UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission File Number: 0-25790
PC MALL, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 95-4518700 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
2555 West 190th Street
Torrance, CA 90504
(address of principal executive offices)
(310) 354-5600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
There were 10,544,472 outstanding shares of Common Stock at May 13, 2003.
PC Mall, Inc.
2
PART I - FINANCIAL INFORMATION
PC Mall, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
| March 31, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
|
Current assets: |
|||||||||||
|
Cash and cash equivalents |
$ |
7,458 |
$ |
11,422 |
|||||||
|
Accounts receivable, net of allowance for doubtful accounts |
58,280 |
54,747 |
|||||||||
|
Inventories |
53,398 |
55,235 |
|||||||||
|
Prepaid expenses and other current assets |
2,182 |
3,038 |
|||||||||
|
Deferred income taxes |
2,657 |
2,657 |
|||||||||
| Total current assets | 123,975 | 127,099 | |||||||||
| Property and equipment, net | 9,379 | 9,214 | |||||||||
| Goodwill, net | 804 | 804 | |||||||||
| Deferred income taxes | 10,547 | 10,718 | |||||||||
|
Other assets |
1,423 |
1,525 |
|||||||||
| $ | 146,128 | $ | 149,360 | ||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 42,788 | $ | 61,865 | |||||||
| Accrued expenses and other current liabilities | 12,930 | 14,066 | |||||||||
| Deferred revenue | 8,116 | 10,532 | |||||||||
| Line of credit | 37,185 | 17,497 | |||||||||
| Capital leases - current portion | 16 | 124 | |||||||||
| Notes payable - current portion |
- |
167 | |||||||||
| Total current liabilities | 101,035 | 104,251 | |||||||||
| Total liabilities |
101,035 |
104,251 |
|||||||||
| Stockholders' equity: | |||||||||||
|
Preferred stock, $.001 par value, 5,000,000 shares authorized; none issued and outstanding |
- | - | |||||||||
|
Common stock, $.001 par value; 30,000,000 shares authorized; 10,789,947 and 10,789,947 shares issued and 10,541,247 and 10,632,347 outstanding, respectively |
11 | 11 | |||||||||
| Additional paid-in capital | 75,833 | 75,833 | |||||||||
| Treasury stock at cost: 248,700 and 157,600 shares, respectively | (864) | (556) | |||||||||
| Retained earnings (accumulated deficit) |
(29,887) |
(30,179) | |||||||||
| Total stockholders' equity |
45,093 |
45,109 | |||||||||
| $ | 146,128 | $ | 149,360 | ||||||||
See notes to condensed consolidated financial statements.
3
PC Mall, Inc.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited, in thousands except per share data)
|
Three Months Ended |
|||||
|
March 31, |
|||||
|
2003 |
2002 |
||||
| Net sales | $ | 234,797 | $ | 191,505 | |
| Cost of goods sold | 205,931 | 171,636 | |||
| Gross profit | 28,866 | 19,869 | |||
| Selling, general and administrative expenses | 24,090 | 18,611 | |||
|
Advertising expenses, net |
4,124 | 498 | |||
| Income from operations | 652 | 760 | |||
| Interest expense, net | 188 | 195 | |||
| Income before income taxes | 464 | 565 | |||
| Income tax provision | 172 | 209 | |||
|
Income before cumulative effect of change in accounting principle |
292 | 356 | |||
| Cumulative effect of change in accounting principle, net of tax | - | (6,801) | |||
| Net income (loss) | $ | 292 | $ | (6,445) | |
| Income before cumulative effect of change in accounting principle | $ | 0.03 | $ | 0.03 | |
| Cumulative effect of change in accounting principle, net of tax | - | (0.65) | |||
| Basic earnings (loss) per share | $ | 0.03 | $ | (0.62) | |
| Income before cumulative effect of change in accounting principle | $ | 0.03 | $ | 0.03 | |
| Cumulative effect of change in accounting principle, net of tax | - | (0.62) | |||
| Diluted earnings (loss) per share | $ | 0.03 | $ | (0.59) | |
|
Basic weighted average number of shares outstanding |
10,598 | 10,444 | |||
|
Diluted weighted average number of shares outstanding |
11,124 | 10,934 | |||
See notes to condensed consolidated financial statements.
4
PC Mall, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited, in thousands)
|
Three Months Ended March 31, |
|||||||||
| 2003 | 2002 | ||||||||
| Cash flows from operating activities: | |||||||||
| Net income (loss) |
$ |
292 |
$ |
(6,445) | |||||
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|||||||||
| Cumulative effect of change in accounting principle | - | 6,801 | |||||||
|
Depreciation and amortization |
1,084 | 1,153 | |||||||
|
Provision for deferred income taxes |
172 | 209 | |||||||
|
Changes in assets and liabilities: |
|||||||||
| Accounts receivable | (3,533) | (3,825) | |||||||
| Inventories | 1,837 | 6,959 | |||||||
| Prepaid expenses and other current assets | 856 | (121) | |||||||
| Other assets | 51 | - | |||||||
| Accounts payable | (19,077) | (2,485) | |||||||
| Accrued expenses and other current liabilities | (1,136) | (513) | |||||||
| Deferred revenue | (2,417) | 1,246 | |||||||
|
Total adjustments |
(22,163) | 9,424 | |||||||
| Net cash (used in)/provided by operating activities | (21,871) | 2,979 | |||||||
| Cash flows from investing activities: | |||||||||
| Purchase of property and equipment | (1,096) | (911) | |||||||
| Net cash used in investing activities | (1,096) | (911) | |||||||
| Cash flows from financing activities: | |||||||||
| Payments for deferred financing costs | (102) | (179) | |||||||
| Payments under notes payable | (167) | (250) | |||||||
| Net borrowings/(payments) under line of credit | 19,688 | (396) | |||||||
| Principal payments of obligations under capital leases | (108) | (109) | |||||||
| Repurchases of common stock | (308) | - | |||||||
| Net cash provided by/(used in) financing activities | 19,003 | (934) | |||||||
| Net (decrease)/increase in cash and cash equivalents | (3,964) | 1,134 | |||||||
| Cash and cash equivalents: | |||||||||
| Beginning of period | 11,422 | 9,972 | |||||||
| End of period |
$ |
7,458 | $ | 11,106 | |||||
See notes to condensed consolidated financial statements.
5
PC Mall, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in thousands, except share and per share amounts)
1. Basis of Presentation
The consolidated interim financial statements include the accounts of PC Mall, Inc., a Delaware corporation, (formerly IdeaMall, Inc. and Creative Computers, Inc.) and its wholly owned subsidiaries (collectively, the "Company") and have been prepared without audit 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 generally accepted accounting principles have been condensed or omitted pursuant to such regulations. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments consisting solely of normal recurring items necessary to present fairly the financial position of the Company at March 31, 2003 and December 31, 2002 and the results of operations for the three months ended March 31, 2003 and 2002, and cash flows for the three months ended March 31, 2003 and 2002. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year.
Reclassifications
Certain reclassifications have been made to the 2002 financial statement amounts to conform to the 2003 presentation.
2. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which changes the accounting for goodwill and indefinite-lived intangible assets from an amortization method to an impairment-only approach. Under SFAS 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value, including consideration of the Company's market capitalization. This methodology differs from the Company's previous policy, as permitted under accounting standards existing at that time, of using undiscounted cash flows to determine if goodwill is recoverable. The Company's reporting units are generally consistent with the operating segments underlying the segments identified in Note 4 - Segment Information.
In the second quarter of 2002, the Company completed its assessment of the impact of SFAS 142, and, as required by the provisions of SFAS 142, effective January 1, 2002, the Company recorded a one-time, non-cash charge of approximately $6,800, net of tax, to reduce the carrying value of its goodwill. Such charge is reflected as a cumulative effect of a change in accounting principle in the accompanying condensed consolidated statement of operations and statement of cash flows.
The Company has adopted the provisions of SFAS No. 148, "Accounting for Stock Based Compensation -- Transition and Disclosure" ("SFAS 148"), which amends FASB Statement No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS 148, the Company continues to measure compensation cost in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations, but provides pro forma disclosures of net income and earnings per share as if the fair-value method had been applied. See Note 6 - Stock-Based Compensation for related disclosures.
In November 2002, the FASB issued EITF No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 requires that consideration received by a customer from a vendor is considered (a) an adjustment of the prices of the vendor's products or services and therefore, characterized as a reduction of cost of sales when recognized in the reseller's statement of operations, (b) an adjustment to a cost incurred by the reseller and, therefore, characterized as a reduction of that cost when recognized in the reseller's statement of operations, or (c) a payment for assets or services delivered to the vendor, and therefore, characterized as revenue when recognized in the reseller's statement of operations. Adoption of EITF 02-16 is required for the Company for new agreements, including modifications of existing agreements, entered into after December 31, 2002. As a result of the adoption of EITF 02-16, the Company recorded approximately $3,648 as a reduction of cost of sales for the three months ended March 31, 2003, of which $3,576 would have previously been netted against advertising expense and $72 against selling and administrative expenses.
6
3. Net income (loss) per share
Basic Earnings Per Share ("EPS") excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reported periods. Diluted EPS reflects the potential dilution that could occur under the treasury stock method if stock options and other commitments to issue common stock were exercised. The computation of Basic and Diluted EPS is as follows:
Three Months Ended
March 31,
2003
2002
Income before cumulative effect of change in accounting principle
$ 292 $ 356 Cumulative effect of change in accounting principle - (6,801) Net income (loss) $ 292 $ (6,445) Weighted average shares - Basic 10,598 10,444 Effect of dilutive stock options and warrants
526 490 Weighted average shares - Diluted
11,124 10,934 Net earnings (loss) per share - Basic Income before cumulative effect of change in accounting principle
$ 0.03 $ 0.03 Cumulative effect of change in accounting principle
- (0.65) Net income (loss)
$ 0.03 $ (0.62) Net earnings (loss) per share - Diluted Income before cumulative effect of change in accounting principle
$ 0.03 $ 0.03 Cumulative effect of change in accounting principle
- (0.62) Net income (loss)
$ 0.03 $ (0.59)
7
4. Segment Information
The Company operates in two reportable segments: 1) a rapid response supplier of technology solutions for business, government and educational institutions as well as consumers, collectively referred to as the "Core Business", and 2) a multi-category Internet retailer under the eCOST.com brand. Beginning in the first quarter of 2003, the Company integrated its eLinux segment into the Core Business segment. The Company allocates resources to and evaluates the performance of its segments based on operating income. Corporate expenses are included in the Company's measure of segment operating income for management reporting purposes.
Summarized segment information for the three months ended March 31, 2003 and 2002 is as follows:
Three months ended March 31, 2003
Core Business (1)
eCOST.com
Consolidated Net sales $ 210,880 $ 23,917 $ 234,797 Gross profit 26,176 2,690 28,866 Income from operations 537 115 652 Three months ended March 31, 2002
Core Business
eCOST.com Consolidated Net sales $ 170,067 $ 21,438 $ 191,505 Gross profit 18,057 1,812 19,869 Income (loss) from operations 770 (10) 760 (1) As discussed in Note 5, the results of ClubMac and Wareforce are included in the Core Business segment for the period ended March 31, 2003. In addition, the Core Business segment includes the Company's eLinux operations, which was previously reported as a separate segment.
8
5. Acquisitions
In July 2002, the Company completed the acquisition of substantially all of the assets of Wareforce, Inc. ("Wareforce") through a United States Bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code. The Company paid initial consideration in the amount of approximately $9,000 to Wareforce's creditors and $436 directly to Wareforce on the closing date in exchange for trade accounts receivable and inventory with an initial valuation of $10,900, as well as all fixed and intangible assets. In connection with these payments, the Company drew on its line of credit. The Company paid to Wareforce $768 as additional contractual consideration in September 2002. In connection with the acquisition, the Company hired substantially all of the sales and sales support employees of Wareforce, and recorded approximately $344 of definite-lived intangible assets with amortizable lives of five to six years. The Company considers Wareforce to be a part of the Core Business segment.
In April 2002, the Company acquired substantially all of the assets of Pacific Business Systems, Inc. ("PBS"), a privately held direct marketer of computer products to business and consumer customers under the ClubMac and PBS brands. Under the terms of the asset purchase agreement, the Company has acquired PBS' customer database, accounts receivable, inventory, certain fixed assets and certain intellectual property and has assumed certain liabilities equal to the negotiated values of acquired accounts receivable and inventory. In addition to certain liabilities assumed, the Company issued 300,000 shares of its common stock valued at approximately $1,329 to PBS and has agreed to a capped three year earn-out, whereby additional consideration may be paid to PBS based on the future results of the acquired business. As a result of the acquisition, the Company recorded approximately $804 of goodwill, and $200 of definite-lived intangible assets with amortizable lives between three and six years. As of March 31, 2003 the acquired business completed its first full year of operations, and the earn-out was deemed to be immaterial. The Company operates the acquired business as ClubMac, and considers this business to be a part of the Core Business segment.
The following table presents unaudited pro forma information as if the acquired businesses had been combined with the Company at the beginning of the period presented (in thousands, except per share amounts). The unaudited pro forma information is not necessarily indicative of future combined operating results. The actual results for the three months ended March 31, 2003 are included in the Company's Condensed Consolidated Statement of Operations.
Three Months Ended
March 31, 2002 Net sales
$ 225,815 Income before cumulative effect of change in accounting principle
$ 67 Cumulative effect of change in accounting principle (6,801) Net loss $ (6,734) Weighted average shares - Basic 10,444 Weighted average shares - Diluted
10,934 Net earnings (loss) per share - Basic
Income before cumulative effect of change in accounting principle
$ 0.01 Cumulative effect of change in accounting principle (0.65) Net earnings (loss) per share - Basic $ (0.64)
Net earnings (loss) per share - Diluted Income before cumulative effect of change in accounting principle
$ 0.01 Cumulative effect of change in accounting principle (0.63) Net earnings (loss) per share - Diluted
$ (0.62)
6. Stock-Based Compensation
The Company accounts for its stock option plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying common stock exceeded the exercise price. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") established accounting and disclosure requirements using a fair value-based method for stock option plans. As allowed by SFAS No. 123, the Company continues to apply the intrinsic value-based method of accounting, and has adopted the disclosure requirements of SFAS 123. Accordingly, the Company does not record compensation expense on issuance of stock options, as all options issued to date were granted at the then-current market value at the date of grant. Had compensation cost been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts shown below:
|
For the three months ended |
|||||
|
March 31, |
|||||
|
2003 |
2002 |
||||
| Income before cumulative effect of change in accounting principle | $ | 292 | $ | 356 | |
|
Cumulative effect of change in accounting principle |
- | (6,801) | |||
| Net income (loss) (as reported) | 292 | (6,445) | |||
| Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects | (269) | (195) | |||
| Pro forma net income (loss) | $ | 23 | $ | (6,640) | |
|
Basic earnings (loss) per share (as reported) |
$ | 0.03 | $ | (0.62) | |
| Basic earnings (loss) per share (pro forma) | $ | 0.00 | $ | (0.64) | |
|
Diluted earnings (loss) per share (as reported) |
$ | 0.03 | $ | (0.59) | |
| Diluted earnings (loss) per share (pro forma) | $ | 0.00 | $ | (0.61) | |
The fair value of each stock option grant has been estimated pursuant to SFAS 123 on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2003 and 2002, respectively: risk-free interest rate of 3.60% and 5.14%; expected volatility of 128% and 133%; and expected lives of 7 years.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview and Recent Developments
PC Mall, Inc. ("PC Mall"), formerly IdeaMall, Inc. and Creative Computers, Inc., together with its subsidiaries ("the Company"), founded in 1987, is a rapid response direct marketer of computer hardware, software, peripheral and electronics products. The Company offers products to business, government and educational institutions as well as individual consumers through direct marketing techniques, direct response catalogs, dedicated inbound and Outbound telemarketing sales executives, the Internet, a direct sales force and three retail showrooms. The Company offers a broad selection of products through its distinctive full-color catalogs under the PC Mall, MacMall, ClubMac, PC Mall Gov and eCOST.com brands, its worldwide Web sites on the Internet: pcmall.com, macmall.com, clubmac.com, pcmallgov.com, and ecost.com, and other promotional materials. The Company believes that its rapid response service and its broad product selection result in customer loyalty and repeat customer orders.
In September 1997, PC Mall formed a wholly-owned subsidiary, uBid, Inc. ("uBid"), to sell computer-related products and consumer electronics through an auction format on the Internet. On December 9, 1998, uBid completed an initial public offering of 1,817,000 shares of its Common Stock. Upon completion of this offering, PC Mall owned 80.1% of the outstanding Common Stock of uBid. On June 7, 1999, PC Mall divested its ownership in uBid by means of a tax-free distribution of all of its remaining 7.3 million shares of uBid C