SEC Company Response from PC MALL INC (CIK 0000937941) — Jul 12, 2005
PC MALL INC (CIK 0000937941)
Date: July 12, 2005 · CIK: 0000937941 · Accession: 0000937941-05-000047
AI Filing Summary & Sentiment
Referenced dates: June 16, 2005
Letter
United States Securities and Exchange Commission Division of Corporation Finance Attention: PC Mall, Inc. Form 10-K for the fiscal year ended December 31, 2004 Form 10-Q for the quarter ended March 31, 2005 File No. 0-25790
Dear Mr. Choi:
On behalf of PC Mall, Inc. (the “Company”), we are responding to a letter dated June 16, 2005 from the Staff of the Securities and Exchange Commission (the “Staff”) regarding the above-referenced filings. The Company’s responses to the Staff’s comments are indicated below, directly following a restatement of each comment in bold, italicized type.
Form 10-K for the fiscal year ended December 31, 2004
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 28
Critical Accounting Policies and Estimates, page 31
Deferred Advertising Revenue and Costs, page 32
1.
We note your disclosure regarding your accounting policy for market development funds and co-op advertising funds received from vendors and of the costs to develop, produce and circulate your catalogs. Please provide us with the following additional information:
•
Clarify for us why market development and co-op advertising funds are not considered to be a reimbursement of costs to sell your vendors’ products;
Securities and Exchange Commission
July 12, 2005
Page Two
•
We presume that the term “co-op revenue” used in your disclosure refers to co-op advertising funds. Please explain to us why you refer to market development and advertising funds as “revenue” when they have been offset to cost of sales;
•
Clarify for us and revise your disclosure to indicate whether deferred advertising costs related to the development, production and circulation of your catalogs and co-op revenue are recognized on a straight-line basis over the estimated life of the catalog or recognized based on sales generated over the life of the catalog; and
•
Your basis for estimating the life of your catalogs to be eight weeks.
Response: In response to the Staff’s comments, the Company advises the Staff as follows with respect to the Company’s accounting policies for market development funds and co-op advertising funds :
•
Nearly all of our vendor consideration is received pursuant to contracts or arrangements with vendors to provide us with funds to sell their products. Typically we receive consideration on the basis of product purchases or product sales out In accordance with EITF No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”), we record funds received from vendors as an offset to cost of goods sold since such funds are not a reimbursement of specific, incremental, identifiable costs incurred by us in selling the vendor’s products. We also receive a certain amount of funds that are used directly to offset certain costs, such as the cost of maintaining vendor experts or “champions” in which such costs are recorded as a reduction of G&A.
•
We use the term “co-op revenue” to refer to vendor consideration that is managed through a vendor marketing sales team. In future filings, we will refer to such funds as vendor consideration.
•
As disclosed in the critical accounting policy for deferred advertising revenue and costs on page 32 of our Form 10-K, deferred advertising costs related to the development, production and circulation of our catalogs, and any related co-op revenue are recognized based on sales generated over the life of the catalog.
•
The eight week catalog life was determined based upon historical source code data that attributes sales to a particular catalog. Each catalog edition has a unique source code to enable matching back sales to that catalog. We collect source code data which we use to calculate the life of the catalog. Based upon the source code data, nearly all sales occur within 8 weeks following the delivery of a catalog.
Securities and Exchange Commission
July 12, 2005
Page Three
Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003, page 33
2.
Please explain why the adoption of EITF 02-16 impacted the comparability of the years ended December 31, 2004 and 2003 since this accounting standard was effective during both of these periods.
Response: In response to the Staff’s comment, many contracts providing funds in early 2003 were signed in 2002 or prior years. EITF 02-16 required application to new arrangements, including modifications of existing arrangements entered into after December 31, 2002. In accordance with EITF 02-16, funds received pursuant to contracts signed in 2002 and prior years were recorded in accordance with our past practices. Such practices were to record vendor consideration as a reduction of advertising expense rather than as a reduction of cost of goods sold as required by EITF 02-16.
3.
In future filings, please quantify the amount of the increase or decrease attributed to each factor that contributes to material changes over the reported periods. For example, we note that you provided various factors that may cause gross margins to fluctuate, but none of those factors are quantified for the changes over the reported periods in question outside of the impact of the adoption of EITF 02-16. Further examples of factors that should be quantified in future filings include the dollar impact of:
•
the 30%, 17% and 2% increases in your outbound telemarketing business, PC Mall Gov sales and retail sales, respectively, on 2004 net sales;
•
the 29%, 11% and 15% increases in your outbound telemarketing business, PC Mall Gov sales and retail sales, respectively, and the 21% decline in catalog sales on 2003 net sales; and
•
the increased expenses of operating your Canadian call center in 2004 on SG&A expense.
Response: The Staff’s comment is duly noted. As requested by the Staff, in future filings we will quantify, where practical in Management’s Discussion and Analysis, the individual factors that contributed to material changes over the reported periods. Please note that we operate in an industry characterized by rapid technological change, evolving standards and short product life cycles. Although there is generally a mix of recurring factors that impacts our gross margins for a particular period, including the factors included in our prior disclosures, the impact of any individual factor has fluctuated in the past, and will continue to fluctuate in the future, for any given period of determination. As a result, quantitative measurements of the relevant factors are less meaningful and may in fact create inaccurate impressions about the significance of any individual factor. In addition, some of these factors are not capable of being quantified in a reliable or accurate manner. Moreover, we believe that disclosure of all the relevant factors and the general order of their significance provide investors with the necessary information to understand the trends that impact gross margins in the future.
Securities and Exchange Commission
July 12, 2005
Page Four
We respectfully submit to the Staff our belief that the use of percentages to quantify the reasons for period to period changes in financial statement line items is useful and appropriate under the guidance provided in Section III.D of Release No. 33-6835 (the “1989 Release”). In that interpretive release, the Commission indicated that quantification of factors affecting line item changes may include “use of dollar amounts or percentages, as reasonably practicable” [emphasis supplied]. In fact, the example provided at the end of Section III.D of the 1989 Release describes the components of the period to period changes in the registrant’s revenue by providing the percentage changes of certain of the drivers of those changes. Nonetheless, to the extent practical, we will attempt to provide a quantitative measurement of the relevant factors affecting gross margins and other line items for future periods as may be necessary to provide an understanding of material line item changes.
4.
In future filings, please attribute all of the material changes in the reported periods to specific factors. For example, we note your explanation of $1.5 million of the $7.1 million increase in 2004 SG&A expenses for the eCOST.com segment and your explanation of approximately $2.3 million of the $11.8 million increase in 2003 consolidated SG&A expenses, but you have not attributed the remaining increases to any other specific factors.
Response: The Staff’s comment is duly noted. As requested by the Staff, we will attribute in the results of operations discussion in future filings, where practical, all of the material changes in the reported periods to specific factors.
5.
In future filings, please expand your discussion to describe the underlying causes of the changes in your results of operations and provide a more detailed analysis of material year-to-year changes and trends. For example, you should explain why the expenses of operating your Canadian call center increased in 2004 and the business purpose of the 2004 awards that resulted in the $1.5 million of non-cash stock-based compensation expenses for the eCOST.com segment.
For further guidance on management’s discussion and analysis of results of operations, please refer to Item 303(a)(3) of Regulation S-K and our Interpretative Releases on Management’s Discussion and Analysis, Release 33-8350 and Section III.D of Release 33-6835, both of which are available on our website at www.sec.gov.
Response: The Staff’s comment is duly noted. As requested by the Staff, we will provide in the results of operations discussion in future filings a detailed analysis of the underlying causes of material period to period changes and trends.
Liquidity and Capital Resources, page 36
6.
In future filings, please quantify and include a discussion of all relevant factors that directly contribute to material changes when describing the change in net cash used in operating activities over reported periods and explain the underlying causes of changes in cash flow.
Securities and Exchange Commission
July 12, 2005
Page Five
For example, we note that you discuss the increase in accounts receivable as a primary factor in the change for 2004 as compared with 2003, but you have excluded discussion of the underlying cause of this change. Furthermore, you have excluded any discussion of other significant factors such as the change in inventory in 2003 and the change in accounts payable, accrued expenses and other current liabilities in both 2004 and 2003.
Response: The Staff’s comment is duly noted. As requested by the Staff, we will quantify in the liquidity and capital resources discussion in future filings and include, where practical, all of the relevant factors that directly contribute to material period to period changes.
7.
In future filings, please discuss the operational reasons for negative cash flows from operations and explain how you intend to meet cash requirements and maintain operations. For further guidance on management’s discussion and analysis of liquidity and capital resources, please refer to Item 303(a)(1) of Regulation S-K and the Commission’s Interpretive Releases on MD&A, Release 33-8350 and Section III.C of Release 33-6835, both of which are available on our website at www.sec.gov.
Response: The Staff’s comment is duly noted. As requested by the Staff, we will include in the liquidity and capital resources discussion in future filings a discussion of the operational reasons for negative cash flows from operations to the extent applicable and how we intend to meet cash requirements.
Contractual Obligations, page 37
8.
In future filings, please revise to include all long-term liabilities and any material employment contracts in your table of contractual obligations.
Response: The Staff’s comment is duly noted. We will include in the table of contractual obligations all items that fall within the categories specified in Item 303(a)(5) of Regulation S-K. However, we respectfully submit that obligations under employment contracts do not fall within the categories described in Item 303(a)(5) of Regulation S-K. We interpret “purchase obligations” under Item 303(a)(5)(ii)(D) of Regulation S-K to cover purchases of goods or services from sources outside the company. As the Staff is aware, a description of the material terms of our employment agreements with our executive officers is set forth in our proxy statement filed in connection with our 2005 annual meeting of stockholders, as well as in an exhibit entitled “Summary of Executive Salary and Bonus Arrangements,” which was filed as Exhibit 10.66 to our 2004 Form 10-K, which we believe is the appropriate location for disclosure of our obligations under employment contracts with such individuals.
Consolidated Financial Statements, page F-1
Report of Independent Registered Public Accounting Firm, page F-2
Securities and Exchange Commission
July 12, 2005
Page Six
9.
We note that your independent auditor’s report indicates that your ineffective control over the valuation and completeness of revenue related to software service advisor agreements resulted in an audit adjustment to the 2004 consolidated financial statements. Quantify for us, the impact, if any, these agreements had on your results of operations and financial condition during 2003 and 2002.
Response: The software service advisor agreements identified in the independent auditors’ report would have had an impact on our consolidated net sales and pre-tax income of $61,000 in 2003 ($40,000 effect on net income after tax) and $39,000 in 2002 ($24,000 after tax) had it been recorded in each period. The effect on our consolidated balance sheet would increase deferred revenue by approximately $100,000 as of December 31, 2003 and $39,000 as of December 31, 2002. We have determined that the effect of these adjustments on our consolidated financial statements for the years ended and as of December 31, 2003 and 2002 was immaterial.
Notes to Consolidated Financial Statements, page F-8
Property and Equipment, page F-11
10.
We note your disclosure on page F-11 indicates that you have equipment acquired under capital leases, yet you have not disclosed any capital lease obligations in Note 5 - Commitments and Contingencies to your consolidated financial statements. Please confirm that you either have no remaining capital lease obligations or that any obligations outstanding at December 31, 2004 are immaterial.
Response: In response to the Staff’s comment, we confirm there were no remaining obligations under capital leases outstanding at December 31, 2004.
Note 7. Employee Benefits, page F-19
Stock Warrants and Options Issued to Non-employees, page F-20
11.
We note your disclosure related to the warrant to purchase 30,000 shares of the Company’s common stock which was issued to a consulting firm for investor and public relations services
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CORRESP
1
filename1.htm
July 12, 2005
Via Facsimile, EDGAR and U.S. Mail
United States Securities and Exchange Commission
Division of Corporation Finance
Station Place, 100 F Street, N.E.
Mail Stop 03-08
Washington, D.C. 20549
Attention:
William Choi
Scott Ruggiero
Re:
PC Mall, Inc.
Form 10-K for the fiscal year ended December 31, 2004
Form 10-Q for the quarter ended March 31, 2005
File No. 0-25790
Dear Mr. Choi:
On behalf of PC Mall, Inc. (the “Company”), we are responding to a letter dated June 16, 2005 from the Staff of the Securities and Exchange Commission (the “Staff”) regarding the above-referenced filings. The Company’s responses to the Staff’s comments are indicated below, directly following a restatement of each comment in bold, italicized type.
Form 10-K for the fiscal year ended December 31, 2004
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 28
Critical Accounting Policies and Estimates, page 31
Deferred Advertising Revenue and Costs, page 32
1.
We note your disclosure regarding your accounting policy for market development funds and co-op advertising funds received from vendors and of the costs to develop, produce and circulate your catalogs. Please provide us with the following additional information:
•
Clarify for us why market development and co-op advertising funds are not considered to be a reimbursement of costs to sell your vendors’ products;
Securities and Exchange Commission
July 12, 2005
Page Two
•
We presume that the term “co-op revenue” used in your disclosure refers to co-op advertising funds. Please explain to us why you refer to market development and advertising funds as “revenue” when they have been offset to cost of sales;
•
Clarify for us and revise your disclosure to indicate whether deferred advertising costs related to the development, production and circulation of your catalogs and co-op revenue are recognized on a straight-line basis over the estimated life of the catalog or recognized based on sales generated over the life of the catalog; and
•
Your basis for estimating the life of your catalogs to be eight weeks.
Response: In response to the Staff’s comments, the Company advises the Staff as follows with respect to the Company’s accounting policies for market development funds and co-op advertising funds :
•
Nearly all of our vendor consideration is received pursuant to contracts or arrangements with vendors to provide us with funds to sell their products. Typically we receive consideration on the basis of product purchases or product sales out In accordance with EITF No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”), we record funds received from vendors as an offset to cost of goods sold since such funds are not a reimbursement of specific, incremental, identifiable costs incurred by us in selling the vendor’s products. We also receive a certain amount of funds that are used directly to offset certain costs, such as the cost of maintaining vendor experts or “champions” in which such costs are recorded as a
reduction of G&A.
•
We use the term “co-op revenue” to refer to vendor consideration that is managed through a vendor marketing sales team. In future filings, we will refer to such funds as vendor consideration.
•
As disclosed in the critical accounting policy for deferred advertising revenue and costs on page 32 of our Form 10-K, deferred advertising costs related to the development, production and circulation of our catalogs, and any related co-op revenue are recognized based on sales generated over the life of the catalog.
•
The eight week catalog life was determined based upon historical source code data that attributes sales to a particular catalog. Each catalog edition has a unique source code to enable matching back sales to that catalog. We collect source code data which we use to calculate the life of the catalog. Based upon the source code data, nearly all sales occur within 8 weeks following the delivery of a catalog.
Securities and Exchange Commission
July 12, 2005
Page Three
Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003, page 33
2.
Please explain why the adoption of EITF 02-16 impacted the comparability of the years ended December 31, 2004 and 2003 since this accounting standard was effective during both of these periods.
Response: In response to the Staff’s comment, many contracts providing funds in early 2003 were signed in 2002 or prior years. EITF 02-16 required application to new arrangements, including modifications of existing arrangements entered into after December 31, 2002. In accordance with EITF 02-16, funds received pursuant to contracts signed in 2002 and prior years were recorded in accordance with our past practices. Such practices were to record vendor consideration as a reduction of advertising expense rather than as a reduction of cost of goods sold as required by EITF 02-16.
3.
In future filings, please quantify the amount of the increase or decrease attributed to each factor that contributes to material changes over the reported periods. For example, we note that you provided various factors that may cause gross margins to fluctuate, but none of those factors are quantified for the changes over the reported periods in question outside of the impact of the adoption of EITF 02-16. Further examples of factors that should be quantified in future filings include the dollar impact of:
•
the 30%, 17% and 2% increases in your outbound telemarketing business, PC Mall Gov sales and retail sales, respectively, on 2004 net sales;
•
the 29%, 11% and 15% increases in your outbound telemarketing business, PC Mall Gov sales and retail sales, respectively, and the 21% decline in catalog sales on 2003 net sales; and
•
the increased expenses of operating your Canadian call center in 2004 on SG&A expense.
Response: The Staff’s comment is duly noted. As requested by the Staff, in future filings we will quantify, where practical in Management’s Discussion and Analysis, the individual factors that contributed to material changes over the reported periods. Please note that we operate in an industry characterized by rapid technological change, evolving standards and short product life cycles. Although there is generally a mix of recurring factors that impacts our gross margins for a particular period, including the factors included in our prior disclosures, the impact of any individual factor has fluctuated in the past, and will continue to fluctuate in the future, for any given period of determination. As a result, quantitative measurements of
the relevant factors are less meaningful and may in fact create inaccurate impressions about the significance of any individual factor. In addition, some of these factors are not capable of being quantified in a reliable or accurate manner. Moreover, we believe that disclosure of all the relevant factors and the general order of their significance provide investors with the necessary information to understand the trends that impact gross margins in the future.
Securities and Exchange Commission
July 12, 2005
Page Four
We respectfully submit to the Staff our belief that the use of percentages to quantify the reasons for period to period changes in financial statement line items is useful and appropriate under the guidance provided in Section III.D of Release No. 33-6835 (the “1989 Release”). In that interpretive release, the Commission indicated that quantification of factors affecting line item changes may include “use of dollar amounts or percentages, as reasonably practicable” [emphasis supplied]. In fact, the example provided at the end of Section III.D of the 1989 Release describes the components of the period to period changes in the registrant’s revenue by providing the percentage changes of certain of the drivers of those changes. Nonetheless, to the extent practical, we will attempt to provide a quantitative measurement of
the relevant factors affecting gross margins and other line items for future periods as may be necessary to provide an understanding of material line item changes.
4.
In future filings, please attribute all of the material changes in the reported periods to specific factors. For example, we note your explanation of $1.5 million of the $7.1 million increase in 2004 SG&A expenses for the eCOST.com segment and your explanation of approximately $2.3 million of the $11.8 million increase in 2003 consolidated SG&A expenses, but you have not attributed the remaining increases to any other specific factors.
Response: The Staff’s comment is duly noted. As requested by the Staff, we will attribute in the results of operations discussion in future filings, where practical, all of the material changes in the reported periods to specific factors.
5.
In future filings, please expand your discussion to describe the underlying causes of the changes in your results of operations and provide a more detailed analysis of material year-to-year changes and trends. For example, you should explain why the expenses of operating your Canadian call center increased in 2004 and the business purpose of the 2004 awards that resulted in the $1.5 million of non-cash stock-based compensation expenses for the eCOST.com segment.
For further guidance on management’s discussion and analysis of results of operations, please refer to Item 303(a)(3) of Regulation S-K and our Interpretative Releases on Management’s Discussion and Analysis, Release 33-8350 and Section III.D of Release 33-6835, both of which are available on our website at www.sec.gov.
Response: The Staff’s comment is duly noted. As requested by the Staff, we will provide in the results of operations discussion in future filings a detailed analysis of the underlying causes of material period to period changes and trends.
Liquidity and Capital Resources, page 36
6.
In future filings, please quantify and include a discussion of all relevant factors that directly contribute to material changes when describing the change in net cash used in operating activities over reported periods and explain the underlying causes of changes in cash flow.
Securities and Exchange Commission
July 12, 2005
Page Five
For example, we note that you discuss the increase in accounts receivable as a primary factor in the change for 2004 as compared with 2003, but you have excluded discussion of the underlying cause of this change. Furthermore, you have excluded any discussion of other significant factors such as the change in inventory in 2003 and the change in accounts payable, accrued expenses and other current liabilities in both 2004 and 2003.
Response: The Staff’s comment is duly noted. As requested by the Staff, we will quantify in the liquidity and capital resources discussion in future filings and include, where practical, all of the relevant factors that directly contribute to material period to period changes.
7.
In future filings, please discuss the operational reasons for negative cash flows from operations and explain how you intend to meet cash requirements and maintain operations. For further guidance on management’s discussion and analysis of liquidity and capital resources, please refer to Item 303(a)(1) of Regulation S-K and the Commission’s Interpretive Releases on MD&A, Release 33-8350 and Section III.C of Release 33-6835, both of which are available on our website at www.sec.gov.
Response: The Staff’s comment is duly noted. As requested by the Staff, we will include in the liquidity and capital resources discussion in future filings a discussion of the operational reasons for negative cash flows from operations to the extent applicable and how we intend to meet cash requirements.
Contractual Obligations, page 37
8.
In future filings, please revise to include all long-term liabilities and any material employment contracts in your table of contractual obligations.
Response: The Staff’s comment is duly noted. We will include in the table of contractual obligations all items that fall within the categories specified in Item 303(a)(5) of Regulation S-K. However, we respectfully submit that obligations under employment contracts do not fall within the categories described in Item 303(a)(5) of Regulation S-K. We interpret “purchase obligations” under Item 303(a)(5)(ii)(D) of Regulation S-K to cover purchases of goods or services from sources outside the company. As the Staff is aware, a description of the material terms of our employment agreements with our executive officers is set forth in our proxy statement filed in connection with our 2005 annual meeting of stockholders, as well as in an exhibit
entitled “Summary of Executive Salary and Bonus Arrangements,” which was filed as Exhibit 10.66 to our 2004 Form 10-K, which we believe is the appropriate location for disclosure of our obligations under employment contracts with such individuals.
Consolidated Financial Statements, page F-1
Report of Independent Registered Public Accounting Firm, page F-2
Securities and Exchange Commission
July 12, 2005
Page Six
9.
We note that your independent auditor’s report indicates that your ineffective control over the valuation and completeness of revenue related to software service advisor agreements resulted in an audit adjustment to the 2004 consolidated financial statements. Quantify for us, the impact, if any, these agreements had on your results of operations and financial condition during 2003 and 2002.
Response: The software service advisor agreements identified in the independent auditors’ report would have had an impact on our consolidated net sales and pre-tax income of $61,000 in 2003 ($40,000 effect on net income after tax) and $39,000 in 2002 ($24,000 after tax) had it been recorded in each period. The effect on our consolidated balance sheet would increase deferred revenue by approximately $100,000 as of December 31, 2003 and $39,000 as of December 31, 2002. We have determined that the effect of these adjustments on our consolidated financial statements for the years ended and as of December 31, 2003 and 2002 was immaterial.
Notes to Consolidated Financial Statements, page F-8
Property and Equipment, page F-11
10.
We note your disclosure on page F-11 indicates that you have equipment acquired under capital leases, yet you have not disclosed any capital lease obligations in Note 5 - Commitments and Contingencies to your consolidated financial statements. Please confirm that you either have no remaining capital lease obligations or that any obligations outstanding at December 31, 2004 are immaterial.
Response: In response to the Staff’s comment, we confirm there were no remaining obligations under capital leases outstanding at December 31, 2004.
Note 7. Employee Benefits, page F-19
Stock Warrants and Options Issued to Non-employees, page F-20
11.
We note your disclosure related to the warrant to purchase 30,000 shares of the Company’s common stock which was issued to a consulting firm for investor and public relations services