PC Connection vows to revive fed contract

Saying there was no indication of intentional wrongdoing, Merrimack-based PC Connection predicts it will win back a $56 million federal contract canceled over possible sales by a subsidiary that may have resulted in “underpayment of fees” or sales of “unqualified items.”

Announcement of the General Services Administration’s cancellation of the contract with GovConnection came on Nov. 17 in the wake of a routine audit and not a specific event, said PC Connection officials. The GSA also referred the matter to the Justice Department. The GSA officially canceled the GovConnection contract Oct. 16.

PC Connection sells computers, computer peripherals and software. Its projected sales this year are $1.3 billion. The company employs about 1,200 people at its three New Hampshire locations – Merrimack, Dover and Keene.

PC Connection has appointed Don Weatherson, the non-executive chairman of GovConnection, to the additional position of the unit’s chief executive. Gary Sorkin, who was the president, has been placed on a leave of absence, the company said.

In a conference call, PC Connection Chairman and CEO Patricia Gallup said she was “confident we have exactly the right leader in place as we move forward.” She added that Weatherson is working to make the changes necessary to submit a new agreement to the GSA for its consideration.

In fact company officials were confident they will get the GSA contract back.

“We see this as a temporary situation happening at time of year where it’s very slow for federal sales,” said Mark Gavin, PC Connection’s chief financial officer.

Weatherson, in fact, said the odds are “extremely low” that GovConnection won’t regain the GSA contract by the fall of 2004. He said his goal is to win it back within two months, and GSA officials have promised to give a new proposal “fair consideration.”

PC Connection acquired the government contract with its June 1999 acquisition of Rockville, Md.-based ComTeq Federal, which it renamed GovConnection in 2001. The subsidiary handles government and education contracts.

The GSA said its actions came after a review of GovConnection’s contract management systems and procedures showed that it “may have resulted in the sale of unqualified items or the underpayment of required fees,” according to PC Connection.

“We have no indication of intentional wrongdoing,” said Patricia Gallup, chairwoman and chief executive officer, in a conference call.

Gallup said the company will cooperate fully with any review by the Justice Department and that PC Connection’s board has begun its own internal review.

The GSA does not audit each year, according to Weatherson. He said this was the first audit of the contract, which dates back to 1997.

The government audit – which covered the period from 1997 to 2001, indicated that some items sold by GovConnection may not have been on the GSA contract at the time of sale, Weatherson said.

“As far as the payment of fees – if an item was on the contract at that time, we should have paid a fee. If not, we should not have paid a fee,” he said.

The amount of fees in question ranges from $500,000 to $1 million, he said.

GovConnection received a 30-day cancellation notice from the GSA on Oct. 16, then met with the GSA to try to resolve differences of opinion regarding contract performance and compliance.

GovConnection’s GSA contract accounted for about $56 million of the company’s $955 million in revenue in the first nine months of 2003. According to Gavin — who said GovConnection’s sales typically decline in the last quarter of the year — the estimated impact of the cancellation is a loss of $10 million in sales.

“We think this time of year is not as bad of a time as it could have been going through this process with the GSA,” he said.

PC Connection expects fourth-quarter earnings of 5 cents to 7 cents a share before any additional charges that may be required related to the GSA contract.

The company also expects sales for the fourth quarter between $330 million and $340 million.

PC Connection doesn’t expect that the loss of the contract will spill over to other government contracts or other contract opportunities, Gavin said.

“We’re maintaining as best we can our business with our partnerships and other contracts we have with other government customers,” Weatherson aid.

The company has hired its own outside counsel to review the matter, Gavin said. The review will be conducted by GovConnection’s special government contracts counsel and an independent auditing firm.