SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 19971998
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
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GLOBAL DIRECTMAIL CORP
(Exact name of registrant as specified in its charter)
DELAWARE 11-3262067
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
22 HARBOR PARK DRIVE
PORT WASHINGTON, NEW YORK 11050
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 625-1555
---------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock, par value $ .01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of the registrant, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 23, 19985, 1999 was approximately $184,964,312.$142,834,000. For purposes
of this computation, all executive officers and directors of the Registrant and
all parties to the Stockholders Agreement dated as of June 15, 1995 have been
deemed to be affiliates. Such determination should not be deemed to be an
admission that such persons are, in fact, affiliates of the Registrant.
The number of shares outstanding of the registrant's common stock, as of
March 23, 1998,5, 1999, was 38,231,99036,089,995 shares.
Documents incorporated by reference: The definitive Proxy Statement of
Global DirectMail Corp relating to the 19981999 Annual Meeting of Stockholders is
incorporated by reference in Part III hereof.
TABLE OF CONTENTS
Part I
Item 1. Business..........................................................1
General..........................................................1
Products.........................................................2Business............................................................1
General.........................................................1
Recent Developments.............................................2
Products........................................................2
Sales and Marketing..............................................3Marketing.............................................3
Distribution Centers.............................................5
Suppliers........................................................5Centers............................................5
Suppliers.......................................................6
Management Information Systems...................................6Systems..................................6
Research and Development.........................................7
Competition......................................................7
Employees........................................................9Development........................................7
Competition.....................................................7
Employees.......................................................9
Environmental Matters............................................9Matters...........................................9
Financial Information About Foreign and Domestic Operations.....9
Item 2. Properties.......................................................10
Item 3. Legal Proceedings................................................10Proceedings................................................11
Item 4. Submission of Matters to a Vote of Security Holders............................................10Holders..............11
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................11
Item 6. Selected Financial Data..........................................11Data..........................................12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................13Operations.......................................14
Item 7A.Quantitative7A. Quantitative and Qualitative Disclosures About Market Risk..................................17Risk.......22
Item 8. Financial Statements and Supplementary Data.............................................18Data .....................22
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................18Disclosure.......................................22
Part III
Item 10. Directors and Executive Officers of the Registrant..............18Registrant...............22
Item 11. Executive Compensation..........................................18Compensation...........................................22
Item 12. Security Ownership of Certain Beneficial
Owners and Management..........................................18Management.........................................22
Item 13. Certain Relationships and Related Transactions..................18Transactions...................23
Part IV
Item 14.Exhibits,14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................18
Signatures......................................................208-K.......................................23
Signatures........................................................26
PART I
UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN TO "GLOBAL DIRECTMAIL
CORP" ("GLOBAL" OR THE "COMPANY") INCLUDE ITS SUBSIDIARIES AND PREDECESSORS.
GLOBAL IS THE SUCCESSOR TO A NUMBER OF CORPORATIONS (THE "PREDECESSOR
COMPANIES") THAT OPERATED WITH RELATED OWNERSHIP.SUBSIDIARIES.
ITEM 1. BUSINESS.
GENERAL
Global is a direct marketer of over 40,000 products includingboth private label and brand name
and private label personal
desktop computers ("PCs"), notebook computers, computer related products, office
products and industrial products in North America and Europe. In addition, theThe Company also
assembles build-to-orderits own PCs, in
North America,primarily on a "build to order" basis, and sells them
under the brand namestrademarks MIDWEST MICRO(R), ULTRA(TM)SYSTEMAX(TM), TIGER(R) and
SYSTEMAX(TM)Tiger(R) AND Ultra(TM). The
Company emphasizesfeatures a broad selection of in-stock products,
frequent mailings of a variety of distinctively branded full color catalogs, extensive customer service and
prompt complete order fulfillment. The Company's
portfolio of catalogs includes such established brand names as GLOBAL(TM),
MISCO(R), HCS GLOBAL(TM), HCS MISCO(TM), ARROWSTAR(TM), DARTEK(R), POWER UP!(R),
TIGER(R), 06 (TM), MIDWEST MICRO(TM) and INFOTEL(TM). GLOBAL HASGlobal has grown rapidly as a result of internal
growth and strategic acquisitions while maintaining a high level of
profitability. The Company's net sales have increased at a compound annual
growth rate of 31% to $1.15$1.44 billion in 19971998 from $393.6$484.2 million in 1993.1994. During
this same period, income from operations increased at a compound annual growth
rate of 19%15% from $29.8$36.2 million to $59.3$64.3 million.
The Company has positioned itself as a "corporate supplier" offering a
broad spectrum of business products. The Company believes that direct marketing
is the most effective and convenient distribution method to reach business
customers who place many small orders requiring a wide selection of products. Computers and computer related
products accounted for 80%84% of the Company's net sales in 1997.
The Company1998.
Global markets its products through an integrated system of distinctively
branded, full color direct mail catalogs, proprietary "e-commerce" Internet
sites and personalized "relationship marketing" to businesses through mailings of its
"full-line" and specialty catalogs and through outbound telemarketing.business customers. The
Company targets individuals at major account customers(morecustomers (more than 1,000
employees), mid-sized businessescustomers (20 to 1,000 employees), small office/home
office customers ("SOHO") and value added resellers ("VARs"). VARs select,
install and maintain PCs and networks for business customers who do not have
their own computer technicians. The Company's portfolio of catalogs includes
such established brand names as GLOBAL(TM), MISCO(R), HCS GLOBAL(TM), HCS
MISCO(TM), ArrowStar(TM), DARTEK(R), POWER UP!(R), TIGER(R), 06(TM), MIDWEST
MICRO(TM) and Infotel(TM). Catalog mailings increased from approximately 98
million catalogs comprising 18 different titles in 1993 to approximately 162179
million catalogs comprising 4144 different titles in 1997.1998. The Company currently
has 18 e-commerce web sites and in 1998 generated over $28 million in unassisted
Internet sales. At December 31, 1997,1998, the Company had 1.8 million "active"
customers (defined as individuals thatwho have purchased from the Company within
the proceedingpreceeding 12 months) and combined customer and prospect files of more than
4045 million names.
The Company operates in eightnine locations in North America. The Company's
North American operations contributed 76%accounted for 78% of net sales in 1997.1998. For some of
the Company's businesses,operations, certain functions, such as merchandising, marketing,
purchasing and information systems, are performed centrally.
European operations, which represented 24%22% of net sales for 1997,1998, are
generated from seveneight sales and distribution centers located across Europe: two
in the United Kingdom, and one
each in England, Scotland, France, Germany, Italy, Spain, the Netherlands and
the
Netherlands. For a more detailed geographic breakdown of the Company's
operations, see Note 10 to the Consolidated Financial Statements.Sweden.
Most of the Company's products are carried in stock, and orders for such
products are fulfilled directly from the Company's distribution centers,
typically on the day on which the order was received. The strategic location of the
Company's distribution centers allows next day or second day delivery via low
cost ground carriers throughout the United States, Canada and Western Europe.
The strategic locations in Europe have enabled the Company to market into four
additional countries with limited incremental investment. The Company also
maintains relationships with a number of distributors that deliver products
directly to customers.
RECENT DEVELOPMENTS
ACQUISITIONS
During 1997 the Company completed two strategic acquisitions.
During the first quarter of 1998, the Company acquired the net assets of
06Zachary Software Centre Europe B.V.
("06")Inc., a direct marketer of computers and computer productssoftware in the Netherlands.
Although 06 does not materially increase the Company's European operations, it
adds an additional market to that region, bringing to 10 the number of countries
serviced there.United
States. At the end of the third quarter the Company acquired the assets of Infotel,
Inc. ("Midwest Micro"), an assembler andDabus Dataprodukter
AB, a Swedish direct marketer of private label
build-to-order PCs and a direct marketer of brand name PCs, notebook computers and computer related products. With
the acquisition of Dabus, the Company markets to 12 European countries. In
February 1999 the Company acquired Simply Computers Limited ("Simply") of
London, England. Simply is a privately held computer products and Internet
marketer which also assembles private label PCs. Simply had approximately $100
million in total net sales in 1998 including $20 million in Internet sales. See
Footnote 3Footnotes 2 and 10 to the Consolidated Financial Statements.
EZBID
In September 1998 the Company formed a new subsidiary, EZBid, Inc. EZBid
sells PC's, PC accessories, software, data com products, and consumer products
through an Internet auction site located at WWW.EZBID.COM. The EZBid.com site
gives shoppers the opportunity to purchase limited quantity, new and refurbished
merchandise by bidding through the Internet. New merchandise is added to the
site daily. When an auction is in progress, shoppers are notified by e-mail when
they have been out-bid, allowing them to return to the site to bid again, until
the auction closes.
PRODUCTS
In positioning itself as a "corporate supplier", the Company has
consistently expanded the breadth of its product offerings in order to fulfill
an increasingly wide range of business product needs. In total, Global offers
over 40,000 brand name and private label products.
Computer sales include a wide array of private label PCs complimented with
offerings of popular brand named PCs and notebook computers. The Company's
computer related products include: supplies such as laser printer toner
cartridges, ink jet printer cartridges, and paper; media such as floppy disks
and magnetic tape cartridges; peripherals such as hard disk drives, printers and
scanners; memory upgrades; data communication and networking equipment;
ergonomic accessories such as adjustable monitor support arms and antiglareanti-glare
screens; and packaged software; and hardware. Computer sales include a wide array of
build-to-order PCs complimented with offerings of the most popular brand named
PCs and notebook computers.
Office products include furniture, chairs, small office machines and
related supplies.software.
The Company's industrial product lines focus primarily on storage equipment
such as metal shelving, bins, lockers, light material handling equipment such as
hand carts and hand trucks and consumable industrial products such as first aid
items, safety items, protective clothing and OSHA compliance items. Office
products include furniture, chairs, small office machines and related supplies.
The table below summarizes the Company's mix of sales by product category:
PRODUCT TYPE - YEAR ENDED DECEMBER 31 (PERCENTAGE OF TOTAL SALES)
1998 1997 1996 1995
---- ---- ----
Computer and Computer Related Products ................ 84% 80% 75%
66%
OfficeIndustrial Products and Industrial Products......Office Products............ 16 20 25 34
-- -- --
Total .............................................................................. 100% 100% 100%
=== === ===
Historically, the Company focused primarily on non-branded or private label
products. Although the Company continues to experience strong growth in its
private label products, in recent years the Company made the strategic decision
to leverage its distribution and marketing strengths into the market for high
volume brand name products which the Company believes offer significant
opportunities to increase sales. In 1993 the Company expanded its offerings of brand name computer
related products, including peripherals, data communications and networking
equipment, software and supplies. In 1995 the Company further expanded its
offering of brand name products to include notebooks, desktops and servers. In
addition, in 1997 the Company entered the "build to order" PC market through the
acquisition of Infotel, Inc. (now Midwest Micro.Micro Corp.). In 1998 the Company
focused its efforts on the expansion of its "build to order" PC business by
substantially increasing its PC assembly capacity at Midwest Micro's facility.
These strategies have impacted the Company's overall gross profit margin
percentages as those incremental sales of PCs typically have lower gross profit margin percentages
than many of the Company's other products. A significant amount of thethis decrease
in gross profit margin has been offset by reduced catalog production costs
resulting from increased levels of vendor supported advertising, improved
catalog management, and increased cost efficiencies.
SALES AND MARKETING
Global has established an integrated three-prong system of direct marketing
designed to maximize sales. The Company's traditional method of frequent catalog
mailings generating inbound telephone sales has been complemented by more
personalized "relationship marketing" to larger business customers and the
availability of interactive Company web sites which allow customers to purchase
products directly over the Internet. The Company believes that the integration
of these marketing methods will enable it to more thoroughly penetrate the
customer base. Increased Internet exposure, for example, should lead not only to
more Internet sales but can also generate more inbound telephone sales; and
catalog mailings which feature the Company's web sites can result in greater
Internet sales.
CATALOGS
The Company produces a total of 4144 "full-line" and targeted specialty
catalogs under distinct titles. "Full- line""Full-line" computer related product catalogs offer
products such as computer suppliesPCs and hardware, peripherals, magnetic media, peripherals, data
communication, networking and power protection equipment, ergonomic accessories,
furniture software, PCs and hardware.software. "Full-line" industrial products catalogs offer products
such as material handling products and industrial supplies. Specialty catalogs
contain more focused product offerings and are targeted to individuals most
likely to purchase from such catalogs. Global mails multiple catalogs to many
individuals at each location, providing the Company with multiple
points-of-entry into a business location. Once a prospect purchases a particular
product, however, the Company's customers have exhibited strong brand loyalty
resulting in limited customer overlap among the Company's various catalog
brands. This multiple brand strategy, andwith the accompanying customer exposure to
the Company's products, is a crucial factor in the Company's strategy to
increase sales volume through broader market coverage and improve the
productivity of its customer file through more focused marketing.
Global has invested consistently and aggressively in developing a
proprietary customer and prospect database. This database, which includes more
than 40 million names, represents a major asset of the Company. The Company
considers its customers to be the various individuals that work within an
organization rather than the business location itself. The customer and prospect
database includes detailed information, including company size, number of
employees, industry, various demographic and geographic characteristics and
purchase history. Management believes that this variety and depth of information
on its customers provides Global a significant competitive advantage.
During 1997,1998, the Company distributed approximately 162179 million catalogs of
which approximately 125144 million catalogs were mailed in North America and
approximately 3735 million catalogs were distributed in Europe. At December 31,
1997,1998, the Company had 1.8 million "active" customers (defined as individuals
thatwho have purchased from the Company within the preceding 12 months).
In its mailings, the Company seeks to maximize the response rates of its
catalogs. The Company calculates response rate as the total catalogs mailednumber of orders
entered for the period divided by the total number of orders enteredcatalogs mailed for the same period. The
following table shows the approximate number of catalogs distributed by the
Company and the catalog response rates:
CATALOGS DISTRIBUTED
- YEAR ENDED DECEMBER 31
(IN MILLIONS EXCEPT RESPONSE RATES) 1998 1997 1996 1995
----------------------------------- ---- ---- ----
North America....................................America.............................. 144 125 120
90
Europe...........................................Europe..................................... 35 37 40
32
---- ---- ----
Total........................................-- -- --
Total...................................... 179 162 160
122
====== ====== ========= === ===
Response rates...................................rates............................. 2.14% 2.18% 2.12% 2.08%
The Company's in-house staff designs all of the Company's catalogs. Catalog
paper is purchased from various sources and has historically been subject to
price fluctuations. The printing of the catalogs is done by several sourcesthird parties under
fixed pricing arrangements. In-house catalog production helps reduce overall
catalog expense and shortens catalog production time. This allows the Company
the flexibility to alter its product offerings and pricing and to refine its
catalog formats more quickly.
INBOUND SALES
Global's catalogs generate calls to the in-boundinbound sales group. Sales
representatives use the capabilities of the Company's systems to fulfill orders
and explore additional customer product needs. Each sales representative has
immediate access to customer files, including usage and billing information, and
real-time inventory levels by distribution center. Using this data, inbound
sales personnel are also prompted by their computer screen to cross-sell
selected products and obtain specific information relating to customer-specific
purchasing habits and product needs.
MAJOR ACCOUNT MANAGEMENTRELATIONSHIP MARKETING
The Company has established a major accounts managementCompany's relationship marketing program focusedfocuses on expanding
penetration of larger businesses.large and mid-sized businesses by establishing a personal
relationship between such customers and a designated Global account manager. In
the United States, Global also has the ability to provide such customers with
EDIelectronic data interchange ("EDI") ordering and customized billing services,
customer savings reports and stocking of specialty items specifically requested
by customers. The Major Accountrelationship marketing sales force's goal is to increase the
purchasing productivity of current customers and to actively solicit newly
targeted prospects to become customers. OTHERIn 1998 the Company added close to 200
relationship marketing personnel, for a total of almost 700 by year end. As a
result, relationship marketing sales increased 78% from 1997 to $476 million, or
33% of total revenues.
INTERNET MARKETING AND SALES
In the past year, the Company greatly expanded and upgraded its Internet
presence. By year end, the Company had eighteen e-commerce sites, including
WWW.GLOBALCOMPUTER.COM, WWW.MWMICRO.COM, WWW.SYSTEMAXPC.COM, WWW.DARTEK.COM,
WWW.MISCO.COM, WWW.TIGERDIRECT.COM, and WWW.EZBID.COM, offering a wide variety
of computer, office and industrial products. Many of these sites also permit
customers to purchase "build to order" PC's configured to their own
specifications. In 1998 the Company had over $28 million in unassisted Internet
sales.
CUSTOMER AND PROSPECT DATABASE
Global has invested consistently and aggressively in developing a
proprietary customer and prospect database. This database, which includes more
than 45 million names, represents a major asset of the Company. The Company
also uses targeted fax campaigns, special single-product "solo"
mailingsconsiders its customers to be the various individuals that work within an
organization rather than the business location itself. The customer and the Internet to generate incremental sales to business customers.
During 1997, the Company initiated Internet marketing with three build-to-order
PC configurator websites.prospect
database includes detailed information, including company size, number of
employees, industry, various demographic and geographic characteristics and
purchasing history. Management believes that this variety and depth of
information on its customers provides Global a significant competitive
advantage.
CUSTOMER SERVICE AND SUPPORT
Order entry and fulfillment occurs at each of the Company's 1517 locations.
Global generally provides toll-free telephone number access to its customers.
The integration of the Company's call centers also provide some domestic locations
with telephone backup in the event of a disruption in phone service. In addition
to telephone orders, Global also receives orders by mail, by fax, via electronic data interchange ("EDI")EDI and on the
Internet.
When an order is entered into the system, ait is submitted for credit check is performed, and,
if theor
credit is approved,card approval, as applicable. Upon approval the order is electronically
transmitted to the warehouse and a packing slip is printed for order
fulfillment. Approximately 70% of the Company's 19971998 sales were on open account
and the Company's bad debt experience has traditionally been less than 1% of
sales. Orders generally are shipped by United Parcel Service in the United
States and by similar national small package delivery services in Europe, as
well as by various freight lines and local carriers. Air freight is also
available. As a result of the regional locations of the Company's warehouses,
Global estimates that most customers receive their orders (other than custom
items, large furniture and large industrial items shipped directly by the
vendor) within one or two business days of the order date. Customers are
invoiced for merchandise, shipping and handling promptly after shipment.
The Company conducts regular on-site training seminars for its sales
representatives and operates a separate customer service department which
responds to customer concerns. The Company also maintains a separateprovides extensive technical support group dedicated to answering customer inquiries and assisting customers
with the operation of their products. Technical support questions are logged
into the computer, thus forming acustomers. A database
of commonly asked questions which is maintained for each product. This database helps salesproduct is available to
technical support representatives, enabling them to respond quickly to similar
questions from future customers andquestions. It also allows product managers to monitor the effectiveness of the
information provided in the catalogs. The Company also
employs a fax-back systemconducts regular on-site
training seminars for its sales representatives to ensure that allows customers to call directly into a computer
system that automatically faxesthey are well
trained and informed regarding the requested information to the customer.Company's latest product offerings.
DISTRIBUTION CENTERS
NORTH AMERICA
The Company operates eightnine separate sales and distribution facilities in
North America. Each sales
and distribution center has a general manager in charge of inbound sales,
outbound telemarketing, on-site operations, credit review, product fulfillment
and asset management.
ManyCertain of the facilities are linked by a wide area network
management information system. In the event of adverse delivery conditions (such
as bad weather) the Company can shift inbound calls and/or order fulfillment and
shipping to an alternative location. Management believes this provides Global
with important operating flexibility and protection from possible sales
interruptions for many of its North American businesses. See "Management
Information Systems."
A large number of the Company's products are carried in stock, and
consequently orders for such products are fulfilled from theits distribution
center. Certain products (such as selected computer hardware and large furniture
and industrial items) are shipped directly by the supplier. The layout of the
Company's distribution centers is managed with a computer-based tracking system
which dictates the location of specific stock items. Individual product
types are consistently stocked in the same physical picking location, allowing
ease of picking and minimizing picking errors. Picking of productsOrder fulfillment at the
distribution centers is done continuously throughout the day. Customerday as customer orders are packed and
shipped as they
are received.
EUROPE
The Company has seven separate European market branch facilities in sixeight European countries and a central
office near London, England to direct their activities. The central office is
responsible for marketing support, catalog production, financial reporting,
logistics and computer programming support. In addition, each marketEuropean branch
has a full service sales and distribution center to process orders and reports
to the respective country manager who has ultimate profit and loss
responsibility.
SUPPLIERS
In North America, the Company purchases the majority of its products and
components directly from manufacturers, except for certain peripherals, software
and hardware products which are purchased through wholesale distributors. In
Europe, products are sourced from a combination of local manufacturers and
wholesalers. Substantially all of the European catalog product content is
sourced in Europe. No single supplier accounted for more than 10% of Global's
total purchases in 1997.1998.
Private label products are manufactured either by the Company or by third
parties to the Company's specifications. Many of these private label products
have been designed or developed by the Company's in-house research and
development team.teams. See "Research and Development.Development".
MANAGEMENT INFORMATION SYSTEMS
In North America, theThe Company operates a proprietary systeminformation systems that allowsallow centralized management
of key management functions. These include communication links between distribution
centers, inventory and accounts receivable management, purchasing, pricing,
sales and distribution, and the preparation of daily operating control reports
which provide concise and timely information regarding key aspects of its
business. This proprietaryThese management information system enablessystems enable the Company to enhance its
flexibility by promptly shipping customer orders usually(usually on a same-day basis,basis),
responding quickly to order changes and providing a high level of customer
service. The Company maintains a database of over 4045 million customer and
prospect names and keeps records of historical purchasing patterns in order to
prompt sales personnel with product suggestions to expand customer order values.
In addition, the Company has developed a customer prospecting function based
upon geographic, economic and demographic data which enables Global to utilize
its information systems to maintain and expand its customer data file. These
applications enable the Company to achieve cost savings, deliver extensive
customer service and centrally manage its operations.
In the United States, the Company's management information systems are
networked, real-time information systems. These allow each distribution center
to share information and monitor daily progress relating to sales activity,
credit approval, inventory levels, stock balancing, vendor returns, order
fulfillment and other measures of performance.
THE YEAR 2000 ISSUE
As is the case with virtually all companies and organizations, the Company
currently utilizes certain computer programs that store two digits in
identifying the year in the date field. Those programs were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected those computer programs could fail or create erroneous results
by or at the year 2000.
The Company currently believes it will be able to modify or replace any
affected computer program in time to minimize any potential harmful effects on
operations. While it is not possible, at present, to give an accurate estimate
of the impact on the Company's operations or the cost of correcting the affected
computer programs, the Company expects that the impact and associated costs will
not be material to the Company's operations. The Company is in the process of contacting customers, vendors and
vendorsservice providers to determine which of them is affected by the year 2000
problem, and to what extent, in order to assess the potential impact on the
Company.
System maintenance and modification costs to existing computer programs
will be expensed as incurred. The costs associated with the acquisition of new
computer programs that are year 2000 compliant will be capitalized and amortized
over the software's expected useful life.
For additional information regarding the year 2000 issue and its potential
impact on the Company, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000 Compliance."
RESEARCH AND DEVELOPMENT
The Company's research and development team designsteams design and developsdevelop products
for Global's private label program.programs. The individuals responsible for research
and development have backgrounds in engineering and industrial design.
This in-house capability provides important support to the private label
program.programs. Many of the Company's private label products were designed or
developed by thean in-house research and development team. Examples of products
designed in-house include:include PC's, furniture, ergonomic monitor support arms,
printer and monitor stands, wrist rests and other durable computer related
products, storage racks and shelving systems, various stock and storage carts,
work benches, plastic bins and shop furniture. The Company owns the tooling for
many of these products, including plastic bins, computer accessories, furniture,
and metal alloy monitor arms. See "Research and Development Costs" in Footnote 1
to the Consolidated Financial Statements.
COMPETITION
PCS AND NOTEBOOK COMPUTERS
The North American and European computer industries are highly competitive
with many U.S., Asian and European companies vying for market share. There are
few barriers of entry to the PC market with PCs being sold through the direct
market channel, directly from manufacturers, computer superstores, mass
merchants and over the Internet. Timely introduction of new products or product
features are critical elements to remaining competitive. Other competitive
factors include product performance, quality and reliability, technical service
and customer support, marketing and distribution and price. There can be no
assurance that the Company will be able to maintain or improve its current
competitive position with respect to any of these or other competitive factors.
Some of the Company's competitors have stronger brand-recognition, broader
product lines and greater financial, marketing, manufacturing and technological
resources than the Company. Additionally, the Company's results could also be
adversely affected should it be unable to implement effectively its
technological and marketing arrangements with other companies, such as
Microsoft(R) and Intel(R).
COMPUTER RELATED PRODUCTS
The North American computer related products market is highly fragmented
and characterized by multiple channels of distribution, including direct
response (mail order) distributors, local and national retail computer stores
that carry computer supplies, computer resellers, mass merchants, computer
"superstores" and the Internet. The tremendous growth in the computer related
products market during the past 10 years has been accompanied by substantial
changes in the nature of product distribution and sales. The decentralization of
computers throughout factory, business, engineering and office environments has
made it increasingly difficult and expensive for many suppliers to use
traditional direct sales methods to locate users, initiate sales contacts and
effectively provide service to customers. Average order values also tend to be
smaller than in the past, reflecting individual requirements rather than the
greater needs traditionally associated with centralized data processing
departments. These changes in the structure of the computer related products
market have placed traditional distributors with direct sales forces at a
competitive disadvantage due to their cost structures and established selling
methods. As a result, direct marketers have been able to increase sales to the
larger businesses that have traditionally been served by contract stationers and
VARs. They have also been able to capture sales volume and market share from the
numerous small retail computer stores.
In Europe, the Company's major competitors are regional or country-specific
retail and direct-mail distribution companies. The Company's presence in seven
majoreight
European countries provides Global with the flexibility to purchase large
volumes centrally. In addition, the commonality of certain core pages of the
European catalogs provides for economies in catalog production. The Company
believes that these factors allow it to take advantage of cost savings not
available to many of its competitors in Europe.
There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
PCS AND NOTEBOOK COMPUTERS
The computer industry is fiercely competitive with many U.S., Asian and
European companies vying for market share. There are few barriers to the PC
market with PCs being sold through the direct market channel, directly from
manufacturers, computer superstores, mass merchants and over the Internet.
Timely introduction of new products or product features are critical elements to
maintaining a competitive advantage. Other competitive factors include product
performance, quality and reliability, technical service and customer support,
marketing and distribution and price. There can be no assurance that the Company
will be able to maintain or improve its current competitive position with
respect to any of these or other competitive factors. Some of the Company's
competitors have stronger brand-recognition, broader product lines and greater
financial, marketing, manufacturing and technological resources than the
Company. Additionally, the Company's results could also be adversely affected
should it be unable to implement effectively its technological and marketing
arrangements with other companies, such as Microsoft(R) and Intel(R).
OFFICE PRODUCTS
The distribution of office products in the United States is highly
fragmented, with no one participant having more than a 10% market share.
Sourcing of products from vendors and distributors also has been through a
highly-fragmented supplier base without volume discounts or central purchasing
efficiencies. Office products are typically sold through one of three channels:
retail outlets, contract stationers and direct mail. However, due to the rapid
growth of the office products market, competition and consolidation in this
market are increasing, particularly with respect to the SOHO and large corporate
(companies with over 1,000 employees) segments. Large contract stationers,
direct mail distributors and office products superstores have grown at the
expense of small independent retail dealers. The companies leading this
consolidation have not, however, captured a large market position with the
mid-sized facilities which the Company targets. The Company believes that this
lack of penetration results from the fact that office products superstores and
direct mail marketers have focused on serving the SOHO segment while contract
stationers have focused on serving the large corporate sector. The Company
believes that direct mail will continue to be a growing channel of distribution
for office products and that price, breadth of product line and customer service
will be key factors in the success of direct mail distribution of office
products.
There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
INDUSTRIAL PRODUCTS
The market for the sale of industrial products in the United States is
highly fragmented and is characterized by multiple distribution channels such as
retail outlets, small dealerships, direct mail distribution and large warehouse
stores. Global also faces competition from manufacturers' own sales
representatives who sell industrial equipment directly to customers, and from
regional or local distributors. Many high volume purchasers, however, utilize
catalog distributors as their first source of product specifications. In the
industrial products market, customer purchasing decisions are primarily based on
price, product selection, product availability, level of service and
convenience. As is the case with the office products industry, the Company
believes that direct mail is one of the most effective and convenient
distribution methods to reach mid-sized facilities which place many small orders
and require a wide selection of products. In addition, because the industrial
product market is highly fragmented and generally less brand oriented, it is
well suited to private label products. The majority of the Company's industrial
products are high gross profit margin, private label products.
Competition with respect to industrial products in the United Kingdom is
similar to competition in the U.S., with the exception that most direct mail
companies in the United Kingdom drop ship the majority of their products from
the manufacturer, resulting in long delivery lead times. As Global intends to
stockstocks the
majority of its products featured in its dedicated industrial catalogs,
management believes it will havehas a significant advantage over most of its direct mail
competitors in the United Kingdom.
Elsewhere in Europe, no dedicated industrial catalogs are mailed by the
Company, although industrial products are featured in computer supplies and/or
office supplies catalogs. Overall, sales of industrial products in Central
European markets are not material to the Company's overall sales in those
markets.
There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
OFFICE PRODUCTS
The distribution of office products in the United States is highly
fragmented, with no one participant having more than a 10% market share. Office
products are typically sold through one of three channels: retail outlets,
contract stationers and direct mail. However, due to the rapid growth of the
office products market, competition and consolidation in this market are
increasing. The Company competes only on a limited basis with contract
stationers and retail outlets selling office products since the Company does not
sell office product consumables such as paper, envelopes and paper clips. The
Company believes that direct mail will continue to be a growing channel of
distribution for office products and that price, convenience and customer
service will be key factors in the success of direct mail distribution of office
products. There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
In Europe, the situation is similar to that in the United States. Direct
mail distributors are expanding their operations into new geographical markets
and this expansion will no doubt continue until all European major markets are
covered. While the impact of this expansion has not as yet had any material
adverse effect on Company performance, there can be no assurance that the
Company will be able to maintain or improve its current competitive position
with respect to future expansion by competitors or other competitive factors.
EMPLOYEES
As of December 31, 1997,1998, the Company employed a total of 2,7923,135 employees,
including 2,5543,010 full-time and 238125 part-time employees, of whom 2,1372,447 were in
North America and 655688 were in Europe.
None of the Company's North American employees is represented by a labor union, except for
approximately 6055 warehouse and assembly employees in New York who are covered by an
"open-shop" agreement with the Company, which expires at the end of 1998.2001. These
employees are not required to join the union. In Europe,
union membership and affiliations vary by country. In general, the European
unions tend to be national, rather than local, in scope and are industry
specific.
The Company considers its relationships with employees to be good and has
not experienced a work stoppage in 2223 years.
ENVIRONMENTAL MATTERS
Under various national, state and local environmental laws and regulations
in North America and Europe, a current or previous owner or operator (including
the lessee) of real property may become liable for the costs of removal or
remediation of hazardous substances at such real property. Such laws and
regulations often impose liability without regard to fault. The Company leases
most of its facilities. In connection with such leases, the Company could be
held liable for the costs of removal or remedial actions with respect to
hazardous substances. Although the Company has not been notified of, and is not
otherwise aware of, any material environmental liability, claim or
non-compliance, there can be no assurance that the Company will not be required
to incur remediation or other costs in connection with environmental matters in
the future.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
See "Geographic Information" containedThe Company conducts its business in Footnote 10 toNorth America (the United States and
Canada) and Europe. The following sets forth the financial
statements.Company's operations in its two
geographic markets (in thousands):
1998 EUROPE NORTH AMERICA TOTAL
---- -------------------- ---------------------- -----
Net sales.............................. $314,404 $1,121,250 $1,435,654
Income from operations................. $10,851 $53,497 $64,348
Identifiable assets.................... $111,412 $343,027 $454,439
1997 EUROPE NORTH AMERICA TOTAL
---- -------------------- ---------------------- -----
Net sales.............................. $270,236 $875,152 $1,145,388
Income from operations................. $3,423 $55,839 $59,262
Identifiable assets.................... $82,548 $317,197 $399,745
1996 EUROPE NORTH AMERICA TOTAL
---- -------------------- ---------------------- -----
Net sales.............................. $234,078 $677,815 $911,893
Income from operations................. $4,224 $65,250 $69,474
Identifiable assets.................... $78,490 $252,949 $331,439
ITEM 2. PROPERTIES.
The Company's primary facilities, which are leased except where otherwise
indicated, are as follows:
APPROX EXPIRATION
FACILITY LOCATION SQ. FT. OF LEASELEASE*
-------- -------- ------- ----------
Headquarters, Sales and
Distribution Center, Catalog
Operations(1).............................Port ...................................Port Washington, NY 178,000 2007
Sales and Distribution Center(1)............Suwanee, ...................Suwanee, GA 130,000 1999
Sales and Distribution Center...............Compton,Center ......................Compton, CA 140,000 2007
Sales and Distribution Center...............Naperville,Center ......................Naperville, IL 241,000 2010
Sales and Distribution Center...............Holmdel,Center ......................Holmdel, NJ 51,000 19992002
Sales and Distribution Center...............Markham,Center ......................Markham, Ontario 45,000 2005
Sales and Distribution Center...............VerrieresCenter ......................Verrieres le Buisson, France 24,000 2000
Sales and Distribution Center...............Dreieich,Center ......................Dreieich, Germany 55,000 2000
Sales and Distribution Center...............Madrid,Center ......................Madrid, Spain 35,000 2 months notice(2)
Sales and Distribution Center...............Milan,Center ......................Milan, Italy 80,000 1999
Sales and Distribution Center...............Greenock,Center ......................Greenock, Scotland 78,000 owned
Sales and Distribution Center...............Wellingborough,Center ......................Wellingborough, England 38,000 2013
Sales Center and Catalog Operations.........Miami,Operations ................Miami, FL 32,000 200071,000 2010
Sales Center................................Amstelveen,Center .......................................Amstelveen, Netherlands 5,000 2000
PC Assembly, Sales and Distribution Center.....Fletcher,Center .........Fletcher, Ohio 185,000 owned
European Headquarters.......................Uxbridge,Headquarters ..............................Uxbridge, England 7,400 2005
- -----------
(1) Facilities leased from related party.parties. See "Certain Relationships and Related Transactions--Agreements-- Leases and Related
Guarantees."
(2) Terminable upon two months prior written notice.
* The Company does not anticipate any difficulty in renewing or replacing the Company's existing facility leases when those
leases expire.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal actions arising out of the normal
course of business, none of which is anticipated to have a material adverse
effect on the Company's financial position or results of operations.
OnIn March 9, 1998 the Company filed suit in U.S. District Court (Eastern
District of New York) against a bankrupt supplier and its lenders (collectively,
the "Defendants") seeking monetary damages of $2.8 million plus interest for
breach of contract and warranty as well aswarranty. The Company is also seeking a declaration that
the Company is not indebted to the Defendants and has certain legal and
equitable rights of offset against amounts otherwise due the supplier, including
a contractual right to offset $4 million paid by the Company to one of the
lenders under a letter of credit. In September 1998 the Defendants denied the
Company's allegations and counterclaimed alleging outstanding amounts owed and
damages totaling $12.2 million plus interest. The Company believes that
Defendants' claims are without merit and accordingly, in October 1998, asked the
Court to dismiss the Defendants' counterclaims. Management believes that the
ultimate outcome of this matter will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
The Company is a party to various other legal actions arising in the normal
course of business, none of which is anticipated to have a material adverse
effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1997,1998, there were no matters submitted
to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has beenis traded on the New York Stock Exchange under
the symbol "GML" since its initial public offering on June 26, 1995 (the
"IPO"). The following table sets forth the high and low sales price of
the Company's Common Stock as reported on the New York Stock Exchange for the
periods indicated.
19971998 HIGH LOW
---- ---- ----
FIRST QUARTER..................................QUARTER............................. $23 1/16 $15
SECOND QUARTER............................ 22 3/8 12 1/2
THIRD QUARTER............................. 14 3/8 12 1/16
FOURTH QUARTER............................ 25 1/4 9 1/4
1997
----
First quarter............................. 43 7/8 17
SECOND QUARTER.................................Second quarter............................ 26 1/4 13 1/8
THIRD QUARTER..................................Third quarter............................. 27 3/4 20
FOURTH QUARTER.................................Fourth quarter............................ 22 3/8 15 5/8
1996
First quarter.................................. 35 24 1/4
Second quarter................................. 47 32 1/8
Third quarter.................................. 47 1/4 36 1/4
Fourth quarter................................. 52 1/4 39 1/4
On March 23, 1998,5, 1999, the last reported sale price of the Company's Common
Stock on the New York Stock Exchange was $1813/$15 15/16 per share. As of March 23,
1998,5,
1999, the Company had 255237 stockholders of record.
The Company has not paid any dividends since its initial public offering
and anticipates that all of its income in the foreseeable future will be
retained for the development and expansion of its business, and therefore does
not anticipate paying dividends on its Common Stock in the foreseeable future.
See "Certain Relationships and Related Transactions" for a description of the
Company's historical distributions.
On September 30, 1997 the Company acquired the assets of Midwest Micro for
approximately $40 million in cash and 375,000 shares of the Company's common
stock. These shares have not been registered with the Securities and Exchange
Commission as they were issued privately to Midwest Micro pursuant to the
private placement exemption provided in Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 of Regulation D promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information is qualified by reference to,
and should be read in conjunction with, the Company's Consolidated Financial
Statements and the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere in this
report. The selected income statement data for the years ended December 31,
1998, 1997 1996 and 19951996 and the selected balance sheet data as of December 31, 19971998
and 19961997 is derived from the audited consolidated financial statements which are
included elsewhere herein. The selected balance sheet data as of December 31,
1996 and 1995 is derived from the audited financial statements of the Company
which are not included herein. The selected balance sheet data as of December
31, 1994 and 1993 and the selected income statement data for the years ended December 31,
19941995 and 19931994 are derived from the audited financial statements of the
Predecessor Companiesinterrelated
predecessor companies of Global which are not included herein.
INCOME STATEMENT DATA:
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA, NUMBER OF CATALOG TITLES AND NUMBER OF COUNTRIES)
YEAR ENDED DECEMBER 311998 1997 1996 1995 1994
1993
---------------------- ---- ---- ---- ---- ------------- --------- -------- -------- --------
Net sales....................................... $ 1,145.4 $ 911.9 $ 634.5 $ 484.2 $ 393.6
Cost of sales................................... 879.8 662.3 437.2 318.5 244.5
----- ----- ----- ----- -----sales ............................................. $1,435.7 $1,145.4 $911.9 $634.5 $484.2
Gross profit.................................... 265.6 249.6 197.3 165.7 149.1profit .......................................... $288.6 $265.6 $249.6 $197.3 $149.1
Selling, general and
administrative expenses...................... 206.3 180.1 143.2 129.5 119.3expenses ............................ $224.2 $206.3 $180.1 $143.2 $129.5
Income from operations.......................... 59.3 69.5 54.1 36.2 29.8
Interest income................................. 3.3 2.5 1.2 1.1 1.1
Interest expense................................ .4 .5 1.3 1.8 2.1operations ................................ $64.3 $59.3 $69.5 $54.1 $36.2
Income taxes.................................... 23.3 27.7 21.0(3) 14.0(3) 11.1(3)taxes .......................................... $25.8 $23.3 $27.7 $21.0(2) $14.0(2)
Net income...................................... 38.8 43.7 33.1(3) 21.9(3) 17.4(3)income ............................................ $41.3 $38.8 $43.7 $33.1(2) $21.9(2)
Net income per common share:
Basic....................................... $ 1.02 $ 1.16 $ .93(3) $ .65(3) $ .51(3)
Diluted..................................... $ 1.02 $ 1.15 $ .93(3) $ .65(3) $ .51(3)Basic ............................................. $1.11 $1.02 $1.16 $.93(2) $.65(2)
Diluted ........................................... $1.11 $1.02 $1.15 $.93(2) $.65(2)
Weighted average common shares outstanding
Basic.......................................outstanding:
Basic ............................................. 37.3 38.0 37.6 35.5(3) 33.8(3) 33.8(3)
Diluted.....................................35.5(2) 33.8(2)
Diluted ........................................... 37.3 38.2 38.1 35.5(3) 33.8(3) 33.8(3)35.5(2) 33.8(2)
SELECTED OPERATING DATA:
Active customers (1)............................ .................................. 1.8 1.8 1.7 1.7 1.1
.9
Orders entered..................................entered ........................................ 3.8 3.5 3.4 2.5 2.2
1.9
Number of catalogs distributed..................distributed ........................ 179 162 160 122 114
98
Number of catalog titles........................titles .............................. 44 41 40 32 24
18
Number of countries receiving catalogs..........catalogs ................ 14 13 12 10 7 7
BALANCE SHEET DATA (AT DECEMBER 31, IN MILLIONS):
Working capital (2)............................. $ 135.3 $ 128.7 $ 99.1 $ 84.6 $ 65.8....................................... $194.6 $187.8 $194.4 $122.2 $74.2
Total assets.................................... 399.7 331.4 247.5 164.2 127.1assets .......................................... $454.4 $399.7 $331.4 $247.5 $164.2
Short-term debt................................. - .5 5.4 19.2 4.8debt ....................................... $.5 $5.4 $19.2
Long-term debt, excluding
current portion............................... 2.0 2.0 2.9 11.5 13.9portion ..................................... $2.5 $2.0 $2.0 $2.9 $11.5
Stockholders' equity............................ 272.2 228.6 154.0 69.1 58.1equity .................................. $286.6 $272.2 $228.6 $154.0 $69.1
(1) An "active customer" is defined as a customer who has purchased from the Company within the preceding 12 months.
(2) Working capital excludes cash and cash equivalents, short-term investments
and short-term debt.
(3) Amount is calculated on a pro forma basis. Net income per common share and
weighted average common shares outstanding give effect to the shares
outstanding and exchanged prior to the Company's IPO.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table represents the Company's consolidated statement of
income data expressed as a percentage of net sales for the three most recent
fiscal years:
YEAR ENDED DECEMBER 311998 1997 1996 1995
----------------------
---- ---- ----
Net sales..................................................... 100.0% 100.0% 100.0%
Gross profit.................................................. 20.1 23.2 27.4 31.1
Selling, general and administrative expenses.................. 15.6 18.0 19.8 22.5
Income from operations........................................ 4.5 5.2 7.6
8.6
Interest income............................................... .2 .3 .3
.2
Interest expense.............................................. - .1 .4
Income taxes.................................................. 1.8 2.0 3.0
2.0
Net income.................................................... 2.9 3.4 4.8 5.6
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales of $1.44 billion in 1998 were $290.3 million or 25.3% higher than
the $1.15 billion reported in 1997. The increase was attributable to higher
demand for PCs, improved productivity in relationship marketing and the full
year effect of the inclusion of sales from Midwest Micro Corp., acquired at the
end of the third quarter of 1997. The Company also began to benefit from orders
received through its various Internet web-sites. Sales attributable to the
Company's North American operations increased 28.1% to $1.12 billion in 1998
from $875.2 million in 1997. European sales increased to $314.4 million in 1998
from $270.2 million in 1997, an increase of 16.3%. Movements in foreign exchange
rates had an immaterial effect on the European sales comparison.
Gross profit, which consists of net sales less product, shipping and
certain distribution center costs, increased by $23 million or 8.7% to $288.6
million in 1998 from $265.5 million in 1997. Gross profit margin decreased to
20.1% in 1998 from 23.2% in 1997. Gross profit margin on PCs improved in the
current year. With sales of PCs representing an increasing proportion of the
Company's sales and with margins that are lower than on other products, they
have the effect of decreasing the overall gross profit margin. The decrease in
the gross profit margin was also due to increased sales of brand name computer
related products, which typically have lower gross profit margins, and the
relatively lower sales contribution of higher-margin industrial products.
Selling, general and administrative expenses totaled $224.2 million, or
15.6% of net sales in 1998 compared to $206.3 million, or 18.0% of net sales in
1997. This improvement resulted from a focus on controlling expenses and
improved productivity from the Company's relationship marketing staff and offset
a large portion of the gross profit margin decline.
Income from operations increased by $5.1 million or 8.6% to $64.3 million
in 1998 from $59.3 million in 1997. Income from operations decreased as a
percentage of net sales to 4.5% in 1998 from 5.2% in 1997.
Interest income decreased $0.2 million to $3.0 million in 1998 from $3.2
million in 1997 as a result of lower interest rates. Interest expense increased
to $0.5 million in 1998 from $0.4 million in 1997.
The effective tax rate increased to 38.5% in 1998 from 37.5% in 1997 as a
result of a higher effective state income tax rate and a change in the relative
income earned in foreign countries. As a result of the foregoing, net income
increased $2.4 million, or 6.3%, to $41.3 million in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased by $233.5 million or 25.6% to $1.15 billion in 1997
from $911.9 million in 1996. The increase was primarily attributable to (i) an
increase in revenue from the Company's major account sales program, (ii) the
inclusion of sales from Midwest Micro since its acquisition at the end of
September 1997, (iii) an increase in the sales of brand name and private label
PCs and notebook computers and (iv) an increased average order value resulting
from increased offerings and sales of brand name products. Sales attributable to
the Company's North American operations increased 29.1% to $875.2 million in
1997 from $677.8 million in 1996. European sales increased to $270.2 million in
1997 from $234.1 million in 1996, an increase of 15.4%. In local currencies
without foreign exchange rate effects, European sales increased 21.3%.
Gross profit, which consists of net sales less product, shipping and
certain distribution center costs, increased by $15.9 million or 6.4% to $265.5
million in 1997 from $249.6 million in 1996. Gross profit margin decreased to
23.2% in 1997 from 27.4% in 1996. The decrease in gross profit margin was
primarily due to (i) the Company's strategic decision to increase the proportion
of net sales attributable to brand name products, particularly PCs, notebook
computers, computer related products and hardware which typically have lower
gross profit margin percentages than many of the Company's other products, (ii)
the increase in the proportion of sales from the Company's major account sales
group which generally sells to larger customers at discounted prices, and (iii)
increased shipping and other costs associated with the United Parcel Service
labor action in August 1997.
A significant portion of this decline in gross profit margin has been
offset by the continued decline in selling, general and administrative expenses
as a percentage of net sales. While selling, general and administrative expenses
increased by $26.1 million or 14.5% to $206.3 million in 1997 from $180.1
million in 1996, as a percentage of net sales they decreased to 18.0% in 1997
from 19.8% in 1996. The decrease as a percentage of net sales was primarily
attributable to reduced catalog costs in North America as a result of the
increased efficiencies from larger average order sizes, vendor supported
advertising, continued expense control and the leveraging of selling, general
and administrative expenses over a larger sales base. Included in selling,
general and administrative expenses in 1997 was a one time charge of $9.6
million incurred during the third quarter relating to the impairment of certain
long lived assets, principally goodwill.
As a result of the above, income from operations decreased by $10.2 million
or 14.7% to $59.3 million in 1997 from $69.5 million in 1996. Income from
operations as a percentage of net sales decreased to 5.2% from 7.6% in 1996.
Interest income increased $ .8 million to $3.3 million in 1997 from $2.5
million in 1996 primarily due to higher levels of investments in short-term
securities. Interest expense decreased $ .1 million to $ .4 million in 1997 from
$ .5 million in 1996.
Net income decreased $4.9 million or 11.2% to $38.8 million in 1997
principally as a result of the above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales increased by $277.4 million or 43.7% to $911.9 million in 1996
from $634.5 million in 1995. The increase was primarily attributable to (i)
internal growth fueled by an increase in the number of catalogs mailed
(including eight new catalog titles), an increase in revenue from the Company's
major account sales program and an increased average order value resulting from
increased offerings and sales of brand name products and (ii) the inclusion of a
full year of sales from TigerDirect verses one month in 1995. Sales attributable
to the Company's North American operations increased 52.1% to $677.8 million in
1996 from $445.7 in 1995 as compared with a 24.0% increase in European sales to
$234.1 million in 1996 from $188.8 million in 1995.
Gross profit, which consists of net sales less product, shipping and
certain distribution center costs, increased by $52.3 million or 26.5% to $249.6
million in 1996 from $197.3 million in 1995. Gross profit margin decreased to
27.4% in 1996 from 31.1% in 1995. The decrease in gross profit margin was due in
part to the inclusion of a full year of sales from TigerDirect whose product mix
has a lower gross profit margin, and the Company's strategic decision to
increase the proportion of net sales attributable to brand name products,
particularly computer related products and hardware which typically have lower
gross profit margins than many of the Company's other products.
A significant portion of this decline in gross profit margin has been
offset by the continued decline in selling, general and administrative expenses
as a percentage of net sales. While selling, general and administrative expenses
increased by $37.1 million or 25.9% to $180.1 million in 1996 from $143.0
million in 1995, as a percentage of net sales they decreased to 19.8% in 1996
from 22.5% in 1995. The decrease as a percentage of net sales was primarily
attributable to reduced catalog costs in North America as a result of the
increased vendor supported advertising, continued expense control and the
leveraging of selling, general and administrative expenses over a larger sales
base. As a result of expenses associated with the Company's launching of cross
border catalogs in the first quarter in Europe, selling, general and
administrative expenses as a percentage of net sales for Europe did not decrease
significantly. These European cross border catalogs were mailed into countries
where the Company did not have an existing customer base and accordingly yielded
lower catalog response rates than the Company's other catalogs.
Income from operations increased by $15.2 million or 28.0% to $69.5 million
in 1996 from $54.3 million in 1995. Income from operations as a percentage of
net sales decreased to 7.6% from 8.6% in 1995 as a result of a $4.6 million
decrease in operating profits for Europe and the inclusion of a full year of
Tiger which had a lower operating profit margin than the rest of North America.
Interest income increased $1.3 million to $2.5 million in 1996 from $1.2
million in 1995 primarily due to investment in short-term securities.
Interest expense decreased $1.9 million to $ .5 million in 1996 from $2.4
million in 1995 primarily as a result of the repayments of officers' notes
issued during 1995.
Net income increased $8.0 million or 22.4% to $43.7 million in 1996 as a
result of the increase in income from operations described above and a $4.7
million decrease in Officers Compensation and an increase of $15.0 million in
income taxes as a result of the predecessor companies termination of S
Corporation status. Net income increased $10.6 million or 32.0% compared to 1995
pro forma net income of $33.1 million, as described below.
SEASONALITY
The operations of the Company are somewhat seasonal. In particular, net
sales have historically been modestly weaker during the second and third quarter
as a result of lower business activity during the summer months. The following
table sets forth net sales, gross profit and income from operations for each of
the quarters since January 1, 19961997
(AMOUNTS IN MILLIONS).
1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------
NET SALES...................................... $358.3 $330.5 $359.8 $387.1
GROSS PROFIT................................... $75.4 $67.1 $71.6 $74.5
INCOME FROM OPERATIONS......................... $20.1 $11.6 $15.6 $17.1
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------
NET SALES......................................Net sales...................................... $273.5 $259.5 $259.7 $352.7 (1)
GROSS PROFIT................................... 69.4 64.2 57.3 74.7
INCOME FROM OPERATIONS......................... 18.6 17.9 2.5 20.3
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------
Net sales...................................... $ 218.7 $ 213.7 $ 225.9 $ 253.6
Gross profit................................... 65.0 60.1 60.3 64.2$69.4 $64.2 $57.3 $74.7
Income from operations......................... 18.3 15.5 16.8 18.9$18.6 $17.9 $2.5 $20.3
(1) Includes approximately $62 million of net sales from Midwest Micro acquired on September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primaryCompany continues to maintain a strong financial position. Primary
capital needs have beenare to fund thefinance working capital requirements necessitated by itsfor sales growth, acquisitions and
acquisitions.investments in property, equipment and information technology. The Company's
primary sourcessource of financing havehas been cash from operations, equity offerings,
andallowing it to a lesser extent bank borrowings.remain
virtually debt-free. The Company believes that its cash flowsflow from operations,
existing cash and short-term investments and available lines of credit will be
adequate to support its current and anticipated activities.
Net cash provided byCash flow from operating activities was $33.1$37.7 million $22.7 million
and $11.0in 1998, $33.1
million in 1997 1996 and 1995, respectively.$22.7 million in 1996. Cash flow is provided primarily by
net income and depreciation. The increase in inventories and accounts payable
and accrued expenses in 1998 resulted from expansion activities in the Company's
PC assembly operation and increased sales activity. The increase in cash flow
from 1996 to 1997 was due to increasedimproved asset management, specificallyprimarily related to
accounts receivable and inventory.
The increase from 1995Net cash of $13.0 million was used in 1998 in investing activities for
business acquisitions and additions to 1996 was dueproperty, plant and equipment. These
included capacity expansion at the Company's PC assembly factory, completion of
the new Compton, California facility and improvements to increased working
capital as a result of increased sales, improved management of inventory and
accounts receivable and reduced levels of unprinted catalog paper in response to
stabilizing paper prices.information technology
systems. Net cash used in investing activities in 1997 was primarily the result offor the
acquisition of Midwest Micro and the acquisition of additional furniture, fixtures and
leasehold improvements needed to accommodate increased staff levels at the new
Compton, California facility to
accommodate the increased staff levels. Those expendituresfacility. Short-term investments were partially offsetdecreased by a decrease$22.0
million as partial funding for these activities resulting in short-term investments, for a net outlaycash used of
$25.2 million for investing activities for the year. For 1996, netNet cash used in investing
activities in 1996 was $39.8 million, resulting from the investment of surplus cash andemployed for the acquisition of computer
equipment and additional furniture and fixturesequipment at the Naperville, Illinois facility to
accommodate increased staff levels. For 1995, netSurplus cash balances of $31.0 million were
invested.
Cash was used in investing activities was $11.7 million resulting from the acquisition of
TigerDirect, property and equipment and the repayment of amounts due to
affiliates.
Net cash (used in) provided by financing activities wasin 1998 ($ .5) million,25.4 million) and in 1997
($0.5 million) and provided $23.9 million and $20.2in 1996. In 1998, the Company used
$28.6 million in 1997, 1996 and 1995, respectively.of cash to purchase shares of its common stock. The use of funds
in 1997 was primarily due tofor the repayment of long-term debt. ForIn 1996, net
cash provided by financing activities resulted from the net proceeds from
the
sale and issuance of 1.0 million shares of common stock aswas partially offset by
the repayment ofused to repay long-term bank
debt and the settlement ofsettle long-term capital leases.
The source of funds in 1995 was due mainly to the net proceeds of the
Company's initial public offering net of the repayment of officers' notes
payable and repayment of bank debt.
The Company maintains secured and unsecured lines of credit with various
financial institutions under which the maximum aggregate amount available is
$95.0approximately $100 million. As of December 31, 1997,1998, the Company had no
outstanding borrowings under thethese lines of credit. TheBorrowings under the lines of credit
bear interest atbased on either the prime rate LIBOR plus 63 basis points or atLIBOR. The maximum borrowings
under the respective bank's base rate and
expire on various dates through December 1998. In addition,facilities are reduced where applicable by the Company may havevalue of any
outstanding letters of credit equal to an amountissued on behalf of the total line less
outstanding borrowings.
The Company also maintains a secured line of credit with a bank with a
maximum amount available of 2.0 Pounds Sterling. There were no borrowings under
this facility as of December 31, 1997. This line expires in April 1998 and
provides for interest at the bank's base rate (6% at December 31, 1997) plus 2%.Company. The Company does
not anticipate any difficulty in renewing or replacing any ofif its lines of
credit as they expire.
The Company is party to certain litigation, as disclosed in "Commitments
and Contingencies" in the Notes to Consolidated Financial Statements, the
outcome of which the Company believes will not have a material adverse effect on
its consolidated financial statements.
Anticipated capital expenditures in 19981999 are expected to be approximatelyapproximate $20
million, which the Company plans to fund out of cash from operations and
existing cash and cash equivalents. These capital expenditures are primarily for
(i) the relocation and expansion of the Company's salesPC assembly operation, construction of a new
distribution center and distribution centers
and (ii) the acquisition of information technology systems and
other fixed assets.
YEAR 2000 COMPLIANCE
The Company is in the process of analyzing and addressing what is known as
the year 2000 (or "Y2K") issue. Based on current information, the Company
believes that it will be year 2000 compliant in a timely manner and the cost of
achieving such compliance will not have a materially adverse effect on the
Company's results of operations or financial condition. As noted in the
following discussion, however, there are multiple variables in determining
whether full Y2K compliance can be achieved, a number of which are dependent on
efforts of third parties.
BACKGROUND.
This issue has arisen because many existing computer programs use only two
digits instead of four (E.G., "98" instead of "1998") to identify a year in the
data field. This is a holdover from the days when businesses first started using
computers and electronic memory was limited and storage was expensive. These
programs were designed and developed without considering the impact of the
upcoming change in the century. Accordingly, some computers can not determine if
the reference to the year "02" means 2002 or 1902. The failure of such
applications or systems to properly recognize the dates beginning in the year
2000 could result in miscalculations or even systems failures. The Company could
be affected by this problem both as a user of computers and as a direct marketer
and retail vendor of PCs and computer related products (including private label
PCs assembled by its Midwest Micro subsidiary).
In 1998 the Company established a Year 2000 Team to assess the Company's
Y2K compliance situation. This team consists of the Company's Chief Financial
Officer, Chief Information Officer, Controller, General Counsel and a
representative from the Company's management information system (MIS)
department.
INTERNAL SYSTEMS
The Company's Y2K Team established a plan to have all of the Company's
computer and computer-dependent systems tested and, if necessary, modified or
replaced to ensure Y2K compliance. Each of the Company's computers and computer
dependent systems has been analyzed to assess what would be the impact on the
Company if the system becomes materially impaired due to Y2K non-compliance.
Each system has been placed in one of three categories based on the level of
risk to the Company - Level I (catastrophic risk), Level II (critical risk) and
Level III (sustainable risk). The Company is now in the process of modifying
those systems identified during the assessment as Level I risks and doing live
tests of the Level I and Level II systems to ascertain anticipated Y2K
compliance. Based on its analysis to-date, the Company believes that all of its
internal computer systems (hardware, system software and applications software)
and computer-dependent systems, including technology embedded in the Company's
machinery and other equipment to the extent that it is date sensitive, are
currently Y2K compliant or will, through the replacement or modification of
existing hardware and software, be made Y2K complaint in a timely manner. A
target date of July 1, 1999 has been fixed for such compliance. The Company
believes at this time that it should be able to meet such target date.
The Company has not retained any outside service provider to conduct
independent verification of the Company's compliance status and does not at this
time intend to hire any such service provider but is utilizing a third-party
software program to test, assess and repair non-mainframe hardware.
As a direct marketer of products, the Company is particularly dependent on
the ability of telecommunications, shipping and credit card companies to provide
services. The Company has contacted its key vendors and service providers to
ascertain their Y2K compliance to the extent that their noncompliance could
affect the Company's internal systems or other aspects of the Company's
business. The Company expects to have completed this process by June 1999. The
Company at this time cannot make any prediction as to the degree of compliance
by such vendors and service providers or the consequence to the Company of any
noncompliance. Any noncompliance by such service providers could have a material
adverse impact on the Company.
Similar issues will be faced with the Company's banks and payroll services,
as well as other vendors. Any serious Y2K problems which significant vendors and
service providers encounter could materially adversely impact the Company. Since
the Company's customer base is diverse and no one customer accounts for a
significant portion of the Company's business, the Company does not at this time
believe that it is necessary to query customers on their Y2K compliance status.
While the Company believes that the efforts which it has taken and plans to
take should be sufficient to identify and correct any Y2K problems before
December 31, 1999, there can be no assurance that the Company will be fully Y2K
complaint in a timely manner.
PRODUCTS SOLD
The Company began assembling its own private label PC hardware systems
following the acquisition of its Midwest Micro subsidiary on September 30, 1997.
Prior to this time the Company only sold private label PC systems assembled by
third party contract manufacturers. The Company believes that all of the private
label PC hardware systems it sells, including those it assembles itself, are Y2K
complaint. All PC hardware systems assembled by the Company on or after January
1, 1998 have been certified to be Y2K compliant by the National Software Testing
Lab (NSTL), an independent testing lab.
The Company is in the process of questioning its vendors as to the Y2K
compliance status of the brand name (i.e. third party-manufactured) hardware and
software products it sells. Accordingly, the Company cannot be certain at this
time, and does not warrant to its customers, that the brand name computer
hardware and software it currently sells is Y2K compliant. This includes the
brand name software that is pre-loaded onto the private label PCs the Company
sells. While the Company believes that the liability for any Y2K failure of any
computer hardware or software the Company sells rests with the manufacturer of
such products or components, and it understands that most of the major
manufacturers have "fixes" available for certain older products which have Y2K
problems, it is possible that purchasers from the Company may make claims
against the Company for alleged Y2K problems with respect to products sold by
the Company and there can be no assurance that the Company would be successful
in having any such liability be borne by its vendors.
FINANCIAL RAMIFICATIONS
The Company estimates that the costs of achieving Y2K compliance, including
costs of personnel devoting significant effort on Y2K matters, will be
approximately $500,000 of which approximately $150,000 has been incurred through
December 31, 1998. The costs associated with any new computers or computer
programs which are year 2000 compliant have been and will be capitalized and
amortized over the computer's and/or software's expected useful life. Any system
modification or maintenance costs necessary to make the Company's existing
computer programs Y2K compliant have been and will be expensed as incurred.
Based on the Company's current status of internal Y2K compliance review and
other preliminary information, the Company does not anticipate that expenses yet
to be incurred to achieve year 2000 compliance will have a material impact on
the Company's results of operations or financial condition or that its business
will be adversely affected by the Y2K issue in any material respect.
Nevertheless, achieving Y2K compliance is dependent on multiple factors,
many of which are not within the Company's sole control. Should one or more of
the internal systems of the Company or the Company's key vendors exhibit
significant Y2K problems or if any of the products which the Company sells which
are still under warranty are Y2K deficient, the Company's business and its
results of operations could be materially adversely affected.
The Company may see an increase in warranty claims related to the Y2K
issue. The Company's standard limited warranty period for the PC systems it
assembles ranges from one to five years from the date of first purchase,
depending upon the system purchased and the particular component part warranted.
The Company does not make any separate warranty on brand name products it sells,
instead passing on the manufacturer's warranty. The Company can not at this time
assess the level of Y2K-related warranty claims it may receive regarding its
products. A significant level of warranty claims relating to the Y2K issue could
have a materially adverse impact on the Company's future results.
RISKS
Until it has completed its Y2K assessment, and attempted to fix any
problems which such assessment may disclose, the Company can not be in a
position to determine what would be its most reasonably likely worst case Y2K
scenario or any plan for handling such scenario. The Company has not devised any
back-up plans should it suffer any internal Y2K problems or should any of its
vendors' Y2K problems affect the Company. After completion of its Y2K
assessment, including a review of the responses received from such vendors, the
Company will assess the need for any contingency plans.
The failure to correct a material Y2K problem could result in an
interruption of, or inability to perform in a timely fashion, a necessary
business activity or operation. Such failures could materially adversely affect
the Company's results of operations, liquidity and/or financial condition.
Because of the general uncertainty which companies generally face regarding the
Year 2000 issue, in part due to actions of third-parties which could affect a
company's compliance, it is not possible to determine at this time whether any
actual failures will have a material adverse impact on the Company.
The foregoing discussion contains forward-looking statements which should
be read in conjunction with the discussion entitled "Forward Looking Statements"
set forth below.
IMPLICATIONS TO THE COMPANY FROM THE ADOPTION OF A EUROPEAN COMMON CURRENCY
The Company has extensive operations in certain European countries,
including France, Germany, Italy, the Netherlands, Spain, Sweden, England and
Scotland. It also sells to additional countries in Europe. For the 1998 fiscal
year, approximately 22% of the Company's net sales were in Europe. With the
exception of Sweden and the United Kingdom, all of the countries in which the
Company has operations have confirmed their participation in a new 11-country
European common currency, the Euro. The adoption of such common currency will be
phased in over a three-year period starting in January 1999. During such
phase-in period, both the Euro and the historical currency of a country will be
valid, although new Euro-denominated currency will not be issued until 2002.
Each member-country will decide when its legacy currency will cease to be legal
tender, which will occur during the period January 1 through June 30, 2002.
Until the introduction of Euro-denominated currency, the paying party will have
the option to decide whether to pay in the legacy currency or in Euros converted
to the legacy currency.
Among other possible economic implications, it is expected that the
adoption of a common currency will generally lead to greater price transparency
and thereby increased competition within the common currency zone. For instance,
with a single currency applicable to the entire region, consumers may be able to
more easily discern differences in price for the Company's products between
different countries and modify their buying practices accordingly. This is less
likely to be a factor for the Company than for many other companies since the
Company currently only advertises the Euro price on its Internet sites, not in
its catalogs. Also, purchasers of low cost individual products are less likely
to shop for a lower Euro price outside of their geographic location. The Company
will still use national catalogs, in the appropriate language, after the
introduction of the Euro. Whether any such price differentials will lead to
significant changes in purchasing practices by the Company's customers depends
on other factors as well, such as convenience, language-related matters and
other factors which may determine where a consumer will purchase products. The
Company is not able at this time to gauge whether the likelihood of increased
competition arising from the introduction of the Euro would have any significant
long-term adverse impact on the pricing for the Company's products.
The adoption of a common currency will not require a significant
modification to the Company's accounting systems.
The Company does not believe that the adoption of a common currency will
give any parties to material contracts with the Company the right to terminate
or modify such contracts on the grounds of "frustration," "impossibility" or
"impracticability."
Other risks associated with such currency conversion include possible
currency exchange and tax risks, neither of which the Company believes will have
a significant effect.
The Company does not at this time anticipate that the adoption of the Euro
and any resulting changes in European economic and market conditions will have
any material adverse impact on the Company or its European business. The Company
has not adopted, nor is it at this time contemplating the adoption of, any
contingency plans regarding this issue.
The foregoing discussion contains forward-looking statements which should
be read in conjunction with the discussion entitled "Forward Looking Statements"
set forth below.
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 Exchange Commission or
otherwise. Statements contained herein that are not historical facts are forward
looking statements made pursuant to the safe harbor provisions referenced above.
Forward looking statements may include, but are not limited to, projections of
revenue, income or loss and capital expenditures, statements regarding future
operations, financing needs, compliance with financial covenants in loan
agreements, plans for acquisition or sale of assets or businesses and
consolidation of operations of newly acquired businesses, and plans relating to
products or services of the Company, assessments of materiality, predictions of
future events and the effects of pending and possible litigation, as well as
assumptions relating to the foregoing. In addition, when used in this
discussion, the words "anticipates", "believes", "estimates", "expects",
"intends", "plans" and variations thereof and similar expressions are intended
to identify forward looking statements.
Forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the forward
looking statements contained in this report. Statements in this report,
particularly in "Item 1. Business", "Item 3. Legal Proceedings", "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Notes to Consolidated Financial Statements describe certain
factors, among others, that could contribute to or cause such differences. Other
factors that could contribute to or cause such differences include, but are not
limited to, unanticipated developments in any one or more of the following
areas: (i) the Company's ability to manage rapid growth as a result of internal
expansion and strategic acquisitions, (ii) the effect on the Company of
volatility in the price of paper and periodic increases in postage rates, (iii)
the operation of the Company's management information systems including the
costs and effects associated with the year 2000 date change problem, (iv) the
general risks attendant to the conduct of business in foreign countries,
including currency fluctuations associated with sales not denominated in United
States dollars, (v) significant changes in the computer products retail
industry, especially relating to the distribution and sale of such products,
(vi) competition in the PC, notebook computer, computer related products,
officeindustrial products and industrialoffice products markets from superstores, direct
response (mail order) distributors, mass merchants, value added resellers, the
Internet and other retailers, (vii) the potential for expanded imposition of
state sales taxes, use taxes, or other taxes on direct marketing companies,
(viii) the continuation of key vendor relationships including the ability to
continue to receive vendor supported advertising, (ix) timely availability of
existing and new products, (x) risks due to shifts in market demand and/or price
erosion of owned inventory, (xi) borrowing costs, (xii) changes in taxes due to
changes in the mix of U.S. and non-U.S. revenue, (xiii)pending or threatened
litigation and investigations and (xiv) the availability of key personnel, as
well as other risk factors which may be detailed from time to time in the
Company's Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unexpected
events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to market risks, which include changes in U.S. and
international interest rates as well as changes in currency exchange rates as
measured against the U.S. dollar and each other. Global attempts to reduce these
risks by utilizing certain derivative financial instruments.
The value of the U.S. dollar affects the Company's financial results.
Changes in exchange rates may positively or negatively affect Global's sales (as
expressed in U.S. dollars), gross margins, operating expenses and retained
earnings. The Company engagesmay engage in hedging programs aimed at limiting in part
the impact of certain currency fluctuations. Using primarily forward exchange
and foreign currency option contracts, Global, from time to time, hedges certain
of its assets that, when remeasured according to generally accepted accounting
principles, may impact the Statement of Consolidated Income. These hedging
activities provide only limited protection against currency exchange risks.
Factors that could impact the effectiveness of the Company's hedging programs
include accuracy of sales forecasts, volatility of the currency markets,
availability of hedging instruments and the credit-worthiness of the parties
which have entered into such contracts with the Company. All currency contracts
that are entered into by Global are for the sole purpose of hedging an existing
or anticipated currency exposure, not for speculative or trading purposes. In
spite of Global's hedging efforts to reduce the effect of changes in exchange
rates against the U.S. dollar, the CompanyCompany's sales or costs could still be
adversely affected by changes in those exchange rates.
As of December 31,1997,31,1998, the Company had no outstanding forward exchange
contracts in the amount of 1.0 million Pounds Sterling, 30.0 million French
Francs and 700.0 million Italian Lire.contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report; see
Item 14 of Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 of Part III is hereby incorporated by
reference from the Company's Proxy Statement for the 19981999 Annual Meeting of
Stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Part III is hereby incorporated by
reference from the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 of Part III is hereby incorporated by
reference from the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 of Part III is hereby incorporated by
reference from the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The Consolidated Financial Statements of Global DirectMail Corp.
2. Financial Statement Schedules:
Schedules not included with this additional financial data have
been omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or
Notes thereto.
3. Exhibits.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------ ---------------------------------------------------------------------------- --------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant*Registrant(1)
3.2 By-laws of Registrant*Registrant(1)
4.1 Stockholders Agreement**Agreement(2)
4.2 Specimen Stock Certificate of Registrant*Registrant(1)
10.1 Form of 1995 Long-Term Stock Incentive Plan*Plan(3)**+
10.2 Exchange Agreement dated as of May 8, 1995 between certain
stockholders of the Predecessor Companies and the Company*Company1
10.3 Lease Agreement dated October 14, 1992 between the Company and
2RB Associates Co. (Port Washington facility)*(1)
10.4 Lease Agreement dated September 20, 1988 between the Company and
Addwin Realty Associates (Port Washington facility)*(1)
10.4A Amendment to Lease Agreement dated September 29, 1998 between the
Company and Addwin Realty Associates (Port Washington facility)
10.5 Lease Agreement dated May 25, 1989 between the Company and Addwin
Realty Associates (Suwanee facility)*(1)
10.6 Lease Agreement dated as of July 17, 1997 between the Company and
South Bay Industrials Company (New Compton(Compton facility)(4)
10.7 Build-to-Suit Lease Agreement dated April, 1995 among the
Company, American National Bank and Trust Company of Chicago and
Walsh, Higgins & Company (Naperville facility)*(1)
10.8 Lease Agreement dated September 17, 1998 between Tiger Direct,
Inc. and Keystone Miami Property Holding Corp. (Miami
facility)(5)
10.9 Rent Guaranty dated as of October 14, 1992 by the Company to the
Bank of New York*
10.9York(1)
10.10 Royalty Agreement dated June 30, 1986 between the Company and
Richard Leeds, Bruce Leeds and Robert Leeds, and Addendum
thereto*
10.10thereto(1)
10.11 Consulting Agreement dated as of December 22, 1992 between the
Company and Paul Leeds*+
10.11Leeds1(1)*
10.12 Form of 1995 Stock Plan for Non-Employee Directors*Directors(3)**+
10.12
10.13 Consulting Agreement dated as of January 1, 1996 between the
Company and Gilbert Rothenberg*Rothenberg(3)**+
10.13
10.14 Asset Purchase Agreement dated September 12, 1997 among Infotel,
Inc., Mark L. Runkle, Midwest Micro Corp. and the Company ****
10.14Company(6)
10.15 Employment Agreement dated as of December 12, 1997 between the
Company and Steven M. Goldschein+Goldschein(4)*
21.1 Subsidiaries of the Registrant
23 Consent of experts and counsel: Consent of Independent Public
Accountants
27 Financial Data Schedule (EDGAR version only)
- --------
*------------------
1 Incorporated herein by reference to the Company's registration statement on
Form S-1 (Registration No. 33-92052).
**2 Incorporated herein by reference to the Company's quarterly report on Form
10-Q for the quarterly period ended September 30, 1995.
***3 Incorporated herein by reference to the Company's registration statement on
Form S-1 (Registration No. 333-1852).
****4 Incorporated herein by reference to the Company's annual report on Form 10-K
for the year ended December 31, 1997.
5 Incorporated herein by reference to the Company's quarterly report on Form
10-Q for the quarterly period ended September 30, 1998.
6 Incorporated herein by reference to the Company's report on Form 8-K dated
September 26,1997
+26, 1997.
* Management contract or compensatory plan or arrangement
--------
(b) Reports on Form 8-K.
On October 15, 1997, the Company filed a reportNo reports on Form 8-K regarding its
September 30, 1997 acquisition of substantially all ofwere filed by the assets of
Infotel, Inc.Company during the fiscal year
ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of New
York, State of New York, on the 27th26th day of March, 1998.1999.
GLOBAL DIRECTMAIL CORP
By: /s/ RICHARD LEEDS
....................................---------------------------------------
Richard Leeds
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
-------- ----- -----
/s/ RICHARD LEEDS Chairman and Chief Executive March 26, 1999
- ------------------------ Officer
March 27, 1998
......................Richard Leeds (Principal Executive Officer)
Richard Leeds
/s/ BRUCE LEEDS Vice Chairman and President of March 27, 1998
......................26, 1999
- ------------------------ International Operations
Bruce Leeds
/s/ ROBERT LEEDS Vice Chairman and President of March 27, 1998
......................26, 1999
- ------------------------ Domestic Operations
Robert Leeds
/s/ ROBERT DOOLEY Director and Senior Vice President-- March 27, 1998
......................26, 1999
- ------------------------ President-- Worldwide Computer
Robert Dooley Sales and
Robert Dooley Marketing
/s/ STEVEN GOLDSCHEIN Senior Vice President and Chief March 27, 1998
......................26, 1999
- ------------------------ Financial Officer
Steven Goldschein (Principal Financial Officer)
/s/ HOWARD KOHOS CorporateMICHAEL SPEILLER Vice President and Controller March 27, 1998
......................26, 1999
- ------------------------ (Principal Accounting Officer)
Howard KohosMichael Speiller
/s/ ROBERT D. ROSENTHAL Director March 27, 1998
......................26, 1999
- ------------------------
Robert D. Rosenthal
/s/ STACY DICK Director March 27, 1998
......................26, 1999
- --------------------------
Stacy Dick
********
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of THE
GLOBAL DIRECTMAIL CORP:
We have audited the accompanying consolidated balance sheets of Global
DirectMail Corp and its subsidiaries, (the "Company"), as of December 31, 19971998
and 19961997 and the related consolidated statements of net income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997.1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 19971998 and 1996,1997, and the consolidated results of their operations and
their cash flows for each of the three years ended December 31, 19971998 in
conformity with generally accepted accounting principles.
/S/ Deloitte & Touche LLP/s/ DELOITTE & TOUCHE LLP
New York, New York
February 5, 1998, March 9, 1998 as it relates to the second paragraph under
LITIGATION of Note 9.4, 1999
GLOBAL DIRECTMAIL CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997 AND 1996
(IN THOUSANDS)
1998 1997 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42,029 $ 43,432
$ 35,211
Short termShort-term investments 5,050 9,017 31,031
Accounts receivable, net 154,516 132,741
111,709
Inventories 129,966 102,599
93,033
Prepaid catalog expense 11,917 12,305
Other prepaid expenses and other current assets 9,565 7,42721,517 21,482
Deferred income tax benefit 6,865 4,059 3,266
--------- ----------
Total current assets 359,943 313,330 293,982
PROPERTY, PLANT AND EQUIPMENT, net 33,988 29,401 21,878
GOODWILL, net 56,612 53,258 13,545
DEFERRED INCOME TAX BENEFIT 3,084 3,122 -
OTHER ASSETS 812 634 2,034
--------- ----------
TOTAL $ 399,745454,439 $ 331,439399,745
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 114,783 $ 75,170
Accrued expenses and accrued expenses $ 125,562 $ 99,053other current liabilities 47,853 50,392
Current portion of long-term debt 2,681 12 495
--------- ----------
Total current liabilities 165,317 125,574 99,548
--------- ----------
LONG-TERM DEBT 2,493 1,972 2,030
--------- ----------
DEFERRED INCOME TAXES - 1,224
--------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, authorized
25 million shares, - -issued none
Common stock, par value $.01 per share, authorized
150 million shares, issued 38,231,990;
outstanding 36,128,090 (1998) and 38,231,990 (1997) 382 379382
Additional paid-in capital 176,743 168,356176,743
Common stock in treasury at cost - 2,103,900 shares in 1998 (28,604)
Accumulated other comprehensive income (348) (2,130)
Retained earnings 138,456 97,204
58,392
Cumulative translation adjustment (2,130) 1,510
------------------- ----------
Total shareholders' equity 286,629 272,199
228,637
------------------- ----------
TOTAL $ 399,745454,439 $ 331,439399,745
========= ==========
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
STATEMENTS OF
CONSOLIDATED STATEMENTS OF NET INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND 1995
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
1998 1997 1996 1995
---- ---- ----
NET SALES $ 1,435,654 $1,145,388 $ 911,893
$ 634,484
COST OF SALES 1,147,098 879,846 662,277 437,179
---------- --------- ----------
GROSS PROFIT 288,556 265,542 249,616 197,305
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 224,208 206,280 180,142 143,034
---------- --------- ----------
INCOME FROM OPERATIONS 64,348 59,262 69,474
54,271INTEREST AND OTHER (INCOME) EXPENSE, net (including $4,707 of
Shareholders' compensation in 1995) (6) 39 4,748
INTEREST INCOME (3,255) (2,470) (1,246)(3,225) (3,261) (2,431)
INTEREST EXPENSE 497 425 521 2,394
---------- --------- ----------
INCOME BEFORE INCOME TAXES 67,076 62,098 71,384 48,375
PROVISION FOR INCOME TAXES 25,824 23,286 27,680 12,655
---------- --------- ----------
NET INCOME $ 41,252 $ 38,812 $ 43,704 $ 35,720
========== ========= ==========
NET INCOME PER COMMON SHARE:
BASIC $ 1.11 $ 1.02 $ 1.16
=========== ========== =====================
DILUTED $ 1.11 $ 1.02 $ 1.15
=========== ========== =========
PRO FORMA INCOME DATA (UNAUDITED)
Historical income before income taxes $ 48,375
Pro forma other adjustments 5,684
----------
Pro forma income before income taxes 54,059
Pro forma income taxes 21,008
----------
Pro forma net income $ 33,051
==========
Pro forma net income per common share - basic and diluted $ 0.93
======================
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
CONSOLIDATED STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND 1998
(IN THOUSANDS)
Notes
Receivable
Additional Cumulative from
Common Paid-in Retained Translation RelatedCOMMON STOCK
-------------------- ACCUMULATED
ADDITIONAL OTHER TREASURY
NUMBER OF PAID-IN RETAINED COMPREHENSIVE STOCK
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT PARTIESINCOME AT COST
--------- ------ -------------------- ------------- ------------- --------
----------- ---------
BALANCES, JANUARY 1, 19951996 36,857 $ 24,934369 $ 14,539138,470 $ 39,59114,688 $ 315 $ (10,273)
Differences arising from480
Change in cumulative translation of
foreign statements - - - 165 -
Dividends paid - - (2,000) - -
Other (30) - 30 - -
Effect of exchange of common
shares, issuance of notes and collection of
notes receivable (24,620) (14,528) (58,653) - 10,273
Initial public offering of common shares 83 134,329 - - -
Issuance of common shares for the acquisition
of TigerDirect, Inc. 2 4,130 - - -
Net income - - 35,720 - -
-------- --------- --------- ------- ---------
BALANCES, DECEMBER 31, 1995 369 138,470 14,688 480 -
Differences arising from translation of
foreign statements - - -adjustment 1,030 -
Net proceeds from sale of common shares 1,000 10 29,886
- - -
Net income - - 43,704 - -
--------
--------- --------- ------- ------------------- --------- --------- --------
BALANCES, DECEMBER 31, 1996 37,857 379 168,356 58,392 1,510
-
Differences arising fromChange in cumulative translation of
foreign statements - - -adjustment (3,640)
-
Issuance of 375,000 common shares as partial consideration
for the acquisition of the net assets of
Infotel, Inc. 375 3 8,387
- - -
Net income - - 38,812 - -
--------
--------- --------- ------------------- --------- --------- --------
BALANCES, DECEMBER 31, 1997 38,232 382 176,743 97,204 (2,130)
Change in cumulative translation adjustment 1,782
Purchase of treasury shares (2,104) $ (28,604)
Net income 41,252
--------- --------- --------- --------- --------- ---------
BALANCES, DECEMBER 31, 1998 36,128 $ 382 $ 176,743 $138,456 $ 97,204(348) $ (2,130) $ -
========(28,604)
========= ========= ========= ========= ========= ========== ========
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
CONSOLIDATED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND 1995
(IN THOUSANDS)
1998 1997 1996
1995
---- ---- ----
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 41,252 $ 38,812 $ 43,704 $ 35,720
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization, net 7,482 5,715 3,813 2,098
Charges associated with the impairment of certain long lived
assets 9,200
- -
BenefitProvision for deferred income taxes (2,728) (5,308) (330) (1,959)
Provision for returns and doubtful accounts 5,264 3,283 2,745 4,178
Changes in certain assets and liabilities:
Accounts receivable (23,688) (18,395) (29,242)
(15,261)
Inventories (23,942) 3,103 (20,748) (12,155)
Prepaid catalog and other prepaid expenses 330 (1,569) 7,028 (8,500)
Accounts payable and accrued expenses 33,801 (1,727) 15,760
6,921
------ ------ -----------
Net cash provided by operating activities 37,771 33,114 22,730
11,042
--------- ----------------- ----- ------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Net change in short term instrumentsshort-term investments 3,967 22,014 (31,031) -
Investments in property, plant and equipment (11,051) (9,989) (8,805)
(4,859)
Loans to affiliated entities - - (5,631)
AcquisitionAcquisitions, net of net assets of businessescash acquired (5,942) (37,227)
- (1,185)
--------- --------- ---------------- ------- -------
Net cash used in investing activities (13,026) (25,202) (39,836)
(11,675)
-------- --------- ----------------- ------- -------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Net cash provided by short termProceeds from long-term borrowings 3,326
Proceeds from short-term borrowings from banks - 478
-
BorrowingsRepayments of long term debt - - 8,392
Repayment of long term debtlong-term borrowings (168) (470) (6,442)
(27,550)
Repayment from related parties - - 4,702
Proceeds from sale and issuance of common shares - 29,896
134,412
Dividends paid - - (2,000)
PaymentPurchase of notes payable to shareholders - - (97,800)
------------- -------------- ----------------treasury shares (28,604)
------- ------- -------
Net cash (used in) provided by financing activities (25,446) (470) 23,932
20,156
------------ --------------- ----------------------- ---- ------
EFFECTS OF EXCHANGE RATES ON CASH (702) 779 (92)
128
-------- ---------- --------------- --- ----
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,403) 8,221 6,734
19,651
--------- ---------- ----------------- ----- -----
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 43,432 35,211 28,477
8,826
--------- ---------- ----------------- ------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 42,029 $ 43,432 $ 35,211
$ 28,477
========= ========== =================== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 309 $ 376 $ 1,194
$ 2,548
======== ========= =================== ========
Income taxes paid $ 28,577 $ 29,497 $ 26,606
$ 14,957
======== ========= ====================
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND 1995
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASISPRINCIPLES OF PRESENTATIONCONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Global DirectMail Corp and its
wholly-owned subsidiaries (collectively, the "Company" or "Global"). The Company is the
successor to several corporations, previously referred to as the Global
Group, which were owned by related shareholders. In connection with the
consummation of an initial public offering in June 1995 (the "IPO"), the
stockholders of these predecessor companies exchanged all of the
outstanding capital stock for common shares of Global. That transaction was
accounted for as a pooling of interests.
DESCRIPTION OF BUSINESSES - The Company is involved in the marketing and
sale of personal computers (PCs), notebook computers, computer related
products, office products and industrial products, through the distribution
of mail order catalogs and a network of major account sales representatives
in the North America and Western Europe.
PRINCIPLES OF CONSOLIDATION - All
significant intercompany accounts and transactions have been eliminated in
consolidation. WhenWhere necessary, the results of operations of the Company's
foreign subsidiaries have been adjusted to conform to accounting principles
generally accepted in the United States of America.
CASH, AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The Company considers
amounts held in money market accounts and other short-term investments with
an original maturity date of approximately three months or less to be cash
equivalents. SALESThe Company's investments in cash equivalents and short-term
investments are classified as debt securities available-for-sale. These
equivalents are stated at fair market value. Unrealized holding gains and
losses are not significant for any of the years presented. The investments
are other debt securities and have contractual maturities of $5,050,000 of
which $2,750,000 is one year or less and $2,300,000 matures between one and
five years.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - The Company recognizes sales
of products, including shipping revenue, at the time of shipment. Accounts
receivable are shown in the consolidated balance sheets net of allowances
for doubtful collections and subsequent customer returns of approximately
$7,338,000$8,664,000 and $7,724,000$7,338,000 at December 31, 19971998 and 1996,1997, respectively. The
changes in these allowance accounts are summarized as follows (in
thousands):
YEAR ENDED DECEMBER 31 1998 1997 1996
1995
-------------------------------------------- -------- ------------ ------ --------
Balance, beginning of year..................................$ 7,724 $7,7317,338 $7,724 $ 4,5987,731
Charged to expense........................................... 5,365 3,283 2,745 4,178
Reductions, principally write-offs...........................(4,039) (3,669) (2,752) (1,045)
------- ------- -------
Balance, end of year........................................$ 7,338 $7,7248,664 $7,338 $ 7,7317,724
======= ====== ======= ========
INVENTORIES - Inventories consist primarily of finished goods and are
stated at the lower of cost or market value. Cost is determined by using
the first-in, first-out method.
PREPAID CATALOG EXPENSE - Prepaid catalog expense includes (i) unused
catalog paper, (ii) cost associated with the production and mailing of
finished catalogs, net of (iii) funding from certain of the Company's
vendors for advertisements placed, advertising allowances and incentives
("Co-op") relating to those catalogs. Finished catalog expense net of the
respective Co-op is deferred and charged to expense over the period that
the catalog remains the most current selling vehicle, generally three
months.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at
cost. Depreciation of furniture, fixtures and equipment is on the
straight
linestraight-line or accelerated method over their estimated useful lives
ranging from three to eight years. Depreciation of buildings is on the
straight linestraight-line method over estimated useful lives of 30 to 50 years.
Leasehold improvements are amortized over the lesser of their useful lives or the
term of the lease.respective
leases.
FOREIGN CURRENCY TRANSLATION - The financial statements of the foreign
entities are translated into U.S. dollars, the reporting currency, using
year-end exchange rates for consolidated balance sheet items and average
exchange rates for the consolidated statementstatements of net income items. The
translation differences are recordedmade directly in the consolidated statementto a separate component of
shareholders' equity.
FOREIGN CURRENCY TRANSACTIONS - Transactions in foreign currencies are
recorded at the exchange rate in effect at the transaction date. Realized
and unrealized exchange gains and losses during the year are included in
the respective year's consolidated statement of net income.
RESEARCH AND DEVELOPMENT COSTS - Costs incurred in connection with research
and development are expensed as incurred. Such expenses for the years ended
December 31, 1998, 1997 1996 and 19951996 aggregated approximately $1,352,000,
$674,000 $573,000 and $443,000,$573,000, respectively.
GOODWILL, NET - Goodwill and negative goodwill are combined and presented
net of the respective accumulated amortization. For acquisitions that the
Company has recorded as purchase transactions, the amount ofGoodwill represents the excess of
the purchase priceacquisition costs over the identifiablefair market value of the net assets of acquired
businesses and is recorded as goodwill.being amortized on a straight-line basis over their
estimated useful lives, ranging from 10 to 40 years. In instances where the
Company had acquired a business below the fair value of the assets
acquired, the Company recorded negative goodwill. GoodwillAnnual amortization of
goodwill for 1998 and negative1997 was expense of $751,000 and $76,000 and for 1996
income of $435,000.
The Company continually evaluates whether events or circumstances warrant
revision of the amortization periods. Additionally, the Company considers
whether the carrying value of goodwill are being amortized over periods ranging from 10should be adjusted based on its
expected future benefit. During 1997, the Company determined that, as a
result of its' decision to 40 years.exit certain lines of its' Tiger Direct Inc.
subsidiary's business, an impairment of the goodwill associated with those
business lines had occurred. The Company recorded a write down in the value
of the goodwill of approximately $6.3 million.
NET INCOME PER COMMON SHARE - The Company accounts for net income per share
in accordance with Statement of Financial Accounting Standard No. 128,
"Earnings Per Share". Net income per common share-basic was calculated
based upon the weighted average number of common shares outstanding during
the respective periods. 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 weighted average common shares outstanding for the computation of basic
earnings per common share for 1998, 1997 and 1996 were 37.3 million, 38.0
million and 37.6 million, respectively. Additionally 16,000 (1998), 262,000
(1997) and 505,000 (1996) of equivalent common shares were included for the
diluted calculation.
COMPREHENSIVE INCOME - In 1998, the Company adopted Statement of Financial
Accounting Standard No. 130 "Reporting Comprehensive Income". This
statement establishes rules for the reporting of comprehensive income and
its components. Comprehensive income consists of net income and foreign
currency translation adjustments and is included in the Consolidated
Statements of Shareholders' Equity. Comprehensive income was $42,335,000
(1998), $36,641,000 (1997) and $44,348,000 (1996), net of effects on
currency translation adjustments of ($699,000) (1998), $1,469,000 (1997)
and ($386,000) (1996).
USE OF ESTIMATES IN FINANCIAL STATEMENTS - The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NET INCOME PER COMMON SHARE - In December 1997 the2. ACQUISITIONS
The Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"acquired two businesses in 1998 for $5.9 million in cash and
restated net income per common share for all periods presented. Net
income per common share-basic was calculated based upon the weighted
average number of common shares outstanding during respective periods. 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 weighted average common shares outstanding for the computation of basic
earnings per common share for 1997 and 1996 were 38.0 million and 37.6
million, respectively. Additionally 262,000 and 505,000 of equivalent
common shares were includedthree businesses in 1997 and 1996, respectively, for the diluted
calculation.
2. PRO FORMA INFORMATION (UNAUDITED)
PRO FORMA INCOME ADJUSTMENTS
The pro forma income data for the year ended December 31, 1995 present the
effects on the historical consolidated financial statements of certain
transactions related to the June 1995 IPO as if they occurred as of the
beginning of the year, including (1) reduced levels of compensation and
royalty payments to officers, (2) the elimination of $500,000 per year of
compensation paid to a shareholder pursuant to a consulting agreement
entered into in 1992 which terminated in connection with the IPO, (3) the
elimination of interest paid on officers notes in 1995, and (4) the
provision for income taxes to eliminate the benefit, for income tax
purposes, of the predecessor companies with S Corporation status.
PRO FORMA NET INCOME PER COMMON SHARE
Pro forma net income per common share-basic was based on the weighted
average number of shares of common stock outstanding prior to and after the
IPO. Pro forma net income per common share-diluted was calculated based on
the weighted average number of shares outstanding plus the effect of
approximately 201,000 options assumed outstanding after the IPO.
3. ACQUISITIONS
During 1997 the Company acquired the net assets of three businesses for a
total of $50.8 million in cash stock and purchase related costs with
additional contingent cash consideration possible.stock. These
acquisitions are
beingwere accounted for as purchases, and accordingly, the assets
and liabilities of the acquired entities have been recorded at their
estimated fair values at the dates of acquisition. The excess of purchase
transactions.price over the estimated fair values of net assets acquired, in the amount
of $5.2 million in 1998 and $15.9 million in 1997 has been recorded as
goodwill and is being amortized over the estimated useful lives.
The Companylargest acquisition in 1997, Infotel Inc., included a provision for
payment of additional consideration to the former shareholders if the
acquired entity's results of operations exceeded certain targeted levels.
Additional consideration of $9 million was earned in 1998 (payable in 1999)
and was recorded as an increase to the purchase price. The maximum amount
of remaining contingent consideration is $3 million (payable in 2000).
During 1998 the estimated fair market valuevalues of the net assets acquired at $15.9 million and the excess of
the purchase price over that amount as goodwill.
The unaudited pro forma results of operations of the Company, including the
pro forma effect as if those companies had been acquired as of January 1,
1995, are as follows (in thousands, except earnings per common share):
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
Net sales $ 1,334,183 $1,207,625 $ 975,946
Net income $ 39,286 $ 42,251 $ 29,839
Earnings per common share - basic and diluted $ 1.02 $ 1.10 $ .83
In November 1995, Global acquired TigerDirect, Inc. ("Tiger") and recorded at that time the
purchase price in excessdate of the fair value of the net
assets acquired as goodwill. The estimated fair valuesacquisition for Infotel, Inc. were further evaluated by the Company
during 1996 and, as
a result,in accordance with Statement of Financial Accounting Standard No. 38,
"Accounting for Pre Acquisition Contingencies of Purchased Enterprises",
goodwill was reduced by approximately $3.1$10.7 million.
DuringThe pro forma results for 1998, 1997 and 1996, assuming these acquisitions
had been made at the Company had determined that, as a result of its decision to exit
certain lines of Tiger's business acquired as partbeginning of the original
purchase, an impairment ofperiod, would not have been
materially different from the goodwill associated with those exited
business lines had occurred. As such, the Company recorded a write down in
the value of the goodwill of approximately $6.3 million.
4.reported results.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consists of the following (in
thousands):
DECEMBER 311998 1997
1996
----------- --------- ------- --------
Land and buildings...............................................................buildings.............................................................$ 8,324 $ 8,085 $ 5,226
Furniture and fixtures, office and warehouse equipment...........................equipment 42,471 32,857
27,273
Leasehold improvements...........................................................improvements.......................................................... 7,871 6,096
3,990
Transportation equipment.........................................................equipment........................................................ 2,111 1,817
1,555
--------- --------------- -----
60,777 48,855 38,044
Less accumulated depreciation and amortization...................................amortization 26,789 19,454
16,166
--------- ----------
Net property,------ ------
Property, plant and equipment..........................................equipment, net..............................................$ 33,988 $ 29,401
$ 21,878
========== =======================
During 1997 the Company recorded a charge relating to the impairment of
certain long-lived fixed assets of approximately $2.9 million
5.million.
4. RELATED PARTY TRANSACTIONS
The Company leases several warehouse and office facilities from affiliates
(see Note 9)8). Rent expense under those leases aggregated approximately
$1,584,000, $1,901,000 $2,130,000 and $2,366,000$2,130,000 for the years ended December 31,
1998, 1997 and 1996, and 1995, respectively.
6.5. LONG-TERM DEBT
Long-term debt consistconsists of the following (in thousands):
DECEMBER 31 1997 1996
----------- -------- -----
Foreign denominated secured loan (a)..................................1998 1997
------- ------
Mortgage loan (a)........................... $2,016 $ 1,972
Secured loan (b) ........................... 3,158
Other....................................... 12
------ -------
Total long-term debt................... 5,174 1,984
Less: current maturities............... 2,681 12
------ -------
$ 2,493 $ 1,972 $ 2,030
Capitalized lease obligations......................................... 12 17
------ -------
Total............................................................ 1,984 2,047
Less: current maturities......................................... 12 17
------ -------
Long-term debt .................................................$1,972 $ 2,030
=====
=======
======
At December 31, 1997,1998, the aggregate maturities of long-term debt are as follows
(in thousands):
YEAR ENDING DECEMBER 31 AMOUNT
1998.................................................------
1999..................................................$ 12
1999.................................................. 1,972
Total notes payable...................................2,681
2000................................................... 665
2001................................................... 665
2002................................................... 665
2003................................................... 498
-------
$ 1,984
==========5,174
=======
(a) A subsidiary of the Company entered into a mortgage agreement
("Mortgage") in the
amount of 1.2 million Pounds Sterling due in its entirety in June
1999, with interest payable semi-annually at a rate of 9.6 percent per
annum. The Mortgagemortgage is secured by land and building with an aggregate
net book value of 2.4 million Pounds Sterling at December 31, 1997.1998.
The Mortgagemortgage contains certain covenants calling for timely reporting
of financial information, restrictions on changes in ownership and
employment levels by such subsidiary. As of December 31, 19971998 the
Company was in compliance with those covenants.
(b) subsidiary of the Company entered into a 5 year loan agreement in the
amount of 26.7 million Swedish Krone which is payable in quarterly
installments having commenced in November 1998 with interest payable
quarterly at a rate of LIBOR plus 200 basis points. The loan
is secured by substantially all of the assets of the Company's United
Kingdom subsidiaries.
The Company maintains lines of credit with various financial institutions.
The maximum aggregate amounts available under these lines of credit were
$95 million and $52$101.7 million at December 31, 1997 and 1996.1998 including $4.2 million denominated in a
foreign currency (2.5 million Pounds Sterling). No amounts were outstanding
under these lines at December 31, 1997.1998. These lines accrue interest at
variable rates ofbased on either the prime rate or LIBOR plus 63 basis
points.LIBOR. The prime rate and
LIBOR were 8.258 percent and 5.95.1 percent, respectively, at December 31, 1997.1998.
The foreign currency line is secured by substantially all of the assets of
the Company's United Kingdom subsidiaries. These lines expire on various
dates through December 1998.1999. Associated with the lines of credit, the
Company may have outstanding letters of credit equal to the amount of the
total line less outstanding borrowings. At December 31, 19971998 there was
a $4 million$100,000 of outstanding standby letterletters of credit.
6. SHAREHOLDERS' EQUITY
In May, 1998 the Board of Directors authorized a share repurchase program
to acquire up to 1,350,000 (subsequently increased to 4,350,000) common
shares on the open market. The Company maintains a secured linepurchased an aggregate of credit with a bank with a maximum
amount available2,103,990
shares during 1998 at an aggregate cost of 2.0 million Pounds Sterling. Borrowings, of which there
were none as of December 31, 1997 and 1996, bear interest at the bank's
base rate (6% at December 31, 1997) plus 2% and are secured by
substantially all of the assets of the Company's United Kingdom
subsidiaries. This line expires in April 1998 and is renewable at the
Company's option.
7. SHAREHOLDERS' EQUITY
At December 31, 1997, there were 25.0 million shares of preferred stock,
$.01 par value, of which none were issued. Common stock at such date
consisted of 150.0 million shares authorized, par value of $.01 per share,
of which 38,231,990 were issued and outstanding.$28.6 million.
As required by law, certain foreign subsidiaries must retain a percentage
of shareholders' capital in the respective company. Accordingly, a portion
of retained earnings is restricted and not available for distribution to
shareholders. Such amount at December 31, 19971998 was not material.
STOCK OPTION PLANS - The Company has two fixed option plans which reserve shares
of common stock for issuance to key employees, directors, consultants and
advisors to the company. The following is a description of these plans:
THE 1995 LONG-TERM STOCK INCENTIVE PLAN - This plan allows the Company to
issue from time to time qualified, non-qualified and deferred compensation stock options, stock
appreciation rights, restricted stock and restricted unit grants, performance
unit grants and other stock based awards authorized by the Compensation
Committee of the Board of Directors. Options issued under this plan expire ten
years after the options are granted and generally become exercisable ratably on
the third, fourth, and fifth anniversary of the grant date. A maximum total
number of 2.0 million shares may be granted under this plan of which a maximum
of 800,000 shares may be of restricted stock and restricted stock units. No
award shall be granted under this plan after December 31, 2005. A total of
1,290,9481,628,848 options were outstanding under this plan as of December 31, 1997.1998.
THE 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS - This plan provides
for automatic awards of non-qualified options to directors of the company who
are not employees of the Company or its affiliates. All options granted under
this plan will have a ten year term from grant date and are immediately
exercisable. A maximum of 100,000 shares may be granted for awards under this
plan. This plan will terminate the day following the tenth annual stockholders
meeting. A total of 14,000 options were outstanding under this plan as of
December 31, 1997.1998.
The Company accounts for these plans in accordance with Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees", under which no
compensation costs have been recognized for stock options. Had compensation
costs of the plans been determined under a fair value alternative method as
stated in Statement of Financial Accounting StandardsStandard No. 123, "Accounting for
Stock-Based Compensations", the Company would have prepared a fair value model
for such options and recorded such amount in the accompanying consolidated
financial statements as compensation expense. On a pro forma basis, net income
for 1998, 1997 and 1996 would have been $39.8 million, $37.7 million and $42.3
million respectively and diluted earnings per common share for 1998, 1997 and
1996 would have been $.99$1.07, $0.99 and $1.11 respectively. The Company arrived at
the fair value of stock grant at the date of the grant by using the
Black-Scholes pricing option model with the following assumptions used for
grants: risk-free interest rate of 5.9% (1998), 6.2% (1997) and 6.1% (1996);
expected dividend rate of 0%; for 1998, 1997 and 1996; expected level of 3.78
years (1998), 3.75 years;years (1997) and 4 years (1996); and expected volatility of
38% (1998), 35% (1997) and 35% (1996). The weighted average stock options outstanding at December
31, 1998 and 1997 have a weighted average contractual level of 7.7 years and 8
years.years, respectively. The following table reflects the plan activity for yearthe
years ended December 31, 1997:
OPTIONS
FOR SHARES OPTION PRICES
---------- -------------
Outstanding, January 1,1996, 1997 1,206,500 $17.50 to $49.13
Granted during the year 604,146 $17.50 to $18.41
Cancelled during the year (505,698) $24.38 to $49.13
Exercised during the year - -
---------------- ---------------
Outstanding, December 31 1,304,948 $17.50 to $39.06
========= =================and 1998:
OPTIONS
FOR SHARES OPTION PRICES
Outstanding, January 1, 1996 865,500 $17.50 to $26.88
Granted 365,150 $27.19 to $49.13
Cancelled (24,150) $17.50 TO $49.13
------- ----------------
Outstanding, December 31, 1996 1,206,500 $17.50 to $49.13
Granted 604,146 $17.50 to $18.41
Cancelled (505,698) $24.38 TO $49.13
-------- ----------------
Outstanding, December 31, 1997 1,304,948 $17.50 to $39.06
Granted 469,450 $12.38 to $17.50
Cancelled (131,550) $17.50 TO $18.41
--------- ----------------
Outstanding, December 31, 1998 1,642,848 $12.38 to $39.06
===========
The following table summarizes information for the three years ended December
31, 19971998 concerning currently outstanding and exercisable options:
1998 1997 1996
1995
-------------------------- --------------------------- ----------------------
Weighted-Average Weighted Average Weighted Average
Fixed Options------------------------
WEIGHTED-AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ----------------------------- ------ ------------------------------ ------ ------------------------------
Fixed Options
Outstanding at beginning of yearyear...... 1,304,948 $19.28 1,206,500 $25.45 865,500 $ 20.49
- -
Granted .............................. 469,450 $14.49 604,146 $19.19 365,150 $ 36.80
876,900 $20.45
ExercisedCancelled ............................ - - - - - -
Cancelled ............................(131,550) $17.64 (505,698) $33.90 (24,150) $ 19.39
(11,400) $17.50
-------- ---------------- ----------- ------- ------- ------- ------
Outstanding at end of year............1,304,948year............ 1,642,848 $18.04 1,304,948 $19.28 1,206,500 $ 25.45
865,500 $20.49
========== ================ ========= ======= ======= ======
Options exercisable at year end....... 335,550 189,000 139,000 10,000
Weighted average fair value per
option granted during the year..... $5.77 $13.05 $13.57 $7.05
As of December 31, 1998:
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Outstanding atNumber Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Exercise
PRICE 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICEPrice
- -------------------- ----------------------------- ------------------ --------------- --------------------------- ------------ -----------------
$ 17.50$12.38 to $ 22.50 1,070,948 8.11 $ 17.57$17.50 1,360,348 7.85 $16.46 196,550 $17.38
$17.51 to $22.50 48,500 8.69 $18.73 5,000 $ 21.56
$ 22.51$21.56
$22.51 to $ 30.00$30.00 230,000 7.64 $ 26.88 180,000 $ 26.87
$ 30.016.64 $26.88 130,000 $26.87
$30.01 to $ 39.06$39.06 4,000 8.33 $ 39.067.33 $39.06 4,000 $39.06
$ 17.50---------- -------
$12.38 to $ 39.06 1,304,948 8.03 $ 19.28 189,000 $ 26.99
================== ========= ==== ======= =======$39.06 1,642,848 7.71 $18.04 335,550 $21.38
========== =======
Of the options issued during 1997,An aggregate of 420,348 options originally issuedgranted during 1997, with exercise prices
ranging from $24.38 to $49.13, were repricedre-priced on April 28, 1997 with an exercise
price of $17.50, representingwhich represented the market price of the outstanding common stock at that time.such
date. All other terms of these options remained unchanged.
8.7. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- -------- ---------- -------
Current:
Federal $ 23,274 $ 23,140 $ 10,400
State 4,107 3,787 1,895
Foreign 1,041 1,038 2,319
Deferred (5,279) (865) (369)
Change in valuation allowance 143 580 (1,590)
-------- -------- ---------
Total $ 23,286 $ 27,680 $ 12,655
======== ========
YEAR ENDED DECEMBER 31 1998 1997 1996
---------------------- -------- ---------- --------
Current:
Federal $ 22,072 $ 23,274 $ 23,140
State 4,259 4,107 3,787
Foreign 2,242 1,041 1,038
Deferred (2,749) (5,279) (865)
Change in valuation allowance 143 580
-------- -------- ---------
Total $ 25,824 $ 23,286 $ 27,680
========= ========= =========
Prior to the IPO, a number of the predecessor companies were S
Corporations and accordingly their income was not taxable for Federal and
certain state tax purposes. Subsequent to the IPO, all of the former S
Corporations terminated such status and accordingly became taxable
entities thereafter.
Income taxes are accrued and paid by each foreign entity in accordance with
applicable local regulations.
TheA reconciliation of the difference between the income tax expense and the
computed income tax expense based on the Federal statutory corporate rate is as
follows (in thousands):
YEAR ENDED DECEMBER 31 1998 1997 1996 1995
---------------------- -------- ---------- ---------------
Federal statutory rate $ 23,477 $ 21,734 $ 24,984 $ 16,931
State and local income taxes, net of Federal tax benefit 2,511 2,092 2,456
1,001
Foreign tax (303) (175) 2,778
Foreign source income (72) (573) (2,685)
Increase (reduction) in valuation allowance 143 580 (923)less than domestic rate (192) (232) (463)
Net operating losslosses utilized 165 335 -(276) (165) (335)
Other items, net (473) 73 -
Federal, state and local tax benefit of S Corporation status - - (4,447)
---------- ---------- ----------
$23,286 $27,680304 (143) 1,038
-------- --------- ---------
$ 12,65525,824 $ 23,286 $ 27,680
======== ======== =========
The deferred tax assets (liabilities) at December 31, 1997 and 1996 are comprised of the following:
1998 1997
1996
-------- --------
Current:------------------ ---------------
Current:
Deductible assets....................................................$(3,649) $(4,106) $ (2,542)(3,649)
Non-deductible accruals and reserves.................................. 10,040 7,458 4,244
Non-deductible assets................................................. 986 553 826
Foreign net operating loss carryforwards..............................carryforwards 26
1,027
Other................................................................. (55) (329) (289)
------- ---------
Current...........................................................Current.......................................................... $ 6,865 4,059
3,266
------ --------
Non-Current:------- ---------
Non-current:
Foreign net operating loss carryforwards..............................carryforwards 5,658 4,980
1,712
Accelerated depreciation.............................................. (1,147) (1,243) (1,441)
Basis differences from acquisitions................................... 1,063 1,843 356
Other assets.......................................................... - (332)
Valuation allowances.................................................. (2,490) (2,458) (1,519)
------- ---------
Non-Current.......................................................Non-current....................................................... 3,084 3,122
(1,224)
------ -----------------
Total........................................................ $ 9,949 $ 7,181 $ 2,042
======= ========
The foreign net operating loss carryforwards generally expire at dates through
2004. The2007 except for carryforwards in the United Kingdom and Germany, which have no
expiration. In accordance with Statement of Financial Accounting Standard 109
"Accounting for Income Taxes", the Company maintains valuation allowances
against its foreign net operating loss carryforwards since, at this time, the
realizability of the related deferred tax benefits can not be reasonably
assured.
9.8. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
LEASES - The Company is obligated under operating lease agreements
for the rental of certain office and warehouse facilities
and equipment which expire at various dates through OctoberDecember
2013.
At December 31, 19971998 future minimum annual lease payments for related and
third-party leases were as follows (in thousands):
YEAR ENDING DECEMBER 31 RELATED PARTY THIRD PARTY TOTAL
----------------------- ------------- ----------- ------
1998................................1999................................ $ 1,6321,584 $ 4,1633,718 $ 5,795
1999................................ 1,122 3,862 4,9845,302
2000................................ 612 2,448 3,0601,584 3,849 5,433
2001................................ 612 1,897 2,5091,224 3,515 4,739
2002................................ 612 1,897 2,509
2003-2007........................... 2,958 9,062 12,020
2008-2012........................... - 3,935 3,935
Thereafter.......................... - 410 410
-----------1,224 3,219 4,443
2003................................ 1,224 3,158 4,382
2004-2008........................... 4,743 12,692 17,435
2009-2013........................... 3,781 3,781
--------- -------- -------
$ 7,54811,583 $ 27,674 $35,22233,932 $ 45,515
=========== ======== ===============
Rent expense for the years ended December 31, 1998, 1997 1996 and 19951996 aggregated
approximately $7,665,000, $7,151,000 $7,406,000 and $5,235,000$7,406,000, respectively.
GUARANTEES - The Company has guaranteed a mortgage obtained by an affiliate ($2.32
million at December 31, 1997)1998) relating to property which the Company leases from
the affiliate. Additionally the Company's U.K. subsidiaries have granted a
security interest for substantially all of their assets to secure a loan and a
line of credit with a U.K. financial institution.
LITIGATION - In March 1998 the Company initiated legal action against a bankrupt
supplier and its lenders (the "Defendants") seeking a declaration that the
Company has contractual rights of offset against indebtedness to the supplier,
including $4 million drawn by one of the lenders under a letter of credit and
monetary damages of $2.8 million. In September 1998 the Defendants denied the
Company's allegations and counterclaimed for amounts outstanding together with
damages totaling $12.2 million. The Company believes that the Defendants' claims
are without merit and asked the Court to dismiss the counterclaims. Management
believes that the ultimate outcome of this matter will not have a material
adverse effect on the Company's consolidated financial statements.
The Company has been named as a defendant in other lawsuits incidental to its
businesses.business. Management of the Company, based on discussions with legal counsel,
believes the ultimate resolution of these lawsuits will not have a material
effect on the Company's consolidated financial position or results of
operations.
At December 31, 1997 the Company was contingently liable under a standby
letter of credit guaranteeing the obligations of a third party supplier in
the amount of $4 million. Such amount was paid on March 2, 1998. The
Company has initiated legal action seeking a declaration that the Company
has a contractual right to offset the $4 million against amounts otherwise
due to the supplier. The Company believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's
consolidated financial statements.
CONTINGENCY - The Company is required to collect sales tax on certain of its
out-of-state sales. In accordance with current law, approximately 20%16% of the
Company's 19971998 domestic sales were subject to sales tax. A change in law could
require the Company to collect sales tax in additional states.
EMPLOYEE BENEFIT PLANS - Certain of the U.S. subsidiaries participate in defined
contribution compensatory 401(k)/profit sharing benefit plans covering such eligible employees as defined by the plan
document. Contributions to the planplans by the Company isare determined as a
percentage of the employees' contributions. Aggregate expense to the Company for
contributions to such plans was approximately $397,000, $373,000 $267,000 and $211,000$267,000 in
the years ended December 31, 1998, 1997 and 1996, and 1995, respectively.
CertainLiabilities accrued by certain foreign entities require amounts to be accrued for each employee's
retirement,employee termination
indemnities, determined in accordance with labor laws and labor agreements in
effect in the respective country. Liabilities relative to such
termination indemnitiescountry, were not material.
FOREIGN EXCHANGE RISK MANAGEMENT - The Company has limited involvement with
derivative financial instruments and does not use them for trading purposes. The
Company entersmay enter into foreign currency options or forward exchange contracts to
hedge certain foreign currency transactions. The intent of this practice is to
minimize the impact of foreign exchange rate movements on the Company's
operating results. As of December 31,1997,31,1998, the Company had no outstanding
forward exchange contracts in the amount of 1.0
million Pounds Sterling, 30.0 million French Francs and 700.0 million
Italian Lire.contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments consist primarily of
investments in cash, trade account receivables, accounts payable and debt
obligations. The Company estimates the fair value of financial instruments based
on interest rates available to the Company and by comparison to quoted market
prices. At December 31, 19971998 and 1996,1997, the fair value of the Company's financial
instruments approximated their carrying values.
CONCENTRATION OF CREDIT RISK - Concentrations of credit risk with respect to
trade account receivables are limited due to the large number of customers
comprising the Company's customer base.
Ongoing credit
evaluations9. SEGMENT AND RELATED INFORMATION
In 1998 the Company adopted Statement of customer's financial condition are performed.
10. GEOGRAPHIC INFORMATIONFinancial Accounting Standard 131,
"Disclosure About Segments of an Enterprise and Related Information". The
Company conductsevaluated its business in North America (the United Statesaccordance with the statement and Canada)determined
that it is engaged in a single reportable segment which markets and Europe.sells
various business products. The following sets forthCompany's product offerings include personal
computers (PC's), computer related products, industrial products and office
products and are monitored for sales trends and profitability in these
sub-categories. Products are marketed through an integrated system of direct
mail catalogs, a network of major account sales representatives and proprietary
e-commerce internet web-sites.
Financial information relating to the Company's operations in
its twoby geographic markets (in thousands):area
was as follows:
YEAR ENDED DECEMBER 31,NET SALES (A)
-----------------------------------------------------------
1998 1997 EUROPE NORTH AMERICA TOTAL
----------------------------1996
--------------- ---------------- ------------------ ---------------- --------------
Net sales.............................. $North America $1,121,250 $875,152 $677,815
Europe 314,404 270,236 $ 875,152 $ 1,145,388
Income from operations................. 3,423 55,839 59,262
Identifiable assets.................... 82,548 317,197 399,745
YEAR ENDED DECEMBER 31,234,078
------- ------- -------
Consolidated $1,435,654 $1,145,388 $911,893
========== ========== ========
a) Revenues are attributed to countries based on location of selling subsidiary.
LONG LIVED ASSETS
-----------------------------------------------------------
1998 1997 1996
EUROPE NORTH AMERICA TOTAL
------------------------------------------- ---------------- ------------------
----------------- ----------------
Net sales.............................. $ 234,078 $ 677,815 $ 911,893
Income from operations................. 4,224 65,250 69,474
Identifiable assets.................... 78,490 252,949 331,439
YEAR ENDED DECEMBER 31, 1995 EUROPE NORTH AMERICA TOTAL
---------------------------- ----------------- ------------------ -----------------
Net sales.............................. $ 188,765 $ 445,719 $ 634,484
Income from operations................. 8,846 45,425 54,271
Identifiable assets.................... 66,369 181,146 247,515
North America $79,254 $77,135 $32,169
Other (principally Europe) 11,346 5,524 3,254
------ ------- -------
Consolidated $90,600 $82,659 $35,423
======== ======= ========
10. SUBSEQUENT EVENT
On February 4, 1999, an affiliate of the Company acquired
for cash consideration all of the outstanding shares of Simply
Computers Limited ("Simply") of London, England. SIMPLY is a privately
held computer products and internet marketer which also assembles
private label PC's. The acquisition was funded through current cash
reserves.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data is as follows:follows (in thousands, except for per share
amounts):
FIRST SECOND THIRD FOURTH
DECEMBER 31, 19971998 QUARTER QUARTER QUARTER QUARTER
--------------------- ------- ------- ------- -------
Net sales............................... $273,537sales................................. $358,358 $ 259,485 $ 259,661 $ 352,705330,452 $359,771 $387,073
Gross profit............................ 69,407 64,167 57,289 74,679$ 75,369 $ 67,056 $ 71,604 $ 74,527
Net income.............................. 12,088 11,665 2,136 12,923$ 12,865 $ 7,619 $ 9,561 $ 11,207
Net income per common share:
Basic and diluted.............. $ .32.34 $ .31.20 $.26 $ .06 $ .34.31
FIRST SECOND THIRD FOURTH
DECEMBER 31, 19961997 QUARTER QUARTER QUARTER QUARTER
--------------------- ------- ------- ------- -------
Net sales............................... $218,732sales................................. $273,537 $ 213,707259,485 $ 225,868 $ 253,586259,661 $352,705
Gross profit............................ 65,021 60,070 60,313 64,212$ 69,407 $ 64,167 $ 57,289 $ 74,679
Net income.............................. 11,392 9,787 10,683 11,842$ 12,088 $ 11,665 $ 2,136 $ 12,923
Net income per common share:
Basic and diluted.............. $ .32 $ .31 $ .26.06 $ .28 $ .31
*.34
* * * * *
EXHIBIT INDEX
10.6 Lease Agreement dated as of July 17, 1997
between the Company and South Bay Industrials
Company (New Compton facility)
10.14 Employment Agreement dated as of December 12, 1997
between the Company and Steven M. Goldschein
21.1 Subsidiaries of the Registrant
23 Consent of experts and counsel; Consent of Independent
Public Accountants
27 Financial Data Schedule
*