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, 2016

 

OR

 

[  ] 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
incorporation or organization)
  (I.R.S. Employer
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 [  ]

 

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 [  ]

 

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 [  ]   Accelerated filer [X]
     
Non-accelerated filer [  ]   Smaller reporting company [  ]

 

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

 

As of August 3, 2016, the registrant had 11,672,526 shares of common stock outstanding.

 

 

 

   
 

 

PCM, INC.

 

TABLE OF CONTENTS

 

  Page
PART I - FINANCIAL INFORMATION  
   
Item 1. Financial Statements (unaudited)  
   
Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 2
   
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 3
   
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015 4
   
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 5
   
Notes to the Condensed Consolidated Financial Statements 6
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
   
Item 4. Controls and Procedures 30
   
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings 31
   
Item 1A. Risk Factors 31
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
   
Item 6. Exhibits 45
   
Signature 46

  

 1 
   

 

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, 2016   December 31, 2015 
ASSETS          
Current assets:          
Cash and cash equivalents   $9,203   $11,176 
Accounts receivable, net of allowances of $479 and $558    396,454    341,018 
Inventories    85,462    55,386 
Prepaid expenses and other current assets    28,260    17,880 
Deferred income taxes    3,433    4,425 
Asset held for sale    5,812    5,812 
Total current assets    528,624    435,697 
Property and equipment, net    54,854    56,774 
Goodwill    81,486    80,552 
Intangible assets, net    18,058    20,807 
Deferred income taxes    898    939 
Other assets    4,539    5,404 
Total assets   $688,459   $600,173 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable   $339,248   $201,524 
Accrued expenses and other current liabilities    62,290    51,580 
Deferred revenue    23,370    11,455 
Line of credit    93,301    162,439 
Notes payable — current    12,225    12,912 
Note payable related to asset held for sale    4,700    4,799 
Current liabilities of discontinued operations    150    153 
Total current liabilities    535,284    444,862 
Notes payable    19,752    21,454 
Other long-term liabilities    13,940    20,289 
Deferred income taxes    3,882    4,053 
Total liabilities    572,858    490,658 
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; 16,151,377 and 16,007,613 shares issued; 11,653,012 and 11,914,946 shares outstanding    16    16 
Additional paid-in capital    124,400    122,932 
Treasury stock, at cost: 4,498,365 and 4,092,667 shares    (26,934)   (23,326)
Accumulated other comprehensive loss    (101)   (765)
Retained earnings    18,220    10,658 
Total stockholders’ equity    115,601    109,515 
Total liabilities and stockholders’ equity   $688,459   $600,173 

 

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,
 
   2016   2015   2016   2015 
Net sales   $580,994   $478,871   $1,079,023   $774,830 
Cost of goods sold    497,995    416,905    925,717    673,759 
Gross profit    82,999    61,966    153,306    101,071 
Selling, general and administrative expenses    69,634    61,116    138,422    105,428 
Operating profit (loss)    13,365    850    14,884    (4,357)
Interest expense, net    1,461    872    2,935    1,643 
Income (loss) from continuing operations before income taxes    11,904    (22)   11,949    (6,000)
Income tax expense (benefit)    4,498    (197)   4,387    (2,651)
Income (loss) from continuing operations    7,406    175    7,562    (3,349)
Income from discontinued operations, net of taxes        74        43 
Net income (loss)   $7,406   $249   $7,562   $(3,306)
                     
Basic and Diluted Earnings (Loss) Per Common Share                    
Basic EPS:                    
Income (loss) from continuing operations   $0.63   $0.01   $0.64   $(0.27)
Income from discontinued operations, net of taxes        0.01        0.00 
Net income (loss)   $0.63   $0.02   $0.64   $(0.27)
                     
Diluted EPS:                    
Income (loss) from continuing operations   $0.61   $0.01   $0.62   $(0.27)
Income from discontinued operations, net of taxes        0.01        0.00 
Net income (loss)   $0.61   $0.02   $0.62   $(0.27)
                     
Weighted average number of common shares outstanding:                    
Basic    11,715    12,106    11,796    12,156 
Diluted    12,211    12,665    12,262    12,156 

 

See Notes to the Condensed Consolidated Financial Statements.

 

 3 
   

 

PCM, INC.

 

CONDENSED CONSOLIDATED STATEMENTS

OF COMPREHENSIVE INCOME (LOSS)

(unaudited, in thousands)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2016   2015   2016   2015 
Net income (loss)   $7,406   $249   $7,562   $(3,306)
                     
Comprehensive income (loss):                    
Foreign currency translation adjustments    42    125    664    (699)
Total other comprehensive income (loss)    42    125    664    (699)
Comprehensive income (loss)   $7,448   $374   $8,226   $(4,005)

 

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,
 
   2016   2015 
Cash Flows From Operating Activities          
Net income (loss)   $7,562   $(3,306)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization    8,047    5,915 
Write-off of software work in process        3,327 
Provision for deferred income taxes    813    (1,504)
Excess tax benefit related to stock option exercises    (52)   (185)
Non-cash stock-based compensation    1,004    865 
Change in operating assets and liabilities:          
Accounts receivable    (55,514)   (174,370)
Inventories    (30,147)   5,801 
Prepaid expenses and other current assets    (10,228)   (13,810)
Other assets    1,127    (1,152)
Accounts payable    153,977    158,220 
Accrued expenses and other current liabilities    10,697    4,685 
Deferred revenue    11,915    11,679 
Total adjustments    91,639    (529)
Net cash provided by (used in) operating activities    99,201    (3,835)
Cash Flows From Investing Activities          
Acquisition of assets of En Pointe        (17,295)
Acquisition of assets of Systemax    (400)    
Acquisition of Acrodex    (93)    
Purchases of property and equipment    (2,461)   (17,238)
Net cash used in investing activities    (2,954)   (34,533)
Cash Flows From Financing Activities          
Net borrowings (payments) under line of credit    (69,138)   16,363 
Borrowings under notes payable        17,694 
Payments under notes payable    (2,488)   (2,221)
Change in book overdraft    (16,266)   11,223 
Payments of obligations under capital leases    (1,280)   (1,207)
Payments of earn-out liability    (5,886)   (1,975)
Proceeds from stock issued under stock option plans    726    540 
Payments for deferred financing costs    (404)   (646)
Common shares repurchased and held in treasury    (3,608)   (3,059)
Excess tax benefit related to stock option exercises    52    185 
Net cash provided by (used in) financing activities    (98,292)   36,897 
Effect of foreign currency on cash flow    72    (507)
Net change in cash and cash equivalents    (1,973)   (1,978)
Cash and cash equivalents at beginning of the period    11,176    8,892 
Cash and cash equivalents at end of the period   $9,203   $6,914 
Supplemental Cash Flow Information          
Interest paid   $2,558   $1,551 
Income taxes paid (refund), net    (153)   290 
Supplemental Non-Cash Investing and Financing Activities          
Earn-out liability   $   $32,500 
Financed purchase of property and equipment    711    624 

 

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, field and internal service teams, direct marketing channels and state of the art owned and operated data centers. Since our founding in 1987, we have served our customers by offering products and services from vendors such as Adobe, Apple, Cisco, Dell, Hewlett Packard Enterprise, HP Inc., Lenovo, Microsoft, Oracle, Samsung, Symantec and VMware. 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 small, medium and enterprise businesses, state, local and federal governments and educational institutions.

 

We have prepared the unaudited condensed 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 condensed 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, 2015 filed with the SEC.

 

In February 2016, we transitioned out nearly the entire management overhead of our MacMall business, thinned out its cost structure and brought it under the management and supervision of our Commercial segment. Also, in connection with our acquisitions of Acrodex and certain assets of Systemax’s North American Technology Group in the fourth quarter of 2015 and our resulting entrance into selling products, services and solutions in the Canadian market, we formed a new operating segment called Canada. This segment includes our operations related to these Canadian market activities, beginning as of the respective dates of these acquisitions. As a result, beginning in 2016, we have the following three operating segments: Commercial, Public Sector and Canada.

 

We discontinued the operation of all four of our retail stores, located in Huntington Beach, Santa Monica and Torrance, California and Chicago, Illinois, and our OnSale and eCost businesses in 2014. We reflected the results of these operations, which were historically reported as a part of our MacMall segment, as discontinued operations for all periods presented herein in our Consolidated Balance Sheets and Consolidated Statements of Operations.

 

We sell primarily to customers in the United States and Canada, and maintain offices in the United States and Canada, as well as in Manila, Philippines. During the three months ended June 30, 2016, we generated approximately 77% of our revenue in our Commercial segment, 17% of our revenue in our Public Sector segment and 6% of our revenue in our Canada segment. During the six months ended June 30, 2016, we generated approximately 77% of our revenue in our Commercial segment, 16% of our revenue in our Public Sector segment and 7% of our revenue in our Canada 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 online extranets.

 

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 Canada segment consists of sales made to customers in the Canadian market beginning as of the respective dates of our acquisition of Acrodex and certain assets of Systemax in October and December 2015, respectively.

 

 6 
   

 

2. New Accounting Standards

 

In March, 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718) - Improvements to Employee Share-Based Accounting,” which simplifies several aspects of accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory state tax withholding requirements, as wells as classification in statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the effects that the adoption of ASU 2016-09 will have on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which amends the principal-versus-agent implementation guidance and illustration in the Board’s revenue standard (ASC 606). In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing,” including updates which are intended to reduce the cost and complexity of applying guidance on identifying promised goods and services under ASC 606. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients,” which clarifies certain narrow aspects of Topic 606 such as assessing the collectability criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition, and technical correction. ASUs 2016-08, 2016-10 and 2016-12 have the same effective date as the new revenue standard, as amended by a one-year deferral and early adoption provision in ASU 2015-14. See discussion of ASU 2015-14 below. We are required to adopt ASU 2016-08 using the same transition method as elected for ASU 2015-14. We are currently evaluating the effects that the adoption of these ASUs will have on our consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. ASU 2016-02 requires a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, and provides certain practical expedients that companies may elect. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the effects that the adoption of ASU 2016-02 will have on our consolidated financial statements.

 

In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date,” which defers the effective date of ASU 2014-09, “Revenues from Contracts with Customers (Topic 606),” for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods with that reporting period. Retrospective or modified retrospective application of the accounting standard is required. We are evaluating the impact of the standard on our consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation,” which amends the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. We adopted ASU 2015-02 effective January 1, 2016 and it did not have an effect on our consolidated financial statements.

 

In January 2015, the FASB issued ASU 2015-01, “Income Statement - Extraordinary and Unusual Items,” with the objective of simplifying income statement presentation requirements by eliminating the concept of extraordinary items from GAAP, but retaining current presentation and disclosure requirements for an event or transaction that is of an unusual nature or of a type that indicates infrequency of occurrence. ASU 2015-01 is effective prospectively for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. We adopted ASU 2015-01 effective January 1, 2016 and it did not have an effect on our consolidated financial statements.

 

There have been no other material changes or additions to the recently issued accounting standards as previously reported in Note 2 to our Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015 that materially affected or may materially affect our financial statements.

 

 7 
   

 

3. Acquisitions

 

Systemax

 

On December 1, 2015, we completed the acquisition of certain Business to Business (B2B) assets of Systemax’s North American Technology Group (NATG) for $14 million in cash. As of June 30, 2016, there has been no change from December 31, 2015 on the preliminary accounting for the Systemax asset acquisition and the related purchase price allocation. We continue to obtain information relative to the fair values of certain assets acquired and certain liabilities assumed in the transaction. We expect to finalize the final fair value determination and purchase price allocation for the Systemax asset acquisition as soon as practicable but within a year of the closing of the acquisition.

 

In January 2016, we exercised an option in our purchase agreement and paid $0.4 million related to our purchase of additional customer list information, which was recorded as an increase to goodwill associated with the Systemax assets acquisition.

 

Acrodex

 

On October 26, 2015, PCM Sales Canada, Inc., a wholly-owned subsidiary of PCM, Inc., completed the acquisition of all the outstanding common stock of Acrodex, Inc. (“Acrodex”) for a total purchase price of approximately C$16.7 million (or $13.6 million, net of cash acquired). In March 2016 and June 2016, we paid an additional $0.2 million and $0.1 million, respectively, related to adjustments to the net asset value as defined in the agreement, which was recorded as an increase to goodwill resulting from the Acrodex acquisition. As of June 30, 2016, there has been no other change from December 31, 2015 on the preliminary accounting for the Acrodex acquisition and the related purchase price allocation. We continue to obtain information relative to the fair values of certain assets acquired and certain liabilities assumed in the transaction. We expect to finalize the final fair value determination and purchase price allocation for the Acrodex acquisition as soon as practicable but within a year of the closing of the acquisition.

 

En Pointe

 

As part of our acquisition of certain assets of En Pointe in April 2015, we agreed to pay certain contingent earn-out consideration, including 22.5% of the future adjusted gross profit of the business and 10% of certain service revenues over the three years following the closing of the acquisition. As of June 30, 2016 and December 31, 2015, we have estimated that the fair value of contingent consideration to be paid throughout the earn-out period ending March 31, 2018 to be approximately $38.6 million, reflecting no change to the fair value of this contingent consideration during the six months ended June 30, 2016.

 

During the three and six months ended June 30, 2016, we made $3.0 and $5.9 million, respectively, of earn-out payments to the sellers of En Pointe. As of June 30, 2016, we had $13.6 million and $10.2 million of accrued earn-out liability included in “Accrued expenses and other current liabilities” and “Other long-term liabilities,” respectively, on our Condensed Consolidated Balance Sheets. As of December 31, 2015, we had $13.2 million and $16.5 million of accrued earn-out liability included in “Accrued expenses and other current liabilities” and “Other long-term liabilities,” respectively, on our Condensed Consolidated Balance Sheets.

 

Following the completion of the acquisition on April 1, 2015, the results of our En Pointe operations, which generated $136.9 million of net sales and $10.3 million of operating profit during the three months ended June 30, 2015, have been included in the results of our Commercial and Public Sector business segments for the three months and six months ended June 30, 2015. Thereafter, we fully integrated the operations of En Pointe into various areas of our business and it became impracticable to compute En Pointe’s operating profit included in our results of operations for periods beginning subsequent to June 30, 2015.

 

The following table sets forth our results of operations on a pro forma basis as though the En Pointe acquisition had been completed as of the beginning of the period presented (in thousands, except per share amounts):

 

  

Six Months Ended

June 30, 2015

 
Net sales   $892,857 
Operating loss    (3,406)
Loss from continuing operations    (5,128)
Net loss    (2,819)
Basic and Diluted Loss Per Common Share     
Basic   $(0.23)
Diluted    (0.23)
Weighted average number of common shares outstanding:     
Basic    12,156 
Diluted    12,156 

 

 8 
   

 

4. Property and Equipment

 

In September 2015, we listed our real property located in Irvine, California (the “Irvine Property”) for sale. The Irvine Property includes approximately 60,000 square feet of office and warehouse space and land. Under a broker agreement, the Irvine Property was available for immediate sale in its present condition. As of June 30, 2016, we classified $5.8 million related to the Irvine Property, stated at lower of cost or fair value, as “Property held for sale” and $4.7 million related to the mortgage on the Irvine Property as “Note payable related to asset held for sale” on our Condensed Consolidated Balance Sheet.

 

On April 27, 2016, we entered into an agreement with Spigen, Inc. (the “Buyer”) to sell the Irvine Property for approximately $13.2 million. The parties agreed to a 60-day escrow period. On June 23, 2016, we received notice of escrow cancellation from the Buyer effective immediately. As a result of the cancellation, the Buyer forfeited a non-refundable deposit of $300,000, which was released to us as liquidated damages in accordance with the agreement and we recorded it as part of “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016. The Irvine Property is available for sale.

 

5. Goodwill and Intangible Assets

 

Goodwill

 

The change in the carrying amounts of goodwill was as follows by segment (in thousands):

 

   Commercial   Public Sector   Canada   Total 
Balance at December 31, 2015   $69,335   $8,322   $2,895   $80,552 
Goodwill related to Acrodex acquisition            329    329 
Goodwill related to Systemax asset acquisition    400            400 
Foreign currency translation            205    205 
Balance at June 30, 2016   $69,735   $8,322   $3,429   $81,486 

 

Intangible Assets

 

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

 

   Weighted
Average
Estimated
   At June 30, 2016   At December 31, 2015 
   Useful Lives
(years)
   Gross
Amount
   Accumulated
Amortization
   Net
Amount
   Gross
Amount
   Accumulated
Amortization
   Net
Amount
 
Patent, trademarks, trade names & URLs    4   $7,713(1)  $1,275   $6,438   $7,675(1)  $585   $7,090 
Customer relationships    15    13,464    3,547    9,917    13,299    1,587    11,712 
Non-compete agreements    4    2,370    667    1,703    2,354    349    2,005 
Total intangible assets        $23,547   $5,489   $18,058   $23,328   $2,521   $20,807 

 

 

(1)Includes $2.9 million of trademarks with indefinite useful lives that are not amortized.

 

Amortization expense for intangible assets was approximately $1.4 million and $0.4 million for the three months ended June 30, 2016 and 2015 and $3.0 million and $0.5 million for the six months ended June 30, 2016 and 2015. Estimated amortization expense for intangible assets in each of the next five years and thereafter is as follows as of June 30, 2016: $2.9 million in the remainder of 2016, $4.1 million in 2017, $3.0 million in 2018, $1.8 million in 2019 and $3.3 million thereafter.

 

6. Discontinued Operations

 

During 2014, we discontinued the operation of all four of our retail stores, located in Huntington Beach, Santa Monica and Torrance, California and Chicago, Illinois, and our OnSale and eCost businesses. We reflected the results of these operations, which were historically reported as a part of our MacMall segment, as discontinued operations for all periods presented herein. The revenues, operating and non-operating results of the discontinued operations are reflected in a single line item entitled “Loss from discontinued operations, net of taxes” on our Condensed Consolidated Statements of Operations, and the related liabilities are presented in our Condensed Consolidated Balance Sheets in a line item entitled “Current liabilities of discontinued operations” for all periods presented herein.

 

 9 
   

 

The carrying amounts of major classes of liabilities that have been included in such balance sheet line item, as described above, in our Condensed Consolidated Balance Sheets were as follows (in thousands):

 

   June 30, 2016   December 31, 2015 
Accounts payable   $114   $117 
Accrued expenses and other current liabilities    36    36 
Current liabilities of discontinued operations   $150   $153 

 

The operating results of our discontinued operations reported in “Loss from discontinued operations, net of taxes” in our Condensed Consolidated Statements of Operations were as follows (in thousands):

 

  

Three Months

Ended
June 30, 2015

  

Six Months

Ended
June 30, 2015

 
Net sales   $(1)  $(7)
           
Income (loss) before income taxes   $109   $78 
Income tax expense (benefit)    35    35 
Income (loss) from discontinued operations, net of taxes…  $74   $43 

 

7. Debt

 

The following table sets forth our outstanding debt as of the periods presented (in thousands):

 

   June 30, 2016   December 31, 2015 
         
Revolving credit facility, LIBOR plus 1.50%, maturing in March 2019   $93,301 (1)   $162,439 (1) 
Note payable, LIBOR plus 1.50%, maturing in March 2019    9,071    9,848 
Note payable, LIBOR plus 1.50%, maturing in March 2019    1,522    1,653 
Note payable, greater of 2% or LIBOR plus 2.15%, maturing in April 2022    4,700 (2)    4,799 (2) 
Note payable, LIBOR plus 2.25%, maturing in January 2022    4,251    4,365 
Notes payable, 4.12%, 4.33% and 4.60%, maturing in March 2017    1,558    2,569 
Note payable, LIBOR plus 2.25%, maturing in January 2020    7,261    7,416 
Note payable, Prime plus 0.375% or LIBOR plus 2.375%, maturing in September 2016    8,314    8,515 
Total    129,978    201,604 
Less: Total current debt    110,226    180,150 
Total non-current debt   $19,752   $21,454 

 

(1) The outstanding balance on our revolving credit facility, which matures in March 2019, has been included as part of current debt to match the presentation on our Condensed Consolidated Balance Sheet.
(2) This note payable, related to the Irvine Property, has been presented on our Condensed Consolidated Balance Sheet as “Note payable related to asset held for sale” and is included as current debt. See Note 4 above for more information regarding the Irvine Property.

 

The following table sets forth the maturities of our outstanding debt balance as of June 30, 2016 (in thousands):

 

   Remainder of 2016   2017   2018   2019   2020   Thereafter   Total 
Total long-term debt obligations   $15,223   $2,879   $2,354   $8,534   $1,968   $5,719   $36,677 
Revolving credit facility        93,301                    93,301 
Total   $15,223   $96,180   $2,354   $8,534   $1,968   $5,719   $129,978 

 

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Line of Credit and Related Notes

 

We maintain a 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. On January 19, 2016, we entered into a Fourth Amended and Restated Loan and Security Agreement (the “Fourth Amended Loan Agreement”) with certain lenders and Wells Fargo Capital Finance, LLC as administrative and collateral agent. The Fourth Amended Loan Agreement provides for, among other things: (i) an increase in the Maximum Credit, as defined in the Fourth Amended Loan Agreement, from $250,000,000 to $275,000,000; (ii) the addition of a sub-line of up to C$40,000,000 as the Canadian Maximum Credit ((i) and (ii) collectively the “Revolving Line”); (iii) an extension of the Maturity Date to March 19, 2019; (iv) interest on outstanding balance under the Canadian Maximum Credit based on the Canadian Base Rate (calculated as the greater of CDOR plus 1 percentage point and the “prime rate” for Canadian Dollar commercial loans, as further defined in the Fourth Amended Loan Agreement) or at the election of the Borrowers, based on the CDOR Rate, plus a margin, depending on average excess availability under the Revolving Line, ranging from 1.50% to 1.75%; and (v) interest on outstanding balance under the Maximum Credit based on the Eurodollar Rate plus a margin, depending on average excess availability under the revolving line, ranging from 1.50% to 1.75%. The credit facility also includes a monthly unused line fee of 0.25% per year on the amount, if any, by which the Maximum Credit, then in effect, exceeds the average daily principal balance of outstanding borrowings during the immediately preceding month.

 

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, 2016, 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, 2016, we had $147.3 million available to borrow for working capital advances under the line of credit.

 

In connection with, and as part of, our revolving credit facility, we maintain two sub-lines under our revolving credit facility secured by the two parcels of real property we own in Santa Monica, California, each with a limit of $9.8 million and $1.7 million, as provided by the Fourth Amended Loan Agreement. The $10.9 million sub-line has a monthly principal amortization of $129,583 and the $1.7 million sub-line has a monthly principal amortization of $21,750, both bearing interest at the same rate as our revolving credit facility.

 

Other Notes Payable

 

In March 2015, we completed the purchase of real property in Irvine, California for approximately $5.8 million and financed $4.9 million with a long-term note. The loan agreement provides for a seven year term and a 25 year straight-line, monthly principal repayment amortization period that began on May 1, 2015 with a balloon payment at maturity in April 2022. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility. In September 2015, we listed the Irvine Property for sale. See Note 4 above for more information.

 

In January 2015, we completed the purchase of certain real property in Lewis Center, Ohio for approximately $6.6 million and financed $4.575 million with a long-term note. The $4.575 million term note provides for a seven year term and a 25 year straight-line, monthly principal repayment amortization period that began in February 2015 with a balloon payment at maturity in January 2022. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility.

 

Throughout 2014, we entered into three financing arrangements with a bank to finance the costs of equipment, software and professional services related to our ERP upgrade. The total amount financed was $5.6 million, with a quarterly repayment schedule maturing in March 2017.

 

In December 2012, we completed the purchase of 7.9 acres of land for approximately $1.1 million and have incurred additional costs of $12.2 million through December 31, 2014 towards the construction of a new cloud data center that we opened in June 2014. In July 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 a five year term and a 25 year straight-line, monthly principal repayment amortization period with a balloon payment at maturity in January 2020. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility.

 

In June 2011, we entered into a credit agreement to finance a total of $10.1 million of the acquisition and improvement costs for 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 in September 2016. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility.

 

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At June 30, 2016, the effective weighted average annual interest rate on our outstanding amounts under the credit facility, term note and variable interest rate notes payable was 2.15%.

 

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. Income Taxes

 

We determine our interim income tax provision by applying our effective income tax rate expected to be applicable for the full fiscal year to pre-tax income (loss) for the interim periods.

 

Accounting for Uncertainty in Income Taxes

 

At June 30, 2016 and December 31, 2015, we had unrecognized tax benefits of $0.5 million and $0.4 million, respectively, related to research credits. For the three and six months ended June 30, 2016 and 2015, we did not recognize any interest or penalties for uncertain tax positions, nor were there any interest or penalties accrued at June 30, 2016 and December 31, 2015. We do not anticipate any significant increases or decreases in our unrecognized tax benefits within the next twelve months.

 

We are subject to U.S. and foreign income tax examinations for years subsequent to 2011, and state income tax examinations for years following 2010. 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 for subsequent utilization, and make adjustments up to the amount of the net operating losses or credit carryforwards.

 

9. Stockholders’ Equity

 

We have a board approved discretionary stock repurchase program under which shares may be repurchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending on market conditions. In April 2015, 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 and amended in September 2012 to add an additional $10 million. 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. 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. The repurchased shares are held as treasury stock. 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.

 

We repurchased a total of 189,562 and 405,698 shares of our common stock under this program during the three and six months ended June 30, 2016, respectively, for a total cost of approximately $1.7 million and $3.5 million, respectively. From the inception of the program in October 2008 through June 30, 2016, we have repurchased an aggregate of 4,081,687 shares of our common stock for a total cost of $25.9 million. At June 30, 2016, we had $4.1 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 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.

 

10. Earnings (Loss) Per Share

 

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) 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. For the three months ended June 30, 2016 and 2015, approximately 626,000 and 416,000 common shares have been excluded from the calculation of diluted EPS because the effect of their inclusion would have been antidilutive. For the six months ended June 30, 2016, approximately 551,000 common shares have been excluded from the calculation of diluted EPS because the effect of their inclusion would have been antidilutive. For the six months ended June 30, 2015, since we reported a loss from continuing operations, all potential shares totaling approximately 578,000 were excluded from the computation of diluted EPS as their inclusion would have been antidilutive. For the six months ended June 30, 2015, had we reported income from continuing operations, approximately 421,000 common shares would have been excluded from the calculation of diluted EPS because the effect of their inclusion would have been antidilutive.

 

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

 

   Amount ($)   Shares   Per Share
Amounts ($)
 
Three Months Ended June 30, 2016:               
Basic EPS               
Income from continuing operations   $7,406    11,715   $0.63 
Effect of dilutive securities               
Dilutive effect of stock options        496      
Diluted EPS               
Adjusted income from continuing operations   $7,406    12,211   $0.61 
                
Three Months Ended June 30, 2015:               
Basic EPS               
Income from continuing operations   $175    12,106   $0.01 
Effect of dilutive securities               
Dilutive effect of stock options        559      
Diluted EPS               
Adjusted income from continuing operations   $175    12,665   $0.01 
                
Six Months Ended June 30, 2016:               
Basic EPS               
Income from continuing operations   $7,562    11,796   $0.64 
Effect of dilutive securities               
Dilutive effect of stock options        466      
Diluted EPS               
Adjusted income from continuing operations   $7,562    12,262   $0.62 
                
Six Months Ended June 30, 2015:               
Basic EPS               
Loss from continuing operations   $(3,349)   12,156   $(0.27)
Effect of dilutive securities               
Dilutive effect of stock options              
Diluted EPS               
Adjusted loss from continuing operations   $(3,349)   12,156   $(0.27)

 

11. Segment Information

 

In February 2016, we transitioned out nearly the entire management overhead of our MacMall business, thinned out its cost structure and brought it under the management and supervision of our Commercial segment. Also, in connection with our acquisitions of Acrodex and certain assets of Systemax’s North American Technology Group in the fourth quarter of 2015 and our resulting entrance into selling products, services and solutions in the Canadian market, we formed a new operating segment called Canada. This segment includes our operations related to these Canadian market activities, beginning as of the respective dates of these acquisitions. The transition described above and our acquisitions in 2015 resulted in changes to the internal reporting package reviewed by the Chief Operating Decision Maker (“CODM”), and beginning in 2016, we have the following three operating segments: Commercial, Public Sector and Canada. All prior periods have been retrospectively recast to conform to the current presentation.

 

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

 

   Commercial   Public Sector   Canada   Corporate & Other   Consolidated 
Three Months Ended June 30, 2016                          
Net sales   $445,022   $98,980   $37,004   $(12)  $580,994 
Gross profit    67,754    9,661    5,595    (11)   82,999 
Depreciation and amortization expense(1)    1,609    286    330    1,750    3,975 
Operating profit (loss)    22,487    4,275    824    (14,221)   13,365 
                          
Three Months Ended June 30, 2015                          
Net sales   $373,202   $105,670   $   $(1)  $478,871 
Gross profit    52,658    9,311        (3)   61,966 
Depreciation and amortization expense(1)    921    101        2,194    3,216 
Operating profit (loss)    17,830    4,705        (21,685)   850 
                          
Six Months Ended June 30, 2016                          
Net sales   $829,427   $171,443   $78,166   $(13)  $1,079,023 
Gross profit    125,847    15,676    11,797    (14)   153,306 
Depreciation and amortization expense(1)    3,243    576    668    3,560    8,047 
Operating profit (loss)    38,715    5,722    2,503    (32,056)   14,884 
                          
Six Months Ended June 30, 2015                          
Net sales   $632,570   $142,271   $   $(11)  $774,830 
Gross profit    88,422    12,653        (4)   101,071 
Depreciation and amortization expense(1)    1,585    108        4,222    5,915 
Operating profit (loss)    25,579    5,380        (35,316)   (4,357)

 

 

(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, 2016 and December 31, 2015, we had total consolidated assets of $688.5 million and $600.2 million, respectively. 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.

 

12. Commitments and Contingencies

 

Total rent expense under our operating leases, net of sublease income, was $1.5 million and $1.0 million in the three month periods ended June 30, 2016 and 2015, respectively, and $3.0 million and $2.0 million in the six month periods ended June 30, 2016 and 2015, respectively. 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.

 

 

13. Subsequent Events

 

On July 7, 2016, the Company, all of its wholly-owned domestic subsidiaries (collectively, the “US Borrowers”) and all of its Canadian subsidiaries (collectively, the “Canadian Borrowers”), entered into a First Amendment to Fourth Amended and Restated Loan and Security Agreement (the “Loan Amendment”) with certain lenders named therein (the “Lenders”) and Wells Fargo Capital Finance, LLC as administrative and collateral agent for the Lenders (the “Agent”).

 

The Loan Amendment provides for, among other things: (i) an increase in the Maximum Credit, as defined in the Fourth Amended Agreement, from $275,000,000 to $290,000,000; (ii) the addition of certain eligible accounts that may be generated by a joint venture of the Company not to exceed 20% of all other eligible accounts and authorization of Company performance guarantees related to the joint venture; and (iii) the addition of a channel finance facility for up to $50 million as more fully described below.

 

Also on July 7, 2016, the Company entered into a Credit Agreement with Castle Pines Capital LLC (“Castle Pines”). The Credit Agreement provides for a credit facility (“Channel Finance Facility”) to finance the purchase of inventory from a list of approved vendors. The aggregate availability under the Channel Finance Facility is variable and discretionary, but has initially been set at $35 million. Each advance under the Channel Finance Facility will be made directly to an approved vendor and must be repaid on the earlier of (i) the payment due date as set by Castle Pines or (ii) the date (if any) when the inventory is lost stolen or damaged. No interest accrues on advances paid on or prior to payment due date. The Channel Finance Facility is secured by a lien on certain of the Company’s assets, subject to an intercreditor arrangement with the Lenders. The Channel Finance Facility has an initial term of one year, but shall be automatically renewed for one year periods from year to year thereafter unless terminated earlier by either party within reasonable notice periods.

 

***

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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 Part II, 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, field and internal service teams, direct marketing channels and state of the art owned and operated data centers. Since our founding in 1987, we have served our customers by offering products and services from vendors such as Adobe, Apple, Cisco, Dell, Hewlett Packard Enterprise, HP Inc., Lenovo, Microsoft, Oracle, Samsung, Symantec and VMware. 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 small, medium and enterprise businesses, state, local and federal governments and educational institutions.

 

In February 2016, we transitioned out nearly the entire management overhead of our MacMall business, thinned out its cost structure and brought it under the management and supervision of our Commercial segment. Also, in connection with our acquisitions of Acrodex and certain assets of Systemax’s North American Technology Group in the fourth quarter of 2015 and our resulting entrance into selling products, services and solutions in the Canadian market, we formed a new operating segment called Canada. This segment includes our operations related to these Canadian market activities, beginning as of the respective dates of these acquisitions. As a result, beginning in 2016, we have the following three operating segments: Commercial, Public Sector and Canada.

 

We discontinued the operation of all four of our retail stores, located in Huntington Beach, Santa Monica and Torrance, California and Chicago, Illinois, and our OnSale and eCost businesses in 2014. We reflected the results of these operations, which were historically reported as a part of our MacMall segment, as discontinued operations for all periods presented herein in our Consolidated Balance Sheets and Consolidated Statements of Operations.

 

We sell primarily to customers in the United States and Canada, and maintain offices in the United States and Canada, as well as in Manila, Philippines. In the three months ended June 30, 2016, we generated approximately 77% of our revenue in our Commercial segment, 17% of our revenue in our Public Sector segment and 6% of our revenue in our Canada segment. In the six months ended June 30, 2016, we generated approximately 77% of our revenue in our Commercial segment, 16% of our revenue in our Public Sector segment and 7% of our revenue in our Canada 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 online extranets.

 

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 Canada segment consists of sales made to customers in the Canadian market beginning as of the respective dates of our acquisition of Acrodex and certain assets of Systemax in October and December 2015, respectively.

 

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. 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 U.S. 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 U.S. 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. Further, our Canadian business may see seasonal increases in the first quarter due to Canadian SLED budgets being closed out in the first quarter. We may also experience variability in our gross profit and gross profit margin as a result of changes in the various vendor programs we participate in and its effect on the amount of vendor consideration we receive from a particular vendor, which may be impacted by a number of events outside of our control. 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.

 

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A substantial portion of our business is dependent on sales of Apple, HP Inc., Microsoft and products purchased from other vendors including Cisco, Dell, Hewlett Packard Enterprise, Ingram Micro, Lenovo, and Tech Data. Our top sales of products by manufacturer as a percent of our gross billed sales were as follows for the periods presented:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2016   2015   2016   2015 
Microsoft   21%   20%   18%   16%
HP Inc.   10    13    11    13 

 

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 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, 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., Canada 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., Canada 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 meet vendor program requirements and to position us for enhanced productivity and future growth.

 

STRATEGIC DEVELOPMENTS

 

Real Estate Transactions

 

In March 2015, we completed the purchase of real property in Irvine, California (the “Irvine Property”) for approximately $5.8 million and financed $4.9 million with a long-term note. The real property includes approximately 60,000 square feet of office and warehouse space and land. Certain of our subsidiaries were tenants of the building, which are continuing to use the office and warehouse space. In September 2015, we listed the Irvine Property for sale in its present condition under a broker agreement. On April 27, 2016, we entered into an agreement with Spigen, Inc. (the “Buyer”) to sell the Irvine Property for approximately $13.2 million. The parties agreed to a 60-day escrow period. On June 23, 2016, we received notice of escrow cancellation from the Buyer effective immediately. As a result of the cancellation, the Buyer forfeited a non-refundable deposit of $300,000, which was released to us as liquidated damages in accordance with the agreement and we recorded it as part of “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016. The Irvine Property is available for sale.

 

In January 2015, we completed the purchase of certain real property in Lewis Center, Ohio for approximately $6.6 million and financed $4.575 million with a long-term note. The real property includes approximately 12.4 acres of land together with a building for office and warehouse space of approximately 144,000 square feet. Certain of our subsidiaries were tenants of the building, which are continuing to use the office and warehouse space.

 

For more information on the financing arrangements of the real estate transactions discussed above, see Note 7 of the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

 

ERP Upgrades

 

During the three months ended June 30, 2015, after consideration of the tools acquired in the En Pointe acquisition, we wrote off approximately $3.3 million of work-in-process software related to a CRM system, which we abandoned in favor or En Pointe’s production CRM system, and included the charge as part of “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations. 

 

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In October 2015, our management determined, and our Board of Directors approved such determination, to adopt the SAP platform acquired with the En Pointe transaction across all of our business units and approved the non-cash write-off of the remaining $22.1 million of work in process software previously capitalized for all major phases of the design, configuration and customization of the AX solution to date. For the year ended December 31, 2015, a total of $25.4 million non-cash charge related to the ERP and CRM write-offs was included in “Selling, general and administrative expenses” on our Consolidated Statements of Operations.

 

We anticipate the SAP implementation to be incrementally adopted by portions of our business throughout the remainder of 2016 and 2017 with a total expected capitalized cost of under $5 million.

 

Common Stock Repurchase Program

 

In April 2015, 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 and amended in September 2012 to add an additional $10 million. 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. 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. The repurchased shares are held as treasury stock. 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.

 

We repurchased a total of 189,562 and 405,698 shares of our common stock under this program during the three and six months ended June 30, 2016, respectively, for a total cost of approximately $1.7 million and $3.5 million, respectively. From the inception of the program in October 2008 through June 30, 2016, we have repurchased an aggregate of 4,081,687 shares of our common stock for a total cost of $25.9 million. At June 30, 2016, we had $4.1 million available in stock repurchases under the program, subject to any limitations that may apply from time to time under our existing credit facility.

 

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 this Annual Report on Form 10-K.

 

Revenue Recognition. We adhere to the guidelines and principles of sales recognition described in ASC 605 — 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.

 

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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.

 

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.

 

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 account 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 Arrangement. 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.

 

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, Customer Payments and Incentives 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, billed or accrued receivables related to our vendor consideration are included in our “Accounts receivable, net of allowances.” Any change by the vendors of their program requirements or any changes in estimates of performance under such programs could have a material impact to 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, or sooner if an event occurs or circumstances change that would more likely than not result in an impairment loss. We perform our annual impairment test for goodwill and indefinite-lived intangible assets as of October 1 of each year.

 

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. At October 1, 2015, our goodwill resided in our Abreon, Commercial without Abreon, and Public Sector reporting units.

 

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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, 2015. Our annual impairment analysis excluded goodwill associated with acquisitions made during the fourth quarter of 2015, as their purchase price allocations were completed subsequent to the analysis date, and their operations have not had sufficient operating time to suggest any triggering event would have occurred. 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, 2015, 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.

 

In conjunction with our annual assessment of goodwill, our valuation techniques did not indicate any impairment as of October 1, 2015. All reporting units with goodwill passed the first step of the goodwill evaluation, with the fair values of our Abreon, Commercial without Abreon and Public Sector reporting units exceeding their respective carrying values by 83%, 14% and 58% and, accordingly, we were not required to perform the second step of the goodwill evaluation. We had $7.2 million, $50.4 million and $7.1 million of goodwill as of October 1, 2015 residing in our Abreon, Commercial without Abreon and Public Sector reporting units, respectively. In applying the market and income approaches to determining fair value of our reporting units, we rely on a number of significant assumptions and estimates including revenue growth rates and operating margins, discount rates and future market conditions, among others. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. Changes in one or more of these significant estimates or assumptions could affect the results of these impairment reviews.

 

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, 2015, 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 28% as of October 1, 2015. We believe several factors are contributing 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, 2015 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, 2016 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.

 

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We amortize other intangible assets with definite lives generally on a straight-line basis over their estimated useful lives, or in the case of customer relationships, based on a relative percentage of annual discounted cash flows expected to be delivered by the asset over its estimated useful life.

 

RESULTS OF OPERATIONS

 

Consolidated Statements of Operations Data

 

The following table sets forth, for the periods indicated, our Condensed Consolidated Statements of Operations (in thousands, unaudited, except per share amounts) and information derived from our Condensed 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,
 
   2016   2015   2016   2015 
Net sales  $580,994   $478,871   $1,079,023   $774,830 
Cost of goods sold   497,995    416,905    925,717    673,759 
Gross profit   82,999    61,966    153,306    101,071 
Selling, general and administrative expenses   69,634    61,116    138,422    105,428 
Operating profit (loss)   13,365    850    14,884    (4,357)
Interest expense, net   1,461    872    2,935    1,643 
Income (loss) from continuing operations before income taxes   11,904    (22)   11,949    (6,000)
Income tax expense (benefit)   4,498    (197)   4,387    (2,651)
Income (loss) from continuing operations   7,406    175    7,562    (3,349)
Income from discontinued operations, net of taxes       74        43 
Net income (loss)  $7,406   $249   $7,562   $(3,306)
                     
Basic and Diluted Earnings (Loss) Per Common Share                    
Basic EPS:                    
Income (loss) from continuing operations  $0.63   $0.01   $0.64   $(0.27)
Income from discontinued operations, net of taxes       0.01        0.00 
Net income (loss)  $0.63   $0.02   $0.64   $(0.27)
                     
Diluted EPS:                    
Income (loss) from continuing operations  $0.61   $0.01   $0.62   $(0.27)
Income from discontinued operations, net of taxes       0.01        0.00 
Net income (loss)  $0.61   $0.02   $0.62   $(0.27)
                     
Weighted average number of common shares outstanding:                    
Basic   11,715    12,106    11,796    12,156 
Diluted   12,211    12,665    12,262    12,156 

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2016   2015   2016   2015 
Net sales   100.0%   100.0%   100.0%   100.0%
Cost of goods sold   85.7    87.1    85.8    87.0 
Gross profit   14.3    12.9    14.2    13.0 
Selling, general and administrative expenses   12.0    12.7    12.8    13.6 
Operating profit (loss)   2.3    0.2    1.4    (0.6)
Interest expense, net   0.3    0.2    0.3    0.2 
Income (loss) from continuing operations before income taxes   2.0    0.0    1.1    (0.8)
Income tax expense (benefit)   0.7    0.0    0.4    (0.4)
Income (loss) from continuing operations   1.3    0.0    0.7    (0.4)
Loss from discontinued operations, net of taxes   0.0    0.0    0.0    0.0 
Net income (loss)   1.3%  $0.0%   0.7%  $(0.4)%

 

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Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015

 

Net Sales

 

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

 

   Three Months Ended June 30,     
   2016   2015         
   Net Sales   Percentage of
Total Net Sales
   Net Sales   Percentage of
Total Net Sales
   Dollar Change   Percent
Change
 
Commercial  $445,022    77%  $373,202    78%  $71,820    19%
Public Sector   98,980    17    105,670    22    (6,690)   (6)
Canada(2)   37,004    6            37,004    NM(1)
Corporate & Other   (12)       (1)       (11)   NM(1)
Consolidated  $580,994    100%  $478,871    100%  $102,123    21%

 

 

(1)Not meaningful.
(2)Our Canada segment was formed in the first quarter of 2016 as a result of our Acrodex and Systemax asset acquisitions in the fourth quarter of 2015.

 

Consolidated net sales were $581.0 million in the three months ended June 30, 2016 compared to $478.9 million in the three months ended June 30, 2015, an increase of $102.1 million, or 21%. This increase was primarily due to the addition of sales from our fourth quarter 2015 acquisitions and investments we have made in advanced technologies and software for the benefit of the overall business. Consolidated sales of services were $34.1 million in the three months ended June 30, 2016 compared to $32.4 million in the three months ended June 30, 2015, an increase of $1.7 million, or 5%, and represented 6% and 7% of net sales in the three months ended June 30, 2016 and 2015, respectively.

 

Commercial net sales were $445.0 million in the three months ended June 30, 2016 compared to $373.2 million in the three months ended June 30, 2015, an increase of $71.8 million or 19%. The increase in Commercial net sales was primarily due to the addition of sales from our Tiger Direct acquisition and the investments we have made in advanced technologies and software for the benefit of the overall business.

 

Public Sector net sales were $99.0 million in the three months ended June 30, 2016 compared to $105.7 million in the three months ended June 30, 2015, a decrease of $6.7 million, or 6%. The decrease in Public Sector net sales was primarily due to a $5.8 million reduction in sales to a single federal customer. Sales for our state and local government and educational institution (“SLED”) business decreased due to a continued shift in sales mix towards products reported on a net basis.

 

Canada net sales were $37.0 million in the three months ended June 30, 2016, representing the sales from our Acrodex acquisition and the Canadian unit of the Tiger Direct assets acquired in December 2015.

 

Gross Profit and Gross Profit Margin

 

Consolidated gross profit was $83.0 million in the three months ended June 30, 2016 compared to $62.0 million in the three months ended June 30, 2015, an increase of $21.0 million, or 34%. Consolidated gross profit margin increased to 14.3% in the three months ended June 30, 2016 from 12.9% in the same period last year. The increase in consolidated gross profit was primarily due to our fourth quarter 2015 acquisitions and the investments we have made in advanced technologies and software for the benefit of the overall business. The increase in our consolidated gross profit margin was primarily due to an increase in vendor consideration as a percent of net sales, a change in sales mix, including a greater mix of sales reported on a net basis and improved selling margins.

 

Selling, General & Administrative Expenses

 

Consolidated SG&A expenses were $69.6 million in the three months ended June 30, 2016 compared to $61.1 million in the three months ended June 30, 2015, an increase of $8.5 million, or 14%. Consolidated SG&A expenses as a percentage of net sales decreased to 12.0% in the three months ended June 30, 2016 from 12.8% in the same period last year. The increase in consolidated SG&A expenses was primarily related to our fourth quarter 2015 acquisitions, including an $11.5 million increase in personnel costs primarily related to the acquisitions, a $1.0 million increase in amortization expense related to purchased intangibles and $0.9 million of variable credit card related fees, partially offset by a $1.3 million gain resulting from a class action settlement related to an industry wide DRAM indirect antitrust litigation and the non-recurrence of certain 2015 expenses including a $3.3 million write-off of CRM software work-in-process which we abandoned in favor of En Pointe’s production CRM system in the three months ended June 30, 2015 and $1.6 million of restructuring related costs.

 

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Operating Profit (Loss)

 

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

 

   Three Months Ended June 30,       Change in 
   2016   2015   Change in   Operating 
   Operating   Operating
Profit
   Operating   Operating
Profit
   Operating
Profit (Loss)
   Profit
Margin
 
   Profit (Loss)   Margin(1)   Profit (Loss)   Margin(1)   $   %   % 
Commercial  $22,487    5.1%  $17,830    4.8%  $4,657    26%   0.3%
Public Sector   4,275    4.3    4,705    4.5    (430)   (9)   (0.2)
Canada   824    2.2            824    NM(2)   2.2 
Corporate & Other   (14,221)   (2.4 )(1)   (21,685)   (4.5 )(1)   7,464    (34)   2.1 
Consolidated  $13,365    2.3%  $850    0.2%  $12,515    1,472%   2.1%

 

 

(1)Operating profit margin for Corporate & 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 $13.4 million in the three months ended June 30, 2016 compared to $0.9 million in the three months ended June 30, 2015, an increase of $12.5 million.

 

Commercial operating profit was $22.5 million in the three months ended June 30, 2016 compared to $17.8 million in the three months ended June 30, 2015, an increase of $4.7 million, or 26%. The increase in Commercial operating profit was primarily due to a $15.1 million increase in Commercial gross profit, offset by increases in personnel costs related to the Tiger Direct acquisition, investments in advanced technologies and software specialists and variable compensation on increased Commercial gross profit.

 

Public Sector operating profit was $4.3 million in the three months ended June 30, 2016 compared to $4.7 million in the three months ended June 30, 2015, a decrease of $0.4 million, or 9%. The decrease in Public Sector operating profit was primarily due to a $0.4 million increase in personnel costs and $0.2 million of amortization costs primarily resulting from the Tiger Direct acquisition, partially offset by a $0.4 million increase in Public Sector gross profit.

 

Canada operating profit was $0.8 million in the three months ended June 30, 2016, representing the operating profit from our Acrodex acquisition and the Canadian unit of the Tiger Direct assets acquired in the fourth quarter of 2015.

 

Corporate & Other operating expenses include 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 $14.2 million in the three months ended June 30, 2016 compared to $21.7 million in the three months ended June 30, 2015, a decrease of $7.5 million, or 34%. The decrease in our Corporate & Other operating expenses was primarily due to a $1.3 million gain resulting from a class action settlement related to an industry wide DRAM indirect antitrust litigation and labor cost savings in Corporate and Other, as well as the non-recurrence of certain 2015 expenses including a $3.3 million write-off of CRM software work-in-process which we abandoned in favor of En Pointe’s production CRM system in the three months ended June 30, 2015 and $1.6 million of restructuring related costs.

 

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Net Interest Expense

 

Total net interest expense for the three months ended June 30, 2016 was $1.5 million compared with $0.9 million in the same period of 2015, reflecting an increase of $0.6 million which was primarily due to the increase in our average net outstanding loan balance on our line of credit.

 

Income Tax Expense (Benefit)

 

We recorded an income tax expense of $4.5 million in the three months ended June 30, 2016 compared to an income tax benefit of $0.2 million in the three months ended June 30, 2015. Our effective tax rate for the three months ended June 30, 2016 was 37.8%. Our effective tax rate for the three months ended June 30, 2015 is not meaningful due to the very low level of income before taxes during this period. The recording of discrete tax benefits and a cumulative adjustment to the annual effective tax rate during the three months ended June 30, 2015 created a tax benefit that was disproportionate in relationship to income before taxes during this period.

 

Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015

 

Net Sales

 

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

 

   Six Months Ended June 30,     
   2016   2015         
   Net Sales   Percentage of
Total Net Sales
   Net Sales   Percentage of
Total Net Sales
   Dollar Change   Percent
Change
 
Commercial  $829,427    77%  $632,570    82%  $196,857    31%
Public Sector   171,443    16    142,271    18    29,172    21 
Canada   78,166    7            78,166    NM(1)
Corporate & Other   (13)       (11)       (2)   NM(1)
Consolidated  $1,079,023    100%  $774,830    100%  $304,193    39%

 

 

(1)Not meaningful.

 

Consolidated net sales were $1,079.0 million in the three months ended June 30, 2016 compared to $774.8 million in the six months ended June 30, 2015, an increase of $304.2 million, or 39%, which was primarily due to the addition of sales from our 2015 acquisitions and investments we have made in advanced technologies and software for the benefit of the overall business. Consolidated sales of services were $66.4 million in the six months ended June 30, 2016 compared to $57.4 million in the six months ended June 30, 2015, an increase of $9.0 million, or 16%, and represented 6% and 7% of consolidated net sales in each of the six months ended June 30, 2016 and 2015, respectively.

 

Commercial net sales were $829.4 million in the six months ended June 30, 2016 compared to $632.6 million in the six months ended June 30, 2015, an increase of $196.8 million, or 31%. The increase in Commercial net sales was primarily due to the addition of sales from our 2015 acquisitions and the investments we have made in advanced technologies and software discussed above.

 

Public Sector net sales were $171.4 million in the six months ended June 30, 2016 compared to $142.3 million in the six months ended June 30, 2015, an increase of $29.2 million, or 21%. This increase in Public Sector net sales was due to the addition of sales from our 2015 acquisitions and the investments we have made in advanced technologies and software discussed above, partially offset by a $5.9 million reduction in sales to a single federal customer and a decrease in SLED sales due to a continued shift in sales mix towards products reported on a net basis.

 

Canada had net sales of $78.2 million in the six months ended June 30, 2016, representing sales from our Acrodex acquisition and the Canadian unit of the Tiger Direct assets acquired in December 2015.

 

Gross Profit and Gross Profit Margin

 

Consolidated gross profit was $153.3 million in the six months ended June 30, 2016 compared to $101.1 million in the six months ended June 30, 2015, an increase of $52.2 million, or 52%. Consolidated gross profit margin increased to 14.2% in the six months ended June 30, 2016 from 13.0% in the same period last year. The increase in consolidated gross profit was primarily due to our 2015 acquisitions and the investments we have made in advanced technologies and software. The increase in our consolidated gross profit margin was primarily due to an increase in vendor consideration as a percent of net sales, a change in sales mix, including a greater mix of sales reported on a net basis and improved selling margins.

 

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Selling, General & Administrative Expenses

 

Consolidated SG&A expenses were $138.4 million in the six months ended June 30, 2016 compared to $105.4 million in the six months ended June 30, 2015, an increase of $33.0 million, or 31%. Consolidated SG&A expenses as a percentage of net sales decreased to 13% in the six months ended June 30, 2016 from 14% in the same period last year. The increase in consolidated SG&A expenses was primarily related to our 2015 acquisitions and the investments we have made in advanced technologies and software for the benefit of the overall business, including a $29.6 million increase in personnel costs, a $2.1 million increase in outside service costs, a $2.5 million increase in amortization expense related to purchased intangibles, a $1.3 million increase in credit card processing fees and a $0.8 million increase in M&A related expenses, partially offset by the non-recurrence of a $3.3 million write-off of CRM software work-in-process which we abandoned in favor of En Pointe’s production CRM system in the six months ended June 30, 2015, a $1.3 million decrease in severance and restructuring costs and a $1.3 million gain resulting from a class action settlement related to an industry wide DRAM indirect antitrust litigation.

 

Operating Profit (Loss)

 

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

 

   Six Months Ended June 30,           Change in 
   2016   2015   Change in   Operating 
   Operating   Operating
Profit
   Operating   Operating
Profit
   Operating
Profit (Loss)
   Profit
Margin
 
   Profit (Loss)   Margin(1)   Profit (Loss)   Margin(1)   $   %   % 
Commercial  $38,715    4.7%  $25,579    4.0%  $13,136    51%   0.7%
Public Sector   5,722    3.3    5,380    3.8    342    6    (0.5)
Canada   2,503    3.2            2,503    NM(2)   3.2 
Corporate & Other   (32,056)   (3.0 )(1)   (35,316)   (4.6 )(1)   3,260    (9)   1.6 
Consolidated  $14,884    1.4%  $(4,357)   (0.6)%  $19,241    442%   2.0%

 

 

(1)Operating profit margin for Corporate & 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 $14.9 million in the six months ended June 30, 2016 compared to a consolidated operating loss of $4.4 million in the six months ended June 30, 2015, an increase of $19.3 million, or 442%.

 

Commercial operating profit was $38.7 million in the six months ended June 30, 2016 compared to $25.6 million in the six months ended June 30, 2015, an increase of $13.1 million, or 51%. The increase in Commercial operating profit was primarily due to a $37.4 million increase in Commercial gross profit, partially offset by a $10.8 million increase in personnel costs which was primarily related to the 2015 acquisitions, investments in advanced technologies and software specialists, a $1.5 million increase in amortization expense relating to purchased intangibles, a $1.1 million increase in credit card processing fees and a $0.6 million increase in outside services.

 

Public Sector operating profit was $5.7 million in the six months ended June 30, 2016 compared to $5.4 million in the six months ended June 30, 2015, an increase of $0.3 million, or 6%. The increase in Public Sector operating profit was primarily due to a $3.0 million increase in Public Sector gross profit partially offset by a $1.9 million increase in personnel costs and a $0.5 million increase in amortization expense relating to purchased intangibles.

 

Canada operating profit was $2.5 million in the six months ended June 30, 2016, representing operating profit from our Acrodex acquisition and the Canadian unit of the Tiger Direct assets acquired in the fourth quarter of 2015.

 

Corporate & Other operating expenses were $32.1 million in the six months ended June 30, 2016 compared to $35.3 million in the six months ended June 30, 2015, a decrease of $3.2 million. The decrease in our Corporate & Other operating expenses was primarily due to the non-recurrence of a $3.3 million write-off of CRM software costs in the six months ended June 30, 2015, a $1.3 million decrease in restructuring and severance charge and a $1.3 million gain resulting from a class action settlement related to an industry wide DRAM indirect antitrust litigation, partially offset by a $1.5 million increase in outside services costs and a $0.7 million increase in M&A related costs.

 

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Net Interest Expense

 

Total net interest expense for the six months ended June 30, 2016 was $2.9 million compared with $1.6 million in the same period of 2015, reflecting an increase of $1.3 million, which was primarily due to the increase in our average net outstanding loan balance on our line of credit.

 

Income Tax Expense (Benefit)

 

We recorded an income tax expense of $4.4 million in the six months ended June 30, 2016 compared to an income tax benefit of $2.7 million in the six months ended June 30, 2015. Our effective tax rates for the six months ended June 30, 2016 and 2015 were 36.7% and 44.2%. We benefited from lower Canadian income tax rates in the six months ended June 30, 2016 as a larger portion of our pre-tax book income during this period was generated by our Canadian entities, resulting in a lower overall effective tax rate during the period. The higher effective tax rate in the six months ended June 30, 2015 was primarily due to the effect of discrete tax benefit items recorded during the that period.

 

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 new ERP system, eCommerce platform and other upgrades of our current IT infrastructure over the next several years, possible sales growth, possible acquisitions and new business ventures, and possible repurchases of our common stock under a discretionary repurchase program, which is 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 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 may in the future seek additional financing from public or private debt or equity financings to fund additional acquisitions or expansion, or take advantage of opportunities or favorable market conditions. 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.

 

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 March 2019, 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.

 

In April 2015, 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 and amended in September 2012 to add an additional $10 million. 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. 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. The repurchased shares are held as treasury stock. 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.

 

We repurchased a total of 189,562 and 405,698 shares of our common stock under this program during the three and six months ended June 30, 2016, respectively, for a total cost of approximately $1.7 million and $3.5 million, respectively. From the inception of the program in October 2008 through June 30, 2016, we have repurchased an aggregate of 4,081,687 shares of our common stock for a total cost of $25.9 million. At June 30, 2016, we had $4.1 million available in stock repurchases under the program, subject to any limitations that may apply from time to time under our existing credit facility.

 

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We maintain a Canadian sales 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. In June 2014, the province of Quebec passed a budget that modified the annual labor credit, prospectively reducing the claim percentage from 25% to 20% of eligible salaries, and reducing the annual amount from $15,000 to $12,000 (Canadian) per eligible employee per year. As of June 30, 2016, we had a total accrued receivable of $3.3 million related to 2015 and the six months ended June 30, 2016. We expect to file our 2015 claim in late 2016. We expect to receive full payment under our remaining accrued labor credits receivable.

 

Cash Flows from Operating Activities. Net cash provided by operating activities was $99.2 million in the six months ended June 30, 2016 compared to net cash used in operating activities of $3.8 million in the six months ended June 30, 2015.

 

The $99.2 million of net cash provided by operating activities in the six months ended June 30, 2016 was primarily due to a $154.0 million increase in accounts payable associated with the timing of outstanding payments in the respective periods, partially offset by a $55.5 million increase in accounts receivable and a $30.1 million increase in inventory primarily related to specific inventory purchases for several customer contracts as well as opportunistic buys on certain items from a manufacturer.

 

The $3.8 million of net cash used in operating activities in the six months ended June 30, 2015 was primarily due to a $174.4 million increase in accounts receivable primarily due to the build of En Pointe receivables during the second quarter, partially offset by a $158.2 million increase in accounts payable also primarily due to the build of En Pointe payables during the second quarter and an $11.7 million increase in deferred revenues.

 

Cash Flows from Investing Activities. Net cash used in investing activities was $3.0 million in the six months ended June 30, 2016 compared to $34.5 million in the six months ended June 30, 2015.

 

The $3.0 million of net cash used in investing activities in the six months ended June 30, 2016 was primarily related to $2.5 million of capital expenditures and $0.5 million of incremental acquisition-related investments.

 

The $34.5 million of net cash used in investing activities in the six months ended June 30, 2015 was primarily related to a $17.3 million payment related to our acquisition of assets of En Pointe and $17.2 million of capital expenditures related to purchase of real property in Irvine, California for $5.8 million and Lewis Center, Ohio for $6.0 million, as well as expenditures relating to investments in our IT infrastructure and new ERP systems.

 

Cash Flows from Financing Activities. Net cash used in financing activities in the six months ended June 30, 2016 was $98.3 million compared to net cash provided by financing activities in the six months ended June 30, 2015 of $36.9 million.

 

The $98.3 million of net cash used in financing activities in the six months ended June 30, 2016 was primarily related to $69.1 million of net payments on our line of credit, a $16.3 million decrease in book overdraft and $5.9 million of earn-out liability payments.

 

The $36.9 million of net cash provided by financing activities in the six months ended June 30, 2015 was primarily related to $17.7 million of borrowings under notes payable to finance the building acquisitions described above, $16.4 million of net borrowings on our line of credit primarily due to the purchase of assets of En Pointe and an $11.2 million change in book overdraft, partially offset by $3.1 million of common shares repurchased under our stock repurchase plan, $2.2 million of payments under our notes payables and $2.0 million of earn-out payments to the sellers of En Pointe.

 

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Line of Credit and Notes Payable. We maintain a 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. On January 19, 2016, we entered into a Fourth Amended and Restated Loan and Security Agreement (the “Fourth Amended Loan Agreement”) with certain lenders and Wells Fargo Capital Finance, LLC as administrative and collateral agent. The Fourth Amended Loan Agreement provides for, among other things: (i) an increase in the Maximum Credit, as defined in the Fourth Amended Loan Agreement, from $250,000,000 to $275,000,000; (ii) the addition of a sub-line of up to C$40,000,000 as the Canadian Maximum Credit ((i) and (ii) collectively the “Revolving Line”); (iii) an extension of the Maturity Date to March 19, 2019; (iv) interest on outstanding balance under the Canadian Maximum Credit based on the Canadian Base Rate (calculated as the greater of CDOR plus 1 percentage point and the “prime rate” for Canadian Dollar commercial loans, as further defined in the Fourth Amended Loan Agreement) or at the election of the Borrowers, based on the CDOR Rate, plus a margin, depending on average excess availability under the Revolving Line, ranging from 1.50% to 1.75%; and (v) interest on outstanding balance under the Maximum Credit based on the Eurodollar Rate plus a margin, depending on average excess availability under the revolving line, ranging from 1.50% to 1.75%. On July 7, 2016, we and our US and Canadian subsidiaries entered into a First Amendment to the Fourth Amended Loan Agreement which provides for, among other things: (i) an increase in the Maximum Credit, as defined in the amended credit facility, from $275,000,000 to $290,000,000; (ii) the addition of certain eligible accounts that may be generated by a joint venture of the Company not to exceed 20% of all other eligible accounts and authorization of Company performance guarantees related to the joint venture; and (iii) the addition of a channel finance facility for up to $50 million as more fully described below. The credit facility also includes a monthly unused line fee of 0.25% per year on the amount, if any, by which the Maximum Credit, then in effect, exceeds the average daily principal balance of outstanding borrowings during the immediately preceding month.

 

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, 2016, 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, 2016, we had $147.3 million available to borrow for working capital advances under the line of credit.

 

In connection with, and as part of, our revolving credit facility, we maintain two sub-lines under our revolving credit facility secured by the two parcels of real property we own in Santa Monica, California, each with a limit of $9.8 million and $1.7 million, as provided by the Fourth Amended Loan Agreement. The $10.9 million sub-line has a monthly principal amortization of $129,583 and the $1.7 million sub-line has a monthly principal amortization of $21,750, both bearing interest at the same rate as our revolving credit facility.

 

Also on July 7, 2016, we entered into a Credit Agreement with Castle Pines Capital LLC (“Castle Pines”). The agreement provides for a credit facility (“Channel Finance Facility”) to finance the purchase of inventory from a list of approved vendors. The aggregate availability under the Channel Finance Facility is variable and discretionary, but has initially been set at $35 million. Each advance under the Channel Finance Facility will be made directly to an approved vendor and must be repaid on the earlier of (i) the payment due date as set by Castle Pines or (ii) the date (if any) when the inventory is lost stolen or damaged. No interest accrues on advances paid on or prior to payment due date. The Channel Finance Facility is secured by a lien on certain of our assets, subject to an intercreditor arrangement with the Lenders. The Channel Finance Facility has an initial term of one year, but shall be automatically renewed for one year periods from year to year thereafter unless terminated earlier by either party within reasonable notice periods.

 

Other Notes Payable

 

In March 2015, we completed the purchase of real property in Irvine, California for approximately $5.8 million and financed $4.9 million with a long-term note. The loan agreement provides for a seven year term and a 25 year straight-line, monthly principal repayment amortization period that began on May 1, 2015 with a balloon payment at maturity in April 2022. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility. In September 2015, we listed the Irvine Property for sale. See Note 4 above for more information.

 

In January 2015, we completed the purchase of certain real property in Lewis Center, Ohio for approximately $6.6 million and financed $4.575 million with a long-term note. The $4.575 million term note provides for a seven year term and a 25 year straight-line, monthly principal repayment amortization period that began in February 2015 with a balloon payment at maturity in January 2022. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility.

 

Throughout 2014, we entered into three financing arrangements with a bank to finance the costs of equipment, software and professional services related to our ERP upgrade. The total amount financed was $5.6 million, with a quarterly repayment schedule maturing in March 2017.

 

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In December 2012, we completed the purchase of 7.9 acres of land for approximately $1.1 million and have incurred additional costs of $12.2 million through December 31, 2014 towards the construction of a new cloud data center that we opened in June 2014. In July 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 a five-year term and a 25 year straight-line, monthly principal repayment amortization period with a balloon payment at maturity in January 2020. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility.

 

In June 2011, we entered into a credit agreement to finance a total of $10.1 million of the acquisition and improvement costs for 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 in September 2016. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility.

 

At June 30, 2016, the effective weighted average annual interest rate on our outstanding amounts under the credit facility, term note and variable interest rate notes payable was 2.15%.

 

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.

 

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 Upgrades

 

In October 2015, our management determined, and our Board of Directors approved such determination, to adopt the SAP platform acquired with the En Pointe transaction across all of our business units. We anticipate the SAP implementation to be incrementally adopted by portions of our business throughout the remainder of 2016 and 2017 with a total expected capitalized cost of under $5 million.

 

In addition to costs related to the upgrade of our ERP systems, we expect to make periodic upgrades to our IT systems on an ongoing basis.

 

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 more fully described in our Annual Report on Form 10-K for the year ended December 31, 2015. As of June 30, 2016, there has been no material change in any off-balance sheet arrangements since December 31, 2015.

 

Contingencies

 

For a discussion of contingencies, see Part I, Item 1, Note 12 of the Notes to the Condensed Consolidated Financial Statements of this report, which is incorporated herein by reference.

 

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RELATED-PARTY TRANSACTIONS

 

There were no material related-party transactions during the three and six months ended June 30, 2016 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 ability to execute and benefit from our business strategies, including but not limited to, business strategies related to and strategic investments in our internal organization and focus on practice groups and sales of end-point solutions, advanced technologies, managed services and software solutions, leveraging our key vendor partner relationships, identifying and driving further operational efficiencies or successfully effecting our acquisition strategies including integrating our most recent acquisitions;
  our use of management information systems and their need for future support or upgrade;
  our expectations regarding the timing, costs and benefits of our ongoing or planned IT systems and communications infrastructure upgrades;
  our expectations regarding the business impact and accounting treatment of recent acquisitions, including any additional charges that may be taken in future periods;
  our expectations regarding key personnel and our ability to hire new and retain such individuals;
  our competitive advantages and growth opportunities;
  our ability to increase revenues and profitability;
  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 to continue our efforts to increase the productivity of our sales force and reduce costs;
  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 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 international operations, including in Canada, the Philippines and Pakistan, including the impact of taxes and labor costs in such operations;
  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 marketing and advertising levels and the effect on 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 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;
  the anticipated impact of reductions in sales to certain large enterprise customers;
  our expectations regarding the impact of investments we are making in the area of sales headcount, software and advanced technology solutions;
  our expectations regarding the payment of dividends and our intention to retain any earnings to finance the growth and development of our business;
  our expectations with respect to changes in our unrecognized tax benefits;
  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; 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.

 

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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 Part II, 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, accounts receivable, accounts payable, debt, accrued expenses and other current liabilities. At June 30, 2016, 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, 2016. 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 notes payable. The variable interest rates on our line of credit and notes payable are tied to the prime rate or the LIBOR, at our discretion. At June 30, 2016, we had $93.3 million outstanding under our line of credit and $35.1 million outstanding under our notes payable with variable interest rates. As of June 30, 2016, the hypothetical impact of a one percentage point increase in interest rate related to the outstanding borrowings under our line of credit and such notes payable would be to increase our annual interest expense by approximately $1.3 million.

 

Foreign Currency Exchange Risk

 

We have operation centers in Canada and the Philippines that provide back-office administrative support, and sales and customer service support. In each of these countries, transactions are primarily conducted in the respective local currencies. In addition, our three 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 and any 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. As of June 30, 2016, we did not have material foreign currency or overall currency exposure.

 

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, 2016.

 

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 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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.

 

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.

 

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 the SAP platform historically utilized by our recently acquired En Point business. 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 our systems upgrades that are currently being implemented, 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. and Canadian economies 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 previous economic downturns in the U.S., Canada 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., Canada 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, Canada or other countries’ slows or declines, current and prospective customer 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, 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 and services 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 and services from a small number of key manufacturers and software publishers, including Adobe, Apple, Cisco, Dell, Hewlett Packard Enterprise, HP Inc., Lenovo, Microsoft, Oracle, Samsung, Symantec and VMware. For example, products manufactured by Microsoft and HP Inc. represented approximately 21% and 10%, respectively, of our gross billed sales (excluding the impact of sales reported on a net basis) in the three months ended June 30, 2016, and products manufactured by Microsoft and HP Inc. represented approximately 20% and 13%, respectively, of our gross billed sales in the three months ended June 30, 2015. 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 OEMs, software publishers and distribution partners 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 advertising, marketing and distribution costs based upon the amount of coverage we give to their respective products in our advertising and marketing mediums. Any termination or interruption of our relationships with one or more of these vendors, 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.

 

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

 

Substantially all of our vendor agreements are terminable upon 30 days’ notice or less. Vendors that currently sell their products or services through us could decide to sell, or increase their sales of, their products or services 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.

 

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

 

The products and services 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 and services that meet these changes in market demand. Our success is also dependent on our ability to develop relationships with and sell products and services from new vendors that address these changes in marketplace demand. To the extent products that address changes in market 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 vendor relationships or preferred provider status with our vendors, 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 and services for resale both directly from manufacturers and software publishers 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 services, and other significant benefits. In many cases, vendors require us to meet certain minimum standards in order to retain these qualifications and preferred provider status. If we do not maintain our existing relationships or preferred provider certifications or authorizations, or if we fail to build new relationships with vendors on acceptable terms, including favorable pricing, vendor consideration or reseller qualifications, we may not be able to offer a broad selection of products and services or continue to offer products and services from these vendors at competitive prices or at all. 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. For example, one of our major vendors recently adopted heightened sales growth and dedicated sales personnel standards for its preferred provider designation. Our failure to meet these heightened standards could cause us to lose preferred provider status with the vendor. Any termination of our preferred provider status with any of our major vendors, or our failure to build new vendor relationships, could have a negative impact on our operating results. Additionally, some products are subject to manufacturer, publisher or distributor allocation, which limits the number of units of those products that are available to us and may adversely affect our operating results.

 

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, enter new geographic markets, 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. In 2015, we completed three strategic acquisitions and are focused on integrating these acquisitions into our operations. No assurance can be given that the benefits or synergies we may expect from acquisitions 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 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 in which our management has limited prior experience, 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, differing regulatory requirements in new geographic markets and new business areas, 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 acquisitions could have a material adverse effect on our business, financial condition and results of operations.

 

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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 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.

 

Narrow 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 and operating 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 margins. Narrow 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 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 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 customer spending and demand for products, services and solutions we offer;
  variability in vendor programs;
  the introduction of new or upgraded products, services or solutions;
  changes in prices from our suppliers;
  promotions;
  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;
  customer acceptance of new purchasing models;
  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, services 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.

 

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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 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 is focused 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. Additionally, our operating results from our commercial segment are impacted by certain commercial customer diverse supplier requirements and relationships we maintain with third party diverse supplier partners. Changes in any of these diverse supplier customer requirements or failure of our diverse supplier relationships to satisfy any such requirements at any time could have a material adverse effect on our results of operations or financial condition.

 

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 sales force. We have also incurred, and expect to continue to incur, significant expenses resulting from infrastructure investments related to our 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 managed, advanced and end-point technology solutions, including around centers (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 sales force or sales support resources 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.

 

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.

 

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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.

 

We may be subject to state or local taxes on income, gross receipts, sales or use or a similar measure. 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 or collect taxes has been the subject of court actions and various legislative efforts. There can be no assurance that these taxes or tax obligations will not be imposed upon us and our subsidiaries in a manner that could materially adversely impact our financial condition or results of operations.

 

We are subject to a number of general business laws and regulations, including laws and regulations specifically governing companies that do business over the Internet. These laws and regulations may cover user privacy, marketing and promotional practices (including electronic communications with our customers and potential customers), data protection and security, pricing, content, copyrights, distribution, contracts and other communications, consumer protection, product safety, the provision of online payment services, copyrights, patents and other intellectual property rights, unauthorized access (including the Computer Fraud and Abuse Act), and the characteristics 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.

 

In addition, we may be subject to federal, state or local taxes on income, gross receipts, sales or use or a similar measure. State and local governments may seek to impose such taxes in cases where they believe the taxpayer may have a sufficient economic presence by reason of sales or services to customers located in the applicable jurisdiction. The responsibility to pay or collect taxes has been the subject of court actions and various legislative efforts. There can be no assurance that these taxes or tax collection obligations will not be imposed upon us and our subsidiaries in a manner that could materially adversely impact our financial condition or results of operations.

 

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 or regulatory agencies. 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 new or existing laws and regulations 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.

 

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, we recently entered the Canadian market with our recent acquisitions in Canada, which subjected us to laws and regulations applicable to companies doing business in the multiple Canadian provinces. Further, there is a possibility that other 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.

 

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.

 

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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 discussed in these risk factors, including 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.

 

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;
  fluctuations in our warehousing and shipping costs; and
  foreign currency exchange rates.

 

If we fail to accurately predict and manage our inventory risks, our 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 owned inventory at our directly operated and distributor partner warehouse and distribution facilities. We assume the inventory damage, theft and obsolescence risks, as well as price erosion risks for products that are sold out of such inventory. These risks are especially significant because many of the products we sell are characterized by rapid technological change, obsolescence and price erosion, and because at times we may 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 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 some of our largest vendor partners, but these rights vary by product line, are subject to specified conditions and limitations and can be terminated or changed at any time. We also recently have decided to move more of our inventory warehousing and distribution functions to third party distributor partners in replacement of our historic directly operated facility in Memphis Tennessee. Moving these operations to third party facilities will result in greater dependence on these third parties for portions of our warehousing and distribution needs. As a result, we will now be subject to third party contractual relationships for these replaced operations, which could result in future cost increases and other contractual risk allocations which we have not historically faced and may not be able control.

 

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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.

 

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.

 

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Furthermore, we sell products, services and solutions manufactured, published and distributed by third parties, some of which may be defective. If any product, service 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 and government or third party audits 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, audit or investigation 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 matters, 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 matters. We cannot determine with any certainty the costs or outcome of such pending or future matters and they may materially harm our business, results of operations or financial condition.

 

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 and software products and accessories. Expansion into new product, service and solutions categories, including for example our efforts to grow managed and advanced technology services and solutions, may require us to incur significant marketing expenses, develop relationships with new vendors, acquire and retain expensive personnel 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 and service 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 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.

 

 39 
   

 

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 or to offer and support our managed and advanced technology solutions, 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.

 

Any inability to effectively manage our growth and achieve economies of scale 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. 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 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.

 

 40 
   

 

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.

 

We have received in the past, and anticipate that we will receive in the future, communications from customers due to purported fraudulent activities, including fraudulent activities on our websites such as 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 could also subject us to losses and could lead to scrutiny from lawmakers and regulators regarding the operation of our businesses, including 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.

 

Breaches of data security could significantly impact our business and expose us to material costs and liability.

 

Data security laws are becoming more widespread and burdensome 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. This liability could also include claims for other misuses of personal information, including for unauthorized marketing purposes. Other liability could include claims alleging misrepresentation of our privacy and data security practices. Any such liability could decrease our profitability and materially adversely affect our financial condition.

 

Laws or regulations relating to privacy and data protection may adversely affect the growth of our business or our marketing efforts and expose us to material costs and liability.

 

We market 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, in the United States, Canada 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 U. S. national do-not-call list and CAN-SPAM Act and the Canadian Anti-Spam Legislation, may subject us to fines, penalties and damages, which could decrease our revenue and profitability.

 

 41 
   

 

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. We also could incur additional costs and liability exposures if new laws or regulations regarding the use of personal information are introduced. These privacy 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, 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.

 

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.

 

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.

 

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 owned and third party distribution facilities, which house the product inventory from which a material amount of our orders may be shipped, are located 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. 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.

 

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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 IT solution providers, 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 and Newegg.com, government resellers such as CDWG and GovConnection, software focused resellers such as SoftwareOne, Soft Choice and Software House International and other direct marketers and value added resellers of hardware, software and technology services and solutions. In these 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 vendors 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 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.

 

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

 

All or portions of certain of the products we sell are produced, or have major components produced, in Asia. We engage in U.S. dollar denominated transactions with U.S. divisions and subsidiaries of companies located in that region as well. We have also recently entered the Canadian market with our Acrodex and Systemax acquisitions. As a result, we may be indirectly affected by risks associated with international events, including economic and labor conditions, such as fluctuating oil prices, 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 Asia 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 also maintain an office in the Philippines and third party back office support from Pakistan, as a result of our En Pointe acquisition, 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 or Pakistan operations or any other offshore operations that we may 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.

 

 43 
   

 

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, the Philippines and Pakistan that provide back-office administrative support and customer service support, and we recently began selling products, services and solutions in the Canadian market in connection with two business acquisitions. 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 solution providers are consolidating operations and acquiring or merging with other providers 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.

 

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.

 

***

 

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

 

Issuer Purchases of Equity Securities

 

In April 2015, 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 and amended in September 2012 to add an additional $10 million. 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. 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. The repurchased shares are held as treasury stock. 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. From the inception of the program in October 2008 through June 30, 2016, we have repurchased an aggregate of 4,081,687 shares of our common stock for a total cost of $25.9 million. At June 30, 2016, we had $4.1 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, 2016 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, 2016 to April 30, 2016     101,937   $8.76    101,937   $4,923 
May 1, 2016 to May 31, 2016     85,125    9.62    85,125    4,103 
June 1, 2016 to June 30, 2016     2,500    9.82    2,500    4,079 
Total     189,562         189,562      

 

ITEM 6. EXHIBITS

 

Exhibit
Number
  Description
     
10.1   First Amendment to Fourth Amended and Restated Loan and Security Agreement, dated as of July 7, 2016, by and among PCM, Inc. and all of its wholly-owned domestic and Canadian subsidiaries, certain lenders and Wells Fargo Capital Finance, LLC
     
10.2   Credit Agreement, dated as of July 7, 2016, by and among PCM, Inc. and Castle Pines Capital LLC
     
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

***

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PCM, INC.

 

SIGNATURE

 

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

 

  PCM, INC.
  (Registrant)
   
Date: August 9, 2016 By: /s/Brandon H. LaVerne
    Brandon H. LaVerne
    Chief Financial Officer

 

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PCM, INC.

 

EXHIBIT LIST

 

Exhibit
Number
  Description
     
10.1   First Amendment to Fourth Amended and Restated Loan and Security Agreement, dated as of July 7, 2016, by and among PCM, Inc. and all of its wholly-owned domestic and Canadian subsidiaries, certain lenders and Wells Fargo Capital Finance, LLC
     
10.2   Credit Agreement, dated as of July 7, 2016, by and among PCM, Inc. and Castle Pines Capital LLC
     
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

 

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EXHIBIT 10.1

 

FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

 

THIS FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this “Amendment”), dated as of July 7, 2016, is entered into by and among PCM, INC., a Delaware corporation (“PCM”), PCM SALES, INC., a California corporation (“PCM Sales”), PCM LOGISTICS, LLC, a Delaware limited liability company (“PCM Logistics”), PCMG, INC., a Delaware corporation (“PCMG”), M2 MARKETPLACE, INC., a Delaware corporation (“M2”), ABREON, INC., a Delaware corporation (“Abreon”), MALL ACQUISITION SUB 5 INC., a Delaware corporation (“Acquisition 5”), PCM BPO, LLC, a Delaware limited liability company (“PCM BPO”), EN POINTE TECHNOLOGIES SALES, LLC, a Delaware limited liability company (“En Pointe”), and ONSALE HOLDINGS, INC., an Illinois corporation (“Holdings”) (each a “U.S. Borrower” and collectively the “U.S. Borrowers”), and PCM SALES CANADA, INC., a Quebec corporation (“PCM Sales Canada”), and ACRODEX INC., an Alberta corporation (“Acrodex”) (each a “Canadian Borrower” and collectively the “Canadian Borrowers”; and the Canadian Borrowers and the U.S. Borrowers are each hereinafter referred to as a “Borrower”, and collectively, the “Borrowers”), WELLS FARGO CAPITAL FINANCE, LLC, a Delaware limited liability company, as administrative and collateral agent for the Lenders (in such capacity, “Agent”) and the Lenders signatory hereto.

 

RECITALS

 

A. Agent and the several financial institutions from time to time party thereto as lenders (“Lenders”) and Borrowers have previously entered into that certain Fourth Amended and Restated Loan and Security Agreement dated as of January 19, 2016 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”), pursuant to which Agent and Lenders have made certain loans and financial accommodations available to Borrowers. Terms used herein without definition shall have the meanings ascribed to them in the Loan Agreement.

 

B. Borrowers have requested that Agent and the Lenders increase the Maximum Credit by an amount equal to $15,000,000 and make other amendments to the Loan Agreement, which Agent and the Lenders are willing to do pursuant to the terms and conditions set forth herein.

 

C. Borrowers are entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of Agent’s or any Lender’s rights or remedies as set forth in the Loan Agreement are being waived or modified by the terms of this Amendment.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

 

 
 

 

1. Amendments to Loan Agreement.

 

(a) The following definition is hereby added to the Loan Agreement as Section 1.47(A):

 

“1.47(A) “Castle Pines” means Castle Pines Capital LLC.”

 

(b) The following definition is hereby added to the Loan Agreement as Section 1.47(B):

 

“1.47(B) “Castle Pines Documents” means the “Second Lien Documents” as such term is defined in the Castle Pines Intercreditor Agreement.”

 

(c) The following definition is hereby added to the Loan Agreement as Section 1.47(C):

 

“1.47(C) “Castle Pines Intercreditor Agreement” means that certain Intercreditor Agreement dated as of the First Amendment Effective Date, by and between Agent and Castle Pines, and acknowledged and agreed to by the Borrowers.”

 

(d) The following definition is hereby added to the Loan Agreement as Section 1.47(D):

 

“1.47(D) “Castle Pines Secured Obligations” means the “Second Lien Debt” as such term is defined in the Castle Pines Intercreditor Agreement.”

 

(e) The lead in to the definition of “Eligible Accounts” in Section 1.68 of the Loan Agreement and clauses (a), (f), (g) and (j) thereof are hereby amended and restated to read in their entirety to read as follows:

 

“1.68 “Eligible Accounts” shall mean Accounts created by Borrowers or Joint Venture which are and continue to be acceptable to Agent based on the criteria set forth below. In general, Accounts shall be Eligible Accounts if:

 

(a) such Accounts arise from the actual and bona fide sale and delivery of goods by Borrowers or Joint Venture or rendition of services by Borrowers or Joint Venture in the ordinary course of their business which transactions are completed in accordance with the terms and provisions contained in any documents related thereto;”

 

“(f) such Accounts do not consist of progress billings (such that the obligation of the account debtors with respect to such Accounts is conditioned upon a Borrower’s or Joint Venture’s satisfactory completion of any further performance under the agreement giving rise thereto), bill and hold invoices or retainage invoices, except as to bill and hold invoices, if Agent shall have received an agreement in writing from the account debtor, in form and substance satisfactory to Agent, confirming the unconditional obligation of the account debtor to take the goods related thereto and pay such invoice;

 

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(g) the account debtor with respect to such Accounts has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Accounts (but the portion of the Accounts of such account debtor in excess of the amount at any time and from time to time owed by any Borrower or Joint Venture to such account debtor or claimed owed by such account debtor may be deemed Eligible Accounts);”

 

“(j) neither the account debtor nor any officer or employee of the account debtor with respect to such Accounts is an officer, employee or agent of or affiliated with any Borrower or Joint Venture directly or indirectly by virtue of family membership, ownership, control, management or otherwise;”

 

(f) In the definition of “Eligible Accounts” in Section 1.68 of the Loan Agreement, (i) the text “; and” at the end of clause (r) thereof is hereby deleted and replaced with the text “;”, (ii) the text “.” at the end of clause (s) thereof is hereby deleted and replaced with the text “; and”, and (iii) a new clause (t) is hereby added as follows:

 

“(t) to the extent such Accounts are created by Joint Venture, such Accounts constitute Eligible Joint Venture Accounts.”

 

(g) The following definition is hereby added to the Loan Agreement as Section 1.71(A):

 

“1.71(A) “Eligible Joint Venture Accounts” means Accounts generated by Joint Venture which are and continue to be acceptable to Agent based on the criteria set forth below. In general, Accounts generated by Joint Venture shall be Eligible Joint Venture Accounts if:

 

(a) such Accounts have been assigned to PCM Sales and PCM in accordance with the Joint Venture Documents with no further action required;

 

(b) the assignment of such Accounts from Joint Venture to PCM Sales and PCM is subject to a true sale opinion in form and substance satisfactory to Agent;

 

(c) such Accounts do not constitute more than twenty percent (20%) of all otherwise Eligible Accounts (but the portion of the Accounts not in excess of such percentage may be deemed Eligible Joint Venture Accounts);

 

(d) PCM Sales and PCM have perfected the transfer of such Accounts from Joint Venture by filing a UCC-1 in form and substance satisfactory to Agent, and such UCC-1 has been assigned to Agent; and

 

3
 

 

(e) the Joint Venture Documents have not been amended since the First Amendment Effective Date other than amendments approved by Agent in its Permitted Discretion.”

 

(h) The following definition is hereby added to the Loan Agreement as Section 1.92(A):

 

“1.92(A) “First Amendment Effective Date” means July 7, 2016.”

 

(i) The following definition is hereby added to the Loan Agreement as Section 1.110(A):

 

“1.110(A) “Joint Venture” means En Pointe IT Solutions, LLC, a Delaware limited liability company.”

 

(j) The following definition is hereby added to the Loan Agreement as Section 1.110(B):

 

“1.110(B) “Joint Venture Documents” means, collectively, that certain Master Services Agreement between Joint Venture and PCM Sales and PCM, that certain Limited Liability Company Agreement of En Pointe IT Solutions, LLC, and any other agreements, documents or instruments related thereto.”

 

(k) The definition of “Maximum Credit” in Section 1.113 of the Loan Agreement is hereby amended and restated to read in its entirety as follows:

 

“1.113 “Maximum Credit” shall mean, with reference to the Loans and the Letter of Credit Accommodations, the amount of Two Hundred Ninety Million Dollars ($290,000,000).”

 

(l) A new Section 9.6(f) is hereby added to the Loan Agreement as follows:

 

“(f) Borrowers shall promptly notify Agent in writing of the details of any amendment, restatement, supplement or other modification to any of the Joint Venture Documents and shall promptly provide Agent with a copy of any such amendment, restatement, supplement or modification.”

 

(m) In Section 9.8 of the Loan Agreement, (i) the text “and” at the end of clause (h) thereof is hereby deleted and replaced with the text “;”, (ii) the text “.” at the end of clause (i) thereof is hereby deleted and replaced with the text “; and”, and (iii) a new clause (j) is hereby added as follows:

 

“(j) Liens in favor of Castle Pines securing the Castle Pines Secured Obligations, subject to the terms of the Castle Pines Intercreditor Agreement.”

 

(n) In Section 9.9 of the Loan Agreement, (i) the text “and” at the end of clause (j) thereof is hereby deleted, (ii) the text “.” at the end of clause (k) thereof is hereby deleted and replaced with the text “; and”, and (iii) a new clause (l) is hereby added as follows:

 

4
 

 

“(l) the Castle Pines Secured Obligations in an amount not to exceed $50,000,000 at any time, subject to the terms of the Castle Pines Intercreditor Agreement.”

 

(o) In Section 9.10 of the Loan Agreement, (i) the text “and” at the end of clause (j) thereof is hereby deleted, (ii) the text “.” at the end of clause (k) thereof is hereby deleted and replaced with the text “; and”, and (iii) a new clause (l) is hereby added as follows

 

“(l) performance guarantees provided by PCM Sales and PCM pursuant to the Joint Venture Documents, as in effect as of the First Amendment Effective Date.”

 

(p) The following is hereby added to the Loan Agreement as a new Section 13.15 thereof:

 

“13.15 Intercreditor Agreement. Each Lender hereunder authorizes and instructs Agent to enter into the Castle Pines Intercreditor Agreement and acknowledges (or is deemed to acknowledge) that a copy of the Castle Pines Intercreditor Agreement was delivered, or made available, to such Lender. Each Lender hereby acknowledges that it has received and reviewed the Castle Pines Intercreditor Agreement. Each of the Lenders agrees to be bound by the Castle Pines Intercreditor Agreement. Nothing in this Section 13.15 shall be construed to provide that any Borrower is a third party beneficiary of the provisions of the Castle Pines Intercreditor Agreement or may assert any rights, defenses or claims on account of the Castle Pines Intercreditor Agreement or this Section 13.15, and each Borrower agrees that nothing in the Castle Pines Intercreditor Agreement is intended or shall impair the obligation of any Borrower to pay the obligations under this Agreement, or any other Financing Agreement as and when the same become due and payable in accordance with their respective terms, or to affect the relative rights of the creditors with respect to any Borrower or except as expressly otherwise provided in the Intercreditor Agreement as to a Borrower’s obligations, such Borrower’s properties.”

 

2. Increase in Maximum Credit. Effective on the date hereof, the Maximum Credit shall be increased from $275,000,000 to $290,000,000 in accordance with terms hereof. The effective date for such increase shall be the date hereof. Effective on the date hereof, each party hereto acknowledges and agrees that the amount of each Lender’s Revolving Loan Commitment as reflected below such Lender’s signature on the signature pages to the Loan Agreement shall be deemed amended and replaced with the amounts set forth below such Lender’s signature on the signature pages hereto.

 

3. Conditions Precedent to Effectiveness of this Amendment. This Amendment shall not become effective until all of the following conditions precedent shall have been satisfied in the sole discretion of Agent or waived by Agent:

 

(a) Agent shall have received this Amendment fully executed in a sufficient number of counterparts for distribution to all parties;

 

5
 

 

(b) Agent shall have received a fully executed copy of the Castle Pines Intercreditor Agreement, in form and substance satisfactory to Agent;

 

(c) Agent shall have received a certificate of a duly authorized officer of each Borrower in form and substance satisfactory to Agent, certifying (i) that attached (or previously provided) copies of such Borrower’s organizational and governing documents are true and complete, and in full force and effect, without amendment except as shown; (ii) that an attached copy of resolutions authorizing execution and delivery of the Financing Agreements is true and complete, and that such resolutions are in full force and effect, were duly adopted, have not been amended, modified or revoked, and constitute all resolutions adopted with respect to this Amendment; and (iii) to the title, name and signature of each Person authorized to sign the Financing Agreements;

 

(d) U.S. Borrowers shall pay to Agent, for the benefit of each U.S. Lender party hereto, (i) an amendment fee in an amount equal to 0.02% of each such U.S. Lender’s aggregate U.S. Revolving Loan Commitment immediately prior to the effectiveness of this Amendment, and (ii) an increase fee in an amount equal to 0.20% of the increase (if any) to each such U.S. Lender’s aggregate U.S. Revolving Loan Commitment as a result of this Amendment, in each case, which fees shall be fully earned as of and payable on the date hereof;

 

(e) Agent shall have received a copy of that certain fee letter dated as of the date hereof, by and among Borrowers and Agent, and Borrowers shall have paid all fees required to be paid thereunder;

 

(f) Agent shall have received fully executed copies of the Joint Venture Documents and the Castle Pine Documents, in form and substance satisfactory to Agent; and

 

(g) Agent shall have received all other documents and legal matters in connection with the transactions contemplated by this Amendment and such documents shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Agent.

 

4. Representations and Warranties. Each Borrower represents and warrants as follows:

 

(a) Authority. Each Borrower has the requisite corporate power and authority to execute and deliver this Amendment, and to perform its obligations hereunder and under the Financing Agreements (as amended or modified hereby) to which it is a party. The execution, delivery and performance by each Borrower of this Amendment have been duly approved by all necessary corporate action, have received all necessary governmental approval, if any, and do not contravene any law or any contractual restriction binding on any Borrower. No other corporate proceedings are necessary to consummate such transactions.

 

(b) Enforceability. This Amendment has been duly executed and delivered by each Borrower. This Amendment and each Financing Agreement (as amended or modified hereby) is the legal, valid and binding obligation of each Borrower, enforceable against each Borrower in accordance with its terms, and is in full force and effect.

 

6
 

 

(c) Representations and Warranties. The representations and warranties contained in each Financing Agreement (other than any such representations or warranties that, by their terms, are specifically made as of a date other than the date hereof) are true and correct on and as of the date hereof as though made on and as of the date hereof.

 

(d) Due Execution. The execution, delivery and performance of this Amendment are within the power of each Borrower, have been duly authorized by all necessary corporate or company action, have received all necessary governmental approval, if any, and do not contravene any law or any contractual restrictions binding on such Borrower.

 

(e) No Default. No event has occurred and is continuing that constitutes a Default or Event of Default.

 

5. Choice of Law. The validity of this Amendment, the construction, interpretation, and enforcement hereof, and the rights of the parties hereto with respect to all matters arising hereunder or related hereto shall be determined under, governed by, and construed in accordance with the laws of the State of California.

 

6. Counterparts. This Amendment may be executed in any number of counterparts and by different parties and separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by telefacsimile or other electronic transmission shall be effective as delivery of a manually executed counterpart of this Amendment.

 

7. Reference to and Effect on the Financing Agreements.

 

(a) Upon and after the effectiveness of this Amendment, each reference in the Loan Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Loan Agreement, and each reference in the other Financing Agreements to “the Loan Agreement”, “thereof” or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as modified and amended hereby.

 

(b) Except as specifically set forth in this Amendment, the Loan Agreement and all other Financing Agreements, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed and shall constitute the legal, valid, binding and enforceable obligations of Borrowers to Agent and Lenders without defense, offset, claim or contribution.

 

(c) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Agent or any Lender under any of the Financing Agreements, nor constitute a waiver of any provision of any of the Financing Agreements.

 

8. Ratification. Each Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Loan Agreement, as amended hereby, and the other Financing Agreements effective as of the date hereof.

 

7
 

 

9. Estoppel. To induce Agent and Lenders to enter into this Amendment and to induce Agent and Lenders to continue to make advances to Borrowers under the Loan Agreement, each Borrower hereby acknowledges and agrees that, after giving effect to this Amendment, as of the date hereof, there exists no Default or Event of Default.

 

10. Integration. This Amendment is a Financing Agreement. This Amendment, together with the other Financing Agreements, incorporates all negotiations of the parties hereto with respect to the subject matter hereof and is the final expression and agreement of the parties hereto with respect to the subject matter hereof.

 

11. Severability. In case any provision in this Amendment shall be invalid, illegal or unenforceable, such provision shall be severable from the remainder of this Amendment and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

 

12. Submission of Amendment. The submission of this Amendment to the parties or their agents or attorneys for review or signature does not constitute a commitment by Agent or any Lender to waive any of their respective rights and remedies under the Financing Agreements, and this Amendment shall have no binding force or effect until all of the conditions to the effectiveness of this Amendment have been satisfied as set forth herein.

 

[Remainder of Page Left Intentionally Blank]

 

8
 

 

IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written.

 

  U.S. BORROWERS:
     
  PCM, INC.,
  a Delaware corporation
     
  By: /s/ Brandon LaVerne
  Name: Brandon LaVerne
  Title: CFO
     
  PCM SALES, INC.,
  a California corporation
     
  By: /s/ Stephen W. Moss
  Name: Stephen W. Moss
  Title: President
     
  PCM LOGISTICS, LLC,
  a Delaware limited liability company
     
  By: /s/ Sean Mollet
  Name: Sean Mollet
  Title: President
     
  PCMG, INC.,
  a Delaware corporation
     
  By: /s/ Alan Lawrence
  Name: Alan Lawrence
  Title: President

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

  U.S. BORROWERS:
     
  M2 MARKETPLACE, INC.,
  a Delaware corporation
     
  By: /s/ Sam Khulusi
  Name: Sam Khulusi
  Title: President
     
  ABREON, INC.,
  a Delaware corporation
     
  By: /s/ Howard Schaphiro
  Name: Howard Schaphiro
  Title: President
     
  MALL ACQUISITION SUB 5 INC.,
  a Delaware corporation
     
  By: /s/ Brandon LaVerne
  Name: Brandon LaVerne
  Title: President

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

  U.S. BORROWERS:
     
  PCM BPO, LLC,
  a Delaware limited liability company
     
  By: /s/ Simon Abuyounes
  Name: Simon Abuyounes
  Title: President
     
  ONSALE HOLDINGS, INC.,
  an Illinois corporation
     
  By: /s/ Sam Khulusi
  Name: Sam Khulusi
  Title: President
     
  EN POINTE TECHNOLOGIES SALES, LLC,
  a Delaware limited liability company
     
  By: /s/ Michael Rapp
  Name: Michael Rapp
  Title: President

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

  CANADIAN BORROWERS:
     
  PCM SALES CANADA, INC.,
  a Quebec corporation
     
  By: /s/ Simon Abuyounes
  Name: Simon Abuyounes
  Title: President
     
  ACRODEX INC.,
  an Alberta corporation
     
  By: /s/ Yasmin Jivraj
  Name: Yasmin Jivraj
  Title: Director

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

AGENT:  
     
WELLS FARGO CAPITAL FINANCE, LLC  
     
By: /s/ Peter Possemoto  
Name: Peter Possemoto  
Title: Director  
     
LENDER:  
     
WELLS FARGO CAPITAL FINANCE, LLC  
     
By: /s/ Peter Possemoto  
Name: Peter Possemoto  
Title: Director  

 

U.S. Revolving Loan Commitment: $110,000,000

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

LENDER:  
     
WELLS FARGO CAPITAL FINANCE CORPORATION CANADA
     
By: /s/ David G. Phillips  
Name: David G. Phillips  
Title: Senior Vice President  

 

Canadian Revolving Loan Commitment: C$14,545,454.55

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

LENDERS:

 

BANK OF AMERICA, N.A.

 

By: /s/ Matthew R. Vansteenhuyse  
Name: Matthew R. Vansteenhuyse  
Title: Senior Vice President  
     
U.S. Revolving Loan Commitment: $53,000,000  
     
BANK OF AMERICA, N.A. (acting through its Canada branch)
     
By: /s/ Sylwia Durkiewicz  
Name: Sylwia Durkiewicz  
Title: Vice President  

 

Canadian Revolving Loan Commitment: C$7,272,727.27

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

LENDERS:

 

PNC BANK, N.A.

 

By: /s/ Steve Roberts  
Name: Steve Roberts  
Title: Senior Vice President  
     
U.S. Revolving Loan Commitment: $40,000,000
     
PNC BANK CANADA BRANCH
     
By: /s/ James Bruce  
Name: James Bruce  
Title: Vice President  

 

Canadian Revolving Loan Commitment: C$5,818,181.82

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

LENDERS:

 

JPMORGAN CHASE BANK, N.A.

 

By: /s/ Jordan Azar  
Name: Jordan Azar  
Title: Authorized Officer  
     
U.S. Revolving Loan Commitment: $37,000,000
     
JPMORGAN CHASE BANK, N.A., TORONTO BRANCH
     
By: /s/ Deborah Booth  
Name: Deborah Booth  
Title: Executive Director  

 

Canadian Revolving Loan Commitment: C$5,090,909.09

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

LENDER:

 

COMPASS BANK

 

By: /s/ Jason Nichols  
Name: Jason Nichols  
Title: Senior Vice President  

 

U.S. Revolving Loan Commitment: $25,000,000

 

Canadian Revolving Loan Commitment: C$3,636,363.64

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

LENDER:

 

CITY NATIONAL BANK

 

By: /s/ Todd Hokamoto  
Name: Todd Hokamoto  
Title: Vice President  

 

U.S. Revolving Loan Commitment: $25,000,000

 

Canadian Revolving Loan Commitment: C$3,636,363.64

 

 

 

 

[Signature page to First Amendment to Fourth Amended and Restated Loan and Security Agreement]

 

 
 

 

 

EXHIBIT 10.2

 

CREDIT AGREEMENT

 

This Credit Agreement is effective as of July 7, 2016 (the “Effective Date”) by and between CASTLE PINES CAPITAL LLC (“CPC”), a Delaware limited liability company having its chief executive office located at 116 Inverness Drive East, Suite 375, Englewood, Colorado 80112, and PCM, INC. (“Reseller”), a Delaware corporation, having its chief executive office located at 1940 E Mariposa Ave, El Segundo, CA 90245 (this “Credit Agreement”). Unless otherwise defined within this Credit Agreement, capitalized terms have the meaning set forth in Section 25, below.

 

1. Extensions of Credit. Subject to the terms of this Credit Agreement, together with the attached Financial Covenants Amendment to Credit Agreement (collectively, this “Agreement”), CPC has made a discretionary inventory line of credit (the “Inventory Line of Credit”) available to Reseller. The Inventory Line of Credit may be used to enable Reseller to purchase Inventory from CPC approved vendors (collectively, the “Vendors”). The Inventory Line of Credit is a discretionary line of credit and CPC has no obligation to make an Advance under such line of credit even if no Default has occurred under the terms of this Agreement. CPC may combine all of CPC’s advances to Reseller or on Reseller’s behalf together under this Credit Agreement or any other agreement between CPC and Reseller, together with all finance charges, fees and expenses related thereto, to make one debt owed by Reseller.

 

2. Financing Terms.

 

  a. Financed Inventory - General. Upon the terms and conditions set forth herein, CPC may finance:

 

    Reseller’s purchases of Eligible Inventory from Vendors (“Financed Inventory”), for which payment shall be due on the Payment Due Date
     
    If CPC agrees to finance an item of Financed Inventory, CPC will send Reseller a TS, identifying such Financed Inventory and if not otherwise provided herein, the interest rate applicable to such Financed Inventory.
     
    CPC may withdraw any approval to finance Inventory at any time prior to Shipment.

 

  b. Discretionary Nature of the Inventory Line of Credit. This Agreement contains the terms and conditions upon which CPC presently expects to make Advances to Reseller in the future. Each Advance shall be in CPC’s sole discretion, and CPC does not need to show that an adverse change has occurred in the business operations or financial condition of Reseller, or show that any conditions of this Agreement have not been met, in order to refuse to make an Advance.
     
  c. Overlines. Reseller may request and CPC may be willing in its sole and absolute discretion to make Advances to Reseller in excess of the Inventory Line of Credit (each an “Overline” and collectively, the “Overlines”). The aggregate amount of permitted Overlines and the duration of time such Overlines may be available to Reseller shall be communicated to Reseller via a separate written communication from CPC, the terms of which shall be incorporated herein by reference.

 

3. Security Interest. Reseller hereby grants to CPC a security interest in all of the Collateral as security for all Indebtedness.

 

 Page 1 of 22 
   

 

4. Representations and Warranties. Reseller represents and warrants to CPC on the date hereof, and shall be deemed to represent and warrant to CPC on each date on which an Advance is made to Reseller hereunder, that:

 

  a. Reseller (i) is in good standing in the State of Delaware, (ii) is qualified to transact business as a foreign organization, and is in good standing under the laws of, all jurisdictions in which it is required by applicable law to maintain such qualification and good standing except to the extent that the failure to qualify or maintain good standing would not reasonably be expected to have a material adverse effect on Reseller’s financial condition, results of operation or the business, or the rights of CPC in or to any of the Collateral, (iii) does not conduct business under any trade styles or trade name(s) except as listed in Exhibit A attached hereto, (iv) has all the necessary authority to enter into and perform this Agreement, and such agreement and performance will not violate Reseller’s Organizational Documents or any law, regulation or agreement binding upon it;
     
  b. Reseller (i) keeps its records respecting Accounts at its chief executive office, and (ii) maintains Collateral solely at Permitted Locations;
     
  c. this Agreement correctly sets forth (i) Reseller’s true legal name, (ii) the type of Reseller’s organization, and (iii) Reseller’s state of organization;
     
  d. all information supplied by Reseller in writing to CPC in connection with this Agreement, including all information within the Documents, regarding Accounts, financial, credit or accounting statements and application for credit, when taken as a whole, was true, correct and complete in all material respects on the date such information was dated or certified; all financial statements furnished to CPC in connection with such application or hereunder have been prepared in accordance with GAAP and fairly present the financial condition and results of operations of Reseller as of the dates and for the periods indicated therein; Reseller has no material, contingent liabilities, liabilities for taxes, unusual forward or long-term commitments, or unrealized or anticipated losses from any unfavorable commitments except as referred to or reflected in such financial statements; there has been no material adverse change in the assets, liabilities, properties and condition, financial or otherwise, of Reseller since the effective date of the most recent financial statements referred to in Section 7;
     
  e. all advances and other transactions hereunder are for lawful commercial purposes;
     
  f. Reseller has good title to all Collateral;
     
  g. Reseller is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended;
     
  h. there are no actions or proceedings pending or, to Reseller’s actual knowledge, threatened against Reseller which, if adversely determined against the Reseller, would result in any material adverse change in the assets or business of Reseller or would impair the ability of Reseller to perform its obligations hereunder or CPC to enforce any Indebtedness or realize upon a material portion of the Collateral;
     
  i. Reseller has provided CPC with a copy of Reseller’s Organizational Documents, and will provide any subsequent amendments thereto bearing indicia of filing from the appropriate governmental authority, if applicable, and such other documents as CPC may reasonably request from time to time;
     
  j. none of the proceeds resulting from this Agreement will be used directly or indirectly to fund a personal loan to or for the benefit of a director or executive officer of Reseller; and
     
  k. no event or circumstance has occurred which Reseller has not disclosed to CPC in writing and which has had or could reasonably be expected to have a material adverse effect on the business or assets of Reseller.

 

 Page 2 of 22 
   

 

5. Covenants. From the date hereof and until the payment and performance in full of all of the Indebtedness, Reseller covenants with CPC that:

 

  a. Until sold as permitted by this Agreement, Reseller shall own all Financed Inventory and Accounts free and clear of all liens, security interests, claims and other encumbrances, whether arising by agreement or operation of law (collectively “Liens”) other than (i) Liens in favor of CPC, (ii) Liens in favor of other persons with respect to which CPC shall have first consented in writing and which Liens are subject to subordination agreements acceptable to CPC; (iii) Liens securing the Revolving Facility Debt, (iv) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and for which Reseller maintains adequate reserves, provided the same have no priority over any of CPC’s security interests, (v) Liens arising from judgments, decrees or attachments arising from circumstances that do not constitute a Default hereunder, for which Reseller maintains adequate reserves and are inferior to any lien of CPC, (vi) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of Reseller in accordance with GAAP, (vii) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being reasonably contested and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of Reseller, (viii) pledges or deposits in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other social security legislation, other than any lien imposed by ERISA, (ix) deposits to secure the performance of bids, trade contracts and leases (other than Indebtedness), statutory obligations, security bonds (other than bonds related to judgments or litigation), performance bonds and other obligations of a like nature incurred in the ordinary course of business, and (x) other Liens not described above arising in the ordinary course of business provided such Liens (1) are inferior to any lien of CPC and (2) would not and would not reasonably be expected to result in a (A) material adverse effect on the business, financial condition, results of operation or business of Reseller, (B) material impairment on the ability of Reseller to perform any of its obligations under this Agreement or any other Document or (C) material impairment of the enforceability of the rights of, or benefits available to, CPC under this Agreement (clauses (i) through (x) above, collectively, “Permitted Liens”).
     
  b. Reseller will: (1) keep all Collateral at Permitted Locations and keep all tangible Collateral in good order, repair and operating condition and insured as required herein; (2) promptly file all tax returns required by law and promptly pay all taxes, fees, and other governmental charges for which it is liable, including without limitation all governmental charges against the Collateral; (3) permit CPC and its designees, upon reasonable advance notice, to inspect the Collateral during normal business hours and at any other time CPC deems desirable (provided, however, that upon a Default, CPC may inspect the Collateral at such times as CPC determines is necessary or desirable in its sole discretion and provided further that, absent a Default, no more than 3 such inspections per consecutive 12 months shall be at the cost and expense of Reseller); (4) keep complete and accurate records of its business, including inventory and sales, and permit CPC and its designees to inspect and copy such records upon request; (5) furnish CPC with such additional information regarding the Collateral and Reseller’s business and financial condition as CPC may from time to time reasonably request (including without limitation financial statements more frequently than as described in Section 7 below); (6) execute all documents CPC requests to perfect and maintain CPC’s security interest in the Collateral; (7) at all times be duly organized, existing, in good standing, qualified and licensed to do business in each jurisdiction in which the nature of its business or property so requires; (8) notify CPC of the commencement of any legal proceedings against Reseller; and (9) comply in all material respects with all applicable laws, rules and regulations.
     
  c. Intentionally omitted.

 

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  d. Reseller will not: (1) use (except for demonstration for sale), rent, lease, sell, transfer, consign, license, encumber or otherwise dispose of Collateral except for (i) sales of inventory at retail in the ordinary course of Reseller’s business, (ii) dispositions of obsolete property, (iii) dispositions to the extent that (x) such property is exchanged for credit against the purchase price of replacement property intended for use in the ordinary course of business, or (y) the proceeds of such disposition are promptly (not to exceed 180 days from disposition) applied to the purchase price of such replacement property, and (iv) dispositions not otherwise permitted under this clause (d) but which are permitted under the Revolving Loan Documents and provided that no Default exists or would result from such disposition and provided further such disposition would not and would not reasonably be expected to have or result in a (i) material adverse effect on the business, financial condition, results of operation or business of Reseller, (ii) material impairment on the ability of Reseller to perform any of its obligations under this Agreement or any other Document or (iii) material impairment of the enforceability of the rights of, or benefits available to, CPC under this Agreement, (2) sell Inventory to an affiliate, except on terms consistent with an arms-length transaction; (3) make any change in the principal nature of its business, (4) be a party to a merger, consolidation or acquisition wherein Reseller is not the surviving entity; (5) change its name or conduct business under a trade style or trade name other than those listed in Exhibit A without giving CPC at least 30 days’ prior written notice thereof; (6) change its chief executive office or office where it keeps its records with respect to accounts or chattel paper without providing CPC with at least 30 days’ prior written notice thereto; (7) change the state in which it is organized (except upon giving CPC at least 30 days’ prior written notice thereof); (8) except for the security interest granted to the agent under the Revolving Loan Documents to secure the Revolving Facility Debt, grant a security interest to any third party in any Financed Inventory that is superior or pari passu with the security interest granted to CPC under this Agreement; (9) except for the security interest granted to the agent under the Revolving Loan Documents to secure the Revolving Facility Debt and other Permitted Liens, grant a security interest to any third party in any Accounts; or (10) store Financed Inventory with any third party, except in the ordinary course of business consistent with Reseller’s past practices.
     
  e. Reseller shall promptly notify CPC in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim which involves an amount in excess of $2,000,000 and relates to the Collateral or any other property which is security for the Indebtedness or which would result in any material adverse change in the Reseller’s business, properties, assets, goodwill or condition, financial or otherwise, and (ii) the occurrence of any Default or event which, with the passage of time or giving of notice or both, would constitute a Default.
     
  f. At the time of each advance of credit under the terms of this Agreement, each representation and warranty set forth in Section 4 above will be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the making of each such advance and after giving effect thereto, except to the extent related to an earlier date, in which case, such representations and warranties shall speak only of such earlier date.
     
  g. Reseller will execute and deliver to CPC such agreements, assignments or instruments (including affidavits, notices, reaffirmations and amendments and restatements of existing documents, as CPC may reasonably request) and do all such other things as CPC may deem necessary, appropriate or convenient (1) to assure CPC of the effectiveness and priority of its security interests, including such financing statements (including renewal statements), amendments and supplements or such other instruments as CPC may from time to time reasonably request in order to perfect and maintain the security interests in the Collateral in accordance with the UCC, (2) to consummate the transactions contemplated hereby and (3) to otherwise protect and assure CPC of its rights and interests hereunder. To that end, Reseller agrees that CPC may file one or more financing statements to perfect CPC’s security interests in the Collateral (which may describe the Collateral as “all assets”).

 

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6. Insurance. Reseller will maintain with financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Reseller shall cause CPC to be named as a loss payee. All insurance proceeds received by CPC in respect of inventory which is damaged, lost or stolen may be retained by CPC, in its sole discretion, for application to the payment of any of the principal or interest on the Indebtedness then due and owing in respect of the inventory damaged, lost or stolen.

 

7. Financial Statements and Notices. Reseller will deliver to CPC :

 

  a. On or before the earlier of the 45th day after the end of each fiscal month or, for any fiscal month ending on the last day of a fiscal quarter, the date on which Reseller files its Form 10Q with the Securities and Exchange Commission for such fiscal quarter, monthly unaudited internally prepared consolidated and consolidating financial statements of Reseller and its Subsidiaries (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholder’s equity) as of the end of and through such fiscal month, all in reasonable detail, which financial statements shall be prepared honestly and in good faith; provided that (i) if the average daily Excess Availability (as defined in, and as determined in accordance with Section 9.6(a) of, the Revolving Loan Agreement as in effect as of the date hereof or as amended or modified hereafter with the written consent of CPC) during any fiscal quarter is not less than the greater of $12,500,000 or 10% of the amount available to be borrowed pursuant to clause (a) of Section 2.1 of the Revolving Loan Agreement as in effect as of the date hereof (but in any event no more than 10% of the Maximum Credit as defined in the Revolving Loan Agreement as in effect as of the date hereof or as amended or modified hereafter with the written consent of CPC) and so long as no Default has occurred and is continuing, then during the immediately following fiscal quarter, such financial statements may be provided on a fiscal quarter basis on or before the earlier of the 45th day after the end of such fiscal quarter or the date on which Reseller files its Form 10Q with the Securities and Exchange Commission for such fiscal quarter and (ii) CPC shall request (and Reseller hereby authorizes CPC to request) copies of the foregoing financial statements from WFCF as agent under the Revolving Loan Documents and, to the extent CPC notifies Reseller in writing that CPC was able to obtain the same from WFCF (and Reseller hereby authorizes WFCF to deliver the same to CPC), Reseller shall not be required to separately deliver the same to CPC under this clause (a).
     
  b. within 90 days after the end of each fiscal year, audited consolidated and consolidating financial statements of Reseller and its Subsidiaries for such year (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholder’s equity), and the accompany notes thereto, all in reasonable detail, fairly presenting the financial position and the results of the operations of Reseller and its Subsidiaries as of the end of and for such fiscal year, together with the opinion of independent certified public accountants, which accountants shall be an independent accounting form selected by Reseller and reasonably acceptable to CPC, that such financial statements have been prepared in accordance with GAAP and present fairly the results of operations and financial condition of Reseller and its Subsidiaries as of the end of and for the fiscal year then ended; provided that CPC shall request (and Reseller hereby authorizes CPC to request) copies of the foregoing financial statements from WFCF as agent under the Revolving Loan Documents and, to the extent CPC notifies Reseller in writing that CPC was able to obtain the same from WFCF (and Reseller hereby authorizes WFCF to deliver the same to CPC), Reseller shall not be required to separately deliver the same to CPC under this clause (b);
     
  c. at CPC’s request, within 75 days after the close of each fiscal year, a copy of Reseller’s budgeted projections for the next succeeding fiscal year, in reasonable detail to the satisfaction of CPC in its discretion; provided that CPC shall request (and Reseller hereby authorizes CPC to request) copies of the foregoing projections from WFCF as agent under the Revolving Loan Documents and, to the extent CPC notifies Reseller in writing that CPC was able to obtain the same from WFCF (and Reseller hereby authorizes WFCF to deliver the same to CPC), Reseller shall not be required to separately deliver the same to CPC under this clause (c);

 

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  d. at CPC’s request, to the extent CPC is unable to obtain the same from WFCF under the Revolving Loan Documents (including in the event the Revolving Facility Debt is repaid or financed), monthly Collateral Reports for and as of the immediately preceding month. Reseller irrevocably authorizes WFCF and each lender under the Revolving Loan Documents to deliver to CPC copies of such Collateral Reports upon request by CPC therefor;
     
  e. copies of any and all reports, examinations, notices, warnings and citations issued by any governmental or quasi-governmental (whether federal, state or local), unit, agency, body or entity, to the extent delivery or notice of the same is required under the Revolving Loan Documents;
     
  f. at CPC’s request, copies, or after the occurrence of a Default, originals of all orders, invoices, and similar agreements and documents; all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery of Inventory, the sale or disposition of which has resulted in Accounts;
     
  g. at CPC’s request, the originals of all Instruments, Chattel Paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts; in the same form as received and upon such request by CPC, immediately upon the receipt of each such document, with all necessary endorsements to enable CPC to enforce the same; and
     
  h. such other information as CPC from time to time reasonably requests.

 

8. Payment Terms. With respect to Financed Inventory, Reseller will immediately pay CPC the principal Indebtedness on the earliest occurrence of any of the following events: (a) on the Payment Due Date, and (b) immediately when the Inventory is lost, stolen or damaged (collectively, the “Loss Date”). All payments hereunder shall be made without setoff or counterclaim, prior to 11:00 a.m., Denver, Colorado time, on the Payment Due Date or the Loss Date, as applicable, in immediately available funds or by electronic data interchange (“EDI”) to the CPC Account or as otherwise agreed between the parties (the “Due Date”). For purposes of calculating interest, payment shall be deemed to have been applied by CPC against the principal of and/or interest on any Indebtedness on the Business Day, when before 11:00 a.m., good funds are received by CPC, whether such payment is made by check, wire, EDI, ACH Debit or other means. Reseller acknowledges that the date defined as the Payment Due Date falls on the same day of each week to establish a consistent payment date. CPC may change the terms of any future financing and the date for repayment of future Indebtedness by giving Reseller written notice specifying such change. Any third party discount, rebate, bonus or credit granted to Reseller for any Inventory will not reduce the Indebtedness Reseller owes CPC until CPC has received payment therefor in cash. Reseller will: (A) pay CPC even if any Inventory is defective or fails to conform to any warranties extended by any third party; (B) not assert against CPC any claim or defense Reseller has against any third party; and (C) indemnify and hold CPC harmless against all claims and defenses asserted by any buyer of any Inventory. Reseller waives all rights of setoff Reseller may have against CPC. CPC will have the continuing exclusive right to apply and reapply any and all payments received from Reseller or on Reseller’s behalf in such manner as CPC may deem advisable notwithstanding any entry by CPC upon its books and records. Notwithstanding anything in this Agreement to the contrary, CPC agrees that: (i) and the Payment Due Date set forth in any TS shall not be any earlier than it is required to be pursuant to the terms of the agreement between CPC and the applicable Vendor; and (ii) if CPC receives a notice from any Vendor that the terms of the agreement between such Vendor and CPC has changed such that the Payment Due Date of Reseller on any future TS will be revised to be earlier than on any prior TS, CPC shall provide Reseller with written notice of such change within one Business Day of CPC receiving such notice from such Vendor.

 

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9. Calculation of Charges. The outstanding principal balance of the Indebtedness and any other obligations arising hereunder shall bear interest commencing on the day immediately succeeding any Due Date; each at the per annum rate of interest applicable under the Revolving Loan Agreement to non-contingent obligations thereunder in the event of a default thereunder or, if no such rate is provided, at the per annum rate equal to LIBOR Rate plus 5.75% (the “Default Rate”). Interest will be calculated for the actual number of days elapsed on the basis of a year consisting of 360 days. Interest is due and payable monthly in arrears pursuant to the terms of the monthly billing statement from CPC. Upon the occurrence and during the continuance of a Default, interest shall accrue at the Default Rate and shall be payable upon demand. CPC intends to strictly conform to the usury laws. Regardless of any provision contained herein, CPC shall never be deemed to have contracted for, charged, received, collected or applied as interest, any amount in excess of the maximum amount allowable by applicable law. If CPC ever receives interest in excess of the maximum amount permitted by law, CPC will apply such excess amount to the reduction of the outstanding unpaid principal balance, and then will pay any excess to Reseller. In determining whether the interest paid or payable exceeds the highest lawful rate, Reseller and CPC shall, to the maximum extent permitted under applicable law, (1) characterize any non-principal payment (other than payments which are expressly designated as interest payments hereunder) as an expense or fee rather than as interest, (2) exclude voluntary pre-payments and the effect thereof, and (3) spread the total amount of interest throughout the entire term of this Agreement so that the interest rate is uniform throughout such term.

 

In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation or application thereof, shall at any time after the date hereof, in the reasonable opinion of CPC, make it unlawful or impractical for CPC to determine or charge interest rates at the LIBOR Rate, thereafter interest shall accrue at the Base Rate plus 4.75%, and Reseller shall not be entitled to elect the LIBOR Rate until CPC determines that it would no longer be unlawful or impractical to do so. Anything to the contrary contained herein notwithstanding, CPC is not required actually to acquire Eurodollar deposits to fund or otherwise match fund any Indebtedness as to which interest accrues at the LIBOR Rate.

 

10. Monthly Interest Billing Statement. CPC agrees to send to Reseller a monthly interest billing statement. Reseller agrees to pay interest arising from Indebtedness monthly in arrears in accordance with the terms of such monthly interest billing statement and this Agreement.

 

11. Default. The occurrence of one or more of the following events shall constitute a default by Reseller (a “Default”): (a) Reseller shall fail to pay any Indebtedness comprising principal when due; (b) Reseller shall fail to pay any Indebtedness comprising interest, fees or other amounts within two Business Days when due; (c) any representation or warranty made to CPC by Reseller shall not be true in any material respect when made; (d) Reseller shall breach or fail to perform any covenant contained in this Agreement or the other Documents and such breach or failure shall continue for 30 days; provided, that, such 30 day period shall not apply in the case of (i) any failure to observe any such covenant which is not capable of being cured at all or within such 30 day period or which has been the subject of a prior failure within the preceding four month period, or (ii) any failure by Reseller to pursue a cure diligently and promptly during such 30 day period; (e) Reseller shall become insolvent or generally fail to pay its debts as they become due or shall cease to do business as a going concern; (f) Reseller shall make an assignment for the benefit of creditors, or commence a proceeding under any bankruptcy, reorganization, arrangement, insolvency, receivership, dissolution or liquidation statute or similar law of any jurisdiction, or any such proceeding shall be commenced against it or any of its property, and in the case of any involuntary proceeding, such proceeding shall not be dismissed within 60 days (an “Automatic Default”); (g) an attachment, sale or seizure shall be issued or shall be executed against any assets of Reseller; (h) Reseller shall lose, or shall be in default of, any franchise, license or right to deal in any Financed Inventory and such loss or default shall not be cured within 30 days; (i) any default by Reseller relating to indebtedness for borrowed money or secured indebtedness owing to any Person other than CPC, in excess of $5,000,000 in the aggregate, which default continues for more than the applicable cure period, if any, with respect thereto, or any default by Reseller under any material contact, lease, license or other obligation to any person other than CPC which default continues for more than the applicable cure period, if any, with respect thereto, unless such defaults are being contested in good faith by appropriate proceedings diligently pursued; or (j) the indebtedness under the Revolving Loan Documents shall become due by acceleration by reason of a default.

 

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12. Rights and Remedies Upon Default. Upon the occurrence of a Default, CPC shall have all rights and remedies of a secured party under the UCC and other applicable law as well as all the rights and remedies set forth in this Agreement. CPC may terminate any obligations it has under this Agreement and any outstanding credit approvals immediately and/or declare any and all Indebtedness immediately due and payable without notice or demand. Reseller waives notice of intent to accelerate, and of acceleration of Indebtedness. CPC may enter any premises of Reseller, with or without process of law, without force, to search for, take possession of, and remove the Collateral, or any part thereof. If CPC requests, Reseller shall cease disposition of and shall assemble the Collateral and make it available to CPC, at Reseller’s expense, at a convenient place or places designated by CPC. CPC may take possession of the Collateral or any part thereof on Reseller’s premises at Reseller’s expense, and store said Collateral upon Reseller’s premises pending sale or other disposition. Upon the voluntary surrender of the Collateral to CPC or upon foreclosure of the Collateral by CPC, Reseller agrees that the sale of Inventory by CPC to a person who is liable to CPC under an agreement to repurchase inventory (a “Repurchase Agreement”) shall not be deemed to be a transfer subject to UCC §9-618(a) or any similar provision of any other applicable law, and Reseller waives any provision of such laws to that effect. Reseller agrees that the repurchase of Inventory by a Vendor pursuant to a Repurchase Agreement shall be deemed a commercially reasonable method of disposition. Reseller shall be liable to CPC for any deficiency resulting from CPC’s disposition, including without limitation a repurchase by a Vendor pursuant to a Repurchase Agreement, regardless of any subsequent disposition thereof. Reseller is not a beneficiary of, and has no right to require CPC to enforce, any Repurchase Agreement. Any notice of a disposition shall be deemed reasonably and properly given if sent to Reseller at least 10 days before such disposition. All of CPC’s rights and remedies shall be cumulative. At CPC’s request, or without request in the event of an Automatic Default, Reseller shall pay all Vendor Credits to CPC as soon as the same are received for application to Indebtedness. Reseller authorizes CPC to collect Vendor Credits directly from Vendors and, upon request of CPC, shall instruct Vendors to pay CPC directly. Additionally, in the event of an Automatic Default, the obligations of CPC, if any, shall automatically terminate, all Indebtedness shall automatically become immediately due and payable and Reseller shall automatically be obligated to repay all of such Indebtedness in full, without presentment, demand, protect or notice or other requirements of any kind, all of which are expressly waived by Reseller. Reseller irrevocably waives any requirement that CPC retain possession and not dispose of any Collateral until after an arbitration hearing, arbitration award, confirmation, trial or final judgment. CPC’s election to extend or not extend credit to Reseller is solely at CPC’s discretion and does not depend on the absence or existence of a Default.

 

13. Power of Attorney. Reseller grants CPC an irrevocable power of attorney, as Reseller’s attorney-in-fact, to: (a) file financing statements naming CPC as “Secured Party”; (b) supply any omitted information and correct administrative errors in any documents between CPC and Reseller; and (c) do anything to protect and preserve the Collateral and CPC’s rights and interest therein (including, but not limited to the payment of any insurance, taxes, fees or other obligations which may impair CPC’s interest in the Collateral), which if CPC’s action require the expenditure of monies, such amounts shall (x) constitute additional Indebtedness under this Agreement, (y) have interest assessed same so long as unpaid at the Default Rate, and (z) be due and payable immediately in full. Upon the occurrence and continuation of a Default, Reseller grants CPC the additional power, as Reseller’s attorney-in-fact, to: (1) change the address for delivery of mail and open mail for Reseller in connection with any property of Reseller (2) endorse on Reseller’s behalf any checks; and (3) initiate and resolve any insurance claim pertaining to the Collateral. This power of attorney and any other powers of attorney granted herein or elsewhere by Reseller to CPC are irrevocable and coupled with an interest.

 

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14. Costs, Expenses and Taxes. Reseller agrees to pay (a) all reasonable and documented fees and expenses of counsel to CPC in connection with the enforcement of the Documents and the Indebtedness, including, but not limited to reasonable attorney fees and costs incurred upon an Automatic Default, and (b) CPC’s standard wire transfer and check return fees, all as may be established and changed by CPC from time to time. Without limitation of and in addition to the foregoing, Reseller shall pay to CPC all reasonable audit fees in connection with audits of the books and records and properties of Reseller and such other matters as CPC shall deem appropriate in its reasonable credit judgment, plus all out-of-pocket expenses incurred by CPC in connection with such audits, whether such audits are conducted by employees of CPC or by third parties hired by CPC. Through execution of this Agreement, Reseller consents to such audits by CPC or third parties hired by CPC. Audit fees and reasonable out-of-pocket expenses equivalent to CPC’s actual cost shall be payable promptly upon demand therefor by CPC from time to time. In addition, Reseller shall pay any and all stamp, transfer and other taxes payable or determined to be payable in connection with the execution and delivery of the Documents and agrees to hold CPC harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. If any suit or proceeding arising from any of the foregoing is brought against CPC, Reseller, to the extent and in the manner directed by CPC, will resist and defend such suit or proceeding or cause the same to be resisted and defended by counsel approved by CPC. If Reseller shall fail to do any act or thing which it has covenanted to do under this Agreement or any representation or warranty on the part of Reseller contained in this Agreement shall be breached, CPC may, in its sole and absolute discretion, after 10 days written notice having been sent to Reseller, do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose; any and all amounts so expended by CPC shall be repayable to CPC by Reseller immediately upon CPC’s demand therefor, with interest at a rate equal to the highest interest rate set forth in this Agreement in effect from time to time during the period from and including the date funds are so expended by CPC to the date of repayment, and any such amounts due and owing CPC shall be deemed to be part of the Indebtedness secured hereunder. The obligations of Reseller under this Section shall survive the termination of this Agreement and the discharge of the other obligations of Reseller under the Documents.

 

15. Information.

 

  a. Reseller hereby notifies Reseller that pursuant to the requirements of the Patriot Act, CPC may be required to obtain, verify and record information that identifies Reseller, which information includes the name and address of Reseller and other information that will allow CPC to identify each Reseller in accordance with the Patriot Act. In addition, if CPC is required by law or regulation or internal policies to do so, it shall have the right to periodically conduct (i) Patriot Act searches, OFAC/PEP searches, and customary individual background checks for Reseller, and (b) OFAC/PEP searches and customary individual background checks of Reseller’s senior management and key principals. Reseller agrees to cooperate with respect to the conduct of such searches and further agrees to reimburse and pay to CPC, promptly upon demand by CPC therefor, the reasonable costs and charges for such searches.
     
  b. CPC may provide to any Vendor information limited to transactional documentation such as invoices, credit and debits for the purpose of confirming orders, resolving questions and potentially avoiding disputes. CPC may also provide to any third party vendor, credit reference information regarding Reseller that CPC may possess.
     
  c. Subject to and without limiting clauses (a) and (b) above, CPC agrees that it will not disclose, without the prior consent of Reseller, confidential information with respect to Reseller or any of its Subsidiaries which is furnished pursuant to this Agreement and which is specifically designated as confidential in writing by Reseller; provided, that, CPC may disclose any such information (i) to its affiliates and its and their employees, auditors or counsel on a need-to-know basis, (ii) as has become generally available to the public without a breach of this Section 15, (iii) as may be required or appropriate in any report, statement or testimony submitted to or upon request of any Governmental Institution having or claiming to have jurisdiction over CPC, (iv) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation, (v) in order to comply with any statute or regulation, and (vi) to any prospective or actual assignee or participant in connection with any contemplated transfer or participation pursuant to Section 18, provided, that, such assignee or participant has agreed in writing to the confidentiality of any such confidential information in accordance with the terms of this Section 15.

 

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16. Reseller’s Claims Against Vendors. Reseller will not assert against CPC any claim or defense Reseller may have against Vendors whether for breach of warranty, misrepresentation, failure to ship, lack of authority, or otherwise, including without limitation claims or defenses based upon charge backs, credit memos, rebates, price protection payments or returns. Any such claims or defenses or other claims or defenses Reseller may have against Vendors shall not affect Reseller’s liabilities or obligations to CPC.

 

17. Terms and Termination. The term of this Agreement, unless sooner terminated in accordance with this Agreement, shall be for a period of one (1) year from the date hereof (the “Termination Date”), provided, however, that (a) this Agreement shall automatically renew for one (1) year periods from year to year thereafter unless terminated or at the end of any subsequent annual anniversary of the Termination Date by the Reseller upon at least 90 days prior written notice; and (b) CPC may terminate this Agreement (i) immediately upon a Default, or (ii) at any time by at least 60 days prior written notice by CPC to Reseller, however where Reseller requests further time be provided within the 60 day notice period CPC may agree to an extension of 30 more days. Upon termination of this Agreement, all Indebtedness owed to CPC shall become immediately due and payable without notice or demand. Upon any termination, Reseller shall remain liable to CPC for all Indebtedness to CPC, including without limitation interest, fees, charges and expenses arising prior to or after the effective date of termination, and all of CPC’s rights and remedies and its security interest shall continue until all Indebtedness to CPC is indefeasibly paid in full and all obligations of Reseller are performed.

 

18. Binding Effect.

 

  a. Reseller shall not assign its interest in this Agreement without CPC’s prior written consent. CPC may (i) without the consent of Reseller, assign all or a portion of its rights and obligations under this Agreement to its parent company and/or any affiliate of CPC which is at least fifty (50%) percent owned by CPC or its parent company or (ii) assign all of such rights and obligations under this Agreement to one or more Eligible Transferees; provided, that, with respect to assignments under clause (ii) to an Eligible Transferee who is not a bank, CPC shall receive a representation in writing by such Eligible Transferee that either (A) no part of its acquisition of its Advances is made out of assets of any employee benefit plan, or (B) after consultation, in good faith, with Reseller and provision by Reseller of such information as may be reasonably requested by such Eligible Transferee, the acquisition and holding of such Advances does not constitute a non-exempt prohibited transaction under Section 406 of ERISA and Section 4975 of the Code, or (C) such assignment is an “insurance company general account,” as such term is defined in the Department of Labor Prohibited Transaction Class Exemption 95.60 (issued July 12, 1995) (“PTCE 95-60”), and, as of the date of the assignment, there is no “employee benefit plan” with respect to which the aggregate amount of such general account’s reserves and liabilities for the contracts held by or on behalf of such “employee benefit plan” and all other “employee benefit plans” maintained by the same employer (and affiliates thereof as defined in Section V(a)(1) of PTCE 95-60) or by the same employee organization (in each case determined in accordance with the provisions of PTCE 95-60) exceeds ten percent (10%) of the total reserves and liabilities of such general account (as determined under PTCE 95-60) (exclusive of separate account liabilities) plus surplus as set forth in the National Association of Insurance Commissioners Annual Statement filed with the state of domicile of such Eligible Transferee. As used in this Section, the term “employee benefit plan” shall have the meaning assigned to it in Title I of ERISA and shall also include a “plan” as defined in Section 4975(e)(1) of the Code.

 

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  b. CPC may sell participations to one or more banks or other entities (each, a “Participant”) in or to all or a portion of its rights and obligations under this Agreement provided, that, (i) CPC’s obligations under this Agreement shall remain unchanged, (ii) CPC shall remain solely responsible to the other parties hereto for the performance of such obligations, and Reseller shall continue to deal solely and directly with CPC in connection with CPC’s rights and obligations under this Agreement, (iii) the Participant shall not have any rights under this Agreement (the Participant’s rights against CPC in respect of such participation to be those set forth in the agreement executed by CPC in favor of the Participant relating thereto) and all amounts payable by Reseller hereunder shall be determined as if CPC had not sold such participation, (iv) so long as no Default is ongoing, any sale to a (A) hedge fund or (B) proposed Participant that is a direct competitor of Reseller shall require the prior written consent of Reseller (which shall not be unreasonably withheld, conditioned or delayed and such approval shall be deemed given by Reseller if no objection from Reseller is received within five (5) Business Days after written notice of such proposed participation has been provided by CPC), and (v) if such Participant is not a bank, such Participant shall represent that either (A) no part of its acquisition of its participation is made out of assets of any employee benefit plan, or (B) after consultation, in good faith, with Reseller and provision by Reseller of such information as may be reasonably requested by the Participant, the acquisition and holding of such participation does not constitute a non-exempt prohibited transaction under Section 406 of ERISA and Section 4975 of the Code, or (C) such participation is an “insurance company general account, “ as such term is defined in the “PTCE 95-60”, and, as of the date of the transfer there is no “employee benefit plan” with respect to which the aggregate amount of such general account’s reserves and liabilities for the contracts held by or on behalf of such “employee benefit plan” and all other “employee benefit plans” maintained by the same employer (and affiliates thereof as defined in Section V(a)(1) of PTCE 95-60) or by the same employee organization (in each case determined in accordance with the provisions of PTCE 95-60) exceeds ten (10%) percent of the total reserves and liabilities of such general account (as determined under PTCE 95-60) (exclusive of separate account liabilities) plus surplus as set forth in the National Association of Insurance Commissioners Annual Statement filed with the state of domicile of the Participant.
     
  c. This Agreement will protect and bind CPC’s and Reseller’s respective heirs, representatives, successors and assigns, as the case may be.

 

19. Notices. Except as otherwise stated herein, all notices, arbitration claims, responses, requests and documents will be sufficiently given or served if mailed or delivered: (a) to Reseller, at 1940 E Mariposa Ave, El Segundo, CA 90245, Attention: Brandon H. LaVerne; and (b) to CPC, at 116 Inverness Drive East, Suite 375, Englewood, CO 80112, Attention: Portfolio Control, or such other address as the parties may hereafter specify in writing.

 

20. Severability. If any provision of this Agreement or its application is invalid or unenforceable, the remainder of this Agreement will not be impaired or affected and will remain binding and enforceable.

 

21. Receipt of Agreement. Reseller acknowledges that it has received a true and complete copy of this Agreement. Reseller has read and understands this Agreement. Notwithstanding anything herein to the contrary, CPC may rely on any facsimile copy, electronic data transmission, or electronic data storage of: this Agreement, any TS, billing statement, financing statement, authorization to pre-file financing statements, invoice from a Vendor, financial statements or other reports, each of which will be deemed an original, and the best evidence thereof for all purposes.

 

22. Miscellaneous. Time is of the essence regarding the performance of CPC’s and Reseller’s respective obligations under this Agreement. Reseller’s liability to CPC is direct and unconditional and will not be affected by the release or nonperfection of any security interest granted hereunder. CPC may refrain from or postpone enforcement of this Agreement or any other agreements between CPC and Reseller without prejudice, and the failure to strictly enforce these agreements will not create a course of dealing which waives, amends or modifies such agreements. The express terms of this Agreement will not be modified by any course of dealing, usage of trade, or custom of trade which may deviate from the terms hereof. Section titles used herein are for convenience only, and do not define or limit the contents of any Section. This Agreement may be validly executed and delivered by electronic transmission and in one or more multiple counterpart signature pages. This Agreement shall be construed without presumption for or against any party who drafted all or any portion of this Agreement.

 

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23. Limitation of Damages. CPC and Reseller agree that if there is any dispute relating to or arising out of or otherwise relating in any respect to this Agreement, any Collateral, any transactions or events described herein or contemplated hereby or otherwise occurring, or any party’s actions or inactions in connection with any of the foregoing, the aggrieved party shall not be entitled to exemplary or punitive or consequential damages.

 

24. Amendments. References in this Agreement to a particular agreement, instrument or document also shall be deemed to refer to and include all renewals, extensions and modifications of such agreement, instrument or document. All addenda, exhibits and schedules attached to this Agreement are a part hereof for all purposes.

 

25. Definitions. Terms defined in this Agreement in the singular are to have a corresponding meaning when used in the plural and vice versa. All words used herein shall be understood and construed to be of such number and gender as the circumstances may require. In addition to the terms defined elsewhere in this Agreement, when used in this Agreement, the following terms shall have the following meanings (such meanings shall be equally applicable to the singular and plural forms of the terms used, as the context requires):

 

AAA has the meaning set forth in Section 31.

 

Account has the meaning set forth in the UCC.

 

Advance means the financing of an item of Financed Inventory.

 

Authorized Employee has the meaning set forth in Section 30.

 

Automatic Default has the meaning set forth in Section 11.

 

Base Rate means, for any day, a rate per annum equal to the greater of (a) the Prime Rate or, (b) the Federal Funds Rate plus 1/2%. Any change in the Base Rate due to a change in the Prime Rate, shall be effective from and including the effective date of such change in the Prime Rate.

 

Business Day means any day that is not a Saturday, Sunday, or other day on which banks are authorized or required to close pursuant to the rules and regulations of the Federal Reserve System.

 

Collateral means all personal property of Reseller, whether such property or Reseller’s right, title or interest therein or thereto is now owned or existing or hereafter acquired or arising, and wherever located, including by way of example and not of limitation, all Accounts, Chattel Paper (whether tangible or electronic), Deposit Accounts, documents (including but not limited to Documents as defined in this Agreement), Equipment, General Intangibles (including, without limitation, Payment Intangibles, Software, tax refunds, licenses and intellectual property, in each case, regardless of whether characterized as general intangibles under the UCC), Goods, Instruments (including, without limitation, Promissory Notes and Vendor Credits), Inventory, Investment Property, Letter-of-Credit Rights and Supporting Obligations; and all Products and Proceeds of the foregoing. As used herein and correspondingly wherever used in this Agreement, capitalized terms not otherwise defined in this Agreement shall have the meaning given to such terms in Article 9 of the UCC.

 

Collateral Reports means reports prepared by Reseller at the request of CPC detailing, if requested by CPC, (a) aging and reconciliation of Accounts, (b) aging and reconciliation of accounts payable, (c) Inventory by location, components and value, including work in process and (d) value incentive program balances, in each case, together with supporting documentation thereof as may be requested by CPC. Such supporting documentation to include, if requested by CPC, sales reports, cash receipts reports, credit and debit journals, inventory reports, accounts payable reports and accounts receivable aging reports.

 

Code shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto.

 

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CPC has the meaning set forth in the introductory paragraph.

 

CPC Account means that certain bank account designated by CPC, information for which has been separately provided to Reseller.

 

Default has the meaning set forth in Section 11.

 

Default Rate has the meaning set forth in Section 9.

 

Documents means, collectively, this Agreement and any amendments hereto, EDI transmissions, each TS, and any other instruments or documents currently or hereafter required or contemplated hereunder.

 

Due Date has the meaning set forth in Section 8.

 

EDI has the meaning set forth in Section 8.

 

Educational Institution means entities that provide instructional services to individuals or education-related services to individuals and other educational institutions.

 

Eligible Inventory means only Inventory which satisfies the following requirements:

 

  a. Reseller has good, valid, and marketable title thereto, free and clear of any (i) title defect, (ii) any liens, (iii) bill of lading or other document of title, (iv) third party trademark, licensing or other proprietary rights (unless CPC is satisfied that such Inventory can be freely sold by CPC on and after the occurrence of a Default despite such third party rights), or (v) any interests of others other than Liens in favor of CPC, Liens securing the Revolving Facility Debt or Liens that are subordinated to the security interest of CPC.