UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
COMMISSION FILE NUMBER 1-13792
Systemax Inc.(Exact name of registrant as specified in its charter)
11 Harbor Park DrivePort Washington, New York 11050(Address of registrant's principal executive offices)(516) 608-7000(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The number of shares outstanding of the registrant's Common Stock as of August 9, 2004 was 34,400,080.
PART I - FINANCIAL INFORMATIONItem 1. Financial Statements
Our independent auditors, Deloitte and Touche LLP, have not completed their review of the Company’s interim financial statements for the period ending June 30, 2004, pending the satisfactory completion of the independent review discussed in Part II, Item 5.
Systemax Inc.Condensed Consolidated Balance Sheets(In Thousands, except share data)
June 30, December 31, 2004 2003 ----------- ------------ (Unaudited) ASSETS: CURRENT ASSETS: Cash and cash equivalents $56,358 $38,702 Accounts receivable, net 156,560 152,435 Inventories 126,230 133,905 Prepaid expenses and other current assets 25,601 26,849 Deferred income tax assets 10,367 10,132 ----------- ------------ Total current assets 375,116 362,023 PROPERTY, PLANT AND EQUIPMENT, net 65,209 68,647 DEFERRED INCOME TAXES AND OTHER ASSETS 11,791 14,982 ----------- ------------ TOTAL ASSETS $452,116 $445,652 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY: CURRENT LIABILITIES: Short-term borrowings, including current portions of long-term debt $23,709 $20,814 Accounts payable 142,220 141,106 Accrued expenses and other current liabilities 50,743 51,037 ----------- ------------ Total current liabilities 216,672 212,957 ----------- ------------ LONG-TERM DEBT 17,590 18,353 OTHER LIABILITIES 1,732 1,768 SHAREHOLDERS' EQUITY: Preferred stock, par value $.01 per share, authorized 25 million shares, issued none Common stock, par value $.01 per share, authorized 150 million shares, issued 38,231,990 shares; outstanding 34,391,296 (2004) and 34,288,068 shares (2003) 382 382 Additional paid-in capital 175,294 175,343 Accumulated other comprehensive income, net 1,460 2,157 Retained earnings 84,105 81,022 ----------- ------------ 261,241 258,904 ----------- ------------ Less: common stock in treasury at cost - 3,840,694 (2004) and 3,943,922 (2003) shares 45,119 46,330 ----------- ------------ Total shareholders' equity 216,122 212,574 ----------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $452,116 $445,652 =========== ============
See notes to condensed consolidated financial statements.
Systemax Inc.Condensed Consolidated Statements of Operations (Unaudited)(In Thousands, except per share amounts)
Six Months Ended Three Months Ended June 30, June 30, -------------------------------- ------------------------------------ 2004 2003 2004 2003 --------------- --------------- ----------------- ----------------- Net sales $916,726 $815,259 $430,990 $388,798 Cost of sales 774,088 679,256 363,172 325,273 --------------- --------------- ----------------- ----------------- Gross profit 142,638 136,003 67,818 63,525 Selling, general & administrative expenses 129,676 125,483 64,101 61,682 Restructuring and other charges 5,015 112 973 Goodwill impairment 2,560 2,560 --------------- --------------- ----------------- ----------------- Income (loss) from operations 7,947 7,848 2,744 (717) Interest and other expense, net 1,073 533 426 319 --------------- --------------- ----------------- ----------------- Income (loss) before income taxes 6,874 7,315 2,318 (1,036) Provision for income taxes 3,791 4,144 1,647 828 --------------- --------------- ----------------- ----------------- Net income (loss) $3,083 $3,171 $671 $(1,864) =============== =============== ================= ================= Net income (loss) per common share: Basic $.09 $.09 $.02 $(.05) =============== =============== ================= ================= Diluted $.09 $.09 $.02 $(.05) =============== =============== ================= ================= Weighted average common and common equivalent shares: Basic 34,338 34,106 34,371 34,108 =============== =============== ================= ================= Diluted 35,227 34,312 35,224 34,108 =============== =============== ================= =================
Systemax Inc.Condensed Consolidated Statement of Shareholders' Equity (Unaudited)(In Thousands)
Common Stock Accumulated ----------------------- Other Additional Comprehensive Treasury Comprehensive Number of Paid-in Retained Income (Loss), Stock, Income (Loss), Shares Amount Capital Earnings Net of Tax At Cost Net of Tax ------------- ---------- ------------- ----------- ------------------ ------------ --------------- Balances, January 1, 2004 34,288 $382 $175,343 $81,022 $2,157 $(46,330) Exercise of stock options 103 (849) 1,211 Change in cumulative translation adjustment, net (697) $(697) Compensation expense related to stock option plans 800 Net income 3,083 3,083 ------- ----- --------- -------- ------- -------- ------ Total comprehensive income $2,386 ====== Balances, June 30, 2004 34,391 $382 $175,294 $84,105 $1,460 $(45,119) ======= ===== ========= ======== ======= ========
Systemax Inc.Condensed Consolidated Statements of Cash Flows (Unaudited)(In Thousands)
Six Months Ended June 30, -------------------------------- 2004 2003 ---- ---- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income $3,083 $3,171 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for deferred income taxes 2,434 1,304 Depreciation and amortization 5,857 6,768 Provision for returns and doubtful accounts 1,634 1,399 Loss on dispositions and abandonment 525 24 Compensation expense related to stock option plans 800 Goodwill impairment 2,560 Changes in operating assets and liabilities: Accounts receivable (7,147) 9,849 Inventories 7,185 (5,596) Prepaid expenses and other current assets 1,518 9,005 Accounts payable, accrued expenses and other current liabilities 1,641 (24,094) --------------- --------------- Net cash provided by operating activities 17,530 4,390 --------------- --------------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Investments in property, plant and equipment (2,894) (4,230) Proceeds from disposals of property, plant and equipment 131 61 Purchase of minority interest (2,560) --------------- --------------- Net cash used in investing activities (2,763) (6,729) --------------- --------------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds (repayments) of borrowings from banks 2,910 (7,409) Repayments of long-term debt and capital lease obligations (878) (625) Exercise of stock options 362 35 --------------- --------------- Net cash provided by (used in) financing activities 2,394 (7,999) --------------- --------------- EFFECTS OF EXCHANGE RATES ON CASH 495 (402) --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,656 (10,740) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 38,702 62,995 --------------- --------------- CASH AND CASH EQUIVALENTS - END OF PERIOD $56,358 $52,255 =============== ===============
Systemax Inc.Notes to Condensed Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, Three Months Ended June 30, ------------------------- --------------------------- 2004 2003 2003 2004 ---- ---- ---- ---- 626,000 1,277,000 588,000 693,000
Six Months Ended Three Months Ended June 30, June 30, ----------------- ------------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net income (loss) - as reported $3,083 $3,171 $671 $(1,864) Stock-based employee compensation expense determined under fair value based method, net of related tax effects 214 259 208 124 ------ ------ ---- ------- Pro forma net income (loss) $2,869 $2,912 $463 $(1,988) ====== ====== ==== ======= Net income (loss) per common share: Basic: Net income (loss) - as reported $.09 $.09 $.02 $(.05) ====== ====== ==== ======= Net income (loss) - pro forma $.08 $.09 $.01 $(.06) ====== ====== ==== ======= Diluted: Net income (loss) - as reported $.09 $.09 $.02 $(.05) ====== ====== ==== ======= Net income (loss) - pro forma $.08 $.08 $.01 $(.06) ====== ====== ==== =======
2004 2003 ---- ---- Expected dividend yield 0% 0% Risk-free interest rate 5.0% 5.0% Expected volatility 55.0% 68.0% Expected life in years 2.29 2.35
Severance and Asset Other Personnel Costs Write-downs Exit Costs Total --------------- ----------- ---------- ----- Charged to expense in 2004 $3,153 $483 $60 $3,696 Amounts utilized (1,933) (483) - (2,416) ------- ---- --- ------- Accrued at June 30, 2004 $ 1,220 - $60 $1,280 ======= ==== === ======
Severance and Asset Other Personnel Costs Write-downs Exit Costs Total --------------- ----------- ---------- ----- Accrued at December 31, 2003 $ 63 $233 $417 $713 Amounts utilized (63) (82) (261) (406) ---- ---- ---- ---- Accrued at June 30, 2004 - $151 $156 $307 ==== ==== ==== ====
Asset Other Write-downs Exit Costs Total ----------- ---------- ----- Accrued at December 31, 2003 $630 $1,682 $2,312 Amounts utilized (630) (951) (1,581) ---- ------ ------ Accrued at June 30, 2004 - $731 $731 ==== ====== ======
Six Months Ended Three Months Ended June 30, June 30, -------- -------- 2004 2003 2004 2003 ---- ---- ---- ---- Net Sales (in thousands): North America $570,983 $500,332 $275,077 $240,501 Europe 345,743 314,927 155,913 148,297 -------- -------- -------- -------- Consolidated $916,726 $815,259 $430,990 $388,798 ======== ======== ======== ======== Revenues are attributed to countries based on location of selling subsidiary.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
Net sales for the three months ended June 30, 2004 increased 10.9% to $431.0 million compared to $388.8 million in the year-ago quarter. North American sales were $275.1 million, an increase of 14.4% from $240.5 million in the prior year. European sales increased 5.1%, to $155.9 million (representing 36.2% of worldwide sales) compared to $148.3 million (38.1% of worldwide sales) in the year-ago quarter. Movements in foreign exchange rates positively impacted the European sales comparison by approximately $13.3 million in 2004. Excluding the movements in foreign exchange rates, European sales would have decreased 3.8% from the prior year.
Gross profit was $67.8 million compared to $63.5 million in the year-ago quarter, an increase of $4.3 million. The increase in gross profit includes an increase of $2.7 million in the amount of vendor allowances reclassified from selling, general and administrative expenses (as a reduction of advertising expenses) as a result of the adoption of Emerging Issues Task Force (“EITF”) Issue 02-16, “Accounting for Consideration Received From a Vendor by a Customer (Including a Reseller of the Vendor’s Products)” in 2003. The gross profit margin was 15.7% in the current quarter, compared to 16.3% in the year-ago quarter. The decline in the gross profit margin was due to pricing pressures, increased customer discounting and changes in the mix of products sold from a year ago.
Selling, general and administrative expenses for the quarter increased $2.4 million, or 3.9%, to $64.1 million compared to $61.7 million in the second quarter of 2003. This increase resulted from an increase of $2.7 million in the amount of vendor allowances reclassified to cost of sales and increased costs in Europe due to the adverse effects of changes in foreign exchange rates. These increases were offset by decreased salaries resulting from workforce reductions in the U. S. associated with our first quarter 2004 computer business streamlining plan and reductions in catalog spending. Selling, general and administrative expenses as a percentage of net sales decreased to 14.9% compared to 15.9% in the year-ago quarter.
During the second quarter of 2004, we incurred $1.0 million of restructuring charges in Europe in connection with facility exit costs and workforce reductions.
During the second quarter of 2003, we purchased the minority ownership of our Netherlands subsidiary pursuant to the terms of the original purchase agreement for $2.6 million. All of the purchase price was attributable to goodwill and, as a result of an impairment analysis, was written off in accordance with Statement of Financial Accounting Standards (“SFAS”) 142.
As a result of the above factors, we had income from operations for the current quarter of $2.7 million compared to a loss from operations of $0.7 million in the year-ago quarter. In our North American operations, we had income from operations of $5.1 million in the current quarter compared to income from operations of $1.3 million last year. Europe had a loss from operations of $2.4 million in the second quarter of 2004 compared to a loss from operations of $2.0 million in the year-ago quarter.
Interest and other expense - net consists principally of interest expense. Interest expense was $725,000 in the second quarter of 2004 and $524,000 in 2003 as a result of higher average borrowings in Europe. Interest income on invested funds increased in 2004 as a result of more funds available for investment.
Income tax expense was $1.6 million in the second quarter of 2004 and $0.8 million in the year-ago quarter. The effective tax rate for the second quarter of 2004 was high due to losses in tax jurisdictions for which no benefit is currently recognized. In 2003, as a result of the goodwill impairment write-off which is not deductible for tax purposes, we had a loss before income taxes with an income tax expense of $828,000.
As a result of the above, net income for the second quarter was $671,000, or $.02 per basic and diluted share, compared to a loss of $1.9 million, or $.05 per basic and diluted share, in the second quarter of 2003.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Net sales for the six months ended June 30, 2004 increased 12.4% to $916.7 million compared to $815.3 million in the year-ago period. North American sales were $571.0 million, a 14.1% increase from last year’s $500.3 million. European sales increased 9.8% to $345.7 million for the first six months of 2004 (representing 37.7% of worldwide sales) compared to $314.9 million (representing 38.6% of worldwide sales) in the year-ago six-month period. Movements in foreign exchange rates positively impacted European sales for the first six months of 2004 by approximately $39.1 million. Excluding the movements in foreign exchange rates, European sales would have decreased 2.6% from the prior year. The increase in North American sales resulted from increased sales of computer products to consumer customers, driven by increased internet purchases and increased sales in our industrial products division. These were partially offset by weakness in demand for information technology products by corporate customers. European sales were lower in local currencies as a result of continued weak market conditions in many of the local markets.
Gross profit was $142.6 million, or 15.6% of net sales, compared to $136.0 million, or 16.7% of net sales, in the year-ago period, an increase of $6.6 million. The increase in gross profit includes an increase of $5.2 million in the amount of vendor allowances reclassified from selling, general and administrative expenses (as a reduction of advertising expenses) as a result of the adoption of EITF Issue 02-16 in 2003. The decline in gross profit margin was due to continued pricing pressure, increased customer discounting and a change in the mix of products sold.
Selling, general and administrative expenses for the six months increased by $4.2 million or 3.3% to $129.7 million compared to $125.5 million in the first half of 2003. This increase resulted from an increase of $5.2 million in the amount of vendor allowances reclassified to cost of sales in 2004 and the adverse effect of movements in foreign exchange rates on our European costs. Decreases in selling, general and administrative expenses resulted from workforce reductions in the U. S. associated with our first quarter 2004 computer business streamlining plan and reductions in catalog spending. As a percentage of sales, these expenses were 14.1% compared to 15.4% in the year-ago period.
During the second quarter of 2004, we incurred $1.0 million of restructuring charges in Europe in connection with facility exit costs and workforce reductions. During 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 also consolidated United Kingdom sales offices in the first quarter of 2004, resulting in the elimination of 50 jobs with restructuring costs of approximately $300,000.
During the second quarter of 2003, we purchased the minority ownership of our Netherlands subsidiary pursuant to the terms of the original purchase agreement for $2.6 million. All of the purchase price was attributable to goodwill and, as a result of an impairment analysis, was written off in accordance with SFAS 142.
The Company had income from operations for the current six month period of $7.9 million compared to $7.8 million in the year-ago period. The Company had income from operations of $7.0 million in its North American operations in the current six month period compared to $7.1 million last year. European income from operations was $0.9 million, an increase of $0.2 million from $0.7 million in the year-ago period.
Interest and other expense - net consists principally of interest expense. Interest expense was $1.4 million in the first six months of 2004 and $1.1 million in 2003 as a result of higher average borrowings in Europe. Interest income on invested funds was $0.4 million in both years.
The income tax provision was $3.8 million for the first six months of 2004 compared to a $4.1 million tax provision for the comparable period in 2003. The effective tax rates were 55.1% in 2004 and 56.7% in 2003. The high effective tax rates are due to non-deductible costs incurred and losses in tax jurisdictions for which no benefit is currently recognized.
As a result of the above, net income for the first six months of 2004 was $3.1 million, or $.09 per basic and diluted share, compared to $3.2 million, or $.09 per basic and diluted share, in the year ago period.
Liquidity and Capital Resources
Our primary liquidity needs are to support working capital requirements in our business and to fund capital expenditures. We rely principally upon operating cash flow and borrowings under our credit facilities to meet these needs. We believe that cash flow available from these sources will be sufficient to meet our working capital requirements, projected capital expenditures and interest and debt repayments in the foreseeable future.
Our cash balance increased to $56.4 million during the six months ended June 30, 2004 from $38.7 million at the end of 2003. Net cash provided by operating activities was $17.5 million in 2004, compared with $4.4 million in 2003. The increase in cash provided by operations in 2004 resulted from changes in our working capital accounts, which provided $3.2 million in cash compared to using $10.8 million of cash in 2003. The improvement resulted primarily from a $7.7 million decrease in inventory in the first six months of 2004, compared to a $7.3 million increase for the same period of the prior year, and a $0.8 million increase in accounts payable, accrued expenses and other current liabilities in 2004, compared to an $18.6 million decrease in the year ago period. Cash generated from net income adjusted by other non-cash items provided $14.3 million in 2004, compared to $15.2 million provided by these items in 2003.
Our working capital was $158 million at June 30, 2004, an increase of $9 million from $149 million at the end of 2003. This was due principally to an $18 million increase in cash and a $4 million increase in accounts receivable offset by an $8 million decrease in inventories, a $1 million decrease in prepaid expenses and other current assets, a $3 million increase in short-term debt and a $1 million increase in accounts payable. Our inventories decreased as a result of the streamlining plan we initiated in our U. S. computer business in the first quarter of this year, which included a consolidation of multiple warehouses into a single location. Future accounts receivable and inventory balances will continue to fluctuate with changes in sales volume and the mix of our net sales between consumer and business customers.
We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of June 30, 2004, all of our investments mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.
In 2004 $2.8 million of cash was used in investing activities, principally for the purchase of property, plant and equipment. Capital expenditures in 2004 consisted primarily of upgrades and enhancements to our information and communications systems hardware and facilities costs for the opening of several new retail stores. Cash of $6.7 million was used in investing activities in 2003, including $4.2 million for capital expenditures and $2.6 million for the acquisition of the minority interest in our Netherlands subsidiary.
Net cash of $2.4 million was provided by financing activities in 2004. Cash of $2.9 million was provided by borrowings under our short-term United Kingdom credit facility. We used cash of $878,000 for payments under long-term borrowing agreements. Exercises of stock options provided $362,000 of cash in 2004. Cash of $8.0 million was used by financing activities in 2003, principally to repay bank borrowings and long-term debt.
Under our $70 million United States secured revolving credit agreement, which expires on March 31, 2005, availability as of June 30, 2004 was $58.7 million. There were outstanding letters of credit of $7.6 million and there were no outstanding advances as of June 30, 2004. Under our £15 million ($27.1 million at the June 30, 2004 exchange rate) multi-currency United Kingdom credit facility, which is available to our United Kingdom subsidiaries, at June 30, 2004 there were £9.1 million ($16.4 million) of borrowings outstanding with interest payable at a rate of 5.87%. The facility does not have a termination date, but may be canceled by either party on six months notice. Borrowings under the facility are secured by certain assets of our United Kingdom subsidiaries. Under our Netherlands €5 million ($6.1 million at the June 30, 2004 exchange rate) credit facility, at June 30, 2004 there were €4.5 million ($5.5 million) of borrowings outstanding under this line with interest payable at a rate of 5.0%. This facility expires in November 2005.
We have begun discussions with our lenders to replace the current United States and United Kingdom credit facilities with a single multi-currency borrowing facility. We expect that a new agreement will be completed by the end of the calendar year.
We also have certain obligations with various parties that include commitments to make future payments. Our principal commitments at June 30, 2004 consisted of repayments of borrowings under our credit agreements and long-term borrowings and payments under operating leases for certain of our real property and equipment.
Off-balance Sheet Arrangements
The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.
Forward Looking Statements - Factors That May Affect Future Results and Financial Condition
This report contains forward looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward looking statements may be made by the Company from time to time, in filings with the Securities Exchange Commission or otherwise. Statements contained in this report that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, financing needs, compliance with financial covenants in loan agreements, plans for acquisition or sale of assets or businesses and consolidation of operations of newly acquired businesses, and plans relating to products or services of the Company, assessments of materiality, predictions of future events and the effects of pending and possible litigation, as well as assumptions relating to the foregoing. In addition, when used in this discussion, the words “anticipates”, “believes”, “estimates”, “expects”, “intends”, “plans” and variations thereof and similar expressions are intended to identify forward looking statements.
Forward-looking statements in this report are based on the Company’s beliefs and expectations as of the date of this report and are subject to risks and uncertainties which may have a significant impact on the Company’s business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of the risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Many of these risk factors are discussed in Item 7 (“Factors That May Affect Future Results and Financial Condition”) of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and which discussion is incorporated by reference herein.
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates as measured against the U.S. dollar and each other.
We have limited involvement with derivative financial instruments and do not use them for trading purposes. Changes in currency exchange rates as measured against the U.S. dollar may positively or negatively affect sales, gross margins, operating expenses and retained earnings as expressed in U.S. dollars. We may enter into foreign currency options or forward exchange contracts aimed at limiting in part the impact of certain currency fluctuations, but as of June 30, 2004 we had no outstanding forward exchange contracts.
Our exposure to market risk for changes in interest rates relates primarily to our variable rate debt. In connection with our United Kingdom term loan agreement, effective April 30, 2002 we entered into an interest rate collar agreement to reduce our exposure to market rate fluctuations. At June 30, 2004 the notional amount of the interest rate collar was £5.4 million ($9.8 million at the June 30, 2004 exchange rate) with an interest rate cap of 6.0% and a floor of 4.5%. The interest rate collar expires on April 30, 2005.
Item 4. Controls and Procedures
The Company has carried out an evaluation under the supervision of management, including the Chairman and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2004, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is assembled and reported to the Company’s management, including the Chairman and Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Other than arising from the review described below, there have been no changes in internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Management has identified and reported to the Audit Committee of the Company’s Board of Directors certain matters involving internal control deficiencies. These deficiencies include informal worldwide policies and procedures and inadequate systems interfaces which are remedied through substantial manual intervention and numerous manual journal entries and account reconciliation procedures. In addition, management has identified internal control deficiencies arising from the consolidation of its U.S. computer businesses with separate accounting systems to a single accounting system. These internal control deficiencies affect the timeliness and accuracy of recording certain transactions and include the lack of formal procedures to reconcile intercompany accounts and transactions. Management will evaluate the additional steps and actions needed to improve our financial infrastructure and eliminate the deficiencies identified. There have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date we carried out this evaluation.
Management and the Audit Committee believe that the internal control deficiencies, as mitigated by the substantial manual procedures and account reconciliations noted above, individually or in the aggregate, did not have a material effect on the financial statements of the Company for the period ended June 30, 2004.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
The annual meeting of the stockholders of the Company was held on May 25, 2004. Each of the seven candidates for the position of director (Richard Leeds, Bruce Leeds, Robert Leeds, Gilbert Fiorentino, Robert D. Rosenthal, Stacy S. Dick and Ann R. Leven) was elected.
The matters voted upon at the meeting and the number of votes cast for, against or withheld (including abstentions) as to each matter, including nominees for office, are as follows:
1. Director election: Richard Leeds For: 33,170,928 Withhold Authority: 731,364 Robert Leeds For: 33,645,753 Withhold Authority: 256,539 Bruce Leeds For: 33,170,925 Withhold Authority: 731,367 Gilbert Fiorentino For: 33,645,753 Withhold Authority: 256,539 Robert D. Rosenthal For: 33,645,753 Withhold Authority: 256,539 Stacy S. Dick For: 33,645,753 Withhold Authority: 256,539 Ann R. Leven For: 33,645,753 Withhold Authority: 256,539 2. Approval of amendments to the Company's 1999 Long-Term Stock Incentive Plan: For: 27,924,959 Against: 2,022,178 Abstain: 61,006 3. Ratification of the appointment of Deloitte & Touche LLP as Independent Auditors for the Fiscal Year ending December 31, 2004: For: 33,814,158 Against: 84,500 Abstain: 3,634
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(b) Reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.