SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number:
1-13792
------------------------
GLOBAL DIRECTMAIL CORP
(Exact name of registrant as specified in its charter)
DELAWARE 11-3262067
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
22 HARBOR PARK DRIVE
PORT WASHINGTON, NEW YORK 11050
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 625-1555
---------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock, par value $ .01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of the registrant, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 5, 1999 was approximately $142,834,000. For purposes
of this computation, all executive officers and directors of the Registrant and
all parties to the Stockholders Agreement dated as of June 15, 1995 have been
deemed to be affiliates. Such determination should not be deemed to be an
admission that such persons are, in fact, affiliates of the Registrant.
The number of shares outstanding of the registrant's common stock, as of
March 5, 1999, was 36,089,995 shares.
Documents incorporated by reference: The definitive Proxy Statement of
Global DirectMail Corp relating to the 1999 Annual Meeting of Stockholders is
incorporated by reference in Part III hereof.
<PAGE>
TABLE OF CONTENTS
Part I
Item 1. Business............................................................1
General.........................................................1
Recent Developments.............................................2
Products........................................................2
Sales and Marketing.............................................3
Distribution Centers............................................5
Suppliers.......................................................6
Management Information Systems..................................6
Research and Development........................................7
Competition.....................................................7
Employees.......................................................9
Environmental Matters...........................................9
Financial Information About Foreign and Domestic Operations.....9
Item 2. Properties.......................................................10
Item 3. Legal Proceedings................................................11
Item 4. Submission of Matters to a Vote of Security Holders..............11
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................11
Item 6. Selected Financial Data..........................................12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......22
Item 8. Financial Statements and Supplementary Data .....................22
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................22
Part III
Item 10. Directors and Executive Officers of the Registrant...............22
Item 11. Executive Compensation...........................................22
Item 12. Security Ownership of Certain Beneficial
Owners and Management.........................................22
Item 13. Certain Relationships and Related Transactions...................23
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.......................................23
Signatures........................................................26
<PAGE>
PART I
UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN TO "GLOBAL DIRECTMAIL
CORP" ("GLOBAL" OR THE "COMPANY") INCLUDE ITS SUBSIDIARIES.
ITEM 1. BUSINESS.
GENERAL
Global is a direct marketer of both private label and brand name personal
desktop computers ("PCs"), notebook computers, computer related products, office
products and industrial products in North America and Europe. The Company also
assembles its own PCs, primarily on a "build to order" basis, and sells them
under the trademarks MIDWEST MICRO(R), SYSTEMAX(TM), Tiger(R) AND Ultra(TM). The
Company features a broad selection of products, extensive customer service and
prompt order fulfillment. 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 31% to $1.44 billion in 1998 from $484.2 million in 1994. During
this same period, income from operations increased at a compound annual growth
rate of 15% from $36.2 million to $64.3 million. Computers and computer related
products accounted for 84% of the Company's net sales in 1998.
Global markets its products through an integrated system of distinctively
branded, full color direct mail catalogs, proprietary "e-commerce" Internet
sites and personalized "relationship marketing" to business customers. The
Company targets individuals at major account customers (more than 1,000
employees), mid-sized customers (20 to 1,000 employees), small office/home
office customers ("SOHO") and value added resellers ("VARs"). VARs select,
install and maintain PCs and networks for business customers who do not have
their own computer technicians. The Company's portfolio of catalogs includes
such established brand names as GLOBAL(TM), MISCO(R), HCS GLOBAL(TM), HCS
MISCO(TM), ArrowStar(TM), DARTEK(R), POWER UP!(R), TIGER(R), 06(TM), MIDWEST
MICRO(TM) and Infotel(TM). Catalog mailings increased from approximately 98
million catalogs comprising 18 different titles in 1993 to approximately 179
million catalogs comprising 44 different titles in 1998. The Company currently
has 18 e-commerce web sites and in 1998 generated over $28 million in unassisted
Internet sales. At December 31, 1998, the Company had 1.8 million "active"
customers (defined as individuals who have purchased from the Company within
the preceeding 12 months) and combined customer and prospect files of more than
45 million names.
The Company operates in nine locations in North America. The Company's
North American operations accounted for 78% of net sales in 1998. For some of
the Company's operations, certain functions, such as merchandising, marketing,
purchasing and information systems, are performed centrally.
European operations, which represented 22% of net sales for 1998, are
generated from eight sales and distribution centers located across Europe: one
each in England, Scotland, France, Germany, Italy, Spain, the Netherlands and
Sweden.
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 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.
The strategic locations in Europe have enabled the Company to market into four
additional countries with limited incremental investment. The Company also
maintains relationships with a number of distributors that deliver products
directly to customers.
RECENT DEVELOPMENTS
ACQUISITIONS
During the first quarter of 1998, the Company acquired the net assets of
Zachary Software Inc., a direct marketer of computer software in the United
States. At the end of the third quarter the Company acquired Dabus Dataprodukter
AB, a Swedish direct marketer of computers and computer related products. With
the acquisition of Dabus, the Company markets to 12 European countries. In
February 1999 the Company acquired Simply Computers Limited ("Simply") of
London, England. Simply is a privately held computer products and Internet
marketer which also assembles private label PCs. Simply had approximately $100
million in total net sales in 1998 including $20 million in Internet sales. See
Footnotes 2 and 10 to the Consolidated Financial Statements.
EZBID
In September 1998 the Company formed a new subsidiary, EZBid, Inc. EZBid
sells PC's, PC accessories, software, data com products, and consumer products
through an Internet auction site located at WWW.EZBID.COM. The EZBid.com site
gives shoppers the opportunity to purchase limited quantity, new and refurbished
merchandise by bidding through the Internet. New merchandise is added to the
site daily. When an auction is in progress, shoppers are notified by e-mail when
they have been out-bid, allowing them to return to the site to bid again, until
the auction closes.
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. In total, Global offers
over 40,000 brand name and private label products.
Computer sales include a wide array of private label PCs complimented with
offerings of popular brand named PCs and notebook computers. The Company's
computer related products include: supplies such as laser printer toner
cartridges, ink jet printer cartridges, and paper; media such as floppy disks
and magnetic tape cartridges; peripherals such as hard disk drives, printers and
scanners; memory upgrades; data communication and networking equipment;
ergonomic accessories such as adjustable monitor support arms and anti-glare
screens; and packaged software.
The Company's industrial product lines focus primarily on storage equipment
such as metal shelving, bins, lockers, light material handling equipment such as
hand carts and hand trucks and consumable industrial products such as first aid
items, safety items, protective clothing and OSHA compliance items. Office
products include furniture, chairs, small office machines and related supplies.
The table below summarizes the Company's mix of sales by product category:
PRODUCT TYPE - YEAR ENDED DECEMBER 31 (PERCENTAGE OF TOTAL SALES)
1998 1997 1996
---- ---- ----
Computer and Computer Related Products ........... 84% 80% 75%
Industrial Products and Office Products............ 16 20 25
-- -- --
Total ............................................. 100% 100% 100%
=== === ===
Historically, the Company focused primarily on non-branded or private label
products. In 1993 the Company expanded its offerings of brand name computer
related products, including peripherals, data communications and networking
equipment, software and supplies. In 1995 the Company further expanded its
offering of brand name products to include notebooks, desktops and servers. In
addition, in 1997 the Company entered the "build to order" PC market through the
acquisition of Infotel, Inc. (now Midwest Micro Corp.). In 1998 the Company
focused its efforts on the expansion of its "build to order" PC business by
substantially increasing its PC assembly capacity at Midwest Micro's facility.
These strategies have impacted the Company's overall gross profit margin
percentages as sales of PCs typically have lower gross profit margin percentages
than many of the Company's other products. A significant amount of this decrease
in gross profit margin has been offset by reduced catalog production costs
resulting from increased levels of vendor supported advertising, improved
catalog management, and increased cost efficiencies.
SALES AND MARKETING
Global has established an integrated three-prong system of direct marketing
designed to maximize sales. The Company's traditional method of frequent catalog
mailings generating inbound telephone sales has been complemented by more
personalized "relationship marketing" to larger business customers and the
availability of interactive Company web sites which allow customers to purchase
products directly over the Internet. The Company believes that the integration
of these marketing methods will enable it to more thoroughly penetrate the
customer base. Increased Internet exposure, for example, should lead not only to
more Internet sales but can also generate more inbound telephone sales; and
catalog mailings which feature the Company's web sites can result in greater
Internet sales.
CATALOGS
The Company produces a total of 44 "full-line" and targeted specialty
catalogs under distinct titles. "Full-line" computer product catalogs offer
products such as PCs and hardware, peripherals, magnetic media, data
communication, networking and power protection equipment, ergonomic accessories,
furniture and software. "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. Global mails 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, with 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.
During 1998, the Company distributed approximately 179 million catalogs of
which approximately 144 million catalogs were mailed in North America and
approximately 35 million catalogs were distributed in Europe. At December 31,
1998, the Company had 1.8 million "active" customers (defined as individuals
who 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 Company calculates response rate as the total number of orders
entered for the period divided by total catalogs mailed for the same period. The
following table shows the approximate number of catalogs distributed by the
Company and the catalog response rates:
CATALOGS DISTRIBUTED
(IN MILLIONS EXCEPT RESPONSE RATES) 1998 1997 1996
----------------------------------- ---- ---- ----
North America.............................. 144 125 120
Europe..................................... 35 37 40
-- -- --
Total...................................... 179 162 160
=== === ===
Response rates............................. 2.14% 2.18% 2.12%
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 by third parties under
fixed pricing arrangements. In-house catalog production helps reduce overall
catalog expense and shortens catalog production time. This allows the Company
the flexibility to alter its product offerings and pricing and to refine its
catalog formats more quickly.
INBOUND SALES
Global's catalogs generate calls to the inbound sales group. Sales
representatives use the capabilities of the Company's systems to fulfill orders
and explore additional customer product needs. Each sales representative has
immediate access to customer files, including usage and billing information, and
real-time inventory levels by distribution center. Using this data, inbound
sales 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.
RELATIONSHIP MARKETING
The Company's relationship marketing program focuses on expanding
penetration of large and mid-sized businesses by establishing a personal
relationship between such customers and a designated Global account manager. In
the United States, Global also has the ability to provide such customers with
electronic data interchange ("EDI") ordering and customized billing services,
customer savings reports and stocking of specialty items specifically requested
by customers. The relationship marketing sales force's goal is to increase the
purchasing productivity of current customers and to actively solicit newly
targeted prospects to become customers. In 1998 the Company added close to 200
relationship marketing personnel, for a total of almost 700 by year end. As a
result, relationship marketing sales increased 78% from 1997 to $476 million, or
33% of total revenues.
INTERNET MARKETING AND SALES
In the past year, the Company greatly expanded and upgraded its Internet
presence. By year end, the Company had eighteen e-commerce sites, including
WWW.GLOBALCOMPUTER.COM, WWW.MWMICRO.COM, WWW.SYSTEMAXPC.COM, WWW.DARTEK.COM,
WWW.MISCO.COM, WWW.TIGERDIRECT.COM, and WWW.EZBID.COM, offering a wide variety
of computer, office and industrial products. Many of these sites also permit
customers to purchase "build to order" PC's configured to their own
specifications. In 1998 the Company had over $28 million in unassisted Internet
sales.
CUSTOMER AND PROSPECT DATABASE
Global has invested consistently and aggressively in developing a
proprietary customer and prospect database. This database, which includes more
than 45 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, various demographic and geographic characteristics and
purchasing history. Management believes that this variety and depth of
information on its customers provides Global a significant competitive
advantage.
CUSTOMER SERVICE AND SUPPORT
Order entry and fulfillment occurs at each of the Company's 17 locations.
Global generally provides toll-free telephone number access to its customers.
The integration of the Company's call centers also provide domestic locations
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, EDI and on the
Internet.
When an order is entered into the system, it is submitted for credit or
credit card approval, as applicable. Upon approval the order is electronically
transmitted to the warehouse and a packing slip is printed for order
fulfillment. Approximately 70% of the Company's 1998 sales were on open account
and the Company's bad debt experience has traditionally been less than 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 warehouses,
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.
The Company provides extensive technical support to customers. A database
of commonly asked questions which is maintained for each product is available to
technical support representatives, enabling them to respond quickly to similar
questions. It also allows product managers to monitor the effectiveness of the
information provided in the catalogs. The Company conducts regular on-site
training seminars for its sales representatives to ensure that they are well
trained and informed regarding the Company's latest product offerings.
DISTRIBUTION CENTERS
NORTH AMERICA
The Company operates nine separate sales and distribution facilities in
North America. Certain of the facilities are linked by a wide area network
management information system. In the event of adverse delivery conditions (such
as bad weather) the Company can shift inbound calls and/or order fulfillment and
shipping to an alternative location. Management believes this provides Global
with important operating flexibility and protection from possible sales
interruptions for many of its North American businesses. 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 its distribution
center. Certain products (such as selected computer hardware and large furniture
and industrial items) are shipped directly by the supplier. Individual product
types are consistently stocked in the same physical picking location, allowing
ease of picking and minimizing picking errors. Order fulfillment at the
distribution centers is done continuously throughout the day as customer orders
are received.
EUROPE
The Company has branch facilities in eight European countries and a central
office near London, England to direct their activities. The central office is
responsible for marketing support, catalog production, financial reporting,
logistics and computer programming support. In addition, each European branch
has a full service sales and distribution center to process orders and reports
to the respective country manager who has ultimate profit and loss
responsibility.
SUPPLIERS
In North America, the Company purchases the majority of its products and
components 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 and
wholesalers. 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 1998.
Private label products are manufactured either by the Company or 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 teams. See "Research and Development".
MANAGEMENT INFORMATION SYSTEMS
The Company operates information systems that allow centralized management
of key functions. These include 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. These management information systems enable the Company to enhance its
flexibility by promptly shipping customer orders (usually 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 45 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 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.
THE YEAR 2000 ISSUE
As is the case with virtually all companies and organizations, the Company
currently utilizes certain computer programs that store two digits in
identifying the year in the date field. Those programs were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected those computer programs could fail or create erroneous results
by or at the year 2000.
The Company currently believes it will be able to modify or replace any
affected computer program in time to minimize any potential harmful effects on
operations. The Company is in the process of contacting customers, vendors and
service providers to determine which of them is affected by the year 2000
problem, and to what extent, in order to assess the potential impact on the
Company.
System maintenance and modification costs to existing computer programs
will be expensed as incurred. The costs associated with the acquisition of new
computer programs that are year 2000 compliant will be capitalized and amortized
over the software's expected useful life.
For additional information regarding the year 2000 issue and its potential
impact on the Company, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000 Compliance."
RESEARCH AND DEVELOPMENT
The Company's research and development teams design and develop products
for Global's private label programs. 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
programs. Many of the Company's private label products were designed or
developed by an in-house research and development team. Examples of products
designed in-house include PC's, 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 Consolidated Financial Statements.
COMPETITION
PCS AND NOTEBOOK COMPUTERS
The North American and European computer industries are highly competitive
with many U.S., Asian and European companies vying for market share. There are
few barriers of entry to the PC market with PCs being sold through the direct
market channel, directly from manufacturers, computer superstores, mass
merchants and over the Internet. Timely introduction of new products or product
features are critical elements to remaining competitive. Other competitive
factors include product performance, quality and reliability, technical service
and customer support, marketing and distribution and price. There can be no
assurance that the Company will be able to maintain or improve its current
competitive position with respect to any of these or other competitive factors.
Some of the Company's competitors have stronger brand-recognition, broader
product lines and greater financial, marketing, manufacturing and technological
resources than the Company. Additionally, the Company's results could also be
adversely affected should it be unable to implement effectively its
technological and marketing arrangements with other companies, such as
Microsoft(R) and Intel(R).
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, mass merchants, computer
"superstores" and the Internet. 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 and
VARs. They have also been able to capture sales volume and market share from the
numerous small retail computer stores.
In Europe, the Company's major competitors are regional or country-specific
retail and direct-mail distribution companies. The Company's presence in eight
European countries provides Global with the flexibility to purchase large
volumes centrally. 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.
There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
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 is the case with 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 with respect to industrial products 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 stocks the
majority of its products featured in its dedicated industrial catalogs,
management believes it has a significant advantage over most of its direct mail
competitors in the United Kingdom.
Elsewhere in Europe, no dedicated industrial catalogs are mailed by the
Company, although industrial products are featured in computer supplies and/or
office supplies catalogs. Overall, sales of industrial products in Central
European markets are not material to the Company's overall sales in those
markets.
There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
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. 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. The Company competes only on a limited basis with contract
stationers and retail outlets selling office products since the Company does not
sell office product consumables such as paper, envelopes and paper clips. The
Company believes that direct mail will continue to be a growing channel of
distribution for office products and that price, convenience and customer
service will be key factors in the success of direct mail distribution of office
products. There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
In Europe, the situation is similar to that in the United States. Direct
mail distributors are expanding their operations into new geographical markets
and this expansion will no doubt continue until all European major markets are
covered. While the impact of this expansion has not as yet had any material
adverse effect on Company performance, there can be no assurance that the
Company will be able to maintain or improve its current competitive position
with respect to future expansion by competitors or other competitive factors.
EMPLOYEES
As of December 31, 1998, the Company employed a total of 3,135 employees,
including 3,010 full-time and 125 part-time employees, of whom 2,447 were in
North America and 688 were in Europe.
None of the Company's employees is represented by a labor union, except for
approximately 55 warehouse employees in New York who are covered by an
"open-shop" agreement with the Company, which expires at the end of 2001. These
employees are not required to join the union.
The Company considers its relationships with employees to be good and has
not experienced a work stoppage in 23 years.
ENVIRONMENTAL MATTERS
Under various national, state and local environmental laws and regulations
in North America and Europe, a current or previous owner or operator (including
the lessee) of real property may become liable for the costs of removal or
remediation of hazardous substances at such real property. Such laws and
regulations often impose liability without regard to fault. The Company leases
most of its 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
The Company conducts its business in North America (the United States and
Canada) and Europe. The following sets forth the Company's operations in its two
geographic markets (in thousands):
<TABLE>
<CAPTION>
1998 EUROPE NORTH AMERICA TOTAL
---- -------------------- ---------------------- -----
<S> <C> <C> <C>
Net sales.............................. $314,404 $1,121,250 $1,435,654
Income from operations................. $10,851 $53,497 $64,348
Identifiable assets.................... $111,412 $343,027 $454,439
1997 EUROPE NORTH AMERICA TOTAL
---- -------------------- ---------------------- -----
<S> <C> <C> <C>
Net sales.............................. $270,236 $875,152 $1,145,388
Income from operations................. $3,423 $55,839 $59,262
Identifiable assets.................... $82,548 $317,197 $399,745
1996 EUROPE NORTH AMERICA TOTAL
---- -------------------- ---------------------- -----
<S> <C> <C> <C>
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
</TABLE>
ITEM 2. PROPERTIES.
The Company's primary facilities, which are leased except where otherwise
indicated, are as follows:
<TABLE>
<CAPTION>
APPROX EXPIRATION
FACILITY LOCATION SQ. FT. OF LEASE*
-------- -------- ------- ----------
<S> <C> <C> <C>
Headquarters, Sales and
Distribution Center, Catalog
Operations(1) ...................................Port Washington, NY 178,000 2007
Sales and Distribution Center(1) ...................Suwanee, GA 130,000 1999
Sales and Distribution Center ......................Compton, CA 140,000 2007
Sales and Distribution Center ......................Naperville, IL 241,000 2010
Sales and Distribution Center ......................Holmdel, NJ 51,000 2002
Sales and Distribution Center ......................Markham, Ontario 45,000 2005
Sales and Distribution Center ......................Verrieres le Buisson, France 24,000 2000
Sales and Distribution Center ......................Dreieich, Germany 55,000 2000
Sales and Distribution Center ......................Madrid, Spain 35,000 (2)
Sales and Distribution Center ......................Milan, Italy 80,000 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 71,000 2010
Sales Center .......................................Amstelveen, Netherlands 5,000 2000
PC Assembly, Sales and Distribution Center .........Fletcher, Ohio 185,000 owned
European Headquarters ..............................Uxbridge, England 7,400 2005
- -----------
(1) Facilities leased from related parties. See "Certain Relationships and Related Transactions--Agreements-- Leases and Related
Guarantees."
(2) Terminable upon two months prior written notice.
* The Company does not anticipate any difficulty in renewing or replacing the Company's existing facility leases when those
leases expire.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
In March 1998 the Company filed suit in U.S. District Court (Eastern
District of New York) against a bankrupt supplier and its lenders (collectively,
the "Defendants") seeking monetary damages of $2.8 million plus interest for
breach of contract and warranty. The Company is also seeking a declaration that
the Company is not indebted to the Defendants and has certain legal and
equitable rights of offset against amounts otherwise due the supplier, including
a contractual right to offset $4 million paid by the Company to one of the
lenders under a letter of credit. In September 1998 the Defendants denied the
Company's allegations and counterclaimed alleging outstanding amounts owed and
damages totaling $12.2 million plus interest. The Company believes that
Defendants' claims are without merit and accordingly, in October 1998, asked the
Court to dismiss the Defendants' counterclaims. Management believes that the
ultimate outcome of this matter will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
The Company is a party to various other legal actions arising in the normal
course of business, none of which is anticipated to have a material adverse
effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1998, there were no matters submitted
to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "GML". 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.
1998 HIGH LOW
---- ---- ----
FIRST QUARTER............................. $23 1/16 $15
SECOND QUARTER............................ 22 3/8 12 1/2
THIRD QUARTER............................. 14 3/8 12 1/16
FOURTH QUARTER............................ 25 1/4 9 1/4
1997
----
First quarter............................. 43 7/8 17
Second quarter............................ 26 1/4 13 1/8
Third quarter............................. 27 3/4 20
Fourth quarter............................ 22 3/8 15 5/8
On March 5, 1999, the last reported sale price of the Company's Common
Stock on the New York Stock Exchange was $15 15/16 per share. As of March 5,
1999, the Company had 237 stockholders of record.
The Company has not paid any dividends since its initial public offering
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. 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,
1998, 1997 and 1996 and the selected balance sheet data as of December 31, 1998
and 1997 is derived from the audited consolidated financial statements which are
included elsewhere herein. The selected balance sheet data as of December 31,
1996 and 1995 is derived from the audited financial statements of the Company
which are not included herein. The selected balance sheet data as of December
31, 1994 and the selected income statement data for the years ended December 31,
1995 and 1994 are derived from the audited financial statements of interrelated
predecessor companies of Global which are not included herein.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA:
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA, NUMBER OF CATALOG TITLES AND NUMBER OF COUNTRIES)
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales ............................................. $1,435.7 $1,145.4 $911.9 $634.5 $484.2
Gross profit .......................................... $288.6 $265.6 $249.6 $197.3 $149.1
Selling, general and
administrative expenses ............................ $224.2 $206.3 $180.1 $143.2 $129.5
Income from operations ................................ $64.3 $59.3 $69.5 $54.1 $36.2
Income taxes .......................................... $25.8 $23.3 $27.7 $21.0(2) $14.0(2)
Net income ............................................ $41.3 $38.8 $43.7 $33.1(2) $21.9(2)
Net income per common share:
Basic ............................................. $1.11 $1.02 $1.16 $.93(2) $.65(2)
Diluted ........................................... $1.11 $1.02 $1.15 $.93(2) $.65(2)
Weighted average common shares outstanding:
Basic ............................................. 37.3 38.0 37.6 35.5(2) 33.8(2)
Diluted ........................................... 37.3 38.2 38.1 35.5(2) 33.8(2)
SELECTED OPERATING DATA:
Active customers (1) .................................. 1.8 1.8 1.7 1.7 1.1
Orders entered ........................................ 3.8 3.5 3.4 2.5 2.2
Number of catalogs distributed ........................ 179 162 160 122 114
Number of catalog titles .............................. 44 41 40 32 24
Number of countries receiving catalogs ................ 14 13 12 10 7
BALANCE SHEET DATA (AT DECEMBER 31, IN MILLIONS):
Working capital ....................................... $194.6 $187.8 $194.4 $122.2 $74.2
Total assets .......................................... $454.4 $399.7 $331.4 $247.5 $164.2
Short-term debt ....................................... $.5 $5.4 $19.2
Long-term debt, excluding
current portion ..................................... $2.5 $2.0 $2.0 $2.9 $11.5
Stockholders' equity .................................. $286.6 $272.2 $228.6 $154.0 $69.1
(1) An "active customer" is defined as a customer who has purchased from the Company within the preceding 12 months.
(2) Amount is calculated on a pro forma basis.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table represents the Company's consolidated statement of
income data expressed as a percentage of net sales for the three most recent
fiscal years:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales..................................................... 100.0% 100.0% 100.0%
Gross profit.................................................. 20.1 23.2 27.4
Selling, general and administrative expenses.................. 15.6 18.0 19.8
Income from operations........................................ 4.5 5.2 7.6
Interest income............................................... .2 .3 .3
Interest expense.............................................. .1
Income taxes.................................................. 1.8 2.0 3.0
Net income.................................................... 2.9 3.4 4.8
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales of $1.44 billion in 1998 were $290.3 million or 25.3% higher than
the $1.15 billion reported in 1997. The increase was attributable to higher
demand for PCs, improved productivity in relationship marketing and the full
year effect of the inclusion of sales from Midwest Micro Corp., acquired at the
end of the third quarter of 1997. The Company also began to benefit from orders
received through its various Internet web-sites. Sales attributable to the
Company's North American operations increased 28.1% to $1.12 billion in 1998
from $875.2 million in 1997. European sales increased to $314.4 million in 1998
from $270.2 million in 1997, an increase of 16.3%. Movements in foreign exchange
rates had an immaterial effect on the European sales comparison.
Gross profit, which consists of net sales less product, shipping and
certain distribution center costs, increased by $23 million or 8.7% to $288.6
million in 1998 from $265.5 million in 1997. Gross profit margin decreased to
20.1% in 1998 from 23.2% in 1997. Gross profit margin on PCs improved in the
current year. With sales of PCs representing an increasing proportion of the
Company's sales and with margins that are lower than on other products, they
have the effect of decreasing the overall gross profit margin. The decrease in
the gross profit margin was also due to increased sales of brand name computer
related products, which typically have lower gross profit margins, and the
relatively lower sales contribution of higher-margin industrial products.
Selling, general and administrative expenses totaled $224.2 million, or
15.6% of net sales in 1998 compared to $206.3 million, or 18.0% of net sales in
1997. This improvement resulted from a focus on controlling expenses and
improved productivity from the Company's relationship marketing staff and offset
a large portion of the gross profit margin decline.
Income from operations increased by $5.1 million or 8.6% to $64.3 million
in 1998 from $59.3 million in 1997. Income from operations decreased as a
percentage of net sales to 4.5% in 1998 from 5.2% in 1997.
Interest income decreased $0.2 million to $3.0 million in 1998 from $3.2
million in 1997 as a result of lower interest rates. Interest expense increased
to $0.5 million in 1998 from $0.4 million in 1997.
The effective tax rate increased to 38.5% in 1998 from 37.5% in 1997 as a
result of a higher effective state income tax rate and a change in the relative
income earned in foreign countries. As a result of the foregoing, net income
increased $2.4 million, or 6.3%, to $41.3 million in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased by $233.5 million or 25.6% to $1.15 billion in 1997
from $911.9 million in 1996. The increase was primarily attributable to (i) an
increase in revenue from the Company's major account sales program, (ii) the
inclusion of sales from Midwest Micro since its acquisition at the end of
September 1997, (iii) an increase in the sales of brand name and private label
PCs and notebook computers and (iv) an increased average order value resulting
from increased offerings and sales of brand name products. Sales attributable to
the Company's North American operations increased 29.1% to $875.2 million in
1997 from $677.8 million in 1996. European sales increased to $270.2 million in
1997 from $234.1 million in 1996, an increase of 15.4%. In local currencies
without foreign exchange rate effects, European sales increased 21.3%.
Gross profit, which consists of net sales less product, shipping and
certain distribution center costs, increased by $15.9 million or 6.4% to $265.5
million in 1997 from $249.6 million in 1996. Gross profit margin decreased to
23.2% in 1997 from 27.4% in 1996. The decrease in gross profit margin was
primarily due to (i) the Company's strategic decision to increase the proportion
of net sales attributable to brand name products, particularly PCs, notebook
computers, computer related products and hardware which typically have lower
gross profit margin percentages than many of the Company's other products, (ii)
the increase in the proportion of sales from the Company's major account sales
group which generally sells to larger customers at discounted prices, and (iii)
increased shipping and other costs associated with the United Parcel Service
labor action in August 1997.
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 $26.1 million or 14.5% to $206.3 million in 1997 from $180.1
million in 1996, as a percentage of net sales they decreased to 18.0% in 1997
from 19.8% in 1996. 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 from larger average order sizes, vendor supported
advertising, continued expense control and the leveraging of selling, general
and administrative expenses over a larger sales base. Included in selling,
general and administrative expenses in 1997 was a one time charge of $9.6
million incurred during the third quarter relating to the impairment of certain
long lived assets, principally goodwill.
As a result of the above, income from operations decreased by $10.2 million
or 14.7% to $59.3 million in 1997 from $69.5 million in 1996. Income from
operations as a percentage of net sales decreased to 5.2% from 7.6% in 1996.
Interest income increased $ .8 million to $3.3 million in 1997 from $2.5
million in 1996 primarily due to higher levels of investments in short-term
securities. Interest expense decreased $ .1 million to $ .4 million in 1997 from
$ .5 million in 1996.
Net income decreased $4.9 million or 11.2% to $38.8 million in 1997
principally as a result of the above.
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, 1997
(AMOUNTS IN MILLIONS).
<TABLE>
<CAPTION>
1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
NET SALES...................................... $358.3 $330.5 $359.8 $387.1
GROSS PROFIT................................... $75.4 $67.1 $71.6 $74.5
INCOME FROM OPERATIONS......................... $20.1 $11.6 $15.6 $17.1
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales...................................... $273.5 $259.5 $259.7 $352.7 (1)
Gross profit................................... $69.4 $64.2 $57.3 $74.7
Income from operations......................... $18.6 $17.9 $2.5 $20.3
(1) Includes approximately $62 million of net sales from Midwest Micro acquired on September 30, 1997.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to maintain a strong financial position. Primary
capital needs are to finance working capital for sales growth, acquisitions and
investments in property, equipment and information technology. The Company's
primary source of financing has been cash from operations, allowing it to remain
virtually debt-free. The Company believes that its cash flow from operations,
existing cash and short-term investments and available lines of credit will be
adequate to support its current and anticipated activities.
Cash flow from operating activities was $37.7 million in 1998, $33.1
million in 1997 and $22.7 million in 1996. Cash flow is provided primarily by
net income and depreciation. The increase in inventories and accounts payable
and accrued expenses in 1998 resulted from expansion activities in the Company's
PC assembly operation and increased sales activity. The increase in cash flow
from 1996 to 1997 was due to improved asset management, primarily related to
accounts receivable and inventory.
Net cash of $13.0 million was used in 1998 in investing activities for
business acquisitions and additions to property, plant and equipment. These
included capacity expansion at the Company's PC assembly factory, completion of
the new Compton, California facility and improvements to information technology
systems. Net cash used in investing activities in 1997 was primarily for the
acquisition of Midwest Micro and the acquisition of furniture, fixtures and
leasehold improvements needed to accommodate increased staff levels at the new
Compton, California facility. Short-term investments were decreased by $22.0
million as partial funding for these activities resulting in net cash used of
$25.2 million for investing activities for the year. Net cash used in investing
activities in 1996 was $39.8 million, employed for the acquisition of computer
equipment and additional equipment at the Naperville, Illinois facility to
accommodate increased staff levels. Surplus cash balances of $31.0 million were
invested.
Cash was used in financing activities in 1998 ($25.4 million) and in 1997
($0.5 million) and provided $23.9 million in 1996. In 1998, the Company used
$28.6 million of cash to purchase shares of its common stock. The use of funds
in 1997 was for the repayment of long-term debt. In 1996, the net proceeds from
issuance of shares of common stock was partially used to repay long-term bank
debt and settle long-term capital leases.
The Company maintains secured and unsecured lines of credit with various
financial institutions under which the maximum aggregate amount available is
approximately $100 million. As of December 31, 1998, the Company had no
outstanding borrowings under these lines of credit. Borrowings under the lines
bear interest based on either the prime rate or LIBOR. The maximum borrowings
under the facilities are reduced where applicable by the value of any
outstanding letters of credit issued on behalf of the Company. The Company does
not anticipate any difficulty in renewing or replacing any if its lines of
credit as they expire.
The Company is party to certain litigation, as disclosed in "Commitments
and Contingencies" in the Notes to Consolidated Financial Statements, the
outcome of which the Company believes will not have a material adverse effect on
its consolidated financial statements.
Anticipated capital expenditures in 1999 are expected to approximate $20
million, which the Company plans to fund out of cash from operations and
existing cash and cash equivalents. These capital expenditures are primarily for
the expansion of the Company's PC assembly operation, construction of a new
distribution center and the acquisition of information technology systems and
other fixed assets.
YEAR 2000 COMPLIANCE
The Company is in the process of analyzing and addressing what is known as
the year 2000 (or "Y2K") issue. Based on current information, the Company
believes that it will be year 2000 compliant in a timely manner and the cost of
achieving such compliance will not have a materially adverse effect on the
Company's results of operations or financial condition. As noted in the
following discussion, however, there are multiple variables in determining
whether full Y2K compliance can be achieved, a number of which are dependent on
efforts of third parties.
BACKGROUND.
This issue has arisen because many existing computer programs use only two
digits instead of four (E.G., "98" instead of "1998") to identify a year in the
data field. This is a holdover from the days when businesses first started using
computers and electronic memory was limited and storage was expensive. These
programs were designed and developed without considering the impact of the
upcoming change in the century. Accordingly, some computers can not determine if
the reference to the year "02" means 2002 or 1902. The failure of such
applications or systems to properly recognize the dates beginning in the year
2000 could result in miscalculations or even systems failures. The Company could
be affected by this problem both as a user of computers and as a direct marketer
and retail vendor of PCs and computer related products (including private label
PCs assembled by its Midwest Micro subsidiary).
In 1998 the Company established a Year 2000 Team to assess the Company's
Y2K compliance situation. This team consists of the Company's Chief Financial
Officer, Chief Information Officer, Controller, General Counsel and a
representative from the Company's management information system (MIS)
department.
INTERNAL SYSTEMS
The Company's Y2K Team established a plan to have all of the Company's
computer and computer-dependent systems tested and, if necessary, modified or
replaced to ensure Y2K compliance. Each of the Company's computers and computer
dependent systems has been analyzed to assess what would be the impact on the
Company if the system becomes materially impaired due to Y2K non-compliance.
Each system has been placed in one of three categories based on the level of
risk to the Company - Level I (catastrophic risk), Level II (critical risk) and
Level III (sustainable risk). The Company is now in the process of modifying
those systems identified during the assessment as Level I risks and doing live
tests of the Level I and Level II systems to ascertain anticipated Y2K
compliance. Based on its analysis to-date, the Company believes that all of its
internal computer systems (hardware, system software and applications software)
and computer-dependent systems, including technology embedded in the Company's
machinery and other equipment to the extent that it is date sensitive, are
currently Y2K compliant or will, through the replacement or modification of
existing hardware and software, be made Y2K complaint in a timely manner. A
target date of July 1, 1999 has been fixed for such compliance. The Company
believes at this time that it should be able to meet such target date.
The Company has not retained any outside service provider to conduct
independent verification of the Company's compliance status and does not at this
time intend to hire any such service provider but is utilizing a third-party
software program to test, assess and repair non-mainframe hardware.
As a direct marketer of products, the Company is particularly dependent on
the ability of telecommunications, shipping and credit card companies to provide
services. The Company has contacted its key vendors and service providers to
ascertain their Y2K compliance to the extent that their noncompliance could
affect the Company's internal systems or other aspects of the Company's
business. The Company expects to have completed this process by June 1999. The
Company at this time cannot make any prediction as to the degree of compliance
by such vendors and service providers or the consequence to the Company of any
noncompliance. Any noncompliance by such service providers could have a material
adverse impact on the Company.
Similar issues will be faced with the Company's banks and payroll services,
as well as other vendors. Any serious Y2K problems which significant vendors and
service providers encounter could materially adversely impact the Company. Since
the Company's customer base is diverse and no one customer accounts for a
significant portion of the Company's business, the Company does not at this time
believe that it is necessary to query customers on their Y2K compliance status.
While the Company believes that the efforts which it has taken and plans to
take should be sufficient to identify and correct any Y2K problems before
December 31, 1999, there can be no assurance that the Company will be fully Y2K
complaint in a timely manner.
PRODUCTS SOLD
The Company began assembling its own private label PC hardware systems
following the acquisition of its Midwest Micro subsidiary on September 30, 1997.
Prior to this time the Company only sold private label PC systems assembled by
third party contract manufacturers. The Company believes that all of the private
label PC hardware systems it sells, including those it assembles itself, are Y2K
complaint. All PC hardware systems assembled by the Company on or after January
1, 1998 have been certified to be Y2K compliant by the National Software Testing
Lab (NSTL), an independent testing lab.
The Company is in the process of questioning its vendors as to the Y2K
compliance status of the brand name (i.e. third party-manufactured) hardware and
software products it sells. Accordingly, the Company cannot be certain at this
time, and does not warrant to its customers, that the brand name computer
hardware and software it currently sells is Y2K compliant. This includes the
brand name software that is pre-loaded onto the private label PCs the Company
sells. While the Company believes that the liability for any Y2K failure of any
computer hardware or software the Company sells rests with the manufacturer of
such products or components, and it understands that most of the major
manufacturers have "fixes" available for certain older products which have Y2K
problems, it is possible that purchasers from the Company may make claims
against the Company for alleged Y2K problems with respect to products sold by
the Company and there can be no assurance that the Company would be successful
in having any such liability be borne by its vendors.
FINANCIAL RAMIFICATIONS
The Company estimates that the costs of achieving Y2K compliance, including
costs of personnel devoting significant effort on Y2K matters, will be
approximately $500,000 of which approximately $150,000 has been incurred through
December 31, 1998. The costs associated with any new computers or computer
programs which are year 2000 compliant have been and will be capitalized and
amortized over the computer's and/or software's expected useful life. Any system
modification or maintenance costs necessary to make the Company's existing
computer programs Y2K compliant have been and will be expensed as incurred.
Based on the Company's current status of internal Y2K compliance review and
other preliminary information, the Company does not anticipate that expenses yet
to be incurred to achieve year 2000 compliance will have a material impact on
the Company's results of operations or financial condition or that its business
will be adversely affected by the Y2K issue in any material respect.
Nevertheless, achieving Y2K compliance is dependent on multiple factors,
many of which are not within the Company's sole control. Should one or more of
the internal systems of the Company or the Company's key vendors exhibit
significant Y2K problems or if any of the products which the Company sells which
are still under warranty are Y2K deficient, the Company's business and its
results of operations could be materially adversely affected.
The Company may see an increase in warranty claims related to the Y2K
issue. The Company's standard limited warranty period for the PC systems it
assembles ranges from one to five years from the date of first purchase,
depending upon the system purchased and the particular component part warranted.
The Company does not make any separate warranty on brand name products it sells,
instead passing on the manufacturer's warranty. The Company can not at this time
assess the level of Y2K-related warranty claims it may receive regarding its
products. A significant level of warranty claims relating to the Y2K issue could
have a materially adverse impact on the Company's future results.
RISKS
Until it has completed its Y2K assessment, and attempted to fix any
problems which such assessment may disclose, the Company can not be in a
position to determine what would be its most reasonably likely worst case Y2K
scenario or any plan for handling such scenario. The Company has not devised any
back-up plans should it suffer any internal Y2K problems or should any of its
vendors' Y2K problems affect the Company. After completion of its Y2K
assessment, including a review of the responses received from such vendors, the
Company will assess the need for any contingency plans.
The failure to correct a material Y2K problem could result in an
interruption of, or inability to perform in a timely fashion, a necessary
business activity or operation. Such failures could materially adversely affect
the Company's results of operations, liquidity and/or financial condition.
Because of the general uncertainty which companies generally face regarding the
Year 2000 issue, in part due to actions of third-parties which could affect a
company's compliance, it is not possible to determine at this time whether any
actual failures will have a material adverse impact on the Company.
The foregoing discussion contains forward-looking statements which should
be read in conjunction with the discussion entitled "Forward Looking Statements"
set forth below.
IMPLICATIONS TO THE COMPANY FROM THE ADOPTION OF A EUROPEAN COMMON CURRENCY
The Company has extensive operations in certain European countries,
including France, Germany, Italy, the Netherlands, Spain, Sweden, England and
Scotland. It also sells to additional countries in Europe. For the 1998 fiscal
year, approximately 22% of the Company's net sales were in Europe. With the
exception of Sweden and the United Kingdom, all of the countries in which the
Company has operations have confirmed their participation in a new 11-country
European common currency, the Euro. The adoption of such common currency will be
phased in over a three-year period starting in January 1999. During such
phase-in period, both the Euro and the historical currency of a country will be
valid, although new Euro-denominated currency will not be issued until 2002.
Each member-country will decide when its legacy currency will cease to be legal
tender, which will occur during the period January 1 through June 30, 2002.
Until the introduction of Euro-denominated currency, the paying party will have
the option to decide whether to pay in the legacy currency or in Euros converted
to the legacy currency.
Among other possible economic implications, it is expected that the
adoption of a common currency will generally lead to greater price transparency
and thereby increased competition within the common currency zone. For instance,
with a single currency applicable to the entire region, consumers may be able to
more easily discern differences in price for the Company's products between
different countries and modify their buying practices accordingly. This is less
likely to be a factor for the Company than for many other companies since the
Company currently only advertises the Euro price on its Internet sites, not in
its catalogs. Also, purchasers of low cost individual products are less likely
to shop for a lower Euro price outside of their geographic location. The Company
will still use national catalogs, in the appropriate language, after the
introduction of the Euro. Whether any such price differentials will lead to
significant changes in purchasing practices by the Company's customers depends
on other factors as well, such as convenience, language-related matters and
other factors which may determine where a consumer will purchase products. The
Company is not able at this time to gauge whether the likelihood of increased
competition arising from the introduction of the Euro would have any significant
long-term adverse impact on the pricing for the Company's products.
The adoption of a common currency will not require a significant
modification to the Company's accounting systems.
The Company does not believe that the adoption of a common currency will
give any parties to material contracts with the Company the right to terminate
or modify such contracts on the grounds of "frustration," "impossibility" or
"impracticability."
Other risks associated with such currency conversion include possible
currency exchange and tax risks, neither of which the Company believes will have
a significant effect.
The Company does not at this time anticipate that the adoption of the Euro
and any resulting changes in European economic and market conditions will have
any material adverse impact on the Company or its European business. The Company
has not adopted, nor is it at this time contemplating the adoption of, any
contingency plans regarding this issue.
The foregoing discussion contains forward-looking statements which should
be read in conjunction with the discussion entitled "Forward Looking Statements"
set forth below.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements within the meaning of that
term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
Additional written or oral forward looking statements may be made by the Company
from time to time, in filings with the Securities Exchange Commission or
otherwise. Statements contained herein that are not historical facts are forward
looking statements made pursuant to the safe harbor provisions referenced above.
Forward looking statements may include, but are not limited to, projections of
revenue, income or loss and capital expenditures, statements regarding future
operations, financing needs, compliance with financial covenants in loan
agreements, plans for acquisition or sale of assets or businesses and
consolidation of operations of newly acquired businesses, and plans relating to
products or services of the Company, assessments of materiality, predictions of
future events and the effects of pending and possible litigation, as well as
assumptions relating to the foregoing. In addition, when used in this
discussion, the words "anticipates", "believes", "estimates", "expects",
"intends", "plans" and variations thereof and similar expressions are intended
to identify forward looking statements.
Forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the forward
looking statements contained in this report. Statements in this report,
particularly in "Item 1. Business", "Item 3. Legal Proceedings", "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Notes to Consolidated Financial Statements describe certain
factors, among others, that could contribute to or cause such differences. Other
factors that could contribute to or cause such differences include, but are not
limited to, unanticipated developments in any one or more of the following
areas: (i) the Company's ability to manage rapid growth as a result of internal
expansion and strategic acquisitions, (ii) the effect on the Company of
volatility in the price of paper and periodic increases in postage rates, (iii)
the operation of the Company's management information systems including the
costs and effects associated with the year 2000 date change problem, (iv) the
general risks attendant to the conduct of business in foreign countries,
including currency fluctuations associated with sales not denominated in United
States dollars, (v) significant changes in the computer products retail
industry, especially relating to the distribution and sale of such products,
(vi) competition in the PC, notebook computer, computer related products,
industrial products and office products markets from superstores, direct
response (mail order) distributors, mass merchants, value added resellers, the
Internet and other retailers, (vii) the potential for expanded imposition of
state sales taxes, use taxes, or other taxes on direct marketing companies,
(viii) the continuation of key vendor relationships including the ability to
continue to receive vendor supported advertising, (ix) timely availability of
existing and new products, (x) risks due to shifts in market demand and/or price
erosion of owned inventory, (xi) borrowing costs, (xii) changes in taxes due to
changes in the mix of U.S. and non-U.S. revenue, (xiii) pending or threatened
litigation and investigations and (xiv) the availability of key personnel, as
well as other risk factors which may be detailed from time to time in the
Company's Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unexpected
events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to market risks, which include changes in U.S. and
international interest rates as well as changes in currency exchange rates as
measured against the U.S. dollar and each other. Global attempts to reduce these
risks by utilizing certain derivative financial instruments.
The value of the U.S. dollar affects the Company's financial results.
Changes in exchange rates may positively or negatively affect Global's sales (as
expressed in U.S. dollars), gross margins, operating expenses and retained
earnings. The Company may engage in hedging programs aimed at limiting in part
the impact of certain currency fluctuations. Using primarily forward exchange
and foreign currency option contracts, Global, from time to time, hedges certain
of its assets that, when remeasured according to generally accepted accounting
principles, may impact the Statement of Consolidated Income. These hedging
activities provide only limited protection against currency exchange risks.
Factors that could impact the effectiveness of the Company's hedging programs
include accuracy of sales forecasts, volatility of the currency markets,
availability of hedging instruments and the credit-worthiness of the parties
which have entered into such contracts with the Company. All currency contracts
that are entered into by Global are for the sole purpose of hedging an existing
or anticipated currency exposure, not for speculative or trading purposes. In
spite of Global's hedging efforts to reduce the effect of changes in exchange
rates against the U.S. dollar, the Company's sales or costs could still be
adversely affected by changes in those exchange rates.
As of December 31,1998, the Company had no outstanding forward exchange
contracts.
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
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 1999 Annual Meeting of
Stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Part III is hereby incorporated by
reference from the Proxy Statement.
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 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 of Part III is hereby incorporated by
reference from the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The Consolidated Financial Statements of Global DirectMail Corp.
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.
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- -------- --------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant(1)
3.2 By-laws of Registrant(1)
4.1 Stockholders Agreement(2)
4.2 Specimen Stock Certificate of Registrant(1)
10.1 Form of 1995 Long-Term Stock Incentive Plan(3)*
10.2 Exchange Agreement dated as of May 8, 1995 between certain
stockholders of the Predecessor Companies and the Company1
10.3 Lease Agreement dated October 14, 1992 between the Company and
2RB Associates Co. (Port Washington facility)(1)
10.4 Lease Agreement dated September 20, 1988 between the Company and
Addwin Realty Associates (Port Washington facility)(1)
10.4A Amendment to Lease Agreement dated September 29, 1998 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)(1)
10.6 Lease Agreement dated as of July 17, 1997 between the Company and
South Bay Industrials Company (Compton facility)(4)
10.7 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)(1)
10.8 Lease Agreement dated September 17, 1998 between Tiger Direct,
Inc. and Keystone Miami Property Holding Corp. (Miami
facility)(5)
10.9 Rent Guaranty dated as of October 14, 1992 by the Company to the
Bank of New York(1)
10.10 Royalty Agreement dated June 30, 1986 between the Company and
Richard Leeds, Bruce Leeds and Robert Leeds, and Addendum
thereto(1)
10.11 Consulting Agreement dated as of December 22, 1992 between the
Company and Paul Leeds1(1)*
10.12 Form of 1995 Stock Plan for Non-Employee Directors(3)*
10.13 Consulting Agreement dated as of January 1, 1996 between the
Company and Gilbert Rothenberg(3)*
10.14 Asset Purchase Agreement dated September 12, 1997 among Infotel,
Inc., Mark L. Runkle, Midwest Micro Corp. and the Company(6)
10.15 Employment Agreement dated as of December 12, 1997 between the
Company and Steven M. Goldschein(4)*
21.1 Subsidiaries of the Registrant
23 Consent of experts and counsel: Consent of Independent Public
Accountants
27 Financial Data Schedule (EDGAR version only)
- ------------------
1 Incorporated herein by reference to the Company's registration statement on
Form S-1 (Registration No. 33-92052).
2 Incorporated herein by reference to the Company's quarterly report on Form
10-Q for the quarterly period ended September 30, 1995.
3 Incorporated herein by reference to the Company's registration statement on
Form S-1 (Registration No. 333-1852).
4 Incorporated herein by reference to the Company's annual report on Form 10-K
for the year ended December 31, 1997.
5 Incorporated herein by reference to the Company's quarterly report on Form
10-Q for the quarterly period ended September 30, 1998.
6 Incorporated herein by reference to the Company's report on Form 8-K dated
September 26, 1997.
* Management contract or compensatory plan or arrangement
--------
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the fiscal year
ended December 31, 1998.
<PAGE>
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 26th day of March, 1999.
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 March 26, 1999
- ------------------------ Officer
Richard Leeds (Principal Executive Officer)
/s/ BRUCE LEEDS Vice Chairman and President of March 26, 1999
- ------------------------ International Operations
Bruce Leeds
/s/ ROBERT LEEDS Vice Chairman and President of March 26, 1999
- ------------------------ Domestic Operations
Robert Leeds
/s/ ROBERT DOOLEY Director and Senior Vice March 26, 1999
- ------------------------ President-- Worldwide Computer
Robert Dooley Sales and Marketing
/s/ STEVEN GOLDSCHEIN Senior Vice President and Chief March 26, 1999
- ------------------------ Financial Officer
Steven Goldschein (Principal Financial Officer)
/s/ MICHAEL SPEILLER Vice President and Controller March 26, 1999
- ------------------------ (Principal Accounting Officer)
Michael Speiller
/s/ ROBERT D. ROSENTHAL Director March 26, 1999
- ------------------------
Robert D. Rosenthal
/s/ STACY DICK Director March 26, 1999
- --------------------------
Stacy Dick
********
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of
GLOBAL DIRECTMAIL CORP:
We have audited the accompanying consolidated balance sheets of Global
DirectMail Corp and its subsidiaries, (the "Company"), as of December 31, 1998
and 1997 and the related consolidated statements of net income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 4, 1999
<PAGE>
<TABLE>
<CAPTION>
GLOBAL DIRECTMAIL CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42,029 $ 43,432
Short-term investments 5,050 9,017
Accounts receivable, net 154,516 132,741
Inventories 129,966 102,599
Prepaid expenses and other current assets 21,517 21,482
Deferred income tax benefit 6,865 4,059
--------- ----------
Total current assets 359,943 313,330
PROPERTY, PLANT AND EQUIPMENT, net 33,988 29,401
GOODWILL, net 56,612 53,258
DEFERRED INCOME TAX BENEFIT 3,084 3,122
OTHER ASSETS 812 634
--------- ----------
TOTAL $ 454,439 $ 399,745
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 114,783 $ 75,170
Accrued expenses and other current liabilities 47,853 50,392
Current portion of long-term debt 2,681 12
--------- ----------
Total current liabilities 165,317 125,574
--------- ----------
LONG-TERM DEBT 2,493 1,972
--------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, authorized
25 million shares, issued none
Common stock, par value $.01 per share, authorized
150 million shares, issued 38,231,990;
outstanding 36,128,090 (1998) and 38,231,990 (1997) 382 382
Additional paid-in capital 176,743 176,743
Common stock in treasury at cost - 2,103,900 shares in 1998 (28,604)
Accumulated other comprehensive income (348) (2,130)
Retained earnings 138,456 97,204
--------- ----------
Total shareholders' equity 286,629 272,199
--------- ----------
TOTAL $ 454,439 $ 399,745
========= ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLOBAL DIRECTMAIL CORP
CONSOLIDATED STATEMENTS OF NET INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 1,435,654 $1,145,388 $ 911,893
COST OF SALES 1,147,098 879,846 662,277
---------- --------- ----------
GROSS PROFIT 288,556 265,542 249,616
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 224,208 206,280 180,142
---------- --------- ----------
INCOME FROM OPERATIONS 64,348 59,262 69,474
INTEREST AND OTHER INCOME (3,225) (3,261) (2,431)
INTEREST EXPENSE 497 425 521
---------- --------- ----------
INCOME BEFORE INCOME TAXES 67,076 62,098 71,384
PROVISION FOR INCOME TAXES 25,824 23,286 27,680
---------- --------- ----------
NET INCOME $ 41,252 $ 38,812 $ 43,704
========== ========= ==========
NET INCOME PER COMMON SHARE:
BASIC $ 1.11 $ 1.02 $ 1.16
=========== ========== ============
DILUTED $ 1.11 $ 1.02 $ 1.15
=========== ========== ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLOBAL DIRECTMAIL CORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
COMMON STOCK
-------------------- ACCUMULATED
ADDITIONAL OTHER TREASURY
NUMBER OF PAID-IN RETAINED COMPREHENSIVE STOCK
SHARES AMOUNT CAPITAL EARNINGS INCOME AT COST
--------- ------ ----------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1996 36,857 $ 369 $ 138,470 $ 14,688 $ 480
Change in cumulative translation adjustment 1,030
Net proceeds from sale of common shares 1,000 10 29,886
Net income 43,704
--------- --------- --------- --------- --------- --------
BALANCES, DECEMBER 31, 1996 37,857 379 168,356 58,392 1,510
Change in cumulative translation adjustment (3,640)
Issuance of shares as partial consideration
for the acquisition of the net assets of
Infotel, Inc. 375 3 8,387
Net income 38,812
--------- --------- --------- --------- --------- --------
BALANCES, DECEMBER 31, 1997 38,232 382 176,743 97,204 (2,130)
Change in cumulative translation adjustment 1,782
Purchase of treasury shares (2,104) $ (28,604)
Net income 41,252
--------- --------- --------- --------- --------- ---------
BALANCES, DECEMBER 31, 1998 36,128 $ 382 $ 176,743 $138,456 $ (348) $ (28,604)
========= ========= ========= ========= ========= ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLOBAL DIRECTMAIL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 41,252 $ 38,812 $ 43,704
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization, net 7,482 5,715 3,813
Charges associated with the impairment of certain long lived
assets 9,200
Provision for deferred income taxes (2,728) (5,308) (330)
Provision for returns and doubtful accounts 5,264 3,283 2,745
Changes in certain assets and liabilities:
Accounts receivable (23,688) (18,395) (29,242)
Inventories (23,942) 3,103 (20,748)
Prepaid catalog and other prepaid expenses 330 (1,569) 7,028
Accounts payable and accrued expenses 33,801 (1,727) 15,760
------ ------ ------
Net cash provided by operating activities 37,771 33,114 22,730
------ ----- ------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Net change in short-term investments 3,967 22,014 (31,031)
Investments in property, plant and equipment (11,051) (9,989) (8,805)
Acquisitions, net of cash acquired (5,942) (37,227)
------ ------- -------
Net cash used in investing activities (13,026) (25,202) (39,836)
------- ------- -------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from long-term borrowings 3,326
Proceeds from short-term borrowings from banks 478
Repayments of long-term borrowings (168) (470) (6,442)
Proceeds from issuance of common shares 29,896
Purchase of treasury shares (28,604)
------- ------- -------
Net cash (used in) provided by financing activities (25,446) (470) 23,932
------- ---- ------
EFFECTS OF EXCHANGE RATES ON CASH (702) 779 (92)
---- --- ----
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,403) 8,221 6,734
------ ----- -----
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 43,432 35,211 28,477
------ ------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 42,029 $ 43,432 $ 35,211
========= ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 309 $ 376 $ 1,194
======== ======== ========
Income taxes paid $ 28,577 $ 29,497 $ 26,606
======== ========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
GLOBAL DIRECTMAIL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Global DirectMail Corp and its
wholly-owned subsidiaries (collectively, the "Company" or "Global"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. Where necessary, the results of operations of the Company's
foreign subsidiaries have been adjusted to conform to accounting principles
generally accepted in the United States of America.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - 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. The Company's investments in cash equivalents and short-term
investments are classified as debt securities available-for-sale. These
equivalents are stated at fair market value. Unrealized holding gains and
losses are not significant for any of the years presented. The investments
are other debt securities and have contractual maturities of $5,050,000 of
which $2,750,000 is one year or less and $2,300,000 matures between one and
five years.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - The Company recognizes sales
of products, including shipping revenue, at the time of shipment. Accounts
receivable are shown in the consolidated balance sheets net of allowances
for doubtful collections and subsequent customer returns of approximately
$8,664,000 and $7,338,000 at December 31, 1998 and 1997, respectively. The
changes in these allowance accounts are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
--------------------- -------- ------ --------
<S> <C> <C> <C>
Balance, beginning of year..................................$ 7,338 $7,724 $ 7,731
Charged to expense........................................... 5,365 3,283 2,745
Reductions, principally write-offs...........................(4,039) (3,669) (2,752)
------- ------- -------
Balance, end of year........................................$ 8,664 $7,338 $ 7,724
======= ======= ========
</TABLE>
INVENTORIES - Inventories consist primarily 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.
PROPERTY, PLANT AND EQUIPMENT - Property, plant 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 buildings is on the
straight-line method over estimated useful lives of 30 to 50 years.
Leasehold improvements are amortized over the term of the respective
leases.
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 net income items. The
translation differences are made directly to a separate component 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 statement of net income.
RESEARCH AND DEVELOPMENT COSTS - Costs incurred in connection with research
and development are expensed as incurred. Such expenses for the years ended
December 31, 1998, 1997 and 1996 aggregated approximately $1,352,000,
$674,000 and $573,000, respectively.
GOODWILL, NET - Goodwill and negative goodwill are combined and presented
net of accumulated amortization. Goodwill represents the excess of
acquisition costs over the fair market value of the net assets of acquired
businesses and is being amortized on a straight-line basis over their
estimated useful lives, ranging from 10 to 40 years. In instances where the
Company had acquired a business below the fair value of the assets
acquired, the Company recorded negative goodwill. Annual amortization of
goodwill for 1998 and 1997 was expense of $751,000 and $76,000 and for 1996
income of $435,000.
The Company continually evaluates whether events or circumstances warrant
revision of the amortization periods. Additionally, the Company considers
whether the carrying value of goodwill should be adjusted based on its
expected future benefit. During 1997, the Company determined that, as a
result of its' decision to exit certain lines of its' Tiger Direct Inc.
subsidiary's business, an impairment of the goodwill associated with those
business lines had occurred. The Company recorded a write down in the value
of the goodwill of approximately $6.3 million.
NET INCOME PER COMMON SHARE - The Company accounts for net income per share
in accordance with Statement of Financial Accounting Standard No. 128,
"Earnings Per Share". Net income per common share-basic was calculated
based upon the weighted average number of common shares outstanding during
the respective periods. Net income per common share-diluted was calculated
based upon the weighted average number of common shares outstanding and
included the equivalent shares for dilutive options outstanding during the
respective periods.
The weighted average common shares outstanding for the computation of basic
earnings per common share for 1998, 1997 and 1996 were 37.3 million, 38.0
million and 37.6 million, respectively. Additionally 16,000 (1998), 262,000
(1997) and 505,000 (1996) of equivalent common shares were included for the
diluted calculation.
COMPREHENSIVE INCOME - In 1998, the Company adopted Statement of Financial
Accounting Standard No. 130 "Reporting Comprehensive Income". This
statement establishes rules for the reporting of comprehensive income and
its components. Comprehensive income consists of net income and foreign
currency translation adjustments and is included in the Consolidated
Statements of Shareholders' Equity. Comprehensive income was $42,335,000
(1998), $36,641,000 (1997) and $44,348,000 (1996), net of effects on
currency translation adjustments of ($699,000) (1998), $1,469,000 (1997)
and ($386,000) (1996).
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.
2. ACQUISITIONS
The Company acquired two businesses in 1998 for $5.9 million in cash and
three businesses in 1997 for $50.8 million in cash and stock. These
acquisitions were accounted for as purchases, and accordingly, the assets
and liabilities of the acquired entities have been recorded at their
estimated fair values at the dates of acquisition. The excess of purchase
price over the estimated fair values of net assets acquired, in the amount
of $5.2 million in 1998 and $15.9 million in 1997 has been recorded as
goodwill and is being amortized over the estimated useful lives.
The largest acquisition in 1997, Infotel Inc., included a provision for
payment of additional consideration to the former shareholders if the
acquired entity's results of operations exceeded certain targeted levels.
Additional consideration of $9 million was earned in 1998 (payable in 1999)
and was recorded as an increase to the purchase price. The maximum amount
of remaining contingent consideration is $3 million (payable in 2000).
During 1998 the estimated fair values of the net assets recorded at the
date of acquisition for Infotel, Inc. were further evaluated by the Company
and, in accordance with Statement of Financial Accounting Standard No. 38,
"Accounting for Pre Acquisition Contingencies of Purchased Enterprises",
goodwill was reduced by approximately $10.7 million.
The pro forma results for 1998, 1997 and 1996, assuming these acquisitions
had been made at the beginning of the period, would not have been
materially different from the reported results.
3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Property, plant and equipment, net consists of the following (in
thousands):
1998 1997
------- --------
<S> <C> <C>
Land and buildings.............................................................$ 8,324 $ 8,085
Furniture and fixtures, office and warehouse equipment 42,471 32,857
Leasehold improvements.......................................................... 7,871 6,096
Transportation equipment........................................................ 2,111 1,817
----- -----
60,777 48,855
Less accumulated depreciation and amortization 26,789 19,454
------ ------
Property, plant and equipment, net..............................................$ 33,988 $ 29,401
========== ===========
</TABLE>
During 1997 the Company recorded a charge relating to the impairment of
certain long-lived fixed assets of approximately $2.9 million.
4. RELATED PARTY TRANSACTIONS
The Company leases several warehouse and office facilities from affiliates
(see Note 8). Rent expense under those leases aggregated approximately
$1,584,000, $1,901,000 and $2,130,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
1998 1997
------- ------
Mortgage loan (a)........................... $2,016 $ 1,972
Secured loan (b) ........................... 3,158
Other....................................... 12
------ -------
Total long-term debt................... 5,174 1,984
Less: current maturities............... 2,681 12
------ -------
$ 2,493 $ 1,972
======= ======
At December 31, 1998, the aggregate maturities of long-term debt are as follows
(in thousands):
AMOUNT
------
1999..................................................$ 2,681
2000................................................... 665
2001................................................... 665
2002................................................... 665
2003................................................... 498
-------
$ 5,174
=======
(a) subsidiary of the Company entered into a mortgage agreement in the
amount of 1.2 million Pounds Sterling 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 2.4 million Pounds Sterling at December 31, 1998.
The mortgage contains certain covenants calling for timely reporting
of financial information, restrictions on changes in ownership and
employment levels by such subsidiary. As of December 31, 1998 the
Company was in compliance with those covenants.
(b) subsidiary of the Company entered into a 5 year loan agreement in the
amount of 26.7 million Swedish Krone which is payable in quarterly
installments having commenced in November 1998 with interest payable
quarterly at a rate of LIBOR plus 200 basis points. The loan
is secured by substantially all of the assets of the Company's United
Kingdom subsidiaries.
The Company maintains lines of credit with various financial institutions.
The maximum aggregate amounts available under these lines of credit were
$101.7 million at December 31, 1998 including $4.2 million denominated in a
foreign currency (2.5 million Pounds Sterling). No amounts were outstanding
under these lines at December 31, 1998. These lines accrue interest at
variable rates based on either the prime rate or LIBOR. The prime rate and
LIBOR were 8 percent and 5.1 percent, respectively, at December 31, 1998.
The foreign currency line is secured by substantially all of the assets of
the Company's United Kingdom subsidiaries. These lines expire on various
dates through December 1999. 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, 1998 there was
$100,000 of outstanding standby letters of credit.
6. SHAREHOLDERS' EQUITY
In May, 1998 the Board of Directors authorized a share repurchase program
to acquire up to 1,350,000 (subsequently increased to 4,350,000) common
shares on the open market. The Company purchased an aggregate of 2,103,990
shares during 1998 at an aggregate cost of $28.6 million.
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, 1998 was not material.
<PAGE>
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 allows the Company to
issue qualified, non-qualified and deferred compensation stock options, stock
appreciation rights, 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 2.0 million 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
1,628,848 options were outstanding under this plan as of December 31, 1998.
THE 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS - This plan provides
for automatic 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, 1998.
The Company accounts for these plans in accordance with Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees", 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 Standard 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 consolidated
financial statements as compensation expense. On a pro forma basis, net income
for 1998, 1997 and 1996 would have been $39.8 million, $37.7 million and $42.3
million respectively and diluted earnings per common share for 1998, 1997 and
1996 would have been $1.07, $0.99 and $1.11 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 5.9% (1998), 6.2% (1997) and 6.1% (1996);
expected dividend rate of 0% for 1998, 1997 and 1996; expected level of 3.78
years (1998), 3.75 years (1997) and 4 years (1996); and expected volatility of
38% (1998), 35% (1997) and 35% (1996). The stock options outstanding at December
31, 1998 and 1997 have a weighted average contractual level of 7.7 years and 8
years, respectively. The following table reflects the plan activity for the
years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
OPTIONS
FOR SHARES OPTION PRICES
<S> <C> <C>
Outstanding, January 1, 1996 865,500 $17.50 to $26.88
Granted 365,150 $27.19 to $49.13
Cancelled (24,150) $17.50 TO $49.13
------- ----------------
Outstanding, December 31, 1996 1,206,500 $17.50 to $49.13
Granted 604,146 $17.50 to $18.41
Cancelled (505,698) $24.38 TO $49.13
-------- ----------------
Outstanding, December 31, 1997 1,304,948 $17.50 to $39.06
Granted 469,450 $12.38 to $17.50
Cancelled (131,550) $17.50 TO $18.41
--------- ----------------
Outstanding, December 31, 1998 1,642,848 $12.38 to $39.06
===========
</TABLE>
The following table summarizes information for the three years ended December
31, 1998 concerning currently outstanding and exercisable options:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- --------------------------- ------------------------
WEIGHTED-AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ --------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Options
Outstanding at beginning of year...... 1,304,948 $19.28 1,206,500 $25.45 865,500 $ 20.49
Granted .............................. 469,450 $14.49 604,146 $19.19 365,150 $ 36.80
Cancelled ............................ (131,550) $17.64 (505,698) $33.90 (24,150) $ 19.39
---------- ----------- -------
Outstanding at end of year............ 1,642,848 $18.04 1,304,948 $19.28 1,206,500 $ 25.45
========== ========== =========
Options exercisable at year end....... 335,550 189,000 139,000
Weighted average fair value per
option granted during the year..... $5.77 $13.05 $13.57
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998:
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- -------------------- -------------- ------------------ ---------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
$12.38 to $17.50 1,360,348 7.85 $16.46 196,550 $17.38
$17.51 to $22.50 48,500 8.69 $18.73 5,000 $21.56
$22.51 to $30.00 230,000 6.64 $26.88 130,000 $26.87
$30.01 to $39.06 4,000 7.33 $39.06 4,000 $39.06
---------- -------
$12.38 to $39.06 1,642,848 7.71 $18.04 335,550 $21.38
========== =======
</TABLE>
An aggregate of 420,348 options granted during 1997, with exercise prices
ranging from $24.38 to $49.13, were re-priced on April 28, 1997 with an exercise
price of $17.50, which represented the market price of the common stock at such
date. All other terms of these options remained unchanged.
7. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
---------------------- -------- ---------- --------
<S> <C> <C> <C>
Current:
Federal $ 22,072 $ 23,274 $ 23,140
State 4,259 4,107 3,787
Foreign 2,242 1,041 1,038
Deferred (2,749) (5,279) (865)
Change in valuation allowance 143 580
-------- -------- ---------
Total $ 25,824 $ 23,286 $ 27,680
========= ========= =========
</TABLE>
Income taxes are accrued and paid by each foreign entity in accordance with
applicable local regulations.
A reconciliation of the difference between the income tax expense and the
computed income tax expense based on the Federal statutory corporate rate is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
---------------------- -------- ---------- --------
<S> <C> <C> <C>
Federal statutory rate $ 23,477 $ 21,734 $ 24,984
State and local income taxes, net of Federal tax benefit 2,511 2,092 2,456
Foreign tax less than domestic rate (192) (232) (463)
Net operating losses utilized (276) (165) (335)
Other items, net 304 (143) 1,038
-------- --------- ---------
$ 25,824 $ 23,286 $ 27,680
======== ======== =========
</TABLE>
The deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
------------------ ---------------
<S> <C> <C>
Current:
Deductible assets.................................................... $(4,106) $ (3,649)
Non-deductible accruals and reserves.................................. 10,040 7,458
Non-deductible assets................................................. 986 553
Foreign net operating loss carryforwards 26
Other................................................................. (55) (329)
------- ---------
Current.......................................................... $ 6,865 4,059
------- ---------
Non-current:
Foreign net operating loss carryforwards 5,658 4,980
Accelerated depreciation.............................................. (1,147) (1,243)
Basis differences from acquisitions................................... 1,063 1,843
Valuation allowances.................................................. (2,490) (2,458)
------- ---------
Non-current....................................................... 3,084 3,122
------ --------
Total........................................................ $ 9,949 $ 7,181
======= ========
</TABLE>
The foreign net operating loss carryforwards generally expire at dates through
2007 except for carryforwards in the United Kingdom and Germany, which have no
expiration. In accordance with Statement of Financial Accounting Standard 109
"Accounting for Income Taxes", the Company maintains valuation allowances
against its foreign net operating loss carryforwards since, at this time, the
realizability of the related deferred tax benefits can not be reasonably
assured.
8. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
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 December
2013.
At December 31, 1998 future minimum annual lease payments for related and
third-party leases were as follows (in thousands):
<TABLE>
<CAPTION>
RELATED PARTY THIRD PARTY TOTAL
<S> <C> <C> <C>
1999................................ $ 1,584 $ 3,718 $ 5,302
2000................................ 1,584 3,849 5,433
2001................................ 1,224 3,515 4,739
2002................................ 1,224 3,219 4,443
2003................................ 1,224 3,158 4,382
2004-2008........................... 4,743 12,692 17,435
2009-2013........................... 3,781 3,781
--------- -------- -------
$ 11,583 $ 33,932 $ 45,515
=========== ======== ========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 aggregated
approximately $7,665,000, $7,151,000 and $7,406,000, respectively.
GUARANTEES - The Company has guaranteed a mortgage obtained by an affiliate ($2
million at December 31, 1998) 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 loan and a
line of credit with a U.K. financial institution.
LITIGATION - In March 1998 the Company initiated legal action against a bankrupt
supplier and its lenders (the "Defendants") seeking a declaration that the
Company has contractual rights of offset against indebtedness to the supplier,
including $4 million drawn by one of the lenders under a letter of credit and
monetary damages of $2.8 million. In September 1998 the Defendants denied the
Company's allegations and counterclaimed for amounts outstanding together with
damages totaling $12.2 million. The Company believes that the Defendants' claims
are without merit and asked the Court to dismiss the counterclaims. Management
believes that the ultimate outcome of this matter will not have a material
adverse effect on the Company's consolidated financial statements.
The Company has been named as a defendant in other lawsuits incidental to its
business. 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, approximately 16% of the
Company's 1998 domestic sales were subject to sales tax. A change in law could
require the Company to collect sales tax in additional states.
EMPLOYEE BENEFIT PLANS - Certain of the U.S. subsidiaries participate in defined
contribution 401(k) plans covering eligible employees as defined by the plan
document. Contributions to the plans by the Company are determined as a
percentage of the employees' contributions. Aggregate expense to the Company for
contributions to such plans was approximately $397,000, $373,000 and $267,000 in
the years ended December 31, 1998, 1997 and 1996, respectively.
Liabilities accrued by certain foreign entities for employee termination
indemnities, determined in accordance with labor laws and labor agreements in
effect in the respective country, 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 may enter 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 31,1998, the Company had no outstanding
forward exchange contracts.
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, 1998 and 1997, 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.
9. SEGMENT AND RELATED INFORMATION
In 1998 the Company adopted Statement of Financial Accounting Standard 131,
"Disclosure About Segments of an Enterprise and Related Information". The
Company evaluated its business in accordance with the statement and determined
that it is engaged in a single reportable segment which markets and sells
various business products. The Company's product offerings include personal
computers (PC's), computer related products, industrial products and office
products and are monitored for sales trends and profitability in these
sub-categories. Products are marketed through an integrated system of direct
mail catalogs, a network of major account sales representatives and proprietary
e-commerce internet web-sites.
Financial information relating to the Company's operations by geographic area
was as follows:
<TABLE>
<CAPTION>
NET SALES (A)
-----------------------------------------------------------
1998 1997 1996
--------------- ---------------- ------------------
<S> <C> <C> <C>
North America $1,121,250 $875,152 $677,815
Europe 314,404 270,236 234,078
------- ------- -------
Consolidated $1,435,654 $1,145,388 $911,893
========== ========== ========
</TABLE>
a) Revenues are attributed to countries based on location of selling subsidiary.
<TABLE>
<CAPTION>
LONG LIVED ASSETS
-----------------------------------------------------------
1998 1997 1996
--------------- ---------------- ------------------
<S> <C> <C> <C>
North America $79,254 $77,135 $32,169
Other (principally Europe) 11,346 5,524 3,254
------ ------- -------
Consolidated $90,600 $82,659 $35,423
======== ======= ========
</TABLE>
10. SUBSEQUENT EVENT
On February 4, 1999, an affiliate of the Company acquired
for cash consideration all of the outstanding shares of Simply
Computers Limited ("Simply") of London, England. SIMPLY is a privately
held computer products and internet marketer which also assembles
private label PC's. The acquisition was funded through current cash
reserves.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data is as follows (in thousands, except for per share
amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales................................. $358,358 $ 330,452 $359,771 $387,073
Gross profit............................ $ 75,369 $ 67,056 $ 71,604 $ 74,527
Net income.............................. $ 12,865 $ 7,619 $ 9,561 $ 11,207
Net income per common share:
Basic and diluted.............. $ .34 $ .20 $.26 $ .31
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
Net sales................................. $273,537 $ 259,485 $ 259,661 $352,705
Gross profit............................ $ 69,407 $ 64,167 $ 57,289 $ 74,679
Net income.............................. $ 12,088 $ 11,665 $ 2,136 $ 12,923
Net income per common share:
Basic and diluted.............. $ .32 $ .31 $ .06 $ .34
</TABLE>
* * * * * *
EX. 10.4A
AMENDMENT TO LEASE
That certain lease, dated September 20, 1988 (the "Lease"), between
ADDWIN REALTY ASSOCIATES, a New York general partnership (hereinafter referred
to as the "Landlord") and CONTINENTAL DYNAMICS CORPORATION, a New York
corporation (hereinafter referred to as the "Tenant") with respect to premises
located at 11 Harbor Park Drive, Port Washington, New York, is hereby amended as
follows:
1. Section 1.03 of the Lease is amended such that the "Expiration
Date" of the Lease is defined as December 31, 2007.
2. Except as herein modified, all of the terms of the Lease shall
remain in full force and effect.
Dated: March 22, 1999
ADDWIN REALTY ASSOCIATES
By: /S/ RICHARD LEEDS
---------------------------
CONTINENTAL DYNAMIC CORPORATION
By: /S/ RICHARD LEEDS
----------------------------
EX-21
SUBSIDIARIES OF GLOBAL DIRECTMAIL CORP
A. DOMESTIC SUBSIDARIES
1. Systemax Inc. (a New York corporation)
d/b/a Global Computer Supplies (GA, CA, IL) d/b/a Global
Occupational Safety (NY, GA)
2. Continental Dynamics Corp. (a New York corporation)
d/b/a Global Computer Supplies (NY)
d/b/a Global Industrial Equipment (NY, GA)
d/b/a Global Business Furniture (NY, GA)
3. Dartek Corp. (a Delaware corporation)
4. Nexel Industries Inc. (a New York corporation)
5. Misco America Inc. (a Delaware corporation)
6. Tiger Direct Inc. (a Florida corporation)
7. Midwest Micro Corp. (a Delaware corporation)
8. EZBID Inc. (a Delaware corporation)
B. FOREIGN SUBSIDIARIES
1. Misco Germany Inc. (a New York corporation)
2. Misco Italy Computer Supplies S.P.A. (an
Italian corporation)
3. H C S Global SA (a French corporation)
4. Global DirectMail Ltd. (a U.K. corporation)
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Registration
Statement No.'s 333-21489 and 333-21491 of Global DirectMail Corp on Form S-8
of our report dated February 4, 1999 appearing in this Annual Report on Form
10-K of Global DirectMail Corp for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
New York, New York
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1998 AND THE AUDITED CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 OF GLOBAL DIRECTMAIL
CORP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 42,029
<SECURITIES> 5,050
<RECEIVABLES> 154,516
<ALLOWANCES> 0
<INVENTORY> 129,966
<CURRENT-ASSETS> 359,943
<PP&E> 33,988
<DEPRECIATION> 0
<TOTAL-ASSETS> 454,439
<CURRENT-LIABILITIES> 165,317
<BONDS> 2,493
<COMMON> 382
0
0
<OTHER-SE> 286,247
<TOTAL-LIABILITY-AND-EQUITY> 454,439
<SALES> 1,435,654
<TOTAL-REVENUES> 1,435,654
<CGS> 1,147,098
<TOTAL-COSTS> 1,147,098
<OTHER-EXPENSES> 224,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,728)
<INCOME-PRETAX> 67,076
<INCOME-TAX> 25,824
<INCOME-CONTINUING> 41,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,252
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.11
</TABLE>
