Bad news for PC Connection (NASDAQ: PCCC). On Nov. 17, the Merrimack, NH-based computer reseller announced that its GovConnection subsidiary’s General Services Administration (GSA) contract—which allows the company to sell to the federal government—was cancelled.
Federal purchases of more than $2,500 must be made from a GSA schedule–a master catalog of government-approved vendors and goods. To be listed on a schedule, a vendor has to prove that it is giving the government its best price on the merchandise it wishes to sell the feds.
According to a statement issued by PC Connection, the government found that “GovConnection’s contract management systems and procedures may have resulted in the sale of unqualified items or the underpayment of required fees.” On Oct. 16, GovConnection received a 30-day cancellation notice from the GSA, and subsequently met with the GSA to try and resolve differences regarding contract performance and compliance. But on Nov. 14, GovConnection was informed that the cancellation notice was final.
PC Connection said that the GSA contract accounted for approximately $56 million in revenue and about $4.8 million in gross profit in the first nine months of 2003. The company expects fourth quarter sales to be in the range of $330 million to $340 million, with earnings per share is expected to be the range of $0.05 to $0.07 before any additional charges that may be required in relation to the GSA contract.
GovConnection, formerly known as ComTeq Federal and acquired by PC Connection in 1999, is scrambling to get back on the GSA schedule. For starters, it has a new chief: Don Weatherson, the non-executive chairman of GovConnection, is now CEO of the subsidiary as well. He replaces GovConnection president Gary Sorkin, who is on a leave of absence.
Further, the company is undergoing a review of its standards and practices with the government subsidiary, and planning to make changes that will permit GovConnection to make a new offering to the GSA “that is grounded on very solid processes and controls,” Weatherson said in a statement. “It is our intention to regain GSA approval for GovConnection as quickly as possible.”
But that may not be so easy. According to Mark Amtower, president of Ashton, MD-based Amtower & Co., a consulting firm that advises marketers on selling to the government, “the government takes with extreme irritation anybody who has sent them something different, even inadvertently, from what it expected. It’s a major infraction.” PC Connection’s relationship with vendors and major government buying entities, he says, could be damaged beyond the point of repair.