For the transition period from to Commission File Number:1-13792
Systemax Inc. (Exact name of registrant as specified in its charter)
11 Harbor Park Drive Port Washington, New York 11050(Address of principal executive offices, including zip code)
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 [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best knowledge of the registrant, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large Accelerated Filer [ ] Accelerated Filer [ ] Non Accelerated Filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2006, which is the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $73,985,207. For purposes of this computation, all executive officers and directors of the Registrant and all parties to the Stockholders Agreement dated as of June 15, 1995 have been deemed to be affiliates. Such determination should not be deemed to be an admission that such persons are, in fact, affiliates of the Registrant. The number of shares outstanding of the registrant’s common stock as of March 1, 2007 was 35,843,259 shares. Documents incorporated by reference: Portions of the Proxy Statement of Systemax Inc. relating to the 2007 annual meeting of stockholders are incorporated by reference in Part III hereof.
PART I
Unless otherwise indicated, all references herein to Systemax Inc. (sometimes referred to as “Systemax,” the “Company” or “we”) include its subsidiaries.
Forward Looking Statements
This report contains forward looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward looking statements may be made by the Company from time to time, in filings with the Securities and Exchange Commission or otherwise. Statements contained in this report that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, financing needs, compliance with financial covenants in loan agreements, plans for acquisition or sale of assets or businesses and consolidation of operations of newly acquired businesses, and plans relating to products or services of the Company, assessments of materiality, predictions of future events and the effects of pending and possible litigation, as well as assumptions relating to the foregoing. In addition, when used in this discussion, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” and “plans” and variations thereof and similar expressions are intended to identify forward looking statements.
Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements contained in this report. Statements in this report, particularly in “Item 1. Business,” “Item 1A. Risk Factors,” “Item 3. Legal Proceedings,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Notes to Consolidated Financial Statements describe certain factors, among others, that could contribute to or cause such differences.
Systemax is a direct marketer of brand name and private label products. Our operations are organized in three primary reportable business segments – Technology Products, Industrial Products and Hosted Software. Hosted Software became a reportable segment in 2006. Our Technology Products segment sells computers, computer supplies and consumer electronics which are marketed in North America and Europe. We assemble our own PCs and sell them under the trademarks Systemax™ and Ultra™. In addition, we market and sell computers manufactured by other leading companies. Technology products accounted for 92% of our net sales in 2006. Our Industrial Products segment sells a wide array of material handling equipment, storage equipment and consumable industrial items which are marketed in North America. Industrial products accounted for 8% of our net sales in 2006. In both of these product groups we offer our customers a broad selection of products, prompt order fulfillment and extensive customer service. Our Hosted Software segment participates in the emerging market for on-demand, web-based business software applications through the marketing of our PCS ProfitCenter Software™of hosted software. See Note 12 to the consolidated financial statements included in Item 15 of this Form 10-K for additional financial information about our business segments as well as information about our geographic operations.
The Company was incorporated in Delaware in 1995. Certain predecessor businesses which now constitute part of the Company have been in business since 1955. Our headquarters office is located at 11 Harbor Park Drive, Port Washington, New York.
We offer more than 100,000 brand name and private label products. We endeavor to expand and keep current the breadth of our product offerings in order to fulfill the increasingly wide range of product needs of our customers.
Our computer sales include Systemax and Ultra PCs as well as offerings of other brand name PCs, servers and notebook computers. Computer supplies and consumer electronics related products include supplies such as laser printer toner cartridges and ink jet printer cartridges; media such as recordable disks and magnetic tape cartridges; peripherals such as hard disks, CD-ROM and DVD drives, printers and scanners; memory upgrades; data communication and networking equipment; monitors; digital cameras; plasma and LCD TVs; MP3 and DVD players; PDA’s; and packaged software.
We assemble our Systemax and Ultra brand PCs in our 297,000 square foot, ISO-9001-certified facility in Fletcher, Ohio. We purchase components and subassemblies from suppliers in the United States as well as overseas. Certain parts and components for our PCs are obtained from a limited group of suppliers. We also utilize licensed technology and computer software in the assembly of our PCs. For a discussion of risks associated with these licenses and suppliers, see Item 1A, “Risk Factors.”
Our industrial products include storage equipment such as wire and metal shelving, bins and lockers; light material handling equipment such as hand carts, forklifts and hand trucks; ladders, furniture, small office machines and related supplies; and consumable industrial products such as first aid items, safety items, protective clothing and OSHA compliance items.
We began to market our PCS ProfitCenter Software™ suite of business applications in 2004. PCS ProfitCenter Software™ is a web-based application which is delivered as an on-demand service over the internet. The product helps companies automate and manage their entire customer life-cycle across multiple sales channels (internet, call centers, outside salespersons, etc.). We have not recognized any significant revenues for this service to date.
We market our products to both business customers and individual consumers. Our business customers include for-profit businesses educational organizations and government entities. We have developed a proprietary customer and prospect database. We consider our business customers to include the various individuals who work within an organization rather than just the business itself.
We have established a three-pronged system of direct marketing to business customers, consisting of relationship marketers, catalog mailings and propriety internet web sites, the combination of which is designed to maximize sales. Our relationship marketers focus their efforts on our business customers by establishing a personal relationship between such customers and a Systemax account manager. The goal of the relationship marketing sales force is to increase the purchasing productivity of current customers and to actively solicit newly targeted prospects to become customers. With access to the records we maintain of historical purchasing patterns, our relationship marketers are prompted with product suggestions to expand customer order values. In the United States, we also have the ability to provide such customers with electronic data interchange (“EDI”) ordering and customized billing services, customer savings reports and stocking of specialty items specifically requested by these customers. Our relationship marketers’ efforts are supported by frequent catalog mailings and e-mail campaigns both of which are designed to generate inbound telephone sales, and our interactive websites, which allow customers to purchase products directly over the Internet. We believe that the integration of these three marketing methods enables us to more thoroughly penetrate our business and government customer base. Increased internet exposure can lead to more internet-related sales and can also generate more inbound telephone sales; just as catalog mailings and email campaigns which feature our websites can result in greater internet-related sales.
Our growth in net sales continues to be supported by strong growth in sales to individual consumers, particularly through e-commerce means. To reach our consumer audience, we use methods such as website campaigns, banner ads and e-mail campaigns. We are able to monitor and evaluate the results of our various advertising campaigns to enable us to execute them in a cost-effective manner. As part of our marketing strategy we advertise manufacturers’ mail-in-rebates on many products we sell and, in some cases, offer our own rebates. We combine our use of e-commerce initiatives with catalog mailings, which generate calls to inbound sales representatives. These sales representatives use our information systems to fulfill orders and explore additional customer product needs. Sales to consumers are generally fulfilled from our own stock, requiring us to carry more inventory than we would for our business customers. We also periodically take advantage of attractive product pricing by making opportunistic bulk inventory purchases with the objective of turning them quickly into sales. We have also successfully increased our sales to individual consumers by using retail outlet stores. We currently have eight such retail locations in North America and we have four in Europe, which are located in or near one of our existing sales and distribution centers, thereby minimizing our operating costs. We presently plan to add four more retail locations in 2007.
E-commerce
The worldwide growth in active internet users has made e-commerce a significant opportunity for sales growth. In 2006, we had approximately $819 million in internet-related sales, an increase of $169 million, or 26%, from 2005. E-commerce sales represented 34.9% of total revenue in 2006, compared to 30.7% in 2005. The increase in our internet-related sales enables us to leverage our advertising spending, allowing us to reduce our printed catalog costs while maintaining customer contact.
We currently operate multiple e-commerce sites, including www.systemaxpc.com,www.tigerdirect.com, www.tiger.ca, www.globalcomputer.com,www.globalgoved.com, www.infotelusa.com, www.misco.co.uk,www.misco.fr, www.misco.de, www.misco.se, www.misco.es,www.misco.it, www.misco.nl, www.profitcenter.com andwww.globalindustrial.com, and we continually upgrade the capabilities and performance of these web sites. Our internet sites feature on-line catalogs of thousands of products, allowing us to offer a wider variety of computer and industrial products than our printed catalogs. Our customers have around-the-clock, on-line access to purchase products and we have the ability to create targeted promotions for our customers’ interests. Many of our internet sites also permit customers to purchase “build to order” PCs configured to their own specifications.
In addition to our own e-commerce web sites, we have partnering agreements with several of the largest internet shopping and search engine providers who feature our products on their web sites or provide “click-throughs” from their sites directly to ours. These arrangements allow us to expand our customer base at an economical cost.
Catalogs
We currently produce a total of 19 full-line and targeted specialty catalogs in North America and Europe under distinct titles. Our portfolio of catalogs includes such established brand names as TigerDirect.com™, Global Computer Supplies™, Misco®, HCS Misco™,Global Industrial™, ArrowStar™ and 06™. Full-line computer product catalogs offer products such as PCs, notebooks, peripherals, computer components, magnetic media, data communication, networking and power protection equipment, ergonomic accessories, furniture and software. Full-line industrial product catalogs offer products such as material handling products and industrial supplies. Specialty catalogs contain more focused product offerings and are targeted to individuals most likely to purchase from such catalogs. We mail catalogs to both businesses and consumers. In the case of business mailings, we mail our catalogs to many individuals at a single business location, providing us with multiple points-of-entry. Our in-house staff designs all of our catalogs. In-house catalog production helps reduce overall catalog expense and shortens catalog production time. This allows us the flexibility to alter our product offerings and pricing and to refine our catalog formats more quickly. Our catalogs are printed by third parties under fixed pricing arrangements. The commonality of certain core pages of our catalogs also allows for economies in catalog production.
As noted above, the increase in our internet-related sales allowed us to reduce the distribution of our catalogs to 59 million, which was 9.5% fewer than in the prior year. We mailed approximately 41 million catalogs in North America, a 8% reduction from last year and approximately 18 million catalogs, or 12% fewer than 2005, were distributed in Europe.
We generally provide toll-free telephone number access to our customers. Certain of our domestic call centers are linked to provide telephone backup in the event of a disruption in phone service. In addition to telephone orders, we also receive orders by mail, fax, electronic data interchange and through the internet.
A large number of our products are carried in stock, and orders for such products are fulfilled on a timely basis directly from our distribution centers, typically on the day the order is received. We operate out of multiple sales and distribution facilities in North America and Europe. The locations of our distribution centers enable us to provide our customers next day or second day delivery. Orders are generally shipped by third-party delivery services in the United States and in Europe. The locations of our distribution centers in Europe have enabled us to market into four additional countries with limited incremental investment. We maintain relationships with a number of large distributors in North America and Europe that also deliver products directly to our customers.
We provide extensive technical telephone support to our Systemax brand PC customers. We maintain a database of commonly asked questions for our technical support representatives, enabling them to respond quickly to similar questions. We conduct regular on-site training seminars for our sales representatives to help ensure that they are well trained and informed regarding our latest product offerings.
We purchase the majority of our products and components directly from manufacturers and large wholesale distributors. For the year ended December 31, 2006, Ingram Micro accounted for 12.8% of our purchases. For the year ended December 31, 2005, no vendor accounted for more than 10% of our purchases. For the year ended December 31, 2004, Tech Data Corporation accounted for 12.2% and Ingram Micro Inc. accounted for 10.4% of our purchases. The loss of either of these vendors, or any other key vendors, could have an adverse effect on us.
Certain private label products are manufactured by third-parties to our specifications. Many of these private label products have been designed or developed by our in-house product design and development teams.
Technology Products
The North American and European computer markets are highly competitive, with many U.S., Asian and European companies vying for market share. There are few barriers of entry to the PC market, with PCs being sold through the direct market channel, mass merchants, over the internet and by computer and office supply superstores.
Timely introduction of new products or product features are critical elements to remaining competitive in the PC market. Other competitive factors include product performance, quality and reliability, technical support and customer service, marketing and distribution and price. Some of our competitors have stronger brand-recognition, broader product lines and greater financial, marketing, manufacturing and technological resources than us. Additionally, our results could also be adversely affected should we be unable to maintain our technological and marketing arrangements with other companies, such as Microsoft®, Intel® and Advanced Micro Devices®.
The North American computer related products market is highly fragmented and characterized by multiple channels of distribution including direct marketers, local and national retail computer stores, computer resellers, mass merchants, computer and office supply “superstores” and internet-based resellers. In Europe, our major competitors are regional or country-specific retail and direct-mail distribution companies and internet-based resellers.
With conditions in the market for computer related products remaining highly competitive, continued reductions in retail prices may adversely affect our revenues and profits. Additionally, we rely in part upon the introduction of new technologies and products by other manufacturers in order to sustain long-term sales growth and profitability. There is no assurance that the rapid rate of such technological advances and product development will continue.
Industrial Products
The market for the sale of industrial products in North America is highly fragmented and is characterized by multiple distribution channels such as retail outlets, small dealerships, direct mail distribution, internet-based resellers and large warehouse stores. We also face competition from manufacturers’ own sales representatives, who sell industrial equipment directly to customers, and from regional or local distributors. Many high volume purchasers, however, utilize catalog distributors as their first source of product. In the industrial products market, customer purchasing decisions are primarily based on price, product selection, product availability, level of service and convenience. We believe that direct marketing via catalog, the internet and sales representatives is an effective and convenient distribution method to reach mid-sized facilities that place many small orders and require a wide selection of products. In addition, because the industrial products market is highly fragmented and generally less brand oriented, it is well suited to private label products.
As of December 31, 2006, we employed a total of 3,287 employees, including 2,961 full-time and 326 part-time employees, of whom 2,119 were in North America and 1,168 were in Europe.
Under various national, state and local environmental laws and regulations in North America and Europe, a current or previous owner or operator (including the lessee) of real property may become liable for the costs of removal or remediation of hazardous substances at such real property. Such laws and regulations often impose liability without regard to fault. We lease most of our facilities. In connection with such leases, we could be held liable for the costs of removal or remedial actions with respect to hazardous substances. Although we have not been notified of, and are not otherwise aware of, any material environmental liability, claim or non-compliance, there can be no assurance that we will not be required to incur remediation or other costs in connection with environmental matters in the future.
We conduct our business in North America (the United States and Canada) and Europe. Approximately 37.5% of our net sales for the year ended December 31, 2006 were made by subsidiaries located outside of the United States. For information pertaining to our international operations, see Note 12, “Segment and Related Information,” to the consolidated financial statements included in Item 15 of this Form 10-K. The following sets forth selected information with respect to our operations in those two geographic markets (in thousands):
See Item 7, Management’s Discussions and Analysis of Financial Condition and Results of Operations, for further information with respect to our operations.
We maintain an internet web site at www.systemax.com. We file reports with the Securities and Exchange Commission and make available free of charge on or through this web site our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including all amendments to those reports. These are available as soon as is reasonably practicable after they are filed with the SEC. All reports mentioned above are also available from the SEC’s web site (www.sec.gov). The information on our web site is not part of this or any other report we file with, or furnish to, the SEC.
Our Board of Directors has adopted the following corporate governance documents with respect to the Company (the “Corporate Governance Documents”):
In accordance with the corporate governance rules of the New York Stock Exchange, each of the Corporate Governance Documents is available on our Company web site (www.systemax.com) or can be obtained by writing to Systemax Inc., Attention: Board of Directors (Corporate Governance), 11 Harbor Park Drive, Port Washington, NY 11050.
There are a number of factors and variables described below that may affect our future results of operations and financial condition. Other factors of which we are currently not aware or that we currently deem immaterial may also affect our results of operations and financial position.
Other factors that may affect our future results of operations and financial condition include, but are not limited to, unanticipated developments in any one or more of the following areas, as well as other factors which may be detailed from time to time in our Securities and Exchange Commission filings:
Readers are cautioned not to place undue reliance on any forward looking statements contained in this report, which speak only as of the date of this report. We undertake no obligation to publicly release the result of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.
None.
Our primary facilities, which are leased except where otherwise indicated, are as follows:
For information about this facility, leased from related parties, see Item 13 — “Certain Relationships and Related Transactions”Terminable upon two months prior written notice.
We also lease space for other smaller offices and retail stores in the United States, Canada and Europe and certain additional facilities leased by the Company are subleased to others.
For further information regarding our lease obligations, see Note 11 to the Consolidated Financial Statements.
Systemax is a party to various pending legal proceedings and disputes arising in the normal course of business, including those involving commercial, employment, tax and intellectual property related claims, none of which, in management’s opinion, is anticipated to have a material adverse effect on our consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
Systemax common stock is traded on the New York Stock Exchange under the symbol “SYX.” The following table sets forth the high and low closing sales price of our common stock as reported on the New York Stock Exchange for the periods indicated.
On December 31, 2006, the last reported sale price of our common stock on the New York Stock Exchange was $17.45 per share. As of December 31, 2006, we had 235 shareholders of record.
On March 14, 2007, the Company’s Board of Directors declared a special dividend of $1.00 per share payable on April 12, 2007 to shareholders of record on April 2, 2007. This special dividend will be the first dividend we have paid since our initial public offering. Depending in part upon profitability, the strength of our balance sheet, our cash position and the need to retain cash for the development and expansion of our business, we may decide to pay a special dividend in the future, but we have no present plans of doing so.
The following selected financial information is qualified by reference to, and should be read in conjunction with, the Company’s Consolidated Financial Statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this report. The selected statement of operations data for the years ended December 31, 2006, 2005 and 2004 and the selected balance sheet data as of December 31, 2006 and 2005 are derived from the audited consolidated financial statements which are included elsewhere in this report. The selected balance sheet data as of December 31, 2004, 2003 and 2002 and the selected statement of operations data for the years ended December 31, 2003 and 2002 are derived from the audited consolidated financial statements of the Company which are not included in this report.
Years Ended December 31 ----------------------- (In millions, except per common share data and number of catalog titles) ------------------------------------------------------------- 2006 2005 2004* 2003* 2002* -------------------------------------------------------------Statement of Operations Data:- ---------------------------- Net sales $2,345.2 $2,115.5 $1,928.1 $1,655.7 $1,551.9 Gross profit $342.9 $307.3 $286.5 $264.9 $266.3 Selling, general & administrative expenses $281.0 $268.3 $260.1 $251.5 $256.1 Restructuring and other charges - $4.2 $7.4 $1.7 $17.3 Income (loss) from operations $61.9 $34.8 $19.0 $9.2 $(7.0) Provision (benefit) for income taxes $24.5 $21.4 $6.4 $4.4 $(0.8) Income (loss) before cumulative effect of change in accounting principle, net of tax $45.1 $11.4 $10.2 $3.2 $(7.4) Cumulative effect of change in accounting principle, net of tax - - - - $(51.0) Net income (loss) $45.1 $11.4 $10.2 $3.2 $(58.4)Per Share Amounts:- ----------------- Income (loss) before cumulative effect of change in accounting principle, net of tax, basic $1.29 $.33 $.30 $.09 $(.21) Cumulative effect of change in accounting principle, net of tax, basic - - - - $(1.50) Net income (loss), basic $1.29 $.33 $.30 $.09 $(1.71) Income (loss) before cumulative effect of change in accounting principle, net of tax, diluted $1.22 $.31 $.29 $.09 $(.21) Cumulative effect of change in accounting principle, net of tax, diluted - - - - $(1.50) Net income (loss), diluted $1.22 $.31 $.29 $.09 $(1.71) Weighted average common shares outstanding: Basic 35.0 34.6 34.4 34.2 34.1 Diluted 36.9 36.5 35.5 34.9 34.1Selected Operating Data:- ----------------------- Orders entered 7.2 6.2 5.2 4.4 4.0 Number of catalogs distributed 59 66 88 97 106 Number of catalog titles 19 22 22 30 37Balance Sheet Data:- ------------------ Working capital $229.4 $169.8 $148.0 $144.1 $132.0 Total assets $584.1 $504.5 $483.2 $445.3 $436.6 Short-term debt $12.8 $26.8 $25.0 $20.8 $21.2 Long-term debt, excluding current portion $.5 $8.0 $8.6 $18.4 $17.5 Shareholders' equity $289.5 $232.8 $222.6 $208.6 $200.6
* As previously restated – see Note 2 to the consolidated financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
We are a direct marketer of brand name and private label products. Our operations are organized in two primary reportable segments – Technology Products and Industrial Products. Our Technology Products segment markets personal desktop computers, notebook computers and computer supplies and consumer electronics related products in North America and Europe. We assemble our own PCs and sell them under our own trademarks, which we believe gives us a competitive advantage. We also sell personal computers manufactured by other leading companies. Our Industrial Products segment markets material handling equipment, storage equipment and consumable industrial items in North America. We offer more than 100,000 products and continuously update our product offerings to address the needs of our customers, which include large, mid-sized and small businesses, educational and government entities as well as individual consumers. We reach customers by multiple channels, utilizing relationship marketers, e-commerce web sites, mailed catalogues and retail outlet stores. We also participate in the emerging market for on-demand, web-based software applications through the marketing of our PCS ProfitCenter Software™suite of hosted software, which we began during 2004, and in which we have not yet recognized significant revenues and have incurred considerable losses to date. Technology Products related products account for 92% of our net sales, and, as a result, we are dependent on the general demand for information technology products and consumer electronics.
The market for computer products is subject to intense price competition and is characterized by narrow gross profit margins. The North American industrial products market is highly fragmented and we compete against multiple distribution channels. Distribution of information technology and our industrial products is working capital intensive, requiring us to incur significant costs associated with the warehousing of many products, including the costs of leasing warehouse space, maintaining inventory and inventory management systems, and employing personnel to perform the associated tasks. We supplement our on-hand product availability by maintaining relationships with major distributors and manufacturers, utilizing a combination of stocking and drop-shipment fulfillment.
The primary component of our operating expenses historically has been employee related costs, which includes items such as wages, commissions, bonuses, and employee benefits. We have made substantial reductions in our workforce and closed or consolidated several facilities over the past several years. In response to poor economic conditions in the United States, we implemented a plan in the first quarter of 2004 to streamline our United States computer business. This plan consolidated duplicative back office and warehouse operations, which resulted in annual savings of approximately $8 million excluding severance and other restructuring costs of approximately $3 million, which were recognized in fiscal 2004. With evidence of a prolonged economic downturn in Europe, we took measures to align our cost structure with expected potentially lower revenues and decreasing gross margins, initiating several cost reduction plans there during 2004 and 2005. Actions taken in 2005 to increase efficiency and profitability in our European operations resulted in the elimination of approximately 240 positions, and resulted in approximately $6.0 million in annual savings excluding severance and restructuring costs of approximately $3.7 million, which were recognized in fiscal 2005. Our restructuring actions and other cost savings measures implemented over the last several years resulted in reducing our consolidated selling, general and administrative expenses from 16.5% of net sales in 2002 to 12.0% of net sales in 2006. We will continue to monitor our costs and evaluate the need for additional actions.
Our significant accounting policies are described in Note 1 to the consolidated financial statements. The policies below have been identified as critical to our business operations and understanding the results of operations. Certain accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty, and as a result, actual results could differ from those estimates. These judgments are based on historical experience, observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. Management believes that full consideration has been given to all relevant circumstances that we may be subject to, and the consolidated financial statements of the Company accurately reflect management’s best estimate of the consolidated results of operations, financial position and cash flows of the Company for the years presented. Actual results may differ from these estimates under different conditions or assumptions.
Revenue Recognition. We recognize product sales when persuasive evidence of an order arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Generally, these criteria are met at the time of receipt by customers when title and risk of loss both are transferred. Sales are shown net of returns and allowances, rebates and sales incentives. Reserves for estimated returns and allowances are provided when sales are recorded, based on historical experience and current trends.
Accounts Receivable and Allowance for Doubtful Accounts. We record an allowance for doubtful accounts to reflect our estimate of the collectibility of our trade accounts receivable. We evaluate the collectibility of accounts receivable based on a combination of factors, including an analysis of the age of customer accounts and our historical experience with accounts receivable write-offs. The analysis also includes the financial condition of a specific customer or industry, and general economic conditions. In circumstances where we are aware of customer charge-backs or a specific customer’s inability to meet its financial obligations, a specific reserve for bad debts applicable to amounts due to reduce the net recognized receivable to the amount management reasonably believes will be collected is recorded. In those situations with ongoing discussions, the amount of bad debt recognized is based on the status of the discussions. While bad debt allowances have been within expectations and the provisions established, there can be no guarantee that we will continue to experience the same allowance rate we have in the past.
Inventories. We value our inventories at the lower of cost or market, cost being determined on the first-in, first-out method. Reserves for excess and obsolete or unmarketable merchandise are provided based on historical experience, assumptions about future product demand and market conditions. If market conditions are less favorable than projected or if technological developments result in accelerated obsolescence, additional write-downs may be required. While obsolescence and resultant markdowns have been within expectations, there can be no guarantee that we will continue to experience the same level of markdowns we have in the past.
Long-lived Assets. Management exercises judgment in evaluating our long-lived assets for impairment. We believe we will generate sufficient undiscounted cash flow to more than recover the investments made in property, plant and equipment. Our estimates of future cash flows involve assumptions concerning future operating performance and economic conditions. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations.
Accruals. Management exercises judgment in estimating various period end liabilities such as costs related to vendor drop shipments, sales returns and allowances, cooperative advertising and customer rebate reserves, and other vendor and employee related costs. While we believe that these estimates are reasonable, any significant deviation of actual costs as compared to these estimates could have a material impact on the Company’s financial statements.
Income Taxes. We are subject to taxation from federal, state and foreign jurisdictions and the determination of our tax provision is complex and requires significant management judgment. Management judgment is also applied in the determination of deferred tax assets and liabilities and any valuation allowances that might be required in connection with our ability to realize deferred tax assets.
Since we conduct operations in numerous US states and internationally, our effective tax rate has and will continue to depend upon the geographic distribution of our pre-tax income or losses among locations with varying tax rates and rules. As the geographic mix of our pre-tax results among various tax jurisdictions changes, the effective tax rate may vary from period to period. We are also subject to periodic examination from domestic and foreign tax authorities regarding the amount of taxes due. These examinations include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. We have established, and periodically reevaluate, an estimated income tax reserve on our consolidated balance sheet to provide for the possibility of adverse outcomes in income tax proceedings. While management believes that we have identified all reasonably identifiable exposures and that the reserve we have established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved.
We recognize deferred tax assets and liabilities for the effect of temporary differences between the book and tax bases of recorded assets and liabilities and for tax loss carry forwards. The realization of net deferred tax assets is dependent upon our ability to generate sufficient future taxable income. Where it is more likely than not that some portion or all of the deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made. In the event that actual results differ from these estimates or we adjust these estimates in future periods, an adjustment to the valuation allowance may be required, which could materially affect our consolidated financial position and results of operations.
Restructuring charges. We have taken restructuring actions, and may commence further restructuring activities which result in recognition of restructuring charges. These actions require management to make judgments and utilize significant estimates regarding the nature, timing and amounts of costs associated with the activity. When we incur a liability related to a restructuring action, we estimate and record all appropriate expenses, including expenses for severance and other employee separation costs, facility consolidation costs (including estimates of sublease income), lease cancellations, asset impairments and any other exit costs. Should the actual amounts differ from our estimates, the amount of the restructuring charges could be impacted, which could materially affect our consolidated financial position and results of operations.
Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for the vested portion of share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.
The fair value of employee share options is recognized in expense over the vesting period of the options, using the graded attribution method. The fair value of employee share options is determined on the date of grant using the Black-Scholes option pricing model. The Company has used historical volatility in its estimate of expected volatility. The expected life represents the period of time (in years) for which the options granted are expected to be outstanding. The Company used the simplified method for determining expected life as permitted in SEC Staff Accounting Bulletin 107 for options qualifying for such treatment (“plain-vanilla” options) due to the limited history the Company currently has with option exercise activity. The risk-free interest rate is based on the U.S. Treasury yield curve.
In June 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The consensus requires disclosure of either the gross or net presentation, and any such taxes reported on a gross basis should be disclosed in the interim and annual financial statements. This Issue is effective for financial reporting periods beginning after December 15, 2006. The Company does not expect to change its presentation of such taxes, as its sales are currently recorded net of tax.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)", which is effective for fiscal years beginning after December 15, 2006. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is currently evaluating the potential impact, if any, of this pronouncement.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 provides interpretative guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This pronouncement is effective for fiscal years ending after November 15, 2006. This pronouncement had no impact on the Company’s consolidated financial statements for the year ended December 31. 2006.
The discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements included herein.
We had net income of $45.1 million for the year ended December 31, 2006, $11.4 million for the year ended December 31, 2005 and $10.2 million for the year ended December 31, 2004.
The following table represents our consolidated statement of operations data expressed as a percentage of net sales for our three most recent fiscal years:
NET SALES
Net sales were $2.35 billion for the year ended December 31, 2006, an increase of 10.9% from $2.12 billion for the year ended December 31, 2005. Net sales in 2006 included approximately $819 million of internet-related sales, an increase of $169 million, or 26%, from 2005. North American sales increased to $1.6 billion, a 12.7% increase from $1.42 billion in 2005. The increase in North American sales resulted primarily from growth in both our Technology Products and our Industrial Products segments. Sales in our Technology Products segment increased 12.8% to $1.40 billion from $1.25 billion in 2005. This increase was largely a result of our successful internet-based marketing initiatives directed primarily at our consumer customers as reflected by an increase in our internet-related sales of approximately $169 million as well as an expansion of product offerings including private label products. Although our internet-related sales are not exclusively made to consumers, we believe that a large majority of these sales are made to consumers. We continued to see strong growth in our industrial product sales in 2006. Sales of industrial products increased 12.8% to $196.9 million from $174.6 million last year, representing 12.2% of the overall increase in North American sales. European sales, stated in US dollars, increased 7.1% to $743.9 million for 2006 (representing 31.7% of worldwide sales) compared to $694.6 million (representing 32.8% of worldwide sales) in the year-ago period. Movements in foreign exchange rates negatively impacted European sales for 2006 by approximately $.4 million. Sales in our Hosted Software segment were not material in 2006.
European economies began to recover during 2006 and we saw our sales improve in those markets as measured in local currencies. The table below reflects European sales for the three years as reported in this report at then-current exchange rates and at constant (2004) exchange rates (in millions):
Net sales were $2.12 billion for the year ended December 31, 2005, an increase of 9.7% from $1.93 billion for the year ended December 31, 2004. Net sales in 2005 included approximately $650 million of internet-related sales, an increase of $135 million, or 26%, from 2004. North American sales increased to $1.42 billion in 2005, a 15.3% increase from 2004‘s $1.23 billion. The increase in North American sales resulted primarily from growth in both our Technology Products and our Industrial Products segments. Sales in our Technology Products segment increased 15.3% to $1.25 billion from $1.08 billion in 2004. This increase was largely a result of our successful internet-based marketing initiatives directed primarily at our consumer customers as reflected by an increase in our internet-related sales of approximately $100 million. Although our internet-related sales are not exclusively made to consumers, we believe that a large majority of these sales are made to consumers. We continued to see strong growth in our industrial product sales in 2005. Sales of industrial products increased 15.2% to $174.6 million from $151.6 million in 2004, representing 12% of the overall increase in North American sales. European sales, stated in US dollars, decreased 0.2% to $694.6 million for 2005 (representing 32.8% of worldwide sales) compared to $695.7 million (representing 36.1% of worldwide sales) in 2004. Movements in foreign exchange rates positively impacted European sales for 2005 by approximately $5.8 million. If currency exchange rates for 2004 had prevailed in 2005, however, European sales would have decreased 1.0% from the prior year. Continued weakness in demand for information technology products from business customers in Europe and the effect of exchange rate movements on product pricing in certain European markets for products whose cost is U.S. dollar based, resulted in decreased local currency denominated sales. Sales in our Hosted Software segment were not material in 2005 and 2004.
GROSS PROFIT
Gross profit, which consists of net sales less product cost, shipping, assembly and certain distribution center costs, was $342.9 million, or 14.6% of net sales, for the year ended December 31, 2006, compared to $307.3 million or 14.5% of net sales in 2005. In the fourth quarter of 2006 the Company’s gross margin was 12.9% compared to 14.7% in the fourth quarter of 2005. The decrease in gross margin was primarily attributable to price discounting for technology products.
Gross profit was $307.3 million, or 14.5% of net sales, for the year ended December 31, 2005, compared to $286.5 million or 14.9% of net sales in 2004. Our gross profit ratio declined in 2005 primarily as a result of approximately $7 million of increased costs for warehouse staff and supplies related to increased activity levels from the prior year. These increased costs were partially offset by favorable changes in product mix. Improvement in our gross profit ratio in North America was partially offset by a continued decline in our gross profit ratio in Europe.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $281.0 million, or 12.0% of net sales, for the year ended December 31, 2006, $268.3 million, or 12.7% of net sales, for 2005, and $260.1 million, or 13.5% of net sales, in 2004. Selling, general and administrative expenses increased $12.7 million, or 4.7%, in 2006 from a year ago. Significant expense changes include $3.1 million of increased credit card fees, a $4.0 million increase in sales salaries related to the increased sales volume, an increase in other salaries and related costs of approximately $10.0 million due to increased staff in areas such as marketing and information technology as well as $1.8 million of salary expense related to stock compensation expense recorded as the result of the adoption of SFAS 123(R). Rent expense increased $2.3 million due to the company’s expansion. These increases were partially offset by a decrease of approximately $6.1 million of bad debt expense and a positive impact of foreign exchange of approximately $3.5 million.
Selling, general and administrative expenses totaled $268.3 million, or 12.7% of net sales, for the year ended December 31, 2005 as compared to $260.1 million or 13.5% of net sales for 2004. Selling, general and administrative expenses increased $8.2 million, or 3.2%, in 2005 from 2004 as a result of $3.8 million of increased credit card fees related to the increased sales volume, increased legal and professional fees of $2.0 million related to the restatement of the 2004 and 2003 financial statements and $3.8 million of increased foreign exchange expenses. These increases were partially offset by increased funding of advertising expenses from vendors.
RESTRUCTURING AND OTHER CHARGES
During the year ended December 31, 2005, we incurred $4.2 million of restructuring and other charges. These costs were primarily related to further restructuring actions undertaken in Europe during the year as a result of continuing decline in profitability. The costs were comprised primarily of staff severance expense related to the elimination of approximately 240 positions, which resulted in approximately $6.0 million in annual savings.
We incurred $7.4 million of restructuring and other charges in 2004. In the first quarter of 2004 we implemented a plan to streamline the activities of our United States computer businesses’ back office and warehouse operations, resulting in the elimination of approximately 200 jobs. We incurred $3.7 million of restructuring costs associated with this plan, including $3.2 million for staff severance and benefits for terminated employees and $0.5 million of non-cash costs for impairment of the carrying value of fixed assets. We recorded $0.6 million of additional costs in 2004 related to facility exit costs for our 2003 plan to consolidate United States warehouse locations. We also implemented several cost reduction plans in Europe during 2004, including a consolidation of United Kingdom sales offices which resulted in the elimination of 50 jobs. We incurred $2.5 million of restructuring charges for facility exit costs and workforce reductions in connection with these actions and $0.5 million of additional costs resulting from adjustments to our estimates of lease and contract termination costs for our 2002 plan to consolidate our United Kingdom operations.
INCOME FROM OPERATIONS
We had income from operations of $61.9 million in 2006, $34.8 million in 2005 and $19.0 million in 2004. Income from operations for the year ended December 31, 2005 included restructuring and other charges of $4.2 million. For the year ended December 31, 2004, restructuring charges of $7.4 million were included in income from operations.
Income from operations in North America was $45.4 million for the year ended December 31, 2006, $39.4 million in 2005 and $31.4 million in 2004. Declining gross profit margin and increased selling, general and administrative expenses resulted in our implementation of the previously described restructuring activities in Europe in 2005 and 2004.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest expense was $1.7 million in 2006, $2.7 million in 2005 and $3.1 million in 2004. Interest expense decreased in 2006 as a result of decreased short-term borrowings in the United Kingdom as well as the extinguishment of mortgage debt related to our Georgia warehouse sale in the first quarter of 2006. The increased expense in 2004 resulted from increased short-term borrowings under our United Kingdom facility. Interest and other income, net was $9.5 million in 2006, $0.7 million in 2005 and $0.6 million in 2004. The increase in other income in 2006 mainly resulted from the gain on sale of the Georgia location.
INCOME TAXES
Our income tax provisions were $24.5 million for the year ended December 31, 2006, $21.4 million for the year ended December 31, 2005 and $6.4 million for 2004. The effective rates were 35.2% in 2006, 65.2% in 2005, and 38.5% in 2004. The high effective tax rate in 2005 was a result of our establishing valuation allowances of approximately $10.2 million for deferred tax assets in the United Kingdom in 2005. The Company’s United Kingdom subsidiary had recorded historical losses and had been affected by restructuring and other charges in recent years. These losses represented evidence for management to estimate that a full valuation allowance for the net deferred tax asset was necessary in 2005. In 2006 the United Kingdom subsidiary recorded a profit and the Company’s effective tax rate benefited by approximately 3.2% or $2.3 million.. The effective rate in 2005 also was unfavorably impacted by increased state and local taxes and losses in other foreign jurisdictions for which no tax benefit has been recognized. These increases were partially offset by an income tax benefit of $2.7 million we recorded in the fourth quarter of 2005 resulting from a favorable decision we received for a petition submitted in connection with audit assessments made in 2002 and 2004 in a foreign jurisdiction. The tax rate in 2004 was higher than the United States statutory rate of 35% primarily due to losses in foreign jurisdictions for which we recognized no tax benefit and losses in a foreign jurisdiction where the benefit rate is lower than the rate in the United States.
For the years ended December 31, 2006, 2005 and 2004, we have not recognized certain foreign tax credits, certain state deferred tax assets in the United States and certain benefits on losses in foreign tax jurisdictions due to our inability to carry such credits and losses back to prior years and our determination that it was more likely than not that we would not generate sufficient future taxable income to realize these assets. Accordingly, valuation allowances were recorded against the deferred tax assets associated with those items. If we are able to realize all or part of these deferred tax assets in future periods, it will reduce our provision for income taxes by a release of the corresponding valuation allowance.
NET INCOME
Net income was $45.1 million, or $1.29 per basic share and $1.22 per diluted share, for the year ended December 31, 2006, $11.4 million, or $.33 per basic share and $.31 per diluted share, for the year ended December 31, 2005 and $10.2 million, or $.30 per basic share and $.29 per diluted share, for the year ended December 31, 2004.
Net sales have historically been modestly weaker during the second and third quarters as a result of lower business activity during those months. The following table sets forth the net sales, gross profit and income from operations for each of the quarters since January 1, 2004 (amounts in millions).
March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 2006 ---- Net sales $575 $547 $575 $648 Percentage of year's net sales 24.5% 23.3% 24.5% 27.6% Gross profit $90 $77 $92 $83 Income from Operations $21 $11 $19 $112005 ---- Net sales $538 $506 $489 $583 Percentage of year's net sales 25.4% 23.9% 23.1% 27.6% Gross profit $80 $71 $70 $86 Income from operations $5 $3 $8 $18 2004 ---- Net sales $485 $433 $458 $552 Percentage of year's net sales 25.1% 22.5% 23.8% 28.6% Gross profit $76 $68 $71 $71 Income from operations $7 $2 $4 $6
Our primary liquidity needs are to support working capital requirements in our business, to fund capital expenditures and minimal acquisitions and fund the special dividend declared by our Board in March 2007. We rely principally upon operating cash flow and borrowings under our credit facilities to meet these needs. We believe that cash flow available from these sources will be sufficient to meet our working capital requirements, projected capital expenditures and interest and debt repayments in the foreseeable future.
Our working capital was $229.4 million at December 31, 2006, an increase of $59.6 million from $169.8 million at the end of 2005. This was the result of a $23.7 million increase in cash, a $14.0 million increase in accounts receivable, a $41.0 million increase in inventories, a $11.0 million increase in prepaid expenses and other current assets and a decrease in short term borrowings of $14.0 million offset by a $29.8 million increase in accounts payable, and a $12.8 million increase in accrued expense and other current liabilities, and a $1.5 million decrease in deferred tax assets. The $41.0 million increase in our inventories was principally in our domestic US locations. Inventory turnover increased slightly from 9.3 to 10 times in 2006. The increase in accounts receivable occurred in Europe, resulting from our increased sales. This also increased our days of sales outstanding from 22 in 2005 to 23 in 2006.We expect that future accounts receivable and inventory balances will fluctuate with the mix of our net sales between consumer and business customers, as well as geographic regions.
We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of December 31, 2006, all of our investments mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.
Net cash provided by operating activities was $34.3 million for the year ended December 31, 2006, $27.3 million for the year ended December 31, 2005 and $12.8 million for the year ended December 31,2004. The increase in cash provided by operating activities in 2006 of $7.0 million as compared to 2005 resulted from a $14.1 million increase in net income adjusted by other non-cash items, such as depreciation expense, and a decrease of $7.1 million in cash used for changes in our working capital accounts. The $14.6 million increase in cash provided by operating activities in 2005 as compared to 2004 resulted from an increase in cash provided by net income adjusted by other non-cash items, such as depreciation expense, and a decrease in cash used for changes in our working capital accounts. Cash provided by net income and other non-cash items was $37.6 million in 2005, an increase of $10.4 million, compared to $27.2 million in 2004, and was primarily attributable to the $8.6 million increase in the provision for deferred income taxes. The cash used for changes in our working capital accounts was $10.2 million in 2005 compared to $14.5 million in 2004.
Net cash of $12.2 million was provided by investing activities for the year ended December 31, 2006. Proceeds from disposals of property and equipment was $18.9 million primarily the result of the sale of our distribution facility in Suwanee, Georgia. We used cash of $6.7 million during 2006, $5.8 million during 2005 and $8.3 million during 2004 in investing activities, principally for the purchase of property, plant and equipment. Capital expenditures in both 2006, 2005 and 2004 included upgrades and enhancements to our information and communications systems hardware and facilities costs for the opening of additional retail outlet stores in North America.
Net cash of $22.1 million was used in financing activities for the year ended December 31, 2006. Repayment of short and long-term borrowings used approximately $24.7 million of cash and proceeds from stock option exercises and excess tax benefits from stock option exercises provided approximately $2.6 million of cash. Net cash of $4.7 million was provided by financing activities in 2005, primarily as a result of an increase in our short-term borrowings in Europe. Net cash of $6.8 million was used in financing activities in 2004, primarily for the repayment of short and long-term borrowings.
We amended our $70 million secured United States revolving credit agreement in October 2005 to increase the amount available to $120 million (which may be increased by up to an additional $30 million, subject to certain conditions), increase the number of lenders participating and to provide for borrowings by both our United States and United Kingdom businesses. The upgraded facility expires in October 2010. Borrowings under the agreement are subject to borrowing base limitations of up to 85% of eligible accounts receivable and 40% of qualified inventories and are secured by accounts receivable, inventories and certain other assets. The undrawn availability under the facility may not be less than $15 million until the last day of any month in which the availability net of outstanding borrowings is at least $70 million. The revolving credit agreement requires that we maintain a minimum level of availability. If such availability is not maintained, we will then be required to maintain a fixed charge coverage ratio (as defined). The agreement contains certain other covenants, including restrictions on capital expenditures and payments of dividends. We were in compliance with all of the covenants as of December 31, 2006, except for the required timely submission of certain financial statements, for which we have obtained a waiver. As of December 31, 2006, eligible collateral under the facility was $104.1 million, there were outstanding advances of $9.3 million (all in the United Kingdom), outstanding letters of credit of $11.0 million and total availability of $83.8 million.
In connection with the amendment to our revolving credit agreement in October 2005, we terminated our £15 million multi-currency credit facility with a financial institution in the United Kingdom, which was available to our United Kingdom subsidiaries. We also paid off the remaining £4.7 million balance on our United Kingdom term loan, which we had entered into in 2002 to finance the construction of our United Kingdom headquarters.
Our Netherlands subsidiary has a €5 million ($6.6 million at the December 31, 2006 exchange rate, which exchange rate applies to all other Euro denominated amounts below) credit facility. Borrowings under the facility are secured by the subsidiary’s accounts receivable and are subject to a borrowing base limitation of 85% of the eligible accounts. At December 31, 2006 there were €2.2 million ($3.0 million) of borrowings outstanding under this line with interest payable at a rate of 5.0%. The facility expires in August 2007.
In April 2002, we entered into a ten year, $8.4 million mortgage loan on our Suwanee, Georgia distribution facility. The mortgage had monthly principal and interest payments of $62,000 payable through May 2012, with a final additional principal payment of $6.4 million at maturity in May 2012. The mortgage loan bore interest at 7.04% and was collateralized by the underlying land and building. During the first quarter of fiscal 2006, we sold this facility and repaid the remaining balance on the loan. The facility was replaced by a larger, leased distribution center in a nearby area.
We are obligated under non-cancelable operating leases for the rental of most of our facilities and certain of our equipment which expire at various dates through 2026. We currently lease our New York facility from an entity owned by Richard Leeds, Robert Leeds and Bruce Leeds, the Company’s three principal shareholders and senior executive officers. The annual rental totals $612,000 and the lease expires in 2007. We have sublease agreements for unused space we lease in Compton, California and Wellingborough, England. In the event a sublessee is unable to fulfill its obligations, we would be responsible for rent due under the lease. However, we expect the sublessees will fulfill their obligations under the leases.
Following is a summary of our contractual obligations for future principal payments on our debt, minimum rental payments on our non-cancelable operating leases and minimum payments on our other purchase obligations at December 31, 2006 (in thousands):
After 2007 2008 2009 2010 2011 2011 ---- ---- ---- ---- ----- ----- Contractual Obligations:Payments on capital lease obligations $573 $402 $81 $11 $10 Payments on non-cancelable operating leases, net of subleases 10,255 10,033 9,568 7,358 6,170 $51,719 Dividends payable 35,800 ------ Purchase and other obligations 3,936 1,733 1,191 1,169 900 2,836 ----- ----- ----- ----- --- ----- Total contractual obligations $50,564 $12,168 $10,840 $8,538 $7,080 $54,555 ======= ======= ======= ====== ====== =======
Our purchase and other obligations consist primarily of certain employment agreements and service agreements.
In addition to the contractual obligations noted above, we had $11.0 million of standby letters of credit outstanding as of December 31, 2006.
Our operating results have generated cash flow which, together with borrowings under our debt agreements, has provided sufficient capital resources to finance working capital and cash operating requirements, fund capital expenditures, and fund the payment of interest on outstanding debt. Our primary ongoing cash requirements will be to finance working capital, provide payment of the special shareholder dividend of approximately $35 million declared in the first quarter of 2007, fund the payment of principal and interest on indebtedness, fund capital expenditures, fund minimal acquisitions and fund any future special shareholder dividends that may be declared. We believe future cash flows from operations and availability of borrowings under our lines of credit will be sufficient to fund ongoing cash requirements for at least the next twelve months.
We are party to certain litigation, the outcome of which we believe, based on discussions with legal counsel, will not have a material adverse effect on our consolidated financial statements.
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.
We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates (principally Pounds Sterling, Euros and Canadian Dollars) as measured against the U.S. Dollar and each other.
The translation of the financial statements of our operations located outside of the United States is impacted by movements in foreign currency exchange rates. Changes in currency exchange rates as measured against the U.S. dollar may positively or negatively affect sales, gross margins, operating expenses and retained earnings as expressed in U.S. dollars. Sales would have fluctuated by approximately $80 million and income from operations would have fluctuated by approximately $1.4 million if average foreign exchange rates changed by 10% in 2006. We have limited involvement with derivative financial instruments and do not use them for trading purposes. We may enter into foreign currency options or forward exchange contracts aimed at limiting in part the impact of certain currency fluctuations, but as of December 31, 2006 we had no outstanding forward exchange contracts.
Our exposure to market risk for changes in interest rates relates primarily to our variable rate debt. Our variable rate debt consists of short-term borrowings under our credit facilities. As of December 31, 2006, the balance outstanding on our variable rate debt was approximately $12.3 million. A hypothetical change in average interest rates of one percentage point is not expected to have a material effect on our financial position, results of operations or cash flows over the next fiscal year.
The information required by Item 8 of Part II is incorporated herein by reference to the Consolidated Financial Statements filed with this report; see Item 15 of Part IV.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
Disclosure Controls and Procedures
The Company establishes and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to provide reasonable assurance that such information is accumulated and reported to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in control systems, misstatements due to error or fraud may occur and not be detected. These limitations include the circumstances that breakdowns can occur as a result of error or mistake, the exercise of judgment by individuals or that controls can be circumvented by acts of misconduct. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and the operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. As part of this evaluation we identified certain significant deficiencies in our internal controls over financial reporting as of December 31, 2006. These significant deficiencies are:
Although these significant deficiencies do not, in our judgment, rise to the level of a material weakness in internal controls over financial reporting, the Chief Executive Officer and the Chief Financial Officer have concluded, based on our evaluation as of December 31, 2006, that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were not effective to ensure that the information required to be disclosed by us in this annual report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
As a result of this determination and as part of the work undertaken in connection with this report, we have applied compensating procedures and processes as necessary to ensure the reliability of our financial reporting. Accordingly, management believes, based on its knowledge, that (i) this 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 they were made, not misleading with respect to the period covered by this report and (ii) the financial statements, and other financial information included in this report, fairly reflect the form and substance of transactions and fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the periods presented in this report.
Section 404 of the Sarbanes-Oxley Act
For the year ended December 31, 2006, we were not subject to the internal controls certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 because we were not an accelerated filer as defined by the SEC. For the year ended December 31, 2007, we will be subject to the requirements of Section 404 that management provide an assessment of the effectiveness of the Company’s internal control over financial reporting and the Company’s independent registered public accounting firm will be required to audit that assessment.
We are working to achieve compliance with the requirements of Section 404. We will be dedicating substantial time and resources to documentation and review of our procedures in 2007. We may also need to engage outside consultants to assist us. We have not completed this process or its assessment, due to the complexities of our decentralized structure, the number of accounting systems in use and the lack of qualified personnel to devote to the process. In addition to the weaknesses reported as of December 31, 2006 discussed under the caption “Disclosure Controls and Procedures,” we have identified numerous other internal control deficiencies that may affect the timeliness and accuracy of recording transactions and which, individually or in the aggregate, could become material weaknesses in future periods if not remediated.
We have a significant amount of work to do to remediate the items we have identified. In the course of completing our evaluation and testing we may identify further deficiencies and weaknesses that will need to be addressed and will require remediation. We may not be able to correct all such internal control deficiencies in a timely manner and may find that a material weakness or weaknesses exist. As a result, management may not be able to issue an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.
The information required by Item 10 of Part III is hereby incorporated by reference from the Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders which we anticipate filing April 30, 2007 (the “Proxy Statement”).
The information required by Item 11 of Part III is hereby incorporated by reference from the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by item 12 of Part III is hereby incorporated by reference from the Proxy Statement.
The information required by Item 10 of Part III is hereby incorporated by reference from the Proxy Statement.
The information required by Item 14 of Part III is hereby incorporated by reference from the Proxy Statement.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 60
3. Exhibits.
* Management contract or compensatory plan or arrangement
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Shareholders and Board of Directors of Systemax Inc.:
We have audited the accompanying consolidated balance sheets of Systemax Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the two years in the period ended December 31, 2006. Our audit also included the 2006 and 2005 financial statement schedules listed in the accompanying index in Item 15. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control 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 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Systemax Inc. at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows each of the two years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related 2006 and 2005 financial statement schedules, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” effective January 1, 2006.
ERNST & YOUNG LLP
New York, New YorkMarch 27, 2007
To the Shareholders and Board of Directors of Systemax Inc.:
We have audited the accompanying consolidated statements of operations, shareholders’ equity, and cash flows of Systemax Inc. and subsidiaries (the "Company") for the year ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15 for the period ended December 31, 2004. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement 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 control 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated results of operations and cash flows of Systemax Inc. and subsidiaries for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule for year ended December 31, 2004, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the accompanying consolidated financial statements had been restated.
DELOITTE & TOUCHE LLPNew York, New YorkApril 13, 2005 (November 17, 2005 as to the effects of the restatement discussed in Note 2)
2006 2005 ---- ---- ASSETS: Current assets: Cash and cash equivalents $86,964 $63,291 Accounts receivable, net of allowances of $11,370 (2006) and $12,508 (2005) 164,615 150,635 Inventories, net 233,136 192,102 Prepaid expenses and other current assets 26,919 15,877 Deferred income tax assets, net 7,727 9,227 -------- ------- Total current assets 519,361 431,132 Property, plant and equipment, net 48,586 57,259 Deferred income tax assets, net 14,041 14,100 Other assets 2,173 2,053 -------- ------- Total assets $584,161 $504,544 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Short-term borrowings, including current portions of long-term debt $12,788 $26,773 Accounts payable 201,486 171,667 Accrued expenses and other current liabilities 75,688 62,888 -------- ------- Total current liabilities 289,962 261,328 -------- ------- Long-term debt 483 8,028 Other liabilities 4,226 2,346 Commitments and contingencies Shareholders' equity: Preferred stock, par value $.01 per share, authorized 25 million shares, issued none Common stock, par value $.01 per share, authorized 150 million shares, issued 38,331,990 shares; outstanding 35,341,377 (2006) issued 38,231,990 shares; outstanding 34,761,174 (2005) shares 383 382 Additional paid-in capital 172,983 177,574 Accumulated other comprehensive income, net of tax 7,181 893 Retained earnings 144,074 98,927 Common stock in treasury at cost - 2,990,613 (2006) and 3,470,816 (2005) (35,131) shares (40,772) Unearned restricted stock compensation (4,162) -------- ------- Total shareholders' equity 289,490 232,842 -------- ------- Total liabilities and shareholders' equity $584,161 $504,544 ======== ======= See notes to consolidated financial statements.
2006 2005 2004* ---- ---- ---- Net sales $2,345,165 $2,115,518 $1,928,147 Cost of sales 2,002,246 1,808,231 1,641,681 ------------------ ----------------- -------------- Gross profit 342,919 307,287 286,466 Selling, general and administrative expenses 281,015 268,327 260,111 Restructuring and other charges - 4,151 7,356 ------------------ ----------------- -------------- Income from operations 61,904 34,809 18,999 Interest and other income, net (9,475) (735) (630) Interest expense 1,684 2,670 3,073 ------------------ ----------------- -------------- Income before income taxes 69,695 32,874 16,556 Provision for income taxes 24,548 21,433 6,368 ------------------ ----------------- -------------- Net income $45,147 $11,441 $10,188 ================== ================= ============== Net income per common share, basic: $1.29 $.33 $.30 Net income per common share, diluted: $1.22 $.31 $.29 Weighted average common and common equivalent shares: Basic 34,960 34,646 34,373 Diluted 36,881 36,488 35,489
* As previously restated – see Note 2.
See notes to consolidated financial statements.
Common Accumulated Number Other Unearned of Shares Additional Comprehensive Treasury Restricted Out- Stock Paid-in Retained Income (Loss), Stock, Stock Comprehensive Standing Amount Capital Earnings Net of Tax At Cost Compensation Income (Loss) ------------ ---------- ------------ ----------- --------------- ------------- ------------ -------------- Balances, January 1, 2004* $34,288 $382 $175,343 $77,298 $1,933 $(46,330) $- $- -------- ---- -------- ------- ------ --------- -------- ------ Change in cumulative translation adjustment 1,987 1,987 Exercise of stock options 145 (631) 1,700 Tax benefit of employee stock plans 188 Grant of restricted stock units 5,740 (5,740) Amortization of unearned restricted stock compensation 574 Net income* 10,188 10,188 -------- ---- -------- ------- ------ --------- -------- ------ Total comprehensive income* 12,175 Balances, December 31, 2004* 34,433 382 180,640 87,486 3,920 (44,630) (5,166) Change in cumulative translation (3,027) (3,027) adjustment Exercise of stock options 328 (3,078) 3,858 Tax benefit of employee stock plans 12 Amortization of unearned restricted stock compensation 1,004 Net income 11,441 11,441 -------- ---- -------- ------- ------ --------- -------- ------ Total comprehensive income $8,414 Balances, December 31, 2005 34,761 382 177,574 98,927 893 (40,772) (4,162) Reversal of unamortized unearned restricted stock compensation - Note 2 (4,162) 4,162 Stock-based compensation expense 2,330 Issuance of restricted 100 1 stock Exercise of stock options 480 (4,039) 5,641 Income tax benefit on stock-based compensation 1,280 Change in cumulative translation adjustment 6,288 6,288 Net income 45,147 45,147 -------- ---- -------- ------- ------ --------- -------- ------ Total comprehensive income $51,435 -------- Balances, December 31, 2006 35,341 $383 $172,983 $144,074 $7,181 ($35,131) $- ======== ==== ======== ======= ====== ========= ======== * As previously restated - see Note 2. See notes to consolidated financial statements.
2006 2005 2004* ---- ---- ---- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income $45,147 $11,441 $10,188 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, net 8,185 9,994 11,314 (Gain) loss on dispositions and abandonment (7,721) 1,279 1,444 Provision (benefit) for deferred income taxes 2,254 6,228 (2,377) Provision for returns and doubtful accounts 1,503 7,620 5,079 Compensation expense related to equity compensation plans 2,330 1,004 1,374 Tax benefit of employee stock plans - 12 188 Changes in operating assets and liabilities: Accounts receivable (3,917) (31,722) (1,982) Inventories (36,216) (3,457) (40,872) Prepaid expenses and other current assets (10,060) 3,989 5,300 Income taxes payable/receivable (4,234) 527 6,335 Accounts payable, accrued expenses and other current liabilities 37,055 20,430 16,767 ------------ ------------ ------------ Net cash provided by operating activities 34,326 27,345 12,758 ------------ ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Investments in property, plant and equipment (6,701) (5,896) (8,583) Proceeds from disposals of property, plant and equipment 18,938 103 247 ------------ ------------ ------------ Net cash provided by (used in) investing activities 12,237 (5,793) (8,336) ------------ ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: (Repayments) proceeds of borrowings from banks (16,473) 13,889 (5,254) Repayments of long-term debt and capital lease obligations (8,305) (9,978) (1,768) Proceeds from issuance of common stock 1,602 780 269 Excess tax benefit from exercises of stock options 1,030 - - ------------ ------------ ------------ Net cash provided by (used in) financing activities (22,146) 4,691 (6,753) ------------ ------------ ------------ EFFECTS OF EXCHANGE RATES ON CASH (744) 791 (114) ------------ ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23,673 27,034 (2,445) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 63,291 36,257 38,702 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS - END OF YEAR $86,964 $63,291 $36,257 ============ ============ ============ Supplemental disclosures: Interest paid $1,861 $2,498 $3,385 Income taxes paid $26,465 $15,522 $4,676 Supplemental disclosures of non-cash investing and financing activities: Acquisitions of equipment through capital leases $776 - - Deferred stock-based compensation related to restricted unit stock - granted - $5,740
See notes to consolidated financial statements
Years ended December 31, 2006 2005 2004 ---- ---- ---- Balance, beginning of year $1,316 $2,011 $2,642 Charged to expense 1,556 21 168 Deductions (1,811) (716) (799) ------ ------- ------ Balance, end of year $1,061 $1,316 $2,011
Years ended December 31: 2004 ---- As previously ------------- reported As restated -------- ----------- Net sales $1,927,835 $1,928,147 Cost of sales 1,637,452 1,641,681 Gross profit 290,383 286,466 Income from operations 22,916 18,999 Income before income taxes 20,473 16,556 Provision for income taxes 7,923 6,368 Net income 12,550 10,188 Net income per common share, basic: $.37 $.30 Net income per common share, diluted: $.35 $.29 The Company also previously restated its segment disclosures for the year ended December 31, 2004 - see Note 12.
Property, plant and equipment, net consists of the following (in thousands): 2006 2005 ---- ---- Land and buildings $33,525 $42,585 Furniture and fixtures, office, computer and other equipment and 77,478 71,719 software Leasehold improvements 12,762 11,328 123,765 125,632 Less accumulated depreciation and amortization 75,179 68,373 ------ ------ Property, plant and equipment, net $48,586 $57,259 ======= ======= Included in property, plant and equipment are assets under capital leases, as follows (in thousands): 2006 2005 ---- ---- Furniture and fixtures, office, computer and other equipment $2,358 $1,582 Less: Accumulated amortization 1,270 754 ----- --- $1,088 $ 828 ------ -----
2006 2005 ---- ---- Payroll and employee benefits $17,151 $13,262 Income taxes payable 2,327 6,819 Other 56,210 42,807 ------ ------ $75,688 $62,888 ======= =======
2006 2005 ---- ---- Mortgage note payable (a) -- $ 7,803 Term loan payable -- -- Capitalized equipment lease obligations 1,031 799 ----- --- 1,031 8,602 Less: current portion 548 574 --- --- $483 $ 8,028 ==== =======
Mortgage note payable. The Company had a ten year, $8.4 million mortgage loan on its Georgia distribution facility. The mortgage had monthly principal and interest payments of $62,000 through May 2012, with a final additional principal payment of $6.4 million at maturity in May 2012. The mortgage bore interest at 7.04% and was collateralized by the underlying land and building. In March 2006, the Company sold its Georgia distribution facility and repaid the remaining balance on the mortgage (see Note 14).
2007 2008 2009 2010 2011 ---- ---- ---- ---- ---- Maturities $548 $385 $78 $10 $10
2006 ---- Fair value $5.64 Expected annual dividend yield 0% Risk-free interest rate 4.76% Expected volatility 78.2% Expected life in years 6.0
2006 2005 2004 ---- ---- ---- Weighted-Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding at beginning of year 2,657,419 $3.93 3,241,251 $3.96 2,821,302 $3.70 Granted 479,334 $8.01 75,000 $6.25 780,267 $5.38 Exercised (480,203) $3.33 (328,374) $2.37 (144,168) $2.28 Cancelled (27,474) $12.84 (330,458) $6.35 (216,150) $6.82 ------- -------- -------- Outstanding at end of year 2,629,076 $ 4.69 2,657,419 $3.93 3,241,251 $3.96 ========= ========= ========= Options exercisable at year end 1,891,426 1,891,155 1,756,517 Weighted average fair value per option granted during the year $4.24 $4.21 $1.61
Weighted Weighted Average Aggregate -------- ---------------- --------- Number Average Remaining Intrinsic ------- ------- --------- --------- Outstanding Exercise Contractual Life Value (in ----------- -------- ---------------- --------- Range of Exercise Prices At 12/31/06 Price thousands) ------------------------ ----------- ----- --------- $ 1.76 to $ 5.00 1,176,935 $2.10 5.56 18,063 $ 5.01 to $ 15.00 1,400,316 $6.45 7.26 15,441 $ 15.01 to $ 18.41 51,825 $15.72 7.81 60 ------ -- $ 1.76 to $ 18.41 2,629,076 $4.69 6.51 $33,564 ========= =======
Weighted Weighted Average Aggregate -------- ---------------- --------- Number Average Remaining Intrinsic ------- ------- --------- --------- Outstanding Exercise Contractual Life Value (in ----------- -------- ---------------- --------- Range of Exercise Prices At 12/31/06 Price thousands) ------------------------ ----------- ----- --------- $ 1.76 to $ 5.00 1,016,935 $2.15 5.47 15,557 $ 5.01 to $ 15.00 847,666 $6.36 6.37 9,435 $ 15.01 to $ 18.41 26,825 $16.36 5.97 ----- $ 1.76 to $ 18.41 1,891,426 $4.24 5.88 $24,992 ========= =======
Weighted Weighted Average Aggregate -------- ---------------- --------- Number Average Remaining Intrinsic ------ ------- --------- --------- Exercisable Exercise Contractual Life Value (in ----------- -------- ---------------- --------- Range of Exercise Prices At 12/31/06 Price thousands) ------------------------ ----------- ----- --------- $ 1.76 to $ 5.00 1,176,935 $2.10 5.56 $18,063 $ 5.01 to $ 15.00 1,383,616 $6.45 7.26 15,238 $ 15.01 to $ 18.41 51,825 $15.72 7.81 60 ------ -- $ 1.76 to $ 18.41 2,612,376 $4.69 6.51 $33,361 ========= =======
Weighted Average ---------------- For Shares Grant-Date Fair Value ---------- --------------------- Unvested at January 1, 2006 840,189 $1.84 Granted 479,334 $5.64 Vested (577,875) $2.60 Forfeited (3,998) $2.25 ------ Unvested at December 31, 2006 737,650 $3.71 =======
2006 ---- Stock based compensation expense $ 1,756 Tax effect on share based compensation (599) ------- Net effect on net income $ 1,157 ------- Tax effect on cash flows from financing activities $ 1,030 ------- Effect on net income per common share, basic $.03 ==== Effect on net income per common share, diluted $.03 ====
2005 2004 ---- ---- Net income - as reported $11,441 $10,188 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 647 886 Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax effects 915 1,295 --- ----- Pro forma net income $11,173 $9,779 ======= ====== Basic net income per common share: Net income - as reported $.33 $ .30 ==== ===== Net income - pro forma $.32 $ .28 ==== ===== Diluted net income per common share: Net income - as reported $.31 $ .29 ==== ===== Net income - pro forma $.31 $ .28 ==== =====
2005 2004 ---- ---- Expected dividend yield 0% 0% Risk-free interest rate 4.5% 5.5% Expected volatility 79.0% 46.0% Expected life in years 5.20 2.36
Years ended December 31, 2005 2004 ------------------------ ---- ---- 2004 United States streamlining plan $- $3,743 2003 United States warehouse consolidation plan 122 642 2002 United Kingdom consolidation plan (93) 467 Litigation settlements (recoveries) 300 Other severance and exit costs 3,822 2,504 ----- ----- Total restructuring and other charges $4,151 $7,356 ====== ======
Severance and Other Personnel Costs Exit Costs Total --------------- ---------- ----- Balance as of January 1, 2005 $633 $1,396 $2,029 Charged to expense in 2005 3,945 (93) 3,852 Amounts utilized (4,325) (1,038) (5,363) ------ ------ ------ Balance at December 31, 2005 253 265 518 --- --- --- Amounts utilized (253) (176) (429) ---- ---- ---- Balance at December 31, 2006 $0 $89 $89 == === ===
Years Ended December 31 2006 2005 2004 ----------------------- ---- ---- ---- United States $53,587 $38,912 $33,268 Foreign $16,108 (6,038) (16,712) ------- ------- ------- Total $69,695 $32,874 $16,556 ======= ======= =======
Years Ended December 31 2006 2005 2004 ----------------------- ---- ---- ---- Current: Federal $15,437 $10,499 $8,622 State 3,179 3,146 565 Foreign 3,678 1,560 (442) ----- ----- ---- Total current 22,294 15,205 8,745 ====== ====== ===== Deferred: Federal 1,235 (265) 725 State 511 (490) (899) Foreign 508 6,983 (2,203) --- ----- ------ Total deferred 2,254 6,228 (2,377) ----- ----- ------ TOTAL $24,548 $21,433 $6,368 ======= ======= ======
Years Ended December 31 2006 2005 2004 ----------------------- ---- ---- ---- Income tax at Federal statutory rate $24,407 $11,506 $5,795 State and local income taxes (benefits) and changes in valuation allowances, net of federal tax benefit 2,577 1,311 (172) Foreign taxes at rates different from the U.S. rate 1,199 1,703 2,375 Changes in valuation allowances for foreign deferred tax assets (2,260) 10,194 -- Tax credits (718) (197) (599) Adjustment for prior year taxes (760) (3,205) (588) Other items, net 103 121 (443) --- --- ---- $24,548 $21,433 $6,368 ======= ======= ======
2006 2005 ---- ---- Current: Deductible assets $ (876) $(1,197) Accrued expenses and other liabilities 8,063 9,875 Inventory 1,596 1,201 Other (318) (125) Valuation allowances (738) (527) ---- ---- Total current 7,727 9,227 ----- ----- Non-current: Net operating loss and credit carryforwards 15,881 14,543 Foreign currency translation adjustments - (511) Accelerated depreciation 3,520 3,059 Intangible and other assets 8,453 10,031 Other 3,328 1,757 Valuation allowances (17,141) (14,779) ------- ------- Total non-current 14,041 14,100 ------- ------- TOTAL $21,768 $23,327 ======= =======
Related Third Party Party Capital Operating Operating Leases Leases Lease Total ------- ----------- ---------- ----- 2007 $573 $11,083 $612 $12,268 2008 402 10,369 10,771 2009 81 9,871 9,952 2010 11 7,662 7,673 2011 10 6,473 6,483 2012-2016 24,635 24,635 2017-2021 18,808 18,808 Thereafter 8,807 8,807 ------ ------- ---- ------- Total minimum lease payments 1,077 97,708 612 99,397 Less: sublease rental income 2,605 2,605 ------ ------- ---- ------- Lease obligation net of subleases 1,077 $95,103 $612 $96,792 ======= ==== ======= Less amount representing interest 46 ------ Present value of minimum capital lease payments (including current portion of $548) $1,031 ======
Year Ended December 31, ---------------------- 2006 2005 2004* ---- ---- ---- Net Sales: --------- Technology Products $2,148,104 $1,940,902 $1,776,444 Industrial products 196,860 174,616 151,630 Hosted Software 201 - 73 --- -- Consolidated $2,345,165 $2,115,518 $1,928,147 ========== ========== ========== Depreciation Expense: -------------------- Technology Products $6,395 $7,341 $9,081 Industrial products 1,040 1,995 1,789 Hosted Software 683 403 178 Corporate 67 255 266 -- --- --- Consolidated $8,185 $9,994 $11,314 ====== ====== ======= Income (Loss) from Operations: ----------------------------- Technology Products $59,374 $41,521 $16,873 Industrial products 13,957 7,591 10,782 Hosted Software (9,600) (6,803) (4,954) Corporate and other expenses (1,827) (7,500) (3,702) ------ ------ ------ Consolidated $61,904 $34,809 $18,999 ======= ======= ======= Total Assets Technology Products $230,512 $172,534 Industrial products 59,239 51,031 Hosted Software 3,068 1,819 Corporate and other 291,342 279,160 ------- ------- Consolidated 584,161 $504,544 ======= ========
Year Ended December 31, ---------------------- 2006 2005 2004* ---- ---- ---- Net Sales: United States: Industrial products $196,860 $174,616 $151,630 Technology Products 1,268,780 1,147,230 1,011,118 --------- --------- --------- United States total 1,465,640 1,321,846 1,162,748 Other North America 135,619 99,035 69,704 Europe 743,906 694,637 695,695 ------- ------- ------- Consolidated 2,345,165 $2,115,518 $1,928,147 ========= ========== ========== Dec 31, 2006 Dec 31, 2005 ------------ ------------ Long-lived Assets: North America - principally United States $21,347 $31,435 Europe 27,239 25,824 ------ ------ Consolidated $48,586 $57,259 ======= ======= Net sales are attributed to countries based on location of selling subsidiary. * As previously restated – see Note 2.
First Quarter Second Quarter Third Quarter Fourth Quarter 2006: Net sales $574,908 $547,242 $575,041 $647,974 Gross profit $90,763 $77,370 $91,514 $83,272 Net income $17,557 $7,106 $12,541 $8,033 Net income per common share: Basic $.51 $.20 $.36 $.23 Diluted $.48 $.19 $.33 $.22 2005: Net sales $537,908 $506,142 $488,502 $582,966 Gross profit $79,775 $71,365 $70,480 $85,667 Net income $2,638 $1,522 $3,875 $3,406 Net income per common share: Basic $.08 $.04 $.11 $.10 Diluted $.07 $.04 $.11 $.09
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31:(in thousands)
Balance at Beginning of Charged to Balance at Description Period Expenses Write-offs Other End of Period ------- -------- ---------- ----- ------------- Allowance for sales returns and doubtful accounts 2006 $12,508 $1,503 $(2,641) $11,370 2005 $11,318 $7,316 $(6,126) $12,508 2004 $10,000 $5,079 $(3,761) $11,318 Allowance for deferred tax assets 2006 Current $527 $136 $75 $738 Noncurrent (1) $14,779 $2,743 $(2,260) $1,879 $17,141 2005 Current $413 $114 $527 Noncurrent $10,643 $5,828 $(1,301) $(391) $14,779 2004 Current $698 $(285) $413 Noncurrent $12,953 $1,147 $(3,683) $226 $10,643
EXHIBIT INDEX