**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

##### **FORM10-Q**

 

| R                                                                                                                                                                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                          |       |                                                                                          |
| For the quarterly  period ended September 30, 2007                                                                                                                                            |
|                                                                                                                                                                                          |       |                                                                                          |
| OR                                                                                                                                                                                            |
|                                                                                                                                                                                          |       |                                                                                          |
| o                                                                                                                                                                                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                          |       |                                                                                          |
| For the transition  period from             to              |

 

Commission File Number:0-25790

** **

**PC MALL,INC.**

**(Exactname of registrant as specified in its charter)**

 

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

 

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

**Torrance,CA 90504**

**(Addressof principal executive offices)**

 

**(310)354-5600**

**(Registrant’stelephone 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 the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.

 

Yes  R    No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer  o |   | Accelerated filer  o |   | Non-accelerated filer  R |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes  o    No  R

 

As of November 9, 2007,the registrant had 13,381,012 shares of common stock outstanding.

 

 

**PC MALL, INC.**

** **

**TABLE OFCONTENTS**

 
|                                                                                                 | **Page**                                                                                                              |
|------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
| PART I -  FINANCIAL INFORMATION (unaudited)                                                          |                                                                                                                  |
|                                                                                                 |                                                                                                                  |
| Item 1.  Financial Statements                                                                        |                                                                                                                  |
|                                                                                                 |                                                                                                                  |
|                                                                                                 | Consolidated  Balance Sheets as of September 30, 2007 and December 31, 2006                                           | 2 |
|                                                                                                 |                                                                                                                  |   |
|                                                                                                 | Consolidated Statements of  Operations for the Three and Nine Months Ended September 30, 2007 and  September 30, 2006 | 3 |
|                                                                                                 |                                                                                                                  |   |
|                                                                                                 | Consolidated  Statement of Stockholders’ Equity for the Nine Months Ended September 30,  2007                    | 4 |
|                                                                                                 |                                                                                                                  |   |
|                                                                                                 | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2007 and  September 30, 2006           | 5 |
|                                                                                                 |                                                                                                                  |   |
|                                                                                                 | Notes to  the Consolidated Financial Statements                                                                       | 6 |
|                                                                                                 |                                                                                                                  |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 15                                                                                                                    |
|                                                                                                 |                                                                                                                  |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                  | 28                                                                                                                    |
|                                                                                                 |                                                                                                                  |
| Item 4T.  Controls and Procedures                                                                    | 28                                                                                                                    |
|                                                                                                 |                                                                                                                  |
| PART II - OTHER  INFORMATION (unaudited)                                                             |                                                                                                                  |
|                                                                                                 |                                                                                                                  |
| Item 1. Legal  Proceedings                                                                           | 29                                                                                                                    |
|                                                                                                 |                                                                                                                  |
| Item  1A. Risk Factors                                                                               | 29                                                                                                                    |
|                                                                                                 |                                                                                                                  |
| Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds                                 | 45                                                                                                                    |
|                                                                                                 |                                                                                                                  |
| Item 4.  Submission of Matters to a Vote of Security Holders                                         | 45                                                                                                                    |
|                                                                                                 |                                                                                                                  |
| Item  6. Exhibits                                                                                    | 46                                                                                                                    |
|                                                                                                 |                                                                                                                  |
| Signature                                                                                            | 47                                                                                                                    |

 

1

 

**PC MALL,INC.**

 

**PARTI - FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

 

**CONSOLIDATEDBALANCE SHEETS**

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

 
| ** **                                                                                                                                                              | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                              | ** ** |
| Current assets:                                                                                                                                                         |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                               |       | $                            | 9,799      |                        | $          | 5,836 |   |
| Accounts receivable, net of allowances of $4,583 and  $4,630                                                                                                            |       | 160,524                      |       | 114,184                     |       |
| Inventories, net                                                                                                                                                        |       | 59,711                       |       | 51,268                      |       |
| Prepaid expenses and other current assets                                                                                                                               |       | 9,322                        |       | 8,497                       |       |
| Deferred income taxes                                                                                                                                                   |       | 4,564                        |       | 4,594                       |       |
| Total current assets                                                                                                                                                    |       | 243,920                      |       | 184,379                     |       |
| Property and equipment, net                                                                                                                                             |       | 9,255                        |       | 8,055                       |       |
| Deferred income taxes                                                                                                                                                   |       | 1,034                        |       | 6,248                       |       |
| Goodwill                                                                                                                                                                |       | 32,542                       |       | 3,525                       |       |
| Intangible assets, net                                                                                                                                                  |       | 5,538                        |       | 931                         |       |
| Other assets                                                                                                                                                            |       | 480                          |       | 429                         |       |
| Total assets                                                                                                                                                            |       | $                            | 292,769    |                        | $          | 203,567 |   |
| **LIABILITIES, REDEEMABLE COMMON  STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                 | ** ** |
| Current liabilities:                                                                                                                                                    |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                        |       | $                            | 110,452    |                        | $          | 75,837 |   |
| Accrued expenses and other current liabilities                                                                                                                          |       | 23,661                       |       | 20,215                      |       |
| Deferred revenue                                                                                                                                                        |       | 16,243                       |       | 11,964                      |       |
| Line of credit                                                                                                                                                          |       | 58,915                       |       | 32,477                      |       |
| Note payable – current                                                                                                                                             |       | 775                          |       | 500                         |       |
| Total current liabilities                                                                                                                                               |       | 210,046                      |       | 140,993                     |       |
| Note payable and other long-term liabilities                                                                                                                            |       | 4,873                        |       | 1,750                       |       |
| Total liabilities                                                                                                                                                       |       | 214,919                      |       | 142,743                     |       |
| Commitments and contingencies (Note 10)                                                                                                                                 |       |                         |       |                        |       |
| Redeemable common stock, $0.001 par value, 511,503  shares issued and outstanding (Note 3)                                                                              |       | 6,051                        |       | —                      |       |
| 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; 13,099,532 and 12,648,720 shares issued; and 12,682,854 and  12,354,520 shares outstanding, respectively |       | 14                           |       | 13                          |       |
| Additional paid-in capital                                                                                                                                              |       | 89,405                       |       | 87,465                      |       |
| Treasury stock, at cost: 416,678 shares and 294,200  shares, respectively                                                                                               |       | (1,015                       | )          | (1,015                      | )          |
| Accumulated other comprehensive income                                                                                                                                  |       | 1,430                        |       | 241                         |       |
| Accumulated deficit                                                                                                                                                     |       | (18,035                      | )          | (25,880                     | )          |
| Total stockholders’ equity                                                                                                                                         |       | 71,799                       |       | 60,824                      |       |
| Total liabilities, redeemable common stock and  stockholders’ equity                                                                                               |       | $                            | 292,769    |                        | $          | 203,567 |   |

 

See Notes to theConsolidated Financial Statements.

 

2

 

**PC MALL, INC.**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                             | ** ** | **Three Months Ended**

**September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                                 | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                              |       | $                                                        | 287,688    |                                                | $          | 242,171 |   | $ | 807,426 |   | $ | 710,512 |   |
| Cost of goods sold                                     |       | 253,509                                                  |       | 210,615                                             |       | 707,503 |   | 620,533 |   |
| Gross profit                                           |       | 34,179                                                   |       | 31,556                                              |       | 99,923 |   | 89,979 |   |
| Selling, general and administrative expenses           |       | 28,413                                                   |       | 27,480                                              |       | 84,315 |   | 83,339 |   |
| Operating profit                                       |       | 5,766                                                    |       | 4,076                                               |       | 15,608 |   | 6,640 |   |
| Interest expense, net                                  |       | 800                                                      |       | 912                                                 |       | 2,530 |   | 2,912 |   |
| Income before income taxes                             |       | 4,966                                                    |       | 3,164                                               |       | 13,078 |   | 3,728 |   |
| Income tax expense                                     |       | 1,988                                                    |       | 1,256                                               |       | 5,233 |   | 1,480 |   |
| Net income                                             |       | $                                                        | 2,978      |                                                | $          | 1,908 |   | $ | 7,845 |   | $ | 2,248 |   |
| **Basic and Diluted Earnings Per Common Share**        |       |                                                     |       |                                                |       |   |   |   |   |
| Basic                                                  |       | $                                                        | 0.24       |                                                | $          | 0.16 |   | $ | 0.63 |   | $ | 0.19 |   |
| Diluted                                                |       | 0.22                                                     |       | 0.15                                                |       | 0.58 |   | 0.18 |   |
| Weighted average number of common shares  outstanding: |       |                                                     |       |                                                |       |   |   |   |   |
| Basic                                                  |       | 12,606                                                   |       | 12,214                                              |       | 12,473 |   | 11,978 |   |
| Diluted                                                |       | 13,715                                                   |       | 12,927                                              |       | 13,604 |   | 12,842 |   |

 

See Notes to theConsolidated Financial Statements.

 

3

 

**PC MALL, INC.**

** **

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**(unaudited,in thousands)**

 

 
| ** **                       | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **                        | ** ** | **Accumulated**     | ** ** | ** **                       | ** ** | ** **               | ** ** |
|----------------------------------|------------|-----------------------|------------|------------|------------|-----------------------------------|------------|---------------------|------------|----------------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **Outstanding**       | ** ** | **Amount** | ** ** | **Additional  Paid-in-  Capital** | ** ** | **Treasury  Stock** | ** ** | **Other  Comprehensive  Income** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
| Balance at December 31, 2006     |       | 12,354                |       | $          | 13         |                              | $          | 87,465              |       | $                                | (1,015     | )                        | $          | 241 |   | $ | (25,880 | ) | $ | 60,824 |   |
| SARCOM acquisition (Note 3)      |       | —                |       | —     |       | 136                               |       | —              |       | —                           |       |                     |       | 136 |   |
| Stock option exercises           |       | 329                   |       | 1          |       | 855                               |       | —              |       | —                           |       |                     |       | 856 |   |
| Stock-based compensation expense |       | —                |       | —     |       | 949                               |       | —              |       | —                           |       | —                   |       | 949 |   |
|  Subtotal                   |       | —                |       | —     |       | —                            |       | —              |       | —                           |       | —                   |       | 62,765 |   |
| Net income                       |       | —                |       | —     |       | —                            |       | —              |       | —                           |       | 7,845                    |       | 7,845 |   |
| Translation adjustments          |       | —                |       | —     |       | —                            |       | —              |       | 1,189                            |       | —                   |       | 1,189 |   |
| Comprehensive income             |       | —                |       | —     |       | —                            |       | —              |       | —                           |       | —                   |       | 9,034 |   |
| Balance at September 30, 2007    |       | 12,683                |       | $          | 14         |                              | $          | 89,405              |       | $                                | (1,015     | )                        | $          | 1,430 |   | $ | (18,035 | ) | $ | 71,799 |   |

 

See Notes to theConsolidated Financial Statements.

 

4

 

**PC MALL, INC.**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited,in thousands)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Cash Flows From Operating Activities**                                           |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 7,845      |   | $ | 2,248 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                      |       | 2,962                                               |       | 3,071 |   |
| Provision for deferred income taxes                                                |       | 5,233                                               |       | 1,480 |   |
| Stock-based compensation                                                           |       | 949                                                 |       | 1,171 |   |
| Loss on disposal of fixed assets                                                   |       | 49                                                  |       | — |   |
| Change in operating assets and liabilities:                                        |       |                                                |       |   |   |
| Accounts receivable                                                                |       | (15,190                                             | )          | (13,737 | ) |
| Inventories                                                                        |       | (4,028                                              | )          | 24,450 |   |
| Prepaid expenses and other current assets                                          |       | 43                                                  |       | (754 | ) |
| Other assets                                                                       |       | 499                                                 |       | 14 |   |
| Accounts payable                                                                   |       | 11,595                                              |       | 12,169 |   |
| Accrued expenses and other current liabilities                                     |       | (2,751                                              | )          | 655 |   |
| Deferred revenue                                                                   |       | 1,940                                               |       | 2,474 |   |
| Total adjustments                                                                  |       | 1,301                                               |       | 30,993 |   |
| Net cash provided by operating activities                                          |       | 9,146                                               |       | 33,241 |   |
| **Cash Flows From Investing Activities**                                           |       |                                                |       |   |   |
| Purchases of property and equipment                                                |       | (1,331                                              | )          | (2,687 | ) |
| Acquisition of SARCOM, net of cash acquired                                        |       | (47,650                                             | )          | — |   |
| Acquisition of GMRI’s products business                                       |       | —                                              |       | (3,359 | ) |
| Net cash used in investing activities                                              |       | (48,981                                             | )          | (6,046 | ) |
| **Cash Flows From Financing Activities**                                           |       |                                                |       |   |   |
| Borrowings (repayments) under note payable                                         |       | 3,175                                               |       | (375 | ) |
| Net borrowings (payments) under line of credit                                     |       | 26,438                                              |       | (29,732 | ) |
| Change in book overdraft                                                           |       | 12,533                                              |       | 2,659 |   |
| Payments of obligations under capital lease                                        |       | (118                                                | )          | — |   |
| Payments for deferred financing costs                                              |       | (275                                                | )          | — |   |
| Proceeds from stock issued under stock option plans                                |       | 856                                                 |       | 545 |   |
| Net cash provided by (used in) financing activities                                |       | 42,609                                              |       | (26,903 | ) |
| Effect of foreign currency on cash flow                                            |       | 1,189                                               |       | 291 |   |
| Net increase in cash and cash equivalents                                          |       | 3,963                                               |       | 583 |   |
| Cash and cash equivalents at beginning of the period                               |       | 5,836                                               |       | 6,289 |   |
| Cash and cash equivalents at end of the period                                     |       | $                                                   | 9,799      |   | $ | 6,872 |   |
| **Supplemental Cash Flow Information**                                             |       |                                                |       |   |   |
| Interest paid                                                                      |       | $                                                   | 2,460      |   | $ | 2,472 |   |
| Income taxes paid                                                                  |       | 2,850                                               |       | 99 |   |
| **Supplemental Non-Cash Investing Activity (Note  3)**                             |       |                                                |       |   |   |
| Goodwill related to acquisition of GMRI’s products  business                  |       | $                                                   | 389        |   | $ | — |   |
| Sarcom acquisition related:                                                        |       |                                                |       |   |   |
| Fair value of assets acquired                                                      |       | $                                                   | 73,147     |   | $ | 3,996 |   |
| Cash paid                                                                          |       | (48,220                                             | )          | (3,363 | )  |
| Value of common stock issued (including redeemable  common stock)                  |       | (6,188                                              | )          | — |   |
| Liabilities assumed                                                                |       | $                                                   | 18,739     |   | $ | 633 |   |

 

See Notes to theConsolidated Financial Statements.

 

5

** **

**PC MALL, INC.**

** **

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1. Basisof Presentation**

 

PC Mall, Inc.,together with its wholly-owned subsidiaries (collectively referred to as “we”or “us”), founded in 1987, is a rapid response direct marketer of computerhardware, software, peripheral, electronics, and other consumer products andservices. We offer products and services to businesses, government andeducational institutions, as well as individual consumers, through dedicatedoutbound and inbound telemarketing account executives, the Internet, directmarketing techniques, direct response catalogs, a direct sales force and threeretail showrooms. We offer a broad selection of products through ourdistinctive full-color catalogs under the PC Mall, MacMall and PC Mall Govbrands, our websites pcmall.com, macmall.com, pcmallgov.com, gmri.com,wareforce.com, sarcom.com and onsale.com, and other promotional materials.

 

We have preparedthe unaudited consolidated financial statements included herein pursuant to therules and regulations of the Securities and Exchange Commission (“SEC”).Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations. In the opinion of management, all adjustments,consisting only of normal recurring items which are necessary for a fairpresentation, have been included. The results for interim periods are notnecessarily indicative of the results that may be expected for any otherinterim period or for the full year. These unaudited consolidated financialstatements should be read in conjunction with the audited consolidated financialstatements and the notes thereto included in our Annual Report on Form 10-K forthe year ended December 31, 2006 filed with the SEC on March 12, 2007, asamended on April 30, 2007, our Quarterly Reports on Form 10-Q for the quartersended March 31, 2007 and June 30, 2007 filed with the SEC on May 15, 2007 andAugust 14, 2007 and all of our other periodic filings, including CurrentReports on Form 8-K, filed with the SEC from the end of our prior fiscal yearthrough the date of this report.

 

**2.Summary of Significant Accounting Policies**

 

*IncomeTaxes*

 

On January 1,2007, we adopted Financial Accounting Standards Board (“FASB”) InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASBStatement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. Only tax positions that meet the more-likely-than-not recognitionthreshold at the effective date may be recognized or continue to be recognizedupon adoption of FIN 48. The cumulative effect of applying the provisions ofFIN 48, if any, is to be reported as an adjustment to the opening balance ofretained earnings (or other appropriate components of equity or net assets inthe statement of financial position) for that fiscal year. Our adoption of FIN48 did not have an impact on our consolidated financial statements. See Note 6below for more information.

 

*RecentAccounting Pronouncements*

 

In February 2007,the FASB issued Statement No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS159”), which permits entities to choose to measure many financial instrumentsand certain other assets and liabilities at fair value on aninstrument-by-instrument basis (the fair value option). Unrealized gains andlosses on items for which the fair value option has been elected are to berecognized in earnings at each subsequent reporting date. SFAS 159 is effectivefor fiscal years beginning after November 15, 2007. We believe that theadoption of SFAS 159 will not have a significant impact on our consolidatedfinancial statements.

 

6

 

In September 2006,the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”),which clarifies the definition of fair value, establishes a framework formeasuring fair value and expands the disclosures about fair value measurements.SFAS 157 is effective for fiscal years beginning after November 15, 2007 andinterim periods within those fiscal years. We believe that the adoption of SFAS157 will not have a significant impact on our consolidated financialstatements.

 

In June 2006, theFASB ratified EITF Issue No. 06-03, “How Sales Taxes Collected from Customersand Remitted to Governmental Authorities Should Be Presented in the IncomeStatement (That Is, Gross Versus Net Presentation)” (“EITF 06-03”). EITF 06-03provides that any tax assessed by a governmental authority that is directlyimposed on a revenue-producing transaction between a seller and a customer mayinclude, but is not limited to, sales, use, value added, and some excise taxes.EITF 06-03 also provides that the presentation of such taxes on either a gross(included in revenues and costs) or a net (excluded from revenues) basis is anaccounting policy decision that a company should make and disclose in itsfinancial statements, and disclose any such taxes that are reported on a grossbasis, if material, for each period for which an income statement is presented.EITF 06-03 is effective for financial statements for interim and annualreporting periods beginning after December 15, 2006. We adopted EITF 06-03 onJanuary 1, 2007, and have concluded that we will continue to report such taxeson a net basis in our consolidated statements of operations. As such, ouradoption of EITF 06-03 did not have a significant impact on our consolidatedfinancial statements.

 

**3.Acquisitions**

 

*SARCOM*

 

On September 17, 2007, we completed the acquisition ofSARCOM, Inc. (“SARCOM”), a provider of advanced technology solutions, pursuantto the terms of an Agreement and Plan of Merger, dated as of August 17, 2007for an initial total purchase price of approximately $55.7 million, includingtransaction costs. SARCOM, headquartered in Columbus, Ohio, has served themid-market and enterprise market for over 20 years and currently specializes inproviding enterprise hardware and software solutions, procurement solutions anda full range of professional and managed services. Our acquisition of SARCOMwas motivated in part by our desire to enhance our capabilities as a resellerof advanced technology product solutions and services, consistent with ourcommitment to grow our business in part through an effort to expand our shareof our customers’ IT spending. The results of SARCOM are included in our Corebusiness segment from the closing date of the acquisition.

 

The total purchase price was subject to a post-closingdebt and net asset value adjustment (see below for a discussion of the finalnet asset value adjustment on November 6, 2007). The aggregate purchase pricepaid at closing included a total of $48.2 million in cash and approximately$7.5 million in shares of our common stock, the number of shares being based onthe average closing price of our stock on the Nasdaq Global Market for the 20consecutive trading days immediately preceding the acquisition closing date.Under that formula, at closing, we issued an aggregate of 633,981 shares of ourcommon stock to the sellers as payment of the stock component of the purchaseprice. We financed the cash component of the purchase price through borrowingsunder our existing credit facility.

 

**On November 6, 2007, we and thesellers agreed on a final net asset value adjustment, resulting in a decreasein the purchase price by approximately $2.1 million, which was to be repaid, atthe sellers’ option, in either cash or shares of our common stock based on aper share price determined by the average closing price for the 20 consecutivetrading days ending on the date of final determination of the net asset valueadjustment. As a result, in settlement of the $2.1 million net asset valueadjustment, the sellers tendered back to us a total of 122,478 shares of ourcommon stock previously issued to them, which has been recorded as a reductionof the purchase price as of September 30, 2007.**

** **

**In determining the purchase pricefor accounting purposes, we measured the fair value of the shares issued inaccordance with EITF No. 99-12, “Determination of the Measurement Date for theMarket Price of Acquirer Securities Issued in a Purchase Business Combination.”We used an average closing price of our common stock over the four days priorto the close of the SARCOM acquisition, resulting in a total fair value ofapproximately $6.2 million for the 511,503 shares of common stock ultimatelyissued. As of September 30, 2007, the adjusted total purchase price foraccounting purposes, which includes the valuation of the net stock paymentunder EITF No. 99-12, was $59.4 million.**

** **

**7**

** **

**Pursuant to a registration rightsagreement entered into with each of the recipients of the shares of our commonstock issued in the SARCOM acquisition, if we were unable to file, by October17, 2007, a registration statement with the SEC covering the sale of the sharesheld by each of such recipients, the recipients of such shares would then havethe right to require us to repurchase all, or any portion, of the shares heldby the recipients at the same formula price at which the original number ofshares was determined. As such, we have treated the shares issued as redeemablecommon stock and classified the redemption amount outside of the stockholders’equity section on our Consolidated Balance Sheet as of September 30, 2007. Wefiled the registration statement on October 17, 2007 and as a result, thecommon stock is no longer considered redeemable and will be reclassified toequity in the fourth quarter. At September 30, 2007, the excess of accountingvalue over the redemption amount of the shares of approximately $136,000 wasincluded in additional paid-in capital.**

** **

As of September30, 2007, based on a preliminary purchase price allocation, which is subject tofurther review, we recorded the following assets and liabilities in our Corebusiness segment based on their estimated fair values at the date ofacquisition (in thousands):

 
| Total purchase price, adjusted |   | $      | 54,408  |   |
|--------------------------------|--------|--------|---------|--------|
|                           |   |   |    |
| Cash                           |   | $      | 571     |   |
| Accounts receivable            |   | 27,728 |    |
| Inventory                      |   | 4,415  |    |
| Other accounts receivable      |   | 3,172  |    |
| Property and equipment, net    |   | 2,502  |    |
| Other assets                   |   | 1,131  |    |
| Intangible assets:             |   |   |    |
| Customer relationships         |   | $      | 4,310   |   |
| Trade names                    |   | 400    |    |
| Software licenses              |   | 250    |    |
| Non-compete agreements         |   | 40     |    |
| Total intangible assets        |   | 5,000  |    |
| Total assets acquired          |   | $      | 44,519  |   |
|                           |   |   |    |
| Accounts payable               |   | $      | (10,487 | )      |
| Accrued liabilities            |   | (5,914 | )       |
| Deferred revenue               |   | (2,338 | )       |
| Total liabilities assumed      |   | $      | (18,739 | )      |
|                           |   |   |    |
| Total allocated to goodwill    |   | $      | 28,628  |   |

 

The followingtable sets forth our results of operations on a pro forma basis as though theSARCOM acquisition had been completed as of the beginning of the periodspresented (in thousands):

 
| ** **                                            | ** ** | **Three Months Ended  September 30,** | ** **    | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|---------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                             | ** **    | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                        |       | $                                                    |  334,339 |                                                | $          |  305,169 |   | $ |  989,995 |   | $ |  881,495 |   |
| Operating profit                                      |       | 5,449                                                |          | 5,353                                               |       | 17,973 |   | 8,672 |   |
| Net income                                            |       | 2,250                                                |          | 2,096                                               |       | 7,590 |   | 1,863 |   |
| **Basic and Diluted Earnings Per Common Share**       |       |                                                 |          |                                                |       |   |   |   |   |
| Basic                                                 |       | $                                                    | 0.18          |                                                | $          | 0.17 |   | $ | 0.59 |   | $ | 0.15 |   |
| Diluted                                               |       | 0.17                                                 |          | 0.16                                                |       | 0.54 |   | 0.14 |   |
| Weighted average number of common shares outstanding: |       |                                                 |          |                                                |       |   |   |   |   |
| Basic                                                 |       | 12,521                                               |          | 12,214                                              |       | 12,956 |   | 12,490 |   |
| Diluted                                               |       | 13,629                                               |          | 12,927                                              |       | 14,087 |   | 13,353 |   |

 

8

 

*GMRI*

 

On September 7,2006, PC Mall Gov, Inc. (“PC Mall Gov”), our wholly-owned subsidiary, acquiredthe products business of Government Micro Resources, Inc. (“GMRI”) pursuant toan Asset Purchase Agreement for approximately $3.4 million in cash, includingtransaction costs. The business includes assets of GMRI’s former productsbusiness, which include the GMRI trade names, contracts and the relatedemployees, among other items.

 

Following thecompletion of the GMRI acquisition, during the nine months ended September 30,2007, we completed our review of whether certain liabilities existed at the timeof the acquisition. As a result of our review, we recorded an entry to adjustour preliminary purchase price allocation to increase the amount allocated togoodwill by approximately $0.4 million relating to net liabilities that weconcluded existed at the time of the acquisition.

 

Based on ourpurchase price allocation, we recorded the following assets and liabilities,including the $0.4 million discussed above, at the Core business segment basedon their estimated fair values at the date of acquisition (in thousands):

 
| Other receivable        |   | $      | 250    |   |
|-------------------------|--------|--------|--------|--------|
|                    |   |   |   |
| Goodwill                |   | $      | 2,509  |   |
|                    |   |   |   |
| Intangible assets:      |   |   |   |
| Product backlog         |   | $      | 567    |   |
| Maintenance contracts   |   | 143    |   |
| Trade names             |   | 240    |   |
| Software licenses       |   | 218    |   |
| Non-compete agreements  |   | 20     |   |
| Total intangible assets |   | $      | 1,188  |   |
|                    |   |   |   |
| Furniture and equipment |   | $      | 49     |   |
|                    |   |   |   |
| Total assets acquired   |   | $      | 3,996  |   |
|                    |   |   |   |
| Liabilities:            |   |   |   |
| Accrued liabilities     |   | $      | 633    |   |
|                    |   |   |   |
| Net assets acquired     |   | $      | 3,363  |   |

 

We recordedapproximately $71,000 and $237,000 of amortization expense during the three andnine months ended September 30, 2007 related to the estimated $1.2 million ofintangible assets acquired in the GMRI transaction. For additional informationon goodwill and intangible assets, see Note 4.

 

Following thecompletion of the acquisition, the results of the acquired products business ofGMRI have been included in our Core business segment.

 

**4.Goodwill and Intangible Assets**

 

*Goodwill*

 

The change in thecarrying amounts of goodwill, all of which is held at the Core business segment,was as follows (in thousands):

 
| ** **                                                           | ** ** | **Goodwill** | ** ** |
|----------------------------------------------------------------------|------------|--------------|------------|
| Balance at December 31, 2006                                         |       | $            | 3,525      |   |
| Acquisition of SARCOM                                                |       | 28,628       |       |
| Adjustment relating to purchase accounting for the  GMRI acquisition |       | 389          |       |
| Balance at September 30, 2007                                        |       | $            | 32,542     |   |

 

9

 

*Intangible Assets*

* *

The followingtable sets forth the amounts recorded for intangible assets as of the periodspresented (in thousands), including intangibles related to our acquisition ofSARCOM in September 2007. The estimated fair values of such intangiblesresulting from the SARCOM acquisition are based on a preliminary purchase priceallocation, as more fully described in Note 3 above, and is subject to change:

 
| ** **                   | ** ** | **Weighted**                                             | ** ** | **At September 30, 2007** | ** ** | **At December 31, 2006** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                   | ** ** | **Average  Estimated   Useful Lives  (years)** | ** ** | **Gross  Amount**                        | ** ** | **Accumulated  Amortization**           | ** ** | **Net  Amount** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Amount** | ** ** |
| Patent, trademark & URLs |       | 7                                                        |       | $                                        | 1,318      |                                    | $          | 562 |   | $ | 756 |   | $ | 922 |   | $ | 504 |   | $ | 418 |   |
| Customer relationships       |       | 5                                                        |       | 4,865                                    |       | 596                                     |       | 4,269 |   | 555 |   | 499 |   | 55 |   |
| Product backlog              |       | Various (1                                               | )          | 567                                      |       | 522                                     |       | 45 |   | 581 |   | 422 |   | 160 |   |
| Software licenses            |       | 3                                                        |       | 468                                      |       | 81                                      |       | 387 |   | 218 |   | 24 |   | 194 |   |
| Maintenance contracts        |       | Various (1                                               | )          | 143                                      |       | 125                                     |       | 18 |   | 143 |   | 84 |   | 59 |   |
| Non-compete agreements       |       | 5                                                        |       | 158                                      |       | 97                                      |       | 61 |   | 118 |   | 80 |   | 38 |   |
| Other                        |       | 5                                                        |       | 32                                       |       | 30                                      |       | 2 |   | 32 |   | 25 |   | 7 |   |
| Total intangible assets      |       |                                                     |       | $                                        | 7,551      |                                    | $          | 2,013 |   | $ | 5,538 |   | $ | 2,569 |   | $ | 1,638 |   | $ | 931 |   |

 

----

(1)       Amortization of theseintangible assets which relate to customer orders is based on actual shipmentsof goods or performance of service.

 

Amortizationexpense for intangible assets was approximately $131,000 and approximately$270,000 for the three months ended September 30, 2007 and 2006 andapproximately $379,000 and approximately $358,000 for the nine months endedSeptember 30, 2007 and 2006.

 

Estimatedamortization expense for intangible assets, excluding intangible assets basedon customer orders, in each of the next five years and thereafter is asfollows: $356,000 in the remainder of 2007; $1,405,000 in 2008; $1,374,000 in2009; $1,321,000 in 2010; $944,000 in 2011 and $75,000 thereafter.

 

**5. Debt**

 

As of September30, 2007, we maintained a $100 million asset-based revolving credit facilityfrom a lending unit of a large commercial bank. On June 11, 2007, we amendedour credit facility to provide, among other things: an extension of thematurity date of the facility from March 2008 to March 2011; an option for usto extend and increase the amount of the real estate term loan up to $4.2million or 70% of appraised value within a limited time period; a reduction ofthe interest rate spread for the prime rate loans to a range of negative 0.25%to 0.00% from a previous spread of 0.00% and LIBOR loans to a range of 1.50% to1.75% from a previous range of 2.00% to 2.50%, both of which spreads aredependent upon average excess availability under the facility; an increase inthe advance rate against accounts receivable to 90% from 85% and againstcertain original closed box inventory to 80% from 75%; an increase in thesublimit for credit card receivables to $10 million from $7.5 million and forinventory to $40 million from the previous range of $20 million to $40 million,which was dependent upon turnover; and a restatement of the definition of “AdjustmentTangible Net Worth” to include certain additional assets as defined in theamendment.

 

On September 17,2007, in connection with our acquisition of SARCOM as discussed in Note 3, weentered into a third amendment to the credit facility. The amendment provided,among other things, for the addition of SARCOM as a subsidiary borrower underthe loan agreement, and an increase in the amount of the real estate term loan,which is discussed below, to $5.425 million.

 

The creditfacility, which functions as a working capital line of credit with a borrowingbase of inventory and accounts receivable, including certain credit cardreceivables, also includes a commitment fee of 0.25% annually on the unusedportion of the line up to $60 million, unless the outstanding borrowings underthe credit facility exceed $75 million, at which time the unused line fees willbe assessed on the unused portion of the facility up to $80 million. AtSeptember 30, 2007, our effective weighted average annual interest rate was7.83% and we had $58.9 million of net working capital advances outstandingunder the line of credit. At September 30, 2007, we had $35.0 million availableto borrow for working capital advances under the line of credit. The creditfacility is collateralized by substantially all of our assets. In addition tothe security interest required by the credit facility, certain of our vendorshave security interests in some of our assets related to their products. Thecredit facility has as its single 

 

10

 

financial covenant aminimum tangible net worth requirement that is tested as of the last day ofeach fiscal quarter, which we were in compliance with at September 30, 2007.Loan availability under the line of credit fluctuates daily and is affected bymany factors, including eligible assets on-hand, opportunistic purchases ofinventory and availability and utilization of early-pay discounts.

 

In connection withand as part of the amended credit facility, we entered into an amended termnote on September 17, 2007 with a principal balance of $5.425 million, payablein equal monthly principal installments beginning on October 1, 2007, plusinterest at the prime rate with a LIBOR option. The amended term note maturesin October 2014. At September 30, 2007, we had $5.425 million outstanding underthe amended term note, at an effective interest rate of 8.0%. Our term notematures as follows: $193,750 in the remainder of 2007, $775,000 annually ineach of the years 2008 through 2011 and $2,131,250 thereafter.

 

The carryingamounts of our line of credit borrowings and note payable approximate theirfair values based upon the current rates offered to us for obligations ofsimilar terms and remaining maturities.

 

See Note 11 for adiscussion of the amendment to our credit facility entered into on November 5,2007, which increased our maximum credit line by up to $50 million, for a totalline up to $150 million.

 

**6.Income Taxes**

 

We adopted FIN 48on January 1, 2007. As of the adoption date, we had no material unrecognizedtax benefits. We do not believe that the total amounts of unrecognized taxbenefits will significantly increase or decrease within 12 months of September30, 2007. We recognize penalties and interest accrued related to unrecognizedtax benefits, if any, as part of income tax expense in our ConsolidatedStatements of Operations. As of January 1, 2007, we had no amounts accrued forincome tax-related interest or income tax-related penalties on our ConsolidatedBalance Sheets.

 

We conductbusiness through one or more of our subsidiaries in the U.S., Canada and thePhilippines. We or one of our subsidiaries file income tax returns in the U.S.federal jurisdiction, and various state and foreign jurisdictions. Because weutilized or have available U.S. federal and state net operating losscarryforwards generated in certain jurisdictions for the years of 1997 through2001, such jurisdictions for the respective tax years remain subject toexamination by tax authorities. Except for the respective jurisdictions for theyears indicated above, we are generally no longer subject to U.S. federal,state and local, or non-U.S. income tax examinations by tax authorities foryears before 2002. All tax returns for the 2006 fiscal year have been filed.

 

**7.Earnings Per Share**

 

Basic earnings pershare (“EPS”) excludes dilution and is computed by dividing net income by theweighted average number of common shares outstanding during the reportedperiods. Diluted EPS reflects the potential dilution that could occur under thetreasury stock method if stock options and other commitments to issue commonstock were exercised, except in loss periods where the effect would beantidilutive. In addition, we exclude common stock options from the computationof diluted EPS when their exercise price is greater than the average marketprice of our common stock. As such, potential common shares of approximately125,000 and 576,000 for the three months ended September 30, 2007 and 2006, andapproximately 63,000 and 1,080,000 for the nine months ended September 30, 2007and 2006 have been excluded from the calculation of diluted EPS because theeffect of their inclusion would be antidilutive.

 

11

 

The reconciliationof the amounts 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, 2007:**    |       |       |       |       |       |                        |       |
| Basic EPS                                     |       |       |       |       |       |                        |       |
| Net income                                    |       | $          | 2,978      |       | 12,606     |                        | $          | 0.24 |   |
| Effect of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock options and warrants |       | —     |       | 1,109      |       |                        |       |
| Diluted EPS                                   |       |       |       |       |       |                        |       |
| Adjusted net income                           |       | $          | 2,978      |       | 13,715     |                        | $          | 0.22 |   |
| **Three Months Ended September 30, 2006:**    |       |       |       |       |       |                        |       |
| Basic EPS                                     |       |       |       |       |       |                        |       |
| Net income                                    |       | $          | 1,908      |       | 12,214     |                        | $          | 0.16 |   |
| Effect of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock options and warrants |       | —     |       | 713        |       |                        |       |
| Diluted EPS                                   |       |       |       |       |       |                        |       |
| Adjusted net income                           |       | $          | 1,908      |       | 12,927     |                        | $          | 0.15 |   |
| **Nine Months Ended September 30, 2007:**     |       |       |       |       |       |                        |       |
| Basic EPS                                     |       |       |       |       |       |                        |       |
| Net income                                    |       | $          | 7,845      |       | 12,473     |                        | $          | 0.63 |   |
| Effect of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock options and warrants |       | —     |       | 1,131      |       |                        |       |
| Diluted EPS                                   |       |       |       |       |       |                        |       |
| Adjusted net income                           |       | $          | 7,845      |       | 13,604     |                        | $          | 0.58 |   |
| **Nine Months Ended September 30, 2006:**     |       |       |       |       |       |                        |       |
| Basic EPS                                     |       |       |       |       |       |                        |       |
| Net income                                    |       | $          | 2,248      |       | 11,978     |                        | $          | 0.19 |   |
| Effect of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock options and warrants |       | —     |       | 864        |       |                        |       |
| Diluted EPS                                   |       |       |       |       |       |                        |       |
| Adjusted net income                           |       | $          | 2,248      |       | 12,842     |                        | $          | 0.18 |   |

 

**8.Comprehensive Income**

 

Our totalcomprehensive income was as follows for the periods presented (in thousands):

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                               |       | $                                                    | 2,978      |                                                | $          | 1,908 |   | $ | 7,845 |   | $ | 2,248 |   |
| Other comprehensive income:              |       |                                                 |       |                                                |       |   |   |   |   |
| Foreign currency translation adjustments |       | 446                                                  |       | 54                                                  |       | 1,189 |   | 288 |   |
| Total comprehensive income               |       | $                                                    | 3,424      |                                                | $          | 1,962 |   | $ | 9,034 |   | $ | 2,536 |   |

 

**9.Segment Information**

 

We operate in tworeportable segments: (1) a rapid response supplier of technology solutions forbusinesses, government and educational institutions, as well as consumers,collectively referred to as “Core business” and (2) an online retailer ofcomputer and consumer electronic products under the OnSale.com brand. Weallocate our resources to and evaluate the performance of our segments based onoperating income. Corporate expenses are included in our measure of segmentoperating income for management reporting purposes.

 

12

 

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

 

 
| **Three Months Ended September 30, 2007** | ** ** | **Core business** | ** **    | **OnSale.com** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|---------------|----------------|------------|------------------|------------|
| Net sales                                                     |       | $                      |  283,267 |           | $          |  4,421      |       | $ |  287,688 |   |
| Gross profit                                                       |       | 33,713                 |          | 466            |       | 34,179           |       |
| Operating profit (loss)                                            |       | 6,096                  |          | (330           | )          | 5,766            |       |
|                                                               |       |                   |          |           |       |             |       |
| **Three Months Ended September 30, 2006**                          |       |                   |          |           |       |             |       |
| Net sales                                                          |       | $                      | 239,889       |           | $          | 2,282            |       | $ | 242,171 |   |
| Gross profit                                                       |       | 31,183                 |          | 373            |       | 31,556           |       |
| Operating profit (loss)                                            |       | 4,350                  |          | (274           | )          | 4,076            |       |
|                                                               |       |                   |          |           |       |             |       |
| **Nine Months Ended September 30, 2007**                           |       |                   |          |           |       |             |       |
| Net sales                                                          |       | $                      | 797,312       |           | $          | 10,114           |       | $ | 807,426 |   |
| Gross profit                                                       |       | 98,789                 |          | 1,134          |       | 99,923           |       |
| Operating profit (loss)                                            |       | 16,504                 |          | (896           | )          | 15,608           |       |
|                                                               |       |                   |          |           |       |             |       |
| **Nine Months Ended September 30, 2006**                           |       |                   |          |           |       |             |       |
| Net sales                                                          |       | $                      | 700,396       |           | $          | 10,116           |       | $ | 710,512 |   |
| Gross profit                                                       |       | 88,670                 |          | 1,309          |       | 89,979           |       |
| Operating profit (loss)                                            |       | 7,754                  |          | (1,114         | )          | 6,640            |       |

 

As of September30, 2007 and December 31, 2006, we had total consolidated assets of $292.8million and $203.6 million. Our management does not have available to them anddoes not use assets measured at the segment level in allocating resources.Therefore, such information relating to segment assets is not provided herein.

 

**10.Commitments and Contingencies**

 

*Commitments*

 

In connection with our acquisition of SARCOM onSeptember 17, 2007, which is described in Note 3, we assumed the remainingcommitments of SARCOM under its operating leases covering all of its officespace located in various states throughout the U.S. and its capital leasecovering various computer and network related equipment and software. As ofSeptember 30, 2007,  the remainingcommitments we assumed under the operating leases totaled approximately $3.7million, of which approximately $1.3 million is due by September 30, 2008, $1.2million by September 30, 2009, $0.6 million by September 30, 2010, $0.5 millionby September 30, 2011 and $0.1 million by September 30, 2012. As of September30, 2007, the remaining commitments we assumed under the capital leases totaledapproximately $0.3 million, of which approximately $178,000 is due by September30, 2008, and approximately $75,000 and $25,000 is due in each of the yearsthereafter. In addition, we financed the cash component of the purchase pricewe paid in the SARCOM acquisition through borrowings under our existing creditfacility. As a result, the outstanding balance on our revolving line of creditand term note, which is described in Note 5, increased to $58.9 million and$5.425 million as of September 30, 2007 from $32.5 million and $2.2 million asof December 31, 2006.

 

Total rent expenseunder our operating leases, net of sublease income, was $1.2 million and $1.1million for the three months ended September 30, 2007 and 2006, and $3.5million and $3.2 million for the nine months ended September 30, 2007 and 2006.Some of our leases contain renewal options and escalation clauses, and requireus to pay taxes, insurance and maintenance costs.

 

*LegalProceedings*

 

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

 

On July 6, 2007,Zekiya Whitmill and Lee Hanzy filed a purported class action lawsuit entitledZekiya Whitmill and Lee Hanzy, individually and on behalf of others similarlysituated, Plaintiffs, vs. PC Mall Gov, Inc., a Delaware corporation, and Does 1through 200, inclusive, Defendants, Case No., BC373934 in the Superior Court of

 

13

 

California, County of LosAngeles. The potential class consists of current and former account executivesin California who worked for PC Mall Gov., Inc., one of our wholly-ownedsubsidiaries. The lawsuit alleges that PC Mall Gov. improperly classifiedmembers of the putative class as “exempt” employees and failed to provideputative class members with meal and rest breaks. The complaint in this actionasserts the following three causes of action: (1) failure to pay wages,including overtime, in violation of California Labor Code sections 201 through203, and section 1194(a); (2) failure to provide meal and rest periods inviolation of California Labor Code section 226.7; and (3) violation of section17200 of the California Business and Professions Code. The lawsuit seeks unpaidovertime, statutory penalties, interest, attorneys’ fees, punitive damages,restitution and injunctive relief. While the case was originally filed in LosAngeles Superior Court, on September 26, 2007, the Superior Court ordered theaction to arbitration and stayed all proceedings in superior court. We plan tovigorously defend this litigation. Because the case is in its preliminarystages, we cannot yet predict its outcome and potential financial impact on ourbusiness, results of operations and financial condition.

 

*Lee Hanzyv. PC Mall, Inc. dba MACMALL, et al.*

 

On July 6, 2007,Lee Hanzy filed a purported class action lawsuit entitled Lee Hanzy,individually and on behalf of others similarly situated, Plaintiff, vs. PCMall, Inc., a Delaware corporation dba MACMALL, and Does 1 through 200,inclusive, Defendants, Case No., BC373935 in the Superior Court of California,County of Los Angeles. The potential class consists of current and formeraccount executives in California who worked for PC Mall, and in particular, theMacMall operating division of PC Mall. The lawsuit alleges that PC Mallimproperly classified members of the putative class as “exempt” employees andfailed to provide putative class members with meal and rest breaks. TheComplaint in this action asserts the following three causes of action: (1)failure to pay wages, including overtime, in violation of California Labor Codesections 201 through 203, and section 1194(a); (2) failure to provide mealand rest periods in violation of California Labor Code section 226.7; and (3)violation of section 17200 of the California Business and Professions Code. Thelawsuit seeks unpaid overtime, statutory penalties, interest, attorneys’ fees,punitive damages, restitution and injunctive relief. While the case wasoriginally filed in Los Angeles Superior Court, on August 30, 2007, theSuperior Court ordered the action to arbitration and stayed all proceedings insuperior court. We plan to vigorously defend this litigation. Because the caseis in its preliminary stages, we cannot yet predict its outcome and potentialfinancial impact on our business, results of operations and financialcondition.

 

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

 

**11.Subsequent Event**

 

On November 5,2007, we entered into a fourth amendment to our credit facility. The amendmentprovides for, among other things, (i) an increase to the credit limit inincrements of $5 million, up to a total maximum amount of $150 million,provided that any increase of the total credit limit in excess of $120 millionis subject to an acceptance by a third party assignee in the event theadministrative agent elects to assign such excess amount; (ii) a line increasefee equal to 0.25% of the amount of each increment increased as described above,plus, to the extent that the administrative agent assigns a portion of itsrevolving loan commitment under the credit facility and to the extent requiredby the assignee, an aggregate acceptance fee not to exceed 0.125% of theaggregate sum of the increase in credit limit assigned; and (iii) an increasein the number of LIBOR interest rate options we can enter into and theelimination of a limit on the maximum outstanding principal balance which maybe subject to a LIBOR interest rate option.

 

On November 6,2007, we and the sellers of SARCOM agreed on a final net asset valueadjustment, resulting in a decrease in our initial total purchase price byapproximately $2.1 million. See Note 3 for a detailed discussion.

 

* * *

 

14

 
| **ITEM  2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS****OF OPERATIONS** |
|--------------|----------------------------------------------------------------------------------------------------|

 

*Youshould read the following Management’s Discussion and Analysis of**Financial Condition and Results ofOperations together with the consolidated**financial statements and related notes included elsewhere in thisreport, our**Annual Report on Form10-K for the year ended December 31, 2006 filed with the**SEC on March 12, 2007, as amended on April 30, 2007,our Quarterly Reports on**Form10-Q for the quarters ended March 31, 2007 and June 30, 2007 filed with the SECon May 15,**2007 and August 14,2007, and all of our other periodic filings, including Current Reports on Form**8-K, filed with the SEC from the end of ourprior fiscal year through the date of this report.**This discussion contains forward-looking statementsthat involve risks and**uncertainties.Our actual results could differ materially from those**anticipated in these forward-looking statements as aresult of various factors,**includingthose described under “Forward-Looking Statements” below and under**“Risk Factors” in Item 1A of Part II, and elsewherein this report.*

 

**BUSINESSOVERVIEW**

 

PC Mall, Inc.,together with its wholly-owned subsidiaries (collectively referred to as “we”or “us”), founded in 1987, is a rapid response direct marketer of computerhardware, software, peripherals, electronics, and other consumer products andservices. We offer products and services to businesses, government andeducational institutions, as well as individual consumers, through dedicatedoutbound and inbound telemarketing account executives, the Internet, directmarketing techniques, direct response catalogs, a direct sales force and threeretail showrooms. We offer a broad selection of products through our distinctivefull-color catalogs under the PC Mall, MacMall and PC Mall Gov brands, ourwebsites pcmall.com, macmall.com, pcmallgov.com, gmri.com, wareforce.com,sarcom.com and onsale.com, and other promotional materials.

 

We operate in tworeportable segments: (1) a rapid response supplier of technology solutions forbusinesses, government and educational institutions, as well as individualconsumers, collectively referred to as “Core business” and (2) an onlineretailer of computer and consumer electronic products under the OnSale.combrand. We allocate resources to and evaluate the performance of our segmentsbased on operating income. Corporate expenses are included in our measure ofsegment operating income for management reporting purposes.

 

Management reviewsour operating performance using a variety of financial and non-financialmetrics, 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 substantialportion of our business is dependent on sales of Apple and Apple-relatedproducts, HP products, and products purchased from other vendors includingAdobe, Cisco, IBM, Ingram Micro, Lenovo, Microsoft, Sony, Sun Microsystems andTech Data. Excluding SARCOM, products manufactured by Apple representedapproximately 22% and 23% of our total net sales in the three months endedSeptember 30, 2007 and 2006, and approximately 23% and 19% of our total netsales in the nine months ended September 30, 2007 and 2006. Excluding SARCOM,products manufactured by HP represented approximately 19% and 20% of our totalnet sales in the three months ended September 30, 2007 and 2006, andapproximately 20% and 22% of our total net sales in the nine months endedSeptember 30, 2007 and 2006.

 

*Acquisitions*

 

*SARCOM*

 

On September 17, 2007, we completed the acquisition ofSARCOM, Inc. (“SARCOM”), a provider of advanced technology solutions, pursuantto the terms of an Agreement and Plan of Merger, dated as of August 17, 2007for an initial total purchase price of approximately $55.7 million, includingtransaction costs. SARCOM, headquartered in Columbus, Ohio, has served themid-market and enterprise market for over 20 years and currently specializes inproviding enterprise hardware and software solutions, procurement solutions anda full range of professional and 

 

15

 

managed services.Also included in the acquisition is the Abreon Group, a division of SARCOM.Abreon is a high end consulting and training business focused on providingbusiness reengineering, business consulting and training services to mid-marketand enterprise clients. Our acquisition of SARCOM was motivated in part by ourdesire to enhance our capabilities as a reseller of advanced technology productsolutions and services, consistent with our commitment to grow our business inpart through an effort to expand our share of our customers’ IT spending. Theresults of SARCOM are included in our Core business segment from the closingdate of the acquisition.

 

The total purchase price was subject to a post-closingdebt and net asset value adjustment (see below for a discussion of the finalnet asset value adjustment on November 6, 2007). The aggregate purchase pricepaid at closing included a total of $48.2 million in cash and approximately$7.5 million in shares of our common stock, the number of shares being based onthe average closing price of our stock on the Nasdaq Global Market for the 20consecutive trading days immediately preceding the acquisition closing date.Under that formula, at closing, we issued an aggregate of 633,981 shares of ourcommon stock to the sellers as payment of the stock component of the purchaseprice. We financed the cash component of the purchase price through borrowingsunder our existing credit facility.

 

**On November 6, 2007, we and thesellers agreed on a final net asset value adjustment, resulting in a decreasein the purchase price by approximately $2.1 million, which was to be repaid, atthe sellers’ option, in either cash or shares of our common stock based on aper share price determined by the average closing price for the 20 consecutivetrading days ending on the date of final determination of the net asset valueadjustment. As a result, in settlement of the $2.1 million net asset valueadjustment, the sellers tendered back to us a total of 122,478 shares of ourcommon stock previously issued to them, which has been recorded as a reductionof the purchase price as of September 30, 2007.**

** **

Following thecompletion of the acquisition, the results of SARCOM have been included in thecommercial division of our Core business segment.

 

*GMRI*

 

In September 2006,our wholly-owned subsidiary, PC Mall Gov, acquired the products business ofGMRI. The business includes assets of GMRI’s former products business, whichinclude the GMRI trade names, contracts and the related employees, among otheritems. Following the completion of the acquisition, the results of the acquiredproducts business of GMRI have been included in the public sector results ofthe Core business segment.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof our consolidated 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.

 

Managementconsiders an accounting estimate to be critical if:

 

•**            **it requiresassumptions to be made that were uncertain at the time the estimate was made;and

 

•**            **changes in theestimate or different estimates that could have been selected could have amaterial impact on our consolidated results of operations or financialposition.

 

Management hasdiscussed the development and selection of these critical accounting policiesand estimates with the audit committee of our board of directors. We believethe critical accounting policies described below 

 

16

 

affect the moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements. For a summary of our significant accounting policies,including those discussed below, see Note 2 of the Notes to the ConsolidatedFinancial Statements in Item 8, Part II of our Annual Report on Form 10-K forthe year ended December 31, 2006, filed with the SEC on March 12, 2007, whichwe incorporate herein by reference.

 

*RevenueRecognition.*We adhere to the revised guidelines andprinciples of sales recognition described in Staff Accounting Bulletin No. 104,“Revenue Recognition” (“SAB 104”), issued by the staff of the SEC as a revisionto Staff Accounting Bulletin No. 101, “Revenue Recognition” (“SAB 101”). UnderSAB 104, sales are recognized when the title and risk of loss are passed to thecustomer, there is persuasive evidence of an arrangement for sale, delivery hasoccurred and/or services have been rendered, the sales price is fixed anddeterminable and collectibility is reasonably assured. Under these guidelines,the majority of our sales, including revenue from product sales and grossoutbound shipping and handling charges, are recognized upon receipt of theproduct by the customer. In accordance with our revenue recognition policy, weperform an analysis to estimate the number of days products we have shipped arein transit to our customers using data from our third party carriers and otherfactors. We record an adjustment to reverse the impact of sale transactionsbased on the estimated value of products that have shipped, but have not yetbeen received by our customers, and we recognize such amounts in the subsequentperiod when delivery has occurred. Changes in delivery patterns or unforeseenshipping delays beyond our control could have a material impact on our revenuerecognition for the current period.

 

For all productsales shipped directly from suppliers to customers, we take title to theproducts sold upon shipment, bear credit risk, and bear inventory risk forreturned products that are not successfully returned to suppliers; therefore,these revenues are recognized at gross sales amounts.

 

Certain softwareproducts and extended warranties that we sell (for which we are not the primaryobligor) are recognized on a net basis in accordance with SAB 104 and EmergingIssues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as aPrincipal versus Net as an Agent.” Accordingly, such revenues are recognized innet sales either at the time of sale or over the contract period, based on thenature of the contract, at the net amount retained by us, with no cost of goodssold.

 

Sales are reportednet of estimated returns and allowances, discounts, mail-in rebate redemptionsand credit card chargebacks. If 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 allowancefor doubtful accounts receivable based upon estimates of future collection. Weextend credit to our customers based upon an evaluation of each customer’s financialcondition and credit history, and generally do not require collateral. Weregularly evaluate our customers’ financial condition and credit history indetermining the adequacy of our allowance for doubtful accounts. We alsomaintain an allowance for uncollectible vendor receivables, which arise fromvendor rebate programs, price protections and other promotions. We determinethe sufficiency of the vendor receivable allowance based upon various factors,including payment history. Amounts received from vendors may vary from amountsrecorded because of potential non-compliance with certain elements of vendorprograms. If the estimated allowance for uncollectible accounts or vendorreceivables subsequently proves to be insufficient, additional allowance may berequired.

 

*Reservefor Inventory Obsolescence.*We maintain an allowance for thevaluation of our inventory by estimating obsolete or unmarketable inventorybased on the difference between inventory cost and market value, which 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 areregularly adjusted as actual mail-in rebate redemptions for the program areprocessed. If actual redemption rates are greater than anticipated, additionalexpense may be incurred.

 

17

 

*AdvertisingCosts and Vendor Consideration.*We account for advertisingcosts in accordance with Statement of Position No. 93-7, “Reporting onAdvertising Costs.” We produce and circulate direct response catalogs atvarious dates throughout the year. The costs of developing, producing andcirculating each direct response catalog are deferred and amortized toadvertising expense based on the life of the catalog, which is approximatelyeight weeks. Other non-catalog advertising expenditures are expensed in theperiod incurred. Advertising expenditures are included in “Selling, general andadministrative expenses” in our Consolidated Statements of Operations. Deferredadvertising costs are included in “Prepaid expenses and other current assets”in our Consolidated Balance Sheets.

 

As we circulatecatalogs throughout the year, we receive market development funds and othervendor consideration from vendors included in each catalog. These funds are deferredand recognized based on sales generated over the life of the catalog. We alsoreceive other non-catalog related vendor consideration from our vendors in theform of cooperative marketing allowances, volume incentive rebate programs andother programs to support our marketing of their products. Most of our vendorconsideration is recorded as an offset to cost of sales in accordance with EITF02-16, “Accounting by a Customer (Including a Reseller) for CertainConsideration Received from a Vendor” (“EITF 02-16”) since such funds are not areimbursement of specific, incremental, identifiable costs incurred by us inselling the vendors’ products. Deferred vendor consideration is included in “Accruedexpenses and other current liabilities” in our Consolidated Balance Sheets.

 

*Stock-BasedCompensation.*On January 1, 2006, we adopted the provisionsof Financial Accounting Standards Board, or FASB, Statement No. 123 (revised2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospectiveapplication transition method. SFAS 123R addresses the accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for either equity instruments of the enterprise orliabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.SFAS 123R generally requires that such transactions be accounted for using afair value based method and recognized as expenses in our ConsolidatedStatements of Operations. The provisions of SFAS 123R apply to new stock optiongrants subsequent to December 31, 2005 and unvested stock options outstandingas of January 1, 2006.

 

We estimate thegrant date fair value of each stock option grant awarded pursuant to SFAS 123Rusing the Black-Scholes option pricing model and management assumptions maderegarding various factors, including expected volatility of our common stock,expected life of options granted and estimated forfeiture rates, which requireextensive use of accounting judgment and financial estimates. In estimating ourassumption regarding expected term for options granted, we apply the simplifiedmethod set out in SEC Staff Accounting Bulletin No. 107, “Share-Based Payment,”which was issued in March 2005. We compute our expected volatility using afrequency of weekly historical prices of our common stock for a period equal tothe expected term of the options. The risk free interest rate is determinedusing the implied yield on U.S. Treasury issues with a remaining term withinthe contractual life of the award. We estimate an annual forfeiture rate basedon our 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.

 

18

 

**RESULTSOF OPERATIONS**

 

**ConsolidatedStatements of Operations Data**

 

The followingtable sets forth, for the periods indicated, our Consolidated Statements ofOperations (in thousands, unaudited) and information derived from ourConsolidated Statements of Operations expressed as a percentage of net sales.There can be no assurance that trends in our net sales, gross profit oroperating results will continue in the future.

 
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                    |       | $                                                    | 287,688    |                                                | $          | 242,171 |   | $ | 807,426 |   | $ | 710,512 |   |
| Cost of goods sold                           |       | 253,509                                              |       | 210,615                                             |       | 707,503 |   | 620,533 |   |
| Gross profit                                 |       | 34,179                                               |       | 31,556                                              |       | 99,923 |   | 89,979 |   |
| Selling, general and administrative expenses |       | 28,413                                               |       | 27,480                                              |       | 84,315 |   | 83,339 |   |
| Operating profit                             |       | 5,766                                                |       | 4,076                                               |       | 15,608 |   | 6,640 |   |
| Interest expense, net                        |       | 800                                                  |       | 912                                                 |       | 2,530 |   | 2,912 |   |
| Income before income taxes                   |       | 4,966                                                |       | 3,164                                               |       | 13,078 |   | 3,728 |   |
| Income tax expense                           |       | 1,988                                                |       | 1,256                                               |       | 5,233 |   | 1,480 |   |
| Net income                                   |       | $                                                    | 2,978      |                                                | $          | 1,908 |   | $ | 7,845 |   | $ | 2,248 |   |

 
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                    |       | 100.0                                                | %          |                                                | 100.0      | % |   | 100.0 | % |   | 100.0 | % |   |
| Cost of goods sold                           |       | 88.1                                                 |       |                                                | 87.0       |   |   | 87.6 |   |   | 87.3 |   |   |
| Gross profit                                 |       | 11.9                                                 |       |                                                | 13.0       |   |   | 12.4 |   |   | 12.7 |   |   |
| Selling, general and administrative expenses |       | 9.9                                                  |       |                                                | 11.3       |   |   | 10.5 |   |   | 11.8 |   |   |
| Operating profit                             |       | 2.0                                                  |       |                                                | 1.7        |   |   | 1.9 |   |   | 0.9 |   |   |
| Interest expense, net                        |       | 0.3                                                  |       |                                                | 0.4        |   |   | 0.3 |   |   | 0.4 |   |   |
| Income before income taxes                   |       | 1.7                                                  |       |                                                | 1.3        |   |   | 1.6 |   |   | 0.5 |   |   |
| Income tax expense                           |       | 0.7                                                  |       |                                                | 0.5        |   |   | 0.6 |   |   | 0.2 |   |   |
| Net income                                   |       | 1.0                                                  | %          |                                                | 0.8        | % |   | 1.0 | % |   | 0.3 | % |   |

 

**SelectedOther Operating Data**

 
| ** **                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Commercial and public sector sales percentage                                         |       | 82.2                                                 | %          |                                                | 80.2       | % |   | 81.0 | % |   | 78.1 | % |   |
| Consumer sales percentage (includes OnSale.com)                                       |       | 17.8                                                 | %          |                                                | 19.8       | % |   | 19.0 | % |   | 21.9 | % |   |
| Commercial and public sector account executives (at  end of period, excluding SARCOM) |       | 569                                                  |       |                                                | 606        |   |   | 569 |   |   | 606 |   |   |

 

**ThreeMonths Ended September 30, 2007 Compared to the Three Months Ended September30,****2006**

 

*NetSales.*The following table presents our net sales, bysegment, for the periods presented (in thousands):

 
| ** **      | ** ** | **Three Months Ended  September 30,** | ** ** | **Change** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **      | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **$** | ** ** | **%** | ** ** |
| Core business   |       | $                                                    | 283,267    |       | $          | 239,889 |   | $ | 43,378 |   | 18% |   |
| OnSale.com      |       | 4,421                                                |       | 2,282      |       | 2,139 |   | NMF(1) |   |
| Total net sales |       | $                                                    | 287,688    |       | $          | 242,171 |   | $ | 45,517 |   | 19% |   |

 

----

(1)       Not meaningful.

 

19

 

Total net salesfor the third quarter of 2007 increased by $45.5 million, or 19%, compared tototal net sales for the third quarter of 2006. This increase was primarilyattributable to the $43.4 million increase in Core business net sales.

 

The increase inCore business net sales of $43.4 million for the third quarter of 2007 comparedto the third quarter of 2006 was primarily due to growth in our public sectornet sales of $21.3 million, or 79%, to $48.4 million, which resulted primarilyfrom our acquisition of the products business of GMRI in September 2006 and astrong finish in the federal government sales season. Also, our commercial netsales increased by $20.7 million, or 12%, to $188.1 million in the thirdquarter of 2007 compared to the third quarter of 2006, primarily due to anincrease in our account executive productivity in the third quarter and theaddition of approximately $8.0 million of SARCOM’s sales since the completionof our acquisition on September 17, 2007. Further, our consumer net salesincreased by $1.4 million, or 3%, to $46.8 million in the third quarter of 2007compared to the third quarter of 2006, primarily due to increased sales ofApple products, offset by some delayed purchases due to the pending release ofApple’s OS X Leopard, which started shipping late in October 2007.

 

OnSale.com netsales were $4.4 million for the third quarter of 2007 compared to $2.3 millionfor the third quarter of 2006, an increase of $2.1 million.

 

Excluding SARCOM,sales of products manufactured by Apple and HP represented approximately 22%and 19% of net sales for the quarter ended September 30, 2007 compared toapproximately 23% and 20% of net sales for the quarter ended September 30,2006.

 

*GrossProfit and Gross Profit Margin.*The following table presentsour gross profit and gross profit margin, by segment, for the periods presented(in thousands):

 
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** **   | ** **                    | ** ** | ** **            | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|--------------|-------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2007**                                             | ** **   | **2006**                      | ** ** | **Change**            | ** ** |
| ** **                                 | ** ** | **Gross Profit**                                | ** **   | **Gross Profit  Margin** | ** ** | **Gross Profit** | ** ** | **Gross Profit  Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| Core business                         |       | $                                                    |  33,713 |                          | 11.9%      |                  | $          |  31,183 |   | 13.0% |   | $ |  2,530 |   | (1.1)% |   |
| OnSale.com                                 |       | 466                                                  |         | 10.5%                         |       | 373                   |       | 16.3% |   | 93 |   | (5.8)% |   |
| Total gross profit and gross profit margin |       | $                                                    | 34,179       |                          | 11.9%      |                  | $          | 31,556 |   | 13.0% |   | $ | 2,623 |   | (1.1)% |   |

 

Total gross profitfor the third quarter of 2007 increased by $2.6 million, or 8%, compared tototal gross profit for the third quarter of 2006. Total gross profit margin forthe third quarter of 2007 decreased by 1.1% compared to the third quarter of2006. The increase in total gross profit was due to the $2.5 million increasein Core business gross profit. The decrease in total gross profit margin wasprimarily due to the 1.1% decrease in Core business gross profit margin.

 

The increase inCore business gross profit of $2.5 million for the third quarter of 2007compared to the third quarter of 2006 was primarily the result of the increasein Core business net sales discussed above. The decrease in Core business grossprofit margin of 1.1% in the third quarter of 2007 compared to the thirdquarter of 2006 was primarily due to the reduction in a single vendorconsideration program beginning in the fourth quarter of 2006. In addition, thedecline in Core business gross profit margin in the current quarter alsoincludes the effect of a significant year-over-year increase in federalgovernment sales at lower product margins. Other factors which may cause ourgross profit margin to vary in future periods include the continuation of keyvendor support programs, including price protections, rebates and returnpolicies, our product or customer mix, product acquisition and shipping costs,competition and other factors.

 

Gross profit forOnSale.com for the third quarter of 2007 was $0.5 million, an increase of $0.1million compared to the third quarter of 2006, primarily due to the increase inOnSale.com’s net sales. OnSale.com’s gross profit margin for the third quarterof 2007 was 10.5% compared to 16.3% in the third quarter of 2006, a decrease of5.8%, which was primarily due to the decrease in vendor consideration receivedas a percentage of OnSale.com’s net sales.

 

20

 

*Selling,General and Administrative Expenses.*The following tablepresents our selling, general and administrative, or SG&A, expenses, bysegment, for the periods presented (in thousands):

 
| ** **              | ** ** | **Three Months Ended**

**September 30,** | ** ** | ** **                                        | ** ** | ** **   | ** ** | ** **                                        | ** ** |
|-------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------|------------|--------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                                 | ** ** | **2006**                                          | ** ** | **Change**   | ** ** |
| ** **              | ** ** | **SG&A**                                             | ** ** | **SG&A as a  % of Sales** | ** ** | **SG&A** | ** ** | **SG&A as a  % of Sales** | ** ** | **$** | ** ** | **%** | ** ** | **SG&A as a  % of Sales** | ** ** |
| Core business           |       | $                                                        | 27,617     |                                              | 9.8%       |         | $          | 26,833                                            |       | 11.2% |   | $ | 784 |   | 3% |   | (1.4)% |   |
| OnSale.com              |       | 796                                                      |       | 18.0%                                             |       | 647          |       | 28.4%                                             |       | 149 |   | 23% |   | (10.4)% |   |
| Total SG&A expenses |       | $                                                        | 28,413     |                                              | 9.9%       |         | $          | 27,480                                            |       | 11.3% |   | $ | 933 |   | 3% |   | (1.4)% |   |

 

Total SG&Aexpenses increased by $0.9 million, or 3%, in the third quarter of 2007compared with the third quarter of 2006. As a percent of sales, total SG&Aexpenses decreased to 9.9% in the third quarter of 2007 from 11.3% in the thirdquarter of 2006. The increase in total SG&A expenses was primarily due tothe $0.8 million increase in Core business SG&A expenses.

 

The increase inCore business SG&A expenses of $0.8 million in the third quarter of 2007compared to the same period last year was primarily due to $1.5 million ofincremental personnel costs attributable to the acquisitions of SARCOM andGMRI. This increase was partially offset by a $0.8 million decrease in bad debtexpense resulting from improvements in our accounts receivable aging. As apercent of net sales, SG&A expenses for the Core business decreased by 1.4%to 9.8% in the third quarter of 2007 from 11.2% in the third quarter of 2006.The 1.4% decline in Core business SG&A expenses as a percent of net saleswas primarily due to a 41 basis point decline in personnel costs, a 35 basispoint decline in bad debt expense, a 21 basis point decline in professionalfees and a 16 basis point decline in advertising expenditures.

 

In June 2003, weestablished a Canadian call center serving the U.S. market and have receivedthe benefit of labor credits under a Canadian government program that iscurrently scheduled to terminate at the end of 2007. Under that program, weclaimed annual labor credits of up to 35% of eligible compensation paid to ourqualifying employees. As a result, as of September 30, 2007, we had received atotal of $6.4 million relating to our 2005, 2004 and 2003 claims under thatprogram. We have filed our 2006 claim and are awaiting its results. As ofSeptember 30, 2007, we had an accrued receivable of $6.1 million related tothese labor credits and we expect to receive full payment under our laborcredit claim. We have applied for an alternative program in an effort topartially replace these labor credits upon the expiration of the currentprogram at the end of 2007; however, there can be no assurance that we willqualify for the alternative program. In the event that we do qualify for thenew program, we could receive labor credits of up to 25% of eligiblecompensation paid to our qualifying employees in Canada. The alternativeprogram could continue through the end of 2015.

 

For OnSale.com,SG&A expenses in the third quarter of 2007 were $0.8 million, an increaseof $0.1 million from the third quarter of 2006. OnSale.com SG&A expenses asa percent of net sales was 18.0% in the third quarter of 2007 compared to 28.4%in the third quarter of 2006, a decrease of 10.4%. This decrease of 10.4% inSG&A expenses as percent of net sales for OnSale.com was primarily due tothe increase in OnSale.com’s net sales in the current quarter.

 

*NetInterest Expense.*Total net interest expense for the thirdquarter of 2007 decreased to $0.8 million compared with $0.9 million in thethird quarter of 2006. The decreased interest expense resulted from a loweraverage interest rate in effect during the third quarter of 2007 compared tothe third quarter of 2006, partially offset by a higher average outstandingloan balance in the current period. In September 2007, we borrowedapproximately $48 million under our credit facility in connection with theSARCOM acquisition. As a result, we expect a significant increase in ourinterest expense beginning in the fourth quarter of 2007. Additionally, ifinterest rates rise in the future, we would expect interest expense on ourborrowings to increase.

 

*IncomeTax Expense.*We recorded an income tax expense ofapproximately $2.0 million in the third quarter of 2007 compared to an incometax expense of $1.3 million in the third quarter of 2006. Our effective taxrate for each of the quarterly periods ended September 30, 2007 and 2006 wasapproximately 40%. The increase in income tax expense for the third quarter of2007 compared to the third quarter of 2006 was due to the increase in ourtaxable income.

 

 

 

21

** **

**NineMonths Ended September 30, 2007 Compared to the Nine Months Ended September 30,2006**

 

*NetSales.*The following table presents our net sales, bysegment, for the periods presented (in thousands):

 
| ** **      | ** ** | **Nine Months Ended**

**September 30,** | ** ** | **Change** | ** ** |
|-----------------|------------|---------------------------------------------------------|------------|------------|------------|
| ** **      | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **$** | ** ** | **%** | ** ** |
| Core business   |       | $797,312                                                |       | $700,396   |       | $96,916 |   |   | 14% |   |
| OnSale.com      |       | 10,114                                                  |       | 10,116     |       | (2 | ) |   | NMF(1) |   |
| Total net sales |       | $807,426                                                |       | $710,512   |       | $96,914 |   |   | 14% |   |

 

----

(1)       Not meaningful.

 

Total net salesfor the nine months ended September 30, 2007 increased by $96.9 million, or14%, compared to total net sales for the nine months ended September 30, 2006.This increase was primarily attributable to the $96.9 million increase in Corebusiness net sales.

 

The increase inCore business net sales of $96.9 million for the nine months ended September30, 2007 compared to the nine months ended September 30, 2006 was primarily dueto growth in our public sector and commercial net sales. Our public sector netsales increased by $52.2 million, or 88%, to $111.6 million in the nine monthsended September 30, 2007 compared to the nine months ended September 30, 2006,primarily due to our acquisition of the products business of GMRI in September2006, the launch of the GSA EDD contract with the federal government andcontracts with several state, local and educational institutions, and a strongfinish in the federal government sales season. Our commercial net salesincreased by $41.9 million, or 8%, to $542.6 million, primarily due to anincrease in our account executive productivity in the current period and theaddition of approximately $8.0 million of SARCOM’s sales since the completionof our acquisition on September 17, 2007. In addition, our consumer net salesincreased by $3.4 million, or 2%, to $143.0 million in the nine month periodended September 30, 2007 compared to the same period in the prior year,primarily due to increased sales of Apple products, offset by some delayedpurchases due to the pending release of Apple’s OS X Leopard, which startedshipping late in October 2007.

 

OnSale.com netsales were $10.1 million in each of the nine month periods ended September 30,2007 and 2006.

 

Excluding SARCOM,sales of products manufactured by Apple and HP represented approximately 23%and 20% of net sales for the nine months ended September 30, 2007 compared toapproximately 19% and 22% of net sales for the nine months ended September 30,2006.

 

*GrossProfit and Gross Profit Margin.*The following table presentsour gross profit and gross profit margin, by segment, for the periods presented(in thousands):

 
| ** **                                 | ** ** | **Nine Months Ended  September 30,** | ** ** | ** **                    | ** ** | ** **            | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2007**                                            | ** ** | **2006**                      | ** ** | **Change**            | ** ** |
| ** **                                 | ** ** | **Gross Profit**                               | ** ** | **Gross Profit  Margin** | ** ** | **Gross Profit** | ** ** | **Gross Profit  Margin** | ** ** | **$** | ** ** | ** ** | **Margin** | ** ** |
| Core business                              |       | $                                                   | 98,789     |                          | 12.4%      |                  | $          | 88,670 |   | 12.7% |   | $ | 10,119 |   | (0.3)% |   |
| OnSale.com                                 |       | 1,134                                               |       | 11.2%                         |       | 1,309                 |       | 12.9% |   | (175 | ) | (1.7)% |   |
| Total gross profit and gross profit margin |       | $                                                   | 99,923     |                          | 12.4%      |                  | $          | 89,979 |   | 12.7% |   | $ | 9,944 |   | (0.3)% |   |

 

Total gross profitfor the nine months ended September 30, 2007 increased by $9.9 million, or 11%,compared to total gross profit for the nine months ended September 30, 2006.Total gross profit margin for the nine months ended September 30, 2007decreased by 0.3% compared to the nine months ended September 30, 2006. Theincrease in total gross profit was primarily due to the $10.1 million increasein Core business gross profit in the current period compared to the same periodin the prior year. The decrease in total gross profit margin in the nine monthsended September 30, 2007 compared to the same period last year resultedprimarily from the 0.3% decrease in Core business gross profit margin.

 

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The increase inCore business gross profit of $10.1 million for the nine months ended September30, 2007 compared to the nine months ended September 30, 2006 was primarily theresult of the increase in Core business net sales discussed above. The decreasein Core business gross profit margin of 0.3% in the nine months ended September30, 2007 compared to the nine months ended September 30, 2006 was primarily dueto the reduction in a single vendor consideration program beginning in thefourth quarter of 2006. Other factors which may cause our gross profit marginto vary in future periods include the continuation of key vendor supportprograms, including price protections, rebates and return policies, our productor customer mix, product acquisition and shipping costs, competition and otherfactors.

 

Gross profit forOnSale.com for the nine months ended September 30, 2007 was $1.1 million, adecrease of $0.2 million compared to the nine months ended September 30, 2006,primarily due to a decrease in vendor consideration. OnSale.com’s gross profitmargin for the nine months ended September 30, 2007 was 11.2% compared to 12.9%in the nine months ended September 30, 2006, a decrease of 1.7%, primarily dueto a 239 basis point decrease in margin relating to vendor considerationreceived as a percentage of OnSale.com’s net sales, partially offset by a 60basis point increase in product sales margin.

 

*Selling,General and Administrative Expenses.*The following tablepresents our selling, general and administrative, or SG&A, expenses, bysegment, for the periods presented (in thousands):

 
| ** **              | ** ** | **Nine Months Ended  September 30,** | ** ** | ** **                                        | ** ** | ** **   | ** ** | ** **                                        | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|--------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **Change**   | ** ** |
| ** **              | ** ** | **SG&A**                                        | ** ** | **SG&A as a  % of Sales** | ** ** | **SG&A** | ** ** | **SG&A as a  % of Sales** | ** ** | **$** | ** ** | **%** | ** ** | **SG&A as a  % of Sales** | ** ** |
| Core business           |       | $                                                   | 82,285     |                                              | 10.3%      |         | $          | 80,916                                            |       | 11.6% |   | $ | 1,369 |   | 1.7% |   | (1.3 | )% |   |
| OnSale.com              |       | 2,030                                               |       | 20.1%                                             |       | 2,423        |       | 24.0%                                             |       | (393 | ) | (16.2)% |   | (3.9 | )% |   |
| Total SG&A expenses |       | $                                                   | 84,315     |                                              | 10.4%      |         | $          | 83,339                                            |       | 11.7% |   | $ | 976 |   | 1.2% |   | (1.3 | )% |   |

 

Total SG&Aexpenses increased by $1.0 million in the nine months ended September 30, 2007compared with the nine months ended September 30, 2006. As a percent of sales,total SG&A expenses decreased to 10.4% in the nine months ended September30, 2007 from 11.7% in the nine months ended September 30, 2006. The increasein total SG&A expenses in the current period was due to the $1.4 millionincrease in Core business SG&A expenses, partially offset by a $0.4 milliondecrease in OnSale.com SG&A expenses.

 

The increase inCore business SG&A expenses of $1.4 million in the nine months ended September30, 2007 compared to the same period last year was primarily due to $3.3million of incremental personnel costs attributable to the acquisitions ofSARCOM and GMRI and a $0.6 million increase in facilities related expenses,partially offset by a $2.9 million decrease in advertising expendituresprimarily supporting our consumer business.

 

As a percent ofnet sales, SG&A expenses for Core business decreased to 10.3% in the ninemonths ended September 30, 2007 compared to 11.6% in the nine months ended September30, 2006. The 1.3% decline in Core business SG&A expenses as a percent ofnet sales was primarily due to a 53 basis point decline in advertisingexpenditures, a 36 basis point decline in personnel costs and a 16 basis pointdecline in bad debt expense as a percent of net sales.

 

For OnSale.com,SG&A expenses in the nine months ended September 30, 2007 were $2.0million, a decrease of $0.4 million from the nine months ended September 30,2006 primarily due to a $0.2 million decrease in advertising expenditures, a$0.1 million decrease in administrative and fulfillment expenses and a $0.1million decrease in personnel costs in the nine months ended September 30,2007. OnSale.com SG&A expenses as a percent of net sales was 20.1% in thenine months ended September 30, 2007 compared to 24.0% in the nine months endedSeptember 30, 2006, a decrease of 3.9%. This decrease of 3.9% in SG&Aexpenses as percent of net sales for OnSale.com was primarily due to a 211basis point decrease in advertising expenditures as a percentage of net sales,a 92 basis point decrease in personnel costs and a 53 basis point decrease inadministrative and fulfillment expenses as a percentage of net sales.

 

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*NetInterest Expense.*Total net interest expense for the ninemonths ended September 30, 2007 decreased to $2.5 million compared with $2.9million in the same period of 2006. The decreased interest expense resultedfrom a lower average outstanding balance during the first nine months of 2007compared to the first nine months of 2006, partially offset by a higher averageinterest rate in effect in the current period compared to the same period inthe prior year.

 

*IncomeTax Expense.*We recorded an income tax expense of approximately$5.2 million in the nine months ended September 30, 2007 compared to an incometax expense of $1.5 million in the nine months ended September 30, 2006. Oureffective tax rate for each of the nine month periods ended September 30, 2007and 2006 was approximately 40%. The increase in income tax expense in the ninemonths ended September 30, 2007 compared to the nine months ended September 30,2006 was due to the increase in our taxable income.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*WorkingCapital.*Our primary capital need has historically beenfunding the working capital requirements created by our growth in sales andstrategic acquisitions. We expect that our primary capital needs will continueto be the funding of our existing working capital requirements, possible salesgrowth and possible acquisitions and new business ventures. Our primary sourcesof financing have historically come from borrowings from financialinstitutions, public and private issuances of our common stock and cash flowsfrom operations. We believe that our current working capital, including ourexisting 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 twelvemonths. Our efforts to focus on commercial and public sector sales could resultin an increase in our accounts receivable as these customers are generallyprovided longer payment terms than consumers. In addition, we expect tocontinue to focus our efforts on increasing the productivity of our sales forceand reducing our infrastructure costs, as well as increasing our offshoreoperations, in an effort to reduce our costs.

 

In the future, ifwe 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, we may seekadditional financing from public or private debt or equity financings; however,there can be no assurance that such financing will be available at acceptableterms, if at all. To the extent any such financings involve the issuance ofequity securities, existing stockholders could experience dilution.

 

We had cash andcash equivalents of $9.8 million at September 30, 2007 and $5.8 million atDecember 31, 2006. Our working capital decreased by $9.5 million to $33.9million at September 30, 2007 from working capital of $43.4 million at December31, 2006.

 

*CashFlows from Operating Activities.*Net cash provided byoperating activities was $9.1 million in the nine months ended September 30,2007 compared to $33.2 million in the nine months ended September 30, 2006. The$9.1 million of net cash provided by operating activities in the nine monthsended September 30, 2007 was primarily the result of the $11.6 million increasein accounts payable related to the increase in our sales during the currentperiod and the timing of our vendor payables and the $7.8 million of net incomefrom our operations, partially offset by a $15.2 million increase in accountsreceivable primarily due to increased open account sales.

 

The $33.2 millionnet cash provided by operating activities in the nine months ended September30, 2006 resulted primarily from a $24.5 million decrease in inventoriesreflecting our efforts to optimize inventory levels, seasonality and oursell-through of year-end strategic buys for the holidays from the prior yearend, a $12.2 million increase in accounts payable primarily due to theacquisition of the products business from GMRI in September 2006, partiallyoffset by a $13.7 million increase in accounts receivable primarily due toreceivables generated by the new GMRI products business we acquired and anincrease in receivables from our vendors.

 

 

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*CashFlows from Investing Activities.*Net cash used in investingactivities was $49.0 million in the nine months ended September 30, 2007compared to $6.0 million in the same period of 2006. The $ 49.0 million of netcash used in investing activities in the nine months ended September 30, 2007resulted from the $47.7 million related to the acquisition of SARCOM inSeptember 2007 and the $1.3 million of capital expenditures relating to thecreation of enhanced electronic tools for our account executives and salessupport staff and the continued expansion of our Philippines office. The $6.0million of net cash used in investing activities in the nine months endedSeptember 30, 2006 resulted from the $2.7 million of capital expendituresrelating to the continued expansion of our Philippines office, as well as thecreation of enhanced electronic tools for our account executives and salessupport staff, and the $3.4 million related to the acquisition of the productsbusiness from GMRI in September 2006.

 

*CashFlows from Financing Activities.*Net cash provided byfinancing activities was $42.6 million in the nine months ended September 30,2007 compared to net cash used in financing activities of $26.9 million in thesame period of 2006. The $42.6 million of net cash provided by financingactivities in the nine months ended September 30, 2007 was primarily related tofinancing required to fund the cash portion of the purchase price of SARCOM inthe amount of approximately $48 million, which net of payments made on theoutstanding balance of our line of credit resulted in a net increase of $26.4million in our line of credit, and a $12.5 million increase in book overdraft,which was due to timing of outstanding payments to vendors. The $26.9 millionof net cash used in financing activities in the nine months endedSeptember 30, 2006 was primarily related to $29.7 million of net paymentsof our outstanding balance on our line of credit, partially offset by a $2.7million increase in book overdraft, which were both due to the timing ofoutstanding payments to vendors relative to the prior period.

 

*Lineof Credit and Note Payable.*As of September 30, 2007, wemaintained a $100 million asset-based revolving credit facility from a lendingunit of a large commercial bank. On June 11, 2007, we amended our creditfacility to provide, among other things: an extension of the maturity date ofthe facility from March 2008 to March 2011; an option for us to extend andincrease the amount of the real estate term loan up to $4.2 million or 70% ofappraised value within a limited time period; a reduction of the interest ratespread for the prime rate loans to a range of negative 0.25% to 0.00% from aprevious spread of 0.00% and LIBOR loans to a range of 1.50% to 1.75% from aprevious range of 2.00% to 2.50%, both of which spreads are dependent uponaverage excess availability under the facility; an increase in the advance rateagainst accounts receivable to 90% from 85% and against certain original closedbox inventory to 80% from 75%; an increase in the sublimit for credit cardreceivables to $10 million from $7.5 million and for inventory to $40 millionfrom the previous range of $20 million to $40 million, which was dependent uponturnover; and a restatement of the definition of “Adjustment Tangible Net Worth”to include certain additional assets as defined in the amendment.

 

On September 17,2007, in connection with our acquisition of SARCOM, we entered into a thirdamendment to the credit facility. The amendment provided, among other things,for the addition of SARCOM as a new subsidiary borrower under the loanagreement, and an increase in the amount of the real estate term loan, which isdiscussed below, to $5.425 million.

 

The creditfacility, which functions as a working capital line of credit with a borrowingbase of inventory and accounts receivable, including certain credit cardreceivables, also includes a commitment fee of 0.25% annually on the unusedportion of the line up to $60 million, unless the outstanding borrowings underthe credit facility exceed $75 million, at which time the unused line fees willbe assessed on the unused portion of the facility up to $80 million. AtSeptember 30, 2007, our effective weighted average annual interest rate was7.83% and we had $58.9 million of net working capital advances outstandingunder the line of credit. At September 30, 2007, we had $35.0 million availableto borrow for working capital advances under the line of credit. The creditfacility is collateralized by substantially all of our assets. In addition tothe security interest required by the credit facility, certain of our vendorshave security interests in some of our assets related to their products. Thecredit facility has as its single financial covenant a minimum tangible networth requirement that is tested as of the last day of each fiscal quarter,which we were in compliance with at September 30, 2007. Loan availability underthe line of credit fluctuates daily and is affected by many factors, includingeligible assets on-hand, opportunistic purchases of inventory and availabilityand utilization of early-pay discounts.

 

In connection withand as part of the amended credit facility, we entered into an amended termnote on September 17, 2007 with a principal balance of $5.425 million, payablein equal monthly principal installments beginning on October 1, 2007, plusinterest at the prime rate with a LIBOR option. The amended term note matures inOctober 2014. At September 30, 2007, we had $5.425 million outstanding underthe amended term note, at an effective interest rate of 8.0%. Our term notematures as follows: $193,750 in the remainder of 2007, $775,000 annually ineach of the years 2008 through 2011 and $2,131,250 thereafter.

 

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On November 5,2007, we entered into a fourth amendment to our credit facility. The amendmentprovides for, among other things, (i) an increase to the credit limit inincrements of $5 million, up to a total maximum amount of $150 million,provided that any increase of the total credit limit in excess of $120 millionis subject to an acceptance by a third party assignee in the event theadministrative agent elects to assign such excess amount; (ii) a line increasefee equal to 0.25% of the amount of each increment increased as describedabove, plus, to the extent that the administrative agent assigns a portion ofits revolving loan commitment under the credit facility and to the extentrequired by the assignee, an aggregate acceptance fee not to exceed 0.125% ofthe aggregate sum of the increase in credit limit assigned; and (iii) anincrease in the number of LIBOR interest rate options we can enter into and theelimination of a limit on the maximum outstanding principal balance which maybe subject to a LIBOR interest rate option.

 

The carryingamounts of our line of credit borrowings and note payable approximate theirfair value based upon the current rates offered to us for obligations ofsimilar terms and remaining maturities.

 

As part of ourgrowth strategy, we may, in the future, acquire other companies in the same orcomplementary lines of business, and pursue other business ventures. Any launchof a new business venture or any acquisition and the ensuing integration of theoperations of the acquired company would place additional demands on ourmanagement, operating and financial resources.

 

**Inflation**

 

Inflation has nothistorically had a material impact on our operating results; however, there canbe no assurance that inflation will not have a material impact on our businessin the future.

 

**DividendPolicy**

 

We have not paidcash dividends on our capital stock and we do not currently anticipate payingdividends in the future. We intend to retain any earnings to finance the growthand development of our business.

 

**CONTRACTUALOBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENCIES**

 

***Contractual Obligations***

 

In connection with our acquisition of SARCOM onSeptember 17, 2007, we assumed the remaining commitments of SARCOM under itsoperating leases covering all of its office space located in various statesthroughout the U.S. and its capital lease covering various computer and networkrelated equipment and software. As of September 30, 2007,  the remaining commitments we assumed underthe operating leases totaled approximately $3.7 million, of which approximately$1.3 million is due by September 30, 2008, $1.2 million by September 30, 2009,$0.6 million by September 30, 2010, $0.5 million by September 30, 2011 and $0.1million by September 30, 2012. As of September 30, 2007, the remainingcommitments we assumed under the capital leases totaled approximately $0.3million, of which approximately $178,000 is due by September 30, 2008, andapproximately $75,000 and $25,000 is due in each of the years thereafter. Inaddition, we financed the cash component of the purchase price we paid in theSARCOM acquisition through borrowings under our existing credit facility. As aresult, the outstanding balance on our revolving line of credit and term noteincreased to $58.9 million and $5.425 million as of September 30, 2007 from$32.5 million and $2.2 million as of December 31, 2006.

 

***Off-Balance Sheet Arrangements***

 

 As of September 30, 2007, we did not have anyoff-balance sheet arrangements.

 

***Contingencies***

 

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

 

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**IMPACTOF RECENTLY ISSUED ACCOUNTING STANDARDS**

 

For a discussionof recent accounting 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 QuarterlyReport on Form 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 strategy, 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:

 

•**            **our beliefsrelating to the benefits to be received from our Philippines office andCanadian call center;

 

•**            **our beliefsregarding changes in our total amount of unrecognized tax benefits;

 

•**            **our expectationsregarding future expenses from infrastructure related to our outbound telemarketingsales force;

 

•**            **the possibilitythat we will not fully realize the anticipated benefits of the SARCOMacquisition;

 

•**            **the impact of the SARCOM acquisition on ourfinancial condition, liquidity and our future cash flows and earnings;

 

•             our ability to execute our business strategy;

 

•             the availability of funding;

 

•**            **our acquisitionstrategy and the impact of any past or future acquisitions;

 

•**            **our expectationsregarding our working capital, liquidity and cash flows from operations;

 

•**            **the impact onaccounts receivable from our efforts to focus on commercial and public sectorsales;

 

•**            **our beliefsregarding the applicability of tax regulations;

 

•**            **our expectationsregarding the impact of accounting pronouncements; and

 

•**            **our plans andexpectations relating to our growth strategy, capital needs, cost reductionefforts and future financing.

 

Forward-lookingstatements involve certain risks and uncertainties, and actual results maydiffer materially from those discussed in any such statement. Factors thatcould cause actual results to differ materially from such forward-lookingstatements include the risks described in greater detail under the heading “RiskFactors” in Item 1A, Part II 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, we assume no obligation to update or revise anyforward-looking statement.

 

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**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*Interest Rate Risk*

 

We have exposureto the risks of fluctuating interest rates on our line of credit and notepayable. The variable interest rates on our line of credit and note payable aretied to the prime rate or the LIBOR, at our discretion. At September 30, 2007,we had $58.9 million outstanding under our line of credit and $5.4 millionoutstanding under our note payable. As of September 30, 2007, the hypotheticalimpact of a one percentage point increase in interest rate related to theoutstanding borrowings under our line of credit and note payable would be toincrease our annual interest expense by approximately $0.6 million.

 

*ForeignCurrency Exchange Risk*

 

We have operation centers in Canada and thePhilippines that provide back-office administrative support and customerservice support. In each of these countries, transactions are primarilyconducted in the respective local currencies. In addition, our two foreignsubsidiaries that operate the operation centers have intercompany accounts withour U.S. subsidiaries that eliminate upon consolidation. However, transactionsresulting in such accounts expose us to foreign currency rate fluctuations. Werecord gains and losses resulting from exchange rate fluctuations on ourshort-term intercompany accounts in “Selling, general and administrativeexpenses” in our Consolidated Statements of Operations and gains and lossesresulting from exchange rate fluctuations on long-term intercompany accounts inour Consolidated Balance Sheets under “Accumulated other comprehensive income,”a section of stockholders’ equity. As such, we have foreign currencytranslation exposure for changes in exchange rates for these currencies.However, we did not have significant foreign currency or overall currencyexposure as of September 30, 2007. Significant changes in exchange ratesbetween foreign currencies in which we transact business and the U.S. dollarmay adversely affect our Consolidated Statements of Operations and ConsolidatedBalance Sheets.

 

*Other*

 

Our financialinstruments include cash and cash equivalents and long-term debt. At September30, 2007, the carrying values of our financial instruments approximated theirfair values based on current market prices and rates.

 

We have not enteredinto derivative financial instruments as of September 30, 2007.

 

**ITEM4T. CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in the reportsthat we file or submit under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Interim Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

We carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and Interim Chief Financial Officer, of the effectiveness of the designand operation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period coveredby this report. Based upon this evaluation, our Chief Executive Officer andInterim Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of September 30, 2007.

 

**Changesin Internal Control Over Financial Reporting**

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)occurred during the third quarter of 2007 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

* * *

 

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**PART II - OTHER INFORMATION**

** **

**ITEM1. LEGAL PROCEEDINGS**

 

We are not currently a party to any material legalproceedings, other than ordinary routine litigation incidental to the business.From time to time, we receive claims of and become subject to consumerprotection, employment, intellectual property and other litigation related tothe conduct of our business. Any such litigation, including the litigation discussedabove, could be costly and time consuming and could divert our management andkey personnel from our business operations. In connection with any suchlitigation, we may be subject to significant damages or equitable remediesrelating to the operation of our business. Any such litigation may materiallyharm our business, results of operations and financial condition.

 

**ITEM1A. RISK FACTORS**

 

*This report and other documents wefile with the Securities and Exchange**Commission contain forward looking statements thatare based on current**expectations,estimates, forecasts and projections about us, our future**performance, our business, our beliefs and ourmanagement’s assumptions. These**statementsare not guarantees of future performance and involve certain risks,**uncertainties, and assumptions that are difficult topredict.*

 

*We have revised the risk factorsthat relate to our business, as set forth below. These risks include anymaterial changes to and supersede the risks previously disclosed in Item 1A ofour Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Youshould**carefully considerthe risks and uncertainties facing our business which are**set forth below. The risks described below are notthe only ones facing us. Our**businessis also subject to risks that affect many other companies, such as**employment relations, general economic conditions,geopolitical events and**internationaloperations. Further, additional risks not currently known to us**or that we currently believe are immaterial also mayimpair our business,**operations,liquidity and stock price materially and adversely.*

 

**Ourrevenue is dependent on sales of products from a small number of keymanufacturers, and a decline in sales of products from these manufacturerscould materially harm our business.**

 

Our revenue is dependent on sales of products from asmall number of key manufacturers, including Apple, HP, IBM, Lenovo, Microsoftand Sony. For example, excluding SARCOM, products manufactured by Appleaccounted for approximately 22% and 23% of our total net sales for the quartersended September 30, 2007 and 2006, and products manufactured by HP accountedfor approximately 19% and 20% of our total net sales for the quarters endedSeptember 30, 2007 and 2006. A decline in sales of any of our key manufacturers’products, whether due to decreases in supply of or demand for their products,termination of any of our agreements with them, or otherwise, could have amaterial adverse impact on our sales and operating results.

 

**Certainof our key vendors provide us with incentives and other assistance that reduceour operating costs, and any decline in these incentives and other assistancecould materially harm our operating results.**

 

Certain of our key vendors, including Adobe, Apple,Cisco, HP, IBM, Ingram Micro, Lenovo, Microsoft, Sony, Sun Microsystems andTech Data, provide us with trade credit or substantial incentives in the formof discounts, credits and cooperative advertising. We have agreements with mostof our key vendors under which they provide us, or they have otherwiseconsistently provided us, with market development funds to finance portions ofour catalog publication and distribution costs based upon the amount ofcoverage we give to their respective products in our catalogs or otheradvertising mediums. Any termination or interruption of our relationships withone or more of these vendors, particularly Apple or HP, or modification of theterms or discontinuance of our agreements and market development fund programs andarrangements with these vendors, could adversely affect our operating incomeand cash flow.

 

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**Wegenerally do not have long-term supply agreements or guaranteed price ordelivery arrangements with our vendors.**

 

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

 

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

 

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

 

**Oursuccess is dependent in part upon the ability of our vendors to develop andmarket products that meet changes in marketplace demand, as well as our abilityto sell popular products from new vendors.**

 

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

 

**Wemay not be able to maintain existing or build new vendor relationships, whichmay affect our ability to offer a broad selection of products at competitiveprices and negatively impact our results of operations.**

 

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

 

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**Ournarrow gross margins magnify the impact of variations in our operating costsand of adverse or unforeseen events on our operating results.**

 

We are subject to intense price competition withrespect to the products we sell. As a result, our gross margins havehistorically been narrow, and we expect them to continue to be narrow. Ournarrow gross margins magnify the impact of variations in our operating costsand of adverse or unforeseen events on our operating results. If we are unableto maintain our gross margins in the future, it could have a material adverseeffect on our business, financial condition and results of operations. Inaddition, because price is an important competitive factor in our industry, wecannot assure you that we will not be subject to increased price competition inthe future. If we become subject to increased price competition in the future,we cannot assure you that we will not lose market share, that we will not beforced to reduce our prices and further reduce our gross margins, or that wewill be able to compete effectively.

 

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

 

We experience variability in our net sales and netincome on a quarterly basis as a result of many factors. These factors includethe frequency of our catalog mailings, introduction or discontinuation of newcatalogs, variability in vendor programs, the introduction of new products orservices by us and our competitors, changes in prices from our suppliers, theloss or consolidation of significant suppliers or customers, generalcompetitive conditions such as pricing, our ability to control costs, thetiming of our capital expenditures, the condition of our industry in general,seasonal shifts in 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 relative mix of products sold during theperiod, any inability on our part to obtain adequate quantities of productscarried in our catalogs, delays in the release by suppliers of new products andinventory adjustments, our expenditures on new business ventures andacquisitions, performance of acquired businesses, adverse weather conditionsthat affect response, distribution or shipping to our customers, and generaleconomic conditions and geopolitical events. Our planned operating expenditureseach quarter are based on sales forecasts for the quarter. If our sales do notmeet expectations in any given quarter, our operating results for the quartermay be materially adversely affected. Our narrow gross margins may magnify theimpact 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 commercial andpublic sector sales presents numerous risks and challenges, and may not improveour profitability or result in expanded market share.**

 

An important element of our business strategy is toincreasingly focus on commercial and public sector sales. In shifting ourfocus, we face numerous risks and challenges, including competition from awider range of sources and an increased need to develop strategic relationships.We cannot assure you that our increased focus on commercial and public sectorsales will result in expanded market share or increased profitability.Furthermore, revenue from our public sector business is derived from sales tofederal, state and local governmental departments and agencies, as well as toeducational institutions, through various contracts and open market sales.Government contracting is a highly regulated area, and noncompliance withgovernment procurement regulations or contract provisions could result incivil, criminal, and administrative liability, including substantial monetaryfines or damages, termination of government contracts, and suspension,debarment or ineligibility from doing business with the government. The effectof any of these possible actions by any governmental department or agency withwhich we contract could adversely affect our business and results ofoperations. Moreover, contracting with governmental departments and agenciesinvolves additional risks, such as limited recourse against the governmentagency in the event of a business dispute, the potential lack of a limitationof our liability for damages from our provision of services to the departmentor agency, and the potential for changes in statutory or regulatory provisionsthat negatively affect the profitability of such contracts.

 

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**Ourinvestments in our outbound telemarketing sales force model may not improve ourprofitability or result in expanded market share.**

 

We have made and are currently making efforts toincrease our market share by investing in training and retention of ouroutbound telemarketing sales force. We have also incurred, and expect tocontinue to incur, significant expenses resulting from infrastructureinvestments related to our outbound telemarketing sales force. We cannot assureyou that any of our investments in our outbound telemarketing sales force willresult in expanded market share or increased profitability in the near or longterm.

 

**Ourfinancial performance could be adversely affected if we are not able to retainand increase the experience of our sales force or if we are not able tomaintain or increase their productivity.**

 

Our sales and operating results may be adversely affectedif we are unable to increase the average tenure of our account executives or ifthe sales volumes and profitability achieved by our account executives do notincrease with their increased experience.

 

**Existingor future government and tax regulations could expose us to liabilities orcostly changes in our business operations, and could reduce demand for ourproducts and services.**

 

Based upon current interpretations of existing law,certain of our subsidiaries currently collect and remit sales or use tax onlyon sales of products or services to residents of the states in which therespective subsidiaries have a physical presence or have voluntarily registeredfor sales tax collection. The U.S. Supreme Court has ruled that states, absentCongressional legislation, may not impose tax collection obligations on anout-of-state direct marketer whose only contacts with the taxing state aredistribution of catalogs and other advertisement materials through the mail,and whose subsequent delivery of purchased goods is by mail or interstatecommon carriers. However, we cannot predict the level of contact with any statewhich would give rise to future or past tax collection obligations.Additionally, it is possible that federal legislation could be enacted that wouldpermit states to impose sales or use tax collection obligations on out-of-statedirect marketers. Furthermore, court cases have upheld tax collectionobligations on companies, including mail order companies, whose contacts withthe taxing state were quite limited (e.g., visiting the state several times ayear to aid customers or to inspect showrooms stocking their goods). We believeour operations in states in which we have no physical presence are differentfrom the operations of the companies in those cases and are thus not subject tothe tax collection obligations imposed by those decisions. Various state taxingauthorities have sought to impose on direct marketers with no physical presencein the taxing state the burden of collecting state sales and use taxes on thesale of products shipped or services sold to those states’ residents, and it ispossible that such a requirement could be imposed in the future.

 

Furthermore, we are subject to general businessregulations and laws, as well as regulations and laws specifically governingcompanies that do business over the Internet. Such existing and future laws andregulations may impede the growth of the Internet or other online services.These regulations and laws may cover taxation of e-commerce, user privacy,marketing and promotional practices (including electronic communications withour customers and potential customers), database protection, pricing, content,copyrights, distribution, electronic contracts and other communications,consumer protection, product safety, the provision of online payment services,copyrights, patents and other intellectual property rights, unauthorized access(including the Computer Fraud and Abuse Act), and the characteristics andquality of products and services. It is not clear how existing laws governingissues such as property ownership, sales and other taxes, libel, trespass, datamining and collection, and personal privacy, among other laws, apply to theInternet and e-commerce. Unfavorable resolution of these issues may expose usto liabilities and costly changes in our business operations, and could reducecustomer demand for our products. The growth and demand for online commerce hasand may continue to result in more stringent consumer protection laws that imposeadditional compliance burdens on online companies. For example, legislation inCalifornia requires us to notify our California customers if certain personalinformation about them is obtained by an unauthorized person, such as acomputer hacker. These consumer protection laws could result in substantialcompliance costs and could decrease our profitability.

 

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**Partof our business strategy includes the acquisition of other companies, and wemay have difficulties integrating acquired companies into our operations in acost-effective manner, if at all** .

 

One element of our business strategy involvesexpansion through the acquisition of businesses, assets, personnel ortechnologies that allow us to complement our existing operations, expand ourmarket coverage, or add new business capabilities. We continually evaluate andexplore strategic opportunities as they arise, including business combinationtransactions, strategic partnerships, and the purchase or sale of assets. Ouracquisition strategy depends on the availability of suitable acquisitioncandidates at reasonable prices and our ability to resolve challengesassociated with integrating acquired businesses into our existing business,including challenges we may face in connection with our recent acquisition ofSARCOM. No assurance can be given that the benefits or synergies we may expectfrom the acquisition of companies or businesses will be realized to the extentor in the time frame we anticipate. We may lose key employees, customers,distributors, vendors and other business partners of the companies we acquirefollowing and continuing after announcement of acquisition plans. In addition,acquisitions may involve a number of risks and difficulties, includingexpansion into new geographic markets and business areas, the diversion ofmanagement’s attention to the operations and personnel of the acquired company,the integration of the acquired company’s personnel, operations and managementinformation systems, changing relationships with customers, suppliers andstrategic partners, and potential short-term adverse effects on our operatingresults. These challenges can be magnified as the size of the acquisitionincreases. Any delays or unexpected costs incurred in connection with theintegration of acquired companies or otherwise related to the acquisitionscould have a material adverse effect on our business, financial condition andresults of operations.

 

Acquisitions may require large one-time charges andcan result in increased debt or other contingent liabilities, adverse taxconsequences, deferred compensation charges, and the recording and lateramortization of amounts related to deferred compensation and certain purchasedintangible assets, any of which items could negatively impact our business,financial condition and results of operations. In addition, we may recordgoodwill in connection with an acquisition and incur goodwill impairmentcharges in the future. Any of these charges could cause the price of our commonstock to decline.

 

An acquisition could absorb substantial cashresources, require us to incur or assume debt obligations, or involve ourissuance of additional equity securities. If we are not able to obtainfinancing, then we may not be in a position to consummate acquisitions. If weissue equity securities in connection with an acquisition, we may dilute ourcommon stock with securities that have an equal or a senior interest in ourcompany. If we incur additional debt to pay for an acquisition, it maysignificantly reduce amounts that would otherwise be available under our creditfacility, increase our interest expense, leverage and debt service requirementsand could negatively impact our ability to comply with applicable financialcovenants in our credit facility or limit our ability to obtain credit from ourvendors. Acquired entities also may be highly leveraged or dilutive to ourearnings per share, or may have unknown liabilities. In addition, the combinedentity may have lower revenues or higher expenses and therefore may not achievethe anticipated results. Any of these factors relating to acquisitions couldhave a material adverse impact on our business, financial condition and resultsof operations.

 

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

 

**If purchased goodwill or amortizable intangibleassets become impaired, we may be required to record a significant charge toearnings.**

 

The purchase price allocation for the acquisition ofSARCOM resulted in a material amount allocated to goodwill and amortizableintangible assets. In accordance with GAAP, we review our amortizableintangible assets for impairment when events or changes in circumstancesindicate the carrying value may not be recoverable. We review the fair value ofour goodwill and test it for impairment annually. Factors that may beconsidered a change in circumstances indicating that the carrying value of ourgoodwill or amortizable intangible assets may not be

 

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recoverableinclude a decline in stock price and market capitalization, reduced future cashflow estimates, and slower growth rates in our industry. We may be required torecord a significant non-cash charge to earnings in our consolidated financialstatements during the period in which any impairment of our goodwill oramortizable intangible assets is determined, which could have a materialadverse effect on our results of operations.

 

**Wemay not be able to maintain profitability on a quarterly or annual basis.**

 

Our ability to maintain profitability on a quarterlyor annual basis given our planned business strategy depends upon a number offactors, including our ability to achieve and maintain vendor relationships,procure merchandise and fulfill orders in an efficient manner, leverage ourfixed cost structure, maintain adequate levels of vendor consideration, andmaintain customer acquisition costs at acceptable levels. Our ability tomaintain profitability on a quarterly or annual basis will also depend on ourability to manage and control operating expenses and to generate and sustainadequate levels of revenue. Many of our expenses are fixed in the short term,and we may not be able to quickly reduce spending if our revenue is lower thanwe project. In addition, we may find that our business plan costs more toexecute than we currently anticipate. Some of the factors that affect ourability to maintain profitability on a quarterly or annual basis are beyond ourcontrol.

 

**Theeffect of the change in accounting rules for stock-based compensation maymaterially adversely affect our consolidated operating results, our stock priceand our ability to hire, retain and motivate employees.**

 

We use employee stock options and other stock-basedcompensation to hire, retain and motivate certain of our employees. In December2004, the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 123R, “Share-Based Payment,” which requires us tomeasure compensation costs for all stock-based compensation (including stockoptions) at fair value as of the date of grant and to recognize these costs asexpenses in our consolidated statements of operations. We adopted SFAS 123R onJanuary 1, 2006. The recognition of non-cash stock-based compensation expensesin our consolidated statements of operations had and will have a negativeeffect on our consolidated operating results, including our net income andearnings per share, which could negatively impact our stock price.Additionally, if we reduce or alter our use of stock-based compensation toreduce these expenses and their impact, our ability to hire, motivate andretain certain employees could be adversely affected and we may need toincrease the cash compensation we pay to these employees.

 

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

 

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

 

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

 

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

 

•                     fluctuationsin mail-in rebate redemption rates;

 

•                     theamount and timing of advertising and marketing costs;

 

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

 

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

 

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•                     technicaldifficulties, including system or Internet failures;

 

•                     fluctuationsin the demand for our products or overstocking or understocking of ourproducts;

 

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

 

•                     fluctuationsin shipping costs, particularly during the holiday season;

 

•                     changes in the amounts ofinformation technology spending by commercial and public sector entities;

 

•                     economicconditions generally or economic conditions specific to the Internet,e-commerce, the retail industry or the mail order industry;

 

•                     changesin the mix of products that we sell; and

 

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

 

**Ifwe fail to accurately predict our inventory risk, our gross margins may declineas a result of required inventory write downs due to lower prices obtained fromolder or obsolete products.**

 

We derive most of our gross sales from products soldout of inventory at our distribution facilities. We assume the inventorydamage, theft and obsolescence risks, as well as price erosion risks for productsthat are sold out of inventory stocked at our distribution facilities. Theserisks are especially significant because many of the products we sell arecharacterized by rapid technological change, obsolescence and price erosion(e.g., computer hardware, software and consumer electronics), and because ourdistribution facilities sometimes stock large quantities of particular types ofinventory. There can be no assurance that we will be able to identify and offerproducts necessary to remain competitive, maintain our gross margins, or avoidor minimize losses related to excess and obsolete inventory. We currently havelimited return rights with respect to products we purchase from Apple, HP,Lenovo, and certain other vendors, but these rights vary by product line, aresubject to specified conditions and limitations, and can be terminated orchanged at any time.

 

**Wemay need additional financing and may not be able to raise additional financingon favorable terms or at all, which could increase our costs, limit our abilityto grow and dilute the ownership interests of existing stockholders.**

 

We require substantial working capital to fund ourbusiness. We believe that our current working capital, including our existingcash balance, together with our expected future cash flows from operations andavailable borrowing capacity under our line of credit, will be adequate tosupport our current operating plans for at least the next twelve months.However, if we need additional financing, such as for acquisitions or expansionor to fund a significant downturn in sales or an increase in operatingexpenses, there are no assurances that adequate financing will be available onacceptable terms, if at all. We may in the future seek additional financingfrom public or private debt or equity financings to fund additional expansion,or take advantage of opportunities or favorable market conditions. There can beno assurance such financings will be available on terms favorable to us or atall. To the extent any such financings involve the issuance of equitysecurities, existing stockholders could suffer dilution. If we raise additionalfinancing through the issuance of equity, equity-related or debt securities,those securities may have rights, preferences or privileges senior to those ofthe rights of our common stock and our stockholders will experience dilution oftheir ownership interests. If additional financing is required but notavailable, we would have to implement further measures to conserve cash andreduce costs. However, there is no assurance that such measures would besuccessful. Our failure to raise required additional financing could adverselyaffect our ability to maintain, develop or enhance our product offerings, takeadvantage of future opportunities, respond to competitive pressures or continueoperations.

 

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

 

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

 

**Wemay be subject to claims regarding our intellectual property, including ourbusiness processes, or the products we sell, any of which could result inexpensive litigation, distract our management or force us to enter into costlyroyalty or licensing agreements.**

 

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

 

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

 

**Costsand other factors associated with pending or future litigation could materiallyharm our business, results of operations and financial condition.**

 

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

 

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**Wemay fail to expand our merchandise categories, product offerings, websites andprocessing systems in a cost-effective and timely manner as may be required toefficiently operate our business.**

 

We may be required to expand or change our merchandisecategories, product offerings, websites and processing systems in order tocompete in our highly competitive and rapidly changing industry or toefficiently operate our business. Any failure on our part to expand or changethe way we do business in a cost-effective and timely manner in response to anysuch requirements would likely adversely affect our operating results,financial condition and future prospects. Additionally, we cannot assure youthat we will be successful in implementing any such changes when and if theyare required.

 

We have generated substantially all of our revenue inthe past from the sale of computer hardware, software and accessories andconsumer electronics products. Expansion into new product categories mayrequire us to incur significant marketing expenses, develop relationships withnew vendors and comply with new regulations. We may lack the necessaryexpertise in a new product category to realize the expected benefits of thatnew category. These requirements could strain our managerial, financial andoperational resources. Additional challenges that may affect our ability toexpand into new product categories include our ability to:

 

•       establishor increase awareness of our new brands and product categories;

 

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

 

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

 

•       attracta sufficient number of new customers to whom our new product categories aretargeted;

 

•       successfullymarket our new product offerings to existing customers;

 

•       maintainor improve our gross margins and fulfillment costs;

 

•       attractand retain vendors to provide our expanded line of products to our customers onterms that are acceptable to us; and

 

•       manageour inventory in new product categories.

 

We cannot be certain that we will be able tosuccessfully address any or all of these challenges in a manner that willenable us to expand our business into new product categories in a cost-effectiveor timely manner. If our new categories of products or services are notreceived 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.

 

**Wemay not be able to attract and retain key personnel such as senior managementand information technology specialists.**

 

Our future performance will depend to a significantextent upon the efforts and abilities of certain key management and otherpersonnel, including Frank F. Khulusi, our Chairman of the Board, President andChief Executive Officer, as well as other executive officers and seniormanagement. The loss of service of one or more of our key management memberscould have a material adverse effect on our business. Our success and plans forfuture growth will also depend in part on our management’s continuing abilityto hire, train and retain skilled personnel in all areas of our business. Forexample, our management information systems and processes require the servicesof employees with extensive knowledge of these systems and processes and thebusiness environment in which we operate, and in order to successfullyimplement and operate our systems and processes we must be able to attract andretain a significant number of information technology specialists. We may notbe able to attract, train and retain the skilled personnel required to, amongother things, implement, maintain, and operate our information systems andprocesses, and any failure to do so would likely have a material adverse effecton our operations.

 

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**Ifwe fail to achieve and maintain adequate internal controls, we may not be ableto produce reliable financial reports in a timely manner or prevent financialfraud.**

 

We monitor and periodically test our internal controlprocedures. We may from time to time identify deficiencies which we may not beable to remediate. In addition, if we fail to achieve and maintain the adequacyof our internal controls, we may not be able to ensure that we can conclude onan ongoing basis that we have effective internal controls over financialreporting. Effective internal controls, particularly those related to revenuerecognition, are necessary for us to produce reliable financial reports and areimportant in helping prevent financial fraud. If we cannot provide reliablefinancial reports on a timely basis or prevent financial fraud, our businessand operating results could be harmed, investors could lose confidence in our reportedfinancial information, and the trading price of our stock could dropsignificantly.

 

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

 

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

 

**Ouradvertising and marketing efforts may be costly and may not achieve desiredresults.**

 

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

 

**Changesand uncertainties in the economic climate could negatively affect the rate ofinformation technology spending by our customers, which would likely have animpact on our business.**

 

An important element of our business strategy is toincreasingly focus on commercial and public sector sales. During the mostrecent economic downturn in the U.S. and elsewhere, commercial and publicsector entities generally reduced, often substantially, their rate ofinformation technology spending. Continued and future changes and uncertaintiesin the 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 hinder our growth.

 

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

 

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

 

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

 

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

 

**Wemay be liable for misappropriation of our customers’ personal information.**

 

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

 

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

 

**Lawsor regulations relating to privacy and data protection may adversely affect thegrowth of our Internet business or our marketing efforts.**

 

We mail catalogs and send electronic messages to namesin our proprietary customer database and to potential customers whose names weobtain from rented or exchanged mailing lists. Worldwide public concernregarding personal privacy has subjected the rental and use of customer mailinglists and other customer information to increased scrutiny and regulation. As aresult, we are subject to increasing regulation relating to privacy and the useof personal information. For example, we are subject to various telemarketingand anti-spam laws that regulate the manner in which we may solicit futuresuppliers and customers. Such regulations, along with increased 

 

39

 

governmental orprivate enforcement, may increase the cost of operating and growing ourbusiness. In addition, several states have proposed legislation that wouldlimit the uses of personal information gathered online or require onlineservices to establish privacy policies. The Federal Trade Commission hasadopted regulations regarding the collection and use of personal identifyinginformation obtained from children under 13 years of age. Bills proposed inCongress would expand online privacy protections already provided to adults.Moreover, proposed legislation in the U.S. and existing laws in other countriesrequire companies to establish procedures to notify users of privacy andsecurity policies, obtain consent from users for collection and use of personalinformation, and provide users with the ability to access, correct and deletepersonal information stored by companies. These data protection regulations andenforcement efforts may restrict our ability to collect or transfer demographicand personal information from users, which could be costly or harm ourmarketing efforts. Further, any violation of domestic or foreign or domesticprivacy 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 e-commerce may discourage customers from purchasing goodsfrom us.**

 

In order for the e-commerce market to be successful,we and other market participants must be able to transmit confidentialinformation securely over public networks. Third parties may have thetechnology or know-how to breach the security of customer transaction data. Anybreach could cause customers to lose confidence in the security of our websitesand choose not to purchase from our websites. If someone is able to circumventour security measures, he or she could destroy or steal valuable information ordisrupt our operations. Concerns about the security and privacy of transactionsover the Internet could inhibit the growth of Internet usage and e-commerce.Our security measures may not effectively prohibit others from obtainingimproper access to our information. Any security breach could expose us torisks of loss, litigation and liability and could seriously damage ourreputation and disrupt our operations.

 

**Creditcard fraud could decrease our revenue and profitability.**

 

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

 

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

 

Our headquarters, customer service center and themajority of our infrastructure, including computer servers, are located nearLos Angeles, California in an area that is susceptible to earthquakes and othernatural disasters. Our distribution facilities, which are located in Memphis,Tennessee, Irvine, California, and Lewis Center, Ohio house the productinventory from which a substantial majority of our orders are shipped, and arealso in areas that are susceptible to natural disasters and extreme weatherconditions such as earthquakes, fire, floods and major storms. A naturaldisaster or other catastrophic event, such as an earthquake, fire, flood,severe storm, break-in, terrorist attack or other comparable events in theareas in which we operate could cause interruptions or delays in our businessand loss of data or render us unable to accept and fulfill customer orders in atimely manner, or at all. Our systems, including our management informationsystems, websites and telephone system, are not fully redundant, and we do nothave redundant geographic locations or earthquake insurance. Further,California periodically experiences power outages as a result of insufficientelectricity supplies. These outages may recur in the future and could disruptour operations. We currently have no formal disaster recovery plan and ourbusiness interruption insurance may not adequately compensate us for lossesthat may occur.

 

**Werely on independent shipping companies to deliver the products we sell.**

 

We rely upon third party carriers, especially FederalExpress and UPS, for timely delivery of our product shipments. As a result, weare subject to carrier disruptions and increased costs due to factors that arebeyond our control, including employee strikes, inclement weather and increasedfuel costs. Any failure to deliver products to our customers in a timely andaccurate manner may damage our reputation and brand and could cause us to lose 

 

40

 

customers. We donot have a written long-term agreement with any of these third party carriers,and we cannot be sure that these relationships will continue on terms favorableto us, if at all. If our relationship with any of these third party carriers isterminated or impaired, or if any of these third parties are unable to deliverproducts for us, we would be required to use alternative carriers for theshipment of products to our customers. We may be unable to engage alternativecarriers on a timely basis or on terms favorable to us, if at all. Potentialadverse consequences include:

 

•       reducedvisibility of order status and package tracking;

 

•       delaysin order processing and product delivery;

 

•       increasedcost of delivery, resulting in reduced margins; and

 

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

 

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

 

**Wemay not be able to compete successfully against existing or future competitors,which include some of our largest vendors.**

 

The business of direct marketing of computer hardware,software, peripherals and electronics is highly competitive, based primarily onprice, product availability, speed and accuracy of delivery, effectiveness ofsales and marketing programs, credit availability, ability to tailor specificsolutions to customer needs, quality and breadth of product lines and services,and availability of technical or product information. We compete with otherdirect marketers, including CDW, Insight Enterprises, and PC Connection. Inaddition, we compete with computer retail stores and resellers, includingsuperstores such as Best Buy and CompUSA, certain hardware and software vendorssuch as Apple and Dell Computer that sell or are increasing sales directly toend users, online resellers such as Amazon.com, Newegg.com and TigerDirect.com,government resellers such as GTSI, CDWG and GovConnection, software onlyresellers such as Soft Choice and Software House International and other directmarketers and value added resellers of hardware, software and computer-relatedand electronic products. We also compete with value-added resellers andproviders of information technology solutions. In the direct marketing andInternet retail industries, barriers to entry are relatively low and the riskof new competitors entering the market is high. Certain of our existingcompetitors have substantially greater financial resources than we have. Therecan be no assurance that we will be able to continue to compete effectivelyagainst existing competitors, consolidations of competitors or new competitorsthat may enter the market.

 

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

 

**Oursuccess is tied to the continued use of the Internet and the adequacy of theInternet infrastructure.**

 

The level of sales generated from our websites, bothin absolute terms and as a percentage of our net sales, has increased in recentyears in part because of the growing use and acceptance of the Internet byend-users. Continued growth of our Internet sales is dependent on potentialcustomers using the Internet in addition to traditional means of commerce topurchase products. Widespread use of the Internet could decline as a result ofdisruptions, computer viruses or other damage to Internet servers or users’computers. If consumer use of the Internet to purchase products decline in anysignificant way, our business, financial condition and results of operationscould be adversely affected.

 

41

 

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

 

Weak general economic conditions, along withuncertainties in political conditions could adversely impact our revenue,expenses and growth rate. In addition, our revenue, gross margins and earningscould deteriorate in the future as a result of unfavorable economic orpolitical conditions.

 

**Thesuccess of our Canadian call center is dependent, in part, on our receipt ofgovernment labor credits.**

 

In June 2003, we established a Canadian call centerserving the U.S. market. One of the benefits we receive from having ourCanadian call center is that we can claim Canadian government labor credits oneligible compensation paid to qualifying employees at the call center. Thegovernment program that provides for these labor credits is currently scheduledto terminate at the end of 2007. The success of our Canadian call center isdependent, in part, on our receipt of the government labor credits we expect toreceive. If we do not receive these expected labor credits, or a sufficientportion of them, then the costs of operating our Canadian call center mayexceed the benefits it provides us and our operating results would likelysuffer. We have applied for an alternative program in an effort to partiallyreplace these labor credits upon the expiration of the current program at theend of 2007; however, there can be no assurance that we will qualify for thealternative program. In the event that we do not qualify for the new program,our labor costs in our Canadian call center would increase materially, whichcould adversely affect our consolidated results of operations.

 

**Weare exposed to the risks of business and other conditions in the Asia Pacificregion.**

 

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

 

In the third quarter of 2005, we opened an office inthe Philippines in connection with our cost reduction initiatives, and we mayincrease 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. For example, a national state of emergency wastemporarily in effect in the Philippines in early 2006 as a result of politicalunrest. We could be subject to similar risks and uncertainties, particularly ifand to the extent we increase or establish new offshore operations, in thePhilippines or elsewhere in the future.

 

**Theincreasing significance of our foreign operations exposes us to risks that arebeyond our control and could affect our ability to operate successfully.**

 

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

 

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

 

42

 

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

 

•       politicaluncertainties;

 

•       wageinflation;

 

•       exposureto foreign currency fluctuations;

 

•       tariffsand other trade barriers; and

 

•       foreignregulatory restrictions and unexpected changes in regulatory environments.

 

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

 

**International operations expose us to currencyexchange risk and we cannot predict the effect of future exchange ratefluctuations on our business and operating results.**

 

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

 

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

 

**Weare subject to risks associated with the evolution of, and consolidationwithin, our industry.**

 

Our industry has undergone significant change in thepast several years. In addition, many new, cost-effective channels ofdistribution have developed in the industry, such as the Internet, computersuperstores, consumer electronic and office supply superstores, national directmarketers and mass merchants. Many computer resellers are consolidatingoperations and acquiring or merging with other resellers, direct marketers andproviders of information technology solutions to achieve economies of scale,expanded product and service offerings, and increased efficiency. The currentindustry reconfiguration and the trend towards consolidation could cause theindustry to become even more competitive, further increase pricing pressuresand make it more difficult for us to maintain our operating margins or toincrease or maintain the same level of net sales or gross profit. Decliningprices, resulting in part from technological changes, may require us to sell agreater number of products to achieve the same level of net sales and grossprofit. Such a trend could make it more difficult for us to continue toincrease our net sales and earnings growth. In addition, growth in theinformation technology market has slowed. If the growth rate of the informationtechnology market were to further decrease, our business, financial conditionand operating results could be materially adversely affected.

 

43

 

**Oursuccess is in part dependent on the accuracy and proper utilization of ourmanagement information systems.**

 

Our ability to analyze data derived from our managementinformation systems, including our telephone system, to increase productpromotions, manage inventory and accounts receivable collections, to purchase,sell and ship products efficiently and on a timely basis and to maintaincost-efficient operations, is dependent upon the quality and utilization of theinformation generated by our management information systems. We regularlyupgrade our management information system hardware and software to better meetthe information requirements of our users, and believe that to remaincompetitive, it will be necessary for us to upgrade our management informationsystems on a regular basis in the future. We currently operate our managementinformation systems using an HP3000 Enterprise System. HP has indicated that itwill support this system until December 2008, by which time we expect that wewill need to seek third party support for our HP3000 Enterprise System orupgrade to other management information systems hardware and software. Inaddition to the costs associated with such upgrades, the transition to andimplementation of new or upgraded hardware or software systems can result insystem delays or failures which could impair our ability to receive, process,ship and bill for orders in a timely manner. We do not currently have aredundant or back-up telephone system, nor do we have complete redundancy forour management information systems. Any interruption in our managementinformation systems, including those caused by natural disasters, could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**Ifwe are unable to provide satisfactory customer service, we could lose customersor fail to attract new customers.**

 

Our ability to provide satisfactory levels of customerservice depends, to a large degree, on the efficient and uninterruptedoperation of our customer service operations. Any material disruption orslowdown in our order processing systems resulting from labor disputes,telephone or Internet failures, power or service outages, natural disasters orother events could make it difficult or impossible to provide adequate customerservice and support. Furthermore, we may be unable to attract and retainadequate numbers of competent customer service representatives and relationshipmanagers for our business customers, each of which is essential in creating afavorable interactive customer experience. If we are unable to continuallyprovide adequate 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.

 

**Ourstock price may be volatile.**

 

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

 

•       failureto meet investors’ expectations regarding our operating performance;

 

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

 

•       publicationof research reports by analysts;

 

•       changesin market valuations of similar companies;

 

44

 

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

 

•       actualor anticipated fluctuations in our operating results;

 

•       litigationdevelopments; and

 

•       generalmarket conditions or other economic factors unrelated to our performance.

 

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

 

**ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

The information required under this item was disclosed under Item3.02 of our Current Report on Form 8-K, filed with the SEC on September 18,2007.

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

At the annual meeting of the stockholdersheld on August 31, 2007, the following matters were submitted to a vote ofthe stockholders of PC Mall, Inc.:

 

1. The re-election as directors of Frank F. Khulusi, ThomasA. Maloof, Ronald B. Reck and Paul C. Heeschen, all of whom were re-elected atthe annual meeting. The directors received the following votes:

 
| ** **       | ** ** | **FOR**   | ** ** | **WITHHELD** | ** ** |
|------------------|------------|-----------|------------|--------------|------------|
| Frank F. Khulusi |       | 7,159,915 |       | 2,330,592    |       |
| Thomas A. Maloof |       | 8,506,016 |       | 984,491      |       |
| Ronald B. Reck   |       | 8,506,016 |       | 984,491      |       |
| Paul C. Heeschen |       | 8,506,016 |       | 984,491      |       |

 

2. The ratification of the appointment ofPricewaterhouseCoopers LLP as our independent registered public accounting firmfor the fiscal year ending December 31, 2007. 

 
| ** **                                                    | ** ** | **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTENTIONS** | ** ** |
|---------------------------------------------------------------|------------|-----------|------------|-------------|------------|-----------------|------------|
| Appointment of Independent Registered Public  Accounting Firm |       | 9,374,536 |       | 61,451      |       | 54,520          |       |

 

45

 

**ITEM6. EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                            |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1                 |       | Agreement and Plan of  Merger, dated as of August 17, 2007, by and among PC Mall, Inc., Mall  Acquisition 2, Inc., SARCOM, Inc., Zohar CDO 2003-1, Limited, Zohar II  2005-1, Limited, Charles E. Sweet, Robert F. Angart & Company, John R.  Strauss, Daniel A. Schneider and Howard Schapiro (incorporated by reference  to Exhibit 2.1 of our Current Report on Form 8-K filed with the SEC on  September 18, 2007) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1                |       | Summary of Executive  Salary and Bonus Arrangements                                                                                                                                                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2                |       | Summary of Director  Compensation Arrangements                                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3                |       | Form of Director  Restricted Stock Bonus Award Agreement                                                                                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4                |       | Severance Agreement  between AF Services, LLC and Brandon LaVerne                                                                                                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.5                |       | Third Amendment to  Amended and Restated Loan and Security Agreement, dated as of September 17,  2007, by and among PC Mall, Inc., certain subsidiaries of PC Mall, Inc.,  Wachovia Capital Finance Corporation (Western) and certain other financial  institutions (incorporated by reference to Exhibit 10.1 of our Current Report  on Form 8-K filed with the SEC on September 18, 2007)                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6                |       | Registration Rights  Agreement, dated as of September 17, 2007, by and among PC Mall, Inc., Zohar  CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F.  Angart & Company, John R. Strauss, Daniel A. Schneider and Howard  Schapiro (incorporated by reference to Exhibit 10.2 of our Current Report on  Form 8-K filed with the SEC on September 18, 2007)                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.7                |       | Fourth Amendment to  Amended and Restated Loan and Security Agreement, dated as of November 5,  2007, by and among PC Mall, Inc, certain of its subsidiaries, Wachovia  Capital Finance Corporation (Western) and certain other financial  institutions (incorporated by reference to Exhibit 10.1 of our Current Report  on Form 8-K filed with the SEC on November 6, 2007)                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.8                |       | Lease Agreement, dated  as of July 1, 2001, by and between Sarcom Properties, Inc. and Sarcom Desktop  Solutions, Inc., as amended as of December 1, 2002 and as of March 22, 2004                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1                |       | Certification of the  Chief Executive Officer of the Registrant pursuant to Exchange Act Rule  13a-14(a)                                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2                |       | Certification of the  Interim 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  Interim 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                                                                                                                                                                                                                                                     |

 

***

 

46

 

**PC MALL, INC.**

** **

**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                    | PC MALL, INC. |
|-------------------------|---------------|
|                    | (Registrant)  |
|                    |          |   |
| Date: November 14, 2007 | By:           | /s/ Brandon H. LaVerne |   |
|                    |          | Brandon H. LaVerne |
|                    |          | Interim Chief Financial  Officer |

 

***

 

47

 

**PC MALL, INC.**

** **

**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                            |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1                 |       | Agreement and Plan of  Merger, dated as of August 17, 2007, by and among PC Mall, Inc., Mall  Acquisition 2, Inc., SARCOM, Inc., Zohar CDO 2003-1, Limited, Zohar II  2005-1, Limited, Charles E. Sweet, Robert F. Angart & Company, John R.  Strauss, Daniel A. Schneider and Howard Schapiro (incorporated by reference  to Exhibit 2.1 of our Current Report on Form 8-K filed with the SEC on  September 18, 2007) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1                |       | Summary of Executive  Salary and Bonus Arrangements                                                                                                                                                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2                |       | Summary of Director  Compensation Arrangements                                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3                |       | Form of Director  Restricted Stock Bonus Award Agreement                                                                                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4                |       | Severance Agreement  between AF Services, LLC and Brandon LaVerne                                                                                                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.5                |       | Third Amendment to  Amended and Restated Loan and Security Agreement, dated as of September 17,  2007, by and among PC Mall, Inc., certain subsidiaries of PC Mall, Inc.,  Wachovia Capital Finance Corporation (Western) and certain other financial  institutions (incorporated by reference to Exhibit 10.1 of our Current Report  on Form 8-K filed with the SEC on September 18, 2007)                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6                |       | Registration Rights  Agreement, dated as of September 17, 2007, by and among PC Mall, Inc., Zohar  CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F.  Angart & Company, John R. Strauss, Daniel A. Schneider and Howard  Schapiro (incorporated by reference to Exhibit 10.2 of our Current Report on  Form 8-K filed with the SEC on September 18, 2007)                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.7                |       | Fourth Amendment to  Amended and Restated Loan and Security Agreement, dated as of November 5,  2007, by and among PC Mall, Inc, certain of its subsidiaries, Wachovia  Capital Finance Corporation (Western) and certain other financial  institutions (incorporated by reference to Exhibit 10.1 of our Current Report  on Form 8-K filed with the SEC on November 6, 2007)                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.8                |       | Lease Agreement, dated  as of July 1, 2001, by and between Sarcom Properties, Inc. and Sarcom Desktop  Solutions, Inc., as amended as of December 1, 2002 and as of March 22, 2004                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1                |       | Certification of the  Chief Executive Officer of the Registrant pursuant to Exchange Act Rule  13a-14(a)                                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2                |       | Certification of the  Interim 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 Interim  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                                                                                                                                                                                                                                                     |