[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2000
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Delaware | 11-3262067 |
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.
The number of shares outstanding of the registrant’s Common Stock as of August 10, 2000 was 34,104,290.
Restatement of Financial Statements and Changes to Certain Information
This Form 10-Q/A is filed to amend the Form 10-Q for the period ended June 30, 2000 (the “Original Form 10-Q”) to restate the Financial Statements (Item 1) and make corresponding changes to Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2). Subsequent to the issuance of the Company’s financial statements in the Original Form 10-Q, accounting irregularities, principally related to inventory, were discovered at the Company’s Midwest Micro subsidiary. The effects of the restatement are more fully described in Note 4 of the Notes to Condensed Consolidated Financial Statements.
This report continues to speak as of the date of the Original Form 10-Q and we have not updated the disclosures in this report to speak to any later date. While this report primarily relates to the historical period covered, events may have taken place since the date of the Original Form 10-Q that might have been reflected in this report if they had taken place prior to the filing of the Original Form 10-Q. All information contained in this report is subject to updating and supplementing as provided in our periodic reports filed with the Securities and Exchange Commission.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Systemax Inc.
Condensed Consolidated Balance Sheets
(In Thousands, except share data)
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
(As restated)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,946 $ 17,470
Accounts receivable, net 180,420 200,082
Inventories 132,777 173,966
Prepaid expenses and other current assets 31,194 35,259
------ ------
Total current assets 362,337 426,777
PROPERTY, PLANT AND EQUIPMENT, net 64,967 46,839
GOODWILL, net 71,757 73,684
OTHER ASSETS 2,419 2,662
----- -----
TOTAL $ 501,480 $ 549,962
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 40,000 $ 9,000
Current portion of long-term debt 634
Accounts payable and accrued expenses 184,371 230,252
------- -------
Total current liabilities 224,371 239,886
------- -------
LONG-TERM DEBT 1,740
-----
STOCKHOLDERS' EQUITY:
Preferred stock
Common stock, par value $.01 per share,
issued 38,231,990 shares,
outstanding 34,104,290 and 35,237,790
shares as of June 30, 2000
and December 31, 1999, respectively 382 382
Additional paid-in capital 176,743 176,743
Accumulated other comprehensive loss (8,912) (4,598)
Retained earnings 157,385 174,468
------- -------
325,598 346,995
------- -------
Less: Common stock in treasury at cost - 4,127,700
and 2,994,200 shares 48,489 38,659
--------- ------ ------
Total stockholders' equity 277,109 308,336
------- -------
TOTAL $ 501,480 $ 549,962
========= =========
See notes to condensed consolidated financial statements.
Systemax Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(In Thousands, except per share amounts)
Six Month Three Month
Periods ended Periods ended
June 30, June 30,
------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
(As restated) (As restated)
NET SALES $ 854,842 $ 835,451 $ 405,972 413,800
COST OF SALES 742,325 679,917 361,624 337,578
------- ------- ------- -------
GROSS PROFIT 112,517 155,534 44,348 76,222
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES 136,170 129,433 64,698 67,292
------- ------- ------ ------
INCOME (LOSS) FROM OPERATIONS (23,653) 26,101 (20,350) 8,930
OTHER - net (2,231) 350 (1,667) 20
------ --- ------ --
INCOME (LOSS) BEFORE INCOME TAXES (25,884) 26,451 (22,017) 8,950
PROVISION (BENEFIT) FOR INCOME TAXES (8,801) 10,458 (7,486) 3,720
------ ------ ------ -----
NET INCOME (LOSS) $ (17,083) $ 15,993 $ (14,531) $ 5,230
========= ========= ========= =========
Net income (loss) per common share: $ (.49) $ .44 $ (.43) $ .15
========= ========= ========= =========
Diluted $ (.49) $ .44 $ (.43) $ .15
========= ========= ========= =========
Common and common equivalent shares
outstanding:
Basic 34,594 35,941 34,167 35,818
====== ====== ====== ======
Diluted 34,594 35,976 34,167 35,838
====== ====== ====== ======
See notes to condensed consolidated financial statements
Systemax Inc.
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
(In Thousands)
Accumulated
Common Stock Additional Other Treasury
Number of Paid-in Retained Comprehensive Stock
Shares Amount Capital Earnings Loss at Cost
----------- ------ ---------- -------- ------------- ---------
Balances, December 31, 1999 35,238 $382 $176,743 $174,468 $(4,598) $(38,659)
Change in cumulative translation
adjustment (4,314)
Purchase of treasury shares (1,134) (9,830)
Net loss (as restated) (17,083)
------- ------- ------- -------- -------- --------
Balances, June 30, 2000 34,104 $382 $176,743 $157,385 $(8,912) $(48,489)
====== ==== ======== ======== ======= ========
See notes to condensed consolidated financial statements.
Systemax Inc.
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In Thousands)
Six-Month Periods
Ended June 30,
2000 1999
---- -----
(As restated)
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net income (loss) $(17,083) $15,993
Adjustments to reconcile net income (loss) to
net cash provided by
operating activities:
Depreciation and amortization, net 6,505 7,213
Provision for returns and doubtful accounts 4,343 3,351
Changes in certain assets and liabilities:
Accounts receivable 14,014 (24,767)
Inventories 38,095 10,177
Prepaid expenses and other current assets 4,103 (7,791)
Accounts payable and accrued expenses (43,423) 6,610
------- -----
Net cash provided by operating activities 6,554 10,786
----- ------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Investments in property, plant and equipment (24,540) (7,419)
Net change in short-term investments 5,050
Acquisitions, net of cash acquired (8,398)
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Net cash used in investing activities (24,540) (10,767)
------- -------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Purchase of treasury shares (9,830) (5,719)
Proceeds from short-term borrowings from banks 31,000
Repayments of long-term borrowings (2,286) (2,325)
------ ------
Net cash provided by (used in) financing
activities 18,884 (8,044)
------ ------
EFFECTS OF EXCHANGE RATES ON CASH (422) 703
---- ---
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 476 (7,322)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 17,470 42,029
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $17,946 $34,707
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See notes to condensed consolidated financial statements.
Systemax Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Description of Business
The accompanying condensed 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. |
2. Basis of Presentation
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. |
All intercompany accounts and transactions have been eliminated in consolidation. |
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 Shareholders’ Equity. For the six month periods comprehensive income (loss) was ($19,968,000) in 2000 (as restated) and $13,083,000 in 1999 net of tax effects on currency translation adjustments of $1,429,000 in 2000 and $1,749,000 in 1999. For the three month periods, comprehensive income (loss) was ($15,781,000) in 2000 (as restated) and $3,937,000 in 1999 net of tax effects on foreign currency translation adjustments of $580,000 in 2000 and $799,000 in 1999. |
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 June 30, 2000 and the results of operations for the six month periods ended June 30, 2000 and 1999, cash flows for the six months ended June 30, 2000 and 1999 and changes in stockholders’ equity for the six months ended June 30, 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 six months ended June 30, 2000 are not necessarily indicative of the results for an entire year. |
In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” SAB 101 summarizes certain SEC views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company is required to adopt SAB 101 no later than the first quarter of fiscal 2001. Systemax is currently evaluating the impact of SAB 101 on the Company’s results of operations and financial position. |
3. Segment Information
The Company is engaged in a single reportable segment, the marketing and sales of various business products. Financial information relating to the Company’s operations by geographic area was as follows: |
Six Month Three Month
Periods ended Periods ended
June 30, June 30,
----------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Net Sales (in thousands):
(As restated) (As restated)
North America $574,440 $605,989 $279,237 $302,047
Europe 280,402 229,462 126,735 111,753
------- ------- ------- -------
Consolidated $854,842 $835,451 $405,972 $413,800
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Revenues are attributed to countries based on location of selling subsidiary.
4. Restatement
Subsequent to the issuance of the Company’s financial statements in its Form 10-Q for the six months ended June 30, 2000, the Company discovered accounting irregularities at a subsidiary company related principally to inventory and sales returns. These irregularities had the effect of overstating certain asset values as of June 30, 2000 and overstating income for the three months and six months ended June 30, 2000. The restatement does not affect previously reported net cash flows for the period or future periods. |
As a result, the accompanying financial statements as of June 30, 2000 and for the three months and six months ended June 30, 2000 have been restated from the amounts previously reported to properly reflect these items. A summary of the effects of the restatement is as follows (in thousands, except per share data): |
Previously As
Reported Restated
----------- ---------
As of June 30, 2000:
Accounts receivable, net $ 185,692 $ 180,420
Inventories 144,027 132,777
Prepaid expenses and other current assets 33,084 31,194
Accounts payable and accrued expenses (183,670) (184,371)
Retained earnings (176,498) (157,385)
Periods ended June 30, 2000:
Six Months Three Months
---------- -------------
Previously As Previously As
Reported Restated Reported Restated
---------- --------- ---------- --------
Net sales $859,857 $854,842 $406,870 $405.972
Cost of sales 719,801 742,325 344,371 361,624
Selling, general and administrative
expense 134,442 136,170 64,231 64,698
Income (loss) from operations 5,614 (23,653) (1,732) (20,350)
Income (loss) before income taxes 3,383 (25,884) (3,399) (22,017)
Provision (benefit) for income taxes 1,353 (8,801) (1,359) (7,486)
Net income (loss) 2,030 (17,083) (2,040) (14,531)
Net Income (loss) per common share:
Basic $.06 $(.49) $(.06) $(.43)
Diluted $.06 $(.49) $(.06) $(.43)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 |
Net sales for the three months ended June 30, 2000 decreased 2% to $406 million compared to $414 million in the year-ago quarter. The decrease was attributable to lower North American computer related product sales. The total number of orders shipped decreased 8% compared to the year-ago quarter while the average order value increased 6% from the prior year. European sales increased 13% to $127 million (representing 31% of worldwide sales) compared to $112 million in the year-ago quarter. The effect of changes in exchange rates on European sales for the three months resulted in an 8% unfavorable comparison. |
Gross profit was $44.3 million, or 10.9% of sales, compared to $76.2 million, or 18.4% of sales, in the year-ago quarter, a decrease of $31.9 million. The decrease in the gross profit percentage was due to increased technical support and service costs and losses on liquidation of excess inventory in the Company’s PC assembly business. Increased relationship marketing sales and a relatively lower sales contribution from higher-margin industrial products affected the gross profit percentage unfavorably. |
Selling, general and administrative expenses for the quarter decreased by $2.6 million or 3.9% to $64.7 million compared to $67.3 million in the second quarter of 1999. These expenses for the second quarter of 1999 included a one-time charge of $4.1 million for reserves related to certain contingencies and a write-off of goodwill. Selling, general and administrative expenses increased $1.5 million in 2000 after excluding the effect of these one-time charges in 1999. This increase resulted from continued expansion of our relationship marketing sales organizations and was partially offset by a decrease in net advertising costs. As a percentage of sales, selling, general and administrative expenses were 15.9% compared to 16.3% in the year-ago quarter (or 15.3% excluding the one-time charges). |
The Company incurred a loss from operations for the current quarter of $20.4 million compared to an operating profit of $8.9 million in the year-ago quarter. The Company incurred an operating loss in its North American operations in the current quarter compared to an operating profit last year. Operating income in Europe increased to $3.4 million from $0.6 million in the year-ago quarter. During the quarter, the Company sold its internet auction subsidiary, EZBid Inc., and closed a small software sales subsidiary, which together will eliminate approximately $5 million in operating losses on an annualized basis. |
Other – net consists principally of interest expense in 2000 while it also included interest income in 1999, resulting from increased borrowings and less cash available for investment. |
As a result of the above, the net loss for the quarter was $14.5 million, or $.43 per basic and diluted share, compared to net income of $5.2 million, or $.15 per basic and diluted share, in the second quarter of 1999. |
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 |
Net sales for the six months ended June 30, 2000 increased 2% to $855 million compared to $835 million in the year-ago period. The net increase of $19 million resulted from strong performance by the Company’s European operations. The number of orders shipped increased marginally compared to the year-ago period, with the average order value up 3% from the prior year. Sales during the period from North American operations decreased 5% to $574 million compared to $606 million in the first half of 1999. European sales increased 22% to $280 million compared to $229 million a year ago. The effect of changes in exchange rates on European sales for the six months resulted in a 6% unfavorable comparison. |
Gross profit was $113 million, or 13.2% of sales, compared to $156 million, or 18.6% of sales, in the year-ago period, a decrease of $43 million. The decrease in the gross profit percentage was due to the aforementioned costs associated with the Company’s PC assembly business and 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 affected the gross profit percentage unfavorably. |
Selling, general and administrative expenses for the six months increased by $7 million or 5% to $136 million compared to $129 million in the first half of 1999. The increase resulted from continued expansion of our relationship marketing sales organizations and investments in the Company’s “e-commerce” Internet business offset by decreased net advertising costs. The prior year period also included a one-time charge of $4.1 million for reserves related to certain contingencies and a write-off of goodwill. As a percentage of sales, selling, general and administrative expenses increased to 15.9% compared to 15.5% in the year-ago period (or 15.0% excluding the one-time charges). |
The Company incurred a loss from operations for the period of $23.7 million compared to an operating profit of $26.1 million a year ago. North American operations incurred an operating loss for the period. Operating income in Europe increased to $9.6 million from $4.6 million in the year-ago quarter. |
Other – net consisted principally of interest expense in 2000 while it also included interest income in 1999, resulting from increased borrowings and less cash available for investment. |
Income taxes consist of foreign income taxes paid or payable reduced by an income tax benefit for U. S. operating loss carrybacks. No tax benefit was recorded for unrealized U. S. net operating loss carryforwards. |
As a result of the above, net loss for the six months was $17.1 million, or $.49 per basic and diluted share, compared to net income of $16.0 million, or $.44 per basic and diluted share, in the first half 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 $18 million at June 30, 2000. For the six months ended June 30, 2000, the Company generated cash from operating activities of $7 million compared to $11 million generated in the year ago period. The decrease resulted from the net loss in 2000, offset by improvement in changes in accounts receivable, inventories and other current assets and liabilities. Cash was used in investing activities in 2000 for the purchase of capital equipment, including a new distribution center in Georgia and investments in information technology. Cash was used in financing activities for the purchase of additional treasury shares and repayment of long-term debt. The Board of Directors of the Company has authorized the repurchase of up to 6,350,000 shares of common stock. Through June 30, 2000, the Company has purchased 4,127,700 shares, of which 1,133,500 were purchased during 2000 (183,700 in the second quarter). Cash outlays were financed by additional short-term borrowings from banks. For the six months ended June 30, 2000, cash and cash equivalents increased by $476,000. |
The Company believes it has access to adequate funds for continued operations and 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, access to funds, 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, (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. |
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 13, 2000 | By: /s/ RICHARD LEEDS |