**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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# **FORM 10-K**

 

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

 

**For thefiscal year ended December 31, 2009**

 

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

 

**For thetransition periodfrom                       to                       **

 

### **Commission File Number:0-25790**

 

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**PC MALL, INC.**

(Exactname of Registrant as specified in its charter)

 

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| **Delaware**                    | ** ** | **95-4518700**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (IRS Employer          |
| incorporation or organization)  |       | Identification Number) |

 

**2555 West 190th Street, Suite 201, Torrance, CA 90504**

(Address of principal executive offices, includingzip code)

 

**(310) 354-5600**

(Registrant’s telephone number, including area code)

 

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Securities registered pursuant toSection 12(b) of the Act:

 

| **Title of Each Class**   | ** ** | **Name of Exchange on Which Registered** |
|------------------------------------------|------------|-------------------------------------------------------------------|
| Common Stock, $0.001 par value per share |       | The NASDAQ Global Market                                          |

 

Securities registered pursuant toSection 12(g) of the Act:

### **None**

 

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

 

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

 

Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x No o

 

Indicate by check mark whetherthe registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T during the preceding 12 months (orfor such shorter period that the registrant was required to submit and post suchfiles).  Yes o No o

 

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

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-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 o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated  filer o                       |   | Smaller  Reporting Company o |
| (Do  not check if a smaller reporting company) |   |                         |

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theAct).  Yes o No x

 

Asof June 30, 2009, the aggregate market value of the Common Stock held bynon-affiliates of the registrant was approximately $69.7 million, based uponthe closing sales price of the registrant’s Common Stock on such date, asreported on the Nasdaq Global Market. Shares of Common Stock held by eachexecutive officer, director and each person owning more than 10% of theoutstanding Common Stock of the registrant have been excluded in that suchpersons may be deemed to be affiliates of the registrant. This determination ofaffiliate status is not necessarily a conclusive determination for other purposes.

 

As of March 11, 2010, theregistrant had 12,306,652 shares of common stock outstanding.

 

**DocumentsIncorporated By Reference Into Part III:**

 

Portionsof the definitive Proxy Statement for the Registrant to be filed in connectionwith its 2010 Annual Meeting of Stockholders are incorporated by reference intoPart III of this Report.

 

 

 

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**PC MALL,INC.**

 

TABLE OF CONTENTS

 
| ** **                                                                                                                       | ** ** | **Page**   |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                                       | ** ** | ** ** |
| PART I                                                                                                                      |       |       |
|                                                                                                                             |       |       |
| ITEM 1 — Business                                                                                                           |       | 4          |
|                                                                                                                             |       |       |
| ITEM 1A  — Risk Factors                                                                                                     |       | 14         |
|                                                                                                                             |       |       |
| ITEM 1B — Unresolved Staff Comments                                                                                         |       | 30         |
|                                                                                                                             |       |       |
| ITEM 2 —  Properties                                                                                                        |       | 30         |
|                                                                                                                             |       |       |
| ITEM  3 — Legal Proceedings                                                                                                 |       | 31         |
|                                                                                                                             |       |       |
| ITEM 4 —  Reserved                                                                                                          |       | 31         |
|                                                                                                                             |       |       |
| ITEM 4A — Executive Officers of the Registrant                                                                              |       | 31         |
|                                                                                                                             |       |       |
| PART II                                                                                                                     |       |       |
|                                                                                                                             |       |       |
| ITEM 5 — Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |       | 32         |
|                                                                                                                             |       |       |
| ITEM  6 — Selected Financial Data                                                                                           |       | 34         |
|                                                                                                                             |       |       |
| ITEM 7 —  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                       |       | 35         |
|                                                                                                                             |       |       |
| ITEM  7A — Quantitative and Qualitative Disclosures about Market Risk                                                       |       | 52         |
|                                                                                                                             |       |       |
| ITEM 8 —  Financial Statements and Supplementary Data                                                                       |       | 53         |
|                                                                                                                             |       |       |
| ITEM 9 — Changes in and Disagreements with Accountants  on Accounting and Financial Disclosure                              |       | 80         |
|                                                                                                                             |       |       |
| ITEM 9A — Controls and Procedures                                                                                           |       | 80         |
|                                                                                                                             |       |       |
| ITEM  9B — Other Information                                                                                                |       | 81         |
|                                                                                                                             |       |       |
| PART III                                                                                                                    |       |       |
|                                                                                                                             |       |       |
| ITEM 10 — Directors, Executive Officers and Corporate  Governance                                                           |       | 81         |
|                                                                                                                             |       |       |
| ITEM 11 — Executive Compensation                                                                                            |       | 81         |
|                                                                                                                             |       |       |
| ITEM 12 — Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                   |       | 81         |
|                                                                                                                             |       |       |
| ITEM 13 — Certain Relationships and Related  Transactions, and Director Independence                                        |       | 81         |
|                                                                                                                             |       |       |
| ITEM 14 — Principal Accounting Fees and Services                                                                            |       | 81         |
|                                                                                                                             |       |       |
| PART IV                                                                                                                     |       |       |
|                                                                                                                             |       |       |
| ITEM 15 — Exhibits and Financial Statement Schedules                                                                        |       | 82         |
|                                                                                                                             |       |       |
| SIGNATURES                                                                                                                       |       | 88         |

 

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**PART I**

 

**FORWARD-LOOKING STATEMENTS**

 

This Annual Report on Form 10-K containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Suchstatements include statements regarding our expectations, hopes or intentionsregarding the future, including but not limited to, statements regarding ourstrategy, competition, markets, vendors, expenses, new services andtechnologies, growth prospects, financing, revenue, margins, operations,litigation and compliance with applicable laws. In particular, the followingtypes of statements are forward-looking:

 

·              ourbeliefs relating to the benefits to be received from our Philippines office andCanadian call center, including tax credits and reduction in labor costs overtime;

 

·              ourexpectation regarding reductions in vendor consideration and their impact onour operating results;

 

·              ourexpectation regarding general economic uncertainties, the competitive pricingpressure in the current environment and the related potential negative impacton our gross profit margins;

 

·             ourplans for our growth strategy;

 

·             ourexpectations regarding our future capital needs and the availability of workingcapital, liquidity, cash flows from operations and borrowings under our creditfacility;

 

·             ourexpectations regarding the timing and costs of our ongoing or planned ITupgrades;

 

·             theimpact on accounts receivable from our efforts to focus on sales in our MME,SMB, and Public Sector segments;

 

·             our acquisition strategy and the impactof any past or future acquisitions;

 

·             theimpact of acquisitions on our financial condition, liquidity and our futurecash flows and earnings;

 

·             ourability to execute our business strategy;

 

·             ourcompetitive advantages and growth opportunities;

 

·             ourability to increase profitability and revenues;

 

·             ourability to generate vendor supported marketing;

 

·             ourbeliefs regarding the applicability of tax regulations;

 

·             ourbelief regarding our exposure to currency exchange and interest rate risks;

 

·             ourbelief regarding the effect of seasonal trends and general economic conditionson our business and results of operations across all of our segments;

 

·             ourexpectations regarding the impact of accounting pronouncements;

 

·             ourexpectations regarding the payment of dividends and our intention to retain anyearnings to finance the growth and development of our business;

 

·             ourability to attract new customers and stimulate additional purchases fromexisting customers, including our expectations regarding future advertisinglevels and the effect on consumer sales;

 

·             our belief regarding financing ofrepurchases of our common stock;

 

·             ourability to leverage our market position and purchasing power and offer a wideselection of products at competitive prices;

 

·             ourability to penetrate the public sector market;

 

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·             ourability to limit risk related to price reductions;

 

·             ouruse of management information systems and their need for future support orupgrade;

 

·             ourexpectations regarding competition and the industry trend toward consolidation;

 

·             ourcompliance with laws and regulations;

 

·             ourexpectations to continue our efforts to increase the productivity of our salesforce and reduce costs;

 

·             ourbelief that the use of extranets has the potential to yield additional salesopportunities and the ability to reach new customer bases;

 

·             ourexpectations regarding the ability of our marketing programs or campaigns tostimulate additional purchases or to maximize product sales;

 

·             ourbelief that backlog is not useful for predicting our future sales;

 

·             ourbelief that our existing distribution facilities are adequate for our currentand foreseeable future needs; and

 

·             thelikelihood that new laws and regulations will be adopted with respect to theInternet that may impose additional restrictions or burdens on our business.

 

Forward-looking statements involve certain risks anduncertainties, and actual results may differ materially from those discussed inany such statement. Factors that could cause actual results to differmaterially from such forward-looking statements include the risks describedunder the heading “Risk Factors” in Item 1A of this report. All forward-lookingstatements in this document are made as of the date hereof, based oninformation available to us as of the date hereof, and, except as otherwiserequired by law, we assume no obligation to update any forward-lookingstatement or other information contained herein to reflect new information,events or circumstances after the date hereof.

 

*******

 

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**ITEM 1. BUSINESS**

 

**General**

 

PC Mall, Inc.,together with its wholly-owned subsidiaries (collectively referred to as “PCMall,” “we” or “us”), founded in 1987, is a value added direct marketer oftechnology products, services and solutions to businesses, government andeducational institutions and individual consumers. We offer our products,services and solutions through dedicated account executives, field serviceteams, various direct marketing techniques and three retail stores. We alsoutilize distinctive full-color catalogs under the PC Mall, MacMall, PC Mall Govand SARCOM brands and our websites pcmall.com, macmall.com, pcmallgov.com,gmri.com, sarcom.com, abreon.com, onsale.com and clubmac.com and otherpromotional materials.

 

PC Mall plays a valuable role in the IT supply chain.While we provide comprehensive solutions for our customers’ technology needs,our business model also provides significant leverage to technologymanufacturers and service providers. Through us, technology manufacturers andservice providers are able to reach multiple customer segments includingconsumers, small and medium sized businesses, large enterprise businesses, aswell as state, local and federal governments and educational institutions. Ourmodel also facilitates an efficient supply chain and support mechanism formanufacturers by using a combination of direct marketing, centralized sellingand support and centralized product fulfillment. Additionally, while ourexperience and expertise in marketing and eCommerce allows us to efficientlyreach and capture customers across these segments, our scale and centralizedmodel allow us to efficiently deploy a one-to-many selling and delivery model.

 

In December 2009,Sarcom, Inc. (“SARCOM”), our wholly-owned subsidiary, acquiredcertain assets of Data Systems Worldwide, Inc. (“DSW”). DSW, a provider ofconverged Cisco solutions in the western United States, had approximately 20employees as of December 15, 2009, the majority of which are service orsales personnel. Each of these employees became employees of SARCOM inconnection with the acquisition. DSW’s practice areas include managed andprofessional services and Cisco intelligent networks, facilities, datacentersand security, with a focus on unified communications and connected real estate.

 

In the first quarter of 2008, following the completionof our acquisition of SARCOM in September 2007, which is discussed below,we changed the way we internally look at our business and realigned ourreportable operating segments from two segments (previously Core business andOnSale.com) to four segments that we referred to as SMB, MME, Public Sector andConsumer. Our operating segments are primarily aligned based upon theirrespective customer base. We include corporate related expenses such as legal,accounting, information technology, product management and other administrativecosts that are not otherwise included in our operating segments in Corporate &Other. We allocate our resources to and evaluate the performance of oursegments based on operating income. A description of each of our new segmentsis provided below. All historical segment financial information provided hereinhas been revised to reflect these new operating segments.

 

In the fourth quarter of 2009, we changedthe name of our Consumer segment to MacMall. The MacMall segment includes salesmade under our MacMall and Onsale brand names via telephone and the Internet toconsumers, businesses and creative professionals. This was a name change onlyand does not affect the segment results reported in the current or priorperiods.

 

Our SMB segment consistsof sales made primarily to small and medium-sized businesses, utilizing anoutbound phone based sales force and, where applicable, a field-based salesforce.

 

Our MME segment consistsof sales made primarily to mid-market and enterprise-sized businesses under theSARCOM, DSW and Abreon brands, utilizing a field relationship-based sellingmodel, an outbound phone based sales force and a field service organization.The MME segment sells complex products, services and solutions, which webelieve can be best delivered with a face-to-face selling model.

 

Our Public Sector segmentconsists of sales made primarily to federal, state, and local governments, aswell as educational institutions, utilizing an outbound phone and fieldrelationship-based selling model as well as contracts and bids businessdevelopment teams.

 

In October 2008, our Board of Directorsapproved a discretionary common stock repurchase program for up to $10 millionof our common stock in aggregate with all other repurchases made under anyrepurchase programs following the date of such Board of Directors’ approval.This repurchase program effectively supersedes an existing repurchase programadopted in 1996. Under this new program, the shares may be repurchased fromtime to time at prevailing market prices, through open market or unsolicitednegotiated transactions, depending on market conditions. We expect that therepurchase of our common stock under this new program will be financed withexisting working capital and amounts available under our existing creditfacility. No limit was placed on the duration of the repurchase program. Thereis no guarantee as to the exact number of shares that we will repurchase.Subject to applicable securities laws, repurchases may be made at such timesand 

 

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insuch amounts as our management deems appropriate. The program can also bediscontinued at any time management feels additional purchases are notwarranted. During the year ended December 31, 2009, we repurchased a totalof 582,779 shares of our common stock under this program for a total cost of$2.6 million. From the inception of the program in October 2008 through December 31,2009, we had repurchased an aggregate total of 1,324,410 shares of our commonstock for a total cost of $5.2 million.

 

In September 2007, we completed the acquisitionof SARCOM, a provider of advanced technology solutions, for an initial totalpurchase price of approximately $55.7 million, including transaction costs,comprised of approximately $48.2 million in cash and approximately $7.5 millionin shares of our common stock. The purchase price was subsequently adjusteddown by $2.1 million as a result of a final net asset value adjustment enteredinto on November 6, 2007, under which the sellers tendered back to usapproximately 122,478 shares of our common stock previously issued to them.

 

SARCOM, headquartered in Columbus, Ohio, has servedthe mid-market and enterprise market for over 20 years and currentlyspecializes in providing enterprise hardware and software solutions, procurementsolutions and a full range of professional and managed services. Theacquisition included the Abreon Group (“Abreon”), a division of SARCOM. Abreonis a change management business focused on providing business reengineering,business consulting and training services to mid-market and enterprise clients.Our acquisition of SARCOM was motivated in part by our desire to enhance ourcapabilities as a value added direct marketer of advanced technology products,services and solutions, consistent with our commitment to drive growth in ourbusiness in part by expanding our share of our customers’ IT spending.

 

We maintain a Canadiancall center serving the U.S. market, which has historically received thebenefit of labor credits under a Canadian government program. In 2007, wereceived an eligibility certificate to participate in the Investment QuebecRefundable Tax Credit for Major Employment Generating Projects (GPCE),replacing the prior government subsidy program which ended at the end of 2007.In addition to other eligibility requirements under the new program, we arerequired to maintain a minimum of 317 eligible employees employed by oursubsidiary PC Mall Canada, Inc. in the province of Quebec at all times toremain eligible to apply annually for these labor credits. As a result of thisnew certification, we are eligible to make annual labor credit claims foreligible employees equal to 25% of eligible salaries, but not to exceed $15,000(Canadian) per eligible employee per year, beginning in fiscal year 2008 andcontinuing through fiscal year 2016. Under the prior program through the end of2007, we claimed annual labor credits of up to 35% of eligible compensationpaid to our qualifying employees. As of December 31, 2009, we had anaccrued receivable of $6.5 million related to the 2008 and 2009 calendar years,and we expect to receive full payment under our labor credit claims.

 

**Strategy**

 

Our strategy is to be a value added single sourceprovider of information technology products, services and solutions for ourcustomers. Historically, we implemented our strategy as a rapid response, highvolume, cost-efficient direct marketer of multi-branded, competitively-pricedinformation technology products and services, while providing a high level ofsupport to our customers. More recently, as we have added more servicecapabilities to our offerings to customers, we have become more focused on thereturn on investment (ROI) that our customers can generate by partnering withus.  We believe our model is a compellingcombination of technology hardware, services and solutions, highly efficientorder processing engines and centralized back-office functions that enables usto provide significant value to our customers. The key elements of our strategyare discussed below.

 

*Expand Our Client Base and Further Penetrate OurExisting Client Base*

 

During 2009, as companies, government agencies andconsumers curtailed their IT spending, we continued to invest in people,processes and systems that we feel will enable us to attract new clients andalso gain share within our current client base. For example:

 

·                  In 2009 we launched the Small Business Network, whichis an innovative, social media platform designed to drive demand in businesseswith fewer than 100 employees. This is the largest segment of businesses in theU.S. market, but has historically been difficult and expensive to reach. Byutilizing viral marketing and social media, we believe that the Small BusinessNetwork gives us a unique platform to drive demand from these small businesses.

 

·                  We opened a newoffice in downtown Chicago during 2009. This office houses a new SMBcall-center for us, and we have added significant headcount to that locationover the last several months. We believe that the excellent pool of qualifiedaccount executives available in the Chicago area has allowed us to assemble andmaintain a strong local sales team to grow our business with SMB customers.

 

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·                  In 2009, we launched Health Dynamix, a verticallyintegrated team that, while based within our Public Sector segment, willsupport our SMB, MME and Public Sector segments, each of which serves customerswithin the healthcare market. The healthcare market is specialized and changesrapidly, but is also one of the fastest growing markets for IT products. Webelieve our investment in Health Dynamix will enable us to continue to grow inthis important market.

 

Our account executives are trained in relationshipbuilding, account management and offering high levels of service through a hightouch model. Account executives in our SMB, MME and Public Sector segmentshandle a variety of customer needs, including ongoing customer service,technology assessment and support requirements, operations and procurementprocesses and other value-added services. We continue toplace significant emphasis on increasing the productivity and tenure of ourexisting sales force through enhanced training and tools, as well as byoptimizing our technical pre-sales resources and other support functions.  Through these investments we intend to betterequip our sales executives to evaluate, understand and ultimately deliversolutions that address their customers’ IT needs.

 

*Focus on**the Growth of Our ValueAdded Services and Product Offerings*

 

While historically our growth has been drivenby growth in hardware and software sales, we also believe that consolidation inour marketplace has created a unique opportunity for companies like us toleverage our scale by offering value-added services and solutions to earn agreater share of our clients’ IT expenditures.  We work with our customers to identify areaswhere they can gain efficiencies by outsourcing some of their IT functions tous.  Our services are available to ourcommercial and public sector customers and span the entire IT life cycle. Theseservices include:

 

·        strategicplanning;

·        needsassessment;

·        solutiondesign;

·        productacquisition/e-procurement;

·        projectmanagement;

·        installation;

·        postinstallation support and maintenance;

·        systemsrefresh and installation/move/add/change; and

·        recyclingand disposal.

 

With over 600 technicians and a national network ofthird party service providers, we can provide pre-sales assessments andpost-sales services efficiently to our customers in the SMB,mid-market/enterprise and public sector markets. We believe that by effectivelyproviding outsourced IT solutions to our customers we will be better able toanticipate their needs and capture a larger share of their IT expenditures.

 

We continue to focus on sales of solutions includingclient based computing, networking products, servers, storage, unifiedcommunication and annuity based licensing, which we believe represent highgrowth opportunities in the SMB, mid-market, enterprise and public sectormarkets. We are authorized to sell Cisco, HP, IBM, Lenovo, Microsoft, Symantec,Sun Microsystems and other name brand enterprise solutions. We are alsoauthorized to sell annuity based licenses from leading publishers such asAdobe, IBM, Microsoft, Symantec and VMware to our SMB, MME and Public Sectorcustomers. We have continued to invest in pre-sales assets including pre-salestechnical representatives, technical content and training that assist ouraccount executives in our SMB, MME and Public Sector segments to identify andclose opportunities for products, services and solutions.

 

*Further Strengthen Our Partnerships With Vendors*

 

We believe it is important to maintain relationshipswith key manufacturers such as Apple, HP, Cisco, VMware and other key partnerson a company-wide basis. We believe our relationships with key manufacturersgive us increased visibility and legitimacy in the minds of our customers. Wealso maintain direct relationships with key sales and marketing personnel fromselected IT manufacturers and software publishers, who provide key insightsrelated to new and existing products and also provide referral salesopportunities to us.

 

In 2009 substantially all of our sales executives inour SMB segment became VMware certified, and we are in the process of pursingCisco CSE certifications for those sales executives as well.  By investing in specializations like these weintend to equip our sales executives to better serve their customers and addmore value to our vendor partners’ efforts as well.

 

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We are a leading resellerof Apple computer products. In 2009, we added engineering capability to our MMEsegment subsidiary to increase our ability to drive both hardware and serviceopportunities in the Apple enterprise market. Apple also enhanced its support ofenterprise resellers in 2009, which we believe has created a new opportunityfor us to sell the Apple platform into enterprise accounts. We intend toleverage our position with Apple to further penetrate the corporate market,while continuing to offer Apple’s software and hardware products to ourconsumer customers.

 

*Leverage Our Shared ServicesCapabilities*

 

We utilize a centralizedinfrastructure for our back-office capabilities. While we strive to free oursales and marketing organizations to focus on their customers and on theirgrowth, we maintain centralized IT, finance, human resource, and otherfunctions.  Some of these functions arelocated in the Philippines, which provides us a cost advantage. We believe thatby leveraging a centralized model to perform back-office functions we mayachieve a more efficient overall cost structure and ability to introduce newtools to our sales organizations.

 

We have been involved inInternet eCommerce since 1995 and are focused on leveraging our eCommerceexpertise. We utilize our public websites to provide our customers with easyand convenient shopping, ordering and tracking tools. Our extranet sites (CAPand Ops Track), which are customized extranets for commercial and public sectorcustomers, provide these same capabilities along with custom catalogs, pricing,security, asset management and workflow configurable to the customers’ needs.We believe having sophisticated eCommerce capabilities facilitates customeracquisition and retention, and we leverage our shared services model to attemptto replicate best practices among our sales organizations.

 

We are currently upgrading many of our IT systems. Wehave purchased licenses for workflow software, web development tools andMicrosoft Dynamics AX (Axapta) to upgrade our ERP systems. We initiated theimplementation and upgrade of our eCommerce system in the second half of 2008and have completed and launched a new generation of our public sites atmacmall.com, onsale.com and pcmall.com. We are currently working on theimplementation of the ERP modules and the upgrade of the ERP systems, includingadditional enhancements and features. We have completed the initial phase ofthe implementation in January 2010, and we expect to be complete with allphases of the implementation of the ERP systems by 2013. We believe the implementationand upgrade should help us to gain further efficiencies across ourorganization.

 

*SelectivelyPursue Strategic Acquisition*

 

One element of ourbusiness strategy involves expansion through the acquisition of businesses,assets, personnel or technologies that allow us to complement our existingoperations, expand our market coverage or add new business capabilities. Ourmarket, broadly defined as the technology reseller channel, has undergone significantconsolidation over the past 15-20 years. While we believe that the fragmentednature of the technology reseller industry and industry consolidation trendsmay continue to present acquisition opportunities for us, these trends may makeacquisitions more competitive.

 

We continuallyevaluate and explore strategic opportunities as they arise, including businesscombination transactions, strategic partnerships and the purchase or sale ofassets. We may choose to pursue acquisitions for several reasons. For instance,we may pursue acquisitions that will broaden our capabilities in IT services.We may also choose to pursue acquisitions that will enable us to furtherpenetrate or enter geographies we deem attractive. We evaluate acquisitionopportunities based on our assessment of several factors, including theperceived value of the opportunity, our available financing sources andpotential synergies of the acquisition target with our business. Ourimplementation of our acquisition strategy depends on the availability ofsuitable acquisition candidates at reasonable prices and our ability to resolvechallenges associated with integrating acquired businesses into our existingbusiness. Our ability to complete acquisitions in the future will depend on ourability to fund such acquisitions with our internally available cash, cashgenerated from operations, amounts available under our existing creditfacilities, additional borrowings or from the issuance of additionalsecurities.

 

**Sales and Marketing**

 

**Sales Activities.**We believe that much of our success hascome from the quality and training of our account executives. Accountexecutives handle a variety of customer needs, including ongoing customerservice, technology assessment and support requirements, operations andprocurement processes and other value-added services in our SMB, MME and PublicSector segments. Account executives are responsible for assisting customers inpurchasing decisions, answering product pricing and availability questions andprocessing product orders. Account executives have the authority to vary priceswithin specified parameters in order to be competitive. In addition, accountexecutives undergo an initial sales training program focusing on use of oursystems, product offerings and networking solutions, sales techniques, phoneetiquette and customer service. Account executives also attend regular trainingsessions to stay up-to-date on new products. In 2009, we utilized our low costmodel in the Philippines (OSRP) to significantly augment the amount of customerservice and support personnel 

 

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available to our commercial sales teams. Customerservice and technical support personnel assist outbound account executives,handling administrative tasks, so that account executives can focus on selling.Our phone and computer systems are used for order entry, customer tracking andinventory management. We use a proprietary customer relationship managementsystem for our outbound account executives to assist them with prospecting andaccount management functions. We also use a customer acquisition, retention anddevelopment program to support the ability of our outbound account executivesto sell across more product categories.

 

We believe a key to supporting the successfulacquisition and growth of customers in the SMB, mid-market, enterprise andpublic sector markets is the use of a relationship-based selling model. Ouraccount executives in our segments serving these markets are trained in relationshipbuilding, account management and offering high levels of service through a hightouch model. Additionally, account executives bring product expertise to bearfrom within our company, leveraging technical specialists who support ourleading manufacturers including Adobe, Apple, Cisco, HP, IBM, Lenovo,Microsoft, Sun Microsystems and Symantec.

 

We frequently enhance our tools to support our salesactivities. Our efforts in this regard have included adding more sophisticationto our CRM tools by models we have built to enable our account executives andsales managers to utilize a number of metrics and analytics to derive numericalscores from which incremental opportunities can be identified within specificcustomer accounts or an account executive’s entire book of business. Thiscapability provides a solid foundation from which our account executives canexpand their customer account penetration and drive incremental revenue andprofitability.

 

We address the needs of our MacMall customers throughinbound account executives, who are trained to support the product needs andthe order management requirements of the customer. The account executives aremanaged to efficiently handle inquiries, while managing their ability toprocess orders rapidly and address customer service issues. The inbound salesforce has access to phone-based technical and customer service resources toensure a 24/7 ability to handle customer needs.

 

We fulfill the specific needs of our SMB, MME andPublic Sector customers through an outbound phone based sales force and, whereapplicable, a field based sales force. The sales force is trained in oursystems, processes and products and is then provided leads of existing andprospective corporate or public sector customers in the United States. Accountexecutives prospect aggressively into their lead pools to enhance relationshipswith existing customers, re-establish relationships with inactive customers andbuild relationships with new customers. Our sales staff strives to buildlong-term relationships with commercial customers through regular phone contactand personalized service. Commercial customers may choose from several purchaseor third-party lease options for financing product purchases and we extendcredit to certain commercial customers based upon an evaluation of thecustomer’s financial condition and credit history.

 

**Marketing Activities.**We design our marketing programs toattract new customers and to stimulate additional purchases by existingcustomers. Our marketing programs are tailored for MacMall, SMB, MME and publicsector customers. We utilize sophisticated analytic tools designed to managemarketing campaigns using different media channels and to optimize campaignsthrough advanced data mining techniques. The analytic tools combineoptimization techniques with multiple models to more effectively match offers toindividuals and businesses in an effort to provide the most profitable results.

 

*Vendor Supported Marketing.*We sell advertising space in our catalogsand on our websites, provide vendor supported outbound phone campaigns anddevelop custom marketing campaigns for manufacturer partners that may includeseminars for end users, promotional offers and trade-in and trade-up programs.We also work collaboratively with our manufacturer partners and usemanufacturer funding to help offset portions of the costs of marketingpromotions, direct mail offers, customer trainings and events and e-marketingor sales incentives which are each based on market opportunity and themanufacturers’ needs. We also develop marketing campaigns designed to maximizeproduct sales and we receive funds from our vendors in the form of volumeincentive rebates and other programs.

 

*Proprietary Websites.*We operate several websites, includingpcmall.com, macmall.com, clubmac.com, pcmallgov.com, gmri.com, sarcom.com,abreon.com and onsale.com. Our websites offer features such as on-lineordering, access to inventory availability and a large product selection withdetailed product information. We also maintain and operate commercial,customized extranets to provide custom catalogs and online purchasing channelsfor commercial and public sector customers and their employees. These extranetsites are designed to enhance sales productivity by allowing customers toperform routine tasks online, freeing the associated account executive’s timefor other tasks. Sales generated through the Internet have grown as we offerour customers a convenient means of shopping and ordering our products.

 

*Direct Marketing.*We selectively mail catalogs to existingand prospective customers, advertise on the Internet and, to a limited extent,advertise in certain major computer magazines. We obtain the names ofprospective customers through selected mailing lists acquired from varioussources, including manufacturers, suppliers and computer magazine publishers.We also send direct marketing mailers to selected target audiences to drivesales to new and existing customers.

 

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We create our marketing materials in-house with ourown design team and production artists. We believe the in-house preparation ofcatalogs, advertisements, and promotional materials streamlines the productionprocess, provides greater flexibility and creativity in catalog production andresults in significant cost savings over outside production.

 

*Online Marketing.*eCommerce marketing programs and capabilities, such asaffiliate marketing, search engine optimization, email and search enginemarketing, are essential components of our customer acquisition and retentionstrategy. In 2009, we continued to invest in web merchandising resources andskills and enhanced our eCommerce technology to increase the efficiency ofthese online marketing vehicles. In 2009, we also continued to shift ouradvertising expenditures to web marketing. In 2009, we partnered with Lyris tomanage our email engine, which we believe resulted in stronger sales from ouremail marketing. We also engaged the services of Site Wire to enable strongerconversion rates for Search Engine Optimization (SEO) and Search EngineMarketing (SEM) programs. We saw improved customer acquisition resultsthroughout the second half of 2009 in both SEO and SEM.

 

**Products and Merchandising**

 

We offer information technology products, services andsolutions, as well as consumer electronics equipment and other consumerproducts. We screen and select new products and manufacturers based on themarket opportunity and technology adoption trends within our targeted customermarkets. We also consider product attributes like features, quality, salestrends, price, margins, market development funds and warranties. We offer ourcustomers other value-added services, such as custom configured systems,software licensing asset management, image management, product asset taggingand asset disposal services.

 

Through frequent mailings of our catalogs and e-mailsto our customers, we believe we are able to quickly introduce new products andreplace slower selling products with new products. We also use variousmarketing materials, web training and local events to educate our customers onsolutions and more complex technologies and to provide other content todescribe technology applications and how they will benefit the customer.Through these materials and activities, we showcase the full breadth of theproducts and solutions we sell in an effort to provide our customers with asingle source for all their technology needs.

 

The following table sets forth our net sales by majorcategories as a percentage of total net sales for the periods presented,determined based upon our internal product code classifications.

 
| ** **                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Software                          |       | 16.9                                        | %          | 15.9 | % | 15.1 | % |
| Notebooks                         |       | 15.8                                        |       | 16.2 |   | 15.9 |   |
| Desktop                           |       | 9.4                                         |       | 9.6 |   | 10.4 |   |
| Storage                           |       | 8.0                                         |       | 6.9 |   | 6.1 |   |
| Networking                        |       | 7.7                                         |       | 7.3 |   | 4.3 |   |
| Professional services             |       | 6.8                                         |       | 5.9 |   | 2.4 |   |
| Manufacturer service and warranty |       | 4.2                                         |       | 3.7 |   | 2.5 |   |
| iPods/MP3                         |       | 4.1                                         |       | 5.1 |   | 9.5 |   |
| Displays                          |       | 4.0                                         |       | 4.8 |   | 5.3 |   |
| Servers                           |       | 3.3                                         |       | 3.8 |   | 4.7 |   |
| Printers                          |       | 3.2                                         |       | 3.9 |   | 4.6 |   |
| Supplies                          |       | 3.2                                         |       | 3.0 |   | 2.6 |   |
| Accessories                       |       | 2.7                                         |       | 2.5 |   | 1.8 |   |
| Input devices                     |       | 2.2                                         |       | 1.7 |   | 1.7 |   |
| Power                             |       | 2.1                                         |       | 2.0 |   | 1.9 |   |
| Memory                            |       | 1.6                                         |       | 1.9 |   | 2.3 |   |
| Consumer electronics              |       | 1.5                                         |       | 1.5 |   | 1.9 |   |
| Other (1)                         |       | 3.3                                         |       | 4.3 |   | 7.0 |   |
| Total                             |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |

 

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(1) Other consists primarily of other electronic products, income frommiscellaneous items, and other consumer products.

 

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**Service Offerings for Commercial andPublic Sector Markets**

 

We provide sophisticated information technologyservices with national reach to help businesses effectively manage and leveragetheir technology infrastructure. Our services are available to our SMB, MME,and Public Sector customers and span the entire information technology lifecycle. These services include:

 

·                  strategic planning

·                  needs assessment

·                  solution design

·                  product acquisition/e-procurement

·                  project management

·                  installation

·                  post installation support and maintenance

·                  systems refresh and installation/move/add/change

·                  recycling and disposal

 

Our solutions are focused on serving our customers’data center, client computing, unified communications, network infrastructure,enterprise security, enterprise server and storage, software licensing andprocurement needs. Through the acquisition of DSW in December 2009, wefurther enhanced our services portfolio and can now offer both hosting andnetwork operating center capabilities.

 

With over 600 technicians and a national network ofthird party service providers, we can provide pre-sales assessments and post-salesservices efficiently to our customers in our SMB, MME and Public Sectorsegments. We hold over 3,000 certifications on manufacturers and productsolutions which enable our sales and service teams to effectively support thesecustomers. Our technical resources and service teams regularly undergo trainingto maintain these certifications and authorizations. We are an authorizeddelivery partner for HP, Apple, Cisco, Microsoft, Sun Microsystems and others.Where we do not have in-house capability, we attempt to utilize ourrelationships with third party service contactors to deliver the mostappropriate solution for our customers.

 

**Purchasing and Inventory**

 

Effective purchasing is a key element of our strategyto provide name brand computer products and related software and peripherals atcompetitive prices. We believe that our high volume of sales results inincreased purchasing power with our primary suppliers, resulting in volumediscounts, favorable product return policies and vendor promotional allowances.Products manufactured by Apple represented approximately 19%, 20% and 25% ofour net sales in 2009, 2008 and 2007. Products manufactured by HP accounted for19%, 19% and 18% of our net sales in 2009, 2008 and 2007. We are also linkedelectronically with 15 distributors and manufacturers, which allows our accountexecutives to view applicable product availability online and drop-ship thoseproducts directly to customers. The benefits of this program include reducedinventory carrying costs, higher order fill rates and improved inventory turns.

 

Many of our vendor partners provide us with marketdevelopment funds to assist in the active marketing and sales of theirproducts. Such funds help offset portions of the cost of catalog publicationand distribution based upon the amount of coverage given in the catalogs fortheir products, as well as other costs incurred to market their products.Termination or interruption of our relationships with our vendors, ormodification of the terms of or discontinuance of our agreements with ourvendors, could adversely affect our operating results. Our success is dependentin part upon the ability of our vendors to develop and market products thatmeet the changing requirements of the marketplace. As is customary in ourindustry, we have no long-term supply contracts with any of our vendors.Substantially all of our contracts with our vendors are terminable upon 30days’ notice or less.

 

We attempt to manage our inventory to optimize orderfill rate and customer satisfaction, while limiting inventory risk. Inventorylevels may vary from period to period, due in part to increases or decreases insales levels, our practice of making large-volume purchases when we deem theterms of such purchases to be attractive and the addition of new manufacturersand products. We have negotiated agreements with many of our vendors thatcontain price protection provisions intended to reduce our risk of loss due tomanufacturer price reductions. We currently have such rights with respect tocertain products that we purchase from Apple, HP and certain other vendors;however, rights vary by product line, have conditions and limitations andgenerally can be terminated or changed at any time.

 

The market for information technology products, solutionsand services is characterized by rapid technological change and growingdiversity. We believe that our success depends in large part on our ability toidentify and obtain the right to market products, solutions and services thatmeet the changing requirements of the marketplace and to obtain sufficientquantities to meet changing demands. There can be no assurance that we will beable to identify and offer products, solutions and services necessary to remaincompetitive or avoid losses related to excess or obsolete inventory.

 

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**Backlog**

 

Our backlog generally represents open, cancelableorders and may vary significantly from period to period. We do not believe thatbacklog is useful for predicting our future sales.

 

**Distribution**

 

We operate a full-service 212,000 square footdistribution center in Memphis, Tennessee, an 84,640 square foot warehousefacility in Columbus, Ohio and a 20,254 square foot warehouse facility inIrvine, California. The Memphis warehouse is our primary distribution centerand is strategically located near the FedEx main hub in Memphis, which allowsmost orders of in-stock products accepted by 10:00 p.m. Eastern Time to beshipped for delivery by 10:30 a.m. the following day via FedEx, ifrequested by the customer. Upon request, orders may also be shipped at a lowercost using other modes of transportation such as United Parcel Service grounddelivery or the United States Postal Service. The Columbus and Irvinewarehouses primarily function as custom configuration and distribution centersfor our corporate customers. We believe that our existing distributionfacilities are adequate for our current and foreseeable future needs.

 

When an order is entered into our systems, a credit checkor credit card verification is performed, and if approved, and the product isin stock, the order is electronically transmitted to the warehouse, where apacking slip is printed for order fulfillment. Inventory items are bar codedand located in computer-designated areas which are easily identified on thepacking slip. Orders are checked with bar code scanners prior to final packingto ensure that each order is packed correctly.

 

We also have electronic purchasing and drop shippingsystems for products that are not in stock at our distribution centers. Fifteendistributors and manufacturers are linked to us electronically to provideinventory availability and pricing information. We transmit orderselectronically for immediate shipment via an electronic interchange to theselected distributor after considering inventory availability, price andlocation. This capability has historically allowed us to ship a high percentageof orders on the same day that they are received.

 

**Management Information Systems**

 

We have committed significant resources to thedevelopment of sophisticated computer systems that are used to manage ourbusiness. Our computer systems support phone and web-based sales, marketing,purchasing, accounting, customer service, warehousing and distribution, andfacilitate the preparation of daily operating control reports which aredesigned to provide concise and timely information regarding key aspects of ourbusiness. The systems allow us to, among other things, monitor sales trends,make informed purchasing decisions, and provide product availability and orderstatus information. In addition to the main computer systems, we have systemsof networked personal computers across all of our U.S. and foreign locations.We also use our management information systems to manage our inventory. Webelieve that in order to remain competitive, we will need to upgrade ourmanagement information systems on a regular basis, which could requiresignificant capital expenditures.

 

We are currently upgrading many of our IT systems. Wehave purchased licenses for workflow software, web development tools andMicrosoft Dynamics AX (Axapta) to upgrade our ERP systems. We initiated theimplementation and upgrade of our eCommerce system in the second half of 2008and have completed and launched a new generation of our public sites atmacmall.com, onsale.com and pcmall.com. We are currently working on theimplementation of the ERP modules and the upgrade of the ERP systems, includingadditional enhancements and features. We have completed the initial phase ofthe implementation in January 2010, and we expect to be complete with allphases of the implementation of the ERP systems by 2013.  We believe the implementation and upgrade shouldhelp us to gain further efficiencies across our organization.

 

In July 2008, we entered into an agreement withCisco Systems for the purchase and implementation of various solutions toupgrade our current infrastructure for up to approximately $4.0 million. Thepurchase is financed through a capital lease over a five year term. Our plan isto provide a unified platform for our entire company and to provide a robustand efficient contact center. We are implementing the Cisco solution across allof our locations and expect that all of our locations will be upgraded by thesecond half of 2010.

 

Our success is dependent on the accuracy and properutilization of our management information systems and our telephone system. Inaddition to the costs associated with system upgrades, the transition to andimplementation of new or upgraded hardware or software systems can result insystem delays or failures. We currently operate one of our managementinformation systems using an HP3000 Enterprise System. HP has indicated that itwill support this system until December 2010, by which time we expect thatwe will need to seek third party support for such systems or complete theupgrade of our management information systems hardware and software. Anyinterruption, corruption, degradation or failure of our management informationsystems or telephone system could adversely impact our ability to receive andprocess customer orders on a timely basis.

 

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**Retail Stores**

 

We currently operate three retail stores, located inSanta Monica and Torrance, California, and Memphis, Tennessee, that aretargeted at consumers and small businesses residing in the local areas.

 

**Competition**

 

The business of selling information technologyproducts, solutions and services is highly competitive. We compete with avariety of companies that can be divided into several broad categories:

 

·             otherdirect marketers, including CDW, Insight Enterprises and PC Connection;

 

·             largevalue added resellers such as CompuCom Systems, Pomeroy IT Solutions and WorldWide Technology;

 

·             governmentresellers such as GTSI, CDWG and GovConnection;

 

·             computerretail stores and resellers, including superstores such as Best Buy andStaples;

 

·             hardwareand software vendors such as Apple and Dell Computer that sell or areincreasing sales directly to end users;

 

·             onlineresellers, such as Amazon.com, Newegg.com and TigerDirect.com;

 

·             softwarefocused resellers such as Soft Choice and Software House International; and

 

·             otherdirect marketers and value added resellers of information technology products,solutions and services.

 

Barriers to entry are relatively low in the directmarketing industry, and the risk of new competitors entering the market ishigh. The markets in which our retail stores operate are also highlycompetitive.

 

Competition in our market is based on various factors,including but not limited to, price, product selection, quality andavailability, ease of doing business, customer service, and brand recognition.

 

The manner in which the products, solutions andservices we sell are distributed and sold is continually changing, and newmethods of sales and distribution have emerged. Information technologyresellers are consolidating operations and acquiring or merging with otherresellers to achieve economies of scale and increased efficiency. Our largestmanufacturers have sold, and continue to sell, their products directly tocustomers. To the extent additional manufacturers adopt this selling format orthis trend becomes more prevalent, it could adversely affect our sales andprofitability. In addition, traditional retailers have entered and may increasetheir penetration into direct marketing and the SMB market. The currentindustry reconfiguration and the trend toward consolidation could cause theindustry to become even more competitive, further increase pricing pressuresand make it more difficult for us to maintain our operating margins or toincrease or maintain the same level of net sales or gross profit.

 

Although many of our competitors have greaterfinancial resources than we do, we believe that our ability to offer SMB,mid-market/enterprise, public sector and consumer customers a wide selection ofproducts, solutions and services, at competitive prices, with prompt deliveryand a high level of customer satisfaction, together with good relationshipswith our vendors and suppliers, allows us to compete effectively. We competenot only for customers, but also for favorable product allocations andcooperative advertising support from product manufacturers. Some of ourcompetitors could enter into exclusive distribution arrangements with ourvendors and deny us access to their products and solutions, devote greaterresources to marketing and promotional campaigns and devote substantially moreresources to their websites and systems development than we can. Newtechnologies and the continued enhancement of existing technologies also mayincrease competitive pressures on us. Some of our competitors have reducedtheir prices in an attempt to stimulate sales. If competition or technologicalchanges cause the prices of our products, solutions and services to decrease,we must increase the quantity of the products, solutions and services we sellto achieve the same level of net sales and gross profit. If prices decrease andwe are unable to attract new customers and sell increased quantities, our salesand profitability could be adversely affected. There can be no assurance thatwe can continue to compete effectively against existing or new competitors thatmay enter the market. We believe that competition may increase in the future,which could require us to adopt competitive pricing strategies, which couldinclude reduced prices or a decision not to raise prices to offset any costincreases; increase advertising expenditures; or take other competitive actionsthat may have an adverse effect on our operating results.

 

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**Intellectual Property**

 

We rely on a combination of laws and contractualrestrictions with our employees, customers, suppliers, affiliates and others toestablish and protect our proprietary rights. Despite these precautions, it ispossible that third parties may copy or otherwise obtain and use ourintellectual property, including using our trademarks or domain names, withoutauthorization. Although we regularly assert our intellectual property rightswhen we learn that they are being infringed, these claims can be time-consumingand may require litigation and administrative proceedings to be successful. Wehave numerous trademarks and service marks that we consider to be material tothe successful operation of our business. The most important are PC Mall,SARCOM, MacMall and Abreon, which we currently use in connection withtelephone, mail order, catalog and/or online retail services. We haveregistrations for PC Mall and MacMall in the United States and in numerousforeign jurisdictions for telephone, mail order, catalog and/or online retailservices.

 

Third parties have asserted, and may in the futureassert, that our business methods or the technologies we use infringe theirintellectual property rights. We may be subject to intellectual property claimsand legal proceedings in the ordinary course of our business. If we are forcedto defend against any third-party infringement claims, we could face expensiveand time-consuming litigation and be required to pay monetary damages, whichcould include treble damages and attorneys’ fees for any infringement that isfound to be willful, and either be enjoined or required to pay ongoingroyalties with respect to any business methods or technologies that are foundto be infringing. Further, as a result of infringement claims either against usor against those who license technology to us, we may be required, or deem itadvisable, to develop non-infringing business methods or technology, whichcould be costly and time-consuming, or enter into costly royalty or licensingagreements.

 

Third parties have in the past, and may in the future,hire employees who have had access to our proprietary technologies, processesand operations. This exposes us to the risk that former employees willmisappropriate our intellectual property.

 

Litigation may be necessary in the future to enforceour intellectual property rights, to protect our trade secrets or to determinethe validity and scope of the proprietary rights of others. Any litigation,regardless of outcome or merit, could result in substantial costs and diversionof management and technical resources, which could materially harm ourbusiness.

 

**Segment Reporting Data**

 

Operating segment and principal geographic area datafor 2009, 2008 and 2007 are summarized in Note 14 of the Notes to theConsolidated Financial Statements in Part II, Item 8 of this report, whichis incorporated herein by reference.

 

**Employees**

 

At December 31, 2009, we had 2,408 full-time and81 part-time employees, consisting of 1,694 in the United States, 351 in Canadaand 444 in the Philippines. We emphasize recruiting and training high-qualitypersonnel and, to the extent practical, promote people to positions ofincreased responsibility from within the company. Many employees initiallyreceive training appropriate for their position, followed by varying levels oftraining in computer technology, communication and leadership. New accountexecutives participate in an intensive sales training program, during whichtime they are introduced to our business ethics and philosophy, availableresources, products and services, as well as basic and advanced sales skills.Training for specific product lines and continuing education programs areconducted on a regular basis, supplemented by vendor-sponsored trainingprograms for account executives and technical support personnel.

 

We consider our employee relations to be good. None ofour employees is represented by a labor union, and we have experienced no workstoppages.

 

**Regulatory and Legal Matters**

 

Our direct response business is subject to the Mail orTelephone Order Merchandise Rule and other related regulations promulgatedby the Federal Trade Commission and it is also subject to other laws andregulations applicable to access to or commerce on the Internet. While webelieve we are currently in compliance with such laws and regulations and havesought to implement processes, programs and systems in an effort to achievecompliance with existing laws and regulations applicable to our business, manyof these laws and regulations are unclear and have yet to be interpreted bycourts, or may be 

 

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subject to conflicting interpretations by courts. Noassurances can be given that new laws or regulations will not be enacted oradopted, or that our processes, programs and systems will be sufficient tocomply with present or future laws or regulations, which might adversely affectour operations. Due to the increasing popularity and use of the Internet, it islikely that new laws and regulations will be adopted with respect to theInternet, including laws and regulations that may impose additionalrestrictions or burdens on our business. Moreover, the growth and developmentof the market for Internet commerce could prompt calls for more stringentconsumer protection laws that, if enacted, could impose additional restrictionsor burdens on us and other companies conducting business over the Internet. Inaddition to imposing restrictions or burdens on our business, the adoption ofany additional laws or regulations with respect to the Internet may decreasethe growth of Internet usage, which, in turn, could decrease the demand for andgrowth of our Internet-based sales.

 

Based upon current law, certain of our subsidiariescurrently collect and remit sales and use tax only on sales of products orservices to residents of the states in which the respective subsidiaries have aphysical presence or have voluntarily registered. Various state taxingauthorities have sought to impose on direct marketers with no physical presencein the taxing state the burden of collecting state sales and use taxes on thesale of products or services shipped or sold to those states’ residents, and itis possible that such a requirement could be imposed in the future. Inaddition, a number of bills may be introduced or are pending before federal andstate legislatures that would potentially expand our tax collectionresponsibility. Until these legislative efforts have run their course and thecourts have considered and resolved some cases involving these tax collectionissues, there can be no assurance that future laws or interpretations ofexisting laws imposing taxes or other regulations on direct marketing orInternet commerce would not substantially impair our growth or otherwise have amaterial adverse effect on our business, results of operations and financialcondition.

 

In addition, we and our subsidiaries may be subject tostate or local taxes on income or (in states such as Texas, Kentucky orWashington) on gross receipts earned in a state even though we and oursubsidiaries may have no physical presence in the state. State and localgovernments may seek to impose such taxes in cases where they believe thetaxpayer may have a significant economic presence by reason of significantsales to customers located in the states. The responsibility to pay income andgross receipts taxes has also been the subject of court actions and variouslegislative efforts. There can be no assurance that these taxes will not beimposed upon us and our subsidiaries.

 

**Available Information**

 

Our corporate website address is www.pcmall.com. Weare subject to the informational requirements of Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934 and file or furnish reports, proxystatements, and other information with the Securities and Exchange Commission(“SEC”). We make our annual reports on Form 10-K, our quarterly reports onForm 10-Q, our current reports on Form 8-K and all amendments tothese reports, if any, available free of charge on our corporate website assoon as reasonably practicable after such reports are electronically filedwith, or furnished to, the SEC. We have also adopted a code of conduct andethics that applies to our directors, officers and employees which is availableon our website. The information contained on our website is not part of thisreport or incorporated by reference herein.

 

***

 

**ITEM 1A. RISK FACTORS**

 

*This report and other documents wefile with the Securities and Exchange**Commission containforward looking statements that are based on current**expectations, estimates, forecasts and projectionsabout us, our future**performance,our business, our beliefs and our management’s assumptions. These**statements are not guarantees of future performanceand involve certain risks,**uncertainties,and assumptions that are difficult to predict. You should**carefully consider the risks and uncertainties facingour business which are**set forthbelow. The risks described below are not the only ones facing us. Our**business is also subject to risks thataffect many other companies, such as**employment relations, general economic conditions, geopolitical eventsand**international operations.Further, additional risks not currently known to us**or that we currently believe are immaterial also mayimpair our business,**operations,liquidity and stock price materially and adversely.*

 

**Changes and uncertainties in theeconomic climate could negatively affect the****rate of informationtechnology spending by our customers, which would likely****have an impact on our business.**

 

An important element of our business strategy is toincreasingly focus on SMB, MME and Public Sector sales. As a result of theongoing tightness in the credit markets, softness in the housing market,difficulties in the financial services sector, general economic weakness andcontinuing economic uncertainties, the direction and relative strength of theU.S. economy remains considerably uncertain. These factors could also increasethe risk of uncollectible accounts receivable from our customers. During therecent economic downturns in the U.S. and elsewhere, SMB, MME and Public Sectorentities generally reduced, often substantially, their rate of informationtechnology spending. Weak economic conditions and consumer confidence has alsoresulted in a decline in consumer spending on technology and related consumergoods. Continued and future changes and uncertainties in the economic climatein the U.S. and elsewhere could have a similar negative impact on the rate ofinformation technology spending of our current and potential customers, whichwould likely have a negative impact on our business and results of operations,and could significantly hinder our growth.

 

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**Our earnings and growth rate could beadversely affected by continued changes in economic****andgeopolitical conditions**.

 

We are subject to risks arising from adverse changesin domestic and global economic conditions. If economic growth in the UnitedStates and other countries’ economies continues to slow or declines, consumerand business spending rates could be significantly reduced. This could resultin reductions in sales of our products, longer sales and payment cycles, sloweradoption of new technologies and increased price competition, any of whichcould materially and adversely affect our business, results of operations andfinancial condition. Weak general economic conditions, along with uncertaintiesin political conditions could adversely impact our revenue, expenses and growthrate. In addition, our revenue, gross margins and earnings could deteriorate inthe future as a result of unfavorable economic or geopolitical conditions.

 

**Our revenue is dependent on sales ofproducts from a small number of key****manufacturers, anda decline in sales of products from these manufacturers****could materially harm our business.**

 

Our revenue is dependent on sales of products from asmall number of key manufacturers and software publishers, including Apple, HP,IBM, Lenovo, Microsoft and Sony. For example, products manufactured by Appleaccounted for approximately 19%, 20% and 25% of our total net sales for 2009,2008 and 2007, and products manufactured by HP accounted for approximately 19%,19% and 18% of our total net sales for 2009, 2008 and 2007. A decline in salesof any of our key manufacturers’ products, whether due to decreases in supplyof or demand for their products, termination of any of our agreements withthem, or otherwise, could have a material adverse impact on our sales andoperating results.

 

**Certain of our vendors provide uswith incentives and other assistance that****reduce ouroperating costs, and any decline in these incentives and other****assistance could materially harm our operatingresults.**

 

Certain of our vendors, including Adobe, Apple, Cisco,HP, IBM, Ingram Micro, Lenovo, Microsoft, Sony, Sun Microsystems and Tech Data,provide us with trade credit or substantial incentives in the form ofdiscounts, credits and cooperative advertising. We have agreements with many ofour vendors under which they provide us, or they have otherwise consistentlyprovided us, with market development funds to finance portions of our catalogpublication and distribution costs based upon the amount of coverage we give totheir respective products in our catalogs or other advertising mediums. Anytermination or interruption of our relationships with one or more of thesevendors, particularly Apple or HP, or modification of the terms ordiscontinuance of our agreements and market development fund programs andarrangements with these vendors, could adversely affect our operating incomeand cash flow.

 

**We do not have long-term supplyagreements or guaranteed price or delivery****arrangements withour vendors.**

 

In most cases we have no guaranteed price or deliveryarrangements with our vendors. As a result, we have experienced and may in thefuture experience inventory shortages on certain products. Furthermore, ourindustry occasionally experiences significant product supply shortages andcustomer order backlogs due to the inability of certain manufacturers to supplycertain products as needed. We cannot assure you that suppliers will maintainan adequate supply of products to fulfill our orders on a timely basis, or atall, or that we will be able to obtain particular products on favorable termsor at all. Additionally, we cannot assure you that product lines currentlyoffered by suppliers will continue to be available to us. A decline in thesupply or continued availability of the products of our vendors, or asignificant increase in the price of those products, could reduce our sales andnegatively affect our operating results.

 

**Substantially all of our agreementswith vendors are terminable within 30 days.**

 

Substantially all of our agreements with vendors areterminable upon 30 days’ notice or less. For example, while we are anauthorized dealer for the full retail line of HP and Apple products, HP andApple can terminate our dealer agreements upon 30 days’ notice. Vendors thatcurrently sell their products through us could decide to sell, or increasetheir sales of, their products directly or through other resellers or channels.Any termination, interruption or adverse modification of our relationship witha key vendor or a significant number of other vendors would likely adverselyaffect our operating income, cash flow and future prospects.

 

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**Our success is dependent in part uponthe ability of our vendors to develop and****market productsthat meet changes in marketplace demand, as well as our ability****to sell popular products from new vendors.**

 

The products we sell are generally subject to rapidtechnological change and related changes in marketplace demand. Our success isdependent in part upon the ability of our vendors to develop and marketproducts that meet these changes in marketplace demand. Our success is alsodependent on our ability to develop relationships with and sell products fromnew vendors that address these changes in marketplace demand. To the extentproducts that address changes in marketplace demand are not available to us, orare not available to us in sufficient quantities or on acceptable terms, wecould encounter increased price and other competition, which would likelyadversely affect our business, financial condition and results of operations.

 

**We may not be able to maintainexisting or build new vendor relationships,****which may affectour ability to offer a broad selection of products at****competitive prices and negatively impact our resultsof operations.**

 

We purchase products for resale both directly frommanufacturers and indirectly through distributors and other sources, all ofwhom we consider our vendors. We also maintain certain qualifications andpreferred provider status with several of our vendors, which provides us withpreferred pricing, vendor training and support, preferred access to products,and other significant benefits. While these vendor relationships are animportant element of our business, we do not have long-term agreements with anyof these vendors. Any agreements with vendors governing our purchase ofproducts are generally terminable by either party upon 30 days’ notice or less.In general, we agree to offer products through our catalogs and on our websitesand the vendors agree to provide us with information about their products andhonor our customer service policies. If we do not maintain our existingrelationships or build new relationships with vendors on acceptable terms,including favorable product pricing and vendor consideration, we may not beable to offer a broad selection of products or continue to offer products atcompetitive prices. In addition, some vendors may decide not to offerparticular products for sale on the Internet, and others may avoid offeringtheir new products to retailers offering a mix of close-out and refurbishedproducts in addition to new products. From time to time, vendors may terminateour right to sell some or all of their products, modify or terminate ourpreferred provider or qualification status, change the applicable terms andconditions of sale or reduce or discontinue the incentives or vendorconsideration that they offer us. Any such termination or the implementation ofsuch changes, or our failure to build new vendor relationships, could have anegative impact on our operating results. Additionally, some products aresubject to manufacturer or distributor allocation, which limits the number ofunits of those products that are available to us and may adversely affect ouroperating results.

 

**Our narrow gross margins magnify theimpact of variations in our operating****costs and ofadverse or unforeseen events on our operating results.**

 

We are subject to intense price competition withrespect to the products we sell. As a result, our gross margins havehistorically been narrow, and we expect them to continue to be narrow. Ournarrow gross margins magnify the impact of variations in our operating costsand of adverse or unforeseen events on our operating results. Future increasesin costs such as the cost of merchandise, wage levels, shipping rates, freightcosts and fuel costs may negatively impact our margins and profitability. Weare not always able to raise the sales price of our merchandise to offset costincreases. If we are unable to maintain our gross margins in the future, itcould have a material adverse effect on our business, financial condition andresults of operations. In addition, because price is an important competitivefactor in our industry, we cannot assure you that we will not be subject toincreased price competition in the future. If we become subject to increasedprice competition in the future, we cannot assure you that we will not losemarket share, that we will not be forced to reduce our prices and furtherreduce our gross margins, or that we will be able to compete effectively.

 

**We experience variability in our netsales and net income on a quarterly basis****as a result of manyfactors.**

 

We experience variability inour net sales and net income on a quarterly basis as a result of manyfactors.  These factors include:

 

·                  the general economic environment and competitiveconditions, such as pricing;

·                  the timing of procurement cycles by our business,government and educational institution customers;

·                  seasonality in consumer spending;

·                  the frequency of our catalog mailings,introduction or discontinuation of new catalogs;

·                  variability in vendor programs;

·                  the introduction of new products orservices by us and our competitors;

·                  changes in prices from our suppliers;

·                  promotions;

·                  the loss or consolidation of significantsuppliers or customers;

 

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·                  our ability to control costs;

·                  the timing of our capital expenditures;

·                  the condition of our industry in general;

·                  seasonal shifts in demand for computerand electronics products;

·                  industry announcements and marketacceptance of new products or upgrades;

·                  deferral of customer orders inanticipation of new product applications;

·                  product enhancements or operatingsystems;

·                  the relative mix of products sold duringthe period;

·                  any inability on our part to obtainadequate quantities of products carried in our catalogs;

·                  delays in the release by suppliers of newproducts and inventory adjustments;

·                  our expenditures on new business venturesand acquisitions;

·                  performance of acquired businesses;

·                  adverse weather conditions that affectresponse;

·                  distribution or shipping to ourcustomers; and

·                  geopolitical events.

 

Our planned operating expenditures each quarter arebased on sales forecasts for the quarter. If our sales do not meet expectationsin any given quarter, our operating results for the quarter may be materiallyadversely affected. Our narrow gross margins may magnify the impact of thesefactors on our operating results. We believe that period-to-period comparisons ofour operating results are not necessarily a good indication of our futureperformance. In addition, our results in any quarterly period are notnecessarily indicative of results to be expected for a full fiscal year. Infuture quarters, our operating results may be below the expectations of publicmarket analysts or investors and as a result the market price of our commonstock could be materially adversely affected.

 

**The transition of our businessstrategy to increasingly focus on SMB, MME and Public Sector sales presentsnumerous risks and challenges, and may not improve****ourprofitability or result in expanded market share.**

 

An important element of our business strategy is toincreasingly focus on SMB, MME and Public Sector sales. In shifting our focus,we face numerous risks and challenges, including competition from a wider rangeof sources and an increased need to develop strategic relationships. We cannotassure you that our increased focus on SMB, MME and Public Sector sales willresult in expanded market share or increased profitability. Furthermore,revenue from our public sector business is derived from sales to federal, stateand local governmental departments and agencies, as well as to educationalinstitutions, through various contracts and open market sales. Governmentcontracting is a highly regulated area, and noncompliance with governmentprocurement regulations or contract provisions could result in civil, criminal,and administrative liability, including substantial monetary fines or damages,termination of government contracts, and suspension, debarment or ineligibilityfrom doing business with the government. The effect of any of these possibleactions by any governmental department or agency with which we contract couldadversely affect our business and results of operations. Moreover, contractingwith governmental departments and agencies involves additional risks, such aslonger payment terms, limited recourse against the government agency in theevent of a business dispute, the potential lack of a limitation of ourliability for damages from our provision of services to the department oragency, and the potential for changes in statutory or regulatory provisionsthat negatively affect the profitability of such contracts.

 

**Our investments in our outboundphone-based sales force model may not improve****our profitabilityor result in expanded market share.**

 

We have made and are currently making efforts toincrease our market share by investing in training and retention of ouroutbound phone-based sales force. We have also incurred, and expect to continueto incur, significant expenses resulting from infrastructure investmentsrelated to our outbound phone-based sales force. We cannot assure you that anyof our investments in our outbound phone-based sales force will result inexpanded market share or increased profitability in the near or long term.

 

**Our financial performance could beadversely affected if we are not able to****retain and increasethe experience of our sales force or if we are not able to****maintain or increase their productivity.**

 

Our sales and operating results may be adverselyaffected if we are unable to increase the average tenure of our accountexecutives or if the sales volumes and profitability achieved by our accountexecutives do not increase with their increased experience.

 

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**Existing or future government and taxregulations could expose us to****liabilities orcostly changes in our business operations, and could reduce****demand for our products and services.**

 

Based upon current interpretations of existing law,certain of our subsidiaries currently collect and remit sales or use tax onlyon sales of products or services to residents of the states in which therespective subsidiaries have a physical presence or have voluntarily registeredfor sales tax collection. The U.S. Supreme Court has ruled that states, absentCongressional legislation, may not impose tax collection obligations on anout-of-state direct marketer whose only contacts with the taxing state aredistribution of catalogs and other advertisement materials through the mail,and whose subsequent delivery of purchased goods is by mail or interstatecommon carriers. However, we cannot predict the level of contact with any statewhich would give rise to future or past tax collection obligations.Additionally, it is possible that federal legislation could be enacted thatwould permit states to impose sales or use tax collection obligations onout-of-state direct marketers. Furthermore, court cases have upheld taxcollection obligations on companies, including mail order companies, whosecontacts with the taxing state were quite limited (e.g., visiting the stateseveral times a year to aid customers or to inspect stores stocking their goodsor to provide training or other support to customers in the state). States havealso successfully imposed sales and use tax collection responsibility uponin-state manufacturers that agree to act as a drop shipper for the out-of-statemarketer, giving rise to the risk that such taxes may be imposed indirectly onthe out-of-state seller. We believe our operations in states in which we haveno physical presence are different from the operations of the companies inthose cases and are thus not subject to the tax collection obligations imposedby those decisions. Various state laws, regulations and taxing authorities havesought to impose on direct marketers with no physical presence in the taxingstate the burden of collecting state sales and use taxes on the sale ofproducts shipped or services sold to those states’ residents, and it ispossible that such a requirement could be imposed in the future. For example,New York recently adopted an affiliate marketing statute and relatedregulations that impose sales and use tax collection obligations onout-of-state sellers that use certain web-based affiliate marketingrelationships with web-based affiliates deemed to be located in New York. Otherstates such as California, Connecticut, Hawaii and Minnesota have proposedsimilar legislation. There can be no assurance that existing or future lawsthat impose taxes or other regulations on direct marketing or Internet commercewould not substantially impair our growth or otherwise have a material adverse effecton our business, results or operations and financial condition.

 

In addition, we and our subsidiaries may be subject tostate or local taxes on income or (in states such as Kentucky, Michigan, Ohio,Texas or Washington) on gross receipts earned in a state even though we and oursubsidiaries may have no physical presence in the state. State and localgovernments may seek to impose such taxes in cases where they believe thetaxpayer may have a significant economic presence by reason of significant salesto customers located in the states. The responsibility to pay income and grossreceipts taxes has also been the subject of court actions and variouslegislative efforts. There can be no assurance that these taxes will not beimposed upon us and our subsidiaries.

 

Furthermore, we are subject to general business lawsand regulations, as well as laws and regulations specifically governingcompanies that do business over the Internet. These laws and regulations maycover taxation of eCommerce, user privacy, marketing and promotional practices(including electronic communications with our customers and potentialcustomers), database protection, pricing, content, copyrights, distribution,electronic contracts and other communications, consumer protection, productsafety, the provision of online payment services, copyrights, patents and otherintellectual property rights, data security, unauthorized access (including theComputer Fraud and Abuse Act), and the characteristics and quality of productsand services. While we have sought to implement processes, programs and systemsin an effort to achieve compliance with existing laws and regulationsapplicable to our business, many of these laws and regulations are unclear andhave yet to be interpreted by courts, or may be subject to conflictinginterpretations by courts. Further, no assurances can be given that new laws orregulations will not be enacted or adopted, or that our processes, programs andsystems will be sufficient to comply with present or future laws orregulations, which might adversely affect our operations.

 

Such existing and future laws and regulations may alsoimpede the growth of the Internet or other online services, including ourbusiness. Additionally, it is not always clear how existing laws andregulations governing issues such as property ownership, sales and other taxes,libel, trespass, data mining and collection, data security and personalprivacy, among other laws, apply to the Internet and eCommerce. Unfavorableresolution of these issues may expose us to liability and costly changes in ourbusiness operations, and could reduce customer demand for our products.

 

The growth and demand for online commerce has and maycontinue to result in more stringent consumer protection laws that imposeadditional compliance burdens on online companies. These consumer protection lawscould result in substantial compliance costs and could decrease ourprofitability. For example, data security laws are becoming more widespread andburdensome in the United States, and increasingly require notification ofaffected individuals and, in some instances, regulators. Moreover, thirdparties are engaging in increased cyber-attacks against companies doingbusiness on the Internet, and individuals are increasingly subjected toidentity and credit card theft on the Internet. There is a risk that we mayfail to prevent such activities and that our customers or others may assertclaims against us. In addition, the FTC and state consumer protectionauthorities have brought a number of enforcement actions against U.S. companiesfor alleged deficiencies in those companies’ data security practices, and theymay continue to bring such actions. Enforcement actions, which may or may notbe based upon actual cyber attacks or other breaches in such companies’ datasecurity, present an ongoing risk to us, could result in a loss of users andcould damage our reputation. Further, additional regulation of the Internet maylead to a decrease in Internet usage, which could adversely affect ourbusiness.

 

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Growing public concern about privacy and thecollection, distribution and use of information about individuals may subjectus to increased regulatory scrutiny or litigation. In the past, the FTC hasinvestigated companies that have used personally identifiable informationwithout permission or in violation of a stated privacy policy. If we areaccused of violating the stated terms of our privacy policy, we may face a lossof users and damage to our reputation and be forced to expend significantamounts of financial and managerial resources to defend against theseaccusations and we may face potential liability as well as extended regulatoryoversight in the form of a long-term consent order.

 

Additionally, although historically only a smallpercentage of our total sales in any given quarter or year are made tocustomers outside of the continental United States, there is a possibility thata foreign jurisdiction may take the position that our business is subject toits laws and regulations, which could impose restrictions or burdens on us andexpose us to tax and other potential liabilities and could also require costlychanges to our business operations with respect to those jurisdictions.

 

**Part of our business strategyincludes the acquisition of other companies, and****we may havedifficulties integrating acquired companies into our operations in****a cost-effective manner, if at all**.

 

One element of our business strategy involvesexpansion through the acquisition of businesses, assets, personnel ortechnologies that allow us to complement our existing operations, expand ourmarket coverage, or add new business capabilities. We continually evaluate andexplore strategic opportunities as they arise, including business combinationtransactions, strategic partnerships, and the purchase or sale of assets. Ouracquisition strategy depends on the availability of suitable acquisitioncandidates at reasonable prices and our ability to resolve challengesassociated with integrating acquired businesses into our existing business. Noassurance can be given that the benefits or synergies we may expect from theacquisition of companies or businesses will be realized to the extent or in thetime frame we anticipate. We may lose key employees, customers, distributors,vendors and other business partners of the companies we acquire following andcontinuing after announcement of acquisition plans. In addition, acquisitionsmay involve a number of risks and difficulties, including expansion into newgeographic markets and business areas, the diversion of management’s attentionto the operations and personnel of the acquired company, the integration of theacquired company’s personnel, operations and management information (ERP)systems, changing relationships with customers, suppliers and strategicpartners, and potential short-term adverse effects on our operating results.These challenges can be magnified as the size of the acquisition increases. Anydelays or unexpected costs incurred in connection with the integration ofacquired companies or otherwise related to the acquisitions could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

Acquisitions may require large one-time charges andcan result in increased debt or other contingent liabilities, adverse taxconsequences, deferred compensation charges, the recording and lateramortization of amounts related to deferred compensation and certain purchasedintangible assets, and the refinement or revision of fair value acquisitionestimates following the completion of acquisitions, any of which items couldnegatively impact our business, financial condition and results of operations.In addition, we may record goodwill in connection with an acquisition and incurgoodwill impairment charges in the future. Any of these charges could cause theprice of our common stock to decline.

 

An acquisition could absorb substantial cashresources, require us to incur or assume debt obligations, or involve ourissuance of additional equity securities. If we issue equity securities inconnection with an acquisition, we may dilute our common stock with securitiesthat have an equal or a senior interest in our company. If we incur additionaldebt to pay for an acquisition, it may significantly reduce amounts that wouldotherwise be available under our credit facility, increase our interestexpense, leverage and debt service requirements and could negatively impact ourability to comply with applicable financial covenants in our credit facility orlimit our ability to obtain credit from our vendors. Acquired entities also maybe highly leveraged or dilutive to our earnings per share, or may have unknownliabilities. In addition, the combined entity may have lower revenues or higherexpenses and therefore may not achieve the anticipated results. Any of thesefactors relating to acquisitions could have a material adverse impact on ourbusiness, financial condition and results of operations.

 

We cannot assure you that we will be able toconsummate any pending or future acquisitions or that we will realize anyanticipated benefits from these acquisitions. We may not be able to findsuitable acquisition opportunities that are available at attractive valuations,if at all. Even if we do find suitable acquisition opportunities, we may not beable to consummate the acquisitions on commercially acceptable terms, and anydecline in the price of our common stock may make it significantly moredifficult and expensive to initiate or consummate additional acquisitions. Wecannot assure you that we will be able to implement or sustain our acquisitionstrategy or that our strategy will ultimately prove profitable.

 

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**If goodwill or intangible assetsbecome impaired, we may be required****to record asignificant charge to earnings.**

 

The purchase price allocation for our historicalacquisitions resulted in a material amount allocated to goodwill and intangibleassets. In accordance with GAAP, we review our intangible assets for impairmentwhen events or changes in circumstances indicate the carrying value may not berecoverable. We review the fair values of our goodwill and intangible assetswith indefinite useful lives and test them for impairment annually or wheneverevents or changes in circumstances indicate an impairment may have occurred.Factors that may be considered a change in circumstances indicating that thecarrying value of our goodwill or intangible assets may not be recoverableinclude a decline in stock price and market capitalization, reduced future cashflow estimates, and slower growth rates in our industry. We may be required torecord a significant non-cash charge to earnings in our consolidated financialstatements during the period in which any impairment of our goodwill orintangible assets is determined, which could have a material adverse effect onour results of operations.

 

Significant negative industry or economic trends,including decreases in our market capitalization, slower growth rates or lackof growth in our business, resulted in write-downs and impairment charges infiscal 2008. While no such write-downs or charges occurred in fiscal 2009, ifsuch occur in the future it may indicate that additional impairment charges arerequired. If we are required to record additional impairment charges, thiscould have a material adverse affect on our consolidated financial statements.In addition, the testing of goodwill for impairment requires us to makesignificant estimates about the future performance and cash flows of ourcompany, as well as other assumptions. These estimates can be affected bynumerous factors, including changes in economic, industry or market conditions,changes in underlying business operations, future reporting unit operatingperformance, existing or new product market acceptance, changes in competition,or changes in technologies. Any changes in key assumptions, or actualperformance compared with those assumptions, about our business and futureprospects or other assumptions could affect the fair value of one or morereporting units, resulting in an impairment charge.

 

**We may not be able to maintainprofitability on a quarterly or annual basis.**

 

Our ability to maintain profitability on a quarterlyor annual basis given our planned business strategy depends upon a number offactors, including, but not limited to, our ability to achieve and maintainvendor relationships, procure merchandise and fulfill orders in an efficientmanner, leverage our fixed cost structure, maintain adequate levels of vendorconsideration and price protection, maintain a well-balanced product andcustomer mix, maintain customer acquisition costs and shipping costs atacceptable levels, and our ability to effectively compete in the marketplacewith our competitors. Our ability to maintain profitability on a quarterly orannual basis will also depend on our ability to manage and control operatingexpenses and to generate and sustain adequate levels of revenue. Many of ourexpenses are fixed in the short term, and we may not be able to quickly reducespending if our revenue is lower than what we project. In addition, we may findthat our business plan costs more to execute than what we currently anticipate.Some of the factors that affect our ability to maintain profitability on aquarterly or annual basis are beyond our control, including general economictrends and uncertainties.

 

**The effect of accounting rules forstock-based compensation may materially****adversely affectour consolidated operating results, our stock price and our****ability to hire, retain and motivate employees.**

 

We use employee stock options and other stock-basedcompensation to hire, retain and motivate certain of our employees. Currentaccounting rules require us to measure compensation costs for allstock-based compensation (including stock options) at fair value as of the dateof grant and to recognize these costs as expenses in our consolidatedstatements of operations. The recognition of non-cash stock-based compensationexpenses in our consolidated statements of operations has had and will likelycontinue to have a negative effect on our consolidated operating results,including our net income and earnings per share, which could negatively impactour stock price. Additionally, if we reduce or alter our use of stock-basedcompensation to reduce these expenses and their impact, our ability to hire,motivate and retain certain employees could be adversely affected and we mayneed to increase the cash compensation we pay to these employees.

 

**Our operating results are difficultto predict and may adversely affect our****stock price.**

 

Our operating results have fluctuated in the past andare likely to vary significantly in the future based upon a number of factors,many of which we cannot control. We operate in a highly dynamic industry andfuture results could be subject to significant fluctuations. These fluctuationscould cause us to fail to meet or exceed financial expectations of investors oranalysts, which could cause our stock price to decline rapidly and significantly.Revenue and expenses in future periods may be greater or less than revenue andexpenses in the immediately preceding period or in the comparable period of theprior year. Therefore, period-to-period comparisons of our operating resultsare not necessarily a good indication of our future performance. Some of thefactors that could cause our operating results to fluctuate include:

 

·             theamount and timing of operating costs and capital expenditures relating to anyexpansion of our business operations and infrastructure;

 

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·             pricecompetition that results in lower sales volumes, lower profit margins, or netlosses;

 

·             fluctuationsin mail-in rebate redemption rates;

 

·             theamount and timing of advertising and marketing costs;

 

·             ourability to successfully integrate operations and technologies from any past orfuture acquisitions or other business combinations;

 

·             revisionsor refinements of fair value estimates relating to acquisitions or otherbusiness combinations;

 

·             changesin the number of visitors to our websites or our inability to convert thosevisitors into customers;

 

·             technicaldifficulties, including system or Internet failures;

 

·             fluctuationsin the demand for our products or overstocking or under-stocking of ourproducts;

 

·             introductionof new or enhanced services or products by us or our competitors;

 

·             fluctuationsin shipping costs, particularly during the holiday season;

 

·             changesin the amounts of information technology spending by SMB, MME, Public Sectorand MacMall segment customers;

 

·             economicconditions;

 

·             changesin the mix of products that we sell; and

 

·             fluctuationsin levels of inventory theft, damage or obsolescence that we incur.

 

**If we fail to accurately predict ourinventory risk, our gross margins may****decline as a resultof required inventory write downs due to lower prices****obtained from older or obsolete products.**

 

We derive a significant amount of our gross sales fromproducts sold out of inventory at our distribution facilities. We assume theinventory damage, theft and obsolescence risks, as well as price erosion risksfor products that are sold out of inventory stocked at our distributionfacilities. These risks are especially significant because many of the productswe sell are characterized by rapid technological change, obsolescence and priceerosion (e.g., computer hardware, software and consumer electronics), andbecause our distribution facilities sometimes stock large quantities ofparticular types of inventory. There can be no assurance that we will be ableto identify and offer products necessary to remain competitive, maintain ourgross margins, or avoid or minimize losses related to excess and obsoleteinventory. We currently have limited return rights with respect to products wepurchase from Apple, HP, Lenovo, and certain other vendors, but these rightsvary by product line, are subject to specified conditions and limitations, andcan be terminated or changed at any time.

 

**We may need additional financingand may not be able to raise additional financing on favorable terms or at all,which could increase our costs, limit our ability to grow and dilute theownership interests of existing stockholders.**

 

We require substantial working capital to fund ourbusiness. We believe that our current working capital, including our existingcash balance, together with our expected future cash flows from operations andavailable borrowing capacity under our existing credit facility, whichfunctions as a working capital line of credit, will be adequate to support ourcurrent operating plans for at least the next twelve months. However, if weneed additional financing, such as for acquisitions or expansion or to financeour operations during a significant downturn in sales or an increase inoperating expenses, there are no assurances that adequate financing will beavailable on acceptable terms, if at all. We may in the future seek additionalfinancing from public or private debt or equity financings to fund additionalexpansion, or take advantage of opportunities or favorable market conditions.There can be no assurance such financings will be available on terms favorableto us or at all. To the extent any such financings involve the issuance ofequity securities, existing stockholders could suffer dilution. If we raiseadditional financing through the issuance of equity, equity-related or debtsecurities, those securities may have rights, preferences or privileges seniorto those of the rights of our common stock and our stockholders will experiencedilution of their ownership interests. If additional financing is required butnot available, we would have to implement further measures to conserve cash andreduce costs. However, there is no assurance that such measures would besuccessful. Our failure to raise required additional financing could adverselyaffect our ability to maintain, develop or enhance our product offerings, takeadvantage of future opportunities, respond to competitive pressures or continueoperations.

 

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Our existing credit facility contains terms that aremore favorable to us than terms that we believe would otherwise be available tous in the current credit market environment. We have been informed by theadministrative agent for the facility that any amendment, modification, waiver,consent or other change we may seek with regard to our facility will result inthe renegotiation of the terms of the facility and that any such renegotiatedterms would likely include terms less favorable to us, such as the addition ofstricter financial covenants and less favorable interest rate terms. Such limitationscould adversely affect our ability to pursue certain acquisitions and otherstrategic transactions which would require an amendment or consent under theexisting credit facility. Additionally, if market conditions have not improvedby the time our current credit facility expires in 2011, we expect that any newfacility, to the extent available to us at such time, would be on terms lessfavorable to us than our existing credit facility.

 

There has beensignificant ongoing weakness in the global economic environment, coupled withdisruptions in the capital and credit markets. Continued problems in theseareas could have a negative impact on our ability to obtain financing if weneed additional funds, such as for acquisitions or expansion, to fund a significantdownturn in our sales or an increase in our operating expenses, or to takeadvantage of opportunities or favorable market conditions, in the future. Tothe extent we seek additional financing from public or private debt or equityissuances, there can be no assurance that such financing will be available atacceptable terms, if at all. There can be no assurance that the cost oravailability of future borrowings, if any, under our credit facility or in thedebt markets will not be impacted by disruptions or continued weakness in thecapital and credit markets.

 

**Rising interest rates couldnegatively impact our results of operations and****financialcondition.**

 

A significant portion of our working capitalrequirements has historically been funded through borrowings under our creditfacility, which functions as a working capital line of credit and bearsinterest at variable rates, tied to the LIBOR or prime rate. In connection withand as part of the line of credit, we also entered into a term note, bearinginterest at the same rate as our credit facility. If the variable interestrates on our line of credit and term note increase, we could incur greaterinterest expense than we have in the past. Rising interest rates, and ourincreased interest expense that would result from them, could negatively impactour results of operations and financial condition.

 

**We may be subject to claims regardingour intellectual property, including our****business processes,or the products we sell, any of which could result in****expensive litigation, distract our management or forceus to enter into costly****royalty orlicensing agreements.**

 

Third parties have asserted, and may in the futureassert, that our business or the technologies we use infringe on theirintellectual property rights. As a result, we may be subject to intellectualproperty legal proceedings and claims in the ordinary course of our business.We cannot predict whether third parties will assert additional claims ofinfringement against us in the future or whether any future claims will preventus from offering popular products or operating our business as planned. If weare forced to defend against any third-party infringement claims, whether theyare with or without merit or are determined in our favor, we could faceexpensive and time-consuming litigation, which could result in the impositionof a preliminary injunction preventing us from continuing to operate ourbusiness as currently conducted throughout the duration of the litigation ordistract our technical and management personnel. If we are found to infringe,we may be required to pay monetary damages, which could include treble damagesand attorneys’ fees for any infringement that is found to be willful, andeither be enjoined or required to pay ongoing royalties with respect to anytechnologies found to infringe. Further, as a result of infringement claimseither against us or against those who license technology to us, we may berequired, or deem it advisable, to develop non-infringing technology, which couldbe costly and time consuming, or enter into costly royalty or licensingagreements. Such royalty or licensing agreements, if required, may beunavailable on terms that are acceptable to us, or at all. If a third partysuccessfully asserts an infringement claim against us and we are enjoined orrequired to pay monetary damages or royalties or we are unable to developsuitable non-infringing alternatives or license the infringed or similartechnology on reasonable terms on a timely basis, our business, results ofoperations and financial condition could be materially harmed. Similarly, wemay be required incur substantial monetary and diverted resource costs in orderto protect our intellectual property rights against infringement by others.

 

Furthermore, we sell products manufactured anddistributed by third parties, some of which may be defective. If any productthat we sell were to cause physical injury or damage to property, the injuredparty or parties could bring claims against us as the retailer of the product.Our insurance coverage may not be adequate to cover every claim that could beasserted. If a successful claim were brought against us in excess of ourinsurance coverage, it could expose us to significant liability. Evenunsuccessful claims could result in the expenditure of funds and managementtime and could decrease our profitability.

 

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**Costs and other factors associatedwith pending or future litigation could****materially harm ourbusiness, results of operations and financial condition.**

 

From time to time we receive claims and become subjectto litigation, including consumer protection, employment, intellectual propertyand other litigation related to the conduct of our business. Additionally, wemay from time to time institute legal proceedings against third parties toprotect our interests. Any litigation that we become a party to could be costlyand time consuming and could divert our management and key personnel from ourbusiness operations. In connection with any such litigation, we may be subjectto significant damages or equitable remedies relating to the operation of ourbusiness and could incur significant costs in asserting, defending, or settlingany such litigation. We cannot determine with any certainty the costs oroutcome of pending or future litigation. Any such litigation may materiallyharm our business, results of operations and financial condition.

 

**We may fail to expand our product,services and solutions categories and offerings, our websites****or****our processing systemsin a cost-effective and timely manner as may be required****toefficiently operate our business.**

 

We may be required to expand or change our product,services and solutions categories or offerings, our websites or our processingsystems in order to compete in our highly competitive and rapidly changingindustry or to efficiently operate our business. Any failure on our part toexpand or change the way we do business in a cost-effective and timely mannerin response to any such requirements would likely adversely affect ouroperating results, financial condition and future prospects. Additionally, wecannot assure you that we will be successful in implementing any such changeswhen and if they are required.

 

We have generated substantial portions of our revenuein the past from the sale of computer hardware, software and accessories andconsumer electronics products. Expansion into new product, service andsolutions categories may require us to incur significant marketing expenses,develop relationships with new vendors and comply with new regulations. We maylack the necessary expertise in a new category to realize the expected benefitsof that new category. These requirements could strain our managerial, financialand operational resources. Additional challenges that may affect our ability toexpand into new product, service or solutions categories include our abilityto:

 

·             establishor increase awareness of our new brands and product, service and solutionscategories;

 

·             acquire,attract and retain customers at a reasonable cost;

 

·             achieveand maintain a critical mass of customers and orders across all of our productcategories;

 

·             attracta sufficient number of new customers to whom any new categories and offerings aretargeted;

 

·             successfullymarket our new categories or offerings to existing customers;

 

·             maintainor improve our gross margins and fulfillment costs;

 

·             attractand retain vendors to provide expanded lines of products, services or solutionsto our customers on terms that are acceptable to us; and

 

·             manageour inventory in new product categories.

 

We cannot be certain that we will be able tosuccessfully address any or all of these challenges in a manner that willenable us to expand our business into new product categories in acost-effective or timely manner. If our new categories of products or servicesare not received favorably, or if our suppliers fail to meet our customers’expectations, our results of operations would suffer and our reputation and thevalue of the applicable new brand and our other brands could be damaged. Thelack of market acceptance of our new product categories or our inability togenerate satisfactory revenue from any expanded product categories to offsettheir cost could harm our business.

 

**We may not be able to attract andretain key personnel such as senior****management andinformation technology specialists.**

 

Our future performance will depend to a significantextent upon the efforts and abilities of certain key management and otherpersonnel, including Frank F. Khulusi, our Chairman of the Board, President andChief Executive Officer, as well as other executive officers and seniormanagement. The loss of service of one or more of our key management memberscould have a material adverse effect on our business. Our success and plans forfuture growth will also depend in part on our 

 

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management’s continuing ability to hire, train andretain skilled personnel in all areas of our business. For example, ourmanagement information systems and processes require the services of employeeswith extensive knowledge of these systems and processes and the businessenvironment in which we operate, and in order to successfully implement andoperate our systems and processes we must be able to attract and retain asignificant number of information technology specialists. We may not be able toattract, train and retain the skilled personnel required to, among otherthings, implement, maintain, and operate our information systems and processes,and any failure to do so would likely have a material adverse effect on ouroperations.

 

**If we fail to achieve and maintainadequate internal controls, we may not be****able to producereliable financial reports in a timely manner or prevent****financial fraud.**

 

We monitor and periodically test our internal controlprocedures. We may from time to time identify deficiencies which we may not beable to remediate in a timely or cost-effective manner. In addition, if we failto achieve and maintain the adequacy of our internal controls, we may not beable to ensure that we can conclude on an ongoing basis that we have effectiveinternal controls over financial reporting. Effective internal controls,particularly those related to revenue recognition, are necessary for us toproduce reliable financial reports and are important in helping preventfinancial fraud. If we cannot provide reliable financial reports on a timelybasis or prevent financial fraud, our business and operating results could beharmed, investors could lose confidence in our reported financial information,and the trading price of our stock could drop significantly.

 

**Any inability to effectively manageour growth may prevent us from successfully****expanding ourbusiness.**

 

The growth of our business has required us to makesignificant additions in personnel and has significantly increased our workingcapital requirements. Although we have experienced significant sales growth inthe past, such growth should not be considered indicative of future salesgrowth. Such growth has resulted in new and increased responsibilities for ourmanagement personnel and has placed and continues to place significant strainupon our management, operating and financial systems, and other resources. Anyfuture growth, whether organic or through acquisition, may result in increasedstrain. There can be no assurance that current or future strain will not have amaterial adverse effect on our business, financial condition, and results ofoperations, nor can there be any assurance that we will be able to attract orretain sufficient personnel to continue the expansion of our operations. Alsocrucial to our success in managing our growth will be our ability to achieveadditional economies of scale. We cannot assure you that we will be able toachieve such economies of scale, and the failure to do so could have a materialadverse effect upon our business, financial condition and results ofoperations.

 

**Our advertising and marketing effortsmay be costly and may not achieve desired****results.**

 

We incur substantial expense in connection with ouradvertising and marketing efforts. Postage represents a significant expense forus because we generally mail our catalogs to current and potential customersthrough the U.S. Postal Service. Any future increases in postal rates willincrease our mailing expenses and could have a material adverse effect on ourbusiness, financial condition and results of operations. We also incursignificant expenses related to purchasing the paper we use in printing ourcatalogs. The cost of paper has fluctuated over the last several years, and mayincrease in the future. We believe that we may be able to recoup a portion ofany increased postage and paper costs through increases in vendor advertisingrates, but no assurance can be given that any efforts we may undertake tooffset all or a portion of future increases in postage, paper and otheradvertising and marketing costs through increases in vendor advertising rateswill be successful or sustained, or that they will offset all of the increasedcosts. Furthermore, although we target our advertising and marketing efforts oncurrent and potential customers who we believe are likely to be in the marketfor the products we sell, we cannot assure you that our advertising andmarketing efforts will achieve our desired results. In addition, weperiodically adjust our advertising expenditures in an effort to optimize thereturn on such expenditures. Any decrease in the level of our advertisingexpenditures which may be made to optimize such return could adversely affectour sales.

 

**We are exposed to the credit risk ofsome of our customers and to credit exposures in weakened markets, which couldnegatively impact our business, operating results and financial condition.**

 

Business customers who qualify are provided creditterms and while we monitor individual customer payment capability and maintainreserves we believe are adequate to cover exposure for doubtful accounts, wehave exposure to credit risk in the event that customers fail to meet theirpayment obligations. Additionally, to the degree that the ongoing tightness inthe credit markets makes it more difficult for some customers to obtainfinancing, those customers’ ability to meet their payment obligations to uscould be adversely impacted, which in turn could have a material adverse impacton our business, operating results, and financial condition.

 

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**Increased product returns or afailure to accurately predict product returns****could decrease ourrevenue and impact profitability.**

 

We make allowances for product returns in ourconsolidated financial statements based on historical return rates. We areresponsible for returns of certain products ordered through our catalogs andwebsites from our distribution center, as well as products that are shipped toour customers directly from our vendors. If our actual product returnssignificantly exceed our allowances for returns, our revenue and profitabilitycould decrease. In addition, because our allowances are based on historicalreturn rates, the introduction of new merchandise categories, new products,changes in our product mix, or other factors may cause actual returns to exceedreturn allowances, perhaps significantly. In addition, any policies that weadopt that are intended to reduce the number of product returns may result incustomer dissatisfaction and fewer repeat customers.

 

**Our business may be harmed byfraudulent activities on our websites, including****fraudulent creditcard transactions.**

 

We have received in the past, and anticipate that wewill receive in the future, communications from customers due to purportedfraudulent activities on our websites, including fraudulent credit cardtransactions. Negative publicity generated as a result of fraudulent conduct bythird parties could damage our reputation and diminish the value of our brandname. Fraudulent activities on our websites could also subject us to losses andcould lead to scrutiny from lawmakers and regulators regarding the operation ofour websites. We expect to continue to receive requests from customers forreimbursement due to purportedly fraudulent activities or threats of legalaction against us if no reimbursement is made.

 

**We may be liable for misappropriationof our customers’ personal information.**

 

If third parties or our employees are able topenetrate our network security or otherwise misappropriate our customers’personal information or credit card information, or if we give third parties orour employees improper access to our customers’ personal information or creditcard information, we could be subject to liability. This liability couldinclude claims for unauthorized purchases with credit card information,identity theft or other similar fraud-related claims. This liability could alsoinclude claims for other misuses of personal information, including forunauthorized marketing purposes. Other liability could include claims allegingmisrepresentation or our privacy and data security practices. Any suchliability for misappropriation of this information could decrease ourprofitability. In addition, the Federal Trade Commission and state agencieshave been investigating various Internet companies regarding whether theymisused or inadequately secured personal information regarding consumers. Wecould incur additional expenses if new laws or regulations regarding the use ofpersonal information are introduced or if government agencies investigate our privacypractices.

 

We seek to rely on encryption and authenticationtechnology licensed from third parties to provide the security andauthentication necessary to effect secure online transmission of confidentialinformation such as customer credit card numbers. Advances in computercapabilities, new discoveries in the field of cryptography or other events ordevelopments may result in a compromise or breach of the algorithms that we useto protect sensitive customer transaction data. A party who is able tocircumvent our security measures could misappropriate proprietary informationor cause interruptions in our operations. We may be required to expendsignificant capital and other resources to protect against such securitybreaches or to alleviate problems caused by such breaches. Our securitymeasures are designed to protect against security breaches, but our failure toprevent such security breaches could cause us to incur significant expense toinvestigate and respond to a security breach and correct any problems caused byany breach, subject us to liability, damage our reputation and diminish thevalue of our brand-name.

 

**Laws or regulations relating toprivacy and data protection may adversely****affect the growthof our Internet business or our marketing efforts.**

 

We mail catalogs and send electronic messages to namesin our proprietary customer database and to potential customers whose names weobtain from rented or exchanged mailing lists. Worldwide public concernregarding personal privacy has subjected the rental and use of customer mailinglists and other customer information to increased scrutiny and regulation. As aresult, we are subject to increasing regulation relating to privacy and the useof personal information. For example, we are subject to various telemarketingand anti-spam laws that regulate the manner in which we may solicit futuresuppliers and customers. Such regulations, along with increased governmental orprivate enforcement, may increase the cost of operating and growing our business.In addition, several states have proposed legislation that would limit the usesof personal information gathered online or require online services to establishprivacy policies. The Federal Trade Commission has adopted regulationsregarding the collection and use of personal identifying information obtainedfrom children under 13 years of age. Bills proposed in Congress would expandonline privacy protections already provided to adults. Moreover, both in theUnited States and elsewhere, laws and regulations are becoming increasinglyprotective of consumer privacy, with a trend toward requiring companies toestablish procedures to notify users of privacy and security policies, toobtain consent from users for collection and use of personal information, andto provide users with the ability to access, correct and delete personalinformation stored by companies. Such privacy and data protection laws andregulations, and efforts to enforce such laws and regulations, may restrict ourability to collect, use or transfer demographic and personal information fromusers, which could be costly or harm our marketing efforts. Further, anyviolation of domestic or foreign privacy or data protection laws andregulations, including the national do-not-call list, may subject us to fines,penalties and damages, which could decrease our revenue and profitability.

 

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**The security risks of eCommerce maydiscourage customers from purchasing goods****from us.**

 

In order for the eCommerce market to be successful, weand other market participants must be able to transmit confidential informationsecurely over public networks. Third parties may have the technology orknow-how to breach the security of customer transaction data. Any breach couldcause customers to lose confidence in the security of our websites and choosenot to purchase from our websites. If someone is able to circumvent oursecurity measures, he or she could destroy or steal valuable information ordisrupt our operations. Concerns about the security and privacy of transactionsover the Internet could inhibit the growth of Internet usage and eCommerce. Oursecurity measures may not effectively prohibit others from obtaining improperaccess to our information. Any security breach could expose us to risks ofloss, litigation and liability and could seriously damage our reputation,disrupt our operations and require the devotion of significant management,financial and other resources to remedy the breach and comply with applicablenotice and other legal requirements in connection therewith.

 

**Credit card fraud could decrease ourrevenue and profitability.**

 

We do not carry insurance against the risk of creditcard fraud, so the failure to adequately control fraudulent credit cardtransactions could reduce our revenues or increase our operating costs. We mayin the future suffer losses as a result of orders placed with fraudulent creditcard data even though the associated financial institution approved payment ofthe orders. Under current credit card practices, we may be liable forfraudulent credit card transactions. If we are unable to detect or controlcredit card fraud, or if credit card companies require more burdensome terms orrefuse to accept credit card charges from us, our revenue and profitabilitycould decrease.

 

**Our facilities and systems arevulnerable to natural disasters or other catastrophic events.**

 

Our headquarters, customer service center and themajority of our infrastructure, including computer servers, are located nearLos Angeles, California in an area that is susceptible to earthquakes and othernatural disasters. Our distribution facilities, which are located in Memphis,Tennessee, Irvine, California, and Lewis Center, Ohio, house the productinventory from which a substantial majority of our orders are shipped, and arealso in areas that are susceptible to natural disasters and extreme weatherconditions such as earthquakes, fire, floods and major storms. Our operationsin the Philippines are also in an area that is periodically subject to extremeweather. A natural disaster or other catastrophic event, such as an earthquake,fire, flood, severe storm, break-in, terrorist attack or other comparableevents in the areas in which we operate could cause interruptions or delays inour business and loss of data or render us unable to accept and fulfillcustomer orders in a timely manner, or at all. Our systems, including ourmanagement information systems, websites and telephone system, are not fullyredundant, and we do not have redundant geographic locations or earthquakeinsurance. Further, California periodically experiences power outages as aresult of insufficient electricity supplies. These outages may recur in thefuture and could disrupt our operations. We currently have no formal disasterrecovery plan and our business interruption insurance may not adequatelycompensate us for losses that may occur.

 

**We rely on independent shippingcompanies to deliver the products we sell.**

 

We rely upon third party carriers, especially FedExand UPS, for timely delivery of our product shipments. As a result, we aresubject to carrier disruptions and increased costs due to factors that arebeyond our control, including employee strikes, inclement weather and increasedfuel costs. Any failure to deliver products to our customers in a timely andaccurate manner may damage our reputation and brand and could cause us to losecustomers. We do not have a written long-term agreement with any of these thirdparty carriers, and we cannot be sure that these relationships will continue onterms favorable to us, if at all. If our relationship with any of these thirdparty carriers is terminated or impaired, or if any of these third parties areunable to deliver products for us, we would be required to use alternativecarriers for the shipment of products to our customers. We may be unable toengage alternative carriers on a timely basis or on terms favorable to us, ifat all. Potential adverse consequences include:

 

·             reducedvisibility of order status and package tracking;

 

·             delaysin order processing and product delivery;

 

·             increasedcost of delivery, resulting in reduced margins; and

 

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·             reducedshipment quality, which may result in damaged products and customerdissatisfaction.

 

Furthermore, shipping costs represent a significantoperational expense for us. Any future increases in shipping rates could have amaterial adverse effect on our business, financial condition and results of operations.

 

**We may not be able to competesuccessfully against existing or future competitors, which include some of ourlargest vendors.**

 

The business of direct marketing of computer hardware,software, peripherals and electronics is highly competitive, based primarily onprice, product availability, speed and accuracy of delivery, effectiveness ofsales and marketing programs, credit availability, ability to tailor specificsolutions to customer needs, quality and breadth of product lines and services,and availability of technical or product information. We compete with otherdirect marketers, including CDW, Insight Enterprises and PC Connection. Inaddition, we compete with large value added resellers such as CompuCom Systemsand World Wide Technology, and computer retail stores and resellers, includingsuperstores such as Best Buy and Staples, certain hardware and software vendorssuch as Apple and Dell Computer that sell or are increasing sales directly toend users, online resellers such as Amazon.com, Newegg.com and TigerDirect.com,government resellers such as GTSI, CDWG and GovConnection, software focusedresellers such as Soft Choice and Software House International and other directmarketers and value added resellers of hardware, software and computer-relatedand electronic products. In the direct marketing and Internet retailindustries, barriers to entry are relatively low and the risk of newcompetitors entering the market is high. Certain of our existing competitorshave substantially greater financial resources than we have. There can be noassurance that we will be able to continue to compete effectively againstexisting competitors, consolidations of competitors or new competitors that mayenter the market.

 

Furthermore, the manner in which our products andservices are distributed and sold is changing, and new methods of sale anddistribution have emerged and serve an increasingly large portion of themarket. Computer hardware and software vendors have sold, and may intensifytheir efforts to sell, their products directly to end users. From time to time,certain vendors, including Apple and HP, have instituted programs for thedirect sale of large quantities of hardware and software to certain largebusiness accounts. These types of programs may continue to be developed andused by various vendors. Vendors also may attempt to increase the volume ofsoftware products distributed electronically to end users’ personal computers.Any of these competitive programs, if successful, could have a material adverseeffect on our business, financial condition and results of operations.

 

**Our success is tied to the continueduse of the Internet and the adequacy of****the Internetinfrastructure.**

 

The level of sales generated from our websites, bothin absolute terms and as a percentage of our net sales, continues to bematerial to our operating results. Our Internet sales are dependent uponcustomers continuing to use the Internet in addition to traditional means ofcommerce to purchase products and services. Widespread use of the Internetcould decline as a result of disruptions, computer viruses, data securitythreats, privacy issues or other damage to Internet servers or users’computers. If consumer use of the Internet to purchase products or servicesdeclines in any significant way, our business, financial condition and resultsof operations could be adversely affected.

 

**The success of our Canadian callcenter is dependent, in part, on our receipt****of government laborcredits.**

 

We maintain a Canadian call center serving the U.S.market, which has historically received the benefit of labor credits under aCanadian government program. In 2007, we received an eligibility certificate toparticipate in the Investment Quebec Refundable Tax Credit for Major EmploymentGenerating Projects (GPCE), replacing the prior government subsidy programwhich ended at the end of 2007. In addition to other eligibility requirementsunder the replacement program, which extends through fiscal year 2016, we willbe required to maintain a minimum of 317 eligible employees employed by oursubsidiary PC Mall Canada, Inc. in the province of Quebec at all times toremain eligible to apply annually for these labor credits. The success of ourCanadian call center is dependent, in part, on our receipt of the governmentlabor credits we expect to receive. If we do not receive these expected laborcredits, or a sufficient portion of them, the costs of operating our Canadiancall center may exceed the benefits it provides us and our operating resultswould likely suffer.

 

**We are exposed to the risks ofbusiness and other conditions in the Asia****Pacific region.**

 

All or portions of certain of the products we sell areproduced, or have major components produced, in the Asia Pacific region. Weengage in U.S. dollar denominated transactions with U.S. divisions andsubsidiaries of companies located in that region as well. As a result, we maybe indirectly affected by risks associated with international events, includingeconomic and labor conditions, political instability, tariffs and taxes,availability of products, natural disasters and currency fluctuations in theU.S. dollar versus the regional currencies. In the past, countries in the AsiaPacific region have experienced volatility in their currency, banking andequity markets. Future volatility could adversely affect the supply and priceof the products we sell and their components and ultimately, our results ofoperations.

 

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In 2005, we opened an office in the Philippines inconnection with our cost reduction initiatives, and we may increase these andother offshore operations in the future. Establishing offshore operations mayentail considerable expense before we realize cost savings, if any, from theseinitiatives. Our limited operating history in the Philippines, as well as therisks associated with doing business overseas and international events, couldprevent us from realizing the expected benefits from our Philippines operationsor any other offshore operations that we establish.

 

**The increasing significance of ourforeign operations exposes us to risks that****are beyond ourcontrol and could affect our ability to operate successfully.**

 

In order to enhance the cost-effectiveness of ouroperations, we have increasingly sought to shift portions of our operations tojurisdictions with lower cost structures than that available in the UnitedStates The transition of even a portion of our business operations to newfacilities in a foreign country involves a number of logistical and technicalchallenges that could result in operational interruptions, which could reduceour revenues and adversely affect our business. We may encounter complicationsassociated with the set-up, migration and operation of business systems andequipment in a new facility. This could result in disruptions that could damageour reputation and otherwise adversely affect our business and results ofoperations.

 

To the extent that we shift any operations or laboroffshore to jurisdictions with lower cost structures, we may experiencechallenges in effectively managing those operations as a result of severalfactors, including time zone differences and regulatory, legal, cultural andlogistical issues. Additionally, the relocation of labor resources may have anegative impact on our existing employees, which could negatively impact ouroperations. If we are unable to effectively manage our offshore personnel andany other offshore operations, our business and results of operations could beadversely affected.

 

We cannot be certain that any shifts in our operationsto offshore jurisdictions will ultimately produce the expected cost savings. Wecannot predict the extent of government support, availability of qualifiedworkers, future labor rates, or monetary and economic conditions in anyoffshore locations where we may operate. Although some of these factors mayinfluence our decision to establish or increase our offshore operations, thereare inherent risks beyond our control, including:

 

·             politicaluncertainties;

 

·             wageinflation;

 

·             exposureto foreign currency fluctuations;

 

·             tariffsand other trade barriers; and

 

·             foreignregulatory restrictions and unexpected changes in regulatory environments.

 

We will likely be faced with competition in theseoffshore markets for qualified personnel, and we expect this competition toincrease as other companies expand their operations offshore. If the supply ofsuch qualified personnel becomes limited due to increased competition orotherwise, it could increase our costs and employee turnover rates. One or moreof these factors or other factors relating to foreign operations could resultin increased operating expenses and make it more difficult for us to manage ourcosts and operations, which could cause our operating results to decline andresult in reduced revenues.

 

**International operations expose us tocurrency exchange risk and we cannot****predict the effectof future exchange rate fluctuations on our business and****operating results.**

 

We have operation centers in Canada and thePhilippines that provide back-office administrative support and customerservice support. Our international operations are sensitive to currencyexchange risks. We have currency exposure arising from both sales and purchasesdenominated in foreign currencies, as well as intercompany transactions.Significant changes in exchange rates between foreign currencies in which wetransact business and the U.S. dollar may adversely affect our results ofoperations and financial condition. Historically, we have not entered into anyhedging activities, and, to the extent that we continue not to do so in thefuture, we may be vulnerable to the effects of currency exchange-ratefluctuations.

 

In addition, our international operations also exposeus to currency fluctuations as we translate the financial statements of ourforeign operations to the U.S. dollar. Although the effect of currencyfluctuations on our financial statements has not generally been material in thepast, there can be no guarantee that the effect of currency fluctuations willnot be material in the future.

 

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**We are subject to risks associatedwith consolidation****within our industry.**

 

Many computer resellers are consolidating operationsand acquiring or merging with other resellers, direct marketers and providersof information technology solutions to achieve economies of scale, expandedproduct and service offerings, and increased efficiency. The current industryreconfiguration and the trend towards consolidation could cause the industry tobecome even more competitive, further increase pricing pressures and make itmore difficult for us to maintain our operating margins or to increase ormaintain the same level of net sales or gross profit. Declining prices,resulting in part from technological changes, may require us to sell a greaternumber of products to achieve the same level of net sales and gross profit.Such a trend could make it more difficult for us to continue to increase ournet sales and earnings growth. In addition, growth in the informationtechnology market has slowed. If the growth rate of the information technologymarket were to further decrease, our business, financial condition andoperating results could be materially adversely affected.

 

**Our success is in part dependent onthe accuracy and proper utilization of our****managementinformation systems.**

 

Our ability to analyze data derived from ourmanagement information (ERP) systems, including our telephone system, toincrease product promotions, manage inventory and accounts receivablecollections, to purchase, sell and ship products efficiently and on a timelybasis and to maintain cost-efficient operations, is dependent upon the qualityand utilization of the information generated by our management informationsystems. We regularly upgrade our management information system hardware andsoftware to better meet the information requirements of our users, and believethat to remain competitive, it will be necessary for us to upgrade ourmanagement information systems on a regular basis in the future. We currentlyoperate our management information systems using an HP3000 Enterprise Systemand are in the process of implementing a substantial upgrade to our ERP system.This implementation is complex, in part, because of the wide range of processesand the multiple legacy systems that must be integrated across our business. Wehave created a project plan that we believe provides a reasonable allocation ofresources to the project; however, execution of the plan, or a divergence fromit, may result in cost overruns, project delays, or business interruptions.Furthermore, any divergence from our project plan could affect the timingand/or extent of benefits we expect to achieve from the system and processefficiencies. Any disruptions, delays or deficiencies in the design andimplementation of the new ERP system, or in the performance of our legacysystems, particularly any disruptions, delays or deficiencies that impact ouroperations, could adversely affect our ability to effectively run and manageour business, including our ability to receive, process, ship and bill fororders in a timely manner. We do not currently have a redundant or back-uptelephone system, nor do we have complete redundancy for our managementinformation systems. Any interruption in our management information systems,including those caused by natural disasters, could have a material adverseeffect on our business, financial condition and results of operations.

 

**If we are unable to providesatisfactory customer service, we could lose****customers or failto attract new customers.**

 

Our ability to provide satisfactory levels of customerservice depends, to a large degree, on the efficient and uninterruptedoperation of our customer service operations. Any material disruption orslowdown in our order processing systems resulting from labor disputes,telephone or Internet failures, upgrading our management information systems,power or service outages, natural disasters or other events could make itdifficult or impossible to provide adequate customer service and support.Furthermore, we may be unable to attract and retain adequate numbers ofcompetent customer service representatives and relationship managers for ourbusiness customers, each of which is essential in creating a favorableinteractive customer experience. If we are unable to continually provideadequate staffing and training for our customer service operations, ourreputation could be seriously harmed and we could lose customers or fail toattract new customers. In addition, if our e-mail and telephone call volumesexceed our present system capacities, we could experience delays in placingorders, responding to customer inquiries and addressing customer concerns.Because our success depends largely on keeping our customers satisfied, anyfailure to provide high levels of customer service would likely impair ourreputation and decrease our revenues.

 

**Our stock price may be volatile.**

 

We believe that certain factors, such as sales of ourcommon stock into the market by existing stockholders, fluctuations in ourquarterly operating results, changes in market conditions affecting stocks ofcomputer hardware and software manufacturers and resellers generally andcompanies in the Internet and eCommerce industries in particular, could causethe market price of our common stock to fluctuate substantially. Other factorsthat could affect our stock price include, but are not limited to, thefollowing:

 

·             failureto meet investors’ expectations regarding our operating performance;

 

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·             changesin securities analysts’ recommendations or estimates of our financialperformance;

 

·             publicationof research reports by analysts;

 

·             changesin market valuations of similar companies;

 

·             announcementsby us or our competitors of significant contracts, acquisitions, commercialrelationships, joint ventures or capital commitments;

 

·             actualor anticipated fluctuations in our operating results;

 

·             litigationdevelopments; and

 

·             generaleconomic and market conditions or other economic factors unrelated to ourperformance, including disruptions in the capital and credit markets.

 

The stock market in general, and the stocks ofcomputer and software resellers, and companies in the Internet and electroniccommerce industries in particular, and other technology or related stocks, havein the past experienced extreme price and volume fluctuations which have beenunrelated to corporate operating performance. Such market volatility mayadversely affect the market price of our common stock. In the past, followingperiods of volatility in the market price of a public company’s securities,securities class action litigation has often been instituted against thatcompany. Such litigation, if asserted against us, could result in substantialcosts to us and cause a likely diversion of our management’s attention from theoperations of our company.

 

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2. PROPERTIES**

 

Our principal facilities at December 31, 2009were as follows:

 
| **Description**                                                      | ** ** | **Sq. Ft.** | ** ** | **Location**                   |
|----------------------------------------------------------------------|------------|------------------|------------|--------------------------------|
| Distribution  Center and Retail Store                                |       | 212,000          |       | Memphis,  TN                   |
| SARCOM  Headquarters, Sales Office and Warehouse/Distribution Center |       | 115,846          |       | Lewis  Center, OH              |
| PC  Mall Corporate Headquarters and Sales Office                     |       | 59,692           |       | Torrance,  CA                  |
| Irvine  Sales Office and Warehouse/Distribution Center               |       | 60,072           |       | Irvine,  CA                    |
| Canadian  Office                                                     |       | 45,128           |       | Montreal,  Quebec              |
| Wisconsin  Sales Office                                              |       | 35,503           |       | Menomonee  Falls, WI           |
| Chicago  Office                                                      |       | 28,074           |       | Chicago,  Illinois             |
| Philippines  Office                                                  |       | 25,134           |       | Mandaluyong  City, Philippines |
| Retail  Store — Torrance                                        |       | 10,018           |       | Torrance,  CA                  |
| Retail  Store — Santa Monica                                    |       | 9,750            |       | Santa  Monica, CA              |

 

We lease each of our principal facilities, except forthe Santa Monica, California retail store, which we own. Our distributioncenters include shipping, receiving, warehousing and administrative spaces. Allof our segments, except our MacMall segment, use all the properties describedabove. Our MacMall segment uses each of the properties described above exceptfor the Lewis Center, Ohio office, the Irvine, California office and theMenomonee Falls, Wisconsin office. In addition to the properties listed above,we lease sales offices in various cities in the U.S.

 

On January 1, 2010, AFServices, LLC, our wholly-owned subsidiary, entered into a lease agreement foroffice space in Milwaukee,Wisconsin for a total of 4,887 square feet. Thisoffice replaces the Wisconsin Sales Office lease for 35,503 square feet, whichended on January 31, 2010. 

 

On February 23, 2010,AF Services, LLC, our wholly-owned subsidiary, entered into a lease agreementwith SARCOM Properties, Inc., renewing a lease which expired on December 31,2009, for space utilized by PC Mall’s wholly-owned subsidiary, SARCOM, Inc.This new lease agreement is for substantially the same leased space for a totalof 121,486 square feet of office and warehouse/distribution space in LewisCenter, Ohio.

 

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**ITEM 3. LEGAL PROCEEDINGS**

 

We are not currently a party to any material legalproceedings, other than ordinary routine litigation incidental to the business.From time to time, we receive claims of and become subject to consumerprotection, employment, intellectual property and other litigation related tothe conduct of our business. Any such litigation, including the litigationdiscussed above, could be costly and time consuming and could divert ourmanagement and key personnel from our business operations. In connection withany such litigation, we may be subject to significant damages or equitableremedies relating to the operation of our business. Any such litigation maymaterially harm our business, results of operations and financial condition.

 

**ITEM 4. RESERVED**

 

**ITEM 4A. EXECUTIVE OFFICERS OF THEREGISTRANT**

 

Our executive officers as of March 16, 2010 andtheir respective ages and positions were as follows:

 
| **Name**            | ** ** | **Age** | ** ** | **Position**                                                            |
|---------------------|------------|---------|------------|-------------------------------------------------------------------------|
| Frank  F. Khulusi   |       | 43      |       | Chairman  of the Board, President and Chief Executive Officer           |
| Brandon  H. LaVerne |       | 38      |       | Chief  Financial Officer, Treasurer and Chief Accounting Officer        |
| Kristin  M. Rogers  |       | 51      |       | Executive  Vice President — Sales and Marketing                    |
| Robert I. Newton    |       | 44      |       | Executive Vice President and General Counsel                            |
| Daniel J. DeVries   |       | 48      |       | Executive Vice President — MacMall                                 |
| Joseph B. Hayek     |       | 37      |       | Executive Vice President, Corporate Development and  Investor Relations |

 

The following is a biographical summary of theexperience of our executive officers:

 

*Frank F. Khulusi*is one of our co-founders and has servedas our Chairman of the Board and Chief Executive Officer since our inception in1987, served as President until July 1999, and resumed the office ofPresident in March 2001. Mr. Khulusi attended the University ofSouthern California.

 

*BrandonH. LaVerne*hasserved as our Chief Financial Officer since July 2008. Mr. LaVernepreviously served as our Interim Chief Financial Officer, Chief AccountingOfficer and Treasurer of the Company since June 2007, and continues toserve as our principal financial and accounting officer. Prior to June 2007,Mr. LaVerne served as Vice President and Controller and has been with ussince October 1998. Prior to joining us, Mr. La Verne worked forComputer Sciences Corporation, and started his career with Deloitte and ToucheLLP. Mr. LaVerne received his B.S. in Accounting from the University ofSouthern California and is a Certified Public Accountant.

 

*Kristin M. Rogers*joined us in February 2000 and wasappointed as our Executive Vice President — Sales in June 2001. Ms. Rogerscurrently serves as Executive Vice President — Sales and Marketing and isresponsible for all of our sales and marketing functions. Prior to joining us, Ms. Rogersheld a variety of positions with Merisel, a computer wholesale distributor from1980 through 1999, most recently as Senior Vice President and General Managerof the U.S. region. In addition, Ms. Rogers spent one year (1997) asExecutive Vice President and General Manager of the U.S. region for MicroWarehouse, a direct marketer based in Norwalk, Connecticut. Ms. Rogersreceived a B.A. degree in Political Science from Bates College in Lewiston,Maine. Ms. Rogers also serves as the President of the HP PC Mall SalesAdvisory Council.

 

*Robert I. Newton*joined us in June 2004 and currentlyserves as our Executive Vice President and General Counsel. Mr. Newton wasOf Counsel in the corporate practice group of Morrison & Foerster LLPfrom February 2000 until joining our company. Prior to his employment atMorrison & Foerster LLP, Mr. Newton was a partner in thecorporate practice group of McDermott, Will & Emery LLP. Mr. Newtonreceived a B.B.A., with highest honors, and a J.D., with honors, from theUniversity of Texas at Austin.

 

*Daniel J. DeVries*has served as our Executive VicePresident — Marketing since February 1996 and was our Senior VicePresident from October 1994 to that time. Mr. DeVries currentlyserves as Executive Vice President — MacMall and is responsible for all aspectsof our MacMall businesses, including sales and marketing. From April 1993to October 1994, Mr. DeVries held various sales and marketingpositions with our company. From July 1988 to April 1993, Mr. DeVrieswas a Regional Manager for Sun Computers, a computer retailer. Mr. DeVriesattended the University of Michigan.

 

*Joseph B. Hayek* joined us in March 2008as Executive Vice President, Corporate Development and Investor Relations. FromAugust 2000 to March 2008, Mr. Hayek worked in corporate financeat Raymond James & Associates, an investment banking firm, where hemost recently served as a Senior Vice President and headed the firm’s SupplyChain Technologies Practice. Before joining Raymond James, Mr. Hayek wasan investment banker in the technology group at Wachovia Securities. Mr. Hayekalso worked for the Eastman Kodak Company. Mr. Hayek holds an MBA fromDuke University’s Fuqua School of Business and a B.S. in Business from MiamiUniversity in Oxford, Ohio.

 

***

 

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**PART II**

 

**ITEM5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS****ANDISSUER PURCHASES OF EQUITY SECURITIES**

 

Our common stock has been publicly traded on theNasdaq Global Market (formerly known as Nasdaq National Market) under thesymbol “MALL” since our initial public offering on April 4, 1995. Thefollowing table sets forth the range of high and low sales price per share forour common stock for the periods indicated, as reported on the Nasdaq GlobalMarket.

 
| ** **                             | ** ** | **Price Range of Common Stock** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **High**                                            | ** ** | **Low** | ** ** |
| **Year Ended December 31,  2009** |       |                                                |       |   |   |
| First Quarter                          |       | $                                                   | 4.06       |   | $ | 2.84 |   |
| Second Quarter                         |       | 8.58                                                |       | 4.38 |   |
| Third Quarter                          |       | 8.98                                                |       | 6.50 |   |
| Fourth Quarter                         |       | 8.08                                                |       | 5.04 |   |
| **Year Ended December 31,  2008** |       |                                                |       |   |   |
| First Quarter                          |       | $                                                   | 14.07      |   | $ | 6.32 |   |
| Second Quarter                         |       | 14.88                                               |       | 9.78 |   |
| Third Quarter                          |       | 13.66                                               |       | 6.80 |   |
| Fourth Quarter                         |       | 7.20                                                |       | 2.60 |   |

 

As of the close of business on March 11, 2010,there were approximately 34 holders of record of our common stock.

 

We have never paid cash dividends on our capital stockand our credit facility prohibits us from paying any cash dividends on ourcapital stock. Therefore, we do not currently anticipate paying dividends; weintend to retain any earnings to finance the growth and development of ourbusiness.

 

Information regarding compensation plans under whichour equity securities may be issued is included in Item 12 of Part III ofthis report through incorporation by reference to our definitive ProxyStatement to be filed in connection with our 2010 Annual Meeting ofStockholders.

 

**Issuer Purchases of Equity Securities**

 

A summary of the repurchase activity for the threemonths ended December 31, 2009 is as follows (dollars in thousands, exceptper share amounts):

 
| ** **                                      | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs** | ** ** | **Maximum Dollar  Value that May  Yet Be Purchased  Under the Plans  or Programs** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| October 1, 2009 to October 31, 2009   |       | 8,149                                                |       | $                                                | 6.97       |                                                                                                                         | 8,149      |                                                                                                                       | $          | 5,688 |   |
| November 1, 2009 to November 30, 2009 |       | 129,440                                              |       | 6.39                                             |       | 129,440                                                                                                                      |       | 4,857                                                                                                                      |       |
| December 1, 2009 to December 31, 2009 |       | 14,816                                               |       | 6.23                                             |       | 14,816                                                                                                                       |       | 4,764                                                                                                                      |       |
| Total                                           |       | 152,405                                              |       | 6.41                                             |       | 152,405                                                                                                                      |       |                                                                                                                       |       |
|                                                 |            |                                                      |            |                                                  |            |                                                                                                                              |            |                                                                                                                            |            |  |  |

 

InOctober 2008, our Board of Directors approved a discretionary common stockrepurchase program for up to $10 million of our common stock in aggregate withall other repurchases made under any repurchase programs following the date ofsuch Board of Directors’ approval. This repurchase program effectivelysupersedes an existing repurchase program adopted in 1996. Under this newprogram, the shares may be repurchased from time to time at prevailing marketprices, through open market or unsolicited negotiated transactions, dependingon market conditions. We expect that the repurchase of our common stock underthis new program will be financed with existing working capital and amountsavailable under our existing credit facility. No limit was placed on theduration of the repurchase program. There is no guarantee as to the exactnumber of shares that we will repurchase. Subject to applicable securities laws,repurchases may be made at such times and in such amounts as our managementdeems appropriate. The program can also be discontinued at any time managementfeels additional purchases are not warranted. During the year ended December 31,2009, we repurchased a total of 582,779 shares of our common stock under thisprogram for a total cost of $2.6 million. From the inception of the program in October 2008through December 31, 2009, we had repurchased an aggregate total of1,324,410 shares of our common stock for a cost of $5.2 million. Therepurchased shares are held as treasury stock.

 

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*Notwithstanding anything to thecontrary set forth in any of the Company’s**filings under theSecurities Act of 1933, as amended, or the Securities**Exchange Act of 1934, as amended, that mightincorporate future filings,**includingthis Annual Report on Form 10-K, in whole or in part, the Stock**Performance Graph which follows shall not bedeemed to be incorporated by**referenceinto any such filings except to the extent that we specifically**incorporate any such information into any such futurefilings.*

 

**Stock Performance Graph**

 

The performance graph below compares the cumulativetotal stockholder return of our company with the cumulative total return of theNasdaq Stock Market—the Nasdaq Composite Index and the Nasdaq Retail TradeIndex. The graph assumes $100 invested at the per-share closing price of ourcommon stock and each of the indices on December 31, 2004. The stock priceperformance shown in this graph is neither necessarily indicative of norintended to suggest future stock price performance. On April 11, 2005, wespun-off to our shareholders all of the shares of common stock of our formersubsidiary, eCOST.com, that we had owned. For each share of PC Mall commonstock owned, our stockholders received approximately 1.2071 shares of eCOST.comcommon stock. For purposes of the graph below, it is assumed that each share ofeCOST.com common stock received in the distribution was immediately sold forits market value and the proceeds reinvested in additional shares of PC Mallcommon stock. The value of PC Mall common stock in periods subsequent to theeCOST.com spin-off therefore includes the value of the spin-off shares but notthe separate performance of those securities since the date of the spin-off.

 

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

Among PC Mall, Inc., The NASDAQ Composite Index

And The NASDAQ Retail Trade Index

 

 

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*$100 invested on 12/31/04in stock or index, including reinvestment of dividends.

Fiscal year ending December31.

 
| ** **          | ** ** | **Measurement Period (fiscal years covered)** | ** ** |
|---------------------|------------|-------------------------------------------------------------------|------------|
| ** **          | ** ** | **12/04**                                                         | ** ** | **12/05** | ** ** | **12/06** | ** ** | **12/07** | ** ** | **12/08** | ** ** | **12/09** | ** ** |
| PC Mall, Inc.  |       | $                                                                 | 100.00     |   | $ | 137.26 |   | $ | 255.61 |   | $ | 225.78 |   | $ | 97.25 |   | $ | 126.59 |   |
| NASDAQ Composite    |       | 100.00                                                            |       | 101.33 |   | 114.01 |   | 123.71 |   | 73.11 |   | 105.61 |   |
| NASDAQ Retail Trade |       | 100.00                                                            |       | 89.91 |   | 83.59 |   | 91.82 |   | 53.65 |   | 93.55 |   |
|                     |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***

 

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**ITEM 6. SELECTED FINANCIAL DATA**

 

The following selected consolidated financial data arequalified by reference to, and should be read in conjunction with, ourconsolidated financial statements and the notes thereto and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”contained elsewhere herein.

 

The selected consolidated statements of operationsdata for the years ended December 31, 2009, 2008 and 2007 and the selectedconsolidated balance sheet data as of December 31, 2009 and 2008 presentedbelow were derived from our audited consolidated financial statements, whichare included elsewhere herein. The selected consolidated statements ofoperations data for the years ended December 31, 2006 and 2005 along withthe consolidated balance sheet data as of December 31, 2007, 2006 and 2005presented below were derived from our audited consolidated financial statementswhich are not included elsewhere herein. The selected consolidated statementsof operations data and the selected consolidated balance sheet data reflect ourformer subsidiary, eCOST.com, which we spun-off in April 2005, as adiscontinued operation for 2005.

 
| ** **                                                    | ** ** | **Years Ended December 31,**                        | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2009**                                                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated Statements of  Operations Data:**              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net sales                                                     |       | $                                                                  | 1,138,061  |   | $ | 1,327,974 |   | $ | 1,215,433 |   | $ | 1,005,820 |   | $ | 997,232 |   |
| Cost of goods sold                                            |       | 985,045                                                            |       | 1,148,593 |   | 1,067,595 |   | 881,902 |   | 878,665 |   |
| Gross profit                                                  |       | 153,016                                                            |       | 179,381 |   | 147,838 |   | 123,918 |   | 118,567 |   |
| Selling, general and administrative expenses                  |       | 145,274                                                            |       | 155,494 |   | 123,520 |   | 111,817 |   | 118,555 |   |
| Special charges (1)                                           |       | —                                                             |       | 4,893 |   | — |   | 1,683 |   | — |   |
| Operating profit                                              |       | 7,742                                                              |       | 18,994 |   | 24,318 |   | 10,418 |   | 12 |   |
| Interest expense, net                                         |       | 1,567                                                              |       | 3,667 |   | 4,031 |   | 3,940 |   | 3,058 |   |
| Income (loss) from continuing operations before  income taxes |       | 6,175                                                              |       | 15,327 |   | 20,287 |   | 6,478 |   | (3,046 | ) |
| Income tax expense (benefit)                                  |       | 2,818                                                              |       | 5,724 |   | 7,844 |   | 2,522 |   | (1,114 | ) |
| Income (loss) from continuing operations                      |       | 3,357                                                              |       | 9,603 |   | 12,443 |   | 3,956 |   | (1,932 | ) |
| Loss from discontinued operations, net of taxes               |       | —                                                             |       | — |   | — |   | — |   | (1,781 | ) |
| Net income (loss)                                             |       | $                                                                  | 3,357      |   | $ | 9,603 |   | $ | 12,443 |   | $ | 3,956 |   | $ | (3,713 | ) |
| **Basic and Diluted Earnings  (Loss) Per Common Share**:      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share:                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                      |       | $                                                                  | 0.27       |   | $ | 0.72 |   | $ | 0.98 |   | $ | 0.33 |   | $ | (0.17 | ) |
| Loss from discontinued operation, net of taxes                |       | —                                                             |       | — |   | — |   | — |   | (0.15 | ) |
| Net income (loss)                                             |       | $                                                                  | 0.27       |   | $ | 0.72 |   | $ | 0.98 |   | $ | 0.33 |   | $ | (0.32 | ) |
| Diluted earnings (loss) per share:                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                      |       | $                                                                  | 0.26       |   | $ | 0.69 |   | $ | 0.90 |   | $ | 0.31 |   | $ | (0.17 | ) |
| Loss from discontinued operation, net of taxes                |       | —                                                             |       | — |   | — |   | — |   | (0.15 | ) |
| Net income (loss)                                             |       | $                                                                  | 0.26       |   | $ | 0.69 |   | $ | 0.90 |   | $ | 0.31 |   | $ | (0.32 | ) |

 

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(1)          2008 includes a$4.1 million goodwill and intangible asset impairment charge and a $0.8 millionlawsuit settlement charge. 2006 relates to a lawsuit settlement charge.

 
| ** **                                | ** ** | **At December 31,** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in thousands)**       | ** ** |
| **Consolidated Balance Sheet  Data:**     |       |                          |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                 |       | $                             | 9,215      |   | $ | 6,748 |   | $ | 6,623 |   | $ | 5,836 |   | $ | 6,289 |   |
| Working capital                           |       | 54,034                        |       | 50,847 |   | 37,264 |   | 43,386 |   | 35,621 |   |
| Total assets                              |       | 301,176                       |       | 282,385 |   | 296,235 |   | 203,567 |   | 205,242 |   |
| Short-term debt                           |       | 1,038                         |       | 1,038 |   | 775 |   | 500 |   | 500 |   |
| Line of credit                            |       | 53,127                        |       | 29,010 |   | 53,893 |   | 32,477 |   | 53,517 |   |
| Long-term debt, excluding current portion |       | 3,333                         |       | 4,337 |   | 4,456 |   | 1,750 |   | 2,250 |   |
| Total stockholders’ equity           |       | 97,755                        |       | 93,551 |   | 84,424 |   | 60,824 |   | 52,968 |   |
|                                           |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***

 

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**ITEM7.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND****RESULTSOF OPERATIONS**

 

*You should read the followingManagement’s Discussion and Analysis of**FinancialCondition and Results of Operations together with the consolidated**financial statements and related notes theretoincluded elsewhere in this**report.This discussion contains forward-looking statements that involve risks**and uncertainties. Our actual results coulddiffer materially from those**anticipatedin these forward-looking statements as a result of various factors,**including those described under “Risk Factors” inItem 1A and elsewhere in this**report.*

 

**BUSINESS OVERVIEW**

 

PC Mall, Inc.,together with its wholly-owned subsidiaries (collectively referred to as “PCMall,” “we” or “us”), founded in 1987, is a value added direct marketer oftechnology products, services and solutions to businesses, government andeducational institutions and individual consumers. We offer our products,services and solutions through dedicated account executives, field serviceteams, various direct marketing techniques and three retail stores. We alsoutilize distinctive full-color catalogs under the PC Mall, MacMall, PC Mall Govand SARCOM brands and our websites pcmall.com, macmall.com, pcmallgov.com,gmri.com, sarcom.com, abreon.com, onsale.com and clubmac.com and otherpromotional materials.

 

PC Mall plays a valuable role in the IT supply chain.While we provide comprehensive solutions for our customers’ technology needs,our business model also provides significant leverage to technologymanufacturers and service providers. Through us, technology manufacturers andservice providers are able to reach multiple customer segments includingconsumers, small and medium sized businesses, large enterprise businesses, aswell as state, local and federal governments and educational institutions. Ourmodel also facilitates an efficient supply chain and support mechanism formanufacturers by using a combination of direct marketing, centralized sellingand support and centralized product fulfillment. Additionally, while ourexperience and expertise in marketing and eCommerce allows us to efficientlyreach and capture customers across these segments, our scale and centralizedmodel allow us to efficiently deploy a one-to-many selling and delivery model.

 

In the first quarter of 2008, followingthe completion of our acquisition of Sarcom, Inc. (“SARCOM”) in September 2007,which is discussed more in detail below, we changed the way we internally lookat our business and realigned our reportable operating segments from twosegments (previously Core business and OnSale.com) to four segments that wereferred to as SMB, MME, Public Sector and Consumer. Our operating segments areprimarily aligned based upon their respective customer base. We includecorporate related expenses such as legal, accounting, information technology,product management and other administrative costs that are not otherwiseincluded in our operating segments in Corporate and Other. We allocate ourresources to and evaluate the performance of our segments based on operatingincome. A description of each of our new segments is provided below. Allhistorical segment financial information provided herein has been revised toreflect these new operating segments.

 

In the fourth quarter of 2009, we changedthe name of our Consumer segment to MacMall. The MacMall segment includes salesmade under our MacMall and Onsale brand names via telephone and the Internet toconsumers, businesses and creative professionals. This was a name change onlyand does not affect the segment results reported in the current or priorperiods.

 

Our SMB segment consistsof sales made primarily to small and medium-sized businesses, utilizing anoutbound phone based sales force and, where applicable, a field-based salesforce.

 

Our MME segment consistsof sales made primarily to mid-market and enterprise-sized businesses under theSARCOM, DSW and Abreon brands, utilizing a field relationship-based sellingmodel, an outbound phone based sales force and a field service organization.The MME segment sells complex products, services and solutions, which webelieve can be best delivered with a face-to-face selling model.

 

Our Public Sector segmentconsists of sales made primarily to federal, state, and local governments, aswell as educational institutions, utilizing an outbound phone and fieldrelationship-based selling model as well as contracts and bids businessdevelopment teams.

 

We experiencevariability in our net sales and operating results on a quarterly basis as aresult of many factors. We experience some seasonal trends in our sales oftechnology products, services and solutions to businesses, government andeducational institutions and individual customers. For example, the timing ofcapital budget authorizations for our customers in the small and medium sizedbusiness sector and the mid-market and enterprise sector can affect when thesecompanies can procure IT products and services. The fiscal year-ends of PublicSector customers vary for those in the federal government space and those inthe state and local government and educational institution (“SLED”) sector. Wegenerally see an increase in our second quarter sales related to customers inthe SLED sector and in our third quarter sales related to customers in thefederal government space as these customers close out their budgets for theirfiscal year. Also, consumer holiday spending contributes to variances in ourquarterly results. As such, the results of interim periods are not necessarilyindicative of the results that may be expected for any other interim period orfor the full year.

 

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Therehas been substantial ongoing weakness in the global economic environment,coupled with disruptions in the capital and credit markets. General economicconditions have an effect on our business and results of operations across allof our segments. As a result of the ongoing tightness in the credit markets,softness in the housing market, difficulties in the financial services sector,general economic weakness and continuing economic uncertainties, the directionand relative strength of the U.S. economy has remained considerably uncertain.If economic growth in the U.S. and other countries’ economies continues to beslow or declines, consumer and business spending rates could be significantlyreduced. These developments could also increase the risk of uncollectibleaccounts receivable from our customers. Continued and future changes anduncertainties in the economic climate in the U.S. and elsewhere could have asimilar negative impact on the rate of information technology spending of ourcurrent and potential customers, which would likely have a negative impact onour business and results of operations, and could significantly hinder ourgrowth. These factors could result in reductions in sales of our products,longer sales cycles, slower adoption of new technologies and increased pricecompetition, which could materially and adversely affect our business, resultsof operations and financial condition. In response to these developments, wehave focused our efforts on cost reduction initiatives, competitive pricingstrategies and driving higher margin service and solution sales, whilecontinuing to make selective investments in our sales force personnel, servicecapabilities and IT infrastructure and tools in an effort to position us forenhanced productivity and future growth.

 

Ourplanned operating expenditures each quarter are based on sales forecasts forthe quarter. If our sales do not meet expectations in any given quarter, ouroperating results for the quarter may be materially adversely affected. Ournarrow gross margins may magnify the impact of these factors on our operatingresults. Management regularly reviews our operating performance using a varietyof financial and non-financial metrics including sales, shipments, grossmargin, vendor consideration, advertising expense, personnel costs, accountexecutive productivity, accounts receivable aging, inventory turnover,liquidity and cash resources. Our management monitors the various metricsagainst goals and budgets, and makes necessary adjustments intended to enhanceour performance.

 

A substantial portion of our business is dependent onsales of Apple, HP, and products purchased from other vendors including Adobe,Cisco, IBM, Ingram Micro, Lenovo, Microsoft, Sony, Sun Microsystems and TechData. Products manufactured by Apple represented approximately19%, 20% and 25%of our net sales in 2009, 2008 and 2007. Products manufactured by HPrepresented 19%, 19% and 18% of our net sales in 2009, 2008 and 2007.

 

One element of ourbusiness strategy involves expansion through the acquisition of businesses,assets, personnel or technologies that allow us to complement our existingoperations, expand our market coverage, or add new business capabilities. Whilewe believe that the fragmented nature of the technology reseller industry andindustry consolidation trends may continue to present acquisition opportunitiesfor us, these continued trends may make acquisitions more competitive.

 

We evaluateacquisition opportunities based on our assessment of several factors, includingthe perceived value of the opportunity, our available financing sources, andpotential synergies of the acquisition target with our business. Our ability tocomplete acquisitions in the future will depend on our ability to fund suchacquisitions with our internally available cash, cash generated fromoperations, amounts available under our existing credit facilities, additionalborrowings or from the issuance of additional securities. As more fullydiscussed under “Liquidity and Capital Resources” below, certain trends in ouroperating results may impact our available cash resources and availability underour credit facilities, which in turn may impact our ability to pursue ouracquisition strategy.

 

**STRATEGIC DEVELOPMENTS**

 

*ERP andWeb Infrastructure Upgrade*

 

We are currently upgrading many of our IT systems. Wehave purchased licenses for workflow software, web development tools andMicrosoft Dynamics AX (Axapta) to upgrade our ERP systems. We initiated theimplementation and upgrade of our eCommerce system in the second half of 2008and have completed and launched a new generation of our public sites at macmall.com,onsale.com and pcmall.com. We are currently working on the implementation ofthe ERP modules and the upgrade of the ERP systems, including additionalenhancements and features. We have completed the initial phase of theimplementation in January 2010, and we expect to be complete with allphases of the implementation of the ERP systems by 2013. We believe the implementationand upgrade should help us to gain further efficiencies across ourorganization.

 

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## ***Infrastructure Upgrade***

## ** **

In July 2008, we entered into an agreement withCisco Systems for the purchase and implementation of various solutions toupgrade our current infrastructure for up to approximately $4.0 million. Thepurchase is financed through a capital lease over a five year term. Our plan isto provide a unified platform for our entire company and to provide a robustand efficient contact center. As of December 31, 2009, we have received$3.1 million of the Cisco solution. We expect to receive the remainder of theequipment and services in the******first half of 2010. We are implementing the Ciscosolution across all of our locations and expect that all of our locations willbe upgraded by the second half of 2010.

 

*DSW Acquisition*

 

InDecember 2009, SARCOM, our wholly-owned subsidiary, acquired certainassets of Data Systems Worldwide, Inc. (“DSW”) for a total purchase priceof approximately $1.5 million. DSW, a provider of converged Cisco solutions inthe western United States, had approximately 20 employees as of December 15,2009, the majority of which are service or sales personnel. Each of theseemployees became employees of Sarcom in connection with the acquisition. DSW’spractice areas include managed and professional services and Cisco intelligentnetworks, facilities, datacenters and security, with a focus on unifiedcommunications and connected real estate.

 

*SARCOM Acquisition*

 

In September 2007, we completed the acquisitionof SARCOM, a provider of advanced technology solutions, for an initial totalpurchase price of approximately $55.7 million, including transaction costs.SARCOM, headquartered in Columbus, Ohio, has served the mid-market andenterprise market for over 20 years and currently specializes in providingenterprise hardware and software solutions, procurement solutions and a fullrange of professional and managed services. The acquisition included the AbreonGroup (“Abreon”), a division of SARCOM. Abreon is a high-end consulting andtraining business focused on providing business reengineering, businessconsulting and training services to mid-market and enterprise clients. Ouracquisition of SARCOM was motivated in part by our desire to enhance ourcapabilities as a value added direct marketer of advanced technology products,services and solutions, consistent with our commitment to drive growth in ourbusiness in part by expanding our share of our customers’ IT spending.

 

The total purchase price was subject to a post-closingdebt and net asset value adjustment discussed below. The aggregate purchaseprice paid at closing included a total of $48.2 million in cash andapproximately $7.5 million in shares of our common stock, the number of sharesbeing based on the average closing price of our stock on the Nasdaq Global Marketfor the 20 consecutive trading days immediately preceding the acquisitionclosing date. Under that formula, at closing, we issued an aggregate of 633,981shares of our common stock to the sellers as payment of the stock component ofthe purchase price. We financed the cash component of the purchase pricethrough borrowings under our existing credit facility.

 

In November 2007, we and the sellers agreed on afinal net asset value adjustment, resulting in a decrease in the purchase priceby approximately $2.1 million, which was to be repaid, at the sellers’ option,in either cash or shares of our common stock based on a per share pricedetermined by the average closing price for the 20 consecutive trading daysending on the date of final determination of the net asset value adjustment. Asa result, in settlement of the $2.1 million net asset value adjustment, thesellers tendered back to us a total of 122,478 shares of our common stockpreviously issued to them, which has been recorded as a reduction of the purchaseprice.

 

## ***Goodwill Impairment***

## ** **

In accordance with ASC 350-20 (formerlyStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets”), we performed our annual impairment analysis of goodwilland intangible assets for possible impairment. Our management, with theassistance of an independent third-party valuation firm, determined the fairvalues of our reporting units and their underlying assets and compared them totheir respective carrying values. Based on our analysis, we have determinedthat no impairment of goodwill existed as of December 31, 2009.  In the prior year, based on our analysis asof December 31, 2008, we determined that approximately $2.7 million ofgoodwill and purchased intangibles held by our Public Sector segment, relatedto our acquisition of Government Micro Resources, Inc. in 2006, andapproximately $1.4 million of goodwill held by our MacMall segment, related toour acquisition of ClubMac in 2002, representing all of the goodwill held ateach of these segments, were impaired. As a result, we recorded a non-cash,pre-tax impairment charge totaling $4.1 million to “Special charges” on ourConsolidated Statements of Operations for the year ended December 31,2008. The $4.1 million impairment charge resulted in a deferred tax benefit of$1.5 million. Subsequent to this charge, the only remaining goodwill andpurchased intangibles reside in our MME segment, totaling $29.0 million as of December 31,2009, which resulted from our 2007 acquisition of SARCOM. See below under“Critical Accounting Policies and Estimates — Goodwill and Intangible Assets”for more information.

 

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**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

Our consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of our consolidated financialstatements requires management to make estimates, judgments and assumptionsthat affect the reported amounts of assets, liabilities, net sales andexpenses, as well as the disclosure of contingent assets and liabilities.Management bases its estimates, judgments and assumptions on historicalexperience and on various other factors that we believe to be reasonable underthe circumstances, the results of which form the basis for making judgmentsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Due to the inherent uncertainty involved in makingestimates, actual results reported for future periods may be affected bychanges in those estimates, and revisions to estimates are included in ourresults for the period in which the actual amounts become known.

 

Management considers an accounting estimate to becritical if:

 

·             it requires assumptions to be made that were uncertainat the time the estimate was made; and

 

·             changes in the estimate or different estimates thatcould have been selected could have a material impact on our consolidatedresults of operations or financial position.

 

Management has discussed the development and selectionof these critical accounting policies and estimates with the audit committee ofour board of directors. We believe the critical accounting policies describedbelow affect the more significant judgments and estimates used in thepreparation of our consolidated financial statements. For a summary of oursignificant accounting policies, including those discussed below, see Note 2 ofthe Notes to the Consolidated Financial Statements in Item 8, Part II, ofthis Annual Report on Form 10-K.

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued FASB Accounting Standards Codification (“ASC”) 105-10-05(formerly Statement of Financial Accounting Standards (“SFAS”) No. 168,“The FASB Accounting Standards Codification and the Hierarchy of GenerallyAccepted Accounting Principles, a replacement of FASB Statement No. 162”).ASC 105-10-05 establishes that the FASB ASC will become the source ofauthoritative generally accepted accounting principles (“GAAP”) recognized bythe FASB to be applied by nongovernmental entities. Rules and interpretivereleases of the SEC under authority of federal securities laws are also sourcesof authoritative GAAP for SEC registrants. ASC 105-10-05 is not intended tochange existing GAAP and as such, it will not have a significant impact on ourconsolidated financial statements. We adopted ASC 105-10-05 effective on July 1,2009 and we have replaced references to legacy GAAP with references to the ASC,where appropriate.

 

*Revenue Recognition.*We adhere to the revised guidelines andprinciples of sales recognition described in ASC 605 (formerly Staff AccountingBulletin No. 104, “Revenue Recognition,” issued by the staff of the SEC asa revision to Staff Accounting Bulletin No. 101, “Revenue Recognition”).Under ASC 605, product sales are recognized when the title and risk of loss arepassed to the customer, there is persuasive evidence of an arrangement forsale, delivery has occurred and/or services have been rendered, the sales priceis fixed and determinable and collectability is reasonably assured. Under theseguidelines, the majority of our sales, including revenue from product sales andgross outbound shipping and handling charges, are recognized upon receipt ofthe product by the customer. In accordance with our revenue recognition policy,we perform an analysis to estimate the number of days products we have shippedare in transit to our customers using data from our third party carriers andother factors. We record an adjustment to reverse the impact of saletransactions based on the estimated value of products that have shipped, buthave not yet been received by our customers, and we recognize such amounts inthe subsequent period when delivery has occurred. Changes in delivery patternsor unforeseen shipping delays beyond our control could have a material impacton our revenue recognition for the current period.

 

For all product sales shipped directly from suppliersto customers, we take title to the products sold upon shipment, bear creditrisk, and bear inventory risk for returned products that are not successfullyreturned to suppliers; therefore, these revenues are recognized at gross salesamounts.

 

Certain software products and extended warranties thatwe sell (for which we are not the primary obligor) are recognized on a netbasis in accordance with ASC 605-45 (formerly Emerging Issues Task Force(“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versusNet as an Agent”). Accordingly, such revenues are recognized in net saleseither at the time of sale or over the contract period, based on the nature ofthe contract, at the net amount retained by us, with no cost of goods sold.

 

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Sales are reported net of estimated returns andallowances, discounts, mail-in rebate redemptions and credit card chargebacks.If the actual sales returns, allowances, discounts, mail-in rebate redemptionsor credit card chargebacks are greater than estimated by management, additionalexpense may be incurred.

 

*Allowance for Doubtful AccountsReceivable.*Wemaintain an allowance for doubtful accounts receivable based upon estimates offuture collection. We extend credit to our customers based upon an evaluation ofeach customer’s financial condition and credit history, and generally do notrequire collateral. We regularly evaluate our customers’ financial conditionand credit history in determining the adequacy of our allowance for doubtfulaccounts. We also maintain an allowance for uncollectible vendor receivables,which arise from vendor rebate programs, price protections and otherpromotions. We determine the sufficiency of the vendor receivable allowancebased upon various factors, including payment history. Amounts received fromvendors may vary from amounts recorded because of potential non-compliance withcertain elements of vendor programs. If the estimated allowance foruncollectible accounts or vendor receivables subsequently proves to beinsufficient, additional allowance may be required.

 

*Reserve for Inventory Obsolescence.*We maintain an allowance for thevaluation of our inventory by estimating obsolete or unmarketable inventorybased on the difference between inventory cost and market value, which is determinedby general market conditions, nature, age and type of each product andassumptions about future demand. We regularly evaluate the adequacy of ourinventory reserve. If our inventory reserve subsequently proves to beinsufficient, additional allowance may be required.

 

*Mail-In Rebate Redemption RateEstimates.*Weaccrue monthly expense related to promotional mail-in rebates based upon thequantity of eligible orders transacted during the period and the estimatedredemption rate. The estimated expense is accrued and presented as a reductionof net sales. The estimated redemption rates used to calculate the accruedmail-in rebate expense and related mail-in rebate liability are based uponhistorical redemption experience rates for similar products or mail-in rebateamounts. Estimated redemption rates and the related mail-in rebate expense andliability are regularly adjusted as actual mail-in rebate redemptions for theprogram are processed. If actual redemption rates are greater than anticipated,additional expense may be incurred.

 

*Advertising Costs and VendorConsideration.*Weaccount for advertising costs in accordance with ASC 340-20 (formerly Statementof Position No. 93-7, “Reporting on Advertising Costs”). We produce andcirculate direct response catalogs at various dates throughout the year. Thecosts of developing, producing and circulating each direct response catalog aredeferred and amortized to advertising expense based on the life of the catalog,which is approximately eight weeks. Other non-catalog advertising expendituresare expensed in the period incurred. Advertising expenditures are included in“Selling, general and administrative expenses” in our Consolidated Statementsof Operations. Deferred advertising costs are included in “Prepaid expenses andother current assets” in our Consolidated Balance Sheets.

 

As we circulate catalogs throughout the year, wereceive market development funds and other vendor consideration from vendorsincluded in each catalog. These funds are deferred and recognized based onsales generated over the life of the catalog. Deferred vendor consideration isincluded in “Accrued expenses and other current liabilities” in ourConsolidated Balance Sheets. We also receive other non-catalog related vendorconsideration from our vendors in the form of cooperative marketing allowances,volume incentive rebates and other programs to support our marketing of theirproducts. Most of our vendor consideration is accrued, when performancerequired for recognition is completed, as an offset to cost of sales inaccordance with ASC 605-50 (formerly EITF 02-16, “Accounting by a Customer(Including a Reseller) for Certain Consideration Received from a Vendor”) sincesuch funds are not a reimbursement of specific, incremental, identifiable costsincurred by us in selling the vendors’ products. At the end of any givenperiod, unbilled receivables related to our vendor consideration are includedin our “Accounts receivable, net of allowances.”

 

*Stock-Based Compensation.*Since January 1,2006, we haveaccounted for stock-based compensation in accordance with ASC 718 (formerlyfinancial Accounting Standards Board Statement No. 123 (revised 2004),“Share-Based Payment”), using the modified prospective application transitionmethod. ASC 718 addresses the accounting for share-based payment transactionsin which an enterprise receives employee services in exchange for either equityinstruments of the enterprise or liabilities that are based on the fair valueof the enterprise’s equity instruments or that may be settled by the issuanceof such equity instruments. ASC 718 generally requires that such transactionsbe accounted for using a fair value based method and recognized as expenses inour Consolidated Statements of Operations. The provisions of ASC 718 apply tonew stock option grants subsequent to December 31, 2005 and unvested stockoptions outstanding as of January 1, 2006.

 

Pursuant to ASC 718, we estimate the grant date fairvalue of each stock option grant awarded pursuant to ASC 718 using theBlack-Scholes option pricing model and management assumptions made regardingvarious factors, including expected volatility of our common stock, expectedlife of options granted and estimated forfeiture rates, which require extensiveuse of accounting judgment and financial estimates. In estimating ourassumption regarding expected term for options we granted during the year endedDecember 31, 2007, we applied the simplified method set out in ASC 718 (whichalso includes former SEC Staff Accounting Bulletin No. 107, “Share-BasedPayment,” 

 

39

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which was issued in March 2005). For optionsgranted during the years ended December 31, 2009 and 2008, we computed theexpected term based upon an analysis of historical exercises of stock optionsby our employees. We compute our expected volatility using a frequency ofweekly historical prices of our common stock for a period equal to the expectedterm of the options. The risk free interest rate is determined using theimplied yield on U.S. Treasury issues with a remaining term within thecontractual life of the award. We estimate an annual forfeiture rate based onour historical forfeiture data, which rate will be revised, if necessary, infuture periods if actual forfeitures differ from those estimates. Any materialchange in the estimates used in calculating the stock-based compensationexpense could result in a material impact on our results of operations.

 

*Goodwill and Intangible Assets.*Goodwill is carried at historical costs,subject to write-down, as needed, based upon an impairment analysis that weperform annually, or sooner if an event occurs or circumstances change thatwould more likely than not result in an impairment loss. We perform our annualimpairment test for goodwill as of December 31 of each year. Under ASC 350(formerly SFAS No. 142, “Goodwill and Other Intangible Assets”), goodwillimpairment is deemed to exist if the net book value of a reporting unit exceedsits estimated fair value. Events that may create an impairment review include,but are not limited to, significant and sustained decline in our stock price ormarket capitalization, significant underperformance of operating units andsignificant changes in market conditions. Changes in estimates of future cashflows or changes in market values could result in a write-down of our goodwillin a future period. If an impairment loss results from the annual impairmenttest, such loss will be recorded as a pre-tax charge to our operating income.

 

We amortize other intangible assets with definitelives generally on a straight-line basis over their estimated useful lives.

 

Goodwill impairment testingis a two-step process. Step one involves comparing the fair value of ourreporting units to their carrying amount. If the fair value of the reportingunit is greater than its carrying amount, there is no impairment and no furthertesting is required. If the reporting unit’s carrying amount is greater thanthe fair value, the second step must be completed to measure the amount ofimpairment, if any. Step two calculates the implied fair value of goodwill bydeducting the fair value of all tangible and intangible assets, excludinggoodwill, of the reporting unit from the fair value of the reporting unit asdetermined in Step one. The implied fair value of goodwill determined in thisstep is compared to the carrying value of goodwill. If the implied fair valueof goodwill is less than the carrying value of goodwill, an impairment loss isrecognized equal to the difference.

 

As of December 31, 2009, weperformed our annual impairment analysis of goodwill and intangible assets forpossible impairment. Our management, with the assistance of an independentthird-party valuation firm, determined the fair values of our reporting unitsand their underlying assets, and compared them to their respective carryingvalues. Goodwill represents the excess of the purchase price over the fairvalue of the net tangible and identifiable intangible assets acquired in eachbusiness combination. The carrying value of goodwill was allocated to ourreporting units pursuant to ASC 350. As a result of our annual impairmentanalysis, we determined that the estimated fair value of our MME segmentexceeded its net carrying value and as such, no impairment of goodwill existedas of December 31, 2009.

 

For the year ended December 31,2008, as a result of the global economic downturn and its effect on the resultsof each of our reporting units and as a result of our 2008 annual impairment analysis,which indicated that there would be no remaining implied value attributable tothe goodwill of our Public Sector and MacMall reporting units, we determinedthat the goodwill and purchased intangible assets related to our Public Sectorand the goodwill related to our MacMall segments were impaired. Therefore, werecorded an impairment charge totaling $4.1 million, which represents theentire goodwill and purchased intangible asset amounts related to our PublicSector ($2.7 million) and MacMall ($1.4 million) segments, for the year ended December 31,2008. The $4.1 million of total impairment charge was included as part of“Special charges” on our Consolidated Statements of Operations for the yearended December 31, 2008.

 

Fair value was determined by using aweighted combination of a market-based approach and an income approach, as thiscombination was deemed to be the most indicative of fair value in an orderlytransaction between market participants. Under the market-based approach, weutilized information regarding our company and publicly available comparablecompany and industry information to determine cash flow multiples and revenuemultiples that are used to value our reporting units. Under the incomeapproach, we determined fair value based on estimated future cash flows of eachreporting unit, discounted by an estimated weighted-average cost of capital,which reflects the overall level of inherent risk of a reporting unit and therate of return an outside investor would expect to earn. Determining the fairvalue of a reporting unit requires the use of significant estimates andassumptions, including revenue growth rates and operating margins, discountrates and future market conditions, among others.

 

Given the current economic environmentand the uncertainties regarding the impact on our business, there can be noassurance that our estimates and assumptions made for purposes of our goodwillimpairment testing as of December 31, 2009 will prove to be accuratepredictions of the future. We may be required to record additional goodwillimpairment charges in future periods, whether in connection with our nextannual impairment testing as of December 31, 2010 or prior to that, if anychange constitutes a triggering event outside of the quarter from when theannual goodwill impairment test is performed. It is not possible at this timeto determine if any such future impairment charge would result or, if it does,whether such charge would be material.

 

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**RESULTS OF OPERATIONS**

 

**Consolidated Statements of OperationsData**

 

The following table sets forth, for the yearsindicated, our Consolidated Statements of Operations (in thousands) andinformation derived from our Consolidated Statements of Operations expressed asa percentage of net sales. There can be no assurance that trends in net sales,gross profit or operating results will continue in the future.

 
| ** **                                   | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                    |       | $                                           | 1,138,061  |   | $ | 1,327,974 |   | $ | 1,215,433 |   |
| Cost of goods sold                           |       | 985,045                                     |       | 1,148,593 |   | 1,067,595 |   |
| Gross profit                                 |       | 153,016                                     |       | 179,381 |   | 147,838 |   |
| Selling, general and administrative expenses |       | 145,274                                     |       | 155,494 |   | 123,520 |   |
| Special charges                              |       | —                                      |       | 4,893 |   | — |   |
| Operating profit                             |       | 7,742                                       |       | 18,994 |   | 24,318 |   |
| Interest expense, net                        |       | 1,567                                       |       | 3,667 |   | 4,031 |   |
| Income before income taxes                   |       | 6,175                                       |       | 15,327 |   | 20,287 |   |
| Income tax expense                           |       | 2,818                                       |       | 5,724 |   | 7,844 |   |
| Net income                                   |       | $                                           | 3,357      |   | $ | 9,603 |   | $ | 12,443 |   |

 
| ** **                                   | ** ** | **As a Percentage of Net Sales****For Years Ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                    |       | 100                                                                                                           | %          | 100 | % | 100 | % |
| Cost of goods sold                           |       | 86.5                                                                                                          |       | 86.5 |   | 87.8 |   |
| Gross profit                                 |       | 13.5                                                                                                          |       | 13.5 |   | 12.2 |   |
| Selling, general and administrative expenses |       | 12.8                                                                                                          |       | 11.7 |   | 10.2 |   |
| Special charges                              |       | —                                                                                                        |       | 0.4 |   | — |   |
| Operating profit                             |       | 0.7                                                                                                           |       | 1.4 |   | 2.0 |   |
| Interest expense, net                        |       | 0.2                                                                                                           |       | 0.3 |   | 0.3 |   |
| Income before income taxes                   |       | 0.5                                                                                                           |       | 1.1 |   | 1.7 |   |
| Income tax expense                           |       | 0.3                                                                                                           |       | 0.4 |   | 0.7 |   |
| Net income                                   |       | 0.2                                                                                                           | %          | 0.7 | % | 1.0 | % |

 

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

 

*Net Sales.*The following table presents our netsales, by segment, for the periods presented (in thousands):

 
| ** **             | ** ** | **Years Ended  December 31,** | ** ** | **Change** | ** ** |
|------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2009**                                | ** ** | **2008**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                       | 368,846    |       | $          | 486,876 |   | $ | (118,030 | ) | (24.2 | )% |
| MME                    |       | 382,725                                 |       | 426,101    |       | (43,376 | ) | (10.2 | ) |
| Public Sector          |       | 173,957                                 |       | 161,418    |       | 12,539 |   | 7.8 |   |
| MacMall                |       | 212,531                                 |       | 253,537    |       | (41,006 | ) | (16.2 | ) |
| Corporate and Other    |       | 2                                       |       | 42         |       | (40 | ) | NMF | (1) |
| Consolidated net sales |       | $                                       | 1,138,061  |       | $          | 1,327,974 |   | $ | (189,913 | ) | (14.3 | )% |

 

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(1)  Not meaningful.

 

Our consolidated net sales for 2009 were$1,138.1 million, a $189.9 million, or 14%, decrease from consolidated netsales of $1,328.0 million in 2008.

 

Our SMB segment net sales decreased by$118.1 million, or 24%, to $368.8 million in 2009 from $486.9 million in 2008.The decrease in SMB segment net sales was primarily due to general economicweakness and the resulting softness in IT spending by small and medium sizedbusinesses in North America and a $25.0 million decrease in lower margin volumeiPod sales to certain customers.

 

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Our MME segment net sales decreased by$43.4 million, or 10%, to $382.7 million in 2009 from $426.1 million in 2008.The decrease in MME segment net sales was primarily due to a 13% decrease inproduct revenues, which was due to general economic weakness and the resultingsoftness in IT spending by customers in the mid-market and enterprise sector in2009. The decline in product revenues was partially offset by a 1% increase inservice revenues in 2009 compared to 2008. Service revenues included an 8% increasein SARCOM branded professional and managed services and an 18% decline inAbreon branded services, which are primarily focused on change management andeLearning consulting. Service revenues represented 23% of MME net sales in 2009compared to 20% of MME net sales in 2008.

 

Our Public Sector segment net salesincreased by $12.6 million, or 8%, in 2009 to $174.0 million from $161.4million in 2008. This increase was primarily due to an 18% increase in sales inour SLED business reflecting increased productivity of SLED account executivesand a 4% increase in our Federal business.

 

Our MacMall segment net sales decreasedby $41.0 million, or 16%, to $212.5 million in 2009 compared to $253.5 millionin 2008. This decrease was primarily due to general economic weakness,increased competition for retail customers, significant pricing pressure forApple products and a decrease in average selling prices resulting from adecrease in sales of higher priced items in the notebook computer category. Weexpect to continue to encounter a similarly competitive economic environment in2010.

 

*Gross Profit and Gross ProfitMargin.*Thefollowing table presents our gross profit and gross profit margin, by segment,for the periods presented (in thousands):

 
| ** **                                        | ** ** | **Years Ended December 31,** | ** ** | ** **            | ** ** | ** **            | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2009**                                    | ** ** | **2008**              | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | ** **                                  | ** ** | **Gross Profit** | ** ** | ** **            | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | **Gross Profit**                       | ** ** | **Margin**            | ** ** | **Gross Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                               |       | $                                           | 47,259     |                  | 12.8       | %                     | $          | 60,368 |   | 12.4 | % | $ | (13,109 | ) | 0.4 | % |
| MME                                               |       | 65,182                                      |       | 17.0                  |       | 73,600                |       | 17.3 |   | (8,418 | ) | (0.3 | ) |
| Public Sector                                     |       | 18,300                                      |       | 10.5                  |       | 16,565                |       | 10.3 |   | 1,735 |   | 0.2 |   |
| MacMall                                           |       | 22,095                                      |       | 10.4                  |       | 28,647                |       | 11.3 |   | (6,552 | ) | (0.9 | ) |
| Corporate and Other                               |       | 180                                         |       | NMF                   | (1)        | 201                   |       | NMF | (1) | (21 | ) | NMF | (1) |
| Consolidated gross profit and gross profit margin |       | $                                           | 153,016    |                  | 13.4       | %                     | $          | 179,381 |   | 13.5 | % | $ | (26,365 | ) | (0.1 | )% |

 

----

(1)  Not meaningful.

 

Consolidated gross profit for 2009 was$153.0 million compared to $179.4 million in 2008, a $26.4 million or 15%decrease. Consolidated gross profit margin was 13.4% in 2009 compared to 13.5%in 2008.

 

Gross profit for our SMB segment was$47.3 million in 2009 compared to $60.4 million in 2008, a decrease of $13.1million or 22%. SMB segment gross profit margin increased by 40 basis points to12.8% in 2009 compared to 12.4% in 2008. The decrease in SMB gross profit was primarilydue to the decrease in SMB net sales discussed above. The increase in SMB grossprofit margin resulted primarily due to a decline in low margin volume iPodsales discussed above.

 

Gross profit for our MME segmentdecreased by $8.4 million, or 11%, to $65.2 million in 2009 compared to $73.6million 2008, and gross profit margin decreased by 30 basis points to 17.0% in2009 compared to 17.3% in 2008. The decrease in MME gross profit was primarilydue to the decreased MME net sales discussed above. The decrease in grossprofit margin was primarily due to a decrease in MME selling margin due to acompetitive pricing environment, partially offset by a 36 basis point increasein vendor consideration as a percentage of net sales.

 

Gross profit for our Public Sectorsegment increased by $1.7 million, or 10%, to $18.3 million in 2009 compared to$16.6 million in 2008.  Public Sectorgross profit margin increased by 20 basis points to 10.5% in 2009 compared to10.3% in 2008. The increase in our Public Sector gross profit was primarily dueto the increase in Public Sector net sales discussed above. The increase in ourPublic Sector gross profit margin was primarily due to an increase in sellingmargin related to an improved product mix, partially offset by a decrease of 9basis points in vendor consideration as a percentage of net sales.

 

Gross profit for our MacMall segment for2009 was $22.1 million compared to $28.6 million in 2008, a decrease of $6.5million or 23%. Gross profit margin for our MacMall segment decreased by 90basis points to 10.4% in 2009 compared to 11.3% in 2008. The decrease in ourMacMall gross profit was primarily due to the decrease in MacMall net salesdiscussed above. The decrease in our MacMall gross profit margin was primarilydue to a very competitive pricing environment and a 33 basis point decrease invendor consideration as a percentage of net sales. We expect this competitiveenvironment to continue in 2010.

 

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*Operating Profit (Loss) andOperating Profit Margin.*The following table presents our operating profit (loss) and operatingprofit margin, by segment, for the periods presented (in thousands):

 
| ** **                                                 | ** ** | **Years Ended December 31,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2009**                                    | ** ** | **2008**      | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                  | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Operating**                               | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **Profit (Loss)**                      | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                        |       | $                                           | 23,048     |          | 6.2        | %                      | $          | 29,514 |   | 6.1 | % | $ | (6,466 | ) | 0.1 | % |
| MME                                                        |       | 18,613                                      |       | 4.9           |       | 18,379                 |       | 4.3 |   | 234 |   | 0.6 |   |
| Public Sector                                              |       | 5,847                                       |       | 3.4           |       | 2,200                  |       | 1.4 |   | 3,647 |   | 2.0 |   |
| MacMall                                                    |       | 3,191                                       |       | 1.5           |       | 7,540                  |       | 3.0 |   | (4,349 | ) | (1.5 | ) |
| Corporate and Other                                        |       | (42,957                                     | )          | (3.8          | )          | (38,639                | )          | (2.9 | ) | (4,318 | ) | (0.9 | )% |
| Consolidated operating profit and operating profit  margin |       | $                                           | 7,742      |          | 0.7        | %                      | $          | 18,994 |   | 1.4 | % | $ | (11,252 | ) | (0.7 | )% |

 

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(1)               Operating profit margin forCorporate and Other is computed based on consolidated net sales. Operatingprofit margin for each of the other segments is computed based on therespective segment’s net sales.

 

Consolidated operating profit for 2009decreased by $11.3 million, or 59%, to $7.7 million compared to $19.0 millionin 2008. Consolidated operating profit margin for 2009 was 0.7% compared to1.4% in 2008, a decrease of 70 basis points. Consolidated operating profit andoperating profit margin in 2008 were impacted by a $4.1 million goodwill andintangible asset impairment charge and a $0.8 million lawsuit settlementcharge.

 

Operating profit in 2009 for our SMBsegment decreased by $6.5 million, or 22%, to $23.0 million compared to $29.5million in 2008. The decrease was primarily due to the $13.1 million decreasein SMB gross profit discussed above, partially offset by a $5.2 milliondecrease in SMB personnel costs, a $0.6 million decrease in credit card relatedfees, a $0.6 million decrease in bad debt expense and a $0.6 million decreasein variable fulfilment costs.

 

Our MME segment operating profit in 2009increased by $0.2 million, or 1%, to $18.6 million compared to $18.4 million in2008. The increase in MME operating profit was primarily due to a $7.7 milliondecrease in MME personnel costs, which resulted primarily from centralizationof resources of $3.7 million to our Corporate & Other segment and a$2.4 million decrease in variable compensation, a $0.5 million decrease intravel and entertainment expenses offset by the $8.4 million decrease in MMEgross profit discussed above.

 

Operating profit in 2009 for our PublicSector segment was $5.8 million compared to $2.2 million in 2008, an increaseof $3.6 million, or 166%. The increase in Public Sector segment operatingprofit in 2009 was primarily due to the $1.7 million increase in Public Sectorgross profit discussed above and a $2.7 million goodwill impairment charge in2008, partially offset by a $0.6 million increase in personnel costs in 2009 primarilyin our federal government business.

 

Operating profit in 2009 for our MacMallsegment decreased by $4.3 million, or 58%, to $3.2 million compared to $7.5million in 2008. The decrease in MacMall segment operating profit was primarilydue to the $6.6 million decrease in MacMall segment gross profit discussedabove, partially offset by a $1.4 million goodwill impairment charge in 2008, a$0.8 million decrease in credit card related fees and a $0.4 million decreasein advertising expenditures.

 

Corporate and Otherexpenses increased by $4.4 million, or 11%, to $43.0 million in 2009 from $38.6million in 2008. This increase was primarily due to a $3.3million increase in personnel costs, which includes $3.7 million ofcentralization of certain resources from our MME segment, partially offset by a$0.4 million decrease in other personnel costs. The increase in Corporate andOther expenses also included a $1.7 million increase in professional servicerelated costs, which includes $1.0 million in legal costs related to defendingwhat we believe is a meritless lawsuit by a competitor in connection with ourhiring of two account executives. Corporate and Other expenses in 2008 includeda $0.8 million lawsuit settlement in the second quarter of 2008. As a percentof consolidated net sales, Corporate and Other expenses increased by 90 basispoints in 2009 to 3.8% compared to 2.9% in 2008, primarily due to the decreasein consolidated net sales discussed above and the centralization of certainresources from our MME segment.

 

*Net Interest Expense.*Total net interest expense in 2009decreased to $1.6 million compared with $3.7 million in 2008. The decrease ininterest expense resulted primarily from a decrease in our average effectiverate in 2009 compared to 2008 and a decrease in our average total outstandingborrowings in 2009.

 

43

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*Income Tax Expense.*We recorded an income tax expense of $2.8million in 2009 compared to an income tax expense of $5.7 million in 2008. Oureffective tax rates for 2009 and 2008 were 46% and 37%. The decrease in incometax expense is primarily attributable to the decrease in pre-tax income. Theincrease in our effective tax rate was primarily due to the impact of a taxadjustment relating to a dividend from a foreign subsidiary.

 

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

 

*Net Sales.*The following table presents our netsales, by segment, for the periods presented (in thousands):

 
| ** **             | ** ** | **Years Ended  December 31,** | ** ** | **Change** | ** ** |
|------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2008**                                | ** ** | **2007**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                       | 486,876    |       | $          | 554,493 |   | $ | (67,617 | ) | (12.2 | )% |
| MME                    |       | 426,101                                 |       | 238,545    |       | 187,556 |   | 78.6 |   |
| Public Sector          |       | 161,418                                 |       | 156,970    |       | 4,448 |   | 2.8 |   |
| MacMall                |       | 253,537                                 |       | 265,511    |       | (11,974 | ) | (4.5 | ) |
| Corporate and Other    |       | 42                                      |       | (86        | )          | 128 |   | NMF | (1) |
| Consolidated net sales |       | $                                       | 1,327,974  |       | $          | 1,215,433 |   | $ | 112,541 |   | 9.3 | % |

 

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(1) Notmeaningful.

 

Our consolidated net sales for 2008 were$1,328.0 million, a $112.5 million, or 9%, increase from consolidated net salesof $1,215.4 million in 2007.

 

Our SMB segment net sales decreased by$67.6 million, or 12%, to $486.9 million in 2008 from $554.5 million in 2007.The decrease in SMB segment net sales was primarily due to continued softeningin IT spending during the second half of 2008 by small and medium sized businessesin North America and a $35.8 million decrease in lower margin volume iPod salesto certain corporate customers.

 

Our MME segment net sales increased by$187.6 million, or 78%, to $426.1 million in 2008 from $238.5 million in 2007.The increase in MME segment net sales was primarily due to the inclusion ofSARCOM results since its acquisition in September 2007, which contributed$169.8 million in increased net sales in 2008 compared to 2007 since theacquisition, and continued growth in our legacy MME business. Excluding theimpact of the $169.8 million of increase attributable to SARCOM net salesyear-over-year, our MME net sales increased 10% to $189.1 million in 2008 from$171.3 million in 2007.

 

Our Public Sector segment net salesincreased by $4.4 million, or 3%, in 2008 to $161.4 million from $157.0 millionin 2007. This increase was primarily due to sales realized under existingcontracts in our state and local (“SLED”) business, partially offset bysoftness in sales to two large customers in our federal government business inthe latter part of 2008.

 

Our MacMall segment net sales decreasedby $12.0 million, or 5%, to $253.5 million in 2008 compared to $265.5 millionin 2007. We believe this decrease was primarily due to continued softening inconsumer spending.

 

*Gross Profit and Gross ProfitMargin.*Thefollowing table presents our gross profit and gross profit margin, by segment,for the periods presented (in thousands):

 
| ** **                                        | ** ** | **Years Ended December 31,** | ** ** | ** **            | ** ** | ** **            | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2008**                                    | ** ** | **2007**              | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | ** **                                  | ** ** | **Gross Profit** | ** ** | ** **            | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | **Gross Profit**                       | ** ** | **Margin**            | ** ** | **Gross Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                               |       | $                                           | 60,368     |                  | 12.4       | %                     | $          | 62,760 |   | 11.3 | % | $ | (2,392 | ) | 1.1 | % |
| MME                                               |       | 73,600                                      |       | 17.3                  |       | 36,105                |       | 15.1 |   | 37,495 |   | 2.2 |   |
| Public Sector                                     |       | 16,565                                      |       | 10.3                  |       | 15,930                |       | 10.1 |   | 635 |   | 0.2 |   |
| MacMall                                           |       | 28,647                                      |       | 11.3                  |       | 32,972                |       | 12.4 |   | (4,325 | ) | (1.1 | ) |
| Corporate and Other                               |       | 201                                         |       | NMF                   | (1)        | 71                    |       | NMF | (1) | 130 |   | NMF | (1) |
| Consolidated gross profit and gross profit margin |       | $                                           | 179,381    |                  | 13.5       | %                     | $          | 147,838 |   | 12.2 | % | $ | 31,543 |   | 1.3 | % |

 

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(1) Notmeaningful.

 

44

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Consolidated gross profit for 2008 was$179.4 million compared to $147.8 million in 2007, a $31.5 million or 21%increase. Consolidated gross profit margin was 13.5% in 2008 compared to 12.2%in 2007.

 

Gross profit for our SMB segment was$60.4 million in 2008 compared to $62.8 million in 2007, a decrease of $2.4million or 4%. SMB segment gross profit margin increased by 110 basis points to12.4% in 2008 compared to 11.3% in 2007. The decrease in SMB gross profit wasprimarily due to the decrease in SMB net sales discussed above. The increase inSMB gross profit margin resulted primarily from an improvement in product mix,decreased sales of lower margin volume iPod sales to certain customers andincreased performance of key products generating increased vendorconsideration, partially offset by pricing pressure in certain productcategories.

 

Gross profit for our MME segmentincreased by $37.5 million, or 104%, to $73.6 million in 2008 compared to $36.1million 2007, and gross profit margin increased by 220 basis points to 17.3% in2008 compared to 15.1% in 2007. The increase in MME gross profit was primarilydue to the increase in MME net sales discussed above. The increase in MME grossprofit margin was due to a favorable increase in the mix of services in ourlegacy MME business in 2008 and an increase in sales of certain softwarelicenses by SARCOM, which are recorded on a net basis.

 

Gross profit for our Public Sectorsegment increased by $0.6 million, or 4%, to $16.6 million in 2008 compared to$15.9 million in 2007, and gross profit margin increased by 20 basis points to10.3% in 2008 compared to 10.1% in 2007. The increase in our Public Sectorgross profit was primarily due to the increase in Public Sector net salesdiscussed above. The increase in Public Sector gross profit margin wasprimarily due a favorable product mix with higher margins as well as a decreasein lower margin sales to two large customers in our federal government businessas discussed above, partially offset by the loss of a state contract underwhich we provided contractual licensing products recorded on a net basis.

 

Gross profit for our MacMall segment for2008 was $28.6 million compared to $33.0 million in 2007, a decrease of $4.3million or 13%. Gross profit margin for our MacMall segment decreased by 110basis points to 11.3% in 2008 compared to 12.4% in 2007. The decrease in ourMacMall gross profit was primarily due to the decrease in MacMall net salesdiscussed above. The decrease in MacMall segment gross profit margin wasprimarily the result of a proportional increase in sales of lower marginconsumer CPUs, increased promotional activities, and aggressive competitivepricing, which was the result of continued softening in consumer spending.

 

*Operating Profit (Loss) andOperating Profit Margin.*The following table presents our operating profit (loss) and operatingprofit margin, by segment, for the periods presented (in thousands):

 
| ** **                                                 | ** ** | **Years Ended December 31,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2008**                                    | ** ** | **2007**      | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                  | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Operating**                               | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **Profit (Loss)**                      | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                        |       | $                                           | 29,514     |          | 6.1        | %                      | $          | 34,244 |   | 6.2 | % | $ | (4,730 | ) | (0.1 | )% |
| MME                                                        |       | 18,379                                      |       | 4.3           |       | 7,382                  |       | 3.1 |   | 10,997 |   | 1.2 |   |
| Public Sector                                              |       | 2,200                                       |       | 1.4           |       | 4,681                  |       | 3.0 |   | (2,481 | ) | (1.6 | ) |
| MacMall                                                    |       | 7,540                                       |       | 3.0           |       | 11,560                 |       | 4.4 |   | (4,020 | ) | (1.4 | ) |
| Corporate and Other                                        |       | (38,639                                     | )          | (2.9          | )          | (33,549                | )          | (2.8 | ) | (5,090 | ) | (0.1 | )% |
| Consolidated operating profit and operating profit  margin |       | $                                           | 18,994     |          | 1.4        | %                      | $          | 24,318 |   | 2.0 | % | $ | (5,324 | ) | (0.6 | )% |

 

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(1)               Operating profit margin forCorporate and Other is computed based on consolidated net sales. Operatingprofit margin for each of the other segments is computed based on therespective segment’s net sales.

 

Consolidated operating profit for 2008 decreasedby $5.3 million, or 6%, to $19.0 million compared to $24.3 million in 2007.Consolidated operating profit margin for 2008 was 1.4% compared to 2.0% in2007, a decrease of 60 basis points. Consolidated operating profit andoperating profit margin in 2008 were impacted by a $4.1 million goodwill andintangible asset impairment charge and a $0.8 million lawsuit settlementcharge.

 

Operating profit in 2008 for our SMBsegment decreased by $4.7 million, or 14%, to $29.5 million compared to $34.2million in 2007. The decrease was primarily due to the decrease in SMB segmentgross profit discussed above and a $2.1 million increase in SMB personnelcosts. The increase in SMB personnel costs was primarily due to our investmentin SMB account executive headcount for future growth and a reduction in ourCanadian labor subsidy under a new program which began in January 2008.

 

45

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Our MME segment operating profit in 2008increased by $11.0 million, or 149%, to $18.4 million compared to $7.4 millionin 2007. The increase was primarily due to the increase in MME gross profitdiscussed above, partially offset by a $20.3 million increase in MME personnelcosts, which was primarily due to the addition of SARCOM personnel, as well asan investment in sales account executives in our legacy MME business, a $1.7million increase in depreciation and amortization expense primarily relating tothe SARCOM acquisition, a $1.0 million increase in lease costs primarilyrelating to the acquisition of SARCOM, a $0.9 million increase in travelrelated costs and a $0.7 million increase in telecommunication costs.

 

Operating profit in 2008 for our PublicSector segment was $2.2 million compared to $4.7 million in 2007, a decrease of$2.5 million, or 53%. Public Sector segment operating profit in 2008 wasaffected primarily by the $2.7 million goodwill and intangible asset impairmentcharge and a $0.5 million increase in personnel costs, partially offset by theincrease in Pubic Sector gross profit discussed above.

 

Operating profit in 2008 for our MacMallsegment decreased by $4.0 million, or 35%, to $7.5 million compared to $11.6million in 2007. The decrease in MacMall segment operating profit was primarilydue to the decrease in MacMall segment gross profit discussed above and the$1.4 million goodwill impairment charge, partially offset by a $1.0 milliondecrease in advertising expenditures, a $0.4 million decrease in personnelcosts and a $0.3 million decrease in facility related fees.

 

Corporate and OtherSG&A expenses increased by $5.1 million, or 15%, to $38.6 million in 2008from $33.5 million in 2007. This increase was primarily due to a $4.1 millionincrease in personnel costs resulting from investments in our marketing, informationtechnology and credit departments, which included $1.2 million of expensesrelated to the centralization of certain resources from our MME segment, and a$0.8 million lawsuit settlement charge, partially offset by a $0.7 milliondecrease in facility related costs. As a percent of consolidated net sales,Corporate and Other operating profit margin decreased by 10 basis points to(2.9)% in 2008 compared to (2.8)% in 2007 primarily due to the increase insales resulting from the addition of SARCOM without a corresponding increase inCorporate and Other SG&A expenses.

 

*Net Interest Expense.*Total net interest expense in 2008decreased to $3.7 million compared with $4.0 million in 2007. The decrease ininterest expense resulted primarily from a decrease in our average effectiveborrowing rate in 2008 compared to 2007, which was partially offset by anincrease in our average total outstanding borrowings in 2008.

 

*Income Tax Expense.*We recorded an income tax expense of $5.7million in 2008 compared to an income tax expense of $7.8 million in 2007. Oureffective tax rates for 2008 and 2007 were 37% and 39%. The decrease in incometax expense is primarily attributable to the decrease in pre-tax income. Thedecrease in our effective tax rate was primarily due to non-recurring,acquisition-related permanent timing differences.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

*WorkingCapital.*Ourprimary capital need has historically been funding the working capitalrequirements created by our growth in sales and strategic acquisitions. Weexpect that our primary capital needs will continue to be the funding of ourexisting working capital requirements, capital expenditures for which we expectto include substantial investments in a new ERP system, eCommerce platform andan upgrade of our current IT infrastructure over the next several years, whichare discussed below in “Other Planned Capital Projects,” possible sales growth, possibleacquisitions and new business ventures, and possible repurchases of our commonstock under a discretionary repurchase program, which is discussed below. Ourprimary sources of financing have historically come from borrowings fromfinancial institutions, public and private issuances of our common stock andcash flows from operations. Our efforts to focus on SMB, MME and Public Sectorsales could result in an increase in our accounts receivable as these customersare generally provided longer payment terms than consumers. We historicallyhave increased our inventory levels from time to time to take advantage ofstrategic manufacturer promotions. We believe that our current working capital,including our existing cash balance, together with our expected future cashflows from operations and available borrowing capacity under our line ofcredit, will be adequate to support our current operating plans for at leastthe next 12 months. However, the current macroeconomic environment and relatedcompetitive pricing pressure, which have negatively impacted our operatingresults, together with tight credit markets, may limit our cash resources thatcould otherwise be available to fund future strategic opportunities, capitalinvestments or growth beyond our current operating plans.

 

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There has beensubstantial ongoing weakness in the global economic environment, coupled withdisruptions in the capital and credit markets. Continued problems in theseareas could have a negative impact on our ability to obtain financing if weneed additional funds, such as for acquisitions or expansion, to fund asignificant downturn in our sales or an increase in our operating expenses, orto take advantage of opportunities or favorable market conditions, in thefuture. We may seek additional financing from public or private debt or equityissuances; however, there can be no assurance that such financing will beavailable at acceptable terms, if at all. Also, there can be no assurance thatthe cost or availability of future borrowings, if any, under our creditfacility or in the debt markets will not be impacted by disruptions in thecapital and credit markets.

 

We had cash and cash equivalents of $9.2 million at December 31,2009 and $6.7 million at December 31, 2008. Our working capital increasedby $3.2 million to $54.0 million at December 31, 2009 from working capitalof $50.8 million at December 31, 2008.

 

InOctober 2008, our Board of Directors approved a discretionary common stockrepurchase program for up to $10 million of our common stock in aggregate withall other repurchases made under any repurchase programs following the date ofsuch Board of Directors’ approval. This repurchase program effectivelysupersedes an existing repurchase program adopted in 1996. Under this newprogram, the shares may be repurchased from time to time at prevailing marketprices, through open market or unsolicited negotiated transactions, dependingon market conditions. We expect that any repurchases of our common stock underthis program will be financed with existing working capital and amountsavailable under our existing credit facility. No limit was placed on theduration of the repurchase program. There is no guarantee as to the exactnumber of shares that we will repurchase. Subject to applicable securitieslaws, repurchases may be made at such times and in such amounts as ourmanagement deems appropriate. The program can also be discontinued at any timemanagement feels additional purchases are not warranted. During the year ended December 31,2009, we had repurchased a total of 582,779 shares of our common stock underthis program for a cost of $2.6 million. From the inception of the program in October 2008through December 31, 2009, we had repurchased an aggregate total of1,324,410 shares of our common stock for a cost of $5.2 million. Therepurchased shares are held as treasury stock.

 

We maintain a Canadiancall center serving the U.S. market, which has historically received thebenefit of labor credits under a Canadian government program. In 2007, wereceived an eligibility certificate to participate in the Investment QuebecRefundable Tax Credit for Major Employment Generating Projects (GPCE),replacing the prior government subsidy program which ended at the end of 2007.In addition to other eligibility requirements under the new program, we are requiredto maintain a minimum of 317 eligible employees employed by our subsidiary PCMall Canada, Inc. in the province of Quebec at all times to remaineligible to apply annually for these labor credits. As a result of this newcertification, we are eligible to make annual labor credit claims for eligibleemployees equal to 25% of eligible salaries, but not to exceed $15,000(Canadian) per eligible employee per year, beginning in fiscal year 2008 andcontinuing through fiscal year 2016. Under the prior program through the end of2007, we claimed annual labor credits of up to 35% of eligible compensationpaid to our qualifying employees. As of December 31, 2009, we had anaccrued receivable of $6.5 million related to the 2008 and 2009 calendar yearsand we expect to receive full payment under our labor credit claims.

 

*Cash Flows from OperatingActivities.*Net cash used in operating activities was $9.0million in 2009 compared to net cash provided by operating activities of $28.2million in 2008 and $29.8 million in 2007. The $9.0 million of net cash used in operatingactivities in 2009 resulted primarily from the $12.9 million increase inaccounts receivable which resulted from higher sales on account, partiallyoffset by the $3.4 million of income from our operations. The $28.2 million ofnet cash provided by operating activities in 2008 resulted primarily from the$11.5 million decrease in accounts receivable which resulted from lower saleson account and the $9.6 million of income from our operations partially offsetby a $4.0 million increase in inventory. The $29.8 million of net cash providedby operating activities in 2007 resulted primarily from the $31.7 millionincrease in accounts payable, which was due to timing of our vendor payablesand the $12.4 million of income from our operations partially offset by a $12.8million increase in accounts receivable, which was primarily due to increasedreceivables from our government customers.

 

*Cash Flows from InvestingActivities.*Netcash used in investing activities during the years ended December 31,2009, 2008 and 2007 was $9.3 million, $3.2 million and $50.3 million. The $9.3million of net cash used in investing activities in 2009 was primarily relatedto investment in our IT infrastructure, including ERP, security andtelecommunications upgrades and the acquisition of certain assets of DSW. The$3.2 million of net cash used in investing activities in 2008 was primarily dueto the creation of enhanced electronic tools for our account executives andsales support staff, the continued expansion of our Philippines offices,leasehold improvements and capitalized labor relating to internally developedsoftware. The $50.3 million of net cash used in investing activities in 2007resulted from the $47.7 million related to the acquisition of SARCOM in September 2007and the $2.6 million of capital expenditures relating to the creation ofenhanced electronic tools for our account executives and sales support staffand the continued expansion of our Philippines offices.

 

47

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*Cash Flows from FinancingActivities.*Netcash provided by financing activities was $19.8 million in 2009 compared to netcash used in financing activities of $25.2 million in 2008 and net cashprovided by financing activities of $20.5 million in 2007. The $19.8 million ofnet cash provided by financing activities in 2009 was primarily due to a $24.1million increase in our outstanding balance on our line of credit, partiallyoffset by repurchases of our common shares totaling $2.6 million, a $1.1million decrease in book overdraft and $1.0 million of net payment on our notespayable. The $25.2 million of net cash used in financing activities in 2008 wasprimarily due to the $24.9 million repayment on our line of credit and a $2.6million repurchase of our common shares into treasury stock, partially offsetby a $2.4 million increase in book overdraft. The $20.5 million of net cashprovided by financing activities in 2007 was primarily due to financing requiredto fund the cash portion of the purchase price of SARCOM in the amount ofapproximately $48.2 million, which net of payments made on the outstandingbalance of our line of credit resulted in a net increase of $21.4 million onour line of credit, an increase in our note payable of $3.0 million partiallyoffset by a decrease in book overdraft of $7.2 million which was due to timingof our outstanding payments to vendors relative to the prior year.

 

*Line of Credit and Notes Payable.*We maintain an asset-based revolvingcredit facility, as amended from time to time, of up to $150 million from alending unit of a large commercial bank. The credit facility provides for,among other things, (i) a credit limit of $130 million up to a totalmaximum amount of $150 million, in increments of $5 million, provided that anyincrease of the total credit limit in excess of $130 million is subject to anacceptance by a third party assignee in the event the administrative agentelects to assign such excess amount; (ii) a line increase fee equal to0.25% of the amount of each increment increased as described above, plus, tothe extent that the administrative agent assigns a portion of its revolvingloan commitment under the credit facility and to the extent required by the assignee,an aggregate acceptance fee not to exceed 0.125% of the aggregate sum of theincrease in credit limit assigned; (iii) LIBOR interest rate options thatwe can enter into with no limit on the maximum outstanding principal balancewhich may be subject to a LIBOR interest rate option; and (iv) a maturitydate of March 2011. In October 2008, we elected to increase ourmaximum credit line to $130 million from a previous maximum of $115 million.

 

The credit facility, which functions as a workingcapital line of credit with a borrowing base of inventory and accountsreceivable, including certain credit card receivables, also includes a monthlyunused line fee of 0.25% per year on the amount, if any, by which 80% of theMaximum Credit, as defined in the agreement, then in effect, exceeds theaverage daily principal balance of the outstanding borrowings during theimmediately preceding month. At December 31, 2009, we had $53.1 million ofnet working capital advances outstanding under the line of credit. At December 31,2009, the maximum credit line was $130 million and we had $52.8 millionavailable to borrow for working capital advances under the line of credit.There can be no assurance that the administrative agent, if electing to do so,will be successful in assigning the remaining excess $20 million of creditbeyond the $130 million in any future period. As a result, we may not be ableto access the credit facility beyond its current limit of $130 million andgiven the current credit market environment, we do not currently expect to beable to do so on our existing credit facility terms.

 

The credit facility is collateralized by substantiallyall of our assets. In addition to the security interest required by the creditfacility, certain of our vendors have security interests in some of our assetsrelated to their products. The credit facility has as its single financialcovenant a minimum tangible net worth requirement that is tested as of the lastday of each fiscal quarter, which we were in compliance with at December 31,2009. Loan availability under the line of credit fluctuates daily and isaffected by many factors, including eligible assets on-hand, opportunisticpurchases of inventory and availability and utilization of early-pay discounts.

 

Our existing credit facility contains terms that aremore favorable to us than terms that we believe would otherwise be available tous in the current credit market environment. We have been informed by theadministrative agent for the facility that any amendment, modification, waiver,consent or other change we may seek with regard to our facility, including aconsent to pursue an acquisition, will result in the renegotiation of the termsof the facility and would likely include terms less favorable to us, such as stricterfinancial covenants (such as covenants requiring us to maintain minimum levelsof excess borrowing capacity or be subject to minimum fixed charge coverageratios) and less favorable interest rates. These limitations could adverselyaffect our ability to make certain strategic investments or pursue certainacquisitions and other strategic transactions. Additionally, if marketconditions have not improved by the time our current credit facility expires inMarch 2011, we expect that any new facility, to the extent available to usat such time, would be on terms less favorable to us than our existing creditfacility.

 

In connection with and as part of the amended creditfacility, we entered into an amended term note on September 17, 2007 witha principal balance of $5.425 million, payable in equal monthly principalinstallments beginning on October 1, 2007, plus interest at the prime ratewith a LIBOR option. The amended term note matures in September 2014 or inthe event of a default, termination or non-renewal of our credit facility, ispayable in its entirety upon demand by our lender.  At December 31, 2009, we had $3.7 millionoutstanding under the amended term note, which is included in “Notes payable —current” and “Notes payable and other long-term liabilities” on ourConsolidated Balance Sheets. The remaining balance under our term note maturesas follows: $775,000 annually in each of the years 2010 through 2013 and$581,250 thereafter.

 

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At December 31, 2009, our effective weightedaverage annual interest rate on outstanding amounts under our credit facilityand term note was 1.82%.

 

We are currently upgrading many of our IT systems. Wehave purchased licenses for workflow software, web development tools andMicrosoft AX (Axapta) to upgrade our ERP systems. We initiated theimplementation and upgrade of our eCommerce system in the second half of 2008and have completed and launched a new generation of our public sites atmacmall.com, onsale.com and pcmall.com. We are currently working on theimplementation of the ERP modules and the upgrade of our ERP systems, includingadditional enhancements and features.  Wehave completed the initial phase of the implementation in January 2010,and we expect to be complete with all phases of the implementation of the ERPsystems by 2013. We believe the implementation and upgrade should help us to gainfurther efficiencies across our organization. To date, we have incurred approximately $4.1 million of external costs,and approximately $1.0 million of internal capitalized labor costs related tothe implementation of the ERP systems. In addition, based on our estimates, which are subject to change, weexpect to incur approximately $5.2 million of additional external costs relatedto the implementation of the ERP systems. We also expect to incur material additional internal capitalized laborcosts related to the ERP systems in the future. As of December 31, 2009,$0.3 million and $0.4 million were included in “Notes payable — current” and“Notes payable and other long-term liabilities,” respectively, on ourConsolidated Balance Sheets.

 

The carrying amounts of our line of credit borrowingsand notes payable approximate their fair value based upon the current ratesoffered to us for obligations of similar terms and remaining maturities.

 

As part of our growthstrategy, we may, in the future, make acquisitions in the same or complementarylines of business, and pursue other business ventures. Any launch of a newbusiness venture or any acquisition and the ensuing integration of the acquiredoperations would place additional demands on our management, and our operatingand financial resources.

 

**Inflation**

 

Inflation has not had a material impact on ouroperating results; however, there can be no assurance that inflation will nothave a material impact on our business in the future.

 

**Dividend Policy**

 

We have never paid cash dividends on our capital stockand our credit facility prohibits us from paying any cash dividends on ourcapital stock. Therefore, we do not currently anticipate paying dividends; weintend to retain any earnings to finance the growth and development of ourbusiness.

 

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**CONTRACTUAL OBLIGATIONS, OFF-BALANCESHEET ARRANGEMENTS AND CONTINGENCIES**

 

**ContractualObligations**

 

The following tables set forth our future contractualobligations and other commercial commitments as of December 31, 2009 (inthousands), including the future periods in which payments are expected.Additional details regarding these obligations are provided in the Notes to theConsolidated Financial Statements in Part II, Item 8 of this report.

 
| ** **                                  | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
| **Contractual obligations**                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt obligation (a) (Note 7) |       | $                                         | 4,371      |   | $ | 996 |   | $ | 2,018 |   | $ | 1,357 |   | $ | — |   |
| Purchase obligations (b) (Note 9)      |       | 8,246                                     |       | 6,376 |   | 1,870 |   | — |   | — |   |
| Operating lease obligations (Note 9)        |       | 16,972                                    |       | 5,402 |   | 6,858 |   | 3,057 |   | 1,655 |   |
| Capital lease obligations (Note 9)          |       | 2,814                                     |       | 620 |   | 1,242 |   | 952 |   | — |   |
| Total contractual obligations               |       | $                                         | 32,403     |   | $ | 13,394 |   | $ | 11,988 |   | $ | 5,366 |   | $ | 1,655 |   |

 
| ** **                       | ** ** | **Total** | ** ** | **Less  than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **After 5  years** | ** ** |
|----------------------------------|------------|-----------|------------|------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|
| **Other commercial commitment**  |       |      |       |                   |       |           |       |           |       |               |       |
| Line of credit (a) (Note 7) |       | $         | 53,127     |                   | $          | 53,127         |       | $              | —     |               | $          | — |   | $ | — |   |
|                                  |            |           |            |                        |            |                |            |                |            |                    |            |  |  |  |  |  |

 

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(a)     Long-term debtobligation and line of credit exclude interest, which is based on a variablerate tied to the prime rate or LIBOR plus a variable spread, at our option.

(b)     Purchaseobligations consist of minimum commitments under non-cancelable contracts forservices relating to telecommunications, IT maintenance, financial services andemployment contracts with certain employees (which consist of severance arrangementsthat, if exercised, would become payable in less than one year).

 

**OtherPlanned Capital Projects**

 

*ERP andWeb Infrastructure Upgrade*

 

We are currently upgrading many of our IT systems. Wehave purchased licenses for workflow software, web development tools andMicrosoft Dynamics AX (Axapta) to upgrade our ERP systems. We initiated theimplementation and upgrade of our eCommerce system in the second half of 2008and have completed and launched a new generation of our public sites atmacmall.com, onsale.com and pcmall.com. We are currently working on theimplementation of the ERP modules and the upgrade of the ERP systems, includingadditional enhancements and features. We have completed the initial phase ofthe implementation in January 2010, and we expect to be complete with allphases of the implementation of the ERP systems by 2013. We believe theimplementation and upgrade should help us to gain further efficiencies acrossour organization.

 

## ***Infrastructure Upgrade***

## ** **

In July 2008, we entered into an agreement withCisco Systems for the purchase and implementation of various solutions toupgrade our current infrastructure for up to approximately $4.0 million. Thepurchase is financed through a capital lease over a five year term. Our plan isto provide a unified platform for our entire company and to provide a robustand efficient contact center. As of December 31, 2009, we have received$3.1 million of the Cisco solution. We expect to receive the remainder of theequipment and services in the******first half of 2010. We are implementing the Ciscosolution across all of our locations and expect that all of our locations willbe upgraded by the second half of 2010.

 

**Off-Balance Sheet Arrangements**

 

As of December 31, 2009, we did not have anyoff-balance sheet arrangements.

 

**Contingencies**

 

For a discussion of contingencies, see Part II,Item 8, Note 9 of the Notes to the Consolidated Financial Statements of thisreport.

 

50

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**RELATED-PARTY TRANSACTIONS**

 

For a discussion of related-party transactions, see Part II,Item 8, Note 15 of the Notes to the Consolidated Financial Statements of thisreport.

 

**IMPACT OF RECENTLY ISSUED ACCOUNTINGSTANDARDS**

 

In October 2009, the FASB issuedASU 2009-14,**“Certain Arrangements That Contain SoftwareElements (Topic 985) — a consensus of the FASB Emerging Issues Task Force.”ASU 2009-14 amends the scope of software revenue guidance in ASC Subtopic985-605, “Software-RevenueRecognition,” to exclude tangible products containing software andnon-software components that function together to deliver the product’sessential functionality. In October 2009, FASB also issued ASU 2009-13,**“Multiple-DeliverableRevenue Arrangements (Topic 605) — a consensus of the FASB EITF.” ASU2009-13 eliminates the residual method of allocation and requires the relativeselling price method when allocating arrangement consideration to alldeliverables at the inception of the arrangement. ASU 2009-13 specifies thatthe best estimate of a selling price is consistent with that used to determinethe price to sell the deliverable on a standalone basis. ASU 2009-14 and ASU2009-13 are effective prospectively for revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010,and must be adopted in the same period using the same transition method. Ifadoption is elected in a period other than the beginning of a fiscal year, theamendments in these standards must be applied retrospectively to the beginningof the fiscal year. Full retrospective application of these amendments to priorfiscal years is optional. We believe that the adoption of ASU 2009-14 and ASU2009-13 will not have a significant impact on our consolidated financialstatements.

 

In May 2009, the FASB issued ASC 855-10-05(formerly SFAS No. 165, “Subsequent Events”) which establishes accountingand disclosure requirements for subsequent events. ASC 855-10-05 sets forth theperiod after the balance sheet date during which we should evaluate events ortransactions that occur for potential recognition or disclosure in ourfinancial statements, the circumstances under which we should recognize eventsor transactions occurring after the balance sheet date in our financialstatements and the required disclosures for such events or transactions. ASC855-10-05 is effective for interim or annual financial periods ending after June 15,2009, and as such, we adopted ASC 855-10-05 prospectively beginning in ourquarterly period ended June 30, 2009. In February 2010, the FASBissued ASU 2010-09,*“*Subsequent Events (Topic 855) — Amendments to Certain Recognition andDisclosure Requirements.” ASU 2010-09 removes the requirement for an SECfiler to disclose the date through which subsequent events have been evaluatedin both issued and revised financial statements. Revised financial statementsinclude financial statements revised as a result of either correction of anerror or retrospective application of U.S. GAAP. The amendment in the ASU waseffective for the Company upon issuance (February 24, 2010). We haveevaluated subsequent events through the filing date of this report pursuant toASC 855-10-05.

 

In April 2008,the FASB issued ASC 350-30 (formerly FASB Staff Position FAS 142-3,“Determination of Useful Life of Intangible Assets”). ASC 350-30 amends thefactors that should be considered in developing the renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS 142, “Goodwill and Other Intangible Assets” and also requiresexpanded disclosure related to the determination of intangible asset usefullives. ASC 350-30 intends to improve the consistency between the useful life ofa recognized intangible asset under SFAS 142 and the period of expected cashflows used to measure the fair value of the asset under SFAS 141R, and otherGAAP. ASC 350-30 is effective for fiscal years beginning after December 15,2008. We adopted ASC 350-30 on January 1, 2009 and it did not have asignificant impact on our consolidated financial statements.

 

In March 2008,the FASB issued ASC 815-10 (formerly SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”).ASC 815-10 requires entities to provide enhanced disclosures about (a) howand why an entity uses derivative instruments and the objectives for usingderivative instruments in terms of underlying risk and accounting designation, (b) howderivative instruments and related hedged items are accounted for under SFAS133, “Accounting for DerivativeInstruments and Hedging Activities”**andits related interpretations, including a tabular format disclosure of the fairvalues of derivative instruments and their gains and losses and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance and cash flows. ASC 815-10 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application encouraged. ASC 815-10 encourages,but does not require, comparative disclosures for earlier periods at initialadoption. We adopted ASC 815-10 on January 1, 2009 and it did not have asignificant impact on our consolidated financial statements.

 

In December 2007,the FASB issued ASC 805-20 (formerly SFAS No. 141 (revised 2007),“Business Combinations,” which replaces SFAS 141). ASC 805-20 retains thefundamental requirements in SFAS 141 and establishes principles andrequirements for (a) how an acquirer recognizes and measures the identifiableassets acquired, the liabilities assumed and any non-controlling interest inthe acquired business, (b) how an acquirer recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase, and (c) what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. ASC 805-20 applies prospectively to business combinationsfor which the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008. We adopted ASC805-20 on January 1, 2009. We cannot anticipate whether the adoption ofASC 805-20 will have a material impact on our results of operations andfinancial condition as the impact will depend on the terms and nature of anybusiness combination we enter into after January 1, 2009.

 

*******

 

51

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**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Our financial instruments include cash and cashequivalents and long-term debt. At December 31, 2009, the carrying valuesof our financial instruments approximated their fair values based on currentmarket prices and rates.

 

We have not entered into derivative financialinstruments as of December 31, 2009. However, from time-to-time, wecontemplate and may enter into derivative financial instruments related tointerest rate, foreign currency, and other market risks.

 

*Interest Rate Risk*

 

We have exposure to the risks of fluctuating interestrates on our line of credit and note payable. The variable interest rates onour line of credit and note payable are tied to the prime rate or the LIBOR, atour discretion. At December 31, 2009, we had $53.1 million outstandingunder our line of credit and $3.7 million outstanding under our note payable.As of December 31, 2009, the hypothetical impact of a one percentage pointincrease in interest rate related to the outstanding borrowings under our lineof credit and note payable would be to increase our annual interest expense byapproximately $0.6 million.

 

*Foreign Currency Exchange Risk*

 

We have operation centers in Canada and thePhilippines that provide back-office administrative support and customerservice support. In each of these countries, transactions are primarilyconducted in the respective local currencies. In addition, our two foreignsubsidiaries that operate the operation centers have intercompany accounts withour U.S. subsidiaries that eliminate upon consolidation. However, transactionsresulting in such accounts expose us to foreign currency rate fluctuations. Werecord gains and losses resulting from exchange rate fluctuations on ourshort-term intercompany accounts in “Selling, general and administrative expenses”in our Consolidated Statements of Operations and translation gains and lossesresulting from exchange rate fluctuations on local currency based assets andliabilities in “Accumulated other comprehensive income,” a separate componentof stockholders’ equity on our Consolidated Balance Sheets. As such, we haveforeign currency translation exposure for changes in exchange rates for thesecurrencies. As of December 31, 2009, we did not have material foreigncurrency or overall currency exposure. Significant changes in exchange ratesbetween foreign currencies in which we transact business and the U.S. dollarmay adversely affect our Consolidated Statements of Operations and ConsolidatedBalance Sheets.

 

***

 

52

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**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| **Financial Statements and  Supplementary Data**                                                                |   |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                            |   |   |
| Report of Independent Registered Public Accounting  Firm                                                        |   | 54     |
|                                                                                                            |   |   |
| Consolidated  Balance Sheets at December 31, 2009 and 2008                                                 |   | 55     |
|                                                                                                            |   |   |
| Consolidated Statements of Operations for the Years  Ended December 31, 2009, 2008 and 2007                |   | 56     |
|                                                                                                            |   |   |
| Consolidated Statements of Stockholders’ Equity for  the Years Ended December 31, 2009, 2008 and 2007 |   | 57     |
|                                                                                                            |   |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2009, 2008 and 2007                |   | 58     |
|                                                                                                            |   |   |
| Notes to the Consolidated Financial Statements                                                                  |   | 59     |
|                                                                                                            |   |   |
| Quarterly Financial Information (unaudited)                                                                     |   | 79     |
|                                                                                                            |   |   |
| Financial Statement Schedule                                                                                    |   | 82     |
|                                                                                                            |   |   |
| Schedule II — Valuation and Qualifying Accounts                                                            |   | 83     |

 

All other schedules are omitted since the requiredinformation is not present or is not present in amounts sufficient to requiresubmission of the schedule, or because the information required is included inthe consolidated financial statements and notes thereto.

 

53

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors andShareholders of PC Mall, Inc.:

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations, stockholders’ equity, and cash flowspresent fairly, in all material respects, the financial position of PC Mall, Inc.and its subsidiaries****at December 31,2009 and 2008, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2009****in conformity with accounting principles generally acceptedin the United States of America.  Inaddition, in our opinion, the financial statement schedule listed in theaccompanying index presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements.  Also in ouropinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2009, based oncriteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  The Company’s management is responsible forthese financial statements and financial statement schedule, for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting, included inManagement’s Report on Internal Control Over Financial Reporting appearing inItem 9A.  Our responsibility is toexpress opinions on these financial statements, financial statement schedule,and on the Company’s internal control over financial reporting based on ourintegrated audits.  We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement and whether effective internal control over financial reportingwas maintained in all material respects. Our audits of the financial statementsincluded examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Ouraudit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

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

 

 
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|
|                            |   |
| Los Angeles, California         |   |
| March 16, 2010             |   |

 

54

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**PC MALL,INC.**

 

**CONSOLIDATEDBALANCE SHEETS**

**(inthousands, except per share amounts and share data)**

 
| ** **                                                                                                                                                              | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                                                              |       |                          |       |   |   |
| Current assets:                                                                                                                                                         |       |                          |       |   |   |
| Cash and cash equivalents                                                                                                                                               |       | $                             | 9,215      |   | $ | 6,748 |   |
| Accounts receivable, net of allowances of $2,740  and $4,241                                                                                                            |       | 161,468                       |       | 148,547 |   |
| Inventories, net                                                                                                                                                        |       | 68,564                        |       | 67,845 |   |
| Prepaid expenses and other current assets                                                                                                                               |       | 9,290                         |       | 7,328 |   |
| Deferred income taxes                                                                                                                                                   |       | 3,297                         |       | 4,820 |   |
| Total current assets                                                                                                                                                    |       | 251,834                       |       | 235,288 |   |
| Property and equipment, net                                                                                                                                             |       | 17,091                        |       | 11,839 |   |
| Deferred income taxes                                                                                                                                                   |       | 1,538                         |       | 4,173 |   |
| Goodwill                                                                                                                                                                |       | 19,291                        |       | 18,781 |   |
| Intangible assets, net                                                                                                                                                  |       | 10,354                        |       | 11,260 |   |
| Other assets                                                                                                                                                            |       | 1,068                         |       | 1,044 |   |
| Total assets                                                                                                                                                            |       | $                             | 301,176    |   | $ | 282,385 |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                          |       |                          |       |   |   |
| Current liabilities:                                                                                                                                                    |       |                          |       |   |   |
| Accounts payable                                                                                                                                                        |       | $                             | 108,773    |   | $ | 110,669 |   |
| Accrued expenses and other current liabilities                                                                                                                          |       | 25,148                        |       | 29,262 |   |
| Deferred revenue                                                                                                                                                        |       | 9,714                         |       | 14,462 |   |
| Line of credit                                                                                                                                                          |       | 53,127                        |       | 29,010 |   |
| Note payable — current                                                                                                                                             |       | 1,038                         |       | 1,038 |   |
| Total current liabilities                                                                                                                                               |       | 197,800                       |       | 184,441 |   |
| Note payable and other long-term liabilities                                                                                                                            |       | 5,621                         |       | 4,393 |   |
| Total liabilities                                                                                                                                                       |       | 203,421                       |       | 188,834 |   |
| Commitments and contingencies (Note 9)                                                                                                                                  |       |                          |       |   |   |
| Stockholders’ equity:                                                                                                                                              |       |                          |       |   |   |
| Preferred stock, $0.001 par value; 5,000,000  shares authorized; none issued and outstanding                                                                            |       | —                        |       | — |   |
| Common stock, $0.001 par value; 30,000,000 shares  authorized; 14,031,740 and 13,839,609 shares issued; and 12,290,652 and  12,681,300 shares outstanding, respectively |       | 14                            |       | 14 |   |
| Additional paid-in capital                                                                                                                                              |       | 102,361                       |       | 99,732 |   |
| Treasury stock, at cost: 1,741,088 and 1,158,309  shares                                                                                                                |       | (6,254                        | )          | (3,623 | ) |
| Accumulated other comprehensive income                                                                                                                                  |       | 2,111                         |       | 1,262 |   |
| Accumulated deficit                                                                                                                                                     |       | (477                          | )          | (3,834 | ) |
| Total stockholders’ equity                                                                                                                                         |       | 97,755                        |       | 93,551 |   |
| Total liabilities and stockholders’ equity                                                                                                                         |       | $                             | 301,176    |   | $ | 282,385 |   |

 

See Notes to theConsolidated Financial Statements.

 

55

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**PC MALL,INC.**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(inthousands, except per share amounts)**

 
| ** **                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                              |       | $                                           | 1,138,061  |   | $ | 1,327,974 |   | $ | 1,215,433 |   |
| Cost of goods sold                                     |       | 985,045                                     |       | 1,148,593 |   | 1,067,595 |   |
| Gross profit                                           |       | 153,016                                     |       | 179,381 |   | 147,838 |   |
| Selling, general and administrative expenses           |       | 145,274                                     |       | 155,494 |   | 123,520 |   |
| Special charges                                        |       | —                                      |       | 4,893 |   | — |   |
| Operating profit                                       |       | 7,742                                       |       | 18,994 |   | 24,318 |   |
| Interest expense, net                                  |       | 1,567                                       |       | 3,667 |   | 4,031 |   |
| Income before income taxes                             |       | 6,175                                       |       | 15,327 |   | 20,287 |   |
| Income tax expense                                     |       | 2,818                                       |       | 5,724 |   | 7,844 |   |
| Net income                                             |       | $                                           | 3,357      |   | $ | 9,603 |   | $ | 12,443 |   |
| **Basic and Diluted Earnings Per  Common Share**       |       |                                        |       |   |   |   |   |
| Basic                                                  |       | $                                           | 0.27       |   | $ | 0.72 |   | $ | 0.98 |   |
| Diluted                                                |       | 0.26                                        |       | 0.69 |   | 0.90 |   |
| Weighted average number of common shares  outstanding: |       |                                        |       |   |   |   |   |
| Basic                                                  |       | 12,373                                      |       | 13,268 |   | 12,667 |   |
| Diluted                                                |       | 12,675                                      |       | 13,861 |   | 13,767 |   |

 

See Notes to theConsolidated Financial Statements.

 

56

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**PC MALL,INC.**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(inthousands)**

 
| ** **                                                                | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|-------------|------------|
| ** **                                                                | ** ** | **Outstanding**       | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Stock**                             | ** ** | **Income (Loss)** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| **Balance at December 31, 2006**                                     |       | 12,354                |       | $                       | 13         |         | $          | 87,465                                |       | $                      | (1,015     | )           | $          | 241 |   | $ | (25,880 | ) | $ | 60,824 |   |
| Stock  option exercises, including related income tax benefit             |       | 394                   |       | 1                       |       | 2,864        |       | —                                |       | —                 |       | —      |       | 2,865 |   |
| Stock-based  compensation expense                                         |       | —                |       | —                  |       | 1,353        |       | —                                |       | —                 |       | —      |       | 1,353 |   |
| SARCOM  acquisition                                                       |       | 512                   |       | —                  |       | 6,187        |       | —                                |       | —                 |       | —      |       | 6,187 |   |
| Subtotal                                                                  |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 71,229 |   |
| Net  income                                                               |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | 12,443      |       | 12,443 |   |
| Translation  adjustments, net of taxes                                    |       | —                |       | —                  |       | —       |       | —                                |       | 752                    |       | —      |       | 752 |   |
| Comprehensive  income                                                     |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 13,195 |   |
| **Balance at December 31, 2007**                                     |       | 13,260                |       | 14                      |       | 97,869       |       | (1,015                                | )          | 993                    |       | (13,437     | )          | 84,424 |   |
| Stock  option and warrant exercises, including related income tax benefit |       | 142                   |       | —                  |       | 354          |       | —                                |       | —                 |       | —      |       | 354 |   |
| Restricted  stock awards                                                  |       | 21                    |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | — |   |
| Stock-based  compensation expense                                         |       | —                |       | —                  |       | 1,509        |       | —                                |       | —                 |       | —      |       | 1,509 |   |
| Purchases  of common stock under a stock repurchase program               |       | (742                  | )          | —                  |       | —       |       | (2,608                                | )          | —                 |       | —      |       | (2,608 | ) |
| Subtotal                                                                  |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 83,679 |   |
| Net  income                                                               |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | 9,603       |       | 9,603 |   |
| Translation  adjustments, net of taxes                                    |       | —                |       | —                  |       | —       |       | —                                |       | 269                    |       | —      |       | 269 |   |
| Comprehensive  income                                                     |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 9,872 |   |
| **Balance at December 31, 2008**                                     |       | 12,681                |       | 14                      |       | 99,732       |       | (3,623                                | )          | 1,262                  |       | (3,834      | )          | 93,551 |   |
| Stock  option and warrant exercises, including related income tax benefit |       | 193                   |       | —                  |       | 945          |       | —                                |       | —                 |       | —      |       | 945 |   |
| Stock-based  compensation expense                                         |       | —                |       | —                  |       | 1,684        |       | —                                |       | —                 |       | —      |       | 1,684 |   |
| Purchases  of common stock under a stock repurchase program               |       | (583                  | )          | —                  |       | —       |       | (2,631                                | )          | —                 |       | —      |       | (2,631 | ) |
| Subtotal                                                                  |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 93,549 |   |
| Net  income                                                               |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | 3,357       |       | 3,357 |   |
| Translation  adjustments, net of taxes                                    |       | —                |       | —                  |       | —       |       | —                                |       | 849                    |       | —      |       | 849 |   |
| Comprehensive  income                                                     |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 4,206 |   |
| **Balance at December 31, 2009**                                     |       | 12,291                |       | $                       | 14         |         | $          | 102,361                               |       | $                      | (6,254     | )           | $          | 2,111 |   | $ | (477 | ) | $ | 97,755 |   |

 

See Notes to theConsolidated Financial Statements.

 

57

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**PC MALL,INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(inthousands)**

 
| ** **                                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Cash Flows From Operating  Activities**                                                    |       |                                        |       |   |   |   |   |
| Net income                                                                                   |       | $                                           | 3,357      |   | $ | 9,603 |   | $ | 12,443 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                                |       | 5,597                                       |       | 5,606 |   | 4,357 |   |
| Goodwill and intangible assets impairment charge                                             |       | —                                      |       | 4,103 |   | — |   |
| Provision for deferred income taxes                                                          |       | 4,273                                       |       | 1,698 |   | 1,960 |   |
| Net tax benefit (expense) related to stock option  exercises                                 |       | 309                                         |       | (74 | ) | 1,833 |   |
| Excess tax benefit related to stock option  exercises                                        |       | (289                                        | )          | (487 | ) | (2,663 | ) |
| Non-cash stock-based compensation                                                            |       | 1,684                                       |       | 1,509 |   | 1,353 |   |
| Loss (gain) on sale of fixed assets                                                          |       | 22                                          |       | (1 | ) | 57 |   |
| Change in operating assets and liabilities:                                                  |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                          |       | (12,921                                     | )          | 11,513 |   | (12,783 | ) |
| Inventories                                                                                  |       | (719                                        | )          | (4,028 | ) | (8,832 | ) |
| Prepaid expenses and other current assets                                                    |       | (1,942                                      | )          | 1,905 |   | 132 |   |
| Other assets                                                                                 |       | (24                                         | )          | 410 |   | (189 | ) |
| Accounts payable                                                                             |       | (779                                        | )          | (2,858 | ) | 31,656 |   |
| Accrued expenses and other current liabilities                                               |       | (2,672                                      | )          | (2,578 | ) | 2,249 |   |
| Deferred revenue                                                                             |       | (4,858                                      | )          | 1,899 |   | (1,739 | ) |
| Total adjustments                                                                            |       | (12,319                                     | )          | 18,617 |   | 17,391 |   |
| Net cash provided by (used in) operating  activities                                         |       | (8,962                                      | )          | 28,220 |   | 29,834 |   |
| **Cash Flows From Investing  Activities**                                                    |       |                                        |       |   |   |   |   |
| Purchases of property and equipment                                                          |       | (8,240                                      | )          | (3,153 | ) | (2,619 | ) |
| Acquisition of SARCOM                                                                        |       | —                                      |       | — |   | (47,650 | ) |
| Acquisition of DSW                                                                           |       | (1,020                                      | )          | — |   | — |   |
| Proceeds from sale of fixed assets                                                           |       | —                                      |       | 2 |   | — |   |
| Net cash used in investing activities                                                        |       | (9,260                                      | )          | (3,151 | ) | (50,269 | ) |
| **Cash Flows From Financing  Activities**                                                    |       |                                        |       |   |   |   |   |
| Net borrowings (payments) under line of credit                                               |       | 24,117                                      |       | (24,883 | ) | 21,416 |   |
| Change in book overdraft                                                                     |       | (1,117                                      | )          | 2,367 |   | (7,194 | ) |
| Net borrowings (payments) under note payable                                                 |       | (1,004                                      | )          | (775 | ) | 2,981 |   |
| Payments for deferred financing costs                                                        |       | —                                      |       | (75 | ) | (275 | ) |
| Payments of obligations under capital lease                                                  |       | (450                                        | )          | (154 | ) | (153 | ) |
| Proceeds from stock issued under stock option  plans                                         |       | 636                                         |       | 428 |   | 1,032 |   |
| Excess tax benefit related to stock option  exercises                                        |       | 289                                         |       | 487 |   | 2,663 |   |
| Common shares repurchased and held in treasury                                               |       | (2,631                                      | )          | (2,608 | ) | — |   |
| Net cash provided by (used in) financing  activities                                         |       | 19,840                                      |       | (25,213 | ) | 20,470 |   |
| Effect of foreign currency on cash flow                                                      |       | 849                                         |       | 269 |   | 752 |   |
| Net change in cash and cash equivalents                                                      |       | 2,467                                       |       | 125 |   | 787 |   |
| Cash and cash equivalents at beginning of the  period                                        |       | 6,748                                       |       | 6,623 |   | 5,836 |   |
| Cash and cash equivalents at end of the period                                               |       | $                                           | 9,215      |   | $ | 6,748 |   | $ | 6,623 |   |
| **Supplemental Cash Flow  Information**                                                      |       |                                        |       |   |   |   |   |
| Interest paid                                                                                |       | $                                           | 1,516      |   | $ | 3,745 |   | $ | 3,897 |   |
| Income taxes paid                                                                            |       | 2,446                                       |       | 2,945 |   | 3,146 |   |
| **Supplemental Non-Cash Investing  and Financing Activities (Notes 4 and 7)**                |       |                                        |       |   |   |   |   |
| Purchase of infrastructure system                                                            |       | $                                           | 1,105      |   | $ | 2,741 |   | $ | — |   |
| Seller financed purchase of ERP system                                                       |       | —                                      |       | 919 |   | — |   |
| Goodwill related to acquisitions                                                             |       | —                                      |       | 374 |   | 389 |   |
| SARCOM and DSW acquisitions related:                                                         |       |                                        |       |   |   |   |   |
| Fair value of assets acquired                                                                |       | $                                           | 1,510      |   | $ | — |   | $ | 73,821 |   |
| Cash paid                                                                                    |       | (1,020                                      | )          | — |   | (48,220 | ) |
| Value of common stock issued (including redeemable  common stock)                            |       | —                                      |       | — |   | (6,188 | ) |
| Liabilities assumed                                                                          |       | $                                           | 490        |   | $ | — |   | $ | 19,413 |   |

 

See Notes to theConsolidated Financial Statements.

 

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**PCMALL, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Description of Company**

 

PCMall, Inc., together with its wholly-owned subsidiaries (collectivelyreferred to as “PC Mall,” “we” or “us”), founded in 1987, is a value addeddirect marketer of technology products, services and solutions to businesses,government and educational institutions and individual consumers. We offer ourproducts, services and solutions through dedicated account executives, fieldservice teams, various direct marketing techniques and three retail stores. Wealso utilize distinctive full-color catalogs under the PC Mall, MacMall, PCMall Gov and SARCOM brands and our websites pcmall.com, macmall.com,pcmallgov.com, gmri.com, sarcom.com, abreon.com, onsale.com and clubmac.com andother promotional materials.

 

In the first quarter of2008, following the completion of our acquisition of SARCOM, Inc. (“SARCOM”)in September 2007, which is discussed in detail below, we changed the waywe internally look at our business and realigned our reportable operatingsegments from two segments (previously Core business and OnSale.com) to foursegments that we now refer to as SMB, MME, Public Sector and MacMall. Ouroperating segments are primarily aligned based upon their respective customerbase. We include corporate related expenses such as legal, accounting,information technology, product management and other administrative costs thatare not otherwise included in our operating segments in Corporate and Other. Weallocate our resources to and evaluate the performance of our segments based onoperating income. A description of each of our new segments is provided below.All historical segment financial information provided herein has been revisedto reflect these new operating segments.

 

In the fourth quarter of2009, we changed the name of our Consumer segment to MacMall. The MacMallsegment includes sales made under our MacMall and Onsale brand names viatelephone and the Internet to consumers, businesses and creative professionals.This was a name change only and does not affect the segment results reported inthe current or prior periods.

 

OurSMB segment consists of sales made primarily to small and medium-sizedbusinesses, utilizing an outbound phone based sales force and, where applicable,a field-based sales force.

 

OurMME segment consists of sales made primarily to mid-market and enterprise-sizedbusinesses under the SARCOM, DSW and Abreon brands, utilizing a fieldrelationship-based selling model, an outbound phone based sales force and afield service organization. The MME segment sells complex products, servicesand solutions, which we believe can be best delivered with a face-to-faceselling model.

 

OurPublic Sector segment consists of sales made primarily to federal, state, andlocal governments, as well as educational institutions, utilizing an outboundphone and field relationship-based selling model as well as contracts and bidsbusiness development teams.

 

**2. Basis of Presentation and Summaryof Significant Accounting Policies**

 

In June 2009, the FinancialAccounting Standards Board (“FASB”) issued FASB Accounting Standards Codification (“ASC”)105-10-05 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168,“The FASB Accounting Standards Codification and the Hierarchy of GenerallyAccepted Accounting Principles, a replacement of FASB Statement No. 162”).ASC 105-10-05 establishes that the FASB ASC will become the source ofauthoritative generally accepted accounting principles (“GAAP”) recognized bythe FASB to be applied by nongovernmental entities. Rules and interpretivereleases of the SEC under authority of federal securities laws are also sourcesof authoritative GAAP for SEC registrants. ASC 105-10-05 is not intended tochange existing GAAP and as such, it will not have a significant impact on ourconsolidated financial statements. We adopted ASC 105-10-05 effective on July 1,2009 and we have replaced references to legacy GAAP with references to the ASC,where appropriate.

 

***Principles ofConsolidation***

 

The accompanyingfinancial statements included herein are presented on a consolidated basis andinclude our accounts and the accounts of all of our wholly-owned subsidiariesafter elimination of intercompany accounts and transactions.

 

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***Use of Estimates inthe Preparation of the Consolidated Financial Statements***

 

We prepare ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America, which requires managementto make estimates, judgments and assumptions that affect the amounts reportedherein. Management bases its estimates, judgments and assumptions on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances. Due to the inherent uncertainty involved in makingestimates, actual results reported in future periods could differ from thoseestimates.

 

***Revenue Recognition***

 

We adhere to the revisedguidelines and principles of sales recognition described in ASC 605 (formerlyStaff Accounting Bulletin No. 104, “Revenue Recognition,” issued by thestaff of the SEC as a revision to Staff Accounting Bulletin No. 101, “RevenueRecognition”). Under ASC 605, product sales are recognized when the title andrisk of loss are passed to the customer, there is persuasive evidence of anarrangement for sale, delivery has occurred and/or services have been rendered,the sales price is fixed and determinable and collectability is reasonablyassured. Under these guidelines, the majority of our sales, including revenuefrom product sales and gross outbound shipping and handling charges, arerecognized upon receipt of the product by the customer. In accordance with ourrevenue recognition policy, we perform an analysis to estimate the number ofdays products we have shipped are in transit to our customers using data fromour third party carriers and other factors. We record an adjustment to reversethe impact of sale transactions based on the estimated value of products thathave shipped, but have not yet been received by our customers, and we recognizesuch amounts in the subsequent period when delivery has occurred. Changes indelivery patterns or unforeseen shipping delays beyond our control could have amaterial impact on our revenue recognition for the current period.

 

For all product salesshipped directly from suppliers to customers, we take title to the productssold upon shipment, bear credit risk, and bear inventory risk for returnedproducts that are not successfully returned to suppliers; therefore, theserevenues are recognized at gross sales amounts.

 

Certain software productsand extended warranties that we sell (for which we are not the primary obligor)are recognized on a net basis in accordance with ASC 605-45 (formerly EmergingIssues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as aPrincipal versus Net as an Agent).” Accordingly, such revenues are recognizedin net sales either at the time of sale or over the contract period, based onthe nature of the contract, at the net amount retained by us, with no cost ofgoods sold.

 

Sales are reported net ofestimated returns and allowances, discounts, mail-in rebate redemptions andcredit card chargebacks. If the actual sales returns, allowances, discounts,mail-in rebate redemptions or credit card chargebacks are greater thanestimated by management, additional expense may be incurred.

 

***Cost of Goods Sold***

 

Cost of goods soldincludes product costs, outbound and inbound shipping costs and costs ofdelivered services, offset by certain market development funds and otherconsideration from vendors included in our catalogs, as described in “AdvertisingCosts and Vendor Consideration” below.

 

***Cash and CashEquivalents***

 

All highly liquid investmentswith initial maturities of three months or less are considered cashequivalents. Our cash management programs result in utilizing available cash topay down our line of credit. Checks issued but not presented for payment to thebank totaling $4.1 million and $5.2 million as of December 31, 2009 and2008 were included in “Accounts payable” in our Consolidated Balance Sheets.

 

***Accounts Receivable***

 

We generate the majorityof our accounts receivable through the sale of products and services to certaincustomers on account. In addition, we record vendor receivables at such time asall conditions have been met that would entitle us to receive such vendorfunding, and is thereby considered fully earned.

 

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The following tablepresents the gross amounts of our accounts receivable (in thousands):

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Trade receivables                                 |       | $                     | 138,450    |   | $ | 127,514 |   |
| Vendor receivables                                |       | 23,499                |       | 22,632 |   |
| Other receivables                                 |       | 2,259                 |       | 2,642 |   |
| Total gross accounts receivable                   |       | 164,208               |       | 152,788 |   |
| Less: Allowance for  doubtful accounts receivable |       | (2,740                | )          | (4,241 | ) |
| Accounts receivable, net                          |       | $                     | 161,468    |   | $ | 148,547 |   |

 

For the years ended December 31,2009 and 2008, “Vendor receivables” presented above included $12.4 million and$10.9 million, respectively, of unbilled receivables relating to vendorconsideration, which are described below under “Advertising Costs and VendorConsideration.”

 

Accounts receivablepotentially subject us to credit risk. We extend credit to our customers basedupon an evaluation of each customer’s financial condition and credit history,and generally do not require collateral. No customer accounted for more than10% of trade accounts receivable at December 31, 2009 and 2008.We maintainan allowance for doubtful accounts receivable based upon estimates of futurecollection. We regularly evaluate our customers’ financial condition and credithistory in determining the adequacy of our allowance for doubtful accounts. Wehave historically incurred credit losses within management’s expectations. Wealso maintain an allowance for uncollectible vendor receivables, which arisefrom vendor rebate programs, price protections and other promotions. Wedetermine the sufficiency of the vendor receivable allowance based upon variousfactors, including payment history. Amounts received from vendors may vary fromamounts recorded because of potential non-compliance with certain elements ofvendor programs. If the estimated allowance for uncollectible accounts or vendorreceivables subsequently proves to be insufficient, additional allowance may berequired.

 

***Inventories***

 

Inventories consistprimarily of finished goods, and are stated at the lower of cost (determinedunder the first-in, first-out method) or market. We had reserves of $1.6million and $1.7 million as of December 31, 2009 and 2008, reflectinglower of cost or market pricing and allowance for potential excess and obsoleteinventory. As discussed under “Revenue Recognition” above, we do not recordrevenue and related cost of goods sold until there is persuasive evidence of anarrangement for sale, delivery has occurred, the sales price is fixed anddeterminable and collectability is reasonably assured. As such, inventoriesinclude goods-in-transit to customers at December 31, 2009 and 2008.

 

***Advertising Costsand Vendor Consideration***

 

We account foradvertising costs in accordance with ASC 340-20 (formerly Statement of Position(“SOP”) No. 93-7, “Reporting on Advertising Costs”). We produce andcirculate direct response catalogs at various dates throughout the year. Thecosts of developing, producing and circulating each direct response catalog aredeferred and amortized to advertising expense based on the life of the catalog,which is approximately eight weeks. Other non-catalog advertising expendituresare expensed in the period incurred. Total net advertising expenditures, whichare included in “Selling, general and administrative expenses” in ourConsolidated Statements of Operations, were $8.5 million in 2009, compared to$8.9 million in 2008 and $9.8 million in 2007. Deferred advertising costs,which are included in “Prepaid expenses and other current assets” in ourConsolidated Balance Sheets, were $0.3 million at December 31, 2009 and$0.4 million at December 31, 2008.

 

As we circulate catalogsthroughout the year, we receive market development funds and other vendorconsideration from vendors included in each catalog. These funds are deferredand recognized based on sales generated over the life of the catalog. Deferredvendor consideration is included in “Accrued expenses and other currentliabilities” in our Consolidated Balance Sheets. We also receive othernon-catalog related vendor consideration from our vendors in the form ofcooperative marketing allowances, volume incentive rebates and other programsto support our marketing of their products. Most of our vendor consideration isaccrued, when performance required for recognition is completed, as an offsetto cost of sales in accordance with ASC 605-50 (formerly EITF 02-16, “Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor”) since such funds are not a reimbursement of specific, incremental,identifiable costs incurred by us in selling the vendors’ products. At the endof any given period, unbilled receivables related to our vendor considerationare included in our “Accounts receivable, net of allowances.”

 

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***Property andEquipment***

 

Property and equipment arestated at cost and are depreciated using the straight-line method over theestimated useful lives of the assets, as noted below. Leasehold improvementsare amortized over the shorter of their useful lives or the remaining leaseterm. We also capitalize computer software costs that meet both the definitionof internal-use software and defined criteria for capitalization in accordancewith ASC 350-40 (formerly SOP 98-1, “Accounting for the Cost of ComputerSoftware Developed or Obtained for Internal Use”).

 
| Autos                                        |   | 3 – 5 years  |
|----------------------------------------------|--------|-------------------|
| Computers, software, machinery and equipment |   | 1 – 7 years  |
| Leasehold improvements                       |   | 1 – 10 years |
| Furniture and fixtures                       |   | 3 – 15 years |
| Building and improvements                    |   | 5 – 31 years |

 

We had $2.5 million and$2.0 million of unamortized internally developed software at December 31,2009 and 2008.

 

***Disclosures AboutFair Value of Financial Instruments***

 

The carrying amounts ofour cash and cash equivalents, accounts receivable, accounts payable andaccrued expenses and other current liabilities approximate their fair valuesbecause of the short-term maturity of these instruments. The carrying amountsof our line of credit borrowings and notes payable approximate their fairvalues based upon the current rates offered to us for obligations of similarterms and remaining maturities.

 

***Goodwill andIntangible Assets***

 

Goodwill is carried athistorical costs, subject to write-down, as needed, based upon an impairmentanalysis that we perform annually, or sooner if an event occurs orcircumstances change that would more likely than not result in an impairmentloss. We perform our annual impairment test for goodwill as of December 31of each year. Under ASC 350 (formerly SFAS No. 142, “Goodwill and OtherIntangible Assets”), goodwill impairment is deemed to exist if the net bookvalue of a reporting unit exceeds its estimated fair value. Events that maycreate an impairment review include, but are not limited to, significant andsustained decline in our stock price or market capitalization, significant underperformanceof operating units and significant changes in market conditions. Changes inestimates of future cash flows or changes in market values could result in awrite-down of our goodwill in a future period. If an impairment loss resultsfrom the annual impairment test, such loss will be recorded as a pre-tax chargeto our operating income.

 

We amortize otherintangible assets with definite lives generally on a straight-line basis overtheir estimated useful lives.

 

Goodwillimpairment testing is a two-step process. Step one involves comparing the fairvalue of our reporting units to their carrying amount. If the fair value of thereporting unit is greater than its carrying amount, there is no impairment andno further testing is required. If the reporting unit’s carrying amount isgreater than the fair value, the second step must be completed to measure theamount of impairment, if any. Step two calculates the implied fair value ofgoodwill by deducting the fair value of all tangible and intangible assets,excluding goodwill, of the reporting unit from the fair value of the reportingunit as determined in Step one. The implied fair value of goodwill determinedin this step is compared to the carrying value of goodwill. If the implied fairvalue of goodwill is less than the carrying value of goodwill, an impairmentloss is recognized equal to the difference.

 

As of December 31,2009, we performed our annual impairment analysis of goodwill and intangibleassets for possible impairment. Our management, with the assistance of anindependent third-party valuation firm, determined the fair values of ourreporting units and their underlying assets, and compared them to theirrespective carrying values. Goodwill represents the excess of the purchaseprice over the fair value of the net tangible and identifiable intangibleassets acquired in each business combination. The carrying value of goodwillwas allocated to our reporting units pursuant to ASC 350. As a result of ourannual impairment analysis, we determined that the estimated fair value of ourMME segment exceeded its net carrying value and as such, no impairment ofgoodwill existed as of December 31, 2009.

 

For the year ended December 31,2008, as a result of the global economic downturn and its effect on the resultsof each of our reporting units and as a result of our 2008 annual impairmentanalysis, which indicated that there would be no remaining implied valueattributable to the goodwill of our Public Sector and MacMall reporting units,we determined that the goodwill and purchased intangible assets related to ourPublic Sector and the goodwill related to our MacMall segments were impaired.Therefore, we recorded an impairment charge totaling $4.1 million, whichrepresents the entire goodwill and purchased intangible asset amounts relatedto our Public Sector ($2.7 million) and MacMall ($1.4 million) segments, forthe year ended December 31, 2008. The $4.1 million of total impairmentcharge was included as part of “Special charges” on our Consolidated Statementsof Operations for the year ended December 31, 2008.

 

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Fair value wasdetermined by using a weighted combination of a market-based approach and anincome approach, as this combination was deemed to be the most indicative offair value in an orderly transaction between market participants. Under themarket-based approach, we utilized information regarding our company andpublicly available comparable company and industry information to determinecash flow multiples and revenue multiples that are used to value our reportingunits. Under the income approach, we determined fair value based on estimatedfuture cash flows of each reporting unit, discounted by an estimatedweighted-average cost of capital, which reflects the overall level of inherentrisk of a reporting unit and the rate of return an outside investor wouldexpect to earn. Determining the fair value of a reporting unit requires the useof significant estimates and assumptions, including revenue growth rates andoperating margins, discount rates and future market conditions, among others.

 

Given the currenteconomic environment and the uncertainties regarding the impact on ourbusiness, there can be no assurance that our estimates and assumptions made forpurposes of our goodwill impairment testing as of December 31, 2009 willprove to be accurate predictions of the future. We may be required to recordadditional goodwill impairment charges in future periods, whether in connectionwith our next annual impairment testing as of December 31, 2010 or priorto that, if any change constitutes a triggering event outside of the quarterfrom when the annual goodwill impairment test is performed. It is not possibleat this time to determine if any such future impairment charge would result or,if it does, whether such charge would be material.

 

***Valuation ofLong-Lived Assets***

 

We review long-livedassets and certain intangible assets for impairment when events or changes incircumstances indicate the carrying amount of an asset may not be recoverable.In the event the undiscounted future cash flow attributable to the asset isless than the carrying amount of the asset, an impairment loss is recognizedbased on the amount by which the carrying value exceeds the fair value of thelong-lived asset. Changes in estimates of future cash flows attributable to thelong-lived assets could result in a write-down of the asset in a future period.

 

***Debt Issuance Costs***

 

We defer costs incurredto obtain our credit facility and amortize these costs to interest expenseusing the straight-line method over the term of the respective obligation.

 

***Income Taxes***

 

We account for incometaxes under the liability method as prescribed in accordance with ASC 740(formerly SFAS No. 109, “Accounting for Income Taxes”). Under this method,deferred tax assets and liabilities are recognized by applying enactedstatutory tax rates applicable to future years to differences between the taxbasis and financial reporting amounts of existing assets and liabilities. Wemake certain estimates and judgments in determining income tax provisions andbenefits, in assessing the likelihood of recovering our deferred tax assets andin evaluating our tax positions. A valuation allowance is provided when it is morelikely than not that all or some portion of deferred tax assets will not berealized. See Note 8 for more detailed information.

 

We account foruncertainty in income taxes recognized in financial statements in accordancewith ASC 740 (formerly FIN 48, “Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109,”) which we adopted on January 1,2007. ASC 740 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. ASC 740 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. Only tax positions that meet themore-likely-than-not recognition threshold may be recognized. Under ASC 740, werecognize penalties and interest accrued related to unrecognized tax benefits,if any, as part of “Income tax expense (benefit)” in our ConsolidatedStatements of Operations.

 

***Sales Taxes***

 

We present sales tax wecollect from our customers on a net basis (excluded from our revenues), apresentation which is prescribed as one of two methods available under ASC605-45-50-3 (formerly EITF Issue No. 06-03, “How Sales Taxes Collectedfrom Customers and Remitted to Governmental Authorities Should Be Presented inthe Income Statement (That Is, Gross Versus Net Presentation)”).

 

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***Stock-BasedCompensation***

 

SinceJanuary 1, 2006, wehave accounted for stock-based compensation in accordance with ASC 718(formerly Financial Accounting Standards Board Statement No. 123 (revised2004), “Share-Based Payment”), using the modified prospective applicationtransition method. ASC 718 addresses the accounting for share-based paymenttransactions in which an enterprise receives employee services in exchange foreither equity instruments of the enterprise or liabilities that are based onthe fair value of the enterprise’s equity instruments or that may be settled bythe issuance of such equity instruments. ASC 718 generally requires that suchtransactions be accounted for using a fair value based method and recognized asexpenses in our Consolidated Statements of Operations. The provisions of ASC718 apply to new stock option grants subsequent to December 31, 2005 andunvested stock options outstanding as of January 1, 2006.

 

Pursuant to ASC 718, weestimate the grant date fair value of each stock option grant awarded pursuantto ASC 718 using the Black-Scholes option pricing model and managementassumptions made regarding various factors, including expected volatility ofour common stock, expected life of options granted and estimated forfeiturerates, which require extensive use of accounting judgment and financial estimates.In estimating our assumption regarding expected term for options we grantedduring the year ended December 31, 2007, we applied the simplified method setout in ASC 718 (which also includes former SEC Staff Accounting Bulletin No. 107,“Share-Based Payment,” which was issued in March 2005). For optionsgranted during the years ended December 31, 2009 and 2008, we computed theexpected term based upon an analysis of historical exercises of stock optionsby our employees. We compute our expected volatility using a frequency ofweekly historical prices of our common stock for a period equal to the expectedterm of the options. The risk free interest rate is determined using theimplied yield on U.S. Treasury issues with a remaining term within the contractuallife of the award. We estimate an annual forfeiture rate based on ourhistorical forfeiture data, which rate will be revised, if necessary, in futureperiods if actual forfeitures differ from those estimates. Any material changein the estimates used in calculating the stock-based compensation expense couldresult in a material impact on our results of operations.

 

***Foreign CurrencyTranslation***

 

The local currency of ourforeign operations is their functional currency. The financial statements ofour foreign subsidiaries are translated into U.S. dollars in accordance withASC 830-30 (formerly SFAS No. 52, “Foreign Currency Translation”).Accordingly, the assets and liabilities of our Canadian and Philippinesubsidiaries are translated into U.S. dollars at the exchange rate in effect atthe balance sheet dates. Income and expense items are translated at the averageexchange rate for each month within the year. The resulting translationadjustments are recorded in “Accumulated other comprehensive income (loss),” aseparate component of stockholders’ equity on our Consolidated Balance Sheets.All transaction gains or losses are recorded in “Selling, general andadministrative expenses” on our Consolidated Statements of Operations. Thesegains or losses were not material in any of the years presented in ourconsolidated financial statements.

 

***Subsequent Events***

 

In May 2009, theFASB issued ASC 855-10-05 (formerly SFAS No. 165, “Subsequent Events”)which establishes accounting and disclosure requirements for subsequent events.ASC 855-10-05 sets forth the period after the balance sheet date during whichwe should evaluate events or transactions that occur for potential recognitionor disclosure in our financial statements, the circumstances under which we shouldrecognize events or transactions occurring after the balance sheet date in ourfinancial statements and the required disclosures for such events ortransactions. ASC 855-10-05 is effective for interim or annual financialperiods ending after June 15, 2009, and as such, we adopted ASC 855-10-05prospectively beginning in our quarterly period ended June 30, 2009. In February 2010,the FASB issued ASU 2010-09,*“*Subsequent Events (Topic 855) — Amendments to Certain Recognition andDisclosure Requirements.” ASU 2010-09 removes the requirement for an SECfiler to disclose the date through which subsequent events have been evaluatedin both issued and revised financial statements. Revised financial statementsinclude financial statements revised as a result of either correction of anerror or retrospective application of U.S. GAAP. The amendment in the ASU waseffective upon issuance (February 24, 2010). We have evaluated subsequentevents pursuant to ASC 855-10-05.

 

***Recent AccountingPronouncements***

 

In October 2009, theFASB issued ASU 2009-14,**“Certain Arrangements That Contain SoftwareElements (Topic 985) — a consensus of the FASB Emerging Issues Task Force.”ASU 2009-14 amends the scope of software revenue guidance in ASC Subtopic985-605, “Software-Revenue Recognition,”to exclude tangible products containing software and non-software componentsthat function together to deliver the product’s essential functionality. In October 2009,FASB also issued ASU 2009-13,**“Multiple-Deliverable Revenue Arrangements(Topic 605) — a consensus of the FASB EITF.” ASU 2009-13 eliminates theresidual method of allocation and requires the relative selling price methodwhen allocating arrangement consideration to all deliverables at the inceptionof the arrangement. ASU 2009-13 specifies that the best estimate of a sellingprice is consistent with that used to determine the price to sell thedeliverable on a standalone basis. ASU 2009-14 and ASU 2009-13 are effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010, and must be adopted inthe same period using the same transition method. If adoption is elected in aperiod other than the beginning of a fiscal year, the amendments in thesestandards must be applied retrospectively to the beginning of the fiscal year.Full retrospective application of these amendments to prior fiscal years isoptional. We believe that the adoption of ASU 2009-14 and ASU 2009-13 will nothave a significant impact on our consolidated financial statements.

 

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In April 2008,the FASB issued ASC 350-30 (formerly FASB Staff Position FAS 142-3, “Determinationof Useful Life of Intangible Assets”). ASC 350-30 amends the factors that shouldbe considered in developing the renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under SFAS 142, “Goodwilland Other Intangible Assets” and also requires expanded disclosure related tothe determination of intangible asset useful lives. ASC 350-30 intends toimprove the consistency between the useful life of a recognized intangibleasset under SFAS 142 and the period of expected cash flows used to measure thefair value of the asset under SFAS 141R, and other GAAP. ASC 350-30 iseffective for fiscal years beginning after December 15, 2008. We adoptedASC 350-30 on January 1, 2009 and it did not have a significant impact onour consolidated financial statements.

 

In March 2008,the FASB issued ASC 815-10 (formerly SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”).ASC 815-10 requires entities to provide enhanced disclosures about (a) howand why an entity uses derivative instruments and the objectives for usingderivative instruments in terms of underlying risk and accounting designation, (b) howderivative instruments and related hedged items are accounted for under SFAS133, “Accounting for DerivativeInstruments and Hedging Activities”**andits related interpretations, including a tabular format disclosure of the fairvalues of derivative instruments and their gains and losses and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance and cash flows. ASC 815-10 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application encouraged. ASC 815-10encourages, but does not require, comparative disclosures for earlier periodsat initial adoption. We adopted ASC 815-10 on January 1, 2009 and it didnot have a significant impact on our consolidated financial statements.

 

In December 2007, the FASB issued ASC 805-20(formerly SFAS No. 141 (revised 2007), “Business Combinations,” whichreplaces SFAS 141). ASC 805-20 retains the fundamental requirements in SFAS 141and establishes principles and requirements for (a) how an acquirerrecognizes and measures the identifiable assets acquired, the liabilities assumedand any non-controlling interest in the acquired business, (b) how anacquirer recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase, and (c) what information todisclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. ASC 805-20 applies prospectivelyto business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008. We adopted ASC 805-20 on January 1, 2009. We cannot anticipatewhether the adoption of ASC 805-20 will have a material impact on our resultsof operations and financial condition as the impact will depend on the termsand nature of any business combination we enter into after January 1,2009.

 

**3. Stock-Based Compensation**

 

**Stock-Based Benefit Plans**

 

*1994Stock Incentive Plan*

 

In November 1994,our Board of Directors and stockholders approved the 1994 Stock Incentive Plan,as amended in May 2000 and June 2002 and approved by our Board ofDirectors and stockholders (the “1994 Plan”), which provides for the grant ofequity awards such as stock options, restricted stock or restricted stock unitsto our employees, officers, directors and consultants. The 1994 Plan has an “evergreenprovision” which automatically increases the number of shares of our commonstock available for issuance under the 1994 Plan as of January 1 of eachyear by three percent of our outstanding common stock as of December 31 ofthe immediately preceding fiscal year. Under the 1994 Plan, we may grantoptions (“Incentive Stock Options”) within the meaning of Section 422A ofthe Internal Revenue Code, or options not intended to qualify as IncentiveStock Options (“Nonstatutory Stock Options”).

 

The 1994 Plan isadministered by the Compensation Committee of the Board of Directors. Subjectto the provisions of the 1994 Plan, the Compensation Committee has theauthority to select the employees, officers, directors and consultants to whomoptions are granted and determine the terms of each option, including (i) thenumber of shares of common stock covered by the option, (ii) when theoption becomes exercisable, (iii) the option’s exercise price, which mustbe at least 100% of the fair market value of the common stock as of the date ofgrant with respect to Incentive Stock Options, and (iv) the duration ofthe option (which may not exceed ten years). All options generally vest overthree to five years, expire ten years from the grant date, are granted atexercise prices equal to the market price of our stock at grant date and arenontransferable other than by will or by the laws of descent and distribution.The Compensation Committee has delegated to our Chief Executive Officer theauthority to approve option grants to eligible employees under the 1994 Plan(other than executive officers), subject to certain numerical limits. TheCompensation Committee has delegated to our Chief Executive Officer theauthority to approve option grants to eligible employees under the 1994 Plan(other than executive officers), subject to certain numerical limits.

 

65

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On August 21, 2009, July 31,2008 and on August 31, 2007, our Compensation Committee approved andgranted, under our 1994 Plan, the award of 7,500 shares, 4,000 shares and 3,000shares, respectively, of restricted stock to each of our non-employee membersof the board for a total award of 22,500 shares, 12,000 shares and 9,000 sharesof restricted stock in the years ended December 31, 2009, 2008 and 2007.The restricted stock awards each vest quarterly in equal amounts over a oneyear period from the date of grant. In accordance with ASC 718 (formerly SFAS123R), we valued the restricted stock award at fair value as of the grant dateand we recognize compensation expense on a straight-line basis over the vestingperiod.

 

As of December 31,2009, a total of 1,141,690 shares of authorized and unissued shares wereavailable for future grants. All options granted through December 31, 2009have been Nonstatutory Stock Options. We satisfy stock option exercises withnewly issued shares.

 

OnFebruary 26, 2010, our Compensation Committee approved and granted, underour 1994 Plan, options to purchase a total of 561,000 shares of our commonstock to certain of our employees. See Note 16 for more information.

 

**Stock-Based Compensation**

 

For the years ended December 31,2009, 2008 and 2007, we recognized stock-based compensation expense of $1.7million, $1.5 million and $1.4 million in “Selling, general and administrativeexpenses” in our Consolidated Statements of Operations, and related deferredincome tax benefits of $0.8 million, $0.6 million and $0.5 million.

 

*ValuationAssumptions*

 

We estimated the grantdate fair value of each stock option grant awarded during the years ended December 31,2009, 2008 and 2007 pursuant to ASC 718 using the Black-Scholes option pricingmodel and management assumptions made regarding various factors which requireextensive use of accounting judgment and financial estimates. In estimating ourassumption regarding the expected term for options granted during the yearended December 31, 2007, we applied the simplified method set out in SECStaff Accounting Bulletin No. 107, “Share-Based Payment,” which was issuedin March 2005. For the options granted during the years ended December 31,2009 and 2008, we computed the expected term based upon an analysis ofhistorical exercises of stock options by our employees. We computed ourexpected volatility using a frequency of weekly historical prices of our commonstock for a period equal to the expected term of the options, which wedetermined to be six years for grants made during the year ended December 31,2009, 2008 and 2007, respectively. The risk free interest rate was determinedusing the implied yield on U.S. Treasury issues with a remaining term withinthe contractual life of the award. Each year, we estimated an annual forfeiturerate based on our historical forfeiture data, which rate is revised, ifnecessary, in future periods if actual forfeitures differ from those estimates.

 

The following tablepresents the weighted average assumptions we used in each of the followingyears:

 
| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Risk free interest rate  |       | 2.71                                        | %     | 2.93 | % |
| Expected volatility      |       | 77                                          | %          | 70 | % |
| Expected term (in years) |       | 6                                           |       | 6 |   |
| Expected dividend yield  |       | None                                        |       | None |   |

 

66

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*Stock-BasedPayment Award Activity*

 

*StockOptions*

 

The following tablesummarizes our stock option activity during the year ended December 31,2009 and stock options outstanding and exercisable at December 31, 2009for the above plans:

 
| ** **                             | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in years)** | ** ** | **Aggregate  Intrinsic  Value  (in thousands)** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Outstanding at  December 31, 2008 |       | 2,490,090  |       | $                                      | 5.66       |                                                                     |       |                                                 |       |   |
| Granted                                |       | 419,035    |       | 7.03                                   |       |                                                                     |       |                                                 |       |
| Exercised                              |       | (192,131   | )          | 3.03                                   |       |                                                                     |       |                                                 |       |
| Forfeited                              |       | (6,743     | )          | 6.89                                   |       |                                                                     |       |                                                 |       |
| Expired/cancelled                      |       | (22,533    | )          | 3.61                                   |       |                                                                     |       |                                                 |       |
| Outstanding at  December 31, 2009 |       | 2,687,718  |       | $                                      | 5.68       |                                                                     | 6.83       |                                                 | $          | 2,120 |   |
| Exercisable at  December 31, 2009 |       | 1,592,150  |       | $                                      | 5.42       |                                                                     | 5.46       |                                                 | $          | 1,579 |   |

 

The aggregate intrinsicvalue is calculated for in-the-money options based on the difference betweenthe exercise price of the underlying awards and the closing price of our commonstock on December 31, 2009, which was $5.22.

 
| ** **                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted average  grant-date fair value of options granted during the period |       | $                                           | 4.87       |   | $ | 3.76 |   | $ | 7.07 |   |
| Total intrinsic value of  options exercised during the period (in thousands) |       | 805                                         |       | 1,030 |   | 4,462 |   |
| Total fair value of shares  vested during the period (in thousands)          |       | 1,603                                       |       | 1,399 |   | 1,325 |   |
|                                                                              |            |                                             |            |  |  |  |  |  |  |  |

 

*RestrictedStock*

 

The following tablesummarizes our restricted stock activity during the year ended December 31,2009 for the above plans:

 
| ** **                            | ** ** | **Number** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** ** |
|---------------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** **                                                  | ** ** |
| Non-vested at  December 31, 2008 |       | 9,000      |       | $                                                           | 8.92       |   |
| Granted                               |       | 22,500     |       | 7.99                                                        |       |
| Vested                                |       | (14,625    | )          | 8.56                                                        |       |
| Forfeited                             |       | —     |       | —                                                      |       |
| Non-vested at  December 31, 2009 |       | 16,875     |       | 7.99                                                        |       |
|                                       |            |            |            |                                                             |            |  |

 

The grant date fairvalues of restricted stock awards which vested during 2009, 2008 and 2007 were$125,224, $109,583 and $27,608.

 

As of December 31, 2009,there was $3.7 million of unrecognized compensation cost related to unvestedoutstanding stock options and restricted stock. We expect to recognize thesecosts over a weighted average period of 2.6 years.

 

**4. Acquisitions**

 

*DSW*

 

In December 2009,SARCOM, our wholly-owned subsidiary, acquired certain assets ofData Systems Worldwide, Inc. (“DSW”) for a total purchase price ofapproximately $1.5 million. DSW, a provider of converged Cisco solutions in thewestern United States, had approximately 20 employees as of December 15,2009, the majority of which are service or sales personnel and each of theseemployees became employees of SARCOM. DSW’s practice areas include managed andprofessional services and Cisco intelligent networks, facilities, datacentersand security, with a focus on unified communications and connected real estate.The assets SARCOMrecorded as a result of this purchase, based on a preliminary purchase priceallocation, include certain fixed assets, customer relations, covenants not to competeand goodwill.

 

67

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*SARCOM*

 

In September 2007,we completed the acquisition of Sarcom, Inc. (“SARCOM”), a provider ofadvanced technology solutions, for an initial total purchase price of approximately$55.7 million, including transaction costs. The initial total purchase pricewas subject to a post-closing debt and net asset value adjustment discussedbelow. The aggregate purchase price paid at closing included a total of $48.2million in cash and approximately $7.5 million in shares of our common stock,the number of shares being based on the average closing price of our stock onthe Nasdaq Global Market for the 20 consecutive trading days immediatelypreceding the acquisition closing date. Under that formula, at closing, weissued an aggregate of 633,981 shares of our common stock to the sellers aspayment of the stock component of the purchase price. We financed the cashcomponent of the purchase price through borrowings under our existing credit facility.

 

In November 2007, weand the sellers agreed on a final net asset value adjustment, resulting in adecrease in the purchase price by approximately $2.1 million, which was to berepaid, at the sellers’ option, in either cash or shares of our common stockbased on a per share price determined by the average closing price for the 20consecutive trading days ending on the date of final determination of the netasset value adjustment. As a result, in settlement of the $2.1 million netasset value adjustment, the sellers tendered back to us a total of 122,478shares of our common stock previously issued to them, which has been recordedas a reduction to the purchase price we paid.

 

In determining thepurchase price for accounting purposes, we measured the fair value of theshares issued in accordance with ASC 805 (formerly EITF No. 99-12, “Determinationof the Measurement Date for the Market Price of Acquirer Securities Issued in aPurchase Business Combination”). We used an average closing price of our commonstock over the four days prior to the close of the SARCOM acquisition,resulting in a total fair value of approximately $6.2 million for the 511,503shares of common stock ultimately issued.

 

Subsequent to our initialrecording of the preliminary purchase price allocation, we refined ourpreliminary purchase price allocation relating to the SARCOM acquisition. As aresult, we have adjusted our preliminary purchase price allocation to increasethe amount allocated to long-term deferred tax assets by approximately $3.3million to reflect acquired net operating losses in the SARCOM acquisitionwhich begin to expire in 2023, increase various intangible assets byapproximately $1.1 million, decrease goodwill by approximately $4.2 million,increase accounts payable by $0.4 million and increase cash by $0.2 million. Asa result, the adjusted total purchase price for accounting purposes, whichincludes the valuation of the net stock payment under ASC 805, was $54.4million.

 

We recorded the followingassets and liabilities in our MME segment based on their estimated fair valuesat the date of acquisition (in thousands).

 
| Total purchase price,  adjusted |   | $       | 54,408 |   |
|---------------------------------|--------|---------|--------|--------|
|                            |   |    |   |
| Cash                            |   | 768     |   |
| Accounts receivable             |   | 27,728  |   |
| Inventory                       |   | 4,415   |   |
| Other accounts receivable       |   | 3,172   |   |
| Property and equipment,  net    |   | 1,916   |   |
| Other assets                    |   | 4,425   |   |
| Intangible assets:              |   |    |   |
| Customer relationships          |   | 7,300   |   |
| Trade names                     |   | 5,200   |   |
| Non-compete agreements          |   | 490     |   |
| Total intangible assets         |   | 12,990  |   |
| Total assets acquired           |   | 55,414  |   |
|                            |   |    |   |
| Accounts payable                |   | (10,861 | )      |
| Accrued liabilities             |   | (6,588  | )      |
| Deferred revenue                |   | (2,338  | )      |
| Total liabilities assumed       |   | (19,787 | )      |
|                            |   |    |   |
| Total allocated to  goodwill    |   | $       | 18,781 |   |

 

68

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We recorded approximately$1.5 million of amortization expense during each of the years ended December 31,2009 and 2008 related to the intangible assets arising from customerrelationships and non-compete agreements acquired in the SARCOM transaction.

 

The following table setsforth our results of operations on a pro forma basis as though the SARCOMacquisition had been completed as of the beginning of the periods presented (inthousands, except per share amounts):

 
| ** **                                             | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2007**                               | ** ** |
| Net sales                                              |       | $                                      | 1,398,002  |   |
| Operating profit                                       |       | 26,164                                 |       |
| Net income                                             |       | 11,209                                 |       |
| **Basic and Diluted Earnings Per  Common Share**       |       |                                   |       |
| Basic                                                  |       | $                                      | 0.86       |   |
| Diluted                                                |       | 0.79                                   |       |
| Weighted average number of  common shares outstanding: |       |                                   |       |
| Basic                                                  |       | 13,029                                 |       |
| Diluted                                                |       | 14,129                                 |       |

 

**5. Property and Equipment**

 

Property and equipmentconsisted of the following (in thousands):

 
| ** **                                            | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                            | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| Computers, software,  machinery and equipment         |       | $                             | 40,134     |   | $ | 35,423 |   |
| Leasehold improvements                                |       | 5,450                         |       | 5,191 |   |
| Furniture and fixtures                                |       | 3,027                         |       | 3,772 |   |
| Building and improvements                             |       | 1,725                         |       | 1,725 |   |
| Land                                                  |       | 912                           |       | 912 |   |
| Software development and  other equipment in progress |       | 5,493                         |       | 4,417 |   |
| Subtotal                                              |       | 56,741                        |       | 51,440 |   |
| Less: Accumulated  depreciation and amortization      |       | (39,650                       | )          | (39,601 | ) |
| Property and equipment,  net                          |       | $                             | 17,091     |   | $ | 11,839 |   |

 

Depreciation andamortization expense for property and equipment for the years ended December 31,2009, 2008 and 2007 totaled $4.0 million, $3.9 million and $3.6 million.Depreciation and amortization expense for 2009 and 2008 includes amortizationof assets under capital leases.

 

**6. Goodwill and Intangible Assets**

 

*Goodwill*

 

The changes in thecarrying amounts of goodwill were as follows (in thousands):

 
| ** **                         | ** ** | **SMB** | ** ** | **MME** | ** ** | **Public Sector** | ** ** | **MacMall** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|------------------------------------|------------|---------|------------|---------|------------|------------------------|------------|-------------|------------|---------------------------------|------------|------------------|------------|
| Balance at  December 31, 2008 |       | $       | —     |    | $          | 18,781                 |       | $           | —     |                            | $          | —           |       | $ | — |   | $ | 18,781 |   |
| Acquisition of DSW                 |       | —  |       | 510     |       | —                 |       | —      |       | —                          |       | 510              |       |
| Balance at  December 31, 2009 |       | $       | —     |    | $          | 19,291                 |       | $           | —     |                            | $          | —           |       | $ | — |   | $ | 19,291 |   |

 

69

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*Intangible Assets*

 

The following table setsforth the amounts recorded for intangible assets (in thousands):

 
| ** **                         | ** ** | **Weighted  Average  Estimated** | ** ** | **At December 31, 2009** | ** ** | **At December 31, 2008** | ** ** |
|------------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                         | ** ** | **Useful Lives  (years)**   | ** ** | **Gross  Amount**                       | ** ** | **Accumulated  Amortization**           | ** ** | **Net  Amount** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Amount** | ** ** |
| Patent, trademarks & URLs |       | 7                                |       | $                                       | 5,878      | (1)                                | $          | 557 |   | $ | 5,321 |   | $ | 5,878 | (1)  | $ | 535 |   | $ | 5,343 |   |
| Customer relationships             |       | 5                                |       | 8,104                                   |       | 3,662                                   |       | 4,442 |   | 7,854 |   | 2,301 |   | 5,553 |   |
| Non-compete agreements             |       | 5                                |       | 918                                     |       | 327                                     |       | 591 |   | 588 |   | 224 |   | 364 |   |
| Other                              |       | 5                                |       | 32                                      |       | 32                                      |       | — |   | 32 |   | 32 |   | — |   |
| Total intangible assets            |       |                             |       | $                                       | 14,932     |                                    | $          | 4,578 |   | $ | 10,354 |   | $ | 14,352 |   | $ | 3,092 |   | $ | 11,260 |   |

 

----

(1)       Included in the total amountfor “Patent, trademarks, & URLs” in 2009 and 2008 are $5.2 million oftrademarks with indefinite useful lives acquired in the SARCOM acquisition thatare not amortized.

 

Amortization expense forintangible assets was $1.5 million, $1.7 million and $0.8 million in each ofthe years ended December 31, 2009, 2008 and 2007.

 

Estimated amortizationexpense for intangible assets in each of the next five years and thereafter, asapplicable, is as follows: $1.7 million in 2010; $1.7 million in 2011; $1.4million in 2012; and $0.4 million in 2013.

 

**7. Line of Credit and Note Payable**

 

We maintain anasset-based revolving credit facility, as amended from time to time, of up to$150 million from a lending unit of a large commercial bank. The creditfacility provides for, among other things, (i) a credit limit of $130million up to a total maximum amount of $150 million, in increments of $5million, provided that any increase of the total credit limit in excess of $130million is subject to an acceptance by a third party assignee in the event theadministrative agent elects to assign such excess amount; (ii) a lineincrease fee equal to 0.25% of the amount of each increment increased asdescribed above, plus, to the extent that the administrative agent assigns aportion of its revolving loan commitment under the credit facility and to theextent required by the assignee, an aggregate acceptance fee not to exceed0.125% of the aggregate sum of the increase in credit limit assigned; (iii) LIBORinterest rate options that we can enter into with no limit on the maximumoutstanding principal balance which may be subject to a LIBOR interest rateoption; and (iv) a maturity date of March 2011. In October 2008,we elected to increase our maximum credit line to $130 million from a previousmaximum of $115 million.

 

The credit facility,which functions as a working capital line of credit with a borrowing base ofinventory and accounts receivable, including certain credit card receivables,also includes a monthly unused line fee of 0.25% per year on the amount, ifany, by which 80% of the Maximum Credit, as defined in the agreement, then ineffect, exceeds the average daily principal balance of the outstandingborrowings during the immediately preceding month. At December 31, 2009,we had $53.1 million of net working capital advances outstanding under the lineof credit. At December 31, 2009, the maximum credit line was $130 millionand we had $52.8 million available to borrow for working capital advances underthe line of credit. There can be no assurance that the administrative agent, ifelecting to do so, will be successful in assigning the remaining excess $20million of credit beyond the $130 million in any future period. As a result, wemay not be able to access the credit facility beyond its current limit of $130million and given the current credit market environment, we do not currentlyexpect to be able to do so on our existing credit facility terms.

 

The credit facility iscollateralized by substantially all of our assets. In addition to the securityinterest required by the credit facility, certain of our vendors have securityinterests in some of our assets related to their products. The credit facilityhas as its single financial covenant a minimum tangible net worth requirementthat is tested as of the last day of each fiscal quarter, which we were incompliance with at December 31, 2009. Loan availability under the line ofcredit fluctuates daily and is affected by many factors, including eligibleassets on-hand, opportunistic purchases of inventory and availability andutilization of early-pay discounts.

 

In connection with and aspart of the amended credit facility, we entered into an amended term note on September 17,2007 with a principal balance of $5.425 million, payable in equal monthlyprincipal installments beginning on October 1, 2007, plus interest at theprime rate with a LIBOR option. The amended term note matures in September 2014or in the event of a default, termination or non-renewal of our creditfacility, is payable in its entirety upon demand by our lender. At December 31,2009, we had $3.7 million outstanding under the amended term note. Theremaining balance of our term note matures as follows: $775,000 annually ineach of the years 2010 through 2013 and $581,250 thereafter.

 

70

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At December 31,2009, our effective weighted average annual interest rate on outstanding amountsunder the credit facility and term note was 1.82%.

 

We are currentlyupgrading many of our IT systems. We have purchased licenses for workflowsoftware, web development tools and Microsoft AX (Axapta) to upgrade our ERPsystems. We initiated the implementation and upgrade of our eCommerce system inthe second half of 2008 and have completed and launched a new generation of ourpublic sites at macmall.com, onsale.com and pcmall.com. We are currentlyworking on the implementation of the ERP modules and the upgrade of our ERPsystems, including additional enhancements and features.  We have completed the initial phase of theimplementation in January 2010, and we expect to be complete with allphases of the implementation of the ERP systems by 2013. We believe the implementationand upgrade should help us to gain further efficiencies across ourorganization.  To date, we have incurredapproximately $4.1 million of external costs, and approximately $1.0 million ofinternal capitalized labor costs related to the implementation of the ERPsystems.  In addition, based on ourestimates, which are subject to change, we expect to incur approximately $5.2million of additional external costs related to the implementation of the ERPsystems.  We also expect to incurmaterial additional internal capitalized labor costs related to the ERP systemsin the future. As of December 31, 2009, $0.3 million and $0.4 million wereincluded in “Notes payable — current” and “Notes payable and other long-termliabilities,” respectively, on our Consolidated Balance Sheets.

 

The carrying amounts ofour line of credit borrowings and notes payable approximate their fair valuebased upon the current rates offered to us for obligations of similar terms andremaining maturities.

 

**8. Income Taxes**

 

Our income tax expenseconsisted of the following for the years ended December 31 (in thousands):

 
| ** **               | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current                  |       |     |       |     |       |     |       |
| Federal                  |       | $        | (1,701     | )        | $          | 3,290    |       | $ | 4,622 |   |
| State                    |       | 246      |       | 736      |       | 1,069    |       |
| Total — Current     |       | (1,455   | )          | 4,026    |       | 5,691    |       |
| Deferred                 |       |     |       |     |       |     |       |
| Federal                  |       | 3,998    |       | 1,633    |       | 1,984    |       |
| State                    |       | 146      |       | 32       |       | 145      |       |
| Foreign                  |       | 129      |       | 33       |       | 24       |       |
| Total — Deferred    |       | 4,273    |       | 1,698    |       | 2,153    |       |
| Total income tax expense |       | $        | 2,818      |     | $          | 5,724    |       | $ | 7,844 |   |

 

The provision for incometaxes differed from the amount computed by applying the U.S. federal statutoryrate to income before income taxes due to the effects of the following:

 
| ** **                                             | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected taxes at federal  statutory tax rate          |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State income taxes, net of  federal income tax benefit |       | 3.6      |       | 3.1      |       | 5.0      |       |
| Income from foreign  subsidiary                        |       | 5.6      |       | —   |       | —   |       |
| Non-deductible business  expenses                      |       | 3.0      |       | 2.0      |       | 0.8      |       |
| Other                                                  |       | (0.6     | )          | (1.8     | )          | (1.1     | )          |
| Total                                                  |       | 45.6     | %          | 37.3     | %          | 38.7     | %          |

 

71

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The significantcomponents of deferred tax assets were as follows at December 31 (inthousands):

 
| ** **                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Accounts receivable                 |       | $        | 1,080      |     | $          | 1,618 |   |
| Inventories                         |       | 182      |       | 1,020    |       |
| Property and equipment              |       | (603     | )          | 1,546    |       |
| Amortization                        |       | (2,199   | )          | (1,787   | )          |
| Accrued expenses and  reserves      |       | 2,012    |       | 2,006    |       |
| Tax credits and loss  carryforwards |       | 4,505    |       | 4,593    |       |
| Other                               |       | 23       |       | 176      |       |
| Subtotal                            |       | 5,000    |       | 9,172    |       |
| Valuation allowance                 |       | (165     | )          | (179     | )          |
| Total                               |       | $        | 4,835      |     | $          | 8,993 |   |

 

As of December 31,2009 and 2008, we had a valuation allowance of $0.2 million relating to certainstate net operating loss carryforwards for which we believe it is more likelythan not that the related deferred tax assets will not be realized.

 

We had deferred taxliabilities of $1.3 million and $1.1 million at December 31, 2009 and2008, respectively, relating to a Canadian employment tax subsidy, which wereincluded as part of “Accrued expenses and other current liabilities” on ourConsolidated Balance Sheets.

 

The exercise ofstock options and warrants in 2009 and 2008 resulted in tax benefit of $0.3 millionand $0.5 million, respectively, that have been reflected as a reduction oftaxes payable and an increase to additional paid-in capital.

 

At December 31,2009, we had state net operating loss carryforwards of $22.1 million, whichbegin to expire at the end of 2012, and federal net operating losscarryforwards of $10.3 million, which begin to expire at the end of 2023. Allof the federal net operating loss carryforwards and $2.8 million of the statenet operating loss carryforwards relate to pre-acquisition losses from anacquired subsidiary and, accordingly, they are subject to annual limitations asto their use under the provisions of IRC Section 382. As such, the extentto which these losses may offset future taxable income may be limited.

 

*Accounting for Income Taxes*

 

We account for incometaxes under the liability method. Under this method, deferred income taxes arerecognized by applying enacted statutory tax rates applicable to future yearsto differences between the tax bases and financial reporting amounts ofexisting assets and liabilities. In assessing the realizability of deferred taxassets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized. The ultimaterealization of deferred tax assets is dependent upon sufficient taxable incomewithin the carryback years and the generation of future taxable income duringthe periods in which those temporary differences become deductible. Managementconsiders taxable income in carryback years, if carryback is permitted in thetax law, the projected future taxable income, and tax planning strategies inmaking this assessment. Based upon the level of historical taxable income andthe projections for future taxable income over the periods when the deferredtax assets are deductible, management believes it is more likely than not thatwe will realize all of these deductible differences. The amount of the deferredtax asset considered realizable, however, could be reduced in the near term ifestimates of future taxable income during the carryforward periods are reduced.

 

*Accounting for Uncertainty in IncomeTaxes*

 

We adopted ASC 740(formerly FIN 48) on January 1, 2007 as described above in Note 2. ASC 740clarifies the accounting for uncertainty in tax positions by prescribing therecognition threshold a tax position is required to meet before beingrecognized in the financial statements. It also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. We had no unrecognized tax benefits and noaccrued interest or penalties recognized as of the date of our adoption of ASC740. During the year ended December 31, 2009, there were no changes in ourunrecognized tax benefits, and we had no accrued interest or penalties as of December 31,2009.

 

We are subject to U.S.and foreign income tax examinations for years subsequent to 2005, and stateincome tax examinations for years following 2004. In addition, certain federaland state net operating loss carryforwards generated after 1998 and 1996,respectively, and used in a subsequent year, may still be adjusted by a taxingauthority upon examination.

 

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**9. Commitments and Contingencies**

 

*Commitments*

 

We lease office andwarehouse space and equipment under various non-cancelable operating leaseswhich provide for minimum annual rentals and escalations based on increases inreal estate taxes and other operating expenses. We also have minimumcommitments under non-cancelable contracts for services relating totelecommunications, IT maintenance, financial services and employment contractswith certain employees (which consist of severance arrangements that, ifexercised, would become payable in less than one year). In addition, we haveobligations under capital leases for computers and related equipment,telecommunications equipment and software. As of December 31, 2009,minimum payments over the terms of applicable contracts were payable as follows(in thousands):

 
| ** **                   | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Operating lease  obligations |       | $        | 5,402      |     | $          | 4,376    |       | $        | 2,482      |     | $          | 1,900          |       | $         | 1,157      |   | $ | 1,655 |   | $ | 16,972 |   |
| Capital lease obligations    |       | 620      |       | 614      |       | 628      |       | 607      |       | 345      |       | —         |       | 2,814     |       |
| Other commitments            |       | 6,376    |       | 1,483    |       | 387      |       | —   |       | —   |       | —         |       | 8,246     |       |
| Total minimum payments       |       | $        | 12,398     |     | $          | 6,473    |       | $        | 3,497      |     | $          | 2,507          |       | $         | 1,502      |   | $ | 1,655 |   | $ | 28,032 |   |

 

For the years ended December 31,2009, 2008 and 2007, total rent expense, net of sublease income, totaled $6.5million, $6.1 million and $5.0 million. Some of the leases contain renewaloptions and escalation clauses, and require us to pay taxes, insurance andmaintenance costs.

 

*ERP and Web Infrastructure Upgrade*

 

We are currentlyupgrading many of our IT systems. We have purchased licenses for workflowsoftware, web development tools and Microsoft Dynamics AX (Axapta) to upgradeour ERP systems. We initiated the implementation and upgrade of our eCommercesystem in the second half of 2008 and have completed and launched a newgeneration of our public sites at macmall.com, onsale.com and pcmall.com. Weare currently working on the implementation of the ERP modules and the upgradeof the ERP systems, including additional enhancements and features. We havecompleted the initial phase of the implementation in January 2010, and weexpect to be complete with all phases of the implementation of the ERP systemsby 2013. We believe the implementation and upgrade should help us to gain furtherefficiencies across our organization.

 

## ***Infrastructure Upgrade***

## ** **

In July 2008, weentered into an agreement with Cisco Systems for the purchase andimplementation of various solutions to upgrade our current infrastructure forup to approximately $4.0 million. The purchase is financed through a capitallease over a five year term. Our plan is to provide a unified platform for ourentire company and to provide a robust and efficient contact center. As of December 31,2009, we have received $3.1 million of the Cisco solution. We expect to receivethe remainder of the equipment and services in the******first half of 2010. We are implementingthe Cisco solution across all of our locations and expect that all of ourlocations will be upgraded by the second half of 2010.

 

*Legal Proceedings*

 

*ZekiyaWhitmill and Lee Hanzy v. PC Mall Gov, Inc.*

 

On July 6, 2007,Zekiya Whitmill and Lee Hanzy filed a purported class action lawsuit entitledZekiya Whitmill and Lee Hanzy, individually and on behalf of others similarlysituated, Plaintiffs, vs. PC Mall Gov, Inc., a Delaware corporation, andDoes 1 through 200, inclusive, Defendants, Case No., BC373934 in the SuperiorCourt of California, County of Los Angeles. The potential class consists ofcurrent and former account executives in California who worked for PC Mall Gov., Inc.,one of our wholly-owned subsidiaries. The lawsuit alleges that PC Mall Gov.improperly classified members of the putative class as “exempt” employees andfailed to provide putative class members with meal and rest breaks. Thecomplaint in this action asserts the following three causes of action: (1) failureto pay wages, including overtime, in violation of California Labor Codesections 201 through 203, and section 1194(a); (2) failure to provide mealand rest periods in violation of California Labor Code section 226.7; and (3) violationof section 17200 of the California Business and Professions Code. The lawsuitseeks unpaid overtime, statutory penalties, interest, attorneys’ fees, punitivedamages, restitution and injunctive relief. While the case was originally filedin Los Angeles Superior Court, on September 26, 2007, the Superior Courtordered the action to arbitration and stayed all proceedings in superior court.The case was settled in July 2008 as described below.

 

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*LeeHanzy v. PC Mall, Inc. dba MACMALL, et al.*

 

On July 6, 2007, LeeHanzy filed a purported class action lawsuit entitled Lee Hanzy, individuallyand on behalf of others similarly situated, Plaintiff, vs. PC Mall, Inc.,a Delaware corporation dba MACMALL, and Does 1 through 200, inclusive,Defendants, Case No., BC373935 in the Superior Court of California, County ofLos Angeles. The potential class consists of current and former accountexecutives in California who worked for PC Mall, and in particular, the MacMalloperating division of PC Mall. The lawsuit alleges that PC Mall improperlyclassified members of the putative class as “exempt” employees and failed toprovide putative class members with meal and rest breaks. The Complaint in thisaction asserts the following three causes of action: (1) failure to paywages, including overtime, in violation of California Labor Code sections 201through 203, and section 1194(a); (2) failure to provide meal and restperiods in violation of California Labor Code section 226.7; and (3) violationof section 17200 of the California Business and Professions Code. The lawsuitseeks unpaid overtime, statutory penalties, interest, attorneys’ fees, punitivedamages, restitution and injunctive relief. While the case was originally filedin Los Angeles Superior Court, on August 30, 2007, the Superior Courtordered the action to arbitration and stayed all proceedings in superior court.The case was settled in July 2008 as described below.

 

On July 17, 2008, weentered into a settlement agreement to settle each of the above describedWhitmill and Hanzy lawsuits in accordance with a memorandum of understanding(the “MOU”) entered into on June 26, 2008. Under the MOU and thesettlement agreement, we agreed to pay an aggregate of $0.7 million, whichincludes amounts to pay class members (shared proportionally among classmembers based on the number of verified class members and the amount of weeksworked during the class period), the plaintiff’s attorneys’ fees and costs,enhanced payments for class representatives, and all funds needed for theadministration of the settlement. We have the right to nullify the settlementin the event that 5% or more of the class members opted out of the settlement.In exchange for the settlement payment, the plaintiff and all class members whodo not opt out of the settlement will release us and our affiliates for allasserted and unasserted claims, known and unknown, relating to the classaction. As part of the settlement, we continue to deny any liability orwrongdoing with respect to the claims made in the class action.

 

On July 28,2008, the arbitrator granted the parties joint application for preliminaryapproval of the settlement and ordered notices and claim forms to be distributedto all class members. On October 7, 2008, the arbitrator granted finalapproval of the class action settlement, the incentive awards to plaintiffs andthe award of attorneys’ fees and costs to class counsel. On October 8,2008, the arbitrator also executed the proposed judgment dismissing the casesbefore JAMS with prejudice as against all class members.

 

On October 21and 24, 2008, the Superior Court confirmed the arbitrator’s award and enteredjudgments dismissing the respective actions with prejudice as against theplaintiffs and all class members. Based on the parties’ settlement agreement,we distributed settlement funds to class members, class counsel and theplaintiffs in the fourth quarter of 2008 and the first quarter of 2009.

 

As a result of thesettlement discussed above, during the second quarter of 2008, we recorded acharge of $0.8 million, which includes the settlement amount and other costsrelated to the lawsuit, in “Special charges” on our Consolidated Statements ofOperations for the year ended December 31, 2008.

 

From time to time, wereceive claims of and become subject to consumer protection, employment,intellectual property and other litigation related to the conduct of ourbusiness. Any such litigation, including the litigation discussed above, couldbe costly and time consuming and could divert our management and key personnelfrom our business operations. In connection with any such litigation, we may besubject to significant damages or equitable remedies relating to the operationof our business. Any such litigation may materially harm our business, resultsof operations and financial condition.

 

**10.****    ****Stockholders’ Equity**

 

In October 2008, our Board of Directorsapproved a discretionary common stock repurchase program for up to $10 millionof our common stock in aggregate with all other repurchases made under anyrepurchase programs following the date of such Board of Directors’ approval.This repurchase program effectively supersedes an existing repurchase programadopted in 1996. Under this new program, the shares may be repurchased fromtime to time at prevailing market prices, through open market or unsolicitednegotiated transactions, depending on market conditions. We expect that therepurchase of our common stock under this new program will be financed withexisting working capital and amounts available under our existing creditfacility. No limit was placed on the duration of the repurchase program. Thereis no guarantee as to the exact number of shares that we will repurchase.Subject to applicable securities laws, repurchases may be made at such timesand in such amounts as our management deems appropriate. The program can alsobe discontinued at any time management feels additional purchases are notwarranted.

 

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During 2009 and 2008, werepurchased a total of 582,779 and 741,631 shares of our common stock at anaggregate cost of $2.6 million and $2.6 million, respectively, which wererecorded as treasury stock. As of December 31, 2009 and 2008, we had totaltreasury shares of 1,741,088 and 1,158,309 shares, respectively. The common sharesheld as treasury stock are available for general corporate purposes.

 

We have never paid cashdividends on our capital stock and our credit facility prohibits us from payingany cash dividends on our capital stock. Therefore, we do not currentlyanticipate paying dividends; we intend to retain any earnings to finance thegrowth and development of our business.

 

**11. Earnings Per Common Share**

 

Basic earnings per share(“EPS”) excludes dilution and is computed by dividing net income by theweighted average number of common shares outstanding during the reportedperiods. Diluted EPS reflects the potential dilution that could occur under thetreasury stock method if stock options and other commitments to issue commonstock were exercised, except in loss periods where the effect would beantidilutive. Potential common shares of approximately 1,666,000, 660,000 and117,000 for the years ended December 31, 2009, 2008 and 2007 have beenexcluded from the calculation of diluted EPS because the effect of theirinclusion would be antidilutive.

 

The reconciliation of theamounts used in the basic and diluted EPS computation was as follows (inthousands, except per share amounts):

 
| ** **                                     | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per Share  Amounts** | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|
| **Year Ended December 31, 2009:**              |       |       |       |       |       |                        |       |
| Basic EPS                                      |       |       |       |       |       |                        |       |
| Net income                                     |       | $          | 3,357      |       | 12,373     |                        | $          | 0.27 |   |
| Effect of dilutive  securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock  options              |       | —     |       | 302        |       |                        |       |
| Diluted EPS                                    |       |       |       |       |       |                        |       |
| Adjusted net income                            |       | $          | 3,357      |       | 12,675     |                        | $          | 0.26 |   |
| **Year Ended December 31,  2008:**        |       |       |       |       |       |                        |       |
| Basic EPS                                      |       |       |       |       |       |                        |       |
| Net income                                     |       | $          | 9,603      |       | 13,268     |                        | $          | 0.72 |   |
| Effect of dilutive  securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock  options              |       | —     |       | 593        |       |                        |       |
| Diluted EPS                                    |       |       |       |       |       |                        |       |
| Adjusted net income                            |       | $          | 9,603      |       | 13,861     |                        | $          | 0.69 |   |
| **Year Ended December 31,  2007:**        |       |       |       |       |       |                        |       |
| Basic EPS                                      |       |       |       |       |       |                        |       |
| Net income                                     |       | $          | 12,443     |       | 12,667     |                        | $          | 0.98 |   |
| Effect of dilutive  securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock  options and warrants |       | —     |       | 1,100      |       |                        |       |
| Diluted EPS                                    |       |       |       |       |       |                        |       |
| Adjusted net income                            |       | $          | 12,443     |       | 13,767     |                        | $          | 0.90 |   |

 

**12.****    ****Employee & Non-EmployeeBenefits**

 

*401(k) Savings Plan*

 

We maintain a 401(k) SavingsPlan which covers substantially all full-time employees who meet the plan’seligibility requirements. Participants are allowed to make tax-deferredcontributions up to limitations specified by the Internal Revenue Code. On July 1,2007, we began making 25% matching contributions for amounts that did notexceed 4% of the participants’ compensation. The matched contributions to theemployees are subject to a 5 year vesting provision, with credit given towardsvesting for employment during prior years. We made matching contributions tothe plan totaling approximately $406,000 and $251,000 in 2009 and 2008.

 

*Restricted Stock, Stock Warrants andOptions Issued to Non-employees*

 

On August 21, 2009, July 31,2008 and on August 31, 2007, our Compensation Committee approved andgranted, under our 1994 Plan, the award of 7,500 shares, 4,000 shares and 3,000shares, respectively, of restricted stock to each of our non-employee membersof the board for a total award of 22,500 shares, 12,000 shares and 9,000 sharesof restricted stock in the years ended December 31, 2009, 2008 and 2007.The restricted stock awards each vest quarterly in equal amounts over a oneyear period from the date of grant. See Note 3 above for more information onrestricted stock.

 

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In October 2004, weissued options to purchase 45,000 shares of our common stock under our 1994Plan to an investor and public relations consultant. The options were issued atan exercise price of $15.43 with a five-year term. Effective April 11,2005, as a result of the spin-off of eCOST.com, the exercise price of theoptions was reduced to $6.12 and the consultant received options to purchase54,319 shares of eCOST.com common stock in the transaction. Of the originalgrant of options to purchase 45,000 shares, an aggregate of 7,500 shares of theoptions vested on the date of the grant, and the remaining shares vestedquarterly over a one-year period from the date of grant. We valued the optionsat fair value based on a Black-Scholes fair value calculation. The options werevalued at the date of grant and were measured at fair value at each subsequentreporting period, with changes in value recorded over the twelve monthperformance period of the option. The options became fully vested in October 2005.We recorded a cumulative compensation expense of $0.4 million through thevesting period. The options were exercised in full in 2009.

 

In June 2003, weissued a warrant to purchase 30,000 shares of our common stock to a consultingfirm for investor and public relations services. The warrant was issued at anexercise price of $3.99 with a five-year term, which vested monthly over a oneyear period from the date of grant. Effective April 11, 2005, as a resultof the spin-off of eCOST.com, the exercise price of the warrant was reduced to$1.59, and the consulting firm received a warrant to purchase 36,213 shares ofeCOST.com common stock in the transaction. We valued the warrant at fair valuebased on a Black-Scholes fair value calculation. The warrant was valued at thedate of grant and was measured at fair value at each subsequent reportingperiod, with changes in value recorded over the twelve month performance periodof the warrant. The warrant became fully vested in June 2004. We recordeda cumulative compensation expense of $0.4 million through the vesting period.The warrant was exercised in full in the second quarter of 2008.

 

**13. Comprehensive Income**

 

Our total comprehensiveincome was as follows for the periods presented (in thousands):

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                                          |       | $                                          | 3,357      |   | $ | 9,603 |   | $ | 12,443 |   |
| Other comprehensive income  (loss), before tax:                     |       |                                       |       |   |   |   |   |
| Foreign currency  translation adjustments                           |       | 849                                        |       | (933 | ) | 1,311 |   |
| Income tax benefit  (expense) related to other comprehensive income |       | —                                     |       | 1,202 |   | (559 | ) |
| Total comprehensive income                                          |       | $                                          | 4,206      |   | $ | 9,872 |   | $ | 13,195 |   |

 

**14. Segment Information**

 

In the first quarter of 2008,following the completion of our acquisition of SARCOM in September 2007,we changed the way we internally look at our business and realigned ourreportable operating segments from two segments (previously Core business andOnSale.com) to four segments that we referred to as SMB, MME, Public Sector andConsumer. Our operating segments are primarily aligned based upon theirrespective customer base. We include corporate related expenses such as legal,accounting, information technology, product management and other administrativecosts that are not otherwise included in our operating segments in Corporateand Other. We allocate our resources to and evaluate the performance of oursegments based on operating income. A description of each of our new segmentsis provided below. All historical segment financial information provided hereinhas been revised to reflect these new operating segments.

 

In the fourth quarter of2009, we changed the name of our Consumer segment to MacMall. The MacMallsegment includes sales made under our MacMall and Onsale brand names viatelephone and the Internet to consumers, businesses and creative professionals.This was a name change only and does not affect the segment results reported inthe current or prior periods.

 

OurSMB segment consists of sales made primarily to small and medium-sizedbusinesses, utilizing an outbound phone based sales force and, whereapplicable, a field-based sales force.

 

OurMME segment consists of sales made primarily to mid-market and enterprise-sizedbusinesses under the SARCOM, DSW and Abreon brands, utilizing a fieldrelationship-based selling model and an outbound phone based sales force. TheMME segment sells complex products, services and solutions, which we believecan be best delivered with a face-to-face selling model.

 

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OurPublic Sector segment consists of sales made primarily to federal, state, andlocal governments, as well as educational institutions, utilizing an outboundphone and field relationship-based selling model as well as contracts and bidsbusiness development teams.

 

Summarized segmentinformation for our continuing operations for the periods presented was asfollows (in thousands):

 
| ** **                                 | ** ** | **SMB** | ** ** | **MME** | ** ** | **Public Sector** | ** ** | **MacMall** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|---------|------------|---------|------------|------------------------|------------|-------------|------------|---------------------------------|------------|------------------|------------|
| **Year Ended December 31,  2009**     |       |    |       |    |       |                   |       |        |       |                            |       |             |       |
| Net sales                                  |       | $       | 368,846    |    | $          | 382,725                |       | $           | 173,957    |                            | $          | 212,531          |       | $ | 2 |   | $ | 1,138,061 |   |
| Gross profit                               |       | 47,259  |       | 65,182  |       | 18,300                 |       | 22,095      |       | 180                             |       | 153,016          |       |
| Depreciation and  amortization expense (1) |       | 43      |       | 2,506   |       | 213                    |       | 119         |       | 2,716                           |       | 5,597            |       |
| Operating profit (loss)                    |       | 23,048  |       | 18,613  |       | 5,847                  |       | 3,191       |       | (42,957                         | )          | 7,742            |       |
| ** **                                 |       |    |       |    |       |                   |       |        |       |                            |       |             |       |
| **Year Ended December 31,  2008**     |       |    |       |    |       |                   |       |        |       |                            |       |             |       |
| Net sales                                  |       | $       | 486,876    |    | $          | 426,101                |       | $           | 161,418    |                            | $          | 253,537          |       | $ | 42 |   | $ | 1,327,974 |   |
| Gross profit                               |       | 60,368  |       | 73,600  |       | 16,565                 |       | 28,647      |       | 201                             |       | 179,381          |       |
| Depreciation and  amortization expense (1) |       | 65      |       | 2,654   |       | 261                    |       | 114         |       | 2,512                           |       | 5,606            |       |
| Operating profit (loss)                    |       | 29,514  |       | 18,379  |       | 2,200                  |       | 7,540       |       | (38,639                         | )          | 18,994           |       |
|                                       |       |    |       |    |       |                   |       |        |       |                            |       |             |       |
| **Year Ended December 31,  2007**     |       |    |       |    |       |                   |       |        |       |                            |       |             |       |
| Net sales                                  |       | $       | 554,493    |    | $          | 238,545                |       | $           | 156,970    |                            | $          | 265,511          |       | $ | (86 | ) | $ | 1,215,433 |   |
| Gross profit                               |       | 62,760  |       | 36,105  |       | 15,930                 |       | 32,972      |       | 71                              |       | 147,838          |       |
| Depreciation and  amortization expense (1) |       | 56      |       | 927     |       | 428                    |       | 141         |       | 2,805                           |       | 4,357            |       |
| Operating profit (loss)                    |       | 34,244  |       | 7,382   |       | 4,681                  |       | 11,560      |       | (33,549                         | )          | 24,318           |       |

 

----

| (1)   | Primary fixed assets relating to centralized network and servers are  managed by the Corporate headquarters. As such, depreciation expense relating  to such assets is included as part of Corporate and Other. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As of December 31,2009 and 2008, we had total consolidated assets of $301.2 million and $282.4million. Our management does not have available to them and does not use totalassets measured at the segment level in allocating resources. Therefore, suchinformation relating to segment assets is not provided herein.

 

Sales of our products andservices are made to customers primarily within the U.S. During the years endedDecember 31, 2009, 2008 and 2007, less than 1% of our total net sales weremade to customers outside of the continental U.S. No single customer accountedfor more than 10% of our total net sales in the years ended December 31,2009, 2008 and 2007.

 

Our property andequipment, net, were located in the following countries as of the periodspresented (in thousands):

 
| ** **                   | ** ** | **At December 31,** | ** ** |
|------------------------------|------------|-------------------------------|------------|
| **Location:**                | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| U.S.                         |       | $                             | 16,235     |   | $ | 10,854 |   | $ | 7,439 |   |
| Philippines                  |       | 516                           |       | 870 |   | 1,240 |   |
| Canada                       |       | 340                           |       | 115 |   | 279 |   |
| Property and equipment,  net |       | $                             | 17,091     |   | $ | 11,839 |   | $ | 8,958 |   |

 

**15. Related Party Transactions**

 

InFebruary 2009, we entered into a Software License and Maintenance andSupport Agreement with Eruces, Inc., a Delaware corporation, pursuant towhich Eruces licensed data security technology to our company. Dr. BassamKhulusi and Sam Khulusi, each of whom is a brother of our Chairman and ChiefExecutive Officer Frank Khulusi, together beneficially own a majority of theoutstanding voting stock of Eruces. Ronald Reck, a member of our Board ofDirectors and the Audit Committee and the chairman of our Compensation Committee,is a minority stockholder in Eruces. The Eruces technology licensed under theagreement is proprietary encryption software that was independently identifiedby our Director of Security as the best solution for certain of our datasecurity needs. The transactions contemplated by the agreement were approved bythe independent members of our Board of Directors and Audit Committee inaccordance with our Audit Committee Charter and our policy for approval ofrelated party transactions. The agreement provides for a one-time license feeof $270,300 in consideration for a worldwide, non-exclusive, perpetual andirrevocable license to use the software, a one-time $23,625 installation andintegration fee and annual support fees in the initial amount of $40,545.

 

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**16. Subsequent Events**

 

OnFebruary 23, 2010, AF Services, LLC, our wholly-owned subsidiary, enteredinto a lease agreement with SARCOM Properties, Inc., renewing a leasewhich expired on December 31, 2009, for space utilized by PC Mall’swholly-owned subsidiary, SARCOM, Inc. This new lease agreement is forsubstantially the same leased space for a total of 121,486 square feet ofoffice and warehouse/distribution space in Lewis Center, Ohio, and covers a periodof five years beginning on January 1, 2010. The monthly base rent,commencing on January 1, 2010, is $45,000, plus applicable operating andmaintenance fees and taxes. Thereafter, the monthly base rent increases 2%annually.

 

OnFebruary 26, 2010, our Compensation Committee approved and granted, underour 1994 Plan, options to purchase a total of 561,000 shares of our commonstock to certain of our employees. These options were issued at an exerciseprice of $4.66, vest quarterly over 5 years and have a term of 10 years.

 

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**PCMALL, INC.**

 

**SUPPLEMENTARYDATA**

**QUARTERLY FINANCIAL INFORMATION**

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

 
| ** **                                        | ** ** | **2009**                     | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **1****st**** Quarter** | ** ** | **2****nd**** Quarter** | ** ** | **3****rd**** Quarter** | ** ** | **4****th**** Quarter** | ** ** |
| Net sales                                         |       | $                            | 259,300    |   | $ | 261,412 |   | $ | 280,349 |   | $ | 337,000 |   |
| Gross profit                                      |       | 37,495                       |       | 35,837 |   | 39,184 |   | 40,500 |   |
| Net income                                        |       | 1,011                        |       | 815 |   | 1,448 |   | 83 |   |
| **Basic and diluted earnings per  common share:** |       |                         |       |   |   |   |   |   |   |
| Basic                                             |       | $                            | 0.08       |   | $ | 0.07 |   | $ | 0.12 |   | $ | 0.01 |   |
| Diluted                                           |       | 0.08                         |       | 0.06 |   | 0.11 |   | 0.01 |   |

 
| ** **                                        | ** ** | **2008**                     | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **1****st**** Quarter** | ** ** | **2****nd**** Quarter** | ** ** | **3****rd**** Quarter** | ** ** | **4****th**** Quarter** | ** ** |
| Net sales                                         |       | $                            | 336,627    |   | $ | 331,182 |   | $ | 325,867 |   | $ | 334,298 |   |
| Gross profit                                      |       | 45,335                       |       | 46,219 |   | 44,308 |   | 43,519 |   |
| Net income                                        |       | 2,996                        |       | 3,033 |   | 2,590 |   | 984 |   |
| **Basic and diluted earnings per  common share:** |       |                         |       |   |   |   |   |   |   |
| Basic                                             |       | $                            | 0.23       |   | $ | 0.23 |   | $ | 0.19 |   | $ | 0.08 |   |
| Diluted                                           |       | 0.21                         |       | 0.22 |   | 0.18 |   | 0.07 |   |

 

79

----

 

**ITEM 9. CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND****FINANCIAL****DISCLOSURE**

 

None.

 

**ITEM 9A.CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized, and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

We carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of the end of our most recent fiscal year. Based upon thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of December 31,2009.

 

**Changes in Internal Control OverFinancial Reporting**

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fourth quarter of2009 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Report on Internal Control OverFinancial Reporting**

 

***Management’s Report on Internal Control Over FinancialReporting***

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting. Internal control over financial reporting is defined in Rules 13a-15(f) and15d-15(f) promulgated under the Securities Exchange Act of 1934, asamended, as a process designed by, or under the supervision of, our principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by our board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with U.S. generally accepted accounting principles andincludes those policies and procedures that:

 

·**             **pertain to the maintenance of recordsthat in reasonable detail accurately and fairly reflect the transactions anddispositions of our assets;

 

·**             **provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statementsin accordance with generally accepted accounting principles, and that receiptsand expenditures of the company are being made only in accordance withauthorizations of our management and directors; and

 

·**             **provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of ourassets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Our management, with theparticipation of our principal executive officer and principal financialofficers, has assessed the effectiveness of our internal control over financialreporting as of December 31, 2009. In making its assessment of internalcontrol over financial reporting, management used the criteria described in “InternalControl — Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on this assessment andthose criteria, management believes that, as of December 31, 2009, ourinternal control over financial reporting was effective.

 

The effectiveness of ourinternal control over financial reporting has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which appears in Part II, Item 8 of this Form 10-K.

 

80

----

 

**ITEM 9B.OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

Information regarding ourboard of directors, audit committee, audit committee financial expert, code ofbusiness conduct and ethics, and other corporate governance matters is setforth under the caption “Election of Directors” in our definitive ProxyStatement to be filed in connection with our 2010 Annual Meeting ofStockholders and such information is incorporated herein by reference.

 

Information regarding Section 16(a) beneficialownership compliance is set forth under the caption “Executive Compensation — Section 16(a) BeneficialOwnership Reporting Compliance” in our definitive Proxy Statement to be filedin connection with our 2010 Annual Meeting of Stockholders and such informationis incorporated herein by reference.

 

A list of our executiveofficers is included in Part I, Item 4A of this annual report under thecaption “Executive Officers of the Registrant” and such information isincorporated herein by reference.

 

We have adopted a code ofbusiness conduct and ethics that applies to our directors, officers andemployees, including our principal executive officer and principal financialand accounting officer. Our code of business conduct and ethics is posted inthe “Investor Relations” section of our website at www.pcmall.com. Anyamendments to, or waivers from, a provision of our code of business conduct andethics that applies to our principal executive officer, principal financialofficer, principal accounting officer or controller, or persons performingsimilar functions will be posted in the “Investor Relations” section of ourwebsite. We will provide a copy of our code of business conduct and ethics toany person, without charge, upon receipt of a written request directed to ourCorporate Secretary at our principal executive offices.

 

**ITEM 11.EXECUTIVE COMPENSATION**

 

The information requiredby this item is set forth under the caption “Executive Compensation” and “Electionof Directors-Director Compensation” in our definitive Proxy Statement to befiled in connection with our 2010 Annual Meeting of Stockholders and suchinformation is incorporated herein by reference.

 

**ITEM 12. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT****AND RELATEDSTOCKHOLDER MATTERS**

 

The information requiredby this item is set forth under the caption “Security Ownership of CertainBeneficial Owners” and “Executive Compensation — Equity Compensation PlanInformation” in our definitive Proxy Statement to be filed in connection withour 2010 Annual Meeting of Stockholders and such information is incorporatedherein by reference.

 

**ITEM 13. CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS, AND DIRECTOR****INDEPENDENCE**

 

The information requiredby this item is set forth under the captions “Certain Relationships and RelatedTransactions,” “Election of Directors — Director Independence” and “ExecutiveCompensation — Compensation Committee Interlocks and Insider Participation” inour definitive Proxy Statement to be filed in connection with our 2010 AnnualMeeting of Stockholders and such information is incorporated herein byreference.

 

**ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

The information requiredby this item is set forth under the caption “Ratification of the Appointment ofIndependent Registered Public Accounting Firm” in our definitive ProxyStatement to be filed in connection with our 2010 Annual Meeting ofStockholders and such information is incorporated herein by reference.

 

81

----

 

**PART IV**

 

**ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

(a)      The following documents are filed as part of thisreport:

 
| ** ** | ** **                                                                                                                      | ** ** | **Page Number**                                 |
|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|
| (1)   | Financial Statements                                                                                                            |       | See Part II, Item 8, beginning on page 53  |
|       |                                                                                                                            |       |                                                 |
| (2)   | Financial  Statement Schedule II - Valuation and Qualifying Accounts for the Years Ended  December 31, 2009, 2008 and 2007 |       | See Part IV, Item 15, beginning on page 83 |
|       |                                                                                                                            |       |                                                 |
| (3)   | Exhibits                                                                                                                        |       | See Part IV, Item 15, beginning on page 84 |

 

82

----

 

**PCMALL, INC.**

 

**SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS**

**Forthe Years Ended December 31, 2009, 2008 and 2007**

**(inthousands)**

 
| ** **                                                        | ** ** | **Balance  at  Beginning  of Year** | ** ** | **Additions  Charged to  Operations** | ** ** | **Deduction  from  Reserves** | ** ** | **Balance  at  End of  Year** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Allowance for doubtful accounts for the years  ended:             |       |                                     |       |                                       |       |                          |       |                          |       |
| December 31, 2009                                            |       | $                                        | 4,241      |                                       | $          | 2,088                         |       | $                             | (3,589     | )(a) | $ | 2,740 |   |
| December 31, 2008                                            |       | 4,653                                    |       | 3,338                                      |       | (3,750                        | )(a)       | 4,241                         |       |
| December 31, 2007                                            |       | 4,630                                    |       | 2,215                                      |       | (2,192                        | )(a)       | 4,653                         |       |
|                                                              |       |                                     |       |                                       |       |                          |       |                          |       |
| Reserve for inventory for the years ended:                        |       |                                     |       |                                       |       |                          |       |                          |       |
| December 31, 2009                                            |       | $                                        | 1,713      |                                       | $          | 642                           |       | $                             | (784       | )(b) | $ | 1,571 |   |
| December 31, 2008                                            |       | 1,680                                    |       | 1,045                                      |       | (1,012                        | )(b)       | 1,713                         |       |
| December 31, 2007                                            |       | 1,616                                    |       | 1,519                                      |       | (1,455                        | )(b)       | 1,680                         |       |
|                                                              |       |                                     |       |                                       |       |                          |       |                          |       |
| Sales returns reserve for the years ended:                        |       |                                     |       |                                       |       |                          |       |                          |       |
| December 31, 2009                                            |       | $                                        | 1,653      |                                       | $          | 20,637                        |       | $                             | (20,600    | )(c) | $ | 1,690 |   |
| December 31, 2008                                            |       | 2,078                                    |       | 21,940                                     |       | (22,365                       | )(c)       | 1,653                         |       |
| December 31, 2007                                            |       | 2,882                                    |       | 21,003                                     |       | (21,807                       | )(c)       | 2,078                         |       |
|                                                              |       |                                     |       |                                       |       |                          |       |                          |       |
| Valuation allowance for deferred tax assets for  the years ended: |       |                                     |       |                                       |       |                          |       |                          |       |
| December 31, 2009                                            |       | $                                        | 179        |                                       | $          | 115                           | (e)        | $                             | (129       | )(f) | $ | 165 |   |
| December 31, 2008                                            |       | 214                                      | ** ** | **—**                                 |       | (35                           | )(d)       | 179                           |       |
| December 31, 2007                                            |       | 202                                      |       | 12                                         | ** ** | **—**                    |       | 214                           |       |

 

----

| (a)   | Relates primarily to accounts written-off.                                                                                       |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------|
| (b)             | Relates primarily to excess and/or obsolete  inventory written-off.                                                              |
| (c)             | Relates to sales returns received and applied to  sales returns reserve.                                                         |
| (d)             | Relates primarily to a decrease in valuation  allowance recorded for a Tennessee net operating loss carryforward.                |
| (e)             | Relates primarily to an increase in valuation allowance  recorded for New York state and local net operating loss carryforwards. |
| (f)             | Relates primarily to a decrease in valuation  allowance recorded for an Ohio net operating loss carryforward which expired.      |

 

83

----

 

**EXHIBIT LIST**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.1                 |       | Agreement and Plan of Merger, dated as of  August 17, 2007, by and among PC Mall, Inc., Mall Acquisition  2, Inc., Sarcom, Inc., Zohar CDO 2003-1, Limited, Zohar II 2005-1,  Limited, Charles E. Sweet, Robert F. Angart & Company, John R.  Strauss, Daniel A. Schneider and Howard Schapiro (incorporated herein by  reference to Exhibit 2.1 to the Current Report on Form 8-K of PC  Mall, Inc. (File no. 0-25790) filed with the Securities and Exchange  Commission (the “Commission”) on September 18, 2007) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1                 |       | Amended and Restated Certificate of Incorporation of  PC Mall, Inc. (incorporated herein by reference to  Exhibit 3.1(C) to the Quarterly Report on Form 10-Q of PC  Mall, Inc. for the quarter ended September 30, 2003 (File  No. 0-25790) filed with the Commission on November 14, 2002)                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2                 |       | Amended and Restated Bylaws of PC Mall, Inc.  (incorporated herein by reference to Exhibit 3.2 to the Annual Report on  Form 10-K of PC Mall, Inc. for the year ended December 31,  2000 (File No. 0-25790) filed with the Commission on April 2, 2001  (the “2000 Form 10-K”))                                                                                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.1*               |       | Amended and Restated 1994 Stock Incentive Plan  (amended as of June 19, 2002) (incorporated herein by reference to Annex  A to the Definitive Proxy Statement of PC Mall, Inc. (File  No. 0-25790) filed with the Commission on June 24, 2002)                                                                                                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2*               |       | Employment Agreement, dated January 1, 1995,  between Creative Computers, Inc. and Frank F. Khulusi (incorporated  herein by reference to the Registration Statement on Form S-1 of PC  Mall, Inc. (File No. 33-89572), declared effective on April 4,  1995 (the “1995 Form S-1”))                                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3*               |       | Amendment to Employment Agreement made and entered  into as of December 28, 2005, by and between PC Mall, Inc. and  Frank F. Khulusi (incorporated herein by reference to Exhibit 10.32 to  the Annual Report on Form 10-K of PC Mall, Inc. for the year ended  December 31, 2005 (File No. 0-25790) filed with the Commission on  March 31, 2006 (the “December 31, 2005 Form 10-K))                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4*               |       | Second Amendment to Employment Agreement made and  entered into as of December 28, 2005, by and between PC Mall, Inc.  and Frank F. Khulusi (incorporated herein by reference to Exhibit 10.33  to the December 31, 2005 Form 10-K)                                                                                                                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.5*               |       | Employment Agreement, dated January 20, 2000,  between PC Mall, Inc. and Kristin M. Rogers (incorporated herein by  reference to Exhibit 10.45 to the Annual Report on Form 10-K of PC  Mall, Inc., for the year ended December 31, 2001 (File No. 0-25790)  filed with the Commission on April 1, 2002)                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.6*               |       | Employment Agreement, dated January 1, 1994,  between Creative Computers, Inc. and Daniel J. DeVries (incorporated  herein by reference to the 1995 Form S-1)                                                                                                                                                                                                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.7*               |       | Severance Agreement, dated January 31, 2006,  between PC Mall Inc. and Daniel J. DeVries (incorporated herein by reference  to Exhibit 10.1 to the Current Report on Form 8-K of PC  Mall, Inc. (File No. 0-25790) filed with the Commission on  February 3, 2006)                                                                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.8*               |       | Employment Agreement, dated June 8, 2004, between  PC Mall, Inc. and Rob Newton (incorporated herein by reference to  Exhibit 10.54 to the Quarterly Report on Form 10-Q of PC  Mall, Inc. for the quarter ended June 30, 2004 (File  No. 0-25790) filed with the Commission on August 11, 2004 (the  “June 30, 2004 Form 10-Q”))                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.9*               |       | Amendment to Employment Agreement, dated  March 22, 2005, between PC Mall, Inc. and Rob Newton (incorporated  herein by reference to Exhibit 10.2 to the Current Report on form 8-K of  PC Mall, Inc. (File No. 0-25790) filed with the commission on  March 25, 2005)                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.10*              |       | Severance Agreement between AF Services, LLC and  Brandon LaVerne (incorporated herein by reference to Exhibit 10.4 to the  Quarterly Report on Form 10-Q of PC Mall, Inc. for the quarter  ended September 30, 2007 (File No. 0-25790) filed with the  Commission on November 14, 2007 (the “September 30, 2007  Form 10-Q”))                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.11*              |       | Form of Executive Non-Qualified Stock Option  Agreement (full acceleration upon change in control)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

84

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|   |   | (incorporated herein by reference to  Exhibit 10.61 to the Quarterly Report on Form 10-Q of PC  Mall, Inc. for the quarter ended September 30, 2004 (File  No. 0-25790) filed with the Commission on November 15, 2004 (the  “September 30, 2004 Form 10-Q”))                                                                                                                                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.12* |   | Form of Executive Non-Qualified Stock Option  Agreement (partial acceleration upon change in control) (incorporated herein  by reference to Exhibit 10.62 to the September 30, 2004  Form 10-Q)                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.13* |   | Directors’ Non-Qualified Stock Option Plan, amended  and restated as of May 18, 1999 (incorporated herein by reference to  Exhibit 10.2 to the Quarterly Report on Form 10-Q of PC  Mall, Inc. for the quarter ended June 30, 1999 (File  No. 0-25790) filed with the Commission on August 16, 1999)                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14* |   | Form of Indemnification Agreement between PC  Mall, Inc. and each of its directors and executive officers  (incorporated herein by reference to Exhibit 10.48 to the Annual Report  on Form 10-K of PC Mall, Inc. for the year ended December 31,  2002 (File No. 0-25790) filed with the Commission on March 31,  2003)                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.15* |   | Form of Director Restricted Stock Bonus Award  Agreement (incorporated herein by reference to Exhibit 10.3 to the  September 30, 2007 Form 10-Q)                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.16  |   | Master Separation and Distribution Agreement, dated  September 1, 2004, between PC Mall, Inc. and eCOST.com, Inc.  (incorporated herein by reference to Exhibit 10.56 to the Current Report  on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on September 8, 2004 (the “September 8, 2004  Form 8-K”))                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.17  |   | Tax Allocation and Indemnification Agreement, dated  September 1, 2004, between PC Mall, Inc. and eCOST.com, Inc.  (incorporated herein by reference to Exhibit 10.57 to the  September 8, 2004 Form 8-K)                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.18  |   | Employee Benefit Matters Agreement, dated  September 1, 2004, between PC Mall, Inc. and eCOST.com, Inc.  (incorporated herein by reference to Exhibit 10.58 to the  September 8, 2004 Form 8-K)                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.19  |   | Office Lease by and between St. Paul  Properties, Inc., as Landlord, and PC Mall, Inc., as Tenant  (incorporated herein by reference to Exhibit 10.1 to the Current Report  on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on June 21, 2007)                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.20  |   | Lease Agreement, dated September 1, 2003,  between PC Mall, Inc. and Anderson Tully Company for the premises  located at 4715 E. Shelby Drive, Memphis, TN (incorporated herein by  reference to Exhibit 10.63 to the Annual Report on Form 10-K of PC  Mall, Inc. for the year ended December 31, 2004 (File  No. 0-25790) filed with the Commission on March 31, 2005 (the  “December 31, 2004 Form 10-K”)) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.21  |   | Renewal Letter for lease of property in Memphis,  Tennessee, entered into on October 2, 2006 (incorporated herein by  reference to Exhibit 10.1 to the Current Report on Form 8-K of PC  Mall, Inc. (File No. 0-25790) filed with the Commission on  October 6, 2006)                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.22  |   | Lease Agreement, dated June 11, 2003, among PC  Mall, Inc., PC Mall Canada, Inc. and Canaprev, Inc. for the  premises located at 1100, University, 2nd Floor, Montreal (Quebec) Canada  (incorporated herein by reference to Exhibit 10.64 to the  December 31, 2004 Form 10-K)                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.23  |   | Addendum to Lease Agreement, dated January 26,  2004, between PC Mall, Inc., PC Mall Canada, Inc. and Canaprev, Inc.  for premises located at 1100 University, Montreal, Quebec, Canada, dated  January 26, 2004 (incorporated herein by reference to Exhibit 10.70  to the December 31, 2004 Form 10-K)                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.24  |   | Lease Agreement, dated as of July 1, 2001, by  and between Sarcom Properties, Inc. and Sarcom Desktop  Solutions, Inc., as amended as of December 1, 2002 and as of  March 22, 2004 (incorporated herein by reference to Exhibit 10.8 to  the September 30, 2007 Form 10-Q)                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.25  |   | Addendum No. 2, by and between Complexe Rue  Universite S.E.C., PC Mall Canada, Inc. and PC Mall, Inc., dated  January 10, 2008 (incorporated herein by reference to Exhibit 10.1  to the Current Report on Form 8-K of PC Mall, Inc. (File  No. 0-25790) filed with the Commission on January 15, 2008)                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.26+ |   | Amended and Restated Loan and Security Agreement,  dated as of August 1, 2005, by and among PC Mall, Inc., certain  subsidiaries of PC Mall, Inc., Wachovia Capital Finance Corporation  (Western) and certain other financial institutions                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.27  |   | Second Amendment to Amended and Restated Loan and  Security Agreement, dated as of June 11, 2007, by and among the  Registrant, certain subsidiaries of the Registrant, Wachovia Capital Finance  Corporation (Western) and certain other financial institutions (incorporated  herein by reference to Exhibit 10.1 to the Current Report on  Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on June 15, 2007)     |

 

85

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| 10.28  |   | Third Amendment to Amended and Restated Loan and  Security Agreement, dated as of September 17, 2007, by and among PC  Mall, Inc., certain subsidiaries of PC Mall, Inc., Wachovia Capital  Finance Corporation (Western) and certain other financial institutions  (incorporated by reference to Exhibit 10.1 to the Current Report on  Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on September 18, 2007) |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.29  |   | Fourth Amendment to Amended and Restated Loan and  Security Agreement, dated as of November 5, 2007, by and among PC Mall,  Inc, certain of its subsidiaries, Wachovia Capital Finance Corporation  (Western) and certain other financial institutions (incorporated by reference  to Exhibit 10.1 to the Current Report on Form 8-K of PC  Mall, Inc. (File No. 0-25790) filed with the Commission on  November 6, 2007)                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.30  |   | Asset Purchase Agreement, dated as of  September 7, 2006, by and among a wholly-owned subsidiary of PC Mall  Gov, Inc. GMRI and the shareholders of GMRI (incorporated herein by  reference to Exhibit 10.1 to the Current Report on Form 8-K of PC  Mall, Inc. (File No. 0-25790) filed with the Commission on  September 12, 2006)                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.31  |   | Joint Stipulation of Settlement and Release made and  entered into by and between Plaintiff Nicole Atkins,  Class Representative and Defendants PC Mall, Inc. and PC Mall  Sales, Inc. (incorporated herein by reference to Exhibit 10.1 to  the Quarterly Report on Form 10-Q of PC Mall, Inc. (File  No. 0-25790) for the period ended March 31, 2007 filed with the  Commission on May 15, 2007)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.32  |   | Registration Rights Agreement, dated as of  September 17, 2007, by and among PC Mall, Inc., Zohar CDO 2003-1,  Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F.  Angart & Company, John R. Strauss, Daniel A. Schneider and Howard  Schapiro (incorporated by reference to Exhibit 10.2 to the Current  Report on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed  with the Commission on September 18, 2007)      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.33* |   | Summary of Executive Bonus Plan (incorporated herein  by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q  of PC Mall, Inc. (File No. 0-25790) for the period ended  June 30, 2008 filed with the Commission on August 5, 2008)                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.34* |   | Summary of Executive Salary and Bonus Arrangements                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.35* |   | Summary of Director Compensation Arrangements                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.36* |   | Employment Agreement, by and between PC  Mall, Inc. and Joseph B. Hayek, dated March 17, 2008 (incorporated  herein by reference to Exhibit 10.1 to the Current Report on  Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on March 19, 2008)                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.37* |   | Amendment to Employment Agreement made and entered  into as of December 30, 2008, by and between PC Mall, Inc. and  Frank F. Khulusi (incorporated herein by reference to Exhibit 10.37 to  the Annual Report on Form 10-K of PC Mall, Inc. (File  No. 0-25790) filed with the Commission on March 16, 2009)                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.38  |   | Lease Agreement, Executed By and Between SARCOM  Properties, Inc. and AF Services, LLC, effective January 1, 2010  (incorporated herein by reference to Exhibit 10.1 to the Current Report  on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on February 26, 2010)                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.39  |   | Renewal Letter, by and between WNI/Tennessee, L.P.  and AF Services, LLC, dated September 30, 2009 (incorporated herein by  reference to Exhibit 10.1 to the Current Report on Form 8-K of PC  Mall, Inc. (File No. 0-25790) filed with the Commission on  October 6, 2009)                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21.1   |   | Subsidiaries of PC Mall, Inc. as of  December 31, 2009                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 23.1   |   | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of the Chief Executive Officer of PC  Mall, Inc. pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of the Chief Financial Officer of PC  Mall, Inc. pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                                                                |

 

86

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| 32.1   |   | Certification of the Chief Executive Officer of PC  Mall, Inc. pursuant to 18 U.S.C. 1350, as adopted by Section 906 of  the Sarbanes-Oxley Act of 2002 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                              |
| 32.2   |   | Certification of the Chief Financial Officer of PC  Mall, Inc. pursuant to 18 U.S.C. 1350, as adopted by Section 906 of  the Sarbanes-Oxley Act of 2002 |

 

----

| * | Management contract, or compensatory plan or  arrangement.                                                                                                                                           |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| + | Confidential portions omitted and filed separately  with the U.S. Securities and Exchange Commission pursuant to Rule 24b-2  promulgated under the Securities Exchange Act of 1934, as amended. |

 

*******

 

87

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, hereunto duly authorized.

 
|                      | PC MALL, INC.   |
|---------------------------|-----------------|
|                      | (Registrant)    |
|                      |            |
| Date: March 16, 2010 | By:   | /s/ FRANK F. KHULUSI |
|                      |            | Frank F. Khulusi |
|                      |            | Chief Executive Officer |

 

**POWEROF ATTORNEY**

 

KNOW ALL PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Frank F. Khulusi and Brandon H. LaVerne, and each of them, as his trueand lawful attorneys-in-fact and agents, with full power of substitution andre-substitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this Annual Report on Form 10-K,and to file the same, with exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them, full power and authority to doand perform each and every act and thing requisite and necessary to be done inconnection therewith, as fully to all intents and purposes as he might or coulddo in person, hereby ratifying and confirming all that said attorneys-in-factand agents, or any of them, or their or his substitute or substitutes, maylawfully do or cause to be done by virtue hereof.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, this reporthas been signed below by the following persons on behalf of the Registrant inthe capacities and on the dates indicated.

 
| **Signature**          | ** ** | **Title**                                                                      | ** ** | **Date**             |
|------------------------|------------|--------------------------------------------------------------------------------|------------|----------------------|
|                   |       |                                                                           |       |                 |
| /s/ FRANK F. KHULUSI   |       | Chairman, Chief Executive Officer and                                          |       |                 |
| Frank F. Khulusi       |       | President (Principal Executive Officer)                                        |       | March 16, 2010  |
|                   |       |                                                                           |       |                 |
| /s/ BRANDON H. LAVERNE |       | Chief Financial Officer, Chief                                                 |       | March 16,  2010 |
| Brandon H. LaVerne     |       | Accounting Officer and Treasurer (Principal  Financial and Accounting Officer) |       |                 |
|                   |       |                                                                           |       |                 |
| /s/ THOMAS A. MALOOF   |       | Director                                                                       |       | March 16,  2010 |
| Thomas A. Maloof       |       |                                                                           |       |                 |
|                   |       |                                                                           |       |                 |
| /s/ RONALD B. RECK     |       | Director                                                                       |       | March 16,  2010 |
| Ronald B. Reck         |       |                                                                           |       |                 |
|                   |       |                                                                           |       |                 |
| /s/ PAUL C. HEESCHEN   |       | Director                                                                       |       | March 16,  2010 |
| Paul C. Heeschen       |       |                                                                           |       |                 |

 

***

 

88

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                            |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                       |
| 10.26+              |       | Amended and Restated Loan and Security Agreement,  dated as of August 1, 2005, by and among PC Mall, Inc., certain  subsidiaries of PC Mall, Inc., Wachovia Capital Finance Corporation  (Western) and certain other financial institutions |
|                |       |                                                                                                                                                                                                                                                       |
| 10.34*              |       | Summary of Executive Salary and Bonus Arrangements                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                       |
| 10.35*              |       | Summary of Director Compensation Arrangements                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                       |
| 21.1                |       | Subsidiaries of PC Mall, Inc. as of December 31,  2009                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                       |
| 23.1                |       | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                       |
| 31.1                |       | Certification of the Chief Executive Officer of PC  Mall, Inc. pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                       |
| 31.2                |       | Certification of the Chief Financial Officer of PC  Mall, Inc. pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                       |
| 32.1                |       | Certification of the Chief Executive Officer of PC  Mall, Inc. pursuant to 18 U.S.C. 1350, as adopted by Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                          |
|                |       |                                                                                                                                                                                                                                                       |
| 32.2                |       | Certification of the Chief Financial Officer of PC  Mall, Inc. pursuant to 18 U.S.C. 1350, as adopted by Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                          |

 

----

| * | Management contract, or compensatory plan or  arrangement.                                                                                                                                           |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| + | Confidential portions omitted and filed separately  with the U.S. Securities and Exchange Commission pursuant to Rule 24b-2  promulgated under the Securities Exchange Act of 1934, as amended. |

 

*******

 

89

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