GLOBAL INDUSTRIAL Co - Quarter Report: 2003 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2003
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _____________
COMMISSION FILE NUMBER 1-13792
Systemax Inc.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
11-3262067 (I.R.S. Employer Identification No.) |
11 Harbor Park Drive
Port Washington, New York 11050
(Address of registrant's principal executive offices)
(516) 608-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The number of shares outstanding of the registrant's Common Stock as of May 9, 2003 was 34,108,129.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Systemax Inc.
Condensed Consolidated Balance Sheets
(In Thousands, except share data)
March 31, December 31,
2003 2002
-------------- ----------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 42,572 $ 62,995
Accounts receivable, net 154,592 148,554
Inventories 113,978 98,401
Prepaid expenses and other current assets 38,354 31,343
Deferred income tax benefits 7,059 9,073
--------- ----------
Total current assets 356,555 350,366
PROPERTY, PLANT AND EQUIPMENT, net 69,813 71,133
DEFERRED INCOME TAX BENEFITS 14,131 15,100
OTHER ASSETS 980 1,305
--------- ----------
TOTAL $ 441,479 $ 437,904
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Amounts due to banks $ 9,530 $ 21,211
Accounts payable 143,033 131,510
Accrued expenses and other current liabilities 62,571 64,349
--------- ----------
Total current liabilities 215,134 217,070
--------- ----------
Long-term debt 17,042 17,519
Other liabilities 1,613 1,398
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, authorized 25 million shares,
issued none
Common stock, par value $.01 per share, authorized 150 million shares,
issued 38,231,990 shares, outstanding 34,104,290 shares 382 382
Additional paid-in capital 176,743 176,743
Accumulated other comprehensive loss (1,392) (2,130)
Retained earnings 80,446 75,411
--------- ----------
256,179 250,406
--------- ----------
Less: Common stock in treasury at cost - 4,127,700 shares 48,489 48,489
--------- ----------
Total shareholders' equity 207,690 201,917
--------- ----------
TOTAL $ 441,479 $ 437,904
========= ==========
See notes to condensed consolidated financial statements.
Systemax Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(In Thousands, except per share amounts)
Three Months Ended
March 31,
---------
2003 2002
---- ----
Net sales $426,461 $412,260
Cost of sales 356,464 338,412
--------------- ---------------
Gross profit 69,997 73,848
Selling, general and administrative expenses 61,320 72,730
Restructuring and other charges 112 133
--------------- ---------------
Income from operations 8,565 985
Interest and other expense, net 214 13
--------------- ---------------
Income before income taxes 8,351 972
Provision for income taxes 3,316 387
--------------- ---------------
Income before cumulative effect of change in accounting principle, net of tax 5,035 585
Cumulative effect of change in accounting principle, net of tax (50,971)
--------------- ---------------
Net income (loss) $5,035 $(50,386)
=============== ===============
Net income (loss) per common share, basic and diluted:
Income before cumulative effect of change in accounting principle, net of tax $.15 $.02
Cumulative effect of change in accounting principle, net of tax (1.50)
--------------- ---------------
Net income (loss) $.15 $(1.48)
=============== ===============
Common and common equivalent shares outstanding:
Basic and diluted 34,109 34,109
=============== ===============
See notes to condensed consolidated financial statements
Systemax Inc.
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
(In Thousands)
Common Stock Accumulated
------------------------- Other
Comprehensive
Additional Income Treasury
Number of Paid-in Retained (Loss), Net Stock Comprehensive
Shares Amount Capital Earnings of Tax At Cost Income
---------- ------ ---------- -------- -------------- ---------- ---------------
Balances,
January 1, 2003 34,104 $382 $176,743 $75,411 $(2,130) $(48,489)
Change in cumulative
translation
adjustment 738 $738
Net income 5,035 5,035
-------- ------ --------- ------- ------- --------- -------
Total comprehensive
income $5,773
======
Balances,
March 31, 2003 34,104 $382 $176,743 $80,446 $(1,392) $(48,489)
====== ======== ======== ======= ========
See notes to condensed consolidated financial statements.
Systemax Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Three Months
Ended March 31,
------------------------------
2003 2002
---- ----
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $5,035 $(50,386)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Cumulative effect of accounting change, net 50,971
Provision for deferred income taxes 2,052 2,061
Depreciation and amortization, net 3,463 3,520
Provisions for returns and doubtful accounts 1,242 1,321
Loss on dispositions 18
Changes in certain assets and liabilities:
Accounts receivable (6,047) (22,391)
Inventories (15,342) (9,034)
Prepaid expenses and other current assets (7,364) (195)
Accounts payable, accrued expenses and other current liabilities 7,642 6,269
------------- ---------------
Net cash used in operating activities (9,301) (17,864)
------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Investments in property, plant and equipment (2,552) (3,508)
Proceeds from disposals of property, plant and equipment 61 124
------------- ---------------
Net cash used in investing activities (2,491) (3,384)
------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds (repayments) of borrowings from banks (11,439) 7,984
Repayments of long-term debt (311)
------------- ---------------
Net cash provided by (used in) financing activities (11,750) 7,984
------------- ---------------
EFFECTS OF EXCHANGE RATES ON CASH 3,119 (965)
------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (20,423) (14,229)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 62,995 36,464
------------- ---------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $42,572 $22,235
============= ===============
See notes to condensed consolidated financial statements.
Systemax Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
| 1. | Description of Business |
| The Company is a direct marketer of brand name and private label products, including personal desktop computers (PCs), notebook computers, computer related products and industrial products in North America and Europe. Systemax markets these products through an integrated system of distinctively branded full-color direct mail catalogs, proprietary "e-commerce" Internet sites and personalized "relationship marketing" to business customers. |
| 2. | Basis of Presentation |
| The accompanying condensed consolidated financial statements include the accounts of Systemax Inc. and its wholly-owned subsidiaries (collectively, the "Company" or "Systemax"). All significant intercompany accounts and transactions have been eliminated in consolidation. The equity method of accounting is used for the Company's investment in a 50%-owned joint venture, over which the Company exercises significant influence. The results of operations of this investee are not material to the results of operations of the Company. The joint venture brokers paper, a significant portion of which is used by the Company in printing its catalogs. |
| Net income (loss) per common share - basic was calculated based upon the weighted average number of common shares outstanding during the respective periods presented. Net income (loss) per common share – diluted was calculated based upon the weighted average number of common shares outstanding and included the equivalent shares for dilutive options outstanding during the respective periods. All options were anti-dilutive as of March 31, 2003 and 2002. |
| The Company adopted Statement of Financial Accounting Standards ("SFAS") 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 requires companies to recognize the costs associated with exit or disposal activities when they are incurred. SFAS 146 is effective for exit or disposal activities that are initiated subsequent to December 31, 2002. The adoption of this Statement did not have a significant impact on the Company's condensed consolidated financial statements. |
| The Company adopted SFAS 148, "Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123". SFAS 148 amends SFAS 123 "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, this Statement amends Accounting Principles Board ("APB") Opinion 28, "Interim Financial Reporting", to require disclosure about those effects in interim financial information (see Note 3). SFAS 148 is effective for fiscal years ending after December 15, 2002. The Company will continue to account for stock-based compensation using the intrinsic value method of APB Opinion 25, "Accounting for Stock Issued to Employees". |
| In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of March 31, 2003 and the results of operations for the three month periods ended March 31, 2003 and 2002, cash flows for the three months ended March 31, 2003 and 2002 and changes in shareholders' equity for the three months ended March 31, 2003. The December 31, 2002 Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. |
| These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements as of December 31, 2002 and for the year then ended. The results for the three months ended March 31, 2003 are not necessarily indicative of the results for an entire year. |
| 3. | Stock-based Compensation |
| The Company has three stock-based employee compensation plans. The Company has elected to follow the accounting provisions of APB Opinion 25 for stock-based compensation and to provide the pro forma disclosures required under SFAS 148. No stock-based employee compensation cost is reflected in net income, as all options granted under the plans have an exercise price equal to the market value of the underlying stock on the date of grant. The following table illustrates the effect on net income (loss) and earnings (loss) per share had compensation costs of the plans been determined under a fair value alternative method as stated in SFAS 123, (in thousands, except per share data): |
Three Months Ended
March 31,
2003 2002
---- ----
Net income (loss) - as reported $5,035 $(50,386)
Stock-based employee compensation expense determined under fair
value based method, net of related tax effects 135 178
------ ---------
Pro forma net income (loss) $4,900 $(50,564)
====== =========
Basic and diluted net income (loss) per common share:
Net income (loss) - as reported $.15 $(1.48)
==== =======
Net income (loss) - pro forma $.14 $(1.48)
==== =======
The fair value of options granted was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
2003 2002
---- ----
Expected dividend yield 0% 0%
Risk-free interest rate 5.0% 5.6%
Expected volatility 68.0% 71.0%
Expected life in years 2.41 2.52
| 4. | Comprehensive Income |
| Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments and is included in the Condensed Consolidated Statement of Shareholders' Equity. For the three month periods, comprehensive income (loss) was $5,773,000 in 2003 and $(51,206,000) in 2002 net of tax effects on foreign currency translation adjustments of $(799,000) in 2003 and $744,000 in 2002. |
| 5. | Business Combinations and Goodwill |
| Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets," which established new accounting and reporting requirements for goodwill and other intangible assets. SFAS 142 requires that goodwill amortization be discontinued and replaced with periodic tests of impairment. With the adoption of SFAS 142, management determined that the carrying value of the Company was impaired in an amount greater than the carrying value of goodwill. As required by SFAS 142, the entire carrying value of goodwill was written off. This write-off, $68 million ($51 million or $1.50 per share, net of tax), was reported as a cumulative effect of a change in accounting principle, on a net of tax basis, in the Company's Consolidated Statement of Operations for the year ended December 31, 2002. The adoption of SFAS 142 had no cash flow impact on the Company. |
| 6. | Credit Facilities |
| The Company maintains a $70 million revolving credit agreement with a group of financial institutions which provides for borrowings in the United States. The borrowings are secured by all of the domestic accounts receivable and inventories of the Company and the Company's shares of stock in its domestic subsidiaries. The revolving credit agreement contains certain financial and other covenants, including restrictions on capital expenditures and payments of dividends. The credit facility expires and outstanding borrowings thereunder are due on June 15, 2004. As of March 31, 2003, availability under the agreement was $58.3 million, of which the Company may not draw $20 million through June 30, 2003. There were outstanding letters of credit of $7.3 million and there were no outstanding advances. |
| The Company also has a £15 million ($23.7 million at the March 31, 2003 exchange rate) multi-currency credit facility with a United Kingdom financial institution, which is available to its United Kingdom subsidiaries. The facility does not have a termination date, but may be canceled with six months notice beginning in December 2003. Borrowings under the facility are secured by certain assets of the Company's United Kingdom subsidiaries. At March 31, 2003 there were £5.2 million ($8.3 million) of borrowings outstanding under this line with interest payable at a rate of 5.69%. |
| 7. | Guarantees |
| The Company has provided financial guarantees from time to time to a number of vendors on behalf of its 50%-owned joint venture (see Note 2) for trade obligations in the normal course of its business. The amount of such guarantees is limited to $7 million pursuant to the terms of the Company's revolving credit agreement. As of March 31, 2003 the amount of such guarantees totaled $0.8 million. The Company has not been required to perform on any of these guarantees and as a result, estimates that the fair value of these guarantees is minimal. Accordingly, the Company has recorded no liabilities for these guarantees at March 31, 2003. |
| 8. | Segment Information |
| The Company is engaged in a single reportable segment, the marketing and sales of various business products. Financial information relating to the Company's operations by geographic area was as follows: |
Three Months Ended
March 31,
---------
2003 2002
---- ----
Net Sales (in thousands):
North America $259,831 $257,952
Europe 166,630 154,308
------- -------
Consolidated $426,461 $412,260
======== ========
Revenues are attributed to countries based on location of selling subsidiary.
| 9. | Recent Accounting Pronouncements |
| In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation 45 ("FIN 45") "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", which requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties or to guarantees accounted for as derivatives. FIN 45 also elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has made the required disclosures as of March 31, 2003. The adoption of the recognition and measurement provisions of FIN 45 did not have a material effect on the Company's consolidated financial statements. |
| In January 2003, the FASB issued Interpretation 46 ("FIN 46"), "Consolidation of Variable Interest Entities", which requires the consolidation of variable interest entities, as defined. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The Interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The only variable interest entity of the Company is a 50%-owned joint venture disclosed in Note 2. The Company is evaluating the impact of this Interpretation on its consolidated financial results. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
| Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 |
| Net sales for the three months ended March 31, 2003 increased 3.4% to $426.5 million compared to $412.3 million in the year-ago quarter. North American sales were $259.8 million, an increase of less than one percent from $258.0 million in the prior year. European sales increased 8% to $166.6 million (representing 39% of worldwide sales) compared to $154.3 million (37% of worldwide sales) in the year-ago quarter. Movements in foreign exchange rates positively impacted the European sales comparison by approximately $24.5 million in 2003. Excluding the movements in foreign exchange rates, European sales would have decreased 7.9% from the prior year. |
| Gross profit was $70.0 million, or 16.4% of net sales, compared to $73.8 million, or 17.9% of net sales, in the year-ago quarter, a decrease of $3.9 million. The decline in the gross profit percentage was due to continued pricing pressure and changes in the mix of products sold. |
| Selling, general and administrative expenses for the quarter decreased $11.4 million or 15.7% to $61.3 million compared to $72.7 million in the first quarter of 2002. This decrease resulted from reduced advertising expenses and the elimination of consulting fees associated with information technology projects undertaken in the prior year. As a percentage of net sales, selling, general and administrative expenses were 14.4% compared to 17.6% in the year-ago quarter. |
| The Company had income from operations for the current quarter of $8.6 million compared to $1.0 million in the year-ago quarter. The Company had income from operations of $5.8 million in its North American operations in the current quarter compared to a loss from operations of $1.7 million last year. Income from operations in Europe was $2.8 million, compared to $2.7 million in the year-ago quarter. |
| Interest and other expense - net consists principally of interest expense. Interest expense increased in 2003 as a result of interest on long-term borrowings, partially offset by interest income on invested funds in the United States. |
| The effective income tax rate for the first quarter of 2003 was 39.7%, compared to 39.8% in the year ago period. |
| During the first half of 2002, the Company completed the transitional review for goodwill impairment required by SFAS 142. The review indicated that the entire carrying value of the goodwill recorded on the Company's Consolidated Balance Sheet was impaired as of January 1, 2002. Accordingly, the Company recorded a transitional impairment loss of $68 million ($51 million net of tax or a net loss per share of $1.50) as a cumulative effect of change in accounting principle in its Consolidated Statement of Operations for the year ended December 31, 2002. |
| As a result of the above, net income for the first
quarter was $5.0 million, or $.15 per basic and diluted share, compared to a net
loss of $50.4 million, or $1.48 per basic and diluted share, in the first
quarter of 2002. Liquidity and Capital Resources |
| The Company's cash and cash equivalents totaled $42.6 million at March 31, 2003, a decrease of $20.4 million during the three-month period. For the three months ended March 31, 2003, the Company used cash in operating activities of $9.3 million compared to $17.9 million used in the year ago period. Cash was used in investing activities in 2003 ($2.6 million) and 2002 ($3.5 million) for the purchase of property, plant and equipment. Cash of $11.8 million was used in financing activities in 2003 to repay short-term bank borrowings and long-term debt. In 2002, $8 million of cash was provided by financing activities from bank borrowings. |
| The Company's working capital at March 31, 2003 was $141 million, an increase of $8 million from $133 million at the end of 2002, due principally to a $6 million increase in accounts receivable, a $16 million increase in inventories, a $5 million increase in prepaid expenses and other current assets and an $12 million decrease in amounts due to banks, offset by a $20 million decrease in cash and a $10 million increase in accounts payable and accrued expenses. |
| Under the Company's $70 million revolving credit agreement, which expires in June 2004, availability as of March 31, 2003 was $58.3 million, of which the Company may not draw $20 million through June 30, 2003. There were outstanding letters of credit of $7.3 million and there were no outstanding advances. Under the Company's £15 million ($23.7 million at the March 31, 2003 exchange rate) multi-currency United Kingdom credit facility, there were £5.2 million ($8.3 million) of borrowings outstanding as of March 31, 2003. |
| The Company has certain obligations with various
parties that include commitments to make future payments. The Company's
principal commitments at March 31, 2003 consisted of repayments of borrowings
under its credit agreements and mortgages and obligations under operating leases
for certain of its real property and equipment. Off-balance Sheet Arrangements |
| The Company has not created, and is not party to, any
special-purpose or off-balance sheet entities for the purpose of raising
capital, incurring debt or operating the Company's business. The Company does
not have any arrangements or relationships with entities that are not
consolidated into the financial statements that are reasonably likely to
materially affect the Company's liquidity or the availability of capital
resources. Forward Looking Statements - Factors That May Affect Future Results |
| This report contains forward looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward looking statements may be made by the Company from time to time, in filings with the Securities Exchange Commission or otherwise. Statements contained in this report that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, financing needs, compliance with financial covenants in loan agreements, plans for acquisition or sale of assets or businesses and consolidation of operations of newly acquired businesses, and plans relating to products or services of the Company, assessments of materiality, predictions of future events and the effects of pending and possible litigation, as well as assumptions relating to the foregoing. In addition, when used in this discussion, the words "anticipates", "believes", "estimates", "expects", "intends", "plans" and variations thereof and similar expressions are intended to identify forward looking statements. |
| Forward looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified based
on current expectations. Consequently, future events and results could differ
materially from those set forth in, contemplated by, or underlying the forward
looking statements contained in this report. Statements in this report,
particularly in "Item 1. Business", "Item 3. Legal Proceedings", "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Notes to Consolidated Financial Statements describe certain
factors, among others, that could contribute to or cause such
differences. Some of the factors that may affect future results are discussed below. |
| • | The Company and the Company's customers are subject to global political, economic and market conditions, including military action and the threat of terrorism. The United States has been experiencing a prolonged economic downturn, which has now extended to Europe. The Company has yet to see significant improvement in economic conditions and cannot predict when improvements might occur. The Company's results have been and could continue to be adversely affected depending on the length and severity of the current economic downturn. The Company may experience a decline in sales as a result of the current economic conditions and the lack of visibility relating to future orders. In response to economic conditions, the Company from time to time adjusts its cost structure to reduce spending where appropriate. A failure by the Company to reduce costs in a timely manner could adversely affect the Company's future operating results. In addition, notwithstanding such cost control measures, a continuing decline in the economy that adversely affects the Company's customers, causing them to limit their spending, would likely adversely affect the Company as well. |
| • | The Company's consolidated results of operations depends upon, among other things, its ability to maintain and increase sales volumes with existing customers, its ability to attract new customers and the financial condition of its customers. The Company cannot predict with any certainty whether it will be able to maintain or improve upon historical sales volumes with existing customers, or whether it will be able to attract new customers. |
| • | The Company may not be able to compete effectively with current or future competitors. The market for the Company's products and services is intensely competitive and subject to constant technological change. The Company expects this competition to further intensify in the future. Some competitors are large companies with greater financial, marketing and product development resources than the Company's. In addition, new competitors may enter the Company's key markets. This may place the Company at a disadvantage in responding to competitors' pricing strategies, technological advances and other initiatives, resulting in the Company's inability to maintain its gross margins in the future. |
| • | In many cases the Company's products compete directly with those offered by other manufacturers and distributors. If any of the Company's competitors were to develop products or services that are more cost-effective or technically superior, demand for the Company's product offerings could decrease. |
| • | The Company purchases certain materials and components for its products from various suppliers, some of which are located outside of the U.S. Any loss of, or interruption of supply from key suppliers may require the Company to find new suppliers. This could result in production or development delays while new suppliers are located, which could substantially impair operating results. |
| • | The Company's PC products contain electronic components, subassemblies and software that in some cases are supplied through sole or limited source third-party suppliers. Although the Company does not anticipate any problems procuring supplies in the near-term, there can never be any assurance that parts and supplies will be available in a timely manner and at reasonable prices. If the availability of these or other components used in the manufacture of our products was to decrease, or if the prices for these components was to increase significantly, operating costs and expenses could be adversely affected. |
| • | A significant portion of the Company's revenues are derived from the sale of products manufactured using licensed patents, software and/or technology. Failure to renew these licenses on favorable terms or at all could force the Company to stop manufacturing and distributing these products and the Company's financial condition could be adversely affected. |
| • | The Company's inventory is subject to risk due to technological change and changes in market demand for particular products. The resulting excess and/or obsolete inventory could have an adverse impact on the Company's results of operations. |
| • | The Company currently has operations located in nine countries outside the United States, and non-U.S. sales accounted for 40% of the Company's revenue during the first quarter of 2003. The Company's future results could be adversely affected by several factors, including changes in foreign currency exchange rates, changes in a country's economic or political conditions, unexpected changes in regulatory requirements and natural disasters. |
| • | It is the policy of the Company to insure for certain property and casualty risks consisting primarily of physical loss to property, business interruptions resulting from property losses, workers' compensation, comprehensive general liability, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. Although the Company believes that its insurance coverage is reasonable, significant events such as acts of war and terrorism, economic conditions, judicial decisions, legislation and large losses could materially affect the Company's insurance obligations and future expense. |
| • | The Company maintains credit facilities in the United States and in the United Kingdom. If the Company is unable to renew or replace these facilities at maturity, its liquidity and capital resources may be adversely affected. However, the Company has no reason to believe that it will not be able to renew its facilities. |
Other factors that could contribute to or cause such differences include, but are not limited to, unanticipated developments in any one or more of the following areas: (i) the effect on the Company of volatility in the price of paper and periodic increases in postage rates, (ii) the operation of the Company's management information systems, (iii) significant changes in the computer products retail industry, especially relating to the distribution and sale of such products, (iv) the potential for expanded imposition of state sales taxes, use taxes, or other taxes on direct marketing and e-commerce companies, (v) timely availability of existing and new products, (vi) risks involved with e-commerce, including possible loss of business and customer dissatisfaction if outages or other computer-related problems should preclude customer access to the Company, (vii) risks associated with delivery of merchandise to customers by utilizing common delivery services such as the United States Postal Service and United Parcel Service, including possible strikes and contamination, (viii) borrowing costs or availability, (ix) changes in taxes due to changes in the mix of U.S. and non-U.S. revenue, (x) pending or threatened litigation and investigations and (xi) the availability of key personnel, as well as other risk factors which may be detailed from time to time in the Company's Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward looking statements contained in this report, which speak only as of the date of this report. The Company undertakes no obligation to publicly release the result of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
| The Company is exposed to market risks, which include changes in U.S. and
international interest rates as well as changes in currency exchange rates as
measured against the U.S. dollar and each other. The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. Changes in currency exchange rates as measured against the U.S. dollar may positively or negatively affect Systemax's sales, gross margins, operating expenses and retained earnings as expressed in U.S. dollars. The Company may enter into foreign currency options or forward exchange contracts aimed at limiting in part the impact of certain currency fluctuations, but as of March 31, 2003 the Company had no outstanding forward exchange contracts. |
| The Company's exposure to market risk for changes in interest rates relates primarily to the Company's variable rate debt. In connection with the term loan agreement entered into in the United Kingdom, effective April 30, 2002 the Company entered into an interest rate collar agreement to reduce its exposure to market rate fluctuations. At March 31, 2003 the notional amount of the interest rate collar was £6.4 million ($10.2 million) with an interest rate cap of 6.0% and a floor of 4.5%. The interest rate collar expires on April 30, 2005. |
Item 4. Controls andProcedures
| The Company maintains a system of internal controls and procedures designed to provide reasonable assurance that information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The Company's principal executive and financial officers have evaluated the disclosure controls and procedures within 90 days prior to the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the completion of the evaluation. |
PART II - OTHER INFORMATION
Item 6. Exhibits
| (a) | Exhibits. |
| 3.1 | Composite Certificate of Incorporation of Registrant, as amended. (Incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.) |
| 3.2 | By-laws of Registrant. (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, File No. 33-92052). |
| 4.1 | Stockholders Agreement. (Incorporated herein by reference to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 1995). |
| 4.2 | Specimen Stock Certificate. (Incorporated herein by reference to Exhibit 19.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001). |
| 99.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 99.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| (b) | Reports on Form 8-K. |
| (i) A report on Form 8-K was filed by the Company on February 28, 2003 regarding the Company's financial results for the fourth quarter and year ended December 31, 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SYSTEMAX INC. |
| Date: May 14, 2003 | By: /s/ RICHARD LEEDS
Richard Leeds Chairman and Chief Executive Officer By: /s/ STEVEN GOLDSCHEIN Steven Goldschein Senior Vice President and Chief Financial Officer |
CERTIFICATION UNDER SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Richard Leeds, Chief Executive Officer of Systemax Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Systemax Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within these entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: May 14, 2003
/s/ RICHARD LEEDS
Richard Leeds, Chief Executive Officer
CERTIFICATION UNDER SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Steven M. Goldschein, Chief Financial Officer of Systemax Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Systemax Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within these entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: May 14, 2003
/s/ STEVEN M. GOLDSCHEIN
Steven M. Goldschein, Chief Financial Officer