| PC MALL INC ITEM 1A RISK FACTORS 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, Lenovo, Microsoft and Sony |
| For example, products manufactured by HP accounted for 21dtta4prca of net sales in 2005, 21dtta5prca of net sales in 2004 and 21dtta5prca of net sales in 2003, and products manufactured by Apple represented approximately 20dtta8prca of net sales in 2005, 20dtta6prca of net sales in 2004 and 23dtta4prca of net sales in 2003 |
| 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 future decline in these incentives and other assistance could materially harm our operating results |
| Certain of our key vendors, including Apple, HP, Ingram Micro, Lenovo, Microsoft, Sony 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 |
| We do not have long-term supply agreements or guaranteed price or delivery arrangements with our vendors |
| In most cases we have no guaranteed price or delivery arrangements with our vendors |
| As a result, we have experienced and may in the future experience inventory shortages on certain products |
| Furthermore, the personal computer 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 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, we are an authorized dealer for the full retail line of HP products, sales of which represented 21dtta4prca of our net sales in 2005, and Apple products, sales of which represented 20dtta8prca of our net sales in 2005, but 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 13 ______________________________________________________________________ [40]Table of Contents 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 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, 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 |
| 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 an 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, 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 the personal computer and electronics 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, adverse weather conditions that affect response, distribution or shipping to our customers, and general economic 14 ______________________________________________________________________ [41]Table of Contents 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 should not be relied upon as an 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 business and public sector sales presents numerous risks and challenges, and may not improve our profitability or result in expanded market share |
| We are in the process of transitioning our business strategy to increasingly focus on business 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 business 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 |
| Our increased 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 the growth, training and retention of our outbound telemarketing sales force |
| We have also incurred, and expect to continue to incur, significant expenses related to infrastructure investments related to this growth in 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 |
| The success of our Canadian call center is dependent, in part, on our receipt of government labor credits |
| In September 2003, we established a Canadian call center serving the US 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 term of the government program that provides for these labor credits is currently scheduled to extend through approximately the end of 2007 |
| During the period through 2007, we expect to annually claim labor credits of up to 35prca of eligible compensation paid to our qualifying employees under the program |
| The success of our Canadian call center is dependent, in part, on our receipt of the government labor credits we expect to receive |
| While management believes the amounts claimed are collectible, 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 |
| 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 US Supreme Court has 15 ______________________________________________________________________ [42]Table of Contents 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 was quite limited (eg, visiting the state several times a year to aid customers or to inspect showrooms stocking their goods) |
| We believe our operations 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 |
| 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 |
| We have pursued in the past, and may pursue in the future, acquisitions of companies that either complement or expand our existing business |
| No assurance can be given that the benefits we may expect from the acquisition of complementary or supplementary companies will be realized |
| In addition, acquisitions may involve a number of risks and difficulties, including expansion into new geographic markets and business areas, the diversion of management’s attention to the operations and personnel of the acquired company, the integration of the acquired company’s personnel, operations and management information systems, potential short-term adverse effects on our operating results and the amortization of acquired intangible assets |
| Any delays or unexpected costs incurred in connection with the integration of acquired companies could have a material adverse effect on our business, financial condition and results of operations |
| Furthermore, we cannot assure you that we will be able to implement or sustain our acquisition strategy or that our strategy will ultimately prove profitable |
| 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 16 ______________________________________________________________________ [43]Table of Contents 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 |
| Some of the factors that affect our ability to maintain profitability on a quarterly or annual basis are beyond our control |
| Changes in accounting rules for stock-based compensation may 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 Nodtta 123R, “Share-Based Payment,” which will require us, beginning in the first fiscal quarter of 2006, to measure compensation costs for all stock-based compensation (including stock options) at fair value as of the date of grant and to recognize these costs as expenses in our consolidated statements of operations |
| The recognition of these expenses in our consolidated statements of operations 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 future acquisitions or other business combinations; • changes in the number of visitors to our websites or our inability to convert those visitors into customers; • technical difficulties, including system or Internet failures; • 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; • 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 |
| 17 ______________________________________________________________________ [44]Table of Contents 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 |
| In 2005, we derived approximately 76prca 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 (eg, 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 believe that our current working capital, including our existing cash balance, together with our 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 |
| 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 18 ______________________________________________________________________ [45]Table of Contents 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 |
| 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 |
| 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 able to or 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 |
| 19 ______________________________________________________________________ [46]Table of Contents 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 |
| The loss of service of one or more of our key management members could have an adverse effect on our business |
| Our success and plans for future growth will also depend in part on our management’s continuing ability to hire, train and retain skilled personnel in all areas of our business |
| 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 significant adverse effect on our operations |
| If we fail to achieve and maintain adequate internal controls, we may not be able to produce reliable financial reports in a timely manner or prevent financial fraud |
| We will continue to document and test our internal control procedures on an ongoing basis in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of internal controls over financial reporting and a report by an independent registered public accounting firm addressing such assessments if applicable |
| During the course of our testing 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, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 |
| 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 US Postal Service |
| Any future increases in postal rates will increase our mailing expenses and could have a 20 ______________________________________________________________________ [47]Table of Contents 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 |
| 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 |
| During the most recent economic downturn in the US and elsewhere, businesses 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 US 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 |
| 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 21 ______________________________________________________________________ [48]Table of Contents 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 |
| For example, we are subject to various telemarketing and anti-spam laws that regulate the manner in which we may solicit future suppliers and customers |
| Such regulations, along with increased governmental or private enforcement, may increase the cost of operating and growing our business |
| In addition, several states have proposed legislation that would limit the uses of personal information gathered online or require online services to establish privacy policies |
| The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from children under 13 years of age |
| Bills proposed in Congress would expand online privacy protections already provided to adults |
| Moreover, proposed legislation in the US 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 |
| 22 ______________________________________________________________________ [49]Table of Contents 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 and Irvine, California, 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 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 23 ______________________________________________________________________ [50]Table of Contents 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, government resellers such as GTSI and CDWG, 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 |
| 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 |
| The growth in Internet usage is a relatively recent development, and no assurance can be made that the Internet will continue to develop or that a sufficiently broad base of consumers will adopt and continue to use the Internet and other online services as a medium of commerce |
| 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 does not continue, our business, financial condition and results of operations could be adversely affected |
| 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 |
| 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 US dollar denominated transactions with US 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 US 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 24 ______________________________________________________________________ [51]Table of Contents 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 |
| We are subject to risks associated with the evolution of, and consolidation within, our industry |
| The personal computer 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 and/or direct marketers to achieve economies of scale 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 personal computer market has slowed |
| If the growth rate of the personal computer market were to further decrease, our business, financial condition and operating results could be materially adversely affected |
| 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 25 ______________________________________________________________________ [52]Table of Contents 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; • 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 company’s securities, securities class action litigation has often been instituted against that company |
| Such litigation, if asserted against us, could result in substantial costs to us and cause a likely diversion of our management’s attention from the operations of our company |