SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549











FORM 10-K





(Mark One)





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





For the fiscal year ended December 31, 2010





or





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





For the transition period from         to





Commission File Number: 1-13792











Systemax Inc.


(Exact name of registrant as specified in its charter)





Delaware

11-3262067(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)





11 Harbor Park Drive


Port Washington, New York   11050


(Address of principal executive offices, including zip code)





Registrant’s telephone number, including area code: (516) 608-7000










Securities registered pursuant to Section 12(b) of the Act:





Title of each class

Name of each exchange on which registeredCommon Stock, par value $ .01 per share

New York Stock Exchange





Securities registered pursuant to Section 12(g) of the Act:NONE










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





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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and 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 registrant was required to submit and post such files). Yes  ̈ No  ̈





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





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





Large Accelerated Filer  ̈

Accelerated Filer xNon-Accelerated Filer  ̈

Smaller reporting company  ̈





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





The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2010, which is the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $158,673,326. For purposes of this computation, all executive officers and directors of the Registrant and all parties to the Stockholders Agreement dated as of June 15, 1995 have been deemed to be affiliates. Such determination should not be deemed to be an admission that such persons are, in fact, affiliates of the Registrant.





The number of shares outstanding of the registrant’s common stock as of March 4, 2011 was 36,791,488 shares.


Documents incorporated by reference: Portions of the Proxy Statement of Systemax Inc. relating to the 2011 annual meeting of stockholders are incorporated by reference in Part III hereof.












TABLE OF CONTENTS





Part IItem 1.
Business
4General
4Products
4Sales and Marketing
4Customer Service, Order Fulfillment and Support
6Suppliers
6Competition and Other Market Factors
6Employees
7Environmental Matters
7Financial Information About Foreign and Domestic Operations
7Available Information
8Item 1A.
Risk Factors
8Item 1B.
Unresolved Staff Comments
13Item 2.
Properties
13Item 3.
Legal Proceedings
14Item 4.
Submission of Matters to a Vote of Security Holders
14Part IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
15Item 6.
Selected Financial Data
16Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
24Item 8.
Financial Statements and Supplementary Data
25Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
25Item 9A.
Controls and Procedures
25Item 9B.
Other Information
26Part IIIItem 10.
Directors, Executive Officers and Corporate Governance
27Item 11.
Executive Compensation
27Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
27Item 13.
Certain Relationships and Related Transactions, and Director Independence
27Item 14.
Principal Accounting Fees and Services
27Part IVItem 15.
Exhibits and Financial Statement Schedules
27Signatures
30





2





PART I





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





Forward Looking Statements





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





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





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





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


·
general economic conditions, such as decreased consumer confidence and spending, reductions in manufacturing capacity, and inflation could result in our failure to achieve our historical sales growth rates and profit level


·
the markets for our products and services are extremely competitive and if we are unable to successfully respond to our competitors’ strategies our sales and gross margins will be adversely affected


·
state sales tax laws may be changed which could result in ecommerce and direct mail retailers having to collect sales taxes in states where the current laws do not require us to do so


·
goodwill and intangible assets may become impaired resulting in a charge to earnings


·
our substantial international operations are subject to risks such as fluctuations in currency rates, foreign regulatory requirements, political uncertainty and the management of our growing international operations


·
managing various inventory risks, such as being unable to profitably resell excess or obsolete inventory and/or the loss of product return rights and price protection from our vendors


·
effective management of our rapid growth in retail stores in North America


·
meeting credit card industry compliance standards in order to maintain our ability to accept credit cards


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


·
timely availability of existing and new products


·
risks associated with delivery of merchandise to customers by utilizing common delivery services


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


·
borrowing costs or availability


·
pending or threatened litigation and investigations


·
the availability of key personnel


·
the continuation of key vendor relationships


·
the operation of the Company’s management information systems


·
the ability to maintain satisfactory credit arrangements




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





3





Item 1. Business.





General





Systemax is primarily a direct marketer of brand name and private label products. Our operations are organized in two reportable business segments — Technology Products and Industrial Products.





Our Technology Products segment sells computers, computer supplies and consumer electronics which are marketed in North America and Europe. Most of these products are manufactured by other companies. Some products are manufactured for us to our own design and marketed on a private label basis. Technology Products accounted for 93%, 94% and 92% of our net sales in 2010, 2009 and 2008, respectively.





Our Industrial Products segment sells a wide array of industrial products and supplies which are marketed in North America. Most of these products are manufactured by other companies. Some products are manufactured for us to our own design and marketed on a private label basis.Industrial products accounted for 7%, 6% and 8% of our net sales in 2010, 2009 and 2008, respectively.





The Company announced plans to exit its Software Solutions segment in June 2009 as the result of economic conditions and difficulties in marketing the segment’s products successfully (See Note 7 to the Consolidated Financial Statements included in Item 15 of this Form 10-K.).  The Software Solutions segment participated in the emerging market for on-demand, web-based business software applications through the marketing of its PCS ProfitCenter SoftwareTM application. Substantially all of the third party business activities of the Software Solutions segment have ended. Current and prior year results of Software Solutions are now included in “Corporate and other”.





See Note 11 to the Consolidated Financial Statements included in Item 15 of this Form 10-K for additional financial information about our business segments as well as information about our geographic operations.





The Company was incorporated in Delaware in 1995. Certain predecessor businesses which now constitute part of the Company have been in business since 1949. Our headquarters office is located at 11 Harbor Park Drive, Port Washington, New York.





Products





We offer hundreds of thousands of brand name and private label products. We endeavor to expand and keep current the breadth of our product offerings in order to fulfill the increasingly wide range of product needs of our customers.





Products offered by our Technology Products segment include individual technology products in the following categories:  computers; computer parts; TV and video; audio; cameras and camcorders; car and GPS; cellphones; software; video games; home and office; and other products.





We assemble our private label PCs in our ISO-9001:2008 certified facility in Fletcher, Ohio. We purchase components and subassemblies from suppliers in the United States as well as overseas. Certain parts and components for our PCs are obtained from a limited group of suppliers.  We also utilize licensed technology and computer software in the assembly of our PCs. For a discussion of risks associated with these licenses and suppliers, see Item 1A, Risk Factors.





Products offered by our Industrial  Products segment include individual industrial products in the following categories:  material handling; storage and shelving; workbench & shop desks; packaging and supplies; furniture and office; foodservice and appliances; janitorial and maintenance; tools and instruments; fasteners and hardware; motors and power transmission; HVAC/R and fans; electrical and bulbs; plumbing supplies; and safety and medical items.





Sales and Marketing





We market our products to both individual consumers and business customers. Our business customers include for-profit businesses, educational organizations and government entities. We have developed numerous proprietary customer and prospect databases.





To reach our individual consumer customers, 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 advertising campaigns to enable us to execute them in the most cost-effective manner. We combine our use of e-commerce initiatives with catalog mailings, which generate online orders and calls to inbound sales representatives. These sales representatives use our information and distribution systems to fulfill orders and explore additional customer product needs. Sales to individual consumers are generally fulfilled from our own stock, requiring us to carry more inventory than we would for our business customers. We also periodically take advantage of attractive product pricing by making opportunistic bulk inventory purchases with
the objective of turning them quickly into sales. We have also successfully increased our sales to individual consumers by using retail outlet stores. Over the past several years, the Company has expanded its brick and mortar retail operations through the CompUSA acquisition and by opening new stores.





4





We have established a multi-faceted direct marketing system to business customers, consisting primarily of our relationship marketers, catalog mailings and proprietary internet websites, the combination of which is designed to maximize sales. Our relationship marketers focus their efforts on our business customers by establishing a personal relationship between such customers and a Systemax account manager. The goal of the relationship marketing sales force is to increase the purchasing productivity of current customers and to actively solicit newly targeted prospects to become customers. With access to the records we maintain, our relationship marketers are prompted with product suggestions to expand customer order values. In certain countries, we also have the ability to provide such customers with electronic data
interchange (“EDI”) ordering and customized billing services, customer savings reports and stocking of specialty items specifically requested by these customers. Our relationship marketers’ efforts are supported by frequent catalog mailings and e-mail campaigns, both of which are designed to generate inbound telephone sales, and our interactive websites, which allow customers to purchase products directly over the Internet. We believe that the integration of our multiple marketing methods enables us to more thoroughly penetrate our business, educational and government customer base. We believe increased internet exposure leads to more internet-related sales and also generates more inbound telephone sales; just as we believe catalog mailings and email campaigns which feature our websites results in greater internet-related sales.





E-commerce





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





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





North America

Europewww.tigerdirect.com

www.misco.co.ukwww.compusa.com

www.misco.dewww.circuitcity.com

www.misco.frwww.compusagoved.com

www.misco.nlwww.compusabusiness.com

www.misco.itwww.tigerdirect.ca

www.misco.eswww.infotelusa.com

www.misco.sewww.globalcomputer.com

www.misco.atwww.globalgoved.com

www.misco.chwww.systemaxpc.com

www.misco.bewww.globalindustrial.com

www.misco.iewww.globalindustrial.ca

www.wstore.co.ukwww.inmac-wstore.comwww.dealopro.com





We are 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 than our printed catalogs.  Our customers have around-the-clock, on-line access to purchase products and we have the ability to create targeted promotions for our customers’ interests. Many of our internet sites also permit customers to purchase “build to order” PCs configured to their own specifications.





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





Catalogs





We currently produce a total of 16 full-line or direct mail publications in North America and Europe under distinct titles. Our portfolio of catalogs includes such established brand names as TigerDirect.comTM, Global Computer SuppliesTM, TigerDirect.caTM, Misco®, Global IndustrialTM, NexelTM and Inmac WStore®.  We mail catalogs to both businesses and individual consumers. In the case of business mailings, we mail our catalogs to many individuals at a single business location, providing us with multiple points-of-entry. Our in-house staff designs all of our catalogs, which reduces overall catalog expense and shortens catalog production time. Our catalogs are printed by third parties under fixed pricing arrangements.
The commonality of certain core pages of our catalogs also allows for economies of scale in catalog production.





Continuing our focus on internet advertising, the distribution of our catalogs decreased to 33 million in 2010, which was 28.3% less than in the prior year. In 2010, we mailed approximately 26 million catalogs in North America, a 32.1% decrease from last year and approximately 7 million catalogs in Europe, or 9.7% fewer than mailed in 2009.





5





Customer Service, Order Fulfillment and Support





We receive orders through the internet, by telephone, electronic data interchange and by fax. We generally provide toll-free telephone number access for our customers in countries where it is customary. Certain domestic call centers are linked to provide telephone backup in the event of a disruption in phone service.





Certain of our products are carried in stock, and orders for such products are fulfilled on a timely basis directly from our distribution centers, typically within one day of the order. We utilize numerous sales and distribution facilities in North America and Europe. Orders are generally shipped by third-party delivery services. We maintain relationships with a number of large distributors in North America and Europe that also deliver products directly to our customers.





We provide extensive technical telephone support to our private label PC customers.  We maintain a database of commonly asked questions for our technical support representatives, enabling them to respond quickly to similar questions. We conduct regular on-site training seminars for our sales representatives to help ensure that they are well trained and informed regarding our latest product offerings.





Suppliers





We purchase substantially all of our products and components directly from manufacturers and large wholesale distributors. In 2010, one vendor accounted for 10.0% of our purchases. One vendor accounted for 12.0% and another vendor accounted for 11.3% of our purchases in 2009 and one vendor accounted for 12.0% in 2008. The loss of these vendors, or any other key vendors, could have a material adverse effect on us.





Certain private label products are manufactured by third parties to our specifications.





Competition and Other Market Factors





Technology Products





The North 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 to entry, with these products being sold through multiple channels of distribution, including direct marketers, local and national retail computer stores, computer resellers, mass merchants, over the internet and by computer and office supply superstores.





Timely introduction of new products or product features are critical elements to remaining competitive. Other competitive factors include product performance, quality and reliability, technical support and customer service, marketing and distribution and price. Some of our competitors have stronger brand-recognition, broader product lines and greater financial, marketing, manufacturing and technological resources than us.





Conditions in the market for technology products remaining highly competitive, characterized by prevalent discounting of product sales price as well as free or highly discounted freight offerings to our customers.  These actions have and may continue to adversely affect our revenues and profits. Additionally, we rely in part upon the introduction of new technologies and products by other manufacturers in order to sustain long-term sales growth and profitability. There is no assurance that the rapid rate of such technological advances and product development will continue.





Current economic conditions raise additional factors as the loss of consumer confidence in the Company’s markets could result in a decrease of spending in the categories of products we sell.  It is also possible that as manufacturers react to the marketplace they may reduce manufacturing capacity and create shortages of product.





Industrial Products





The market for the sale of industrial products in North America is highly fragmented and is characterized by multiple distribution channels such as small dealerships, direct mail distribution, internet-based resellers, large warehouse stores and retail outlets. We also face competition from manufacturers’ own sales representatives, who sell industrial equipment directly to customers, and from regional or local distributors. Many high volume purchasers, however, utilize catalog distributors as their first source of product. In the industrial products market, customer purchasing decisions are primarily based on price, product selection, product availability, level of service and convenience.  We believe that direct marketing via sales representatives, catalog and the internet are effective and
convenient distribution methods to reach mid-sized facilities that place many small orders and require a wide selection of products. In addition, because the industrial products market is highly fragmented and generally less brand oriented, it is well suited to private label products.





6





Software Solutions





In June 2009, the Company announced plans to exit the Software Solutions segment as the result of economic conditions and difficulties in marketing the segment’s products successfully (See Note 7 to the Consolidated Financial Statements included in Item 15 of this Form 10-K). The Software Solutions segment participated in the emerging market for on-demand, web-based business software applications through the marketing of its PCS ProfitCenter SoftwareTM application. Substantially all of the third party business activities of the Software Solutions segments ended as of December 31, 2009. Current and prior year results of Software Solutions are now included in ‘Corporate and other”.





Employees





As of December 31, 2010, we employed a total of approximately 5,600 employees, of whom 4,200 were in North America and 1,400 were in Europe.





Seasonality





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





Environmental Matters





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





Financial Information About Foreign and Domestic Operations





We conduct our business in North America (the United States, Puerto Rico and Canada) and Europe.  Approximately 35.9%, 33.5% and 37.9% of our net sales during 2010, 2009 and 2008, respectively were made by subsidiaries located outside of the United States. For information pertaining to our international operations, see Note 11, “Segment and Related Information,” to the Consolidated Financial Statements included in Item 15 of this Form 10-K. The following sets forth selected information with respect to our operations in those two geographic markets (in thousands):





North

America

Europe

Total2010Net sales

$
2,543,014


$
1,046,975


$
3,589,989Operating income

$
47,739


$
21,006


$
68,745Identifiable assets

$
665,686


$
228,414


$
894,1002009Net sales

$
2,317,475


$
848,520


$
3,165,995Operating income

$
62,308


$
11,321


$
73,629Identifiable assets

$
591,990


$
224,911


$
816,9012008Net sales

$
2,092,372


$
940,589


$
3,032,961Operating income

$
62,513


$
21,099


$
83,612Identifiable assets

$
552,459


$
149,994


$
702,453





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





7





Available Information





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





Our Board of Directors has adopted the following corporate governance documents with respect to the Company (the “Corporate Governance Documents”):





·
Corporate Ethics Policy for officers, directors and employees


·
Charter for the Audit Committee of the Board of Directors


·
Charter for the Compensation Committee of the Board of Directors


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


·
Corporate Governance Guidelines and Principles





In accordance with the listing standards of the New York Stock Exchange, each of the Corporate Governance Documents is available on our Company website (www.systemax.com).





Item 1A. Risk Factors.





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





Risks Related to the Economy and Our Industries





·
General economic conditions, such as decreased consumer confidence and spending, reductions in manufacturing capacity, and inflation could result in our failure to achieve our historical sales growth rates and profit levels.





Current economic conditions may cause the loss of consumer confidence in the Company’s markets which may result in a decrease of spending in the categories of products we sell. With conditions in the market for technology products remaining highly competitive, reductions in our selling prices, as we experienced in 2010 and 2009, would adversely affect our revenues and profits.  It is also possible that as manufacturers react to the marketplace they may reduce manufacturing capacity or allocations to their customers creating shortages of product. Both we and our customers are subject to global political, economic and market conditions, including inflation, interest rates, energy costs, the impact of natural disasters, military action and the threat of terrorism. Our consolidated results of operations
are directly affected by economic conditions in North America and Europe. We may experience a decline in sales as a result of poor economic conditions and the lack of visibility relating to future orders. Our results of operations depend upon, among other things, our ability to maintain and increase sales volumes with existing customers, our ability to limit price reductions and maintain our margins, our ability to attract new customers and the financial condition of our customers. A decline in the economy that adversely affects our customers, causing them to limit or defer their spending, would likely adversely affect our sales, prices and profitability as well. We cannot predict with any certainty whether we will be able to maintain or improve upon historical sales volumes with existing customers, or whether we will be able to attract new customers.





In response to economic and market conditions, from time to time we have undertaken initiatives to reduce our cost structure where appropriate. These initiatives, as well as any future workforce and facilities reductions, may not be sufficient to meet current and future changes in economic and market conditions and allow us to continue to achieve the growth rates and levels of profitability we have recently experienced. In addition, costs actually incurred in connection with our restructuring actions may be higher than our estimates of such costs and/or may not lead to the anticipated cost savings.





·
The markets for our products and services are extremely competitive and if we are unable to successfully respond to our competitors’ strategies our sales and gross margins will be adversely affected.





We may not be able to compete effectively with current or future competitors. The markets for our products and services are intensely competitive and subject to constant technological change. We expect this competition to further intensify in the future. Competitive factors include price, availability, service and support. We compete with a wide variety of other resellers and retailers, including internet marketers, as well as manufacturers. Many of our competitors are larger companies with greater financial, marketing and product development resources than ours. The market for the sale of industrial products in North America is highly fragmented and is characterized by multiple distribution channels such as small dealerships, direct mail distribution, internet-based resellers, large warehouse stores and retail
outlets. We also face competition from manufacturers’ own sales representatives, who sell industrial equipment directly to customers, and from regional or local distributors. In addition, new competitors may enter our markets. This may place us at a disadvantage in responding to competitors’ pricing strategies, technological advances and other initiatives, resulting in our inability to increase our revenues or maintain our gross margins in the future.





8





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





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





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





Our United States subsidiaries collect and remit sales tax in states in which the subsidiaries have physical presence or in which we believe nexus exists which obligates us to collect sales tax. Other states may, from time to time, claim that we have state-related activities constituting a sufficient nexus to require such collection. Additionally, many other states seek to impose sales tax collection or reporting obligations on companies that sell goods to customers in their state, or directly to the state and its political subdivisions, even without a physical presence. Such efforts by states have increased recently, as states seek to raise revenues without increasing the tax burden on residents. We rely on United States Supreme Court decisions which hold that, without Congressional authority, a state may not
enforce a sales tax collection obligation on a company that has no physical presence in the state and whose only contacts with the state are through the use of interstate commerce such as the mailing of catalogs into the state and the delivery of goods by mail or common carrier. We cannot predict whether the nature or level of contacts we have with a particular state will be deemed enough to require us to collect sales tax in that state nor can we be assured that Congress or individual states will not approve legislation authorizing states to impose tax collection or reporting obligations on all e-commerce and/or direct mail transactions. A successful assertion by one or more states that we should collect sales tax on the sale of merchandise could result in substantial tax liabilities related to past sales and would result in considerable administrative burdens and costs for us and may reduce demand for our products from customers in such states when we charge customers for such
taxes.





·
Events such as acts of war or terrorism, natural disasters, changes in law, or large losses could adversely affect our insurance coverage and insurance expense, resulting in an adverse affect on our profitability and financial condition.





We insure for certain property and casualty risks consisting primarily of physical loss to property, business interruptions resulting from property losses, worker’s compensation, comprehensive general liability, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. Although we believe that our insurance coverage is reasonable, significant events such as acts of war and terrorism, economic conditions, judicial decisions, legislation, natural disasters and large losses could materially affect our insurance obligations and future expense.





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





A change in accounting standards or practices can have a significant effect on our reported results of operations. New accounting pronouncements and interpretations of existing accounting rules and practices have occurred and may occur in the future. Changes to existing rules may adversely affect our reported financial results.





9




Risks Related to Our Company


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





We rely on a variety of information and telecommunications systems in our operations. Our success is dependent in large part on the accuracy and proper use of our information systems, including our telecommunications systems. To manage our growth, we continually evaluate the adequacy of our existing systems and procedures. We anticipate that we will regularly need to make capital expenditures to upgrade and modify our management information systems, including software and hardware, as we grow and the needs of our business change.  In particular, our primary financial system is being replaced currently. The occurrence of a significant system failure, electrical or telecommunications outages or our failure to expand or successfully implement new systems could have a material adverse effect on our results of
operations.





Our information systems networks, including our websites, and applications could be adversely affected by viruses or worms and may be vulnerable to malicious acts such as hacking. The availability and efficiency of sales via our websites could also be adversely affected by “denial of service” attacks and other unfair competitive practices. Although we take preventive measures, these procedures may not be sufficient to avoid harm to our operations, which could have an adverse effect on our results of operations.





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





We purchase substantially all of our technology products from major distributors and directly from large manufacturers who may deliver those products directly to our customers. These relationships enable us to make available to our customers a wide selection of products without having to maintain large amounts of inventory. The termination or interruption of our relationships with any of these suppliers could materially adversely affect our business.





We purchase a number of our products from vendors outside of the United States. Difficulties encountered by one or several of these suppliers could halt or disrupt production and delay completion or cause the cancellation of our orders. Delays or interruptions in the transportation network could result in loss or delay of timely receipt of product required to fulfill customer orders. Our ability to find qualified vendors who meet our standards and supply products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced from outside the U.S.  Political or financial instability, merchandise quality issues, product safety concerns, trade restrictions, work stoppages, tariffs, foreign currency exchange rates,
transportation capacity and costs, inflation, civil unrest, outbreaks of pandemics and other factors relating to foreign trade are beyond our control.  These and other issues affecting our vendors could materially adversely affect our revenue and gross profit.





Our PC products contain electronic components, subassemblies and software that in some 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 any problems procuring supplies in the near-term, there is no assurance that parts and supplies will be available in a timely manner and at reasonable prices. Any loss of, or interruption of, supply from key suppliers may require us to find new suppliers. This could result in production or development delays while new suppliers are located, which could substantially impair operating results. If the availability of these or other components used in the manufacture of our products was to decrease, or if the prices for these components were to increase significantly, operating costs and
expenses could be adversely affected.





Many product suppliers provide us with co-op advertising support in exchange for featuring their products in our catalogs and on our internet sites. Certain suppliers provide us with other incentives such as rebates, reimbursements, payment discounts, price protection and other similar arrangements. These incentives are offset against cost of goods sold or selling, general and administrative expenses, as applicable. The level of co-op advertising support and other incentives received from suppliers may decline in the future, which could increase our cost of goods sold or selling, general and administrative expenses and have an adverse effect on results of operations and cash flows.




10


·
Goodwill and intangible assets may become impaired resulting in a charge to earnings.





The acquisition of certain assets of CompUSA, CircuitCity and the purchase of the stock of WStore Europe SA resulted in the recording of significant intangible assets and or goodwill. We are required to test goodwill and intangible assets annually to determine if the carrying values of these assets are impaired or on a more frequent basis if indicators of impairment exist. If any of our goodwill or intangible assets are determined to be impaired we may be required to record a significant charge to earnings in the period during which the impairment is discovered.





·
Our substantial international operations are subject to risks such as fluctuations in currency rates (which can adversely impact foreign revenues and profits when translated to US Dollars), foreign regulatory requirements, political uncertainty and the management of our growing international operations.





We operate internationally and as a result, we are subject to risks associated with doing business globally. Risks inherent to operating overseas include:





·
Changes in a country’s economic or political conditions


·
Changes in foreign currency exchange rates


·
Difficulties with staffing and managing international operations


·
Unexpected changes in regulatory requirements




For example, we currently have operations located in numerous countries outside the United States, and non-U.S. sales (Europe, Canada and Puerto Rico) accounted for approximately 35.9% of our revenue during 2010.  To the extent the U.S. dollar strengthens against foreign currencies, our foreign revenues and profits will be reduced when translated into U.S. dollars.





·
We are exposed to various inventory risks, such as being unable to profitably resell excess or obsolete inventory and/or the loss of product return rights and price protection from our vendors; such events could lower our gross margins or result in inventory write-downs that would reduce reported future earnings.





Our inventory is subject to risk due to technological change and changes in market demand for particular products. If we fail to manage our inventory of older products we may have excess or obsolete inventory. We may have limited rights to return purchases to certain suppliers and we may not be able to obtain price protection on these items. The elimination of purchase return privileges and lack of availability of price protection could lower our gross margin or result in inventory write-downs.





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





·
If we fail to observe certain restrictions and covenants under our credit facilities the lenders could refuse to waive such default, terminate the credit facility and demand immediate repayment, which would adversely affect our cash position and materially adversely affect our operations.





Our United States/United Kingdom combined revolving credit agreement contains 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





If we fail to comply with the covenants and other requirements set forth in the credit agreement, we would be in default and would need to negotiate a waiver agreement with the lenders. Failure to agree on such a waiver could result in the lenders terminating the credit agreement and demanding repayment of any outstanding borrowings, which could adversely affect our cash position and adversely affect the availability of financing to us, which could materially impact our operations.





·
We depend on bank credit facilities to address our working capital and cash flow needs from time to time, and if we are unable to renew or replace these facilities, or borrowing capacity were to be reduced our liquidity and capital resources may be adversely affected.


11





We require significant levels of capital in our business to finance accounts receivable and inventory. We maintain credit facilities in the United States and in Europe to finance increases in our working capital if available cash is insufficient.  The amount of credit available to us at any point in time may be adversely affected by the quality or value of the assets collateralizing these credit lines. In addition, in recent years global financial markets have experienced diminished liquidity and lending constraints. Our ability to obtain future and/or increased financing to satisfy our requirements as our business expands could be adversely affected by economic and market conditions, credit availability and lender perception of our Company and industry.. However, we currently have no reason to believe that we will not be able to renew or replace our facilities when they reach maturity.





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





We have 41 retail stores in North America at December 31, 2010. The Company needs to effectively manage its cost structure in 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 attract customers and build brand loyalty. The retail computer and consumer electronics business is highly competitive and has narrow gross margins. If we fail to manage our growth and cost structure while maintaining high levels of service and meeting competitive pressures adequately, our business plan  may not be achieved and may lead to reduced profitability.





·
The failure to timely and satisfactorily process manufacturers’ and our own rebate programs could negatively impact our customer satisfaction levels.





Similar to other companies in the technology products industry, we advertise manufacturers’ mail-in rebates on many products we sell and, in some cases, offer our own rebates. These rebates are processed through third party vendors and in house. If these rebates are not processed in a timely and satisfactory manner by either third party vendors or our in house operations, our reputation in the marketplace could be negatively impacted.





·
We may be unable to reduce prices in reaction to competitive pressures, or implement cost reductions or new product line expansion to address gross profit and operating margin pressures; failure to mitigate these pressures could adversely affect our operating results and financial condition.





The computer and consumer electronics industry is highly price competitive and gross profit margins are narrow and variable. The Company’s ability to further reduce prices in reaction to competitive pressure is limited. Additionally, gross margins and operating margins are affected by changes in factors such as vendor pricing, vendor rebate and or price protection programs, product return rights, and product mix. Pricing pressure continued to be prevalent in 2010 as a result of the significant decline in economic activity in the markets we serve and we expect this to continue during this or any period of sustained economic decline. We may not be able to mitigate these pricing pressures and resultant declines in sales and gross profit margin with cost reductions in other areas or expansion into new product
lines. If we are unable to proportionately mitigate these conditions our operating results and financial condition may suffer.





·
We would be exposed to liability, including substantial fines and penalties and, in extreme cases, loss of our ability to accept credit cards, in the event our privacy and data security policies and procedures are inadequate to prevent security breaches of our consumer personal information and credit card information records.





In processing our sales orders we often collect personal information and credit card information from our customers. The Company has privacy and data security policies in place which are designed to prevent security breaches, however, if a third party or a rogue employee or employees are able to bypass our network security or otherwise compromise our customers’ personal information or credit card information, we could be subject to liability. This liability may include claims for identity theft, unauthorized purchases and claims alleging misrepresentation of our privacy and data security practices or other related claims. Further, the Company has not yet achieved full compliance with the Payment Card Industry (“PCI”) security standards. Without full compliance, any breach involving the loss of
credit card information may lead to PCI related fines of up to $500,000. In the event of a severe breach credit card providers may prevent the accepting of credit cards. Any such liability related to the aforementioned risks could lead to reduced profitability and damage our brand(s) and or reputation.





12




·
Failure to protect the integrity, security and use of our customers’ information could expose us to litigation and materially damage our standing with our customers




The use of individually identifiable consumer data is regulated at the state, federal and international levels and we incur      costs associated with information security – such as increased investment in technology and the costs of compliance with consumer protection laws.  Additionally, our internet operations and website sales depends upon the secure transmission of confidential information over public networks, including the use of cashless payments.  While we have taken significant steps to protect customer and confidential information, there can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and
personal data.  If any such compromise of our security were to occur, it could have a material adverse effect on our reputation, operating results and financial condition and could subject us to litigation.




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





Failure to adequately control fraudulent credit card transactions could increase our expenses. Increased sales to individual consumers, which are more likely to be paid for using a credit card, increases our exposure to fraud. We employ technology solutions to help us detect the fraudulent use of credit card information. 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 card data, which could adversely affect our business.





·
Our profitability can be adversely affected by increases in our income tax exposure due to, among other things, changes in the mix 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 among different countries and changes in valuation of our deferred tax assets and liabilities.





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




·
Our business is dependent on certain key personnel.
  Our business depends largely on the efforts and abilities of certain key senior management. The loss of the services of one or more of such key personnel could have a material adverse affect on our business and financial results. We do not maintain key man insurance policies on any of our executive officers.
  ·
We are subject to litigation risk due to the nature of our business, which may have a material adverse effect on our results of operations and business.
  From time to time, we are involved in lawsuits or other legal proceedings arising in the ordinary course of our business. These may relate to, for example, patent, trademark or other intellectual property matters, employment law matters, product liability, commercial disputes, consumer sales practices or other matters. In addition, as a public company we could from time to time face claims relating to corporate or securities law matters. The defense and/or outcome of such lawsuits or proceedings could have a material adverse effect on our business.


Item 1B. Unresolved Staff Comments.





None.





Item 2. Properties.





We operate our business from numerous facilities in North America and Europe.  These facilities include our headquarters location, administrative offices, telephone call centers, distribution centers, computer assembly and retail stores.  Certain facilities handle multiple functions.  Most of our facilities are leased; certain are owned by the Company.





North America





As of December 31, 2010 we have seven distribution centers in North America which aggregate approximately 1.7 million square feet, all of which are leased.  Our headquarters, administrative offices and call centers aggregate approximately 340,000 square feet, all of which are leased.  Our computer assembly facility is approximately 300,000 square feet and is owned by the Company.





The following table summarizes the geographic location of our North America stores at the end of 2010:





Location

Stores Open – 12/31/09

Store Openings

Stores Open – 12/31/10Delaware

1

1

2Florida

18

-

18Georgia

-

1

1Illinois

3

1

4North Carolina

2

-

2Puerto Rico

1

-

1Texas

4

3

7Ontario, Canada

5

1

634

7

41




All of our retail stores are leased.  The retail stores average 22,500 square feet.




13




Europe





As of December 31, 2010, we have seven distribution centers in Europe which aggregate approximately 295,000 square feet.  Six of these, aggregating approximately 219,000 square feet, are leased; one distribution center of approximately 76,000 square feet is owned by the Company.  Our administrative offices and call centers aggregate approximately 270,000 square feet, of which 192,000 square feet are leased and 78,000 square feet are owned by the Company.





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





Item 3. Legal Proceedings.





Other Matters





The Company and its subsidiaries are involved in various lawsuits, claims, investigations and proceedings including commercial, employment, consumer, personal injury and health and safety law matters, which are being handled and defended in the ordinary course of business. In addition, the Company is subject to various assertions, claims, proceedings and requests for indemnification concerning intellectual property, including patent infringement suits involving technologies that are incorporated in a broad spectrum of products the Company sells. The Company is also audited by (or has initiated voluntary disclosure agreements with) numerous governmental agencies in various countries, including U.S. Federal and state authorities, concerning potential income tax, sales tax and unclaimed property
liabilities. These matters are in various stages of investigation, negotiation and/or litigation, and are being vigorously defended.  Although the Company does not expect, based on currently available information, that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition or results of operations, the ultimate outcome is inherently unpredictable. Therefore, judgments could be rendered or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period.  Additionally, our Audit Committee, with the assistance of independent counsel, is conducting an independent investigation into certain anonymous whistleblower allegations concerning our Miami, Florida operations. While the investigation is not yet complete, it does not appear that there is any material impact on our reported consolidated financial statements. The Company
routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable and estimable.





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





None.





14





PART II





Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities





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





High


Low2010First Quarter

$
21.90


$
15.80Second Quarter


23.85



15.07Third Quarter


16.97



11.77Fourth Quarter


14.31



12.092009First Quarter

$
14.19


$
9.12Second Quarter


17.30



11.25Third Quarter


14.29



11.34Fourth Quarter


16.46



12.00





On January 1, 2011, the last reported sale price of our common stock on the New York Stock Exchange was $14.10 per share.  As of January 1, 2011, we had 207 shareholders of record.





On November 16, 2009, the Company’s Board of Directors declared a special dividend of $.75 per share payable on December 15, 2009 to shareholders of record on December 1, 2009. This special dividend is the third dividend we have paid since our initial public offering. Depending in part upon profitability, the strength of our balance sheet, our cash position and the need to retain cash for the development and expansion of our business, we may decide to declare another special dividend in the future.





In May 2008, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s common stock. The Company repurchased a total 574,235 shares under this plan which expired in December 2009.





Information regarding securities authorized for issuance under equity compensation plans and a performance graph relating to the Company’s common stock is set forth in the Company’s Proxy Statement relating to the 2011 annual meeting of shareholders and is incorporated by reference herein.





15





Item 6. Selected Financial Data.





The following selected financial information is qualified by reference to, and should be read in conjunction with, the Company’s Consolidated Financial Statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this report. The selected statement of operations data for fiscal years 2010, 2009 and 2008 and the selected balance sheet data as of December 2010 and 2009 are derived from the audited consolidated financial statements which are included elsewhere in this report. The selected balance sheet data as of December 2008, 2007 and 2006 and the selected statement of operations data for fiscal years 2007 and 2006 are derived from the audited consolidated financial statements of the Company which
are not included in this report.




Years Ended December 31,(In millions, except per share data)2010


2009


2008


2007


2006Statement of Operations Data:Net sales

$
3,590.0


$
3,166.0


$
3,033.0


$
2,779.9


$
2,345.2Gross profit

$
495.9


$
460.2


$
458.6


$
426.3


$
342.9Operating income

$
68.7


$
73.6


$
83.6


$
94.2


$
60.9Net income

$
42.6


$
46.2


$
52.8


$
69.5


$
45.14Per Share Amounts:Net income — diluted

$
1.13


$
1.24


$
1.40


$
1.84


$
1.22Weighted average common shares — diluted


37.6



37.3



37.7



37.8



36.9Cash dividends declared per common share

$
—


$
.75


$
1.00


$
1.00


$
—Balance Sheet Data:Working capital

$
300.9


$
250.1


$
253.1


$
274.4


$
229.4Total assets

$
894.1


$
816.9


$
702.5


$
677.6


$
584.1Long-term debt, excluding current portion

$
7.4


$
1.2


$
1.4


$
.3


$
.5Shareholders’ equity

$
409.3


$
364.7


$
334.0


$
335.8


$
289.5




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





Overview





Systemax is primarily a direct marketer of brand name and private label products. Our operations are organized in two reportable business segments — Technology Products and Industrial Products.





Our Technology Products segment sells computers, computer supplies and consumer electronics which are marketed in North America, Puerto Rico and Europe. Most of these products are manufactured by other companies. Some products are manufactured for us to our own design and marketed on a private label basis.  Technology products accounted for 93%, 94% and 92% of our net sales in 2010, 2009 and 2008, respectively.





Our Industrial Products segment sells a wide array of industrial products and supplies which are marketed in North America. Most of these products are manufactured by other companies. Some products are manufactured for us to our own design and marketed under the trademarks GlobalTM, GlobalIndustrial.comTM and NexelTM. Industrial products accounted for 7%,6% and 8%, of our net sales in 2010, 2009 and 2008, respectively. In both of these product groups, we offer our customers a broad selection of products, prompt order fulfillment and extensive customer service.





We announced plans to exit the Software Solutions segment during the second quarter of 2009. (See Note 7 to the Consolidated Financial Statements included in Item 15 of this Form 10-K).Substantially all of the third party business activities of ProfitCenter Software have ended. Current and prior year results for Software Solutions are now included in “Corporate and other”. See Note 11 to the Consolidated Financial Statements included in Item 15 of this Form 10-Kfor additional financial information about our business segments as well as information about our geographic operations.





The market for computer products and consumer electronics is subject to intense price competition and is characterized by narrow gross profit margins. The North American industrial products market is highly fragmented and we compete against companies utilizing multiple distribution channels. Distribution is working capital intensive, requiring us to incur significant costs associated with the warehousing of many products, including the costs of leasing warehouse space, maintaining inventory and inventory management systems, and employing personnel to perform the associated tasks. We supplement our on-hand product availability by maintaining relationships with major distributors and manufacturers, utilizing a combination of stocking and drop-shipment fulfillment.





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





16





In the discussion of our results of operations we refer to business to business sales, consumer channel sales and period to period constant currency comparisons. Business to business sales are sales made direct to other businesses through managed business relationships, outbound call centers and extranets. Sales in the Industrial Products segment and Corporate and other are considered to be business to business sales. Consumer channel sales are sales from retail stores, consumer websites, inbound call centers and television shopping channels. Constant currency refers to the adjustment of the results of our foreign operations to exclude the effects of period to period fluctuations in currency exchange rates.





Critical Accounting Policies and Estimates





Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Item 15 of this Form 10-K. Certain accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty, and as a result, actual results could differ from those estimates. These judgments are based on historical experience,observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. Management believes that full consideration has been given to all relevant circumstances that we may be subject
to, and the consolidated financial statements of the Company accurately reflect management’s best estimate of the consolidated results of operations, financial position and cash flows of the Company for the years presented. We identify below a number of policies that entail significant judgments or estimates. Actual results may differ from these estimates under different conditions or assumptions.





Revenue Recognition.We recognize product sales when persuasive evidence of an order arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Generally, these criteria are met at the time of receipt by customers when title and risk of loss both are transferred. Sales are shown net of returns and allowances, rebates and sales incentives.  Reserves for estimated returns and allowances are provided when sales are recorded, based on historical experience and current trends.





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





Inventory valuation.  We value our inventories at the lower of cost or market, cost being determined on the first-in, first-out method except in Europe and retail locations where an average cost is used. Excess and obsolete or unmarketable merchandise are written down based on historical experience, assumptions about future product demand and market conditions. If market conditions are less favorable than projected or if technological developments result in accelerated obsolescence, additional write-downs may be required. While obsolescence and resultant markdowns have been within expectations, there can be no guarantee that we will continue to experience the same level of markdowns we have in the past.





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





Long-lived Assets. Management exercises judgment in evaluating our long-lived assets for impairment and in their depreciation and amortization methods and lives. We believe we will generate sufficient undiscounted cash flow to more than recover the investments made in property, plant and equipment. Our estimates of future cash flows involve assumptions concerning future operating performance and economic conditions. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations.





Accruals.Management exercises judgment in estimating various period end liabilities such as costs related to vendor drop shipments, sales returns and allowances, cooperative advertising and customer rebate reserves, and other vendor and employee related costs. While we believe that these estimates are reasonable, any significant deviation of actual costs as compared to these estimates 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 is complex and requires significant management judgment. Management judgment is also applied in the determination of deferred tax assets and liabilities and any valuation allowances that might be required in connection with our ability to realize deferred tax assets.





17





Since we conduct operations in numerous US states and internationally, our effective tax rate depends upon the geographic distribution of our pre-tax income or losses among locations with varying tax rates and rules. As the geographic mix of our pre-tax results among various tax jurisdictions changes, the effective tax rate may vary from period to period. We are also subject to periodic examination from domestic and foreign tax authorities regarding the amount of taxes due. These examinations include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. We have established, and periodically reevaluate, an estimated income tax reserve on our consolidated balance sheet to provide for the possibility of adverse outcomes in income tax proceedings. While
management believes that we have identified all reasonably identifiable exposures and that the reserve we have established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved.





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





Reorganization and other charges.We have taken restructuring actions in the past and could in the future commence further restructuring activities which result in recognition of restructuring charges if events make it necessary. These actions require management to make judgments and utilize significant estimates regarding the nature, timing and amounts of costs associated with the activity. When we incur a liability related to a restructuring action, we estimate and record all appropriate expenses, including expenses for severance and other employee separation costs, facility consolidation costs (including estimates of sublease income), lease cancellations, asset impairments and any other exit costs. Should the actual amounts differ from our
estimates, the amount of the restructuring charges could be impacted, which could materially affect our consolidated financial position and results of operations.





Recently Adopted and Newly Issued Accounting Pronouncements





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





In October 2009, the FASB issued revised guidance related to multiple-element arrangements which requires an entity to allocate arrangement consideration at the inception of an arrangement to all deliverables based on relative selling prices. This update eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances. This guidance is effective for fiscal years beginning on or after September 15, 2010. Companies may use either prospective application for revenue arrangements entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. The Company does not believe this amended guidance will have a material impact on its consolidated financial
statements.





In October 2009, the FASB issued amended guidance that affects how entities account for revenue arrangements that contain both hardware and software elements.  Products that rely on software will be accounted for under the revised multiple-element arrangement revenue recognition guidance mentioned above rather than software revenue recognition guidance. The revised guidance must be adopted no later than fiscal years beginning on or after September 15, 2010. The transition method and period for the adoption of this guidance and the revisions to the multiple-element arrangements guidance noted above must be the same.  The Company does not believe that this guidance will have a material impact on its consolidated financial statements.





Highlights from 2010


The discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements included herein.





·
Sales grew 13.4% to $3.6 billion in 2010 over 2009.


·
Seven new retail stores were opened.


·
One-time charges were $4.3 million, approximately $0.07 per diluted share, after tax, for costs related primarily to the integration of the WStore acquisitions.


·
Gross and operating margins negatively impacted by new warehouse costs and pricing pressures.


·
Diluted earnings per share declined to $1.13 from $1.24 in 2009.


·
Movements in exchange rates negatively impacted European sales by approximately $52.9 million yet positively impacted Canadian sales by approximately $19.9 million.


·
2010 and 2009 both included 52 weeks while 2008 included 53 weeks.





18





Results of Operations





Key Performance Indicators (in thousands):





Years Ended December 31,%








%2010


2009


Change


2009


2008


ChangeNet sales by segment:Technology products

$
3,337,635


$
2,966,657



12.5
%

$
2,966,657


$
2,794,948



6.1
%Industrial products


250,036



196,129



27.5
%


196,129



237,027



(17.3
)%Corporate and other


2,318



3,209



(27.8
)%


3,209



986



225.5
%Consolidated net sales

$
3,589,989


$
3,165,995



13.4
%

$
3,165,995


$
3,032,961



4.4
%Net sales by geography:North America

$
2,543,014


$
2,317,475



9.7
%

$
2,317,475


$
2,092,372



10.8
%Europe


1,046,975



848,520



23.4
%


848,520



940,589



(9.8
)%Consolidated net sales

$
3,589,989


$
3,165,995



13.4
%

$
3,165,995


$
3,032,961



4.4
%Net sales by channel:Consumer

$
1,819,803


$
1,764,514



3.1
%

$
1,764,514


$
1,645,021



7.3
%Business to business


1,770,186



1,401,481



26.3
%


1,401,481



1.387.940



1.0
%Consolidated net sales

$
3,589,989


$
3,165,995



13.4
%

$
3,165,995



3,032,961



4.4
%Consolidated gross margin


13.8
%


14.5
%


(0.7
)%


14.5
%


15.1
%


(0.6
)%.Consolidated SG&A costs

$
427,202


$
386,619



10.5
%

$
386,619


$
374,947



3.1
%Consolidated SG&A costs as % of sales


11.9
%


12.2
%


(0.3
)%


12.2
%


12.4
%


(0.2
)%Operating income (loss) by segment:Technology products

$
64,443


$
88,173



(26.9
)%

$
88,173


$
97,747



(9.8
)%Industrial products


23,814



15,415



54.5
%


15,415



24,621



(37.4
)%Corporate and other


(19,512
)


(29,959
)


(34.9
)%


(29,959
)


(38,756
)


(22.7
)%Consolidated operating income

$
68,745


$
73,629



(6.6
)%

$
73,629


$
83,612



(11.9
)%Operating margin by segment:Technology products


1.9
%


3.0
%


(1.1
)%


3.0
%


3.5
%


(0.5
)%Industrial products


9.5
%


7.9
%


1.6
%


7.9
%


10.4
%


(2.5
)%Consolidated operating margin


1.9
%


2.3
%


(0.4
)%


2.3
%


2.8
%


(0.5
)%Effective income tax rate


35.6
%


36.8
%


(1.2
)%


36.8
%


36.9
%


(0.1
)%Net income

$
42,551


$
46,185



(7.9
)%

$
46,185


$
52,843



(12.6
)%Net margin


1.2
%


1.5
%


(0.3
)%


1.5
%


1.7
%


(0.2
)%




NET SALES





SEGMENTS:





The Technology Products net sales increase is attributable to increased business to business and consumer channel sales worldwide as a result of improved global economic conditions, the expansion of the number of retail stores in the United States and Canada and the continuing sales contribution from our Circuit City and WStore Europe SA (“WStore”) acquisitions in 2009. On a constant currency basis, translating 2010 foreign results at 2009 exchange rates, and excluding the impact of the WStore acquisition on results, sales would have grown 7.9% or $230.6 million.





Industrial Products sales, primarily business to business, increased 27.5% as compared to last year. The sales increase, the majority of which was driven by web sales, is attributable to improved economic conditions in North America in 2010 resulting in increased demand for the segment’s various products as well as an increase in the number of products offered on its websites and in its catalogs.





The Company announced plans to exit its Software solutions segment during the second quarter of 2009. Substantially all of the third party business activities of ProfitCenter Software have ended. Current and prior year results for this segment are now included in Corporate and other.





19





GEOGRAPHIES:





North American sales benefited from increased retail and internet sales in the consumer channel, the result of opening seven retail stores in 2010, the Circuit City acquisition in 2009, and the increased sales from the Industrial Products segment.  On a constant currency basis, North American sales would have grown 8.9%. The movement in the exchange rates positively impacted sales by approximately $19.9 million.





European sales grew primarily from an increase in business to business sales. On a constant currency basis, European sales would have increased 29.6%. Movement in foreign exchange rates negatively impacted sales by approximately $52.9 million.





CHANNEL SALES:





Worldwide consumer-channel revenue, defined as revenues from retail stores, consumer websites, inbound call centers and shopping channels, grew primarily from volume increases in computers, including laptops and netbooks and consumer electronics, including televisions, reflecting improved global economic conditions. On a constant currency basis and excluding the WStore acquisition, worldwide consumer channel sales increased 2.4%.





Worldwide business to business channel sales grew primarily from an improvement in global economic conditions and the WStore acquisition in 2009. On a constant currency basis and excluding the WStore acquisition, worldwide business to business channel sales grew 18.1%.





2009 versus 2008:





The growth in Technology products sales in 2009 compared to 2008 was driven by increased retail and internet sales, opening of five retail stores and the two acquisitions completed in 2009. The Circuit City acquisition and the WStore acquisition contributed $67.3 million and $63.8 million in sales, respectively. On a constant currency basis, translating 2009 foreign results at 2008 exchange rates, Technology product sales would have grown 10.5% or $120.9 million. Adjusting for the impact of the number of weeks, Technology products sales increased 8.3% for the year. North American technology sales increased 14.3% in 2009 compared to 2008 benefiting from the opening of five retail stores and the Circuit City acquisition. On a constant currency basis, translating 2009 Other North America results at 2008 exchange rates,
North American technology products sales would have grown to 15.2%. The movement in exchange rates negatively impacted sales by approximately $17.3 million. Adjusting for the impact of the number of weeks, North American technology sales would have increased 16.7%. European technology products sales declined 9.8% to $848.5 million as the result of slower business to business sales. Sales attributable to the WStore acquisition totaled $63.8 million for the year. On a constant currency basis, European sales would have increased 1.2%. Movement in foreign exchange rates accounted for $103.6 million of the sales decline in Europe for the year. Adjusting for the impact of the number of weeks, European sales would have declined 8.3%. As in the United States, sales slowed in the second half of 2008 in Europe and Canada for both consumer and business to business sales as the result of a slowdown in economic activity Industrial products sales decline was attributable to the slowdown in business
to business economic activity. The Company announced plans to exit its Software solutions segment during the second quarter of 2009. Substantially all of the third party business activities of ProfitCenter Software had ended as of December 31, 2009. Current and prior year results for this segment are now included in Corporate and other.





GROSS MARGIN





Consolidated gross margin declined by 70 basis points in 2010 versus 2009 as the Company continued to lower certain product prices, offered freight discounts on the Company’s North American websites and incurred start up costs related to the new distribution center in North America partially offset by improvement in gross margin in Europe and in Industrial Products. Gross margin is dependent on variables such as product mix, vendor price protection and other sales incentives, competition, pricing strategy, cooperative advertising funds required to be classified as a reduction to cost of sales, freight discounting and other variables, any or all of which may result in fluctuations in gross margin.





Consolidated gross margin declined by 60 basis points in 2009 versus 2008 as the Company lowered certain product prices and offered freight incentives in order to maintain and grow market share and to respond to competitive pricing pressures that started in 2008. Additionally, consolidated gross margin has been impacted by a shift in mix, as higher margin Industrial Products accounted for a smaller percentage of consolidated revenues than in previous years.





20





SELLING, GENERAL AND ADMINISTRATIVE EXPENSES/REORGANIZATION AND OTHER CHARGES





Selling, general and administrative expenses increased in 2010 over 2009 primarily as a result of the increased sales volume, increases in facility and other operating costs related to opening additional retail stores and reorganization costs related to the WStore acquisition. Selling, general and administrative costs as a percent of sales declined 30 basis points as sales grew at a faster rate than costs. Retail expansion in the United States and the inclusion of WStore results for a full year were primary drivers of the cost increases in 2010. Significant expense increases include approximately $28.1 million of increased payroll, severance and related costs of which $3.0 million related to reorganization charges related to the merger of the Company’s Misco and WStore operations in Europe, other exit costs
related to the merger of $1.0 million, $8.5 million of increased internet advertising expenses, $5.6 million of increased rent and related expenses primarily related to retail stores, $2.8 million of increased credit card fees, $2.5 million of additional depreciation and amortization expense offset by approximately $9.7 million of increased vendor consideration related to advertising 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 2009 over 2008 primarily as a result of the increase in sales volume, facility and other operating costs related to opening additional retail stores, costs related to winding down the Software Solutions segment and costs related to the WStore acquisition.  Selling, general and administrative costs as a percent of sales declined 20 basis points as sales grew at a faster rate than costs. Significant expense increases include approximately $7.8 million in charges for severance costs, litigation and contractual lease terminations of which approximately $2.9 million related to winding down costs related to Software Solutions segment. Also included in 2009 is a gain of approximately $1.8 million from a lawsuit that was settled favorably.





OPERATING MARGIN





Technology products operating margin decreased 100 basis points in 2010 versus 2009 due to price promotions, freight discounts offered during the year, start up costs related to the new distribution center in North America and reorganization costs related to the WStore integration which could not be fully offset by cost reduction initiatives. Technology products operating margin decreased 40 basis points in 2009 versus 2008 due to the global economic slowdown, price promotions, freight discounts and other cost increases which were not fully offset by cost reduction initiatives.





Industrial products operating margin increased by 20 basis points in 2010 versus 2009 due to improved economic conditions in North America, resulting in increased demand for the segment’s various products and prudent cost management. Industrial products operating margin decreased 30 basis points in 2009 versus 2008 due to the slowdown in sales coupled with additional information technology staffing and other costs for the support of the new products added and the newly launched e-commerce website.





Corporate and other expenses operating costs decreased 30.4% during 2010 due to cost savings from winding down the ProfitCenter Software segment in 2009, reduced consulting and outside services for the software implementation which began in 2009 and significantly less legal and professional fees incurred in 2010 compared to 2009. Corporate and other expenses decreased 6.5% due to winding down the ProfitCenter Software segment in 2009 offset by expenses for new software implementation, acquisition related costs and additional staffing and overhead costs to support the growth in the Company’s business.





INTEREST EXPENSE





Interest expense was $1.8 million, $1.4 million, and $0.8 million in 2010, 2009 and 2008, respectively. The interest expense increase in 2010 compared to 2009 is primarily attributable to a full year of interest expense related to the debt assumed in the WStore acquisition, higher average outstanding balances under the Company’s revolving credit agreement and interest on the Recovery Zone Bond entered into to finance the equipment for the new distribution center opened in 2010. Interest expense increased in 2009 over 2008 primarily as a result of the short term debt assumed in the WStore acquisition and interest on capital lease obligations. Interest and other income, net was $0.8 million, $1.0 million, and $2.2 million in 2010, 2009 and 2008, respectively. The changes are a result of the Company’s
investable cash fluctuations due to cash sources and uses for operating, investing and financing activities.





INCOME TAXES





The Company’s effective tax rate was 35.6% in 2010 as compared to 36.8% in 2009. The lower tax rate in 2010 is primarily attributed to reversals of valuation allowances of approximately $0.5 million. If excluded, the Company’s effective tax rate would have been 36.3%. The lower tax rate in 2010 is primarily attributed to a higher percentage of taxable income in countries that have lower corporate tax rates. The Company’s effective tax rate will vary as the mix of pretax income from the countries the Company does business in varies.





The effective tax rate in 2009 was flat compared to 2008. Included in the 2009 rate was a reversal of tax reserves of approximately $0.9 million, as a result of statute expirations. If excluded, the Company’s effective tax rate would have been 38.4%. The higher tax rate in 2009 is primarily attributed to a higher percentage of taxable income in countries that have higher corporate tax rates.





21





Seasonality





As the Company’s consumer channel sales have grown significantly in the past few years, the fourth quarter has represented a greater portion of annual sales than historically.  Net sales have historically been modestly weaker during the second and third quarters as a result of lower business activity during those months. The following table sets forth the net sales seasonality for each of the quarters since January 1, 2008 (amounts in millions).





Quarter EndedMarch 31


June 30


September 30


December 312010Net sales

$
915


$
806


$
863


$
1,006Percentage of year’s net sales


25.5
%


22.5
%


24.0
%


28.0
%2009Net sales

$
752


$
722


$
754


$
938Percentage of year’s net sales


23.8
%


22.8
%


23.8
%


29.6
%2008Net sales

$
725


$
756


$
739


$
813Percentage of year’s net sales


23.9
%


24.9
%


24.4
%


26.8
%




Financial Condition, Liquidity and Capital Resources





Selected liquidity data (in thousands):





December 31,2010


2009


$ ChangeCash

$
92,077


$
58,309


$
33,768Accounts receivable, net

$
276,344


$
241,860


$
34,484Inventories

$
370,375


$
365,725


$
4,650Prepaid expenses and other current assets

$
19,308


$
20,066


$
(758
)Accounts payable

$
377,030


$
348,029


$
29,001Accrued expenses and other current liabilities

$
84,680


$
78,841


$
5,839Current portion of long term debt

$
2,655


$
1,029


$
1,626Short term debt

$
-



14,168


$
(14,168
)Long term debt

$
7,386


$
1,194


$
6,192Working capital

$
300,872


$
250,519


$
50,353





Our primary liquidity needs are to support working capital requirements in our business, including working capital for new retail stores, to fund capital expenditures, including the second North American distribution center for the Technology Products segment, to fund the payment of interest on outstanding debt, to fund special dividends declared by our Board of Directors and for acquisitions. We rely principally upon operating cash flows to meet these needs. We believe that cash flows from operations and our availability under credit facilities will be sufficient to fund our working capital and other cash requirements for the next twelve months.





Our working capital increased in 2010 as the result of increased cash, accounts receivable and inventory balances as a result of growth in the business offset partially by an increase in accounts payable, accrued expenses and the current portion of long term debt. The increase in inventory is the result of increased retail store inventory in 2010 and the opening of a new distribution facility for Technology Products in the third quarter of 2010. Accounts receivable balances increased as the result of growth in open account business to business customers, the WStore acquisition and slight growth in accounts receivable days outstanding. Accounts payable and accrued expense balances increased due to inventory growth and the WStore acquisition. Accounts receivable days outstanding were at 25 in 2010 up from 23 in 2009.
We expect that future accounts receivable and inventory balances will fluctuate with growth in net sales and the mix of our net sales between consumer and business customers.





Net cash provided by operating activities was $64.9 million, $4.8 million, and $82.4 million during 2010, 2009, and 2008. The increase in cash provided by operating activities in 2010 over 2009 resulted from a $5.0 million decrease in net income adjusted by other non-cash items, such as depreciation expense, and an increase of $65.1 million in cash used for changes in our working capital accounts. The decrease in cash provided by operating activities in 2009 compared to 2008 resulted from a $3.0 million decrease in net income adjusted by other non-cash items, such as depreciation expense, and a decrease of $74.6 million in cash used for changes in working capital accounts.





22





Net cash used in investing activities was $24.7 million during 2010, primarily for capital expenditures including expenditures for the second North American distribution center for the Technology Products segment. Cash flows used in investing activities during 2009 totaled $32.3 million primarily for the CircuitCity.com acquisition and for capital expenditures. Net cash used in investing activities was $45.5 million during 2008, primarily for the CompUSA acquisition and for capital expenditures. Capital expenditures in 2010, 2009 and 2008 included upgrades and enhancements to our information and communications systems hardware and software and expenditures in retail stores in North America.





Net cash used in financing activities was $4.7 million during 2010. We borrowed and repaid approximately $261.7 million against our credit facilities. We repaid approximately $13.2 million in short term debt and approximately $1.5 million in capital lease obligations and received proceeds of approximately $7.9 million from the Recovery Zone Facility Bond. Proceeds and excess tax benefits from stock option exercises provided approximately $2.1 million of cash. Net cash used in financing activities was $31.5 million during 2009. We repaid approximately $3.6 million in short-term debt and approximately $0.8 million in capital lease obligations, paid a special dividend of $27.6 million, and repurchased Company stock of approximately $1.2 million. Proceeds and excess tax benefits from stock option exercises provided
approximately $1.7 million of cash. Net cash used in financing activities was $45.0 million during 2008, attributable to dividends paid of $37.1 million, repayment of short term debt of $3.9 million, repayment of $0.7 million in capital lease obligations, repurchase of common stock of approximately $5.8 million, offset by proceeds of stock option exercises and related excess tax benefits of $2.5 million.





We have a $125.0 million secured revolving credit agreement (which may be increased to $200.0 million, subject to certain conditions). The facility has a five year term expiring in October 2015. The borrowings under the agreement are subject to borrowing base limitations of up to 85% of eligible accounts receivable and up to 40% of qualified inventories. Borrowings are secured by substantially all of the Company’s assets, including accounts receivable, inventory and certain other assets, subject to limited exceptions, including the exclusion of certain foreign assets from the collateral. The amended and restated credit agreement contains certain operating, financial and other covenants, including limits on annual levels of capital expenditures, availability tests related to payments of dividends and stock
repurchases and fixed charge coverage tests related to acquisitions.The revolving credit agreement requires that we maintain a minimum level of availability. If such availability is not maintained, we will then be required to maintain a fixed charge coverage ratio (as defined). As of December 31, 2010, the Company was in compliance with all of the covenants under the credit facility. Eligible collateral under the facility was $125.0 million, total availability was $115.9 million, outstanding letters of credit of were $9.1 million and there were no outstanding advances.





The Company’s Inmac WStore subsidiary maintains a secured revolving credit agreement with a financial institution in France which is secured by WStore Europe SA accounts receivable balances. Available amounts for borrowing under this facility includes all accounts receivable balances not over 60 days past due reduced by the greater of €4.0 million or 10% of the eligible accounts receivable. As of December 31, 2010, there was availability under this credit facility of approximately €15.6 million ($20.9 million) and there were no outstanding borrowings. The credit facility duration is indefinite; however either party may cancel the agreement with ninety days notice. Under this agreement the Company is subject to certain non-financial covenants which it was in compliance with at December 31,
2010.





The Company’s WStore UK subsidiary maintained a £2 million secured revolving credit agreement with a financial institution in the United Kingdom. The Company terminated this facility in July 2010.





On September 23, 2010, the Company (through a subsidiary) completed tax exempt Recovery Zone Facility Bond (the “Bonds”) financing for up to $15 million with the Development Authority of Jefferson, Georgia (the “Authority”). The Bonds were issued by the Authority and initially purchased by GE Government Finance Inc., and mature on October 1, 2018.  Interest on the Bonds is calculated at the rate of 4.15% per annum and principal and interest payments are due monthly. The proceeds of the Bonds are   used to finance or repay the costs of capital equipment purchased for the Company’s distribution facility located in Jefferson, Georgia.  The purchase and installation of all the equipment for the facility is expected to be completed by December 31,
2011. Pursuant to the transaction, the Company will transfer to the Authority for consideration consisting of the Bond proceeds ownership of the equipment to be used at the distribution facility and the Authority in turn will lease the equipment to the Company’s subsidiary pursuant to a capital equipment lease expiring October 1, 2018. Under the capital equipment lease the Company has the right to acquire ownership of the equipment at any time for a purchase price sufficient to pay off all principal and interest on the Bonds, plus $1.00.





Our earnings and cash flows are seasonal in nature, with the fourth quarter of the fiscal year generating higher earnings and cash flows than the other quarters. Levels of earnings and cash flows are dependent on factors such as consolidated gross margin and selling, general and administrative costs as a percentage of sales, product mix and relative levels of domestic and foreign sales. Unusual expense items, such as one time charges and settlements, may impact earnings and are separately disclosed. We expect that past performance may not be indicative of future performance due to the competitive nature of our Technology Products segment where 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 or financial condition.  However, we do not believe that there is a direct correlation between any specific macroeconomic indicator and our revenues, cash flows or financial condition.  We are not currently interest rate sensitive, as we have significant cash balances and minimal debt.





23





We anticipate cash needs to support our growth and expansion plans, continued investment in upgrading and expanding our technological capabilities and information technology infrastructure, opening of new retail stores, and in building out and expanding our distribution center facilities and inventory systems.





These expenses and capital expenditures will require significant levels of liquidity, which we believe can be adequately funded from our currently available cash resources. We have recently engaged in several opportunistic acquisitions, choosing to pay the purchase price in cash, and may do so in the future as favorable situations arise.  However, a deep and prolonged period of reduced consumer and/or business to business spending could adversely impact our cash resources and force us to either forego future acquisition opportunities or to pay the purchase price in shares of our common stock, which could have a dilutive effect on  our earnings per share. In addition we anticipate cash needs for implementation of the financial systems. We believe that our cash balances, future cash flows from
operations and our availability under credit facilities will be sufficient to fund our working capital and other cash requirements for at least the next twelve months.





We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of December 31, 2010, all of our investments had maturities of less than three months.  Accordingly, we do not believe that our investments have significant exposure to interest rate risk.





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





Following is a summary of our contractual obligations for future principal payments on our debt, minimum rental payments on our non-cancelable operating leases and minimum payments on our other purchase obligations as of December 2010 (in thousands):





Total


Less than

1 year


1-3 years


3-5 years


More than

5 yearsContractual Obligations:Capital lease obligations

$
19,845


$
3,343


$
7,958


$
6,703


$
1,841Non-cancelable operating leases, net of subleases


220,370



26,069



70,291



57,916



66,094Purchase & other obligations


34,977



27,619



5,166



2,192



—Total contractual obligations

$
275,192


$
57,031


$
83,415


$
66,811


$
67,935





Our purchase and other obligations consist primarily of certain employment agreements and service agreements.





In addition to the contractual obligations noted above, we had $9.1 million of standby letters of credit outstanding as of December 2010.





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





Tax contingencies are related to uncertain tax positions taken on income tax returns that may result in additional tax, interest and penalties being paid to taxing authorities. As of December 31, 2010, the Company had no uncertain tax positions.





Off-Balance Sheet Arrangements





We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.





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





Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
 
 We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates (principally Pounds Sterling, Euros and Canadian Dollars) as measured against the U.S. Dollar and each other.





24





The translation of the financial statements of our operations located outside of the United States is impacted by movements in foreign currency exchange rates. Changes in currency exchange rates as measured against the U.S. dollar may positively or negatively affect income statement, balance sheet and cash flows as expressed in U.S. dollars. Sales would have fluctuated by approximately $123.2 million and pretax income would have fluctuated by approximately $2.1 million if average foreign exchange rates changed by 10% in 2010. We have limited involvement with derivative financial instruments and do not use them for trading purposes. We may enter into foreign currency options or forward exchange contracts aimed at limiting in part the impact of certain currency fluctuations, but as of December 31, 2010 we had no
outstanding forward exchange contracts.





Our exposure to market risk for changes in interest rates relates primarily to our variable rate debt. Our variable rate debt consists of short-term borrowings under our credit facilities. As of December 31, 2010, there were no outstanding balances under our variable rate credit facility. A hypothetical change in average interest rates of one percentage point is not expected to have a material effect on our financial position, results of operations or cash flows over the next fiscal year.





Item 8. Financial Statements and Supplementary Data.





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





Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.





None.





Item 9A. Controls and Procedures.





Evaluation of Disclosure Controls and Procedures





Under the 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 and operation of the Company’s disclosure controls and procedures as of December 31, 2010. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.





Inherent Limitations of Internal Controls over Financial Reporting





The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in
accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.





Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control 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 are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to
the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.





Management’s Report on Internal Control Over Financial Reporting





The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its internal control over financial reporting based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal control over financial reporting was effective
as of December 31, 2010.





25





The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, a copy of which is included in this report.





Changes in Internal Control Over Financial Reporting





There have been no changes in the Company’s internal controls over financial reporting for the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.





Item 9B. Other Information.





None.





26





PART III





Item 10. Directors, Executive Officers and Corporate Governance.





The information required by Item 10 of Part III is hereby incorporated by reference to the Company’s Proxy Statement for the 2011 Annual Meeting of Stockholders. (the “Proxy Statement”).





Item 11. Executive Compensation.





The information required by Item 11 of Part III is hereby incorporated by reference to the Proxy Statement.





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





The information required by item 12 of Part III is hereby incorporated by reference to the Proxy Statement.





Item 13. Certain Relationships and Related Transactions, and Director Independence





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





Item 14. Principal Accounting Fees and Services.





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





PART IV





Item 15. Exhibits and Financial Statement Schedules.





(a)
1.
Consolidated Financial Statements of Systemax Inc.

ReferenceReports of Ernst & Young LLP Independent Registered Public Accounting Firm

31Consolidated Balance Sheets as of December 31, 2010 and 2009

33Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008

34Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008

35Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2010, 2009 and 2008

36Notes to Consolidated Financial Statements

372.
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

50Schedules 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.





27





Item 15. Exhibits and Financial Statement Schedules.





3.
Exhibits.





ExhibitNo.

Description3.1

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 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)





28





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).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).10.28

Second Amended and Restated Credit Agreement, dated as of October 27, 2010, by and among Systemax Inc. and certain affiliates thereof and JPMorgan Chase Bank, N.A., as U.S. Administrative Agent, J.P. Morgan Europe Limited, as UK Administrative Agent, J.P. Morgan Securities, Inc. as Sole Bookrunner and Sole Lead Arranger, and the lenders from time to time party thereto (incorporated by reference to the Company’s report on Form 8-K dated November 2, 2010).10.29

Lease Agreement, dated as of September 1, 2010, among Development Authority of Jefferson, Georgia, GE Government Finance Inc. and SYX Distribution Inc. (incorporated by reference to the Company’s report on Form 8-K dated September 24, 2010).10.30

Corporate Guaranty and Negative Pledge Agreement, dated as of September 1, 2010, among Systemax Inc., Development Authority of Jefferson, Georgia and GE Government Finance Inc. (incorporated by reference to the Company’s report on Form 8-K dated September 24, 2010).

Escrow Agreement, dated as of September 1, 2010, among Marshall & Ilsley Trust Company, N.A. (as escrow agent), GE Government Finance Inc., Development Authority of Jefferson, Georgia and SYX Distribution Inc. (incorporated by reference to the Company’s report on Form 8-K dated September 24, 2010).10.31

Restricted Stock Unit Agreement, dated August 25, 2010, between Systemax, Inc. and Lawrence P. Reinhold*(incorporated by reference to the Company’s report on Form 8-K dated August 30, 2010).10.32

Form of 2010 Long Term Incentive Plan* (incorporated by reference to the Company’s Definitive Proxy Statement filed April 29,2010).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)


*   Management contract or compensatory plan or arrangement




29




SIGNATURES





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





SYSTEMAX INC.By:
/s/ RICHARD LEEDSRichard LeedsChairman and Chief Executive OfficerDate: March 17, 2011





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





Signature

Title

Date/s/ RICHARD LEEDS

Chairman and Chief Executive Officer

March 17, 2011Richard Leeds

(Principal Executive Officer)/s/ BRUCE LEEDS

Vice Chairman and Director

March 17, 2011Bruce Leeds/s/ ROBERT LEEDS

Vice Chairman and Director

March 17, 2011Robert Leeds/s/ LAWRENCE P. REINHOLD

Executive Vice President, Chief Financial Officer

March 17, 2011Lawrence P. Reinhold

and Director(Principal Financial Officer)/s/ THOMAS AXMACHER

Vice President and Controller

March 17, 2011Thomas Axmacher

(Principal Accounting Officer)/s/ GILBERT FIORENTINO

Chief Executive, Technology Products Group

March 17, 2011Gilbert Fiorentino

and Director/s/ ROBERT D. ROSENTHAL

Director

March 17, 2011Robert D. Rosenthal/s/ STACY DICK

Director

March 17, 2011Stacy Dick/s/ MARIE ADLER-KRAVECAS

Director

March 17, 2011Marie Adler-Kravecas




30




Report of Independent Registered Public Accounting Firm





The Board of Directors and Shareholders of Systemax Inc.





We have audited the accompanying consolidated balance sheets of Systemax Inc. (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.





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





In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Systemax Inc. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.




We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Systemax Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 17, 2011 expressed an unqualified opinion thereon.




/s/ Ernst & Young LLP


New York, New York


March 17, 2011





31




The Board of Directors and Shareholders of Systemax Inc.





We have audited Systemax Inc.’s (the “Company”)internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.





We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.





A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





In our opinion, Systemax Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based onthe COSO criteria.





We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Systemax Inc. as of December 31, 2010 and 2009 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 of Systemax Inc. and our report dated March 17, 2011 expressed an unqualified opinion thereon.





/s/ Ernst & Young LLP


New York, New York


March 17, 2011





32




SYSTEMAX INC.


CONSOLIDATED BALANCE SHEETS


(in thousands, except for share data)





December 31,2010


2009ASSETS:Current assets:Cash

$
92,077


$
58,309Accounts receivable, net of allowances of $17,881 and $22,532


276,344



241,860Inventories


370,375



365,725Prepaid expenses and other current assets


19,308



20,066Deferred income taxes


7,133



6,626Total current assets


765,237



692,586Property, plant and equipment, net


73,765



65,598Deferred income taxes


2,313



8,564Goodwill and intangibles


49,473



48,127Other assets


3,312



2,026Total assets

$
894,100


$
816,901LIABILITIES AND SHAREHOLDERS’ EQUITY:Current liabilities:Accounts payable

$
377,030


$
348,029Accrued expenses and other current liabilities


84,680



78,841Short term debt


-



14,168Current portion of long term debt


2,655



1,029Total current liabilities


464,365



442,067Long term debt


7,386



1,194Other liabilities


13,081



8,955Total liabilities


484,832



452,216Commitments and contingenciesShareholders’ equity:Preferred stock, par value $.01 per share, authorized 25 million shares; issued noneCommon stock, par value $.01 per share, authorized 150 million shares; issued 38,862,019 and 38,862,019 shares; outstanding 36,754,700 and 36,450,767 shares


389



389Additional paid-in capital


181,519



180,508Treasury stock at cost — 2,107,319 and 2,411,252 shares


(24,947
)


(28,545
)Retained earnings


253,526



210,975Accumulated other comprehensive (loss) income


(1,219
)


1,358Total shareholders’ equity


409,268



364,685Total liabilities and shareholders’ equity

$
894,100


$
816,901





See notes to consolidated financial statements.





33




SYSTEMAX INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share data)





Year Ended December 31,2010


2009


2008Net sales

$
3,589,989


$
3,165,995


$
3,032,961Cost of sales


3,094,042



2,705,747



2,574,402Gross profit


495,947



460,248



458,559Selling, general and administrative expenses


422,913



378,869



374,947Reorganization and other charges


4,289



7,750



-Operating income


68,745



73,629



83,612Foreign currency exchange loss


1,750



187



1,300Interest and other income, net


(840
)


(1,015
)


(2,229
)Interest expense


1,802



1,372



798Income before income taxes


66,033



73,085



83,743Provision for income taxes


23,482



26,900



30,900Net income

$
42,551


$
46,185


$
52,843Net income per common share:Basic

$
1.15


$
1.26


$
1.43Diluted

$
1.13


$
1.24


$
1.40Weighted average common and common equivalent shares:Basic


36,996



36,706



36,950Diluted


37,601



37,343



37,705





See notes to consolidated financial statements.





34




SYSTEMAX INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)





Year Ended December 31,2010


2009


2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
42,551


$
46,185


$
52,843Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


14,480



12,353



10,387Provision for deferred income taxes


4,572



5,704



6,197Provision for returns and doubtful accounts


3,268



4,698



2,424Compensation expense related to equity compensation plans


2,496



2,867



3,869Excess tax benefit from exercises of stock options


(1,072
)


(576
)


(1,380
)Loss on dispositions and abandonment


83



154



89Changes in operating assets and liabilities:Accounts receivable


(45,121
)


(20,907
)


6,010Inventories


(5,913
)


(69,618
)


(48,924
)Prepaid expenses and other current assets


6,403



(5,490
)


(16
)Income taxes payable/receivable


(3,315
)


3,983



602Accounts payable, accrued expenses and other current liabilities


46,451



25,414



50,318Net cash provided by operating activities


64,883



4,767



82,419CASH 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


(24,747
)


(18,855
)


(14,942
)Proceeds from disposals of property, plant and equipment


23



84



72Net cash used in investing activities


(24,724
)


(32,296
)


(45,519
)CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings on credit facility and short term debt


261,708



-



-Repayments of borrowings on credit facility and short term debt


(274,858
)


(3,614
)


(3,880
)Proceeds from recovery zone bond


7,949



-



-Repayments of capital lease obligations


(1,553
)


(726
)


(673
)Dividends paid


-



(27,611
)


(37,126
)Proceeds from issuance of common stock


1,017



1,082



1,133Purchase of treasury stock


-



(1,174
)


(5,824
)Excess tax benefit from exercises of stock options


1,072



576



1,380Net cash used in by financing activities


(4,665
)


(31,467
)


(44,990
)EFFECTS OF EXCHANGE RATES ON CASH


(1,726
)


1,338



(3,964
)NET (DECREASE) INCREASE IN CASH


33,768



(57,658
)


(12,054
)CASH – BEGINNING OF YEAR


58,309



115,967



128,021CASH – END OF YEAR

$
92.077


$
58,309


$
115,967Supplemental disclosures:Interest paid

$
1,346


$
994


$
536Income taxes paid

$
21,749


$
13,909


$
29,514Supplemental disclosures of non-cash investing and financing activities:Acquisitions of equipment through capital leases

$
9,371


$
765


$
2,152


See notes to consolidated financial statements.





35




SYSTEMAX INC.


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


(in thousands)





Common StockNumber

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, 2008


36,092



383



173,381



(26,324
)


176,684



11,711Stock-based compensation expense










3,794Issuance of restricted stock


104



1



283



46Exercise of stock options


503



5



184



944Repurchase of Treasury Stock


(475
)










(5,824
)Income tax benefit on stock-based compensation










1,599Cumulative effect of adoption of FIN 48Change in cumulative translation adjustment






















(18,629
)


(18,629
)Dividends paid


















(37,126
)Net income


















52,843







52,843Total comprehensive income


























34,214Balances, December 31, 2008


36,224



389



179,241



(31,158
)


192,401



(6,918
)Stock-based compensation expense










2,818Issuance of restricted stock


105







(754
)


1,183Retired restricted stock










(10
)


(15
)Exercise of stock options


221







(1,537
)


2,619Repurchase of treasury stock


(99
)










(1,174
)Income tax benefit on stock-based compensation










750Change in cumulative translation adjustment






















8,276



8,276Dividends paid


















(27,611
)Net income


















46,185







46,185Total comprehensive income


























54,461Balances, December 31, 2009


36,451


$
389


$
180,508


$
(28,545
)

$
210,975


$
1,358Stock-based compensation expense










2,377Issuance of restricted stock


106







(420
)


1,259Restricted stock withheld for employee taxes


(36
)






(367
)


(432
)Exercise of stock options


234







(1,754
)


2,771Income tax benefit on stock-based compensation










1,175Change in cumulative translation adjustment






















(2,577
)


(2,577
)Net income


















42,551







42,551Total comprehensive income

























$
39,974Balances, December 31, 2010


36,755


$
389


$
181,519


$
(24,947
)

$
253,526


$
(1,219
)





See notes to consolidated financial statements.





36




SYSTEMAX INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





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





Reclassifications— Certain prior year amounts were reclassified to conform to current year presentation.





Use of Estimates In Financial Statements — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.





Fiscal Year — The Company’s fiscal year ends at midnight on the Saturday closest to December 31. Fiscal years will typically include 52 weeks, 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 they ended on December 31. The fiscal year will be divided into four fiscal quarters that each end at midnight on a Saturday. Fiscal quarters will typically include 13 weeks, but the fourth quarter will include 14 weeks in a 53 week fiscal year. For clarity of presentation herein, all fiscal quarters are referred to as if they ended on the traditional calendar month.





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





Cash— The Company considers amounts held in money market accounts and other short-term investments, including overnight bank deposits, with an original maturity date of three months or less to be cash. Cash overdrafts are classified in accounts payable.





Inventories — Inventories consist primarily of finished goods and are stated at the lower of cost or market value. Cost is determined by using the first-in, first-out method except in Europe and retail locations where 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 at cost. Furniture, fixtures and equipment, including equipment under capital leases, are depreciated using the straight-line or accelerated method over their estimated useful lives ranging from three to ten years. Buildings are depreciated using the straight-line method over estimated useful lives of 30 to 50 years.  Leasehold improvements are amortized over the shorter of the useful lives or the term of the respective leases.





Evaluation of Long-lived Assets — Long-lived assets are evaluated for recoverability whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flows expected to result from the use 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 of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset is recognized.





Goodwill and intangible assets — Goodwill represents the excess of the cost of acquired assets over the fair value of assets acquired. The Company tests goodwill and intangibles for impairment annually or more frequently if indicators of impairment exist. The Company assesses the carrying value of its definite-lived intangible assets if circumstances indicate that those values may not be recoverable. In addition, goodwill is required to be tested for impairment after a portion of the goodwill is allocated to a business targeted for disposal. The Company’s identifiable intangible assets consist of trademarks, trade and domain names, technology, retail leases and customer lists (See Note 2).





Accruals — Management makes estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. These estimates are based upon various factors such as the number of units sold, historical and anticipated results and data received from third party vendors. Actual results could differ from these estimates. Our most significant estimates include those related to the costs of vendor drop shipments, sales returns and allowances, cooperative advertising and customer rebate reserves, and other vendor and employee related costs.


37


Income Taxes — Deferred tax assets and liabilities are recognized for the effect of temporary differences between the book and tax bases of recorded assets and liabilities and for tax loss carry forwards. The realization of net deferred tax assets is dependent upon our ability to generate sufficient future taxable income. Where it is more likely than not that some portion or the entire deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made.





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





Revenue Recognition and Accounts Receivable — The Company recognizes sales of products, including shipping revenue, when persuasive evidence of an order arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Generally, these criteria are met at the time the product is received by the customers when title and risk of loss have transferred. Allowances for estimated subsequent customer returns, rebates and sales incentives are provided when revenues are recorded. Costs incurred for the shipping and handling of its products are recorded as cost of sales. Revenue from extended warranty and support contracts on the Company’s assembled PCs is deferred and
recognized over the contract period. The Company evaluates collectability of accounts receivable based on numerous factors, including past transaction history with customers and their credit rating and provides a reserve for accounts that are potentially uncollectible. Trade receivables are generally written off once all collection efforts have been exhausted. Accounts receivable are shown in the consolidated balance sheets net of allowances for doubtful collections and subsequent customer returns.





Advertising Costs — Expenditures for internet, television, local radio and newspaper advertising are expensed in the period the advertising takes place. Catalog preparation, printing and postage expenditures are amortized over the period of catalog distribution during which the benefits are expected, generally one to six months.





Net advertising expenses were $31.7 million, $38.9 million and $40.0 million during 2010, 2009 and 2008 respectively and are included in the accompanying consolidated statements of operations. The Company utilizes advertising programs to support vendors, including catalogs, internet and magazine advertising, and receives payments and credits from vendors, including consideration pursuant to volume incentive programs and cooperative marketing programs. The Company accounts for consideration from vendors as a reduction of cost of sales unless certain conditions are met showing that the funds are used for specific, incremental, identifiable costs, in which case the consideration is accounted for as a reduction in the related expense category, such as advertising expense. The amount of vendor consideration recorded as
a reduction of selling, general and administrative expenses totaled $65.6 million, $55.9 million and $60.4 million during 2010, 2009 and 2008 respectively.





Prepaid expenses as of December 2010 and 2009 include deferred advertising costs of $2.1 million and $2.8 million, respectively which are reflected as an expense during the periods benefited, typically the subsequent fiscal quarter.





Stock based compensation — The Company recognizes the fair value of share based compensation in the consolidated statement of operations over the requisite employee service period. Stock-based compensation expense includes an estimate for forfeitures and is recognized over the expected term of the award.





Net Income Per Common Share– Net income per common share - basic was calculated based upon the weighted average number of common shares outstanding during the respective periods presented using the two class method of computing earnings per share. The two class method was used as the Company has outstanding restricted stock with rights to dividend participation for unvested shares.  Net income per common share - diluted was calculated based upon the weighted average number of common shares outstanding and included the equivalent shares for dilutive options outstanding during the respective periods, including unvested options. The dilutive effect of outstanding options issued by the Company is reflected in net
income per share - diluted using the treasury stock method. Under the treasury stock method, options will only have a dilutive effect when the average market price of common stock during the period exceeds the exercise price of the options. The weighted average number of stock options outstanding included in the computation of diluted earnings per share was 0.6 million, 0.6 million and 0.7 million for the years ended December 31, 2010, 2009 and 2008, respectively. The weighted average number of restricted stock awards included in the computation of diluted earnings per share was 0.2 million for the years December 31, 2010, 2009 and 2008. The weighted average number of stock options outstanding excluded from the computation of diluted earnings per share was 0.7 million, 0.7 million and 0.6 million for the years ended December 31, 2010, 2009 and 2008, respectively, due to their antidilutive effect.





Comprehensive Income — Comprehensive income consists of net income and foreign currency translation adjustments and is included in the consolidated statements of shareholders’ equity. Comprehensive income was $40.0 million, $54.5 million and $34.2 million in 2010, 2009 and 2008, respectively.


38





Employee Benefit Plans-The Company’s U.S. subsidiaries participate in a defined contribution 401(k) plan covering substantially all U.S. employees. Employees may invest 1% or more of their eligible compensation, limited to maximum amounts as determined by the Internal Revenue Service. The Company provides a matching contribution to the plan, determined as a percentage of the employees’ contributions. Aggregate expense to the Company for contributions to such plans was approximately $0.9 million, $0.9 million and $0.7 million in 2010, 2009 and 2008, respectively.





Fair Value of Financial Instruments - Financial instruments consist primarily of investments in cash, trade accounts receivable debt and accounts payable. The Company estimates the fair value of financial instruments based on interest rates available to the Company and by comparison to quoted market prices. At December 31, 2010 and 2009, the carrying amounts of cash, accounts receivable  and accounts payable are considered to be representative of their respective fair values due to their short-term nature. The Company’s debt is considered to representative of its fair value because of its variable interest rate.





Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, and accounts receivable. The Company’s excess cash balances are invested with money center banks.  Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers and their geographic dispersion comprising the Company’s customer base. The Company also performs on-going credit evaluations and maintains allowances for potential losses as warranted.





Recent Accounting Pronouncements





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





In October 2009, the FASB issued revised guidance related to multiple-element arrangements which requires an entity to allocate arrangement consideration at the inception of an arrangement to all deliverables based on relative selling prices. This update eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances. This guidance is effective for fiscal years beginning on or after September 15, 2010. Companies may use either prospective application for revenue arrangements entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. The Company does not believe this amended guidance will have a material impact on its consolidated financial
statements.





In October 2009, the FASB issued amended guidance that affects how entities account for revenue arrangements that contain both hardware and software elements.  Products that rely on software will be accounted for under the revised multiple-element arrangement revenue recognition guidance mentioned above rather than software revenue recognition guidance. The revised guidance must be adopted no later than fiscal years beginning on or after September 15, 2010. The transition method and period for the adoption of this guidance and the revisions to the multiple-element arrangements guidance noted above must be the same. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.


39


2.
GOODWILL AND INTANGIBLES





Goodwill:





The following table provides information related to the carrying value of goodwill (in thousands):




2010Balance January 1

$
930Deferred tax adjustment


1,350Adjustments to finalize purchase price allocation


1,000Balance December 31

$
3,280





Indefinite-lived intangible assets:





Thefollowing table summarizes information related to indefinite-lived intangible assets (in thousands):





December 31,


December 31,2010


2009Gross Carrying

Amount


Gross Carrying

AmountTrademarks

$
24,082


$
23,226Domain names


14,739



14,739Total

$
38,821


$
37,965




Definite-lived intangible assets:




The following table summarizes information related to definite-lived intangible assets (in thousands):




December 31,


December 31,2010


2009Gross Carrying

Amount


Accumulated

Amortization


Gross Carrying

Amount


Accumulated

AmortizationRetail store leases

$
3,410


$
748


$
3,410


$
484Client lists


5,938



1,996



6,368



843Technology


1,000



232



806


$
25Total

$
10,348


$
2,976


$
10,584


$
1,352





The aggregate amortization expense for these intangibles was approximately $1.6 million in 2010. The estimated amortization for future years ending December 31 is as follows (in thousands):




2011

$
1,6542012


1,6432013


1,6392014 and after


2,436Total

$
7,372





40


3.
PROPERTY, PLANT AND EQUIPMENT





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





December 31,2010


2009Land and buildings

$
27,844


$
28,458Furniture and fixtures, office, computer and other equipment and software


130,022



123,876Leasehold improvements


23,944



19,212181,810



171,546Less accumulated depreciation and amortization


108,045



105,948Property, plant and equipment, net

$
73,765


$
65,598




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





2010


2009Furniture and fixtures, office, computer and other equipment

$
14,896


$
5,525Less: Accumulated amortization


4,994



3,510$
9,902


$
2,015





Depreciation charged to operations for property, plant and equipment including capital leases in 2010, 2009, and 2008 was $12.9 million, $11.2 million and $10.1 million, respectively.





4.
CREDIT FACILITIES





The Company maintains a $125.0 million (which may be increased to $200 million, subject to certain conditions) secured revolving credit agreement with a group of financial institutions which provides for borrowings in the United States and United Kingdom. Availability is subject to a borrowing base formula that takes into account eligible receivables and eligible inventory. Borrowings are secured by substantially all of the Company’s assets, including accounts receivable, inventory and certain other assets, subject to limited exceptions, including the exclusion of certain foreign assets from the collateral. The amended and restated credit agreement contains certain operating, financial and other covenants, including limits on annual levels of capital expenditures, availability tests related to payments of
dividends and stock repurchases and fixed charge coverage tests related to acquisitions. The credit facility has a five year term and expires in October 2015. The borrowings under the agreement are subject to borrowing base limitations of up to 85% of eligible accounts receivable and up to 40% of qualified inventories. The interest on outstanding advances is payable monthly, at the Company’s option, at the prime rate (3.25% at December 31, 2010) or the overnight daily LIBOR rate (0.25% at December 31, 2010) plus 1.00% to 2.50%. The facility also calls for a commitment fee payable quarterly in arrears of 0.375% of the average daily unused portions of the facility. The revolving credit agreement requires that a minimum level of availability be maintained. If such availability is not maintained, the Company will be required to maintain a fixed charge coverage ratio (as defined). The agreement contains certain other covenants, including restrictions on capital expenditure,
acquisitions and payments of dividends. We were in compliance with all of the covenants as of December 31, 2010. As of December 31, 2010, eligible collateral under the agreement was $125.0 million and total availability was $115.9 million. There were outstanding letters of credit of $9.1 million and there were no outstanding advances.





The Company’s Inmac WStore subsidiary maintains a secured revolving credit agreement with a financial institution in France which is secured by WStore Europe SA accounts receivable balances. Available amounts for borrowing under this facility includes all accounts receivable balances not over 60 days past due reduced by the greater of €4.0 million or 10% of the eligible accounts receivable. As of December 31, 2010 there was availability under this credit facility of approximately €15.6 million ($20.9 million) and there were no outstanding borrowings. The credit facility duration is indefinite; however either party may cancel the agreement with ninety days notice. Under this agreement the Company is subject to certain non-financial covenants which it was in compliance with at December 31,
2010.





The Company’s WStore UK subsidiary maintained a £2 million secured revolving credit agreement with a financial institution in the United Kingdom. The Company terminated this facility in July 2010.





The weighted average interest rate on short-term borrowings was3.5%, 3.3%, and 5.1% in 2010, 2009 and 2008, respectively.





41





5.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES





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





December 31,2010


2009Payroll and employee benefits

$
30,166


$
27,715Freight


17,142



9,171Advertising


8,033



8,030Sales and VAT tax payable


8,613



7,989Other


20,726



25,936$
84,680


$
78,841




6.
LONG-TERM DEBT





On September 23, 2010, the Company (through a subsidiary) completed tax exempt Recovery Zone Facility Bond (the “Bonds”) financing for up to $15 million with the Development Authority of Jefferson, Georgia (the “Authority”). The Bonds were issued by the Authority and initially purchased by GE Government Finance Inc., and mature on October 1, 2018.  Interest on the Bonds is calculated at the rate of 4.15% per annum and principal and interest payments are due monthly. The proceeds of the Bonds are   used to finance or repay the costs of capital equipment purchased for the Company’s distribution facility located in Jefferson, Georgia.  The purchase and installation of all the equipment for the facility is expected to be completed by December 31,
2011. Pursuant to the transaction, the Company will transfer to the Authority for consideration consisting of the Bond proceeds ownership of the equipment to be used at the distribution facility and the Authority in turn will lease the equipment to the Company’s subsidiary pursuant to a capital equipment lease expiring October 1, 2018. Under the capital equipment lease the Company has the right to acquire ownership of the equipment at any time for a purchase price sufficient to pay off all principal and interest on the Bonds, plus $1.00. As a result of the capital lease treatment for this transaction, the leased equipment is included in property, plant and equipment in the Company’s consolidated balance sheet. As of December 31, 2010 the Company had $7.9 million outstanding against this facility.





Long-term debt consists of (in thousands):





December 31,2010


2009Capitalized equipment lease obligations

$
10,041


$
2,223Less: current portion


2,655



1,029$
7,386


$
1,194





The aggregate maturities of long-term debt outstanding at December 31, 2010 are as follows (in thousands):





2011


2012


2013


2014


2015Maturities

$
2,655


$
2,329


$
2,249


$
1,967


$
841





7.
BUSINESS EXIT AND REORGANIZATION COSTS





The Companyannounced plans to exit its Software Solutions segment, in the second quarter of 2009, as the result of economic conditions and difficulties in marketing the segment’s products successfully. Total charges incurred for the years ended December 31, 2010 and December 31, 2009 were $0.3 million and $2.9 million, respectively. These costs were recorded in selling, general and administrative expenses within the Corporate and Other segment in the accompanying condensed consolidated statement of operations.





The following table reconciles the associated liabilities incurred (in thousands):





Severance

and

Personnel

Costs


Contract

Termination

Costs


Other Exit Costs


TotalBalance January 1, 2009

$
-


$
-


$
-


$
-Charged to expense


1,208



1,644



80



2,932Paid or otherwise settled


(1,208
)


(697
)


(80
)


(1,985
)Balance December 31, 2009


-



947



-



947Charged to expense


-



284



-



284Paid or otherwise settled


-



(918
)


-



(918
)Balance December 31, 2010

$
-


$
313


$
-


$
313





42





Reorganization





In 2010 the Company’s WStore France subsidiary incurred integration related charges of approximately $3.7 million for severances and other costs related to the merger of its Misco and WStore operations. These costs were recorded in selling, general and administrative expenses within the Technology Products segment. Other costs totaling $0.3 million were recorded in selling, general and administrative expenses within the Corporate and other segment. The Company anticipates incurring minimal additional costs related to this integration.





The following table details the associated liabilities incurred related to this plan (in thousands):





Severance

and

Personnel

Costs


Other Exit Costs


TotalBalance January 1, 2010

$
-


$
-


$
-Charged to expense


2,975



1,030



4,005Paid or otherwise settled


(1,923
)


(946
)


(2,869
)Balance December 31, 2010

$
1,052


$
84


$
1,136





8.
SHAREHOLDERS’ EQUITY





Stock based compensation plans





The Company currently has five equity compensation plans which reserve shares of common stock for issuance to key employees, directors, consultants and advisors to the Company. The following is a description of these plans:





The 1995 Long-term Stock Incentive Plan - This plan, adopted in 1995, allowed the Company to issue qualified, non-qualified and deferred compensation stock options, stock appreciation rights, restricted stock and restricted unit grants, performance unit grants and other stock based awards authorized by the Compensation Committee of the Board of Directors. Options issued under this plan expire ten years after the options are granted. The ability to grant new awards under this plan ended on December 31, 2005 but awards granted prior to such date continue until their expiration. A total of 510,326 options were outstanding under this plan as of December 31, 2010.





The 1995 Stock Option Plan for Non-Employee Directors - This plan, adopted in 1995, provides for automatic awards of non-qualified options to directors of the Company who are not employees of the Company or its affiliates. All options granted under this plan will have a ten year term from grant date and are immediately exercisable. A maximum of 100,000 shares may be granted for awards under this plan. 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. A total of 28,000 options were outstanding under this plan as of December 31, 2010.





The1999 Long-term Stock Incentive Plan, as amended (“1999 Plan”) - This plan was adopted on October 25, 1999 with substantially the same terms and provisions as the 1995 Long-term Stock Incentive Plan. The Company increased the number of shares that may be granted under this plan to a maximum of 7,500,000  from 5,000,000  shares. The maximum number of shares granted per type of award to any individual may not exceed 1,500,000 in any calendar year and 3,000,000 in total. The ability to grant new awards under this plan ended on December 31,
2009 but awards granted prior to such date continue until their expiration. Restricted stock grants and common stock awards reduce stock options otherwise available for future grant. A total of 1,307,372 options and 300,000 restricted stock units were outstanding under this plan as of December 31, 2010.





The 2006 Stock Incentive 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. The Company adopted the plan so that it could offer directors of the Company who are not employees of the Company or of any entity in which the Company has more than a 50% equity interest (“independent directors”) an opportunity to participate in the ownership of the Company by receiving options to purchase shares of common stock at a price equal to the fair market value at the date of grant of the option and restricted stock awards. Awards for a maximum of 200,000 shares may be granted under this plan. A total of
15,000 options were outstanding under this plan as of December 31, 2010.





The2010Long-term Stock Incentive Plan (“2010 Plan”) - This plan was adopted on April 23, 2010 with substantially the same terms and provisions as the 1999 Long-term Stock Incentive Plan. The maximum number of shares granted per type of award to any individual may not exceed 1,500,000 in any calendar year. Restricted stock grants and common stock awards reduce stock options otherwise available for future grant. Awards for a maximum of 7,500,000shares may be granted
under this plan. A total of 40,000 options and 175,000 restricted stock units were outstanding under this plan as of December 31, 2010.





43





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





The fair value of employee share options is recognized in expense over the vesting period of the options, using the graded attribution method.  The fair value of employee share options is determined on the date of grant using the Black-Scholes option pricing model. The Company has used historical volatility in its estimate of expected volatility. The expected life represents the period of time (in years) for which the options granted are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury yield curve.





Compensation cost related to non-qualified stock options recognized in operating results (selling, general and administrative expense) for 2010, 2009 and 2008 was $1.5 million, $2.2 million, and $3.2 million respectively. The related future income tax benefits recognized for 2010, 2009 and 2008 were $0.6 million, $0.9 million and $1.2 million, respectively.





Stock options





The following table presents the weighted-average assumptions used to estimate the fair value of options granted in 2010, 2009 and 2008:





2010


2009


2008Expected annual dividend yield


0
%


0
%


0
%Risk-free interest rate


1.37
%


2.64
%


3.17
%Expected volatility


61.1
%


66.9
%


63.8
%Expected life in years


4.8



7.7



6.3




The following table summarizes information concerning outstanding and exercisable options:





Weighted Average2010


2009


2008Shares


Exercise

Price


Shares


Exercise

Price


Shares


Exercise

PriceOutstanding at beginning of year


2,102,459


$
9.87



2,202,584


$
9.23



2,655,937


$
7.95Granted


40,000


$
14.18



164,000


$
13.46



110,000


$
12.90Exercised


(234,011
)

$
4.34



(221,225
)

$
4.89



(503,078
)

$
2.25Cancelled or expired


(7,750
)

$
19.39



(42,900
)

$
16.46



(60,275
)

$
17.77Outstanding at end of year


1,900,698


$
10.60



2,102,459


$
9.87



2,202,584


$
9.23Options exercisable at year end


1,559,872







1,558,229







1,560,804Weighted average fair value per option granted during the year

$
7.24






$
9.53






$
7.94





The total intrinsic value of options exercised was $3.2 million, $2.0 million and $4.1 million respectively, for 2010, 2009 and 2008.





The following table summarizes information about options vested and exercisable or nonvested that are expected to vest (nonvested outstanding less expected forfeitures) at December 31, 2010:





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



313,441


$
2.35



1.68


$
3,682$
5.01
to
$
15.00



981,836


$
8.10



5.41



5,893$
15.01
to
$
20.00



476,341


$
18.78



6.38



-$
20.01
to
$
20.15



100,000


$
20.15



6.05



—$
1.76
to
$
20.15



1,871,618


$
10.50



5.06


$
9,575


The aggregate intrinsic value in the tables above represents the total pretax intrinsic value (the difference between the closing stock price on the last day of trading in 2010 and the exercise price) that would have been received by the option holders had all options been exercised on December 31, 2010. This value will change based on the fair market value of the Company’s common stock.





44





The following table reflects the activity for all unvested stock options during 2010:





Shares


Weighted

Average Grant-

Date Fair ValueUnvested at January 1, 2010


544,230


$
10.98Granted


40,000


$
7.24Vested


(237,279
)

$
11.02Forfeited


(6,125
)

$
13.21Unvested at December 31, 2010


340.826


$
10.47





At December 31, 2010, there was approximately $1.3 million of unrecognized compensation costs related to unvested stock options, which is expected to be recognized over a weighted average period of 1.15 years. The total fair value of stock options vested during 2010, 2009 and 2008 was $2.6 million, $2.5 million and $3.0 million, respectively.





Restricted Stock and Restricted Stock Units





In October 2004, the Company granted 1,000,000 restricted stock units under the 1999 Plan to a key employee who is also a Company director. A restricted stock unit represents the right to receive a share of the Company’s common stock. The restricted stock units have none of the rights as other shares of common stock until common stock is distributed, other than rights to cash dividends. The restricted stock unit award was a non-performance award which 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 stock awards was determined based on the market price of the Company’s stock at the date of the award. Compensation expense related to the restricted stock award was approximately $0.6 million in each of
2010, 2009 and 2008. Share-based compensation expense for restricted stock issued to Directors was $0.1 million in each of 2010, 2009 and 2008.





In August 2010, the Company granted 175,000 restricted stock units under the 2010 Plan to a key employee who is also a Company director. A restricted stock unit represents the right to receive a share of the Company’s common stock. The restricted stock units have none of the rights as other shares of common stock, other than rights to cash dividends, until common stock is distributed. The restricted stock unit award was a non-performance award which vests in ten equal annual installments of 17,500 units beginning May 15, 2011 and each May 15, thereafter. The share-based expense for restricted stock awards was determined based on the market price of the Company’s stock at the date of the award. Compensation expense related to the restricted stock award was approximately $0.3 million for the year ended
December 31, 2010.





Share repurchase plan





In May 2008, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s common stock. During 2009 the Company repurchased 98,934 common shares at a cost of approximately $1.2 million, an average of $11.87 per share. These shares are included in common stock in treasury at cost in the Company’s consolidated balance sheet. The authorization to repurchase shares under this plan has expired.





9.
INCOME TAXES





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





Year Ended December 31,2010


2009


2008United States

$
43,386


$
54,468


$
61,220Foreign


22,647



18,617



22,523Total

$
66,033


$
73,085


$
83,743





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





Year Ended December 31,2010


2009


2008Current:Federal

$
9,535


$
11,987


$
15,753State


2,269



3,005



4,106Foreign


7,106



6,204



4,844Total current


18,910



21,196



24,703Deferred:Federal


4,712



4,271



2,242State


(193
)


844



154Foreign


53



589



3,801Total deferred


4,572



5,704



6,197TOTAL

$
23,482


$
26,900


$
30,900





45





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





A reconciliation of the difference between the income tax expense and the computed income tax expense based on the Federal statutory corporate rate is as follows (in thousands):





Year Ended December 31,2010


2009


2008Income tax at Federal statutory rate

$
23,112


$
25,580


$
29,311State and local income taxes and changes in valuation allowances, net of federal tax benefit


1,381



2,402



3,036Foreign taxes at rates different from the U.S. rate


(1,407
)


(991
)


(940
)Changes in valuation allowances


(87
)


965



(120
)Decrease in tax reserves


-



(1,195
)


—Refunds- prior years


-



—



(872
)Non-deductible items


680



—



—Adjustment for prior year taxes


(30
)


107



253Other items, net


(167
)


32



232$
23,482


$
26,900


$
30,900





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





December 31,2010


2009Assets:Current:Accrued expenses and other liabilities

$
12,720


$
7,612Inventory


1,902



1,838Valuation allowances


(1,605
)


(1,507
)Total current assets

$
13,017


$
7,943Non-current:Net operating loss and credit carryforwards

$
22,842


$
19,058Accelerated depreciation


4,728



10,516Intangible and other assets

_



2,264Other


8,594



6,910Valuation allowances


(27,671
)


(28,326
)Total non-current assets

$
8,493


$
10,422Liabilities :Current :Deductible assets

$
1,350


$
1,298Other


4,534



19Total current liabilities

$
5,884


$
1,317Non-current:Accelerated depreciation

$
6,107


$
1,858Other


73



—Total non-current liabilities

$
6,180


$
1,858





The Company has not provided for federal income taxes applicable to the undistributed earnings of its foreign subsidiaries of approximately $48.5 million as of December 31, 2010, since these earnings are considered indefinitely reinvested. The Company has foreign net operating loss carryforwards which expire through 2025. The Company records these benefits as assets 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 valuation allowances for certain state deferred tax assets and net operating loss carryforwards where it is not likely they will be realized.





46





As of December 31, 2010, the Company has recorded valuation allowances of approximately $29.3 million including valuations against net operating loss carryforwards incurred in foreign and state jurisdictions of $20.4 million and $2.1 million, respectively, deductible temporary differences incurred in foreign jurisdictions of $6.4 million, the majority of which relates to the WStore acquisition, and $0.4 million for other state deductible temporary differences.





Valuation allowances increased in 2009 by $20.9 million as a result of the WStore acquisition and the valuation allowances recorded against acquired deferred tax assets and net operating losses. Carry forward losses of $1 million were utilized in 2009 for which valuation allowances had been previously provided.





The Company is routinely audited by federal, state and foreign tax authorities with respect to its income taxes. The Company regularly reviews and evaluates the likelihood of audit assessments. The Company’s federal income tax returns have been audited through 2006. The Company has not signed any consents to extend the statute of limitations for any subsequent years. The Company’s significant state tax returns have been audited through 2005. The Company considers its significant tax jurisdictions in foreign locations to be the United Kingdom, Canada, France, Italy and Germany. The Company remains subject to examination in the United Kingdom for years after 2008, in Canada for years after 2005, in France for years after 2008, in Italy for years after 2006, in Netherlands for years after 2005 and in
Germany for years after 2008.





In accordance with the guidance for accounting for uncertainty in income taxes the Company recognizes the tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit of an uncertain tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount that is greater than 50% likely to be realized upon settlement with the tax authority. To the extent we prevail in matters for which accruals have been established or are required to pay amounts in excess of accruals, our effective tax rate in a given financial statement period could be affected. There were no accrued interest or penalty charges related to unrecognized
tax benefits recorded in income tax expense in 2010 or 2009. As of December 31, 2010 the Company had no uncertain tax positions.





The following table details activity of the Company’s uncertain tax positions during 2009:




December 31,2009Balance beginning of year

$
916Decreases related to settlements with taxing authorities

(916
)Balance end of year

$
—




10.
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS





Leases- The Company is obligated under operating lease agreements for the rental of certain office and warehouse facilities and equipment which expire at various dates through October 2026. The Company currently leases its headquarters office/warehouse facility in New York from an entity owned by the Company’s three principal shareholders and senior executive officers. The Company believes that these payments were no higher than would be paid to an unrelated lessor for comparable space. The Company also acquires certain computer, communications equipment, and machinery and equipment pursuant to capital lease obligations.





At December 31, 2010, the future minimum annual lease payments for capital leases and related and third-party operating leases were as follows (in thousands):





Capital

Leases


Operating

Leases


Total2011

$
3,343


$
26,311


$
29,6542012


2,901



25,925



28,8262013


2,716



23,793



26,5092014


2,342



20,614



22,9562015


2,286



19,846



22,1322016-2020


6,257



75,541



81,7982021-2025






17,914



17,914Thereafter






10,709



10,709Total minimum lease payments


19,845



220,653



240,498Less: sublease rental income






283



283Lease obligation net of subleases


19,845


$
220,370


$
240,215Less amount representing interest


2,754Present value of minimum capital lease payments (including current portion of $2,655)

$
17,091




47





Annual rent expense aggregated approximately $31.1 million, $27.1 million and $25.0 million in 2010, 2009 and 2008, respectively. Included in rent expense was $0.9 million, $0.9 million and $0.9 million in 2010, 2009 and 2008, respectively, to related parties. Rent expense is net of sublease income of $0.2 million, $0.1 million and $0.4 million for 2010, 2009 and 2008, respectively.





Other Matters





The Company and its subsidiaries are involved in various lawsuits, claims, investigations and  proceedings including commercial, employment, consumer, personal injury and health and safety law matters, which are being handled and defended in the ordinary course of business.  In addition, the Company is subject to various assertions, claims, proceedings and requests for indemnification concerning intellectual property, including patent infringement suits involving technologies that are incorporated in a broad spectrum of products the Company sells. The Company is also audited by (or has initiated voluntary disclosure agreements with) numerous governmental agencies in various countries, including U.S. Federal and state authorities, concerning potential income tax, sales tax and unclaimed
property liabilities. These matters are in various stages of investigation, negotiation and/or litigation, and are being vigorously defended.  Although the Company does not expect, based on currently available information, that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition or results of operations, the ultimate outcome is inherently unpredictable.  Therefore, judgments could be rendered or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period.  Additionally, our Audit Committee, with the assistance of independent counsel, is conducting an independent investigation into certain anonymous whistleblower allegations concerning our Miami, Florida operations. While the investigation is not yet complete, it does not appear that there is any material impact on our reported consolidated financial statements. The
Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable and estimable.





11.
SEGMENT AND RELATED INFORMATION





The Company operates and is internally managed in two operating segments, Technology Products and Industrial Products. The Company’s chief operating decision-maker is the Company’s Chief Executive Officer. The Company evaluates segment performance based on income from operations before net interest, foreign exchange gains and losses, restructuring and other charges and income taxes. Corporate costs not identified with the disclosed segments and restructuring and other charges are grouped as “Corporate and other expenses.” The chief operating decision-maker reviews assets and makes significant capital expenditure decisions for the Company on a consolidated basis only. The accounting policies of the segments are the same as those of the Company described in Note 1.





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





Year Ended December 31,2010


2009


2008Net Sales:Technology Products

$
3,337,635


$
2,966,657


$
2,794,948Industrial Products


250,036



196,129



237,027Corporate and other


2,318



3,209



986Consolidated

$
3,589,989


$
3,165,995


$
3,032,961Depreciation and Amortization Expense:Technology Products

$
12,117


$
10,112


$
8,197Industrial Products


1,556



1,476



986Corporate and other


807



765



1,204Consolidated

$
14,480


$
12,353


$
10,387Operating Income (Loss):Technology Products

$
64,443


$
88,173


$
97,747Industrial Products


23,814



15,415



24,621Corporate and other expenses


(19,512
)


(29,959
)


(38,756
)Consolidated

$
68,745


$
73,629


$
83,612Total AssetsTechnology Products

$
570,234


$
521,900


$
400,340Industrial Products


136,909



103,370



98,670Corporate and other


186,957



191,631



203,443Consolidated

$
894,100


$
816,901


$
702,453





48





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





Year Ended December 31,2010


2009


2008Net Sales:United States

$
2,329,530


$
2,129,643


$
1,898,422United Kingdom


418,865



358,742



423,245Other


841,594



677,610



711,294Consolidated

$
3,589,989


$
3,165,995


$
3,032,961Long-lived Assets:United States

$
51,532


$
35,557


$
28,332United Kingdom


15,953



17,223



15,973Other


6,280



12,818



4,160Consolidated

$
73,765


$
65,598


$
48,465





Net sales are attributed to countries based on location of selling subsidiary.





12.
QUARTERLY FINANCIAL DATA (UNAUDITED)





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





First Quarter


Second Quarter


Third Quarter


Fourth Quarter2010:Net sales

$
915,237


$
805,875


$
862,705


$
1,006,172Gross profit

$
126,241


$
115,222


$
116,692


$
137,792Net income

$
11,751


$
9,450


$
8,622


$
12,728Net income per common share:Basic

$
.32


$
.26


$
.23


$
.34Diluted

$
.31


$
.25


$
.23


$
.342009:Net sales

$
752,268


$
721,599


$
753,880


$
938,248Gross profit

$
107,550


$
107,054


$
112,763


$
132,881Net income

$
8,698


$
6,491


$
12,598


$
18,398Net income per common share:Basic

$
.24


$
.18


$
.34


$
.50Diluted

$
.23


$
.17


$
.34


$
.49







49







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 PeriodAllowance for sales returns and doubtful accounts2010

$
22,532


$
3,268


$
(6,816
)


(1,103
)(1)

$
17,8812009

$
17,523


$
4,698


$
(4,493
)


4,804
(2)


22,5322008

$
20,521


$
2,424


$
(5,422
)





$
17,523Allowance for deferred tax assets2010Current

$
1,507


$
81



(16
)

$
33


$
1,605Noncurrent

$
28,326


$
27


$
(65
)

$
(617
)

$
27,6712009Current (3)

$
—



—






$
1,507


$
1,507Noncurrent (3) (4)

$
8,377


$
—


$
(2,125
)

$
22,074


$
28,3262008Current

$
96






$



$
(96
)

$
—Noncurrent (4)

$
7,291


$
1,996


$
(64
)

$
(846
)

$
8,377








(1)(2)
WStore opening balance sheet adjustment.


(3)
Included in other is allowances recorded for deferred tax assets and net operating losses acquired in the WStore Europe SA acquisition


(4)
Charges to expense are net of reductions resulting from changes in deferred tax assets due to changes in tax laws.




50