and Distribution Center...............Naperville, IL 241,000 2010
Sales and Distribution Center...............Holmdel, NJ 51,000 1999
Sales and Distribution Center...............Markham, Ontario 45,000 2005
Sales and Distribution Center...............Verrieres le Buisson, France 24,000 2000
Sales and Distribution Center...............Dreieich, Germany 55,000 2000
Sales and Distribution Center...............Madrid, Spain 35,000 2 months notice
Sales and Distribution Center...............Milan, Italy 80,000 1999
Sales and Distribution Center...............Greenock, Scotland 78,000 owned
Sales and Distribution Center...............Wellingborough, England 38,000 2013
Sales Center and Catalog Operations.........Miami, FL 32,000 2000
Sales Center................................Amstelveen, Netherlands 5,000 2000
Assembly, Sales and Distribution Center.....Fletcher, Ohio 185,000 owned
European Headquarters.......................Uxbridge, England 7,400 2005
- -----------
(1) Facilities leased from related party. See "Certain Relationships and
Related Transactions--Agreements-- Leases and Related Guarantees."
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal actions arising out of the normal
course of business, none of which is anticipated to have a material adverse
effect on the Company's financial position or results of operations.
On March 9, 1998 the Company filed suit in U.S. District Court (Eastern
District of New York) against a bankrupt supplier and its lenders seeking
monetary damages for breach of contract and warranty as well as a declaration
that the Company has certain legal and equitable rights of offset against
amounts otherwise due the supplier, including a contractual right to offset $4
million paid by the Company to one of the lenders under a letter of credit. The
Company believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1997, there were no matters submitted
to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the New York Stock Exchange
under the symbol "GML" since its initial public offering on June 26, 1995 (the
"IPO"). The following table sets forth the high and low sales price of the
Company's Common Stock as reported on the New York Stock Exchange for the
periods indicated.
1997 HIGH LOW
FIRST QUARTER.................................. 43 7/8 17
SECOND QUARTER................................. 26 1/4 13 1/8
THIRD QUARTER.................................. 27 3/4 20
FOURTH QUARTER................................. 22 3/8 15 5/8
1996
First quarter.................................. 35 24 1/4
Second quarter................................. 47 32 1/8
Third quarter.................................. 47 1/4 36 1/4
Fourth quarter................................. 52 1/4 39 1/4
On March 23, 1998, the last reported sale price of the Company's Common
Stock on the New York Stock Exchange was $1813/16 per share. As of March 23,
1998, the Company had 255 stockholders of record.
The Company has not paid any dividends since its initial public offering
and anticipates that all of its income in the foreseeable future will be
retained for the development and expansion of its business, and therefore does
not anticipate paying dividends on its Common Stock in the foreseeable future.
See "Certain Relationships and Related Transactions" for a description of the
Company's historical distributions.
On September 30, 1997 the Company acquired the assets of Midwest Micro for
approximately $40 million in cash and 375,000 shares of the Company's common
stock. These shares have not been registered with the Securities and Exchange
Commission as they were issued privately to Midwest Micro pursuant to the
private placement exemption provided in Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 of Regulation D promulgated thereunder.
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 income statement data for the years ended December 31,
1997, 1996 and 1995 and the selected balance sheet data as of December 31, 1997
and 1996 is derived from the audited consolidated financial statements which are
included elsewhere herein. The selected balance sheet data as of December 31,
1995 is derived from the audited financial statements of the Company which are
not included herein. The selected balance sheet data as of December 31, 1994 and
1993 and the selected income statement data for the years ended December 31,
1994 and 1993 are derived from the audited financial statements of the
Predecessor Companies which are not included herein.
INCOME STATEMENT DATA:
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA, NUMBER OF CATALOG TITLES AND NUMBER OF COUNTRIES)
YEAR ENDED DECEMBER 31 1997 1996 1995 1994 1993
---------------------- ---- ---- ---- ---- ----
Net sales....................................... $ 1,145.4 $ 911.9 $ 634.5 $ 484.2 $ 393.6
Cost of sales................................... 879.8 662.3 437.2 318.5 244.5
----- ----- ----- ----- -----
Gross profit.................................... 265.6 249.6 197.3 165.7 149.1
Selling, general and
administrative expenses...................... 206.3 180.1 143.2 129.5 119.3
Income from operations.......................... 59.3 69.5 54.1 36.2 29.8
Interest income................................. 3.3 2.5 1.2 1.1 1.1
Interest expense................................ .4 .5 1.3 1.8 2.1
Income taxes.................................... 23.3 27.7 21.0(3) 14.0(3) 11.1(3)
Net income...................................... 38.8 43.7 33.1(3) 21.9(3) 17.4(3)
Net income per common share:
Basic....................................... $ 1.02 $ 1.16 $ .93(3) $ .65(3) $ .51(3)
Diluted..................................... $ 1.02 $ 1.15 $ .93(3) $ .65(3) $ .51(3)
Weighted average common shares outstanding
Basic....................................... 38.0 37.6 35.5(3) 33.8(3) 33.8(3)
Diluted..................................... 38.2 38.1 35.5(3) 33.8(3) 33.8(3)
SELECTED OPERATING DATA:
Active customers (1)............................ 1.8 1.7 1.7 1.1 .9
Orders entered.................................. 3.5 3.4 2.5 2.2 1.9
Number of catalogs distributed.................. 162 160 122 114 98
Number of catalog titles........................ 41 40 32 24 18
Number of countries receiving catalogs.......... 13 12 10 7 7
BALANCE SHEET DATA (AT DECEMBER 31, IN MILLIONS):
Working capital (2)............................. $ 135.3 $ 128.7 $ 99.1 $ 84.6 $ 65.8
Total assets.................................... 399.7 331.4 247.5 164.2 127.1
Short-term debt................................. - .5 5.4 19.2 4.8
Long-term debt, excluding
current portion............................... 2.0 2.0 2.9 11.5 13.9
Stockholders' equity............................ 272.2 228.6 154.0 69.1 58.1
(1) An "active customer" is defined as a customer who has purchased from the
Company within the preceding 12 months.
(2) Working capital excludes cash and cash equivalents, short-term investments
and short-term debt.
(3) Amount is calculated on a pro forma basis. Net income per common share and
weighted average common shares outstanding give effect to the shares
outstanding and exchanged prior to the Company's IPO.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table represents the Company's statement of income data
expressed as a percentage of net sales for the three most recent fiscal years:
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
Net sales..................................................... 100.0% 100.0% 100.0%
Gross profit.................................................. 23.2 27.4 31.1
Selling, general and administrative expenses.................. 18.0 19.8 22.5
Income from operations........................................ 5.2 7.6 8.6
Interest income............................................... .3 .3 .2
Interest expense.............................................. - .1 .4
Income taxes.................................................. 2.0 3.0 2.0
Net income.................................................... 3.4 4.8 5.6
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased by $233.5 million or 25.6% to $1.15 billion in 1997
from $911.9 million in 1996. The increase was primarily attributable to (i) an
increase in revenue from the Company's major account sales program, (ii) the
inclusion of sales from Midwest Micro since its acquisition at the end of
September 1997, (iii) an increase in the sales of brand name and private label
PCs and notebook computers and (iv) an increased average order value resulting
from increased offerings and sales of brand name products. Sales attributable to
the Company's North American operations increased 29.1% to $875.2 million in
1997 from $677.8 million in 1996. European sales increased to $270.2 million in
1997 from $234.1 million in 1996, an increase of 15.4%. In local currencies
without foreign exchange rate effects, European sales increased 21.3%.
Gross profit, which consists of net sales less product, shipping and
certain distribution center costs, increased by $15.9 million or 6.4% to $265.5
million in 1997 from $249.6 million in 1996. Gross profit margin decreased to
23.2% in 1997 from 27.4% in 1996. The decrease in gross profit margin was
primarily due to (i) the Company's strategic decision to increase the proportion
of net sales attributable to brand name products, particularly PCs, notebook
computers, computer related products and hardware which typically have lower
gross profit margin percentages than many of the Company's other products, (ii)
the increase in the proportion of sales from the Company's major account sales
group which generally sells to larger customers at discounted prices, and (iii)
increased shipping and other costs associated with the United Parcel Service
labor action in August 1997.
A significant portion of this decline in gross profit margin has been
offset by the continued decline in selling, general and administrative expenses
as a percentage of net sales. While selling, general and administrative expenses
increased by $26.1 million or 14.5% to $206.3 million in 1997 from $180.1
million in 1996, as a percentage of net sales they decreased to 18.0% in 1997
from 19.8% in 1996. The decrease as a percentage of net sales was primarily
attributable to reduced catalog costs in North America as a result of the
increased efficiencies from larger average order sizes, vendor supported
advertising, continued expense control and the leveraging of selling, general
and administrative expenses over a larger sales base. Included in selling,
general and administrative expenses in 1997 was a one time charge of $9.6
million incurred during the third quarter relating to the impairment of certain
long lived assets, principally goodwill.
As a result of the above, income from operations decreased by $10.2 million
or 14.7% to $59.3 million in 1997 from $69.5 million in 1996. Income from
operations as a percentage of net sales decreased to 5.2% from 7.6% in 1996.
Interest income increased $ .8 million to $3.3 million in 1997 from $2.5
million in 1996 primarily due to higher levels of investments in short-term
securities. Interest expense decreased $ .1 million to $ .4 million in 1997 from
$ .5 million in 1996.
Net income decreased $4.9 million or 11.2% to $38.8 million in 1997
principally as a result of the above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales increased by $277.4 million or 43.7% to $911.9 million in 1996
from $634.5 million in 1995. The increase was primarily attributable to (i)
internal growth fueled by an increase in the number of catalogs mailed
(including eight new catalog titles), an increase in revenue from the Company's
major account sales program and an increased average order value resulting from
increased offerings and sales of brand name products and (ii) the inclusion of a
full year of sales from TigerDirect verses one month in 1995. Sales attributable
to the Company's North American operations increased 52.1% to $677.8 million in
1996 from $445.7 in 1995 as compared with a 24.0% increase in European sales to
$234.1 million in 1996 from $188.8 million in 1995.
Gross profit, which consists of net sales less product, shipping and
certain distribution center costs, increased by $52.3 million or 26.5% to $249.6
million in 1996 from $197.3 million in 1995. Gross profit margin decreased to
27.4% in 1996 from 31.1% in 1995. The decrease in gross profit margin was due in
part to the inclusion of a full year of sales from TigerDirect whose product mix
has a lower gross profit margin, and the Company's strategic decision to
increase the proportion of net sales attributable to brand name products,
particularly computer related products and hardware which typically have lower
gross profit margins than many of the Company's other products.
A significant portion of this decline in gross profit margin has been
offset by the continued decline in selling, general and administrative expenses
as a percentage of net sales. While selling, general and administrative expenses
increased by $37.1 million or 25.9% to $180.1 million in 1996 from $143.0
million in 1995, as a percentage of net sales they decreased to 19.8% in 1996
from 22.5% in 1995. The decrease as a percentage of net sales was primarily
attributable to reduced catalog costs in North America as a result of the
increased vendor supported advertising, continued expense control and the
leveraging of selling, general and administrative expenses over a larger sales
base. As a result of expenses associated with the Company's launching of cross
border catalogs in the first quarter in Europe, selling, general and
administrative expenses as a percentage of net sales for Europe did not decrease
significantly. These European cross border catalogs were mailed into countries
where the Company did not have an existing customer base and accordingly yielded
lower catalog response rates than the Company's other catalogs.
Income from operations increased by $15.2 million or 28.0% to $69.5 million
in 1996 from $54.3 million in 1995. Income from operations as a percentage of
net sales decreased to 7.6% from 8.6% in 1995 as a result of a $4.6 million
decrease in operating profits for Europe and the inclusion of a full year of
Tiger which had a lower operating profit margin than the rest of North America.
Interest income increased $1.3 million to $2.5 million in 1996 from $1.2
million in 1995 primarily due to investment in short-term securities.
Interest expense decreased $1.9 million to $ .5 million in 1996 from $2.4
million in 1995 primarily as a result of the repayments of officers' notes
issued during 1995.
Net income increased $8.0 million or 22.4% to $43.7 million in 1996 as a
result of the increase in income from operations described above and a $4.7
million decrease in Officers Compensation and an increase of $15.0 million in
income taxes as a result of the predecessor companies termination of S
Corporation status. Net income increased $10.6 million or 32.0% compared to 1995
pro forma net income of $33.1 million, as described below.
SEASONALITY
The operations of the Company are somewhat seasonal. In particular, net
sales have historically been modestly weaker during the second and third quarter
as a result of lower business activity during the summer months. The following
table sets forth net sales, gross profit and income from operations for each of
the quarters since January 1, 1996 (AMOUNTS IN MILLIONS).
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------
NET SALES...................................... $273.5 $259.5 $259.7 $352.7 (1)
GROSS PROFIT................................... 69.4 64.2 57.3 74.7
INCOME FROM OPERATIONS......................... 18.6 17.9 2.5 20.3
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------
Net sales...................................... $ 218.7 $ 213.7 $ 225.9 $ 253.6
Gross profit................................... 65.0 60.1 60.3 64.2
Income from operations......................... 18.3 15.5 16.8 18.9
(1) Includes approximately $62 million of net sales from Midwest Micro acquired
on September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the working capital
requirements necessitated by its sales growth and acquisitions. The Company's
primary sources of financing have been cash from operations, equity offerings,
and to a lesser extent bank borrowings. The Company believes that its cash flows
from operations and available lines of credit will be adequate to support its
current and anticipated activities.
Net cash provided by operating activities was $33.1 million, $22.7 million
and $11.0 million in 1997, 1996 and 1995, respectively. The increase from 1996
to 1997 was due to increased asset management, specifically accounts receivable
and inventory. The increase from 1995 to 1996 was due to increased working
capital as a result of increased sales, improved management of inventory and
accounts receivable and reduced levels of unprinted catalog paper in response to
stabilizing paper prices.
Net cash used in investing activities in 1997 was primarily the result of
the acquisition of Midwest Micro and the acquisition of additional furniture,
fixtures and leasehold improvements at the new Compton, California facility to
accommodate the increased staff levels. Those expenditures were partially offset
by a decrease in short-term investments, for a net outlay of $25.2 million for
the year. For 1996, net cash used in investing activities was $39.8 million,
resulting from the investment of surplus cash and the acquisition of computer
equipment and additional furniture and fixtures at the Naperville, Illinois
facility to accommodate increased staff levels. For 1995, net cash used in
investing activities was $11.7 million resulting from the acquisition of
TigerDirect, property and equipment and the repayment of amounts due to
affiliates.
Net cash (used in) provided by financing activities was ($ .5) million,
$23.9 million and $20.2 million in 1997, 1996 and 1995, respectively. The use of
funds in 1997 was primarily due to the repayment of long-term debt. For 1996 net
cash provided by financing activities resulted from the net proceeds from the
sale and issuance of 1.0 million shares of common stock, as partially offset by
the repayment of long-term bank debt and the settlement of long-term capital
leases. The source of funds in 1995 was due mainly to the net proceeds of the
Company's initial public offering net of the repayment of officers' notes
payable and repayment of bank debt.
The Company maintains unsecured lines of credit with various financial
institutions under which the maximum aggregate amount available is $95.0
million. As of December 31, 1997, the Company had no outstanding borrowings
under the lines of credit. The lines of credit bear interest at either the prime
rate, LIBOR plus 63 basis points or at the respective bank's base rate and
expire on various dates through December 1998. In addition, the Company may have
outstanding letters of credit equal to an amount of the total line less
outstanding borrowings.
The Company also maintains a secured line of credit with a bank with a
maximum amount available of 2.0 Pounds Sterling. There were no borrowings under
this facility as of December 31, 1997. This line expires in April 1998 and
provides for interest at the bank's base rate (6% at December 31, 1997) plus 2%.
The Company does not anticipate any difficulty in renewing or replacing any
of its lines of credit as they expire.
Anticipated capital expenditures in 1998 are expected to be approximately
$20 million, which the Company plans to fund out of cash from operations and
existing cash and cash equivalents. These capital expenditures are primarily for
(i) the relocation and expansion of the Company's sales and distribution centers
and (ii) the acquisition of information technology systems and other fixed
assets.
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 herein that are not historical facts are forward
looking statements made pursuant to the safe harbor provisions referenced above.
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 are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual 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 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. 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 Company's ability to manage rapid growth as a result of internal
expansion and strategic acquisitions, (ii) the effect on the Company of
volatility in the price of paper and periodic increases in postage rates, (iii)
the operation of the Company's management information systems including the
costs and effects associated with the year 2000 date change problem, (iv) the
general risks attendant to the conduct of business in foreign countries,
including currency fluctuations associated with sales not denominated in United
States dollars, (v) significant changes in the computer products retail
industry, especially relating to the distribution and sale of such products,
(vi) competition in the PC, notebook computer, computer related products, office
products and industrial products markets from superstores, direct response (mail
order) distributors, mass merchants, value added resellers, the Internet and
other retailers, (vii) the potential for expanded imposition of state sales
taxes, use taxes, or other taxes on direct marketing companies, (viii) the
continuation of key vendor relationships including the ability to continue to
receive vendor supported advertising, (ix) timely availability of existing and
new products, (x) risks due to shifts in market demand and/or price erosion of
owned inventory, (xi) borrowing costs, (xii) changes in taxes due to changes in
the mix of U.S. and non-U.S. revenue, (xiii)pending or threatened litigation and
investigations and (xiv) the availability of key personnel, as well as other
risk factors which may be detailed from time to time in the Company's Securities
and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is 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. Global attempts to reduce these
risks by utilizing certain derivative financial instruments.
The value of the U.S. dollar affects the Company's financial results.
Changes in exchange rates may positively or negatively affect Global's sales (as
expressed in U.S. dollars), gross margins, operating expenses and retained
earnings. The Company engages in hedging programs aimed at limiting in part the
impact of certain currency fluctuations. Using primarily forward exchange and
foreign currency option contracts, Global, from time to time, hedges certain of
its assets that, when remeasured according to generally accepted accounting
principles, may impact the Statement of Consolidated Income. These hedging
activities provide only limited protection against currency exchange risks.
Factors that could impact the effectiveness of the Company's hedging programs
include accuracy of sales forecasts, volatility of the currency markets,
availability of hedging instruments and the credit-worthiness of the parties
which have entered into such contracts with the Company. All currency contracts
that are entered into by Global are for the sole purpose of hedging an existing
or anticipated currency exposure, not for speculative or trading purposes. In
spite of Global's hedging efforts to reduce the effect of changes in exchange
rates against the U.S. dollar, the Company sales or costs could still be
adversely affected by changes in those exchange rates.
As of December 31,1997, the Company had outstanding forward exchange
contracts in the amount of 1.0 million Pounds Sterling, 30.0 million French
Francs and 700.0 million Italian Lire.
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 14 of Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 of Part III is hereby incorporated by
reference from the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Part III is hereby incorporated by
reference from the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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 13 of Part III is hereby incorporated by
reference from the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The Consolidated Financial Statements of Global DirectMail Corp.
2. Financial Statement Schedules:
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 INDEX
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant*
3.2 By-laws of Registrant*
4.1 Stockholders Agreement**
4.2 Specimen Stock Certificate of Registrant*
10.1 Form of 1995 Long-Term Stock Incentive Plan***+
10.2 Exchange Agreement dated as of May 8, 1995 between certain stockholders
of the Predecessor Companies and the Company*
10.3 Lease Agreement dated October 14, 1992 between the Company and 2RB
Associates Co. (Port Washington facility)*
10.4 Lease Agreement dated September 20, 1988 between the Company and Addwin
Realty Associates (Port Washington facility)*
10.5 Lease Agreement dated May 25, 1989 between the Company and Addwin Realty
Associates (Suwanee facility)*
10.6 Lease Agreement dated as of July 17, 1997 between the Company and South
Bay Industrials Company (New Compton facility)
10.7 Build-to-Suit Lease Agreement dated April, 1995 among the Company,
American National Bank and Trust Company of Chicago and Walsh, Higgins &
Company (Naperville facility)*
10.8 Rent Guaranty dated as of October 14, 1992 by the Company to the Bank of
New York*
10.9 Royalty Agreement dated June 30, 1986 between the Company and Richard
Leeds, Bruce Leeds and Robert Leeds, and Addendum thereto*
10.10 Consulting Agreement dated as of December 22, 1992 between the Company
and Paul Leeds*+
10.11 Form of 1995 Stock Plan for Non-Employee Directors***+
10.12 Consulting Agreement dated as of January 1, 1996 between the Company and
Gilbert Rothenberg***+
10.13 Asset Purchase Agreement dated September 12, 1997 among Infotel, Inc.,
Mark L. Runkle, Midwest Micro Corp. and the Company ****
10.14 Employment Agreement dated as of December 12, 1997 between the Company
and Steven M. Goldschein+
21.1 Subsidiaries of the Registrant
23 Consent of experts and counsel: Consent of Independent Public Accountants
27 Financial Data Schedule (EDGAR version only)
- --------
* Incorporated herein by reference to the Company's registration statement
on Form S-1 (Registration No. 33-92052).
** Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the quarterly period ended September 30, 1995.
*** Incorporated herein by reference to the Company's registration statement
on Form S-1 (Registration No. 333-1852).
**** Incorporated herein by reference to the Company's report on Form 8-K
dated September 26,1997
+ Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K.
On October 15, 1997, the Company filed a report on Form 8-K regarding its
September 30, 1997 acquisition of substantially all of the assets of
Infotel, Inc.
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 in the City of New
York, State of New York, on the 27th day of March, 1998.
GLOBAL DIRECTMAIL CORP
By: /s/ RICHARD LEEDS
....................................
Richard Leeds
Chairman and Chief Executive Officer
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 27, 1998
...................... (Principal Executive Officer)
Richard Leeds
/s/ BRUCE LEEDS Vice Chairman and President of March 27, 1998
...................... International Operations
Bruce Leeds
/s/ ROBERT LEEDS Vice Chairman and President of March 27, 1998
...................... Domestic Operations
Robert Leeds
/s/ ROBERT DOOLEY Director and Senior Vice President-- March 27, 1998
...................... Worldwide Computer Sales and
Robert Dooley Marketing
/s/ STEVEN GOLDSCHEIN Senior Vice President and Chief March 27, 1998
...................... Financial Officer
Steven Goldschein (Principal Financial Officer)
/s/ HOWARD KOHOS Corporate Controller March 27, 1998
...................... (Principal Accounting Officer)
Howard Kohos
/s/ ROBERT D. ROSENTHAL Director March 27, 1998
......................
Robert D. Rosenthal
/s/ STACY DICK Director March 27, 1998
......................
Stacy Dick
********
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of THE GLOBAL DIRECTMAIL CORP:
We have audited the accompanying consolidated balance sheets of Global
DirectMail Corp and its subsidiaries, (the "Company"), as of December 31, 1997
and 1996 and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years ended December 31, 1997 in
conformity with generally accepted accounting principles.
/S/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
February 5, 1998, March 9, 1998 as it relates to the second paragraph under
LITIGATION of Note 9.
GLOBAL DIRECTMAIL CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
1997 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 43,432 $ 35,211
Short term investments 9,017 31,031
Accounts receivable, net 132,741 111,709
Inventories 102,599 93,033
Prepaid catalog expense 11,917 12,305
Other prepaid expenses and current assets 9,565 7,427
Deferred income tax benefit 4,059 3,266
--------- ----------
Total current assets 313,330 293,982
PROPERTY, PLANT AND EQUIPMENT, net 29,401 21,878
GOODWILL, net 53,258 13,545
DEFERRED INCOME TAX BENEFIT 3,122 -
OTHER ASSETS 634 2,034
--------- ----------
TOTAL $ 399,745 $ 331,439
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 125,562 $ 99,053
Current portion of long-term debt 12 495
--------- ----------
Total current liabilities 125,574 99,548
--------- ----------
LONG-TERM DEBT 1,972 2,030
--------- ----------
DEFERRED INCOME TAXES - 1,224
--------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares - -
Common shares 382 379
Additional paid-in capital 176,743 168,356
Retained earnings 97,204 58,392
Cumulative translation adjustment (2,130) 1,510
---------- ----------
Total shareholders' equity 272,199 228,637
---------- ----------
TOTAL $ 399,745 $ 331,439
========= ==========
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
STATEMENTS OF CONSOLIDATED INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
1997 1996 1995
---- ---- ----
NET SALES $1,145,388 $ 911,893 $ 634,484
COST OF SALES 879,846 662,277 437,179
---------- --------- ----------
GROSS PROFIT 265,542 249,616 197,305
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 206,280 180,142 143,034
---------- --------- ----------
INCOME FROM OPERATIONS 59,262 69,474 54,271
OTHER (INCOME) EXPENSE, net (including $4,707 of
Shareholders' compensation in 1995) (6) 39 4,748
INTEREST INCOME (3,255) (2,470) (1,246)
INTEREST EXPENSE 425 521 2,394
---------- --------- ----------
INCOME BEFORE INCOME TAXES 62,098 71,384 48,375
PROVISION FOR INCOME TAXES 23,286 27,680 12,655
---------- --------- ----------
NET INCOME $ 38,812 $ 43,704 $ 35,720
========== ========= ==========
NET INCOME PER COMMON SHARE:
BASIC $ 1.02 $ 1.16
========== =========
DILUTED $ 1.02 $ 1.15
========== =========
PRO FORMA INCOME DATA (UNAUDITED)
Historical income before income taxes $ 48,375
Pro forma other adjustments 5,684
----------
Pro forma income before income taxes 54,059
Pro forma income taxes 21,008
----------
Pro forma net income $ 33,051
==========
Pro forma net income per common share - basic and diluted $ 0.93
==========
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
Notes
Receivable
Additional Cumulative from
Common Paid-in Retained Translation Related
SHARES CAPITAL EARNINGS ADJUSTMENT PARTIES
------ --------- -------- ----------- ---------
BALANCES, JANUARY 1, 1995 $ 24,934 $ 14,539 $ 39,591 $ 315 $ (10,273)
Differences arising from translation of
foreign statements - - - 165 -
Dividends paid - - (2,000) - -
Other (30) - 30 - -
Effect of exchange of common
shares, issuance of notes and collection of
notes receivable (24,620) (14,528) (58,653) - 10,273
Initial public offering of common shares 83 134,329 - - -
Issuance of common shares for the acquisition
of TigerDirect, Inc. 2 4,130 - - -
Net income - - 35,720 - -
-------- --------- --------- ------- ---------
BALANCES, DECEMBER 31, 1995 369 138,470 14,688 480 -
Differences arising from translation of
foreign statements - - - 1,030 -
Net proceeds from sale of common shares 10 29,886 - - -
Net income - - 43,704 - -
-------- --------- --------- ------- ----------
BALANCES, DECEMBER 31, 1996 379 168,356 58,392 1,510 -
Differences arising from translation of
foreign statements - - - (3,640) -
Issuance of 375,000 common shares as partial consideration
for the acquisition of the net assets of Infotel, Inc. 3 8,387 - - -
Net income - - 38,812 - -
-------- --------- --------- ---------- --------
BALANCES, DECEMBER 31, 1997 $ 382 $ 176,743 $ 97,204 $ (2,130) $ -
======== ========= ========= ========== ========
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
1997 1996 1995
---- ---- ----
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 38,812 $ 43,704 $ 35,720
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization, net 5,715 3,813 2,098
Charges associated with the impairment of certain
long lived assets 9,200 - -
Benefit for deferred income taxes (5,308) (330) (1,959)
Provision for returns and doubtful accounts 3,283 2,745 4,178
Changes in certain assets and liabilities:
Accounts receivable (18,395) (29,242) (15,261)
Inventories 3,103 (20,748) (12,155)
Prepaid catalog and other prepaid expenses (1,569) 7,028 (8,500)
Accounts payable and accrued expenses (1,727) 15,760 6,921
------ ------ -----
Net cash provided by operating activities 33,114 22,730 11,042
--------- ----------- ------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Net change in short term instruments 22,014 (31,031) -
Investments in property, plant and equipment (9,989) (8,805) (4,859)
Loans to affiliated entities - - (5,631)
Acquisition of net assets of businesses acquired (37,227) - (1,185)
--------- --------- ----------
Net cash used in investing activities (25,202) (39,836) (11,675)
-------- --------- ----------
CASH FLOWS (USED IN) PROVIDED BY FINANCING
ACTIVITIES:
Net cash provided by short term borrowings from banks - 478 -
Borrowings of long term debt - - 8,392
Repayment of long term debt (470) (6,442) (27,550)
Repayment from related parties - - 4,702
Proceeds from sale and issuance of common shares - 29,896 134,412
Dividends paid - - (2,000)
Payment of notes payable to shareholders - - (97,800)
------------- -------------- ----------------
Net cash (used in) provided by financing activities (470) 23,932 20,156
------------ --------------- ----------------
EFFECTS OF EXCHANGE RATES ON CASH 779 (92) 128
-------- ---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,221 6,734 19,651
--------- ---------- -----------
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 35,211 28,477 8,826
--------- ---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 43,432 $ 35,211 $ 28,477
========= ========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 376 $ 1,194 $ 2,548
======== ========= ===========
Income taxes paid $ 29,497 $ 26,606 $ 14,957
======== ========= ===========
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of Global DirectMail Corp and its wholly-owned
subsidiaries (collectively, the "Company" or "Global"). The Company is the
successor to several corporations, previously referred to as the Global
Group, which were owned by related shareholders. In connection with the
consummation of an initial public offering in June 1995 (the "IPO"), the
stockholders of these predecessor companies exchanged all of the
outstanding capital stock for common shares of Global. That transaction was
accounted for as a pooling of interests.
DESCRIPTION OF BUSINESSES - The Company is involved in the marketing and
sale of personal computers (PCs), notebook computers, computer related
products, office products and industrial products, through the distribution
of mail order catalogs and a network of major account sales representatives
in the North America and Western Europe.
PRINCIPLES OF CONSOLIDATION - All significant intercompany accounts and
transactions have been eliminated in consolidation. When necessary, the
results of operations of the Company's foreign subsidiaries have been
adjusted to conform to accounting principles generally accepted in the
United States of America.
CASH AND CASH EQUIVALENTS - The Company considers amounts held in money
market accounts and other short-term investments with an original maturity
date of approximately three months or less to be cash equivalents.
SALES RECOGNITION AND ACCOUNTS RECEIVABLE - The Company recognizes sales of
products, including shipping revenue at the time of shipment. Accounts
receivable are shown in the consolidated balance sheets net of allowances
for doubtful collections and subsequent customer returns of approximately
$7,338,000 and $7,724,000 at December 31, 1997 and 1996, respectively. The
changes in these allowance accounts are summarized as follows (in
thousands):
YEAR ENDED DECEMBER 31 1997 1996 1995
----------------------- -------- ------------ ------
Balance, beginning of year..................................$ 7,724 $7,731 $ 4,598
Charged to expense........................................... 3,283 2,745 4,178
Reductions, principally write-offs...........................(3,669) (2,752) (1,045)
------- ------- -------
Balance, end of year........................................$ 7,338 $7,724 $ 7,731
======= ====== =======
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.
PREPAID CATALOG EXPENSE - Prepaid catalog expense includes (i) unused
catalog paper, (ii) cost associated with the production and mailing of
finished catalogs, net of (iii) funding from certain of the Company's
vendors for advertisements placed, advertising allowances and incentives
("Co-op") relating to those catalogs. Finished catalog expense net of the
respective Co-op is deferred and charged to expense over the period that
the catalog remains the most current selling vehicle, generally three
months.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at
cost. Depreciation of furniture, fixtures and equipment is on the straight
line or accelerated method over their estimated useful lives ranging from
three to eight 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 their useful lives or the
term of the lease.
FOREIGN CURRENCY TRANSLATION - The financial statements of the foreign
entities are translated into U.S. dollars, the reporting currency, using
year-end exchange rates for consolidated balance sheet items and average
exchange rates for the consolidated statement of income items. The
translation differences are recorded directly in the consolidated statement
of shareholders' equity.
FOREIGN CURRENCY TRANSACTIONS - Transactions in foreign currencies are
recorded at the exchange rate in effect at the transaction date. Realized
and unrealized exchange gains and losses during the year are included in
the respective year's consolidated statement of income.
RESEARCH AND DEVELOPMENT COSTS - Costs incurred in connection with research
and development are expensed as incurred. Such expenses for the years ended
December 31, 1997, 1996 and 1995 aggregated approximately $674,000,
$573,000 and $443,000, respectively.
GOODWILL, NET - Goodwill and negative goodwill are combined and presented
net of the respective accumulated amortization. For acquisitions that the
Company has recorded as purchase transactions, the amount of the excess of
the purchase price over the identifiable assets, is recorded as goodwill.
In instances where the Company had acquired a business below the fair value
of the assets acquired, the Company recorded negative goodwill. Goodwill
and negative goodwill are being amortized over periods ranging from 10 to
40 years.
USE OF ESTIMATES IN FINANCIAL STATEMENTS - The preparation of financial
statements in conformity with generally accepted accounting principles
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.
NET INCOME PER COMMON SHARE - In December 1997 the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
and restated net income per common share for all periods presented. Net
income per common share-basic was calculated based upon the weighted
average number of common shares outstanding during respective periods. 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 weighted average common shares outstanding for the computation of basic
earnings per common share for 1997 and 1996 were 38.0 million and 37.6
million, respectively. Additionally 262,000 and 505,000 of equivalent
common shares were included in 1997 and 1996, respectively, for the diluted
calculation.
2. PRO FORMA INFORMATION (UNAUDITED)
PRO FORMA INCOME ADJUSTMENTS
The pro forma income data for the year ended December 31, 1995 present the
effects on the historical consolidated financial statements of certain
transactions related to the June 1995 IPO as if they occurred as of the
beginning of the year, including (1) reduced levels of compensation and
royalty payments to officers, (2) the elimination of $500,000 per year of
compensation paid to a shareholder pursuant to a consulting agreement
entered into in 1992 which terminated in connection with the IPO, (3) the
elimination of interest paid on officers notes in 1995, and (4) the
provision for income taxes to eliminate the benefit, for income tax
purposes, of the predecessor companies with S Corporation status.
PRO FORMA NET INCOME PER COMMON SHARE
Pro forma net income per common share-basic was based on the weighted
average number of shares of common stock outstanding prior to and after the
IPO. Pro forma net income per common share-diluted was calculated based on
the weighted average number of shares outstanding plus the effect of
approximately 201,000 options assumed outstanding after the IPO.
3. ACQUISITIONS
During 1997 the Company acquired the net assets of three businesses for a
total of $50.8 million in cash, stock and purchase related costs with
additional contingent cash consideration possible. These acquisitions are
being accounted for as purchase transactions. The Company recorded the fair
market value of the net assets acquired at $15.9 million and the excess of
the purchase price over that amount as goodwill.
The unaudited pro forma results of operations of the Company, including the
pro forma effect as if those companies had been acquired as of January 1,
1995, are as follows (in thousands, except earnings per common share):
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
Net sales $ 1,334,183 $1,207,625 $ 975,946
Net income $ 39,286 $ 42,251 $ 29,839
Earnings per common share - basic and diluted $ 1.02 $ 1.10 $ .83
In November 1995, Global acquired TigerDirect, Inc. ("Tiger") and recorded,
at that time the purchase price in excess of the fair value of the net
assets acquired as goodwill. The estimated fair values were further
evaluated by the Company during 1996 and, as
a result, goodwill was reduced by approximately $3.1 million. During 1997
the Company had determined that, as a result of its decision to exit
certain lines of Tiger's business acquired as part of the original
purchase, an impairment of the goodwill associated with those exited
business lines had occurred. As such, the Company recorded a write down in
the value of the goodwill of approximately $6.3 million.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consists of the following (in
thousands):
DECEMBER 31 1997 1996
----------- --------- -------
Land and buildings...............................................................$ 8,085 $ 5,226
Furniture and fixtures, office and warehouse equipment........................... 32,857 27,273
Leasehold improvements........................................................... 6,096 3,990
Transportation equipment......................................................... 1,817 1,555
--------- ----------
48,855 38,044
Less accumulated depreciation and amortization................................... 19,454 16,166
--------- ----------
Net property, plant and equipment..........................................$ 29,401 $ 21,878
========== ============
During 1997 the Company recorded a charge relating to the impairment of
certain long-lived assets of approximately $2.9 million
5. RELATED PARTY TRANSACTIONS
The Company leases several warehouse and office facilities from affiliates
(see Note 9). Rent expense under those leases aggregated approximately
$1,901,000, $2,130,000 and $2,366,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
6. LONG-TERM DEBT
Long-term debt consist of the following (in thousands):
DECEMBER 31 1997 1996
----------- -------- -----
Foreign denominated secured loan (a)..................................$1,972 $ 2,030
Capitalized lease obligations......................................... 12 17
------ -------
Total............................................................ 1,984 2,047
Less: current maturities......................................... 12 17
------ -------
Long-term debt .................................................$1,972 $ 2,030
===== =======
At December 31, 1997, the aggregate maturities of long-term debt are as
follows (in thousands):
YEAR ENDING DECEMBER 31 AMOUNT
1998.................................................$ 12
1999.................................................. 1,972
Total notes payable...................................$ 1,984
==========
(a) A subsidiary of the Company entered into a mortgage agreement
("Mortgage") in the amount of 1.2 million Pounds Sterling due in its
entirety in June 1999, with interest payable semi-annually at a rate
of 9.6 percent per annum. The Mortgage is secured by land and building
with an aggregate net book value of 2.4 million Pounds Sterling at
December 31, 1997. The Mortgage contains certain covenants calling for
timely reporting of financial information, restrictions on changes in
ownership and employment levels by such subsidiary. As of December 31,
1997 the Company was in compliance with those covenants.
The Company maintains lines of credit with various financial institutions.
The maximum aggregate amounts available under these lines of credit were
$95 million and $52 million at December 31, 1997 and 1996. No amounts were
outstanding under these lines at December 31, 1997. These lines accrue
interest at variable rates of either the prime rate or LIBOR plus 63 basis
points. The prime rate and LIBOR were 8.25 percent and 5.9 percent,
respectively, at December 31, 1997. These lines expire on various dates
through December 1998.
Associated with the lines of credit, the Company may have outstanding
letters of credit equal to the amount of the total line less outstanding
borrowings. At December 31, 1997 there was a $4 million outstanding standby
letter of credit.
The Company maintains a secured line of credit with a bank with a maximum
amount available of 2.0 million Pounds Sterling. Borrowings, of which there
were none as of December 31, 1997 and 1996, bear interest at the bank's
base rate (6% at December 31, 1997) plus 2% and are secured by
substantially all of the assets of the Company's United Kingdom
subsidiaries. This line expires in April 1998 and is renewable at the
Company's option.
7. SHAREHOLDERS' EQUITY
At December 31, 1997, there were 25.0 million shares of preferred stock,
$.01 par value, of which none were issued. Common stock at such date
consisted of 150.0 million shares authorized, par value of $.01 per share,
of which 38,231,990 were issued and outstanding.
As required by law, certain foreign subsidiaries must retain a percentage
of shareholders' capital in the respective company. Accordingly, a portion
of retained earnings is restricted and not available for distribution to
shareholders. Such amount at December 31, 1997 was not material.
STOCK OPTION PLANS - The Company has two fixed option 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 allows the Company to
issue from time to time 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 and
generally become exercisable ratably on the third, fourth, and fifth
anniversary of the grant date. A maximum total number of 2.0 million shares
may be granted under this plan of which a maximum of 800,000 shares may be
of restricted stock and restricted stock units. No award shall be granted
under this plan after December 31, 2005. A total of 1,290,948 options were
outstanding under this plan as of December 31, 1997.
THE 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS - This plan 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. This plan will terminate the day following the
tenth annual stockholders meeting. A total of 14,000 options were
outstanding under this plan as of December 31, 1997.
The Company accounts for these plans in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees",
under which no compensation costs have been recognized for stock options.
Had compensation costs of the plans been determined under a fair value
alternative method as stated in Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensations", the Company would have
prepared a fair value model for such options and recorded such amount in
the accompanying consolidated financial statements as compensation expense.
On a pro forma basis, net income for 1997 and 1996 would have been $37.7
million and $42.3 million respectively and diluted earnings per common
share for 1997 and 1996 would have been $.99 and $1.11 respectively. The
Company arrived at the fair value of stock grant at the date of the grant
by using the Black-Scholes pricing option model with the following
assumptions used for grants: risk-free interest rate of 6.2%; expected
dividend rate of 0%; expected level of 3.75 years; and expected volatility
of 35%. The weighted average stock options at December 31, 1997 have a
weighted average contractual level of 8 years. The following table reflects
the plan activity for year ended December 31, 1997:
OPTIONS
FOR SHARES OPTION PRICES
---------- -------------
Outstanding, January 1, 1997 1,206,500 $17.50 to $49.13
Granted during the year 604,146 $17.50 to $18.41
Cancelled during the year (505,698) $24.38 to $49.13
Exercised during the year - -
---------------- ---------------
Outstanding, December 31 1,304,948 $17.50 to $39.06
========= =================
The following table summarizes information for the three years ended
December 31, 1997 concerning currently outstanding and exercisable options:
1997 1996 1995
-------------------------- --------------------------- ----------------------
Weighted-Average Weighted Average Weighted Average
Fixed Options SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year 1,206,500 $25.45 865,500 $ 20.49 - -
Granted .............................. 604,146 $19.19 365,150 $ 36.80 876,900 $20.45
Exercised ............................ - - - - - -
Cancelled ............................ (505,698) $33.90 (24,150) $ 19.39 (11,400) $17.50
-------- ------ ------- ------- ------- ------
Outstanding at end of year............1,304,948 $19.28 1,206,500 $ 25.45 865,500 $20.49
========== ====== ========= ======= ======= ======
Options exercisable at year end....... 189,000 139,000 10,000
Weighted average fair value per
option granted during the year..... $13.05 $13.57 $7.05
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Outstanding at Remaining Exercise Exercisable Exercise
PRICE 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
-------------------- --------------- ------------------ --------------- ----------- -----------------
$ 17.50 to $ 22.50 1,070,948 8.11 $ 17.57 5,000 $ 21.56
$ 22.51 to $ 30.00 230,000 7.64 $ 26.88 180,000 $ 26.87
$ 30.01 to $ 39.06 4,000 8.33 $ 39.06 4,000 $39.06
$ 17.50 to $ 39.06 1,304,948 8.03 $ 19.28 189,000 $ 26.99
================== ========= ==== ======= ======= =======
Of the options issued during 1997, 420,348 options originally issued with
exercise prices ranging from $24.38 to $49.13 were repriced on April 28,
1997 with an exercise price of $17.50, representing the market price of the
outstanding common stock at that time.
All other terms of these options remained unchanged.
8. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- -------- ---------- -------
Current:
Federal $ 23,274 $ 23,140 $ 10,400
State 4,107 3,787 1,895
Foreign 1,041 1,038 2,319
Deferred (5,279) (865) (369)
Change in valuation allowance 143 580 (1,590)
-------- -------- ---------
Total $ 23,286 $ 27,680 $ 12,655
======== ======== =========
Prior to the IPO, a number of the predecessor companies were S
Corporations and accordingly their income was not taxable for Federal and
certain state tax purposes. Subsequent to the IPO, all of the former S
Corporations terminated such status and accordingly became taxable
entities thereafter. Income taxes are accrued and paid by each foreign
entity in accordance with applicable local regulations. The difference
between the income tax expense and the computed income tax based on the
Federal statutory corporate rate is as follows (in thousands):
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- -------- ---------- -------
Federal statutory rate $ 21,734 $ 24,984 $ 16,931
State and local income taxes, net of
Federal tax benefit 2,092 2,456 1,001
Foreign tax (303) (175) 2,778
Foreign source income (72) (573) (2,685)
Increase (reduction) in valuation allowance 143 580 (923)
Net operating loss utilized 165 335 -
Other items, net (473) 73 -
Federal, state and local tax benefit of S Corporation status - - (4,447)
---------- ---------- ----------
$23,286 $27,680 $ 12,655
======== ======== =========
The deferred tax assets (liabilities) at December 31, 1997 and 1996 are
comprised of the following:
1997 1996
-------- --------
Current:
Deductible assets....................................................$(3,649) $ (2,542)
Non-deductible accruals and reserves.................................. 7,458 4,244
Non-deductible assets................................................. 553 826
Foreign net operating loss carryforwards.............................. 26 1,027
Other................................................................. (329) (289)
------- ---------
Current........................................................... 4,059 3,266
------ --------
Non-Current:
Foreign net operating loss carryforwards.............................. 4,980 1,712
Accelerated depreciation..............................................(1,243) (1,441)
Basis differences from acquisitions................................... 1,843 356
Other assets.......................................................... - (332)
Valuation allowances..................................................(2,458) (1,519)
------- ---------
Non-Current....................................................... 3,122 (1,224)
------ ---------
Total........................................................$ 7,181 $ 2,042
======= ========
The foreign net operating loss carryforwards generally expire at dates
through 2004. The Company maintains valuation allowances against its
foreign net operating loss carryforwards since, at this time, the
realizability of the related deferred tax benefits can not be reasonably
assured.
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
LEASES - The Company is obligated under operating lease agreements for the
rental of certain office and warehouse facilities and equipment which
expire at various dates through October 2013.
At December 31, 1997 future minimum annual lease payments for related and
third-party leases were as follows (in thousands):
YEAR ENDING DECEMBER 31 RELATED PARTY THIRD PARTY TOTAL
----------------------- ------------- ----------- ------
1998................................ $ 1,632 $ 4,163 $ 5,795
1999................................ 1,122 3,862 4,984
2000................................ 612 2,448 3,060
2001................................ 612 1,897 2,509
2002................................ 612 1,897 2,509
2003-2007........................... 2,958 9,062 12,020
2008-2012........................... - 3,935 3,935
Thereafter.......................... - 410 410
----------- -------- -------
$ 7,548 $ 27,674 $35,222
=========== ======== =======
Rent expense for the years ended December 31, 1997, 1996 and 1995
aggregated approximately $7,151,000, $7,406,000 and $5,235,000
respectively.
GUARANTEES - The Company has guaranteed a mortgage obtained by an affiliate
($2.3 million at December 31, 1997) relating to property which the Company
leases from the affiliate. Additionally the Company's U.K. subsidiaries
have granted a security interest for substantially all of their assets to
secure a line of credit with a U.K. financial institution.
LITIGATION - The Company has been named as a defendant in lawsuits
incidental to its businesses. Management of the Company, based on
discussions with legal counsel, believes the ultimate resolution of these
lawsuits will not have a material effect on the Company's consolidated
financial position or results of operations.
At December 31, 1997 the Company was contingently liable under a standby
letter of credit guaranteeing the obligations of a third party supplier in
the amount of $4 million. Such amount was paid on March 2, 1998. The
Company has initiated legal action seeking a declaration that the Company
has a contractual right to offset the $4 million against amounts otherwise
due to the supplier. The Company believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's
consolidated financial statements.
CONTINGENCY - The Company is required to collect sales tax on certain of
its out-of-state sales. In accordance with current law, approximately 20%
of the Company's 1997 domestic sales were subject to sales tax. A change in
law could require the Company to collect sales tax in additional states.
EMPLOYEE BENEFIT PLANS - Certain of the U.S. subsidiaries participate in
defined contribution compensatory 401(k)/profit sharing benefit plans
covering such eligible employees as defined by the plan document.
Contributions to the plan by the Company is determined as a percentage of
the employees' contributions. Aggregate expense to the Company for
contributions to such plans was approximately $373,000, $267,000 and
$211,000 in the years ended December 31, 1997, 1996 and 1995, respectively.
Certain foreign entities require amounts to be accrued for each employee's
retirement, determined in accordance with labor laws and labor agreements
in effect in the respective country. Liabilities relative to such
termination indemnities were not material.
FOREIGN EXCHANGE RISK MANAGEMENT - The Company has limited involvement with
derivative financial instruments and does not use them for trading
purposes. The Company enters into foreign currency options or forward
exchange contracts to hedge certain foreign currency transactions. The
intent of this practice is to minimize the impact of foreign exchange rate
movements on the Company's operating results. As of December 31,1997, the
Company had outstanding forward exchange contracts in the amount of 1.0
million Pounds Sterling, 30.0 million French Francs and 700.0 million
Italian Lire.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments consist
primarily of investments in cash, trade account receivables, 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, 1997 and 1996, the
fair value of the Company's financial instruments approximated their
carrying values.
CONCENTRATION OF CREDIT RISK - Concentrations of credit risk with respect
to trade account receivables are limited due to the large number of
customers comprising the Company's customer base. Ongoing credit
evaluations of customer's financial condition are performed.
10. GEOGRAPHIC INFORMATION
The Company conducts its business in North America (the United States and
Canada) and Europe. The following sets forth the Company's operations in
its two geographic markets (in thousands):
YEAR ENDED DECEMBER 31, 1997 EUROPE NORTH AMERICA TOTAL
---------------------------- ------------------ ---------------- --------------
Net sales.............................. $ 270,236 $ 875,152 $ 1,145,388
Income from operations................. 3,423 55,839 59,262
Identifiable assets.................... 82,548 317,197 399,745
YEAR ENDED DECEMBER 31, 1996 EUROPE NORTH AMERICA TOTAL
---------------------------- ------------------ ----------------- ----------------
Net sales.............................. $ 234,078 $ 677,815 $ 911,893
Income from operations................. 4,224 65,250 69,474
Identifiable assets.................... 78,490 252,949 331,439
YEAR ENDED DECEMBER 31, 1995 EUROPE NORTH AMERICA TOTAL
---------------------------- ----------------- ------------------ -----------------
Net sales.............................. $ 188,765 $ 445,719 $ 634,484
Income from operations................. 8,846 45,425 54,271
Identifiable assets.................... 66,369 181,146 247,515
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data is as follows:
FIRST SECOND THIRD FOURTH
DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
----------------- ------- ------- ------- -------
Net sales............................... $273,537 $ 259,485 $ 259,661 $ 352,705
Gross profit............................ 69,407 64,167 57,289 74,679
Net income.............................. 12,088 11,665 2,136 12,923
Net income per common share:
Basic and diluted.............. $ .32 $ .31 $ .06 $ .34
FIRST SECOND THIRD FOURTH
DECEMBER 31, 1996 QUARTER QUARTER QUARTER QUARTER
----------------- ------- ------- ------- -------
Net sales............................... $218,732 $ 213,707 $ 225,868 $ 253,586
Gross profit............................ 65,021 60,070 60,313 64,212
Net income.............................. 11,392 9,787 10,683 11,842
Net income per common share:
Basic and diluted.............. $ .31 $ .26 $ .28 $ .31
* * * * * *
EXHIBIT INDEX
10.6 Lease Agreement dated as of July 17, 1997
between the Company and South Bay Industrials
Company (New Compton facility)
10.14 Employment Agreement dated as of December 12, 1997
between the Company and Steven M. Goldschein
21.1 Subsidiaries of the Registrant
23 Consent of experts and counsel; Consent of Independent
Public Accountants
27 Financial Data Schedule