Item 1. Business.
General
Global is a direct marketer of over 40,000 products including brand name and private label computer related products, office products and industrial products in North America and Europe. The Company emphasizes a broad selection of in-stock products, frequent mailings of a variety of distinctively branded full color catalogs, extensive customer service and prompt, complete order fulfillment. The Company's portfolio of catalogs includes such established brand names as Global, Misco, HCS Global, HCS Misco, Dartek, Power Up! and Tiger for computer related products and office products and Global and ArrowStar for industrial products. Global has grown rapidly as a result of internal growth and strategic acquisitions while maintaining a high level of profitability. The Company's net sales have increased at a compound annual growth rate of 40% from $238.8 million in 1992 to $911.9 million in 1996. During this same period, income from operations increased at a compound annual growth rate of 35% from $21.2 million to $69.5 million.
The Company has positioned itself as a "corporate supplier" offering a broad spectrum of business products principally to mid-sized facilities (20 to 1,000 employees). The Company believes that direct mail is one of the most effective and convenient distribution methods to reach mid-sized facilities which place many small orders and require a wide selection of products. The Company's products consist of computer, office and industrial products, which accounted for 75%, 13% and 12%, respectively, of the Company's net sales in 1996.
The Company primarily targets individuals at mid-sized facilities through demographically directed mailings of its "full-line" and specialty catalogs. Most of the Company's various catalog titles are mailed monthly, although certain specialty catalogs are mailed less frequently. Catalog mailings increased from approximately 71 million catalogs comprising 11 different titles in 1992 to approximately 160 million catalogs comprising 40 different titles in 1996. At December 31, 1996, the Company had 1.7 million "active" customers (defined as individuals that have purchased from the Company within the preceding 12 months) and combined customer and prospect files of more than 40 million names.
The Company operates in the United States, Canada and Europe through a network of regional distribution centers. The Company's North American operations contributed 74% of net sales in 1996 and consist of eight branch locations in seven states and in Canada. Certain corporate functions, such as merchandising, marketing, purchasing and information systems, are centralized at the Company's corporate headquarters for efficiency, while other functions, such as sales, order entry and fulfillment, are decentralized at each of the Company's branches in order to provide superior customer service. Each branch consists of a regional distribution center as well as telemarketing and administrative functions which address local customer needs. European operations which began in June 1990 represented 26% of net sales in 1996 and consist of six sales and distribution centers located across Europe: two in the United Kingdom and one in each of France, Germany, Italy and Spain. Each country branch performs the same functions as each North American branch in addition to local marketing. For a more detailed geographic breakdown of the Company's operations, see Note 10 to the Consolidated Financial Statements.
Most of the Company's products are carried in stock, and orders for such products are fulfilled directly from the Company's distribution centers, typically on the day on which the order was received. The strategic location of the Company's distribution centers allows next day or second day delivery via low cost ground carriers throughout the United States, Canada and Western Europe. In Europe, the location of branches also enables the Company to expand into new markets with limited incremental investment through cross border shipping.
Products
In positioning itself as a "corporate supplier", the Company has consistently expanded the breadth of its product offerings in order to fulfill an increasingly wide range of business product needs of mid-sized facilities. In total, Global offers over 40,000 brand name and private label products.
The Company's computer related products include: supplies, media such as floppy disks and magnetic tape cartridges, peripherals such as hard disk drives and memory upgrades, data communication and networking equipment, ergonomic accessories, such as adjustable monitor support arms and antiglare screens, packaged software and hardware. Sales of office products include furniture, chairs, small office machines and related supplies. The Company's industrial product lines focus primarily on storage equipment such as metal shelving, bins and lockers, and light material handling equipment such as hand carts and hand trucks. In addition, Global has expanded into consumable industrial products such as first aid items, safety items, protective clothing and OSHA compliance items. The table below summarizes the Company's mix of sales by product category:
Year Ended December 31, ----------------------------- Product Type 1994 1995 1996 ------ ------ ------ (% of total sales)
Computer Related Products................ 65% 66% 75% Office Products ........................ 18 16 13 Industrial Products .................... 17 18 12 ___ ___ ___ Total ............................. 100% 100% 100% === === ===
Historically, the Company focused primarily on non-branded or private label products. Although the Company continues to experience strong growth in its private label products, in recent years, the Company made the strategic decision to leverage its distribution and marketing strengths into the market for high volume brand name products which the Company believes offer significant opportunities to increase sales. In 1993 the Company expanded its offerings of brand name computer related products, including peripherals, data communications and networking equipment, software and supplies. In addition, in 1995 the Company further expanded its offering of brand name products to include notebooks, desktops and servers. This strategy has impacted gross profit margins, as such products typically have lower gross profit margins than many of the Company's other products. The majority of such decrease in gross profit margin, however, has been offset by decreased catalog production costs as a result of vendor supported advertising and increased efficiencies from (i) increased average order values, particularly with respect to order fulfillment and (ii) increased response rates for the Company's catalogs. Management believes that the market for brand name products represents a significant growth opportunity and will become an increasingly important part of its business.
Merchandising is managed by product category and each product manager is responsible for product selection and purchasing and is evaluated based on product line growth and profitability. Product managers also determine which products to list in each catalog.
Catalogs and Marketing
The Company produces a total of 40 "full-line" and targeted specialty catalogs under distinct titles. Most of the Company's various catalog titles are mailed monthly although certain of its specialty catalogs are mailed less frequently. "Full-line" computer related products catalogs offer products such as computer supplies and magnetic media, peripherals, data communication, networking and power protection equipment, ergonomic accessories, furniture, software and hardware. "Full-line" industrial products catalogs offer products such as material handling products and industrial supplies. Specialty catalogs contain more focused product offerings and are targeted to individuals most likely to purchase from such catalogs. It is Global's policy to mail multiple catalogs to many individuals at each location, providing the Company with multiple points-of-entry into a business location. Once a prospect purchases a particular product, however, the Company's customers have exhibited strong brand loyalty resulting in limited customer overlap among the Company's various catalog brands. This multiple brand strategy, and the accompanying customer exposure to the Company's products, is a crucial factor in the Company's strategy to increase sales volume through broader market coverage and improve the productivity of its customer file through more focused marketing.
Specialty catalogs permit the Company to offer a more extensive selection of focused products at a reduced catalog cost. The Company's database permits it to target each catalog to customers whose purchasing history suggest that they are most likely to purchase from it. For example, a data communications specialty catalog can be mailed exclusively to individuals who had purchased complementary products in the past. Introductions of specialty catalogs have included a safety products catalog, a hardware and software catalog, a data communications and networking catalog, an ergonomics catalog and a shelving catalog.
Global has invested consistently and aggressively in developing a proprietary customer and prospect database. This database, which includes more than 40 million names, represents a major asset of the Company. The Company considers its customers to be the various individuals that work within an organization rather than the business location itself. The customer and prospect database includes detailed information, including company size, number of employees, industry of operation, various demographic and geographic characteristics and personal purchase history (catalog preference, product preference, order value). Management believes that this variety and depth of information on its customers offers Global a significant competitive advantage.
Using its database, the Company primarily targets individuals at mid-sized facilities (20 to 1,000 employees) through demographically directed mailings of its "full-line" and targeted specialty catalogs. During 1996, the Company distributed approximately 160 million catalogs of which approximately 120 million catalogs were mailed in North America and approximately 40 million catalogs were distributed in Europe. At December 31, 1996, the Company had 1.7 million "active" customers (defined as individuals that have purchased from the Company within the preceding 12 months).
In its mailings, the Company seeks to maximize the response rates of its catalogs. The following table shows the approximate number of catalogs distributed by the Company and the catalog response rates:
Catalogs Distributed
Year Ended December 31, ----------------------------- Product Type 1994 1995 1996 - ------------ ------ ------ ------ (in millions, except response rates)
North America......................... 87 90 120 Europe................................ 27 32 40 ___ ___ ___ Total............................ 114 122 160 === === === Response rates........................ 1.94% 2.08% 2.12%
Catalogs distributed in 1996 include a full year catalog mailings for Tiger Direct versus one month for 1995. The Company's in-house staff designs all of the Company's catalogs. Catalog paper is purchased from various sources and has historically been subject to price fluctuations. The printing of the catalogs is done from several sources under fixed pricing arrangements. Each catalog is printed with full-color photographs, contains detailed product descriptions and generally bears a toll-free telephone number to be used by customers to place a product order. In-house catalog production helps reduce overall catalog expense and shortens catalog production time, allowing the Company the flexibility to alter its product offerings and pricing and refine its catalog formats more quickly.
In addition to its catalogs and telemarketing sales force, the Company uses targeted fax campaigns and special single-product "solo" mailings to generate incremental sales from key customer segments.
Sales and Customer Service and Support
In responding to orders generated by its catalogs, soliciting new customers through outbound telemarketing and responding to service and technical support requirements of its customers, the Company relies heavily on its proprietary systems. See "--Management Information Systems." The principal components of its sales and support functions are as follows.
Order Entry and Fulfillment
Global makes purchasing its products as convenient as possible. Because a majority of customer orders are placed by telephone, the efficient handling of calls is an extremely important aspect of Global's business. Order entry and fulfillment occurs at each of the Company's 13 branches. Global generally provides a toll-free telephone number which automatically directs calls to the branch closest to the customer. Department managers are trained to monitor and coordinate automatic call distribution activity which allows them to shift staff from other departments to cover periods of the day with heavy calling activity. Calls are received by well trained inbound telemarketing representatives who utilize on-line terminals to enter customer orders into computerized order processing systems. The integration of the Company's call centers also provide each domestic branch with telephone backup in the event of a disruption in phone service. In addition to telephone orders, Global also receives orders by mail, by fax, via EDI, and via the Internet.
When an order is entered into the system, a credit check is performed, and, if the credit is approved, the order is electronically transmitted to the warehouse and a packing slip is printed for order fulfillment. Approximately 75% of the Company's 1996 sales were on open account and the Company's bad debt experience has traditionally been approximately 1/2 of 1% of sales. Orders generally are shipped by United Parcel Service in the United States and by similar national small package delivery services in Europe, as well as by various freight lines and local carriers. Air freight is also available. As a result of the regional locations of the Company's branches, Global estimates that most customers receive their orders (other than custom items, large furniture and large industrial items shipped directly by the vendor) within one or two business days of the order date. Customers are invoiced for merchandise, shipping and handling promptly after shipment.
Inbound Telemarketing
The Company's catalogs generate calls to the in-bound telemarketing group which is supported by proprietary software applications. Inbound telemarketing representatives use the capabilities of the Company's systems to effectively fulfill orders and explore additional customer product needs. Using proprietary applications, each member of the telemarketing group has immediate access to customer files, including usage and billing information, and real-time inventory levels by distribution center. Using this data, inbound telemarketing personnel are also prompted by their computer screen to cross-sell selected products and obtain specific information relating to customer-specific purchasing habits and product needs. For example, one program prompts the sales representative to suggest the purchase of an additional product which may be used with the products just ordered by the customer. In addition, the Company frequently runs sales incentive programs to improve productivity and enhance employee motivation. The Company also conducts regular on-site training seminars for its sales representatives and regularly reviews performance to monitor productivity.
Outbound Telemarketing
In 1988, the Company began to utilize outbound telemarketing to increase the overall level of sales. Each of the Company's 13 branches has its own telephone sales center. The telemarketing sales force's goal is to increase the purchasing productivity of current customers and to actively solicit newly targeted prospects to become customers. As part of its outbound telemarketing effort, the Company established a national accounts program focused on expanding penetration of larger facilities. In the United States, Global has the ability to provide such customers with EDI ordering and customized billing services, customer savings reports, bulk discounts and stocking of specialty items specifically requested by customers. Global can also provide monthly reports illustrating customer savings from utilizing Global.
Customer Service and Support
The Company conducts regular on-site training seminars for its sales representatives and operates a separate customer service department which responds to customer concerns and generally offers a 30 day return policy. Sales representatives receive technical training regarding various products from vendors and in-house training specialists. The Company also maintains a separate technical support group dedicated to answering customer inquiries and assisting customers with the operation of their products. Technical support questions are logged into the computer, thus forming a database of commonly asked questions for each product. This database helps sales representatives respond quickly to similar questions from future customers and also allows product managers to monitor the effectiveness of the information provided in the catalogs. The Company also employs a fax-back system that allows customers to call directly into a computer system that automatically faxes the requested information to the customer.
Distribution Centers
North American
The Company operates a network of seven branch locations in North America. Each sales and distribution center has a general manager in charge of sales and supervising on-site operations and handles its own telemarketing, credit review, product fulfillment and collection functions.
Each location is linked by a sophisticated wide area network management information system and in the event of adverse delivery conditions (such as weather problems or other delivery issues), the Company can easily shift inbound calls and/or order fulfillment and shipping to an alternative branch. Management believes this provides Global with important operating flexibility and protection from possible sales interruptions. See "Management Information Systems."
A large number of the Company's products are carried in stock, and consequently orders for such products are fulfilled from the distribution center. Certain products (such as selected computer hardware and large furniture and industrial items) are shipped directly by the supplier. The layout of the Company's distribution centers is managed via a computer-based tracking system which dictates the location of specific stock items. Individual product types are consistently stocked in the same physical picking location, allowing ease of picking and minimizing picking errors. Picking of products at the distribution centers is done continuously throughout the day. Customer orders are packed and shipped as they are received.
European
The Company has six branch locations in five European countries, the operations of which are all directed from a central office outside London, England. The central office in Uxbridge is responsible for marketing support, catalog production, financial reporting, logistics, auditing and MIS programming support. Each of the Company's six separate European operations is run by a country manager with profit and loss responsibility. Management believes that its practice of operating each country's operations as a more autonomous entity fosters a highly entrepreneurial culture and increases management accountability. Each country (except the United Kingdom which has two) has a full service sales and distribution center to process orders.
Suppliers
In North America, the Company purchases substantially all of its products directly from manufacturers, except for certain peripherals, software and hardware products which are purchased through wholesale distributors. In Europe, products are sourced from a combination of local manufacturers, wholesalers and import suppliers of private label products. Substantially all of the European catalog product content is sourced in Europe. No single supplier accounted for more than 10% of Global's total purchases in 1996.
Private label products are manufactured by third parties to the Company's specifications. Many of these private label products have been designed or developed by the Company's in-house research and development team. See "Research and Development." As certain private label products require assembly, the Company also maintains a small assembly operation.
Management Information Systems
In North America, the Company has installed and operates a sophisticated, proprietary system that allows centralized management of key management functions, including communication links between distribution centers, inventory and accounts receivable management, purchasing, pricing, sales and distribution, and the preparation of daily operating control reports which provide concise and timely information regarding key aspects of its business. This proprietary management information system enables the Company to enhance its flexibility by shipping customer orders on a same-day basis, responding quickly to order changes and providing a high level of customer service. The Company maintains a database of over 40 million customer and prospect names and keeps records of historical purchasing patterns in order to prompt sales personnel with product suggestions to expand customer order values. In addition, the Company has developed a state-of-the-art customer prospecting function based upon geographic, economic and demographic data which enables Global to utilize its information systems to maintain and expand its customer data file. These applications enable the Company to achieve cost savings, deliver extensive customer service and centrally manage its operations.
In the United States, the Company's management information systems are networked, real-time information systems that allow each distribution center to share information and monitor daily progress relating to sales activity, credit approval, inventory levels, stock balancing, vendor returns, order fulfillment and other measures of performance.
The Company believes that its management information systems and planned enhancements are sufficient to sustain its present operations and to accommodate the Company's internal growth strategy.
Research and Development
The Company's research and development team designs and develops products for Global's private label program. Management believes this engineering and design capability, which Global has had for more than 10 years, is unique in the direct marketing industry. The individuals responsible for research and development have backgrounds in engineering and industrial design.
This in-house capability provides important support to the private label program. Many of the Company's private label products were designed or developed by the in-house research and development team. Examples of products designed in-house include: furniture, ergonomic monitor support arms, printer and monitor stands, wrist rests and other durable computer related products, storage racks and shelving systems, various stock and storage carts, work benches, plastic bins and shop furniture. The Company owns the tooling for many of these products, including plastic bins, computer accessories, furniture, and metal alloy monitor arms. See "Research and Development Costs" in Footnote 1 to the financial statements.
Competition
Computer Related Products
The North American computer related products market is highly fragmented and characterized by multiple channels of distribution, including direct-response (mail-order) distributors, local and national retail computer stores that carry computer supplies, computer resellers (OEMs), and computer "superstores". The tremendous growth in the computer related products market during the past 10 years has been accompanied by substantial changes in the nature of product distribution and sales. The decentralization of computers throughout factory, business, engineering and office environments has made it increasingly difficult and expensive for many suppliers to use traditional direct sales methods to locate users, initiate sales contacts and effectively provide service to customers. Average order values also tend to be smaller than in the past, reflecting individual requirements rather than the greater needs traditionally associated with centralized data processing departments. These changes in the structure of the computer related products market have placed traditional distributors with direct sales forces at a competitive disadvantage due to their cost structures and established selling methods. As a result, direct marketers have been able to increase sales to the larger businesses that have traditionally been served by contract stationers as well as capturing sales volume and market share from the numerous, small retail computer stores. The Company believes that the relative inability of the traditional distribution channels to respond to changing industry dynamics together with the key customer purchase criteria of selection, price and service has created an opportunity for the growth of direct marketing organizations such as Global. In addition, the growing number of non-technical users has increased the need for a knowledgeable source for quality products. Global addresses these needs through its direct-response marketing strategy, broad product offering, same day shipping and a commitment to customer service and support.
In Europe, the Company's major competitors are regional or country-specific retail and direct-mail distribution companies. The Company's presence in five major European countries provides Global with the flexibility to purchase large volumes centrally from its European headquarters in the United Kingdom or locally at each branch. In addition, the commonality of certain core pages of the European catalogs provides for economies in catalog production. The Company believes that these factors allow it to take advantage of cost savings not available to many of its competitors in Europe.
Office Products
The distribution of office products in the United States is highly fragmented, with no one participant having more than a 10% market share. Sourcing of products from vendors and distributors also has been through a highly-fragmented supplier base without volume discounts or central purchasing efficiencies. Office products are typically sold through one of three channels: retail outlets, contract stationers and direct mail. However, due to the rapid growth of the office products market, competition and consolidation in this market are increasing, particularly with respect to the SOHO and large corporate (companies with over 1,000 employees) segments. Large contract stationers, direct mail distributors and office products superstores have grown at the expense of small independent retail dealers. The companies leading this consolidation have not, however, captured a large market position with the mid-sized facilities which the Company targets. The Company believes that this lack of penetration results from the fact that office products superstores and direct mail marketers have focused on serving the SOHO segment while contract stationers have focused on serving the large corporate sector. The Company believes that direct mail will continue to be a growing channel of distribution for office products and that price, breadth of product line and customer service will be key factors in the success of direct mail distribution of office products.
Industrial Products
The market for the sale of industrial products in the United States is highly fragmented and is characterized by multiple distribution channels such as retail outlets, small dealerships, direct mail distribution and large warehouse stores. Global also faces competition from manufacturers' own sales representatives who sell industrial equipment directly to customers, and from regional or local distributors. Many high volume purchasers, however, utilize catalog distributors as their first source of product specifications. In the industrial products market, customer purchasing decisions are, primarily, based on price, product selection, product availability, level of service and convenience. As in the office products industry, the Company believes that direct mail is one of the most effective and convenient distribution methods to reach mid-sized facilities which place many small orders and require a wide selection of products. In addition, because the industrial product market is highly fragmented and generally less brand-oriented, it is well-suited to private label products. The majority of the Company's industrial products are high gross profit margin, private label products.
Competition in the United Kingdom is similar to competition in the U.S. with the exception that most direct mail companies in the United Kingdom drop ship the majority of their products from the manufacturer resulting in long delivery lead times. As Global intends to stock the majority of its products, management believes it will have a significant advantage over most of its direct mail competitors in the United Kingdom.
Employees
As of December 31, 1996, the Company employed a total of 2,166 employees, geincluding 1,957 full-time and 209 part-time employees, of whom 1,613 were in North America and 553 were in Europe.
None of the Company's North American employees is represented by a labor union, except for approximately 80 warehouse and assembly employees at the Port Washington distribution center who are covered by an "open-shop" agreement with the Company, which expires at the end of 1998. The Port Washington employees are not required to join the union. In Europe, union membership and affiliations vary by country. In general, the European unions tend to be national, rather than local, in scope and industry specific.
The Company considers its relationships with employees to be good and has experienced no work stoppages since 1976.
Environmental Matters
Under various Federal, state and local environmental laws and regulations, a current or previous owner or operator (including the lessee) of real property may become liable for the costs of removal or remediation of hazardous substances at such real property. Such laws and regulations often impose liability without regard to fault. The Company leases all of its U.S. facilities. In connection with such leases, the Company could be held liable for the costs of removal or remedial actions with respect to hazardous substances. Although the Company has not been notified of, and is not otherwise aware of, any material environmental liability, claim or non-compliance, there can be no assurance that the Company will not be required to incur remediation or other costs in connection with environmental matters in the future.
Financial Information About Foreign and Domestic Operations
See "Geographic Information" contained in Footnote 10 to the financial statements.
Item 2.
Item 2. Properties.
The Company's primary facilities, which are leased except where otherwise indicated, are as follows: Expira- tion Approx of Facility Location Sq. Ft. Lease -------- -------- ------- ------ Headquarters, Sales and Distribution Center, Catalog Operations(1)......................Port Washington, NY 178,000 2007 Sales and Distribution Center(1).....Suwanee, GA 110,000 1999 Sales and Distribution Center(1).....Compton, CA 60,000 1998 Sales and Distribution Center........Naperville, IL 241,000 2010 Sales and Distribution Center........Holmdel, NJ 51,000 1999 Sales and Distribution Center........Markham, Ontario 45,000 2005 Sales and Distribution Center........Verrieres le Buisson France 19,500 2000 Sales and Distribution Center........Dreieich, Germany 55,000 2000 Sales and Distribution Center........Madrid, Spain 35,000 2 months notice Sales and Distribution Center........Milan, Italy 44,600 1999 Sales and Distribution Center........Greenock, Scotland 78,000 owned Sales and Distribution Center........Wellingborough, England 38,000 2013 Sales Center and Catalog Operations..Miami, FL 32,000 2000 Sales Center.........................Raleigh-Durham, NC 12,000 1998 ___________ (1) Facility leased from related party. See "Certain Relationships and Related Transactions--Agreements--Leases and Related Guarantees."
The Company believes that its facilities are adequate for its current needs and that suitable additional space would be available as needed.
Item 3.
Item 3. Legal Proceedings.
There are no material legal proceedings pending against the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
During the quarter ended December 31, 1996, there were no matters submitted to a vote of the Company's security holders.
PART II
Item 5.
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
The Company's Common Stock has been traded on the New York Stock Exchange under the symbol "GML" since its initial public offering on June 26, 1995 (the "IPO"). The following table sets forth the high and low sales price of the Company's Common Stock as reported on the New York Stock Exchange for the periods indicated.
1995 High Low - ---- ---- ---
Second quarter (from June 27, 1995)................ $20 1/4 $19 Third quarter...................................... 28 7/8 19 1/4 Fourth quarter..................................... 30 3/8 23 1/4
- ----
First quarter...................................... 35 24 1/4 Second quarter..................................... 47 32 1/8 Third quarter...................................... 47 1/4 36 1/4 Fourth quarter..................................... 52 1/4 39 1/4
On March 25, 1997, the last reported sale price of the Company's Common Stock on the New York Stock Exchange was $19 (7/8) per share. As of March 25, 1997, the Company had 258 stockholders of record.
The Company has not paid any dividends since the IPO and anticipates that all of its income in the foreseeable future will be retained for the development and expansion of its business, and therefore does not anticipate paying dividends on its Common Stock in the foreseeable future. See "Certain Relationships and Related Transactions" for a description of the Company's historical distributions.
Item 6.
Item 6. Selected Financial Data.
The following selected financial information is qualified by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this report. The selected income statement data for the years ended December 31, 1994, 1995 and 1996 and the selected balance sheet data as of December 31, 1995 and 1996 is derived from the audited consolidated financial statements which are included elsewhere herein. The selected balance sheet data as of December 31, 1992, 1993, and 1994 and the selected income statement data for the years ended December 31, 1992 and 1993 are derived from the audited financial statements of the Predecessor Companies which are not included herein.
Year Ended December 31, ___________________________________________ 1992 1993(1) 1994 1995 1996 ------- ------- ------ ------ ------
(in millions, except per share data, number of catalog titles and number of countries) Income Statement Data: Net sales...................... $ 238.8 $ 393.6 $ 484.2 $ 634.5 $ 911.9 Cost of sales................... 147.0 244.5 318.5 437.2 662.3 ------- ------- ------- ------- ------- Gross profit.................... 91.8 149.1 165.7 197.3 249.6 Selling, general and administrative expenses...... 70.6 119.0 129.2 143.0 180.1 ------- ------- ------- ------- ------- Income from operations......... 21.2 30.1 36.5 54.3 69.5 Interest income................ 0.2 1.1 1.1 1.2 2.5 Interest expense............... 1.5 2.1 1.8 2.4 .5 Income taxes(2)................ 0.0 0.7 0.9 12.7 27.7 Officer compensation(3)........ 14.9 16.8 18.1 4.7 0.0 Net income..................... 5.1 11.2 17.1 35.7 43.7 Net income per share .......... $ 1.15 Common and common equivalent shares outstanding........... 38.1 Selected Operating Data: Active customers(4)............ 0.5 0.9 1.1 1.7 1.7 Orders entered................. 1.0 1.9 2.2 2.5 3.4 Number of catalogs distributed. 71 98 114 122 160 Number of catalog titles....... 11 18 24 32 40 Number of countries receiving catalogs........... 7 7 7 10 12
(Footnotes on following page)
Year Ended December 31, ___________________________________________ 1992 1993(1) 1994 1995 1996 ------- ------- ------ ------ ------ (in millions) Balance Sheet Data (at period end): Working capital(5)...... $ 62.8 $ 65.8 $ 84.6 $ 99.1 $128.7 Total assets............ 114.5 127.1 164.2 247.5 331.4 Short-term debt......... 5.0 4.8 19.2 5.4 0.5 Long-term debt, excluding current portion....... 23.8 13.9 11.5 2.9 2.0 Stockholders' equity.... 42.4 58.1 69.1 154.0 228.6 ___________
(1) In December 1992, the Company acquired a computer related products catalog business located in North America and Europe operating under the Misco brand name. This business contributed $107.6 million in net sales in 1993.
(2) From 1992 through the closing of the IPO, the Predecessor Companies operated as a series of corporations with related ownership, most of which elected to be treated as S Corporations and therefore were subject to minimal federal and state income taxes.
(3) Following the IPO, the aggregate amount of salary paid to each of the Company's three senior executive officers was reduced to $300,000 per year and included in selling, general and administrative expenses. Prior to the IPO, distributions to officers/shareholders were made primarily to satisfy their tax liabilities resulting from the S Corporation status of certain of the Predecessor Companies. Officer compensation for 1995 was based on distributions made to such officers of $4.7 million through the closing of the IPO and $0.5 million for the period after the closing of the IPO (which represents an annual rate of $0.9 million for such period).
(4) An "active customer" is defined as a customer who has purchased from the Company within the preceding 12 months.
(5) Working capital excludes cash and cash equivalents and short term debt.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
Global is a direct marketer of brand name and private label computer related products, office products and industrial products in North America and Europe. The Company emphasizes a broad selection of in-stock products, frequent mailings of a variety of distinctively branded, full color catalogs, extensive customer service and prompt, complete order fulfillment. Global has grown rapidly as a result of internal growth and strategic acquisitions with net sales increasing from $238.8 million in 1992 to $911.9 million in 1996.
Global was started over 45 years ago and existed as a direct sales organization prior to entering the direct mail business in 1972 with an industrial products catalog published under the Global name. Since then, the Company has added 39 catalog titles to its portfolio, the majority of which are specifically targeted at mid-sized facilities (20 to 1,000 employees). As a "corporate supplier" offering a broad spectrum of business products principally to mid-sized facilities, the Company has consistently emphasized serving the needs of its customers rather than selling particular products. This strategy has resulted in a product offering which has expanded over time to include computer related products and a selection of office products.
In June 1990, the Company made a strategic entry into the European market with the purchase of Heathrow Computer Supplies, a direct marketing company in the United Kingdom. In October 1991, the Company expanded its sales of computer related products to France and in December 1992, the Company acquired Misco, a computer related products catalog business located in North America and Europe operating under the Misco brand name. The Misco acquisition provided the Company with new bases of operations in the United Kingdom and United States and further expanded its international operations into Germany, Italy, Spain and Canada. The Company's European operations represented 26% of net sales in 1996, substantially all of which were attributable to the sale of computer related products. The Company does not hedge any of its sales denominated in foreign currencies.
Prior to its acquisition by the Company in December 1992, Misco was owned and operated by a substantially larger multinational corporation and had an established and respected brand name but had experienced substantial losses from operations. Following the acquisition, the Company promptly implemented a number of strategic initiatives designed to convert Misco to the Global business model including (i) redesigning Misco catalogs to increase the overall breadth and depth of the product offerings, (ii) repositioning Misco's products at lower price points in order to increase sales, (iii) reducing overhead expenses and (iv) applying the Company's distribution and marketing expertise.
In November 1995, the Company acquired Tiger Direct, a company engaged primarily in the direct marketing of personal computer software and peripheral hardware products, in exchange for 148,240 shares of Global Common Stock and $1.1 million in cash. At the time of acquisition, Tiger had a mailing list of almost 3.5 million names, including approximately 400,000 active customers. Since the acquisition, the Company has implemented several measures designed to improve Tiger's operations, including the elimination of unprofitable catalogs and reducing overhead expenses. See Note 3 to the Consolidated Financial Statements.
Impact of Expansion into Brand Name Products
Historically the Company focused primarily on non-brand name or private label products. Although the Company has continued to experience strong growth in its private label products, in recent years the Company made the strategic decision to leverage its distribution and marketing strengths into the market for higher volume brand name products which the Company believes offer significant opportunities to increase sales. In particular, in 1993 the Company expanded its offerings of brand name computer related products. Although brand name computer related products typically have lower gross profit margins than many of the Company's other products, the majority of such decrease has been offset by vendor supported advertising and increased efficiencies from (i) larger average order values and (ii) increased response rates for the Company's catalogs.
Geographic Segments
The Company operates in two geographic segments, North America and Europe. (See Footnote 10 to the financial statements) Sales and income from operations in North America grew from 1992 through 1996 at compound annual growth rates of 32% and 34% respectively.
The Company's growth in sales and income from operations in Europe grew rapidly since its entry into Europe in 1990 through 1995. Sales and income from operations from 1992 through 1995 grew at compound annual growth rates of 32% and 115% respectively. In 1996 sales in Europe increased by 24% and income from operations decreased by 48%. At the end of 1996 the Company had operations in five European countries (United Kingdom, France, Germany, Italy and Spain) and sold cross border into an additional five countries (Austria, Switzerland, Belgium, Portugal and Ireland). Sales growth was affected by the weak economies in those countries, particularly Germany and Italy. Income from operations was impacted by the expenses associated with the first quarter launching of four new catalogs into those "cross border" countries in which the Company did not have an existing customer base.
Termination of S Corporation Status
Immediately prior to the consummation of the IPO, Global became a successor to the Predecessor Companies. The Predecessor Companies operated as a series of corporations with related ownership, most of which elected to be treated as S Corporations under Subchapter S of the Internal Revenue Code and therefore were subject to minimal Federal and state income taxes. In connection with the consummation of the IPO, the stockholders of the Predecessor Companies exchanged all of the outstanding capital stock of the Predecessor Companies for 28,400,000 shares of Global Common Stock (the "Formation"). Upon the Formation, the Company terminated the S Corporation elections of the Predecessor Companies and accordingly became subject to Federal income taxes on its total earnings. See Note 2 to the Consolidated Financial Statements.
Results of Operations
The following table represents the Company's statement of income data expressed as a percentage of net sales for the three most recent fiscal years:
Year Ended December 31, ----------------------------- 1994 1995 1996 ------ ------ ------ (dollars in millions)
Net sales................................ $484.2 $634.5 $ 911.9 Net sales................................ 100.0% 100.0% 100.0% Gross profit............................. 34.2 31.1 27.4 Selling, general and administrative expenses...... 26.7 22.5 19.8 Income from operations................... 7.5 8.6 7.6 Interest income.......................... 0.2 0.2 0.3 Interest expense......................... 0.4 0.4 0.1 Income taxes............................. 0.2 2.0 3.0 Officer compensation..................... 3.7 0.7 0.0 Net income............................... 3.5 5.6 4.8
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased by $277.4 million or 43.7% to $911.9 million in 1996 from $634.5 million in 1995. The increase was attributable to (i) internal growth fueled by an increase in the number of catalogs mailed (including 8 new catalog titles), an increase in revenue from the Company's outbound telemarketing program and an increased average order value resulting from increased offerings and sales of brand name products and (ii) the inclusion of a full year of sales from Tiger Direct verses one month in 1995. Sales attributable to the Company's North American operations increased 52.1% to $677.8 million in 1996 from $445.7 in 1995 as compared with a 24.0% increase in European sales to $234.1 million in 1996 from $188.8 million in 1995.
Gross profit, which consists of net sales less product and certain shipping and distribution center costs, increased by $52.3 million or 26.5% to $249.6 million in 1996 from $197.3 million in 1995. Gross profit margin decreased to 27.4% in 1996 from 31.1% in 1995. The decrease in gross profit margin was due in part to the inclusion of a full year of sales from Tiger Direct whose product mix has a lower gross profit margin, and the Company's strategic decision to increase the proportion of net sales attributable to brand name products, particularly computer related products and hardware which typically have lower gross profit margins than many of the Company's other products.
A significant portion of this decline in gross profit margin has been offset by the continued decline in selling, general and administrative expenses as a percentage of net sales. While selling, general and administrative expenses increased by $37.1 million or 25.9% to $180.1 million in 1996 from $143.0 million in 1995, as a percentage of net sales they decreased to 19.8% in 1996 from 22.5% in 1995. The decrease as a percentage of net sales was primarily attributable to reduced catalog costs in North America as a result of the increased efficiencies described above under "--Impact of Expansion into Brand Name Products", vendor supported advertising, continued expense control and the leveraging of selling, general and administrative expenses over a larger sales base. As a result of expenses associated with the Company's launching of four new cross border catalogs in the first quarter in Europe, selling, general and administrative expenses as a percentage of net sales for Europe did not decrease significantly. These European cross border catalogs were mailed into countries where the Company did not have an existing customer base and accordingly yielded lower catalog response rates than the Company's other catalogs.
Income from operations increased by $15.2 million or 28.0% to $69.5 million in 1996 from $54.3 million in 1995. Income from operations as a percentage of net sales decreased to 7.6% from 8.6% in 1995 as a result of a $4.6 million decrease in operating profits for Europe and the inclusion of a full year of Tiger which had a lower operating profit margin than the rest of North America.
Interest income increased $1.3 million to $2.5 million in 1996 from $1.2 million in 1995 primarily due to investment in short-term securities.
Interest expense decreased $1.9 million to $0.5 million in 1996 from $2.4 million in 1995 primarily as a result of the repayments of officers/shareholders' notes issued during 1995.
Net income increased $8.0 million or 22.4% to $43.7 million in 1996 as a result of the increase in income from operations described above and a $4.7 million decrease in Officer Compensation and an increase of $15.0 million in income taxes as described in "--Termination of S Corporation Status". Net income increased $10.6 million or 32.0% compared to 1995 pro forma net income of $33.1 million, as described below.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales increased by $150.3 million or 31.0% to $634.5 million in 1995 from $484.2 million in 1994. The increase was attributable to a 7.3% increase in the number of catalogs mailed (including 8 new catalog titles), an increase in revenue from the Company's outbound telemarketing program, a 7.2% increase in catalog response rates and a 13.6% increase in average order value. The Company attributes the increase in catalog response rates (calculated as the number of orders entered during a period divided by the number of catalogs distributed during such period) and the increase in the average order value primarily to increased offerings and sales of brand name products. Sales attributable to the Company's North American operations increased 25.6% to $445.7 million in 1995 from $354.8 in 1994 as compared with a 45.9% increase in European sales to $188.8 million in 1995 from $129.4 million in 1994.
Gross profit, which consists of net sales less product and certain shipping and distribution center costs, increased by $31.6 million or 19.0% to $197.3 million in 1995 from $165.7 million in 1994. Gross profit margin decreased to 31.1% in 1995 from 34.2% in 1994. The decrease in gross profit margin was primarily due to an increase in the proportion of net sales attributable to brand name products, particularly computer related products, which typically have lower gross profit margins than many of the Company's other products. The majority of this decline, however, was offset by the increased efficiencies discussed above under "--Impact of Expansion into Brand Name Products" and vendor supported advertising.
Selling, general and administrative expenses increased by $13.8 million or 10.7% to $143.0 million in 1995 from $129.2 million in 1994. Selling, general and administrative expenses decreased as a percentage of net sales, however, to 22.5% in 1995 from 26.7% in 1994. The decrease as a percentage of net sales was primarily attributable to reduced catalog costs as a result of the increased efficiencies described above under "--Impact of Expansion into Brand Name Products," vendor supported advertising, continued expense control and the leveraging of selling, general and administrative expenses over a larger sales base.
Prior to the closing of the IPO on June 29, 1995, selling, general and administrative expenses excluded officer compensation paid to the Company's three principal stockholders who also serve as the Company's three principal executive officers. Effective upon the closing of the IPO, each of such officers was paid a base salary of $300,000 per year and is not eligible for any increase in salary, any discretionary bonus or any stock options for the two year period following the closing of the IPO. All compensation paid to such officers after the closing of the IPO was included in selling, general and administrative expenses. The increase in selling, general and administrative expenses attributable to such salaries was partially offset, however, by (i) the termination in connection with the IPO of a $500,000 per year consulting agreement entered into in 1992 with a stockholder and (ii) the assignment to the Company in connection with the IPO of certain patents subject to a royalty agreement with the Company's three senior executive officers and principal stockholders pursuant to which the Company recorded $85,000 in royalty expenses during 1995. After giving effect to such adjustments, pro forma selling, general and administrative expenses would have been $143.2 million or 22.6% of net sales in 1995.
Income from operations increased by $17.7 million or 48.6% to $54.3 million in 1995 from $36.5 million in 1994. Income from operations as a percentage of net sales increased from 7.5% to 8.6% for the reasons discussed above. Income from operations on a pro forma basis as described above would have been $54.1 million or 8.5% of net sales in 1995.
Interest income increased to $1.2 million in 1995 from $1.1 million in 1994 primarily due to investment in short-term securities.
Interest expense increased to $2.4 million in 1995 from $1.8 million in 1994 primarily as a result of the interest paid on officers/shareholders' notes issued during 1995.
Net income increased $18.6 million or 108.5% to $35.7 million in 1995 principally as a result of the increase in income from operations described above. Net income on a pro forma basis as described above would have been $33.1 million. The decrease in pro forma net income compared to historical net income primarily reflects the imposition of a higher provision for income taxes resulting from the termination of the S Corporation status of certain Predecessor Companies in connection with the IPO. See "--Termination of S Corporation Status."
Seasonality
The operations of the Company are somewhat seasonal. In particular, net sales have historically been modestly weaker during the second and third quarter as a result of lower business activity during the summer months. The following table sets forth net sales, gross profit and income from operations for each of the quarters since January 1, 1994.
Three Months Ended ----------------------------------------------------- March 31, June 30, September 30, December 31, 1994 1994 1994 1994 -------- -------- ------------- ------------ (dollars in millions)
Net sales................ $114.2 $114.3 $120.7 $135.0 Gross profit............. 40.4 39.8 41.2 44.3 Income from operations... 10.3 7.9 9.4 8.9
Three Months Ended ----------------------------------------------------- March 31, June 30, September 30, December 31, 1995 1995 1995 1995 -------- -------- ------------- ------------
Net sales................ $160.7 $149.4 $153.0 $171.4 Gross profit............. 50.9 45.6 47.5 53.3 Income from operations... 14.7 12.1 12.8 14.7
Three Months Ended ----------------------------------------------------- March 31, June 30, September 30, December 31, 1996 1996 1996 1996 -------- -------- ------------- ------------
Net sales................ $218.7 $213.7 $225.9 $253.6 Gross profit............. 65.0 60.1 60.3 64.2 Income from operations... 18.3 15.5 16.8 18.9
Liquidity and Capital Resources
The Company's primary capital needs have been to fund (i) the working capital requirements necessitated by its sales growth, (ii) acquisitions and (iii) prior to the IPO, distributions to its existing stockholders primarily to satisfy their tax liabilities resulting from the S Corporation status of certain of the Predecessor Companies. The Company's primary sources of financing have been cash from operations and to a lesser extent, bank borrowings and loans from affiliates. The Company believes that its cash flows from operations and available lines of credit will be adequate to support its current operations.
Net cash provided by operating activities was $5.7 million, $11.0 million and $19.6 million in 1994, 1995 and 1996, respectively. The increase from 1994 to 1995 was primarily due to increased working capital as a result of increased sales. The increase from 1995 to 1996 was due to increased working capital as a result of increased sales, improved management of inventory and accounts receivable and reduced levels of unprinted catalog paper in response to stabilizing paper prices.
Net cash used in investing activities in 1994 of $5.5 million was a result of additional capital expenditures of $5.4 million for the acquisition of a distribution center in Scotland, computer equipment and additional furniture and fixtures to accommodate increased staff levels.
Net cash used in investing activities in 1995 of $11.7 million was primarily as a result of the acquisition of Tiger, property and equipment purchases and the repayment of amounts due to affiliates. Net cash used in investing activities in 1996 of $39.8 million was the result of the investment of surplus cash and the acquisition of computer equipment and additional furniture and fixtures at the new Naperville, Illinois facility to accommodate increased staff levels.
Net cash provided by (used in) financing activities was ($1.4) million, $20.2 million and $27.0 in 1994, 1995 and 1996, respectively. The use of funds in 1994 was primarily due to additional bank borrowings to fund stockholder loans to pay taxes.
The source of funds in 1995 was due mainly to the net proceeds of the IPO net of the repayment of officers' notes payable and repayment of bank debt. For 1996 net cash provided by financing activities resulted from the net proceeds from the sale and issuance of 1,000,000 shares of common stock by the Company on March 26, 1996, the repayment of long term bank debt in Europe, the settlement of long term capital leases assumed and the write down of the goodwill resulting from the acquisition of Tiger Direct.
The Company maintains unsecured lines of credit with various financial institutions under which the maximum aggregate amount available is $52.0 million. As of December 31, 1996, the Company had no outstanding borrowings under the lines of credit. The lines of credit bear interest at either the prime rate, LIBOR, plus 0.63% or at the bank's base rate and expire on various dates through December 1997. In addition, the Company may have outstanding letters of credit equal to an amount of the total line less outstanding borrowings. At December 31, 1996 there were no outstanding letters of credit.
The Company also maintains a secured line of credit with a bank with a maximum amount available of Pound Sterling1,000,000. Borrowings, of which there were none as of December 31, 1996, bear interest at the bank's base rate (6 % at December 31, 1996) plus 2% and are secured by substantially all of the assets of the Global's United Kingdom subsidiaries. This line expires in December 1997 and is renewable at Global's option.
The Company anticipates capital expenditures in 1997 of approximately $15 million, which the Company expects to fund out of cash from operations and existing cash and cash equivalents . These capital expenditures are primarily for (i) the relocation and expansion of the Company's sales and distribution centers and (ii) the purchase of computers and other fixed assets.
Recent Pronouncements of the Financial Accounting Standards Board
Recent pronouncements of the Financial Accounting Standards Board ("FASB") include Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which are effective for the fiscal year ended December 31, 1996. The adoption of SFAS 123 and SFAS 121 did not have a material impact on the Company's consolidated financial position or results of operations.
Forward Looking Statements
The Company has made in this report, and from time to time may otherwise make, forward looking statements concerning the Company's operations, economic performance and financial condition. Such forward looking statements are subject to various risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including but not limited to (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 computer related products, office products and industrial products markets from superstores, direct marketers, the Internet and other retailers, (vii) the potential for expanded imposition of state sales taxes or use taxes, or other taxes on mail order 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, and (x) risks due to shifts in market demand and/or price erosion of owned inventory.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 of Part II is incorporated herein by reference to the Consolidated Financial Statements filed with this report; see Item 14 of Part IV.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 of Part III is hereby incorporated by reference from the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders (the "Proxy Statement").
Item 11.
Item 11. Executive Compensation.
The information required by Item 11 of Part III is hereby incorporated by reference from the Company's Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 of Part III is hereby incorporated by reference from the Company's Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 of Part III is hereby incorporated by reference from the Company's Proxy Statement.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) 1. The Consolidated Financial Statements of Global DirectMail Corp (see index to financial statements at).
2. Financial Statement Schedules:
Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
3. Exhibits.
EXHIBIT INDEX Exhibit No. Description _______ ____________________________________________________________________
3.1 Certificate of Incorporation of Registrant*
3.2 By-laws of Registrant*
4.1 Stockholders Agreement**
4.2 Specimen Stock Certificate of Registrant*
10.1 Form of 1995 Stock Option Plan***
10.2 Exchange Agreement dated as of May 8, 1995 between certain stockholders of the Predecessor Companies and the Company*
10.3 Lease Agreement dated October 14, 1992 between the Company and 2 RB Associates Co. (Port Washington facility)*
10.4 Lease Agreement dated September 20, 1988 between the Company and Addwin Realty Associates (Port Washington facility)*
10.5 Lease Agreement dated May 25, 1989 between the Company and Addwin Realty Associates (Suwanee facility)*
10.6 Lease Agreements dated February 1, 1988 between the Company and Addwin Realty Associates (Addison facility)*
10.7 Lease Agreements dated November 1, 1993 between the Company and Delcomp Realty Company (Compton facility)*
10.8 Build-to-Suit Lease Agreement dated April, 1995 among the Company, American National Bank and Trust Company of Chicago and Walsh, Higgins & Company (Naperville facility)*
10.9 Rent Guaranty dated as of October 14, 1992 by the Company to the Bank of New York*
10.10 Royalty Agreement dated June 30, 1986 between the Company and Richard Leeds, Bruce Leeds and Robert Leeds, and Addendum thereto*
10.11 Consulting Agreement dated as of December 22, 1992 between the Company and Paul Leeds*
10.12 Form of 1995 Stock Plan for Non-Employee Directors***
10.13 Consulting Agreement dated as of January 1, 1996 between the Company and Gilbert Rothenberg***
21.1 Subsidiaries of the Registrant***
23.1 Consent of Independent Public Accountants
23.2 Consent of Independent Public Accountants
27 Financial Data Schedule __________
* Incorporated herein by reference to the Company's registration statement on Form S-1 (Registration No. 33-92052).
** Incorporated herein by reference to the Company's quarterly report on Form 10-Q for the quarterly period ended September 30, 1995.
*** Incorporated herein by reference to the Company's registration statement on Form S-1 (Registration No. 333-1852).
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarterly period ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of New York, State of New York, on the 28th day of March, 1997.
GLOBAL DIRECTMAIL CORP
By: /s/ RICHARD LEEDS ..................................... Richard Leeds Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ RICHARD LEEDS Chairman and Chief Executive Officer March 28, 1997 - --------------------- Principal Executive Officer) Richard Leeds
/s/ BRUCE LEEDS Vice Chairman and President of March 28, 1997 - --------------------- International Operations Bruce Leeds
/s/ ROBERT LEEDS Vice Chairman and President of March 28, 1997 - ---------------------- Domestic Operations Robert Leeds
/s/ ROBERT DOOLEY Director and Senior Vice President-- March 28, 1997 - ---------------------- Worldwide Computer Sales and Robert Dooley Marketing
/s/ KENNETH J. HALL Chief Financial Officer March 28, 1997 - ---------------------- (Principal Financial Officer) Kenneth J. Hall
/s/ HOWARD KOHOS Corporate Controller March 28, 1997 - ---------------------- (Principal Accounting Officer) Howard Kohos
/s/ ROBERT D. ROSENTHAL Director March 28, 1997 - ----------------------- Robert D. Rosenthal
/s/ STACY DICK Director March 28, 1997 - ----------------------- Stacy Dick
GLOBAL DIRECTMAIL CORP
Page Global DirectMail Corp ----
Independent Auditors' Report..............................................F-2
Consolidated Balance Sheets-- December 31, 1995 and 1996.............................................F-3
Statements of Consolidated Income-- Years ended December 31, 1994, 1995 and 1996...........................F-4
Statements of Consolidated Shareholders' Equity-- Years ended December 31, 1994, 1995 and 1996...........................F-5
Statements of Consolidated Cash Flows-- Years ended December 31, 1994, 1995 and 1996...........................F-6
Notes to Consolidated Financial Statements.................. through
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of THE GLOBAL DIRECTMAIL CORP:
We have audited the accompanying consolidated balance sheets of Global DirectMail Corp, the successor corporation to the Global Group of Companies (collectively, the "Company"), as of December 31, 1995 and 1996 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years ended December 31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP New York, New York February 5, 1997
GLOBAL DIRECTMAIL CORP
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 (IN THOUSANDS)
Notes 1995 1996 ASSETS ----- -------- -------- - ------ CURRENT ASSETS: Cash and cash equivalents $ 28,477 $ 35,211 Short term investments - 31,031 Accounts receivable, net 1 84,390 111,709 Inventories 71,645 93,033 Prepaid catalog expense 20,467 12,305 Other prepaid expenses and current assets 6,331 7,427 Deferred income tax benefit 8 1,470 3,266 -------- -------- Total current assets 212,780 293,982
PROPERTY AND EQUIPMENT, net 4 17,255 21,878
GOODWILL, net 3 16,125 13,545
DEFERRED INCOME TAX BENEFIT 8 300 -
OTHER ASSETS 1,055 2,034 -------- -------- TOTAL $247,515 $331,439 ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 85,189 $ 99,053 Current portion of long-term debt 6 5,395 495 -------- --------
Total current liabilities 90,584 99,548 -------- --------
LONG-TERM DEBT 6 2,924 2,030 -------- -------- DEFERRED INCOME TAXES 8 - 1,224 -------- -------- COMMITMENTS AND CONTINGENCIES 9 SHAREHOLDERS' EQUITY: 7 Preferred shares - - Common shares 369 379 Additional paid-in capital 138,470 168,356 Retained earnings 14,688 58,392 Cumulative translation adjustment 480 1,510 -------- -------- Total shareholders' equity 154,007 228,637 -------- -------- TOTAL $247,515 $331,439 ======== ========
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
STATEMENTS OF CONSOLIDATED INCOME FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994 1995 1996 -------- -------- --------
NET SALES $484,165 $634,484 $911,893
COST OF SALES 318,429 437,179 662,277 -------- -------- --------
GROSS PROFIT 165,736 197,305 249,616
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 129,204 143,034 180,142 -------- -------- --------
INCOME FROM OPERATIONS 36,532 54,271 69,474
OTHER INCOME (EXPENSE), net 313 (41) (39)
INTEREST INCOME 1,075 1,246 2,470
INTEREST EXPENSE (1,759) (2,394) (521)
PROVISION FOR INCOME TAXES (909) (12,655) (27,680)
OFFICERS'/SHAREHOLDERS' COMPENSATION (18,124) (4,707) - -------- -------- --------
NET INCOME $ 17,128 $ 35,720 $ 43,704 ======== ======== ========
NET INCOME PER COMMON SHARE$ 1.15 ======== Weighted average common and common equivalent shares outstanding 38,129 ======== Pro Forma Income Data (unaudited) Historical income before income taxes $ 18,037 $ 48,375 Pro forma other adjustments 17,833 5,684 -------- -------- Pro forma income before income taxes 35,870 54,059 Pro forma income taxes 13,989 21,008 -------- -------- Pro forma net income $ 21,881 $ 33,051 ======== ======== Pro forma net income per common share $ 0.65 $ 0.93(1) ======== ======== Pro forma weighted average common and common equivalent shares outstanding 33,807 35,499(1) ======== ========
(1) If the common shares outstanding after the initial public offering in June 1995 were outstanding for the entire 1995 year, then pro forma net income per share for 1995 would have been $0.90 (see Note 2).
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
[CAPTION]
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS) [CAPTION]
See notes to consolidated financial statements.
GLOBAL DIRECTMAIL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying consolidated financial statements include the accounts of Global DirectMail Corp and its wholly-owned subsidiaries (collectively, the "Company" or "Global").
Global DirectMail Corp is the successor to several corporations, previously referred to as the Global Group, which were owned by related shareholders. In connection with the consummation of an initial public offering in June 1995 (the "IPO"), the stockholders of these predecessor companies exchanged all of the outstanding capital stock for 28,400,000 common shares of Global DirectMail Corp and the predecessor companies terminated their elections to be treated as S Corporations. This transaction was accounted for as if it were a pooling of interests.
In addition to this exchange, notes aggregating $97.8 million, which were issued by certain of the predecessor companies to the shareholders, representing S Corporation earnings and tax basis through the date of the closing of the IPO discussed below, were paid. Such payment was made net of $10.6 million of notes receivable from officers/shareholders and loans made to officers/shareholders of $1.2 million. In addition, all affiliated indebtedness which existed at that time was satisfied. On June 29, 1995, Global completed the IPO of 8,308,750 shares at $17.50 per share. On March 26, 1996 the Company sold 1,000,000 shares of common stock at $32.25 per share.
Description of Businesses - The Company is involved in the marketing and sale of computer related products, office products and industrial products, through the distribution of mail order catalogs and a network of outbound telemarketers.
Principles of Consolidation - All significant intercompany accounts and transactions have been eliminated in consolidation. The foreign subsidiaries' financial statements have been adjusted, when necessary, to conform to accounting principles generally accepted in the United States of America.
Cash and Cash Equivalents - The Company considers amounts held in money market accounts and other short-term investments with an original maturity date of approximately three months or less to be cash equivalents.
Accounts Receivable - The amounts shown in the consolidated balance sheets are shown net of allowances for doubtful collections and subsequent customer returns of approximately $7,731,000 and $7,724,000 at December 31, 1995 and 1996, respectively. The changes in these reserve accounts are summarized as follows (in thousands):
Years ended December 31, --------------------------------- 1994 1995 1996 -------- -------- --------
Balance, beginning of year......... $ 5,367 $ 4,598 $ 7,731 Charged to expense................. 3,330 4,178 2,745 Reductions, principally write-offs. (4,099) (1,045) (2,752) Balance, end of year............... $ 4,598 $ 7,731 $ 7,724
Inventories - Inventories consist of finished goods and are stated at the lower of cost or market value. Cost is determined by using the first-in, first-out method.
Prepaid Catalog Expense - Prepaid catalog expense includes unused paper and reflects the costs of producing and distributing catalogs which are deferred and charged to expense over the period that each catalog remains the most current selling vehicle (generally three months). Vendors place advertisements in the catalogs for which the Company receives advertising allowances and incentives. These revenues are recognized on the same basis as catalog costs.
Property and Equipment - Property and equipment is stated at cost. Depreciation of furniture, fixtures and equipment is on the straight line or accelerated method over their estimated useful lives ranging from three to eight years. Depreciation of the building is on the straight line method over its estimated useful life of 50 years. Leasehold improvements are amortized over the lessor of their useful lives or the term of the lease.
Income Taxes - Under the provisions of the Internal Revenue Code, several of the predecessor companies had elected to be treated as S Corporations. Accordingly, Federal and, where applicable, certain state income taxes were included in the respective shareholders' individual tax returns until such time as the predecessor companies completed the IPO. Income taxes for the predecessor companies were recorded where appropriate. Since that time, the predecessor companies have all become taxable entities (see Note 8).
Foreign Currency Translation - The financial statements of the foreign entities are translated into U.S. dollars, the reporting currency, using year-end exchange rates for consolidated balance sheet items and average exchange rates for the consolidated statements of income items. The translation differences are recorded directly in the consolidated statement of shareholders' equity.
Foreign Currency Transactions - Transactions in foreign currencies are recorded at the exchange rate in effect at the transaction date. Realized and unrealized exchange gains and losses during the year are included in the respective year's consolidated statements of income.
Sales Recognition - Sales of products are recognized at the time of shipment. A reserve is recorded for returns based upon historic trends.
Research and Development Costs - Costs incurred in connection with research and development are expensed as incurred. Such expenses for each of the three years ended December 31, 1994, 1995 and 1996 aggregated approximately $515,000, $443,000 and $573,000, respectively.
Goodwill and Negative Goodwill - Goodwill of $19.4 million at December 31, 1996 arose from the 1995 acquisition of Tiger Direct, Inc. (see Note 3) and is shown net of negative goodwill which arose as a result of acquisitions made in prior years. Goodwill and negative goodwill are being amortized over 35-year and 10-year periods, respectively.
Use of Estimates In Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Net Income Per Share - Net income per share in 1996 was calculated based upon the weighted average number of common shares outstanding and include the equivalent shares for dilutive options outstanding during 1996.
Reclassifications - Certain amounts in prior years have been reclassified to conform to the 1996 presentation.
2. PRO FORMA INFORMATION (UNAUDITED)
Pro Forma Income Adjustments
The pro forma income data for the years ended December 31, 1994 and 1995 present the effects on the historical consolidated financial statements of certain transactions related to the IPO as if they occurred as of the beginning of such periods, including (1) reduced levels of compensation and royalty payments to officers/shareholders, (2) the elimination of $500,000 per year of compensation paid to a shareholder pursuant to a consulting agreement entered into in 1992 which terminated in connection with the IPO, (3) the elimination of interest paid on officers/shareholders notes in 1995, and (4) the provision for income taxes to eliminate the benefit, for income tax purposes, of the predecessor companies with S Corporation status.
Payments to Officers/Shareholders - An adjustment has been made to eliminate (1) compensation paid to the Company's three principal officers/shareholders in excess of $300,000 each per annum, (2) interest paid to officers/shareholders on notes in 1995, and (3) royalty expenses paid to the Company's three principal officers/shareholders aggregating approximately $109,000 and $85,000 for the years ended December 31, 1994 and 1995, respectively, under a royalty agreement. Such patents were assigned to Global DirectMail Corp and the royalty agreement was terminated in connection with the IPO.
Income Taxes - Immediately prior to the closing of the IPO, each of the predecessor companies with S Corporation status terminated such status. The pro forma adjustment reflects increased provisions for income taxes to an effective rate of approximately 39 percent. While this effective rate represents the pro forma tax rate based on historic earnings trends in the respective tax jurisdictions and results through December 31, 1995, this rate will change in the future in accordance with such trends as tax credits currently available are fully utilized.
Pro Forma Net Income Per Common Share
Pro forma net income per common share prior to the completion of the IPO was based on the number of shares of common stock to be outstanding after the exchange and additionally includes only the number of shares (calculated at the assumed initial public offering price) that were used in the IPO to repay the various notes and related party payments (see Note 5).
Pro forma net income per share for the year ended December 31, 1995 was calculated based on the weighted average number of shares outstanding plus the effect of 201,400 options assumed outstanding. Pro forma net income per share for the year ended December 31, 1994 was calculated based on 33,807,000 shares outstanding during the entire year.
3. ACQUISITIONS
On November 30, 1995, Global acquired Tiger Direct, Inc. ("Tiger") from unrelated third party sellers. Tiger was purchased for aggregate consideration of $5.8 million, representing cash of $1.1 million, the issuance of approximately 148,000 Global common shares, and purchase related expenses of $0.6 million. The acquisition has been accounted for under the purchase method of accounting. As required by the purchase method, assets were recorded at their fair market value, which approximated cost, and liabilities of $21.5 million were assumed at fair value. At December 31, 1995, the Company recorded the purchase price in excess of the fair value of the net assets acquired as goodwill. The estimated fair values were further evaluated by the Company during 1996 and, as a result, goodwill from this transaction was reduced by approximately $3.1 million. The Company will periodically evaluate the carrying value of goodwill using undiscounted cash flows. While the Company intends to make all efforts to effectively assign a value to other intangibles no value has been attributed to intangible assets other than goodwill.
The unaudited pro forma results of operations of the Company, including the pro forma effect as if Tiger had been acquired as of January 1, 1994 are as follows (in thousands, except earnings per share):
Years ended December 31, --------------------------- 1994 1995 -------- --------
Net Sales.............................. $ 574,402 $ 721,816 Net income from continuing operations.. $ 15,590 $ 20,491 Earnings per share..................... $ 0.46 $ 0.58
The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of the periods presented or future operating results of the Company.
During 1994, the Company acquired the assets of two separate businesses, Power UP! and SN Option PC S.A.R.L. for aggregate consideration of approximately $800,000. The effect of such acquisitions on the Company's operating results, actual or pro forma for 1994 or 1995, were not material.
4. PROPERTY AND EQUIPMENT, net
Property and equipment, net consists of the following (in thousands):
December 31, --------------------------- 1995 1996 -------- --------
Land and building...................... $ 3,932 $ 5,226 Furniture and fixtures, office and warehouse equipment.................. 21,485 27,273 Leasehold improvements................. 2,929 3,990 Transportation equipment............... 1,271 1,555 ------- ------- 29,617 38,044 Less accumulated depreciation and amortization......................... 12,362 16,166 ------- ------- Net Property and Equipment... $17,255 $21,878 ======= =======
5. RELATED PARTY TRANSACTIONS
All amounts receivable from and/or payable to related parties and affiliates at December 31, 1994, net of activity through June 29, 1995, were satisfied from the proceeds of the IPO (see Note 1).
The Company leases several warehouse and office facilities from affiliates (see Note 9). Rent expense under those leases aggregated $2,497,000, $2,366,000 and $2,130,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
6. LONG-TERM DEBT
Long-term debt consist of the following (in thousands):
December 31, --------------------------- 1995 1996 -------- -------- Unsecured lines of credit (a).......... $ - $ - Secured lines of credit (b)............ - - Foreign denominated term loan subsequently repaid 4,647 - Foreign denominated secured loan (c)... 1,860 2,030 Capitalized lease obligations.......... 1,812 17 ------- ------- Total.................................. 8,319 2,047 Less: current maturities............... 5,395 17 ------- ------- Long-Term Debt......................... $ 2,924 $ 2,030 ======= =======
At December 31, 1996, the aggregate maturities of notes payable are as follows (in thousands):
Year Ending December 31, Amount ------------------------ ------
1997........................................... $ 17 1998........................................... - 1999........................................... 2,030 ------ Total Notes Payable............................ $2,047 ======
(a) The Company maintains lines of credit with various financial institutions. The maximum aggregate amounts available under these lines of credit were $32 million and $52 million at December 31, 1995 and 1996. No amounts were outstanding under these lines at December 31, 1996. These lines accrue interest at variable rates of either the prime rate or LIBOR plus 63 basis points. The prime rate and LIBOR were 8.25 percent and 5.5 percent, respectively, at December 31, 1996. These lines expire on various dates through December 1997.
Associated with the lines of credit, the Company may have outstanding letters of credit equal to the amount of the total line less outstanding borrowings. At December 31, 1996 there were no outstanding letters of credit.
(b) The Company maintains a secured line of credit with a bank with a maximum amount available of Pound Sterling1,000,000. Borrowings, of which there were none as of December 31, 1995 and 1996, bear interest at the bank's base rate (6 % at December 31, 1996) plus 2% and are secured by substantially all of the assets of the Global's United Kingdom subsidiaries. This line expires in December 1997 and is renewable at Global's option.
(c) In May 1994, a subsidiary of the Company entered into a mortgage agreement ("Mortgage") in the amount of Pound Sterling1,200,000 due in its entirety in June 1999, with interest payable semi-annually at a rate of 9.6 percent per annum. The Mortgage is secured by land and building with an aggregate net book value of Pound Sterling2,479,000 at December 31, 1996. The Mortgage contains certain covenants calling for timely reporting of financial information, restrictions on changes in ownership and employment levels by such subsidiary.
7. SHAREHOLDERS' EQUITY
At December 31, 1996, there were 25,000,000 shares of preferred stock, $0.01 par value, of which none were issued. Common stock at such date consisted of 150,000,000 shares authorized, par value of $0.01 per share, of which 37,856,990 were issued and outstanding.
Prior to the IPO, the consolidated common stock and additional paid-in capital on a company-by-company basis at December 31, 1994 were as follows (in thousands):
Additional Paid- In Common Stock Capital ------------ ---------- Continental Dynamics Corp. ("Continental") - 9,000 non-voting shares and 1,000 voting shares authorized, 6,116 and 998 outstanding, respectively..................... $ 19,703 $ -
Systemax Incorporated - 200 shares authorized, 174 outstanding............................... 87 9,634
Dartek Corporation - 300 shares authorized and outstanding - 4,891
Misco America, Inc. - 99 shares authorized, 3 outstanding - 3
HCS Global, Ltd. - 869,000 shares authorized, 793,333 outstanding........................... 1,201 11
Misco Germany, Inc. - 99 shares authorized, 3 outstanding................................. 18 -
Misco Italy Computer Supplies, S.p.A. -6 million shares authorized and outstanding.. 3,715 -
Other entities - 5,401 shares authorized, 3,117 outstanding............................. 210 - -------- -------- $ 24,934 $ 14,539 ======== ========
As required by law, certain foreign subsidiaries must retain a percentage of shareholders' capital in the respective company. Accordingly, a portion of retained earnings is restricted and not available for distribution to shareholders. Such amount at December 31, 1996 was not material.
Continental issued 1,523 shares of non-voting shares of common stock during 1994. Such issuance was made as compensation to the Company's three principal officers/shareholders. Continental determined the fair value of the shares issued to be $6,000,000.
Stock Option Plans - The Company has two fixed option plans which reserve shares of common stock for issuance to key employees, directors, consultants and advisors to the company. The following is a description of these plans:
The 1995 Long-Term Stock Incentive Plan - This plan empowers the Company to award or grant from time to time non qualified and deferred compensation stock options, stock appreciation rights ( SAR's), restricted stock and restricted unit grants, performance unit grants and other stock based awards authorized by the Compensation Committee of the Board of Directors. Options issued under this plan expire ten years after the options are granted and generally become exercisable ratably on the third, fourth, and fifth anniversary of the grant date. A maximum total number of 2,000,000 shares may be granted under this plan of which a maximum of 800,000 shares may be of restricted stock and restricted stock units. No award shall be granted under this plan after December 31, 2005. A total of 1,192,500 options were outstanding under this plan as of December 31, 1996.
The 1995 Stock Option Plan for Non-Employee Directors - This plan provides for awards of non qualified options to directors of the company who are not employees of the Company or its affiliates. All options granted under this plan will have a ten-year term from grant date and are immediately exercisable. A maximum of 100,000 shares may be granted for awards under this plan. This plan will terminate the day following the tenth annual stockholders meeting. A total of 14,000 options were outstanding under this plan as of December 31, 1996.
The Company accounts for these plans in accordance with Accounting Principles Board Opinion No. 25, under which no compensation costs have been recognized for stock options. Had compensation costs of the plans been determined under a fair value alternative method as stated in Statement of Financial Accounting Standards No. 123, "accounting for stock-based compensations," the company would have prepared a fair value model for such options and recorded such amount in the accompanying Financial Statements as compensation expense. On a pro forma basis, net income for 1996 and 1995 would have been $42.3 million and $32.6 million respectively and earnings per share for 1996 and 1995 would have been $1.11 and $0.92 respectively. The Company arrived at the fair value of stock grant at the date of the grant by using the Black-Scholes pricing option model with the following assumptions used for grants: risk-free interest rate of 6.1%;w expected dividend rate of 0%; expected level of 4 years; and expected volatility of 35%. The weighted average stock options at December 31, 1996 have a weighted average contractual level of 8.82 years.
The following reflects activity for 1996 in these plans:
Options For Shares Option Prices ---------- -----------------
Outstanding, January 1, 1996............ 865,500 - Granted during 1996..................... 365,150 $27.19 to $49.13 Terminated during 1996.................. (24,150) $17.50 to $39.50 Exercised during 1996................... - - --------- ---------------- Outstanding, December 31, 1996.......... 1,206,500 $17.50 to $49.13 =========
The following table summarizes information as of December 31, 1996 concerning currently outstanding and exercisable options:
1995 1996 ------------------------ -------------------------- Weighted- Weighted Average Average Fixed Options Shares Exercise Price Shares Exercise Price - ------------- ------- -------------- -------- ---------------
Outstanding at beginning of year - - 865,500 $ 20.49 Granted............ 876,900 $ 20.45 365,150 $ 36.80 Exercised.......... - - - - Forfeited.......... (11,400) $ 17.50 (24,150) $ 19.39 ------- --------- Outstanding at end of year.......... 865,500 $ 20.49 1,206,500 $ 25.45 ======= =========
Options exercisable at year end...... 10,000 139,000 Weighted average fair value per option granted during the year.. $ 7.05 $ 13.57
Weighted Number Average Weighted Weighted Range of Outstanding Remaining Average Number Average Exercise at Contractual Exercise Exercisable Exercise Price 12/31/96 Life Price at 12/31/96 Price -------- ----------- ----------- -------- ----------- -------- $17.50 to $22.50 555,150 8.48 $17.54 5,000 $21.56 $22.51 to $30.00 347,750 8.74 $26.73 130,000 $26.87 $30.01 to $40.00 294,600 9.52 $38.13 4,000 $39.06 $40.01 to $49.13 9,000 9.83 $49.13 - - --------- ------- $17.50 to $49.13 1,206,500 8.82 $25.45 139,000 $27.03 ========= =======
8. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Years Ended December 31, ------------------------------- 1994 1995 1996 ------ ------ ------ Current: Federal........................... $ - $10,400 $23,140 State............................. 855 1,895 3,787 Foreign........................... (157) 2,319 1,038 Deferred.......................... (837) (369) (865) Change in valuation allowance..... 1,048 (1,590) 580 ------ ------- ------- Total............................. $ 909 $12,655 $27,680 ====== ======= =======
Prior to the IPO, a number of the predecessor companies were S Corporations and accordingly their income was not taxable for Federal and certain state tax purposes. Subsequent to the IPO, all of the former S Corporations terminated such status and accordingly became taxable entities thereafter. Income taxes are accrued and paid by each foreign entity in accordance with applicable local regulations. The difference between the income tax expense and the computed income tax based on the Federal statutory corporate rate is as follows (in thousands):
Year Ended December 31, ------------------------------- 1994 1995 1996 ------ ------ ------
Federal statutory rate...................... $ 6,313 $16,931 $24,984 State and local income taxes, net of Federal tax benefit........................ 855 1,001 2,456 Foreign tax.................................. 1,040 2,778 (175) Foreign source income........................ (3,065) (2,685) (573) Increase (reduction) in valuation allowance.. 1,048 (923) 580 Net operating loss utilized.................. - - 335 Other items, net............................. - - 73 Federal, state and local tax benefit of S Corporation status......................... (5,282) (4,447) - ------- ------- ------- $ 909 $12,655 $27,680 ======= ======= =======
The deferred tax assets (liabilities) at December 31, 1995 and 1996 are comprised of the following:
Years Ended December 31, ------------------------- 1995 1996 ------ ------
Current: Deductible assets......................... $ (3,580) $(2,542) Non-deductible accruals and reserves...... 3,870 4,244 Non-deductible assets..................... 780 826 Foreign net operating loss carryforwards.. 140 1,027 Other..................................... 260 (289) -------- ------- Current................................. 1,470 3,266 -------- ------- Non-Current: Foreign net operating loss carryforwards.. 1,320 1,712 Accelerated depreciation.................. (920) (1,441) Basis differences from acquisitions....... 440 356 Other assets.............................. 50 (332) Valuation allowances...................... (590) (1,519) -------- ------- Non-Current............................. 300 (1,224) -------- ------- Total................................. $ 1,770 $ 2,042 ======== =======
The foreign net operating loss carryforwards generally expire at dates through 2003. The Company maintains valuation allowances against its foreign net operating loss carryforwards since, at the this time, the realizability of the related deferred tax benefits can not be reasonably assured.
9. COMMITMENTS AND CONTINGENCIES
Leases - The Company is obligated under operating lease agreements for the rental of certain office and warehouse facilities and equipment which expire at various dates through October 2013.
At December 31, 1996 future minimum annual lease payments for related and third-party leases were as follows (in thousands):
Year Ending December 31, Related Party Third Party Total ------------------------ ------------- ----------- -------
1997.......................... $ 1,920 $ 3,309 $ 5,229 1998.......................... 1,872 3,131 5,003 1999.......................... 1,122 2,889 4,011 2000.......................... 612 1,706 2,318 2001.......................... 612 1,339 1,951 2002-2006..................... 3,060 6,493 9,553 2007-2011..................... 510 4,796 5,306 Thereafter.................... - 352 352 ------- ------- ------- $ 9,708 $24,015 $33,723 ======= ======= =======
Rent expense for the years ended December 31, 1994, 1995 and 1996 aggregated approximately $4,869,000, $5,235,000 and $7,406,000, respectively.
Guarantees - The Company has guaranteed a mortgage obtained by an affiliate ($2.5 million at December 31, 1996) relating to property which the Company leases from the affiliate. Additionally the Company's U.K. subsidiaries have granted a security interest for substantially all of their assets to secure a line of credit with a U.K. financial institution.
Litigation - The Company has been named defendant in lawsuits incidental to their businesses. Management of the Company, based on discussions with legal counsel, believes the ultimate resolution of these lawsuits will not have a material effect on the Company's consolidated financial position or results of operations.
Contingency - The Company is required to collect sales tax on certain of its out-of-state sales. In accordance with current law, 20% of the Company's 1996 domestic sales were subject to sales tax. A change in this law could require the Company to collect sales tax in additional states.
Sales by the Company to government agencies are subject to certain government regulations. Inadvertent failure to comply with such regulations can result in significant penalties. While the Company has never paid any such penalties to date, there can be no assurances that penalties will not be levied in the future.
10. GEOGRAPHIC INFORMATION
The Company conducts its business in North America (the United States and Canada) and Europe. The following sets forth the Company's operations in their two geographic markets (in thousands):
Year ended December 31, 1994 ---------------------------------------- Europe North America TOTAL ---------- ------------- --------
Net Sales....................... $ 129,390 $354,775 $484,165 Income from operations.......... 4,341 32,191 36,532 Identifiable assets............. 50,589 113,578 164,167
Year ended December 31, 1995 ---------------------------------------- Europe North America TOTAL ---------- ------------- --------
Net Sales....................... $ 188,765 $445,719 $634,484 Income from operations.......... 8,846 45,425 54,271 Identifiable assets............. 66,369 181,146 247,515
Year ended December 31, 1996 ---------------------------------------- Europe North America TOTAL ---------- ------------- --------
Net Sales....................... $ 234,078 $677,815 $911,893 Income from operations.......... 4,224 65,250 69,474 Identifiable assets............. 78,490 252,949 331,439
11. OTHER MATTERS
Employee Benefit Plans - Certain of the U.S. subsidiaries participate in defined contribution compensatory 401(k)/profit sharing benefit plans covering such eligible employees as defined by the plan document. Contributions to the plan by the Company is determined as a percentage of the employees' contributions. Aggregate expense to the Company for contributions to such plans was approximately $274,000, $211,000 and $267,000 in the years ended December 31, 1994, 1995 and 1996, respectively.
Certain foreign entities require amounts to be accrued for each employee's retirement, determined in accordance with labor laws and labor agreements in effect in the respective country. Liabilities relative to such termination indemnities were not material.
Foreign Exchange Risk Management - The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. The Company enters into foreign currency options or forward exchange contracts to hedge certain foreign currency transactions. The intent of this practice is to minimize the impact of foreign exchange rate movements on the Company's operating results. As of December 31,1996, the Company had outstanding options in the amount of Pound Sterling 1.0 million.
Fair Value of Financial Instruments - Financial instruments consist primarily of investments in cash, trade account receivables, accounts payable and debt obligations. The Company estimates the fair value of financial instruments based on interest rates available to the Company and by comparison to quoted market prices. At December 31, 1995 and 1996, the fair value of the Company's financial instruments approximated their carrying values.
Concentration of Credit Risk - Concentrations of credit risk with respect to trade account receivables are limited due to the large number of customers comprising the Company's customer base. Ongoing credit evaluations of customer's financial condition are performed.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1995 and 1996 is as follows:
First Second Third Fourth 1995: Quarter Quarter Quarter Quarter - ---- --------- --------- --------- ---------
Net Sales.................. $160,685 $149,443 $152,949 $171,407 Gross Profit............... $ 50,934 $ 45,590 $ 47,498 $ 53,283 Net Income: Pro forma................ $ 8,703 $ 7,191 Actual................... $ 7,940 $ 9,217 Net Income Per Share: Pro forma................ $ 0.26 $ 0.20 Actual................... $ 0.22 $ 0.25
First Second Third Fourth 1996: Quarter Quarter Quarter Quarter - ---- --------- --------- --------- ---------
Net Sales.................. $ 218,732 $213,707 $225,868 $253,586 Gross Profit............... $ 65,021 $ 60,070 $ 60,313 $ 64,212 Net Income................. $ 11,392 $ 9,787 $ 10,683 $ 11,842 Net Income Per Share....... $ 0.31 $ 0.26 $ 0.28 $ 0.31
Prior to the third quarter of 1995, the Company had disclosed net income and net income per share on a pro forma basis, the latter having been determined based on the weighted average number of shares and share equivalents outstanding.
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