# **UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

## **Washington, D.C.20549**

 

### **FORM 10-Q**

 

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

 

**For thequarterly period ended March 31, 2010**

 

**OR**

** **

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

 

**For thetransition period from                      to                      **

 

**CommissionFile Number: 0-25790**

 

**PCMALL, INC.**

(Exact name 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**

(Address of principal executive offices)

 

**(310)354-5600**

(Registrant’s telephone number, including area code)

 

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

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company. See definition of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

As of May 4, 2010,the registrant had 12,318,402 shares of common stock outstanding.

 

 

 

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**PC MALL,INC.**

 

**TABLE OFCONTENTS**

 
| ** **                                                                                                     | **Page** |
|----------------------------------------------------------------------------------------------------------------|----------|
| PART I - FINANCIAL INFORMATION (unaudited)                                                                |     |
|                                                                                                           |     |
| Item 1. Financial Statements                                                                                   |     |
|                                                                                                           |     |
| Consolidated Balance Sheets as of  March 31, 2010 and December 31, 2009                              | 2        |
|                                                                                                           |     |
| Consolidated Statements of  Operations for the Three Months Ended March 31, 2010 and March 31,  2009 | 3        |
|                                                                                                           |     |
| Consolidated Statement of  Stockholders’ Equity for the Three Months Ended March 31, 2010            | 4        |
|                                                                                                           |     |
| Consolidated Statements of  Cash Flows for the Three Months Ended March 31, 2010 and March 31,  2009 | 5        |
|                                                                                                           |     |
| Notes to the Consolidated Financial Statements                                                                 | 6        |
|                                                                                                           |     |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations           | 11       |
|                                                                                                           |     |
| Item 3. Quantitative  and Qualitative Disclosures About Market Risk                                            | 23       |
|                                                                                                           |     |
| Item  4. Controls and Procedures                                                                               | 23       |
|                                                                                                           |     |
| PART II - OTHER INFORMATION (unaudited)                                                                   |     |
|                                                                                                           |     |
| Item 1. Legal Proceedings                                                                                      | 24       |
|                                                                                                           |     |
| Item 1A. Risk Factors                                                                                          | 24       |
|                                                                                                           |     |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                           | 40       |
|                                                                                                           |     |
| Item 6. Exhibits                                                                                               | 40       |
|                                                                                                           |     |
| Signature                                                                                                      | 41       |

 

1

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**PC MALL,INC.**

 

**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**CONSOLIDATEDBALANCE SHEETS**

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

 
| ** **                                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                                                                                              | ** ** | **2010**           | ** ** | **2009**             | ** ** |
| **ASSETS**                                                                                                                                                              |       |               |       |                 |       |
| Current  assets:                                                                                                                                                        |       |               |       |                 |       |
| Cash  and cash equivalents                                                                                                                                              |       | $                  | 6,453      |                 | $          | 9,215 |   |
| Accounts  receivable, net of allowances of $2,974 and $2,740                                                                                                            |       | 153,738            |       | 161,468              |       |
| Inventories, net                                                                                                                                                        |       | 42,821             |       | 68,564               |       |
| Prepaid expenses and other  current assets                                                                                                                              |       | 10,072             |       | 9,290                |       |
| Deferred income taxes                                                                                                                                                   |       | 3,305              |       | 3,297                |       |
| Total current assets                                                                                                                                                    |       | 216,389            |       | 251,834              |       |
| Property and equipment,  net                                                                                                                                            |       | 17,851             |       | 17,091               |       |
| Deferred income taxes                                                                                                                                                   |       | 1,484              |       | 1,538                |       |
| Goodwill                                                                                                                                                                |       | 19,291             |       | 19,291               |       |
| Intangible assets, net                                                                                                                                                  |       | 9,941              |       | 10,354               |       |
| Other assets                                                                                                                                                            |       | 1,022              |       | 1,068                |       |
| Total assets                                                                                                                                                            |       | $                  | 265,978    |                 | $          | 301,176 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                           |       |               |       |                 |       |
| Current liabilities:                                                                                                                                                    |       |               |       |                 |       |
| Accounts payable                                                                                                                                                        |       | $                  | 85,505     |                 | $          | 108,773 |   |
| Accrued expenses and other  current liabilities                                                                                                                         |       | 20,017             |       | 25,148               |       |
| Deferred revenue                                                                                                                                                        |       | 10,394             |       | 9,714                |       |
| Line of credit                                                                                                                                                          |       | 45,086             |       | 53,127               |       |
| Note payable — current                                                                                                                                             |       | 1,148              |       | 1,038                |       |
| Total current liabilities                                                                                                                                               |       | 162,150            |       | 197,800              |       |
| Note payable and other  long-term liabilities                                                                                                                           |       | 5,209              |       | 5,621                |       |
| Total liabilities                                                                                                                                                       |       | 167,359            |       | 203,421              |       |
| Commitments and  contingencies (Note 9)                                                                                                                                 |       |               |       |                 |       |
| Stockholders’ equity:                                                                                                                                              |       |               |       |                 |       |
| Preferred stock, $0.001  par value; 5,000,000 shares authorized; none issued and outstanding                                                                            |       | —             |       | —               |       |
| Common stock, $0.001 par  value; 30,000,000 shares authorized; 14,066,490 and 14,031,740 shares issued;  and 12,314,652 and 12,290,652 shares outstanding, respectively |       | 14                 |       | 14                   |       |
| Additional paid-in capital                                                                                                                                              |       | 102,920            |       | 102,361              |       |
| Treasury stock, at cost:  1,751,838 and 1,741,088 shares                                                                                                                |       | (6,311             | )          | (6,254               | )          |
| Accumulated other  comprehensive income                                                                                                                                 |       | 2,300              |       | 2,111                |       |
| Accumulated deficit                                                                                                                                                     |       | (304               | )          | (477                 | )          |
| Total stockholders’ equity                                                                                                                                         |       | 98,619             |       | 97,755               |       |
| Total liabilities and  stockholders’ equity                                                                                                                        |       | $                  | 265,978    |                 | $          | 301,176 |   |

 

See Notes to theConsolidated Financial Statements.

 

2

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**PC MALL,INC.**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Net sales                                              |       | $                                      | 289,854    |   | $ | 259,300 |   |
| Cost of goods sold                                     |       | 251,825                                |       | 221,805 |   |
| Gross profit                                           |       | 38,029                                 |       | 37,495 |   |
| Selling, general and administrative expenses           |       | 37,253                                 |       | 35,435 |   |
| Operating profit                                       |       | 776                                    |       | 2,060 |   |
| Interest expense, net                                  |       | 482                                    |       | 364 |   |
| Income before income taxes                             |       | 294                                    |       | 1,696 |   |
| Income tax expense                                     |       | 121                                    |       | 685 |   |
| Net income                                             |       | $                                      | 173        |   | $ | 1,011 |   |
| **Basic and Diluted Earnings Per  Common Share**       |       |                                   |       |   |   |
| Basic                                                  |       | $                                      | 0.01       |   | $ | 0.08 |   |
| Diluted                                                |       | 0.01                                   |       | 0.08 |   |
| Weighted average number of common shares  outstanding: |       |                                   |       |   |   |
| Basic                                                  |       | 12,302                                 |       | 12,416 |   |
| Diluted                                                |       | 12,499                                 |       | 12,620 |   |

 

See Notes to theConsolidated Financial Statements.

 

3

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**PC MALL,INC.**

 

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**(unaudited,in thousands)**

 
| ** **                                                                                | ** ** | ** **       | ** ** | ** **   | ** ** | **Additional** | ** ** | ** **        | ** ** | **Accumulated  Other** | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------|------------|--------------|------------|----------------|------------|-------------------|------------|------------------------|------------|-------------|------------|------------|------------|
| ** **                                                                                | ** ** | **Common Stock** | ** ** | **Paid-in-** | ** ** | **Treasury**   | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | ** **  | ** ** |
| ** **                                                                                | ** ** | **Outstanding**  | ** ** | **Amount**   | ** ** | **Capital**    | ** ** | **Stock**         | ** ** | **Income**             | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| Balance at December 31, 2009                                                         |       | 12,291           |       | $            | 14         |           | $          | 102,361           |       | $                      | (6,254     | )           | $          | 2,111      |       | $ | (477 | ) | $ | 97,755 |   |
| Stock option exercises and restricted stock  awards, including related income tax benefit |       | 35               |       | —       |       | 55             |       | —            |       | —                 |       |        |       | 55         |       |
| Stock-based compensation expense                                                          |       | —           |       | —       |       | 504            |       | —            |       | —                 |       | —      |       | 504        |       |
| Purchase of common stock under a repurchase  program                                      |       | (11              | )          | ** **   |       |           |       | (57               | )          | ** **             |       |        |       | (57        | )          |
| Subtotal                                                                                  |       | —           |       | —       |       | —         |       | —            |       | —                 |       | —      |       | 98,257     |       |
| Net income                                                                                |       | —           |       | —       |       | —         |       | —            |       | —                 |       | 173         |       | 173        |       |
| Translation adjustments                                                                   |       | —           |       | —       |       | —         |       | —            |       | 189                    |       | —      |       | 189        |       |
| Comprehensive income                                                                      |       | —           |       | —       |       | —         |       | —            |       | —                 |       | —      |       | 362        |       |
| Balance at March 31, 2010                                                            |       | 12,315           |       | $            | 14         |           | $          | 102,920           |       | $                      | (6,311     | )           | $          | 2,300      |       | $ | (304 | ) | $ | 98,619 |   |

 

See Notes to theConsolidated Financial Statements.

 

4

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**PC MALL,INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited,in thousands)**

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                    | ** ** | **2009** | ** ** |
| **Cash Flows From Operating  Activities**                                          |       |                                        |       |   |   |
| Net income                                                                         |       | $                                           | 173        |   | $ | 1,011 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                        |       |   |   |
| Depreciation and amortization                                                      |       | 1,829                                       |       | 1,290 |   |
| Provision for deferred income taxes                                                |       | 86                                          |       | 231 |   |
| Net tax benefit (expense) related to stock option  exercises                       |       | 4                                           |       | (82 | ) |
| Excess tax benefit related to stock option  exercises                              |       | (10                                         | )          | (3 | ) |
| Non-cash stock-based compensation                                                  |       | 504                                         |       | 416 |   |
| Gain on sale of fixed assets                                                       |       | (11                                         | )          | — |   |
| Change in operating assets and liabilities:                                        |       |                                        |       |   |   |
| Accounts receivable                                                                |       | 7,730                                       |       | 20,742 |   |
| Inventories                                                                        |       | 25,743                                      |       | 20,307 |   |
| Prepaid expenses and other current assets                                          |       | (782                                        | )          | (1,544 | ) |
| Other assets                                                                       |       | 45                                          |       | 59 |   |
| Accounts payable                                                                   |       | (21,678                                     | )          | (14,506 | ) |
| Accrued expenses and other current liabilities                                     |       | (5,052                                      | )          | (5,842 | ) |
| Deferred revenue                                                                   |       | 680                                         |       | (3,066 | ) |
| Total adjustments                                                                  |       | 9,088                                       |       | 18,002 |   |
| Net cash provided by operating activities                                          |       | 9,261                                       |       | 19,013 |   |
| **Cash Flows From Investing  Activities**                                          |       |                                        |       |   |   |
| Purchases of property and equipment                                                |       | (2,164                                      | )          | (1,555 | ) |
| Net cash used in investing activities                                              |       | (2,164                                      | )          | (1,555 | ) |
| **Cash Flows From Financing  Activities**                                          |       |                                        |       |   |   |
| Repayments under notes payable                                                     |       | (253                                        | )          | (244 | ) |
| Net payments under line of credit                                                  |       | (8,041                                      | )          | (12,669 | ) |
| Change in book overdraft                                                           |       | (1,590                                      | )          | (4,660 | ) |
| Payments of obligations under capital lease                                        |       | (168                                        | )          | (32 | ) |
| Proceeds from stock issued under stock option  plans                               |       | 51                                          |       | 4 |   |
| Excess tax benefit related to stock option  exercises                              |       | 10                                          |       | 3 |   |
| Common shares repurchased and held in treasury                                     |       | (57                                         | )          | (1,588 | ) |
| Net cash (used in) provided by financing  activities                               |       | (10,048                                     | )          | (19,186 | ) |
| Effect of foreign currency on cash flow                                            |       | 189                                         |       | (144 | ) |
| Net change in cash and cash equivalents                                            |       | (2,762                                      | )          | (1,872 | ) |
| Cash and cash equivalents at beginning of the  period                              |       | 9,215                                       |       | 6,748 |   |
| Cash and cash equivalents at end of the period                                     |       | $                                           | 6,453      |   | $ | 4,876 |   |
| **Supplemental Cash Flow  Information**                                            |       |                                        |       |   |   |
| Interest paid                                                                      |       | $                                           | 455        |   | $ | 432 |   |
| Income taxes paid                                                                  |       | 215                                         |       | 1,821 |   |

 

See Notes to theConsolidated Financial Statements.

 

5

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**PC MALL,INC.**

 

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1. Basis of Presentation**

 

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

 

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

 

**2. Summary of New Accounting Standard**

 

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

 

**3. Goodwill and Intangible Assets**

 

*Goodwill*

 

Our goodwill, all of which is recorded in and heldby our MME segment, totaled $19.3 million as of March 31, 2010 and December 31,2009.

 

6

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*Intangible Assets*

* *

Thefollowing table sets forth the amounts recorded for intangible assets as of theperiods presented (in thousands):

 
| ** **                         | ** ** | **Weighted**     | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------------|------------|----------------------------|------------|-------------------------------|------------|------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                         | ** ** | **Average**      | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Estimated**    | ** ** | **At March 31, 2010** | ** ** | **At December 31, 2009** | ** ** |
| ** **                         | ** ** | **Useful Lives** | ** ** | **Gross**                  | ** ** | **Accumulated**               | ** ** | **Net**    | ** ** | **Gross**  | ** ** | **Accumulated**  | ** ** | **Net**    | ** ** |
| ** **                         | ** ** | **(years)**      | ** ** | **Amount**                 | ** ** | **Amortization**              | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Patent, trademarks & URLs |       | 7                |       | $                          | 5,878      | (1)                           | $          | 563        |       | $          | 5,315      |             | $          | 5,878      | (1)        | $ | 557 |   | $ | 5,321 |   |
| Customer relationships             |       | 5                |       | 8,104                      |       | 4,017                         |       | 4,087      |       | 8,104      |       | 3,662            |       | 4,442      |       |
| Non-compete agreements             |       | 5                |       | 918                        |       | 379                           |       | 539        |       | 918        |       | 327              |       | 591        |       |
| Other                              |       | 5                |       | 32                         |       | 32                            |       | —     |       | 32         |       | 32               |       | —     |       |
| Total intangible assets            |       |             |       | $                          | 14,932     |                          | $          | 4,991      |       | $          | 9,941      |             | $          | 14,932     |       | $ | 4,578 |   | $ | 10,354 |   |

 

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

 

Amortizationexpense for intangible assets was approximately $0.4 million for the threemonths ended March 31, 2010 and 2009. Estimated amortization expense forintangible assets in each of the next four years and thereafter is as follows:$1.2 million in the remainder of 2010; $1.7 million in 2011; $1.4 million in2012; $0.4 million in 2013; and $29,000 thereafter.

 

**4. Line of Credit and Notes Payable**

 

Wemaintain an asset-based revolving credit facility, as amended from time totime, of up to $150 million from a lending unit of a large commercial bank. Thecredit facility provides for, among other things, (i) a credit limit of$130 million up to a total maximum amount of $150 million, in increments of $5million, provided that any increase of the total credit limit in excess of $130million is subject to an acceptance by a third party assignee in the event theadministrative agent elects to assign such excess amount; (ii) a lineincrease fee equal to 0.25% of the amount of each increment increased 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; (iii) LIBORinterest rate options that we can enter into with no limit on the maximumoutstanding principal balance which may be subject to a LIBOR interest rateoption; and (iv) a maturity date of March 2011. In October 2008,we elected to increase our maximum credit line to $130 million from a previousmaximum of $115 million.

 

Thecredit facility, which functions as a working capital line of credit with aborrowing base of inventory and accounts receivable, including certain creditcard receivables, also includes a monthly unused line fee of 0.25% per year onthe amount, if any, by which 80% of the Maximum Credit, as defined in theagreement, then in effect, exceeds the average daily principal balance of theoutstanding borrowings during the immediately preceding month. At March 31,2010, we had $45.1 million of net working capital advances outstanding underthe line of credit. At March 31, 2010, the maximum credit line was $130million and we had $56.8 million available to borrow for working capitaladvances under the line of credit. There can be no assurance that theadministrative agent, if electing to do so, will be successful in assigning theremaining excess $20 million of credit beyond the $130 million in any futureperiod. As a result, we may not be able to access the credit facility beyondits current limit of $130 million and given the current credit marketenvironment, we do not currently expect to be able to do so on our existingcredit facility terms.

 

Thecredit facility is collateralized by substantially all of our assets. Inaddition to the security interest required by the credit facility, certain ofour vendors have security interests in some of our assets related to theirproducts. The credit facility has as its single financial covenant a minimumtangible net worth requirement that is tested as of the last day of each fiscalquarter, which we were in compliance with at March 31, 2010. Loanavailability under the line of credit fluctuates daily and is affected by manyfactors, including eligible assets on-hand, opportunistic purchases ofinventory and availability and utilization of early-pay discounts.

 

Ourexisting credit facility contains terms that are more favorable to us thanterms that we believe would otherwise be available to us in the current creditmarket environment. We have been informed by the administrative agent for thefacility that any amendment, modification, waiver, consent or other change wemay seek with regard to our facility, including a consent to pursue anacquisition, will result in the renegotiation of the terms of the facility andwould likely include terms less favorable to us, such as stricter financialcovenants (such as covenants requiring us to maintain minimum levels of excess 

 

7

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borrowing capacity or be subject to minimum fixedcharge coverage ratios) and less favorable interest rates. These limitationscould adversely affect our ability to make certain strategic investments orpursue certain acquisitions and other strategic transactions. Additionally, ifmarket conditions have not improved by the time our current credit facilityexpires in March 2011, we expect that any new facility, to the extentavailable to us at such time, would be on terms less favorable to us than ourexisting credit facility.

 

Inconnection with and as part of the amended credit facility, we entered into anamended term note on September 17, 2007 with a principal balance of $5.425million, payable in equal monthly principal installments beginning on October 1,2007, plus interest at the prime rate with a LIBOR option. The amended termnote matures in September 2014 or, in the event of a default, terminationor non-renewal of our credit facility, is payable in its entirety upon demandby our lender. At March 31, 2010, we had $3.5 million outstanding underthe amended term note. Our term note matures as follows: $581,250 in theremainder of 2010, $775,000 annually in each of the years 2011 through 2013 and$581,250 thereafter.

 

At March 31,2010, our effective weighted average annual interest rate on outstandingamounts under the credit facility and term note was 1.77%.

 

As of March 31,2010, $0.3 million and $0.4 million relating to the financing of our purchaseof Microsoft AX (Axapta), which is a part of our ERP upgrade, were included in “Notespayable — current” and “Notes payable and other long-term liabilities,”respectively, on our Consolidated Balance Sheets.

 

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

 

**5. Income Taxes**

 

*Accounting for Uncertainty in IncomeTaxes*

 

ASC740 clarifies the accounting for uncertainty in tax positions by prescribingthe recognition threshold a tax position is required to meet before beingrecognized in the financial statements. It also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. We had no unrecognized tax benefits and noaccrued interest or penalties recognized as of the date of our adoption of ASC740. During the three months ended March 31, 2010, there were no changesin our unrecognized tax benefits, and we had no accrued interest or penaltiesas of March 31, 2010.

 

We aresubject to U.S. and foreign income tax examinations for years subsequent to2005, and state income tax examinations for years following 2004. In addition, certainfederal and state net operating loss carryforwards generated after 1998 and1996, respectively, and used in a subsequent year, may still be adjusted by ataxing authority upon examination.

 

**6. Earnings Per Share**

 

Basicearnings per share (“EPS”) excludes dilution and is computed by dividing netincome by the weighted average number of common shares outstanding during thereported periods. Diluted EPS reflects the potential dilution that could occurunder the treasury stock method if stock options and other commitments to issuecommon stock were exercised, except in loss periods where the effect would beantidilutive. For the three months ended March 31, 2010 and 2009,approximately 2,213,000 and 2,083,000 shares of common stock underlying stockoptions have been excluded from the calculation of diluted EPS because theeffect of their inclusion would be antidilutive.

 

8

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Thereconciliation of the amounts used in the basic and diluted EPS computation wasas follows (in thousands, except per share amounts):

 
| ** **                                   | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per Share  Amounts** | ** ** |
|----------------------------------------------|------------|-----------------|------------|------------|------------|------------------------|------------|
| **Three Months Ended  March 31, 2010:** |       |            |       |       |       |                   |       |
| Basic EPS                                    |       |            |       |       |       |                   |       |
| Net income                                   |       | $               | 173        |       | 12,302     |                   | $          | 0.01 |   |
| Effect of dilutive securities                |       |            |       |       |       |                   |       |
| Dilutive effect of stock options             |       | —          |       | 197        |       |                   |       |
| Diluted EPS                                  |       |            |       |       |       |                   |       |
| Adjusted net income                          |       | $               | 173        |       | 12,499     |                   | $          | 0.01 |   |
| ** **                                   |       |            |       |       |       |                   |       |
| **Three Months Ended  March 31, 2009:** |       |            |       |       |       |                   |       |
| Basic EPS                                    |       |            |       |       |       |                   |       |
| Net income                                   |       | $               | 1,011      |       | 12,416     |                   | $          | 0.08 |   |
| Effect of dilutive securities                |       |            |       |       |       |                   |       |
| Dilutive effect of stock options             |       | —          |       | 204        |       |                   |       |
| Diluted EPS                                  |       |            |       |       |       |                   |       |
| Adjusted net income                          |       | $               | 1,011      |       | 12,620     |                   | $          | 0.08 |   |

 

**7. Comprehensive Income**

 

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

 

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Net income                               |       | $                                      | 173        |   | $ | 1,011 |   |
| Other comprehensive loss:                |       |                                   |       |   |   |
| Foreign currency translation adjustments |       | 189                                    |       | (144 | ) |
| Total comprehensive income               |       | $                                      | 362        |   | $ | 867 |   |

 

**8. Segment Information**

 

Summarizedsegment information for our continuing operations for the periods presented isas follows (in thousands):

 
| ** **                                  | ** ** | **SMB**    | ** ** | **MME**    | ** ** | **Public Sector** | ** ** | **MacMall** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|-------------|------------|---------------------------------|------------|------------------|------------|
| **Three Months Ended  March 31, 2010** |       |       |       |       |       |              |       |        |       |                            |       |             |       |
| Net sales                                   |       | $          | 107,994    |       | $          | 96,491            |       | $           | 44,015     |                            | $          | 41,334           |       | $ | 20 |   | $ | 289,854 |   |
| Gross profit                                |       | 13,397     |       | 16,481     |       | 3,629             |       | 4,461       |       | 61                              |       | 38,029           |       |
| Depreciation and amortization expense(1)    |       | 4          |       | 653        |       | 52                |       | 88          |       | 1,032                           |       | 1,829            |       |
| Operating profit                            |       | 6,384      |       | 4,614      |       | 378               |       | 554         |       | (11,154                         | )          | 776              |       |
|                                        |       |       |       |       |       |              |       |        |       |                            |       |             |       |
| **Three Months Ended  March 31, 2009** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net sales                                   |       | $          | 89,504     |       | $          | 84,930            |       | $           | 27,240     |                            | $          | 57,619           |       | $ | 7 |   | $ | 259,300 |   |
| Gross profit                                |       | 11,281     |       | 15,871     |       | 3,683             |       | 6,632       |       | 28                              |       | 37,495           |       |
| Depreciation and amortization expense(1)    |       | 14         |       | 620        |       | 43                |       | 29          |       | 584                             |       | 1,290            |       |
| Operating profit                            |       | 5,439      |       | 4,147      |       | 894               |       | 1,841       |       | (10,261                         | )          | 2,060            |       |

 

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(1) Primary fixed assetsrelating to network and servers are managed by the Corporate headquarters. Assuch, depreciation expense relating to such assets is included as part ofCorporate and Other.

 

As of March 31,2010 and December 31, 2009, we had total consolidated assets of $266.0million and $301.2 million. Our management does not have available to them anddoes not use total assets measured at the segment level in allocatingresources. Therefore, such information relating to segment assets is notprovided herein.

 

9

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**9. Commitments and Contingencies**

 

Totalrent expense under our operating leases, net of sublease income, was $1.7million and $1.5 million for each of the three month periods ended March 31,2010 and March 31, 2009. Some of our leases contain renewal options andescalation clauses, and require us to pay taxes, insurance and maintenancecosts.

 

*Legal Proceedings*

 

Fromtime to time, we receive claims of and become subject to consumer protection,employment, intellectual property and other litigation related to the conductof our business. Any such litigation could be costly and time consuming andcould divert our management and key personnel from our business operations. Inconnection with any such litigation, we may be subject to significant damagesor equitable remedies relating to the operation of our business. Any suchlitigation may materially harm our business, results of operations andfinancial condition.

 

* * *

 

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**ITEM 2.****       ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS**

 

*You should read the followingManagement’s Discussion and Analysis of**FinancialCondition and Results of Operations together with the consolidated**financial statements and related notes includedelsewhere in this report, our**AnnualReport on Form 10-K for the year ended December 31, 2009 filed withthe**SEC on March 16, 2010,as amended and filed on April 30, 2010, and all of our other**periodic filings, including Current Reports on Form 8-K,filed with the SEC**after the endof our 2009 fiscal year and through the date of this report. This discussioncontains**forward-lookingstatements that involve risks and uncertainties. Our actual**results could differ materially from thoseanticipated in these forward-looking**statements as a result of various factors, including those describedunder**“Forward-Looking Statements”below and under “Risk Factors” in Item 1A of Part II, and elsewhere inthis report.*

 

**BUSINESS OVERVIEW**

 

PC Mall, Inc., together with its wholly-ownedsubsidiaries (collectively referred to as “PC Mall,” “we” or “us”), founded in1987, is a value added direct marketer of technology products, services andsolutions to businesses, government and educational institutions and individualconsumers. We offer our products, services and solutions through dedicatedaccount executives, field service teams, various direct marketing techniquesand three retail stores. We also utilize distinctive full-color catalogs under thePC Mall, MacMall, PC Mall Gov and SARCOM brands and our websites pcmall.com,macmall.com, pcmallgov.com, gmri.com, sarcom.com, abreon.com, onsale.com andclubmac.com and other promotional materials.

 

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

 

We have four operating segments for financialreporting purposes, consisting of SMB, MME, Public Sector and MacMall. Ouroperating segments are primarily aligned based upon their respective customerbase. We include corporate related expenses such as legal, accounting,information technology, product management and other administrative costs thatare not otherwise included in our operating segments in Corporate and Other. Weallocate our resources to and evaluate the performance of our segments based onoperating income.

 

We experience variabilityin our net sales and operating results on a quarterly basis as a result of manyfactors. We experience some seasonal trends in our sales of technologyproducts, services and solutions to businesses, government and educationalinstitutions and individual customers. For example, the timing of capitalbudget authorizations for our customers in the small and medium sized businesssector and the mid-market and enterprise sector can affect when these companiescan procure IT products and services. The fiscal year-ends of Public Sectorcustomers vary for those in the federal government space and those in the stateand local government and educational institution (“SLED”) sector. We generallysee an increase in our second quarter sales related to customers in the SLEDsector and in our third quarter sales related to customers in the federalgovernment space as these customers close out their budgets for their fiscalyear. Also, consumer holiday spending contributes to variances in our quarterlyresults. As such, the results of interim periods are not necessarily indicativeof the results that may be expected for any other interim period or for thefull year.

 

There has been substantialongoing weakness in the global economic environment, coupled with disruptionsin the capital and credit markets. General economic conditions have an effecton our business and results of operations across all of our segments. As aresult of the ongoing tightness in the credit markets, softness in the housingmarket, difficulties in the financial services sector, general economicweakness and continuing economic uncertainties, the direction and relativestrength of the U.S. economy has remained considerably uncertain. If economicgrowth in the U.S. and other countries’ economies continues to be slow ordeclines, consumer and business spending rates could be significantly reduced.These developments could also increase the risk of uncollectible accountsreceivable from our customers. 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 

 

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businessand results of operations, and could significantly hinder our growth. Thesefactors could result in reductions in sales of our products, longer salescycles, slower adoption of new technologies and increased price competition,which could materially and adversely affect our business, results of operationsand financial condition. In response to these developments, we have focused ourefforts on cost reduction initiatives, competitive pricing strategies anddriving higher margin service and solution sales, while continuing to makeselective investments in our sales force personnel, service capabilities and ITinfrastructure and tools in an effort to position us for enhanced productivityand future growth. Weare currently engaged in an aggressive market share growth strategy in certainof our segments, which includes targeted aggressive pricing to acquire orenhance customer relationships as well as to enhance vendor relationships.

 

Our planned operatingexpenditures each quarter are based on sales forecasts for the quarter. If oursales do not meet expectations in any given quarter, our operating results forthe quarter may be materially adversely affected. Our narrow gross margins maymagnify the impact of these factors on our operating results. Managementregularly reviews our operating performance using a variety of financial andnon-financial metrics including sales, shipments, gross margin, vendorconsideration, advertising expense, personnel costs, account executiveproductivity, accounts receivable aging, inventory turnover, liquidity and cashresources. Our management monitors the various metrics against goals andbudgets, and makes necessary adjustments intended to enhance our performance.

 

A substantial portion of our business is dependent onsales of Apple, HP, and products purchased from other vendors including Adobe,Cisco, Ingram Micro, Lenovo, Microsoft, Sun Microsystems and Tech Data.Products manufactured by HP represented approximately 19% of our net sales ineach of the three months ended March 31, 2010 and 2009. Productsmanufactured by Apple represented approximately 16% and 19% of our net sales inthe three months ended March 31, 2010 and 2009.

 

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

 

We evaluate acquisitionopportunities based on our assessment of several factors, including theperceived value of the opportunity, our available financing sources, and potentialsynergies of the acquisition target with our business. Our ability to completeacquisitions in the future will depend on our ability to fund such acquisitionswith our internally available cash, cash generated from operations, amountsavailable under our existing credit facilities, additional borrowings or fromthe issuance of additional securities. As more fully discussed under “Liquidityand Capital Resources” below, certain trends in our operating results mayimpact our available cash resources and availability under our creditfacilities, which in turn may impact our ability to pursue our acquisitionstrategy.

 

**STRATEGIC DEVELOPMENTS**

 

We are currently upgrading many of our IT systems. Wehave purchased licenses for workflow software, web development tools andMicrosoft Dynamics AX (Axapta) to upgrade our ERP systems. We initiated theimplementation and upgrade of our eCommerce system in the second half of 2008and have completed and launched a new generation of our public sites atmacmall.com, onsale.com and pcmall.com. We are currently working on theimplementation of the ERP modules and the upgrade of the ERP systems, includingadditional enhancements and features. We have completed the initial phase ofthe implementation in January 2010, and we expect to be complete with allphases of the implementation of the ERP systems by 2013. We believe theimplementation and upgrade should help us to gain further efficiencies acrossour organization. To date, we have incurred approximately $4.3 million of externalcosts, and approximately $1.6 million of internal capitalized labor costsrelated to the implementation of the ERP systems. In addition, based on ourestimates, which are subject to change, we expect to incur approximately $5.0million of additional external costs related to the implementation of the ERPsystems. We also expect to incur material additional internal capitalized laborcosts related to the ERP systems in the future.

 

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

 

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**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

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

 

Management considers an accounting estimate to becritical if:

 

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

 

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

 

Management has discussedthe development and selection of these critical accounting policies andestimates with the audit committee of our board of directors. We believe thecritical accounting policies described below affect the more significantjudgments and estimates used in the preparation of our consolidated financialstatements. For a summary of our significant accounting policies, includingthose discussed below, see Note 2 of the Notes to the Consolidated FinancialStatements in Item 8, Part II, of our Annual Report on Form 10-K forthe year ended December 31, 2009 filed with the SEC on March 16,2010, as amended and filed on April 30, 2010.

 

*RevenueRecognition.*Weadhere to the revised guidelines and principles of sales recognition describedin ASC 605 (formerly Staff Accounting Bulletin No. 104, “RevenueRecognition,” issued by the staff of the SEC as a revision to Staff AccountingBulletin No. 101, “Revenue Recognition”). Under ASC 605, product sales arerecognized when the title and risk of loss are passed to the customer, there ispersuasive evidence of an arrangement for sale, delivery has occurred and/orservices have been rendered, the sales price is fixed and determinable andcollectability is reasonably assured. Under these guidelines, the majority ofour sales, including revenue from product sales and gross outbound shipping andhandling charges, are recognized upon receipt of the product by the customer.In accordance with our revenue recognition policy, we perform an analysis toestimate the number of days products we have shipped are in transit to ourcustomers using data from our third party carriers and other factors. We recordan adjustment to reverse the impact of sale transactions based on the estimatedvalue of products that have shipped, but have not yet been received by ourcustomers, and we recognize such amounts in the subsequent period when deliveryhas occurred. Changes in delivery patterns or unforeseen shipping delays beyondour control could have a material impact on our revenue recognition for thecurrent period.

 

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

 

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

 

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

 

*Allowancefor Doubtful Accounts Receivable.*We maintain an allowance for doubtful accountsreceivable based upon estimates of future collection. We extend credit to ourcustomers based upon an evaluation of each customer’s financial condition andcredit history, and generally do not require collateral. We regularly evaluateour customers’ financial condition and credit history in determining theadequacy of our allowance for doubtful accounts. We also maintain an allowancefor uncollectible vendor receivables, which arise from vendor rebate programs,price protections and other promotions. We determine the sufficiency of thevendor receivable allowance based upon various factors, including paymenthistory. Amounts received from vendors may vary from amounts recorded becauseof potential non-compliance with certain elements of vendor programs. If theestimated allowance for uncollectible accounts or vendor receivablessubsequently proves to be insufficient, additional allowance may be required.

 

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*Reservefor Inventory Obsolescence.*We maintain an allowance for the valuation of ourinventory by estimating obsolete or unmarketable inventory based on thedifference between inventory cost and market value, which is determined bygeneral market conditions, nature, age and type of each product and assumptionsabout future demand. We regularly evaluate the adequacy of our inventoryreserve. If our inventory reserve subsequently proves to be insufficient,additional allowance may be required.

 

*Mail-InRebate Redemption Rate Estimates.*We accrue monthly expense related to promotionalmail-in rebates based upon the quantity of eligible orders transacted duringthe period and the estimated redemption rate. The estimated expense is accruedand presented as a reduction of net sales. The estimated redemption rates usedto calculate the accrued mail-in rebate expense and related mail-in rebateliability are based upon historical redemption experience rates for similarproducts or mail-in rebate amounts. Estimated redemption rates and the relatedmail-in rebate expense and liability are regularly adjusted as actual mail-inrebate redemptions for the program are processed. If actual redemption ratesare greater than anticipated, additional expense may be incurred.

 

*AdvertisingCosts and Vendor Consideration.*We account for advertising costs in accordance withASC 340-20 (formerly 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 circulate catalogs throughoutthe year, we receive market development funds and other vendor considerationfrom vendors included in each catalog. These funds are deferred and recognizedbased on sales generated over the life of the catalog. Deferred vendorconsideration is included in “Accrued expenses and other current liabilities”in our Consolidated Balance Sheets. We also receive other non-catalog relatedvendor consideration from our vendors in the form of cooperative marketingallowances, volume incentive rebates and other programs to support ourmarketing of their products. Most of our vendor consideration is accrued, whenperformance required for recognition is completed, as an offset to cost ofsales in accordance with ASC 605-50 (formerly EITF 02-16, “Accounting by aCustomer (Including a Reseller) for Certain Consideration Received from aVendor”) since such funds are not a reimbursement of specific, incremental,identifiable costs incurred by us in selling the vendors’ products. At the endof any given period, unbilled receivables related to our vendor considerationare included in our “Accounts receivable, net of allowances.”

 

*Stock-BasedCompensation.*Since January 1, 2006, we have accounted for stock-basedcompensation in accordance with ASC 718 (formerly financial AccountingStandards Board Statement No. 123 (revised 2004), “Share-Based Payment”),using the modified prospective application transition method. ASC 718 addressesthe accounting for share-based payment transactions in which an enterprisereceives employee services in exchange for either equity instruments of theenterprise or liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. ASC 718 generally requires that such transactions be accounted forusing a fair value based method and recognized as expenses in our ConsolidatedStatements of Operations. The provisions of ASC 718 apply to new stock optiongrants subsequent to December 31, 2005 and unvested stock optionsoutstanding as of January 1, 2006.

 

Pursuant to ASC 718, weestimate the grant date fair value of each stock option grant awarded pursuantto ASC 718 using the Black-Scholes option pricing model and managementassumptions made regarding various factors, including expected volatility ofour common stock, expected life of options granted and estimated forfeiturerates, which require extensive use of accounting judgment and financialestimates. In estimating our assumption regarding expected term for options wegranted during the year ended December 31, 2007, we applied the simplifiedmethod set out in ASC 718 (which also includes former SEC Staff AccountingBulletin No. 107, “Share-Based Payment,” which was issued in March 2005).For options granted during the quarter ended March 31, 2010 and the yearsended December 31, 2009 and 2008, we computed the expected term based uponan analysis of historical exercises of stock options by our employees. Wecompute our expected volatility using a frequency of weekly historical pricesof our common stock for a period equal to the expected term of the options. Therisk free interest rate is determined using the implied yield on U.S. Treasuryissues with a remaining term within the contractual life of the award. We estimatean annual forfeiture rate based on our historical forfeiture data, which ratewill be revised, if necessary, in future periods if actual forfeitures differfrom those estimates. Any material change in the estimates used in calculatingthe stock-based compensation expense could result in a material impact on ourresults of operations.

 

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*Goodwilland Intangible Assets.*Goodwill is carried at historical costs, subject to write-down, asneeded, based upon an impairment analysis that we perform annually, or soonerif an event occurs or circumstances change that would more likely than notresult in an impairment loss. We perform our annual impairment test forgoodwill and indefinite lived intangible assets as of December 31 of eachyear. Under ASC 350 (formerly SFAS No. 142, “Goodwill and Other IntangibleAssets”), goodwill impairment is deemed to exist if the net book value of areporting unit exceeds its estimated fair value. Events that may create animpairment review include, but are not limited to, significant and sustaineddecline in our stock price or market capitalization, significantunderperformance of operating units and significant changes in marketconditions. Changes in estimates of future cash flows or changes in marketvalues could result in a write-down of our goodwill in a future period. If animpairment loss results from the annual impairment test, such loss will berecorded as a pre-tax charge to our operating income. We amortize other intangibleassets with definite lives generally on a straight-line basis over theirestimated useful lives.

 

**RESULTS OF OPERATIONS**

 

**Consolidated Statements of OperationsData**

 

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

 
| ** **                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Net sales                                    |       | $                                      | 289,854    |   | $ | 259,300 |   |
| Cost of goods sold                           |       | 251,825                                |       | 221,805 |   |
| Gross profit                                 |       | 38,029                                 |       | 37,495 |   |
| Selling, general and administrative expenses |       | 37,253                                 |       | 35,435 |   |
| Operating profit                             |       | 776                                    |       | 2,060 |   |
| Interest expense, net                        |       | 482                                    |       | 364 |   |
| Income before income taxes                   |       | 294                                    |       | 1,696 |   |
| Income tax expense                           |       | 121                                    |       | 685 |   |
| Net income                                   |       | $                                      | 173        |   | $ | 1,011 |   |

 
| ** **                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net sales                                    |       | 100.0                                  | %          | 100.0 | % |
| Cost of goods sold                           |       | 86.9                                   |       | 85.5 |   |
| Gross profit                                 |       | 13.1                                   |       | 14.5 |   |
| Selling, general and administrative expenses |       | 12.8                                   |       | 13.7 |   |
| Operating profit                             |       | 0.3                                    |       | 0.8 |   |
| Interest expense, net                        |       | 0.2                                    |       | 0.1 |   |
| Income before income taxes                   |       | 0.1                                    |       | 0.7 |   |
| Income tax expense                           |       | 0.0                                    |       | 0.3 |   |
| Net income                                   |       | 0.1                                    | %          | 0.4 | % |

 

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**Three Months Ended March 31,2010 Compared to the Three Months Ended March 31,****2009**

 

*NetSales.*Thefollowing table presents our net sales, by segment, for the periods presented(dollars in thousands):

 
| ** **             | ** ** | **Three Months Ended  March 31,** | ** ** | **Change** | ** ** |
|------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                      | 107,994    |       | $          | 89,504 |   | $ | 18,490 |   | 20.7 | % |
| MME                    |       | 96,491                                 |       | 84,930     |       | 11,561 |   | 13.6 |   |
| Public Sector          |       | 44,015                                 |       | 27,240     |       | 16,775 |   | 61.6 |   |
| MacMall                |       | 41,334                                 |       | 57,619     |       | (16,285 | ) | (28.3 | ) |
| Corporate and Other    |       | 20                                     |       | 7          |       | 13 |   | NMF | (1) |
| Consolidated net sales |       | $                                      | 289,854    |       | $          | 259,300 |   | $ | 30,554 |   | 11.8 | % |

 

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(1) Not meaningful

 

Our consolidatednet sales for the first quarter of 2010 were $289.9 million, a $30.6 million or12% increase from consolidated net sales of $259.3 million in the first quarterof 2009.

 

Our SMB segmentnet sales increased by $18.5 million, or 21%, in the first quarter of 2010 to$108.0 million from $89.5 million in the first quarter of 2009. The increase inSMB segment net sales was primarily due to an improvement in demand environmentand an increase in revenues from SMB’s new sales office located in Chicago,combined with SMB’s aggressive market growth strategy.

 

OurMME segment net sales increased by $11.6 million, or 14%, in the first quarterof 2010 to $96.5 million from $84.9 million in the first quarter of 2009. Thisincrease was primarily due to increased spending by customers in the mid-marketand enterprise sector in the first quarter of 2010. Product revenues increasedby 27% in the first quarter of 2010 compared to the first quarter of 2009 whileservice revenues decreased by 20% in the first quarter of 2010 compared to thesame period of 2009. Service revenues represented 19% of MME net sales in thefirst quarter of 2010 compared to 27% of sales in the same period of 2009. Theservice revenue decline was primarily due to a 23% decline in MME’s Sarcombranded professional and managed services in the first quarter of 2010 comparedto the first quarter of 2009 resulting from certain large service projects inthe first quarter of 2009 that did not reoccur in the first quarter of 2010. Inaddition, MME service revenues were also impacted by a 15% decline in servicesperformed under our Abreon brand, which is primarily focused on changemanagement and eLearning consulting. This decline was due primarily to areduction in projects associated with larger ERP migrations. MME’s servicerevenue vehicles are primarily contract-based and have longer lead times. As aresult, the decline in services revenue lagged the economic decline, and webelieve service revenue recovery has lagged the economic turnaround.

 

OurPublic Sector segment net sales increased by $16.8 million, or 62%, in thefirst quarter of 2010 to $44.0 million compared to $27.2 million in the firstquarter of 2009. This increase in Public Sector net sales was due to anincrease in net sales in both our federal government business and our SLEDbusiness driven by stronger demand and our aggressive public sector marketshare growth strategy, as well as significant backlog from a large customercarried over from the fourth quarter of 2009.

 

Our MacMallsegment net sales decreased by $16.3 million, or 28%, in the first quarter of2010 compared to $57.6 million in the first quarter of 2009. This decrease inMacMall net sales was primarily due to our intentional strategy shift to focusthe MacMall brand on higher profit customer segments such as small businessesand creative professionals. The decrease in MacMall net sales was also affectedby continued competition in the market for Apple products and the absence ofyear end opportunistic purchases we made in 2008 which we were able toprofitably sell in the first quarter of 2009.

 

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

 
| ** **                                        | ** ** | **Three Months Ended  March 31,** | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                        | ** ** | **2010**                               | ** ** | **2009**         | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | ** **                             | ** ** | **Gross Profit** | ** ** | ** **       | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | **Gross Profit**                       | ** ** | **Margin**       | ** ** | **Gross Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                               |       | $                                      | 13,397     |             | 12.4       | %                | $          | 11,281 |   | 12.6 | % | $ | 2,116 |   | (0.2 | )% |
| MME                                               |       | 16,481                                 |       | 17.1             |       | 15,871           |       | 18.7 |   | 610 |   | (1.6 | ) |
| Public Sector                                     |       | 3,629                                  |       | 8.2              |       | 3,683            |       | 13.5 |   | (54 | ) | (5.3 | ) |
| MacMall                                           |       | 4,461                                  |       | 10.8             |       | 6,632            |       | 11.5 |   | (2,171 | ) | (0.7 | ) |
| Corporate and Other                               |       | 61                                     |       | NMF              | (1)        | 28               |       | NMF | (1) | 33 |   | NMF | (1) |
| Consolidated gross profit and gross profit margin |       | $                                      | 38,029     |             | 13.1       | %                | $          | 37,495 |   | 14.5 | % | $ | 534 |   | (1.4 | )% |

 

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(1) Not meaningful

 

Consolidatedgross profit for the first quarter of 2010 was $38.0 million compared to $37.5million in the first quarter of 2009, a $0.5 million or $1% increase.Consolidated gross profit margin was 13.1% in the first quarter of 2010compared to 14.5% in the first quarter of 2009.

 

Gross profit forour SMB segment increased by $2.1 million, or 19%, to $13.4 million in thefirst quarter of 2010 compared to $11.3 million in the first quarter of 2009and SMB gross profit margin decreased by 20 basis points to 12.4% in the firstquarter 2010 compared to 12.6% in the first quarter 2009. The increase in SMBgross profit was primarily due to increased SMB net sales discussed above. Thedecrease in SMB gross profit margin was primarily due to a competitive pricingenvironment and our aggressive SMB market share growth strategy.

 

Gross profit forour MME segment increased by $0.6 million, or 4%, to $16.5 million in the firstquarter of 2010 compared to $15.9 million in the first quarter of 2009 and MMEgross profit margin decreased by 160 basis points to 17.1% in the first quarterof 2010 compared to 18.7% in the first quarter of 2009. The increase in MMEgross profit was primarily due to increased MME net sales discussed above. Thedecrease in MME gross profit margin was primarily due to a competitive pricingenvironment and the decline in services as a percentage of sales.

 

Gross profit forour Public Sector segment decreased by $0.1 million, or 1%, to $3.6 million inthe first quarter of 2010 compared to $3.7 million in the first quarter of 2009and Public Sector gross profit margin decreased by 530 basis points to 8.2% inthe first quarter of 2010 compared to 13.5% in the first quarter of 2009. Thedecrease in Public Sector gross profit and gross profit margin was primarilydue to a higher mix of large, lower margin deals in first quarter of 2010. Inthe first quarter of 2009, our Public Sector business had an unusually highmargin mix of transactions that resulted in margins higher than typicallyachieved. Excluding the impact of the first quarter of 2009, our Public Sectorsegment had an average gross profit margin of 10% for the remainder of 2009.Our 8.2% gross profit margin for the first quarter of 2010 reflects ourpreviously stated market share growth strategy in the Public Sector business,specifically on the Wintel platform in order to broaden our sales mix.

 

Grossprofit for our MacMall segment decreased by $2.1 million, or 33%, to $4.5million in the first quarter of 2010 compared to $6.6 million in the firstquarter of 2009 and MacMall gross profit margin decreased by 70 basis points to10.8% in the first quarter of 2010 compared to 11.5% in the first quarter of2009. The decrease in MacMall gross profit was primarily due to the decreasedMacMall net sales discussed above. The decrease in MacMall gross profit marginwas primarily due to the higher margin sales in the first quarter of 2009mentioned above that did not reoccur in the first quarter of 2010 and thecontinued competitive pricing environment. We do not expect this competitiveenvironment to improve in the near term; however, we are refining our MacMallmarket strategy to address the new market dynamics by focusing on higher profitcustomer segments such as small businesses and creative professionals.

 

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*Operating Profit and OperatingProfit Margin.*Thefollowing table presents our operating profit and operating profit margin, bysegment, for the periods presented (dollars in thousands):

 
| ** **                                                 | ** ** | **Three Months Ended  March 31,** | ** ** | ** **            | ** ** | ** **    | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------|------------|---------------|------------|
| ** **                                                 | ** ** | **2010**                               | ** ** | **2009**              | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Operating**                          | ** ** | **Operating  Profit** | ** ** | **Operating** | ** ** | **Operating  Profit** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **Profit**                             | ** ** | **Margin(1)**         | ** ** | **Profit**    | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                        |       | $                                      | 6,384      |                  | 5.9        | %             | $          | 5,439 |   | 6.1 | % | $ | 945 |   | (0.2 | )% |
| MME                                                        |       | 4,614                                  |       | 4.8                   |       | 4,147         |       | 4.9 |   | 467 |   | (0.1 | ) |
| Public Sector                                              |       | 378                                    |       | 0.9                   |       | 894           |       | 3.3 |   | (516 | ) | (2.4 | ) |
| MacMall                                                    |       | 554                                    |       | 1.3                   |       | 1,841         |       | 3.2 |   | (1,287 | ) | (0 | ) |
| Corporate and Other                                        |       | (11,154                                | )          | (3.8                  | )(1)       | (10,261       | )          | (4.0 | )(1) | (893 | ) | (0.2 | )(1) |
| Consolidated operating profit and operating profit  margin |       | $                                      | 776        |                  | 0.3        | %             | $          | 2,060 |   | 0.8 | % | $ | (1,284 | ) | (0.5 | )% |

 

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

 

Consolidatedoperating profit for the first quarter of 2010 was $0.8 million compared to$2.1 million in the first quarter of 2009, a $1.3 million, or 62%, decrease.Consolidated operating profit margin for the first quarter of 2010 was 0.3%compared to 0.8% in the first quarter of 2009.

 

OurSMB segment operating profit increased by $1.0 million, or 17%, to $6.4 millionin the first quarter of 2010 compared to $5.4 million in the first quarter of2009. The increase in SMB operating profit in the first quarter of 2010 wasprimarily due to the increase in SMB gross profit discussed above and a $0.3million reduction in bad debt expense, partially offset by a $1.3 millionincrease in personnel costs. This increase in personnel costs in the firstquarter of 2010 was primarily due to a one-time $0.6 million benefit related tothe Canadian government labor subsidy program in the first quarter of 2009 thatdid not reoccur, a $0.4 million impact of a higher Canadian exchange rate, theinvestment in our Chicago office and our addition of account executives in thatfacility, and an increase in variable commission and bonus expenses due to theincreased SMB gross profit discussed above.

 

OurMME segment operating profit increased by $0.5 million, or 11%, to $4.6 millionin the first quarter of 2010 compared to $4.1 million in the first quarter of2009. The increase was primarily due to the increase in MME gross profitdiscussed above.

 

OurPublic Sector segment operating profit decreased by $0.5 million, or 58%, to$0.4 million in the first quarter of 2010 compared to $0.9 million in the firstquarter of 2009. The decrease in Public Sector operating profit was primarilydue to an increase in Public Sector personnel costs of $0.4 million, resultingfrom our investment in Public Sector’s Health Dynamics division and incrementalinvestments in headcount.

 

OurMacMall segment operating profit decreased by $1.2 million, or 70%, to $0.6million in the first quarter of 2010 compared to $1.8 million in the firstquarter of 2009.  The decrease in MacMalloperating profit was primarily due to the decrease in MacMall gross profitdiscussed above, partially offset by a $0.7 million decrease in MacMalladvertising expenditures and a $0.3 million decrease in credit card processingfees on lower sales. However, MacMall operating profit increased sequentiallyfrom operating profit of $0.4 million in the fourth quarter 2009 on a seasonaldecline in sales as a result of the aforementioned strategy shift.

 

Corporate &Other operating expenses includes corporate related expenses such as legal,accounting, information technology, product management and other administrativecosts that are not otherwise included in our reportable operating segments.First quarter 2010 Corporate & Other SG&A expenses increased by$0.9 million, or 9%, to $11.2 million from $10.3 million in the first quarterof 2009; however, they decreased sequentially from Q4 2009 by 5% from $11.7million. The increase from the first quarter of 2009 was primarily related toan increase in personnel costs of $0.5 million, which included $0.2 million ofseverance costs related to our efforts to reduce personnel expenses and a $0.1million increase in stock-based compensation expenses, and an increase indepreciation expenses of $0.4 million related to the completed portions of ourERP and infrastructure upgrades.

 

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*Net Interest Expense*. Total netinterest expense for the first quarter of 2010 increased to $0.5 millioncompared with $0.4 million in the first quarter of 2009. The increase in interestexpense was primarily due to a higher average balance of our total outstandingborrowings during the first quarter of 2010 compared to the first quarter of2009, partially offset by a lower average LIBOR rate during the first quarterof 2010 compared to the first quarter of 2009.

 

*Income Tax Expense.*We recorded an income tax expense of $0.1million in the first quarter of 2010 compared to an income tax expense of $0.7million in the first quarter of 2009. Our effective tax rate for the quartersended March 31, 2010 and 2009 was approximately 41% and 40%.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

*Working Capital.*Our primary capital need has historically been fundingthe working capital requirements created by our growth in sales and strategicacquisitions. We expect that our primary capital needs will continue to be thefunding of our existing working capital requirements, capital expenditures forwhich we expect to include substantial investments in a new ERP system,eCommerce platform and an upgrade of our current IT infrastructure over thenext several years, which are discussed below in “Other Planned Capital Projects,”possible sales growth, possible acquisitions and new business ventures, andpossible repurchases of our common stock under a discretionary repurchaseprogram, which is discussed below. Our primary sources of financing havehistorically come from borrowings from financial institutions, public andprivate issuances of our common stock and cash flows from operations. Ourefforts to focus on SMB, MME and Public Sector sales could result in anincrease in our accounts receivable as these customers are generally providedlonger payment terms than consumers. We historically have increased ourinventory levels from time to time to take advantage of strategic manufacturerpromotions. 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 to supportour current operating plans for at least the next 12 months. However, thecurrent macroeconomic environment and related competitive pricing pressure,which have negatively impacted our operating results, together with tightcredit markets, may limit our cash resources that could otherwise be availableto fund future strategic opportunities, capital investments or growth beyondour current operating plans.

 

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

 

We had cash and cash equivalents of $6.5 million at March 31,2010 and $9.2 million at December 31, 2009. Our working capital was $54.0million at each of March 31, 2010 and December 31, 2009.

 

In October 2008, ourBoard of Directors approved a discretionary common stock repurchase program for up to $10 millionof our common stock in aggregate with all other repurchases made under anyrepurchase programs following the date of such Board of Directors’ approval.This repurchase program effectively supersedes an existing repurchase programadopted in 1996. Under this new program, the shares may be repurchased fromtime to time at prevailing market prices, through open market or unsolicitednegotiated transactions, depending on market conditions. We expect that anyrepurchases of our common stock under this program will be financed withexisting working capital and amounts available under our existing creditfacility. No limit was placed on the duration of the repurchase program. Thereis no guarantee as to the exact number of shares that we will repurchase.Subject to applicable securities laws, repurchases may be made at such timesand in such amounts as our management deems appropriate. The program can alsobe discontinued at any time management feels additional purchases are notwarranted. During the quarter ended March 31, 2010, we repurchased a totalof 10,750 shares of our common stock under this program for a cost ofapproximately $57,000. From the inception of the program in October 2008through March 31, 2010, we have repurchased an aggregate total of1,335,160 shares of our common stock for a cost of $5.3 million. Therepurchased shares are held as treasury stock.

 

Wemaintain a Canadian call center serving the U.S. market, which has historicallyreceived the benefit of labor credits under a Canadian government program. In2007, we received an eligibility certificate to participate in the InvestmentQuebec Refundable Tax Credit for Major Employment Generating Projects (GPCE),replacing the prior government subsidy program which ended at the end of 2007.In addition to other eligibility requirements under the new program, we arerequired to 

 

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maintain a minimum of 317eligible employees employed by our subsidiary PC Mall Canada, Inc. in theprovince of Quebec at all times to remain eligible to apply annually for theselabor credits. As a result of this new certification, we are eligible to makeannual labor credit claims for eligible employees equal to 25% of eligiblesalaries, but not to exceed $15,000 (Canadian) per eligible employee per year,beginning in fiscal year 2008 and continuing through fiscal year 2016. Underthe prior program through the end of 2007, we claimed annual labor credits ofup to 35% of eligible compensation paid to our qualifying employees. As of March 31,2010, we had an accrued receivable of $7.3 million related to the 2008 and 2009calendar years and we expect to receive full payment under our labor creditclaims.

 

*Cash Flows from OperatingActivities.*Netcash provided by operating activities was $9.3 million in the first quarter of2010 compared to $19.0 million in the first quarter of 2009. The $9.3 millionof net cash provided by operating activities was primarily due to a $25.7million decrease in inventory reflecting the sell-through of seasonal purchasesmade in late 2009 as well as sell-through of our Public Sector segment backlogand a $7.7 million decrease in accounts receivable related to lower openaccount sales in the current quarter, partially offset by a $21.7 milliondecrease in gross accounts payable. The $19.0 million of net cash provided byoperating activities in the first quarter of 2009 was primarily due to the$20.7 million decrease in accounts receivable resulting from lower open accountsales in that quarter and the $20.3 million decrease in inventory reflectingthe sell-through of seasonal and strategic purchases made in late 2008,partially offset by a $14.5 million decrease in gross accounts payable.

 

*Cash Flows from InvestingActivities.*Netcash used in investing activities was $2.2 million in the first quarter of 2010compared to $1.6 million in the first quarter of 2009, related to capitalexpenditures in each period. Capital expenditures in the first quarter of 2010were primarily related to investments in our IT infrastructure, leaseholdimprovements relating to our relocated retail store in Torrance, California andthe creation of enhanced electronic tools for our account executives and salessupport staff.Capital expenditures in the first quarter of 2009 were primarilyrelated to the investment in our IT infrastructure, including ERP, security andtelecommunications upgrades.

 

*Cash Flows from FinancingActivities.*Netcash used in financing activities for the first quarter of 2010 was $10.0million compared to $19.2 million in the first quarter of 2009. The $10.0million of net cash used in financing activities in the first quarter of 2010was primarily due to the $8.0 million of net payments made on the outstandingbalance of our line of credit and a $1.6 million change in book overdraft. The$19.2 million of net cash used in financing activities in the first quarter of2009 was primarily due to the $12.7 million of net payments made on the outstandingbalance of our line of credit and a $4.7 million change in book overdraft.

 

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

 

The credit facility,which functions as a working capital line of credit with a borrowing base ofinventory and accounts receivable, including certain credit card receivables,also includes a monthly unused line fee of 0.25% per year on the amount, ifany, by which 80% of the Maximum Credit, as defined in the agreement, then ineffect, exceeds the average daily principal balance of the outstandingborrowings during the immediately preceding month. At March 31, 2010, wehad $45.1 million of net working capital advances outstanding under the line ofcredit. At March 31, 2010, the maximum credit line was $130 million and wehad $56.8 million available to borrow for working capital advances under theline of credit. There can be no assurance that the administrative agent, ifelecting to do so, will be successful in assigning the remaining excess $20million of credit beyond the $130 million in any future period. As a result, wemay not be able to access the credit facility beyond its current limit of $130million and given the current credit market environment, we do not currentlyexpect to be able to do so on our existing credit facility terms.

 

The credit facility iscollateralized by substantially all of our assets. In addition to the securityinterest required by the credit facility, certain of our vendors have securityinterests in some of our assets related to their products. The credit facilityhas as its single financial covenant a minimum tangible net worth requirementthat is tested as of the last day of each fiscal quarter, which we were incompliance with at March 31, 2010. Loan availability under the line ofcredit fluctuates daily and is affected by many factors, including eligibleassets on-hand, opportunistic purchases of inventory and availability andutilization of early-pay discounts.

 

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Our existing creditfacility contains terms that are more favorable to us than terms that webelieve would otherwise be available to us in the current credit marketenvironment. We have been informed by the administrative agent for the facilitythat any amendment, modification, waiver, consent or other change we may seekwith regard to our facility, including a consent to pursue an acquisition, willresult in the renegotiation of the terms of the facility and would likelyinclude terms less favorable to us, such as stricter financial covenants (suchas covenants requiring us to maintain minimum levels of excess borrowingcapacity or be subject to minimum fixed charge coverage ratios) and lessfavorable interest rates. These limitations could adversely affect our abilityto make certain strategic investments or pursue certain acquisitions and otherstrategic transactions. Additionally, if market conditions have not improved bythe time our current credit facility expires in March 2011, we expect thatany new facility, to the extent available to us at such time, would be on termsless favorable to us than our existing credit facility.

 

In connection with and as part of the amended creditfacility, we entered into an amended term note on September 17, 2007 witha principal balance of $5.425 million, payable in equal monthly principalinstallments beginning on October 1, 2007, plus interest at the prime ratewith a LIBOR option. The amended term note matures in September 2014 or,in the event of a default, termination or non-renewal of our credit facility,is payable in its entirety upon demand by our lender. At March 31, 2010,we had $3.5 million outstanding under the amended term note. Our term notematures as follows: $581,250 in the remainder of 2010, $775,000 annually ineach of the years 2011 through 2013 and $581,250 thereafter.

 

At March 31, 2010,our effective weighted average annual interest rate on outstanding amountsunder the credit facility and term note was 1.77%.

 

As of March 31,2010, $0.3 million and $0.4 million relating to the financing of our purchaseof Microsoft AX (Axapta) were included in “Notes payable — current” and “Notespayable and other long-term liabilities,” respectively, on our ConsolidatedBalance Sheets. See “Other Planned Capital Projects” below for a detaileddiscussion.

 

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

 

As part of our growth strategy, we may, in the future,make acquisitions in the same or complementary lines of business, and pursueother business ventures. Any launch of a new business venture or anyacquisition and the ensuing integration of the acquired operations would placeadditional demands on our management, and our operating and financialresources.

 

**OtherPlanned Capital Projects**

 

We are currentlyupgrading many of our IT systems. We have purchased licenses for workflowsoftware, web development tools and Microsoft Dynamics AX (Axapta) to upgradeour ERP systems. We initiated the implementation and upgrade of our eCommercesystem in the second half of 2008 and have completed and launched a newgeneration of our public sites at macmall.com, onsale.com and pcmall.com. Weare currently working on the implementation of the ERP modules and the upgradeof the ERP systems, including additional enhancements and features. We havecompleted the initial phase of the implementation in January 2010, and weexpect to be complete with all phases of the implementation of the ERP systemsby 2013. We believe the implementation and upgrade should help us to gainfurther efficiencies across our organization. To date, we have incurredapproximately $4.3 million of external costs, and approximately $1.6 million ofinternal capitalized labor costs related to the implementation of the ERPsystems. In addition, based on our estimates, which are subject to change, weexpect to incur approximately $5.0 million of additional external costs relatedto the implementation of the ERP systems. We also expect to incur materialadditional internal capitalized labor costs related to the ERP systems in thefuture.

 

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

 

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**Inflation**

 

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

 

**Dividend Policy**

 

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

 

**Off-Balance Sheet Arrangements**

 

As of March 31, 2010, we did not have anyoff-balance sheet arrangements.

 

**Contingencies**

 

For a discussion of contingencies, see Part I,Item 1, Note 9 of the Notes to the Consolidated Financial Statements of thisreport, which is incorporated herein by reference.

 

#### **IMPACT OF RECENTLYISSUED ACCOUNTING STANDARDS**

 

For a discussion of recent accounting pronouncements,see Part I, Item 1, Note 2 of the Notes to the Consolidated FinancialStatements of this report, which is incorporated herein by reference.

 

**FORWARD-LOOKING STATEMENTS**

 

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

 

·              our beliefs relating to the benefits to be receivedfrom our Philippines office and Canadian call center, including tax credits andreduction in labor costs over time;

·              our expectation regarding reductions in vendorconsideration and their impact on our operating results;

·              our expectation regarding general economicuncertainties, the competitive pricing pressure in the current environment andthe related potential negative impact on our gross profit margins;

·             our plans for our growth strategies, including ourmarket share growth strategies and our refined MacMall strategy;

·             our expectations regarding our future capital needsand the availability of working capital, liquidity, cash flows from operationsand borrowings under our credit facility;

·             our expectations regarding the timing and costs of ourongoing or planned IT upgrades;

·             the impact on accounts receivable from our efforts tofocus on sales in our MME, SMB, and Public Sector segments;

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

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

·             our ability to execute our business strategies;

·             our competitive advantages and growth opportunities;

·             our ability to increase profitability and revenues;

·             our ability to generate vendor supported marketing;

·             our beliefs regarding the applicability of taxregulations;

·             our belief regarding our exposure to currency exchangeand interest rate risks;

·             our belief regarding the effect of seasonal trends andgeneral economic conditions on our business and results of operations acrossall of our segments;

·             our expectations regarding the impact of accountingpronouncements;

·             our expectations regarding the payment of dividendsand our intention to retain any earnings to finance the growth and developmentof our business;

·             our ability to attract new customers and stimulateadditional purchases from existing customers, including our expectationsregarding future advertising levels and the effect on consumer sales;

 

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·             our belief regarding financing ofrepurchases of our common stock;

·             our ability to limit risk related to price reductions;

·             our use of management information systems and theirneed for future support or upgrade;

·             our expectations regarding competition and theindustry trend toward consolidation;

·             our compliance with laws and regulations; and

·             the likelihood that new laws and regulations will beadopted with respect to the Internet that may impose additional restrictions orburdens on our business.

 

Forward-looking statements involve certain risks anduncertainties, and actual results may differ materially from those discussed inany such statement. Factors that could cause actual results to differmaterially from such forward-looking statements include the risks described ingreater detail under the heading “Risk Factors” in Part II, Item 1A ofthis report. All forward-looking statements in this document are made as of thedate hereof, based on information available to us as of the date hereof, and,except as otherwise required by law, we assume no obligation to update orrevise any forward-looking statement or other information contained herein toreflect new information, events or circumstances after the date hereof.

 

#### **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

#### ** **

Our financial instruments include cash and cashequivalents and long-term debt. At March 31, 2010, the carrying values ofour financial instruments approximated their fair values based on currentmarket prices and rates.

 

We have not entered into derivative financialinstruments as of March 31, 2010. However, from time-to-time, wecontemplate and may enter into derivative financial instruments related tointerest rate, foreign currency, and other market risks.

 

*Interest Rate Risk*

 

We have exposure to the risks of fluctuating interestrates on our line of credit and note payable. The variable interest rates onour line of credit and note payable are tied to the prime rate or the LIBOR, atour discretion. At March 31, 2010, we had $45.1 million outstanding underour line of credit and $3.5 million outstanding under our note payable. As of March 31,2010, the hypothetical impact of a one percentage point increase in interestrate related to the outstanding borrowings under our line of credit and notepayable would be to increase our annual interest expense by approximately $0.5million.

 

*Foreign Currency Exchange Risk*

 

We have operation centers in Canada and thePhilippines that provide back-office administrative support and customer servicesupport. In each of these countries, transactions are primarily conducted inthe respective local currencies. In addition, our two foreign subsidiaries thatoperate the operation centers have intercompany accounts with our U.S.subsidiaries that eliminate upon consolidation. However, transactions resultingin such accounts expose us to foreign currency rate fluctuations. We recordgains and losses resulting from exchange rate fluctuations on our short-termintercompany accounts in “Selling, general and administrative expenses” in ourConsolidated Statements of Operations and translation gains and lossesresulting from exchange rate fluctuations on local currency based assets andliabilities in “Accumulated other comprehensive income (loss),” a separate componentof stockholders’ equity on our Consolidated Balance Sheets. As such, we haveforeign currency translation exposure for changes in exchange rates for thesecurrencies. As of March 31, 2010, we did not have material foreigncurrency or overall currency exposure. Significant changes in exchange ratesbetween foreign currencies in which we transact business and the U.S. dollarmay adversely affect our Consolidated Statements of Operations and ConsolidatedBalance Sheets.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Disclosure Controls 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 rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

 

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We carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of the end of the period covered bythis report. Based upon this evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of March 31, 2010.

 

**Changes in Internal Control OverFinancial Reporting**

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the first quarter of 2010 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 1. 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 could be costly and timeconsuming and could divert our management and key personnel from our businessoperations. In connection with any such litigation, we may be subject tosignificant damages or equitable remedies relating to the operation of ourbusiness. Any such litigation may materially harm our business, results ofoperations and financial condition.

 

**ITEM 1A. RISK FACTORS**

 

*This report and other documents wefile with the Securities and Exchange****Commission contain forward lookingstatements that are based on current****expectations, estimates, forecastsand projections about us, our future****performance, our business, ourbeliefs and our management’s assumptions. These****statements are notguarantees of future performance and involve certain risks,****uncertainties, andassumptions that are difficult to predict. We have set forth the risk factorsthat relate to our business, as set forth below. These risks include anymaterial changes to and supersede the risks previously disclosed in Part I,Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31,2009. You should****carefully consider the risks and uncertainties facing ourbusiness which are****set forth below. The risks described below are not the onlyones facing us. Our****business is also subject to risks that affect many othercompanies, such as****employment relations, general economic conditions,geopolitical events and****international operations. Further, additional risks notcurrently known to us****or that we currently believe are immaterial also may impairour business,****operations, liquidity and stock price materially andadversely.*

 

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

 

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

 

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

 

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

 

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

 

Our revenue is dependent on sales of products from asmall number of key manufacturers and software publishers, including Apple, HP,IBM, Lenovo, Microsoft and Sony. For example, products manufactured by HPrepresented approximately 19% of our net sales in each of the three monthsended March 31, 2010 and 2009. Products manufactured by Apple representedapproximately 16% and 19% of our net sales in the three months ended March 31,2010 and 2009. A decline in sales of any of our key manufacturers’ products,whether due to decreases in supply of or demand for their products, terminationof any of our agreements with them, or otherwise, could have a material adverseimpact on our sales and operating results.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We purchase products for resale both directly frommanufacturers and indirectly through distributors and other sources, all ofwhom we consider our vendors. We also maintain certain qualifications andpreferred provider status with several of 

 

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our vendors, which provides us with preferred pricing,vendor training and support, preferred access to products, and othersignificant benefits. While these vendor relationships are an important elementof our business, we do not have long-term agreements with any of these vendors.Any agreements with vendors governing our purchase of products are generallyterminable by either party upon 30 days’ notice or less. In general, we agreeto offer products through our catalogs and on our websites and the vendorsagree to provide us with information about their products and honor ourcustomer service policies. If we do not maintain our existing relationships orbuild new relationships with vendors on acceptable terms, including favorableproduct pricing and vendor consideration, we may not be able to offer a broadselection of products or continue to offer products at competitive prices. Inaddition, some vendors may decide not to offer particular products for sale onthe Internet, and others may avoid offering their new products to retailersoffering a mix of close-out and refurbished products in addition to newproducts. From time to time, vendors may terminate our right to sell some orall of their products, modify or terminate our preferred provider orqualification status, change the applicable terms and conditions of sale orreduce or discontinue the incentives or vendor consideration that they offerus. Any such termination or the implementation of such changes, or our failureto build new vendor relationships, could have a negative impact on ouroperating results. Additionally, some products are subject to manufacturer ordistributor allocation, which limits the number of units of those products thatare available to us and may adversely affect our operating results.

 

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

 

We are subject to intense price competition with respectto the products we sell. As a result, our gross margins have historically beennarrow, and we expect them to continue to be narrow. As a result of the recenteconomic downturn, we have experienced increasing price competition, which hashad a negative impact on our gross margins. Our narrow gross margins magnifythe impact of variations in our operating costs and of adverse or unforeseenevents on our operating results. Future increases in costs such as the cost ofmerchandise, wage levels, shipping rates, freight costs and fuel costs maynegatively impact our margins and profitability. We are not always able toraise the sales price of our merchandise to offset cost increases. If we areunable to maintain our gross margins in the future, it could have a materialadverse effect on our business, financial condition and results of operations.In addition, because price is an important competitive factor in our industry,we cannot assure you that we will not be subject to increased price competitionin the future. If we become subject to increased price competition in thefuture, we cannot assure you that we will not lose market share, that we willnot be forced to reduce our prices and further reduce our gross margins, orthat we will be able to compete effectively.

 

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

 

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

 

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

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

·                  seasonality in consumer spending;

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

·                  variability in vendor programs;

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

·                  changes in prices from our suppliers;

·                  promotions;

·                  the loss or consolidation of significantsuppliers or customers;

·                  our ability to control costs;

·                  the timing of our capital expenditures;

·                  the condition of our industry in general;

·                  seasonal shifts in demand for computerand electronics products;

·                  industry announcements and marketacceptance of new products or upgrades;

·                  deferral of customer orders inanticipation of new product applications;

·                  product enhancements or operatingsystems;

·                  the relative mix of products sold duringthe period;

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

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

·                  our expenditures on new business venturesand acquisitions;

·                  performance of acquired businesses;

·                  adverse weather conditions that affectresponse;

·                  distribution or shipping to ourcustomers; and

·                  geopolitical events.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Based upon current interpretations of existing law,certain of our subsidiaries currently collect and remit sales or use tax onlyon sales of products or services to residents of the states in which therespective subsidiaries have a physical presence or have voluntarily registeredfor sales tax collection. The U.S. Supreme Court has ruled that states, absentCongressional legislation, may not impose tax collection obligations on anout-of-state direct marketer whose only contacts with the taxing state aredistribution of catalogs and other advertisement materials through the mail,and whose subsequent delivery of purchased goods is by mail or interstatecommon carriers. However, we cannot predict the level of contact with any statewhich would give rise to future or past tax collection obligations.Additionally, it is possible that federal legislation could be enacted thatwould permit states to impose sales or use tax collection obligations onout-of-state direct marketers. Furthermore, court cases have upheld taxcollection obligations on companies, including mail order companies, whosecontacts with the taxing state were quite limited (e.g., visiting the stateseveral times a year to aid customers or to inspect stores stocking their goodsor to provide training or other support to customers in the state). States havealso successfully imposed sales and use tax collection responsibility uponin-state manufacturers that agree to act as a drop shipper for the out-

 

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

 

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

 

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

 

Such existing and future laws and regulations may alsoimpede the growth of the Internet or other online services, including ourbusiness. Additionally, it is not always clear how existing laws and regulationsgoverning issues such as property ownership, sales and other taxes, libel,trespass, data mining and collection, data security and personal privacy, amongother laws, apply to the Internet and eCommerce. Unfavorable resolution ofthese issues may expose us to liability and costly changes in our businessoperations, and could reduce customer demand for our products.

 

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

 

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

 

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

 

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

 

One element of our business strategy involvesexpansion through the acquisition of businesses, assets, personnel ortechnologies that allow us to complement our existing operations, expand ourmarket coverage, or add new business capabilities. We continually evaluate andexplore strategic opportunities as they arise, including business combinationtransactions, strategic partnerships, and the purchase or sale of assets. Ouracquisition strategy depends on the availability of suitable acquisitioncandidates at reasonable prices and our ability to resolve challenges associatedwith integrating acquired businesses into our existing business. No assurancecan be given that the benefits or synergies we may expect from the acquisitionof companies or businesses will be realized to the extent or in the time framewe anticipate. We may lose key employees, customers, distributors, vendors andother business partners of the companies we acquire following and continuingafter announcement of acquisition plans. In addition, acquisitions may involvea number of risks and difficulties, including expansion into new geographicmarkets and business areas, the diversion of management’s attention to theoperations and personnel of the acquired company, the integration of theacquired company’s personnel, operations and management information (ERP)systems, changing relationships with customers, suppliers and strategicpartners, and potential short-term adverse effects on our operating results.These challenges can be magnified as the size of the acquisition increases. Anydelays or unexpected costs incurred in connection with the integration ofacquired companies or otherwise related to the acquisitions could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

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

 

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

 

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

 

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

 

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

 

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Significant negative industry or economic trends,including decreases in our market capitalization, slower growth rates or lackof growth in our business, resulted in write-downs and impairment charges infiscal 2008. While no such write-downs or charges occurred in fiscal 2009 orthe first quarter of 2010, if such occur in the future it may indicate thatadditional impairment charges are required. If we are required to recordadditional impairment charges, this could have a material adverse affect on ourconsolidated financial statements. In addition, the testing of goodwill forimpairment requires us to make significant estimates about the futureperformance and cash flows of our company, as well as other assumptions. Theseestimates can be affected by numerous factors, including changes in economic,industry or market conditions, changes in underlying business operations,future reporting unit operating performance, existing or new product marketacceptance, changes in competition, or changes in technologies. Any changes inkey assumptions, or actual performance compared with those assumptions, aboutour business and future prospects or other assumptions could affect the fairvalue of one or more reporting units, resulting in an impairment charge.

 

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

 

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

 

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

 

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

 

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

 

Our operating results have fluctuated in the past andare likely to vary significantly in the future based upon a number of factors,many of which we cannot control. We operate in a highly dynamic industry andfuture results could be subject to significant fluctuations. These fluctuationscould cause us to fail to meet or exceed financial expectations of investors oranalysts, which could cause our stock price to decline rapidly 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;

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

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

·             technicaldifficulties, including system or Internet failures;

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

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

·             fluctuationsin shipping costs, particularly during the holiday season;

 

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

·             economicconditions;

·             foreigncurrency exchange rate;

·             changesin the mix of products that we sell; and

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

 

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

 

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

 

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

 

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

 

Our existing credit facility contains terms that aremore favorable to us than terms that we believe would otherwise be available tous in the current credit market environment. We have been informed by theadministrative agent for the facility that any amendment, modification, waiver,consent or other change we may seek with regard to our facility will result inthe renegotiation of the terms of the facility and that any such renegotiatedterms would likely include terms less favorable to us, such as the addition ofstricter financial covenants and less favorable interest rate terms. Suchlimitations could adversely affect our ability to pursue certain acquisitionsand other strategic transactions which would require an amendment or consentunder the existing credit facility. Additionally, if market conditions have notimproved by the time our current credit facility expires in 2011, we expectthat any new facility, to the extent available to us at such time, would be onterms less favorable to us than our existing credit facility.

 

There has been significant ongoing weakness in theglobal economic environment, coupled with disruptions in the capital and creditmarkets. Continued problems in these areas could have a negative impact on ourability to obtain financing if we need additional funds, such as foracquisitions or expansion, to fund a significant downturn in our sales or anincrease in our operating expenses, or to take advantage of opportunities orfavorable market conditions, in the future. To the extent we seek additionalfinancing from public or private debt or equity issuances, there can be noassurance that such financing will be available at acceptable terms, if at all.There can be no assurance that the cost or availability of future borrowings,if any, under our credit facility or in the debt markets will not be impactedby disruptions or continued weakness in the capital and credit markets.

 

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

 

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

 

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

 

Third parties have asserted, and may in the futureassert, that our business or the technologies we use infringe on theirintellectual property rights. As a result, we may be subject to intellectualproperty legal proceedings and claims in the ordinary course of our business.We cannot predict whether third parties will assert additional claims ofinfringement against us in the future or whether any future claims will preventus from offering popular products or operating our business as planned. If weare forced to defend against any third-party infringement claims, whether theyare with or without merit or are determined in our favor, we could faceexpensive and time-consuming litigation, which could result in the impositionof a preliminary injunction preventing us from continuing to operate ourbusiness as currently conducted throughout the duration of the litigation or distractour technical and management personnel. If we are found to infringe, we may berequired to pay monetary damages, which could include treble damages andattorneys’ fees for any infringement that is found to be willful, and either beenjoined or required to pay ongoing royalties with respect to any technologiesfound to infringe. Further, as a result of infringement claims either againstus or against those who license technology to us, we may be required, or deemit advisable, to develop non-infringing technology, which could be costly andtime consuming, or enter into costly royalty or licensing agreements. Suchroyalty or licensing agreements, if required, may be unavailable on terms thatare acceptable to us, or at all. If a third party successfully asserts aninfringement claim against us and we are enjoined or required to pay monetarydamages or royalties or we are unable to develop suitable non-infringingalternatives or license the infringed or similar technology on reasonable termson a timely basis, our business, results of operations and financial conditioncould be materially harmed. Similarly, we may be required incur substantialmonetary and diverted resource costs in order to protect our intellectualproperty 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. Even unsuccessfulclaims could result in the expenditure of funds and management time and coulddecrease our profitability.

 

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

 

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

 

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

 

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

 

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

 

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

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

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

·             attracta sufficient number of new customers to whom any new categories and offeringsare targeted;

·             successfullymarket our new categories or offerings to existing customers;

·             maintainor improve our gross margins and fulfillment costs;

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

·             manageour inventory in new product categories.

 

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

 

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

 

Our future performance will depend to a significantextent upon the efforts and abilities of certain key management and otherpersonnel, including Frank F. Khulusi, our Chairman of the Board, President andChief Executive Officer, as well as other executive officers and senior management.The loss of service of one or more of our key management members could have amaterial adverse effect on our business. Our success and plans for futuregrowth will also depend in part on our management’s continuing ability to hire,train and retain skilled personnel in all areas of our business. For example,our management information systems and processes require the services ofemployees 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.

 

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

 

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

 

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

 

The growth of our business has required us to makesignificant additions in personnel and has significantly increased our workingcapital requirements. Although we have experienced significant sales growth inthe past, such growth should not be considered indicative of future salesgrowth. Such growth has resulted in new and increased responsibilities for our

 

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management personnel and has placed and continues toplace significant strain upon our management, operating and financial systems,and other resources. Any future growth, whether organic or through acquisition,may result in increased strain. There can be no assurance that current orfuture strain will not have a material adverse effect on our business,financial condition, and results of operations, nor can there be any assurancethat we will be able to attract or retain sufficient personnel to continue theexpansion of our operations. Also crucial to our success in managing our growthwill be our ability to achieve additional economies of scale. We cannot assureyou that we will be able to achieve such economies of scale, and the failure todo so could have a material adverse effect upon our business, financialcondition and results of operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

If third parties or our employees are able topenetrate our network security or otherwise misappropriate our customers’personal information or credit card information, or if we give third parties orour employees improper access to our customers’ personal information or creditcard information, we could be subject to liability. This liability couldinclude 

 

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claims for unauthorized purchases with credit cardinformation, identity theft or other similar fraud-related claims. Thisliability could also include claims for other misuses of personal information,including for unauthorized marketing purposes. Other liability could includeclaims alleging misrepresentation or our privacy and data security practices.Any such liability 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 cause us to incur significant expense toinvestigate and respond to a security breach and correct any problems caused byany breach, subject us to liability, damage our reputation and diminish thevalue of our brand-name.

 

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

 

We mail catalogs and send electronic messages to namesin our proprietary customer database and to potential customers whose names weobtain from rented or exchanged mailing lists. Worldwide public concernregarding personal privacy has subjected the rental and use of customer mailinglists and other customer information to increased scrutiny and regulation. As aresult, we are subject to increasing regulation relating to privacy and the useof personal information. For example, we are subject to various telemarketingand anti-spam laws that regulate the manner in which we may solicit futuresuppliers and customers. Such regulations, along with increased governmental orprivate enforcement, may increase the cost of operating and growing 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, both in the United States and elsewhere, laws and regulations arebecoming increasingly protective of consumer privacy, with a trend towardrequiring companies to establish procedures to notify users of privacy andsecurity policies, to obtain consent from users for collection and use ofpersonal information, and to provide users with the ability to access, correctand delete personal information stored by companies. Such privacy and dataprotection laws and regulations, and efforts to enforce such laws andregulations, may restrict our ability to collect, use or transfer demographicand personal information from users, which could be costly or harm ourmarketing efforts. Further, any violation of domestic or foreign privacy ordata protection laws and regulations, including the national do-not-call list,may subject us to fines, penalties and damages, which could decrease ourrevenue and profitability.

 

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

 

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

 

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

 

We do not carry insurance against the risk of creditcard fraud, so the failure to adequately control fraudulent credit cardtransactions could reduce our revenues or increase our operating costs. We mayin the future suffer losses as a result of orders placed with fraudulent creditcard data even though the associated financial institution approved payment ofthe orders. 

 

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Under current credit card practices, we may be liablefor fraudulent credit card transactions. If we are unable to detect or controlcredit card fraud, or if credit card companies require more burdensome terms orrefuse to accept credit card charges from us, our revenue and profitabilitycould decrease.

 

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

 

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

 

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

 

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

 

·                       reduced visibility of order status andpackage tracking;

·                       delays in order processing and productdelivery;

·                       increased cost of delivery, resulting inreduced margins; and

·                       reduced shipment quality, which mayresult in damaged products and customer dissatisfaction.

 

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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                       political uncertainties;

 

·                       wage inflation;

 

·                       exposure to foreign currencyfluctuations;

 

·                       tariffs and other trade barriers; and

 

·                       foreign regulatory restrictions andunexpected changes in regulatory environments.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our ability to analyze data derived from ourmanagement information (ERP) systems, or our telephone system, to increaseproduct promotions, manage inventory and accounts receivable collections, topurchase, sell and ship products efficiently and on a timely basis and tomaintain cost-efficient operations, is dependent upon the quality andutilization of the information generated by these systems. We regularly upgradeour system hardware and software to better meet the information requirements ofour users, and believe that to remain competitive, it will be necessary for usto upgrade our systems on a regular basis in the future. We currently operateour management information systems using an HP3000 Enterprise System and are inthe process of implementing a substantial upgrade to our ERP system. Thisimplementation is complex, in part, because of the wide range of processes andthe multiple legacy systems that must be integrated across our business. Wehave created a project plan that we believe provides a reasonable allocation ofresources to the project; however, execution of the plan, or a divergence fromit, may result in cost overruns, project delays, or business interruptions.Furthermore, any divergence from our project plan could affect the timingand/or extent of benefits we expect to achieve from the system and processefficiencies. Any disruptions, delays or deficiencies in the design andimplementation of the new ERP system, or in the performance of our legacysystems, particularly any disruptions, delays or deficiencies that impact ouroperations, could adversely affect our ability to effectively run and manageour business, including our ability to receive, process, ship and bill fororders in a timely manner. We do not currently have a redundant or back-uptelephone system, nor do we have complete redundancy for our managementinformation systems. Any interruption in our systems, including those caused bynatural disasters, could have a material adverse effect on our business,financial condition and results of operations.

 

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

 

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

 

**Our stock price may be volatile.**

 

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

 

·             failureto meet investors’ expectations regarding our operating performance;

 

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

 

·             publicationof research reports by analysts;

 

·             changesin market valuations of similar companies;

 

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

 

·             actualor anticipated fluctuations in our operating results;

 

·             litigationdevelopments; and

 

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

 

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

 

***

 

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

#### ** **

**Issuer Purchases of Equity Securities**

 

In October 2008,our Board of Directors approved a discretionary common stockrepurchase program for up to $10 million of our common stock in aggregate withall other repurchases made under any repurchase programs following the date ofsuch Board of Directors’ approval. This repurchase program effectivelysupersedes an existing repurchase program adopted in 1996. Under this newprogram, the shares may be repurchased from time to time at prevailing marketprices, through open market or unsolicited negotiated transactions, depending onmarket conditions. We expect that the repurchase of our common stock under thisnew program will be financed with existing working capital and amountsavailable under our existing credit facility. No limit was placed on theduration of the repurchase program. There is no guarantee as to the exactnumber of shares that we will repurchase. Subject to applicable securitieslaws, repurchases may be made at such times and in such amounts as ourmanagement deems appropriate. The program can also be discontinued at any timemanagement feels additional purchases are not warranted.

 

The repurchased shares are held as treasurystock. A summary of the repurchase activity for the three months ended March 31,2010 is as follows (dollars in thousands, except share and per share amounts):

 
| ** **                                      | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs** | ** ** | **Maximum Dollar  Value that May  Yet Be Purchased  Under the Plans  or Programs** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| January 1, 2010 to January 31, 2010   |       | —                                               |       | —                                           |       | —                                                                                                                       |       | —                                                                                                                     |       |
| February 1, 2010 to February 28, 2010 |       | —                                               |       | —                                           |       | —                                                                                                                       |       | —                                                                                                                     |       |
| March 1, 2010 to March 31, 2010       |       | 10,750                                               |       | $                                                | 5.28       |                                                                                                                         | 10,750     |                                                                                                                       | 4,707      |   |
| Total                                           |       | 10,750                                               |       | 5.28                                             |       | 10,750                                                                                                                       |       | 4,707                                                                                                                      |       |
|                                                 |            |                                                      |            |                                                  |            |                                                                                                                              |            |                                                                                                                            |            |  |

 

#### **ITEM 6. EXHIBITS**

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                 |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                | ** ** | ** **                                                                                                                                                                                                                                                                                                                      |
| 10.1                      |       | Lease Agreement, Executed By and Between SARCOM  Properties, Inc. and AF Services, LLC, effective January 1, 2010  (incorporated herein by reference to Exhibit 10.1 to the Current Report  on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on February 26, 2010) |
| 31.1                      |       | Certification of the Chief Executive Officer of the  Registrant pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                            |
| 31.2                      |       | Certification of the Chief Financial Officer of the  Registrant pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                    |
|                      |       |                                                                                                                                                                                                                                                                                                                            |
| 32.1                      |       | Certification of the Chief Executive Officer of  Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                             |
|                      |       |                                                                                                                                                                                                                                                                                                                            |
| 32.2                      |       | Certification of the Chief Financial Officer of  Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                             |

 

***

 

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**PC MALL,INC.**

 

**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                    | PC MALL, INC. |
|-------------------------|---------------|
|                    | (Registrant)  |
|                    |          |   |
| Date: May 10, 2010 | By:           | /s/ Brandon H. LaVerne |
|                    |          | Brandon H. LaVerne |
|                    |          | Chief Financial Officer |

 

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**PC MALL,INC.**

 

**EXHIBITLIST**

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                     |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                |
| 31.1                      |       | Certification of the Chief Executive Officer of the  Registrant pursuant to Exchange Act Rule 13a-14(a)                                                        |
|                      |       |                                                                                                                                                                |
| 31.2                      |       | Certification of the Chief Financial Officer of the  Registrant pursuant to Exchange Act Rule 13a-14(a)                                                        |
|                      |       |                                                                                                                                                                |
| 32.1                      |       | Certification of the Chief Executive Officer of  Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906  of the Sarbanes-Oxley Act of 2002 |
|                      |       |                                                                                                                                                                |
| 32.2                      |       | Certification of the Chief Financial Officer of  Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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