| SYSTEMAX INC report, particularly in “Item 1 |
| Business,” “Item 1A Risk Factors,” “Item 3 |
| Legal Proceedings,” “Item 7 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Notes to Consolidated Financial Statements describe certain factors, among others, that could contribute to or cause such differences |
| General Systemax is a direct marketer of brand name and private label products |
| Our operations are organized in two primary reportable business segments – Computer Products and Industrial Products |
| Computer Products includes personal desktop computers (“PCs”), notebook computers, computer related products and other consumer electronics products which are marketed in North America and Europe |
| We assemble our own PCs and sell them under the trademarks Systemax™ and Ultra™ |
| In addition, we market and sell computers manufactured by other leading companies |
| Computers and computer related products accounted for 92prca of our net sales in 2005 |
| Our Industrial Products segment sells a wide array of material handling equipment, storage equipment and consumable industrial items in North America |
| Industrial products accounted for 8prca of our net sales in 2005 |
| In both of these product groups we offer our customers a broad selection of products, prompt order fulfillment and extensive customer service |
| We also participate in the emerging market for on-demand, web-based business software applications through the marketing of our PCS Profitability Suite™ of hosted software |
| See Note 12 to the consolidated financial statements included in Item 15 of this Form 10-K for additional financial information about our business segments as well as information about our geographic operations |
| The Company was incorporated in Delaware in 1995 |
| Certain predecessor businesses which now constitute part of the Company have been in business since 1955 |
| Our headquarters office is located at 11 Harbor Park Drive, Port Washington, New York |
| Recent Developments Upgrade of Credit Facility On October 27, 2005, we increased our committed revolving credit facility from dlra70 million to an aggregate amount of up to dlra120 million |
| The enhanced facility is with a group of financial institutions and certain additional lenders with JP Morgan Chase serving as Agent |
| This facility also replaced a £15 million United Kingdom facility and a £5 million term loan in the United Kingdom |
| The facility has a five year maturity and will be available to the Company, its domestic subsidiaries and its United Kingdom subsidiary |
| Borrowings under the facility are secured principally by accounts receivable, inventory and certain other assets |
| Change in Independent Registered Public Accountants On November 7, 2005, our independent registered public accountants, Deloitte & Touche LLP, notified us that they would not stand for re-appointment as the Company’s independent registered public accountant for the year ended December 31, 2005 |
| On December 9, 2005, the Company engaged Ernst & Young LLP as its independent registered public accounting firm to audit the Company’s consolidated financial statements as of and for the year ended December 31, 2005 |
| Restatement of Financial Statements On May 11, 2005, we announced that we would restate our previously issued consolidated financial statements for the year ended December 31, 2004 following the discovery of certain errors in accounting for inventory at our Tiger Direct, Inc |
| In connection with this restatement, the Company filed an amended Form 10-K for the year ended December 31, 2004 with the Securities and Exchange Commission on November 22, 2005 |
| The consolidated financial statements included herein and all related information for the periods affected have been restated to reflect the corrections |
| Restructuring Activities We continued to address the pressures of competitive markets with the identification of opportunities for cost savings |
| In early 2005, we announced that we were taking steps to increase the efficiency and profitability of our European operations, including combining certain back office operations in the United Kingdom, to provide better customer service and reduce costs |
| These actions resulted in the elimination of approximately 240 positions and are expected to result in approximately dlra6dtta0 million in annual savings |
| Products We offer more than 100cmam000 brand name and private label products |
| We endeavor to expand and keep current the breadth of our product offerings in order to fulfill the increasingly wide range of product needs of our customers |
| Our computer sales include Systemax PCs as well as offerings of other brand name PCs, servers and notebook computers |
| Computer related products include supplies such as laser printer toner cartridges and ink jet printer cartridges; media such as recordable disks and magnetic tape cartridges; peripherals such as hard disks, CD-ROM and DVD drives, printers and scanners; memory upgrades; data communication and networking equipment; monitors; digital cameras; plasma and LCD TVs, MP3 and DVD players, PDA’s and packaged software |
| We assemble our Systemax brand PCs in our 297cmam000 square foot, ISO-9000-certified facility in Fletcher, Ohio |
| We purchase components and subassemblies from suppliers in the United States as well as overseas |
| Certain parts and components for our PCs are obtained from a limited group of suppliers |
| We also utilize licensed technology and computer software in the assembly of our PCs |
| For a discussion of risks associated with these licenses and suppliers, see Item 1A, “Risk Factors |
| ” Our industrial products include storage equipment such as wire and metal shelving, bins and lockers; light material handling equipment such as hand carts, forklifts and hand trucks; ladders, furniture, small office machines and related supplies; and consumable industrial products such as first aid items, safety items, protective clothing and OSHA compliance items |
| We began to market our ProfitCenter Software™ suite of business applications in 2004 |
| ProfitCenter Software™ is a web-based application which is delivered as an on-demand service over the internet |
| The product helps companies automate and manage their entire customer life-cycle across multiple sales channels (internet, call centers, outside salespersons, etc) |
| Computer and computer-related products accounted for 92prca and industrial products accounted for 8prca of our net sales for each of the three years ended December 31, 2005, 2004 and 2003 |
| Our business customers include large businesses (customers with more than 1cmam000 employees), small and mid-sized businesses (customers with 20 to 1cmam000 employees), educational organizations and government entities |
| We have invested consistently and aggressively in developing a proprietary customer and prospect database |
| We consider our business customers to be the various individuals who work within an organization rather than the business location itself |
| We have established a three-pronged system of direct marketing to business customers, consisting of relationship marketers, catalog mailings and propriety internet web sites, the combination of which is designed to maximize sales |
| Our relationship marketers focus their efforts on our business customers by establishing a personal relationship between such customers and a Systemax account manager |
| The goal of the relationship marketing sales force is to increase the purchasing productivity of current customers and to actively solicit newly targeted prospects to become customers |
| With access to the records we maintain of historical purchasing patterns, our relationship marketers are prompted with product suggestions to expand customer order values |
| In the United States, we also have the ability to provide such customers with electronic data interchange (“EDI”) ordering and customized billing services, customer savings reports and stocking of specialty items specifically requested by these customers |
| Our relationship marketers’ efforts are supported by frequent catalog mailings and e-mail campaigns designed to generate inbound telephone sales, and our interactive websites, which allow customers to purchase products directly over the Internet |
| We believe that the integration of these three marketing methods enables us to more thoroughly penetrate our business and government customer base |
| Increased internet exposure can lead to more internet-related sales and can also generate more inbound telephone sales; just as catalog mailings which feature our websites can result in greater internet-related sales |
| Our growth in net sales continues to be supported by strong growth in sales to individual consumers, particularly through e-commerce means |
| To reach our consumer audience, we use methods such as website campaigns, banner ads and e-mail campaigns |
| We are able to monitor and evaluate the results of our various advertising campaigns to enable us to execute them in a cost-effective manner |
| We combine our use of e-commerce initiatives with catalog mailings, which generate calls to inbound sales representatives |
| These sales representatives use our information systems to fulfill orders and explore additional customer product needs |
| Sales to consumers are generally fulfilled from our own stock, requiring us to carry more inventory than we would for our business customers |
| We also periodically take advantage of attractive product pricing by making opportunistic bulk inventory purchases with the objective of turning them quickly into sales |
| We have also successfully increased our sales to individual consumers by using retail outlet stores |
| We currently have seven such retail locations in North America, which are located in or near one of our existing sales and distribution centers, thereby minimizing our operating costs |
| We presently plan to add two more retail locations in 2006 |
| E-commerce The worldwide growth in active internet users has made e-commerce a significant opportunity for sales growth |
| In 2005 we had approximately dlra650 million in internet-related sales, an increase of dlra135 million, or 26prca, from 2004 |
| E-commerce sales represented 30dtta7prca of total revenue in 2005, compared to 26dtta7prca in 2004 |
| The increase in our internet sales enables us to leverage our advertising spending, allowing us to reduce our printed catalog costs while maintaining customer contact |
| We currently operate multiple e-commerce sites, including www |
| tigerdirect |
| globalindustrial |
| co, and we continually upgrade the capabilities and performance of these web sites |
| Our internet sites feature on-line catalogs of thousands of products, allowing us to offer a wider variety of computer and industrial products than our printed catalogs |
| Our customers have around-the-clock, on-line access to purchase products and we have the ability to create targeted promotions for our customers’ interests |
| Many of our internet sites also permit customers to purchase “build to order” PCs configured to their own specifications |
| In addition to our own e-commerce web sites, we have partnering agreements with several of the largest internet shopping and search engine providers who feature our products on their web sites or provide “click-throughs” from their sites directly to ours |
| These arrangements allow us to expand our customer base at an economical cost |
| Catalogs We currently produce a total of 22 full-line and targeted specialty catalogs in North America and Europe under distinct titles |
| Full-line computer product catalogs offer products such as PCs, notebooks, peripherals, computer components, magnetic media, data communication, networking and power protection equipment, ergonomic accessories, furniture and software |
| Full-line industrial product catalogs offer products such as material handling products and industrial supplies |
| Specialty catalogs contain more focused product offerings and are targeted to individuals most likely to purchase from such catalogs |
| We mail catalogs to both businesses and consumers |
| In the case of business mailings, we mail our catalogs to many individuals at a single business location, providing us with multiple points-of-entry |
| Our in-house staff designs all of our catalogs |
| In-house catalog production helps reduce overall catalog expense and shortens catalog production time |
| This allows us the flexibility to alter our product offerings and pricing and to refine our catalog formats more quickly |
| Our catalogs are printed by third parties under fixed pricing arrangements |
| The commonality of certain core pages of our catalogs also allows for economies in catalog production |
| As noted above, the increase in our internet sales allowed us to reduce the distribution of our catalogs to 66 million, which was 26prca fewer than in the prior year |
| We mailed approximately 45 million catalogs in North America, a 12prca reduction from last year and approximately 21 million catalogs, or 44prca fewer than 2004, were distributed in Europe |
| Customer Service, Order Fulfillment and Support We generally provide toll-free telephone number access to our customers |
| Certain of our domestic call centers are linked to provide telephone backup in the event of a disruption in phone service |
| In addition to telephone orders, we also receive orders by mail, fax, electronic data interchange and on the internet |
| A large number of our products are carried in stock, and orders for such products are fulfilled on a timely basis directly from our distribution centers, typically on the day the order is received |
| We operate out of multiple sales and distribution facilities in North America and Europe |
| The locations of our distribution centers enable us to provide our customers next day or second day delivery |
| Orders are generally shipped by United Parcel Service in the United States and by similar national small package delivery services in Europe as well as by various freight lines and local carriers |
| The locations of our distribution centers in Europe have enabled us to market into four additional countries with limited incremental investment |
| We maintain relationships with a number of large distributors in North America and Europe that also deliver products directly to our customers |
| We provide extensive technical telephone support to our Systemax brand PC customers |
| We maintain a database of commonly asked questions for our technical support representatives, enabling them to respond quickly to similar questions |
| We conduct regular on-site training seminars for our sales representatives to help ensure that they are well trained and informed regarding our latest product offerings |
| Suppliers We purchase the majority of our products and components directly from manufacturers and large wholesale distributors |
| For the year ended December 31, 2005, no vendor accounted for more than 10prca of our purchases |
| For the year ended December 31, 2004, Tech Data Corporation accounted for 12dtta2prca and Ingram Micro Inc |
| For the year ended December 31, 2003, Tech Data Corporation accounted for 14dtta7prca and Ingram Micro Inc |
| The loss of either of these vendors, or any other key vendors, could have an adverse effect on us |
| Certain private label products are manufactured by third parties to our specifications |
| Many of these private label products have been designed or developed by our in-house research and development teams |
| ” Research and Development Our research and development teams design and develop products for our private label offerings |
| The individuals responsible for research and development have backgrounds in engineering and industrial design |
| This in-house capability provides important support to the private label offerings |
| Products designed include PCs, servers, furniture, ergonomic monitor support arms, printer and monitor stands, power supplies and other durable computer related products, storage racks and shelving systems, various stock and storage carts, work benches, plastic bins and shop furniture |
| We own the tooling for many of these products, including plastic bins, computer accessories, furniture and metal alloy monitor arms |
| See “Research and Development Costs” in Footnote 1 to the Consolidated Financial Statements for further information |
| Competition and Other Market Factors Computers and Computer Related Products The North American and European computer markets are highly competitive, with many US, Asian and European companies vying for market share |
| There are few barriers of entry to the PC market, with PCs being sold through the direct market channel, mass merchants, over the internet and by computer and office supply superstores |
| Timely introduction of new products or product features are critical elements to remaining competitive in the PC market |
| Other competitive factors include product performance, quality and reliability, technical support and customer service, marketing and distribution and price |
| Some of our competitors have stronger brand-recognition, broader product lines and greater financial, marketing, manufacturing and technological resources than us |
| Additionally, our results could also be adversely affected should we be unable to maintain our technological and marketing arrangements with other companies, such as Microsoft®, Intel® and Advanced Micro Devices® |
| The North American computer related products market is highly fragmented and characterized by multiple channels of distribution including direct marketers, local and national retail computer stores, computer resellers, mass merchants, computer and office supply “superstores” and internet-based resellers |
| In Europe, our major competitors are regional or country-specific retail and direct-mail distribution companies and internet-based resellers |
| With conditions in the market for computer related products remaining highly competitive, continued reductions in retail prices may adversely affect our revenues and profits |
| Additionally, we rely in part upon the introduction of new technologies and products by other manufacturers in order to sustain long-term sales growth and profitability |
| There is no assurance that the rapid rate of such technological advances and product development will continue |
| Industrial Products The market for the sale of industrial products in North America is highly fragmented and is characterized by multiple distribution channels such as retail outlets, small dealerships, direct mail distribution, internet-based resellers and large warehouse stores |
| We also face competition from manufacturers’ own sales representatives, who sell industrial equipment directly to customers, and from regional or local distributors |
| Many high volume purchasers, however, utilize catalog distributors as their first source of product |
| In the industrial products market, customer purchasing decisions are primarily based on price, product selection, product availability, level of service and convenience |
| We believe that direct marketing via catalog, the internet and sales representatives is an effective and convenient distribution method to reach mid-sized facilities that place many small orders and require a wide selection of products |
| In addition, because the industrial products market is highly fragmented and generally less brand oriented, it is well suited to private label products |
| Employees As of December 31, 2005, we employed a total of 2cmam850 employees, including 2cmam730 full-time and 121 part-time employees, of whom 1cmam764 were in North America and 1cmam086 were in Europe |
| Environmental Matters Under various national, state and local environmental laws and regulations in North America and Europe, a current or previous owner or operator (including the lessee) of real property may become liable for the costs of removal or remediation of hazardous substances at such real property |
| Such laws and regulations often impose liability without regard to fault |
| We lease most of our facilities |
| In connection with such leases, we could be held liable for the costs of removal or remedial actions with respect to hazardous substances |
| Although we have not been notified of, and are not otherwise aware of, any material environmental liability, claim or non-compliance, there can be no assurance that we will not be required to incur remediation or other costs in connection with environmental matters in the future |
| Financial Information About Foreign and Domestic Operations We conduct our business in North America (the United States and Canada) and Europe |
| Approximately 37dtta5prca of our net sales for the year ended December 31, 2005 were made by subsidiaries located outside of the United States |
| For information pertaining to our international operations, see Note 12, “Segment and Related Information,” to the consolidated financial statements included in Item 15 of this Form 10-K The following sets forth selected information with respect to our operations in those two geographic markets (in thousands): Europe North America Total 2005 Net sales dlra694cmam637 dlra1cmam420cmam881 dlra2cmam115cmam518 Income (loss) from operations $(4cmam603 ) dlra39cmam412 dlra34cmam809 Identifiable assets dlra142cmam174 dlra362cmam370 dlra504cmam544 2004 Net sales dlra695cmam695 dlra1cmam232cmam452 dlra1cmam928cmam147 Income (loss) from operations $(12cmam376 ) dlra31cmam375 dlra18cmam999 Identifiable assets dlra169cmam912 dlra313cmam284 dlra483cmam196 2003 Net sales dlra631cmam048 dlra1cmam024cmam688 dlra1cmam655cmam736 Income (loss) from operations $(5cmam251 ) dlra14cmam401 dlra9cmam150 Identifiable assets dlra140cmam319 dlra304cmam941 dlra445cmam260 See Item 7, Management’s Discussions and Analysis of Financial Condition and Results of Operations, for further information with respect to our operations |
| Available Information We maintain an internet web site at www |
| We file reports with the Securities and Exchange Commission and make available free of charge on or through this web site our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including all amendments to those reports |
| These are available as soon as is reasonably practicable after they are filed with the SEC All reports mentioned above are also available from the SEC’s web site (www |
| The information on our web site is not part of this or any other report we file with, or furnish to, the SEC Our Board of Directors has adopted the following corporate governance documents with respect to the Company (the “Corporate Governance Documents”): • • • • • Corporate Ethics Policy for officers, directors and employees Charter for the Audit Committee of the Board of Directors Charter for the Compensation Committee of the Board of Directors Charter for the Nominating/Corporate Governance Committee of the Board of Directors Corporate Governance Guidelines and Principles In accordance with the corporate governance rules of the New York Stock Exchange, each of the Corporate Governance Documents is available on our Company web site (www |
| com) or can be obtained by writing to Systemax Inc, Attention: Board of Directors (Corporate Governance), 11 Harbor Park Drive, Port Washington, NY 11050 |
| Item 1A Risk Factors |
| There are a number of factors and variables described below that may affect our future results of operations and financial condition |
| Other factors of which we are currently not aware or that we currently deem immaterial may also affect our results of operations and financial position |
| Risks Related to Our Industry • Economic conditions have affected and could continue to adversely affect our revenues and profits |
| Both we and our customers are subject to global political, economic and market conditions, including inflation, interest rates, energy costs, the impact of natural disasters, military action and the threat of terrorism |
| Our consolidated results of operations are directly affected by economic conditions in North America and Europe |
| We may experience a decline in sales as a result of poor economic conditions and the lack of visibility relating to future orders |
| Our results of operations depend upon, among other things, our ability to maintain and increase sales volumes with existing customers, our ability to attract new customers and the financial condition of our customers |
| A decline in the economy that adversely affects our customers, causing them to limit or defer their spending, would likely adversely affect us as well |
| We cannot predict with any certainty whether we will be able to maintain or improve upon historical sales volumes with existing customers, or whether we will be able to attract new customers |
| In response to economic and market conditions, from time to time we have undertaken initiatives to reduce our cost structure where appropriate |
| The initiatives already implemented as well as any future workforce and facilities reductions undertaken may not be sufficient to meet the changes in economic and market conditions and to achieve future profitability |
| In addition, costs actually incurred in connection with our restructuring actions may be higher than our estimates of such costs and/or may not lead to the anticipated cost savings |
| • Increased costs associated with corporate governance compliance may impact our results of operations |
| As a public company, we incur significant legal, accounting and other expenses that we would not incur as a private company |
| In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission and listing requirements subsequently adopted by the New York Stock Exchange in response to Sarbanes-Oxley, have required changes in corporate governance practices of public companies |
| These developments have already substantially increased our legal compliance, auditing and financial reporting costs and made them more time consuming |
| We anticipate that the impact of Section 404 of the Sarbanes-Oxley Act, if and when it fully applies to us, will further increase these costs and make some activities more time consuming |
| These developments may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage, possibly making it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee |
| We presently cannot estimate the timing or magnitude of additional costs we may incur as a result of the implementation of Section 404 of the Sarbanes-Oxley Act; however, to the extent these costs are significant, our general and administrative expenses are likely to increase as a percentage of revenue and our results of operations will be negatively impacted |
| • Competitive pressures could harm our revenue and gross margin |
| We may not be able to compete effectively with current or future competitors |
| The markets for our products and services are intensely competitive and subject to constant technological change |
| We expect this competition to further intensify in the future |
| Competitive factors include price, availability, service and support |
| We compete with a wide variety of other resellers and retailers, as well as manufacturers |
| Some of our competitors are larger companies with greater financial, marketing and product development resources than ours |
| In addition, new competitors may enter our markets |
| This may place us at a disadvantage in responding to competitors’ pricing strategies, technological advances and other initiatives, resulting in our inability to increase our revenues or maintain our gross margins in the future |
| In many cases our products compete directly with those offered by other manufacturers and distributors |
| If any of our competitors were to develop products or services that are more cost-effective or technically superior, demand for our product offerings could decrease |
| Our margins are also dependent on the mix of products we sell and could be adversely affected by a continuation of our customers’ shift to lower-priced products |
| • State and local sales tax collection may affect demand for our products |
| Our United States subsidiaries collect and remit sales tax in states in which the subsidiaries have physical presence or in which we believe nexus exists which obligates us to collect sales tax |
| Other states may, from time to time, claim that we have state-related activities constituting a sufficient nexus to require such collection |
| Additionally, many other states seek to impose sales tax collection obligations on companies that sell goods to customers in their state, or directly to the state and its political subdivisions, even without a physical presence |
| Such efforts by states have increased recently, as states seek to raise revenues without increasing the tax burden on residents |
| We rely, as do other direct mail retailers, 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 |
| We cannot predict whether the nature or level of contacts we have with a particular state will be deemed enough to require us to collect sales tax in that state nor can we 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 |
| A successful assertion by one or more states that we should collect sales tax on the sale of merchandise could result in substantial tax liabilities related to past sales and would result in considerable administrative burdens and costs for us and may reduce demand for our products from customers in such states when we charge customers for such taxes |
| • Business disruptions could adversely impact our revenue and financial condition |
| It is our policy 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 we believe that our insurance coverage is reasonable, significant events such as acts of war and terrorism, economic conditions, judicial decisions, legislation, natural disasters and large losses could materially affect our insurance obligations and future expense |
| • Changes in financial accounting standards may affect our results of operations |
| A change in accounting standards or practices can have a significant effect on our reported results of operations |
| New accounting pronouncements and interpretations of existing accounting rules and practices have occurred and may occur in the future |
| Changes to existing rules, such as the adoption of Statement of Financial Accounting Standard 123R (“SFAS 123R”), “Share-based Payment”, may adversely affect our reported financial results |
| SFAS 123R will require that we measure all stock-based compensation awards using a fair value method and record such expense, which may be significant, in our results of operations |
| Risks Related to Our Company • If we are unable to attain effective internal controls or remediate the existing material weaknesses in our internal controls over financial reporting, we may not be able to report our financial results timely or accurately and our business could suffer |
| We currently have material weaknesses in internal controls over financial reporting |
| We previously have had material weaknesses in internal controls over financial reporting which resulted in our filing restated consolidated financial statements for the years ended December 31, 2004 and 2003 |
| We are not yet subject to the internal controls certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 because we are not an “accelerated filer” (the market value of the public float of our shares was less than dlra75 million at the end of our second fiscal quarters of 2005 and 2006) |
| Based on SEC implementing regulations in effect as of June 30, 2006, we will not be required to satisfy the Section 404 requirements until at least our annual report for the fiscal year ending December 31, 2007, depending on the timing and scope of the final SEC rules implementing Section 404 for non-accelerated filers |
| We have begun the process of documenting and evaluating our systems of internal control over financial reporting |
| As a result of the ongoing evaluation of our internal control over financial reporting we cannot be assured that significant deficiencies or material weaknesses would not be required to be reported in the future |
| We have identified a number of deficiencies in our internal control over financial reporting |
| We are working to implement remedial measures which include enhancements to eliminate these deficiencies |
| If we are not able to implement the requirements of Section 404 in a timely manner or with inadequate compliance, we might be subject to regulatory sanctions and we might suffer a loss of public confidence in our reported financial information |
| Any such action could adversely affect our business and our financial results |
| • We have not filed our required financial reports on a timely basis, which could affect the trading of our stock |
| We have been late in the filing of our 2005 quarterly and annual reports required under the Securities Exchange Act of 1934 |
| We expect that the first two quarterly reports for 2006 will also be filed late |
| Failure to file our annual report on a timely basis could result in the de-listing of the Company’s common stock by the New York Stock Exchange |
| If we do not file our required annual and quarterly financial statements in the prescribed time frames we would also be ineligible to file certain registration statements and could be subject to SEC enforcement action |
| • Our success is dependent upon the availability of credit and financing |
| We require significant levels of capital in our business to finance accounts receivable and inventory |
| We maintain credit facilities in the United States and in Europe to finance increases in our working capital if available cash is insufficient |
| The amount of credit available to us at any point in time may be adversely affected by the quality or value of the assets collateralizing these credit lines |
| In addition, if we are unable to renew or replace these facilities at maturity our liquidity and capital resources may be adversely affected |
| However, we have no reason to believe that we will not be able to renew or replace our facilities when they reach maturity |
| • We have substantial international operations and we are exposed to fluctuations in currency exchange rates and political uncertainties |
| We operate internationally and as a result, we are subject to risks associated with doing business globally |
| Risks inherent to operating overseas include: • • • • Changes in a countryapstas economic or political conditions Changes in foreign currency exchange rates Difficulties with staffing and managing international operations Unexpected changes in regulatory requirements For example, we currently have operations located in nine countries outside the United States, and non-US sales (Europe and Canada) accounted for 37dtta5prca of our revenue during 2005 |
| To the extent the US dollar strengthens against the Euro and British pound, our European revenues and profits will be reduced when translated into US dollars |
| • Sales to individual consumers exposes us to credit card fraud, which could adversely affect our business |
| Failure to adequately control fraudulent credit card transactions could increase our expenses |
| Increased sales to individual consumers, which are more likely to be paid for using a credit card, increases our exposure to fraud |
| We employ technology solutions to help us detect the fraudulent use of credit card information |
| However, if we are unable to detect or control credit card fraud, we may in the future suffer losses as a result of orders placed with fraudulent credit card data, which could adversely affect our business |
| • We are exposed to inventory risks |
| A substantial portion of our inventory is subject to risk due to technological change and changes in market demand for particular products |
| If we fail to manage our inventory of older products we may have excess or obsolete inventory |
| We may have limited rights to return purchases to certain suppliers and we may not be able to obtain price protection on these items |
| The elimination of purchase return privileges and lack of availability of price protection could lower our gross margin or result in inventory write-downs |
| We also take advantage of attractive product pricing by making opportunistic bulk inventory purchases; any resulting excess and/or obsolete inventory that we are not able to re-sell could have an adverse impact on our results of operations |
| Any inability to make such bulk inventory purchases may significantly impact our sales and profitability |
| • Our income tax rate and the value of our deferred tax assets are subject to change |
| Changes in our income tax expense due to changes in the mix of US and non-US revenues and profitability, changes in tax rates or exposure to additional income tax liabilities could affect our profitability |
| We are subject to income taxes in the United States and various foreign jurisdictions |
| Our effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws or by material audit assessments |
| The carrying value of our deferred tax assets, which are primarily in the United States and the United Kingdom, is dependent on our ability to generate future taxable income in those jurisdictions |
| Our United Kingdom deferred tax assets currently have a full valuation allowance |
| In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions and a material assessment by a tax authority could affect our profitability |
| • Our reliance on information and communications technology requires significant expenditures and entails risk |
| We rely on a variety of information and telecommunications systems in our operations |
| Our success is dependent in large part on the accuracy and proper use of our information systems, including our telecommunications systems |
| To manage our growth, we continually evaluate the adequacy of our existing systems and procedures |
| We anticipate that we will regularly need to make capital expenditures to upgrade and modify our management information systems, including software and hardware, as we grow and the needs of our business change |
| The occurrence of a significant system failure, electrical or telecommunications outages or our failure to expand or successfully implement new systems could have a material adverse effect on our results of operations |
| Our information systems networks, including our web sites, and applications could be adversely affected by viruses or worms and may be vulnerable to malicious acts such as hacking |
| Although we take preventive measures, these procedures may not be sufficient to avoid harm to our operations, which could have an adverse effect on our results of operations |
| We purchase a significant portion of our computer products from major distributors such as Tech Data Corporation and Ingram Micro Inc |
| and directly from large manufacturers such as Hewlett Packard and Acer, who may deliver those products directly to our customers |
| These relationships enable us to make available to our customers a wide selection of products without having to maintain large amounts of inventory |
| The termination or interruption of our relationships with any of these suppliers could materially adversely affect our business |
| Our PC products contain electronic components, subassemblies and software that in some cases are supplied through sole or limited source third-party suppliers, some of which are located outside of the US Although we do not anticipate any problems procuring supplies in the near-term, there can never be any assurance that parts and supplies will be available in a timely manner and at reasonable prices |
| Any loss of, or interruption of supply, from key suppliers may require us to find new suppliers |
| This could result in production or development delays while new suppliers are located, which could substantially impair operating results |
| If the availability of these or other components used in the manufacture of our products was to decrease, or if the prices for these components were to increase significantly, operating costs and expenses could be adversely affected |
| We purchase a number of our products from vendors outside of the United States |
| Difficulties encountered by one or several of these suppliers could halt or disrupt production and delay completion or cause the cancellation of our orders |
| Delays or interruptions in the transportation network could result in loss or delay of timely receipt of product required to fulfill customer orders |
| Many product suppliers provide us with co-op advertising support in exchange for featuring their products in our catalogs and on our internet sites |
| Certain suppliers provide us 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 our cost of goods sold or selling, general and administrative expenses and have an adverse effect on results of operations and cash flows |
| • We may encounter risks in connection with sales of our web-hosted software application |
| In 2004 we introduced our web-based and hosted, on-demand software suite of products, marketed as ProfitCenter Software |
| We have a limited operating history with this type of product offering and may encounter risks inherent in the software industry, including but not limited to: • • • • • • • • Errors or security flaws in our product Technical difficulties which we can not resolve on a timely or cost-effective basis, Inability to provide the level of service we commit to Inability to deliver product upgrades and enhancements Delays in development Inability to hire and retain qualified technical personnel Impact of privacy laws on the use of our product Exposure to claims of infringement of intellectual property rights • Restrictions and covenants in our credit facility may limit our ability to enter into certain transactions |
| Our United States/United Kingdom combined revolving credit agreement contains covenants restricting or limiting our ability to, among other things: • • • • incur additional debt create or permit liens on assets make capital expenditures or investments pay dividends If we fail to comply with the covenants and other requirements set forth in the agreement, we will have to negotiate a waiver agreement with the lenders |
| Failure to enter into such a waiver agreement could adversely affect the availability of financing to us which could materially impact our operations |
| Other factors that may affect our future results of operations and financial condition include, but are not limited to, unanticipated developments in any one or more of the following areas, as well as other factors which may be detailed from time to time in our Securities and Exchange Commission filings: • • • • • • • • the effect on us of volatility in the price of paper and periodic increases in postage rates significant changes in the computer products retail industry, especially relating to the distribution and sale of such products timely availability of existing and new products 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 us risks associated with delivery of merchandise to customers by utilizing common delivery services such as the United States Postal Service and United Parcel Service, including possible strikes and contamination borrowing costs or availability pending or threatened litigation and investigations the availability of key personnel Readers are cautioned not to place undue reliance on any forward looking statements contained in this report, which speak only as of the date of this report |
| We undertake no obligation to publicly release the result of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events |