UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





Form 10-K/A


(Amendment No. 2)





R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009or£
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _________ to _________





Commission file number:  0-21528





BELL MICROPRODUCTS INC.


(Exact Name of Registrant as Specified in Its Charter)





California
94-3057566(State or Other Jurisdiction of

Incorporation or Organization)
(I.R.S. Employer

Identification No.)1941 Ringwood Avenue, San Jose, California
95131-1721(Address of principal executive offices)
(zip code)Registrant’s telephone number, including area code(408) 451-9400Securities registered pursuant to Section 12(b) of the Act:Common Stock, $.01 par valueNASDAQ Global Market(Name of each exchange on which registered)Securities registered pursuant to Section 12(g) of the Act:None.(Title of Class)








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





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 R





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 R   No £


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period as 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 of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  £





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 £
Non-accelerated filer £
Smaller reporting company R(Do not check if a smaller reporting company)





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


The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2009) was approximately $29.9 million for the registrant’s common stock, $0.01 par value per share.  For purposes of this disclosure, shares of common stock held by executive officers, directors and greater than 10% shareholders of the registrant have been excluded because such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.





The number of shares of registrant’s Common Stock outstanding as of May 31, 2010 was 32,532,427.


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EXPLANATORY NOTE





We originally filed our Annual Report on Form 10-K for the year ended December 31, 2009 with the Securities and Exchange Commission (“SEC”) on March 26, 2010.  We filed Amendment No. 1 to our Annual Report on Form 10-K (“Amendment No. 1”) on April 28, 2010 to correct our filer status and include the information required by Part III of Form 10-K.  Additionally, with Amendment No. 1 we filed certain exhibits not included with the originally filed Form 10-K.





We are filing this Amendment No. 2 to our Annual Report on Form 10-K (“Amendment No. 2”) to restate certain items in our consolidated statements of cash flows for each of the three years in the period ended December 31, 2009 and report the identification of an additional material weakness as of December 31, 2009.  These restatements are required as a result of errors in the calculations and classifications of foreign currency effects on our cash flows.  See Note 18, Restatement of Consolidated Statements of Cash Flows to our audited consolidated financial statements included in Part II – Item 8 – Financial Statements and Supplementary Data of this report.  The restatements had no impact on our consolidated balance sheets, statements of operations or statements of shareholders’ equity and comprehensive income (loss) for any period presented.





For the convenience of the reader, this Amendment No. 2 presents all information included in our Annual Report on Form 10-K, as amended by Amendment No. 1.  The following items in this report have been amended to give effect to the restatements of our consolidated statements of cash flows:





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





·
Item 8.  Financial Statements and Supplementary Data; and





·
Item 9.  Controls and Procedures.





The exhibits filed with this Amendment No. 2 include an updated consent of our independent registered public accounting firm, and current certifications of our principal executive officer and principal financial officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002.





Except as described above, we have not otherwise amended or updated the disclosures presented in the Form 10-K originally filed on March 26, 2010.  Accordingly, this Amendment No. 2 should be read in conjunction with our filings with the SEC subsequent to the filing of the originally filed Form 10-K.





Throughout this Annual Report on Form 10-K/A, all references to the “Company,” “Bell Micro,” “we,” “us,” and “our” refer to Bell Microproducts Inc., a California corporation, and its subsidiaries, unless otherwise indicated or the context otherwise requires.





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BELL MICROPRODUCTS INC.




INDEX TO FORM 10-K/A




Explanatory Note
2PART I

5Item 1.
Business
5Executive Officers of the Registrant
10Item 1A.
Risk Factors
11Item 1B.
Unresolved Staff Comments
22Item 2.
Properties
22Item 3.
Legal Proceedings
23Item 4.
[Removed and Reserved]
24PART II

24Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
24Item 6.
Selected Financial Data
26Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
47Item 8.
Financial Statements and Supplementary Data
47Consolidated Balance Sheets
49Consolidated Statements of Operations
50Consolidated Statements of Shareholders’ Equity and Comprehensive INCOME (Loss)
51Consolidated Statement of Cash Flows
52Notes to the Consolidated Financial Statements
53Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
95Item 9A.
Controls and Proceedures
95Item 9B.
Other Information
103PART III

103Item 10.
Directors, Executive Officers and Corporate Governance
103Item 11.
Executive Compensation
106Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
111Item 13.
Certain Relationships and Related Transactions and Director Independence
114Item 14.
Principal Accountant Fees and Services
115PART IV

115Item 15.
Exhibits and Financial Statement Schedules
115SIGNATURES

116Schedule II
Valuation and Qualifying Accounts
117





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FORWARD-LOOKING STATEMENTS





This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  You should not place undue reliance on these statements.  These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and to future events with respect to our business and our industry in general.  Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements.  Forward-looking statements address matters that involve risks and uncertainties.  Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements.  We believe that these factors include, but are not limited to, the following:  the circumstances resulting in the restatement of our consolidated financial statements for the years ended December 31, 2005 and 2004 and the material weaknesses in our internal control over financial reporting and in our disclosure controls and procedures; the outcome of any pending or future litigation or regulatory proceedings, including the current shareholder lawsuit and any claims or litigation related to the restatement of our consolidated financial statements; risks related to our substantial indebtedness, including the inability to obtain additional financing for our operations on terms acceptable to us or at all; our ability to comply with the financial covenants in our credit agreements; limitations on our operating and strategic flexibility under the terms of our debt agreements; our reliance on credit provided by our manufacturers to finance our inventory purchases; the effects of a prolonged economic downturn; our reliance on third parties to manufacture the products we sell; competition in the markets in which we operate; risks associated with doing business abroad, including foreign currency risks; our ability to accurately forecast customer demand and order sufficient product quantities; the fact that the products we sell may not satisfy shifting customer demand or compete successfully with our competitors’ products; loss or adverse effect on our supplier relationships, including the reduction or elimination of rebates offered by our manufacturers; our ability to achieve cost reductions and other benefits in connection with our strategic initiatives; our ability to attract and retain qualified personnel; and our inability to identify, acquire and integrate acquired businesses.





The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Annual Report on Form 10-K/A, including under the caption Risk Factorsin Item 1A of this Annual Report on Form 10-K/A.  If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.


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PART I





Item 1.             Business





General





Founded in 1988, Bell Microproducts Inc., a California corporation, is a leading distributor and value-added reseller of data storage and server products and solutions, computer component products and peripherals, as well as a variety of software applications.  We also design and integrate systems through our value-added division, and provide customers with a variety of services, such as system configuration, product installation, post-sale service and support and supply chain management.  Bell Micro markets and distributes products at all levels of integration, from components to fully integrated, tested and certified systems.  We carry over 400 brand name product lines worldwide, as well as our own proprietary Rorke® and Galaxy® data storage products and our Markvision consumer electronics and computer products.  Across our product lines, we emphasize our ability to combine our extensive product portfolio with comprehensive value-added and supply chain services.





We offer component-level products that include hard disk, tape, optical and solid state drives, processors, memory, motherboard and computer I/O products, flat panel displays and related products and other data storage and custom-configured computer products.  Our offerings also include value-added services such as system design, integration, installation, maintenance and other consulting services combined with a variety of data storage, server and other computer hardware and software products.  We also offer supply chain services such as consignment, bonding and end-of-life management programs.  In addition, at the system level, we offer a variety of data storage systems, including direct attached storage (“DAS”), network attached storage (“NAS”) and storage area network (“SAN”) systems, as well as servers and other computer platforms, tape drive systems, tape libraries and related software.  Our access to a wide range of products and technologies, together with our extensive technical capabilities, allows us to tailor high-quality hardware, software and service solutions for each customer’s specific requirements.  Customers can purchase our components or systems as stand-alone products, or in combination with our value-added and supply chain services.  We are organized to service different customer needs with dedicated sales teams for each of our original equipment manufacturer (“OEM”), value-added reseller (“VAR”), direct market reseller (“DMR”), contract manufacturer (“CM”), integration and end-user customer types.





Available Information





All reports filed electronically by us with the Securities and Exchange Commission (“SEC”), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and other information and amendments to those reports, are accessible at no cost on our web site at www.bellmicro.com and are available by contacting our Investor Relations Department at ir@bellmicro.com or (408) 451-9400.  These filings are also accessible on the SEC’s website at www.sec.gov.  The public may read, and copy at prescribed rates, any materials filed by us with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC  20549.  The public may obtain information regarding the Public Reference Room by calling the SEC at (800) 732-0330.





Industry





The economic downturn that began in 2008 and continued into 2009 significantly impacted the demand in the  information technology (“IT”), OEM and consumer markets for data storage, servers, personal computers (“PCs”) and computer components.  However, the economic recovery that began in the second half of 2009 has resulted in increased demand for the products we sell.  Market growth continues to be driven by increases in the demand for processing, storing, managing and security of data; the reduced cost of higher performing enterprise servers and data storage systems; lower cost entry-level servers, desktop and laptop computers; increasing needs to meet corporate and government compliance requirements; and, in recent years, the storage, processing and networking of digital audio and video files in the consumer market.





Traditionally, suppliers have sold data storage, connectivity, servers and computer components directly to end-users and through both direct and indirect distribution channels.  The use of distribution channels continues to grow as the computer products, IT and consumer electronics industries mature.  Suppliers utilize distributors not only to increase their reach in the marketplace, but also to allow suppliers to focus primarily on their core strengths, such as product design, development and marketing.  Suppliers are increasingly relying on their partners in the distribution industry to manage customer relationships, create demand and execute the sales transaction.  The indirect distribution channel has seen growth as the needs and demands of the suppliers’ OEMs, VARs, CMs, DMRs, system integrators, and, most recently, major retailers, have increased.  Suppliers are also driving the trend toward indirect distribution due to the value-added and supply chain services that distributors can often provide.  The rapid growth of complex data processing and storage requirements and the need for sophisticated server and networked storage systems have also increased the enterprise customer’s dependence on value-added service providers to assist in the design, integration, service and support of their data processing and storage needs.  These changes in the industry provide opportunities for distributors to differentiate themselves in the market through product specialization and the value-added and supply chain services they offer.





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The complexity of sophisticated server and storage solutions, combined with a shortage of qualified IT personnel and the cost-benefit of outsourcing, often leads customers to outsource some or all of the research, design, implementation and support of their IT servers and data storage solutions.





To increase their efficiencies, suppliers are continually reducing the number of distributors they use.  Distributors are also choosing to consolidate because of the competitive advantages derived from expanded product offerings and economies of scale.  The rapidly changing nature of the data storage, server and computer components markets has required distributors to significantly modify their customer base, as well as their product and service offerings, to compete effectively.  To be successful in this changing market environment, we believe distributors must emphasize time-to-market and total cost reductions, in addition to focusing on specific markets through product offerings, technical expertise and value-added and supply chain service capability.  Distributors need to distinguish themselves through a combination of value-added services, such as consulting, design, integration, implementation and maintenance, as well as more knowledgeable service and technical support resources and innovative supply chain programs.





Segment and geographic information for the Company is contained in Note 13 — Segment and Geographic Information in our notes to the consolidated financial statements included in this Annual Report on Form 10-K/A.





Our Strategy





Our goal is to expand our position as a leading distributor of storage and server solutions and systems, as well as computer component products and peripherals.  We intend to achieve this goal by leveraging our strengths and implementing the following strategies as described in the Products and Technologies and Market Expansion sections below.





Products and Technologies





Continue to Focus on the Storage Market.We plan to continue to take advantage of opportunities in the storage market by maintaining our strategic focus on providing complete storage solutions to our customers.  For example, we have devoted significant resources to broadening our range of value-added services, expanding our marketing efforts, improving the expertise of our sales force and offering an extensive range of technologically advanced products in the data storage market.  We believe that we are well-positioned to benefit from the future growth of the storage market.  In the markets we serve, as user needs grow more sophisticated and cost efficiencies are demanded of storage infrastructure providers, additional opportunities will arise in the storage, management and security of data, all of which benefits our storage-centric strategy.





Expand our Storage and Complementary Product Lines.We believe that our ability to offer customers an extensive line of leading data storage, server, other computer components and software across technologies and suppliers will continue to be a strong competitive advantage for us, particularly as it relates to the storage infrastructure.  Our selection of products and technologies, together with our technological expertise, allows us to reliably deliver appropriate hardware and software solutions and services to meet the demands of our customers.  The addition of new product lines and application technology expertise is a continuous process at Bell Micro.





Enter Complementary Growth Markets.Our technology expertise, broad customer base and global operations enable us to identify emerging market opportunities that are based upon storage-centric applications.  These opportunities are often based upon consumer demands, government regulations or cost efficiencies that require the processing and storage of substantial data.  Current examples of growth markets created by the advent of digitized video are digital signage displays, video surveillance and medical imaging.  We offer product lines, application expertise and services to provide components, subsystems and complete solutions for these markets, leveraging our design, integration, installation, maintenance and supply chain capabilities.  Our Rorke Data division is a specialist in the application of server and storage products in the video and health care vertical markets.





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Strengthen Relationships with Industry Leaders.We intend to utilize our position as a leading distributor of storage solutions to broaden our existing strategic relationships with industry leaders and to create new strategic relationships.  We believe that distribution channels will continue to consolidate and leading suppliers will align with those distributors that are best able to offer value-added services and access to new customers in multiple countries and markets.  We believe that being aligned with leading suppliers will allow us to identify innovative products, exchange critical information, gain access to new technologies and create cross-marketing opportunities.  We have developed strategic relationships with a number of suppliers, including Hewlett-Packard Company (“HP”), Seagate Technology (“Seagate”), Hitachi Global Storage Technologies, Inc. and Hitachi Data Systems Corporation, Microsoft Corporation (“Microsoft”), Western Digital Corporation (“WD”), International Business Machines Corporation (“IBM”), Cisco Systems, Inc. (“Cisco”), Intel Corporation (“Intel”) and Quantum Corporation.





As a consequence of our existing strategic relationships with industry leaders, we tend to rely on a relatively small number of key suppliers for products that make up a significant portion of our sales.  Our two largest suppliers are HP and Seagate.  In 2009, 2008 and 2007, HP supplied us with products that accounted for approximately 17%, 17% and 15% of our total sales, respectively, and Seagate supplied us products that accounted for approximately 10%, 12% and 14% of our total sales, respectively.  Our top five suppliers provided us products representing approximately 47% of our total sales in 2009, 2008 and 2007.  We believe that staying aligned with industry leaders in the storage solutions market is an important part of our overall strategy.





Market Expansion





Our long-term market expansion goals include the following:





Capture New Market Opportunities.As profitable new market opportunities emerge that complement our storage-centric strategy, we will determine the applicability of our technology expertise and expand into these new markets organically or through acquisition.  We continue to evaluate new market opportunities where the application of our products and technical expertise will differentiate us from other market participants and afford significant volume and profit opportunities.  Our strategy is to gain early market share in new markets and leverage our position as the market grows.





Expand our Domestic and International Presence.We intend to increase our presence in North America and expand our coverage in the major international markets that we serve, primarily Latin America and Europe, through organic growth and strategic acquisitions.  As we expand our global presence, we believe that we will be better able to address the demands of multinational customers, gain further access to multinational suppliers and leverage our expertise.





Products and Services





We market and distribute more than 400 brand name product lines of other companies, as well as our own Rorke® and Galaxy® data storage products and our Markvision consumer electronics and computer products.  We offer these products and services as discrete components or as part of our solutions offering.





Storage, Server, Networking and Related Software Infrastructure Products





Our storage solutions include DAS, NAS and SAN offerings.  These solutions are comprised of fibre channel and ethernet networking products and systems, tape libraries, disk drive subsystems, tape subsystems and storage-related software products.  Additionally, we offer custom and standard configurations of server products from various suppliers.  We partner with leading storage and server suppliers to provide comprehensive, cost-effective solutions to customers in the worldwide IT and OEM markets.  Our customer base includes leading VARs and other resellers, independent software vendors (“ISVs”), major retailers, system builders and OEMs.  Our ProSys and TotalTec divisions provide storage, server and network infrastructure solutions to Fortune 1000 end-user customers.  Rorke Data provides data storage solutions in both the video and health care markets.





Disk and Tape Drives, Motherboards, Processors, and Other Computer Components





We distribute a variety of computer components, including hard disk, optical, tape and solid state drives, DRAM and flash memory modules, including our Markvision branded products, microprocessors, standard and custom motherboards, graphics and video devices, network interface cards (“NICs”) and other board level products, computer power supplies and chassis products.





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Computer Peripherals, Monitor and Display Systems, Software and Other Computer Products





Our computer peripherals include flat panel displays, monitors, keyboards, scanners, laptops, desktops and other computer peripherals.  Our software offerings include storage management, operating systems, data security, systems management, middleware, database and replication products.





Value-Added Services





In North America and Europe, we offer our customers a variety of value-added services.  Customers employ these services to modify a variety of standard products to meet the needs of their specific application requirements.  Additionally, we offer a wide range of supply chain services to support our customers’ logistical requirements.





Data Storage and Server Subsystems.We provide standard and custom subsystem products to our customers.  We integrate standard products to customize our Rorke® and Galaxy® data storage products.  We also configure, build and test custom products to meet the needs of customers that cannot be served by industry-standard product offerings.





Solutions Configuration, Test, Installation and Support.We offer a broad range of professional services, including design and consultation, installation, training and on-site and remote managed service programs related to storage and server solutions.  Networking solutions and services are offered through our ProSys division.  We have established several dedicated enterprise storage system teams that address the challenges associated with data storage and management in the enterprise data center.  Our service programs also offer customers feasibility testing and fully integrated turnkey storage solutions.  For example, we integrate SANs with fibre channel-based technology including switches, bridges, archive libraries and network and data management software.  For server and storage solutions, we offer a wide range of support services that include design support and product recommendations, testing services, training programs and maintenance.  Much of this expertise lies in our ProSys, Rorke Data and TotalTec divisions, and is leveraged to support the needs of our distribution customers.





Component Product Services.We provide value-added services for a full range of storage and computer products, including modifying disk, tape and optical drives to meet specifications established by a customer’s specific application needs.  For customers requiring supply chain services, we offer a full range of solutions, including automated quotations, bonded inventory, consignment and end-of-life management.  We also provide image duplication, firmware modification, software downloading, special labeling and other hardware modification services.  For other computer product components, we provide various configuration services, testing and packaging.  We provide a variety of materials-management solutions, including e-procurement services, Internet-enabled real-time pricing and delivery quotations, electronic data interchange (“EDI”) programs, just-in-time (“JIT”) inventory programs, bonded inventories, on-site consignment inventory and end-of-life management services.





Board and Blade Level Building Blocks.We provide both standard and custom configured board and blade offerings geared for applications to include computers, servers, medical equipment, video/graphics, security, test and measurement and networking products.  These solutions are offered in a variety of industry standard form factors.  We also provide complete integration services, manufacturing, assembly, interoperability testing and application support.





Retail Packaging.In addition, we provide value-added services to storage suppliers, combining the strengths of our  supply chain services with third-party packaging.  Our retail packaging programs deliver consumer-ready storage products.  The core materials planning and logistics capabilities of our distribution operations enable us to deliver retail-ready products to our customers’ distribution centers or directly to their retail outlets.





Flat Panel Integration.We offer a comprehensive portfolio of flat panel displays, technologies and integration services.  These include off-the-shelf solutions for kiosks, point-of-sale (“POS”) displays, digital signage displays and medical imaging.  Our display solutions also include custom designs to support applications such as full sunlight readability and harsh environmental deployment.





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Sales and Marketing





Our customer base primarily consists of OEMs, VARs, system integrators, DMRs, CMs, storage, server and networking infrastructure end-user customers and major retailers.  For customers primarily seeking our solution offerings, our sales and marketing activities often involve efforts by our salespeople and field application engineers over an extended period of time.  Sales and technical personnel focusing on these customers tend to spend a significant amount of time assessing the customers’ needs and developing solutions supported by our technical capabilities and experience.





For customers seeking our components, servers, storage subsystems and other related product offerings, our sales and marketing efforts focus on price and availability, augmented by our supply chain management programs, consignment and bonded inventory programs and end-of-life management programs tailored to specific customer needs.  Sales of these offerings are principally driven by supply chain capabilities, our design and product recommendation services, product breadth and depth, pricing, on-time and on-demand availability, and, often, our hardware value-added capabilities.





For customers seeking end-user solutions, our ProSys, Rorke Data and TotalTec divisions work to determine their server, data storage, data management, data security and network needs to enable them to make decisions regarding their infrastructure, and to design systems to address these needs.  Our consulting services draw from our core competencies in enterprise server, storage and networked integrated solutions.  We perform tasks such as storage audit and feasibility studies, as well as requirements analyses that lead to hardware and software system recommendations and complete implementation project management, as well as the management of supplemental subsets of customer-defined projects.





We also believe that our relationships with our suppliers provide us with significant opportunities to increase our sales and our customer base.  We work closely with our suppliers to develop strategies to penetrate both targeted markets and specific customers.  In some cases, our sales presentations to customers are a joint effort with a supplier’s sales representative.





Electronic Commerce





Customers rely on our electronic ordering and information systems as a source for product information, availability and price.  Through our website, customers can gain remote access to our information systems to determine product availability and pricing, as well as to place orders.  We actively market our website capabilities to current and new customers, encouraging them to complete their purchases electronically.  Some of our larger customers utilize our electronic ordering, such as EDI, extensible markup language (“XML”) or file transfer protocol (“FTP”) services, through which orders, order acknowledgments, invoices, inventory status reports, customized pricing information and other industry standard transactions are consummated electronically.  With a broad suite of e-commerce capabilities, we are able to increase efficiency and timeliness for ourselves, as well as for our customers.





Competition





In the distribution of storage, server and related products and services, as well as computer components and peripherals, we generally compete for customer relationships with numerous local, regional, national and international authorized and unauthorized distributors.  We also compete for customer relationships with the suppliers we represent and with our own customers.  Consistent with our sales and marketing efforts, we tend to view this competition, whether direct or indirect, on a customer-category basis.  We believe that our most significant competition for customers seeking both products and value-added services arises from Arrow Electronics, Inc. (“Arrow”), Avnet, Inc. (“Avnet”), SYNNEX Corporation (“SYNNEX”) and the Magirus Group (“Magirus”).  We believe that our most significant competition for customers seeking commodity products comes from Ingram Micro Inc. (“Ingram Micro”), Tech Data Corporation (“Tech Data”), Actebis Group (“Actebis”) and Intcomex, Inc. (“Intcomex”).  While many of our competitors possess superior financial resources, in the area of storage products and solutions, however, we believe that none of our competitors offer the full range of data storage products, combined with the solutions, expertise and services that we provide.





A key competitive factor in the electronic component and computer product distribution industry, as a whole, is the need to sustain a sufficient level of inventory to meet the rapid delivery requirements of customers.  To minimize our exposure related to declines in the valuation of inventory on hand, the majority of our product lines are purchased pursuant to non-exclusive distributor agreements, which provide certain protections to us for product obsolescence and price erosion in the form of rights of return and price protection.  Furthermore, these agreements are generally cancelable upon 30 to 180 days notice and, in most cases, provide for inventory return privileges upon cancellation.





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We enhance our competitive position by offering a variety of value-added services tailored to individual customer specifications and business needs, such as design support, testing, assembly, supply chain management and materials management.





Business Segments





We are in the business of providing computer components and peripherals, server and storage subsystems and solutions, software and value added services to OEMs, VARs, CMs, direct manufacturers, integration and end-user customers.  Our five reportable segments are North America, Europe, ProSys, Latin America and Other (which consists of Rorke Data and TotalTec).  Management designates the internal reporting used by the chief executive officer for making decisions and assessing performance as the source of our reportable segments.  See Note 3 — Goodwill and Other Intangible Assets and Note 13 — Segment and Geographic Information in our notes to the consolidated financial statements included in this Annual Report on Form 10-K/A for additional information.





Acquisitions





We have completed a limited number of strategic acquisitions intended to increase our expertise in storage solutions or increase our access to international markets.  Our most recent acquisition was completed in October 2006 when we acquired ProSys Information Systems (“ProSys”).  This acquisition has broadened our position as a supplier of enterprise solutions to our customers.  ProSys provides storage, server, networking and IT infrastructure and consulting services.  ProSys’ strategic partners include HP, Cisco, Teradata Corporation, Microsoft and IBM, as well as a diverse group of other leading solution providers.  ProSys will continue to focus on large enterprise accounts.





Employees





As of December 31, 2009, we had a total of 1,910 employees, consisting of 880 in sales and marketing positions, 350 in general administrative positions, 303 in warehousing and operations and 377 in technical and value-add integration positions.  Of our total employees, as of December 31, 2009, 892 were located outside of the United States, including 408 in the United Kingdom, 126 in Germany, 82 in Mexico, 85 in Brazil and 191 in other locations.  None of our employees are represented by a labor union.  We have not experienced any work stoppages and consider our relations with our employees to be good.





Executive Officers of the Registrant





The following table and descriptions identify and set forth information regarding our executive officers as of February 28, 2010:





Name
Age
PositionW. Donald Bell
72
President, Chief Executive Officer and DirectorAndrew S. Hughes
44
Vice President, General Counsel and Corporate SecretaryRichard J. Jacquet
70
Senior Vice President, Human ResourcesWilliam E. Meyer
48
Executive Vice President and Chief Financial OfficerRobert J. Sturgeon
56
Vice President, Operations and Chief Information OfficerGraeme Watt
48
President, Worldwide Distribution





W. Donald Bellhas been the Company’s President and Chief Executive Officer and a member of the Board since the Company was founded in 1988.  Mr. Bell has over forty years of experience in the electronics industry.  He was formerly the President of Ducommun Inc. and its subsidiary, Kierulff Electronics Inc., as well as Electronic Arrays Inc.  He has also held senior management positions at Texas Instruments Incorporated, American Microsystems and other electronics companies.





Andrew S. Hugheshas been our Vice President, General Counsel and Corporate Secretary since July 2007.  Mr. Hughes previously served as Vice President, General Counsel and Corporate Secretary of LSI Logic Corporation, a provider of semiconductors and storage systems, from May 2006 to April 2007.  He joined LSI Logic in November 2000 and became manager of LSI Logic’s Commercial Law Group and Assistant Corporate Secretary beginning in February 2004 until being promoted to General Counsel.  Prior to joining LSI Logic, Mr. Hughes was Division Counsel for Harris Corporation from 1998 to 2000.





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Richard J. Jacquethas been our Senior Vice President, Human Resources since May 2003, prior to which he served as our Vice President, Human Resources since joining the Company in May 2000.  From 1988 to May 2000, Mr. Jacquet served as Vice President of Administration of Ampex Corporation, an electronics manufacturing company.  Prior to 1988, Mr. Jacquet served in various senior human resource positions with Harris Corporation and FMC Corporation.





William E. Meyerhas been our Executive Vice President and Chief Financial Officer since August 2007.  Previously, he was a managing director of Financial Intelligence, LLC, a provider of project-based financial consulting services, from June 2006 to August 2007.  Prior to that, Mr. Meyer served as the Executive Vice President and Chief Financial Officer of BroadVision, Inc., a provider of enterprise web applications, from April 2003 until June 2006.  Prior to joining BroadVision, Mr. Meyer was Chief Financial Officer of Mainsoft Corporation from April 2001 to March 2003, a publisher of cross-platform development software.  Before Mainsoft, he held senior finance positions with Phoenix Technologies, inSilicon Corporation and Arthur Andersen & Co.





Robert J. Sturgeonhas been our Vice President, Operations and Chief Information Officer since July 2000, prior to which he served as our Vice President of Operations since joining the Company in 1992.  From January 1991 to February 1992, Mr. Sturgeon was Director of Information Services for Disney Home Video.  Prior to that time, Mr. Sturgeon served as Management Information Services (“MIS”) Director for Paramount Pictures’ Home Video Division from June 1989 to January 1991 and as a Marketing Manager for MTI Systems, a division of Arrow Electronics, Inc., from January 1988 to June 1989.  Other positions Mr. Sturgeon has held include Executive Director of MIS for Ducommun Inc. where he was responsible for ten divisions, including Kierulff Electronics.





Graeme Watthas been our President, Worldwide Distribution since May 2008.  He served as President, Bell Micro Europe from April 2004 until his promotion in May 2008.  Prior to joining the Company in April 2004, Mr. Watt served in several IT distribution companies from 1988 to 2004.  He served with Tech Data Corporation, most recently as their President of Europe and Middle East, from August 2000 to October 2003.  Previously he served as Tech Data’s Regional Managing Director in Europe.  He was also previously employed at Computer 2000, Frontline Distribution and First Software.





Officers are not elected for a fixed term of office, but hold office until their successors have been elected.  There are no family relationships among the executive officers and directors of the Company.





Item 1A.                     Risk Factors





In addition to the other information included in this Annual Report on Form 10-K/A, you should carefully consider the risk factors described below.





Risks Related to Our Internal Control Over Financial Reporting and the Restatement of Our Previously Issued Financial Statements





We have identified, and we are continuing to remediate various material weaknesses in our internal control over financial reporting.  These weaknesses could continue to adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.





Our management is responsible for maintaining internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP.  Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009 and identified a number of material weaknesses, primarily related to our failure to maintain an effective control environment.  As a result of these material weaknesses, our management concluded that our internal control over financial reporting was not effective as of December 31, 2009.  Further, we believe that our internal control over financial reporting remains ineffective as of the date of the filing of this Annual Report on Form 10-K/A.  See Item 9A — Controls and Procedures.





A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that creates a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.  We are implementing a plan to remediate the identified material weaknesses.  Our efforts have been and will continue to be time-consuming and expensive.  We cannot give any assurance that the measures we are taking to remediate the identified material weaknesses will be effective.  We also cannot assure you that other material weaknesses will not arise as a result of our failure to maintain adequate internal control over financial reporting or that circumvention of those controls will not occur.  Additionally, even if we succeed in improving our controls, those controls may not be adequate to prevent or identify errors or irregularities or ensure that our financial statements are prepared in accordance with GAAP.





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The investigations by the Board of Directors (the “Board”) into some of our historical accounting practices and the determination of various other accounting adjustments, which resulted in the restatement of our previously issued consolidated financial statements, were time-consuming and expensive and had a material adverse effect on our financial condition, results of operations and cash flows.





During 2007 and 2008, we devoted substantial internal and external resources to the completion of a restatement of certain of our historical consolidated financial statements.  During 2009, we have devoted substantial additional resources to preparing the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.  As a result of these efforts, as of December 31, 2009, we have paid in excess of $90.0 million in fees and expenses, primarily for additional accounting, tax, legal and related consulting costs, and $11.1 million in fees related to obtaining covenant waivers, including an 8.5% special interest payment of $9.4 million under our $110.0 million of outstanding convertible notes.  These costs, as well as the substantial management time devoted to address these issues, have materially adversely affected our financial condition, results of operations and cash flows.





We and certain of our current and former officers and directors have been named as parties to a purported shareholder derivative lawsuit relating to our historical stock option granting practices, and may be named in further litigation, including with respect to the restatement of our consolidated financial statements, all of which could require significant management time and attention, result in significant legal expenses or cause our business, financial condition, results of operations and cash flows to suffer.





On December 29, 2008, John R. Campbell, who alleges he is one of our shareholders, caused a purported shareholder’s derivative lawsuit to be filed in the Superior Court of California for the County of San Mateo, naming us as a nominal defendant, and naming 17 of our current and former directors and officers as defendants.  The lawsuit seeks to recover unspecified damages purportedly sustained by us in connection with our historical stock option granting practices.  Subject to certain limitations, we are obligated to indemnify our current and former officers and directors in connection with the investigation of our historical stock option practices and such lawsuits.  During 2009, two of our former officers were dismissed from the lawsuit.  The expense of defending this lawsuit may be significant.  We cannot predict the outcome of this matter, or any other matter related to our historical stock option granting practices.





Our historical stock option granting practices and the restatement of our consolidated financial statements have exposed us to greater risks associated with litigation, regulatory proceedings and government enforcement actions.  We and our current and former officers and directors may, in the future, be subject to additional private and governmental actions relating to our historical stock option granting practices or the restatement of our consolidated financial statements.  Subject to certain limitations, we are obligated to indemnify our current and former officers and directors in connection with such lawsuits and governmental investigations and any related litigation.  We cannot predict the outcome of these investigations or lawsuits.  Regardless of the outcome, these lawsuits, and any other litigation that may be brought against us or our officers and directors, could be time-consuming, result in significant expense to us and divert the attention and resources of our management and other key employees, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.  An unfavorable outcome in any of such litigation matters could exceed coverage provided under applicable insurance policies, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.





Further, we could be required to pay damages or additional penalties or have other remedies imposed against us, our directors or officers, which could harm our reputation, business, financial condition, results of operations or cash flows.





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Risks Related to Our Financial Condition





We have incurred substantial indebtedness under agreements that require us to make significant interest and principal payments, and certain of these agreements will require us to negotiate extensions or refinancings in the next twelve months.   We did not generate consistent positive cash flows from operations prior to 2008.  Failure to generate sufficient cash flows from operations to fund future debt interest and principal payments or failure to negotiate the required extensions or refinancings would materially adversely affect our business.





At December 31, 2009, we had $350.3 million of indebtedness outstanding.  Among other things, our substantial debt service obligations:





•
require significant debt interest and principal payments, and limit the availability of our cash flow to fund working capital, capital expenditures, acquisitions, investments and other general corporate purposes;





•
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;





•
limit our ability to obtain additional financing for working capital, capital expenditures, strategic acquisitions, investments and other general corporate purposes;





•
limit our ability to refinance our indebtedness on terms acceptable to us or at all;





•
increase our exposure to fluctuating interest rates;





•
restrict our credit with suppliers, thereby limiting our ability to purchase inventory; and





•
make us more vulnerable to economic downturns, increased competition and adverse industry conditions, which places us at a disadvantage compared to our competitors that have less indebtedness.





In  the first half of 2009 and in 2008 and 2007, we incurred significant losses.  During the same periods, we used $5.7 million, $10.9 million and $8.8 million, respectively, of cash to repay principal and pay interest on our outstanding long-term debt.  If we are unable to generate sufficient cash flows from operations in the future, it may be necessary for us to refinance all or a portion of our indebtedness, obtain additional financing or take other actions.





Our primary revolving line of credit in the United States expires on September 20, 2010, but is automatically extended for one year unless we receive written notice of termination 60 days prior to that date.  We are currently negotiating an extension of this line of credit, and our ability to negotiate an extended or replacement revolving line of credit could be adversely impacted by the redemption provisions of our convertible subordinated notes discussed below.





If we cannot make scheduled interest or principal payments on our debt when due or negotiate an extended or replacement revolving line of credit when necessary, we will be in default of the terms of our debt agreements and, as a result: (1) our lenders could declare all outstanding principal and interest to be due and payable, and certain cross-default provisions under other credit arrangements would be triggered; or (2) our lenders could terminate their commitments to loan us money and foreclose against the assets securing their borrowings.  Should these events occur, there would be uncertainty regarding our ability to continue as a going concern.





Our audited consolidated financial statements included in this Annual Report on Form 10-K/A have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business.  Our ability to continue as a going concern is predicated upon, among other factors, our ability to obtain alternate or additional financings, when and if necessary, and our compliance with the provisions of our credit agreements.





If the holders of our convertible subordinated notes exercise their right to require us to redeem all or a portion of the notes at face value in March 2011, our liquidity and financial condition could be materially adversely affected.




In 2004, we completed an offering of $110.0 million aggregate principal amount of convertible subordinated notes.  The related indenture permits the note holders to require us to redeem all or a portion of the notes at face value in March 2011, March 2014 and March 2019.  If we are required to redeem all or a substantial portion of the notes in March 2011, we would be required to pay to the note holders $110.0 million, plus accrued and unpaid interest.  In order to pay the notes, we could be forced to issue new equity securities that would result in existing shareholders experiencing significant dilution, and these new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock.  If we are unable to either obtain necessary funds to redeem the notes or negotiate the terms of a refinancing with the current note holders, both of which could be difficult in the current economic environment, we would be in default of our obligations under the indenture, which would constitute a cross-default under most of our other debt arrangements. If those defaults should occur and we were unable to negotiate cures: (1) our lenders could declare all outstanding principal and interest to be due and payable, and certain cross-default provisions under other credit arrangements would be triggered; or (2) our lenders could terminate their commitments to loan us money and foreclose against the assets securing their borrowings.  Should these events occur, there would be uncertainty regarding our ability to continue as a going concern.





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The negotiation of extended or replacement revolving lines of credit and a financing with our current note holders, if required, will be subject to conditions and circumstances outside of our control and therefore may not be available to us, in which case our business would be materially adversely affected.





When we are required to extend or replace our revolving credit facilities and when and if we are required to negotiate a refinancing with our current note holders, we cannot be certain that such financings will be available for reasons including uncertainties in the global credit markets.  At the expiration of any credit facility, the lender is not obligated to renegotiate the terms of the loan and can require full repayment at that time.  We have commenced discussion with our lenders in the United States to renew our revolving line of credit.  Our ability to negotiate an extended or replacement revolving line will likely be impacted by the redemption provisions of our convertible subordinated notes and our ability to successfully complete a restructuring of those provisions.  While in the past we have successfully extended the term of each of our facilities on or before the time they expired, we cannot be certain that, in the future, our lenders will be willing to extend the terms of our existing loans, or our note holders will be willing to negotiate the terms of a refinancing, if required, on terms that are acceptable to us.  If we are unsuccessful in these negotiations, our business would be materially adversely affected.





Covenants and restrictions in our debt agreements require us to meet certain financial criteria and limit our operating and strategic flexibility.





Our debt agreements contain financial covenants and restrictions that limit our ability to engage in certain future transactions.  The covenants require us to, among other things, maintain a minimum net worth for certain operating subsidiaries and meet a consolidated fixed-charge coverage ratio.  The restrictions limit our ability to, or do not permit us to:





•
incur additional debt;





•
create liens;





•
redeem and prepay certain debt;





•
pay cash dividends, make other distributions or repurchase stock;





•
make investments;





•
engage in asset sales outside the ordinary course of business;





•
enter into certain transactions with affiliates;





•
engage in certain mergers and acquisitions; and





•
make certain capital expenditures.





Events beyond our control could affect our ability to comply with these covenants and restrictions.  Failure to comply with any of these covenants and restrictions would result in a default under the applicable agreements and under our other debt agreements containing cross-default provisions.  A default would permit lenders to accelerate the maturity of the debt under these agreements, foreclose upon our assets securing the debt and terminate any commitments to lend.  Under these circumstances, we may not have sufficient funds or other resources to satisfy our debt and other obligations.  In addition, the limitations imposed by these debt agreements on our ability to incur additional debt and to take other actions may significantly impair our ability to obtain other financing, including, without limitation, the ability to restructure our outstanding convertible bonds.





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In the past, we were required to obtain waivers in connection with covenant defaults under our debt agreements. In the future, we may need to obtain additional waivers.  The failure to obtain the necessary waivers could have a material adverse effect on our business, liquidity and financial condition.





Under our debt agreements, our lenders have the right to declare an event of default if we breach a representation or covenant and do not cure the breach, or obtain necessary waivers or modifications, within the required time periods.  If an event of default occurs, our lenders may accelerate the maturity of the debt outstanding under our debt agreements, foreclose upon our assets securing the debt and terminate any commitments to lend.  In addition, our ability to incur additional indebtedness would be restricted. Moreover, defaults under our debt agreements could trigger cross-default provisions under other debt arrangements.





In 2010, 2009, 2008 and 2007, we obtained agreements from our lenders to waive defaults under our debt agreements related to non-compliance with financial and non-financial covenants, and related cross-defaults.  If, in the future, we were to breach any covenants under our debt agreements, there can be no assurance that any additional waivers will be received on a timely basis, if at all, or that any waivers obtained will extend for a sufficient period of time to avoid an acceleration event, an event of default or other restrictions on our business.  The failure to obtain the necessary waivers or modifications could have a material adverse effect on our business, liquidity and financial condition.





Our primary revolving credit facilities are subject to contractual and borrowing base limitations, which could adversely affect our liquidity and business.





The maximum amounts we can borrow under our primary revolving credit facilities are subject to contractual limitations and borrowing base limitations which could significantly and negatively impact our future access to capital required to operate our business.  Borrowing base limitations are based upon eligible inventory and accounts receivable.  If our inventory or accounts receivable are deemed ineligible, because, for example, they are held outside certain geographical regions or a receivable is older than 90 days, the amount we can borrow under the revolving credit facilities would be reduced.  These limitations could have a material adverse impact on our liquidity and business.





We are subject to two governmental audits that could have a material adverse effect on our financial condition, results of operations and cash flows.





On June 4, 2008, our export subsidiary in the United Kingdom received a notification from the Direction Générale des Finances Publiques that the French tax authorities were proposing to issue a tax deficiency notice against our export subsidiary for failure to pay value-added tax and corporate income tax in France during the period of January 1, 2002 to December 31, 2006.  We requested a review of the assessment by the French central tax administration, which has discretionary power to review and modify tax assessments.  In a letter dated March 11, 2010, the French central tax administration informed us of its decision to cancel the value-added tax assessment, including interest and penalties, but maintain the corporate income tax assessment, including interest and penalties.  As a result, we expect to receive an amended tax assessment reflecting the decision of the French central tax administration setting forth a tax assessment, including interest and penalties, of approximately €1.1 million ($1.6 million at an exchange rate of $1.43/€1.00 million as of December 31, 2009).  We are evaluating our position with respect to the corporate income tax assessment and presently intend to avail ourselves of all available defenses.  A negative outcome of this matter could have an effect on our consolidated financial position, results of operations and cash flows.





On September 23, 2009, U.S. Customs and Border Protection (“CBP”) completed a pre-assessment survey of the import reporting processes used by our Latin American subsidiary located in Miami, Florida.  Based on its pre-assessment survey, CBP notified us of its intention to conduct a compliance test to quantify any potential loss of revenue.  As of the date of this report, such testing has not been commenced.  A negative outcome of this matter could have a material adverse impact on our consolidated financial position, results of operations and cash flows.





The goodwill on our balance sheet may not be recoverable and may be impaired in future periods, reducing the carrying value of goodwill as an asset.





The value of goodwill on our balance sheet is evaluated, in part, based on the trading price of our common stock.  On December 31, 2009 and 2008, the per-share closing price of our common stock was $3.55 and $0.60, respectively.  During 2008, we recorded aggregate goodwill impairment charges of $5.9 million.  As of December 31, 2009 and 2008, the carrying value of our goodwill was $21.5 million and $19.2 million, respectively.





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We rely in large part on credit lines provided by manufacturers to finance our inventory purchases, which lines are subject to change by the manufacturer with little or no notice.  Without such credit lines, our ability to purchase and hold inventory could be negatively impacted, which could adversely affect our results of operations and business.





To finance our purchases of inventory, we rely in large part on credit lines provided by the manufacturers of the products we sell.  These manufacturers are under no obligation to provide these credit lines to us and have complete discretion in determining the size of the credit lines.  Our manufacturers could determine to reduce or eliminate these credit lines because of their own financial condition, the global credit environment or their evaluation of our creditworthiness.  In the event one or more credit lines is reduced or eliminated, our ability to purchase and hold inventory would be negatively affected, and would likely have an adverse impact on our results of operations and business.





Risks Related to Our Business





We rely on a small number of suppliers for products that represent a significant portion of our inventory purchases.  Any adverse change in our relationships with and of these suppliers could have a material adverse effect on our results of operations.





In 2009, 2008 and 2007, products from our top five suppliers accounted for approximately 47% of our sales.  These suppliers have a variety of other distributors to choose from, which allows them to make substantial demands of us.  In addition, each of these suppliers may terminate its relationship with us on relatively short notice.  Any adverse change in our relationships with these suppliers could have a material adverse effect on our financial condition and results of operations.





Many suppliers have consolidated in recent years, resulting in fewer suppliers of the products in the markets we serve.  Moreover, suppliers have been consolidating the number of distributors they utilize.  Further consolidation in the industry could adversely affect our relationships with our suppliers, which could have an adverse effect on our business.





In addition, certain suppliers in our industry routinely purchase credit insurance from several major carriers to manage collection risks, and there can be no assurance that credit insurance will continue to be provided by those carriers.  A reduction in credit insurance available to our suppliers could result in decreased credit lines from suppliers to us and, therefore, adversely affect our ability to maintain sufficient inventory, all of which could have a material adverse effect on our financial condition and results of operations.





A reduction in the vendor allowances we collect from the manufacturers of the products we sell could adversely affect our results of operations.





We receive credits from manufacturers of the products we sell for price protection, product rebates, marketing, promotions and other competitive pricing programs.  In some instances, these vendor allowances represent a significant contribution to our pricing decisions and, therefore, our profitability.  If manufacturers reduce the amount of vendor allowances available to us, decide to terminate vendor allowance programs, or if we are unable to collect allowances that have been made available to us, it could have a material adverse effect on our results of operations.





We operate in an industry with significant pricing and margin pressure.





Our industry experiences intense competition in pricing.  There are several distributors in each of the markets in which we operate that distribute products that are identical or similar to the products we distribute.  As a result, we face pricing and margin pressure on a continual basis.  Additionally, the mix of products we sell also affects overall margins.  If we increase sales of products that are more widely distributed, we may reduce our overall gross profit margin, as those products typically have lower margins due to competition.  Freight costs and foreign currency exchange exposure can also have an adverse effect on margins.





Our international operations trade in local currencies that subject us to risks related to the fluctuation of foreign currencies against the U.S. dollar.





Our international revenues represented approximately 61% of our revenues in 2009, 2008 and 2007.  We believe that international sales will continue to represent a large percentage of our net sales for the foreseeable future.  Because our international operations trade in the currencies of the jurisdictions in which they operate, we are subject to fluctuations in foreign currency exchange rates and face exposure to adverse changes in these rates.  These exposures may be different over time as business practices change.  For each of our foreign subsidiaries, the local currency is its functional currency.  When our revenues and expenses are denominated in currencies other than U.S. dollars, gains and losses on the conversion to U.S. dollars may contribute to fluctuations in our operating results.  We have in the past entered, and expect in the future to enter into, hedging arrangements and local currency borrowing facilities to reduce this exposure, but these arrangements will not eliminate the significant effects these currency fluctuations may have on our results of operations.  An increase in the value of the dollar could increase the real cost of our products to our customers in those markets outside the United States where we sell in dollars, and a weakened dollar could increase the cost of local operating expenses and procurement of product to the extent that we must purchase product in foreign currencies.





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The products we sell may not satisfy shifting customer demand or compete successfully with our competitors’ products.





Our business is based on the demand for the products we sell, which are primarily used in the manufacture or configuration of electronic products.  These end products typically have short life cycles and experience intense price competition.  Our success depends upon our ability to identify new product lines that will achieve market acceptance and to establish relationships with suppliers that will develop these products on a timely basis in response to the rapid technological changes in our industry, such as the shift occurring between traditional hard disk drives and solid state drives.  If we misinterpret consumer preferences or fail to respond to changes in the marketplace, consumer demand for the products we sell could decrease.  Furthermore, our suppliers must commit significant resources each time they develop a product.  If they do not invest in the development of new products, then the range of products we offer may be reduced and the demand for the products we offer may decrease.  If any of these events occur, our sales could decline significantly.





A substantial portion of our sales consist of hard disk drives, which subjects us to the significant fluctuations in the overall hard disk drive market.





In 2009, 2008, and 2007, 25%, 26% and 31%, respectively, of our worldwide sales consisted of hard disk drives, and 34%, 37% and 41%, respectively, of our U.S. Distribution sales consisted of hard disk drives.  In 2009 and 2008, the disk drive market was adversely affected by the global economic crisis in terms of decreased sales volume and average selling prices, resulting in a year-over-year decrease in our disk drive revenue of 20% both worldwide and in the U.S. Distribution segment.  The overall hard disk drive market is subject to significant fluctuations over time and, because a significant portion of our sales consist of disk drives, our revenue and our profitability are subject to those same significant fluctuations.





A portion of our profitability is based on rebates we receive from manufacturers.  These rebates may be reduced by manufacturers or we may not be able to participate in rebate offers made by manufacturers.





Manufacturers have historically offered to their distribution partners, including us, rebates associated with the sale of their products.  Recently, because of global economic issues, manufacturers have begun selectively reducing the rebates they offer.  In addition, some rebates require us to qualify in order to receive the rebates by taking relatively large orders over a short period of time or paying invoices in significantly less time than what is commercially standard under the circumstances.  Due to our financial condition, we may be unwilling or unable to take advantage of these rebate offers from manufacturers, thereby adversely impacting our profitability.





Our reliance on legacy information systems that are supported by only a few individuals, as well as a lack of a fully integrated information system, could materially adversely affect our business.





Some of our information systems consist of legacy applications that are supported by small internal and external IT teams.  As a result, the expertise to maintain and upgrade these systems resides in only a few individuals, which, given the legacy nature of the information systems, could make replacement of these individuals very difficult.  These legacy IT systems may also not be compatible with commercially available software.  In addition, our information systems are not consistent across our operations, making consolidation of financial information increasingly difficult.  A loss of our internal or external IT teams, or the ability to consolidate financial and other information across our operations, could have a material adverse effect on our business and results of operations.





- 17 -


The value of our inventory may decline, which could have an adverse effect on our financial condition and results of operations.





Our business model requires that we purchase and maintain adequate levels of inventory in order to meet customer demand on a timely basis.  The markets we serve are subject to rapid technological change, new and enhanced products and evolving industry standards.  These changes, along with changes in customer demand, may cause our inventory on hand to decline substantially in value.  A majority of our suppliers provide some protection from a loss in inventory values through price protection or the option to return products, but only in specified circumstances.  However, our suppliers may become unable or unwilling to fulfill these obligations.





Supply shortages could adversely affect our operating results and cash flows.





We are dependent on our suppliers for the products we sell.  Historically, our industry has experienced periods of product shortages due to suppliers’ inability to accurately project demand.  When these shortages occur, we typically receive an allocation of the available product from our suppliers.  We cannot assure you that our suppliers will be able to maintain an adequate supply of products to fulfill all of our customers’ orders on a timely basis.  If we are unable to enter into and maintain satisfactory distribution arrangements, it may delay the availability and shipment of products to our customers.  This may lead to our customers purchasing products from our competitors, which could adversely affect our business.





If we do not control our operating expenses, we may not be able to successfully implement our strategy.





The successful implementation of our strategy depends, to a substantial degree, upon our ability to increase sales while, at the same time, reducing or controlling the growth of operating expenses.  We have implemented initiatives intended to increase productivity and reduce costs.  These initiatives include significant personnel reductions, reduction or elimination of non-personnel expenses, streamlining operations and consolidating business lines.  We cannot assure you that our efforts will produce the expected cost savings and other benefits.  Moreover, our cost reduction efforts may adversely affect our financial and operational controls and our ability to distribute products in volumes required to meet customer demand.  These efforts may also result in disruptions that could adversely affect our ability to service customers.





Our ability to operate effectively could be impaired if we fail to attract and retain key personnel and qualified managers.





Our success largely depends on our ability to recruit and retain qualified managers and key personnel.  If one or more of our key personnel, particularly W. Donald Bell, our President and Chief Executive Officer, resigns or otherwise terminates his or her employment with us, we could experience a loss of sales and supplier relationships and diversion of management resources.  Competition for skilled employees in the technology industry is intense, especially in the San Francisco Bay Area, where many of our key employees are located.  There can be no assurance that we will be able to recruit and retain such personnel.





In order to attract and retain personnel in a competitive marketplace, we have historically provided competitive compensation packages, including equity-based compensation.  However, given the recent economic slowdown, we have generally not raised base salaries or bonus opportunities for our employees, including for our named executive officers, for the past several years.  As a result, most of our named executive officers are now paid below current market rates for their positions as determined by the independent compensation consultant hired by the Compensation Committee of our Board of Directors.  The perception that our stock price may not increase over time could also adversely affect our ability to attract or retain key employees.  Further, the compensation expense that must be recognized in connection with the grant of stock options and other equity awards may limit the attractiveness of using equity-based compensation as a primary incentive and retention tool in the future.  If we are unable to retain our existing key personnel or hire and integrate new management or employees, our business, financial condition and results of operations could be adversely affected.





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Our international operations subject us to additional risks that may adversely affect our results of operations.





As described above, sales from our international operations in recent years have represented a significant percentage of our total sales, and we believe that international sales will continue to represent a significant portion of our business.  Our international operations are subject to a number of risks, including:





•
accounts receivable collection risks, longer payment cycles and unpredictable sales cycles;





•
costs and difficulty in staffing and managing foreign operations;





•
import and export license requirements, tariffs, taxes and other trade barriers;





•
potentially adverse tax consequences, including restrictions on repatriating earnings and the potential for “double taxation;”





•
the burden of complying with a wide variety of foreign laws, treaties and technical standards, and changes in those regulations; and





•
local political and economic instability.





Our inability to adequately assess and monitor credit risks of our customers could have a material adverse effect on our financial condition, results of operations and liquidity.





We are subject to the credit risk of our customers.  We use various methods to screen potential customers and establish appropriate credit limits; however, these methods cannot eliminate all potential bad credit risks and may not prevent us from approving applications that are fraudulently completed.  Moreover, businesses that are good credit risks at the time of application may become bad credit risks over time and we may fail to detect this change.  In times of economic recession, the number of our customers who default on payments owed to us tends to increase.  If we fail to adequately assess and monitor our credit risks, we could experience longer payment cycles, increased collection costs and higher bad debt expense.





Most of our sales are on an open credit basis, with typical payment terms of 30 days in the United States and, because of local customs or conditions, longer periods in some markets outside the United States.  We monitor individual customer payment capability in granting such open credit arrangements, seek to limit such open credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts.





Our exposure to credit risks may increase if our customers are adversely affected by the current global economic downturn, or if there is a continuation or worsening of the downturn.  Although we have programs in place that are designed to monitor and mitigate the associated risk, including monitoring of particular risks in certain geographic areas, there can be no assurance that such programs will be effective in reducing our credit risks.





In the past, there have been bankruptcies among customers, causing us to incur economic or financial losses.  There can be no assurance that additional losses will not be incurred.  Future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition.  Additionally, to the degree that the ongoing turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers’ ability to pay could be adversely impacted, which, in turn, could have a material adverse impact on our business, operating results and financial condition.





In addition, our ability to borrow under our primary revolving credit facility and to incur additional indebtedness is subject to limits based on a percentage of our outstanding accounts receivable.  A decrease in accounts receivable resulting from an increase in bad debt expense could adversely affect our liquidity.





If we are unable to compete effectively in our industry, our operating results may suffer.





The markets in which we compete are highly competitive.  As a result, we face a variety of significant challenges, including rapid technological advances, price erosion, changing customer preferences and evolving industry standards.  Our competitors continue to offer products with improved price and performance characteristics, and we will have to do the same in order to remain competitive.  Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share, any of which would have a material adverse effect on our business.  We cannot be certain that we will be able to compete successfully in the future.





We compete for customer relationships with numerous local, regional, national and international distributors.  We also compete for customer relationships with suppliers, including some of our own suppliers and customers.  We believe our most significant competition for customers seeking both products and services arises from Arrow, Avnet, SYNNEX and Magirus.  We believe our most significant competition for customers seeking only products arises from Ingram Micro, Tech Data, Actebis and Intcomex.  We also compete with regionalized distributors in North America, Europe and Latin America who use their localized knowledge and focused product expertise as a competitive advantage.  Some of our competitors have superior brand recognition and greater financial resources than we do, which may enable them to increase their market share at our expense.  If we are unable to compete successfully, our operating results may suffer.





- 19 -


We also compete with other distributors for relationships with suppliers.  In recent years, a growing number of suppliers have begun consolidating the number of distributors they use.  This consolidation could result in fewer major distributors in our industry.  As a result of this consolidation, we may lose relationships with one or more existing suppliers.  In addition, suppliers have established, and may continue to establish, cooperative relationships with other suppliers and data storage solution providers.  These cooperative relationships may enable suppliers to offer comprehensive solutions that compete with those we offer and the suppliers may have greater resources to devote to sales and marketing efforts.  If we are unable to maintain our relationships with existing suppliers and not establish new relationships, it could harm our competitive position and adversely affect our operating results.





Our lack of long-term agreements with our customers could have a material adverse effect on our business.





Most of our sales are made on an order-by-order basis, rather than under long-term sales agreements.  We make commitments to our suppliers based on our forecasts of future demand.  A variety of conditions, both those specific to our customers and those generally affecting the economy in the markets in which we operate, may cause our customers to cancel, reduce or delay purchase orders that were previously made or anticipated.  Generally, customers can cancel, reduce or delay purchase orders and commitments without penalty.  We seek to mitigate these risks, in some cases, by entering into sales agreements that prohibit order cancellations and product returns.  However, we cannot assure you that these agreements will adequately protect us or that the customer will honor the agreement.  A significant number of cancellations, reductions or delays in orders by customers could materially adversely affect our business.





Failure to identify acquisition opportunities or to successfully integrate acquired businesses into our operations could reduce our revenues and profits and limit our growth.





Historically, a substantial part of our growth has been achieved through the acquisition of complementary businesses.  An important component of our strategy is to continue to pursue selective acquisitions to develop and expand our business.  In the past several years, our ability to pursue acquisition opportunities has been significantly impacted by the issues relating to the restatement of our consolidated financial statements.  Our identification of suitable acquisition candidates involves risks inherent in assessing the value, strengths, weaknesses, overall risks and profitability of acquisition candidates.  We may be unable to identify suitable acquisition candidates in the future.  If we do not make suitable acquisitions, we may find it more difficult to realize our growth objectives.





The process of integrating new businesses into our operations poses numerous risks, including:





•
an inability to integrate acquired operations, accounting systems and processes, information systems and internal control systems;





•
exposure to unanticipated contingent liabilities of acquired companies;





•
use of substantial portions of our available cash to consummate an acquisition and/or to operate the acquired business;





•
diversion of management’s attention;





•
difficulties and uncertainties in transitioning the business relationships from the acquired entity to us;





•
the loss of key supplier relationships upon a change of ownership of the acquired business; and





•
the loss of key employees of acquired companies, which could lead to a loss of customers or supplier relationships.





In addition, future acquisitions may be dilutive to our shareholders, cause us to incur additional indebtedness and/or large one-time expenses and/or create intangible assets that could result in significant amortization expense.  If we expend significant amounts of cash or incur additional debt, our liquidity may decline and we may be more vulnerable to economic downturns and competitive pressures.  We cannot assure you that we will be able to successfully complete any future acquisitions, that we will be able to finance acquisitions or that we will realize any anticipated benefits from any acquisitions that we do complete.





- 20 -


Our geographic coverage on the European continent is not as extensive as some of our competitors, which may lead manufacturers to select our competitors over us as their distributor.





Our geographic coverage on the European continent is not as extensive as some of our competitors.  Manufacturers use a variety of criteria to select their distributors, whether for new products or in the event of distributor consolidation.  Our smaller geographic coverage as compared to some of our competitors may cause manufacturers to select our competitors as their distributors rather than us, which could have an adverse impact on our operations.





The current economic downturn has adversely affected customer spending patterns, which has affected our business and results of operations and may have further adverse effects on our business.





The disruptions in the financial markets and challenging economic conditions have adversely affected the United States and world economy and, in particular, have reduced consumer and business spending.  Turmoil in global credit markets and recent turmoil in the geopolitical environment in many parts of the world, as well as other disruptions, such as changes in energy costs, are and may continue to put pressure on the global economy.  Our operating results in one or more segments may also be affected by uncertain or changing economic conditions particularly germane to that segment or to particular customer markets within that segment.  If our customers delay or cancel spending on their IT infrastructure, that decision could result in reductions in sales of our products, longer sales cycles and increased price competition.  There can be no assurances that government responses to the disruptions in the financial markets will restore spending to previous levels.  If global economic and market conditions, or economic conditions in the United States or other key markets, remain uncertain or persist, spread, or deteriorate further, we may experience material impacts on our business, operating results and financial condition.





Our geographic reach requires that we have a significant amount of intercompany sales across international borders, which subject us to the risk that the transfer pricing between our subsidiaries will be subject to review by the local taxing authorities.  A finding by the local taxing authorities that our transfer pricing is inadequate could subject us to significant liability.





We sell a significant amount of product to our local subsidiaries at a cost we believe is fair and reasonable based on the cost of the product plus a reasonable margin.  Because these sales are significant, the sales are subject to review by local taxing authorities who may claim that we transferred the goods at a cost that is below that which is fair or reasonable.  If we are subject to review, we may incur significant costs participating in and responding to such an investigation.  In addition, if it is determined that we did not adequately set the transfer prices between our cross-border subsidiaries, we may be subject to tax assessments that could be significant and adversely impact our results of operations.





Some of our operations are located in areas that are subject to natural disasters that could result in a business stoppage and adversely affect our results of operations.





Our operations depend on our ability to maintain and protect our facilities, computer systems and personnel.  Our corporate headquarters, including some of our business operations, computer systems and personnel, are located in the San Francisco Bay Area, which is in close proximity to known earthquake faults.  In addition, a substantial portion of our IT infrastructure is located in Montgomery, Alabama, which is susceptible to tornados and hurricanes.  Our backup systems only reside locally for each IT system.  An earthquake or other catastrophe, communication failure or similar event, that disables our facilities, requiring transportation of electronic backup media to an unaffected location, or that impairs the transportation of our employees and causes a business interruption, may have an adverse effect on our results of operations.





Our business model requires us to hold inventory in a number of different locations, both internationally and domestically, which makes us susceptible to inventory theft.





We hold inventory of expensive high technology products in reasonable proximity to our customers around the world.  From time to time in the past, we have experienced inventory theft, both in the United States and abroad.  While we have safeguards in place to protect against theft, theft continues to occur.  In addition, we purchase insurance to cover potential theft; however, the insurance policies require payment of high deductibles and may not cover every situation.  If we were to experience a significant loss of inventory due to theft, it could have an adverse effect on our results of operations and financial condition.





- 21 -


We operate in a number of jurisdictions and some of our personnel travel extensively, which may subject our employees to contagious airborne pathogens, including the H1N1 influenza virus or “swine flu.”





We operate in a number of jurisdictions, including a number of countries in Latin America.  Our personnel also travel extensively by air and other modes of common commercial transportation.  If a significant number of our personnel were to become exposed to one or more contagious pathogens, including the H1N1 influenza virus, or if one or more of the countries we operate in experiences a significant quarantine, our ability to sell products to our customers could be negatively affected, which could have an adverse impact on our results of operations.





Risks Related to Our Common Stock





The price of our common stock has been volatile in the past and may continue to be volatile in the future, which could cause the value of an investment in our common stock to decline.





From January 1, 2009 through March 25, 2010, the high and low sales prices of our common stock were $5.55 and $0.36, respectively.  The market price of our common stock may continue to fluctuate substantially in the future in response to a number of factors, including:





•
fluctuations in our quarterly operating results or the operating results of our competitors;





•
continued operating losses or the inability to generate positive cash flows;





•
changes in general conditions in the economy, the financial markets or our industry;





•
the ability to timely file future consolidated financial statements;





•
the ability to remediate identified material weaknesses;





•
announcements of significant acquisitions, strategic alliances or joint ventures by our customers or our competitors; and





•
other developments affecting us, our industry, suppliers, customers or competitors.





The stock market has recently experienced extreme price and volume fluctuations.  This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance.  These broad market fluctuations may materially adversely affect the market price of our common stock, regardless of our operating results.  In addition, as a result of its small public float and limited trading volume, our common stock may be more susceptible to volatility arising from any of these factors.





Item 1B.                     Unresolved Staff Comments





None.





Item 2.              Properties





North America.In North America, our corporate headquarters is located in San Jose, California and we occupy approximately 77,000 square feet of leased office space for that purpose under two operating leases.  The current terms of these leases expire on September 30, 2010.  In addition, in our North America segment, we occupy approximately 11 sales offices that we lease pursuant to leases that expire through 2012, aggregating approximately 34,000 square feet.  We also occupy two integration and service centers and three warehouses in San Jose, California, New Castle, Delaware and Elk Grove Village, Illinois, all of which together comprise approximately 218,000 square feet pursuant to leases that expire through 2011.  We also maintain an approximately 27,000 square foot leased facility in Montgomery, Alabama, housing our corporate IT, data center and primary call center.  The lease for this facility expires in November 2012.





- 22 -


In connection with our acquisition of ProSys in October 2006, we added approximately 33,000 square feet of office space and approximately 60,000 square feet of warehouse space located near Atlanta, Georgia.  These leases expire in January 2024 and November 2025, respectively.  Our ProSys segment is also supported by four additional office space leases and a 32,500 square foot facility located in Kentucky, which expire in 2010.





Our TotalTec operation, which is included in our Other segment, is supported by two office space leases in New Jersey and Florida, comprising 72,000 square feet in leases that expire at various dates through 2012.





Our Canada operation, which is included in our North America segment, operates in three office and warehouse facilities in Quebec, British Columbia and Ontario, totaling 21,000 square feet under leases expiring through 2014.





The Rorke Data operation, which is included in our Other segment, maintains a 46,000 square foot facility in Eden Prairie, Minnesota under a lease that expires in 2014.





Latin America.Our Latin America group leases its headquarters in Doral, Florida.  The lease for this facility expires in 2014 and is related to our Latin America segment.  Throughout Latin America, we occupy 20 sales offices and distribution facilities totaling approximately 123,000 square feet.





Europe.Our European group maintains its headquarters, comprised of approximately 38,000 square feet of leased office space, in Chessington, England.  The lease for this facility expires in December 2010.  Our European group also leases approximately 55,000 square feet of unused warehouse space in Chessington pursuant to a lease that also expires in December 2010.  We maintain a distribution center in Birmingham, England, comprised of approximately 126,000 square feet of space under a lease that expires in 2019, which we currently utilize at 60% of capacity.  Our value-added storage and solutions business servicing the United Kingdom and Ireland occupies approximately 23,000 square feet in Haslingden, England, in premises we own.  We also maintain approximately 16,500 square feet of additional office and warehouse spaces under leases that terminate through 2019.  We also maintain a sales office located in Neubiberg, Germany comprising of approximately 18,500 square feet under a lease that will expire in 2012, as well as other sales offices in Germany, totaling 3,330 square feet, under leases expiring through 2010.  Our Continental European distribution center was relocated into a larger facility in Poing, Germany in August 2007, comprising approximately 93,000 square feet.  The lease for this facility will expire in July 2012.  We lease approximately 31,000 square feet of office and warehouse space in Almere and Hoogeveen, Netherlands, under leases expiring through 2014.  We also occupy sales offices in Belgium, France and Spain comprising approximately 12,000 square feet under leases that expire through 2015.  These properties are used by the Europe segment.





We believe that our existing facilities are suitable and adequate for our current operational needs.





Item 3.              Legal Proceedings





We are involved in various claims, suits, investigations and legal proceedings that arise from time to time in the ordinary course of our business.  The following is a discussion of our significant legal matters.





On June 4, 2008, our export subsidiary in the United Kingdom received notification from the Direction Générale des Finances Publiques that the French tax authorities were proposing to issue a tax deficiency notice against our export subsidiary for failure to pay value-added tax and corporate income tax in France during the period of January 1, 2002 to December 31, 2006.  Subsequently, the French tax authorities issued a tax assessment against our U.K. export subsidiary.  We requested a review of the assessment by the French central tax administration, which has discretionary power to review and modify tax assessments.  In a letter dated March 11, 2010, the French central tax administration informed us of its decision to cancel the value-added tax assessment, including interest and penalties, but maintain the corporate income tax assessment, including interest and penalties.  As a result, we expect to receive an amended tax assessment reflecting the decision of the French central tax administration.  Based upon the letter from the French central tax administration, we believe that the tax assessment, including interest and penalties, should be reduced to approximately €1.1 million ($1.6 million at an exchange rate of $1.43/€1.00 as of December 31, 2009).  We are evaluating our position with respect to the corporate income tax assessment and presently intend to avail ourselves of all available defenses.





- 23 -


On December 29, 2008, John R. Campbell, who alleges he is one of our shareholders, caused a purported shareholder’s derivative lawsuit to be filed in the Superior Court of California for the County of San Mateo, naming us as a nominal defendant, and naming 17 of our current and former officers and directors as defendants.  The lawsuit seeks to recover unspecified damages purportedly sustained by us in connection with our historical stock option granting practices.  Subject to certain limitations, we are obligated to indemnify our current and former officers and directors in connection with the investigation of our historical stock option practices and such lawsuits.  During 2009, two of our former officers were dismissed from the lawsuit.  Although the matter is in its preliminary stages and we have procured insurance coverage for these types of claims, the expense for us to defend this lawsuit may be significant.





Item 4.             [Removed and Reserved]





PART II





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





Prior to March 19, 2008, our common stock traded on the NASDAQ Global Market under the symbol “BELM.”  Effective March 19, 2008, our common stock was suspended from trading on the NASDAQ Global Market and traded on the Pink OTC Market, or Pink Sheets, under the symbol “BELM.PK.”  Our common stock traded primarily on the OTC Bulletin Board, under the symbol “BELM.OB,” from October 2009 until January 25, 2010, when our common stock was relisted on the NASDAQ Global Market under the symbol “BELM.”





The following table sets forth the high and low sale prices of our common stock as reported by the NASDAQ Global Market prior to March 19, 2008 for each of the periods indicated, and the high and low bid quotations for our common stock as reported by Pink Sheets or OTC Bulletin Board on and after March 19, 2008, for each of the periods indicated.  The over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent transactions.





High


Low2008First quarter

$
6.60


$
1.51Second quarter


3.05



1.92Third quarter


2.50



1.31Fourth quarter


1.95



0.272009First quarter

$
1.04


$
0.36Second quarter


1.21



0.45Third quarter


3.67



1.10Fourth quarter


3.65



2.75





The graph below shows the cumulative five-year total return to holders of Bell Microproducts Inc. common stock compared to the cumulative total returns of the S&P 500 index and the NYSE Arca Tech 100 index.  The graph assumes an investment of $100 in our common stock and in each of the indices (including reinvestment of dividends) on December 31, 2004.






- 24 -












December 31,2004


2005


2006


2007


2008


2009Bell Microproducts Inc.


100.00



79.52



73.28



62.47



6.24



36.90S&P 500


100.00



104.91



121.48



128.16



80.74



102.11NYSE Arca Tech 100


100.00



116.54



131.47



198.57



123.61



126.01








The stock price performance included in this graph is not necessarily indicative of future stock price performance.





As of March 25, 2010, there were approximately 331 holders of record of our common stock.





We have never paid cash dividends to our shareholders and we do not plan to do so in the future.  Our line of credit agreements prohibit the payment of dividends or other distributions on any of our shares except dividends payable in our capital stock.





- 25 -





Item 6.             Selected Financial Data





The following selected consolidated financial data as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007, respectively, are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K/A.  The selected consolidated financial data as of December 31, 2007, 2006 and 2005 and for the years ended December 31, 2006 and 2005 are derived from our audited consolidated financial statements not contained herein.  The historical results do not necessarily indicate results to be expected for any future period.





Five-Year Selected Financial Highlights:





Years Ended December 31,2009(1)(2)(3)


2008(1)(2)(3)


2007(1)(2)(3)


2006(1)(2)(3)


2005(2)(3)(in thousands, except per share data)Consolidated Statements of Operations Data:Net sales

$
3,021,167


$
3,579,499


$
3,949,905


$
3,372,876


$
3,139,250Cost of sales


2,725,127



3,244,053



3,609,362



3,098,135



2,923,476Gross profit


296,040



335,446



340,543



274,741



215,774Selling, general and administrative expense


226,329



302,416



297,483



233,985



193,787Professional fees (4)


26,129



56,763



22,625



5,830



4,236Impairment of goodwill and other intangibles


—



5,864



52,445



3,477



7,296Restructuring and impairment costs


3,795



4,289



1,404



—



1,275Total operating expenses


256,253



369,332



373,957



243,292



206,594Operating income (loss)


39,787



(33,886
)


(33,414
)


31,449



9,180Interest expense, net


33,097



37,544



40,797



35,171



27,108Other expense (income), net


(2,121
)


10,509



(2,426
)


(2,848
)


1,373Income (loss) before income taxes


8,811



(81,939
)


(71,785
)


(874
)


(19,301
)Provision for (benefit from) income taxes


1,289



527



6,961



27,948



(766
)Net income (loss)

$
7,522


$
(82,466
)

$
(78,746
)

$
(28,822
)

$
(18,535
)Net income (loss) per share:Basic

$
0.24


$
(2.55
)

$
(2.44
)

$
(0.94
)

$
(0.63
)Diluted

$
0.23


$
(2.55
)

$
(2.44
)

$
(0.94
)

$
(0.63
)Shares used in per share calculation:Basic


31,859



32,299



32,248



30,772



29,299Diluted


32,595



32,299



32,248



30,772



29,299





(1)
Includes the results of operations of ProSys Information Systems since the acquisition of substantially all of its assets on October 2, 2006.(2)
Includes the results of operations of MCE Group since its acquisition on December 1, 2005 and Net Storage since its acquisition on July 8, 2005.(3)
Adjusted for the retrospective adoption of Financial Accounting Standards Board (“FASB”) ASC 470-20,  Debt with Conversion and Other Options (“ASC 470-20”) (formerly FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”)).  See Note 2, “Summary of Significant Accounting Policies” to our Consolidated Financial Statements included elsewhere in this Form 10-K/A.(4)
Professional fees represent fees for audit, legal, tax and outside accounting advisory services.





As of December 31,2009


2008(1)


2007(1)


2006(1)


2005(1)(In thousands)Consolidated Balance Sheet DataWorking capital

$
152,330


$
117,093


$
196,267


$
220,113


$
216,353Goodwill


21,456



19,211



26,214



69,161



51,931Total assets


856,976



782,126



1,111,572



1,056,675



887,706Long-term debt


159,494



161,063



129,334



131,718



102,454Shareholders’ equity


31,832



5,700



125,286



197,594



179,863





(1)
Adjusted for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other Options.See Note 2, “Summary of Significant Accounting Policies” to our Consolidated Financial Statements included elsewhere in this Form 10-K/A.





- 26 -


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





SPECIAL NOTE:  This section, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are based on our current expectations.  Actual results in future periods may differ materially from those expressed or implied by those forward-looking statements because of a number of risks and uncertainties.  For a discussion of some of the factors that may affect our business and prospects, see Part 1 — Item 1A — Risk Factors.





Credit Agreement Covenants and Consolidated Financial Statement Presentation





Our audited consolidated financial statements included in this Annual Report on Form 10-K/A have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business.  Our ability to continue as a going concern is dependent upon, among other factors, continuing to generate positive cash flows from operations, maintaining compliance with the provisions of our existing credit agreements and, when necessary, our ability to renew such agreements and/or obtain alternative or additional financing.  Our compliance with the provisions of our existing credit agreements and our ability to obtain alternative or additional financing when needed are an important part of our ability to continue as a going concern.





Our credit agreements currently include a number of financial covenants:





·
U.S. Operations.  Our agreement with Wachovia Capital Finance Corporation (Western) (the “Western Facility”) and the other lenders named therein and the credit agreements related to our 9% Senior Subordinated Notes payable to the Retirement Systems of Alabama (“RSA”), principally financing our U.S. operations, require that we satisfy several covenants, including a minimum fixed-charge coverage ratio that requires us to have earnings before interest, income taxes, depreciation, amortization and restructuring charges (“EBITDA”) greater than or equal to a specified percentage of the payments we make for income taxes, interest, capital expenditures and principal payments.  We were required to, and did, satisfy the fixed-charge coverage ratio for the three-month periods ended March 31, 2009, June 30, 2009 and September 30, 2009 based upon a ratio of 35%, 75% and 110%, respectively.  The measurement period extends to two quarters ending December 31, 2009, three quarters ending March 31, 2010, and the 12-month period ending on the last day of each subsequent fiscal quarter, each based upon a ratio of 110%.  We satisfied the fixed-charge coverage ratio as of December 31, 2009, and all other required covenants and currently expect to satisfy the ratio and all other covenants under this agreement as of March 31, 2010 and for at least the next twelve months.  At January 31 and February 28, 2010, we were not in compliance with an intercompany receivable limitation, and at December 31, 2009 we were not in compliance with a cross-default provision due to a breach of the GE Commercial Distribution Finance Corporation agreement as described below.  We obtained a waiver from the Western Facility lenders in March 2010 regarding such non-compliance.  In addition, the lack of compliance under the Western Facility triggered the cross-default provisions under the notes payable to the RSA, and we obtained a waiver of such non-compliance from the RSA in March 2010.





·
European Operations.  Our agreement with Bank of America, N.A. and the other lenders named therein, principally financing our European operations, requires that we maintain a minimum aggregate quarterly tangible net worth of £26.9 million ($43.6 million using the exchange rate on December 31, 2009 of $1.62/£1.00) for certain of our European subsidiaries.  Through December 31, 2009, we were not in compliance with this covenant due to the exclusion of certain assets in our calculation.  In March 2010, we obtained a waiver of this non-compliance for all prior periods. In addition, the agreement was amended to permit inclusion of intercompany receivables in all future calculations of the minimum aggregate tangible net worth covenant.  We expect to satisfy all covenants under this agreement for at least the next twelve months.





·
ProSys Operations.  Our agreement with GE Commercial Distribution Finance Corporation requires our ProSys subsidiary to maintain its combined tangible net worth and subordinated debt of not less than $9 million, a ratio of funded debt to earnings before interest, taxes, depreciation and amortization for the 12-month period ending on the last day of each fiscal quarter of not more than four-to-one (4:1), and a fixed-charge coverage ratio for the 12-month period ending on the last day of such fiscal quarter of not less than one-and-one-half-to-one (1.5:1).  As of December 31, 2009, we were not in compliance with the tangible net worth and subordinated debt provision of this agreement.  Additionally, there is a cross-default provision in this agreement that was triggered by the breaches in the Western Facility on January 31 and February 28, 2010, as described above.  In March 2010, we obtained a waiver of such non-compliance.  We expect to satisfy all covenants under this agreement for at least the next twelve months.





- 27 -


Further, our credit agreements contain certain non-financial covenants, such as restrictions on the incurrence of debt liens, mergers, acquisitions, asset dispositions, capital contributions, payment of dividends, repurchases of stock and investments, as well as a requirement that we provide audited consolidated financial statements to lenders within a prescribed time period after the close of our fiscal year.





We presently believe we will be able to maintain compliance with all of our debt covenants for at least the next twelve months.





We currently have substantial outstanding debt obligations that could become payable through the first quarter of 2011, including the following:




·
The Western Facility expires on September 20, 2010, but is automatically extended for one year unless we receive written notice of termination 60 days prior to that date.  This facility provides availability of up to $153 million, as amended on February 3, 2010, of which approximately $70 million was outstanding at December 31, 2009.




·
Our convertible subordinated notes, in the aggregate principal amount of $110 million, include a provision under which the holders have the right to require us to repurchase for cash all or a portion of the notes at face value on March 5, 2011.





We are currently negotiating an extension of the Western Facility.  Our ability to negotiate an extended or replacement revolving line of credit will likely be impacted by the redemption provisions of our convertible subordinated notes and our ability to successfully complete a restructuring of those provisions.  We believe we will be able to successfully negotiate an extension of the Western Facility and renegotiate the terms of the convertible subordinated notes, or obtain alternative or additional financing, if needed.





Alternative or additional financings could result in existing shareholders experiencing significant dilution, and we may issue new equity securities with rights, preferences or privileges senior to those of existing holders of our common stock.  Further, a renegotiation of the terms of the notes or an alternate or additional financing could be dilutive to future earnings per share.  Should we be unsuccessful in negotiating an extended or replacement revolving line of credit when necessary, or either obtaining necessary funds to redeem the convertible subordinated notes or renegotiating the terms of a refinancing with the current note holders, including obtaining the necessary approvals from senior lenders, we would be in default of the terms of our debt agreements which would constitute a cross-default under most of our other debt arrangements.  If those defaults should occur and we were unable to negotiate cures: (1) our lenders could declare all outstanding principal and interest to be due and payable and certain cross-default provisions under other credit arrangements would be triggered; or (2) our lenders could terminate their commitments to loan us money and foreclose against the assets securing their borrowings.  Should these events occur, there would be uncertainty regarding our ability to continue as a going concern.





In the future, if we fail to satisfy any of the covenants in our credit agreements and are unable to obtain waivers or amendments, the lenders could declare a default under our credit agreements.  Any default under our credit agreements would allow the lenders under these agreements the option to demand repayment of the indebtedness outstanding under the applicable credit agreements, and would allow certain other lenders to exercise their rights and remedies under their respective cross-default provisions.  If these lenders were to exercise their rights to accelerate the indebtedness outstanding, there can be no assurance that we would be able to refinance or otherwise repay any amounts that may become accelerated under the agreements.  The acceleration of a significant portion of our indebtedness would have a material adverse effect on our business, liquidity and financial condition.  Given our existing financial condition and current conditions in the global credit markets, should these events occur, there would be uncertainty regarding our ability to continue as a going concern.  See Liquidity and Capital Resources for additional information.





Critical Accounting Policies and Estimates





Management is required to make judgments, assumptions and estimates that affect the amounts reported when we prepare consolidated financial statements and related disclosures in conformity with generally accepted accounting principles in the United States.  Note 2— Summary of Significant Accounting Policies in our notes to the consolidated financial statements included in this Annual Report on Form 10-K/A describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.  The following critical accounting policies require significant judgments regarding assumptions and estimates used in the preparation of our consolidated financial statements.  Actual results could differ from these estimates.





- 28 -


For additional information regarding our accounting policies, see Note 2 – Summary of Significant Accounting Policies inour notes to the consolidated financial statements included in this Annual Report on Form 10-K/A.





Revenue Recognition





We recognize product revenue when the following conditions are met:  (i) we have received a firm customer order, (ii) the goods have been shipped and title and risk of loss have passed to the buyer, (iii) the price to the buyer is fixed or determinable and (iv) collectability is reasonably assured.  Revenue is recorded net of estimated discounts, rebates and estimated returns.  We recognize service revenue as the services are performed, and the related costs are expensed as incurred.  If installation is essential to the functionality of the product, then product and service revenue is deferred until the service is completed.  Determining whether each of the conditions has been met requires the application of judgment and estimates, such as, with respect to collectability.  If our judgment or estimates are not correct, we may have to defer certain revenues or reserve certain receivables, which would reduce our sales and cost of sales or increase our operating expenses.





Certain customer arrangements require us to record our net profit as a component of revenue (essentially as an agent fee) rather than recording the gross amount of the sale and related cost.  We are required to use our best judgment in determining the application of the criteria to the facts of each situation.  If our judgments change in the future, such changes may have a significant impact on our reported sales and cost of sales.





We enter into multiple-element revenue arrangements, which may include any combination of services, extended warranty and hardware.  If the required criteria are met for each element of the arrangement and there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value.  If these criteria are not met, product and service revenue is deferred and recognized upon delivery of the undelivered items.  Determining whether each of the conditions has been met requires the application of judgment and estimates, such as, with respect to collectability.  If our judgment or estimates are not correct, we may have to defer certain revenues or reserve certain receivables, which would decrease our sales and cost of sales or increase our operating expenses.





Shipping and handling costs charged to customers are included in net sales and the associated expense is recorded in cost of sales for all periods, which may not be comparable to other companies’ presentations.





Accounts Receivable and Allowance for Doubtful Accounts





We evaluate the collectability of our accounts receivable based on a combination of factors.  When we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations to us, we record a specific allowance against amounts due to us and thereby reduce the net receivable to the amount we reasonably believe is likely to be collected.  If the financial condition of our customers deteriorates or if economic conditions worsen, additional allowances may be required.  Historically, our estimates of the allowance for doubtful accounts have not deviated significantly from actual write-offs.  If an additional 0.2% to 0.5% of our accounts receivable were determined to be uncollectible at December 31, 2009, then our 2009 operating income from continuing operations before income taxes would have decreased by $0.9 million to $2.3 million.





Customer credits pertaining to price protection programs, rebate programs, promotions and product returns are recorded to offset customer receivables.  When applicable, credits are extinguished when a customer applies them to its related receivable or we are legally released from being the primary obligor under the liability.





Inventories





Inventories are stated at the lower of cost or market.  Cost is generally determined by the first-in, first-out (“FIFO”) method.  Market is based on estimated net realizable value.  We assess the valuation of our inventory on a quarterly basis and periodically write down the value for estimated excess and obsolete inventory based on estimates about future demand, actual usage and current market value.  Once inventory is written down, a new cost basis is established.  If an additional 0.2% to 0.5% of our inventory were determined to be excess or obsolete at December 31, 2009, then our 2009 gross profit and operating income from continuing operations before income taxes would have decreased by $0.6 million to $1.6 million, respectively.





- 29 -


Stock-Based Compensation





We recognize initial stock-based compensation expense for stock-based awards made to employees and directors based on estimated fair values on the date of grant, net of an estimated forfeiture rate.  Compensation expense for stock options and non-performance based restricted stock units (“RSUs”) granted after December 31, 2005 is recognized over the requisite service period of the award on a straight-line basis.  Compensation expense for all non-performance based RSUs granted on or prior to December 31, 2005 is recognized using the accelerated multiple-option approach.  Compensation expense for performance-based RSUs is recognized using the accelerated multiple option method based upon the fair value of the underlying shares on the vesting date.  Forfeiture rates used in the determination of compensation expense are revised in subsequent periods if actual forfeitures differ from estimates.





We utilize the Black-Scholes option pricing model for determining the estimated fair value for stock options.  The Black-Scholes valuation calculation requires us to estimate key assumptions, such as future stock price volatility, expected terms, risk-free rates and dividend yield.  We also estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly.  The estimate of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates.  Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change, and the amount of stock compensation expense recognized in future periods is adjusted.  The fair values of RSUs equal their intrinsic value on the date of grant.





The following table summarizes the variables used in determining fair values of awards granted during the three years in the period ended December 31, 2009:





2009


2008


2007Volatility *


90.1
%


41.4
%


42.3
%Expected term (in years) **


3.49



3.56



3.49Risk-free interest rate ***


1.4
%


2.3
%


4.2
%





*
Volatility is measured using historical daily price changes of our common stock over the expected term of the option.


**
The expected term represents the weighted average period the option is expected to be outstanding and is based on the historical exercise behavior of employees.


***
The risk-free interest rate is based on the U.S. Treasury zero-coupon yield with a maturity that approximates the expected term of the option.





Accounting for Income Taxes





The provision for income taxes and recognition of tax benefits involves uncertainties and numerous evaluations and judgments in the interpretation of complex tax regulations by various taxing authorities.  In situations involving uncertain tax positions related to income tax matters, we do not recognize a benefit unless we believe that it is more likely than not that our tax position will be sustained.  As additional information becomes available, or these uncertainties are resolved with the taxing authorities, revisions to these liabilities or benefits may be required, resulting in additional provision for or benefit from income taxes reflected in our consolidated statement of operations.





In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located.  When we assess the likelihood of realizing our deferred tax assets, we consider all available evidence, both positive and negative, including historical levels of income, future market growth, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies.  When we are unable to conclude that it is more likely than not that we will realize all or part of our net deferred tax assets in the future, a valuation allowance is provided against the deferred tax assets in the period in which we make such a determination.  The most significant and objective negative evidence requiring us to record a valuation allowance is cumulative losses in recent years.  Projected losses in future years, while representing less objective, negative evidence, are also considered.  Conversely, positive evidence includes historical and future sources of taxable income, as well as prudent and feasible tax planning strategies.  We exercise significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets.  To the extent that our judgment is not correct, we adjust our valuation allowances, resulting in a tax provision or benefit to our income statement in the period that the adjustment is made.





- 30 -


In 2009 and 2008, we recorded valuation allowances on deferred tax assets in a number of tax jurisdictions, the most significant of which were the U.S., The Netherlands and Germany.  The valuation allowances against the deferred tax assets in these jurisdictions were generally recorded based upon the full deferred tax assets recorded, less any amounts considered realizable due to loss carryback claims.  The most significant tax jurisdictions with deferred tax assets and no valuation allowance included the U.K. and Brazil.  We adjusted our valuation allowance against the deferred tax assets in the United States in the fourth quarter of 2009 to properly reflect the net deferred tax asset that is more likely than not to be realized.  The adjustment reduced the valuation allowance and recorded an income tax benefit of $5.8 million in the fourth quarter of 2009, $2.4 million of which represents an immaterial out of period adjustment associated with the prior year as it was determined that the valuation allowance was not required as a liability had been previously established to offset certain deferred tax assets.  Overall, amounts recorded for deferred tax assets, net of valuation allowance, were $12.3 million and $7.1 million at December 31, 2009 and 2008, respectively.





Through December 31, 2009, we have not provided for U.S. income taxes for undistributed earnings from foreign subsidiaries as it is currently our intention to reinvest these earnings indefinitely in operations outside the U.S.  The Company believes it is not practicable to determine the Company’s tax liability that may arise in the event of a future repatriation.  If repatriated, these earnings could result in a tax expense at the current U.S. Federal statutory tax rate of 35%, subject to available net operating losses and other factors.  Subject to limitation, tax on undistributed earnings may also be reduced by foreign tax credits that may be generated in connection with the repatriation of earnings.





The amount of income tax we pay is subject to audits by U.S. Federal, state and foreign tax authorities, which may result in proposed assessments.  Our estimate of the potential outcome for any uncertain tax position requires significant judgment.  We believe we have adequately provided for any reasonably foreseeable outcome related to these matters.  However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.  Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates.  As a result, our effective tax rate in future periods may fluctuate significantly.





We evaluate our uncertain tax positions in accordance with the guidance for accounting for uncertainty in income taxes.  The amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our future tax provisions, net income and cash flows.  Our reserve for uncertain tax positions is attributable primarily to uncertainties concerning the tax treatment of our international operations, including the allocation of income among different jurisdictions, and related interest.  We review our reserves quarterly, and we may adjust such reserves because of proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable information obtained during the course of an examination, negotiations between tax authorities of different countries concerning our transfer prices, resolution with respect to individual audit issues, the resolution of entire audits, or the expiration of statues of limitations.  Our overall uncertain tax position amounts recorded at December 31, 2009 and 2008 were $9.9 million and $14.1 million, respectively.  The decrease was primarily due to the reduction of deemed dividend exposure and the expiration of the statutes of limitation of various uncertain tax positions, offset by certain accrued interest and penalties.





Goodwill, Intangible Assets and Other Long-Lived Assets





We apply the provisions of FASB’s Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other(“ASC 350”) in our evaluation of goodwill and other intangible assets.  ASC 350 eliminates the requirement to amortize goodwill, but requires that goodwill be reviewed at least annually for potential impairment.





At December 31, 2009 and 2008, we performed our annual goodwill impairment test.  In performing this test and determining the appropriate goodwill impairment charge, management considered, in part, a valuation prepared by an independent valuation advisor.





Effective March 19, 2008, our common stock was suspended from trading on the NASDAQ Global Market.  Consequently, in the first quarter of 2008, we experienced a significant decline in the market value of our stock.  As a result, our market capitalization was significantly lower than our book value and we believed that this was an indicator of potential impairment of our goodwill and therefore a goodwill impairment test was performed with all reporting units passing the first step of the two-step process described below.





- 31 -


In accordance with ASC 350, we used the required two-step process to test goodwill for impairment.  The first step is to determine if there is an indication of impairment by comparing the estimated fair value of each reporting unit to its carrying value including existing goodwill.  ASC 350 states that the reporting unit is considered as an operating segment or one level below an operating segment (i.e., a component of an operating segment).  A component of an operating segment can be a reporting unit if the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component.  ASC 350 provides that two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics.





During the fourth quarter of 2008, the chief operating decision maker (“CODM”) started to review financial information differently, which resulted in a change in operating segments.  The change in operating segment determination required us to re-evaluate our historical ASC 350 assumption of 11 reporting units for goodwill impairment analysis used at December 31, 2007 and March 31, 2008, and we determined that we had 10 reporting units at December 31, 2008.  In 2009, the CODM further changed the segments included in his review of our financial information, which resulted in operating segments in 2009 consisting of North America, Latin America, Europe, ProSys, Rorke and Total Tec, and the Company making the determination that we had nine reporting units at December 31, 2009.





Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value.  We utilized a combination of income and market approaches to estimate the fair value of our reporting units in the first step.  In our analysis, we weighted the income and market approaches 75% and 25%, respectively.





The income approach utilizes estimates of discounted cash flows of the reporting units, which requires assumptions of, among other factors, the reporting units’ expected long-term revenue trends, as well as estimates of profitability, changes in working capital and long-term discount rates, all of which require significant judgment.  The income approach also requires the use of appropriate discount rates that take into account the current risks in the capital markets.  The market approach evaluates comparative market multiples applied to our reporting units’ businesses to yield a second estimated fair value of each reporting unit.





We compared the fair value of each reporting unit to its carrying value including existing goodwill at December 31, 2009 and since there was no indication of impairment, it was not necessary to perform the second step of the impairment analysis and therefore, no goodwill impairment charge was recorded.  At December 31, 2008, these tests yielded an indication of impairment in each of the TotalTec and Net Storage Brazil reporting units and the Europe and ProSys reporting units at December 31, 2007.  We also compared the aggregate of the estimated fair values of our reporting units to our overall market capitalization, taking into account an acceptable control premium considered supportable based upon historical comparable transactions and current market conditions.





At December 31, 2009, key assumptions used to determine the fair value of each reporting unit under the income approach method were: (a) expected cash flow for the period from 2009 to 2014; and (b) a discount rate of 12.2%, which was based on management’s best estimate of the after-tax weighted average cost of capital (“WACC”).  At December 31, 2008, key assumptions used to determine the fair value of each reporting unit under the income approach method were:  (a) expected cash flow for the period from 2008 to 2013; and (b) a discount rate of 12.6%, which was based on management’s best estimate of the after-tax WACC.  At March 31, 2008, key assumptions used to determine the fair value of each reporting unit under the income approach method were: (a) expected cash flow for the period from 2008 to 2012; and (b) a discount rate of 13.3%, which was derived from management’s estimate of a market participant’s assumption of the WACC.  At December 31, 2007, key assumptions used to determine the fair value of each reporting unit under the income approach method were: (a) expected cash flow for the period from 2008 to 2013; and (b) a discount rate of 12.8%, which was derived from management’s estimate of a market participant’s assumption of the WACC.





Step two of the impairment test requires us to compute a fair value of the assets and liabilities, including identifiable intangible assets, within each of the reporting units with indications of impairment, and compare the implied fair value of goodwill to its carrying value.  The results of step two indicated that the goodwill for the TotalTec reporting unit was fully impaired and the goodwill for the Net Storage Brazil reporting unit was partially impaired at December 31, 2008.  As a result, in 2008, we recorded a goodwill impairment charge of $3.5 million in the TotalTec reporting unit and a goodwill impairment charge of $2.4 million in the Net Storage Brazil reporting unit, for a total goodwill impairment charge of $5.9 million in 2008.  This non-cash charge materially impacted our equity and results of operations in 2008, but does not impact our ongoing business operations, liquidity, cash flow or compliance with covenants for our credit facilities.





- 32 -


In addition, we recorded a charge of $52.4 million in the fourth quarter of 2007, which consisted of a $20.5 million goodwill impairment charge in the ProSys reporting unit and a $31.9 million goodwill impairment charge in the Europe reporting unit.  This non-cash charge materially impacted our equity and results of operations in 2007, but does not impact our ongoing business operations, liquidity, cash flow or compliance with covenants for our credit facilities.





As of December 31, 2009, if forecasted cash flows had been 10% lower than estimated, goodwill would not have been impaired as there was no indication of impairment when we compared the fair value of each reporting unit to its carrying value including existing goodwill.





As of December 31, 2008, if forecasted cash flows had been 10% lower than estimated, the resulting goodwill impairment would have increased by $1.0 million.





We also assess potential impairment of our other identifiable intangible assets and other long-lived assets when there is evidence that recent events or changes in circumstances such as significant changes in the manner of use of the asset, negative industry or economic trends, and significant underperformance relative to historical or projected future operating results, have made recovery of an asset’s carrying value unlikely.  The amount of an impairment loss would be recognized as the excess of the asset’s carrying value over its fair value.  There were no indicators of intangible impairments in 2009 and, therefore, we did not conduct impairment tests for our intangible assets.  We conducted impairment tests of our intangible assets and other long-lived assets in the first quarter of 2008 and the fourth quarters of 2007 and 2008 prior to our assessment of goodwill.  Our results indicated that the carrying value of these assets was recoverable from undiscounted cash flows and no impairment was indicated.





From January 1, 2008 through December 31, 2009, our common stock traded as low as $0.27 per share.  We will continue to monitor the estimates of fair value for our reporting units and there may be circumstances in future periods that will require us to recognize an impairment loss on all or a portion of our recorded goodwill or other intangible assets.





Restructuring and Related Impairment Costs





Restructuring and impairment costs include employee severance and benefit costs, costs related to leased facilities abandoned and subleased, costs related to leased equipment that has been abandoned, and impairment of owned equipment to be disposed of.





We recognize severance and benefit costs when management has committed to a restructuring plan, the terms of that plan are communicated to the affected employees and the severance costs are probable and estimable.  Our estimate of severance and benefit costs are based on planned employee attrition.





We have also recorded certain estimated future losses for leased facilities as a component of restructuring costs.  These losses are calculated based on an estimate of the fair value of the lease liability as measured by the present value of future lease payments subsequent to abandonment, less the present value of any estimated sublease income.  In order to estimate future sublease income, we engage real estate brokers to assist management in estimating the length of time to sublease a facility and the amount of rent we can expect to receive.  Estimates of expected sublease income could change based on factors that affect our ability to sublease those facilities, such as general economic conditions and the real estate market, among others.  Other exit costs include costs to consolidate facilities or close facilities and relocate employees.  A liability for these costs is recorded at its fair value in the period in which the liability is incurred.





At each reporting date, we evaluate our accruals for exit costs and employee separation costs to ensure the accruals are still appropriate.  If our severance and benefit cost estimates and loss accruals for leased facilities are incorrect, the effect on our consolidated financial statements would  be insignificant due to the short-term nature of these obligations.





- 33 -


Loss Contingencies





We are subject to the possibility of various loss contingencies arising in the ordinary course of business (such as legal matters).  We consider the likelihood of the loss occurring and our ability to reasonably estimate the amount of loss in determining the necessity for, and amount of, any loss contingencies.  Estimated loss contingencies are accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.  We regularly evaluate information available to us to determine whether any such accruals should be adjusted.  Such revisions in the estimates of the potential loss contingencies could have a material impact on our consolidated results of operations, financial position and cash flows.





Vendor Programs





We receive funds from vendors for price protection, product rebates, marketing, promotions and other competitive pricing programs.  These amounts are recorded as a vendor receivable or as a reduction in accounts payable with a corresponding reduction to inventories, cost of sales or selling, general and administrative expense, depending on the nature of the program.  Vendor receivables are generally collected through vendor-authorized reductions to our accounts payable, and reserves are established for vendor receivables that are determined to be uncollectible.  Actual rebates may vary based on volume or other sales achievement levels, which could result in an increase or reduction in the estimated amounts previously earned.  Historically, our rebate estimates have been within 10% of actual rebates.  Rebate estimates as of December 31, 2009 have not been negatively impacted by the recession in 2009, and are not expected to change in the near future.





RESULTS OF OPERATIONS





The following table sets forth certain operating data as a percentage of net sales for the periods indicated:





Years Ended December 31,2009


2008


2007Net sales


100.0
%


100.0
%


100.0
%Cost of sales


90.2



90.6



91.4Gross profit


9.8



9.4



8.6Operating expenses:Selling, general and administrative


7.5



8.4



7.5Professional fees


0.9



1.6



0.6Impairment of goodwill and other intangibles


—



0.2



1.3Restructuring and impairment costs


0.1



0.2



—Total operating expenses


8.5



10.4



9.4Operating income (loss)


1.3



(1.0
)


(0.8
)Interest expense, net


1.1



1.0



1.1Other expense (income), net


(0.1
)


0.3



(0.1
)Income (loss) before income taxes


0.3



(2.3
)


(1.8
)Provision for income taxes


0.1



—



0.2Net income (loss)


0.2
%


(2.3
)%


(2.0
)%





Major Customers





No customer accounted for more than 10% of consolidated net sales in 2009, 2008 or 2007.  Our top ten customers accounted for 15% of consolidated net sales in both 2009 and 2008 and 12% of consolidated net sales in 2007.  We cannot guarantee that these or any other customers will not increase or decrease as a percentage of our consolidated net sales either individually or as a group.  Consequently, any material decrease in sales to these or other customers could materially harm our consolidated results of operations.





We believe our ability to grow depends on increasing sales to existing customers and on successfully attracting new customers.  Customer contracts can be canceled and volume levels can be changed or delayed by our customers.  The timely replacement of delayed, canceled or reduced orders with new business cannot be assured.  In addition, we cannot assume that any of our current customers will continue to utilize our services.  Consequently, our consolidated results of operations may be materially adversely affected.





- 34 -


Segments





Under the accounting guidance for segment reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in determining allocation of resources and assessing performance.  At December 31, 2007, we determined that we had 11 operating segments and seven reportable segments.  The Company’s seven reportable segments consisted of the following:





U.S. Distribution
MiamiEurope
CanadaProSys
OtherTotalTec





Our “Other” reportable segment included certain operations in North America (Rorke Data) and certain in-country operations in Latin America (Brazil, Chile and Mexico).





During the fourth quarter of 2008, the CODM started to review financial information differently which included review of Chile and Chile IQQ on a combined basis, which resulted in a change in operating segments.  As a result, we determined that we had ten operating segments at December 31, 2008 and the same seven reportable segments we had at December 31, 2007.





In 2009, the CODM started to review financial information differently, which included review of U.S. Distribution and Canada on a combined basis, designated as North America.  In addition, the review of Mexico, Brazil, Chile and Miami was presented on a combined basis, designated as Latin America.  This resulted in operating segments in 2009 consisting of North America, Latin America, Europe, ProSys, Rorke and Total Tec.





At December 31, 2009, we determined that we had the following five reportable segments:





North America
EuropeProSys
Latin AmericaOther





Year Ended December 31, 2009 Compared to Year Ended December 31, 2008





We disclosed segment and geographic information using seven reportable segments for the year ended December 31, 2008.  For comparative purposes we have presented in the tables below the 2008 segment and geographic information as if we had used the current five reportable segments determined at December 31, 2009.





Net Sales





Net sales by segment, product and geographic region for the years ended December 31, 2009 and 2008 were as follows (dollars in thousands):





Years Ended December 31,


ChangeNet Sales by Segment

2009


2008


$


%North America

$
823,107



27.2
%

$
988,421



27.6
%

$
(165,314
)


(16.7
)%Europe


1,247,809



41.3



1,459,128



40.8



(211,319
)


(14.5
)ProSys


385,968



12.8



451,446



12.6



(65,478
)


(14.5
)Latin America


499,706



16.5



592,654



16.6



(92,948
)


(15.7
)Other


64,577



2.2



87,850



2.4



(23,273
)


(26.5
)Total

$
3,021,167



100.0
%

$
3,579,499



100.0
%

$
(558,332
)


(15.6
)%






- 35 -




Years Ended December 31,


ChangeNet Sales by Product

2009


2008


$


%Computer platforms

$
560,211



18.6
%

$
614,050



17.2
%

$
(53,839
)


(8.8
)%Storage systems


550,778



18.2



679,069



19.0



(128,291
)


(18.9
)Disk drives


749,635



24.8



932,388



26.0



(182,753
)


(19.6
)All other products


1,160,543



38.4



1,353,992



37.8



(193,449
)


(14.3
)Total

$
3,021,167



100.0
%

$
3,579,499



100.0
%

$
(558,332
)


(15.6
)%





Years Ended December 31,


ChangeNet Sales by Geographical Region

2009


2008


$


%United States

$
1,170,654



38.8
%

$
1,403,776



39.2
%

$
(233,122
)


(16.6
)%Canada


102,998



3.4



123,941



3.5



(20,943
)


(16.9
)United Kingdom


684,524



22.7



810,934



22.6



(126,410
)


(15.6
)Other Europe


563,285



18.6



648,194



18.1



(84,909
)


(13.1
)Latin America(1)


499,706



16.5



592,654



16.6



(92,948
)


(15.7
)Total

$
3,021,167



100.0
%

$
3,579,499



100.0
%

$
(558,332
)


(15.6
)%





(1)
Includes U.S.-based sales from the Miami operations of $110,323 and $124,292 for the years ended December 31, 2009 and 2008, respectively.





Consolidated net sales decreased 15.6% in 2009 to $3.0 billion from $3.6 billion in 2008, which included sales decreases across all segments and all geographical regions.  On a segment basis, the decrease consisted primarily of sales decreases in the Europe and North America segments of $211.3 million and $165.3 million, respectively.  As a result of the global economic recession, the Europe segment experienced a decrease in demand for its computer platform and disk drive products, which resulted in a sales decrease (without giving effect to currency exchange rate changes) of $86.1 million.  Also, the translation of our Europe segment sales into U.S. dollars resulted in decreased sales of $158.9 million for the year ended December 31, 2009, when compared to 2008, due to a stronger U.S. dollar against foreign currencies.  The sales decrease in our North America segment of $165.3 million was primarily attributable to lower demand for products resulting from the global economic recession, mainly disk drives and computer platforms, which comprised $123.1 million of the decrease as well as approximately $7.0 million due to a stronger U.S. dollar against foreign currency.  The remaining segments, ProSys, Latin America and Other sales decreased an aggregate of approximately $181.7 million which was primarily attributable to a decrease in sales of $136.6 million (without giving effect to currency exchange rate changes) due to lower demand for all products resulting from the global economic recession and approximately $14.5 million due to a stronger U.S. dollar against foreign currencies.





Gross Margin





The gross profit as a percentage of net sales (“gross margin”) was 9.8% of consolidated net sales in 2009, compared to 9.4% of consolidated net sales in 2008.  Gross margin increases in the North America, Europe, and Latin America segments were offset by gross margin decreases in the Other segment.  The increase in North America gross margin was primarily attributable to a higher percentage of sales of higher margin products to OEM customers.  Also contributing to the increase in the North America gross margin was the settlement and recognition in 2009 of $5.8 million of receivable credits (recorded as an increase in net sales) and $11.7 million of vendor credits (recorded as a reduction of cost of goods sold) arising in prior periods.  The receivable credits recorded were primarily related to the resolution of liabilities recorded during the restatement of our historical financial statements, while the majority of vendor credits recorded were identified and resolved within a normal operating cycle.  The increases in the gross margins in our Europe and Latin America segments were primarily attributable to a higher percentage of sales to OEM customers.  The decrease in gross margin in the Other segment was primarily attributable to sales of lower margin products.





Selling, General and Administrative (SG&A) Expense





SG&A expense for the years ended December 31, 2009 and 2008 was as follows (dollars in thousands):





Years Ended December 31,


Change2009


2008


$


%SG&A expense

$
226,329


$
302,416


$
(76,087
)


(25.2
)%Percentage of net sales


7.5
%


8.4
%





- 36 -


The decrease in SG&A expense in 2009 over 2008 included decreases of approximately $26.4 million in the Europe segment, approximately $18.7 million in the North America segment, approximately $19.1 million in the ProSys segment and an aggregate of approximately $11.8 million in the Latin America and Other segments. The decrease in SG&A expense in the Europe segment was primarily due to a $11.6 million decrease in salaries and employee benefit expenses due to headcount reductions, but also included a $2.9 million decrease in commissions and bonus expense as a result of lower sales volume, a $1.8 million decrease in bad debt expense due to lower sales volume, a $1.2 million decrease in rent expense, and decreases of $1.2 million in travel and entertainment expenses, and $0.6 million in advertising expense due to lower discretionary spending resulting from lower sales volumes. The decrease in SG&A expense in the North America segment was primarily due to a $4.8 million decrease in bad debt expense due to the lower sales volumes, a $4.0 million decrease in salaries and employee benefit expenses due to headcount reductions, a $3.5 million decrease in advertising expense due to lower discretionary spending resulting from lower sales volumes and a $2.7 million decrease in commissions and bonus due to lower business volumes.  ProSys derivative gains of approximately $2.9 million offset SG&A expense in 2009 in the ProSys segment.  In addition, the decrease in SG&A expense in the ProSys segment was primarily due to a $10.4 million decrease in commissions and bonus expense due to lower sales volumes, but also included a $3.4 million decrease in salaries and employee benefit expenses due to a headcount reductions to lower operating costs, a $2.6 million decrease in insurance expense due to lower business volumes and a $1.4 million decrease in travel and entertainment expense due to lower discretionary spending resulting from lower sales volumes.  The decrease in SG&A expense in the Latin America segment was primarily due to a $2.7 million decrease in salaries and employee benefit expenses, a $1.7 million in decrease in bad debt expense, a $0.5 million decrease in advertising expense and a $0.9 million decrease in commissions and bonus expense.  The decrease in SG&A expense in the Other segment was primarily due to a $1.6 million decrease in salaries and employee benefit expense, a $1.7 million decrease in commissions and bonus expense and a $0.4 million decrease in bad debt expense.





Professional Fees





Professional fees for audit, legal, tax and outside accounting advisor services decreased $30.6 million, or 54.0%, in 2009 compared to 2008 due to the conclusion of our accounting investigations and restatements in late 2008.





Impairment of Goodwill and Other Intangibles





In 2009, we did not impair goodwill as the fair value of the reporting units substantially exceeded their carrying value.  In 2008, we recorded a goodwill impairment charge of $5.9 million, which consisted of a $3.5 million charge in the TotalTec reporting unit, part of our Other segment, and a $2.4 million charge in the Net Storage Brazil reporting unit which is currently part of our Latin America segment.





Restructuring and Impairment Costs





In 2009, we initiated restructuring plans for our North America, Europe and Latin America reportable segments and, as a result, we incurred restructuring costs and other charges of approximately $3.8 million.  These costs consisted primarily of severance and benefit costs of $3.5 million for involuntary employee terminations and costs of $0.3 million related to the closure and impairment of certain leased facilities.  We terminated 129 employees in North America, 40 employees in Latin America and 66 employees in the United Kingdom and continental Europe in sales, marketing, finance and support functions.  Approximately $1.6 million of the involuntary employee termination costs incurred in 2009 resulted from the cessation of our operations in Italy.  We expect to pay all remaining 2009 restructuring expenses, estimated to be approximately $1.5 million, by the end of the first quarter of 2010.  See Note 7 3⁄4 Restructuring and Impairment Costs in our notes to the consolidated financial statements included in this Form 10-K/A for additional information.





In 2008, we initiated a restructuring plan for our North America, Europe and Latin America reportable segments, and, as a result, we incurred restructuring and impairment costs of $4.3 million.  These costs consisted primarily of severance and benefit costs of $3.9 million for involuntary employee terminations and costs of $0.4 million related to the closure and impairment of certain leased facilities.  We terminated 48 employees in North America, 105 employees in Latin America and 58 employees in the United Kingdom and continental Europe in sales, marketing, finance and support functions.





Interest Expense, Net





Interest expense, net for the years ended December 31, 2009 and 2008 was as follows (dollars in thousands):





Years Ended

December 31,


Change2009


2008


$


%Interest expense, net

$
33,097


$
37,544


$
(4,447
)


(11.8
)%





- 37 -


The decrease in interest expense, net in 2009 as compared to 2008 was primarily attributable to lower average borrowings due to higher positive cash flows from operations that were used to pay down debt and to lower interest rates in 2009.  Our weighted average borrowings in 2009 were $340.3 million compared to $427.0 million in 2008.  The weighted average interest rate in 2009 was 5.6% compared to 6.1% in 2008.





Other Expense (Income), Net





Other expense (income), net for the years ended December 31, 2009 and 2008 was as follows (dollars in thousands):





Years Ended

December 31,


Change2009


2008


$


%Other expense (income), net

$
(2,121
)

$
10,509


$
(12,630
)


(120.2
)%





Other expense (income), net primarily consists of foreign currency transaction gains and losses.  The change in other expense (income), net in 2009 as compared to 2008 was primarily attributable to gains of $1.2 million due to foreign currency transactions in 2009 as compared to foreign currency transaction losses of $10.1 million in 2008.





Income Taxes





The provision for income taxes for the years ended December 31, 2009 and 2008 was as follows (dollars in thousands):





Years Ended December 31,2009


2008Provision for income taxes

$
1,289


$
527Effective tax provision rate


14.6
%


(0.6
)%





Our income tax provisions and effective tax rate are primarily impacted by, among other factors, the statutory tax rates in the countries in which we operate and the related level of income generated by our global operations.  Our income tax provision rate in 2009 was 14.6%, an increase of 15.2% from our income tax provision of (0.6%) in 2008.  The increase was primarily attributable to an increase in worldwide pretax income of $8.8 million in 2009 compared to a net loss of $(81.9) million in 2008.  Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings and losses as we have a full valuation allowance position in certain jurisdictions.





Our gross deferred tax assets as of December 31, 2009 and 2008 were $58.3 million and $53.2 million, respectively, which consisted of reserve items and net operating losses.  Of these amounts, valuation allowances of $45.8 million and $44.8 million, respectively, were recorded against these assets.  We recorded a valuation allowance against substantially all of the U.S. deferred tax assets in 2009 and 2008, as management does not believe it is more likely than not that the deferred tax assets will be realized.





In the fourth quarter of 2009, we reduced our valuation allowance on deferred tax assets and recorded a tax benefit of $6.2 million to reflect the impact of The Worker, Homeownership and Business Assistance Act of 2009 (the “WHBA Act”).  Of this amount: (1) $4.1 million pertains to a carryback of a portion of our 2008 U.S. Federal net operating loss to 2004 based on the provisions of the WHBA Act and Revenue Procedures 2009-52; that carryback was collected in March 2010, and (2) $2.1 million pertains to a valuation allowance determined to be no longer required as a result of the WHBA Act.  In addition to the credits recorded as a result of the WHBA Act, a tax benefit of $2.4 million and a corresponding reduction in the valuation allowance were recorded by us in the fourth quarter of 2009 as it was determined that the valuation allowance was not required as a liability had been previously established to offset certain deferred tax assets.  This out-of-period adjustment, which related to the impact of certain tax positions recorded in 2008, was determined to be immaterial for all periods presented.





- 38 -


Year Ended December 31, 2008 Compared to Year Ended December 31, 2007





We disclosed segment and geographic information using seven reportable segments for the years ended December 31, 2008 and 2007.  For comparative purposes we have presented in the tables below the 2008 and 2007 segment and geographic information as if we had used the current five reportable segments determined at December 31, 2009.





Net Sales





Net sales by segment, product and geographic region for the years ended December 31, 2008 and 2007 were as follows (dollars in thousands):





Years Ended December 31,


ChangeNet Sales by Segment

2008


2007


$


%U.S. Distribution

$
988,421



27.6
%

$
1,195,894



30.3
%

$
(207,473
)


(17.3
)%Europe


1,459,128



40.8



1,699,732



43.0



(240,604
)


(14.2
)ProSys


451,446



12.6



378,760



9.6



72,686



19.2Latin America


592,654



16.6



570,474



14.4



22,180



3.9Other


87,850



2.4



105,045



2.7



(17,195
)


(16.4
)Total

$
3,579,499



100.0
%

$
3,949,905



100.0
%

$
(370,406
)


(9.4
)%





Years Ended December 31,


ChangeNet Sales by Product

2008


2007


$


%Computer platforms

$
614,050


$
615,137


$
(1,087
)


(0.2
)%Storage systems


679,069



693,713



(14,644
)


(2.1
)Disk drives


932,388



1,237,103



(304,715
)


(24.6
)All other products


1,353,992



1,403,952



(49,960
)


(3.6
)Total

$
3,579,499


$
3,949,905


$
(370,406
)


(9.4
)%





Years Ended December 31,


ChangeNet Sales by Geographical Region

2008


2007


$


%United States

$
1,403,776



39.2
%

$
1,530,658



38.8
%

$
(126,882
)


(8.3
)%Canada


123,941



3.5



149,042



3.8



(25,101
)


(16.8
)United Kingdom


810,934



22.6



1,018,365



25.8



(207,431
)


(20.4
)Other Europe


648,194



18.1



681,367



17.2



(33,173
)


(4.9
)Latin America(1)


592,654



16.6



570,473



14.4



22,181



3.9Total

$
3,579,499



100.0
%

$
3,949,905



100.0
%

$
(370,406
)


(9.4
)%





(1)
Includes U.S.-based sales from the Miami operations of $124,292 and $129,872 for the years ended December 31, 2008 and 2007, respectively.





Consolidated net sales decreased 9.4% in 2008 to $3.6 billion from $3.9 billion in 2007, attributable to decreases in Europe segment sales of approximately $240.6 million and North America sales of $207.5 million, which were partially offset by increases in ProSys sales of $72.7 million and Latin America segment sales of $22.2 million.  As a result of the recession, the Europe segment experienced a decrease in demand for its computer platform and disk drive products.  Also, the translation of our Europe segment sales into U.S. dollars resulted in decreased sales of $20.3 million for the year ended December 31, 2008, when compared to 2007, due to a stronger U.S. dollar.  The sales decrease in our North America segment of $207.5 million was primarily attributable to lower demand for all products resulting from the global economic recession, particularly disk drives, storage system sales and computer platforms, which experienced a $190.6 million decrease in sales when comparing 2008 to 2007.  The translation of our North America segment sales into U.S. dollars resulted in an increase in sales of $1.0 million for the year ended December 31, 2008, compared with 2007, due to the stronger U.S. dollar.  The $22.2 million increase in our Latin America segment sales was primarily due to an increase in sales of computer platform products of $51.9 million and an increase in all other products of $17.2 million.  This increase was partially offset by a decrease in disk drive sales of $24.2 million.  The increase in our ProSys segment sales of $72.7 million was primarily attributable to an increase in sales of our computer platform products of $19.0 million and storage systems of $39.0 million when comparing 2008 to the corresponding period in 2007.  The sales decrease in our Other segment of $17.2 million was primarily attributable to a decrease in sales of our computer platform products.  Also, the translation of Latin America segment sales into U.S. dollars resulted in increased sales of $3.9 million for the year ended December 31, 2008, when compared to 2007, due to stronger foreign currencies against the U.S. dollar.





- 39 -


Gross Margin





Gross margin was 9.4% of consolidated net sales in 2008, compared to 8.6% of consolidated net sales in 2007.  Gross margin in the ProSys segment increased by 0.4 percentage points when comparing 2008 to 2007.  The increase in our ProSys segment gross margin is attributable to increased sales of higher margin business, including a $39.0 million increase in storage systems sales and a $19.0 million increase in computer platform sales, when comparing 2008 to 2007.  Gross margin in the Latin America, North America and Other segments increased in the aggregate by 0.3 percentage points, which is also attributable to increased sales of higher margin business.  Furthermore, we recorded approximately $10.0 million as a reduction to cost of sales resulting from the release of certain vendor allowances previously deferred.  The release of deferred vendor allowances had a 0.3% impact on our gross profit percentage in 2008.





Selling, General and Administrative (SG&A) Expense





SG&A expense for the years ended December 31, 2008 and 2007 was as follows (dollars in thousands):





Years Ended December 31,


Change2008


2007


$


%SG&A expense

$
302,416


$
297,483


$
4,933



1.7
%Percentage of net sales


8.4
%


7.5
%





The increase in SG&A expense in 2008 over 2007 was primarily attributable to approximately $12.5 million in additional SG&A expenses in the ProSys segment and additional SG&A expenses of $3.0 million, and $0.6 million in the Latin America and North America segments, respectively.  These SG&A expense increases, resulting from higher headcount, were partially offset by decreases in SG&A expenses in the Europe and Other segments of approximately $3.5 million due to decreases in salary and wage expenses, and commissions and bonus expense.  The SG&A increase in our ProSys segment is attributable to an approximately $16.1 million increase in commissions and bonus expenses, which were offset by a $3.5 million decrease in salaries and wages expenses.  The SG&A increase in our Latin America segment is attributable to approximately $2.3 million in additional bad debt expense and $0.8 million in additional advertising expense when comparing 2008 to 2007.  The overall decrease of SG&A expense in our Europe segment was due to a $1.8 million decrease in salary and wage expenses, a $1.4 million decrease in commission and bonus expense and a $1.1 million decrease in employee benefit expense when comparing 2008 to 2007.  The SG&A decreases in our Europe segment were offset by a $2.4 million increase in bad debt expense.





Professional Fees





Professional fees for audit, legal, tax and outside accounting advisor services increased $34.1 million, or 150.9%, in 2008 compared to 2007 due to the investigation-related activities and the restatement of our historical consolidated financial statements.





Impairment of Goodwill and Other Intangibles





In 2008, we recorded a goodwill impairment charge of $5.9 million in Brazil, part of our Latin America segment, which consisted of a $3.5 million charge in the TotalTec reporting unit, part of our Other segment, and a $2.4 million charge in the Net Storage Brazil reporting unit, part of our Latin America segment.  In 2007, we recorded a goodwill impairment charge of $52.4 million, which consisted of a $20.5 million goodwill impairment charge in the ProSys reporting unit and a $31.9 million goodwill impairment charge in the Europe reporting unit.





Restructuring and Impairment Costs





In 2008, we initiated a restructuring plan for our North America, Europe and Latin America reportable segments, and, as a result, we incurred restructuring and impairment costs of $4.3 million.  These costs consisted primarily of severance and benefit costs of $3.9 million for involuntary employee terminations and costs of $0.4 million related to the closure and impairment of certain leased facilities.  We terminated 48 employees in North America, 105 employees in Latin America and 58 employees in the United Kingdom and continental Europe in sales, marketing, finance and support functions.  See Note 7 3⁄4 Restructuring and Impairment Costs in our notes to the consolidated financial statements included in this Form 10-K/A for additional information.





In 2007, we incurred and paid restructuring costs of approximately $1.4 million related to severance and benefit costs associated with involuntary employee terminations.  We terminated 22 employees in North America, 56 employees in Latin America and 25 employees in Europe.





- 40 -


Interest Expense, Net





Interest expense, net for the years ended December 31, 2008 and 2007 was as follows (dollars in thousands):





Years Ended

December 31,


Change2008


2007


$


%Interest expense, net

$
37,544


$
40,797


$
(3,253
)


(8.0
)%





The decrease in interest expense, net in 2008 over 2007 was primarily attributable to lower average interest rates in 2008.  Our weighted average borrowings in 2008 were $427.0 million compared to $418.8 million in 2007.  The weighted average interest rate in 2008 was 6.1% compared to 6.9% in 2007.





Other Expense (Income), Net





Other expense (income), net for the years ended December 31, 2008 and 2007 was as follows (dollars in thousands):





Years Ended

December 31,


Change2008


2007


$


%Other expense (income), net

$
10,509


$
(2,426
)

$
12,935



533.2
%





Other expense (income), net primarily consists of foreign currency transaction gains and losses.  The change in other expense (income), net in 2008 over 2007 was primarily attributable to a loss of $10.1 million due to foreign currency transactions in 2008 as compared to a foreign currency transaction gain of $2.1 million in 2007.





Income Taxes





The provision for income taxes for the years ended December 31, 2008 and 2007 was as follows (dollars in thousands):





Years Ended December 31,2008


2007Provision for income taxes

$
527


$
6,961Effective tax provision rate


(0.6
)%


(9.7
)%





Our income tax provision of $0.5 million and $7.0 million for 2008 and 2007, respectively, was primarily due to income taxes in certain foreign jurisdictions.  During 2008 and 2007, we increased the valuation allowance by approximately $17.6 million and $9.2 million, respectively.  In both 2008 and 2007, the Company continued to record a full valuation allowance against substantially all of its deferred tax assets in the U.S. and certain foreign jurisdictions.





Our gross deferred tax assets as of December 31, 2008 and 2007 were $53.2 million and $38.1 million, respectively, and consisted of reserve items and net operating losses.  Of these amounts, a valuation allowance of $44.8 million and $27.2 million, respectively, were recorded against the assets.  We recorded a valuation allowance against substantially all of the U.S. deferred tax assets in 2008 and 2007, as management does not believe it is more likely than not that the deferred tax assets will be realized.





LIQUIDITY AND CAPITAL RESOURCES





The following Liquidity and Capital Resources discussion has been updated to reflect the effects of the restatement discussed in Note 18, Restatement of Consolidated Statements of Cash Flows, to the consolidated financial statements in Item 8.





- 41 -


Our audited consolidated financial statements included in this Annual Report on Form 10-K/A have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business.  We currently have substantial outstanding obligations that could become payable through the first quarter of 2011, including the following:





·
The Western Facility expires on September 20, 2010, but is automatically extended for one year unless we receive written notice of termination 60 days prior to that date.  This facility provides availability of up to $153 million, as amended on February 3, 2010, of which approximately $70 million was outstanding at December 31, 2009.





·
Our convertible subordinated notes, in the aggregate principal amount of $110 million, include a provision under which the holders have the right to require us to repurchase, for cash, all or a portion of the notes at face value on March 5, 2011.





In recent years, we have funded our working capital requirements principally through borrowings under bank lines of credit and subordinated term loans.  These credit agreements require that we comply with a number of financial and other covenants, including a quarterly minimum fixed-charge coverage ratio based upon earnings.  Our ability to continue as a going concern is dependent upon, among other factors, continuing to generate sufficient cash flows from operations, maintaining compliance with the provisions of our existing credit agreements and, when necessary, being able to renew such agreements and/or obtain alternative or additional financing.  For information about these covenants, see “Credit Agreement Covenants and Consolidated Financial Statement Presentation,” above.





Further, our credit agreements contain certain non-financial covenants, such as restrictions on the incurrence of debt and liens, and restrictions on mergers, acquisitions, asset dispositions, capital contributions, payment of dividends, repurchases of stock and investments, as well as a requirement that we provide audited financial statements to lenders within a prescribed time period after the close of our fiscal year.





Based upon our current projections, we believe we will generate sufficient cash flows from operations and maintain debt covenant compliance for at least the next twelve months, and that we will be able to successfully renegotiate the terms of the Western Facility and the convertible subordinated notes, or obtain alternative or additional financing, if needed.





Alternative or additional financings could result in existing shareholders experiencing significant dilution, and we may issue new equity securities with rights, preferences or privileges senior to those of existing holders of our common stock.  Further, a renegotiation of the terms of the notes or an alternate or additional financing could be dilutive to future earnings per share.  If we fail in the future to satisfy any of the covenants in our credit agreements and are unable to obtain waivers or amendments or if we are unsuccessful in renegotiating or refinancing the Western Facility or the convertible subordinated notes when due, we would be in default of the terms of our debt agreements, which would constitute a cross-default under most of our other debt arrangements.  If those defaults should occur and we were unable to negotiate cures: (1) our lenders could declare all outstanding principal and interest to be due and payable, and certain cross-default provisions under other credit arrangements would be triggered; or (2) our lenders could terminate their commitments to loan us money and foreclose against the assets securing their borrowings.  Should these events occur, there would be uncertainty regarding our ability to continue as a going concern.





Our cash and cash equivalents totaled $21.1 million and $22.8 million at December 31, 2009 and 2008, respectively.





To date, we have not paid cash dividends to our shareholders and we do not plan to pay cash dividends in the future.  Our credit agreements prohibit the payment of dividends or other distributions on any of our shares, except dividends payable in our capital stock.





- 42 -


The following table presents the balances and certain terms of our indebtedness as of December 31, 2009 (amounts in thousands):





Maximum

Facility

Amount


Amount

Outstanding


Interest

Rate(f)


MaturityLines of credit:Western Facility(a)

$
204,000
(b)

$
69,647



5.00
%

September 2010BOA Facility(a)

£
76,000
(g)

$
42,900



2.62
%

October 2011GE Facility(a)

$
80,000


$
58,342



0.00
%

—
(c)IBM Kreditbank Facility Germany

$
25,000


$
(1,984
)(h)


6.71
%

—
(d)IBM Facility Holland

$
5,000


$
0



N/A


—
(d)Banco de Credito e Inversiones

$
5,000


$
2,800



3.20
%

September 2010Banco de Chile

$
2,500


$
517



4.05
%

June 2010Banco Internacional

$
5,000


$
4,600



4.39
%

June 2010Itau Bank

$
865


$
861



12.12
%

December 2010Intel Facility

$
2,048


$
2,008



0.00
%

March 2010Notes:Convertible Notes

$
—


$
111,341
(e)


3.75
%

March 2011(i)2008 Notes — RSA

$
—


$
44,733
(e)


9.00
%

December 20132006 Notes — RSA

$
—


$
30,866
(e)


9.00
%

August 2013





(a)
The maximum borrowings under these lines of credit are limited to a percentage of the value of eligible accounts receivable and inventory (for the GE Facility, only eligible inventory).  At December 31, 2009, our additional available borrowings under these lines of credit were $44.2 million in the United States and $28.0 million in Europe.  Limitations exist on the transfer of funds between geographies.(b)
As of February 3, 2010 the maximum facility amount was reduced to $153 million.(c)
Facility may be terminated by either party upon 30 days’ notice.  If the facility is terminated, all amounts outstanding would be due at the end of the 30-day notice period.(d)
Facility may be terminated by either party upon six weeks’ notice.  If the facility is terminated, all amounts outstanding would be due at the end of the six-week notice period.(e)
Includes accrued interest.(f)
Interest rates under the lines of credit represent the average interest rates for the month of December 2009.(g)
The maximum borrowing under this facility is $123.1 million (based on an exchange rate of $1.62/£1.00 as of December 31, 2009).(h)
Amount outstanding represents cash held by the lender in excess of outstanding borrowings under the line of credit with IBM and Kreditbank Facilities Germany at December 31, 2009.(i)
The Company’s convertible notes mature in March 2024; however, the notes include the right of the holders to put the notes to the Company at face value as of March 2011





For a discussion of the terms of these lines of credit and notes, see Note 6 – Lines of Credit and Long-Term Debt in our notes to the consolidated financial statements included in this Annual Report on Form 10-K/A.  Additionally, for a discussion regarding our adoption of ASC 470-20, Debt with Conversion and Other Options, see Note 2 – Summary of Significant Accounting Policies in our notes to the consolidated financial statements included in this Annual Report on Form 10-K/A.





Debt, Other Contractual Obligations and Off Balance Sheet Arrangements





The following is a summary of certain contractual obligations and commitments as of December 31, 2009 (in thousands):





Payments Due by Period (1)Less than

1 Year


1-3

Years


3-5

Years


More Than

5 Years


TotalLong-term debt

$
11,097


$
124,683


$
34,811


$
—


$
170,591Interest expense on long-term debt


10,363



11,127



1,736



—



23,226Lines of credit


138,775



42,900



—



—



181,675Operating leases


10,778



12,841



7,238



10,419



41,276Supplemental Executive Retirement Plan liability


—



623



776



2,067



3,466Total

$
171,013


$
192,174


$
44,561


$
12,486


$
420,234





(1)
Assumes that we continue to satisfy all covenants contained in our debt agreements.


(2)
Includes $110.0 million outstanding associated with our convertible notes that are due March 5, 2024, which include a provision under which the holders have the right to require the Company to repurchase for cash all or a portion of the notes at face value on March 5, 2011.





- 43 -


This table excludes unrecognized tax liabilities computed under ASC 740-10, Income Taxes (“ASC 740-10”, formerly FIN48 – Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109), of $10.4 million because a reasonable and reliable estimate of the timing of future tax payments or settlements, if any, cannot be determined.  See Note 9 3⁄4 Income Taxes in our notes to the consolidated financial statements included in this Annual Report on Form 10-K/A.





Long-Term Debt and Related Interest Expense





At December 31, 2009, we had various notes payable and other long-term debt with an outstanding balance of $170.6 million with interest rates ranging from 3.75% to 9.00%.  The notes payable and other long-term debt mature at various dates through March 2024.





Lines of Credit





At December 31, 2009, we had amounts outstanding under various lines of credit based upon eligible accounts receivable and inventories.  Payments due have been included in the table above based upon the maturity dates of the underlying facilities.  All amounts have been classified as currently due in our consolidated balance sheets at December 31, 2009 and 2008.





Capital Leases





At December 31, 2009, we had no capital lease obligations outstanding.





Operating Leases





We lease our facilities under cancelable and non-cancelable operating lease agreements.  The leases expire at various times through 2025 and contain renewal options.  Certain of the leases require us to pay property taxes, insurance and maintenance costs.





Cash Flows from Operating Activities





Net cash provided by (used in) operating activities during the years ended December 31, 2009, 2008 and 2007 consisted of (in thousands):





Years Ended December 31,2009


2008


2007Cash flows from operating activities:Net income (loss)

$
7,522


$
(82,466
)

$
(78,746
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


10,970



10,774



10,968Amortization of debt issuance costs


3,746



2,958



2,597Amortization of debt discount


9,832



8,656



7,761Stock-based compensation expense


2,518



4,893



1,418Provision for bad debts


8,214



16,375



7,090Loss on property and equipment


89



225



610Remeasurement of ProSys Derivative


(2,840
)


4,019



372(Gain) loss on currency remeasurement


(5,253
)


16,965



(1,278
)Impairment of goodwill and other intangibles


—



5,864



52,445Deferred taxes


(3,657
)


(2,008
)


2,588Cash provided by (used in) working capital


11,095



95,401



(5,930
)Net cash provided by (used in) operating activities

$
42,236


$
81,656


$
(105
)






- 44 -


The net cash provided by operating activities in 2009 was due primarily to net income before depreciation, amortization and other non-cash charges and an increase in accounts payable and cash overdrafts, partially offset by an increase in inventories and a decrease in deferred taxes, as compared to 2008.  Our accounts receivable, net of allowances for doubtful accounts, increased to $434.9 million at December 31, 2009 from $430.0 million at December 31, 2008, due primarily to higher sales volume in the fourth quarter of 2009 when compared to the same period in 2008 and a decrease in the allowance for doubtful accounts.  Our inventories increased to $295.7 million at December 31, 2009 from $230.7 million at December 31, 2008, primarily due to higher inventories required to support our projected sales volumes.  Our accounts payable and cash overdraft increased to $360.9 million at December 31, 2009 from $274.7 million at December 31, 2008 as a result of the increase in inventory purchases and our efforts to manage working capital.





Cash Flows from Investing Activities





The net cash used in investing activities was $4.0 million, $7.6 million and $11.4 million for the years ended December 31, 2009, 2008 and 2007, respectively, primarily due to the acquisition of property and equipment.





Cash Flows from Financing Activities





The net cash used in financing activities was $43.1 million in 2009, which primarily related to the repayment of $31.4 million under our short-term borrowing facilities and repayments of long-term notes of $11.2 million.  The net cash used in financing activities was $60.2 million in 2008, which primarily related to the repayment of $53.3 million under our short-term borrowing facilities and repayments of long-term notes of $10.9 million, partially offset by proceeds of $10.0 million from long-term notes payable.  The net cash provided by financing activities was $28.9 million in 2007, primarily related to borrowings under our short-term borrowing facilities of $47.4 million, partially offset by debt issuance costs of $9.8 million and payments under long-term notes payable and capital leases of $8.8 million.





ProSys Derivative





At the time of the acquisition of ProSys Information Systems, Inc. (“ProSys”) on October 2, 2006, we entered into a registration rights agreement with the former shareholders of ProSys (the “Holders”) obligating us to file a registration statement with the Securities and Exchange Commission (the “SEC”) to register the resale of 1.72 million shares of the our common stock used as part of the consideration in the purchase transaction within 60 days of the closing date of the acquisition.  On April 30, 2007, we entered into an amendment to the registration rights agreement with the Holders.  The amendment provided that, in exchange for an extension of the time to register the shares, we would provide the Holders with cash or our common stock necessary to make up the positive difference between the per share price of the our common stock on the date the registration statement was declared effective and $4.93 (the “Issue Price”).  The Issue Price was the price used to determine the share value for purposes of determining the consideration for the purchase transaction.  As well, a put right at the Issue Price in certain circumstances was provided to the Holders for those shares not subject to restriction on sale under the registration rights agreement.  On February 5, 2008, we entered into a memorandum of understanding with the Holders that required us to pay an advance against potential contingent consideration due to the Holders in exchange for an extension on the previously granted put right through September 30, 2008.  On August 26, 2008, we entered into a second amendment to the registration rights agreement with the Holders under which we agreed to purchase from the Holders all of the right, title and interest in 710,036 shares of the purchase consideration common stock at the Issue Price, in exchange for granting the Holders a right to put the remaining 1,014,336 shares to us at the Issue Price if we had not filed all delinquent SEC periodic reports by October 31, 2009 (the “contingent put option”).  If we were no longer delinquent in our SEC periodic reports on October 31, 2009, once the remaining 1,014,336 shares became freely tradable in the open market, we agreed to pay the Holders the positive difference between the Issue Price and the open market sale price (“Price Protection”).  In September 2009, we regained compliance with our SEC periodic reporting obligations, which had the effect of terminating the contingent put option.





The contingent put option and the Price Protection represent derivative instruments issued by us that were required to be recorded at fair value.  Based on the terms described above for each, only one of these derivative instruments, and not both, could eventually be exercised by the Holders thereby limiting the maximum liability to us under the agreements discussed above.  Prior to the expiration of the contingent put option, we recorded a derivative liability equal to the greater of the fair value of the Price Protection or the contingent put option, reflective of the fact that only one of the instruments could be exercised at any point in time.  Due to the expiration of the contingent put option, the derivative liability was valued solely based on the Price Protection as of September 30, 2009.  Changes in fair value are recorded as compensation expense in “selling, general and administrative expense” in the consolidated statements of operations.  The derivative liability, which was included in “other accrued liabilities” in our consolidated balance sheets, totaled $4.4 million at December 31, 2008.  The contingent put option and the Price Protection are collectively referred to herein as the “ProSys Derivative.”  We have obligations under agreements entered into in connection with our acquisition of ProSys that constitute a derivative liability.  For details of the terms of this arrangement, See Note 14 3⁄4 Derivative Instruments in our notes to the consolidated financial statements included in this Annual Report on Form 10-K/A.





- 45 -


On October 13, 2009, we entered into a settlement agreement with the Holders covering all claims relating to the earnout payments agreed to at the time the we acquired ProSys.  Under the terms of the settlement, we agreed to pay the Holders $1.5 million by October 21, 2009 and an additional $3.3 million.  On January 4, 2010, we paid the additional $3.3 million to the Holders.  As a result of these payments, we have no further obligations related to the price protection granted to the former Holders.  In addition, we agreed to relieve the Holders of any liability arising out of certain contingent state sales tax liabilities incurred prior to our acquisition of ProSys.  As of December 31, 2009, we accrued $6.8 million related to these contingent state sales tax liabilities.  We believe these liabilities will be paid in full prior to June 30, 2010.





Transactions with Related Parties





A director of the Company is a director of one of our customers, Datalink Corporation.  The consultant who managed our Brazilian operation through June 30, 2009 has an ownership interest in two of our customers/vendors, Megaware Commercial Ltda and Megaware Industrial Ltda (collectively, “Megaware”).





Sales to and purchases from these parties for the three years ended December 31, 2009 and accounts receivable at December 31, 2009, 2008 and 2007 are summarized below (in thousands):





Years Ended December 31,2009


2008


2007Sales:Datalink Corporation

$
165


$
60


$
—Megaware


31,313



45,111



37,939Accounts receivable:Datalink Corporation


91



—



—Megaware


3,654



8,443



10,024





In 2006, as a part of our acquisition of ProSys, we entered into two long-term real property leases for office and warehouse space in Norcross, Georgia with Laurelwood Holdings, LLC (“Laurelwood Holdings”).  The sellers of ProSys, who thereafter became our employees, had an ownership interest in Laurelwood Holdings.  In 2009, 2008 and 2007, we paid $539,000, $501,000 and $498,000, respectively, under those lease agreements to Laurelwood Holdings.  One of the employees disposed of her interest shortly after the ProSys acquisition in 2006 and the other employee terminated his employment as of December 31, 2008.





Since October 2005, we have employed a stepson of Mr. Bell, our president and chief executive officer, in the position of director of strategic markets.  In 2009, 2008 and 2007, Mr. Bell’s stepson received total cash compensation of $215,000, $246,000 and $238,000, respectively.  On November 17, 2005, he was granted an option to purchase 15,000 shares of common stock with an exercise price of $7.95 per share.  On January 21, 2008, he was granted an option to purchase 10,000 shares of common stock with an exercise price of $5.90 per share.  On September 2, 2009, he was granted an option to purchase 10,000 shares of common stock with an exercise price of $2.00 per share.  In addition, he participates in all other benefits that we generally offer to all our employees.  The Audit Committee reviewed and ratified the employment of Mr. Bell’s stepson and his compensation.





RECENT ACCOUNTING PRONOUNCEMENTS





In October 2009, the FASB issued ASU 2009-13,Multiple-Deliverable Revenue Arrangements (amendments to FASB ASC Topic 605,Revenue Recognition ) (“ASU 2009-13”) and ASU 2009-14,Certain Revenue Arrangements That Include Software Elements  (amendments to FASB ASC Topic 985,Software ) (“ASU 2009-14”).  ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy.  The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method.  ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance.  ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the effect the adoption of ASU 2009-13 and ASU 2009-14 will have on our consolidated financial statements.





- 46 -


On January 21, 2009, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”).  ASU 2010-06 amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose additional information regarding assets and liabilities that are transferred between levels of the fair value hierarchy. Entities are also required to disclose information in the Level 3 rollforward about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclose requirements, ASU 2010-06 also amends Topic 820 to further clarify existing guidance pertaining to the level of disaggregation at which fair value disclosures should be made and the requirements to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The guidance in ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15 2009, except for the requirement to separately disclose purchases, sales, issuances, and settlements in the Level 3 rollforward, which becomes effective for fiscal years (and for interim periods within those fiscal years) beginning after December 15, 2010.  We are currently evaluating the effect the adoption of ASU 2009-06 will have on our consolidated financial statements.





Item 7A.                     Quantitative and Qualitative Disclosures about Market Risk





We are subject to interest rate risk on our floating rate credit facilities and could be subjected to higher interest payments if interest rates increase.  For the year ended December 31, 2009, average borrowings on floating rate credit facilities included $81.4 million under the Western Facility, $39.3 million under the Bank of America Facility and $18.8 million under the Kreditbank Facility.  These facilities have interest rates that are based on associated rates such as Eurodollar and base or prime rates that fluctuate based on market conditions.  A one percentage point increase/decrease in the average interest rate would have impacted interest expense by approximately $1.5 million in 2009.





A substantial part of our revenue and capital expenditures are transacted in currencies other than the U.S. dollar, and the functional currencies for our foreign subsidiaries are generally not the U.S. dollar.  We enter into foreign forward exchange contracts to economically hedge certain balance sheet exposures against future movements in foreign exchange rates.  A sudden or significant change in foreign exchange rates could have a material impact on our net income or loss or cash flows.  The fair value of foreign exchange contracts are estimated using market quotes.  The notional amounts of foreign exchange contracts at December 31, 2009 and 2008 were approximately $80.6 million and $75.5 million, respectively.  The carrying amounts, which are nominal, approximated fair value at December 31, 2009 and 2008.  The majority of these foreign exchange contracts mature in six months or less.  These contracts will settle in British pounds, Euros, Chilean pesos, Mexican pesos and U.S. dollars.  Gains and (losses) from foreign currency transactions, as well as realized and unrealized gains and (losses) from our derivative instruments, are included in our consolidated statements of operations in the amounts of $1.2 million, $(10.1) million and $2.1 million, for the years ended December 31, 2009, 2008 and 2007, respectively.





The translation of the consolidated financial statements of the non-United States operations is impacted by fluctuations in foreign currency exchange rates.  We recorded translation gains (losses) to comprehensive income (loss) in the amounts of $16.1 million, $(38.9) million and $7.4 million, for the years ended December 31, 2009, 2008 and 2007, respectively.  Sales and operating income would have decreased by approximately $123.0 million and $2.3 million, respectively, if average foreign exchange rates had declined by 10% against the U.S. dollar in 2009.  This amount was determined by considering the impact of a hypothetical foreign exchange rate for British pounds, Euros and Canadian dollars on sales and operating income of the Company’s international operations.





Item 8.            Financial Statements and Supplementary Data





Index to Consolidated Financial Statements:




PageReport of Independent Registered Public Accounting Firm
48Consolidated Balance Sheets
49Consolidated Statements of Operations
50Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)
51Consolidated Statements of Cash Flows
52Notes to the Consolidated Financial Statements
53





All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.





- 47 -


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Directors and Shareholders of


Bell Microproducts Inc.





We have audited the accompanying consolidated balance sheets of Bell Microproducts Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15 (a) (2).  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the financial statements and financial statement 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, such consolidated financial statements present fairly, in all material respects, the financial position of Bell Microproducts Inc. and subsidiaries as of December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.





As discussed in Note 2 to the consolidated financial statements, effective January 1, 2009, the Company adopted FASB ASC 470-20, Debt with Conversion and Other Options(formerly FSP APB 14-1).





As discussed in Note 18 to the consolidated financial statements, the accompanying consolidated financial statements have been restated.





We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 26, 2010 (June 2, 2010 as to the material weakness relating to the preparation of the statements of cash flows) thereon expressed an adverse opinion on the Company’s internal control over financial reporting because of material weaknesses.




/s/ Deloitte & Touche LLPSan Jose, CaliforniaMarch 26, 2010(June 2, 2010 as to the effects of the restatement discussed in Note 18)


- 48 -


BELL MICROPRODUCTS INC.





CONSOLIDATED BALANCE SHEETS





In thousands, except per share data





December 31,2009


2008(1)ASSETSCurrent assets:Cash and cash equivalents

$
21,132


$
22,775Accounts receivable, net


434,858



429,853Inventories


295,692



230,652Prepaid expenses and other current assets


44,088



24,907Total current assets


795,770



708,187Property and equipment, net


15,710



19,042Goodwill


21,456



19,211Other intangibles, net


6,261



9,315Other long-term assets


17,779



26,371Total assets

$
856,976


$
782,126LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities:Cash overdraft

$
12,453


$
10,527Accounts payable


348,415



264,218Borrowings under lines of credit


179,691



211,405Current portion of long-term debt


11,097



10,286Other accrued liabilities


91,784



94,658Total current liabilities


643,440



591,094Long-term debt, net of current portion


159,494



161,063Other long-term liabilities


22,210



24,269Total liabilities


825,144



776,426Commitments and contingencies (Note 10)Shareholders’ equity:Preferred stock, $0.01 par value, 10,000 shares authorized; none issued and outstanding


—



—Common stock, $0.01 par value, 80,000 shares authorized; 31,942 and 31,774 shares issued and outstanding at December 31, 2009 and 2008, respectively


233,950



231,432Accumulated deficit


(209,978
)


(217,500
)Accumulated other comprehensive income (loss)


7,860



(8,232
)Total shareholders’ equity


31,832



5,700Total liabilities and shareholders’ equity

$
856,976


$
782,126





Debt with Conversion and Other Options Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)





The accompanying notes are an integral part of these consolidated financial statements.








- 49 -


BELL MICROPRODUCTS INC.





CONSOLIDATED STATEMENTS OF OPERATIONS





In thousands, except per share data





Years Ended December 31,2009


2008 (1)


2007 (1)Net sales

$
3,021,167


$
3,579,499


$
3,949,905Cost of sales


2,725,127



3,244,053



3,609,362Gross profit


296,040



335,446



340,543Selling, general and administrative expense


226,329



302,416



297,483Professional fees (2)


26,129



56,763



22,625Impairment of goodwill and other intangibles


—



5,864



52,445Restructuring and impairment costs


3,795



4,289



1,404Total operating expenses


256,253



369,332



373,957Operating income (loss)


39,787



(33,886
)


(33,414
)Interest expense, net


33,097



37,544



40,797Other expense (income), net


(2,121
)


10,509



(2,426
)Income (loss) before income taxes


8,811



(81,939
)


(71,785
)Provision for income taxes


1,289



527



6,961Net income (loss)

$
7,522


$
(82,466
)

$
(78,746
)Net income (loss) per share:Basic

$
0.24


$
(2.55
)

$
(2.44
)Diluted

$
0.23


$
(2.55
)

$
(2.44
)Shares used in per share calculation:Basic


31,859



32,299



32,248Diluted


32,595



32,299



32,248





(1)
Adjusted for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other Options.See Note 2, “Summary of Significant Accounting Policies.”





(2)
Professional fees represent fees for audit, legal, tax and outside accounting advisory services.







- 50 -


BELL MICROPRODUCTS INC.




CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY




AND COMPREHENSIVE INCOME (LOSS)




In thousands


Common Stock


Accumulated

DeficitShares


Amount


Accumulated

Other

Comprehensive

Income (Loss)


Total

Shareholders’

Equity


Comprehensive

Income (Loss)Balance at January 1, 2007


32,162


$
198,854


$
(60,505
)

$
23,761


$
162,110Adjustment for the cumulative effect of prior years of the adoption of FASB ASC 470-20 (1)


—



29,731



5,753



—



35,484Adjustment for the cumulative effect of prior years of the adoption of ASC 740-10


—



—



(1,536
)


—



(1,536
)Adjusted balance at January 1, 2007


32,162



228,585



(56,288
)

$
23,761


$
196,058Currency translation adjustment


—



—



—



7,408



7,408


$
7,408Net unrealized loss on available-for-sale security


—



—



—



(18
)


(18
)


(18
)Changes in unrealized loss on derivative instruments, net of tax


—



—



—



(870
)


(870
)


(870
)Net loss


—



—



(78,746
)


—



(78,746
)


(78,746
)Total comprehensive loss





















$
(72,226
)Exercise of stock options and vesting of RSUs


125



36



—



—



36Tax benefit associated with exercise of stock options


—



68



—



—



68Stock-based compensation


—



1,350



—



—



1,350Balance at December 31, 2007


32,287



230,039



(135,034
)


30,281



125,286Currency translation adjustment


—



—



—



(38,895
)


(38,895
)


(38,895
)Net unrealized loss on available-for-sale security


—



—



—



(30
)


(30
)


(30
)Changes in unrealized gain on derivative instruments, net of tax


—



—



—



412



412



412Net loss


—



—



(82,466
)


—



(82,466
)


(82,466
)Total comprehensive loss





















$
(120,979
)Vesting of RSUs


197



—



—



—



—Repurchase of shares


(710
)


(1,562
)


—



—



(1,562
)Stock-based compensation


—



2,955



—



—



2,955Balance at December 31, 2008


31,774



231,432



(217,500
)


(8,232
)


5,700Currency translation adjustment


—



—



—



16,149



16,149



16,149Net unrealized loss on available-for-sale security


—



—



—



(2
)


(2
)


(2
)Changes in unrealized gain on derivative instruments, net of tax


—



—



—



(55
)


(55
)


(55
)Net income


—



—



7,522



—



7,522



7,522Total comprehensive income





















$
23,614Vesting of RSUs


168



—



—



—



—Stock-based compensation


—



2,518



—



—



2,518Balance at December 31, 2009


31,942


$
233,950


$
(209,978
)

$
7,860


$
31,832





(1)
Adjusted for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other Options.See Note 2, “Summary of Significant Accounting Policies.”







- 51 -


BELL MICROPRODUCTS INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS




In thousands


Years Ended December 31,2009


2008 (1) (2)


2007 (1)(Restated)


(Restated)


(Restated)See Note 18


See Note 18


See Note 18Cash flows from operating activities:Net income (loss)

$
7,522


$
(82,466
)

$
(78,746
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


10,970



10,774



10,968Amortization of debt issuance costs


3,746



2,958



2,597Amortization debt discount


9,832



8,656



7,761Stock-based compensation expense


2,518



4,893



1,418Provision for bad debts


8,214



16,375



7,090Loss on property and equipment


89



225



610Remeasurement of ProSys derivative


(2,840
)


4,019



372(Gain) loss on currency remeasurement


(5,253
)


16,965



(1,278
)Impairment of goodwill and other intangibles


—



5,864



52,445Deferred taxes


(3,657
)


(2,008
)


2,588Changes in assets and liabilities:Accounts receivable


7,268



45,757



(23,912
)Inventories


(53,360
)


178,225



(45,755
)Prepaid expenses and other assets


(17,795
)


(2,730
)


3,533Accounts payable and cash overdrafts


74,165



(117,239
)


67,745Other accrued liabilities


817



(8,612
)


(7,541
)Net cash provided by (used in) operating activities


42,236



81,656



(105
)Cash flows from investing activities:Proceeds from sale of property and equipment


53



47



124Purchases of property and equipment


(4,036
)


(7,604
)


(9,247
)Payments associated with acquisitions of businesses, net of cash acquired


—



—



(2,324
)Net cash used in investing activities


(3,983
)


(7,557
)


(11,447
)Cash flows from financing activities:Net (repayments) borrowings under lines of credit


(31,393
)


(53,329
)


47,416Debt issuance costs


(475
)


(2,480
)


(9,770
)Borrowings under long-term notes payable


—



10,000



—Payments under long-term notes payable and capital lease obligations


(11,198
)


(10,884
)


(8,781
)Repurchases of common stock


—



(3,500
)


—Proceeds from issuances of common stock


—



—



36Net cash (used in) provided by financing activities


(43,066
)


(60,193
)


28,901Effect of exchange rate changes on cash


3,170



(31,479
)


(3,595
)(Decrease) increase in cash and cash equivalents


(1,643
)


(17,573
)


13,754Cash and cash equivalents, beginning of year


22,775



40,348



26,594Cash and cash equivalents, end of year

$
21,132


$
22,775


$
40,348Cash payments (receipts) during the year:Interest paid

$
19,364


$
26,940


$
28,576Income taxes paid


4,245



3,038



4,935Income tax receipts


(380
)


(5,221
)


(1,186
)Supplemental non-cash investing activities:Purchase price adjustment – ProSys


—



—



5,694Accrual of earnout payments associated with acquisitions


505



1,151



1,167Settlement of earnout associated with acquisitions


—



1,056



—





(1)
Adjusted for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other Options.See Note 2, “Summary of Significant Accounting Policies.”


(2)
Includes stock-based compensation expense of $1.9 million resulting from the repurchase of 710,036 shares of Company common stock from the former ProSys shareholders.







- 52 -


BELL MICROPRODUCTS INC.





NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 — ORGANIZATION, BUSINESS OF COMPANY AND CREDIT AGREEMENT COVENANTS





Description of Operations





Bell Microproducts Inc., a California corporation, and its subsidiaries (collectively, the “Company”) are distributors of storage products and systems, as well as computer products and peripherals to original equipment manufacturers (“OEMs”), value-added resellers (“VARs”) and dealers in the United States, Canada, Latin America and Europe.





Financial Statement Presentation and Liquidity





The Company’s consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business.  The Company’s ability to continue as a going concern is dependent upon, among other factors, continuing to generate sufficient cash flows from operations, maintaining compliance with the provisions of its existing credit agreements and meeting or successfully negotiating the terms of its obligations when due and obtaining alternative or additional financing, if needed.





The Company currently has substantial outstanding debt obligations that could become payable through the first quarter of 2011, including the following:




·
The Company’s primary U.S. line of credit with Wachovia Capital Finance Corporation (Western) (the “Western Facility”) expires on September 20, 2010, but is automatically extended for one year unless the Company receives written notice of termination 60 days prior to that date.  This facility provides availability of up to $153 million, as amended on February 3, 2010, of which approximately $70 million was outstanding at December 31, 2009.




·
The Company’s convertible subordinated notes, in the aggregate principal amount of $110 million, include a provision under which the holders have the right to require the Company to repurchase for cash all or a portion of the notes at face value on March 5, 2011.





The Company is currently negotiating an extension of the Western Facility.  The ability of the Company to negotiate an extended or replacement revolving line of credit will likely be impacted by the redemption provisions of its convertible subordinated notes and its ability to successfully complete a restructuring of those provisions.  The Company believes it will be able to successfully renegotiate the terms of the Western Facility and the convertible subordinated notes, or obtain alternative or additional financing, if needed.





Alternative or additional financings could result in existing shareholders experiencing significant dilution, and the Company may issue new equity securities with rights, preferences or privileges senior to those of existing holders of our common stock.  Further, a renegotiation of the terms of the notes or an alternate or additional financing could be dilutive to future earnings per share.  Should the Company be unsuccessful in negotiating an extended or replacement revolving line of credit when necessary, or either obtaining necessary funds to redeem the convertible subordinated notes or renegotiating the terms of a refinancing with the current note holders, including obtaining the necessary approvals from senior lenders, it would be in default of the terms of its debt agreements which would constitute a cross-default under most of our other debt arrangements.  If those defaults should occur and the Company was unable to negotiate cures: (1) its lenders could declare all outstanding principal and interest to be due and payable and certain cross-default provisions under other credit arrangements would be triggered; or (2) its lenders could terminate their commitments to loan the Company money and foreclose against the assets securing their borrowings.  Should these events occur, there would be uncertainty regarding the Company’s ability to continue as a going concern.





Several of the Company’s credit agreements require that the Company comply with financial and non-financial covenants, including a minimum fixed-charge coverage ratio based upon earnings.  In 2010, 2009, 2008 and 2007, we obtained agreements from our lenders to waive defaults under our debt agreements related to non-compliance with certain of these covenants, and related cross-defaults.  Based upon the Company’s current projections, the Company believes that it will generate sufficient cash flows from operations and maintain debt covenant compliance for at least the next twelve months.  Should the Company be unsuccessful in maintaining debt covenant compliance, the lenders may exercise their option to demand repayment of the amounts outstanding, and there would be uncertainty regarding the Company’s ability to continue as a going concern.  Based upon the Company’s current projections, the Company believes that it will generate sufficient cash flows from operations and maintain debt covenant compliance for at least the next twelve months.  Should the Company be unsuccessful in maintaining debt covenant compliance, the lenders may exercise their option to demand repayment of the amounts outstanding, and there would be uncertainty regarding the Company’s ability to continue as a going concern.





- 53 -


NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of Consolidation and Basis of Preparation





The consolidated financial statements include the accounts of Bell Microproducts Inc. and its wholly owned subsidiaries.  All intercompany transactions and balances have been eliminated in consolidation.





The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes.  These estimates may affect the reported amounts of assets and liabilities and the disclosure of contingent assets at the date of the financial statements.  They may also affect the reported amounts of revenues and expenses during the reporting period.  Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable.  Although these estimates are based on management’s assessment of current events and actions that may impact the Company in the future, actual results may differ materially from the estimates.  The Company’s critical accounting estimates are those that affect its consolidated financial statements materially and involve difficult, subjective or complex judgments by management.





Revenue Recognition





The Company principally generates revenues from distributing storage products and systems and computer products and peripherals.  The Company also provides value-added services such as system design, integration, installation, maintenance and other consulting services, combined with a variety of storage and computer hardware and software products.





The Company recognizes product revenue when the following conditions are met:  (1) a firm customer order has been received, (2) the goods have been shipped and, title and risk of loss have been passed to the buyer, (3) the price to the buyer is fixed or determinable and (4) collectibility is reasonably assured.  Revenue is recorded net of estimated discounts, rebates and estimated returns.  The Company recognizes service revenue as the services are performed, and the related costs are expensed as incurred unless installation is essential to the functionality of the product, in which case product and service revenue is deferred until the service is completed.  Service revenues represented less than 10% of total net sales for 2009, 2008 and 2007.





Certain customer arrangements require the Company to record net profit as a component of revenue (essentially as an agent fee) rather than recording the gross amount of the sale and related cost.  Generally, revenue and the related costs are recorded on a gross basis only when the Company is primarily obligated in a transaction,.  Other factors that the Company considers in determining whether to recognize revenue and the related cost on a gross versus net basis include the assumption of general and physical inventory risk, latitude in establishing prices, discretion in selecting suppliers, determination of product or service specifications, involvement in the provision of services and assumption of credit risk.  The Company recognized sales under these net contracts in the amounts of $5.9 million, $8.5 million and $10.5 million during 2009, 2008 and 2007, respectively.





The Company enters into multiple-element revenue arrangements, which may include any combination of services, extended warranty and hardware.  A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met:





•
The delivered item(s) has value to the customer on a stand-alone basis;





•
There is objective and reliable evidence of the fair value of the undelivered item(s); and





•
If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.





- 54 -


If these criteria are met for each element and there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value.  If these criteria are not met, revenue is deferred and recognized upon delivery of the undelivered items.





Shipping and handling costs charged to customers are included in net sales and the associated expense is recorded in cost of sales for all periods presented.





Cost of Sales





Cost of sales comprises all costs for products and services sold.  The Company records warehouse costs to operating expenses as opposed to cost of sales.





Cash and Cash Equivalents and Cash Overdraft





Cash equivalents consist of highly liquid investments that are readily convertible into cash and have original maturities of three months or less at the date of purchase.  Cash overdraft represents payments recorded by the Company in excess of available bank funds.  Changes in cash overdraft are recorded in cash provided by (used in) operating activities in the accompanying consolidated statements of cash flows.





Accounts Receivable and Allowance for Doubtful Accounts





Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  The Company evaluates the collectibility of its accounts receivable based on a combination of factors.  Collection risks are mitigated by (i) sales to well-established companies; (ii) ongoing credit evaluation of its customers; and (iii) frequent contact by the Company with its customers, especially its most significant customers, which enables the Company to monitor changes in business operations and to respond accordingly.  When the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance against amounts due to it and thereby reduces the net receivable to the amount the Company reasonably believes is likely to be collected.  For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are outstanding, industry and geographic concentrations, the current business environment and its historical experience.





Customer credits pertaining to price protection programs, rebate programs, promotions and product returns are recorded to offset customer receivables.  When applicable, credits are extinguished when a customer applies them to its related receivable or the Company is legally released from being the primary obligor under the liability.





Vendor Programs





The Company receives funds from vendors for price protection, product rebates, marketing, promotions and other competitive pricing programs.  These amounts are recorded as a vendor receivable, as a reduction to accounts payable, with a corresponding reduction to inventories, cost of sales or selling, general and administrative expense, depending on the nature of the program.  Vendor receivables are generally collected through vendor-authorized reductions to the Company’s accounts payable, and reserves are established for vendor receivables that are determined to be uncollectible.





Financial Instruments, Concentration of Credit and Other Risks





Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and short-term debt obligations.  The fair value of these financial instruments approximates their carrying value as of December 31, 2009 and 2008, due to the nature of these instruments or their short-term maturity.  Financial instruments also include long-term debt, the fair value of which is disclosed in Note 6— Lines of Credit and Long-Term Debt.  The Company’s derivative instruments are recorded at fair value as disclosed in Note 14, Derivative Instruments.





Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable.  The Company performs ongoing credit evaluations of its customers and generally does not require collateral.  The Company maintains allowances for estimated collection losses.  No customer accounted for more than 10% of net sales in any of the three years ended December 31, 2009, 2008 and 2007, or of accounts receivable at December 31, 2009 or 2008.





- 55 -


Five vendors accounted for 47% of the Company’s inventory purchases during 2009.  Five vendors accounted for 48% of the Company’s inventory purchases during 2008 and five vendors accounted for 49% of the Company’s inventory purchases during 2007.





Inventories





Inventories are stated at the lower of cost or market.  Cost is generally determined by the first-in, first-out (“FIFO”) method.  Market is based on estimated net realizable value.  The Company assesses the valuation of its inventory on a quarterly basis and periodically writes down the value for estimated excess and obsolete inventory based on estimates about future demand, actual usage and current market value.  The Company’s only component of inventory is finished goods.  When inventory is written down, a new cost basis is established.





Property and Equipment





Property and equipment are recorded at cost.  Depreciation is computed using the straight-line method based upon the estimated useful lives of computer and other equipment, furniture and fixtures and warehouse equipment, which range from three to five years.  Maintenance and repairs are charged to expense as incurred, and improvements are capitalized.  Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.





Goodwill





The Financial Accounting Standards  Board (“FASB”) Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other (“ASC 350”) requires goodwill to be tested for impairment and written down when impaired on an annual basis and between annual tests in certain circumstances.  ASC 350 also requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite.





In accordance with ASC 350, a two-step impairment test is required to identify potential goodwill impairment and measure the amount of the goodwill impairment loss to be recognized.  In the first step, the fair value of each reporting unit is compared to its carrying value to determine if the goodwill is impaired.  If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, then goodwill is not impaired and no further testing is required.  If the carrying value of the net assets assigned to the reporting unit exceeds its fair value, then the second step is performed in order to determine the implied fair value of the reporting unit’s goodwill and an impairment loss is recorded for an amount equal to the difference between the implied fair value and the carrying value of the goodwill.





Long-Lived Assets and Other Intangible Assets





Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition.  Measurement of any impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset.





Other intangible assets consist of non-compete agreements, intellectual property and contractual and non-contractual customer relationships obtained in acquisitions.  These assets are included within other intangibles, net within the consolidated balance sheets and are carried at cost less accumulated amortization.  Amortization is computed over the estimated useful lives of the respective assets ranging from three to 20 years and using the straight-line method.  Intangible assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable.  An impairment loss is recognized when estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset.  When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value.





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Other Expense (Income), Net





Other expense (income), net primarily consists of gains and losses arising from foreign currency transactions.





Income Taxes





The Company’s provision for income taxes is comprised of its current tax liability and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the differences are expected to reverse.  The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in the results of operations for the period that includes the effective date.  A valuation allowance is recorded to reduce the carrying value of deferred tax assets unless it is more likely than not that such assets will be realized.  The Company’s income tax calculations are based upon applicable U.S. Federal, State, or foreign corporate income tax laws.





Through December 31, 2009 and 2008, the Company has not provided for U.S. Federal income tax for undistributed earnings from foreign subsidiaries as it is currently the Company’s intention to reinvest these earnings indefinitely in operations outside the U.S.  The Company believes it is not practicable to determine the Company’s tax liability that may arise in the event of a future repatriation of foreign earnings.  If repatriated, these earnings could result in a tax expense at the current U.S. Federal statutory tax rate of 35%, subject to available net operating losses and other factors.  Tax on undistributed earnings may also be reduced by foreign tax credits that may be generated in connection with the repatriation of earnings.  The Company expects to satisfy its anticipated cash needs for operations and capital requirements in all jurisdictions for at least the next twelve months using existing cash, anticipated cash flows generated from operations and borrowings under its existing lines of credit.  Virtually all of the Company’s foreign jurisdictions need cash for day-to-day operations and expansion and, as such, the Company does not plan to repatriate any of the foreign earnings.





The Company calculates its current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in the income tax returns it files.  Adjustments based on filed returns are generally recorded in the period when the tax returns are filed and the global tax implications are known.





The amount of income tax the Company pays is subject to audits by U.S. Federal, state and foreign tax authorities, which may result in proposed assessments.  The Company’s estimate of the potential outcome for any uncertain tax issue requires significant judgment.  The Company believes it has adequately provided for any reasonably foreseeable outcome related to these matters.  However, the Company’s future results may include favorable or unfavorable adjustments to its estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.  Additionally, the jurisdictions in which the Company’s earnings or deductions are realized may differ from its current estimates.  As a result, the Company’s effective tax rate in future periods may fluctuate significantly.





The Company evaluates its uncertain tax positions in accordance with the guidance for accounting for uncertainty in income taxes.  The amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in the Company’s income tax expense and therefore could have a material impact on our future tax provisions, net income and cash flows. The Company’s reserve for uncertain tax positions is attributable primarily to uncertainties concerning the tax treatment of our international operations, including the allocation of income among different jurisdictions, and related interest. The Company reviews its reserves quarterly, and we may adjust such reserves because of proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable information obtained during the course of an examination, negotiations between tax authorities of different countries concerning our transfer prices, execution of advanced pricing agreements, resolution with respect to individual audit issues, the resolution of entire audits, or the expiration of statutes of limitations.





Net Income (Loss) Per Share





Basic and diluted net income (loss) per share are calculated using the weighted average number of common shares outstanding during the period.  In addition, diluted net income includes potentially issuable shares of common stock and their effects on income which were included in the diluted calculations as their effect was dilutive for 2009.  Potentially issuable shares of common stock and their effects on income were excluded from the diluted calculations as their effect was anti-dilutive for 2008 and 2007.





- 57 -


Foreign Currency Translation and Transactions





For each of our foreign subsidiaries, the local currency is its functional currency.  Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries are reported as a component of accumulated comprehensive income as a separate component of shareholders’ equity.  Assets and liabilities denominated in currencies other than U.S. dollars are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities, and historical exchange rates for nonmonetary assets and liabilities. Net revenue, cost of sales and expenses are remeasured at average exchange rates in effect during each reporting period, and net revenue, cost of sales and expenses related to the previously reported periods are remeasured at historical exchange rates. The Company includes gains and losses from foreign currency transactions in net earnings.





Comprehensive Income (Loss)





Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.  For the Company, comprehensive income (loss) consists of its net income (loss), the change in the currency translation adjustment and the change in unrealized gain (loss) on certain derivative instruments, net of tax.





Accumulated other comprehensive income, comprised primarily of foreign currency translation adjustments, was $7.9 million at December 31, 2009, and accumulated other comprehensive loss was $(8.2) million at December 31, 2008.  Foreign currency translation adjustments consist of adjustments to consolidate subsidiaries that use the local currency as their functional currency and transaction gains and losses related to intercompany dollar-denominated debt that is not expected to be repaid in the foreseeable future.





Stock-Based Compensation





Stock-based compensation expense for all share-based payment awards granted is initially determined based on the estimated fair values on the date of grant, net of an estimated forfeiture rate . Compensation expense for stock options and non-performance based RSUs granted after December 31, 2005 is recognized over the requisite service period of the award on a straight-line basis.  Compensation expense for all non-performance based RSUs granted on or prior to December 31, 2005 is recognized using the accelerated multiple-option approach.  Compensation expense for performance-based RSUs is recognized using the accelerated multiple option method based upon the fair value of the underlying shares on the vesting date.  Forfeiture rates used in the determination of compensation expense are revised in subsequent periods if actual forfeitures differ from estimates.





Business Segments





The Company is in the business of providing computer components and peripherals, server and storage subsystems and solutions, software and value added services to OEMs, VARs, contract manufacturers, direct manufacturers, integration and end-user customers.  The Company’s reportable segments are North America, Europe, ProSys, Latin America, and Other.  Management designates the internal reporting used by its chief operating decision maker for making decisions and assessing performance as the source of reportable segments.  See Note 3— Goodwill and Other Intangible Assets, as well as Note 13— Segment and Geographic Information.





Derivative Financial Instruments





The Company accounts for derivative financial instruments in accordance with FASB ASC 815-10, Derivatives and Hedging(“ASC 815-10”).  ASC 815-10 requires that all derivative instruments be recognized on the balance sheet at fair value.  In addition, ASC 815-10 provides that for derivative instruments that qualify for hedge accounting, changes in the fair value will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in shareholder’s equity as a component of accumulated other comprehensive income (loss), net of taxes, until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge changes in fair values or cash flows.  The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.  For derivative instruments that are not designated as accounting hedges, changes in fair value are recognized in earnings in the period of change.  The Company uses derivative instruments principally to manage the risk associated with movements in foreign currency exchange rates and the risk that changes in interest rates will affect the fair value or cash flows of its debt obligations.





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Restructuring and Impairment Costs





Restructuring and impairment costs include employee severance and benefit costs, costs related to leased facilities abandoned and subleased, costs related to owned and leased equipment that has been or will be abandoned.  For owned facilities and equipment, the impairment loss recognized was based on the fair value less costs to sell, with fair value estimated based on existing market prices for similar assets.





Severance and benefit costs are recognized when the Company’s management has committed to a restructuring plan, the terms of that plan are communicated to the affected employees and the severance costs are probable and estimable.  The Company’s estimate of severance and benefit costs is based on planned employee attrition.





The Company also records estimated future losses for leased facilities as a component of restructuring costs.  These losses are calculated based upon an estimate of the fair value of the lease liability as measured by the present value of future lease payments subsequent to abandonment, less the present value of any estimated sublease income.  In order to estimate future sublease income, the Company engages real estate brokers to estimate the length of time to sublease a facility and the amount of rent it can expect to receive.  Estimates of expected sublease income could change based on factors that affect its ability to sublease those facilities, such as general economic conditions and the real estate market, among others.  A liability for these costs is recorded at its fair value in the period in which the liability is incurred.





Other exit costs include costs to consolidate facilities or close facilities and relocate employees.  A liability for such costs is recorded at its fair value in the period in which the liability is incurred.





At each reporting date, the Company evaluates its accruals for exit costs and employee separation costs to ensure the accruals are still appropriate.  See Note 7— Restructuring and Impairment Costs.





Advertising





Costs related to advertising and product promotion expenditures are charged to selling, general and administrative expense as incurred, and are primarily offset by OEM marketing reimbursements.  The Company incurred advertising and product promotion costs, net of reimbursement, in the amounts of $1.1 million, $2.6 million and $2.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.





Immaterial Reclassifications and Error Correction Disclosure





At December 31, 2008 accounts receivable balances of $5.7 million were reclassified to prepaid expenses and other current assets to conform to the current period presentation.  Certain December 31, 2008 and 2007 selling, general and administrative expense amounts were reclassified to professional fees to conform to the current period presentation.  Subsequent to the issuance of the 2008 financial statements, management determined that the supplemental disclosure of cash paid for interest in the consolidated statement of cash flows for the years ended December 31, 2008 and 2007 contained errors which management believes are immaterial.  The amounts originally reported as $43.3 million and $36.4 million were corrected to $26.9 million and $28.6 million, for the years ended December 31, 2008 and 2007, respectively.





Adoption of New Pronouncements





On July 1, 2009, the FASB issued FASB ASC 105-10, Generally Accepted Accounting Principles(“GAAP”) (“ASC 105-10”) (the “Codification”).  ASC 105-10 establishes the exclusive authoritative reference for U.S. GAAP for use in financial statements, except for SEC rules and interpretive releases, which are also authoritative for SEC registrants.  The Codification supersedes all existing non-SEC accounting and reporting standards.  The Company has included the references to the Codification, as appropriate, in these consolidated financial statements.





In May 2008, the FASB issued FASB ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”) (formerly FSP APB 14-1), which requires issuers of convertible debt securities within its scope to bifurcate these securities into a debt component and an equity component in a manner that reflects an issuer’s nonconvertible borrowing rate.  ASC 470-20 applies to the Company’s subordinated notes issued on March 5, 2004 and became effective for the Company at the beginning of fiscal 2009.  ASC 470-20 requires retrospective application to all periods presented.  Accordingly, the information presented for periods prior to January 1, 2009 has been adjusted for such retrospective application.





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On January 1, 2009, the Company adopted the provisions of ASC 470-20.  The Company estimated the debt component (fair value of the convertible notes at issuance without the conversion feature) at approximately $58.2 million using a discounted cash-flow method.  Key assumptions in determining this fair value estimate included the Company’s nonconvertible debt borrowing rate as of March 5, 2004, as well as the expected life of the debt, which is through March 2011, the first put date of the related debt.  The equity component, which is the value of the conversion feature at issuance, was recognized as the difference between the proceeds from the issuance of the convertible notes and the debt component, after adjusting for the deferred tax impact.  The value of the conversion feature is accordingly reflected as a discount to reduce the initial $110.0 million carrying value of the debt to fair value without the conversion feature, and the discount is accreted as additional interest expense over the expected life of the debt.  Original debt issuance costs have also been allocated between other assets and equity on a proportional basis of the debt and equity components.





As a result of applying ASC 470-20 retrospectively to all periods presented, the Company recognized the following effects on the individual line items on the consolidated statements of operations:





(1)
Incremental interest expense of $9.4 million , $8.1 million and $7.2 million for the twelve months ended December 31, 2009, 2008 and 2007, respectively.





(2)
A decrease in the net income per basic and diluted share of $0.30 for the twelve months ended December 31, 2009, and increases in the net loss per basic and diluted share of $0.25 and $0.22 for the twelve months ended December 31, 2008 and 2007, respectively.





Consolidated Balance Sheet as of

December 31, 2008As Previously Reported


ASC 470-20 Adjustments


As Adjusted(In thousands)Prepaid expenses and other current assets

$
25,495 (1)


$
(588
)

$
24,907Total current assets


708,775



(588
)


708,187Other long-term assets


18,545



7,826



26,371Total assets


774,888



7,238



782,126Long-term debt, net of current portion


183,547



(22,484
)


161,063Other long-term liabilities


15,751



8,518



24,269Total liabilities


790,392



(13,966
)


776,426Common stock


201,701



29,731



231,432Accumulated deficit


(208,973
)


(8,527
)


(217,500
)Total shareholders’ equity (deficit)


(15,504
)


21,204



5,700





(1) Reflects reclassification of certain December 31, 2008 accounts receivable balances reclassified to prepaid expenses and other current assets to conform to current period presentation.





Consolidated Balance Sheet as of

December 31, 2007As Previously Reported


ASC 470-20 Adjustments


As Adjusted(In thousands)Common stock


200,308



29,731



230,039Accumulated deficit


(134,153
)


(881
)


(135,034
)Total shareholders’ equity


96,436



28,850



125,286





See Note 6 – Lines of Credit and Long-Term Debt for additional information.





- 60 -


Recently Issued Accounting Standards





In October 2009, the FASB issued ASU 2009-13,Multiple-Deliverable Revenue Arrangements (amendments to FASB ASC Topic 605,Revenue Recognition ) (“ASU 2009-13”) and ASU 2009-14,Certain Revenue Arrangements That Include Software Elements  (amendments to FASB ASC Topic 985,Software ) (“ASU 2009-14”).  ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy.  The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method.  ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance.  ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently evaluating the effect the adoption of ASU 2009-13 and ASU 2009-14 will have on its consolidated financial statements.





On January 21, 2009, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements(“ASU 2010-06”).  ASU 2010-06 amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements.  The amended guidance requires entities to disclose additional information regarding assets and liabilities that are transferred between levels of the fair value hierarchy.  Entities are also required to disclose information in the Level 3 rollforward about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, ASU 2010-06 also amends Topic 820 to further clarify existing guidance pertaining to the level of disaggregation at which fair value disclosures should be made and the requirements to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements.  The guidance in ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to separately disclose purchases, sales, issuances, and settlements in the Level 3 rollforward, which becomes effective for fiscal years (and for interim periods within those fiscal years) beginning after December 15, 2010.  The Company is currently evaluating the effect that the adoption of ASU 2009-06 will have on its consolidated financial statements.





NOTE 3 — GOODWILL AND OTHER INTANGIBLE ASSETS





A reporting unit is defined as operating segment or one level below an operating segment (i.e., a component of an operating segment).  A component of an operating segment can be a reporting unit if the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component.  The accounting guidance for segment reporting provides that two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics.





The Company applies the provisions of FASB ASC 350, Intangibles – Goodwill and Other(“ASC 350”), in its evaluation of goodwill and other intangible assets.  ASC 350 eliminates the requirement to amortize goodwill, but requires that goodwill be reviewed at least annually for potential impairment, which the Company performs each year as of December 31.





Effective March 19, 2008, the Company’s common stock was suspended from trading on the NASDAQ Global Market.  Consequently, in the first quarter of 2008, the Company experienced a significant decline in the market value of its stock.  As a result, the Company’s market capitalization was significantly lower than its book value and the Company believed that this was an indicator of potential impairment of its goodwill.





The Company determined that it had the following 11 operating segments at December 31, 2007 and March 31, 2008 for goodwill impairment analysis as follows:





U.S. Distribution
Rorke Data
Chile IQQ
EuropeCanada
Latin America Export
Mexico
ProSysTotalTec
Chile
Net Storage Brazil





During 2008, the CODM started to review financial information differently, which included Chile and Chile IQQ as one set of financial information which resulted in a change in operating segments.  The change in operating segment determination required the Company to reevaluate its historical assumption of 11 reporting units for goodwill impairment analysis.  As a result, the Company determined that it had 10 reporting units at December 31, 2008 for goodwill impairment analysis, consisting of the 11 reporting units determined at March 31, 2008 and December 31, 2007, less Chile IQQ.





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In 2009, the CODM further changed the segments included in his review of financial information which resulted in U.S. Distribution and Canada being combined and designated as North America, and Mexico, Brazil, Chile and Miami being combined and designated as Latin America.





As a result of these changes, the Company has re-evaluated its reporting units and has determined that it has nine reporting units at December 31, 2009.





Goodwill balances by year and by reportable segment and changes therein were as follows (in thousands):





North America


Latin America


Other


TotalBalance at January 1, 2008

$
8,487


$
8,387


$
9,340


$
26,214Contingent purchase price adjustment


—



1,151



—



1,151Impairment charge


—



(2,413
)


(3,451
)


(5,864
)Currency translation adjustment


—



(2,290
)


—



(2,290
)Balance at December 31, 2008


8,487



4,835



5,889



19,211Contingent purchase price adjustment


—



505



—



505Currency translation adjustment


—



1,740



—



1,740Balance at December 31, 2009

$
8,487


$
7,080


$
5,889


$
21,456





The above goodwill balances are reflected net of aggregate accumulated goodwill impairment charges of $69.1 million, $69.1 million and $63.2 million at December 31, 2009, 2008 and 2007, respectively.





In accordance with ASC 350, the Company used a two-step process to test for goodwill impairment.  The first step is to determine if there is an indication of impairment by comparing the estimated fair value of each reporting unit to its carrying value including existing goodwill.  Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value.  The Company utilized a combination of income and market approaches to estimate the fair value of its reporting units in the first step.





The income approach utilizes estimates of discounted cash flows of the reporting units, which requires assumptions of, among other factors, the reporting units’ expected long-term revenue trends, as well as estimates of profitability, changes in working capital and long-term discount rates, all of which require significant judgment.  The income approach also requires the use of appropriate discount rates that take into account the current risks in the capital markets.  The market approach evaluates comparative market multiples applied to the Company’s reporting units’ businesses to yield a second estimated fair value of each reporting unit.  In its analysis, the Company weighted the income and market approaches 75% and 25%, respectively.





At December 31, 2009, key assumptions used to determine the fair value of each reporting unit under the income approach method were:  (a) expected cash flow for the period from 2009 to 2014; and (b) a discount rate of 12.2%, which was based on management’s best estimate of the after-tax weighted average cost of capital (“WACC”).  At December 31, 2008, key assumptions used to determine the fair value of each reporting unit under the income approach method were:  (a) expected cash flow for the period from 2008 to 2013; and (b) a discount rate of 12.6%, which was based on management’s best estimate of the after-tax WACC.  At March 31, 2008, key assumptions used to determine the fair value of each reporting unit under the income approach method were:  (i) expected cash flow for the period from 2008 to 2012; and (ii) a discount rate of 13.3%, which was derived from management’s estimate of a market participant’s assumption of the WACC.  At December 31, 2007, key assumptions used to determine the fair value of each reporting unit under the income approach method were:  (1) expected cash flow for the period from 2008 to 2013; and (2) a discount rate of 12.8%, which was derived from management’s estimate of a market participant’s assumption of the WACC.





At December 31, 2009 and March 31, 2008, the Company did not impair goodwill as the fair value of the reporting units substantially exceeded their carrying value.





- 62 -


Step two of the impairment test requires the Company to compute a fair value of the assets and liabilities, including identifiable intangible assets, within each of the reporting units with indications of impairment, and compare the implied fair value of goodwill to its carrying value.  The results of step two indicated that the goodwill for the TotalTec reporting unit was fully impaired and the goodwill for the Net Storage Brazil reporting unit was partially impaired at December 31, 2008.  The TotalTec impairment was triggered by a reduction in customer base as a result of the recession that required us to decrease our forecast of future TotalTec cash flows.  The Net Storage Brazil impairment was triggered by the decline of the overall economic environment in Brazil as a result of the recession, which required us to decrease our forecast of future Net Storage Brazil cash flows.  As a result, in 2008, the Company recorded a goodwill impairment charge of $3.5 million in the TotalTec reporting unit and a goodwill impairment charge of $2.4 million in the Net Storage Brazil reporting unit, for a total goodwill impairment charge of $5.9 million in 2008.





In addition, as a result of the step two test in 2007, the Company recorded a charge of $52.4 million in the fourth quarter of 2007, which consisted of $20.5 million goodwill impairment charge recorded in the ProSys reporting unit and a $31.9 million goodwill impairment charge recorded in the Europe reporting unit.  The ProSys impairment was triggered by a decline in the overall economic environment resulting from the recession.  The decline required us to decrease our estimate of future ProSys cash flows.  The Europe impairment was triggered by combining Europe Distribution and Europe Enterprise into a single reporting unit, Europe.  The change in reporting unit determination resulted in revised future cash flows that did not support the carrying value of goodwill of the combined reporting unit.





The carrying value of goodwill is based on fair value estimates of projected financial information, which management believes to be reasonable.  The valuation methodology used to estimate the fair value of the Company and its reporting units considers the market capitalization of the Company, and requires inputs and assumptions that reflect market conditions, as well as management judgment.





The carrying values and accumulated amortization of intangible assets at December 31, 2009 and 2008 were as follows (in thousands):





Estimated

December 31, 2009Useful Life for

Gross


Accumulated


NetIntangible Assets
Amortization

Amount


Amortization


AmountNon-compete agreements
2-6 years

$
3,065


$
2,451


$
614Trade names
20 years


2,500



480



2,020Customer/supplier relationships
4-10 years


14,412



10,995



3,417Internally developed software
5 years


600



390



210Total


$
20,577


$
14,316


$
6,261





December 31, 2008Gross

Amount


Accumulated

Amortization


Net

AmountIntangible Assets
Estimated

Useful Life for

AmortizationNon-compete agreements
2-6 years

$
3,008


$
2,055


$
953Trade names
20 years


2,500



355



2,145Customer/supplier relationships
4-10 years


13,996



8,109



5,887Internally developed software
5 years


600



270



330Total


$
20,104


$
10,789


$
9,315





The weighted average amortization period of all intangible assets was approximately seven years for the years ended December 31, 2009, 2008 and 2007.





Amortization expense, using the straight line method, was $3.2 million, $3.4 million and $3.6 million for the years ended December 31, 2009, 2008 and 2007, respectively.  The Company estimates future annual amortization expense for intangible assets as follows (in thousands):





Years Ending December 31,

Amount2010

$
2,8942011


1,4572012


2132013


1772014


125Thereafter


1,395








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NOTE 4 — ACQUISITIONS





The acquisitions described below have been accounted for using the purchase method.  Accordingly, the results of operations of the acquired businesses are included in the consolidated financial statements from the dates of acquisition.





2006





ProSys Information Systems Acquisition





On October 2, 2006, the Company acquired substantially all of the assets and liabilities of ProSys.  Under the purchase agreement, the former shareholders of ProSys (the “Holders”) were eligible for additional payments related to the performance of the ProSys business unit for each of the three years ended September 30, 2007, 2008 and 2009.  Each annual payment was payable in a combination of cash and shares of the Company’s common stock based on the profits generated, up to a three-year maximum additional payment of $13.0 million.  In addition, the Company was subject to a potential additional payment in an amount equal to 20% of the profits of the ProSys business unit earned in excess of an aggregate of $26.0 million for the three-year period ended September 30, 2009.  In 2009, the company paid $1.5 million and accrued, but did not pay, an additional $3.3 million in contingent consideration.  In 2007 and 2008, the Company accrued, but did not pay, $6.8 million, in contingent consideration to the Holders.  The contingent payments were accounted for as compensation expense, and were not included in the purchase price of ProSys, because continued employment at the Company was required.





On October 13, 2009, the Company entered into a settlement agreement with the Holders covering all claims relating to the earnout payments.  Under the terms of the settlement, the Company paid the Holders $1.5 million by October 21, 2009 and accrued an additional $3.3 million at December 31, 2009 to settle all remaining claims relating to the earnout payments.  On January 4, 2010, the Company paid the remaining $3.3 million of earnout claims to the Holders.  As a result of these payments, the Company has no further obligations to the Holders, other than the payment to the Holders of any amounts not paid on account of pre-acquisition sales tax liabilities up to the amount accrued.  In addition, the Company agreed to relieve the Holders of any liability arising out of the contingent state sales tax liabilities incurred by ProSys prior to the Company’s acquisition of ProSys.  As of December 31, 2009, the Company accrued $6.8 million related to these contingent state sales tax liabilities, including $2.5 million related to the State of Washington.  In January 2010, the Company received a final assessment from the State of Washington for sales tax liabilities in the amount of $1.6 million.  As a result, the remaining accrual of $0.9 million related to the State of Washington is payable to the Holders under the terms of the settlement agreement.





Net Storage Computers, Ltda Acquisition





On July 8, 2005, the Company acquired all of the outstanding capital stock of Net Storage Computers Ltda.  Under the purchase agreement, the Company is obligated to pay an earnout based upon a percentage of the earnings of the Brazilian operation over a four-year period.  In 2009 and 2008, the former owners earned $0.5 million and $1.2 million, respectively, under this earnout provision.  The earnouts are accounted for as additional purchase price of Net Storage because continued employment at the Company was not required.  In addition, the Company also entered into a four-year Management Service Agreement, which obligates the Company to pay an additional $1.1 million to the former owners.





NOTE 5 — BALANCE SHEET COMPONENTS





December 31,2009


2008(in thousands)Accounts receivable:Accounts receivable

$
456,616


$
452,457Less:  allowance for doubtful accounts


(21,758
)


(22,604
)$
434,858


$
429,853Property and equipment:Computer and other equipment

$
51,430


$
47,682Land and buildings


3,539



3,720Furniture and fixtures


5,431



5,190Warehouse equipment


3,734



3,668Leasehold improvements


13,179



11,32677,313



71,586Less:  accumulated depreciation and amortization


(61,603
)


(52,544
)$
15,710


$
19,042





Total depreciation expense was $7.8 million in 2009, $7.4 million in 2008 and $7.3 million in 2007.





- 64 -


NOTE 6 — LINES OF CREDIT AND LONG-TERM DEBT





Borrowings Under Lines of Credit





December 31,2009


2008(in thousands)Western Facility

$
69,647


$
118,629IBM and Kreditbank Facilities (1)


(1,984
)


22,889Bank of America Facility


42,900



23,156GE Commercial Distribution Finance Facility


58,342



44,223Banco de Credito de Inversiones


2,800



—Banco de Chile


517



—Banco Internacional


4,600



—Itau Bank


861



—Intel Corporation Facility


2,008



2,508Amounts included in current liabilities

$
179,691


$
211,405





(1)
Amount outstanding represents cash held by the lender in excess of outstanding borrowings under the line of credit with IBM and Kreditbank Facilities Germany at December 31, 2009.





Western Facility





On May 14, 2001, the Company entered into a loan and security agreement with Congress Financial Corporation (Western), which is now known as Wachovia Capital Finance Corporation (Western), as agent for lenders under a revolving line of credit (the “Western Facility”).  On November 7, 2006, the Company entered into an amendment to the Western Facility, which increased the line of credit from $125.0 million to $150.0 million, and extended the maturity date to September 20, 2010.  On September 29, 2008, the Company amended and restated the Western Facility and increased the line of credit to a maximum amount of $204.0 million, but did not change the maturity date.  The maximum amount of borrowings under the amended Western Facility is primarily determined based on a percentage of eligible accounts receivable and inventory.





The Western Facility has been amended three times since September 29, 2008.  The first amendment, on November 10, 2008, modified the level of intercompany receivables permitted to be outstanding at any time.  The second amendment, on February 17, 2009, eliminated the minimum fixed-charge coverage ratio for the quarter ended December 31, 2008, and reduced the fixed-charge coverage ratio criteria required in the quarters ended March 31 and June 30, 2009.  The second amendment also extended the required delivery date of the Company’s audited consolidated financial statements for the year ended December 31, 2007, from March 31, 2009 to June 30, 2009, and modified the definition of Interest Rate and the calculation of Excess Availability, as those terms are utilized in the Western Facility.  The third amendment, effective February 3, 2010, removed, at the Company’s request, one of the lenders in the facility and reduced the line of credit to a maximum amount of $153 million.  At various times prior to September 29, 2008, the Company sought and obtained modifications to the credit agreement extending the time by which the Company was required to deliver its audited consolidated financial statements to the lender for the 2006, 2007 and 2008 fiscal years.  As of January 31 and February 28, 2010, the Company was not in compliance with an intercompany receivable limitation, and as of December 31, 2009, the Company was not in compliance with a cross-default provision due to a covenant breach in the GE Commercial Distribution Finance facility discussed below, although it obtained a waiver from the lenders in March 2010 regarding such non-compliance.





- 65 -


Prior to February 17, 2009, borrowings under the Western Facility bore interest at Wachovia’s prime rate plus a margin of between 0.25% and 0.75%, based on unused availability.  Effective February 17, 2009, borrowings under the Western Facility bear interest at the greater of (i) 5% or (ii) Wachovia’s prime rate plus a margin of between 0.25% and 0.75%, based on unused availability.  At the Company’s option, all or any portion of the outstanding borrowings may be converted to a Eurodollar rate loan, which would bear interest at the greater of (i) 5% or (ii) the adjusted Eurodollar rate plus a margin of between 2.50% and 3.00%, based on a percentage of unused availability.  The Company also pays an unused line fee equal to 0.25% per annum of the unused portion of the Western Facility, subject to certain adjustments.  The weighted average interest rate on outstanding borrowings under the Western Facility during the years ended December 31, 2009, 2008 and 2007 was 4.80%, 5.07% and 7.24%, respectively.





The Company’s obligations under the Western Facility are collateralized by substantially all of the assets of the Company and its North and South American subsidiaries, other than ProSys.  The Western Facility requires the Company to meet certain financial covenant tests and to comply with certain other covenants, including restrictions on the incurrence of debt and liens and restrictions on mergers, acquisitions, asset dispositions, capital contributions, payment of dividends, repurchases of stock and investments, achievement of a fixed-charge coverage ratio for certain fiscal periods (effective in the first quarter of 2009, the Company was required to have earnings before interest, income taxes, depreciation, amortization and restructuring charges in the applicable period greater than or equal to 35% of payments the Company makes for income taxes, interest, capital expenditures and principal payments during such quarter; that ratio increased to 75% for the second quarter of 2009, and to 110% thereafter; the applicable period was a single quarter during the first three quarters of 2009, extending to a two-quarter period as of December 31, 2009, a three-quarter period as of March 31, 2010, and a rolling four-quarter period thereafter) and the requirement that the Company provide audited consolidated financial statements to the lenders within a prescribed period of time after the close of the fiscal year.  Upon any event of default, the lenders may demand immediate payment of the balance outstanding.  An event of default includes the failure to pay any obligations when due or the failure to perform any of the terms, covenants, conditions or provisions of the agreement if such failure continues for 15 days.  Under this line, if an event is deemed to have a material adverse effect on the borrower, the lender can declare the loan to be in default.  Additionally, this agreement has a cross-default provision that is triggered by defaults in the agreement with GE Commercial Distribution Finance Corporation.





Kreditbank Facilities





On December 1, 2005, in connection with the acquisition of MCE, the Company entered into a short-term financing agreement with IBM Deutschland Kreditbank GmbH (“Kreditbank”) for up to $25.0 million.  The loan is collateralized by substantially all of the assets of the Company’s German subsidiary, as well as cross-company guarantees of certain of the Company’s European subsidiaries, and bears interest at LIBOR plus 7.16%, effective January 12, 2009.  In 2009 and 2008, the effective interest rate was U.S. LIBOR plus 2.00%.  The average interest rate on outstanding borrowings for the years ended December 31, 2009, 2008 and 2007 was 6.70%, 4.64% and 7.24%, respectively.  The facility has no maturity date, and continues indefinitely until terminated by either party upon six weeks’ notice.  If the facility is terminated, all amounts would be due at the end of the six-week period.  To date, neither party has given notice of intent to terminate this facility.  The balance outstanding on this facility at December 31, 2009 and 2008 was zero and $19.4 million, respectively, including interest payable.





Also on December 1, 2005, the Company entered into another short-term financing agreement with Kreditbank for €6.5 million ($9.3 million using the exchange rate on December 31, 2009 of $1.43/€1.00).  In May 2006, the agreement was amended to increase the available financing to €8.0 million ($11.4 million using the exchange rate on December 31, 2009 of $1.43/€1.00).  The loan was collateralized by substantially all of the assets of the Company’s German subsidiary, as well as cross-company guarantees of certain of the Company’s European subsidiaries, and bore interest at Euribor plus 3.85%.  The average interest rates on outstanding borrowings for the years ended December 31, 2008 and 2007 was 8.23% and 7.98%, respectively.  The facility has no maturity date and continues indefinitely until terminated by either party upon six weeks’ notice.  The balance outstanding on this facility at December 31, 2008 was $3.5 million, including interest payable.  On November 11, 2008, the Company received notice from Kreditbank that they would terminate this line of credit as of December 31, 2008, and all amounts due thereunder, which, as of November 11, 2008, totaled approximately €8.0 million, would be due on that date.  Subsequently, on December 5, 2008, the Company entered into an agreement with Kreditbank permitting repayment of €4.0 million by December 31, 2008 and the remainder no later than February 28, 2009.  As of February 28, 2009, all amounts under this facility had been repaid.





- 66 -


On December 10, 2004, the Company entered into a short-term financing agreement with IBM Nederland Financieringen B.V. for up to $5.0 million.  The loan is collateralized by substantially all of the assets of the Company’s Dutch subsidiary, as well as cross-company guarantees of certain of the Company’s European subsidiaries, and bears interest at the ABN Amro base rate plus 2.25%.  The average interest rate on outstanding borrowings for the years ended December 31, 2008 and 2007 was 7.75% and 6.90%, respectively.  The facility has no maturity date and continues indefinitely until terminated by either party upon six weeks’ notice.  If the facility is terminated, all amounts would be due at the end of the six-week period.  To date, neither party has given notice of intent to terminate this facility.  There were no amounts outstanding under this facility at December 31, 2009 and 2008.





Bank of America Facility





On December 2, 2002, certain wholly owned subsidiaries of the Company, based in Europe, entered into a facility arranged by Bank of America, N.A., as agent, to provide a revolving line of credit facility of up to £75.0 million (the “Bank of America Facility”).  The maximum amount of borrowings on the Bank of America Facility is determined based on a percentage of the borrower’s eligible accounts receivable.  On October 20, 2005, the agreement was amended to extend the maturity date to October 20, 2008 and reduce the facility to £60.0 million ($97.2 million using the exchange rate on December 31, 2009 of $1.62/£1.00), increasing to £80.0 million ($129.6 million using the exchange rate on December 31, 2009 of $1.62/£1.00) at the Company’s option.  On May 21, 2008, the agreement was amended to extend the termination date of the facility to October 20, 2011 and decrease the size of the facility from £80.0 million to £76.0 million ($123.1 million using the exchange rate on December 31, 2009 of $1.62/£1.00).  Borrowings under the line of credit bear interest at Bank of America’s reference rate, or the LIBOR rate, as applicable, plus a margin of between 1.75% and 3.0%, based on certain financial measurements.  At the borrower’s option, all or any portion of the outstanding borrowings may be converted to a LIBOR-based revolving loan.  The average interest rates on the outstanding borrowings under the revolving line of credit during the years ended December 31, 2009, 2008 and 2007 were 2.81%, 5.14% and 6.59%, respectively, and the balances outstanding at December 31, 2009 and 2008 were $42.9 million and $23.2 million, respectively.  Obligations of the borrower under the revolving line of credit are collateralized by substantially all of the assets of the borrower.  This agreement is operated in a lock box arrangement.  The revolving line of credit requires the borrower to meet certain financial covenant tests (including maintaining an Adjusted Tangible Net Worth at the end of each quarter of not less than £26.9 million ($43.6 million using the exchange rate on December 31, 2009 of $1.62/₤1.00)) and to comply with certain other covenants, including restrictions on incurrence of debt and liens and restrictions on mergers, acquisitions, asset dispositions, capital contributions, payment of dividends, repurchases of stock, repatriation of cash and investments.  Under this line, if an event is deemed to have a material adverse effect on the borrower, the lender can declare the loan to be in default.  This revolving line of credit has cross-default provisions with other debt, but only within the Company’s European subsidiaries.  Through December 31, 2009, the Company was not in compliance with the European tangible net worth covenant due to the exclusion of certain assets in its covenant calculation.  In March 2010, the Company obtained a waiver of this non-compliance for all prior periods and an amendment to the debt agreement permitting the inclusion of these assets in the calculation in future periods.





GE Commercial Distribution Finance Facility





In connection with the acquisition of ProSys on October 2, 2006, the Company entered into a credit facility arrangement managed by GE Commercial Distribution Finance (“CDF”), which currently permits borrowings of up to $80.0 million, including an accounts receivable facility, a supplemental inventory facility and a floorplan credit facility.  ProSys is required to pay interest to CDF on the daily contract balance at a rate equal to LIBOR plus 3.10%.  The floorplan facility contains an interest-free period and ProSys repays substantially all amounts within that time.  Under these credit facilities, ProSys has granted CDF a lien on substantially all of its assets.  The credit facility has a two-year term with annual renewals thereafter but may be terminated by either party with notice.  The balances outstanding at December 31, 2009 and 2008 were $58.3 million and $44.2 million, respectively, and were related solely to inventory floorplan financing.  The facility contains a number of financial covenants, including covenants requiring the ProSys subsidiary to maintain an operating profit margin of not less than 0.5% of sales on a 12-month rolling basis, the maintenance of a ratio of debt to tangible net worth of not more than six-to-one (6:1) measured as of the last day of each fiscal quarter and maintenance of a ratio of funded debt to earnings before interest, taxes, depreciation and amortization for the 12-month period ending on the last day of each fiscal quarter of not more than four-to-one (4:1).  The facility was amended effective March 31, 2009 to modify the financial covenants for all quarters ending on or after March 31, 2009 such that ProSys thereafter is required to (a) maintain a tangible net worth and subordinated debt of not less than $9.0 million; (b) maintain a ratio of Funded Debt to Adjusted EBITDA for the 12-month period ending on the last day of such fiscal quarter of not more than four-to-one (4:1); and (c) achieve, as of the last day of each fiscal quarter, a fixed-charge coverage ratio for the 12-month period ending on the last day of such fiscal quarter of at least one-and-one-half-to-one (1.5:1).  As of December 31, 2009, the Company was not in compliance with the tangible net worth and subordinated debt covenant and there is a cross-default provision in this agreement that was triggered by breaches in the Western Facility at January 31 and February 28, 2010.  In March 2010, the Company obtained a waiver of such non-compliance.





- 67 -


Banco de Credito e Inversiones





In September 2009, the Company renewed its facility with Banco de Credito e Inversiones (“BCI”) to provide a line of credit of up to $5.0 million.  The facility is comprised of a $3.0 million direct line of credit collateralized with a $1.5 million time deposit, which bears interest at 4.0%; and an up to $2.0 million receivable factoring facility collateralized by accounts receivable in the same amount which bears interest at 2.76%.  The facility has a one-year term with subsequent annual renewals, but may be terminated by BCI at any time.  The average interest rate on outstanding borrowings under the facility was 3.2%.  The balance outstanding at December 31, 2009 was $2.8 million.





Banco de Chile





In June 2009, the Company entered into a facility with Banco de Chile to provide a line of credit of up to $2.5 million.  The facility is collateralized by a time deposit in the amount of $0.5 million, and bears interest at 2.4%.  The facility has a one-year term with subsequent annual renewals, but may be terminated by Banco de Chile at any time.  The average interest rate on outstanding borrowings under the facility was 2.4%.  The balance outstanding at December 31, 2009 was $0.5 million.





Banco Internacional





In June 2009, the Company entered into a facility with Banco Internacional to provide a line of credit of up to $5.0 million.  The facility is comprised of a $3.0 million direct line of credit collateralized by accounts receivable in an amount up to 130% of the amount outstanding, which bears interest at 3.2%;  and an up to $2.0 million receivable factoring facility collateralized by accounts receivable in the same amount, which bears interest at 2.4%.  The facility has a one-year term with subsequent annual renewals, but may be terminated by Banco Internacional at any time.  The average interest rate on outstanding borrowings under the facility was 2.9%.  The balance outstanding at December 31, 2009 was $4.6 million.





Intel Corporation Facility





On March 30, 2006, the Company entered into a working capital facility with Intel Corporation (the “Intel Facility”) to provide a line of credit up to $3.0 million.  The Intel Facility is non-interest bearing and has a one-year term with subsequent annual renewals, but may be terminated by Intel at any time.  The Company is required to meet certain program eligibility requirements including compliance with its distribution agreement with Intel.  The balances outstanding at December 31, 2009 and 2008 were $2.0 million and $2.5 million, respectively.  In May 2008, the line of credit under the Working Capital Facility was reduced to $1.9 million, then increased to $2.5 million in November 2008, and was subsequently reduced to $2.0 million in November 2009.





- 68 -


Long-Term Debt





December 31,2009


2008(in thousands)3.75% convertible subordinated notes, due 2024

$
97,011


$
87,5169.0% senior subordinated 2008 notes, due 2013


43,792



51,5209.0% senior subordinated 2006 notes, due 2013


29,590



32,026Other, fair values approximate carrying value


198



287Total term debt


170,591



171,349Less:  current portion of long-term debt


(11,097
)


(10,286
)Total long-term debt

$
159,494


$
161,063





The estimated fair market value is as follows (in thousands):




Level 2


Level 3


TotalAt December 31, 2009:3.75% convertible subordinated notes, due 2024

$
100,152


$
—


$
100,152Other term debt


—



71,150



71,150$
100,152


$
71,150


$
171,302At December 31, 2008:3.75% convertible subordinated notes, due 2024

$
18,929


$
—


$
18,929Other term debt


—



73,235



73,235$
18,929


$
73,235


$
92,164


Fair value is determined using a discounted cash-flow model with all significant inputs derived from or corroborated with observable market data and management’s best estimate of fair value from the perspective of a market participant (see Note 16 – Fair Value Measurements).




Contingent Convertible Notes





On March 5, 2004, the Company completed a private offering of $110.0 million aggregate principal amount of 3.75% convertible subordinated notes due in 2024 (the “Old Notes”).  On December 20, 2004, the Company completed its offer to exchange newly issued 3.75% convertible subordinated notes, Series B due in 2024 (the “New Notes”) for an equal amount of the Company’s outstanding Old Notes.  Approximately 99.9% of the total principal amount of Old Notes outstanding were tendered in exchange for an equal principal amount of New Notes.





The New Notes mature on March 5, 2024 and bear interest at the rate of 3.75% per year on the principal amount, payable semi-annually on March 5 and September 5.  Holders of the New Notes may convert the New Notes any time on or before the maturity date if certain conversion conditions are satisfied.  Upon conversion of the New Notes, the Company will be required to deliver, in respect of each $1,000 principal of New Notes, cash in an amount equal to the lesser of (1) the principal amount of each New Note to be converted and (2) the conversion value, which is equal to (a) the applicable conversion rate, multiplied by (b) the applicable stock price.  The initial conversion rate is 91.2596 shares of common stock per New Note with a principal amount of $1,000, or 10,038,556 shares, and is equivalent to an initial conversion price of approximately $10.96 per share.  The conversion rate is subject to adjustment upon the occurrence of certain events.





Under the terms of the New Notes, holders have the right to convert their notes upon the occurrence of certain events, including if the closing price of the Company’s common stock exceeds a certain threshold for at least 20 of the last 30 days in preceding fiscal quarters and upon specified corporate transactions, as described in more detail in the prospectus filed in connection with the exchange offer.  The applicable stock price is the average of the closing sales prices of the Company’s common stock over the five trading-day period starting the third trading day following the date the New Notes are tendered for conversion.  If the conversion value is greater than the principal amount of each New Note, the Company will be required to deliver to holders upon conversion, at their option (1) a number of shares of its common stock, (2) cash or (3) a combination of cash and shares of its common stock in an amount calculated as described in the prospectus filed by the Company in connection with the exchange offer.  In lieu of paying cash and shares of its common stock upon conversion, the Company may direct the conversion agent to surrender any New Notes tendered for conversion to a financial institution designated by the Company for exchange in lieu of conversion.  The designated financial institution must agree to deliver, in exchange for the New Notes (1) a number of shares of the Company’s common stock equal to the applicable conversion rate, plus cash for any fractional shares or (2) cash or (3) a combination of cash and shares of the Company’s common stock.  Any New Notes exchanged by the designated institution will remain outstanding.  As of December 31, 2009, the conversion value is not greater than the principal amount of $110.0 million.





- 69 -


The Company may redeem some or all of the New Notes for cash on or after March 5, 2009 and before March 5, 2011 at a redemption price of 100% of the principal amount of the New Notes, plus accrued and unpaid interest up to, but excluding, the redemption date, but only if the closing price of the Company’s common stock has exceeded 130% of the conversion price then in effect for at least 20 trading days within a 30 consecutive trading-day period ending on the trading day before the date the redemption notice is mailed.  The Company may redeem some or all of the New Notes for cash at any time on or after March 5, 2011 at a redemption price equal to 100% of the principal amount of the New Notes, plus accrued and unpaid interest up to, but excluding, the redemption date.





The Company may be required to purchase for cash all or a portion of the New Notes on March 5, 2011, March 5, 2014 or March 5, 2019, or upon a change in control, at a purchase price equal to 100% of the principal amount of the New Notes being purchased, plus accrued and unpaid interest up to, but excluding, the purchase date.  Upon any event of default, the lender may demand immediate payment of the balance outstanding.  An event of default includes the failure to pay any interest or principal when due, failure to perform any of the terms, covenants, conditions or provisions of the agreement.





In December 2006, the Company obtained consents from holders of the New Notes for the waiver of certain defaults related to the late filing of the Company’s Form 10-Q for the period ended September 30, 2006 and certain proposed amendments to the indentures governing the New Notes eliminating covenants related to the filing of periodic reports with the SEC and the delivery of such reports to the trustee for the New Notes.  The waiver and amendment required the consent of holders of a majority in aggregate principal amount of the New Notes outstanding.  In exchange for the consent to the waiver and amendment, the Company paid holders of the New Notes an initial consent fee of $5.00 for each $1,000 principal amount of New Notes for which consents were obtained.  The initial consent fee of $0.6 million was paid to holders of the New Notes in December 2006 and charged to interest expense.  If the Company did not commence a cash tender offer for the New Notes on or before February 28, 2007 to redeem all validly tendered New Notes at a price of at least $1,000 for each $1,000 principal amount of New Notes, the Company was required to pay holders of the New Notes for which consents to the waiver and amendment were obtained an additional fee of $85.00 for each $1,000 principal amount of New Notes.  The Company did not initiate the tender and, on March 4, 2007, an aggregate of $9.4 million was paid to the holders of the New Notes, which amount was capitalized and will be amortized to interest expense through March 2011.





The Company adopted the provisions of ASC 470-20 (formerly FSP APB 14-1) on January 1, 2009, with retrospective application to prior periods (see Note 2 – Summary of Significant Accounting Policies).  At December 31, 2009, the Company’s contingent convertible debt outstanding was $97.0 million, consisting of outstanding principal of $110.0 million and unamortized discount of $13.0 million.  The discount of $13.0 million at December 31, 2009 will be amortized through March 2011, the initial put date of the debt.  At December 31, 2008 the Company’s contingent convertible debt outstanding was $87.5 million, consisting of principal of $110.0 million and unamortized discount of $22.5 million.  Due to the retrospective adoption of ASC 470-20, the effective interest rate recorded by the Company on its outstanding convertible debt for all periods presented was 14.74%.  The Company recorded interest expense related to the contingent convertible debt of $13.4 million for the year ended December 31, 2009, consisting of $4.0 million of interest paid in cash and $9.4 million resulting from the amortization of the discount.  The Company recorded interest expense related to the contingent convertible debt of $12.1 million for the year ended December 31, 2008, consisting of $4.0 million of interest paid in cash and $8.1 million resulting from amortization of the discount.  The Company recorded interest expense related to the contingent convertible debt of $11.2 million for the year ended December 31, 2007, consisting of $4.0 million of interest paid in cash and $7.2 million resulting from amortization of the discount.  At December 31, 2009, the net carrying value of the conversion feature for the contingent convertible debt outstanding recorded in common stock was $49.9 million.





Notes Payable to The Retirement Systems of Alabama (the “RSA”)





The Company has notes payable to the RSA (the “RSA Notes”) that consist of the following:




- 70 -





·
9% Senior Subordinated Notes Payable to the RSA Issued in 2000—On July 6, 2000, and as amended on May 3, 2004, the Company entered into a facility under which it issued $180.0 million of subordinated debt to two of the RSA’s affiliated funds (the “2000 Notes”).  The 2000 Notes were comprised of $80.0 million bearing interest at 9.125%, which was repaid in June 2001; and $100.0 million bearing interest at 9.0%, payable in semi-annual interest and principal payments with semi-annual principal installments commencing on December 31, 2000 of $3.5 million, $4.4 million commencing December 31, 2007, $5.1 million due December 31, 2009 and a final payment of $8.5 million on June 30, 2010.  The 2000 Notes were collateralized by a second lien on substantially all of the Company’s and its subsidiaries’ North American and South American assets.  Effective June 30, 2008, the Company entered into the 2008 Notes with the lenders, consolidating the 2000 Notes and the 2007 Notes.





·
9% Senior Subordinated Notes Payable to the RSA Issued in 2006— On October 2, 2006, the Company borrowed $35.0 million from two of the RSA’s affiliated funds in connection with its acquisition of ProSys (the “2006 Notes”).  The 2006 Notes bear interest at 9% and are in the form of two notes, one for $23.0 million and a second for $12.0 million, both with scheduled principal payments on various dates through August 1, 2013.  The 2006 Notes are collateralized by ProSys shares and all tangible and intangible assets of the ProSys business, other than those assets pledged to CDF.  The aggregate balances outstanding at December 31, 2009 and 2008 were $29.8 million and $32.3 million, respectively, with scheduled repayments totaling $3.3 million in 2010, $4.0 million in 2011, $5.0 million in 2012 and $17.5 million thereafter.  Principal payments are due on August 1 and February 1 of each year and include accrued interest through that date.  The Company must meet certain financial covenant tests on a quarterly basis (including, as provided by the amendment entered into on February 24, 2009, the same fixed-charge coverage ratio as required by the Western Facility; prior to the amendment, the Company was required to maintain a consolidated net worth at the end of each quarter of not less than $87.5 million), and comply with certain other covenants, including restrictions of incurrence of debt and liens and restrictions on asset dispositions, payment of dividends and repurchase of stock.  The Company is also required to be in compliance with the covenants of certain other borrowing agreements.  Under this line, if an event is deemed to have a material adverse effect on the borrower, the lender can declare the loan to be in default.  Upon any event of default the lender may demand immediate payment of the balance outstanding.





·
9% Senior Subordinated Notes Payable to the RSA Issued in 2007 — On January 30, 2007, the Company entered into a revolving credit agreement with two of the RSA’s affiliated funds in the amount of $30.0 million (the “2007 Notes”).  The 2007 Notes bear interest at 9%.  Under the terms of the 2007 Notes, the availability of the revolving credit was set to expire on July 31, 2008 and thereafter payments would have been made at the rate of $1.0 million per month beginning August 15, 2008, and the entire principal balance would have been due on January 30, 2009.  The 2007 Notes were collateralized by a second lien on substantially all of the Company’s and its subsidiaries’ North American and South American assets.  Effective June 30, 2008, the Company entered into the 2008 Notes with the lenders, consolidating the 2000 Notes and the 2007 Notes.





·
9% Senior Subordinated Notes Payable to the RSA Issued in 2008 — On August 5, 2008, the Company entered into an Amended and Restated Credit Agreement effective as of June 30, 2008 with several of the RSA’s affiliated funds, which consolidated and restructured the $56.7 million in outstanding indebtedness due under the 2000 Notes and 2007 Notes.  The notes issued under the agreement are referred to as the “2008 Notes”.  The balances outstanding on the 2008 Notes at December 31, 2009 and 2008 were $44.4 million and $52.4 million, respectively.  The 2008 Notes bear interest at 9% per annum payable in semi-annual installments, with principal payments due of $4.0 million semi-annually through June 1, 2011, $5.0 million semi-annually through June 1, 2013 and a final payment of $12.4 million due December 1, 2013.  The Company granted a second priority security interest, subordinate to the Western Facility and the CDF facility, in substantially all of the property then owned or thereafter acquired by the Company in North or South America.  The Company must meet certain financial covenant tests on a quarterly basis (including, as provided by the amendment entered into on February 24, 2009, the same fixed-charge coverage ratio as required by the Western Facility; prior to the amendment, the Company was required to maintain a consolidated net worth at the end of each quarter of not less than $87.5 million), and must comply with certain other covenants, including restrictions of incurrence of debt and liens, restrictions on asset dispositions, payment of dividends and repurchases of stock.  The Company is also required to be in compliance with the covenants of certain other borrowing agreements.  Under this line, if an event is deemed to have a material adverse effect on the borrower, the lender can declare the loan to be in default.  Upon any event of default the lender may demand immediate payment of the balance outstanding.





The Company was not in compliance with certain covenants under the Western Facility and therefore was not in compliance with the cross-default provisions of the RSA Notes at December 31, 2009, and in March 2010, it received a waiver from the RSA regarding such non-compliance.





HSBC Bank plc Mortgage





On June 22, 2004, in connection with the acquisition of OpenPSL, the Company assumed a mortgage with HSBC for an original amount of £0.7 million ($1.1 million using the exchange rate on December 31, 2009 of $1.62/£1.00).  The mortgage has a term of ten years and bears interest at HSBC’s rate plus 1.25%.  The balance on the mortgage was $0.2 million and $0.3 million at December 31, 2009 and 2008, respectively.





Maturities





Maturities of term loans based on the amounts and terms outstanding at December 31, 2009 totaled $11.4 million in 2010, $123.1 million in 2011 (includes $110.0 million outstanding associated with our convertible notes, which include a provision under which the holders have the right to require the Company to repurchase for cash all or a portion of the notes at face value on March 5, 2011), $15.0 million in 2012, $34.9 million in 2013 and none thereafter.





NOTE 7 — RESTRUCTURING AND IMPAIRMENT COSTS





From time to time, the Company has initiated a series of restructuring activities intended to realign the Company’s global capacity and infrastructure with demand by its customers so as to optimize the operational efficiency, which activities include reducing excess workforce and capacity, and consolidating and relocating certain facilities to lower-cost regions.





The restructuring and impairment costs include employee severance, costs related to leased facilities and other costs associated with the early termination of certain contractual agreements due to facility closures.  The overall intent of these activities is for the Company to shift its distribution capacity to locations with higher efficiencies and, in most instances, lower costs, and to better utilize its overall existing distribution capacity.  This would enhance the Company’s ability to provide cost-effective distribution service offerings, which may enable it to retain and expand the Company’s existing relationships with customers and attract new business.





In 2008, the Company initiated a restructuring plan for all of its reportable segments, and, as a result, the Company incurred restructuring costs and other charges of approximately $4.3 million.  These costs consisted primarily of severance and benefit costs of $3.9 million for involuntary employee terminations and costs of $0.4 million related to the closure and impairment of certain leased facilities.  The Company terminated 48 employees in North America, 105 employees in Latin America and 58 employees in the United Kingdom and continental Europe in sales, marketing, and finance and support functions.  The Company classified all of these 2008 restructuring charges of approximately $4.3 million to restructuring and impairment costs in the consolidated statement of operations during 2008.  The Company substantially completed this restructuring plan in 2009 and does not anticipate incurring additional costs associated with this restructuring initiative going forward.





In 2009, the Company initiated a second restructuring plan for all its reportable segments, and, as a result, the Company incurred restructuring costs and other charges of approximately $3.8 million.  These costs consisted primarily of severance and benefit costs of $3.5 million for involuntary employee terminations and costs of $0.3 million related to the closure and impairment of certain leased facilities.  The Company terminated 129 employees in North America, 40 employees in Latin America and 66 employees in the United Kingdom and continental Europe in sales, marketing, finance and support functions.  Approximately $1.6 million of the involuntary employee termination costs incurred in 2009 resulted from the cessation of the Company’s operations in Italy.  The Company expects to complete this restructuring plan in 2010.




- 71 -




Employee

Termination

Costs


Facility-

Related Costs


Total(in thousands)Restructuring obligations at December 31, 2006

$
—


$
141


$
141Additional restructuring cost


1,404



—



1,404Foreign currency impact


31



—



31Cash payments


(1,422
)


(141
)


(1,563
)Restructuring obligations at December 31, 2007


13



—



13Additional restructuring cost


3,903



386



4,289Foreign currency impact


(46
)


—



(46
)Cash payments


(3,375
)


—



(3,375
)Restructuring obligations at December 31, 2008


495



386



881Additional restructuring cost


3,488



307



3,795Cash payments


(2,815
)


(345
)


(3,160
)Restructuring obligations at December 31, 2009

$
1,168


$
348


$
1,516





NOTE 8 — STOCK-BASED COMPENSATION PLANS





The Company recognizes initial stock-based compensation expense for stock-based awards made to employees and directors based on estimated fair values on the date of grant, net of an estimated forfeiture rate.  Compensation expense for stock options and non-performance based restricted stock units (“RSUs”) granted after December 31, 2005 is recognized over the requisite service period of the award on a straight-line basis.  Compensation expense for all non-performance based RSUs granted on or prior to December 31, 2005 is recognized using the accelerated multiple-option approach.  Compensation expense for performance-based RSUs is recognized using the accelerated multiple option method based upon the fair value of the underlying shares on the vesting date. Forfeiture rates used in the determination of compensation expense are revised in subsequent periods if actual forfeitures differ from estimates.





Total stock-based compensation expense for the years ended December 31, 2009, 2008 and 2007 of $2.5 million, $3.0 million and $1.4 million, respectively, was recorded as a component of selling, general and administrative expense in the accompanying consolidated statements of operations.





Equity Incentive Plans





The Company adopted the 1998 Stock Plan in 1998.  The 1998 Stock Plan replaced the 1988 Amended and Restated Incentive Stock Plan and the 1993 Director Stock Option Plan.  The Company’s 1998 Stock Plan expired in May 2008.  After May 2008, there were no equity awards available for grant under the 1998 Stock Plan.  On May 21, 2009, the Board approved the 2009 Equity Incentive Plan (the “Plan”), subject to approval by the Company’s shareholders.  On August 19, 2009, the Company’s shareholders approved the Plan and authorized the issuance of: (1) 6,225,000 shares of common stock pursuant to the Plan, subject to adjustment as provided in the Plan, and (2) up to a maximum of 3,950,000 additional shares upon the expiration, forfeiture or repurchase of outstanding awards under the 1998 Stock Plan.  On August 20, 2009, the Board amended and restated the Plan, incorporating certain non-substantive changes.





Stock Options and Restricted Stock Units





The Company utilizes the Black-Scholes option pricing model for determining the estimated fair value for stock options.  The Black-Scholes valuation calculation requires the Company to estimate key assumptions such as future stock price volatility, expected terms, risk-free rates and dividend yield.  Expected stock price volatility is based upon the historical volatility of our stock.  Expected term is derived from an analysis of historical exercises and remaining contractual life of options.  The risk-free rate is based on the U.S. treasury yield curve in effect at the time of grant.  The Company has never paid cash dividends and does not currently intend to pay cash dividends, thus we have assumed a 0% dividend yield.  The Company must estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly.  The estimate of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ or are expected to differ, from such estimates.  Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change, and the amount of stock compensation expense recognized in future periods is adjusted.  The fair values of RSUs equal their intrinsic value on the date of grant.





The following table summarizes the key variables used to calculate the fair values of stock awards granted during the three years in the period ended December 31, 2009:





Years Ended December 31,2009


2008


2007Expected volatility


90.1
%


41.4
%


42.3
%Dividend yield

None


None


NoneExpected life in years


3.49



3.56



3.49Risk-free rate


1.4
%


2.3
%


4.2
%





The weighted average per share fair values of the options granted in 2009, 2008 and 2007 was $1.24, $1.87 and $2.00, respectively.





- 72 -


The following table presents summarized stock option activity and weighted average per share exercise prices for stock options and the weighted average intrinsic value for RSUs granted, exercised and forfeited as of, and for the three years ended, December 31, 2009:





Options Outstanding

Restricted Stock Units OutstandingOptions

Available for

Grant


Shares


Weighted

Average

Exercise

Price Per Share

Weighted

Average

Remaining

Contractual Life (in years)
Aggregate

Intrinsic

Value

Shares


Weighted

Average

Intrinsic

Value Per RSU

Weighted

Average

Remaining

Contractual Life (in years)
Aggregate

Intrinsic

ValueBalance at December 31, 2006


981,091



3,210,487


$
6.90





512,324


$
6.84Increase in options available for grant


600,000



—



—





—



—Options and awards forfeited


201,825



(196,825
)

$
7.72





(5,000
)

$
8.01Canceled options not available for grant


(24,750
)


—



—





—



—Options and awards granted


(460,500
)


453,000


$
5.65





7,500


$
5.98Options and awards exercised/vested


—



(5,108
)

$
7.05





(119,491
)

$
7.01Balance at December 31, 2007


1,297,666



3,461,554


$
6.69





395,333


$
6.93Increase in options available for grant


600,000



—



—





—



—Options and awards forfeited


797,904



(694,487
)

$
6.78





(103,417
)

$
5.19Canceled options not available for grant


(537,362
)


—



—





—



—Options and awards granted


(2,158,208
)


1,232,500


$
5.69





925,708


$
4.25Options and awards exercised/vested


—



—


$
—





(197,541
)

$
2.36Balance at December 31, 2008


—



3,999,567


$
6.37





1,020,083


$
4.69Increase in options available for grant


7,292,278



—



—





—



—Options and awards forfeited


2,388,967



(2,198,217
)

$
6.03





(190,750
)

$
4.86Canceled options not available for grant


(2,203,967
)


—



—





—



—Options and awards granted


(4,603,872
)


4,603,872


$
2.04





—


$
—Options and awards exercised/vested


—



—



—





(167,729
)

$
1.60Balance at December 31, 2009


2,873,406



6,405,222


$
3.37

4.08
$  6,672,927


661,604


$
4.51

0.20
$ 2,348,694Vested and expected to vest at December 31, 2009






5,578,688


$
3.53

4.01
$  5,517,244


651,111


$
3.55

0.20
$2,311,445




- 73 -


Stock Options





Under the terms of the 1998 Stock Plan (which expired as to future grants in May 2008), stock options were granted to directors and employees to purchase common stock at the fair market value of such shares on the grant date.  Stock options granted to employees vest annually over a four-year period beginning on the one-year anniversary of the grant date.  Stock options granted to directors vested immediately.  Generally, the term of each employee option is five years from the date of grant and the term of each director option is ten years from the date of grant, as provided in each respective option agreement.  For options granted to an optionee who owns stock representing more than 10% of the voting power of all classes of stock, the option term is no more than five years.  If an optionee ceases to be employed by the Company, the optionee may within 30 days (or such other period of time determined by the Board of Directors, but not exceeding three months) exercise vested stock options.  There were no options exercised during the years ended December 31, 2009 and 2008.  The total pre-tax intrinsic value of options exercised during the year ended December 31, 2007 was $3,348.  The total pre-tax intrinsic value of the RSUs that vested was $0.3 million, $0.5 million and $0.8 million during the years ended December 31, 2009, 2008 and 2007, respectively.





As of December 31, 2009, the number of stock options outstanding and exercisable by range of exercise prices, the weighted average exercise prices, the intrinsic value and, for options outstanding, the weighted average remaining contractual life are as follows (in thousands, except for years and per share amounts):





Options Outstanding

Options ExercisableRange of Exercise Price


Number

Outstanding


Weighted-

Average

Remaining

Contractual

Life (in Years)


Weighted-

Average

Exercise

Price per

Share

Aggregate

Intrinsic

Value

Number

Exercisable

Weighted

Average

Remaining

Contractual Life (in years)

Weighted-

Average

Exercise

Price per

Share

Aggregate

Intrinsic

Value$
1.75-$5.21



4,701



4.7


$
2.22




319



$
3.40$
5.22-$6.33



1,263



2.7



5.97




520




6.04$
6.34-$6.59



169



2.0



6.53




130




6.53$
6.60-$8.23



117



1.2



8.10




117




8.10$
8.24-$10.28



137



0.4



9.70




137




9.70$
10.29   -      $11.82



18



2.1



11.82




18




11.82$
1.75-$11.82



6,405



4.1



3.37

$      6,673


1,241

3.0

$
6.10

$      284





The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $3.55 per share as of December 31, 2009, which would have been received by the option holders had holders exercised all outstanding options as of that date with exercise prices at or below such closing price.  There were options to purchase 157,500 shares that were exercisable at or below the closing price of $3.55 per share at December 31, 2009.





The Company recorded $1.4 million, $1.2 million and $0.7 million of compensation expense related to stock options for the years ended December 31, 2009, 2008 and 2007, respectively.





As of December 31, 2009, there was $7.0 million of unrecognized compensation costs related to outstanding stock options.  These costs are expected to be recognized over a weighted average period of 3.4 years.





As of December 31, 2009, there were options to purchase 5,167,874 shares that were outstanding, but not yet vested.





Restricted Stock Units





During 2009, the Company did not make any RSU grants.  During 2008 and 2007, there were 925,708 and 7,500 RSUs, respectively, granted to certain eligible employees.  Compensation expense under the fair value method for these RSUs for the years ended December 31, 2009, 2008 and 2007 of $1.0 million, $1.6 million and $0.2 million, respectively, is being expensed over the vesting periods of the underlying awards.





Compensation expense for performance-based RSU grants with graded vesting terms was $0.1 million, $0.3 million and $0.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.  For compensation expense purposes, the intrinsic value of RSUs equals the fair market value of these awards on the date of grant.





- 74 -


At December 31, 2009, unrecognized compensation costs related to RSUs totaled approximately $0.6 million and are expected to be recognized over a weighted-average period of 0.3 years.  The total fair value of RSUs vested was $0.3 million, $0.5 million and $0.8 million for the years ended December 31, 2009, 2008 and 2007, respectively.





NOTE 9 — INCOME TAXES





The components of income (loss) before income taxes attributable to domestic and foreign operations are as follows (in thousands):





Years Ended December 31,2009


2008


2007Domestic

$
(11,283
)

$
(55,253
)

$
(42,075
)Foreign


20,094



(26,685
)


(29,710
)Total income (loss) before income taxes

$
8,811


$
(81,938
)

$
(71,785
)





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





Years Ended December 31,2009


2008


2007Current provision:U.S Federal

$
(2,266
)

$
(651
)

$
(3,102
)State


555



335



1,419Foreign


6,657



2,851



6,056Total current provision


4,946



2,535



4,373Deferred provision (benefit):U.S. Federal


(5,795
)


—



37Foreign


2,138



(2,008
)


2,551Total deferred provision


(3,657
)


(2,008
)


2,588Total provision for income taxes

$
1,289


$
527


$
6,961





The provision for income taxes differed from the amount computed by applying the U.S. Federal statutory rate to our income (loss) before income taxes as follows (amounts in thousands):





Years Ended December 31,2009


2008


2007Tax at U.S. Federal statutory rate

$
3,084


$
(28,679
)

$
(25,125
)State tax expenses, net of Federal tax benefit


433



(512
)


(1,082
)Foreign taxes at other than U.S. rates


7,742



2,196



1,110Net operating loss carryback claims


(4,098
)


2,578



4,715Changes in valuation allowances


(6,696
)


24,704



15,560Non-includible items


(740
)


1,060



10,055Non-deductible contingency and interest expense


1,268



(576
)


1,569Other


296



(244
)


159Provision for income taxes

$
1,289


$
527


$
6,961





For the year ended December 31, 2009, the Company included in its taxable income approximately $23.8 million of deemed dividends from certain foreign jurisdictions.





- 75 -


Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount on the consolidated balance sheets.  These temporary differences result in taxable or deductible amounts in future years.  The significant components of deferred tax assets and liabilities were (in thousands):





Years Ended December 31,2009


2008Accruals and allowances

$
14,738


$
21,031Revenue recognition


277



360Capitalized inventory expenses


915



924Management earnout


—



476Deferred compensation


1,360



1,270Stock-based compensation


1,902



1,648Depreciation and amortization


12,213



2,576Net operating loss carryforwards


26,028



24,874Unrealized loss


913



—Gross deferred tax assets


58,346



53,159Unrealized gain


—



(735
)Other


(271
)


(580
)Gross deferred tax liabilities


(271
)


(1,315
)Valuation allowance


(45,795
)


(44,790
)Net deferred tax assets

$
12,280


$
7,054





The breakdown between current and long-term deferred tax assets, net of  deferred tax liabilities was as follows (in thousands):





Years Ended December 31,2009


2008Net current deferred tax assets

$
5,550


$
5,654Net non-current deferred tax assets


6,730



1,400Net deferred tax assets

$
12,280


$
7,054





Net current deferred tax assets and net non-current deferred tax assets are recorded in “Prepaid expense and other current assets” and “Other long-term assets,” respectively on the consolidated balance sheet.





The Company records valuation allowances that reduce deferred tax assets to the amounts that, based upon available evidence, are more likely than not to be realized.  In both 2009 and 2008, the Company continued to record a full valuation allowance against its deferred tax assets in the U.S. and certain foreign jurisdictions.  The valuation allowances at December 31, 2009 and 2008 are mainly attributable to net operating loss carryforwards in The Netherlands, Germany, and the U.S., as well as U.S. Federal foreign tax credits that do not meet the more likely than not standard for recognition.  During 2009, the Company recorded an increase in valuation allowance of approximately $1.0 million, primarily due to the adoption of ASC 470-20 as described in Note 2 above, which was offset by certain tax benefits described below.





In the fourth quarter of 2009, the Company reduced its valuation allowance on deferred tax assets and recorded a tax benefit of $6.2 million to reflect the impact of The Worker, Homeownership and Business Assistance Act of 2009 (the “WHBA Act”).  Of this amount: (1) $4.1 million pertains to a carryback of a portion of the Company’s 2008 U.S. Federal net operating loss to 2004 based on the provisions of the WHBA Act and Revenue Procedures 2009-52; that carryback was collected in March 2010, and (2) $2.1 million pertains to a valuation allowance determined to be no longer required as a result of the WHBA Act.  In addition to the credits recorded as a result of the WHBA Act, a tax benefit of $2.4 million and a corresponding reduction in the valuation allowance was recorded by the Company in the fourth quarter of 2009 as it was determined that the valuation allowance was not required as a liability had been previously established to offset certain deferred tax assets.  This out-of-period adjustment, which related to the impact of certain tax positions recorded in 2008, was determined to be immaterial for all periods presented.





- 76 -


At December 31, 2009 and 2008, the Company reported a U.S. Federal net operating loss carryforwards in the amount of $29.7 million and $46.6 million, respectively, which are generally expected to be available to offset future taxable income and, if not utilized, will begin to expire in 2028.  At December 31, 2009 and 2008, the Company had state net operating loss carryforwards of approximately $63.9 million and $73.4 million, respectively, which are available to offset future state taxable income.  The state net operating loss carryforwards, if not utilized, will expire between years 2013 and 2029.  At December 31, 2009 and 2008, the Company had foreign net operating loss carryforwards of approximately $37.9 million and $58.1 million, respectively, which are available to offset future taxable income.  A majority of the foreign net operating losses can be carried forward indefinitely, the remainder expire on various dates through 2019.





Based on an analysis performed in June 2009, the Company previously disclosed that it had likely incurred a change of control, as defined under Internal Revenue Code Section 382, during 2008.  Accordingly, the Company decreased its deferred tax assets at December 31, 2008 by $28.0 million based upon the estimated statutory limitations in annual net operating loss carryforward recognition and loss carryforward time periods for both U.S. Federal and state purposes. As the Company maintained a full valuation allowance on its deferred tax assets, the reduction in deferred tax assets resulted in a corresponding reduction in the valuation allowance by $28.0 million. In the third quarter of 2009, prior to completing its condensed consolidated financial statements for the quarter ended March 31, 2009, the Company obtained additional information that resulted in a conclusion that there had not actually been an ownership change in 2008. Therefore, as of March 31, 2009, the Company increased its deferred tax assets by $28.0 million and increased the corresponding valuation allowance associated with this asset by $28.0 million.





At December 31, 2009 and 2008, the Company did not maintain a provision for U.S. income taxes arising from undistributed earnings of the Company’s foreign subsidiaries as it is currently the Company’s intention to reinvest these earnings indefinitely in operations outside the United States.  The Company believes it is not practicable to determine the Company’s tax liability in the event of a future repatriation of these earnings.  If repatriated, these earnings could result in a tax expense at the current U.S. Federal statutory tax rate of 35%, subject to available net operating losses and other factors.  Tax on undistributed earnings may also be reduced by foreign tax credits that may be generated in connection with the repatriation of earnings.





The Company accounts for uncertain tax positions in accordance with ASC 740-10, which requires the Company to recognize the financial statement effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination.





A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows (in thousands):





Years Ended December 31,2009


2008


2007Balance at beginning of year

$
14,057


$
14,371


$
12,841Increase related to prior year tax positions


1,004



—



13Decrease related to prior year tax positions


(5,113
)


(127
)


—Increase related to current year tax positions


47



927



2,822Settlements with tax authorities


—



(81
)


—Decrease related to lapse of statute of limitations


(116
)


(1,033
)


(1,305
)Balance at end of year

$
9,879


$
14,057


$
14,371





The unrecognized tax benefits, if recognized, would impact the tax provision by $2.1 million, $7.1 million and $7.9 million at December 31, 2009, 2008 and 2007, respectively.





The Company has elected to include interest and penalties as a component of tax expense.  Accrued interest and penalties at December 31, 2009, 2008 and 2007 were $2.5 million, $1.9 million and $2.0 million, respectively.  The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months.





- 77 -


The Company files U.S. Federal income tax returns, as well as income tax returns in various states and foreign jurisdictions.  The Company is currently under examination by tax authorities in Chile, France, Mexico and the United States for certain years between 2001 and 2008.  Most state and foreign jurisdictions have three or four open tax years at any point in time.  Although the outcome of any tax audit is uncertain, the Company believes that it has adequately provided in its financial statements for any additional taxes that it may be required to pay as a result of such examinations.  If the payment ultimately proves to be unnecessary, the reversal of these tax liabilities would result in a tax benefit being recognized in the period in which the Company determines such liabilities are no longer necessary.  However, if a final tax assessment exceeds the Company’s estimate of the tax liability, an additional tax provision will be recorded in the period such tax assessment is made.





NOTE 10 — COMMITMENTS AND CONTINGENCIES





The Company leases its facilities under cancelable and non-cancelable operating lease agreements.  The leases expire at various times through 2025 and contain renewal options.  Certain of the leases require the Company to pay property taxes, insurance and maintenance costs.  The Company leases certain equipment under capital leases with such equipment amounting to $2.3 million at each of December 31, 2009 and 2008, less accumulated depreciation of $2.3 million and $1.8 million at December 31, 2009 and 2008, respectively.  Depreciation expense on assets subject to capital leases was $0.6 million for each of the years ended December 31, 2009, 2008 and 2007.  At December 31, 2009, the Company had no capital lease obligations outstanding.





The following is a summary of commitments under non-cancelable leases as of December 31, 2009 (in thousands):





Operating

LeasesYears Ending December 31,2010

$
10,7782011


6,8282012


6,0132013


4,0782014


3,1602015 and beyond


10,419Total minimum lease payments

$
41,276





Total rent expense was $18.2 million, $20.1 million and $19.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.





On June 4, 2008, the Company’s export subsidiary in the United Kingdom received a notification from the Direction Générale des Finances Publiques that the French tax authorities were proposing to issue a tax deficiency notice against the Company’s export subsidiary for failure to pay value-added tax and corporate income tax in France during the period of January 1, 2002 to December 31, 2006.  Subsequently, the tax authorities issued a tax assessment against the Company’s U.K. export subsidiary.  The Company requested a review of the assessment by the French central tax administration, which has discretionary power to review and modify tax assessments.  In a letter dated March 11, 2010, the French central tax administration informed the Company of its decision to cancel the value-added tax assessment, including interest and penalties, but maintain the corporate income tax assessment, including interest and penalties.  As a result, the Company expects to receive an amended tax assessment reflecting the decision of the French central tax administration.  Based upon the letter from the French central tax administration, the Company believes that the tax assessment, including interest and penalties, should be reduced to approximately €1.1 million ($1.6 million at an exchange rate of $1.43/€1.00 as of December 31, 2009).  The Company is evaluating its position with respect to the corporate income tax assessment and presently intends to avail itself of all available defenses.  The Company is not in a position to estimate a loss, if any, or a range of potential loss.  As no amount of potential loss is both probable and estimable, no accrual has been made in the consolidated financial statements as of December 31, 2009 or 2008.





On December 29, 2008, John R. Campbell, who alleges that he is a shareholder of the Company, caused a purported shareholder’s derivative lawsuit to be filed in the Superior Court of California for the County of San Mateo against the Company, as a nominal defendant, and naming 17 current and former officers and directors of the Company as defendants.  The lawsuit seeks to recover damages purportedly sustained by the Company in connection with its historical stock option granting practices.  Subject to certain limitations, the Company is obligated to indemnify its current and former officers and directors in connection with the investigation of the Company’s historical stock option practices and such lawsuits.  During 2009, two of the Company’s former officers were dismissed from the lawsuit.  Although the matter is in its preliminary stages and the Company has procured insurance coverage for these types of claims, the expense to the Company associated with this lawsuit may be significant.





- 78 -


On September 23, 2009, U.S. Customs and Border Protection (“CBP”) completed a pre-assessment survey of the import reporting processes used by the Company’s Latin American subsidiary located in Miami, Florida.  Based on its pre-assessment survey, CBP notified the Company of its intention to conduct a compliance test to quantify any potential loss of revenue.  As of the date of this report, such testing has not commenced.  As no amount of potential loss is both probable and estimable, no accrual has been made in the Company’s consolidated financial statements as of December 31, 2009.  However, a negative outcome of this matter could have a material adverse impact on the Company’s consolidated financial position, results of operations and cash flows.





In October 2008, the Company provided indemnification agreements to all members of the Board and the Company’s executive officers.  Four members of the Board had pre-existing indemnification agreements that were entered into immediately prior to the Company’s initial public offering in 1993 and those agreements were amended in October 2008.  The indemnification agreements require the Company to indemnify the directors and officers and pay their expenses if they become a party to, or are threatened with, any action, suit or proceeding arising out of their service to the Company.





In February 2008, independent counsel to the Board, accompanied by counsel for the Company, self-reported to the Securities and Exchange Commission (the “SEC”) the findings of the independent investigations conducted by special committees of the Board.  The SEC initiated a non-public inquiry into certain of the Company’s accounting and financial reporting matters.  In August 2009, the SEC entered a formal order of investigation.  In February 2010, the SEC notified the Company in writing that the investigation had been completed and that no enforcement action would be recommended.





The Company is subject to legal proceedings and claims that arise in the normal course of business.  Management believes that the ultimate resolution of such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.





The Company is a party to agreements pursuant to which it may be obligated to indemnify another party.  Typically, these obligations arise in connection with sales agreements, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of warranties, representations or covenants related to such matters as title to assets sold, validity of certain intellectual property rights and non-infringement of third-party rights.  In each of these circumstances, payment by the Company is typically subject to the other party making a claim and cooperating with the Company pursuant to the procedures specified in the particular agreement.  This process usually allows the Company to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party.  Further, the Company’s obligations under these agreements may be limited in terms of activity (typically to replace or correct the products or terminate the agreement with a refund to the other party), duration and/or amounts.  In many instances, the Company has recourse against the suppliers of the products that will cover the payments that may be made by the Company.





NOTE 11 — TRANSACTIONS WITH RELATED PARTIES





One director of the Company is a director of one of the Company’s customers, Datalink Corporation.  The consultant who managed the Company’s Brazilian operation through June 30, 2009 has an ownership interest in two of the Company’s customers/vendors, Megaware Commercial Ltda and Megaware Industrial Ltda (collectively, “Megaware”).





Sales to and purchases from these parties for the three years ended December 31, 2009 and accounts receivable at December 31, 2009, 2008 and 2007, are summarized below (in thousands):





Years Ended December 31,2009


2008


2007Sales:Datalink Corporation

$
165


$
60


$
—Megaware


31,313



45,111



37,939Accounts receivable:Datalink Corporation


91



—



—Megaware


3,654



8,443



10,024




- 79 -


In 2006, as a part of the Company’s acquisition of ProSys, the Company entered into two long-term real property leases for office and warehouse space in Norcross, Georgia with Laurelwood Holdings, LLC (“Laurelwood Holdings”).  The sellers of ProSys, who thereafter became employees of the Company, had an ownership interest in Laurelwood Holdings.  In 2009, 2008 and 2007, the Company paid $539,000, $501,000 and $498,000, respectively, under those lease agreements to Laurelwood Holdings.  One of the employees disposed of her interest shortly after the ProSys acquisition in 2006 and the other employee terminated his employment as of December 31, 2008.





Since October 2005, the Company has employed a stepson of Mr. Bell, the Company’s president and chief executive officer, in the position of director of strategic markets.  In 2009, 2008 and 2007, Mr. Bell’s stepson received total cash compensation of $215,000, $246,000 and $238,000, respectively.  On November 17, 2005, he was granted an option to purchase 15,000 shares of common stock with an exercise price of $7.95 per share.  On January 21, 2008, he was granted an option to purchase 10,000 shares of common stock with an exercise price of $5.90 per share.  On September 2, 2009, he was granted an option to purchase 10,000 shares of common stock with an exercise price of $2.00 per share. In addition, he participates in all other benefits that the Company generally offers to all of its employees.  The Audit Committee has reviewed and ratified the employment of Mr. Bell’s stepson and his compensation.





These related party transactions are not deemed material and therefore are not disclosed separately on the face of the consolidated financial statements.





NOTE 12 — SALARY SAVINGS PLAN AND RETIREMENT PLAN





The Company has a Section 401(k) Plan (the “Plan”), which provides participating U.S. employees an opportunity to accumulate funds for retirement and hardship.  Participants may contribute up to 30% of their eligible earnings to the Plan.  Beginning in 2006, the Company began providing a matching contribution of 25% of the employee’s first 6% of contributions to the Plan up to $2,000 per year.  The Company’s expense for matching contributions for the years ended December 31, 2008 and 2007 was $1.5 million and $1.0 million, respectively.  As of January 1, 2009, the Company terminated matching contributions to employees.





During 2002, the Board adopted the Supplemental Executive Retirement Plan (“SERP”), which was amended in November 2007.  The SERP provides an annual income benefit to the Company’s Chief Executive Officer of $450,000 for life commencing upon his retirement.  The SERP is unfunded and expenses related to the SERP, consisting of life insurance premium payments, were $0.3 million, $0.3 million and $0.1 million in the years ended December 31, 2009, 2008 and 2007, respectively.  The actuarial estimate of the SERP liability amounted to $3.5 million and $3.2 million as of December 31, 2009 and 2008, respectively, and is included in “Other Long-Term Liabilities” in the consolidated balance sheets.





The Company has purchased life insurance on its Chief Executive Officer and other key employees.  As beneficiary of these insurance policies, the Company receives the cash surrender value if the policy is terminated, and upon death of an insured, receives all benefits payable.  The Company estimates that the proceeds from the life insurance benefits will be sufficient to recover, over time, the full cost of the SERP and the death benefits being provided to the other key employees ($250,000 per employee), plus the cost of insurance.  The “cash value of life insurance,” as reported in the consolidated balance sheets in “Other Long-Term Assets” as of December 31, 2009 and 2008, is $1.9 million and $1.7 million, respectively.





NOTE 13 — SEGMENT AND GEOGRAPHIC INFORMATION





Operating segments are defined as components of an enterprise about which separate financial information is available, which the chief operating decision-maker evaluates regularly in determining allocation of resources and assessing performance. For the years ended December 31, 2008 and 2007, the Company had ten operating segments and seven reportable segments. In 2009, the chief operating decision maker changed the level of detail he reviews, which resulted in six operating segments and five reportable segments for the year ended December 31, 2009.





- 80 -


The following are the Company’s reportable segments for the year ended December 31, 2009:





North America
Latin AmericaEurope
OtherProSys





The reportable segments, North America, Europe, Latin America and ProSys, represent operating segments that individually met the quantitative threshold reporting requirements of FASB ASC 280-10, Segment Reporting (“ASC 280-10”).  The reportable segment, Other, represents operating segments that were combined as they share a majority of the reportable segment aggregation criteria of ASC 280-10 and do not individually or in the aggregate meet the quantitative threshold reporting requirements of ASC 280-10.  The Other segment includes TotalTec and Rorke Data.





Historically, the Company disclosed segment and geographic information using seven reportable segments for the years ended December 31, 2008 and 2007.  For comparative purposes, the Company has presented in the tables below the 2008 and 2007 segment and geographic information as if the Company has used the five reportable segments determined at December 31, 2009.





Financial information for each of the Company’s five reportable segments is summarized below (dollars in thousands):





Years Ended December 31,2009


2008


2007Amount


%


Amount


%


Amount


%Net sales:North America

$
823,107



27.2
%

$
988,421



27.6
%

$
1,195,894



30.3
%Europe


1,247,809



41.3



1,459,128



40.8



1,699,732



43.0ProSys


385,968



12.8



451,446



12.6



378,760



9.6Latin America


499,706



16.5



592,654



16.6



570,474



14.4Other


64,577



2.2



87,850



2.4



105,045



2.7Total net sales

$
3,021,167



100.0
%

$
3,579,499



100.0
%

$
3,949,905



100.0
%Net sales by product:Computer platforms

$
560,211



18.6
%

$
614,050



17.2
%

$
615,137



15.6
%Storage systems


550,778



18.2



679,069



19.0



693,713



17.6Disk drives


749,635



24.8



932,388



26.0



1,237,103



31.3All other products


1,160,543



38.4



1,353,992



37.8



1,403,952



35.5Total net sales

$
3,021,167



100.0
%

$
3,579,499



100.0
%

$
3,949,905



100.0
%Operating income (loss):North America

$
(1,998
)


(5.0
)%

$
(37,889
)


(111.8
)%

$
(8,119
)


(24.3
)%Europe


22,842



57.4



1,920



5.6



(14,275
)


(42.7
)ProSys


12,021



30.2



1,893



5.6



(17,909
)


(53.6
)Latin America


7,103



17.9



1,331



3.9



2,765



8.3Other


(181
)


(0.5
)


(1,141
)


(3.3
)


4,124



12.3Total income (loss)

$
39,787



100.0
%

$
(33,886
)


(100.0
)%

$
(33,414
)


(100.0
)%





(Continued)





- 81 -





Years Ended December 31,2009


2008


2007Capital expenditures:North America

$
1,004


$
1,449


$
1,948Europe


1,854



2,631



3,688ProSys


606



1,005



1,518Latin America


303



2,037



1,155Other


269



482



938Total

$
4,036


$
7,604


$
9,247Depreciation and amortization:North America

$
2,176


$
1,573


$
1,679Europe


3,334



3,779



4,127ProSys


3,771



3,722



3,390Latin America


909



812



878Other


780



888



894Total

$
10,970


$
10,774


$
10,968Interest expense (income), net:North America

$
24,571


$
23,746


$
27,261Europe


8,136



13,758



13,817ProSys


259



(44
)


(326
)Latin America


(12
)


(49
)


(9
)Other


143



133



54Total

$
33,097


$
37,544


$
40,797





As of December 31,2009


2008Total assets:North America

$
250,365


$
252,165Europe


330,603



274,110ProSys


102,943



106,793Latin America


146,842



120,289Other


26,223



28,769Total

$
856,976


$
782,126Long-lived assets:North America

$
3,334


$
4,677Europe


5,152



5,806ProSys


2,762



3,303Latin America


3,032



3,439Other


1,430



1,817Total

$
15,710


$
19,042







- 82 -


Net sales by geographic region based on the location from which the product was shipped (except Miami, where net sales are based upon the location to which the product was shipped) for the years ended December 31, 2009, 2008 and 2007 were as follows (dollars in thousands):





Years Ended December 31,2009


2008


2007Amount


%


Amount


%


Amount


%United States

$
1,170,654



38.8
%

$
1,403,776



39.2
%

$
1,530,658



38.8
%Canada


102,998



3.4



123,941



3.5



149,042



3.8United Kingdom


684,524



22.7



810,934



22.6



1,018,365



25.8Other Europe


563,285



18.6



648,194



18.1



681,367



17.2Latin America(1)


499,706



16.5



592,654



16.6



570,473



14.4Total

$
3,021,167



100.0
%

$
3,579,499



100.0
%

$
3,949,905



100.0
%


_________________


(1)
Includes U.S.-based sales from the Miami operation of $110,323, $124,292 and $129,872 for the years ended December 31, 2009, 2008 and 2007, respectively.





Net property and equipment by geographic area at December 31, 2009 is as follows (in thousands):





December 31,2009


2008United States

$
7,436


$
9,665Canada


90



132United Kingdom


4,433



5,191Other Europe


719



615Latin America (1)


3,032



3,439Total

$
15,710


$
19,042


_________________


(1)
Includes U.S.-based property and equipment from the Miami operation of $1,864, and $2,297  as of December 31, 2009 and 2008, respectively.





NOTE 14 — DERIVATIVE INSTRUMENTS





The Company uses derivative instruments, principally forward and swap contracts, to manage the risk associated with changes in foreign currency exchange rates and the risk that changes in interest rates will affect the fair value or cash flows of its debt obligations.  The Company monitors its positions with, and the credit quality of, the financial institutions that are party to these financial transactions.  Counterparty credit risk related to derivative financial instruments has historically been considered low because the transactions have been entered into with a number of strong, creditworthy financial institutions.  From time to time, the Company uses interest rate swap agreements to hedge the fair value of its fixed-rate debt obligations.  Under an interest rate swap contract, the Company agrees to receive a fixed-rate payment (in most cases equal to the stated coupon rate of the debt being hedged) for a floating-rate payment.





Foreign Currency Risk Management





A substantial part of the Company’s revenue, inventory purchases and capital expenditures are transacted in U.S. dollars, but the functional currency for foreign subsidiaries is not the U.S. dollar.  The Company enters into foreign forward exchange contracts to economically hedge certain balance sheet exposures against the impact of future changes in foreign exchange rates.  The gains and losses on the forward exchange contracts are largely offset by gains and losses on the underlying transactions.  To the extent the Company is unable to manage these risks, its consolidated financial position and cash flows could be materially adversely affected.  The Company’s foreign exchange forward contracts related to current assets and liabilities are generally six months or less in original maturity.





At December 31, 2009 and 2008, the Company had outstanding foreign exchange forward contracts with a total notional amount of approximately $80.6 million and $75.5 million, respectively.  These contracts will settle in British pounds, Euros, Chilean pesos, Mexican pesos and U.S. dollars.





For all derivative transactions, the Company is exposed to counterparty credit risk to the extent that the counterparties may not be able to meet their obligations to the Company.  To manage the counterparty risk, the Company enters into derivative transactions only with major financial institutions.




- 83 -


Interest Rate Risk Management





In August 2003, the Company entered into an interest rate swap agreement in order to gain access to the lower borrowing rates generally available on floating-rate debt, while avoiding prepayment and other costs that would be associated with refinancing long-term fixed-rate debt.  The swap agreement purchased has a notional amount of $40.0 million, with a six-month settlement period and provides for variable interest at LIBOR plus a set rate spread.  The notional amount decreases ratably as the underlying debt is repaid.  The value of the swap agreement was a liability of $73,516 at December 31, 2007.  The interest rate swap agreement was scheduled to terminate in June 2010, subject to early termination at the counterparty’s discretion.  The counterparty terminated the interest rate swap on February 6, 2008.  The counterparty paid the Company approximately $15,000 in connection with the termination of the swap representing the fair market value of the interest rate swap on the termination date.  Historically, changes in the fair market value of the instrument were recorded in the statement of operations.  The amount recorded to earnings due to ineffectiveness during the year ended December 31, 2008 was insignificant.





On June 30, 2006, the Company entered into a cross-currency interest rate swap agreement with Wachovia Bank, N.A. to hedge its investments in foreign operations in which the Euro is their functional currency (“Euro investments”).  The principal notional amount of the swap was €6.0 million ($8.4 million using the exchange rate of $1.40/€1.00 on June 30, 2006).  The notional amount of the swap at December 31, 2008 was $7.7 million.  Under the terms of the swap, Wachovia agreed to pay the Company an interest payment computed on the 3-month USD LIBOR in exchange for an interest payment from the Company computed on the 3-month Euro LIBOR.  On both sides of the swap, the Company’s bank margin of 1.5% was added.  The interest payments were reset every three months and at maturity there would be a cash settlement between the Company and Wachovia, which was dependent on the conversion rates at maturity in comparison to the original spot rate of $1.28/€1.  The swap had a three-year maturity and could be terminated by the Company for convenience at no cost.  This swap agreement was accounted for as a net investment hedge under the accounting guidance for derivative transactions.  Both at inception, and on an on-going basis, the Company performed effectiveness tests.  Consistent with the Company’s policy with respect to derivative instruments and hedging activities, the Company designated the change in Euro spot rates as the hedged risk in its Euro investments.  Since the contract was a hedge of the Company’s Euro investments, the change in the fair value of the contract attributable to changes in spot rates, which is the effective portion of the hedge, was recorded as an offset to the Company’s Euro investments in the cumulative translation account on the balance sheet.  The fair value of the cross-currency interest rate swap agreement at December 31, 2008 was $0.7 million and was recorded as a liability on the consolidated balance sheet.  The change in fair value of this contract due to exchange rate fluctuations was recorded to accumulated other comprehensive income (loss) in the amount of $0.4 million during 2008 and $0.9 million during 2007.  All other changes in the fair value during the year were recorded to interest expense (income), net as ineffectiveness.  On June 30, 2009, the Company terminated its cross-currency interest rate swap agreement with Wachovia Bank N.A.  The Company paid the counterparty $0.8 million in connection with the termination of the swap representing the fair market value of the cross-currency interest rate swap on the termination date and reclassified the amount previously recognized in accumulated comprehensive income (loss) into earnings.  The amount recorded to earnings due to ineffectiveness during the year ended December 31, 2009 and 2008 was insignificant.





The fair values of derivative instruments, consisting of foreign exchange contracts, in the consolidated balance sheet at December 31, 2009 were not significant.  The fair values of derivative instruments in the consolidated balance sheet at December 31, 2008 were as follows (in thousands):





Asset (Liability) DerivativesBalance Sheet Location

Fair ValueAs of December 31, 2008:Derivative instruments designated as hedges:Cross-currency swap
Other long-term liabilities

$
744Total


$
744Derivative instruments not designated as hedges:ProSys derivative
Other long-term liabilities

$
(4,391
)Total


$
(4,391
)





Foreign exchange contract fair values have not been included in the table above as they were deemed to be insignificant at December 31, 2008.





- 84 -


The effect of derivative instruments on the consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007 was as follows (in thousands):





Location of

Gain (Loss)

Recognized in Income

on Derivatives

Amount of

Gain (Loss)

Recognized

in Income on

DerivativesYear Ended December 31, 2009:Derivative instruments not designated as hedges:ProSys derivative
Selling, general and administrative expense

$
2,933Foreign exchange contracts
Other income


375Total


$
3,308Year Ended December 31, 2008:Derivative instruments designated as hedges:Cross-currency swap designated as a net investment hedge
Other comprehensive income (loss)

$
400Total


$
400Derivative instruments not designated as hedges:ProSys derivative
Selling, general and administrative expense

$
(4,391
)Foreign exchange contracts
Other expense


(8,380
)Total


$
(12,771
)Year Ended December 31, 2007:Derivative instruments designated as hedges:Cross-currency swap
Other comprehensive income (loss)

$
900Interest rate swap
Other income


500Total


$
1,400Derivative instruments not designated as hedges:Foreign exchange contracts
Other income

$
621Total


$
621





ProSys Derivative





At the time of the acquisition of ProSys on October 2, 2006, the Company and the former shareholders of ProSys (the “Holders”) entered into a registration rights agreement obligating the Company to file a registration statement with the SEC to register for resale 1.72 million shares of the Company’s common stock used as part of the consideration in the purchase transaction within 60 days after the closing date of the acquisition.  On April 30, 2007, the Company and the Holders entered into an amendment to the registration rights agreement.  The amendment provided that, in exchange for an extension of the time to register the shares, the Company would provide the Holders with cash or Company common stock necessary to make up the positive difference between the per share price of the Company common stock on the date the registration statement was declared effective and $4.93 (the “Issue Price”).  The Issue Price was the price used to determine the share value for purposes of determining the consideration for the purchase transaction, as well as a put right to the Company at the Issue Price in certain circumstances, for those shares not subject to restriction on sale under the registration rights agreement.  On February 5, 2008, the Company entered into a memorandum of understanding with the Holders that required the Company to pay an advance against potential contingent consideration due to the Holders in exchange for an extension on the previously granted put right through September 30, 2008.  On August 26, 2008, the Company and the Holders entered into a second amendment to the registration rights agreement under which the Company agreed to purchase from the Holders all of the right, title and interest in 710,036 shares of the purchase consideration common stock at the Issue Price, in exchange for granting the Holders a right to put the remaining 1,014,336 shares to the Company at the Issue Price if the Company had not filed all of its delinquent SEC periodic reports by October 31, 2009 (the “contingent put option”).  If the Company was no longer delinquent in its SEC periodic reports on October 31, 2009, once the remaining 1,014,336 shares became freely tradable in the open market, the Company agreed to pay the Holders the positive difference between the Issue Price and the open market sale price (“Price Protection”).  In September 2009, the Company regained compliance with its SEC periodic reporting obligations, which had the effect of terminating the contingent put option.





- 85 -


The contingent put option and the Price Protection represent derivative instruments issued by the Company that were required to be recorded at fair value.  Based on the terms described above for each, only one of these derivative instruments, and not both, could eventually be exercised by the Holders thereby limiting the maximum liability to the Company under the agreements discussed above.  Prior to the expiration of the contingent put option, the Company recorded a derivative liability equal to the greater of the fair value of the Price Protection or the contingent put option, reflective of the fact that only one of the instruments could be exercised at any point in time.  Due to the expiration of the contingent put option, the derivative liability was valued solely based on the Price Protection as of September 30, 2009.  Changes in fair value were recorded as compensation expense in “selling, general and administrative expense” in the consolidated statements of operations.  The derivative liability, which was included in “other accrued liabilities” in the Company’s consolidated balance sheets, totaled $4.4 million at December 31, 2008.  The contingent put option and the Price Protection are collectively referred to herein as the “ProSys Derivative.”





The Company paid an aggregate of $3.5 million for the 710,036 shares purchased pursuant to the second amendment to the registration rights agreement.  The amount paid in excess of the Company’s share price on August 26, 2008 totaled $1.9 million, which was recorded in “selling, general and administrative expense.”





On October 13, 2009, the Company entered into a settlement agreement with the Holders covering all claims relating to the earnout payments agreed to at the time the Company acquired ProSys, which terminated the Company’s obligations related to the price protection.





NOTE 15 — SHAREHOLDERS’ EQUITY





Income (Loss) Per Share





Basic and diluted net income (loss) per share (“EPS”) is computed by dividing net income (loss) (the numerator) by the weighted average number of common shares outstanding (the denominator), during the period.  Diluted EPS gives effect to potentially dilutive common shares outstanding during the period, including stock options and warrants using the treasury stock method, except in periods when anti-dilutive.





The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods presented below (in thousands, except per share data):





Years Ended December 31,2009


2008


2007Basic income (loss) per share:Net income (loss)

$
7,522


$
(82,466
)

$
(78,746
)Shares used in computation:Weighted average ordinary shares outstanding


31,859



32,299



32,248Basic income (loss) per share

$
0.24


$
(2.55
)

$
(2.44
)Diluted income (loss) per share:Net income (loss)

$
7,522


$
(82,466
)

$
(78,746
)Shares used in computation:Weighted average ordinary shares outstanding


31,859



32,299



32,248Employee options


79



—



—Restricted stock units


657



—



—Weighted average number of shares


32,595



32,299



32,248Diluted income (loss) per share

$
0.23


$
(2.55
)

$
(2.44
)





At December 31, 2009, 6,264,743 shares of the Company’s common stock and warrants to purchase 125,000 shares were excluded from the calculation of diluted EPS because they were anti-dilutive.  At December 31, 2008, 1,020,083 RSU awards, options to purchase 3,999,567 shares of the Company’s common stock and warrants to purchase 125,000 shares were excluded from the calculation of diluted EPS because they were anti-dilutive.  At December 31, 2007, 395,333 RSU awards, options to purchase 3,461,554 shares of the Company’s common stock and warrants to purchase 125,000 shares were excluded from the calculation of diluted EPS because they were anti-dilutive.





- 86 -


Warrants





In connection with the 2006 Notes used to finance the October 2, 2006 acquisition of ProSys, the Company issued warrants to the investors to purchase up to an aggregate of 125,000 shares of the Company’s common stock at an exercise price of $5.15 per share.  These warrants had a fair value of $382,000 at December 31, 2006 and were recorded to equity at fair value on the date of grant.  Subsequent changes in fair value of the warrants are not recognized as long as they are classified as equity.





The warrants expire in October 2011 and the investor has the right to convert the warrant into common stock at any time prior to its expiration.  Upon exercise of the warrant, the Company is required to deliver to the holder common stock equal to the quotient obtained by dividing the net value of all the warrant shares by the fair market value of a single warrant share.





The holder can also exercise the warrant right upon payment of an amount equal to the warrant exercise price in the form of cash or securities previously issued by the Company at such securities’ then fair market value.  In the event of capital reorganizations, such as a consolidation or merger of the Company with another corporation or the sale of all or substantially all of its assets in which the holders of the Company’s common stock shall be entitled to receive stock, securities or assets, the holders of the warrants would be entitled to receive stock, securities or assets as if it had exercised its rights under the warrant agreement.





The Company was required to file a registration statement for the warrant shares under the Securities Act of 1933 promptly after the date of the asset purchase agreement of October 2, 2006.  The Company has not been able to do so because of prior delays in the filing of its periodic reports with the SEC.  As of March 15, 2010, the Company has not filed the registration statement covering the resale of the warrant shares.





NOTE 16 — FAIR VALUE MEASUREMENTS





The Company estimates the fair value of its financial instruments using available market information and valuation methodologies it believes to be appropriate for these purposes.  Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that the Company would realize upon disposition.





- 87 -


The fair value hierarchy consists of three broad levels, which are described below:





Level 1
Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.  Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.  Level 1 primarily consists of financial instruments, such as exchange-traded derivatives, listed equities and U.S. government treasury securities.Level 2
Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.  Level 2 includes those financial instruments that are valued using models or other valuation methodologies.  These models are primarily industry standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.  Instruments in this category include non-exchange-traded derivatives, such as over-the-counter forwards, options and repurchase agreements.Level 3
Pricing inputs include significant inputs that are generally less observable from objective sources.  These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.  Level 3 instruments include those that may be more structured or otherwise tailored to customers’ needs.  At each balance sheet date, the Company performs an analysis of all instruments subject to fair value measurement and includes in Level 3 all of those whose fair value is based on significant unobservable input.





Assets and liabilities measured at fair value on a recurring basis at December 31, 2009 were insignificant.  Assets and liabilities measured at fair value on a recurring basis include the following at December 31, 2008 (in thousands):





Fair Value MeasurementsLevel 1


Level 2


Level 3


TotalAvailable-for-sale security

$
22


$
—


$
—


$
22Cross-currency interest rate swap


—



(744
)


—



(744
)ProSys derivative


—



—



(4,391
)


(4,391
)$
22


$
(744
)

$
(4,391
)

$
(5,113
)





The Company discloses the fair value of its term loans and its convertible notes.  See Note 6 – Lines of Credit and Long-Term Debt.





Available-For-Sale Security





The Company has an equity ownership interest in CHDT Corporation, which is accounted for as an available-for-sale security.  The fair value of the Company’s available security is as follows at December 31, 2009 and 2008 (in thousands):





December 31,2009


2008Cost basis

$
80


$
80Unrealized holding loss


(59
)


(58
)Fair value

$
21


$
22





The fair value of this investment is included in “Other assets” in the Company’s consolidated balance sheets and the related net unrealized holding gains and losses are included in “Accumulated Other Comprehensive Income” in the shareholders’ equity section in the Company’s consolidated balance sheets.





- 88 -


Cross-Currency Interest Rate Swap





On June 30, 2006, the Company entered into a cross-currency interest rate swap agreement with Wachovia Bank, N.A. to hedge its investments in foreign operations in which the Euro is the functional currency.  The notional amount of the swap at December 31, 2008 was £6.0 million.  This swap agreement is accounted for as a net investment hedge, as the notional amount of the cross-currency interest rate swap is expected to equal a comparable amount of hedge assets.  No material ineffectiveness is expected.  The fair value of the cross-currency interest rate swap agreement at December 31, 2008 was $0.7 million and is recorded as a liability on the consolidated balance sheet.  The fair value of the cross-currency interest rate swap is calculated using a discounted cash-flow model, which uses the forward yield curves of USD LIBOR interest rates and Euro LIBOR interest rates to arrive at the net present value of the expected cash flows of the cross-currency swap.  This financial instrument is typically exchange-traded and is generally classified within Level 1 or Level 2 of the fair value hierarchy, depending on whether or not the exchange is deemed to be an active market.  The cross-currency interest rate swap is traded in an active market and, therefore, is classified within Level 2.





On June 30, 2009, the Company terminated its cross-currency interest group swap agreement with Wachovia Bank N.A.  The Company paid the counterparty $0.8 million in connection with the termination of the swap representing the fair market value of the cross-currency interest rate swap on the termination date.  The amount recorded to earnings due to ineffectiveness during the years ended December 31, 2009 and 2008 was insignificant.





ProSys Derivative





The Company utilizes the Black-Sholes option pricing model for determining the estimated fair value of the ProSys Derivative (Level 3).  In the Black-Scholes valuation calculation, the Company made estimates of key assumptions such as future stock price volatility, expected term and risk free rates.  The expected stock price volatility is based on the historical volatility of the Company’s stock.  The expected term is based upon the Company’s estimate of the life of the ProSys Derivative.  The risk-free rate is based on the U.S. Treasury yield curve in effect at each valuation date.  As of December 31, 2008, the fair value of the Price Protection was equivalent to the fair value of the contingent put option.  In September 2009, the Company regained compliance with its SEC periodic reporting obligations, which combined with a settlement agreement with the former ProSys shareholders had the effect of terminating the ProSys Derivative.  For further information regarding the ProSys Derivative, see Note 14 – Derivative Instruments.





Foreign Exchange Contracts





The Company enters into foreign exchange forward, option or swap contracts (collectively, the “foreign exchange contracts”) to mitigate the impact of changes in foreign currency exchange rates.  These contracts are executed to facilitate the hedging of foreign currency exposures resulting from inventory purchases and sales and generally have terms of no more than six months.  Gains or losses on these contracts are recognized currently in earnings.  The Company does not enter into foreign exchange contracts for trading purposes.  The risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the Company minimizes by limiting its counterparties to major financial institutions.  The fair value of the foreign exchange contracts is estimated using market quotes obtained from brokers (Level 2) and has been excluded from the table above as it is insignificant as of December 31, 2009 and 2008.  The notional amount of the foreign exchange contracts at December 31, 2009 and 2008 was $80.6 million and $75.5 million, respectively.





NOTE 17 — SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)





The tables below summarize unaudited quarterly financial data for the eight quarters in the two-year period ended December 31, 2009.  In the Company’s opinion, the unaudited quarterly financial data has been prepared on the same basis as the audited consolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the data for the periods presented.  The Company’s results of operations varied and may continue to fluctuate significantly from quarter to quarter.  The results of operations in any period should not necessarily be considered indicative of the results to be expected for any future period.




- 89 -





2009March 31


June 30


September 30


December 31(in thousands)ASSETSCurrent assets:Cash and cash equivalents

$
31,621


$
26,731


$
24,402


$
21,132Accounts receivable, net


420,691



399,962



401,678



434,858Inventories


236,598



217,506



235,755



295,692Prepaid expenses and other current assets


28,649



31,632



37,775



44,088Total current assets


717,559



675,831



699,610



795,770Property and equipment, net


17,901



17,882



16,584



15,710Goodwill


19,421



20,535



21,239



21,456Other intangibles, net


8,509



7,834



7,056



6,261Other long-term assets


23,751



21,615



20,604



17,779Total assets

$
787,141


$
743,697


$
765,093


$
856,976LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities:Cash overdraft

$
4,187


$
7,019


$
5,543


$
12,453Accounts payable


316,164



289,990



285,599



348,415Borrowings under lines of credit


176,477



144,217



181,841



179,691Current portion of long-term debt


10,662



10,700



11,083



11,097Other accrued liabilities


93,726



94,847



81,429



91,784Total current liabilities


601,216



546,773



565,495



643,440Long-term debt, net of current portion


161,753



160,163



160,942



159,494Other long-term liabilities


23,185



22,605



21,829



22,210Total liabilities


786,154



729,541



748,266



825,144Shareholders’ equity:Common stock


231,993



232,697



233,174



233,950Accumulated deficit


(221,543
)


(224,591
)


(222,926
)


(209,978
)Accumulated other comprehensive income (loss)


(9,463
)


6,050



6,579



7,860Total shareholders’ equity


987



14,156



16,827



31,832Total liabilities and shareholders’ equity

$
787,141


$
743,697


$
765,093


$
856,976





(continued)




- 90 -




2008March 31(1)


June 30(1)


September 30(1)


December 31(1)(in thousands)ASSETSCurrent assets:Cash and cash equivalents

$
26,921


$
36,489


$
45,394


$
22,775Accounts receivable, net


517,496



521,491



473,861



429,853Inventories


354,125



316,942



303,401



230,652Prepaid expenses and other current assets


25,795



30,689



31,463



24,907Total current assets


924,337



905,611



854,119



708,187Property and equipment, net


19,827



20,147



19,335



19,042Goodwill


26,722



28,001



26,463



19,211Other intangibles, net


12,138



11,289



10,288



9,315Other long-term assets


26,161



37,551



36,088



26,371Total assets

$
1,009,185


$
1,002,599


$
946,293


$
782,126LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities:Cash overdraft

$
25,645


$
16,876


$
8,896


$
10,527Accounts payable


330,571



363,292



345,118



264,218Borrowings under lines of credit


284,072



215,654



251,344



211,405Current portion of long-term debt


10,563



8,395



8,788



10,286Other accrued liabilities


86,173



100,538



79,372



94,658Total current liabilities


737,024



704,755



693,518



591,094Long-term debt, net of current portion


130,067



163,802



163,617



161,063Other long-term liabilities


27,763



27,518



26,720



24,269Total liabilities


894,854



896,075



883,855



776,426Shareholders’ equity:Common stock


230,750



231,548



231,391



231,432Accumulated deficit


(146,936
)


(155,765
)


(184,021
)


(217,500
)Accumulated other comprehensive income (loss)


30,517



30,741



15,068



(8,232
)Total shareholders’ equity


114,331



106,524



62,438



5,700Total liabilities and shareholders’ equity

$
1,009,185


$
1,002,599


$
946,293


$
782,126





(1)
Adjusted for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other Options.See Note 2, “Summary of Significant Accounting Policies.”





(continued)


- 91 -





Year Ended December 31, 2009First

Quarter


Second

Quarter


Third

Quarter


Fourth

Quarter(in thousands, except per share data)Net sales

$
715,316


$
703,728


$
765,156


$
836,967Cost of sales


643,464



629,664



693,431



758,568Gross profit


71,852



74,064



71,725



78,399Selling, general and administrative expense


57,331



55,306



59,040



54,652Professional fees


8,574



10,452



2,906



4,197Impairment of goodwill and other intangibles


—



—



—



—Restructuring and impairment costs


1,188



911



—



1,696Total operating expenses


67,093



66,669



61,946



60,545Operating income


4,759



7,395



9,779



17,854Interest expense, net


8,311



8,307



8,058



8,421Other expense (income), net


(2,183
)


45



(541
)


558Income (loss) before income taxes


(1,369
)


(957
)


2,262



8,875Provision for (benefit from) income taxes


2,674



2,091



597



(4,073
)Net income (loss)

$
(4,043
)

$
(3,048
)

$
1,665


$
12,948Net income (loss) per share:Basic

$
(0.13
)

$
(0.10
)

$
0.05


$
0.41Diluted

$
(0.13
)

$
(0. 10
)

$
0.05


$
0.40Shares used in per share calculation:Basic


31,790



31,847



31,879



31,919Diluted


31,790



31,847



32,575



32,694





Year Ended December 31, 2008First

Quarter (1)


Second

Quarter (1)


Third

Quarter (1)


Fourth

Quarter (1)(in thousands, except per share data)Net sales

$
993,362


$
936,601


$
880,730


$
768,806Cost of sales


905,953



849,826



797,973



690,301Gross profit


87,409



86,775



82,757



78,505Selling, general and administrative expense


79,133



73,160



76,816



73,307Professional fees


10,253



12,237



17,053



17,220Impairment of goodwill and other intangibles


—



—



—



5,864Restructuring and impairment costs


2,209



72



59



1,949Total operating expenses


91,595



85,469



93,928



98,340Operating income (loss)


(4,186
)


1,306



(11,171
)


(19,835
)Interest expense, net


9,800



9,175



9,165



9,404Other expense (income), net


(2,329
)


(416
)


8,377



4,877Loss before income taxes


(11,657
)


(7,453
)


(28,713
)


(34,116
)Provision for (benefit from) income taxes


246



1,375



(457
)


(637
)Net loss

$
(11,903
)

$
(8,828
)

$
(28,256
)

$
(33,479
)Net loss per share:Basic

$
(0.37
)

$
(0.27
)

$
(0.87
)

$
(1.04
)Diluted

$
(0.37
)

$
(0. 27
)

$
(0.87
)

$
(1.04
)Shares used in per share calculation:Basic


32,313



32,434



32,380



32,070Diluted


32,313



32,434



32,380



32,070





(1)
Adjusted for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other Options.See Note 2, “Summary of Significant Accounting Policies.”




- 92 -





The following table summarizes the impact of the restatement disclosed in Note 18 on the quarterly condensed consolidated statements of cash flows previously reported for the three, six and nine month periods ended March 31, June 30 and September 30, respectively, of 2008 and 2009 (in thousands).  See Note 18 for a description of the nature of the restatement and the associated errors.





Three Months Ended

March 31, 2009


Six Months Ended

June 30, 2009


Nine Months Ended

September 30, 2009Previously Reported


Adjust-ments


As Restated


Previously Reported


Adjust-ments


As Restated


Previously Reported


Adjust-ments


As RestatedLoss (gain) on currency remeasurement

$
1,166
(1)

$
1,188


$
2,354


$
(1,191
)

$
(3,060
)

$
(4,251
)

$
(1,246
)

$
(3,015
)

$
(4,261
)Changes in assets and liabilities:Accounts receivable


(3,406
)


3,850



444



48,213



(6,441
)


41,772



40,449



(1,208
)


39,241Inventories


(6,279
)


7



(6,272
)


18,544



7



18,551



2,564



(16
)


2,548Prepaid expenses and other assets


(3,615
)


1



(3,614
)


(6,201
)


820



(5,381
)


(8,653
)


(4,164
)


(12,817
)Accounts payable and cash overdrafts


58,268



(7,544
)


50,724



18,500



(6,044
)


12,456



10,369



(4,422
)


5,947Other accrued liabilities


(366
)


677



311



(2,592
)


420



(2,172
)


(12,297
)


(247
)


(12,544
)Net cash provided by (used in) operating activities


50,725



(1,820
)


48,905



85,437



(14,298
)


71,139



49,448



(13,072
)


36,376Net cash provided by (used in) investing activities


(861
)


---



(861
)


(1,961
)


---



(1,961
)


(2,994
)


---



(2,994
)Net (repayments) borrowings under lines of credit


(32,863
)


(1,253
)


(34,116
)


(67,885
)


3,158



(64,727
)


(33,033
)


4,302



(28,731
)Net cash (used in) provided by financing activities


(34,712
)


(1,253
)


(35,965
)


(73,961
)


3,158



(70,803
)


(40,549
)


4,302



(36,247
)Effect of exchange rate changes on cash


(6,306
)


3,073



(3,233
)


(5,559
)


11,140



5,581



(4,278
)


8,770



4,492Net increase in cash and cash equivalents


8,846



---



8,846



3,956



---



3,956



1,627



---



1,627


(1)  Included as a component of Other in the previously filed Quarterly Report on Form 10-Q.


Three Months Ended

March 31, 2008


Six Months Ended

June 30, 2008


Nine Months Ended

September 30, 2008Previously Reported


Adjust-ments


As Restated


Previously Reported


Adjust-ments


As Restated


Previously Reported


Adjust-ments


As RestatedLoss (gain) on currency remeasurement

$
(1,135
)

$
(1,205
)

$
(2,340
)

$
(549
)

$
(1,158
)

$
(1,707
)

$
(229
)

$
5,102


$
4,873Changes in assets and liabilities:Accounts receivable


25,941



3,703



29,644



17,575



3,956



21,531



24,238



13,729



37,967Inventories


72,548



1



72,549



103,946



(1
)


103,945



110,710



-



110,710Prepaid expenses


(1,940
)


---



(1,940
)


(4,347
)


---



(4,347
)


(7,420
)


---



(7,420
)Other assets


(708
)


(3,162
)


(3,870
)


(8,351
)


(5,134
)


(13,485
)


(6,451
)


(4,509
)


(10,960
)Accounts payable and cash overdrafts


(84,015
)


4,826



(79,189
)


(61,844
)


5,208



(56,636
)


(64,006
)


1,480



(62,526
)Other accrued liabilities


(20,945
)


---



(20,945
)


(7,300
)


---



(7,300
)


(24,705
)


-



(24,705
)Net cash provided by (used in) operating activities


(9,896
)


4,163



(5,733
)


39,725



2,871



42,596



14,528



15,802



30,330Net cash provided by (used in) investing activities


(2,409
)


---



(2,409
)


(2,718
)


---



(2,718
)


(5,131
)


---



(5,131
)Net (repayments) borrowings under lines of credit


(4,796
)


(388
)


(5,184
)


(42,740
)


(378
)


(43,118
)


(2,356
)


(4,588
)


(6,944
)Net cash provided by (used in) financing activities


(197
)


(388
)


(585
)


(40,393
)


(378
)


(40,771
)


(3,348
)


(4,588
)


(7,936
)Effect of exchange rate changes on cash and cash equivalents


(925
)


(3,775
)


(4,700
)


(473
)


(2,493
)


(2,966
)


(1,003
)


(11,214
)


(12,217
)Net (decrease) increase in cash and cash equivalents


(13,427
)


---



(13,427
)


(3,859
)


---



(3,859
)


5,046



---



5,046








- 93 -


NOTE 18 — RESTATEMENT OF CONSOLIDATED STATEMENTS OF CASH FLOWS





Subsequent to the issuance of its 2009 consolidated financial statements, the Company determined that it would be required to restate its consolidated statements of cash flows for the years ended December 31, 2009, 2008 and 2007 to correct errors associated with the calculations and classifications of the foreign currency effects on cash flows as prescribed by ASC 230, “Statement of Cash Flows.”  The errors were primarily due to: (1) incorrect classifications of currency gains and losses pertaining to certain foreign currency denominated line of credit borrowings, resulting in overstated/(understated) cash flows from operating activities of $6.5 million, $(12.8) million and $(0.1) million, for the years ended December 31, 2009, 2008 and 2007, respectively, with offsetting impacts to cash flows from financing activities and (2) incorrect classifications of foreign currency adjustments pertaining to long-term intercompany notes, that resulted in overstated/(understated) cash flows from operating activities (within “Changes in assets and liabilities”) of $6.4 million, $(26.4) million and $(4.3) million, for the years ended December 31, 2009, 2008 and 2007, respectively, with corresponding offsetting impacts to the effect of exchange rate changes on cash.  These adjustments had no impact on the Company’s consolidated balance sheets, statements of operations or statements of shareholders’ equity and comprehensive income (loss) for any period presented.





The following table summarizes the impact of the restatement on the consolidated cash flow statements previously reported in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2009 (in thousands):





Year Ended

December 31, 2009


Year Ended

December 31, 2008


Year Ended

December 31, 2007Previously Reported


Adjust-ments


As Restated


Previously Reported


Adjust-ments


As Restated


Previously Reported


Adjust-ments


As RestatedGain (loss) on currency remeasurement

$
(2,005
)

$
(3,248
)

$
(5,253
)

$
3,662


$
13,303


$
16,965


$
(274
)

$
(1,004
)

$
(1,278
)Changes in assets and liabilities:Accounts receivable


11,640



(4,372
)


7,268



25,573



20,184



45,757



(20,854
)


(3,058
)


(23,912
)Inventories


(53,353
)


(7
)


(53,360
)


178,225



--



178,225



(45,728
)


(27
)


(45,755
)Prepaid expenses and other assets


(18,341
)


546



(17,795
)


(2,531
)


(199
)


(2,730
)


3,164



369



3,533Accounts payable and cash overdrafts


79,970



(5,805
)


74,165



(123,153
)


5,914



(117,239
)


59,500



8,245



67,745Other accrued liabilities


837



(20
)


817



(8,618
)


6



(8,612
)


(7,430
)


(111
)


(7,541
)Net cash provided by (used in) operating activities


55,142



(12,906
)


42,236



42,448



39,208



81,656



(4,519
)


4,414



(105
)Net cash used in investing activities


(3,983
)


---



(3,983
)


(7,557
)


---



(7,557
)


(11,447
)


---



(11,447
)Net (repayments) borrowings under lines of credit


(37,927
)


6,534



(31,393
)


(40,513
)


(12,816
)


(53,329
)


47,549



(133
)


47,416Net cash provided by (used in) financing activities


(49,600
)


6,534



(43,066
)


(47,377
)


(12,816
)


(60,193
)


29,034



(133
)


28,901Effect of exchange rate changes on cash


(3,202
)


6,372



3,170



(5,087
)


(26,392
)


(31,479
)


686



(4,281
)


(3,595
)(Decrease) increase in cash and cash equivalents


(1,643
)


---



(1,643
)


(17,573
)


---



(17,573
)


13,754



---



13,754







- 94 -


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





None.





Item 9A.Controls and Procedures





Introduction





During 2007 and 2008, the Company spent considerable time and resources preparing restated consolidated financial statements and supporting the audit processes for the periods from January 1, 1996 to June 30, 2006. These restated financial statements were included in our Form 10-K for the year ended December 31, 2006, which was filed on December 30, 2008. Because of the extensive efforts required and the timing of the filing of our Form 10-K for the year ended December 31, 2008 on June 29, 2009, we had not fully remediated all previously-identified material weaknesses as of December 31, 2009.  We continue to invest significant time and resources remediating weaknesses in our internal control over financial reporting.





Evaluation of Disclosure Controls and Procedures





Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules promulgated by the SEC, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.





In connection with the preparation of the original Annual Report on Form 10-K, the Company completed an evaluation, as of December 31, 2009, under the supervision of and with participation from the Company’s management, including the current Chief Executive Officer and Chief Financial Officer, as to the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon this evaluation, management concluded that as of December 31, 2009, the Company’s disclosure controls and procedures were not effective because of the material weaknesses described in Management’s Report on Internal Control over Financial Reporting included in the original Annual Report on Form 10-K.





Subsequent to the evaluation made in connection with our original Annual Report on Form 10-K, we reevaluated our internal control over financial reporting following the identification of errors that resulted in the restatement of previously issued financial statements, as described further in Note 18 to the consolidated financial statements.  We concluded that these errors were the result of an additional material weakness in the Company’s internal control over financial reporting relating to the preparation of the statement of cash flows as described further in Management’s Report on Internal Control over Financial Reporting (As Revised).  Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, reevaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009 and based upon this evaluation, have concluded that they were not effective because of the material weaknesses described in Management’s Report on Internal Control over Financial Reporting (As Revised).





In light of the material weaknesses described below, including the additional material weakness relating to the preparation of the statement of cash flows, additional analyses and other procedures were performed to ensure that the Company’s restated consolidated financial statements included in this Annual Report on Form 10-K/A were prepared in accordance with GAAP.  These measures included expanded year-end closing procedures, the dedication of significant internal resources and external consultants to scrutinize account analyses and reconciliations and management’s own internal reviews and efforts to remediate the material weaknesses in internal control over financial reporting described below.  As a result of these measures, management concluded that the Company’s restated consolidated financial statements included in this Annual Report on Form 10-K/A present fairly, in all material respects, the Company’s consolidated financial position, results of operations and cash flows as of the dates, and for the periods, presented in conformity with GAAP.





- 95 -


Management’s Report on Internal Control over Financial Reporting (As Revised)





Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The 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 consolidated financial statements for external reporting purposes in accordance with GAAP.





The 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 consolidated financial statements in accordance with GAAP, 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 use, acquisition or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement. Any evaluation of effectiveness is subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may decrease over time.





In making its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009, management used the criteria established in the Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Based on the criteria established by COSO, management identified the following material weaknesses in the Company’s internal control over financial reporting as of December 31, 2009:





●
Control Environment — The Company did not maintain an effective control environment, which is the foundation for the discipline and structure necessary for effective internal control over financial reporting, as evidenced by: (i) an insufficient number of personnel appropriately qualified to perform control monitoring activities, including the recognition of the risks and complexities of its business operations, (ii) insufficient resources and deficient processes for information and communication flows commensurate with the complexity of its organizational and entity structure and (iii) an insufficient number of personnel with an appropriate level of GAAP knowledge and experience or ongoing training in the application of GAAP commensurate with the Company’s financial reporting requirements, which resulted in erroneous or unsupported judgments regarding the proper application of GAAP.  This control environment material weakness also contributed to the following additional material weaknesses.





●
Accrued Liabilities and Reserves - The Company did not have effective controls to ensure that all accrued liabilities were valid, complete and accurate. Specifically, the Company had insufficient processes in place to ensure that invoiced and uninvoiced liabilities for vendor accounts payable were properly indentified and recorded in the appropriate period.  Further, the Company did not have effective controls to ensure that certain analyses to support key assumptions used in the determination of certain of the Company’s reserves were prepared and reviewed.





●
Revenue — The Company did not have effective controls to ensure that revenue and the related costs were reported in the appropriate accounting period.  Specifically, the Company had insufficient processes in place to validate that customer shipping terms were properly identified, communicated, and input into the accounting system, and that multiple element arrangements were properly identified and recorded.





●
Income Taxes — The Company did not have effective controls to ensure that the income tax accounts were properly recorded, primarily in the calculation of deferred tax assets and the related valuation allowance and tax provision.




- 96 -




●
Debt Covenants— The Company did not have effective controls to ensure a thorough review of its debt agreements and financial covenant compliance calculations, and thus ensure that such calculations were performed correctly.





●
Convertible Debt Valuation— The Company did not have effective controls to ensure that the fair value of its convertible debt was appropriately computed and accounted for upon the adoption of FASB ASC 470-20, Debt with Conversion and Other Options (formerly FSP APB 14-1).





●
Goodwill Impairment — The Company did not have effective controls to ensure that its reporting units were properly identified when assessing goodwill for possible impairment.





●
Fixed Asset Dispositions — The Company did not have effective controls to ensure that fixed assets that were either retired or decommissioned were removed from the Company’s fixed asset records on a timely basis.





●
Inventory in-Transit— The Company did not have effective controls to ensure the inventory in-transit and the related vendor liability was recorded in the appropriate period.  Specifically, the Company had insufficient procedures in place to ensure that vendor shipping terms were properly identified, communicated, and input into the accounting system.





●
General Computer Controls — The Company did not have effective change management and operations controls in one of its computer processing environments.





●
Preparation of the Statements of Cash Flows — The Company did not have proper preparation and review procedures in place to ensure an accurate preparation of its consolidated statements of cash flows as required by GAAP.





These material weaknesses could result in misstatements of the Company’s consolidated financial statement accounts and disclosures, which would result in a material misstatement of future annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.





As a result of these material weaknesses, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control - Integrated Framework, issued by the COSO.





The Company’s internal control over financial reporting as of December 31, 2009 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which appears herein.





Completed and Planned Remediation Actions to Address the Internal Control Weaknesses





In response to the identified material weaknesses, the Company has dedicated significant resources to improving its control environment.  Management believes that actions taken beginning in 2007, along with other improvements not yet fully implemented, will address the material weaknesses in the Company’s internal control over financial reporting noted above.  Company management plans to continue to review and make changes to the overall design of its control environment, including the roles and responsibilities within the organization and reporting structure, as well as policies and procedures to improve the overall internal control over financial reporting.  In particular, the Company has implemented, or plans to implement, the measures described below to remediate the material weaknesses described above.





Completed Remediation Actions





Prior to the Quarter Ended December 31, 2009





·
Control Environment—The Company has updated its code of conduct, and all employees were required to acknowledge their commitment to adhere to this policy.  The Company  also regularly reminds all employees of the availability of its whistleblower hotline, through which employees at all levels can anonymously submit information or express concerns regarding accounting, financial reporting and other irregularities they have become aware of or have observed.




- 97 -




·
Personnel Matters—As part of the initiative to improve its control environment, the Company has made the following personnel and structural changes in the accounting, finance and administrative areas, all in 2007 and 2008:





o
The hiring of a new Executive Vice President and Chief Financial Officer in August 2007.





o
The hiring of an employee in the newly created position of Chief Accounting Officer in March 2008, which replaced the position of Vice President and Corporate Controller.





o
The formation of a Legal Department, the hiring of a Vice President, General Counsel and Corporate Secretary in July 2007 and the hiring of additional personnel in the Legal Department during 2007.





o
The delegation to the General Counsel of the responsibility for managing and administering the Company’s equity award granting process.





o
The hiring of employees in the newly created positions of Director of GAAP and SEC Reporting and SEC Reporting Manager.





o
The addition of three professionals in its Internal Audit Department in 2007.





During the Quarter Ended December 31, 2009





·
Policies and Procedures — In 2009, the Company developed and implemented or enhanced a number of key accounting and finance-related policies and procedures, including with respect to foreign currency translations, revenue recognition excluding revenue cut-off, accounts receivable, vendor allowances and the preparation of the statement of cash flows.





·
Stock-Based Compensation— In 2007, the Board (i) amended the Charter of the Compensation Committee to clarify its duties and responsibilities and (ii) adopted, and the Company implemented, a new equity award policy defining the responsibilities of the Compensation Committee in its oversight of the Company’s stock option grant practices and clarifying the administration of equity awards.  Key features of the equity award policy include:





o
All awards to employees will be granted by the Compensation Committee or recommended by the Compensation Committee to the Board.





o
All awards to directors (other than automatic awards under Company equity plans) will be granted by the Board.





o
Awards will normally be considered at regularly scheduled Committee or Board meetings, but may also be considered at special meetings or as action taken by unanimous written consent of the Compensation Committee or Board.





o
The exercise price of all stock options shall be equal to or greater than the closing price of the Company’s common stock on the grant date.





o
Minutes will be prepared and circulated promptly following all meetings of the Board and its Committees.





·
Account Reconciliations — In 2009, the Company implemented procedures and controls to ensure that account reconciliations were supported by sufficient documentation and adequately performed and reviewed on a timely basis for validity, completeness and accuracy.





·
Accounts Receivable — In 2009, the Company implemented a revised policy regarding the accounting for accounts receivable credits.




- 98 -




·
Vendor Allowances— In 2009, the Company implemented a revised policy and related procedures to ensure:  (i) vendor allowances are only recorded in connection with final sales transactions and (ii) supporting documentation is maintained for all vendor allowances recorded.





·
Revenue—In 2009, the Company implemented procedures to ensure that (i) adequate collectability assessments were performed prior to recognizing revenue, (ii) revenue was completely and accurately recorded on a net basis with respect to certain third-party service contracts where the Company was not the primary obligor and (iii) intercompany sales were properly eliminated.





·
Post-Retirement Benefits — In 2009, the Company updated and enhanced its key accounting and finance policies and procedures related to post-retirement benefits.





·
Employee Training— In December 2009, the Company completed Company-wide training to enhance adherence to GAAP accounting  principles.  Training participants included key members of senior management, finance, and sales and marketing personnel.  This training included:





o
Comprehensive training programs for all finance personnel at the manager level and above covering fundamental accounting and Company-specific financial reporting matters, including GAAP accounting principles, revenue recognition, reserve and accrual accounting and purchase accounting.





o
A financial leadership training program (led by the Chief Financial Officer) covering worldwide financial management issues, debriefings on all historical restatement items, financial issues requiring substantial judgment and new accounting policies and procedures.





·
Account Reconciliations — In the fourth quarter of 2009, the Company implemented additional procedures and controls to ensure that account reconciliations were supported by sufficient documentation and adequately performed and reviewed on a timely basis for validity, completeness and accuracy.





·
Business Combinations and Segment Reporting— In the fourth quarter of 2009, the Company established additional control processes for the accurate and timely accounting for (i) business combinations, and (ii) allocation of goodwill to the appropriate reportable segments.





·
Financing-Related Accounts — In the fourth quarter of 2009, the Company implemented additional policies, procedures and documentation requirements to ensure appropriate accounting for and monitoring of warrant and derivative transactions.





Planned Remediation Actions to Address the Internal Control Weaknesses





·
Control Environment —The Company intends to hire additional qualified accounting personnel in the first half of 2010.  Additionally during 2010, the Company will continue to provide ongoing technical training to enhance knowledge of GAAP within our accounting department and improve the quality of our review process.





·
Accrued Liabilities and Reserves —The Company is improving its procedures to ensure that all accrued liability balances are valid, complete and accurate.  Further, the Company plans to modify existing processes to ensure the completeness and timely recording of invoiced and uninvoiced liabilities within the accounting system.  The Company is also updating its processes to  ensure that certain analyses to support key assumptions used in the determination of certain of the Company’s  reserves are performed.  The Company expects that these policies and procedures will be implemented by December 31, 2010.





·
Revenue —The Company is updating and enhancing its policies and procedures related to revenue recognition.  The Company will enhance its procedures to validate that all customer shipping terms are properly identified, communicated, and input into the accounting system.  In addition, the Company will enhance its procedures to ensure that multiple element arrangements are properly identified and recorded. The Company expects that these policies and procedures will be implemented by December 31, 2010.





·
Income Taxes —The Company is updating its processes to ensure that certain analyses to support the calculation of the income tax accounts are properly prepared and reviewed.  The Company expects that these improvements and procedures will be implemented by December 31, 2010.




- 99 -




·
Debt Covenants— The Company is implementing additional procedures to periodically review its debt agreements to ensure that it has identified all of its debt covenants, including cross-covenant default provisions.  Additionally, the Company plans to implement procedures to evaluate and compute compliance with all identified covenants. The Company expects these procedures to be implemented by December 31, 2010.





·
Convertible Debt Valuation—The Company is implementing additional policies, procedures and documentation requirements to ensure appropriate accounting for and monitoring of the fair value of its convertible debt.  The Company expects these procedures to be implemented by December 31, 2010.





·
Goodwill Impairment—The Company is implementing additional policies, procedures and documentation requirements to ensure appropriate accounting for and monitoring of the determination of reporting units when assessing goodwill for possible impairment.  The Company expects these procedures to be implemented by December 31, 2010.





·
Fixed Asset Dispositions — The Company is implementing enhanced procedures in several locations to ensure that fixed assets that are either disposed of or decommissioned are removed from the Company’s fixed asset records and that the appropriate accounting entries are recorded on a timely basis.  The Company plans to perform a physical count of all significant fixed assets. The Company expects that these policies and procedures will be implemented by December 31, 2010.





·
Inventory in-Transit—The Company is implementing additional procedures to ensure that inventory items shipped by vendors are recorded by the Company upon the passage of title.  Specifically, the Company plans to implement procedures to ensure that vendor shipping terms are identified, communicated, and input into the accounting system at the outset of the arrangement.  The Company expects these procedures to be implemented by December 31, 2010.





·
General Computer Controls —The Company is implementing change management and operations controls in the affected environment.  The Company expects these controls to be fully implemented by December 31, 2010.





·
Preparation of the Statements of Cash Flows — The Company is implementing updated preparation and review procedures to ensure its consolidated statements of cash flows are accurately prepared in accordance with GAAP.





Management is committed to implementing its remediation action plan to remediate the material weaknesses discussed above.  Management intends to continue to monitor the effectiveness of these actions and will make changes that management determines appropriate.





Changes in Internal Control over Financial Reporting





Except for the identification of the additional material weakness relating to the preparation of the statement of cash flows described in Management’s Report on Internal Control over Financial Reporting (As Revised) and the changes described in Completed and Planned Remediation Actions to Address the Internal Control Weaknesses, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.





- 100 -


Report of Independent Registered Public Accounting Firm


on Internal Control Over Financial Reporting





The Board of Directors and Shareholders of


Bell Microproducts Inc.





We have audited the internal control over financial reporting of Bell Microproducts Inc. and its subsidiaries (the “Company”) as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  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 on Internal Control over Financial Reporting (As Revised).”  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 that 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 by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.  The following material weaknesses have been identified and included in management’s assessment:  control environment; accrued liabilities and reserves; revenue; income taxes; debt covenants; convertible debt valuation; goodwill impairment; fixed asset dispositions; inventory in-transit; general computer controls; and preparation of the statements of cash flows.  These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2009, of the Company and this report does not affect our report on such financial statements and financial statement schedule.





In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.





- 101 -


We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2009, of the Company and our report dated March 26, 2010 (June 2, 2010 as to the effects of the restatement discussed in Note 18) expressed an unqualified opinion thereon and included an explanatory paragraph relating to the adoption of a new accounting standard and the restatement described in Note 18 to those consolidated financial statements.






/s/ Deloitte & Touche LLPSan Jose, CaliforniaMarch 26, 2010(June 2, 2010 as to the effects of the restatement discussed in Note 18)


- 102 -





Item 9B.                     Other Information





None.





PART III





Item 10. Directors, Executive Officers and Corporate Governance





DIRECTORS





The names of the directors of the Company, and the experience and background of each, are set forth below.  Ages are as of April 19, 2010.





Name of Nominee

Age

Principal Occupation

DirectorSinceW. Donald Bell

72

President, Chief Executive Officer and Director of the Company

1987Gordon A. Campbell

65

Executive Director, Techfarm Ventures

1988Eugene B. Chaiken

69

Chairman and Chief Executive Officer, Almo Corporation

1998David M. Ernsberger

64

President, Ernsberger Partnerships, Inc.

2002Edward L. Gelbach

78

Independent Investor

1993Peter G. Hanelt

65

Business Consultant

2008James E. Ousley

64

Chief Executive Officer, Savvis, Inc.

1998Mark L. Sanders

66

Chairman of the Board of Directors of LookSmart, Ltd.

2003





There are no family relationships between or among any directors or executive officers of the Company.





W. Donald Bellhas been the Company’s President and Chief Executive Officer, and a member of our Board of Directors, since the Company was founded in 1988.  He was formerly the President of Ducommum Inc. and its subsidiary, Kierulff Electronics Inc., as well as Electronic Arrays Inc.  He also held senior management positions at Texas Instruments Incorporated, American Microsystems and other electronics companies.  Mr. Bell’s experience as founder and President and Chief Executive Officer of the Company and his long-term service as a director give him unique knowledge of the opportunities and challenges associated with the Company’s business.  His familiarity with the Company and over forty years of experience in the electronics industry make him uniquely qualified to serve as a director of the Company.





Gordon A. Campbellhas served as one of our directors since May 1988.  Mr. Campbell is an executive director at Techfarm Ventures, a provider of private equity capital for new technology companies, and has been since he founded Techfarm in 1993.  Mr. Campbell has founded and been involved in the start-up of numerous Silicon Valley companies, including SEEQ Technologies Inc., CHIPS and Technologies, Inc., a semiconductor and related device company, 3dfx Interactive and Cobalt Networks.  Mr. Campbell has served as a director of Palm, Inc., a mobile products company, since September 1999.  Mr. Campbell’s exposure to companies in the high technology industry provides valuable insight to the Board regarding industry trends that affect the Company.





Eugene B. Chaikenhas served as one of our directors since November 1998.  Mr. Chaiken has served since 1973 as the Chairman and Chief Executive Officer of Almo Corporation, a major appliance, consumer electronics and wire and cable distribution company.  Mr. Chaiken brings to the Board substantial and relevant experience as the chief executive officer of a distribution company, which provides him with a solid background to advise the Board on issues affecting the Company.





David M. Ernsbergerhas served as one of our directors since June 2002.  Mr. Ernsberger has served as President of Ernsberger Partnerships, Inc., a consulting and investment company, since founding it in 2001.  From 1994 to 2001, Mr. Ernsberger served as Group Vice President of Worldwide Sales and Support for IBM Technology Group.  Mr. Ernsberger served as President and Chief Executive Officer of SkillSet Software, Inc. from 1993 to 1994.  From 1967 to 1993, Mr. Ernsberger held various senior executive positions with IBM Corporation.  With more than 30 years of experience in senior executive positions at IBM Corporation, Mr. Ernsberger provides sales and product knowledge expertise about the technology industry to the Board.





- 103 -


Edward L. Gelbachhas served as one of our directors since March 1993.  Mr. Gelbach served as Senior Vice President and a director of Intel from 1971 to 1988.  Mr. Gelbach has been an independent investor since 1989.  Mr. Gelbach brings to our Board significant sales management experience as well as extensive knowledge of the high technology industry.





Peter G. Hanelthas served as one of our directors since October 2008.  Mr. Hanelt has been a self-employed business consultant since November 2003.  He served as Chief Operating Officer of the Good Guys, a regional consumer electronics retailer, from December 2001 through July 2003, and through October 2003 as a consultant.  From October 1998 to June 2001, Mr. Hanelt served as Chief Executive Officer and director of Natural Wonders, Inc., a national specialty retailer of nature and science-related merchandise.  Mr. Hanelt has also served as a director of Silicon Image, Inc., a developer of semiconductor products since 2005, currently serving as its Chairman of the Board, and as a director of BIDZ.com, Inc. since 2006.  He is also a director of Andronico’s Markets, Inc., Coast Asset Management LLC, and InterHealth Nutraceuticals, Inc., all privately held companies, and on the boards of Catholic Healthcare West and Patelco Credit Union, both not-for-profit entities.  Mr. Hanelt’s significant experience in senior financial positions at various companies provides a solid background for him to advise the Board on financial and audit-related matters as chair of the Audit Committee and to serve as the Audit Committee’s designated financial expert.





James E. Ousleyhas served as one of our directors since February 1998, and was our Lead Independent Director from April 2007 to March 2009.  In March 2009, he was appointed to serve as the Chairman of the Board.  Mr. Ousley was appointed Chief Executive Officer of Savvis, Inc. a provider of hosted information technology solutions, in March 2010.  He served as its interim Chief Executive Officer from January 2010 until March 2010.  Mr. Ousley has also served on the Board of Savvis since April 2002, and has served as Chairman of the Board of Directors since May 2006.  Mr. Ousley served as President and Chief Executive Officer of Vytek, Inc., a wireless integration company, from September 2000 until April 2004, when Vytek merged with California Amplifier Inc., now known as CalAmp Corp.  From August 1999 to October 2000, Mr. Ousley was President, Chief Executive Officer and Chairman of Syntegra (USA) Inc.  From August 1992 to August 1999, Mr. Ousley was President and Chief Executive Officer of Control Data Systems.  From February 1990 to July 1992, Mr. Ousley was Executive Vice President of Ceridian Corporation.  From May 1989 to February 1990, Mr. Ousley was President of Ceridian’s Computer Products business.  From January 1989 to April 1989, Mr. Ousley was Vice President, Marketing and Sales for Ceridian’s Computer Products business.  Mr. Ousley has served as a director of ActivIdentity, Inc., a security software company, since 1996, and Datalink Corporation, an information storage company, since 1998.  Mr. Ousley’s extensive experience as chief executive officer and chairman of other public companies in the technology industry provides the Board with insight into the issues and opportunities facing the Company as well as an understanding of the current economic and other challenges facing this industry.





Mark L. Sandershas served as one of our directors since August 2003.  Mr. Sanders served as President and Chief Executive Officer of Pinnacle Systems, Inc. from January 1990 to July 2002 and as its Chairman of the Board from July 2002 to March 2004.  Prior to that time, Mr. Sanders served in a variety of management positions, most recently as Vice President and General Manager of the Recording Systems Division of Ampex Corporation, a manufacturer of video broadcast equipment.  Mr. Sanders has served as Chairman of the Board of Directors of LookSmart, Ltd, a search advertising network and management company, since 2003.  Mr. Sanders brings to the Board his significant management experience in the high technology industry.





SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Section 16(a) of the Exchange Act requires that our directors, certain of our officers, and beneficial owners of more than 10% of our common stock file reports of their ownership of our securities and changes in their ownership of our securities with the SEC.  Such persons are also required by SEC rules to furnish us with copies of all Section 16(a) forms they file.  Under these rules, we believe that, during the year ended December 31, 2009, all required Section 16(a) reports were timely filed, except that in March 2009, Mr. Andrew S. Hughes, Vice President, General Counsel and Corporate Secretary, filed a required Form 4 reporting one transaction one day late, and in December 2009, Mr. Hanelt filed a required Form 4 reporting three transactions two days late.





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CORPORATE GOVERNANCE





Board Structure and Composition





Our business affairs are conducted under the direction of the Board of Directors (the “Board”) in accordance with the California Corporations Code, our Articles of Incorporation and our Bylaws.  Members of the Board keep informed of our business activities through discussions with management, by reviewing materials provided to them and by participating in meetings of the Board and its committees.  The Board is responsible for selection of the executive management team, providing oversight responsibility and direction to management and evaluating the performance of the executive management team on behalf of the shareholders.  The Board has adopted Corporate Governance Guidelines (the “Guidelines”) to assist it in the performance of its responsibilities.





The Board has an Audit Committee, a Compensation Committee and a Corporate Governance and Nominating Committee.  The Audit, Compensation and Corporate Governance and Nominating Committees consist solely of non-employee independent directors as defined by the Nasdaq listing standards.  The Board appoints the members and chairs of the committees annually.  All committees operate under charters approved by the Board.  These charters are available on the Company’s website at www.bellmicro.com.  You may also request a print copy by writing to Bell Microproducts Inc., 1941 Ringwood Avenue, San Jose, California 95131-1721, Attn:  Corporate Secretary.





The Audit Committee consists of Mr. Hanelt (Chair), Mr. Chaiken and Mr. Ousley.  The Board determined that Mr. Hanelt is an “audit committee financial expert” as defined by Item 407(d)(5) of Regulation S-K under the Securities Act of 1933.  We acknowledge that the designation of Mr. Hanelt as an audit committee financial expert does not impose on him any duties, obligations, or liabilities that are greater than the duties, obligations, or liabilities imposed on other members of the Audit Committee and the Board in the absence of such designation.





Code of Ethics and Code of Conduct/Proper Business Practices





Code of Ethics.  Each of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer reviewed and signed our Code of Ethics.  The Code of Ethics addresses such topics as acting with honesty and integrity, avoiding conflicts of interest, providing full, fair, timely and accurate disclosure in our public communications, including our filings with the SEC, and compliance with the rules and regulations of other governmental and regulatory agencies.  The Code of Ethics is available free of charge on our website at www.bellmicro.com and by written request to Bell Microproducts Inc., 1941 Ringwood Avenue, San Jose, California 95131-1721, Attn:  Corporate Secretary.  We intend to include on our website any amendment to, or waiver from, a provision of the Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer that relates to any elements of the code of ethics definition enumerated in Item 406 of Regulation S-K.





Code of Conduct.  All employees, including our executive officers and directors, are provided a copy of our Code of Conduct and are obligated to act consistent with its provisions.  This Code of Conduct addresses protection and proper use of our assets, compliance with applicable laws and regulations, accuracy and preservation of records, accounting and financial reporting, conflicts of interest, insider trading and other related policies.  The Code of Conduct is available free of charge on our website at www.bellmicro.com, and in print to any shareholder who sends a request for a paper copy to the address set forth in the preceding paragraph.  We intend to disclose future amendments to provisions of our Code of Conduct, or waivers of such provisions granted to executive officers and directors, on the website within four business days following the date of such amendment or waiver.





Ethics Hot Line.  We have a hot line, managed by a third party, that gives all employees a way to confidentially and anonymously report any actual or perceived unethical behavior or violations or suspected violations of our Code of Ethics or Code of Conduct.  This hot line permits communications by telephone or email in order to facilitate reports by employees of suspected violations of our Code of Ethics or Code of Conduct.


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Item 11. Executive Compensation





EXECUTIVE COMPENSATION AND RELATED INFORMATION








Summary Compensation Table





The following table provides information with respect to the compensation earned during the last three fiscal years by our chief executive officer and our two other most highly compensated executive officers for fiscal 2009 (the “named executive officers”).





Name and Principal Position
Year

Salary ($)


Bonus ($)


Stock Awards ($)(2)


Option Awards ($)(2)


Non-Equity Incentive Plan Compensation ($)(3)


All Other Compensation ($)(4)


Total ($)W. Donald Bell
2009


632,500



—



—



395,980



1,243,425



33,267



2,305,172President & Chief Executive Officer
2008


632,500



—



—



—



200,272



89,730



922,5022007


647,096



—



—



—



389,695



77,192



1,113,983William E. Meyer
2009


350,000



200,000
(1)


—



121,840



252,725



4,210



928,775Executive Vice President & Chief Financial Officer
2008


350,000



—



313,125



57,963



200,000



6,500



927,5882007


137,597



50,000



—



415,305



100,434



1,461



704,797Graeme Watt (5)
2009


447,450



—



—



395,980



504,266



56,957



1,404,653President, Worldwide Distribution
2008


538,470



—



454,625



115,926



289,089



93,118



1,491,2282007


570,000



—



—



—



315,308



82,935



968,243


_________________


(1)
In 2009, Mr. Meyer was awarded a one-time bonus of $200,000 for his leadership in the Company regaining compliance with its SEC periodic reporting requirements.


(2)
Under SEC rules, the values reported in the “Stock Awards” and “Options Awards” columns of the Summary Compensation Table reflect the full grant fair value, computed in accordance with FASB ASC Topic 718.  Pursuant to SEC rules, the amounts shown in these columns exclude the impact of estimated forfeitures related to service-based vesting conditions.  Assumptions used in the calculation of this amount for purposes of our consolidated financial statements are included in Note 8 — Stock-Based Compensation Plans in the notes to our consolidated financial statements.


(3)
Amounts shown under the heading “Non-Equity Incentive Plan Compensation” for each of the named executive officers (other than Mr. Bell) are the actual amounts paid under our Management Incentive and Strategic Initiative Plans.  The amount shown for Mr. Bell does not reflect a reduction of $159,091 representing reimbursement to the Company of 50% of the overpayment of his 2006 incentive award.  The overpayment was determined after the Company completed the audit of its 2006 consolidated financial statements in December 2008.  Mr. Bell has now reimbursed the Company for the full amount of the overpayment.


(4)
For a break-out of the amounts included in “All Other Compensation,” see the table immediately following these footnotes.


(5)
All amounts for Mr. Watt have been converted from British pounds to U.S. dollars using an exchange rate of $1.57/£1.00 for 2009, $1.86/£1.00 for 2008 and $2.00/£1.00 for 2007.  These rates were the average British pound to U.S. dollar exchange rate during the years indicated.




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All Other Compensation – Detail





This table sets forth each of the elements comprising each named executive officer’s compensation reported in the “All Other Compensation” column for 2009 in the Summary Compensation Table above.








Name

Car Allowance ($)


Pension Contribution ($)


Tax Prep. /Financial Planning ($)


Spousal or Dependent Travel ($)


Other ($)


Total ($)W. Donald Bell


3,600



—



12,609



15,126



1,932
(1)


33,267William E. Meyer


3,600



—



610



—



—



4,210Graeme Watt (2)


9,420



4,710



—



6,277



36,550
(1)


56,957


_________________


(1)
For Mr. Bell, this amount represents reimbursement of the cost of a routine medical examination.  For Mr. Watt, this amount represents an employee benefit allowance.


(2)
All amounts for Mr. Watt have been converted from British pounds to U.S. dollars using an exchange rate of $1.57/£1.00, the average British pound to U.S. dollar exchange rate for 2009.





Outstanding Equity Awards at 2009 Fiscal Year End





The following table provides information with respect to each outstanding stock option and RSU award held by each named executive officer as of December 31, 2009.





Option Awards(1)

Stock AwardsName

Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable


Number of

Securities

Underlying

Unexercised

Options (#)

Unexercisable


Option

Exercise Price

($)

Option

Expiration

Date

Number of

Shares or

Units of Stock

That Have Not

Vested

(#)(2)


Market Value

of Shares or

Units of Stock

That Have Not

Vested

($)(3)W. Donald Bell





325,000



2.00

9/2/201456,250



18,750



6.32

3/21/2011—



—William E. Meyer






100,000



2.00

9/2/2014112,500



112,500



5.15

8/6/20127,500



22,500



5.90

1/21/201387,500



310,625Graeme Watt






325,000



2.00

9/2/201415,000



45,000



5.90

1/21/2013160,000



568,000





(1)
The stock option grant date is five years prior to the expiration date for the grant.  The stock option grant vests 25% per year on each anniversary of the grant date.


(2)
For Mr. Meyer, 42,500 shares vested on January 29, 2010, 22,500 shares vested on February 26, 2010, 12,500 shares vested on March 1, 2010 and 10,000 shares vest on May 20, 2010.  For Mr. Watt, 42,500 shares vested on January 29, 2010, 77,500 shares vested on February 26, 2010, 20,000 shares vested on March 1, 2010 and 20,000 shares vest on May 20, 2010.


(3)
Based upon a market value per share of $3.55, the closing price of our common stock on December 31, 2009.





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Retirement Benefits





Supplemental Executive Retirement Program





In 2002, the Board adopted a Supplemental Executive Retirement Program (the “SERP”), which was amended in November 2007.  The SERP provides supplemental retirement benefits to certain executive officers designated by the Board.  The Board establishes the amount of the annual retirement benefit, vesting schedule and other terms separately for each participant.  Mr. Bell is the only named executive officer who has been designated as a participant in the SERP.  He is fully vested in his benefits, which entitle him to an annual income benefit of $450,000.  Mr. Bell’s benefits are payable in the form of a life annuity unless he elects, in accordance with the terms of his award, an actuarially equivalent joint and survivor form of benefit prior to his termination of employment.  Mr. Bell is also entitled to a death benefit under the SERP of $1,125,000, representing 50% of the annual benefit payable to his spouse over five years.





Although benefits under the SERP are unsecured, the Company has purchased life insurance policies on Mr. Bell and other executives, the proceeds of which are payable to the Company.  The Company expects that the proceeds from these policies will be sufficient to recover, over time, the full cost of the SERP, the cost of the insurance and certain death benefits payable to the other covered executives.





Section 401(k) Plan





Under our Section 401(k) plan, which is a defined contribution plan qualified under the Internal Revenue Code, participants, including our named executive officers who reside in the United States (which includes all of our named executive officers, other than Mr. Watt), can contribute a percentage of their annual compensation.  In addition, we typically make a matching contribution, subject to a maximum of $2,000.  For 2009, we suspended our matching contributions as one of our expense reduction initiatives.  Accordingly, Mr. Bell and Mr. Meyer did not receive any matching contribution for 2009.





Employment and Change-in-Control Agreements





CEO Employment Agreement





In March 2009, the Company entered into a new employment agreement with Mr. Bell (the “CEO Agreement”).  The CEO Agreement provides as follows:





Term of CEO Agreement.  The CEO Agreement has a two-year initial term.  Upon expiration of the initial term, the term of employment shall extend for successive one-year periods, unless written notice of non-renewal is provided no less than ninety (90) prior to the expiration of the applicable term by either party, or the CEO Agreement is otherwise terminated upon (a) mutual agreement of the parties, (b) upon the death or disability of Mr. Bell, (c) by the Company, immediately and without prior notice, for cause, or (d) by either party for any reason not otherwise covered by sections (a), (b) or (c) herein.





Salary.  Mr. Bell shall receive a minimum base salary of $632,500 per year.  The Compensation Committee shall review Mr. Bell’s base salary at least annually, and may, in its sole discretion, increase the base salary under its normal compensation policies for executive officers.





Annual Incentive Compensation.  Mr. Bell shall be eligible to participate in annual incentive compensation plans, which may include the Management Incentive Plan.





Severance Benefits.  Upon the termination of Mr. Bell’s employment for any reason, Mr. Bell shall be entitled to receive his base salary through his last day of employment, in addition to any unreimbursed business expenses and accrued but unused vacation and other benefits.  In the event of termination of employment without cause or involuntary termination during the term of the CEO Agreement, the Company shall pay Mr. Bell severance benefits equal to two times his annual base salary.  In the event there is a change-in-control event and his employment is terminated by the Company without cause during the 12-month period following a change in control, Mr. Bell will receive the severance benefits mentioned above, and 100% of the unvested portion of any stock option, restricted stock, and any restricted stock unit shall automatically be accelerated in full so as to become completely vested.  In addition to setting forth his salary, incentives and other benefits, the agreement provides for a non-solicitation covenant for a period of one year following his termination from the Company.





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For purposes of the CEO Agreement, key terms are defined as follows:





“Cause” means (A) any act of personal dishonesty of Mr. Bell taken in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of Mr. Bell; (B) Mr. Bell’s conviction of a felony; (C) a willful act by Mr. Bell that constitutes gross misconduct and that is injurious to the Company; or (D) following delivery to Mr. Bell of a written demand for performance from the Company that describes the basis for the Company’s belief that Mr. Bell has not substantially performed his duties, continued violations by Mr. Bell of his obligations to the Company that are demonstrably willful and deliberate on Mr. Bell’s part.





“Change in Control” means the occurrence of any of the following events:





(A)  a change in the ownership of the Company as determined in accordance with Section 1.409A-3(i)(5)(v) of the Treasury Regulations;





(B)  a change in effective control of the Company as determined in accordance with Section 1.409A-3(i)(5)(vi) of the Treasury Regulations; or





(C)  a change in the ownership of a substantial portion of the assets of the Company as determined in accordance with Section 1.409A-3(i)(5)(vii) of the Treasury Regulations.





“Involuntary termination” means:





(A)  Without Mr. Bell’s express written consent, a significant reduction of Mr. Bell’s duties, authority or responsibilities as President and Chief Executive Officer of the Company, relative to his duties, authority or responsibilities in this position as in effective immediately prior to such reduction, or the assignment to Mr. Bell of such reduced duties, authority or responsibilities;





(B)  Without Mr. Bell’s express written consent, a substantial reduction, without good business reasons, of the facilities and perquisites available to Mr. Bell immediately prior to such reduction;





(C)  A material reduction by the Company in Mr. Bell’s base salary as in effect immediately prior to such reduction, except in the event the Compensation Committee decreases his base salary if it decreases the base salaries of all other executive officers of the Company and, in such circumstance, decreases his base salary in an amount substantially proportional to the decreases in the base salaries of the Company’s other executive officers;





(D)  The relocation of Mr. Bell’s principal place of work to a location more than 35 miles from its present location, without his express written consent;





(E)  Any purported termination of Mr. Bell by the Company during the initial term or renewal term not effected by disability or for cause; or





(F)  The failure of the Company to obtain the assumption of the agreement by any successor.





Executive Employment Agreements





We have also entered into employment agreements with Messrs. Meyer and Watt that provide for covenants not to compete with us for 12 months following their termination of employment; and, in the case of termination without cause, severance payments equal to their base salary for twelve months.  These agreements are in effect unless either the Company or the named executive officer provides the other party with notice of intent to terminate the employment agreement.  Pursuant to these agreements, the Company provides Messrs. Meyer and Watt with an annual car allowance.  In addition, pursuant to our agreement with Mr. Watt, the Company makes contributions to his private pension plan.





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Management Retention Agreements





The Company has also entered into management retention agreements with our named executive officers, other than Mr. Bell.  The agreements generally provide severance benefits in the event the executive’s employment is terminated for reasons other than cause during the 12-month period following a change in control.  The management retention agreements have three-year terms and are automatically extended for successive one-year periods unless terminated, amended, or modified by us.  If the named executive officer is involuntarily terminated other than for cause, he will receive a cash payment equal to his annual base annual salary, certain benefits for one year from the date of termination or until the date that the named executive officer becomes covered under another employer’s benefit plans, and accelerated vesting of unvested equity awards.  In the event that the named executive officer’s employment is terminated for any reason either prior to the occurrence of a change in control, or later than 12 months following a change in control, then he is entitled only to receive severance and other benefits under established employee severance and benefit plans and practices or pursuant to other agreements with us.





For purposes of the management retention agreements, the term “cause” is defined in the same manner as in the CEO Agreement.  An “Involuntary Termination” occurs when the Company causes:  (i) without the officer’s express written consent, the significant reduction of his duties, authority or responsibilities relative to his duties, authority or responsibilities in effect immediately prior to such reduction, or the assignment to the officer of such reduced duties, authority or responsibilities; (ii) without the officer’s express written consent, a substantial reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to him immediately prior to such reduction; (iii) a reduction in the officer’s base salary; (iv) a material reduction in the kind or level of employee benefits, including bonuses, to which the officer is entitled with the result that the officer’s overall benefits package is significantly reduced; (v) the relocation of the officer to a facility or a location more than 35 miles from the officer’s then-present location, without the officer’s express written consent; (vi) any purported termination of the officer’s employment other than for disability or for cause, or any purported termination for which the grounds relied upon are not valid; (vii) the failure of the Company to obtain the assumption of the officer’s retention agreement by any successor; or (viii) any act or set of facts or circumstances, which would, under California law, constitute constructive termination.  “Change of Control” means the occurrence of any of the following events:  (x) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities; (y) a change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are incumbent directors; (z) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.





Director Compensation





At the beginning of 2009, our non-employee directors, other than Mr. Ousley, were entitled to an annual retainer of $30,000, a fee of $4,000 for each Board meeting attended in person, a fee of $2,000 at each telephonic Board meeting attended and a fee of $2,000 for each in-person or telephonic Board committee meeting attended.  Each director serving as chair of a standing committee of the Board is entitled to an additional annual retainer as follows:  Audit Committee Chair ($25,000), Compensation Committee Chair ($12,000) and Corporate Governance and Nominating Chair ($10,000).  At that time, Mr. Ousley was entitled to annual compensation of $350,000.  The amount of his annual compensation was established in November 2007 and reflected his responsibilities related to the restatement of our historical financial statements.  Effective March 2009, the Board reduced Mr. Ousley’s annual compensation to $150,000.  In addition, the Board reduced the retainer and meeting fees earned by all other non-employee directors by 30% for fees earned on or after January 1, 2009.  The 30% reduction ceased to be effective on January 1, 2010.





Under the terms of our 2009 Equity Incentive Plan, each non-employee director automatically receives a non-qualified option to purchase 22,500 shares of our common stock upon initial election or appointment as a director and a non-qualified option to purchase 7,500 shares of common stock following each annual meeting of shareholders.  Following our 2009 annual meeting of shareholders, on August 27, 2009, each of our non-employee directors, except for Mr. Hanelt, received an option to purchase 22,500 shares of common stock.  This award consisted of options to purchase 7,500 shares of common stock for each of 2007 and 2008 when no annual meeting was held, and 7,500 shares for 2009.  When Mr. Hanelt was appointed to the Board in October 2008, our equity incentive plan had expired and he did not receive an initial grant.  In August 2009, Mr. Hanelt received an option to purchase 22,500 shares of common stock.  All of the option awards described above vested immediately.





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Director Compensation for Fiscal Year 2009





The following table provides information with respect to all compensation the Company earned by each person who served as a non-employee director during 2009.  Mr. Bell, our President and Chief Executive Officer, receives no additional compensation for his service on our Board.





Name

Fees Earned or

Paid in Cash ($)


Option

Awards

($)(1)


Total ($)Gordon A. Campbell


49,000



23,987



72,987Eugene B. Chaiken


50,400



23,987



74,387David M. Ernsberger (2)


60,200



23,987



84,187Edward L. Gelbach


37,800



23,987



61,787Peter G. Hanelt (2)


66,675



23,987



90,662James E. Ousley


128,333



23,987



152,320Mark L. Sanders (2)


59,675



23,987



83,662





(1)
These amounts reflect the full grant date fair value, computed in accordance with FASB ASC Topic 718.  Pursuant to SEC rules, the amounts shown in these columns exclude the impact of estimated forfeitures related to service-based vesting conditions.  Assumptions used in the calculation of this amount for purposes of our financial statements are included in Note 8—Stock-Based Compensation Plansin the notes to our consolidated financial statements.  As of December 31, 2009 each non-employee director held stock options to purchase the following number of shares of our common stock:  Mr. Campbell (30,000) Mr. Chaiken (52,500), Mr. Ernsberger (67,500), Mr. Gelbach (60,000), Mr. Hanelt (22,500); Mr. Ousley (45,000), and Mr. Sanders (37,500).


(2)
In 2009, Mr. Ernsberger served as Chair of the Compensation Committee, Mr. Hanelt served as Chair of the Audit Committee and Mr. Sanders served as Chair of the Corporate Governance and Nominating Committee.







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





SECURITY OWNERSHIP





The following tables present information regarding the beneficial ownership of the shares of our common stock as of April 19, 2010, with respect to:





•
each of our directors;





•
each of the executive officers listed in the Summary Compensation Table contained under the caption Executive Compensation above;





•
all current directors and executive officers as a group; and





•
each person beneficially owning more than 5% of our common stock.





Beneficial ownership is determined under the rules promulgated by the SEC and generally includes voting or investment power over securities.  Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each shareholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the shareholder.  Shares of common stock subject to options that are currently exercisable or will become exercisable on or before June 18, 2010, and restricted stock units that are expected to vest on or before June 18, 2010 are considered outstanding and beneficially owned by the person holding the options or restricted stock units, but are not considered outstanding when computing other persons’ percentage ownership.


- 111 -


Directors and Named Executive Officers


Shares Beneficially OwnedName of Beneficial Owner (1)

Number


Percent (2)W. Donald Bell (3)(4)


1,107,985



3.4Gordon A. Campbell (3)


43,000



*Eugene B. Chaiken (3)


49,264



*David M. Ernsberger (3)


74,539



*Edward L. Gelbach (3)(5)


173,922



*Peter G. Hanelt (3)(6)


25,070



*James E. Ousley (3)


72,098



*Mark L. Sanders (3)


38,764



*William E. Meyer (3)(7)


198,342



*Graeme Watt (3)(7)


202,500



*All current directors and executive officers as a group (13 individuals) (3)(7)


2,253,105



7.0





* Less than 1% of our outstanding common stock.




(1)
The address of each of the named individuals is c/o Bell Microproducts Inc., 1941 Ringwood Avenue, San Jose, California  95131-1721.


(2)
Percentage of beneficial ownership is based on 32,392,759 shares of common stock outstanding as of April 19, 2010.


(3)
Includes shares that may be acquired pursuant to options that are currently exercisable or will become exercisable on or before June 1, 2010 as follows:  Mr. Bell (75,000 shares), Mr. Campbell (30,000 shares), Mr. Chaiken (45,000 shares), Mr. Ernsberger (67,500 shares), Mr. Gelbach (52,500 shares), Mr. Hanelt (22,500 shares), Mr. Ousley (37,500 shares), Mr. Sanders (37,500 shares), Mr. Meyer (127,500 shares), and Mr. Watt (30,000 shares); for all current directors and executive officers as a group (653,500 shares).


(4)
Includes 671,972 shares held by the Bell Family Trust U/D/T 04/26/91.


(5)
Includes 25,000 shares held by ELG Limited for which Mr. Gelbach is a principal.


(6)
Includes 815 shares held by a family member of Mr. Hanelt.  Mr. Hanelt has no voting or dispositive power over the shares.


(7)
Includes shares underlying restricted stock units that will vest on or before June 1, 2010, as follows:  Mr. Meyer (10,000 shares), Mr. Watt (20,000 shares) and for all current directors and executive officers as a group (52,354 shares).





Five Percent Holders





The following table sets forth information regarding the number and percentage of shares of common stock held by all persons and entities known by us to beneficially own more than 5% of our outstanding common stock.  The information regarding beneficial ownership of common stock by the entities identified below is included in reliance on reports filed by such entities with the SEC, except that the percentage is based upon our calculations made in reliance upon the number of shares reported to be beneficially owned by each entity in such reports and the number of shares of common stock outstanding on April 19, 2010.





Shares Beneficially OwnedName of Beneficial Owner(1)

Number


Percent(2)Ramius Advisors, LLC (2)


3,663,465



10.3Paradigm Capital Management, Inc. (3)


2,983,122



9.2GAMCO Investors, Inc. (4 )


2,649,200



8.2ICS Opportunities, Ltd. (5)


2,207,000



6.8State of Wisconsin Investment Board (6)


2,052,089



6.3Royce & Associates, LLC (7)


1,836,670



5.7Dimensional Fund Advisors L.P. (8)


1,835,416



5.7Bank of America Corporation and affiliated entities  (9)


1,638,710



5.1


- 112 -


(1)
Percentage of beneficial ownership is based on 32,392,759 shares of common stock outstanding as of April 19, 2010.


(2)
As reported in (1) a Schedule 13G/A filed with the SEC on February 10, 2010 by Ramius LLC (“Ramius”) on behalf of Ramius, Ramius Navigation Master Fund Ltd (“NMF”), Ramius Enterprise Master Fund Ltd (“EMF”), RCG PB, Ltd (“RCG PB”), Ramius Advisors, LLC (“Ramius Advisors”), Cowen Group, Inc. (“Cowen”), RCG Holdings LLC (“RCG Holdings”), C4S & Co., L.L.C. (“C4S”), Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon and (2) a Schedule 13G/A filed with the SEC on April 1, 2010 by Ramius on behalf of Ramius, the other parties identified in this footnote and Cowen Overseas Investment LP (“COI”).  The Schedule 13G/A filed in February 2010 provides that Ramius is deemed to be the beneficial owner of 3,103,467 shares as a result of its wholly owned subsidiary, Ramius Advisors, acting as investment adviser to NMF and EMF, which beneficially own 2,008,715 and 1,094,750 shares, respectively, as a result of their ownership of the Company’s 3.75% Convertible Subordinated Notes due 2024.  In the Schedule 13G/A filed in April 2010, the reporting persons disclaimed beneficial ownership of the shares underlying our convertible notes beneficially owned by NMF and EMF, which would reduce each of the shareholder’s ownership percentage below five percent.  The Schedule 13G/A filed in April 2010 provides further that Ramius is deemed to be the beneficial owner of 560,000 shares as a result of Ramius Advisors acting as investment adviser to NMF, EMF and COI, which directly own 235,200, 235,200 and 89,600 shares, respectively.  Cowen, as the sole member of Ramius, RCG Holdings, as the majority shareholder of Cowen, and C4S, as the managing member of Ramius, are deemed to beneficially own any shares beneficially owned by Ramius.  RCG PB, as the sole shareholder of NMG, is deemed to beneficially own any shares beneficially owned by NMG.  Messrs. Cohen, Stark, Strauss and Solomon are deemed to beneficially own the shares as a result of their position as the sole managing members of C4S.  The address for each of Ramius, Ramius Advisors, Cowen, RCG Holdings, C4S, COI and Messrs. Cohen, Stark, Strauss and Solomon is 599 Lexington Avenue, 20th Floor, New York, NY 10022.  The address for each of NMF, EMF and RCG PB is Regatta Office Park, Windward 1, 2nd Floor, PO Box 31106, Grand Cayman KY1-1205, Cayman Islands.


(3)
As reported in a Schedule 13G/A filed with the SEC on February 12, 2010 by Paradigm Capital Management, Inc. (“Paradigm”).  The address for Paradigm is Nine Elk Street, Albany, NY 12207.


(4)
As reported in a Schedule 13D/A filed with the SEC on April 19, 2010 by Mario J. Gabelli and certain entities which he directly or indirectly controls or for which he acts as chief investment officer, including GGCP, Inc. (“GGCP”), Gabelli Funds, LLC (“Gabelli Funds”), Gabelli Securities, Inc. (“GSI”), GAMCO Asset Management Inc. (“GAMCO”), GAMCO Investors, Inc. (“GBL”) and Teton Advisors, Inc. (“Teton”).  The Schedule 13D/A provides that, of these 2,649,200 shares, GAMCO beneficially owns 1,350,000 shares, Gabelli Funds beneficially owns 848,100 shares, GSI beneficially owns 272,500 shares and Teton beneficially owns 178,600 shares.  GGCP, as the parent company of GBL, GBL, as the parent company of the foregoing entities, and Mr. Gabelli, as the majority stockholder of GGCP may be deemed to have beneficial ownership of the 2,649,200 shares owned beneficially by GAMCO, Gabelli Funds, GSI and Teton.  Except as otherwise provided in the Schedule 13D/A filing, each entity has the sole power to vote or direct the vote and sole power to dispose or to direct the disposition of the shares reported for it, either for its own benefit or for the benefit of its investment clients or its partners, as the case may be.  The address for each of Mr. Gabelli, GBL, GAMCO, Gabelli Funds, GSI and Teton is One Corporate Center, Rye, New York 10580.  The address for GGCP is 140 Greenwich Avenue, Greenwich, Connecticut 06830.


(5)
As reported in a Schedule 13D filed with the SEC on April 15, 2010 by ICS Opportunities, Ltd (“ICS”) on behalf of itself, Millennium International Management LP (“Millennium International”), Millennium International Management GP LLC (“Millennium GP”), Millennium Management LLC (“Millennium”) and Israel A. Englander.  The Schedule 13D provides that ICS beneficially owns all of the reported shares, and each of Millennium International, as investment advisor to ICS, Millennium GP, as the general partner of Millennium International, Millennium, as the general partner of the 100% shareholder of ICS, and Mr. Englander, as the managing member of Millennium GP and of Millennium, may be deemed the beneficial owner of all of the reported shares.  The Schedule 13D provides that each reporting person has shared voting and disposition power over the shares.  The address for each of ICS, Millennium International, Millennium GP and Millennium is 666 Fifth Avenue, New York New York 10103.  The Schedule 13D does not provide an address for Mr. Englander.


(6)
As reported in a Schedule 13G/A filed with the SEC on February 16, 2010 by the State of Wisconsin Investment Board (“Wisconsin Investment”).  The address for Wisconsin Investment is P.O. Box 7842, Madison, Wisconsin  53707.


(7)
As reported in a Schedule 13G/A filed with the SEC on January 22, 2010 by Royce & Associates, LLC (“Royce”).  The address for Royce is 745 Fifth Avenue, New York, New York 10151.


(8)
As reported in a Schedule 13G/A filed with the SEC on February 8, 2010 by Dimensional Fund Advisors, L.P. (“Dimensional Fund”).  The address for Dimensional Fund is Palisades West, Building One, 6300 Bee Cave Road, Austin, Texas 78746.


(9)
As reported in a Schedule 13G filed with the SEC on January 28, 2010 by Bank of America Corporation (“BofA”) on behalf of itself, Bank of America, N.A. (“Bank of America”), Columbia Management Advisors, LLC (“CMA”), and Merrill Lynch, Pierce, Fenner & Smith, Inc (“Merrill Lynch”).  BofA has shared voting and shared dispositive power over 1,638,710 shares, of which Bank of America has shared voting and dispositive power over 2,350 shares, CMA has sole voting and sole dispositive power over 2,350 shares and Merrill Lynch has sole voting and dispositive power over 1,636,360 shares.  The address for each of BofA, Bank of America, CMA and Merrill Lynch is 100 North Tryon Street, Floor 25, Bank of America Corporate Center, Charlotte, North Carolina 28255.





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EQUITY COMPENSATION PLAN INFORMATION





The following table provides information concerning our equity compensation plans as of December 31, 2009:





Equity Compensation Plan InformationPlan Category

Number of Securities

to be Issued

Upon Exercise of

Outstanding Options,

Warrants and Rights


Weighted-Average

Exercise Price of

Outstanding

Options, Warrants

and Rights


Number of Securities

Remaining Available for

Future Issuance Under

Equity Compensation

Plans (Excluding

Securities Reflected in

First Column)Equity compensation plans approved by security holders


6,405,222


$
3.05
(1)


2,873,406
(2)Equity compensation plans not approved by security holders


—


$
—



—Total


6,405,222


$
3.05



2,873,406





(1)
Weighted-average exercise price includes 661,604 shares underlying RSUs,which do not require any compensation to be paid to the Company upon exercise.  Excluding the 661,604 shares underlying these RSUs, the weighted-average exercise price of the shares reported in the table above would be $3.37 per share.(2)
Our 1998 Stock Plan expired in May 2008.  No stock awards were made between then and August 2009, when our shareholders approved a new 2009 Equity Incentive Plan.





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





RELATED PERSON TRANSACTIONS





The Audit Committee of the Board of Directors monitors and reviews issues involving potential conflicts of interest and reviews and approves all transactions with the Company in which a related person has or will have a direct or indirect material interest.





Since October 2005, the Company has employed a stepson of Mr. Bell, our president and chief executive officer, in the position of director of strategic markets.  In 2009, Mr. Bell’s stepson received total cash compensation of $215,370.  On September 2, 2009, he was granted an option to purchase 10,000 shares of common stock with an exercise price of $2.00 per share.  In addition, he participates in other benefits that we generally offer to our employees.  The Audit Committee reviewed and ratified the employment of Mr. Bell’s stepson and his compensation.





DIRECTOR INDEPENDENCE





The Board of Directors has determined that Messrs. Campbell, Chaiken, Ernsberger, Gelbach, Hanelt, Ousley, and Sanders are independent, as such term is defined in the Marketplace Rules of The Nasdaq Stock Market, and that the members of the Audit Committee are also “independent” for purposes of Section 10A(m)(3) of the Securities Exchange Act of 1934.  The Board of Directors has determined that Mr. Bell is not independent.





- 114 -


Item 14.  Principal Accountant Fees and Services





ACCOUNTING FEES





We incurred the following fees to our independent registered public accounting firm in fiscal years 2009 and 2008 (in thousands):





Fiscal Year 2009


Fiscal Year 2008Audit Fees

$
6,405


$
4,801Audit-Related Fees


—



—Tax Fees


41



—All Other Fees


—



—Total

$
6,446


$
4,801





“Audit Fees” are for professional services rendered by our independent registered public accounting firm for the audit of the Company’s annual financial statements and the internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act for fiscal year 2009 and the audit of the financial statements for fiscal year 2008, and services that are normally provided in connection with statutory and regulatory filings or engagements.





“Tax Fees” consist of fees for services related to tax compliance, tax advice and tax planning.  The Company paid no fees in this category to Deloitte for the fiscal years ended December 31, 2008.





AUDIT COMMITTEE PRE-APPROVAL POLICY





Pursuant to the Audit Committee’s pre-approval policy, the Audit Committee is responsible for pre-approving all audit and permitted non-audit services to be performed for the Company by its independent auditors or any other auditing or accounting firm.  The Audit Committee has delegated to the Chair of the Committee the authority to unilaterally approve any incremental service to be performed by the independent auditor, provided such service does not exceed $50,000.  During 2009, the Audit Committee pre-approved all audit and permitted non-audit services.





PART IV





Item 15.   Exhibits and Financial Statement Schedules





(a)        The following documents are filed as part of this Form 10-K/A:





(1)         Consolidated Financial Statements.





The financial statements (including the notes thereto) listed in the index to consolidated financial statements (set forth in Item 8 of this Form 10-K/A) are filed as part of this Annual Report on Form 10-K/A.





(2)         Consolidated Financial Statement Schedule II — Valuation and Qualifying Accounts.





Schedules not listed above have been omitted because they are not required or the information required to be set forth therein is included in the consolidated financial statements or the notes to the consolidated financial statements included in this Annual Report on Form 10-K/A.





(3)         Exhibits — See Exhibit Index following signature page.





(b)        Exhibits.  See Item 15(a), above.





(c)        Financial Statements and Schedule.  See Item 15(a), above.


- 115 -








SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to be signed on its behalf by the undersigned, thereunto duly authorized on June 2, 2010.




BELL MICROPRODUCTS INC.By:
/s/ William E. MeyerWilliam E. MeyerExecutive Vice President and Chief Finanancial Officerand a duly authorized signatory(principal financial and accounting officer)







- 116 -


SCHEDULE II3⁄4


VALUATION AND QUALIFYING ACCOUNTS





Years Ended December 31,

Balance at

Beginning of

Period


Additions

Charged (Credited)

to Costs and

Expenses


Charged

to Other

Accounts(1)


Deductions and

Write-Offs


Balance at

End of Period(in thousands)2007Allowance for doubtful accounts

$
11,587


$
7,090


$
—


$
(5,533
)

$
13,144Allowance for deferred taxes


18,011



15,560



(6,359
)


—



27,2122008Allowance for doubtful accounts


13,144



16,375



—



(6,915
)


22,604Allowance for deferred taxes


27,212



24,704



(7,126
)


—



44,7902009Allowance for doubtful accounts


22,604



8,214



—



(9,060
)


21,758Allowance for deferred taxes


44,790



(10,794
)


11,799



—



45,795


____________





(1)
Amounts charged to deferred tax assets/liabilities.





- 117 -


Index to Exhibits





Exhibit Number

Description of Document2.1

Asset Purchase Agreement, dated October 2, 2006, among the Company, New ProSys Corp., ProSys Information Systems, Inc., Michelle Clery and Bruce Keenan.  Incorporated by reference to Exhibit 2.1 filed with the Company’s Current Report on Form 8-K filed with the SEC on October 4, 2006.2.2

Stock Purchase Agreement, dated October 2, 2006, by and between New ProSys Corp.  and Bruce Keenan.  Incorporated by reference to Exhibit 2.2 filed with the Company’s Current Report on Form 8-K filed with the SEC on October 4, 2006.2.3

Agreement and Plan of Merger by and among Avnet, Inc., AVT Acquisition Corp. and Bell Microproducts Inc. dated as of March 28, 2010.  Incorporated by reference to Exhibit 2.1 filed with the Company’s Current Report on Form 8-K on March 29, 2010.3.1

Amended and Restated Articles of Incorporation of the Company.  Incorporated by reference to Exhibit 4.1 filed with the Company’s Registration Statement on Form S-3 (File No. 333-117555) on July 21, 2004.3.2

Amended and Restated Bylaws of the Company (as amended through May 21, 2009).  Incorporated by reference to Exhibit 3.2 filed with the Company’s Current Report on Form 8-K on May 22, 2009.4.1

Form of Indenture between the Company and Wells Fargo Bank, National Association, as Trustee, with respect to the Series B 3.75% Subordinated Convertible Notes due 2024.  Incorporated by reference to Exhibit 4.1 filed with the Company’s Registration Statement on Form S-4 (File No. 333-120527) on November 16, 2004.4.2

Indenture dated as of March 5, 2004 between the Company and Wells Fargo Bank, National Association as Trustee, with respect to the 3.75% Subordinated Convertible Notes due 2024.  Incorporated by reference to Exhibit 4.1 filed with the Registrant’s Registration Statement on Form S-3 (File No. 333-116130) on June 3, 2004.4.3

Form of Series B 3.75% Subordinated Convertible Notes due 2024 (contained in Exhibit 4.1).4.4

Form of 3.75% Subordinated Convertible Notes due 2024 (contained in Exhibit 4.2).4.5

Registration Rights Agreement dated March 5, 2004 by and among the Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Raymond James & Associates, Inc. Incorporated by reference to Exhibit 4.2 filed with the Company’s Registration Statement on Form S-3 (File No. 333-116130) on June 3, 2004.4.6

First Supplemental Indenture dated as of December 20, 2006 between the Company and Wells Fargo Bank, N.A.  Incorporated by reference to Exhibit 4.1 filed with the Company’s Current Report on Form 8-K on December 21, 2006.4.7

9% Senior Subordinated Note in the Amount of $23,000,000 dated as of October 2, 2006 in connection with the Securities Purchase Agreement dated as of October 2, 2006 among the Company, The Teachers’ Retirement System of Alabama and the Employees’ Retirement System of Alabama.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on October 4, 2006.4.8

9% Senior Subordinated Note in the Amount of $12,000,000 dated as of October 2, 2006 in connection with the Securities Purchase Agreement dated as of October 2, 2006 among the Company, The Teachers’ Retirement System of Alabama and The Employees’ Retirement System of Alabama.  Incorporated by reference to Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on October 4, 2006.4.9

Warrant to Purchase 125,000 Shares of Common Stock Bell Microproducts Inc. dated as of October 2, 2006.  Incorporated by reference to Exhibit 10.4 filed with the Company’s Current Report on Form 8-K on October 4, 2006.10.1

Executive Employment and Non-Compete Agreement dated as of August 13, 2002 between the Company and James E. Illson.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Quarterly Report on Form 10-Q (File No. 000-21528) for the quarter ended September 30, 2002.*10.2

Syndicated Composite Guarantee and Debenture effective as of December 2, 2002 by and among Bell Microproducts Limited, certain other companies and Bank of America, N.A.  Incorporated by reference to Exhibit 10.40 filed with the Company’s Annual Report on Form 10-K (File No. 000-21528) for the year ended December 31, 2002.


- 118 -





10.3

Securities Purchase Agreement dated October 2, 2006 among the Company, The Teachers’ Retirement System of Alabama and The Employees’ Retirement System of Alabama.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on October 4, 2006.10.4

Bell Microproducts Inc. Supplemental Executive Retirement Program, effective July 1, 2002 and amended on August 3, 2005 and November 13, 2007.  Incorporated by reference to Exhibit 99.2 filed with the Company’s Current Report on Form 8-K on November 15, 2007.*10.5

Ninth Supplemental Agreement dated May 21, 2008 in relation to a Syndicated Credit Agreement dated December 2, 2002, among Bell Microproducts Limited, Bell Microproducts Europe Export Limited, Bell Microproducts Europe (Holdings) B.V., BM Europe Partners C.V., Bell Microproducts Europe B.V. and Bank of America, National Association.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on May 28, 2008.10.6

Separation Agreement dated May 12, 2008, by and between the Company and James E. Illson.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on June 10, 2008.*10.7

Consultant Agreement dated as of May 12, 2008, by and between the Company and James E. Illson.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on June 10, 2008.10.8

Amended and Restated Credit Agreement effective as of June 30, 2008 and executed on August 5, 2008, among the Company, The Teachers’ Retirement System of Alabama, The Employees’ Retirement System of Alabama, Judicial Retirement Fund, the PEIRAF-Deferred Compensation Plan and the Public Employee Individual Retirement Account Fund.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on August 6, 2008.10.9

Letter to Bell Microproducts Inc. dated August 4, 2008, from The Teachers’ Retirement System of Alabama and The Employees’ Retirement System of Alabama, amending the Securities Purchase Agreement dated October 2, 2006.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on August 6, 2008.10.10

Letter Agreement executed August 6, 2008 between Bell Microproducts Limited and Bank of America, N.A. as Agent for the Syndicated Credit Agreement dated December 2, 2002, as amended and restated effective May 21, 2008.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on August 11, 2008.10.11

Amended and Restated Loan and Security Agreement dated September 29, 2008, among Bell Microproducts Inc., Bell Microproducts — Future Tech, Inc., Rorke Data, Inc., Bell Microproducts Canada — Tenex Data ULC, TotalTec Systems, Inc., Forefront Graphics U.S. Inc. as Borrowers, Bell Microproducts Canada Inc. and Bell Microproducts Mexico Shareholder, LLC, as Guarantors and Wachovia Capital Finance Corporation (Western) (“Wachovia”) in its capacity as administrative agent for the financial institutions, Wachovia, Bank of America, N.A., The CIT Group/Business Credit, Inc. and Wells Fargo Foothill, LLC (the “Lenders”), Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on September 30, 2008.10.12

Letter Agreement, dated September 29, 2008, terminating the Second Amended and Restated Credit and Security Agreement dated as of May 14, 2007, as amended, by and between the Company, Bell Microproducts Funding Corporation, Variable Funding Capital Company LLC, Wachovia Bank, National Association and General Electric Capital Corporation.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on September 30, 2008.10.13

Bell Microproducts Inc. form of Executive Officer Indemnification Agreement.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on November 5, 2008.*10.14

Bell Microproducts Inc. form of Director Indemnification Agreement.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on November 5, 2008.*10.15

Bell Microproducts Inc. form of Amended and Restated Director Indemnification Agreement.  Incorporated by reference to Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on November 5, 2008.*10.16

1998 Stock Plan, as amended through August 1, 2007, and form of option agreement.  Incorporated by reference to Exhibit 10.22 filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.*10.17

1998 Stock Plan Form of Restricted Stock Unit Agreement.  Incorporated by reference to Exhibit 10.23 filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.*


- 119 -





10.18

Second Amendment to Amended and Restated Loan and Security Agreement dated February 17, 2009, among Bell Microproducts Inc., Bell Microproducts — Future Tech, Inc., Rorke Data, Inc., Bell Microproducts Canada — Tenex Data ULC, TotalTec Systems, Inc., Forefront Graphics U.S. Inc. as Borrowers, Bell Microproducts Canada Inc. and Bell Microproducts Mexico Shareholder, LLC, as Guarantors and Wachovia Capital Finance Corporation (Western) (“Wachovia”) in its capacity as administrative agent for the financial institutions, Wachovia, Bank of America, N.A., The CIT Group/Business Credit, Inc. and Wells Fargo Foothill, LLC (the “Lenders”).  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on February 20, 2009.10.19

Bell Microproducts Inc. Management Incentive Plan for 2009.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on February 24, 2009.*10.20

First Amendment to the October 2, 2006 Securities Purchase Agreement dated as of February 24, 2009, among the Company, The Teachers’ Retirement System of Alabama (“TRSA”) and The Employees’ Retirement System of Alabama (“ERSA”).  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on March 2, 2009.10.21

Second Amendment to the June 30, 2008 Amended and Restated Credit Agreement dated as of February 24, 2009, among the TRSA, ERSA, Judicial Retirement Fund, PEIRAF-Deferred Compensation Plan and Public Employees Individual Retirement Account Fund.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on March 2, 2009.10.22

Letter Agreement to Bell Microproducts Inc. dated February 25, 2009, among the Company, TRSA and ERSA.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on March 3, 2009.10.23

Employment Agreement dated as of March 12, 2009, between the Company and W. Donald Bell.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on March 16, 2009.*10.24

First Amendment to Amended and Restated Loan Agreement dated as of November 10, 2008, by and among Bell Microproducts Inc., Bell Microproducts — Future Tech, Inc., Rorke Data, Inc., Bell Microproducts Canada — Tenex Data ULC, TotalTec Systems, Inc., Forefront Graphics U.S. Inc. as Borrowers, Bell Microproducts Canada Inc. and Bell Microproducts Mexico Shareholder, LLC, as Guarantors and Wachovia Capital Finance Corporation (Western) (“Wachovia”) in its capacity as administrative agent for the financial institutions, Wachovia, Bank of America, N.A., The CIT Group/Business Credit, Inc. and Wells Fargo Foothill, LLC (the “Lenders”).  Incorporated by reference to Exhibit 10.31 filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, on June 29, 2009.10.25

First Amendment to Amended and Restated Credit Agreement dated as of December 23, 2008, by and among the Company, TRSA, ERSA, Judicial Retirement Fund, the PEIRAF-Deferred Compensation Plan and the Public Employee Individual Retirement Account Fund.  Incorporated by reference to Exhibit 10.32 filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, on June 29, 2009.10.26

Letter Agreement executed June 29, 2009, among Bell Microproducts Limited, other European-based subsidiaries of the Company, and Bank of America, N.A. Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on July 1, 2009.10.27

Bell Microproducts Inc. 2009 Equity Incentive Plan (Amended and Restated as of August 20, 2009).   Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on August 25, 2009.*10.28

Bell Microproducts Inc. 2009 Equity Incentive Plan Form of Notice of Grant of Stock Options.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on August 25, 2009.*10.29

Bell Microproducts Inc. 2009 Equity Incentive Plan Form of Notice of Grant of Restricted Stock Units.  Incorporated by reference to Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on August 25, 2009.*10.30

Form of Management Retention Agreement between the Company and certain executive officers of the Company.  Incorporated by reference to Exhibit 10.4 filed with the Company’s Current Report on Form 8-K on August 25, 2009.*10.31

Executive Employment Agreement between the Company and William E. Meyer, dated August 6, 2007, and amended and restated as of August 25, 2009.  Incorporated by reference to Exhibit 10.5 filed with the Company’s Current Report on Form 8-K on August 25, 2009.*


- 120 -





10.32

Tenth Supplemental Agreement dated December 18, 2009 in relation to a Syndicated Credit Agreement dated December 2, 2002, among Bell Microproducts Limited, Bell Microproducts Europe Export Limited, Bell Microproducts Europe (Holdings) B.V., BM Europe Partners C.V., Bell Microproducts Europe B.V. and Bank of America, N.A.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on December 23, 2009.10.33

Fee Letter entered into between Bell Microproducts Ltd., and Bank of America N.A. dated December 18, 2009.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on December 23, 2009.10.34

Executive Employment Agreement between the Company and Richard J. Jacquet dated December 22, 2009.  Incorporated by reference to Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on December 23, 2009.*10.35

Third Amendment to Amended and Restated Loan Security Agreement dated February 3, 2010 by and between the Company, and certain of the Company’s U.S. and Canadian subsidiaries, on the one hand, and Wachovia Capital Finance Corporation (Western) (“Wachovia”) in its capacity as administrative agent for the Lenders, and Wachovia, Bank of America, N.A., The CIT Group/Business Credit, Inc. (“CIT”), and Wells Fargo Foothill, LLC (“Foothill”).  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on February 4, 2010.10.36

Bell Microproducts Inc. Management Incentive Plan Description for 2010.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on February 22, 2010. *10.37

Service Agreement between the Company and Graeme Watt. *10.38

Executive Employment Agreement between the Company and Robert J. Sturgeon, dated June 26, 2002, and amended and restated as of December 17, 2009. *10.39

Letter Agreement dated March 17, 2010, by and among Bell Microproducts Limited, other European-based subsidiaries of Bell Microproducts Inc., and Bank of America, N.A. **10.40

Letter to ProSys Information Systems, Inc. and New ProSys Corp. dated March 18, 2010 from GE Commercial Distribution Finance Corporation. **10.41

Letter Agreement dated March 24, 2010, executed by and among Bell Microproducts Inc., various U.S. subsidiaries of Bell Microproducts Inc., Wachovia Capital Finance Corporation (Western), and Bank of America, N.A. **10.42

Letter Agreement dated March 25, 2010, executed by and among Bell Microproducts Inc., The Teachers’ Retirement System of Alabama, The Employees’ Retirement System of Alabama, Judicial Retirement Fund, PEIRAF-Deferred Compensation Plan, and Public Employees Individual Retirement Account Fund. **21.1

Subsidiaries of the Company.23.1

Consent of Independent Registered Public Accounting Firm.31.1

Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.***32.2

Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.***





*
Denotes management contract or compensatory plan or arrangement.**
Previously filed with Amendment No. 1 to this Annual Report on Form 10-K.***
Furnished, not filed.


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