SYSTEMAX INC.Systemax Inc.
Condensed Consolidated Statements of Income
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTH NINE MONTH
PERIODS ENDED PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
NET SALES $ 440,659 $ 359,771 $1,276,109 $1,048,581
COST OF SALES 362,962 288,167 1,042,880 834,552
------- ------- --------- -------
GROSS PROFIT 77,697 71,604 233,229 214,029
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES 61,884 56,024 191,319 166,745
------ ------ ------- -------
INCOME FROM OPERATIONS 15,813 15,580 41,910 47,284
INTEREST AND OTHER INCOME-net 271 624 625 2,227
--- --- --- -----
INCOME BEFORE INCOME TAXES 16,084 16,204 42,535 49,511
PROVISION FOR INCOME TAXES 6,770 6,643 17,228 19,466
----- ----- ------ ------
NET INCOME $ 9,314 $ 9,561 $ 25,307 $ 30,045
========== ========== ========== ==========
Net income per common share:
Basic $ .26 $ .26 $ .71 $. .80
========== ========== ========== ==========
Diluted $ .26 $ .26 $ .71 $ .80
========== ========== ========== ==========
Common and common equivalent shares:
Basic 35,732 36,690 35,870 37,674
====== ====== ======= ======
Diluted 35,732 36,690 35,886 37,678
====== ====== ======= ======(In Thousands, except per share amounts)
- ------------------------------------------------------------------------------------
Three Month
Periods ended
March 31,
-----------------------
2000 1999
---- ----
(Unaudited)
NET SALES $ 452,987 $421,651
COST OF SALES 375,430 342,339
-------- --------
GROSS PROFIT 77,557 79,312
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 70,211 62,141
-------- --------
INCOME FROM OPERATIONS 7,346 17,171
INTEREST AND OTHER INCOME (EXPENSE) - Net (564) 330
-------- --------
INCOME BEFORE INCOME TAXES 6,782 17,501
PROVISION FOR INCOME TAXES 2,712 6,738
-------- --------
NET INCOME $ 4,070 $ 10,763
========== ========
Net income per common share:
Basic $ .12 $ .30
========== ========
Diluted $ .12 $ .30
========== ========
Common and common equivalent shares outstanding:
Basic 35,021 36,064
========== ========
Diluted 35,124 36,117
========== ========
See notes to condensed consolidated financial statements
SYSTEMAX INC.Systemax Inc.
Condensed Statement of Consolidated Stockholders' Equity
(IN THOUSANDS)
COMMON STOCK ACCUMULATED
------------ ADDITIONAL OTHER TREASURY
NUMBER OF PAID-IN RETAINED COMPREHENSIVE STOCK
SHARES AMOUNT CAPITAL EARNINGS INCOME AT COST
--------- ------ --------- -------- ------------ ---------
BALANCES, DECEMBER 31, 1998 36,128 $ 382 $ 176,743 $ 138,456 $ (348) $ (28,604)
Change in cumulative translation adjustment ( 2,295)
Purchase of treasury shares (396) ( 5,719)
Net income 25,307
------ ------ ------ ------ -------- ---------
BALANCES, SEPTEMBER 30, 1999 35,732 $ 382 $ 176,743 $ 163,763 $( 2,643) $ (34,323)
====== ======== ==========(In Thousands)
- --------------------------------------------------------------------------------------
Common Stock Accumulated
----------------------- Additional Other Treasury
Number of Paid-in Retained Comprehensive Stock
Shares Amount Capital Earnings Income at Cost
---------- -------- --------- -------- ---------- -------
Balances, December 31, 1999 35,238 $ 382 $ 176,743 $ 174,468 $ (4,598) $ (38,659)
Change in cumulative translation adjustment (2,448)
Purchase of treasury shares (950) ( 8,465)
Net income 4,070
Balances, March 31, 2000 34,288 $ 382 $ 176,743 $ 178,502 $ (7,046) $ (47,124)
======== ======== ========= ========= ========= ========== ===========
See notes to consolidated financial statements.
SYSTEMAX INC.
Systemax Inc.
Condensed Statements of Consolidated Cash Flows
(IN THOUSANDS)
NINE-MONTH PERIOD
ENDED SEPTEMBER 30,
--------------------------------
1999 1998
------------ -----------
(UNAUDITED)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 25,307 $ 30,045
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, net 9,348 5,669
Provision for returns and doubtful accounts 4,746 4,472
Changes in certain assets and liabilities:
Accounts receivable (39,147) (17,435)
Inventories (875) (7,210)
Prepaid expenses and other current assets (10,178) (12,203)
Accounts payable and accrued expenses 36,532 25,518
------ ------
Net cash provided by operating activities 25,733 28,856
------ ------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Net change in short-term investments 5,050 1,493
Investments in property, plant and equipment (13,509) (7,985)
Acquisitions, net of cash acquired (8,398) (5,942)
------ ------
Net cash used in investing activities (16,857) (12,434)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Purchase of treasury shares (5,719) (28,604)
Proceeds of long-term borrowings 3,336
Repayments of long-term borrowings (2,487)
------ -------
Net cash used in financing activities (8,206) (25,268)
------ -------
EFFECTS OF EXCHANGE RATES ON CASH (38) (166)
--- ----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 632 (9,012)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 42,029 43,432
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 42,661 $ 34,420
========(In Thousands)
- --------------
Three-Month Period
Ended March 31,
2000 1999
--------- --------
(Unaudited)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 4,070 $ 10,763
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, net 2,987 2,393
Provision for returns and doubtful accounts 2,194 1,820
Changes in certain assets and liabilities:
Accounts receivable (25,123) (19,506)
Inventories 24,530 (654)
Prepaid expenses and other current assets 1,776 (1,078)
Accounts payable and accrued expenses (14,785) 19,634
--------- -------
Net cash (used in) provided by operating activities (4,351) 13,372
--------- -------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Investments in property, plant and equipment (17,269) (2,443)
Net change in short-term investments 4,252
Acquisitions, net of cash acquired (8,398)
--------- --------
Net cash used in investing activities (17,269) (6,589)
--------- ------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Purchase of treasury shares (8,465) (4,089)
Proceeds from short-term borrowings from banks 25,000
Repayments of long-term borrowings (2,399) (160)
--------- -----
Net cash provided by (used in) financing activities 14,136 (4,249)
--------- ---------
EFFECTS OF EXCHANGE RATES ON CASH (1,695) 1,104
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,179) 3,638
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 17,470 42,029
--------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 8,291 $ 45,667
========= ========
See notes to condensed consolidated financial statements.
SYSTEMAX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
Systemax Inc. and its wholly-owned subsidiaries (collectively, the
"Company" or "Systemax"). The Company is a corporate supplier of personal
computers (PCs), notebook computers, computer related products, industrial
products and office products in North America and Europe. Systemax markets
these products through an integrated system of direct mail catalogs, a
network of major account sales representatives and proprietary "e-commerce"
Internet sites.
2. BASIS OF PRESENTATION
Net income per common share - basic was calculated based upon the weighted
average number of common shares outstanding during the respective periods
presented. Net income per common share - diluted was calculated based upon
the weighted average number of common shares outstanding and included the
equivalent shares for dilutive options outstanding during the respective
periods.
All intercompany accounts have been eliminated in consolidation.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all normal and recurring
adjustments necessary
Notes to present fairly the financial position of the
Company as of September 30,1999 and the results of operations for the three
and nine month periods ended September 30, 1999 and 1998, cash flows for
the nine months ended September 30, 1999 and 1998 and changes in
stockholders' equity for the nine months ended September 30, 1999. The
December 31, 1998 consolidated balance sheet has been extracted from the
audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
These condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements as
of December 31, 1998 and for the period then ended. The results for the
three months and nine months ended September 30, 1999 are not necessarily
indicative of the results for an entire year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the three months ended September 30, 1999 increased 22% to
$440.7 million compared to $359.8 million in the year-ago quarter. The
increase of $80.9 million was attributable to increased demand for PCs and
sales made by Simply Computers Ltd. (Simply), acquired in February 1999.
The number of orders shipped increased 19% to 1.1 million compared to the
year-ago quarter, and showed a 3% increase in the average order value to
$402, reflecting the increased PC sales. Sales during the quarter from
North American operations increased 11% to $319.6 million compared to
$287.6 million in the third quarter of 1998. European sales increased 68%
to $121.1 million (including approximately $30 million for Simply) compared
to $72.2 million in the year-ago quarter. The effect of changes in exchange
rates on European sales for the three months was not material.
Gross profit was $77.7 million, or 17.6% of sales, compared to $71.6
million, or 19.9% of sales in the year-ago quarter, an increase of $6.1
million. The decrease in the gross profit percentage was primarily due to
the continuing trend of increased sales of PCs and brand name products,
which generally have a lower gross profit percentage than our other
products. Increased relationship sales and a relatively lower sales
contribution from higher-margin industrial products also affected the gross
profit percentage unfavorably.
Selling, general and administrative expenses for the quarter increased by
$5.9 million or 10% to $61.9 million compared to $56.0 million in the third
quarter of 1998. This increase resulted from the inclusion of Simply,
continued expansion of our relationship marketing sales organizations and
investments in the Company's "e-commerce" Internet business. This was
partially offset by a decrease in advertising expenses from a reduction in
the number of catalogs we mailed. As a percentage of sales, selling,
general and administrative expenses improved to 14.0% compared to 15.6% in
the year-ago quarter.
Income from operations for the quarter increased to $15.8 million from
$15.6 million in the year-ago quarter. Income from operations as a
percentage of net sales decreased to 3.6% from 4.3% in the prior year
quarter. Operating income in North America decreased 3% to $13.7 million
from $14.1 million last year. Operating income in Europe increased to $2.2
million from $1.5 million in the year-ago quarter.
Interest and other income decreased as a result of less interest income in
the current year due to lower invested cash balances.
The Company's income tax rate was 41.6% for the third quarter of 1999 and
38.5% for the third quarter of 1998. The increase was due to a variety of
factors, including a change in the relative income earned in foreign
locations.
As a result of the above, net income for the quarter was $9.3 million, or
$.26 per basic and diluted share, compared to $9.6 million, or $.26 per
basic and diluted share, in the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the nine months ended September 30, 1999 increased 22% to
$1.276 billion compared to $1.049 billion in the year-ago period. The
increase of $227 million was attributable to increased demand for PCs,
sales made by Simply, acquired in February 1999, and increased sales
generated by the Company's Internet sites. The number of orders increased
14% to 3.3 million compared to the year-ago period, with a 7% increase in
the average order value to $392. Sales during the nine months from North
American operations increased 11% to $926 million compared to $829 million
in 1998. European sales increased 59% to $350 million (including
approximately $76 million for Simply) compared to $220 million a year ago.
The effect of changes in exchange rates on European sales for the nine
months was not material.
Gross profit was $233.2 million, or 18.3% of sales, compared to $214.0
million, or 20.4% of sales, last year, an increase of $19.2 million. The
decrease in the gross profit percentage was primarily due to the continuing
change in our product mix resulting from increased sales of PCs and brand
name products, which generally have a lower gross profit percentage than
our other products. Increased relationship sales and a relatively lower
sales contribution from higher-margin industrial products also affected the
gross profit percentage unfavorably.
Selling, general and administrative expenses for the period increased by
$24.6 million or 14.7% to $191.3 million compared to $166.7 million in the
first nine months of 1998. This increase was primarily the result of
continuing investments for expansion of the relationship marketing sales
organizations, investments in the Company's "e-commerce" Internet
business, the inclusion of Simply and one-time charges of $4.1 million
recorded in the second quarter for reserves related to certain
contingencies and a write-off of goodwill associated with a variety of
small acquisitions made during the last few years. This was partially
offset by a decrease in net advertising expense as a result of a reduction
in the number of catalogs mailed, combined with increased vendor
participation and the overall leveraging of selling, general and
administrative expenses over the larger sales base. Selling, general and
administrative expenses as a percentage of sales improved to 15.0% compared
to 15.9% in the year-ago period.
Income from operations for the period decreased by $5.4 million to $41.9
million from $47.3 million in the year-ago period. Income from operations
as a percentage of net sales decreased to 3.3% from 4.5% a year ago.
Operating income in North America decreased 12% to $35.2 million from $39.8
million in the year ago period. Income from operations in Europe decreased
to $6.7 million from $7.4 million in the year ago period.
Interest and other income decreased as a result of less interest income in
the current year due to lower invested cash balances.
The Company's income tax rate was 40.5% for the first nine months of 1999
and 39.3% for the year-ago period, increasing due to a variety of factors,
both domestic and international.
As a result of the above, net income for the nine months was $25.3 million,
or $.71 per basic and diluted share, compared to $30.0 million, or $.80 per
basic and diluted share, in the year-ago period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs are to finance working capital for
sales growth, investments in property, equipment and information technology
and business acquisitions. Cash and cash equivalents totaled approximately
$43 million at September 30, 1999. For the nine months ended September 30,
1999, the Company generated cash from operating activities of $25.7 million
compared to $28.9 million for the year ago period. The decrease resulted
from lower net income in 1999 and increased accounts receivable as a result
of the increased sales volume. These were partially offset by an increase
in accounts payable. Cash was used in investing activities, primarily for
the purchase of Simply Computers and additions of capital equipment. Cash
was also used in financing activities for the purchase of additional
treasury shares and repayment of a mortgage loan. For the nine months ended
September 30, 1999, cash and cash equivalents increased by $0.6 million.
The Company believes it has access to adequate funds for growth through its
available cash balances and funds generated by operations and secured and
unsecured lines of credit maintained with financial institutions.
YEAR 2000 COMPLIANCE
The Company is in the process of addressing what is known as the year 2000
(or Y2K) issue. Based on current information, management believes that the
Company 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, many of which are dependent on
efforts of third parties. For a discussion of this problem see the
Company's Form 10-K for the year ended December 31, 1998, "Item 7.
Management's Discussion and Analysis of Financial Conditions and Results of
Operations."
Internal Systems
The Company has tested and, as necessary, repaired or replaced its internal
PC hardware/software and computer network systems, and management believes
they are now Y2K compliant. The Company's phone systems have been tested
and management believes they are Y2K compliant. A majority of the Company's
North American internal business systems are currently Y2K compliant. The
remainder are in the process of being repaired and/or replaced to assure
Y2K compliance in a timely manner. The internal business systems of the
Company's European subsidiaries are currently Y2K compliant with the
exception of one subsidiary, which is in the process of repairing its
systems. Management believes these repairs will be completed in a timely
manner.
As noted in the Company's Form 10-K, the Company has been contacting its
key vendors and service providers to ascertain their Y2K compliance to the
extent that their problems could affect the Company's internal systems or
other aspects of its business. Inquiry letters have been sent to all key
vendors and service providers. Positive responses or other assurances have
been received from substantially all of our significant vendors and service
providers.
Products Sold
The Company has questioned its vendors as to the Y2K compliance status of
the brand name (i.e. third party-manufactured) hardware and software
products it sells. This includes the brand name software that is pre-
loaded onto the private label PC's the Company sells. Substantially all of
the Company's significant vendors have indicated that their products are
Y2K compliant although the Company makes no warranties to customers
regarding the Y2K compliance of third party-manufactured products.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 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 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations", and the Notes toCondensed 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, office products and industrial 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 and e-commerce 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 involved with e-commerce, including
possible loss of business and customer dissatisfaction if outages or other
computer-related problems should preclude customer access to the Company,
(xi) risks associated with delivery of merchandise to customers by
utilizing common delivery services such as UPS, including possible strikes,
(xii) risks due to shifts in market demand and/or price erosion of owned
inventory, (xiii) borrowing costs, (xiv) changes in taxes due to changes in
the mix of U.S. and non-U.S. revenue, (xv) pending or threatened litigation
and investigations and (xvi) 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 in this report, 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 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. Systemax 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 Systemax's
sales (as expressed in U.S. dollars), gross margins, operating expenses and
retained earnings. The Company may engage in hedging programs aimed at
limiting in part the impact of certain currency fluctuations. Using
primarily forward exchange and foreign currency option contracts, Systemax
from time to time hedges certain of its assets that may impact the
Statement of Consolidated Income when remeasured according to generally
accepted accounting principles. 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 Systemax are for the sole purpose of hedging an
existing or anticipated currency exposure, not for speculative or trading
purposes. In spite of Systemax's hedging efforts to reduce the effect of
changes in exchange rates against the U.S. dollar, the Company sales or
costs could still be adversely affected by changes in those exchange rates.
As of September 30,1999, the Company had no outstanding forward exchange
contracts.
| 1. | | Description of Business |
| | | The accompanying consolidated financial statements include the accounts of
Systemax Inc. and its wholly-owned subsidiaries (collectively, the
“Company” or “Systemax”). The Company is a corporate
supplier of personal 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 “e-commerce” Internet sites and
personalized “relationship marketing” to business
customers. |
| | | Net income per common share - basic was calculated based upon the weighted
average number of common shares outstanding during the respective periods
presented. Net income per common share – diluted was calculated based upon
the weighted average number of common shares outstanding and included the
equivalent shares for dilutive options outstanding during the respective
periods. |
| | | All intercompany accounts have been eliminated in consolidation. |
| | | In the opinion of the Company, 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 March 31, 2000 and
the results of operations for the three month periods ended March 31, 2000 and
1999, cash flows for the three months ended March 31, 2000 and 1999 and changes
in stockholders’ equity for the three months ended March 31, 2000. The
December 31, 1999 condensed consolidated balance sheet has been extracted from
the audited consolidated financial statements included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 1999. |
| | | These condensed consolidated financial statements should be read in conjunction
with the Company’s audited consolidated financial statements as of December
31, 1999 and for the period then ended. The results for the three months ended
March 31, 2000 are not necessarily indicative of the results for an entire
year. |
| Item 2. | | Management's Discussion and Analysis of
Financial Condition and Results of Operations. |
| | | Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999 |
| | | Net sales for the three months ended March 31, 2000 increased 7% to $453 million
compared to $422 million in the year-ago quarter. The increase of $31 million
resulted from quarterly record sales in the Company’s European operations
and an increase in PC sales. The number of orders shipped increased 8% to 1.2
million compared to the year-ago quarter, with an average order value unchanged
from the prior year’s. Sales during the quarter from North American
operations decreased 2% to $299 million compared to $304 million in the first
quarter of 1999. European sales increased 31% to $154 million compared to $118
million in the year-ago quarter. The effect of changes in exchange rates on
European sales for the three months was not material. |
| | | Gross profit was $77.6 million, or 17.1% of sales, compared to $79.3 million, or
18.8% of sales in the year-ago quarter, a decrease of $1.8 million. The decrease
in the gross profit percentage was primarily due to the continuing trend of
increased sales of PCs and brand name products, which generally have a lower
gross profit percentage than our other products. Increased relationship sales
and a relatively lower sales contribution from higher-margin industrial products
continue to affect the gross profit percentage unfavorably. |
| | | Selling, general and administrative expenses for the quarter increased by $8.1
million or 13% to $70.2 million compared to $62.1 million in the first quarter
of 1999. The increase resulted from continued expansion of our relationship
marketing sales organizations, investments in the Company’s
“e-commerce” Internet business and increased advertising costs. As a
percentage of sales, selling, general and administrative expenses increased to
15.5% compared to 14.7% in the year-ago quarter. |
| | | Income from operations for the quarter decreased to $7.3 million from $17.2
million in the year-ago quarter. Income from operations as a percentage of net
sales decreased to 1.6% from 4.1% in the prior year quarter. Operating income in
North America decreased 92% to $1.1 million from $13.2 million last year.
Operating income in Europe increased to $6.2 million from $4.0 million in the
year-ago quarter. |
| | | Interest and other income decreased as a result of higher interest expense in
the current year due to increased borrowings and less interest income from lower
invested cash balances. |
| | | The Company’s income tax rate was 40.0% for the first quarter of 2000 and
38.5% for the first quarter of 1999. The increase was due to a variety of
factors, including a change in the relative income earned in foreign locations. |
| | | As a result of the above, net income for the quarter was $4.0 million, or $.12
per basic and diluted share, compared to $10.8 million, or $.30 per basic and
diluted share, in the first quarter of 1999. |
| | | Liquidity and Capital Resources |
| | | The Company’s primary capital needs are to finance working capital for
sales growth, investments in property, equipment and information technology and
business acquisitions. Cash and cash equivalents totaled approximately $8
million at March 31, 2000. For the three months ended March 31, 2000, the
Company used cash in operating activities of $4.3 million compared to $13.4
million generated in the year ago period. The decrease resulted from lower net
income in 2000 and increased accounts receivable as a result of the increased
sales volume. These were partially offset by an decrease in inventories. Cash
was used in investing activities in 2000 for the purchase of capital equipment,
including a new distribution center in Georgia. Cash was used in financing
activities for the purchase of additional Company shares and repayment of
long-term debt. The Board of Directors of the Company has authorized the
repurchase by the Company of up to 6,350,000 outstanding shares of common stock.
Through March 31, 2000, the Company has purchased 3,944,000 shares, of which
949,800 were purchased in the first quarter of 2000. Cash outlays were financed
by additional short-term borrowings from banks. For the three months ended March
31, 2000, cash and cash equivalents decreased by $9.2 million. |
| | | The Company believes it has access to adequate funds for growth through its
available cash balances and funds generated by operations and secured and
unsecured lines of credit maintained with financial institutions. |
| | | Forward Looking Statements |
| | | This Quarterly Report on Form 10-Q 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 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 2. 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, office products and industrial 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 and e-commerce 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
involved with e-commerce, including possible loss of business and customer
dissatisfaction if outages or other computer-related problems should preclude
customer access to the Company, (xi) risks associated with delivery of
merchandise to customers by utilizing common delivery services such as UPS,
including possible strikes, (xii) risks due to shifts in market demand and/or
price erosion of owned inventory, (xiii) borrowing costs, (xiv) changes in taxes
due to changes in the mix of U.S. and non-U.S. revenue, (xv) pending or
threatened litigation and investigations and (xvi) 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 in this report, 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 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. Systemax may attempt 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 Systemax’s
sales (as expressed in U.S. dollars), gross margins, operating expenses and
retained earnings. The Company may engage in hedging programs aimed at limiting
in part the impact of certain currency fluctuations. Using primarily forward
exchange and foreign currency option contracts, Systemax from time to time
hedges certain of its assets that may impact the Statement of Consolidated
Income when remeasured according to generally accepted accounting principles.
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 Systemax are for the
sole purpose of hedging an existing or anticipated currency exposure, not for
speculative or trading purposes. In spite of Systemax’s hedging efforts to
reduce the effect of changes in exchange rates against the U.S. dollar, the
Company sales or costs could still be adversely affected by changes in those
exchange rates. |
| | | As of March 31, 2000, the Company had no outstanding forward exchange contracts. |
PART II - OTHER INFORMATION
ITEM 5. On October 25,1999 the Board of Directors of the Company adopted the
Systemax 1999 Long-Term Stock Incentive Plan which authorizes a committee
composed of the Board's non-employee directors to grant to eligible
employees of the Company non-qualified stock options, stock appreciation
rights, restricted stock awards or other stock-based awards representing a
total of 2,000,000 shares of common stock of the Company, subject to
adjustment in certain cases. The 1999 Long-Term Stock Incentive Plan is
intended to supplement the Company's existing stock incentive plans,
namely, the 1995 Long-Term Stock Incentive Plan and the 1995 Stock Plan for
Non-Employee Directors.
ITEM 6. EXHIBITS
(a) Exhibits.
3.1 Certificate of Incorporation. (Incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1, File
No. 33-92052).
3.2 By-laws. (Incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, File No. 33-92052).
3.3 Certificate of Amendment of Certificate of Incorporation changing the
Company's name to Systemax Inc. (Incorporated herein by reference to
the Company's current report on Form 8-K, filed on May 18, 1999).
4.1 Stockholders Agreement. (Incorporated herein by reference to the
Company's quarterly report on Form 10-Q for the quarterly period ended
June 30, 1995).
4.2 Specimen Stock Certificate. (Incorporated herein by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1, File
No. 33-92052).
19 Systemax 1999 Long-Term Stock Incentive Plan.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1999.
| Item 5. | | Other Information. |
| | On May 12, 2000, the Company's subsidiary EZBid Inc. was merged
with a subsidiary of Bidhit.com (OTCBB:BHIT), pursuant to which Systemax received
5,391,522 shares of common stock of Bidhit.com, representing approximately 30%
of the outstanding shares. The closing price for Bidhit.com's common stock on
May 12, 2000 was $15/16. The parties waived conditions to the merger requiring
Bidhit.com to raise additional capital prior to the closing. Bidhit.com is an Internet auction and e-commerce company for computers and
peripherals, camera equipment, sporting goods, household goods, home electronics
and sports memorabilia, EZBid Inc. is a consumer-based on-line auction company
for PC's, consumer electronics and other consumer products. |
| Item 6. | | Exhibits and Reports on Form 8-K |
| | 3.1 | Certificate of Incorporation. (Incorporated herein by reference to Exhibit 3.1
to the Company's Registration Statement on Form S-1, File No. 33-92052). |
| | 3.2 | By-laws. (Incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1, File No. 33-92052). |
| | 4.1 | Stockholders Agreement. (Incorporated herein by reference to the Company's
quarterly report on Form 10-Q for the quarterly period ended June 30, 1995). |
| | 4.2 | Specimen Stock Certificate. (Incorporated herein by reference to Exhibit 19.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999). |
| | 27 | Financial Data Schedule. |
| | | | No reports on Form 8-K were filed by the Company during the three months ended
March 31, 2000. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SYSTEMAX INC.
Date: November 12, 1999 By: /S/ RICHARD LEEDS
-----------------------------------
Richard Leeds
Chairman and Chief Executive Officer
By: /S/ STEVEN GOLDSCHEIN
-------------------------------
Steven Goldschein
Senior Vice President and Chief
Financial Officer
EXHIBIT INDEX
Exhibit No.
- -----------
19 Systemax 1999 Long-Term Stock Incentive Plan
Stock Incentive Plan
27 Financial Data Schedule
| Date: May 12, 2000 | | By: /s/ RICHARD LEEDS |
| | | Chairman and Chief Executive Officer |
| | | By: /s/ STEVEN GOLDSCHEIN |
| | | Senior Vice President and Chief Financial Office4r |