** **

** **

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2007**

**or**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the transition period from          to          **

 

**Commission File Number:  1-13792**

 

----

** **

**SystemaxInc.**

 (Exact name of registrant asspecified in its charter)

 

| **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 area code: (516) 608-7000**

 

----

 

**Securities registered pursuant to Section 12(b) of the 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**

 

----

 

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 filereports pursuant 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.  o

 

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 (Checkone):

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

 

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

 

The aggregate market value of the voting stock held by non-affiliatesof the registrant as of June 30, 2007, which is the last business day ofthe registrant’s most recently completed second fiscal quarter, wasapproximately $175,722,268. For purposes of this computation, all executiveofficers and directors of the Registrant and all parties to the StockholdersAgreement dated as of June 15, 1995 have been deemed to be affiliates.Such determination should not be deemed to be an admission that such personsare, in fact, affiliates of the Registrant.

 

The number of shares outstanding of the registrant’s common stock as ofFebruary 29, 2008 was 36,102,783 shares.

 

Documents incorporated by reference: Portions of the Proxy Statement ofSystemax Inc. relating to the 2007 annual meeting of stockholders areincorporated by reference in Part III hereof.

 

 

----

 

 

**TABLE OF CONTENTS**

 
| Part I   |                                                                                              |   |
|---------------|---------------------------------------------------------------------------------------------------|--------|
| Item 1.       | Business                                                                                          | 3      |
|          | General                                                                                           | 3      |
|          | Products                                                                                          | 4      |
|          | Sales and Marketing                                                                               | 5      |
|          | Customer Service, Order Fulfillment and Support                                                   | 6      |
|          | Suppliers                                                                                         | 7      |
|          | Competition and Other Market Factors                                                              | 7      |
|          | Employees                                                                                         | 8      |
|          | Environmental Matters                                                                             | 8      |
|          | Financial Information About Foreign and Domestic  Operations                                      | 9      |
|          | Available Information                                                                             | 9      |
| Item  1A.     | Risk Factors                                                                                      | 10     |
| Item 1B.      | Unresolved Staff  Comments                                                                        | 15     |
| Item  2.      | Properties                                                                                        | 16     |
| Item 3.       | Legal Proceedings                                                                                 | 16     |
| Item 4.       | Submission of  Matters to a Vote of Security Holders                                              | 17     |
| Part II  |                                                                                              |   |
| Item 5.       | Market for  Registrant’s Common Equity and Related Stockholder Matters of Equity  Securities | 17     |
| Item 6.       | Selected Financial  Data                                                                          | 18     |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations       | 19     |
| Item 7A.      | Quantitative  and Qualitative Disclosures About Market Risk                                       | 28     |
| Item 8.       | Financial  Statements and Supplementary Data                                                      | 29     |
| Item 9.       | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure             | 29     |
| Item 9A.      | Controls and  Procedures                                                                          | 29     |
| Item 9B.      | Other Information                                                                                 | 30     |
| Part III |                                                                                              |   |
| Item 10.      | Directors,  Executive Officers and Corporate Governance                                           | 31     |
| Item 11.      | Executive  Compensation                                                                           | 31     |
| Item 12.      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters  | 31     |
| Item 13.      | Certain  Relationships and Related Transactions, and Director Independence                        | 31     |
| Item 14.      | Principal  Accountant Fees and Services                                                           | 31     |
| Part IV  |                                                                                              |   |
| Item 15.      | Exhibits and  Financial Statement Schedules                                                       | 31     |
|          |                                                                                              |   |
|          | Signatures                                                                                        | 35     |

 

 

2

----

 

PART I

 

*Unless otherwise indicated, all references herein to Systemax Inc.(sometimes referred to as “Systemax,” the “Company” or “we”) include itssubsidiaries.*

 

***Forward Looking Statements***

*** ***

*This report contains forward looking statements within the meaning ofthat term in the Private Securities Litigation Reform Act of 1995 (Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934).  Additional written or oralforward looking statements may be made by the Company from time to time infilings with the Securities and Exchange Commission or otherwise.  Statements contained in this report that arenot historical facts are forward looking statements made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  Forward looking statements may include, butare not limited to, projections of revenue, income or loss and capitalexpenditures, statements regarding future operations, financing needs,compliance with financial covenants in loan agreements, plans for acquisitionor sale of assets or businesses and consolidation of operations of newlyacquired businesses, and plans relating to products or services of the Company,assessments of materiality, predictions of future events and the effects ofpending and possible litigation, as well as assumptions relating to theforegoing.  In addition, when used inthis discussion, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,”and “plans” and variations thereof and similar expressions are intended toidentify forward looking 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 “Item1. Business,” “Item 1A. Risk Factors,” “Item 3. Legal Proceedings,” “Item 7.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.*

 

**Item 1. Business.**

 

**General**

 

Systemaxis primarily a direct marketer of brand name and private label products. Ouroperations are organized in three reportable business segments — TechnologyProducts, Industrial Products and Hosted Software. Our Technology Productssegment sells computers, computer supplies and consumer electronics which aremarketed in North America and Western Europe. Most of these products are manufactured by other companies.  We assemble our own personal computers (“PCs”)and sell them under the trademarks *SystemaxTM* and *UltraTM*.  We also sellcertain computer-related products manufactured for us to our own design underthe trademark *UltraTM*.  Technology Products accounted for 92% of ournet sales in 2007. Our Industrial Products segment sells a wide array ofmaterial handling equipment, storage equipment and consumable industrial itemswhich are marketed in North America. Most of these products are manufactured byother companies.  Some products are manufacturedfor us to our own design and marketed under the trademarks *GlobalTM*,*GlobalIndustrial.comTM* and *NexelTM.*Industrial products accounted for 8% of our netsales in 2007. In both of these segments we offer our customers a broadselection of products, prompt order fulfillment and extensive customer service.Our Hosted Software segment, which became a reportable segment in 2006,participates in the emerging market for on-demand, web-based business softwareapplications through the marketing of our PCS ProfitCenter Software*TM* application. See Note 11 to the consolidated financialstatements included in Item 15 of this Form 10-K for additional financialinformation about our business segments as well as information about ourgeographic operations.

 

 

3

----

 

The Company was incorporated in Delaware in 1995. Certain predecessorbusinesses which now constitute part of the Company have been in business since1955. Our headquarters office is located at 11 Harbor Park Drive, PortWashington, New York.

 

**RecentDevelopments**

 

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 $30.4 million. This acquisition accelerates the Company’s plannedexpansion into the retail market place and when consummated in early 2008 willgive the Company approximately 26 retail storefronts operating in North Americaand Puerto Rico.

 

Effectivethe fourth quarter of 2007, the Company changed its fiscal year end from acalendar year ending on December 31 to a fiscal year ending at midnight onthe Saturday closest to December 31. Fiscal years will typically include 52 weeks, but every few years willinclude 53 weeks which was the case in 2005. Fiscal 2007 ended on December 29 and included 52 businessweeks.  For clarity of presentationherein, all fiscal years are referred to as if they ended on December 31.  The fiscal year will be divided into fourfiscal quarters that each end at midnight on a Saturday.  Fiscal quarters will typically include 13weeks, but the fourth quarter will include 14 weeks in a 53 week fiscalyear.  For clarity of presentationherein, all fiscal quarters are referred to as if they ended on the traditionalcalendar month.  The effect of the changein year end in 2007 was de minimis.

 

**Products**

 

We offer more than 100,000 brand name and private label products. Weendeavor to expand and keep current the breadth of our product offerings inorder to fulfill the increasingly wide range of product needs of our customers.

 

Our computer sales are primarilyofferings of brand name original equipment manufacturers, as well as our ownSystemax and Ultra brands. Computer supplies and consumer electronics relatedproducts include supplies such as laser printer toner cartridges and ink jetprinter cartridges; media such as flash memory, recordable disks and magnetictape cartridges; peripherals such as hard disks, CD-ROM and DVD drives,printers and scanners; memory upgrades; data communication and networkingequipment; monitors; digital cameras; plasma and 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-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.”

 

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.).  We have recognizedless than $1 million in revenues for this service to date.

 

 

4

----

 

**Sales and Marketing**

 

We market our products to both business customers and individualconsumers. Our business customers include for-profit businesses, educationalorganizations and government entities. We have developed numerous proprietarycustomer and prospect databases. We consider our business customers to includethe various individuals who work within an organization rather than just thebusiness itself.

 

We have established a multi-pronged system of direct marketing tobusiness customers, consisting primarily of relationship marketers, catalogmailings and proprietary internet websites, the combination of which isdesigned to maximize sales. Our relationship marketers focus their efforts onour business customers by establishing a personal relationship between such customersand a Systemax account manager. The goal of the relationship marketing salesforce is to increase the purchasing productivity of current customers and toactively solicit newly targeted prospects to become customers. With access tothe records we maintain of historical purchasing patterns, our relationshipmarketers are prompted with product suggestions to expand customer ordervalues. In the United States, we also have the ability to provide suchcustomers with electronic data interchange (“EDI”) ordering and customizedbilling services, customer savings reports and stocking of specialty itemsspecifically requested by these customers. Our relationship marketers’ effortsare supported by frequent catalog mailings and e-mail campaigns, both of whichare designed to generate inbound telephone sales, and our interactive websites,which allow customers to purchase products directly over the Internet. Webelieve 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.

 

Our growth in net sales continues to be supported by strong growth insales to individual consumers, particularly through e-commerce means. To reachour consumer audience, we use online methods such as website campaigns, bannerads and e-mail campaigns. We are able to monitor and evaluate the results ofour various advertising campaigns to enable us to execute them in the mostcost-effective manner. As part of our marketing strategy we advertise manufacturers’mail-in-rebates on many products we sell and, in some cases, offer our ownrebates. We combine our use of e-commerce initiatives with catalog mailings,which generate calls to inbound sales representatives. These salesrepresentatives use our information systems to fulfill orders and exploreadditional customer product needs. Sales to consumers are generally fulfilledfrom our own stock, requiring us to carry more inventory than we would for ourbusiness customers. We also periodically take advantage of attractive productpricing by making opportunistic bulk inventory purchases with the objective ofturning them quickly into sales. We have also successfully increased our salesto individual consumers by using retail outlet stores. As of December 31,2007 we had eleven such retail locations open in North America and four in Europe, withseveral new retail locations under construction.  With the CompUSA acquisition, the Companywill add approximately 16 retail outlets in 2008, bringing total retail outletsto approximately 26 in North America and Puerto Rico. The Company expects toselectively add to its North America retail network in the remainder of 2008.

 

## ***E-commerce***

## ** **

Theworldwide growth in active internet users has made e-commerce a significantopportunity for sales growth. In 2007, we had approximately $915 million ininternet-related sales, an increase of $96 million, or 12%, from 2006.E-commerce sales represented approximately 33% of total revenue in 2007,compared to approximately 35% in 2006.  Theincrease in our internet-related sales enables us to leverage our advertisingspending, allowing us to reduce our printed catalog costs while maintainingcustomer contact.

 

 

5

----

 

Wecurrently operate multiple e-commerce sites, includingwww.tigerdirect.com,  www.compusa.com,www.compusagoved.com, www.compusabusiness.com, www.misco.co.uk,www.globalindustrial.com, 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 and www.systemaxpc.com, and we continually upgrade thecapabilities and performance of these web sites. Our internet sites featureon-line catalogs of thousands of products, allowing us to offer a wider varietyof computer and industrial products than our printed catalogs.  Our customers have around-the-clock, on-lineaccess to purchase products and we have the ability to create targetedpromotions for our customers’ interests. Many of our internet sites also permitcustomers to purchase “build to order” PCs configured to their ownspecifications.

 

Inaddition to our own e-commerce web sites, we have partnering agreements withseveral of the largest internet shopping and search engine providers whofeature our products on their web sites or provide “click-throughs” from theirsites directly to ours. These arrangements allow us to expand our customer baseat an economical cost.

 

## ***Catalogs***

## ** **

We currently produce a total of 18 full-line and targeted specialtycatalogs in North America and Europe under distinct titles. Our portfolio ofcatalogs includes such established brand names as *TigerDirect.comTM,Global Computer SuppliesTM,TigerDirect.caTM, Misco®, HCS MiscoTM, GlobalIndustrialTM, ArrowStarTM and 06TM.* Full-line computer product catalogs offer products such as PCs,notebooks, peripherals, computer components, magnetic media, datacommunication, 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 consumers. In the case of business mailings, we mail ourcatalogs to many individuals at a single business location, providing us with multiplepoints-of-entry. Our in-house staff designs all of our catalogs. In-housecatalog design helps reduce overall catalog expense and shortens catalogproduction time. This allows us the flexibility to alter our product offeringsand pricing and to refine our catalog formats more quickly. Our catalogs areprinted by third parties under fixed pricing arrangements. The commonality ofcertain core pages of our catalogs also allows for economies of scale incatalog production.

 

 As noted above, the increase inour internet-related sales allowed us to reduce the distribution of ourcatalogs to 57 million in 2007, which was 3.4% fewer than in the prior year. In2007 we mailed approximately 40 million catalogs in North America, a 2.5%reduction from last year and approximately 17 million catalogs, or 5.6% fewerthan 2006, were distributed in Europe.

 

**Customer Service, Order Fulfillment and Support**

 

We generally provide toll-free telephonenumber access for our customers. Certain of our domestic call centers are linkedto provide telephone backup in the event of a disruption in phone service. Inaddition to telephone orders, we also receive orders by mail, fax, electronicdata 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.

 

 

6

----

 

We provide extensive technical telephone support to our Systemax andUltra brand PC customers.  We maintain adatabase of commonly asked questions for our technical support representatives,enabling them to respond quickly to similar questions. We conduct regularon-site training seminars for our sales representatives to help ensure thatthey are well trained and informed regarding our latest product offerings.

 

**Suppliers**

 

We purchase the majority of our products and components directly from manufacturersand large wholesale distributors. During 2007 and 2006, Ingram Micro accountedfor 14.4% and 12.8% of our purchases.  During 2005, no vendor accounted for more than 10% of our purchases. Theloss of this vendor, or any other key vendors, could have an 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 technology product markets are highlycompetitive, with many U.S., Asian and European companies vying for marketshare.  There are few barriers of entry,with these products being sold through the direct market channel, massmerchants, over the internet and by computer and office supply superstores.

 

Timely introduction of new products or product features are criticalelements to remaining competitive. Other competitive factors include productperformance, quality and reliability, technical support and customer service,marketing and distribution and price. Some of our competitors have strongerbrand-recognition, broader product lines and greater financial, marketing,manufacturing and technological resources than us.  Additionally, our results could also beadversely affected should we be unable to maintain our technological andmarketing arrangements with other companies, such as Microsoft®, Intel® andAdvanced Micro Devices®.

 

The North American technology products market is highly fragmented andcharacterized by multiple channels of distribution including direct marketers,local and national retail computer stores, computer resellers, mass merchants,computer and office supply “superstores” and internet-based resellers. InEurope, our major competitors are regional or country-specific retail anddirect-mail distribution companies and internet-based resellers.

 

With conditions in the market for technology products remaining highlycompetitive, continued reductions in retail prices may adversely affect ourrevenues and profits. Additionally, we rely in part upon the introduction ofnew technologies and products by other manufacturers in order to sustainlong-term sales growth and profitability. There is no assurance that the rapidrate of such technological advances and product development will continue.

 

 

7

----

 

***Industrial Products***

 

The market for the sale of industrial products in North America ishighly fragmented and is characterized by multiple distribution channels suchas retail outlets, small dealerships, direct mail distribution, internet-basedresellers and large warehouse stores. We also face competition frommanufacturers’ own sales representatives, who sell industrial equipmentdirectly to customers, and from regional or local distributors. Many highvolume purchasers, however, utilize catalog distributors as their first sourceof product. In the industrial products market, customer purchasing decisionsare primarily based on price, product selection, product availability, level ofservice and convenience.  We believe thatdirect marketing via catalog, the internet and sales representatives is aneffective and convenient distribution method to reach mid-sized facilities thatplace many small orders and require a wide selection of products. In addition,because the industrial products market is highly fragmented and generally lessbrand oriented, it is well suited to private label products.

 

***Hosted Software***

 

HostedSoftware offers an on-demand software solution 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).  Leading technology analysts generally agreethat traditional software licensing is being replaced with on-demand deliverymodels that increase the predictability of information technology financialexpenditures while making it easier for multi-channel commerce companies tomanage their customers, products and services regardless of sales channel.

 

Theincreasing replacement of obsolete software solutions by multi-channel retailersfor newer technologies provides Hosted Software with a competitive edge whichis likely to give rise to greater deployments of its on-demand software. Theadvantages of having a single solution, single database to manage all saleschannels (eCommerce, call center, catalog, mail order, retail) with web-basedaccessibility and faster implementation cycles will fuelcontinued penetration into the multi-channel software market space.

 

**Employees**

 

As of December 31, 2007, we employed a total of 3,535 employees,including 3,140 full-time and 395 part-time employees, of whom 2,343 were inNorth America and 1,192 were in Europe.

 

**Environmental Matters**

 

Under various national, state and local environmental laws andregulations in North America and Europe, a current or previous owner oroperator (including the lessee) of real property may become liable for thecosts of removal or remediation of hazardous substances at such real property.Such laws and regulations often impose liability without regard to fault. We leasemost of our facilities. In connection with such leases, we could be held liablefor the costs of removal or remedial actions with respect to hazardoussubstances. Although we have not been notified of, and are not otherwise awareof, any material real property environmental liability, claim ornon-compliance, there can be no assurance that we will not be required to incurremediation or other costs in connection with real property environmentalmatters in the future.

 

 

8

----

 

**Financial Information About Foreign and Domestic Operations**

 

Weconduct our business in North America (the United States and Canada) andEurope.  Approximately 39.7% of our netsales during 2007 were made by subsidiaries located outside of the UnitedStates. For information pertaining to our international operations, see Note11, “Segment and Related Information,” to the consolidated financial statementsincluded in Item 15 of this Form 10-K. The following sets forth selectedinformation with respect to our operations in those two geographic markets (inthousands):

*** ***

| ** **              | ** **   | ** **   | ** **   | **North**    | ** **   | ** **   |
|-------------------------|--------------|--------------|--------------|--------------|--------------|--------------|
| ** **              | ** **   | **Europe**   | ** **   | **America**  | ** **   | **Total**    |
| *2007*                  | * *     | * *     | * *     | * *     | * *     | * *     |
| Net sales               |         | $            | 932,398      |         | $            | 1,847,477    |   | $ | 2,779,875 |
| Operating income        |         | $            | 13,345       |         | $            | 82,159       |   | $ | 95,504 |
| Identifiable assets     |         | $            | 185,110      |         | $            | 488,761      |   | $ | 673,871 |
| *** ***            | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| *2006*                  | * *     | * *     | * *     | * *     | * *     | * *     |
| Net sales               |         | $            | 743,906      |         | $            | 1,601,259    |   | $ | 2,345,165 |
| Operating income        |         | $            | 16,459       |         | $            | 45,445       |   | $ | 61,904 |
| Identifiable assets     |         | $            | 157,710      |         | $            | 426,451      |   | $ | 584,161 |
| ** **              | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   |
| *2005*                  | * *     | * *     | * *     | * *     | * *     | * *     |
| Net sales               |         | $            | 694,637      |         | $            | 1,420,881    |   | $ | 2,115,518 |
| Operating income (loss) |         | $            | (4,603       | )            | $            | 39,412       |   | $ | 34,809 |
| Identifiable assets     |         | $            | 142,174      |         | $            | 362,370      |   | $ | 504,544 |

 

See Item 7, Management’s Discussions and Analysis of FinancialCondition and Results of Operations, for further information with respect toour operations.

 

**Available Information**

 

 We maintain an internet website atwww.systemax.com. We file reports with the Securities and Exchange Commissionand make available free of charge on or through this web site our annualreports on Form 10-K, quarterly reports on Form 10-Q and currentreports on Form 8-K, including all amendments to those reports.  These are available as soon as is reasonablypracticable after they are filed with the SEC. All reports mentioned above are also available from the SEC’s web site (www.sec.gov).The information on our web site is not part of this or any other report we filewith, or furnish to, the SEC.

 

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

·                  Charterfor the Audit Committee of the Board of Directors

·                  Charterfor the Compensation Committee of the Board of Directors

·                  Charterfor the Nominating/Corporate Governance Committee of the Board of Directors

·                  CorporateGovernance Guidelines and Principles

 

In accordance with the corporate governance rules ofthe New York Stock Exchange, each of the Corporate Governance Documents isavailable on our Company web site (www.systemax.com) or can be obtained bywriting to Systemax Inc., Attention: Board of Directors (Corporate Governance),11 Harbor Park Drive, Port Washington, NY 11050.

 

 

9

----

 

**Item 1A. Risk Factors.**

 

Thereare a number of factors and variables described below that may affect ourfuture results of operations and financial condition. Other factors of which weare currently not aware or that we currently deem immaterial may also affectour results of operations and financial position.

 

**Risks Related to Our Industry**

 

·      *Economic conditions have affected and couldcontinue to adversely affect our revenues and profits.*

 

Bothwe and our customers are subject to global political, economic and marketconditions, including inflation, interest rates, energy costs, the impact ofnatural disasters, military action and the threat of terrorism. Ourconsolidated results of operations are directly affected by economic conditionsin North America and Europe. We may experience a decline in sales as a resultof poor economic conditions and the lack of visibility relating to futureorders. Our results of operations depend upon, among other things, our abilityto maintain and increase sales volumes with existing customers, our ability toattract new customers and the financial condition of our customers. A declinein the economy that adversely affects our customers, causing them to limit ordefer their spending, would likely adversely affect us as well. We cannotpredict with any certainty whether we will be able to maintain or improve uponhistorical sales volumes with existing customers, or whether we will be able toattract new customers.

 

Inresponse to economic and market conditions, from time to time we haveundertaken initiatives to reduce our cost structure where appropriate. The initiativesalready implemented as well as any future workforce and facilities reductionsundertaken may not be sufficient to meet the changes in economic and marketconditions and to achieve future profitability. In addition, costs actuallyincurred in connection with our restructuring actions may be higher than ourestimates of such costs and/or may not lead to the anticipated cost savings.

 

·      *Competitive pressures could harm our revenueand gross margin.*

 

Wemay not be able to compete effectively with current or future competitors. Themarkets for our products and services are intensely competitive and subject toconstant technological change. We expect this competition to further intensifyin the future. Competitive factors include price, availability, service andsupport. We compete with a wide variety of other resellers and retailers, aswell as manufacturers. Some of our competitors are larger companies withgreater financial, marketing and product development resources than ours. Inaddition, new competitors may enter our markets. This may place us at adisadvantage in responding to competitors’ pricing strategies, technologicaladvances and other initiatives, resulting in our inability to increase ourrevenues or maintain our gross margins in the future.

 

Inmany 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.

 

Ourgross margins are also dependent on the mix of products we sell and could beadversely affected by a continuation of our customers’ shift to lower-pricedproducts. As do most other companies in the technology products industry, weadvertise manufacturers’ mail-in rebates on many products we sell and, in somecases, offer our own rebates. We process these rebates through third partyvendors and in house. If we are unable to fulfill these rebates in a timely andsatisfactory manner, our reputation in the marketplace could be negativelyimpacted.

 

10

----

 

·      *State and local sales tax collection mayaffect demand for our products.*

 

OurUnited States subsidiaries collect and remit sales tax in states in which thesubsidiaries have physical presence or in which we believe nexus exists whichobligates us to collect sales tax. Other states may, from time to time, claimthat we have state-related activities constituting a sufficient nexus torequire such collection. Additionally, many other states seek to impose salestax collection obligations on companies that sell goods to customers in theirstate, or directly to the state and its political subdivisions, even without aphysical presence.  Such efforts bystates have increased recently, as states seek to raise revenues withoutincreasing the tax burden on residents. We rely on United States Supreme Courtdecisions which hold that, without Congressional authority, a state may notenforce a sales tax collection obligation on a company that has no physicalpresence in the state and whose only contacts with the state are through theuse of interstate commerce such as the mailing of catalogs into the state andthe delivery of goods by mail or common carrier.  We cannot predict whether the nature or levelof contacts we have with a particular state will be deemed enough to require usto collect sales tax in that state nor can we be assured that Congress orindividual states will not approve legislation authorizing states to impose taxcollection obligations on all direct mail and/or e-commerce transactions. Asuccessful assertion by one or more states that we should collect sales tax onthe sale of merchandise could result in substantial tax liabilities related topast sales and would result in considerable administrative burdens and costsfor us and may reduce demand for our products from customers in such stateswhen we charge customers for such taxes.

 

·      *Business disruptions could adversely impactour revenue and financial condition.*

 

Weinsure for certain property and casualty risks consisting primarily of physicalloss to property, business interruptions resulting from property losses,workers’ compensation, comprehensive general liability, and auto liability.Insurance coverage is obtained for catastrophic property and casualty exposuresas well as those risks required to be insured by law or contract. Although webelieve that our insurance coverage is reasonable, significant events such asacts of war and terrorism, economic conditions, judicial decisions,legislation, natural disasters and large losses could materially affect ourinsurance obligations and future expense.

 

·      *Changes in financial accounting standardsmay affect our results of operations.*

 

Achange in accounting standards or practices can have a significant effect onour reported results of operations. New accounting pronouncements andinterpretations of existing accounting rules and practices have occurredand may occur in the future. Changes to existing rules may adverselyaffect our reported financial results.

 

**Risks Related to Our Company**

 

·      *Increased costs associated with corporategovernance compliance may impact our results of operations.*

 

Asa public company, we incur significant legal, accounting and other expensesthat we would not incur as a private company. In addition, the Sarbanes-OxleyAct of 2002, as well as rules subsequently implemented by the Securitiesand Exchange Commission and listing requirements subsequently adopted by theNew York Stock Exchange in response to Sarbanes-Oxley, have required changes incorporate governance practices of public companies. These developments havesubstantially increased our legal compliance, auditing and financial reportingcosts and made them more time consuming. These developments may also make itmore difficult and more expensive for us to obtain directors’ and officers’liability insurance and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage, possibly making it moredifficult for us to attract and retain qualified members of our board ofdirectors, particularly to serve on our audit committee.

 

11

----

 

·      *In the past we have been late filing ourrequired financial reports. Any such delays in the future could affect thetrading of our stock.*

 

Wewere late in the filing of our 2005 quarterly and annual reports and our 2006quarterly reports required under the Securities Exchange Act of 1934. Failureto file required reports on a timely basis could result in the de-listing ofthe Company’s common stock by the New York Stock Exchange. If we do not fileour required annual and quarterly financial statements in the prescribed timeframes we would also be ineligible to file certain registration statements andcould be subject to SEC enforcement action.

 

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

 

Werequire significant levels of capital in our business to finance accountsreceivable and inventory. We maintain credit facilities in the United Statesand in Europe to finance increases in our working capital if available cash isinsufficient.  The amount of creditavailable to us at any point in time may be adversely affected by the qualityor value of the assets collateralizing these credit lines. In addition, if weare unable to renew or replace these facilities at maturity our liquidity andcapital 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.

 

·      *We have substantial international operationsand we are exposed to fluctuations in currency exchange rates and politicaluncertainties.*

 

Weoperate internationally and as a result, we are subject to risks associatedwith doing business globally. Risks inherent to operating overseas include:

 

·      Changes in a country’s economic or political conditions

·      Changes in foreign currency exchange rates

·      Difficulties with staffing and managing internationaloperations

·      Unexpected changes in regulatory requirements

 

Forexample, we currently have operations located in numerous countries outside theUnited States, and non-U.S. sales (Europe and Canada) accounted forapproximately 40% of our revenue during 2007. To the extent the U.S. dollar strengthens against the Euro and Britishpound, our European revenues and profits will be reduced when translated intoU.S. dollars.

 

·      *We may not be successful in integrating thebusiness of CompUSA.*

 

Our acquisition of selected assets of CompUSA involves the integrationof those assets into our existing business operating environment, includinginformation systems. This will require us to devote significant managementattention and resources to integrate these business practices and operations.There can be no assurance we will benefit from the addition of these retailstores. The potential difficulties we face include, but are not limited to, thefollowing:

 

·      Integrating personnel from CompUSA and hiring new personnelwhile maintaining focus on providing high quality service to our customers.

·      Maintaining and building upon CompUSA’s existing customer base.

·      Operating retail stores in new and unfamiliar locations.

·      Complying with local laws and business practices.

 

12

----

 

·      *Sales to individual consumers exposes us tocredit card fraud, which could adversely affect our business.*

 

Failureto adequately control fraudulent credit card transactions could increase ourexpenses. Increased sales to individual consumers, which are more likely to bepaid for using a credit card, increases our exposure to fraud. We employtechnology 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.

 

·      *We are exposed to inventory risks.*

 

Asubstantial portion of our inventory is subject to risk due to technologicalchange and changes in market demand for particular products. If we fail tomanage 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.

 

Wealso take advantage of attractive product pricing by making opportunistic bulkinventory purchases; any resulting excess and/or obsolete inventory that we arenot able to re-sell could have an adverse impact on our results of operations.Any inability to make such bulk inventory purchases may significantly impactour sales and profitability.

 

·      *Our income tax rate and the value of ourdeferred tax assets are subject to change.*

 

Changesin our income tax expense due to changes in the mix of U.S. and non-U.S.revenues and profitability, changes in tax rates or exposure to additionalincome tax liabilities could affect our profitability. We are subject to incometaxes in the United States and various foreign jurisdictions. Our effective taxrate could be adversely affected by changes in the mix of earnings in countrieswith differing statutory tax rates, changes in the valuation of deferred taxassets and liabilities, changes in tax laws or by material audit assessments.The carrying value of our deferred tax assets, which are primarily in theUnited States and the United Kingdom, is dependent on our ability to generatefuture taxable income in those jurisdictions. In addition, the amount of incometaxes we pay is subject to ongoing audits in various jurisdictions and amaterial assessment by a tax authority could affect our profitability.

 

·      *Our reliance on information andcommunications technology requires significant expenditures and entails risk.*

 

Werely on a variety of information and telecommunications systems in ouroperations. Our success is dependent in large part on the accuracy and properuse of our information systems, including our telecommunications systems.  To manage our growth, we continually evaluatethe adequacy of our existing systems and procedures. We anticipate that we willregularly need to make capital expenditures to upgrade and modify ourmanagement information systems, including software and hardware, as we grow andthe needs of our business change.  Inparticular, our financial systems are disparate and will likely be replacedduring the coming years.  The occurrenceof a significant system failure, electrical or telecommunications outages orour failure to expand or successfully implement new systems could have amaterial adverse effect on our results of operations.

 

Ourinformation systems networks, including our web sites, and applications couldbe adversely affected by viruses or worms and may be vulnerable to maliciousacts such as hacking.  Although we takepreventive measures, these procedures may not be sufficient to avoid harm toour operations, which could have an adverse effect on our results ofoperations.

 

13

----

 

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

 

Wepurchase a significant portion of our computer products from major distributorssuch as Ingram Micro Inc. and Tech Data and directly from largemanufacturers such as Hewlett Packard and Acer, who may deliver those productsdirectly to our customers. These relationships enable us to make available toour customers a wide selection of products without having to maintain largeamounts of inventory.  The termination orinterruption of our relationships with any of these suppliers could materiallyadversely affect our business.

 

OurPC products contain electronic components, subassemblies and software that in somecases are supplied through sole or limited source third-party suppliers, someof which are located outside of the U.S. Although we do not anticipate anyproblems procuring supplies in the near-term, there can never be any assurancethat parts and supplies will be available in a timely manner and at reasonableprices. Any loss of, or interruption of supply, from key suppliers may requireus to find new suppliers. This could result in production or development delayswhile new suppliers are located, which could substantially impair operatingresults. If the availability of these or other components used in themanufacture of our products was to decrease, or if the prices for thesecomponents were to increase significantly, operating costs and expenses couldbe adversely affected.

 

Wepurchase a number of our products from vendors outside of the United States.Difficulties encountered by one or several of these suppliers could halt ordisrupt production and delay completion or cause the cancellation of our orders.Delays or interruptions in the transportation network could result in loss ordelay of timely receipt of product required to fulfill customer orders.

 

Manyproduct suppliers provide us with co-op advertising support in exchange forfeaturing 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.

 

·      *We may encounter risks in connection withsales of our web-hosted software application.*

 

In2004, we introduced our web-based and hosted, on-demand software suite ofproducts, marketed as PCS ProfitCenter SoftwareTM. We have a limited operatinghistory with this type of product offering and may encounter risks inherent inthe software industry, including but not limited to:

 

·      Failure to implement effective general and application controls

·      Errors or security flaws in our product

·      Technical difficulties which we can not resolve on a timely orcost-effective basis,

·      Inability to provide the level of service we commit to

·      Inability to deliver product upgrades and enhancements

·      Delays in development

·      Inability to hire and retain qualified technical personnel

·      Impact of privacy laws on the use of our product

·      Exposure to claims of infringement of intellectual propertyrights

 

14

----

 

·      *Restrictions and covenants in our creditfacility may limit our ability to enter into certain transactions.*

 

Our United States/United Kingdom combined revolving credit agreementcontains covenants restricting or limiting our ability to, among other things:

 

·      incur additional debt

·      create or permit liens on assets

·      make capital expenditures or investments

·      pay dividends

 

Ifwe fail to comply with the covenants and other requirements set forth in theagreement, we will have to negotiate a waiver agreement with the lenders.Failure to enter into such a waiver agreement could adversely affect theavailability of financing to us which could materially impact our operations.

 

Other factors that may affect our future results of operations andfinancial condition include, but are not limited to, unanticipated developmentsin any one or more of the following areas, as well as other factors which maybe detailed from time to time in our Securities and Exchange Commissionfilings:

 

·      the effect on us of volatility in the price of paper andperiodic increases in postage rates

·      significant changes in the computer products retail industry,especially relating to the distribution and sale of such products

·      timely availability of existing and new products

·      risks involved with e-commerce, including possible loss ofbusiness and customer dissatisfaction if outages or other computer-relatedproblems should preclude customer access to us

·      risks associated with delivery of merchandise to customers byutilizing common delivery services such as the United States Postal Service andUnited Parcel Service, including possible strikes and contamination

·      borrowing costs or availability

·      pending or threatened litigation and investigations

·      the availability of key personnel

 

Readers are cautioned not to place undue reliance on any forwardlooking statements contained in this report, which speak only as of the date ofthis report.  We undertake no obligationto publicly release the result of any revisions to these forward lookingstatements that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unexpected events.

 

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

None.

 

15

----

 

**Item 2. Properties.**

 

Our primary facilities, which are leased except where otherwiseindicated, 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  and Distribution Center                   |       | 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             |       | 22,000                       |       | 2013                      |
|                                             |       |                          |       |                         |       |                      |
| Canadian  Headquarters and Sales Center          |       | Richmond  Hill, Ontario       |       | 21,250                       |       | 2017                      |
|                                             |       |                          |       |                         |       |                      |
| Sales  and Distribution Center                   |       | Verrieres  le Buisson, France |       | 48,000                       |       | 2010                      |
|                                             |       |                          |       |                         |       |                      |
| Sales  and Distribution Center                   |       | Frankfurt,  Germany           |       | 92,000                       |       | 2013                      |
|                                             |       |                          |       |                         |       |                      |
| Sales  and Distribution Center                   |       | Madrid,  Spain                |       | 38,000                       |       | (2)                       |
|                                             |       |                          |       |                         |       |                      |
| Sales  and Distribution Center                   |       | Milan,  Italy                 |       | 102,000                      |       | 2009                      |
|                                             |       |                          |       |                         |       |                      |
| Sales  and Distribution Center                   |       | Greenock,  Scotland           |       | 78,000                       |       | Owned                     |
|                                             |       |                          |       |                         |       |                      |
| European  Headquarters and Sales Center          |       | Wellingborough,  England      |       | 75,000                       |       | Owned                     |
|                                             |       |                          |       |                         |       |                      |
| Sales  Center                                    |       | Amstelveen,  Netherlands      |       | 21,000                       |       | 2012                      |
|                                             |       |                          |       |                         |       |                      |
| Sales  and Distribution Center                   |       | Lidkoping,  Sweden            |       | 20,000                       |       | 2008                      |
|                                             |       |                          |       |                         |       |                      |
| Sales  and Administrative Center                 |       | Uniondale,  NY                |       | 11,494                       |       | 2012                      |

 

----

(1)   For information about thisfacility, leased from related parties, see Item 13 —“Certain Relationships andRelated Transactions”

(2)   Terminable upon two monthsprior written notice.

 

We also lease space for other smalleroffices and retail stores in the United States, Canada and Europe and certainadditional facilities leased by the Company are subleased to others.

 

For further information regarding ourlease obligations, see Note 10 to the Consolidated Financial Statements.

 

**Item 3. Legal Proceedings.**

 

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

 

OnOctober 18, 2007, Kevin Vukson filed a class action complaint in U.S.District Court (E.D.N.Y.) 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 alleges that since 2004 Systemax, TigerDirectand OnRebate 

 

16

----

 

haveconducted a deceptive and unlawful enterprise by failing to pay rebates thatshould have been paid and delaying unnecessarily the payment of other rebatesthat were paid. Vukson alleges claims arising under Florida’s Unfair, DeceptiveTrade Practice Act, the federal RICO statute, along with claims for breach ofcontract, conspiracy to commit fraud and unjust enrichment. Systemax,TigerDirect and OnRebate have moved to dismiss the Complaint and to transferthe matter to the Southern District of Florida. The Court has not yet ruled onthese motions and has not yet certified a class. The Company intends tovigorously defend this case.

 

# **Stateof 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. On January 30, 2008 the Company received a secondsubpoena for additional documents. The Company is cooperating with the FloridaAttorney General’s Office to provide the requested documents.

 

Other Matters

 

Systemax is a party to various pending legal proceedings and disputesarising in the normal course of business, including those involving commercial,employment, tax and intellectual property related claims, none of which, inmanagement’s opinion, is anticipated to have a material adverse effect on ourconsolidated financial statements.

 

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

 

           None.

 

 

**PART II**

 

**Item 5.  Market for Registrant’sCommon Equity and Related Stockholder Matters**

 

Systemax common stock is traded on the New York Stock Exchange underthe symbol “SYX.”  The following tablesets forth the high and low closing sales price of our common stock as reportedon the New York Stock Exchange for the periods indicated.

 
| ** **      | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| 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   |       |
|            |       |     |       |    |       |
| 2006            |       |     |       |    |       |
| First  Quarter  |       | $        | 7.33       |    | $          | 6.23 |   |
| Second  Quarter |       | 7.99     |       | 5.87    |       |
| Third  Quarter  |       | 16.02    |       | 7.25    |       |
| Fourth  Quarter |       | 18.80    |       | 9.93    |       |

 

 

17

----

 

On December 29, 2007, the last reported sale price of our commonstock on the New York Stock Exchange was $20.52 per share.  As of December 29, 2007, we had 232shareholders of record.

 

On March 3, 2008, the Company’s Board of Directors declared aspecial dividend of $1.00 per share payable on April 2, 2008 toshareholders of record on March 21, 2008. This special dividend is thesecond dividend we have paid since our initial public offering. Depending inpart upon profitability, the strength of our balance sheet, our cash positionand the need to retain cash for the development and expansion of our business,we may decide to declare another special dividend in the future, but we have nopresent plans of doing so

 

On March 14, 2007, the Company’s Board of Directors declared aspecial dividend of $1.00 per share payable on April 12, 2007 toshareholders of record on April 2, 2007. This special dividend was thefirst dividend we have paid since our initial public offering.

 

**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 2007, 2006 and 2005 and the selected balancesheet data as of December 2007 and 2006 are derived from the auditedconsolidated financial statements which are included elsewhere in this report.The selected balance sheet data as of December 2005, 2004 and 2003 and theselected statement of operations data for fiscal years 2004 and 2003 arederived from the audited consolidated financial statements of the Company whichare not included in this report.

 
| ** **                                           | ** ** | **Years  Ended December 31,**        | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **(In  millions, except per share data)** | ** ** |
| ** **                                           | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004*** | ** ** | **2003*** | ** ** |
| ** **                                           | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Statement  of Operations Data:**                   | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                           |       | $                                         | 2,779.9    |   | $ | 2,345.2 |   | $ | 2,115.5 |   | $ | 1,928.1 |   | $ | 1,655.7 |   |
| Gross  profit                                        |       | $                                         | 426.3      |   | $ | 342.9 |   | $ | 307.3 |   | $ | 286.5 |   | $ | 264.9 |   |
| Selling,  general & administrative expenses |       | $                                         | 330.8      |   | $ | 281.0 |   | $ | 268.3 |   | $ | 260.1 |   | $ | 251.5 |   |
| Restructuring  and other charges                     |       | —                                    |       | — |   | $ | 4.2 |   | $ | 7.4 |   | $ | 1.7 |   |
| Operating  income                                    |       | $                                         | 95.5       |   | $ | 61.9 |   | $ | 34.8 |   | $ | 19.0 |   | $ | 9.2 |   |
| Provision  for income taxes                          |       | $                                         | 30.5       |   | $ | 24.5 |   | $ | 21.4 |   | $ | 6.4 |   | $ | 4.4 |   |
| Net  income                                          |       | $                                         | 69.5       |   | $ | 45.1 |   | $ | 11.4 |   | $ | 10.2 |   | $ | 3.2 |   |
| **Per Share  Amounts:**                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Net  income — basic                             |       | $                                         | 1.93       |   | $ | 1.29 |   | $ | .33 |   | $ | .30 |   | $ | .09 |   |
| Net  income — diluted                           |       | $                                         | 1.84       |   | $ | 1.22 |   | $ | .31 |   | $ | .29 |   | $ | .09 |   |
| Weighted  average common shares — basic         |       | 36.0                                      |       | 35.0 |   | 34.6 |   | 34.4 |   | 34.2 |   |
| Weighted  average common shares — diluted       |       | 37.8                                      |       | 36.9 |   | 36.5 |   | 35.5 |   | 34.9 |   |
| Cash  dividends declared per common share            |       | $                                         | 1.00       |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| **Balance  Sheet Data:**                             | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working  capital                                     |       | $                                         | 273.5      |   | $ | 229.4 |   | $ | 169.8 |   | $ | 148.0 |   | $ | 144.1 |   |
| Total  assets                                        |       | $                                         | 673.9      |   | $ | 584.1 |   | $ | 504.5 |   | $ | 483.2 |   | $ | 445.3 |   |
| Short-term  debt                                     |       | $                                         | 4.3        |   | $ | 12.8 |   | $ | 26.8 |   | $ | 25.0 |   | $ | 20.8 |   |
| Long-term  debt, excluding current portion           |       | $                                         | .3         |   | $ | .5 |   | $ | 8.0 |   | $ | 8.6 |   | $ | 18.4 |   |
| Shareholders’  equity                           |       | $                                         | 335.8      |   | $ | 289.5 |   | $ | 232.8 |   | $ | 222.6 |   | $ | 208.6 |   |

 

----

*** As previously restated.**

** **

**18**

----

** **

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

 

# **Overview**

# ** **

# **Systemax is primarily adirect marketer of brand name and private label products. Our operations areorganized in three reportable business segments — Technology Products,Industrial Products and Hosted Software. Our Technology Products segment sellscomputers, computer supplies and consumer electronics which are marketed inNorth America and Western Europe.  Mostof these products are manufactured by other companies.  We assemble our own PCs and sell them underour own trademarks*****SystemaxTM* and *UltraTM*.  We also sell certain computer-relatedproducts manufactured for us to our own design under the trademark *UltraTM.*Technology products accounted for 92% of our netsales in 2007.  Our Industrial Productssegment sells a wide array of material handling equipment, storage equipmentand consumable industrial items which are marketed in North America.  Most of these products are manufactured byother companies.  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 2007.  In bothof these product groups, we offer our customers a broad selection of products,prompt order fulfillment and extensive customer service.  Our Hosted Software segment, which became areportable segment in 2006, participates in the emerging market for on-demand,web-based business software applications through the marketing of our PCSProfitCenter Software*TM*application.  See Note 11 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 multiple distribution channels. Distribution of information technologyand our industrial products is working capital intensive, requiring us to incursignificant costs associated with the warehousing of many products, includingthe costs of leasing warehouse space, maintaining inventory and inventorymanagement systems, and employing personnel to perform the associated tasks. Wesupplement our on-hand product availability by maintaining relationships withmajor distributors and manufacturers, utilizing a combination of stocking anddrop-shipment fulfillment.

 

Theprimary component of our operating expenses historically has been employeerelated costs, which includes items such as wages, commissions, bonuses, andemployee benefits and stock option expenses. We have made substantialreductions in our workforce and closed or consolidated several facilities overthe past several years.  Ourrestructuring actions and other cost savings measures implemented over the lastseveral years resulted in reducing our consolidated selling, general andadministrative expenses from 15.2% of net sales in 2003 to 11.9% of net salesin 2007. We will continue to monitor our costs and evaluate the need foradditional actions.

 

Duringthe first quarter of 2008 the Company entered into an asset purchase agreementwith CompUSA Inc. and acquired CompUSA’s e-commerce business and 16 of itsretail leases and related fixtures for direct consideration of approximately $30.4million. This acquisition accelerates the Company’s planned expansion into theretail market place for Technology Products and gives the Company 26 retailoutlets in North America and Puerto Rico.

 

**CriticalAccounting Policies and Estimates**

 

Oursignificant accounting policies are described in Note 1 to the consolidatedfinancial statements.  The policies belowhave been identified as critical to our business operations and understandingthe results of operations.  Certainaccounting policies require the application of significant judgment bymanagement in selecting the appropriate assumptions for calculating financialestimates.  By their nature, these judgmentsare subject to an inherent degree of uncertainty, and as a result, actualresults 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 theCompany accurately reflect management’s best estimate of the consolidatedresults of operations, financial position and cash flows of the Company for theyears presented. Actual results may differ from these estimates under differentconditions or assumptions.

 

 

19

----

 

*RevenueRecognition.*We recognize product sales when persuasive evidenceof an order arrangement exists, delivery has occurred, the sales price is fixedor determinable and collectibility is reasonably assured. Generally, thesecriteria are met at the time of receipt by customers when title and risk ofloss both are transferred. Sales are shown net of returns and allowances,rebates and sales incentives.  Reservesfor estimated returns and allowances are provided when sales are recorded,based on historical experience and current trends.

 

*AccountsReceivable and Allowance for Doubtful Accounts*. We record an allowance fordoubtful accounts to reflect our estimate of the collectibility of our tradeaccounts receivable. We evaluate the collectibility of accounts receivablebased on a combination of factors, including an analysis of the age of customeraccounts and our historical experience with accounts receivable write-offs. Theanalysis also includes the financial condition of a specific customer orindustry, and general economic conditions. In circumstances where we are aware of customer charge-backs or aspecific customer’s inability to meet its financial obligations, a specificreserve for bad debts applicable to amounts due to reduce the net recognizedreceivable to the amount management reasonably believes will be collected isrecorded. In those situations with ongoing discussions, the amount of bad debtrecognized is based on the status of the discussions. While bad debt allowanceshave been within expectations and the provisions established, there can be noguarantee that we will continue to experience the same allowance rate we havein the past.

 

*Inventories*.  We value our inventories at the lower of costor market, cost being determined on the first-in, first-out method. Reservesfor excess and obsolete or unmarketable merchandise are provided based onhistorical experience, assumptions about future product demand and marketconditions. If market conditions are less favorable than projected or iftechnological developments result in accelerated obsolescence, additionalwrite-downs may be required. While obsolescence and resultant markdowns havebeen within expectations, there can be no guarantee that we will continue toexperience the same level of markdowns we have in the past.

 

*Long-livedAssets.* Management exercises judgment in evaluating our long-lived assets forimpairment. We believe we will generate sufficient undiscounted cash flow tomore than recover the investments made in property, plant and equipment. Ourestimates of future cash flows involve assumptions concerning future operatingperformance and economic conditions. While we believe that our estimates of future cash flows are reasonable,different assumptions regarding such cash flows could materially affect ourevaluations.

 

*Accruals.*Management exercises judgment in estimating various period endliabilities such as costs related to vendor drop shipments, sales returns andallowances, cooperative advertising and customer rebate reserves, and othervendor and employee related costs. While we believe that these estimates arereasonable, any significant deviation of actual costs as compared to theseestimates could have a material impact on the Company’s financial statements.

 

*IncomeTaxes.* We aresubject to taxation from federal, state and foreign jurisdictions and thedetermination of our tax provision is complex and requires significantmanagement judgment.  Management judgmentis also applied in the determination of deferred tax assets and liabilities andany valuation allowances that might be required in connection with our abilityto realize deferred tax assets. 

 

Since weconduct operations in numerous US states and internationally, our effective taxrate has and will continue to depend upon the geographic distribution of ourpre-tax income or losses among locations with varying tax rates and rules. Asthe geographic mix of our pre-tax results among various tax jurisdictionschanges, the effective tax rate may vary from period to period. We are alsosubject to periodic examination from domestic and foreign tax authoritiesregarding the amount of taxes due. These examinations include questionsregarding the timing and amount of deductions and the allocation of incomeamong various tax jurisdictions. We have established, and periodicallyreevaluate, an estimated income tax reserve on our consolidated balance sheetto provide for the possibility of adverse outcomes in income tax proceedings.While management believes that we have identified all reasonably identifiableexposures and that the reserve we have established for identifiable exposuresis appropriate under the circumstances, it is possible that additionalexposures exist and that exposures may be settled at amounts different than theamounts reserved.

 

 

20

----

 

****Werecognize deferred tax assets and liabilities**** for the effectof temporary differences between the book and tax bases of recorded assets andliabilities and for tax loss carry forwards. The realization of net deferredtax assets is dependent upon our ability to generate sufficient future taxableincome. Where it is more likely than not that some portion or all of thedeferred tax asset will not be realized, we have provided a valuationallowance. If the realization of those deferred tax assets in the future isconsidered more likely than not, an adjustment to the deferred tax assets wouldincrease net income in the period such determination is made. In the event thatactual results differ from these estimates or we adjust these estimates infuture periods, an adjustment to the valuation allowance may be required, whichcould materially affect our consolidated financial position and results of operations.

 

*Restructuring charges. *We have takenrestructuring actions in the past, and may commence further restructuringactivities which result in recognition of restructuring charges. These actionsrequire management to make judgments and utilize significant estimatesregarding the nature, timing and amounts of costs associated with the activity.When we incur a liability related to a restructuring action, we estimate andrecord all appropriate expenses, including expenses for severance and otheremployee separation costs, facility consolidation costs (including estimates ofsublease income), lease cancellations, asset impairments and any other exitcosts. Should the actual amounts differ from our estimates, the amount of therestructuring charges could be impacted, which could materially affect ourconsolidated financial position and results of operations.

 

**Recently Adopted and Newly Issued Accounting Pronouncements**

 

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.

 

The Company or one of its subsidiaries file U.S.federal income tax returns and tax returns in various state and foreignjurisdictions in Canada and Western Europe. The Company’s U.S. federal income tax returns have been examined by theTreasury Department through 2001.  Stateand local tax returns have been examined through various dates from 2001 to 2005with ongoing tax examinations pending in several states.  Included in the Company’s FIN 48 liability isa current liability of $2,264,000 for the expected taxes and interest andpenalties relating to pending state tax examinations involving disputed allocationsof income; no issues have been raised to date with respect to the other pendingstate tax examinations. 

 

With the exception of the current liability of$2,264,000, the Company’s remaining tax liabilities and interest with respectto unrecognized tax benefits have been reclassified to other non-currentliabilities on the balance sheet because payment of cash is not anticipatedwithin one year.  This amount at January 1,2007 aggregates to approximately $1,115,000, including $305,000 for interest andpenalties.  The Company’s continuingpractice is to record interest and penalties related to tax positions in incometax expense in its consolidated statement of operations.

 

During 2007, the Company resolved a state taxissue by paying an assessment of approximately $1,901,000 (including $169,000in interest) to a state taxing authority. As of December 31, 2007 the Company’s liability for unrecognizedtax benefits was approximately $1,547,000 (including interest and penalties ofapproximately $632,000).

 

 

21

----

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157 “Fair ValueMeasurements” which is effective for fiscal years beginning after November 15,2007. This statement was issued to increase consistency and comparability infair value measurements and for expanded disclosures about fair valuemeasurements. The Company is currently evaluating the potential impact, if any,of this pronouncement.

 

InFebruary 2007, the FASB issued SFAS No. 159 “The Fair Value Optionfor Financial Assets and Financial Liabilities (including an amendment of FASBStatement No. 115)” which is effective for fiscal years beginning after November 15,2007. This interpretation was issued to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. The Company is currentlyevaluating the potential impact, if any, of this pronouncement.

 

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 141Restablishes principles and requirements for how an acquirer 1) recognizes andmeasures identifiable assets acquired, the liabilities assumed and anynoncontrolling 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 business combinations forwhich the acquisition date is on or after the beginning of the first annualreporting period beginning after December 15, 2008. The Company iscurrently evaluating the potential impact, if any, of this pronouncement.

 

InDecember 2007, the FASB issued SFAS No. 160, “Accounting andReporting of Noncontrolling Interest” (“SFAS No. 160”). The objective ofSFAS 160 is to improve the relevance, comparability and transparency of thefinancial information that reporting entities provide related to noncontrollinginterests, sometimes referred to as minority interests. SFAS No. 160requires, among other things, that noncontrolling interests be shown separatelyin the consolidated 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 thenoncontrolling interest, for consistency in accounting for changes in a parent’sownership interest when the parent retains a controlling interest, for thevaluation of retained noncontrolling equity interests when a subsidiary isdeconsolidated and for providing sufficient disclosure that identifies anddistinguishes the interests of the parent and the interests of thenoncontrolling owners. SFAS No. 160 is effective beginning January 1,2009. The Company is currently evaluating the potential impact, if any, of thispronouncement.

 

 

22

----

 

**Highlights from 2007**

 

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 increase of 19% in 2007 over 2006

·                  E-commerce sales increase of 12% in 2007 over2006

·                  Operating income increase of 54% in 2007 over2006

·                  Net income increase of 54% in 2007 over 2006

·                  Diluted earnings per share increase of 51% in2007 over 2006

 

# **Resultsof Operations**

# ** **

KeyPerformance Indicators (in thousands):

 
| ** **                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2007**                          | ** ** | **2006** | ** ** | **%   Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **%   Change** | ** ** |
| *Net sales by segment:*       | * *   | * *                          | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Technology products           |       | $                                 | 2,553,716  |   | $ | 2,148,104 |   | 18.9 | % | $ | 2,148,104 |   | $ | 1,940,902 |   | 10.7 | % |
| Industrial products           |       | 225,746                           |       | 196,860 |   | 14.7 | % | 196,860 |   | 174,616 |   | 12.8 | % |
| Hosted software               |       | 413                               |       | 201 |   | 105.5 | % | 201 |   | — |   | — | % |
| Total net sales               |       | $                                 | 2,779,875  |   | $ | 2,345,165 |   | 18.5 | % | $ | 2,345,165 |   | $ | 2,115,518 |   | 10.9 | % |
| *Net sales by geography:*     | * *   | * *                          | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| North America                 |       | $                                 | 1,847,477  |   | $ | 1,601,259 |   | 15.4 | % | $ | 1,601,259 |   | $ | 1,420,881 |   | 12.7 | % |
| Europe                        |       | 932,398                           |       | 743,906 |   | 25.3 | % | 743,906 |   | 694,637 |   | 7.1 | % |
| Total net sales               |       | $                                 | 2,779,875  |   | $ | 2,345,165 |   | 18.5 | % | $ | 2,345,165 |   | $ | 2,115,518 |   | 10.9 | % |
| *Gross margin*                |       | 15.3                              | %          | 14.6 | % | .7 | % | 14.6 | % | 14.5 | % | .1 | % |
| SG&A costs                |       | $                                 | 330,797    |   | $ | 281,015 |   | 17.7 | % | $ | 281,015 |   | $ | 272,478 |   | 3.1 | % |
| SG&A costs as % of  sales |       | 11.9                              | %          | 12.0 | % | (.1 | )% | 12.0 | % | 12.9 | % | (7.0 | )% |
| Operating income              |       | $                                 | 95,505     |   | $ | 61,904 |   | 54.3 | % | $ | 61,904 |   | $ | 34,809 |   | 77.8 | % |
| *Operating margin*            |       | 3.4                               | %          | 2.6 | % | .8 | % | 2.6 | % | 1.6 | % | 1.0 | % |
| Effective income tax rate     |       | 30.5                              | %          | 35.2 | % | (4.5 | )% | 35.2 | % | 65.2 | % | (30.0 | )% |
| Net income                    |       | $                                 | 69,481     |   | $ | 45,147 |   | 53.9 | % | $ | 45,147 |   | $ | 11,441 |   | 294.6 | % |
| *Net margin*                  |       | 2.5                               | %          | 1.9 | % | .6 | % | 1.9 | % | .5 | % | 1.4 | % |

 

*NETSALES*

 

Salesincreased in all three reporting business segments and in both geographiesduring 2007 over 2006.  The growth inTechnology Products sales was driven by increased internet and retail storesales, private label product sales and expanded product offerings. The growthin Industrial Products sales resulted from the Company increasing its marketshare through competitive pricing advantages and increased internet sales. Thegrowth in North American sales reflected the 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 foreign exchange rates, European sales wouldhave increased 12% from the prior year. Sales as measured in local currenciesincreased in all of the European markets we serve in 2007.  Sales in our Hosted Software segment were notmaterial in 2007 or 2006 due to early stage of operations.

 

Salesincreased in all three reporting business segments and in both geographiesduring 2006 over 2005.  The growth inTechnology Products sales was driven primarily by increased internet-relatedmarketing initiatives targeting consumers. The growth in Industrial Products sales resulted from the Companygrowing its market share through competitive pricing advantages and increasedinternet sales.  The growth in NorthAmerican sales reflected the above factors in both segments. The growth inEuropean sales was driven by strong business to business gains and by theeffect of a weaker US dollar.  Exchangerates positively impacted the European sales comparison by approximately $4million in 2006 as compared to 2005. Sales in our Hosted Software segment were not material in 2006 and 2005due to early stage of operations.

 

 

23

----

 

*GROSSMARGIN*

 

Consolidated gross margin increased 70basis points during 2007 over 2006, due primarily to decreased competitivepricing pressures in the Technology Products segment.  Gross margin is dependent on variables suchas product mix, vendor price protection and other sales incentives,competition, pricing strategy, rebates and other variables, any or all of whichmay result in fluctuations in gross margin.

 

Grossmargin was relatively flat during 2006 over 2005, due to decreased competitiverebates and pricing pressures in the Company’s Technology Products segment.

 

*SELLING,GENERAL AND ADMINISTRATIVE EXPENSES*

 

Selling,general and administrative expenses increased in 2007 over 2006 primarily as aresult of the increase in sales volume as well as increased accounting,auditing, legal and consulting costs related to the Company being subject toSarbanes Oxley section 404 requirements. Significant expense increases includeapproximately $26 million of increased internet advertising costs, $8 millionof increased sales salaries related to the increased sales volume and anincrease in other salaries and related costs of approximately $15 million dueto increased staff in areas such as finance, marketing and informationtechnology.

 

Selling,general and administrative expenses increased in 2006 over 2005 as a result ofapproximately $3 million of increased credit card fees, a $4 million increasein sales salaries related to the increased sales volume, an increase in othersalaries and related costs of approximately $10 million due to increased staffin areas such as marketing and information technology as well as approximately$1.8 million of salary expense related to stock compensation expense recordedas the result of the adoption of SFAS 123(R). Rent expense increased $2.3million due to the company’s expansion. These increases were partially offsetby a decrease of approximately $6.1 million of bad debt expense and a positiveimpact of foreign exchange of approximately $3.5 million.

 

*RESTRUCTURINGAND OTHER CHARGES*

 

During2005, we incurred $4.2 million of restructuring and other charges. These costswere primarily related to further restructuring actions undertaken in Europeduring the year as a result of continuing decline in profitability. The costswere comprised primarily of staff severance expense related to the eliminationof approximately 240 positions, which resulted in approximately $6 million inannual savings.

 

*INTERESTAND OTHER INCOME**AND INTEREST EXPENSE*

 

Interest expense was $1.0 million, $1.7million and $2.7 million in 2007, 2006 and 2005. Interest expense decreased in2007 and 2006 as a result of decreased short-term borrowings in the UnitedKingdom. The extinguishment of mortgage debt related to our Georgia warehousesale in the first quarter of 2006 also contributed to the decreased interestexpense. Interest and other income, net was $5.5 million, $9.5 million and $0.7million in 2007, 2006 and 2005. The increase in other income in 2006 mainlyresulted from the gain on sale of the Georgia location.

 

 

24

----

 

*INCOME TAXES*

 

Thelow effective tax rate in 2007 resulted primarily from the reversal of avaluation allowance of approximately $5.9 million against deferred tax assetsin the United Kingdom partially offset by the recording of a valuationallowance of approximately $1.7 million against the deferred tax assets ofGermany. The United Kingdom valuation allowance, originally recorded at $10.2million, had been established in 2005 as the result of a cumulative lossposition in the United Kingdom and was the primary driver of the high effectivetax rate in 2005. The effective rate in 2005 also was unfavorably impacted byincreased state and local taxes and losses in other foreign jurisdictions forwhich no tax benefit has been recognized. These increases were partially offsetby an income tax benefit of $2.7 million we recorded in the fourth quarter of2005 resulting from a favorable decision we received for a petition submittedin connection with audit assessments made in 2002 and 2004 in a foreignjurisdiction.

 

During2007, 2006 and 2005, 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 to realizethese assets. Accordingly, valuation allowances were recorded against thedeferred tax assets associated with those items. If we are able to realize allor part of these deferred tax assets in future periods, it will reduce ourprovision for income taxes by a release of the corresponding valuationallowance.

 

**Seasonality**

 

Net sales have historically been modestly weaker during the second andthird quarters as a result of lower business activity during those months. Thefollowing table sets forth the net sales, gross profit and income fromoperations for each of the quarters since January 1, 2005 *(amounts in millions)*.

 
| ** **                           | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
| 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                    |       | $                    | 26         |   | $ | 27 |   |
|                                 |       |              |       |             |       |                  |       |                 |       |
| 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         |             | $          | 11                    |       | $                    | 19         |   | $ | 11 |   |
|                                 |       |              |       |             |       |                  |       |                 |       |
| 2005                                 |       |              |       |             |       |                  |       |                 |       |
| Net sales                            |       | $                 | 538        |             | $          | 506                   |       | $                    | 489        |   | $ | 583 |   |
| Percentage of year’s net  sales |       | 25.4              | %          | 23.9             | %          | 23.1                  | %          | 27.6                 | %          |
| Gross profit                         |       | $                 | 80         |             | $          | 71                    |       | $                    | 70         |   | $ | 86 |   |
| Operating income                     |       | $                 | 5          |             | $          | 3                     |       | $                    | 8          |   | $ | 18 |   |

 

 

25

----

 

**Financial Condition, Liquidity and Capital Resources**

 

Selectedliquidity data (in thousands):

 
| ** **                          | ** ** | **December 31,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                          | ** ** | **2007**              | ** ** | **2006**   | ** ** | **$ Change** | ** ** |
| Cash and cash equivalents           |       | $                     | 128,021    |       | $          | 86,964 |   | $ | 41,057 |   |
| Accounts receivable, net            |       | $                     | 197,397    |       | $          | 164,615 |   | $ | 32,782 |   |
| Inventories                         |       | $                     | 250,222    |       | $          | 233,136 |   | $ | 17,086 |   |
| Prepaid expenses and other  current |       | $                     | 20,589     |       | $          | 26,919 |   | $ | (6,330 | ) |
| Accounts payable                    |       | $                     | 249,117    |       | $          | 201,486 |   | $ | 47,631 |   |
| Accrued expenses                    |       | $                     | 82,570     |       | $          | 75,688 |   | $ | 6,882 |   |
| Short term debt                     |       | $                     | 4,302      |       | $          | 12,788 |   | $ | (8,486 | ) |
| Working capital                     |       | $                     | 273,453    |       | $          | 229,399 |   | $ | 44,054 |   |

 

Ourprimary liquidity needs are to support working capital requirements in ourbusiness, to fund capital expenditures and minimal acquisitions and fund thespecial dividends declared by our Board in 2007 and 2008. We rely principallyupon operating cash flow and borrowings under our credit facilities to meetthese needs. We believe that cash flow available from these sources will besufficient to meet our working capital requirements, projected capitalexpenditures and interest and debt repayments in the foreseeable future.

 

The growth of our working capital in 2007over 2006 resulted primarily from higher cash, receivables, inventories andlower debt, offset by increased payables and accrued expenses.  The increase in our inventories wasprincipally in our domestic locations. Inventory turnover was at 10 timesduring 2007 and 2006. Our accounts receivable days outstanding was at 24 in2007 up slightly from 23 in 2006. 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 2007,all of our investments mature in less than three months. Accordingly, we do notbelieve that our investments have significant exposure to interest rate risk.

 

Net cash provided by operating activities was $93.1million, $34.3 million and $27.3 million during 2007, 2006 and 2005. Theincrease in cash provided by operating activities in 2007 over 2006 resulted froma $28.2 million increase in net income adjusted by other non-cash items, suchas depreciation expense, and an increase of $30.6 million in cash used forchanges in our working capital accounts. Theincrease in cash provided by operating activities in 2006 over 2005 resultedfrom a $14.1 million increase in net income adjusted by other non-cash items,such as depreciation expense, and a decrease of $7.1 million in cash used forchanges in our working capital accounts.

 

Net cash used in investing activities was$8.0 million during 2007, primarily for capital expenditures. Net cash of $12.2million was provided by investing activities during 2006 consisting of proceedsfrom disposals of property and equipment of $18.9 million from the sale of ourdistribution facility in Suwanee, Georgia offset by cash used for capitalexpenditures of $6.7 million. We used cash $5.8 million during 2005 ininvesting activities, principally for the purchase of property, plant andequipment. Capital expenditures in 2007, 2006 and 2005 included upgrades andenhancements to our information and communications systems hardware andfacilities costs for the opening of additional retail outlets stores in NorthAmerica.

 

Netcash used in financing activities was $46.3 million during 2007, attributableto dividends paid of $36.6 million, repayment of short term debt of $12.9million, offset by proceeds of stock option exercises, related excess taxbenefits and share repurchases of $3.1 million. Net cash of $22.1 million wasused 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. Net cash of $4.7 million was provided byfinancing activities in 2005, primarily as a result of an increase in ourshort-term borrowings in Europe.

 

 

26

----

 

Wehave a $120 million secured revolving credit agreement (which may be increasedby up to an additional $30 million, subject to certain conditions).  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 million until the last day of any month in which theavailability net of outstanding borrowings is at least $70 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, 2007, the Company was incompliance with all of the covenants under the credit facility. Eligiblecollateral under the facility was $106.9 million, total availability was $97.0million, outstanding letters of credit of were $9.7 million and there were nooutstanding advances.

 

The Company’s Netherlands subsidiarymaintains a €5 million ($7.4 million as of December 2007 exchange rate)credit facility with a local financial institution. At December 2007 therewas approximately €2.6 million ($3.9 million) outstanding under this line. Thefacility carries interest at a rate of 7.05%. Borrowings under the facility aresecured by the subsidiary’s accounts receivable and are subject to a borrowingbase limitation of 85% of the eligible accounts.  This facility expires in September 2008.

 

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.

 

We are obligated under non-cancelableoperating leases for the rental of most of our facilities and certain of ourequipment which expire at various dates through 2026.  We currently lease one of our New Yorkfacilities from an entity owned by Richard Leeds, Robert Leeds and Bruce Leeds,the Company’s three principal shareholders and senior executive officers. Theannual rental will total $860,000 for 2008 and the lease expires in 2017. Wehave sublease agreements for unused space we lease Wellingborough, England. Inthe event the sublessee is unable to fulfill its obligations, we would beresponsible for rent due under the lease. However, we expect the sublessee willfulfill their obligations under the leases.

 

Followingis a summary of our contractual obligations for future principal payments onour debt, minimum rental payments on our non-cancelable operating leases andminimum payments on our other purchase obligations as of December 2007 (inthousands):

 
| ** **                                        | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **After 2012** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| *Contractual Obligations:*                        | * *   | * * | * *   | * * | * *   | * * | * *   | * * | * *   | * * | * *   | * *       | * *   |
| Capital lease obligations                         |       | $        | 471        |     | $          | 186      |       | $        | 73         |     | $          | 10             |       |   |   |   |   |
| Non-cancelable operating leases, net of subleases |       | 13,280   |       | 12,895   |       | 10,390   |       | 9,342    |       | 8,549    |       | 54,737         |       |
| Purchase and other  obligations                   |       | 6,945    |       | 3,437    |       | 3,523    |       | 3,368    |       | 3,471    |       | 3,632          |       |
| Short term loans                                  |       | 3,853    |       |     |       |     |       |     |       |     |       |           |       |
| Tax contingencies                                 |       | 1,547    |       |     |       |     |       |     |       |     |       |           |       |
| Total contractual  obligations                    |       | $        | 26,096     |     | $          | 16,518   |       | $        | 13,986     |     | $          | 12,720         |       | $ | 12,020 |   | $ | 58,369 |   |
|                                                   |            |          |            |          |            |          |            |          |            |          |            |                |            |  |  |  |  |  |  |

 

 

27

----

 

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

 

Inaddition to the contractual obligations noted above, we had $9.7 million ofstandby letters of credit outstanding as of December 2007.

 

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, particularly working capitalrequirements related to our purchase of CompUSA, provide payment of the specialshareholder dividend of approximately $37 million (based on shareholders ofrecord as of March 21,2008) declared in the first quarter of 2008, fundthe payment of principal and interest on indebtedness, fund capitalexpenditures, fund minimal acquisitions and fund any future special shareholderdividends that may be declared. We believe future cash flows from operations andavailability of borrowings under our lines of credit will be sufficient to fundongoing cash requirements 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**

 

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.

 

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.

 

**Item 7A.  Quantitative andQualitative Disclosure About Market Risk.**

 

We are exposed to market risks, which include changes in U.S. andinternational interest rates as well as changes in currency exchange rates(principally Pounds Sterling, Euros and Canadian Dollars) as measured againstthe U.S. Dollar and each other.

 

The translation of the financial statements of our operations locatedoutside of the United States is impacted by movements in foreign currencyexchange rates. Changes in currency exchange rates as measured against the U.S.dollar may positively or negatively affect sales, gross margins, operatingexpenses and retained earnings as expressed in U.S. dollars. Sales would havefluctuated by approximately $102 million and pre tax income would havefluctuated by approximately $1.6 million if average foreign exchange rateschanged by 10% in 2007.  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 2007 we had no outstanding forwardexchange contracts.

 

Our exposure to market risk for changes in interest rates relatesprimarily to our variable rate debt.  Ourvariable rate debt consists of short-term borrowings under our creditfacilities.  As of December 2007,there were no outstanding balances under our variable rate credit facility. Ahypothetical change in average interest rates of one percentage point is notexpected to have a material effect on our financial position, results ofoperations or cash flows over the next fiscal year.

 

 

28

----

 

**Item 8. Financial Statements and Supplementary Data.**

 

The information required by Item 8 of Part II is incorporated hereinby reference to the Consolidated Financial Statements filed with this report;see Item 15 of Part IV.

 

**Item 9. Changes In and Disagreements with Accountants on Accounting andFinancial 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 31,2007. As part of this evaluation we identified a significant deficiency, asdefined under Auditing Standard No. 5: An Audit of Internal Control OverFinancial Reporting That is Integrated With an Audit of Financial Statements,in our internal controls over financial reporting as of December 31, 2007.This significant deficiency is:

 

TheCompany consolidates its worldwide financial results from disparate underlyingfinancial and operational systems that have various functional limitations andfew automated interfaces. This results in a consolidation process that isheavily reliant on manual review procedures and manual adjustments. Our controlover this consolidation process primarily consists of corporate reviewprocedures. The design and operation of this control process may not prevent ordetect misstatements on a timely basis. This significant deficiency does not,in our judgment, rise to the level of a material weakness in internal controlsover financial reporting because we believe that the controls in place wouldprevent or detect a material misstatement. Based upon this evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat the Company’s disclosure controls and procedures are effective.

 

**Inherent Limitations ofInternal Controls**

 

**Our internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Our internal controlover financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that our receipts and expenditures arebeing made only in accordance with authorizations of our management anddirectors; and (iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of our assets thatcould have a material effect on our financial statements.**

** **

**Management, including our Chief Executive Officerand Chief Financial Officer, does not expect that our internal controls willprevent or detect all errors and all fraud. A control system, no matter howwell designed and operated, can provide only reasonable, not absolute,assurance that the objectives of the**

** **

** **

**29**

----

** **

**control system are met. Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations in all control systems, no evaluation of internal controlscan provide absolute assurance that all control issues and instances of fraud,if any, have been detected. Also, any evaluation of the effectiveness ofcontrols in future periods are subject to the risk that those internal controlsmay become inadequate because of changes in business conditions, or that thedegree of compliance with the policies or procedures may 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 in Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s internal control over financial reporting waseffective as of December 31, 2007.**

** **

**Our independent registered public accounting firm,Ernst & Young, has issued an attestation report on the effectivenessof our internal control over financial reporting as of December 31, 2007,a copy of which is included in this report.**

** **

**Changes in Internal Control OverFinancial Reporting**

 

Inconjunction with our Section 404 compliance efforts, we have made numeroussignificant improvements to our internal control over financial reporting,including remediation of the significant deficiencies noted during previousquarters, with the exception of the consolidation process. The scope of these improvementswas broad, impacting internal control over financial reporting throughout theCompany. However, 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 year ended December 31, 2007 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**Item 9B. Other Information.**

 

None.

 

 

30

----

** **

**PART III**

 

**Item 10. Directors, Executive Officers and Corporate Governance.**

 

Theinformation required by Item 10 of Part III is hereby incorporated byreference from the Company’s Proxy Statement for the 2008 Annual Meeting ofStockholders which we anticipate filing April 25, 2008 (the “ProxyStatement”).

 

**Item 11. Executive Compensation.**

 

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

 

**Item 12. Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters.**

 

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

 

**Item 13. Certain Relationships and Related Transactions**

 

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

 

**Item 14. Principal Accounting Fees and Services.**

 

The information required by Item 14 of Part III is herebyincorporated by reference from the Proxy Statement.

 

**PART IV**

 

**Item 15. Exhibits and Financial Statement Schedules.**

 

                              (a)     1.     ConsolidatedFinancial Statements of Systemax Inc.

 
| ** **                                                                                                      | ** ** | **Reference** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------|
| Reports  of Ernst & Young LLP Independent Registered Public Accounting Firm                            |       | 36            |
| Consolidated  Balance Sheets as of December 31, 2007 and 2006                                              |       | 38            |
| Consolidated Statements of Operations for the years  ended December 31, 2007, 2006, and 2005               |       | 39            |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2007, 2006 and 2005                |       | 41            |
| Consolidated Statements of Shareholders’ Equity for  the Years ended December 31, 2007, 2006 and 2005 |       | 40            |
| Notes to Consolidated Financial Statements                                                                      |       | 42            |

 

31

----

 
|   | 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                        60                   |
|   |   |                                                                                                                                                                                                            |
|   |   | 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         |       | Composite  Certificate of Incorporation of Registrant, as amended (incorporated by  reference to the Company’s annual report on Form 10-K for the year ended  December 31, 2001)                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2         |       | Amended  and Restated By-laws of Registrant (effective as of December 29,2007)  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)                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                           |
| 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)                                                                                                                                                                                                         |

 

32

----

 
| 10.12  |   | Employment  Agreement dated as of December 12, 1997 between the Company and Steven  M. Goldschein* (incorporated by reference to the Company’s annual report on  Form 10-K for the year ended December 31, 1997. See exhibit 10,23  for Amendment.)                                                                                                                                                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.15  |   | 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)                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.16  |   | 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)                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.17  |   | Amended  and Restated Credit Agreement, dated as of October 27, 2005, between JP  Morgan 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) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.18  |   | 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 10K for the year ended  December 31, 2005)                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.19  |   | 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 10K for the year ended  December 31, 2005)                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.20  |   | 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 10K  for the year ended December 31, 2005)                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.21  |   | 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 10K for the year ended December 31, 2005)                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.22  |   | Agreement  of Purchase and Sale, dated December 9, 2005, between the Company (as  Seller) and Hewlett Packard Company (as Buyer) (Suwanee, Georgia facility)  (incorporated by reference to the Company’s annual report on Form 10K  for the year ended December 31, 2005)                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.23  |   | Amendment  No. 1 dated January 17, 2007, to Employment Agreement dated as  December 12, 1997 between the Company and Stephen M.  Goldschein*(incorporated by reference to the Company’s report on  Form 10-K dated December 31, 2006).                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.24  |   | Employment  Agreement, dated as of January 17, 2007, between the Company and  Lawrence P. Reinhold*(incorporated by reference to the Company’s report on  Form 10-K dated December 31, 2006).                                                                                                                                                                                                                                                         |

 

33

----

 
| 10.25  |   | Form of  2006 Stock Incentive Plan for Non-Employee Directors*(incorporated by  reference to the Company’s report on Form 10-K dated December 31,  2006).                                                              |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                       |
| 10.26  |   | Form of  2005 Employee Stock Purchase Plan* (incorporated by reference to the  Company’s report on Form 10-K dated December 31, 2006).                                                                                 |
|   |   |                                                                                                                                                                                                                                       |
| 10.27  |   | Second  Amendment to Lease Agreement dated September 20, 1988 between the  Company and Addwin Realty Associates(filed herewith).                                                                                                      |
|   |   |                                                                                                                                                                                                                                       |
| 10.28  |   | Asset  Purchase Agreement between the Company and CompUSA dated January 5, 2008  (filed herewith).                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                       |
| 10.29  |   | Amendment  to Asset Purchase Agreement between the Company and CompUSA dated  February 14, 2008 (filed herewith).                                                                                                                     |
|   |   |                                                                                                                                                                                                                                       |
| 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                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                       |
| 23     |   | Consent  of experts and counsel: Consent of Independent Registered Public Accounting  Firm                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                       |
| 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  August 29, 2006 (incorporated by reference to the Company’s report on  Form 8-K dated August 29, 2006)                           |
|   |   |                                                                                                                                                                                                                                       |
| 99.2   |   | Charter  of the Compensation Committee of the Company’s Board of Directors, as revised  August 29, 2006 (incorporated by reference to the Company’s report on  Form 8-K dated August 29, 2006)                    |
|   |   |                                                                                                                                                                                                                                       |
| 99.3   |   | Charter  of the Nominating/Corporate Governance Committee of the Company’s Board of  Directors, as revised August 29, 2006 (incorporated by reference to the  Company’s report on Form 8-K dated August 29, 2006) |

 

----

*   Management contract orcompensatory plan or arrangement

 

34

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |   | SYSTEMAX  INC.                        |
|--------|--------|---------------------------------------|
|   |   |                                  |
|   |   | By:                                   | /s/  RICHARD LEEDS |
|   |   |                                  |
|   |   | Richard  Leeds                        |
|   |   | Chairman  and Chief Executive Officer |
|   |   |                                  |
|   |   | Date:  March 13, 2008            |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this Report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 
| **Signature**            | ** ** | **Title**                                            | ** ** | **Date**            |
|--------------------------|------------|------------------------------------------------------|------------|---------------------|
|                     |       |                                                 |       |                |
| /s/ RICHARD LEEDS        |       | Chairman and Chief Executive Officer                 |       | March 13, 2008 |
| Richard Leeds            |       | (Principal Executive Officer)                        |       |                |
|                     |       |                                                 |       |                |
| /s/ BRUCE LEEDS          |       | Vice Chairman                                        |       | March 13, 2008 |
| Bruce Leeds              |       |                                                 |       |                |
|                     |       |                                                 |       |                |
| /s/ ROBERT LEEDS         |       | Vice Chairman                                        |       | March 13, 2008 |
| Robert Leeds             |       |                                                 |       |                |
|                     |       |                                                 |       |                |
| /s/ LAWRENCE P. REINHOLD |       | Executive Vice President and Chief Financial Officer |       | March 13, 2008 |
| Lawrence P. Reinhold     |       | (Principal Financial Officer)                        |       |                |
|                     |       |                                                 |       |                |
| /s/ THOMAS AXMACHER      |       | Vice President and Controller                        |       | March 13, 2008 |
| Thomas Axmacher          |       | (Principal Accounting Officer)                       |       |                |
|                     |       |                                                 |       |                |
| /s/ GILBERT FIORENTINO   |       | Director                                             |       | March 13, 2008 |
| Gilbert Fiorentino       |       |                                                 |       |                |
|                     |       |                                                 |       |                |
| /s/ ROBERT D. ROSENTHAL  |       | Director                                             |       | March 13, 2008 |
| Robert D. Rosenthal      |       |                                                 |       |                |
|                     |       |                                                 |       |                |
| /s/ STACY DICK           |       | Director                                             |       | March 13, 2008 |
| Stacy Dick               |       |                                                 |       |                |
|                     |       |                                                 |       |                |
| /s/ ANN R. LEVEN         |       | Director                                             |       | March 13, 2008 |
| Ann R. Leven             |       |                                                 |       |                |

 

35

----

 

**Report of Independent Registered Public Accounting Firm**

 

**TheBoard of Directors and Shareholders of**

**Systemax, Inc.**

 

We have audited the accompanying consolidated balance sheetsof Systemax, Inc. as of December 31, 2007 and 2006, and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2007. Our auditsalso included the financial statement schedule included in the Index at Item15. These financial statements and schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Systemax, Inc. at December 31, 2007 and 2006, and the consolidatedresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2007, in conformity with U.S. generally acceptedaccounting principles.

 

As discussed in Note 1 to the consolidated financialstatements, effective January 1, 2007, Systemax, Inc. adoptedFinancial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”and effective January 1, 2006, Systemax, Inc. adopted Statement ofFinancial Accounting Standards No. 123(R), “Share-Based Payment.”

 

We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), Systemax, Inc.’sinternal control over financial reporting as of December 31, 2007, basedon criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated March 12, 2008 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

New York, New York

March 12,2008

 

36

----

 

**Report of Independent Registered Public AccountingFirm on Internal Control over Financial Reporting**

 

**The Board of Directors and Shareholders of**

**Systemax, Inc.**

 

We have audited Systemax, Inc.’sinternal control over financial reporting as of December 31, 2007, basedon criteria established in Internal Control — Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (the “COSOcriteria”). 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.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, testing and evaluating thedesign and operating effectiveness of internal control based on the assessedrisk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance 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.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion, Systemax, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2007, based on the COSO criteria.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board (UnitedStates), the consolidated balance sheets of Systemax, Inc. as of December 31,2007 and 2006, and the related consolidated statements of operations,shareholders’ equity and cash flows for each of the three years in the periodended December 31, 2007 of Systemax, Inc. and our report dated March 12,2008 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

New York, New York

March 12,2008

 

37

----

 

 

 

#### ** **

#### **SYSTEMAX INC.**

#### **CONSOLIDATED BALANCE SHEETS**

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

 

| ** **                                                                                                                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                                                                                                                           |       |                  |       |   |   |
| ASSETS:                                                                                                                                                        |       |                  |       |   |   |
| Current assets:                                                                                                                                                |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                      |       | $                     | 128,021    |   | $ | 86,964 |   |
| Accounts receivable, net of allowances of $11,817 and  $11,370                                                                                                 |       | 197,397               |       | 164,615 |   |
| Inventories, net                                                                                                                                               |       | 250,222               |       | 233,136 |   |
| Prepaid expenses and other current assets                                                                                                                      |       | 20,589                |       | 26,919 |   |
| Deferred income tax assets, net                                                                                                                                |       | 9,360                 |       | 7,727 |   |
| Total current assets                                                                                                                                           |       | 605,589               |       | 519,361 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Property, plant and equipment, net                                                                                                                             |       | 48,480                |       | 48,586 |   |
| Deferred income tax assets, net                                                                                                                                |       | 18,652                |       | 14,041 |   |
| Other assets                                                                                                                                                   |       | 1,150                 |       | 2,173 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Total assets                                                                                                                                                   |       | $                     | 673,871    |   | $ | 584,161 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY:                                                                                                                    |       |                  |       |   |   |
| Current liabilities:                                                                                                                                           |       |                  |       |   |   |
| Short-term borrowings, including current portions of  long-term debt                                                                                           |       | $                     | 4,302      |   | $ | 12,788 |   |
| Accounts payable                                                                                                                                               |       | 245,264               |       | 201,486 |   |
| Accrued expenses and other current liabilities                                                                                                                 |       | 82,570                |       | 75,688 |   |
| Total current liabilities                                                                                                                                      |       | 332,136               |       | 289,962 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Long-term debt                                                                                                                                                 |       | 254                   |       | 483 |   |
| Other liabilities                                                                                                                                              |       | 5,646                 |       | 4,226 |   |
| Total liabilities                                                                                                                                              |       | 338,036               |       | 294,671 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| 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 38,332,990  and 38,331,990 shares; outstanding 36,092,067 and 35,341,377 shares |       | 383                   |       | 383 |   |
| Additional paid-in capital                                                                                                                                     |       | 173,381               |       | 172,983 |   |
| Common stock in treasury at cost — 2,240,923 and  2,990,613 shares                                                                                        |       | (26,324               | )          | (35,131 | ) |
| Retained earnings                                                                                                                                              |       | 176,684               |       | 144,074 |   |
| Accumulated other comprehensive income, net of tax                                                                                                             |       | 11,711                |       | 7,181 |   |
| Total shareholders’ equity                                                                                                                                |       | 335,835               |       | 289,490 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Total liabilities and shareholders’ equity                                                                                                                |       | $                     | 673,871    |   | $ | 584,161 |   |

 

See notes to consolidatedfinancial statements.

 

38

----

 

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

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, except per shareamounts)**

 
| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net  sales                                             |       | $                                | 2,779,875  |   | $ | 2,345,165 |   | $ | 2,115,518 |   |
| Cost  of sales                                         |       | 2,353,574                        |       | 2,002,246 |   | 1,808,231 |   |
| Gross  profit                                          |       | 426,301                          |       | 342,919 |   | 307,287 |   |
| Selling,  general and administrative expenses          |       | 330,797                          |       | 281,015 |   | 268,327 |   |
| Restructuring  and other charges                       |       | —                           |       | — |   | 4,151 |   |
| Operating  income                                      |       | 95,504                           |       | 61,904 |   | 34,809 |   |
| Interest  and other income, net                        |       | (5,505                           | )          | (9,475 | ) | (735 | ) |
| Interest  expense                                      |       | 986                              |       | 1,684 |   | 2,670 |   |
| Income  before income taxes                            |       | 100,023                          |       | 69,695 |   | 32,874 |   |
| Provision  for income taxes                            |       | 30,542                           |       | 24,548 |   | 21,433 |   |
| Net  income                                            |       | $                                | 69,481     |   | $ | 45,147 |   | $ | 11,441 |   |
| Net  income per common share:                          |       |                             |       |   |   |   |   |
| Basic                                                  |       | $                                | 1.93       |   | $ | 1.29 |   | $ | .33 |   |
| Diluted                                                |       | $                                | 1.84       |   | $ | 1.22 |   | $ | .31 |   |
|                                                   |       |                             |       |   |   |   |   |
| Weighted  average common and common equivalent shares: |       |                             |       |   |   |   |   |
| Basic                                                  |       | 35,968                           |       | 34,960 |   | 34,646 |   |
| Diluted                                                |       | 37,688                           |       | 36,881 |   | 36,488 |   |

 

See notes toconsolidated financial statements.

 

39

----

 

**SYSTEMAX INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |       |                             |       |   |   |   |   |
| Net income                                                                         |       | $                                | 69,481     |   | $ | 45,147 |   | $ | 11,441 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                             |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 8,780                            |       | 8,185 |   | 9,994 |   |
| (Gain) loss on dispositions and abandonment                                        |       | (1,032                           | )          | (7,721 | ) | 1,279 |   |
| Provision (benefit) for deferred income taxes                                      |       | (6,106                           | )          | 2,254 |   | 6,228 |   |
| Provision for returns and doubtful accounts                                        |       | 4,575                            |       | 1,503 |   | 7,620 |   |
| Compensation expense related to equity compensation  plans                         |       | 4,159                            |       | 2,330 |   | 1,004 |   |
| Tax benefit of employee stock plans                                                |       | —                           |       | — |   | 12 |   |
| Changes in operating assets and liabilities:                                       |       |                             |       |   |   |   |   |
| Accounts receivable                                                                |       | (27,786                          | )          | (3,917 | ) | (31,722 | ) |
| Inventories                                                                        |       | (13,229                          | )          | (36,216 | ) | (3,457 | ) |
| Prepaid expenses and other current assets                                          |       | 9,229                            |       | (10,060 | ) | 3,989 |   |
| Income taxes payable/receivable                                                    |       | (235                             | )          | (4,234 | ) | 527 |   |
| Accounts payable, accrued expenses and other current  liabilities                  |       | 45,247                           |       | 37,055 |   | 20,430 |   |
| Net cash provided by operating activities                                          |       | 93,083                           |       | 34,326 |   | 27,345 |   |
|                                                                               |       |                             |       |   |   |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |                             |       |   |   |   |   |
| Purchases of property, plant and equipment                                         |       | (7,950                           | )          | (6,701 | ) | (5,896 | ) |
| Proceeds from disposals of property, plant and  equipment                          |       | 28                               |       | 18,938 |   | 103 |   |
| Net cash provided by (used in) investing activities                                |       | (7,922                           | )          | 12,237 |   | (5,793 | ) |
|                                                                               |       |                             |       |   |   |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                             |       |                             |       |   |   |   |   |
| (Repayments) proceeds of borrowings from banks                                     |       | (8,708                           | )          | (16,473 | ) | 13,889 |   |
| Repayments of long-term debt and capital lease  obligations                        |       | (328                             | )          | (8,305 | ) | (9,978 | ) |
| Dividends paid                                                                     |       | (36,588                          | )          | — |   | — |   |
| Proceeds from issuance of common stock, net of  repurchases                        |       | 972                              |       | 1,602 |   | 780 |   |
| Excess tax benefit from exercises of stock options                                 |       | 2,160                            |       | 1,030 |   | — |   |
| Net cash provided by (used in) financing activities                                |       | (42,492                          | )          | (22,146 | ) | 4,691 |   |
|                                                                               |       |                             |       |   |   |   |   |
| EFFECTS  OF EXCHANGE RATES ON CASH                                                 |       | (1,612                           | )          | (744 | ) | 791 |   |
|                                                                               |       |                             |       |   |   |   |   |
| NET  INCREASE IN CASH AND CASH EQUIVALENTS                                         |       | 41,057                           |       | 23,673 |   | 27,034 |   |
| CASH  AND CASH EQUIVALENTS — BEGINNING OF YEAR                                |       | 86,964                           |       | 63,291 |   | 36,257 |   |
|                                                                               |       |                             |       |   |   |   |   |
| CASH  AND CASH EQUIVALENTS — END OF YEAR                                      |       | $                                | 128,021    |   | $ | 86,964 |   | $ | 63,291 |   |
|                                                                               |       |                             |       |   |   |   |   |
| Supplemental  disclosures:                                                         |       |                             |       |   |   |   |   |
| Interest paid                                                                      |       | $                                | 1,182      |   | $ | 1,861 |   | $ | 2,498 |   |
| Income taxes paid                                                                  |       | $                                | 30,275     |   | $ | 26,465 |   | $ | 15,522 |   |
| Supplemental  disclosures of non-cash investing and financing activities:          |       |                             |       |   |   |   |   |
| Acquisitions of equipment through capital leases                                   |       | $                                | 251        |   | $ | 776 | ** ** | **—** | ** ** |
| Deferred stock-based compensation related to  restricted unit stock granted        | ** ** | **—**                       | ** ** | **—** | ** ** | **—** | ** ** |

 

See notes to consolidatedfinancial statements.

 

40

----

 

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

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

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

 
| ** **                                                      | ** ** | **Common  Stock** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated** | ** ** | ** **          | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|------------|------------|----------------|------------|--------------|------------|-----------------|------------|---------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **Number**        | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **      | ** ** | **Other**           | ** ** | **Unearned**     | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **of Shares**     | ** ** | ** ** | ** ** | **Additional** | ** ** | **Treasury** | ** ** | ** **      | ** ** | **Comprehensive**   | ** ** | **Restricted**   | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Out-**          | ** ** | ** ** | ** ** | **Paid-in**    | ** ** | **Stock,**   | ** ** | **Retained**    | ** ** | **Income  (Loss),** | ** ** | **Stock**        | ** ** | **Comprehensive** | ** ** |
| ** **                                                      | ** ** | **Standing**      | ** ** | **Amount** | ** ** | **Capital**    | ** ** | **At Cost**  | ** ** | **Earnings**    | ** ** | **Net of  Tax**     | ** ** | **Compensation** | ** ** | **Income  (Loss)** | ** ** |
|                                                            |       |              |       |       |       |           |       |         |       |            |       |                |       |             |       |   |   |
| Balances, January 1, 2005                                  |       | 34,433            |       | $          | 382        |           | $          | 180,640      |       | $               | (44,630    | )                   | $          | 87,486           |       | $ | 3,920 |   | $ | (5,166 | ) | $ | — |   |
| Change in  cumulative translation adjustment                    |       |              |       |       |       |           |       |         |       |            |       | (3,027              | )          |             |       | (3,027 | ) |
| Exercise of stock options                                       |       | 328               |       |       |       | (3,078         | )          | 3,858        |       |            |       |                |       |             |       |   |   |
| Tax benefit of  employee stock plans                            |       |              |       |       |       | 12             |       |         |       |            |       |                |       |             |       |   |   |
| Grant of  restricted stock units                                |       |              |       |       |       |           |       |         |       |            |       |                |       |             |       |   |   |
| Amortization of  unearned restricted stock compensation         |       |              |       |       |       |           |       |         |       |            |       |                |       | 1,004            |       |   |   |
| Net income                                                      |       |              |       |       |       |           |       |         |       | 11,441          |       |                |       |             |       | 11,441 |   |
| Total  comprehensive income                                     |       |              |       |       |       |           |       |         |       |            |       |                |       |             |       | $ | 8,414 |   |
| Balances,  December 31, 2005                               |       | 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 |   | $ | — |   |   |   |

 

See notes to consolidated financial statements.

 

41

----

 

**SYSTEMAX INC.**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****               ****SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Principles of Consolidation* — The accompanyingconsolidated financial statements include the accounts of Systemax Inc. and itswholly-owned subsidiaries (collectively, the “Company” or “Systemax”). Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.    Certain prior yearbalance sheet amounts have been reclassified to conform to current yearpresentation.

 

*                         **Use ofEstimates In Financial Statements* — The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amount of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

                          *FiscalYear* — Effective the fourth quarter of 2007, the Companychanged its fiscal year end from a calendar year ending on December 31 toa fiscal year ending at midnight on the Saturday closest to December 31.Fiscal years will typically include 52 weeks, but every few years will include53 weeks which was the case in 2005. For clarity of presentation herein, allfiscal years are referred to as if they ended on December 31. The fiscalyear will be divided into four fiscal quarters that each end at midnight on aSaturday. Fiscal quarters will typically include 13 weeks, but the fourthquarter will include 14 weeks in a 53 week fiscal year. For clarity ofpresentation herein, all fiscal quarters are referred to as if they ended onthe traditional calendar month.  Theeffect of the change in year end in 2007 was de minimis.

 

                          *ForeignCurrency Translation* — The Company has operations in numerousforeign countries.  The functionalcurrency of in each foreign country is the local currency.  The financial statements of the Company’sforeign entities are translated into U.S. dollars, the reporting currency,using year-end exchange rates for assets and liabilities, average exchangerates for the statement of operations items and historical rates for equityaccounts.  The translation differencesare recorded as a separate component of shareholders’ equity.

 

*                         **Cash and Cash Equivalents* — The Companyconsiders amounts held in money market accounts and other short-terminvestments, including overnight bank deposits, with an original maturity dateof three months or less to be cash equivalents.

 

                          *Inventories* — Inventoriesconsist primarily of finished goods and are stated at the lower of cost ormarket value.  Cost is determined byusing the first-in, first-out method. Allowances are maintained for obsolete,slow-moving and non-saleable inventory.

 

                          *Property,Plant and Equipment* — Property, plant and equipment is stated atcost.  Depreciation of furniture,fixtures and equipment, including equipment under capital leases, is on 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.

 

*                         **CapitalizedSoftware Costs* — The Company capitalizes purchased software readyfor service and capitalizes software development costs incurred on significantprojects from the time that the preliminary project stage is completed andmanagement commits to funding a project until the project is substantiallycomplete and the software is ready for its intended use.  Capitalized costs include materials and servicecosts and payroll and payroll-related costs. Capitalized software costs are amortized using the straight-line methodover the estimated useful life of the underlying system, generally five years.

 

                          *Evaluationof Long-lived Assets* — Long-lived assets are evaluated forrecoverability whenever events or changes in circumstances indicate that anasset may have been impaired.  Inevaluating an asset for recoverability, the Company estimates the future cashflows expected to result from the use of the asset and eventualdisposition.  If the sum of the expectedfuture cash flows (undiscounted and without interest charges) is less than thecarrying amount of the asset, an impairment loss, equal to the excess of thecarrying amount over the fair market value of the asset is recognized.

 

42

----

 

*Accruals* — Management makes estimates andassumptions that affect amounts reported in the consolidated financialstatements and accompanying notes. These estimates are based upon variousfactors such as the number of units sold, historical and anticipated resultsand data received from third party vendors. Actual results could differ fromthese estimates. Our most significant estimates include those related to thecosts of vendor drop shipments, sales returns and allowances, cooperativeadvertising and customer rebate reserves, and other vendor and employee relatedcosts.

 

*                       **ProductWarranties* — Provisions for estimated future expenses relatingto product warranties for the Company’s assembled PCs are recorded as cost ofsales when revenue is recognized. Liability estimates are determined based onmanagement judgment considering such factors as the number of units sold,historical and anticipated rates of warranty claims and the likely current costof corrective action.  The changes inaccrued product warranties were as follows (in thousands):

 

| ** **                 | ** ** | **Year ended December 31** | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance, beginning of year |       | $                               | 1,061      |   | $ | 1,316 |   | $ | 2,011 |   |
| Charged to expense         |       | 1,400                           |       | 1,556 |   | 21 |   |
| Deductions                 |       | (1,547                          | )          | (1,811 | ) | (716 | ) |
| Balance, end of year       |       | $                               | 914        |   | $ | 1,061 |   | $ | 1,316 |   |

 

                        *IncomeTaxes* — Deferred tax assets and liabilities arerecognized for the effect of temporary differences between the book and taxbases of recorded 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 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.

 

                        *RevenueRecognition and Accounts Receivable* — The Company recognizessales of products, including shipping revenue, when persuasive evidence of anorder arrangement exists, delivery has occurred, the sales price is fixed ordeterminable and collectibility is reasonably assured. Generally, thesecriteria are met at the time the product is received by the customers whentitle 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.

 

                          Accountsreceivable are shown in the consolidated balance sheets net of allowances fordoubtful collections and subsequent customer returns.

 

*Advertising Costs* — Advertising costs,consisting primarily of catalog preparation, printing and postage expenditures,are amortized over the period of catalog distribution during which the benefitsare expected, generally one to six months. Expenditures relating to television and local radio advertising areexpensed in the period the advertising takes place.

 

Netadvertising expenses were $47.2 million, $37.4 million and $39.4 million during2007, 2006 and 2005 are included in the accompanying Consolidated Statements ofOperations.  The Company utilizesadvertising programs to support vendors, including catalogs, internet andmagazine advertising, and receives payments and credits from vendors, includingconsideration pursuant to volume incentive programs and cooperative marketingprograms. The Company accounts for consideration from vendors as a reduction ofcost of sales unless certain conditions are met showing that the funds are usedfor specific, incremental, identifiable costs, in which case the considerationis accounted for as a reduction in the related expense category, such asadvertising expense.  The amount ofvendor consideration recorded as a reduction of selling, general andadministrative expenses totaled $42.6 million, $39.6 million and $39.1 millionduring 2007, 2006 and 2005.

 

Prepaidexpenses as of December 2007 and 2006 include deferred advertising costsof $3.9 million and $3.5 million which are reflected as an expense during theperiods benefited, typically the subsequent fiscal quarter.

 

*Stockbased compensation*— Effective January 1, 2006, the Companyadopted 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-datefair value estimated in accordance with the original provisions of SFAS 123,and (b) compensation cost for the vested portion of share-based paymentsgranted subsequent to January 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS 123(R). Results for priorperiods have not been restated.

 

The fair value of employee share options isrecognized in expense over the vesting period of the options, using the gradedattribution method.  The fair value ofemployee share options is determined on the date of grant using theBlack-Scholes option pricing model. The Company has used historical volatilityin its estimate of expected volatility. The expected life represents the periodof time (in years) for which the options granted are expected to beoutstanding. The Company used the simplified method for determining expectedlife as permitted in SEC Staff Accounting Bulletin 107 for options qualifying forsuch treatment (“plain-vanilla” options) due to the limited history the Companycurrently has with option exercise activity. The risk-free interest rate isbased on the U.S. Treasury yield curve.

 

43

----

 

The Company receives an income tax deduction forstock options exercised by employees in the United States equal to the excessof the market value of our common stock on the date of exercise over the optionprice. Prior to the adoption of SFAS 123(R), the income tax benefit from theexercise of stock options was presented as a component of cash flow fromoperating activities. SFAS 123(R) requires the excess tax benefits (taxbenefits resulting from tax deductions in excess of compensation costrecognized) to be classified as a cash flow provided by financing activities.

 

In periods prior to 2006, the Company followedthe accounting provisions of Accounting Principles Board (“APB”) Opinion 25, “Accountingfor Stock Issued to Employees” for stock-based compensation and provided thepro forma disclosures required under SFAS 148, “Accounting for Stock-basedCompensation — Transition and Disclosure.” No stock-based employee compensation was reflected in net income (loss),as all options granted under the plans had an exercise price equal to themarket value of the underlying stock on the date of grant (See Note 7).

 

                          *NetIncome Per Common Share* — Net income per commonshare basic is calculated based upon the weighted average number of commonshares outstanding during the respective periods presented. Net income percommon share diluted is calculated based upon the weighted average number ofcommon shares outstanding and included the equivalent shares for dilutivesecurities outstanding during the respective periods, where the effect isanti-dilutive. The dilutive effect of outstanding options issued by the Companyis reflected in net income per share - diluted using the treasury stock method.

 

                          Under thetreasury stock method, options will only have a dilutive effect when theaverage market price of common stock during the period exceeds the exerciseprice of the options. Equivalent common shares of 1,087,000, 989,000 and842,000 in 2007, 2006 and 2005 were included for the diluted calculation. Theweighted average number of stock options outstanding excluded from thecomputation of diluted earnings per share was 0, 36,000 and 503,000 in 2007,2006 and 2005 due to their antidilutive effect.

 

                          *ComprehensiveIncome* — Comprehensive income consists of net income andforeign currency translation adjustments and is included in the ConsolidatedStatements of Shareholders’ Equity. Comprehensive income was $74,011,000, $51,435,000 and $8,414,000 in2007, 2006 and 2005, respectively.

 

*        Employee Benefit Plans-*The Company’s U.S. subsidiaries participate in a defined contribution401(k) plan covering substantially all U.S. employees.  Employees may invest 1% or more of theireligible compensation, limited to maximum amounts as determined by the InternalRevenue Service. The Company provides a matching contribution to the plan,determined as a percentage of the employees’ contributions.  Aggregate expense to the Company forcontributions to such plans was approximately $614,000, $514,000 and $455,000in 2007, 2006 and 2005.

 

*Fair Value of Financial Instruments* - Financial instrumentsconsist primarily of investments in cash and cash equivalents, trade accountsreceivable, accounts payable and debt obligations.  The Company estimates the fair value offinancial instruments based on interest rates available to the Company and bycomparison to quoted market prices.  At December 31,  2007 and 2006, 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. The carrying amounts of the notes payable to banks and the term loanpayable are considered to be representative of their respective fair values astheir interest rates are based on market rates. The estimated fair value of theCompany’s mortgage loan payable was $8.8 million at December 31, 2005.

 

                          *Concentrationof Credit Risk**—*Financial instruments thatpotentially subject the Company to concentrations of credit risk consist ofcash, cash equivalents and accounts receivable. The Company’s excess cash balances are invested with high credit qualityissuers.  Concentrations of credit riskwith respect to accounts receivable are limited due to the large number ofcustomers and their geographic dispersion comprising the Company’s customerbase. The Company also performs on-going credit evaluations and maintainsallowances for potential losses as warranted.

 

                        *Adoption of New Accounting Standard*— Effective January 1,2007, the Company adopted the provisions of FASB Interpretation 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties inincome tax law.  This interpretationprescribes a comprehensive model for the financial statement recognition,measurement, presentation and disclosure of uncertain tax positions taken orexpected to be taken in income tax returns. For those benefits to be recognized, a tax position must bemore-likely-than-not to be sustained 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.

 

TheCompany or one of its subsidiaries file U.S. federal income tax returns and taxreturns in various state and foreign jurisdictions in Canada and WesternEurope.  The Company’s U.S. federalincome tax returns have been examined by the Treasury Department through2001.  State and local tax returns havebeen examined through various dates from 2001 to 2005 with ongoing taxexaminations pending in several states. Included in the Company’s FIN 48 liability is a current liability of$2,264,000 for the expected taxes and interest and penalties relating topending state tax examinations involving disputed allocations of income; noissues have been raised to date with respect to the other pending state taxexaminations.

 

44

----

 

Withthe exception of the current liability of $2,264,000, the Company’s remainingtax liabilities and interest with respect to unrecognized tax benefits havebeen reclassified to other non-current liabilities on the balance sheet becausepayment of cash is not anticipated within one year.  This amount at January 1, 2007aggregates to approximately $1,115,000, including $305,000 for interest andpenalties.  The Company’s continuingpractice is to record interest and penalties related to tax positions in incometax expense in its consolidated statement of operations.

 

                        During 2007, the Company resolved a statetax issue by paying an assessment of approximately $1,901,000 (including$169,000 in interest) to a state taxing authority.  As of December 2007 the Company’sliability for unrecognized tax benefits was approximately $1,547,000 (includinginterest and penalties of approximately $632,000).

 

                          *RecentAccounting Pronouncements*

 

                        In September 2006, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 157 “Fair Value Measurements” which is effective forfiscal years beginning after November 15, 2007. This statement was issuedto increase consistency and comparability in fair value measurements and forexpanded disclosures about fair value measurements. The Company is currentlyevaluating the potential impact, if any, of this pronouncement.

 

                        In February 2007, the FASB issuedSFAS No. 159 “The Fair Value Option for Financial Assets and FinancialLiabilities (including an amendment of FASB Statement No. 115)” which iseffective for fiscal years beginning after November 15, 2007. Thisinterpretation was issued to improve financial reporting by providing entitieswith the opportunity to mitigate volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. The Company is currently evaluating thepotential impact, if any, of this pronouncement.

 

                        In December 2007, the FASB issuedSFAS No. 141R, “Business Combinations,” which replaces FASB Statement 141.SFAS No.141R retains the requirement that the acquisition method of accountingbe used for business combinations. The objective of SFAS No. 141R is toimprove the relevance, representational faithfulness and comparability thatreporting entities provide in their financial reports about businesscombinations and their effects. SFAS 141R establishes principles andrequirements for how an acquirer 1) recognizes and measures identifiable assetsacquired, the liabilities assumed and any noncontrolling interest in the acquiree,2) recognizes and measures the goodwill acquired in the combination or a gainfrom a bargain purchase and 3) determines what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination. SFAS No. 141R is effective forbusiness combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning after December 15,2008. The Company is currently evaluating the potential impact, if any, of thispronouncement.

 

                        In December 2007, the FASB issuedSFAS No. 160, “Accounting and Reporting of Noncontrolling Interest” (“SFASNo. 160”). The objective of SFAS 160 is to improve the relevance,comparability and transparency of the financial information that reportingentities provide related to noncontrolling interests, sometimes referred to asminority interests. SFAS No. 160 requires, among other things, thatnoncontrolling interests be shown separately in the consolidated entity’sequity section of the balance sheet. SFAS No. 160 also establishesaccounting and reporting standards for ownership interest in subsidiariesheld by parties other than the parent, for presentation of amounts ofconsolidated net income attributable to the parent and the noncontrollinginterest, for consistency in accounting for changes in a parent’s ownershipinterest when the parent retains a controlling interest, for the valuation ofretained noncontrolling equity interests when a subsidiary is deconsolidatedand for providing sufficient disclosure that identifies and distinguishes theinterests of the parent and the interests of the noncontrolling owners. SFAS No. 160is effective beginning January 1, 2009. The Company is currentlyevaluating the potential impact, if any, of this pronouncement.

 

**2.****               ****PROPERTY,PLANT AND EQUIPMENT**

 

                          Property, plant andequipment, net consist of the following (in thousands):

 

| ** **                                                                 | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                 | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Land and buildings                                                         |       | $                     | 33,950     |   | $ | 33,525 |   |
| Furniture and fixtures,  office, computer and other equipment and software |       | 82,838                |       | 77,478 |   |
| Leasehold improvements                                                     |       | 12,748                |       | 12,762 |   |
|                                                                       |       | 129,536               |       | 123,765 |   |
| Less accumulated  depreciation and amortization                            |       | 81,056                |       | 75,179 |   |
| Property, plant and  equipment, net                                        |       | $                     | 48,480     |   | $ | 48,586 |   |

 

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

 

|                                                          |   | **2007** |   | **2006** |   |
|---------------------------------------------------------------|--------|----------|--------|----------|--------|
| Furniture and fixtures,  office, computer and other equipment |   | $        | 2,609  |     | $      | 2,358 |   |
| Less: Accumulated  amortization                               |   | 1,813    |   | 1,270    |   |
|                                                          |   | $        | 796    |     | $      | 1,088 |   |

 

45

----

 

**3.****               ****RELATEDPARTY TRANSACTIONS**

 

                          TheCompany leased its headquarters office/warehouse facility from affiliatesduring 2007, 2006 and 2005 (see Note 10). Rent expense under the leaseaggregated $612,000 in each of those years. The Company believes that thesepayments were no higher than would be paid to an unrelated lessor forcomparable space.

 

**4.     CREDIT FACILITIES**

 

In October 2005, the Company amended and restated its $70,000,000revolving credit agreement with a group of financial institutions to increasethe amount available to $120,000,000 (which may be increased by up to $30million, subject to certain conditions) and to provide for borrowings by theCompany’s United States and United Kingdom subsidiaries. The borrowings aresecured by all of the domestic and United Kingdom accounts receivable, thedomestic inventories of the Company, the Company’s United Kingdom headquartersbuilding and 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, 2007) plus 0.25% or the bank’s daily LIBOR rate (at December 31,2007) 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 requiresthat a 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, 2007. As of December 31,2007, eligible collateral under the agreement was $106.9 million and totalavailability was $97.0 million. There were outstanding letters of credit of$9.7 million and there were no outstanding advances.

 

TheCompany’s Netherlands subsidiary maintains a €5 million ($7.4 million at the December 31,2007 exchange rate) credit facility with a local financial institution.Borrowings under the facility are secured by the subsidiary’s accountsreceivable and are subject to a borrowing base limitation of 85% of theeligible accounts. At December 31, 2007 and, 2006 was €2.6 million and€2.2 million ($3.9 million and $3.0 million) of borrowings outstanding underthis line with interest payable at a rate of 7.05%. The facility expires in September 2008.

 

Theweighted average interest rate on short-term borrowings was****7.5%,7.8%, and 6.4% in 2007, 2006 and 2005.

 

**5.     ACCRUED EXPENSES AND OTHERCURRENT LIABILITIES**

 

         Accrued expenses andother current liabilities consist of the following (in thousands):

 

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Payroll and employee  benefits |       | $                     | 21,850     |   | $ | 17,151 |   |
| Income taxes payable           |       | 2,297                 |       | 2,327 |   |
| Freight                        |       | 10,908                |       | 6,106 |   |
| Deferred revenue               |       | 5,704                 |       | 2,653 |   |
| Other                          |       | 41,811                |       | 47,451 |   |
|                           |       | $                     | 82,570     |   | $ | 75,688 |   |

 

**6.     LONG-TERM DEBT**

 

**        **Long-term debtconsists of (in thousands):

 

| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Capitalized equipment  lease obligations |       | $                     | 703        |   | $ | 1,031 |   |
| Less: current portion                    |       | 449                   |       | 548 |   |
|                                     |       | $                     | 254        |   | $ | 483 |   |

 

         The aggregate maturitiesof long-term debt outstanding at December 31, 2007 are as follows (inthousands):

 

| ** ** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Maturities |       | $        | 449        |     | $          | 173      |       | $        | 71         |     | $          | 10 |   | $ | 0 |   |
|            |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

46

----

 

**7.     STOCK-BASED COMPENSATION PLANS**

 

                          The Company currently hasfour equity compensation plans which reserve shares of common stock forissuance to key employees, directors, consultants and advisors to theCompany.   The following is a descriptionof these plans:

 

*The 1995 Long-term Stock Incentive Plan* - This plan,adopted in 1995, allowed the Company to issue qualified, non-qualified anddeferred compensation stock options, stock appreciation rights, restrictedstock and restricted unit grants, performance unit grants and other stock basedawards authorized by the Compensation Committee of the Board of Directors.  Options issued under this plan expire tenyears after the options are granted. The ability to grant new awardsunder this plan ended on December 31, 2005 but awards granted prior tosuch date continue until their expiration. A total of 862,867 options wereoutstanding under this plan as of December 31, 2007.

 

*The 1995 Stock Option Plan for Non-Employee Directors* - This plan,adopted in 1995, provides for automatic awards of non-qualified options todirectors of the Company who are not employees of the Company or itsaffiliates. All options granted under this plan will have a ten year term fromgrant date and are immediately exercisable. A maximum of 100,000 shares may begranted for awards under this plan. The ability to grant new awards under this plan ended on October 12,2006 but awards granted prior to such date continue until their expiration. Atotal of 39,000 options were outstanding under this plan as of December 31,2007.

 

*The**1999 Long-term StockIncentive Plan, as amended (“1999 Plan”)* - This planwas adopted on October 25, 1999 with substantially the same terms andprovisions as the 1995 Long-term Stock Incentive Plan.  A maximum of 5.0 million shares may begranted under this plan.  The maximumnumber of shares granted per type of award to any individual may not exceed1,500,000 in any calendar year and 3,000,000 in total.  No award shall be granted under this planafter December 31, 2009. Restricted stock grants and common stock awardsreduce stock options otherwise available for future grant. A total of 1,739,070options and 600,000 restricted stock units were outstanding under this plan asof December 31, 2007.

 

***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, 2007.

** **

Shares issued under our share-basedcompensation plans are usually issued from shares of our common stock held inthe treasury.

 

*Adoption of SFAS 123(R)*

 

EffectiveJanuary 1, 2006, the Company adopted the provisions of SFAS 123(R), usingthe modified-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). Results for prior periods have not been restated.

 

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 Staff AccountingBulletin 107 for options qualifying for treatment (“plain-vanilla” options) dueto the limited history the Company currently has with option exercise activity.The risk-free interest rate is based on the U.S. Treasury yield curve.

 

Compensation cost related to non-qualified stock options recognized inoperating results (selling, general and administrative expense) for the yearsended December 31, 2007 and 2006 was $3,435,000 and $1,756,000,respectively. The related future income tax benefits recognized for the yearsended December 31, 2007 and 2006 were $1,147,000 and $599,000,respectively.

 

47

----

 

*Stock options*

 

Thefollowing table presents the weighted-average assumptions used to estimate thefair value of options granted in 2007, 2006 and 2005:

 

 

| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |     |       |
| Expected annual dividend  yield |       | 0        | %          | 0        | %          | 0        | %          |
| Risk-free interest rate         |       | 4.93     | %          | 4.76     | %          | 4.5      | %          |
| Expected volatility             |       | 71.2     | %          | 78.2     | %          | 79       | %          |
| Expected life in years          |       | 6.2      |       | 6.0      |       | 5.2      |       |

 

The following table summarizes information concerning outstanding andexercisable options:

 

| *** ***                                                   | *** *** | **Weighted Average** | *** *** |
|----------------------------------------------------------------|--------------|----------------------|--------------|
| ** **                                                     | ** **   | **2007**             | ** **   | **2006** | ** ** | **2005** | ** ** |
| ** **                                                     | ** **   | **Shares**           | ** **   | **Exercise  Price** | ** ** | **Shares** | ** ** | **Exercise  Price** | ** ** | **Shares** | ** ** | **Exercise  Price** | ** ** |
| Outstanding at beginning of year                               |         | 2,629,076            |         | $ | 4.69 |   | 2,657,419 |   | $ | 3.93 |   | 3,241,251 |   | $ | 3.96 |   |
| Granted                                                        |         | 699,050              |         | $ | 19.45 |   | 479,334 |   | $ | 8.01 |   | 75,000 |   | $ | 6.25 |   |
| Exercised                                                      |         | (545,815             | )            | $ | 5.19 |   | (480,203 | ) | $ | 3.33 |   | (328,374 | ) | $ | 2.37 |   |
| Cancelled or expired                                           |         | (126,374             | )            | $ | 15.64 |   | (27,474 | ) | $ | 12.84 |   | (330,458 | ) | $ | 6.35 |   |
| Outstanding at end of year                                     |         | 2,655,937            |         | $ | 7.95 |   | 2,629,076 |   | $ | 4.69 |   | 2,657,419 |   | $ | 3.93 |   |
|                                                           |         |                 |         |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at year end                                |         | 1,645,639            |         |   |   | 1,891,426 |   |   |   | 1,891,155 |   |   |   |
| Weighted average fair value per option granted during the year |         | $                    | 13.19        |   |   |   |   | $ | 5.64 |   |   |   |   | $ | 4.21 |   |   |   |
|                                                                |              |                      |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 The total intrinsic value ofoptions exercised and share based payments made was $6,517,000, $3,501,000 and$679,000, respectively, for the years ended December 31 2007, 2006 and2005.

 

The following table summarizes information about options vested andexercisable or nonvested that are expected to vest (nonvested outstanding lessexpected forfeitures) at December 31, 2007:

 

| **Range of Exercise Prices**                                                   | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **WeightedAverage  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic  Value  (in thousands)** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| $   1.76   to  $   5.00 |       | 996,682                 |       | $                                      | 2.11       |                                             | 4.67       |                                            | $          | 18,345 |   |
| $   5.01   to  $ 15.00            |       | 1,005,330               |       | $                                      | 6.40       |                                             | 6.50       |                                            | 14,282     |   |
| $ 15.01   to  $ 20.00                       |       | 486,338                 |       | $                                      | 19.01      |                                             | 9.41       |                                            | 650        |   |
| $ 20.01   to  $ 20.15                       |       | 100,000                 |       | $                                      | 20.15      |                                             | 9.11       |                                            | 37         |   |
| $   1.76   to  $ 20.15            |       | 2,588,350               |       | $                                      | 7.95       |                                             | 6.44       |                                            | $          | 33,314 |   |

 

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 the year December 31, 2007 and the exercise price)that would have been received by the option holders had all options beenexercised on December 31, 2007. This value will change based on the fairmarket value of the Company’s common stock.

 

The following table reflects the activity for all unvested stockoptions during the year ended December 31, 2007:

 

| ** **                          | ** ** | **For Shares** | ** ** | **Weighted Average  Grant-Date Fair Value** | ** ** |
|-------------------------------------|------------|----------------|------------|---------------------------------------------|------------|
| Unvested at  January 1, 2007   |       | 737,650        |       | $                                           | 3.71       |   |
| Granted                             |       | 699,050        |       | $                                           | 13.19      |   |
| Vested                              |       | (270,903       | )          | $                                           | 2.48       |   |
| Forfeited                           |       | (67,999        | )          | $                                           | 4.68       |   |
| Unvested at  December 31, 2007 |       | 1,097,798      |       | $                                           | 9.99       |   |

 

At December 31, 2007, there was approximately $5,500,000 ofunrecognized compensation costs related to unvested stock options, which isexpected to be recognized over a weighted average period of 1.6 years. Thetotal fair value of stock options vested during the years ended December 31,2007, 2006 and 2005 was $671,000, $1,502,000 and $761,000, respectively.

 

48

----

 

*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 2007 and 2006 and $1,005,000 in 2005. Share-basedcompensation expense for restricted stock issued to Directors was $75,000 ineach of the years ended December 31, 2007 and 2006.

 

Under the provisions of SFAS 123(R), the balance sheet recognition ofunearned compensation is no longer allowed. As of January 1, 2006, thebalance of Unearned Restricted Stock Compensation was reversed into AdditionalPaid-in Capital on the Company’s balance sheet. As of December 31, 2007,there was unrecognized stock-based compensation of $3.0 million related to therestricted stock award, which is expected to be recognized over aweighted-average period of 5.0 years.

 

*Prior to the Adoption of SFAS 123(R)*

 

Prior to 2006, the Company elected to follow the accounting provisionsof APB Opinion 25 for stock-based compensation and to provide the pro formadisclosures required under SFAS 148, “Accounting for Stock-Based Compensation —Transition and Disclosure.” Accordingly, the Company did not recognizecompensation expense for stock option grants made at an exercise price equal toor in excess of the market value of the underlying stock on the date of grantfor periods prior to January 1, 2006. The following table illustrates theeffect on net income per share had compensation costs of the plans beendetermined under a fair value alternative method as stated in SFAS 123, “Accountingfor Stock-Based Compensation” (in thousands, except per share data):

 

| ** **                                                                                                              | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Net income — as reported                                                                                           |       | $        | 11,441     |   |
| Add: Stock-based employee compensation expense included in reported  net income, net of related tax effects             |       | 647      |       |
| Deduct: Stock-based employee compensation expense determined under  fair value based method, net of related tax effects |       | 915      |       |
| Pro forma net income                                                                                                    |       | $        | 11,173     |   |
|                                                                                                                    |       |     |       |
| Basic net income per common share:                                                                                      |       |     |       |
| Net income — as reported                                                                                           |       | $        | .33        |   |
| Net income — pro forma                                                                                             |       | $        | .32        |   |
|                                                                                                                    |       |     |       |
| Diluted net income per common share:                                                                                    |       |     |       |
| Net income — as reported                                                                                           |       | $        | .31        |   |
| Net income — pro forma                                                                                             |       | $        | .31        |   |

 

                          The weightedaverage remaining contractual life of the stock options outstanding was 6.7years at December 31, 2005.

 

49

----

** **

 

**8.     RESTRUCTURING AND OTHERCHARGES**

 

The Company periodically assesses its operations to ensure that theyare efficient, aligned with market conditions and responsive to customer needs.During the year ended December 31, 2005, management approved and implementedrestructuring actions which included workforce reductions and facilityconsolidations. The following table summarizes the amounts recognized by theCompany as restructuring and other charges for the periods presented (inthousands):

 

| **Years ended December 31,**                | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|
| 2003 United States  warehouse consolidation plan |       | $        | 122        |   |
| 2002 United Kingdom  consolidation plan          |       | (93      | )          |
| Litigation settlements                           |       | 300      |       |
| Other severance and exit  costs                  |       | 3,822    |       |
| Total restructuring and  other charges           |       | $        | 4,151      |   |

 

*2003 United States Warehouse Consolidation Plan*

In the fourth quarter of 2003, the Company implemented a plan toconsolidate the warehousing facilities in its United States computer suppliesbusiness. The Company recorded $122,000 of additional severance costs in 2005 relatedto this plan.

 

*2002 United Kingdom Consolidation Plan*

In 2002 the Company implemented a restructuring plan to consolidate theactivities of three United Kingdom locations into a new facility constructedfor the Company. During 2005 the Company recorded $93,000 of gain related tothis plan as actual costs were less than anticipated.

 

*Litigation Settlements*

In May 2006, the Company entered into a stipulation of settlementwith all of the plaintiffs who had filed derivative complaints in 2005 allegingmisconduct in connection with the Company’s restatement of its 2004 financialresults (see Note 10).

 

*Other Severance and Exit Costs*

The Company recorded restructuring costs of $3.8million during 2005 in Europe in connection with workforce reductions and facilityexit costs. In 2005, these costs were comprised of employee severance costs.

 

The following table summarizes the components of the accruedrestructuring charges and the movements within these components during 2007,2006 and 2005 (in thousands). The balance of the restructuring reserves isincluded in the Consolidated Balance Sheets within accrued expenses and othercurrent liabilities.

 

| ** **                          | ** ** | **Severance and  Personnel Costs** | ** ** | **Other  Exit Costs** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|-----------------------|------------|-----------|------------|
| Balance as of  January 1, 2005 |       | $                                  | 633        |                  | $          | 1,396     |       | $ | 2,029 |   |
| Charged to expense in 2005          |       | 3,945                              |       | (93                   | )          | 3,852     |       |
| Amounts utilized                    |       | (4,325                             | )          | (1,038                | )          | (5,363    | )          |
| Balance at  December 31, 2005  |       | 253                                |       | 265                   |       | 518       |       |
| Amounts utilized                    |       | (253                               | )          | (176                  | )          | (429      | )          |
| Balance at  December 31, 2006  |       | $                                  | 0          |                  | $          | 89        |       | $ | 89 |   |
| Amounts utilized                    |       | (0                                 | )          | (89                   | )          | (89       | )          |
| Balance at  December 31, 2007  |       | $                                  | 0          |                  | $          | 0         |       | $ | 0 |   |

 

 

50

----

 

 

**9.****               ****INCOMETAXES**

 

                          The componentsof income (loss) before income taxes are as follows (in thousands):

 

| ** **    | ** ** | **Year Ended December 31,** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States |       | $                                | 81,832     |   | $ | 53,587 |   | $ | 38,912 |   |
| Foreign       |       | 18,191                           |       | 16,108 |   | (6,038 | ) |
| Total         |       | $                                | 100,023    |   | $ | 69,695 |   | $ | 32,874 |   |

 

                          The provision(benefit) for income taxes consists of the following (in thousands):

 

| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current:       |       |                             |       |   |   |   |   |
| Federal        |       | $                                | 26,174     |   | $ | 15,437 |   | $ | 10,499 |   |
| State          |       | 4,842                            |       | 3,179 |   | 3,146 |   |
| Foreign        |       | 5,632                            |       | 3,678 |   | 1,560 |   |
| Total current  |       | 36,648                           |       | 22,294 |   | 15,205 |   |
| Deferred:      |       |                             |       |   |   |   |   |
| Federal        |       | (1,004                           | )          | 1,235 |   | (265 | ) |
| State          |       | 277                              |       | 511 |   | (490 | ) |
| Foreign        |       | (5,379                           | )          | 508 |   | 6,983 |   |
| Total deferred |       | (6,106                           | )          | 2,254 |   | 6,228 |   |
| TOTAL          |       | $                                | 30,542     |   | $ | 24,548 |   | $ | 21,433 |   |

 

Incometaxes are accrued and paid by each foreign entity in accordance with applicablelocal regulations.

 

Areconciliation of the difference between the income tax expense (benefit) andthe computed income tax expense based on the Federal statutory corporate rateis as follows (in thousands):

 

| ** **                                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                               | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Income tax at Federal statutory rate                                                                     |       | $                                | 35,008     |   | $ | 24,407 |   | $ | 11,506 |   |
| State and local income taxes (benefits) and changes in valuation  allowances, net of federal tax benefit |       | 3,332                            |       | 2,577 |   | 1,311 |   |
| Foreign taxes at rates different from the U.S. rate                                                      |       | (2,260                           | )          | 1,199 |   | 1,703 |   |
| Changes in valuation allowances for foreign deferred tax assets                                          |       | (6,184                           | )          | (2,260 | ) | 10,194 |   |
| Tax credits                                                                                              |       | —                           |       | (718 | ) | (197 | ) |
| Non-deductible items                                                                                     |       | 963                              |       | — |   | — |   |
| Adjustment for prior year taxes                                                                          |       | (593                             | )          | (760 | ) | (3,205 | ) |
| Other items, net                                                                                         |       | 276                              |       | 103 |   | 121 |   |
|                                                                                                     |       | $                                | 30,542     |   | $ | 24,548 |   | $ | 21,433 |   |

 

 

51

----

 

 

                          The deferredtax assets (liabilities) are comprised of the following (in thousands):

 

| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Current:                                    |       |                  |       |   |   |
| Deductible assets                           |       | $                     | (773       | ) | $ | (876 | ) |
| Accrued expenses and other liabilities      |       | 8,379                 |       | 8,063 |   |
| Inventory                                   |       | 2,374                 |       | 1,596 |   |
| Other                                       |       | (524                  | )          | (318 | ) |
| Valuation allowances                        |       | (96                   | )          | (738 | ) |
| Total current assets, net                   |       | 9,360                 |       | 7,727 |   |
|                                        |       |                  |       |   |   |
| Non-current:                                |       |                  |       |   |   |
| Net operating loss and credit carryforwards |       | 12,462                |       | 15,881 |   |
| Accelerated depreciation                    |       | 3,494                 |       | 3,520 |   |
| Intangible and other assets                 |       | 6,791                 |       | 8,453 |   |
| Other                                       |       | 3,196                 |       | 3,328 |   |
| Valuation allowances                        |       | (7,291                | )          | (17,141 | ) |
| Subtotal non-current assets, net            |       | 18,652                |       | 14,041 |   |
| TOTAL                                       |       | $                     | 28,012     |   | $ | 21,768 |   |

 

                          The Company hasnot provided for federal income taxes applicable to the undistributed earningsof its foreign subsidiaries of approximately $33.8 million as of December 31,2007, since these earnings are indefinitely reinvested. The Company has foreignnet operating loss carryforwards which expire through 2022 except for carryforwardsin the United Kingdom which have no expiration. The Company records these benefits as assets to the extent thatutilization of such assets is more likely than not; otherwise, a valuationallowance has been recorded.  The Companyhas also provided valuation allowances for certain state deferred tax assetsand net operating loss carryforwards where it is not likely they will berealized.

 

                          In the fourthquarter of 2005, the Company recorded a valuation allowance of $10.2 millionrelated to carryforward losses and deferred tax assets in the United Kingdom.The Company’s United Kingdom subsidiary had recorded losses and has beenaffected by restructuring activities in recent years.  These losses and the loss incurred for theyear ended December 31, 2005 represented evidence for management toestimate that a full valuation allowance for the net deferred tax assets wasnecessary. In the fourth quarter of 2005, the Company also recorded an incometax benefit of $2.7 million as a result of a favorable decision received inconnection with a petition submitted in connection with audit assessments madein 2002 and 2004 in a foreign jurisdiction. In the fourth quarter of 2007 theCompany’s United Kingdom subsidiary emerged from its cumulative loss position andthe remaining valuation allowance against the deferred tax assets of the UnitedKingdom of approximately $5.9 million was reversed. In the fourth quarter of2007 the Company recorded a valuation allowance of approximately $1.7 millionagainst the deferred tax assets of its German subsidiary as the result of theGerman subsidiary entering a cumulative loss position and uncertainty as towhether or not future earnings will be sufficient to enable utilization ofthose assets.

 

                          As of December 31,2007, the valuation allowances of approximately $7.4 million related to netoperating loss carryforwards in foreign jurisdictions of $6.0 million, $1.2million for state net operating loss carryforwards and $0.2 million for otherstate deductible temporary differences. During the year ended December 31,2007, valuation allowances decreased $10.5 million primarily as a result of thereversal of the valuation allowance in the United Kingdom, utilization of netoperating losses and timing differences in the United Kingdom and utilizationof state net operating loss deductions in the United States.  Valuation allowances decreased $2.3 millionin 2006 for carryforward losses utilized for which valuation allowances hadbeen previously provided. As of December 31, 2006, the valuationallowances of $17.9 million included $11.4 million related to net operatingloss carryforwards and $3.2 million for other deductible temporary differencesin foreign jurisdictions, $3.0 million for state net operating losscarryforwards and $0.3 million for other state deductible temporarydifferences. During the year ended December 31, 2006, valuation allowancesincreased $2.6 million as a result of additional losses incurred in certainstate jurisdictions and adjustments of prior year’s allowances in foreignjurisdictions. As of December 31, 2005, the valuation allowances of $15.3million included $11.1 million related to net operating loss carryforwards and$2.3 million for other deductible temporary differences in foreignjurisdictions and $1.5 million for state net operating loss carryforwards and$0.4 million for other state deductible temporary differences. During the yearended December 31, 2005, valuation allowances increased $5.6 million as aresult of additional losses incurred in foreign and state jurisdictions, net ofreductions resulting from changes in deferred tax assets due to changes in taxlaws. Valuation allowances decreased $1,301,000 in 2005 for carryforward lossesutilized for which valuation allowances had been previously provided.

 

                          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 1996 through 2002

 

 

52

----

 

                        were audited by the Internal RevenueService. The outcome of the audit did not have a material impact on the Company’sconsolidated financial statements.  TheCompany has not signed any consents to extend the statute of limitations forany 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 for years after 2000, in France for years after 2004,in Italy for years after 2002 and in Germany for years after 2004.

 

                        Effective January 1, 2007, theCompany adopted the provisions of FASB Interpretation 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties inincome tax law.  This interpretationprescribes a comprehensive model for the financial statement recognition,measurement, presentation and disclosure of uncertain tax positions taken orexpected to be taken in income tax returns. For those benefits to be recognized, a tax position must bemore-likely-than-not to be sustained upon examination by taxingauthorities.  At January 1, 2007,the Company had a liability for unrecognized tax benefits of $3,379,000(including interest and penalties of $731,000) of which $283,000 was charged toretained earnings at January 1, 2007. Of this total, $2,586,000 (net of the federal benefit on state issues)represents the amount of unrecognized tax benefits that, if recognized, wouldfavorably affect the effective income tax rate in any future periods. At December 31,2007 the Company had a liability for unrecognized tax benefits of $1,547,000(including interest and penalties of $631,000). Of this total, $1,467,000 (netof the federal benefit on state issues) represents the amount of unrecognizedtax benefits that, if recognized, would favorably affect the effective incometax rate in any future periods. The following table details activity of theCompany’s uncertain tax positions during 2007:

 

| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2007**              | ** ** |
| Opening balance  January 1,2007                      |       | $                     | 2,648      |   |
| Decreases related to  settlements with taxing authorities |       | (1,732                | )          |
| Closing balance  December 31, 2007                   |       | $                     | 916        |   |

 

                        Interestand penalties of approximately $69,000 related to unrecognized tax benefitswere expensed in 2007 and are included in income tax expense. Within the nexttwelve months the Company believes it reasonably possible that certain taxpositions may be reduced. The specific positions that may be reduced arerelated to certain ongoing state and foreign tax audits. The Company estimatesthat the unrecognized benefits may be reduced by $1.5 million.

 

**10.****        ****COMMITMENTS, CONTINGENCIES ANDOTHER MATTERS**

 

                          *Leases***- The Companyis obligated under operating lease agreements for the rental of certain officeand warehouse facilitiesand equipment which expire at various dates through September 2026.The Company currently leases one facility in New York from an entity owned bythe Company’s three principal shareholders and senior executive officers (seeNote 3). The Company also acquires certain computer and communicationsequipment pursuant to capital lease obligations.

 

                          At December 31,2007, the future minimum annual lease payments for capital leases and relatedand third-party operating leases were as follows (in thousands):

 

| ** **                                                                           | ** ** | **Capital  Leases** | ** ** | **Third Party  Operating  Leases** | ** ** | **Related Party  Operating  Lease** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------------------|------------|------------------------------------------|------------|-----------|------------|
|                                                                                 |       |                |       |                               |       |                                     |       |      |       |
| 2008                                                                                 |       | $                   | 471        |                               | $          | 13,589                                   |       | $         | 860        |   | $ | 14,920 |   |
| 2009                                                                                 |       | 186                 |       | 13,204                             |       | 895                                      |       | 14,285    |       |
| 2010                                                                                 |       | 73                  |       | 10,699                             |       | 932                                      |       | 11,704    |       |
| 2011                                                                                 |       | 10                  |       | 9,651                              |       | 970                                      |       | 10,631    |       |
| 2012                                                                                 |       |                |       | 9,089                              |       | 1,010                                    |       | 10,099    |       |
| 2013-2017                                                                            |       |                |       | 32,269                             |       | 5,706                                    |       | 37,975    |       |
| 2018-2022                                                                            |       |                |       | 17,644                             |       |                                     |       | 17,644    |       |
| Thereafter                                                                           |       |                |       | 4,823                              |       |                                     |       | 4,823     |       |
| Total minimum lease payments                                                         |       | 740                 |       | 110,968                            |       | 10,373                                   |       | 122,081   |       |
| Less: sublease rental income                                                         |       |                |       | 1,775                              |       |                                     |       | 1,775     |       |
| Lease obligation net of subleases                                                    |       | 740                 |       | $                                  | 109,193    |                                     | $          | 10,373    |       | $ | 120,306 |   |
| Less amount representing interest                                                    |       | 37                  |       |                               |       |                                     |       |      |       |
| Present value of minimum capital lease payments (including current  portion of $449) |       | $                   | 703        |                               |       |                                     |       |      |       |   |

 

                          Annual rentexpense aggregated approximately $14,760,000, including $612,000 to relatedparties, for 2007, $13,198,000, including $612,000 to related parties, for 2006and $10,272,000, including $612,000 to related parties, for 2005. Rent expensefor 2007 is net of sublease income of $853,000.

 

 

53

----

 

                          *Litigation* —

 

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

 

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 since 2004Systemax, 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. Systemax, TigerDirect and OnRebate havemoved to dismiss the Complaint and to transfer the matter to the SouthernDistrict of Florida. The Court has not yet ruled on these motions and has notyet certified a class. The Company intends to vigorously 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. On January 30, 2008the Company received a second subpoena for additional documents. The Company iscooperating with the Florida Attorney General’s Office to provide the requesteddocuments.

 

Other matters

 

Beginningon May 24, 2005, three shareholder derivative lawsuits were filed againstvarious officers and directors of the Company and naming the Company as anominal defendant in connection with the Company’s restatements of its fiscalyear 2003 and 2004 financial statements. The defendants and the Company deniedall of the allegations of wrongdoing contained in the complaints. During 2006,the lawsuits were settled or dismissed. Pursuant to the settlement the defendants are released from liabilityand the Company adopted certain corporate governance principles including theappointment of a lead independent director to, among other things, assist theBoard of Directors in assuring compliance with and implementation of theCompany’s corporate governance policies and paid $300,000 of the legal fees ofthe plaintiffs.

 

TheCompany has also been named as a defendant in other lawsuits in the normalcourse of its business, including those involving commercial, tax, employmentand intellectual property related claims. Based on discussions with legalcounsel, management believes the ultimate resolution of these lawsuits will nothave a material effect on the Company’s consolidated financial statements.

 

                          *Contingency**-* The Company isrequired to collect sales tax on certain of its sales.  In accordance with current laws,approximately 17.3%, 17.9%, 17% of the Company’s domestic sales in 2007, 2006and 2005 were subject to sales tax. Changes in law could require the Company to collect sales tax inadditional states and subject the Company to liabilities related to past sales.

 

**11.****        ****SEGMENTAND RELATED INFORMATION**

 

                          TheCompany operates in one primary business as a reseller of business products tocommercial and consumer users. The Company operates and is internally managedin three operating segments, Technology Products, Industrial Products andHosted Software. The Company’s chief operating decision-maker is the Company’sChief Executive Officer. The Company evaluates segment performance based onincome from operations before net interest, foreign exchange gains and losses,restructuring and other charges and income taxes. Corporate costs notidentified with the disclosed segments and restructuring and other charges aregrouped as “Corporate and other expenses.” The chief operating decision-makerreviews assets and makes significant capital expenditure decisions for theCompany on a consolidated basis only. The accounting policies of the segmentsare the same as those of the Company described in Note 1.

 

 

54

----

 

 

Financialinformation relating to the Company’s operations by reportable segment was asfollows (in thousands):

 

| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Sales:                    |       |                             |       |   |   |   |   |
| Technology Products           |       | $                                | 2,553,716  |   | $ | 2,148,104 |   | $ | 1,940,902 |   |
| Industrial Products           |       | 225,746                          |       | 196,860 |   | 174,616 |   |
| Hosted Software               |       | 413                              |       | 201 |   | — |   |
| Consolidated                  |       | $                                | 2,779,875  |   | $ | 2,345,165 |   | $ | 2,115,518 |   |
|                          |       |                             |       |   |   |   |   |
| Depreciation Expense:         |       |                             |       |   |   |   |   |
| Technology Products           |       | $                                | 6,818      |   | $ | 6,395 |   | $ | 7,341 |   |
| Industrial Products           |       | 1,023                            |       | 1,040 |   | 1,995 |   |
| Hosted Software               |       | 904                              |       | 683 |   | 403 |   |
| Corporate                     |       | 35                               |       | 67 |   | 255 |   |
| Consolidated                  |       | $                                | 8,780      |   | $ | 8,185 |   | $ | 9,994 |   |
|                          |       |                             |       |   |   |   |   |
| Operating Income (Loss):      |       |                             |       |   |   |   |   |
| Technology Products           |       | $                                | 86,986     |   | $ | 58,318 |   | $ | 41,521 |   |
| Industrial Products           |       | 20,595                           |       | 13,947 |   | 7,591 |   |
| Hosted Software               |       | (15,813                          | )          | (10,092 | ) | (6,803 | ) |
| Corporate and other  expenses |       | 3,736                            |       | (269 | ) | (7,500 | ) |
| Consolidated                  |       | $                                | 95,504     |   | $ | 61,904 |   | $ | 34,809 |   |
|                          |       |                             |       |   |   |   |   |
| Total Assets                  |       |                             |       |   |   |   |   |
| Technology Products           |       | $                                | 328,557    |   | $ | 230,512 |   | $ | 172,534 |   |
| Industrial Products           |       | 76,634                           |       | 59,239 |   | 51,031 |   |
| Hosted Software               |       | 3,783                            |       | 3,068 |   | 1,819 |   |
| Corporate and other           |       | 264,897                          |       | 291,342 |   | 279,160 |   |
| Consolidated                  |       | $                                | 673,871    |   | 584,161 |   | $ | 504,544 |   |

 

Financial information relating to theCompany’s operations by geographic area was as follows (in thousands):

 

| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Sales:                                      |       |                             |       |   |   |   |   |
| United States:                                  |       |                             |       |   |   |   |   |
| Industrial Products                             |       | $                                | 225,746    |   | $ | 196,860 |   | $ | 174,616 |   |
| Technology Products                             |       | 1,451,459                        |       | 1,268,780 |   | 1,147,230 |   |
| United States total                             |       | 1,677,205                        |       | 1,465,640 |   | 1,321,846 |   |
| Other North America                             |       | 170,272                          |       | 135,619 |   | 99,035 |   |
| Europe                                          |       | 932,398                          |       | 743,906 |   | 694,637 |   |
| Consolidated                                    |       | 2,779,875                        |       | 2,345,165 |   | $ | 2,115,518 |   |
|                                            |       |                             |       |   |   |   |   |
| Long-lived Assets:                              |       |                             |       |   |   |   |   |
| North America —  principally United States |       | $                                | 21,978     |   | $ | 21,347 |   | $ | 31,435 |   |
| Europe                                          |       | 26,502                           |       | 27,239 |   | 25,824 |   |
| Consolidated                                    |       | $                                | 48,480     |   | $ | 48,586 |   | $ | 57,259 |   |

 

        Net sales are attributedto countries based on location of selling subsidiary.

 

**12.****        ****QUARTERLYFINANCIAL DATA (UNAUDITED)**

 

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

 

| ** **                    | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter****(1****)** | ** ** |
|-------------------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|-------------------------------|------------|
| 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 |   |
|                          |       |              |       |               |       |              |       |                          |       |
| 2006:                         |       |              |       |               |       |              |       |                          |       |
| Net sales                     |       | $                 | 574,908    |               | $          | 547,242           |       | $                             | 575,041    |   | $ | 647,974 |   |
| Gross profit                  |       | $                 | 90,763     |               | $          | 77,370            |       | $                             | 91,514     |   | $ | 83,272 |   |
| Net income                    |       | $                 | 17,557     |               | $          | 7,106             |       | $                             | 12,451     |   | $ | 8,033 |   |
| Net income per common  share: |       |              |       |               |       |              |       |                          |       |
| Basic                         |       | $                 | .51        |               | $          | .20               |       | $                             | .36        |   | $ | .23 |   |
| Diluted                       |       | $                 | .48        |               | $          | .19               |       | $                             | .33        |   | $ | .22 |   |

 

----

(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.

 

 

55

----

 

 

**13.****        ****SUBSEQUENTEVENTS**

 

                          On January 5,2008, the Company, through various subsidiaries, entered into an asset purchaseagreement with CompUSA Inc., a Delaware corporation.

 

                          Pursuant to thePurchase Agreement, the Company agreed to acquire 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.

 

Pursuantto the Purchase Agreement, the Company also agreed to acquire up to sixteenretail leases from CompUSA Inc. and certain fixtures located at theselocations. The closing of the acquisition of each lease was subject to thereceipt of the consent of the landlord, if required under the terms of alease.  During February and March 2008the Company completed the acquisition of these sixteen store leases andfixtures for an aggregate purchase price of approximately $11.5 million.

 

                        On March 3,2008, the Company’s Board of Directors declared a special dividend of $1.00 pershare payable on April 2, 2008 to shareholders of record on Mar 21, 2008.This special dividend is the second dividend we will have paid since ourinitial public offering.

 

 

56

----

 

 

**SYSTEMAX INC.**

 

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

 

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 |       |                                    |       |                     |       |           |       |      |       |                          |       |
| 2007                                               |       | $                                       | 11,370     |                     | $          | 4,575          |       | $         | (4,128     | )                             |       |   | $ | 11,817 |   |
| 2006                                               |       | $                                       | 12,508     |                     | $          | 1,503          |       | $         | (2,641     | )                             |       |   | $ | 11,370 |   |
| 2005                                               |       | $                                       | 11,318     |                     | $          | 7,316          |       | $         | (6,126     | )                             |       |   | $ | 12,508 |   |
|                                               |       |                                    |       |                     |       |           |       |      |       |                          |       |
| Allowance for deferred tax  assets                 |       |                                    |       |                     |       |           |       |      |       |                          |       |
| 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 |   |
| 2005                                               |       |                                    |       |                     |       |           |       |      |       |                          |       |
| Current                                            |       | $                                       | 413        |                     | $          | 114            |       |      |       |                          |       | $ | 527 |   |
| Noncurrent                                         |       | $                                       | 10,643     |                     | $          | 5,828          |       | $         | (1,301     | )                             | $          | (391 | ) | $ | 14,779 |   |

----

(1) Charges to expense are net of reductions resulting fromchanges in deferred tax assets due to changes in tax laws.

 

 

57

----