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, 1999
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.)
730 MILFORD ROAD,
MERRIMACK, NEW HAMPSHIRE 03054
- ------------------------------ ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 423-2000
---------------
Indicate by check mark (X) 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, 1999 was 15,697,062.
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARY
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements:
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998.......................................1
Consolidated Statements of Income -
Three months ended September 30, 1999 and 1998;
Nine months ended September 30, 1999 and 1998...............2
Consolidated Statement of Changes in Stockholders' Equity -
Nine months ended September 30, 1999........................3
Consolidated Statements of Cash Flows - Nine
months ended September 30, 1999 and 1998 ...................4
Notes to Consolidated Financial Statements....................5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................9
Item 3 Qualitative and Quantitative Disclosures About Market Risk...16
PART II OTHER INFORMATION
Item 1 Legal Proceedings............................................17
Item 2 Changes in Securities and Use of Proceeds....................17
Item 3 Defaults Upon Senior Securities..............................17
Item 4 Submission of Matters to a Vote of Security Holders..........17
Item 5 Other Information............................................17
Item 6 Exhibits and Reports on Form 8-K.............................17
SIGNATURES...................................................18
</TABLE>
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1999 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,957 $ 11,910
Accounts receivable, net 82,192 58,890
Inventories-merchandise 58,569 63,425
Deferred income taxes 1,693 3,181
Prepaid expenses and other current assets 3,632 4,115
--------- ---------
TOTAL CURRENT ASSETS 158,043 141,521
Goodwill 9,593 -
Deferred income taxes - 314
Property and equipment, net 23,972 22,675
--------- ---------
Total assets $ 191,608 $ 164,510
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease
obligation to affiliate $ 133 $ 123
Notes payable, current maturities 1,000 -
Accounts payable 84,113 77,561
Accrued expenses and other liabilities 11,261 10,069
--------- ---------
Total current liabilities 96,507 87,753
Notes payable, less current maturities 2,000 -
Capital lease obligation to affiliate 6,981 7,081
Deferred taxes 745 -
--------- ---------
Total liabilities 106,233 94,834
--------- --------
Stockholders' Equity:
Common stock 157 156
Additional paid-in capital 57,406 56,812
Retained earnings 27,812 12,708
--------- --------
TOTAL STOCKHOLDERS' EQUITY 85,375 69,676
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 191,608 $ 164,510
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
-1-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------------------------------------
<S> <C> <C> <C> <C>
Net sales $282,103 $169,089 $738,915 $512,081
Cost of sales 247,651 147,837 649,598 446,299
------- -------- -------- -------
GROSS PROFIT 34,452 21,252 89,317 65,782
Selling, general and
administrative expenses 24,333 16,317 64,136 49,217
Additional stockholder/officer
compensation - - - 2,354
------- ------- ------- -------
INCOME FROM OPERATIONS 10,119 4,935 25,181 14,211
Interest expense (449) (10) (991) (267)
Other, net 32 233 173 532
Income tax provision (3,687) (2,012) (9,259) (837)
------- ------- -------- -------
NET INCOME $ 6,015 $ 3,146 $ 15,104 $13,639
======= ======= ======== =======
Weighted average shares outstanding:
Basic 15,651 15,443 15,633
======= ======= ========
Diluted 16,078 16,000 16,072
======= ======= ========
Earnings per share:
Basic $ 0.39 $ .20 $ .97
======= ======= ========
Diluted $ 0.37 $ .20 $ .94
======= ======= ========
Pro forma data:
Historical income before income taxes $14,476
Pro forma adjustment - stockholder/officer
compensation in excess of aggregate base salaries 2,354
-------
Pro forma income before income taxes 16,830
Pro forma income taxes 6,563
-------
Pro forma net income $10,267
=======
Pro forma weighted average shares outstanding:
Basic 15,036
=======
Diluted 15,578
=======
Pro forma earnings per share:
Basic $ .68
=======
Diluted $ .66
=======
See accompanying notes to consolidated financial statements.
</TABLE>
-2-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED 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, 1998 15,605 $ 156 $56,812 $12,708 $69,676
Exercise of stock options,
including income
tax benefits 28 1 282 - 283
Issuance of stock under
employee stock
purchase plan 19 - 198 - 198
Compensation under
nonstatutory stock
option agreements - - 114 - 114
Net income - - - 15,104 15,104
------ ------ ------- ------- -------
BALANCE, SEPTEMBER 30, 1999 15,652 $ 157 $57,406 $27,812 $85,375
====== ====== ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
-3-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $15,104 $13,639
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation and amortization 3,796 1,989
Deferred income tax provision (benefit) 2,697 (4,317)
Compensation under nonstatutory stock
option agreements 114 1,235
Provision for doubtful accounts 4,961 3,456
Loss on disposal of fixed assets 24 174
Changes in assets and liabilities:
Accounts receivable (23,722) (19,330)
Inventories 5,474 (13,986)
Prepaid expenses and other current assets 936 (1,287)
Accounts payable (1,489) 43,224
Amounts payable to stockholders - (1,185)
Accrued expenses and other liabilities (26) 1,218
------- -------
Net cash provided by operating activities 7,869 24,830
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,868) (6,065)
Proceeds from sale of property and equipment 3 -
Payment for purchase of ComTeq, net of
cash acquired (3,198) -
------- -------
Net cash used for investing activities (8,063) (6,065)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 392,960 20,796
Repayment of short-term borrowings (392,960) (49,114)
Repayment of term loan - (4,500)
Repayment of capital lease obligations (90) -
Issuance of stock upon exercise of nonstatutory
stock options 133 69
Issuance of stock under Employee
Stock Purchase Plan 198 -
Net proceeds from initial public offering - 57,253
Payment of dividend - (33,037)
------ --------
Net cash provided by (used for) financing activities 241 (8,533)
------ --------
Increase in cash and cash equivalents 47 10,232
Cash and cash equivalents, beginning of period 11,910 758
------- -------
Cash and cash equivalents, end of period $11,957 $10,990
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 983 $ 439
Income taxes paid 5,341 5,279
NON-CASH TRANSACTIONS:
Issuance of notes payable in connection
with acquisition of a subsidiary $3,000 $ -
See accompanying notes to consolidated financial statements
</TABLE>
-4-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1-BASIS OF PRESENTATION
- ----------------------------
The accompanying consolidated financial statements of PC Connection, Inc. and
Subsidiary ("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 Annual Report on Form 10-K for the year ended December 31, 1998 (the
"10-K Report") filed with the Securities and Exchange Commission ("SEC"). The
accompanying consolidated financial statements should be read in conjunction
with the financial statements contained in the Company's 10-K Report. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation. The operating results for the
three and nine months ended September 30, 1999 may not be indicative of the
results expected for any succeeding quarter or the entire year ending December
31, 1999.
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-PRO FORMA INCOME STATEMENT DATA
- --------------------------------------
The following pro forma adjustments have been made to the historical results of
operations for the nine months ended September 30, 1998 to make the pro forma
presentation comparable to what would have been reported had the Company
operated as a C Corporation for that period:
1.Elimination of stockholder/officer compensation in excess of aggregate
established 1998 quarterly base salaries ($150,000) for the period prior to
March 6, 1998. These amounts generally represented Company-related S
Corporation tax obligations payable by the stockholder/officers for periods
prior to March 6, 1998.
2.Elimination of the historical income tax benefit for the period prior to
March 6, 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% for the
period from January 1, 1998 to March 5, 1998 after an adjustment for
stockholder/officer compensation described in No. 1 above.
-5-
<PAGE>
NOTE 4-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. The
denominator used to determine pro forma basic earnings per share for the nine
months ended September 30, 1998 includes the weighted average shares required to
pay the S Corporation dividend, assuming a price per share of $17.50.
The following table sets forth the computation of pro forma basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
(ACTUAL) (ACTUAL)(ACTUAL)(PRO FORMA)
<S> <C> <C> <C> <C>
Numerator:
Net income $6,015 $3,146 $15,104 $10,267
====== ====== ======= =======
Denominator:
Denominator for basic earnings
per share:
Weighted average shares 15,651 15,443 15,633 14,614
Weighted average shares required
to pay stockholder dividend - - - 422
------- ------ ------ ------
Denominator for basic earnings
per share 15,651 15,443 15,633 15,036
------- ------ ------ ------
Effect of dilutive securities:
Employee stock options 427 557 439 542
------- ------- ------ ------
Denominator for diluted earnings
per share 16,078 16,000 16,072 15,578
====== ====== ====== ======
Earnings per share:
Basic $ .39 $ .20 $ .97 $ .68
====== ====== ====== ======
Diluted $ .37 $ .20 $ .94 $ .66
====== ====== ====== ======
</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, 1999 and 1998 because the effect of the options on the calculation
would have been anti-dilutive:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, (AMOUNTS IN THOUSANDS) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anti-dilutive stock options 953 25 903 65
===== ===== ===== ====
</TABLE>
NOTE 5-REPORTING COMPREHENSIVE INCOME
- -------------------------------------
The Company had no components to be included in comprehensive income other than
the net income reported on the income statement in either 1999 or 1998.
Therefore, comprehensive income is the same as net income reported for the nine
months ended September 30, 1999 and 1998.
-6-
<PAGE>
NOTE 6-RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
- ------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", adjusted to
be effective for fiscal years beginning after June 15, 2000. The new standard
requires that all companies record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the financial statements of
the Company. The Company will adopt this accounting standard on January 1, 2001,
as required.
NOTE 7-ACQUISITION OF SUBSIDIARY
- --------------------------------
On June 29, 1999, the Company acquired all of the outstanding stock of ComTeq
Federal, Inc. ("ComTeq Federal"), a supplier of computer equipment and services
to federal government agencies. The purchase price was $8.3 million, consisting
of $5.3 million in cash, including acquisition costs and promissory notes
aggregating $3 million. Total cash paid for ComTeq Federal on June 29, 1999,
net of cash acquired, was $3.2 million. The transaction has been accounted for
by the purchase method, and the assets purchased and liabilities assumed have
been recorded at their fair value at date of acquisition. The excess of the
purchase price, including acquisition costs, over the fair value of the net
assets acquired has been recorded as goodwill. Such amount recorded at September
30, 1999 is subject to change pending final valuation of the net assets
acquired. Goodwill is being amortized over a period of 15 years.
NOTE 8-SEGMENT AND RELATED DISCLOSURES
- --------------------------------------
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", requires that public companies report profits and losses and
certain other information on its "reportable operating segments" in its annual
and interim financial statements.
Management has determined that the Company has only one "reportable operating
segment", given the financial information provided to and used by the "chief
decision maker" of the Company to allocate resources and assess the Company's
performance. However, senior management does monitor revenue by platform (PC vs.
Mac), sales channel (Corporate Outbound, Inbound Telesales and On-line
Internet), and product mix (Computer Systems and Memory, Peripherals, Software,
and Networking and Communications).
Net sales by platform, sales channel and product mix are presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, (AMOUNTS IN THOUSANDS) 1999 1998 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Platform
PC and Multi Platform $244,567 $136,624 $621,191 $413,482
Mac 37,536 32,465 117,724 98,599
-------- -------- -------- --------
Total $282,103 $169,089 $738,915 $512,081
======== ======== ======== ========
Sales Channel
Corporate Outbound $194,598 $ 96,524 $470,607 $278,209
Inbound Telesales 72,639 66,240 229,180 215,419
On-Line Internet 14,866 6,325 39,128 18,453
-------- -------- -------- --------
Total $282,103 $169,089 $738,915 $512,081
======== ======== ======== ========
Product Mix
Computer Systems and Memory $131,911 $ 73,705 $349,364 $217,216
Peripherals 95,853 59,803 246,390 178,935
Software 35,490 22,597 94,752 73,546
Networking and Communications 18,849 12,984 48,409 42,384
-------- -------- ------- --------
Total $282,103 $169,089 $738,915 $512,081
======== ======== ======== ========
</TABLE>
-7-
<PAGE>
NOTE 8-SEGMENT AND RELATED DISCLOSURES-CONT'D.
- ----------------------------------------------
Substantially, all of the Company's net sales for the quarters ended September
30, 1999 and 1998 were made to customers located in the United States. Shipments
to customers located in foreign countries aggregated less than 2% in those
respective quarters. All of the Company's assets at September 30, 1999 and
December 31, 1998 were located in the United States. The Company's primary
target customers are small- to medium-size businesses ("SMBs") comprised of 20
to 1,000 employees, although its customers also include individual consumers,
larger companies, federal, state and local governmental agencies and educational
institutions. Except for the federal government, no single customer accounted
for more than 2% of total net sales in the nine months ended September 30, 1999
and 1998. With the acquisition of ComTeq Federal in June 1999, sales to the
federal government account for 12.2%, or $37.5 million, and 7.9%, or $58.1
million, of total sales for the three and nine months ended September
30, 1999, respectively.
-8-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARY
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 in Item 7 under the caption "Factors That May
Affect Future Results and Financial Condition" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 filed with the SEC, which are
incorporated by reference herein. 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. Such risks and
uncertainties also include the continued acceptance of the Company's
distribution channel by vendors and customers, continuation of key vendor
relationships and support programs and the ability of the Company to hire and
retain qualified sales account managers and other essential personnel. 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, (ii) inbound calls from customers responding to the
Company's catalogs and other advertising and (iii) 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 during the last
two years, from 23.0% of net sales for the year ended December 31, 1996 to 13.3%
of net sales in the quarter ended September 30, 1999. Although net sales
attributable to Mac products increased by approximately $5.1 million in the
quarter ended September 30, 1999 as compared to the comparable period in 1998,
the Mac percentage of total sales continued to decrease. The Company believes
that such sales will continue to decrease as a percentage of net sales and may
even decline in dollar volume in future periods.
All of the Company's product categories experienced growth in the quarter
ended September 30, 1999 over the comparable period in 1998, 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 $624 in the quarter ended
September 30, 1998 to $848 in the quarter ended September 30, 1999. Computer
system sales also 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 in 1999 over the comparable three and
nine month periods in 1998, while the operating income margin has generally
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, outbound, and on-line Internet
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.
However, the gross profit dollar contribution per order is generally higher as
average order sizes of orders to corporate accounts are usually larger. The
Company believes that outbound and on-line Internet sales will continue to
represent a larger portion of its business mix in future periods.
-9-
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
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 periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 1998 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Computer Systems/Memory 46.7% 43.6% 47.3% 42.4%
Peripherals 34.0 35.4 33.3 34.9
Software 12.6 13.4 12.8 14.4
Networking and Communications 6.7 7.6 6.6 8.3
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
NET SALES increased $113.0 million, or 66.8%, to $282.1 million for the quarter
ended September 30, 1999 from $169.1 million for the comparable period in 1998.
Net sales for the nine months ended September 30, 1999 increased $226.8 million,
or 44.3%, to $738.9 million from $512.1 million for the comparable period in
1998. 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, an increase in the number of catalog
mailings, growth in the Company's Internet sales and the acquisition of ComTeq
Federal, Inc. on June 29, 1999. Outbound sales increased $98.1 million, or
101.7%, to $194.6 million in the three months ended September 30, 1999 from
$96.5 million in the three months ended September 30, 1998. While Inbound sales
for the quarter, at $72.6 million, grew modestly over the prior year quarter,
on-line Internet sales increased $8.6 million or 136.5%, to $14.9 million in the
three months ended September 30, 1999 from $6.3 million in the three months
ended September 30, 1998. Outbound sales for the nine months ended September 30,
1999 increased $192.4 million, or 69.2%, to $470.6 million from $278.2 million
for the comparable period in 1998 and on-line Internet sales increased $20.7
million, or 112.5%, to $39.1 million, from $18.4 million in the comparable
period in 1998. Computer system/memory sales increased to 46.7% and 47.3% of net
sales for the three months and nine months ended September 30, 1999,
respectively, from 43.6% and 42.4% for the respective comparable periods in
1998.
GROSS PROFIT increased $13.2 million, or 62.0%, to $34.5 million for the quarter
ended September 30, 1999 from $21.3 million for the comparable quarter in 1998.
Gross profit for the nine months ended September 30, 1999 increased $23.5
million, or 35.7%, to $89.3 million from $65.8 million for the comparable
period in 1998. The increase in gross profit dollars was primarily attributable
to the increase in net sales described above. Gross profit margin decreased from
12.6% and 12.9% for the respective three and nine months ended September 30,
1998 to 12.2% and 12.1% for the respective three and nine months ended September
30, 1999, due primarily to the continued decline in margins for system sales and
growth in outbound telemarketing sales, which generally carry lower margins.
During 1999, certain product manufacturers changed the focus of their vendor
support programs from providing general cooperative advertising dollars to
issuing rebates based on specified product sell through. The effect of this
change in vendor focus affected both cost of sales and selling, general and
administrative expenses, because rebates are accounted for as credits to cost of
sales and cooperative advertising revenue is credited to advertising expense.
Therefore, in 1999, gross margins have been positively affected by such rebate
activity while selling, general and administrative expenses have been negatively
affected. The Company anticipates that this trend may continue in the future.
-10-
<PAGE>
RESULTS OF OPERATIONS - GENERAL - CONT'D.
- -----------------------------------------
As stated in previous reports, the Company expects that its gross margin, as a
percentage of sales may vary by quarter based upon Vendor Support programs,
product mix, pricing strategies, market conditions and other factors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $8.0 million, or 49.1%,
to $24.3 million for the quarter ended September 30, 1999 from $16.3 million for
the comparable quarter in 1998, but decreased as a percentage of sales from 9.7%
for the three months ended September 30, 1998 to 8.6% for the three months ended
September 30, 1999. Such expenses for the nine months ended September 30, 1999
increased by $14.9 million, or 30.3%, to $64.1 million from $49.2 million in the
nine months ended September 30, 1998, but decreased as a percentage of sales to
8.7% for the nine months ended September 30, 1999 from 9.6% in the comparable
period in 1998. However, the nine months ended September 30, 1999 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 Company's initial public
offering of its shares.The increase in expenses was primarily attributable to
increases in volume-sensitive costs such as sales personnel and credit card
fees. 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.
ADDITIONAL STOCKHOLDER/OFFICER COMPENSATION for the nine months ended September
30, 1998 represented Company-related federal income tax obligations payable by
the stockholder/officers for periods prior to March 6, 1998, the point in time
that the Company converted from an S Corporation to a C Corporation. No such
expense was incurred after March 6, 1998.
INCOME FROM OPERATIONS increased $5.2 million, or 106.1%, to $10.1 million for
the quarter ended September 30, 1999, from $4.9 million for the quarter ended
September 30, 1998. Income from operations as a percentage of sales increased
from 2.9% in the three months ended September 30, 1998 to 3.6% in the comparable
period in 1999 for the reasons discussed above. Similarly, income from
operations for the nine months ended September 30, 1999 increased $11.0 million,
or 77.5%, to $25.2 million from $14.2 million in the comparable 1998 period.
Income from operations as a percentage of sales increased from 2.8% for the nine
months ended September 30, 1998 to 3.4% for the comparable period in 1999,
primarily as a result of the additional 1998 stockholder/officer compensation
referred to above.
Income from operations, excluding both the one-time charge for stock option
compensation expense ($870,000) and the additional stockholder/officer
compensation ($2.4 million) for the nine months ended September 30, 1998,
increased by $7.8 million, or 44.8%, to $25.2 million for the nine months ended
September 30, 1999 from $17.4 million for the comparable period in 1998. Such
income from operations as a percentage of net sales remained at 3.4% for the
nine months ended September 30, 1998 and 1999, respectively.
INTEREST EXPENSE increased to $449,000 for the quarter ended September 30, 1999
from $10,000, for the comparable quarter in 1998. Similarly, interest expense
for the nine months ended September 30, 1999 increased to $991,000 from
$267,000 for the comparable period in 1998. This increase in interest expense
was due primarily to higher average outstanding borrowings in the nine months
ended September 30, 1999, and the commencement of the Company's capital lease
obligation to an affiliate, effective December 1998.
The Company's provision for INCOME TAXES for three months ended September 30,
1999 was $3.7 million compared to $2.0 million for the comparable quarter in
1998. The Company's provision for income taxes for the nine months ended
September 30, 1999 was $9.3 million, compared to $ 0.8 million for the
comparable period in 1998. The nine-month period ended September 30, 1998 was
favorably affected by the Company's status as a Subchapter S Corporation,
since no federal taxes were provided for from the period January 1, 1998 to
March 6, 1998.
-11-
<PAGE>
RESULTS OF OPERATIONS - GENERAL - CONT'D.
- -----------------------------------------
NET INCOME for the quarter ended September 30, 1999 increased $2.9 million, or
93.5%, to $6.0 million from $3.1 million for the comparable quarter in 1998,
principally as a result of the increases in operating income as described above.
Net income for the nine months ended September 30, 1999 increased $1.5 million,
or 11.0%, to $15.1 million from $13.6 million for the comparable period in 1998,
principally as a result of a $4.2 million income tax benefit in the 1998 period.
PRO FORMA NET INCOME calculated for the nine months ended September 30, 1998, 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 nine months ended September 30, 1999
was $15.1 million, or $.94 per share, compared to pro forma net income for the
nine months ended September 30, 1998 of $10.3 million, or $.66 per share.
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 then current
stockholders, equal to substantially all previously taxed, but undistributed, S
Corporation earnings of the Company. The remaining net proceeds of $11.4 million
were invested in short-term investment securities and were 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 (which currently has $50 million in availability), will be
sufficient to finance its working capital and capital expenditure requirements
at least through the next 12 months. The Company's ability to continue
funding its planned growth is dependent upon its ability to generate
sufficient cash flow from operations or to obtain additional funds through
equity or debt financing, or from other sources of financing, as may be
required.
Net cash provided by operating activities was $7.9 million for the nine months
ended September 30, 1999, as compared to $24.8 million provided in the
comparable period in 1998. 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. 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. Historically, inventories and accounts payable had increased
as a result of the sales growth of the Company; however, inventory and accounts
payable actually decreased in the nine months ended September 30, 1999 by $5.5
million and $1.5 million, respectively, compared to increases of $14.0 million
and $43.2 million, respectively in the comparable period in 1998. The reductions
in inventory levels related to continued steps taken to improve inventory
turns while the change in accounts payable is due to the timing of payments
with vendors.
The Company also used cash and cash equivalents of $3.2 million for the
acquisition of its new subsidiary, ComTeq Federal in 1999. Additionally,
capital expenditures were $4.9 million in the nine months ended September 30,
1999, as compared to $6.1 million in the comparable period in 1998. The majority
of the capital expenditures for the respective 1999 and 1998 periods relate to
computer hardware and software for the Company's management information systems.
The Company has upgraded its order management and fulfillment systems to new
hardware and software, completing the conversion during the third quarter
of 1998. Additional enhancements to increase functionality of
the system have occurred throughout 1999. Total capital expenditures for
the year ending December 31, 1999 are estimated at $8.0 million.
The Company has an unsecured credit agreement with a bank providing for short-
term borrowings up to $50 million, which bears interest at various rates ranging
from the prime rate (8.25% at September 30, 1999) to prime less 1%, depending on
the ratio of senior debt to EBITDA. The credit agreement includes various
customary financial and operating covenants, including restrictions on the
payment of dividends; none of which the Company believes significantly restricts
its operations. No borrowings were outstanding at September 30, 1999.
-12-
<PAGE>
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.
As of September 30, 1999, the Company believed that it had largely completed
each of these five phases. For each system that was determined to be
non-compliant, the Company took one of the following three courses of
action to achieve date compliance: (i) renovated (converted) the current
system; (ii) replaced the current system with a new date compliant system;
or (iii) retired the current system because it no longer serves a valid
business need.
In 1998, the Company replaced its order management and fulfillment software with
new software and converted its principal computer equipment to new IBM AS400
platform systems, both of which are better suited to the Company's expected
scale of operations and are designed to be Year 2000 compliant.
The Company has communicated with all third parties on which it relies to
assess their progress in evaluating their systems and implementing appropriate
corrective measures, and such assessments have been completed by September 30,
1999. Furthermore, the Company has actively encouraged its customers to
undertake their own Year 2000 compliance projects in order to
ensure the continued viability of the Company's commercial business pursuits.
The Company has been taking, and will continue to pursue, all steps it believes
are reasonably necessary to protect its operations, assets and the interests of
its customers, shareholders, employees and community partners.
Utilizing both internal and external resources to identify and assess needed
Year 2000 remediation, the Company believes that its Year 2000 awareness,
assessment, renovation, validation and implementation efforts, which began
in 1996, were largely completed by September 30, 1999, prior to any currently
anticipated impact on its computer equipment and software. The Company also
believes that as of September 30, 1999, it had completed substantially all
of the initiatives that it believes will be necessary to implement
corrective actions required to address potential Year 2000 issues relating
to its computer equipment and software.
-13-
<PAGE>
YEAR 2000 COMPLIANT INFORMATION SYSTEMS- CONT'D.
- ------------------------------------------------
<TABLE>
<CAPTION>
TIME PERCENT
FRAME COMPLETED
Status of overall Year 2000 Project:
<S> <C> <C>
Awareness 10/97 - 06/98 100%
Assessment 10/97 - 12/98 100%
Renovation 04/98 - 09/99 100%
Validation 05/98 - 11/99 99%
Implementation 05/98 - 12/99 99%
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
$200,000, which will be funded from operating cash flow. These costs will be
expensed as incurred and funded from working capital.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for the Company. However, for all Year 2000
issues that are not properly identified, or assessments, renovations, 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 other
entities will not have a material adverse impact on the Company's systems or
results of operations.
The Company is presently undertaking 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 worst case scenarios,
and such scenarios have not yet been clearly identified. The Company currently
plans to complete such analysis and contingency planning before 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 "Year 2000 Compliance"
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.
-14-
<PAGE>
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
- ----------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", adjusted to be effective for fiscal years
beginning after June 15, 2000. The new standard requires that all companies
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Management is currently assessing the
impact of SFAS No. 133 on the financial statements of the Company. The Company
will adopt this accounting standard on January 1, 2001, as required.
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.
-15-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARY
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. 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.
-16-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARY
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
-17-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARY
SEPTEMBER 30, 1999
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 15, 1999 By: /s/
--------------------------------------
Wayne L. Wilson
President and Chief Operating Officer
November 15, 1999 By: /s/
---------------------------------------
Mark A. Gavin
Vice President of Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1999 Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,957
<SECURITIES> 0
<RECEIVABLES> 89,856
<ALLOWANCES> 7,664
<INVENTORY> 58,569
<CURRENT-ASSETS> 158,043
<PP&E> 47,752
<DEPRECIATION> 23,780
<TOTAL-ASSETS> 191,608
<CURRENT-LIABILITIES> 96,507
<BONDS> 8,981
0
0
<COMMON> 157
<OTHER-SE> 85,218
<TOTAL-LIABILITY-AND-EQUITY> 191,608
<SALES> 738,915
<TOTAL-REVENUES> 738,915
<CGS> 649,598
<TOTAL-COSTS> 649,598
<OTHER-EXPENSES> (173)
<LOSS-PROVISION> 2,736
<INTEREST-EXPENSE> 991
<INCOME-PRETAX> 24,363
<INCOME-TAX> 9,259
<INCOME-CONTINUING> 15,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,104
<EPS-BASIC> .97
<EPS-DILUTED> .94
</TABLE>
