XNAS:MALL Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

Table of Contents

 

 

 

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, 2012

 

OR

 

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

 

For the transition period from                        to

 

Commission File Number: 0-25790

 

PC MALL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4518700

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

1940 E. Mariposa Avenue

El Segundo, California 90245

(Address of principal executive offices)

 

(310) 354-5600

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

As of August 3, 2012, the registrant had 12,034,942 shares of common stock outstanding.

 

 

 



Table of Contents

 

PC MALL, INC.

 

TABLE OF CONTENTS

 

 

 

Page

PART I - FINANCIAL INFORMATION (unaudited)

 

 

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

 

2

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and June 30, 2011

 

3

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and June 30, 2011

 

4

 

 

 

Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2012

 

5

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and June 30, 2011

 

6

 

 

 

Notes to the Consolidated Financial Statements

 

7

 

 

 

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

 

13

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

Item 4. Controls and Procedures

 

29

 

 

 

PART II - OTHER INFORMATION (unaudited)

 

 

 

 

 

Item 1. Legal Proceedings

 

29

 

 

 

Item 1A. Risk Factors

 

29

 

 

 

Item 6. Exhibits

 

46

 

 

 

Signature

 

47

 



Table of Contents

 

PC MALL, INC.

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS

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

 

 

 

June 30,
2012

 

December 31,
2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

8,558

 

$

9,484

 

Accounts receivable, net of allowances of $1,352 and $1,642

 

195,318

 

207,985

 

Inventories, net

 

76,420

 

79,456

 

Prepaid expenses and other current assets

 

12,773

 

9,681

 

Deferred income taxes

 

3,741

 

3,937

 

Total current assets

 

296,810

 

310,543

 

Property and equipment, net

 

46,013

 

44,745

 

Deferred income taxes

 

327

 

247

 

Goodwill

 

25,510

 

25,510

 

Intangible assets, net

 

8,396

 

9,840

 

Other assets

 

2,247

 

2,387

 

Total assets

 

$

379,303

 

$

393,272

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

128,356

 

$

122,523

 

Accrued expenses and other current liabilities

 

28,101

 

31,797

 

Deferred revenue

 

14,786

 

18,079

 

Line of credit

 

71,753

 

91,852

 

Notes payable — current

 

974

 

1,015

 

Total current liabilities

 

243,970

 

265,266

 

Notes payable and other long-term liabilities

 

16,761

 

11,574

 

Deferred income taxes

 

5,606

 

5,606

 

Total liabilities

 

266,337

 

282,446

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.001 par value; 30,000,000 shares authorized; 14,408,126 and 14,368,888 shares issued; and 12,034,942 and 11,995,704 shares outstanding, respectively

 

14

 

14

 

Additional paid-in capital

 

109,204

 

108,061

 

Treasury stock, at cost: 2,373,184 shares at each period

 

(9,733

)

(9,733

)

Accumulated other comprehensive income

 

2,292

 

2,256

 

Retained earnings

 

11,189

 

10,228

 

Total stockholders’ equity

 

112,966

 

110,826

 

Total liabilities and stockholders’ equity

 

$

379,303

 

$

393,272

 

 

See Notes to the Consolidated Financial Statements.

 

2



Table of Contents

 

PC MALL, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

362,593

 

$

361,910

 

$

704,939

 

$

697,848

 

Cost of goods sold

 

314,087

 

315,524

 

609,661

 

607,993

 

Gross profit

 

48,506

 

46,386

 

95,278

 

89,855

 

Selling, general and administrative expenses

 

45,256

 

44,605

 

91,899

 

86,159

 

Revaluation of earnout liability

 

(175

)

(800

)

(175

)

(800

)

Operating profit

 

3,425

 

2,581

 

3,554

 

4,496

 

Interest expense, net

 

909

 

835

 

1,840

 

1,558

 

Income before income taxes

 

2,516

 

1,746

 

1,714

 

2,938

 

Income tax expense

 

1,085

 

710

 

753

 

1,175

 

Net income

 

$

1,431

 

$

1,036

 

$

961

 

$

1,763

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Common Share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

$

0.08

 

$

0.08

 

$

0.14

 

Diluted

 

0.12

 

0.08

 

0.08

 

0.14

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

12,032

 

12,405

 

12,016

 

12,318

 

Diluted

 

12,166

 

12,750

 

12,221

 

12,679

 

 

See Notes to the Consolidated Financial Statements.

 

3



Table of Contents

 

PC MALL, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income

 

$

1,431

 

$

1,036

 

$

961

 

$

1,763

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(152

)

56

 

36

 

248

 

Total other comprehensive income (loss)

 

(152

)

56

 

36

 

248

 

Comprehensive income

 

$

1,279

 

$

1,092

 

$

997

 

$

2,011

 

 

See Notes to the Consolidated Financial Statements.

 

4



Table of Contents

 

PC MALL, INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

 

 

 

 

 

 

 

Additional

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

Common Stock

 

Paid-in-

 

Treasury

 

Comprehensive

 

Retained

 

 

 

 

 

Outstanding

 

Amount

 

Capital

 

Stock

 

Income

 

Earnings

 

Total

 

Balance at December 31, 2011

 

11,996

 

$

14

 

$

108,061

 

$

(9,733

)

$

2,256

 

$

10,228

 

$

110,826

 

Stock option exercises, including related income tax benefit

 

39

 

 

92

 

 

 

 

 

92

 

Stock-based compensation expense

 

 

 

1,051

 

 

 

 

1,051

 

Net Income

 

 

 

 

 

 

961

 

961

 

Translation adjustments

 

 

 

 

 

36

 

 

36

 

Balance at June 30, 2012

 

12,035

 

$

14

 

$

109,204

 

$

(9,733

)

$

2,292

 

$

11,189

 

$

112,966

 

 

See Notes to the Consolidated Financial Statements.

 

5



Table of Contents

 

PC MALL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

Cash Flows From Operating Activities

 

 

 

 

 

Net income

 

$

961

 

$

1,763

 

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

 

 

 

 

 

Depreciation and amortization

 

6,302

 

4,619

 

Provision for deferred income taxes

 

2,015

 

620

 

Net tax benefit related to stock option exercises

 

 

2

 

Excess tax benefit related to stock option exercises

 

(39

)

(660

)

Non-cash stock-based compensation

 

1,051

 

1,062

 

Decrease in earnout liability

 

(175

)

(800

)

Gain on sale of fixed assets

 

 

(15

)

Change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

10,774

 

4,917

 

Inventories

 

3,036

 

5,327

 

Prepaid expenses and other current assets

 

(3,053

)

(1,956

)

Other assets

 

51

 

(100

)

Accounts payable

 

8,303

 

(29,497

)

Accrued expenses and other current liabilities

 

(4,602

)

(532

)

Deferred revenue

 

(3,293

)

6,601

 

Total adjustments

 

20,370

 

(10,412

)

Net cash provided by (used in) operating activities

 

21,331

 

(8,649

)

Cash Flows From Investing Activities

 

 

 

 

 

Purchase of El Segundo building

 

 

(9,565

)

Purchases of property and equipment

 

(5,082

)

(5,194

)

Acquisition of eCost

 

 

(2,284

)

Proceeds from sale of fixed assets

 

 

23

 

Net cash used in investing activities

 

(5,082

)

(17,020

)

Cash Flows From Financing Activities

 

 

 

 

 

Net (payments) borrowings under line of credit

 

(20,099

)

5,769

 

Capital lease proceeds

 

4,356

 

 

Borrowing under note payable

 

2,859

 

7,198

 

Payments under notes payable

 

(552

)

(368

)

Change in book overdraft

 

(2,744

)

7,660

 

Payments of obligations under capital lease

 

(1,123

)

(526

)

Proceeds from stock issued under stock option plans

 

92

 

665

 

Payment for deferred financing costs

 

 

(25

)

Excess tax benefit related to stock option exercises

 

39

 

660

 

Net cash (used in) provided by financing activities

 

(17,172

)

21,033

 

Effect of foreign currency on cash flow

 

(3

)

(58

)

Net change in cash and cash equivalents

 

(926

)

(4,694

)

Cash and cash equivalents at beginning of the period

 

9,484

 

10,711

 

Cash and cash equivalents at end of the period

 

$

8,558

 

$

6,017

 

Supplemental Cash Flow Information

 

 

 

 

 

Interest paid

 

$

1,638

 

$

1,346

 

Income taxes paid

 

969

 

3,648

 

Supplemental Non-Cash Investing and Financing Activities

 

 

 

 

 

Purchase of infrastructure system

 

$

346

 

$

2,070

 

Deferred financing costs

 

 

49

 

 

See Notes to the Consolidated Financial Statements.

 

6



Table of Contents

 

PC MALL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Basis of Presentation and Description of Company

 

PC Mall, Inc. is a leading value added direct marketer of technology products, services and solutions to businesses, government and educational institutions and individual consumers. We go to market through our dedicated sales force of over 700 account executives. We also offer our products, services and solutions through our field service teams, various direct marketing techniques and a limited number of retail stores. Since our founding in 1987, we have served our customers in part by offering them multi-branded hardware solutions from leading brands including HP, Apple, Cisco, Microsoft and Lenovo. Through us, these and other manufacturers are able to reach multiple customer segments including consumers, small and medium sized businesses, large enterprise businesses, as well as state, local and federal governments and educational institutions. We add additional value to our manufacturer partners by being able to sell, deliver and incorporate their products and services into comprehensive solutions with a high degree of customization. Our model also facilitates an efficient supply chain and support mechanism for manufacturers by using a combination of direct marketing, centralized selling and support, and centralized product fulfillment.

 

We have prepared the unaudited consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America, or GAAP, which requires us to make estimates and assumptions that affect amounts reported herein. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, our actual results reported in future periods may be affected by changes in those estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations for interim financial reporting. In the opinion of management, all adjustments, consisting only of normal recurring items which are necessary for a fair presentation, have been included. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 15, 2012, our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2012 filed with the SEC on May 10, 2012, and all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC after the end of our 2011 fiscal year and through the date of this report.

 

In conjunction with our eCost.com acquisition, which is discussed in detail below, beginning with the first quarter of 2011, our management considered the OnSale and eCOST businesses together as a separate segment and reported their results accordingly. As such, in 2011, existing sales under the OnSale brand were no longer reported under the MacMall segment and we had five operating segments: SMB, MME, Public Sector, MacMall and OnSale.

 

In the first quarter of 2012, we determined that certain product sales in a daily deal format marketed under our OnSale segment’s daily deal business can do considerably better than in a traditional ecommerce catalog format. As this “daily deal” market and its related customer buying behaviors have continued to evolve, the “daily deals” business model is rapidly expanding to include sales of IT products. In response to these developments, we determined that our strategic objectives can be best achieved by incorporating the best practices, technologies and methodologies we have developed in our stand alone “daily deals” business into our traditional eCommerce platform and no longer operating a stand alone “daily deals” business. As a result, and in order to take advantage of this opportunity, we have determined that we will no longer operate a stand-alone “daily deals” business under OnSale. Instead, we have taken the best practices and technology we have developed in the OnSale daily deals business and incorporated them into our overall eCommerce offering. Beginning in the first quarter of 2012, we restored operating and reporting of the OnSale and MacMall businesses within a single segment. As a result, we now have four operating segments: SMB, MME, Public Sector and MacMall/OnSale. We include corporate related expenses such as legal, accounting, information technology, product management, certain support services and other administrative costs that are not otherwise allocated to our reportable operating segments in Corporate and Other. All historical segment financial information provided herein has been revised to reflect these new reportable operating segments.

 

During the three months ended June 30, 2012, we generated approximately 41% of our revenue in our MME segment, 32% of our revenue in our SMB segment, 16% of our revenue in our MacMall/OnSale segment and 11% of our revenue in our Public Sector segment. During the six months ended June 30, 2012, we generated approximately 41% of our revenue in our MME segment, 33% of our revenue in our SMB segment, 16% of our revenue in our MacMall/OnSale segment and 10% of our revenue in our Public Sector segment.

 

7



Table of Contents

 

Our SMB segment consists of sales made primarily to small and medium sized businesses, generally with less than 1,000 employees. The SMB segment utilizes an outbound phone based sales force and, where applicable, a field-based sales force, together with an online extranet customized for individual customers that enables them to manage their IT procurement process. In addition, the SMB segment markets to small businesses through its Small Business Network utilizing its own social network site at www.pcmallsbn.com.

 

Our MME segment consists of sales made primarily to mid-market and enterprise-sized businesses, generally with more than 1,000 employees, under the SARCOM, NSPI and Abreon brands. The MME segment sells complex products, services and solutions, utilizing a field relationship-based selling model, an outbound phone based sales force, a field service organization and an online extranet.

 

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

 

Our MacMall/OnSale segment consists of sales made under our MacMall brand name via telephone, the Internet and four retail stores to consumers, small businesses and creative professionals, and sales made under our OnSale and eCost brand names via the Internet and inbound phone-based sales forces. The OnSale business has utilized traditional internet marketing as well as our recently developed “daily deals” business model.

 

2. Summary of New Accounting Standard

 

In June 2011, the FASB issued ASU 2011-12, “Comprehensive Income” (ASU 2011-12), which amended existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. ASU 2011-12 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We adopted the two separate but consecutive financial statements presentation effective in our quarterly period ended March 31, 2012. The adoption of this new standard did not have any effect on our consolidated financial position or results of operations.

 

3. Property and Equipment

 

El Segundo Building

 

In March 2011, we completed the purchase of the real property comprising approximately 82,000 square feet of office space located at 1940 East Mariposa Avenue, El Segundo, California, which became our new corporate headquarters. We moved into this building from our current headquarters located in Torrance, California in November 2011. The total purchase price was $9.6 million. Based on the proportionate appraised values, we allocated $7.4 million of the purchase price to land and $2.2 million to building. In June 2011, we entered into a credit agreement to finance the purchase and improvement of this real property. The credit agreement provides a commitment for a loan up to $10.9 million of which we drew down a total of $10.1 million through June 30, 2012. At June 30, 2012, approximately $9.9 million was outstanding under this credit agreement. See Note 6 below for more information.

 

Capital Leases

 

In February, March and June 2012, we entered into capital lease agreements with a bank totaling approximately $4.7 million related to various furniture and equipment at our El Segundo, California corporate headquarters office, our data center in Roswell, Georgia and our MME segment’s headquarter office in Lewis Center, Ohio. Each of the capital leases have a five year term.

 

8



Table of Contents

 

4. Acquisition

 

eCOST.com

 

On February 18, 2011, we acquired certain assets, including approximately $1 million of inventory, of eCOST.com, a subsidiary of PFSweb, Inc., for $2.3 million. Also, as part of this acquisition, we assumed certain liabilities related to a web-based promotional membership program available on eCOST.com’s website and liabilities with respect to customer warranty claims, credits, returns and refunds related to transactions of eCOST.com’s business or through the website from and after the acquisition date. eCOST.com is an online marketplace featuring an assortment of product categories, including but not limited to computers, networking, electronics and entertainment, TVs, monitors and projectors, cameras and camcorders, memory and storage, apparel, and sports and leisure items. The website also features a proprietary and patented shopping format, Bargain Countdown®, which amongst other features, offers limited time, limited quantity deals, and supports its premium online membership shopping club. eCOST.com commenced business in 1999 as a subsidiary of PC Mall. In September 2004, eCOST.com completed an initial public offering of approximately 19.8% of its outstanding common stock. In April 2005, we completed a spin-off of eCOST.com by distributing all of our remaining ownership interest in eCOST.com to our stockholders. In February 2006, eCOST.com was acquired by PFSweb in a stock for stock merger.

 

5. Goodwill and Intangible Assets

 

Goodwill

 

There was no change in goodwill during the quarter ended June 30, 2012. Goodwill totaled $25.5 million as of June 30, 2012 and December 31, 2011, all of which related to our MME segment.

 

Intangible Assets

 

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

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

At June 30, 2012

 

At December 31, 2011

 

 

 

Useful Lives

 

Gross

 

Accumulated

 

Net

 

Gross

 

Accumulated

 

Net

 

 

 

(years)

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

Patent, trademarks & URLs

 

4

 

$

5,805

(1)

$

882

 

$

4,923

 

$

5,715

(1)

$

372

 

$

5,343

 

Customer relationships

 

6

 

10,600

 

7,319

 

3,281

 

10,600

 

6,431

 

4,169

 

Non-compete agreements

 

4

 

1,070

 

878

 

192

 

1,070

 

742

 

328

 

Total intangible assets

 

 

 

$

17,475

 

$

9,079

 

$

8,396

 

$

17,385

 

$

7,545

 

$

9,840

 

 


(1)  Included in the gross amounts for “Patent, trademarks & URLs” at June 30, 2012 and December 31, 2011 are $2.9 million of trademarks with indefinite useful lives acquired in the SARCOM acquisition that are not amortized.

 

Amortization expense for intangible assets was approximately $0.8 million and $0.6 million for the three months ended June 30, 2012 and 2011, respectively, and approximately $1.5 million and $1.1 million for the six months ended June 30, 2012 and 2011, respectively. Estimated amortization expense for intangible assets in each of the next five years and thereafter is as follows: $1.3 million in the remainder of 2012; $1.9 million in 2013, $0.5 million in 2014, $0.5 million in 2015, $0.3 million in 2016 and $0.9 million thereafter.

 

6. Line of Credit and Notes Payable

 

We maintain an asset-based revolving credit facility of up to $160 million from a lending unit of a large commercial bank. The credit facility provides for, among other things, (i) a credit limit of $160 million, which may be increased in increments of $5 million up to a total credit limit of $180 million, provided that any increase of the total credit limit in excess of $160 million is subject to, among other things, an acceptance and commitment by the lenders to such excess amount and a line increase fee not to exceed 0.65% of the increased amount; (ii) LIBOR interest rate options that we can enter into with no limit on the maximum outstanding principal balance which may be subject to a LIBOR interest rate option; and (iii) a maturity date of March 31, 2015. The credit facility, which functions as a working capital line of credit with a borrowing base of inventory and accounts receivable, including certain credit card receivables, also includes a monthly unused line fee of 0.25% per year on the amount, if any, by which the Maximum Credit, as defined in the agreement, then in effect, exceeds the average daily principal balance of the outstanding borrowings during the immediately preceding month. There can be no assurance that the lenders, if we elected to increase the credit limit, will commit to the remaining excess $20 million of credit beyond the $160 million in any future period. As a result, we may not be able to access the credit facility beyond its current limit of $160 million.

 

9



Table of Contents

 

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 for each twelve-month period. At June 30, 2012, we were in compliance with our financial covenant.

 

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 utilization of early-pay discounts. At June 30, 2012, we had $71.8 million of net working capital advances outstanding under the line of credit. At June 30, 2012, the maximum credit line was $160 million and we had $62.9 million available to borrow for working capital advances under the line of credit.

 

In connection with and as part of the amended credit facility, we entered into an amended term note on December 14, 2010 with a principal balance of $2.87 million, payable in equal monthly principal installments beginning on January 1, 2011, plus interest at the prime rate with a LIBOR option. The amended term note matures in December 2017 or in the event of a default, termination or non-renewal of our credit facility, is payable in its entirety upon demand by our lender. At June 30, 2012, we had $2.26 million outstanding under the amended term note. The remaining balance of our term note matures as follows: $205,000 in the remainder of 2012 and $410,000 annually in each of the years 2013 through 2017.

 

At June 30, 2012, our effective weighted average annual interest rate on outstanding amounts under the credit facility and term note was 2.38%.

 

At June 30, 2012, $0.1 million relating to the financing of our purchase of Microsoft AX (Axapta), which is a part of our ERP upgrade, was included in our “Notes payable — current” on our Consolidated Balance Sheets.

 

In June 2011, we entered into a credit agreement to finance the acquisition and improvement of the real property we purchased in March 2011 in El Segundo, California. The credit agreement provides for a lending commitment for a loan up to $10.9 million with a five year term and a 25 year straight-line principal repayment amortization period with a balloon payment at maturity. Interest is variable, indexed to Prime plus a spread of 0.375% or LIBOR plus a spread of 2.375% at our option, payable monthly. At June 30, 2012, we had $9.9 million outstanding under this credit agreement. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility.

 

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

 

7. Income Taxes

 

Accounting for Uncertainty in Income Taxes

 

ASC 740 clarifies the accounting for uncertainty in tax positions by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We had no unrecognized tax benefits and no accrued interest or penalties recognized as of the date of our adoption of ASC 740. During the three months ended June 30, 2012, there were no changes in our unrecognized tax benefits, and we had no accrued interest or penalties as of June 30, 2012.

 

We are subject to U.S. and foreign income tax examinations for years subsequent to 2007, and state income tax examinations for years following 2006. In addition, certain federal and state net operating loss carryforwards generated after 2003 and 1997, respectively, and used in a subsequent year, may still be adjusted by a taxing authority upon examination.

 

8. Earnings Per Share

 

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the reported periods. Diluted EPS reflects the potential dilution that could occur under the treasury stock method if stock options and other commitments to issue common stock were exercised, except in loss periods where the effect would be antidilutive. As such, potential common shares of approximately 1,810,000 and 520,000 for the three months ended June 30, 2012 and 2011, and approximately 1,799,000 and 521,000 for the six months ended June 30, 2012 and 2011 have been excluded from the calculation of diluted EPS because the effect of their inclusion would be antidilutive.

 

10



Table of Contents

 

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

 

 

 

Net
Income

 

Shares

 

Per Share
Amounts

 

Three Months Ended June 30, 2012:

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

Net income

 

$

1,431

 

12,032

 

$

0.12

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

 

134

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

Adjusted net income

 

$

1,431

 

12,166

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2011:

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

Net income

 

$

1,036

 

12,405

 

$

0.08

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

 

345

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

Adjusted net income

 

$

1,036

 

12,750

 

$

0.08

 

Six Months Ended June 30, 2012:

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

Net income

 

$

961

 

12,016

 

$

0.08

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

 

205

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

Adjusted net income

 

$

961

 

12,221

 

$

0.08

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2011:

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

Net income

 

$

1,763

 

12,318

 

$

0.14

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

 

361

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

Adjusted net income

 

$

1,763

 

12,679

 

$

0.14

 

 

9. Segment Information

 

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

 

 

 

SMB

 

MME

 

Public
Sector

 

MacMall/
OnSale

 

Corporate &
Other

 

Consolidated

 

Three Months Ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

115,605

 

$

149,048

 

$

41,646

 

$

56,324

 

$

(30

)

$

362,593

 

Gross profit (loss)

 

16,814

 

21,806

 

3,681

 

6,289

 

(84

)

48,506

 

Depreciation and amortization expense(1)

 

1

 

1,203

 

28

 

281

 

1,639

 

3,152

 

Operating profit (loss)

 

9,592

 

8,163

 

(240

)

753

 

(14,843

)

3,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

131,270

 

$

128,624

 

$

41,404

 

61,071

 

$

(459

)

$

361,910

 

Gross profit

 

16,837

 

19,859

 

3,356

 

6,305

 

29

 

46,386

 

Depreciation and amortization expense(1)

 

1

 

888

 

44

 

236

 

1,285

 

2,454

 

Operating profit (loss)

 

9,005

 

7,697

 

(344

)

(185

)

(13,592

)

2,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

233,160

 

$

286,381

 

$

73,876

 

$

111,553

 

$

(31

)

$

704,939

 

Gross profit

 

33,578

 

41,662

 

7,457

 

12,563

 

18

 

95,278

 

Depreciation and amortization expense(1)

 

3

 

2,360

 

62

 

532

 

3,345

 

6,302

 

Operating profit (loss)

 

18,940

 

14,434

 

(204

)

1,073

 

(30,689

)

3,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

270,008

 

$

239,133

 

$

73,081

 

116,346

 

$

(720

)

$

697,848

 

Gross profit (loss)

 

33,755

 

37,845

 

6,553

 

12,117

 

(415

)

89,855

 

Depreciation and amortization expense(1)

 

4

 

1,763

 

96

 

360

 

2,396

 

4,619

 

Operating profit (loss)

 

18,189

 

12,856

 

(303

)

599

 

(26,845

)

4,496

 

 


(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.

 

11



Table of Contents

 

As of June 30, 2012 and December 31, 2011, we had total consolidated assets of $379.3 million and $393.3 million. Our management does not have available to them and does not use total assets measured at the segment level in allocating resources. Therefore, such information relating to segment assets is not provided herein.

 

10. Commitments and Contingencies

 

Total rent expense under our operating leases, net of sublease income, was $1.3 million and $1.6 million in each of the three month periods ended June 30, 2012 and June 30, 2011 and $2.7 million and $3.2 million in each of the six month periods ended June 30, 2012 and June 30, 2011. 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.

 

* *

 

12



Table of Contents

 

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

 

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

 

BUSINESS OVERVIEW

 

PC Mall, Inc. is a leading value added direct marketer of technology products, services and solutions to businesses, government and educational institutions and individual consumers. We go to market through our dedicated sales force of over 700 account executives. We also offer our products, services and solutions through our field service teams, various direct marketing techniques and a limited number of retail stores. Since our founding in 1987, we have served our customers in part by offering them multi-branded hardware solutions from leading brands including HP, Apple, Cisco, Microsoft and Lenovo. Through us, these and other manufacturers are able to reach multiple customer segments including consumers, small and medium sized businesses, large enterprise businesses, as well as state, local and federal governments and educational institutions. We add additional value to our manufacturer partners by being able to sell, deliver and incorporate their products and services into comprehensive solutions with a high degree of customization. Our model also facilitates an efficient supply chain and support mechanism for manufacturers by using a combination of direct marketing, centralized selling and support, and centralized product fulfillment.

 

In conjunction with our eCost.com acquisition, which is discussed in detail below, beginning with the first quarter of 2011, our management considered the OnSale and eCOST businesses together as a separate segment and reported their results accordingly. As such, in 2011, existing sales under the OnSale brand were no longer reported under the MacMall segment and we had five operating segments: SMB, MME, Public Sector, MacMall and OnSale.

 

In the first quarter of 2012, we determined that certain product sales in a daily deal format marketed under our OnSale segment’s daily deal business can do considerably better than in a traditional ecommerce catalog format. As this “daily deal” market and its related customer buying behaviors have continued to evolve, the “daily deals” business model is rapidly expanding to include sales of IT products. In response to these developments, we determined that our strategic objectives can be best achieved by incorporating the best practices, technologies and methodologies we have developed in our stand alone “daily deals” business into our traditional eCommerce platform and no longer operating a stand alone “daily deals” business. As a result, and in order to take advantage of this opportunity, we have determined that we will no longer operate a stand-alone “daily deals” business under OnSale. Instead, we have taken the best practices and technology we have developed in the OnSale daily deals business and incorporated them into our overall eCommerce offering. Beginning in the first quarter of 2012, we restored operating and reporting of the OnSale and MacMall businesses within a single segment. As a result, we now have four operating segments: SMB, MME, Public Sector and MacMall/OnSale. We include corporate related expenses such as legal, accounting, information technology, product management, certain support services and other administrative costs that are not otherwise allocated to our reportable operating segments in Corporate and Other. All historical segment financial information provided herein has been revised to reflect these new reportable operating segments.

 

During the three months ended June 30, 2012, we generated approximately 41% of our revenue in our MME segment, 32% of our revenue in our SMB segment, 16% of our revenue in our MacMall/OnSale segment and 11% of our revenue in our Public Sector segment. During the six months ended June 30, 2012, we generated approximately 41% of our revenue in our MME segment, 33% of our revenue in our SMB segment, 16% of our revenue in our MacMall/OnSale segment and 10% of our revenue in our Public Sector segment.

 

Our SMB segment consists of sales made primarily to small and medium sized businesses, generally with less than 1,000 employees. The SMB segment utilizes an outbound phone based sales force and, where applicable, a field-based sales force, together with an online extranet customized for individual customers that enables them to manage their IT procurement process. In addition, the SMB segment markets to small businesses through its Small Business Network utilizing its own social network site at www.pcmallsbn.com.

 

Our MME segment consists of sales made primarily to mid-market and enterprise-sized businesses, generally with more than 1,000 employees, under the SARCOM, NSPI and Abreon brands. The MME segment sells complex products, services and solutions, utilizing a field relationship-based selling model, an outbound phone based sales force, a field service organization and an online extranet.

 

13



Table of Contents

 

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

 

Our MacMall/OnSale segment consists of sales made under our MacMall brand name via telephone, the Internet and four retail stores to consumers, small businesses and creative professionals, and sales made under our OnSale and eCost brand names via the Internet and inbound phone-based sales forces. The OnSale business has utilized traditional internet marketing as well as our recently developed “daily deals” business model.

 

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

 

There has been substantial ongoing uncertainty in the global economic environment and recent disruptions in the capital and credit markets. General economic conditions have an effect on our business and results of operations across all of our segments. If economic growth in the U.S. and other countries’ economies slows or declines, government, consumer and business spending rates could be significantly reduced. These developments could also increase the risk of uncollectible accounts receivable from our customers. Continued and future changes and uncertainties in the economic climate in the U.S. and elsewhere could have a similar negative impact on the rate of information technology spending of our current and potential customers, which would likely have a negative impact on our business and results of operations, and could significantly hinder our growth. These factors could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition, which could materially and adversely affect our business, results of operations and financial condition. In response to these uncertainties, we have continued to focus our efforts on cost reduction initiatives, competitive pricing strategies and driving higher margin service and solution sales, while continuing to make selective investments in our sales force personnel, service and solutions capabilities and IT infrastructure and tools in an effort to position us for enhanced productivity and future growth.

 

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

 

A substantial portion of our business is dependent on sales of Apple, HP, and products purchased from other vendors including Adobe, APC, Cisco, Dell, IBM, Ingram Micro, Lenovo, Microsoft, Tech Data and VMware. Products manufactured by Apple represented approximately 17% and 21% of our net sales in the three months ended June 30, 2012 and 2011, and 17% and 22% of our net sales in the six months ended June 30, 2012 and 2011. Products manufactured by HP represented 20% and 22% of our net sales in the three months ended June 30, 2012 and 2011, and 21% and 21% of our net sales in the six months ended June 30, 2012 and 2011.

 

One element of our business strategy involves expansion through the acquisition of businesses, assets, personnel or technologies that allow us to complement our existing operations, expand our market coverage, or add new business capabilities. While we believe that the fragmented nature of the technology reseller industry and industry consolidation trends may continue to present acquisition opportunities for us, these continued trends may make acquisitions more competitive.

 

We evaluate acquisition opportunities based on our assessment of several factors, including the perceived value of the opportunity, our available financing sources, and potential synergies of the acquisition target with our business. Our ability to complete acquisitions in the future will depend on our ability to fund such acquisitions with our internally available cash, cash generated from operations, amounts available under our existing credit facilities, additional borrowings or from the issuance of additional securities. As more fully discussed under “Liquidity and Capital Resources” below, certain trends in our operating results may impact our available cash resources and availability under our credit facilities, which in turn may impact our ability to pursue our acquisition strategy.

 

14



Table of Contents

 

STRATEGIC DEVELOPMENTS

 

Rebranding Strategy and Cost Reduction Initiatives

 

Over the past several years, our company has grown into a multi-billion dollar enterprise in part through our acquisition and internal cultivation of many different brands. We have historically differentiated those brands primarily based on the identity of the customers. After careful examination of the markets we serve and the trends taking shape in the marketplace, we have determined that going forward, our commercial customers can benefit from a more unified and streamlined brand strategy. In 2012, we began the process of unifying our commercial brands. We believe this unification will lead to an improved customer experience, operational synergies and benefits to all of our stakeholders, providing a brand that better represents the value-added solutions provider we are today.

 

An important part of these initiatives is a focused reduction of our overhead expenses. To that end, we took actions in the first half of 2012 that we expect will result in $3.4 million of annualized cost savings. These and other related actions resulted in severance and restructuring related expenses of approximately $1.4 million in the first half of 2012. We are evaluating additional actions that we plan to implement in the third and fourth quarters of 2012 that we expect will result in incremental annualized cost reductions of at least $2.5 million. We currently expect that we will incur additional severance and restructuring related costs in connection with these actions.

 

ERP and Web Infrastructure Upgrades

 

We are currently upgrading many of our IT systems. We have purchased licenses for Microsoft Dynamics AX (Axapta) and other related tools, such as workflow software, web development tools and other related items, to upgrade our ERP and eCommerce systems. We initiated the implementation and upgrade of our eCommerce system in the second half of 2008 and have completed and launched a new generation of our public sites at macmall.com, onsale.com and pcmall.com. We are currently working on the implementation of the ERP modules and the upgrade of the ERP systems, including additional enhancements and features, and we expect to be complete with all major phases of the implementation of the ERP systems by the end of 2013. We believe the implementation and upgrade should help us to gain further efficiencies across our organization. While it is difficult to estimate costs based on the complexity of the systems design, customization and implementation, based on our estimates, which are subject to change, we currently expect to incur a cost of approximately $16 million for the major phases of these IT system upgrades. To date, we have incurred approximately $12.6 million of such costs. In addition to the above expenditures, we expect on an ongoing basis to make periodic upgrades to our IT systems.

 

Real Estate Transactions

 

On February 10, 2012, we announced that we signed a definitive agreement to sell the property we own in Southern California, where one of our retail stores is currently located, for $17.5 million. While there are no guarantees that this transaction will close, in the event of closing we expect to realize a book gain of approximately $15.9 million. Buyer is currently engaged in certain due diligence related to the property and we are currently uncertain of the timing of the close of the transaction and the probability that the transaction will close. In connection with and in the event of this sale, we intend to explore potential purchases or exchanges of real estate through Section 1031 of the Internal Revenue Code of 1986, as amended. We expect to effectuate such exchanges through one or more purchases of real property to be used in connection with our business and operations. We expect that any exchanges or purchases we make would benefit us through direct ownership of facilities that are strategic to our operations, reductions in our lease obligations, or other ancillary benefits. To that end, On March 16, 2012 we announced that one of our wholly-owned subsidiaries, M2 Marketplace, Inc., entered into an agreement with Sarcom Properties, Inc., an unaffiliated third party, to buy certain real estate for $5.9 million. The parcel is located in Lewis Center, Ohio and includes approximately 12.4 acres of land together with a building of approximately 144,000 square feet. One of our other subsidiaries is currently the tenant of the building. We expect that the completion of this purchase will occur only in the event that the sale of our retail location in Southern California is consummated.

 

On March 11, 2011, we completed the purchase of real property comprising approximately 184,000 square feet of land, which includes approximately 84,000 square feet of office space located at 1940 East Mariposa Avenue, El Segundo, California, which became our new corporate headquarters effective November 14, 2011. We purchased and have improved this building, located strategically adjacent to the Los Angeles International Airport (LAX), because we want it to be a compelling destination for customers who want to experience new and cutting edge IT solutions in person. The new headquarters was designed to drive higher productivity and efficiency for our employees and to provide a state-of-the-art demo center for our customers and vendor partners, as well as increase capacity to support our growth well into the future. In conjunction with the move, we relocated and substantially upgraded our primary data center from Torrance, California to our own hosting facility in Atlanta, Georgia, which incorporates state of the art monitoring and disaster recovery capabilities. As a result of this relocation certain of our subsidiaries now have geographically redundant web and information systems. We are in the process of developing a formal disaster recovery plan for our critical systems.

 

15



Table of Contents

 

eCOST.com Acquisition

 

On February 18, 2011, we acquired certain assets, including approximately $1 million of inventory, of eCOST.com, a subsidiary of PFSweb, Inc., for $2.3 million.  eCOST.com is an online marketplace featuring an assortment of product categories, including but not limited to computers, networking, electronics and entertainment, TVs, monitors and projectors, cameras and camcorders, memory and storage, apparel, and sports and leisure items. The website also features a proprietary and patented shopping format, Bargain Countdown®, which amongst other features, offers limited time, limited quantity deals, and supports its premium online membership shopping club. eCOST.com commenced business in 1999 as a subsidiary of PC Mall. In September 2004, eCOST.com completed an initial public offering of approximately 19.8% of its outstanding common stock. In April 2005, we completed a spin-off of eCOST.com by distributing all of our remaining ownership interest in eCOST.com to our stockholders. In February 2006, eCOST.com was acquired by PFSweb in a stock for stock merger.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

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

 

Management considers an accounting estimate to be critical if:

 

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

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

 

Management has discussed the development and selection of these critical accounting policies and estimates with the audit committee of our board of directors. We believe the critical accounting policies described below affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. For a summary of our significant accounting policies, including those discussed below, see Note 2 of the Notes to the Consolidated Financial Statements in Item 8, Part II, of our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Revenue Recognition. We adhere to the revised guidelines and principles of sales recognition described in ASC 605. 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 and determinable and collectability is reasonably assured. Under these guidelines, the majority of our sales, including revenue from product sales and gross outbound shipping and handling charges, are recognized upon receipt of the product by the customer. In accordance with our revenue recognition policy, we perform an analysis to estimate the number of days products we have shipped are in transit to our customers using data from our third party carriers and other factors. We record an adjustment to reverse the impact of sale transactions based on the estimated value of products that have shipped, but have not yet been received by our customers, and we recognize such amounts in the subsequent period when delivery has occurred. Changes in delivery patterns or unforeseen shipping delays beyond our control could have a material impact on our revenue recognition for the current period.

 

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

 

Certain software assurance or subscription products and extended warranties that we sell (for which we are not the primary obligor) are recognized on a net basis in accordance with ASC 605. Accordingly, such revenues are recognized in net sales either at the time of sale or over the contract period, based on the nature of the contract, at the net amount retained by us, with no cost of goods sold.

 

16



Table of Contents

 

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. 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.

 

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

 

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

 

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

 

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 since such funds are not a reimbursement of specific, incremental, identifiable costs incurred by us in selling the vendors’ products. At the end of any given period, unbilled receivables related to our vendor consideration are included in our “Accounts receivable, net of allowances.”

 

Stock-Based Compensation. We account for stock-based compensation in accordance with ASC 718, using the modified prospective application transition method. ASC 718 addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 generally requires that such transactions be accounted for using a fair value based method and recognized as expenses in our Consolidated Statements of Operations.

 

Pursuant to ASC 718, we estimate the grant date fair value of each stock option grant awarded pursuant to ASC 718 using the Black-Scholes option pricing model and management assumptions made regarding various factors, including expected volatility of our common stock, expected life of options granted and estimated forfeiture rates, which require extensive use of accounting judgment and financial estimates. In estimating our assumption regarding expected term for options we granted during the years ended December 31, 2011, 2010 and 2009, we computed the expected term based upon an analysis of historical exercises of stock options by our employees. We compute our expected volatility using historical prices of our common stock for a period equal to the expected term of the options. The risk free interest rate is determined using the implied yield on U.S. Treasury issues with a remaining term within the contractual life of the award. We estimate an annual forfeiture rate based on our historical forfeiture data, which rate will be revised, if necessary, in future periods if actual forfeitures differ from those estimates. Any material change in the estimates used in calculating the stock-based compensation expense could result in a material impact on our results of operations.

 

Goodwill and Intangible Assets. Goodwill and indefinite-lived intangible assets are carried at historical cost, subject to write-down, as needed, based upon an impairment analysis that we perform annually, 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 December 31 of each year. Under ASC 350, 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.

 

17



Table of Contents

 

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.

 

Fair value is determined by using a weighted combination of a market-based approach and an income approach, as this combination is deemed to be the most indicative of fair value in an orderly transaction between market participants. Under the market-based approach, we utilize 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 determine 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 values of our trademarks are 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 result in an indication of the pre-tax royalty savings associated with ownership of the trademarks. Projected after-tax royalty savings are 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) is added.

 

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 December 31, 2011 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 December 31, 2012 or prior to that, if any change constitutes a triggering event outside of the quarter from when the annual goodwill and indefinite-lived intangible assets impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

 

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

 

18



Table of Contents

 

RESULTS OF OPERATIONS

 

Consolidated Statements of Operations Data

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

362,593

 

$

361,910

 

$

704,939

 

$

697,848

 

Cost of goods sold

 

314,087

 

315,524

 

609,661

 

607,993

 

Gross profit

 

48,506

 

46,386

 

95,278

 

89,855

 

Selling, general and administrative expenses

 

45,256

 

44,605

 

91,899

 

86,159

 

Revaluation of earnout liability

 

(175

)

(800

)

(175

)

(800

)

Operating profit

 

3,425

 

2,581

 

3,554

 

4,496

 

Interest expense, net

 

909

 

835

 

1,840

 

1,558

 

Income before income taxes

 

2,516

 

1,746

 

1,714

 

2,938

 

Income tax expense

 

1,085

 

710

 

753

 

1,175

 

Net income

 

$

1,431

 

$

1,036

 

$

961

 

$

1,763

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Common Share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

$

0.08

 

$

0.08

 

$

0.14

 

Diluted

 

0.12

 

0.08

 

0.08

 

0.14

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

12,032

 

12,405

 

12,016

 

12,318

 

Diluted

 

12,166

 

12,750

 

12,221

 

12,679

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of goods sold

 

86.6

 

87.2

 

86.5

 

87.1

 

Gross profit

 

13.4

 

12.8

 

13.5

 

12.9

 

Selling, general and administrative expenses

 

12.5

 

12.3

 

13.0

 

12.3

 

Revaluation of earnout liability

 

(0.1

)

(0.2

)

0.0

 

(0.1

)

Operating profit

 

1.0

 

0.7

 

0.5

 

0.7

 

Interest expense, net

 

0.3

 

0.2

 

0.3

 

0.2

 

Income before income taxes

 

0.7

 

0.5

 

0.2

 

0.5

 

Income tax expense

 

0.3

 

0.2

 

0.1

 

0.2

 

Net income

 

0.4

%

0.3

%

0.1

%

0.3

%

 

Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011

 

Net Sales. The following table presents our net sales, by segment, for the periods presented (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

SMB

 

$

115,605

 

$

131,270

 

$

(15,665

)

(12

)%

MME

 

149,048

 

128,624

 

20,424

 

16

 

Public Sector

 

41,646

 

41,404

 

242

 

1

 

MacMall/OnSale

 

56,324

 

61,071

 

(4,747

)

(8

)

Corporate and Other

 

(30

)

(459

)

429

 

NMF

(1)

Consolidated net sales

 

$

362,593

 

$

361,910

 

$

683

 

0

%

 


(1)  Not meaningful.

 

19



Table of Contents

 

Our consolidated net sales for the second quarter of 2012 were $362.6 million, a $0.7 million increase from consolidated net sales of $361.9 million in the second quarter of 2011.

 

Our SMB segment net sales decreased by $15.7 million, or 12%, in the second quarter of 2012 to $115.6 million from $131.3 million in the second quarter of 2011. This decrease was due to a $17.2 million decline in sales to promotional companies as a result of a program change in the fourth quarter of 2011 by a large vendor primarily impacting our SMB and MacMall/OnSale segments as we had disclosed in our fourth quarter 2011 results. The decrease was partially offset by a $1.6 million increase in sales to customers outside that program. As we indicated previously, the effects of this program change are expected to continue to have an impact on year over year comparisons throughout 2012. In 2011, sales under this program were approximately $23.2 million, $20.0 million, $12.7 million and $8.8 million in the first quarter, second quarter, third quarter and fourth quarter respectively.

 

Our MME segment net sales increased by $20.4 million, or 16%, in the second quarter of 2012 to $149.0 million from $128.6 million in the second quarter of 2011. This increase was primarily due to a 14% increase in net sales of products in the second quarter of 2012 compared to the second quarter of 2011, as well as a 26% increase in sales of services.  In the second quarter of 2012, sales of services as a percentage of net sales increased to 20% of MME segment net sales from 18% of net sales for the same period in 2011.

 

Our Public Sector segment net sales increased by $0.2 million, or 1%, in the second quarter of 2012 to $41.6 million compared to $41.4 million in the second quarter of 2011. This increase in Public Sector net sales was due to a 19% increase in sales to state and local government and educational institutions (SLED) resulting primarily from increased account executive headcount focused on SLED business and increased account executive productivity, partially offset by a 26% decrease in our federal government business.

 

Our MacMall/OnSale segment net sales were $56.3 million in the second quarter of 2012 compared to $61.1 million in the second quarter of 2011, a decrease of $4.7 million, or 8%. The decrease in MacMall/OnSale net sales was primarily due to what we believe was a combination of soft demand in anticipation of new product releases as well as constrained inventory once those products were announced.

 

Gross Profit and Gross Profit Margin. The following table presents our gross profit and gross profit margin, by segment, for the periods presented (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

 

 

 

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Gross Profit

 

 

 

Gross Profit

 

Change

 

 

 

Gross Profit

 

Margin

 

Gross Profit

 

Margin

 

$

 

Margin

 

SMB

 

$

16,814

 

14.5

%

$

16,837

 

12.8

%

$

(23

)

1.7

%

MME

 

21,806

 

14.6

 

19,859

 

15.4

 

1,947

 

(0.8

)

Public Sector

 

3,681

 

8.8

 

3,356

 

8.1

 

325

 

0.7

 

MacMall/OnSale

 

6,289

 

11.2

 

6,305

 

10.3

 

(16

)

0.9

 

Corporate and Other

 

(84

)

NMF

(1)

29

 

NMF

(1)

(113

)

NMF

(1)

Consolidated gross profit and gross profit margin

 

$

48,506

 

13.4

%

$

46,386

 

12.8

%

$

2,120

 

0.6

%

 


(1)  Not meaningful

 

Consolidated gross profit for the second quarter of 2012 was $48.5 million compared to $46.4 million in the second quarter of 2011, an increase of $2.1 million, or 5%. Consolidated gross profit margin was 13.4% in the second quarter of 2012 compared to 12.8% in the second quarter of 2011.

 

Gross profit for our SMB segment remained flat at $16.8 million in the second quarter of 2012 and in the second quarter of 2011. SMB gross profit margin increased to 14.5% in the second quarter of 2012 compared to 12.8% in the second quarter of 2011 primarily due to an increase in vendor consideration as a percentage of net sales as well as a decrease in sales to promotional companies at lower margins.

 

Gross profit for our MME segment increased by $1.9 million, or 10%, to $21.8 million in the second quarter of 2012 compared to $19.9 million in the second quarter of 2011. MME gross profit margin decreased to 14.6% in the second quarter of 2012 compared to 15.4% in the second quarter of 2011. The increase in MME gross profit was due to the increased MME net sales discussed above, partially offset by a decrease in product margins. The decrease in MME gross profit margin was primarily due to a 50 basis point decrease in vendor consideration as a percentage of net sales and a competitive pricing environment for product sales.

 

20



Table of Contents

 

Gross profit for our Public Sector segment increased by $0.3 million, or 10%, to $3.7 million in the second quarter of 2012 compared to $3.4 million in the second quarter of 2011. Public Sector gross profit margin increased by 70 basis points to 8.8% in the second quarter of 2012 compared to 8.1% in the second quarter of 2011. The increase in Public Sector gross profit and gross profit margin was primarily due to an increase in selling margin and an increase in vendor consideration.

 

Gross profit for our MacMall/OnSale segment remained flat at $6.3 million in the second quarter of 2012 and 2011. MacMall/OnSale gross profit margin increased by 90 basis points to 11.2% in the second quarter of 2012 compared to 10.3% in the second quarter of 2011. The increase in MacMall/OnSale gross profit margin was primarily due to an increase in selling margin as well as a 28 basis point increase in vendor consideration as a percentage of sales.

 

Operating Profit (Loss) and Operating Profit (Loss) Margin. The following table presents our operating profit and operating profit margin, by segment, for the periods presented (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

 

 

 

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Operating

 

Operating
Profit (Loss)

 

Operating

 

Operating
Profit (Loss)

 

Change

 

 

 

Profit (Loss)

 

Margin(1)

 

Profit (Loss)

 

Margin(1)

 

$

 

Margin

 

SMB

 

$

9,592

 

8.3

%

$

9,005

 

6.9

%

$

587

 

1.4

%

MME

 

8,163

 

5.5

 

7,697

 

6.0

 

466

 

(0.5

)

Public Sector

 

(240

)

(0.6

)

(344

)

(0.8

)

104

 

0.2

 

MacMall/OnSale

 

753

 

1.3

 

(185

)

(0.3

)

938

 

1.6

 

Corporate and Other

 

(14,843

)

(4.1

)(1)

(13,592

)

(3.8

)(1)

(1,251

)

(0.3

)(1)

Consolidated operating profit and operating profit margin

 

$

3,425

 

0.9

%

$

2,581

 

0.7

%

$

844

 

0.2

%

 


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

 

Consolidated operating profit for the second quarter of 2012 was $3.4 million compared to $2.6 million in the second quarter of 2011, a $0.8 million increase, or 33%. Consolidated operating profit margin for the second quarter of 2012 was 0.9% compared to 0.7% in the second quarter of 2011.

 

Our SMB segment operating profit increased by $0.6 million, or 7%, to $9.6 million in the second quarter of 2012 compared to $9.0 million in the second quarter of 2011. This increase resulted primarily from small improvements in a number of components of selling, general and administrative expenses.

 

MME operating profit in the second quarter of 2012 increased by $0.5 million, or 6%, to $8.2 million compared to $7.7 million in the second quarter of 2011. The increase was primarily due to the increased MME gross profit discussed above, partially offset by a $0.6 million increase in personnel costs and a $0.3 million increase in depreciation and amortization expenses primarily related to the acceleration of our SARCOM and NSPI trademark amortization in connection with our rebranding strategy. The increase in personnel costs was primarily related to an increase in unutilized service labor and variable compensation costs related to the growth in our business and a $0.2 million increase in employee severance costs. Second quarter 2012 operating profit also included a $0.2 million benefit from a decrease in the estimated fair value of the contingent consideration liability related to our NSPI acquisition, compared to a $0.8 million benefit recorded in the second quarter of 2011.

 

Our Public Sector segment operating loss decreased by $0.1 million, or 30% to $0.2 million in second quarter of 2012 compared to $0.3 million in the second quarter of 2011. The decrease in Public Sector operating loss was primarily due to the increase in Public Sector gross profit discussed above, partially offset by a $0.4 million increase in personnel costs.

 

MacMall/OnSale operating profit increased by $1.0 million to $0.8 million in the second quarter of 2012 compared to an operating loss of $0.2 million in the second quarter 2011. This increase in MacMall/OnSale operating profit was primarily due to a decrease in third party support costs of $0.3 million which were incurred in the prior year to transition our eCost acquisition, a decrease in personnel costs of $0.2 million, a decrease in legal costs of $0.2 million and a decrease in credit card related costs of $0.2 million.

 

21



Table of Contents

 

Corporate and Other operating expenses includes corporate related expenses such as legal, accounting, information technology, product management and certain professional and pre-sales support services and other administrative costs that are not otherwise included in our reportable operating segments. Second quarter 2012 Corporate and Other operating expenses increased by $1.2 million, or 9%, to $14.8 million from $13.6 million in the second quarter of 2011. The increase in the second quarter of 2012 was primarily related to a $1.1 million increase in personnel costs primarily supporting continued investments in IT and professional and pre-sales support services, and a $0.4 million increase in depreciation expense associated with the completed portions of our on-going systems upgrades, partially offset by a $0.5 million decrease in litigation costs primarily related to defending in the prior year what we believe was a meritless lawsuit which was settled in January 2012 without liability to the company.

 

Net Interest Expense. Total net interest expense for the second quarter of 2012 increased to $0.9 million compared to $0.8 million in the second quarter of 2011. The increase in interest expense of $0.1 million resulted primarily from the increase in our outstanding borrowings primarily related to the financing of our new El Segundo headquarters office building, partially offset by a decrease in our average outstanding borrowing on our revolving loan as well as a decrease in our average effective borrowing rate.

 

Income Tax Expense. We recorded an income tax expense of $1.1 million in the second quarter of 2012 compared to an income tax expense of $0.7 million in the second quarter of 2011. Our effective tax rate for the quarters ended June 30, 2012 and 2011 was approximately 43% and 41%.

 

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

 

Net Sales. The following table presents our net sales, by segment, for the periods presented (dollars in thousands):

 

 

 

Six Months Ended
June 30,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

SMB

 

$

233,160

 

$

270,008

 

$

(36,848

)

(14

)%

MME

 

286,381

 

239,133

 

47,248

 

20

 

Public Sector

 

73,876

 

73,081

 

795

 

1

 

MacMall/OnSale

 

111,553

 

116,346

 

(4,793

)

(4

)

Corporate and Other

 

(31

)

(720

)

689

 

NMF

(1)

Consolidated net sales

 

$

704,939

 

$

697,848

 

$

7,091

 

1

%

 


(1)  Not meaningful.

 

Our consolidated net sales for the six months ended June 30, 2012 were $704.9 million, an increase of $7.1 million, or 1%, from consolidated net sales of $697.8 million in the six months ended June 30, 2011.

 

Our SMB segment net sales decreased by $36.8 million, or 14%, to $233.2 million in the six months ended June 30, 2012 from $270.0 million in the six months ended June 30, 2011. This decrease was due to a $35.9 million decline in sales to promotional companies as a result of the program change mentioned earlier and $1.0 million decrease in sales to customers outside that program.

 

Our MME segment net sales increased by $47.3 million, or 20%, to $286.4 million in the six months ended June 30, 2012 from $239.1 million in the six months ended June 30, 2011. This increase was primarily due to a 24% increase in sales of services in the six months ended June 30, 2012 compared to the same period in 2011 while product revenues increased by 19% in the six months ended June 30, 2012 compared to the same period in 2011. In the six months ended June 30, 2012, sales of services as a percentage of net sales increased to 20% of sales from 19% of net sales in the six months ended June 30, 2011.

 

Our Public Sector segment net sales increased by $0.8 million, or 1%, to $73.9 million in the six months ended June 30, 2012 compared to $73.1 million in the six months ended June 30, 2011. This increase in Public Sector net sales was due to a 21% increase in sales to SLED customers resulting primarily from increased account executive headcount focused on SLED business, partially offset by a 22% decrease in our federal government business.

 

Our MacMall/OnSale segment net sales decreased by $4.7 million, or 4%, to $111.6 million in the six months ended June 30, 2012 compared to $116.3 million in the six months ended June 30, 2011. The decrease in MacMall/OnSale net sales was primarily due to a $4.0 million decrease in MacMall net sales due to the vendor program change mentioned earlier. Sales under this program in 2012 were approximately $1.0 million and $3.2 million in each of the first two quarters of 2012 and approximately $5.5 million and $2.7 million in each of the first two quarters of 2011. In addition, MacMall/OnSale net sales were impacted by what we believe was a combination of soft demand in anticipation of new product releases as well as constrained inventory once those products were announced during the second quarter of 2012.

 

22



Table of Contents

 

Gross Profit and Gross Profit Margin. The following table presents our gross profit and gross profit margin, by segment, for the periods presented (dollars in thousands):

 

 

 

Six Months Ended
June 30,

 

 

 

 

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

Gross Profit

 

Change

 

 

 

Gross Profit

 

Margin

 

Gross Profit

 

Margin

 

$

 

Margin

 

SMB

 

$

33,578

 

14.4

%

$

33,755

 

12.5

%

$

(177

)

1.9

%

MME

 

41,662

 

14.5

 

37,845

 

15.8

 

3,817

 

(1.3

)

Public Sector

 

7,457

 

10.1

 

6,553

 

9.0

 

904

 

1.1

 

MacMall/OnSale

 

12,563

 

11.3

 

12,117

 

10.4

 

446

 

0.9

 

Corporate and Other

 

18

 

NMF

(1)

(415

)

NMF

(1)

433

 

NMF

(1)

Consolidated gross profit and gross profit margin

 

$

95,278

 

13.5

%

$

89,855

 

12.9

%

$

5,423

 

0.6

%

 


(1) Not meaningful

 

Consolidated gross profit for the six months ended June 30, 2012 was $95.3 million compared to $89.9 million in the six months ended June 30, 2011, an increase of $5.4 million, or 6%. Consolidated gross profit margin for the six months ended June 30, 2012 was 13.5% compared to 12.9% in the six months ended June 30, 2011.

 

Gross profit for our SMB segment decreased by $0.2 million, to $33.6 million for the six months ended June 30, 2012 compared to $33.8 million in the six months ended June 30, 201 resulting primarily from decreased SMB net sales discussed above but offset by an increase in gross profit for the core SMB business. SMB gross profit margin increased by 190 basis points to 14.4% in the six months ended June 30, 2012 compared to 12.5% in the six months ended June 30, 2011 primarily due to an increase in vendor consideration as a percentage of net sales as well as a decrease in sales to promotional companies at lower margins.

 

Gross profit for our MME segment increased by $3.9 million, or 10%, to $41.7 million in the six months ended June 30, 2012 compared to $37.8 million in the six months ended June 30, 2011, and gross profit margin for the six months ended June 30, 2012 was 14.5% compared to 15.8% in the six months ended June 30, 2011. The increase in MME gross profit was primarily due to the increased MME net sales discussed above, partially offset by a decrease in product margins. The decrease in MME gross profit margin was primarily due to a 53 basis point decrease in vendor consideration as a percentage of net sales and a competitive pricing environment for product sales.

 

Gross profit for our Public Sector segment increased by $0.9 million, or 14%, to $7.5 million in the six months ended June 30, 2012 compared to $6.6 million in the six months ended June 30, 2011. Public Sector gross profit margin increased by 110 basis points to 10.1% in the six months ended June 30, 2012 compared to 9.0% in the six months ended June 30, 2011. The increase in Public Sector gross profit and gross profit margin was primarily due to an increase in selling margin and an increase in vendor consideration.

 

Gross profit for our MacMall/OnSale segment increased by $0.5 million, or 4%, to $12.6 million in the six months ended June 30, 2012 compared to $12.1 million in the six months ended June 30, 2011. MacMall/OnSale gross profit margin increased by 90 basis points to 11.3% in the six months ended June 30, 2012 compared to 10.4% in the six months ended June 30, 2011. The increase in our MacMall/OnSale gross profit and gross margin was primarily due to an increase in selling margin as well as a 14 basis point increase in vendor consideration as a percentage of sales.

 

Operating Profit (Loss) and Operating Profit (Loss) Margin. The following table presents our operating profit and operating profit margin, by segment, for the periods presented (dollars in thousands):

 

 

 

Six Months Ended
June 30,

 

 

 

 

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Operating

 

Operating
Profit (Loss)

 

Operating

 

Operating
Profit (Loss)

 

Change

 

 

 

Profit (Loss)

 

Margin(1)

 

Profit (Loss)

 

Margin(1)

 

$

 

Margin

 

SMB

 

$

18,940

 

8.1

%

$

18,189

 

6.7

%

$

751

 

1.4

%

MME

 

14,434

 

5.0

 

12,856

 

5.4

 

1,578

 

(0.4

)

Public Sector

 

(204

)

(0.3

)

(303

)

(0.4

)

99

 

0.1

 

MacMall

 

1,073

 

1.0

 

599

 

0.5

 

474

 

0.5

 

Corporate and Other

 

(30,689

)

(4.4

)(1)

(26,845

)

(3.8

)(1)

(3,844

)

(0.6

)(1)

Consolidated operating profit and operating profit margin

 

$

3,554

 

0.5

%

$

4,496

 

0.6

%

$

(942

)

(0.1

)%

 


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

 

23



Table of Contents

 

Consolidated operating profit for the six months ended June 30, 2012 was $3.6 million compared to $4.5 million in the six months ended June 30, 2011, a decrease of $0.9 million, or 21%. Consolidated operating profit margin for the six months ended June 30, 2012 was 0.5% compared to 0.6% in the six months ended June 30, 2011.

 

Our SMB segment operating profit increased by $0.7 million, or 4%, to $18.9 million in the six months ended June 30, 2012 compared to $18.2 million in the six months ended June 30, 2011. This increase resulted primarily from a decrease bad debt expense of $0.3 million and improvements in a number of components of selling, general and administrative expenses, partially offset by the SMB gross profit decrease discussed above and a $0.3 million increase in personnel costs primarily due to increased variable compensation expenses related to higher selling margin for SMB’s core business.

 

Our MME segment operating profit increased by $1.5 million, or 12%, to $14.4 million in the six months ended June 30, 2012 compared to $12.9 million in the six months ended June 30, 2011. The increase was primarily due to the increase in MME gross profit discussed above, partially offset by a $0.8 million increase in personnel costs, a $0.6 million increase in depreciation and amortization expenses primarily related to the acceleration of our SARCOM and NSPI trademark amortization in connection with our rebranding strategy, and a $0.4 million increase in variable fulfillment costs. The increase in personnel costs was primarily related to an increase in unutilized service labor and a $0.3 million increase in employee severance costs. Operating profit for the six months ended June 30, 2012 also included a $0.2 million benefit from a decrease in the estimated fair value of the contingent consideration liability related to our NSPI acquisition, compared to a $0.8 million benefit recorded in the six months ended June 30, 2011.

 

Our Public Sector segment reported an operating loss of $0.2 million in the six months ended June 30, 2012 compared to $0.3 million in the six months ended June 30, 2011. The decrease in Public Sector operating loss was primarily due to the increase in Public Sector gross profit discussed above, partially offset by a $0.9 million increase in personnel costs.

 

MacMall/OnSale segment operating profit increased by $0.5 million, or 79%, to $1.1 million in the six months ended June 30, 2012 compared to $0.6 million in the six months ended June 30, 2011. The increase in MacMall/OnSale segment operating profit was primarily due to the increase in MacMall/OnSale segment gross profit discussed above and a decrease in outside service costs of $0.5 million, a decrease in legal costs of $0.4 million and a decrease in credit card related costs of $0.3 million, partially offset by an increase in personnel costs of $0.8 million.

 

Corporate and Other operating expenses increased by $3.9 million, or 14%, to $30.7 million in the six months ended June 30, 2012 from $26.8 million in the six months ended June 30, 2011. The increase in the six months ended June 30, 2012 was primarily related to a $2.7 million increase in personnel costs primarily supporting continued investments in IT and professional and pre-sales support services, and a $0.9 million increase in depreciation expense associated with the completed portions of our on-going systems upgrades, partially offset by a $0.3 million decrease in litigation costs primarily related to defending in the prior year what we believe was a meritless lawsuit which was settled in January 2012 without liability to the company.

 

Net Interest Expense. Total net interest expense for the six months ended June 30, 2012 increased to $1.8 million compared to $1.6 million in the six months ended June 30, 2011. The increase in interest expense of $0.2 million resulted primarily from an increase in our average total outstanding borrowings, primarily related to the financing of our new El Segundo headquarters office building and an increase in amortization expense related to deferred financing costs, partially offset by a decrease in our average effective borrowing rate.

 

Income Tax Expense. We recorded an income tax expense of $0.7 million in the six months ended June 30, 2012 compared to an income tax expense of $1.2 million in the six months ended June 30, 2011. Our effective tax rates for the six months ended June 30, 2012 and 2011 were approximately 44% and 40%.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Working Capital. Our primary capital need has historically been funding the working capital requirements created by our growth in sales and strategic acquisitions. We expect that our primary capital needs will continue to be the funding of our existing working capital requirements, capital expenditures for which we expect to include substantial investments in a new ERP system, eCommerce platform and an upgrade of our current IT infrastructure over the next several years, which are discussed below in “Other Planned Capital Projects,” possible sales growth, possible acquisitions and new business ventures, including our announced rebranding strategy and possible repurchases of our common stock under a discretionary repurchase program, which is discussed below. Our primary sources of financing have historically come from borrowings from financial institutions, public and private issuances of our common

 

24



Table of Contents

 

stock and cash flows from operations. Our continuing efforts to drive revenue growth from commercial customers could result in an increase in our accounts receivable as these customers are generally provided longer payment terms than consumers. We historically have increased our inventory levels from time to time to take advantage of strategic manufacturer promotions. We believe that our current working capital, including our existing cash balance, together with our expected future cash flows from operations and available borrowing capacity under our line of credit, will be adequate to support our current operating plans for at least the next 12 months. However, the current uncertainty in the macroeconomic environment may limit our cash resources that could otherwise be available to fund future strategic opportunities, capital investments or growth beyond our current operating plans. We are also unable to quantify any synergies or expected costs related to our recently announced rebranding strategy.

 

There has been ongoing weakness and uncertainty in the global economic environment, coupled with disruptions in the capital and credit markets. While our revolving credit facility does not mature until March 2015, we believe continued problems in these areas could have a negative impact on our ability to obtain future financing if we need additional funds, such as for acquisitions or expansion, to fund a significant downturn in our sales or an increase in our operating expenses, or to take advantage of opportunities or favorable market conditions in the future. We may seek additional financing from public or private debt or equity issuances; however, there can be no assurance that such financing will be available at acceptable terms, if at all. Also, there can be no assurance that the cost or availability of future borrowings, if any, under our credit facility or in the debt markets will not be impacted by disruptions in the capital and credit markets.

 

We had cash and cash equivalents of $8.6 million at June 30, 2012 and $9.5 million at December 31, 2011. Our working capital was $52.8 million as of June 30, 2012 and $45.3 million as of December 31, 2011.

 

In October 2008, our Board of Directors approved a discretionary common stock repurchase program for up to $10 million of our common stock in aggregate with all other repurchases made under any repurchase programs following the date of such Board of Directors’ approval. This repurchase program effectively superseded an earlier repurchase program adopted in 1996. Under this new 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 any repurchases of our common stock under this program will be financed with existing working capital and amounts available under our existing credit facility. No limit was placed on the duration of the repurchase program. There is no guarantee as to the exact number of shares that we will repurchase. Subject to applicable securities laws, repurchases may be made at such times and in such amounts as our management deems appropriate. The program can also be discontinued at any time management feels additional purchases are not warranted. From the inception of the program in October 2008 through December 31, 2011, we had repurchased an aggregate total of 1,956,506 shares of our common stock for a cost of $8.7 million. The repurchased shares are held as treasury stock. We did not repurchase any of our common stock during the six months ended June 30, 2012.

 

We maintain a Canadian call center serving the U.S. market, which has historically received the benefit of labor credits under a Canadian government program. In 2007, we received an eligibility certificate to participate in the Investment Quebec Refundable Tax Credit for Major Employment Generating Projects (GPCE). In addition to other eligibility requirements, we are required to maintain a minimum of 317 eligible employees employed by our subsidiary PC Mall Canada, Inc. in the province of Quebec at all times to remain eligible to apply annually for these labor credits. As a result of this new 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, beginning in fiscal year 2008 and continuing through fiscal year 2016. As of June 30, 2012, we had an aggregate accrued receivable of $8.9 million related to the 2010 and 2011 calendar years and the first six months of 2012. We expect to file our 2011 claim in 2012 and we expect to receive full payment under our remaining accrued labor credits receivable.

 

Cash Flows from Operating Activities. Net cash provided by operating activities in the six months ended June 30, 2012 was $21.3 million, primarily due to a $10.8 million decrease in accounts receivable and an $8.3 million increase in accounts payable. The decrease in accounts receivable reflects the payment received related to certain large sales near the end of 2011 as well as normal seasonality between the fourth quarter and the first half of the year thereafter. The increase in accounts payable is primarily due to the mix and timing of trade payables, including our management of the utilization of early pay discounts.

 

Net cash used in operating activities in the six months ended June 30, 2011 was $8.6 million, primarily due to a reduction in accounts payable of $29.5 million based upon timing of payments to certain vendors, partially offset by a $6.6 million increase in deferred revenues, a $5.3 million decrease in inventory and a $4.9 million decrease in accounts receivable, both due generally to normal seasonality between the fourth quarter and the first half of the year thereafter.

 

Cash Flows from Investing Activities. Net cash used in investing activities was $5.1 million in the six months ended June 30, 2012 compared to $17.0 million in the six months ended June 30, 2011. The $5.1 million of net cash used in investing activities in the six months ended June 30, 2012 was due to capital expenditures relating to investments in our IT infrastructure and the creation of enhanced electronic tools for our account executives and sales support staff. Capital expenditures of $17.0 million in the six months ended June 30, 2011 were primarily related to investments in our IT infrastructure and the creation of enhanced electronic tools for our account executives and sales support staff, the $9.6 million purchase of a new headquarters office building in El Segundo, California, as discussed above, and the $2.3 million acquisition of certain assets of eCost.

 

25



Table of Contents

 

Cash Flows from Financing Activities. Net cash used in financing activities in the six months ended June 30, 2012 was $17.2 million compared to net cash provided by financing activities in the six months ended June 30, 2011 of $21.0 million. The $17.2 million of net cash used in financing activities in the six months ended June 30, 2012 was primarily related to $20.1 million of net payments made on the outstanding balance of our line of credit, partially offset by $4.4 million of proceeds resulting from capital leases entered into during the quarter but relating to assets acquired in prior periods. The $21.0 million of net cash provided by financing activities in the six months ended June 30, 2011 was primarily related to $7.2 million of borrowings under a new note payable to finance a part of the purchase price of the building in El Segundo, a $7.7 million change in book overdraft and a $5.8 million of net borrowings on our line of credit.

 

Line of Credit and Note Payable. We maintain an asset-based revolving credit facility of up to $160 million from a lending unit of a large commercial bank. The credit facility provides for, among other things, (i) a credit limit of $160 million, which may be increased in increments of $5 million up to a total credit limit of $180 million, provided that any increase of the total credit limit in excess of $160 million is subject to, among other things, an acceptance and commitment by the lenders to such excess amount and a line increase fee not to exceed 0.65% of the increased amount; (ii) LIBOR interest rate options that we can enter into with no limit on the maximum outstanding principal balance which may be subject to a LIBOR interest rate option; and (iii) a maturity date of March 31, 2015. The credit facility, which functions as a working capital line of credit with a borrowing base of inventory and accounts receivable, including certain credit card receivables, also includes a monthly unused line fee of 0.25% per year on the amount, if any, by which the Maximum Credit, as defined in the agreement, then in effect, exceeds the average daily principal balance of the outstanding borrowings during the immediately preceding month. There can be no assurance that the lenders, if we elected to increase the credit limit, will commit to the remaining excess $20 million of credit beyond the $160 million in any future period. As a result, we may not be able to access the credit facility beyond its current limit of $160 million.

 

The credit facility is collateralized by substantially all of our assets. In addition to the security interest required by the credit facility, certain of our vendors have security interests in some of our assets related to their products. The credit facility has as its single financial covenant a minimum fixed charge coverage ratio (FCCR) requirement in the event an FCCR triggering event has occurred. An FCCR triggering event is comprised of maintaining certain specified daily and average excess availability thresholds. In the event the FCCR covenant applies, the fixed charge coverage ratio is 1.0 to 1.0 for each twelve-month period. At June 30, 2012, we were in compliance with our financial covenant.

 

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 utilization of early-pay discounts. At June 30, 2012, we had $71.8 million of net working capital advances outstanding under the line of credit. At June 30, 2012, the maximum credit line was $160 million and we had $62.9 million available to borrow for working capital advances under the line of credit.

 

In connection with and as part of the amended credit facility, we entered into an amended term note on December 14, 2010 with a principal balance of $2.87 million, payable in equal monthly principal installments beginning on January 1, 2011, plus interest at the prime rate with a LIBOR option. The amended term note matures in December 2017 or in the event of a default, termination or non-renewal of our credit facility, is payable in its entirety upon demand by our lender. At June 30, 2012, we had $2.26 million outstanding under the amended term note. The remaining balance of our term note matures as follows: $205,000 in the remainder of 2012 and $410,000 annually in each of the years 2012 through 2017.

 

At June 30, 2012, our effective weighted average annual interest rate on outstanding amounts under the credit facility and term note was 2.38%.

 

At June 30, 2012, $0.1 million relating to the financing of our purchase of Microsoft AX (Axapta), which is a part of our ERP upgrade, were included in our “Notes payable — current” on our Consolidated Balance Sheets. See “Other Planned Capital Projects” below for a detailed discussion.

 

In June 2011, we entered into a credit agreement to finance the acquisition and improvement of real property we purchased in March 2011 in El Segundo, California. The credit agreement provides for a lending commitment for a loan up to $10.9 million with a five year term and a 25 year straight-line principal repayment amortization period with a balloon payment at maturity. Interest is variable, indexed to Prime plus a spread of 0.375% or LIBOR plus a spread of 2.375% at our option, payable monthly. At June 30, 2012, we had $9.9 million outstanding under this credit agreement. The loan is secured by the real property and contains financial covenants substantially similar to those of our existing asset-based credit facility.

 

26



Table of Contents

 

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.

 

Other Planned Capital Projects

 

We are currently upgrading many of our IT systems. We have purchased licenses for Microsoft Dynamics AX (Axapta) and other related tools, such as workflow software, web development tools and other related items, to upgrade our ERP and eCommerce systems. We initiated the implementation and upgrade of our eCommerce system in the second half of 2008 and have completed and launched a new generation of our public sites at macmall.com, onsale.com and pcmall.com. We are currently working on the implementation of the ERP modules and the upgrade of the ERP systems, including additional enhancements and features, and we expect to be complete with all major phases of the implementation of the ERP systems by the end of 2013. We believe the implementation and upgrade should help us to gain further efficiencies across our organization. While it is difficult to estimate costs based on the complexity of the systems design, customization and implementation, based on our estimates, which are subject to change, we currently expect to incur a cost of approximately $16 million for the major phases of these IT system upgrades. To date, we have incurred approximately $12.6 million of such costs. In addition to the above expenditures, we expect on an ongoing basis to make periodic upgrades to our IT systems.

 

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

 

As of June 30, 2012, we did not have any off-balance sheet arrangements.

 

Contingencies

 

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

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

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

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

·              our expectations regarding the potential sale, exchange and/or acquisition of certain real property assets, and the timing of such transactions;

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

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

·              our competitive advantages and growth opportunities;

·              our ability to increase profitability and revenues;

 

27



Table of Contents

 

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

·              our ability to generate vendor supported marketing;

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

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

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

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

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

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

·              our ability to penetrate the public sector market;

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

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

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

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

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

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

·              our ability to limit risk related to price reductions;

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

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

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

·              our compliance with laws and regulations;

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

·              our expectations regarding the impact of accounting pronouncements;

·              our belief regarding financing of repurchases of our common stock;

·              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.

 

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 in greater detail 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 or revise any forward-looking statement or other information contained herein to reflect new information, events or circumstances after the date hereof.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our financial instruments include cash and cash equivalents and long-term debt. At June 30, 2012, 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, 2012. However, from time-to-time, we contemplate and may enter into derivative financial instruments related to interest rate, foreign currency, and other market risks.

 

Interest Rate Risk

 

We have exposure to the risks of fluctuating interest rates on our line of credit and note payable. The variable interest rates on our line of credit and note payable are tied to the prime rate or the LIBOR, at our discretion. At June 30, 2012, we had $71.8 million outstanding under our line of credit and $12.2 million outstanding under our notes payable. As of June 30, 2012, the hypothetical impact of a one percentage point increase in interest rate related to the outstanding borrowings under our line of credit and note payable would be to increase our annual interest expense by approximately $0.8 million.

 

28



Table of Contents

 

Foreign Currency Exchange Risk

 

We have operation centers in Canada and the Philippines that provide back-office administrative support and customer service support. In each of these countries, transactions are primarily conducted in the respective local currencies. In addition, our two foreign subsidiaries that operate the operation centers have intercompany accounts with our U.S. subsidiaries that eliminate upon consolidation. However, transactions resulting in such accounts expose us to foreign currency rate fluctuations. We record gains and losses resulting from exchange rate fluctuations on our short-term intercompany accounts in “Selling, general and administrative expenses” in our Consolidated Statements of Operations and translation gains and losses resulting from exchange rate fluctuations on local currency based assets and liabilities in “Accumulated other comprehensive income (loss),” a separate component of stockholders’ equity on our Consolidated Balance Sheets. As such, we have foreign currency translation exposure for changes in exchange rates for these currencies. As of June 30, 2012, we did not have material foreign currency or overall currency exposure. Significant changes in exchange rates between foreign currencies in which we transact business and the U.S. dollar may adversely affect our Consolidated Statements of Operations and our Consolidated Balance Sheets.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

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

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.

 

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 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

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.

 

29



Table of Contents

 

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

 

We have committed significant resources to the development of sophisticated computer systems that are used to manage our business. Our computer 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 personal computers across all of our U.S. and foreign 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 systems on a regular basis, which could require significant capital expenditures.

 

We are currently upgrading many of our IT systems. We have purchased licenses for Microsoft Dynamics AX (Axapta) and other related tools, such as workflow software, web development tools and other related items, to upgrade our ERP and eCommerce systems. We initiated the implementation and upgrade of our eCommerce system in the second half of 2008 and have completed and launched a new generation of our public sites at macmall.com, onsale.com, ecost.com and pcmall.com. We are currently working on the implementation of the ERP modules and the upgrade of the ERP systems, including additional enhancements and features, and we expect to be complete with all phases of the implementation of the ERP systems by the end of 2013.

 

Our success is dependent on the accuracy and proper utilization of our management information systems and our telephone system. In addition to the costs associated with system upgrades, the transition to and implementation of new or upgraded systems 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 have had a contract for the last three years with a third party service provider, who specializes in maintenance and support of both hardware and operating system, to provide us adequate support until the completion of the upgrade of our management information system, which is expected to be completed by the end of 2013.

 

In addition to the specifically discussed IT and phone system upgrades discussed above, we also regularly upgrade our systems in an effort to better meet the information requirements of our users, and believe that to remain competitive, it will be necessary for us to upgrade our management information 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 IT 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.

 

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.

 

An important element of our business strategy is to increasingly focus on SMB, MME and Public Sector sales. As a result of the ongoing economic uncertainties, the direction and relative strength of the U.S. economy remains a considerable risk to our business, operating results and financial condition. This economic uncertainty could also increase the risk of uncollectible accounts receivable from our customers. During the recent economic downturns in the U.S. and elsewhere, SMB, MME and Public Sector entities generally reduced, often substantially, their rate of information technology spending. Additionally, these recent weak economic conditions and consumer confidence resulted in a decline in consumer spending on technology and related consumer goods. Future changes and uncertainties in the economic climate in the U.S. and elsewhere could have a similar negative impact on the rate of information technology spending of our current and potential customers, which would likely have a negative impact on our business, operating results and financial condition, and could significantly hinder our growth and prevent us from achieving our financial performance goals.

 

30



Table of Contents

 

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

 

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

 

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

 

Our revenue is dependent on sales of products from a small number of key manufacturers and software publishers, including Apple, Cisco, HP, IBM, Lenovo, Microsoft and Dell. For example, products manufactured by Apple accounted for approximately 17% and 21% of our net sales in the three months ended June 30, 2012 and 2011. Products manufactured by HP represented 20% and 22% of our net sales in the three months ended June 30, 2012 and 2011.  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 Adobe, Apple, Cisco, Dell, HP, IBM, Ingram Micro, Lenovo, Microsoft and Tech Data, provide us with trade credit or substantial incentives in the form of discounts, credits and cooperative advertising and certain licenses to use their technology in the operation of our business at no or significantly reduced cost. We have agreements with many of our vendors under which they provide us, or they have otherwise consistently provided us, with market development funds to finance portions of our catalog publication and distribution costs based upon the amount of coverage we give to their respective products in our catalogs or other advertising mediums. Any termination or interruption of our relationships with one or more of these vendors, particularly Apple or HP, or modification of the terms or discontinuance of our agreements and market development fund programs and arrangements with these vendors, could adversely affect our operating income and cash flow. For example, the amount of vendor consideration we receive from a particular vendor may be impacted by a number of events outside of our control, including acquisitions, management changes or economic pressures affecting such vendor, any of which could materially affect the amount of vendor consideration we receive from such vendor.

 

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

 

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

 

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

 

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

 

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

 

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

 

31



Table of Contents

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

·                  seasonality in consumer spending;

·                  variability in vendor programs;

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

·                  changes in prices from our suppliers;

·                  promotions;

·                  the loss or consolidation of significant suppliers or customers;

·                  our ability to control costs;

·                  the timing of our capital expenditures;

·                  the condition of our industry in general;

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

·                  consumer acceptance of new purchasing models such as our daily deals offerings and the use of social commerce to drive sales;

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

·                  deferral of customer orders in anticipation of new offerings;

·                  product or solution enhancements or operating system changes;

 

32



Table of Contents

 

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

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

·