Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended September 30, 2008

 

 

 

or

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to                        

 

COMMISSION FILE NUMBER 1-13792

 

Systemax Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

11-3262067

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

11 Harbor Park Drive

Port Washington, New York   11050

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code: (516) 608-7000

 

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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer o    Accelerated filer   x           Non-accelerated filer o      Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o    No x

 

The number of shares outstanding of the registrant’s Common Stock as of October 31, 2008 was 36,470,620.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

Available Information

3

 

 

 

Part I

 

 

Item 1.

Financial Statements

4

Item 2.

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

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

16

Item 4.

Controls and Procedures

16

 

 

 

Part II

 

 

Item 1.

Legal Proceedings

18

Item 6.

Exhibits

18

 

 

 

 

Signatures

19

 

2



Table of Contents

 

Available Information

 

We maintain an internet web site at www.systemax.com. We file reports with the Securities and Exchange Commission (“SEC”) 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”):

 

·                  Corporate Ethics Policy for officers, directors and employees

·                  Charter for the Audit Committee of the Board of Directors

·                  Charter for the Compensation Committee of the Board of Directors

·                  Charter for the Nominating/Corporate Governance Committee of the Board of Directors

·                  Corporate Governance Guidelines and Principles

 

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.

 

3



Table of Contents

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

 

Systemax Inc.

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

73,373

 

$

128,021

 

Accounts receivable, net

 

207,446

 

206,940

 

Inventories, net

 

275,974

 

250,222

 

Prepaid expenses and other current assets

 

17,087

 

14,455

 

Deferred income tax assets, net

 

9,700

 

9,360

 

Total current assets

 

583,580

 

608,998

 

 

 

 

 

 

 

Property, plant and equipment, net

 

52,134

 

47,580

 

Deferred income tax assets, net

 

14,052

 

18,652

 

Goodwill, intangibles and other assets

 

31,536

 

1,150

 

 

 

 

 

 

 

Total assets

 

$

681,302

 

$

676,380

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings, including current portions of long-term debt

 

$

520

 

$

4,302

 

Accounts payable

 

262,670

 

248,673

 

Accrued expenses and other current liabilities

 

72,951

 

81,670

 

Total current liabilities

 

336,141

 

334,645

 

 

 

 

 

 

 

Long-term debt

 

501

 

254

 

Other liabilities

 

5,688

 

5,646

 

Total liabilities

 

342,330

 

340,545

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock

 

 

 

Common stock

 

389

 

383

 

Additional paid-in capital

 

178,079

 

173,381

 

Treasury stock

 

(28,785

)

(26,324

)

Retained earnings

 

182,433

 

176,684

 

Accumulated other comprehensive income

 

6,856

 

11,711

 

Total shareholders’ equity

 

338,972

 

335,835

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

681,302

 

$

676,380

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

Systemax Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net sales

 

$

739,479

 

$

687,317

 

$

2,220,251

 

$

2,010,541

 

Cost of sales

 

623,010

 

576,664

 

1,873,054

 

1,703,896

 

Gross profit

 

116,469

 

110,653

 

347,197

 

306,645

 

Selling, general & administrative expenses

 

97,887

 

84,847

 

280,026

 

239,233

 

Operating income

 

18,582

 

25,806

 

67,171

 

67,412

 

Interest and other income, net

 

(58

)

(1,113

)

(1,245

)

(2,811

)

Income before income taxes

 

18,640

 

26,919

 

68,416

 

70,223

 

Provision for income taxes

 

7,367

 

9,275

 

25,541

 

24,922

 

Net income

 

$

11,273

 

$

17,644

 

$

42,875

 

$

45,301

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

.31

 

$

.49

 

$

1.18

 

$

1.26

 

Diluted

 

$

.30

 

$

.47

 

$

1.14

 

$

1.20

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

36,579

 

36,055

 

36,472

 

35,928

 

Diluted

 

37,524

 

37,734

 

37,483

 

37,667

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

$

 

$

 

$

1.00

 

$

1.00

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

Systemax Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

42,875

 

$

45,301

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

7,591

 

6,675

 

Provision (benefit) for deferred income taxes

 

3,922

 

580

 

Provision (reduction) for returns and doubtful accounts

 

1,170

 

2,856

 

Compensation expense related to equity compensation plans

 

2,778

 

2,934

 

Excess tax benefit from exercises of stock options

 

(1,377

)

(1,810

)

(Gain) loss on dispositions and abandonment

 

13

 

1

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(6,016

)

(12,165

)

Inventories

 

(27,795

)

1,440

 

Prepaid expenses and other current assets

 

(3,171

)

577

 

Accounts payable, accrued expenses and other current liabilities

 

11,321

 

17,031

 

Net cash provided by operating activities

 

31,311

 

63,420

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of CompUSA

 

(30,649

)

 

Purchases of property, plant and equipment

 

(13,159

)

(6,064

)

Proceeds from disposals of property, plant and equipment

 

47

 

13

 

Net cash used in investing activities

 

(43,761

)

(6,051

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Repayments of borrowings from banks

 

(3,989

)

(12,487

)

Proceeds from (repayments of) long-term debt and capital lease obligations, net

 

298

 

(278

)

Dividends paid

 

(37,126

)

(36,588

)

Proceeds from issuance of common stock

 

1,125

 

2,645

 

Repurchase of treasury stock

 

(3,435

)

(1,860

)

Excess tax benefit from exercises of stock options

 

1,377

 

1,810

 

Net cash used in financing activities

 

(41,750

)

(46,758

)

 

 

 

 

 

 

Effects of exchange rates on cash

 

(448

)

209

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(54,648

)

10,820

 

Cash and cash equivalents – beginning of period

 

128,021

 

86,964

 

Cash and cash equivalents – end of period

 

$

73,373

 

$

97,784

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

Acquisitions of equipment through capital leases

 

$

750

 

$

148

 

 

See notes to condensed consolidated financial statements.

 

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Systemax Inc.

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Other

 

 

 

 

 

Number of

 

 

 

Additional

 

Treasury

 

 

 

Comprehensive

 

 

 

 

 

Shares

 

 

 

Paid-in

 

Stock,

 

Retained

 

Income,

 

Comprehensive

 

 

 

Outstanding

 

Amount

 

Capital

 

At Cost

 

Earnings

 

Net of Tax

 

Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2008

 

36,092

 

$

383

 

$

173,381

 

$

(26,324

)

$

176,684

 

$

11,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

2,703

 

 

 

 

 

 

 

 

 

Issuance of restricted stock

 

104

 

1

 

283

 

46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

501

 

5

 

193

 

928

 

 

 

 

 

 

 

Repurchase of treasury stock

 

(228

)

 

 

 

 

(3,435

)

 

 

 

 

 

 

Income tax benefit on stock-based compensation

 

 

 

 

 

1,519

 

 

 

 

 

 

 

 

 

Change in cumulative translation adjustment, net

 

 

 

 

 

 

 

 

 

 

 

(4,855

)

$

(4,855

)

Dividends paid

 

 

 

 

 

 

 

 

 

(37,126

)

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

42,875

 

 

 

42,875

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

38,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, September 30, 2008

 

36,469

 

$

389

 

$

178,079

 

$

(28,785

)

$

182,433

 

$

6,856

 

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

Systemax Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1.                Basis of Presentation

 

The accompanying condensed consolidated financial statements of the Company and its wholly-owned subsidiaries are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America are not required in these interim financial statements and have been condensed or omitted. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to current year presentation.

 

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of September 30, 2008 and the results of operations for the three and nine month periods ended September 30, 2008 and 2007, cash flows for the nine month periods ended September 30, 2008 and 2007 and changes in shareholders’ equity for the nine month period ended September 30, 2008.  The December 31, 2007 condensed consolidated balance sheet has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of December 31, 2007 and for the year then ended included in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.  The results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results for an entire year.

 

Systemax manages its business and reports using a 52-53 week fiscal year that ends at midnight on the Saturday closest to December 31. For clarity of presentation herein, fiscal years and quarters are referred to as if they ended on the traditional calendar month.  The actual fiscal quarter ended on September 27, 2008. The third quarters of both 2008 and 2007 included 13 weeks, and the nine month periods of both 2008 and 2007 included 39 weeks.

 

2.              Acquisition of CompUSA

 

On January 5, 2008, the Company, through various subsidiaries, entered into an asset purchase agreement with CompUSA Inc., a Delaware corporation. Pursuant to the Purchase Agreement, the Company acquired certain assets and liabilities related to the e-commerce business of CompUSA Inc., certain intellectual property rights owned by CompUSA, and the E-Commerce Business for $18.9 million in cash.  The Company completed its acquisition of the E-Commerce Business on January 10, 2008.  Pursuant to the Purchase Agreement, the Company also acquired sixteen retail leases from CompUSA Inc. and certain fixtures located at these locations. The closing of the acquisition of each lease was subject to the receipt of the consent of the landlord, if required, under the terms of a lease.  During February and March 2008 the Company completed the acquisition of these sixteen store leases and fixtures for an aggregate purchase price of approximately $11.7 million. This acquisition accelerates the Company’s planned expansion into the retail market place and gives the Company 29 retail storefronts operating in North America and Puerto Rico.

 

A preliminary purchase price allocation has been completed and the Company has recorded assets of approximately $17.0 million for Trademarks and Trade Names, $8.0 million for Domain Names, $.4 million for Client Lists, $.9 million for fixed assets and $4.3 million for Goodwill. The Company expects to amortize its Client Lists over a 5 year period and depreciate its fixed assets over a similar period. All other assets are indefinite lived.

 

The Company was assigned the rights and prospective obligations of the tenant for each of the 16 retail stores acquired. The following table details the contractual obligations related to the assigned leases (in thousands):

 

 

 

2008

 

2009

 

2010

 

2011

 

2012

 

After 2012

 

Retail store operating leases

 

$

4,669

 

$

5,067

 

$

4,695

 

$

4,105

 

$

3,699

 

$

13,808

 

 

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Table of Contents

 

3.              Stock-based Compensation Plans

 

Pre-tax stock-based compensation expense for the nine months ended September 30, 2008 and 2007 was $2,778,000 and $2,934,000 respectively.

 

The Company continues to use the simplified method for determining expected life of a stock option as permitted in SEC Staff Accounting Bulletin 110 for options qualifying for treatment (“plain-vanilla” options) due to the limited history the Company currently has with option exercise activity.

 

4.                Net Income per Common Share

 

Net income per common share - basic was calculated based upon the weighted average number of common shares outstanding during the respective periods presented.  Net income per common share - diluted was calculated based upon the weighted average number of common shares outstanding and included the equivalent shares for dilutive options outstanding during the respective periods. The dilutive effect of outstanding options issued by the Company is reflected in net income per share - diluted using the treasury stock method. Under the treasury stock method, options will only have a dilutive effect when the average market price of common stock during the period exceeds the exercise price of the options. The weighted average number of stock options outstanding excluded from the computation of diluted earnings per share was 599,000 and 100,000 shares for the three months ended September 30, 2008 and 2007, and 605,000 and zero shares for the nine months ended September 30, 2008 and 2007, respectively, due to their antidilutive effect.

 

5.    Comprehensive Income

 

Comprehensive income consists of net income and foreign currency translation adjustments, net of tax, and is included in the Condensed Consolidated Statement of Shareholders’ Equity. For the three month periods ended September 30, 2008 and 2007, comprehensive income was $4,603,000 and $20,847,000, respectively. For the nine month periods ended September 30, 2008 and 2007, comprehensive income was $38,020,000 and $50,831,000, respectively.

 

6.    Credit Facilities

 

The Company maintains a $120 million (which may be increased by up to $30 million, subject to certain conditions) secured revolving credit agreement with a group of financial institutions which provides for borrowings in the United States and United Kingdom. The borrowings are secured by all of the Company’s domestic and United Kingdom accounts receivable, the domestic inventories of the Company, general intangibles and the Company’s shares of stock in its domestic subsidiaries and the Company’s United Kingdom headquarters building. The credit facility expires and the outstanding borrowings thereunder are due on October 26, 2010. The revolving credit agreement contains certain financial and other covenants, including maintaining a minimum level of availability and restrictions on capital expenditures and payments of dividends. The Company was in compliance with all of the covenants as of September 30, 2008. As of September 30, 2008, eligible collateral under the agreement was $120 million, total availability was $109.3 million and there were outstanding letters of credit of $10.7 million and there were no outstanding advances.

 

The Company’s Netherlands subsidiary maintains a €5.0 million ($7.3 million at the September 30, 2008 exchange rate) credit facility with a local financial institution. At September 30, 2008 there were approximately €14 thousand ($20 thousand) of borrowings outstanding with interest payable at a rate of 8.15%. 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. The facility expires in November 2008. The Company will not be renewing this credit facility.

 

7.    Product Warranties

 

Provisions for estimated future expenses relating to product warranties for the Company’s assembled proprietary products are recorded as cost of sales when revenue is recognized. Liability estimates are determined based on management judgment considering such factors as the number of units sold, historical and anticipated rates of warranty claims and the likely current cost of corrective action.  The changes in accrued product warranties were as follows:

 

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Table of Contents

 

 

 

Nine months
ended
September 30,
2008
(in thousands)

 

 

 

 

 

Balance, beginning of year

 

$

914

 

Charged to expense

 

819

 

Deductions

 

(993

)

Balance, end of period

 

$

740

 

 

8.                Segment Information

 

Systemax is primarily a direct marketer of brand name and private label products. Our operations are organized in three reportable business segments – Technology Products, Industrial Products and Hosted Software. Our Technology Products segment sells computers, computer supplies and consumer electronics which are marketed in North America and Western Europe.  Most of these products are manufactured by other companies.  We assemble our own personal computers (“PCs”) and sell them under the trademarks Systemax™ and Ultra™.  We also sell certain computer-related products manufactured for us to our own design under the trademark Ultra™.  Our Industrial Products segment sells a wide array of material handling equipment, storage equipment and consumable industrial items which are marketed in North America. Most of these products are manufactured by other companies.  Some products are manufactured for us to our own design and marketed under the trademarks Global™, GlobalIndustrial.com™ and Nexel™. In both of these segments we offer our customers a broad selection of products, prompt order fulfillment and extensive customer service. Our Hosted Software segment, which became a reportable segment in 2006, participates in the emerging market for on-demand, web-based business software applications through the marketing of our PCS ProfitCenter Software application.

 

The Company’s chief operating decision-maker is the Company’s Chief Executive Officer. The Company evaluates segment performance based on operating income, before net interest, foreign exchange gains and losses, restructuring and other charges and income taxes. Corporate costs not identified with the disclosed segments and restructuring and other charges are grouped as “Corporate and other expenses.” The chief operating decision-maker reviews assets and makes capital expenditure decisions for the Company on a consolidated basis only. The accounting policies of the segments are the same as those of the Company.

 

Financial information relating to the Company’s operations by reportable segment was as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Net sales:

 

 

 

 

 

 

 

 

 

Technology products

 

$

676,133

 

$

625,683

 

$

2,037,780

 

$

1,840,922

 

Industrial products

 

63,187

 

61,523

 

182,166

 

169,232

 

Hosted software

 

159

 

111

 

305

 

387

 

Consolidated

 

$

739,479

 

$

687,317

 

$

2,220,251

 

$

2,010,541

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

Technology products

 

$

21,316

 

$

27,693

 

$

75,030

 

$

72,078

 

Industrial products

 

7,315

 

6,592

 

19,548

 

16,759

 

Hosted software

 

(3,775

)

(5,019

)

(12,379

)

(10,983

)

Corporate and other expenses

 

(6,274

)

(3,460

)

(15,028

)

(10,442

)

Consolidated

 

$

18,582

 

$

25,806

 

$

67,171

 

$

67,412

 

 

10



Table of Contents

 

Financial information relating to the Company’s operations by geographic area was as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net sales:

 

 

 

 

 

 

 

 

 

United States:

 

 

 

 

 

 

 

 

 

Technology products

 

$

401,297

 

$

356,642

 

$

1,168,353

 

$

1,045,283

 

Industrial products

 

63,187

 

61,523

 

182,166

 

169,232

 

Hosted software

 

159

 

111

 

305

 

387

 

United States total

 

464,643

 

418,276

 

1,350,824

 

1,214,902

 

Other North America (Technology products)

 

47,661

 

41,191

 

145,754

 

116,033

 

North America total

 

512,304

 

459,467

 

1,496,578

 

1,330,935

 

Europe

 

227,175

 

227,850

 

723,673

 

679,606

 

Consolidated

 

$

739,479

 

$

687,317

 

$

2,220,251

 

$

2,010,541

 

 

Revenues are attributed to countries based on the location of the selling subsidiary.

 

9.                Contingencies

 

Litigation – Kevin Vukson v. TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc.

 

On October 18, 2007, Kevin Vukson filed a national class action complaint in U.S. District Court against TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc. on behalf of himself and all OnRebate customers whose rebates were denied or delayed. (OnRebate.com Inc. is a rebate processing company owned by Systemax.).  Vukson’s Complaint (as amended) alleges that since 2004 Systemax, TigerDirect and OnRebate engaged in a conspiracy to engage in deceptive and unfair rebate practices.  Vukson alleges counts for violation of state consumer protection states, conspiracy, and unjust enrichment.  Defendants have moved to dismiss the Complaint. The Company intends to vigorously defend this case.

 

State of Florida, Office of the Attorney General Subpoena.

 

On January 2, 2008 the Company received a subpoena for documents from the Florida Attorney General’s Office relating to the payment and processing of rebates by the Company. The Company received subpoenas for additional documents on January 30, 2008 and on August 25, 2008.  The Company is cooperating with the Florida Attorney General’s investigation and has provided a substantial number of documents in response to the subpoenas.

 

10.         Stock Repurchase

 

On May 12, 2008 the Company’s Board of Director’s authorized the repurchase of up to two million shares of Company stock. During the third quarter of 2008 the Company repurchased 228,401 shares for approximately $3.4 million.

 

11



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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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,” “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. Statements in this report, particularly in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to Condensed Consolidated Financial Statements, describe certain factors, among others, that could contribute to or cause such differences.

 

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.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the period. Significant accounting policies employed by the Company, including the use of estimates, were presented in the Notes to Consolidated Financial Statements of the Company’s 2007 Annual Report on Form 10-K.

 

Critical accounting policies are those that are most important to the presentation of our financial condition and results of operations, require management’s most difficult, subjective and complex judgments, and involve uncertainties. The accounting policies that have been identified as critical to our business operations and understanding the results of operations pertain to revenue recognition, accounts receivable and allowance for doubtful accounts, inventories, long-lived assets, income taxes and accruals. The application of each of these critical accounting policies and estimates was discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. There have been no significant changes in the application of critical accounting policies or estimates during 2008. Management believes that full consideration has been given to all relevant circumstances that we may be subject to, and the condensed 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 periods presented. Because of the uncertainty in these estimates, actual results could differ from estimates used in applying the critical accounting policies. We are not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect its financial condition or results of operations.

 

Overview

 

Systemax is primarily a direct marketer of brand name and private label products. Our operations are organized in three reportable business segments – Technology Products, Industrial Products and Hosted Software. Our Technology Products segment sells computers, computer supplies and consumer electronics which are marketed in North America and Western

 

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Europe.  Most of these products are manufactured by other companies.  We assemble our own PCs and sell them under our own trademarks Systemax™ and Ultra™.  We also sell certain computer-related products manufactured for us to our own design under the trademark Ultra™. For the nine months ended September 30, 2008, Technology products accounted for 92% of our net sales.  Our Industrial Products segment sells a wide array of material handling equipment, storage equipment and consumable industrial items which are marketed in North America.  Most of these products are manufactured by other companies.  Some products are manufactured for us to our own design and marketed under the trademarks Global™, GlobalIndustrial.com™ and Nexel™. Industrial products accounted for 8% of our net sales for the nine months ended September 30, 2008.  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, which became a reportable segment in 2006, participates in the emerging market for on-demand, web-based business software applications through the marketing of our PCS ProfitCenter Software™ application.  See Note 8 to the consolidated financial statements for additional financial information about our business segments as well as information about our geographic operations.

 

The market for computer products and consumer electronics 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 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 discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements, the factors that we believe may affect our future results and financial condition as well as information about how certain accounting principles and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the condensed consolidated financial statements included herein.

 

Results of Operations

 

Three and Nine Months Ended September 30, 2008 compared to the Three and Nine Months Ended September 30, 2007

 

Key Performance Indicators (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

%
Change

 

2008

 

2007

 

% Change

 

Net sales by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology products

 

$

676,133

 

$

625,683

 

8.1

%

$

2,037,780

 

$

1,840,922

 

10.7

%

Industrial products

 

63,187

 

61,523

 

2.7

%

182,166

 

169,232

 

7.6

%

Hosted software

 

159

 

111

 

43.2

%

305

 

387

 

(21.2

)%

Total net sales

 

$

739,479

 

$

687,317

 

7.6

%

$

2,220,251

 

$

2,010,541

 

10.4

%

Net sales by geography:

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

512,304

 

$

459,467

 

11.5

%

$

1,496,578

 

$

1,330,935

 

12.4

%

Europe

 

227,175

 

227,850

 

(.3

)%

723,673

 

679,606

 

6.5

%

Total net sales

 

$

739,479

 

$

687,317

 

7.6

%

$

2,220,251

 

$

2,010,541

 

10.4

%

Gross margin

 

15.8

%

16.1

%

(.3

)%

15.6

%

15.3

%

.3

%

Selling, general and administrative costs

 

$

97,887

 

$

84,847

 

15.4

%

$

280,026

 

$

239,233

 

17.1

%

Selling, general and administrative as a % of net sales

 

13.2

%

12.3

%

.9

%

12.6

%

11.9

%

.7

%

Operating income

 

$

18,582

 

$

25,806

 

(28.0

)%

$

67,171

 

$

67,412

 

(.4

)%

Operating margin

 

2.5

%

3.8

%

(1.3

)%

3.0

%

3.4

%

(.4

)%

Effective income tax rate

 

39.5

%

34.5

%

5.0

%

37.3

%

35.5

%

1.8

%

Net income

 

$

11,273

 

$

17,644

 

(36.1

)%

$

42,875

 

$

45,301

 

(5.4

)%

Net margin

 

1.5

%

2.6

%

(1.1

)%

1.9

%

2.3

%

(.4

)%

 

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The Technology Products sales increase was driven by increased internet and retail store sales as the result of the acquisition of the CompUSA ecommerce business and re-opening sixteen retail stores.  Sales attributable to CompUSA web and retail were $63.0 million for the third quarter of 2008 and $139.4 million for the first nine months of 2008. Excluding CompUSA revenue, total Technology Products revenues declined approximately 2.0% in the third quarter of 2008 and increased 3.1% for the first nine months of 2008 as compared to the same periods in 2007. In the United States, Technology Products sales excluding CompUSA declined 5% in the third quarter of 2008 and 1.5% for the first nine months of 2008 as compared to the same periods in 2007. The decline in the third quarter and nine month periods of 2008 is the result of slower business to business IT and consumer electronics sales as United States economic activity slowed. In Europe sales were flat in the third quarter of 2008 and increased 6.5% for the first nine months of 2008 as compared to the same periods in 2007. Movements in foreign exchange rates positively impacted the European sales comparison by approximately $8 million in the third quarter and $44 million for the first nine months of 2008. Excluding exchange rate benefits, European sales would have declined by 4% in the third quarter of 2008 and would have been flat in the first nine months of 2008 as compared to the same periods in 2007.  Measured in local currencies, quarterly revenues in each of our European locations declined in the third quarter as compared to the same period in 2007 as European economic conditions deteriorated. The decline in sales for the quarter is primarily the result of slowed consumer and business to business sales.  Sales in Canada (Other North America) increased by 15.7% in the third quarter of 2008 and 25.6% in the first nine months of 2008 as compared to the same periods in 2007.  Excluding exchange rate benefits sales would have increased 12.3% for the quarter and 13.6% for the first nine months of 2008. The increased sales are primarily the result of the opening of one additional retail store, increased business to business and web sales and generally more stable economic conditions in Canada as compared to other locations.

 

The Industrial Products sales increase resulted from the Company increasing its market share through competitive pricing advantages and increased internet sales. Quarter over quarter growth in Industrial Products slowed in the third quarter primarily the result of a slowing US economy. In our Hosted Software segment revenues continue to be insignificant relevant to consolidated revenues. Subsequent to the end of the third quarter of 2008 the Company is reorganizing and refocusing its Hosted Software business to reduce its net loss and negative cash flow. The actions taken to date will result in a charge to earnings of approximately $.4 million. The Company expects to realize savings of approximately $2 million annually.

 

Consolidated gross margin declined for the three month period ended September 30, 2008 by 30 basis points and improved by 30 basis points for the nine months ending September 30, 2008 compared to the same periods in 2007. Gross margin is dependent on variables such as product mix, vendor price protection and other sales incentives, competition, pricing strategy, cooperative advertising funds required to be classified as a reduction to cost of sales and other variables, any or all of which may result in fluctuations in gross margin.

 

The increase in selling, general and administrative expenses in the third quarter of 2008 was primarily the result of $5.6 million of increased salaries and related costs, $2.5 million of increased rent and real estate taxes, $2.0 million of increased professional fees, telephone/computer maintenance and utility charges, $1.1 million increase in bad debt expense and $.7 million of increased credit card fees. Included in these cost increases are approximately $7.2 million of costs related to CompUSA operations. As a percentage of sales S, G &A increased in the third quarter to 13.2% compared to 12.3% in the third quarter of 2007. This increase is primarily the result of the addition to S, G&A of costs related to the CompUSA retail stores. The Company expects S, G & A as a percentage of sales to decline as retail store sales ramp up and as the Company realizes cost savings from the Hosted Software segment reorganization .

 

The increase in selling, general and administrative expenses in the first nine months of 2008 was primarily the result of $23.7 million of increased salaries and related costs, $6.7 million of increased rent and real estate costs, $3.8 million of professional fees and telephone/computer maintenance charges, and $2.0 million of increased credit card fees. Included in these cost increases are approximately $15.2 million of costs related to CompUSA operations and $.7 million in severance costs.  Included in the nine months of 2007 is a gain of approximately $2.4 million from a lawsuit that was settled favorably. Excluding this gain selling, general and administrative expenses would have increased 15.9% in 2008 as compared to 2007. As a percentage of sales S, G &A increased in the first nine months of 2008 to 12.6% compared to 11.9% in the same period of 2007. This increase is primarily the result of the addition to S, G&A of costs related to the CompUSA retail stores. The Company expects S, G & A as a percentage of sales to decline as retail store sales ramp up and as the Company realizes cost savings from the Hosted Software segment reorganization.

 

The Company’s effective tax rate for the quarter was 39.5% up from 34.5% in the third quarter of 2007, primarily the result of increased taxable income in the United Kingdom where we had a deferred tax valuation allowance in the prior year. The effective tax rate for the nine months was 37.3% in 2008, up from 35.5% in 2007.

 

Net income for the third quarter of 2008 declined 35.8% to $11.3 million compared to $17.6 million in the third quarter of

 

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2007. The decline in net income is the result of slowing sales growth and increased fixed overhead related to the ramp up of the Company’s CompUSA retail stores. The Company has implemented selected hiring freezes and targeted expense cuts in certain business units as the result of general economic uncertainty worldwide. Net income for the first nine months of 2008 declined 5.4% to $42.9 million compared to $45.3 million in 2007.

 

Financial Condition, Liquidity and Capital Resources

 

Our primary liquidity needs are to support working capital requirements in our business, fund capital expenditures, repurchases of Company stock, fund special dividends declared by our Board of Directors and fund acquisitions. 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 as well as any interest and debt repayments in the next twelve months and thereafter.

 

Selected liquidity data (in thousands):

 

 

 

September 30,
2008

 

December 31,
2007

 

$ Change

 

Cash and cash equivalents

 

$

73,373

 

$

128,021

 

$

(54,648

)

Accounts receivable, net

 

$

207,446

 

$

206,940

 

$

506

 

Inventories, net

 

$

275,974

 

$

250,222

 

$

25,752

 

Prepaid expenses and other current assets

 

$

17,087

 

$

14,455

 

$

2,632

 

Accounts payable

 

$

262,670

 

$

248,673

 

$

13,997

 

Accrued expenses and other current liabilities

 

$

72,951

 

$

81,670

 

$

(8,719

)

Short term borrowings

 

$

520

 

$

4,302

 

$

(3,782

)

Working capital

 

$

247,439

 

$

274,353

 

$

(26,914

)

 

Our working capital decreased in the first nine months of 2008 as the result of the use of approximately $30.6 million cash for the purchase of certain CompUSA assets, payment of $37.1 million for a special dividend, stock repurchases of $3.4 million and an increase in inventory, primarily related to purchasing inventory for the 16 CompUSA retail stores. Accounts payable balances increased by approximately $14.0 million offset by a decrease of approximately $8.7 million in accrued expenses and a reduction in short term debt in Europe.  Our inventory turnover decreased from 10 times to 8.9 times on an annual basis primarily the result of the restocking of the 16 acquired CompUSA retail stores. 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.

 

The decrease in cash provided by operations in the first nine months of 2008 resulted from changes in our working capital accounts, which used $25.7 million in cash compared to $6.9 million generated in 2007, primarily the result of an increase in inventories related to the CompUSA acquisition. Cash generated from net income adjusted by other non-cash items provided $57.0 million for the nine months ended September 30, 2008 compared to $56.5 million provided by these items for the nine months ended September 30, 2007.

 

Cash flows used in investing activities during the first nine months of 2008 were primarily for the CompUSA acquisition and for capital expenditures in retail stores and information technology. Cash flows used in investing activities during 2007 consisted primarily of upgrades and enhancements to our information and communications systems hardware and facilities costs.

 

Net cash of $41.8 million was used in financing activities for the nine months of 2008.  We repaid approximately $4 million in short-term loans, repurchased Company stock of approximately $3.4 million and we paid $37.1 million for a special dividend. Proceeds and excess tax benefits from stock option exercises provided approximately $2.5 million of cash. In the first nine months of 2007, we repaid $12.5 million in short-term loans and paid $36.6 million for a special dividend.  Proceeds from stock option exercises, net of repurchases and excess tax benefits, provided approximately $2.6 million of cash.

 

Under our $120 million (which may be increased by up to $30 million, subject to certain conditions) secured revolving credit agreement for borrowings in the United States and United Kingdom, as of September 30, 2008, eligible collateral was $120 million and total availability was $109.3 million. There were outstanding letters of credit of $10.7 million and there were no outstanding advances as of September 30, 2008. The borrowings are secured by all of the domestic and United Kingdom accounts receivable, the domestic inventories of the Company, general intangibles, the Company’s shares of stock in its domestic subsidiaries and the Company’s United Kingdom headquarters building. The credit facility expires and the outstanding borrowings thereunder are due on October 26, 2010. The revolving credit agreement contains certain financial and other

 

15



Table of Contents

 

covenants, including maintaining a minimum level of availability and restrictions on capital expenditures and payments of dividends. We were in compliance with all of the covenants under this facility as of September 30, 2008.

 

Under our Netherlands €5 million ($7.3 million at the September 30, 2008 exchange rate) credit facility, at September 30, 2008 there was approximately €14 thousand outstanding under this line ($20 thousand). This facility expires in November 2008.  The Company will not be renewing this credit facility.

 

We also have certain obligations with various parties that include commitments to make future payments. Our principal commitments at September 30, 2008 consisted of repayments of borrowings under our credit agreements, payments under operating leases for certain of our real property and equipment and payments under employment and other service agreements.

 

Our current and anticipated needs for cash include funding growth in working capital, capital expenditures necessary for future growth in sales, repurchase of Company stock and potential expansion through acquisitions. We believe that our cash balances and our availability under credit facilities will be sufficient to fund our working capital and other cash requirements for the next twelve months.

 

We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of September 30, 2008, all of our investments had maturities of less than three months.  Accordingly, we do not believe that our investments have significant exposure to interest rate risk.

 

Off-balance Sheet Arrangements

 

The Company has not created, and is not party to, except as described above, 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.

 

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 (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 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. 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 September 30, 2008 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 includes short-term borrowings in Europe under our credit facilities. As of September 30, 2008, the balance outstanding on our variable rate debt was approximately $20 thousand. Based on our market sensitive instruments as of September 30, 2008, 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 for the fiscal year.

 

Item 4.   Controls and Procedures

 

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2008. As part of this evaluation we noted that the remediation and testing of the significant deficiency identified as part of our December 31, 2007 review is not yet complete as of September 30, 2008. This significant deficiency is described below:

 

The Company consolidates its worldwide financial results from disparate underlying financial and operational systems that have various functional limitations and few automated interfaces. This results in a consolidation process that is heavily reliant on manual review procedures and manual adjustments. Our control over this consolidation process primarily consists of corporate review procedures. The design and operation of this control process may not prevent or detect misstatements on a timely basis.

 

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This significant deficiency does not, in our judgment, rise to the level of a material weakness in internal controls over financial reporting because we believe that the controls in place would prevent or detect a material misstatement. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal controls over financial reporting during the quarterly period ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Recent Accounting Pronouncements

 

Effective January 1, 2008, the Company adopted SFAS 157 and SFAS 159. In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.157 “Fair Value Measurements”. This statement was issued to increase consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”) which amends SFAS 157 to delay the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  FSP 157-2 delays the effective date of SFAS 157, for certain items, until fiscal years beginning after November 15, 2008. The Company is currently evaluating the potential impact, if any, of FSP 157-2. In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities (including an amendment of FASB Statement No. 115)”. This interpretation was issued to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Since we do not have any financial assets and liabilities that are required to be recorded at fair value, the only impact of these adoptions will be on the disclosures required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF -3-6-1). This FSP was issued to clarify that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. The guidance in this FSP applies to the calculation of Earnings Per Share (“EPS”) under Statement 128 for share-based payment awards with rights to dividends or dividend equivalents. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP. The Company is currently evaluating the impact of this FSP on its consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which replaces FASB Statement 141. SFAS No.141R retains the requirement that the acquisition method of accounting be used for business combinations. The objective of SFAS No. 141R is to improve the relevance, representational faithfulness and comparability that reporting entities provide in their financial reports about business combinations and their effects. SFAS 141R establishes principles and requirements for how an acquirer 1) recognizes and measures identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, 2) recognizes and measures the goodwill acquired in the combination or a gain from a bargain purchase and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for annual periods beginning after December 15, 2008 and will be applied prospectively for all business combinations entered into after the date of adoption.

 

In December 2007, the FASB issued SFAS No. 160, “Accounting and Reporting of Noncontrolling Interest” (“SFAS No. 160”). The objective of SFAS 160 is to improve the relevance, comparability and transparency of the financial information that reporting entities provide related to noncontrolling interests, sometimes referred to as minority interests. SFAS No. 160 requires, among other things, that noncontrolling interests be shown separately in the consolidated entity’s equity section of the

 

17



Table of Contents

 

balance sheet. SFAS No. 160 also establishes accounting and reporting standards for ownership interest in subsidiaries held by parties other than the parent, for presentation of amounts of consolidated net income attributable to the parent and the noncontrolling interest, for consistency in accounting for changes in a parent’s ownership interest when the parent retains a controlling interest, for the valuation of retained noncontrolling equity interests when a subsidiary is deconsolidated and for providing sufficient disclosure that identifies and distinguishes the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective beginning January 1, 2009. The Company is currently evaluating the potential impact, if any, of this pronouncement.

 

PART II - OTHER INFORMATION

 

 Item 1.      Legal Proceedings

 

Litigation – Kevin Vukson v. TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc.

 

On October 18, 2007, Kevin Vukson filed a national class action complaint in U.S. District Court against TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc. on behalf of himself and all OnRebate customers whose rebates were denied or delayed. (OnRebate.com Inc. is a rebate processing company owned by Systemax.) .  Vukson’s Complaint (as amended) alleges that since 2004 Systemax, TigerDirect and OnRebate engaged in a conspiracy to engage in deceptive and unfair rebate practices.  Vukson alleges counts for violation of state consumer protection states, conspiracy, and unjust enrichment.  Defendants have moved to dismiss the Complaint.  The Company intends to vigorously defend this case.

 

State of Florida, Office of the Attorney General Subpoena.

 

On January 2, 2008 the Company received a subpoena for documents from the Florida Attorney General’s Office relating to the payment and processing of rebates by the Company. The Company received subpoenas for additional documents on January 30, 2008 and on August 25, 2008.  The Company is cooperating with the Florida Attorney General’s investigation and has provided a substantial number of documents in response to the subpoenas.

 

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 6.

Exhibits

 

 

 

 

 

 

 

31

Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

32

Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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  SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

SYSTEMAX INC.

 

 

 

 

Date: November 6, 2008

By:

/s/ Richard Leeds

 

 

 

Richard Leeds

 

Chairman and Chief Executive Officer

 

 

 

 

 

By:

/s/ Lawrence P. Reinhold

 

 

 

Lawrence P. Reinhold

 

Executive Vice President and Chief Financial Officer

 

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