Attached files

file filename
EX-12.1 - CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES - Intcomex, Inc.dex121.htm
EX-32.2 - CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 - Intcomex, Inc.dex322.htm
EX-31.2 - CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER REQUIRED BY SECTION 302 - Intcomex, Inc.dex312.htm
EX-32.1 - CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 - Intcomex, Inc.dex321.htm
EX-31.1 - CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER REQUIRED BY SECTION 302 - Intcomex, Inc.dex311.htm
EX-21.1 - SUBSIDIARIES OF INTCOMEX, INC. - Intcomex, Inc.dex211.htm
EX-10.26 - PURCHASE AGREEMENT - Intcomex, Inc.dex1026.htm
EX-10.28 - AMENDMENT NO. 3 TO REVOLVING CREDIT AGREEMENT - Intcomex, Inc.dex1028.htm
EX-10.27 - INDEMNITY AGREEMENT LETTER - Intcomex, Inc.dex1027.htm
Table of Contents

 

 

UNITED STATES

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, 2010

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: 333-134090

 

 

LOGO

Intcomex, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   65-0893400

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3505 NW 107th Avenue, Miami, FL 33178

(Address of principal executive offices) (Zip Code)

(305) 477-6230

(Registrant’s telephone number, including area code)

 

 

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

 

Title of Each Class

 

Name of Each Exchange on Which Registered

None  

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

 

 

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

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

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  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Small reporting company   ¨

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

The registrant had 100,000 shares of Common Stock, voting, par value $0.01 per share and 29,357 shares of Class B Common Stock, non-voting par value $0.01 per share, outstanding at March 30, 2011. There is no public trading market for the stock.

 

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     PART I       

Item 1.

 

Business

     1   

Item 1A.

 

Risk Factors

     10   

Item 1B.

 

Unresolved Staff Comments

     21   

Item 2.

 

Properties

     21   

Item 3.

 

Legal Proceedings

     22   

Item 4.

 

(Removed and Reserved)

     22   
  PART II   

Item 5.

 

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

     22   

Item 6.

 

Selected Financial Data

     22   

Item 7.

 

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

     24   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk.

     43   

Item 8.

 

Financial Statements and Supplementary Data.

     45   

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     86   

Item 9A.

 

Controls and Procedures

     86   

Item 9B.

 

Other Information

     87   
  PART III   

Item 10.

 

Directors, Executive Officers and Corporate Governance.

     87   

Item 11.

 

Executive Compensation.

     91   

Item 12.

 

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

     100   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence.

     102   

Item 14.

 

Principal Accounting Fees and Services

     104   
  PART IV   

Item 15.

 

Exhibits, Financial Statement Schedules

     105   
  SIGNATURES   

 

 


Table of Contents

PART I

Item 1. Business.

Company

We believe Intcomex, Inc. and its subsidiaries, or Intcomex, (or the Company, we, us, or our) is the largest pure play value-added international distributor of computer information technology, or IT, products focused solely on serving Latin America and the Caribbean, or the Region. We distribute computer equipment, components, peripherals, software, computer systems, accessories, networking products and digital consumer electronics to more than 44,000 customers in 41 countries. We offer single source purchasing to our customers by providing an in-stock selection of more than 13,000 products from over 150 vendors, including many of the world’s leading IT product manufacturers. We serve the Latin American and Caribbean IT products markets using a dual distribution model as a wholesale aggregator and an in-country distributor:

 

   

As a Miami-based wholesale aggregator, we sell primarily to:

 

   

third-party distributors, resellers and retailers of IT products based in countries in Latin America and the Caribbean where we do not have a local presence;

 

   

third-party distributors, resellers and retailers of IT products based in countries in Latin America and the Caribbean where we have a local presence but whose volumes are large enough to enable them to efficiently acquire products directly from United States, or U.S.-based wholesale aggregators;

 

   

other Miami-based exporters of IT products to Latin America and the Caribbean; and

 

   

our in-country operations.

 

   

As an in-country distributor in 12 countries, we sell to over 42,000 local reseller and retailer customers, including value-added resellers (companies that sell, install and support IT products and personal computers, or PCs), systems builders (companies that specialize in building complete computer systems by combining components from different vendors), smaller distributors and retailers.

History

Anthony Shalom and Michael Shalom, or the Shaloms, founded our company as a small software retailer in South Florida in 1988. In 1989, we started exporting IT products from Miami, Florida, or Miami to Latin America and moved our headquarters to the vicinity of the Port of Miami and the Miami International Airport in order to capitalize on the growing export trade of IT products to Latin America and the Caribbean. We established our first in-country sales and distribution operations in Mexico in 1990, and expanded our presence to include Chile and Panama in 1994; Guatemala, Peru and Uruguay in 1997; Costa Rica, Ecuador, El Salvador and Jamaica in 2000; Argentina in 2003; and Colombia in 2004.

In 2001, we exchanged our interest in Centel S.A. de C.V., or Intcomex Mexico, our then-existing Mexican operations, with Intcomex Mexico’s management, for all the shares of Intcomex held by Intcomex Mexico’s management. In June 2005, we re-established our presence in Mexico by re-acquiring all of our interest in Intcomex Mexico. Our growth into new markets has been largely organic, typically in partnership with talented local managers knowledgeable about the IT products distribution business in their country.

In 2004, CVC International, a unit of Citigroup Inc., engaged in private equity investments in emerging markets, acquired 52.5% of our voting equity interests. As part of that transaction, we redeemed all of the equity interests in our company held by our former non-management shareholders and some of the equity interests in our company held by our management shareholders. We incorporated in the state of Delaware in August 2004. After giving effect to the acquisition and redemptions, Anthony Shalom and Michael Shalom became our second and third largest shareholders after CVC International, with holdings of 23.0% and 9.0%, respectively, of our voting common stock. Our other shareholders, also members of our management, entered into a shareholders’ agreement providing for, among other things, certain governance arrangements concerning the Company.

In December 2009, certain of our company’s existing shareholders and their affiliates contributed $20.0 million of new capital in exchange for newly-issued shares of our Class B common stock, non-voting. Following the capital contribution, CVC International maintained 52.5% of our voting equity interests and held 47.6% of our non-voting common stock. Anthony Shalom and Michael Shalom remain our second and third largest shareholders after CVC International, with holdings of 23.0% and 9.0%, respectively, of our voting equity interests and each holds 6.1% of our non-voting common stock.

 

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Industry

IT products generally follow a three-tiered distribution system from the manufacturer to end-users in Latin America and the Caribbean:

 

   

Wholesale aggregators, like our Miami-based operations, typically based in Miami, purchase IT products from vendors, and sell those products to other Miami-based exporters and in-country distributors. They typically maintain warehouses and sales forces in Miami and do not have substantial operations outside of Miami.

 

   

In-country distributors, like our In-country Operations, typically purchase IT products from wholesale aggregators and sell them to local resellers and retailers. The in-country distributors typically have a limited geographic focus (generally limited to one country or cities within one country), a local sales force in direct contact with their customers and local warehousing. The in-country distributors’ limited size, capital and geographic reach often prevent them from establishing and maintaining direct relationships with vendors, which are located predominantly in the U.S. and Asia and which focus their relationships on IT distributors with broad geographic coverage or large order sizes. In most markets most in-country distributors lack sufficient size to benefit from significant economies of scale and are not sufficiently capitalized to offer their customers a full range of products and services. We have in-country sales and distribution operations in 12 countries in Latin America and the Caribbean.

 

   

Resellers typically acquire IT products from the in-country distributors and resell them to the end-user (typically individuals, small and medium businesses or governments). Resellers vary greatly in size and type, from one-person operations to large retailers.

LOGO

The distribution model for IT products in Latin America and the Caribbean is markedly different from that of more advanced markets where direct sales by IT vendors are common. In Latin America and the Caribbean, IT vendors rely extensively on wholesale distribution rather than direct sales. According to International Data Corporation, or IDC, a market intelligence and advisory firm in the IT and telecommunications industries, IT distributors (including local dealers, resellers, retailers and assemblers) comprised about 73% of PCs sold in Latin America and the Caribbean, while the remaining 27% were sold directly to end-users through the internet and original equipment manufacturer, or OEM direct sales forces for calendar year 2010.

Latin America and the Caribbean are comprised of more than 45 countries, many unique with respect to their logistical infrastructure, regulatory and legal framework, trade barriers, taxation, currency and language. This fragmentation presents challenges to IT product manufacturers seeking to establish a regional distribution, sales, logistics and service network, because such a network would have to be created separately for each country, with limited economies of scale due to the small size of most markets and barriers to entry associated with cross-border complexities. We believe that our dual distribution model, as well as our extensive geographic presence in the Region, is not only unique but also valuable to our vendors and customers and difficult to replicate.

The IT products distribution industry is driven by sales to end-users. From 1999 to 2009, spending on IT products (including hardware, packaged software and services) in Latin America grew at approximately 6.1% per year, from $ 33.5 billion to $60.7 billion. According to IDC, spending is projected to grow an average of 10.7% per year from 2009 to 2014, to $100.8 billion. While the Latin American population of approximately 564 million people is 83.9% larger than that of the U.S., the market in 2010 for IT products in the Region was only 12 % of the size of the market for IT products in the U.S.

 

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The growth in IT spending in Latin America and the Caribbean is attributed mainly to increasing PC penetration rates, rapidly increasing Internet penetration rates and increasing access to consumer credit. According to Gartner, Inc., or Gartner, a provider of research and analysis on the global IT industry, in 2010, the IT industry performed better than Gartner’s forecast and global IT spending growth is expected to experience a similar level of growth in 2011.

Operations

Our Regional Presence

We operate a sales and distribution center in the U.S., 25 sales and distribution centers in Latin America and the Caribbean. We believe we have the broadest geographical scope of any IT distributor in Latin America and the Caribbean, with in-country operations in 12 countries — Argentina, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Jamaica, Mexico, Panama, Peru and Uruguay, or collectively, our In-country Operations.

Revenue derived from sales to customers located in Latin America and the Caribbean accounted for almost all of our consolidated revenue for the years ended December 31, 2010, 2009 and 2008. The following chart shows our revenue for the year ended December 31, 2010, by our customers’ country of origin.

2010 Percentage of Revenue by Customers’ Country of Origin

LOGO

*Other includes 26 other countries, each representing less than 1% of our 2010 revenue.

Our Miami Operations

Our Miami Operations serves as the headquarters for our entire Company, or our Miami Operations. Our Miami Operations handles purchases from our vendors, and a majority of the products that we acquire from our vendors pass through our Miami warehouse (with the exception of products sourced from Asia, which are usually shipped directly to our In-country Operations). Our Miami Operations supplies our 25 in-country sales and distribution centers and also sells products directly to third parties. Miami third-party customers include U.S., Latin American and Caribbean distributors, resellers and retailers, who in turn, distribute or sell products throughout Latin America and the Caribbean.

Our Miami purchasing department handles most of our vendor relationships and contracts. Our Miami Operations monitors our entire inventory pipeline on an ongoing basis and uses information regarding the levels of inventory, in conjunction with input from the in-country managers regarding our customer demand patterns, to place orders with vendors. The centralization of our purchasing

 

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function allows our In-country Operations to focus attention on more country-specific issues such as sales, local marketing, credit control and collections. The centralization of purchasing also allows our Miami Operations to maintain the records with regard to all vendor back-end rebates, promotions and incentives to ensure they are collected and to adjust pricing of products accordingly.

Our Miami distribution center typically ships products to each of our in-country sales and distribution operations twice a week by air and once a week by sea. These frequent shipments facilitate more efficient inventory management and increased inventory turnover. Generally, we do not have long-term contracts with logistics providers, except in Mexico and Chile. Where we do not have long-term contracts, we seek to obtain the best rates and fastest delivery times on a shipment-by-shipment basis. Our Miami Operations coordinates direct shipments to third-party customers and In-country Operations from vendors in Asia.

We have sales and marketing staff located in our Miami headquarters. For a detailed discussion of our sales and marketing staff, see “— Customers, Sales and Marketing.” Other functions performed in our Miami headquarters include human resources, treasury and accounting, strategic planning, consolidated information systems development and maintenance and overall marketing strategy.

As of December 31, 2010, 2009 and 2008, our Miami Operations total assets were $125.7 million, $126.4 million and $119.1 million, respectively. For detailed information of our revenue and operating income (loss) from our Miami Operations, see our segment information in Part II— Item 8. Financial Statements and Supplemental Data, “Note 14. Segment Information” in the Notes to Consolidated Financial Statements, of this Annual Report.

Our In-country Operations

Each of our in-country sales and distribution operations has a local sales force and substantial inventory, with the exception of our operations in Brazil, which consist solely of a sales office. Our In-country Operations sells to more than 42,000 customers in 12 countries.

Each of our In-country Operations is critical to meeting the needs of local resellers and retailers which are often small, locally owned companies that lack the size and the knowledge to buy directly from the U.S. or Asia and to handle customs processing, including taxes and duties. By selling directly to resellers and retailers from locally-based facilities, our In-country Operations provide a competitive advantage over other multinational companies that export products into those markets. We believe that we offer our customers some of the shortest product delivery times in the industry by leveraging our capabilities as a Miami-based aggregator and as an in-country distributor. Our local presence also allows us to obtain timely and accurate information with respect to each market’s growth potential and the needs of the customers in each market.

Each of our In-country Operations is responsible for the following functions: sales, human resources, local marketing, extension of credit (in compliance with our corporate credit policies), collections, inventory controls, local accounting and financial controls, shipping to customers when needed and providing local input and data from their IT systems to Miami for purchasing decisions.

As of December 31, 2010, 2009 and 2008, our In-country Operations total assets were $220.4 million, $181.7 million and $165.0 million, respectively. For detailed information of our revenue and operating income (loss) from In-country Operations, see our segment information in Part II — Item 8. Financial Statements and Supplemental Data, “Note 14. Segment Information” in the Notes to Consolidated Financial Statements, of this Annual Report.

Products

We offer single source purchasing to our reseller and retailer customers so they can purchase all of their IT product needs from us, including computer products, components and peripherals. We believe that our wide selection of products is a key attraction for resellers and retailers to purchase products from us. The single source purchasing concept is especially important for assemblers of unbranded or “white-box” PCs, who must source all the necessary components before the assembly process begins. White-box PCs typically have lower retail selling prices but higher margins than branded computer systems. We do not focus on selling branded desktop PCs other than our own Hurricane operating PCs, Blue Code PC kits and PCs we assemble under our customers’ brands.

Our in-country product lines typically include between 1,500 and 2,500 products in stock. Our catalog of products offers a broad selection that demonstrates our focus on responding to market demands, reflecting increasing demand for portable computing devices such as notebook computers and netbooks, bare-bones notebook computers designed specifically for web browsing, multimedia access and gaming, and mobile and ultra portable products. The breadth and diversity of our product lines allows us a key competitive advantage by enhancing our leadership position in the IT distribution industry and mitigating the risks inherent in our strong, competitive market. Based on our estimates, we believe that many of our local competitors have product lines of no more than 200 to 300 products in stock. The following table presents the percentage of our consolidated revenue represented by our product categories in each of the last three years:

 

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     Year Ended December 31,  

Category

   2010     2009     2008  

Components

     32.5 %      36.9     40.3

Computer systems

     31.7 %      28.0     24.2

Peripherals

     15.6 %      15.8     16.7

Accessories

     9.7 %      8.4     6.2

Software

     6.1 %      6.4     6.6

Networking

     3.0 %      2.6     2.7

Other products

     1.4 %      1.9     3.3
                        

Total

     100.0 %      100.0     100.0
                        

Our product categories are:

 

   

Components. This category consists of the components that are the basic building blocks of a PC and includes motherboards, processors, memory chips, internal hard drives, internal optical drives, cases and monitors.

 

   

Computer systems. This category consists of self-standing computer systems capable of functioning independently, including notebook computers and netbooks. In most of our operations, we assemble and sell PC and notebook computers under our own brands, under our customers’ brands and in unbranded cases.

 

   

Peripherals. This category consists of devices that are used in conjunction with computer systems and includes printers, power protection/backup devices, mice, scanners, external disk drives, storage devices, multimedia peripherals, modems, projectors and digital cameras.

 

   

Accessories. This category consists of computer cables, connectors, computer and networking tools, media, media storage, keyboard and mouse accessories, speakers, computer furniture and networking accessories.

 

   

Software. This category consists of operating system, security and anti-virus software.

 

   

Networking. This category consists of hardware that enables two or more PCs to communicate, and includes adapters, modems, routers, switches, hubs and wireless local area network, or LAN, access points and interface cards.

 

   

Other products. This category consists of digital consumer electronics and special order products.

We focus primarily on distribution of components, computer systems, peripherals and accessories categories, as these product categories tend to have higher margins than the other product categories. We believe our focus on these product categories and our attention to the vendor price protection policies described below under “—Vendors,” help us reduce the risks associated with inventory obsolescence. We believe that our inventory obsolescence rates of 0.18%, (0.10)% and 0.17% of revenue for the years ended December 31, 2010, 2009 and 2008, respectively, are very low by industry standards. One of our strategies is to maintain our core mix of product categories, in particular, to maintain high levels of sales in the components category as more people in Latin America and the Caribbean become computer users.

We have experienced an increase in market demand for mobile and ultraportable products within our computer systems category. As the percentage of products in our computer systems product category has continued to increase, the percentage of products in our components product category has continued to decline from prior year levels. Sales in our computer systems product category increased to 31.7% of our consolidated revenue as of December 31, 2010 from 28.0% of our consolidated revenue as of December 31, 2009. We believe this reflects increasing customer demand for portable computing devices such as notebook computers and netbooks, barebones notebook computers designed specifically for web browsing, multimedia access and gaming devices. Notebook computers and netbooks serve as a portable solution for accessing the web’s multimedia alternatives.

Among our growth strategies is the expansion of our offerings in the following product categories or subcategories: enterprise-class networking products (including networking products, servers, storage and software), enterprise IP telephony products (including IP, PBX systems and IP telephones), gaming and “infotainment” products (including video game systems), digital consumer electronics (including digital cameras and plasma displays) and products sold under our proprietary brands (for example, Hurricane). We plan to expand into these product categories or subcategories gradually as demand for these products grows among our customers and end user markets, our existing vendors begin to offer these products and as we initiate relationships with new vendors offering these products.

 

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Vendors

We have established long-term direct relationships with many of the major global manufacturers of branded computer products, including Apple, Dell, Epson, Hewlett Packard, Intel, Kingston, Microsoft, Samsung, Seagate, Toshiba and Western Digital, as well as a number of generic component vendors from the U.S. and Asia. For the years ended December 31, 2010, 2009 and 2008, our top 10 vendors manufactured products that accounted for 65.7%, 66.1% and 65.5%, respectively, of our total revenue and the products of our top vendor accounted for 18.6%, 19.1% and 17.5%, respectively, of our total revenue. We continue to believe in the strategic importance of diversifying our revenues among multiple vendors.

We have entered into written distribution agreements, which provide for nonexclusive distribution rights for specific territories with many of our vendors. The distribution agreements are generally short-term and subject to periodic renewal. We believe it is not common for vendors in our industry to have exclusive relationships with distributors. We also believe our customers are better served by our ability to carry a breadth of competing brands because the IT products market is subject to rapid change and reliant upon product innovation. Our vendors typically extend to us payment terms of between 30 and 60 days. Vendors of branded products often offer to us back-end rebates, promotions and incentives, to drive sales of their products.

Like other IT distributors, we are subject to the risk that the value of our inventory will be affected adversely by vendors’ price reductions or by technological changes affecting the usefulness or desirability of the products comprising our inventory. It is the policy of many vendors of IT products to offer distributors like us, who purchase directly from them, some protection from the loss in value of inventory due to technological change or a vendor’s price reductions. Under many of these agreements, there is only a limited, specified period of time in which the distributor may return products for credit, exchange products for other products or claim price protection credits. We take various actions to maximize our participation in these vendor approved programs and reduce our inventory risk including monitoring our inventory levels, soliciting frequent input from in-country managers about demand projections and controlling the timing of purchases.

Although we do not offer our own rebates or price protection to our customers, we provide some of the benefits of vendor-sponsored rebates. When we sell a product, we issue to our customer a product warranty with the same terms as the vendor’s product warranty issued to us. We track the unique serial numbers of all products passing through each of our distribution facilities which enables us to determine whether specific products under product warranty presented by our customers of our In-country Operations for service or repair benefit from the product warranty issued by us. This tracking system allows us to limit the quantity of unauthorized returns of merchandise and provide fast, high quality return-to-manufacturer authorization, or RMA, service across Latin America and the Caribbean. We incurred expenses in administering the warranties issued to our customers of $1.8 million, $1.7 million and $2.4 million for the years ended December 31, 2010, 2009 and 2008, respectively.

Customers, Sales and Marketing

Customers

We currently sell to over 44,000 distributors, resellers and retailers in 41 countries. Although the end users of our products are mostly individuals and small and medium-sized businesses, we supply these end users through a well-established network of in-country distributors, value-added resellers, system builders and retailers, as well as through U.S.-based distributors selling into the Region. We have always emphasized customer care and long-term customer development. We seek to build customer loyalty not only by having wide product selection and quick delivery times, but also by offering customs and duties payment management, marketing assistance, product training, new product exposure, technical support and local warranty service and by providing trade credit (when the customer is approved under our credit policies). We believe that the extension of payment terms to creditworthy customers is one of our key competitive advantages. Many of our local competitors do not have the financial resources to do so and, as a result, offer products only on a cash-and-carry basis.

For the years ended December 31, 2010, 2009 and 2008, no single customer accounted for more than 2.0% of our consolidated revenue and the top 10 customers by sales volume accounted for less than 8.9%, 10.4% and 9.0%, respectively, of our consolidated revenue. Our strategy is to not rely on any single customer for a large percentage of sales, but to diversify our revenues and maximize sales from a large quantity of individual customers.

Sales

As of December 31, 2010, we maintained a sales force of 391 people in our In-country Operations and 36 employees in our Miami Operations dedicated to serving our third-party customers. Each in-country sales force is managed by a general manager and, in some cases, a sales manager, depending on the size of the operation. The general managers and sales managers are responsible for

 

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developing and maintaining relationships with new and existing customers. Our Chief Executive Officer also spends a considerable amount of time visiting customers and our In-country Operations to develop new customer accounts and solidify and improve existing relationships.

We use an incentive-based compensation structure for our sales force that varies from country to country. Generally, the compensation consists of a base salary and variable commission or bonus, based on pre-established sales and performance metrics. The commission is generally calculated as a percentage of collected gross profits and net customer additions.

Marketing

As of December 31, 2010, our marketing department consisted of four employees in Miami and 47 employees throughout Latin America and the Caribbean. The marketing department’s responsibilities include oversight of our corporate identity, preparation of marketing materials, creation and coordination of various types of media activity and development of marketing research studies and specialized reseller-focused events. In addition, the marketing department works with vendors to establish periodic marketing and sales programs to generate vendor brand awareness and product demand. In this regard, our marketing department acts as a liaison between our company and our vendors.

The marketing department uses marketing and business development funds available from vendors of branded IT products for various activities, including the preparation of our annual product catalog and monthly pricing books, customer training, specialized events and trade shows. Our Miami Operations administer a majority of the marketing funds and distribute them as needed to our In-country Operations.

Some of our more notable marketing events include quarterly IT educational and training seminars offered by vendors for our sales executives and channel customers in Latin America and the Caribbean in order to introduce new products and programs, present product roadmaps, launches and promotions and provide strategies aimed at enhancing selling skills.

Promotional Floordays are conducted weekly throughout the Region, in which vendors interact with and showcase products and solutions to reseller customers and sales executives and provide individualized training and test drives of the products. Our regional Intcomex Product Catalog is published semi-annually and includes over 1,500 products in 45 categories.

IntcomExpo and Expoworkshops are our annual private, regional trade shows held throughout the year in several of our In-country locations in which 15 to 30 vendors present their products.

Reseller training labs are seminar events designed to introduce new products, provide product and technology information and selling techniques to resellers.

Intcomex WebStore is our e-commerce store located at http://store.intcomex.com which offers our products to our resellers and customers to search products by category, subcategory, name or stock-keeping unit (or SKU), compare product specifications, review product quotations and prices and purchase products.

In addition, we utilize the following direct marketing methods: I-Blasts or automatic electronic mailings, announcing new product releases, current promotions and other important information are sent directly to our customers on a bi-weekly basis. Interactive email signatures are animated flash banners displaying a vendor’s name or product under our email signature block and a link to the brand’s promotion(s) and the Intcomex Webstore.

Intcomex Marketing on Hold is a unique method of advertising that allows our vendors to promote their products to our customers on a daily basis. We play an advertisement of the vendor’s products, brand and latest releases on large screen televisions in the Region that customers can view as they await or obtain quotations. Internal communications also showcase vendors’ products on large screen televisions in the Region in the form of slideshows and short movies that run continuously between promotions. The television advertisements are a convenient format for introducing new products and programs to our customers.

Credit Risk Management

We extend payment terms, generally up to 30 days, to creditworthy customers of our Miami Operations and of most of our In-country Operations, although some higher-volume customers, such as large retailers, receive longer payment terms. In other countries (most notably Mexico, where sales are primarily on a cash-and-carry basis), we establish our credit policies on a country-by-country basis depending mostly on local macroeconomic conditions, the nature of our customers and local market practices.

We have established standardized credit policies for our Miami Operations and our In-country Operations. Our credit policies include credit analysis, credit database checks, vendor and bank relationship checks and, where necessary, collateralization. In addition, other than accounts receivable owed by affiliates, substantially all of our Miami Operations’ foreign accounts receivables are insured by a worldwide credit insurance company. The policy’s aggregate limit is $20.0 million with an aggregate deductible of $1.0

 

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million; the policy expires on August 31, 2011. In addition, 10% or 20% buyer coinsurance provisions and sub-limits in coverage on a per-buyer and on a per-country basis apply. The policy also covers certain large, local companies that purchase directly from our In-country Operations in Argentina, Costa Rica, El Salvador, Guatemala, Jamaica and Peru. Our In-country Operations in Chile insures certain customer accounts with a credit insurance company in Chile; the policy expires on October 31, 2012.

We believe that our relatively low bad debt expenses of 0.2% 0.5% and 0.4% of net revenues for the years ended December 31, 2010, 2009 and 2008, respectively, are a result of our standardized credit policies, our close and proactive monitoring of accounts receivable and collections by our Miami and In-country Operations and the diversification of our receivables over a large number of countries and customers. We have become more cautious in extending credit to our customers due to the worsening financial and economic crisis. Most of our credit losses are with respect to customers of our Miami Operations, where we serve larger customers who in some cases are afforded credit lines in excess of $100,000. In our In-country Operations, where credit lines typically do not exceed $10,000, credit losses have been nominal.

Information Systems

In 2010, we completed the process of installing Sentai, our company-wide enterprise resource planning, or ERP, management and financial consolidation system. Sentai is a scalable IT ERP system that enables simultaneous decentralized decision-making by our employees included in sales and purchasing while permitting control of daily operating functions by our senior management. We use the Sentai logistics and inventory management system in order to better manage our increasing shipping volumes. In 2009, we implemented the ERP system in our Miami Operations and in all of our In-country Operations, except Mexico. We completed the implementation of our core ERP system in Mexico, server upgrades in Miami and leasehold improvements in El Salvador and Panama in the second quarter of 2010.

In 2010, we completed the process of implementing our e-commerce sales platform which helps maximize online revenues and reduce costs and risks associated with running our e-commerce operation. The e-commerce infrastructure includes site development and hosting, order management and merchandising, reporting and analytics, product fulfillment and multilingual customer service. Our e-commerce platform is a centralized system and critical solution to serving our Miami and in-country customers through rich functionality to deliver large volume transactions in an integrated environment.

Competition

The IT products distribution industry in Latin America and the Caribbean is highly competitive. The factors on which we compete include:

 

   

price;

 

   

availability and quality of products and services;

 

   

terms and conditions of sale;

 

   

availability of credit and credit terms;

 

   

timeliness of delivery;

 

   

flexibility in tailoring specific solutions to customers’ needs;

 

   

effectiveness of marketing and sales programs;

 

   

availability of technical and product information; and

 

   

availability and effectiveness of warranty programs.

The IT products distribution industry in Latin America and the Caribbean is very fragmented and contains several public multinational companies, such as Ingram Micro Inc. (operations in Argentina, Brazil, Chile, Mexico and Peru), Tech Data Corporation (operations in Brazil, Chile, Peru and Uruguay), Avnet, Inc. (operations in Brazil, Chile and Mexico) and SYNNEX Corporation (operations in Mexico), (we refer to these companies as our public company competitors), and a large number of local companies that operate in a single country, such as Grupo Deltron S.A. in Peru, Airoldi Computación in Argentina and Makro Computo in Colombia. We believe we have the broadest in-country presence in Latin America and the Caribbean in terms of the number of countries served through an in-country presence.

Our principal public company competitors are Ingram Micro and Tech Data, each of which operates local distribution centers in the limited number of markets listed above. In contrast, we are able to offer our vendors an in-country distribution channel to many Latin American and Caribbean markets. Additionally, while our product offering is more focused on components for white-box personal computers, Ingram Micro and Tech Data are focused on high-end branded equipment, including servers. While these competitors are larger and better capitalized than we are, and, in the case of the Mexican market, have a significantly larger market share than we do, we believe that our multi-country, components-focused business model is better suited to Latin America and the Caribbean.

 

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Our relatively large size provides us with certain advantages over smaller local distributors, who sometimes have a lower cost structure than we do, in part because we believe they may operate in the grey market or “informal” economy. We believe our advantages generally include more developed vendor relationships, broader product offerings, greater product availability and more extensive customer service (including credit and technical support).

Our participation at two levels of the distribution chain (Miami and in-country), coupled with our extensive geographic footprint, creates a market presence that we believe is unmatched by any of our competitors in terms of the number of countries served through an in-country presence and enables us to generate industry-leading margins among our public company competitors. Our dual distribution approach links a diversified set of vendors, primarily located in the U.S. and Asia, to a fragmented number of customers spread throughout Latin America and the Caribbean, and delivers value to both ends of the supply chain. To our vendors, we provide access to markets and customers that would be costly and inefficient for them to reach directly. To our customers, which are often small local resellers and retailers that lack the scale and access to buy directly from the U.S. and Asia, we provide broad and timely product availability, local staff, multi-vendor single source purchasing, technical support, customs management and local warranty service.

Trademarks and Domain Names

We have registered a number of trademarks and domain names for use in our business. We have registered trademarks such as “Intcomex,” “Blue Code,” “CENTEL,” “FORZA,” “FORZA Power Technologies,” “Hurricane,” “Hurricane Systems,” “KLIP,” “KLIP XTREME” and “NEXXT Solutions” in the U.S. and/or in various Latin American and Caribbean jurisdictions. We also have registered domain names, including intcomex.com, intcomex.cl, intcomex.ec and intcomex.com.pe, e-ias.com, hurricanesys.com, klipxtreme.com, nexxtsolutions.com. We believe that our trademarks help us build name recognition in the region in which we operate.

Market and Industry Data

Market and industry data used throughout this Annual Report on Form 10-K, or Annual Report, were obtained from our internal surveys, industry publications, unpublished industry data and estimates, discussions with industry sources and currently available information. The sources for this data include IDC and Gartner. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy and completeness of such information. Based on our familiarity with the market, we believe that estimates by these third party sources are reliable; however, we have not independently verified such market data. Similarly, while believed by us to be reliable, our internal surveys have not been verified by any independent sources. Accordingly, no assurance can be given that such data will prove to be accurate.

Personnel

As of December 31, 2010, we employed 1,438 people, of which 175 were in Miami and the rest located in our In-country Operations. We do not have any collective bargaining agreements with our employees, nor are they unionized, except for our employees in Mexico and certain employees in Argentina. We believe that our relations with our employees are generally good.

We have a contract with ADP Total Source, Inc. or ADP, to provide certain professional employment services such as health insurance, other benefits and payroll services in respect of all Miami personnel. Pursuant to this contract, our Miami personnel, with certain exceptions, became employees of ADP. We lease the services of these employees from ADP, and reimburse ADP for the costs of compensation and benefits. For purposes of this prospectus, we consider employees of ADP covered by this contract to be employees of Intcomex.

Website Access to Exchange Act Reports and Available Information

We file periodic reports and other information with the U.S. Securities and Exchange Commission, or the SEC. A copy of those reports and the exhibits and schedules thereto may be inspected without charge at the public reference room maintained by the SEC located at 100 F Street, N.E., Room 1580, Washington, DC 20549. Copies of those reports may be obtained from such offices upon payment of prescribed fees. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Financial and other information can also be accessed through our website at www.intcomex.com, where we make available, free of charge, copies of our Annual Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished, as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Our website and the information contained therein or connected thereto are not incorporated into this Annual Report.

 

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Item 1A. Risk Factors.

The occurrence of any of the following events could materially affect our business, financial condition or results of operations. The forward-looking statements contained in this Annual Report should be considered in connection with these risk factors because these factors could cause the actual results and conditions to differ materially from those projected in the forward-looking statements. If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected. Additional risks not currently known to us or that we now deem immaterial may also harm or affect our business.

Risks Related to Our Industry and our Business

Our revenue, operating results and margins could fluctuate and adversely be affected by many factors related to our industry and our business including, but not limited to the following:

 

   

general economic, political, social and health conditions and developments in the global environment and throughout Latin America and the Caribbean;

 

   

competitive conditions and fluctuations in the foreign currency in the environment in which we operate;

 

   

market acceptance of the products we distribute;

 

   

credit exposure to our customers’ financial condition and creditworthiness;

 

   

operating and financial restrictions of our creditors and sufficiency of trade credit from our vendors;

 

   

dependency on accounting and financial reporting, IT and telecommunications management and systems; and,

 

   

compliance with accounting rules and standards, and corporate governance and disclosure requirements.

We have incurred net losses in two out of the last three fiscal years, and there can no assurance that we will return to profitability, and if so, when.

We operate in a highly competitive environment and, as a result, we may not be able to compete effectively or maintain or increase our sales, market share or margins, particularly if the global economic downturn continues or intensifies.

The IT products distribution industry in Latin America and the Caribbean is highly competitive. The factors on which IT distributors compete include:

 

   

price;

 

   

availability and quality of products and services;

 

   

terms and conditions of sale;

 

   

availability of credit and credit terms;

 

   

timeliness of delivery;

 

   

flexibility in tailoring specific solutions to customers’ needs;

 

   

effectiveness of marketing and sales programs;

 

   

availability of technical and product information; and

 

   

availability and effectiveness of warranty programs.

The IT products distribution industry in Latin America and the Caribbean is very fragmented. In certain markets, we compete against large multinational public companies (including Ingram Micro, Tech Data, Avnet and SYNNEX) that are significantly better capitalized than we are and potentially have greater bargaining power with vendors than we do. In addition, our main competitor in Mexico, Ingram Micro, has a significantly larger market share than we do in that country. In all of our in-country markets, we also compete against a substantial number of locally-based distributors, many of which have a lower cost structure than we do, in some cases because they operate in the gray market and the local “informal” economy. Due to intense competition in our industry, we may not be able to compete effectively against our existing competitors or new entrants to the industry, or maintain or increase our sales, market share or margins.

In addition, overcapacity in our industry and price reductions by our competitors may result in a reduction of our prices and thereby a reduction of our gross margins. We may also, as a result, lose market share, need to offer customers more credit or extended payment terms or need to reduce our prices in order to remain competitive, and any of these measures may result in an increase in our required capital, financing costs, and bad debt expense in the future.

 

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The global economic downturn in recent years and the ongoing volatility and disruptions in the global credit markets could cause a severe disruption in our operations and adversely affect our business and results of operations.

The global financial markets experienced a significant economic downturn and substantial disruption in late 2008 and early 2009, including, among other things, volatility in securities prices, severely diminished liquidity and credit availability, and rating downgrades of certain investments. Although the global economy has improved from this severe downturn, a prolonging or further deterioration of the economic conditions and the associated credit crisis could result in severely negative implications to our business that may exacerbate many other risks described below.

The global economic downturn and the associated credit crisis could have a further negative impact on financial institutions and the global financial system, which would, in turn, have a negative impact on us and our creditors. Credit insurers could drop coverage on our customers and increase premiums, deductibles and co-insurance levels on our remaining or prospective coverage. Our suppliers have tightened trade credit already, and could do so further, which could negatively impact our liquidity. We may not be able to borrow additional funds under our existing credit facilities if participating banks become insolvent or their liquidity is limited or impaired. The recent tightening of credit in financial markets could also result in a decrease in the demand for IT products. The global recession could adversely affect our vendors’ and customers’ ability to obtain financing for operations and result in continued severe job losses and lower consumer confidence. Certain markets may experience deflation, which could negatively impact our average selling price and revenue.

A further or prolonged downturn in the global economy may result in intensified competition, regionally and internationally, which may negatively affect our margins. The impact may be in the form of reduced prices, lower sales or reduced sales growth, loss of market share, lower gross margins, loss of vendor rebates, extended payment terms with customers, increased bad debt risks, shorter payment terms with vendors, increased capital investment and interest costs, increased inventory losses related to obsolescence and/or excess quantities, all of which could adversely affect our results of operations and financial condition. Our vendors and customers may become insolvent and file for bankruptcy, which also would negatively impact our results of operations.

Our business requires significant levels of capital to finance accounts receivable and inventory that is not financed by trade creditors. We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds available under our credit arrangements, will provide sufficient resources to meet our present and future working capital and cash requirements for at least the next twelve months. However, the capital and credit markets have been experiencing unprecedented levels of volatility and disruption. Such market conditions may affect our ability to access the capital markets or the capital we require may not be available on terms acceptable to us, or at all, due to inability of our finance partners to meet their commitments to us. We are unable to predict the likely duration and severity of such disruptions in the financial markets and adverse economic conditions in the U.S. and other countries and the impact these events may have on our operations and the industry in general.

We are dependent on a variety of IT and telecommunications systems and are subject to additional risks, as we have recently completed the implementation of our company-wide reporting system, and any disruptions in our systems could adversely impact our ability to effectively manage our business and prepare accurate and timely financial information.

We are dependent on a variety of IT and telecommunications systems, including systems for managing our inventories, accounts receivable, accounts payable, order processing, shipping and accounting. In addition, our ability to price products appropriately and the success of our expansion plans depend to a significant degree upon our IT and telecommunications systems. We recently completed our ERP system implementation and integration of Sentai, our company-wide ERP management and financial consolidation system in our Miami Operations and all of our In-country Operations. Sentai is a scalable IT system that enables simultaneous decentralized decision-making by our employees involved in sales and purchasing while permitting control of daily operating functions by our senior management. We are also using the Sentai logistics and inventory management system in order to better adapt to higher shipping volumes.

Our experience with this new platform is limited and each new installation required the training of our local employees. In addition, new installations may require further modifications in order to handle the different accounting requirements in each of the countries in which it is installed. Any temporary or long-term failure of these systems could adversely impact our ability to effectively manage our business and prepare accurate and timely financial information. Also, our failure to adapt and upgrade our systems to keep pace with our future development and expansion could hurt our results of operations.

 

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If the IT products market in Latin America and the Caribbean does not grow as we expect, we may not be able to maintain or increase our present growth rate and our results of operations and financial condition could be affected.

Historically, the growth of our business has been driven in large part by the growth of the IT products market in Latin America and the Caribbean. In particular, we have benefited from rapid growth in PC and Internet penetration rates. We expect that our future growth will also depend in large part on further growth in the IT market including growth in PC and Internet penetration rates and increasing demand for notebook computers. If the IT products market does not grow as quickly and in the manner we expect for any reason, including as a result of economic, political, social or legal developments in Latin America and the Caribbean or the recent global economic downturn, we may not be able to maintain or grow our business as expected which could have an impact on our results of operations and financial condition.

Economic, political, social or legal developments in Latin America and the Caribbean could hurt our results of operations and financial condition.

Historically, sales to Latin America and the Caribbean have accounted for almost all of our consolidated revenues. As a result, our financial results are particularly sensitive to the performance of the economies of countries in Latin America and the Caribbean. If local, regional or worldwide developments adversely affect the economies of any of the countries in which we do business, our results of operations and financial condition could be hurt. Our results are also impacted by political and social developments in the countries in which we do business and changes in the laws and regulations affecting our business in those regions. Changes in local laws and regulations could, among other things, make it more difficult for us to sell our products in the affected countries, restrict or prevent our receipt of cash from our customers, result in longer payment cycles, impair our collection of accounts receivable and make it more difficult for us to repatriate capital and dividends from our foreign subsidiaries to the ultimate U.S. parent company.

The economic, political, social, legal and other risks we are subject to in the regions or countries where we conduct business or obtain computer products include but are not limited to:

 

   

deteriorating economic, political or social conditions, instability, military conflicts or civilian unrest and terrorism;

 

   

additional tariffs, import and export controls or other trade barriers that restrict our ability to sell products into countries in Latin America and the Caribbean;

 

   

changes in local tax regimes, including the imposition of significantly increased withholding or other taxes or an increase in VAT or sales tax on products we sell;

 

   

changes in laws and other regulatory requirements governing foreign capital transfers and the repatriation of capital and dividends;

 

   

increases in costs for complying with a variety of different local laws, trade customs and practices;

 

   

delays in shipping and delivering products to us or customers across borders for any reason, including more complex and time-consuming customs procedures;

 

   

fluctuations of local currencies;

 

   

business interruptions due to natural or manmade disasters, extreme weather conditions including earthquakes, fires, floods, hurricanes, medical epidemics, power and/or water shortages, telecommunication failures, tsunamis. in the

 

Any adverse economic, political, social or legal developments in the countries in which we do business could harm our results of operations and financial condition.

The Japanese earthquake in March 2011 could severely disrupt our ability to acquire products from Asia due to the interruption of power supply, factory closings and cessation of production of key components used by many of our vendors in their products. Disruptions in the supply of products and prolonged product shortages could result in our inability to coordinate direct shipments to third-party customers and each of our In-country Operations from vendors in Asia, and negatively impact our results of operations and financial condition.

Fluctuations in foreign currency exchange rates could reduce our gross profit and gross margins and increase our operating expenses in U.S. dollar terms.

We periodically engage in foreign currency forward contracts when available and when doing so is not cost prohibitive. In periods when we do not engage in these contracts, foreign currency fluctuations may adversely affect our results of operations, including our gross margins and operating margins.

A significant portion of our revenues from our In-country Operations is invoiced in currencies other than the U.S. dollar, and a significant amount of our in-country operating expenses from our In-country Operations are denominated in currencies other than U.S. dollars. In markets where we invoice in local currency, including Argentina, Chile, Colombia, Costa Rica, Guatemala, Jamaica, Mexico, Peru and Uruguay, the appreciation of the U.S. dollar could have a marginal impact on our results of operations due to lower demand caused by the appreciation of the U.S. dollar. In markets where our books and records are prepared in currencies other than the U.S. dollar, the appreciation of a local currency will increase our operating expenses and decrease our operating margins in U.S. dollar terms. For example, operating expenses, excluding depreciation and amortization from our In-country Operations increased $5.5 million for the year ended December 31, 2010. Excluding the effects of the strengthening currencies, operating expenses, excluding depreciation and amortization from our In-country Operations would have increased $2.9 million for the year ended December 31, 2010, as compared to the same period in 2009, due mainly to the higher salary and payroll-related expenses in Chile, Colombia, Mexico, Peru and Uruguay. The Chilean Peso strengthened by 9.9%, to 468.0 pesos per U.S. dollar as of December 31, 2010, from 519.3 as of December 31, 2009.

 

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Large and sustained devaluations of local currencies, like those that occurred in Brazil in 2000 and Argentina in 2001, can make many of our products more expensive in local currencies. This could result in our customers having difficulty paying those invoices and, in turn, result in decreases in revenue. Moreover, such devaluations may adversely impact demand for our products because our customers may be unable to afford them.

We are exposed to market risk and credit exposure and loss as we engage in foreign currency exchange forward contracts to hedge foreign currency denominated payables for inventory purchases, in a currency other than the currency in which the products are sold.

We are exposed to fluctuations in foreign exchange rates and reduce our exposure to the fluctuations by sometimes using derivative financial instruments, particularly foreign currency forward contracts. We use these contracts to hedge foreign currency denominated payables for inventory purchases in the normal course of business, in a currency other than the currency in which the products are sold. Derivative financial instruments potentially subject us to risk. Volatile foreign currency exchange rates increase our risk related to products purchased in a currency other than the currency in which the products are sold in the normal course of business.

We are exposed to market risk related to volatility in foreign currency exchange rates, including devaluation and revaluation of local currencies. The market risk related to the forward contracts is offset by changes in the valuation of the underlying foreign currencies being hedged. We are also exposed to credit loss in the event of nonperformance by our counterparties to foreign exchange forward contracts and we may not be able to adequately mitigate all foreign currency related risks. We manage our exposure to fluctuations in the value of currencies and interest rates using foreign currency forward contracts with creditworthy financial institution counterparties. We monitor our exposures and the creditworthiness of our financial institution counterparties. Credit exposure for derivative financial instruments is limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed our obligations to the counterparties. We manage the potential risk of credit loss through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of financial institutions and other contract provisions.

We maintain a policy to protect against fluctuation in currency exchange rates, which may result in a loss. We do not use derivative financial instruments for trading or speculative purposes. The realization of any or all of these risks could have a significant adverse effect on our financial results and statement of operations.

Our expansion into new markets may present additional risks, which may limit our success in those markets and could hurt our results of operations.

We currently have in-country sales and distribution operations in 12 Latin American and Caribbean countries. We expect to enter into new geographic markets both within the countries where we already conduct operations and in new countries where we have no prior operating or distribution experience. In new markets, we will face challenges such as customers’ lack of awareness of our brand, difficulties in hiring personnel and our unfamiliarity with local markets. New markets may also have different competitive conditions from our existing markets and may generate lower margins. Any failure on our part to recognize or effectively respond to these differences may limit the success of our operations in those markets, and could hurt our results of operations.

Our management and financial reporting systems, internal and disclosure controls and finance and accounting personnel may not be sufficient to meet our management and reporting needs.

We rely on a variety of management and financial reporting systems and internal and disclosure controls to provide management with accurate and timely information about our business and operations. This information is important because it enables management to capitalize on business opportunities and identify unfavorable developments and risks at an early stage. We also rely on these management and financial reporting systems and internal and disclosure controls to enable us to prepare accurate and timely financial information for our investors.

The challenge of establishing and maintaining sufficient systems and controls and hiring, training and retaining sufficient accounting and finance personnel has intensified as our business has grown rapidly in recent years and expanded into new geographic markets. As a result, we have identified the need to expand our finance and accounting staff and enhance internal controls at both the corporate and in-country levels, and to enhance the training of in-country management personnel regarding internal controls and management reporting to meet our current needs. This process is ongoing and we expect Sentai, our company-wide ERP, management and accounting system, to enhance the control of daily operating functions by our senior management. Sentai was recently implemented in Mexico, our final location to adopt the system. In 2010, we added a new Corporate Controller to further strengthen our reporting and accounting competencies. In addition, we are continuously seeking to add personnel to our finance and accounting staff and instituting new controls and enhancing existing controls at our consolidated and subsidiary operating levels.

 

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Although we believe our current management and financial reporting systems, internal and disclosure controls and finance and accounting personnel are sufficient to enable us to effectively manage our business, identify unfavorable developments and risks at an early stage and produce financial information in an accurate and timely manner, we cannot be sure this will be the case. For example, management identified a material weakness in one of our foreign operations control environment during the second quarter of 2008. The material weakness included the following: (i) a failure to perform proper management oversight of the local operations and monitor and test controls to detect the override of established controls and policies; (ii) failure to institute all elements of an effective program to detect and prevent personnel (considered to be employees performing functions under a services agreement in the ordinary course of business for us under the laws of the jurisdiction in which the foreign entity operates) from improperly claiming tax withholding exemptions as non-employees; and (iii) failure to establish and maintain an effective control environment surrounding the payroll process and the disbursement process, including the failure to verify the existence of complete and accurate procedures to support a three-way matching process comparing the original purchase order, invoice and receipt records of the purchased products to support the approval and payment for services rendered or products purchased. This material weakness resulted in increased payroll tax and value added tax, or VAT, in the amount estimated to be approximately $0.4 million in the second quarter of 2008.

Management has undertaken corrective actions to remediate the failed controls surrounding the foreign operating entity’s purchase and receipt of products. However, such actions may prove to be ineffective or inadequate and may expose us to risk of misstatements in its financial statements. In such circumstances, investors and other users of our financial statement may lose confidence in the reliability of our financial information, and we could fail to comply with certain covenants in its debt agreements.

No matter how well designed and operated, a control system can provide only reasonable, not absolute, assurance that its objectives are met. Its inherent limitations include the realities that judgments in decision-making can be faulty and failures can occur due to simple mistakes. Moreover, controls can be circumvented by the acts of an individual, collusion of two or a group of people or by management’s decision to override the existing controls.

We believe that we need to continue to expand our finance and accounting staff and enhance internal controls at both the corporate and in-country levels, and to enhance the training of in-country management personnel regarding internal controls and management reporting to meet our future needs, as a result of our anticipated or future growth. We cannot be sure that we will be able to take all necessary actions in a timely manner to keep pace with our anticipated growth.

Although we believe our controls are effective, if we fail to maintain sufficient management and financial reporting systems and internal and disclosure controls, hire, retain and train sufficient accounting and finance personnel, and enhance the training of in-country management personnel regarding internal controls and management reporting, our ability to prepare accurate and timely financial information could be impaired, hinder our growth and have a material adverse effect on our current or future business, results of operations and financial condition.

We could experience difficulties in staffing and managing our foreign operations, which could result in reduced revenues and difficulties in realizing our growth strategy.

We have many sales and distribution centers in multiple countries, which require us to attract managers of our business in each of those locations. In establishing and developing many of our in-country sales and distribution operations, we have relied in large part on the local market knowledge and entrepreneurial skills of a limited number of local managers in those markets. We have no employment agreements with any of our in-country managers. The loss of the services of any of these managers could adversely impact our results of operations in the market in which the manager is located. Further, it may prove difficult to find and attract new talent (including accounting and finance personnel) in our existing markets or any new markets we enter in Latin America and the Caribbean who possess the expertise required to successfully manage and operate our in-country sales and distribution operations. In 2008, we hired new management for our operations in Mexico including a new general manager and a controller, and in 2009, we hired a new general manager and a director of finance for our operations in Colombia, each of whom we believe has the appropriate knowledge and management skills to oversee our operations. If we fail to recruit highly qualified candidates, we may experience greater difficulty realizing our growth strategy, which could hurt our results of operations.

If we lose the services of our key executive officers, we may not succeed in implementing our business strategy.

We are currently managed by certain key executive officers, including both of our founders, Anthony Shalom and Michael Shalom. The Shaloms have extensive experience and knowledge of our industry and the many local markets in which we operate. They also have been integral in establishing and expanding some of our most significant customer and vendor relationships and building our unique distribution platform. The loss of the services of these key executive officers could adversely affect our ability to implement our business strategy, and new members of management may not be able to successfully replace them. With the exception of an employment agreement with our Chief Financial Officer, we have no employment agreements with any of our key executive officers.

 

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The interests of our principal shareholder may not be aligned with yours.

As our controlling shareholder, CVC International can elect a majority of the members of our Board of Directors, select our management team, determine our corporate and management policies and make decisions relating to fundamental corporate actions. In addition, under the shareholders agreement among us and our shareholders, the members of our Board of Directors appointed by the Shaloms have veto rights over certain decisions, which could result in a deadlock and consequently could delay our management’s decision-making process.

We are exposed to increased costs associated with complying with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act and other corporate governance and disclosure standards. Compliance efforts could divert management time from revenue-generating activities to compliance activities. Failures to comply could cause reputational harm and additional costs to remedy shortcomings.

The Sarbanes-Oxley Act and the rules promulgated by the SEC require us to adopt various corporate governance practices and implement various internal controls. Our efforts to comply with evolving laws, regulations and standards applicable to public companies have resulted in, and are likely to continue to result in, increased expenses and a diversion of management time from revenue-generating activities to compliance activities.

In particular, Section 404 of the Sarbanes-Oxley Act, or Section 404, requires our management to annually review and evaluate our internal controls over financial reporting and attest to the effectiveness of these controls. To date, our ongoing efforts to comply with Section 404 have required the commitment of significant financial and managerial resources. In the event that our Chief Executive Officer or Chief Financial Officer determines that our controls over financial reporting are not effective as required by Section 404 at any time in the future, investor perceptions of us and our reputation may be adversely affected and we may incur significant additional costs to remedy shortcomings in our internal controls.

We are dependent on a variety of IT and telecommunications systems and are subject to additional risks, as we have recently completed the implementation of our company-wide reporting system, and any disruptions in our systems could adversely impact our ability to effectively manage our business and prepare accurate and timely financial information.

We are dependent on a variety of IT and telecommunications systems, including systems for managing our inventories, accounts receivable, accounts payable, order processing, shipping and accounting. In addition, our ability to price products appropriately and the success of our expansion plans depend to a significant degree upon our IT and telecommunications systems. We recently completed our ERP system implementation and integration of Sentai, our company-wide enterprise resource planning, or ERP, management and financial consolidation system in our Miami Operations and all of our In-country Operations. Sentai is a scalable IT system that enables simultaneous decentralized decision-making by our employees involved in sales and purchasing while permitting control of daily operating functions by our senior management. We are also using the Sentai logistics and inventory management system in order to better adapt to higher shipping volumes.

Our experience with this new platform is limited and each new installation required the training of our local employees. In addition, new installations may require further modifications in order to handle the different accounting requirements in each of the countries in which it is installed. Any temporary or long-term failure of these systems could adversely impact our ability to effectively manage our business and prepare accurate and timely financial information. Also, our failure to adapt and upgrade our systems to keep pace with our future development and expansion could hurt our results of operations.

Changes in accounting rules could adversely affect our business and results of operations.

Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAAP. The U.S. government has authorized various policy-making bodies, including the Financial Accounting Standards Board, or the FASB, and the SEC, to interpret these principles and create appropriate accounting standards. Changes in these interpretations and standards, which may occur from time to time, may result in additional non-cash charges and/or changes in presentation or disclosure, which in turn could have a significant adverse effect on our results of operations.

We may be required to recognize further impairments of our goodwill, identifiable intangible assets or other long-lived assets or to establish further valuation allowances against our deferred income tax assets, which could adversely affect our results of operations or financial condition.

An extended period of economic contraction or a deterioration of our operating performance could result in impairment to the carrying amount of our goodwill. We did not recognize any goodwill impairment charges for the year ended December 31, 2010 and 2009. In the fourth quarter of 2008, consistent with the severe decline in the global capital markets, we experienced a similar decline in the market value of our goodwill and other intangible assets. As a result, our fair value of goodwill was significantly lower than book value. We performed our annual impairment test of our goodwill and other intangible assets. As a result of this evaluation, we recognized a charge of $18.8 million against the carrying value of our goodwill. This non-cash charge materially impacted our equity and results of operations in 2008, but does not impact our ongoing business operations, liquidity or cash flow.

 

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Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities. Deferred tax assets, which also include net operating loss, or NOL carryforwards for entities that have generated or continue to generate operating losses, are assessed periodically by management to determine if their future benefit will be fully realized. If it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net (loss) income. Such charges could have a material adverse effect on our results of operations or financial condition. We establish a valuation allowance against our NOLs when we do not believe that we will realize the full benefit of the NOLs. As of December 31, 2010 and 2009, we recorded a valuation allowance of $12.5 million and $6.4 million, respectively, against the respective NOLs, of which $10.4 million and $4.4 million, respectively, related to our U.S. and $2.1 million and $2.0 million, respectively, related to our In-country Operations.

Our future results of operations may be impacted by the prolonged weakness in the recent economic environment that may result in a further impairment of any existing goodwill or goodwill recorded in the future and/or other long-lived assets or further valuation allowances on our deferred tax assets, which could adversely affect our results of operations or financial condition.

Our substantial debt could limit the cash flow available for our operations, which could adversely affect our business.

We have and will continue to have a substantial amount of debt, which requires significant interest and principal payments. As of December 31, 2010 we had $137.5 million of total debt outstanding (consisting of $114.7 million outstanding under our $120.0 million 13  1/4% Second Priority Senior Secured Notes due December 15, 2014, or the 13  1/4% Senior Notes, net of discount, $16.9 million outstanding under Software Brokers of America, Inc.’s, or SBA’s, senior secured revolving credit facility with Comerica Bank, or Senior Secured Revolving Credit Facility and cash overdrafts with banks, $5.1 million outstanding debt of our foreign subsidiaries, and $0.8 million other long-term debt, including capital leases). As of December 31, 2009, we had $129.7 million of total debt outstanding (consisting of $113.3 million outstanding under our $120.0 million 13  1/4% Senior Notes due December 15, 2014, or the 13   1/4% Senior Notes, net of discount, $9.2 million outstanding under our Senior Secured Revolving Credit Facility, $6.2 million of outstanding debt of our foreign subsidiaries and $1.0 million of capital leases of SBA). Subject to the limits contained in the indenture governing the 13   1/4% Senior Notes and our other debt instruments, we may be able to incur additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we incur additional debt, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences to the holders of our common stock, including the following:

 

   

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

 

   

requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes;

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

   

placing us at a disadvantage compared to other, less leveraged competitors; and

 

   

increasing our cost of borrowing.

The indenture governing the 13   1/4% Senior Notes and the credit agreement governing SBA’s Senior Secured Revolving Credit Facility with Comerica Bank impose significant operating and financial restrictions on our company and our subsidiaries, which may prevent us from capitalizing on business opportunities.

The indenture governing the 13   1/4% Senior Notes imposes significant operating and financial restrictions on us. These restrictions limit our ability, among other things, to (i) incur additional indebtedness or enter into sale and leaseback obligations; (ii) pay certain dividends or make certain distributions on our capital stock or repurchase our capital stock; (iii) make certain investments or other restricted payments; (iv) place restrictions on the ability of subsidiaries to pay dividends or make other payments to us; (v) engage in transactions with shareholders or affiliates; (vi) sell certain assets or merge with or into other companies; (vii) guarantee indebtedness; or (viii) create liens.

The Senior Secured Revolving Credit Facility further contains a number of financial and non-financial covenants that, among other things, restrict SBA’s ability to (i) incur additional indebtedness; (ii) make certain capital expenditures; (iii) guarantee certain obligations; (iv) create or allow liens on certain assets; (v) make investments, loans or advances; (vi) pay dividends, make distributions or undertake stock and other equity interest buybacks; (vii) make certain acquisitions; (viii) engage in mergers, consolidations or sales of assets; (ix) use the proceeds of the revolving credit facility for certain purposes; (x) enter into transactions with affiliates in non-arms’ length transactions; (xi) make certain payments on subordinated indebtedness; and (xii) acquire or sell subsidiaries. The Senior Secured Revolving Credit Facility also requires SBA to maintain certain ratios of debt, income, net worth and other restrictive financial covenants.

 

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As of December 31, 2010, the Senior Secured Revolving Credit Facility financial covenants require SBA to:

 

   

maintain a total leverage ratio of not greater than 5.50 to 1.00 through the quarter ending December 31, 2010, 5.00 to 1.00 for the quarters ending March 31, 2011 and June 30, 2011, 4.50 to 1.00 for the quarters ending December 31, 2011, 4.00 to 1.00 for the quarter ending March 31, 2012 and each quarter ending thereafter;

 

   

maintain a fixed charge coverage ratio of not less than 1.00 to 1.00 commencing March 31, 2010, on a year-to-date basis through December 31, 2010, and on a rolling four-quarter basis thereafter; and,

 

   

maintain consolidated net income of not less than $0 on a rolling four-quarter basis.

SBA was in default with certain covenants under the Senior Secured Revolving Credit Facility and did not meet the total leverage ratio, the fixed charge coverage ratio and the rolling four-quarter net income covenant as of December 31, 2010.

On March 28, 2011, SBA obtained a waiver of the covenant defaults as of December 31, 2010. SBA obtained an amendment to the Senior Secured Revolving Credit Facility, reducing the aggregate size of the facility to $25.0 million and updating the financial convents requiring SBA to:

 

   

maintain a total leverage ratio of not greater than 5.00 to 1.00 for the quarters ending March 31, 2011 and June 30, 2011, 4.50 to 1.00 for the quarters ending September 30, 2011 and December 31, 2011, 4.00 to 1.00 for the quarter ending March 31, 2012 and each quarter ending thereafter; and,

 

   

maintain on a year-to-date basis through December 31, 2011, consolidated net income of not less than $(2.5) million for the quarter ended March 31, 2011, $(2.0) million for the quarter ended June 30, 2011, $(1.5) million for the quarter ended September 30, 2011, $(1.0) million for the quarter ended December 31, 2011, and, on a rolling four-quarter basis, not less than $(0.5) million for the quarter ended March 31, 2012 and $0 for each quarter ending thereafter.

SBA’s failure to comply with the restrictive covenants described above could result in an event of default, which, if not cured or waived, could result in either of us having to repay our respective borrowings before their respective due dates. If SBA is forced to refinance these borrowings on less favorable terms, our results of operations or financial condition could be harmed. In addition, if we are in default under any of our existing or future debt facilities, we also will not be able to borrow additional amounts under those facilities to the extent they would otherwise be available and may not be able to repay our existing indebtedness.

We anticipate that we may need to raise additional financing to grow our business but it may not be available on terms acceptable to us, if at all.

We expect our operating expenditures and working capital needs will increase over the next several years as our sales volume increases and we expand our geographic presence and product portfolio. If our results of operations are not as favorable as we anticipate (including as a result of increased competition), our funding requirements are greater than we expect (including as a result of growth in our business) or our liquidity sources are not at anticipated levels (including levels of available trade credit), our resources may not be sufficient and we may have to raise additional capital to support our business.

In addition, we may not be able to accurately predict future operating results or changes in our industry which may change these needs. In the event that such additional financing is necessary, we may seek to raise such funds through public or private equity or debt financing or other means. We may not be able to obtain additional financing when we need it, or we may not be able to raise financing on terms acceptable to us. The current tightening in the credit markets heightens this risk. In addition, we may not be able to borrow additional funds under our existing credit facilities if participating banks become insolvent or their liquidity is limited or impaired. In the event that adequate funds are not available in a timely manner, our business and results of operations may be harmed.

We have significant credit exposure to our customers. If we are unable to effectively manage our accounts receivable, it could result in longer payment cycles, increased collection costs and defaults exceeding our expectations and adversely impact the cost or availability of our financing.

We extend credit for a significant portion of sales to our customers. Any negative trends in our customer’s businesses as well as their inability to obtain financing for operations could increase the risk that we may be unable to collect on receivables on a timely basis, or at all. If our customers fail to pay or delay payment for the products they purchase from us, it could result in longer payment cycles, increased collection costs, defaults exceeding our expectations and an adverse impact on the cost or availability of financing. If there is a substantial deterioration in the collectability of our receivables, we may not be able to obtain credit insurance at reasonable rates and credit insurers may drop coverage on our customers and increase premiums, deductibles and co-insurance levels on our remaining or prospective coverage. If we are unable to collect under existing credit insurance policies, or fail to take other actions to

 

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adequately mitigate such credit risk, our earnings, cash flows and our ability to utilize receivable-based financing could deteriorate. These risks may be exacerbated by a variety of factors, including adverse economic conditions, solvency issues experienced by our customers as a result of an economic downturn or a decrease in IT spending by end-users, decreases in demand for our products and negative trends in the businesses of our customers.

We have a number of credit facilities under which the amount we are able to borrow is based on the value and quality of our accounts receivable. The value and quality of our accounts receivable is affected by several factors, including:

 

   

the collectability of our accounts receivable;

 

   

general and regional industry and economic conditions; and

 

   

our and our customers’ financial condition and creditworthiness.

Any reduction in our borrowing capacity under these credit facilities could adversely affect our ability to finance our working capital and other needs.

Although we obtain credit insurance against the failure to pay or delay in payment for our products by some of the customers of our Miami Operations, our results of operations and liquidity could be hurt by a loss for which we do not have insurance or that is subject to an exclusion or that exceeds our applicable policy limits. In addition, increasing insurance premiums could adversely affect our results of operations. Moreover, failure to obtain credit insurance may have a negative impact on the amount of borrowing capacity available to our Miami based operations under our Senior Secured Revolving Credit Facility.

If we are unable to obtain sufficient trade credit from our vendors or other sources in a timely manner and on reasonable terms, our results of operations could be adversely affected and our growth inhibited.

Our business is working capital intensive and our vendors historically have been an important source of funding our business growth through the provision of trade credit. We expect to continue to rely on trade credit from our vendors to provide a significant amount of our working capital. If our vendors fail to provide us with sufficient trade credit, including larger amounts of trade credit, in a timely manner as our business grows, we may have to rely on other sources of financing, which may not be readily available or, if available, may not be on terms acceptable or favorable to us. The recent global economic downturn and the tightening in the credit markets further heightens the risk that we may not be able to obtain such trade credit or alternative sources of financing, or that to the extent we can obtain it, the terms are unfavorable. If we are unable to obtain sufficient trade credit from our vendors or other sources in a timely manner, our results of operations could be adversely affected and our growth inhibited.

In addition, our ability to pay for products is largely dependent on our principal vendors providing us with payment terms that facilitate the efficient use of our capital. The payment terms we receive from our vendors are based on several factors, including (i) our recent operating results, financial position (including our level of indebtedness) and cash flows; (ii) our payment history with the vendor; (iii) the vendor’s credit granting policies (including any contractual restrictions to which it is subject), our creditworthiness (as determined by various entities) and general industry conditions; (iv) prevailing interest rates; and (v) the vendors’ ability to obtain credit insurance in respect of amounts that we owe. Adverse changes in any of these factors, many of which are not within our control, could increase the costs to us of financing our inventory and may limit or eliminate our ability to obtain vendor financing and hurt our results of operations and financial condition.

We depend on a relatively small number of vendors for products that make up a significant portion of our revenue and the loss of a relationship with any of our key vendors may hurt our results of operations.

A significant portion of our revenue is derived from products manufactured by a relatively small number of vendors. For the years ended December 31, 2010, 2009 and 2008, our top 10 vendors manufactured products that accounted for 65.7%, 66.1% and 65.0%, respectively, of our total revenue and the products of our top vendor accounted for 18.6%, 19.1% and 17.4%, respectively, of our total revenue. We expect that we will continue to obtain most of our products from a relatively small number of vendors and that the portion of our revenue that we obtain from such vendors may continue to increase in the future. Due to intense competition in the IT products distribution industry, our key vendors can choose to work with other distributors and, pursuant to standard terms in our vendor agreements, may terminate their relationships with us on short notice. The loss of a relationship with any of our key vendors may hurt our results of operations.

In addition, the global economic downturn may lead to the consolidation of certain vendors with other vendors, contract assemblers or distributors. The increased size, operating and financial resources of such consolidated vendors could allow them to sell more products directly to customers and reduce the number of authorized distributors with which they conduct business. Such direct sales by vendors and/or the loss of a relationship with any of our key vendors could hurt our results of operations.

 

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Our vendors generally can unilaterally change the terms of the sales agreements for future orders and if they adversely change the terms, our results of operations could be hurt.

The sales agreements provided by our vendors are generally at-will agreements that have short terms. Generally, each vendor has the ability to unilaterally change the terms and conditions of its sales agreements for future orders, including a reduction in the level of purchase discounts, rebates and marketing programs available to us. If we are unable to pass the impact of these changes through to our reseller and retailer customers (usually through increased prices), our results of operations could be hurt.

We are dependent on vendors to maintain adequate inventory levels and oversupplies may adversely affect our margins and product shortages may adversely affect our revenues and costs.

We depend on our vendors to maintain adequate inventory. Our inventory levels may vary from period to period, due primarily to the anticipated and actual sales levels and our purchasing levels. The IT industry occasionally experiences an oversupply of IT products, which vendors then sell on the market at reduced prices. Recently we have experienced periods of excess LCD monitors in the market, resulting in price decreases to sell excess inventories. If similar oversupplies occur in the future, our results of operations could be adversely affected again. The IT industry is also characterized by periods of severe product shortages due to vendors’ difficulties in projecting demand for certain products distributed by us. When such product shortages occur, we typically receive an allocation of products from the vendor. Our vendors may not be able to maintain an adequate supply of products to fulfill all of our customer orders on a timely basis and the costs of these products to us may increase. Any supply shortages or delays (some or all of which are beyond our control) could cause us to be unable to service customers on a timely basis. If the decline in sales or increased costs due to product shortages is not offset by higher margins, this could hurt our results of operations.

If our vendors fail to respond quickly to technological changes and innovations and our product offerings fail to satisfy consumers’ tastes or respond to changes in consumer preferences, our revenues may decline and our competitors may gain additional market share.

Our ability to stay competitive in the IT products distribution industry and increase our customer base depends on our ability to offer, on a continuous basis, a selection of appealing products that reflect our customers’ preferences. To be successful, our product offerings must be broad in scope, competitively priced, well-made, innovative and attractive to a wide range of consumers whose preferences may change regularly. This depends in large part on the ability of our key vendors to respond quickly to technological changes and innovations and to manufacture new products that meet the new and changing demands of our customers and requires on the part of vendors a continuous investment of resources to develop and manufacture new products. If our key vendors fail to respond on a timely basis to the rapid technological changes that have been characteristic of the IT products industry, fail to provide new products that are desired by consumers or otherwise fail to compete effectively against other IT products manufacturers, the products that we offer may be less desirable to consumers and we could suffer a significant decline in our revenue. The ability and willingness of our vendors to develop new products depends on factors beyond our control. If our product offerings fail to satisfy consumers’ tastes or respond to changes in consumer preferences, our revenues may decline and our competitors may gain additional market share.

We are subject to the risk that our inventory values may decline, which could adversely affect our results of operations.

The IT products distribution industry is subject to rapid technological change, new and enhanced product specification requirements and evolving industry standards. These factors may cause a substantial decline in the value of our inventory or may render all or substantial portions of our inventory obsolete. Changes in customs or security procedures in the countries through which our inventory is shipped, as well as other logistical difficulties that slow the movement of our products to our customers, can also exacerbate the impact of these factors. While some of our vendors offer us limited protection against the decline in value of our inventory due to technological change or new product developments in the form of credit or partial refunds, these protective policies are largely subject to the discretion of our vendors and change from time to time. In addition, we distribute private label products for which price protection and rights of return are not customarily contractually available, and for which we bear increased risks. In any event, the protective terms of our vendor agreements may not adequately cover declines in our inventory value and these vendors may discontinue providing these terms at any time in the future. Any decline in the value of our inventory not offset by vendor credits or refunds could adversely affect our results of operations.

We may suffer from theft of inventory, which could result in losses and increases in security and insurance costs.

We store significant quantities of inventory at warehouses in Miami, China and throughout Latin America and the Caribbean. We and our third party shippers have experienced inventory theft at, or in transit to or from, certain facilities in several of our locations at various times in the past. In the future, we may be subject to significant inventory losses due to theft from our warehouses, hijacking of trucks carrying our inventory or other forms of theft. The implementation of security measures beyond those we already utilize, which include the establishment of alarm systems in our warehouses, GPS tracking systems on delivery vehicles and armed escorts for shipment of our products, in each case in certain of our locations, would increase our operating costs.

 

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Any losses of inventory could exceed the limits of, or be subject to an exclusion from, coverage under our insurance policies. In addition, claims filed by us under our insurance policies could lead to increases in the insurance premiums payable by us or the termination of coverage under the relevant policy. As a result, losses of inventory, whether or not insured, could adversely affect our results of operations.

Direct sourcing by our customers could result in our customers reducing their purchases from us, which would hurt our results of operations.

We occupy a position in the middle of the IT products distribution chain in Latin America and the Caribbean, between IT product vendors, on the one hand, and locally-based distributors, resellers and retailers, on the other. Further industry consolidation, increased competition, technological changes and other developments, including improvements in regional infrastructure, may cause our vendors to bypass us and sell directly to our customers. As a result, our distributor, reseller and retailer customers and our vendors may increase the level of direct business they do with each other, which could reduce their purchases from us and hurt our results of operations.

We rely on third party shippers and carriers whose operations are outside our control, and any failure by them to deliver products to our customers in a timely manner may damage our reputation and could cause us to lose customers.

We rely on arrangements with third-party shippers and carriers such as independent shipping companies for timely delivery of our products to our in-country sales and distribution operations and third-party distributors, resellers and retailers. As a result, we are subject to carrier disruptions and increased costs due to factors that are beyond our control, including labor strikes, inclement weather and increased fuel costs. If the services of any of these third parties become unsatisfactory, we may experience delays in meeting our customers’ product demands and we may not be able to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure to deliver products to our customers in a timely manner may damage our reputation and could cause us to lose customers.

We may not realize the expected benefits from any future acquisitions, thereby adversely impacting our growth.

As part of our strategy, we may pursue acquisitions in the future. Our success in realizing the expected benefits from any business acquisitions depends on a number of factors, including retaining or hiring local management personnel to run our operations in new countries, successfully integrating the operations, IT systems, customers, vendors and partner relationships of the acquired companies and devoting sufficient capital and management attention to the newly acquired companies in light of other operational needs. Our efforts to implement our strategy could be affected by a number of factors beyond our control, such as increased competition and general economic conditions in the countries where the newly acquired companies operate. Any failure to effectively implement our strategy could adversely impact our growth.

We are exposed to the risk of natural disasters, war and terrorism that could disrupt our business and result in increased operating costs and capital expenditures.

Our Miami headquarters, some of our sales and distribution centers and certain of our vendors and customers are located in areas prone to natural disasters such as floods, hurricanes, tornadoes or earthquakes. In addition, demand for our services is concentrated in major metropolitan areas. Adverse weather conditions, major electrical or telecommunications failures or other events in these major metropolitan areas may disrupt our business and may adversely affect our ability to distribute products. Our exposure to these risks may be heightened because we do not have a comprehensive disaster recovery system or disaster recovery plan. Our failure to have such a system or plan in place could hurt our results of operations and financial condition.

We operate in multiple geographic markets, several of which may be susceptible to acts of war and terrorism. Security measures and customs inspection procedures have been implemented in a number of jurisdictions in response to the threat of terrorism. These procedures have made the import and export of goods, including to and from our Miami headquarters, more time-consuming and expensive. Such measures have added complexity to our logistical operations and may extend our inventory cycle. Our business may be harmed if our ability to distribute products is further impacted by any such events. In addition, more stringent processes for the issuance of visas and the admission of non-U.S. persons to the U.S. may make travel to our headquarters in Miami by representatives of some vendors and customers more difficult. These developments may also hurt our relationships with these vendors and customers.

The combination of the factors described above could diminish the attractiveness of Miami as a leading business center for Latin America and the Caribbean in general, and as the central hub for the Latin American and Caribbean IT products distribution industry in particular. In the event of the emergence of one or more other hubs serving Latin America and the Caribbean that are more favorable to IT distributors, competitors operating in those locations could have an advantage over us. The relocation of all or a part of our main warehouse and logistics center in Miami to any such new hubs could materially increase our operating costs or capital expenditures.

 

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In addition, because of concerns arising from large damage awards and incidents of terrorism, it has become increasingly difficult for us to obtain adequate terrorism insurance coverage at reasonable premiums, which has increased our costs.

Item 1B. Unresolved Staff Comments.

None.

Item  2. Properties.

Our corporate headquarters are located in a 221,021 square foot facility in Miami, Florida. We support our operations throughout Latin America and the Caribbean from our Miami facility, which is an extensive sales and administrative office and distribution network integrating executive-level management, warehousing, RMA, purchasing, sales, marketing, human resources, credit, finance, technical support and customer service functions. Our Miami facility is located near the Port of Miami and Miami International Airport which facilitates access to the area’s air and container-cargo networks. The lease commencement date of our Miami facility was May 1, 2007.

As of December 31, 2010, we operated a sales and distribution center in the U.S., 25 sales and distribution centers in 12 countries in Latin America and the Caribbean. The foreign distribution centers include our In-Country Operations office and warehouses. Some of the distribution centers include assembly lines for “white-box” PCs that we or our value-added reseller and retailer customers assemble locally. In total, our sales and distribution centers in our Miami Operations and in our In-country Operations represent nearly 775,000 square feet of space (including 200,000 square feet of office space and 575,000 square feet of warehouse space). As of December 31, 2010, we leased substantially all of our facilities on varying terms with the exception of a portion of our sales and distribution center in Santiago, Chile, San Salvador, El Salvador and warehouse space in Lima, Peru. Further, we have an option to purchase a warehouse and office space in Mexico City, Mexico for $3.0 million, which expires on December 31, 2011. We do not anticipate any material difficulties with the renewal of any of our leases when they expire or in securing replacement facilities on commercially reasonable terms. The following table sets forth information regarding our facilities including location, use, size and ownership or lease status:

 

Location

  

Use

   Approximate
Gross
Square Feet
     Owned or Leased

Buenos Aires, Argentina

   Office/Warehouse      27,243       Leased

Santiago, Chile

   Office/Warehouse      57,296       Owned-80%;Leased-20%

Iquique, Chile

   Office/Warehouse      7,750       Leased

Bogotá, Colombia

   Office/Warehouse      10,828       Leased

Cota, Colombia

   Office/Warehouse      13,659       Leased

San José, Costa Rica

   Office/Warehouse      43,056       Leased

Quito, Ecuador

   Office/Warehouse      28,589       Leased

Guayaquil, Ecuador

   Office/Warehouse      8,191       Leased

San Salvador, El Salvador

   Office/Warehouse      17,352       Owned

Guatemala City, Guatemala

   Office/Warehouse      37,104       Leased

Kingston, Jamaica

   Office/Warehouse      16,968       Leased

Centro de Capacitación, Mexico

   Office/Warehouse      5,382       Leased

León, Mexico

   Office/Warehouse      4,650       Leased

Mexico City, Mexico

   Office/Warehouse      43,368       Leased

Monterrey, Mexico

   Office/Warehouse      4,306       Leased

Plaza, Mexico

   Office/Warehouse      1,615       Leased

Puebla, Mexico

   Office/Warehouse      6,458       Leased

Querétaro, Mexico

   Office/Warehouse      3,875       Leased

Tlalnepantla, Mexico

   Office/Warehouse      104,238       Leased

Veracruz, Mexico

   Office/Warehouse      2,939       Leased

Villahermosa, Mexico

   Office/Warehouse      1,399       Leased

Panama City, Panama

   Office/Warehouse      34,445       Leased

Chiriqui, Panama

   Office/Warehouse      6,480       Leased

Lima, Peru

   Office/Warehouse      45,252       Owned-93%;Leased-7%

Montevideo, Uruguay

   Office/Warehouse      25,058       Leased

Miami, United States

   Office/Warehouse      221,021       Leased

 

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Item 3. Legal Proceedings.

As of December 31, 2010, we had no material legal proceedings pending. From time to time, we are the subject of legal proceedings arising in the ordinary course of business. We do not believe that any proceedings currently pending or threatened will have a material adverse affect on our business or results of operations.

Item 4. (Removed and Reserved).

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Common Stock. The Company had 100,000 shares of common stock, voting and 29,357 shares of Class B common stock, non-voting, collectively referred to herein as Common Stock, outstanding as of December 31, 2010 and 2009. Our Company’s Common Stock is privately held and not traded on a public stock exchange.

As of March 30, 2011, there were 13 holders of record of our common stock, voting and 19 holders of record of our Class B common stock, non-voting. For a detailed discussion of the ownership of our Company, see Part III—Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this Annual Report.

Dividend Policy. The Company declared and paid a $20.0 million dividend on our Common Stock on August 25, 2005, using a portion of the proceeds from our $120.0 million offering of our prior 11 3/4% Senior Notes. We have neither declared nor paid a dividend on our Common Stock subsequently. We currently intend to retain future earnings to fund ongoing operations and finance the growth and development of our business and, therefore, do not anticipate declaring or paying cash dividends on our Common Stock for the foreseeable future.

Any determination to pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant. The terms of certain of our 13 3/4% Senior Notes and SBA’s outstanding indebtedness substantially restrict the ability of either company to pay dividends. In addition, because we are a holding company, our ability to pay dividends depends on our receipt of cash dividends from our subsidiaries.

For a detailed discussion of the equity compensation plan of our Company, see Part III—Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this Annual Report.

Item 6. Selected Financial Data.

The following table presents selected consolidated financial information and other data as of and for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 and includes the results of operations of our acquisitions that have been combined with our results of operations beginning on their acquisition dates. We derived the statement of operations and other data set forth below for the years ended December 31, 2010, 2009 and 2008, and the balance sheet data as of December 31, 2010 and 2009 from our audited consolidated financial statements (together with the notes thereto) included elsewhere in this Annual Report. We derived the selected financial information and other data for the years ended December 31, 2007 and 2006 and as of December 31, 2008, 2007 and 2006 from our audited consolidated financial statements with respect to such date and periods not included in this Annual Report. The information set forth below should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and notes thereto, included in this Annual Report.

 

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     As of or For the Years Ended December 31,  
     2010     2009     2008     2007     2006  
     (Dollars in thousands, except per share and other data)  

Statement of Operations Data:

          

Revenue

   $ 1,013,272      $ 917,168      $ 1,071,551      $ 1,038,368      $ 889,779   

Cost of revenue

     917,529        825,587        970,955        937,286        797,665   
                                        

Gross profit

     95,743        91,581        100,596        101,082        92,114   

Operating expenses

     79,638        71,256        105,723 (1)      73,314        57,537   
                                        

Operating income

     16,105        20,325        (5,127     27,768        34,577   

Other expense (income)

          

Interest expense

     20,933        17,495        17,431        17,763        16,233   

Interest income

     (309 )      (514     (941     (730     (876

Other (income) expense, net

     (237 )      (3,563     (3,427     (292     164   

Foreign exchange (gain) loss, net

     (2,025 )      (3,130     15,533        (2,401     1,099   
                                        

Total other expense

     18,362        10,288        28,596        14,340        16,620   

(Loss) income before provision for income taxes

     (2,257 )      10,037        (33,723     13,428        17,957   

Provision for income taxes

     1,393        2,844        1,595        867        4,894   
                                        

Net (loss) income

   $ (3,650   $ 7,193      $ (35,318   $ 12,561      $ 13,063   
                                        

Net (loss) income per weighted average share of common stock, voting and Class B common stock, non-voting

          

Basic

   $ (28.21 )    $ 69.94      $ (345.63   $ 122.93      $ 127.84   
                                        

Diluted

   $ (28.21 )    $ 69.94      $ (345.63   $ 122.93      $ 127.84   
                                        

Weighted average number of common shares, voting and Class B common stock, non-voting used in per share calculation:

          

Basic

     129,357 (2)      102,852 (2)      102,182        102,182        102,182   
                                        

Diluted

     129,357 (2)      102,852 (2)      102,182        102,182        102,182   
                                        
     As of or For the Years Ended December 31,  
     2010     2009     2008     2007     2006  

Balance Sheet Data:

          

Cash and cash equivalents

   $ 28,867      $ 27,234      $ 22,344      $ 29,399      $ 20,574   

Working capital(3)

     104,358        110,693        75,726        101,629        98,222   

Total assets

     346,105        308,101        284,068        363,008        292,575   

Long-term debt (including current maturities and capital leases)

     116,251        114,982        105,865        117,224        120,209   

Total debt

     137,507        129,711        136,906        143,590        137,862   

Total shareholders’ equity

     39,041        42,734        14,550        54,101        38,337   

Other Data:

          

Cash dividends per common share

   $ —        $ —        $ —        $ —        $ —     

Ratio of earnings to fixed charges(4)

   $ 18,676        1.5x      $ (16,292 )      1.7x        2.1x   

 

(1) Operating expenses includes the goodwill impairment charge of $18,777 for the year ended December 31, 2008.
(2)

Weighted average number of common shares, voting and Class B common stock, non-voting used in the per share calculation for the periods presented reflects the issuance of 27,175 shares of Class B common stock, non-voting to certain of our Company’s existing shareholders and their affiliates, concurrently with the redemption and cancellation of our 11  3/4% Senior Notes and the closing of our 13  1/4% Senior Notes offering on December 22, 2009.

(3) Working capital is defined as current assets less current liabilities.
(4) For purposes of calculating the ratio of earnings to fixed charges: (i) earnings is defined as income before income taxes plus fixed charges; and (ii) fixed charges is defined as interest expense (including capitalized interest and amortization of debt issuance costs) and the portion of operating rental expense which management believes would be representative of the interest component of rental expense. A ratio of less than one-to-one coverage requires the disclosure of the dollar amount of the deficiency.

 

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

Forward-Looking Statements

This Annual Report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, beliefs, estimates, forecasts, projections and management assumptions about our company, our future performance, our liquidity and the IT products distribution industry in which we operate. Words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “goal,” “plan,” “seek,” “project,” “target” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances including but not limited to, management’s expectations for competition, revenues, margin, expenses and other operating results, capital expenditures, liquidity, capital requirements, acquisitions and exchange rate fluctuations, each of which involves numerous risks and uncertainties are forward-looking statements. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth in this Annual Report under Part I—Item 1A. Risk Factors and elsewhere herein. These risks and uncertainties include, but are not limited to, the following:

 

   

the effects of the global economic downturn on the markets in which we operate or plan to operate, which may lead to a decline in our business and our results of operations;

 

   

an increase in competition in the markets in which we operate or plan to operate;

 

   

difficulties in maintaining and enhancing internal controls and management and financial reporting systems;

 

   

adverse changes in general, regional and country-specific economic and political conditions in Latin America and the Caribbean;

 

   

fluctuations of other currencies relative to the U.S. dollar;

 

   

difficulties in staffing and managing our foreign operations;

 

   

departures of our key executive officers;

 

   

increases in credit exposure to our customers;

 

   

adverse changes in our relationships with vendors and customers; or

 

   

declines in our inventory values.

This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative but not exhaustive. In addition, new risks and uncertainties may arise from time to time. Accordingly, all forward-looking statements should be evaluated with an understanding of their inherent uncertainty. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Annual Report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2010, which are included in this Annual Report.

Overview

We believe we are the largest pure play value-added distributor of computer IT products focused solely on serving Latin America and the Caribbean. We distribute computer equipment components, peripherals, software, computer systems, accessories, networking products and digital consumer electronics to more than 44,000 customers in 41 countries. We offer single source purchasing to our customers by providing an in-stock selection of more than 13,000 products from over 150 vendors, including the world’s leading IT product manufacturers. From our headquarters and main distribution center in Miami, we support a network of 25 sales and distribution operations in 12 Latin American and the Caribbean countries, or our In-country Operations.

Our results for the year ended December 31, 2010, reflect an increase in revenue across most of our product lines and our customer markets, as compared to the corresponding period in 2009. Revenue increased $96.1 million, or 10.5% to $1,013.3 million for the year ended December 31, 2010, as compared to $917.2 million for the year ended December 31, 2009. The improvement in the

 

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global economy, which experienced a downturn in late 2008 and early 2009, was the main driver for the increase in our revenues. Gross profit increased $4.1 million, or 4.5% to $95.7 million for the year ended December 31, 2010, as compared to $91.6 million for the year ended December 31, 2009. The improvement in gross profit was the result of the higher sales volume.

Total operating expenses increased $8.3 million, or 11.8% to $79.6 million for the year ended December 31, 2010, as compared to $71.3 million for the year ended December 31, 2009. The increase in operating expenses resulted primarily from the additional salary and payroll-related expenses incurred during the year ended December 31, 2010. Other expense increased $8.1 million, or 78.5% to $18.4 million during the year ended December 31, 2010, as compared to $10.3 million for the year ended December 31, 2009. The increase in other expense during the year ended December 31, 2010 was due primarily to the higher interest expense related to our 13 1/4% Senior Notes that were issued concurrent with the redemption and cancellation on December 22, 2009 of our prior 11 3/4% Senior Notes. The increase was also a result of the absence of the $4.4 million gain on the repurchase of $7.1 million of our prior 11 3/4% Senior Notes at substantial discounts to their face amounts during the year ended December 31, 2009.

Net loss was $3.7 million for the year ended December 31, 2010, as compared to net income of $7.2 million for the year ended December 31, 2009.

Factors Affecting Our Results of Operations

The following events and developments have in the past, or are expected in the future to have a significant impact on our financial condition and results of operations:

 

   

Impact of price competition, vendor terms and conditions, and the late 2008 and early 2009 downturn in the global economy on margin. Historically, our gross profit margins have been impacted by price competition, changes to vendor terms and conditions, including but not limited to, reductions in product rebates and incentives, our ability to return inventory to manufacturers, and time periods during which vendors provide price protection. We expect these competitive pricing pressures and modifications to vendor terms and conditions to continue into the foreseeable future. The recent downturn in the global economy has also increasingly become a factor impacting our gross profit margins. We experienced a softening in demand for IT products in Latin America and the Caribbean as a result of the global economic downturn in late 2008 and throughout 2009.

 

   

Shift in revenue to In-country Operations. One of our growth strategies is to expand the geographic presence of our In-country Operations into areas in which we believe we can achieve higher gross margins than our Miami Operations. Miami gross margins are generally lower than gross margins from our In-country Operations because the Miami export market is more competitive due to the high concentration of other Miami-based IT distributors who compete for the export business of resellers and retailers located in Latin America or the Caribbean. In addition, these resellers and retailers generally have larger average order quantities than customers of our In-country Operations segment, and as a result, benefit from lower average prices. Revenue from our In-country Operations grew by an average of 19.0% annually between 2001 and 2010, as compared to growth in revenue from our Miami Operations of an average of 5.6% annually over the same period. Revenue from our In-country Operations accounted for 78.6%, 74.4% and 74.1% of consolidated revenue for the years ended December 31, 2010, 2009 and 2008, respectively.

 

   

Exposure to fluctuations in foreign currency. A significant portion of the revenues from our In-country Operations is invoiced in currencies other than the U.S. dollar and a significant amount of the operating expenses from our In-country Operations are denominated in currencies other than U.S. dollar. In markets where we invoice in local currency, including Argentina, Chile, Colombia, Costa Rica, Guatemala, Jamaica, Mexico, Peru and Uruguay, the appreciation of a local currency could have a marginal impact on our gross profit and gross margins in U.S. dollar terms. In markets where our books and records are prepared in currencies other than the U.S. dollar, the appreciation of the local currency will increase our operating expenses and decrease our operating margins in U.S. dollar terms. Our consolidated statements of operations include a foreign exchange gain of $2.0 million, a gain of $3.1 million and a loss of $15.5 million, respectively, for the years ended December 31, 2010, 2009 and 2008. We periodically engage in foreign currency forward contracts when available and when doing so is not cost prohibitive. In periods when we do not, foreign currency fluctuations may adversely affect our results of operations, including our gross margins and operating margins.

 

   

Trade credit. All of our key vendors and many of our other vendors provide us with trade credit. Historically, trade credit has been an important source of liquidity to finance our growth. Although our overall available trade credit has increased significantly over time, from time to time the trade credit available from certain vendors has not kept pace with the growth of our business with them. Given the recent economic downturn, many of our vendors reduced the level of available trade credit extended to us as a result of our vendors’ view of our liquidity at the time.

When we purchase goods from these vendors, we need to increase our use of available cash or borrowings under our credit facility (in each case to the extent available) to pay the purchase price upon delivery of the products, which adversely affects our liquidity and can adversely affect our results of operations and opportunities for growth. We

 

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purchase credit insurance to support trade credit lines extended to our customers which has been restricted due to regional or global economic events or disruptions in the credit markets. Periodically, credit insurers may tighten the requirements for extending credit insurance coverage thereby limiting our capacity to extend trade credit to our customers and the growth of our business throughout the Region.

 

   

Increased levels of indebtedness. During December 2009, we completed a cash tender offer for $96.9 million aggregate principal amount of our prior 11  3/4% Senior Notes outstanding. We financed the tender offer with the net cash proceeds of $120.0 million aggregate principal amount of the 13  1/4% Senior Notes that were sold in a private placement transaction and closed on December 22, 2009. We used the proceeds from the sale of the 13  1/4% Senior Notes to repay our borrowings under, and renew our existing senior secured credit facility, repurchase, redeem or otherwise discharge our 11  3/4% Senior Notes and the balance for general corporate purposes. For the years ended December 31, 2010, 2009 and 2008, interest expense was $20.9 million, $17.5 million and $17.4 million, respectively.

 

   

Goodwill impairment. Goodwill represents the excess of the purchase price over the fair value of the net assets. We perform our impairment test of our goodwill and other intangible assets on an annual basis. The goodwill impairment charge represents the extent to which the carrying values exceeded the fair value attributable to our goodwill. Fair values are determined based upon market conditions and the income approach which utilizes cash flow projections and other factors. The decline in value of our goodwill was consistent with the overall market decline as a result of the recent global economic environment and financial market dislocation. Our future results of operations may be impacted by the prolonged weakness in the economic environment, which may result in a further impairment of any existing goodwill or goodwill and/or other long-lived assets recorded in the future.

In connection with the Company’s goodwill impairment testing and analysis conducted in 2010, the Company noted that as of December 31, 2010, the fair value exceeded the carrying value of Computación Monrenca Panama, S.A., or Intcomex Panama, by 3.1%. The fair value of Intcomex Panama was determined using management’s estimate of fair value based upon the financial projections for the business. As of December 31, 2010, the balance of Intcomex Panama’s goodwill was $0.5 million, which represented 5.0% of the carrying value of Intcomex Panama and less than 1.0% of the Company’s total assets. In connection with the Company’s goodwill impairment testing and analysis conducted in 2009, the Company noted that as of December 31. 2009, the fair value exceeded the carrying value of Intcomex Mexico by 3.4%. The fair value of Intcomex Mexico was determined using management’s estimate of fair value based upon the financial projections for the business given the recent economic contraction in Mexico’s gross domestic product, or GDP. As of December 31, 2009, the balance of Intcomex Mexico’s goodwill was $2.9 million, which represented 9.5% of the carrying value of Intcomex Mexico and less than 1.0% of the Company’s total assets. An extended period of economic contraction or a deterioration of operating performance could result in a further impairment to the carrying amount of the Company’s goodwill.

We did not record an impairment charge for goodwill and identifiable intangible assets for the years ended December 31, 2010 and 2009. For the year ended December 31, 2008, consistent with the severe decline in the global capital markets, our annual goodwill and identifiable intangible asset impairment test resulted in a substantial decline in the value attributable to our goodwill. In the fourth quarter of 2008, we recorded a goodwill impairment charge of $18.8 million to our $32.3 million goodwill. This non-cash charge materially impacted our equity and results of operations in 2008, but did not impact our ongoing business operations, liquidity or cash flow. Goodwill impairment charge was recorded in the amount of $11.5 million related to our Miami Operations and $7.3 million related to our In-country Operations, particularly $4.1 million in Mexico, $1.3 million in Guatemala, $1.2 million in Jamaica, $0.5 million in El Salvador and $0.2 million in Argentina. This non-cash charge materially impacted our equity and results of operations in 2008, but did not impact our ongoing business operations, liquidity or cash flow.

 

   

Deferred tax assets. Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities. Deferred tax assets, which also include NOL carryforwards for entities that have generated or continue to generate operating losses, are assessed periodically by management to determine if their future benefit will be fully realized. If it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net (loss) income. Such charges could have a material adverse effect on our results of operations or financial condition.

As of December 31, 2010 and 2009, our U.S. and state of Florida NOLs resulted in $19.9 million and $13.3 million, respectively, of deferred tax assets, which will begin to expire in 2026. As of December 31, 2010 and 2009, Intcomex Argentina, S.R.L. had $5.0 million and $4.0 million, respectively, in NOLs resulting in $1.8 million and $1.4 million, respectively, of deferred tax assets, which will begin to expire in 2011. As of December 31, 2010 and 2009, Intcomex Mexico had $1.3 million and $1.1 million, respectively, in NOLs resulting in $0.4 million and $0.3 million, respectively, of deferred tax assets, which will expire in 2018. As of December 31, 2010, Intcomex Colombia LTDA, or Intcomex Colombia did not have any NOLs remaining. As of December 31, 2009, Intcomex Colombia had $0.8 million in NOLs resulting in $0.3 million of deferred tax assets related to a NOL carryforward.

We periodically analyze the available evidence related to the realization of the deferred tax assets, considered the current negative economic environment and determined it is now more likely than not that we will not recognize a portion of our deferred tax assets associated with the NOL carryforwards. Factors in management’s determination include the performance of the business and the feasibility of ongoing tax planning strategies. As of December 31, 2010 and 2009, we had a valuation allowance of $10.4 million and $4.4 million, respectively, related to our U.S. and state of Florida NOLs

 

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and $2.1 million and $2.0 million, respectively, related to our foreign NOLs, as management does not believe that it will realize the full benefit of these NOLs. Our future results of operations may be impacted by a prolonged weakness in the economic environment, which may result in further valuation allowances on our deferred tax assets and adversely affect our results of operations or financial condition.

 

   

Write-Off of Proposed Initial Public Offering Expenses. For the years ended December 31, 2010 and 2008, we wrote off $0.5 million and $2.0 million, respectively, related to a proposed initial public offering, or IPO transaction to take our Company public. For the year ended 2009, we did not write off any costs related to such proposed IPO transaction. The costs were recorded as an increase in operating expenses in the consolidated statement of operations, as they were one-time charges that were not indicative of operations in the normal course of business and relate to a non-recurring transaction that would normally be netted against IPO proceeds.

 

   

Restructuring Charges. For the year ended December 31, 2010, we did not incur any restructuring charges. Restructuring charges for the years ended December 31, 2009 and 2008 were $0.6 million incurred in 2009 and $1.5 million in the fourth quarter of 2008, respectively. In 2008, we implemented restructuring and rebalancing actions designed to improve our efficiencies and profitability, strengthen our operations and reduce our costs in several of our locations. The restructuring included involuntary workforce reductions and employee benefits and other costs incurred in connection with vacating leased facilities. The charges were recorded in our statements of operations as an increase to our operating expenses.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in conformity with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments related to assets, liabilities, contingent assets and liabilities, revenue and expenses. Our estimates are based on our historical experience and a variety of other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making our estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Although we believe our estimates, judgments and assumptions are appropriate and reasonable based upon available information, these assessments are subject to various other factors. Actual results may differ from these estimates under different assumptions and conditions.

We believe the following critical accounting policies are affected by our significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition. Revenue is recognized when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collection of the related receivable is reasonably assured and delivery has occurred. Delivery to customers has occurred at the point of shipment, provided that title and risk of loss have transferred and no significant obligations remain. We allow our customers to return defective products for exchange or credit within 30 days of delivery based on the warranty of the original equipment manufacturer, or OEM. An exception is infrequently made for long-standing customers with current accounts, on a case-by-case basis and upon approval by management. A return is recorded in the period of the return because, based on past experience, these returns are infrequent and immaterial.

Our revenues are reported net of any sales, gross receipts or value added taxes. Shipping and handling costs billed to customers are included in revenue and related expenses are included in the cost of revenue.

We extend a warranty for products to customers with the same terms as the OEM’s warranty to us. All product-related warranty costs incurred by us are reimbursed by the OEMs.

Accounts Receivable. We provide allowances for doubtful accounts on our accounts receivable for estimated losses resulting from our customers’ inability to make required payments due to changes in our customers’ financial condition or other unanticipated events, which could result in charges for additional allowances exceeding our expectations. These estimates require judgment and are influenced by factors including, but not limited to the following: the large number of customers and their dispersion across wide geographic areas; the fact that no single customer accounted for 2.0% or more of our revenue; the continual credit evaluation of our customers’ financial condition; the aging of our customers’ receivables, individually and in the aggregate; the value and adequacy of credit insurance coverage; the value and adequacy of collateral received from our customers (in certain circumstances); our historical loss experience; and, increases in credit risk due to an economic downturn resulting in our customers’ inability to obtain capital. Uncollectible accounts are written-off against the allowance on an annual basis.

 

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Vendor Programs. We receive funds from vendors for price protection, product rebates, marketing and promotions and competitive programs, which are recorded as adjustments to product costs or selling, general and administrative expenses according to the nature of the program. Some of these programs may extend over one or more quarterly reporting periods. We recognize rebates or other vendor incentives as earned based on sales of qualifying products or as services are provided in accordance with the terms of the related program. We provide reserves for receivables on vendor programs for estimated losses resulting from vendors’ inability to pay or rejections of claims by vendors. These reserves require judgment and are based upon aging and management’s estimate of collectability.

Inventories. Our inventory levels are based on our projections of future demand and market conditions. Any unanticipated decline in demand or technological changes could cause us to have excess or obsolete inventories. On an ongoing basis, we review for estimated excess or obsolete inventories and make provisions for our inventories to reflect their estimated net realizable value based upon our forecasts of future demand and market conditions. These forecasts require judgment as to future demand and market conditions. If actual market conditions are less favorable than our forecasts, additional inventory obsolescence provisions may be required. Our estimates are influenced by the following considerations: the availability of protection from loss in value of inventory under certain vendor agreements, the extent of our right to return to vendors a percentage of our purchases, the aging of inventories, variability of demand due to an economic downturn and other factors, and the frequency of product improvements and technological changes. Rebates earned on products sold are recognized when the product is shipped to a third party customer and are recorded as a reduction to cost of revenue.

Goodwill, Identifiable Intangible and Other Long-Lived Assets. We review goodwill at least annually for potential impairment or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our annual impairment review requires extensive use of accounting judgment and financial estimates, including projections about our business, our financial performance and the performance of the market and overall economy. Application of alternative assumptions and definitions could produce significantly different results. Because of the significance of the judgments and estimates used in the processes, it is likely that materially different amounts could result if different assumptions were made or if the underlying circumstances were changed.

Our goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Potential impairment exists if the fair value of a reporting unit to which goodwill has been allocated is less than the carrying value of the reporting unit. The amount of an impairment loss is recognized as the amount by which the carrying value of the goodwill exceeds its implied value.

Future changes in the estimates used to conduct the impairment review, including revenue projections, market values and changes in the discount rate used could cause the analysis to indicate that our goodwill is impaired in subsequent periods and result in a write-off of a portion or all of the goodwill. The discount rate used is based on our capital structure and, if required, an additional premium on the reporting unit based upon its geographic market and operating environment. The assumptions used in estimating revenue projections are consistent with internal planning.

Our intangible assets are presented at cost, net of accumulated amortization. Intangible assets are amortized on a straight line basis over their estimated useful lives and assessed for impairment. We recognize an impairment of long-lived assets if the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset for assets to be held and used, or the amount by which the carrying value exceeds the fair value less cost to dispose for assets to be disposed. Fair value is determined using the anticipated cash flows discounted at a rate commensurate with the risk involved. We test intangible assets for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

In addition, we review other long-lived assets, principally property, plant and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds the asset’s fair value, we measure and record an impairment loss for the excess. We assess an asset’s fair value by determining the expected future undiscounted cash flows of the asset. There are numerous uncertainties and inherent risks in conducting business, such as general economic conditions, actions of competitors, ability to manage growth, actions of regulatory authorities, pending investigations or litigation, customer demand and risk relating to international operations. Adverse effects from these or other risks may result in adjustments to the carrying value of our other long-lived assets. See Part II—Item 8. Financial Statements and Supplemental Data, “Note 4. Identifiable Intangible Assets, Net and Goodwill” in the Notes to Consolidated Financial Statements, of this Annual Report.

 

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There are numerous uncertainties and inherent risks in conducting business, such as but not limited to general economic conditions, actions of competitors, ability to manage growth, actions of regulatory authorities, pending investigations and/or litigation, customer demand and risk relating to international operations. Adverse effects from these risks may result in adjustments to the carrying value of our assets and liabilities in the future including, but not necessarily limited to, goodwill.

Income taxes. We account for the effects of income taxes resulting from activities during the current and preceding years. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases as measured by the enacted tax rates which will be in effect when these differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date under the law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized, unless it is more likely than not that such assets will be realized.

We are subject to income and other related taxes in areas in which we operate. When recording income tax expense, certain estimates are required by management due to timing and the impact of future events on when income tax expenses and benefits are recognized by us. We periodically evaluate our net operating losses and other carryforwards to determine whether gross deferred tax assets and related valuation allowances should be adjusted for future realization in our consolidated financial statements.

Highly certain tax positions are determined based upon the likelihood of the positions sustained upon examination by the taxing authorities. The benefit of a tax position is recognized in the financial statements in the period during which management believes it is more likely than not that the position will be sustained.

In the event of a distribution of the earnings of certain international subsidiaries, we would be subject to withholding taxes payable on those distributions to the relevant foreign taxing authorities. Since we currently intend to reinvest undistributed earnings of these international subsidiaries indefinitely, we have made no provision for income taxes that might be payable upon the remittance of these earnings. We have also not determined the amount of tax liability associated with an unplanned distribution of these permanently reinvested earnings. In the event that in the future we consider that there is a reasonable likelihood of the distribution of the earnings of these international subsidiaries (for example, if we intend to use those distributions to meet our liquidity needs), we will be required to make a provision for the estimated resulting tax liability, which will be subject to the evaluations and judgments of uncertainties described above.

We conduct business globally and, as a result, one or more of our subsidiaries file income tax returns in U.S. federal, state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities in the countries in which we operate. We are currently under ongoing tax examinations in several countries. While such examinations are subject to inherent uncertainties, we do not currently anticipate that any such examination would have a material adverse impact on our audited consolidated financial statements.

Commitments and Contingencies. We accrue for contingent obligations when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, we reassess our position and make appropriate adjustments to the financial statements. Estimates that require judgment and are particularly sensitive to future changes include those related to taxes, legal matters, the imposition of international governmental monetary, fiscal or other controls, changes in the interpretation and enforcement of international laws (in particular related to items such as duty and taxation), and the impact of local economic conditions and practices, which are all subject to change as events evolve and as additional information becomes available.

As part of our normal course of business, we are involved in certain claims, regulatory and tax matters. In the opinion of our management, the final disposition of such matters will not have a material adverse impact on our results of operations and financial condition.

Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The update requires additional disclosures for fair value measurements, requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for these transfers and provides clarification for existing disclosure requirements. The update was effective for interim and annual periods beginning after December 15, 2009, except for the activity in Level 3 fair value measurements, which was effective for annual periods beginning after December 15, 2010. The updates did not have an impact on our consolidated financial statements.

 

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Recently Adopted Accounting Guidance

In February 2010, the FASB issued ASU 2010-9, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, which clarifies the guidance on certain recognition and disclosure requirements for subsequent events. The update requires SEC filers and conduit bond obligors for conduit debt securities that are traded in a public market to evaluate subsequent events through the date of the financial statements issued and all other entities to evaluate subsequent events through the date the financial statements are available to be issued. The update was effective immediately upon issuance and did not have an impact on our consolidated financial statements.

In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary — A Scope Clarification. The update amends the codification to clarify that the scope of the decrease in ownership provisions of ASC 810-10 and related guidance applies to: (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method or joint venture; (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity (including an equity-method investee or joint venture); and (iv) a decrease in ownership in a subsidiary that is not a business or nonprofit activity when the substance of the transaction causing the decrease in ownership is not addressed in other authoritative guidance. If no other guidance exists, an entity should apply the guidance in ASC 810-10, Consolidation-Overall. The update did not have an impact on our consolidated financial statements.

Results of Operations

We report our business in two operating segments, based upon the geographic location of where we originate the sale: Miami and In-country. Our Miami segment, or Miami Operations, includes revenue from our Miami, Florida headquarters, including sales from Miami to our in-country sales and distribution centers and sales directly to resellers, retailers and distributors that are located in countries in which we have in-country sales and distribution operations or in which we do not have any In-country Operations. Our in-country segment, or In-country Operations, includes revenue from our in-country sales and distribution centers, which have been aggregated because of their similar economic characteristics. Most of our vendor rebates, incentives and allowances are reflected in the results of our Miami segment. When we consolidate our results, we eliminate revenue and cost of revenue attributable to inter-segment sales, and the financial results of our Miami segment discussed below reflect these eliminations.

Comparison of the year ended December 31, 2010 versus the year ended December 31, 2009 and of the year ended December 31, 2009 versus the year ended December 31, 2008

The following table sets forth selected financial data (in thousands) and percentages of revenue for the periods presented:

 

     Year Ended
December 31, 2010
    Year Ended
December 31, 2009
    Year Ended
December 31, 2008
 
     Amount     Percentage
of Revenue
    Amount      Percentage
of Revenue
    Amount     Percentage
of Revenue
 

Revenue

   $ 1,013,272        100.0   $ 917,168         100.0   $ 1,071,551        100.0

Cost of revenue

     917,529        90.6     825,587         90.0     970,955        90.6
                               

Gross profit

     95,743        9.4     91,581         10.0     100,596        9.4

Selling, general and administrative expenses

     75,315        7.4     66,973         7.3     83,038        7.7

Goodwill impairment charge

     —          —          —           —          18,777        1.8

Depreciation and amortization

     4,323        0.4     4,283         0.5     3,908        0.4
                               

Total operating expenses

     79,638        7.9     71,256         7.8     105,723        9.9
                                                 

Operating income (loss)

     16,105        1.6     20,325         2.2     (5,127     (0.5 )% 

Other expense, net

     18,362        1.8     10,288         1.1     28,596        2.7
                               

(Loss) income before provision for income taxes

     (2,257     (0.2 )%      10,037         1.1     (33,723     (3.2 )% 

Provision for income taxes

     1,393        0.1     2,844         1.1     1,595        0.1
                                                 

Net (loss) income

   $ (3,650     (0.4 )%    $ 7,193         0.8   $ (35,318     (3.3 )% 
                               

 

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Revenue. Revenue increased $96.1 million, or 10.5%, to $1,013.3 million for the year ended December 31, 2010, from $917.2 million for the year ended December 31, 2009. Our revenue growth was driven by the increased demand for our products throughout Latin America and the Caribbean, as a result of the improved economic conditions following the global economic downturn in late 2008 and throughout 2009, and our efforts to grow and diversify our product offerings. Revenue growth was driven primarily by the increase in sales of notebook computers of $43.4 million, basic “white-box” systems of $25.8 million, memory products of $17.7 million, printers of $5.3 million and software of $3.3 million. We experienced an 11.1% increase in unit shipments across our core product lines coupled with a 0.4% increase in average sales prices across the same core products for the year ended December 31, 2010, as compared to the same period in 2009, due to the improved demand for our products. Revenue derived from our In-country Operations increased $114.5 million, or 16.8%, to $796.8 million for the year ended December 31, 2010, from $682.2 million for the year ended December 31, 2009. Revenue derived from our In-country Operations accounted for 78.6% of our total revenue for the year ended December 31, 2010, as compared to 74.4% of our total revenue for the year ended December 31, 2009. The growth in revenue from our In-country Operations was mainly driven by the overall increase in sales in Chile, Colombia and Peru, and also driven by the increase in sales in Costa Rica, Ecuador, El Salvador, Guatemala, Jamaica, Panama and Uruguay. This growth was driven by the increased sales volume and price of basic “white-box” systems, memory products and the increased sales volume of notebook computers, printers and software. Revenue derived from our Miami Operations decreased $18.4 million, or 7.9%, to $216.5 million for the year ended December 31, 2010 (net of $275.6 million of revenue derived from sales to our In-country Operations) from $234.9 million for the year ended December 31, 2009 (net of $230.4 million of revenue derived from sales to our In-country Operations). The decline in revenue derived from our Miami Operations reflected the decreased sales volume and price of software products, hard disk drives, basic “white-box” systems, the decrease in sales volume of motherboards and monitors, partially offset by the increase in sales volume and price of memory products and the increase in sales volume of notebook computers and printers.

Revenue decreased $154.4 million, or 14.4%, to $917.2 million for the year ended December 31, 2009, from $1,071.6 million for the year ended December 31, 2008. Our revenue was impacted by the recent severe recession, decline in the global capital markets and the unprecedented levels of volatility and disruption of the capital and credit markets resulting in reduced demand for our products. The decline resulted in an overall decrease in the sales of our core products, such as monitors of $42.8 million, central processing units, or CPUs, of $30.6 million, printers of $20.4 million, software of $12.2 million, basic “white-box” systems of $11.2 million, memory products of $6.0 million and hard drives of $5.7 million in our Miami Operations and In-country Operations, particularly in Argentina, Colombia, El Salvador, Mexico, Panama, Peru and Uruguay. We experienced a 7.0% decline in unit shipments across our core product lines for the year ended December 31, 2009, as compared to the year ended December 31, 2008, due to the declining demand for IT products, coupled with a 7.8% decline in average sales prices across the same core products. Revenue derived from our In-country Operations decreased $112.1 million, or 14.1%, to $682.2 million for the year ended December 31, 2009, from $794.3 million for the year ended December 31, 2008. Revenue derived from our In-country Operations accounted for 74.4% of our total revenue for the year ended December 31, 2009, as compared to 74.1% of our total revenue for the year ended December 31, 2008. The decline in revenue from our In-country Operations was mainly due to the overall decrease in sales in Argentina, Colombia, Ecuador, Jamaica, Mexico, Panama, Peru and Uruguay, and to a lesser extent, in Guatemala and El Salvador, and the decreased sales volume and price of monitors, printers and basic “white-box” systems, the decreased sales volume of CPUs and decreased price of notebook computers and software. Revenue derived from our Miami Operations decreased $42.3 million, or 15.2%, to $234.9 million for the year ended December 31, 2009 (net of $230.4 million of revenue derived from sales to our In-country Operations) from $277.2 million for the year ended December 31, 2008 (net of $253.4 million of revenue derived from sales to our In-country Operations). The decline in revenue derived from our Miami Operations reflected the decrease in sales volume of memory products, CPUs and monitors, the decrease in sales volume and price of notebook computers, slightly offset by the increase in sales volume and price of hard disk drives and the increase in price of CPUs.

Gross profit. Gross profit increased $4.2 million, or 4.5%, to $95.7 million for the year ended December 31, 2010, from $91.6 million for the year ended December 31, 2009. The increase was driven by higher sales volume in our In-country Operations, offset by higher inventory obsolescence expense. Gross profit from our In-country Operations increased $2.9 million, or 4.5%, to $66.8 million for the year ended December 31, 2010, from $64.0 million for the year ended December 31, 2009. The improvement in gross profit from our In-country Operations was driven by the increase in sales volume and price of notebook computers, basic “white-box” systems, memory products and the increased sales volume of printers and software, particularly in Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Jamaica, Panama, Peru and Uruguay. Gross profit from our In-country Operations accounted for 69.8% of our consolidated gross profit for the years ended December 31, 2010 and 2009. Gross profit from our Miami Operations increased $1.3 million, or 4.6%, to $28.9 million for the year ended December 31, 2010, as compared to $27.6 million for the year ended December 31, 2009. The improvement in gross profit from our Miami Operations was driven by the increased sales volume and price of memory products, increased sales volume of notebook computers and printers, partially offset by the decreased sales volume and price of software products, hard disk drives, CPUs and basic “white-box” systems and the decrease in sales volume of motherboards and monitors. As a percentage of revenue, gross margin was 9.4% for the year ended December 31, 2010 and 10.0% for the year ended December 31, 2009. Inventory obsolescence expense increased $2.7 million, to $1.8 million for year ended December 31, 2010, from $(0.9) million for the same period in 2009, thus impacting our gross margin. The increase in inventory obsolescence

 

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expense for the years ended December 31, 2010 and 2009 impacted our gross margin by 0.2% and (0.1)%, respectively. Excluding the impact of the inventory obsolescence expense, gross margin would have been 9.6% for the year ended December 31, 2010 and 9.9% for the year ended December 31, 2009.

Gross profit decreased $9.0 million, or 9.0%, to $91.6 million for the year ended December 31, 2009, from $100.6 million for the year ended December 31, 2008. The decrease was primarily driven by lower sales volume in our Miami Operations and In-country Operations. Gross profit from our In-country Operations decreased $8.0 million, or 11.1%, to $64.0 million for the year ended December 31, 2009, from $72.0 million for the year ended December 31, 2008. The decrease in gross profit from our In-country Operations was driven by the decreased sales volumes of monitors, CPUs, printers, software and basic “white-box” systems, primarily in Argentina, Chile, Colombia, Mexico, Peru and Uruguay. Gross profit from our In-country Operations accounted for 69.8% of our consolidated gross profit for the year ended December 31, 2009, as compared to 71.6% of our consolidated gross profit for the year ended December 31, 2008. Gross profit from our Miami Operations decreased $1.0 million, or 3.5%, to $27.6 million for the year ended December 31, 2009, as compared to $28.6 million for the year ended December 31, 2008. The decrease in Miami’s gross profit was largely the result of lower sales volumes of CPUs, memory products and monitors, the decline in sales volume and price of notebook computers, slightly offset by an increase in sales volume and price of hard disk drives and the increase in price of CPUs. As a percentage of revenue, gross margin increased to 10.0% for the year ended December 31, 2009, as compared to 9.4% for the year ended December 31, 2008, due to the increased mix of higher margin products and the reduced dependency on high volume, low margin products.

Operating expenses. Total operating expenses increased $8.4 million, or 11.8%, to $79.6 million for the year ended December 31, 2010, from $71.3 million for the year ended December 31, 2009. As a percentage of revenue, operating expenses remained steady at 7.8% of revenue for the years ended December 31, 2010 and 2009. The increase in operating expenses resulted from higher salary and payroll-related expenses of $5.6 million, expenses related to our proposed IPO transaction of $0.5 million, office, warehouse, building and occupancy expenses of $1.2 million and the effects of strengthening currencies of $2.6 million, primarily in Chile, Colombia and Mexico, partially offset by the decrease in bad debt expense of $2.5 million. As a percentage of total operating expenses, salary and payroll-related expenses increased to 54.1% of total operating expenses for the year ended December 31, 2010, as compared to 52.6% for the year ended December 31, 2009. Operating expenses from our In-country Operations increased $5.3 million, or 11.3% to $52.0 million for the year ended December 31, 2010, from $46.7 million for the year ended December 31, 2009. The increase resulted from higher salary and payroll-related expenses of $4.5 million and office, warehouse, building and occupancy expenses of $0.9 million, offset by the decrease in bad debt expense of $2.9 million. Excluding the effects of the strengthening currencies, operating expenses, excluding depreciation and amortization from our In-country Operations would have increased $2.9 million for the year ended December 31, 2010, as compared to the same period in 2009, due mainly to the higher salary and payroll-related expenses in Chile, Colombia, Costa Rica, Mexico, Peru and Uruguay. Operating expenses from our Miami Operations increased $3.1 million, or 12.6%, to $27.6 million for the year ended December 31, 2010, as compared to $24.5 million for the year ended December 31, 2009, due to the higher salary and payroll-related expenses of $1.1 million and the increase in bad debt expense of $0.5 million.

Total operating expenses decreased $34.5 million, or 32.6%, to $71.3 million for the year ended December 31, 2009, from $105.7 million for the year ended December 31, 2008. As a percentage of revenue, operating expenses decreased to 7.8% of revenue for the year ended December 31, 2009, as compared to 9.9% of revenue for the year ended December 31, 2008. The decrease in operating expenses resulted from our restructuring actions implemented in the fourth quarter of 2008 and the first and second quarters of 2009, which were designed to improve our efficiencies and profitability, primarily in Miami, Argentina, Chile, Colombia, Mexico and Panama. The decrease was driven in part by reduced salary and payroll-related expenses of $5.1 million, office, warehouse, building and occupancy expenses of $1.6 million, professional fees of $1.8 million and bad debt expense of $0.3 million for the year ended December 31, 2009. As a percentage of total operating expenses (excluding the one-time restructuring charge of $0.6 million incurred during the year ended December 31, 2009 and excluding the one-time goodwill impairment charge of $18.8 million, IPO write-off charge of $2.0 million and restructuring charge of $1.5 million incurred for the year ended December 31, 2008) salary and payroll-related expenses increased to 52.2% of total operating expenses for the year ended December 31, 2009, as compared to 49.3% for the year ended December 31, 2008. Operating expenses from our In-country Operations decreased $15.0 million, or 24.3%, to $46.7 million for the year ended December 31, 2009, as compared to $61.7 million for the year ended December 31, 2008, due to the lower salary and payroll-related expenses, professional fees, commission expense, office and warehouse expenses, particularly in Argentina, Chile, Colombia and Mexico, and to a lesser extent Costa Rica, Peru and Uruguay, and the absence of the $1.5 million associated with our restructuring charges in several of our In-country Operations. The decrease in commission expenses resulted from the lower sales volumes. Operating expenses from our Miami Operations decreased $19.5 million, or 44.3%, to $24.5 million for the year ended December 31, 2009, as compared to $44.0 million for the year ended December 31, 2008, due to the absence of the $11.5 million goodwill impairment charge and $2.0 million write-off associated with our IPO efforts, the reduced level of salary and payroll-related expenses, professional fees, office, warehouse, building and occupancy expenses.

 

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Operating income. Operating income decreased $4.2 million, or 20.8%, to $16.1 million for the year ended December 31, 2010, from $20.3 million for the year ended December 31, 2009, driven primarily by the higher operating expenses. Operating income from our In-country Operations decreased $2.4 million, or 13.9%, to $14.8 million for the year ended December 31, 2010, from $17.2 million for the year ended December 31, 2009, primarily from the higher operating expenses associated with the increase in sales volume. Operating income from our Miami Operations decreased $1.8 million, or 58.8%, to $1.3 million for the year ended December 31, 2010, from $3.1 million for the year ended December 31, 2009, primarily from the higher operating expenses.

Operating income increased $25.5 million to operating income of $20.3 million for the year ended December 31, 2009, from operating loss of $5.1 million for the year ended December 31, 2008. The increase was primarily driven by a reduction in operating expenses, partially offset by lower sales volumes. Operating income from our In-country Operations increased $7.3 million to $17.2 million for the year ended December 31, 2009, from $9.9 million for the year ended December 31, 2008, primarily from the reduced level of salary and payroll-related expenses, professional fees, office, warehouse, building and occupancy expenses, partially offset by the lower sales volumes. Operating income (loss) from our Miami Operations increased $18.2 million to $3.1 million for the year ended December 31, 2009, from a loss of $15.1 million for the year ended December 31, 2008. The increase in operating income from our Miami Operations resulted primarily from the reduction in operating expenses.

Other expense, net. Other expense, net increased $8.1 million, or 78.5%, to $18.4 million for the year ended December 31, 2010, from $10.3 million for the year ended December 31, 2009. The increase in other expense, net was primarily attributable to the higher interest expense of $3.4 million related to the 13  1/4% Senior Notes that were issued concurrent with the redemption and cancellation on December 22, 2009 of our prior 11  3/4% Senior Notes. The increase in other expense, net was also due to the absence of the $4.4 million gain on the repurchase of $7.1 million of our 11  3/4% Senior Notes at substantial discounts to their face amount during the year ended December 31, 2009. The foreign exchange gain decreased $1.1 million, to $2.0 million, for the year ended December 31, 2010, from $3.1 million for the year ended December 31, 2009, due primarily to foreign currency forward and option collar contract losses. The increase in other expense, net was partially offset by the $0.4 million collected related to the business interruption insurance recovery in Chile in the third quarter of 2010.

Other expense, net decreased $18.3 million, or 64.0%, to $10.3 million for the year ended December 31, 2009, from $28.6 million for the year ended December 31, 2008. The decrease was primarily attributable to the foreign currency exchange gains during the period, due to the appreciation of the Chilean, Colombian and Uruguayan Pesos. The foreign exchange (gain) loss increased by $18.7 million to a gain of $3.1 million for the year ended December 31, 2009, from a loss of $15.5 million for the year ended December 31, 2008. The Chilean Peso strengthened by 19.9%, to 519 pesos per U.S. dollar as of December 31, 2009, from 648 pesos per U.S. dollar as of December 31, 2008. The Colombian Peso strengthened by 8.3%, to 2,065 pesos per U.S. dollar as of December 31, 2009, from 2,252 pesos per U.S. dollar as of December 31, 2008. The Uruguayan Peso also strengthened by 19.8%, to 20 pesos per U.S. dollar as of December 31, 2009, from 25 pesos per U.S. dollar as of December 31, 2008. Other expense, net also decreased due to the $4.4 million gain from the repurchase, in arm’s length transactions, of $7.1 million of our 11  3/4% Senior Notes at substantial discounts to their face amount during 2009.

Provision for income taxes. Provision for income taxes decreased $1.5 million, or 51.0%, to $1.4 million for the year ended December 31, 2010, from $2.8 million for the year ended December 31, 2009. The decrease was due to lower taxable earnings partially offset by the additional $5.9 million valuation allowance recorded in the U.S. against its NOLs.

Provision for income taxes increased $1.2 million, to $2.8 million for the year ended December 31, 2009, from $1.6 million for the year ended December 31, 2008. The increase was due to provisioning of realization reserves against U.S. NOLs beginning in the fourth quarter of 2008 and taxes due as subpart F income for certain of our foreign operations. Our effective tax rate was 28% for the year ended December 31, 2009, as compared to 5% for the year ended December 31, 2008, resulting primarily from the taxable gains on the repurchase of our 11  3/4% Senior Notes, and the taxable earnings in several of our In-country Operations, as compared to the year ended December 31, 2008.

Net (loss) income. Net (loss) income decreased $10.8 million, to net loss of $3.7 million for the year ended December 31, 2010, as compared to net income of $7.2 million for the year ended December 31, 2009.

Net (loss) income increased $42.5 million, to net income of $7.2 million for the year ended December 31, 2009, as compared to a net loss of $35.3 million for the year ended December 31, 2008.

 

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Liquidity and Capital Resources

The IT products distribution business is working-capital intensive. Historically, we have financed our working capital needs through a combination of cash generated from operations, trade credit from manufacturers, borrowings under revolving bank lines of credit (including issuance of letters of credit), asset-based financing arrangements that we have established in certain Latin American markets and the issuance of our 13  1/4% Senior Notes.

Our cash and cash equivalents were $28.9 million as of December 31, 2010, as compared to $27.2 million as of December 31, 2009. The increase in cash and cash equivalents was primarily attributable to the increase in our lines of credit borrowings during the year ended December 31, 2010, offset by the increase in our inventory. Our working capital decreased by $6.3 million, or 5.7%, to $104.4 million as of December 31, 2010, as compared to $110.7 million as of December 31, 2009. The increase in inventories was mostly offset by the higher lines of credit borrowing and higher accounts payable, accrued expenses and other. We believe our existing cash and cash equivalents, as well as any cash expected to be generated from operating activities, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Our working capital increased by $35.0 million, or 46.2%, to $110.7 million at December 31, 2009, as compared to $75.7 million at December 31, 2008. This increase was due primarily to increased trade accounts receivable and inventories, partly offset by an increase in trade accounts payable. Our cash and cash equivalents at December 31, 2009 amounted to $27.2 million, as compared to $22.3 million at December 31, 2008. The increase was primarily attributable to the increase in trade accounts payable, offset by the repurchase of $7.1 million of our 11  3/4% Senior Notes at substantial discounts to their face amount, the redemption and cancellation of the remaining 11  3/4% Senior Notes and the concurrent closing of the 13  1/4% Senior Notes offering and the decrease in our lines of credit borrowings during the year ended December 31, 2009. We believe the improvement in working capital will benefit our company in our ability to fund our working capital and capital expenditure requirements for the foreseeable future.

Changes in Financial Condition

The following table summarizes our cash flows for the periods presented:

 

     For the Years Ended December 31,  
     2010     2009     2008  
     (Dollars in thousands)  

Cash flows (used in) provided by operating activities

   $ (174   $ (4,357   $ 4,873   

Cash flows used in investing activities

     (4,159     (2,417     (6,646

Cash flows provided by (used in) financing activities

     6,460        11,270        (3,214

Effect of foreign currency exchange rate changes on cash and cash equivalents

     (494     394        (2,068
                        

Net increase (decrease) in cash and cash equivalents

   $ 1,633      $ 4,890      $ (7,055
                        

Cash flows (used in) provided by operating activities. Our cash flows from operating activities resulted in a requirement of $0.2 million for the year ended December 31, 2010, as compared to $4.4 million during the year ended December 31, 2009. The requirement was primarily driven by the continued high level of inventories and trade accounts receivable, offset by the increase in trade accounts payable in 2010, as compared to the same period in 2009. The growth in inventory resulted from our In-country Operations in Chile, primarily related to notebooks for the retail channel, coupled with higher levels of notebook computers in our Mexico and Miami operations as the primary countries responsible for the increase in inventory.

Our cash flows from operating activities resulted in cash used in operations of $4.4 million for the year ended December 31, 2009, as compared to a generation of $4.9 million for the year ended December 31, 2008. The requirement was primarily driven by the increase in accounts receivables due to higher sales in the fourth quarter 2009, as compared to 2008, and the early payment of accrued interest on December 22, 2009 of our prior 11  3/4% Senior Notes.

Cash flows used in investing activities. Our cash flows from investing activities resulted in a requirement of $4.2 million for the year ended December 31, 2010, as compared to $2.4 million for the year ended December 31, 2009. This requirement was primarily driven by the completion of the implementation of Sentai, our company-wide ERP, management and financial reporting system in Mexico during the second quarter of 2010, plus server upgrade in Miami and leasehold improvements in El Salvador and Panama.

Our cash flows from investing activities resulted in a requirement of $2.4 million for the year ended December 31, 2009, as compared to a requirement of $6.6 million for the year ended December 31, 2008. The improvement was due primarily to the absence of capital expenditures associated with the new facilities in Peru and, to a lesser extent, Costa Rica and less ERP system integration expenditures due to the near completion of this effort.

 

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Cash flows provided by (used in) financing activities. Our cash flows from financing activities resulted in a generation of $6.5 million for the year ended December 31, 2010, as compared to $11.3 million for the year ended December 31, 2009. The generation was primarily the result of increased net borrowings under our lines of credit by our Miami Operations.

Our cash flows from financing activities resulted in a generation of $11.3 million for the year ended December 31, 2009, as compared to requirement of $3.2 million for the year ended December 31, 2008. The improvement was driven by higher net borrowings of our new 13  1/4% Senior Notes in December 2009, offset by the redemption and cancellation of our prior 11  3/4% Senior Notes and pay down of our revolving credit facility with Comerica Bank.

Working Capital Management

The successful management of our working capital needs is a key driver of our growth and cash flow generation. The following table sets forth certain information about the largest components of our working capital: our trade accounts receivable, inventories and accounts payable:

 

     As of December 31,  
   2010     2009     2008  
     (Dollars in thousands)  

Balance sheet data:

      

Trade accounts receivable, net of allowance

   $ 116,888      $ 100,238      $ 91,085   

Inventories

     110,390        95,185        90,858   

Accounts payable

     147,129        117,216        108,754   

Other data:

      

Trade accounts receivable days(1)

     42.1        39.9        41.0   

Inventory days(2)

     43.9        42.1        34.2   

Accounts payable days(3)

     (58.5     (51.8     (40.9
                        

Cash conversion cycle days(4)

     27.5        30.2        24.3   
                        

 

(1) Trade accounts receivable days is defined as our consolidated trade accounts receivable (net of allowance for doubtful accounts) as of the last day of the period divided by our consolidated revenue for such period times 365 days for the years ended December 31, 2010, 2009 and 2008. Our consolidated trade accounts receivable for our In-country Operations include value added tax at a rate of between 5% and 27% (depending on the country). The exclusion of such value added tax would result in lower trade accounts receivable days.
(2) Inventory days is defined as our consolidated inventory as of the last day of the period divided by our consolidated cost of goods sold for such period times 365 days for the years ended December 31, 2010, 2009 and 2008.
(3) Accounts payable days is defined as our consolidated accounts payable as of the last day of the period divided by our consolidated cost of goods sold for such period times 365 days for the years ended December 31, 2010, 2009 and 2008.
(4) Cash conversion cycle is defined as our trade accounts receivable days plus inventory days less accounts payable days.

Cash conversion cycle days. One measurement we use to monitor working capital is the cash conversion cycle, which measures the number of days to convert trade accounts receivable and inventory, net of accounts payable, into cash. Our cash conversion cycle decreased to 27.5 days as of December 31, 2010, from 30.2 days as of December 31, 2009. Trade accounts receivable days increased to 42.1 days as of December 31, 2010, from 39.9 days as of December 31, 2009. Inventory days increased to 43.9 days as of December 31, 2010, from 42.1 days as of December 31, 2009, due to higher levels of inventory and inventory-in-transit. The increase resulted from the growth in inventory levels in our Chile, Mexico and Miami Operations that experienced a softening in demand for our products after longer lead time inventory had been ordered and shipped mainly from China. Accounts payable days increased to 58.5 days as of December 31, 2010, from 51.8 days as of December 31, 2009, and is in line with management’s expectations.

Our cash conversion cycle increased to 30.2 days as of December 31, 2009, from 24.3 days as of December 31, 2008. This deterioration was primarily driven by the increase in our accounts receivable and inventory days. Trade accounts receivable days increased to 39.9 days as of December 31, 2009, from 31.0 days as of December 31, 2008, resulting from retailers in Chile and Ecuador taking longer to pay and extended term special projects in Guatemala. Inventory days increased to 42.1 days as of December 31, 2009, as compared to 34.2 days as of December 31, 2008, due to growth in inventory levels to meet recovering demand in the Region. Accounts payable days increased to 51.8 days as of December 31, 2009, from 40.9 days as of December 31, 2008, as management continued to align vendor payments to collection activity.

 

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Trade accounts receivable. We principally sell products to a large base of third-party distributors, resellers and retailers throughout Latin America and the Caribbean and to other Miami-based exporters of IT products to Latin America and the Caribbean. Credit risk on trade receivables is diversified over several geographic areas and a large number of customers. No one customer accounted for more than 2.0% of sales for the year ended December 31, 2010, 2009 and 2008. We provide trade credit to our customers in the normal course of business. The collection of a substantial portion of our receivables is susceptible to changes in Latin America and Caribbean economies and political climates. We monitor our exposure for credit losses and maintain allowances for anticipated losses after giving consideration to delinquency data, historical loss experience, and economic conditions impacting our industry. The financial condition of our customers and the related allowance for doubtful accounts is continually reviewed by management.

We believe the recent global economic downturn and the associated credit crisis had a negative impact on us and our creditors. The global recession has adversely affected our vendors’ and customers’ ability to obtain financing for operations. The subsequent tightening of credit in financial markets has affected our suppliers, who have already tightened trade credit, and, in turn, we have tightened trade credit to our customers.

Prior to extending credit to a customer, we analyze the customer’s financial history and obtain personal guarantees, where appropriate. Our Miami Operations and In-country Operations in Chile use credit insurance and make provisions for estimated credit losses. Our other In-country Operations make provisions for estimated credit losses but generally do not use credit insurance. In addition, other than accounts receivable owed by affiliates, substantially all of our Miami Operations’ foreign accounts receivable are insured by a worldwide credit insurance company. The policy’s aggregate limit is $20.0 million with an aggregate deductible of $1.0 million; the policy expires on August 31, 2011. In addition, 10% or 20% buyer coinsurance provisions and sub-limits in coverage on a per-buyer and per-country basis apply. The policy also covers certain large, local companies in Argentina, Costa Rica, El Salvador, Guatemala, Jamaica and Peru. Our In-country Operations in Chile insures certain customer accounts with a credit insurance company in Chile; the policy expires on October 31, 2012.

Our large customer base and our credit policies allow us to limit and diversify our exposure to credit risk on our trade accounts receivable.

Inventory. We seek to minimize our inventory levels and inventory obsolescence rates through frequent product shipments, close and ongoing monitoring of inventory levels and customer demand patterns, optimal use of carriers and shippers and the negotiation of clauses in some vendor supply agreements protecting against loss of value of inventory in certain circumstances. The Miami distribution center ships products to each of our In-country Operations approximately twice per week by air and once per week by sea. These frequent shipments result in efficient inventory management and increased inventory turnover. We do not have long-term contracts with logistics providers, except in Mexico and Chile. Where we do not have long-term contracts, we seek to obtain the best rates and fastest delivery times on a shipment-by-shipment basis. Our Miami Operations also coordinates direct shipments to third-party customers and each of our In-country Operations from vendors in Asia.

Accounts payable. We seek to maximize our accounts payable days through centralized purchasing and management of our vendor back-end rebates, promotions and incentives. This centralization of the purchasing function allows our In-country Operations to focus their attention on more country-specific issues such as sales, local marketing, credit control and collections. The centralization of purchasing also allows our Miami Operations to control the records and receipts of all vendor back-end rebates, promotions and incentives to ensure their collection and to adjust pricing of products according to such incentives.

Capital Expenditures and Investments

Capital expenditures increased to $4.2 million for the year ended December 31, 2010, as compared to $2.5 million for the year ended December 31, 2009. The increase was primarily driven by the capital expenditures related to the final implementation and integration of our ERP system in our operations in Mexico.

Capital expenditures decreased to $2.5 million for the year ended December 31, 2009, as compared to $6.1 million for the year ended December 31, 2008. The decrease was primarily driven by absence of capital expenditures related to the new facilities in Costa Rica and Peru and the ERP system implementation costs.

Capital expenditures decreased to $6.1 million for the year ended December 31, 2008, as compared to $6.8 million for the year ended December 31, 2007. The decrease was primarily driven by absence of capital expenditures related to the opening of our headquarters facility in Miami, Florida and the purchase of additional warehouse space in Chile in 2007, partially offset by capital expenditures associated with the new facilities in Costa Rica and Peru.

Our future capital requirements will depend on many factors, including the timing and amount of our revenues and our investment decisions, which will affect our ability to generate additional cash. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the foreseeable future.

 

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Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings or other means. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all. The recent global economic downturn and the subsequent tightening of the credit markets further heightens the risk that we may not be able to borrow additional funds under our existing credit facilities if participating banks become insolvent or their liquidity is impaired or that our ability to obtain alternative sources of financing will be limited. We anticipate that capital expenditures will be approximately $3.0 million per year over the next few years, as we have no further facility expansion needs and have completed our ERP system implementation and integration. We have the option to purchase the warehouse and office facility located in Mexico City, Mexico, which we currently lease, prior to December 31, 2011, the option termination date. If we exercise this option, our capital expenditures will increase by $3.0 million in the year of exercise.

Capital Resources

We currently believe that our cash on hand, anticipated cash provided by operations, available and anticipated trade credit and borrowings under our existing credit facility and lines of credit, will provide sufficient resources to meet our anticipated debt service requirements, capital expenditures and working capital needs for the next 12 months. If our results of operations are not as favorable as we anticipate (including as a result of increased competition), our funding requirements are greater than we expect (including as a result of growth in our business), or our liquidity sources are not at anticipated levels (including levels of available trade credit), our resources may not be sufficient and we may have to raise additional financing or capital to support our business. In addition, we may not be able to accurately predict future operating results or changes in our industry that may change these needs. We continually assess our capital needs and may seek additional financing as needed to fund working capital requirements, capital expenditures and potential acquisitions. We cannot assure you that we will be able to generate anticipated levels of cash from operations or to obtain additional debt or equity financing in a timely manner, if at all, or on terms that are acceptable to us. Our inability to generate sufficient cash or obtain financing could hurt our results of operations and financial condition and prevent us from growing our business as anticipated.

We have lines of credit, short-term overdraft and credit facilities with various financial institutions in the countries in which we conducts business. Many of the In-country Operations also have limited credit facilities. These credit facilities fall into the following categories: asset-based financing facilities, letters of credit and performance bond facilities, and unsecured revolving credit facilities and lines of credit. The lines of credit are available sources of short-term liquidity for us.

As of December 31, 2010 and 2009, the total amounts available under the credit facilities were $23.8 million and $17.1 million, respectively, and the total amounts outstanding were $21.3 million and $14.7 million, respectively, of which $16.9 million and $9.2 million, respectively related to our Miami Operations credit facility and $4.4 million and $5.5 million, respectively related to our In-country Operations credit facilities. The change in the outstanding balance is primarily attributed to the increased borrowing by SBA from the new three-year revolving credit facility.

SBA — Senior Secured Revolving Credit Facility

On December 22, 2009, SBA closed the Senior Secured Revolving Credit Facility with Comerica Bank pursuant to SBA and Comerica Bank’s commitment letter dated October 23, 2009, replacing the previous revolving credit facility with a three-year revolving credit facility maturing in January 2013. As of December 31, 2010, the aggregate size of the Senior Secured Revolving Credit Facility was $30.0 million, including letter of credit commitments of $0.2 million and a capital expenditures limit of $1.0 million.

Under the Senior Secured Revolving Credit Facility, interest is due monthly and the amounts due bear interest at the daily adjustable LIBOR rate (at no time less than 2.0%) plus 3.5%, unless in the event of a default when interest will accrue at a rate equal to 3.0% per annum above the otherwise applicable rate. In addition, SBA will pay an administrative fee of $30 per annum and a facility fee equal to 0.50% of the aggregate amount of the revolving credit commitment, payable quarterly in arrear and additional customary fees are payable upon the issuance of letters of credit.

The Senior Secured Revolving Credit Facility contains a number of financial and non-financial covenants that, among other things, restrict SBA’s ability to (i) incur additional indebtedness; (ii) make certain capital expenditures; (iii) guarantee certain obligations; (iv) create or allow liens on certain assets; (v) make investments, loans or advances; (vi) pay dividends, make distributions or undertake stock and other equity interest buybacks; (vii) make certain acquisitions; (viii) engage in mergers, consolidations or sales of assets; (ix) use the proceeds of the revolving credit facility for certain purposes; (x) enter into transactions with affiliates in non-arms’ length transactions; (xi) make certain payments on subordinated indebtedness; and (xii) acquire or sell subsidiaries. The Senior Secured Revolving Credit Facility also requires SBA to maintain certain ratios of debt, income, net worth and other restrictive financial covenants.

 

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As of December 31, 2010, the Senior Secured Revolving Credit Facility financial covenants require SBA to:

 

   

maintain a total leverage ratio of not greater than 5.50 to 1.00 through the quarter ending December 31, 2010, 5.00 to 1.00 for the quarters ending March 31, 2011 and June 30, 2011, 4.50 to 1.00 for the quarters ending December 31, 2011, 4.00 to 1.00 for the quarters ending March 31, 2012 and each quarter ending thereafter;

 

   

maintain a fixed charge coverage ratio of not less than 1.00 to 1.00 commencing March 31, 2010, on a year-to-date basis through December 31, 2010, and on a rolling four-quarter basis thereafter; and,

 

   

maintain consolidated net income of not less than $0 on a rolling four-quarter basis.

SBA was in default with certain covenants under the Senior Secured Revolving Credit Facility and did not meet the total leverage ratio, the fixed charge coverage ratio and the rolling four-quarter net income covenant as of December 31, 2010. As of December 31, 2010, SBA had a total leverage ratio of 28.2 to 1.00; a fixed charge coverage ratio of (4.8) to 1.00; and consolidated net income of $(3.7) million on a rolling four-quarter basis.

On March 28, 2011, SBA obtained a waiver of the covenant defaults as of December 31, 2010. SBA obtained an amendment to the Senior Secured Revolving Credit Facility, reducing the aggregate size of the facility to $25.0 million and updating the financial convents which require SBA to:

 

   

maintain a total leverage ratio of not greater than 5.00 to 1.00 for the quarters ending March 31, 2011 and June 30, 2011, 4.50 to 1.00 for the quarters ending September 30, 2011 and December 31, 2011, 4.00 to 1.00 for the quarter ending March 31, 2012 and each quarter ending thereafter; and,

 

   

maintain on a year-to-date basis through December 31, 2011, consolidated net income of not less than $(2.5) million for the quarter ended March 31, 2011, $(2.0) million for the quarter ended June 30, 2011, $(1.5) million for the quarter ended September 30, 2011, $(1.0) million for the quarter ended December 31, 2011, and, on a rolling four-quarter basis, not less than $(0.5) million for the quarter ended March 31, 2012 and $0 for each quarter ending thereafter.

Additionally, during March 2011, while in the process of amending the Senior Secured Revolving Credit Facility, it was identified that the Company may have violated the consolidated fixed charge coverage ratio as of June 30, 2010. Due to ambiguity in the definition of the term Applicable Measuring Period, the Company may have violated the consolidated fixed charge coverage ratio under one possible interpretation. Accordingly, while neither party concluded that the Company did in fact violate the covenant, Comerica did provide a waiver for the potential covenant violation as of June 30, 2010.

SBA’s failure to comply with the restrictive covenants could result in an event of default, which, if not cured or waived, could result in either of us having to repay our respective borrowings before their respective due dates. If SBA is forced to refinance these borrowings on less favorable terms, our results of operations or financial condition could be harmed. In addition, if we are in default under any of our existing or future debt facilities, we also will not be able to borrow additional amounts under those facilities to the extent they would otherwise be available and may not be able to repay our existing indebtedness.

Intcomex, Inc.— 13  1/4% Senior Notes

On December 22, 2009, we completed a private offering to eligible purchasers or the 13  1/4% Senior Notes Offering of $120.0 million aggregate principal amount of our 13  1/4% Senior Notes due December 15, 2014 with an interest rate of 13.25% per year, payable semi-annually on June 15 and December 15 of each year, commencing on June 15, 2010. The 13  1/4% Senior Notes were offered at an initial offering price of 94.43% of par, or an effective yield to maturity of approximately 14.875%.

We used the net proceeds from the 13  1/4% Senior Notes Offering to, among other things, repay outstanding borrowings under our Senior Secured Revolving Credit Facility, fund the repurchase, redemption or other discharge of our 11  3/4% Senior Notes, for which we conducted a tender offer, and for general corporate purposes. The 13  1/4% Senior Notes are guaranteed by all of our existing and future domestic restricted subsidiaries that guarantee our obligations under the Senior Secured Revolving Credit Facility.

In connection with the 13   1/4% Senior Notes Offering, our company and certain of our subsidiaries that guaranteed our obligations, or the Guarantors under the indenture governing our prior 11  3/4% Senior Notes, or the 11  3/4% Senior Notes Indenture entered into an indenture, or the 13  1/4% Senior Notes Indenture with The Bank of New York Mellon Trust Company, N.A., or the Trustee. Our obligations under the 13  1/4% Senior Notes and the Guarantors’ obligations under the guarantees are secured on a second priority basis by a lien on 100% of the capital stock of certain of ours and each Guarantor’s directly owned domestic restricted subsidiaries; 65% of the capital stock of ours and each Guarantor’s directly owned foreign restricted subsidiaries; and substantially all the assets of SBA, to the extent that those assets secure our new Senior Secured Revolving Credit Facility with Comerica Bank, subject to certain exceptions.

        Subject to certain requirements, we are required to redeem $5.0 million aggregate principal amount of the 13  1/4% Senior Notes on December 15 of each of the years 2011 and 2012 and $10.0 million aggregate principal amount of the 13  1/4% Senior Notes on December 15, 2013, at a redemption price equal to 100% of the aggregate principal amount of the 13  1/4% Senior Notes to be redeemed, plus accrued and unpaid interest to the redemption date subject to certain requirements. We may redeem the 13 1/4% Senior Notes, in whole or in part, at any time prior to December 15, 2012 at a price equal to 100% of the aggregate principal amount of the 13  1/4% Senior Notes plus a “make-whole” premium (106.625% in 2012 and 100.0% in 2013 and thereafter). At any time prior to December 15, 2012, we may redeem up to 35% of the aggregate principal amount of the 13  1/4% Senior Notes with the net cash proceeds of certain equity offerings. In addition, at our option, we may redeem up to 10% of the original aggregate principal amount

 

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of the 13 1/4% Senior Notes three different times at $103.00 (but no more than once in any 12-month period). We will be required to redeem up to 35% of the aggregate principal amount of the 13  1/4% Senior Notes if an initial public offering occurs on or prior to December 15, 2012 at a price equal to 113.25% of the principal amount of the 13 1/4% Senior Notes.

The indenture governing our 13  1/4% Senior Notes imposes operating and financial restrictions on us. These restrictive covenants limit our ability, among other things to (i) incur additional indebtedness or enter into sale and leaseback obligations; (ii) pay certain dividends or make certain distributions on our capital stock or repurchase our capital stock; (iii) make certain investments or other restricted payments; (iv) place restrictions on the ability of subsidiaries to pay dividends or make other payments to us; (v) engage in transactions with shareholders or affiliates; (vi) sell certain assets or merge with or into other companies; (vii) guarantee indebtedness; and (viii) create liens. We may only pay a dividend if we are in compliance with all covenants and restrictions in the Indenture prior to and after payment of a dividend.

The 13  1/4% Senior Notes contain a single restrictive covenant. We must maintain a consolidated fixed charges coverage ratio not to exceed 4.75 to 1.00. Our failure to comply with the restrictive covenant could result in an event of default, which, if not cured or waived, could result in either of us having to repay our respective borrowings before their respective due dates. If we are forced to refinance these borrowings on less favorable terms, our results of operations or financial condition could be harmed. In addition, if we are in default under any of our existing or future debt facilities, we also will not be able to borrow additional amounts under those facilities to the extent they would otherwise be available. As of December 31, 2010, we had a consolidated fixed charges coverage ratio of 3.46 to 1.00.

On June 15, 2010 and December 15, 2010, we made mandatory interest payments of $7.6 million and $8.0 million, respectively, on its 13 1/4% Senior Notes. As of December 31, 2010 and 2009, the carrying value of the $120.0 million principal amount of the 13 1/4% Senior Notes was $114.7 million and $113.3 million, respectively. As of December 31, 2010 and 2009, we were in compliance with all of the covenants and restrictions under the 13  1/4% Senior Notes.

On February 8, 2011, we commenced the exchange offer for all of our outstanding 13  1/4% Secured Notes not registered under the Securities Act of 1933, for an equal principal amount of 13 1/4% Second Priority Senior Secured Notes due 2014, which have been registered under the Securities Act of 1933, or New 13 1/4% Secured Notes. The exchange offer was scheduled to expire on March 9, 2011 and was extended until March 11, 2011. We accepted for exchange all of the $120,000 aggregate principal amount of the 13 1/4% Senior Notes, representing 100% of the principal amount of the outstanding initial 13 1/4% Senior Notes, which were validly tendered and not withdrawn. See Part II—Item 8. Financial Statements and Supplemental Data, “Note 18. “Subsequent Events” in the Notes to Consolidated Financial Statements, of this Annual Report.

Intcomex, Inc. – 11 3/4% Senior Notes

On March 13, 2008, we repurchased $1.0 million of the 11 3/4% Senior Notes in an arm’s length transaction, at 98.25% of face value plus accrued interest. On April 9, 2008, we purchased $1.0 million of its 11 3/4% Senior Notes at 96.25% of face value plus accrued interest and an additional $1.0 million on April 25, 2008, at 96.5% of face value plus accrued interest in arms’ length transactions in connection with its mandatory sinking fund redemption requirement. On June 24, 2008, we purchased $2.0 million of its 11 3/4% Senior Notes in arm’s length transactions at 90.00% of face value plus accrued interest in connection with its mandatory sinking fund redemption requirement.

On December 22, 2009, we, the Trustee and the Guarantors executed a second supplemental indenture, or the 11 3/4% Senior Notes Second Supplemental Indenture as a result of the receipt of tenders and related consents from the holders of at least two thirds in principal amount of the 11 3/4% Senior Notes, in response to our tender offer and consent solicitation. The 11 3/4% Senior Notes Second Supplemental Indenture amended the indenture governing the 11 3/4% Senior Notes to delete or make less restrictive substantially all of the restrictive covenants contained in such indenture (other than requirements to make an offer for the 11  3/4% Senior Notes in the event of certain asset sales), to delete events of default relating to covenant defaults, cross-defaults and judgments against us, to make conforming and related changes to the indenture and to reduce the minimum redemption notice period from 30 days to three days.

The $1.4 million of the 11  3/4% Senior Notes which had not been tendered in the early tender redemption period and were outstanding at December 31, 2009, were redeemed from the proceeds held by the Trustee, in accordance with the terms of the 11 3/4% Senior Notes Second Supplemental Indenture on January 15, 2010.

 

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Contractual Obligations

The following table summarizes our contractual obligations and the payments due on such obligations as of December 31, 2010:

 

     Payments Due by  Period
(Dollars in millions)
 

Contractual Obligations

   Total      Less than
1 Year
     1 – 3
Years
     3 – 5
Years
     5 Years  

Debt obligations(1)

   $ 142.6       $ 26.8       $ 15.8       $ 100.0       $ —     

Interest on debt obligations(2)

     59.1         16.0         29.8         13.3         —     

Operating lease obligations

     20.4         2.2         6.8         3.7         7.7   
                                            

Total

   $ 222.1       $ 45.0       $ 52.4       $ 117.0       $ 7.7   
                                            

 

(1)

Debt obligations include our short and long term debt principal and the $5.3 million original issue discount remaining related to the issuance of our 13 1/4% Senior Notes.

(2) Interest on debt obligations is calculated assuming no early prepayment or redemption.

Subsequent Events

On March 16, 2011, we and two of our subsidiaries, Intcomex Colombia LTDA and Intcomex Guatemala, signed an agreement to purchase certain assets consisting of certain Latin America operations and equity, or the Acquired Assets from two subsidiaries of Brightpoint, Inc., or Brightpoint, Brightpoint Latin America, Inc., or Brightpoint Latin America and Brightpoint International Ltd. In addition to the assumption of certain liabilities associated with the Acquired Assets, under the terms of the agreement, we will receive $15.0 million in cash and issue shares of our common stock to Brightpoint Latin America. Upon consummation of the transaction, which is subject to certain closing conditions, Brightpoint Latin America will own approximately 23% of our outstanding common stock and will be entitled to appoint one member to our Board of Directors.

Also on March 16, 2011, we entered into a letter agreement with the Shaloms and a CVC International subsidiary, CVCI Intcomex Investment LP, or CVCI Investment, pursuant to which we agreed to return approximately $0.9 million, or the Reimbursement Amount, to the Shaloms. The return of the Reimbursement Amount is a result of an overpayment by the Shaloms of an indemnification payment owed to CVCI Investment and paid to us pursuant to an indemnity agreement letter between the Shaloms and CVCI Investment dated as of June 29, 2007. The Reimbursement Amount is payable at the earlier of: (i) such time that such payment is not prohibited by any agreement by which the Company or any of its subsidiaries is bound; and, (ii) a change of control other than that as a result of an IPO.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in conformity with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments related to assets, liabilities, contingent assets and liabilities, revenue and expenses. Our estimates are based on our historical experience and a variety of other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making our estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Although we believe our estimates, judgments and assumptions are appropriate and reasonable based upon available information, these assessments are subject to various other factors. Actual results may differ from these estimates under different assumptions and conditions.

We believe the following critical accounting policies are affected by our significant judgments and estimates used in the preparation of our consolidated financial statements.

 

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Revenue Recognition. Revenue is recognized when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collection of the related receivable is reasonably assured and delivery has occurred. Delivery to customers has occurred at the point of shipment, provided that title and risk of loss have transferred and no significant obligations remain. We allow our customers to return defective products for exchange or credit within 30 days of delivery based on the warranty of the original equipment manufacturer, or OEM. An exception is infrequently made for long-standing customers with current accounts, on a case-by-case basis and upon approval by management. A return is recorded in the period of the return because, based on past experience, these returns are infrequent and immaterial.

Our revenues are reported net of any sales, gross receipts or value added taxes. Shipping and handling costs billed to customers are included in revenue and related expenses are included in the cost of revenue.

We extend a warranty for products to customers with the same terms as the OEM’s warranty to us. All product-related warranty costs incurred by us are reimbursed by the OEMs.

Accounts Receivable. We provide allowances for doubtful accounts on our accounts receivable for estimated losses resulting from our customers’ inability to make required payments due to changes in our customers’ financial condition or other unanticipated events, which could result in charges for additional allowances exceeding our expectations. These estimates require judgment and are influenced by factors including, but not limited to the following: the large number of customers and their dispersion across wide geographic areas; the fact that no single customer accounted for 2.0% or more of our revenue; the continual credit evaluation of our customers’ financial condition; the aging of our customers’ receivables, individually and in the aggregate; the value and adequacy of credit insurance coverage; the value and adequacy of collateral received from our customers (in certain circumstances); our historical loss experience; and, increases in credit risk due to an economic downturn resulting in our customers’ inability to obtain capital. Uncollectible accounts are written-off against the allowance on an annual basis.

Vendor Programs. We receive funds from vendors for price protection, product rebates, marketing and promotions and competitive programs, which are recorded as adjustments to product costs or selling, general and administrative expenses according to the nature of the program. Some of these programs may extend over one or more quarterly reporting periods. We recognize rebates or other vendor incentives as earned based on sales of qualifying products or as services are provided in accordance with the terms of the related program. We provide reserves for receivables on vendor programs for estimated losses resulting from vendors’ inability to pay or rejections of claims by vendors. These reserves require judgment and are based upon aging and management’s estimate of collectability.

Inventories. Our inventory levels are based on our projections of future demand and market conditions. Any unanticipated decline in demand or technological changes could cause us to have excess or obsolete inventories. On an ongoing basis, we review for estimated excess or obsolete inventories and make provisions for our inventories to reflect their estimated net realizable value based upon our forecasts of future demand and market conditions. These forecasts require judgment as to future demand and market conditions. If actual market conditions are less favorable than our forecasts, additional inventory obsolescence provisions may be required. Our estimates are influenced by the following considerations: the availability of protection from loss in value of inventory under certain vendor agreements, the extent of our right to return to vendors a percentage of our purchases, the aging of inventories, variability of demand due to an economic downturn and other factors, and the frequency of product improvements and technological changes. Rebates earned on products sold are recognized when the product is shipped to a third party customer and are recorded as a reduction to cost of revenue.

Goodwill, Identifiable Intangible and Other Long-Lived Assets. We review goodwill at least annually for potential impairment or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our annual impairment review requires extensive use of accounting judgment and financial estimates, including projections about our business, our financial performance and the performance of the market and overall economy. Application of alternative assumptions and definitions could produce significantly different results. Because of the significance of the judgments and estimates used in the processes, it is likely that materially different amounts could result if different assumptions were made or if the underlying circumstances were changed.

Our goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Potential impairment exists if the fair value of a reporting unit to which goodwill has been allocated is less than the carrying value of the reporting unit. The amount of an impairment loss is recognized as the amount by which the carrying value of the goodwill exceeds its implied value.

 

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Future changes in the estimates used to conduct the impairment review, including revenue projections, market values and changes in the discount rate used could cause the analysis to indicate that our goodwill is impaired in subsequent periods and result in a write-off of a portion or all of the goodwill. The discount rate used is based on our capital structure and, if required, an additional premium on the reporting unit based upon its geographic market and operating environment. The assumptions used in estimating revenue projections are consistent with internal planning.

Our intangible assets are presented at cost, net of accumulated amortization. Intangible assets are amortized on a straight line basis over their estimated useful lives and assessed for impairment. We recognize an impairment of long-lived assets if the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset for assets to be held and used, or the amount by which the carrying value exceeds the fair value less cost to dispose for assets to be disposed. Fair value is determined using the anticipated cash flows discounted at a rate commensurate with the risk involved. We test intangible assets for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

In addition, we review other long-lived assets, principally property, plant and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds the asset’s fair value, we measure and record an impairment loss for the excess. We assess an asset’s fair value by determining the expected future undiscounted cash flows of the asset. There are numerous uncertainties and inherent risks in conducting business, such as general economic conditions, actions of competitors, ability to manage growth, actions of regulatory authorities, pending investigations or litigation, customer demand and risk relating to international operations. Adverse effects from these or other risks may result in adjustments to the carrying value of our other long-lived assets. See “—Factors Affecting Our Results of Operations—Goodwill Impairment” and Part II—Item 8. Financial Statements and Supplemental Data, “Note 4. Identifiable Intangible Assets, Net and Goodwill” in the Notes to Consolidated Financial Statements, of this Annual Report.

There are numerous uncertainties and inherent risks in conducting business, such as but not limited to general economic conditions, actions of competitors, ability to manage growth, actions of regulatory authorities, pending investigations and/or litigation, customer demand and risk relating to international operations. Adverse effects from these risks may result in adjustments to the carrying value of our assets and liabilities in the future including, but not necessarily limited to, goodwill.

Income taxes. We account for the effects of income taxes resulting from activities during the current and preceding years. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases as measured by the enacted tax rates which will be in effect when these differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date under the law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized, unless it is more likely than not that such assets will be realized.

We are subject to income and other related taxes in areas in which we operate. When recording income tax expense, certain estimates are required by management due to timing and the impact of future events on when income tax expenses and benefits are recognized by us. We periodically evaluate our net operating losses and other carryforwards to determine whether gross deferred tax assets and related valuation allowances should be adjusted for future realization in our consolidated financial statements.

Highly certain tax positions are determined based upon the likelihood of the positions sustained upon examination by the taxing authorities. The benefit of a tax position is recognized in the financial statements in the period during which management believes it is more likely than not that the position will be sustained.

In the event of a distribution of the earnings of certain international subsidiaries, we would be subject to withholding taxes payable on those distributions to the relevant foreign taxing authorities. Since we currently intend to reinvest undistributed earnings of these international subsidiaries indefinitely, we have made no provision for income taxes that might be payable upon the remittance of these earnings. We have also not determined the amount of tax liability associated with an unplanned distribution of these permanently reinvested earnings. In the event that in the future we consider that there is a reasonable likelihood of the distribution of the earnings of these international subsidiaries (for example, if we intend to use those distributions to meet our liquidity needs), we will be required to make a provision for the estimated resulting tax liability, which will be subject to the evaluations and judgments of uncertainties described above.

We conduct business globally and, as a result, one or more of our subsidiaries file income tax returns in U.S. federal, state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities in the countries in which we operate. We are currently under ongoing tax examinations in several countries. While such examinations are subject to inherent uncertainties, we do not currently anticipate that any such examination would have a material adverse impact on our audited consolidated financial statements.

 

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Commitments and Contingencies. We accrue for contingent obligations when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, we reassess our position and make appropriate adjustments to the financial statements. Estimates that require judgment and are particularly sensitive to future changes include those related to taxes, legal matters, the imposition of international governmental monetary, fiscal or other controls, changes in the interpretation and

Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The update requires additional disclosures for fair value measurements, requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for these transfers and provides clarification for existing disclosure requirements. The update was effective for interim and annual periods beginning after December 15, 2009, except for the activity in Level 3 fair value measurements, which was effective for annual periods beginning after December 15, 2010. The updates did not have an impact on our consolidated financial statements.

Recently Adopted Accounting Guidance

In February 2010, the FASB issued ASU 2010-9, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, which clarifies the guidance on certain recognition and disclosure requirements for subsequent events. The update requires SEC filers and conduit bond obligors for conduit debt securities that are traded in a public market to evaluate subsequent events through the date of the financial statements issued and all other entities to evaluate subsequent events through the date the financial statements are available to be issued. The update was effective immediately upon issuance and did not have an impact on our consolidated financial statements.

In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary—A Scope Clarification. The update amends the codification to clarify that the scope of the decrease in ownership provisions of ASC 810-10 and related guidance applies to: (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method or joint venture; (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity (including an equity-method investee or joint venture); and (iv) a decrease in ownership in a subsidiary that is not a business or nonprofit activity when the substance of the transaction causing the decrease in ownership is not addressed in other authoritative guidance. If no other guidance exists, an entity should apply the guidance in ASC 810-10, Consolidation-Overall. The update did not have an impact on our consolidated financial statements.

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

Foreign exchange risk

Our principal market risk relates to foreign exchange rate sensitivity, which is the risk related to fluctuations of local currencies in our in-country markets, as compared to the U.S. dollar. We periodically engage in foreign currency forward contracts when available and when doing so is not cost prohibitive. In periods when we do not, foreign currency fluctuations may adversely affect our results of operations, including our gross and operating margins. As of December 31, 2010 and 2009, we did not have any foreign currency forward contracts or collars outstanding.

A significant portion of our revenues from In-country Operations is invoiced in currencies other than the U.S. dollar, even though prices for IT products in our in-country markets are based on U.S. dollar amounts. For the years ended December 31, 2010, 2009 and 2008, 45.3%, 43.6% and 43.8% respectively, of our total revenue was invoiced in currencies other than the U.S. dollar. In addition, a significant majority of our cost of revenue is driven by the pricing of products in U.S. dollars. As a result, our gross profit and gross margins will be affected by fluctuations in foreign currency exchange rates. In addition, a significant amount of our in-country operating expenses are denominated in currencies other than the U.S. dollar. For the years ended December 31, 2010, 2009 and 2008, 53.8%, 52.8% and 47.0%, respectively, of our operating expenses were denominated in currencies other than the U.S. dollar. As a result, our operating expenses and operating margins will be affected by fluctuations in foreign currency exchange rates.

 

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In most markets, including Argentina, Chile, Colombia, Costa Rica, Guatemala, Jamaica, Mexico, Peru and Uruguay, we invoice in local currency. Foreign currency fluctuations in these markets will impact our results of operations, both through foreign currency transactions and through the remeasurement of the financial statements into U.S. dollars. In the case of foreign currency transactions, inventory is initially recorded in the books and records of each of our In-country Operations in the local currency at the exchange rate in effect on the date the inventory is received. When a sale of this inventory is made by our In-country Operations, it is invoiced and recorded in the books and records in the local currency based on the U.S. dollar price converted at the exchange rate in effect on the date of sale. As a result, the appreciation of a local currency in one of these markets between the time that inventory is purchased and the time it is sold could have a marginal impact on our gross profit in U.S. dollar terms, thereby impacting our gross margins. In these cases, the settlement of the initial payable owed to a vendor (including, in many cases, our Miami Operations) results in a foreign exchange gain, which is included in foreign exchange loss (gain) in our consolidated statements of operations and which effectively offsets, in part, the reduction in gross profit. Conversely, the weakening of a local currency in one of these markets will have the opposite effect from those described above on our gross profit and gross margins.

The U.S. dollar is the functional currency in the preparation of our consolidated financial statements in each of our In-country Operations, except in Mexico where the functional currency is the Mexican Peso. In most of our In-country Operations, including Argentina, Chile, Colombia, Costa Rica, Guatemala, Jamaica, Mexico, Peru and Uruguay, our books and records are prepared in currencies other than the U.S. dollar. Remeasurement into the U.S. dollar is required for the preparation of our consolidated financial statements and will impact our results of operations. The remeasurement of our operating expenses is performed using an appropriately weighted-average exchange rate for the period. For periods where the local currency has appreciated relative to the U.S. dollar, the remeasurement increases the U.S. dollar amount of our operating expenses, thereby adversely impacting our operating margins. Conversely, the weakening of a local currency in one of these markets will have the opposite effect from those described above on operating expenses and operating margins. For example, we estimate that a one percent weakening or strengthening of the U.S. dollar against these local currencies would have increased or decreased our selling, general and administrative expenses by approximately $0.4 million, $0.4 million and $0.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. The remeasurement of our monetary assets and liabilities is performed using exchange rates at the balance sheet date, with the changes being recognized in foreign exchange (gain) loss in our consolidated statements of operations.

In Ecuador, Panama and El Salvador, all of our transactions are conducted in U.S. dollars and all of our financial statements are prepared using the U.S. dollar, and therefore, foreign exchange fluctuations do not directly impact our results of operations.

We believe that our broad geographical scope reduces our exposure to the risk of significant and sustained currency fluctuations in any of our Latin American or Caribbean markets. In addition, a relatively small portion of the sales from our In-country Operations in Argentina, Chile, Costa Rica, Peru and Uruguay can be invoiced, at the election of certain of our customers, in U.S. dollars, thereby reducing the overall impact of fluctuations in the foreign currency exchange rates in these countries. In addition, in Chile, Peru and Guatemala, we from time to time reduce our exposure to the risk of currency devaluation by drawing on a local currency-denominated line of credit to acquire U.S. dollars.

If there are large and sustained devaluations of local currencies, like those that occurred in Brazil in 2000 and in Argentina in 2001, many of our products can become more expensive in local currencies. This could result in our customers having difficulty paying those invoices and, in turn, result in decreases in revenue. Moreover, such devaluations may adversely impact demand for our products because our customers may be unable to afford them. In these circumstances, we will usually offer a repayment plan for an affected customer, which in our experience has usually resulted in successful collection. In addition, other than accounts receivable owed by affiliates, substantially all of our Miami Operations’ foreign accounts receivable are insured by a worldwide credit insurance company. The policy’s aggregate limit is $20.0 million with an aggregate deductible of $1.0 million; the policy expires on August 31, 2011. In addition, 10% or 20% buyer coinsurance provisions apply, as well as sub-limits in coverage on a per-buyer and on a per-country basis. The policy also covers certain large, local companies in Argentina, Costa Rica, El Salvador, Guatemala, Jamaica and Peru. Our In-country Operations in Chile insures certain customer accounts with a credit insurance company in Chile; the policy expires on October 31, 2012.

It is our policy not to enter into foreign currency transactions for speculative purposes.

Interest rate risk

We are also exposed to market risk related to interest rate sensitivity, which is the risk that future changes in interest rates may affect our net income or our net assets. Given that a majority of our debt is a fixed rate obligation, we do not believe that we have a material exposure to interest rate fluctuations. As of December 31, 2010, assuming SBA’s $30.0 million floating rate revolving credit facility with Comerica Bank was fully drawn for the entire year, a 1.0% (100 basis points) increase (or decrease) in the U.S. prime lending rate would result in $300,000 increase (or decrease) in our current expense for the year.

It is our policy not to enter into interest rate transactions for speculative purposes.

 

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm BDO USA, LLP

     46   

Consolidated Balance Sheets as of December 31, 2010 and 2009

     47   

Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008

     48   

Consolidated Statements of Shareholders’ Equity for the Years Ended December  31, 2010, 2009 and 2008

     49   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008

     50   

Notes to Consolidated Financial Statements

     52   

Financial Statement Schedule

     107   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

BDO USA, LLP

Intcomex, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Intcomex, Inc. and Subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intcomex, Inc. and Subsidiaries at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

 

Miami, Florida

/s/ BDO USA, LLP

March 30, 2011

 

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INTCOMEX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2010 AND 2009

(Dollars in thousands, except per share data)

 

     As of December 31,  
     2010     2009  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 28,867      $ 27,234   

Restricted cash

     371        —     

Trade accounts receivable (net of allowance for doubtful accounts of $4,590 and $4,428 at December 31, 2010 and 2009, respectively)

     116,888        100,238   

Notes and other receivables

     22,459        20,104   

Due from related parties

     287        272   

Inventories

     110,390        95,185   

Prepaid expenses and other

     13,919        11,553   

Deferred tax assets

     3,180        2,564   
                

Total current assets

     296,361        257,150   

Property and equipment, net

     16,330        16,295   

Goodwill

     13,862        13,704   

Identifiable intangible assets

     1,396        1,658   

Deferred tax assets

     11,462        11,116   

Other assets

     6,694        8,178   
                

Total assets

   $ 346,105      $ 308,101   
                

Liabilities and Shareholders’ Equity

    

Liabilities

    

Current liabilities

    

Lines of credit

   $ 21,256      $ 14,729   

Current maturities of long-term debt

     5,693        557   

Accounts payable

     147,129        117,216   

Income taxes payable

     717        68   

Deferred tax liabilities

     261        231   

Due to related parties

     51        75   

Accrued expenses and other

     16,896        13,581   
                

Total current liabilities

     192,003        146,457   

Long-term debt, net of current maturities

     110,558        114,425   

Other long-term liabilities

     1,942        1,702   

Deferred tax liabilities

     2,561        2,783   
                

Total liabilities

     307,064        265,367   

Commitments and contingencies

    

Shareholders’ equity

    

Common stock, voting $0.01 par value, 140,000 shares authorized, 100,000 issued and outstanding

     1        1   

Class B common stock, non-voting $0.01 par value, 60,000 shares authorized, 29,357 issued and outstanding

     —          —     

Additional paid in capital

     41,539        41,388   

Retained earnings

     1,503        5,153   

Accumulated other comprehensive loss

     (4,002     (3,808
                

Total shareholders’ equity

     39,041        42,734   
                

Total liabilities and shareholders’ equity

   $ 346,105      $ 308,101   
                

The accompanying notes are an integral part of the consolidated financial statements.

 

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INTCOMEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(Dollars in thousands, except per share data)

 

     For the Years Ended December 31,  
     2010     2009     2008  

Revenue

   $ 1,013,272      $ 917,168      $ 1,071,551   

Cost of revenue

     917,529        825,587        970,955   
                        

Gross profit

     95,743        91,581        100,596   

Operating expenses

      

Selling, general and administrative

     75,315        66,973        83,038   

Goodwill impairment charge

     —          —          18,777   

Depreciation and amortization

     4,323        4,283        3,908   
                        

Total operating expenses

     79,638        71,256        105,723   

Operating income (loss)

     16,105        20,325        (5,127

Other expense (income)

      

Interest expense

     20,933        17,495        17,431   

Interest income

     (309     (514     (941

Foreign exchange (gain) loss

     (2,025     (3,130     15,533   

Other income, net

     (237     (3,563     (3,427
                        

Total other expense

     18,362        10,288        28,596   

(Loss) income before provision for income taxes

     (2,257     10,037        (33,723

Provision for income taxes

     1,393        2,844        1,595   
                        

Net (loss) income

   $ (3,650   $ 7,193      $ (35,318
                        

Net (loss) income per weighted average share of common stock, voting and Class B common stock, non-voting:

      

Basic

   $ (28.21   $ 69.94      $ (345.63
                        

Diluted

   $ (28.21   $ 69.94      $ (345.63
                        

Weighted average number of common shares, voting and Class B common stock, non-voting, used in per share calculation:

      

Basic

     129,357        102,852        102,182   
                        

Diluted

     129,357        102,852        102,182   
                        

The accompanying notes are an integral part of the consolidated financial statements.

 

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INTCOMEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(Dollars in thousands)

 

     For the Years Ended December 31, 2010, 2009 and 2008  
     Common Stock                                  
     Shares             Additional
Paid in
Capital
     Retained
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
(Loss) Income
    Shareholders’
Equity
    Comprehensive
(Loss) Income
 
     Voting      Class B
Non-voting
     Par
Value
             

Balance at December 31, 2007

     100,000         2,182       $ 1       $ 20,825       $ 33,278      $ (3   $ 54,101     

Share-based compensation expense

     —           —           —           313         —          —          313     

Net loss

     —           —           —           —           (35,318     —          (35,318   $ (35,318

Foreign currency translation loss

     —           —           —           —           —          (4,546     (4,546     (4,546
                          

Total comprehensive loss

                     $ (39,864
                                                                    

Balance at December 31, 2008

     100,000         2,182       $ 1       $ 21,138       $ (2,040   $ (4,549   $ 14,550     

Share-based compensation expense

     —           —           —           249         —          —          249     

Issuance of Class B common stock, non-voting

     —           27,175         —           20,001         —          —          20,001     

Net income

     —           —           —           —           7,193        —          7,193      $ 7,193   

Foreign currency translation gain

     —           —           —           —           —          741        741        741   
                          

Total comprehensive income

                     $ 7,934   
                                                                    

Balance at December 31, 2009

     100,000         29,357       $ 1       $ 41,388       $ 5,153      $ (3,808   $ 42,734     

Share-based compensation expense

     —           —           —           151         —          —          151     

Net loss

     —           —           —           —           (3,650     —          (3,650   $ (3,650

Foreign currency translation loss

     —           —           —           —           —          (194     (194     (194
                          

Total comprehensive loss

                     $ (3,844
                                                                    

Balance at December 31, 2010

     100,000         29,357       $ 1       $ 41,539       $ 1,503      $ (4,002   $ 39,041     
                                                              

The accompanying notes are an integral part of the consolidated financial statements.

 

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INTCOMEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(Dollars in thousands)

 

     For the Years Ended December 31,  
     2010     2009     2008  

Cash flows from operating activities:

      

Net (loss) income

   $ (3,650   $ 7,193      $ (35,318

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

      

Stock-based compensation expense

     151        249        313   

Depreciation expense

     3,908        3,812        3,336   

Amortization expense

     2,914        3,353        2,217   

Bad debt expense

     1,765        4,214        4,544   

Inventory obsolescence expense

     1,783        (886     1,800   

Deferred income tax benefit

     (1,154     (476     (3,342

Impairment charge and other non-cash items

     482       —          20,824   

Gain on extinguishment of long-term debt

     —          (4,411     (3,470

Loss (gain) on disposal of property and equipment and other

     67        (210     5   

Change in operating assets and liabilities:

      

(Increase) decrease in:

      

Trade accounts receivables

     (18,415     (13,367     21,115   

Inventories

     (16,988     (3,441     24,303   

Notes and other receivables

     (2,355     (3,569     3,169   

Prepaid expenses and other

     (2,760     586        (2,734

Due from related parties

     (15     6        893   

Increase (decrease) in:

      

Accounts payable

     29,913        7,573        (33,157

Income taxes payable

     649        (713     (128

Accrued expenses and other

     3,555        (4,296     505   

Due to related parties

     (24     26        (2
                        

Net cash (used in) provided by operating activities

     (174     (4,357     4,873   

Cash flows from investing activities:

      

Purchases of property and equipment

     (4,184     (2,531     (6,125

Proceeds from disposition of assets

     196        69        57   

Notes receivable and other

     (171     45        (578
                        

Net cash used in investing activities

     (4,159 )       (2,417     (6,646

Cash flows from financing activities:

      

Borrowings (payments) under lines of credit, net

     6,527        (16,312     4,675   

Proceeds from borrowings under long-term debt

     543        108,737        36   

Payments of long-term debt

     (610     (85,122     (7,925

Proceeds from issuance of common stock

     —          3,967       —     
                        

Net cash provided by (used in) financing activities

     6,460        11,270        (3,214

Effect of foreign currency exchange rate changes on cash and cash equivalents

     (494     394        (2,068
                        

Net increase (decrease) in cash and cash equivalents

     1,633        4,890        (7,055

Cash and cash equivalents, beginning of period

   $ 27,234      $ 22,344      $ 29,399   
                        

Cash and cash equivalents, end of period

   $ 28,867      $ 27,234      $ 22,344   
                        

The accompanying notes are an integral part of the consolidated financial statements.

 

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INTCOMEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008—(Continued)

(Dollars in thousands)

 

     For the Years Ended December 31,  
     2010      2009      2008  

Supplemental disclosure of operating cash flow information:

        

Cash paid for:

        

Interest

   $ 18,561       $ 20,359       $ 16,536   

Income taxes

   $ 3,510       $ 3,456       $ 6,119   

Supplemental disclosure of non-cash flow information:

        

Non-cash investing activities:

        

Issuance of Class B Common Stock, non-voting in exchange for 11  3/4% Senior Notes at face value

   $ —         $ 16,034       $ —     

Non-cash financing activities:

        

Property and equipment acquired through financing

   $ 72      $ —         $ 14   

The accompanying notes are an integral part of the consolidated financial statements.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Note 1. Organization and Basis of Presentation

Nature of Operations

Intcomex, Inc. (“Intcomex”) is a United States (“U.S.”) based pure play value-added international distributor of computer information technology (“IT”) products focused solely on serving Latin America and the Caribbean (the “Region”). Intcomex distributes computer equipment, components, peripherals, software, computer systems, accessories, networking products and digital consumer electronics to more than 44,000 customers in 41 countries. Intcomex offers single source purchasing to its customers by providing an in-stock selection of more than 13,000 products from over 150 vendors, including many of the world’s leading IT product manufacturers. The Company serves the Latin American and Caribbean IT products markets using a dual distribution model as a wholesale aggregator and an in-country distributor:

 

   

As a Miami-based wholesale aggregator, the Company sells primarily to:

 

   

third-party distributors, resellers and retailers of IT products based in countries in Latin America and the Caribbean where the Company does not have a local presence;

 

   

third-party distributors, resellers and retailers of IT products based in countries in Latin America and the Caribbean where the Company has a local presence but whose volumes are large enough to enable them to efficiently acquire products directly from U.S.-based wholesale aggregators;

 

   

other Miami-based exporters of IT products to Latin America and the Caribbean; and

 

   

our In-country Operations.

 

   

As an in-country distributor in 12 countries, the Company sells to over 42,000 local reseller and retailer customers, including value-added resellers (companies that sell, install and support IT products and personal computers (“PCs”)), systems builders (companies that specialize in building complete computer systems by combining components from different vendors), smaller distributors and retailers.

Organization

The accompanying consolidated financial statements include the accounts of Intcomex (the “Parent”) and its subsidiaries (collectively referred to herein as the “Company”) including the accounts of Intcomex Holdings, LLC (“Holdings”) (parent company of Software Brokers of America, Inc. (“SBA”), a Florida corporation), IXLA Holdings, Ltd. (“IXLA”), IFC International, LLC, a Delaware limited liability company (“IFC”) and Intcomex International Holdings Cooperatief U.A., a Netherlands cooperative (“Coop”). IXLA is the Cayman Islands limited time duration holding company of 14 separate subsidiaries located in Central America, South America, and the Caribbean. IFC and Coop are the parent companies of Intcomex Holdings SPC-1, LLC (“Intcomex SPC-1 Mexico”) (parent company of Centel, S.A. de C.V. (“Intcomex Mexico”), a dually formed company in the U.S. and Mexico). The consolidated financial statements reflect the Company as the reporting entity for all periods presented.

The Company’s operations include sales generated from and invoiced by the Miami, Florida operations (the “Miami Operations”) and sales generated from and invoiced by all of the Latin American and Caribbean subsidiary operations. The subsidiary operations conduct business with sales and distribution centers in the following countries: Argentina, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Jamaica, Mexico, Panama, Peru, and Uruguay (collectively, our “In-country Operations”).

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with the instructions to the Annual Report on Form 10-K and Article 10 of Regulation S-X, pursuant to the rules and regulations of the SEC. The consolidated financial statements include the accounts of Intcomex, Inc. and its subsidiaries. In management’s opinion, the consolidated financial statements reflect all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position of the Company as of December 31, 2010 and 2009, its results of operations, statements of changes in shareholders’ equity and its statements of cash flows for the years ended December 31, 2010, 2009 and 2008. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements reflect the Company as the reporting entity for all periods presented.

As of December 31, 2010, the Company had one wholly-owned subsidiary: Holdings. Holdings has three wholly owned subsidiaries: SBA, IXLA, and IFC. Holdings owns 99.99% and the Company owns 0.01% of Coop.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

SBA has one wholly owned subsidiary: Accvent LLC (“Accvent”), a Florida corporation. Accvent owns 100.0% of the following subsidiaries, each of which are Florida limited liability companies:

 

   

FORZA Power Technologies LLC;

 

   

KLIP Xtreme LLC; and

 

   

NEXXT Solutions LLC.

IXLA owns 100.0% of the following subsidiaries in their respective locations in Latin America and the Caribbean:

 

   

Intcomex Argentina S.R.L., Argentina;

 

   

Intcomex S.A., Chile:

 

   

Intcomex Iquique S.A., Chile;

 

   

Intcomex del Ecuador S.A., Ecuador;

 

   

Intcomex Latin America Finance Corp., Cayman Islands;

 

   

Hurricane Systems, S.A., Ecuador;

 

   

Intcomex Colombia LTDA, Colombia;

 

   

Intcomex Costa Rica Mayorista en Equipo de Cómputo, S.A., Costa Rica;

 

   

Intcomex El Salvador, S.A., El Salvador;

 

   

Intcomex de Guatemala, S.A., Guatemala;

 

   

Intcomex Jamaica Ltd., Jamaica;

 

   

Computación Monrenca Panama, S.A., Panama;

 

   

Intcomex de Las Americas, S.A., Panama;

 

   

Intcomex Peru, S.A.C., Peru;

 

   

Compañía de Servicios IMSC, S. de R.L. de C.V., Mexico.

 

   

T.G.M., S.A., Uruguay;

 

   

Pontix Trading S.A., Uruguay (inactive)

 

   

Latin CAS, S.D., El Salvador; and

 

   

Latin Service, S.A., Guatemala.

Coop and IFC own 99.0% and 1.0%, respectively, of Intcomex SPC-I Mexico.

Intcomex SPC-I Mexico has one wholly owned subsidiary: Centel, S.A. de C.V., located in Mexico.

We operate a sales and distribution center in the U.S., or our Miami Operations, 25 sales and distribution centers in 12 countries in Latin America and the Caribbean—Argentina, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Jamaica, Mexico, Panama, Peru and Uruguay.

Fiscal Year

The Company’s fiscal year ends on December 31 and is based on a calendar year.

Use of Accounting Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”). These principles require us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses, cash flows and the related footnote disclosures during the reporting period. On an on-going basis, we review and evaluate our estimates and assumptions, including, but not limited to, those that relate to the realizable value of accounts receivable, inventories, identifiable intangible assets, goodwill and other long-lived assets, income taxes and contingencies. Actual results could differ from these estimates.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Foreign Currency Translation and Remeasurement

The U.S. dollar is considered the functional currency in all of the Company’s foreign subsidiary operations, except in Mexico where the functional currency is the Mexican Peso. Non-monetary balance sheet amounts are translated using historical exchange rates. Other balance sheet amounts are translated at the exchange rates in effect at the balance sheet date. Statements of operations amounts, excluding those items of income and expense that relate to non-monetary balance sheet amounts, are translated at the average exchange rate for the month. Remeasurement adjustments are included in the determination of net (loss) income under the caption “Foreign exchange loss (gain).” These amounts include the effect of foreign currency remeasurement, realized foreign currency transaction gains and losses and changes in the value of foreign currency denominated accounts receivable and accounts payable. In the accompanying consolidated statements of operations, a foreign exchange (gain) loss of $(2,025), $(3,130) and $15,533 were included for the years ended December 31, 2010, 2009 and 2008, respectively.

Translation adjustments related to our Mexican subsidiary are recorded in accumulated other comprehensive (loss) income under shareholders’ equity in our consolidated balance sheets and in our consolidated statement of changes in shareholders’ equity. In the accompanying consolidated statements of changes in shareholders’ equity, foreign currency translation adjustments of $(194), $741, $(4,546) were included for the years ended December 31, 2010, 2009 and 2008, respectively.

Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents in accordance with FASB ASC 305-10-20, Cash and Cash Equivalents Glossary. The majority of the Company’s cash and cash equivalents is cash in banks.

Accounts Receivable

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments due to changes in our customers’ financial condition or other unanticipated events, which could result in charges for additional allowances exceeding our expectations. These estimates require judgment and are influenced by factors including, but not limited to the following: the large number of customers and their dispersion across wide geographic areas; the fact that no single customer accounted for 2.0% or more of our revenue; the continual credit evaluation of our customers’ financial condition; the aging of our customers’ receivables, individually and in the aggregate; the value and adequacy of credit insurance coverage; the value and adequacy of collateral received from our customers (in certain circumstances); our historical loss experience; and, increases in credit risk due to an economic downturn resulting in our customers’ inability to obtain capital. Uncollectible accounts are written-off against the allowance on an annual basis.

Inventories

Inventories consist entirely of finished goods and are stated at the lower of cost or market. Cost is determined primarily on the first-in, first-out (“FIFO”) method. Due to the availability of “price protection” guarantees offered by many of our vendors on a significant portion of inventory, some of the Company’s In-country Operations use the average cost method that approximates FIFO. The Company operates in an industry characterized by the continual introduction of new products, rapid technological advances and product obsolescence. The Company continuously evaluates the salability of its inventories and utilizes incentive sales programs for slow moving items. Rebates earned from our suppliers on products sold are recognized when the product is shipped to a third party customer and is recorded as a reduction to cost of revenue.

Property and Equipment, Net

Property and equipment are recorded at cost and depreciated over the estimated economic lives of the assets. Depreciation is computed using the straight-line and accelerated methods based on the estimated economic lives of the related assets as follows:

 

     Years

Buildings and leasehold improvements

   30 – 39

Office furniture, vehicles and equipment

   5 – 7

Warehouse equipment

   5 – 7

Software

   5

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Goodwill, Identifiable Intangible and Other Long-Lived Assets

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill and Other provides guidance on the annual assessment of goodwill for impairment using fair value measurement techniques. The Company reviews goodwill at least annually for potential impairment or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our annual impairment review requires extensive use of accounting judgment and financial estimates, including projections about our business, our financial performance and the performance of the market and overall economy. Application of alternative assumptions and definitions could produce significantly different results. Because of the significance of the judgments and estimates used in the processes, it is likely that materially different amounts could result if different assumptions were made or if the underlying circumstances were changed.

Our goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Potential impairment exists if the fair value of a reporting unit to which goodwill has been allocated is less than the carrying value of the reporting unit. The amount of an impairment loss is recognized as the amount by which the carrying value of the goodwill exceeds its implied value.

Future changes in the estimates used to conduct the impairment review, including revenue projections, market values and changes in the discount rate used could cause the analysis to indicate that our goodwill is impaired in subsequent periods and result in a write-off of a portion or all of the goodwill. The discount rate used is based on our capital structure and, if required, an additional premium on the reporting unit based upon its geographic market and operating environment. The assumptions used in estimating revenue projections are consistent with internal planning.

Our intangible assets are presented at cost, net of accumulated amortization. Intangible assets are amortized on a straight line basis over their estimated useful lives and assessed for impairment. The Company recognizes an impairment of long-lived assets if the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset for assets to be held and used, or the amount by which the carrying value exceeds the fair value less cost to dispose for assets to be disposed. Fair value is determined using the anticipated cash flows discounted at a rate commensurate with the risk involved. The Company tests intangible assets for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

The Company reviews long-lived assets, principally property, plant and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds the asset’s fair value, we measure and record an impairment loss for the excess. We assess an asset’s fair value by determining the expected future undiscounted cash flows of the asset. There are numerous uncertainties and inherent risks in conducting business, such as general economic conditions, actions of competitors, ability to manage growth, actions of regulatory authorities, pending investigations or litigation, customer demand and risk relating to international operations. Adverse effects from these or other risks may result in adjustments to the carrying value of our other long-lived assets.

There are numerous uncertainties and inherent risks in conducting business, such as but not limited to general economic conditions, actions of competitors, ability to manage growth, actions of regulatory authorities, pending investigations and/or litigation, customer demand and risk relating to international operations. Adverse effects from these risks may result in adjustments to the carrying value of the Company’s assets and liabilities in the future including, but not necessarily limited to, goodwill.

Deferred Loan Costs

Deferred loan costs are amortized over the life of the applicable indebtedness using the straight-line method. Deferred loan costs, net of accumulated amortization, amounted to $4,390 and $6,654 at December 31, 2010 and 2009, respectively, and are included in Other assets in the accompanying balance sheets.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Fair Value of Financial Instruments

FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a framework for all fair value measurements and expands disclosures related to fair value measurement and developments. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires that assets and liabilities measured at fair value are classified and disclosed in one of the following three categories:

Level 1Quoted market prices for identical assets or liabilities in active markets or observable inputs;

Level 2Significant other observable inputs that can be corroborated by observable market data; and

Level 3Significant unobservable inputs that cannot be corroborated by observable market data.

The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable, notes receivable and other, accounts payable, accrued expenses and other liabilities approximate fair value because of the short-term nature of these items. The carrying amounts of outstanding short-term debt approximate fair value because interest rates over the term of these financial instruments approximate current market interest rates available to the Company. The current market price of outstanding long-term debt approximates fair value because the Company’s $120,000 aggregate principal amount 13 1/4% Second Priority Senior Secured Notes due December 15, 2014 (the “13 1/4% Senior Notes”) were tradable under the Securities Act of 1933 Rule 144A, Private Resales of Securities to Institutions at 106.75 of the principal amount as of December 31, 2010. On February 8, 2011, the Company commenced an exchange offer for all of its 13 1/4% Senior Notes, which were not registered under the Securities Act of 1933, for an equal principal amount of 13 1/4% Second Priority Senior Secured Notes due 2014, which have been registered under the Securities Act of 1933 (the “New 13 1/4% Senior Notes”). See “Note 18. Subsequent Events” in these Notes to Consolidated Financial Statements.

The Company is exposed to fluctuations in foreign exchange rates and reduces its exposure to the fluctuations by periodically using derivative financial instruments and entering into derivative transactions with large multinational banks to manage its primary risk, foreign currency price risk. The Company’s derivative instruments are comprised of the following types of instruments:

Foreign currency forward contractsDerivative instruments that convert one currency to another currency and contain a fixed amount, fixed exchange rate used for conversion and fixed future date on which the conversion will be made. The Company recognizes unrealized loss (gain) in the statements of operations for temporary fluctuations in the value of non-qualifying derivative instruments designated as cash flow hedges, if the fair value of the underlying hedged currency increases (decreases) prior to maturity. The Company reports realized loss (gain) upon conversion if the fair value of the underlying hedged currency increases (decreases) as of the maturity date.

Foreign currency collarsDerivative instruments that contain a fixed floor price (put option) and fixed ceiling price (call option). If the market price exceeds the call option strike price or falls below the put option strike price, the Company receives the fixed price or pays the counterparty bank the market price. If the market price is between the call and put option on strike prices, neither the Company nor the counterparty bank are required to make a payment.

The amount required to enter into similar offsetting contracts with similar remaining maturities based on quoted market prices approximates the fair value of derivative financial instruments. The Company’s foreign currency forward contracts are measured on a recurring basis based on foreign currency spot rates quoted by financial institutions (Level 2) and are marked-to-market each period with gains and losses on these contracts recorded in foreign exchange (gain) loss in the Company’s consolidated statements of operations in the period in which the value changes, with the offsetting amount for unsettled positions included in other current assets or liabilities in the Company’s consolidated balance sheets. The location and amounts of the fair value in the consolidated balance sheets and (gain) loss in the statements of operations related to the Company’s derivative instruments are described in “Note 8. Fair Value of Derivative Instruments” in these Notes to Consolidated Financial Statements.

There were no changes to our valuation methodology for assets and liabilities measured at fair value during the year ended December 31, 2010 and 2009. The Company’s did not have any foreign currency forward contracts or collars outstanding as of December 31, 2010 and 2009.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Off-Balance Sheet Arrangements

The Company has agreements with unrelated third parties for factoring of specific accounts receivable in several of its In-country Operations. The factoring is a sale in accordance with FASB ASC 860, Transfers and Servicing, and is accounted for as an off-balance sheet arrangement. Proceeds from the transfers reflect the face value of the account less a discount, which is recorded in the Company’s consolidated statements of operations as a charge to interest expense in the period the sale occurred. Net funds received are recorded as an increase to cash and a reduction to accounts receivable outstanding.

The Company acts as the collection agent on behalf of the third party for the arrangements and has no significant retained interests or servicing liabilities related to the accounts receivable sold. In order to mitigate credit risk related to the Company’s factoring of accounts receivable, the Company has credit insurance for the majority of factored accounts receivable, resulting in risk of loss being limited to the factored accounts receivable not covered by credit insurance, which is immaterial.

As of December 31, 2010, the Company factored approximately $13,500 of accounts receivable pursuant to the Company’s agreements, representing the face amount of total outstanding receivables. The Company incurred approximately $100 in fees pursuant to the agreements. The Company did not enter into any factoring arrangements as of December 31, 2009. The Company reports the cash flows attributable to the sale of receivables to third parties, as well as cash receipts from collections made on behalf of and paid to the third parties, on a net basis in operating cash flows in trade accounts receivables.

Revenue Recognition

Revenue is recognized when there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured and delivery has occurred. Delivery to customers has occurred at the point of shipment, provided that title and risk of loss have transferred and no significant obligations remain. We allow our customers to return defective products for exchange or credit within 30 days of delivery based on the warranty of the original equipment manufacturer (“OEM”). An exception is infrequently made for long-standing customers with current accounts, on a case-by-case basis and upon approval by management. A return is recorded in the period of the return because, based on past experience, these returns are infrequent and immaterial.

The Company’s revenues are reported net of any sales, gross receipts or value added taxes. Shipping and handling costs billed to customers are included in revenue and related costs are included in the cost of revenue.

The Company extends a warranty for products to customers with the same terms as the OEM’s warranty to the Company. All product-related warranty costs incurred by the Company are reimbursed by the OEMs.

Product Rebates, Price Protection and Vendor Program Incentives

The Company receives funds from vendors for price protection, product rebates, marketing and promotions and competitive programs, which are recorded as adjustments to product costs or selling, general and administrative expenses according to the nature of the program. Some of these programs may extend over one or more quarterly reporting periods. We recognize product rebates or other vendor program incentives when earned, based upon sales of qualifying products or as services are provided in accordance with the terms of the related program. We estimate and record reserves for receivables on vendor programs for estimated losses resulting from vendors’ inability to pay or rejections of claims by vendors on a quarterly basis. These reserves require management’s judgment and are based upon aging, historical trends and data specific to each reporting period, management’s estimate of collectability and other factors.

Write-Off of Initial Public Offering Expenses

For the years ended December 31, 2010 and 2008, the Company wrote off $482 and $2,000, respectively, related to a proposed initial public offering (“IPO”) transaction to take the Company public. The costs were recorded as an increase in operating expenses in the consolidated statement of operations as they were one-time charges that were not indicative of operations in the normal course of business and relate to a non-recurring transaction that would normally be netted against IPO proceeds. The Company did not write off or incur any additional costs related to the proposed IPO transaction for the year ended December 31, 2009.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Restructuring Activities

The provision for restructuring relates to the estimated costs of reorganizations including the costs of closure or discontinuance of lines of activities. FASB ASC 420, Exit or Disposal Cost Obligations requires that a liability be recognized for those costs only when the liability is incurred. Liabilities related to one-time employee termination benefits are recognized ratably over the future service period if those employees are required to render services to the Company, if that period exceeds 60 days or a longer legal notification period. Employee termination benefits covered by a contract or under an ongoing benefit arrangement are recognized when it is probable that the employees will be entities to the benefits and the amounts can be reasonably estimated.

In 2008 and 2009, the Company’s management implemented restructuring and rebalancing actions designed to improve the Company’s efficiencies and profitability, strengthen its operations and reduce its costs in several of its In-country Operations in which the Company conducts business. The restructuring includes involuntary workforce reductions and employee benefits and other costs incurred in connection with vacating leased facilities. For the year ended December 31, 2010, the Company did not incur any restructuring charges. For the years ended December 31, 2009 and 2008, the Company incurred restructuring charges of $585 and $1,535, respectively. The restructuring charges were recorded in the Company’s consolidated statement of operations as an increase to the Company’s operating expenses

Income Taxes

The Company accounts for the effects of income taxes resulting from activities during the current and preceding years in accordance with FASB ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases as measured by the enacted tax rates which will be in effect when these differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date under the law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized, unless it is more likely than not that such assets will be realized.

We are subject to income and other related taxes in areas in which we operate. When recording income tax expense, certain estimates are required by management due to timing and the impact of future events on when income tax expenses and benefits are recognized by us. We periodically evaluate our net operating losses and other carryforwards to determine whether gross deferred tax assets and related valuation allowances should be adjusted for future realization in our consolidated financial statements.

Highly certain tax positions are determined based upon the likelihood of the positions sustained upon examination by the taxing authorities. The benefit of a tax position is recognized in the financial statements in the period during which management believes it is more likely than not that the position will be sustained.

In the event of a distribution of the earnings of certain international subsidiaries, we would be subject to withholding taxes payable on those distributions to the relevant foreign taxing authorities. Since we currently intend to reinvest undistributed earnings of these international subsidiaries indefinitely, we have made no provision for income taxes that might be payable upon the remittance of these earnings. We have also not determined the amount of tax liability associated with an unplanned distribution of these permanently reinvested earnings. In the event that in the future we consider that there is a reasonable likelihood of the distribution of the earnings of these international subsidiaries (for example, if we intend to use those distributions to meet our liquidity needs), we will be required to make a provision for the estimated resulting tax liability, which will be subject to the evaluations and judgments of uncertainties described above.

We conduct business globally and, as a result, one or more of our subsidiaries file income tax returns in U.S. federal, state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities in the countries in which we operate. We are currently under ongoing tax examinations in several countries. While such examinations are subject to inherent uncertainties, we do not currently anticipate that any such examination would have a material adverse impact on our audited consolidated financial statements.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Computation of Net (Loss) Income per Share

The Company reports both basic and diluted net (loss) income per share. Basic net (loss) income per share excludes dilution and is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily reflect the potential dilution that could occur if stock options and other commitments to issue common stock were exercised using the treasury stock method.

FASB ASC 260, Earnings per Share, requires that employee equity share options, non-vested shares and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted net (loss) income per share. Diluted shares outstanding include the dilutive effect of in-the-money options which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid in capital when the award becomes deductible are assumed to be used to repurchase shares.

The Company has two classes of common stock: voting and Class B, non-voting (collectively herein referred to as the “Common Stock”). The two classes of common stock have substantially identical rights with respect to any dividends or distributions of cash or property declared on shares of common stock and rank equally as to the right to receive proceeds on liquidation or dissolution of the Company after the payment of the Company’s indebtedness. The Company uses the two-class method for calculating net (loss) income per share. Basic and diluted net (loss) income per share of Common Stock are the same.

The following table sets forth the computation of basic and diluted net (loss) income per weighted average share of Common Stock for the periods presented:

 

     For the Years Ended December 31,  
     2010     2009      2008  

Numerator for basic and diluted net (loss) income per share of Common Stock:

       

Net (loss) income

   $ (3,650   $ 7,193       $ (35,318
                         

Denominator:

       

Denominator for basic net (loss) income per share of Common Stock—weighted average shares

     129,357        102,852         102,182   
                         

Effect of dilutive securities:

       

Stock options and unvested restricted stock(1)

     —          —           —     
                         

Denominator for diluted net (loss) income per common share, voting and Class B common share, non-voting—adjusted weighted average shares

     129,357        102,852         102,182   
                         

Net (loss) income per share of Common Stock:

       

Basic

   $ (28.21   $ 69.94       $ (345.63
                         

Diluted

   $ (28.21   $ 69.94       $ (345.63
                         

 

 

(1) The stock options were anti-dilutive as of December 31, 2010 and 2008, as the Company had a net loss as of the years ended December 31, 2010 and 2008. The stock options were anti-dilutive as of December 31, 2009, as the fair value was below the exercise price. The shares of restricted common stock, non-voting were anti-dilutive during the years ended December 31, 2010, 2009 and 2008.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The update requires additional disclosures for fair value measurements, requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for these transfers and provides clarification for existing disclosure requirements. The update was effective for interim and annual periods beginning after December 15, 2009, except for the activity in Level 3 fair value measurements, which was effective for annual periods beginning after December 15, 2010. The updates did not have an impact on the Company’s consolidated financial statements.

Recently Adopted Accounting Guidance

In February 2010, the FASB issued ASU 2010-9, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, which clarifies the guidance on certain recognition and disclosure requirements for subsequent events. The update requires SEC filers and conduit bond obligors for conduit debt securities that are traded in a public market to evaluate subsequent events through the date of the financial statements issued and all other entities to evaluate subsequent events through the date the financial statements are available to be issued. The update was effective immediately upon issuance and did not have an impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope Clarification. The update amends the codification to clarify that the scope of the decrease in ownership provisions of ASC 810-10 and related guidance applies to: (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method or joint venture; (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity (including an equity-method investee or joint venture); and (iv) a decrease in ownership in a subsidiary that is not a business or nonprofit activity when the substance of the transaction causing the decrease in ownership is not addressed in other authoritative guidance. If no other guidance exists, an entity should apply the guidance in ASC 810-10, Consolidation-Overall. The update did not have an impact on the Company’s consolidated financial statements.

Reclassifications

Certain reclassifications have been made to prior period balances in order to conform to the current period’s presentation. In particular, the 2008 gains from the Company’s repurchase of its 11  3/4% Senior Notes have been reclassified to operating activities from financing activities in the audited consolidated statements of cash flows.

Note 2. Business and Credit Concentrations

The Company principally sells products to a large base of third-party distributors, resellers and retailers throughout Latin America and the Caribbean and to other Miami-based exporters of IT products to Latin America and the Caribbean. Credit risk on trade receivables is diversified over several geographic areas and a large number of customers. No one customer accounted for more than 2.0% of sales for the years ended December 31, 2010, 2009 and 2008. The Company provides trade credit to its customers in the normal course of business. The collection of a substantial portion of the Company’s receivables is susceptible to changes in Latin American economies and political climates. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses after giving consideration to delinquency data, historical loss experience, and economic conditions impacting the industry. The Company’s management continually reviews the financial condition of its customers and the related allowance for doubtful accounts.

Prior to extending credit, the Company analyzes the customer’s financial history and, if appropriate, obtains forms of personal guarantees. The Company’s Miami Operations and In-country Operations in Chile use credit insurance and make provisions for estimated credit losses. The Company’s other In-country Operations make provisions for estimated credit losses but generally do not use credit insurance. The Company’s Miami Operations has a credit insurance policy covering trade sales to non-affiliated buyers. The policy’s aggregate limit is $20.0 million with an aggregate deductible of $1.0 million; the policy expires on

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

August 31, 2011. In addition, 10% or 20% buyer coinsurance provisions and sub-limits in coverage on a per-buyer and per-country basis apply. The policy also covers certain large, local companies in Argentina, Costa Rica, El Salvador, Guatemala, Jamaica and Peru. The Company’s In-country Operations in Chile insures certain customer accounts with Coface Chile, S.A. credit insurance company; the policy expires on October 31, 2012.

Our large customer base and our credit policies allow us to limit and diversify our exposure to credit risk on our trade accounts receivable.

In some countries there are risks of continuing periodic devaluations of local currencies. In these countries, no hedging mechanism exists. The Company’s risks in these countries are that such devaluations could cause economic loss and negatively impact future sales since its product costs would increase in local terms after such devaluations.

The Company purchases products from various suppliers located in the U.S. and Asia. Products purchased from the Company’s top two vendors accounted for 18.6% and 7.0%, 19.1% and 6.5%, and 17.4% and 7.7%, of its total revenue for the years ended December 31, 2010, 2009 and 2008, respectively.

Note 3. Property and Equipment, Net

Property and equipment, net consisted of the following:

 

     As of December 31,  
     2010     2009  

Property and equipment, net

    

Land

   $ 760      $ 735   

Building and leasehold improvements

     9,333        8,410   

Office furniture, vehicles and equipment

     11,749        11,012   

Warehouse equipment

     2,506        2,438   

Software

     9,788        8,337   
                

Total property and equipment

     34,136        30,932   

Less accumulated depreciation

     (17,806     (14,637
                

Total property and equipment, net

   $ 16,330      $ 16,295   
                

Property and equipment, net included approximately $1,614 and $2,764 of capitalized leases at December 31, 2010 and 2009, respectively. There was no interest expense capitalized to property and equipment during the years ended December 31, 2010, 2009 and 2008.

Note 4. Identifiable Intangible Assets, Net and Goodwill

Identifiable Intangible Assets, Net

Identifiable intangible assets, net consisted of the assets of Intcomex Mexico including the following:

 

As of December 31, 2010

   Gross
Carrying
Amount
     Accumulated
Amortization
    Cumulative
Foreign
Currency
Translation
Effect
    Net
Carrying
Amount
     Useful
Life

(in
years)
 

Identifiable intangible assets, net

            

Customer relationships

   $ 3,630       $ (2,025   $ (209   $ 1,396         10.0   

Trade names

     1,080         (1,080     —          —           3.5   

Non-compete agreements

     730         (730     —          —           3.0   

Patents .

     5         (5     —          —        
                                    

Total identifiable intangible assets, net

   $ 5,445       $ (3,840   $ (209   $ 1,396      
                                    

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

As of December 31, 2009

   Gross Carrying
Amount
     Accumulated
Amortization
    Cumulative
Foreign  Currency
Translation Effect
    Net Carrying
Amount
     Useful Life
(in years)
 

Identifiable intangible assets, net

            

Customer relationships

   $ 3,630       $ (1,662   $ (333   $ 1,635         10.0   

Trade names

     1,080         (1,035     (22     23         3.5   

Non-compete agreements

     730         (730     —          —           3.0   

Patents.

     5         (5     —          —        
                                    

Total identifiable intangible assets, net

   $ 5,445       $ (3,432   $ (355   $ 1,658      
                                    

For the years ended December 31, 2010, 2009 and 2008, the Company recorded amortization expense related to the intangible assets of $408, $471 and $572, respectively. There was no impairment charge for identifiable intangible assets for the years ended December 31, 2010, 2009 and 2008.

Expected future identifiable intangible asset amortization as of December 31, 2010, is as follows:

 

For the Year Ended December 31,

      

2011

   $ 363   

2012

     363   

2013

     363   

2014

     307   

2015

     —     

Thereafter

     —     
        
   $ 1,396   
        

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. In connection with our annual impairment test, we use current market capitalization, control premiums, discounted cash flows and other factors as the best evidence of fair value and to determine if our goodwill is impaired. The 2008 impairment test resulted in a substantially lower value attributable to our goodwill. The impairment charge represents the extent to which the carrying values exceed the fair value attributable to the goodwill. Fair values were determined based upon market conditions, the income approach which utilized cash flow projections and other factors.

The changes in the carrying amount of goodwill relate to the accumulated foreign currency translation effect of the Mexican Peso and consisted of the following for the periods presented:

 

     Miami
Operations
    In-Country
Operations
    Total  

As of December 31, 2010

      

Goodwill

   $ 11,531        21,108        32,639   

Accumulated impairment losses

     (11,531 )      (7,246 )      (18,777 ) 
                        

Total goodwill

   $ —        $ 13,862      $ 13,862   

As of December 31, 2009

      

Goodwill

   $ 11,531      $ 20,950      $ 32,481   

Accumulated impairment losses

     (11,531     (7,246     (18,777
                        

Total goodwill

     —          13,704        13,704   
                        

The change in goodwill during the year ended December 31, 2010 represents a net translation adjustment of $158.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

There were no goodwill impairment charges recorded for the years ended December 31, 2010 and 2009. We recorded a goodwill impairment charge of $18,777 during the year ended December 31, 2008. For the year ended December 31, 2008, the carrying amount of the goodwill decreased by $20,709, of which $1,932 relates to the cumulative foreign currency translation effect of the Mexican Peso and $18,777 relates to the goodwill impairment charge. We recorded a goodwill impairment charge of $11,531 related to our Miami Operations and $7,246 related to our In-country Operations, particularly $4,086 in Mexico, $1,294 in Guatemala, $1,157 in Jamaica, $471 in El Salvador and $238 in Argentina.

In connection with the Company’s goodwill impairment testing and analysis conducted in 2010, the Company noted that as of December 31, 2010, the fair value exceeded the carrying value of Computación Monrenca Panama, S.A., or Intcomex Panama, by 3.1%. The fair value of Intcomex Panama was determined using management’s estimate of fair value based upon the financial projections for the business. As of December 31, 2010, the balance of Intcomex Panama’s goodwill was $532, which represented 5.0% of the carrying value of Intcomex Panama and less than 1.0% of the Company’s total assets. In connection with the Company’s goodwill impairment testing and analysis conducted in 2009, the Company noted that as of December 31, 2009, the fair value exceeded the carrying value of Intcomex Mexico’s goodwill by 3.4%. The fair value of Intcomex Mexico was determined using management’s estimate of fair value based upon the financial projections for the business given the recent economic contraction in Mexico’s gross domestic product, or GDP. As of December 31, 2009, the balance of Intcomex Mexico’s goodwill was $2,946, which represented 9.5% of the carrying value of Intcomex Mexico and less than 1.0% of the Company’s total assets.

An extended period of economic contraction or a deterioration of operating performance could result in a further impairment to the carrying amount of the Company’s goodwill.

Note 5. Lines of Credit

The Company’s lines of credit are available sources of short-term liquidity for the Company. Lines of credit consist of short-term overdraft and credit facilities with various financial institutions in the countries in which the Company and its subsidiary operations conduct business consisting of the following categories: asset-based financing facilities, letter of credit and performance bond facilities, and unsecured revolving credit facilities and lines of credit.

The outstanding balance of lines of credits consisted of the following:

 

     As of December 31,  
     2010      2009  

Lines of credit

     

SBA – Miami

   $ 16,877       $ 9,165   

Intcomex de Guatemala, S.A.

     1,044         664   

Intcomex de Ecuador, S.A.

     1,000         1,000   

Intcomex Peru S.A.C.

     900         2,443   

TGM S.A. – Uruguay

     509         714   

Computación Monrenca Panama, S.A.

     500         501   

Intcomex S.A. de C.V. – El Salvador

     426         —     

Intcomex Costa Rica Mayorista en Equipo de Cómputo, S.A.

     —           242   
                 

Total lines of credit

   $ 21,256       $ 14,729   
                 

The change in the outstanding balance was primarily attributable to SBA’s increased borrowing under its senior secured revolving credit facility. As of December 31, 2010 and 2009, the total remaining credit amount available was $23,789 and $17,055, respectively.

SBA Miami—Senior Secured Revolving Credit Facility

On December 22, 2009, SBA closed a senior secured revolving credit facility with Comerica Bank (the “Senior Secured Revolving Credit Facility”), replacing the previous revolving credit facility with a three-year facility maturing in January 2013. As of December 31, 2010, the aggregate size of the Senior Secured Revolving Credit Facility was $30,000, including letter of credit commitments of $200 and a capital expenditures limit of $1,000.

On May 21, 2010, SBA and Comerica Bank executed an amendment to the Senior Secured Revolving Credit Facility, amending the definition of consolidated net income to exclude, in the event of an IPO, not more than $12,000 of interest charges arising from the accelerated amortization of the original issue discount, capitalized debt expense and premiums associated with a redemption of the Company’s $120,000 aggregate principal amount of its 13 1/4% Senior Notes in connection with an IPO.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

On June 4, 2010, SBA and Comerica Bank executed a second amendment to the Senior Secured Revolving Credit Facility, increasing the revolving credit commitment by $10,000, the maximum optional increase permitted in accordance with the terms of the facility, from its original aggregate size of $20,000 to $30,000. Under the amendment, interest is due monthly at the daily adjusting LIBOR rate, at no time less than 2.0% per annum (unless in the event of an IPO, in which case 1.0% per annum), plus an applicable margin of 3.0% per annum, unless in the event of an IPO and provided that no default occurs, when interest will accrue at a rate equal to the daily adjusting LIBOR rate plus an applicable margin of 2.75% per annum. In addition, the second amendment amended the borrowing capacity to reflect advances under the facility to be provided based upon 85.0% of eligible domestic and foreign accounts receivable plus the lesser of 60.0% of eligible domestic inventory or $16.0 million, plus the lesser of 90.0% of eligible standby letters of credit or $3.0 million. Further, the Company is required to maintain consolidated net income of not less than $0 for the period of four consecutive fiscal quarters as of the end of each fiscal quarter ending June 30, 2010 and each fiscal quarter ended thereafter.

The Senior Secured Revolving Credit Facility contains certain financial and non-financial covenants, including but not limited to, maintenance of a minimum level of tangible effective net worth, as defined and annual limitations on capital expenditures. The Senior Secured Revolving Credit Facility contains a number of covenants that, among other things, restrict SBA’s ability to (i) incur additional indebtedness; (ii) make certain capital expenditures; (iii) guarantee certain obligations; (iv) create or allow liens on certain assets; (v) make investments, loans or advances; (vi) pay dividends, make distributions or undertake stock and other equity interest buybacks; (vii) make certain acquisitions; (viii) engage in mergers, consolidations or sales of assets; (ix) use the proceeds of the revolving credit facility for certain purposes; (x) enter into transactions with affiliates in non-arms’ length transactions; (xi) make certain payments on subordinated indebtedness; and (xii) acquire or sell subsidiaries. The Senior Secured Revolving Credit Facility also requires SBA to maintain certain ratios of debt, income, net worth and other restrictive financial covenants.

Borrowings under the Senior Secured Revolving Credit Facility are secured on a first priority basis with all the assets of SBA and can be repaid and re-borrowed at any time during the term of the facility. Borrowing capacity is established bi-monthly based upon certain parameters established under the facility. Advances under the facility were provided based on 85.0% of eligible domestic and foreign accounts receivable plus 60.0% of eligible domestic inventory, less any credit facility reserves.

As of December 31, 2010 and 2009, SBA’s outstanding draws against the Senior Secured Revolving Credit Facility were $15,186 and $5,853, respectively, and the remaining amounts available were $12,923 and $10,635, respectively. As of December 31, 2010 and 2009, SBA’s outstanding checks issued in excess of bank balances were $1,691 and $3,312, respectively, and outstanding undrawn stand-by letters of credit were $200. As of December 31, 2010, SBA was in default with certain covenants under the Senior Secured Revolving Credit Facility.

On March 28, 2011, SBA obtained a waiver of the covenant defaults as of December 31, 2010. SBA obtained an amendment to the Senior Secured Revolving Credit Facility, reducing the aggregate size of the facility to $25.0 million and updating the financial convents requiring SBA to:

 

   

maintain a total leverage ratio of not greater than 5.00 to 1.00 for the quarters ending March 31, 2011 and June 30, 2011, 4.50 to 1.00 for the quarters ending September 30, 2011 and December 31, 2011, 4.00 to 1.00 for the quarter ending March 31, 2012 and each quarter ending thereafter; and,

 

   

maintain on a year-to-date basis through December 31, 2011, consolidated net income of not less than $(2.5) million for the quarter ended March 31, 2011, $(2.0) million for the quarter ended June 30, 2011, $(1.5) million for the quarter ended September 30, 2011, $(1.0) million for the quarter ended December 31, 2011, and, on a rolling four-quarter basis, not less than $(0.5) million for the quarter ended March 31, 2012 and $0 for each quarter ending thereafter.

Additionally, during March 2011, while in the process of amending the Senior Secured Revolving Credit Facility, it was identified that the Company may have violated the consolidated fixed charge coverage ratio as of June 30, 2010. Due to ambiguity in the definition of the term Applicable Measuring Period, the Company may have violated the consolidated fixed charge coverage ratio under one possible interpretation. Accordingly, while neither party concluded that the Company did in fact violate the covenant, Comerica did provide a waiver for the potential covenant violation as, of June 30, 2010.

Intcomex de Guatemala, S.A.

Intcomex de Guatemala, S.A. (“Intcomex Guatemala”) has two lines of credit with two local financial institutions. The lines of credit carry interest rates of 7.5% and 11.0% and mature in March 2011 and October 2013, respectively.

Intcomex de Ecuador, S.A.

Intcomex de Ecuador, S.A. (“Intcomex Ecuador”) has one line of credit with a local financial institution. The line of credit carries interest rates of 10.2% and matures in March 2011.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Intcomex Peru S.A.C.

Intcomex Peru S.A.C. (“Intcomex Peru”) has two lines of credit with two local financial institutions. The lines of credit are collateralized with a guarantee from Holdings and carry interest rates ranging from 3.9% to 4.5% and mature in March and October 2011.

T.G.M. S.A.

TGM S.A. Uruguay (“Intcomex Uruguay”) has two lines of credit with two local financial institutions. The lines of credit carry interest rates of 5.5% and 7.0%, each of which matures in April 2011.

Computación Monrenca Panama, S.A.

Computación Monrenca Panama, S.A. (“Intcomex Panama”) has three lines of credit with three local financial institutions. The lines of credit carry interest rates ranging from 6.3% to 6.8% and mature in April, June and September 2011.

Intcomex S.A. de C.V.

Intcomex S.A. de C.V. (“Intcomex El Salvador”) has two lines of credit with local financial institutions. The lines of credit carry an interest rate of 9.0% and mature in March and May 2011.

Intcomex Costa Rica Mayorista en Equipo de Cómputo, S.A.

Intcomex Costa Rica Mayorista en Equipo de Cómputo, S.A. (“Intcomex Costa Rica”) has one line of credit with a local financial institution. The line of credit carries an interest rate of 8.0% and matures in August 2011.

Intcomex S.A.

As of December 31, 2010 and 2009, Intcomex S.A. (“Intcomex Chile”) had undrawn stand-by letters of credit of $13,200 and $19,600, respectively.

Note 6. Long-Term Debt

Long-term debt consisted of the following for the periods presented:

 

     As of December 31,  
     2010     2009  

Long-term debt, net of current portion

    

Intcomex, Inc. – 13 1/4% Senior Notes, net of discount of $5,317 and $6,654, respectively

   $ 114,683      $ 113,346   

SBA – Capital lease

     539        847   

Intcomex Peru – Collateralized notes

     425        579   

Other, including various capital leases

     604        210   
                

Total long-term debt

     116,251        114,982   

Current maturities of long-term debt

     (5,693     (557
                

Total long-term debt, net of current portion

   $ 110,558      $ 114,425   
                

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Annual maturities of long-term debt as of December 31, 2010 are as follows:

 

For the Years Ended December 31,

      

2011

   $ 5,693   

2012

     5,581   

2013

     10,251   

2014

     100,043   

2015 and thereafter

     —     
        
   $ 121,568   
        

Intcomex, Inc. – 13 1/4% Senior Notes

On December 22, 2009, the Company completed a private offering (the “13 1/4% Senior Notes Offering”) to eligible purchasers of $120,000 aggregate principal amount of its 13 1/4% Senior Notes due December 15, 2014 with an interest rate of 13.25% per year, payable semi-annually on June 15 and December 15 of each year, commencing on June 15, 2010. The 13 1/4% Senior Notes were offered at an initial offering price of 94.43% of par, or an effective yield to maturity of approximately 14.875%.

The Company used the net proceeds from the 13 1/4% Senior Notes Offering to, among other things, repay borrowings under its previous senior secured revolving credit facility, fund the repurchase, redemption or other discharge of its 11 3/4% Second Priority Senior Secured Notes, due January 15, 2011 (the “11 3/4% Senior Notes”), for which it conducted a tender offer, and for general corporate purposes.

In connection with the 13 1/4% Senior Notes Offering, the Company and certain subsidiaries of the Company that guaranteed the Company’s obligations (the “Guarantors”) entered into an indenture (the “13 1/4% Senior Notes Indenture”) with The Bank of New York Mellon Trust Company, N.A., (the “Trustee”), relating to the 13 1/4% Senior Notes. The Company’s obligations under the 13 1/4% Senior Notes and the Guarantors’ obligations under the guarantees will be secured on a second priority basis by a lien on 100% of the capital stock of certain of the Company’s and each Guarantor’s directly owned domestic restricted subsidiaries; 65% of the capital stock of the Company’s and each Guarantor’s directly owned foreign restricted subsidiaries; and substantially all the assets of SBA, to the extent that those assets secure the Company’s Senior Secured Revolving Credit Facility with Comerica Bank, subject to certain exceptions.

Subject to certain requirements, the Company is required to redeem $5,000 aggregate principal amount of the 13 1/4% Senior Notes on December 15 of each of the years 2011 and 2012 and $10,000 aggregate principal amount of the 13 1/4% Senior Notes on December 15, 2013, at a redemption price equal to 100% of the aggregate principal amount of the 13 1/4% Senior Notes to be redeemed, together with accrued and unpaid interest to the redemption date subject to certain requirements. The Company may redeem the 13 1/4% Senior Notes, in whole or in part, at any time on or after December 15, 2012 at a price equal to 100% of the aggregate principal amount of the 13 1/4% Senior Notes plus a “make-whole” premium (106.625% in 2012 and 100.0% in 2013 and thereafter). At any time prior to December 15, 2012, the Company is required to redeem up to 35% of the aggregate principal amount of the 13 1/4% Senior Notes with the net cash proceeds of an initial public offering which occurs on or prior to December 15, 2012 at a price equal to 113.25% of the principal amount of the 13 1/4% Senior Notes. In addition, at its option, the Company may redeem up to 10% of the original aggregate principal amount of the 13 1/4% Senior Notes three different times at $103.00 (but no more than once in any 12-month period).

The indenture governing the Company’s 13 1/4% Senior Notes imposes operating and financial restriction on the Company. These restrictive covenants limit our ability, among other things to (i) incur additional indebtedness or enter into sale and leaseback obligations; (ii) pay certain dividends or make certain distributions on the Company’s capital stock or repurchase the Company’s capital stock; (iii) make certain investments or other restricted payments; (iv) place restrictions on the ability of subsidiaries to pay dividends or make other payments to the Company; (v) engage in transactions with shareholders or affiliates; (vi) sell certain assets or merge with or into other companies; (vii) guarantee indebtedness; and (viii) create liens. The Company may only pay a dividend if the Company is in compliance with all covenants and restrictions in the Indenture prior to and after payment of a dividend.

 

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INTCOMEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

On June 15, 2010 and December 15, 2010, the Company made mandatory interest payments of $7,641 and $7,950, respectively, on the 13 1/4% Senior Notes. As of December 31, 2010 and 2009, the carrying value of the $120,000 principal amount of the 13 1/4% Senior Notes was $114,683 and $113,346, respectively. As of December 31, 2010, the Company was in compliance with all of the covenants and restrictions under the 13 1/4% Senior Notes.

On February 8, 2011, the Company commenced an exchange offer for all of its 13 1/4% Senior Notes not registered under the Securities Act of 1933, for an equal principal amount of 13 1/4% Second Priority Senior Secured Notes due 2014, which have been registered under the Securities Act of 1933 (the “New 13 1