**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended September 30, 2010**

 

**OR**

** **

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

 

**For thetransition period from             to              **

 

**CommissionFile Number: 0-25790**

 

**PC MALL, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                    | ** ** | **95-4518700**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer       |
| incorporation or organization)  |       | Identification Number) |

 

**2555 West 190th Street, Suite 201**

**Torrance, CA 90504**

(Address of principal executive offices)

 

**(310) 354-5600**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the 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 was requiredto file such reports) and (2) has been subject to such filing requirementsfor the past 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer x         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-accelerated filer o   |   | Smaller reporting company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

As of November 4, 2010,the registrant had 12,133,374 shares of common stock outstanding.

 

 

 

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**PC MALL, INC.**

 

**TABLE OF CONTENTS**

 
| ** **                                                                                                                     | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I - FINANCIAL INFORMATION (unaudited)                                                                                |       |     |
|                                                                                                                           |       |     |
| Item 1. Financial Statements                                                                                                   |       |     |
|                                                                                                                           |       |     |
| Consolidated Balance Sheets as of September 30,  2010 and December 31, 2009                                          |       | 2        |
|                                                                                                                           |       |     |
| Consolidated Statements of Operations for the Three  and Nine Months Ended September 30, 2010 and September 30, 2009 |       | 3        |
|                                                                                                                           |       |     |
| Consolidated Statement of Stockholders’ Equity for the  Nine Months Ended September 30, 2010                         |       | 4        |
|                                                                                                                           |       |     |
| Consolidated Statements of Cash Flows for the Nine  Months Ended September 30, 2010 and September 30, 2009           |       | 5        |
|                                                                                                                           |       |     |
| Notes to the Consolidated Financial Statements                                                                                 |       | 6        |
|                                                                                                                           |       |     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            |       | 11       |
|                                                                                                                           |       |     |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                            |       | 27       |
|                                                                                                                           |       |     |
| Item 4. Controls and Procedures                                                                                                |       | 27       |
|                                                                                                                           |       |     |
| PART II  - OTHER INFORMATION (unaudited)                                                                                  |       |     |
|                                                                                                                           |       |     |
| Item  1. Legal Proceedings                                                                                                     |       | 28       |
|                                                                                                                           |       |     |
| Item  1A. Risk Factors                                                                                                         |       | 28       |
|                                                                                                                           |       |     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                           |       | 44       |
|                                                                                                                           |       |     |
| Item 6.  Exhibits                                                                                                              |       | 45       |
|                                                                                                                           |       |     |
| Signature                                                                                                                      |       | 46       |

 

1

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**PC MALL, INC.**

 

**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.****       ****FINANCIALSTATEMENTS**

 

**CONSOLIDATED BALANCE SHEETS**

**(unaudited, in thousands, except per share amounts and sharedata)**

 
| ** **                                                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                              | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                                              |       |                   |       |                  |       |
| Current assets:                                                                                                                                                         |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                               |       | $                      | 8,925      |                  | $          | 9,215 |   |
| Accounts receivable, net of allowances of $2,245  and $2,740                                                                                                            |       | 161,695                |       | 161,468               |       |
| Inventories, net                                                                                                                                                        |       | 56,153                 |       | 68,564                |       |
| Prepaid expenses and other current assets                                                                                                                               |       | 11,076                 |       | 9,290                 |       |
| Deferred income taxes                                                                                                                                                   |       | 3,368                  |       | 3,297                 |       |
| Total current assets                                                                                                                                                    |       | 241,217                |       | 251,834               |       |
| Property and equipment, net                                                                                                                                             |       | 21,390                 |       | 17,091                |       |
| Deferred income taxes                                                                                                                                                   |       | 707                    |       | 1,538                 |       |
| Goodwill                                                                                                                                                                |       | 25,516                 |       | 19,291                |       |
| Intangible assets, net                                                                                                                                                  |       | 12,252                 |       | 10,354                |       |
| Other assets                                                                                                                                                            |       | 1,505                  |       | 1,068                 |       |
| Total assets                                                                                                                                                            |       | $                      | 302,587    |                  | $          | 301,176 |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                          |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                    |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                        |       | $                      | 95,200     |                  | $          | 108,773 |   |
| Accrued expenses and other current liabilities                                                                                                                          |       | 27,225                 |       | 25,148                |       |
| Deferred revenue                                                                                                                                                        |       | 13,503                 |       | 9,714                 |       |
| Line of credit                                                                                                                                                          |       | 58,350                 |       | 53,127                |       |
| Note payable — current                                                                                                                                             |       | 1,148                  |       | 1,038                 |       |
| Total current liabilities                                                                                                                                               |       | 195,426                |       | 197,800               |       |
| Note payable and other long-term liabilities                                                                                                                            |       | 4,540                  |       | 5,621                 |       |
| Total liabilities                                                                                                                                                       |       | 199,966                |       | 203,421               |       |
| Commitments and contingencies (Note 10)                                                                                                                                 |       |                   |       |                  |       |
| 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; 14,073,740 and 14,031,740 shares issued; and 12,132,568 and  12,290,652 shares outstanding, respectively |       | 14                     |       | 14                    |       |
| Additional paid-in capital                                                                                                                                              |       | 104,359                |       | 102,361               |       |
| Treasury stock, at cost: 1,941,172 and 1,741,088  shares                                                                                                                |       | (7,176                 | )          | (6,254                | )          |
| Accumulated other comprehensive income                                                                                                                                  |       | 2,245                  |       | 2,111                 |       |
| Accumulated earnings (deficit)                                                                                                                                          |       | 3,179                  |       | (477                  | )          |
| Total stockholders’ equity                                                                                                                                         |       | 102,621                |       | 97,755                |       |
| Total liabilities and stockholders’ equity                                                                                                                         |       | $                      | 302,587    |                  | $          | 301,176 |   |

 

SeeNotes to the Consolidated Financial Statements.

 

2

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**PC MALL, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                              |       | $                                                    | 336,099    |                                                | $          | 280,349 |   | $ | 942,936 |   | $ | 801,061 |   |
| Cost of goods sold                                     |       | 292,859                                              |       | 241,165                                             |       | 821,112 |   | 688,545 |   |
| Gross profit                                           |       | 43,240                                               |       | 39,184                                              |       | 121,824 |   | 112,516 |   |
| Selling, general and administrative expenses           |       | 39,200                                               |       | 36,146                                              |       | 114,161 |   | 105,461 |   |
| Operating profit                                       |       | 4,040                                                |       | 3,038                                               |       | 7,663 |   | 7,055 |   |
| Interest expense, net                                  |       | 548                                                  |       | 395                                                 |       | 1,537 |   | 1,083 |   |
| Income before income taxes                             |       | 3,492                                                |       | 2,643                                               |       | 6,126 |   | 5,972 |   |
| Income tax expense                                     |       | 1,372                                                |       | 1,195                                               |       | 2,470 |   | 2,698 |   |
| Net income                                             |       | $                                                    | 2,120      |                                                | $          | 1,448 |   | $ | 3,656 |   | $ | 3,274 |   |
| **Basic and Diluted Earnings Per  Common Share**       |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                  |       | $                                                    | 0.17       |                                                | $          | 0.12 |   | $ | 0.30 |   | $ | 0.26 |   |
| Diluted                                                |       | 0.17                                                 |       | 0.11                                                |       | 0.29 |   | 0.26 |   |
| Weighted average number of common shares  outstanding: |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                  |       | 12,193                                               |       | 12,420                                              |       | 12,248 |   | 12,377 |   |
| Diluted                                                |       | 12,309                                               |       | 12,900                                              |       | 12,489 |   | 12,686 |   |

 

SeeNotes to the Consolidated Financial Statements.

 

3

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**PC MALL, INC.**

 

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**(unaudited, in thousands)**

 
| ** **                                                                                      | ** ** | ** **            | ** ** | **Additional** | ** ** | ** **   | ** ** | **Accumulated  Other** | ** ** | **Accumulated** | ** ** | ** **    | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------|------------|------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                                                      | ** ** | **Common Stock** | ** ** | **Paid-in-**   | ** ** | **Treasury** | ** ** | **Comprehensive**      | ** ** | **Earnings**    | ** ** | ** **    | ** ** |
| ** **                                                                                      | ** ** | **Outstanding**       | ** ** | **Amount**     | ** ** | **Capital**  | ** ** | **Stock**              | ** ** | **Income**      | ** ** | **(Deficit)** | ** ** | **Total** | ** ** |
| Balance  at December 31, 2009                                                              |       | 12,291                |       | $              | 14         |         | $          | 102,361                |       | $               | (6,254     | )             | $          | 2,111 |   | $ | (477 | ) | $ | 97,755 |   |
| Stock  option exercises and restricted stock awards, including related income  tax benefit |       | 42                    |       | —         |       | 223          |       | —                 |       | —          |       |          |       | 223 |   |
| Stock-based  compensation expense                                                               |       | —                |       | —         |       | 1,775        |       | —                 |       | —          |       | —        |       | 1,775 |   |
| Purchase  of common stock under a repurchase program                                  |       | (200                  | )          | ** **     |       |         |       | (922                   | )          | ** **      |       |          |       | (922 | ) |
| Subtotal                                                                                        |       | —                |       | —         |       | —       |       | —                 |       | —          |       | —        |       | 98,831 |   |
| Net  income                                                                                     |       | —                |       | —         |       | —       |       | —                 |       | —          |       | 3,656         |       | 3,656 |   |
| Translation  adjustments                                                                        |       | —                |       | —         |       | —       |       | —                 |       | 134             |       | —        |       | 134 |   |
| Comprehensive  income                                                                           |       | —                |       | —         |       | —       |       | —                 |       | —          |       | —        |       | 3,790 |   |
| Balance  at September 30, 2010                                                             |       | 12,133                |       | $              | 14         |         | $          | 104,359                |       | $               | (7,176     | )             | $          | 2,245 |   | $ | 3,179 |   | $ | 102,621 |   |

 

SeeNotes to the Consolidated Financial Statements.

 

4

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**PC MALL, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited, in thousands)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| **Cash Flows From Operating  Activities**                                          |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 3,656      |   | $ | 3,274 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                      |       | 5,999                                               |       | 4,018 |   |
| Provision for deferred income taxes                                                |       | 787                                                 |       | 2,894 |   |
| Net tax benefit (expense) related to stock option  exercises                       |       | 162                                                 |       | (309 | ) |
| Excess tax benefit related to stock option  exercises                              |       | (15                                                 | )          | (278 | ) |
| Non-cash stock-based compensation                                                  |       | 1,775                                               |       | 1,223 |   |
| Gain on sale of fixed assets                                                       |       | 14                                                  |       | — |   |
| Change in operating assets and liabilities:                                        |       |                                                |       |   |   |
| Accounts receivable                                                                |       | 733                                                 |       | 1,226 |   |
| Inventories                                                                        |       | 12,411                                              |       | 10,061 |   |
| Prepaid expenses and other current assets                                          |       | (1,786                                              | )          | (478 | ) |
| Other assets                                                                       |       | (439                                                | )          | 111 |   |
| Accounts payable                                                                   |       | (10,700                                             | )          | (11,314 | ) |
| Accrued expenses and other current liabilities                                     |       | (1,556                                              | )          | (5,850 | ) |
| Deferred revenue                                                                   |       | 3,205                                               |       | (3,292 | ) |
| Total adjustments                                                                  |       | 10,590                                              |       | (1,988 | ) |
| Net cash provided by operating activities                                          |       | 14,246                                              |       | 1,286 |   |
| **Cash Flows From Investing  Activities**                                          |       |                                                |       |   |   |
| Acquisition of NSPI, net of cash acquired                                          |       | (8,788                                              | )          | — |   |
| Purchases of property and equipment                                                |       | (5,936                                              | )          | (4,921 | ) |
| Proceeds from sale of fixed assets                                                 |       | 15                                                  |       | — |   |
| Net cash used in investing activities                                              |       | (14,709                                             | )          | (4,921 | ) |
| **Cash Flows From Financing  Activities**                                          |       |                                                |       |   |   |
| Repayments under notes payable                                                     |       | (829                                                | )          | (735 | ) |
| Net borrowings under line of credit                                                |       | 5,223                                               |       | 7,721 |   |
| Change in book overdraft                                                           |       | (3,017                                              | )          | (2,202 | ) |
| Payments of obligations under capital lease                                        |       | (492                                                | )          | (295 | ) |
| Proceeds from stock issued under stock option  plans                               |       | 61                                                  |       | 541 |   |
| Excess tax benefit related to stock option  exercises                              |       | 15                                                  |       | 278 |   |
| Common shares repurchased and held in treasury                                     |       | (922                                                | )          | (1,647 | ) |
| Net cash provided by financing activities                                          |       | 39                                                  |       | 3,661 |   |
| Effect of foreign currency on cash flow                                            |       | 134                                                 |       | 637 |   |
| Net change in cash and cash equivalents                                            |       | (290                                                | )          | 663 |   |
| Cash and cash equivalents at beginning of the  period                              |       | 9,215                                               |       | 6,748 |   |
| Cash and cash equivalents at end of the period                                     |       | $                                                   | 8,925      |   | $ | 7,411 |   |
| **Supplemental Cash Flow  Information**                                            |       |                                                |       |   |   |
| Interest paid                                                                      |       | $                                                   | 1,427      |   | $ | 1,103 |   |
| Income taxes paid                                                                  |       | 1,166                                               |       | 2,371 |   |
| **Supplemental Non-Cash Investing  and Financing Activities**                      |       |                                                |       |   |   |
| Purchase of infrastructure system                                                  |       | $                                                   | —     |   | $ | 1,105 |   |
| NSPI acquisition related:                                                          |       |                                                |       |   |   |
| Fair value of assets, net of cash, acquired                                        |       | $                                                   | 13,472     |   | $ | — |   |
| Net cash paid                                                                      |       | (8,788                                              | )          | — |   |
| Liabilities assumed                                                                |       | $                                                   | 4,684      |   | $ | — |   |

 

SeeNotes to the Consolidated Financial Statements.

 

5

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**PC MALL, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1. Basis ofPresentation**

 

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, nspi.com and onsale.com andother promotional materials.

 

Wehave prepared the unaudited consolidated financial statements included hereinpursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”). Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted pursuant to such rules and regulations for interimfinancial reporting. In the opinion of management, all adjustments, consistingonly of normal recurring items which are necessary for a fair presentation,have been included. The results for interim periods are not necessarilyindicative of the results that may be expected for any other interim period orfor the full year. These unaudited consolidated financial statements should beread in conjunction with the audited consolidated financial statements and thenotes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2009 filed with the SEC on March 16, 2010, as amendedand filed on April 30, 2010, our Quarterly Reports on Form 10-Q forthe quarters ended March 31, 2010 and June 30, 2010, filed with theSEC on May 10, 2010 and August 9, 2010 respectively, and all of ourother periodic filings, including Current Reports on Form 8-K, filed withthe SEC after the end of our 2009 fiscal year and through the date of thisreport.

 

**2. Summaryof New Accounting Standards**

 

InOctober 2009, the FASB issued ASU 2009-14,**“CertainArrangements That Contain Software Elements (Topic 985) — a consensus of theFASB Emerging Issues Task Force.” ASU 2009-14 amends the scope ofsoftware revenue guidance in ASC Subtopic 985-605, “Software-Revenue Recognition,” to exclude tangible productscontaining software and non-software components that function together todeliver the product’s essential functionality. In October 2009, FASB alsoissued 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.

 

**3.Acquisition**

 

*NSPI*

 

In June 2010, Sarcom, Inc,our wholly-owned subsidiary, completed the acquisition of substantially all ofthe assets of Network Services Plus, Inc. (“NSPI”). NSPI, primarily aprovider of hosted data center and managed IT services in the southeasternUnited States, had approximately 73 employees as of the closing date, 53 ofwhom are billable IT resources. The terms of the transaction included aninitial purchase price of $7.8 million, less a customary hold-back to settlepossible indemnity claims. In addition, we extinguished substantially allof NSPI’s indebtedness that existed immediately prior to the closing date ofour acquisition. We have recorded identifiable intangible assets of $2.6million related to customer relationships, $0.5 million related to trademarksand $0.3 million related to a non-compete agreement, with estimated usefullives of 10, 10 and 4 years, respectively. In addition, pursuant to the termsof the asset purchase agreement, NSPI’s shareholders can earn additionalconsideration based on the performance of the NSPI business over the next twoyears, up to a total of approximately $5.2 million. In accordance with ASC 805,“Purchase Price Allocations” (formerly FAS No. 141R), based on an initialvaluation of the fair value of the contingent consideration, in June 2010we recorded additional goodwill and a corresponding liability of $3.2 millionfor future earnout payments. Such valuation is based upon management’s initialforecasts of expected profitability of NSPI during the earnout period, and willbe updated, if necessary, in future periods with adjustments reflected in ourconsolidated statement of operations.

 

6

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**4. Goodwilland Intangible Assets**

 

*Goodwill*

 

Our goodwill, all of whichis recorded in and held by our MME segment, totaled $25.5 million at September 30,2010 and $19.3 million at December 31, 2009. The $6.2 million of increasein goodwill from December 31, 2009 to September 30, 2010 was relatedto our acquisition of NSPI, which is discussed above, and is amortizable forincome tax purposes over 15 years.

 

*IntangibleAssets*

 

The following table setsforth the amounts recorded for intangible assets as of the periods presented(in thousands):

 
| ** **                          | ** ** | **Weighted  Average  Estimated** | ** ** | **At September 30, 2010** | ** ** | **At December 31, 2009** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **Useful Lives  (years)**   | ** ** | **Gross  Amount**                        | ** ** | **Accumulated  Amortization**           | ** ** | **Net  Amount** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Amount** | ** ** |
| Patent,  trademarks & URLs |       | 9                                |       | $                                        | 6,328      | (1)                                     | $          | 589 |   | $ | 5,739 |   | $ | 5,878 | (1) | $ | 557 |   | $ | 5,321 |   |
| Customer  relationships             |       | 6                                |       | 10,654                                   |       | 4,807                                   |       | 5,847 |   | 8,104 |   | 3,662 |   | 4,442 |   |
| Non-compete  agreements             |       | 4                                |       | 1,168                                    |       | 502                                     |       | 666 |   | 918 |   | 327 |   | 591 |   |
| Other                               |       | 5                                |       | 32                                       |       | 32                                      |       | — |   | 32 |   | 32 |   | — |   |
| Total  intangible assets            |       |                             |       | $                                        | 18,182     |                                    | $          | 5,930 |   | $ | 12,252 |   | $ | 14,932 |   | $ | 4,578 |   | $ | 10,354 |   |

 

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(1)          Included in the total amountfor “Patent, trademarks, & URLs” at September 30, 2010 and December 31,2009 are $5.2 million of trademarks with indefinite useful lives acquired inthe SARCOM acquisition that are not amortized.

 

Amortization expense forintangible assets was approximately $0.5 million and $0.4 million for the threemonths ended September 30, 2010 and 2009 and approximately $1.4 millionand approximately $1.1 million for the nine months ended September 30,2010 and 2009.

 

Estimated amortizationexpense for intangible assets in each of the next five years and thereafter isas follows: $0.5 million in the remainder of 2010; $2.0 million in 2011; $1.7million in 2012; $0.8 million in 2013, $0.4 million in 2014 and $1.6 millionthereafter.

 

**5. Debt**

 

We maintain an asset-basedrevolving credit facility, as amended from time to time, of up to $150 millionfrom lending units of large commercial banks. 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 theassignee, an aggregate acceptance fee not to exceed 0.125% of the aggregate sumof the increase in credit limit assigned; (iii) LIBOR interest rateoptions that we can enter into with no limit on the maximum outstandingprincipal balance which may be subject to a LIBOR interest rate option; and(iv) a maturity date of March 2011. In October 2008, we electedto increase our maximum credit line to $130 million from a previous maximum of$115 million.

 

The credit facility, whichfunctions 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 September 30, 2010,we had $58.4 million of net working capital advances outstanding under the lineof credit. At September 30, 2010, the maximum credit line was $130 millionand we had $68.5 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.

 

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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 September 30, 2010. 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 onSeptember 17, 2007 with a principal balance of $5.425 million, payable inequal monthly principal installments beginning on October 1, 2007, plusinterest at the prime rate with a LIBOR option. The amended term note maturesin September 2014 or, in the event of a default, termination ornon-renewal of our credit facility, is payable in its entirety upon demand byour lender. At September 30, 2010, we had $3.1 million outstanding underthe amended term note. Our term note matures as follows: $193,750 in theremainder of 2010, $775,000 annually in each of the years 2011 through 2013 and$581,250 thereafter.

 

At September 30, 2010,our effective weighted average annual interest rate on outstanding amountsunder the credit facility and term note was 1.77%.

 

Asof September 30, 2010, $0.3 million relating to the financing of ourpurchase of Microsoft AX (Axapta), which is a part of our ERP upgrade, wereincluded in each of our “Notes payable — current” and “Notes payable and otherlong-term liabilities” on our Consolidated Balance Sheets.

 

Thecarrying amounts of our line of credit borrowings and notes payable approximatetheir fair value based upon the current rates offered to us for obligations ofsimilar terms and remaining maturities.

 

**6. IncomeTaxes**

 

*Accountingfor Uncertainty in Income Taxes*

 

ASC740 clarifies the accounting for uncertainty in tax positions by prescribingthe recognition 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 three and nine months ended September 30, 2010, there wereno changes in our unrecognized tax benefits, and we had no accrued interest orpenalties as of September 30, 2010.

 

Weare subject to U.S. and foreign income tax examinations for years subsequent to2006, and state income tax examinations for years following 2004. In addition,certain federal and state net operating loss carryforwards generated after 1999and 1996, respectively, and used in a subsequent year, may still be adjusted bya taxing authority upon examination.

 

**7. EarningsPer Share**

 

Basic earnings per share (“EPS”)excludes dilution and is computed by dividing net income by the weightedaverage number of common shares outstanding during the reported periods.Diluted EPS reflects the potential dilution that could occur under the treasurystock method if stock options and other commitments to issue common stock wereexercised, except in loss periods where the effect would be antidilutive. Inaddition, we exclude common stock options from the computation of diluted EPSwhen their exercise price is greater than the average market price of ourcommon stock. As such, potential common shares of approximately 2,412,000 and921,000 for the three months ended September 30, 2010 and 2009, andapproximately 1,493,000 and 1,693,000 for the nine months ended September 30,2010 and 2009 have been excluded from the calculation of diluted EPS becausethe effect of their inclusion would be antidilutive.

 

8

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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** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|
| **Three Months Ended  September 30, 2010:** |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 2,120      |       | 12,193     |                        | $          | 0.17 |   |
| Effect of dilutive securities                    |       |       |       |       |       |                        |       |
| Dilutive effect of stock options                 |       | —     |       | 116        |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 2,120      |       | 12,309     |                        | $          | 0.17 |   |
| **Three Months Ended  September 30, 2009:** |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 1,448      |       | 12,420     |                        | $          | 0.12 |   |
| Effect of dilutive securities                    |       |       |       |       |       |                        |       |
| Dilutive effect of stock options                 |       | —     |       | 480        |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 1,448      |       | 12,900     |                        | $          | 0.11 |   |
| **Nine Months Ended  September 30, 2010:**  |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 3,656      |       | 12,248     |                        | $          | 0.30 |   |
| Effect of dilutive securities                    |       |       |       |       |       |                        |       |
| Dilutive effect of stock options                 |       | —     |       | 241        |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 3,656      |       | 12,489     |                        | $          | 0.29 |   |
| **Nine Months Ended  September 30, 2009:**  |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 3,274      |       | 12,377     |                        | $          | 0.26 |   |
| Effect of dilutive securities                    |       |       |       |       |       |                        |       |
| Dilutive effect of stock options                 |       | —     |       | 309        |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 3,274      |       | 12,686     |                        | $          | 0.26 |   |

 

**8.Comprehensive Income**

 

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

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income                               |       | $                                                    | 2,120      |                                                | $          | 1,448 |   | $ | 3,656 |   | $ | 3,274 |   |
| Other comprehensive income:              |       |                                                 |       |                                                |       |   |   |   |   |
| Foreign currency translation adjustments |       | 237                                                  |       | 354                                                 |       | 134 |   | 637 |   |
| Total comprehensive income               |       | $                                                    | 2,357      |                                                | $          | 1,802 |   | $ | 3,790 |   | $ | 3,911 |   |

 

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**9. SegmentInformation**

 

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

 
| ** **                                      | ** ** | **SMB**    | ** ** | **MME**    | ** ** | **Public Sector** | ** ** | **MacMall** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------------------|------------|-------------|------------|---------------------------------|------------|------------------|------------|
| **Three Months Ended  September 30, 2010** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net sales                                  |       | $          | 110,033    |       | $          | 133,758                |       | $           | 53,526     |                            | $          | 38,797           |       | $ | (15 | ) | $ | 336,099 |   |
| Gross profit                                    |       | 14,551     |       | 19,920     |       | 4,179                  |       | 4,533       |       | 57                              |       | 43,240           |       |
| Depreciation and amortization expense (1)       |       | 4          |       | 892        |       | 53                     |       | 116         |       | 1,203                           |       | 2,268            |       |
| Operating profit (loss)                         |       | 7,571      |       | 5,908      |       | 646                    |       | 1,185       |       | (11,270                         | )          | 4,040            |       |
|                                            |       |       |       |       |       |                   |       |        |       |                            |       |             |       |
| **Three Months Ended  September 30, 2009** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net sales                                  |       | $          | 85,164     |       | $          | 97,711                 |       | $           | 55,627     |                            | $          | 41,867           |       | $ | (20 | ) | $ | 280,349 |   |
| Gross profit                                    |       | 11,712     |       | 17,172     |       | 5,658                  |       | 4,597       |       | 45                              |       | 39,184           |       |
| Depreciation and amortization expense (1)       |       | 9          |       | 625        |       | 55                     |       | 29          |       | 678                             |       | 1,396            |       |
| Operating profit (loss)                         |       | 5,937      |       | 5,519      |       | 2,391                  |       | 473         |       | (11,282                         | )          | 3,038            |       |
|                                            |       |       |       |       |       |                   |       |        |       |                            |       |             |       |
| **Nine Months Ended  September 30, 2010**  |       |       |       |       |       |                   |       |        |       |                            |       |             |       |
| Net sales                                       |       | $          | 325,736    |       | $          | 355,731                |       | $           | 138,650    |                            | $          | 122,829          |       | $ | (10 | ) | $ | 942,936 |   |
| Gross profit                                    |       | 42,626     |       | 55,040     |       | 10,394                 |       | 13,714      |       | 50                              |       | 121,824          |       |
| Depreciation and amortization expense (1)       |       | 12         |       | 2,224      |       | 160                    |       | 313         |       | 3,290                           |       | 5,999            |       |
| Operating profit (loss)                         |       | 21,603     |       | 16,537     |       | 203                    |       | 3,013       |       | (33,693                         | )          | 7,663            |       |
|                                            |       |       |       |       |       |                   |       |        |       |                            |       |             |       |
| **Nine Months Ended  September 30, 2009**  |       |       |       |       |       |                   |       |        |       |                            |       |             |       |
| Net sales                                       |       | $          | 259,935    |       | $          | 275,051                |       | $           | 120,825    |                            | $          | 145,262          |       | $ | (12 | ) | $ | 801,061 |   |
| Gross profit                                    |       | 34,591     |       | 48,814     |       | 13,137                 |       | 15,854      |       | 120                             |       | 112,516          |       |
| Depreciation and amortization expense (1)       |       | 35         |       | 1,875      |       | 149                    |       | 87          |       | 1,872                           |       | 4,018            |       |
| Operating profit (loss)                         |       | 17,165     |       | 14,316     |       | 4,067                  |       | 2,782       |       | (31,275                         | )          | 7,055            |       |

 

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(1)                        Primary fixedassets relating to network and servers are managed by our corporateheadquarters. As such, depreciation expense relating to such assets is includedas part of Corporate and Other.

 

As of September 30,2010 and December 31, 2009, we had total consolidated assets of $302.6million and $301.2 million, respectively. Our management does not haveavailable to them and does not use total assets measured at the segment level inallocating resources. Therefore, such information relating to segment assets isnot provided herein.

 

**10.Commitments and Contingencies**

 

Total rent expense under ouroperating leases, net of sublease income, was $1.7 million and $1.6 million forthe three months ended September 30, 2010 and 2009, and $5.0 million and$4.6 million for the nine months ended September 30, 2010 and 2009. Someof our leases contain renewal options and escalation clauses, and require us topay taxes, insurance and maintenance costs.

 

*Legal Proceedings*

 

Inaddition to any matters disclosed above, we currently are, or from time to timemay become, party to disputes which involve or may involve litigation,including consumer protection, employment, intellectual property and other litigationrelated to the conduct of our business. We consult with legal counsel on suchissues and seek input from other experts and advisors with respect to suchmatters in the ordinary course of business. Any such matter, however,could be costly and time consuming and could divert our management and keypersonnel from our business operations. Whether any losses, damages or remediesultimately resulting from such matters could reasonably have a material effecton our business, financial condition, results of operation, or cash flows willdepend on a number of variables, including, for example, the timing and amountof such losses or damages (if any) and the structure and type of any suchremedies. For these reasons, it is not possible to make reliable estimatesof the amount or range of loss that could result from any such matters at thistime. We do not, however, presently expect any such matters to have amaterial impact on our consolidated financial statements.

 

** *

 

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**ITEM 2.****                    ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*You shouldread the following Management’s Discussion and Analysis of**Financial Condition and Results of Operationstogether with the consolidated**financialstatements and related notes included elsewhere in this report, our**Annual Report on Form 10-K for the year endedDecember 31, 2009 filed with the**SEC on March 16, 2010, as amended and filed on April 30,2010, our Quarterly Reports on Form 10-Q for the quarters ended March 31,2010 and June 30, 2010, filed with the SEC on May 10, 2010 and August 9,2010 respectively, and all of our other**periodic filings, including Current Reports on Form 8-K, filedwith the SEC**after the end of our2009 fiscal year and through the date of this report. This discussion contains**forward-looking statements that involverisks and uncertainties. Our actual**resultscould differ materially from those anticipated in these forward-looking**statements as a result of various factors,including those described under**“Forward-LookingStatements” below and under “Risk Factors” in Item 1A of Part II, andelsewhere in this report.*

 

**BUSINESSOVERVIEW**

 

PC Mall, Inc., togetherwith its wholly-owned subsidiaries (collectively referred to as “PC Mall,” “we”or “us”), founded in 1987, is a value added direct marketer of technologyproducts, services and solutions to businesses, government and educationalinstitutions and individual consumers. We offer our products, services andsolutions through dedicated account executives, field service teams, variousdirect marketing techniques and three retail stores. We also utilizedistinctive full-color catalogs under the PC Mall, MacMall, PC Mall Gov andSARCOM brands and our websites pcmall.com, macmall.com, pcmallgov.com,gmri.com, sarcom.com, abreon.com, nspi.com and onsale.com and other promotionalmaterials.

 

PC Mall plays a valuablerole in the IT supply chain. While we provide comprehensive solutions for ourcustomers’ technology needs, our business model also provides significantleverage to technology manufacturers and service providers. Through us,technology manufacturers and service providers are able to reach multiplecustomer segments including consumers, small and medium sized businesses, largeenterprise businesses, as well as state, local and federal governments andeducational institutions. Our model also facilitates an efficient supply chainand support mechanism for manufacturers by using a combination of directmarketing, centralized selling and support and centralized product fulfillment.Additionally, while our experience and expertise in marketing and eCommerceallows us to efficiently reach and capture customers across these segments, ourscale and centralized model allow us to efficiently deploy a one-to-manyselling and delivery model.

 

We have four operatingsegments for financial reporting purposes, consisting of SMB, MME, PublicSector and MacMall. Our operating segments are primarily aligned based upontheir respective customer base. We include corporate related expenses such aslegal, accounting, information technology, product management and otheradministrative costs that are not otherwise included in our operating segmentsin Corporate and Other. We allocate our resources to and evaluate theperformance of our segments based on operating income.

 

Weexperience variability in our net sales and operating results on a quarterlybasis as a result of many factors. We experience some seasonal trends in oursales of technology products, services and solutions to businesses, governmentand educational institutions and individual customers. For example, the timingof capital budget authorizations for our customers in the small and mediumsized business sector and the mid-market and enterprise sector can affect whenthese companies can procure IT products and services. The fiscal year-ends ofPublic Sector customers vary for those in the federal government space andthose in the state and local government and educational institution (“SLED”)sector. We generally see an increase in our second quarter sales related tocustomers in the SLED sector and in our third quarter sales related tocustomers in the federal government space as these customers close out theirbudgets for their fiscal year. Also, consumer holiday spending contributes tovariances in our quarterly results. As such, the results of interim periods arenot necessarily indicative of the results that may be expected for any otherinterim period or for the full year.

 

There has been substantialongoing uncertainty in the global economic environment, coupled withdisruptions in the capital and credit markets. General economic conditions havean effect on our business and results of operations across all of our segments.As a result of the ongoing tightness in the credit markets, softness in thehousing market, difficulties in the financial services sector, general economicweakness and continuing economic uncertainties, the direction and relativestrength of the U.S. economy has remained considerably uncertain. If economicgrowth in the U.S. and other countries’ economies slows or declines, consumerand business spending rates could be significantly reduced. These developmentscould also increase the risk of uncollectible accounts receivable from ourcustomers. Continued and future changes and uncertainties in the economicclimate in the U.S. and elsewhere could have a similar negative impact on therate of information technology spending of our current and potential customers,which would likely have a negative impact on our 

 

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business and results ofoperations, and could significantly hinder our growth. These factors couldresult in reductions in sales of our products, longer sales cycles, sloweradoption of new technologies and increased price competition, which couldmaterially and adversely affect our business, results of operations andfinancial condition. In response to these developments, we have focused ourefforts on cost reduction initiatives, competitive pricing strategies anddriving higher margin service and solution sales, while continuing to makeselective investments in our sales force personnel, service capabilities and ITinfrastructure and tools in an effort to position us for enhanced productivityand future growth. We are currently engaged in an aggressive market sharegrowth strategy in certain of our segments, which includes targeted aggressivepricing to acquire or enhance customer relationships as well as to enhancevendor relationships.

 

Our planned operatingexpenditures each quarter are based on sales forecasts for the quarter. If oursales do not meet expectations in any given quarter, our operating results forthe quarter may be materially adversely affected. Our narrow gross margins maymagnify the impact of these factors on our operating results. Managementregularly reviews our operating performance using a variety of financial andnon-financial metrics including sales, shipments, gross margin, vendor consideration,advertising expense, personnel costs, account executive productivity, accountsreceivable aging, inventory turnover, liquidity and cash resources. Ourmanagement monitors the various metrics against goals and budgets, and makesnecessary adjustments intended to enhance our performance.

 

A substantial portion of ourbusiness is dependent on sales of Apple, HP, and products purchased from othervendors including Adobe, Cisco, Ingram Micro, Lenovo, Microsoft, SunMicrosystems and Tech Data. Products manufactured by HP representedapproximately 21% and 20% of our net sales in the three months ended September 30,2010 and 2009, and 22% and 19% of our net sales in the nine months ended September 30,2010 and 2009. Products manufactured by Apple represented approximately 16% ofour net sales in each of the three months ended September 30, 2010 and2009, and 16% and 17% of our net sales in the nine months ended September 30,2010 and 2009.

 

One element of our businessstrategy involves expansion through the acquisition of businesses, assets,personnel or technologies that allow us to complement our existing operations,expand our market coverage, or add new business capabilities. While we believethat the fragmented nature of the technology reseller industry and industryconsolidation trends may continue to present acquisition opportunities for us,these continued trends may make acquisitions more competitive.

 

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. 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 availabilityunder our credit facilities, which in turn may impact our ability to pursue ouracquisition strategy.

 

**STRATEGICDEVELOPMENTS**

 

*ERP and Infrastructure Upgrades*

 

We are currently upgradingmany of our IT systems. We have purchased licenses for Microsoft Dynamics AX(Axapta) and other related tools, such as workflow software, web developmenttools and other related items, to upgrade our ERP and eCommerce systems. We initiatedthe implementation and upgrade of our eCommerce system in the second half of2008 and 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, 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. Based on our estimates, which are subject to change, wecurrently expect to incur a total cost of up to $14 million for all these ITsystem upgrades. To date, we have incurred approximately $16.9 million of suchcosts. In addition to the above expenditures, we expect on an ongoing basis tomake periodic upgrades to our IT systems.

 

In addition to the upgradesto our IT systems, in July 2008, we entered into an agreement with CiscoSystems for the purchase and implementation of various solutions to upgrade ourcurrent infrastructure for up to approximately $4.0 million. The purchase isfinanced through a capital lease over a five year term. Our plan is to providea unified platform for our entire company and to provide a robust and efficientcontact center. To date, we have received $3.1 million of the Cisco solution.We expect to receive the remainder of the equipment and services in the******fourth quarter of2010. We are implementing the Cisco solution across all of our locations andexpect that all of our locations will be upgraded by the first half of 2011.

 

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*NSPIAcquisition*

 

In June 2010, Sarcom, Inc,our wholly-owned subsidiary, completed the acquisition of substantially all ofthe assets of Network Services Plus, Inc. (“NSPI”). NSPI, primarily aprovider of hosted data center and managed IT services in the southeasternUnited States, had approximately 73 employees as of the closing date, 53 ofwhom are billable IT resources. The terms of the transaction included aninitial purchase price of $7.8 million, less a customary hold-back to settlepossible indemnity claims. In addition, we extinguished substantially allof NSPI’s indebtedness that existed immediately prior to the closing date ofour acquisition. We have recorded identifiable intangible assets of $2.6million related to customer relationships, $0.5 million related to trademarksand $0.3 million related to a non-compete agreement, with estimated useful livesof 10, 10 and 4 years, respectively. In addition, pursuant to the terms of theasset purchase agreement, NSPI’s shareholders can earn additional considerationbased on the performance of the NSPI business over the next two years, up to atotal of approximately $5.2 million. In accordance with ASC 805, “PurchasePrice Allocations” (formerly FAS No. 141R), based on an initial valuationof the fair value of the contingent consideration, we recorded additionalgoodwill and a corresponding liability of $3.2 million for future earnoutpayments. Such valuation is based upon management’s initial forecasts ofexpected profitability of NSPI during the earnout period, and will be updated,if necessary, in future periods with adjustments reflected in our consolidated statementof operations.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of ourconsolidated financial statements requires management to make estimates,judgments and assumptions that affect the reported amounts of assets,liabilities, net sales and expenses, as well as the disclosure of contingentassets and liabilities. Management bases its estimates, judgments andassumptions on historical experience and on various other factors that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about carrying values of assets and liabilities thatare not readily apparent from other sources. Due to the inherent uncertaintyinvolved in making estimates, actual results reported for future periods may beaffected by changes in those estimates, and revisions to estimates are includedin our results for the period in which the actual amounts become known.

 

Management considers anaccounting estimate to be critical if:

 

·                  it requires assumptions tobe made that were uncertain at the time the estimate was made; and

·                  changes in the estimate ordifferent estimates that could have been selected could have a material impacton our consolidated results of operations or financial position.

 

Management has discussed thedevelopment and selection of these critical accounting policies and estimateswith the audit committee of our board of directors. We believe the criticalaccounting policies described below affect the more significant judgments andestimates used in the preparation of our consolidated financial statements. Fora summary of our significant accounting policies, including those discussedbelow, see Note 2 of the Notes to the Consolidated Financial Statements in Item8, Part II, of our Annual Report on Form 10-K for the year endedDecember 31, 2009 filed with the SEC on March 16, 2010, as amendedand filed on April 30, 2010.

 

*RevenueRecognition.*We adhere to the revised guidelines and principlesof sales recognition described in ASC 605 (formerly Staff Accounting BulletinNo. 104, “Revenue Recognition,” issued by the staff of the SEC as arevision 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 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.

 

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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.

 

*Allowancefor Doubtful Accounts Receivable.*We maintain an allowance fordoubtful accounts receivable based upon estimates of future collection. Weextend credit to our customers based upon an evaluation of each customer’sfinancial condition and credit history, and generally do not requirecollateral. We regularly evaluate our customers’ financial condition and credithistory in determining the adequacy of our allowance for doubtful accounts. 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 orvendor receivables subsequently proves to be insufficient, additional allowancemay be required.

 

*Reservefor Inventory Obsolescence.*We maintain an allowance forthe valuation of our inventory by estimating obsolete or unmarketable inventorybased on the difference between inventory cost and market value, which isdetermined by general market conditions, nature, age and type of each productand assumptions 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-InRebate Redemption Rate Estimates.*We accrue monthly expenserelated to promotional mail-in rebates based upon the quantity of eligibleorders transacted during the period and the estimated redemption rate. Theestimated expense is accrued and presented as a reduction of net sales. Theestimated redemption rates used to calculate the accrued mail-in rebate expenseand related mail-in rebate liability are based upon historical redemptionexperience rates for similar products or mail-in rebate amounts. Estimatedredemption rates and the related mail-in rebate expense and liability are regularlyadjusted as actual mail-in rebate redemptions for the program are processed. Ifactual redemption rates are greater than anticipated, additional expense may beincurred.

 

*AdvertisingCosts and Vendor Consideration.*We account for advertisingcosts in accordance with ASC 340-20 (formerly Statement of PositionNo. 93-7, “Reporting on Advertising Costs”). We produce and circulatedirect response catalogs at various dates throughout the year. The costs ofdeveloping, producing and circulating each direct response catalog aredeferred, when warranted, and amortized to advertising expense based on thelife of the catalog, which is approximately eight weeks. Other non-deferrablecatalog and non-catalog advertising expenditures are expensed in the period incurred.Advertising expenditures are included in “Selling, general and administrativeexpenses” in our Consolidated Statements of Operations. Deferred advertisingcosts, if any, are included in “Prepaid expenses and other current assets” inour Consolidated Balance Sheets. At September 30, 2010 we had no deferredadvertising costs, and at December 31, 2009 we had $0.3 million ofdeferred advertising costs on our Consolidated Balance Sheets.

 

We receive 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 in accordancewith ASC 605-50 (formerly EITF 02-16, “Accounting by a Customer (Including aReseller) for Certain Consideration Received from a Vendor”) since such fundsare not a reimbursement of specific, incremental, identifiable costs incurredby us in selling the vendors’ products. As we circulate catalogs throughout theyear, we also receive market development funds and other vendor considerationfrom vendors included in each catalog. These funds are deferred, whenwarranted, and recognized based on sales generated over the life of thecatalog. Deferred vendor consideration is included in “Accrued expenses andother current liabilities” in our Consolidated Balance Sheets. At the end ofany given period, unbilled receivables related to our vendor consideration areincluded in our “Accounts receivable, net of allowances.”

 

14

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*Stock-BasedCompensation.*Since January 1,2006, we have accounted for stock-based compensation in accordance with ASC718 (formerly financial Accounting Standards Board Statement No. 123(revised 2004), “Share-Based Payment”), using the modified prospectiveapplication transition method. ASC 718 addresses the accounting for share-basedpayment transactions in which an enterprise receives employee services inexchange for either equity instruments of the enterprise or liabilities thatare based on the fair value of the enterprise’s equity instruments or that maybe settled by the issuance of such equity instruments. ASC 718 generallyrequires that such transactions be accounted for using a fair value basedmethod and recognized as expenses in our Consolidated Statements of Operations.The provisions of ASC 718 apply to new stock option grants subsequent toDecember 31, 2005 and unvested stock options outstanding as ofJanuary 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 financialestimates. In estimating our assumption regarding expected term for options wegranted during the year ended December 31, 2007, we applied the simplifiedmethod set out in ASC 718 (which also includes former SEC Staff AccountingBulletin No. 107, “Share-Based Payment,” which was issued inMarch 2005). For options granted during the nine months ended September 30,2010 and 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 iscarried at historical costs, subject to write-down, as needed, based upon animpairment analysis 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 and indefinite livedintangible assets as of December 31 of each year. Under ASC 350 (formerlySFAS No. 142, “Goodwill and Other Intangible Assets”), goodwill impairmentis deemed to exist if the net book value of a reporting unit exceeds itsestimated fair value. Events that may create an impairment review include, butare 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 definite lives generally on astraight-line basis over their estimated useful lives.

 

15

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**RESULTS OFOPERATIONS**

 

**ConsolidatedStatements of Operations Data**

 

The following table setsforth, for the periods indicated, our Consolidated Statements of Operations (inthousands, unaudited) and information derived from our Consolidated Statementsof Operations expressed as a percentage of net sales. There can be no assurancethat trends in our net sales, gross profit or operating results will continuein the future.

 
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                    |       | $                                                    | 336,099    |                                                | $          | 280,349 |   | $ | 942,936 |   | $ | 801,061 |   |
| Cost of goods sold                           |       | 292,859                                              |       | 241,165                                             |       | 821,112 |   | 688,545 |   |
| Gross profit                                 |       | 43,240                                               |       | 39,184                                              |       | 121,824 |   | 112,516 |   |
| Selling, general and administrative expenses |       | 39,200                                               |       | 36,146                                              |       | 114,161 |   | 105,461 |   |
| Operating profit                             |       | 4,040                                                |       | 3,038                                               |       | 7,663 |   | 7,055 |   |
| Interest expense, net                        |       | 548                                                  |       | 395                                                 |       | 1,537 |   | 1,083 |   |
| Income before income taxes                   |       | 3,492                                                |       | 2,643                                               |       | 6,126 |   | 5,972 |   |
| Income tax expense                           |       | 1,372                                                |       | 1,195                                               |       | 2,470 |   | 2,698 |   |
| Net income                                   |       | $                                                    | 2,120      |                                                | $          | 1,448 |   | $ | 3,656 |   | $ | 3,274 |   |

 
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                    |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                           |       | 87.1                                                 |       | 86.0                                                |       | 87.1 |   | 86.0 |   |
| Gross profit                                 |       | 12.9                                                 |       | 14.0                                                |       | 12.9 |   | 14.0 |   |
| Selling, general and administrative expenses |       | 11.7                                                 |       | 12.9                                                |       | 12.1 |   | 13.2 |   |
| Operating profit                             |       | 1.2                                                  |       | 1.1                                                 |       | 0.8 |   | 0.8 |   |
| Interest expense, net                        |       | 0.2                                                  |       | 0.2                                                 |       | 0.2 |   | 0.1 |   |
| Income before income taxes                   |       | 1.0                                                  |       | 0.9                                                 |       | 0.6 |   | 0.7 |   |
| Income tax expense                           |       | 0.4                                                  |       | 0.4                                                 |       | 0.2 |   | 0.3 |   |
| Net income                                   |       | 0.6                                                  | %          | 0.5                                                 | %          | 0.4 | % | 0.4 | % |

 

**Three MonthsEnded September 30, 2010 Compared to the Three Months Ended September 30,2009**

 

*Net Sales.*The following table presents our net sales, by segment, for the periodspresented (dollars in thousands):

 
| ** **             | ** ** | **Three Months Ended  September 30,** | ** ** | **Change** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2010**                                             | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                                    | 110,033    |       | $          | 85,164 |   | $ | 24,869 |   | 29.2 | % |
| MME                    |       | 133,758                                              |       | 97,711     |       | 36,047 |   | 36.9 |   |
| Public Sector          |       | 53,526                                               |       | 55,627     |       | (2,101 | ) | (3.8 | ) |
| MacMall                |       | 38,797                                               |       | 41,867     |       | (3,070 | ) | (7.3 | ) |
| Corporate and Other    |       | (15                                                  | )          | (20        | )          | 5 |   | NMF | (1) |
| Consolidated net sales |       | $                                                    | 336,099    |       | $          | 280,349 |   | $ | 55,750 |   | 19.9 | % |

 

----

(1)                        Not meaningful.

 

Ourconsolidated net sales for the third quarter of 2010 were $336.1 million, a$55.8 million or 20% increase from consolidated net sales of $280.3 million inthe third quarter of 2009.

 

SMBsegment net sales increased by $24.9 million, or 29%, to $110.0 million in thethird quarter of 2010 from $85.2 million in the third quarter of 2009 primarilydue to improved account executive productivity and an increase in revenues fromSMB’s new sales office located in Chicago.

 

16

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OurMME segment net sales increased by $36.1 million, or 37%, to $133.8 million inthe third quarter of 2010 from $97.7 million in the third quarter of 2009. Thisincrease was primarily due to increased spending by customers in the mid-marketand enterprise sector in the third quarter of 2010. Product revenues increasedby 44% in the third quarter of 2010 compared to the third quarter of 2009 whileservice revenues increased by 11% in the third quarter of 2010 compared to thesame period in 2009. Service revenues represented 17% of MME net sales in thethird quarter of 2010 compared to 21% of sales in the third quarter of 2009.The service revenue increase was primarily due to the inclusion of servicerevenues of NSPI, which we acquired in June 2010, as well as a 24%increase in service sales performed under our Abreon brand, which is primarilyfocused on change management and eLearning consulting. These increases inservice revenues were partially offset by a 12% decrease in MME’s Sarcombranded professional and managed services in the third quarter of 2010 comparedto the third quarter of 2009 resulting from certain large service projects inthe third quarter of 2009 that did not reoccur in the third quarter of 2010.MME’s service revenue vehicles are primarily contract-based and have longerlead times.

 

OurPublic Sector segment net sales decreased by $2.1 million, or 4%, to $53.5million in the third quarter of 2010 from $55.6 million in the third quarter of2009. This decrease in Public Sector net sales was due to a 13% decrease in ourfederal government business resulting from a 75% reduction in sales of SunMicrosystems solutions, which we believe is substantially related to the acquisitionof Sun by Oracle in January 2010 and resulting vendor program changes madein the second quarter of 2010 in connection with Sun solutions. As a result, weexpect our federal government sales of Sun solutions may be negatively impactedfor the foreseeable future. This decrease in our federal government businesswas partially offset by a 12% increase in net sales of our SLED business drivenby stronger demand and our aggressive public sector market share growthstrategy.

 

OurMacMall segment net sales decreased by $3.1 million, or 7%, to $38.8 million inthe third quarter of 2010 from $41.9 million in the third quarter of 2009.Sales in our MacMall segment declined primarily due to our previously announcedintentional strategy shift in the first quarter of 2010 to focus the MacMallbrand on higher profit customer segments such as small businesses, creativeprofessionals and high-end consumers.

 

*Gross Profit and Gross Profit Margin.*The followingtable presents our gross profit and gross profit margin, by segment, for theperiods presented (dollars in thousands):

 
| ** **                                              | ** ** | **Three Months Ended  September 30,** | ** ** | ** **            | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2010**                                             | ** ** | **2009**              | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **                                           | ** ** | **Gross Profit** | ** ** | ** ** | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                              | ** ** | **Gross Profit**                                | ** ** | **Margin**            | ** ** | **Gross Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                     |       | $                                                    | 14,551     |                  | 13.2       | % | $ | 11,712 |   | 13.8 | % | $ | 2,839 |   | (0.6 | )% |
| MME                                                     |       | 19,920                                               |       | 14.9                  |       | 17,172 |   | 17.6 |   | 2,748 |   | (2.7 | ) |
| Public Sector                                           |       | 4,179                                                |       | 7.8                   |       | 5,658 |   | 10.2 |   | (1,479 | ) | (2.4 | ) |
| MacMall                                                 |       | 4,533                                                |       | 11.7                  |       | 4,597 |   | 11.0 |   | (64 | ) | 0.7 |   |
| Corporate and Other                                     |       | 57                                                   |       | NMF                   | (1)        | 45 |   | NMF | (1) | 12 |   | NMF | (1) |
| Consolidated gross profit and gross profit  margin |       | $                                                    | 43,240     |                  | 12.9       | % | $ | 39,184 |   | 14.0 | % | $ | 4,056 |   | (1.1 | )% |

 

----

(1)                        Not meaningful.

 

Consolidatedgross profit for the third quarter of 2010 was $43.2 million compared to $39.2million in the third quarter of 2009, a $4.0 million or 10% increase.Consolidated gross profit margin was 12.9% in the third quarter of 2010compared to 14.0% in the third quarter of 2009, a decrease of 110 basis points.

 

Grossprofit for our SMB segment increased by $2.9 million, or 24%, to $14.6 millionin the third quarter of 2010 compared to $11.7 million in the third quarter of2009, resulting primarily from increased SMB net sales discussed above and a$0.3 million increase in vendor consideration. SMB gross profit margindecreased to 13.2% in the third quarter of 2010 compared to 13.8% in the thirdquarter of 2009 primarily due to a 59 basis point decline in vendorconsideration as a percentage of net sales.

 

Grossprofit for our MME segment increased by $2.7 million, or 16%, to $19.9 millionin the third quarter of 2010 compared to $17.2 million in the third quarter of2009, and gross profit margin decreased by 270 basis points to 14.9% in thethird quarter of 2010 compared to 17.6% in the third quarter of 2009. Theincrease in MME gross profit was due to the increase in MME net sales discussedabove. The decrease in MME gross profit margin was primarily due to the growthof product sales, driven by some lower margin large product transactions,outpacing the growth of service sales, and a 94 basis point decrease in vendorconsideration compared to the third quarter of 2009, which was primarily due tothe impact of the positive resolution of certain vendor consideration claims inthe third quarter of 2009.

 

17

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Grossprofit for our Public Sector segment decreased by $1.5 million, or 26%, to $4.2million in the third quarter of 2010 compared to $5.7 million in the thirdquarter of 2009, and gross profit margin decreased by 240 basis points to 7.8%in the third quarter of 2010 compared to 10.2% in the third quarter of 2009.The decrease in Public Sector gross profit and gross profit margin wasprimarily due to the impact of the Sun changes mentioned above. Gross profitmargin also reflects the effects of our previously stated market share growthstrategy in the Public Sector business, specifically on the Windows platform inorder to broaden our sales mix. We expect that future sales of Sun Microsystemssolutions will be made at lower margins than we have historically experiencedprior to the vendor program changes made by Oracle.

 

MacMallgross profit decreased by $0.1 million, or 2%, to $4.5 million in the thirdquarter of 2010 and MacMall gross profit margin increased to 11.7% in the thirdquarter of 2010 compared to 11.0% in the third quarter of 2009. The increase inMacMall gross profit margin was primarily due to the aforementioned strategyshift to focus the MacMall brand on higher profit customer segments.

 

*Operating Profit and Operating Profit Margin.*The followingtable presents our operating profit and operating profit margin, by segment,for the periods presented (dollars in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | ** **            | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2010**                                             | ** ** | **2009**              | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Operating**                                        | ** ** | **Operating  Profit** | ** ** | **Operating** | ** ** | **Operating  Profit** | ** ** | **Change** | ** ** |
| ** **                                                      | ** ** | **Profit (Loss)**                               | ** ** | **Margin(1)**         | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                             |       | $                                                    | 7,571      |                  | 6.9        | % | $ | 5,937 |   | 7.0 | % | $ | 1,634 |   | (0.1 | )% |
| MME                                                             |       | 5,908                                                |       | 4.4                   |       | 5,519 |   | 5.6 |   | 389 |   | (1.2 | ) |
| Public Sector                                                   |       | 646                                                  |       | 1.2                   |       | 2,391 |   | 4.3 |   | (1,745 | ) | (3.1 | ) |
| MacMall                                                         |       | 1,185                                                |       | 3.1                   |       | 473 |   | 1.1 |   | 712 |   | 2.0 |   |
| Corporate and Other                                             |       | (11,270                                              | )          | (3.4                  | )(1)       | (11,282 | ) | (4.0 | )(1) | 12 |   | 0.6 |   |
| Consolidated operating profit and operating  profit margin |       | $                                                    | 4,040      |                  | 1.2        | % | $ | 3,038 |   | 1.1 | % | $ | 1,002 |   | 0.1 | % |

 

----

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

 

Consolidatedoperating profit increased by $1.0 million, or 33%, to $4.0 million in thethird quarter of 2010 compared to $3.0 million in the third quarter of 2009.Consolidated operating profit margin for the third quarter of 2010 was 1.2%compared to 1.1% in the third quarter of 2009, an increase of 10 basis points.

 

OurSMB segment operating profit increased by $1.7 million, or 28%, to $7.6 millionin the third quarter of 2010 compared to $5.9 million in the third quarter of2009. The increase in SMB operating profit in the third quarter of 2010 wasprimarily due to the increase in SMB gross profit discussed above, partiallyoffset by a $1.1 million increase in personnel costs. This increase inpersonnel costs in the third quarter of 2010 was primarily due to theinvestment in our Chicago office and our addition of account executives in thatfacility, an increase in variable compensation expenses due to the increasedSMB gross profit discussed above and a $0.1 million impact of a higher Canadianexchange rate.

 

OurMME segment operating profit increased by $0.4 million, or 7%, to $5.9 millionin the third quarter of 2010 compared to $5.5 million in the third quarter of2009. The increase in MME operating profit was primarily due to the increase inMME gross profit discussed above, partially offset by a $1.4 million increasein personnel costs, a $0.3 million increase in depreciation and amortizationexpenses primarily relating to the acquisition of NSPI, and a $0.2 millionincrease in variable fulfillment costs. The increase in MME personnel costs wasdue in part to an increase in variable compensation costs related to the increasedgross profit discussed above and the acquisition of NSPI.

 

OurPublic Sector segment operating profit decreased by $1.8 million to $0.6million in the third quarter of 2010 compared to $2.4 million in the thirdquarter of 2009. The decrease in Public Sector operating profit from the thirdquarter of 2009 was primarily due to the decrease in Public Sector gross profitdiscussed above and an increase in Public Sector personnel costs of $0.3million, resulting primarily from our investment in our Public Sector’s HealthDynamix division.

 

18

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OurMacMall segment operating profit increased by $0.7 million to $1.2 million inthe third quarter of 2010 compared to $0.5 million in the third quarter of2009. The increase in MacMall operating profit was primarily due to a $0.8million decrease in advertising expenditures.

 

Corporateand Other operating expenses includes corporate related expenses such as legal,accounting, information technology, product management and other administrativecosts that are not otherwise included in our reportable operating segments.Corporate and Other operating expenses remained flat at $11.3 million for thethird quarter 2010 as compared to the third quarter of 2009. However, Corporateand Other operating expenses in the third quarter of 2010 included an increasein depreciation expense of $0.5 million, which was primarily related to thecompleted portions of our ERP and infrastructure upgrades, and an increase inpersonnel costs of $0.2 million, which was primarily related to an increase instock-based compensation expense, partially offset by a $0.5 million decreasein professional services fees and a $0.3 million decrease in telecommunicationscosts.

 

*NetInterest Expense.*Total net interest expense for the third quarter of2010 increased to $0.5 million compared with $0.4 million in the third quarterof 2009. The increase in interest expense resulted primarily from an increasein our average total outstanding borrowings, partially offset by a decrease inour average effective borrowing rate in the third quarter of 2010 compared tothe third quarter of 2009.

 

*Income Tax Expense.*We recordedan income tax expense of $1.4 million in the third quarter of 2010 compared toan income tax expense of $1.2 million in the third quarter of 2009. Oureffective tax rates for the quarters ended September 30, 2010 and 2009were approximately 39% and 45%. The decrease in our effective tax rate in thethird quarter of 2010 compared to the third quarter of 2009 was primarily dueto the impact of a tax adjustment relating to a dividend from an internationalsubsidiary in the third quarter of 2009 that did not reoccur in 2010.

 

**Nine MonthsEnded September 30, 2010 Compared to the Nine Months Ended September 30,2009**

 

*Net Sales.*The following table presentsour net sales, by segment, for the periods presented (dollars in thousands):

 
| ** **             | ** ** | **Nine Months Ended  September 30,** | ** ** | **Change** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2010**                                            | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                                   | 325,736    |       | $          | 259,935 |   | $ | 65,801 |   | 25.3 | % |
| MME                    |       | 355,731                                             |       | 275,051    |       | 80,680 |   | 29.3 |   |
| Public Sector          |       | 138,650                                             |       | 120,825    |       | 17,825 |   | 14.8 |   |
| MacMall                |       | 122,829                                             |       | 145,262    |       | (22,433 | ) | (15.4 | ) |
| Corporate and Other    |       | (10                                                 | )          | (12        | )          | 2 |   | NMF | (1) |
| Consolidated net sales |       | $                                                   | 942,936    |       | $          | 801,061 |   | $ | 141,875 |   | 17.7 | % |

 

----

(1)                        Not meaningful.

 

Ourconsolidated net sales for the nine months ended September 30, 2010 were$942.9 million, a $141.8 million, or 18%, increase from consolidated net salesof $801.1 million in the nine months ended September 30, 2009.

 

OurSMB segment net sales increased by $65.8 million, or 25%, to $325.7 million inthe nine months ended September 30, 2010 from $259.9 million in the ninemonths ended September 30, 2009, primarily due to an improvement in thedemand environment, an improvement in account executive productivity, anincrease in revenues from SMB’s new sales office located in Chicago, combinedwith SMB’s aggressive market growth strategy.

 

Our MME segment net sales increased by $80.6 million,or 29%, to $355.7 million in the nine months ended September 30, 2010 from$275.1 million in the nine months ended September 30, 2009. This increasewas primarily due to increased spending by customers in the mid-market andenterprise sector in the nine months ended September 30, 2010. Productrevenues increased by 41% in the nine months ended September 30, 2010compared to the same period in 2009 while service revenues decreased by 6% inthe nine months ended September 30, 2010 compared to the same period in2009. Service revenues represented 18% of MME net sales in the nine monthsended September 30, 2010 compared to 24% of net sales in the nine monthsended September 30, 2009. The service revenue decline was primarily due toan 18% decline in MME’s Sarcom branded professional and managed services in thenine months ended September 30, 2010 compared to the nine months ended September 30,2009 resulting from certain large service projects in the nine months ended September 30,2009 that did not reoccur in the nine months ended September 30, 2010.Thisdecline was partially offset by the inclusion of service revenues of NSPI,which we acquired in June 2010, and services performed under our Abreonbrand, which sales increased by 7% in the nine months ended September 30,2010 compared to the nine months ended September 30, 2009. MME’s servicerevenue vehicles are primarily contract-based and have longer lead times.

 

19

----

 

OurPublic Sector segment net sales increased by $17.9 million, or 15%, to $138.7million in the nine months ended September 30, 2010 compared to $120.8million in the nine months ended September 30, 2009. This increase was dueto an increase in net sales in both our SLED business and our federalgovernment business driven by stronger demand and our aggressive public sectormarket share growth strategy, as well as significant backlog from a largecustomer carried over from the fourth quarter of 2009. These increases were,however, partially offset by the impact of decreases in our federal governmentbusiness due to a 10% reduction in sales of Sun Microsystems solutions, whichwe believe is substantially related to the acquisition of Sun by Oraclediscussed above. In addition, these changes had a significant negative impacton our federal government net sales through a large contract vehicle.

 

OurMacMall segment net sales decreased by $22.5 million, or 15%, to $122.8 millionin the nine months ended September 30, 2010 compared to $145.3 million inthe nine months ended September 30, 2009. This decrease in MacMall netsales was primarily due to the aforementioned strategy shift to focus theMacMall brand on higher profit customer segments. The decrease in MacMall netsales was also affected by continued competition in the market for Appleproducts and the absence of year end opportunistic purchases we made in 2008which we were able to profitably sell in the first half of 2009.

 

*Gross Profit and Gross Profit Margin.*The followingtable presents our gross profit and gross profit margin, by segment, for theperiods presented (dollars in thousands):

 
| ** **                                              | ** ** | **Nine Months Ended  September 30,** | ** ** | ** **            | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2010**                                            | ** ** | **2009**              | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **                                          | ** ** | **Gross Profit** | ** ** | ** ** | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                              | ** ** | **Gross Profit**                               | ** ** | **Margin**            | ** ** | **Gross Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                     |       | $                                                   | 42,626     |                  | 13.1       | % | $ | 34,591 |   | 13.3 | % | $ | 8,035 |   | (0.2 | )% |
| MME                                                     |       | 55,040                                              |       | 15.5                  |       | 48,814 |   | 17.7 |   | 6,226 |   | (2.2 | ) |
| Public Sector                                           |       | 10,394                                              |       | 7.5                   |       | 13,137 |   | 10.9 |   | (2,743 | ) | (3.4 | ) |
| MacMall                                                 |       | 13,714                                              |       | 11.2                  |       | 15,854 |   | 10.9 |   | (2,140 | ) | 0.3 |   |
| Corporate and Other                                     |       | 50                                                  |       | NMF                   | (1)        | 120 |   | NMF | (1) | (70 | ) | NMF | (1) |
| Consolidated gross profit and gross profit  margin |       | $                                                   | 121,824    |                  | 12.9       | % | $ | 112,516 |   | 14.0 | % | $ | 9,308 |   | (1.1 | )% |

 

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(1)                        Not meaningful.

 

Consolidatedgross profit for the nine months ended September 30, 2010 was $121.8million compared to $112.5 million in the nine months ended September 30,2009, a $9.3 million or 8% increase. Consolidated gross profit margin was 12.9%in the nine months ended September 30, 2010 compared to 14.0% in the ninemonths ended September 30, 2009, a decrease of 110 basis points.

 

Grossprofit for our SMB segment increased by $8.0 million, or 23%, to $42.6 for thenine months ended September 30, 2010 compared to $34.6 million in the ninemonths ended September 30, 2009 resulting primarily from increased SMB netsales discussed above. SMB segment gross profit margin decreased by 20 basispoints to 13.1% in the nine months ended September 30, 2010 compared to13.3% in the nine months ended September 30, 2009 primarily due to a 37basis point decline in vendor consideration as a percentage of net sales.

 

Grossprofit for our MME segment increased by $6.2 million, or 13%, to $55.0 millionin the nine months ended September 30, 2010 compared to $48.8 million inthe nine months ended September 30, 2009, and gross profit margindecreased by 220 basis points to 15.5% in the nine months ended September 30,2010 compared to 17.7 % in the nine months ended September 30, 2009. Theincrease in MME gross profit was primarily due to the increased MME net salesdiscussed above as well as a $1.9 million increase in vendor consideration. Thedecrease in MME gross profit margin was primarily due to the growth of productsales, driven by some lower margin large product transactions, combined withthe relative decreased mix of service sales during the nine months ended September 30,2010 compared to the same period last year, and a competitive pricingenvironment.

 

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Grossprofit for our Public Sector segment decreased by $2.7 million, or 21%, to$10.4 million in the nine months ended September 30, 2010 compared to$13.1 million in the nine months ended September 30, 2009. Public Sectorgross profit margin decreased by 340 basis points to 7.5% in the nine monthsended September 30, 2010 compared to 10.9% in the nine months ended September 30,2009. The decrease in our Public Sector gross profit and gross profit marginwas primarily due to a higher mix of large, lower margin deals in the ninemonths ended September 30, 2010 and the impact of the Sun vendor programchanges mentioned above. Gross profit margin for the nine months ended September 30,2010 also reflects the effects of our previously stated market share growthstrategy in the Public Sector business, specifically on the Windows platform inorder to broaden our sales mix.

 

Grossprofit for our MacMall segment decreased by $2.2 million, or 14%, to $13.7million in the nine months ended September 30, 2010 compared to $15.9million in the nine months ended September 30, 2009. MacMall gross profitmargin increased by 30 basis points to 11.2% in the nine months ended September 30,2010 compared to 10.9% in the nine months ended September 30, 2009. Thedecrease in our MacMall gross profit was primarily due to the decrease inMacMall net sales discussed above. The increase in our MacMall gross profitmargin reflects the benefit of our previously announced strategy shift to focusthe MacMall brand on higher profit customer segments.

 

*Operating Profit and OperatingProfit Margin.*The following table presents our operating profit andoperating profit margin, by segment, for the periods presented (dollars inthousands):

 
| ** **                                                      | ** ** | **Nine Months Ended  September 30,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **2010**                                            | ** ** | **2009**      | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | ** **                                          | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Operating**                                       | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                      | ** ** | **Profit (Loss)**                              | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                             |       | $                                                   | 21,603     |          | 6.6        | %                      | $          | 17,165 |   | 6.6 | % | $ | 4,438 |   | 0.0 | % |
| MME                                                             |       | 16,537                                              |       | 4.6           |       | 14,316                 |       | 5.2 |   | 2,221 |   | (0.6 | ) |
| Public Sector                                                   |       | 203                                                 |       | 0.1           |       | 4,067                  |       | 3.4 |   | (3,864 | ) | (3.3 | ) |
| MacMall                                                         |       | 3,013                                               |       | 2.5           |       | 2,782                  |       | 1.9 |   | 231 |   | 0.6 |   |
| Corporate and Other                                             |       | (33,693                                             | )          | (3.6          | )(1)       | (31,275                | )          | (3.9 | )(1) | (2,418 | ) | 0.3 | (1) |
| Consolidated operating profit and operating  profit margin |       | $                                                   | 7,663      |          | 0.8        | %                      | $          | 7,055 |   | 0.9 | % | $ | 608 |   | (0.1 | )% |

 

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(1)         Operating profit margin for Corporate and Other iscomputed based on consolidated net sales. Operating profit margin for each ofthe other segments is computed based on the respective segment’s net sales.

 

Consolidatedoperating profit for the nine months ended September 30, 2010 increased by$0.6 million, or 9%, to $7.7 million compared to $7.1 million in the ninemonths ended September 30, 2009. Consolidated operating profit margin forthe nine months ended September 30, 2010 was 0.8% compared to 0.9% in thenine months ended September 30, 2009, a decrease of 10 basis points.

 

OurSMB segment operating profit increased by $4.4 million, or 26%, to $21.6million in the nine months ended September 30, 2010 compared to $17.2million in the nine months ended September 30, 2009. The increase wasprimarily due to the increase in SMB gross profit discussed above, partiallyoffset by a $3.5 million increase in SMB personnel costs. This increase inpersonnel costs in the nine months ended September 30, 2010 was primarilydue to the investment in our Chicago office and our addition of accountexecutives in that facility, an increase in variable compensation expenses dueto the increased SMB gross profit and a $0.8 million impact of a higher Canadianexchange rate.

 

OurMME segment operating profit increased by $2.2 million, or 15%, to $16.5million in the nine months ended September 30, 2010 compared to $14.3million in the nine months ended September 30, 2009. The increase in MMEoperating profit was primarily due to the increase in MME gross profitdiscussed above, partially offset by a $2.5 million increase in MME personnelcosts due in part to an increase in variable compensation costs related to theincreased gross profit, a $0.4 million increase in telecommunication expensesand a $0.4 million increase in variable fulfillment costs.

 

OurPublic Sector segment operating profit decreased by $3.9 million, or 95% to 0.2million in the nine months ended September 30, 2010 compared to of $4.1 millionin the nine months ended September 30, 2009. The decrease in Public Sectoroperating profit from the nine months ended September 30, 2009 wasprimarily due to the decrease in Public Sector gross profit discussed above andan increase in Public Sector personnel costs of $1.1 million, resultingprimarily from our investment in our Public Sector’s Health Dynamix divisionand incremental investments in headcount.

 

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OurMacMall segment operating profit increased by $0.2 million, or 7%, to $3.0million in the nine months ended September 30, 2010 compared to $2.8million in the nine months ended September 30, 2009. The increase inMacMall segment operating profit was primarily due to a $2.2 million decreasein advertising expenditures, a $0.6 million decrease in variable fulfilmentcosts and a $0.5 million decrease in credit card processing fees, partiallyoffset by the decrease in MacMall segment gross profit discussed above, a $0.7million increase in personnel costs and a $0.2 million increase in depreciationexpense primarily related to the new retail store in Torrance, California.

 

Corporateand Other operating expenses increased by $2.4 million, or 12%, to $33.7million in the nine months ended September 30, 2010 from $31.3 million inthe nine months ended September 30, 2009. This increase was primarily dueto a $1.3 million increase in personnel costs, which included $0.4 millionincrease in stock-based compensation expenses, an increase in depreciationexpenses of $1.4 million primarily related to the completed portions of our ERPand infrastructure upgrades, and $0.3 million of acquisition-related legalcosts. These increases were partially offset by a $0.5 million decrease intelecommunication costs.

 

*NetInterest Expense.*Total net interest expense in the nine months ended September 30,2010 increased to $1.5 million compared with $1.1 million in the nine monthsended September 30, 2009. The increase in interest expense of $0.4 millionresulted primarily from an increase in our average total outstanding borrowingsin the nine months ended September 30, 2010, partially offset by adecrease in our average effective borrowing rate in the nine months ended September 30,2010 compared to the same period in 2009.

 

*Income TaxExpense.*We recorded an income tax expense of $2.5 million inthe nine months ended September 30, 2010 compared to an income tax expenseof $2.7 million in the nine months ended September 30, 2009. Our effectivetax rates for the nine months ended September 30, 2010 and 2009 wereapproximately 40% and 45%. The decrease in our effective tax rate in the ninemonths ended September 30, 2010 compared to the same period of 2009 wasprimarily due to the impact of a tax adjustment relating to a dividend from aninternational subsidiary in the nine months ended September 30, 2009 thatdid not reoccur in 2010.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*Working Capital.*Our primary capital need hashistorically been funding the working capital requirements created by ourgrowth in sales and strategic acquisitions. We expect that our primary capitalneeds will continue to be the funding of our existing working capitalrequirements, capital expenditures for which we expect to include substantialinvestments in a new ERP system, eCommerce platform and an upgrade of ourcurrent IT infrastructure over the next several years, which are discussedbelow in “OtherPlanned Capital Projects,” possible sales growth, possible acquisitionsand new business ventures, and possible repurchases of our common stock under adiscretionary repurchase program, which is discussed below. Our primary sourcesof financing have historically come from borrowings from financialinstitutions, public and private issuances of our common stock and cash flowsfrom operations. Our efforts to focus on SMB, MME and Public Sector sales couldresult in an increase in our accounts receivable as these customers aregenerally provided longer payment terms than consumers. We historically haveincreased our inventory levels from time to time to take advantage of strategicmanufacturer promotions. We believe that our current working capital, includingour existing cash balance, together with our expected future cash flows fromoperations and available borrowing capacity under our line of credit, will beadequate to support our current operating plans for at least the next 12months. However, the current macroeconomic environment and related competitivepricing pressure, which have negatively impacted our operating results,together with tight credit markets, may limit our cash resources that couldotherwise be available to fund future strategic opportunities, capitalinvestments or growth beyond our current operating plans.

 

Therehas been substantial ongoing uncertainty in the global economic environment,coupled with disruptions in the capital and credit markets. Continued uncertaintyin these areas could have a negative impact on our ability to obtain financingif we need 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 credit facilityor in the debt markets will not be impacted by disruptions in the capital andcredit markets.  See discussion below under“Line of Credit and Note Payable” regarding our credit facility.

 

We had cash and cashequivalents of $8.9 million at September 30, 2010 and $9.2 million atDecember 31, 2009. Our working capital was $45.8 million at September 30,2010 and $54.0 million at December 31, 2009.

 

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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 anyrepurchases of our common stock under this 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. During the quarter ended September 30, 2010, we repurchased atotal of 87,813 shares of our common stock under this program for a cost ofapproximately $368,000. From the inception of the program in October 2008through September 30, 2010, we have repurchased an aggregate total of1,524,494 shares of our common stock for a total cost of $6.2 million. Therepurchased shares are held as treasury stock.

 

We maintain a Canadian callcenter serving the U.S. market, which has historically received the benefit oflabor credits under a Canadian government program. In 2007, we received aneligibility certificate to participate in the Investment Quebec Refundable TaxCredit for Major Employment Generating Projects (GPCE), replacing the priorgovernment subsidy program which ended at the end of 2007. In addition to othereligibility requirements under the new program, we are required to maintain aminimum of 317 eligible employees employed by our subsidiary PC MallCanada, Inc. in the province of Quebec at all times to remain eligible toapply annually for these labor credits. As a result of this new certification,we are eligible to make annual labor credit claims for eligible employees equalto 25% of eligible salaries, but not to exceed $15,000 (Canadian) per eligibleemployee per year, beginning in fiscal year 2008 and continuing through fiscalyear 2016. Under the prior program through the end of 2007, we claimed annuallabor credits of up to 35% of eligible compensation paid to our qualifyingemployees. As of September 30, 2010, we had an accrued receivable of $8.8million related to the 2008, 2009 and 2010 calendar years. In October 2010,we received a payment of $3.3 million relating to the 2008 claim, and we expectto receive full payment under our remaining labor credit claims.

 

*Cash Flowsfrom Operating Activities.*Net cash provided byoperating activities was $14.2 million in the nine months ended September 30,2010 compared to $1.3 million in the nine months ended September 30, 2009,an increase of $12.9 million. The $12.9 million increase in net cash providedby operating activities in the nine months ended September 30, 2010 wasprimarily due to an $11.4 million improvement in the management of our workingcapital and a $1.6 million increase in our net income adjusted for non-cashitems. The $11.4 million improvement in the management of our working capitalprimarily resulted from a $6.5 million improvement in the management of ourdeferred revenue and a $4.3 million improvement in the management of ouraccrued expenses and other current liabilities. The $1.6 million increase inour net income adjusted for non-cash items resulted primarily from a $2.0million increase in depreciation and amortization expenses relating to the completedportions of our ERP and IT infrastructure upgrades.

 

*Cash Flowsfrom Investing Activities.*Net cash used in investingactivities was $14.7 million in the nine months ended September 30, 2010compared to $4.9 million in the nine months ended September 30, 2009. The$14.7 million of net cash used in investing activities in the nine months endedSeptember 30, 2010 was related to the $8.8 million (net of cash acquired)used for the acquisition of NSPI in June 2010 and $5.9 million of capitalexpenditures. The $5.9 million of capital expenditures were primarily relatedto investments in our IT infrastructure, leasehold improvements relating to ourrelocated retail store in Torrance, California and the creation of enhancedelectronic tools for our account executives and sales support staff. The $4.9million of net cash used in investing activities in the nine months endedSeptember 30, 2009 was primarily related to investment in our ITinfrastructure, including ERP, security and telecommunications upgrades.

 

*Cash Flowsfrom Financing Activities.*Net cash provided byfinancing activities for the nine months ended September 30, 2010 was $39thousand compared to $3.7 million in the nine months ended September 30,2009. The $39 thousand of net cash provided by financing activities in the ninemonths ended September 30, 2010 was primarily due to the $5.2 million ofnet borrowings on our line of credit, which included a $9.8 million borrowingrelated to our acquisition of NSPI, partially offset by a $3.0 million changein book overdraft, $0.9 million of repurchases of our common stock and $0.8million of net repayments under our notes payable. The $3.7 million of net cashprovided by financing activities in the nine months ended September 30,2009 was primarily due to the $7.7 million of net borrowings on our line ofcredit, partially offset by a $2.2 million change in book overdraft andrepurchases of our common stock totaling $1.6 million.

 

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*Line ofCredit and Note Payable.*We maintain an asset-based revolving creditfacility, as amended from time to time, of up to $150 million from lendingunits of large commercial banks. The credit facility provides for, among otherthings, (i) a credit limit of $130 million up to a total maximum amount of$150 million, in increments of $5 million, provided that any increase of thetotal credit limit in excess of $130 million is subject to an acceptance by athird party assignee in the event the administrative agent elects to assignsuch excess amount; (ii) a line increase fee equal to 0.25% of the amountof each increment increased as described above, plus, to the extent that theadministrative agent assigns a portion of its revolving loan commitment underthe credit facility and to the extent required by the assignee, an aggregateacceptance fee not to exceed 0.125% of the aggregate sum of the increase incredit limit assigned; (iii) LIBOR interest rate options that we can enterinto with no limit on the maximum outstanding principal balance which may besubject to a LIBOR interest rate option; and (iv) a maturity date ofMarch 2011. In October 2008, we elected to increase our maximumcredit line to $130 million from a previous maximum of $115 million.

 

The credit facility, whichfunctions 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 September 30, 2010,we had $58.4 million of net working capital advances outstanding under the lineof credit. At September 30, 2010, the maximum credit line was $130 millionand we had $68.5 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 September 30, 2010. 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.

 

Our existing credit facilitycontains certain terms that are more favorable to us than terms that we believeare otherwise available in the current credit market environment. We arecurrently in the process of negotiating a new credit facility which we expectto enter into in the fourth quarter of 2010. We expect that any new facilitywill generally be on terms substantially similar to our existing facility, butwill likely also include some terms that are less favorable to us than ourcurrent terms, including covenants requiring us to maintain minimum levels ofexcess borrowing capacity or minimum fixed charge coverage ratios, as well asless favorable interest rates.

 

In connection with and aspart of the amended credit facility, we entered into an amended term note onSeptember 17, 2007 with a principal balance of $5.425 million, payable inequal monthly principal installments beginning on October 1, 2007, plusinterest at the prime rate with a LIBOR option. The amended term note maturesin September 2014 or, in the event of a default, termination ornon-renewal of our credit facility, is payable in its entirety upon demand byour lender. At September 30, 2010, we had $3.1 million outstanding underthe amended term note. Our term note matures as follows: $193,750 in theremainder of 2010, $775,000 annually in each of the years 2011 through 2013 and$581,250 thereafter.

 

At September 30, 2010,our effective weighted average annual interest rate on outstanding amountsunder the credit facility and term note was 1.77%.

 

As of September 30,2010, $0.3 million relating to the financing of our purchase of Microsoft AX(Axapta), which is a part of our ERP upgrade, were included in each of our “Notespayable — current” and “Notes payable and other long-term liabilities” on ourConsolidated Balance Sheets. See “Other Planned Capital Projects” below for adetailed discussion.

 

The carrying amounts of ourline of credit borrowings and notes payable approximate their fair value basedupon the current rates offered to us for obligations of similar terms andremaining 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.

 

**Other Planned Capital Projects**

 

We are currently upgradingmany of our IT systems. We have purchased licenses for Microsoft Dynamics AX(Axapta) and other related tools, such as workflow software, web developmenttools and other related items, to upgrade our ERP and eCommerce systems. Weinitiated the implementation and upgrade of our eCommerce system in the secondhalf of 2008 and have completed and launched a new generation of our publicsites at macmall.com, onsale.com and pcmall.com. We are currently working onthe implementation of the ERP modules and the upgrade of the ERP systems,including additional enhancements and features, and we expect to be completewith all phases of the implementation of the ERP systems by 2013. 

 

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We believe theimplementation and upgrade should help us to gain further efficiencies acrossour organization. Based on our estimates, which are subject to change, wecurrently expect to incur a total cost of up to $14 million for all these ITsystem upgrades. To date, we have incurred approximately $6.9 million of suchcosts. In addition to the above expenditures, we expect on an ongoing basis tomake periodic upgrades to our IT systems.

 

Inaddition to the upgrades to our IT systems, in July 2008, we entered intoan agreement with Cisco Systems for the purchase and implementation of varioussolutions to upgrade our current infrastructure for up to approximately $4.0million. The purchase is financed through a capital lease over a five yearterm. Our plan is to provide a unified platform for our entire company and toprovide a robust and efficient contact center. To date, we have received $3.1million of the Cisco solution. We expect to receive the remainder of theequipment and services in the******fourth quarter of 2010. We are implementing the Ciscosolution across all of our locations and expect that all of our locations willbe upgraded by the first half of 2011.

 

**Inflation**

 

Inflationhas not had a material impact on our operating results; however, there can beno assurance that inflation will not have a material impact on our business inthe future.

 

**DividendPolicy**

 

Wehave never paid cash dividends on our capital stock and our credit facilityprohibits us from paying any cash dividends on our capital stock. Therefore, wedo not currently anticipate paying dividends; we intend to retain any earningsto finance the growth and development of our business.

 

**Off-BalanceSheet Arrangements**

 

As of September 30,2010, we did not have any off-balance sheet arrangements.

 

**Contingencies**

 

For a discussion of contingencies,see Part I, Item 1, Note 10 of the Notes to the ConsolidatedFinancial Statements of this report, which is incorporated herein by reference.

 

**IMPACT OFRECENTLY ISSUED ACCOUNTING STANDARDS**

 

For a discussion of recentaccounting pronouncements, see Part I, Item 1, Note 2 of the Notes tothe Consolidated Financial Statements of this report, which is incorporatedherein by reference.

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report onForm 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended (the “Securities Act”)and Section 21E of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Such statements include statements regarding our expectations, hopes orintentions regarding the future, including but not limited to, statementsregarding our strategies, competition, markets, vendors, expenses, new servicesand technologies, growth prospects, financing, revenue, margins, operations,litigation and compliance with applicable laws. In particular, the followingtypes of statements are forward-looking:

 

·             the impact ofchanges in vendor programs or other vendor assistance on our operating results;

·             the impact of strategicinvestments, including our investment in our Chicago call center, our HealthDynamix division, our IT infrastructure, and the PC Mall Small BusinessNetwork;

·             our expectationregarding general economic uncertainties, the competitive pricing pressure inthe current environment and the related potential negative impact on our grossprofit margins;

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

·             our use of managementinformation systems and their need for future support or upgrade;

·             our expectations regardingthe timing and costs of our ongoing or planned IT upgrades;

·             our plans for our growthstrategies, including our market share growth strategies and our refinedMacMall strategy;

·             our expectations regardingour future capital needs and the availability of working capital, liquidity,cash flows from operations and borrowings under our credit facility;

·             the impact of changes in ourmix of products and services in our MME segment on our operating results;

 

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·             the impact of recentacquisitions within the industry on our Public Sector business;

·             the impact on accountsreceivable from our efforts to focus on sales in our MME, SMB, and PublicSector segments;

·             our acquisition strategy andthe impact of any past or future acquisitions;

·             the impact of acquisitionson our financial condition, liquidity and our future cash flows and earnings;

·             our ability to execute ourbusiness strategies;

·             our competitive advantagesand growth opportunities;

·             our ability to increaseprofitability and revenues;

·             our beliefs regarding theapplicability of tax regulations;

·             our belief regarding ourexposure to currency exchange and interest rate risks;

·             our belief regarding theeffect of seasonal trends and general economic conditions on our business andresults of operations across all of our segments;

·             our expectations regardingthe impact of accounting pronouncements;

·             our expectations regardingthe payment of dividends and our intention to retain any earnings to financethe growth and development of our business;

·             our ability to attract newcustomers and stimulate additional purchases from existing customers, includingour expectations regarding future advertising levels and the effect on consumersales;

·             our belief regardingfinancing of repurchases of our common stock;

·             our ability to limit riskrelated to price reductions;

·             our expectations regardingcompetition and the industry trend toward consolidation;

·             our compliance with laws andregulations; and

·             the likelihood that new lawsand regulations will be adopted with respect to the Internet that may imposeadditional restrictions or burdens on our business.

 

Forward-looking statementsinvolve certain risks and uncertainties, and actual results may differmaterially from those discussed in any such statement. Factors that could causeactual results to differ materially from such forward-looking statementsinclude the risks described in greater detail under the heading “Risk Factors”in Part II, Item 1A of this report. All forward-looking statements inthis document are made as of the date hereof, based on information available tous as of the date hereof, and, except as otherwise required by law, we assumeno obligation to update or revise any forward-looking statement or otherinformation contained herein to reflect new information, events orcircumstances after the date hereof.

 

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**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our financial instrumentsinclude cash and cash equivalents and long-term debt. At September 30, 2010,the carrying values of our financial instruments approximated their fair valuesbased on current market prices and rates.

 

We have not entered intoderivative financial instruments as of September 30, 2010. However, fromtime-to-time, we contemplate and may enter into derivative financialinstruments related to interest rate, foreign currency, and other market risks.

 

*InterestRate Risk*

 

We have exposure to therisks of fluctuating interest rates on our line of credit and note payable. Thevariable interest rates on our line of credit and note payable are tied to theprime rate or the LIBOR, at our discretion. At September 30, 2010, we had $58.4million outstanding under our line of credit and $3.1 million outstanding underour note payable. As of September 30, 2010, the hypothetical impact of a onepercentage point increase in interest rate related to the outstandingborrowings under our line of credit and note payable would be to increase ourannual interest expense by approximately $0.6 million.

 

*ForeignCurrency Exchange Risk*

 

We have operation centers inCanada and the Philippines that provide back-office administrative support andcustomer service support. In each of these countries, transactions areprimarily conducted in the respective local currencies. In addition, our twoforeign subsidiaries that operate the operation centers have intercompanyaccounts with our U.S. subsidiaries that eliminate upon consolidation. However,transactions resulting in such accounts expose us to foreign currency ratefluctuations. We record gains and losses resulting from exchange ratefluctuations on our short-term intercompany accounts in “Selling, general andadministrative expenses” in our Consolidated Statements of Operations andtranslation gains and losses resulting from exchange rate fluctuations on localcurrency based assets and liabilities in “Accumulated other comprehensiveincome,” a separate component of stockholders’ equity on our ConsolidatedBalance Sheets. As such, we have foreign currency translation exposure forchanges in exchange rates for these currencies. As of September 30, 2010, wedid not have material foreign currency or overall currency exposure.Significant changes in exchange rates between foreign currencies in which wetransact business and the U.S. dollar may adversely affect our ConsolidatedStatements of Operations and Consolidated Balance Sheets.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

**DisclosureControls 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 the period covered by this report. Basedupon this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as ofSeptember 30, 2010.

 

**Changes inInternal Control Over Financial 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 third quarter of2010 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

Weare not currently a party to any material legal proceedings, other thanordinary routine litigation incidental to the business. We currently are, orfrom time to time may become, party to disputes which involve or may involvelitigation, including consumer protection, employment, intellectual propertyand other litigation related to the conduct of our business. We consult withlegal counsel on such issues and seek input from other experts and advisorswith respect to such matters in the ordinary course of business. Any suchmatter, however, could be costly and time consuming and could divert ourmanagement and key personnel from our business operations. Whether any losses,damages or remedies ultimately resulting from such matters could reasonablyhave a material effect on our business, financial condition, results ofoperation, or cash flows will depend on a number of variables, including, forexample, the timing and amount of such losses or damages (if any) and thestructure and type of any such remedies. For these reasons, it is notpossible to make reliable estimates of the amount or range of loss that couldresult from any such matters at this time. We do not, however, presentlyexpect any such matters to have a material impact on our consolidated financialstatements.

 

**ITEM 1A.RISK FACTORS**

 

*Thisreport and other documents we file with the Securities and Exchange****Commissioncontain forward looking statements that are based on current****expectations,estimates, forecasts and projections about us, our future****performance,our business, our beliefs and our management’s assumptions. These****statementsare not guarantees of future performance and involve certain risks,****uncertainties,and assumptions that are difficult to predict. We have set forth the riskfactors that relate to our business, as set forth below. These risks includeany material changes to and supersede the risks previously disclosed inPart II, Item 1A of our Quarterly Report on Form 10-Q for the periodended June 30, 2010. You should****carefullyconsider the risks and uncertainties facing our business which are****setforth below. The risks described below are not the only ones facing us. Our****businessis also subject to risks that affect many other companies, such as****employmentrelations, general economic conditions, geopolitical events and****internationaloperations. Further, additional risks not currently known to us****orthat we currently believe are immaterial also may impair our business,****operations,liquidity and stock price materially and adversely.*

 

**Changes anduncertainties in the economic climate could negatively affect the****rate of information technology spending by ourcustomers, which would likely****havean impact on our business.**

 

An important element of ourbusiness strategy is to increasingly focus on SMB, MME and Public Sector sales.As a result of the ongoing tightness in the credit markets, softness in thehousing market, difficulties in the financial services sector, general economicweakness and continuing economic uncertainties, the direction and relativestrength of the U.S. economy remains considerably uncertain. These factorscould also increase the risk of uncollectible accounts receivable from our customers.During the recent economic downturns in the U.S. and elsewhere, SMB, MME andPublic Sector entities generally reduced, often substantially, their rate ofinformation technology spending. Weak economic conditions and consumerconfidence has also resulted in a decline in consumer spending on technologyand related consumer goods. Continued and future changes and uncertainties inthe economic climate in the U.S. and elsewhere could have a similar negativeimpact on the rate of information technology spending of our current andpotential customers, which would likely have a negative impact on our businessand results of operations, and could significantly hinder our growth.

 

**Ourearnings and growth rate could be adversely affected by continued changes in economic****and geopolitical conditions**.

 

We are subject to risksarising from adverse changes in domestic and global economic conditions. Ifeconomic growth in the United States and other countries’ economies continuesto slow or declines, consumer and business spending rates could besignificantly reduced. This could result in reductions in sales of ourproducts, longer sales and payment cycles, slower adoption of new technologiesand increased price competition, any of which could materially and adversely affectour business, results of operations and financial condition. Weak generaleconomic conditions, along with uncertainties in political conditions couldadversely impact our revenue, expenses and growth rate. In addition, ourrevenue, gross margins and earnings could deteriorate in the future as a resultof unfavorable economic or geopolitical conditions.

 

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**Certain ofour vendors provide us with incentives and other assistance that****reduce our operating costs, and any decline in theseincentives and other****assistancecould materially harm our operating results.**

 

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 substantialincentives in the form of discounts, credits and cooperative advertising. Wehave agreements with many of our vendors under which they provide us, or theyhave otherwise consistently provided us, with market development funds tofinance portions of our catalog publication and distribution costs based uponthe amount of coverage we give to their respective products in our catalogs orother advertising mediums. Any termination or interruption of our relationshipswith one or more of these vendors, particularly Apple or HP, or modification ofthe terms or discontinuance of our agreements and market development fundprograms and arrangements with these vendors, could adversely affect ouroperating income and cash flow. For example, the amount of vendor considerationwe receive from a particular vendor may be impacted by a number of eventsoutside of our control, including acquisitions, management changes or economicpressures affecting such vendor, any of which could materially affect theamount of vendor consideration we receive from such vendor.

 

**Our revenueis dependent on sales of products from a small number of key****manufacturers, and a decline in sales of products fromthese manufacturers****couldmaterially harm our business.**

 

Our revenue is dependent onsales of products from a small number of key manufacturers and softwarepublishers, including Apple, HP, IBM, Lenovo, Microsoft and Sony. For example,products manufactured by HP represented approximately 21% and 20%of our net salesfor the three months ended September 30, 2010 and 2009. Productsmanufactured by Apple represented approximately 16% of our net sales in each ofthe three months ended September 30, 2010 and 2009. A decline in sales ofany of our key manufacturers’ products, whether due to decreases in supply ofor demand for their products, termination of any of our agreements with them,or otherwise, could have a material adverse impact on our sales and operatingresults.

 

**We do nothave long-term supply agreements or guaranteed price or delivery****arrangements with our vendors.**

 

In most cases we have noguaranteed price or delivery arrangements with our vendors. As a result, wehave experienced and may in the future experience inventory shortages oncertain products. Furthermore, our industry occasionally experiencessignificant product supply shortages and customer order backlogs due to theinability of certain manufacturers to supply certain products as needed. Wecannot assure you that suppliers will maintain an adequate supply of productsto fulfill our orders on a timely basis, or at all, or that we will be able toobtain particular products on favorable terms or at all. Additionally, wecannot assure you that product lines currently offered by suppliers will continueto be available to us. A decline in the supply or continued availability of theproducts of our vendors, or a significant increase in the price of thoseproducts, could reduce our sales and negatively affect our operating results.

 

**Substantiallyall of our agreements with vendors are terminable within 30 days.**

 

Substantially all of ouragreements with vendors are terminable upon 30 days’ notice or less. Forexample, while we are an authorized dealer for the full retail line of HP andApple products, HP and Apple can terminate our dealer agreements upon 30 days’notice. Vendors that currently sell their products through us could decide tosell, or increase their sales of, their products directly or through otherresellers or channels. Any termination, interruption or adverse modification ofour relationship with a key vendor or a significant number of other vendorswould likely adversely affect our operating income, cash flow and futureprospects.

 

**Our successis dependent in part upon the ability of our vendors to develop and****market products that meet changes in marketplacedemand, as well as our ability****tosell popular products from new vendors.**

 

The products we sell aregenerally subject to rapid technological change and related changes inmarketplace demand. Our success is dependent in part upon the ability of ourvendors to develop and market products that meet these changes in marketplacedemand. Our success is also dependent on our ability to develop relationshipswith and sell products from new vendors that address these changes inmarketplace demand. To the extent products that address changes in marketplacedemand are not available to us, or are not available to us in sufficientquantities or on acceptable terms, we could encounter increased price and othercompetition, which would likely adversely affect our business, financialcondition and results of operations.

 

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**We may notbe able to maintain existing or build new vendor relationships,****which may affect our ability to offer a broadselection of products at****competitiveprices and negatively impact our results of operations.**

 

We purchase products forresale both directly from manufacturers and indirectly through distributors andother sources, all of whom we consider our vendors. We also maintain certainqualifications and preferred provider status with several of our vendors, whichprovides us with preferred pricing, vendor training and support, preferredaccess to products, and other significant benefits. While these vendorrelationships are an important element of our business, we do not havelong-term agreements with any of these vendors. Any agreements with vendorsgoverning our purchase of products are generally terminable by either partyupon 30 days’ notice or less. In general, we agree to offer products throughour catalogs and on our websites and the vendors agree to provide us withinformation about their products and honor our customer service policies. If wedo not maintain our existing relationships or build new relationships withvendors on acceptable terms, including favorable product pricing and vendorconsideration, we may not be able to offer a broad selection of products orcontinue to offer products at competitive prices. In addition, some vendors maydecide not to offer particular products for sale on the Internet, and othersmay avoid offering their new products to retailers offering a mix of close-outand refurbished products in addition to new products. From time to time,vendors may be acquired by other companies, terminate our right to sell some orall of their products, modify or terminate our preferred provider orqualification status, change the applicable terms and conditions of sale orreduce or discontinue the incentives or vendor consideration that they offerus. Any such termination or the implementation of such changes, or our failureto build new vendor relationships, could have a negative impact on ouroperating results. Additionally, some products are subject to manufacturer ordistributor allocation, which limits the number of units of those products thatare available to us and may adversely affect our operating results.

 

**Our narrowgross margins magnify the impact of variations in our operating****costs and of adverse or unforeseen events on ouroperating results.**

 

We are subject to intenseprice competition with respect to the products we sell. As a result, our grossmargins have historically been narrow, and we expect them to continue to benarrow. As a result of the recent economic downturn, we have experiencedincreasing price competition, which has had a negative impact on our grossmargins. Our narrow gross margins magnify the impact of variations in ouroperating costs and of adverse or unforeseen events on our operating results.Future increases in costs such as the cost of merchandise, wage levels,shipping rates, freight costs and fuel costs may negatively impact our marginsand profitability. We are not always able to raise the sales price of ourmerchandise to offset cost increases. If we are unable to maintain our grossmargins in the future, it could have a material adverse effect on our business,financial condition and results of operations. In addition, because price is animportant competitive factor in our industry, we cannot assure you that we willnot be subject to increased price competition in the future. If we becomesubject to increased price competition in the future, we cannot assure you thatwe will not lose market share, that we will not be forced to reduce our pricesand further reduce our gross margins, or that we will be able to competeeffectively.

 

**Weexperience variability in our net sales and net income on a quarterly basis****as a result of many factors.**

 

Weexperience variability in our net sales and net income on a quarterly basis asa result of many factors.  These factorsinclude:

 

·                  the generaleconomic environment and competitive conditions, such as pricing;

·                  variability invendor programs;

·                  the timing ofprocurement cycles by our business, government and educational institutioncustomers;

·                  seasonality inconsumer spending;

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

·                  theintroduction of new products or services by us and our competitors;

·                  changes inprices from our suppliers;

·                  promotions;

·                  the loss orconsolidation of significant suppliers or customers;

·                  our ability tocontrol costs;

·                  the timing ofour capital expenditures;

·                  the conditionof our industry in general;

·                  seasonal shiftsin demand for computer and electronics products;

·                  industryannouncements and market acceptance of new products or upgrades;

·                  deferral ofcustomer orders in anticipation of new product applications;

·                  productenhancements or operating systems;

·                  the relativemix of products sold during the period;

·                  any inabilityon our part to obtain adequate quantities of products carried in our catalogs;

·                  delays in therelease by suppliers of new products and inventory adjustments;

·                  ourexpenditures on new business ventures and acquisitions;

·                  performance ofacquired businesses;

·                  adverse weatherconditions that affect response;

 

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·                  distribution orshipping to our customers; and

·                  geopoliticalevents.

 

Our planned operatingexpenditures each quarter are based on sales forecasts for the quarter. If oursales do not meet expectations in any given quarter, our operating results forthe quarter may be materially adversely affected. Our narrow gross margins maymagnify the impact of these factors on our operating results. We believe thatperiod-to-period comparisons of our operating results are not necessarily agood indication of our future performance. In addition, our results in anyquarterly period are not necessarily indicative of results to be expected for afull fiscal year. In future quarters, our operating results may be below theexpectations of public market analysts or investors and as a result the marketprice of our common stock could be materially adversely affected.

 

**Thetransition of our business strategy to increasingly focus on SMB, MME andPublic Sector sales presents numerous risks and challenges, and may not improve****our profitability or result in expanded market share.**

 

An important element of ourbusiness strategy is to increasingly focus on SMB, MME and Public Sector sales.In shifting our focus, we face numerous risks and challenges, includingcompetition from a wider range of sources and an increased need to developstrategic relationships. We cannot assure you that our increased focus on SMB,MME and Public Sector sales will result in expanded market share or increasedprofitability. Furthermore, revenue from our public sector business is derivedfrom sales to federal, state and local governmental departments and agencies,as well as to educational institutions, through various contracts and openmarket sales. Government contracting is a highly regulated area, andnoncompliance with government procurement regulations or contract provisionscould result in civil, criminal, and administrative liability, includingsubstantial monetary fines or damages, termination of government contracts, andsuspension, debarment or ineligibility from doing business with the government.The effect of any of these possible actions by any governmental department oragency with which we contract could adversely affect our business and resultsof operations. Moreover, contracting with governmental departments and agenciesinvolves additional risks, such as longer payment terms, limited recourseagainst the government agency in the event of a business dispute, the potentiallack of a limitation of our liability for damages from our provision ofservices to the department or agency, and the potential for changes instatutory or regulatory provisions that negatively affect the profitability ofsuch contracts.

 

**Ourinvestments in our outbound phone-based sales force model may not improve****our profitability or result in expanded market share.**

 

We have made and arecurrently making efforts to increase our market share by investing in trainingand retention of our outbound phone-based sales force. We have also incurred,and expect to continue to incur, significant expenses resulting frominfrastructure investments related to our outbound phone-based sales force. Wecannot assure you that any of our investments in our outbound phone-based salesforce will result in expanded market share or increased profitability in thenear or long term.

 

**Ourfinancial performance could be adversely affected if we are not able to****retain and increase the experience of our sales forceor if we are not able to****maintainor increase their productivity.**

 

Our sales and operatingresults may be adversely affected if we are unable to increase the averagetenure of our account executives or if the sales volumes and profitabilityachieved by our account executives do not increase with their increasedexperience.

 

**Existing orfuture government and tax regulations could expose us to****liabilities or costly changes in our businessoperations, and could reduce****demandfor our products and services.**

 

Based upon current interpretationsof existing law, certain of our subsidiaries currently collect and remit salesor use tax only on sales of products or services to residents of the states inwhich the respective subsidiaries have a physical presence or have voluntarilyregistered for sales tax collection. The U.S. Supreme Court has ruled thatstates, absent Congressional legislation, may not impose tax collectionobligations on an out-of-state direct marketer whose only contacts with thetaxing state are distribution of catalogs and other advertisement materialsthrough the mail, and whose subsequent delivery of purchased goods is by mailor interstate common carriers. However, we cannot predict the level of contactwith any state which would give rise to future or past tax collectionobligations. Additionally, it is possible that federal legislation could beenacted that would permit states to impose sales or use tax collectionobligations on out-of-state direct marketers. Furthermore, court cases haveupheld tax collection obligations on companies, including mail order companies,whose contacts with the taxing state were quite limited (e.g., visiting thestate several times a year to aid customers or to inspect stores stocking theirgoods or to provide training or other support to customers in the state).States have also successfully 

 

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imposed sales and use taxcollection responsibility upon in-state manufacturers that agree to act as adrop shipper for the out-of-state marketer, giving rise to the risk that suchtaxes may be imposed indirectly on the out-of-state seller. We believe ouroperations in states in which we have no physical presence are different fromthe operations of the companies in those cases and are thus not subject to thetax collection obligations imposed by those decisions. Various state laws,regulations and taxing authorities have sought to impose on direct marketerswith no physical presence in the taxing state the burden of collecting statesales and use taxes on the sale of products shipped or services sold to thosestates’ residents, and it is possible that such a requirement could be imposedin the future. For example, New York recently adopted an affiliate marketingstatute and related regulations that impose sales and use tax collectionobligations on out-of-state sellers that use certain web-based affiliatemarketing relationships with web-based affiliates deemed to be located in NewYork. Other states such as California, Connecticut, Hawaii and Minnesota haveproposed similar legislation. There can be no assurance that existing or futurelaws that impose taxes or other regulations on direct marketing or Internetcommerce would not substantially impair our growth or otherwise have a materialadverse effect on our business, results or operations and financial condition.

 

In addition, we and oursubsidiaries may be subject to state or local taxes on income or (in statessuch as Kentucky, Michigan, Ohio, Texas or Washington) on gross receipts earnedin a state even though we and our subsidiaries may have no physical presence inthe state. State and local governments may seek to impose such taxes in caseswhere they believe the taxpayer may have a significant economic presence byreason of significant sales to customers located in the states. Theresponsibility to pay income and gross receipts taxes has also been the subjectof court actions and various legislative efforts. There can be no assurancethat these taxes will not be imposed upon us and our subsidiaries.

 

Furthermore, we are subjectto general business laws and regulations, as well as laws and regulationsspecifically governing companies that do business over the Internet. These lawsand regulations may cover taxation of eCommerce, user privacy, marketing andpromotional practices (including electronic communications with our customersand potential customers), database protection, pricing, content, copyrights,distribution, electronic contracts and other communications, consumerprotection, product safety, the provision of online payment services,copyrights, patents and other intellectual property rights, data security,unauthorized access (including the Computer Fraud and Abuse Act), and thecharacteristics and quality of products and services. While we have sought toimplement processes, programs and systems in an effort to achieve compliancewith existing laws and regulations applicable to our business, many of theselaws and regulations are unclear and have yet to be interpreted by courts, or maybe subject to conflicting interpretations by courts. Further, no assurances canbe given that new laws or regulations will not be enacted or adopted, or thatour processes, programs and systems will be sufficient to comply with presentor future laws or regulations, which might adversely affect our operations.

 

Such existing and futurelaws and regulations may also impede the growth of the Internet or other onlineservices, including our business. Additionally, it is not always clear howexisting laws and regulations governing issues such as property ownership,sales and other taxes, libel, trespass, data mining and collection, datasecurity and personal privacy, among other laws, apply to the Internet andeCommerce. Unfavorable resolution of these issues may expose us to liabilityand costly changes in our business operations, and could reduce customer demandfor our products.

 

The growth and demand foronline commerce has and may continue to result in more stringent consumerprotection laws that impose additional compliance burdens on online companies.These consumer protection laws could result in substantial compliance costs andcould decrease our profitability. For example, data security laws are becomingmore widespread and burdensome in the United States, and increasingly requirenotification of affected individuals and, in some instances, regulators.Moreover, third parties are engaging in increased cyber-attacks againstcompanies doing business on the Internet, and individuals are increasingly subjectedto identity 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.

 

Growing public concern aboutprivacy and the collection, distribution and use of information aboutindividuals may subject us to increased regulatory scrutiny or litigation. Inthe past, the FTC has investigated companies that have used personallyidentifiable information without permission or in violation of a stated privacypolicy. If we are accused of violating the stated terms of our privacy policy,we may face a loss of users and damage to our reputation and be forced toexpend significant amounts of financial and managerial resources to defendagainst these accusations and we may face potential liability as well asextended regulatory oversight in the form of a long-term consent order.

 

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Additionally, althoughhistorically only a small percentage of our total sales in any given quarter oryear are made to customers outside of the continental United States, there is apossibility that a foreign jurisdiction may take the position that our businessis subject to its laws and regulations, which could impose restrictions orburdens on us and expose us to tax and other potential liabilities and couldalso require costly changes to our business operations with respect to thosejurisdictions.

 

**Part ofour business strategy includes the acquisition of other companies, and****we may have difficulties integrating acquiredcompanies into our operations in****acost-effective manner, if at all**.

 

One element of our businessstrategy involves expansion through the acquisition of businesses, assets,personnel or technologies that allow us to complement our existing operations,expand our market coverage, or add new business capabilities. We continuallyevaluate and explore strategic opportunities as they arise, including businesscombination transactions, strategic partnerships, and the purchase or sale ofassets. Our acquisition strategy depends on the availability of suitableacquisition candidates at reasonable prices and our ability to resolvechallenges associated with integrating acquired businesses into our existingbusiness. No assurance can be given that the benefits or synergies we mayexpect from the acquisition of companies or businesses will be realized to theextent or in the time frame we anticipate. We may lose key employees,customers, distributors, vendors and other business partners of the companieswe acquire following and continuing after announcement of acquisition plans. Inaddition, acquisitions may involve a number of risks and difficulties,including expansion into new geographic markets and business areas, thediversion of management’s attention to the operations and personnel of theacquired company, the integration of the acquired company’s personnel,operations and management information (ERP) systems, changing relationshipswith customers, suppliers and strategic partners, and potential short-termadverse effects on our operating results. These challenges can be magnified asthe size of the acquisition increases. Any delays or unexpected costs incurredin connection with the integration of acquired companies or otherwise relatedto the acquisitions could have a material adverse effect on our business,financial condition and results of operations.

 

Acquisitions may requirelarge one-time charges and can result in increased debt or other contingentliabilities, adverse tax consequences, deferred compensation charges, therecording and later amortization of amounts related to deferred compensationand certain purchased intangible assets, and the refinement or revision of fairvalue acquisition estimates following the completion of acquisitions, any ofwhich items could negatively impact our business, financial condition andresults of operations. In addition, we may record goodwill in connection withan acquisition and incur goodwill impairment charges in the future. Any ofthese charges could cause the price of our common stock to decline.

 

An acquisition could absorbsubstantial cash resources, require us to incur or assume debt obligations, orinvolve our issuance of additional equity securities. If we issue equitysecurities in connection with an acquisition, we may dilute our common stockwith securities that have an equal or a senior interest in our company. If weincur additional debt to pay for an acquisition, it may significantly reduceamounts that would otherwise be available under our credit facility, increaseour interest expense, leverage and debt service requirements and couldnegatively impact our ability to comply with applicable financial covenants inour credit facility or limit our ability to obtain credit from our vendors.Acquired entities also may be highly leveraged or dilutive to our earnings pershare, or may have unknown liabilities. In addition, the combined entity mayhave lower revenues or higher expenses and therefore may not achieve theanticipated results. Any of these factors relating to acquisitions could have amaterial adverse impact on our business, financial condition and results ofoperations.

 

We cannot assure you that wewill be able to consummate any pending or future acquisitions or that we willrealize any anticipated benefits from these acquisitions. We may not be able tofind suitable 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.

 

**If goodwillor intangible assets become impaired, we may be required****to record a significant charge to earnings.**

 

The purchase priceallocation for our historical acquisitions resulted in a material amountallocated to goodwill and intangible assets. In accordance with GAAP, we reviewour intangible assets for impairment when events or changes in circumstancesindicate the carrying value may not be recoverable. We review the fair valuesof our goodwill and intangible assets with indefinite useful lives and testthem for impairment annually or whenever events or changes in circumstancesindicate an impairment may have occurred. Factors that may be considered achange in circumstances indicating that the carrying value of our goodwill orintangible assets may not be recoverable include a decline in stock price and marketcapitalization, reduced future cash flow estimates, and slower growth rates inour industry. We may be required to record a significant non-cash charge toearnings in our consolidated financial statements during the period in whichany impairment of our goodwill or intangible assets is determined, which couldhave a material adverse effect on our results of operations.

 

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Significant negativeindustry or economic trends, including decreases in our market capitalization,slower growth rates or lack of growth in our business, resulted in write-downsand impairment charges in fiscal 2008. While no such write-downs or chargesoccurred in fiscal 2009 or the first nine months of 2010, if such occur in the futureit may indicate that additional impairment charges are required. If we arerequired to record additional impairment charges, this could have a materialadverse affect on our consolidated financial statements. In addition, thetesting of goodwill for impairment requires us to make significant estimatesabout the future performance and cash flows of our company, as well as otherassumptions. These estimates can be affected by numerous factors, includingchanges in economic, industry or market conditions, changes in underlyingbusiness operations, future reporting unit operating performance, existing ornew product market acceptance, changes in competition, or changes intechnologies. Any changes in key assumptions, or actual performance comparedwith those assumptions, about our business and future prospects or otherassumptions could affect the fair value of one or more reporting units,resulting in an impairment charge.

 

**We may notbe able to maintain profitability on a quarterly or annual basis.**

 

Our ability to maintainprofitability on a quarterly or annual basis given our planned businessstrategy depends upon a number of factors, including, but not limited to, ourability to achieve and maintain vendor relationships, procure merchandise andfulfill orders in an efficient manner, leverage our fixed cost structure,maintain adequate levels of vendor consideration and price protection, maintaina well-balanced product and customer mix, maintain customer acquisition costsand shipping costs at acceptable levels, and our ability to effectively competein the marketplace with our competitors. Our ability to maintain profitabilityon a quarterly or annual basis will also depend on our ability to manage andcontrol operating expenses and to generate and sustain adequate levels ofrevenue. Many of our expenses are fixed in the short term, and we may not beable to quickly reduce spending if our revenue is lower than what we project.In addition, we may find that our business plan costs more to execute than whatwe currently anticipate. Some of the factors that affect our ability tomaintain profitability on a quarterly or annual basis are beyond our control,including general economic trends and uncertainties.

 

**The effectof accounting rules for stock-based compensation may materially****adversely affect our consolidated operating results,our stock price and our****ability tohire, retain and motivate employees.**

 

We use employee stockoptions and other stock-based compensation to hire, retain and motivate certainof our employees. Current accounting rules require us to measurecompensation costs for all stock-based compensation (including stock options)at fair value as of the date of grant and to recognize these costs as expensesin our consolidated statements of operations. The recognition of non-cashstock-based compensation expenses in our consolidated statements of operationshas had and will likely continue to have a negative effect on our consolidatedoperating results, including our net income and earnings per share, which couldnegatively impact our stock price. Additionally, if we reduce or alter our useof stock-based compensation to reduce these expenses and their impact, ourability to hire, motivate and retain certain employees could be adverselyaffected and we may need to increase the cash compensation we pay to theseemployees.

 

**Ouroperating results are difficult to predict and may adversely affect our****stock price.**

 

Our operating results havefluctuated in the past and are likely to vary significantly in the future basedupon a number of factors, many of which we cannot control. We operate in ahighly dynamic industry and future results could be subject to significantfluctuations. These fluctuations could cause us to fail to meet or exceedfinancial expectations of investors or analysts, which could cause our stockprice to decline rapidly and significantly. Revenue and expenses in futureperiods may be greater or less than revenue and expenses in the immediatelypreceding period or in the comparable period of the prior year. Therefore,period-to-period comparisons of our operating results are not necessarily agood indication of our future performance. Some of the factors that could causeour operating results to fluctuate include:

 

·             the amount and timing ofoperating costs and capital expenditures relating to any expansion of ourbusiness operations and infrastructure;

·             price competition thatresults in lower sales volumes, lower profit margins, or net losses;

·             fluctuations in mail-inrebate redemption rates;

·             the amount and timing ofadvertising and marketing costs;

·             our ability to successfullyintegrate operations and technologies from any past or future acquisitions orother business combinations;

·             revisions or refinements offair value estimates relating to acquisitions or other business combinations;

·             changes in the number ofvisitors to our websites or our inability to convert those visitors intocustomers;

·             technical difficulties,including system or Internet failures;

·             fluctuations in the demandfor our products or overstocking or under-stocking of our products;

·             introduction of new orenhanced services or products by us or our competitors;

·             fluctuations in shippingcosts, particularly during the holiday season;

·             changes in the amounts ofinformation technology spending by SMB, MME, Public Sector and MacMall segmentcustomers;

 

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·             economic conditions;

·             foreign currency exchangerate;

·             changes in the mix ofproducts that we sell; and

·             fluctuations in levels ofinventory theft, damage or obsolescence that we incur.

 

**If we failto accurately predict our inventory risk, our gross margins may****decline as a result of required inventory write downsdue to lower prices****obtained fromolder or obsolete products.**

 

We derive a significantamount of our gross sales from products sold out of inventory at ourdistribution facilities. We assume the inventory damage, theft and obsolescencerisks, as well as price erosion risks for products that are sold out ofinventory stocked at our distribution facilities. These risks are especiallysignificant because many of the products we sell are characterized by rapidtechnological change, obsolescence and price erosion (e.g., computer hardware,software and consumer electronics), and because our distribution facilitiessometimes stock large quantities of particular types of inventory. There can beno assurance that we will be able to identify and offer products necessary toremain competitive, maintain our gross margins, or avoid or minimize lossesrelated to excess and obsolete inventory. We currently have limited returnrights with respect to products we purchase from Apple, HP, Lenovo, and certainother vendors, but these rights vary by product line, are subject to specifiedconditions and limitations, and can be terminated or changed at any time.

 

**We mayneed additional financing and may not be able to raise additional financing onfavorable terms or at all, which could increase our costs, limit our ability togrow and dilute the ownership interests of existing stockholders.**

 

We require substantialworking capital to fund our business. We believe that our current workingcapital, including our existing cash balance, together with our expected futurecash flows from operations and available borrowing capacity under our existingcredit facility, which functions as a working capital line of credit, will beadequate to support our current operating plans for at least the next twelvemonths. However, if we need additional financing, such as for acquisitions orexpansion or to finance our operations during a significant downturn in salesor an increase in operating expenses, there are no assurances that adequatefinancing will be available on acceptable terms, if at all. We may in thefuture seek additional financing from public or private debt or equityfinancings to fund additional expansion, or take advantage of opportunities orfavorable market conditions. There can be no assurance such financings will beavailable on terms favorable to us or at all. To the extent any such financingsinvolve the issuance of equity securities, existing stockholders could sufferdilution. If we raise additional financing through the issuance of equity,equity-related or debt securities, those securities may have rights,preferences or privileges senior to those of the rights of our common stock andour stockholders will experience dilution of their ownership interests. Ifadditional financing is required but not available, we would have to implementfurther measures to conserve cash and reduce costs. However, there is noassurance that such measures would be successful. Our failure to raise requiredadditional financing could adversely affect our ability to maintain, develop orenhance our product offerings, take advantage of future opportunities, respondto competitive pressures or continue operations.

 

Our existing credit facilitycontains certain terms that are more favorable to us than terms that we believewould otherwise be available to us in the current credit market environment. Weare currently in the process of negotiating a new credit facility which weexpect to enter into in the fourth quarter of 2010. We expect that any newfacility will generally be on terms substantially similar to our existingfacility, but will likely also include some terms that are less favorable to usthan our current terms, including covenants requiring us to maintain minimumlevels of excess borrowing capacity or minimum fixed charge coverage ratios, aswell as less favorable interest rates.

 

There has been significantongoing uncertainty in the global economic environment, coupled withdisruptions in the capital and credit markets. Continued uncertainty 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. To the extent we seek additional financing from public or private debtor equity issuances, there can be no assurance that such financing will beavailable at acceptable terms, if at all. There can be no assurance that thecost or availability of future borrowings, if any, under our credit facility orin the debt markets will not be impacted by disruptions or continued weaknessin the capital and credit markets.

 

**Risinginterest rates could negatively impact our results of operations and****financial condition.**

 

A significant portion of ourworking capital requirements has historically been funded through borrowingsunder our credit facility, which functions as a working capital line of creditand bears interest at variable rates, tied to the LIBOR or prime rate. Inconnection with and as part of the line of credit, we also entered into a termnote, bearing interest at the same rate as our credit facility. If the variableinterest rates on our line of credit and term note increase, we could incurgreater interest expense than we have in the past. Rising interest rates, andour increased interest expense that would result from them, could negativelyimpact our results of operations and financial condition.

 

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**We may besubject to claims regarding our intellectual property, including our****business processes, or the products we sell, any ofwhich could result in****expensivelitigation, distract our management or force us to enter into costly****royalty or licensing agreements.**

 

Third parties have asserted,and may in the future assert, that our business or the technologies we useinfringe on their intellectual property rights. As a result, we may be subjectto intellectual property legal proceedings and claims in the ordinary course ofour business. We cannot predict whether third parties will assert additionalclaims of infringement against us in the future or whether any future claimswill prevent us from offering popular products or operating our business asplanned. If we are forced to defend against any third-party infringementclaims, whether they are with or without merit or are determined in our favor,we could face expensive and time-consuming litigation, which could result inthe imposition of a preliminary injunction preventing us from continuing tooperate our business as currently conducted throughout the duration of thelitigation or distract our technical and management personnel. If we are foundto infringe, we may be required to pay monetary damages, which could includetreble damages and attorneys’ fees for any infringement that is found to bewillful, and either be enjoined or required to pay ongoing royalties withrespect to any technologies found to infringe. Further, as a result ofinfringement claims either against us or against those who license technologyto us, we may be required, or deem it advisable, to develop non-infringingtechnology, which could be costly and time consuming, or enter into costly royaltyor licensing agreements. Such royalty or licensing agreements, if required, maybe unavailable 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 sellproducts manufactured and distributed by third parties, some of which may bedefective. If any product that we sell were to cause physical injury or damageto property, the injured party or parties could bring claims against us as theretailer of the product. Our insurance coverage may not be adequate to coverevery claim that could be asserted. If a successful claim were brought againstus in excess of our insurance coverage, it could expose us to significantliability. Even unsuccessful claims could result in the expenditure of fundsand management time and could decrease our profitability.

 

**Costs andother factors associated with pending or future litigation could****materially harm our business, results of operationsand financial condition.**

 

From time to time we receiveclaims and become subject to litigation, including consumer protection,employment, intellectual property and other litigation related to the conductof our business. Additionally, we may from time to time institute legalproceedings against third parties to protect our interests. Any litigation thatwe become a party to 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 and could incur significantcosts in asserting, defending, or settling any such litigation. We cannotdetermine with any certainty the costs or outcome of pending or futurelitigation. Any such litigation may materially harm our business, results ofoperations and financial condition.

 

**We may failto expand our product, services and solutions categories and offerings, ourwebsites****or****our processing systems in acost-effective and timely manner as may be required****to efficiently operate our business.**

 

We may be required to expandor change our product, services and solutions categories or offerings, ourwebsites or our processing systems in order to compete in our highlycompetitive and rapidly changing industry or to efficiently operate our business.Any failure on our part to expand or change the way we do business in acost-effective and timely manner in response to any such requirements wouldlikely adversely affect our operating results, financial condition and futureprospects. Additionally, we cannot assure you that we will be successful inimplementing any such changes when and if they are required.

 

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We have generatedsubstantial portions of our revenue in the past from the sale of computerhardware, software and accessories and consumer electronics products. Expansioninto new product, service and solutions categories may require us to incursignificant marketing expenses, develop relationships with new vendors andcomply with new regulations. We may lack the necessary expertise in a newcategory to realize the expected benefits of that new category. Theserequirements could strain our managerial, financial and operational resources.Additional challenges that may affect our ability to expand into new product,service or solutions categories include our ability to:

 

·             establish or increaseawareness of our new brands and product, service and solutions categories;

·             acquire, attract and retaincustomers at a reasonable cost;

·             achieve and maintain acritical mass of customers and orders across all of our product categories;

·             attract a sufficient numberof new customers to whom any new categories and offerings are targeted;

·             successfully market our newcategories or offerings to existing customers;

·             maintain or improve ourgross margins and fulfillment costs;

·             attract and retain vendorsto provide expanded lines of products, services or solutions to our customerson terms that are acceptable to us; and

·             manage our inventory in newproduct categories.

 

We cannot be certain that wewill be able to successfully address any or all of these challenges in a mannerthat will enable 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 notbe able to attract and retain key personnel such as senior****management and information technology specialists.**

 

Our future performance willdepend to a significant extent upon the efforts and abilities of certain keymanagement and other personnel, including Frank F. Khulusi, our Chairman of theBoard, President and Chief Executive Officer, as well as other executiveofficers and senior management. The loss of service of one or more of our keymanagement members could have a material adverse effect on our business. Oursuccess and plans for future growth will also depend in part on our management’scontinuing ability to hire, train and retain skilled personnel in all areas ofour business. For example, our management information systems and processesrequire the services of employees with extensive knowledge of these systems andprocesses and the business environment in which we operate, and in order tosuccessfully implement and operate our systems and processes we must be able toattract and retain a significant number of information technology specialists.We may not be able to attract, train and retain the skilled personnel requiredto, among other things, implement, maintain, and operate our informationsystems and processes, and any failure to do so would likely have a materialadverse effect on our operations.

 

**If we failto achieve and maintain adequate internal controls, we may not be****able to produce reliable financial reports in a timelymanner or prevent****financial fraud.**

 

We monitor and periodicallytest our internal control procedures. We may from time to time identifydeficiencies which we may not be able to remediate in a timely orcost-effective manner. In addition, if we fail to achieve and maintain theadequacy of our internal controls, we may not be able to ensure that we canconclude on an ongoing basis that we have effective internal controls overfinancial reporting. Effective internal controls, particularly those related torevenue recognition, are necessary for us to produce reliable financial reportsand are important in helping prevent financial fraud. If we cannot providereliable financial reports on a timely basis or prevent financial fraud, ourbusiness and operating results could be harmed, investors could lose confidencein our reported financial information, and the trading price of our stock coulddrop significantly.

 

**Anyinability to effectively manage our growth may prevent us from successfully****expanding our business.**

 

The growth of our businesshas required us to make significant additions in personnel and hassignificantly increased our working capital requirements. Although we haveexperienced significant sales growth in the past, such growth should not beconsidered indicative of future sales growth. Such growth has resulted in newand increased responsibilities for our management personnel and has placed andcontinues to place significant strain upon our management, operating andfinancial systems, and other resources. Any future growth, whether organic orthrough acquisition, may result in increased strain. There can be no assurancethat current or future strain will not have a material adverse effect on ourbusiness, financial condition, and results of operations, nor can there be anyassurance that we will be able to attract or retain sufficient personnel tocontinue the expansion of our operations. Also crucial to our success inmanaging our growth will be our ability to achieve additional economies ofscale. We cannot assure you that we will be able to achieve such economies ofscale, and the failure to do so could have a material adverse effect upon ourbusiness, financial condition and results of operations.

 

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**Ouradvertising and marketing efforts may be costly and may not achieve desired****results.**

 

We incur substantial expensein connection with our advertising and marketing efforts. Postage represents asignificant expense for us because we generally mail our catalogs to currentand potential customers through the U.S. Postal Service. Any future increasesin postal rates will increase our mailing expenses and could have a materialadverse effect on our business, financial condition and results of operations.We also incur significant expenses related to purchasing the paper we use inprinting our catalogs. The cost of paper has fluctuated over the last severalyears, and may increase in the future. We believe that we may be able to recoupa portion of any increased postage and paper costs through increases in vendoradvertising rates, but no assurance can be given that any efforts we mayundertake to offset all or a portion of future increases in postage, paper andother advertising and marketing costs through increases in vendor advertisingrates will be successful or sustained, or that they will offset all of theincreased costs. Furthermore, although we target our advertising and marketingefforts on current and potential customers who we believe are likely to be inthe market for the products we sell, we cannot assure you that our advertisingand marketing 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 areexposed to the credit risk of some of our customers and to credit exposures inweakened markets, which could negatively impact our business, operating resultsand financial condition.**

 

Business customers whoqualify are provided credit terms and while we monitor individual customerpayment capability and maintain reserves we believe are adequate to coverexposure for doubtful accounts, we have exposure to credit risk in the eventthat customers fail to meet their payment obligations. Additionally, to thedegree that the ongoing tightness in the credit markets makes it more difficultfor some customers to obtain financing, those customers’ ability to meet theirpayment obligations to us could be adversely impacted, which in turn could havea material adverse impact on our business, operating results, and financialcondition.

 

**Increasedproduct returns or a failure to accurately predict product returns****could decrease our revenue and impact profitability.**

 

We make allowances forproduct returns in our consolidated financial statements based on historicalreturn rates. We are responsible for returns of certain products orderedthrough our catalogs and websites from our distribution center, as well asproducts that are shipped to our customers directly from our vendors. If ouractual product returns significantly exceed our allowances for returns, ourrevenue and profitability could decrease. In addition, because our allowancesare based on historical return rates, the introduction of new merchandisecategories, new products, changes in our product mix, or other factors maycause actual returns to exceed return allowances, perhaps significantly. Inaddition, any policies that we adopt that are intended to reduce the number ofproduct returns may result in customer dissatisfaction and fewer repeatcustomers.

 

**Ourbusiness may be harmed by fraudulent activities on our websites, including****fraudulent credit card transactions.**

 

We have received in thepast, and anticipate that we will receive in the future, communications fromcustomers due to purported fraudulent activities on our websites, includingfraudulent credit card transactions. Negative publicity generated as a resultof fraudulent conduct by third parties could damage our reputation and diminishthe value of our brand name. Fraudulent activities on our websites could alsosubject us to losses and could lead to scrutiny from lawmakers and regulatorsregarding the operation of our websites. We expect to continue to receiverequests from customers for reimbursement due to purportedly fraudulentactivities or threats of legal action against us if no reimbursement is made.

 

**We may beliable for misappropriation of our customers’ personal information.**

 

If third parties or ouremployees are able to penetrate our network security or otherwisemisappropriate our customers’ personal information or credit card information,or if we give third parties or our employees improper access to our customers’personal information or credit card information, we could be subject toliability. This liability could include claims for unauthorized purchases withcredit card information, identity theft or other similar fraud-related claims.This liability could also include claims for other misuses of personalinformation, including for unauthorized marketing purposes. Other liabilitycould include claims alleging misrepresentation or our privacy and datasecurity practices. Any such liability for misappropriation of this informationcould decrease our profitability. In addition, the Federal Trade Commission andstate agencies have been investigating various Internet companies regardingwhether they misused or inadequately secured personal information regardingconsumers. We could incur additional expenses if new laws or regulationsregarding the use of personal information are introduced or if governmentagencies investigate our privacy practices.

 

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We seek to rely onencryption and authentication technology licensed from third parties to providethe security and authentication necessary to effect secure online transmissionof confidential information such as customer credit card numbers. Advances incomputer capabilities, new discoveries in the field of cryptography or otherevents or developments may result in a compromise or breach of the algorithmsthat we use to protect sensitive customer transaction data. A party who is ableto circumvent our security measures could misappropriate proprietaryinformation or cause interruptions in our operations. We may be required toexpend significant 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 orregulations relating to privacy and data protection may adversely****affect the growth of our Internet business or our marketingefforts.**

 

We mail catalogs and sendelectronic messages to names in our proprietary customer database and topotential customers whose names we obtain from rented or exchanged mailinglists. Worldwide public concern regarding personal privacy has subjected therental and use of customer mailing lists and other customer information toincreased scrutiny and regulation. As a result, we are subject to increasingregulation relating to privacy and the use of personal information. Forexample, we are subject to various telemarketing and anti-spam laws thatregulate the manner in which we may solicit future suppliers and customers.Such regulations, along with increased governmental or private enforcement, mayincrease the cost of operating and growing our business. In addition, severalstates have proposed legislation that would limit the uses of personalinformation gathered online or require online services to establish privacypolicies. The Federal Trade Commission has adopted regulations regarding the collectionand use of personal identifying information obtained from children under 13years of age. Bills proposed in Congress would expand online privacyprotections already provided to adults. Moreover, both in the United States andelsewhere, laws and regulations are becoming increasingly protective ofconsumer privacy, with a trend toward requiring companies to establishprocedures to notify users of privacy and security policies, to obtain consentfrom users for collection and use of personal information, and to provide userswith the ability to access, correct and delete personal information stored bycompanies. Such privacy and data protection laws and regulations, and effortsto enforce such laws and regulations, may restrict our ability to collect, useor transfer demographic and personal information from users, which could becostly or harm our marketing efforts. Further, any violation of domestic orforeign privacy or data protection laws and regulations, including the nationaldo-not-call list, may subject us to fines, penalties and damages, which coulddecrease our revenue and profitability.

 

**Thesecurity risks of eCommerce may discourage customers from purchasing goods****from us.**

 

In order for the eCommercemarket to be successful, we and other market participants must be able totransmit confidential information securely over public networks. Third partiesmay have the technology or know-how to breach the security of customertransaction data. Any breach could cause customers to lose confidence in thesecurity of our websites and choose not to purchase from our websites. Ifsomeone is able to circumvent our security measures, he or she could destroy orsteal valuable information or disrupt our operations. Concerns about thesecurity and privacy of transactions over the Internet could inhibit the growthof Internet usage and eCommerce. Our security measures may not effectivelyprohibit others from obtaining improper access to our information. Any securitybreach could expose us to risks of loss, litigation and liability and couldseriously damage our reputation, disrupt our operations and require thedevotion of significant management, financial and other resources to remedy thebreach and comply with applicable notice and other legal requirements in connectiontherewith.

 

**Credit cardfraud could decrease our revenue and profitability.**

 

We do not carry insuranceagainst the risk of credit card fraud, so the failure to adequately controlfraudulent credit card transactions could reduce our revenues or increase ouroperating costs. We may in the future suffer losses as a result of ordersplaced with fraudulent credit card data even though the associated financialinstitution approved payment of the orders. Under current credit cardpractices, we may be liable for fraudulent credit card transactions. If we areunable to detect or control credit card fraud, or if credit card companiesrequire more burdensome terms or refuse to accept credit card charges from us,our revenue and profitability could decrease.

 

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**Ourfacilities and systems are vulnerable to natural disasters or othercatastrophic events.**

 

Our headquarters, customerservice center and the majority of our infrastructure, including computerservers, are located near Los Angeles, California in an area that issusceptible to earthquakes and other natural disasters. Our distributionfacilities, which are located in Memphis, Tennessee, Irvine, California,and Lewis Center, Ohio, house the product inventory from which a substantialmajority of our orders are shipped, and are also in areas that are susceptibleto natural disasters and extreme weather conditions such as earthquakes, fire,floods and major storms. Our operations in the Philippines are also in an areathat is periodically subject to extreme weather. A natural disaster or othercatastrophic event, such as an earthquake, fire, flood, severe storm, break-in,terrorist attack or other comparable events in the areas in which we operatecould cause interruptions or delays in our business and loss of data or renderus unable to accept and fulfill customer orders in a timely manner, or at all.Our systems, including our management information systems, websites andtelephone system, are not fully redundant, and we do not have redundantgeographic locations or earthquake insurance. Further, California periodicallyexperiences power outages as a result of insufficient electricity supplies.These outages may recur in the future and could disrupt our operations. Wecurrently have no formal disaster recovery plan and our business interruptioninsurance may not adequately compensate us for losses that may occur.

 

**We rely onindependent shipping companies to deliver the products we sell.**

 

We rely upon third party carriers,especially FedEx and UPS, for timely delivery of our product shipments. As aresult, we are subject to carrier disruptions and increased costs due tofactors that are beyond our control, including employee strikes, inclementweather and increased fuel costs. Any failure to deliver products to ourcustomers in a timely and accurate manner may damage our reputation and brandand could cause us to lose customers. We do not have a written long-termagreement with any of these third party carriers, and we cannot be sure thatthese relationships will continue on terms favorable to us, if at all. If ourrelationship with any of these third party carriers is terminated or impaired,or if any of these third parties are unable to deliver products for us, we wouldbe required to use alternative carriers for the shipment of products to ourcustomers. We may be unable to engage alternative carriers on a timely basis oron terms favorable to us, if at all. Potential adverse consequences include:

 

·        reduced visibility of order status and package tracking;

·        delays in order processing and product delivery;

·        increased cost of delivery, resulting in reduced margins; and

·        reduced shipment quality, which may result in damagedproducts and customer dissatisfaction.

 

Furthermore, shipping costsrepresent a significant operational expense for us. Any future increases inshipping rates could have a material adverse effect on our business, financialcondition and results of operations.

 

**We maynot be able to compete successfully against existing or future competitors,which include some of our largest vendors.**

 

The business of directmarketing of computer hardware, software, peripherals and electronics is highlycompetitive, based primarily on price, product availability, speed and accuracyof delivery, effectiveness of sales and marketing programs, creditavailability, ability to tailor specific solutions to customer needs, qualityand breadth of product lines and services, and availability of technical orproduct information. We compete with other direct marketers, including CDW, InsightEnterprises and PC Connection. In addition, we compete with large value addedresellers such as CompuCom Systems and World Wide Technology, and computerretail stores and resellers, including superstores such as Best Buy andStaples, certain hardware and software vendors such as Apple and Dell Computerthat sell or are increasing sales directly to end users, online resellers suchas Amazon.com, Newegg.com and TigerDirect.com, government resellers such asGTSI, CDWG and GovConnection, software focused resellers such as Soft Choiceand Software House International and other direct marketers and value addedresellers of hardware, software and computer-related and electronic products.In the direct marketing and Internet retail industries, barriers to entry arerelatively low and the risk of new competitors entering the market is high.Certain of our existing competitors have substantially greater financialresources than we have. There can be no assurance that we will be able tocontinue to compete effectively against existing competitors, consolidations ofcompetitors or new competitors that may enter the market.

 

Furthermore, the manner inwhich our products and services are distributed and sold is changing, and newmethods of sale and distribution have emerged and serve an increasingly largeportion of the market. Computer hardware and software vendors have sold, andmay intensify their efforts to sell, their products directly to end users. Fromtime to time, certain vendors, including Apple and HP, have instituted programsfor the direct sale of large quantities of hardware and software to certainlarge business accounts. These types of programs may continue to be developedand used 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.

 

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**Our successis tied to the continued use of the Internet and the adequacy of****the Internet infrastructure.**

 

The level of sales generatedfrom our websites, both in absolute terms and as a percentage of our net sales,continues to be material to our operating results. Our Internet sales aredependent upon customers continuing to use the Internet in addition totraditional means of commerce to purchase products and services. Widespread useof the Internet could decline as a result of disruptions, computer viruses,data security threats, privacy issues or other damage to Internet servers orusers’ computers. If consumer use of the Internet to purchase products orservices declines in any significant way, our business, financial condition andresults of operations could be adversely affected.

 

**The successof our Canadian call center is dependent, in part, on our receipt****of government labor credits.**

 

We maintain a Canadian callcenter serving the U.S. market, which has historically received the benefit oflabor credits under a Canadian government program. In 2007, we received aneligibility certificate to participate in the Investment Quebec Refundable TaxCredit for Major Employment Generating Projects (GPCE), replacing the priorgovernment subsidy program which ended at the end of 2007. In addition to othereligibility requirements under the replacement program, which extends throughfiscal year 2016, we will be required to maintain a minimum of 317 eligibleemployees employed by our subsidiary PC Mall Canada, Inc. in the provinceof Quebec at all times to remain eligible to apply annually for these laborcredits. The success of our Canadian call center is dependent, in part, on our receiptof the government labor credits we expect to receive. If we do not receivethese expected labor credits, or a sufficient portion of them, the costs ofoperating our Canadian call center may exceed the benefits it provides us andour operating results would likely suffer.

 

**We areexposed to the risks of business and other conditions in the Asia****Pacific region.**

 

All or portions of certainof the products we sell are produced, or have major components produced, in theAsia Pacific region. We engage in U.S. dollar denominated transactions withU.S. divisions and subsidiaries of companies located in that region as well. Asa result, we may be indirectly affected by risks associated with internationalevents, including economic and labor conditions, political instability, tariffsand taxes, availability of products, natural disasters and currencyfluctuations in the U.S. dollar versus the regional currencies. In the past,countries in the Asia Pacific region have experienced volatility in theircurrency, banking and equity markets. Future volatility could adversely affectthe supply and price of the products we sell and their components andultimately, our results of operations.

 

In 2005, we opened an officein the Philippines in connection with our cost reduction initiatives, and wemay increase these and other offshore operations in the future. Establishingoffshore operations may entail considerable expense before we realize costsavings, if any, from these initiatives. Our limited operating history in thePhilippines, as well as the risks associated with doing business overseas andinternational events, could prevent us from realizing the expected benefitsfrom our Philippines operations or any other offshore operations that weestablish.

 

**Theincreasing significance of our foreign operations exposes us to risks that****are beyond our control and could affect our ability tooperate successfully.**

 

In order to enhance thecost-effectiveness of our operations, we have increasingly sought to shiftportions of our operations to jurisdictions with lower cost structures thanthat available in the United States The transition of even a portion of ourbusiness operations to new facilities in a foreign country involves a number oflogistical and technical challenges that could result in operationalinterruptions, which could reduce our revenues and adversely affect ourbusiness. We may encounter complications associated with the set-up, migrationand operation of business systems and equipment in a new facility. This couldresult in disruptions that could damage our reputation and otherwise adverselyaffect our business and results of operations.

 

To the extent that we shiftany operations or labor offshore to jurisdictions with lower cost structures,we may experience challenges in effectively managing those operations as aresult of several factors, including time zone differences and regulatory,legal, cultural and logistical issues. Additionally, the relocation of laborresources may have a negative impact on our existing employees, which couldnegatively impact our operations. If we are unable to effectively manage ouroffshore personnel and any other offshore operations, our business and resultsof operations could be adversely affected.

 

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We cannot be certain thatany shifts in our operations to offshore jurisdictions will ultimately producethe expected cost savings. We cannot predict the extent of government support,availability of qualified workers, future labor rates, or monetary and economicconditions in any offshore locations where we may operate. Although some ofthese factors may influence our decision to establish or increase our offshoreoperations, there are inherent risks beyond our control, including:

 

·        political uncertainties;

·        wage inflation;

·        exposure to foreign currency fluctuations;

·        tariffs and other trade barriers; and

·        foreign regulatory restrictions and unexpected changes inregulatory environments.

 

We will likely be faced withcompetition in these offshore markets for qualified personnel, and we expectthis competition to increase as other companies expand their operationsoffshore. If the supply of such qualified personnel becomes limited due toincreased competition or otherwise, it could increase our costs and employeeturnover rates. One or more of these factors or other factors relating toforeign operations could result in increased operating expenses and make itmore difficult for us to manage our costs and operations, which could cause ouroperating results to decline and result in reduced revenues.

 

**Internationaloperations expose us to currency exchange risk and we cannot****predict the effect of future exchange ratefluctuations on our business and****operatingresults.**

 

We have operation centers inCanada and the Philippines that provide back-office administrative support andcustomer service support. Our international operations are sensitive tocurrency exchange risks. We have currency exposure arising from both sales andpurchases denominated in foreign currencies, as well as intercompanytransactions. Significant changes in exchange rates between foreign currenciesin which we transact business and the U.S. dollar may adversely affect ourresults of operations and financial condition. Historically, we have notentered into any hedging activities, and, to the extent that we continue not todo so in the future, we may be vulnerable to the effects of currencyexchange-rate fluctuations.

 

In addition, ourinternational operations also expose us to currency fluctuations as wetranslate the financial statements of our foreign operations to the U.S.dollar. Although the effect of currency fluctuations on our financialstatements has not generally been material in the past, there can be no guaranteethat the effect of currency fluctuations will not be material in the future.

 

**We aresubject to risks associated with consolidation****within our industry.**

 

Many computer resellers areconsolidating operations and acquiring or merging with other resellers, directmarketers and providers of information technology solutions to achieveeconomies of scale, expanded product and service offerings, and increasedefficiency. The current industry reconfiguration and the trend towardsconsolidation could cause the industry to become even more competitive, furtherincrease pricing pressures and make it more difficult for us to maintain ouroperating margins or to increase or maintain the same level of net sales orgross profit. Declining prices, resulting in part from technological changes,may require us to sell a greater number of products to achieve the same levelof net sales and gross profit. Such a trend could make it more difficult for usto continue to increase our net sales and earnings growth. In addition, growthin the information technology market has slowed. If the growth rate of theinformation technology market were to further decrease, our business, financialcondition and operating results could be materially adversely affected.

 

**Our successis in part dependent on the accuracy and proper utilization of our****management information systems.**

 

Our ability to analyze dataderived from our management information (ERP) systems, or our telephone system,to increase 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 these systems. We regularlyupgrade our system hardware and software to better meet the informationrequirements of our users, and believe that to remain competitive, it will benecessary for us to upgrade our systems on a regular basis in the future. Wecurrently operate our management information systems using an HP3000 EnterpriseSystem and are in the process of implementing a substantial upgrade to our ERPsystem. This implementation is complex, in part, because of the wide range ofprocesses and the multiple legacy systems that must be integrated across ourbusiness. We have created a project plan that we believe provides a reasonableallocation of resources to the project; however, execution of the plan, or adivergence from it, 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 systems, including those caused bynatural disasters, could have a material adverse effect on our business,financial condition and results of operations.

 

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**If we areunable to provide satisfactory customer service, we could lose****customers or fail to attract new customers.**

 

Our ability to providesatisfactory levels of customer service depends, to a large degree, on theefficient and uninterrupted operation of our customer service operations. Anymaterial disruption or slowdown in our order processing systems resulting fromlabor disputes, telephone or Internet failures, upgrading our managementinformation systems, power or service outages, natural disasters or otherevents could make it difficult or impossible to provide adequate customer serviceand support. Furthermore, we may be unable to attract and retain adequatenumbers of competent customer service representatives and relationship managersfor our business 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 stockprice may be volatile.**

 

We believe that certainfactors, such as sales of our common stock into the market by existingstockholders, fluctuations in our quarterly operating results, changes inmarket conditions affecting stocks of computer hardware and softwaremanufacturers and resellers generally and companies in the Internet andeCommerce industries in particular, could cause the market price of our commonstock to fluctuate substantially. Other factors that could affect our stockprice include, but are not limited to, the following:

 

·             failure to meet investors’expectations regarding our operating performance;

·             changes in securities analysts’recommendations or estimates of our financial performance;

·             publication of researchreports by analysts;

·             changes in market valuationsof similar companies;

·             announcements by us or ourcompetitors of significant contracts, acquisitions, commercial relationships,joint ventures or capital commitments;

·             actual or anticipatedfluctuations in our operating results;

·             litigation developments; and

·             general economic and marketconditions or other economic factors unrelated to our performance, including disruptionsin the capital and credit markets.

 

The stock market in general,and the stocks of computer and software resellers, and companies in theInternet and electronic commerce industries in particular, and other technologyor related stocks, have in the past experienced extreme price and volumefluctuations which have been unrelated to corporate operating performance. Suchmarket volatility may adversely affect the market price of our common stock. Inthe past, following periods of volatility in the market price of a publiccompany’s securities, securities class action litigation has often beeninstituted against that company. Such litigation, if asserted against us, couldresult in substantial costs to us and cause a likely diversion of ourmanagement’s attention from the operations of our company.

 

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**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

**IssuerPurchases of Equity Securities**

 

In October 2008, our Board of Directors approved adiscretionary common stock repurchase program for up to $10 million of ourcommon stock in aggregate with all other repurchases made under any repurchaseprograms following the date of such Board of Directors’ approval. Thisrepurchase 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.

 

The repurchased shares areheld as treasury stock. A summary of the repurchase activity for the threemonths ended September 30, 2010 is as follows (dollars in thousands,except share and per 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** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| July 1, 2010 to July 31, 2010           |       | —                                               |       | —                                           |       | —                                                                                                                       |       | $                                                                                                                          | 4,207      |   |
| August 1, 2010 to August 30, 2010       |       | 62,703                                               |       | $                                                | 4.11       |                                                                                                                         | 62,703     |                                                                                                                       | 3,947      |   |
| September 1, 2010 to September 30, 2010 |       | 25,110                                               |       | 4.30                                             |       | 25,110                                                                                                                       |       | 3,838                                                                                                                      |       |
| Total                                             |       | 87,813                                               |       | 4.16                                             |       | 87,813                                                                                                                       |       |                                                                                                                       |       |
|                                                   |            |                                                      |            |                                                  |            |                                                                                                                              |            |                                                                                                                            |            |  |  |

 

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**ITEM 6.EXHIBITS**

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                     |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                | ** ** | ** **                                                                                                                                                          |
| 10.1*                     |       | Summary of Executive Bonus  Plan (adopted August 18, 2010)                                                                                                     |
|                      |       |                                                                                                                                                                |
| 31.1                      |       | Certification of the Chief  Executive Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                       |
|                      |       |                                                                                                                                                                |
| 31.2                      |       | Certification of the Chief  Financial Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                       |
|                      |       |                                                                                                                                                                |
| 32.1                      |       | Certification of the Chief  Executive Officer of Registrant furnished 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 Registrant furnished pursuant to 18 U.S.C. 1350, as  adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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*  Management contract, or compensatory plan orarrangement.

 

***

 

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**PC MALL, INC.**

 

**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                         | PC MALL, INC. |
|------------------------------|--------------------|
|                         | (Registrant)       |
|                         |               |
|                         |               |
| Date: November 9,  2010 | By:                | /s/ Brandon H. LaVerne |
|                         |               | Brandon H. LaVerne |
|                         |               | Chief Financial Officer |

 

***

 

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**PC MALL, INC.**

 

**EXHIBIT INDEX**

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                     |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                | ** ** | ** **                                                                                                                                                          |
| 10.1*                     |       | Summary of Executive Bonus  Plan (adopted August 18, 2010)                                                                                                     |
|                      |       |                                                                                                                                                                |
| 31.1                      |       | Certification of the Chief  Executive Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                       |
|                      |       |                                                                                                                                                                |
| 31.2                      |       | Certification of the Chief  Financial Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                       |
|                      |       |                                                                                                                                                                |
| 32.1                      |       | Certification of the Chief  Executive Officer of Registrant furnished 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 Registrant furnished pursuant to 18 U.S.C. 1350, as  adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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*  Management contract, or compensatory plan orarrangement.

 

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