<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 0-23827
PC CONNECTION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0497006
- ---------------------------------- --------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ROUTE 101A, 730 MILFORD ROAD
MERRIMACK, NEW HAMPSHIRE 03054
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 423-2000
--------------
528 ROUTE 13, MILFORD, NEW HAMPSHIRE 03055
--------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark () whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of November 12, 1998 was 15,561,221.
================================================================================
<PAGE>
PC CONNECTION, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
--------------------- ----
<S> <C>
Item 1 Financial Statements:
Balance Sheets - September 30, 1998 and December 31, 1997.. 1
Statements of Income -
Three Months Ended September 30, 1998 and 1997;
Nine Months Ended September 30, 1998 and 1997.............. 2
Statement of Changes in Stockholders' Equity Nine
Months Ended September 30, 1998............................ 3
Statements of Cash Flows - Nine
Months Ended September 30, 1998 and 1997................... 4
Notes to Financial Statements.............................. 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 8
Item 3 Qualitative and Quantitative Disclosures
About Market Risk......................................... 17
PART II OTHER INFORMATION
-----------------
Item 1 Legal Proceedings.......................................... 18
Item 2 Changes in Securities and Use of Proceeds.................. 18
Item 3 Defaults Upon Senior Securities............................ 18
Item 4 Submission of Matters to a Vote of Security Holders........ 18
Item 5 Other Information.......................................... 18
Item 6 Exhibits and Reports on Form 8-K........................... 18
SIGNATURES................................................. 19
----------
</TABLE>
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------ ------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 10,990 $ 758
Accounts receivable, net 45,795 29,921
Inventoriesmerchandise 77,706 63,720
Deferred income taxes 3,928 375
Prepaid expenses and other current assets 3,492 2,205
-------- --------
TOTAL CURRENT ASSETS 141,911 96,979
Property and equipment, net 13,025 8,463
Deferred income taxes 342 -
-------- --------
TOTAL ASSETS $155,278 $105,442
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ - $ 28,318
Current maturities of long-term debt - 1,250
Amounts payable to stockholders - 1,185
Accounts payable 81,398 38,174
Accrued expenses and other liabilities 11,023 9,145
-------- --------
TOTAL CURRENT LIABILITIES 92,421 78,072
Term loan, less current maturities - 3,250
-------- --------
Total liabilities 92,421 81,322
-------- --------
Stockholders' Equity:
Preferred Stock, $.01 par value, 7,500,000 shares authorized,
none issued and outstanding
Common Stock, $.01 par value, 30,000,000 shares authorized,
15,465,181 and 11,798,793 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 154 118
Additional paid-in capital 55,000 4,097
Retained earnings 7,703 19,905
-------- --------
Total Stockholders' Equity 62,857 24,120
-------- --------
Total Liabilities and Stockholders' Equity $155,278 $105,442
======== ========
</TABLE>
See notes to financial statements.
-1-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENTS OF INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $169,089 $139,137 $512,081 $383,460
Cost of sales 147,837 119,841 446,299 330,008
-------- -------- -------- --------
Gross profit 21,252 19,296 65,782 53,452
Selling, general and administrative expenses 16,317 14,537 49,217 40,965
Additional stockholder/officer compensation - 3,200 2,354 8,630
-------- -------- -------- --------
INCOME FROM OPERATIONS 4,935 1,559 14,211 3,857
Interest expense (10) (267) (267) (933)
Other, net 233 (37) 532 (43)
Income tax provision (2,012) (165) (837) (429)
-------- -------- -------- --------
NET INCOME $ 3,146 $ 1,090 $ 13,639 $ 2,452
======== ======== ======== ========
Weighted average shares outstanding:
Basic 15,443
========
Diluted 16,000
========
Earnings per share:
Basic $ .20
========
Diluted $ .20
========
PRO FORMA DATA:
- ---------------
Historical income before income taxes $ 1,255 $ 14,476 $ 2,881
Pro forma adjustment - stockholder/officer
compensation in excess of aggregate base salaries 3,170 2,354 8,540
-------- -------- --------
Pro forma income before income taxes 4,425 16,830 11,421
Pro forma income taxes 1,726 6,563 4,454
-------- -------- --------
Pro forma net income $ 2,699 $ 10,267 $ 6,967
======== ======== ========
Pro forma weighted average shares outstanding:
Basic 13,861 15,036 13,861
======== ======== ========
Diluted 14,259 15,578 14,181
======== ======== ========
Pro forma earnings per share:
Basic $.20 $.68 $.51
======== ======== ========
Diluted $.19 $.66 $.49
======== ======== ========
</TABLE>
See notes to financial statements.
-2-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID IN CAPITAL EARNINGS TOTAL
------ ------ --------------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 11,799 $118 $ 4,097 $ 19,905 $ 24,120
Net proceeds from initial public offering 3,594 36 57,217 - 57,253
Dividend - - (7,196) (25,841) (33,037)
Exercise of nonstatutory stock options,
including income tax benefits 72 - 588 - 588
Compensation under nonstatutory
stock option agreements - - 1,235 - 1,235
Recognition of deferred taxes on
nonstatutory stock option agreements - - (941) - (941)
Net income - - - 13,639 13,639
------ ---- ------- -------- --------
Balance, September 30, 1998 15,465 $154 $55,000 $ 7,703 $ 62,857
====== ==== ======= ======== ========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,639 $ 2,452
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,989 2,713
Deferred income taxes (4,317) (53)
Compensation under nonstatutory stock option agreements 1,235 785
Provision for doubtful accounts 2,003 1,577
Loss on disposal of fixed assets 174 54
Changes in assets and liabilities:
Accounts receivable (17,877) (7,697)
Inventories (13,986) (16,326)
Prepaid expenses and other current assets (1,287) 759
Accounts payable 43,224 18,156
Amounts payable to stockholders (1,185) 2,958
Accrued expenses and other liabilities 1,218 3,009
-------- ---------
Net cash provided by operating activities 24,830 8,387
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,065) (3,399)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 20,796 112,476
Repayment of short-term borrowings (49,114) (116,653)
Repayment of term loan (4,500) (250)
Issuance of stock upon exercise of nonstatutory stock options 69 -
Net proceeds from initial public offering 57,253 -
Payment of dividend (33,037) -
-------- ---------
Net cash used for financing activities (8,533) (4,427)
-------- ---------
Increase in cash and cash equivalents 10,232 561
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 758 162
-------- ---------
Cash and cash equivalents, end of period $ 10,990 $ 723
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 439 $ 1,021
Income taxes paid 5,279 175
NON-CASH TRANSACTIONS:
Computer equipment in the amount of $660 was acquired in April 1998
and financed by means of a capital lease
</TABLE>
See notes to financial statements
-4-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying financial statements of PC Connection, Inc. ("PCC" or the
"Company") have been prepared in accordance with generally accepted accounting
principles. Such principles were applied on a basis consistent with those of the
financial statements contained in the Company's Registration Statement on Form
S-1 (the "Registration Statement") filed with the Securities and Exchange
Commission ("SEC") in connection with its initial public offering ("the
Offering") (File No. 333-41171). The accompanying financial statements should be
read in conjunction with the financial statements contained in the Company's
Registration Statement. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation. The operating results
for the three and nine month periods ended September 30, 1998 may not be
indicative of the results expected for any succeeding quarter or the entire year
ending December 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results may
differ from those estimates.
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
NOTE 2--CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with original
maturities of 90 days or less to be cash equivalents.
NOTE 3--RECAPITALIZATION AND STOCK SPLIT
On February 4, 1998, the Company amended its Articles of Incorporation to
increase the authorized shares of the Company's Series A Non-Voting Common
Stock, $.01 par value per share (the "Series A Non-Voting Common Stock"), and
Series B Voting Common Stock, $.01 par value per share (the "Series B Voting
Common Stock"), to 22,500,000 and 7,500,000 shares, respectively. The Company
also, through a 1.310977-for-one stock split, increased the total number of
Series A Non-Voting Common Stock and Series B Voting Common Stock issued and
outstanding to 8,849,095 shares and 2,949,698 shares, respectively. The effect
of this recapitalization and stock split has been reflected in the Company's
financial statements and related notes thereto for all periods presented.
NOTE 4--REINCORPORATION OF THE COMPANY
On February 27, 1998, the Company changed its state of incorporation from New
Hampshire to Delaware (the "Reincorporation"). Pursuant to the Reincorporation,
the Company converted all of the issued and outstanding shares of Series A Non-
Voting Common Stock, and Series B Voting Common Stock of the New Hampshire
corporation into 11,798,793 shares of Common Stock, $.01 par value of the
"Common Stock", of the Delaware corporation on a one-for-one basis.
NOTE 5--INITIAL PUBLIC OFFERING
On March 6, 1998, the Company completed its offering of 3,593,750 shares of
Common Stock (including 468,750 shares issued upon the exercise of an
underwriters' overallotment option) at a price of $17.50 per share, raising
$57.3 million in net proceeds. The Company used the net proceeds from the
Offering for repayment of bank indebtedness ($12.9 million) and to pay a
dividend to stockholders of record as of February 27, 1998 ($33.0 million) equal
to substantially all previously taxed, but undistributed, S Corporation earnings
of the Company. The remaining net proceeds ($11.4 million) have been invested in
short-term investment securities and will be used for general corporate
purposes.
-5-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 6--TERMINATION OF S CORPORATION ELECTION
For periods prior to March 6, 1998, the Company elected to be treated as an S
Corporation under Subchapter S of the Internal Revenue Code ("the Code"), and
applicable state laws. Effective with the consummation of the Offering, the
Company's S Corporation election was automatically terminated and the Company
became subject to federal and state income taxes as a C Corporation from that
date forward.
Effective with the termination of the Company's S Corporation election, the
Company recorded a tax benefit of approximately $4.2 million relating to the
establishment of additional net deferred tax assets for future tax deductions
resulting from such termination.
NOTE 7--COMPENSATION UNDER NON-STATUTORY STOCK OPTION AGREEMENTS
Effective upon the consummation of the Offering, certain restrictions as to the
exercise of options granted under the Company's 1993 Incentive and Non-Statutory
Stock Option Plan expired. Prior to the consummation of the Offering, the
Company recorded compensation expense for certain options granted at prices less
than their fair market value ratably over seven years from the dates granted,
because such options were not exercisable except upon the occurrence of certain
events, including a public offering of the Company's Common Stock. Effective
upon the consummation of the Offering, the Company recorded a one-time charge
for stock-option compensation expense of approximately $870,000, relating to the
acceleration of the vesting period of certain of the Company's stock options
from seven years to four years.
NOTE 8--PRO FORMA INCOME STATEMENT DATA
The following pro forma adjustments have been made to the historical results of
operations to make the pro forma presentation
comparable to what would have been reported had the Company operated as a C
Corporation for the periods prior to the quarter ended June 30, 1998:
1. Elimination of stockholder/officer compensation in excess of aggregate
established 1998 base salaries ($150,000) for all periods prior to the quarter
ended June 30, 1998. These amounts generally represented Company-related S
Corporation tax obligations payable by the stockholder/officers for periods
prior to March 6, 1998. Effective upon the closing of the Offering, these
stockholder/officers are being paid annual base salaries aggregating $600,000.
2. Elimination of the historical income tax benefit/provision for all periods
prior to the quarter ended June 30, 1998 (including elimination of the $4.2
million income tax benefit related to the establishment of additional deferred
tax assets for future tax deductions resulting from the termination of the
Company's Subchapter S Corporation status) and establishment of a provision for
federal and state income taxes that would have been payable by the Company if
taxed under Subchapter C of the Code, assuming an effective tax rate of 39%
after an adjustment for stockholder/officer compensation described in Paragraph
1 above.
NOTE 9--EARNINGS PER SHARE
NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per common share is
computed using the weighted average number of shares outstanding. Diluted
earnings per common share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares attributed to outstanding
options to purchase common stock. All earnings per share amounts for all periods
have been presented in accordance with SFAS No. 128 requirements.
-6-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 9--PRO FORMA EARNINGS PER SHARE - CONT'D.
The denominator used to determine pro forma basic earnings per share for all
periods prior to the quarter ended June 30, 1998 includes the weighted average
shares required to pay the S Corporation dividend (assuming a price per share of
$17.50 for the nine months ended September 30, 1998, and $16.00 for all 1997
periods).
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(PRO FORMA) (PRO FORMA) (PRO FORMA)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 3,146 $ 2,699 $10,267 $ 6,967
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share:
Weighted average shares 15,443 11,799 14,614 11,799
Weighted average shares required to pay stockholder dividend - 2,062 422 2,062
------- ------- ------- -------
Denominator for basic earnings per share 15,443 13,861 15,036 13,861
------- ------- ------- -------
Effect of dilutive securities
Employee stock options 557 398 542 320
------- ------- ------- -------
Denominator for diluted earnings per share 16,000 14,259 15,578 14,181
======= ======= ======= =======
Earnings per share:
Basic $ .20 $ .20 $ .68 $ .51
======= ======= ======= =======
Diluted $ .20 $ .19 $ .66 $ .49
======= ======= ======= =======
</TABLE>
The following stock options to purchase Common Stock were excluded from the
computation of diluted earnings per share for the three and nine months ended
September 30, 1998 and 1997 because the effect of the options on the calculation
would have been anti-dilutive:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
ENDED ENDED
SEPTEMBER 30, (AMOUNTS IN THOUSANDS) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anti-dilutive stock options 25 -- 65 --
==== ==== ==== ====
</TABLE>
NOTE 10--CAPITAL LEASE
In November 1997, the Company entered into a fifteen year lease for a new
corporate headquarters with an affiliated entity related to the Company through
common ownership. The Company began occupying this facility in October of 1998
and the lease payments commenced in November 1998. Annual lease payments under
the terms of the lease, as amended on December 29, 1997, will be approximately
$903,000 for the first five years of the lease, increasing to $1,016,000 for
years nine through ten and $1,129,000 for years eleven through fifteen. The
lease requires the Company to pay its proportionate share of real estate taxes
and common area maintenance charges as additional rent and also to pay insurance
premiums for the leased property. The Company has the option to renew the lease
for two additional terms of five years each.
-7-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 10--CAPITAL LEASE - CONT'D.
In November 1998, the Company recorded the lease as a capital lease. The
recorded value of the asset (lease property under capital lease) and the related
liability (obligation under capital lease) was $6.8 million.
NOTE 11--REPORTING COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires the reporting of comprehensive income in addition
to net income. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. Based on
the current financial structure and operations of the Company, the Company had
no other components to be included in comprehensive income. Therefore,
comprehensive income is the same as net income reported for the three and nine
months ended September 30, 1998 and 1997.
NOTE 12--RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the year ending
December 31, 1998, establishes standards for reporting information about
operating segments in the annual financial statements, selected information
about operating segments in interim financial reports and disclosures about
products and services, geographic areas and major customers. This new standard
will require the Company to report financial information on the basis that is
used internally for evaluating segment performance and deciding how to allocate
resources to segments, which may result in more detailed information in the
notes to the Company's financial statements than is currently required and
provided. The Company has not yet determined the effects, if any, of
implementing SFAS No. 131 on its reporting of financial information.
-8-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements based on management's
current expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. All statements,
trends, analyses and other information contained in this report relative to
trends in net sales, gross margin and anticipated expense levels, as well as
other statements, including words such as "anticipate", "believe," "plan,"
"estimate," "expect" and "intend" and other similar expressions, constitute
forward-looking statements. These forward-looking statements involve risks and
uncertainties, and actual results may differ materially from those anticipated
or expressed in such statements. Potential risks and uncertainties include,
among others, those set forth under the caption "Risk Factors" in the Company's
Registration Statement filed with the SEC in connection with its Initial Public
Offering (File No. 333-41171). Particular attention should be paid to the
cautionary statements involving the industry's rapid technological change and
exposure to inventory obsolescence, availability and allocation of goods,
reliance on vendor support and relationships, continued sales of Mac products,
competitive risks, pricing risks, and economic risks. Except as required by law,
the Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company files from time to time with the SEC.
GENERAL
The Company was founded in 1982 as a mail-order business offering a broad range
of software and accessories for IBM and IBM-compatible personal computers
("PCs"). The founders' goal was to provide consumers with superior service and
high quality branded products at competitive prices. The Company initially
sought customers through advertising in magazines and the use of inbound toll
free telemarketing. Currently, the Company seeks to generate sales through (i)
outbound telemarketing by account managers focused on the business, education
and government markets and (ii) inbound calls from customers responding to the
Company's catalogs and other advertising. The Company also advertises in
selected computer industry publications, on radio and television and in 1997
commenced selling products through its Internet web site.
The Company offers both PC compatible products and Mac personal computer
compatible products. Reliance on Mac product sales has decreased over the last
two years, from 26.7% of net sales in the year ended December 31, 1995 to 19.3%
of net sales in the quarter ended September 30, 1998. In late 1997, Apple
announced that it will sell built-to-order computers directly to customers over
the Internet. While Apple also indicated that it is not abandoning traditional
retail and direct marketing outlets, the Company cannot predict whether direct
sales by Apple will affect the future supply of Mac products to the Company.
Although net sales attributable to Mac products in absolute dollar amounts
increased in the quarter ended September 30, 1998, as compared to the comparable
period in 1997, such sales decreased as a percentage of net sales and the
Company believes that such sales will continue to decrease as a percentage of
net sales and may decline in absolute dollar amounts in future periods.
All of the Company's product categories experienced strong growth in the quarter
ended September 30, 1998 over the comparable period in 1997, with sales of
computer systems representing one of the fastest growing categories. Sales of
computer systems result in a relatively high dollar sales order, as reflected in
the increase in the Company's average order size from $555 in the quarter ended
September 30, 1997 to $624 in the quarter ended September 30, 1998. Computer
system sales generally provide the largest gross profit dollar contribution per
order of all of the Company's products, although they usually yield the lowest
gross margin percentage. Partially as a result of higher system sales, the
Company's gross margin has declined over the last two years while the operating
income margin has increased due to the leveraging of selling, general and
administrative expenses over a larger sales base.
The Company's profit margins are also influenced by, among other things,
industry pricing and the relative mix of inbound and outbound sales. Generally,
pricing in the computer and related products market is very aggressive and the
Company intends to maintain prices at competitive levels. Since outbound sales
are typically to corporate accounts that purchase at volume discounts, the gross
margin on such sales is generally lower than inbound sales, although the gross
profit dollar contribution per order is generally higher as average order sizes
to corporate accounts are usually larger. The Company believes that outbound
sales will continue to represent a larger portion of its business mix in future
periods.
-9-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
GENERAL - CONT'D.
The direct marketing of personal computers and related products is highly
competitive. In addition to other direct marketers and manufacturers who sell
direct, such as Dell Computer Corporation and Gateway 2000, Inc., manufacturers
of PCs sold by the Company, such as Compaq and IBM, have also announced varying
plans to sell PCs directly to end users. However, both Compaq and IBM continue
to rely on reseller arrangements with direct marketers such as the Company as
part of their own marketing programs designed to compete more effectively with
Dell and Gateway. The Company currently believes that direct sales by Compaq and
IBM will not have a significant adverse effect upon the Company's net sales.
Most product manufacturers provide the Company with cooperative advertising
support in exchange for product coverage in the Company's catalogs. Although the
level of cooperative advertising support available to the Company from certain
manufacturers has declined, and may decline further in the future, the overall
level of cooperative advertising revenues has continued to increase consistent
with the Company's increased levels of spending for catalog and other
advertising programs. The Company believes that the overall levels of
cooperative advertising revenues available over the next twelve months will be
consistent with the Company's planned advertising programs.
In connection with the planned relocation of its headquarters facility in the
fall of 1998, the Company incurred certain one-time moving and other costs, not
expected to exceed $500,000, which will be charged to operating costs. In
connection with the Offering of the Company's Common Stock that closed in March
1998, the Company reported certain non-recurring, non-cash items in the nine
months ended September 30, 1998. See "Initial Public Offering" and "Pro Forma
and Other Adjustments" below.
INITIAL PUBLIC OFFERING
On March 6, 1998, the Company closed its Offering of 3,593,750 shares (including
468,750 shares issued upon the exercise of an underwriters' overallotment
option) of Common Stock at an offering price of $17.50 per share. Net proceeds
to the Company after deducting expenses of the Offering were approximately $57.3
million. See "Liquidity and Capital Resources".
PRO FORMA AND OTHER ADJUSTMENTS
The pro forma income statements presented below have been determined by applying
the following pro forma and other adjustments to the Company's historical income
statements for all periods prior to the quarter ended June 30, 1998:
Pro Forma Adjustments
- ---------------------
1. Elimination of stockholder/officer compensation in excess of aggregate
established 1998 base salaries ($150,000) for all periods prior to the quarter
ended June 30, 1998. These amounts generally represented Company-related S
Corporation tax obligations payable by the stockholder/officers for periods
prior to March 6, 1998. Effective upon the closing of the Offering, these
stockholder/officers are being paid annual base salaries aggregating $600,000.
2. Elimination of the historical income tax benefit/provision for all
periods prior to the quarter ended June 30, 1998 (including elimination of the
$4.2 million income tax benefit related to the establishment of additional
deferred tax assets for future tax deductions resulting from the termination of
the Company's Subchapter S Corporation status) and establishment of a provision
for federal and state income taxes that would have been payable by the Company
if taxed under Subchapter C of the Code, assuming an effective tax rate of 39%
after an adjustment for stockholder/officer compensation described in Paragraph
1 above.
Other Adjustments
- -----------------
1. Elimination for the nine months ended September 30, 1998 of an $870,000
one-time charge for stock option compensation expense relating to the
acceleration in the vesting period of certain of the Company's stock options
from seven years to four years in connection with the Offering.
-10-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
GENERAL - CONT'D.
<TABLE>
<CAPTION>
INCOME STATEMENTS, AS ADJUSTED THREE MONTHS ENDED SEPTEMBER 30,
% of % of
(Amounts in thousands, except per share data) 1998 NET SALES 1997 NET SALES
(PRO FORMA)
<S> <C> <C> <C> <C>
Net sales $169,089 100.00% $139,137 100.00%
Cost of sales 147,837 87.43 119,841 86.13
-------- ------ -------- ------
GROSS PROFIT 21,252 12.57 19,296 13.87
Selling, general and administrative expenses 16,317 9.65 14,537 10.45
Additional stockholder/officer compensation - - 30 .02
-------- ------ -------- ------
Income from operations 4,935 2.92 4,729 3.40
Interest expense (10) - (267) (.19)
Other, net 233 .13 (37) (.03)
Income taxes (2,012) (1.19) (1,726) (1.24)
-------- ------ -------- ------
NET INCOME $ 3,146 1.86% $ 2,699 1.94%
======== ====== ======== ======
Weighted average shares outstanding:
Basic 15,443 13,861
======== ========
Diluted 16,000 14,259
======== ========
Earnings per share:
Basic $.20 $.20
======== ========
Diluted $.20 $.19
======== ========
<CAPTION>
INCOME STATEMENTS, AS ADJUSTED THREE MONTHS ENDED SEPTEMBER 30,
% of % of
(Amounts in thousands, except per share data) 1998 NET SALES 1997 NET SALES
(PRO FORMA) (PRO FORMA)
<S> <C> <C> <C> <C>
Net sales $512,081 100.00% $383,460 100.00%
Cost of sales 446,299 87.15 330,008 86.06
-------- ------ -------- ------
GROSS PROFIT 65,782 12.85 53,452 13.94
Selling, general and administrative expenses 48,347 9.44 40,965 10.69
Additional stockholder/officer compensation - - 90 .02
-------- ------ -------- ------
Income from operations 17,435 3.41 12,397 3.23
Interest expense (267) (.05) (933) (.24)
Other, net 532 .10 (43) (.01)
Income taxes (6,903) (1.35) (4,454) (1.16)
-------- ------ -------- ------
NET INCOME $ 10,797 2.11% $ 6,967 1.82%
======== ====== ======== ======
Weighted average shares outstanding:
Basic 15,036 13,861
======== ========
Diluted 15,578 14,181
======== ========
Earnings per share:
Basic $.72 $.51
======== ========
Diluted $.70 $.49
======== ========
</TABLE>
-11-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
The following table sets forth the Company's percentage of net sales (in
dollars) of computer systems/memory, peripherals, software, and networking and
communications products during the three month and nine month periods ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Computer Systems/Memory 43.6% 43.8% 42.4% 40.9%
Peripherals 35.4 33.6 34.9 34.7
Software 13.4 14.9 14.4 16.5
Networking and Communications 7.6 7.7 8.3 7.9
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
NET SALES increased $30.0 million, or 21.5%, to $169.1 million for the quarter
ended September 30, 1998 from $139.1 million for the comparable period in 1997.
Similarly, net sales for the nine months ended September 30, 1998 increased
$128.6 million, or 33.5%, to $512.1 million from $383.5 million for the
comparable nine month period in 1997. Growth in net sales was primarily
attributable to the continued expansion and increased productivity of the
Company's outbound telemarketing group, continued growth in average order size,
increased catalog mailings and growth in the Company's Internet sales. The
Company's growth in net sales in the early part of the quarter was adversely
affected by the conversion in July 1998 of its sales order management and
fulfillment software to a new enterprise management software system. Also,
product availability levels for certain models of computer systems were lower
than anticipated. Outbound sales increased $29.3 million, or 43.6%, to $96.5
million in the three months ended September 30, 1998 from $67.2 million for the
three months ended September 30, 1997. Inbound and on-line Internet sales
increased $0.7 million, or 1.0%, to $72.6 million in the three months ended
September 30, 1998 from $71.9 million for the three months ended September 30,
1997. Outbound sales for the nine months ended September 30, 1998 increased
$104.0 million, or 59.7%, to $278.2 million from $174.2 million for the
comparable period in 1997, and inbound and online Internet sales for the nine
months ended September 30, 1998 increased $24.6 million, or 11.7%, to $233.9
million from $209.3 million in the comparable period in 1997, respectively.
System/memory sales increased to 43.6% and 42.4% of net sales for the three
months and nine months ended September 30, 1998, respectively, from 43.8% and
40.9% for the respective comparable periods in 1997.
GROSS PROFIT increased $2.0 million, or 10.4%, to $21.3 million for the quarter
ended September 30, 1998 from $19.3 million for the comparable quarter in 1997.
Gross profit increased for the nine months ended September 30, 1998 by $12.3
million, or 23.1% to $65.8 million from $53.5 million in the comparable period
in 1997. The increase in gross profit dollars was primarily attributable to the
increase in net sales described above. Gross profit margin decreased from 13.9%
and 13.9% in the three months and nine months ended September 30, 1997,
respectively, to 12.6% and 12.9% in the three months and nine months ended
September 30, 1998, respectively, due primarily to the continued decline in
margins for system sales and growth in outbound telemarketing sales, which
generally carry lower margins. The Company's gross profit margin as a percentage
of net sales may vary on a quarterly basis based upon vendor support programs,
product mix, pricing strategies, market conditions and other factors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $1.8 million, or 12.2%,
to $ 16.3 million for the quarter ended September 30, 1998 from $14.5 million
for the comparable quarter in 1997, but decreased as a percentage of sales from
10.5% for the three months ended September 30, 1997 to 9.7% for the three months
ended September 30, 1998. Such expenses for the nine months ended September 30,
1998 increased by $8.2 million, or 20.1%, to $49.2 million from $41.0 million in
the nine months ended September 30, 1997, but decreased as a percentage of sales
from 10.7% for the nine months ended September 30, 1997 period to 9.6% in the
comparable period in 1998. The increase in expenses was primarily attributable
to increases in volume-sensitive costs such as sales personnel and credit card
fees and included a $870,000 one-time charge for stock option compensation
expense relating to the acceleration in the vesting period of certain of the
Company's stock options from seven to four years in connection with the
Offering. The decrease as a percentage of net sales was primarily attributable
to improved expense control and the leveraging of selling, general and
administrative expenses over a larger sales base.
-12-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS - GENERAL - CONT'D.
Selling, general and administrative expenses, excluding the one-time charge for
stock option compensation expense, increased $7.3 million, or 18.0%, to $48.3
million for the nine months ended September 30, 1998 from $41.0 million for the
comparable period in 1997, but decreased as a percentage of sales from 10.7% for
the nine months ended September 30, 1997 to 9.4% for the comparable period in
1998.
ADDITIONAL STOCKHOLDER/OFFICER COMPENSATION was $0 and $2.4 million for the
three months and nine months ended September 30, 1998, respectively, compared to
$3.2 million and $8.6 million for the respective comparable periods in 1997.
These amounts generally represented Company-related federal income tax
obligations payable by the stockholder/officers for periods prior to March 6,
1998. Effective upon closing of the Offering, these stockholder/officers are
being paid annual base salaries aggregating $600,000.
INCOME FROM OPERATIONS increased $3.4 million, or 216.5%, to $4.9 million for
the quarter ended September 30, 1998, from $1.6 million for the quarter ended
September 30, 1997. Income from operations as a percentage of sales increased
from 1.1% in the three months ended September 30, 1997 to 2.9% in the comparable
period in 1998 for the reasons discussed above. Similarly, income from
operations for the nine months ended September 30, 1998 increased $10.3 million,
or 268.4%, to $14.2 million from $3.9 million in the comparable 1997 period, and
income from operations as a percentage of sale increased from 1.0% for the nine
months ended September 30, 1997 to 2.8% for the comparable period in 1998.
Income from operations, excluding both the one-time charge for stock option
compensation expense ($870,000) and the additional stockholder/officer
compensation in excess of their aggregate annual base salaries of $0.6 million,
($3.2 million, $2.4 million and $8.5 million for the three months ended
September 30, 1997, and the nine months and nine months ended September 30, 1998
and 1997, respectively) increased by $0.2 million, or 4.4%, to $4.9 million for
the quarter ended September 30, 1998, from $4.7 million for the quarter ended
September 30, 1997, and increased by $5.0 million, or 40.6%, to $17.4 million
for the nine months ended September 30, 1998 from $12.4 million for the
comparable period in 1997. Such income from operations as a percentage of net
sales changed from 3.4% and 3.2% for the respective three-month and nine-month
periods ended September 30, 1997 to 2.9% and 3.4% for the respective comparable
periods in 1998.
INTEREST EXPENSE decreased $257,000, or 96.3%, to $10,000 for the quarter ended
September 30, 1998 from $267,000 for the comparable quarter in 1997. Similarly,
interest expense for the nine months ended September 30, 1998, decreased
$666,000, or 71.4%, to $267,000 from $933,000 for the comparable period in 1997.
This decrease in interest expense was due primarily to lower average outstanding
borrowings generally in the nine months ended September 30, 1998, compared to
the comparable period in 1997, and particularly, to the full payment of all
outstanding bank borrowings at the close of the Offering.
INCOME TAXES for the three months ended September 30, 1998 was a provision of
$2.0 million compared to a provision of $165,000 for the comparable quarter in
1997. Income taxes for the nine months ended September 30, 1998 was a net
provision of $837,000, compared to a provision of $429,000 for the comparable
period in 1997.
Effective with the consummation of the Offering, the Company's S Corporation
election was automatically terminated and the Company recorded a tax benefit of
approximately $4.2 million relating to the establishment of additional net
deferred tax assets for future tax deductions resulting from the termination of
the S Corporation election. In addition, for the periods subsequent to March 6,
1998, the Company recorded income tax expense at the Company's effective tax
rate (39%). For periods prior to the termination of the S Corporation election,
the Company was only required to pay New Hampshire Business Profits Tax.
NET INCOME for the quarter ended September 30, 1998 increased $2.0 million, or
188.6%, to $3.1 million from $1.1 million for the comparable quarter in 1997,
principally as a result of the increases in operating income as described above.
Net income for the nine months ended September 30, 1998 increased $11.1 million,
or 456.2%, to $13.6 million from $2.5 million for the comparable period in 1997,
principally as a result of the $4.2 million income tax benefit and increase in
operating income as described above.
-13-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS - GENERAL - CONT'D.
PRO FORMA NET INCOME, calculated for the nine months ended September 30, 1998,
and the three and nine months ended September 30, 1997, is determined by (i)
eliminating stockholder/officer compensation in excess of quarterly base
salaries ($150,000) and (ii) by eliminating the actual income tax
provision/benefit and adding a provision for federal and state income taxes that
would have been payable by the Company under Subchapter C of the Internal
Revenue Code ("Code"). Net income for the quarter ended September 30, 1998 was
$3.1 million, or $.20 per share, compared to pro forma net income for the
quarter ended September 30, 1997 of $2.7 million, or $.19 per share. Pro forma
net income for the nine months ended September 30, 1998 was $10.3 million, or
$.66 per share, compared to $7.0 million, or $.49 per share for the comparable
period in 1997.
Excluding a one-time charge for the acceleration of certain stock option
compensation expense (described above), the Company would have reported pro
forma net income of $10.8 million, or $.70 per share, for the nine months ended
September 30, 1998, compared to pro forma net income of $7.0 million, or $.49
per share, for the comparable period in 1997, an increase of $.21 per share, or
43%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital expenditures
through cash flow from operations and bank borrowings. In March 1998, the
Company completed an initial public offering and used the net proceeds of the
Offering, aggregating $57.3 million, to repay all outstanding bank indebtedness
of $12.9 million and to pay a dividend of $33.0 million to its stockholders of
record as of February 27, 1998, equal to substantially all previously taxed, but
undistributed, S Corporation earnings of the Company. The remaining net proceeds
of $11.4 million have been invested in short-term investment securities and are
being used for general corporate purposes. The Company believes that funds
generated from operations, together with the net proceeds from the Offering and
available credit under its bank line of credit, will be sufficient to finance
its working capital and capital expenditure requirements at least through 1998.
Net cash provided by operating activities was $24.8 million in the nine months
ended September 30, 1998, as compared to $8.4 million provided in the comparable
period in 1997. The primary factors historically affecting cash flows from
operations are the Company's net income and changes in the levels of accounts
receivable, inventories and accounts payable. Historically, inventories and
accounts payable have increased as a result of the sales growth of the Company.
Accounts receivable have increased primarily due to an increase in open account
purchases by commercial customers resulting from the Company's continued efforts
to increase its sales to such customers, offset in part by a higher rate of
increase in accounts receivable allowances for sales returns and doubtful
accounts related to the growth in sales and the disproportionately higher level
and complexity of settling claims with vendors.
Capital expenditures were $6.1 million in the nine months ended September 30,
1998, as compared to $3.4 million in the comparable period in 1997. The majority
of the capital expenditures for the first half of 1998 and 1997 relate to
computer hardware and software for the Company's management information systems.
The Company has been in the process over the last year of upgrading its order
management and fulfillment systems to new hardware and software. The conversion
was completed during the third quarter of 1998. Total additional expenditures
related to the management information systems for the year ending December 31,
1998 are estimated at $0.5 million.
In addition, in connection with the relocation of its headquarters facility
during October and November, the Company expects to spend approximately $3.0
million in total for leasehold improvements and for furniture and equipment.
-14-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES - CONT'D.
As of September 30, 1998, the Company had a credit agreement with a bank
providing for short-term borrowings equal to the lesser of $45 million or an
amount determined by a formula based on accounts receivable and inventory
balances. Such borrowings are collateralized by the Company's accounts
receivable and inventories (other than inventories pledged to secure trade
credit arrangements) and bear interest at the prime rate (8.25% at September 30,
1998). The credit agreement includes various customary financial and operating
covenants, including restrictions on the payment of dividends, except for
dividends to stockholders in respect of income taxes, none of which the Company
believes significantly restricts its operations. No borrowings were outstanding
at September 30, 1998. The Company had $81.4 million in outstanding accounts
payable at September 30, 1998, including $18.0 million for in-transit inventory
from vendors not yet received by the Company but for which title passed to the
Company upon shipment. Such accounts are generally paid within 30 days of
incurrence and will be financed by cash flows from operations or short-term
borrowings under the line of credit.
INFLATION
The Company has historically offset any inflation in operating costs by a
combination of increased productivity and price increases, where appropriate.
The Company does not expect inflation to have a significant impact on its
business in the future.
YEAR 2000 COMPLIANT INFORMATION SYSTEMS
The change in date from 1999 to 2000 poses potential problems for many computer
and electro-mechanical systems around the world. Some of the Company's systems
could be affected by this problem which could have a material adverse effect on
the Company's business, financial condition and results of operations.
In order to minimize any potential disruption to the Company's business, the
Company has an active, on-going program to evaluate its systems and take
corrective action prior to the millennium change. A full-time senior manager is
responsible for managing the Year 2000 Project, which is comprised of five
phases: Awareness, Assessment, Renovation, Validation and Implementation. For
each system that is determined to be non-compliant, the Company will take one of
the following three courses of action to achieve date compliance: (i) renovate
(convert) the current system; (ii) replace the current system with a new date
compliant system; or (iii) retire the current system because it no longer
serves a valid business need.
The Company recently replaced its order management and fulfillment software with
new software and converted its mainframe equipment to a new IBM AS400 platform,
both of which are better suited to the Company's expected scale of operations
and are designed to be Year 2000 compliant. The Company is investigating the
extent to which its other systems may be affected and communicating to all of
its system vendors concerning timely and completed remedies for those systems
requiring modification. The Company currently believes it will be able to modify
or replace any affected systems in time to minimize any detrimental effect on
operations.
The Company is also communicating with all third parties on which it relies to
assess their progress in evaluating their systems and implementing appropriate
corrective measures. Furthermore, the Company is actively encouraging its
customers to undertake their own Year 2000 Compliance projects in order to
ensure the continued viability of the Company's commercial business pursuits.
Utilizing both internal and external resources to identify and assess needed
Year 2000 remediation, the Company currently anticipates that its Year 2000
awareness, assessment, renovation and validation efforts, which began in 1996,
will be completed by June 30, 1999, and that such efforts will be completed
prior to any currently anticipated impact on its computer equipment and
software. The Company estimates that as of September 30, 1998 it had completed
approximately 60% of the initiatives that it believes will be necessary to fully
address potential Year 2000 issues relating to its computer equipment and
software. The projects comprising the remaining 40% of the initiatives are in
process and expected to be completed by June 30, 1999.
-15-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
YEAR 2000 COMPLIANT INFORMATION SYSTEMS - CONT'D.
<TABLE>
<CAPTION>
YEAR 2000 INITIATIVE
TIME PERCENT
FRAME COMPLETED
<S> <C> <C>
Status of overall Year 2000 Project:
Awareness 10/97 - 06/98 100%
Assessment 10/97 - 12/98 85%
Renovation 04/98 - 09/99 60%
Validation 05/98 - 11/99 50%
Implementation 05/98 - 12/99 60%
Summary of significant Year 2000 projects completed:
Conversion to new IBM AS400 10/96 - 09/98 100%
Conversion to new order management
and fulfillment software 10/96 - 09/98 100%
</TABLE>
The primary objectives of the Year 2000 Project relating to the Company's
internal systems were met when the Company implemented its new order management
and fulfillment software and upgraded its IBM AS400 data processing platform.
The majority of the costs (approximately $5.5 million) of the new software and
hardware were capitalized during the period October 1, 1997 to September 30,
1998. The Company believes that the costs of its Year 2000 awareness,
assessment, renovation, validation and implementation for all other computer
equipment and software, as well as currently anticipated costs to be incurred by
the Company with respect to Year 2000 issues of third parties, will not exceed
$500,000, which will be funded from operating cash flow. These costs will be
expensed as incurred.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for the Company. The Company has been taking,
and will continue to pursue, all reasonably necessary steps to protect its
operations, assets and the interests of its customers, shareholders, employees
and community partners. However, for all Year 2000 issues that are not properly
identified, or assessments, renovation, validation and implementation that are
not effected timely with respect to Year 2000 problems, there can be no
assurance that the Year 2000 issues of the Company or other entities will not
have a material adverse impact on the Company's systems or results of
operations.
The Company is presently considering, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999.
The costs of the Company's Year 2000 awareness, assessment, renovation,
validation and implementation efforts and the dates on which the Company
believes it will complete such efforts are based upon management's best
estimates, which were derived using numerous assumptions regarding future
events, including the continued availability of certain resources, third-party
remediation plans, and other factors. There can be no assurance that these
estimates will prove to be accurate and actual results could differ materially
from those currently anticipated. Specific factors that could cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in Year 2000 issues, the ability to assess, renovate and
implement all relevant computer codes and embedded technology and similar
uncertainties. In addition, variability of definitions of "compliance of Year
2000" and the myriad of different products and services and combinations
thereof, sold by the Company may lead to claims whose impact on the Company is
not currently estimable. No assurance can be given that the aggregate cost of
defending and resolving such claims, if any, will not materially adversely
affect the Company's results of operations. Although some of the Company's
agreements with manufacturers and others from whom it purchases products for
resale contain provisions requiring such parties to indemnify the Company under
some circumstances, there can be no assurance that such indemnification
arrangements will cover all of the Company's liabilities and costs related to
claims by third parties related to the Year 2000 issue.
-16-
<PAGE>
PC CONNECTION, INC.
PART I - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in short-
term securities, generally with maturities of 90 days or less. In addition, the
Company's Credit Agreement provides for borrowings which bear interest at
variable rates based on the prime rate. The Company had no borrowings
outstanding pursuant to the Credit Agreement as of September 30, 1998. The
Company believes that the effect, if any, of reasonably possible near-term
changes in interest rates on the Company's financial position, results of
operations and cash flows should not be material.
-17-
<PAGE>
PC CONNECTION, INC.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 - OTHER INFORMATION
Not applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
-------------------
(i) None
-18-
<PAGE>
PC CONNECTION, INC.
SEPTEMBER 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PC CONNECTION, INC.
November 16, 1998 By: /s/ Wayne L. Wilson
---------------------------------
Wayne L. Wilson
President and Chief Operating Officer
November 16, 1998 By: /s/ Mark A. Gavin
---------------------------------
Mark A. Gavin
Vice President of Finance and
Chief Financial Officer
-19-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMPANY'S
QUARTERLY FINANCIAL STATEMENTS ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,990
<SECURITIES> 0
<RECEIVABLES> 53,827
<ALLOWANCES> 8,032
<INVENTORY> 77,706
<CURRENT-ASSETS> 141,911
<PP&E> 32,550
<DEPRECIATION> 19,525
<TOTAL-ASSETS> 155,278
<CURRENT-LIABILITIES> 92,421
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 62,703
<TOTAL-LIABILITY-AND-EQUITY> 155,278
<SALES> 169,089
<TOTAL-REVENUES> 169,089
<CGS> 147,837
<TOTAL-COSTS> 147,837
<OTHER-EXPENSES> (233)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 5,158
<INCOME-TAX> 2,012
<INCOME-CONTINUING> 3,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,146
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
