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**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

 

**(Mark One)**

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

 

**For the fiscal year ended December 31,2009**

 

**or**

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

 

**For the transition periodfrom         to         **

 

**Commission File Number: 1-13792**

 

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**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.) |

 

**11Harbor Park Drive**

**PortWashington, New York   11050**

(Addressof principal executive offices, including zip code)

 

Registrant’stelephone number, including area code: **(516) 608-7000**

 

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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                        |

 

Securitiesregistered pursuant to Section 12(g) of the Act:**NONE**

 

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Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act. Yes o No x

 

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

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate website, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes oNo o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best knowledge of the registrant, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment of this Form 10-K. x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

| Large Accelerated Filer o    |   | Accelerated Filer x              |
|------------------------------|--------|----------------------------------|
| Non-Accelerated Filer o |   | Smaller reporting company o |

 

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 votingstock held by non-affiliates of the registrant as of June 30, 2009, whichis the last business day of the registrant’s most recently completed secondfiscal quarter, was approximately $117,681,986. For purposes of thiscomputation, all executive officers and directors of the Registrant and allparties to the Stockholders Agreement dated as of June 15, 1995 have beendeemed to be affiliates. Such determination should not be deemed to be anadmission that such persons are, in fact, affiliates of the Registrant.

 

The number of shares outstanding of the registrant’s common stock as of March 5,2010 was 36,457,941 shares.

Documents incorporated by reference: Portions of the Proxy Statement ofSystemax Inc. relating to the 2010 annual meeting of stockholders areincorporated by reference in Part III hereof.

 

 

 

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**TABLE OF CONTENTS**

 
| **Part I**   |                                                                                                                |   |
|-------------------|---------------------------------------------------------------------------------------------------------------------|--------|
| Item  1.          | Business                                                                                                            | 4      |
|              | General                                                                                                             | 4      |
|              | Products                                                                                                            | 4      |
|              | Sales and Marketing                                                                                                 | 5      |
|              | Customer  Service, Order Fulfillment and Support                                                                    | 7      |
|              | Suppliers                                                                                                           | 7      |
|              | Competition  and Other Market Factors                                                                               | 7      |
|              | Employees                                                                                                           | 8      |
|              | Environmental Matters                                                                                               | 9      |
|              | Financial  Information About Foreign and Domestic Operations                                                        | 9      |
|              | Available Information                                                                                               | 10     |
| Item 1A.          | Risk Factors                                                                                                        | 10     |
| Item 1B.          | Unresolved  Staff Comments                                                                                          | 17     |
| Item 2.           | Properties                                                                                                          | 17     |
| Item 3.           | Legal Proceedings                                                                                                   | 18     |
| Item 4.           | Submission  of Matters to a Vote of Security Holders                                                                | 18     |
|              |                                                                                                                |   |
| **Part II**  |                                                                                                                |   |
| Item 5.           | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 19     |
| Item 6.           | Selected  Financial Data                                                                                            | 20     |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 21     |
| Item 7A.          | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 32     |
| Item 8.           | Financial  Statements and Supplementary Data                                                                        | 32     |
| Item 9.           | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                               | 32     |
| Item 9A.          | Controls and  Procedures                                                                                            | 32     |
| Item 9B.          | Other Information                                                                                                   | 33     |
|              |                                                                                                                |   |
| **Part III** |                                                                                                                |   |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                             | 34     |
| Item 11.          | Executive  Compensation                                                                                             | 34     |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 34     |
| Item 13.          | Certain  Relationships and Related Transactions, and Director Independence                                          | 34     |
| Item 14.          | Principal Accounting Fees and Services                                                                              | 34     |
|              |                                                                                                                |   |
| **Part IV**  |                                                                                                                |   |
| Item 15.          | Exhibits  and Financial Statement Schedules                                                                         | 34     |
|              |                                                                                                                |   |
|              | Signatures                                                                                                          | 38     |

 

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**PART I**

 

*Unlessotherwise indicated, all references herein to Systemax Inc. (sometimes referredto as “Systemax,” the “Company” or “we”) include its subsidiaries.*

 

***ForwardLooking Statements***

*** ***

*Thisreport contains forward looking statements within the meaning of that term inthe Private Securities Litigation Reform Act of 1995 (Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934).  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 safeharbor provisions 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 in thisreport, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,”and “plans” and variations thereof and similar expressions are intended toidentify forward looking statements.*

 

*Forward looking statements are inherently subjectto risks and uncertainties, some of which cannot be predicted or quantifiedbased on current expectations. Consequently, future events and results could differ materially fromthose set forth in, contemplated by, or underlying the forward lookingstatements contained in this report. Statements in this report, particularly in “Item 1. Business,” “Item 1A.Risk Factors,” “Item 3. Legal Proceedings,” “Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations,” and the Notesto Consolidated Financial Statements describe certain factors, among others,that could contribute to or cause such differences.*

 

Otherfactors that may affect our future results of operations and financialcondition include, but are not limited to, unanticipated developments in anyone or more of the following areas, as well as other factors which may bedetailed from time to time in our Securities and Exchange Commission filings:

 

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

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

·                  timelyavailability of existing and new products

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

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

·                  borrowing costsor availability

·                  pending orthreatened litigation and investigations

·                  theavailability of key personnel

 

Readersare cautioned not to place undue reliance on any forward looking statementscontained in this report, which speak only as of the date of this report.  We undertake no obligation to publiclyrelease the result of any revisions to these forward looking statements thatmay be made to reflect events or circumstances after the date hereof or toreflect the occurrence of unexpected events.

 

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**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 Software Solutions.

 

OurTechnology Products segment sells computers, computer supplies and consumerelectronics which are marketed in North America and Europe. Except for certainpersonal computer (“PC”) and related products that we assemble ourselves andsell on a private label basis,**substantiallyall of our products are manufactured by other companies. TechnologyProducts accounted for 94%, 92% and 92% of our net sales in 2009, 2008, and2007, respectively.

 

OurIndustrial Products segment sells a wide array of material handling equipment,storage equipment and consumable industrial items which are marketed in NorthAmerica. Most of these products are manufactured by other companies.  Some products are manufactured for us to ourown design and marketed on a private label basis*.**TM.*Industrial products accounted for 6%, 8% and 8% of our net sales in2009, 2008, and 2007, respectively.

 

InJune, 2009, the Company announced plans to exit the Software Solutions segmentas the result of economic conditions and difficulties in marketing the segment’sproducts successfully (See Note 7 to the ConsolidatedFinancial Statements included in Item 15 of this Form 10-K.). Our SoftwareSolutions segment participated in the emerging market for on-demand, web-basedbusiness software applications through the marketing of our PCS ProfitCenterSoftware*TM* application. As of December 31,2009, substantially all of the third party business activities of the SoftwareSolutions segment had been ended.

 

SeeNote 10 to the Consolidated Financial Statements included in Item 15 of this Form 10-Kfor additional financial information about our business segments as well asinformation about our geographic operations.

 

TheCompany was incorporated in Delaware in 1995. Certain predecessor businesseswhich now constitute part of the Company have been in business since 1949. Ourheadquarters office is located at 11 Harbor Park Drive, Port Washington, NewYork.

 

**RecentDevelopments**

 

OnSeptember 18, 2009, the Company acquired WStore Europe SA and itssubsidiaries, (“WStore”), a European supplier of business IT products andsoftware solutions with operations in France and the United Kingdom. Thepurchase price (after giving effect to the conversion of Euros to U.S. dollars)was approximately $4.4 million in cash, $2.2 million of which was placed intoan escrow account for one year to secure the sellers’ indemnificationobligations under the purchase agreement. This acquisition expands the Company’sbusiness in France and, to a lesser extent, the United Kingdom.

 

OnApril 5, 2009, the Company acquired certain intellectual property andecommerce assets owned Circuit City Stores, Inc. and Circuit City StoresWest Coast, Inc. (‘the Sellers”) for $14.0 million in cash. In addition,the Company will pay the Sellers a royalty based on a percentage of sales overa thirty month period dependent upon levels of sales achieved from the acquiredassets, with a minimum payment of $3.0 million. This acquisition expands theCompany’s ecommerce market.

 

**Products**

 

Weoffer hundreds of thousands of brand name and private label products. We endeavorto expand and keep current the breadth of our product offerings in order tofulfill the increasingly wide range of product needs of our customers.

 

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Ourcomputer product include desktops, laptops and notebooks and are primarilyofferings of brand name original equipment manufacturers, as well as our ownprivate label 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.

 

Weassemble our private label PCs in our ISO-9001:2000 certified facility inFletcher, Ohio.  We purchase componentsand subassemblies from suppliers in the United States as well as overseas.Certain parts 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.

 

Ourindustrial products include material handling equipment, storage andshelving equipment, work benches, packaging supplies, furniture and officeproducts, food service equipment and supplies, janitorial and maintenancesupplies, HVAC, electrical and plumbing supplies and consumable industrialproducts such as first aid items, safety items, protective clothing and OSHAcompliance items.

 

**Sales and Marketing**

 

Wemarket our products to both individual consumers and business customers. Ourbusiness customers include for-profit businesses, educational organizations andgovernment entities. We have developed numerous proprietary customer andprospect databases.

 

Wecontinue to have strong growth in sales to individual consumers, throughe-commerce means and retail stores. To reach our individual consumer audience,we use online methods such as website campaigns, banner ads and e-mail campaigns.We are able to monitor and evaluate the results of our various advertisingcampaigns to enable us to execute them in the most cost-effective manner. Wecombine our use of e-commerce initiatives with catalog mailings, which generateonline orders and calls to inbound sales representatives. These salesrepresentatives use our information systems to fulfill orders and exploreadditional customer product needs. Sales to individual consumers are generallyfulfilled from our own stock, requiring us to carry more inventory than wewould for our business customers. We also periodically take advantage ofattractive product pricing by making opportunistic bulk inventory purchaseswith the objective of turning them quickly into sales. We have alsosuccessfully increased our sales to individual consumers by using retail outletstores. Over the past several years, the Company has expanded its brick andmortar retail operations through the CompUSA acquisition and by opening newstores.

 

Wehave established a multi-faceted direct marketing system to business customers,consisting primarily of our relationship marketers, catalog mailings andproprietary internet websites, the combination of which is designed to maximizesales. Our relationship marketers focus their efforts on our business customersby establishing a personal relationship between such customers and a Systemaxaccount manager. The goal of the relationship marketing sales force is toincrease the purchasing productivity of current customers and to actively solicitnewly targeted prospects to become customers. With access to the records wemaintain, our relationship marketers are prompted with product suggestions toexpand customer order values. In certain countries, we also have the ability toprovide such customers with electronic data interchange (“EDI”) ordering andcustomized billing services, customer savings reports and stocking of specialtyitems specifically requested by these customers. Our relationship marketers’efforts are supported by frequent catalog mailings and e-mail campaigns, bothof which are designed to generate inbound telephone sales, and our interactivewebsites, which allow customers to purchase products directly over theInternet. We believe that the integration of our multiple marketing methodsenables us to more thoroughly penetrate our business, educational andgovernment customer base. We believe increased internet exposure leads to moreinternet-related sales and also generates more inbound telephone sales; just aswe believe catalog mailings and email campaigns which feature our websitesresults in greater internet-related sales.

 

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## ***E-commerce***

## ** **

Theworldwide growth in active internet users has made e-commerce a significantopportunity for sales growth.

 

Theincrease in our internet-related sales enables us to leverage our advertisingspending. We currently operate multiple e-commerce sites, including:

 
| **North  America**       | ** ** | **Europe**           |
|--------------------------|------------|----------------------|
|                     |       |                 |
| www.tigerdirect.com      |       | www.misco.co.uk      |
| www.compusa.com          |       | www.misco.de         |
| www.circuitcity.com      |       | www.misco.fr         |
| www.compusagoved.com     |       | www.misco.nl         |
| www.compusabusiness.com  |       | www.misco.it         |
| www.tigerdirect.ca       |       | www.misco.es         |
| www.infotelusa.com       |       | www.misco.se         |
| www.globalcomputer.com   |       | www.misco.at         |
| www.globalgoved.com      |       | www.misco.ch         |
| www.systemaxpc.com       |       | www.misco.be         |
| www.dealopro.com         |       |                 |
| www.globalindustrial.com |       | www.misco.ie         |
| * *                 |       | www.wstore.co.uk     |
|                     |       | www.inmac-wstore.com |
|                     |       | www.wstore.fr        |
|                     |       | www.inmac-wstore.eu  |
|                     |       | www.inmac-wstore.fr  |
|                     |       | www.inmac.com        |
|                     |       | www.dealopro.com     |
|                     |       | www.dealopro.fr      |

 

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

 

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

 

## ***Catalogs***

## ** **

Wecurrently produce a total of 15 full-line and targeted specialty catalogs inNorth America and Europe under distinct titles. Our portfolio of catalogsincludes such established brand names as *TigerDirect.comTM, GlobalComputer SuppliesTM, CompUSA, TigerDirect.caTM, Misco®, Global IndustrialTM,ArrowStarTM and **Nexel**TM.*  Full-line computer product catalogs offerproducts such as PCs, notebooks, peripherals, computer components, magneticmedia, data communication, networking and power protection equipment, ergonomicaccessories, furniture and software. Full-line industrial product catalogsoffer products such as material handling products and industrial supplies.Specialty catalogs contain more focused product offerings and are targeted toindividuals most likely to purchase from such 

 

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catalogs.We mail catalogs to both businesses and individual consumers. In the case ofbusiness mailings, we mail our catalogs to many individuals at a singlebusiness location, providing us with multiple points-of-entry. Our in-housestaff designs all of our catalogs, which reduces overall catalog expense andshortens catalog production time. . Our catalogs are printed by third partiesunder fixed pricing arrangements. The commonality of certain core pages ofour catalogs also allows for economies of scale in catalog production.

 

Withincreased focus on internet advertising, the distribution of our catalogsdecreased to 46 million in 2009, which was 26.9% less than in the prior year.In 2009, we mailed approximately 38 million catalogs in North America, a 18.5%decrease from last year and approximately 8 million catalogs in Europe, or51.3% fewer than 2008.

 

**Customer Service, Order Fulfillment and Support**

 

Wereceive orders through the internet, by telephone, electronic data interchangeand by fax. We generally provide toll-free telephone number access for ourcustomers in countries where it is customary. Certain domestic call centers arelinked to provide telephone backup in the event of a disruption in phoneservice.

 

Certainof our products are carried in stock, and orders for such products arefulfilled on a timely basis directly from our distribution centers, typicallywithin one the day of the order. We operate out of multiple sales anddistribution facilities in North America and Europe. Orders are generallyshipped by third-party delivery services. We maintain relationships with anumber of large distributors in North America and Europe that also deliverproducts directly to our customers.

 

Weprovide extensive technical telephone support to our private label PCcustomers.  We maintain a database ofcommonly asked questions for our technical support representatives, enablingthem to respond quickly to similar questions. We conduct regular on-sitetraining seminars for our sales representatives to help ensure that they arewell trained and informed regarding our latest product offerings.

 

**Suppliers**

 

Wepurchase substantially all of our products and components directly frommanufacturers and large wholesale distributors. In 2009, one vendor accountedfor 12.0% of our purchases and another vendor accounted for 11.3% of ourpurchases. One vendor accounted for 12.0% and 14.4% of our purchases in 2008and 2007, respectively. The loss of these vendors, or any other key vendors,could have a material adverse effect on us.

 

Certainprivate label products are manufactured by third-parties to our specifications.Many of these private label products have been designed or developed by ourin-house product design and development teams.

 

**Competition and Other Market Factors**

 

***Technology Products***

 

TheNorth American and European technology product markets are highly competitive,with many U.S., Asian and European companies vying for market share.  There are few barriers of entry, with theseproducts being sold through multiple channels of distribution, including directmarketers, local and national retail computer stores, computer resellers, massmerchants, over the internet and by computer and office supply superstores.

 

Timelyintroduction of new products or product features are critical elements to remainingcompetitive. Other competitive factors include product performance, quality andreliability, technical support and customer service, marketing and distributionand price. Some of our competitors have stronger brand-

 

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recognition,broader product lines and greater financial, marketing, manufacturing andtechnological resources than us. Additionally, our results could also be adversely affected should we beunable to maintain our technological and marketing arrangements with othercompanies, such as Microsoft®, Intel® and Advanced Micro Devices®.

 

Withconditions in the market for technology products remaining highly competitive,reductions in retail prices, as we experienced in 2009, would adversely affectour revenues and profits. Additionally, we rely in part upon the introductionof new technologies and products by other manufacturers in order to sustain long-termsales growth and profitability. There is no assurance that the rapid rate ofsuch technological advances and product development will continue.

 

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

 

***Industrial Products***

 

Themarket for the sale of industrial products in North America is highlyfragmented and is characterized by multiple distribution channels such as smalldealerships, direct mail distribution, internet-based resellers, large warehousestores and retail outlets. We also face competition from manufacturers’ ownsales representatives, who sell industrial equipment directly to customers, andfrom regional or local distributors. Many high volume purchasers, however,utilize catalog distributors as their first source of product. In theindustrial products market, customer purchasing decisions are primarily basedon price, product selection, product availability, level of service andconvenience.  We believe that directmarketing via sales representatives, catalog and the internet are effective andconvenient distribution methods to reach mid-sized facilities that place manysmall orders and require a wide selection of products. In addition, because theindustrial products market is highly fragmented and generally less brandoriented, it is well suited to private label products.

 

***Software Solutions***

 

InJune 2009, the Company announced plans to exit the Software Solutions segmentas the result of economic conditions and difficulties in marketing the segment’sproducts successfully (See Note 7 to the ConsolidatedFinancial Statements included in Item 15 of this Form 10-K). Our SoftwareSolutions segment participated in the emerging market for on-demand, web-basedbusiness software applications through the marketing of our PCS ProfitCenterSoftware*TM* application. As of December 31,2009 substantially all of the third party business activities of the SoftwareSolutions segments had been ended.

 

**Employees**

 

Asof December 31, 2009, we employed a total of approximately 5,000employees, of whom 3,500 were in North America and 1,500 were in Europe.

 

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** **

**Seasonality**

 

As the Company’s consumer channel sales have grown significantly in thepast few years, the fourth quarter has represented a greater portion of annualsales than historically. Net sales have historically been modestly weakerduring the second and third quarters as a result of lower business activityduring those months.  See Item 7, Management’sDiscussions and Analysis of Financial Condition and Results of Operations;Seasonality.

 

**Environmental Matters**

 

Under various national, state and local environmental laws andregulations in North America and Western 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. Welease most of our facilities. In connection with such leases, we could be heldliable for 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.

 

**Financial Information About Foreign and Domestic Operations**

 

Weconduct our business in North America (the United States, Puerto Rico andCanada) and Europe.  Approximately 33.5%,37.9% and 39.7% of our net sales during 2009, 2008 and 2007, respectively weremade by subsidiaries located outside of the United States. For informationpertaining to our international operations, see Note 10, “Segment and RelatedInformation,” to the Consolidated Financial Statements included in Item 15 ofthis Form 10-K. The following sets forth selected information with respectto our operations in those two geographic markets (in thousands):

*** ***
| ** **          | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Total**  | ** ** |
|---------------------|------------|--------------------|------------|------------|------------|------------|------------|
| *2009*              |       |               |       |       |       |       |       |
| Net sales           |       | $                  | 2,317,475  |       | $          | 848,520    |       | $ | 3,165,995 |   |
| Operating income    |       | $                  | 62,070     |       | $          | 11,321     |       | $ | 73,391 |   |
| Identifiable assets |       | $                  | 591,990    |       | $          | 224,911    |       | $ | 816,901 |   |
| *** ***        | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| *2008*              |       |               |       |       |       |       |       |
| Net sales           |       | $                  | 2,092,372  |       | $          | 940,589    |       | $ | 3,032,961 |   |
| Operating income    |       | $                  | 62,268     |       | $          | 21,099     |       | $ | 83,367 |   |
| Identifiable assets |       | $                  | 552,459    |       | $          | 149,994    |       | $ | 702,453 |   |
| ** **          | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| *2007*              |       |               |       |       |       |       |       |
| Net sales           |       | $                  | 1,847,477  |       | $          | 932,398    |       | $ | 2,779,875 |   |
| Operating income    |       | $                  | 82,365     |       | $          | 11,577     |       | $ | 93,942 |   |
| Identifiable assets |       | $                  | 488,761    |       | $          | 185,110    |       | $ | 673,871 |   |

 

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

 

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**Available Information**

 

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

 

**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 the Economy and Our Industries**

 

·                  *Generaleconomic conditions, such as decreased consumer confidence and spending,reductions in manufacturing capacity, and inflation could result in our failureto achieve our historical sales growth rates and profit levels.*

 

Currenteconomic conditions may cause the loss of consumer confidence in the Company’smarkets which may result in a decrease of spending in the categories ofproducts we sell. With conditions in the market for technology productsremaining highly competitive, reductions in our retail prices, as weexperienced in 2009, would adversely affect our revenues and profits.  Itis also possible that as manufacturers react to the marketplace they may reducemanufacturing capacity or allocations to their customers creating shortages ofproduct. Both we and our customers are subject to global political, economic andmarket conditions, including inflation, interest rates, energy costs, theimpact of natural 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 tolimit price reductions and maintain our margins, our ability to attract newcustomers and the financial condition of our customers. A decline in theeconomy that adversely affects our customers, causing them to limit or defertheir spending, would likely adversely affect our sales, prices andprofitability as well. We cannot predict with any certaintywhether we will be able to maintain or improve upon historical sales volumeswith existing customers, or whether we will be able to attract new customers.

 

Inresponse to economic and market conditions, from time to time we haveundertaken initiatives to reduce our cost structure where appropriate. Theseinitiatives, as well as any future workforce and facilities reductions, may notbe sufficient to meet current and future changes in

 

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economicand market conditions and allow us to continue to achieve the growth rates andlevels of profitability we have recently experienced. In addition, costsactually incurred in connection with our restructuring actions may be higherthan our estimates of such costs and/or may not lead to the anticipated costsavings.

 

·                  *Themarkets for our products and services are extremely competitive and if we areunable to successfully respond to our competitors’ strategies our sales andgross margins will be adversely affected.*

 

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. Many of our competitors are larger companies withgreater financial, marketing and product development resources than ours. In addition,new competitors may enter our markets. This may place us at a disadvantage inresponding to competitors’ pricing strategies, technological advances and otherinitiatives, resulting in our inability to increase our revenues or maintainour gross margins in the future.

 

Inmost 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.

 

·                  *State sales tax laws may be changed which couldresult in ecommerce and direct mail retailers having to collect sales taxes instates where the current laws do not require us to do so.  This could reduce demand for our products insuch states and could result in us having substantial tax liabilities for pastsales.*

 

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 e-commerce and/or direct mail 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.

 

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·                  *Events such as acts of war or terrorism, naturaldisasters, changes in law, or large losses could adversely affect our insurancecoverage and insurance expense, resulting in an adverse affect on ourprofitability and financial condition.*

 

Weinsure for certain property and casualty risks consisting primarily of physicalloss to property, business interruptions resulting from property losses, worker’scompensation, comprehensive general liability, and auto liability. Insurancecoverage is obtained for catastrophic property and casualty exposures as wellas those risks required to be insured by law or contract. Although we believethat our insurance coverage is reasonable, significant events such as acts ofwar and terrorism, economic conditions, judicial decisions, legislation,natural disasters and large losses could materially affect our insuranceobligations and future expense.

 

·                  *Changes in accounting standards or practices, aswell as new accounting pronouncements or interpretations, may require us to accountfor and report our financial results in a different manner in the future, whichmay be less favorable than the manner used historically.*

 

A change in accounting standards or practices can have a significanteffect on our reported    results ofoperations. New accounting pronouncements and interpretations of existingaccounting rules and practices have occurred and may occur in the future.Changes to existing rules may adversely affect our reported financialresults.

 

**Risks Related to Our Company**

 

·                  *We rely to a great extent on our information andtelecommunications systems, and significant system failures or outages, or ourfailure to properly evaluate, upgrade or replace our systems, or the failure ofour security/safety measures to protect our systems and websites, could have anadverse affect on our results of operations.*

 

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 our managementinformation systems, including software and hardware, as we grow and the needsof our business change.  In particular,our financial and retail point of sale systems will be replaced during thecoming years.  The occurrence of asignificant system failure, electrical or telecommunications outages or ourfailure to expand or successfully implement new systems could have a materialadverse effect on our results of operations.

 

Ourinformation systems networks, including our websites, and applications could beadversely affected by viruses or worms and may be vulnerable to malicious actssuch as hacking. The availability and efficiency of sales via ourwebsites could also be adversely affected by “denial of service” attacks andother unfair competitive practices.    Although we take preventive measures, theseprocedures may not be sufficient to avoid harm to our operations, which couldhave an adverse effect on our results of operations.

 

·                  *We rely on third party suppliers for most of ourproducts and services. The loss or interruption of these relationships couldimpact our sales volumes, the levels of inventory we must carry, and/or resultin sales delays and/or higher inventory costs from new suppliers.  Coop advertising and other sales incentivesprovided by our suppliers could decrease in the future thereby increasing ourexpenses and adversely affecting our results of operations and cash flows.*

 

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Wepurchase substantially all of our computer products from major distributors anddirectly from large manufacturers who may deliver those products directly toour customers. These relationships enable us to make available to our customersa wide selection of products without having to maintain large amounts ofinventory.  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 insome cases are supplied through sole or limited source third-party suppliers,some of which are located outside of the U.S. Although we do not anticipate anyproblems procuring supplies in the near-term, there is no assurance that partsand supplies will be available in a timely manner and at reasonable prices. Anyloss of, or interruption of, supply from key suppliers may require us to findnew suppliers. This could result in production or development delays while newsuppliers are located, which could substantially impair operating results. Ifthe availability of these or other components used in the manufacture of ourproducts was to decrease, or if the prices for these components were toincrease significantly, operating costs and expenses could be adverselyaffected.

 

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 ourorders. Delays or interruptions in the transportation network could result inloss or delay 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, paymentdiscounts, price protection and other similar arrangements.  These incentives are offset against cost ofgoods sold or selling, general and administrative expenses, as applicable. Thelevel of co-op advertising support and other incentives received from suppliersmay decline in the future, which could increase our cost of goods sold orselling, general and administrative expenses and have an adverse effect onresults of operations and cash flows.

 

·                  *Goodwill and intangible assets may become impaired resultingin a charge to earnings.*

 

Theacquisition of certain assets of CompUSA, CircuitCity and the purchase of thestock of WStore Europe SA resulted in the recording of significant intangibleassets and or goodwill. We are required to test goodwill and intangible assetsannually to determine if the carrying values of these assets are impaired or ona more frequent basis if indicators of impairment exist. If any of our goodwillor intangible assets are determined to be impaired we may be required to recorda significant charge to earnings in the period during which the impairment isdiscovered.

 

·                  *Our substantial international operations aresubject to risks such as fluctuations in currency rates (which can adverselyimpact foreign revenues and profits when translated to US Dollars), foreignregulatory requirements, political uncertainty and the management of ourgrowing international operations*.

 

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 politicalconditions

·                  Changes in foreign currency exchange rates

·                  Difficulties with staffing and managinginternational operations

·                  Unexpected changes in regulatory requirements

 

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Forexample, we currently have operations located in numerous countries outside theUnited States, and non-U.S. sales (Europe, Canada and Puerto Rico) accountedfor approximately 33.5% of our revenue during 2009.  To the extent the U.S. dollar strengthensagainst foreign currencies, our foreign revenues and profits will be reducedwhen translated into U.S. dollars.

 

·                  *We are exposed to various inventory risks, such**as**  being unable to profitablyresell excess or obsolete inventory and/or the loss of product return rightsand price protection from our vendors; such events could lower our grossmargins or result in inventory write-downs that would reduce reported futureearnings.*

 

Ourinventory is subject to risk due to technological change and changes in marketdemand for particular products. If we fail to manage our inventory of olderproducts we may have excess or obsolete inventory. We may have limited rightsto return purchases to certain suppliers and we may not be able to obtain priceprotection on these items. The elimination of purchase return privileges andlack of availability of price protection could lower our gross margin or resultin 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.

 

·                  *If we fail to observe certain restrictions andcovenants under our credit facilities the lenders could refuse to waive suchdefault, terminate the credit facility and demand immediate repayment, whichwould adversely affect our cash position and materially adversely affect ouroperations.*

 

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 thecredit agreement, we would be in default and would need to negotiate a waiveragreement with the lenders. Failure to agree on such a waiver could result inthe lenders terminating the credit agreement and demanding repayment of anyoutstanding borrowings, which could adversely affect our cash position andadversely affect the availability of financing to us, which could materiallyimpact our operations.

 

·                  *We have experienced rapid growth in retail storesin North America and to maintain their profitability we must effectively manageour growth and cost structure, such as inventory needs, point of sales systems,personnel and lease expense.*

 

Wehave 34 retail stores in North America at December 31 2009, a significantincrease over 2008. The Company needs to effectively manage its cost structurein order to maintain profitability including the additional inventory needs,retail point of sales IT systems, retail personnel and leased facilities.Future growth in retail will also be dependent on the ability to attractcustomers and build brand loyalty. The retail computer and consumer electronicsbusiness is highly competitive and has narrow gross margins. If we fail tomanage our growth and cost structure while maintaining high levels of serviceand meeting competitive pressures adequately, our business plan  may notbe achieved and may lead to reduced profitability***.***

 

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·                  *The failure to timely and satisfactorily processmanufacturers’ and our own rebate programs could negatively impact our customersatisfaction levels*.

 

Similarto other companies in the technology products industry, we advertisemanufacturers’ mail-in rebates on many products we sell and, in some cases,offer our own rebates. These   rebatesare processed through third party vendors and in house. If these rebates arenot processed in a timely and satisfactory manner by either third party vendorsor our in house operations, our reputation in the marketplace could benegatively impacted.  See Item 3, LegalProceedings.

 

·                  *We maybe unable to reduce prices in reaction to competitive pressures, or implementcost reductions or new product line expansion to address gross profit andoperating margin pressures; failure to mitigate these pressures could adverselyaffect our operating results and financial condition*.

 

Thecomputer and consumer electronics industry is highly price competitive andgross profit margins are narrow and variable. The Company’s ability to furtherreduce prices in reaction to competitive pressure is limited. Additionally,gross margins and operating margins are affected by changes in factors such asvendor pricing, vendor rebate and or price protection programs, product returnrights, and product mix. Pricing pressure continued to be prevalent in 2009 asa result of the significant decline in economic activity in the markets weserve and we expect this to continue during this or any period of sustainedeconomic decline. We may not be able to mitigate these pricing pressures andresultant declines in sales and gross profit margin with cost reductions inother areas or expansion into new product lines. If we are unable toproportionately mitigate these conditions our operating results and financialcondition may suffer.

 

·                *Wedepend on bank credit facilities to address our working capital and cash flowneeds from time to time, and if we are unable to renew or replace thesefacilities, or borrowing capacity were to be reduced our liquidity and capitalresources may be adversely affected.*

 

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 would be exposed to liability, including substantial fines and penaltiesand, in extreme cases, loss of our ability to accept credit cards, in the eventour privacy and data security policies and procedures are inadequate to preventsecurity breaches of our consumer personal information and credit cardinformation records.*

 

Inprocessing our sales orders we often collect personal information and creditcard information from our customers. The Company has privacy and data securitypolicies in place which are designed to prevent security breaches, however, ifa third party or a rogue employee or employees are able to bypass our networksecurity or otherwise compromise our customers’ personal information or creditcard information, we could be subject to liability. This liability may includeclaims for identity theft, unauthorized purchases, claims allegingmisrepresentation

 

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ofour privacy and data security practices or other related claims. Further, theCompany has not yet achieved full compliance with the Payment Card Industry (“PCI”)security standards. Without full compliance any breach involving the loss ofcredit card information may lead to PCI related fines of up to $500,000. In theevent of a severe breach credit card providers may prevent the accepting ofcredit cards. Any such liability related to the aforementioned risks could leadto reduced profitability and damage our brand(s) and or reputation.

 

·                  *Sales to individual customers expose us to creditcard fraud, which impacts our operations. If we fail to adequately protect ourselves from credit card fraud, ouroperations could be adversely impacted.*

 

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.

 

·                  *Our profitability can be adversely affected byincreases in our income tax exposure due to, among other things, changes in themix of U.S. and non-U.S. revenues and earnings, changes in tax rates or laws,changes in our effective tax rate due to changes in the mix of earnings amongdifferent countries and changes in valuation of our deferred tax assets andliabilities.*

 

Changesin our income tax expense due to changes in the mix of U.S. and non-U.S. revenuesand profitability, changes in tax rates or exposure to additional income taxliabilities could affect our profitability. We are subject to income taxes inthe United States and various foreign jurisdictions. Our effective tax ratecould be adversely affected by changes in the mix of earnings in countries withdiffering statutory tax rates, changes in the valuation of deferred tax assetsand liabilities, changes in tax laws or by material audit assessments. Thecarrying value of our deferred tax assets, which are primarily in the UnitedStates and the United Kingdom, is dependent on our ability to generate futuretaxable income in those jurisdictions. In addition, the amount of income taxeswe pay is subject to ongoing audits in various jurisdictions and a materialassessment by a tax authority could affect our profitability.

 

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

 

None.

 

**Item 2. Properties.**

 

Weoperate our business from numerous facilities in North America andEurope.  These facilities include our headquarters location,administrative offices, telephone call centers, distribution centers, computerassembly and retail stores.  Certain facilities handle multiplefunctions.  Most of our facilities are leased; certain are owned by theCompany.

 

**North America**

 

Asof December 31, 2009 we have 6 distribution centers in North America whichaggregate approximately 1.2 million square feet, all of which are leased. Our headquarters, administrative offices and call centers aggregateapproximately 250,000 square feet, all of which are leased.  Our computerassembly facility is 297,000 square feet and is owned by the Company.

 

Thefollowing table summarizes the geographic location of our North America storesat the end of 2009:

 
| **Location**     | ** ** | **Stores Open – 12/31/08** | ** ** | **Store Openings** | ** ** | **Stores Open – 12/31/09** | ** ** |
|------------------|------------|---------------------------------|------------|--------------------|------------|---------------------------------|------------|
| Delaware         |       | —                          |       | 1                  |       | 1                               |       |
| Florida          |       | 15                              |       | 3                  |       | 18                              |       |
| Illinois         |       | 3                               |       | —             |       | 3                               |       |
| North  Carolina  |       | 2                               |       | —             |       | 2                               |       |
| Puerto  Rico     |       | 1                               |       | —             |       | 1                               |       |
| Texas            |       | 3                               |       | 1                  |       | 4                               |       |
| Ontario,  Canada |       | 5                               |       | —             |       | 5                               |       |
|             |       | 29                              |       | 5                  |       | 34                              |       |

 

Allof our retail stores are leased.  The retail stores average 21,700 squarefeet.

 

**Europe**

 

Asof December 31, 2009 we have 7 distribution centers in Europe whichaggregate approximately 300,000 square feet.  Six of these, aggregatingapproximately 224,000 square feet, are leased; one distribution center ofapproximately 76,000 square feet is owned by the Company.  Ouradministrative offices and call centers aggregate approximately 254,000 squarefeet, of which 176,000 square feet are leased and 78,000 square feet are ownedby the Company.

 

Please refer to Note 10 to the Consolidated Financial Statements foradditional information about leased properties.

 

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**Item 3. Legal Proceedings.**

 

State of Florida, Office ofthe Attorney General

 

On September 4, 2009,the Office of the Attorney General, Department of Legal Affairs for the Stateof Florida filed a lawsuit against OnRebate.com Inc, TigerDirect Inc. andSystemax Inc. in the Circuit Court of the Eleventh Judicial Court forMiami-Dade County, Florida alleging deceptive and unfair trade practices underFlorida law relating to the offering and processing of customer rebates. The lawsuit seeks injunctive relief, damages, civil penalties and otherequitable relief.  The Company denies the allegations in the lawsuit andintends to vigorously defend the case.

 

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.

 

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**PART II**

 

**Item 5.  Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

Systemax common stock is traded on the NYSE Euronext Exchange under thesymbol “SYX.”  The following table setsforth the high and low closing sales price of our common stock as reported onthe New York Stock Exchange for the periods indicated.

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2009           |       |     |       |    |       |
| First Quarter  |       | $        | 14.19      |    | $          | 9.12 |   |
| Second Quarter |       | 17.30    |       | 11.25   |       |
| Third Quarter  |       | 14.29    |       | 11.34   |       |
| Fourth Quarter |       | 16.46    |       | 12.00   |       |
|           |       |     |       |    |       |
| 2008           |       |     |       |    |       |
| First Quarter  |       | $        | 20.32      |    | $          | 9.01 |   |
| Second Quarter |       | 20.89    |       | 12.06   |       |
| Third Quarter  |       | 18.43    |       | 14.04   |       |
| Fourth Quarter |       | 15.10    |       | 8.75    |       |

 

On January 2, 2010, the last reported sale price of our commonstock on the New York Stock Exchange was $15.71 per share.  As of January 2, 2010, we had 215shareholders of record.

 

On November 16, 2009, the Company’s Board of Directors declared aspecial dividend of $.75 per share payable on December 15, 2009 toshareholders of record on December 1, 2009. This special dividend is thethird 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.

 

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.

 

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.

 

In May 2008, the Company’s Board of Directors authorized therepurchase of up to 2,000,000 shares of the Company’s common stock. During 2009the Company repurchased 98,934 common shares. Details of all repurchases are asfollows:

 

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| **Fiscal Month** | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **            | ** ** | ** **                                           | ** ** | ** **                                       | ** ** | ** **                                                                                                                   | ** ** | ** **                                                                                                                          | ** ** |
| August 2008      |       | 228,401                                              |       | $                                                | 15.04      |                                                                                                                         | 228,401    |                                                                                                                                | 1,771,599  |   |
| December 2008    |       | 246,900                                              |       | $                                                | 9.67       |                                                                                                                         | 475,301    |                                                                                                                                | 1,524,699  |   |
| March 2009       |       | 32,444                                               |       | $                                                | 11.63      |                                                                                                                         | 507,745    |                                                                                                                                | 1,492,255  |   |
| May 2009         |       | 29,200                                               |       | $                                                | 12.02      |                                                                                                                         | 536,945    |                                                                                                                                | 1,463,055  |   |
| June 2009        |       | 37,290                                               |       | $                                                | 11.97      |                                                                                                                         | 574,235    |                                                                                                                                | 1,425,765  |   |
|                  |       |                                                 |       |                                             |       |                                                                                                                         |       |                                                                                                                                |       |
| Total                 |       | 574,235                                              |       | $                                                | 12.19      |                                                                                                                         |       |                                                                                                                                |       |   |

 

Information regarding securities authorized for issuance under equitycompensation plans and a performance graph relating to the Company’s commonstock is set forth in the Company’s Proxy Statement relating to the 2010 annualmeeting of shareholders and is incorporated by reference herein.

 

**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 2009, 2008 and 2007 and the selected balancesheet data as of December 2009 and 2008 are derived from the auditedconsolidated financial statements which are included elsewhere in this report.The selected balance sheet data as of December 2007, 2006 and 2005 and theselected statement of operations data for fiscal years 2006 and 2005 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)** | ** ** |
| ** **                                     | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Statement  of Operations Data****:**         |       |                                     |       |   |   |   |   |   |   |   |   |
| Net sales                                      |       | $                                        | 3,166.0    |   | $ | 3,033.0 |   | $ | 2,779.9 |   | $ | 2,345.2 |   | $ | 2,115.5 |   |
| Gross profit                                   |       | $                                        | 460.2      |   | $ | 458.6 |   | $ | 426.3 |   | $ | 342.9 |   | $ | 307.3 |   |
| Operating income                               |       | $                                        | 73.4       |   | $ | 83.4 |   | $ | 93.9 |   | $ | 60.7 |   | $ | 37.2 |   |
| Net income                                     |       | $                                        | 46.2       |   | $ | 52.8 |   | $ | 69.5 |   | $ | 45.1 |   | $ | 11.4 |   |
| **Per Share  Amounts**:                        |       |                                     |       |   |   |   |   |   |   |   |   |
| Net income — diluted (1)                  |       | $                                        | 1.24       |   | $ | 1.40 |   | $ | 1.84 |   | $ | 1.22 |   | $ | .31 |   |
| Weighted average common  shares — diluted |       | 37.3                                     |       | 37.7 |   | 37.8 |   | 36.9 |   | 36.5 |   |
| Cash dividends declared per common share       |       | $                                        | .75        |   | $ | 1.00 |   | $ | 1.00 |   | $ | — |   | $ | — |   |
| **Balance  Sheet Data****:**                   |       |                                     |       |   |   |   |   |   |   |   |   |
| Working capital                                |       | $                                        | 250.1      |   | $ | 253.1 |   | $ | 274.4 |   | $ | 229.4 |   | $ | 169.8 |   |
| Total assets                                   |       | $                                        | 816.9      |   | $ | 702.5 |   | $ | 677.6 |   | $ | 584.1 |   | $ | 504.5 |   |
| Long-term debt, excluding  current portion     |       | $                                        | 1.2        |   | $ | 1.4 |   | $ | .3 |   | $ | .5 |   | $ | 8.0 |   |
| Shareholders’ equity                      |       | $                                        | 364.7      |   | $ | 334.0 |   | $ | 335.8 |   | $ | 289.5 |   | $ | 232.8 |   |

 

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(1) previous years have been restated in accordance with accounting guidanceconcerning participating securities

 

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**Item 7.  Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

 

# **Overview**

# ** **

# **Systemax is primarily a direct marketer of brand name andprivate label products. Our operations are organized in three reportablebusiness segments — Technology Products, Industrial Products and SoftwareSolutions.**

# ** **

# **Our Technology Products segment sells computers, computersupplies and consumer electronics which are marketed in North America, PuertoRico and Europe. Except for certain PC and related products that we assembleourselves and sell on a private label basis, substantially all of our productsare manufactured by other companies.  Wealso sell private label brands. * *Technology products accounted for94%, 92% and 92% of our net sales in 2009, 2008 and 2007, respectively.**

# ** **

# **Our Industrial Productssegment sells a wide array of material handling equipment, storage equipment,and consumable industrial items which are marketed in North America.  Most of these products are manufactured by othercompanies.  Some products aremanufactured for us to our own design and marketed under the trademarks *GlobalTM*, *GlobalIndustrial.comTM*and *NexelTM.* Industrial products accountedfor 6***%,*8% and 8%, of our net sales in 2009,2008 and 2007, respectively.  In both of these product groups, we offer ourcustomers a broad selection of products, prompt order fulfillment and extensivecustomer service.

# ** **

# **The Company announced plansto exit the Software Solutions segment during the second quarter of 2009 as aresult of economic conditions and difficulties in marketing the segment’sproducts successfully. (See Note 7 to the**Consolidated FinancialStatements included in Item 15 of this Form 10-K).  As of December 31,2009 substantially all of the third party business activities of the SoftwareSolutions segments had been ended.See Note 10 to the Consolidated FinancialStatements included in Item 15 of this Form 10-Kfor additional financialinformation about our business segments as well as information about ourgeographic operations.

# ** **

Themarket for computer products and consumer electronics is subject to intenseprice competition and is characterized by narrow gross profit margins. TheNorth American industrial products market is highly fragmented and we competeagainst companies utilizing multiple distribution channels. Distribution isworking capital intensive, requiring us to incur significant costs associatedwith the warehousing of many products, including the costs of leasing warehousespace, maintaining inventory and inventory management systems, and employingpersonnel to perform the associated tasks. We supplement our on-hand productavailability by maintaining relationships with major distributors andmanufacturers, utilizing a combination of stocking and drop-shipmentfulfillment.

 

Theprimary component of our operating expenses historically has been employee relatedcosts, which includes items such as wages, commissions, bonuses, employeebenefits and stock option expenses. We continually assess our operations toensure that they are efficient, aligned with market conditions and responsiveto customer needs.

 

Duringthe third quarter of 2009, the Company acquired WStore Europe SA and itssubsidiaries, (“WStore”), a European supplier of business IT products andsoftware solutions with operations in France and the United Kingdom forapproximately $4.4 million in cash (see “Financial Condition, Liquidity andCapital Resources” and Note 2 to the Consolidated Financial Statements includedin Item 15 of this Form 10-K).

 

Duringthe second quarter of 2009, the Company purchased certain intellectual propertyand ecommerce assets owned by Circuit City Stores, Inc. and Circuit CityStores West Coast, Inc for $14.0 million in cash plus a sales-based royaltyover 30 months (See Note 2 to the Consolidated Financial Statements included inItem 15 of this Form 10-K).

 

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**CriticalAccounting Policies and Estimates**

 

Oursignificant accounting policies are described in Note 1 to the ConsolidatedFinancial Statements included in Item 15 of this Form 10-K.  Certain accounting policies require theapplication of significant judgment by management in selecting the appropriateassumptions for calculating financial estimates.  By their nature, these judgments are subjectto an inherent degree of uncertainty, and as a result, actual results coulddiffer from those estimates.  Thesejudgments are based on historical experience*,*observationof trends in the industry, information provided by customers and informationavailable from other outside sources, as appropriate.  Management believes that full considerationhas been given to all relevant circumstances that we may be subject to, and theconsolidated financial statements of the Company accurately reflectmanagement’s best estimate of the consolidated results of operations, financialposition and cash flows of the Company for the years presented. We identifybelow a number of policies that entail significant judgments or estimates.  Actual results may differ from these estimatesunder different conditions or assumptions.

 

*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.

 

*Allowancefor Doubtful Accounts Receivable*. 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.

 

*Inventoryvaluation*.  We valueour inventories at the lower of cost or market, cost being determined on thefirst-in, first-out method except in Europe and retail locations where anaverage cost is used. Excess and obsolete or unmarketable merchandise arewritten down based on historical experience, assumptions about future productdemand and market conditions. If market conditions are less favorable thanprojected or if technological developments result in accelerated obsolescence,additional write-downs may be required. While obsolescence and resultantmarkdowns have been within expectations, there can be no guarantee that we willcontinue to experience the same level of markdowns we have in the past.

 

*Goodwill and Intangible Assets.* We apply theprovisions of relevant accounting guidance in our valuation of goodwill,trademarks, domain names, client lists and other intangible assets. Relevantaccounting guidance requires that goodwill and indefinite lived intangibles bereviewed at least annually for impairment or more frequently if indicators ofimpairment exist. The amount of an impairment loss would be recognized as theexcess of the asset’s carrying value over its fair value.

 

*Long-livedAssets.* Management exercises judgment in evaluating our long-lived assets forimpairment and in their depreciation and amortization methods and lives. Webelieve we will generate sufficient undiscounted cash flow to more than recoverthe investments made in property, plant and equipment. Our estimates of futurecash flows involve assumptions concerning future operating performance andeconomic conditions.  While we believethat our estimates of future cash flows are reasonable, different assumptionsregarding such cash flows could materially affect our evaluations.

 

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*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 consolidated financial statements.

 

*Income Taxes.* We are subject to taxation from federal,state and foreign jurisdictions and the determination of our tax provision iscomplex and requires significant management judgment.  Management judgment is also applied in thedetermination of deferred tax assets and liabilities and any valuationallowances that might be required in connection with our ability to realizedeferred tax assets.

 

Sincewe conduct operations in numerous US states and internationally, our effectivetax rate depends upon the geographic distribution of our pre-tax income orlosses among locations with varying tax rates and rules. As the geographic mixof our pre-tax results among various tax jurisdictions changes, the effectivetax rate may vary from period to period. We are also subject to periodicexamination from domestic and foreign tax authorities regarding the amount oftaxes due. These examinations include questions regarding the timing and amountof deductions and the allocation of income among various tax jurisdictions. Wehave established, and periodically reevaluate, an estimated income tax reserveon our consolidated balance sheet to provide for the possibility of adverseoutcomes in income tax proceedings. While management believes that we haveidentified all reasonably identifiable exposures and that the reserve we haveestablished for identifiable exposures is appropriate under the circumstances,it is possible that additional exposures exist and that exposures may besettled at amounts different than the amounts reserved.

 

****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 the entiredeferred 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 ofoperations.

 

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

 

**Recently Adopted and Newly Issued Accounting Pronouncements**

 

Public companies in theUnited States are subject to the accounting and reporting requirements ofvarious authorities, including the Financial Accounting Standards Board(“FASB”) and the Securities and Exchange Commission (“SEC”). These authoritiesissue numerous pronouncements, most of which are not applicable to theCompany’s current or reasonably foreseeable operating structure. Below are thenew authoritative pronouncements that management believes are relevant to theCompany’s current operations.

 

InOctober 2009, the FASB issued amended guidance related to revenuerecognition in multiple-deliverable revenue arrangements and certain arrangementsthat include software elements. This standard

 

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eliminatesthe residual method of revenue allocation by requiring entities to allocaterevenue in an arrangement to all of the deliverables based upon the relativeselling prices of the delivered goods and services  The FASB also issued a new accountingstandard in October 2009, which changes revenue recognition for tangibleproducts containing software and hardware elements. Under this standard,tangible products containing software and hardware that function together todeliver the tangible products’ essential functionality are scoped out of theexisting software revenue recognition guidance and will be accounted for underthe multiple-element arrangements revenue recognition guidance discussed above.Both standards are effective for fiscal years beginning on or after June 15,2010. The Company is currently evaluating the impact, if any, of the adoptionof this standard on our consolidated financial position and results ofoperations.

 

Effective January 1,2009, the Company adopted authoritative guidance that establishes principlesand requirements for how an acquirer in a business combination (i) recognizesand measures in its financial statements the identifiable assets acquired,liabilities assumed, and any non-controlling interest in the acquiree, (ii) recognizesand measures goodwill acquired in a business combination or a gain from abargain purchase, and (iii) determines what information to disclose toenable users of financial statements to evaluate the nature and financialeffects of the business combination. This guidance is applied prospectively forall business combinations entered into after the date of adoption. In the thirdquarter of 2009 the Company expensed approximately $0.8 million of costs thatwould have been capitalized under previous guidance.

 

In June 2008, FASBissued authoritative guidance to clarify that instruments granted inshare-based payment transactions can be participating securities prior to therequisite service having been rendered. The guidance applies to the calculationof Earnings Per Share (“EPS”) for share-based payment awards with rights todividends or dividend equivalents. Unvested share-based payment awards thatcontain non-forfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are participating securities and shall be included in thecomputation of EPS pursuant to the two-class method. This guidance becameeffective for financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those years. All prior-period EPS datapresented is adjusted retrospectively (including interim financial statements,summaries of earnings, and selected financial data). The Company adopted thisauthoritative guidance in January 2009 and it did not have a materialimpact on its condensed consolidated financial statements.

 

**Highlights from 2009**

 

The discussion of ourresults of operations and financial condition that follows will provideinformation that will assist in understanding our financial statements andinformation about how certain accounting principles and estimates affect theconsolidated financial statements. This discussion should be read inconjunction with the consolidated financial statements included herein.

 

·                  Sales increase of 4.4% to $3.2 billion in2009 over 2008.

·                  Completed CircuitCity.com asset purchase andWStore Europe SA and Subsidiaries (“WStore”) stock purchase.

·                  Opened five new retail stores.

·                  Exited unprofitable Software Solutionssegment.

·                  Diluted earnings per share declined to$1.24 from $1.40 in 2008.

·                  Movements in exchange rates negatively impactedEuropean and Canadian sales by approximately $103.6 million and $17.3 million,respectively.

·                  52 weeks in 2009 and 2007 vs. 53 weeks in2008.

 

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# **Results ofOperations**

 

Key PerformanceIndicators (in thousands):

 
| ** **                                                               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                               | ** ** | **2009**                     | ** ** | **2008** | ** ** | **%  Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **%  Change** | ** ** |
| ***Net sales by segment:***                                              |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Technology products                                                      |       | $                            | 2,967,896  |   | $ | 2,795,441 |   | 6.2 | % | $ | 2,795,441 |   | $ | 2,553,716 |   | 9.5 | % |
| Industrial products                                                      |       | 196,129                      |       | 237,027 |   | (17.3 | )% | 237,027 |   | 225,746 |   | 5.0 | % |
| Software solutions                                                       |       | 1,970                        |       | 493 |   | 299.6 | % | 493 |   | 413 |   | 19.4 | % |
| Total net sales                                                          |       | $                            | 3,165,995  |   | $ | 3,032,961 |   | 4.4 | % | $ | 3,032,961 |   | $ | 2,779,875 |   | 9.1 | % |
| ***Net sales by geography:***                                            |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| North America                                                            |       | $                            | 2,317,475  |   | $ | 2,092,372 |   | 10.8 | % | $ | 2,092,372 |   | $ | 1,847,477 |   | 13.3 | % |
| Europe                                                                   |       | 848,520                      |       | 940,589 |   | (9.8 | )% | 940,589 |   | 932,398 |   | .9 | % |
| Total net sales                                                          |       | $                            | 3,165,995  |   | $ | 3,032,961 |   | 4.4 | % | $ | 3,032,961 |   | $ | 2,779,875 |   | 9.1 | % |
| *Consolidated gross profit*                                              |       | $                            | 460,248    |   | $ | 458,559 |   | .4 | % | $ | 458,559 |   | $ | 426,301 |   | 7.6 | % |
| *Consolidated gross margin*                                              |       | 14.5                         | %          | 15.1 | % | (.6 | )% | 15.1 | % | 15.3 | % | (.2 | )% |
| Consolidated selling, general and administrative costs                   |       | $                            | 386,857    |   | $ | 375,192 |   | 3.1 | % | $ | 375,192 |   | $ | 332,359 |   | 12.9 | % |
| *Consolidated*selling,  general and administrative *costs as % of sales* |       | 12.2                         | %          | 12.4 | % | (.2 | )% | 12.4 | % | 12.0 | % | .4 | % |
| ***Operating income (loss) by  segment:***                               |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Technology products                                                      |       | $                            | 87,127     |   | $ | 96,177 |   | (9.4 | )% | $ | 96,177 |   | $ | 100,958 |   | (4.7 | )% |
| Industrial products                                                      |       | 15,415                       |       | 24,621 |   | (37.4 | )% | 24,621 |   | 20,595 |   | 19.5 | % |
| Software solutions                                                       |       | (6,457                       | )          | (17,948 | ) | 64.0 | % | (17,948 | ) | (15,813 | ) | (13.5 | )% |
| Consolidated operating income                                            |       | $                            | 73,391     |   | $ | 83,367 |   | (12.0 | )% | $ | 83,367 |   | $ | 93,942 |   | (11.3 | )% |
| ***Operating margin by segment****:*                                     |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Technology products                                                      |       | 2.7                          | %          | 3.2 | % | (.5 | )% | 3.2 | % | 3.6 | % | (.4 | )% |
| Industrial products                                                      |       | .5                           | %          | .8 | % | (.3 | )% | .8 | % | .7 | % | .1 | % |
| Software solutions                                                       |       | (.2                          | )%         | (.6 | )% | .4 | % | (.6 | )% | (.6 | )% | — |   |
| *Consolidated operating margin*                                          |       | 2.3                          | %          | 2.7 | % | (.4 | )% | 2.7 | % | 3.4 | % | (.7 | )% |
| Effective income tax rate                                                |       | 36.8                         | %          | 36.9 | % | (.1 | )% | 36.9 | % | 30.5 | % | 6.4 | % |
| Net income                                                               |       | $                            | 46,185     |   | $ | 52,843 |   | (12.6 | )% | $ | 52,843 |   | $ | 69,481 |   | (23.9 | )% |
| *Net margin*                                                             |       | 1.5                          | %          | 1.7 | % | (.2 | )% | 1.7 | % | 2.5 | % | (.8 | )% |

 

*NETSALES*

 

*SEGMENTS:*

 

Thegrowth in Technology products sales in 2009 is attributable to increased retailand internet sales in the consumer channel, opening 5 retail stores and the twoacquisitions completed during 2009. Sales attributable to Circuit City andWStore Europe SA and subsidiaries (acquired in the second and third quarters of2009, respectively) totaled approximately $131.1 million for the year. On aconstant currency basis, translating 2009 foreign results at 2008 exchangerates, sales would have grown 10.5%. or $120.9 million. Adjusting for theimpact of the number of weeks, Technology products sales increased 8.3% for theyear.

 

NorthAmerican technology products sales increased 14.3% in 2009 compared to 2008benefiting from the opening of 5 retail stores and the Circuit City acquisitionwhich contributed $67.3 million in sales. On a constant currency basis,translating 2009 Other North America results at 2008 exchange rates, NorthAmerican technology products sales would have grown to 15.2%. The movement inthe exchange rates negatively impacted sales by approximately $17.3 million.Adjusting for the impact of the number of weeks, North American technologyproducts sales increased 16.7%. 

 

Europeantechnology products sales declined 9.8% to $848.5 million as the result ofslower business to business sales. The trend of declining sales in Europe isexpected to reverse as global economic conditions improve and as a result ofthe WStore acquisition. Sales attributable to the WStore acquisition totaledapproximately $63.8 million in 2009. On a constant currency basis, translating2009 foreign results at 2008 exchange rates, European sales would haveincreased 1.2%. The movement in foreign exchange rates accounted for $103.6million of the revenue decline in Europe for the year. Adjusting for the impactof the number of weeks, European sales would have declined 8.3%. 

 

Thedecline in Industrial products sales is attributable to the slowdown inbusiness to business economic activity which started in the second half of 2008and continued into 2009. Adjusting for the impact of the number of weeks,Industrial products sales decreased 15.9%. The Company has implementedstrategies to improve sales growth such as expanding its product offerings andlaunching an improved customer website.

 

TheCompany announced plans to exit its Software solutions segment during thesecond quarter of 2009. As of December 31, 2009 substantially all of thethird party business activities of ProfitCenter Software had ended.

 

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*GEOGRAPHIES:*

 

NorthAmerican sales increased 10.8% to $2.3 billion compared to 2008. North Americansales benefited from increased retail and internet sales in the consumerchannel, opening 5 retail stores and the Circuit City acquisition, whichcontributed $67.3 million of sales offset by the declining sales in theIndustrial products segment.  On aconstant currency basis, translating 2009 Other North America results at 2008exchange rates, North American sales would have grown to 11.6%. The movement inthe exchange rates negatively impacted sales by approximately $17.3 million.Adjusting for the impact of the number of weeks, North American sales increased13.1%.

 

Europeantechnology products sales declined 9.8% to $848.5 million. On a constantcurrency basis, European sales would have increased 1.2%. Sales attributable tothe WStore acquisition totaled approximately $63.8 million for the year.Movement in foreign exchange rates accounted for $103.6 million of the salesdecline in Europe for the year. The trend of declining sales in Europe isexpected to reverse as global economic conditions improve and as a result ofthe WStore acquisition.

 

Worldwideconsumer-channel revenue, defined as revenues from retail stores, consumerwebsites, inbound call centers and, shopping channels, were $1.8 billioncompared to $1.6 billion in the same period in 2008, an increase of 12.2%.Growth was driven primarily by volume increases in computers, including laptopsand netbooks and consumer electronics, including televisions. Worldwidebusiness to business channel sales were $1.3 billion for 2009 compared to $1.4billion in the prior year, a 4.9% decrease. Worldwide business to businesssales declined as the result of the global economic slowdown. The acquisitionof WStore in September 2009 partially offset the decline.

 

*2008vs. 2007:*

 

Salesincreased in all reporting business segments and in both geographies during2008 over 2007. The growth in Technology Products sales increase was driven byincreased internet and retail store sales as the result of the acquisition ofthe CompUSA. The growth in Industrial Products sales resulted from the Companyincreasing its market share through aggressive acquisition of customers via weband catalog advertising.  Salesattributable to CompUSA web and retail were $226.3 million for the year. InEurope sales increased .9% compared to 2007. Movements in foreign exchangerates positively impacted the European sales comparison by approximately $13million for the year. Excluding exchange rate benefits, European sales wouldhave been flat year over year. Sales in Canada (Other North America) increasedby 13.9% compared to the prior year. Excluding exchange rate benefits, saleswould have increased 10.9% for the year. As in the United States, sales slowedin the second half of 2008 in Europe and Canada for both consumer and businessto business sales as the result of a slowdown in economic activity. Sales in theSoftware Solutions segment were not material in 2008 and 2007. The Companyreorganized this segment in the fourth quarter of 2008 which resulted in acharge to earnings of approximately $1.7 million.

 

*GROSSMARGIN*

 

Consolidated gross margindeclined in 2009.as the Company lowered certain product prices and offeredfreight incentives in order to maintain and grow market share and to respond tocompetitive pricing pressures that started in 2008. Additionally, consolidatedgross margin has been impacted by a shift in mix, as higher margin IndustrialProducts accounted for a smaller percentage of consolidated revenues than inprevious years. Gross margin is dependent on variables such as product mix,vendor price protection and other sales incentives, competition, pricingstrategy, cooperative advertising funds required to be classified as areduction to cost of sales, freight discounting and other variables, any or allof which may result in fluctuations in gross margin.

 

Consolidated gross margindeclined during 2008 over 2007 due primarily to competitive pricing pressuresin the Technology Products segment.

 

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*SELLING,GENERAL AND ADMINISTRATIVE EXPENSES*

 

Selling,general and administrative expenses increased in 2009 over 2008 primarily as aresult of the increased sales volume, facility and other operating costsrelated to opening additional retail stores, costs related to winding down theSoftware Solutions segment and costs related to the WStore acquisition.Significant expense increases include approximately $7.8 million in charges forseverance costs, litigation and contractual lease terminations of which approximately$2.9 million of winding down costs related to Software Solutions segment, $4.3million of increased credit card fees, and $1.8 million of increased consultingservices primarily incurred for new software implementation offset by savingsin other various expenses. Also included in 2009 is a gain of approximately$1.8 million from a lawsuit that was settled favorably.

 

Selling,general and administrative expenses increased in 2008 over 2007 primarily as aresult of the increase in sales volume, added personnel, facility and otheroperating costs associated with the CompUSA acquisition, as well as increasedaccounting, auditing, legal and professional expenses and reorganizationcharges incurred in our Software segment. CompUSA operations accounted for $23.6 million of these cost increases.Included in 2007 is a gain of approximately $2.4 million from a lawsuit thatwas settled favorably.

 

*OPERATINGMARGIN*

 

Technologyproducts operating margin decreased in 2009 compared to 2008 due to decline inbusiness to business sales as the result of the global economic slowdown, pricepromotions and freight discounts offered during the year and costs related tothe WStore acquisition.

 

Industrialproducts operating margin decreased in 2009 compared to 2008 due to theslowdown in sales coupled with additional information technology staffing andother costs for the support of new products added and the newly launchede-commerce website.

 

Softwaresolutions segment operating margin increased due to revenue recognized fromcontract terminations. This segment has been winding down operations since thesecond quarter of 2009.

 

Corporateand other expenses operating costs increased 16.5% in 2009 as compared to 2008due to increased expenses for new software implementation, acquisition relatedcosts and additional staffing and overhead costs to support the growth in theCompany’s business.

 

*INTERESTAND OTHER INCOME**AND INTEREST EXPENSE*

 

Interest expense was $.9million, $.3 million, and $1.0 million in 2009, 2008 and 2007, respectively.The interest expense increase in 2009 compared to 2008 is primarilyattributable to the WStore acquisition assumed short term debt and interest oncapital lease obligations. Interest expense decreased in 2008 and 2007 as aresult of decreased short-term borrowings in the Company’s subsidiaries in theUnited Kingdom and the Netherlands. Interest and other income, net was $.8million, $2.0 million, and $5.5 million in 2009, 2008 and 2007, respectively.

 

*INCOME TAXES*

 

The Company’s effective taxrate was 36.8% in 2009 flat as compared to 36.9% in 2008. Included in the 2009rate was a reversal of tax reserves of approximately $0.9 million, as a resultof statute expirations. If excluded, the Company’s effective tax rate wouldhave been 38.4%. The higher tax rate in 2009 is primarily attributed to ahigher percentage of taxable income in countries that have higher corporate taxrates. The Company’s effective tax rate will vary as the mix of pre tax incomefrom the countries the Company does business in varies.

 

The higher tax rate in 2008compared to 2007 is primarily attributable to a higher effective tax rate inthe United Kingdom in 2008 as the result of the reversal of the valuationallowance in 2007. The lower

 

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effective tax rate in 2007resulted primarily from the reversal of a valuation allowance of approximately$5.9 million against deferred tax assets in the United Kingdom partially offsetby the recording of a valuation allowance of approximately $1.7 million againstthe deferred tax assets of Germany. The United Kingdom valuation allowance,originally recorded at $10.2 million, had been established in 2005 as theresult of a cumulative loss position in the United Kingdom

 

During 2009, 2008, and 2007,we did not recognize certain foreign tax credits, certain state deferred taxassets in the United States and certain benefits on losses in foreign tax jurisdictionsdue to our inability to carry such credits and losses back to prior years andour determination that it was more likely than not that we would not generatesufficient future taxable income in those tax jurisdictions to realize theseassets. Accordingly, valuation allowances were recorded against the deferredtax assets associated with those items. If we are able to realize all or partof these deferred tax assets in future periods, it will reduce our provisionfor income taxes by a release of the corresponding valuation allowance.

 

**Seasonality**

 

As the Company’s consumerchannel sales have grown significantly in the past few years, the fourthquarter has represented a greater portion of annual sales thanhistorically.  Net sales havehistorically been modestly weaker during the second and third quarters as aresult of lower business activity during those months. The following table setsforth the net sales, gross profit and income from operations for each of thequarters since January 1, 2007 *(amounts in millions)*.

 
| ** **                          | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------|------------|-------------------|------------|
| ** **                          | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 2009                                | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                           |       | $                 | 752        |   | $ | 722 |   | $ | 754 |   | $ | 938 |   |
| Percentage of year’s net sales |       | 23.8              | %          | 22.8 | % | 23.8 | % | 29.6 | % |
| Gross profit                        |       | $                 | 108        |   | $ | 107 |   | $ | 113 |   | $ | 132 |   |
| Operating income                    |       | $                 | 15         |   | $ | 9 |   | $ | 19 |   | $ | 30 |   |
|                                |       |              |       |   |   |   |   |   |   |
| 2008                                | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                           |       | $                 | 725        |   | $ | 756 |   | $ | 739 |   | $ | 813 |   |
| Percentage of year’s net sales |       | 23.9              | %          | 24.9 | % | 24.4 | % | 26.8 | % |
| Gross profit                        |       | $                 | 114        |   | $ | 115 |   | $ | 115 |   | $ | 115 |   |
| Operating income                    |       | $                 | 26         |   | $ | 21 |   | $ | 20 |   | $ | 16 |   |
|                                |       |              |       |   |   |   |   |   |   |
| 2007                                | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                           |       | $                 | 676        |   | $ | 647 |   | $ | 687 |   | $ | 769 |   |
| Percentage of year’s net sales |       | 24.3              | %          | 23.3 | % | 24.7 | % | 27.7 | % |
| Gross profit                        |       | $                 | 97         |   | $ | 99 |   | $ | 111 |   | $ | 120 |   |
| Operating income                    |       | $                 | 22         |   | $ | 20 |   | $ | 24 |   | $ | 28 |   |

 

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**Financial Condition, Liquidity and Capital Resources**

 

Selectedliquidity data (in thousands):

 
| ** **                                       | ** ** | **December 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                       | ** ** | **2009**              | ** ** | **2008**   | ** ** | **$ Change** | ** ** |
| Cash                                             |       | $                     | 58,309     |       | $          | 115,967 |   | $ | (57,658 | ) |
| Accounts receivable, net                         |       | $                     | 241,860    |       | $          | 182,841 |   | $ | 59,019 |   |
| Inventories                                      |       | $                     | 365,725    |       | $          | 290,594 |   | $ | 75,131 |   |
| Prepaid expenses and other current assets        |       | $                     | 20,066     |       | $          | 12,667 |   | $ | 7,399 |   |
| Accounts payable                                 |       | $                     | 346,362    |       | $          | 285,410 |   | $ | 60,952 |   |
| Accrued expenses and other current liabilities   |       | $                     | 80,945     |       | $          | 72,352 |   | $ | 8,593 |   |
| Current portion of capitalized lease obligations |       | $                     | 1,029      |       | $          | 773 |   | $ | 256 |   |
| Short term debt                                  |       | $                     | 14,168     |       | —     |   | $ | 14,168 |   |
| Working capital                                  |       | $                     | 250,082    |       | $          | 253,092 |   | $ | (3,010 | ) |

 

Our primary liquidity needs areto support working capital requirements in our business, including workingcapital for new retail stores, to fund capital expenditures, to fund thepayment of interest on outstanding debt, to fund special dividends declared byour Board of Directors and for acquisitions. We rely principally upon operatingcash flow to meet these needs. We believe that cash flow from operations andour availability under credit facilities will be sufficient to fund our workingcapital and other cash requirements for the next twelve months.

 

Our working capitaldecreased in 2009 as the result of using cash balances of approximately $14.5million for the purchase of the Circuit City assets, payment of $27.6 millionfor a special dividend, the $4.5 million cash purchase of WStore and commonstock repurchases of $1.2 million. Inventory balances increased related towarehousing additional products as a result in the growth of sales and thestocking our retail stores. Accounts receivable balances increased as theresult of growth in open account business to business sales, the WStoreacquisition and slight growth in accounts receivable days outstanding. Accountspayable and accrued expense balances increased due to inventory growth and theWStore acquisition. The increase in short term debt was attributable to theassumption of the outstanding debt of WStore. Inventory turnover was consistentat 9 times during 2009 and 2008. Our accounts receivable days outstanding wereat 24 in 2009 up from 21 in 2008. 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.

 

Net cash provided byoperating activities was $4.8 million, $82.4 million, and $93.1 million during2009, 2008, and 2007. The decrease in cash provided by operating activities in2009 over 2008 resulted from a $3.0 million decrease in net income adjusted byother non-cash items, such as depreciation expense, and a decrease of $74.6million in cash used for changes in our working capital accounts. The decreasein cash provided by operating activities in 2008 compared to 2007 resulted froma $3.3 million decrease in net income adjusted by other non-cash items, such asdepreciation expense, and a decrease of $7.4 million in cash used for changesin working capital accounts.

 

Net cash used in investingactivities was $32.3 million during 2009, primarily for the CircuitCity.comacquisition and capital expenditures. The WStore acquisition used approximately$4.5 million and provided $5.4 million in cash acquired.  Cash flows used in investing activitiesduring 2008 totaled $45.5 million primarily for the CompUSA acquisition and forcapital expenditures. Net cash used in investing activities was $7.7 millionduring 2007, primarily for capital expenditures. Capital expenditures in 2009,2008, and 2007 included upgrades and enhancements to our information andcommunications systems hardware and software and expenditures in retail storesin North America.

 

Net cash used in financingactivities was $31.5 million during 2009. We repaid approximately $3.6 million in short term debt, repaidapproximately $0.8 million in capital lease obligations, paid a specialdividend of $27.6 million and repurchased Company stock of approximately $1.2million. Proceeds from stock option exercises provided approximately $1.7million of cash. Net cash used in financing activities

 

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was $45.0 million during2008. We repaid approximately $3.9 million in short-term debt, repaidapproximately $0.7 million in capital lease obligations, paid a specialdividend of $37.1 million, and repurchased Company stock of approximately $5.8million. Proceeds and excess tax benefits from stock option exercises providedapproximately $2.5 million of cash. Net cash used in financing activities was$42.7 million during 2007, attributable to dividends paid of $36.6 million, repaymentof short term debt of $8.7 million, repayment of $0.6 million in capital leaseobligations, repurchase of common stock of approximately $1.8 million, offsetby proceeds of stock option exercises and related excess tax benefits of $5.0million.

 

We have a $120.0 millionsecured revolving credit agreement (which may be increased by up to anadditional $30.0 million, subject to certain conditions).  The facility expires in October 2010 andthe Company expects to renew the facility on or before that date.  Borrowings under the agreement are subject toborrowing base limitations of up to 85% of eligible accounts receivable and 40%of qualified inventories and are secured by accounts receivable, inventoriesand certain other assets. The undrawn availability under the facility may notbe less than $15.0 million until the last day of any month in which theavailability net of outstanding borrowings is at least $70.0 million. Therevolving credit agreement requires that we maintain a minimum level ofavailability. If such availability is not maintained, we will then be requiredto maintain a fixed charge coverage ratio (as defined). The agreement containscertain other covenants, including restrictions on capital expenditures andpayments of dividends. As of December 31, 2009, the Company was incompliance with all of the covenants under the credit facility. Eligiblecollateral under the facility was $110.8 million, total availability was $98.7million, outstanding letters of credit of were $12.1 million and there were nooutstanding advances.

 

The Company’s Inmac WStoresubsidiary maintains a secured revolving credit agreement with a financialinstitution in France which is secured by WStore Europe SA accounts receivablebalances. Available amounts for borrowing under this facility includes allaccounts receivable balances not over 60 days past due reduced by the greaterof €4.0 million or 10% of the eligible accounts receivable. As of December 31,2009, there was availability under this credit facility of approximately €6.0million ($8.6 million) and there was €9.9 million ($14.2 million) ofoutstanding borrowings.  Outstandingbalances under this agreement carry interest at 1.5% as of December 31,2009.  The credit facility duration isindefinite; however either party may cancel the agreement with ninety daysnotice. Under this agreement the Company is subject to certain non-financial covenantswhich it was in compliance with at December 31, 2009.

 

The Company’s WStore UKsubsidiary maintains a £2 million secured resolving credit agreement with afinancial institution in the United Kingdom which is secured by WStore UK’saccounts receivable balances. Available amounts for borrowing under thisfacility includes accounts receivable balances less 30% retention. As of December 31,2009, there was availability under this credit facility of approximately £.5million ($.8 million).  Outstandingbalances under this agreement carry interest at 2.5% above the overnight dailyLIBOR rate (0.5% at December 31, 2009). The credit facility duration is indefinite; however either party maycancel the agreement with ninety days notice. Under this agreement the Companyis subject to certain non-financial covenants which it was in compliance withat December 31, 2009.

 

The Company’s Netherlandssubsidiary maintained a €5.0 million credit facility with a local financialinstitution. This facility expired in November 2008 and was not renewed.

 

Our earnings and cash flowsare seasonal in nature, with the fourth quarter of the fiscal year generatinghigher earnings and cash flows than the other quarters. Levels of earnings andcash flows are dependent on factors such as consolidated gross margin andselling, general and administrative costs as a percentage of sales, product mixand relative levels of domestic and foreign sales. Unusual expense items, suchas one time charges and settlements, may impact earnings and are separatelydisclosed. We expect that past performance may not be indicative of futureperformance due to the competitive nature of our Technology Products segmentwhere the need to adjust prices to gain or hold market share is prevalent.

 

Macroeconomic conditions,such as business and consumer sentiment, may affect our revenues, cash flows orfinancial condition.  However, we do not believe that there is a directcorrelation between any specific macroeconomic indicator and our revenues, cashflows or financial condition.  We are not currently interest ratesensitive, as we have significant cash balances and minimal debt.

 

We anticipate cash needs tosupport our growth and expansion plans, continued investment in upgrading andexpanding our technological capabilities and information technologyinfrastructure, opening of new retail stores, and in building out and expandingour distribution center facilities and inventory systems.

 

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These expenses and capital expenditures willrequire significant levels of liquidity, which we believe can be adequatelyfunded from our currently available cash resources. We have recently engaged inseveral opportunistic acquisitions, choosing to pay the purchase price in cash,and may do so in the future as favorable situations arise.  However, adeep and prolonged period of reduced consumer and or business to businessspending could adversely impact our cash resources and force us to eitherforego future acquisition opportunities or to pay the purchase price in sharesof our common stock, which could have a dilutive effect on the our earnings pershare. In addition we anticipate cash needs for implementation of financial andretail point of sale systems. We believe that our cash balances, future cashflows from operations and our availability under credit facilities will besufficient to fund our working capital and other cash requirements for the nexttwelve months.

 

We maintain our cash and cash equivalentsprimarily in money market funds or their equivalent. As of December 31,2009, all of our investments had maturities of less than three months. Accordingly, we do not believe that our investments have significant exposureto interest rate risk.

 

We are obligated under non-cancelable operatingleases for the rental of most of our facilities and certain of our equipmentwhich expire at various dates through 2026. We have sublease agreements for unused space we lease in Wellingborough,England and Uniondale, New York. In the event the sub lessee is unable tofulfill its obligations, we would be responsible for rents due under theleases.

 

Following is a summary of our contractualobligations for future principal payments on our debt, minimum rental paymentson our non-cancelable operating leases and minimum payments on our otherpurchase obligations as of December 2009 (in thousands):

 
| ** **                                        | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|---------------------------------------------------|------------|-----------|------------|-----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|
| *Contractual Obligations:*                        |       |      |       |                  |       |          |       |          |       |                   |       |
|                                              |       |      |       |                  |       |          |       |          |       |                   |       |
| Capital lease obligations                         |       | $         | 2,423      |                  | $          | 1,145         |       | $             | 1,278      |                   | $          | — |   | $ | — |   |
|                                              |       |      |       |                  |       |          |       |          |       |                   |       |
| Non-cancelable operating leases, net of subleases |       | 187,951   |       | 23,849                |       | 67,127        |       | 47,213        |       | 49,762                 |       |
|                                              |       |      |       |                  |       |          |       |          |       |                   |       |
| Short term debt                                   |       | 14,168    |       | 14,168                |       |          |       |          |       |                   |       |
|                                              |       |      |       |                  |       |          |       |          |       |                   |       |
| Purchase & other obligations             |       | 26,854    |       | 17,191                |       | 6,870         |       | 2,793         |       | —                 |       |
|                                              |       |      |       |                  |       |          |       |          |       |                   |       |
| Tax contingencies                                 |       | —    |       | —                |       | —        |       | —        |       | —                 |       |
|                                              |       |      |       |                  |       |          |       |          |       |                   |       |
| Total contractual obligations                     |       | $         | 231,396    |                  | $          | 56,353        |       | $             | 75,275     |                   | $          | 50,006 |   | $ | 49,762 |   |

 

Our purchase and other obligations consistprimarily of certain employment agreements and service agreements.

 

In addition to the contractual obligations notedabove, we had $11.0 million of standby letters of credit outstanding as of December 2009.

 

We are party to certain litigation, the outcomeof which we believe, based on discussions with legal counsel, will not have amaterial adverse effect on our consolidated financial statements.

 

Tax contingencies are related to uncertain taxpositions taken on income tax returns that may result in additional tax,interest and penalties being paid to taxing authorities.

 

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**Off-Balance Sheet Arrangements**

 

We have not created, and are not party to, anyspecial-purpose or off-balance sheet entities for the purpose of raisingcapital, incurring debt or operating our business. We do not have any arrangementsor relationships with entities that are not consolidated into the financialstatements that are reasonably likely to materially affect our liquidity or theavailability of capital resources.

 

TheCompany currently leases its facility in Port Washington, NY from Addwin RealtyAssociates, an entity owned by Richard Leeds, Bruce Leeds, and Robert Leeds,senior executives, Directors and controlling shareholders of the Company.

 

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

 

Weare exposed to market risks, which include changes in U.S. and internationalinterest rates as well as changes in currency exchange rates (principallyPounds Sterling, Euros and Canadian Dollars) as measured against the U.S.Dollar and each other.

 

Thetranslation of the financial statements of our operations located outside ofthe United States is impacted by movements in foreign currency exchange rates.Changes in currency exchange rates as measured against the U.S. dollar maypositively or negatively affect income statement, balance sheet and cash flowsas expressed in U.S. dollars. Sales would have fluctuated by approximately$109.3 million and pre tax income would have fluctuated by approximately $1.8million if average foreign exchange rates changed by 10% in 2009.  We have limited involvement with derivativefinancial instruments and do not use them for trading purposes. We may enterinto foreign currency options or forward exchange contracts aimed at limitingin part the impact of certain currency fluctuations, but as of December 31,2009 we had no outstanding forward exchange contracts.

 

Ourexposure to market risk for changes in interest rates relates primarily to ourvariable rate debt.  Our variable ratedebt consists of short-term borrowings under our credit facilities.  As of December 31, 2009, there were nooutstanding balances under our variable rate credit facility. A hypotheticalchange in average interest rates of one percentage point is not expected tohave a material effect on our financial position, results of operations or cashflows over the next fiscal year.

 

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

 

Theinformation required by Item 8 of Part II is incorporated herein byreference to the Consolidated Financial Statements filed with this report; seeItem 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 31,2009. Based upon thisevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that the Company’s disclosure controls and procedures areeffective.

 

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**Inherent Limitations ofInternal Controls over Financial Reporting**

 

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

 

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

 

**Management’s Report on InternalControl Over Financial Reporting**

 

**The Company’s management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Under thesupervision and with the participation of Company’s management, including theChief Executive Officer and Chief Financial Officer, the Company evaluated theeffectiveness of the design and operation of its internal control overfinancial reporting based on the framework established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on that evaluation, the Company’s Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s internalcontrol over financial reporting was effective as of December 31, 2009.**

 

**The Company’s independentregistered public accounting firm, Ernst & Young LLP, has issued anattestation report on the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2009, a copy of which is includedin this report.**

** **

**Changes in Internal Control OverFinancial Reporting**

 

Therehave been no changes in the Company’s internal controls over financialreporting during the quarter ended December 31, 2009 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**Item 9B. Other Information.**

 

None.

 

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**PART III**

 

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

 

Theinformation required by Item 10 of Part III is hereby incorporated byreference to the Company’s Proxy Statement for the 2010 Annual Meeting ofStockholders. (the “Proxy Statement”).

 

**Item 11. Executive Compensation.**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**PART IV**

 

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

 
| (a)    | 1.     | Consolidated Financial Statements of Systemax Inc.                                                                                                   |   | **Reference** |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|
|   |   |                                                                                                                                                 |   |          |
|   |   | Reports of Ernst & Young LLP Independent  Registered Public Accounting Firm                                                                 |   | 39            |
|   |   | Consolidated Balance Sheets as of December 31,  2009 and 2008                                                                                   |   | 41            |
|   |   | Consolidated Statements of Operations for the years  ended December 31, 2009, 2008, and 2007                                                    |   | 42            |
|   |   | Consolidated Statements of Cash Flows for the years  ended December 31, 2009, 2008 and 2007                                                     |   | 43            |
|   |   | Consolidated Statements of Shareholders’ Equity for  the Years ended December 31, 2009, 2008 and 2007                                      |   | 44            |
|   |   | Notes to Consolidated Financial Statements                                                                                                           |   | 45            |
|   |   |                                                                                                                                                 |   |          |
|   | 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                                                                                                 |   | 58            |

 

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|                                                      |   | Schedules  not included with this additional financial data have been omitted because  they are not applicable or the required information is shown in the  consolidated financial statements or notes thereto. |   |   |
|-----------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                      |   |                                                                                                                                                                                                            |   |   |
| **Item 15. Exhibits and Financial  Statement Schedules.** |
|                                                      |   |                                                                                                                                                                                                            |   |   |
|                                                      | 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, incorporated  by reference to the Company’s annual report on Form 10-K for the year  ended December 31, 2007)                                                             |
| 3.3         |       | Amendment  to the Bylaws of the Registrant (incorporated by reference to the Company’s  report on Form 8-K dated March 3, 2008)                                                                                                                                |
| 4.1         |       | Stockholders  Agreement (incorporated by reference to the Company’s quarterly report on  Form 10-Q for the quarterly period ended September 30, 1995)                                                                                                          |
| 10.1        |       | Form of  1995 Long-Term Stock Incentive Plan* (incorporated by reference to the  Company’s registration statement on Form S-1) (Registration  No. 333-1852)                                                                                               |
| 10.2        |       | Form of  1995 Stock Plan for Non-Employee Directors* (incorporated by reference to the  Company’s registration statement on Form S-1) (Registration  No. 333-1852)                                                                                        |
| 10.3        |       | 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)                                                                                                              |
| 10.4        |       | Form of  2006 Stock Incentive Plan for Non-Employee Directors* (incorporated by  reference to the Company’s annual report on Form 10-K for the year ended  December 31, 2006)                                                                             |
| 10.5        |       | Form of  2005 Employee Stock Purchase Plan* (incorporated by reference to the  Company’s annual report on Form 10-K for the year ended  December 31, 2006)                                                                                                |
| 10.6        |       | 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)                      |
| 10.7        |       | First  Amendment to Lease Agreement dated September 20, 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)  |
| 10.8        |       | Second  Amendment to Lease Agreement dated September 20, 1988 between the  Company and Addwin Realty Associates (Port Washington facility) (incorporated  by reference to the Company’s annual report on Form 10-K for the year  ended December 31, 2007) |
| 10.9        |       | Build-to-Suit  Lease Agreement dated April, 1995 among the Company, American National Bank  and Trust Company of Chicago (Trustee for the                                                                                                                                     |

 

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|   |   | 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)                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10  |   | First  Amendment, dated as of February 1, 2006, to the Naperville Illinois  Facility Lease between the Company and Ambassador Drive LLC (current  landlord) (incorporated by reference to the Company’s annual report on  Form 10-K for the year ended December 31, 2005) |
| 10.11  |   | 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)      |
| 10.12  |   | First  Amendment, dated as of September 5, 2003, to the Lease Agreement between  Tiger Direct, Inc. and Keystone Miami Property Holding Corp. (Miami  facility) (filed herewith)                                                                                                    |
| 10.13  |   | Second  Amendment, dated March 22, 2007, to the Lease Agreement between Tiger  Direct, Inc. and Keystone Miami Property Holding Corp. (Miami facility)  (filed herewith)                                                                                                            |
| 10.14  |   | Third  Amendment, dated as of June 26, 2009, to the Lease Agreement between  Tiger Direct, Inc. and Mota Associates Limited Partnership (successor in  interest to landlord Keystone Miami Property Holding Corp.) (Miami facility)  (filed herewith)                               |
| 10.15  |   | Lease  agreement, dated December 8, 2005, between the Company and Hamilton  Business Center, LLC (Buford, Georgia facility) (incorporated by reference to  the Company’s annual report on Form 10-K for the year ended  December 31, 2005)                                |
| 10.16  |   | First  Amendment, dated as of June 12, 2006, to the Lease Agreement between the  Company and Hamilton Business Center, LLC (Buford, Georgia facility)  (incorporated by reference to the Company’s annual report on Form 10-K  for the year ended December 31, 2005)      |
| 10.17  |   | 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)                                        |
| 10.18  |   | Amendment  No. 1, dated December 30, 2009, to Employment Agreement between the  Company and Gilbert Fiorentino* (incorporated by reference to the Company’s  report on Form 8-K dated December 30, 2009).                                                            |
| 10.19  |   | 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).                            |
| 10.20  |   | Amendment  No. 1, dated December 30, 2009, to the Restricted Stock Unit  Agreement between the Company and Gilbert Fiorentino* (incorporated by  reference to the Company’s report on Form 8-K dated December 30,  2009).                                            |
| 10.21  |   | Employment  Agreement, dated as of January 17, 2007, between the Company and  Lawrence P. Reinhold*(incorporated by reference to the Company’s annual  report on Form 10-K for the year ended December 31, 2006).                                                         |
| 10.22  |   | Amendment  No.1, dated December 30, 2009, to the Employment Agreement between the  Company and Lawrence P. Reinhold* (incorporated by reference to the Company’s  report on Form 8-K dated December 30, 2009).                                                            |

 

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| 10.23 |   | Amended  and Restated Credit Agreement, dated as of October 27, 2005, between JPMorgan  Chase Bank, N.A. and affiliates, General Electric Capital Corporation, and  GMAC Commercial Finance LLC (as Lenders) with the Company and certain  subsidiaries of the Company (as Borrowers) (the “Amended and Restated JP  Morgan Chase Loan Agreement”) (incorporated by reference to the Company’s  report on Form 8-K dated October 27, 2005) |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24 |   | Amendment  No. 1, dated as of December 19, 2005, to the Amended and Restated  JP Morgan Chase Loan Agreement (incorporated by reference to the Company’s  annual report on Form 10-K for the year ended December 31, 2005)                                                                                                                                                                                                                      |
| 10.25 |   | Asset  Purchase Agreement between the Company and CompUSA dated January 5, 2008  (incorporated by reference to the Company’s annual report on Form 10-K  for the year December 31, 2007)                                                                                                                                                                                                                                                             |
| 10.26 |   | Amendment  to Asset Purchase Agreement between the Company and CompUSA dated  February 14, 2008 (incorporated by reference to the Company’s annual  report on Form 10-K for the year ended December 31, 2007)                                                                                                                                                                                                                                        |
| 10.27 |   | Asset  Purchase Agreement, as amended, dated as of April 5, 2009 and  May 14, 2009, by and among Systemax Inc., as Buyer and Circuit City  Stores West Coast, Inc. and Circuit City Stores, Inc, as Sellers  (incorporated by reference to the Company’s report on Form 8-K dated  May 20, 2009).                                                                                                                                          |
| 14    |   | Corporate  Ethics Policy for Officers, Directors and Employees (revised as of March,  2010)                                                                                                                                                                                                                                                                                                                                                                              |
| 21    |   | Subsidiaries  of the Registrant (filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 23    |   | Consent  of Independent Registered Public Accounting Firm (filed herewith)                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1  |   | Certification  of the Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (filed  herewith)                                                                                                                                                                                                                                                                                                                                          |
| 31.2  |   | Certification  of the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (filed  herewith)                                                                                                                                                                                                                                                                                                                                          |
| 32.1  |   | Certification  of the Chief Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (filed  herewith)                                                                                                                                                                                                                                                                                                                                          |
| 32.2  |   | Certification  of the Chief Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (filed  herewith)                                                                                                                                                                                                                                                                                                                                          |

 

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*   Management contract or compensatory plan or arrangement

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | SYSTEMAX  INC.                        |
|--------|---------------------------------------|
|   |                                  |
|   | By:  /s/ RICHARD LEEDS                |
|   |                                  |
|   | Richard  Leeds                        |
|   | Chairman  and Chief Executive Officer |
|   |                                  |
|   | Date:  March 18, 2010            |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 
| **Signature**             | ** ** | **Title**                                         |   | **Date**            |
|---------------------------|------------|---------------------------------------------------|--------|---------------------|
|                      |       |                                              |   |                |
| /s/  RICHARD LEEDS        |       | Chairman and Chief Executive Officer              |   | March 18, 2010 |
| Richard Leeds             |       | (Principal Executive Officer)                     |   |                |
|                      |       |                                              |   |                |
| /s/  BRUCE LEEDS          |       | Vice Chairman and Director                        |   | March 18, 2010 |
| Bruce Leeds               |       |                                              |   |                |
|                      |       |                                              |   |                |
| /s/  ROBERT LEEDS         |       | Vice Chairman and Director                        |   | March 18, 2010 |
| Robert Leeds              |       |                                              |   |                |
|                      |       |                                              |   |                |
| /s/  LAWRENCE P. REINHOLD |       | Executive Vice President, Chief Financial Officer |   | March 18, 2010 |
| Lawrence P. Reinhold      |       | and Director                                      |   |                |
|                      |       | (Principal Financial Officer)                     |   |                |
|                      |       |                                              |   |                |
| /s/  THOMAS AXMACHER      |       | Vice President and Controller                     |   | March 18, 2010 |
| Thomas Axmacher           |       | (Principal Accounting Officer)                    |   |                |
|                      |       |                                              |   |                |
| /s/  GILBERT FIORENTINO   |       | Chief Executive, Technology Products Group        |   | March 18, 2010 |
| Gilbert Fiorentino        |       | and Director                                      |   |                |
|                      |       |                                              |   |                |
| /s/  ROBERT D. ROSENTHAL  |       | Director                                          |   | March 18, 2010 |
| Robert D. Rosenthal       |       |                                              |   |                |
|                      |       |                                              |   |                |
| /s/  STACY DICK           |       | Director                                          |   | March 18, 2010 |
| Stacy Dick                |       |                                              |   |                |
|                      |       |                                              |   |                |
| /s/  MARIE ADLER-KRAVECAS |       | Director                                          |   | March 18, 2010 |
| Marie Adler-Kravecas      |       |                                              |   |                |

 

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**Report of Independent RegisteredPublic Accounting Firm**

 

TheBoard of Directors and Shareholders of Systemax Inc.

 

Wehave audited the accompanying consolidated balance sheets of Systemax Inc. asof December 31, 2009 and 2008, and the related consolidated statements ofoperations, shareholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2009. Our audits also included the financial statement schedule listed in theindex at Item 15(a).  These financialstatements and schedule are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements and schedule based on our audits.

 

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

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Systemax Inc. at December 31,2009 and 2008, and the consolidated results of its operations and its cashflows for each of the three years in the period ended December 31, 2009,in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, present fairly in all material respects theinformation set forth therein.

 

Asdiscussed in Note 2 to the consolidated financial statements, the Companyadopted the guidance issued in Financial Accounting Standards Board (“FASB”)Statement No. 141(R), “Business Combinations” (codified in FASB AccountingStandards Codification Topic 805, “Business Combinations”) on January 1,2009.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), Systemax Inc.’s internal controlover financial reporting as of December 31, 2009, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 18,2010 expressed an unqualified opinion thereon.

 

 

/s/Ernst & Young LLP

NewYork, New York

March 18,2010

 

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TheBoard of Directors and Shareholders of Systemax Inc.

 

Wehave audited Systemax Inc.’s internal control over financial reporting as of December 31,2009, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Systemax Inc.’s management is responsible for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on the company’s internal controlover financial reporting based on our audit.

 

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

 

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

 

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

 

Inour opinion, Systemax Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2009 based onthe COSO criteria.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofSystemax Inc. as of December 31, 2009 and 2008 and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2009 of SystemaxInc. and our report dated March 18, 2010 expressed an unqualified opinionthereon.

 

/s/Ernst & Young LLP

NewYork, New York

March 18,2010

 

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#### **SYSTEMAX INC.**

#### **CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                                                                                                                           | ** ** | ** **            | ** ** |   | ** ** |
| ASSETS:                                                                                                                                                        | ** ** | ** **            | ** ** |   | ** ** |
| Current assets:                                                                                                                                                | ** ** | ** **            | ** ** |   | ** ** |
| Cash                                                                                                                                                           |       | $                     | 58,309     |   | $ | 115,967 |   |
| Accounts receivable, net of  allowances of $22,532 and $17,523                                                                                                 |       | 241,860               |       | 182,841 |   |
| Inventories                                                                                                                                                    |       | 365,725               |       | 290,594 |   |
| Prepaid expenses and other  current assets                                                                                                                     |       | 20,066                |       | 12,667 |   |
| Deferred income taxes                                                                                                                                          |       | 6,626                 |       | 9,558 |   |
| Total current assets                                                                                                                                           |       | 692,586               |       | 611,627 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Property, plant and  equipment, net                                                                                                                            |       | 65,598                |       | 48,465 |   |
| Deferred income taxes                                                                                                                                          |       | 8,564                 |       | 11,198 |   |
| Goodwill and intangibles                                                                                                                                       |       | 48,127                |       | 29,366 |   |
| Other assets                                                                                                                                                   |       | 2,026                 |       | 1,797 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Total assets                                                                                                                                                   |       | $                     | 816,901    |   | $ | 702,453 |   |
|                                                                                                                                                           | ** ** | ** **            | ** ** |   | ** ** |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                                                                    | ** ** | ** **            | ** ** |   | ** ** |
| Current liabilities:                                                                                                                                           | ** ** | ** **            | ** ** |   | ** ** |
| Accounts payable                                                                                                                                               |       | $                     | 346,362    |   | $ | 285,410 |   |
| Accrued expenses and other  current liabilities                                                                                                                |       | 80,945                |       | 72,352 |   |
| Short term debt                                                                                                                                                |       | 14,168                |       | — |   |
| Current portion of  capitalized lease obligations                                                                                                              |       | 1,029                 |       | 773 |   |
| Total current liabilities                                                                                                                                      |       | 442,504               |       | 358,535 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Capitalized lease  obligations                                                                                                                                 |       | 1,194                 |       | 1,411 |   |
| Other liabilities                                                                                                                                              |       | 8,518                 |       | 8,552 |   |
| Total liabilities                                                                                                                                              |       | 452,216               |       | 368,498 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| 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 38,862,019 and 38,855,989  shares; outstanding 36,450,767 and 36,223,747 shares | ** ** | 389                   | ** ** | 389 | ** ** |
| Additional paid-in capital                                                                                                                                     |       | 180,508               |       | 179,241 |   |
| Common stock in treasury at  cost — 2,411,252 and 2,632,242 shares                                                                                        |       | (28,545               | )          | (31,158 | ) |
| Retained earnings                                                                                                                                              |       | 210,975               |       | 192,401 |   |
| Accumulated other  comprehensive income (loss), net of tax                                                                                                     |       | 1,358                 |       | (6,918 | ) |
| Total shareholders’ equity                                                                                                                                |       | 364,685               |       | 333,955 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Total liabilities and  shareholders’ equity                                                                                                               |       | $                     | 816,901    |   | $ | 702,453 |   |

 

See notes to consolidated financial statements.

 

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

**CONSOLIDATED STATEMENTS OFOPERATIONS**

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

 
| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                              |       | $                                | 3,165,995  |   | $ | 3,032,961 |   | $ | 2,779,875 |   |
| Cost of sales                                          |       | 2,705,747                        |       | 2,574,402 |   | 2,353,574 |   |
| Gross profit                                           |       | 460,248                          |       | 458,559 |   | 426,301 |   |
| Selling, general and  administrative expenses          |       | 386,857                          |       | 375,192 |   | 332,359 |   |
| Operating income                                       |       | 73,391                           |       | 83,367 |   | 93,942 |   |
| Foreign currency exchange  loss (gain)                 |       | 187                              |       | 1,300 |   | (1,562 | ) |
| Interest and other income,  net                        |       | (768                             | )          | (1,981 | ) | (5,505 | ) |
| Interest expense                                       |       | 887                              |       | 305 |   | 986 |   |
| Income before income taxes                             |       | 73,085                           |       | 83,743 |   | 100,023 |   |
| Provision for income taxes                             |       | 26,900                           |       | 30,900 |   | 30,542 |   |
| Net income                                             |       | $                                | 46,185     |   | $ | 52,843 |   | $ | 69,481 |   |
| Net income per common share:                           |       |                             |       |   |   |   |   |
| Basic                                                  |       | $                                | 1.26       |   | $ | 1.43 |   | $ | 1.93 |   |
| Diluted                                                |       | $                                | 1.24       |   | $ | 1.40 |   | $ | 1.84 |   |
|                                                   |       |                             |       |   |   |   |   |
| Weighted average common and  common equivalent shares: |       |                             |       |   |   |   |   |
| Basic                                                  |       | 36,706                           |       | 36,950 |   | 35,968 |   |
| Diluted                                                |       | 37,343                           |       | 37,705 |   | 37,688 |   |

 

See notes to consolidated financialstatements.

 

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**SYSTEMAX INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

 
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                             |       |                             |       |   |   |   |   |
| Net income                                                                         |       | $                                | 46,185     |   | $ | 52,843 |   | $ | 69,481 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities: |       |                             |       |   |   |   |   |
| Depreciation and  amortization                                                     |       | 12,353                           |       | 10,387 |   | 8,780 |   |
| Provision (benefit) for  deferred income taxes                                     |       | 5,704                            |       | 6,197 |   | (6,106 | ) |
| Provision for returns and  doubtful accounts                                       |       | 4,698                            |       | 2,424 |   | 4,575 |   |
| Compensation expense related  to equity compensation plans                         |       | 2,867                            |       | 3,869 |   | 4,159 |   |
| Excess tax benefit from  exercises of stock options                                |       | (576                             | )          | (1,380 | ) | (2,160 | ) |
| Loss (gain) on dispositions  and abandonment                                       |       | 154                              |       | 89 |   | (1,032 | ) |
|                                                                               |       |                             |       |   |   |   |   |
| Changes in operating assets  and liabilities:                                      |       |                             |       |   |   |   |   |
| Accounts receivable                                                                |       | (20,907                          | )          | 6,010 |   | 29,450 | ) |
| Inventories                                                                        |       | (69,618                          | )          | (48,924 | ) | (21,628 | ) |
| Prepaid expenses and other  current assets                                         |       | (5,490                           | )          | (16 | ) | 15,916 |   |
| Income taxes  payable/receivable                                                   |       | 3,983                            |       | 602 |   | 1,925 |   |
| Accounts payable, accrued  expenses and other current liabilities                  |       | 25,414                           |       | 50,318 |   | 48,623 |   |
| Net cash provided by  operating activities                                         |       | 4,767                            |       | 82,419 |   | 93,083 |   |
|                                                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |   | ** ** |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                             | ** ** | ** **                       | ** ** | ** ** | ** ** |   | ** ** |
| Purchase of Circuit City  assets                                                   |       | (14,494                          | )          | — | ** ** | **—** | ** ** |
| Purchase of WStore Europe SA                                                       |       | (4,469                           | )          | — | ** ** | **—** | ** ** |
| Cash acquired WStore Europe  SA                                                    |       | 5,438                            |       | — | ** ** | **—** | ** ** |
| Purchase of certain CompUSA  assets                                                |       | —                           |       | (30,649 | ) | **—** | ** ** |
| Purchases of property, plant  and equipment                                        |       | (18,855                          | )          | (14,942 | ) | (7,699 | ) |
| Proceeds from disposals of  property, plant and equipment                          |       | 84                               |       | 72 |   | 28 |   |
| Net cash used in investing  activities                                             |       | (32,296                          | )          | (45,519 | ) | (7,671 | ) |
|                                                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |   | ** ** |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                             | ** ** | ** **                       | ** ** | ** ** | ** ** |   | ** ** |
| Repayments of borrowings from  banks                                               |       | (3,614                           | )          | (3,880 | ) | (8,708 | ) |
| Repayments of capital lease  obligations                                           |       | (726                             | )          | (673 | ) | (579 | ) |
| Dividends paid                                                                     |       | (27,611                          | )          | (37,126 | ) | (36,588 | ) |
| Proceeds from issuance of  common stock                                            |       | 1,082                            |       | 1,133 |   | 2,830 |   |
| Repurchase of common stock                                                         |       | —                           |       | — |   | (1,858 | ) |
| Purchase of treasury stock                                                         |       | (1,174                           | )          | (5,824 | ) | — |   |
| Excess tax benefit from  exercises of stock options                                |       | 576                              |       | 1,380 |   | 2,160 |   |
| Net cash used in by financing  activities                                          |       | (31,467                          | )          | (44,990 | ) | (42,743 | ) |
|                                                                               |       |                             |       |   |   |   |   |
| EFFECTS OF EXCHANGE RATES ON  CASH                                                 |       | 1,338                            |       | (3,964 | ) | (1,612 | ) |
|                                                                               |       |                             |       |   |   |   |   |
| NET (DECREASE) INCREASE IN  CASH                                                   |       | (57,658                          | )          | (12,054 | ) | 41,057 |   |
| CASH – BEGINNING OF YEAR                                                      |       | 115,967                          |       | 128,021 |   | 86,964 |   |
|                                                                               |       |                             |       |   |   |   |   |
| CASH – END OF YEAR                                                            |       | $                                | 58,309     |   | $ | 115,967 |   | $ | 128,021 |   |
| Supplemental disclosures:                                                          |       |                             |       |   |   |   |   |
| Interest paid                                                                      |       | $                                | 756        |   | $ | 291 |   | $ | 1,182 |   |
| Income taxes paid                                                                  |       | $                                | 13,909     |   | $ | 29,514 |   | $ | 30,275 |   |
| Supplemental disclosures of  non-cash investing and financing activities:          |       |                             |       |   |   |   |   |
| Acquisitions of equipment  through capital leases                                  |       | $                                | 765        |   | $ | 2,152 |   | $ | 251 |   |

 

See notes to consolidated financial statements.

 

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**SYSTEMAX INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

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

 
| ** **                                      | ** ** | **Common  Stock**                  | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                    | ** ** | ** **             | ** ** | ** **                                           | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|------------|------------|----------------------------------|------------|-------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **Number  of Shares  Outstanding** | ** ** | **Amount** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Treasury  Stock,  At Cost** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Comprehensive  Income (Loss)** | ** ** |
|                                            |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       |   |   |
| Balances,  January 1, 2007                 |       | 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    |       |                               |       |       |       |                             |       |                          |       |                   |       | 4,530                                                |       | 4,530 |   |
| Dividends  paid                                 |       |                               |       |       |       |                             |       |                          |       | (36,588                | )          |                                                 |       |   |   |
|                                            |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       |   |   |
| Net  income                                     |       |                               |       |       |       |                             |       |                          |       | 69,481                 |       |                                                 |       | 69,481 |   |
| Total  comprehensive income                     |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       | 74,011 |   |
| Balances,  December 31, 2007               |       | 36,092                             |       | 383        |       | 173,381                          |       | (26,324                       | )          | 176,684                |       | 11,711                                               |       |   |   |
| Stock-based  compensation expense               | ** ** | ** **                         | ** ** | ** ** |       | 3,794                            |       |                          |       |                   |       |                                                 | ** ** | ** ** | ** ** |
| Issuance  of restricted stock                   |       | 104                                |       | 1          |       | 283                              |       | 46                            |       |                   |       |                                                 | ** ** | ** ** | ** ** |
| Exercise  of stock options                      |       | 503                                |       | 5          |       | 184                              |       | 944                           |       |                   |       |                                                 | ** ** | ** ** | ** ** |
| Repurchase  of treasury stock                   |       | (475                               | )          |       |       |                             |       | (5,824                        | )          |                   |       |                                                 | ** ** | ** ** | ** ** |
| Income  tax benefit on stock-based compensation |       |                               |       |       |       | 1,599                            |       |                          |       |                   |       |                                                 |       |   |   |
| Change  in cumulative translation adjustment    |       |                               |       |       |       |                             |       |                          |       |                   |       | (18,629                                              | )          | (18,629 | ) |
|                                            |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       |   |   |
| Dividends  paid                                 |       |                               |       |       |       |                             |       |                          |       | (37,126                | )          |                                                 |       |   |   |
|                                            |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       |   |   |
| Net  income                                     |       |                               |       |       |       |                             |       |                          |       | 52,843                 |       |                                                 |       | 52,843 |   |
|                                            |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       |   |   |
| Total  comprehensive income                     |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       | 34,214 |   |
| Balances,  December 31, 2008               |       | 36,224                             |       | $          | 389        |                             | $          | 179,241                       |       | $                      | (31,158    | )                                                    | $          | 192,401 |   | $ | (6,918 | ) |   |   |
| Stock-based  compensation expense               | ** ** | ** **                         | ** ** | ** ** |       | 2,818                            |       |                          |       |                   |       |                                                 | ** ** | ** ** | ** ** |
| Issuance  of restricted stock                   |       | 105                                |       |       |       | (754                             | )          | 1,183                         |       |                   |       |                                                 | ** ** | ** ** | ** ** |
| Retired  restricted stock                       |       |                               |       |       |       | (10                              | )          | (15                           | )          |                   |       |                                                 | ** ** | ** ** | ** ** |
| Exercise  of stock options                      |       | 221                                |       |       |       | (1,537                           | )          | 2,619                         |       |                   |       |                                                 | ** ** | ** ** | ** ** |
| Repurchase  of treasury stock                   |       | (99                                | )          |       |       |                             |       | (1,174                        | )          |                   |       |                                                 | ** ** | ** ** | ** ** |
| Income  tax benefit on stock-based compensation |       |                               |       |       |       | 750                              |       |                          |       |                   |       |                                                 |       |   |   |
| Change  in cumulative translation adjustment    |       |                               |       |       |       |                             |       |                          |       |                   |       | 8,276                                                |       | 8,276 |   |
|                                            |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       |   |   |
| Dividends  paid                                 |       |                               |       |       |       |                             |       |                          |       | (27,611                | )          |                                                 |       |   |   |
|                                            |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       |   |   |
| Net  income                                     |       |                               |       |       |       |                             |       |                          |       | 46,185                 |       |                                                 |       | 46,185 |   |
|                                            |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       |   |   |
| Total  comprehensive income                     |       |                               |       |       |       |                             |       |                          |       |                   |       |                                                 |       | $ | 54,461 |   |
| Balances,  December 31, 2009               |       | 36,451                             |       | $          | 389        |                             | $          | 180,508                       |       | $                      | (28,545    | )                                                    | $          | 210,975 |   | $ | 1,358 |   |   |   |
|                                                 |            |                                    |            |            |            |                                  |            |                               |            |                        |            |                                                      |            |  |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

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**SYSTEMAX INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**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.

 

*Reclassifications***— Certain prior year amountswere reclassified to conform to current year presentation.  Additionally foreign exchange loss (gain) hasbeen reclassified from selling, general and administrative expense to aseparate income statement line item in prior years to conform to current yearpresentation on the consolidated statements of operations.

 

*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 amounts reported in the consolidated financialstatements and accompanying notes. Actual results could differ from those estimates.

 

*FiscalYear* — The Company’s fiscal year ends at midnight on theSaturday closest to December 31. Fiscal years will typically include 52weeks, but every few years will include 53 weeks which was the case in 2008.For clarity of presentation herein, all fiscal years are referred to as if theyended on December 31. The fiscal year will be divided into four fiscalquarters that each end at midnight on a Saturday. Fiscal quarters willtypically include 13 weeks, but the fourth quarter will include 14 weeks in a53 week fiscal year. For clarity of presentation herein, all fiscal quartersare referred to as if they ended on the traditional calendar month.

 

*ForeignCurrency Translation* — The Company has operations in numerousforeign countries.  The functionalcurrency of 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.  Translation gains or lossesare recorded as a separate component of shareholders’ equity.

 

*Cash*— 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.

 

*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 except in Europe and retail locationswhere an average cost is used. 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, aredepreciated using the straight-line or accelerated method over their estimateduseful lives ranging from three to ten years. Depreciation of buildings is on the straight-line method over estimateduseful lives of 30 to 50 years. Leasehold improvements are amortized over the lesser of the useful livesor the term of the respective leases.

 

*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 eventual disposition.  If the sum of the expected future cash flows(undiscounted and without interest charges) is less than the carrying amount ofthe asset, an impairment loss, equal to the excess of the carrying amount overthe fair market value of the asset is recognized.

 

*Goodwill and intangible assets* — Goodwill represents theexcess of the cost of acquired assets over the fair value of assets acquired.The Company tests goodwill and indefinite lived intangibles for impairmentannually or more frequently if indicators of impairment exist. In addition,goodwill is required to be tested for impairment after a portion of thegoodwill is allocated to a business targeted for disposal. The Company’sidentifiable intangible assets consist of trademarks, trade and domain names,retail leases and customer lists (See Note 2).

 

*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, cooperative advertisingand customer rebate reserves, and other vendor and employee related costs.

 

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*Income Taxes* — Deferred taxassets and liabilities are recognized for the effect of temporary differencesbetween the book and tax bases of recorded assets and liabilities and for taxloss carry forwards. The realization of net deferred tax assets is dependentupon our ability to generate sufficient future taxable income. Where it is morelikely than not that some portion or the entire deferred tax asset will not berealized, we have provided a valuation allowance. If the realization of thosedeferred tax assets in the future is considered more likely than not, anadjustment to the deferred tax assets would increase net income in the periodsuch determination is made.

 

The Company provides for uncertain tax positions andrelated interest and penalties based upon management’s assessment of whether atax benefit is more likely than not to be sustained upon examination by taxauthorities.  To the extent the Companyprevails in matters for which a liability for an unrecognized tax benefit isestablished or is required to pay amounts in excess of the liability, theCompany’s effective tax rate in a given financial statement period may beaffected.

 

*Revenue Recognition and Accounts Receivable* — The Company recognizes sales ofproducts, including shipping revenue, when persuasive evidence of an orderarrangement exists, delivery has occurred, the sales price is fixed ordeterminable and collectability 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. The Company evaluates collectability ofaccounts receivable based on numerous factors, including past transactionhistory with customers and their credit rating and provides a reserve foraccounts that are potentially uncollectible. Trade receivables are generallywritten off once all collection efforts have been exhausted. Accountsreceivable are shown in the consolidated balance sheets net of allowances fordoubtful collections and subsequent customer returns.

 

*AdvertisingCosts* — Expenditures for internet, television, localradio and newspaper advertising are expensed in the period the advertisingtakes place. Catalog preparation, printing and postage expenditures areamortized over the period of catalog distribution during which the benefits areexpected, generally one to six months.

 

Net advertising expenseswere $38.9 million, $40.0 million and $47.2 million during 2009, 2008 and 2007,respectively and 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 $55.9 million, $60.4 million and $42.6 millionduring 2009, 2008 and 2007, respectively.

 

Prepaidexpenses as of December 2009 and 2008 include deferred advertising costsof $2.8 million and $4.1 million which are reflected as an expense during theperiods benefited, typically the subsequent fiscal quarter.

 

*Stock based compensation*— The Company recognizes thefair value of share based compensation in the consolidated statement ofoperations over the requisite employee service period.  Stock-based compensation expense includes anestimate for forfeitures and is recognized over the expected term of the award.

 

*Net Income Per CommonShare* — Net income per common share basic is calculatedbased upon the weighted average number of common shares outstanding during therespective periods presented. Net income per common share diluted is calculatedbased upon the weighted average number of common shares outstanding andincluded the equivalent shares for dilutive securities outstanding during the respectiveperiods, where the effect is anti-dilutive. The dilutive effect of outstandingoptions issued by the Company is reflected in net income per share - dilutedusing the treasury stock method. Under the treasury stock method, options willonly have a dilutive effect when the average market price of common stockduring the period exceeds the exercise price of the options. Equivalent commonshares of 775,000, 941,000, and 1,087,000 in 2009, 2008 and 2007, respectivelywere included for the diluted calculation. The weighted average number of stockoptions outstanding excluded from the computation of diluted earnings per sharewas 711,000, 622,000, and 0 in 2009, 2008 and 2007, respectively due to theirantidilutive effect.

 

*ComprehensiveIncome* — Comprehensive income consists of net income andforeign currency translation adjustments and is included in the consolidatedstatements of shareholders’ equity. Comprehensive income was $54.5 million, $34.2 million and $74.0 millionin 2009, 2008 and 2007, respectively.

 

*Employee Benefit Plans**-*The Company’sU.S. subsidiaries participate in a defined contribution 401(k) plancovering substantially all U.S. employees. Employees may invest 1% or more of their eligible compensation, limitedto maximum amounts as determined by the Internal Revenue Service. The Companyprovides a matching contribution to the plan, determined as a percentage of theemployees’ contributions.  Aggregateexpense to the Company for contributions to such plans was approximately $0.9million, $0.7 million and $0.6 million in 2009, 2008 and 2007, respectively.

 

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*Fair Value of FinancialInstruments* - Financial instruments consist primarily ofinvestments in cash, trade accounts receivable, accounts payable and debtobligations.  The Company estimates thefair value of financial instruments based on interest rates available to theCompany and by comparison to quoted market prices.  At December 31, 2009 and 2008, thecarrying amounts of cash, accounts receivable, debt and accounts payable areconsidered to be representative of their respective fair values due to theirshort-term nature.

 

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

 

*Recent AccountingPronouncements*

 

Publiccompanies in the United States are subject to the accounting and reportingrequirements of various authorities, including the Financial AccountingStandards Board (“FASB”) and the Securities and Exchange Commission (“SEC”).These authorities issue numerous pronouncements, most of which are notapplicable to the Company’s current or reasonably foreseeable operatingstructure. Below are the new authoritative pronouncements that managementbelieves are relevant to Company’s current operations.

 

In October 2009, the FASB issued amendedguidance related to revenue recognition in multiple-deliverable revenuearrangements and certain arrangements that include software elements. Thisstandard eliminates the residual method of revenue allocation by requiringentities to allocate revenue in an arrangement to all of the deliverables basedupon the relative selling prices of the delivered goods and services. The FASBalso issued a new accounting standard in October 2009, which changesrevenue recognition for tangible products containing software and hardwareelements. Under this standard, tangible products containing software andhardware that function together to deliver the tangible products’ essentialfunctionality are scoped out of the existing software revenue recognitionguidance and will be accounted for under the multiple-element arrangementsrevenue recognition guidance discussed above. Both standards are effective forfiscal years beginning on or after June 15, 2010. The Company is currentlyevaluating the impact, if any, of the adoption of this standard on ourconsolidated financial position and results of operations.

 

EffectiveJanuary 1, 2009 the Company adopted authoritative guidance thatestablishes principles and requirements for how an acquirer in a businesscombination (i) recognizes and measures in its financial statements theidentifiable assets acquired, liabilities assumed, and any non-controllinginterest in the acquiree, (ii) recognizes and measures goodwill acquiredin a business combination or a gain from a bargain purchase, and (iii) determineswhat information to disclose to enable users of financial statements toevaluate the nature and financial effects of the business combination. Thisguidance is applied prospectively for all business combinations entered intoafter the date of adoption. In the third quarter of 2009 the Company expensedapproximately $0.8 million of costs that would have been capitalized underprevious guidance.

 

InJune 2008, FASB issued authoritative guidance to clarify that instrumentsgranted in share-based payment transactions can be participating securitiesprior to the requisite service having been rendered. The guidance applies tothe calculation of Earnings Per Share (“EPS”) for share-based payment awardswith rights to dividends or dividend equivalents. Unvested share-based paymentawards that contain non-forfeitable rights to dividends or dividend equivalents(whether paid or unpaid) are participating securities and shall be included inthe computation of EPS pursuant to the two-class method. This guidance becameeffective for financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those years. All prior-period EPS datapresented is adjusted retrospectively (including interim financial statements,summaries of earnings, and selected financial data). The Company adopted thisauthoritative guidance in January 2009 and it did not have a materialimpact on its condensed consolidated financial statements.

 

**2.****             ****ACQUISITIONS**

 

OnSeptember 18, 2009, the Company acquired all of the outstanding stock of WStoreEurope SA and its subsidiaries, (“WStore”), a European supplier of business ITproducts and software solutions with operations in France and the UnitedKingdom. The purchase price (after giving effect to the conversion of Euros toU.S. dollars) was approximately $4.4 million in cash, $2.2 million of which wasplaced into an escrow account for one year to secure the sellers’ indemnificationobligations under the purchase agreement. The Company completed a preliminaryallocation of the purchase price as of the acquisition date and recorded assetsof approximately $3.4 million for Client Lists, $1.4 million for Trademarks,$1.0 million for Technology acquired and $0.1 million of residual goodwill.These assets were recorded in the Company’s Technology Products businesssegment. The Company expects to amortize its Client Lists and Technology over aweighted average 5 year period.  Allother assets have indefinite lives.  Afinal purchase price allocation will be done in 2010. The operating results ofWStore are included in the accompanying condensed consolidated statements ofoperations from the date of acquisition. WStore is included in the Company’sTechnology Products business segment. The Company has determined that this wasnot a material acquisition.

 

OnApril 5, 2009, the Company entered into an Asset Purchase Agreement withCircuit City Stores, Inc. and Circuit City Stores West Coast, Inc.(the “Sellers”). Pursuant to the Asset Purchase Agreement, on May 19, 2009the Company acquired certain intellectual property and ecommerce assets ownedby the Sellers for $14.0 million in cash. In addition, the Company

 

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willpay the Sellers a royalty based on a percentage of sales over a thirty monthperiod dependent upon levels of sales achieved from the acquired assets, with aminimum payment of $3.0 million. The Company capitalized legal and other feesincurred of approximately $0.5 million. The acquisition has been accounted foras an asset purchase rather than a business combination as the acquisition doesnot meet the definition of a business under applicable accounting principles.

 

TheCompany has completed a purchase price allocation with respect to the CircuitCity asset acquisition and recorded assets of approximately $5.0 million forTrademarks and Trade Names, $7.0 million for Domain Names and $2.5 million forClient Lists. These assets were recorded in the Company’s Technology Productsbusiness segment. The Company expects to amortize its Client Lists over aweighted average 5 year period.  Allother assets have indefinite lives.  Thegross carrying amount and accumulated amortization for amortizable intangibleassets related to this acquisition at December 31, 2009 and December 31,2008 was as follows (in thousands):

 
| ** **   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|--------------|------------|----------------------------|------------|-------------------------------|------------|
| Client Lists |       | $                          | 2,541      |                          | $          | 370 |   |
|              |            |                            |            |                               |            |  |  |

 

OnJanuary 5, 2008, the Company, through various subsidiaries, entered intoan asset purchase agreement with CompUSA Inc., a Delaware corporation. Pursuantto the Purchase Agreement, the Company acquired certain assets and liabilitiesrelated to the e-commerce business of CompUSA Inc., certain intellectualproperty rights owned by CompUSA, and the E-Commerce Business for $18.9 millionin cash. Pursuant to the Purchase Agreement, the Company also acquired sixteenretail leases from CompUSA Inc. and certain fixtures located at theselocations. This acquisition accelerated the Company’s planned expansion intothe retail market place in North America and Puerto Rico. The Company hasrecorded assets of approximately $17.0 million for Trademarks and Trade Names,$8.0 million for Domain Names, $3.4 million for Retail Store Leases, $0.4million for Client Lists, $0.9 million for fixed assets and $0.9 million forGoodwill. These assets were recorded in the Company’s Technology Productsbusiness segment. The Company expects to amortize its Retail Store Leases overthe remaining weighted average life of the leases, 12.9 years, the Client Listsover a weighted average 5 year period and depreciate its fixed assets over asimilar period. All other intangible assets are indefinite lived. All of theCompany’s goodwill at December 31, 2009 is deductible for tax purposes ona straight line basis over 15 years. The gross carrying amount and accumulatedamortization for amortizable intangible assets at December 31, 2009 was asfollows (in thousands):

 
| ** **          | ** ** | **2009**                   | ** ** | **2008**                       | ** ** |
|---------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **          | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** |
| Retail store leases |       | $                          | 3,410      |                           | $          | 484 |   | $ | 3,410 |   | $ | 220 |   |
| Client lists        |       | 400                        |       | 323                            |       | 400 |   | $ | 103 |   |
|                |       | $                          | 3,810      |                           | $          | 807 |   | $ | 3,810 |   | $ | 323 |   |

 

Theaggregate amortization expense for material acquisitions was approximately $0.9million in 2009. The estimated amortization for material acquisitions forfuture years ending December 31 is as follows (in thousands):

 
| 2010           |   | 823   |   |
|----------------|--------|-------|--------|
| 2011           |   | 781   |   |
| 2012           |   | 771   |   |
| 2013           |   | 765   |   |
| 2014 and after |   | 2,034 |   |
| Total          |   | $     | 5,174  |   |
|                |        |       |        |  |

 

**3.****               ****PROPERTY,PLANT AND EQUIPMENT**

 

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

 
| ** **                                                                 | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                 | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Land and buildings                                                         |       | $                     | 28,458     |   | $ | 26,556 |   |
| Furniture and fixtures, office, computer and other  equipment and software |       | 123,876               |       | 92,137 |   |
| Leasehold improvements                                                     |       | 19,212                |       | 14,839 |   |
|                                                                       |       | 171,546               |       | 133,532 |   |
| Less accumulated depreciation and amortization                             |       | 105,948               |       | 85,067 |   |
| Property, plant and equipment, net                                         |       | $                     | 65,598     |   | $ | 48,465 |   |

 

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

 
| ** **                                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
| Furniture and fixtures, office, computer and other  equipment |       | $        | 5,525      |     | $          | 4,764 |   |
| Less: Accumulated amortization                                |       | 3,510    |       | 2,573    |       |
|                                                          |       | $        | 2,015      |     | $          | 2,191 |   |

 

Depreciation chargedto operations for property, plant and equipment including capital leases  in 2009, 2008, and 2007 was $11.2 million,$10.1 million and $8.8 million, respectively.

 

**4.****               ****CREDITFACILITIES**

 

The Company maintains a $120 million (which may be increased by up to$30 million, subject to certain conditions) secured revolving credit agreementwith a group of financial institutions which provides for borrowings in theUnited States and United Kingdom. The borrowings are secured by all of thedomestic and United Kingdom accounts receivable, all domestic inventories, theUnited Kingdom headquarters building and the Company’s shares of stock in itsdomestic and United Kingdom subsidiaries. The credit facility expires andoutstanding borrowings thereunder are due on October 26, 2010. Theborrowings under the agreement are subject to borrowing base limitations of upto 85% of eligible accounts receivable and up to 40% of qualified inventories.The interest on outstanding advances is payable monthly, at the Company’soption, at the prime rate (3.25% at December 31, 2009) plus 0.25% or theovernight daily LIBOR rate (0.5% at December 31, 2009) plus 1.25% to2.25%. The undrawn availability under the facility may not be less than $15million until the last day of any month in which the availability net ofoutstanding borrowings is at least $70 million. The facility also calls for acommitment fee payable quarterly in arrears of 0.375% of the average dailyunused portions of the facility.   Therevolving credit agreement requires that a minimum level of availability bemaintained. If such availability is not maintained, the Company will berequired to maintain a fixed charge coverage ratio (as defined). The agreementcontains certain other covenants, including restrictions on capitalexpenditure, acquisitions and payments of dividends. We were in compliance withall of the covenants as of December 31, 2009. As of December 31,2009, eligible collateral under the agreement was $110.8 million and totalavailability was $98.7 million. There were outstanding letters of credit of$12.1 million and there were no outstanding advances.

 

The Company’s Inmac WStore subsidiarymaintains a secured revolving credit agreement with a financial institution inFrance which is secured by WStore Europe SA accounts receivable balances.Available amounts for borrowing under this facility includes all accountsreceivable balances not over 60 days past due reduced by the greater of €4.0million or 10% of the eligible accounts receivable. As of December 31,2009 there was availability under this credit facility of approximately €6.0million ($8.6 million) and there was €9.9 million ($14.2 million) ofoutstanding borrowings. Outstanding balances under this agreement carryinterest at 1.5% as of December 31. The credit facility duration isindefinite; however either party may cancel the agreement with ninety daysnotice. Under this agreement the Company is subject to certain non-financialcovenants which it was in compliance with at December 31, 2009.

 

The Company’s WStore UK subsidiary maintains a£2 million secured revolving credit agreement with a financial institution inthe United Kingdom which is secured by WStore UK’s accounts receivablebalances. Available amounts for borrowing under this facility includes accountsreceivable balances less a 30% retention. As of December 31, 2009 therewas availability under this credit facility of approximately £0.5 million ($0.8million).Outstanding balances under this agreement carry interest at 2.5% abovethe overnight daily LIBOR rate (0.5% at December 31, 2009. The creditfacility duration is indefinite; however either party may cancel the agreementwith ninety days notice. Under this agreement the Company is subject to certainnon-financial covenants which it was in compliance with at December 31, 2009.

 

Theweighted average interest rate on short-term borrowings was****3.3%,5.1%, and 7.5% in 2009, 2008 and 2007, respectively.

 

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

 

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

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Payroll and employee benefits |       | $                     | 27,715     |   | $ | 25,669 |   |
|                          |       |                  |       |   |   |
| Freight                       |       | 9,171                 |       | 6,820 |   |
| Deferred revenue              |       | 1,064                 |       | 5,683 |   |
| Advertising                   |       | 8,030                 |       | 5,286 |   |
| Sales and VAT tax payable     |       | 7,989                 |       | 8,061 |   |
| Other                         |       | 26,976                |       | 20,833 |   |
|                          |       | $                     | 80,945     |   | $ | 72,352 |   |

 

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

 

Long-term debt consists of (in thousands):

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Capitalized equipment lease obligations |       | $                     | 2,223      |   | $ | 2,184 |   |
| Less: current portion                   |       | 1,029                 |       | 773 |   |
|                                    |       | $                     | 1,194      |   | $ | 1,411 |   |

 

The aggregate maturities of long-term debt outstanding at December 31,2009 are as follows (in thousands):

 
| ** ** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Maturities |       | $        | 1,029      |     | $          | 737      |       | $        | 307        |     | $          | 150 |   | — |   |
|            |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |

 

**7.****               ****BUSINESSEXIT COSTS**

 

The Company****announcedplans to exit its Software Solutions segment, in the second quarter of 2009, asthe result of economic conditions and difficulties in marketing the segment’sproducts successfully. Total charges incurred for the year for severances,estimated lease termination costs and other costs were $1.2 million, $1.6million, and $0.1 million, respectively. These costs were recorded in selling, general and administrative expensesand interest and other income, net in the accompanying condensedconsolidated statement of operations.

 

The following table reconciles the associated liabilities incurred (inthousands):

 
| ** **                   | ** ** | **Severance  and  Personnel  Costs** | ** ** | **Lease  Termination  Costs** | ** ** | **Other Exit Costs** | ** ** | **Total** | ** ** |
|------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|----------------------|------------|-----------|------------|
| Balance, beginning of period |       | $                                    | —     |                          | $          | —               |       | $         | —     |   | $ | — |   |
| Charged to expense           |       | 1,208                                |       | 1,644                         |       | 80                   |       | 2,932     |       |
| Paid or otherwise settled    |       | (1,208                               | )          | (697                          | )          | (80                  | )          | (1,985    | )          |
| Balance, end of period       |       | $                                    | —     |                          | $          | 947                  |       | $         | —     |   | $ | 947 |   |

 

**8.****               ****SHAREHOLDERS’EQUITY**

 

*Stock based compensation plans*

 

The Company currently has four equity compensation plans which reserveshares of common stock for issuance to key employees, directors, consultantsand advisors to the Company.   Thefollowing is a description of 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 632,475 options wereoutstanding under this plan as of December 31, 2009.

 

*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 31,2009.

 

*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.  The Company increased the number of sharesthat may be granted under this plan to a maximum of 7.5 million from 5.0million shares.  The maximum number ofshares granted per type of award to any individual may not exceed 1,500,000 inany calendar year and 3,000,000 in total. In 2009 the Company extended until December 31, 2010 the expirationdate under this plan after which no grants shall be made under this plan. Theoriginal expiration date was December 31, 2009. Restricted stock grantsand common stock awards reduce stock options otherwise available for futuregrant. A total of 1,410,984 options and 400,000 restricted stock units wereoutstanding under this plan as of December 31, 2009.

 

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** **

***The 2006 StockIncentive Plan For Non-Employee Directors***— This plan, adopted by the Company’s stockholders on October 11,2006, replaces the 1995 Stock Option Plan for Non-Employee Directors. TheCompany adopted the plan so that it could offer directors of the Company whoare not employees of the Company or of any entity in which the Company has morethan a 50% equity interest (“independent directors”) an opportunity toparticipate in the ownership of the Company by receiving options to purchaseshares of common stock at a price equal to the fair market value at the date ofgrant of the option and restricted stock awards. Awards for a maximum of200,000 shares may be granted under this plan. A total of 20,000 options wereoutstanding under this plan as of December 31, 2009.

** **

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

 

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 risk-freeinterest 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 2009, 2008and 2007 was $2.2 million, $3.2 million, and $3.4 million respectively. Therelated future income tax benefits recognized for 2009, 2008 and 2007 were $0.9million, $1.2 million and $1.1 million, respectively.

 

*Stock options*

 

The following table presents the weighted-average assumptions used toestimate the fair value of options granted in 2009, 2008 and 2007:

 
| ** **                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |     |       |
| Expected annual dividend yield |       | 0        | %          | 0        | %          | 0        | %          |
| Risk-free interest rate        |       | 2.64     | %          | 3.17     | %          | 4.93     | %          |
| Expected volatility            |       | 66.9     | %          | 63.8     | %          | 71.2     | %          |
| Expected life in years         |       | 7.7      |       | 6.3      |       | 6.2      |       |

 

The following table summarizes information concerning outstanding andexercisable options:

 
| ** **                                                      | ** ** | **Weighted Average** | ** ** |
|-----------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                      | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                      | ** ** | **Shares**           | ** ** | **Exercise   Price** | ** ** | **Shares** | ** ** | **Exercise   Price** | ** ** | **Shares** | ** ** | **Exercise   Price** | ** ** |
| Outstanding at beginning of year                                |       | 2,202,584            |       | $ | 9.23 |   | 2,655,937 |   | $ | 7.95 |   | 2,629,076 |   | $ | 4.69 |   |
| Granted                                                         |       | 164,000              |       | $ | 13.46 |   | 110,000 |   | $ | 12.90 |   | 699,050 |   | $ | 19.45 |   |
| Exercised                                                       |       | (221,225             | )          | $ | 4.89 |   | (503,078 | ) | $ | 2.25 |   | (545,815 | ) | $ | 5.19 |   |
| Cancelled or expired                                            |       | (42,900              | )          | $ | 16.46 |   | (60,275 | ) | $ | 17.77 |   | (126,374 | ) | $ | 15.64 |   |
| Outstanding at end of year                                      |       | 2,102,459            |       | $ | 9.87 |   | 2,202,584 |   | $ | 9.23 |   | 2,655,937 |   | $ | 7.95 |   |
|                                                            |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at year end                                 |       | 1,558,229            |       |   |   | 1,560,804 |   |   |   | 1,645,639 |   |   |   |
| Weighted average fair value per option granted  during the year |       | $                    | 9.53       |   |   |   | $ | 7.94 |   |   |   | $ | 13.19 |   |   |   |
|                                                                 |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The total intrinsic value of options exercised was $2.0 million, $4.1million and $6.5 million respectively, for 2009, 2008 and 2007.

 

The following table summarizes information about options vested andexercisable or nonvested that are expected to vest (nonvested outstanding lessexpected forfeitures) at December 31, 2009:

 
| **Range  of Exercise Prices** | ** ** | **Number  Exercisable** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Weighted Average   Remaining  Contractual Life** | ** ** | **Aggregate   Intrinsic   Value (in   thousands)** | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| $                             | 1.76       | to                      | $          |  5.00                                |       | 427,378                                            |       | $                                                  | 2.28       |   | 2.53 |   | $ | 5,739 |   |
| $                             | 5.01       | to                      | $          | 15.00                                     |       | 1,063,317                                          |       | $                                                  | 7.68       |   | 6.07 |   | 8,538 |   |
| $                             | 15.01      | to                      | $          | 20.00                                     |       | 472,174                                            |       | $                                                  | 18.76      |   | 7.40 |   | 28 |   |
| $                             | 20.01      | to                      | $          | 20.15                                     |       | 100,000                                            |       | $                                                  | 20.15      |   | 7.05 |   | — |   |
| $                             | 1.76       | to                      | $          | 20.15                                     |       | 2,062,869                                          |       | $                                                  | 9.70       |   | 5.69 |   | $ | 14,305 |   |

 

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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 2009 and the exercise price) that would have beenreceived by the option holders had all options been exercised on December 31,2009. This value will change based on the fair market value of the Company’scommon stock.

 

The following table reflects the activity for all unvested stockoptions during 2009:

 
| ** **                         | ** ** | **Shares** | ** ** | **Weighted   Average Grant-  Date Fair Value** | ** ** |
|------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Unvested at January 1, 2009   |       | 641,780    |       | $                                              | 11.18      |   |
| Granted                            |       | 164,000    |       | $                                              | 9.53       |   |
| Vested                             |       | (241,363   | )          | $                                              | 10.39      |   |
| Forfeited                          |       | (20,187    | )          | $                                              | 12.80      |   |
| Unvested at December 31, 2009 |       | 544,230    |       | $                                              | 10.98      |   |

 

At December 31, 2009, there was approximately $2.6 million ofunrecognized compensation costs related to unvested stock options, which isexpected to be recognized over a weighted average period of 1.19 years. Thetotal fair value of stock options vested during 2009, 2008 and 2007 was $2.5million, $3.0 million and $0.7 million, respectively.

 

*Restricted Stock and Restricted Stock Units*

 

In October 2004, the Company granted 1,000,000 restricted stockunits under the 1999 Plan to a key employee who is also a Company director. Arestricted stock unit represents the right to receive a share of the Company’scommon stock. The restricted stock units have none of the rights as othershares of common stock until common stock is distributed, other than rights tocash dividends. The restricted stock unit award was a non-performance awardwhich vests at the rate of 20% on May 31, 2005 and 10% per year on April 1,2006 and each year thereafter. The share-based expense for restricted stockawards was determined based on the market price of the Company’s stock at the dateof the award. Compensation expense related to the restricted stock award wasapproximately $0.6 million in each of 2009, 2008 and 2007. Share-basedcompensation expense for restricted stock issued to Directors was $0.1 millionin each of 2009, 2008 and 2007.

 

*Share repurchase plan*

 

In May 2008, the Company’s Board of Directors authorized therepurchase of up to 2,000,000 shares of the Company’s common stock. During 2009the Company repurchased 98,934 common shares at a cost of approximately $1.2million, an average of $11.87 per share. During 2008 the Company repurchased475,301 common shares at a cost of approximately $5.8 million, an average of$12.25 per share. Theses shares are included in common stock in treasury atcost in the Company’s consolidated balance sheet.

 

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

** **

The components of income before income taxes are as follows (inthousands):

 
| ** **    | ** ** | **Year Ended December 31,** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| United States |       | $                                | 54,468     |   | $ | 61,220 |   | $ | 81,832 |   |
| Foreign       |       | 18,617                           |       | 22,523 |   | 18,191 |   |
| Total         |       | $                                | 73,085     |   | $ | 83,743 |   | $ | 100,023 |   |

 

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The provision for income taxes consists of the following (inthousands):

 
| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current:       |       |                             |       |   |   |   |   |
| Federal        |       | $                                | 11,987     |   | $ | 15,753 |   | $ | 26,174 |   |
| State          |       | 3,005                            |       | 4,106 |   | 4,842 |   |
| Foreign        |       | 6,204                            |       | 4,844 |   | 5,632 |   |
| Total current  |       | 21,196                           |       | 24,703 |   | 36,648 |   |
|           |       |                             |       |   |   |   |   |
| Deferred:      |       |                             |       |   |   |   |   |
| Federal        |       | 4,271                            |       | 2,242 |   | (1,004 | ) |
| State          |       | 844                              |       | 154 |   | 277 |   |
| Foreign        |       | 589                              |       | 3,801 |   | (5,379 | ) |
| Total deferred |       | 5,704                            |       | 6,197 |   | (6,106 | ) |
| TOTAL          |       | $                                | 26,900     |   | $ | 30,900 |   | $ | 30,542 |   |

 

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

 

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

 
| ** **                                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                    | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Income tax at Federal statutory rate                                                          |       | $                                | 25,580     |   | $ | 29,311 |   | $ | 35,008 |   |
| State and local income taxes and changes in  valuation allowances, net of federal tax benefit |       | 2,402                            |       | 3,036 |   | 3,332 |   |
| Foreign taxes at rates different from the U.S.  rate                                          |       | (991                             | )          | (940 | ) | (2,260 | ) |
| Changes in valuation allowances for foreign  deferred tax assets                              |       | 965                              |       | (120 | ) | (6,184 | ) |
| Decrease in tax reserves                                                                      |       | (1,195                           | )          | — |   | — |   |
| Refunds- prior years                                                                          |       | —                           |       | (872 | ) |   |   |
| Non-deductible items                                                                          |       | —                           |       | — |   | 963 |   |
| Adjustment for prior year taxes                                                               |       | 107                              |       | 253 |   | (593 | ) |
| Other items, net                                                                              |       | 32                               |       | 232 |   | 276 |   |
|                                                                                          |       | $                                | 26,900     |   | $ | 30,900 |   | $ | 30,542 |   |

 

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

 
| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Assets:                                     |       |                  |       |   |   |
| Current:                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accrued expenses and other liabilities      |       | $                     | 7,612      |   | $ | 8,524 |   |
| Inventory                                   |       | 1,838                 |       | 1,899 |   |
| Valuation allowances                        |       | (1,507                | )          | — |   |
| Total current assets                        |       | $                     | 7,943      |   | $ | 10,423 |   |
|                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Non-current:                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net operating loss and credit carryforwards |       | $                     | 19,058     |   | $ | 8,834 |   |
| Accelerated depreciation                    |       | 10,516                |       | 1,089 |   |
| Intangible and other assets                 |       | 2,264                 |       | 4,606 |   |
| Other                                       |       | 6,910                 |       | 5,300 |   |
| Valuation allowances                        |       | (28,326               | )          | (8,377 | ) |
| Total non-current  assets                   |       | $                     | 10,422     |   | $ | 11,452 |   |
|                                        |       |                  |       |   |   |
| Liabilities :                          |       |                  |       |   |   |
| Current :                              |       |                  |       |   |   |
| Deductible assets                           |       | $                     | 1,298      |   | $ | 753 |   |
| Other                                       |       | 19                    |       | 112 |   |
| Total current liabilities                   |       | $                     | 1,317      |   | $ | 865 |   |
|                                        |       |                  |       |   |   |
| Non-current:                                |       |                  |       |   |   |
| Accelerated depreciation                    |       | $                     | 1,858      |   | $ | 248 |   |
| Other                                       |       | —                |       | 6 |   |
| Total non-current  liabilities              |       | $                     | 1,858      |   | $ | 254 |   |

 

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TheCompany has not provided for federal income taxes applicable to theundistributed earnings of its foreign subsidiaries of approximately $62.9million as of December 31, 2009, since these earnings are consideredindefinitely reinvested. The Company has foreign net operating losscarryforwards which expire through 2024. The Company records these benefits asassets to the extent that utilization of such assets is more likely than not;otherwise, a valuation allowance has been recorded.  The Company has also provided valuationallowances for certain state deferred tax assets and net operating losscarryforwards where it is not likely they will be realized.

 

Asof December 31, 2009, the Company has recorded valuation allowances ofapproximately $29.8 million including valuations against net operating losscarryforwards incurred in foreign and state jurisdictions of $15.9 million and$2.5 million, respectively, deductible temporary differences incurred inforeign jurisdictions of $10.8 million, the majority of which relates to theWStore acquisition, $0.5 million in foreign tax credit carryforwards, and $0.1million for other state deductible temporary differences.

 

Valuationallowances increased in 2009 by $20.9 million as a result of the WStoreacquisition and the valuation allowances recorded against acquired deferred taxassets and net operating losses. Carryforward losses of $1 million wereutilized in 2009 for which valuation allowances had been previously provided.

 

TheCompany has foreign tax credit carryforwards in the amount of $0.5 millionwhich begin to expire in 2017.

 

Valuationallowances decreased $.4 million in 2008 for carryforward losses utilized forwhich valuation allowances had been previously provided. As of December 31,2008, the valuation allowances of $8.4 million included $6.4 million related tonet operating loss carryforwards in foreign jurisdictions, $2.0 million forstate net operating loss carryforwards and $0.2 million for other statedeductible temporary differences. During 2008, valuation allowances increasedapproximately $1.4 additional losses incurred in foreign and statejurisdictions.  Valuation allowancesdecreased $0.7 million in 2008 for carryforward losses utilized for whichvaluation allowances had been previously provided.

 

TheCompany is routinely audited by federal, state and foreign tax authorities withrespect to its income taxes. The Company regularly reviews and evaluates thelikelihood of audit assessments and believes it has adequately accrued forexposures for tax liabilities resulting from future tax audits. To the extentthe Company would be required to pay amounts in excess of reserves or prevailon matters for which accruals have been established, the Company’s effectivetax rate in a given period may be materially impacted. The Company’s federalincome tax returns have been audited through 2006. The Company has not signedany consents to extend the statute of limitations for any subsequent years. TheCompany’s significant state tax returns have been audited through 2005. TheCompany considers its significant tax jurisdictions in foreign locations to bethe United Kingdom, Canada, France, Italy and Germany. The Company remainssubject to examination in the United Kingdom for years after 2002, in Canadafor years after 2004, in France for years after 2007, in Italy for years after2005, in Netherlands for years after 2004 and in Germany for years after 2007.

 

Inaccordance with the guidance for accounting for uncertainty in income taxes theCompany recognizes the tax benefits from an uncertain tax position only if itis more likely than not that the tax position will be sustained on examinationby the taxing authorities based on the technical merits of the position. Thetax benefit of an uncertain tax position that meets the more-likely-than-notrecognition threshold is measured as the largest amount that is greater than50% likely to be realized upon settlement with the tax authority. To the extentwe prevail in matters for which accruals have been established or are requiredto pay amounts in excess of accruals, our effective tax rate in a givenfinancial statement period could be affected. Accrued interest and penaltiesrelated to unrecognized tax benefits are recorded in income tax expense in thecurrent year.

 

Thefollowing table details activity of the Company’s uncertain tax positionsduring 2009 and 2008:

 
| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Balance beginning of year                                 |       | $                     | 916        |   | $ | 916 |   |
| Decreases related to settlements with taxing  authorities |       | (916                  | )          | — |   |
| Balance end of year                                       |       | —                |       | $ | 916 |   |
|                                                           |            |                       |            |  |  |  |  |

 

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Interestand penalties of approximately $0 and $0.1 million related to unrecognized taxbenefits were expensed in 2009 and 2008 and are included in income tax expense.Additionally, included in income tax expense in 2008 is an interest and penaltyreserves reversal of approximately $0.4 million related to a state tax auditthat was settled favorably.

 

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

 

*Leases***- The Companyis obligated under operating lease agreements for the rental of certain officeand warehouse facilities and equipment which expire at various dates through October 2026.The Company currently leases its headquarters office/warehouse facility in NewYork from an entity owned by the Company’s three principal shareholders andsenior executive officers. The Company believes that these payments were nohigher than would be paid to an unrelated lessor for comparable space. TheCompany also acquires certain computer and communications equipment pursuant tocapital lease obligations.

 

AtDecember 31, 2009, the future minimum annual lease payments for capitalleases and related and third-party operating leases were as follows (inthousands):

 
| ** **                                                                             | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|-----------|------------|
|                                                                                   |       |                |       |                  |       |      |       |
| 2010                                                                                   |       | $                   | 1,145      |                  | $          | 24,004    |       | $ | 25,149 |   |
| 2011                                                                                   |       | 794                 |       | 24,280                |       | 25,074    |       |
| 2012                                                                                   |       | 329                 |       | 22,793                |       | 23,122    |       |
| 2013                                                                                   |       | 155                 |       | 20,253                |       | 20,408    |       |
| 2014                                                                                   |       |                |       | 16,367                |       | 16,367    |       |
| 2015-2019                                                                              |       |                |       | 66,413                |       | 66,413    |       |
| 2020-2024                                                                              |       |                |       | 11,767                |       | 11,767    |       |
| Thereafter                                                                             |       |                |       | 2,428                 |       | 2,428     |       |
| Total minimum lease payments                                                           |       | 2,423               |       | 188,305               |       | 190,728   |       |
| Less: sublease rental income                                                           |       |                |       | 354                   |       | 354       |       |
| Lease obligation net of subleases                                                      |       | 2,423               |       | $                     | 187,951    |      | $          | 190,374 |   |
| Less amount representing interest                                                      |       | 200                 |       |                  |       |      |       |
| Present value of minimum capital lease payments  (including current portion of $1,029) |       | $                   | 2,223      |                  |       |      |       |   |

 

Annualrent expense aggregated approximately $27.1 million, $25.0 million and $14.8million in 2009, 2008 and 2007, respectively. Included in rent expense was $0.9million, $0.9 million and $0.6 million in 2009, 2008 and 2007, respectively, torelated parties. Rent expense is net of sublease income of $0.1 million, $0.4million and $0.9 million for 2009, 2008 and 2007, respectively.

 

Litigation —

 

State of Florida, Office ofthe Attorney General

 

On September 4, 2009 theOffice of the Attorney General, Department of Legal Affairs for the State ofFlorida filed a lawsuit against OnRebate.com Inc, TigerDirect Inc. and SystemaxInc. in the Circuit Court of the Eleventh Judicial Court for Miami-Dade County,Florida alleging deceptive and unfair trade practices under Florida lawrelating to the offering and processing of customer rebates.  The lawsuitseeks injunctive relief, damages, civil penalties and other equitable relief. The Company denies the allegations in the lawsuit and intends to vigorouslydefend the case.

 

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Other Matters

 

Systemax is a party tovarious pending legal proceedings and disputes arising in the normal course ofbusiness, including those involving commercial, employment, tax andintellectual property related claims, none of which, in management’s opinion,is anticipated to have a material adverse effect on the consolidated financialstatements.

 

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

 

The Company operates and is internallymanaged in three operating segments, Technology Products, Industrial Productsand Software Solutions. The Company’s chief operating decision-maker is theCompany’s Chief Executive Officer. The Company evaluates segment performancebased on income from operations before net interest, foreign exchange gains andlosses, 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.

 

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

 
| ** **                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net Sales:                             |       |                             |       |   |   |   |   |
| Technology Products                    |       | $                                | 2,967,896  |   | $ | 2,795,441 |   | $ | 2,553,716 |   |
| Industrial Products                    |       | 196,129                          |       | 237,027 |   | 225,746 |   |
| Software Solutions                     |       | 1,970                            |       | 493 |   | 413 |   |
| Consolidated                           |       | $                                | 3,165,995  |   | $ | 3,032,961 |   | $ | 2,779,875 |   |
|                                   |       |                             |       |   |   |   |   |
| Depreciation and Amortization Expense: |       |                             |       |   |   |   |   |
| Technology Products                    |       | $                                | 10,141     |   | $ | 8,219 |   | $ | 6,818 |   |
| Industrial Products                    |       | 1,476                            |       | 986 |   | 1,023 |   |
| Software Solutions                     |       | 613                              |       | 1,111 |   | 904 |   |
| Corporate                              |       | 123                              |       | 71 |   | 35 |   |
| Consolidated                           |       | $                                | 12,353     |   | $ | 10,387 |   | $ | 8,780 |   |
|                                   |       |                             |       |   |   |   |   |
| Operating Income (Loss):               |       |                             |       |   |   |   |   |
| Technology Products                    |       | $                                | 87,127     |   | $ | 96,177 |   | $ | 100,958 |   |
| Industrial Products                    |       | 15,415                           |       | 24,621 |   | 20,595 |   |
| Software Solutions                     |       | (6,457                           | )          | (17,948 | ) | (15,813 | ) |
| Corporate and other expenses           |       | (22,694                          | )          | (19,483 | ) | (11,798 | ) |
| Consolidated                           |       | $                                | 73,391     |   | $ | 83,367 |   | $ | 93,942 |   |
|                                   |       |                             |       |   |   |   |   |
| Total Assets                           |       |                             |       |   |   |   |   |
| Technology Products                    |       | $                                | 521,900    |   | $ | 400,340 |   | $ | 331,033 |   |
| Industrial Products                    |       | 103,370                          |       | 98,670 |   | 76,634 |   |
| Software Solutions                     |       | 149                              |       | 3,531 |   | 3,783 |   |
| Corporate                              |       | 191,482                          |       | 199,912 |   | 266,194 |   |
| Consolidated                           |       | $                                | 816,901    |   | $ | 702,453 |   | $ | 677,644 |   |

 

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

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net Sales:                                     |       |                             |       |   |   |   |   |
| United States:                                 |       |                             |       |   |   |   |   |
| Technology Products                            |       | $                                | 1,931,544  |   | $ | 1,660,902 |   | $ | 1,451,046 |   |
| Industrial Products                            |       | 196,129                          |       | 237,027 |   | 225,746 |   |
| Software Solutions                             |       | 1,970                            |       | 493 |   | 413 |   |
| United States total                            |       | 2,129,643                        |       | 1,898,422 |   | 1,677,205 |   |
| Other North America (Technology Products)      |       | 187,832                          |       | 193,950 |   | 170,272 |   |
| Europe                                         |       | 848,520                          |       | 940,589 |   | 932,398 |   |
| Consolidated                                   |       | $                                | 3,165,995  |   | $ | 3,032,961 |   | $ | 2,779,875 |   |
|                                           |       |                             |       |   |   |   |   |
| Long-lived Assets:                             |       |                             |       |   |   |   |   |
| North America — principally United States |       | $                                | 39,860     |   | $ | 30,188 |   | $ | 21,978 |   |
| Europe                                         |       | 25,738                           |       | 18,277 |   | 25,602 |   |
| Consolidated                                   |       | $                                | 65,598     |   | $ | 48,465 |   | $ | 47,580 |   |

 

Net sales are attributed to 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** | ** ** |
|------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| 2009:                        |       |                   |       |                    |       |                   |       |                    |       |
| Net sales                    |       | $                      | 752,268    |                    | $          | 721,599                |       | $                       | 753,880    |   | $ | 938,248 |   |
| Gross profit                 |       | $                      | 107,550    |                    | $          | 107,054                |       | $                       | 112,763    |   | $ | 132,881 |   |
| Net income                   |       | $                      | 8,698      |                    | $          | 6,491                  |       | $                       | 12,598     |   | $ | 18,398 |   |
| Net income per common share: |       |                   |       |                    |       |                   |       |                    |       |
| Basic                        |       | $                      | .24        |                    | $          | .18                    |       | $                       | .34        |   | $ | .50 |   |
| Diluted                      |       | $                      | .23        |                    | $          | .17                    |       | $                       | .34        |   | $ | .49 |   |
|                         |       |                   |       |                    |       |                   |       |                    |       |
| 2008:                        |       |                   |       |                    |       |                   |       |                    |       |
| Net sales                    |       | $                      | 724,737    |                    | $          | 756,035                |       | $                       | 739,479    |   | $ | 812,710 |   |
| Gross profit                 |       | $                      | 113,749    |                    | $          | 114,754                |       | $                       | 115,419    |   | $ | 114,637 |   |
| Net income                   |       | $                      | 18,061     |                    | $          | 13,541                 |       | $                       | 11,273     |   | $ | 9,968 |   |
| Net income per common share: |       |                   |       |                    |       |                   |       |                    |       |
| Basic                        |       | $                      | .49        |                    | $          | .36                    |       | $                       | .30        |   | $ | .27 |   |
| Diluted                      |       | $                      | .48        |                    | $          | .36                    |       | $                       | .30        |   | $ | .27 |   |

 

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**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 |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| 2009                                              |       | $                                              | 17,523     |                          | $          | 4,698          |       | $         | (4,493     | )                                            | 4,804      | (2) | $ | 22,532 |   |
| 2008                                              |       | $                                              | 20,521     |                          | $          | 2,424          |       | $         | (5,422     | )                                            |       |   | 17,523 |   |
| 2007                                              |       | $                                              | 18,176     |                          | $          | 4,575          |       | $         | (2,230     | )                                            |       |   | $ | 20,521 |   |
|                                              |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| Allowance for deferred tax assets                 |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| 2009                                              |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| Current (3)                                       |       | $                                              | —     |                          | $          | —         |       |      |       | $                                            | 1,507      |   | $ | 1,507 |   |
| Noncurrent (1)(3)                                 |       | $                                              | 8,377      |                          | $          | —         |       | $         | (2,125     | )                                            | $          | 22,074 |   | $ | 28,326 |   |
| 2008                                              |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| Current                                           |       | $                                              | 96         |                          |       |           |       |      | $          | (96                                          | )          | $ | — |   |
| Noncurrent (1)                                    |       | $                                              | 7,291      |                          | $          | 1,996          |       | $         | (64        | )                                            | $          | (846 | ) | $ | 8,377 |   |
| 2007                                              |       |                                           |       |                          |       |           |       |      |       |                                         |       |
| Current                                           |       | $                                              | 738        |                          |       |           | $          | (467      | )          | $                                            | (175       | ) | $ | 96 |   |
| Noncurrent (1)                                    |       | $                                              | 17,141     |                          | $          | 2,842          |       | $         | (11,408    | )                                            | $          | (1,284 | ) | $ | 7,291 |   |

 

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(1)          Charges toexpense are net of reductions resulting from changes in deferred tax assets dueto changes in tax laws.

(2)          Other relatesto WStore acquisition allowance for sales returns and doubtful accounts as ofacquisition date.

(3)          Included in otheris allowances recorded for deferred tax assets and net operating lossesacquired in the WStore Europe SA acquisition.

 

58

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