**Table of Contents**

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**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**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,  2008** |   |
|           |   |   |
| ** **     | **or** | ** ** |
|           |   |   |
| **o**          | **TRANSITION  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** | ** ** |
| ** **     | ** ** | ** ** |
| ** **     | **For the transition period  from         to** | ** ** |

** **

**CommissionFile Number:**

**1-13792**

** **

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**Systemax Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                    | ** ** | **11-3262067**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**11 Harbor Park Drive**

**Port Washington, New York   11050**

(Address of principal executive offices,including zip code)

 

Registrant’s telephone number, including areacode: **(516) 608-7000**

 

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Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of each class**                                         | ** ** | **Name of each exchange on which registered** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|
| Common Stock, par value $ .01 per share                                   | ** ** | New York Stock Exchange                                                     |
|                                                                           |
| Securities registered pursuant to  Section 12(g) of the Act:**NONE** |

 

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Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.

Yes o No x

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K orany amendment of this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer,”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Exchange Act Rule 12b-2).          Yeso No x

 

        Theaggregate market value of the voting stock held by non-affiliates of theregistrant as of June 30, 2008, which is the last business day of theregistrant’s most recently completed second fiscal quarter, was approximately$148,811,545. For purposes of this computation, all executive officers anddirectors of the Registrant and all parties to the Stockholders Agreement datedas of June 15, 1995 have been deemed to be affiliates. Such determinationshould 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 6,2009 was 36,223,720 shares.

Documents incorporated by reference: Portions of the Proxy Statement ofSystemax Inc. relating to the 2008 annual meeting of stockholders areincorporated by reference in Part III hereof.

 

 

 

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**TABLE OF CONTENTS**

 
| **Part I**   |                                                                                                               |   |
|-------------------|--------------------------------------------------------------------------------------------------------------------|--------|
| Item  1.          | Business                                                                                                           | 4      |
|              | General                                                                                                            | 4      |
|              | Products                                                                                                           | 4      |
|              | Sales  and Marketing                                                                                               | 5      |
|              | Customer Service, Order Fulfillment and Support                                                                    | 7      |
|              | Suppliers                                                                                                          | 7      |
|              | Competition and Other Market Factors                                                                               | 7      |
|              | Employees                                                                                                          | 9      |
|              | Environmental  Matters                                                                                             | 9      |
|              | Financial Information About Foreign and Domestic Operations                                                        | 9      |
|              | Available Information                                                                                              | 10     |
| Item 1A.          | Risk Factors                                                                                                       | 10     |
| Item 1B.          | Unresolved Staff Comments                                                                                          | 17     |
| Item 2.           | Properties                                                                                                         | 17     |
| Item 3.           | Legal Proceedings                                                                                                  | 18     |
| Item 4.           | Submission of Matters to a Vote of Security  Holders                                                               | 18     |
| ** **        |                                                                                                               |   |
| **Part II**  |                                                                                                               |   |
| Item 5.           | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities | 19     |
| Item 6.           | Selected  Financial Data                                                                                           | 20     |
| Item 7.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        | 21     |
| Item 7A.          | Quantitative and Qualitative Disclosures  About Market Risk                                                        | 30     |
| Item 8.           | Financial Statements and Supplementary Data                                                                        | 31     |
| Item 9.           | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure                              | 31     |
| Item 9A.          | Controls and Procedures                                                                                            | 31     |
| Item 9B.          | Other Information                                                                                                  | 32     |
| ** **        |                                                                                                               |   |
| **Part III** |                                                                                                               |   |
| Item 10.          | Directors, Executive Officers and Corporate  Governance                                                            | 33     |
| Item 11.          | Executive Compensation                                                                                             | 33     |
| Item 12.          | Security Ownership of Certain Beneficial  Owners and Management and RelatedStockholder  Matters                    | 33     |
| Item 13.          | Certain Relationships and Related  Transactions, and Director Independence                                         | 33     |
| Item 14.          | Principal Accounting Fees and Services                                                                             | 33     |
| ** **        |                                                                                                               |   |
| **Part IV**  |                                                                                                               |   |
| Item 15.          | Exhibits and Financial Statement Schedules                                                                         | 33     |
|              |                                                                                                               |   |
|              | Signatures                                                                                                         |   |

 

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**PART I**

 

*Unless otherwise indicated, all referencesherein to Systemax Inc. (sometimes referred to as “Systemax,” the “Company” or“we”) include its subsidiaries.*

 

***ForwardLooking Statements***

*** ***

*This report contains forward lookingstatements within the meaning of that term in the Private Securities LitigationReform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934). Additional written or oral forward looking statements may be made by theCompany from time to time in filings with the Securities and ExchangeCommission or otherwise.  Statementscontained in this report that are not historical facts are forward lookingstatements made pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Forward looking statements may include, but are not limited to,projections of revenue, income or loss and capital expenditures, statementsregarding future operations, financing needs, compliance with financialcovenants in loan agreements, plans for acquisition or sale of assets orbusinesses and consolidation of operations of newly acquired businesses, andplans relating to products or services of the Company, assessments ofmateriality, predictions of future events and the effects of pending andpossible litigation, as well as assumptions relating to the foregoing.  In addition, when used in this report, thewords “anticipates,” “believes,” “estimates,” “expects,” “intends,” and “plans”and variations thereof and similar expressions are intended to identify forwardlooking statements.*

 

*Forward looking statements areinherently subject to risks and uncertainties, some of which cannot bepredicted or quantified based on current expectations.  Consequently, future events and results coulddiffer materially from those set forth in, contemplated by, or underlying theforward looking statements contained in this report.  Statements in this report, particularly in“Item 1. Business,” “Item 1A. Risk Factors,” “Item 3. Legal Proceedings,” “Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” and the Notes to Consolidated Financial Statements describecertain factors, among others, that could contribute to or cause suchdifferences.*

 

Other factors that may affect our futureresults of operations and financial condition include, but are not limited to,unanticipated developments in any one or more of the following areas, as wellas other factors which may be detailed from time to time in our Securities andExchange Commission filings:

 

·                  the effect on usof volatility in the price of paper and periodic increases in postage rates

·                  significantchanges in the computer products retail industry, especially relating to thedistribution and sale of such products

·                  timelyavailability of existing and new products

·                  risks involvedwith e-commerce, including possible loss of business and customerdissatisfaction if outages or other computer-related problems should precludecustomer access to us

·                  risks associatedwith delivery of merchandise to customers by utilizing common delivery services

·                  borrowing costsor availability

·                  pending orthreatened litigation and investigations

·                  the availabilityof key personnel

 

Readers are cautioned not to place unduereliance on any forward looking statements contained in this report, whichspeak only as of the date of this report. We undertake no obligation to publicly release the result of anyrevisions to these forward looking statements that may be made to reflect eventsor circumstances after the date hereof or to reflect the occurrence ofunexpected events.

 

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**Item 1. Business.**

 

**General**

 

Systemax is primarily a direct marketer of brand name and private labelproducts. Our operations are organized in three reportable business segments —Technology Products, Industrial Products and Software Solutions. Our TechnologyProducts segment sells computers, computer supplies and consumer electronicswhich are marketed in North America and Europe. Except for certain personalcomputer (“PC”) products that we assemble ourselves and sell under thetrademarks *SystemaxTM* and *UltraTM*,substantially all of our products are manufactured by other companies.   We also sell certain computer-relatedproducts manufactured for us to our own design under the trademark *SystemaxTM* and *UltraTM*.  Technology Products accounted for 92% of ournet sales in 2008.

 

Our Industrial Products segment sells a wide array of material handlingequipment, storage equipment and consumable industrial items which are marketedin North America. Substantially all of these products are manufactured by othercompanies.  Some products aremanufactured for us to our own design and marketed under the trademarks *GlobalTM*, *GlobalIndustrial.comTM*and *NexelTM.*Industrial products accountedfor 8% of our net sales in 2008.

 

Our Software Solutions segment participates in the emerging market foron-demand, web-based business software applications through the marketing of ourPCS ProfitCenter Software*TM* application.See Note 10 to the Consolidated Financial Statements included in Item 15 ofthis Form 10-K for additional financial information about our businesssegments as well as information about our geographic operations.

 

The Company was incorporated in Delaware in1995. Certain predecessor businesses which now constitute part of the Companyhave been in business since 1955. Our headquarter office is located at 11Harbor Park Drive, Port Washington, New York.

 

**Recent Developments**

 

OnJanuary 5, 2008 the Company entered into an asset purchase agreement withCompUSA Inc. Under the agreement the Company acquired CompUSA’s e-commercebusiness and 16 of its retail leases and related fixtures for consideration ofapproximately $30.6 million. This acquisition accelerated the Company’s plannedexpansion into the retail market place in North America and Puerto Rico.

 

**Products**

 

We offer more than 100,000 brand name andprivate label products. We endeavor to expand and keep current the breadth ofour product offerings in order to fulfill the increasingly wide range ofproduct needs of our customers.

 

Our computer sales include desktops,laptops and notebooks and are primarily offerings of brand name originalequipment manufacturers, as well as our own Systemax and Ultra brands. Computersupplies and consumer electronics related products include supplies such aslaser printer toner cartridges and ink jet printer cartridges; media such asflash memory, recordable disks and magnetic tape cartridges; peripherals suchas hard disks, CD-ROM and DVD drives, printers and scanners; memory upgrades;data communication and networking equipment; monitors; digital cameras; plasmaand LCD TVs; MP3 and DVD players; PDAs; and packaged software.

 

We assemble our Systemax and Ultra brandPCs in our 297,000 square foot, ISO-9001:2000 certified facility in Fletcher,Ohio.  We purchase components andsubassemblies from suppliers in the United States as well as overseas. Certainparts and components for our PCs are obtained from a limited group ofsuppliers.  We also utilize licensedtechnology and computer software in the assembly of our PCs. For a discussionof risks associated with these licenses and suppliers, see Item 1A, RiskFactors.

 

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Our industrial products include storageequipment such as wire and metal shelving, bins and lockers; light materialhandling equipment such as hand carts, pallet jacks and hand trucks; ladders,furniture, small office machines and related supplies; and consumableindustrial products such as first aid items, safety items, protective clothingand OSHA compliance items.

 

We began to market our PCS ProfitCenterSoftware*TM* suite of business applications in2004. PCS ProfitCenter Software*TM*is aweb-based application which is delivered as an on-demand service over theinternet. The product helps companies automate and manage their entire customerlife-cycle across multiple sales channels (internet, call centers, outsidesalespersons, etc.).

 

**Sales and Marketing**

 

We market our products to both businesscustomers and individual consumers. Our business customers include for-profitbusinesses, educational organizations and government entities. We havedeveloped numerous proprietary customer and prospect databases. We consider ourbusiness customers to include the various individuals who work within anorganization rather than just the business itself.

 

We have established a multi-faceted directmarketing system to business customers, consisting primarily of relationshipmarketers, catalog mailings and proprietary internet websites, the combinationof which is designed to maximize sales. Our relationship marketers focus theirefforts on our business customers by establishing a personal relationshipbetween such customers and a Systemax account manager. The goal of therelationship marketing sales force is to increase the purchasing productivityof current customers and to actively solicit newly targeted prospects to becomecustomers. With access to the records we maintain of historical purchasingpatterns, our relationship marketers are prompted with product suggestions toexpand customer order values. In certain countries, we also have the ability toprovide such customers with electronic data interchange (“EDI”) ordering andcustomized billing services, customer savings reports and stocking of specialtyitems specifically requested by these customers. Our relationship marketers’efforts are supported by frequent catalog mailings and e-mail campaigns, bothof which are designed to generate inbound telephone sales, and our interactivewebsites, which allow customers to purchase products directly over the Internet.We believe that the integration of our multiple marketing methods enables us tomore thoroughly penetrate our business, educational and government customerbase. We believe increased internet exposure leads to more internet-relatedsales and also generates more inbound telephone sales; just as we believecatalog mailings and email campaigns which feature our websites results ingreater internet-related sales.

 

We continue to have strong growth in sales toindividual consumers, particularly through e-commerce means. To reach ourindividual consumer audience, we use online methods such as website campaigns,banner ads and e-mail campaigns. We are able to monitor and evaluate theresults of our various advertising campaigns to enable us to execute them inthe most cost-effective manner. We combine our use of e-commerce initiativeswith catalog mailings, which generate online orders and calls to inbound salesrepresentatives. These sales representatives use our information systems tofulfill orders and explore additional customer product needs. Sales toindividual consumers are generally fulfilled from our own stock, requiring usto carry more inventory than we would for our business customers. We alsoperiodically take advantage of attractive product pricing by makingopportunistic bulk inventory purchases with the objective of turning themquickly into sales. We have also successfully increased our sales to individualconsumers by using retail outlet stores. As of December 31, 2008 we had 29retail locations open in North America and Puerto Rico.

 

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## ***E-commerce***

## ** **

The worldwide growth in active internet users has made e-commerce asignificant opportunity for sales growth.

 

The increase in our internet-related sales enables us to leverage ouradvertising spending. We currently operate multiple e-commerce sites,including:

 

Technology Products:

·                  www.tigerdirect.com

·                  www.compusa.com

·                  www.compusagoved.com

·                  www.compusabusiness.com

·                  www.misco.co.uk

·                  www.tigerdirect.ca

·                  www.misco.de

·                  www.misco.fr

·                  www.infotelusa.com

·                  www.misco.nl

·                  www.globalcomputer.com

·                  www.misco.it

·                  www.misco.es

·                  www.globalgoved.com

·                  www.misco.se

·                  www.systemaxpc.com

·                  www.misco.at

·                  www.misco.ch

·                  www.misco.be

·                  www.misco.pt

·                  www.misco.ie

 

Industrial Products:

·                  www.globalindustrial.com

 

We continually upgrade the capabilities and performance of these websites. Our internet sites feature on-line catalogs of thousands of products,allowing us to offer a wider variety of computer and industrial products thanour printed catalogs.  Our customers havearound-the-clock, on-line access to purchase products and we have the abilityto create targeted promotions for our customers’ interests. Many of ourinternet sites also permit customers to purchase “build to order” PCsconfigured to their own specifications.

 

In addition to our own e-commerce web sites, we have partneringagreements with several of the largest internet shopping and search engineproviders who feature our products on their web sites or provide“click-throughs” from their sites directly to ours. These arrangements allow usto expand our customer base at an economical cost.

 

## ***Catalogs***

## ** **

We currently produce a total of 16 full-lineand targeted specialty catalogs in North America and Europe under distincttitles. Our portfolio of catalogs includes such established brand names as *TigerDirect.comTM, Global Computer SuppliesTM, CompUSA, TigerDirect.caTM,Misco®, Global*

 

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*IndustrialTM, ArrowStarTM and ** **NexelTM.*  Full-line computer product catalogs offerproducts such as PCs, notebooks, peripherals, computer components, magneticmedia, data communication, networking and power protection equipment, ergonomicaccessories, furniture and software. Full-line industrial product catalogsoffer products such as material handling products and industrial supplies.Specialty catalogs contain more focused product offerings and are targeted toindividuals most likely to purchase from such catalogs. We mail catalogs toboth businesses and individual consumers. In the case of business mailings, wemail our catalogs to many individuals at a single business location, providingus with multiple points-of-entry. Our in-house staff designs all of ourcatalogs. In-house catalog design helps reduce overall catalog expense andshortens catalog production time. This allows us the flexibility to alter ourproduct offerings and pricing and to refine our catalog formats more quickly.Our catalogs are printed by third parties under fixed pricing arrangements. Thecommonality of certain core pages of our catalogs also allows foreconomies of scale in catalog production.

 

With the CompUSA acquisition, thedistribution of our catalogs increased to 63 million in 2008, which was 9.5%more than in the prior year. In 2008, we mailed approximately 47 millioncatalogs in North America, a 16.2% increase from last year and approximately 16million catalogs, or 6.5% fewer than 2007, were distributed in Europe.

 

**Customer Service, Order Fulfillment andSupport**

 

We generally provide toll-free telephonenumber access for our customers. Certain of our domestic call centers arelinked to provide telephone backup in the event of a disruption in phoneservice. In addition to telephone orders, we also receive orders by mail, fax,electronic data interchange and through the internet.

 

A large number of our products arecarried in stock, and orders for such products are fulfilled on a timely basisdirectly from our distribution centers, typically on the day the order isreceived. We operate out of multiple sales and distribution facilities in NorthAmerica and Europe. The locations of our distribution centers enable us toprovide our customers next day or second day delivery. Orders are generallyshipped by third-party delivery services in the United States and in Europe.The locations of our distribution centers in Europe have enabled us to marketinto additional countries with limited incremental investment. We maintainrelationships with a number of large distributors in North America and Europethat also deliver products directly to our customers.

 

We provide extensive technical telephonesupport to our Systemax and Ultra brand PC customers.  We maintain a database of commonly askedquestions for our technical support representatives, enabling them to respondquickly to similar questions. We conduct regular on-site training seminars forour sales representatives to help ensure that they are well trained andinformed regarding our latest product offerings.

 

**Suppliers**

 

We purchase substantially all of our productsand components directly from manufacturers and large wholesale distributors.One vendor accounted for 12.0%, 14.4% and 12.8% of our purchases in 2008, 2007and 2006, respectively.   The loss ofthis vendor, or any other key vendors, could have a material adverse effect onus.

 

Certain private label products aremanufactured by third-parties to our specifications. Many of these privatelabel products have been designed or developed by our in-house product designand development teams.

 

**Competition and Other Market Factors**

 

***Technology Products***

 

The North American and European technologyproduct markets are highly competitive, with many U.S., Asian and Europeancompanies vying for market share.  Thereare few barriers of entry, with these 

 

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products being sold through multiple channelsof distribution, including direct marketers, local and national retail computerstores, computer resellers, mass merchants, over the internet and by computerand office supply superstores. In North America, our major competitors operatein all these sales channels; in Europe, our major competitors are regional orcountry-specific retail and direct-mail distribution companies andinternet-based resellers.

 

Timely introduction of new products orproduct features are critical elements to remaining competitive. Othercompetitive factors include product performance, quality and reliability,technical support and customer service, marketing and distribution and price.Some of our competitors have stronger brand-recognition, broader product linesand greater financial, marketing, manufacturing and technological resourcesthan us.  Additionally, our results couldalso be adversely affected should we be unable to maintain our technologicaland marketing arrangements with other companies, such as Microsoft®, Intel® andAdvanced Micro Devices®.

 

With conditions in the market for technologyproducts remaining highly competitive, continued reductions in retail pricesmay adversely affect our revenues and profits. Additionally, we rely in partupon the introduction of new technologies and products by other manufacturersin order to sustain long-term sales growth and profitability. There is noassurance that the rapid rate of such technological advances and productdevelopment will continue.

 

Currenteconomic conditions raise additional factors as the loss of consumer confidencein the Company’s markets could result in a decrease of spending in thecategories of products we sell.   It is also possible that asmanufacturers react to the marketplace they may reduce manufacturing capacityand create shortages of product.

 

***Industrial Products***

 

The market for the sale of industrialproducts in North America is highly fragmented and is characterized by multipledistribution channels such as retail outlets, small dealerships, direct maildistribution, internet-based resellers and large warehouse stores. We also facecompetition from manufacturers’ own sales representatives, who sell industrialequipment directly to customers, and from regional or local distributors. Manyhigh volume purchasers, however, utilize catalog distributors as their firstsource of product. In the industrial products market, customer purchasingdecisions are primarily based on price, product selection, productavailability, level of service and convenience. We believe that direct marketing via catalog, the internet and salesrepresentatives is an effective and convenient distribution method to reachmid-sized facilities that place many small orders and require a wide selectionof products. In addition, because the industrial products market is highlyfragmented and generally less brand oriented, it is well suited to privatelabel products.

 

***Software Solutions***

 

SoftwareSolutions offers a software application for the multi-channel commerceindustry. The software distribution model in which a software application ishosted by a software vendor or a service provider and made available tocustomers over the internet is also known as software as a service (SaaS).   Traditional software licensing is being supplementedwith on-demand delivery models that increase the predictability of informationtechnology financial expenditures while making it easier for multi-channelcommerce companies to manage their customers, products and services regardlessof sales channel.

 

Theincreasing replacement of obsolete software solutions by multi-channelretailers for newer technologies provides our Software Solutions business withan opportunity to market its products and services. The advantages of having asingle solution, single database to manage all sales channels (eCommerce, callcenter, catalog, mail order, retail) with web-based accessibility and fasterimplementation cycles is anticipated to fuel penetration into the multi-channelsoftware market space.

 

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**Employees**

 

As of December 31, 2008, we employed atotal of 4,452 employees, of whom 3,251 were in North America and 1,201 were inEurope.

 

**Seasonality**

 

Net sales have historically been modestly weaker during the second andthird quarters as a result of lower business activity during those months.  See Item 7, Management’s Discussionsand Analysis of Financial Condition and Results of Operations; Seasonality.

 

**Environmental Matters**

 

Under various national, state and localenvironmental laws and regulations in North America and Europe, a current orprevious owner or operator (including the lessee) of real property may becomeliable for the costs of removal or remediation of hazardous substances at suchreal property. Such laws and regulations often impose liability without regardto fault. We lease most of our facilities. In connection with such leases, wecould be held liable for the costs of removal or remedial actions with respectto hazardous substances. Although we have not been notified of, and are nototherwise aware of, any material real property environmental liability, claimor non-compliance, there can be no assurance that we will not be required toincur remediation or other costs in connection with real property environmentalmatters in the future.

 

**Financial Information About Foreign andDomestic Operations**

 

Weconduct our business in North America (the United States, Puerto Rico andCanada) and Europe.  Approximately 37.9%of our net sales during 2008 were made by subsidiaries located outside of theUnited States. For information pertaining to our international operations, seeNote 10, “Segment and Related Information,” to the Consolidated FinancialStatements included in Item 15 of this Form 10-K. The following sets forthselected information with respect to our operations in those two geographicmarkets (in thousands):

*** ***
| ** **          | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Total**  | ** ** |
|---------------------|------------|--------------------|------------|------------|------------|------------|------------|
| *2008*              |       |               |       |       |       |       |       |
| Net sales           |       | $                  | 2,092,372  |       | $          | 940,589    |       | $ | 3,032,961 |   |
| Operating income    |       | $                  | 62,268     |       | $          | 21,099     |       | $ | 83,367 |   |
| Identifiable assets |       | $                  | 553,263    |       | $          | 150,000    |       | $ | 703,263 |   |
| ** **          | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| *2007*              |       |               |       |       |       |       |       |
| Net sales           |       | $                  | 1,847,477  |       | $          | 932,398    |       | $ | 2,779,875 |   |
| Operating income    |       | $                  | 82,365     |       | $          | 11,577     |       | $ | 93,942 |   |
| Identifiable assets |       | $                  | 488,761    |       | $          | 185,110    |       | $ | 673,871 |   |
| ** **          | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| *2006*              |       |               |       |       |       |       |       |
| Net sales           |       | $                  | 1,601,259  |       | $          | 743,906    |       | $ | 2,345,165 |   |
| Operating income    |       | $                  | 45,297     |       | $          | 15,433     |       | $ | 60,730 |   |
| Identifiable assets |       | $                  | 426,451    |       | $          | 157,710    |       | $ | 584,161 |   |

 

See Item 7, Management’s Discussions andAnalysis of Financial Condition and Results of Operations, for furtherinformation with respect to our operations.

 

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** **

**Available Information**

 

We maintain an internetwebsite at www.systemax.com. We file reports with the Securities and ExchangeCommission and make available free of charge on or through this web site ourannual reports on Form 10-K, quarterly reports on Form 10-Q andcurrent reports on Form 8-K, including all amendments to thosereports.  These are available as soon asis reasonably practicable after they are filed with the SEC.  All reports mentioned above are alsoavailable from the SEC’s web site (www.sec.gov). The information on our website is not part of this or any other report we file with, or furnish to, theSEC.

 

Our Board of Directors has adopted the followingcorporate governance documents with respect to the Company (the “CorporateGovernance Documents”):

 

·                  CorporateEthics Policy for officers, directors and employees

·                  Charter forthe Audit Committee of the Board of Directors

·                  Charter forthe Compensation Committee of the Board of Directors

·                  Charter forthe Nominating/Corporate Governance Committee of the Board of Directors

·                  CorporateGovernance Guidelines and Principles

 

In accordance with the listing standards of theNew York Stock Exchange, each of the Corporate Governance Documents isavailable on our Company web site (www.systemax.com) and can be obtained uponrequest by writing to Systemax Inc., Attention: Board of Directors (CorporateGovernance), 11 Harbor Park Drive, Port Washington, NY 11050.

 

**Item 1A. Risk Factors.**

 

There are a number of factors and variables described below that mayaffect our future results of operations and financial condition. Other factorsof which we are currently not aware or that we currently deem immaterial mayalso affect our results of operations and financial position.

 

**Risks Related to the Economy and OurIndustries**

 

·                  *Economic conditions have affected and could continue to adverselyaffect our revenues and profits.*

 

Currenteconomic conditions may cause the loss of consumer confidence in the Company’smarkets which may result in a decrease of spending in the categories ofproducts we sell.   It is also possible that as manufacturers reactto the marketplace they may reduce manufacturing capacity, creating shortagesof product. Both we and our customers are subject to global political,economic and market conditions, including inflation, interest rates, energycosts, the impact of natural disasters, military action and the threat ofterrorism. Our consolidated results of operations are directly affected byeconomic conditions in North America and Europe. We may experience a decline insales as a result of poor economic conditions and the lack of visibilityrelating to future orders. Our results of operations depend upon, among otherthings, our ability to maintain and increase sales volumes with existingcustomers, our ability to attract new customers and the financial condition ofour customers. A decline in the economy that adversely affects our customers,causing them to limit or defer their spending, would likely adversely affect usas well. We cannot predict with any certainty whether we will be able tomaintain or improve upon historical sales volumes with existing customers, orwhether we will be able to attract new customers.

 

In response to economic and market conditions, from time to time wehave undertaken initiatives to reduce our cost structure where appropriate.These initiatives, as well as any future workforce and facilities reductions,may not be sufficient to meet current and future changes in economic and marketconditions and allow us to continue to achieve the growth rates and levels ofprofitability we have recently experienced. In addition, costs actuallyincurred in connection 

 

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with our restructuring actions may be higher than our estimates of suchcosts and/or may not lead to the anticipated cost savings.

 

·                  *Competitive pressures could harm our revenue and gross margin.*

 

We may not be able to compete effectively with current or futurecompetitors. The markets for our products and services are intenselycompetitive and subject to constant technological change. We expect thiscompetition to further intensify in the future. Competitive factors includeprice, availability, service and support. We compete with a wide variety ofother resellers and retailers, as well as manufacturers. Many of ourcompetitors are larger companies with greater financial, marketing and productdevelopment resources than ours. In addition, new competitors may enter ourmarkets. This may place us at a disadvantage in responding to competitors’pricing strategies, technological advances and other initiatives, resulting inour inability to increase our revenues or maintain our gross margins in thefuture.

 

In many cases our products compete directly with those offered by othermanufacturers and distributors. If any of our competitors were to developproducts or services that are more cost-effective or technically superior,demand for our product offerings could decrease.

 

Our gross margins are also dependent on the mix of products we sell andcould be adversely affected by a continuation of our customers’ shift tolower-priced products.

 

·                  *State and local sales tax collection may affect demand for ourproducts.*

 

Our United States subsidiaries collect and remit sales tax in states inwhich the subsidiaries have physical presence or in which we believe nexusexists which obligates us to collect sales tax. Other states may, from time totime, claim that we have state-related activities constituting a sufficientnexus to require such collection. Additionally, many other states seek toimpose sales tax collection obligations on companies that sell goods tocustomers in their state, or directly to the state and its politicalsubdivisions, even without a physical presence. Such efforts by states have increased recently, as states seek to raiserevenues without increasing the tax burden on residents. We rely on UnitedStates Supreme Court decisions which hold that, without Congressionalauthority, a state may not enforce a sales tax collection obligation on acompany that has no physical presence in the state and whose only contacts withthe state are through the use of interstate commerce such as the mailing ofcatalogs into the state and the delivery of goods by mail or commoncarrier.  We cannot predict whether thenature or level of contacts we have with a particular state will be deemedenough to require us to collect sales tax in that state nor can we be assuredthat Congress or individual states will not approve legislation authorizingstates to impose tax collection obligations on all direct mail and/ore-commerce transactions. A successful assertion by one or more states that weshould collect sales tax on the sale of merchandise could result in substantialtax liabilities related to past sales and would result in considerableadministrative burdens and costs for us and may reduce demand for our productsfrom customers in such states when we charge customers for such taxes.

 

·                  *Business disruptions could adversely impact our revenue and financialcondition.*

 

We insure for certain property and casualty risks consisting primarilyof physical loss to property, business interruptions resulting from propertylosses, worker’s compensation, comprehensive general liability, and autoliability. Insurance coverage is obtained for catastrophic property and casualtyexposures as well as those risks required to be insured by law or contract.Although we believe that our insurance coverage is reasonable, significantevents such as acts of war and terrorism, economic conditions, judicialdecisions, legislation, natural disasters and large losses could materiallyaffect our insurance obligations and future expense.

 

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·                  *Changes in financial accounting standards may affect our results ofoperations.*

 

A change in accounting standards or practicescan have a significant effect on our reported   results of operations. New accounting pronouncements and interpretationsof existing accounting rules and practices have occurred and may occur inthe future. Changes to existing rules may adversely affect our reportedfinancial results.

 

**Risks Related to Our Company**

 

·                  *Our reliance on information and communications technology requiressignificant expenditures and entails risk.*

 

We rely on a variety of information and telecommunications systems inour operations. Our success is dependent in large part on the accuracy andproper use of our information systems, including our telecommunicationssystems.  To manage our growth, wecontinually evaluate the adequacy of our existing systems and procedures. Weanticipate that we will regularly need to make capital expenditures to upgradeand modify our management information systems, including software and hardware,as we grow and the needs of our business change.  In particular, our financial and retail pointof sale systems will  be replaced duringthe coming years.  The occurrence of asignificant system failure, electrical or telecommunications outages or ourfailure to expand or successfully implement new systems could have a materialadverse effect on our results of operations.

 

Our information systems networks, including our web sites, andapplications could be adversely affected by viruses or worms and may bevulnerable to malicious acts such as hacking. Although we take preventive measures, these procedures may not besufficient to avoid harm to our operations, which could have an adverse effecton our results of operations.

 

·                  *We are dependent on third-party suppliers.*

 

We purchase substantially all of our computer products from majordistributors such as Ingram Micro Inc. and Tech Data and directly fromlarge manufacturers such as Hewlett Packard and Acer, who may deliver thoseproducts directly to our customers. These relationships enable us to makeavailable to our customers a wide selection of products without having tomaintain large amounts of inventory.  Thetermination or interruption of our relationships with any of these supplierscould materially adversely affect our business.

 

Our PC products contain electronic components, subassemblies andsoftware that in some cases are supplied through sole or limited source third-partysuppliers, some of which are located outside of the U.S. Although we do notanticipate any problems procuring supplies in the near-term, there is noassurance that parts and supplies will be available in a timely manner and atreasonable prices. Any loss of, or interruption of, supply from key suppliersmay require us to find new suppliers. This could result in production ordevelopment delays while new suppliers are located, which could substantiallyimpair operating results. If the availability of these or other components usedin the manufacture of our products was to decrease, or if the prices for thesecomponents were to increase significantly, operating costs and expenses couldbe adversely affected.

 

We purchase a number of our products from vendors outside of the UnitedStates. Difficulties encountered by one or several of these suppliers couldhalt or disrupt production and delay completion or cause the cancellation ofour orders. Delays or interruptions in the transportation network could resultin loss or delay of timely receipt of product required to fulfill customerorders.

 

Many product suppliers provide us with co-op advertising support inexchange for featuring

 

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their products in our catalogs and on our internet sites. Certainsuppliers provide us with other incentives such as rebates, reimbursements,payment discounts, price protection and other similar arrangements.  These incentives are offset against cost ofgoods sold or selling, general and administrative expenses, as applicable. Thelevel of co-op advertising support and other incentives received from suppliersmay decline in the future, which could increase our cost of goods sold orselling, general and administrative expenses and have an adverse effect onresults of operations and cash flows.

 

·                  *Goodwill and intangible assets may become impaired resulting in acharge to earnings.*

 

The acquisition of certain assets of CompUSA resulted in the recordingof significant intangible assets and goodwill. We are required to test goodwilland intangible assets to determine if the carrying values of these assets areimpaired annually or on a more frequent basis if indicators of impairmentexist. If any of our goodwill or intangible assets are determined to beimpaired we may be required to record a significant charge to earnings in theperiod during which the impairment is discovered.

 

·                  *We have substantial international operations and we are exposed tofluctuations in currency exchange rates and political uncertainties.*

 

We operate internationally and as a result, we are subject to risksassociated with doing business globally. Risks inherent to operating overseasinclude:

 

·                  Changes in acountry’s economic or political conditions

·                  Changes inforeign currency exchange rates

·                  Difficultieswith staffing and managing international operations

·                  Unexpectedchanges in regulatory requirements

 

For example, we currently have operations located in numerous countriesoutside the United States, and non-U.S. sales (Europe, Canada and Puerto Rico)accounted for approximately 37.9% of our revenue during 2008.  To the extent the U.S. dollar strengthensagainst foreign currencies, our foreign revenues and profits will be reducedwhen translated into U.S. dollars.

 

·                  *We are exposed to inventory risks.*

 

A substantial portion of our inventory is subject to risk due totechnological change and changes in market demand for particular products. Ifwe fail to manage our inventory of older products we may have excess or obsoleteinventory. We may have limited rights to return purchases to certain suppliersand we may not be able to obtain price protection on these items. Theelimination of purchase return privileges and lack of availability of priceprotection could lower our gross margin or result in inventory write-downs.

 

We also take advantage of attractive product pricing by makingopportunistic bulk inventory purchases; any resulting excess and/or obsoleteinventory that we are not able to re-sell could have an adverse impact on ourresults of operations. Any inability to make such bulk inventory purchases maysignificantly impact our sales and profitability.

 

·                  *Restrictions and covenants in our credit facility may limit our abilityto enter into certain transactions.*

 

Our United States/United Kingdom combinedrevolving credit agreement contains covenants restricting or limiting ourability to, among other things:

 

·                  incur additionaldebt

 

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·                  create or permitliens on assets

·                  make capitalexpenditures or investments

·                  pay dividends

 

If we fail to comply with the covenants and other requirements setforth in the credit agreement, we would be in default and would need tonegotiate a waiver agreement with the lenders. Failure to agree on such awaiver could result in the lenders terminating the credit agreement anddemanding repayment, which would adversely affect our cash position andadversely affect the availability of financing to us, which could materiallyimpact our operations.

 

·                *Wehave experienced rapid growth in retail stores*

 

Theacquisition of CompUSA in 2008 added 16 retail stores, more than double thethen existing number of stores. The addition of these stores requires theCompany to effectively manage its cost structure in order to maintainprofitability including the additional inventory needs, retail point of salesIT systems, retail personnel and leased facilities. Future growth in retailwill also be dependent on the ability to attract customers and build brand loyalty.The retail computer and consumer electronics business is highly competitive andhas narrow gross margins. If we fail to manage our growth and cost structurewhile maintaining high levels of service and meeting competitive pressuresadequately, our business plan  may not be achieved and may lead to reducedprofitability***.***

 

·                  *Rebate Processing*

 

Similiar to other companies in the technology products industry, weadvertise manufacturers’ mail-in rebates on many products we sell and, in somecases, offer our own rebates. These  rebates are processed through third party vendors and in house. If theserebates are not processed in a timely and satisfactory manner by either thirdparty vendors or our in house operations, our reputation in the marketplacecould be negatively impacted.  See Item3, Legal Proceedings.

 

·                  *Grossprofit margins in Technology Products are narrow and variable*

 

Thecomputer and consumer electronics industry is highly price competitive andgross profit margins are narrow and variable. The Company’s ability to reduceprices in reaction to competitive pressure may be limited. Additionally, grossprofit margins and operating margins are affected by changes in factors such asvendor pricing, vendor rebate and or price protection programs, product returnrights, and product mix. Pricing pressure was prevalent in the second half of2008 as a result of the significant decline in economic activity in the marketswe serve and we expect this to continue during this or any period of sustainedeconomic decline. We may not be able to mitigate these pricing pressures andresultant declines in sales and gross profit margin with cost reductions inother areas or expansion into new product lines. If we are unable toproportionately mitigate these conditions our operating results and financialcondition may suffer.

 

·                  *Wemay be liable for misuse, loss or theft of our customers’ personal information*

 

Inprocessing our sales orders we often collect personal information and creditcard information from our customers. The Company has comprehensive privacy anddata security policies in place which are designed to prevent securitybreaches, however, if a third party or a rogue employee or employees are ableto bypass our network security or otherwise compromise our customers’ personalinformation or credit card information, we could be subject to liability. Thisliability may include claims for identity theft, unauthorized purchases, claimsalleging misrepresentation of our privacy and data security practices or otherrelated claims.

 

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·                  *Increased costs associated with corporate governance compliance mayimpact our results of operations.*

 

As a public company, we incur significant legal, accounting and otherexpenses that we would not incur as a private company. In addition, theSarbanes-Oxley Act of 2002, as well as rules subsequently implemented bythe Securities and Exchange Commission and listing requirements subsequentlyadopted by the New York Stock Exchange in response to Sarbanes-Oxley, haverequired changes in corporate governance practices of public companies. Thesedevelopments have substantially increased our legal compliance, auditing andfinancial reporting costs and made them more time consuming. These developmentsmay also make it more difficult and more expensive for us to obtain directors’and officers’ liability insurance and we may be required to accept reducedcoverage or incur substantially higher costs to obtain coverage, possiblymaking it more difficult for us to attract and retain qualified members of ourboard of directors, particularly to serve on our audit committee.

 

·                  *Our success is dependent upon the availability of credit and financing.*

 

We require significant levels of capital in our business to financeaccounts receivable and inventory. We maintain credit facilities in the UnitedStates and in Europe to finance increases in our working capital if availablecash is insufficient.  The amount ofcredit available to us at any point in time may be adversely affected by thequality or value of the assets collateralizing these credit lines. In addition,if we are unable to renew or replace these facilities at maturity our liquidityand capital resources may be adversely affected. However, we currently have noreason to believe that we will not be able to renew or replace our facilitieswhen they reach maturity.

 

·                  *Sales to individual consumers exposes us to credit card fraud, whichcould adversely affect our business.*

 

Failure to adequately control fraudulent credit card transactions couldincrease our expenses. Increased sales to individual consumers, which are morelikely to be paid for using a credit card, increases our exposure to fraud. Weemploy technology solutions to help us detect the fraudulent use of credit cardinformation. However, if we are unable to detect or control credit card fraud,we may suffer losses as a result of orders placed with fraudulent credit carddata, which could adversely affect our business.

 

·                  *Our income tax rate and the value of our deferred tax assets aresubject to change.*

 

Changes in our income tax expense due to changes in the mix of U.S. andnon-U.S. revenues and profitability, changes in tax rates or exposure toadditional income tax liabilities could affect our profitability. We aresubject to income taxes in the United States and various foreign jurisdictions.Our effective tax rate could be adversely affected by changes in the mix ofearnings in countries with differing statutory tax rates, changes in thevaluation of deferred tax assets and liabilities, changes in tax laws or bymaterial audit assessments. The carrying value of our deferred tax assets,which are primarily in the United States and the United Kingdom, is dependenton our ability to generate future taxable income in those jurisdictions. Inaddition, the amount of income taxes we pay is subject to ongoing audits invarious jurisdictions and a material assessment by a tax authority could affectour profitability.

 

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·                  *We may encounter risks in connection with sales of our web-hostedsoftware application.*

 

In 2004, we introduced our web-based and hosted, on-demand softwaresuite of products, marketed as PCS ProfitCenter SoftwareTM. We have a limitedoperating history with this type of product offering and may encounter risksinherent in the software industry, including but not limited to:

 

·                  failure toimplement effective general and application controls

·                  errors orsecurity flaws in our product

·                  technicaldifficulties which we can not resolve on a timely or cost-effective basis

·                  inability toprovide the level of service commitment

·                  inability todeliver product upgrades and enhancements

·                  delays indevelopment

·                  inability tohire and retain qualified technical personnel

·                  impact ofprivacy laws on the use of our product

·                  exposure toclaims of infringement of intellectual property rights

 

 

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**Item 1B. Unresolved Staff Comments.**

None.

 

**Item 2.Properties.**

 

Our primary facilities, which are leasedexcept where otherwise indicated, are as follows:

 
| **Facility**                                    | ** ** | **Location**                    | ** ** | **Approximate  Square Feet** | ** ** | **Expiration  of Lease** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | ** **                      | ** ** | ** **                   | ** ** | ** **                    | ** ** |
| Headquarters, Sales and Distribution Center (1) |       | Port Washington, NY             |       | 86,000                       |       | 2017                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales and Distribution Center                   |       | Buford, GA                      |       | 647,000                      |       | 2021                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales, Distribution Center and Retail Store     |       | Naperville, IL                  |       | 330,000                      |       | 2026                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| PC Assembly, Sales and Distribution Center      |       | Fletcher, OH                    |       | 297,000                      |       | Owned                         |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales and Administrative Center                 |       | Miami, FL                       |       | 80,000                       |       | 2010                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Distribution Center                             |       | Las Vegas, NV                   |       | 90,000                       |       | 2010                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales Center                                    |       | Markham, Ontario                |       | 23,000                       |       | 2013                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales and Administrative Center                 |       | Richmond Hill, Ontario          |       | 20,296                       |       | 2017                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales, Administrative and Distribution Center   |       | Verrieres le Buisson, France    |       | 48,000                       |       | 2010                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales, Administrative and Distribution Center   |       | Langen, Germany                 |       | 92,000                       |       | 2013                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales, Administrative and Distribution Center   |       | San Agustin del Guadalix, Spain |       | 38,000                       |       | 2009                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales, Administrative and Distribution Center   |       | Lacchiarella, Italy             |       | 102,000                      |       | 2009                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales and Distribution Center                   |       | Greenock, Scotland              |       | 78,000                       |       | Owned                         |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales and Administrative Center                 |       | Wellingborough, England         |       | 75,000                       |       | Owned                         |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales and Administrative Center                 |       | Amstelveen, Netherlands         |       | 21,000                       |       | 2012                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales, Administrative and Distribution Center   |       | Lidkoping, Sweden               |       | 20,000                       |       | 2009                          |       |
|                                            |       |                            |       |                         |       |                          |       |
| Sales and Administrative Center                 |       | Uniondale, NY                   |       | 22,719                       |       | 2012                          |       |

 

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(1)          For information about this facility, leasedfrom related parties, see Item 13 —Certain Relationships and RelatedTransactions and Director Independence.

 

We also lease space for other smalleroffices and retail stores in the United States, Canada, Puerto Rico and Europeand certain facilities leased by the Company are subleased to others. Webelieve our current facilities provide adequate capacity for our current andprojected needs. We intend to renew the leases for our space which wouldotherwise terminate in 2009.

 

For further information regarding ourlease obligations, see Note 9 to the Consolidated Financial Statements.

 

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**Item 3. Legal Proceedings.**

 

KevinVukson v. TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc.

 

OnOctober 18, 2007, Kevin Vukson filed a national class action complaint inU.S. District Court against TigerDirect, Inc., OnRebate.com Inc. andSystemax Inc. on behalf of himself and all OnRebate customers whose rebateswere denied or delayed. (OnRebate.com Inc. is a rebate processing company ownedby Systemax.).  Vukson’s complaint (asamended) alleges that since 2004 Systemax, TigerDirect and OnRebate engaged ina conspiracy to engage in deceptive and unfair rebate practices.  Vukson alleges counts for violation of stateconsumer protection statutes, conspiracy, and unfair rebate practices.  On February 11, 2009 the Court dismissedVukson’s complaint with leave to file an amended complaint by February 19,2009 but ordered that any amended complaint not include a request for punitivedamages. On February 19, 2009 Vukson filed an amended complaint with norequest for punitive damages, as ordered by the Court. The Company willcontinue to vigorously defend this case.

 

# **State of Florida,Office of the Attorney General Subpoena**

# ** **

OnJanuary 2, 2008 the Company received a subpoena for documents from theFlorida Attorney General’s Office relating to the payment and processing ofrebates by the Company. The Company received subpoenas for additional documentson January 30, 2008 and on August 25, 2008.  The Company is cooperating with the FloridaAttorney General’s investigation and has provided a substantial number ofdocuments in response to the subpoenas.

 

Other Matters

 

Systemax is a party to various pending legalproceedings and disputes arising in the normal course of business, includingthose involving commercial, employment, tax and intellectual property relatedclaims, none of which, in management’s opinion, is anticipated to have amaterial adverse effect on our consolidated financial statements.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders.**

 

None.

 

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**PART II**

 

**Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases ofEquity Securities**

 

Systemax common stock is traded on the NewYork Stock Exchange under the symbol “SYX.” The following table sets forth the high and low closing sales price ofour common stock as reported on the New York Stock Exchange for the periodsindicated.

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2008           |       |     |       |    |       |
| First Quarter  |       | $        | 20.32      |    | $          | 9.01 |   |
| Second Quarter |       | 20.89    |       | 12.06   |       |
| Third Quarter  |       | 18.43    |       | 14.04   |       |
| Fourth Quarter |       | 15.10    |       | 8.75    |       |
|           |       |     |       |    |       |
| 2007           |       |     |       |    |       |
| First Quarter  |       | $        | 30.13      |    | $          | 18.10 |   |
| Second Quarter |       | 21.75    |       | 16.22   |       |
| Third Quarter  |       | 22.12    |       | 17.60   |       |
| Fourth Quarter |       | 24.47    |       | 17.95   |       |

 

On January 3, 2009, the last reportedsale price of our common stock on the New York Stock Exchange was $10.87 pershare.  As of January 3, 2009, wehad 230 shareholders of record.

 

On March 3, 2008, the Company’s Board ofDirectors declared a special dividend of $1.00 per share payable on April 2,2008 to shareholders of record on March 21, 2008. This special dividend isthe second dividend we have paid since our initial public offering. Dependingin part upon profitability, the strength of our balance sheet, our cashposition and the need to retain cash for the development and expansion of ourbusiness, we may decide to declare another special dividend in the future.

 

On March 14, 2007, the Company’s Boardof Directors declared a special dividend of $1.00 per share payable on April 12,2007 to shareholders of record on April 2, 2007. This special dividend wasthe first dividend we have paid since our initial public offering.

 

In May 2008, the Company’s Board ofDirectors authorized the repurchase of up to 2,000,000 shares of the Company’scommon stock. During 2008 the Company repurchased 475,301 common shares. Detailof those purchases is as follows:

 
| **Fiscal Month** | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
|                  |       |                                                 |       |                                             |       |                                                                                                                         |       |                                                                                                                                |       |
| August                |       | 228,401                                              |       | $                                                | 15.04      |                                                                                                                         | 228,401    |                                                                                                                                | 1,771,599  |   |
| December              |       | 246,900                                              |       | $                                                | 9.67       |                                                                                                                         | 475,301    |                                                                                                                                | 1,524,699  |   |
|                  |       |                                                 |       |                                             |       |                                                                                                                         |       |                                                                                                                                |       |
| Total                 |       | 475,301                                              |       | $                                                | 12.25      |                                                                                                                         |       |                                                                                                                                |       |   |

 

Information regarding securities authorized for issuance under equitycompensation plans and a performance graph relating to the Company’s commonstock is set forth in the Company’s Proxy Statement relating to the 2009 annualmeeting of shareholders and is incorporated by reference herein.

 

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**Item 6. Selected Financial Data.**

 

The following selected financialinformation is qualified by reference to, and should be read in conjunctionwith, the Company’s Consolidated Financial Statements and the notes thereto,and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” contained elsewhere in this report. The selected statement ofoperations data for fiscal years 2008, 2007 and 2006 and the selected balancesheet data as of December 2008 and 2007 are derived from the audited consolidatedfinancial statements which are included elsewhere in this report. The selectedbalance sheet data as of December 2006, 2005 and 2004 and the selectedstatement of operations data for fiscal years 2005 and 2004 are derived fromthe audited consolidated financial statements of the Company which are notincluded in this report.

 
| ** **                                     | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | ** **                                  | ** ** | **(In millions, except per share data)** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Statement of Operations Data:**              |       |                                        |       |   |   |   |   |   |   |   |   |
| Net sales                                      |       | $                                           | 3,033.0    |   | $ | 2,779.9 |   | $ | 2,345.2 |   | $ | 2,115.5 |   | $ | 1,928.1 |   |
| Gross profit                                   |       | $                                           | 464.1      |   | $ | 426.3 |   | $ | 342.9 |   | $ | 307.3 |   | $ | 286.5 |   |
| Operating income                               |       | $                                           | 83.4       |   | $ | 93.9 |   | $ | 60.7 |   | $ | 37.2 |   | $ | 17.6 |   |
| Net income                                     |       | $                                           | 52.8       |   | $ | 69.5 |   | $ | 45.1 |   | $ | 11.4 |   | $ | 10.2 |   |
| **Per Share Amounts:**                         |       |                                        |       |   |   |   |   |   |   |   |   |
| Net income – diluted                      |       | $                                           | 1.41       |   | $ | 1.84 |   | $ | 1.22 |   | $ | .31 |   | $ | .29 |   |
| Weighted average common shares –  diluted |       | 37.4                                        |       | 37.8 |   | 36.9 |   | 36.5 |   | 35.5 |   |
| Cash dividends declared per  common share      |       | $                                           | 1.00       |   | $ | 1.00 |   | $ | — |   | $ | — |   | $ | — |   |
| **Balance Sheet Data:**                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Working capital                                |       | $                                           | 250.6      |   | $ | 274.4 |   | $ | 229.4 |   | $ | 169.8 |   | $ | 148.0 |   |
| Total assets                                   |       | $                                           | 703.3      |   | $ | 677.6 |   | $ | 584.1 |   | $ | 504.5 |   | $ | 483.2 |   |
| Long-term debt, excluding  current portion     |       | $                                           | 1.4        |   | $ | .3 |   | $ | .5 |   | $ | 8.0 |   | $ | 8.6 |   |
| Shareholders’ equity                      |       | $                                           | 334.0      |   | $ | 335.8 |   | $ | 289.5 |   | $ | 232.8 |   | $ | 222.6 |   |

 

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**Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

 

# **Overview**

# ** **

# **Systemax is primarily a direct marketer of brand name andprivate label products. Our operations are organized in three reportablebusiness segments — Technology Products, Industrial Products and Software Solutions.Our Technology Products segment sells computers, computer supplies and consumerelectronics which are marketed in North America, Puerto Rico and Europe. Exceptfor certain PC products that we assemble ourselves and sell under thetrademarks *SystemaxTM* and *UltraTM*,substantially all of our products are manufactured by other companies.  We also sell certain computer-relatedproducts manufactured for us to our own design under the trademark *SystemaxTM and UltraTM.*Technology products accounted for 92%of our net sales in 2008.  Our IndustrialProducts segment sells a wide array of material handling equipment, storageequipment and consumable industrial items which are marketed in North America.  Substantially all of these products aremanufactured by other companies.  Someproducts are manufactured for us to our own design and marketed under thetrademarks *GlobalTM*, *GlobalIndustrial.comTM*and *NexelTM.* Industrial products accountedfor 8% of our net sales in 2008.  In bothof these product groups, we offer our customers a broad selection of products,prompt order fulfillment and extensive customer service.  Our Software Solutions segment, which becamea reportable segment in 2006, participates in the emerging market foron-demand, web-based business software applications through the marketing ofour PCS ProfitCenter Software*TM*application.  See Note 10 to the ConsolidatedFinancial Statements included in Item 15 of this Form 10-K for additionalfinancial information about our business segments as well as information aboutour geographic operations.**

# ** **

Themarket for computer products and consumer electronics is subject to intenseprice competition and is characterized by narrow gross profit margins. TheNorth American industrial products market is highly fragmented and we competeagainst companies utilizing multiple distribution channels. Distribution of ourtechnology products and industrial products is working capital intensive,requiring us to incur significant costs associated with the warehousing of manyproducts, including the costs of leasing warehouse space, maintaining inventoryand inventory management systems, and employing personnel to perform theassociated tasks. We supplement our on-hand product availability by maintainingrelationships with major distributors and manufacturers, utilizing acombination of stocking and drop-shipment fulfillment.

 

Theprimary component of our operating expenses historically has been employeerelated costs, which includes items such as wages, commissions, bonuses,employee benefits and stock option expenses. We continually assess ouroperations to ensure that they are efficient, aligned with market conditionsand responsive to customer needs.

 

Duringthe first quarter of 2008 the Company acquired CompUSA’s e-commerce businessand 16 of its retail leases and related fixtures for direct consideration ofapproximately $30.6 million. This acquisition accelerated the Company’s plannedexpansion into the retail market place for Technology Products in North Americaand Puerto Rico.

 

**Critical Accounting Policies and Estimates**

 

Our significant accounting policies are described in Note 1 to theconsolidated financial statements.   Certain accounting policies require the application of significantjudgment by management in selecting the appropriate assumptions for calculatingfinancial estimates.  By their nature,these judgments are subject to an inherent degree of uncertainty, and as aresult, actual results could differ from those estimates.  These judgments are based on historicalexperience*,*observation of trends in the industry,information provided by customers and information available from other outsidesources, as appropriate.  Managementbelieves that full consideration has been given to all relevant circumstancesthat we may be subject to, and the consolidated financial statements of the Companyaccurately reflect management’s best estimate of the consolidated results ofoperations, financial position and cash flows of the Company for the yearspresented. Weidentify below a number of policies that entail significant judgments orestimates.  Actual results maydiffer from these estimates under different conditions or assumptions.

 

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*Revenue Recognition.*We recognize productsales when persuasive evidence of an order arrangement exists, delivery hasoccurred, the sales price is fixed or determinable and collectibility isreasonably assured. Generally, these criteria are met at the time of receipt bycustomers when title and risk of loss both are transferred. Sales are shown netof returns and allowances, rebates and sales incentives.  Reserves for estimated returns and allowancesare provided when sales are recorded, based on historical experience and currenttrends.

 

*Accounts Receivable and Allowance for Doubtful Accounts*.We record an allowance for doubtful accounts to reflect our estimate of thecollectibility of our trade accounts receivable. We evaluate the collectibilityof accounts receivable based on a combination of factors, including an analysisof the age of customer accounts and our historical experience with accountsreceivable write-offs. The analysis also includes the financial condition of aspecific customer or industry, and general economic conditions.  In circumstances where we are aware ofcustomer charge-backs or a specific customer’s inability to meet its financialobligations, a specific reserve for bad debts applicable to amounts due toreduce the net recognized receivable to the amount management reasonablybelieves will be collected is recorded. In those situations with ongoingdiscussions, the amount of bad debt recognized is based on the status of thediscussions. While bad debt allowances have been within expectations and theprovisions established, there can be no guarantee that we will continue toexperience the same allowance rate we have in the past.

 

*Inventories*. We value our inventories at the lower of cost or market, cost beingdetermined on the first-in, first-out method except in Europe and retaillocations where an average cost is used. Excess and obsolete or unmarketablemerchandise are written down based on historical experience, assumptions aboutfuture product demand and market conditions. If market conditions are lessfavorable than projected or if technological developments result in acceleratedobsolescence, additional write-downs may be required. While obsolescence andresultant markdowns have been within expectations, there can be no guaranteethat we will continue to experience the same level of markdowns we have in thepast.

 

*Goodwill and, Intangible Assets*— We apply the provisions of Statement ofFinancial Accounting Standards No. 142 (“FAS 142”), “Goodwill and OtherIntangible Assets,” in our valuation of goodwill and other intangible assets.FAS 142 requires that goodwill be reviewed at least annually for potentialimpairment. The amount of an impairment loss would be recognized as the excessof the asset’s carrying value over its fair value.

 

*Long-lived Assets.* Management exercisesjudgment in evaluating our long-lived assets for impairment. We believe we willgenerate sufficient undiscounted cash flow to more than recover the investmentsmade in property, plant and equipment. Our estimates of future cash flowsinvolve assumptions concerning future operating performance and economicconditions.  While we believe that ourestimates of future cash flows are reasonable, different assumptions regardingsuch cash flows could materially affect our evaluations.

 

*Accruals.*Management exercises judgment in estimatingvarious period end liabilities such as costs related to vendor drop shipments,sales returns and allowances, cooperative advertising and customer rebatereserves, and other vendor and employee related costs. While we believe thatthese estimates are reasonable, any significant deviation of actual costs ascompared to these estimates could have a material impact on the Company’sconsolidated financial statements.

 

*Income Taxes.* We aresubject to taxation from federal, state andforeign jurisdictions and the determination of our tax provision is complex andrequires significant management judgment. Management judgment is also applied in the determination of deferred taxassets and liabilities and any valuation allowances that might be required inconnection with our ability to realize deferred tax assets.

 

Since we conduct operations in numerous US states and internationally,our effective tax rate has and will continue to depend upon the geographicdistribution of our pre-tax income or losses among locations with varying taxrates and rules. As the geographic mix of our pre-tax results among various taxjurisdictions changes, the effective tax rate may vary from period to period.We are also subject to periodic

 

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examination from domestic and foreign tax authorities regarding theamount of taxes due. These examinations include questions regarding the timingand amount of deductions and the allocation of income among various taxjurisdictions. We have established, and periodically reevaluate, an estimatedincome tax reserve on our consolidated balance sheet to provide for thepossibility of adverse outcomes in income tax proceedings. While managementbelieves that we have identified all reasonably identifiable exposures and thatthe reserve we have established for identifiable exposures is appropriate underthe circumstances, it is possible that additional exposures exist and thatexposures may be settled at amounts different than the amounts reserved.

 

****We recognize deferred tax assets and liabilities****for the effect of temporary differences between the book and tax bases ofrecorded assets and liabilities and for tax loss carry forwards. Therealization of net deferred tax assets is dependent upon our ability togenerate sufficient future taxable income. Where it is more likely than notthat some portion or all of the deferred tax asset will not be realized, we haveprovided a valuation allowance. If the realization of those deferred tax assetsin the future is considered more likely than not, an adjustment to the deferredtax assets would increase net income in the period such determination is made.In the event that actual results differ from these estimates or we adjust theseestimates in future periods, an adjustment to the valuation allowance may berequired, which could materially affect our consolidated financial position andresults of operations.

 

*Restructuring charges. *We have takenrestructuring actions in the past and could in the future commence furtherrestructuring activities which result in recognition of restructuring chargesif events make it necessary. These actions require management to make judgmentsand utilize significant estimates regarding the nature, timing and amounts ofcosts associated with the activity. When we incur a liability related to arestructuring action, we estimate and record all appropriate expenses,including expenses for severance and other employee separation costs, facilityconsolidation costs (including estimates of sublease income), leasecancellations, asset impairments and any other exit costs. Should the actualamounts differ from our estimates, the amount of the restructuring chargescould be impacted, which could materially affect our consolidated financialposition and results of operations.

 

**Recently Adopted and Newly Issued AccountingPronouncements**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157 “Fair ValueMeasurements”. This statement was issued to increase consistency andcomparability in fair value measurements and for expanded disclosures aboutfair value measurements.  Effective January 1,2008 the Company adopted the provisions of SFAS No. 157, which did nothave a material impact on the Company’s consolidated financial statements.

 

InFebruary 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2,which provides for a one-year deferral of the provisions of SFAS No. 157 until fiscal years beginning after December 15, 2008 for non-financial assets and liabilities thatare recognized or disclosed at fair value in the consolidated financialstatements on a non-recurring basis.  TheCompany is currently evaluating the potential impact, if any, of FSP 157-2.

 

InApril 2008, the FASB issued FSP FAS 142-3 “Determination of the UsefulLife of Intangible Assets”. FSP FAS 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets. The intent of this FSP is to improve theconsistency between the useful life of a recognized intangible asset and theperiod of expected cash flows used to measure the fair value of the asset.  The standard applies prospectively tointangible assets acquired and/or recognized on or after January 1, 2009.The Company is currently evaluating the impact, if any, the adoption of thisFSP may have on the Company’s consolidated financial statements.

 

InJune 2008, the FASB issued FASB Staff Position No. EITF 03-6-1“Determining Whether Instruments Granted in Share-Based Payment TransactionsAre Participating Securities”. This FSP was issued to clarify that instrumentsgranted in share-based payment transactions can be participating securitiesprior 

 

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tothe requisite service having been rendered. The guidance in this FSP applies tothe calculation of Earnings Per Share (“EPS”) under Statement 128 forshare-based payment awards with rights to dividends or dividend equivalents.Unvested share-based payment awards that contain non-forfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and shall be included in the computation of EPS pursuant to the two-classmethod. This FSP is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008, and interim periods within those years.All prior-period EPS data presented shall be adjusted retrospectively(including interim financial statements, summaries of earnings, and selectedfinancial data) to conform with the provisions of this FSP. The Company doesnot expect the adoption of this FSP to have a material impact on itsconsolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141R, “BusinessCombinations,” which replaces FASB Statement 141. SFAS No.141R retains therequirement that the acquisition method of accounting be used for businesscombinations. The objective of SFAS No. 141R is to improve the relevance,representational faithfulness and comparability that reporting entities providein their financial reports about business combinations and their effects. SFAS No. 141Restablishes principles and requirements for how an acquirer 1) recognizes andmeasures identifiable assets acquired, the liabilities assumed and anynon-controlling interest in the acquiree, 2) recognizes and measures thegoodwill acquired in the combination or a gain from a bargain purchase and 3)determines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination. SFAS No. 141R is effective for annual periods beginning afterDecember 15, 2008 and will be applied prospectively for all business combinationsentered into after the date of adoption. The impact of SFAS No. 141R will depend on the nature and terms ofany future business combinations, if any.

 

InDecember 2007, the FASB issued SFAS No. 160, “Accounting andReporting of Non-controlling Interest”. The objective of SFAS No. 160 isto improve the relevance, comparability and transparency of the financialinformation that reporting entities provide related to non-controllinginterests, sometimes referred to as minority interests. SFAS No. 160 requires,among other things, that non-controlling interests be shown separately in theconsolidated entity’s equity section of the balance sheet. SFAS No. 160also establishes accounting and reporting standards for ownership interestin subsidiaries held by parties other than the parent, for presentation ofamounts of consolidated net income attributable to the parent and thenon-controlling interest, for consistency in accounting for changes in aparent’s ownership interest when the parent retains a controlling interest, forthe valuation of retained non-controlling equity interests when a subsidiary isdeconsolidated and for providing sufficient disclosure that identifies anddistinguishes the interests of the parent and the interests of the non-controllingowners. SFAS No. 160 is effective beginning January 1, 2009. TheCompany does not expect the adoption of SFAS No.160 to have a material impacton its consolidated financial statements.

 

**Highlights from 2008**

 

Thediscussion of our results of operations and financial condition that followswill provide information that will assist in understanding our financialstatements and information about how certain accounting principles andestimates affect the consolidated financial statements. This discussion shouldbe read in conjunction with the consolidated financial statements includedherein.

 

·                  Sales increaseof 9% in 2008 over 2007

·                  CompUSA.com andCompUSA retail contributed $226.3 million in sales

·                  Movements inexchange rates positively impacted European and Canadian sales by approximately$13 million and $5 million, respectively

·                  Revenue growthslowed in the second half of 2008

 

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# **Results of Operations**

# ** **

KeyPerformance Indicators (in thousands):

 
| ** **                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------|------------|---------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **%  Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **%  Change** | ** ** |
| *Net sales by segment:*      |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Technology products          |       | $                                           | 2,795,441  |   | $ | 2,553,716 |   | 9.5 | % | $ | 2,553,716 |   | $ | 2,148,104 |   | 18.9 | % |
| Industrial products          |       | 237,027                                     |       | 225,746 |   | 5.0 | % | 225,746 |   | 196,860 |   | 14.7 | % |
| Software solutions           |       | 493                                         |       | 413 |   | 19.4 | % | 413 |   | 201 |   | 105.5 | % |
| Total net sales              |       | $                                           | 3,032,961  |   | $ | 2,779,875 |   | 9.1 | % | $ | 2,779,875 |   | $ | 2,345,165 |   | 18.5 | % |
| *Net sales by geography:*    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| North America                |       | $                                           | 2,092,372  |   | $ | 1,847,477 |   | 13.3 | % | $ | 1,847,477 |   | $ | 1,601,259 |   | 15.4 | % |
| Europe                       |       | 940,589                                     |       | 932,398 |   | .9 | % | 932,398 |   | 743,906 |   | 25.3 | % |
| Total net sales              |       | $                                           | 3,032,961  |   | $ | 2,779,875 |   | 9.1 | % | $ | 2,779,875 |   | $ | 2,345,165 |   | 18.5 | % |
| *Gross margin*               |       | 15.3                                        | %          | 15.3 | % | — |   | 15.3 | % | 14.6 | % | .7 | % |
| SG&A costs               |       | $                                           | 380,778    |   | $ | 332,359 |   | 14.6 | % | $ | 332,359 |   | $ | 282,189 |   | 17.8 | % |
| SG&A costs as % of sales |       | 12.6                                        | %          | 12.0 | % | .6 | % | 12.0 | % | 12.0 | % | (.— | )% |
| Operating income             |       | $                                           | 83,367     |   | $ | 93,942 |   | (11.3 | )% | $ | 93,942 |   | $ | 60,730 |   | 54.7 | % |
| *Operating margin*           |       | 2.7                                         | %          | 3.4 | % | (.7 | )% | 3.4 | % | 2.6 | % | .8 | % |
| Effective income tax rate    |       | 36.9                                        | %          | 30.5 | % | 6.4 | % | 30.5 | % | 35.2 | % | (4.7 | )% |
| Net income                   |       | $                                           | 52,843     |   | $ | 69,481 |   | (23.9 | )% | $ | 69,481 |   | $ | 45,147 |   | 53.9 | % |
| *Net margin*                 |       | 1.7                                         | %          | 2.5 | % | (.8 | )% | 2.5 | % | 1.9 | % | .6 | % |

 

*NET SALES*

 

Net sales grew 9% to $3 billion driven by growth in both technology andindustrial products segments.  Excludingthe effects of exchange rate changes, sales would have grown 8%. North Americantechnology products sales grew 14% to $1.9 billion. Exchange rate changes didnot impact full year sales growth. European technology products sales grew 1%to $940.6 million. Excluding exchange rate benefits, European sales would havebeen flat.

 

Sales increased in all three reporting business segments and in bothgeographies during 2008 over 2007.  TheTechnology Products sales increase was driven by increased internet and retailstore sales as the result of the acquisition of the CompUSA ecommerce businessand re-opening sixteen retail stores. Sales attributable to CompUSA web and retail were $226.3 million for theyear. Excluding CompUSA revenue, total Technology Products revenues increased0.6% compared to the prior year. In the United States, Technology Productssales excluding CompUSA declined 1.0% for the year. The decline over the yearis the result of slower business to business IT and consumer electronics salesas United States economy activity slowed in the second half of 2008. In Europesales increased .9% compared to a year ago. Movements in foreign exchange ratespositively impacted the European sales comparison by approximately $13 millionfor the year. Excluding exchange rate benefits, European sales would have beenflat year over year. Sales in Canada (Other North America) increased by 13.9%compared to the prior year. Excluding exchange rate benefits, sales would haveincreased 10.9% for the year. The increased sales are primarily the result ofthe opening of one additional retail store, increased business to business andweb sales and generally more stable economic conditions in Canada as comparedto other locations. As in the United States, sales slowed in the second half of2008 in Europe and Canada for both consumer and business to business sales asthe result of a slowdown in economic activity.

 

The growth in Industrial Products sales resulted from the Companyincreasing its market share through aggressive acquisition of customers via weband catalog, increased web advertising by expanding and refining advertisementsfor existing product lines and adding new advertising for new product lines viasearch engines, shipping engines and vertical market sites.

 

In our Software Solutions segment, revenues continue to beinsignificant relative to consolidated revenues. In the fourth quarter of 2008,the Company reorganized its Software business to reduce its net

 

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loss and negative cash flow.  Theactions taken resulted in a charge to earnings of approximately $1.7million.  The Company expects to realizesavings of approximately $2.6 million annually.

 

Sales increased in all three reporting business segments and in bothgeographies during 2007 over 2006.  Thegrowth in Technology Products sales was driven primarily by increased internetand retail store sales, private label product sales and expanded productofferings.  The growth in IndustrialProducts sales resulted from the Company increasing its market share throughcompetitive pricing advantages and increased internet sales.  The growth in North American sales reflectedthe above factors in both segments. The growth in European sales was driven bystrong business to business gains and by the effect of a weaker US dollar.  Exchange rates positively impacted theEuropean sales comparison by approximately $78 million in 2007 as compared to2006.  Excluding the movements in foreignexchange rates, European sales would have increased 12% from the prioryear.  Sales as measured in localcurrencies increased in all of the European markets we served in 2007. Sales inour Software segment were not material in 2007 and 2006 due to early stage ofoperations.

 

*GROSS MARGIN*

 

Consolidated gross margin remainedconsistent year over year at 15.3%, although in the fourth quarter of 2008 theCompany’s gross margin declined to 14.4% as the Company lowered certain productprices and offered freight incentives in order to gain market share and respondto competitive pricing pressures.  Grossmargin is dependent on variables such as product mix, vendor price protectionand other sales incentives, competition, pricing strategy, cooperativeadvertising funds required to be classified as a reduction of cost of sales,freight discounting and other  variables,any or all of which may result in fluctuations in gross margin.

 

Grossmargin increased 70 basis points during 2007 over 2006, due primarily todecreased competitive pricing pressuresin the Technology Products segment.

 

*SELLING, GENERAL AND ADMINISTRATIVE EXPENSES*

 

Selling, general and administrative expenses increased in 2008 over2007 primarily as a result of the increase in sales volume, added personnel,facility and other operating costs associated with the CompUSA acquisition, aswell as increased accounting, auditing, legal and professional expenses andreorganization charges incurred in our Software segment. Significant expenseincreases include approximately $27.0 million of increased sales and othersalaries and related costs related to the increased sales volume; rent and realestate tax increases of $10.6 million;  $5.8 million of increased professional and telephone/computermaintenance costs; and $4.3 million of increased credit card fees.  CompUSA operations accounted for $23.6million of these cost increases. Included in 2007 is a gain of approximately$2.4 million from a lawsuit that was settled favorably.

 

Selling, general and administrative expenses increased in 2007 over2006 primarily as a result of the increase in sales volume as well as increasedaccounting, auditing, legal and consulting costs related to the Company beingsubject to Sarbanes Oxley section 404 requirements. Significant expenseincreases include approximately $26 million of increased internet advertisingcosts, $8 million of increased sales salaries related to the increased salesvolume and an increase in other salaries and related costs of approximately $15million due to increased staff in areas such as finance, marketing andinformation technology.

 

*INTEREST AND OTHER INCOME**AND INTERESTEXPENSE*

 

Interest expense was $.3 million, $1.0million and $1.7 million in 2008, 2007 and 2006. Interest expense decreased in2008 and 2007 as a result of decreased short-term borrowings in the UnitedKingdom and the Netherlands. The extinguishment of mortgage debt related to ourGeorgia warehouse sale in the first quarter of 2006 also contributed to thedecreased interest expense. Interest and other income, net was $2.0 million,$5.5 million and $9.5 million in 2008, 2007 and 2006. The increase in otherincome in 2006 mainly resulted from the gain on sale of the Georgia location.

 

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*INCOME TAXES*

 

TheCompany’s effective tax rate was 36.9% in 2008 as compared to 30.5% in 2007.The higher tax rate in 2008 is primarily attributed to a higher effective taxrate in the United Kingdom in 2008 as the result of the reversal of thevaluation allowance in 2007. The lower effective tax rate in 2007 resultedprimarily from the reversal of a valuation allowance of approximately $5.9million against deferred tax assets in the United Kingdom partially offset bythe recording of a valuation allowance of approximately $1.7 million againstthe deferred tax assets of Germany. The United Kingdom valuation allowance,originally recorded at $10.2 million, had been established in 2005 as theresult of a cumulative loss position in the United Kingdom.

 

During2008, 2007 and 2006, we did not recognize certain foreign tax credits, certainstate deferred tax assets in the United States and certain benefits on lossesin foreign tax jurisdictions due to our inability to carry such credits andlosses back to prior years and our determination that it was more likely thannot that we would not generate sufficient future taxable income in those taxjurisdictions to realize these assets. Accordingly, valuation allowances were recordedagainst the deferred tax assets associated with those items. If we are able torealize all or part of these deferred tax assets in future periods, it willreduce our provision for income taxes by a release of the correspondingvaluation allowance.

 

**Seasonality**

 

Net sales have historically been modestlyweaker during the second and third quarters as a result of lower businessactivity during those months. The 2008 amounts were impacted by the CompUSAacquisition. The following table sets forth the net sales, gross profit andincome from operations for each of the quarters since January 1, 2006 *(amounts in millions)*.

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31**                | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 2008                                | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                           |       | $                                | 725        |   | $ | 756 |   | $ | 739 |   | $ | 813 |   |
| Percentage of year’s net sales |       | 23.9                             | %          | 24.9 | % | 24.4 | % | 26.8 | % |
| Gross profit                        |       | $                                | 115        |   | $ | 116 |   | $ | 116 |   | $ | 117 |   |
| Operating income                    |       | $                                | 26         |   | $ | 21 |   | $ | 20 |   | $ | 16 |   |
|                                |       |                             |       |   |   |   |   |   |   |
| 2007                                | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                           |       | $                                | 676        |   | $ | 647 |   | $ | 687 |   | $ | 769 |   |
| Percentage of year’s net sales |       | 24.3                             | %          | 23.3 | % | 24.7 | % | 27.7 | % |
| Gross profit                        |       | $                                | 97         |   | $ | 99 |   | $ | 111 |   | $ | 120 |   |
| Operating income                    |       | $                                | 22         |   | $ | 20 |   | $ | 24 |   | $ | 28 |   |
|                                |       |                             |       |   |   |   |   |   |   |
| 2006                                |       |                             |       |   |   |   |   |   |   |
| Net sales                           |       | $                                | 575        |   | $ | 547 |   | $ | 575 |   | $ | 648 |   |
| Percentage of year’s net sales |       | 24.5                             | %          | 23.3 | % | 24.5 | % | 27.6 | % |
| Gross profit                        |       | $                                | 90         |   | $ | 77 |   | $ | 92 |   | $ | 83 |   |
| Operating income                    |       | $                                | 21         |   | $ | 10 |   | $ | 19 |   | $ | 11 |   |

 

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**Financial Condition, Liquidity and CapitalResources**

 

Selected liquidity data (in thousands):

 
| ** **                         | ** ** | **December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                         | ** ** | **2008**              | ** ** | **2007**   | ** ** | **$ Change** | ** ** |
| Cash and cash equivalents          |       | $                     | 115,967    |       | $          | 128,021 |   | $ | (12,054 | ) |
| Accounts receivable, net           |       | $                     | 190,909    |       | $          | 207,460 |   | $ | (16,551 | ) |
| Inventories                        |       | $                     | 282,217    |       | $          | 250,222 |   | $ | 31,995 |   |
| Prepaid expenses and other current |       | $                     | 12,667     |       | $          | 13,902 |   | $ | (1,235 | ) |
| Accounts payable                   |       | $                     | 284,378    |       | $          | 248,673 |   | $ | 35,705 |   |
| Accrued expenses                   |       | $                     | 75,603     |       | $          | 81,637 |   | $ | (6,034 | ) |
| Short term debt                    |       | $                     | 773        |       | $          | 4,302 |   | $ | (3,529 | ) |
| Working capital                    |       | $                     | 250,564    |       | $          | 274,353 |   | $ | (23,789 | ) |

 

Ourprimary liquidity needs are to support working capital requirements in ourbusiness, to fund capital expenditures, to fund the payment of interest onoutstanding debt and to effect small acquisitions. We rely principally uponoperating cash flow to meet these needs. In addition we have available a credit facility of approximately $120million  We believe that cash flowavailable from these sources will be sufficient to meet our working capitalrequirements, projected capital expenditures and interest and debt repaymentsin the foreseeable future.

 

Ourworking capital decreased in 2008 as the result of use of approximately $30.6million cash for the purchase of certain CompUSA assets, payment of $37.1million for a special dividend, stock repurchases of $5.8 million and anincrease in inventory, primarily related to purchasing inventory for the 16CompUSA retail stores. Accounts payable balances increased by approximately$35.7 million offset by a decrease of approximately $6.0 million in accruedexpenses and a reduction in short term debt in Europe.  Inventory turnover was at 9 times during 2008and 10 times at 2007. Our accounts receivable days outstanding was at 21 in2008 down from 24 in 2007. We expect that future accounts receivable andinventory balances will fluctuate with growth in net sales and the mix of ournet sales between consumer and business customers.

 

We maintain our cash and cash equivalentsprimarily in money market funds or their equivalent. As of December 31,2008, all of our investments mature in less than three months. Accordingly, wedo not believe that our investments have significant exposure to interest raterisk.

 

Netcash provided by operating activities was $82.4 million, $93.1 million and$34.3 million during 2008, 2007 and 2006. The decrease in cash provided byoperating activities in 2008 over 2007 resulted from a $3.3 million decrease innet income adjusted by other non-cash items, such as depreciation expense, anda decrease of $7.4 million in cash used for changes in our working capitalaccounts. The increase in cash provided by operating activities in 2007 over2006 resulted from a $27.0 million increase in net income adjusted by othernon-cash items, such as depreciation expense, and an increase of $31.7 millionin cash used for changes in our working capital accounts.

 

Netcash used in investing activities was $47.7 million during 2008, primarily forthe CompUSA acquisition and for capital expenditures. Net cash used ininvesting activities was $8.0 million during 2007, primarily for capitalexpenditures. Net cash provided by investing activities during 2006 consistingof proceeds from disposals of property and equipment of $18.9 million from the saleof our distribution facility in Suwanee, Georgia offset by cash used forcapital expenditures of $6.7 million. Capital expenditures in 2008, 2007 and2006 included upgrades and enhancements to our information and communicationssystems hardware and facilities costs for the opening of additional retailoutlets stores in North America.

 

Netcash used in financing activities was $42.8 million during 2008. We repaidapproximately $3.9 million in short-term debt, paid a special dividend of $37.1million, and repurchased Company stock of approximately $5.8 million. Proceedsand excess tax benefits from stock option exercises and proceeds

 

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fromdebt and capital leases obligations provided approximately $4.0 million ofcash. Net cash used in financing activities was $42.5 million during 2007,attributable to dividends paid of $36.6 million, repayment of short term debtof $9.0 million, offset by proceeds of stock option exercises, related excesstax benefits and share repurchases of $3.1 million. Net cash of $22.1 millionwas used in financing activities for 2006. Repayment of short and long-termborrowings used approximately $24.8 million of cash and proceeds from stockoption exercises and excess tax benefits from stock option exercises providedapproximately $2.6 million of cash.

 

Wehave a $120.0 million secured revolving credit agreement (which may beincreased by up to an additional $30.0 million, subject to certainconditions).  The facility expires in October 2010.  Borrowings under the agreement are subject toborrowing base limitations of up to 85% of eligible accounts receivable and 40%of qualified inventories and are secured by accounts receivable, inventoriesand certain other assets. The undrawn availability under the facility may notbe less than $15.0 million until the last day of any month in which theavailability net of outstanding borrowings is at least $70.0 million. Therevolving credit agreement requires that we maintain a minimum level ofavailability. If such availability is not maintained, we will then be requiredto maintain a fixed charge coverage ratio (as defined). The agreement containscertain other covenants, including restrictions on capital expenditures andpayments of dividends. As of December 31, 2008, the Company was incompliance with all of the covenants under the credit facility. Eligiblecollateral under the facility was $103.5 million, total availability was $94.4million, outstanding letters of credit of were $9.1 million and there were nooutstanding advances.

 

TheCompany’s Netherlands subsidiary maintained a €5.0 million credit facility witha local financial institution. This facility expired in November 2008 andwas not renewed.

 

InApril 2002, we entered into a ten year, $8.4 million mortgage loan on ourSuwanee, Georgia distribution facility. During the first quarter of fiscal 2006, we sold this facility andrepaid the remaining balance on the loan. The facility was replaced by alarger, leased distribution center in a nearby area.

 

Weare obligated under non-cancelable operating leases for the rental of most ofour facilities and certain of our equipment which expire at various datesthrough 2026.  We have subleaseagreements for unused space we lease in Wellingborough, England. In the eventthe sublessee is unable to fulfill its obligations, we would be responsible forrent due under the lease.

 

Followingis a summary of our contractual obligations for future principal payments onour debt, minimum rental payments on our non-cancelable operating leases and minimumpayments on our other purchase obligations as of December 2008 (inthousands):

 
| ** **                                         | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|----------------------------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| *Contractual Obligations:*                         |       |      |       |                            |       |               |       |               |       |                             |       |
|                                               |       |      |       |                            |       |               |       |               |       |                             |       |
| Capital lease obligations                          |       | $         | 2,451      |                            | $          | 905                |       | $                  | 1,421      |                             | $          | 125 |   | $ | — |   |
|                                               |       |      |       |                            |       |               |       |               |       |                             |       |
| Non-cancelable operating leases, net of  subleases |       | 135,609   |       | 19,034                          |       | 47,880             |       | 31,794             |       | 36,901                           |       |
|                                               |       |      |       |                            |       |               |       |               |       |                             |       |
| Purchase & other obligations              |       | 28.483    |       | 21,093                          |       | 4,531              |       | 2,859              |       | —                           |       |
|                                               |       |      |       |                            |       |               |       |               |       |                             |       |
| Tax contingencies                                  |       | 1,195     |       | 1,195                           |       | —             |       | —             |       | —                           |       |
|                                               |       |      |       |                            |       |               |       |               |       |                             |       |
| Total contractual obligations                      |       | $         | 167,738    |                            | $          | 42,227             |       | $                  | 53,832     |                             | $          | 34,778 |   | $ | 36,901 |   |

 

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Ourpurchase and other obligations consist primarily of certain employmentagreements and service agreements.

 

Inaddition to the contractual obligations noted above, we had $9.1 million ofstandby letters of credit outstanding as of December 2008.

 

Ouroperating results have generated cash flow which, together with borrowingsunder our debt agreements, has provided sufficient capital resources to financeworking capital and cash operating requirements, fund capital expenditures, andfund the payment of interest on outstanding debt. Our primary ongoing cashrequirements will be to finance working capital, fund the payment of principaland interest on indebtedness, fund capital expenditures and fund smallacquisitions. We believe future cash flows from operations and availability ofborrowings under our lines of credit will be sufficient to fund ongoing cashrequirements for at least the next twelve months.

 

We are party to certain litigation, theoutcome of which we believe, based on discussions with legal counsel, will nothave a material adverse effect on our consolidated financial statements.

 

Tax contingencies are related touncertain tax positions taken on income tax returns that may result inadditional tax, interest and penalties being paid to taxing authorities.

 

**Off-Balance Sheet Arrangements**

 

Wehave not created, and are not party to, any special-purpose or off-balancesheet entities for the purpose of raising capital, incurring debt or operatingour business. We do not have any arrangements or relationships with entitiesthat are not consolidated into the financial statements that are reasonablylikely to materially affect our liquidity or the availability of capitalresources.

 

TheCompany currently leases its facility in Port Washington, NY from Addwin RealtyAssociates, an entity owned by Richard Leeds, Bruce Leeds, and Robert Leeds,Directors of the Company and the Company’s three senior executive officers andprincipal stockholders.

 

**Item 7A. Quantitative and Qualitative Disclosures About Market Risk.**

 

We are exposed to market risks, which includechanges in U.S. and international interest rates as well as changes in currencyexchange rates (principally Pounds Sterling, Euros and Canadian Dollars) asmeasured against the U.S. Dollar and each other.

 

The translation of the financial statementsof our operations located outside of the United States is impacted by movementsin foreign currency exchange rates. Changes in currency exchange rates asmeasured against the U.S. dollar may positively or negatively affect incomestatement, balance sheet and cash flows as expressed in U.S. dollars. Saleswould have fluctuated by approximately $112 million and pre tax income wouldhave fluctuated by approximately $2.3 million if average foreign exchange rateschanged by 10% in 2008.  We have limitedinvolvement with derivative financial instruments and do not use them fortrading purposes. We may enter into foreign currency options or forwardexchange contracts aimed at limiting in part the impact of certain currencyfluctuations, but as of December 2008 we had no outstanding forwardexchange contracts.

 

Our exposure to market risk for changes ininterest rates relates primarily to our variable rate debt.  Our variable rate debt consists of short-termborrowings under our credit facilities. As of December 2008, there were no outstanding balances under ourvariable rate credit facility. A hypothetical change in average interest ratesof one percentage point is not expected to have a material effect on ourfinancial position, results of operations or cash flows over the next fiscalyear.

 

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**Item 8. Financial Statements andSupplementary Data.**

 

The information required by Item 8 of Part IIis incorporated herein by reference to the Consolidated Financial Statementsfiled with this report; see Item 15 of Part IV.

 

**Item 9. Changes In and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None.

 

**Item 9A. Controls and Procedures.**

 

**Evaluation of Disclosure Controls and Procedures**

 

Underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer,the Company carried out an evaluation of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures as of December 31,2008. Based upon this evaluation, the Company’sChief Executive Officer and Chief Financial Officer have concluded that theCompany’s disclosure controls and procedures are effective.

 

**Inherent Limitations ofInternal Controls over Financial Reporting**

 

TheCompany’s internal control over financial reporting is designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. The Company’s internal control overfinancial reporting includes those policies and procedures that: (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the Company’s assets; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that the Company’s receipts and expenditures arebeing made only in accordance with authorizations of the Company’s managementand directors; and (iii) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the Company’s financialstatements.

 

**Management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, does not expect that the Company’sinternal controls will prevent or detect all errors and all fraud. A controlsystem, no matter how well designed and operated, can provide only reasonable,not absolute, assurance that the objectives of the control system are met.Further, the design of a control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations in all control systems, noevaluation of internal controls can provide absolute assurance that all controlissues and instances of fraud, if any, have been detected. Also, any evaluationof the effectiveness of controls in future periods are subject to the risk thatthose internal controls may become inadequate because of changes in businessconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.**

** **

**Management’s Report onInternal Control Over Financial Reporting**

 

**The Company’s management is responsible forestablishing and maintaining adequate internal control over financialreporting. Under the supervision andwith the participation of Company’s management, including the Chief ExecutiveOfficer and Chief Financial Officer, the Company evaluated the effectiveness ofthe design and operation of its internal control over financial reporting basedon the framework established in Internal Control - Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Basedon that evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s internal control over financial reportingwas effective as of December 31, 2008.**

 

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**The Company’s independent registered publicaccounting firm, Ernst & Young, has issued an attestation report onthe effectiveness of the Company’s internal control over financial reporting asof December 31, 2008, a copy of which is included in this report.**

** **

**Changes in Internal Control OverFinancial Reporting**

 

In conjunction with theCompany’s Section 404 compliance efforts, the Company has continued tomake improvements to its internal control over financial reporting, includingremediation of the significant deficiency in the consolidation processpreviously noted. The nature of these improvements was incremental, and theimpact was not material both individually and in the aggregate.

 

Therehave been no changes in the Company’s internal controls over financialreporting during the quarter ended December 31, 2008 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**Item 9B. Other Information.**

 

None.

 

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**PART III**

 

**Item 10. Directors, Executive Officers andCorporate Governance.**

 

Theinformation required by Item 10 of Part III is hereby incorporated byreference to the Company’s Proxy Statement for the 2009 Annual Meeting ofStockholders. (the “Proxy Statement”).

 

**Item 11. Executive Compensation.**

 

Theinformation required by Item 11 of Part III is hereby incorporated byreference to the Proxy Statement.

 

**Item 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

Theinformation required by item 12 of Part III is hereby incorporated byreference to the Proxy Statement.

 

**Item 13. Certain Relationships and RelatedTransactions, and Director Independence**

 

The information required by Item 10 of Part III is herebyincorporated by reference to the Proxy Statement.

 

**Item 14. Principal Accounting Fees andServices.**

 

The information required by Item 14 of Part III is hereby incorporatedby reference to the Proxy Statement.

 

**PART IV**

 

**Item 15. Exhibits and Financial StatementSchedules.**

 
| (a)    | 1.     | Consolidated Financial Statements of Systemax Inc.                                                               |   | **Reference** |
|--------|--------|------------------------------------------------------------------------------------------------------------------|--------|---------------|
|   |   |                                                                                                             |   |          |
|   |   | Reports  of Ernst & Young LLP Independent Registered Public Accounting Firm                             |   | 38            |
|   |   | Consolidated Balance Sheets as of December 31,  2008 and 2007                                               |   | 40            |
|   |   | Consolidated  Statements of Operations for the years ended December 31, 2008, 2007,  and 2006               |   | 41            |
|   |   | Consolidated  Statements of Cash Flows for the years ended December 31, 2008, 2007 and  2006                |   | 42            |
|   |   | Consolidated  Statements of Shareholders’ Equity for the Years ended December 31,  2008, 2007 and 2006 |   | 43            |
|   |   | Notes to  Consolidated Financial Statements                                                                      |   | 44            |

 
|   | 2.     | Financial Statement Schedules:                                                                                                                       |   |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                 |   |   |
|   |   | The following financial statement schedule is filed as part of this  report and should be read together with our consolidated financial  statements: |   |   |
|   |   |                                                                                                                                                 |   |   |
|   |   | Schedule II –  Valuation and Qualifying Accounts                                                                                                |   | 57     |

 

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|   |   | Schedules not included with this additional financial data have been  omitted because they are not applicable or the required information is shown  in the consolidated financial statements or notes thereto. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|   | 3. | Exhibits. |   |   |
|--------|----|-----------|--------|--------|

 
| **Exhibit** | ** **                                                                                                                                                                                                                                                                                                                                                                                    |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **No.**     | ** **                                                                                                                                                                                                                                                                                                                                                                                    | **Description** |
| 3.1         | Certificate of Incorporation of Registrant, as amended (incorporated  by reference to the Company’s registration statement on Form S-1  (33-92052))                                                                                                                                                                                                                                 |
| 3.2         | Certificate of Amendment of Certificate of Incorporation of  Registrant (incorporated by reference to the Company’s report on  Form 8-K dated May 18, 1999)                                                                                                                                                                                                                    |
| 3.3         | Amended and Restated By-laws of Registrant (effective as of  December 29, 2007, incorporated by reference to the Company’s annual  report on Form 10-K for the year ended December 31, 2007)                                                                                                                                                                              |
| 3.4         | Amendment to the Bylaws of the Registrant (incorporated by reference  to the Company’s report on Form 8-K dated March 3, 2008)                                                                                                                                                                                                                                                 |
| 4.1         | Stockholders Agreement (incorporated by reference to the Company’s  quarterly report on Form 10-Q for the quarterly period ended  September 30, 1995)                                                                                                                                                                                                                          |
| 10.1        | Form of 1995 Long-Term Stock Incentive Plan* (incorporated by  reference to the Company’s registration statement on Form S-1)  (Registration No. 333-1852)                                                                                                                                                                                                                |
| 10.2        | Form of 1999 Long-Term Stock Incentive Plan as amended*  (incorporated by reference to the Company’s report on Form 8-K dated  May 20, 2003)                                                                                                                                                                                                                              |
| 10.3        | Lease Agreement dated September 20, 1988 between the Company and  Addwin Realty Associates (Port Washington facility) (incorporated by  reference to the Company’s registration statement on Form S-1)  (Registration No. 33-92052)                                                                                                                                       |
| 10.4        | Amendment to Lease Agreement dated September 29, 1998 between  the Company and Addwin Realty Associates (Port Washington facility)  (incorporated by reference to the Company’s annual report on Form 10-K  for the year ended December 31, 1998)                                                                                                                         |
| 10.5        | Lease Agreement dated as of July 17, 1997 between the Company  and South Bay Industrials Company (Compton facility) (incorporated by reference to  the Company’s annual report on Form 10-K for the year ended  December 31, 1997)                                                                                                                                        |
| 10.6        | Build-to-Suit Lease Agreement dated April, 1995 among the Company,  American National Bank and Trust Company of Chicago (Trustee for the original  landlord) and Walsh, Higgins & Company (Contractor) (“Naperville  Illinois Facility Lease”) (incorporated by reference to the Company’s  registration statement on Form S-1) (Registration No. 33-92052) |
| 10.7        | Lease Agreement dated September 17, 1998 between Tiger  Direct, Inc. and Keystone Miami Property Holding Corp. (Miami facility)  (incorporated by reference to the Company’s quarterly report on  Form 10-Q for the quarterly period ended September 30, 1998)                                                                                                       |
| 10.8        | Royalty Agreement dated June 30, 1986 between the Company and  Richard Leeds, Bruce Leeds and Robert Leeds, and Addendum thereto  (incorporated by reference to the Company’s registration statement on  Form S-1) (Registration No. 33-92052)                                                                                                                            |
|             |                                                                                                                                                                                                                                                                                                                                                                                               |  |

 

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| 10.9  | Form of 1995 Stock Plan for Non-Employee Directors*  (incorporated by reference to the Company’s registration statement on  Form S-1) (Registration No. 333-1852)                                                                                                                                                                                                                                                                                   |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10 | Employment Agreement entered into on October 12, 2004 but  effective as of June 1, 2004 between the Company and Gilbert Fiorentino*  (incorporated by reference to the Company’s report on Form 8-K dated  October 12, 2004)                                                                                                                                                                                                                   |
| 10.11 | Restricted Stock Unit Agreement entered into on October 12, 2004  but effective as of June 1, 2004 between the Company and Gilbert  Fiorentino* (incorporated by reference to the Company’s report on  Form 8-K dated October 12, 2004)                                                                                                                                                                                                        |
| 10.12 | Amended and Restated Credit Agreement, dated as of October 27,  2005, between JPMorgan Chase Bank, N.A. and affiliates, General Electric  Capital Corporation, and GMAC Commercial Finance LLC (as Lenders) with the  Company and certain subsidiaries of the Company (as Borrowers) (the “Amended  and Restated JP Morgan Chase Loan Agreement”) (incorporated by reference to  the Company’s report on Form 8-K dated October 27, 2005) |
| 10.13 | Amendment No. 1, dated as of December 19, 2005, to the  Amended and Restated JP Morgan Chase Loan Agreement(incorporated  by reference to the Company’s annual report on Form 10-K for the year  ended December 31, 2005)                                                                                                                                                                                                                      |
| 10.14 | Lease agreement, dated December 8, 2005, between the Company and  Hamilton Business Center, LLC (Buford, Georgia facility) (incorporated by  reference to the Company’s annual report on Form 10-K for the year ended  December 31, 2005)                                                                                                                                                                                                           |
| 10.15 | First Amendment, dated as of June 12, 2006, to the Lease Agreement  between the Company and Hamilton Business Center, LLC (Buford, Georgia  facility) (incorporated by reference to the Company’s annual report on  Form 10-K for the year ended December 31, 2005)                                                                                                                                                                                 |
| 10.16 | First Amendment, dated as of February 1, 2006, to the Naperville  Illinois Facility Lease between the Company and Ambassador Drive LLC (current  landlord) (incorporated by reference to the Company’s annual report on  Form 10-K for the year ended December 31, 2005)                                                                                                                                                                            |
| 10.17 | Employment Agreement, dated as of January 17, 2007, between the  Company and Lawrence P. Reinhold*(incorporated by reference to the Company’s  annual report on Form 10-K for the year ended December 31, 2006).                                                                                                                                                                                                                                    |
| 10.18 | Form of 2006 Stock Incentive Plan for Non-Employee  Directors*(incorporated by reference to the Company’s annual report on  Form 10-K for the year ended December 31, 2006).                                                                                                                                                                                                                                                                        |
| 10.19 | Form of 2005 Employee Stock Purchase Plan* (incorporated by  reference to the Company’s annual report on Form 10-K for the year ended  December 31, 2006).                                                                                                                                                                                                                                                                                          |
| 10.20 | Second Amendment to Lease Agreement dated September 20, 1988  between the Company and Addwin Realty Associates (Port Washington facility)  (incorporated by reference to the Company’s annual report on Form 10-K  for the year ended December 31, 2007).                                                                                                                                                                                           |
| 10.21 | Asset Purchase Agreement between the Company and CompUSA dated  January 5, 2008 (incorporated by reference to the Company’s annual  report on Form 10-K for the year December 31, 2007).                                                                                                                                                                                                                                                            |

 

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| 10.22 | Amendment to Asset Purchase Agreement between the Company and CompUSA  dated February 14, 2008 (incorporated by reference to the Company’s  annual report on Form 10-K for the year ended December 31, 2007). |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 14    | Corporate Ethics Policy for Officers, Directors and Employees  (revised as of March 30, 2005) (incorporated by reference to the  Company’s report on Form 8-K dated March 30, 2005)                           |
| 21    | Subsidiaries of the Registrant (filed herewith)                                                                                                                                                                                   |
| 23    | Consent of Independent Registered Public Accounting Firm (filed  herewith)                                                                                                                                                        |
| 31.1  | Certification of the Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                      |
| 31.2  | Certification of the Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                      |
| 32.1  | Certification of the Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                      |
| 32.2  | Certification of the Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                      |
| 99.1  | Charter of the Audit Committee of the Company’s Board of Directors,  as revised February 23, 2009 (filed herewith)                                                                                                      |
| 99.2  | Charter of the Compensation Committee of the Company’s Board of  Directors, as revised February 23, 2009 (filed herewith)                                                                                               |
| 99.3  | Charter of the Nominating/Corporate Governance Committee of the  Company’s Board of Directors, as revised February 23, 2009 (filed  herewith)                                                                           |

 

----

*  Management contract or compensatory plan or arrangement

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | SYSTEMAX INC.                        |
|--------|--------------------------------------|
|   |                                 |
|   | By: /s/ RICHARD LEEDS                |
|   |                                 |
|   | Richard Leeds                        |
|   | Chairman and Chief Executive Officer |
|   |                                 |
|   | Date: March 18, 2009            |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this Report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

 
| **Signature**            | ** ** | **Title**                                          | ** ** | **Date**            |
|--------------------------|------------|----------------------------------------------------|------------|---------------------|
|                     |       |                                               |       |                |
| /s/ RICHARD LEEDS        |       | Chairman and Chief Executive Officer               |       | March 18, 2009 |
| Richard Leeds            |       | (Principal Executive Officer)                      |       |                |
|                     |       |                                               |       |                |
| /s/ BRUCE LEEDS          |       | Vice Chairman and Director                         |       | March 18, 2009 |
| Bruce Leeds              |       |                                               |       |                |
|                     |       |                                               |       |                |
| /s/ ROBERT LEEDS         |       | Vice Chairman and Director                         |       | March 18, 2009 |
| Robert Leeds             |       |                                               |       |                |
|                     |       |                                               |       |                |
| /s/ LAWRENCE P. REINHOLD |       | Executive Vice President, Chief Financial  Officer |       | March 18, 2009 |
| Lawrence P. Reinhold     |       | and Director                                       |       |                |
|                     |       | (Principal Financial Officer)                      |       |                |
|                     |       |                                               |       |                |
| /s/ THOMAS AXMACHER      |       | Vice President and Controller                      |       | March 18, 2009 |
| Thomas Axmacher          |       | (Principal Accounting Officer)                     |       |                |
|                     |       |                                               |       |                |
| /s/ GILBERT FIORENTINO   |       | Chief Executive, Technology Products Group         |       | March 18, 2009 |
| Gilbert Fiorentino       |       | and Director                                       |       |                |
|                     |       |                                               |       |                |
| /s/ ROBERT D. ROSENTHAL  |       | Director                                           |       | March 18, 2009 |
| Robert D. Rosenthal      |       |                                               |       |                |
|                     |       |                                               |       |                |
| /s/ STACY DICK           |       | Director                                           |       | March 18, 2009 |
| Stacy Dick               |       |                                               |       |                |
|                     |       |                                               |       |                |
| /s/ ANN R. LEVEN         |       | Director                                           |       | March 18, 2009 |
| Ann R. Leven             |       |                                               |       |                |

 

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**Report of Independent Registered PublicAccounting Firm**

 

TheBoard of Directors and Shareholders of Systemax Inc.

 

Wehave audited the accompanying consolidated balance sheets of Systemax Inc. asof December 31, 2008 and 2007, and the related consolidated statements ofoperations, shareholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2008. Our audits also included the financial statement schedule listed in theindex at Item 15(a).  These financialstatements and schedule are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements and schedule based on ouraudits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Systemax Inc. at December 31,2008 and 2007, and the consolidated results of its operations and its cashflows for each of the three years in the period ended December 31, 2008,in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

Asdiscussed in Note 8 to the consolidated financial statements, the Companyadopted Financial Accounting Standards Board Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109* as of January 1, 2007.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), Systemax Inc.’s internal controlover financial reporting as of December 31, 2008, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 16,2009 expressed an unqualified opinion thereon.

 

 
|                 | /s/  Ernst & Young LLP |
|----------------------|---------------------------------|
|                 |
| New  York, New York  |
| March 16,  2009 |

 

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**Reportof Independent Registered Public Accounting Firm**

 

TheBoard of Directors and Shareholders of Systemax Inc.

 

Wehave audited Systemax Inc.’s internal control over financial reporting as of December 31,2008, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Systemax Inc.’s management is responsible for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on the company’s internal controlover financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Inour opinion, Systemax Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2008 based onthe COSO criteria.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofSystemax Inc. as of December 31, 2008 and 2007 and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2008 of SystemaxInc. and our report dated March 16, 2009 expressed an unqualified opinionthereon.

 
|                 | /s/  Ernst & Young LLP |
|----------------------|---------------------------------|
|                 |
| New  York, New York  |
| March 16,  2009 |

 

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#### **SYSTEMAX INC.**

#### **CONSOLIDATED BALANCE SHEETS**

#### **(in thousands, except for share data)**

 
| ** **                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                                                                                                                                                  |       |                  |       |   |   |
| ASSETS:                                                                                                                                                               |       |                  |       |   |   |
| Current assets:                                                                                                                                                       |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                             |       | $                     | 115,967    |   | $ | 128,021 |   |
| Accounts receivable, net of  allowances of $9,146  and $12,122                                                                                                   |       | 190,909               |       | 207,460 |   |
| Inventories                                                                                                                                                           |       | 282,217               |       | 250,222 |   |
| Prepaid expenses and other  current assets                                                                                                                            |       | 12,667                |       | 13,902 |   |
| Deferred income taxes                                                                                                                                                 |       | 10,423                |       | 10,657 |   |
| Total current assets                                                                                                                                                  |       | 612,183               |       | 610,262 |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| Property, plant and equipment,  net                                                                                                                                   |       | 48,465                |       | 47,580 |   |
| Deferred income taxes                                                                                                                                                 |       | 11,452                |       | 18,652 |   |
| Goodwill and intangibles                                                                                                                                              |       | 30,326                |       |   |   |
| Other assets                                                                                                                                                          |       | 837                   |       | 1,150 |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| Total assets                                                                                                                                                          |       | $                     | 703,263    |   | $ | 677,644 |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| LIABILITIES AND SHAREHOLDERS’  EQUITY:                                                                                                                           |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                  |       |                  |       |   |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| Short-term borrowings,  including current portion of capitalized   lease obligations                                                                             |       | $                     | 773        |   | $ | 4,302 |   |
| Accounts payable                                                                                                                                                      |       | 284,378               |       | 248,673 |   |
| Accrued expenses and other  current liabilities                                                                                                                       |       | 75,603                |       | 81,637 |   |
| Deferred income taxes                                                                                                                                                 |       | 865                   |       | 1,297 |   |
| Total current liabilities                                                                                                                                             |       | 361,619               |       | 335,909 |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| Capitalized lease obligations                                                                                                                                         |       | 1,411                 |       | 254 |   |
| Deferred income taxes                                                                                                                                                 |       | 254                   |       | 3 |   |
| Other liabilities                                                                                                                                                     |       | 6,024                 |       | 5,643 |   |
| Total liabilities                                                                                                                                                     |       | 369,308               |       | 341,809 |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| 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 38,855,989 and 38,332,990 shares; outstanding 36,223,747 and  36,092,067 shares |       | 389                   |       | 383 |   |
| Additional paid-in capital                                                                                                                                            |       | 179,241               |       | 173,381 |   |
| Common stock in treasury at  cost – 2,632,242 and 2,240,923 shares                                                                                               |       | (31,158               | )          | (26,324 | ) |
| Retained earnings                                                                                                                                                     |       | 192,401               |       | 176,684 |   |
| Accumulated other comprehensive  (loss) income, net of tax                                                                                                            |       | (6,918                | )          | 11,711 |   |
| Total shareholders’ equity                                                                                                                                       |       | 333,955               |       | 335,835 |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| Total liabilities and  shareholders’ equity                                                                                                                      |       | $                     | 703,263    |   | $ | 677,644 |   |

 

See notes to consolidated financialstatements.

 

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##### **SYSTEMAX INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**

 
| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                              |       | $                                          | 3,032,961  |   | $ | 2,779,875 |   | $ | 2,345,165 |   |
| Cost of sales                                          |       | 2,568,816                                  |       | 2,353,574 |   | 2,002,246 |   |
| Gross profit                                           |       | 464,145                                    |       | 426,301 |   | 342,919 |   |
| Selling, general and  administrative expenses          |       | 380,778                                    |       | 332,359 |   | 282,189 |   |
| Operating income                                       |       | 83,367                                     |       | 93,942 |   | 60,730 |   |
| Foreign currency exchange loss  (gain)                 |       | 1,300                                      |       | (1,562 | ) | (1,174 | ) |
| Interest and other income, net                         |       | (1,981                                     | )          | (5,505 | ) | (9,475 | ) |
| Interest expense                                       |       | 305                                        |       | 986 |   | 1,684 |   |
| Income before income taxes                             |       | 83,743                                     |       | 100,023 |   | 69,695 |   |
| Provision for income taxes                             |       | 30,900                                     |       | 30,542 |   | 24,548 |   |
| Net income                                             |       | $                                          | 52,843     |   | $ | 69,481 |   | $ | 45,147 |   |
| Net income per common share:                           |       |                                       |       |   |   |   |   |
| Basic                                                  |       | $                                          | 1.45       |   | $ | 1.93 |   | $ | 1.29 |   |
| Diluted                                                |       | $                                          | 1.41       |   | $ | 1.84 |   | $ | 1.22 |   |
|                                                   |       |                                       |       |   |   |   |   |
| Weighted average common and  common equivalent shares: |       |                                       |       |   |   |   |   |
| Basic                                                  |       | 36,450                                     |       | 35,968 |   | 34,960 |   |
| Diluted                                                |       | 37,411                                     |       | 37,688 |   | 36,881 |   |

 

See notes to consolidated financialstatements.

 

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**SYSTEMAX INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                             |       |                                       |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 52,843     |   | $ | 69,481 |   | $ | 45,147 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 10,387                                     |       | 8,780 |   | 8,185 |   |
| Provision (benefit) for  deferred income taxes                                     |       | 6,197                                      |       | (6,106 | ) | 2,254 |   |
| Provision for returns and  doubtful accounts                                       |       | 2,424                                      |       | 4,575 |   | 1,503 |   |
| Compensation expense related to  equity compensation plans                         |       | 3,869                                      |       | 4,159 |   | 2,330 |   |
| Excess tax benefit from  exercises of stock options                                |       | (1,380                                     | )          | (2,160 | ) | (1,030 | ) |
| Loss (gain) on dispositions and  abandonment                                       |       | 89                                         |       | (1,032 | ) | (7,721 | ) |
|                                                                               |       |                                       |       |   |   |   |   |
| Changes in operating assets and  liabilities:                                      |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                |       | (2,058                                     | )          | (37,849 | ) | (3,917 | ) |
| Inventories                                                                        |       | (40,547                                    | )          | (13,229 | ) | (36,216 | ) |
| Prepaid expenses and other  current assets                                         |       | (16                                        | )          | 15,916 |   | (10,060 | ) |
| Income taxes payable/receivable                                                    |       | 602                                        |       | 1,925 |   | (3,204 | ) |
| Accounts payable, accrued  expenses and other current liabilities                  |       | 50,009                                     |       | 48,623 |   | 37,055 |   |
| Net cash provided by operating  activities                                         |       | 82,419                                     |       | 93,083 |   | 34,326 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                             |       |                                       |       |   |   |   |   |
| Purchase of certain CompUSA  assets                                                |       | (30,649                                    | **)**      | **—** | ** ** | **—** | ** ** |
| Purchases of property, plant  and equipment                                        |       | (17,094                                    | )          | (7,950 | ) | (6,701 | ) |
| Proceeds from disposals of  property, plant and equipment                          |       | 72                                         |       | 28 |   | 18,938 |   |
| Net cash (used in) provided by  investing activities                               |       | (47,671                                    | )          | (7,922 | ) | 12,237 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                             |       |                                       |       |   |   |   |   |
| Repayments of borrowings from  banks                                               |       | (3,880                                     | )          | (8,708 | ) | (16,473 | ) |
| Proceeds (repayments) of  long-term debt and capital lease obligations             |       | 1,481                                      |       | (328 | ) | (8,305 | ) |
| Dividends paid                                                                     |       | (37,126                                    | )          | (36,588 | ) | — |   |
| Proceeds from issuance of  common stock, net of repurchases                        |       | 1,133                                      |       | 972 |   | 1,602 |   |
| Purchase of treasury stock                                                         |       | (5,824                                     | )          | — |   | — |   |
| Excess tax benefit from  exercises of stock options                                |       | 1,380                                      |       | 2,160 |   | 1,030 |   |
| Net cash used in by financing  activities                                          |       | (42,838                                    | )          | (42,492 | ) | (22,146 | ) |
|                                                                               |       |                                       |       |   |   |   |   |
| EFFECTS OF EXCHANGE RATES ON  CASH                                                 |       | (3,964                                     | )          | (1,612 | ) | (744 | ) |
|                                                                               |       |                                       |       |   |   |   |   |
| NET (DECREASE) INCREASE IN CASH  AND CASH EQUIVALENTS                              |       | (12,054                                    | )          | 41,057 |   | 23,673 |   |
| CASH AND CASH EQUIVALENTS –  BEGINNING OF YEAR                                |       | 128,021                                    |       | 86,964 |   | 63,291 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS – END  OF YEAR                                      |       | $                                          | 115,967    |   | $ | 128,021 |   | $ | 86,964 |   |
| Supplemental disclosures:                                                          |       |                                       |       |   |   |   |   |
| Interest paid                                                                      |       | $                                          | 291        |   | $ | 1,182 |   | $ | 1,861 |   |
| Income taxes paid                                                                  |       | $                                          | 29,514     |   | $ | 30,275 |   | $ | 26,465 |   |
| Supplemental disclosures of  non-cash investing and financing activities:          |       |                                       |       |   |   |   |   |
| Acquisitions of equipment  through capital leases                                  |       | $                                          | 1,688      |   | $ | 251 |   | $ | 779 |   |

 

See notes to consolidated financialstatements.

 

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##### **SYSTEMAX INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY**

##### **(in thousands)**

 
| ** **                                                      | ** ** | **Common Stock**                      | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                         | ** ** | **Accumulated**        | ** ** | ** **                                                          | ** ** | ** **                                    | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|----------------------------------|------------|------------------------------------|------------|------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **Number  of Shares  Out-  standing** | ** ** | **Amount** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Treasury  Stock,  At Cost** | ** ** | **Retained  Earnings** | ** ** | **Other  Comprehensive  Income (Loss),  Net of Tax** | ** ** | **Unearned  Restricted  Stock  Compensation** | ** ** | **Comprehensive  Income (Loss)** | ** ** |
|                                                            |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Balances,  January 1, 2006                                 |       | 34,761                                     |       | $          | 382        |                             | $          | 177,574                            |       | $                      | (40,772    | )                                                                   | $          | 98,927                                        |       | $ | 893 |   | $ | (4,162 | ) | $ | — |   |
| Reversal of  unamortized unearned restricted stock compensation | ** ** | ** **                                 | ** ** | ** ** |       | (4,162                           | )          |                               |       |                   |       |                                                                |       | 4,162                                         | ** ** | ** ** | ** ** |
| Stock-based  compensation expense                               | ** ** | ** **                                 | ** ** | ** ** |       | 2,330                            |       |                               |       |                   |       |                                                                |       |                                          | ** ** | ** ** | ** ** |
| Issuance of  restricted stock,net                               |       | 100                                        |       | 1          |       |                             |       |                               |       |                   |       |                                                                |       |                                          | ** ** | ** ** | ** ** |
| Exercise of stock  options                                      |       | 480                                        |       |       |       | (4,039                           | )          | 5,641                              |       |                   |       |                                                                |       |                                          | ** ** | ** ** | ** ** |
| Income tax  benefit on stock-based compensation                 |       |                                       |       |       |       | 1,280                            |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Change in  cumulative translation adjustment                    |       |                                       |       |       |       |                             |       |                               |       |                   |       | 6,288                                                               |       |                                          |       | 6,288 |   |
|                                                            |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Net income                                                      |       |                                       |       |       |       |                             |       |                               |       | 45,147                 |       |                                                                |       |                                          |       | 45,147 |   |
| Total  comprehensive income                                     |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       | 51,435 |   |
| Balances,  December 31, 2006                               |       | 35,341                                     |       | 383        |       | 172,983                          |       | (35,131                            | )          | 144,074                |       | 7,181                                                               |       | —                                        |       |   |   |
| Stock-based  compensation expense                               | ** ** | ** **                                 | ** ** | ** ** |       | 4,009                            |       |                               |       |                   |       |                                                                |       |                                          | ** ** | ** ** | ** ** |
| Issuance of  restricted stock                                   |       | 205                                        |       |       |       | (2,843                           | )          | 2,406                              |       |                   |       |                                                                |       |                                          | ** ** | ** ** | ** ** |
| Exercise of stock  options                                      |       | 546                                        |       |       |       | (3,569                           | )          | 6,401                              |       |                   |       |                                                                |       |                                          | ** ** | ** ** | ** ** |
| Income tax  benefit on stock-based compensation                 |       |                                       |       |       |       | 2,801                            |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Cumulative effect  of adoption of FIN 48                        |       |                                       |       |       |       |                             |       |                               |       | (283                   | )          |                                                                |       |                                          |       |   |   |
| Change in  cumulative translation adjustment net                |       |                                       |       |       |       |                             |       |                               |       |                   |       | 4,530                                                               |       |                                          |       | 4,530 |   |
|                                                            |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Dividends paid                                                  |       |                                       |       |       |       |                             |       |                               |       | (36,588                | )          |                                                                |       |                                          |       |   |   |
|                                                            |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Net income                                                      |       |                                       |       |       |       |                             |       |                               |       | 69,481                 |       |                                                                |       |                                          |       | 69,481 |   |
|                                                            |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Total  comprehensive income                                     |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       | 74,011 |   |
| Balances,  December 31, 2007                               |       | 36,092                                     |       | 383        |       | 173,381                          |       | (26,324                            | )          | 176,684                |       | 11,711                                                              |       | —                                        |       |   |   |
| Stock-based  compensation expense                               | ** ** | ** **                                 | ** ** | ** ** |       | 3,794                            |       |                               |       |                   |       |                                                                |       |                                          | ** ** | ** ** | ** ** |
| Issuance of  restricted stock                                   |       | 104                                        |       | 1          |       | 283                              |       | 46                                 |       |                   |       |                                                                |       |                                          | ** ** | ** ** | ** ** |
| Exercise of stock  options                                      |       | 503                                        |       | 5          |       | 184                              |       | 944                                |       |                   |       |                                                                |       |                                          | ** ** | ** ** | ** ** |
| Repurchase of  treasury stock                                   |       | (475                                       | )          |       |       |                             |       | (5,824                             | )          |                   |       |                                                                |       |                                          | ** ** | ** ** | ** ** |
| Income tax  benefit on stock-based compensation                 |       |                                       |       |       |       | 1,599                            |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Change in  cumulative translation adjustment net                |       |                                       |       |       |       |                             |       |                               |       |                   |       | (18,629                                                             | )          |                                          |       | (18,629 | ) |
|                                                            |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Dividends paid                                                  |       |                                       |       |       |       |                             |       |                               |       | (37,126                | )          |                                                                |       |                                          |       |   |   |
|                                                            |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Net income                                                      |       |                                       |       |       |       |                             |       |                               |       | 52,843                 |       |                                                                |       |                                          |       | 52,843 |   |
|                                                            |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       |   |   |
| Total  comprehensive income                                     |       |                                       |       |       |       |                             |       |                               |       |                   |       |                                                                |       |                                          |       | $ | 34,214 |   |
| Balances,  December 31, 2008                               |       | 36,224                                     |       | $          | 389        |                             | $          | 179,241                            |       | $                      | (31,158    | )                                                                   | $          | 192,401                                       |       | $ | (6,918 | ) | $ | — |   |   |   |

 

See notes to consolidated financialstatements.

 

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**SYSTEMAX INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

*Principles of Consolidation*— The accompanying consolidated financial statements include the accounts ofSystemax Inc. and its wholly-owned subsidiaries (collectively, the “Company” or“Systemax”). All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

*Reclassifications*—Certain balances have been reclassified among current assets and currentliabilities in prior year to conform to current year presentation on theconsolidated balance sheets.  Foreignexchange loss (gain) has been reclassified from selling, general and administrativeexpense to its own separate income statement account in prior years to conformto current year presentation on the consolidated statements of operations.

 

*Use of Estimates In Financial Statements*— The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the amounts reportedin the consolidated financial statements and accompanying notes.  Actual results could differ from thoseestimates.

 

*Fiscal Year* —Effective the fourth quarter of 2007, the Company changed its fiscal year endfrom a calendar year ending on December 31 to a fiscal year ending atmidnight on the Saturday closest to December 31. Fiscal years willtypically include 52 weeks, but every few years will include 53 weeks which wasthe case in 2008. For clarity of presentation herein, all fiscal years arereferred to as if they ended on December 31. The fiscal year will bedivided into four fiscal quarters that each end at midnight on a Saturday.Fiscal quarters will typically include 13 weeks, but the fourth quarter willinclude 14 weeks in a 53 week fiscal year. For clarity of presentation herein,all fiscal quarters are referred to as if they ended on the traditionalcalendar month.

 

*Foreign Currency Translation*— The Company has operations in numerous foreign countries.  The functional currency of each foreigncountry is the local currency.  Thefinancial statements of the Company’s foreign entities are translated into U.S.dollars, the reporting currency, using year-end exchange rates for assets andliabilities, average exchange rates for the statement of operations items andhistorical rates for equity accounts. Translation gains or losses are recorded as a separate component ofshareholders’ equity.

 

*Cash and Cash Equivalents*— The Company considers amounts held in money market accounts and othershort-term investments, including overnight bank deposits, with an originalmaturity date of three months or less to be cash equivalents*.*

* *

*Inventorie*s— Inventories consist primarily of finished goods and are stated at the lowerof cost or market value.  Cost isdetermined by using the first-in, first-out method except in Europe and retaillocations where an average cost is used. Allowances are maintained forobsolete, slow-moving and non-saleable inventory.

* *

*Property, Plant and Equipment*— Property, plant and equipment is stated at cost.  Depreciation of furniture, fixtures andequipment, including equipment under capital leases, are depreciated using thestraight-line or accelerated method over their estimated useful lives rangingfrom three to ten years.  Depreciation ofbuildings is on the straight-line method over estimated useful lives of 30 to50 years.  Leasehold improvements areamortized over the lesser of the useful lives or the term of the respectiveleases.

* *

*Evaluation of Long-lived Assets*— Long-lived assets are evaluated for recoverability whenever events orchanges in circumstances indicate that an asset may have been impaired.  In evaluating an asset for recoverability,the Company estimates the future cash flows expected to result from the use ofthe asset and eventual disposition.  Ifthe sum of the expected future cash flows (undiscounted and without interestcharges) is less than the carrying amount of the asset, an impairment loss,equal to the excess of the carrying amount over the fair market value of theasset is recognized.

 

*Goodwill and intangible assets* — Goodwill represents the excess of the costof acquired assets over the fair value of assets acquired. The Company testsgoodwill and indefinite lived intangibles for impairment annually or morefrequently if indicators of impairment exist. In addition, goodwill is requiredto be tested for impairment after a portion of the goodwill is allocated to abusiness targeted for disposal. The Company’s identifiable intangible assetsconsist of trademarks, trade and domain names, retail leases and customer lists(See Note 2).

 

*Accruals* — Management makes estimates and assumptionsthat affect amounts reported in the consolidated financial statements andaccompanying notes. These estimates are based upon various factors such as thenumber of units sold, historical and anticipated results and data received fromthird party vendors. Actual results could differ from these estimates. Our mostsignificant estimates include those related to the costs of vendor dropshipments, sales returns and allowances, cooperative advertising and customerrebate reserves, and other vendor and employee related costs.

 

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*Product Warranties*— Provisions for estimated future expenses relating to product warranties forthe Company’s assembled PCs are recorded as cost of sales when revenue isrecognized. Liability estimates are determined based on management judgmentconsidering such factors as the number of units sold, historical andanticipated rates of warranty claims and the likely current cost of correctiveaction.  The changes in accrued productwarranties were as follows:

 
| ** **                 | ** ** | **Year ended December 31** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Balance, beginning of year |       | $                                         | 914        |   | $ | 1,061 |   | $ | 1,316 |   |
| Charged to expense         |       | 1,145                                     |       | 1,400 |   | 1,556 |   |
| Deductions                 |       | (1,366                                    | )          | (1,547 | ) | (1,811 | ) |
| Balance, end of year       |       | $                                         | 693        |   | $ | 914 |   | $ | 1,061 |   |

 

*Income Taxes* —Deferred tax assets and liabilities are recognized for the effect of temporarydifferences between the book and tax bases of recorded assets and liabilitiesand for tax loss carry forwards. The realization of net deferred tax assets isdependent upon our ability to generate sufficient future taxable income. Whereit is more likely than not that some portion or of the deferred tax asset willnot be realized, we have provided a valuation allowance. If the realization ofthose deferred tax assets in the future is considered more likely than not, anadjustment to the deferred tax assets would increase net income in the periodsuch determination is made.

 

TheCompany provides for uncertain tax positions and related interest and penaltiesbased upon management’s assessment of whether a tax benefit is more likely thannot to be sustained upon examination by tax authorities.  To the extent the Company prevails in mattersfor which a liability for an unrecognized tax benefit is established or isrequired to pay amounts in excess of the liability, the Company’s effective taxrate in a given financial statement period may be affected.

 

*RevenueRecognition and Accounts Receivable* — The Companyrecognizes sales of products, including shipping revenue, when persuasiveevidence of an order arrangement exists, delivery has occurred, the sales priceis fixed or determinable and collectability is reasonably assured. Generally,these criteria are met at the time the product is received by the customerswhen title and risk of loss have transferred. Allowances for estimated subsequent customer returns, rebates and salesincentives are provided when revenues are recorded.  Costs incurred for the shipping and handlingof its products are recorded as cost of sales. Revenue from extended warrantyand support contracts on the Company’s assembled PCs is deferred and recognizedover the contract period. The Companyevaluates collectability of accounts receivable based on numerous factors,including past transaction history with customers and their credit rating andprovides a reserve for accounts that are potentially uncollectible. Trade receivablesare generally written off once all collection efforts have been exhausted.Accounts receivable are shown in the consolidated balance sheets net ofallowances for doubtful collections and subsequent customer returns.

 

*Advertising Costs*— Expenditures for internet, television and local radio advertising areexpensed in the period the advertising takes place. Catalog preparation,printing and postage expenditures are amortized over the period of catalogdistribution during which the benefits are expected, generally one to sixmonths.

 

Net advertising expenses were $40.0 million,$47.2 million and $37.4 million during 2008, 2007 and 2006, respectively andare included in the accompanying Consolidated Statements of Operations.  The Company utilizes advertising programs tosupport vendors, including catalogs, internet and magazine advertising, andreceives payments and credits from vendors, including consideration pursuant tovolume incentive programs and cooperative marketing programs. The Company accountsfor consideration from vendors as a reduction of cost of sales unless certainconditions are met showing that the funds are used for specific, incremental,identifiable costs, in which case the consideration is accounted for as areduction in the related expense category, such as advertising expense.  The amount of vendor consideration recordedas a reduction of selling, general and administrative expenses totaled $60.4million, $42.6 million and $39.6 million during 2008, 2007 and 2006,respectively.

 

Prepaid expenses as of December 2008 and2007 include deferred advertising costs of $4.1 million and $3.9 million whichare reflected as an expense during the periods benefited, typically thesubsequent fiscal quarter.

 

*Stock based compensation* — The Company recordsshare-based payment awards exchanged for employee services at fair value on thedate of grant and expenses the awards in the consolidated statement ofoperations over the requisite employee service period.  Stock-based compensation expense includes anestimate for forfeitures and is recognized over the expected term of the awardon a straight-line basis.  The Companyrecorded, as a component of selling, general and administrative expenses,amortization of stock-based compensation of $3,220,000, $3,435,000, and$1,756,000 in 2008, 2007 and 2006, respectively. (See Note 7)

 

*Net Income Per Common Share*— Net income per common share basic is calculated based upon the weightedaverage number of common shares outstanding during the respective periods presented.Net income per common share diluted is calculated based upon the weightedaverage number of common shares outstanding and included the equivalent sharesfor dilutive securities outstanding during the respective periods, where theeffect is anti-dilutive. The dilutive effect of outstanding options issued bythe Company is reflected in net income per share - diluted using the treasurystock method. Under the treasury stock method, options will only have adilutive effect when the average market price of common stock during the periodexceeds the exercise price of the options. Equivalent common shares of 941,000,1,087,000, and 989,000

 

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in 2008, 2007 and 2006, respectively wereincluded for the diluted calculation. The weighted average number of stockoptions outstanding excluded from the computation of diluted earnings per sharewas 622,000, 0, and 36,000 in 2008, 2007 and 2006, respectively due to theirantidilutive effect.

 

*Comprehensive Income*— Comprehensive income consists of net income and foreign currency translationadjustments and is included in the Consolidated Statements of Shareholders’Equity.  Comprehensive income was$34,214,000, $74,011,000 and $51,435,000 in 2008, 2007 and 2006, respectively.

 

*Employee Benefit Plans-*The Company’s U.S. subsidiaries participate in a defined contribution 401(k) plancovering substantially all U.S. employees. Employees may invest 1% or more of their eligible compensation, limitedto maximum amounts as determined by the Internal Revenue Service. The Companyprovides a matching contribution to the plan, determined as a percentage of theemployees’ contributions.  Aggregateexpense to the Company for contributions to such plans was approximately$730,000, $614,000 and $514,000 in 2008, 2007 and 2006, respectively.

 

*Fair Value of Financial Instruments*- Financial instruments consist primarily of investments in cash and cashequivalents, trade accounts receivable, accounts payable and debtobligations.  The Company estimates thefair value of financial instruments based on interest rates available to theCompany and by comparison to quoted market prices.  At December 31,  2008 and 2007, the carrying amounts of cashand cash equivalents, accounts receivable, income taxes receivable and payableand accounts payable are considered to be representative of their respectivefair values due to their short-term nature.

 

*Concentration of Credit Risk—*Financial instruments that potentially subject the Company toconcentrations of credit risk consist of cash, cash equivalents and accountsreceivable.  The Company’s excess cashbalances are invested with money center banks such as Wachovia and JP MorganChase. Concentrations of credit risk with respect to accounts receivable arelimited due to the large number of customers and their geographic dispersioncomprising the Company’s customer base. The Company also performs on-goingcredit evaluations and maintains allowances for potential losses as warranted.

 

*Recent Accounting Pronouncements*

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157 “Fair ValueMeasurements”. This statement was issued to increase consistency andcomparability in fair value measurements and for expanded disclosures aboutfair value measurements.  Effective January 1,2008 the Company adopted the provisions of SFAS No. 157, which did nothave a material impact on the Company’s consolidated financial statements.

 

InFebruary 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2,which provides for a one-year deferral of the provisions of SFAS No. 157until fiscal years beginning after December 15, 2008 for non-financialassets and liabilities that are recognized or disclosed at fair value in theconsolidated financial statements on a non-recurring basis.  The Company is currently evaluating thepotential impact, if any, of FSP 157-2.

 

InApril 2008, the FASB issued FSP FAS 142-3 “Determination of the UsefulLife of Intangible Assets”. FSP FAS 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,*Goodwill and Other Intangible Assets*.The intent of this FSP is to improve the consistency between the useful life ofa recognized intangible asset and the period of expected cash flows used tomeasure the fair value of the asset.  Thestandard applies prospectively to intangible assets acquired and/or recognizedon or after January 1, 2009. The Company is currently evaluating theimpact, if any, the adoption of this FSP may have on the Company’s consolidatedfinancial statements.

 

InJune 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities”. This FSP was issued to clarify that instruments grantedin share-based payment transactions can be participating securities prior tothe requisite service having been rendered. The guidance in this FSP applies tothe calculation of Earnings Per Share (“EPS”) under Statement 128 forshare-based payment awards with rights to dividends or dividend equivalents.Unvested share-based payment awards that contain non-forfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and shall be included in the computation of EPS pursuant to thetwo-class method. This FSP is effective for financial statements issued forfiscal years beginning after December 15, 2008, and interim periods withinthose years. All prior-period EPS data presented shall be adjusted retrospectively(including interim financial statements, summaries of earnings, and selectedfinancial data) to conform with the provisions of this FSP. The Company doesnot expect the adoption of this FSP to have a material impact on itsconsolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141R, “Business Combinations,”which replaces FASB Statement 141. SFAS No.141R retains the requirement thatthe acquisition method of accounting be used for business combinations. Theobjective of SFAS No. 141R is to improve the relevance, representationalfaithfulness and comparability that reporting entities provide in theirfinancial reports about business combinations and their effects. SFAS No. 141Restablishes principles and requirements for how an acquirer 1) recognizes andmeasures identifiable assets acquired, the liabilities assumed and anynon-controlling interest in the acquiree, 2) recognizes and measures thegoodwill acquired in the combination or a gain from a bargain purchase and 3)determines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination. SFAS No. 141R is effective for

 

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annualperiods beginning after December 15, 2008 and will be appliedprospectively for all business combinations entered into after the date ofadoption.  The impact of SFAS No. 141Rwill depend on the nature and terms of any future business combinations, ifany.

 

InDecember 2007, the FASB issued SFAS No. 160, “Accounting andReporting of Non-controlling Interest”. The objective of SFAS No. 160 isto improve the relevance, comparability and transparency of the financialinformation that reporting entities provide related to non-controllinginterests, sometimes referred to as minority interests. SFAS No. 160requires, among other things, that non-controlling interests be shownseparately in the consolidated entity’s equity section of the balance sheet.SFAS No. 160 also establishes accounting and reporting standardsfor ownership interest in subsidiaries held by parties other than theparent, for presentation of amounts of consolidated net income attributable tothe parent and the non-controlling interest, for consistency in accounting forchanges in a parent’s ownership interest when the parent retains a controllinginterest, for the valuation of retained non-controlling equity interests when asubsidiary is deconsolidated and for providing sufficient disclosure thatidentifies and distinguishes the interests of the parent and the interests ofthe non-controlling owners. SFAS No. 160 is effective beginning January 1,2009. The Company does not expect the adoption of SFAS No.160 to have amaterial impact on its consolidated financial statements.

 

**2.****              ACQUISITION**

 

On January 5, 2008, the Company, through various subsidiaries,entered into an asset purchase agreement with CompUSA Inc., a Delaware corporation.Pursuant to the Purchase Agreement, the Company acquired certain assets andliabilities related to the e-commerce business of CompUSA Inc., certainintellectual property rights owned by CompUSA, and the E-Commerce Business for$18.9 million in cash.  The Companycompleted its acquisition of the E-Commerce Business on January 10,2008.  Pursuant to the PurchaseAgreement, the Company also acquired sixteen retail leases from CompUSA Inc.and certain fixtures located at these locations. The closing of the acquisitionof each lease was subject to the receipt of the consent of the landlord, ifrequired, under the terms of a lease. During February and March 2008 the Company completed theacquisition of these 16 store leases and fixtures for an aggregate purchaseprice of approximately $11.7 million. This acquisition accelerated the Company’splanned expansion into the retail market place in North America and PuertoRico. A final purchase price allocation based on the fair market value ofacquired assets has been completed and the Company has recorded assets ofapproximately $17.0 million for Trademarks and Trade Names, $8.0 million forDomain Names, $3.4 million for Retail Store Leases, $0.4 million for ClientLists, $0.9 million for fixed assets and $0.9 million for Goodwill. Theseassets were recorded in the Company’s Technology Products business segment. TheCompany expects to amortize its Retail Store Leases over the remaining weightedaverage life of the leases, 12.9 years, the Client Lists over a 5 year periodand depreciate its fixed assets over a similar period. All other intangibleassets are indefinite lived. All of the Company’s goodwill at December 31,2008 is deductible for tax purposes on a straight line basis over 15 years. Thegross carrying amount and accumulated amortization for amortizable intangibleassets at December 31, 2008 was as follows (in thousands):

 
| ** **          | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|---------------------|------------|---------------------------------|------------|-------------------------------|------------|
| Retail store leases |       | $                               | 3,410      |                          | $          | 220 |   |
| Client lists        |       | 400                             |       | 103                           |       |
|                |       | $                               | 3,810      |                          | $          | 323 |   |

 

The aggregate amortization expense was approximately $0.3 million in2008. The estimated amortization for future years ending December 31 is asfollows (in thousands):

 
| 2009       |   | $     | 484    |   |
|------------|--------|-------|--------|--------|
| 2010       |   | 322   |   |
| 2011       |   | 278   |   |
| 2012       |   | 269   |   |
| 2013       |   | 264   |   |
| Thereafter |   | 1,870 |   |
| Total      |   | $     | 3,487  |   |

 

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**3.****                PROPERTY, PLANTAND EQUIPMENT**

 

Property, plant and equipment, net consist ofthe following (in thousands):

 
| ** **                                                                 | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                 | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Land and buildings                                                         |       | $                     | 26,556     |   | $ | 32,724 |   |
| Furniture and fixtures, office, computer  and other equipment and software |       | 92,377                |       | 82,838 |   |
| Leasehold improvements                                                     |       | 14,839                |       | 12,748 |   |
|                                                                       |       | 133,772               |       | 128,310 |   |
| Less accumulated depreciation and  amortization                            |       | 85,307                |       | 80,730 |   |
| Property, plant and equipment, net                                         |       | $                     | 48,465     |   | $ | 47,580 |   |

 

Included in property, plant and equipment areassets under capital leases, as follows (in thousands):

 
| ** **                                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
| Furniture and fixtures, office, computer  and other equipment |       | $        | 4,300      |     | $          | 2,612 |   |
| Less: Accumulated amortization                                |       | 2,564    |       | 1,798    |       |
|                                                          |       | $        | 1,736      |     | $          | 814 |   |

 

Depreciation charged tooperations for property, plant and equipment in 2008, 2007, and 2006 was $10.1million, $8.8 million and $8.2 million, respectively.

 

**4.****                CREDITFACILITIES**

 

The Company maintains a revolving credit agreement with a group offinancial institutions at an amount of $120 million (which may be increased byup to $30 million, subject to certain conditions). The borrowings are securedby all of the domestic and United Kingdom accounts receivable, the domesticinventories of the Company, the Company’s United Kingdom headquarters buildingand the Company’s shares of stock in its domestic and United Kingdomsubsidiaries. The credit facility expires and outstanding borrowings thereunderare due on October 26, 2010. The borrowings under the agreement aresubject to borrowing base limitations of up to 85% of eligible accountsreceivable and up to 40% of qualified inventories. The interest on outstandingadvances is payable monthly, at the Company’s option, at the agent bank’s baserate (at December 31, 2008) plus 0.25% or the bank’s daily LIBOR rate (at December 31,2008) plus 1.25% to 2.25%. The undrawn availability under the facility may notbe less than $15 million until the last day of any month in which theavailability net of outstanding borrowings is at least $70 million. Thefacility also calls for a commitment fee payable quarterly in arrears of 0.375%of the average daily unused portions of the facility.   The revolving credit agreement requires thata minimum level of availability be maintained. If such availability is notmaintained, the Company will be required to maintain a fixed charge coverageratio (as defined). The agreement contains certain other covenants, includingrestrictions on capital expenditures and payments of dividends. We were incompliance with all of the covenants as of December 31, 2008. As of December 31,2008, eligible collateral under the agreement was $103.5 million and totalavailability was $94.4 million. There were outstanding letters of credit of$9.1 million and there were no outstanding advances.

 

The Company’sNetherlands subsidiary maintained a €5 million credit facility with a localfinancial institution. Borrowings under the facility were secured by thesubsidiary’s accounts receivable and are subject to a borrowing base limitationof 85% of the eligible accounts. The facility expired during 2008.  At December 31, 2007 there was €2.6million ($3.9 million) of borrowings outstanding under this line with interestpayable at a rate of 7.05%.

 

The weighted averageinterest rate on short-term borrowings was****5.1%, 7.5%,and 7.8% in 2008, 2007 and 2006.

 

**5.****                ACCRUEDEXPENSES AND OTHER CURRENT LIABILITIES**

 

Accrued expenses and other currentliabilities consist of the following (in thousands):

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Payroll and employee benefits |       | $                     | 25,669     |   | $ | 21,850 |   |
| Income taxes payable          |       | 733                   |       | 2,297 |   |
| Freight                       |       | 6,820                 |       | 10,908 |   |
| Deferred revenue              |       | 5,683                 |       | 5,704 |   |
| Advertising                   |       | 5,286                 |       | 4,785 |   |
| Sales and VAT tax payable     |       | 8,061                 |       | 2,140 |   |
| Other                         |       | 23,351                |       | 33,953 |   |
|                          |       | $                     | 75,603     |   | $ | 81,637 |   |

 

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**6.****                LONG-TERMDEBT**

 

Long-term debt consists of (in thousands):

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Capitalized equipment lease obligations |       | $                     | 2,184      |   | $ | 703 |   |
| Less: current portion                   |       | 773                   |       | 449 |   |
|                                    |       | $                     | 1,411      |   | $ | 254 |   |

 

The aggregate maturities of long-term debtoutstanding at December 31, 2008 are as follows (in thousands):

 
| ** ** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Maturities |       | $        | 773        |     | $          | 666      |       | $        | 471        |     | $          | 152 |   | $ | 122 |   |
|            |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

**7.****                SHAREHOLDERS’EQUITY**

 

*Stock based compensation plans*

 

The Company currently has four equitycompensation plans which reserve shares of common stock for issuance to keyemployees, directors, consultants and advisors to the Company.   The following is a description of theseplans:

 

*The 1995 Long-term Stock Incentive Plan*- This plan, adopted in 1995, allowed the Company to issue qualified,non-qualified and deferred compensation stock options, stock appreciationrights, restricted stock and restricted unit grants, performance unit grantsand other stock based awards authorized by the Compensation Committee of theBoard of Directors.  Options issued underthis plan expire ten years after the options are granted. The ability togrant new awards under this plan ended on December 31, 2005 but awardsgranted prior to such date continue until their expiration. A total of 762,688options were outstanding under this plan as of December 31, 2008.

 

*The 1995 Stock Option Plan for Non-EmployeeDirectors* - This plan, adopted in 1995, providesfor automatic awards of non-qualified options to directors of the Company whoare not employees of the Company or its affiliates. All options granted underthis plan will have a ten year term from grant date and are immediatelyexercisable. A maximum of 100,000 shares may be granted for awards under thisplan.  The ability to grantnew awards under this plan ended on October 12, 2006 but awardsgranted prior to such date continue until their expiration. A total of 39,000options were outstanding under this plan as of December 31, 2008.

 

*The**1999 Long-term Stock Incentive Plan, as amended (“1999 Plan”)*- This plan was adopted on October 25, 1999 with substantially the sameterms and provisions as the 1995 Long-term Stock Incentive Plan.  The Company increased the number of sharesthat may be granted under this plan to a maximum of 7.5 million from 5.0million shares.  The maximum number ofshares granted per type of award to any individual may not exceed 1,500,000 inany calendar year and 3,000,000 in total. The Company extended the expiration date under this plan that no grantsshall be granted under this plan after December 31, 2010. The originaldate was after December 31, 2009. Restricted stock grants and common stockawards reduce stock options otherwise available for future grant. A total of1,385,896 options and 600,000 restricted stock units were outstanding underthis plan as of December 31, 2008.

 

***The 2006 Stock Incentive Plan For Non-EmployeeDirectors***—This plan, adopted by the Company’s stockholders on October 11, 2006,replaces the 1995 Stock Option Plan for Non-Employee Directors. The Companyadopted the plan so that it could offer directors of the Company who are notemployees of the Company or of any entity in which the Company has more than a50% equity interest (“independent directors”) an opportunity to participate inthe ownership of the Company by receiving options to purchase shares of commonstock at a price equal to the fair market value at the date of grant of theoption and restricted stock awards. Awards for a maximum of 200,000 shares maybe granted under this plan. A total of 15,000 options were outstanding underthis plan as of December 31, 2008.

** **

Shares issuedunder our share-based compensation plans are usually issued from shares of ourcommon stock held in the treasury.

 

*Adoption of SFAS 123(R)*

 

Effective January 1,2006, the Company adopted the provisions of SFAS 123(R), using themodified-prospective-transition method. Under that transition method,compensation cost recognized for the year ended December 31, 2006includes: (a) compensation cost for all share-based payments granted priorto, but not yet vested as of January 1, 2006, based on the grant-date fairvalue estimated in accordance with the original provisions of SFAS 123, and (b) compensationcost for the vested portion of share-based payments granted subsequent to January 1,2006, based on the grant-date fair value estimated in accordance with theprovisions of SFAS 123(R).

 

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The fair value of employee share options is recognized in expense overthe vesting period of the options, using the graded attribution method.  The fair value of employee share options isdetermined on the date of grant using the Black-Scholes option pricing model.The Company has used historical volatility in its estimate of expectedvolatility. The expected life represents the period of time (in years) forwhich the options granted are expected to be outstanding. The Company used thesimplified method for determining expected life as permitted in SEC StaffAccounting Bulletin 107 for options qualifying for treatment (“plain-vanilla”options) due to the limited history the Company currently has with optionexercise activity. The risk-free interest rate is based on the U.S. Treasuryyield curve.

 

Compensation cost related to non-qualified stock options recognized inoperating results (selling, general and administrative expense) for 2008, 2007and 2006 was $3,220,000, $3,435,000, and $1,756,000 respectively. The relatedfuture income tax benefits recognized for 2008, 2007 and 2006 were $1,219,000,$1,147,000 and $599,000, respectively.

 

*Stock options*

 

The followingtable presents the weighted-average assumptions used to estimate the fair valueof options granted in 2008, 2007 and 2006:

 
| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |     |       |
| Expected annual dividend yield |       | 0        | %          | 0        | %          | 0        | %          |
| Risk-free interest rate        |       | 3.17     | %          | 4.93     | %          | 4.76     | %          |
| Expected volatility            |       | 63.8     | %          | 71.2     | %          | 78.2     | %          |
| Expected life in years         |       | 6.3      |       | 6.2      |       | 6.0      |       |

 

The following table summarizes information concerning outstanding andexercisable options:

 
| ** **                                                      | ** ** | **Weighted Average** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                      | ** ** | **2008**                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                      | ** ** | **Shares**                | ** ** | **Exercise  Price** | ** ** | **Shares** | ** ** | **Exercise  Price** | ** ** | **Shares** | ** ** | **Exercise  Price** | ** ** |
| Outstanding at beginning of year                                |       | 2,655,937                 |       | $ | 7.95 |   | 2,629,076 |   | $ | 4.69 |   | 2,657,419 |   | $ | 3.93 |   |
| Granted                                                         |       | 110,000                   |       | $ | 12.90 |   | 699,050 |   | $ | 19.45 |   | 479,334 |   | $ | 8.01 |   |
| Exercised                                                       |       | (503,078                  | )          | $ | 2.25 |   | (545,815 | ) | $ | 5.19 |   | (480,203 | ) | $ | 3.33 |   |
| Cancelled or expired                                            |       | (60,275                   | )          | $ | 17.77 |   | (126,374 | ) | $ | 15.64 |   | (27,474 | ) | $ | 12.84 |   |
| Outstanding at end of year                                      |       | 2,202,584                 |       | $ | 9.23 |   | 2,655,937 |   | $ | 7.95 |   | 2,629,076 |   | $ | 4.69 |   |
|                                                            |       |                      |       |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at year end                                 |       | 1,560,804                 |       |   |   | 1,645,639 |   |   |   | 1,891,426 |   |   |   |
| Weighted average fair value per option  granted during the year |       | $                         | 7.94       |   |   |   | $ | 13.19 |   |   |   | $ | 5.64 |   |   |   |
|                                                                 |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The total intrinsic value of optionsexercised and share based payments made was $4,088,000, $6,517,000 and$3,501,000, respectively, for 2008, 2007 and 2006.

 

The following table summarizes informationabout options vested and exercisable or nonvested that are expected to vest(nonvested outstanding less expected forfeitures) at December 31, 2008:

 
| **Range of Exercise Prices** | ** ** | **Number  Exercisable** | ** **        | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic  Value (in  thousands)** | ** ** |
|---------------------------------------------|------------|-------------------------|-------------------|----------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------|------------|
| $                                           | 1.76       | to                      | $  5.00 |                                   | 527,703    |                                                        | $          | 2.25                                                 |       | 3.43 |   | $ | 4,547 |   |
| $                                           | 5.01       | to                      | $ 15.00      |                                   | 1,037,331  |                                                        | $          | 6.75                                                 |       | 5.72 |   | 4,324 |   |
| $                                           | 15.01      | to                      | $ 20.00      |                                   | 484,764    |                                                        | $          | 18.77                                                |       | 8.34 |   | — |   |
| $                                           | 20.01      | to                      | $ 20.15      |                                   | 100,000    |                                                        | $          | 20.15                                                |       | 7.91 |   | — |   |
| $                                           | 1.76       | to                      | $ 20.15      |                                   | 2,149,798  |                                                        | $          | 8.98                                                 |       | 5.85 |   | $ | 8,871 |   |

 

The aggregate intrinsic value in the tables above represents the totalpretax intrinsic value (the difference between the closing stock price on thelast day of trading in 2008 and the exercise price) that would have beenreceived by the option holders had all options been exercised on December 31,2008. This value will change based on the fair market value of the Company’scommon stock.

 

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The following table reflects the activity for all unvested stockoptions during 2008:

 
| ** **                         | ** ** | **Shares** | ** ** | **Weighted  Average Grant-  Date Fair Value** | ** ** |
|------------------------------------|------------|------------|------------|--------------------------------------------------------------|------------|
| Unvested at January 1, 2008   |       | 1,097,798  |       | $                                                            | 9.99       |   |
| Granted                            |       | 110,000    |       | $                                                            | 7.94       |   |
| Vested                             |       | (429,518   | )          | $                                                            | 6.94       |   |
| Forfeited                          |       | (136,500   | )          | $                                                            | 12.34      |   |
| Unvested at December 31, 2008 |       | 641,780    |       | $                                                            | 11.18      |   |

 

At December 31, 2008, there was approximately $2,810,000 ofunrecognized compensation costs related to unvested stock options, which isexpected to be recognized over a weighted average period of 1.21 years. Thetotal fair value of stock options vested during 2008, 2007 and 2006 was$2,981,000, $671,000 and $1,502,000, respectively.

 

*Restricted Stock and Restricted Stock Units*

 

In October 2004, the Company granted 1,000,000 restricted stockunits under the 1999 Plan to a key employee who is also a Company director. Arestricted stock unit represents the right to receive a share of the Company’scommon stock. The restricted stock units have none of the rights as othershares of common stock until common stock is distributed, other than rights tocash dividends. The restricted stock unit award was a non-performance awardwhich vests at the rate of 20% on May 31, 2005 and 10% per year on April 1,2006 and each year thereafter. The share-based expense for restricted stockawards was determined based on the market price of the Company’s stock at thedate of the award. Compensation expense related to the restricted stock awardwas approximately $574,000 in each of 2008, 2007 and 2006. Share-basedcompensation   expense for restrictedstock issued to Directors was $75,000 in each of 2008, 2007 and 2006.

 

*Share repurchase plan*

 

In May 2008, the Company’s Board ofDirectors authorized the repurchase of up to 2,000,000 shares of the Company’scommon stock. During 2008 the Company repurchased 475,301 common shares at a costof approximately $5.8 million, an average of $12.25 per share. Theses sharesare included in Common stock in treasury at cost in the Company’s consolidatedbalance sheet.

 

**8.****                INCOME TAXES**

 

The components of income before income taxesare as follows (in thousands):

 
| ** **    | ** ** | **Year Ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| United States |       | $                                          | 61,220     |   | $ | 81,832 |   | $ | 53,587 |   |
| Foreign       |       | 22,523                                     |       | 18,191 |   | 16,108 |   |
| Total         |       | $                                          | 83,743     |   | $ | 100,023 |   | $ | 69,695 |   |

 

The provision for income taxes consists ofthe following (in thousands):

 
| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current:       |       |                                       |       |   |   |   |   |
| Federal        |       | $                                          | 15,753     |   | $ | 26,174 |   | $ | 15,437 |   |
| State          |       | 4,106                                      |       | 4,842 |   | 3,179 |   |
| Foreign        |       | 4,844                                      |       | 5,632 |   | 3,678 |   |
| Total current  |       | 24,703                                     |       | 36,648 |   | 22,294 |   |
| Deferred:      |       |                                       |       |   |   |   |   |
| Federal        |       |                                       | 2,242      |   | (1,004 | ) | 1,235 |   |
| State          |       | 154                                        |       | 277 |   | 511 |   |
| Foreign        |       | 3,801                                      |       | (5,379 | ) | 508 |   |
| Total deferred |       | 6,197                                      |       | (6,106 | ) | 2,254 |   |
| TOTAL          |       | $                                          | 30,900     |   | $ | 30,542 |   | $ | 24,548 |   |

 

Income taxes are accrued and paid by eachforeign entity in accordance with applicable local regulations.

 

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Areconciliation of the difference between the income tax expense and thecomputed income tax expense based on the Federal statutory corporate rate is asfollows (in thousands):

 
| ** **                                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Income tax at Federal statutory rate                                                          |       | $                                          | 29,311     |   | $ | 35,008 |   | $ | 24,407 |   |
| State and local income taxes and changes in  valuation allowances, net of federal tax benefit |       | 3,036                                      |       | 3,332 |   | 2,577 |   |
| Foreign taxes at rates different from the  U.S. rate                                          |       | (940                                       | )          | (2,260 | ) | 1,199 |   |
| Changes in valuation allowances for foreign  deferred tax assets                              |       | (120                                       | )          | (6,184 | ) | (2,260 | ) |
| Tax credits                                                                                   |       | —                                     |       | — |   | (718 | ) |
| Refunds- prior years                                                                          |       | (872                                       | )          |   |   |   |   |
| Non-deductible items                                                                          |       | —                                     |       | 963 |   | — |   |
| Adjustment for prior year taxes                                                               |       | 253                                        |       | (593 | ) | (760 | ) |
| Other items, net                                                                              |       | 232                                        |       | 276 |   | 103 |   |
|                                                                                          |       | $                                          | 30,900     |   | $ | 30,542 |   | $ | 24,548 |   |

 

The deferred tax assets and liabilities arecomprised of the following (in thousands):

 
| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Assets:                                     |       |                  |       |   |   |
| Current:                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accrued expenses and other liabilities      |       | $                     | 8,524      |   | $ | 8,379 |   |
| Inventory                                   |       | 1,899                 |       | 2,374 |   |
| Valuation allowances                        |       | —                |       | (96 | ) |
| Total current assets                        |       | $                     | 10,423     |   | $ | 10,657 |   |
| ** **                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Non-current:                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net operating loss and credit carryforwards |       | $                     | 8,834      |   | $ | 12,462 |   |
| Accelerated depreciation                    |       | 1,089                 |       | 3,494 |   |
| Intangible and other assets                 |       | 4,606                 |       | 6,791 |   |
| Other                                       |       | 5,300                 |       | 3,196 |   |
| Valuation allowances                        |       | (8,377                | )          | (7,291 | ) |
| Total  non-current assets                   |       | $                     | 11,452     |   | $ | 18,652 |   |
|                                        |       |                  |       |   |   |
| Liabilities :                          |       |                  |       |   |   |
| Current :                              |       |                  |       |   |   |
| Deductible assets                           |       | $                     | 753        |   | $ | 773 |   |
| Other                                       |       | 112                   |       | 524 |   |
| Total current liabilities                   |       | $                     | 865        |   | $ | 1,297 |   |
|                                        |       |                  |       |   |   |
| Non-current:                                |       |                  |       |   |   |
| Accelerated depreciation                    |       | $                     | 248        |   | $ | — |   |
| Other                                       |       | 6                     |       | 3 |   |
| Total  non-current liabilities              |       | $                     | 254        |   | $ | 3 |   |

 

The Companyhas not provided for federal income taxes applicable to the undistributedearnings of its foreign subsidiaries of approximately $39.6 million as of December 31,2008, since these earnings are considered indefinitely reinvested. The Companyhas foreign net operating loss carryforwards which expire through 2022 exceptfor carryforwards in the United Kingdom which have no expiration.  The Company records these benefits as assetsto the extent that utilization of such assets is more likely than not;otherwise, a valuation allowance has been recorded.  The Company has also provided valuationallowances for certain state deferred tax assets and net operating losscarryforwards where it is not likely they will be realized.

 

In the fourthquarter of 2007 the Company’s United Kingdom subsidiary emerged from itscumulative loss position and the previously established valuation allowanceagainst the deferred tax assets of the United Kingdom of approximately $5.9million was reversed. In the fourth quarter of 2007 the Company recorded avaluation allowance of approximately $1.7 million against the deferred taxassets of its German subsidiary as the result of the German subsidiary enteringa cumulative loss position and uncertainty as to whether or not future earningswill be sufficient to enable utilization of those assets.

 

As of December 31,2008, the valuation allowances of approximately $8.4 million related to netoperating loss carryforwards in foreign jurisdictions of $6.4 million, $2.0million for state net operating loss carryforwards and $0.2 million for otherstate deductible temporary differences. During 2008, valuation allowancesincreased $1.4 million as a

 

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result ofadditional losses incurred in foreign and state jurisdictions.   Valuation allowances decreased $.7 millionin 2008 for carryforward losses utilized for which valuation allowances hadbeen previously provided. As of December 31, 2007, the valuationallowances of $7.4 million included $6.0 million related to net operating losscarryforwards in foreign jurisdictions, $1.2 million for state net operatingloss carryforwards and $0.2 million for other state deductible temporarydifferences. During 2007, valuation allowances decreased $10.5 millionprimarily as a result of the reversal of the valuation allowance in the UnitedKingdom, utilization of net operating losses and timing differences in theUnited Kingdom and utilization of state net operating loss deductions in theUnited States.  During 2006, valuationallowances increased $2.6 million as a result of additional losses incurred incertain state jurisdictions and adjustments of prior year’s allowances inforeign jurisdictions.

 

The Company isroutinely audited by federal, state and foreign tax authorities with respect toits income taxes. The Company regularly reviews and evaluates the likelihood ofaudit assessments and believes it has adequately accrued for exposures for taxliabilities resulting from future tax audits. To the extent the Company wouldbe required to pay amounts in excess of reserves or prevail on matters forwhich accruals have been established, the Company’s effective tax rate in agiven period may be materially impacted. The Company’s federal income taxreturns for fiscal years 2005 and 2006 are currently under audit by theInternal Revenue Service. The Company does not expect the outcome of the auditto have a material impact on the Company’s consolidated financial statements.The Company has not signed any consents to extend the statute of limitationsfor any subsequent years. The Company’s significant state tax returns have beenaudited through 2005. The Company considers its significant tax jurisdictionsin foreign locations to be the United Kingdom, Canada, France, Italy andGermany. The Company remains subject to examination in the United Kingdom foryears after 2001, in

 

Canada foryears after 2000, in France for years after 2004, in Italy for years after2002. Audits are currently ongoing in the Netherlands for 2006 and in Germanyfor 2005 and 2006.

 

Effective January 1, 2007, the Companyadopted the provisions of FASB Interpretation 48, “Accounting for Uncertaintyin Income Taxes” (“FIN 48”).  FIN 48clarifies the accounting and reporting for uncertainties in income taxlaw.  This interpretation prescribes acomprehensive model for the financial statement recognition, measurement,presentation and disclosure of uncertain tax positions taken or expected to betaken in income tax returns.  For thosebenefits to be recognized, a tax position must be more-likely-than-not to besustained upon examination by taxing authorities.  At January 1, 2007, the Company had aliability for unrecognized tax benefits of $3,379,000 (including interest andpenalties of $731,000) of which $283,000 was charged to retained earnings at January 1,2007.  Of this total, $2,586,000 (net ofthe federal benefit on state issues) represents the amount of unrecognized taxbenefits that, if recognized, would favorably affect the effective income taxrate in any future periods. At December 31, 2007 the Company had aliability for unrecognized tax benefits of $1,547,000 (including interest andpenalties of $631,000). Of this total, $1,467,000 (net of the federal benefiton state issues) represents the amount of unrecognized tax benefits that, ifrecognized, would favorably affect the effective income tax rate in any futureperiods. The following table details activity of the Company’s uncertain taxpositions during 2008 and 2007:

 
| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Balance beginning of year                                 |       | $                     | 916        |   | $ | 2,648 |   |
| Decreases related to settlements with  taxing authorities |       | —                |       | (1,732 | ) |
| Balance end of year                                       |       | $                     | 916        |   | $ | 916 |   |

 

Interest and penaltiesof approximately $46,000 and $69,000 related to unrecognized tax benefits wereexpensed in 2008 and 2007 and are included in income tax expense. Additionally,included in income tax expense in 2008 is an interest and penalty reservesreversal of approximately $399,000 related to a state tax audit that wassettled favorably. Within the next twelve months the Company believes itreasonably possible that these tax positions, related to foreign tax audits,will be reduced.

 

**9.****                COMMITMENTS,CONTINGENCIES AND OTHER MATTERS**

 

*Leases*- The Company is obligated under operating lease agreements for the rentalof certain office and warehouse facilities and equipment which expire atvarious dates through September 2026. The Company currently leases itsheadquarters office/warehouse facility in New York from an entity owned by theCompany’s three principal shareholders and senior executive officers. TheCompany believes that these payments were no higher than would be paid to anunrelated lessor for comparable space. The Company also acquires certaincomputer and communications equipment pursuant to capital lease obligations.

 

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At December 31,2008, the future minimum annual lease payments for capital leases and relatedand third-party operating leases were as follows (in thousands):

 
| ** **                                                                           | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|-----------|------------|
|                                                                                 |       |                |       |                  |       |      |       |
| 2009                                                                                 |       | $                   | 905        |                  | $          | 19,131    |       | $ | 20,036 |   |
| 2010                                                                                 |       | 746                 |       | 17,176                |       | 17,922    |       |
| 2011                                                                                 |       | 508                 |       | 15,960                |       | 16,468    |       |
| 2012                                                                                 |       | 167                 |       | 14,769                |       | 14,936    |       |
| 2013                                                                                 |       | 125                 |       | 13,066                |       | 13,191    |       |
| 2014-2018                                                                            |       |                |       | 38,602                |       | 38,602    |       |
| 2019-2023                                                                            |       |                |       | 13,476                |       | 13,476    |       |
| Thereafter                                                                           |       |                |       | 3,552                 |       | 3,552     |       |
| Total minimum lease payments                                                         |       | 2,451               |       | 135,732               |       | 138,183   |       |
| Less: sublease rental income                                                         |       |                |       | 122                   |       | 122       |       |
| Lease obligation net of subleases                                                    |       | 2,451               |       | $                     | 135,610    |      | $          | 138,061 |   |
| Less amount representing interest                                                    |       | 267                 |       |                  |       |      |       |
| Present value of minimum capital lease  payments (including current portion of $773) |       | $                   | 2,184      |                  |       |      |       |   |

 

Annual rent expense aggregated approximately $24,993,000, $14,760,000and $13,198,000 in 2008, 2007 and 2008, respectively. Included in rent expensewas $860,000, $612,000, and $612, 000 in 2008, 2007 and 2006, respectively, torelated parties.Rent expense is net of sublease income of $355,000, $853,000and $937,000 for 2008, 2007 and 2006, respectively.

 

Litigation —

 

Kevin Vukson v. TigerDirect, Inc., OnRebate.com Inc. and SystemaxInc.

 

On October 18, 2007, Kevin Vukson filed aclass action complaint in U.S. District Court (E.D.N.Y.) against TigerDirect, Inc.,OnRebate.com Inc. and Systemax Inc. on behalf of himself and all OnRebatecustomers whose rebates were denied or delayed. (OnRebate.com Inc. is a rebateprocessing company owned by Systemax.) Vukson’s Complaint alleges that since2004 Systemax, TigerDirect and OnRebate have conducted a deceptive and unlawfulenterprise by failing to pay rebates that should have been paid and delayingunnecessarily the payment of other rebates that were paid. Vukson allegesclaims arising under Florida’s Unfair, Deceptive Trade Practice Act, thefederal RICO statute, along with claims for breach of contract, conspiracy tocommit fraud and unjust enrichment. On February 11, 2009 the Courtdismissed Vukson’s complaint with leave to file an amended complaint by February 19,2009 but ordered that any amended complaint not include a request for punitivedamages. On February 19, 2009 Vukson filed an amended complaint with norequest for punitive damages, as ordered by the Court. The Company intends tovigorously defend this case.

 

Stateof Florida, Office of the Attorney General Subpoena

 

On January 2, 2008 the Company received asubpoena for documents from the Florida Attorney General’s Office relating tothe payment and processing of rebates by the Company. The Company receivedsubpoenas for additional documents on January 30, 2008 and on August 25,2008.  The Company is cooperating withthe Florida Attorney General’s investigation and has provided a substantialnumber of documents in response to the subpoenas.

 

Other matters

 

The Company has also been named as a defendant in other lawsuits in thenormal course of its business, including those involving commercial, tax,employment and intellectual property related claims. Based on discussions withlegal counsel, management believes the ultimate resolution of these lawsuitswill not have a material effect on the Company’s consolidated financial statements.

 

**10.****         SEGMENT AND RELATEDINFORMATION**

 

The Company operates andis internally managed in three operating segments, Technology Products,Industrial Products and Software Solutions. The Company’s chief operatingdecision-maker is the Company’s Chief Executive Officer. The Company evaluatessegment performance based on income from operations before net interest,foreign exchange gains and losses, restructuring and other charges and incometaxes. Corporate costs not identified with the disclosed segments andrestructuring and other charges are grouped as “Corporate and other expenses.”The chief operating decision-maker reviews assets and makes significant capitalexpenditure decisions for the Company on a consolidated basis only. Theaccounting policies of the segments are the same as those of the Companydescribed in Note 1.

 

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Financial information relating to the Company’s operations byreportable segment was as follows (in thousands):

 
| ** **                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net Sales:                   |       |                                       |       |   |   |   |   |
| Technology Products          |       | $                                          | 2,795,441  |   | $ | 2,553,716 |   | $ | 2,148,104 |   |
| Industrial Products          |       | 237,027                                    |       | 225,746 |   | 196,860 |   |
| Software Solutions           |       | 493                                        |       | 413 |   | 201 |   |
| Consolidated                 |       | $                                          | 3,032,961  |   | $ | 2,779,875 |   | $ | 2,345,165 |   |
|                         |       |                                       |       |   |   |   |   |
| Depreciation Expense:        |       |                                       |       |   |   |   |   |
| Technology Products          |       | $                                          | 8,219      |   | $ | 6,818 |   | $ | 6,395 |   |
| Industrial Products          |       | 986                                        |       | 1,023 |   | 1,040 |   |
| Software Solutions           |       | 1,111                                      |       | 904 |   | 683 |   |
| Corporate                    |       | 71                                         |       | 35 |   | 67 |   |
| Consolidated                 |       | $                                          | 10,387     |   | $ | 8,780 |   | $ | 8,185 |   |
|                         |       |                                       |       |   |   |   |   |
| Operating Income (Loss):     |       |                                       |       |   |   |   |   |
| Technology Products          |       | $                                          | 96,177     |   | $ | 100,958 |   | $ | 68,843 |   |
| Industrial Products          |       | 24,621                                     |       | 20,595 |   | 13,947 |   |
| Software Solutions           |       | (17,948                                    | )          | (15,813 | ) | (10,092 | ) |
| Corporate and other expenses |       | (19,483                                    | )          | (11,798 | ) | (11,968 | ) |
| Consolidated                 |       | $                                          | 83,367     |   | $ | 93,942 |   | $ | 60,730 |   |
|                         |       |                                       |       |   |   |   |   |
| Total Assets                 |       |                                       |       |   |   |   |   |
| Technology Products          |       | $                                          | 400,037    |   | $ | 331,033 |   | $ | 230,512 |   |
| Industrial Products          |       | 98,670                                     |       | 76,634 |   | 59,239 |   |
| Software Solutions           |       | 3,531                                      |       | 3,783 |   | 3,068 |   |
| Corporate                    |       | 201,025                                    |       | 266,194 |   | 291,342 |   |
| Consolidated                 |       | $                                          | 703,263    |   | $ | 677,644 |   | $ | 584,161 |   |

 

Financial information relating to the Company’s operations bygeographic area was as follows (in thousands):

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net Sales:                                     |       |                                       |       |   |   |   |   |
| United States:                                 |       |                                       |       |   |   |   |   |
| Technology Products                            |       | $                                          | 1,660,902  |   | $ | 1,451,046 |   | $ | 1,268,579 |   |
| Industrial Products                            |       | 237,027                                    |       | 225,746 |   | 196,860 |   |
| Software Solutions                             |       | 493                                        |       | 413 |   | 201 |   |
| United States total                            |       | 1,898,422                                  |       | 1,677,205 |   | 1,465,640 |   |
| Other North America (Technology Products)      |       | 193,950                                    |       | 170,272 |   | 135,619 |   |
| Europe                                         |       | 940,589                                    |       | 932,398 |   | 743,906 |   |
| Consolidated                                   |       | $                                          | 3,032,961  |   | $ | 2,779,875 |   | $ | 2,345,165 |   |
|                                           |       |                                       |       |   |   |   |   |
| Long-lived Assets:                             |       |                                       |       |   |   |   |   |
| North America — principally United States |       | $                                          | 30,188     |   | $ | 21,978 |   | $ | 21,347 |   |
| Europe                                         |       | 18,277                                     |       | 25,602 |   | 27,239 |   |
| Consolidated                                   |       | $                                          | 48,465     |   | $ | 47,580 |   | $ | 48,586 |   |

 

Net sales are attributed to countries basedon location of selling subsidiary.

 

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**11.****         QUARTERLY FINANCIAL DATA(UNAUDITED)**

 

Quarterly financial data is as follows (in thousands, except for pershare amounts):

 
| ** **                   | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter ****(1****)** | ** ** |
|------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|------------------------------------------|------------|
| 2008:                        |       |                   |       |                    |       |                   |       |                                     |       |
| Net sales                    |       | $                      | 724,737    |                    | $          | 756,035                |       | $                                        | 739,479    |   | $ | 812,710 |   |
| Gross profit                 |       | $                      | 114,680    |                    | $          | 116,048                |       | $                                        | 116,469    |   | $ | 116,948 |   |
| Net income                   |       | $                      | 18,061     |                    | $          | 13,541                 |       | $                                        | 11,273     |   | $ | 9,968 |   |
| Net income per common share: |       |                   |       |                    |       |                   |       |                                     |       |
| Basic                        |       | $                      | .50        |                    | $          | .37                    |       | $                                        | .31        |   | $ | .27 |   |
| Diluted                      |       | $                      | .48        |                    | $          | .36                    |       | $                                        | .30        |   | $ | .27 |   |
|                         |       |                   |       |                    |       |                   |       |                                     |       |
| 2007:                        |       |                   |       |                    |       |                   |       |                                     |       |
| Net sales                    |       | $                      | 676,122    |                    | $          | 647,102                |       | $                                        | 687,317    |   | $ | 769,334 |   |
| Gross profit                 |       | $                      | 96,674     |                    | $          | 99,318                 |       | $                                        | 110,653    |   | $ | 119,656 |   |
| Net income                   |       | $                      | 13,895     |                    | $          | 13,762                 |       | $                                        | 17,644     |   | $ | 24,180 |   |
| Net income per common share: |       |                   |       |                    |       |                   |       |                                     |       |
| Basic                        |       | $                      | .39        |                    | $          | .38                    |       | $                                        | .49        |   | $ | .67 |   |
| Diluted                      |       | $                      | .37        |                    | $          | .37                    |       | $                                        | .47        |   | $ | .64 |   |

 

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(1) During the fourth quarter of 2007 the Company recorded a writedown of certain assets in Europe of approximately $6.7 million and a reversalof certain liabilities in a domestic location of approximately $3.9 million.

 

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**SYSTEMAXINC.**

 

SCHEDULE II - VALUATION AND QUALIFYINGACCOUNTS

 

For the years ended December:

(in thousands)

 
| **Description**                                    | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Expenses** | ** ** | **Write-offs** | ** ** | **Other** | ** ** | **Balance at  End of Period** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------|------------|----------------|------------|-----------|------------|----------------------------------------------|------------|
| Allowance for sales returns and doubtful  accounts |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| 2008                                               |       | $                                              | 12,122     |                          | $          | 2,424          |       | $         | (5,400     | )                                            |       |   | $ | 9,146 |   |
| 2007                                               |       | $                                              | 11,585     |                          | $          | 4,575          |       | $         | (4,038     | )                                            |       |   | $ | 12,122 |   |
| 2006                                               |       | $                                              | 12,686     |                          | $          | 1,503          |       | $         | (2,604     | )                                            |       |   | $ | 11,585 |   |
|                                               |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| Allowance for deferred tax assets                  |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| 2008                                               |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| Current                                            |       | $                                              | 96         |                          |       |           |       |      | $          | (96                                          | )          | $ | — |   |
| Noncurrent (1)                                     |       | $                                              | 7,291      |                          | $          | 1,996          |       | $         | (64        | )                                            | $          | (846 | ) | $ | 8,377 |   |
| 2007                                               |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| Current                                            |       | $                                              | 738        |                          |       |           | $          | (467      | )          | $                                            | (175       | ) | $ | 96 |   |
| Noncurrent (1)                                     |       | $                                              | 17,141     |                          | $          | 2,842          |       | $         | (11,408    | )                                            | $          | (1,284 | ) | $ | 7,291 |   |
| 2006                                               |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| Current                                            |       | $                                              | 527        |                          | $          | 136            |       |      |       | $                                            | 75         |   | $ | 738 |   |
| Noncurrent (1)                                     |       | $                                              | 14,779     |                          | $          | 2,743          |       | $         | (2,260     | )                                            | $          | 1,879 |   | $ | 17,141 |   |

 

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(1) Charges to expense are net ofreductions resulting from changes in deferred tax assets due to changes in taxlaws.

 

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