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<SEC-DOCUMENT>0000899681-04-000781.txt : 20041115
<SEC-HEADER>0000899681-04-000781.hdr.sgml : 20041115
<ACCEPTANCE-DATETIME>20041115114500
ACCESSION NUMBER:		0000899681-04-000781
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		3
CONFORMED PERIOD OF REPORT:	20040930
FILED AS OF DATE:		20041115
DATE AS OF CHANGE:		20041115

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SYSTEMAX INC
		CENTRAL INDEX KEY:			0000945114
		STANDARD INDUSTRIAL CLASSIFICATION:	RETAIL-CATALOG & MAIL-ORDER HOUSES [5961]
		IRS NUMBER:				113262067
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-13792
		FILM NUMBER:		041142753

	BUSINESS ADDRESS:	
		STREET 1:		22 HARBOR PARK DR
		CITY:			PORT WASHINGTON
		STATE:			NY
		ZIP:			11050
		BUSINESS PHONE:		5166087000

	MAIL ADDRESS:	
		STREET 1:		22 HARBOR PARK DRIVE
		CITY:			PORT WASHINGTON
		STATE:			NY
		ZIP:			11050

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	GLOBAL DIRECTMAIL CORP
		DATE OF NAME CHANGE:	19950509
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>systemax-10q_111204.htm
<TEXT>
<HTML>
<HEAD>
<TITLE>10-Q</TITLE>
</HEAD>
<BODY>


<P ALIGN=CENTER><FONT SIZE=3><B>UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION<BR>
WASHINGTON, D.C. 20549<BR>
<BR>
FORM 10-Q</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>[X]&nbsp;&nbsp;&nbsp; QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>For the quarterly period ended September 30, 2004</FONT></P>

<P ALIGN=CENTER><FONT SIZE=3>or</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>[&nbsp;&nbsp;]&nbsp;&nbsp;&nbsp; TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>For the transition period from ____________ to _____________</FONT></P>



<P ALIGN=CENTER><FONT SIZE=3>COMMISSION FILE NUMBER 1-13792</FONT></P>

<P ALIGN=CENTER><FONT SIZE=3><B>Systemax Inc.</B><BR>
(Exact name of registrant as specified in its charter)</FONT></P>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=50% ALIGN=CENTER>Delaware<BR>
(State or other jurisdiction<BR>
of incorporation or organization) </TD>
<TD WIDTH=50% ALIGN=CENTER>
11-3262067<BR>
(I.R.S. Employer<BR>
Identification No.)
</TD>
</TR>
</TABLE>
<BR>

<P ALIGN=CENTER><FONT SIZE=3>11 Harbor Park Drive<BR>
Port Washington, New York 11050<BR>
(Address of registrant's principal executive offices)<BR>
(516) 608-7000<BR>
(Registrant's telephone number, including area code)</FONT></P>

<P><FONT SIZE=3>Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. </FONT></P>

<P ALIGN=CENTER><FONT SIZE=3>[X] Yes&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [&nbsp;&nbsp;&nbsp;] No</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [&nbsp;&nbsp;&nbsp; ] No [X]</FONT></P>

<P><FONT SIZE=3>The number of shares outstanding of the registrant's Common
Stock as of November 5, 2004 was 34,405,080. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>PART I - FINANCIAL INFORMATION<BR>
Item 1. <U>Financial Statements</U></B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Systemax Inc.</B><BR>
Condensed Consolidated Balance Sheets<BR>
(In Thousands, except share data) </FONT></P>
<HR SIZE=1 WIDTH=75% ALIGN=LEFT>
<PRE>
<FONT SIZE=1>
                                                                                     September 30,    December 31,
                                                                                          2004              2003
                                                                                          ----              ----
                                                                                      (Unaudited)
ASSETS:
   CURRENT ASSETS:
      Cash and cash equivalents                                                         $57,291          $38,702
      Accounts receivable, net                                                          153,811          152,435
      Inventories                                                                       137,907          133,905
      Prepaid expenses and other current assets                                          33,267           26,849
      Deferred income tax assets                                                         11,442           10,132
                                                                                         ------           ------
           Total current assets                                                         393,718          362,023

   PROPERTY, PLANT AND EQUIPMENT, net                                                    64,173           68,647
   DEFERRED INCOME TAXES AND OTHER ASSETS                                                12,617           14,982
                                                                                         ------           ------
              TOTAL ASSETS                                                             $470,508         $445,652
                                                                                       ========         ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
   CURRENT LIABILITIES:
      Short-term borrowings, including current portions of long-term debt               $14,812          $20,814
      Accounts payable                                                                  157,137          141,106
      Accrued expenses and other current liabilities                                     60,119           51,037
                                                                                         ------           ------
           Total current liabilities                                                    232,068          212,957
                                                                                        -------          -------
   LONG-TERM DEBT                                                                        17,116           18,353
                                                                                         ------           ------
   OTHER LIABILITIES                                                                      1,648            1,768
                                                                                          -----            -----
SHAREHOLDERS' EQUITY:
   Preferred stock, par value $.01 per share, authorized 25 million shares, issued
       none
   Common stock, par value $.01 per share, authorized 150 million shares, issued
       38,231,990 shares; outstanding 34,405,080 (2004) and 34,288,068 shares
       (2003)                                                                               382              382
   Additional paid-in capital                                                           175,180          175,343
   Accumulated other comprehensive income, net                                            2,273            2,157
   Retained earnings                                                                     86,797           81,022
                                                                                         ------           ------
                                                                                        264,632          258,904
   Less: common stock in treasury at cost - 3,826,910 (2004) and 3,943,922 (2003)
       shares                                                                            44,956           46,330
                                                                                         ------           ------
                        Total shareholders' equity                                      219,676          212,574
                                                                                        -------          -------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                          $470,508         $445,652
                                                                                       ========         ========
</FONT>
</PRE>
<P><FONT SIZE=3>See notes to condensed consolidated financial statements. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Systemax Inc.</B><BR>
Condensed Consolidated Statements of Income (Unaudited)<BR>
(In Thousands, except per share amounts)</FONT></P>
<HR SIZE=1 WIDTH=75% ALIGN=LEFT>
<PRE>
<FONT SIZE=1>

                                                                Nine Months Ended                  Three Months Ended
                                                                  September 30,                       September 30,
                                                         --------------------------------  ------------------------------------
                                                                   2004             2003               2004               2003
                                                         ---------------  ---------------  -----------------  -----------------
Net sales                                                    $1,376,997       $1,220,270           $460,271           $405,011
Cost of sales                                                 1,161,135        1,017,156            387,047            337,900
                                                         ---------------  ---------------  -----------------  -----------------
Gross profit                                                    215,862          203,114             73,224             67,111
Selling, general and administrative expenses                    196,092          190,305             66,416             64,822
Restructuring and other charges (reversals)                       6,041          (1,160)              1,026            (1,272)
Goodwill impairment                                                                2,560
                                                         ---------------  ---------------  -----------------  -----------------
Income from operations                                           13,729           11,409              5,782              3,561
Interest and other expense, net                                   1,788            1,075                715                542
                                                         ---------------  ---------------  -----------------  -----------------
Income before income taxes                                       11,941           10,334              5,067              3,019
Provision for income taxes                                        6,166            5,256              2,375              1,112
                                                         ---------------  ---------------  -----------------  -----------------
Net income                                                       $5,775           $5,078             $2,692             $1,907
                                                         ===============  ===============  =================  =================


Net income per common share:
Basic                                                              $.17             $.15               $.08               $.06
                                                         ===============  ===============  =================  =================
Diluted                                                            $.16             $.15               $.08               $.05
                                                         ===============  ===============  =================  =================

Weighted average common and common equivalent shares:
Basic                                                            34,358           34,124             34,399             34,159
                                                         ===============  ===============  =================  =================
Diluted                                                          35,243           34,672             35,272             35,128
                                                         ===============  ===============  =================  =================

</FONT>
</PRE>
<P><FONT SIZE=3>See notes to condensed consolidated financial statements. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Systemax Inc.</B><BR>
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)<BR>
(In Thousands)</FONT></P>
<HR SIZE=1 WIDTH=75% ALIGN=LEFT>
<PRE>
<FONT SIZE=1>

                                      Common  Stock                              Accumulated
                                   --------------------                            Other
                                                         Additional              Comprehensive   Treasury    Comprehensive
                                    Number of             Paid-in      Retained     Income,       Stock,        Income,
                                      Shares    Amount    Capital      Earnings    Net of Tax     At Cost      Net of Tax
                                   ---------- --------- ------------- ----------- ------------- ----------   ---------------

Balances, January 1, 2004             34,288     $382     $175,343     $81,022       $2,157    $(46,330)

Exercise of stock options                117                  (963)                               1,374
Change in cumulative translation
  adjustment, net                                                                       116                       $116
Compensation expense related to
  stock option plans                                           800
Net income                                                               5,775                                   5,775
                                      ------     -----    --------     -------       ------    --------         ------
Total comprehensive income                                                                                      $5,891
                                                                                                                ======
Balances, September 30, 2004          34,405     $382     $175,180     $86,797       $2,273    $(44,956)
                                      ======     ====     ========     =======       ======    =========
</FONT>
</PRE>

<P><FONT SIZE=3>See notes to condensed
consolidated financial statements. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>Systemax Inc.</FONT></P>

<PRE>
<FONT SIZE=1>
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
                                                                                             Nine Months
                                                                                          Ended September 30,
                                                                                 --------------------------------
                                                                                           2004             2003
                                                                                 ---------------  ---------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
   Net income                                                                            $5,775           $5,078
   Adjustments to reconcile net income to net cash provided by (used in)
   operating activities:
       Provision for deferred income taxes                                                  358          (1,941)
       Depreciation and amortization                                                      8,623            9,995
       Provision for returns and doubtful accounts                                        2,069            3,627
       Loss on dispositions and abandonment                                                 525              132
       Compensation expense related to stock option plans                                   800
       Goodwill impairment                                                                                 2,560
   Changes in operating assets and liabilities:
       Accounts receivable                                                               (3,764)             764
       Inventories                                                                       (4,160)         (10,509)
       Prepaid expenses and other current assets                                         (5,803)           6,378
       Accounts payable, accrued expenses and other current liabilities                  25,027          (15,695)
                                                                                 ---------------  ---------------
           Net cash provided by operating activities                                     29,450              389
                                                                                 ---------------  ---------------

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
   Investments in property, plant and equipment                                          (5,528)          (6,597)
   Proceeds from disposals of property, plant and equipment                                 978               90
   Purchase of minority interest                                                                          (2,560)
                                                                                 ---------------  ---------------
           Net cash used in investing activities                                         (4,550)          (9,067)
                                                                                 ---------------  ---------------

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
   Repayments of borrowings from banks                                                   (6,079)          (6,263)
   Issuance of long-term borrowings and capital lease obligations                                          1,330
   Repayments of long-term debt and capital lease obligations                            (1,322)            (938)
   Exercise of stock options                                                                412            1,318
                                                                                 ---------------  ---------------
           Net cash used in financing activities                                         (6,989)          (4,553)
                                                                                 ---------------  ---------------

EFFECTS OF EXCHANGE RATES ON CASH                                                           678           (4,283)
                                                                                 ---------------  ---------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     18,589          (17,514)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                          38,702           62,995
                                                                                 ---------------  ---------------

CASH AND CASH EQUIVALENTS - END OF PERIOD                                               $57,291          $45,481
                                                                                 ===============  ===============
</FONT>
</PRE>

<P><FONT SIZE=3>See notes to condensed consolidated financial statements. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>Systemax Inc.<BR>
<U>Notes to Condensed Consolidated Financial Statements (Unaudited)</U></FONT></P>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><B>1.</B></TD>
<TD WIDTH=95%><B>Basis of Presentation</B></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>The accompanying condensed consolidated financial
statements of the Company, its wholly-owned subsidiaries and all Variable
Interest Entities (VIEs) of which the Company is deemed to be the primary
beneficiary (see Note 8) are unaudited and have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America are not required
in these interim financial statements and have been condensed or omitted. All
significant intercompany accounts and transactions have been eliminated in
consolidation.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>In the opinion of management, the accompanying
condensed consolidated financial statements contain all normal and recurring
adjustments necessary to present fairly the financial position of the Company as
of September 30, 2004 and the results of operations for the three and nine month
periods ended September 30, 2004 and 2003, cash flows for the nine month periods
ended September 30, 2004 and 2003 and changes in shareholders&#146; equity for
the nine month period ended September 30, 2004. The December 31, 2003 Condensed
Consolidated Balance Sheet has been derived from the audited consolidated
financial statements included in the Company&#146;s Annual Report on Form 10-K
for the year ended December 31, 2003.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>These condensed consolidated financial statements
should be read in conjunction with the Company&#146;s audited consolidated
financial statements as of December 31, 2003 and for the year then ended
included in the Company&#146;s Annual Report on Form 10-K for the fiscal year
ended December 31, 2003. The results for the nine months ended September 30,
2004 are not necessarily indicative of the results for an entire
year.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><B>2.</B></TD>
<TD WIDTH=95%><B>Stock-based Compensation</B></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>The Company has three stock-based compensation plans,
two of which are for employees, consultants and advisors and the third of which
is for non-employee Directors. The Company has elected to follow the accounting
provisions of Accounting Principles Board Opinion 25 for stock-based
compensation and to provide the pro forma disclosures required under Statement
of Financial Accounting Standards (&#147;SFAS&#148;) 148, &#147;Accounting for
Stock-Based Compensation &#150; Transition and Disclosure.&#148; Accordingly,
the Company does not recognize compensation expense for stock option grants made
at an exercise price equal to or in excess of the market value of the underlying
stock on the date of grant. The following table illustrates the effect on net
income per share had compensation costs of the plans been determined under a
fair value alternative method as stated in SFAS 123, &#147;Accounting for
Stock-Based Compensation,&#148; (in thousands, except per share
data):</FONT></TD>
</TR>
</TABLE>
<BR>

<PRE>
<FONT SIZE=1>
                                                                     Nine Months Ended            Three Months Ended
                                                                         Sept. 30,                     Sept. 30,
                                                                     -----------------            ------------------
                                                                    2004           2003           2004          2003
                                                                    ----           ----           ----          ----
     Net income - as reported                                      $5,775         $5,078         $2,692        $1,907
     Stock-based employee compensation expense determined
         under fair value based method, net of related
         tax effects                                                  308            387             94           129
                                                                      ---            ---             --           ---
     Pro forma net income                                          $5,467         $4,691         $2,598        $1,778
                                                                   ======         ======         ======        ======
     Net income per common share:
     Basic:
     Net income  - as reported                                       $.17           $.15           $.08          $.06
                                                                     ====           ====           ====          ====
     Net income  - pro forma                                         $.16           $.14           $.08          $.05
                                                                     ====           ====           ====          ====
     Diluted:
     Net income - as reported                                        $.16           $.15           $.08          $.05
                                                                     ====           ====           ====          ====
     Net income - pro forma                                          $.16           $.14           $.07          $.05
                                                                     ====           ====           ====          ====
</FONT>
</PRE>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>The fair value of options granted was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions:</FONT></TD>
</TR>
</TABLE>
<BR>

<PRE>
                                                            2004        2003
                                                            ----        ----
           Expected dividend yield                            0%          0%
           Risk-free interest rate                          5.0%        5.0%
           Expected volatility                             50.0%       68.0%
           Expected life in years                           2.29        2.42
</PRE>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><B>3.</B></TD>
<TD WIDTH=95%><B>Net Income per Common Share</B></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>Net income per common share - basic was calculated
based upon the weighted average number of common shares outstanding during the
respective periods presented. Net income per common share &#150; diluted was
calculated based upon the weighted average number of common shares outstanding
and included the equivalent shares for dilutive options outstanding during the
respective periods. The dilutive effect of outstanding options issued by the
Company are reflected in net income per share - diluted using the treasury stock
method. Under the treasury stock method, options will only have a dilutive
effect when the average market price of common stock during the period exceeds
the exercise price of the options. Stock options for the following number of
shares in the period noted were excluded from the computation of diluted
earnings per share due to their antidilutive effect.</FONT></TD>
</TR>
</TABLE>
<BR>

<PRE>
                   Nine Months Ended Sept. 30,      Three Months Ended Sept. 30,
                   ---------------------------      ----------------------------
                    2004          2003                 2004           2003
                    ----          ----                 ----           ----
                   601,000       702,000              553,000        683,000
</PRE>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><B>4.</B></TD>
<TD WIDTH=95%><B>Comprehensive Income</B></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>Comprehensive income consists of net income and
foreign currency translation adjustments, net of tax and is included in the
Condensed Consolidated Statement of Shareholders&#146; Equity. For the nine
month periods ended September 30, comprehensive income was $5,891,000 in 2004
and $8,316,000 in 2003 net of tax effects on foreign currency translation
adjustments of $(66,000) in 2004 and $(2,445,000) in 2003. For the three month
periods ended September 30, comprehensive income was $3,505,000 in 2004 and
$2,660,000 in 2003, net of tax effects on foreign currency translation
adjustments of $(453,000) in 2004 and $(484,000) in 2003.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><B>5.</B></TD>
<TD WIDTH=95%><B>Credit Facilities</B></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>The Company maintains a $70 million secured revolving
credit agreement with a group of financial institutions which provides for
borrowings in the United States. The borrowings are secured by all of the
domestic accounts receivable and inventories of the Company, general intangibles
and the Company&#146;s shares of stock in its domestic subsidiaries. The
revolving credit agreement contains certain financial and other covenants,
including restrictions on capital expenditures and payments of dividends. The
Company was in compliance with all of the covenants as of September 30, 2004.
The credit facility expires and outstanding borrowings thereunder are due on
March 31, 2005. As of September 30, 2004, availability under the agreement was
$60.4 million. There were outstanding letters of credit of $10.1 million and
there were no outstanding advances as of September 30, 2004.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>Under the Company&#146;s &#163;15 million ($27.1
million at the September 30, 2004 exchange rate) United Kingdom credit facility,
which is available to its United Kingdom subsidiaries, at September 30, 2004
there were &#163;4.4 million ($8.0 million) of borrowings outstanding with
interest payable at a rate of 5.87%. The facility does not have a termination
date, but may be canceled by either party with six months notice. Borrowings
under the facility are secured by certain assets of the Company&#146;s United
Kingdom subsidiaries.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>Under the Company&#146;s &#128;5 million ($6.2
million at the September 30, 2004 exchange rate) Netherlands credit facility,
there were &#128;4.1 million ($5.1 million) of borrowings outstanding at
September 30, 2004, with interest payable at a rate of 5.0%. Borrowings under
the facility are secured by the subsidiary&#146;s accounts receivable and are
subject to a borrowing base limitation of 85% of the eligible accounts. The
facility expires in November 2005.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><B>6.</B></TD>
<TD WIDTH=95%><B>Accrued Restructuring Costs</B></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>The Company periodically assesses its operations to
ensure that they are efficient, aligned with market conditions and responsive to
customer needs. During the nine months ended September 30, 2004 and the years
ended December 31, 2003 and 2002, management approved and implemented
restructuring actions which included workforce reductions and facility
consolidations.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3><I>2004 United States Streamlining Plan</I><BR>
In the first quarter of 2004, the Company implemented a plan to streamline the
back office and warehousing operations in its United States computer businesses.
The Company recorded $3.7 million of costs related to this plan, including $3.2
million for severance and benefits for approximately 200 terminated employees
and $483,000 of non-cash costs for impairment of the carrying value of fixed
assets.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>The following table summarizes the components of the
restructuring charges, the cash payments, non-cash activities, and the remaining
accrual as of September 30, 2004 (in thousands):</FONT></TD>
</TR>
</TABLE>
<BR>

<PRE>
<FONT SIZE=1>
                                                Severance and         Asset            Other
                                              Personnel Costs    Write-downs      Exit Costs        Total
                                              ---------------    -----------      ----------        -----
       Charged to expense in 2004                      $3,153           $483            $263       $3,899
       Amounts utilized                                (2,292)          (483)            (42)      (2,817)
                                                       -------          -----            ----      -------
       Accrued at September 30, 2004                     $861              -            $221       $1,082
                                                         ====           =====           ====       ======
</FONT>
</PRE>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3><I>2003 United States Warehouse Consolidation Plan</I><BR>
In the fourth quarter of 2003, the Company implemented a plan to consolidate the
warehousing facilities in its United States computer supplies business. In the
third quarter of 2004, the Company recorded $399,000 of additional exit costs
related to this plan. The table below displays the activity and liability
balance of the reserve for this initiative (in thousands):</FONT></TD>
</TR>
</TABLE>
<BR>

<PRE>
<FONT SIZE=1>
                                                Severance and         Asset            Other
                                              Personnel Costs    Write-downs      Exit Costs        Total
                                              ---------------    -----------      ----------        -----
       Accrued at December 31, 2003                      $ 63           $233            $417         $713
       Charged to expense in 2004                                         97             302          399
       Amounts utilized                                   (63)          (122)           (392)        (577)
                                                          ----          -----           -----        -----
       Accrued at September 30, 2004                        -           $208            $327         $535
                                                          ====          =====           ====         ====
</FONT>
</PRE>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3><I>2002 United Kingdom Consolidation Plan</I><BR>
In 2002 the Company implemented a restructuring plan to consolidate the
activities of three United Kingdom locations into a new facility constructed for
the Company. In the third quarter of 2004, the Company recorded additional costs
related to this plan. The table below displays the activity and liability
balance of the reserve for this initiative (in thousands):</FONT></TD>
</TR>
</TABLE>
<BR>

<PRE>
                                               Asset           Other
                                          Write-downs     Exit Costs        Total
                                          -----------     ----------        -----
       Accrued at December 31, 2003              $630         $1,682       $2,312
       Charged to expense in 2004                                181          181
       Amounts utilized                          (630)        (1,189)      (1,819)
                                                 -----        -------      -------
       Accrued at September 30, 2004                -           $674         $674
                                                 =====        =======      =======
</PRE>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><B>7.</B></TD>
<TD WIDTH=95%><B>Segment Information</B><BR>
<BR>
The Company is engaged in a single reportable segment, the marketing and sales
of various business products. Financial information relating to the Company's
operations by geographic area was as follows (in thousands):</TD>
</TR>
</TABLE>
<BR>

<PRE>
<FONT SIZE=1>
                                                        Nine Months Ended          Three Months Ended
                                                             Sept. 30,                 Sept. 30,
                                                   ------------------------       ----------------------
                                                       2004          2003           2004          2003
                                                       ----          ----           ----          ----
         Net Sales:
         North America                               $871,990      $761,092       $301,007      $260,092
         Europe                                       505,007       459,178        159,264       144,919
                                                      -------       -------        -------       -------
         Consolidated                              $1,376,997    $1,220,270       $460,271      $405,011
                                                   ==========    ==========       ========      ========

         Revenues are attributed to countries based on location of selling subsidiary.
</FONT>
</PRE>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><B>8.</B></TD>
<TD WIDTH=95%><B>Recent Accounting Pronouncements</B></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>In December&#160;2003, the Financial Accounting
Standards Board (&#147;FASB&#148;) issued Financial Interpretation No.&#160;46
(Revised) (&quot;FIN 46-R&quot;) to address certain FIN 46 implementation
issues. This interpretation clarifies the application of Accounting Research
Bulletin 51, &#147;Consolidated Financial Statements&#148;, for companies that
have interests in entities that are VIEs (as defined in Note 1) as defined under
FIN&#160;46. According to this interpretation, if a company has an interest in a
VIE and is at risk for a majority of the VIE's expected losses or receives a
majority of the VIE's expected gains it shall consolidate the VIE. FIN&#160;46-R
also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. For entities acquired or created before
February&#160;1, 2003, this interpretation is effective no later than the end of
the first interim or reporting period ending after March&#160;15, 2004, except
for those VIE's that are considered to be special purpose entities, for which
the effective date is no later than the end of the first interim or annual
reporting period ending after December&#160;15, 2003. For all entities that were
acquired subsequent to January&#160;31, 2003, this interpretation is effective
as of the first interim or annual period ending after December&#160;31, 2003.
The Company has adopted FIN 46-R and began consolidating a 50%-owned joint
venture in the first quarter of 2004. This consolidation did not have a material
impact on the Company&#146;s consolidated financial position, results of
operations or cash flows.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><B>9.</B></TD>
<TD WIDTH=95%><B>Subsequent Event</B></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>On October 12, 2004, the Company entered into an
employment agreement with Gilbert Fiorentino, the Chief Executive Officer of its
subsidiary, Tiger Direct, Inc., and a director of the Company. The agreement is
effective as of June 1, 2004 and expires on December 31, 2013 unless terminated
sooner under the terms of the agreement.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%>&nbsp;</TD>
<TD WIDTH=95%><FONT SIZE=3>The agreement provides for annual compensation and
bonus payments. The agreement also accelerates the vesting schedule of options
previously granted to Mr. Fiorentino. In addition, new options were granted
under the Company's 1999 Long-term Stock Incentive Plan (the &#147;1999
Plan&#148;) for 166,667 shares, and the agreement obligates the Company to issue
additional options of 166,667 shares in each of August 2005 and 2006, at the
then fair market value. Options will vest in five annual cumulative installments
of 20% each.<BR>
<BR>
Mr. Fiorentino also was granted, pursuant to a restricted stock unit agreement,
restricted stock units under the 1999 Plan representing the right to receive a
total of 1,000,000 shares of restricted stock of the Company. The grant is
conditioned upon shareholder approval at the next annual meeting and
satisfaction of certain performance conditions based on earnings before
interest, taxes and depreciation and amortization expense in fiscal 2004 or
fiscal 2005. Such restricted stock units generally vest at the rate of 20% on
May 31, 2005 (or, if the performance conditions are only satisfied in 2005, the
date in 2006 when they are determined to have been satisfied) and 10% per year
on April 1, 2006 and each year thereafter.</FONT></TD>
</TR>
</TABLE>
<BR>

<P ALIGN=LEFT><FONT SIZE=3><B>Item 2. <U>Management's Discussion and Analysis of
Financial Condition and Results of Operations</U>.</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Forward Looking Statements</B></FONT></P>

<P><FONT SIZE=3>This report contains forward looking statements within the
meaning of that term in the Private Securities Litigation Reform Act of 1995
(Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934). Additional written or oral forward looking statements may
be made by the Company from time to time, in filings with the Securities
Exchange Commission or otherwise. Statements contained in this report that are
not historical facts are forward looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward looking statements may include, but are not limited to, projections of
revenue, income or loss and capital expenditures, statements regarding future
operations, financing needs, compliance with financial covenants in loan
agreements, plans for acquisition or sale of assets or businesses and
consolidation of operations of newly acquired businesses, and plans relating to
products or services of the Company, assessments of materiality, predictions of
future events and the effects of pending and possible litigation, as well as
assumptions relating to the foregoing. In addition, when used in this
discussion, the words &#147;anticipates&#148;, &#147;believes&#148;,
&#147;estimates&#148;, &#147;expects&#148;, &#147;intends&#148;,
&#147;plans&#148; and variations thereof and similar expressions are intended to
identify forward looking statements. </FONT></P>

<P><FONT SIZE=3>Forward-looking statements in this report are based on the
Company&#146;s beliefs and expectations as of the date of this report and are
subject to risks and uncertainties which may have a significant impact on the
Company&#146;s business, operating results or financial condition. Investors are
cautioned that these forward-looking statements are inherently uncertain. Should
one or more of the risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from
those described herein. Many of these risk factors are discussed below in
&#147;Factors That May Affect Future Results and Financial Condition&#148;.
</FONT></P>

<P><FONT SIZE=3>Readers are cautioned not to place undue reliance on any forward
looking statements contained in this report, which speak only as of the date of
this report. We undertake no obligation to publicly release the result of any
revisions to these forward looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unexpected events. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Overview</B></FONT></P>

<P><FONT SIZE=3>Systemax is a direct marketer of brand name and private label
products, including personal desktop computers (PCs), notebook computers,
computer related products and industrial products, in North America and Europe.
We market these products through an integrated system of distinctively branded,
full-color direct mail catalogs, proprietary e-commerce internet sites and
personalized relationship marketing. We assemble our own PCs and sell them under
our own trademarks, which we believe gives us a competitive advantage. We also
sell computers manufactured by other leading companies, such as IBM and Hewlett
Packard. We offer more than 100,000 products and continuously update our product
offerings to address the needs of our customers, which include large, mid-sized
and small businesses, educational and government entities as well as individual
consumers. Computers and computer related products account for more than 90% of
our net sales, and, as a result, we are dependent on the general demand for
information technology products. </FONT></P>

<P><FONT SIZE=3>The market for computer products is subject to intense price
competition and is characterized by narrow gross profit margins. Distribution of
information technology products is working capital intensive, requiring us to
incur significant costs associated with the warehousing of many products,
including the costs of leasing warehouse space, maintaining inventory and
tracking systems, and employing personnel to perform the associated tasks. We
supplement our product availability by maintaining relationships with major
distributors, utilizing a combination of stocking and drop-shipment.</FONT></P>

<P><FONT SIZE=3>During fiscal 2002 and 2003, our performance and that of the
industry as a whole was impacted negatively by a global economic downturn and
cautious information technology spending. As it became evident that the industry
was experiencing a prolonged economic downturn, we took measures to align our
cost structure with lower revenues and decreasing gross margins. The primary
component of our operating expenses historically has been employee related
costs, which includes items such as wages, commissions, bonuses, and benefits.
We have made substantial reductions in our workforce and closed or consolidated
several facilities. In the first quarter of 2004 we announced and began the
implementation of a plan to streamline our United States computer business,
consolidating duplicative back office and warehouse operations. We have
substantially completed this plan, with the benefits evidenced by a continued
decline in selling, general and administrative expense as a percentage of net
sales. </FONT></P>

<P><FONT SIZE=3>Economic conditions in North America have improved in 2004, with
increased demand for both our computer products, particularly from our consumer
customers, and industrial products. We will continue to focus on growth in our
internet sales, which allows us to leverage our advertising spending and lower
our order processing costs. We see unsettled economic conditions continuing to
adversely affect several of the European markets we serve. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Results of Operations</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Three Months Ended September 30, 2004 Compared to
Three Months Ended September 30, 2003</B></FONT></P>

<P><FONT SIZE=3>Net sales for the three months ended September 30, 2004
increased 13.6% to $460.3 million compared to $405.0 million in the year-ago
quarter. North American sales were $301.0 million, an increase of 15.7% from
$260.1 million in the prior year. Sales increased in North America in both our
computer and industrial products, led by increased e-commerce sales, which were
up 17.5% from last year&#146;s third quarter, reflecting strength in our consumer
business. European sales increased 9.9% to $159.3 million (representing 34.6% of
worldwide sales) compared to $144.9 million (35.8% of worldwide sales) in the
year-ago quarter, principally as a result of the impact of a weakening U.S.
Dollar on the translation of our European financial statements. Excluding the
movements in foreign exchange rates, European sales would have been unchanged
from the prior year, reflecting the continuing difficult economic environment in
certain of our European markets and its affect on demand from corporate
customers. </FONT></P>

<P><FONT SIZE=3>Gross profit was $73.2 million compared to $67.1 million in the
year-ago quarter, an increase of $6.1 million. The gross profit margin was 15.9%
in the current quarter, compared to 16.6% in the year-ago quarter. The decline
in the gross profit margin was due to competitive pricing pressures and lower
unit selling prices, both in Europe and in North American computer products, and
changes in the mix of products sold from a year ago. </FONT></P>

<P><FONT SIZE=3>Selling, general and administrative expenses for the quarter
increased $1.6 million, or 2.5%, to $66.4 million compared to $64.8 million in
the third quarter of 2003. This increase resulted from increased
dollar-denominated costs in Europe due to the impact of the weakening U.S.
Dollar on the translation of our European financial statements. Savings
resulting from previously completed workforce reductions in North America were
offset by an unanticipated increase in professional fees and increased other
operating expenses, including credit card fees related to increased sales
volume. Selling, general and administrative expenses as a percentage of net
sales decreased to 14.4% compared to 16.0% in the year-ago quarter. </FONT></P>

<P><FONT SIZE=3>During the third quarter of 2004, we incurred $1.0 million of
additional restructuring charges in the United States and Europe in connection
with facility exit costs and workforce reductions. </FONT></P>

<P><FONT SIZE=3>As a result of the above factors, we had income from operations
for the current quarter of $5.8 million compared to $3.6 million in the year-ago
quarter. In North America, we had income from operations of $8.4 million in the
current quarter compared to income from operations of $4.8 million last year.
Europe had a loss from operations of $2.6 million in the third quarter of 2004
compared to a loss from operations of $1.2 million in the year-ago quarter.</FONT></P>

<P><FONT SIZE=3>Interest and other expense - net consists principally of
interest expense. Interest expense was $887,000 in the third quarter of 2004 and
$638,000 in 2003 as a result of higher average borrowings in Europe. Interest
income on invested funds increased in 2004 because more funds were available for
investment. </FONT></P>

<P><FONT SIZE=3>Income tax expense was $2.4 million in the third quarter of
2004, an effective tax rate of 46.9%, and $1.1 million in the year-ago quarter,
an effective tax rate of 36.8%. The effective tax rate for the third quarter of
2004 was higher than the comparable period in the prior year due to losses in
tax jurisdictions for which no benefit is currently recognized, but was lower
than the effective rate for the first nine months of 2004 as it reflects a
year-to-date adjustment to the rate used in the first half of the year.</FONT></P>

<P><FONT SIZE=3>As a result of the above, net income for the third quarter was
$2.7 million, or $.08 per basic and diluted share, compared to $1.9 million, or
$.06 per basic and $.05 per diluted share, in the third quarter of 2003.</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Nine Months Ended September 30, 2004 Compared to Nine
Months Ended September 30, 2003</B></FONT></P>

<P><FONT SIZE=3>Net sales for the nine months ended September 30, 2004 increased
12.8% to $1.38 billion compared to $1.22 billion in the year-ago period. North
American sales were $872.0 million, a 14.6% increase from last year&#146;s
$761.1 million. European sales increased 10.0% to $505 million for the first
nine months of 2004 (representing 36.7% of worldwide sales) compared to $459.2
million (representing 37.6% of worldwide sales) in the year-ago nine-month
period. The impact of the weakening U.S. Dollar on the translation of our
European financial statements accounted for $53.3 million of the increase.
Excluding the movements in foreign exchange rates, European sales would have
decreased 1.6% from the prior year. The increase in North American sales
resulted from increased sales of computer products to consumer customers, driven
by increased internet purchases and increased sales in our industrial products
division. These were partially offset by weakness in demand for information
technology products by corporate customers. European sales were lower in local
currencies as a result of continued weak market conditions in many of the local
markets. </FONT></P>

<P><FONT SIZE=3>Gross profit was $215.9 million, or 15.7% of net sales, compared
to $203.1 million, or 16.6% of net sales, in the year-ago period, an increase of
$12.7 million.&#160;&#160;The decline in gross profit margin was due to
continued pricing pressure, increased customer discounting and a change in the
mix of products sold. </FONT></P>

<P><FONT SIZE=3>Selling, general and administrative expenses for the nine months
increased $5.8 million, or 3.0%, to $196.1 million compared to $190.3 million in
the first nine months of 2003. This increase resulted from the impact of the
weakening U.S. Dollar on the translation of our European costs. Decreases in
selling, general and administrative expenses resulting from workforce reductions
in the U. S. associated with the first quarter 2004 computer business
streamlining plan described below were offset by an unanticipated increase in
professional fees and increased other operating expenses, including credit card
fees related to increased sales volume. As a percentage of sales, these expenses
were 14.2% compared to 15.6% in the year-ago period. </FONT></P>

<P><FONT SIZE=3>In the first quarter of 2004 we implemented a plan to streamline
the activities of our United States computer businesses&#146; back office and
warehouse operations, resulting in the elimination of approximately 200 jobs. We
incurred $3.7 million of restructuring costs associated with this plan,
including $3.2 million for staff severance and benefits for terminated employees
and $0.5 million of non-cash costs for impairment of the carrying value of fixed
assets. During the third quarter of 2004 we recorded $600,000 of additional
costs related to facility exit costs for previously implemented plans to
consolidate warehouse locations. We incurred $1.7 million of restructuring
charges in Europe in connection with facility exit costs and workforce
reductions during the first nine months of 2004, including a consolidation of
United Kingdom sales offices in the first quarter of 2004, resulting in the
elimination of 50 jobs. </FONT></P>

<P><FONT SIZE=3>During the second quarter of 2003, we purchased the minority
ownership of our Netherlands subsidiary pursuant to the terms of the original
purchase agreement for $2.6 million. All of the purchase price was attributable
to goodwill and, as a result of an impairment analysis, was written off in
accordance with SFAS 142. </FONT></P>

<P><FONT SIZE=3>The Company had income from operations for the current
nine month period of $13.7 million compared to $11.4 million in the year-ago
nine month period. The Company had income from operations of $15.4 million in
its North American operations in the current nine month period compared to $11.9
million last year. We had a loss from operations in Europe of $1.7 million
compared to a loss from operations of $0.5 million in the year-ago period.</FONT></P>

<P><FONT SIZE=3>Interest and other expense - net consists principally of
interest expense. Interest expense was $2.3 million in the first nine months of
2004 and $1.7 million in 2003 as a result of higher average borrowings in
Europe. Interest income on invested funds was $0.5 million in both years.</FONT></P>

<P><FONT SIZE=3>The income tax provision was $6.2 million for the first nine
months of 2004, an effective tax rate of 51.6%, compared to a $5.3 million tax
provision, an effective tax rate of 50.9%, for the comparable period in 2003.
The high effective tax rate in 2004 was due to losses in tax jurisdictions for
which no benefit is currently recognized. The effective tax rate in 2003 was
affected by non-deductible costs incurred and losses in tax jurisdictions for
which no benefit is recognized. </FONT></P>

<P><FONT SIZE=3>As a result of the above, net income for the first nine months
of 2004 was $5.8 million, or $.17 per basic and $.16 per diluted share, compared
to $5.1 million, or $.15 per basic and diluted share, in the year ago period.</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Liquidity and Capital Resources</B></FONT></P>

<P><FONT SIZE=3>Our primary liquidity needs are to support working capital
requirements in our business and to fund capital expenditures. We rely
principally upon operating cash flow and borrowings under our credit facilities
to meet these needs. We believe that cash flow available from these sources will
be sufficient to meet our working capital requirements, projected capital
expenditures and interest and debt repayments in the foreseeable future.</FONT></P>

<P><FONT SIZE=3>Our cash balance increased to $57.3 million during the nine
months ended September 30, 2004 from $38.7 million at the end of 2003. Net cash
provided by operating activities was $29.5 million in 2004, compared with $0.4
million in 2003. The increase in cash provided by operations in 2004 resulted
from changes in our working capital accounts, which provided $11.3 million in
cash compared to using $19.1 million of cash in 2003. The improvement resulted
primarily from a $25.0 million increase in accounts payable, accrued expenses
and other current liabilities in the first nine months of 2004, compared to a
$15.7 million decrease for the same period of the prior year. Cash generated
from net income adjusted by other non-cash items provided $18.2 million in 2004,
compared to $19.5 million provided by these items in 2003. </FONT></P>

<P><FONT SIZE=3>Our working capital was $162 million at September 30, 2004, an
increase of $13 million from $149 million at the end of 2003. This was due
principally to a $19 million increase in cash, a $1 million increase in accounts
receivable, a $4 million increase in inventories, an $8 million increase in
prepaid expenses and other current assets and a $6 million decrease in
short-term debt, offset by a $16 million increase in accounts payable and a $9
million increase in accrued expenses and other current liabilities. Our
inventories increased in anticipation of traditionally strong fourth quarter
sales, which are heavily influenced by individual consumer purchases. Future
accounts receivable and inventory balances will continue to fluctuate with
changes in sales volume and the mix of our net sales between consumer and
business customers. </FONT></P>

<P><FONT SIZE=3>We maintain our cash and cash equivalents primarily in money
market funds or their equivalent. As of September 30, 2004, all of our
investments mature in less than three months. Accordingly, we do not believe
that our investments have significant exposure to interest rate risk.</FONT></P>

<P><FONT SIZE=3>In 2004 $4.6 million of cash was used in investing activities,
principally for the purchase of property, plant and equipment. Capital
expenditures in 2004 consisted primarily of upgrades and enhancements to our
information and communications systems hardware and facilities costs for the
opening of several new retail stores. Cash of $9.1 million was used in investing
activities in 2003, including $6.5 million for capital expenditures and $2.6
million for the acquisition of the minority interest in our Netherlands
subsidiary. </FONT></P>

<P><FONT SIZE=3>Net cash of $7.0 million was used in financing activities in
2004. Cash of $6.1 million was used to repay short-term borrowings under our
European credit facilities. We used cash of $1.3 million for payments under
long-term borrowing agreements. Exercises of stock options provided $412,000 of
cash in 2004. Cash of $4.6 million was used by financing activities in 2003,
including $7.2 million used to repay short and long-term obligations, $1.3
million provided by the issuance of a capital lease and $1.3 million provided by
the exercise of stock options. </FONT></P>

<P><FONT SIZE=3>Under our $70 million United States secured revolving credit
agreement, which expires on March 31, 2005, availability as of September 30,
2004 was $60.4 million. There were outstanding letters of credit of $10.1
million and there were no outstanding advances as of September 30, 2004. Under
our &#163;15 million ($27.1 million at the September 30, 2004 exchange rate)
multi-currency United Kingdom credit facility, which is available to our United
Kingdom subsidiaries, at September 30, 2004 there were &#163;4.4 million ($8.0
million) of borrowings outstanding with interest payable at a rate of 5.87%. The
facility does not have a termination date, but may be canceled by either party
on six months notice. Borrowings under the facility are secured by certain
assets of our United Kingdom subsidiaries. Under our Netherlands &#128;5 million
($6.2 million at the September 30, 2004 exchange rate) credit facility, at
September 30, 2004 there were &#128;4.1 million ($5.1 million) of borrowings
outstanding under this line with interest payable at a rate of 5.0%. This
facility expires in November 2005. </FONT></P>

<P><FONT SIZE=3>We have begun discussions with our lenders to replace the
current United States and United Kingdom credit facilities with a single
multi-currency borrowing facility. We expect that a new agreement will be
completed in the next three months. </FONT></P>

<P><FONT SIZE=3>We also have certain obligations with various parties that
include commitments to make future payments. Our principal commitments at
September 30, 2004 consisted of repayments of borrowings under our credit
agreements and long-term borrowings and payments under operating leases for
certain of our real property and equipment. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Off-balance Sheet Arrangements</B></FONT></P>

<P><FONT SIZE=3>The Company has not created, and is not party to, any
special-purpose or off-balance sheet entities for the purpose of raising
capital, incurring debt or operating the Company&#146;s business. The Company
does not have any arrangements or relationships with entities that are not
consolidated into the financial statements that are reasonably likely to
materially affect the Company&#146;s liquidity or the availability of capital
resources. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Factors That May Affect Future Results and Financial Condition</B></FONT></P>

<P><FONT SIZE=3>There are a number of factors and variables that affect our
results of operations and financial condition. Following is a description of
some of the important factors that may affect future results. </FONT></P>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>Economic conditions have affected and could continue to
adversely affect our revenues and profits.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>Both we and our business customers are subject to
global political, economic and market conditions, including military action and
the threat of terrorism. Economic conditions in the United States have improved
after several years of adverse conditions. Economic conditions in Europe
continue to be unsettled. If the strengthening of general economic conditions
does not continue and if conditions in Europe remain weak, our results could
continue to be adversely affected. We may experience a decline in sales as a
result of poor economic conditions and the lack of visibility relating to future
orders. Our consolidated results of operations depend upon, among other things,
our ability to maintain and increase sales volumes with existing customers, our
ability to attract new customers and the financial condition of our customers. A
decline in the economy that adversely affects our customers, causing them to
limit or defer their spending, would likely adversely affect us as well. We
cannot predict with any certainty whether we will be able to maintain or improve
upon historical sales volumes with existing customers, or whether we will be
able to attract new customers.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>In response to economic and market conditions, from
time to time we have undertaken initiatives to reduce our cost structure where
appropriate. The initiatives already implemented as well as any future workforce
and facilities reductions undertaken may not be sufficient to meet the changes
in economic and market conditions and to achieve future profitability. In
addition, costs actually incurred in connection with our restructuring actions
may be higher than our estimates of such costs and/or may not lead to the
anticipated cost savings.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>Competitive pressures
could harm our revenue and gross margin.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>We may not be able to compete effectively with
current or future competitors. The market for our products and services is
intensely competitive and subject to constant technological change. We expect
this competition to further intensify in the future. Competitive factors include
price, availability, service and support. We compete with a wide variety of
other resellers and retailers, as well as manufacturers. Some of our competitors
are larger companies with greater financial, marketing and product development
resources than ours. In addition, new competitors may enter our markets. This
may place us at a disadvantage in responding to competitors' pricing strategies,
technological advances and other initiatives, resulting in our inability to
increase our revenues or maintain our gross margins in the future.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>In many cases our products compete directly with
those offered by other manufacturers and distributors. If any of our competitors
were to develop products or services that are more cost-effective or technically
superior, demand for our product offerings could decrease.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>Our margins are also dependent on the mix of products
we sell and could be adversely affected by a continuation of our customers&#146;
shift to lower-priced products.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>We are dependent on third-party suppliers.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>We purchase a significant portion of our computer
products from major distributors such as Tech Data Corporation and Ingram
Micro&#160;Inc. and directly from large manufacturers such as IBM and Hewlett
Packard, who deliver those products directly to our customers. These
relationships enable us to make available to our customers a wide selection of
products without having to maintaining large amounts of inventory. The
termination or interruption of our relationships with any of these suppliers
could materially adversely affect our business.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>Our PC products contain electronic components,
subassemblies and software that in some cases are supplied through sole or
limited source third-party suppliers, some of which are located outside of the
U.S. Although we do not anticipate any problems procuring supplies in the
near-term, there can never be any assurance that parts and supplies will be
available in a timely manner and at reasonable prices. Any loss of, or
interruption of supply from key suppliers may require us to find new suppliers.
This could result in production or development delays while new suppliers are
located, which could substantially impair operating results. If the availability
of these or other components used in the manufacture of our products was to
decrease, or if the prices for these components were to increase significantly,
operating costs and expenses could be adversely affected.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>A portion of our revenue is derived from the sale of
products manufactured using licensed patents, software and/or technology.
Failure to renew these licenses on favorable terms or at all could force us to
stop manufacturing and distributing these products and our financial condition
could be adversely affected.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>Many product suppliers provide us with co-op
advertising support in exchange for featuring their products in our catalogs and
on our internet sites. Certain suppliers provide us with other incentives such
as rebates, reimbursements, payment discounts, price protection and other
similar arrangements. These incentives are offset against cost of goods sold or
selling, general and administrative expenses, as applicable. The level of co-op
advertising support and other incentives received from suppliers may decline in
the future, which could increase our cost of goods sold or selling, general and
administrative expenses and have an adverse effect on results of operations and
cash flows.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>We are exposed to inventory risks.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>Our inventory is subject to risk due to technological
change and changes in market demand for particular products. Certain of our
suppliers offer limited price protection from the loss in value of inventory and
we have limited right to return purchases to suppliers. The decrease or
elimination of price protections or purchase returns could lower our gross
margin or result in inventory write-downs. We also periodically take advantage
of attractive product pricing by making opportunistic bulk inventory purchases;
any resulting excess and/or obsolete inventory that we are not able to re-sell
could have an adverse impact on our results of operations. Any inability to
enter into such arrangements may significantly impact our sales and
profitability.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>State and local sales
tax collection may affect demand for our products.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>Our United States subsidiaries collect and remit
sales tax in states in which the subsidiaries have physical presence or in which
we believe other appropriate nexus to obligate such collection exists. Other
states may, from time to time, claim that we have state-related activities
constituting a sufficient nexus to trigger such collection. Additionally, many
other states seek to impose sales tax collection obligations on companies that
sell goods to customers in their state, or directly to the state and its
political subdivisions, even without a physical presence. Such efforts by states
have increased recently, as states seek to raise revenues without increasing the
tax burden on residents. We rely, as do other direct mail retailers, on United
States Supreme Court decisions which hold that, without Congressional authority,
a state may not enforce a sales tax collection obligation on a company that has
no physical presence in the state and whose only contacts with the state are
through the use of interstate commerce such as the mailing of catalogs into the
state and the delivery of goods by mail or common carrier. We cannot predict
whether the nature or level of contacts we have with a particular state will be
deemed enough to require us to collect sales tax in that state nor can we be
assured that Congress or individual states will not approve legislation
authorizing states to impose tax collection obligations on all direct mail
and/or e-commerce transactions. A successful assertion by one or more states
that we should collect sales tax on the sale of merchandise could result in
substantial tax liabilities for past sales and would result in considerable
administrative burdens and costs for us and may reduce demand for our products
from customers in such states when we charge customers for such
taxes.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>We have substantial international operations and we are exposed to
fluctuations in currency exchange </I> <I>rates and political uncertainties.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>We currently have operations located in nine
countries outside the United States, and non-U.S. sales accounted for 40.0% of
our revenue during the first nine months of 2004. Our future results could be
materially adversely affected by a variety of factors, including changes in
foreign currency exchange rates, changes in a country&#146;s economic or
political conditions, unexpected changes in regulatory requirements and natural
disasters.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>Our income tax rate
and the value of our deferred tax assets are subject to change.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>Changes in our income tax expense due to changes in
the mix of U.S. and non-U.S. revenues and profitability, changes in tax rates or
exposure to additional income tax liabilities could affect our profitability. We
are subject to income taxes in the United States and various foreign
jurisdictions. Our effective tax rate could be adversely affected by changes in
the mix of earnings in countries with differing statutory tax rates, changes in
the valuation of deferred tax assets and liabilities, changes in tax laws or by
material audit assessments. The carrying value of our deferred tax assets, which
are primarily in the United States, is dependent on our ability to generate
future taxable income in the United States. In addition, the amount of income
taxes we pay is subject to ongoing audits in various jurisdictions and a
material assessment by a tax authority could affect our
profitability.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>Business disruptions
could adversely impact our revenue and financial condition.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>It is our policy to insure for certain property and
casualty risks consisting primarily of physical loss to property, business
interruptions resulting from property losses, workers' compensation,
comprehensive general liability, and auto liability. Insurance coverage is
obtained for catastrophic property and casualty exposures as well as those risks
required to be insured by law or contract. Although we believe that our
insurance coverage is reasonable, significant events such as acts of war and
terrorism, economic conditions, judicial decisions, legislation and large losses
could materially affect our insurance obligations and future
expense.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>Reliance on technology</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>We rely on a variety of information and
telecommunications systems in our operations. Our success is dependent in large
part on the accuracy and proper use of our information systems, including our
telecommunications systems. To manage our growth, we continually evaluate the
adequacy of our existing systems and procedures. We anticipate that we will
regularly need to make capital expenditures to upgrade and modify our management
information systems, including software and hardware, as we grow and the needs
of our business change. The occurrence of a significant system failure or our
failure to expand or successfully implement our systems could have a material
adverse effect on our results of operations.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>Our information systems networks, including our web
sites, and applications could be adversely affected by viruses or worms and may
be vulnerable to malicious acts such as hacking. Although we take preventive
measures, these procedures may not be sufficient to avoid harm to our
operations, which could have an adverse effect on our results of
operations.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>Availability of credit and financing.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>We require significant levels of capital in our
business to finance accounts receivable and inventory. We maintain credit
facilities in the United States and in Europe to finance increases in our
working capital if cash available is insufficient. The amount of credit
available to us at any point in time may be adversely affected by the quality or
value of the assets collateralizing these credit lines. Such agreements require
that we satisfy certain financial and other covenants. In addition, if we are
unable to renew or replace these facilities at maturity, or if we are in breach
of covenants, our liquidity and capital resources may be adversely affected.
However, we have no reason to believe that we will not be able to renew our
facilities.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>Sales to individual consumers exposes us to credit card fraud, which could
adversely affect our business.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>Failure to adequately control fraudulent credit card
transactions could increase our expenses. Increased sales to individual
consumers, which are more likely to be paid for using a credit card, increases
our exposure to fraud. We employ technology solutions to help us detect the
fraudulent use of credit card information. However, if we are unable to detect
or control credit card fraud, we may in the future suffer losses as a result of
orders placed with fraudulent credit card data, which could adversely affect our
business.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>Increased costs
associated with corporate governance compliance may impact our results of
operations.</I></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>As a public company, we incur significant legal,
accounting and other expenses that we would not incur as a private company. In
addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the Securities and Exchange Commission and listing requirements
subsequently adopted by the New York Stock Exchange in response to
Sarbanes-Oxley, have required changes in corporate governance practices of
public companies. We expect these developments to increase our legal compliance
and financial reporting costs and make some activities more costly and time
consuming. These developments may make it more difficult and more expensive for
us to obtain directors&#146; and officers&#146; liability insurance and we may
be required to accept reduced coverage or incur substantially higher costs to
obtain coverage, possibly making it more difficult for us to attract and retain
qualified members of our board of directors, particularly to serve on our audit
committee. We presently cannot estimate the timing or magnitude of additional
costs we may incur as a result; however, to the extent these costs are
significant, our general and administrative expenses are likely to increase as a
percentage of revenue and our results of operations will be negatively
impacted.</FONT></TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>&#149;</TD>
<TD WIDTH=90%><I>In the event we are unable to satisfy regulatory requirements
requiring companies to evaluate internal controls under
Section&#160;404 of the Sarbanes-Oxley Act of 2002, or if these internal
controls are not effective, our business could suffer.</I> </TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>&nbsp;</TD>
<TD WIDTH=90%><FONT SIZE=3>Section 404 of the Sarbanes-Oxley Act of 2002
requires that we evaluate and report on our internal controls over financial
reporting and have our registered public accountant attest to such evaluation
beginning with our fiscal year ending December 31, 2005. We have prepared a plan
of action for compliance and we are in the process of documenting and testing
our systems of internal controls. Due to the ongoing evaluation and testing of
our internal controls we cannot be assured that no significant deficiencies or
material weaknesses would be required to be reported. We have already identified
a number of deficiencies in our internal controls over financial reporting. We
are diligently working to implement enhancements to eliminate these
deficiencies. If we are not able to implement the requirements of
Section&#160;404 in a timely manner or with adequate compliance, we might be
subject to regulatory sanctions and we might suffer a loss of public confidence
in our reported financial information. Any such action could adversely affect
our business and financial results.</FONT></TD>
</TR>
</TABLE>
<BR>


<P><FONT SIZE=3>Other factors that could contribute to or cause such differences
include, but are not limited to, unanticipated developments in any one or more
of the following areas: (i) the effect on us of volatility in the price of paper
and periodic increases in postage rates, (ii) the operation of our management
information systems, (iii) significant changes in the computer products retail
industry, especially relating to the distribution and sale of such products,
(iv) timely availability of existing and new products, (v) risks involved with
e-commerce, including possible loss of business and customer dissatisfaction if
outages or other computer-related problems should preclude customer access to
us, (vi) risks associated with delivery of merchandise to customers by utilizing
common delivery services such as the United States Postal Service and United
Parcel Service, including possible strikes and contamination, (vii) borrowing
costs or availability, (viii) pending or threatened litigation and
investigations and (ix) the availability of key personnel, as well as other risk
factors which may be detailed from time to time in our Securities and Exchange
Commission filings. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Critical Accounting Policies and Estimates</B></FONT></P>

<P><FONT SIZE=3>The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, and
revenues and expenses during the period. Significant accounting policies
employed by the Company, including the use of estimates, were presented in the
Notes to Consolidated Financial Statements of the Company's 2003 Annual Report
on Form 10-K. </FONT></P>

<P><FONT SIZE=3>Critical accounting policies are those that are most important
to the presentation of our financial condition and results of operations,
require management's most difficult, subjective and complex judgments, and
involve uncertainties. The accounting policies that have been identified as
critical to our business operations and understanding the results of operations
pertain to revenue recognition, net accounts receivable, inventories, long-lived
assets, income taxes and restructuring charges and accruals. The application of
each of these critical accounting policies and estimates was discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003. There
have been no significant changes in the application of critical accounting
policies or estimates during 2004. Management believes that full consideration
has been given to all relevant circumstances that we may be subject to, and the
condensed consolidated financial statements of the Company accurately reflect
management&#146;s best estimate of the consolidated results of operations,
financial position and cash flows of the Company for the periods presented.
Because of the uncertainty in these estimates, actual results could differ from
estimates used in applying the critical accounting policies. We are not aware of
any reasonably likely events or circumstances which would result in different
amounts being reported that would materially affect its financial condition or
results of operations. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Item 3. <U>Quantitative and Qualitative Disclosure About
Market Risk</U>.</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>We are exposed to market risks, which include changes
in U.S. and international interest rates as well as changes in currency exchange
rates as measured against the U.S. dollar and each other.</FONT></P>

<P><FONT SIZE=3>We have limited involvement with derivative financial
instruments and do not use them for trading purposes. Changes in currency
exchange rates as measured against the U.S. dollar may positively or negatively
affect sales, gross margins, operating expenses and retained earnings as
expressed in U.S. dollars. We may enter into foreign currency options or forward
exchange contracts aimed at limiting in part the impact of certain currency
fluctuations, but as of September 30, 2004 we had no outstanding forward
exchange contracts. </FONT></P>

<P><FONT SIZE=3>Our exposure to market risk for changes in interest rates
relates primarily to our variable rate debt. In connection with our United
Kingdom term loan agreement, effective April 30, 2002 we entered into an
interest rate collar agreement to reduce our exposure to market rate
fluctuations. At September 30, 2004 the notional amount of the interest rate
collar was &#163;5.3million ($9.5 million at the September 30, 2004 exchange
rate) with an interest rate cap of 6.0% and a floor of 4.5%. The interest rate
collar expires on April 30, 2005. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Item&#160;4. <U>Controls and Procedures</U></B> </FONT></P>

<P><FONT SIZE=3>The Company has carried out an evaluation under the supervision
of management, including the Chairman and Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of the
Company&#146;s disclosure controls and procedures. Based on that evaluation, the
Company&#146;s Chairman and Chief Executive Officer and Chief Financial Officer
have concluded that, as of September 30, 2004, the Company&#146;s disclosure
controls and procedures were effective to ensure that information required to be
disclosed by the Company in the reports filed or submitted by it under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
SEC, and include controls and procedures designed to ensure that information
required to be disclosed by the Company in such reports is assembled and
reported to the Company&#146;s management, including the Chairman and Chief
Executive Officer and the Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosures. </FONT></P>

<P><FONT SIZE=3>The Company previously disclosed in its Form 10-Q for the
quarter ended June 30, 2004 that management identified and reported to the Audit
Committee of the Company&#146;s Board of Directors certain matters involving
internal control deficiencies. These included internal control deficiencies
arising from the consolidation of its U.S. computer businesses with separate
accounting systems to a single accounting system. These internal control
deficiencies affected the timeliness and accuracy of recording certain
transactions and included the lack of formal procedures to reconcile
intercompany accounts and transactions. We have addressed these deficiencies
with the hiring and training of additional accounting staff. </FONT></P>

<P><FONT SIZE=3>We also identified deficiencies related to policies and
procedures and systems interfaces and are undertaking measures to remediate
them. Management and the Audit Committee believe that those internal control
deficiencies, as mitigated by substantial manual procedures and account
reconciliations, individually or in the aggregate, did not have a material
effect on the financial statements of the Company for the period ended September
30, 2004. </FONT></P>

<P><FONT SIZE=3>Other than arising from the review described above, there have
been no changes in internal control over financial reporting during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, the Company&#146;s internal control over financial
reporting. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>PART II - OTHER INFORMATION</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>Item 6. <U>Exhibits and Reports on Form 8-K</U></B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(a) Exhibits.</FONT></P>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>3.1</TD>
<TD WIDTH=90%>Composite Certificate of Incorporation of Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2001.)</TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>3.2</TD>
<TD WIDTH=90%>By-laws of Registrant. (Incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, File No. 33-92052.)</TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>4.1</TD>
<TD WIDTH=90%>Stockholders Agreement. (Incorporated herein by reference to the Company's
quarterly report on Form 10-Q for the quarterly period ended June 30, 1995.)</TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>4.2</TD>
<TD WIDTH=90%>Specimen Stock Certificate. (Incorporated herein by reference to Exhibit 19.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001.)</TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>31</TD>
<TD WIDTH=90%>Certifications of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002</TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=5%>32</TD>
<TD WIDTH=90%>Certifications of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002</TD>
</TR>
</TABLE>
<BR>

<P ALIGN=LEFT><FONT SIZE=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(b) Reports on Form 8-K.</FONT></P>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=5%></TD>
<TD WIDTH=95%>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) A
report on Form 8-K was filed by the Company on August 11, 2004 regarding the
Company's financial results for the six months ended June 30, 2004.</TD>
</TR>
</TABLE>
<BR>

<P ALIGN=CENTER><FONT SIZE=3><B><U>SIGNATURES</U></B></FONT></P>

<P><FONT SIZE=3>Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized. </FONT></P>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=50%></TD>
<TD WIDTH=50%>SYSTEMAX INC.</TD>
</TR>
</TABLE>
<BR>

<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH=50%>Date:  November 12, 2004</TD>
<TD WIDTH=50%>By: <U>/s/ RICHARD LEEDS&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><BR>
Richard Leeds
Chairman and Chief Executive Officer<BR>
<BR>
<BR>
By: <U>/s/ STEVEN GOLDSCHEIN&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><BR>
Steven Goldschein<BR>
Senior Vice President and Chief Financial Officer</TD>
</TR>
</TABLE>
<BR>


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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>2
<FILENAME>systemax-ex31_111204.htm
<TEXT>
<HTML>
<HEAD>
<TITLE>Exhibit 31</TITLE>
</HEAD>
<BODY>


<P ALIGN=RIGHT>Exhibit 31</P>

<P ALIGN=CENTER><FONT SIZE=3><B>CERTIFICATION UNDER SECTION 302 OF THE<BR>
SARBANES-OXLEY ACT OF 2002</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>CERTIFICATION OF CHIEF EXECUTIVE OFFICER</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>I, Richard Leeds, Chief Executive Officer of Systemax
Inc., certify that:</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>1. I have reviewed this quarterly report on Form 10-Q
of Systemax Inc. (the "registrant");</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>2. Based on my knowledge, this quarterly report does
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>3. Based on my knowledge, the financial statements,
and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
quarterly report;</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>4. The registrant's other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and we
have:</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>a) Designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within
these entities, particularly during the period in which this quarterly report is
being prepared;</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>c) Disclosed in this report any change in the
registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting.</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>5. The registrant's other certifying officer and I
have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function):</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting known to me which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial
information; and</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls over financial reporting.</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>Dated: November 12, 2004</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><U>/s/ RICHARD LEEDS</U><BR>
Richard Leeds, Chief Executive Officer</FONT></P>

<PAGE>

<P ALIGN=CENTER><FONT SIZE=3><B>CERTIFICATION UNDER SECTION 302 OF THE<BR>
SARBANES-OXLEY ACT OF 2002</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B>CERTIFICATION OF CHIEF FINANCIAL OFFICER</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>I, Steven M. Goldschein, Chief Financial Officer of
Systemax Inc., certify that:</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>1. I have reviewed this quarterly report on Form 10-Q
of Systemax Inc. (the "registrant");</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>2. Based on my knowledge, this quarterly report does
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>3. Based on my knowledge, the financial statements,
and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
quarterly report;</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>4. The registrant's other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and we
have:</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>a) Designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within
these entities, particularly during the period in which this quarterly report is
being prepared;</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>c) Disclosed in this report any change in the
registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting.</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>5. The registrant's other certifying officer and I
have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function):</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting known to me which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial
information; and</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls over financial reporting.</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>Dated: November 12, 2004</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><U>/s/ STEVEN M. GOLDSCHEIN</U><BR>
Steven M. Goldschein, Chief Financial Officer</FONT></P>

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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>3
<FILENAME>systemax-ex32_111204.htm
<TEXT>
<HTML>
<HEAD>
<TITLE>Exhibit 32</TITLE>
</HEAD>
<BODY>

<P ALIGN=RIGHT>Exhibit 32</P>


<P ALIGN=CENTER><FONT SIZE=3><B>CERTIFICATION PURSUANT TO SECTION 906 OF THE<BR>
SARBANES-OXLEY ACT OF 2002</B></FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><B><U>CERTIFICATION OF CHIEF EXECUTIVE OFFICER</U></B></FONT></P>

<P><FONT SIZE=3>The undersigned, the Chief Executive Officer of Systemax Inc.,
hereby certifies that to the best of his knowledge Systemax Inc.&#146;s Form
10-Q for the period ended September 30, 2004 fully complies with the
requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m or 78 (o)(d) and that the information contained in such Form
10-Q fairly presents, in all material respects, the financial condition and
results of operations of Systemax Inc. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>Dated:   November 12, 2004</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><U>/s/ RICHARD LEEDS&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><BR>
Richard Leeds, Chief Executive Officer</FONT></P>


<P ALIGN=LEFT><FONT SIZE=3><B><U>CERTIFICATION OF CHIEF FINANCIAL OFFICER</U></B></FONT></P>

<P><FONT SIZE=3>The undersigned, the Chief Financial Officer of Systemax Inc.,
hereby certifies that to the best of his knowledge Systemax Inc.&#146;s Form
10-Q for the period ended September 30, 2004 fully complies with the
requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m or 78 (o)(d) and that the information contained in such Form
10-Q fairly presents, in all material respects, the financial condition and
results of operations of Systemax Inc. </FONT></P>

<P ALIGN=LEFT><FONT SIZE=3>Dated:   November 12, 2004</FONT></P>

<P ALIGN=LEFT><FONT SIZE=3><U>/s/ STEVEN M. GOLDSCHEIN&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><BR>
Steven M. Goldschein, Chief Financial Officer</FONT></P>

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</TEXT>
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