UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
COMMISSION FILE NUMBER 1-13792
Systemax Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 11-3262067 (I.R.S. Employer Identification No.) |
11 Harbor Park Drive
Port Washington, New York 11050
(Address of registrant's principal executive offices)
(516) 608-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The number of shares outstanding of the registrant's Common Stock as of May 9,November 7, 2003 was 34,108,129.34,282,268.
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
Systemax Inc.
Condensed Consolidated Balance Sheets
(In Thousands, except share data)
March 31,September 30, December 31, 2003 2002-------------- ----------------------------- ------------ (Unaudited)ASSETS - ------ASSETS: CURRENT ASSETS: Cash and cash equivalents$ 42,572 $ 62,995$45,481 $62,995 Accounts receivable, net154,592150,515 148,554 Inventories113,978111,154 98,401 Prepaid expenses and other current assets38,35430,421 31,343 Deferred income tax benefits7,0599,718 9,073 ---------------------------- Total current assets356,555347,289 350,366 PROPERTY, PLANT AND EQUIPMENT, net69,81368,729 71,133 DEFERRED INCOME TAX BENEFITS14,13113,897 15,100 OTHER ASSETS9801,815 1,305 ---------------------------- TOTAL$ 441,479 $ 437,904$431,730 $437,904 ============================ LIABILITIES AND SHAREHOLDERS'EQUITY - ------------------------------------EQUITY: CURRENT LIABILITIES:Amounts due to banks $ 9,530 $ 21,211Short-term borrowings, including current portions of long-term debt $15,730 $21,211 Accounts payable143,033131,095 131,510 Accrued expenses and other current liabilities62,57153,330 64,349 ---------------------------- Total current liabilities215,134200,155 217,070 ------------------- Long-term debt 17,042--------- LONG-TERM DEBT 17,899 17,519Other liabilities 1,613OTHER LIABILITIES 2,125 1,398 SHAREHOLDERS' EQUITY: Preferred stock, par value $.01 per share, authorized 25 million shares, issued none Common stock, par value $.01 per share, authorized 150 million shares, issued 38,231,990shares,shares; outstanding 34,278,953 and 34,104,290 shares 382 382 Additional paid-in capital176,743176,009 176,743 Accumulated other comprehensiveloss (1,392)income (loss) 1,108 (2,130) Retained earnings80,44680,489 75,411 ------------------- 256,179--------- 257,988 250,406 ---------------------------- Less:Commoncommon stock in treasury at cost - 3,953,037 and 4,127,700 shares48,48946,437 48,489 ---------------------------- Total shareholders' equity207,690211,551 201,917 ---------------------------- TOTAL$ 441,479 $ 437,904$431,730 $437,904 ============================
See notes to condensed consolidated financial statements.
Systemax Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(In Thousands, except per share amounts)
Nine Months Ended Three Months EndedMarch 31, ---------September 30, September 30, --------------------------- --------------------------- 2003 2002---- ----2003 2002 ------------ ------------- ------------- ------------ Net sales$426,461 $412,260$1,220,270 $1,148,170 $405,011 $372,139 Cost of sales356,464 338,412 --------------- ---------------1,017,156 949,657 337,900 309,413 ------------ ------------- ------------- ------------ Gross profit69,997 73,848203,114 198,513 67,111 62,726 Selling, generaland& administrative expenses61,320 72,730190,305 194,440 64,822 60,032 Restructuring and othercharges 112 133 --------------- ---------------expenses (1,160) 15,846 (1,272) 1,110 Goodwill impairment 2,560 ------------ ------------- ------------- ------------ Income (loss) from operations8,565 98511,409 (11,773) 3,561 1,584 Interest and other expense, net214 13 --------------- ---------------1,075 921 542 681 ------------ ------------- ------------- ------------ Income (loss) before income taxes8,351 97210,334 (12,694) 3,019 903 Provision (benefit) for income taxes3,316 387 --------------- ---------------5,256 (3,725) 1,112 1,630 ------------ ------------- ------------- ------------ Income (loss) before cumulative effect of change 5,078 (8,969) 1,907 (727) in accounting principle, net of tax5,035 585Cumulative effect of change in accounting principle, net of tax (50,971)--------------- --------------------------- ------------- ------------- ------------ Net income (loss)$5,035 $(50,386) =============== ===============$5,078 $(59,940) $1,907 $(727) ============ ============= ============= ============ Net income (loss) per common share,basic and diluted: Income beforebasic: Before cumulative effect of change in accounting principle, net of tax $.15$.02$(.26) $.06 $(.02) Cumulative effect of change in accounting principle, net of tax (1.50)--------------- --------------------------- ------------- ------------- ------------ Net income (loss) $.15$(1.48) =============== =============== Common$(1.76) $.06 $(.02) ============ ============= ============= ============ Net income (loss) per common share, diluted: Before cumulative effect of change in accounting principle, net of tax $.15 $(.26) $.05 $(.02) Cumulative effect of change in accounting principle, net of tax (1.50) ------------ ------------- ------------- ------------ Net income (loss) $.15 $(1.76) $.05 $(.02) ============ ============= ============= ============ Weighted average common and common equivalentshares outstanding:shares: Basicand diluted 34,109 34,109 =============== ===============34,124 34,104 34,159 34,104 ============ ============= ============= ============ Diluted 34,672 34,104 35,128 34,104 ============ ============= ============= ============
See notes to condensed consolidated financial statements
Systemax Inc.
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
(In Thousands)
Common Stock Accumulated-------------------------------------------- Other Additional ComprehensiveAdditional IncomeTreasury Comprehensive Number of Paid-in Retained Income (Loss),NetStock,ComprehensiveIncome, Shares Amount Capital Earnings Net of Tax At CostIncome ---------- ------ ---------- --------Net of Tax ------------------- ----------- --------- -------------- ----------------------------------------- Balances January 1, 2003 34,104 $382 $176,743 $75,411 $(2,130) $(48,489) Exercise of stock options 175 (734) 2,052 Change in cumulative translation 3,238 $3,238 adjustment738 $738Net income5,035 5,035 --------5,078 5,078 -------------------- ------- ---------------- --------------- -------- -------- Total comprehensive income$5,773$8,316 ======== Balances September 30, 2003 34,279 $382 $176,009 $80,489 $ 1,108 $(46,437) ======Balances, March 31, 2003 34,104 $382 $176,743 $80,446 $(1,392) $(48,489) ====== ============ ======== ====================== =========
See notes to condensed consolidated financial statements.
Systemax Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
ThreeNine Months EndedMarch 31, ------------------------------September 30, -------------------------------- 2003 2002---- ------------------- --------------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income (loss)$5,035 $(50,386)$5,078 $(59,940) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Cumulative effect of change in accountingchange,principle, net of tax 50,971 Goodwill impairment 2,560 Provision for deferred income taxes2,052 2,061(1,941) (2,931) Depreciation and amortizationnet 3,463 3,5209,995 10,194 Provisions for returns and doubtful accounts1,242 1,3213,627 3,718 Loss on dispositions18132 14,280 Changes in certain assets and liabilities: Accounts receivable(6,047) (22,391)764 (12,210) Inventories(15,342) (9,034)(10,509) 1,246 Prepaid expenses and other current assets(7,364) (195)6,378 (12,031) Accounts payable, accrued expenses and other current liabilities7,642 6,269 -------------(15,695) (6,146) --------------- --------------- Net cashused inprovided by (used in) operating activities(9,301) (17,864) -------------389 (12,849) --------------- --------------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Investments in property, plant and equipment(2,552) (3,508)(6,597) (14,084) Proceeds from disposals of property, plant and equipment61 124 -------------90 434 Purchase of minority interest (2,560) --------------- --------------- Net cash used in investing activities(2,491) (3,384) -------------(9,067) (13,650) --------------- --------------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds (repayments) of borrowings from banks(11,439) 7,984(6,263) 19,044 Issuance of long-term borrowings and capital lease obligations 1,330 8,500 Repayments of long-term debt(311) -------------and capital lease obligations (938) Exercise of stock options 1,318 --------------- --------------- Net cash provided by (used in) financing activities(11,750) 7,984 -------------(4,553) 27,544 --------------- --------------- EFFECTS OF EXCHANGE RATES ON CASH3,119 (965) -------------(4,283) 4,031 --------------- --------------- NETDECREASEINCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(20,423) (14,229)(17,514) 5,076 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 62,995 36,464---------------------------- --------------- CASH AND CASH EQUIVALENTS - END OF PERIOD$42,572 $22,235 =============$45,481 $41,540 =============== ===============
See notes to condensed consolidated financial statements.
Systemax Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. | Description of Business |
The Company is a direct marketer of brand name and private label products, including personal desktop computers (PCs), notebook computers, computer related products and industrial products in North America and Europe. Systemax markets these products through an integrated system of distinctively branded full-color direct mail catalogs, proprietary |
2. | Basis of Presentation |
The accompanying condensed consolidated financial statements include the accounts of Systemax Inc. and its wholly-owned subsidiaries (collectively, the |
Net income (loss) per common share - basic was calculated based upon the weighted average number of common shares outstanding during the respective periods presented. Net income (loss) per common share – diluted was calculated based upon the weighted average number of common shares outstanding and included the equivalent shares for dilutive options outstanding during the respective periods. |
Nine Months Ended Sept. 30, Three Months Ended Sept. 30, --------------------------- ---------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- 702,000 1,075,000 683,000 1,416,000
For periods that result in a net loss, potential dilutive securities are excluded from the computation of net loss per common share - diluted. The Company adopted Statement of Financial Accounting Standards |
The Company adopted SFAS 148, |
The Company adopted Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” EITF 02-16 requires that consideration received from vendors, such as advertising support funds, be accounted for as a reduction of cost of sales unless certain conditions are met showing that the funds are used for a specific program entirely funded by an individual vendor. If these specific requirements related to individual vendors are met, the consideration is accounted for as a reduction in the related expense category, such as advertising expense. EITF 02-16 applies to all agreements modified or entered into on or after January 1, 2003. The Company utilizes advertising programs to support vendors, including catalogs, internet and magazine advertising, and receives payments and credits from vendors, including consideration pursuant to volume incentive programs and cooperative marketing programs. As a result of prospectively adopting EITF 02-16, the Company has recorded $5.2 million for the three months ended September 30, 2003 and $10.9 million for the nine months ended September 30, 2003 of vendor consideration as a reduction of cost of sales. Adopting EITF 02-16 had no impact on income (loss) from operations, as the vendor consideration recorded as a reduction of cost of sales would previously have been recorded as a reduction of advertising expense. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of |
These condensed consolidated financial statements should be read in conjunction with the |
3. | Stock-based Compensation |
The Company has three stock-based |
Nine Months Ended Three Months EndedMarch 31,September 30, September 30, ------------------- ------------------ 2003 2002 2003 2002 ---- ---- ---- ---- Net income (loss) - as reported$5,035 $(50,386)$5,078 $(59,940) $1,907 $(727) Stock-based employee compensation expense determined under fair value based method, net of related tax effects135 178387 535 129 179 ----------------------- ------ ------ Pro forma net income (loss)$4,900 $(50,564)$4,691 $(60,475) $1,778 $(906) =============== Basic and diluted net======== ====== ====== Net income (loss) per common share: Basic: Net income (loss) - as reported $.15$(1.48) ==== =======$(1.76) $.06 $(.02) ====== ======== ====== ====== Net income (loss) - pro forma $.14$(1.48) ==== =======$(1.77) $.05 $(.03) ====== ======== ====== ====== Diluted: Net income (loss) - as reported $.15 $(1.76) $.05 $(.02) ====== ======== ====== ====== Net income (loss) - pro forma $.14 $(1.77) $.05 $(.03) ====== ======== ====== ======
The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: |
2003 2002---- ---------- ----- Expected dividend yield 0% 0% Risk-free interest rate 5.0% 5.6% Expected volatility 68.0% 71.0% Expected life in years2.412.42 2.52
4. | Comprehensive Income |
Comprehensive income (loss) – Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments and is included in the Condensed Consolidated Statement of |
5. | Business Combinations and Goodwill |
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets," which established new accounting and reporting requirements for goodwill and other intangible assets. SFAS 142 requires that goodwill amortization be discontinued and replaced with periodic tests of impairment. With the adoption of SFAS 142, management determined that the carrying value of the Company was impaired in an amount greater than the carrying value of During the second quarter of 2003, the Company purchased the minority ownership of its Netherlands subsidiary pursuant to the terms of the original purchase agreement for $2.6 million. All of the purchase price was attributable to goodwill and, as a result of an impairment analysis, was written off in accordance with SFAS 142. |
6. | Credit Facilities |
The Company maintains a $70 million revolving credit agreement with a group of financial institutions which provides for borrowings in the United States. The borrowings are secured by all of the domestic accounts receivable and inventories of the Company and the |
The Company also has a £15 million ($ |
7. | Guarantees |
The Company has provided financial guarantees from time to time to a number of vendors on behalf of its 50%-owned joint venture (see Note 2) for trade obligations in the normal course of its business. The amount of such guarantees is limited to $7 million pursuant to the terms of the |
8. | Segment Information |
The Company is engaged in a single reportable segment, the marketing and sales of various business products. Financial information relating to the |
Nine Months Ended Three Months EndedMarch 31, ---------September 30, September 30, ------------------------ --------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net Sales (in thousands): North America$259,831 $257,952$761,092 $712,728 $260,092 $228,124 Europe166,630 154,308 ------- -------459,178 435,442 144,919 144,015 ---------- ---------- -------- --------- Consolidated$426,461 $412,260$1,220,270 $1,148,170 $405,011 $372,139 ========== ========== =========================
Revenues are attributed to countries based on location of selling subsidiary.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002 Net sales for the three months ended September 30, 2003 were $405.0 million, an increase of 8.8% compared to $372.1 million in the year-ago quarter. North American sales increased 14.0%, to $260.1 million, from $228.1 million in the prior year. European sales increased 0.6% to $144.9 million (representing 35.8% of worldwide sales) compared to $144.0 million (38.7% of worldwide sales) in the year-ago quarter. Movements in foreign exchange rates positively impacted the European sales comparison by approximately $12.1 million in 2003. Excluding the movements in foreign exchange rates, European sales would have decreased 7.8% from the prior year. Sales in Europe continue to be adversely affected by weak local economies. North American sales benefited from increased sales to consumers, which were partially offset by decreased sales to corporate customers as a result of continued sluggish economic conditions. Gross profit was $67.1 million, or 16.6% of net sales, compared to $62.7 million, or 16.9% of net sales, in the year-ago quarter, an increase of $4.4 million. As a result of adopting Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”, $5.2 million of vendor consideration (in the form of rebates, co-op advertising support and similar arrangements) was recorded as a reduction of cost of sales in the third quarter of 2003. Excluding the impact of EITF 02-16, and therefore on a non-GAAP basis, the gross profit margin would have been 15.3% in the third quarter of 2003 compared to 16.9% in the prior year. This decline in gross profit was due to continued pricing pressure resulting from weak market demand and a change in the mix of products sold. The non-GAAP gross profit margin has been included here to provide comparability to the prior year. Selling, general and administrative expenses for the quarter were $64.8 million, a $4.8 million increase from the third quarter of 2002. Reduced advertising expenses were offset by increased bad debt expense, increased European-based costs resulting from the effects of changes in foreign exchange rates and the $5.2 million effect of adopting EITF 02-16. As a percentage of net sales, selling, general and administrative expenses were 16.0% of sales (14.7% on a non-GAAP basis before the adoption of EITF 02-16) compared to 16.1% in the year-ago quarter. In August 2003 the Company settled its litigation with a software developer and reversed a previously recorded liability of $1.3 million which was no longer required. During 2002, in connection with the completion of construction of a new facility in the United Kingdom, the Company implemented a plan to consolidate the activities of its three United Kingdom locations into the new facility. The Company incurred $1.1 million of costs associated with the plan during the third quarter of 2002. The Company had income from operations for the third quarter of 2003 of $3.6 million compared to $1.6 million in the third quarter of 2002. In North America, the Company had income from operations of $4.8 million in the current quarter compared $3.1 million last year. In Europe, the Company had a loss from operations of $1.2 million in the current quarter compared to a loss from operations of $1.5 million in the third quarter of 2002. Interest and other expense - net consists principally of interest expense. Interest expense of $0.6 million for the current quarter was slightly lower than the $0.7 million in the third quarter of 2002. For the third quarter of 2003, the income tax provision was $1.1 million, an effective rate of 36.8%. The income tax provision for the three months ended September 30, 2002 consisted of U.S. income taxes payable reduced by an income tax benefit for losses in certain foreign tax jurisdictions. The income tax provision in 2002 was greater than the income before tax as a result of estimated annual losses in certain tax jurisdictions for which the Company did not recognize a benefit for the tax loss carryforwards. As a result of the above, net income for the third quarter was $1.9 million, or $.06 per basic and $.05 per diluted share, compared to a net loss of $727,000, or $.02 per basic and diluted share, in the third quarter of 2002. Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002 Net sales for the nine months ended September 30, 2003 were $1.22 billion, an increase of 6.3% from $1.15 billion for the first nine months of 2002. North American sales were $761.1 million, a 6.8% increase from last year’s $712.7 million. European sales increased 5.5% to $459.2 million for the first nine months of 2003 (representing 37.6% of worldwide sales) compared to $435.4 million (representing 37.9% of worldwide sales) in the year-ago nine-month period. Movements in foreign exchange rates positively impacted European sales for the first nine months of 2003 by approximately $59.4 million. Excluding the movements in foreign exchange rates, European sales would have decreased 8.2% from the prior year. North American sales increased as a result of increased sales to consumer customers, which was partially offset by continued weakness in demand for information technology products from corporate customers. Lower demand in the Company’s European markets resulted in the decreased sales. Gross profit was $203.1 million, or 16.6% of net sales, compared to $198.5 million, or 17.3% of net sales, in the year-ago period, an increase of $4.6 million. As a result of adopting EITF 02-16, $10.9 million of vendor consideration was recorded as a reduction of cost of sales in the first nine months of 2003. Excluding the impact of EITF 02-16, and therefore on a non-GAAP basis, the gross profit margin would have been 15.8% in the first nine months of 2003 compared to 17.3% in the first nine months of 2002. The decline in gross profit was due to continued pricing pressure resulting from weak market demand and changes in the mix of products sold. The non-GAAP gross profit margin has been included here to provide comparability to the prior year. Selling, general and administrative expenses for the first nine months of 2003 were $190.3 million compared to $194.4 million in the first nine months of 2002, a decrease of $4.1 million or 2.1%. This decrease resulted from decreased television advertising expenses related to sales of the Company’s PCs, reductions in catalog spending and lower costs associated with e-commerce and information system applications. These decreases were partially offset by increased Europe-based costs resulting from the effects of changes in foreign exchange rates and the effects of the adoption of EITF 02-16, which resulted in the reclassification of $10.9 million of vendor consideration as a reduction of cost of sales, which would previously have been recorded as a reduction of advertising expense. As a percentage of sales, these expenses were 15.6% (14.7% on a non-GAAP basis before the adoption of EITF 02-16) compared to 16.9% in the year-ago period. In August 2003 the Company settled its litigation with a software developer and reversed a previously recorded liability of $1.3 million which was no longer required. During the second quarter of 2003, the Company purchased the minority ownership of its Netherlands subsidiary for $2.6 million, pursuant to the terms of the original purchase agreement. All of the purchase price was attributable to goodwill and, as a result of an impairment analysis, was written off in accordance with Statement of Financial Accounting Standards 142, “Goodwill and Other Intangible Assets." During the second quarter of 2002 the Company recorded a non-recurring write-off of $13.2 million resulting from the Company’s decision to discontinue development of internal-use computer software. Also during 2002, in connection with the completion of construction of a new facility in the United Kingdom, the Company implemented a plan to consolidate the activities of its three United Kingdom locations into the new facility. The Company incurred $2.6 million of costs associated with the plan during the first nine months of 2002. The Company had income from operations for the current nine month period of $11.4 million compared to a loss from operations of $11.8 million in the year-ago period. The Company had income from operations of $11.9 million in its North American operations in the current nine month period compared to a loss from operations of $13.6 million last year. In Europe, the Company had a loss from operations of $0.5 million, a decrease of $2.3 million from income from operations of $1.8 million recorded for the first nine months of 2002. Interest and other expense - net consists principally of interest expense. Interest expense increased to $1.7 million in 2003 from $1.1 million in 2002 as a result of increased borrowings. The provision for income taxes was $5.3 million for the first nine months of 2003 compared to a $3.7 million tax benefit for the first nine months of 2002. The effective tax rate was 50.9% for the first nine months of 2003 compared to an effective benefit rate of 29.3% for the first nine months of 2002. The effective income tax rate is based upon expected income or loss for the year and the expected composition of that income or loss in the countries in which the Company has operations. The effective tax rate for the first nine months of 2003 was adversely affected by the goodwill impairment write-off, which is not deductible for tax purposes. During the first half of 2002, the Company completed the transitional review for goodwill impairment required by SFAS 142. The review indicated that the entire carrying value of the goodwill recorded on the Company’s Consolidated Balance Sheet was impaired as of January 1, 2002. Accordingly, the Company recorded a transitional impairment loss of $68 million ($51 million net of tax or a net loss per share of $1.50) as a cumulative effect of change in accounting principle in its Consolidated Statement of Operations for the year ended December 31, 2002. As a result of the above, net income for the first nine months of 2003 was $5.1 million, or $.15 per basic and diluted share, compared to a net loss of $59.9 million, or $1.76 per basic and diluted share, in the year ago period. Liquidity and Capital Resources The Company's cash and cash equivalents totaled $45.5 million at September 30, 2003, a decrease of $17.5 million since December 31, 2002. For the nine months ended September 30, 2003, $0.4 million of cash was provided by operating activities compared to $12.8 million used in the year-ago period. In the first nine months of 2003, $9.1 million of cash was used in investing activities, principally for the purchase of property, plant and equipment ($6.6 million) and the acquisition of the minority interest in the Company’s Netherlands subsidiary ($2.6 million). In the first nine months of 2002, $13.7 million of cash was used in investing activities, primarily for the purchase of property, plant and equipment. Net cash of $4.6 million was used in financing activities in 2003, including $7.2 million used to repay short and long-term obligations, $1.3 million provided by the issuance of a capital lease and $1.3 million provided by the exercise of stock options. In the first nine months of 2002, $27.5 million of cash was provided by financing activities from short-term bank and mortgage borrowings. The Company’s working capital at September 30, 2003 was $147 million, an increase of $14 million from $133 million at the end of 2002, due principally to a $13 million increase in inventories, a $2 million increase in accounts receivable, a $5 million decrease in amounts due to banks and an $11 million decrease in accounts payable and accrued expenses, offset by an $18 million decrease in cash. Under the Company’s $70 million revolving credit agreement, which expires in June 2004, availability as of September 30, 2003 was $50.3 million. There were outstanding letters of credit of $7.6 million and there were no outstanding advances. The Company is currently in discussions with its lenders and expects to either extend the agreement for an additional year or enter into a new agreement. Under the Company’s £15 million ($24.9 million at the September 30, 2003 exchange rate) United Kingdom credit facility, there were £8.5 million ($14.2 million) of borrowings outstanding as of September 30, 2003. In October 2003, the Company’s Netherlands subsidiary entered into a 5 million Euro credit facility. Borrowings under the facility will be secured by the subsidiary’s accounts receivable and will bear interest at the bank’s base rate plus 1.75%. The facility will expire two years from the date of the first advance. The Company has certain obligations with various parties that include commitments to make future payments. The Company’s principal commitments at September 30, 2003 consisted of repayments of borrowings under its credit agreements and mortgages and obligations under operating leases for certain of its real property and equipment. Off-balance Sheet Arrangements The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources. Forward Looking Statements - Factors That May Affect Future Results This report contains forward looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward looking statements may be made by the Company from time to time, in filings with the Securities Exchange Commission or otherwise. Statements contained in this report that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, financing needs, compliance with financial covenants in loan agreements, plans for acquisition or sale of assets or businesses and consolidation of operations of newly acquired businesses, and plans relating to products or services of the Company, assessments of materiality, predictions of future events and the effects of pending and possible litigation, as well as assumptions relating to the foregoing. In addition, when used in this discussion, the words “anticipates”, “believes”, “estimates”, “expects”, “intends”, “plans” and variations thereof and similar expressions are intended to identify forward looking statements. Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements contained in this report. Statements in this report, particularly in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the Notes to Condensed Consolidated Financial Statements describe certain factors, among others, that could contribute to or cause such differences. Some of the factors that may affect future results are discussed below. The Company and the The The Company may not be able to compete effectively with current or future competitors. The market for the In many cases the The Company purchases certain materials and components for its products from various suppliers, some of which are located outside of the U.S. Any loss of, or interruption of supply from key suppliers may require the Company to find new suppliers. This could result in production or development delays while new suppliers are located, which could substantially impair operating results. The Many product suppliers provide the Company with co-op advertising support in exchange for featuring their products in the Company’s catalogs and on the Company’s internet sites. Certain suppliers provide the Company with other incentives such as rebates, reimbursements, payment discounts, price protection and other similar arrangements. These incentives are offset against cost of goods sold or selling, general and administrative expenses, as applicable. The level of co-op advertising support and other incentives received from suppliers may decline in the future, which could increase the Company’s cost of goods sold or selling, general and administrative expenses and have an adverse effect on results of operations and cash flows. A significant portion of the The The Company’s subsidiaries collect and remit sales tax in states in which the subsidiaries have physical presence. Many other states seek to impose sales tax collection obligations on companies that sell goods to customers in their state. The Company relies, as do other direct mail marketers, on United States Supreme Court decisions which hold that, without Congressional authority, a state may not enforce a sales tax collection obligation on a company that has no physical presence in the state and whose only contacts with the state are through the use of interstate commerce such as the mailing of catalogs into the state and the delivery of goods by mail or common carrier. The Company cannot predict whether the level of contacts it has with a particular state will be deemed enough to require the Company to collect sales tax in that state nor can the Company be assured that Congress or individual states will not approve legislation authorizing states to impose tax collection obligations on all direct mail and/or e-commerce transactions. If the Company is required to collect sales taxes in those states in which it currently does not it would result in considerable administrative burdens and costs for the Company and may reduce demand for the Company’s products. The Company currently has operations located in nine countries outside the United States, and non-U.S. sales accounted for It is the policy of the Company to insure for certain property and casualty risks consisting primarily of physical loss to property, business interruptions resulting from property losses, workers' compensation, comprehensive general liability and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. Although the Company believes that its insurance coverage is reasonable, significant events such as acts of war and terrorism, economic conditions, judicial decisions, legislation and large losses could materially affect the Company's insurance obligations and future expense. The Company maintains credit facilities in the United States and in the United Kingdom. If the Company is unable to renew or replace these facilities at maturity, its liquidity and capital resources may be adversely affected. However, the Company has no reason to believe that it will not be able to renew its facilities. Other factors that could contribute to or cause such differences include, but are not limited to, unanticipated developments in any one or more of the following areas: (i) the effect on the Company of volatility in the price of paper and periodic increases in postage rates, (ii) the operation of the Company's management information systems, (iii) significant changes in the computer products retail industry, especially relating to the distribution and sale of such products, (iv) Readers are cautioned not to place undue reliance on any forward looking statements contained in this report, which speak only as of the date of this report. The Company undertakes no obligation to publicly release the result of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. Item 3.Quantitative and Qualitative Disclosure About Market Risk. The Company is exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates as measured against the U.S. dollar and each other. The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. Changes in currency exchange rates as measured against the U.S. dollar may positively or negatively affect Systemax’s sales, gross margins, operating expenses and retained earnings as expressed in U.S. dollars. The Company may enter into foreign currency options or forward exchange contracts aimed at limiting in part the impact of certain currency fluctuations, but as of September 30, 2003 the Company had no outstanding forward exchange contracts. The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s variable rate debt. In connection with the Company’s United Kingdom term loan agreement, effective April 30, 2002 the Company entered into an interest rate collar agreement to reduce its exposure to market rate fluctuations. At September 30, 2003 the notional amount of the interest rate collar was £5.9 million ($9.9 million) with an interest rate cap of 6.0% and a floor of 4.5%. The interest rate collar expires on April 30, 2005. Item 4.Controls As of the end of the period covered by this Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and senior management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer believe, as of the end of the period covered by this report, the Company’s disclosure controls and procedures provide reasonable assurances that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. The Company has not identified any changes in its internal controls over financial reporting during the quarter ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. PART II - OTHER INFORMATION Item 6.Exhibits (a) Exhibits.
(b) Reports on Form 8-K.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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