UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2013

 

OR

 

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

 

For the transition period from                        to                      

 

Commission File Number: 0-25790

 

PCM, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4518700

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

1940 E. Mariposa Avenue

El Segundo, California 90245

(Address of principal executive offices)

 

(310) 354-5600

(Registrant’s telephone number, including area code)

 

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.   Yes x No o

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

As of August 6, 2013, the registrant had 11,559,087 shares of common stock outstanding.

 

 

 



 

PCM, INC.

 

TABLE OF CONTENTS

 

 

Page

PART I - FINANCIAL INFORMATION (unaudited)

 

 

 

Item 1. Financial Statements

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012

2

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012

3

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012

4

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012

5

 

 

Notes to the Condensed Consolidated Financial Statements

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

27

 

 

Item 4. Controls and Procedures

28

 

 

PART II - OTHER INFORMATION (unaudited)

 

 

 

Item 1. Legal Proceedings

28

 

 

Item 1A. Risk Factors

29

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

Item 5. Other Information

45

 

 

Item 6. Exhibits

46

 

 

Signature

47

 



 

PCM, INC.

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

June 30,
2013

 

December 31,
2012

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

11,378

 

$

6,535

 

Accounts receivable, net of allowances of $1,340 and $1,459

 

217,361

 

190,079

 

Inventories

 

67,335

 

68,942

 

Prepaid expenses and other current assets

 

22,341

 

14,028

 

Deferred income taxes

 

3,244

 

3,004

 

Total current assets

 

321,659

 

282,588

 

Property and equipment, net

 

51,040

 

48,180

 

Deferred income taxes

 

277

 

380

 

Goodwill

 

25,510

 

25,510

 

Intangible assets, net

 

6,050

 

7,098

 

Other assets

 

4,679

 

1,979

 

Total assets

 

$

409,215

 

$

365,735

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

112,176

 

$

102,972

 

Accrued expenses and other current liabilities

 

29,661

 

30,371

 

Deferred revenue

 

19,615

 

5,411

 

Line of credit

 

100,396

 

87,630

 

Notes payable — current

 

1,022

 

812

 

Total current liabilities

 

262,870

 

227,196

 

Notes payable and other long-term liabilities

 

19,251

 

16,750

 

Deferred income taxes

 

6,539

 

5,678

 

Total liabilities

 

288,660

 

249,624

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding

 

 

 

Common stock, $0.001 par value; 30,000,000 shares authorized; 14,790,853 and 14,560,801 shares issued; and 11,528,460 and 11,525,459 shares outstanding, respectively

 

15

 

14

 

Additional paid-in capital

 

114,133

 

111,952

 

Treasury stock, at cost: 3,262,393 and 3,035,342 shares, respectively

 

(15,246

)

(13,688

)

Accumulated other comprehensive income

 

1,932

 

2,511

 

Retained earnings

 

19,721

 

15,322

 

Total stockholders’ equity

 

120,555

 

116,111

 

Total liabilities and stockholders’ equity

 

$

409,215

 

$

365,735

 

 

See Notes to the Condensed Consolidated Financial Statements.

 

2



 

PCM, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net sales

 

$

366,420

 

$

351,674

 

$

703,589

 

$

686,371

 

Cost of goods sold

 

315,285

 

303,169

 

605,500

 

591,094

 

Gross profit

 

51,135

 

48,505

 

98,089

 

95,277

 

Selling, general and administrative expenses

 

44,845

 

45,255

 

88,921

 

91,898

 

Revaluation of earnout liability

 

 

(175

)

 

(175

)

Operating profit

 

6,290

 

3,425

 

9,168

 

3,554

 

Interest expense, net

 

781

 

909

 

1,553

 

1,840

 

Income before income taxes

 

5,509

 

2,516

 

7,615

 

1,714

 

Income tax expense

 

2,346

 

1,085

 

3,216

 

753

 

Net income

 

$

3,163

 

$

1,431

 

$

4,399

 

$

961

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Common Share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.28

 

$

0.12

 

$

0.38

 

$

0.08

 

Diluted

 

0.27

 

0.12

 

0.37

 

0.08

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

11,488

 

12,032

 

11,483

 

12,016

 

Diluted

 

11,771

 

12,166

 

11,734

 

12,221

 

 

See Notes to the Condensed Consolidated Financial Statements.

 

3



 

PCM, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income

 

$

3,163

 

$

1,431

 

$

4,399

 

$

961

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(346

)

(152

)

(579

)

36

 

Total other comprehensive (loss) income

 

(346

)

(152

)

(579

)

36

 

Comprehensive income

 

$

2,817

 

$

1,279

 

$

3,820

 

$

997

 

 

See Notes to the Condensed Consolidated Financial Statements.

 

4



 

PCM, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

Cash Flows From Operating Activities

 

 

 

 

 

Net income

 

$

4,399

 

$

961

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

5,897

 

6,302

 

Provision for deferred income taxes

 

726

 

2,015

 

Excess tax benefit related to stock option exercises

 

(37

)

(39

)

Non-cash stock-based compensation

 

783

 

1,051

 

Decrease in earnout liability

 

 

(175

)

Change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(27,282

)

8,028

 

Inventories

 

1,607

 

3,036

 

Prepaid expenses and other current assets

 

(8,532

)

(3,053

)

Other assets

 

(1,816

)

51

 

Accounts payable

 

410

 

8,303

 

Accrued expenses and other current liabilities

 

(717

)

(4,602

)

Deferred revenue

 

14,204

 

(547

)

Total adjustments

 

(14,757

)

20,370

 

Net cash (used in) provided by operating activities

 

(10,358

)

21,331

 

Cash Flows From Investing Activities

 

 

 

 

 

Purchases of property and equipment

 

(5,732

)

(5,082

)

Net cash used in investing activities

 

(5,732

)

(5,082

)

Cash Flows From Financing Activities

 

 

 

 

 

Net borrowings (payments) under line of credit

 

12,766

 

(20,099

)

Capital lease proceeds

 

206

 

4,356

 

Borrowing under note payable

 

2,393

 

2,859

 

Payments under notes payable

 

(458

)

(552

)

Change in book overdraft

 

8,722

 

(2,744

)

Payments of obligations under capital lease

 

(1,431

)

(1,123

)

Proceeds from stock issued under stock option plans

 

1,399

 

92

 

Payment for deferred financing costs

 

(752

)

 

Common shares repurchased and held in treasury

 

(1,558

)

 

Excess tax benefit related to stock option exercises

 

37

 

39

 

Net cash provided by (used in) financing activities

 

21,324

 

(17,172

)

Effect of foreign currency on cash flow

 

(391

)

(3

)

Net change in cash and cash equivalents

 

4,843

 

(926

)

Cash and cash equivalents at beginning of the period

 

6,535

 

9,484

 

Cash and cash equivalents at end of the period

 

$

11,378

 

$

8,558

 

Supplemental Cash Flow Information

 

 

 

 

 

Interest paid

 

$

1,393

 

$

1,638

 

Income taxes paid

 

2,134

 

969

 

Supplemental Non-Cash Investing and Financing Activities

 

 

 

 

 

Purchase of property and equipment

 

$

1,985

 

$

346

 

Deferred financing costs

 

228

 

 

 

See Notes to the Condensed Consolidated Financial Statements.

 

5



 

PCM, INC.

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Basis of Presentation and Description of Company

 

PCM, Inc. is a leading multi-vendor provider of technology products, services and solutions offered through our dedicated sales force and field service teams, direct marketing channels and a limited number of retail stores. Since our founding in 1987, we have served our customers by offering products and services from leading brands, such as Apple, Cisco, Dell, HP, Lenovo and Microsoft. We add additional value by incorporating products and services into comprehensive solutions. Our sales and marketing efforts allow our vendor partners to reach multiple customer segments including commercial businesses, state, local and federal governments, educational institutions and individual consumers.

 

We have prepared the unaudited consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America, or GAAP, which requires us to make estimates and assumptions that affect amounts reported herein. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, our actual results reported in future periods may be affected by changes in those estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations for interim financial reporting. In the opinion of management, all adjustments, consisting only of normal recurring items which are necessary for a fair presentation, have been included. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 and our Quarterly Report on Form 10-Q for the period ended March 31, 2013, filed with the SEC on March 18, 2013 and May 10, 2013, respectively, and all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC after the end of our 2012 fiscal year and through the date of this report.

 

In 2012, we had four operating segments: MME, SMB, Public Sector and MacMall/OnSale. As a result of the rebranding and reorganization initiatives discussed below, in January 2013, we began operating under three operating segments - Commercial, Public Sector and MacMall. Our segments are primarily aligned based upon their respective customer base. We include corporate related expenses such as legal, accounting, information technology, product management and other administrative costs that are not otherwise included in our operating segments in Corporate & Other. All historical segment financial information provided herein has been revised to reflect these new reportable operating segments.

 

We sell primarily to customers in the United States, and maintain offices throughout the United States, as well as in Montreal, Canada and Manila, Philippines. During the three months ended June 30, 2013, we generated approximately 70% of our revenue in our Commercial segment, 17% of our revenue in our Public Sector segment and 13% of our revenue in our MacMall segment. During the six months ended June 30, 2013, we generated approximately 72% of our revenue in our Commercial segment, 15% of our revenue in our MacMall segment and 13% of our revenue in our Public Sector segment.

 

Our Commercial segment sells complex products, services and solutions to commercial businesses in the United States, using multiple sales channels, including a field relationship-based selling model, an outbound phone based sales force, a field services organization and an online extranet.

 

Our Public Sector segment consists of sales made primarily to federal, state and local governments, as well as educational institutions. The Public Sector segment utilizes an outbound phone and field relationship-based selling model, as well as contract and bid business development teams and an online extranet.

 

Our MacMall segment consists of sales made under our MacMall brand name via telephone, the Internet and four retail stores to consumers, small businesses and creative professionals, and sales made under our OnSale and eCost brand names via the Internet and inbound phone-based sales forces.

 

6



 

We have revised the December 31, 2012 balance sheet to reduce accounts receivable and deferred revenue by $12.2 million to correct for an immaterial error resulting from the timing of the recognition of the related amounts. We had previously recognized deferred revenue when the related amounts had been billed rather than when the cash had been received in advance of product delivery. Also, we have revised the cash flow statement for the six months ended June 30, 2012 to reflect the correction related to the accounts receivable and deferred revenues as discussed above.

 

2. Summary of New Accounting Standards

 

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220)” (ASU 2013-02), that expanded disclosures for items reclassified out of accumulated other comprehensive income. The standard requires presentation of information about reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. ASU 2013-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. We adopted ASU 2013-02 during the quarter ended March 31, 2013, which did not have any effect on our consolidated financial position or results of operations.

 

In July 2012, the FASB issued ASU 2012-02, “Goodwill and Other - Testing Indefinite-Lived Intangible Assets for Impairment” (ASU 2012-02), which provides companies the option to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary. ASU 2012-02 prescribes an entity to perform a quantitative impairment test if qualitative factors indicate that it is more likely than not that its indefinite-lived intangible assets are impaired. The qualitative factors are similar to the guidance established for goodwill impairment testing and include identifying and assessing events and circumstances that would most significantly impact, individually or in the aggregate, the carrying value of the indefinite-lived intangible assets. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We adopted this new standard on January 1, 2013, which did not have any effect on our consolidated financial position or results of operations.

 

3. Goodwill and Intangible Assets

 

Goodwill

 

There was no change in goodwill during the six months ended June 30, 2013. Goodwill totaled $25.5 million as of June 30, 2013 and December 31, 2012, all of which related to our Commercial segment.

 

Intangible Assets

 

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

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

At June 30, 2013

 

At December 31, 2012

 

 

 

Useful Lives

 

Gross

 

Accumulated

 

Net

 

Gross

 

Accumulated

 

Net

 

 

 

(years)

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

Patents, trademarks & URLs

 

4

 

$

5,808

(1)

$

1,990

 

$

3,818

 

$

5,808

(1)

$

1,436

 

$

4,372

 

Customer relationships

 

7

 

6,349

 

4,176

 

2,173

 

6,349

 

3,713

 

2,636

 

Non-compete agreements

 

4

 

250

 

191

 

59

 

250

 

160

 

90

 

Total intangible assets

 

 

 

$

12,407

 

$

6,357

 

$

6,050

 

$

12,407

 

$

5,309

 

$

7,098

 

 


(1)     Included in the gross amounts for “Patents, trademarks & URLs” at June 30, 2013 and December 31, 2012 are $2.9 million of trademarks with indefinite useful lives that are not amortized.

 

Amortization expense for intangible assets was approximately $0.5 million and $0.8 million for the three months ended June 30, 2013 and 2012, respectively, and $1.0 million and $1.5 million for the six months ended June 30, 2013 and 2012. Estimated amortization expense for intangible assets in each of the next five years and thereafter is as follows: $0.9 million in the remainder of 2013; $0.5 million in 2014, $0.5 million in 2015, $0.3 million in 2016, $0.3 million in 2017 and $0.7 million thereafter.

 

7



 

4. Line of Credit and Notes Payable

 

On March 22, 2013, we entered into a Third Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with certain lenders named therein. The Amended Loan Agreement provides us an asset-based revolving credit facility that provides for, among other things, (i) a credit limit of $190 million, which may be increased by $10 million to a total of $200 million upon the fulfillment of certain conditions; (ii) LIBOR interest rate options that we can enter into with no limit on the maximum outstanding principal balance which may be subject to a LIBOR interest rate option; and (iii) a maturity date of September 30, 2017. The credit facility, which functions as a working capital line of credit with a borrowing base of inventory and accounts receivable, including certain credit card receivables, and a portion of the value of certain real estate, also includes a monthly unused line fee of 0.25% per year on the amount, if any, by which the Maximum Credit, as defined in the agreement, then in effect, exceeds the average daily principal balance of the outstanding borrowings during the immediately preceding month. There can be no assurance that the lenders, if we proposed to increase the credit limit, will commit to the remaining excess $10 million of credit beyond the $190 million in any future period. As a result, we may not be able to access the credit facility beyond its current limit of $190 million.

 

The credit facility is collateralized by substantially all of our assets. In addition to the security interest required by the credit facility, certain of our vendors have security interests in some of our assets related to their products. The credit facility has as its single financial covenant a minimum fixed charge coverage ratio (FCCR) requirement in the event an FCCR triggering event has occurred. An FCCR triggering event is comprised of maintaining certain specified daily and average excess availability thresholds. In the event the FCCR covenant applies, the fixed charge coverage ratio is 1.0 to 1.0 calculated on a trailing four quarter basis as of the end of the last quarter immediately preceding such FCCR triggering event date. At June 30, 2013, we were in compliance with our financial covenant under the credit facility.

 

Loan availability under the line of credit fluctuates daily and is affected by many factors, including eligible assets on-hand, opportunistic purchases of inventory and availability and our utilization of early-pay discounts. At June 30, 2013, we had $100.4 million of net working capital advances outstanding under the line of credit. At June 30, 2013, the maximum credit line was $190 million and we had $45.2 million available to borrow for working capital advances under the line of credit.

 

In connection with, and as part of, the amended credit facility, we entered into an amended term note on March 22, 2013 with a principal balance of $4.34 million, payable in equal monthly principal installments, amortized over 84 months, beginning on April 1, 2013, plus interest at the prime rate with a LIBOR option. In the event of a default, termination or non-renewal of the Amended Loan Agreement upon the maturity thereof, the term loan is payable in its entirety upon demand by the lenders. At June 30, 2013, we had $4.2 million outstanding under the amended term note. The remaining balance of our term note matures as follows: $310,000 in the remainder of 2013, $620,000 annually in each of the years 2014 through 2017, and $1.4 million thereafter.

 

In May 2013, we completed the purchase of real property adjacent to the building we own in Santa Monica, California for $3.0 million and financed $1.7 million of the purchase price with a subline under the Amended Loan Agreement. The loan bears the same interest terms as our revolving credit facility, however, the principal amount is amortized monthly over an 84 month period similar to our term note, with monthly principal amortization of approximately $24,000 beginning in July 2014. Accordingly, at June 30, 2013, $1.7 million is included in our “Notes payable and other long-term liabilities” on our Consolidated Balance Sheets.

 

At June 30, 2013, our effective weighted average annual interest rate on outstanding amounts under the credit facility and term note was 1.98%.

 

In June 2011, we entered into a credit agreement to finance the acquisition and improvement of the real property we purchased in March 2011 in El Segundo, California. The credit agreement provides for a five year term and a 25 year straight-line, monthly principal repayment amortization period with a balloon payment at maturity. Interest is variable, indexed to Prime plus a spread of 0.375% or LIBOR plus a spread of 2.375% at our option, payable monthly. At June 30, 2013, we had $9.6 million outstanding under this credit agreement, which matures as follows: $0.2 million in the remainder of 2013, $0.4 million annually in each of the years 2014 through 2015 and $8.5 million in 2016. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility.

 

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

 

8



 

5. Income Taxes

 

Accounting for Uncertainty in Income Taxes

 

At June 30, 2013, we had no uncertain tax positions. For the three and six months ended June 30, 2013 and 2012, we did not recognize any interest or penalties for uncertain tax positions and there was no accrued interest and penalties at June 30, 2013 and December 31, 2012. We do not anticipate any significant changes to our uncertain tax positions within the next twelve months.

 

Tax years subsequent to December 31, 2008 remain open to federal examination, and tax years subsequent to December 31, 2007 remain open to state examination. However, to the extent allowable by law, the tax authorities may have a right to examine prior periods when net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforwards.

 

6. Stockholders’ Equity

 

In September 2012, our Board of Directors approved a $10 million increase to our discretionary stock repurchase program, which was originally adopted in October 2008 with an initial authorized maximum of $10 million. Under the program, shares may be repurchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending on market conditions. We expect that the repurchase of our common stock under the program will be financed with existing working capital and amounts available under our existing credit facility. No limit was placed on the duration of the repurchase program. There is no guarantee as to the exact number of shares that we will repurchase. Subject to applicable securities laws, repurchases may be made at such times and in such amounts as our management deems appropriate. The program can also be discontinued at any time management feels additional purchases are not warranted.

 

During the three and six months ended June 30, 2013, we repurchased a total of 8,907 and 227,051 shares of our common stock under this program for a cost of approximately $67,000 and $1.6 million, respectively. From the inception of the program in October 2008 through June 30, 2013, we have repurchased an aggregate total of 2,837,319 shares of our common stock for a total cost of $14.3 million. The repurchased shares are held as treasury stock. At June 30, 2013, we had $5.7 million available in stock repurchases under the program, subject to any limitations that may apply from time to time under our existing credit facility.

 

7. Earnings Per Share

 

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the reported periods. Diluted EPS reflects the potential dilution that could occur under the treasury stock method if stock options and other commitments to issue common stock were exercised, except in loss periods where the effect would be antidilutive. As such, potential common shares of approximately 912,000 and 1,810,000 for the three months ended June 30, 2013 and 2012, and approximately 1,051,000 and 1,799,000 for the six months ended June 30, 2013 and 2012 have been excluded from the calculation of diluted EPS because the effect of their inclusion would be antidilutive.

 

9



 

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

 

 

 

Net
Income

 

Shares

 

Per Share
Amounts

 

Three Months Ended June 30, 2013:

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

Net income

 

$

3,163

 

11,488

 

$

0.28

 

Effect of dilutive securities

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

283

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Adjusted net income

 

$

3,163

 

11,771

 

$

0.27

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2012:

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

Net income

 

$

1,431

 

12,032

 

$

0.12

 

Effect of dilutive securities

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

134

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Adjusted net income

 

$

1,431

 

12,166

 

$

0.12

 

Six Months Ended June 30, 2013:

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

Net income

 

$

4,399

 

11,483

 

$

0.38

 

Effect of dilutive securities

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

251

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Adjusted net income

 

$

4,399

 

11,734

 

$

0.37

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2012:

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

Net income

 

$

961

 

12,016

 

$

0.08

 

Effect of dilutive securities

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

205

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Adjusted net income

 

$

961

 

12,221

 

$

0.08

 

 

8. Segment Information

 

Summarized segment information for our continuing operations for the periods presented is as follows (in thousands):

 

 

 

Commercial

 

Public
Sector

 

MacMall

 

Corporate &
Other

 

Consolidated

 

Three Months Ended June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

257,373

 

$

61,190

 

$

47,858

 

$

(1

)

$

366,420

 

Gross profit (loss)

 

40,375

 

5,313

 

5,614

 

(167

)

51,135

 

Depreciation and amortization expense(1)

 

1,015

 

14

 

214

 

1,689

 

2,932

 

Operating profit (loss)

 

16,989

 

1,757

 

667

 

(13,123

)

6,290

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

259,539

 

$

35,841

 

$

56,324

 

$

(30

)

$

351,674

 

Gross profit (loss)

 

38,620

 

3,681

 

6,289

 

(85

)

48,505

 

Depreciation and amortization expense(1)

 

1,200

 

28

 

281

 

1,643

 

3,152

 

Operating profit (loss)

 

15,787

 

(240

)

753

 

(12,875

)

3,425

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

508,741

 

$

92,216

 

$

102,698

 

$

(66

)

$

703,589

 

Gross profit (loss)

 

78,271

 

8,208

 

11,625

 

(15

)

98,089

 

Depreciation and amortization expense(1)

 

2,060

 

29

 

428

 

3,380

 

5,897

 

Operating profit (loss)

 

31,756

 

1,881

 

1,093

 

(25,562

)

9,168

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

508,246

 

$

66,603

 

$

111,553

 

$

(31

)

$

686,371

 

Gross profit

 

75,250

 

7,457

 

12,563

 

7

 

95,277

 

Depreciation and amortization expense(1)

 

2,385

 

62

 

532

 

3,323

 

6,302

 

Operating profit (loss)

 

29,357

 

(204

)

1,073

 

(26,672

)

3,554

 

 


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

 

As of June 30, 2013 and December 31, 2012, we had total consolidated assets of $409.2 million and $365.7 million. Our management does not have available to them and does not use total assets measured at the segment level in allocating resources. Therefore, such information relating to segment assets is not provided herein.

 

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9. Commitments and Contingencies

 

Total rent expense under our operating leases, net of sublease income, was $1.4 million and $1.3 million in the three month periods ended June 30, 2013 and 2012, respectively, and $2.7 million for each of the six month periods ended June 30, 2013 and 2012. Some of our leases contain renewal options and escalation clauses, and require us to pay taxes, insurance and maintenance costs.

 

Legal Proceedings

 

We are not currently a party to any material legal proceedings, other than ordinary routine litigation incidental to the business. From time to time, we receive claims of and become subject to consumer protection, employment, intellectual property and other litigation related to the conduct of our business. Any such litigation could be costly and time consuming and could divert our management and key personnel from our business operations. In connection with any such litigation, we may be subject to significant damages or equitable remedies relating to the operation of our business. Any such litigation may materially harm our business, results of operations and financial condition.

 

10. Subsequent Event

 

In December 2012, we completed the purchase of 7.9 acres of land for approximately $1.1 million with the intent to commence construction on a new cloud data center that we currently expect to open in early 2014. The proposed Tier III facility will be strategically located in a data center-centric development in New Albany, Ohio. The new facility will complement our two existing data centers and a 24/7 Integrated Operations Center (IOC) located in Atlanta, Georgia, enhancing our managed service offerings, including cloud services, data center hosting and management, remote monitoring and disaster recovery. On July 9, 2013, we entered into a loan agreement for up to $7.725 million to finance the build out of the new data center. The loan agreement provides for draws during a construction period, which bear interest at the prime rate plus 0.25%, followed by a five year term and a 25 year straight-line, monthly principal repayment amortization period with a balloon payment at maturity. Interest during the amortization period is variable, indexed to LIBOR plus a spread of 2.25%.

 

***

 

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

 

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations together with the consolidated financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described under “Risk Factors” in Item 1A and elsewhere in this report.

 

BUSINESS OVERVIEW

 

PCM, Inc. is a leading multi-vendor provider of technology products, services and solutions offered through our dedicated sales force and field service teams, direct marketing channels and a limited number of retail stores. Since our founding in 1987, we have served our customers by offering products and services from leading brands, such as Apple, Cisco, Dell, HP, Lenovo and Microsoft. We add additional value by incorporating products and services into comprehensive solutions. Our sales and marketing efforts allow our vendor partners to reach multiple customer segments including commercial businesses, state, local and federal governments, educational institutions and individual consumers.

 

In 2012, we had four operating segments: MME, SMB, Public Sector and MacMall/OnSale. As a result of the reorganization discussed below, in January 2013, we began operating under three operating segments - Commercial, Public Sector and MacMall. Our segments are primarily aligned based upon their respective customer base. We include corporate related expenses such as legal, accounting, information technology, product management and other administrative costs that are not otherwise included in our operating segments in Corporate & Other. All historical segment financial information provided herein has been revised to reflect these new reportable operating segments.

 

We sell primarily to customers in the United States, and maintain offices throughout the United States, as well as in Montreal, Canada and Manila, Philippines. During the three months ended June 30, 2013, we generated approximately 70% of our revenue in our Commercial segment, 17% of our revenue in our Public Sector segment and 13% of our revenue in our MacMall segment. During the six months ended June 30, 2013, we generated approximately 72% of our revenue in our Commercial segment, 15% of our revenue in our MacMall segment and 13% of our revenue in our Public Sector segment.

 

Our Commercial segment sells complex products, services and solutions to commercial businesses in the United States, using multiple sales channels, including a field relationship-based selling model, an outbound phone based sales force, a field services organization and an online extranet.

 

Our Public Sector segment consists of sales made primarily to federal, state and local governments, as well as educational institutions. The Public Sector segment utilizes an outbound phone and field relationship-based selling model, as well as contract and bid business development teams and an online extranet.

 

Our MacMall segment consists of sales made under our MacMall brand name via telephone, the Internet and four retail stores to consumers, small businesses and creative professionals, and sales made under our OnSale and eCost brand names via the Internet and inbound phone-based sales forces.

 

We experience variability in our net sales and operating results on a quarterly basis as a result of many factors. We experience some seasonal trends in our sales of technology products, services and solutions to businesses, government and educational institutions and individual customers. For example, the timing of capital budget authorizations for our commercial customers can affect when these companies can procure IT products and services. The fiscal year-ends of Public Sector customers vary for those in the federal government space and those in the state and local government and educational institution (“SLED”) space. We generally see an increase in our second quarter sales related to customers in the SLED sector and in our third quarter sales related to customers in the federal government space as these customers close out their budgets for their fiscal year. Also, consumer holiday spending contributes to variances in our quarterly results. As such, the results of interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year.

 

A substantial portion of our business is dependent on sales of Apple, HP, and products purchased from other vendors including Cisco, Dell, Ingram Micro, Lenovo, Microsoft and Tech Data. Products manufactured by HP represented approximately 21% and 21% of our net sales in the three months ended June 30, 2013 and 2012, respectively, and products manufactured by Apple represented approximately 15% and 17% of our net sales in the three months ended June 30, 2013 and 2012, respectively. Products manufactured by HP represented approximately 21% and 21% of our net sales in the six months ended June 30, 2013 and 2012, respectively, and products manufactured by Apple represented approximately 16% and 17% of our net sales in the six months ended June 30, 2013 and

 

12



 

2012, respectively.

 

Our planned operating expenditures each quarter are based in large part on sales forecasts for the quarter. If our sales do not meet expectations in any given quarter, our operating results for the quarter may be materially adversely affected. Our narrow gross margins may magnify the impact of these factors on our operating results. Management regularly reviews our operating performance using a variety of financial and non-financial metrics including sales, shipments, gross margin, vendor consideration, advertising expense, personnel costs, account executive productivity, accounts receivable aging, inventory turnover, liquidity and cash resources. Our management monitors the various metrics against goals and budgets, and makes necessary adjustments intended to enhance our performance.

 

General economic conditions have an effect on our business and results of operations across all of our segments. If economic growth in the U.S. and other countries’ economies slows or declines, government, consumer and business spending rates could be significantly reduced. These developments could also increase the risk of uncollectible accounts receivable from our customers. The economic climate in the U.S. and elsewhere could have an impact on the rate of information technology spending of our current and potential customers, which would impact our business and results of operations. These factors affect sales of our products, sales cycles, adoption rates of new technologies and level of price competition. We continue to focus our efforts on cost controls, competitive pricing strategies, and driving higher margin service and solution sales. We also continue to make selective investments in our sales force personnel, service and solutions capabilities and IT infrastructure and tools in an effort to position us for enhanced productivity and future growth.

 

STRATEGIC DEVELOPMENTS

 

Rebranding Strategy

 

Over the past several years, our company has grown in part through the acquisition and internal cultivation of many different brands. We historically differentiated our brands primarily based on the identity of the customers. After carefully examining the markets we serve and the trends taking shape in the marketplace, we believe our commercial customers will benefit from a more unified and streamlined brand strategy. Accordingly, we changed our legal corporate name from PC Mall, Inc. to PCM, Inc. effective December 31, 2012 and our NASDAQ ticker symbol from MALL to PCMI effective January 2, 2013. In addition, we combined our primary commercial subsidiaries PC Mall Sales, Inc., Sarcom, Inc. and PC Mall Services, Inc. into a single subsidiary effective December 31, 2012. The combined subsidiary now operates under the unified commercial brand PCM and will generally include our former SMB, MME and portions of our Corporate & Other segments. Further, in connection with the rebranding, our PC Mall Gov, Inc. subsidiary changed its name to PCMG, Inc. and now operates under the PCM-G brand. We expect this unification will lead to an improved customer experience, operational synergies and benefits to all of our stakeholders providing a brand that better represents the value-added solutions provider we are today.

 

ERP and Web Infrastructure Upgrades

 

We are currently upgrading many of our IT systems. We have purchased licenses for Microsoft Dynamics AX and other related tools, such as workflow software, web development tools and other related items, to upgrade our ERP and eCommerce systems. We are currently working on the implementation of the ERP modules and the upgrade of the ERP systems, including additional enhancements and features. We believe the implementation and upgrade should help us to gain further efficiencies across our organization. Additionally, we initiated the implementation and upgrade of our eCommerce systems and have completed and recently launched a new generation of our public websites at pcm.com, macmall.com, ecost.com, onsale.com and our extranet. We have completed an assessment of the status of the ERP project and identified business gaps. We are currently working on the design phase and finalization of the needed modifications to close the identified gaps for the completion of the major phases of the project and expect to complete this work in the third quarter of 2013. At the conclusion of the design phase, we expect to have a better estimate of the cost and time frame for the completion of the major phases of the project. While it is difficult to estimate costs and timeframes for completion, based on the complexity of the systems design, customization and implementation and our current estimates, which are subject to change, we currently expect to incur a cost of at least $19 million for the major phases of these IT system upgrades and to be complete with all major phases of the implementation by the end of 2014. To date, we have incurred approximately $14.6 million of such costs. In addition to the above expenditures, we expect to make periodic upgrades to our IT systems on an ongoing basis. In addition to the upgrades to our IT systems, we recently implemented various Cisco solutions to upgrade our communications infrastructure to provide a unified platform for our entire company and to provide a robust and efficient contact center.

 

13



 

Common Stock Repurchase Program

 

At June 30, 2013, we had $5.7 million available in stock repurchases under a discretionary stock repurchase program, subject to any limitations that may apply from time to time under our existing credit facility. Under the program, the shares may be repurchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending on market conditions. No limit was placed on the duration of the repurchase program. There is no guarantee as to the exact number of shares that we will repurchase. Subject to applicable securities laws, repurchases may be made at such times and in such amounts as our management deems appropriate. The program can also be discontinued at any time management feels additional purchases are not warranted.

 

New Data Center

 

In December 2012, we completed the purchase of 7.9 acres of land for approximately $1.1 million with the intent to commence construction on a new cloud data center that we currently expect to open in early 2014. The proposed Tier III facility will be strategically located in a data center-centric development in New Albany, Ohio. The new facility will complement our two existing data centers and a 24/7 Integrated Operations Center (IOC) located in Atlanta, Georgia, enhancing our managed service offerings, including cloud services, data center hosting and management, remote monitoring and disaster recovery.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, as well as the disclosure of contingent assets and liabilities. Management bases its estimates, judgments and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Due to the inherent uncertainty involved in making estimates, actual results reported for future periods may be affected by changes in those estimates, and revisions to estimates are included in our results for the period in which the actual amounts become known.

 

Management considers an accounting estimate to be critical if:

 

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

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

 

Management has discussed the development and selection of these critical accounting policies and estimates with the audit committee of our board of directors. We believe the critical accounting policies described below affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. For a summary of our significant accounting policies, including those discussed below, see Note 2 of the Notes to the Consolidated Financial Statements in Item 8, Part II, of our Annual Report on Form 10-K for the year ended December 31, 2012.

 

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

 

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

 

14



 

We also sell certain products for which we act as an agent in accordance with ASC 605-45. Products in this category include the sale of third-party services, warranties, software assurance (“SA”) or subscriptions. SA is an “insurance” or “maintenance” product that allows customers to upgrade, at no additional cost, to the latest technology if new applications are introduced during the period that the SA is in effect. These sales do not meet the criteria for gross sales recognition, and thus are recognized on a net basis at the time of sale. Under net sales recognition, the cost paid to the vendor or third-party service provider is recorded as a reduction to sales, resulting in net sales being equal to the gross profit on the transaction.

 

In 2012, we revised our previously reported revenue and cost of goods sold to correct the accounting for certain SA transactions that were previously recorded on a gross basis, to record such transactions on a net sales basis with no corresponding cost of goods sold. We have revised revenues and cost of sales in all reported prior periods to reflect this immaterial change, which had no impact on our consolidated gross profit, operating profit or earnings per share. The impact of this revision reduced net sales and cost of goods sold for the three and six months ended June 30, 2012 by $10.9 million and $18.6 million, respectively.

 

Some of our larger customers are offered the opportunity by certain of our vendors to purchase software licenses and SA under enterprise agreements (“EAs”). Under EAs, customers are considered to be compliant with applicable license requirements for the ensuing year, regardless of changes to their employee base. Customers are charged an annual true-up fee for changes in the number of users over the year. With most EAs, our vendors will transfer the license and invoice the customer directly, paying us an agency fee or commission on these sales. We record these fees as a component of net sales as earned and there is no corresponding cost of sales amount. In certain instances, we invoice the customer directly under an EA and accounts for the individual items sold based on the nature of the item. Our vendors typically dictate how the EA will be sold to the customer.

 

When a customer order contains multiple deliverables such as hardware, software and services which are delivered at varying times, we determine whether the delivered items can be considered separate units of accounting as prescribed under ASC 605-25, Revenue Recognition, Multiple-Element Arrangements. For arrangements with multiple units of accounting, arrangement consideration is allocated among the units of accounting, where separable, based on their relative selling price. Relative selling price is determined based on vendor-specific objective evidence, if it exists. Otherwise, third-party evidence of selling price is used, when it is available, and in circumstances when neither vendor-specific objective evidence nor third-party evidence of selling price is available, management’s best estimate of selling price is used.

 

Revenue from professional services is either recognized as incurred for services billed at an hourly rate or recognized using the proportional performance method for services provided at a fixed fee. Revenue for data center services, including internet connectivity, web hosting, server co-location and managed services, is recognized over the period the service is performed.

 

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

 

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

 

Inventory. Our inventories consist primarily of finished goods, and are stated at lower of cost or market, which is determined by general market conditions, nature, age and type of each product and assumptions about future demand.

 

Vendor Consideration. We receive vendor consideration from our vendors in the form of cooperative marketing allowances, volume incentive rebates and other programs to support our marketing of their products. Most of our vendor consideration is accrued, when performance required for recognition is completed, as an offset to cost of sales in accordance with ASC 605-50 (formerly EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”) since such funds are not a reimbursement of specific, incremental, identifiable costs incurred by us in selling the vendors’ products. At the end of any given period, unbilled receivables related to our vendor consideration are included in our “Accounts receivable, net of allowances.”

 

15



 

Stock-Based Compensation. We account for stock-based compensation in accordance with ASC 718 (formerly financial Accounting Standards Board Statement No. 123 (revised 2004), “Share-Based Payment”), using the modified prospective application transition method. ASC 718 addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 generally requires that such transactions be accounted for using a fair value based method and recognized as expenses in our Consolidated Statements of Operations.

 

Pursuant to ASC 718, we estimate the grant date fair value of each stock option grant awarded pursuant to ASC 718 using the Black-Scholes option pricing model and management assumptions made regarding various factors, including expected volatility of our common stock, expected life of options granted and estimated forfeiture rates, which require use of accounting judgment and financial estimates. In estimating our assumption regarding expected term for options we granted during the six months ended June 30, 2013, we computed the expected term based upon an analysis of historical exercises of stock options by our employees. We compute our expected volatility using historical prices of our common stock for a period equal to the expected term of the options. The risk free interest rate is determined using the implied yield on U.S. Treasury issues with a remaining term within the contractual life of the award. We estimate an annual forfeiture rate based on our historical forfeiture data, which rate will be revised, if necessary, in future periods if actual forfeitures differ from those estimates. Any material change in the estimates used in calculating the stock-based compensation expense could result in a material impact on our results of operations.

 

Goodwill and Intangible Assets. Goodwill and indefinite-lived intangible assets are carried at historical cost, subject to write-down, as needed, based upon an impairment analysis that we perform annually as of October 1, or sooner if an event occurs or circumstances change that would more likely than not result in an impairment loss.

 

Under ASC 350 (formerly SFAS No. 142, “Goodwill and Other Intangible Assets”), goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Events that may create an impairment include, but are not limited to, significant and sustained decline in our stock price or market capitalization, significant underperformance of operating units and significant changes in market conditions. Changes in estimates of future cash flows or changes in market values could result in a write-down of our goodwill in a future period. If an impairment loss results from any impairment analysis as described above, such loss will be recorded as a pre-tax charge to our operating income. Goodwill is allocated to various reporting units, which are generally an operating segment or one level below the operating segment.

 

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

 

We performed our annual impairment analysis of goodwill and indefinite-lived intangible assets for possible impairment as of October 1, 2012. Our management, with the assistance of an independent third-party valuation firm, determined the fair values of our reporting units and their underlying assets, and compared them to their respective carrying values. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. The carrying value of goodwill was allocated to our reporting units pursuant to ASC 350. As a result of our annual impairment analysis as of October 1, 2012, we have determined that no impairment of goodwill and other indefinite-lived intangible assets existed.

 

Fair value was determined by using a weighted combination of a market-based approach and an income approach, as this combination was deemed to be the most indicative of fair value in an orderly transaction between market participants. Under the market-based approach, we utilized information regarding our company and publicly available comparable company and industry information to determine cash flow multiples and revenue multiples that are used to value our reporting units. Under the income approach, we determined fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.

 

In addition, fair value of our indefinite-lived trademark was determined using the relief from royalty method under the income approach to value. This method applies a market based royalty rate to projected revenues that are associated with the trademarks. Applying the royalty rate to projected revenues resulted in an indication of the pre-tax royalty savings associated with ownership of the trademarks.  Projected after-tax royalty savings were discounted to present value at the reporting unit’s weighted average cost of capital, and a tax amortization benefit (calculated based on a 15 year life for tax purposes) was added.

 

16



 

As part of our annual review for impairment, we assessed the total fair values of the reporting units and compared total fair value to our market capitalization at October 1, 2012, including the implied control premium, to determine if the fair values are reasonable compared to external market indicators. When comparing our market capitalization to the discounted cash flow models for each reporting unit summed together, the implied control premium was approximately 25% as of October 1, 2012. We believe several factors contributed to our low market capitalization, including the lack of trading volume in our stock and the recent significant investments made in various parts of our business and their effects on analyst earnings models.

 

Given continuing economic uncertainties and related risks to our business, there can be no assurance that our estimates and assumptions made for purposes of our goodwill and indefinite-lived intangible assets impairment testing as of October 1, 2012 will prove to be accurate predictions of the future. We may be required to record additional goodwill impairment charges in future periods, whether in connection with our next annual impairment testing as of October 1, 2013 or prior to that, if any change constitutes a triggering event outside of the quarter from when the annual goodwill and indefinite-lived intangible assets impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

 

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

 

17



 

RESULTS OF OPERATIONS

 

Consolidated Statements of Operations Data

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net sales

 

$

366,420

 

$

351,674

 

$

703,589

 

$

686,371

 

Cost of goods sold

 

315,285

 

303,169

 

605,500

 

591,094

 

Gross profit

 

51,135

 

48,505

 

98,089

 

95,277

 

Selling, general and administrative expenses

 

44,845

 

45,255

 

88,921

 

91,898

 

Revaluation of earnout liability

 

 

(175

)

 

(175

)

Operating profit

 

6,290

 

3,425

 

9,168

 

3,554

 

Interest expense, net

 

781

 

909

 

1,553

 

1,840

 

Income before income taxes

 

5,509

 

2,516

 

7,615

 

1,714

 

Income tax expense

 

2,346

 

1,085

 

3,216

 

753

 

Net income

 

$

3,163

 

$

1,431

 

$

4,399

 

$

961

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Common Share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.28

 

$

0.12

 

$

0.38

 

$

0.08

 

Diluted

 

0.27

 

0.12

 

0.37

 

0.08

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

11,488

 

12,032

 

11,483

 

12,016

 

Diluted

 

11,771

 

12,166

 

11,734

 

12,221

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of goods sold

 

86.0

 

86.2

 

86.1

 

86.1

 

Gross profit

 

14.0

 

13.8

 

13.9

 

13.9

 

Selling, general and administrative expenses

 

12.3

 

12.9

 

12.6

 

13.4

 

Revaluation of earnout liability

 

 

(0.1

)

 

 

Operating profit

 

1.7

 

1.0

 

1.3

 

0.5

 

Interest expense, net

 

0.2

 

0.3

 

0.2

 

0.3

 

Income before income taxes

 

1.5

 

0.7

 

1.1

 

0.2

 

Income tax expense

 

0.6

 

0.3

 

0.5

 

0.1

 

Net income

 

0.9

%

0.4

%

0.6

%

0.1

%

 

18



 

Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012

 

Net Sales

 

The following table presents our net sales by segment for the periods presented (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net Sales

 

Percentage of
Total Net Sales

 

Net Sales

 

Percentage of
Total Net Sales

 

Dollar Change

 

Percent
Change

 

Commercial

 

$

257,373

 

70

%

$

259,539

 

74

%

$

(2,166

)

(1

)%

Public Sector

 

61,190

 

17

 

35,841

 

10

 

25,349

 

71

 

MacMall

 

47,858

 

13

 

56,324

 

16

 

(8,466

)

(15

)

Corporate & Other

 

(1

)

 

(30

)

 

29

 

NM

(1)

Consolidated

 

$

366,420

 

100

%

$

351,674

 

100

%

$

14,746

 

4

%

 


(1)  Not meaningful.

 

Consolidated net sales were $366.4 million in the three months ended June 30, 2013 compared to $351.7 million in the three months ended June 30, 2012, an increase of $14.7 million, or 4%. Consolidated sales of services were $32.6 million in the three months ended June 30, 2013 compared to $31.1 million in the three months ended June 30, 2012, an increase of $1.5 million, or 5%, and represented 9% of net sales in each of the three months ended June 30, 2013 and 2012.

 

Commercial segment net sales were $257.4 million in the three months ended June 30, 2013 compared to $259.5 million in the three months ended June 30, 2012, a decrease of $2.1 million, or 1%. Sales of services in the Commercial segment increased by $0.7 million, or 2%, to $30.9 million in the three months ended June 30, 2013 from $30.2 million in the three months ended June 30, 2012, and represented 12% of Commercial segment net sales in each of the three months ended June 30, 2013 and 2012.

 

Public Sector net sales were $61.2 million in the three months ended June 30, 2013 compared to $35.8 million in the three months ended June 30, 2012, an increase of $25.4 million, or 71%. This increase was primarily due to an increase of $27.6 million, or 218%, in our federal government business, partially offset by a decrease of $1.8 million, or 8%, in our SLED business. The increase in our federal government business was primarily due to increased sales made under our new or expanded contracts awarded in the fourth quarter of 2012. The decrease in our SLED business was primarily due to a higher mix of software maintenance products that are reported on a net basis.

 

MacMall net sales were $47.9 million in the three months ended June 30, 2013 compared to $56.3 million in the three months ended June 30, 2012, a decrease of $8.4 million, or 15%. This decrease in MacMall net sales was primarily due to a decrease in sales of tablets during the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

 

Gross Profit and Gross Profit Margin

 

Consolidated gross profit was $51.1 million in the three months ended June 30, 2013, an increase of $2.6 million, or 5%, from $48.5 million in the three months ended June 30, 2012. Consolidated gross profit margin grew to 14.0% in the three months ended June 30, 2013 from 13.8% in the three months ended June 20, 2012, reflecting our improved product mix and a focus on solutions sales. We were able to improve our gross profit margin despite lower margin sales to certain federal customers.

 

Selling, General & Administrative Expenses

 

Consolidated SG&A expenses were $44.8 million in the three months ended June 30, 2013 compared to $45.1 million in the three months ended June 30, 2012, a decrease of $0.3 million, or 1%. This decrease was primarily due to a $0.6 million decrease in telecommunications expenses, partially offset by a $0.3 million increase in advertising expenses. Consolidated SG&A expenses as a percentage of net sales decreased to 12.2% in the three months ended June 30, 2013 from 12.8% in the three months ended June 30, 2012.

 

19



 

Operating Profit

 

The following table presents our operating profit and operating profit margin, by segment, for the periods presented (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

 

 

Change in

 

 

 

2013

 

2012

 

 

 

Operating

 

 

 

Operating

 

Operating
Profit (Loss)

 

Operating

 

Operating
Profit (Loss)

 

Change in
Operating Profit (Loss)

 

Profit
Margin

 

 

 

Profit (Loss)

 

Margin(1)

 

Profit (Loss)

 

Margin(1)

 

$

 

%

 

%

 

Commercial

 

$

16,989

 

6.6

%

$

15,787

 

6.1

%

$

1,202

 

8

%

0.5

%

Public Sector

 

1,757

 

2.9

 

(240

)

(0.7

)

1,997

 

NM

(2)

3.6

 

MacMall

 

667

 

1.4

 

753

 

1.3

 

(86

)

(11

)

0.1

 

Corporate & Other

 

(13,123

)

(3.6

)(1)

(12,875

)

(3.7

)(1)

(248

)

2

 

0.1

(1)

Consolidated

 

$

6,290

 

1.7

%

$

3,425

 

1.0

%

$

2,865

 

84

%

0.7

%

 


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

(2)        Not meaningful.

 

Consolidated operating profit was $6.3 million in the three months ended June 30, 2013 compared to $3.4 million in the three months ended June 30, 2012, an increase of $2.9 million or 84%.

 

Commercial operating profit was $17.0 million in the three months ended June 30, 2013 compared to $15.8 million in the three months ended June 30, 2012, an increase of $1.2 million, or 8%, primarily due to increased net sales discussed above and the related $1.8 million increase in Commercial gross profit, as well as a $0.3 million decrease in amortization expenses, partially offset by a $0.4 million increase in personnel costs, and a $0.3 million increase in each of consulting expenses and other business taxes.

 

Public Sector operating profit was $1.8 million in the three months ended June 30, 2013 compared to operating loss of $0.2 million in the three months ended June 30, 2012. This increase was primarily due to a $1.6 million increase in Public Sector gross profit and a decrease in personnel costs of $0.4 million and other improvements in SG&A expenses.

 

MacMall operating profit was $0.7 million in the three months ended June 30, 2013 compared to $0.8 million in the three months ended June 30, 2012, a decrease of $0.1 million primarily due to a $0.7 million decrease in MacMall gross profit and a $0.4 million increase in advertising expenses, partially offset by a $0.4 million reduction in personnel costs and a $0.2 million decrease in credit card processing fees.

 

Corporate & Other operating expenses includes corporate related expenses such as legal, accounting, information technology, product management and certain other administrative costs that are not otherwise included in our reportable operating segments. Corporate & Other operating expenses were $13.1 million in  the three months ended June 30, 2013 compared to $12.9 million in the three months ended June 30, 2012, an increase of $0.2 million, or 2%, primarily due to a $0.2 million increase in personnel costs.

 

Net Interest Expense

 

Total net interest expense for the three months ended June 30, 2013 decreased to $0.8 million compared with $0.9 million in the three months ended June 30, 2012. The $0.1 million decrease in net interest expense was primarily due to capitalized interest costs relating to internally developed software and lower average interest rates in the three months ended June 30, 2013, partially offset by higher average total outstanding borrowings.

 

Income Tax Expense

 

We recorded an income tax expense of $2.3 million in the three months ended June 30, 2013 compared to an income tax expense of $1.1 million in the three months ended June 30, 2012. Our effective tax rate for each of the quarters ended June 30, 2013 and 2012 was approximately 43%.

 

20



 

Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

 

Net Sales

 

The following table presents our net sales by segment for the periods presented (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net Sales

 

Percentage of
 Total Net Sales

 

Net Sales

 

Percentage of
Total Net Sales

 

Dollar Change

 

Percent
Change

 

Commercial

 

$

508,741

 

72

%

$

508,246

 

74

%

$

495

 

%

Public Sector

 

92,216

 

13

 

66,603

 

10

 

25,613

 

38

 

MacMall

 

102,698

 

15

 

111,553

 

16

 

(8,855

)

(8

)

Corporate & Other

 

(66

)

 

(31

)

 

(35

)

NM

(1)

Consolidated

 

$

703,589

 

100

%

$

686,371

 

100

%

$

17,218

 

3

%

 


(1)  Not meaningful.

 

Consolidated net sales were $703.6 million in the six months ended June 30, 2013 compared to $686.4 million in the six months ended June 30, 2012, an increase of $17.2 million, or 3%. Consolidated sales of services were $62.1 million in the six months ended June 30, 2013 compared to $59.8 million in the six months ended June 30, 2012, an increase of $2.3 million, or 4%, and represented 9% of net sales in each of the six months ended June 30, 2013 and 2012.

 

Commercial segment net sales were $508.7 million in the six months ended June 30, 2013 compared to $508.2 million in the six months ended June 30, 2012, an increase of $0.5 million. Sales of services in the Commercial segment increased by $1.5 million, or 3%, to $59.2 million in the six months ended June 30, 2013 from $57.7 million in the six months ended June 30, 2012, and represented 12% of Commercial segment net sales in the six months ended June 30, 2013 compared to 11% in the six months ended June 30, 2012.

 

Public Sector net sales were $92.2 million in the six months ended June 30, 2013 compared to $66.6 million in the six months ended June 30, 2012, an increase of $25.6 million, or 38%. This increase was primarily due to an increase of $33.3 million, or 122%, in our federal government business, partially offset by a decrease of $6.7 million, or 18%, in our SLED business. The increase in our federal government business was primarily due to sales made under our new or expanded contracts awarded in the fourth quarter of 2012. The decrease in our SLED business was primarily due to a higher mix of software maintenance products that are reported on a net basis.

 

MacMall net sales were $102.7 million in the six months ended June 30, 2013 compared to $111.6 million in the six months ended June 30, 2012, a decrease of $8.9 million, or 8%. This decrease in MacMall net sales was primarily due to a decrease in sales of tablets and a lack of new product releases during the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

 

Gross Profit and Gross Profit Margin

 

Consolidated gross profit was $98.1 million in the six months ended June 30, 2013, an increase of $2.8 million, or 3%, from $95.3 million in the six months ended June 30, 2012. Consolidated gross profit margin remained flat at 13.9% in each of the six months ended June 30, 2013 and 2012. We were able to maintain our gross margins in part due to our focus on sales of higher margin solutions that resulted in an improved product mix, offset by lower margin sales to certain federal customers.

 

Selling, General & Administrative Expenses

 

Consolidated SG&A expenses decreased by $2.8 million, or 3%, to $88.9 million in the six months ended June 30, 2013 from $91.7 million in the six months ended June 30, 2012 primarily due to a $2.5 million decrease in net personnel costs. Consolidated SG&A expenses as a percentage of net sales decreased to 12.6% in the six months ended June 30, 2013 from 13.4% in the six months ended June 30, 2012.

 

21



 

Operating Profit

 

The following table presents our operating profit and operating profit margin, by segment, for the periods presented (in thousands):

 

 

 

Six Months Ended
June 30,

 

 

 

 

 

Change in

 

 

 

2013

 

2012

 

 

 

 

 

Operating

 

 

 

Operating

 

Operating
Profit (Loss)

 

Operating

 

Operating
Profit (Loss)

 

Change in 
Operating Profit (Loss)

 

Profit
Margin

 

 

 

Profit (Loss)

 

Margin(1)

 

Profit (Loss)

 

Margin(1)

 

$

 

%

 

%

 

Commercial

 

$

31,756

 

6.2

%

$

29,357

 

5.8

%

$

2,399

 

8

%

0.4

%

Public Sector

 

1,881

 

2.0

 

(204

)

(0.3

)

2,085

 

NM

(2)

2.3

 

MacMall

 

1,093

 

1.1

 

1,073

 

1.0

 

20

 

2

 

0.1

 

Corporate & Other

 

(25,562

)

(3.6

)(1)

(26,672

)

(3.9

)(1)

1,110

 

(4

)

0.3

(1)

Consolidated

 

$

9,168

 

1.3

%

$

3,554

 

0.5

 

$

5,614

 

158

%

0.8

%

 


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

(2)           Not meaningful.

 

Consolidated operating profit was $9.2 million in the six months ended June 30, 2013 compared to $3.6 million in the six months ended June 30, 2012, an increase of $5.6 million.

 

Commercial operating profit was $31.8 million in the six months ended June 30, 2013 compared to $29.4 million in the six months ended June 30, 2012, an increase of $2.4 million, or 8%, primarily due to increased net sales discussed above and a $3.0 million increase in Commercial gross profit.

 

Public Sector operating profit was $1.9 million in the six months ended June 30, 2013 compared to operating loss of $0.2 million in the six months ended June 30, 2012, an increase of $2.1 million, primarily due to a $1.2 million decrease in personnel costs and a $0.8 million increase in Public Sector gross profit.

 

MacMall operating profit remained flat at $1.1 million in each of the six months ended June 30, 2013 and 2012.

 

Corporate & Other operating expenses includes corporate related expenses such as legal, accounting, information technology, product management and certain other administrative costs that are not otherwise included in our reportable operating segments. Corporate & Other operating expenses were $25.6 million in the six months ended June 30, 2013 compared to $26.7 million in the six months ended June 30, 2012, a decrease of $1.1 million, or 4%, primarily due to a $0.5 million decrease in telecommunications costs and a $0.3 million decrease in personnel costs.

 

Net Interest Expense

 

Total net interest expense for the six months ended June 30, 2013 decreased to $1.6 million compared with $1.8 million in the six months ended June 30, 2012. The $0.2 million decrease in net interest expense was primarily due to capitalized interest costs relating to internally developed software and lower average interest rates in the six months ended June 30, 2013, partially offset by higher average total outstanding borrowings.

 

Income Tax Expense

 

We recorded an income tax expense of $3.2 million in the six months ended June 30, 2013 compared to an income tax expense of $0.8 million in the six months ended June 30, 2012. Our effective tax rate for each of the six months ended June 30, 2013 and 2012 was approximately 42% and 44%, respectively.

 

22



 

LIQUIDITY AND CAPITAL RESOURCES

 

Working Capital. Our primary capital needs have and we expect will continue to be the funding of our existing working capital requirements, capital expenditures for which we expect to include substantial investments in our planned Columbus data center, our new ERP system, eCommerce platform and other upgrades of our current IT infrastructure over the next several years, which are discussed further below in “Other Planned Capital Projects,” possible sales growth, possible acquisitions and new business ventures, including the execution of our rebranding strategy and possible repurchases of our common stock under a discretionary repurchase program, which is also further discussed below. Our primary sources of financing have historically come from borrowings from financial institutions, public and private issuances of our common stock and cash flows from operations. Our continuing efforts to drive revenue growth from commercial customers could result in an increase in our accounts receivable as these customers are generally provided longer payment terms than consumers. We historically have increased our inventory levels from time to time to take advantage of strategic manufacturer promotions. We believe that our current working capital, including our existing cash balance, together with our expected future cash flows from operations and available borrowing capacity under our line of credit, will be adequate to support our current operating plans for at least the next 12 months. However, the current uncertainty in the macroeconomic environment may limit our cash resources that could otherwise be available to fund capital investments, future strategic opportunities or growth beyond our current operating plans. We are also unable to quantify any expected future synergies or costs related to our ongoing rebranding and restructuring efforts.

 

There has been ongoing uncertainty in the global economic environment, which could cause disruptions in the capital and credit markets. While our revolving credit facility does not mature until September 2017, we believe problems in these areas could have a negative impact on our ability to obtain future financing if we need additional funds, such as for acquisitions or expansion, to fund a significant downturn in our sales or an increase in our operating expenses, or to take advantage of opportunities or favorable market conditions in the future. We may seek additional financing from public or private debt or equity issuances; however, there can be no assurance that such financing will be available at acceptable terms, if at all. Also, there can be no assurance that the cost or availability of future borrowings, if any, under our credit facility or in the debt markets will not be impacted by disruptions in the capital and credit markets.

 

We had cash and cash equivalents of $11.4 million at June 30, 2013 and $6.5 million at December 31, 2012. Our working capital was $58.8 million as of June 30, 2013 and $55.4 million as of December 31, 2012.

 

In September 2012, our Board of Directors approved a $10 million increase to our discretionary stock repurchase program, which was originally adopted in October 2008 with an initial authorized maximum of $10 million. Under the program, shares may be repurchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending on market conditions. We expect that the repurchase of our common stock under the program will be financed with existing working capital and amounts available under our existing credit facility. No limit was placed on the duration of the repurchase program. There is no guarantee as to the exact number of shares that we will repurchase. Subject to applicable securities laws, repurchases may be made at such times and in such amounts as our management deems appropriate. The program can also be discontinued at any time management feels additional purchases are not warranted. During the three and six months ended June 30, 2013, we repurchased a total of 8,907 and 227,051 shares of our common stock under this program for a cost of approximately $67,000 and $1.6 million, respectively. From the inception of the program in October 2008 through June 30, 2013, we have repurchased an aggregate total of 2,837,319 shares of our common stock for a total cost of $14.3 million. The repurchased shares are held as treasury stock. At June 30, 2013, we had $5.7 million available in stock repurchases under the program, subject to any limitations that may apply from time to time under our existing credit facility.

 

We maintain a Canadian call center serving the U.S. market, which receives the benefit of labor credits under the Investment Quebec Refundable Tax Credit for Major Employment Generating Projects (GPCE) program. In addition to other eligibility requirements under the program, which extends through fiscal year 2016, we are required to maintain a minimum of 317 eligible employees employed by our subsidiary PCM Sales Canada in the province of Quebec at all times to remain eligible to apply annually for these labor credits. As a result of this certification, we are eligible to make annual labor credit claims for eligible employees equal to 25% of eligible salaries, but not to exceed $15,000 (Canadian) per eligible employee per year, continuing through fiscal year 2016. As of June 30, 2013, we had a total accrued receivable of $5.4 million related to the 2012 calendar year and the first six months of 2013. We expect to file our 2012 claim in 2013 and we expect to receive full payment under our remaining accrued labor credits receivable.

 

Cash Flows from Operating Activities. Net cash used in operating activities in the six months ended June 30, 2013 was $10.4 million compared to net cash provided by operating activities of $21.3 million in the six months ended June 30, 2012.

 

The $10.4 million of net cash used in operating activities in the six months ended June 30, 2013 was primarily due to a $27.3 million increase in accounts receivable due to increased sales, especially to certain federal government customers, partially offset by a $14.2 million increase in deferred revenue related to a deferred maintenance contract.

 

23



 

The $21.3 million of net cash provided by operating activities in the six months ended June 30, 2012 was primarily due to an $8.3 million increase in accounts payable and an $8.0 million decrease in accounts receivable. The increase in accounts payable is primarily due to the mix and timing of trade payables, including our management of the utilization of early pay discounts. The decrease in accounts receivable reflects the payment received related to certain large sales near the end of 2011 as well as normal seasonality between the fourth quarter and the first half of the year thereafter.

 

Cash Flows from Investing Activities. Net cash used in investing activities was $5.7 million in the six months ended June 30, 2013 compared to $5.1 million in the six months ended June 30, 2012.

 

The $5.7 million and $5.1 million of net cash used in investing activities in the six months ended June 30, 2013 and 2012, respectively, were primarily related to capital expenditures relating to investments in our IT infrastructure and the creation of enhanced electronic tools for our account executives and sales support staff. In addition, we incurred approximately $1.3 million of capital expenditures in the six months ended June 30, 2013 related to the unfinanced portion of a building we acquired that is adjacent to the building we own in Santa Monica, California.

 

Cash Flows from Financing Activities. Net cash provided by financing activities in the six months ended June 30, 2013 was $21.3 million compared to net cash used in financing activities $17.2 million in the six months ended June 30, 2012.

 

The $21.3 million of net cash provided by financing activities in the six months ended June 30, 2013 was primarily related to a $12.8 million net increase in the outstanding balance of our line of credit and an $8.7 million change in book overdraft related to outstanding checks at June 30, 2013 compared to the prior year end.

 

The $17.2 million of net cash used in financing activities in the six months ended June 30, 2012 was primarily related to $20.1 million of net payments made on the outstanding balance of our line of credit, partially offset by $4.4 million of proceeds resulting from capital leases entered into during the period but relating to assets acquired in prior periods.

 

Line of Credit and Note Payable. On March 22, 2013, we entered into a Third Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with certain lenders named therein. The Amended Loan Agreement provides us an asset-based revolving credit facility that provides for, among other things, (i) a credit limit of $190 million, which may be increased by $10 million to a total of $200 million upon the fulfillment of certain conditions; (ii) LIBOR interest rate options that we can enter into with no limit on the maximum outstanding principal balance which may be subject to a LIBOR interest rate option; and (iii) a maturity date of September 30, 2017. The credit facility, which functions as a working capital line of credit with a borrowing base of inventory and accounts receivable, including certain credit card receivables, and a portion of the value of certain real estate, also includes a monthly unused line fee of 0.25% per year on the amount, if any, by which the Maximum Credit, as defined in the agreement, then in effect, exceeds the average daily principal balance of the outstanding borrowings during the immediately preceding month. We are currently in discussions with one of the existing lenders to commit to the remaining $10 million increase in the credit limit under the facility. As of the date of this report, we have not received a formal commitment from the lender; however, we currently expect that we will receive a commitment in the third quarter of 2013. However, there can be no assurance that the lender or any other lender will commit to the remaining $10 million increase in the credit limit under the facility in any future period. As a result, we may not be able to access the credit facility beyond its current limit of $190 million.

 

The credit facility is collateralized by substantially all of our assets. In addition to the security interest required by the credit facility, certain of our vendors have security interests in some of our assets related to their products. The credit facility has as its single financial covenant a minimum fixed charge coverage ratio (FCCR) requirement in the event an FCCR triggering event has occurred. An FCCR triggering event is comprised of maintaining certain specified daily and average excess availability thresholds. In the event the FCCR covenant applies, the fixed charge coverage ratio is 1.0 to 1.0 calculated on a trailing four quarter basis as of the end of the last quarter immediately preceding such FCCR triggering event date. At June 30, 2013, we were in compliance with our financial covenant under the credit facility.

 

Loan availability under the line of credit fluctuates daily and is affected by many factors, including eligible assets on-hand, opportunistic purchases of inventory and availability and our utilization of early-pay discounts. At June 30, 2013, we had $100.4 million of net working capital advances outstanding under the line of credit. At June 30, 2013, the maximum credit line was $190 million and we had $45.2 million available to borrow for working capital advances under the line of credit.

 

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In connection with, and as part of, the amended credit facility, we entered into an amended term note on March 22, 2013 with a principal balance of $4.34 million, payable in equal monthly principal installments, amortized over 84 months, beginning on April 1, 2013, plus interest at the prime rate with a LIBOR option. In the event of a default, termination or non-renewal of the Amended Loan Agreement upon the maturity thereof, the term loan is payable in its entirety upon demand by the lenders. At June 30, 2013, we had $4.2 million outstanding under the amended term note. The remaining balance of our term note matures as follows: $310,000 in the remainder of 2013, $620,000 annually in each of the years 2014 through 2017, and $1.4 million thereafter.

 

In May 2013, we completed the purchase of real property adjacent to the building we own in Santa Monica, California for $3.0 million and financed $1.7 million of the purchase price with a subline under the Amended Loan Agreement. The loan bears the same interest terms as our revolving credit facility, however, the principal amount is amortized monthly over an 84 month period similar to our term note, with monthly principal amortization of approximately $24,000 beginning in July 2014. Accordingly, at June 30, 2013, $1.7 million is included in our “Notes payable and other long-term liabilities” on our Consolidated Balance Sheets.

 

At June 30, 2013, our effective weighted average annual interest rate on outstanding amounts under the credit facility and term note was 1.98%.

 

In June 2011, we entered into a credit agreement to finance the acquisition and improvement of the real property we purchased in March 2011 in El Segundo, California. The credit agreement provides for a five year term and a 25 year straight-line, monthly principal repayment amortization period with a balloon payment at maturity. Interest is variable, indexed to Prime plus a spread of 0.375% or LIBOR plus a spread of 2.375% at our option, payable monthly. At June 30, 2013, we had $9.6 million outstanding under this credit agreement, which matures as follows: $0.2 million in the remainder of 2013, $0.4 million annually in each of the years 2014 through 2015 and $8.5 million in 2016. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility.

 

As part of our growth strategy, we may, in the future, make acquisitions in the same or complementary lines of business, and pursue other business ventures. Any launch of a new business venture or any acquisition and the ensuing integration of the acquired operations would place additional demands on our management, and our operating and financial resources.

 

Other Planned Capital Projects

 

ERP and Web Infrastructure Upgrades

 

We are currently upgrading many of our IT systems. We have purchased licenses for Microsoft Dynamics AX and other related tools, such as workflow software, web development tools and other related items, to upgrade our ERP and eCommerce systems. We are currently working on the implementation of the ERP modules and the upgrade of the ERP systems, including additional enhancements and features. We believe the implementation and upgrade should help us to gain further efficiencies across our organization. Additionally, we initiated the implementation and upgrade of our eCommerce systems and have completed and recently launched a new generation of our public websites at pcm.com, macmall.com, ecost.com, onsale.com and our extranet. We have completed an assessment of the status of the ERP project and identified business gaps. We are currently working on the design phase and finalization of the needed modifications to close the identified gaps for the completion of the major phases of the project and expect to complete this work in the third quarter of 2013. At the conclusion of the design phase, we expect to have a better estimate of the cost and time frame for the completion of the major phases of the project. While it is difficult to estimate costs and timeframes for completion, based on the complexity of the systems design, customization and implementation and our current estimates, which are subject to change, we currently expect to incur a cost of at least $19 million for the major phases of these IT system upgrades and to be complete with all major phases of the implementation by the end of 2014. To date, we have incurred approximately $14.6 million of such costs. In addition to the above expenditures, we expect to make periodic upgrades to our IT systems on an ongoing basis. In addition to the upgrades to our IT systems, we recently implemented various Cisco solutions to upgrade our communications infrastructure to provide a unified platform for our entire company and to provide a robust and efficient contact center.

 

New Data Center

 

In December 2012, we completed the purchase of 7.9 acres of land with the intent to commence construction on a new cloud data center that we currently expect to open in early 2014. The proposed Tier III facility will be strategically located in a data center-centric development in New Albany, Ohio. The new facility will complement our two existing data centers and a 24/7 Integrated Operations Center (IOC) located in Atlanta, Georgia, enhancing our managed service offerings, including cloud services, data center hosting and management, remote monitoring and disaster recovery. We expect to incur an incremental $9 million to $10 million of construction and related costs to build out the new data center primarily during 2013.

 

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On July 9, 2013, we entered into a loan agreement for up to $7.725 million to finance the build out of the new data center. The loan agreement provides for draws during the construction period, which bear interest at the prime rate plus 0.25%, followed by a five year term and a 25 year straight-line, monthly principal repayment amortization period with a balloon payment at maturity. Interest during the amortization period is variable, indexed to LIBOR plus a spread of 2.25%.

 

Inflation

 

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

 

Dividend Policy

 

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

 

Off-Balance Sheet Arrangements

 

Our off-balance sheet arrangements are fully described in our Annual Report on Form 10-K for the year ended December 31, 2012. As of June 30, 2013, there has been no material change in any off-balance sheet arrangements since December 31, 2012.

 

Contingencies

 

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

 

RELATED-PARTY TRANSACTIONS

 

There were no material related-party transactions during the three and six months ended June 30, 2013 other than compensation arrangements in the ordinary course of business.

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

·              our expectations regarding the timing and costs of our ongoing or planned IT systems and communications infrastructure upgrades;

·              our ability to execute and benefit from our business strategies; including but not limited to, business strategies related to and strategic investments in our IT systems, investments in our planned new data center, our reorganization strategy, our brand strategy and initiatives to unify our commercial brands, our efforts to expand our sales of value-added services and solutions offerings, and real estate acquisitions and dispositions;

·              our cost reduction strategies and plans, including timing, expected cost savings, the uses of those savings, the timing and amount of payments, the impact on our business, and the amounts of future charges to complete our such plans;

·              our expectations regarding key personnel and our ability to retain such individuals;

·              our competitive advantages and growth opportunities;

·              our ability to increase profitability and revenues;

·              our expectations to continue our efforts to increase the productivity of our sales force and reduce costs;

 

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·              our plans to invest in and enhance programs and training to align us with our key vendor partners;

·              our ability to generate vendor supported marketing;

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

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

·              our expectation regarding general economic uncertainties and the related potential negative impact on our profit and profit margins, as well as our financial condition, liquidity and future cash flows;

·              our expectations regarding our future capital needs and the availability of working capital, liquidity, cash flows from operations and borrowings under our credit facility and other long-term debt;

·              the expected results or profitability of any of our individual business units in future periods;

·              the impact on accounts receivable from our efforts to focus on sales in our Commercial and Public Sector segments;

·              our ability to penetrate the public sector market;

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

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

·              our ability to attract new customers and stimulate additional purchases from existing customers, including our expectations regarding future advertising levels and the effect on consumer sales;

·              our ability to leverage our market position and purchasing power and offer a wide selection of products at competitive prices;

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

·              our belief that the use and enhancement of extranets has the potential to yield additional sales opportunities and the ability to reach new customer bases;

·              our ability to limit risk related to price reductions;

·              our belief regarding the effect of seasonal trends and general economic conditions on our business and results of operations across all of our segments;

·              our expectations regarding competition and the industry trend toward consolidation;

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

·              our compliance with laws and regulations;

·              our beliefs regarding the applicability of tax statutes, regulations and governmental tax regulatory positions;

·              our expectations regarding the impact of accounting pronouncements;

·              our expectations regarding any future repurchases of our common stock, including the financing of any such repurchases;

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

·              our belief that our existing distribution facilities are adequate for our current and foreseeable future needs;

·              our expectations with respect to the timing and cost of completing our new data center in Ohio; and

·              the likelihood that new laws and regulations will be adopted with respect to the Internet, privacy and data security that may impose additional restrictions or burdens on our business.

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our financial instruments include cash and cash equivalents and long-term debt. At June 30, 2013, the carrying values of our financial instruments approximated their fair values based on current market prices and rates.

 

We have not entered into derivative financial instruments as of June 30, 2013. However, from time-to-time, we contemplate and may enter into derivative financial instruments related to interest rate, foreign currency, and other market risks.

 

Interest Rate Risk

 

We have exposure to the risks of fluctuating interest rates on our line of credit and note payable. The variable interest rates on our line of credit and note payable are tied to the prime rate or the LIBOR, at our discretion. At June 30, 2013, we had $100.4 million outstanding under our line of credit and $15.4 million outstanding under our notes payable. As of June 30, 2013, the hypothetical impact of a one percentage point increase in interest rate related to the outstanding borrowings under our line of credit and note payable would be to increase our annual interest expense by approximately $1.2 million.

 

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Foreign Currency Exchange Risk

 

We have operation centers in Canada and the Philippines that provide back-office administrative support and customer service support. In each of these countries, transactions are primarily conducted in the respective local currencies. In addition, our two foreign subsidiaries that operate the operation centers have intercompany accounts with our U.S. subsidiaries that eliminate upon consolidation. However, transactions resulting in such accounts expose us to foreign currency rate fluctuations. We record gains and losses resulting from exchange rate fluctuations on our short-term intercompany accounts in “Selling, general and administrative expenses” in our Consolidated Statements of Operations and translation gains and losses resulting from exchange rate fluctuations on local currency based assets and liabilities in “Accumulated other comprehensive income,” a separate component of stockholders’ equity on our Consolidated Balance Sheets. As such, we have foreign currency translation exposure for changes in exchange rates for these currencies. As of June 30, 2013, we did not have material foreign currency or overall currency exposure. Significant changes in exchange rates between foreign currencies in which we transact business and the U.S. dollar may adversely affect our Consolidated Statements of Operations and Consolidated Balance Sheets.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

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

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2013.

 

Changes in Internal Control Over Financial Reporting

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the second quarter of 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not currently a party to any material legal proceedings, other than ordinary routine litigation incidental to the business. From time to time, we receive claims of and become subject to consumer protection, employment, intellectual property and other litigation related to the conduct of our business. Any such litigation could be costly and time consuming and could divert our management and key personnel from our business operations. In connection with any such litigation, we may be subject to significant damages or equitable remedies relating to the operation of our business. Any such litigation may materially harm our business, results of operations and financial condition.

 

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ITEM 1A. RISK FACTORS

 

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

 

Our success is in part dependent on the accuracy and proper utilization of our management information and communications systems.

 

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

 

We are currently upgrading many of our systems. We have purchased licenses for Microsoft Dynamics AX and other related tools, such as workflow software, web development tools and other related items, to upgrade our ERP and eCommerce systems. We recently launched a new generation of our public websites at pcm.com, macmall.com, onsale.com, ecost.com and our corporate extranet. We are currently working on the implementation of the ERP modules and the upgrade of the ERP systems, including additional enhancements and features, and we expect to be complete with all major phases of the implementation of the ERP systems by the end of 2014. In addition to these upgrades, we recently implemented various Cisco solutions to upgrade our communications infrastructure to provide a unified platform for our entire company and to provide a robust and efficient contact center.

 

Our success is dependent on the accuracy and proper utilization of our management information systems and our communications systems. In addition to the costs associated with system upgrades, the transition to and implementation of new or upgraded solutions can result in system delays or failures. We currently operate one of our management information systems using an HP3000 Enterprise System, which was supported by HP until December 2010. We currently contract with a third party service provider specializing in maintenance and support of this system to provide us adequate support until we finalize the upgrade of this system to Microsoft Dynamics AX. Any interruption, corruption, degradation or failure of our management information systems or communications systems could adversely impact our ability to receive and process customer orders on a timely basis.

 

In addition to the specifically discussed systems upgrades discussed above, we also regularly upgrade our systems in an effort to better meet the information requirements of our users, and believe that to remain competitive, it will be necessary for us to upgrade these systems on a regular basis in the future. The implementation of any upgrades is complex, in part, because of the wide range of processes and the multiple systems that may need to be integrated across our business.

 

In connection with any system upgrades, we generally create a project plan to provide a reasonable allocation of resources to the project; however, execution of any such plan, or a divergence from it, may result in cost overruns, project delays or business interruptions. Furthermore, any divergence from any such project plan could affect the timing or the extent of benefits we may expect to achieve from the system or any process efficiencies. Any such project delays, business interruptions or loss of expected benefits could have a material adverse effect on our business, financial condition or results of operations.

 

Any disruptions, delays or deficiencies in the design, operation or implementation of our various systems, or in the performance of our systems, particularly any disruptions, delays or deficiencies that impact our operations, could adversely affect our ability to effectively run and manage our business, including our ability to receive, process, ship and bill for orders in a timely manner or our ability to properly manage our inventory or accurately present our inventory availability or pricing. We do not currently have a redundant or back-up telephone system, nor do we have complete redundancy for our management information systems. Any interruption, corruption, deficiency or delay in our management information systems, including those caused by natural disasters, could have a material adverse effect on our business, financial condition or results of operations.

 

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

 

As a result of the ongoing economic uncertainties, the direction and relative strength of the U.S. economy remains a considerable risk to our business, operating results and financial condition. This economic uncertainty could also increase the risk of uncollectible accounts receivable from our customers. During the recent economic downturns in the U.S. and elsewhere, customers generally reduced, often substantially, their rate of information technology spending. Additionally, economic conditions and the level of consumer confidence has limited technology spending. Future changes and uncertainties in the economic climate in the U.S. and elsewhere could have a similar negative impact on the rate of information technology spending of our current and potential customers, which would likely have a negative impact on our business, operating results and financial condition, and could significantly hinder our growth and prevent us from achieving our financial performance goals.

 

Our earnings and growth rate could be adversely affected by negative changes in economic or geopolitical conditions.

 

We are subject to risks arising from adverse changes in domestic and global economic conditions and unstable geopolitical conditions. If economic growth in the United States and other countries’ economies slows or declines, consumer and business spending rates could be significantly reduced. This could result in reductions in sales of our products, longer sales and payment cycles, slower adoption of new technologies and increased price competition, any of which could materially and adversely affect our business, results of operations and financial condition. Weak general economic conditions or uncertainties in geopolitical conditions could adversely impact our revenue, expenses and growth rate. In addition, our revenue, gross margins and earnings could deteriorate in the future as a result of unfavorable economic or geopolitical conditions.

 

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

 

Our revenue is dependent on sales of products from a small number of key manufacturers and software publishers, including Apple, Cisco, Dell, HP, Lenovo and Microsoft. For example, products manufactured by HP accounted for approximately 21% and 21% of our total net sales for the six months ended June 30, 2013 and 2012, and products manufactured by Apple accounted for approximately 16% and 17% of our total net sales for the six months ended June 30, 2013 and 2012. A decline in sales of any of our key manufacturers’ products, whether due to decreases in supply of or demand for their products, termination of any of our agreements with them, or otherwise, could have a material adverse impact on our sales and operating results.

 

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

 

Certain of our vendors, including Apple, Cisco, Dell, HP, Ingram Micro, Lenovo, Microsoft and Tech Data, provide us with trade credit or substantial incentives in the form of discounts, credits and cooperative advertising. We have agreements with many of our vendors under which they provide us, or they have otherwise consistently provided us, with market development funds to finance portions of our catalog publication and distribution costs based upon the amount of coverage we give to their respective products in our catalogs or other advertising mediums. Any termination or interruption of our relationships with one or more of these vendors, particularly Apple or HP, or modification of the terms or discontinuance of our agreements and market development fund programs and arrangements with these vendors, could adversely affect our operating income and cash flow. For example, the amount of vendor consideration we receive from a particular vendor may be impacted by a number of events outside of our control, including acquisitions, divestitures, management changes or economic pressures affecting such vendor, any of which could materially affect the amount of vendor consideration we receive from such vendor.

 

We do not have long-term supply agreements or guaranteed price or delivery arrangements with our vendors.

 

In most cases we have no guaranteed price or delivery arrangements with our vendors. As a result, we have experienced and may in the future experience inventory shortages on certain products. Furthermore, our industry occasionally experiences significant product supply shortages and customer order backlogs due to the inability of certain manufacturers to supply certain products as needed. We cannot assure you that suppliers will maintain an adequate supply of products to fulfill our orders on a timely basis, or at all, or that we will be able to obtain particular products on favorable terms or at all. Additionally, we cannot assure you that product lines currently offered by suppliers will continue to be available to us. A decline in the supply or continued availability of the products of our vendors, or a significant increase in the price of those products, could reduce our sales and negatively affect our operating results.

 

Substantially all of our agreements with vendors are terminable within 30 days.

 

Substantially all of our agreements with vendors are terminable upon 30 days’ notice or less. For example, while we are an authorized dealer for HP and Apple products, they can terminate our dealer agreements upon 30 days’ notice. Vendors that currently sell their products through us could decide to sell, or increase their sales of, their products directly or through other resellers or channels. Any termination, interruption or adverse modification of our relationship with a key vendor or a significant number of other vendors would likely adversely affect our operating income, cash flow and future prospects.

 

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

 

The products we sell are generally subject to rapid technological change and related changes in marketplace demand. Our success is dependent in part upon the ability of our vendors to develop and market products that meet these changes in marketplace demand. Our success is also dependent on our ability to develop relationships with and sell products from new vendors that address these changes in marketplace demand. To the extent products that address changes in marketplace demand are not available to us, or are not available to us in sufficient quantities or on acceptable terms, we could encounter increased price and other competition, which would likely adversely affect our business, financial condition and results of operations.

 

We may not be able to maintain existing or build new vendor relationships, which may affect our ability to offer a broad selection of products at competitive prices and negatively impact our results of operations.

 

We purchase products for resale both directly from manufacturers and indirectly through distributors and other sources, all of whom we consider our vendors. We also maintain certain qualifications and preferred provider status with several of our vendors, which provides us with preferred pricing, vendor training and support, preferred access to products, and other significant benefits. While these vendor relationships are an important element of our business, we do not have long-term agreements with any of these vendors. Any agreements with vendors governing our purchase of products are generally terminable by either party upon 30 days’ notice or less. In general, we agree to offer products on our websites and through our catalogs and the vendors agree to provide us with information about their products and honor our customer service policies. If we do not maintain our existing relationships or build new relationships with vendors on acceptable terms, including favorable product pricing and vendor consideration, we may not be able to offer a broad selection of products or continue to offer products at competitive prices. In addition, some vendors may decide not to offer particular products for sale on the Internet, and others may avoid offering their new products to retailers offering a mix of close-out and refurbished products in addition to new products. From time to time, vendors may be acquired by other companies, terminate our right to sell some or all of their products, modify or terminate our preferred provider or qualification status, change the applicable terms and conditions of sale or reduce or discontinue the incentives or vendor consideration that they offer us. Any such termination or the implementation of such changes, or our failure to build new vendor relationships, could have a negative impact on our operating results. Additionally, some products are subject to manufacturer or distributor allocation, which limits the number of units of those products that are available to us and may adversely affect our operating results.

 

Narrow gross margins magnify the impact of variations in operating costs and of adverse or unforeseen events on operating results.

 

We are subject to intense price competition with respect to the products, services and solutions we sell. As a result, our gross margins have historically been narrow, and we expect them to continue to be narrow. We have recently experienced increasing price competition, which has a negative impact on our gross margins. Narrow gross margins magnify the impact of variations in operating costs and of adverse or unforeseen events on operating results. Future increases in costs such as the cost of merchandise, wage levels, shipping rates, freight costs and fuel costs may negatively impact our margins and profitability. We are not always able to raise the sales price to offset cost increases. If we are unable to maintain our gross margins in the future, it could have a material adverse effect on our business, financial condition or results of operations. In addition, because price is an important competitive factor in our industry, we cannot assure you that we will not be subject to increased price competition in the future. If we become subject to increased price competition in the future, we cannot assure you that we will not lose market share, that we will not be forced to reduce our prices and further reduce our gross margins, or that we will be able to compete effectively.

 

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

 

We experience variability in our net sales and net income on a quarterly basis as a result of many factors.  These factors include:

 

·                  the relative mix of products, services and solutions sold during the period;

·                  the general economic environment and competitive conditions, such as pricing;

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

·                  seasonality in consumer spending;

·                  variability in vendor programs;

·                  the introduction of new products, services or solutions by us or our competitors;

·                  changes in prices from our suppliers;

·                  promotions;

 

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·                  the loss or consolidation of significant suppliers or customers;

·                  our ability to control costs;

·                  the timing of our capital expenditures;

·                  the condition of our industry in general;

·                  seasonal shifts in demand for products, services or solutions we offer;

·                  consumer acceptance of new purchasing models;

·                  industry announcements and market acceptance of new offerings or upgrades;

·                  deferral of customer orders in anticipation of new offerings;

·                  product or solution enhancements or operating system changes;

·                  any inability on our part to obtain adequate quantities of products, services or solutions;

·                  delays in the release by suppliers of new products or solutions and inventory adjustments;

·                  our expenditures on new business ventures and acquisitions;

·                  performance of acquired businesses;

·                  adverse weather conditions that affect supply or customer response;

·                  distribution or shipping to our customers; and

·                  geopolitical events.

 

Our planned operating expenditures each quarter are based on sales forecasts for the quarter. If our sales do not meet expectations in any given quarter, our operating results for the quarter may be materially adversely affected. Our narrow gross margins may magnify the impact of these factors on our operating results. We believe that period-to-period comparisons of our operating results are not necessarily a good indication of our future performance. In addition, our results in any quarterly period are not necessarily indicative of results to be expected for a full fiscal year. In future quarters, our operating results may be below the expectations of public market analysts or investors and as a result the market price of our common stock could be materially adversely affected.

 

Our focus on commercial and public sector sales presents numerous risks and challenges, and may not improve our profitability or result in expanded market share.

 

An important element of our business strategy is to focus on commercial and public sector sales and related market share growth.  In competing in these markets, we face numerous risks and challenges, including competition from a wider range of sources and the need to continually develop and enhance strategic relationships. We cannot assure you that our focus on commercial and public sector sales will result in expanded market share or increased profitability. Furthermore, revenue from our public sector business is derived from sales to federal, state and local governmental departments and agencies, as well as to educational institutions, through various contracts and open market sales. Government contracting is a highly regulated area, and noncompliance with government procurement regulations or contract provisions could result in civil, criminal, and administrative liability, including substantial monetary fines or damages, termination of government contracts, and suspension, debarment or ineligibility from doing business with the government. The effect of any of these possible actions by any governmental department or agency with which we contract could adversely affect our business or results of operations. Moreover, contracting with governmental departments and agencies involves additional risks, such as longer payment terms, limited recourse against the government agency in the event of a business dispute, requirements that we provide representations, warranties and indemnities related to the products, services and solutions we sell, the potential lack of a limitation of our liability for damages from our product sales or our provision of services to the department or agency, and the potential for changes in statutory or regulatory provisions that negatively affect the profitability of such contracts. Similarly, many large commercial businesses also require us to regularly enter into complex contractual relationships involving various risks and uncertainties such as requirements that we provide representations, warranties and indemnities to our customers and potential lack of limitation of our liability for damages under some of such contracts.

 

Our strategy and investments in increasing the productivity of our account executives, and our focus on sales and delivery of technology services and solutions may not improve our profitability or result in expanded market share.

 

We have made and are currently making efforts to increase our market share by investing in training and retention of our outbound phone-based sales force. We have also incurred, and expect to continue to incur, significant expenses resulting from infrastructure investments related to our outbound phone-based sales force. Our customers are increasingly consuming IT in different and evolving ways and utilizing more elaborate services and solutions. In response, we are investing in our services and solutions capabilities and portfolio and are working with our customers to identify areas where they can gain efficiencies by outsourcing to us traditional IT functions. Specifically, we are focused on and investing in solutions around the data center (which includes storage and security solutions), cloud computing, collaboration, virtualization, secure mobility, borderless networks and enterprise software solutions. We cannot assure you that any of our investments in our outbound phone-based sales force or our focus on our services and solutions capabilities and portfolio will result in expanded market share or increased profitability in the near or long term.

 

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

 

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

 

Existing or future government and tax laws and regulations and related risks could expose us to liabilities or costly changes in our business operations, and could reduce demand for our products and services.

 

Based upon current interpretations of existing law, certain of our subsidiaries currently collect and remit sales or use tax only on sales of products or services to residents of the states in which the respective subsidiaries have a physical presence or have voluntarily registered for sales tax collection. The U.S. Supreme Court has ruled that states, absent Congressional legislation, may not impose tax collection obligations on an out-of-state direct marketer whose only contacts with the taxing state are distribution of catalogs and other advertisement materials through the mail, and whose subsequent delivery of purchased goods is by mail or interstate common carriers. However, we cannot predict the level of contact with any state which would give rise to future or past tax collection obligations. Additionally, it is possible that federal legislation could be enacted that would permit states to impose sales or use tax collection obligations on out-of-state direct marketers. Furthermore, court cases have upheld tax collection obligations on companies, including mail order companies, whose contacts with the taxing state were quite limited (e.g., visiting the state several times a year to aid customers or to inspect stores stocking their goods or to provide training or other support to customers in the state). States have also successfully imposed sales and use tax collection responsibility upon in-state manufacturers that agree to act as a drop shipper for the out-of-state marketer, giving rise to the risk that such taxes may be imposed indirectly on the out-of-state seller. We believe our operations in states in which we have no physical presence are different from the operations of the companies in those cases and are thus not subject to the tax collection obligations imposed by those decisions. Various state laws, regulations and taxing authorities have sought to impose on direct marketers with no physical presence in the taxing state the burden of collecting or reporting information related to state sales and use taxes on the sale of products shipped or services sold to those states’ residents, and it is possible that such a requirement could be imposed in the future. For example, New York recently adopted an affiliate marketing statute and related regulations that impose sales and use tax collection obligations on out-of-state sellers that use certain web-based affiliate marketing relationships with web-based affiliates deemed to be located in New York. Other states have proposed similar legislation. There can be no assurance that existing or future laws that impose taxes or other regulations on direct marketing or Internet commerce would not substantially impair our growth or otherwise have a material adverse effect on our business, results or operations and financial condition.

 

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

 

We also are subject to general business laws and regulations, as well as laws and regulations specifically governing companies that do business over the Internet. These laws and regulations may cover taxation of eCommerce, user privacy, marketing and promotional practices (including electronic communications with our customers and potential customers), database protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, product safety, the provision of online payment services, copyrights, patents and other intellectual property rights, data security, unauthorized access (including the Computer Fraud and Abuse Act), and the characteristics and quality of products and services. Additionally, some of our subsidiaries which are government contractors or subcontractors are subject to laws and regulations related to companies that sell to the government, including but not limited to regulations of the Department of Labor and laws and regulations related to our procurement of products and services and our sales to the government.

 

While we have sought to implement processes, programs and systems in an effort to achieve compliance with existing laws and regulations applicable to our business, many of these laws and regulations are unclear and have yet to be interpreted by courts, or may be subject to conflicting interpretations by courts. Further, no assurances can be given that new laws or regulations will not be enacted or adopted, or that our processes, programs and systems will be sufficient to comply with present or future laws or regulations, which might adversely affect our business, financial condition or results of operations.

 

Such existing and future laws and regulations may also impede our business. Additionally, it is not always clear how existing laws and regulations governing issues such as property ownership, sales and other taxes, libel, trespass, data mining and collection, data security and personal privacy, among other laws, apply to our businesses. Unfavorable resolution of these issues may expose us to liability and costly changes in our business operations, and could reduce customer demand for our products, services and solutions.

 

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The growth and demand for online commerce has and may continue to result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These consumer protection laws could result in substantial compliance costs and could decrease our profitability. Further, additional regulation of the Internet may lead to a decrease in Internet usage, which could adversely affect our business. Growing public concern about privacy and the collection, distribution and use of information about individuals may subject us to increased regulatory scrutiny or litigation. In the past, the FTC has investigated companies that have used personally identifiable information without permission or in violation of a stated privacy policy. If we are accused of violating the stated terms of our privacy policy or of data breach violations, we may face a loss of customers or damage to our reputation and may be forced to expend significant amounts of financial and managerial resources to defend against these accusations, face potential liability and be subject to extended regulatory oversight in the form of a long-term consent order.

 

Data security laws are also becoming more widespread and burdensome in the United States, and increasingly require notification of affected individuals and, in some instances, regulators. Moreover, third parties are engaging in increased cyber-attacks and other data theft efforts, and individuals are increasingly subjected to theft of identity, medical or credit card or other financial account information. In addition to risks we face from cyber attacks or data theft efforts directly targeted at our systems, we offer our products, services and solutions to companies, such as healthcare or financial institutions, under contracts which may expose us to significant liabilities for data breaches or losses which could arise out of or result from products, services or solutions we may sell to these institutions. There is a risk that we may fail to prevent such data theft or data breaches and that our customers or others may assert claims against us as a result. In addition, the FTC and state consumer protection authorities have brought a number of enforcement actions against U.S. companies for alleged deficiencies in those companies’ data security practices, and they may continue to bring such actions. Enforcement actions, which may or may not be based upon actual cyber attacks or other breaches in data security, present an ongoing risk to us, could result in a loss of customers, damage to our reputation and monetary damages.

 

Additionally, although historically only a small percentage of our total sales in any given quarter or year are made to customers outside of the continental United States, there is a possibility that a foreign jurisdiction may take the position that our business is subject to its laws and regulations, which could impose restrictions or burdens on us and expose us to tax and other potential liabilities and could also require costly changes to our business operations with respect to those jurisdictions. In some cases, our sales related to foreign jurisdictions could also be subject to export control laws and foreign corrupt practice laws and there is a risk that we could face allegations from U.S. or foreign governmental authorities alleging our failure to comply with the requirements of such laws subjecting us to costly litigation and potential significant governmental penalties or fines.

 

Part of our business strategy includes the opportunistic acquisition of other companies, and we may have difficulties integrating acquired companies into our operations in a cost-effective manner, if at all.

 

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

 

Acquisitions may require large one-time charges and can result in increased debt or other contingent liabilities, adverse tax consequences, deferred compensation charges, the recording and later amortization of amounts related to deferred compensation and certain purchased intangible assets, and the refinement or revision of fair value acquisition estimates following the completion of acquisitions, any of which items could negatively impact our business, financial condition and results of operations. In addition, we may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause the price of our common stock to decline.

 

An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or involve our issuance of additional equity securities. If we issue equity securities in connection with an acquisition, we may dilute our common stock with securities that have an equal or a senior interest in our company. If we incur additional debt to pay for an acquisition, it may significantly reduce amounts that would otherwise be available under our credit facility, increase our interest expense, leverage and debt service requirements and could negatively impact our ability to comply with applicable financial covenants in our credit facility

 

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or limit our ability to obtain credit from our vendors. Acquired entities also may be highly leveraged or dilutive to our earnings per share, or may have unknown liabilities. In addition, the combined entity may have lower revenues or higher expenses and therefore may not achieve the anticipated results. Any of these factors relating to acquisitions could have a material adverse impact on our business, financial condition and results of operations.

 

We cannot assure you that we will be able to identify suitable acquisition opportunities, consummate any pending or future acquisitions or that we will realize any anticipated benefits from any such acquisitions. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms, and any decline in the price of our common stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions. We cannot assure you that we will be able to implement or sustain our acquisition strategy or that our strategy will ultimately prove profitable.

 

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

 

The purchase price allocation for our historical acquisitions resulted in a material amount allocated to goodwill and intangible assets. In accordance with GAAP, we review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We review the fair values of our goodwill and intangible assets with indefinite useful lives and test them for impairment annually or whenever events or changes in circumstances indicate an impairment may have occurred. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or intangible assets may not be recoverable include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant non-cash charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets is determined, which could have a material adverse effect on our results of operations.

 

If significant negative industry or economic trends, including decreases in our market capitalization, slower growth rates or lack of growth in our business occurs in the future it may indicate that impairment charges are required. If we are required to record any impairment charges, this could have a material adverse effect on our consolidated financial statements. In addition, the testing of goodwill for impairment requires us to make significant estimates about the future performance and cash flows of our company, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry or market conditions, changes in underlying business operations, future reporting unit operating performance, existing or new product market acceptance, changes in competition, or changes in technologies. Any changes in key assumptions, or actual performance compared with those assumptions, about our business and future prospects or other assumptions could affect the fair value of one or more reporting units, resulting in an impairment charge.

 

We may not be able to maintain profitability on a quarterly or annual basis.

 

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

 

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

 

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

 

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Our operating results are difficult to predict and may adversely affect our stock price.

 

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

 

·             changes in the mix of products, services or solutions that we sell;

·             the amount and timing of operating costs and capital expenditures relating to any expansion of our business operations and infrastructure;

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

·             the availability of vendor programs, authorizations or certifications;

·             our ability to attract and retain key personnel and the related costs,

·             fluctuations in the demand for our products, services or solutions or overstocking or under-stocking of our products;

·             economic conditions;

·             changes in the amounts of information technology spending by our customers;

·             the amount and timing of advertising and marketing costs;

·             fluctuations in levels of inventory theft, damage or obsolescence that we incur;

·             our ability to successfully integrate operations and technologies from any past or future acquisitions or other business combinations;

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

·             changes in the number of visitors to our websites or our inability to convert those visitors into customers;

·             technical difficulties, including system or Internet failures;

·             introduction of new or enhanced products, services or solutions by us or our competitors;

·             fluctuations in our shipping costs; and

·             foreign currency exchange rates.

 

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

 

We derive a significant amount of our gross sales from products sold out of inventory at our distribution facilities. We assume the inventory damage, theft and obsolescence risks, as well as price erosion risks for products that are sold out of inventory stocked at our distribution facilities. These risks are especially significant because many of the products we sell are characterized by rapid technological change, obsolescence and price erosion, and because our distribution facilities sometimes stock large quantities of particular types of inventory. There can be no assurance that we will be able to identify and offer products necessary to remain competitive, maintain our gross margins, or avoid or minimize losses related to excess and obsolete inventory. We currently have limited return rights with respect to products we purchase from Apple, HP and certain other vendors, but these rights vary by product line, are subject to specified conditions and limitations, and can be terminated or changed at any time.

 

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

 

We require substantial working capital to fund our business. We believe that our current working capital, including our existing cash balance, together with our expected future cash flows from operations and available borrowing capacity under our existing credit facility, which functions as a working capital line of credit, will be adequate to support our current operating plans for at least the next twelve months. However, if we need additional financing, such as for acquisitions or expansion of our business or the businesses of our subsidiaries or to finance our operations during a significant downturn in sales or an increase in operating expenses, there are no assurances that adequate financing will be available on acceptable terms, if at all. We may in the future seek additional financing from public or private debt or equity financings to fund additional expansion, or take advantage of strategic opportunities or favorable market conditions. There can be no assurance such financings will be available on terms favorable to us or at all. To the extent any such financings involve the issuance of equity securities, existing stockholders could suffer dilution. If we raise additional financing through the issuance of equity, equity-related or debt securities, those securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders will experience dilution of their ownership interests. If additional financing is required but not available, we would have to implement further measures to conserve cash and reduce costs. However, there is no assurance that such measures would be successful. Our failure to raise required additional financing could adversely affect our ability to maintain, develop or enhance our product offerings, take advantage of future strategic opportunities, respond to competitive pressures or continue operations.

 

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Economic volatility and geopolitical uncertainty could result in disruptions of the capital and credit markets. Problems in these areas could have a negative impact on our ability to obtain future financing if we need additional funds, such as for acquisitions or expansion, to fund changes in our sales or an increase in our operating expenses, or to take advantage of strategic opportunities or favorable market conditions. We may seek additional financing from public or private debt or equity issuances; however, there can be no assurance that such financing will be available at acceptable terms, if at all. Also, there can be no assurance that the cost or availability of future borrowings, if any, under our credit facility or in the debt markets will not be impacted by disruptions in the capital and credit markets.

 

Rising interest rates could negatively impact our results of operations and financial condition.

 

A significant portion of our working capital requirements and our real estate acquisitions have historically been funded through borrowings under our working capital credit facility or through long term notes.  These facilities bear interest at variable rates tied to the LIBOR or prime rate, and the long term notes generally have initial terms of between five and seven years. If the variable interest rates on our borrowings increase, we could incur greater interest expense than we have in the past. Rising interest rates, and our increased interest expense that would result from them, could negatively impact our results of operations and financial condition.

 

We may be subject to claims regarding our intellectual property, including our business processes, or the products, services or solutions we sell, any of which could result in expensive litigation, distract our management or force us to enter into costly royalty or licensing agreements.

 

Third parties have asserted, and may in the future assert, that our business or the technologies we use or sell infringe on their intellectual property rights. As a result, we may be subject to intellectual property legal proceedings and claims in the ordinary course of our business. We cannot predict whether third parties will assert additional claims of infringement against us in the future or whether any future claims will prevent us from offering popular products or operating our business as planned. If we are forced to defend against any third-party infringement claims, whether they are with or without merit or are determined in our favor, we could face expensive and time-consuming litigation, which could result in the imposition of a preliminary injunction preventing us from continuing to operate our business as currently conducted throughout the duration of the litigation or distract our technical and management personnel. If we are found to infringe, we may be required to pay monetary damages, which could include treble damages and attorneys’ fees for any infringement that is found to be willful, and either be enjoined or required to pay ongoing royalties with respect to any technologies found to infringe. Further, as a result of infringement claims either against us or against those who license technology to us, we may be required, or deem it advisable, to develop non-infringing technology, which could be costly and time consuming, or enter into costly royalty or licensing agreements. Such royalty or licensing agreements, if required, may be unavailable on terms that are acceptable to us, or at all. If a third party successfully asserts an infringement claim against us and we are enjoined or required to pay monetary damages or royalties or we are unable to develop suitable non-infringing alternatives or license the infringed or similar technology on reasonable terms on a timely basis, our business, results of operations and financial condition could be materially harmed. Similarly, we may be required incur substantial monetary and diverted resource costs in order to protect our intellectual property rights against infringement by others.

 

Furthermore, we sell products and solutions manufactured and distributed by third parties, some of which may be defective. If any product or solution that we sell were to cause physical injury or damage to property, the injured party or parties could bring claims against us as the retailer of the product or solution. Our insurance coverage may not be adequate to cover every claim that could be asserted. If a successful claim were brought against us in excess of our insurance coverage, it could expose us to significant liability. Even unsuccessful claims could result in the expenditure of funds and management time and could decrease our profitability.

 

Costs and other factors associated with pending or future litigation could materially harm our business, results of operations and financial condition.

 

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

 

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

 

We may be required to expand or change our product, services and solutions categories or offerings, our websites or our processing systems in order to compete in our highly competitive and rapidly changing industry or to efficiently operate our business. Any failure on our part to expand or change the way we do business in a cost-effective and timely manner in response to any such requirements would likely adversely affect our operating results, financial condition or future prospects. Additionally, we cannot assure you that we will be successful in implementing any such changes when and if they are required.

 

We have generated substantial portions of our revenue in the past from the sale of computer hardware, software and accessories and consumer electronics products. Expansion into new product, service and solutions categories, including for example our efforts to grow our value-added services and solutions, may require us to incur significant marketing expenses, develop relationships with new vendors and comply with new regulations. We may lack the necessary expertise in a new category to realize the expected benefits of that new category. These requirements could strain our managerial, financial and operational resources. Additional challenges that may affect our ability to expand into new product, service or solutions categories include our ability to:

 

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

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

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

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

·             successfully market our new categories or offerings to existing customers;

·             maintain or improve our gross margins and fulfillment costs;

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

·             manage our inventory in new product categories.

 

We cannot be certain that we will be able to successfully address any or all of these challenges in a manner that will enable us to expand our business into new categories in a cost-effective or timely manner. If our new categories are not received favorably, or if our suppliers fail to meet our customers’ expectations, our results of operations would suffer and our reputation and the value of the applicable new brand and our other brands could be damaged. The lack of market acceptance of our new categories or our inability to generate satisfactory revenue from any such expanded offerings to offset their cost could harm our business, financial condition or results of operations.

 

We may not be able to attract and retain key personnel such as senior management, sales, services and solutions personnel or information technology specialists.

 

Our future performance will depend to a significant extent upon the efforts and abilities of certain key management and other personnel, including Frank F. Khulusi, our Chairman of the Board and Chief Executive Officer, as well as other executive officers and senior management. The loss of service of one or more of our key management members could have a material adverse effect on our business. Our success and plans for future growth will also depend in part on our management’s continuing ability to hire, train and retain skilled personnel in all areas of our business such as sales, service and solutions personnel and IT personnel. For example, our management information systems and processes require the services of employees with extensive knowledge of these systems and processes and the business environment in which we operate, and in order to successfully implement and operate our systems and processes we must be able to attract and retain a significant number of information technology specialists. We may not be able to attract, train and retain the skilled personnel required to, among other things, implement, maintain, and operate our information systems and processes, and any failure to do so would likely have a material adverse effect on our operations.

 

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

 

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

 

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Any inability to effectively manage our growth may prevent us from successfully expanding our business.

 

The growth of our business has required us to make significant additions in personnel and has significantly increased our working capital requirements. Although we have experienced significant sales growth in the past, such growth should not be considered indicative of future sales growth. Such growth has resulted in new and increased responsibilities for our management personnel and has placed and continues to place significant strain upon our management, operating and financial systems, and other resources. Any future growth, whether organic or through acquisition, may result in increased strain. There can be no assurance that current or future strain will not have a material adverse effect on our business, financial condition, and results of operations, nor can there be any assurance that we will be able to attract or retain sufficient personnel to continue the expansion of our operations. Also crucial to our success in managing our growth will be our ability to achieve additional economies of scale. We cannot assure you that we will be able to achieve such economies of scale, and the failure to do so could have a material adverse effect upon our business, financial condition or results of operations.

 

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

 

We incur substantial expense in connection with our advertising and marketing efforts. Although we target our advertising and marketing efforts on current and potential customers who we believe are likely to be in the market for the products we sell, we cannot assure you that our advertising and marketing efforts will achieve our desired results. In December 2012, we unified many of our commercial brands. While we believe this unification will lead to an improved customer experience, operational synergies and benefits to all of our stakeholders, we are unable to quantify all of the synergies or potential future costs related to our rebranding strategy. In addition, we periodically adjust our advertising expenditures in an effort to optimize the return on such expenditures. Any decrease in the level of our advertising expenditures which may be made to optimize such return could adversely affect our sales.

 

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

 

Business customers who qualify are provided credit terms and while we monitor individual customer payment capability and maintain reserves we believe are adequate to cover exposure for doubtful accounts, we have exposure to credit risk in the event that customers fail to meet their payment obligations. Additionally, to the degree that there may be tightness in the credit markets that makes it more difficult for some customers to obtain financing, those customers’ ability to meet their payment obligations to us could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.

 

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

 

We make allowances for product returns in our consolidated financial statements based on historical return rates. We are responsible for returns of certain products shipped from our distribution center, as well as products that are shipped to our customers directly from our vendors. If our actual product returns significantly exceed our allowances for returns, our revenue and profitability could decrease. In addition, because our allowances are based on historical return rates, the introduction of new merchandise categories, new products, changes in our product mix, or other factors may cause actual returns to exceed return allowances, perhaps significantly. In addition, any policies that we adopt that are intended to reduce the number of product returns may result in customer dissatisfaction and fewer repeat customers.

 

Our business may be harmed by fraudulent activities on our websites.

 

We have received in the past, and anticipate that we will receive in the future, communications from customers due to purported fraudulent activities on our websites, including fraudulent credit card transactions. Negative publicity generated as a result of fraudulent conduct by third parties could damage our reputation and diminish the value of our brand name. Fraudulent activities on our websites could also subject us to losses and could lead to scrutiny from lawmakers and regulators regarding the operation of our websites. We expect to continue to receive requests from customers for reimbursement due to purportedly fraudulent activities or threats of legal action against us if no reimbursement is made.

 

We may be liable for misappropriation of our customers’ personal information.

 

If third parties or our employees are able to penetrate our network security or otherwise misappropriate our customers’ personal information or credit card information, or such information for which our customers may be responsible and for which we agree to be responsible in connection with service contracts we may enter, or if we give third parties or our employees improper access to any such personal information or credit card information, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, identity theft or other similar fraud-related claims. This liability could also

 

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include claims for other misuses of personal information, including for unauthorized marketing purposes. Other liability could include claims alleging misrepresentation or our privacy and data security practices. Any such liability for misappropriation of this information could decrease our profitability. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding whether they misused or inadequately secured personal information regarding consumers. We could incur additional expenses if new laws or regulations regarding the use of personal information are introduced or if government agencies investigate our privacy practices.

 

We seek to rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure online transmission of confidential information such as customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive customer transaction data. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. Our security measures are designed to protect against security breaches, but our failure to prevent such security breaches could cause us to incur significant expense to investigate and respond to a security breach and correct any problems caused by any breach, subject us to liability, damage our reputation and diminish the value of our brand-name.

 

Laws or regulations relating to privacy and data protection may adversely affect the growth of our Internet business or our marketing efforts.

 

We mail catalogs and send electronic messages to names in our proprietary customer database and to potential customers whose names we obtain from rented or exchanged mailing lists. Worldwide public concern regarding personal privacy has subjected the rental and use of customer mailing lists and other customer information to increased scrutiny and regulation. As a result, we are subject to increasing regulation relating to privacy and the use of personal information. For example, we are subject to various telemarketing and anti-spam laws that regulate the manner in which we may solicit future suppliers and customers. Such regulations, along with increased governmental or private enforcement, may increase the cost of operating and growing our business. In addition, several states have proposed legislation that would limit the uses of personal information gathered online or require online services to establish privacy policies. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from children under 13 years of age. Bills proposed in Congress would expand online privacy protections already provided to adults. Moreover, both in the United States and elsewhere, laws and regulations are becoming increasingly protective of consumer privacy, with a trend toward requiring companies to establish procedures to notify users of privacy and security policies, to obtain consent from users for collection and use of personal information, and to provide users with the ability to access, correct and delete personal information stored by companies. Such privacy and data protection laws and regulations, and efforts to enforce such laws and regulations, may restrict our ability to collect, use or transfer demographic and personal information from users, which could be costly or harm our marketing efforts. Further, any violation of domestic or foreign privacy or data protection laws and regulations, including the national do-not-call list, may subject us to fines, penalties and damages, which could decrease our revenue and profitability.

 

The security risks of eCommerce may discourage customers from purchasing products, services or solutions from us.

 

In order for the eCommerce market to be successful, we and other market participants must be able to transmit confidential information securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction data. Any breach could cause customers to lose confidence in the security of our websites and choose not to purchase from our websites. If someone is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Concerns about the security and privacy of transactions over the Internet could inhibit the growth of Internet usage and eCommerce. Our security measures may not effectively prohibit others from obtaining improper access to our information. Any security breach could expose us to risks of loss, litigation and liability and could seriously damage our reputation, disrupt our operations and require the devotion of significant management, financial and other resources to remedy the breach and comply with applicable notice and other legal requirements in connection therewith.

 

Credit card fraud could decrease our revenue and profitability.

 

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

 

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Our facilities and systems are vulnerable to natural disasters or other catastrophic events.

 

Our headquarters, customer service center and a part of our infrastructure, including computer servers, are located near Los Angeles, California and in other areas that are susceptible to earthquakes, floods, severe weather and other natural disasters. Our distribution facilities, which are located in Memphis, Tennessee, Irvine, California and Lewis Center, Ohio, house the product inventory from which a substantial majority of our orders are shipped, and are also in areas that are susceptible to natural disasters and extreme weather conditions such as earthquakes, fire, floods and major storms. Our operations in the Philippines are also in an area that is periodically subject to extreme weather. A natural disaster or other catastrophic event, such as an earthquake, fire, flood, severe storm, break-in, terrorist attack or other comparable events in the areas in which we operate could cause interruptions or delays in our business and loss of data or render us unable to accept and fulfill customer orders in a timely manner, or at all. Our systems, including our management information systems, websites and communications systems, are not fully redundant, and we do not have redundant geographic locations or earthquake insurance. Further, power outages in any locations where our systems are located could disrupt our operations. We currently are in process of developing a formal disaster recovery plan and certain of our subsidiaries have geographical redundancies for web and critical information systems. Our business interruption insurance may not adequately compensate us for losses that may occur.

 

We rely on independent shipping companies to deliver the products we sell.

 

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

 

·             reduced visibility of order status and package tracking;

·             delays in order processing and product delivery;

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

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

 

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

 

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

 

The business of direct marketing of the products, services and solutions we sell is highly competitive and driven in large part by price, product, service and solutions availability, speed and accuracy of delivery and performance, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, availability of talented sales and service personnel and the availability of technical information. We compete with other direct marketers, including CDW, Insight Enterprises and PC Connection. In addition, we compete with large value added resellers such as CompuCom Systems and World Wide Technology, and computer retail stores and resellers, including superstores such as Best Buy and Staples, certain hardware and software vendors such as Apple and Dell Computer that sell or are increasing sales directly to end users, online resellers such as Amazon.com, Newegg.com and TigerDirect.com, government resellers such as GTSI, CDWG and GovConnection, software focused resellers such as Soft Choice and Software House International and other direct marketers and value added resellers of hardware, software and computer-related and electronic products. In the direct marketing and Internet retail industries, barriers to entry are relatively low and the risk of new competitors entering the market is high. Certain of our existing competitors have substantially greater financial resources than we have. There can be no assurance that we will be able to continue to compete effectively against existing competitors, consolidations of competitors or new competitors that may enter the market.

 

Furthermore, the manner in which our products, services and solutions are distributed and sold is changing, and new methods of sale and distribution have emerged and serve an increasingly large portion of the market. Computer hardware and software OEM vendors have sold, and may intensify their efforts to sell, their products directly to end users. From time to time, certain OEM vendors, including Apple and HP, have instituted programs for the direct sale of large quantities of hardware and software to certain large business accounts. These types of programs may continue to be developed and used by various OEM vendors. Software publishers also may attempt to increase the volume of software products distributed electronically directly to end users’ personal computers. Any of these competitive programs, if successful, could have a material adverse effect on our business, financial condition or results of operations.

 

Our success is tied to the continued use of the Internet and the adequacy of the Internet infrastructure.

 

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

 

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

 

We maintain a Canadian call center serving the U.S. market, which receives benefit of labor credits under the Investment Quebec Refundable Tax Credit for Major Employment Generating Projects (GPCE) program. In addition to other eligibility requirements under the program, which extends through fiscal year 2016, we are required to maintain a minimum of 317 eligible employees employed by our subsidiary, PCM Sales Canada in the province of Quebec. The success of our Canadian call center is dependent, in part, on our receipt of the government labor credits we expect to receive. If we do not receive these expected labor credits, or a sufficient portion of them, the costs of operating our Canadian call center may exceed the benefits it provides us and our operating results would likely suffer.

 

We are exposed to the risks of business and other conditions in the Asia Pacific region.

 

All or portions of certain of the products we sell are produced, or have major components produced, in the Asia Pacific region. We engage in U.S. dollar denominated transactions with U.S. divisions and subsidiaries of companies located in that region as well. As a result, we may be indirectly affected by risks associated with international events, including economic and labor conditions, political instability, tariffs and taxes, availability of products, natural disasters and currency fluctuations in the U.S. dollar versus the regional currencies. In the past, countries in the Asia Pacific region have experienced volatility in their currency, banking and equity markets. Future volatility could adversely affect the supply and price of the products we sell and their components and ultimately, our results of operations.

 

We maintain an office in the Philippines and we may increase these and other offshore operations in the future. Establishing offshore operations may entail considerable expense before we realize cost savings, if any, from these initiatives. The risks associated with doing business overseas and international events could prevent us from realizing the expected benefits from our Philippines operations or any other offshore operations that we establish.

 

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

 

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

 

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

 

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

 

·             political unrest or uncertainties;

·             wage inflation;

·             exposure to foreign currency fluctuations;

·             tariffs and other trade barriers; and

·             foreign regulatory restrictions and unexpected changes in regulatory environments.

 

42



 

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

 

International operations expose us to currency exchange risk and we cannot predict the effect of future exchange rate fluctuations on our business and operating results.

 

We have operation centers in Canada and the Philippines that provide back-office administrative support and customer service support. Our international operations are sensitive to currency exchange risks. We have currency exposure arising from both sales and purchases denominated in foreign currencies, as well as intercompany transactions. Significant changes in exchange rates between foreign currencies in which we transact business and the U.S. dollar may adversely affect our results of operations and financial condition. Historically, we have not entered into any hedging activities, and, to the extent that we continue not to do so in the future, we may be vulnerable to the effects of currency exchange-rate fluctuations.

 

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

 

We are subject to risks associated with consolidation within our industry.

 

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

 

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

 

Our ability to provide satisfactory levels of customer service depends, to a large degree, on the efficient and uninterrupted operation of our customer service operations. Any material disruption or slowdown in our order processing systems resulting from labor disputes, telephone or Internet failures, upgrading our management information systems, power or service outages, natural disasters or other events could make it difficult or impossible to provide adequate customer service and support. Furthermore, we may be unable to attract and retain adequate numbers of competent customer service representatives and relationship managers for our business customers, each of which is essential in creating a favorable interactive customer experience. If we are unable to continually provide adequate staffing and training for our customer service operations, our reputation could be seriously harmed and we could lose customers or fail to attract new customers. In addition, if our e-mail and telephone call volumes exceed our present system capacities, we could experience delays in placing orders, responding to customer inquiries and addressing customer concerns. Because our success depends largely on keeping our customers satisfied, any failure to provide high levels of customer service would likely impair our reputation and decrease our revenues.

 

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Our stock price may be volatile.

 

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

 

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

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

·             publication of research reports by analysts;

·             changes in market valuations of similar companies;

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

·             actual or anticipated fluctuations in our operating results;

·             litigation developments; and

·             general economic and market conditions or other economic factors unrelated to our performance, including disruptions in the capital and credit markets.

 

The stock market in general, and the stocks of computer and software resellers, and companies in the Internet and electronic commerce industries in particular, and other technology or related stocks, have in the past experienced extreme price and volume fluctuations which have been unrelated to corporate operating performance. Such market volatility may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against that company. Such litigation, if asserted against us, could result in substantial costs to us and cause a likely diversion of our management’s attention from the operations of our company.

 

***

 

44



 

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

 

Issuer Purchases of Equity Securities

 

In September 2012, our Board of Directors approved a $10 million increase to our discretionary stock repurchase program, which was originally adopted in October 2008 with an initial authorized maximum of $10 million. Under the program, shares may be repurchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending on market conditions. We expect that the repurchase of our common stock under the program will be financed with existing working capital and amounts available under our existing credit facility. No limit was placed on the duration of the repurchase program. There is no guarantee as to the exact number of shares that we will repurchase. Subject to applicable securities laws, repurchases may be made at such times and in such amounts as our management deems appropriate. The program can also be discontinued at any time management feels additional purchases are not warranted. During the three and six months ended June 30, 2013, we repurchased a total of 8,907 and 227,051 shares of our common stock, respectively, under this program for a cost of approximately $67,000 and $1.6 million, respectively. From the inception of the program in October 2008 through June 30, 2013, we have repurchased an aggregate total of 2,837,319 shares of our common stock for a total cost of $14.3 million. The repurchased shares are held as treasury stock. At June 30, 2013, we had $5.7 million available in stock repurchases under the program, subject to any limitations that may apply from time to time under our existing credit facility.

 

A summary of the repurchase activity for the three months ended June 30, 2013 is as follows (dollars in thousands, except per share amounts):

 

 

 

Total Number of
Shares Purchased

 

Average Price
Paid Per Share

 

Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs

 

Maximum Dollar
Value that May
Yet Be Purchased
Under the Plans
or Programs

 

April 1, 2013 to April 30, 2013

 

 

$

 

 

$

5,814

 

May 1, 2013 to May 31, 2013

 

8,907

 

7.55

 

8,907

 

5,747

 

June 1, 2013 to June 30, 2013

 

 

 

 

 

 

Total

 

8,907

 

 

 

8,907

 

 

 

 

ITEM 5. OTHER INFORMATION

 

The following disclosure would otherwise be filed on Form 8-K under the heading “Item 5.02 — Departure  of Directors or Certain Officers; Election of Directors; Appointment of  Certain Officers; Compensatory Arrangements of Certain Officers.”

 

On August 5, 2013, the Compensation Committee of the Board of Directors approved the total amount of cash incentive opportunity available to our Chairman, Chief Executive Officer and President, Frank Khulusi, under the 2013 Executive Incentive Plan adopted by the Committee and our Board of Directors in May 2013 in the total cash incentive amount equal to 62% of Mr. Khulusi’s base salary. Such cash incentive amounts will be paid to Mr. Khulusi in accordance with the Plan described in more detail in Exhibit 10.2 to this Report.

 

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ITEM 6. EXHIBITS

 

Exhibit
Number

 

Description

 

 

 

10.1

 

First Amendment to Third Amended and Restated Loan and Security Agreement, dated May 17, 2013

 

 

 

10.2*

 

Summary of Executive Bonus Plan

 

 

 

10.3*

 

Summary of Executive Salary and Bonus Arrangements

 

 

 

10.4*

 

Form of Restricted Stock Unit Agreement under the PCM, Inc. 2012 Equity Incentive Plan (full acceleration upon change of control) (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of PCM, Inc. (File No. 0-25790) filed with the Commission on May 24, 2013)

 

 

 

10.5*

 

Form of Restricted Stock Unit Agreement under the PCM, Inc. 2012 Equity Incentive Plan (partial acceleration upon change of control) (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of PCM, Inc. (File No. 0-25790) filed with the Commission on May 24, 2013)

 

 

 

31.1

 

Certification of the Chief Executive Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a)

 

 

 

31.2

 

Certification of the Chief Financial Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a)

 

 

 

32.1

 

Certification of the Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of the Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS**

 

XBRL Instance Document

 

 

 

101.SCH**

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL**

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF**

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB**

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE**

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


*       Management contract, or compensatory plan or arrangement.

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

 

***

 

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PCM, INC.