UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
R |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the quarterly period ended September 30, 2007 |
||
|
|
|
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) |
2555 West 190th Street, Suite 201
Torrance, CA 90504
(Address of principal executive offices)
(310) 354-5600
(Registrants 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 R No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
|
Accelerated filer o |
|
Non-accelerated filer R |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No R
As of November 9, 2007, the registrant had 13,381,012 shares of common stock outstanding.
PC MALL, INC.
TABLE OF CONTENTS
1
PC MALL, INC.
PART I - FINANCIAL INFORMATION
(unaudited, in thousands, except per share amounts and share data)
|
|
September 30,
|
|
December 31,
|
|
||
ASSETS |
|
||||||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
9,799 |
|
$ |
5,836 |
|
Accounts receivable, net of allowances of $4,583 and $4,630 |
|
160,524 |
|
114,184 |
|
||
Inventories, net |
|
59,711 |
|
51,268 |
|
||
Prepaid expenses and other current assets |
|
9,322 |
|
8,497 |
|
||
Deferred income taxes |
|
4,564 |
|
4,594 |
|
||
Total current assets |
|
243,920 |
|
184,379 |
|
||
Property and equipment, net |
|
9,255 |
|
8,055 |
|
||
Deferred income taxes |
|
1,034 |
|
6,248 |
|
||
Goodwill |
|
32,542 |
|
3,525 |
|
||
Intangible assets, net |
|
5,538 |
|
931 |
|
||
Other assets |
|
480 |
|
429 |
|
||
Total assets |
|
$ |
292,769 |
|
$ |
203,567 |
|
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS EQUITY |
|
||||||
Current liabilities: |
|
|
|
|
|
||
Accounts payable |
|
$ |
110,452 |
|
$ |
75,837 |
|
Accrued expenses and other current liabilities |
|
23,661 |
|
20,215 |
|
||
Deferred revenue |
|
16,243 |
|
11,964 |
|
||
Line of credit |
|
58,915 |
|
32,477 |
|
||
Note payable current |
|
775 |
|
500 |
|
||
Total current liabilities |
|
210,046 |
|
140,993 |
|
||
Note payable and other long-term liabilities |
|
4,873 |
|
1,750 |
|
||
Total liabilities |
|
214,919 |
|
142,743 |
|
||
Commitments and contingencies (Note 10) |
|
|
|
|
|
||
Redeemable common stock, $0.001 par value, 511,503 shares issued and outstanding (Note 3) |
|
6,051 |
|
|
|
||
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; 13,099,532 and 12,648,720 shares issued; and 12,682,854 and 12,354,520 shares outstanding, respectively |
|
14 |
|
13 |
|
||
Additional paid-in capital |
|
89,405 |
|
87,465 |
|
||
Treasury stock, at cost: 416,678 shares and 294,200 shares, respectively |
|
(1,015 |
) |
(1,015 |
) |
||
Accumulated other comprehensive income |
|
1,430 |
|
241 |
|
||
Accumulated deficit |
|
(18,035 |
) |
(25,880 |
) |
||
Total stockholders equity |
|
71,799 |
|
60,824 |
|
||
Total liabilities, redeemable common stock and stockholders equity |
|
$ |
292,769 |
|
$ |
203,567 |
|
See Notes to the Consolidated Financial Statements.
2
PC MALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
|
|
Three Months Ended September 30, |
|
Nine Months Ended
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Net sales |
|
$ |
287,688 |
|
$ |
242,171 |
|
$ |
807,426 |
|
$ |
710,512 |
|
Cost of goods sold |
|
253,509 |
|
210,615 |
|
707,503 |
|
620,533 |
|
||||
Gross profit |
|
34,179 |
|
31,556 |
|
99,923 |
|
89,979 |
|
||||
Selling, general and administrative expenses |
|
28,413 |
|
27,480 |
|
84,315 |
|
83,339 |
|
||||
Operating profit |
|
5,766 |
|
4,076 |
|
15,608 |
|
6,640 |
|
||||
Interest expense, net |
|
800 |
|
912 |
|
2,530 |
|
2,912 |
|
||||
Income before income taxes |
|
4,966 |
|
3,164 |
|
13,078 |
|
3,728 |
|
||||
Income tax expense |
|
1,988 |
|
1,256 |
|
5,233 |
|
1,480 |
|
||||
Net income |
|
$ |
2,978 |
|
$ |
1,908 |
|
$ |
7,845 |
|
$ |
2,248 |
|
Basic and Diluted Earnings Per Common Share |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.24 |
|
$ |
0.16 |
|
$ |
0.63 |
|
$ |
0.19 |
|
Diluted |
|
0.22 |
|
0.15 |
|
0.58 |
|
0.18 |
|
||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
12,606 |
|
12,214 |
|
12,473 |
|
11,978 |
|
||||
Diluted |
|
13,715 |
|
12,927 |
|
13,604 |
|
12,842 |
|
See Notes to the Consolidated Financial Statements.
3
PC MALL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(unaudited, in thousands)
|
|
Common Stock |
|
|
|
|
|
Accumulated |
|
|
|
|
|
||||||||
|
|
Outstanding |
|
Amount |
|
Additional
|
|
Treasury
|
|
Other
|
|
Accumulated
|
|
Total |
|
||||||
Balance at December 31, 2006 |
|
12,354 |
|
$ |
13 |
|
$ |
87,465 |
|
$ |
(1,015 |
) |
$ |
241 |
|
$ |
(25,880 |
) |
$ |
60,824 |
|
SARCOM acquisition (Note 3) |
|
|
|
|
|
136 |
|
|
|
|
|
|
|
136 |
|
||||||
Stock option exercises |
|
329 |
|
1 |
|
855 |
|
|
|
|
|
|
|
856 |
|
||||||
Stock-based compensation expense |
|
|
|
|
|
949 |
|
|
|
|
|
|
|
949 |
|
||||||
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
|
|
62,765 |
|
||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
7,845 |
|
7,845 |
|
||||||
Translation adjustments |
|
|
|
|
|
|
|
|
|
1,189 |
|
|
|
1,189 |
|
||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
9,034 |
|
||||||
Balance at September 30, 2007 |
|
12,683 |
|
$ |
14 |
|
$ |
89,405 |
|
$ |
(1,015 |
) |
$ |
1,430 |
|
$ |
(18,035 |
) |
$ |
71,799 |
|
See Notes to the Consolidated Financial Statements.
4
PC MALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
Nine Months Ended
|
|
||||
|
|
2007 |
|
2006 |
|
||
Cash Flows From Operating Activities |
|
|
|
|
|
||
Net income |
|
$ |
7,845 |
|
$ |
2,248 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
2,962 |
|
3,071 |
|
||
Provision for deferred income taxes |
|
5,233 |
|
1,480 |
|
||
Stock-based compensation |
|
949 |
|
1,171 |
|
||
Loss on disposal of fixed assets |
|
49 |
|
|
|
||
Change in operating assets and liabilities: |
|
|
|
|
|
||
Accounts receivable |
|
(15,190 |
) |
(13,737 |
) |
||
Inventories |
|
(4,028 |
) |
24,450 |
|
||
Prepaid expenses and other current assets |
|
43 |
|
(754 |
) |
||
Other assets |
|
499 |
|
14 |
|
||
Accounts payable |
|
11,595 |
|
12,169 |
|
||
Accrued expenses and other current liabilities |
|
(2,751 |
) |
655 |
|
||
Deferred revenue |
|
1,940 |
|
2,474 |
|
||
Total adjustments |
|
1,301 |
|
30,993 |
|
||
Net cash provided by operating activities |
|
9,146 |
|
33,241 |
|
||
Cash Flows From Investing Activities |
|
|
|
|
|
||
Purchases of property and equipment |
|
(1,331 |
) |
(2,687 |
) |
||
Acquisition of SARCOM, net of cash acquired |
|
(47,650 |
) |
|
|
||
Acquisition of GMRIs products business |
|
|
|
(3,359 |
) |
||
Net cash used in investing activities |
|
(48,981 |
) |
(6,046 |
) |
||
Cash Flows From Financing Activities |
|
|
|
|
|
||
Borrowings (repayments) under note payable |
|
3,175 |
|
(375 |
) |
||
Net borrowings (payments) under line of credit |
|
26,438 |
|
(29,732 |
) |
||
Change in book overdraft |
|
12,533 |
|
2,659 |
|
||
Payments of obligations under capital lease |
|
(118 |
) |
|
|
||
Payments for deferred financing costs |
|
(275 |
) |
|
|
||
Proceeds from stock issued under stock option plans |
|
856 |
|
545 |
|
||
Net cash provided by (used in) financing activities |
|
42,609 |
|
(26,903 |
) |
||
Effect of foreign currency on cash flow |
|
1,189 |
|
291 |
|
||
Net increase in cash and cash equivalents |
|
3,963 |
|
583 |
|
||
Cash and cash equivalents at beginning of the period |
|
5,836 |
|
6,289 |
|
||
Cash and cash equivalents at end of the period |
|
$ |
9,799 |
|
$ |
6,872 |
|
Supplemental Cash Flow Information |
|
|
|
|
|
||
Interest paid |
|
$ |
2,460 |
|
$ |
2,472 |
|
Income taxes paid |
|
2,850 |
|
99 |
|
||
Supplemental Non-Cash Investing Activity (Note 3) |
|
|
|
|
|
||
Goodwill related to acquisition of GMRIs products business |
|
$ |
389 |
|
$ |
|
|
Sarcom acquisition related: |
|
|
|
|
|
||
Fair value of assets acquired |
|
$ |
73,147 |
|
$ |
3,996 |
|
Cash paid |
|
(48,220 |
) |
(3,363 |
) |
||
Value of common stock issued (including redeemable common stock) |
|
(6,188 |
) |
|
|
||
Liabilities assumed |
|
$ |
18,739 |
|
$ |
633 |
|
See Notes to the Consolidated Financial Statements.
5
PC MALL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
PC Mall, Inc., together with its wholly-owned subsidiaries (collectively referred to as we or us), founded in 1987, is a rapid response direct marketer of computer hardware, software, peripheral, electronics, and other consumer products and services. We offer products and services to businesses, government and educational institutions, as well as individual consumers, through dedicated outbound and inbound telemarketing account executives, the Internet, direct marketing techniques, direct response catalogs, a direct sales force and three retail showrooms. We offer a broad selection of products through our distinctive full-color catalogs under the PC Mall, MacMall and PC Mall Gov brands, our websites pcmall.com, macmall.com, pcmallgov.com, gmri.com, wareforce.com, sarcom.com and onsale.com, and other promotional materials.
We have prepared the unaudited consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. 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, 2006 filed with the SEC on March 12, 2007, as amended on April 30, 2007, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007 filed with the SEC on May 15, 2007 and August 14, 2007 and all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC from the end of our prior fiscal year through the date of this report.
2. Summary of Significant Accounting Policies
Income Taxes
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48, if any, is to be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year. Our adoption of FIN 48 did not have an impact on our consolidated financial statements. See Note 6 below for more information.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115 (SFAS 159), which permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). Unrealized gains and losses on items for which the fair value option has been elected are to be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We believe that the adoption of SFAS 159 will not have a significant impact on our consolidated financial statements.
6
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157), which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We believe that the adoption of SFAS 157 will not have a significant impact on our consolidated financial statements.
In June 2006, the FASB ratified EITF Issue No. 06-03, How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation) (EITF 06-03). EITF 06-03 provides that any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer may include, but is not limited to, sales, use, value added, and some excise taxes. EITF 06-03 also provides that the presentation of such taxes on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that a company should make and disclose in its financial statements, and disclose any such taxes that are reported on a gross basis, if material, for each period for which an income statement is presented. EITF 06-03 is effective for financial statements for interim and annual reporting periods beginning after December 15, 2006. We adopted EITF 06-03 on January 1, 2007, and have concluded that we will continue to report such taxes on a net basis in our consolidated statements of operations. As such, our adoption of EITF 06-03 did not have a significant impact on our consolidated financial statements.
3. Acquisitions
SARCOM
On September 17, 2007, we completed the acquisition of SARCOM, Inc. (SARCOM), a provider of advanced technology solutions, pursuant to the terms of an Agreement and Plan of Merger, dated as of August 17, 2007 for an initial total purchase price of approximately $55.7 million, including transaction costs. SARCOM, headquartered in Columbus, Ohio, has served the mid-market and enterprise market for over 20 years and currently specializes in providing enterprise hardware and software solutions, procurement solutions and a full range of professional and managed services. Our acquisition of SARCOM was motivated in part by our desire to enhance our capabilities as a reseller of advanced technology product solutions and services, consistent with our commitment to grow our business in part through an effort to expand our share of our customers IT spending. The results of SARCOM are included in our Core business segment from the closing date of the acquisition.
The total purchase price was subject to a post-closing debt and net asset value adjustment (see below for a discussion of the final net asset value adjustment on November 6, 2007). The aggregate purchase price paid at closing included a total of $48.2 million in cash and approximately $7.5 million in shares of our common stock, the number of shares being based on the average closing price of our stock on the Nasdaq Global Market for the 20 consecutive trading days immediately preceding the acquisition closing date. Under that formula, at closing, we issued an aggregate of 633,981 shares of our common stock to the sellers as payment of the stock component of the purchase price. We financed the cash component of the purchase price through borrowings under our existing credit facility.
On November 6, 2007, we and the sellers agreed on a final net asset value adjustment, resulting in a decrease in the purchase price by approximately $2.1 million, which was to be repaid, at the sellers option, in either cash or shares of our common stock based on a per share price determined by the average closing price for the 20 consecutive trading days ending on the date of final determination of the net asset value adjustment. As a result, in settlement of the $2.1 million net asset value adjustment, the sellers tendered back to us a total of 122,478 shares of our common stock previously issued to them, which has been recorded as a reduction of the purchase price as of September 30, 2007.
In determining the purchase price for accounting purposes, we measured the fair value of the shares issued in accordance with EITF No. 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination. We used an average closing price of our common stock over the four days prior to the close of the SARCOM acquisition, resulting in a total fair value of approximately $6.2 million for the 511,503 shares of common stock ultimately issued. As of September 30, 2007, the adjusted total purchase price for accounting purposes, which includes the valuation of the net stock payment under EITF No. 99-12, was $59.4 million.
7
Pursuant to a registration rights agreement entered into with each of the recipients of the shares of our common stock issued in the SARCOM acquisition, if we were unable to file, by October 17, 2007, a registration statement with the SEC covering the sale of the shares held by each of such recipients, the recipients of such shares would then have the right to require us to repurchase all, or any portion, of the shares held by the recipients at the same formula price at which the original number of shares was determined. As such, we have treated the shares issued as redeemable common stock and classified the redemption amount outside of the stockholders equity section on our Consolidated Balance Sheet as of September 30, 2007. We filed the registration statement on October 17, 2007 and as a result, the common stock is no longer considered redeemable and will be reclassified to equity in the fourth quarter. At September 30, 2007, the excess of accounting value over the redemption amount of the shares of approximately $136,000 was included in additional paid-in capital.
As of September 30, 2007, based on a preliminary purchase price allocation, which is subject to further review, we recorded the following assets and liabilities in our Core business segment based on their estimated fair values at the date of acquisition (in thousands):
Total purchase price, adjusted |
|
$ |
54,408 |
|
|
|
|
|
|
Cash |
|
$ |
571 |
|
Accounts receivable |
|
27,728 |
|
|
Inventory |
|
4,415 |
|
|
Other accounts receivable |
|
3,172 |
|
|
Property and equipment, net |
|
2,502 |
|
|
Other assets |
|
1,131 |
|
|
Intangible assets: |
|
|
|
|
Customer relationships |
|
$ |
4,310 |
|
Trade names |
|
400 |
|
|
Software licenses |
|
250 |
|
|
Non-compete agreements |
|
40 |
|
|
Total intangible assets |
|
5,000 |
|
|
Total assets acquired |
|
$ |
44,519 |
|
|
|
|
|
|
Accounts payable |
|
$ |
(10,487 |
) |
Accrued liabilities |
|
(5,914 |
) |
|
Deferred revenue |
|
(2,338 |
) |
|
Total liabilities assumed |
|
$ |
(18,739 |
) |
|
|
|
|
|
Total allocated to goodwill |
|
$ |
28,628 |
|
The following table sets forth our results of operations on a pro forma basis as though the SARCOM acquisition had been completed as of the beginning of the periods presented (in thousands):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Net sales |
|
$ |
334,339 |
|
$ |
305,169 |
|
$ |
989,995 |
|
$ |
881,495 |
|
Operating profit |
|
5,449 |
|
5,353 |
|
17,973 |
|
8,672 |
|
||||
Net income |
|
2,250 |
|
2,096 |
|
7,590 |
|
1,863 |
|
||||
Basic and Diluted Earnings Per Common Share |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.18 |
|
$ |
0.17 |
|
$ |
0.59 |
|
$ |
0.15 |
|
Diluted |
|
0.17 |
|
0.16 |
|
0.54 |
|
0.14 |
|
||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
12,521 |
|
12,214 |
|
12,956 |
|
12,490 |
|
||||
Diluted |
|
13,629 |
|
12,927 |
|
14,087 |
|
13,353 |
|
8
GMRI
On September 7, 2006, PC Mall Gov, Inc. (PC Mall Gov), our wholly-owned subsidiary, acquired the products business of Government Micro Resources, Inc. (GMRI) pursuant to an Asset Purchase Agreement for approximately $3.4 million in cash, including transaction costs. The business includes assets of GMRIs former products business, which include the GMRI trade names, contracts and the related employees, among other items.
Following the completion of the GMRI acquisition, during the nine months ended September 30, 2007, we completed our review of whether certain liabilities existed at the time of the acquisition. As a result of our review, we recorded an entry to adjust our preliminary purchase price allocation to increase the amount allocated to goodwill by approximately $0.4 million relating to net liabilities that we concluded existed at the time of the acquisition.
Based on our purchase price allocation, we recorded the following assets and liabilities, including the $0.4 million discussed above, at the Core business segment based on their estimated fair values at the date of acquisition (in thousands):
Other receivable |
|
$ |
250 |
|
|
|
|
|
|
Goodwill |
|
$ |
2,509 |
|
|
|
|
|
|
Intangible assets: |
|
|
|
|
Product backlog |
|
$ |
567 |
|
Maintenance contracts |
|
143 |
|
|
Trade names |
|
240 |
|
|
Software licenses |
|
218 |
|
|
Non-compete agreements |
|
20 |
|
|
Total intangible assets |
|
$ |
1,188 |
|
|
|
|
|
|
Furniture and equipment |
|
$ |
49 |
|
|
|
|
|
|
Total assets acquired |
|
$ |
3,996 |
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Accrued liabilities |
|
$ |
633 |
|
|
|
|
|
|
Net assets acquired |
|
$ |
3,363 |
|
We recorded approximately $71,000 and $237,000 of amortization expense during the three and nine months ended September 30, 2007 related to the estimated $1.2 million of intangible assets acquired in the GMRI transaction. For additional information on goodwill and intangible assets, see Note 4.
Following the completion of the acquisition, the results of the acquired products business of GMRI have been included in our Core business segment.
4. Goodwill and Intangible Assets
Goodwill
The change in the carrying amounts of goodwill, all of which is held at the Core business segment, was as follows (in thousands):
|
|
Goodwill |
|
|
Balance at December 31, 2006 |
|
$ |
3,525 |
|
Acquisition of SARCOM |
|
28,628 |
|
|
Adjustment relating to purchase accounting for the GMRI acquisition |
|
389 |
|
|
Balance at September 30, 2007 |
|
$ |
32,542 |
|
9
Intangible Assets
The following table sets forth the amounts recorded for intangible assets as of the periods presented (in thousands), including intangibles related to our acquisition of SARCOM in September 2007. The estimated fair values of such intangibles resulting from the SARCOM acquisition are based on a preliminary purchase price allocation, as more fully described in Note 3 above, and is subject to change:
|
|
Weighted |
|
At September 30, 2007 |
|
At December 31, 2006 |
|
||||||||||||||
|
|
Average
|
|
Gross
|
|
Accumulated
|
|
Net
|
|
Gross
|
|
Accumulated
|
|
Net
|
|
||||||
Patent, trademark & URLs |
|
7 |
|
$ |
1,318 |
|
$ |
562 |
|
$ |
756 |
|
$ |
922 |
|
$ |
504 |
|
$ |
418 |
|
Customer relationships |
|
5 |
|
4,865 |
|
596 |
|
4,269 |
|
555 |
|
499 |
|
55 |
|
||||||
Product backlog |
|
Various (1 |
) |
567 |
|
522 |
|
45 |
|
581 |
|
422 |
|
160 |
|
||||||
Software licenses |
|
3 |
|
468 |
|
81 |
|
387 |
|
218 |
|
24 |
|
194 |
|
||||||
Maintenance contracts |
|
Various (1 |
) |
143 |
|
125 |
|
18 |
|
143 |
|
84 |
|
59 |
|
||||||
Non-compete agreements |
|
5 |
|
158 |
|
97 |
|
61 |
|
118 |
|
80 |
|
38 |
|
||||||
Other |
|
5 |
|
32 |
|
30 |
|
2 |
|
32 |
|
25 |
|
7 |
|
||||||
Total intangible assets |
|
|
|
$ |
7,551 |
|
$ |
2,013 |
|
$ |
5,538 |
|
$ |
2,569 |
|
$ |
1,638 |
|
$ |
931 |
|
(1) Amortization of these intangible assets which relate to customer orders is based on actual shipments of goods or performance of service.
Amortization expense for intangible assets was approximately $131,000 and approximately $270,000 for the three months ended September 30, 2007 and 2006 and approximately $379,000 and approximately $358,000 for the nine months ended September 30, 2007 and 2006.
Estimated amortization expense for intangible assets, excluding intangible assets based on customer orders, in each of the next five years and thereafter is as follows: $356,000 in the remainder of 2007; $1,405,000 in 2008; $1,374,000 in 2009; $1,321,000 in 2010; $944,000 in 2011 and $75,000 thereafter.
5. Debt
As of September 30, 2007, we maintained a $100 million asset-based revolving credit facility from a lending unit of a large commercial bank. On June 11, 2007, we amended our credit facility to provide, among other things: an extension of the maturity date of the facility from March 2008 to March 2011; an option for us to extend and increase the amount of the real estate term loan up to $4.2 million or 70% of appraised value within a limited time period; a reduction of the interest rate spread for the prime rate loans to a range of negative 0.25% to 0.00% from a previous spread of 0.00% and LIBOR loans to a range of 1.50% to 1.75% from a previous range of 2.00% to 2.50%, both of which spreads are dependent upon average excess availability under the facility; an increase in the advance rate against accounts receivable to 90% from 85% and against certain original closed box inventory to 80% from 75%; an increase in the sublimit for credit card receivables to $10 million from $7.5 million and for inventory to $40 million from the previous range of $20 million to $40 million, which was dependent upon turnover; and a restatement of the definition of Adjustment Tangible Net Worth to include certain additional assets as defined in the amendment.
On September 17, 2007, in connection with our acquisition of SARCOM as discussed in Note 3, we entered into a third amendment to the credit facility. The amendment provided, among other things, for the addition of SARCOM as a subsidiary borrower under the loan agreement, and an increase in the amount of the real estate term loan, which is discussed below, to $5.425 million.
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 commitment fee of 0.25% annually on the unused portion of the line up to $60 million, unless the outstanding borrowings under the credit facility exceed $75 million, at which time the unused line fees will be assessed on the unused portion of the facility up to $80 million. At September 30, 2007, our effective weighted average annual interest rate was 7.83% and we had $58.9 million of net working capital advances outstanding under the line of credit. At September 30, 2007, we had $35.0 million available to borrow for working capital advances under the line of credit. 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
10
financial covenant a minimum tangible net worth requirement that is tested as of the last day of each fiscal quarter, which we were in compliance with at September 30, 2007. 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.
In connection with and as part of the amended credit facility, we entered into an amended term note on September 17, 2007 with a principal balance of $5.425 million, payable in equal monthly principal installments beginning on October 1, 2007, plus interest at the prime rate with a LIBOR option. The amended term note matures in October 2014. At September 30, 2007, we had $5.425 million outstanding under the amended term note, at an effective interest rate of 8.0%. Our term note matures as follows: $193,750 in the remainder of 2007, $775,000 annually in each of the years 2008 through 2011 and $2,131,250 thereafter.
The carrying amounts of our line of credit borrowings and note payable approximate their fair values based upon the current rates offered to us for obligations of similar terms and remaining maturities.
See Note 11 for a discussion of the amendment to our credit facility entered into on November 5, 2007, which increased our maximum credit line by up to $50 million, for a total line up to $150 million.
6. Income Taxes
We adopted FIN 48 on January 1, 2007. As of the adoption date, we had no material unrecognized tax benefits. We do not believe that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of September 30, 2007. We recognize penalties and interest accrued related to unrecognized tax benefits, if any, as part of income tax expense in our Consolidated Statements of Operations. As of January 1, 2007, we had no amounts accrued for income tax-related interest or income tax-related penalties on our Consolidated Balance Sheets.
We conduct business through one or more of our subsidiaries in the U.S., Canada and the Philippines. We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Because we utilized or have available U.S. federal and state net operating loss carryforwards generated in certain jurisdictions for the years of 1997 through 2001, such jurisdictions for the respective tax years remain subject to examination by tax authorities. Except for the respective jurisdictions for the years indicated above, we are generally no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. All tax returns for the 2006 fiscal year have been filed.
7. 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. In addition, we exclude common stock options from the computation of diluted EPS when their exercise price is greater than the average market price of our common stock. As such, potential common shares of approximately 125,000 and 576,000 for the three months ended September 30, 2007 and 2006, and approximately 63,000 and 1,080,000 for the nine months ended September 30, 2007 and 2006 have been excluded from the calculation of diluted EPS because the effect of their inclusion would be antidilutive.
11
The reconciliation of the amounts used in the basic and diluted EPS computation was as follows (in thousands, except per share amounts):
|
|
Income |
|
Shares |
|
Per Share
|
|
||
Three Months Ended September 30, 2007: |
|
|
|
|
|
|
|
||
Basic EPS |
|
|
|
|
|
|
|
||
Net income |
|
$ |
2,978 |
|
12,606 |
|
$ |
0.24 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
||
Dilutive effect of stock options and warrants |
|
|
|
1,109 |
|
|
|
||
Diluted EPS |
|
|
|
|
|
|
|
||
Adjusted net income |
|
$ |
2,978 |
|
13,715 |
|
$ |
0.22 |
|
Three Months Ended September 30, 2006: |
|
|
|
|
|
|
|
||
Basic EPS |
|
|
|
|
|
|
|
||
Net income |
|
$ |
1,908 |
|
12,214 |
|
$ |
0.16 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
||
Dilutive effect of stock options and warrants |
|
|
|
713 |
|
|
|
||
Diluted EPS |
|
|
|
|
|
|
|
||
Adjusted net income |
|
$ |
1,908 |
|
12,927 |
|
$ |
0.15 |
|
Nine Months Ended September 30, 2007: |
|
|
|
|
|
|
|
||
Basic EPS |
|
|
|
|
|
|
|
||
Net income |
|
$ |
7,845 |
|
12,473 |
|
$ |
0.63 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
||
Dilutive effect of stock options and warrants |
|
|
|
1,131 |
|
|
|
||
Diluted EPS |
|
|
|
|
|
|
|
||
Adjusted net income |
|
$ |
7,845 |
|
13,604 |
|
$ |
0.58 |
|
Nine Months Ended September 30, 2006: |
|
|
|
|
|
|
|
||
Basic EPS |
|
|
|
|
|
|
|
||
Net income |
|
$ |
2,248 |
|
11,978 |
|
$ |
0.19 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
||
Dilutive effect of stock options and warrants |
|
|
|
864 |
|
|
|
||
Diluted EPS |
|
|
|
|
|
|
|
||
Adjusted net income |
|
$ |
2,248 |
|
12,842 |
|
$ |
0.18 |
|
8. Comprehensive Income
Our total comprehensive income was as follows for the periods presented (in thousands):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Net income |
|
$ |
2,978 |
|
$ |
1,908 |
|
$ |
7,845 |
|
$ |
2,248 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments |
|
446 |
|
54 |
|
1,189 |
|
288 |
|
||||
Total comprehensive income |
|
$ |
3,424 |
|
$ |
1,962 |
|
$ |
9,034 |
|
$ |
2,536 |
|
9. Segment Information
We operate in two reportable segments: (1) a rapid response supplier of technology solutions for businesses, government and educational institutions, as well as consumers, collectively referred to as Core business and (2) an online retailer of computer and consumer electronic products under the OnSale.com brand. We allocate our resources to and evaluate the performance of our segments based on operating income. Corporate expenses are included in our measure of segment operating income for management reporting purposes.
12
Summarized segment information for our continuing operations for the periods presented is as follows (in thousands):
Three Months Ended September 30, 2007 |
|
Core business |
|
OnSale.com |
|
Consolidated |
|
|||
Net sales |
|
$ |
283,267 |
|
$ |
4,421 |
|
$ |
287,688 |
|
Gross profit |
|
33,713 |
|
466 |
|
34,179 |
|
|||
Operating profit (loss) |
|
6,096 |
|
(330 |
) |
5,766 |
|
|||
|
|
|
|
|
|
|
|
|||
Three Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|||
Net sales |
|
$ |
239,889 |
|
$ |
2,282 |
|
$ |
242,171 |
|
Gross profit |
|
31,183 |
|
373 |
|
31,556 |
|
|||
Operating profit (loss) |
|
4,350 |
|
(274 |
) |
4,076 |
|
|||
|
|
|
|
|
|
|
|
|||
Nine Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|||
Net sales |
|
$ |
797,312 |
|
$ |
10,114 |
|
$ |
807,426 |
|
Gross profit |
|
98,789 |
|
1,134 |
|
99,923 |
|
|||
Operating profit (loss) |
|
16,504 |
|
(896 |
) |
15,608 |
|
|||
|
|
|
|
|
|
|
|
|||
Nine Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|||
Net sales |
|
$ |
700,396 |
|
$ |
10,116 |
|
$ |
710,512 |
|
Gross profit |
|
88,670 |
|
1,309 |
|
89,979 |
|
|||
Operating profit (loss) |
|
7,754 |
|
(1,114 |
) |
6,640 |
|
As of September 30, 2007 and December 31, 2006, we had total consolidated assets of $292.8 million and $203.6 million. Our management does not have available to them and does not use assets measured at the segment level in allocating resources. Therefore, such information relating to segment assets is not provided herein.
10. Commitments and Contingencies
Commitments
In connection with our acquisition of SARCOM on September 17, 2007, which is described in Note 3, we assumed the remaining commitments of SARCOM under its operating leases covering all of its office space located in various states throughout the U.S. and its capital lease covering various computer and network related equipment and software. As of September 30, 2007, the remaining commitments we assumed under the operating leases totaled approximately $3.7 million, of which approximately $1.3 million is due by September 30, 2008, $1.2 million by September 30, 2009, $0.6 million by September 30, 2010, $0.5 million by September 30, 2011 and $0.1 million by September 30, 2012. As of September 30, 2007, the remaining commitments we assumed under the capital leases totaled approximately $0.3 million, of which approximately $178,000 is due by September 30, 2008, and approximately $75,000 and $25,000 is due in each of the years thereafter. In addition, we financed the cash component of the purchase price we paid in the SARCOM acquisition through borrowings under our existing credit facility. As a result, the outstanding balance on our revolving line of credit and term note, which is described in Note 5, increased to $58.9 million and $5.425 million as of September 30, 2007 from $32.5 million and $2.2 million as of December 31, 2006.
Total rent expense under our operating leases, net of sublease income, was $1.2 million and $1.1 million for the three months ended September 30, 2007 and 2006, and $3.5 million and $3.2 million for the nine months ended September 30, 2007 and 2006. Some of our leases contain renewal options and escalation clauses, and require us to pay taxes, insurance and maintenance costs.
Legal Proceedings
Zekiya Whitmill and Lee Hanzy v. PC Mall Gov, Inc.
On July 6, 2007, Zekiya Whitmill and Lee Hanzy filed a purported class action lawsuit entitled Zekiya Whitmill and Lee Hanzy, individually and on behalf of others similarly situated, Plaintiffs, vs. PC Mall Gov, Inc., a Delaware corporation, and Does 1 through 200, inclusive, Defendants, Case No., BC373934 in the Superior Court of
13
California, County of Los Angeles. The potential class consists of current and former account executives in California who worked for PC Mall Gov., Inc., one of our wholly-owned subsidiaries. The lawsuit alleges that PC Mall Gov. improperly classified members of the putative class as exempt employees and failed to provide putative class members with meal and rest breaks. The complaint in this action asserts the following three causes of action: (1) failure to pay wages, including overtime, in violation of California Labor Code sections 201 through 203, and section 1194(a); (2) failure to provide meal and rest periods in violation of California Labor Code section 226.7; and (3) violation of section 17200 of the California Business and Professions Code. The lawsuit seeks unpaid overtime, statutory penalties, interest, attorneys fees, punitive damages, restitution and injunctive relief. While the case was originally filed in Los Angeles Superior Court, on September 26, 2007, the Superior Court ordered the action to arbitration and stayed all proceedings in superior court. We plan to vigorously defend this litigation. Because the case is in its preliminary stages, we cannot yet predict its outcome and potential financial impact on our business, results of operations and financial condition.
Lee Hanzy v. PC Mall, Inc. dba MACMALL, et al.
On July 6, 2007, Lee Hanzy filed a purported class action lawsuit entitled Lee Hanzy, individually and on behalf of others similarly situated, Plaintiff, vs. PC Mall, Inc., a Delaware corporation dba MACMALL, and Does 1 through 200, inclusive, Defendants, Case No., BC373935 in the Superior Court of California, County of Los Angeles. The potential class consists of current and former account executives in California who worked for PC Mall, and in particular, the MacMall operating division of PC Mall. The lawsuit alleges that PC Mall improperly classified members of the putative class as exempt employees and failed to provide putative class members with meal and rest breaks. The Complaint in this action asserts the following three causes of action: (1) failure to pay wages, including overtime, in violation of California Labor Code sections 201 through 203, and section 1194(a); (2) failure to provide meal and rest periods in violation of California Labor Code section 226.7; and (3) violation of section 17200 of the California Business and Professions Code. The lawsuit seeks unpaid overtime, statutory penalties, interest, attorneys fees, punitive damages, restitution and injunctive relief. While the case was originally filed in Los Angeles Superior Court, on August 30, 2007, the Superior Court ordered the action to arbitration and stayed all proceedings in superior court. We plan to vigorously defend this litigation. Because the case is in its preliminary stages, we cannot yet predict its outcome and potential financial impact on our business, results of operations and financial condition.
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, including the litigation discussed above, 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.
11. Subsequent Event
On November 5, 2007, we entered into a fourth amendment to our credit facility. The amendment provides for, among other things, (i) an increase to the credit limit in increments of $5 million, up to a total maximum amount of $150 million, provided that any increase of the total credit limit in excess of $120 million is subject to an acceptance by a third party assignee in the event the administrative agent elects to assign such excess amount; (ii) a line increase fee equal to 0.25% of the amount of each increment increased as described above, plus, to the extent that the administrative agent assigns a portion of its revolving loan commitment under the credit facility and to the extent required by the assignee, an aggregate acceptance fee not to exceed 0.125% of the aggregate sum of the increase in credit limit assigned; and (iii) an increase in the number of LIBOR interest rate options we can enter into and the elimination of a limit on the maximum outstanding principal balance which may be subject to a LIBOR interest rate option.
On November 6, 2007, we and the sellers of SARCOM agreed on a final net asset value adjustment, resulting in a decrease in our initial total purchase price by approximately $2.1 million. See Note 3 for a detailed discussion.
* * *
14
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following Managements Discussion and Analysis of Financial Condition and Results of Operations together with the consolidated financial statements and related notes included elsewhere in this report, our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 12, 2007, as amended on April 30, 2007, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007 filed with the SEC on May 15, 2007 and August 14, 2007, and all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC from the end of our prior fiscal year through the date of 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 Forward-Looking Statements below and under Risk Factors in Item 1A of Part II, and elsewhere in this report.
BUSINESS OVERVIEW
PC Mall, Inc., together with its wholly-owned subsidiaries (collectively referred to as we or us), founded in 1987, is a rapid response direct marketer of computer hardware, software, peripherals, electronics, and other consumer products and services. We offer products and services to businesses, government and educational institutions, as well as individual consumers, through dedicated outbound and inbound telemarketing account executives, the Internet, direct marketing techniques, direct response catalogs, a direct sales force and three retail showrooms. We offer a broad selection of products through our distinctive full-color catalogs under the PC Mall, MacMall and PC Mall Gov brands, our websites pcmall.com, macmall.com, pcmallgov.com, gmri.com, wareforce.com, sarcom.com and onsale.com, and other promotional materials.
We operate in two reportable segments: (1) a rapid response supplier of technology solutions for businesses, government and educational institutions, as well as individual consumers, collectively referred to as Core business and (2) an online retailer of computer and consumer electronic products under the OnSale.com brand. We allocate resources to and evaluate the performance of our segments based on operating income. Corporate expenses are included in our measure of segment operating income for management reporting purposes.
Management 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 and Apple-related products, HP products, and products purchased from other vendors including Adobe, Cisco, IBM, Ingram Micro, Lenovo, Microsoft, Sony, Sun Microsystems and Tech Data. Excluding SARCOM, products manufactured by Apple represented approximately 22% and 23% of our total net sales in the three months ended September 30, 2007 and 2006, and approximately 23% and 19% of our total net sales in the nine months ended September 30, 2007 and 2006. Excluding SARCOM, products manufactured by HP represented approximately 19% and 20% of our total net sales in the three months ended September 30, 2007 and 2006, and approximately 20% and 22% of our total net sales in the nine months ended September 30, 2007 and 2006.
Acquisitions
SARCOM
On September 17, 2007, we completed the acquisition of SARCOM, Inc. (SARCOM), a provider of advanced technology solutions, pursuant to the terms of an Agreement and Plan of Merger, dated as of August 17, 2007 for an initial total purchase price of approximately $55.7 million, including transaction costs. SARCOM, headquartered in Columbus, Ohio, has served the mid-market and enterprise market for over 20 years and currently specializes in providing enterprise hardware and software solutions, procurement solutions and a full range of professional and
15
managed services. Also included in the acquisition is the Abreon Group, a division of SARCOM. Abreon is a high end consulting and training business focused on providing business reengineering, business consulting and training services to mid-market and enterprise clients. Our acquisition of SARCOM was motivated in part by our desire to enhance our capabilities as a reseller of advanced technology product solutions and services, consistent with our commitment to grow our business in part through an effort to expand our share of our customers IT spending. The results of SARCOM are included in our Core business segment from the closing date of the acquisition.
The total purchase price was subject to a post-closing debt and net asset value adjustment (see below for a discussion of the final net asset value adjustment on November 6, 2007). The aggregate purchase price paid at closing included a total of $48.2 million in cash and approximately $7.5 million in shares of our common stock, the number of shares being based on the average closing price of our stock on the Nasdaq Global Market for the 20 consecutive trading days immediately preceding the acquisition closing date. Under that formula, at closing, we issued an aggregate of 633,981 shares of our common stock to the sellers as payment of the stock component of the purchase price. We financed the cash component of the purchase price through borrowings under our existing credit facility.
On November 6, 2007, we and the sellers agreed on a final net asset value adjustment, resulting in a decrease in the purchase price by approximately $2.1 million, which was to be repaid, at the sellers option, in either cash or shares of our common stock based on a per share price determined by the average closing price for the 20 consecutive trading days ending on the date of final determination of the net asset value adjustment. As a result, in settlement of the $2.1 million net asset value adjustment, the sellers tendered back to us a total of 122,478 shares of our common stock previously issued to them, which has been recorded as a reduction of the purchase price as of September 30, 2007.
Following the completion of the acquisition, the results of SARCOM have been included in the commercial division of our Core business segment.
GMRI
In September 2006, our wholly-owned subsidiary, PC Mall Gov, acquired the products business of GMRI. The business includes assets of GMRIs former products business, which include the GMRI trade names, contracts and the related employees, among other items. Following the completion of the acquisition, the results of the acquired products business of GMRI have been included in the public sector results of the Core business segment.
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
16
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, 2006, filed with the SEC on March 12, 2007, which we incorporate herein by reference.
Revenue Recognition. We adhere to the revised guidelines and principles of sales recognition described in Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104), issued by the staff of the SEC as a revision to Staff Accounting Bulletin No. 101, Revenue Recognition (SAB 101). Under SAB 104, 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 collectibility 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 products and extended warranties that we sell (for which we are not the primary obligor) are recognized on a net basis in accordance with SAB 104 and Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. 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.
Sales are reported net of estimated returns and allowances, discounts, mail-in rebate redemptions and credit card chargebacks. If 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 customers 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.
Mail-In Rebate Redemption Rate Estimates. We accrue monthly expense related to promotional mail-in rebates based upon the quantity of eligible orders transacted during the period and the estimated redemption rate. The estimated expense is accrued and presented as a reduction of net sales. The estimated redemption rates used to calculate the accrued mail-in rebate expense and related mail-in rebate liability are based upon historical redemption experience rates for similar products or mail-in rebate amounts. Estimated redemption rates and the related mail-in rebate expense and liability are regularly adjusted as actual mail-in rebate redemptions for the program are processed. If actual redemption rates are greater than anticipated, additional expense may be incurred.
17
Advertising Costs and Vendor Consideration. We account for advertising costs in accordance with Statement of Position No. 93-7, Reporting on Advertising Costs. We produce and circulate direct response catalogs at various dates throughout the year. The costs of developing, producing and circulating each direct response catalog are deferred and amortized to advertising expense based on the life of the catalog, which is approximately eight weeks. Other non-catalog advertising expenditures are expensed in the period incurred. Advertising expenditures are included in Selling, general and administrative expenses in our Consolidated Statements of Operations. Deferred advertising costs are included in Prepaid expenses and other current assets in our Consolidated Balance Sheets.
As we circulate catalogs throughout the year, we receive market development funds and other vendor consideration from vendors included in each catalog. These funds are deferred and recognized based on sales generated over the life of the catalog. We also receive other non-catalog related vendor consideration from our vendors in the form of cooperative marketing allowances, volume incentive rebate programs and other programs to support our marketing of their products. Most of our vendor consideration is recorded as an offset to cost of sales in accordance with EITF 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor (EITF 02-16) since such funds are not a reimbursement of specific, incremental, identifiable costs incurred by us in selling the vendors products. Deferred vendor consideration is included in Accrued expenses and other current liabilities in our Consolidated Balance Sheets.
Stock-Based Compensation. On January 1, 2006, we adopted the provisions of Financial Accounting Standards Board, or FASB, Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123R), using the modified prospective application transition method. SFAS 123R 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 enterprises equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R generally requires that such transactions be accounted for using a fair value based method and recognized as expenses in our Consolidated Statements of Operations. The provisions of SFAS 123R apply to new stock option grants subsequent to December 31, 2005 and unvested stock options outstanding as of January 1, 2006.
We estimate the grant date fair value of each stock option grant awarded pursuant to SFAS 123R 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 granted, we apply the simplified method set out in SEC Staff Accounting Bulletin No. 107, Share-Based Payment, which was issued in March 2005. We compute our expected volatility using a frequency of weekly 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.
18
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
|
|
Nine Months Ended
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Net sales |
|
$ |
287,688 |
|
$ |
242,171 |
|
$ |
807,426 |
|
$ |
710,512 |
|
Cost of goods sold |
|
253,509 |
|
210,615 |
|
707,503 |
|
620,533 |
|
||||
Gross profit |
|
34,179 |
|
31,556 |
|
99,923 |
|
89,979 |
|
||||
Selling, general and administrative expenses |
|
28,413 |
|
27,480 |
|
84,315 |
|
83,339 |
|
||||
Operating profit |
|
5,766 |
|
4,076 |
|
15,608 |
|
6,640 |
|
||||
Interest expense, net |
|
800 |
|
912 |
|
2,530 |
|
2,912 |
|
||||
Income before income taxes |
|
4,966 |
|
3,164 |
|
13,078 |
|
3,728 |
|
||||
Income tax expense |
|
1,988 |
|
1,256 |
|
5,233 |
|
1,480 |
|
||||
Net income |
|
$ |
2,978 |
|
$ |
1,908 |
|
$ |
7,845 |
|
$ |
2,248 |
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Net sales |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
Cost of goods sold |
|
88.1 |
|
|
87.0 |
|
|
87.6 |
|
|
87.3 |
|
|
Gross profit |
|
11.9 |
|
|
13.0 |
|
|
12.4 |
|
|
12.7 |
|
|
Selling, general and administrative expenses |
|
9.9 |
|
|
11.3 |
|
|
10.5 |
|
|
11.8 |
|
|
Operating profit |
|
2.0 |
|
|
1.7 |
|
|
1.9 |
|
|
0.9 |
|
|
Interest expense, net |
|
0.3 |
|
|
0.4 |
|
|
0.3 |
|
|
0.4 |
|
|
Income before income taxes |
|
1.7 |
|
|
1.3 |
|
|
1.6 |
|
|
0.5 |
|
|
Income tax expense |
|
0.7 |
|
|
0.5 |
|
|
0.6 |
|
|
0.2 |
|
|
Net income |
|
1.0 |
% |
|
0.8 |
% |
|
1.0 |
% |
|
0.3 |
% |
|
Selected Other Operating Data
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Commercial and public sector sales percentage |
|
82.2 |
% |
|
80.2 |
% |
|
81.0 |
% |
|
78.1 |
% |
|
Consumer sales percentage (includes OnSale.com) |
|
17.8 |
% |
|
19.8 |
% |
|
19.0 |
% |
|
21.9 |
% |
|
Commercial and public sector account executives (at end of period, excluding SARCOM) |
|
569 |
|
|
606 |
|
|
569 |
|
|
606 |
|
|
Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006
Net Sales. The following table presents our net sales, by segment, for the periods presented (in thousands):
|
|
Three Months Ended
|
|
Change |
|
|||||||
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
|||
Core business |
|
$ |
283,267 |
|
$ |
239,889 |
|
$ |
43,378 |
|
18% |
|
OnSale.com |
|
4,421 |
|
2,282 |
|
2,139 |
|
NMF(1) |
|
|||
Total net sales |
|
$ |
287,688 |
|
$ |
242,171 |
|
$ |
45,517 |
|
19% |
|
(1) Not meaningful.
19
Total net sales for the third quarter of 2007 increased by $45.5 million, or 19%, compared to total net sales for the third quarter of 2006. This increase was primarily attributable to the $43.4 million increase in Core business net sales.
The increase in Core business net sales of $43.4 million for the third quarter of 2007 compared to the third quarter of 2006 was primarily due to growth in our public sector net sales of $21.3 million, or 79%, to $48.4 million, which resulted primarily from our acquisition of the products business of GMRI in September 2006 and a strong finish in the federal government sales season. Also, our commercial net sales increased by $20.7 million, or 12%, to $188.1 million in the third quarter of 2007 compared to the third quarter of 2006, primarily due to an increase in our account executive productivity in the third quarter and the addition of approximately $8.0 million of SARCOMs sales since the completion of our acquisition on September 17, 2007. Further, our consumer net sales increased by $1.4 million, or 3%, to $46.8 million in the third quarter of 2007 compared to the third quarter of 2006, primarily due to increased sales of Apple products, offset by some delayed purchases due to the pending release of Apples OS X Leopard, which started shipping late in October 2007.
OnSale.com net sales were $4.4 million for the third quarter of 2007 compared to $2.3 million for the third quarter of 2006, an increase of $2.1 million.
Excluding SARCOM, sales of products manufactured by Apple and HP represented approximately 22% and 19% of net sales for the quarter ended September 30, 2007 compared to approximately 23% and 20% of net sales for the quarter ended September 30, 2006.
Gross Profit and Gross Profit Margin. The following table presents our gross profit and gross profit margin, by segment, for the periods presented (in thousands):
|
|
Three Months Ended
|
|
|
|
|
|
|||||||||
|
|
2007 |
|
2006 |
|
Change |
|
|||||||||
|
|
Gross Profit |
|
Gross Profit
|
|
Gross Profit |
|
Gross Profit
|
|
$ |
|
Margin |
|
|||
Core business |
|
$ |
33,713 |
|
11.9% |
|
$ |
31,183 |
|
13.0% |
|
$ |
2,530 |
|
(1.1)% |
|
OnSale.com |
|
466 |
|
10.5% |
|
373 |
|
16.3% |
|
93 |
|
(5.8)% |
|
|||
Total gross profit and gross profit margin |
|
$ |
34,179 |
|
11.9% |
|
$ |
31,556 |
|
13.0% |
|
$ |
2,623 |
|
(1.1)% |
|
Total gross profit for the third quarter of 2007 increased by $2.6 million, or 8%, compared to total gross profit for the third quarter of 2006. Total gross profit margin for the third quarter of 2007 decreased by 1.1% compared to the third quarter of 2006. The increase in total gross profit was due to the $2.5 million increase in Core business gross profit. The decrease in total gross profit margin was primarily due to the 1.1% decrease in Core business gross profit margin.
The increase in Core business gross profit of $2.5 million for the third quarter of 2007 compared to the third quarter of 2006 was primarily the result of the increase in Core business net sales discussed above. The decrease in Core business gross profit margin of 1.1% in the third quarter of 2007 compared to the third quarter of 2006 was primarily due to the reduction in a single vendor consideration program beginning in the fourth quarter of 2006. In addition, the decline in Core business gross profit margin in the current quarter also includes the effect of a significant year-over-year increase in federal government sales at lower product margins. Other factors which may cause our gross profit margin to vary in future periods include the continuation of key vendor support programs, including price protections, rebates and return policies, our product or customer mix, product acquisition and shipping costs, competition and other factors.
Gross profit for OnSale.com for the third quarter of 2007 was $0.5 million, an increase of $0.1 million compared to the third quarter of 2006, primarily due to the increase in OnSale.coms net sales. OnSale.coms gross profit margin for the third quarter of 2007 was 10.5% compared to 16.3% in the third quarter of 2006, a decrease of 5.8%, which was primarily due to the decrease in vendor consideration received as a percentage of OnSale.coms net sales.
20
Selling, General and Administrative Expenses. The following table presents our selling, general and administrative, or SG&A, expenses, by segment, for the periods presented (in thousands):
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|||||||||
|
|
2007 |
|
2006 |
|
Change |
|
|||||||||||
|
|
SG&A |
|
SG&A as a
|
|
SG&A |
|
SG&A as a
|
|
$ |
|
% |
|
SG&A as a
|
|
|||
Core business |
|
$ |
27,617 |
|
9.8% |
|
$ |
26,833 |
|
11.2% |
|
$ |
784 |
|
3% |
|
(1.4)% |
|
OnSale.com |
|
796 |
|
18.0% |
|
647 |
|
28.4% |
|
149 |
|
23% |
|
(10.4)% |
|
|||
Total SG&A expenses |
|
$ |
28,413 |
|
9.9% |
|
$ |
27,480 |
|
11.3% |
|
$ |
933 |
|
3% |
|
(1.4)% |
|
Total SG&A expenses increased by $0.9 million, or 3%, in the third quarter of 2007 compared with the third quarter of 2006. As a percent of sales, total SG&A expenses decreased to 9.9% in the third quarter of 2007 from 11.3% in the third quarter of 2006. The increase in total SG&A expenses was primarily due to the $0.8 million increase in Core business SG&A expenses.
The increase in Core business SG&A expenses of $0.8 million in the third quarter of 2007 compared to the same period last year was primarily due to $1.5 million of incremental personnel costs attributable to the acquisitions of SARCOM and GMRI. This increase was partially offset by a $0.8 million decrease in bad debt expense resulting from improvements in our accounts receivable aging. As a percent of net sales, SG&A expenses for the Core business decreased by 1.4% to 9.8% in the third quarter of 2007 from 11.2% in the third quarter of 2006. The 1.4% decline in Core business SG&A expenses as a percent of net sales was primarily due to a 41 basis point decline in personnel costs, a 35 basis point decline in bad debt expense, a 21 basis point decline in professional fees and a 16 basis point decline in advertising expenditures.
In June 2003, we established a Canadian call center serving the U.S. market and have received the benefit of labor credits under a Canadian government program that is currently scheduled to terminate at the end of 2007. Under that program, we claimed annual labor credits of up to 35% of eligible compensation paid to our qualifying employees. As a result, as of September 30, 2007, we had received a total of $6.4 million relating to our 2005, 2004 and 2003 claims under that program. We have filed our 2006 claim and are awaiting its results. As of September 30, 2007, we had an accrued receivable of $6.1 million related to these labor credits and we expect to receive full payment under our labor credit claim. We have applied for an alternative program in an effort to partially replace these labor credits upon the expiration of the current program at the end of 2007; however, there can be no assurance that we will qualify for the alternative program. In the event that we do qualify for the new program, we could receive labor credits of up to 25% of eligible compensation paid to our qualifying employees in Canada. The alternative program could continue through the end of 2015.
For OnSale.com, SG&A expenses in the third quarter of 2007 were $0.8 million, an increase of $0.1 million from the third quarter of 2006. OnSale.com SG&A expenses as a percent of net sales was 18.0% in the third quarter of 2007 compared to 28.4% in the third quarter of 2006, a decrease of 10.4%. This decrease of 10.4% in SG&A expenses as percent of net sales for OnSale.com was primarily due to the increase in OnSale.coms net sales in the current quarter.
Net Interest Expense. Total net interest expense for the third quarter of 2007 decreased to $0.8 million compared with $0.9 million in the third quarter of 2006. The decreased interest expense resulted from a lower average interest rate in effect during the third quarter of 2007 compared to the third quarter of 2006, partially offset by a higher average outstanding loan balance in the current period. In September 2007, we borrowed approximately $48 million under our credit facility in connection with the SARCOM acquisition. As a result, we expect a significant increase in our interest expense beginning in the fourth quarter of 2007. Additionally, if interest rates rise in the future, we would expect interest expense on our borrowings to increase.
Income Tax Expense. We recorded an income tax expense of approximately $2.0 million in the third quarter of 2007 compared to an income tax expense of $1.3 million in the third quarter of 2006. Our effective tax rate for each of the quarterly periods ended September 30, 2007 and 2006 was approximately 40%. The increase in income tax expense for the third quarter of 2007 compared to the third quarter of 2006 was due to the increase in our taxable income.
21
Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006
Net Sales. The following table presents our net sales, by segment, for the periods presented (in thousands):
|
|
Nine Months Ended September 30, |
|
Change |
|
|||||
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
|
Core business |
|
$797,312 |
|
$700,396 |
|
$96,916 |
|
|
14% |
|
OnSale.com |
|
10,114 |
|
10,116 |
|
(2 |
) |
|
NMF(1) |
|
Total net sales |
|
$807,426 |
|
$710,512 |
|
$96,914 |
|
|
14% |
|
(1) Not meaningful.
Total net sales for the nine months ended September 30, 2007 increased by $96.9 million, or 14%, compared to total net sales for the nine months ended September 30, 2006. This increase was primarily attributable to the $96.9 million increase in Core business net sales.
The increase in Core business net sales of $96.9 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was primarily due to growth in our public sector and commercial net sales. Our public sector net sales increased by $52.2 million, or 88%, to $111.6 million in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, primarily due to our acquisition of the products business of GMRI in September 2006, the launch of the GSA EDD contract with the federal government and contracts with several state, local and educational institutions, and a strong finish in the federal government sales season. Our commercial net sales increased by $41.9 million, or 8%, to $542.6 million, primarily due to an increase in our account executive productivity in the current period and the addition of approximately $8.0 million of SARCOMs sales since the completion of our acquisition on September 17, 2007. In addition, our consumer net sales increased by $3.4 million, or 2%, to $143.0 million in the nine month period ended September 30, 2007 compared to the same period in the prior year, primarily due to increased sales of Apple products, offset by some delayed purchases due to the pending release of Apples OS X Leopard, which started shipping late in October 2007.
OnSale.com net sales were $10.1 million in each of the nine month periods ended September 30, 2007 and 2006.
Excluding SARCOM, sales of products manufactured by Apple and HP represented approximately 23% and 20% of net sales for the nine months ended September 30, 2007 compared to approximately 19% and 22% of net sales for the nine months ended September 30, 2006.
Gross Profit and Gross Profit Margin. The following table presents our gross profit and gross profit margin, by segment, for the periods presented (in thousands):
|
|
Nine Months Ended
|
|
|
|
|
|
|||||||||
|
|
2007 |
|
2006 |
|
Change |
|
|||||||||
|
|
Gross Profit |
|
Gross Profit
|
|
Gross Profit |
|
Gross Profit
|
|
$ |
|
|
Margin |
|
||
Core business |
|
$ |
98,789 |
|
12.4% |
|
$ |
88,670 |
|
12.7% |
|
$ |
10,119 |
|
(0.3)% |
|
OnSale.com |
|
1,134 |
|
11.2% |
|
1,309 |
|
12.9% |
|
(175 |
) |
(1.7)% |
|
|||
Total gross profit and gross profit margin |
|
$ |
99,923 |
|
12.4% |
|
$ |
89,979 |
|
12.7% |
|
$ |
9,944 |
|
(0.3)% |
|
Total gross profit for the nine months ended September 30, 2007 increased by $9.9 million, or 11%, compared to total gross profit for the nine months ended September 30, 2006. Total gross profit margin for the nine months ended September 30, 2007 decreased by 0.3% compared to the nine months ended September 30, 2006. The increase in total gross profit was primarily due to the $10.1 million increase in Core business gross profit in the current period compared to the same period in the prior year. The decrease in total gross profit margin in the nine months ended September 30, 2007 compared to the same period last year resulted primarily from the 0.3% decrease in Core business gross profit margin.
22
The increase in Core business gross profit of $10.1 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was primarily the result of the increase in Core business net sales discussed above. The decrease in Core business gross profit margin of 0.3% in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was primarily due to the reduction in a single vendor consideration program beginning in the fourth quarter of 2006. Other factors which may cause our gross profit margin to vary in future periods include the continuation of key vendor support programs, including price protections, rebates and return policies, our product or customer mix, product acquisition and shipping costs, competition and other factors.
Gross profit for OnSale.com for the nine months ended September 30, 2007 was $1.1 million, a decrease of $0.2 million compared to the nine months ended September 30, 2006, primarily due to a decrease in vendor consideration. OnSale.coms gross profit margin for the nine months ended September 30, 2007 was 11.2% compared to 12.9% in the nine months ended September 30, 2006, a decrease of 1.7%, primarily due to a 239 basis point decrease in margin relating to vendor consideration received as a percentage of OnSale.coms net sales, partially offset by a 60 basis point increase in product sales margin.
Selling, General and Administrative Expenses. The following table presents our selling, general and administrative, or SG&A, expenses, by segment, for the periods presented (in thousands):
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
||||||||||
|
|
2007 |
|
2006 |
|
Change |
|
||||||||||||
|
|
SG&A |
|
SG&A as a
|
|
SG&A |
|
SG&A as a
|
|
$ |
|
% |
|
SG&A as a
|
|
||||
Core business |
|
$ |
82,285 |
|
10.3% |
|
$ |
80,916 |
|
11.6% |
|
$ |
1,369 |
|
1.7% |
|
(1.3 |
)% |
|
OnSale.com |
|
2,030 |
|
20.1% |
|
2,423 |
|
24.0% |
|
(393 |
) |
(16.2)% |
|
(3.9 |
)% |
|
|||
Total SG&A expenses |
|
$ |
84,315 |
|
10.4% |
|
$ |
83,339 |
|
11.7% |
|
$ |
976 |
|
1.2% |
|
(1.3 |
)% |
|
Total SG&A expenses increased by $1.0 million in the nine months ended September 30, 2007 compared with the nine months ended September 30, 2006. As a percent of sales, total SG&A expenses decreased to 10.4% in the nine months ended September 30, 2007 from 11.7% in the nine months ended September 30, 2006. The increase in total SG&A expenses in the current period was due to the $1.4 million increase in Core business SG&A expenses, partially offset by a $0.4 million decrease in OnSale.com SG&A expenses.
The increase in Core business SG&A expenses of $1.4 million in the nine months ended September 30, 2007 compared to the same period last year was primarily due to $3.3 million of incremental personnel costs attributable to the acquisitions of SARCOM and GMRI and a $0.6 million increase in facilities related expenses, partially offset by a $2.9 million decrease in advertising expenditures primarily supporting our consumer business.
As a percent of net sales, SG&A expenses for Core business decreased to 10.3% in the nine months ended September 30, 2007 compared to 11.6% in the nine months ended September 30, 2006. The 1.3% decline in Core business SG&A expenses as a percent of net sales was primarily due to a 53 basis point decline in advertising expenditures, a 36 basis point decline in personnel costs and a 16 basis point decline in bad debt expense as a percent of net sales.
For OnSale.com, SG&A expenses in the nine months ended September 30, 2007 were $2.0 million, a decrease of $0.4 million from the nine months ended September 30, 2006 primarily due to a $0.2 million decrease in advertising expenditures, a $0.1 million decrease in administrative and fulfillment expenses and a $0.1 million decrease in personnel costs in the nine months ended September 30, 2007. OnSale.com SG&A expenses as a percent of net sales was 20.1% in the nine months ended September 30, 2007 compared to 24.0% in the nine months ended September 30, 2006, a decrease of 3.9%. This decrease of 3.9% in SG&A expenses as percent of net sales for OnSale.com was primarily due to a 211 basis point decrease in advertising expenditures as a percentage of net sales, a 92 basis point decrease in personnel costs and a 53 basis point decrease in administrative and fulfillment expenses as a percentage of net sales.
23
Net Interest Expense. Total net interest expense for the nine months ended September 30, 2007 decreased to $2.5 million compared with $2.9 million in the same period of 2006. The decreased interest expense resulted from a lower average outstanding balance during the first nine months of 2007 compared to the first nine months of 2006, partially offset by a higher average interest rate in effect in the current period compared to the same period in the prior year.
Income Tax Expense. We recorded an income tax expense of approximately $5.2 million in the nine months ended September 30, 2007 compared to an income tax expense of $1.5 million in the nine months ended September 30, 2006. Our effective tax rate for each of the nine month periods ended September 30, 2007 and 2006 was approximately 40%. The increase in income tax expense in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was due to the increase in our taxable income.
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, possible sales growth and possible acquisitions and new business ventures. Our primary sources of financing have historically come from borrowings from financial institutions, public and private issuances of our common stock and cash flows from operations. 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 twelve months. Our efforts to focus on commercial and public sector sales could result in an increase in our accounts receivable as these customers are generally provided longer payment terms than consumers. In addition, we expect to continue to focus our efforts on increasing the productivity of our sales force and reducing our infrastructure costs, as well as increasing our offshore operations, in an effort to reduce our costs.
In the future, 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, we may seek additional financing from public or private debt or equity financings; however, there can be no assurance that such financing will be available at acceptable terms, if at all. To the extent any such financings involve the issuance of equity securities, existing stockholders could experience dilution.
We had cash and cash equivalents of $9.8 million at September 30, 2007 and $5.8 million at December 31, 2006. Our working capital decreased by $9.5 million to $33.9 million at September 30, 2007 from working capital of $43.4 million at December 31, 2006.
Cash Flows from Operating Activities. Net cash provided by operating activities was $9.1 million in the nine months ended September 30, 2007 compared to $33.2 million in the nine months ended September 30, 2006. The $9.1 million of net cash provided by operating activities in the nine months ended September 30, 2007 was primarily the result of the $11.6 million increase in accounts payable related to the increase in our sales during the current period and the timing of our vendor payables and the $7.8 million of net income from our operations, partially offset by a $15.2 million increase in accounts receivable primarily due to increased open account sales.
The $33.2 million net cash provided by operating activities in the nine months ended September 30, 2006 resulted primarily from a $24.5 million decrease in inventories reflecting our efforts to optimize inventory levels, seasonality and our sell-through of year-end strategic buys for the holidays from the prior year end, a $12.2 million increase in accounts payable primarily due to the acquisition of the products business from GMRI in September 2006, partially offset by a $13.7 million increase in accounts receivable primarily due to receivables generated by the new GMRI products business we acquired and an increase in receivables from our vendors.
24
Cash Flows from Investing Activities. Net cash used in investing activities was $49.0 million in the nine months ended September 30, 2007 compared to $6.0 million in the same period of 2006. The $ 49.0 million of net cash used in investing activities in the nine months ended September 30, 2007 resulted from the $47.7 million related to the acquisition of SARCOM in September 2007 and the $1.3 million of capital expenditures relating to the creation of enhanced electronic tools for our account executives and sales support staff and the continued expansion of our Philippines office. The $6.0 million of net cash used in investing activities in the nine months ended September 30, 2006 resulted from the $2.7 million of capital expenditures relating to the continued expansion of our Philippines office, as well as the creation of enhanced electronic tools for our account executives and sales support staff, and the $3.4 million related to the acquisition of the products business from GMRI in September 2006.
Cash Flows from Financing Activities. Net cash provided by financing activities was $42.6 million in the nine months ended September 30, 2007 compared to net cash used in financing activities of $26.9 million in the same period of 2006. The $42.6 million of net cash provided by financing activities in the nine months ended September 30, 2007 was primarily related to financing required to fund the cash portion of the purchase price of SARCOM in the amount of approximately $48 million, which net of payments made on the outstanding balance of our line of credit resulted in a net increase of $26.4 million in our line of credit, and a $12.5 million increase in book overdraft, which was due to timing of outstanding payments to vendors. The $26.9 million of net cash used in financing activities in the nine months ended September 30, 2006 was primarily related to $29.7 million of net payments of our outstanding balance on our line of credit, partially offset by a $2.7 million increase in book overdraft, which were both due to the timing of outstanding payments to vendors relative to the prior period.
Line of Credit and Note Payable. As of September 30, 2007, we maintained a $100 million asset-based revolving credit facility from a lending unit of a large commercial bank. On June 11, 2007, we amended our credit facility to provide, among other things: an extension of the maturity date of the facility from March 2008 to March 2011; an option for us to extend and increase the amount of the real estate term loan up to $4.2 million or 70% of appraised value within a limited time period; a reduction of the interest rate spread for the prime rate loans to a range of negative 0.25% to 0.00% from a previous spread of 0.00% and LIBOR loans to a range of 1.50% to 1.75% from a previous range of 2.00% to 2.50%, both of which spreads are dependent upon average excess availability under the facility; an increase in the advance rate against accounts receivable to 90% from 85% and against certain original closed box inventory to 80% from 75%; an increase in the sublimit for credit card receivables to $10 million from $7.5 million and for inventory to $40 million from the previous range of $20 million to $40 million, which was dependent upon turnover; and a restatement of the definition of Adjustment Tangible Net Worth to include certain additional assets as defined in the amendment.
On September 17, 2007, in connection with our acquisition of SARCOM, we entered into a third amendment to the credit facility. The amendment provided, among other things, for the addition of SARCOM as a new subsidiary borrower under the loan agreement, and an increase in the amount of the real estate term loan, which is discussed below, to $5.425 million.
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 commitment fee of 0.25% annually on the unused portion of the line up to $60 million, unless the outstanding borrowings under the credit facility exceed $75 million, at which time the unused line fees will be assessed on the unused portion of the facility up to $80 million. At September 30, 2007, our effective weighted average annual interest rate was 7.83% and we had $58.9 million of net working capital advances outstanding under the line of credit. At September 30, 2007, we had $35.0 million available to borrow for working capital advances under the line of credit. 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 tangible net worth requirement that is tested as of the last day of each fiscal quarter, which we were in compliance with at September 30, 2007. 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.
In connection with and as part of the amended credit facility, we entered into an amended term note on September 17, 2007 with a principal balance of $5.425 million, payable in equal monthly principal installments beginning on October 1, 2007, plus interest at the prime rate with a LIBOR option. The amended term note matures in October 2014. At September 30, 2007, we had $5.425 million outstanding under the amended term note, at an effective interest rate of 8.0%. Our term note matures as follows: $193,750 in the remainder of 2007, $775,000 annually in each of the years 2008 through 2011 and $2,131,250 thereafter.
25
On November 5, 2007, we entered into a fourth amendment to our credit facility. The amendment provides for, among other things, (i) an increase to the credit limit in increments of $5 million, up to a total maximum amount of $150 million, provided that any increase of the total credit limit in excess of $120 million is subject to an acceptance by a third party assignee in the event the administrative agent elects to assign such excess amount; (ii) a line increase fee equal to 0.25% of the amount of each increment increased as described above, plus, to the extent that the administrative agent assigns a portion of its revolving loan commitment under the credit facility and to the extent required by the assignee, an aggregate acceptance fee not to exceed 0.125% of the aggregate sum of the increase in credit limit assigned; and (iii) an increase in the number of LIBOR interest rate options we can enter into and the elimination of a limit on the maximum outstanding principal balance which may be subject to a LIBOR interest rate option.
The carrying amounts of our line of credit borrowings and note payable approximate their fair value based upon the current rates offered to us for obligations of similar terms and remaining maturities.
As part of our growth strategy, we may, in the future, acquire other companies in the same or complementary lines of business, and pursue other business ventures. Any launch of a new business venture or any acquisition and the ensuing integration of the operations of the acquired company would place additional demands on our management, operating and financial resources.
Inflation
Inflation has not historically 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 not paid cash dividends on our capital stock and we do not currently anticipate paying dividends in the future. We intend to retain any earnings to finance the growth and development of our business.
CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENCIES
Contractual Obligations
In connection with our acquisition of SARCOM on September 17, 2007, we assumed the remaining commitments of SARCOM under its operating leases covering all of its office space located in various states throughout the U.S. and its capital lease covering various computer and network related equipment and software. As of September 30, 2007, the remaining commitments we assumed under the operating leases totaled approximately $3.7 million, of which approximately $1.3 million is due by September 30, 2008, $1.2 million by September 30, 2009, $0.6 million by September 30, 2010, $0.5 million by September 30, 2011 and $0.1 million by September 30, 2012. As of September 30, 2007, the remaining commitments we assumed under the capital leases totaled approximately $0.3 million, of which approximately $178,000 is due by September 30, 2008, and approximately $75,000 and $25,000 is due in each of the years thereafter. In addition, we financed the cash component of the purchase price we paid in the SARCOM acquisition through borrowings under our existing credit facility. As a result, the outstanding balance on our revolving line of credit and term note increased to $58.9 million and $5.425 million as of September 30, 2007 from $32.5 million and $2.2 million as of December 31, 2006.
Off-Balance Sheet Arrangements
As of September 30, 2007, 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.
26
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion of recent accounting pronouncements, see Part I, Item 1, Note 2 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 strategy, 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 beliefs relating to the benefits to be received from our Philippines office and Canadian call center;
our beliefs regarding changes in our total amount of unrecognized tax benefits;
our expectations regarding future expenses from infrastructure related to our outbound telemarketing sales force;
the possibility that we will not fully realize the anticipated benefits of the SARCOM acquisition;
the impact of the SARCOM acquisition on our financial condition, liquidity and our future cash flows and earnings;
our ability to execute our business strategy;
the availability of funding;
our acquisition strategy and the impact of any past or future acquisitions;
our expectations regarding our working capital, liquidity and cash flows from operations;
the impact on accounts receivable from our efforts to focus on commercial and public sector sales;
our beliefs regarding the applicability of tax regulations;
our expectations regarding the impact of accounting pronouncements; and
our plans and expectations relating to our growth strategy, capital needs, cost reduction efforts and future financing.
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 Item 1A, Part II 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, we assume no obligation to update or revise any forward-looking statement.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 September 30, 2007, we had $58.9 million outstanding under our line of credit and $5.4 million outstanding under our note payable. As of September 30, 2007, 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 $0.6 million.
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 gains and losses resulting from exchange rate fluctuations on long-term intercompany accounts in our Consolidated Balance Sheets under Accumulated other comprehensive income, a section of stockholders equity. As such, we have foreign currency translation exposure for changes in exchange rates for these currencies. However, we did not have significant foreign currency or overall currency exposure as of September 30, 2007. Significant changes in exchange rates between foreign currencies in which we transact business and the U.S. dollar may adversely affect our Consolidated Statements of Operations and Consolidated Balance Sheets.
Other
Our financial instruments include cash and cash equivalents and long-term debt. At September 30, 2007, 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 September 30, 2007.
ITEM 4T. 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 SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim 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 Interim 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 Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2007.
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 third quarter of 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
* * *
28
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, including the litigation discussed above, 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.
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 managements assumptions. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict.
We have revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede the risks previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. You should carefully consider the risks and uncertainties facing our business which are set forth below. The risks described below are not the only ones facing us. Our business is also subject to risks that affect many other companies, such as employment relations, general economic conditions, geopolitical events and international operations. Further, additional risks not currently known to us or that we currently believe are immaterial also may impair our business, operations, liquidity and stock price materially and adversely.
Our 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, including Apple, HP, IBM, Lenovo, Microsoft and Sony. For example, excluding SARCOM, products manufactured by Apple accounted for approximately 22% and 23% of our total net sales for the quarters ended September 30, 2007 and 2006, and products manufactured by HP accounted for approximately 19% and 20% of our total net sales for the quarters ended September 30, 2007 and 2006. 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 key 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 key vendors, including Adobe, Apple, Cisco, HP, IBM, Ingram Micro, Lenovo, Microsoft, Sony, Sun Microsystems and Tech Data, provide us with trade credit or substantial incentives in the form of discounts, credits and cooperative advertising. We have agreements with most of our key 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.
29
We generally 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.
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 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.
30
Our narrow gross margins magnify the impact of variations in our operating costs and of adverse or unforeseen events on our operating results.
We are subject to intense price competition with respect to the products we sell. As a result, our gross margins have historically been narrow, and we expect them to continue to be narrow. Our narrow gross margins magnify the impact of variations in our operating costs and of adverse or unforeseen events on our operating results. If we are unable to maintain our gross margins in the future, it could have a material adverse effect on our business, financial condition and results of operations. In addition, because price is an important competitive factor in our industry, we cannot assure you that we will not be subject to increased price 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 frequency of our catalog mailings, introduction or discontinuation of new catalogs, variability in vendor programs, the introduction of new products or services by us and our competitors, changes in prices from our suppliers, the loss or consolidation of significant suppliers or customers, general competitive conditions such as pricing, our ability to control costs, the timing of our capital expenditures, the condition of our industry in general, seasonal shifts in demand for computer and electronics products, industry announcements and market acceptance of new products or upgrades, deferral of customer orders in anticipation of new product applications, product enhancements or operating systems, the relative mix of products sold during the period, any inability on our part to obtain adequate quantities of products carried in our catalogs, delays in the release by suppliers of new products and inventory adjustments, our expenditures on new business ventures and acquisitions, performance of acquired businesses, adverse weather conditions that affect response, distribution or shipping to our customers, and general economic conditions and geopolitical events. Our planned operating expenditures each quarter are based on sales forecasts for the quarter. If our sales do not meet expectations in any given quarter, our operating results for the quarter may be materially adversely affected. Our narrow gross margins may magnify the impact of these factors on our operating results. We believe that period-to-period comparisons of our operating results are not necessarily a good indication of our future performance. In addition, our results in any quarterly period are not necessarily indicative of results to be expected for a full fiscal year. In future quarters, our operating results may be below the expectations of public market analysts or investors and as a result the market price of our common stock could be materially adversely affected.
The transition of our business strategy to increasingly focus on commercial and public sector sales presents numerous risks and challenges, and may not improve our profitability or result in expanded market share.
An important element of our business strategy is to increasingly focus on commercial and public sector sales. In shifting our focus, we face numerous risks and challenges, including competition from a wider range of sources and an increased need to develop strategic relationships. We cannot assure you that our increased focus on commercial and public sector sales will result in expanded market share or increased profitability. Furthermore, revenue from our public sector business is derived from sales to federal, state and local governmental departments and agencies, as well as to educational institutions, through various contracts and open market sales. Government contracting is a highly regulated area, and noncompliance with government procurement regulations or contract provisions could result in civil, criminal, and administrative liability, including substantial monetary fines or damages, termination of government contracts, and suspension, debarment or ineligibility from doing business with the government. The effect of any of these possible actions by any governmental department or agency with which we contract could adversely affect our business and results of operations. Moreover, contracting with governmental departments and agencies involves additional risks, such as limited recourse against the government agency in the event of a business dispute, the potential lack of a limitation of our liability for damages from our provision of services to the department or agency, and the potential for changes in statutory or regulatory provisions that negatively affect the profitability of such contracts.
31
Our investments in our outbound telemarketing sales force model may not improve our profitability or result in expanded market share.
We have made and are currently making efforts to increase our market share by investing in training and retention of our outbound telemarketing sales force. We have also incurred, and expect to continue to incur, significant expenses resulting from infrastructure investments related to our outbound telemarketing sales force. We cannot assure you that any of our investments in our outbound telemarketing sales force will result in expanded market share or increased profitability in the near or long term.
Our financial performance could be adversely affected if we are not able to retain and increase the experience of our sales force or if we are not able to maintain or increase their productivity.
Our sales and operating results may be adversely affected if we are unable to increase the average tenure of our account executives or if the sales volumes and profitability achieved by our account executives do not increase with their increased experience.
Existing or future government and tax regulations could expose us to liabilities or costly changes in our business operations, and could reduce demand for our products and services.
Based upon current interpretations of existing law, certain of our subsidiaries currently collect and remit sales or use tax only on sales of products or services to residents of the states in which the respective subsidiaries have a physical presence or have voluntarily registered for sales tax collection. The U.S. Supreme Court has ruled that states, absent Congressional legislation, may not impose tax collection obligations on an out-of-state direct marketer whose only contacts with the taxing state are distribution of catalogs and other advertisement materials through the mail, and whose subsequent delivery of purchased goods is by mail or interstate common carriers. However, we cannot predict the level of contact with any state which would give rise to future or past tax collection obligations. Additionally, it is possible that federal legislation could be enacted that would permit states to impose sales or use tax collection obligations on out-of-state direct marketers. Furthermore, court cases have upheld tax collection obligations on companies, including mail order companies, whose contacts with the taxing state were quite limited (e.g., visiting the state several times a year to aid customers or to inspect showrooms stocking their goods). We believe our operations in states in which we have no physical presence are different from the operations of the companies in those cases and are thus not subject to the tax collection obligations imposed by those decisions. Various state taxing authorities have sought to impose on direct marketers with no physical presence in the taxing state the burden of collecting state sales and use taxes on the sale of products shipped or services sold to those states residents, and it is possible that such a requirement could be imposed in the future.
Furthermore, we are subject to general business regulations and laws, as well as regulations and laws specifically governing companies that do business over the Internet. Such existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation of e-commerce, user privacy, marketing and promotional practices (including electronic communications with our customers and potential customers), database protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, product safety, the provision of online payment services, copyrights, patents and other intellectual property rights, unauthorized access (including the Computer Fraud and Abuse Act), and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel, trespass, data mining and collection, and personal privacy, among other laws, apply to the Internet and e-commerce. Unfavorable resolution of these issues may expose us to liabilities and costly changes in our business operations, and could reduce customer demand for our products. The growth and demand for online commerce has and may continue to result in more stringent consumer protection laws that impose additional compliance burdens on online companies. For example, legislation in California requires us to notify our California customers if certain personal information about them is obtained by an unauthorized person, such as a computer hacker. These consumer protection laws could result in substantial compliance costs and could decrease our profitability.
32
Part of our business strategy includes the acquisition of other companies, and we may have difficulties integrating acquired companies into our operations in a cost-effective manner, if at all .
One element of our business strategy involves 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. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets. Our acquisition strategy depends on the availability of suitable acquisition candidates at reasonable prices and our ability to resolve challenges associated with integrating acquired businesses into our existing business, including challenges we may face in connection with our recent acquisition of SARCOM. No assurance can be given that the benefits or synergies we may expect from the acquisition of companies or businesses will be realized to the extent or in the time frame we anticipate. We may lose key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plans. In addition, acquisitions may involve a number of risks and difficulties, including expansion into new geographic markets and business areas, the diversion of managements attention to the operations and personnel of the acquired company, the integration of the acquired companys personnel, operations and management information systems, changing relationships with customers, suppliers and strategic partners, and potential short-term adverse effects on our operating results. These challenges can be magnified as the size of the acquisition increases. Any delays or unexpected costs incurred in connection with the integration of acquired companies or otherwise related to the acquisitions could have a material adverse effect on our business, financial condition and results of operations.
Acquisitions may require large one-time charges and can result in increased debt or other contingent liabilities, adverse tax consequences, deferred compensation charges, and the recording and later amortization of amounts related to deferred compensation and certain purchased intangible assets, any of which items could negatively impact our business, financial condition and results of operations. In addition, we may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause the price of our common stock to decline.
An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or involve our issuance of additional equity securities. If we are not able to obtain financing, then we may not be in a position to consummate acquisitions. If we issue equity securities in connection with an acquisition, we may dilute our common stock with securities that have an equal or a senior interest in our company. If we incur additional debt to pay for an acquisition, it may significantly reduce amounts that would otherwise be available under our credit facility, increase our interest expense, leverage and debt service requirements and could negatively impact our ability to comply with applicable financial covenants in our credit facility or limit our ability to obtain credit from our vendors. Acquired entities also may be highly leveraged or dilutive to our earnings per share, or may have unknown liabilities. In addition, the combined entity may have lower revenues or higher expenses and therefore may not achieve the anticipated results. Any of these factors relating to acquisitions could have a material adverse impact on our business, financial condition and results of operations.
We cannot assure you that we will be able to consummate any pending or future acquisitions or that we will realize any anticipated benefits from these acquisitions. We may not be able to find suitable acquisition opportunities that are available at attractive valuations, if at all. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms, and any decline in the price of our common stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions. We cannot assure you that we will be able to implement or sustain our acquisition strategy or that our strategy will ultimately prove profitable.
If purchased goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.
The purchase price allocation for the acquisition of SARCOM resulted in a material amount allocated to goodwill and amortizable intangible assets. In accordance with GAAP, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We review the fair value of our goodwill and test it for impairment annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be
33
recoverable include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant non-cash charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which could have a material adverse effect on our results of operations.
We may not be able to maintain profitability on a quarterly or annual basis.
Our ability to maintain profitability on a quarterly or annual basis given our planned business strategy depends upon a number of factors, including our ability to achieve and maintain vendor relationships, procure merchandise and fulfill orders in an efficient manner, leverage our fixed cost structure, maintain adequate levels of vendor consideration, and maintain customer acquisition costs at acceptable levels. Our ability to maintain profitability on a quarterly or annual basis will also depend on our ability to manage and control operating expenses and to generate and sustain adequate levels of revenue. Many of our expenses are fixed in the short term, and we may not be able to quickly reduce spending if our revenue is lower than we project. In addition, we may find that our business plan costs more to execute than we currently anticipate. Some of the factors that affect our ability to maintain profitability on a quarterly or annual basis are beyond our control.
The effect of the change in accounting rules for stock-based compensation may materially adversely affect our consolidated operating results, our stock price and our ability to hire, retain and motivate employees.
We use employee stock options and other stock-based compensation to hire, retain and motivate certain of our employees. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment, which requires us to measure compensation costs for all stock-based compensation (including stock options) at fair value as of the date of grant and to recognize these costs as expenses in our consolidated statements of operations. We adopted SFAS 123R on January 1, 2006. The recognition of non-cash stock-based compensation expenses in our consolidated statements of operations had and will have a negative effect on our consolidated operating results, including our net income and earnings per share, which could negatively impact our stock price. Additionally, if we reduce or alter our use of stock-based compensation to reduce these expenses and their impact, our ability to hire, motivate and retain certain employees could be adversely affected and we may need to increase the cash compensation we pay to these employees.
Our operating results are difficult to predict and may adversely affect our stock price.
Our operating results have fluctuated in the past and are likely to vary significantly in the future based upon a number of factors, many of which we cannot control. We operate in a highly dynamic industry and future results could be subject to significant fluctuations. These fluctuations could cause us to fail to meet or exceed financial expectations of investors or analysts, which could cause our stock price to decline rapidly and significantly. Revenue and expenses in future periods may be greater or less than revenue and expenses in the immediately preceding period or in the comparable period of the prior year. Therefore, period-to-period comparisons of our operating results are not necessarily a good indication of our future performance. Some of the factors that could cause our operating results to fluctuate include:
the amount and timing of operating costs and capital expenditures relating to any expansion of our business operations and infrastructure;
price competition that results in lower sales volumes, lower profit margins, or net losses;
fluctuations in mail-in rebate redemption rates;
the amount and timing of advertising and marketing costs;
our ability to successfully integrate operations and technologies from any past or future acquisitions or other business combinations;
changes in the number of visitors to our websites or our inability to convert those visitors into customers;
34
technical difficulties, including system or Internet failures;
fluctuations in the demand for our products or overstocking or understocking of our products;
introduction of new or enhanced services or products by us or our competitors;
fluctuations in shipping costs, particularly during the holiday season;
changes in the amounts of information technology spending by commercial and public sector entities;
economic conditions generally or economic conditions specific to the Internet, e-commerce, the retail industry or the mail order industry;
changes in the mix of products that we sell; and
fluctuations in levels of inventory theft, damage or obsolescence that we incur.
If we fail to accurately predict our inventory risk, our gross margins may decline as a result of required inventory write downs due to lower prices obtained from older or obsolete products.
We derive most of our gross sales from products sold out of inventory at our distribution facilities. We assume the inventory damage, theft and obsolescence risks, as well as price erosion risks for products that are sold out of inventory stocked at our distribution facilities. These risks are especially significant because many of the products we sell are characterized by rapid technological change, obsolescence and price erosion (e.g., computer hardware, software and consumer electronics), and because our distribution facilities sometimes stock large quantities of particular types of inventory. There can be no assurance that we will be able to identify and offer products necessary to remain competitive, maintain our gross margins, or avoid or minimize losses related to excess and obsolete inventory. We currently have limited return rights with respect to products we purchase from Apple, HP, Lenovo, and certain other vendors, but these rights vary by product line, are subject to specified conditions and limitations, and can be terminated or changed at any time.
We may need additional financing and may not be able to raise additional financing on favorable terms or at all, which could increase our costs, limit our ability to grow and dilute the ownership interests of existing stockholders.
We require substantial working capital to fund our business. We believe that our current working capital, including our existing cash balance, together with our expected future cash flows from operations and available borrowing capacity under our line of credit, will be adequate to support our current operating plans for at least the next twelve months. However, if we need additional financing, such as for acquisitions or expansion or to fund a significant downturn in sales or an increase in operating expenses, there are no assurances that adequate financing will be available on acceptable terms, if at all. We may in the future seek additional financing from public or private debt or equity financings to fund additional expansion, or take advantage of opportunities or favorable market conditions. There can be no assurance such financings will be available on terms favorable to us or at all. To the extent any such financings involve the issuance of equity securities, existing stockholders could suffer dilution. If we raise additional financing through the issuance of equity, equity-related or debt securities, those securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders will experience dilution of their ownership interests. If additional financing is required but not available, we would have to implement further measures to conserve cash and reduce costs. However, there is no assurance that such measures would be successful. Our failure to raise required additional financing could adversely affect our ability to maintain, develop or enhance our product offerings, take advantage of future opportunities, respond to competitive pressures or continue operations.
35
Rising interest rates could negatively impact our results of operations and financial condition.
A significant portion of our working capital requirements has historically been funded through borrowings under our credit facility, which functions as a working capital line of credit and bears interest at variable rates, tied to the LIBOR or prime rate. In connection with and as part of the line of credit, we also entered into a term note, bearing interest at the same rate as our credit facility. If the variable interest rates on our line of credit and term note increase, we could incur greater interest expense than we have in the past. Rising interest rates, and our increased interest expense that would result from them, could negatively impact our results of operations and financial condition.
We may be subject to claims regarding our intellectual property, including our business processes, or the products we sell, any of which could result in expensive litigation, distract our management or force us to enter into costly royalty or licensing agreements.
Third parties have asserted, and may in the future assert, that our business or the technologies we use infringe their intellectual property rights. As a result, we may be subject to intellectual property legal proceedings and claims in the ordinary course of our business. We cannot predict whether third parties will assert additional claims of infringement against us in the future or whether any future claims will prevent us from offering popular products or operating our business as planned. If we are forced to defend against any third-party infringement claims, whether they are with or without merit or are determined in our favor, we could face expensive and time-consuming litigation, which could result in the imposition of a preliminary injunction preventing us from continuing to operate our business as currently conducted throughout the duration of the litigation or distract our technical and management personnel. If we are found to infringe, we may be required to pay monetary damages, which could include treble damages and attorneys fees for any infringement that is found to be willful, and either be enjoined or required to pay ongoing royalties with respect to any technologies found to infringe. Further, as a result of infringement claims either against us or against those who license technology to us, we may be required, or deem it advisable, to develop non-infringing technology, which could be costly and time consuming, or enter into costly royalty or licensing agreements. Such royalty or licensing agreements, if required, may be unavailable on terms that are acceptable to us, or at all. If a third party successfully asserts an infringement claim against us and we are enjoined or required to pay monetary damages or royalties or we are unable to develop suitable non-infringing alternatives or license the infringed or similar technology on reasonable terms on a timely basis, our business, results of operations and financial condition could be materially harmed. Similarly, we may be required incur substantial monetary and diverted resource costs in order to protect our intellectual property rights against infringement by others.
Furthermore, we sell products manufactured and distributed by third parties, some of which may be defective. If any product that we sell were to cause physical injury or damage to property, the injured party or parties could bring claims against us as the retailer of the product. Our insurance coverage may not be adequate to cover every claim that could be asserted. If a successful claim were brought against us in excess of our insurance coverage, it could expose us to significant liability. Even unsuccessful claims could result in the expenditure of funds and management time and could decrease our profitability.
Costs and other factors associated with pending or future litigation could materially harm our business, results of operations and financial condition.
From time to time we receive claims and become subject to litigation, including consumer protection, employment, intellectual property and other litigation related to the conduct of our business. Additionally, we may from time to time institute legal proceedings against third parties to protect our interests. Any litigation that we become a party to could be costly and time consuming and could divert our management and key personnel from our business operations. In connection with any such litigation, we may be subject to significant damages or equitable remedies relating to the operation of our business. We cannot determine with any certainty the costs or outcome of pending or future litigation. Any such litigation may materially harm our business, results of operations and financial condition.
36
We may fail to expand our merchandise categories, product offerings, websites and processing systems in a cost-effective and timely manner as may be required to efficiently operate our business.
We may be required to expand or change our merchandise categories, product offerings, websites and processing systems in order to compete in our highly competitive and rapidly changing industry or to efficiently operate our business. Any failure on our part to expand or change the way we do business in a cost-effective and timely manner in response to any such requirements would likely adversely affect our operating results, financial condition and future prospects. Additionally, we cannot assure you that we will be successful in implementing any such changes when and if they are required.
We have generated substantially all of our revenue in the past from the sale of computer hardware, software and accessories and consumer electronics products. Expansion into new product categories may require us to incur significant marketing expenses, develop relationships with new vendors and comply with new regulations. We may lack the necessary expertise in a new product category to realize the expected benefits of that new category. These requirements could strain our managerial, financial and operational resources. Additional challenges that may affect our ability to expand into new product categories include our ability to:
establish or increase awareness of our new brands and product categories;
acquire, attract and retain customers at a reasonable cost;
achieve and maintain a critical mass of customers and orders across all of our product categories;
attract a sufficient number of new customers to whom our new product categories are targeted;
successfully market our new product offerings to existing customers;
maintain or improve our gross margins and fulfillment costs;
attract and retain vendors to provide our expanded line of products to our customers on terms that are acceptable to us; and
manage our inventory in new product categories.
We cannot be certain that we will be able to successfully address any or all of these challenges in a manner that will enable us to expand our business into new product categories in a cost-effective or timely manner. If our new categories of products or services are not received favorably, or if our suppliers fail to meet our customers expectations, our results of operations would suffer and our reputation and the value of the applicable new brand and our other brands could be damaged. The lack of market acceptance of our new product categories or our inability to generate satisfactory revenue from any expanded product categories to offset their cost could harm our business.
We may not be able to attract and retain key personnel such as senior management and information technology specialists.
Our future performance will depend to a significant extent upon the efforts and abilities of certain key management and other personnel, including Frank F. Khulusi, our Chairman of the Board, President and Chief Executive Officer, as well as other executive officers and senior management. The loss of service of one or more of our key management members could have a material adverse effect on our business. Our success and plans for future growth will also depend in part on our managements continuing ability to hire, train and retain skilled personnel in all areas of our business. For example, our management information systems and processes require the services of employees with extensive knowledge of these systems and processes and the business environment in which we operate, and in order to successfully implement and operate our systems and processes we must be able to attract and retain a significant number of information technology specialists. We may not be able to attract, train and retain the skilled personnel required to, among other things, implement, maintain, and operate our information systems and processes, and any failure to do so would likely have a material adverse effect on our operations.
37
If we fail to achieve and maintain adequate internal controls, we may not be able to produce reliable financial reports in a timely manner or prevent financial fraud.
We monitor and periodically test our internal control procedures. We may from time to time identify deficiencies which we may not be able to remediate. In addition, if we fail to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important in helping prevent financial fraud. If we cannot provide reliable financial reports on a timely basis or prevent financial fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.
Any inability to effectively manage our growth may prevent us from successfully expanding our business.
The growth of our business has required us to make significant additions in personnel and has significantly increased our working capital requirements. Although we have experienced significant sales growth in the past, such growth should not be considered indicative of future sales growth. Such growth has resulted in new and increased responsibilities for our management personnel and has placed and continues to place significant strain upon our management, operating and financial systems, and other resources. Any future growth, whether organic or through acquisition, may result in increased strain. There can be no assurance that current or future strain will not have a material adverse effect on our business, financial condition, and results of operations, nor can there be any assurance that we will be able to attract or retain sufficient personnel to continue the expansion of our operations. Also crucial to our success in managing our growth will be our ability to achieve additional economies of scale. We cannot assure you that we will be able to achieve such economies of scale, and the failure to do so could have a material adverse effect upon our business, financial condition and results of operations.
Our advertising and marketing efforts may be costly and may not achieve desired results.
We incur substantial expense in connection with our advertising and marketing efforts. Postage represents a significant expense for us because we generally mail our catalogs to current and potential customers through the U.S. Postal Service. Any future increases in postal rates will increase our mailing expenses and could have a material adverse effect on our business, financial condition and results of operations. We also incur significant expenses related to purchasing the paper we use in printing our catalogs. The cost of paper has fluctuated over the last several years, and may increase in the future. We believe that we may be able to recoup a portion of any increased postage and paper costs through increases in vendor advertising rates, but no assurance can be given that any efforts we may undertake to offset all or a portion of future increases in postage, paper and other advertising and marketing costs through increases in vendor advertising rates will be successful or sustained, or that they will offset all of the increased costs. Furthermore, although we target our advertising and marketing efforts on current and potential customers who we believe are likely to be in the market for the products we sell, we cannot assure you that our advertising and marketing efforts will achieve our desired results. In addition, we periodically adjust our advertising expenditures in an effort to optimize the return on such expenditures. Any decrease in the level of our advertising expenditures which may be made to optimize such return could adversely affect our sales.
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 commercial and public sector sales. During the most recent economic downturn in the U.S. and elsewhere, commercial and public sector entities generally reduced, often substantially, their rate of information technology spending. 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 hinder our growth.
38
Increased product returns or a failure to accurately predict product returns could decrease our revenue and impact profitability.
We make allowances for product returns in our consolidated financial statements based on historical return rates. We are responsible for returns of certain products ordered through our catalogs and websites from our distribution center, as well as products that are shipped to our customers directly from our vendors. If our actual product returns significantly exceed our allowances for returns, our revenue and profitability could decrease. In addition, because our allowances are based on historical return rates, the introduction of new merchandise categories, new products, changes in our product mix, or other factors may cause actual returns to exceed return allowances, perhaps significantly. In addition, any policies that we adopt that are intended to reduce the number of product returns may result in customer dissatisfaction and fewer repeat customers.
Our business may be harmed by fraudulent activities on our websites, including fraudulent credit card transactions.
We have received in the past, and anticipate that we will receive in the future, communications from customers due to purported fraudulent activities on our websites, including fraudulent credit card transactions. Negative publicity generated as a result of fraudulent conduct by third parties could damage our reputation and diminish the value of our brand name. Fraudulent activities on our websites could also subject us to losses and could lead to scrutiny from lawmakers and regulators regarding the operation of our websites. We expect to continue to receive requests from customers for reimbursement due to purportedly fraudulent activities or threats of legal action against us if no reimbursement is made.
We may be liable for misappropriation of our customers personal information.
If third parties or our employees are able to penetrate our network security or otherwise misappropriate our customers personal information or credit card information, or if we give third parties or our employees improper access to our customers personal information or credit card information, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, identify theft or other similar fraud-related claims. This liability could also include claims for other misuses of personal information, including for unauthorized marketing purposes. Other liability could include claims alleging misrepresentation or our privacy and data security practices. Any such liability for misappropriation of this information could decrease our profitability. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding whether they misused or inadequately secured personal information regarding consumers. We could incur additional expenses if new laws or regulations regarding the use of personal information are introduced or if government agencies investigate our privacy practices.
We seek to rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure online transmission of confidential information such as customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive customer transaction data. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. Our security measures are designed to protect against security breaches, but our failure to prevent such security breaches could subject us to liability, damage our reputation and diminish the value of our brand-name.
Laws or regulations relating to privacy and data protection may adversely affect the growth of our Internet business or our marketing efforts.
We mail catalogs and send electronic messages to names in our proprietary customer database and to potential customers whose names we obtain from rented or exchanged mailing lists. Worldwide public concern regarding personal privacy has subjected the rental and use of customer mailing lists and other customer information to increased scrutiny and regulation. As a result, we are subject to increasing regulation relating to privacy and the use of personal information. For example, we are subject to various telemarketing and anti-spam laws that regulate the manner in which we may solicit future suppliers and customers. Such regulations, along with increased
39
governmental or private enforcement, may increase the cost of operating and growing our business. In addition, several states have proposed legislation that would limit the uses of personal information gathered online or require online services to establish privacy policies. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from children under 13 years of age. Bills proposed in Congress would expand online privacy protections already provided to adults. Moreover, proposed legislation in the U.S. and existing laws in other countries require companies to establish procedures to notify users of privacy and security policies, obtain consent from users for collection and use of personal information, and provide users with the ability to access, correct and delete personal information stored by companies. These data protection regulations and enforcement efforts may restrict our ability to collect or transfer demographic and personal information from users, which could be costly or harm our marketing efforts. Further, any violation of domestic or foreign or domestic privacy or data protection laws and regulations, including the national do-not-call list, may subject us to fines, penalties and damages, which could decrease our revenue and profitability.
The security risks of e-commerce may discourage customers from purchasing goods from us.
In order for the e-commerce market to be successful, we and other market participants must be able to transmit confidential information securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction data. Any breach could cause customers to lose confidence in the security of our websites and choose not to purchase from our websites. If someone is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Concerns about the security and privacy of transactions over the Internet could inhibit the growth of Internet usage and e-commerce. Our security measures may not effectively prohibit others from obtaining improper access to our information. Any security breach could expose us to risks of loss, litigation and liability and could seriously damage our reputation and disrupt our operations.
Credit card fraud could decrease our revenue and profitability.
We do not carry insurance against the risk of credit card fraud, so the failure to adequately control fraudulent credit card transactions could reduce our revenues or increase our operating costs. We may in the future suffer losses as a result of orders placed with fraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions. If we are unable to detect or control credit card fraud, or if credit card companies require more burdensome terms or refuse to accept credit card charges from us, our revenue and profitability could decrease.
Our facilities and systems are vulnerable to natural disasters or other catastrophic events.
Our headquarters, customer service center and the majority of our infrastructure, including computer servers, are located near Los Angeles, California in an area that is susceptible to earthquakes and other natural disasters. Our distribution facilities, which are located in Memphis, Tennessee, Irvine, California, and Lewis Center, Ohio house the product inventory from which a substantial majority of our orders are shipped, and are also in areas that are susceptible to natural disasters and extreme weather conditions such as earthquakes, fire, floods and major storms. A natural disaster or other catastrophic event, such as an earthquake, fire, flood, severe storm, break-in, terrorist attack or other comparable events in the areas in which we operate could cause interruptions or delays in our business and loss of data or render us unable to accept and fulfill customer orders in a timely manner, or at all. Our systems, including our management information systems, websites and telephone system, are not fully redundant, and we do not have redundant geographic locations or earthquake insurance. Further, California periodically experiences power outages as a result of insufficient electricity supplies. These outages may recur in the future and could disrupt our operations. We currently have no formal disaster recovery plan and our business interruption insurance may not adequately compensate us for losses that may occur.
We rely on independent shipping companies to deliver the products we sell.
We rely upon third party carriers, especially Federal Express and UPS, for timely delivery of our product shipments. As a result, we are subject to carrier disruptions and increased costs due to factors that are beyond our control, including employee strikes, inclement weather and increased fuel costs. Any failure to deliver products to our customers in a timely and accurate manner may damage our reputation and brand and could cause us to lose
40
customers. We do not have a written long-term agreement with any of these third party carriers, and we cannot be sure that these relationships will continue on terms favorable to us, if at all. If our relationship with any of these third party carriers is terminated or impaired, or if any of these third parties are unable to deliver products for us, we would be required to use alternative carriers for the shipment of products to our customers. We may be unable to engage alternative carriers on a timely basis or on terms favorable to us, if at all. Potential adverse consequences include:
reduced visibility of order status and package tracking;
delays in order processing and product delivery;
increased cost of delivery, resulting in reduced margins; and
reduced shipment quality, which may result in damaged products and customer dissatisfaction.
Furthermore, shipping costs represent a significant operational expense for us. Any future increases in shipping rates could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to compete successfully against existing or future competitors, which include some of our largest vendors.
The business of direct marketing of computer hardware, software, peripherals and electronics is highly competitive, based primarily on price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical or product information. We compete with other direct marketers, including CDW, Insight Enterprises, and PC Connection. In addition, we compete with computer retail stores and resellers, including superstores such as Best Buy and CompUSA, certain hardware and software vendors such as Apple and Dell Computer that sell or are increasing sales directly to end users, online resellers such as Amazon.com, Newegg.com and TigerDirect.com, government resellers such as GTSI, CDWG and GovConnection, software only resellers such as Soft Choice and Software House International and other direct marketers and value added resellers of hardware, software and computer-related and electronic products. We also compete with value-added resellers and providers of information technology solutions. In the direct marketing and Internet retail industries, barriers to entry are relatively low and the risk of new competitors entering the market is high. Certain of our existing competitors have substantially greater financial resources than we have. There can be no assurance that we will be able to continue to compete effectively against existing competitors, consolidations of competitors or new competitors that may enter the market.
Furthermore, the manner in which our products and services are distributed and sold is changing, and new methods of sale and distribution have emerged and serve an increasingly large portion of the market. Computer hardware and software vendors have sold, and may intensify their efforts to sell, their products directly to end users. From time to time, certain vendors, including Apple and HP, have instituted programs for the direct sale of large quantities of hardware and software to certain large business accounts. These types of programs may continue to be developed and used by various vendors. Vendors also may attempt to increase the volume of software products distributed electronically to end users personal computers. Any of these competitive programs, if successful, could have a material adverse effect on our business, financial condition and results of operations.
Our success is tied to the continued use of the Internet and the adequacy of the Internet infrastructure.
The level of sales generated from our websites, both in absolute terms and as a percentage of our net sales, has increased in recent years in part because of the growing use and acceptance of the Internet by end-users. Continued growth of our Internet sales is dependent on potential customers using the Internet in addition to traditional means of commerce to purchase products. Widespread use of the Internet could decline as a result of disruptions, computer viruses or other damage to Internet servers or users computers. If consumer use of the Internet to purchase products decline in any significant way, our business, financial condition and results of operations could be adversely affected.
41
Our earnings and growth rate could be adversely affected by changes in economic and geopolitical conditions .
Weak general economic conditions, along with uncertainties in political conditions could adversely impact our revenue, expenses and growth rate. In addition, our revenue, gross margins and earnings could deteriorate in the future as a result of unfavorable economic or political conditions.
The success of our Canadian call center is dependent, in part, on our receipt of government labor credits.
In June 2003, we established a Canadian call center serving the U.S. market. One of the benefits we receive from having our Canadian call center is that we can claim Canadian government labor credits on eligible compensation paid to qualifying employees at the call center. The government program that provides for these labor credits is currently scheduled to terminate at the end of 2007. The success of our Canadian call center is dependent, in part, on our receipt of the government labor credits we expect to receive. If we do not receive these expected labor credits, or a sufficient portion of them, then the costs of operating our Canadian call center may exceed the benefits it provides us and our operating results would likely suffer. We have applied for an alternative program in an effort to partially replace these labor credits upon the expiration of the current program at the end of 2007; however, there can be no assurance that we will qualify for the alternative program. In the event that we do not qualify for the new program, our labor costs in our Canadian call center would increase materially, which could adversely affect our consolidated results of operations.
We are exposed to the risks of business and other conditions in the Asia Pacific region.
All or portions of certain of the products we sell are produced, or have major components produced, in the Asia Pacific region. We engage in U.S. dollar denominated transactions with U.S. divisions and subsidiaries of companies located in that region as well. As a result, we may be indirectly affected by risks associated with international events, including economic and labor conditions, political instability, tariffs and taxes, availability of products, natural disasters and currency fluctuations in the U.S. dollar versus the regional currencies. In the past, countries in the Asia Pacific region have experienced volatility in their currency, banking and equity markets. Future volatility could adversely affect the supply and price of the products we sell and their components and ultimately, our results of operations.
In the third quarter of 2005, we opened an office in the Philippines in connection with our cost reduction initiatives, and we may increase these and other offshore operations in the future. Establishing offshore operations may entail considerable expense before we realize cost savings, if any, from these initiatives. Our limited operating history in the Philippines, as well as the risks associated with doing business overseas and international events, could prevent us from realizing the expected benefits from our Philippines operations. For example, a national state of emergency was temporarily in effect in the Philippines in early 2006 as a result of political unrest. We could be subject to similar risks and uncertainties, particularly if and to the extent we increase or establish new offshore operations, in the Philippines or elsewhere in the future.
The increasing significance of our foreign operations exposes us to risks that are beyond our control and could affect our ability to operate successfully.
In order to enhance the cost-effectiveness of our operations, we have increasingly sought to shift portions of our operations to jurisdictions with lower cost structures than that available in the United States. The transition of even a portion of our business operations to new facilities in a foreign country involves a number of logistical and technical challenges that could result in operational interruptions, which could reduce our revenues and adversely affect our business. We may encounter complications associated with the set-up, migration and operation of business systems and equipment in a new facility. This could result in disruptions that could damage our reputation and otherwise adversely affect our business and results of operations.
To the extent that we shift any operations or labor offshore to jurisdictions with lower cost structures, we may experience challenges in effectively managing those operations as a result of several factors, including time zone differences and regulatory, legal, cultural and logistical issues. Additionally, the relocation of labor resources may have a negative impact on our existing employees, which could negatively impact our operations. If we are unable to effectively manage our offshore personnel and any other offshore operations, our business and results of operations could be adversely affected.
42
We cannot be certain that any shifts in our operations to offshore jurisdictions will ultimately produce the expected cost savings. We cannot predict the extent of government support, availability of qualified workers, future labor rates, or monetary and economic conditions in any offshore locations where we may operate. Although some of these factors may influence our decision to establish or increase our offshore operations, there are inherent risks beyond our control, including:
political uncertainties;
wage inflation;
exposure to foreign currency fluctuations;
tariffs and other trade barriers; and
foreign regulatory restrictions and unexpected changes in regulatory environments.
We will likely be faced with competition in these offshore markets for qualified personnel, and we expect this competition to increase as other companies expand their operations offshore. If the supply of such qualified personnel becomes limited due to increased competition or otherwise, it could increase our costs and employee turnover rates. One or more of these factors or other factors relating to foreign operations could result in increased operating expenses and make it more difficult for us to manage our costs and operations, which could cause our operating results to decline and result in reduced revenues.
International operations expose us to currency exchange risk and we cannot predict the effect of future exchange rate fluctuations on our business and operating results.
We have operation centers in Canada and the Philippines that provide back-office administrative support and customer service support. Our international operations are sensitive to currency exchange risks. We have currency exposure arising from both sales and purchases denominated in foreign currencies, as well as intercompany transactions. Significant changes in exchange rates between foreign currencies in which we transact business and the U.S. dollar may adversely affect our results of operations and financial condition. Historically, we have not entered into any hedging activities, and, to the extent that we continue not to do so in the future, we may be vulnerable to the effects of currency exchange-rate fluctuations.
In addition, our international operations also expose us to currency fluctuations as we translate the financial statements of our foreign operations to the U.S. dollar. Although the effect of currency fluctuations on our financial statements has not generally been material in the past, there can be no guarantee that the effect of currency fluctuations will not be material in the future.
We are subject to risks associated with the evolution of, and consolidation within, our industry.
Our industry has undergone significant change in the past several years. In addition, many new, cost-effective channels of distribution have developed in the industry, such as the Internet, computer superstores, consumer electronic and office supply superstores, national direct marketers and mass merchants. Many computer resellers are consolidating operations and acquiring or merging with other resellers, direct marketers and providers of information technology solutions to achieve economies of scale, expanded product and service offerings, and increased efficiency. The current industry reconfiguration and the trend towards consolidation could cause the industry to become even more competitive, further increase pricing pressures and make it more difficult for us to maintain our operating margins or to increase or maintain the same level of net sales or gross profit. Declining prices, resulting in part from technological changes, may require us to sell a greater number of products to achieve the same level of net sales and gross profit. Such a trend could make it more difficult for us to continue to increase our net sales and earnings growth. In addition, growth in the information technology market has slowed. If the growth rate of the information technology market were to further decrease, our business, financial condition and operating results could be materially adversely affected.
43
Our success is in part dependent on the accuracy and proper utilization of our management information systems.
Our ability to analyze data derived from our management information systems, including our telephone system, to increase product promotions, manage inventory and accounts receivable collections, to purchase, sell and ship products efficiently and on a timely basis and to maintain cost-efficient operations, is dependent upon the quality and utilization of the information generated by our management information systems. We regularly upgrade our management information system hardware and software 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. We currently operate our management information systems using an HP3000 Enterprise System. HP has indicated that it will support this system until December 2008, by which time we expect that we will need to seek third party support for our HP3000 Enterprise System or upgrade to other management information systems hardware and software. In addition to the costs associated with such upgrades, the transition to and implementation of new or upgraded hardware or software systems can result in system delays or failures which could impair our ability to receive, process, ship and bill for orders in a timely manner. 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 in our management information systems, including those caused by natural disasters, could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to provide satisfactory customer service, we could lose customers or fail to attract new customers.
Our ability to provide satisfactory levels of customer service depends, to a large degree, on the efficient and uninterrupted operation of our customer service operations. Any material disruption or slowdown in our order processing systems resulting from labor disputes, telephone or Internet failures, power or service outages, natural disasters or other events could make it difficult or impossible to provide adequate customer service and support. Furthermore, we may be unable to attract and retain adequate numbers of competent customer service representatives and relationship managers for our business customers, each of which is essential in creating a favorable interactive customer experience. If we are unable to continually provide adequate staffing and training for our customer service operations, our reputation could be seriously harmed and we could lose customers or fail to attract new customers. In addition, if our e-mail and telephone call volumes exceed our present system capacities, we could experience delays in placing orders, responding to customer inquiries and addressing customer concerns. Because our success depends largely on keeping our customers satisfied, any failure to provide high levels of customer service would likely impair our reputation and decrease our revenues.
Our stock price may be volatile.
We believe that certain factors, such as sales of our common stock into the market by existing stockholders, fluctuations in our quarterly operating results, changes in market conditions affecting stocks of computer hardware and software manufacturers and resellers generally and companies in the Internet and e-commerce industries in particular, could cause the market price of our common stock to fluctuate substantially. Other factors that could affect our stock price include, but are not limited to, the following:
failure to meet investors expectations regarding our operating performance;
changes in securities analysts recommendations or estimates of our financial performance;
publication of research reports by analysts;
changes in market valuations of similar companies;
44
announcements by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments;
actual or anticipated fluctuations in our operating results;
litigation developments; and
general market conditions or other economic factors unrelated to our performance.
The stock market in general, and the stocks of computer and software resellers, and companies in the Internet and electronic commerce industries in particular, and other technology or related stocks, have in the past experienced extreme price and volume fluctuations which have been unrelated to corporate operating performance. Such market volatility may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a public companys securities, securities class action litigation has often been instituted against that company. Such litigation, if asserted against us, could result in substantial costs to us and cause a likely diversion of our managements attention from the operations of our company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The information required under this item was disclosed under Item 3.02 of our Current Report on Form 8-K, filed with the SEC on September 18, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the stockholders held on August 31, 2007, the following matters were submitted to a vote of the stockholders of PC Mall, Inc.:
1. The re-election as directors of Frank F. Khulusi, Thomas A. Maloof, Ronald B. Reck and Paul C. Heeschen, all of whom were re-elected at the annual meeting. The directors received the following votes:
|
|
FOR |
|
WITHHELD |
|
Frank F. Khulusi |
|
7,159,915 |
|
2,330,592 |
|
Thomas A. Maloof |
|
8,506,016 |
|
984,491 |
|
Ronald B. Reck |
|
8,506,016 |
|
984,491 |
|
Paul C. Heeschen |
|
8,506,016 |
|
984,491 |
|
2. The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007.
|
|
FOR |
|
AGAINST |
|
ABSTENTIONS |
|
Appointment of Independent Registered Public Accounting Firm |
|
9,374,536 |
|
61,451 |
|
54,520 |
|
45
Exhibit
|
|
Description |
|
|
|
2.1 |
|
Agreement and Plan of Merger, dated as of August 17, 2007, by and among PC Mall, Inc., Mall Acquisition 2, Inc., SARCOM, Inc., Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F. Angart & Company, John R. Strauss, Daniel A. Schneider and Howard Schapiro (incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed with the SEC on September 18, 2007) |
|
|
|
10.1 |
|
Summary of Executive Salary and Bonus Arrangements |
|
|
|
10.2 |
|
Summary of Director Compensation Arrangements |
|
|
|
10.3 |
|
Form of Director Restricted Stock Bonus Award Agreement |
|
|
|
10.4 |
|
Severance Agreement between AF Services, LLC and Brandon LaVerne |
|
|
|
10.5 |
|
Third Amendment to Amended and Restated Loan and Security Agreement, dated as of September 17, 2007, by and among PC Mall, Inc., certain subsidiaries of PC Mall, Inc., Wachovia Capital Finance Corporation (Western) and certain other financial institutions (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on September 18, 2007) |
|
|
|
10.6 |
|
Registration Rights Agreement, dated as of September 17, 2007, by and among PC Mall, Inc., Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F. Angart & Company, John R. Strauss, Daniel A. Schneider and Howard Schapiro (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the SEC on September 18, 2007) |
|
|
|
10.7 |
|
Fourth Amendment to Amended and Restated Loan and Security Agreement, dated as of November 5, 2007, by and among PC Mall, Inc, certain of its subsidiaries, Wachovia Capital Finance Corporation (Western) and certain other financial institutions (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on November 6, 2007) |
|
|
|
10.8 |
|
Lease Agreement, dated as of July 1, 2001, by and between Sarcom Properties, Inc. and Sarcom Desktop Solutions, Inc., as amended as of December 1, 2002 and as of March 22, 2004 |
|
|
|
31.1 |
|
Certification of the Chief Executive Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
31.2 |
|
Certification of the Interim Chief Financial Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
32.1 |
|
Certification of the Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2 |
|
Certification of the Interim Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |
***
46
PC MALL, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
PC MALL, INC. |
||
|
(Registrant) |
||
|
|
|
|
Date: November 14, 2007 |
By: |
/s/ Brandon H. LaVerne |
|
|
|
Brandon H. LaVerne |
|
|
|
Interim Chief Financial Officer |
***
47
PC MALL, INC.
EXHIBIT INDEX
Exhibit
|
|
Description |
|
|
|
2.1 |
|
Agreement and Plan of Merger, dated as of August 17, 2007, by and among PC Mall, Inc., Mall Acquisition 2, Inc., SARCOM, Inc., Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F. Angart & Company, John R. Strauss, Daniel A. Schneider and Howard Schapiro (incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed with the SEC on September 18, 2007) |
|
|
|
10.1 |
|
Summary of Executive Salary and Bonus Arrangements |
|
|
|
10.2 |
|
Summary of Director Compensation Arrangements |
|
|
|
10.3 |
|
Form of Director Restricted Stock Bonus Award Agreement |
|
|
|
10.4 |
|
Severance Agreement between AF Services, LLC and Brandon LaVerne |
|
|
|
10.5 |
|
Third Amendment to Amended and Restated Loan and Security Agreement, dated as of September 17, 2007, by and among PC Mall, Inc., certain subsidiaries of PC Mall, Inc., Wachovia Capital Finance Corporation (Western) and certain other financial institutions (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on September 18, 2007) |
|
|
|
10.6 |
|
Registration Rights Agreement, dated as of September 17, 2007, by and among PC Mall, Inc., Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F. Angart & Company, John R. Strauss, Daniel A. Schneider and Howard Schapiro (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the SEC on September 18, 2007) |
|
|
|
10.7 |
|
Fourth Amendment to Amended and Restated Loan and Security Agreement, dated as of November 5, 2007, by and among PC Mall, Inc, certain of its subsidiaries, Wachovia Capital Finance Corporation (Western) and certain other financial institutions (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on November 6, 2007) |
|
|
|
10.8 |
|
Lease Agreement, dated as of July 1, 2001, by and between Sarcom Properties, Inc. and Sarcom Desktop Solutions, Inc., as amended as of December 1, 2002 and as of March 22, 2004 |
|
|
|
31.1 |
|
Certification of the Chief Executive Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
31.2 |
|
Certification of the Interim Chief Financial Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
32.1 |
|
Certification of the Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2 |
|
Certification of the Interim Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 10.1
Summary of Executive Salary and Bonus Arrangements
The table below summarizes the current annual salary and bonus arrangements we have with each of our current executive officers. All of the compensation arrangements we have with our executive officers, including with respect to annual salaries and bonuses, are reviewed and may be modified from time to time by the Compensation Committee of our Board of Directors. The Compensation Committee approved the annual salary and bonus arrangements noted in the table below.
We generally pay bonuses, if any, to our executive officers on a quarterly basis. Certain of our executive officers participate in the executive bonus plan that was adopted by the Compensation Committee on February 9, 2005, a description of which is filed as Exhibit 10.23 to our Annual Report on Form 10-K for the year ended December 31, 2006. In addition to the bonus arrangements noted in the table below, all of our executive officers are eligible for discretionary bonuses as determined from time to time by the Compensation Committee.
We have written employment arrangements with each of our executive officers, and a copy of each such employment arrangement is filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2006 or to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, as applicable. The non-salary and bonus components of our compensation arrangements with our executive officers, including with respect to severance, option grants and other benefits, are described in those respective agreements.
Executive Officer |
|
Annual
|
|
Bonus |
|
Frank F. Khulusi |
|
|
|
|
|
Chairman, President and Chief Executive Officer |
|
$ |
800,000 |
|
(1) |
|
|
|
|
|
|
Brandon H. LaVerne |
|
|
|
|
|
Interim Chief Financial Officer (2) |
|
$ |
206,748 |
|
(2) |
|
|
|
|
|
|
Kristin M. Rogers |
|
|
|
|
|
Executive Vice PresidentSales |
|
$ |
330,000 |
(3) |
(1) |
|
|
|
|
|
|
Daniel J. DeVries |
|
|
|
|
|
Executive Vice PresidentMarketing |
|
$ |
275,000 |
(3) |
(1) |
|
|
|
|
|
|
Robert I. Newton |
|
|
|
|
|
General Counsel |
|
$ |
300,000 |
(3) |
(4) |
(1) |
|
Mr. Khulusi, Mr. DeVries and Ms. Rogers are eligible to participate in our executive bonus plan, pursuant to which a bonus pool is determined based upon the achievement of specified quantitative criteria and allocated in the discretion of the Compensation Committee. |
(2) |
|
On June 7, 2007, our board of directors appointed Mr. LaVerne as Interim Chief Financial Officer effective upon the departure of our former Chief Financial Officer, Theodore R. Sanders on June 30, 2007. Mr. LaVerne is eligible for an annual bonus of up to $35,350, paid in quarterly installments, as well as for discretionary bonuses as determined from time to time by the Compensation Committee. |
(3) |
|
On August 31, 2007, the Compensation Committee increased Ms. Rogers, Mr.DeVries, and Mr. Newtons annual base salary rates from $300,000, $257,500 and $250,000, respectively, to $330,000, $275,000 and $300,000 effective immediately. |
(4) |
|
Mr. Newton is eligible to receive an annual bonus of up to $120,000, paid in quarterly installments, as well as discretionary bonuses as determined from time to time by the Compensation Committee. |
Exhibit 10.2
Summary of Director Compensation Arrangements
We currently pay each director who is not employed by us or any of our affiliates (i.e., all of our directors except for our Chairman, Frank F. Khulusi) a quarterly retainer of $7,000, plus $2,500 for each regular board meeting attended in person or telephonically, $1,000 for each special board meeting attended in person or telephonically and $1,000 for each committee meeting attended in person or telephonically. We also pay the chairperson of the Audit Committee of our Board of Directors an additional quarterly retainer of $3,125 and the chairperson of the Compensation Committee of our Board of Directors an additional quarterly retainer of $1,250 for serving in such capacities. Directors who are employed by us or any of our affiliates are not paid any additional compensation for their service on our Board of Directors. We reimburse each of our directors for reasonable out-of-pocket expenses that they incur in connection with attending board or committee meetings. We have entered into indemnification agreements, a form of which is attached as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2006, with each of our directors.
Our directors are also eligible to participate in our 1994 Stock Incentive Plan, as amended, which is administered by our Compensation Committee under authority delegated by our Board of Directors. The terms and conditions of option and stock bonus grants to our non-employee directors under our 1994 Stock Incentive Plan, as amended, are determined in the discretion of our Compensation Committee, and must be consistent with the terms of the 1994 Stock Incentive Plan, as amended, which is filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2006.
The compensation arrangements we have with our directors are reviewed and may be modified from time to time by our Board of Directors.
Exhibit 10.3
PC MALL, INC.
1994 STOCK INCENTIVE PLAN
NOTICE OF DIRECTOR RESTRICTED STOCK BONUS AWARD
Grantees Name and Address: |
|
|
|
|
|
You (the Grantee) have been granted shares of Stock of the Company (the Award), subject to the terms and conditions of this Notice of Restricted Stock Bonus Award (the Notice), the PC Mall, Inc. 1994 Stock Incentive Plan, as amended from time to time (the Plan), and the Director Restricted Stock Bonus Award Agreement (the Agreement) attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice.
Award Number |
|
Date of Award |
|
Vesting Commencement Date |
|
Total Number of Shares |
|
of Stock Awarded |
|
(the Shares) |
|
Vesting Schedule :
Subject to the Grantees Continuous Service and other limitations set forth in this Notice, the Plan and the Agreement, the Shares will vest in accordance with the following schedule (the Vesting Schedule):
Twenty-five percent (25%) of the Shares shall vest on each three (3) month anniversary of the Vesting Commencement Date, until one-hundred percent (100%) of the Shares are vested on the twelve (12) month anniversary of the Vesting Commencement Date.
Notwithstanding the foregoing, in the event of a Change in Control, one hundred percent (100%) of the Shares shall automatically become fully vested immediately prior to the specified effective date of such Change in Control.
During any authorized leave of absence, the vesting of the Shares as provided in this schedule shall be suspended after the leave of absence exceeds a period of three (3) months. Vesting of the Shares shall resume upon the Grantees termination of the leave of absence and return to service to the Company or an Affiliate. The Vesting Schedule of the Shares shall be extended by the length of the suspension.
In the event of the Grantees change in status from Employee, Director or Consultant to any other status of Employee, Director or Consultant, the Shares shall continue to vest in accordance with the Vesting Schedule set forth above.
For purposes of this Notice and the Agreement, the term Continuous Service shall mean that the provision of services to the Company or an Affiliate in any capacity of Employee, Director or Consultant is not interrupted or terminated. In jurisdictions requiring notice in advance of an effective termination as an Employee, Director or Consultant, Continuous Service shall be deemed terminated upon the actual cessation of providing services to the Company or an Affiliate notwithstanding any required notice period that must be fulfilled before a termination as an Employee, Director or Consultant can be effective under applicable laws. A Grantees Continuous Service shall be deemed to have terminated either upon an actual termination of Continuous Service or upon the entity for which the Grantee provides services ceasing to be an Affiliate. Continuous Service shall not be considered interrupted in the case of (i) any authorized leave of absence, (ii) transfers among the Company, any Affiliate, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or an Affiliate in any capacity of Employee, Director or Consultant (except as otherwise provided in the Award Agreement). Notwithstanding the foregoing, except as otherwise determined by the Administrator, in the event of any spin-off of an Affiliate, service as an Employee, Director or Consultant for such Affiliate following such spin-off shall be deemed to be Continuous Service for purposes of the Plan and any Award under the Plan. For purposes of this Notice and the Agreement, an authorized leave of absence shall include sick leave, military leave and any other bona fide leave of absence (such as temporary employment by the government and authorized personal leave).
For purposes of this Notice and the Agreement, (i) the term Consultant means any person (other than an Employee or a Director, solely with respect to rendering services in such persons capacity as a Director) who is engaged by the Company or any Affiliate to render consulting or advisory services to the Company or such Affiliate, (ii) the term Director means any member of the board of directors of the Company or the board of directors of any Affiliate, and (iii) the term Employee means any person, including an Officer or Director, who is in the employ of the Company or any Affiliate, subject to the control and direction of the Company or any Affiliate as to both the work to be performed and the manner and method of performance. The payment of a directors fee by the Company or an Affiliate shall not be sufficient to constitute employment by the Company.
For purposes of this Notice and the Agreement, the term vest shall mean, with respect to any Shares, that such Shares are no longer subject to forfeiture to the Company. Shares that have not vested are deemed Restricted Shares. If the Grantee would become vested in a fraction of a Restricted Share, such Restricted Share shall not vest until the Grantee becomes vested in the entire Share.
Vesting shall cease upon the date the Grantee terminates Continuous Service for any reason, excluding death or Disability (as defined below). In the event the Grantee terminates Continuous Service for any reason, excluding death or Disability, any Restricted Shares held by the Grantee immediately following such termination of Continuous Service shall be forfeited and deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of such Restricted Shares and shall have all rights and interest in or related thereto without further action by the Grantee. In the event of death or Disability, vesting will accelerate such
2
that the Grantee will become vested, on the date of such death or Disability, in the number of Restricted Shares that would have vested on the next vesting date as if the Grantees Continuous Service had not terminated. All remaining Restricted Shares shall be forfeited and deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of such Restricted Shares and shall have all rights and interest in or related thereto without further action by the Grantee. For purposes hereof, an individual is disabled (a Disability) if he or she is unable to engage in any substantial gainful activity for the Company and/or its Affiliates by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. An individual shall not be considered to be disabled unless he or she furnishes proof of the existence thereof, in such form and manner, and at such times, as the Administrator may require.
IN WITNESS WHEREOF, the Company and the Grantee have executed this Notice and agree that the Award is to be governed by the terms and conditions of this Notice, the Plan and the Agreement.
|
PC Mall, Inc., |
|
|
a Delaware corporation |
|
|
|
|
|
By: |
|
|
|
|
|
Title: |
|
THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEES CONTINUOUS SERVICE OR AS OTHERWISE AS SPECIFICALLY PROVIDED HEREIN (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS AWARD OR ACQUIRING SHARES HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE AGREEMENT, NOR THE PLAN, SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF THE GRANTEES CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEES RIGHT OR THE COMPANYS RIGHT TO TERMINATE THE GRANTEES CONTINUOUS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE GRANTEES STATUS IS AT WILL.
3
Grantee Acknowledges and Agrees :
The Grantee acknowledges receipt of a copy of the Plan and the Agreement and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Award subject to all of the terms and provisions hereof and thereof. The Grantee has reviewed this Notice, the Agreement and the Plan in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice and fully understands all provisions of this Notice, the Agreement and the Plan.
The Grantee further acknowledges that, from time to time, the Company may be in a blackout period and/or subject to applicable federal securities laws that could subject the Grantee to liability for engaging in any transaction involving the sale of the Companys Shares. The Grantee further acknowledges and agrees that, prior to the sale of any Shares acquired under this Award, it is the Grantees responsibility to determine whether or not such sale of Shares will subject the Grantee to liability under insider trading rules or other applicable federal securities laws.
The Grantee understands that the Award is subject to the Grantees consent to access this Notice, the Agreement, the Plan and the Plan prospectus (collectively, the Plan Documents) in electronic form on the Companys intranet or otherwise. By signing below (or by providing an electronic signature) and accepting the grant of the Award, the Grantee: (i) consents to access electronic copies (instead of receiving paper copies) of the Plan Documents via the Companys intranet; (ii) represents that the Grantee has access to the Companys intranet or otherwise; (iii) acknowledges receipt of electronic copies, or that the Grantee is already in possession of paper copies, of the Plan Documents; and (iv) acknowledges that the Grantee is familiar with and accepts the Award subject to the terms and provisions of the Plan Documents.
The Grantee hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Agreement shall be resolved by the Administrator in accordance with Section 11 of the Agreement. The Grantee further agrees to the venue and jurisdiction selection in accordance with Section 12 of the Agreement. The Grantee further agrees to notify the Company upon any change in his or her residence address indicated in this Notice.
|
|
|
|
Date: |
|
|
|
|
|
Grantees Signature |
|
|
|
|
|
|
|
Grantees Printed Name |
|
|
|
|
|
|
|
Address |
|
|
|
|
|
|
|
City, State & Zip |
|
4
|
Award Number: |
|
PC MALL, INC.
1994 STOCK INCENTIVE PLAN
DIRECTOR RESTRICTED STOCK BONUS AWARD AGREEMENT
2
3
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THAT CERTAIN RESTRICTED STOCK BONUS AWARD AGREEMENT BETWEEN THE COMPANY AND THE NAMED STOCKHOLDER. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH SUCH AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
4
5
6
EXHIBIT A
STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto , ( ) shares of the Stock of PC Mall, Inc., a Delaware corporation (the Company), standing in his name on the books of, the Company represented by Certificate No. herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company attorney to transfer or cause to be transferred the said stock in the books of the Company with full power of substitution.
DATED: |
|
|
|
|
|
||
|
Name: |
||
Please sign this document but do not date it. The date and information of the transferee will be completed if and when the shares are assigned.
Exhibit 10.4
SEVERANCE AGREEMENT
This Severance Agreement (Agreement) is made and entered into by and between Brandon La Verne (Employee) and AF Services, LLC, a Delaware limited liability company (the Company).
RECITALS
A. The Company is a services and support company for rapid response direct marketers of computer hardware, software, peripheral and electronics products.
B. The Company has spent significant time, effort, and money to acquire and develop certain goodwill and Proprietary Information (as defined below) that it considers vital to its business and goodwill, and which has become of great value to the Company.
C. The Companys Proprietary Information has been and will necessarily be communicated to and acquired by Employee in the course of his employment, and the Company desires to continue the services of Employee, only if, in doing so, it can protect its Proprietary Information and goodwill.
TERMS OF SEVERANCE
NOW, THEREFORE, in consideration of the benefits to be derived from the mutual observance of the agreements and covenants hereinafter contained, the parties agree as follows:
|
AF Services |
2555 W. 190th Street |
Torrance, CA 90504 |
|
If to the Employee : |
|
Brandon La Verne |
2555 W. 190th Street |
Torrance, CA 90504 |
Any party may change its address by notice giving notice to the other party of a new address in accordance with the foregoing provisions.
EMPLOYEE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT AND UNDERSTANDS ITS CONTENTS. EMPLOYEE FURTHER ACKNOWLEDGES THAT THE COMPANY HAS ADVISED HIM OF HIS RIGHT TO CONSULT WITH LEGAL COUNSEL OF HIS OWN CHOICE CONCERNING THIS AGREEMENT. BY SIGNING THIS AGREEMENT, EMPLOYEE AND THE COMPANY AGREE TO BE BOUND BY ALL OF THE TERMS AND CONDITIONS OF THIS AGREEMENT.
The parties have executed this Agreement effective as of January 1, 2006.
|
AF SERVICES, LLC |
|
|
|
/s/ Simon Abuyounes |
|
Name: Simon Abuyounes |
|
Title: Manager |
|
|
|
/s/Brandon La Verne |
|
Brandon La Verne |
6
Exhibit 10.8
LEASE AGREEMENT
THIS LEASE AGREEMENT, made as of this 1st day of July 2001, by and between Sarcom Properties, Inc having its principal place of business at 8405 Pulsar Drive, Columbus, Ohio 43240, hereinafter referred to as Landlord, and Sarcom Desktop Solutions, Inc., having its principal place of business at 8337 Green Meadows Drive N., Lewis Center, Ohio 43035, hereinafter referred to as Tenant.
1. DEMISED PREMISES
Landlord, in consideration of the rent to be paid and the covenants to be performed by Tenant, does hereby demise and lease unto Tenant, and Tenant hereby rents from Landlord, approximately 144,000 square feet of space in a certain facility, together with the real estate upon which it is located, and all improvements located therein, located at 8337 Green Meadows Drive in the City of Lewis Center, State of Ohio, as is more particularly described on Exhibit A attached hereto and made a part hereof (said building, improvements, and real estate shall be hereinafter referred to as the Premises.)
2. TERM
The term of this lease shall commence on July 1, 2001 and terminate on December 31, 2004 unless sooner terminated as provided herein.
3. RENT
(a) Tenant shall pay to Landlord during each year of the Term hereof annual fixed rental for the Premises in the amount of Eight Hundred Seventy Six Thousand and No/100 Dollars ($876,000.00) per year (Fixed Rental), payable in twelve (12) equal monthly installments of Seventy Three Thousand and No/100 ($73,000.00) each.
(b) In the event Tenant elects to receive any portion of the Tenant Allowance, as defined below, the Fixed Rental payable by Tenant for the Premises shall increase on a pro rata basis, based upon the portion of the Tenant Allowance taken, as illustrated below. For example, if Tenant takes $30,000.00 of the $100,000.00 available Tenant Allowance, the Fixed Rental shall increase by a percentage calculated as follows: the amount of Tenant Allowance taken ($30,000.00) times an interest rate of 2.74% over the total Tenant Allowance available ($100,000.00), or 82% in this case. The Fixed Rental payable by Tenant ($876,000.00 annually, above) shall increase by .82% and, in this example, shall become $883,183.20 per year, payable in, twelve (12) equal monthly installments of Seventy Three Thousand Five Hundred Ninety Eight and 60/100 Dollars ($73,598.60). In the event that Tenant elects to receive the entire Tenant Improvement Allowance, as defined below, the Fixed Rental payable by Tenant for the Premises shall be Nine Hundred Thousand and No/100 Dollars ($900,000.00) per year, payable in twelve (12) equal monthly installments of Seventy Five Thousand and No/100 Dollars ($75,000.00) each.
1
The monthly installment of the Annual Fixed Rental is due in advance on or before the fifth day of each and every calendar month during the term of this lease, to landlord at Sarcom Properties, Inc., 8405 Pulsar Drive, Columbus, Ohio 43240, or such other place as Landlord may from time to time designate in writing without prior demand thereof and without any set-off or deduction whatsoever. In the event that the commencement date of the term of this Lease shall occur on a day other than the first day of a calendar month, the first rental payment shall be prorated on the basis of a thirty (30) day month and shall be due and payable on the commencement date.
(c) Tenant shall pay any and all sums of money or charges required to be paid by Tenant as additional rent under this Lease promptly when the same are due, without any deduction or set-off whatsoever. Tenants failure to pay any such amounts or charges when due shall carry with it the same consequences as the failure to pay Fixed Rental. All such amounts or charges shall be payable to Landlord at the place where rent is payable.
(d) In the event that (i) Tenant shall fail to pay Fixed Rental payments on the date when due and such non-payment continues for five (5) or more calendar days after the same be due and payable, or (ii) Tenant shall fail to pay any other rental payment or charge due from Tenant to Landlord hereunder on the date when due and such non-payment continues for five (5) or more calendar days after the same be due and payable, and Tenant does not cure the default in (d)(i) or (ii) above within ten (10) calendar days after written demand by Landlord that the default be cured, Tenant shall pay a late payment charge equal to one and one-half percent (1.5%) per month of the amount of such payment from the due date thereof until paid by Tenant. In like manner, all othr obligations, benefits and moneys which may be due to Landlord from Tenant under the terms hereof, or which are paid by landlord because of Tenants default hereunder, shall bear interest at the lesser of (i) the highest rate then allowable by law or (ii) the rate of three percent (3%) per annum above the prime rate announced by Bank One, Columbus, NA of Columbus, Ohio as its prime rate as of the due date, (in either instance the Default Rate) from the due date until paid or, in the case of sums paid by Landlord, because of Tenants default hereunder, from the dale such payments are made by Landlord until the date Landlord is reimbursed by Tenant
4. USE OF PREMISES
(a) Tenant shall use the Premises for general warehousing, configuration, distribution and light manufacturing of computer products clammed under Section 310.0 of the Ohio Basic Building Code, effective September 1, 1992, being in either the S-1 Moderate Hazard Storage Uses or the S-2 Low Hazard Storage Uses (see Exhibit B), or any combination of the two, office uses, training and education uses and for no other purpose without the prior written consent of the Landlord, which shall not be unreasonably withheld Landlord and Tenant have been provided an inspection report, issued by Jezerinac Geers & Associates, Inc., dated December 15, 2000, attached hereto as Exhibit C (Inspection Report), which includes recommendations for the mediation of certain structural defects of the Premises. Landlord covenants to perform any and all actions required for the remediation of the structural defects disclosed by the Inspection Report, as needed, throughout the Term of this Lease. Subject to Landlords obligations described in the preceding sentence, Tenant agrees and accepts the Premises in an as is condition and acknowledges that neither Landlord nor any officer, partner, agent, or employee of the Landlord has made any other representation or warranty regarding the Premises, its condition or Tenants use and occupancy thereof, or undertaken any covenant, unless expressly set forth in this Lease.
2
(b) Landlord shall, at its sole expense, comply with all laws, ordinances, orders and regulations of federal, state, county, and municipal authorities and with any direction of any public officer or off, pursuant to law, and with any restrictions of record; which shall impose any liability, order or duty upon Landlord or Tenant with respect to Tenants use or occupancy of the Premises including compliance wit : the Americans with Disabilities Act of 1990.
5. INSURANCE
(a) Tenant agrees: that, at its own cost and expense, it shall procure and continue in force, the name of Landlord and Tenant, general liability Insurance, on an occurrence basis, against any and all claims for injuries to persons or damage to property occurring in, about, or upon the Premises, in including the interior and exterior common areas, if any, and including all damage from signs, fixtures or other appurtenances, now or hereafter erected upon the Premises, during the term of this Lease. Such insurance shall at all times be in an amount not less than One Million Dollars ($1,000,000.00) on account of bodily injury to or death of one (1) person and Two Million Dollars ($2,000,000.00) on account of bodily injuries or death of more than one person as a result of any accident or disaster, and Five Hundred Thousand Dollars ($500,000.00) for property damage in any one accident. Such insurance shall be written by a company or companies authorized to engage in the business of general liability insurance in the State of Ohio, and a certificate of all such policies procured by Tenant in compliance herewith shall be delivered to Landlord at least fifteen (15) days prior to the time such insurance is required to be carried by Tenant, and thereafter at least fifteen (15) days prior to the expiration of any such policy. Such policy shall bear an endorsement stating that the insurer agrees to notify Landlord not less than ten (10) days in advance of modification or cancellation thereof.
(b) Tenant agrees that, at its own cost and expense, it shall procure and continue in force, for the benefit of the Landlord, insurance insuring the building, the fixtures and other property located therein, on an all-risk basis, including, but not limited to, the perils of fire, with fall extended coverage, vandalism and malicious mischief, sprinkler leakage, collapse, and falling objects, in an amount not less than One Hundred Percent (100%) of full insurable replacement value thereof, without credit for depreciation, and in all events sufficient in amount to prevent the insured from being a co-insurer within the terms of the policy or policies in question. Tenant shall also maintain, to the extent applicable, insurance against loss or damage from the explosion of boilers, heating apparatus or other pressure vessels installed in the building, or any part thereof, and shall further maintain such other insurance in such amounts and against such insurable risks as may from time to time be reasonably required by Landlord. All policies shall provide that loss thereunder shall be payable to Landlord or, if Landlord should so request, to any mortgagee of Landlord, provided that Landlord shall hold the proceeds of any such policies and make the same available to Tenant under conditions of disbursement satisfactory to said mortgagee and on the basis of work completed. Such insurance shall be written by a company or companies authorized to engage in the busies of fire and extended coverage insurance in the State of Ohio, and a certificate of all such .policies procured by Tenant in compliance herewith shall be delivered to Landlord at least fifteen (15) days prior to the time
3
such insurance is required to be carried by Tenant, and therefor at least fifteen (15) days prior to the expiration of any such policy. Such policy shall bear an endorsement stating that the insurer agrees to notify Landlord not less than ten (10) days in advance of modification or cancellation thereof.
(c) If the Tenant at any time during the term hereof should fail to secure or maintain the above insurance required in Article 5(a) and 5(b), the Landlord shall be permitted to obtain such insurance in the Tenants name or as the agent of the Tenant. Any amount paid by the Landlord for such insurance shall become immediately due and payable as rent by Tenant to Landlord, together with interest thereon at the prime rate charged by Bank One, Columbus, NA of Columbus, Ohio as of the date of payment, from the date of payment by Landlord until paid by Tenant. Any such payment by Landlord shall not be deemed to be a waiver of any other rights which the Landlord may have under the provision of this lease or as provided by law.
(d) Each of the parties hereby waives all causes of action and rights of recovery against the other party, its agents, officers and employees, for any loss or damage occurring to the Premises or the improvements, fixtures, merchandise and personal property of every kind located in and about the Premises resulting from any perils fully and effectively covered by insurance, regardless of cause or origin, including negligence of either party, its agents, officers and employees, to the extent of any recovery under any policy or policies of insurance, provided that the same will not be invalidated in whole or in part by reason hereof.
6. MAINTENANCE OBLIGATIONS
(a) Landlord shall make repairs or replacements of those items disclosed by the inspection report attached hereto as Exhibit C to the extent such repairs or replacements are necessary. Landlord otherwise shall be under no obligation to rebuild, replace, maintain or make repairs of any nature, structural or otherwise, to the Premises during the term of this Lease or any extension or renewal thereof. Tenant shall, during the term of this Lease, and any extension thereof, maintain the Premises, and, at its own expanse, make all repairs and replacements, or ordinary or extraordinary, structural or otherwise, required to keep the Premises and all heating, air conditioning, plumbing and electrical system and all fixtures and equipment, in good order and repair. All repairs and replacements made by Tenant shall be equal in quality to the original work. Notwithstanding anything herein to the contrary, Landlord shall be responsible, at its sole cost and expense, for compliance with all laws, ordinances, orders, codes and regulations of federal, state, county, and municipal: authorities and with any direction of any public officer or officers, pursuant to law, and with any restrictions of record, which require structural, changes to the Premises. Landlord hereby represents that as of the date hereof ,the roof and all structural components related thereto are not in need of any repairs or replacement and are in good condition.
(b) Tenant shall, at its sole cost and expense, maintain all parking areas, driveways and access roadways situated the Premises in good condition and repair and reasonably clear of snow and debris, and shall at its expense adequately illuminate the parking areas and driveways situated on the Premises during business hours.
4
(c) Tenant shall, at its sole east and expense, maintain and keep open, free from obstruction and in good repair, all electric, water, sewer and other utility lines and connections, conduits, pipes, catch basins, manholes, poles, lighting fixtures and other related facilities situated in, under or on the Premises.
(d) In the event Tenant should neglect to maintain the Premises, Landlord shall have the right (but not the obligation) to cause repairs or corrections to be made. Any amounts paid by the Landlord for such repairs or corrections shall become immediately due and payable as rent by Tenant to Landlord, together with interest thereon at the Default Rate.
Any such payments by Landlord shall not be deemed to be a waiver of any other rights which the Landlord may have under the provisions of this Lease or as provided by law.
7. REAL ESTATE TAXES AND ASSESSMENTS
(a) Tenant shall pay as additional rent, during the term of this Lease or any renewal or extension thereof, as promptly as the same become due and payable, all personal property taxes and real estate taxes and assessments, both general and special, and any other public charges of any nature, ordinary or extraordinary, now or hereafter levied, assessed, charged or imposed upon the Premises during the term pf this Lease, or now or hereafter arising in respect of the occupancy, use or won of the Premises, or any part thereof, by Tenant. Landlord agrees to reimburse Tenant for any real estate taxes and assessments, both general and special levied, assessed, charged or imposed upon the Premises prior to the commencement of the term of this Lease. Tenant shall furnish to the Landlord upon demand receipts evidencing payment of all such taxes, assessments and public charges. Upon termination of this Lease, all such taxes, assessments and public charges for the then calendar year shall be prorated between the parties using in the case of taxes the rate and valuation in effect for the preceding year unless the rate and valuation for the current year are known.
(b) If Tenant fails to pay such tames, assessments, or charges, Landlord may, at his option, pay such taxes, assessments, or charges, together with all penalties and interest which may have been added thereto because of Tenants delinquency or default, and may likewise redeem the Premises, or any part thereof, or the building or improvements situated thereon, from any tax sale or sales. Any such amounts so paid by Landlord shall become immediately due and payable as rent by Tenant to Landlord, together with interest thereon at the prime rate charged by Bank One, Columbus, NA of Columbus, Ohio, as of the due date, from the date of payment by Landlord until paid by Tenant. Any such payment by Landlord shall not be deemed to be a waiver of any rights which the landlord may have under the provisions of this lease or as provided by law.
8. NET LEASE
It is the purpose and intent of Landlord, and Tenant that the rent payable by Tenant hereunder shall be absolutely net to Tenant so that his Lease shall yield, net, to Landlord, the rent specified in Article 3 hereof, and that all costs, expenses or obligations of every kind and nature whatsoever relating to the Premier, except interest and amortization required to be paid by Landlord on any mortgage, shall be paid by Tenant. Tenant hereby agrees to and shall indemnify and save Landlord harmless from and against any such costs, expenses and obligation.
5
9. ALTERATIONS AND INSTALLATIONS
(a) Tenant shall not make any alterations, installations, additions or improvements in or to the Premises without Landlords prior written consent in each and every instance, which consent will not be reasonably withheld. Any of the foregoing work consented to by Landlord shall be done by competent contractors, approved by Landlord, in a good and workmanlike manner and at Tenants sole expense, unless otherwise agreed to in writing by the parties. Tenant shall, for all approved alterations, at its sole cost and expense, obtain and provide Landlord with a copy of all construction or alteration permits and with certificates of occupancy upon completion and shall otherwise comply with all applicable laws and regulations. If the: construction work is expected to cost in excess of Ten Thousand Dollars ($10,000.00 ), Landlord shall have the right to require Tenant to submit evidence of the availability of funds for such work.
(b) All alterations, upon, additions, or improvements in or to the Premises, whether installed by Landlord or Tenant, shall become Landlords property and shall remain upon and be surrendered with said Premises without disturbance or injury upon the termination this Lease by Lapse of time or otherwise, all without payment or credit to Tenant, unless otherwise agreed to in writing by Landlord and Tenant.
(c) All articles of personal property and trade fixtures owned or installed by Tenant at its expense on the Premises shall remain the property of Tenant any may be removed by Tenant at any time, provided that Tenant is not in default hereunder and that Tenant shall promptly repair at its expense any and all damage to the Premises caused by such removal. Landlord shall not be responsible or liable to Tenant for any loss or damage that may be occasioned by or through the acts or omissions of Landlord or of persons occupying adjourning Premises, or for any loss or damage resulting to the Tenant or its property from damage or destruction to the Premises or from bursting, stoppage or leakage of water, gas, sewer or steam pipes or any damage or loss of property within the Premises from any causes whatsoever.
10. DAMAGE OR DESTRUCTION
In the event of loss or destruction at or wage or injury to the Premises, or any part thereof, by fire, the elements or any other cause whatsoever, Tenant shall have no right to terminate this Lease or to surrender the Premises, whether or not the Premises are thereby rendered untenantable or unfit for occupancy. Whether or not such loss, destruction or damage shall be covered by insurance and whether or not the insurance proceeds are adequate for the purpose, Tenant shall promptly repair, restore or rebuild the damaged portions of the Premises to a condition as nearly as reasonably possible to the condition they were in immediately prior to such damage or destruction, or with such changes and alterations as may be agreed to by Landlord and Tenant. Landlord shall have the right to approve all such construction n plans. Landlord agrees to disburse to Tenant, or its contractor, insurance proceeds received by Landlord, under conditions or disbursements satisfactory to Landlord and its mortgagee which are reasonable and customary in the community and on the basis of work completed. Such repairs, restoration, replacements or rebuilding shall be prosecuted and completed with reasonable diligence.
6
11. SUBORDINATION TO MORTGAGES
Provided Tenant receives a Subordination and Non-Disturbance Agreement in a form reasonably acceptable to Tenant, Tenant agrees that this Lease shall be subject and subordinate to any mortgages that may hereafter be placed upon the Premises and to any and all advances to any be made thereunder and to the interest thereon, and any and all renewals, replacements and extensions thereof, provided, that any such mortgage or a separate agreement furnished by such mortgagee to Tenant provides in substance, that if by foreclosure or otherwise such mortgagee or any successor in interest shall come into possession of the Premises or become the owner of the same or take over the rights of Landlord in the same, it will not disturb the possession, use or enjoyment, of the Premises by Tenant, its successors or assigns, nor disaffirm this Lease or Tenants rights or estate so long as, all of the obligations of Tenant are fully performed in accordance with the terms of this Lease: Tenant agrees that any mortgagee may elect to have this Lease a prior lien to its mortgage and in the event of such election and upon notification, by any mortgagee to Tenant to that effect, this Lease shall be deemed prior in lien to the said mortgage whether this Lease is dated prior to or subsequent to the date of said mortgage. At the request of Landlord, Tenant shall execute and deliver to Landlord whatever Instruments may be required for the foregoing purposes.
12. ASSIGNMENT AND SUBLETTING
(a) Tenant shall not, without Landlords prior consent, which may not be unreasonably withheld:
(1) assign, hypothecate, mortgage, encumber, or convey this Lease;
(ii) allow any transfer thereof or any lien upon Tenants interest by operation of law;
(iii) sublet the Premises or any part thereof; or
(iv) permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant (items (i) through (iv), collectively, a Transfer).
(b) If Tenant desires the consent of the Landlord to an Assignment or Subletting of all or a part of the Building Premises (that portion of the Premises being assigned or sublet shall hereinafter referred to as Subject Premises), Tenant shall submit to Landlord:
(i) the proposed sublease or assignment, which is not to commence prior to the first day of the month immediately following the month in which the thirtieth (30th) day following the submission to Landlord occurs; and
(ii) sufficient information to pent Landlord to determine the acceptability of the financial responsibility and charter of Sublessee or Assignee.
(iii) the proposed sublease or assist shall be only for the remaining term or renewal term existing at the time the sublease or assignment is proposed; the Sublessee or Assignee shall have no, right to exercise any renewal options.
7
(c) Landlord within thirty (30) days after receipt of such documents may:
(i) terminate this Lease for the Subject Premises on the date the Sublessee or Assignment was to have been commenced; or
(ii) so terminate this Lease for the, Subject Premises and lease the Subject Premises, directly to Sublessee or Assignee; and
(iii) if this Lease for the Subject Premises be so terminated, Tenant shall remain liable, for the above fixed if this Lease for the Subject Premises be so terminated, Tenant shall annual renal to the termination die even though such may be billed subsequently.
(1) If Landlord either terminates this Lease for the Subject Premises or terminates this Lease for the Subject Premises and leases the Subject Premises directly to Sublessee or Assignee, Tenants liability and this Lease shall remain in full force and effect for the remainder of the Premises and the term if the Sublease is for less than the entire Premises or remaining term:
(d) If Landlord does not either terminate this Lease for the Subject Premises or terminate this Lease for the Subject Premises and lease the Subject Premises directly to Sublessee or Assignee pursuant to paragraph (c) above, Landlord ill not reasonably withhold its consent except that such consent need not be granted if:
(i) in the reasonable judgment of Landlord the purposes for which the Sublessee or Assignee intends to use the Subject Premises are not in keeping with the use provisions contained within this Lease;
(ii) the Subject Premises is not regular in shape with appropriate means of ingress and egress and suitable for normal renting purposes;
(iii) Space exists in the Building which may be leased directly from Landlord without considering an Assignment or Sublease;
(iv) Tenant is in default under this Lease;
(v) in the reasonable judgment of the Landlord, the intended use of the Subject Premises will increase the cost of insurance for the Building; and
(vi) consent will, cause Landlord to violate any covenant extended to any other Tenant, Sublessee, or Assignee.
(e) If Landlord grants consent:
(i) the terms and conditions of this Lease, including among other things, Tenants liability for the Subject Premises shall in no way be deemed or modified, abrogated or amended;
8
(ii) the consent shall nut be deemed a consent to any further subletting or assignment by either Tenant, Sublessee or Assignee;
(iii) If Tenant shall fail to pay the rent as defined in Article 15, if all or any part of the leased Premises are then assigned or sublet, Landlord, in addition to any other remedies provided by this Lease or provided by law, may at its option, collect directly from the Assignee or Sublessee all rents becoming due to Tenant by reason of the Assignment Sublease, and Landlord shall have a security interest in all properties on the leased Premises to secure payment of such sums. Any collection directly by Landlord from the Assignee or Sublessee shall not be construed to constitute a novation or release of Tenant from the further performance of its obligations under this Lease.
(f) No Assignment under this paragraph shall be valid or effective until there is delivered to Landlord a duplicate original of the written instrument of assignment in recordable form containing the name and address of the Assignee and the assumption by the Assignee of this Lease and of all obligations under this Lease to be performed by Tenant after the effective date of the assignment. No sublease consented to by Landlord shall be valid or effective until a duplicate original thereof shall be delivered to Landlord.
(g) Notwithstanding anything in this Lease to the contrary, a sale of the stock or ownership interests of Tenant shall not be deemed to be a Transfer for purposes this Lease. Moreover Tenant shall have the right (a Permitted Transfer) to assign this Lease in connection with any of the following: (1) sale of less than fifty percent (50%) of: the stock or ownership interests of Tenant, (2) sale or transfer of fifty percent (50%) or more of the stock or ownership interests of Tenant, provided the transferee is in a comparable or superior financial condition than Tenant at the time of the transfer (3) merger or consolidation of Tenant, or (4) an assignment or sublet to an entity which is controlled by, controlling or under common control with Tenant, in each :case wither Landlords consent Landlord shall have no right to increase the Rent under this Lease, to recapture any or all of the Premises or terminate the Lease or to seek the payment of any costs of the Landlord in connection with such permitted transfer. Any sublet or assignment hereunder shall not release or discharge Tenant of or from any liability, whether past, present, or future, under this Lease, and Tenant all continue fully liable thereunder; provided, however, in the case of an assignment effected pursuant to the preceding provision, Tenant shall be released and discharged of its obligations and liabilities hereunder so long as any such assignee has net worth equal to or in excess of the net worth of Tenant and executes an instrument in writing fully assuming all of the obligations : and liabilities imposed upon Tenant under this Lease and delivers the same to Landlord where upon Tenant shall be released of all such future accruing liability. Tenant shall deliver to Landlord promptly after the effective date, of any such Transfer, an executed copy of each such sublease or assignment
13. ACCESS TO THE PREMISES
(a) Landlord or Landlords agents shall have the right to enter the Premises at all reasonable times with reasonable notice to examine the same and to make such repairs as Tenant is obligated to make hereunder, but has failed to make after written notice from Landlord. Landlord shall be allowed to take all materials and equipment into the Premises that may be required to carry out only of the foregoing Landlord agrees, however, to use its best efforts to prevent any unnecessary inconvenience to Tenant in exercising any of the foregoing rights.
9
(b) After prior notice to Tenant, Landlord may exhibit the Premises to prospective purchasers, lenders and tenants at reasonable times. During the last one hundred eighty (180) days of this Lease, or any renewal term, Landlord may enter the Premises for the purpose of altering, renovating, decorating, repairing or otherwise preparing the Premises for reletting.
(c) Landlord reserves unto itself, however, the use of the roof, exterior walls and the area above and beneath the Premises, together with the right to install, maintain , use, repair and replace pipes, ducts, conduits, wires, and structural elements leading through the Premises in location which shall not materially inter a with Tenants use thereof and serving other parts of the Building Premises at Landlords expense.
(d) Landlord may exercise all or any of the foregoing rights without being deemed guilty of an eviction or disturbance of Tenants use and possession, without being liable in any manner to Tenant, and without elimination or abatement of rent, or payment of other compensation.
(e) Notwithstanding anything herein to the contrary, Landlords rights under this paragraph are limited to Tenant related purposes or purposes which will directly benefit Tenant.
14. MECHANICS LIENS
If a mechanics lien is filed against the Premises for, or purporting to be for, labor or material alleged to have been furnished; or to be furnished to, or for Tenant or any Sublessee of Tenant at the Premises, Tenant shall cause such lien to be discharged within fifteen (15) days after written notice from Landlord, by bonding proceedings or otherwise. If Tenant shall fail to take such actions as shell cause such lien to be discharged within said fifteen (15) day period, Landlord may, at its optima pay the amount of such lien or may discharge the same by bonding proceedings and, in the event of such bonding proceedings, Landlord may require the linear to prosecute the appropriate action to enforce the lienors claim. Any such amount paid or expense incurred by Landlord, or any expense incurred or sum of money paid by Landlord by reason of the failure of Tenant to comply with the foregoing provision of this paragraph, or in defending any such action, shall become immediately due and payable as rent by Tenant to Landlord, together with interest thereon at the rate of the prime rate charged by Bank One, Columbus, NA of Columbus, Ohio as of the date of payment, from the date of payment by Landlord until paid by Tenant. Any such payment by Landlord shall not be deemed to be a waiver of any rights which the Landlord may have under the provision of this Lease or as provided by law.
15. REMEDIES OF LANDLORD
(a) If Tenant shall fail to pay to Landlord other amounts provided herein to be paid to Landlord within ten (10) days after rendition of a statement therefor, or defaults in the prompt and full performance of any of Tenants covenants and dents hereunder; and said default is not corrected within fifteen (15) days after notice from Landlord of said default (or if such default is of such a nature that it cannot be cured completely within such fifteen (15) day period, if Tenant shall not have promptly commenced to cure the default within said fifteen (15) day
10
period or shall have not diligently prosecuted the curative work to completion), or if the leasehold interest of Tenant be levied upon under execution, or be attached, or if any voluntary or involuntary petition or similar pleading under any Act of Congress relating to bankruptcy shall be filed by or against Tenant, or if any voluntary or involuntary proceedings in any court or tribunal shall be instituted by or against Tenant, or any guarantor of this Lease, to declare Tenant or any guarantor of this Lease insult or finable to pay the debts of Tenant or any guarantor of this Lease, or if Tenant or any guarantor of this Lease make an assignment for the benefit of creditors or if a receiver be appointed for any property of Tenant, or if Tenant abandons the Premises, then and in any such election and with or without demand whatsoever forthwith terminate this Lease and Tenants right to possession of said Premises, or Landlord may, without this Lease, terminate Tenants right to possession of the Premises.
(b) Upon the termination of this Lease, or upon the termination of Tenants rights to possession without termination of this Lease, Tenant: shall surrender possession and vacate the Premises immediately, and Landlord may enter into and repossess the Premises with our without process of law and remove all persons and property therefrom in the same manner and with the same right as if this Lease had not been made, and for the purpose of such entry and repossession Tenant waives any notice provided by Law or otherwise to be given in connection therewith.
(c) If Landlord elects to terminate Tenants right to possession only, without terminating this Lease as above provided, Landlord may remove from the Premises and all property found therein (subject to the waiver of notice provisions of subparagraph (b) above), and such repossession shall not release Tenant from Tenants obligation to pay the rent reserved herein. After such repossession of the Premises by Landlord without termination of this Lease, Landlord agrees to make reasonable efforts to rent the Premises, or any part thereof; as agent of Tenant or otherwise, to such person, firms or corporations as Landlord: shall in its sole discretion consider financially responsible and suitable as a Tenant or Tenants and for such time and upon such terms as Landlord in Landlords sole discretion, may determine, and for the purpose of such relenting, Landlord may make repairs, alterations and additions to the Property and redecorate the same to the extent reasonably deemed by Landlord as necessary, and Tenant shall, upon demand, pay the cost thereof together with Landlords expenses (including but not limited to attorneys fees and any brokers commissions) of reletting. However, in no event shall Tenant be responsible for any costs for such repairs; alterations and additions in and to the Premises and redecorate the Premises in the event Landlord terminates Tenants right to possession during the final six (6) months of the Term; provided such termination is not a result of Tenants failure to pay sums due under the Lease; after notice, as provided in the Lease. If the rents collected by Landlord upon any such reletting are not sufficient to pay monthly and annually the full amount of the rent and other sums provided herein to be paid by Tenant to Landlord, together with the costs of such repairs, alterations, additions, redecorating and expenses, or if Landlord has not received any rents from reletting, Tenant shall pay to Landlord the amount of each monthly and annual deficiency upon demand. If the rent so collected from any such reletting is more than sufficient to pay the full amount of the rent reserved herein together with the cost of such repairs, alterations, additions, redecorating and expenses, Landlord, at the end of the stated term of this Lease, shall be under no obligation to account to Tenant for any surplus.
11
(d) If Landlord elects to terminate this Lease as above provided, Landlord shall be entitled to recover as damages an amount equal to the then present value of the rent and other sums provided hereunto be paid by Tenant to Landlord for the entire remainder of the state Lease term.
(e) Any and all property which may be removed from the Premises by Landlord may be handled, removed, stored or otherwise disposed of by Landlord at the risk and expense of Tenant, and Landlord shall in no event be responsible for the preservation or safekeeping thereof, or be deemed liable to Tenant in conversion or otherwise.
(f) If Tenant shall default in performing any term, covenant or condition of this Lease, which default may be cured by the expenditure of money, Landlord, at Landlords option, may, but shall not be obligated .to on behalf Tenant, expend such sums as may be necessary to perform and fulfill such terns, covenant or condition, and any and any sums so owed by Landlord, with interest thereon at the Default Rate, shall be deemed to be additional rent, and shall be repaid by Tenant to Landlord on demand, but no such payment or expenditure by Landlord shall be deemed a waiver of Tenants default nor shall it affect any other remedy of Landlord by reason of such default.
(g) All rights and remedies of Landlord herein set forth are in addition to any and all rights and remedies allowed by law and equity.
16. INDEMNITY
(a) Tenant Agrees to indemnify and save harmless Landlord from and against any and all claims as a result of or arising out of, directly or indirectly, any of the following:
(i) the breach by Tenant or any of its agents, contractors, employees, customers, visitors or. licensees of any covenant or agreement of Lease on the part of Tenant to be performed or observed.
(ii) Tenants use or occupancy of the Premises or any part thereof or any sidewalk, drive or space adjacent thereto.
(iii) the carelessness, negligence or improper conduct of Tenant or any of its agents, contractors, employees, customers, visitors or licenscees.
(b) Tenant further agrees to indemnify and save harmless Landlord from and against all costs, damages, expenses, losses, fines, liabilities and counsel fees paid, suffered or incurred as a result of any of the above-described claims or any actions or proceedings brought thereon; and in case any action or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord, Tennant agrees to resist or defend at Tenants expense such action or proceeding by counsel satisfactory to Landlord.
(c) Tenants liability under this Article 16 and this Lease extends to the acts and omissions of any subtenant or assignee of Tenant and any agent, contractor, employee customer, visitor or licensee of any such subtenant or assignee.
12
(d) Landlord shall indemnify, protect, defend and hold harmless, Tenant and its officers, agents, partners, members and employees from and against any and all claims arising from Landlord or Landlords agents or employees, negligent willful acts or Landlords failure to affirmatively perform its obligations hereunder, in which event Landlord shall indemnify, defend and hold harmless Tenant and its officers, agents, partners and employees from any obligations, liabilities, costs, damages, claims and expenses of whatever nature arising as a result thereof.
17. ESTOPPEL CERTIFICATES
At any time and from time to time, Tenant agrees, upon request in writing from Landlord, to execute; acknowledge and deliver to Landlord a statement in writing certifying, if true, that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same in full force and effect as modified and stating the modifications) and the dates to which the rent and other charges have been paid.
18. UTILITIES
Tenant, agrees during the term hereof to pay all charges for electricity, water, sewer, gas, heat, telephone and other utility services used, consumed or wasted upon the Premises. Landlord shall not be liable for the quality; quantity or any interference with such utilities.
19. EMINENT DOMAIN
(a) If the whole of the Premises shall be taken in appropriation proceedings or by any right of eminent domain (including a conveyance in lieu thereof) then this Lease shall terminate from the time possession thereof is required from public use and from that date on the parties shall be released from further obligations thereafter accruing hereunder.
(b) If less than twenty-five Percent (25%) of the floor space of the building occupied by Tenant on. the Premises shall be so taken, the Lease term shall cease only with respect to the part so taken as of the day possession thereof is required for public use, and Tenant shall pay rent up to that day with appropriate refund by Landlord of such rent as may have been paid in advance for the portion so taken for a period subsequent to the date of the taking.
(c) If twenty-five Percent (25%) or more of the space of the building occupied by Tenant shall be so taken, then the term of this Lease shall cease only as to the part so taken from the date possession thereof is required for public use and Tenant shall pay rent up to that day with an appropriate refund by Landlord of such rent as may have been paid in advance for a period subsequent to the date of the taking; provided, however, that either party shall have the right to terminate this Lease in such event as to the entire Premises upon notice in writing thereof made upon the other party within thirty (30) days after such taking of possession.
(d) If, following a taking of a portion of the Premises by eminent domain, this Lease is not terminated under the provisions of this Article, there shall be an equitable adjustment of the rent based upon the portion of the Premises taken, and Landlord shall make all necessary alterations to the Premises so as to make the Premises a complete architectural unit.
13
(e) Tenant agrees that Landlord shall be entitled to collect from any condemning authority the entire award that may be made in any condemnation or appropriation proceeding without deduction therefrom for any estate or rights vested in or owned by Tenant, and Tenant shall not have any claim against Landlord by reason of any condemnation or taking of the whole or part of the Premises, nor any claim to the amount or any portion thereof which may be awarded as damages or paid as the result of any condemnation or taking; provided, however, that Landlord shall not be entitled to any separate award made to Tenant for loss of business, depreciation to and cost of removal of stock and fixtures.
20. NO WAIVER
(a) No receipt of money by Landlord from Tenant with knowledge of the breach of any covenants of this Lease, or after the termination hereof, or after the service of any notice, or after the commencement of any suit or after final judgment for possession of the Premises shall be deemed a waiver of such breach, nor shall it reinstate, continue or extend the term of this Lease or affect any such notice, demand or suit.
(b) No payment by Tenant or, receipt by Landlord of a lesser amount than the monthly rent. herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlords right to recover the balance of such rent o r pursue any other remedy in this Lease provided.
(c) No delay or failure on the part of Landlord in exercising or enforcing any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any other right, power or privilege.
(d) No act done or thing said by Landlord or Landlords agent or employees shall constitute a cancellation, termination. or modification of this Lease, or a waiver of any covenant, agreement or condition hereof, nor relieve Tenant from Tenants obligation to pay the rents reserved or other charges to be paid hereunder. Any waiver or release by Landlord and any cancellation, termination or modification of this Lease must be in writing signed by Landlord.
21. NOTICES
Whenever it shall be necessary or desirable for Landlord to serve any notice or demand upon the other, such notice or demand shall be sent by U.S. Postal Service certified mail with return receipt, recognized courier service such as Federal Express or personal delivery. Notice may be given on behalf of either party by their attorney. Notices shall be addressed to the Landlord at the address where the last previous rental payment was paid. Notices shall be addressed to Tenant at 8337 Green Meadows Drive, Lewis Center, Ohio 43035. Notice sent. as aforesaid shall be deemed to have been served at the time the same is delivered or refused. Either party shall have the right to change the address for notices by giving written notice of such change to the other party.
14
22. RECORDING
This Lease shall not be recorded. However, if either of the parties hereto desires to record a statutory memorandum to this Lease, Landlord and Tenant agree to execute and deliver to the other a recordable memorandum of this Lease containing only the minimum statutory requirements, which memorandum of this Lease may then be recorded in the office of the County Recorder of Franklin County, Ohio.
23. END OF TERM
Upon the expiration or other termination of the term of this Lease, including any renewal term, Tenant shall quit and surrender to Landlord the Premises together with all alterations, installations; additions and. improvements, whether installed by Landlord or Tenant, broom. clean, and in as good condition and repair as. the same were in at the commencement of the term or were thereafter put by Landlord or Tenant, subject only to ordinary wear and tear, and damage or destruction by fire or other casualty covered by standard fire and extended coverage insurance, failing which Landlord may restore said Premises to such condition and Tenant shall pay the cost thereof, and Tenant shall remove all of its property from the Premises. If Tenant fails to remove Tenants carpeting and personal property and trade fixtures which it has a right to remove from the Premises within fifteen (15) days after written notice from Landlord, Tenant shall be conclusively presumed to have abandoned the same, and ownership thereof shall forthwith vest in Landlord without payment or credit to Tenant.
24 HOLDING OVER
Should Tenant remain in possession of the Premises after the date of the expiration of the term of this Lease without the consent of Landlord then, unless a new agreement in writing shall have been entered into between the parties hereto, Landlord shall have the option to treat Tenant as a trespasser or to hold Tenant as a Tenant from month-to-month at a monthly rental equal to 125% of the amount of the last monthly rent payable hereunder and otherwise subject to all of the terms and conditions of this Lease.
25. SECURITY DEPOSIT
Not Applicable.
26. LIMITATION OF LANDLORDS LIABILITY
If Landlord shall fail to perform any covenant, term or condition of this Lease upon Landlords part to be performed and, as a consequence of such default, Tenant shall recover a. money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale of received upon execution of such judgment and levy thereon against the right, title and interest of Landlord in the Premises, and Landlord and any individual signing this Lease on behalf of Landlord shall not be liable for any deficiency. It is understood that in no event shall Tenant have any right to levy execution against property of Landlord other than its interest in the Premises as hereinbefore expressly provided.
15
27. MISCELLANEOUS
(a) Applicable Law. The Laws of the State of Ohio shall govern the validity, performance and enforcement of this Lease. The invalidity or unenforceability of any provision of this Lease shall not affect or impair any other provision.
(b) Headings. The headings of articles and paragraphs are inserted only as a matter of convenience and for referent and in no way define, limit or describe the scope or intent of this Lease, nor in any way affect this Lease;
(c) Assigns. The terms, covenants and conditions contained in the Lease shall bind and inure to the benefit of Landlord and Tenant their respective heirs, legal representatives, successors and assigns, subject, however, to the provision hereof requiring the consent of Landlord to any assignment or subletting of this Lease.
(d) Entire Agreement. This Lease contains the entire agreement between the parties hereto, and shall not be modified in any manner except by an instrument in writing executed by both of said parties or their respective successors in interest.
28. QUIET ENJOYMENT
Landlord covenants and agrees with Tenant that upon Tenant paying the rent and other charges hereunder and observing and performing all the covenants, agreements and conditions on Tenants part to be observed and performed, Tenant may peaceably and quietly enjoy the Premises hereby demised without hindrance of Landlord or any person lawfully claiming under Landlord, subject, nevertheless, to the terms and conditions of this Lease, any mortgage of Landlord, and any restrictions, conditions, reservations and agreements of record.
29. ENVIRONMENTAL PROTECTION AND UTILITY REGULATION
(a) Tenant shall not cause or permit any Hazardous Substance to be used, stored, generated or disposed of on or in the Building Premises and/or Premises by Tenant, Tenants agents, employees, contractors or invitees without first obtaining Landlords written consent. If Hazardous Substances are used, stored, generated, or disposed of on or in Premises (regardless of whether Tenant obtained Landlords consent as required above), or if the Building Premises and/or Premises become contaminated in any manner for which Tenant is legally liable, Tenant shall unify and hold harmless Landlord from any and all claims, damages, fines, judgments, penalties, costs, liabilities or losses (including without limitation, a decrease in value of the Building Premises and/or Premises, damages caused by loss or restriction or rentable or useable space, or any damages caused by adverse impact on marketing of the space, and any and all sums paid for settlement of claims, attorneys fees, consultant and expert fees) arising during or after the term of the Lease, or at any time prior to the term of this Lease during which Tenant occupied the Premises, and arising as a result of such contamination. This indemnification includes, without limitation, any and all costs incurred because of any investigation of the site or any cleanup, removal or restoration mandated by a federal, state or local agency or political subdivision. Without limitation of the foregoing, if Tenant causes or permits the presence of any Hazardous Substance on the Building Premises and/or Premises (regardless of whether Tenant obtained Landlords consent as required above) and that results in contamination, Tenant shall promptly, at sole expense, take any and all necessary actions to return the Building Premises
16
and/or Premises to the condition existing prior to the presence of such Hazardous Substance. Tenant shall first obtain Landlords approval for any such remedial action. As used herein, Hazardous Substance includes any and all material or substances that are defined as hazardous waste, extremely hazardous waste, or a hazardous substance pursuant to state, federal or local governmental law, and for the purposes of this Lease, includes, but is not restricted to asbestos, polychlorinated biphenyl (PCBs), petroleum products and petroleum wastes.
(b) The parties hereto acknowledge that energy shortages in the region in which the Building Premises is located may, from time to time, necessitate reduced or curtailed operation of the Building Premises and the business conducted by the Tenant in the Premises. Tenant agrees to and shall comply with such rules and regulations as may be promulgated from time to time by Landlord with respect to energy consumption, and during such periods of time when, in the opinion of Landlord, energy shortages so dictate, Tenant: shall reduce or curtail business operations in the Premises as shall be directed by Landlord. Compliance with such rules and regulations and such reduction or curtailment of business operations shall not constitute a breach. of Landlords covenant of quiet enjoyment nor shall the same constitute an actual or constructive eviction of Tenant, or otherwise invalidate or affect this Lease Agreement, and Tenant shall not be entitled to any diminution, reduction or abatement of rent during periods of reduction or curtailment of its operations. Failure to keep and observe said rules and regulations and/or to reduce or curtail business operations as herein provided shall constitute an event of default hereunder.
(c) Landlord will indemnify, defend and save Tenant harmless from any and all actions, proceedings, claims, costs, including attorneys fees, expenses and losses of any kind arising (i) in connection with any failure by Landlord, any prior Tenant, any existing sub-Lessees as of the date hereof, or any other occupant to comply with any law, statute, ordinance or regulation governing the use, handling, storage, transportation, generation, release or disposal of Hazardous Substances, relating to or affecting the condition, use or occupancy of the Premises , (ii) in the event that the foregoing representation is incorrect, (iii) in connection with claims from the actions of any third party not under Tenants control (items (i) through (iii), collectively, a Hazardous Substance Event).
(d) In the event that there is any Hazardous Substance Event on the Premises which requires remediation and Landlord fails to commence performance of such remediation within thirty (30) days of Landlords receipt of notice thereof and to diligently and in good faith pursue the remediation to completion, Tenant may perform such remediation, and any and all reasonable costs and expenses incurred by Tenant in the performance of any of Landlords obligations under this Article shall be due and payable by Landlord to Tenant, within thirty (30) days following presentation to Landlord of an invoice therefore. In the event such invoice is not paid by Landlord within said thirty (30) day period, Tenant may reduce any and all payments of Rent, by offsetting such costs against Rent reserved hereunder until such amounts paid by Tenant, plus interest at the Default fate from the expiration of the thirty (30) day period are fully repaid and reimbursed to Tenant. The parties hereby agree that if Tenant shall exercise any of its set-off rights under this Article, in no event shall the same be deemed a Default under any term of this Lease or otherwise.
17
30. IMPROVEMENT
(a) Landlord shall furnish Tenant an allowance (the Tenant Allowance), of up to One Hundred Thousand and No/100 Dollars ($100,000.00) upon Tenants written demand at anytime during the Term. It is understood that Tenant may use the Tenant Allowance for all of Tenants costs incurred in connection with this Lease, the costs of designing and constructing Tenant improvements, including all so-called hard and soft costs which is not limited to but will include architectural and engineering fees, any costs incurred for furniture, furniture systems, telecommunication systems, management information systems and the like, all moving and. relocation costs and any other costs associated with the establishment of Tenant in the Premise, cost associated with Licensing, Tenants legal expenses in connection with this Lease and any licenses, permits, or regulatory approvals arising in connection with the establishment and accreditation of Tenant at the Premises. The Tenant Allowance shall be used for improvements which, in Tenants reasonable judgment, be beneficial to future Tenants at the Property. In the event Tenant does not use all or any portion of the Tenant Allowance for the payment of the foregoing costs, Tenant may elect to apply such unused portion, or all, of the Tenant Allowance against Rent as such becomes due.
(b) Landlord shall pay the Tenant Allowance to Tenant in monthly installments and in the amount requested by Tenant in writing (Request for Allowance) within twenty (20) days of Tenants Request for Allowance if all of the applicable following conditions are met:
(i) Costs incurred by Tenant for architects, engineers or other professional services, Tenant shall only be required to submit to Landlord for payment a statement for such services from such person and the requirement set forth in clause 2 through 7 shall not be applicable;
(ii) For construction payments, Tenant has obtained building permits for all of the work with executed sign offs and furnished copies thereon to Landlord;
(iii) Tenant has substantially performed the work described in the Request for Allowance;
(iv) Tenant has furnished Landlord (i) an affidavit from Tenant listing all contactors and suppliers whom Tenant has contracted with in connection with the work, together with the cost of each contract, and the dollar amount of work each contractor and supplier has performed in connection with the Request for Allowance, and (ii) an affidavit from Tenants general contractor listing all subcontractors and suppliers whom the general contractor has contracted with in connection with the work, together with the cost of each contract and the dollar amount of work each subcontractor and supplier has performed) in connection with the Request for Allowance;
(v) Tenant has performed all work theretofore completed, which amount shall consist of at least the amount of the installment being requested;
(vi) Tenant has furnished Landlord mechanics lien releases from the general contractor in connection with the list for Request for Allowance; and
18
(vii) Tenant is not in Default under this Lease.
(c) Landlord shall pay Tenant the final installment of the Allowance within twenty (20) days after Tenants final Request for Allowance provided the following conditions are met:
(i) Costs incurred by Tenant for architects; engineers or other professional services, Tenant shall only be required to submit to Landlord for payment a statement for such services from such person and the requirement set forth in clause 2 through 7 shall not be applicable.
(ii) Tenant has performed all of the work (including punch list items) in accordance with all applicable provisions of this Lease;
(iii) Tenant has furnished Landlord (i) an affidavit from Tenant listing all contractors and suppliers whom Tenant has contracted with in connection with the work, together with the cost of each contract, and (ii) an affidavit from Tenants general contractor listing all subcontractors and suppliers whom the general contractor has contracted with in connection with the work, together with the cost of each contract;
(iv) Tenant has fully paid for all of the work and has furnished to Landlord a certificate from an officer of Tenant stating that all the work has been paid for and setting forth the total cost of the work ;
(v) Tenant has furnished Landlord valid, full and final mechanics lien releases from the general contractor and all other contractors and suppliers who have performed work or have furnished supplies in excess of $10,000.00 for or in connection with Tenants work at the Premises (including all parties listed in the affidavits referenced in [2] above) and such other evidence as Landlord may reasonably request to evidence that no liens can arise from the work. In the event Tenant does not deliver final lien waivers from its general contractor and each supplier and contractor, in lieu of such lien waivers Landlord agrees that Tenant may provide to Landlord an endorsement to the title insurance policy issued by Landlords Title insurance company insuring Landlord against any possible mechanics liens which might arise as a result of Tenants Work. The form and content of the fide endorsement shall be satisfactory to Landlord;
(vi) Tenant has obtained a certificate of occupancy with respect to the Premises;
(vii) Tenant is not in Default under this Lease.
(d) In the event Tenant has satisfied each and, every requirement for the disbursement of any installment of the Tenant Allowance and Landlord fails to pay the Tenant Allowance within twenty (20) days after such conditions are met, then, unless Landlord pays the Tenant Allowance to Tenant within an additional ten (10) days after receipt by Landlord of notice from Tenant advising Landlord that the Tenant Allowance has not been paid, Tenant shall have the right to set off the unpaid amount of the Tenant Allowance, together with interest at the Default Rate accruing from the expiration of the initial thirty (30) day period within which
19
Landlord is required to pay the Tenant Allowance through the date either Landlord pays the Tenant Allowance or Tenant sets off the unpaid amount of the Tenant Allowance from the Rent that is otherwise payable pursuant to the tern of this Lease. Tenant shall advise Landlord in writing the amount of the Tenant Allowance which is being set off against each installment of Rent as such portion of the Tenant Allowance is so set off. The notice required pursuant to the terms of this paragraph shall be given to Landlord at the address for notices provided in this Lease.
31. COUNTERPARTS
This Lease Agreement may be executed in multiple counterparts which, when taken together, shall constitute one (1) instrument.
[Signature Page to Follow]
20
IN WITNESS WHEREOF, Landlord and Tenant have caused duplicate counterparts of this Lease Agreement to be executed as of the day, month and year first written above.
Signed and Acknowledged in |
|
LANDLORD: |
|||
The presence of: |
|
|
|
||
|
|
SARCOM PROPERTIES, INC. |
|||
|
|
|
|||
/s/ J Clarke |
|
|
|
||
|
By: |
/s/ Randy Wilcox |
|||
|
|
|
|||
/s/ Teresa Cooke |
|
By: |
|
||
|
|
|
|||
|
|
TENANT: |
|
||
|
|
|
|
||
|
|
SARCOM DESKTOP SOLUTIONS, INC. |
|||
|
|
|
|
||
|
|
|
|
||
|
|
/s/ Richard C. Mills |
|||
|
|
|
|
||
|
|
Richard C. Mills |
|||
21
FIRST AMENDMENT TO
LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT (this First Amendment) is entered into as of the 1 st day of December 2002, by and between SARCOM PROPERTIES, INC. (Lessor), and SARCOM DESKTOP SOLUTIONS, INC. (Lessee).
RECITALS:
WHEREAS, Lessor and Lessee entered into that certain Lease Agreement dated December 15, 2001 attached hereto as Exhibit A (hereinafter referred to as the Lease), pursuant to which Lessee leased approximately 144,000 rentable square feet of space in a certain facility, together with the real estate upon which it is located, and all improvements located therein, located at 8337 Green Meadows Drive, in the City of Lewis Center, State of Ohio (the Leased Premises);
WHEREAS, Lessor and Lessee have been affiliates and as of the date hereof continue to be affiliates; and
WHEREAS, Lessor and Lessee each desire to amend the Lease pursuant to the provisions of this First Amendment.
NOW THEREFORE, for and in consideration of the recitals herein above set forth and for other good and valuable consideration the receipt of which are hereby acknowledged, Lessor and Lessee hereby agree as follows:
1. Incorporation of Recitals and Terms: The foregoing recitals are hereby incorporated in and made a part of this First Amendment. Unless otherwise defined in the First Amendment to the contrary, all capitalized terms used herein shall have the respective meanings as are ascribed to them in the Lease.
2. Amendment . Section 2 of the Lease is hereby amended in its entirety to state that The term of this Lease shall commence on July 1, 2001 and shall terminate on December 31, 2009, unless sooner terminated as provided herein. Notwithstanding the foregoing, Tenant shall have the option to terminate this Lease at any time after December 31, 2004 upon the consummation of a Change in Control (as defined below) of Tenant, in exchange for a termination payment equal to:
Date of Termination of Lease: |
|
Termination Payment |
|
|
|
January 1, 2005-December 31, 2005 |
|
$500,000 |
January 1, 2006-December 31, 2006 |
|
$400,000 |
January 1, 2007-December 31, 2007 |
|
$300,00 |
January 1, 2008 December 31, 2008 |
|
$200,000 |
January 1, 2009-December 31, 2009 |
|
$100,000 |
1
For purposes of this Lease, a Change in Control shall occur if:
(i) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the Exchange Act), is or becomes the beneficial owner (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of Tenant representing 50% or more of the combined voting power of Tenants then outstanding securities entitled to vote in the election of directors of Tenant, except that the conversion of debt to equity of the Tenant by the existing bank group shall not constitute a Change of Control; or
(ii) all or substantially all of the assets of Tenant are liquidated or distributed.
3. Continuing Effect . Except as specifically amended hereby, the Lease shall remain in full force and effect and unmodified.
4. Counterparts . This First Amendment may be executed in multiple counterparts which, when taken together, shall constitute one (1) instrument.
[SIGNATURE PAGE TO FOLLOW]
2
IN WITNESS WHEREOF, Lessor and Lessee have caused this First Amendment to Lease Agreement to be executed as of the date first above written.
Lessor: |
Lessee: |
|||||||||||||
|
|
|||||||||||||
SARCOM PROPERTIES, INC. |
SARCOM DESKTOP SOLUTIONS, INC. |
|||||||||||||
|
|
|||||||||||||
|
By: |
/s/ Charles E. Sweet |
|
|
By: |
/s/ Charles E. Sweet |
|
|||||||
|
|
|||||||||||||
Name: |
Charles E. Sweet |
|
Name: |
Charles E. Sweet |
|
|||||||||
|
|
|||||||||||||
|
Title: |
President |
|
|
Its: |
President |
|
|||||||
3
SECOND AMENDMENT TO
LEASE AGREEMENT
This Second Amendment to Lease Agreement (Second Amendment) is entered into as of the 22nd day of March, 2004 by and between SARCOM PROPERTIES, INC. (Lessor) and SARCOM DESKTOP SOLUTIONS, INC. (Lessee) .
Background Information
Lessor and Lessee entered into a certain Lease Agreement dated July 1, 2001 and a First Amendment to Lease Agreement dated December 1, 2002 (hereinafter referred to as Lease) pursuant to which Lessee leased approximately 144,000 rentable square feet of space at a certain facility together with the real estate upon which it is located and all improvements located therein at 8337 Greenmeadows Drive, in the City of Lewis Center, State of Ohio ( Premises).
Lessor and Lessee are desirous of modifying the terms and. conditions of said Lease in the following manner:
Therefore, for and in consideration of the recitals herein set forth and for other good. and valuable consideration, the receipt of which is hereby acknowledged, Lessor and Lessee hereby agree to the following:
Statement of Agreement
Section 1 - Demised Premises. Lessor and.Lessee . hereby agree to reduce thePremises as follows:
(a) Lessee to vacate an approximately 6,000 square foot area on the northwest corner of the first floor of the Premises, said area being that which formerly housed the tech service area. Said square footage to be vacated and returned to Lessor on or before February 29, 2004.
(b) Lessee to vacate an area of approximately 5,159 square feet on the second floor. Same to be inclusive of the large conference room and two (2) small conference rooms. Said space shall be vacated and returned to Lessor on or before February 29, 2004;
(c) Lessee to vacate approximately 17,355 square feet on the southwest corner of the first floor on or before March 31, 2004. Same to be inclusive of the space that contains tthe executive briefing room and the security room .
Lessee covenants to return the space in reasonably clean condition and in good condition and repair, normal wear and tear excepted. Lessor and Lessee will review the space to be vacated and agree upon any maintenance or renovation required to be performed by Lessee as a result of Lessees failure to maintain the vacated space in the manner required by the Lease.
1
As additional consideration for Lessor releasing said square footage from the Lease, Lessee agrees that it will exercise a buy-out option associated with a certain Lease Agreement for the furniture located in the aforesaid vacated space (Vacated Furniture). The Vacated Furniture is set forth on a fixed asset list be attached hereto to this Second Amendment as Exhibit A and should include all furniture currently located in the space to be vacated. Lessee agrees to transfer title to the Vacated Furniture free and clear of any liens and encumbrances and to execute a Bill of Sale setting forth same to Lessor. In consideration of said sale Lessor will grant to the Lessee a rent credit in the amount of Twenty Thousand Dollars ($20,000.00) (the Rent Credit).
Lessee shall retain a 572 square foot area of lab space on the first floor and Lessor agrees to install a.door from the lab space into the space currently occupied by Lessees security group, which door will serve to demise the space retained by Lessee on the first floor from the space to be vacated by Lessee. Same to be completed as soon as practical.
Section 3 - Rent. The parties hereby agree that effective as of December 1, 2004 the monthly Fixed Rental (as defined in the Lease) shall be reduced to Forty Five Thousand Dollars ($45,000.00) per month. Lessor and Lessee acknowledge that Lessee is presently in default in the payment of Fixed Rental under the Lease and is currently obligated to pay Twenty-Five Thousand Dollars ($25,000.00) of rent for December 2003 (because $20,000 has already been paid) (December 2003 Rent), $45,000 of rent for January 2004 (January 2004 Rent), $45,000 for February 2004 (February 2004 Rent), and $45,000 for March 2004 (March 2004 Rent). Lessee agrees that such past due amounts will be paid as follows:
Payment |
|
Date Payable |
|
Amount |
March 2003 Rent |
|
March 22, 2004 |
|
$45,000 |
December 2003 Rent |
|
March 22, 2004 |
|
$5,000(i.e. $25,000
|
January 2004 Rent |
|
April 15, 2004 |
|
$45,000 |
February 2004. Rent . |
|
May 14, 2004 |
|
$45,000 |
Lessor further covenants that commencing on April 1, 2004 to pay the new monthly Fixed Rental amount within five (5) business days of the beginning of each month during the lease term in accordance with the terms and conditions of the Leese.
Section 6 - Maintcnance Obligations. Lessor and Lessee further agree to take all reasonable steps to minimize utility costs inthe square footage being vacated by Lessee, by example: lights will be turned off, doors closed and thermostats turned down or off. However, notwithstanding same, Lessee shall continue to pay all utility costs and all costs for the maintenance and upkeep of the entire building as if it is occupying the original Leased Premises and shall continue paying same until the earlier of December 31, 2004 or the date in which any other tenant occupies the vacated space following which its numerator shall be reduced to the actual square footage leased by Lessee divided by the total square footage of the space leased by lessee and the total square footage of the space occupied by a new tenant. Each time a new tenant occupies space the percentage will be recalculated. The aforesaid shall not modify Lessees obligation to turn over the Premises in the condition as set forth hereinabove. Lessor
2
acknowledges that Lessee will not have any obligation to clean or maintain the space vacated from and after the dates such space is vacated. From and after the date Lessor enters into a lease with a new tenant , Lessor shall be responsible for all repairs, maintenance and replacements to (i) the common areas of the building, (ii) the parking areas, driveways and access roadways serving the building and the Premises, (iii) all utility lines and conduits, pipes, catch basins, manholes, sewer, lighting fixtures and other facilities serving the building and the Premises; and (iv) the roof and structural members of the building including walls and support columns. Lessee shall pay its pro rata share of all such expenses .
Section 7 - Real Estate Taxes and Assessments . Lessor and Lessee hereby agree and acknowledge that Lessee on a Net Lease basis is responsible for all real estate taxes for the 144,000 rentable square feet of the Premises for the calendar year 2003 which are due and payable in June 2004. Commencing with first half 2004 real estate taxes which will be billed and due at the beginning of 2005, Lessee shall pay a prorated portion of the real estate taxes and insurance based on the total square footage of space leased by Lessee versus the total square footage of leasable space at 8337 Greenmeadows Drive.
Section 8 - Leasing of Vacated Space
.
Lessee
agrees to take all reasonable steps
to
provide assistance
to Lessor in releasing
of the
vacated space
to a new tenant. Same to
include but not limited to allowing Lori Emery or
other employees designated by Lessee to be a primary contact for the showing of
the vacated space to perspective tenants and coordinate the activity of brakes
selected and retained by Lessor.
(a) To work with Lessor in modifying or determining solutions for data and voice cabling, security, parking and signage for new tenants provided such support does not include Lessee incurring any additional out-of-pocket costs.
(b) Lessor and Lessee hereby agree to negotiate in good faith to determine any market rate payments from Lessor to Lessee for services to be provided by Lessee to Lessor in connection with the vacated premises including but not limited to cleaning, telephone. ISP, etc. and to determine a market .rate rental to be paid, by Lessee to Lessor for Lessees use of the conference room on the first floor of the Demised Premises during such period of time in which said conference room is not leased to any other tenant. [Should the executive briefing room also be included here?]
(c) All other terms and conditions of said Lease shall remain in full force and effect and in the event of a contradiction or inconsistency between the Lease and this Second Amendment, the teams and conditions of this Second Amendment shall prevail.
(d) Lessor and Lessee acknowledge that one of the purposes of this Second Amendment is to resolve any and all defaults that may currently exist under the Lease and that this Second Amendment is being entered into in good faith in order to to accomplish a fair settlement of any defaults under the Lease and to resolve all disputes between Lessor and Lessee with respect to the Lease.
3
Section 9 - Multi-Tenant Building . The parties acknowledge that, except as expressly provided in this Second Amendment, Lessee shall, from and after the date of this Second Amendment, be responsible only for its pro rata share of common area maintenance and utility expenses, taxes and insurance incurred in connection with the ownership and operation of the building and the premises. Lessee shall reimburse Lessor for its pro rata share of all such expenses. Lessees pro rata share will be 80.20% on the date all of the space to be vacated is returned to Lessor.
Lessee shall have the right to audit operating expenses as reported by Lessor, for accuracy and compliance with the Lease. Lessor and its agents shall reasonably cooperate with Lessee to perform any such audit. If such audit determines that Lessor has billed Lessee in excess of the actual operating expenses incurred by Lessor and allowed per the Lease, then Lessor shall reimburse Lessee for the amount of the variance, and if said variance is in excess of 5% of the total operating expenses, Lessor shall reimburse Lessee for the actual cost of performing the audit.
Witness our hands this 19th day of March, 2004.
|
SARCOM PROPERTIES, INC. |
|||
|
|
|||
|
|
|||
|
By: /s/ James R. Wilcox |
|||
|
Print Name: |
|
|
|
|
Print Title: |
|
|
|
|
|
|||
|
|
|||
|
SARCOM DESKTOP SOLUTIONS, INC. |
|||
|
|
|||
|
|
|||
|
By: /s/ Charles E. Sweet |
|||
|
Print Name: Charles E. Sweet |
|||
|
Print Title: Chairman |
|||
4
EXHIBIT 31.1
PC MALL, INC.
CERTIFICATION
I, Frank F. Khulusi, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of PC Mall, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 14, 2007
/s/ Frank F. Khulusi |
|
Frank F. Khulusi |
|
Chief Executive Officer |
EXHIBIT 31.2
PC MALL, INC.
CERTIFICATION
I, Brandon H. LaVerne, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of PC Mall, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 14, 2007
/s/ Brandon H. LaVerne |
|
Brandon H. LaVerne |
|
Interim Chief Financial Officer |
EXHIBIT 32.1
PC MALL, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
In connection with the Quarterly Report of PC Mall, Inc. (the Company) on Form 10-Q for the fiscal quarter ended September 30, 2007 as filed with the Securities and Exchange Commission (the Report), I, Frank F. Khulusi, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, filed with the Securities and Exchange Commission.
November 14, 2007
/s/ Frank F. Khulusi |
|
Frank F. Khulusi |
|
Chief Executive Officer |
EXHIBIT 32.2
PC MALL, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
In connection with the Quarterly Report of PC Mall, Inc. (the Company) on Form 10-Q for the fiscal quarter ended September 30, 2007 as filed with the Securities and Exchange Commission (the Report), I, Brandon H. LaVerne, Interim Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, filed with the Securities and Exchange Commission.
November 14, 2007
/s/ Brandon H. LaVerne |
|
Brandon H. LaVerne |
|
Interim Chief Financial Officer |