<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, 2000
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 02-0513618
-------- ----------
(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 () 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 9, 2000 was 24,365,108.
--------------------------------------------------------------------------------
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
--------------------- ----
<S> <C> <C>
Item 1 Financial Statements:
Independent Accountants' Report.......................................... 1
Condensed Consolidated Balance Sheets - September 30, 2000
and December 31, 1999.................................................... 2
Condensed Consolidated Statements of Income -
Three months ended September 30, 2000 and 1999;
Nine months ended September 30, 2000 and 1999............................ 3
Condensed Consolidated Statement of Changes in Stockholders' Equity -
Nine months ended September 30, 2000..................................... 4
Condensed Consolidated Statements of Cash Flows - Nine
months ended September 30, 2000 and 1999................................. 5
Notes to Condensed Consolidated Financial Statements..................... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 10
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>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
PC Connection, Inc. and Subsidiaries
Merrimack, New Hampshire
We have reviewed the accompanying condensed consolidated balance sheet of PC
Connection, Inc. and subsidiaries (the "Company") as of September 30, 2000, and
the related condensed consolidated statements of income, changes in
stockholders' equity and cash flows for the three-month and nine-month periods
then ended listed as Part 1, Item 1 in the Table of Contents included on Form
10-Q for the quarterly period ended September 30, 2000. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of PC
Connection, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated January 26,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1999 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 17, 2000
-1-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 12,729 $ 20,416
Accounts receivable, net 166,510 99,405
Inventories-merchandise 83,073 64,348
Deferred income taxes 1,924 1,991
Prepaid expenses and other current assets 6,519 4,651
-------- --------
TOTAL CURRENT ASSETS 270,755 190,811
Property and equipment, net 27,659 23,126
Goodwill, net 9,685 9,431
Other assets 473 169
-------- --------
TOTAL ASSETS $308,572 $223,537
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligation to affiliate $ 176 $ 137
Notes payable, current maturities 8,027 1,000
Accounts payable 145,004 105,547
Accrued expenses and other liabilities 13,319 11,877
-------- --------
TOTAL CURRENT LIABILITIES 166,526 118,561
Notes payable, less current maturities 1,000 2,000
Capital lease obligation to affiliate 6,832 6,945
Deferred taxes 1,342 1,579
Other liabilities 143 229
-------- --------
TOTAL LIABILITIES 175,843 129,314
-------- --------
Stockholders' Equity:
Common stock 244 237
Additional paid-in capital 71,072 58,548
Retained earnings 61,413 35,438
-------- --------
TOTAL STOCKHOLDERS' EQUITY 132,729 94,223
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $308,572 $223,537
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $397,124 $282,103 $1,081,457 $738,915
Cost of sales 347,394 247,651 946,152 649,598
-------- -------- ---------- --------
GROSS PROFIT 49,730 34,452 135,305 89,317
Selling, general and administrative expenses 32,872 24,333 92,782 64,136
-------- -------- ---------- --------
INCOME FROM OPERATIONS 16,858 10,119 42,523 25,181
Interest expense (440) (449) (1,114) (991)
Other, net 121 32 490 173
-------- -------- ---------- --------
Income before taxes 16,539 9,702 41,899 24,363
Income taxes (6,284) (3,687) (15,924) (9,259)
-------- -------- ---------- --------
NET INCOME $ 10,255 $ 6,015 $ 25,975 $ 15,104
======== ======== ========== ========
Earnings per common share:
Basic $ .42 $ 0.26 $ 1.08 $ .64
======== ======== ========== ========
Diluted $ .40 $ 0.25 $ 1.02 $ .63
======== ======== ========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED 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, 1999 23,653 $237 $58,548 $35,438 $ 94,223
Exercise of stock options, including
income tax benefits 686 7 11,994 - 12,001
Issuance of stock under employee stock
purchase plan 25 - 479 - 479
Compensation under nonstatutory
stock option agreements - - 51 - 51
Net income - - - 25,975 25,975
------ ---- ------- ------- --------
Balance, September 30, 2000 24,364 $244 $71,072 $61,413 $132,729
====== ==== ======= ======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,975 $ 15,104
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 4,719 3,796
Deferred income taxes 7,760 2,697
Compensation under nonstatutory stock option
agreements 51 114
Provision for doubtful accounts 7,152 4,961
(Gain)/loss on disposal of fixed assets (5) 24
Changes in assets and liabilities:
Accounts receivable (73,757) (23,722)
Inventories (18,725) 5,474
Prepaid expenses and other current assets (1,868) 936
Other non-current assets (304) -
Accounts payable 39,711 (1,489)
Accrued expenses and other liabilities 1,511 (26)
--------- ---------
Net cash (used for) provided by operating
activities (7,780) 7,869
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,074) (4,868)
Proceeds from sale of property and equipment 74 3
Payment for acquisitions, net of cash acquired (2,158) (3,198)
--------- ---------
Net cash used for investing activities (10,158) (8,063)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 399,774 392,960
Repayment of short-term borrowings (392,747) (392,960)
Repayment of notes payable (1,000) -
Repayment of capital lease obligations (74) (90)
Issuance of stock upon exercise of nonstatutory
stock options 3,819 133
Issuance of stock under Employee Stock Purchase
Plan 479 198
--------- ---------
Net cash provided by financing activities 10,251 241
--------- ---------
(Decrease)/increase in cash and cash equivalents (7,687) 47
Cash and cash equivalents, beginning of period 20,416 11,910
--------- ---------
Cash and cash equivalents, end of period $ 12,729 $ 11,957
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 918 $ 983
Income taxes paid 11,058 5,341
NON-CASH:
Issuance of notes payable in connection with
acquisition of a subsidiary $ - $ 3,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1-BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of PC Connection,
Inc. and Subsidiaries ("PCC" or the "Company") have been prepared in accordance
with accounting principles generally accepted in The United States of America.
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/A for the year
ended December 31, 1999 (the "10-K/A Report") filed with the Securities and
Exchange Commission ("SEC"). The accompanying condensed consolidated financial
statements should be read in conjunction with the financial statements contained
in the Company's Annual Report on Form 10K/A. In the opinion of management, the
accompanying unaudited condensed 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, 2000 may not be indicative of the results expected for any
succeeding quarter or the entire year ending December 31, 2000.
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
In April 2000, the Company's Board of Directors approved a three-for-two stock
split of its outstanding shares of Common Stock to be effected in the form of a
50% stock dividend. The dividend was distributed on May 23, 2000 to the
Company's stockholders of record as of the close of business on May 12, 2000.
All per share and related amounts contained in these financial statements and
notes have been adjusted retroactively to reflect the stock split.
REVENUE RECOGNITION
Revenue on product sales is recognized at the point in time when persuasive
evidence of an arrangement exists, the price is fixed and final, delivery has
occurred and there is a reasonable assurance of collection of the sales
proceeds. The Company generally obtains oral or written purchase authorizations
from its customers for a specified amount of product at a specified price and
considers delivery to have occurred at the point of shipment. The Company
provides its customers with a limited thirty day right of return only for
defective merchandise. Revenue is recognized at shipment and a reserve for sales
returns is recorded. The Company has demonstrated the ability to make reasonable
and reliable estimates of product returns in accordance with SFAS No. 48 based
on significant historical experience.
INVENTORIES--MERCHANDISE
Inventories (all finished goods) consisting of software packages, computer
systems and peripheral equipment, are stated at cost (determined under the
first-in, first-out method) or market, whichever is lower. Provisions are made
currently for obsolete, slow moving and nonsalable inventory.
NOTE 2-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.
-6-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE 2-EARNINGS PER SHARE - CONT'D.
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) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $10,255 $ 6,015 $25,975 $15,104
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share:
Weighted average shares 24,243 23,477 23,949 23,450
Dilutive effect of unexercised
employee stock options: 1,654 640 1,635 658
------- ------- ------- -------
Denominator for diluted earnings per share 25,897 24,117 25,584 24,108
======= ======= ======= =======
Earnings per share:
Basic $ .42 $ .26 $ 1.08 $ .64
======= ======= ======= =======
Diluted $ .40 $ .25 $ 1.02 $ .63
======= ======= ======= =======
</TABLE>
The following unexercised stock options were excluded from the computation of
diluted earnings per share for the three and nine months ended September 30,
2000 and 1999 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) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Anti-dilutive stock options -- 1,430 76 1,355
==== ===== ==== =====
</TABLE>
Note 3-Reporting Comprehensive Income
Comprehensive income is the same as net income reported for the three and nine
months ended September 30, 2000 and 1999.
-7-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
Note 4-Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133)
adjusted to be effective for fiscal years beginning after June 15, 2000. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The Company
intends to adopt SFAS 133 effective January 1, 2001. Management does not expect
the adoption of SFAS 133 to have a significant impact on the financial position
or results of operations of the Company because the Company does not have
significant derivative activity.
In December, 1999 the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB clarifies certain elements of revenue recognition. Since
December, the SEC has issued several amendments that have effectively postponed
the implementation date until the fourth quarter of fiscal 2000. Management
currently believes that the implementation of the SAB will not have a material
impact on the Company's financial statements.
In July, 2000 the Emerging Issues Task Force reached a consensus on Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs". The Consensus
specifically stated that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earned for the
goods provided and should be classified as revenue. It is currently the
Company's policy to record such revenues as a reduction of cost of goods sold.
Management is currently assessing the impact of Issue 00-10 on the financial
statements of the Company. The Company will adopt this Consensus in the fourth
quarter of fiscal 2000.
NOTE 5-ACQUISITION
On January 4, 2000 the Company acquired the Merisel Americas Inc. call center in
Marlborough, Massachusetts for approximately $2.2 million including acquisition
costs. The Company acquired the assembled work force of Merisel, as well as its
fixed assets; it also assumed its lease liabilities. The excess of the purchase
price over the fair value of the assets acquired totaled approximately $1.3
million. Such excess will be amortized over a period of 15 years. Operating
results of PC Connection would not have been materially different from those
reported for the nine months ended September 30, 1999 had the acquisition
occurred on January 1, 1999.
NOTE 6-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).
-8-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE 6-SEGMENT AND RELATED DISCLOSURES - CONT'D.
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) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Platform
--------
PC and Multi Platform $359,400 $244,567 $ 964,676 $621,191
Mac 37,724 37,536 116,781 117,724
-------- -------- ---------- --------
Total $397,124 $282,103 $1,081,457 $738,915
======== ======== ========== ========
Sales Channel
-------------
Corporate Outbound $312,741 $194,598 $ 823,780 $470,607
Inbound Telesales 55,499 72,639 178,592 229,180
On-Line Internet 28,884 14,866 79,085 39,128
-------- -------- ---------- --------
Total $397,124 $282,103 $1,081,457 $738,915
======== ======== ========== ========
Product Mix
-----------
Computer Systems and Memory $208,206 $131,911 $ 564,691 $349,364
Peripherals 113,293 95,853 308,788 246,390
Software 37,432 35,490 113,992 94,752
Networking and Communications 38,193 18,849 93,986 48,409
-------- -------- ---------- --------
Total $397,124 $282,103 $1,081,457 $738,915
======== ======== ========== ========
</TABLE>
Substantially all of the Company's net sales for the quarters ended September
30, 2000 and 1999 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, 2000 and
December 31, 1999 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 3% of total net sales in the nine months ended September 30, 2000
and 1999. Sales to the federal government accounted for $96.1 million, or 8.9%
of total net sales for the nine months ended September 30, 2000 and $58.1
million or 7.9% of total net sales for the nine months ended September 30, 1999.
-9-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
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 and its amendments for the year ended December 31, 1999 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, 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, (ii) inbound calls from customers responding to the
Company's catalogs and other advertising and (iii) the Company's 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
three years, from 23.0% of net sales for the year ended December 31, 1996 to
10.8% of net sales for the nine months ended September 30, 2000. The Company
believes that such sales will continue to decrease as a percentage of net sales
and may decline in dollar volume in future periods.
-10-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
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, 2000 COMPARED WITH THE THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999
The following table sets forth for the periods indicated information derived
from the Company's statements of income expressed as a percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales (in millions)....................... $397.1 $282.1 $1,081.5 $738.9
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Gross profit.................................. 12.5 12.2 12.5 12.1
Selling, general and administrative expenses.. 8.3 8.6 8.6 8.7
Income from operations........................ 4.2 3.6 3.9 3.4
Interest expense.............................. 0.1 0.2 0.1 0.1
Income before income taxes.................... 4.2 3.4 3.9 3.3
Income taxes.................................. 1.6 1.3 1.5 1.3
Net income.................................... 2.6 2.1 2.4 2.0
</TABLE>
The following table sets forth the Company's percentage of net sales by
platform, sales channel, and product mix:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Platform
--------
PC and Multi-Platform.......... 90% 87% 89% 84%
Mac............................ 10 13 11 16
---- ---- ---- ----
Total......................... 100% 100% 100% 100%
==== ==== ==== ====
Sales Channel
-------------
Corporate Outbound............. 79% 69% 76% 64%
Inbound Telesales.............. 14 26 17 31
On-Line Internet............... 7 5 7 5
---- ---- ---- ----
Total......................... 100% 100% 100% 100%
==== ==== ==== ====
Product Mix
-----------
Computer Systems and Memory.... 52% 47% 52% 47%
Peripherals.................... 29 34 29 33
Software....................... 9 12 10 13
Networking and Communications.. 10 7 9 7
---- ---- ---- ----
Total......................... 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
-11-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
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.
NET SALES increased $115.0 million, or 40.8%, to $397.1 million for the quarter
ended September 30, 2000 from $282.1 million for the comparable period in 1999.
Net sales for the nine months ended September 30, 2000 increased $342.6 million,
or 46.4%, to $1,081.5 million from $738.9 million for the comparable period in
1999. Growth in net sales was primarily attributable to increased productivity
of the Company's outbound telemarketing group, continued growth in average order
size, and growth in the Company's Internet sales. Outbound sales increased
$118.1 million, or 60.7%, to $312.7 million in the three months ended September
30, 2000 from $194.6 million in the three months ended September 30, 1999.
Outbound sales increased $353.2 million, or 75.1%, to $823.8 million for the
nine months ended September 30, 2000 from $470.6 million in the comparable
period in 1999. On-line Internet sales increased $14.0 million, or 94.0%, to
$28.9 million in the three months ended September 30, 2000 from $14.9 million in
the three months ended September 30, 1999. On-line Internet sales increased
$40.0 million, or 102.3%, to $79.1 million in the nine months ended September
30, 2000 from $39.1 million in the comparable period in 1999. Inbound sales
showed a decrease for all periods presented. Inbound sales for the quarter
decreased $17.1 million, or 23.6%, to $55.5 million in the quarter ended
September 30, 2000 from $72.6 million in the comparable period in 1999; and
decreased $50.6 million or 22.1% to $178.6 million for the nine months ended
September 30, 2000 from $229.2 million in the comparable period in 1999. This
decrease in inbound sales was consistent with management's expectations to grow
the inbound business through the internet while focussing its sales force on
targeting outbound customers.
Sales of networking and communication products represented the Company's fastest
growing product category with 102.6% growth in net sales over the third quarter
of 1999. Management believes that this category will continue to grow
substantially as its customers further upgrade their network and communications
infrastructure. Sales of computer systems continue to be the largest product
category. Computer system/memory sales increased to 52.4% and 52.2% of net sales
for the three months and nine months ended September 30, 2000, respectively,
from 46.8% and 47.3% for the respective comparable periods in 1999.
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 $848 in the
quarter ended September 30, 1999 to $1,272 in the quarter ended September 30,
2000. 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.
GROSS PROFIT increased $15.2 million, or 44.1%, to $49.7 million for the quarter
ended September 30, 2000 from $34.5 million for the comparable period in 1999.
Gross profit for the nine months ended September 30, 2000 increased $46.0
million, or 51.5%, to $135.3 million from $89.3 million for the comparable
period in 1999. Gross profit margin as a percentage of net sales increased to
12.5% in the third quarter of 2000 from 12.2% for the comparable period in 1999.
Gross profit margin as a percentage of net sales increased to 12.5% in the first
nine months of 2000 from 12.1% for the comparable period in 1999. The margin
improvement resulted from a continuing focus on solution sales to business,
government and educational customers, stable average selling prices, and the
impact of various profitability improvement programs. 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. The gross profit
dollar contribution per outbound sale order is generally higher as average sizes
of orders to corporate accounts are usually larger. 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.
-12-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
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 increased $8.6 million, or 35.4%,
to $32.9 million for the quarter ended September 30, 2000 from $24.3 million for
the comparable quarter in 1999. Such expenses for the nine months ended
September 30, 2000 increased by $28.7 million, or 44.8%, to $92.8 million from
$64.1 million in the nine months ended September 30, 1999. The increase in
expenses was primarily attributable to increases in volume-sensitive costs such
as sales personnel, facility costs, depreciation, and costs associated with the
January 2000 acquisition of Merisel's Marlborough, MA call center. Such costs
remained a consistent percentage of net sales over the comparable periods
presented here.
INCOME FROM OPERATIONS increased $6.8 million, or 67.3%, to $16.9 million for
the quarter ended September 30, 2000, from $10.1 million for the comparable
period in 1999. Income from operations as a percentage of sales increased from
3.6% in the three months ended September 30, 1999 to 4.2% for the comparable
period in 2000 for the reasons discussed above. Similarly, income from
operations for the nine months ended September 30, 2000 increased $17.3 million,
or 68.7%, to $42.5 million from $25.2 million for the comparable period in 1999.
Income from operations as a percentage of sales increased from 3.4% for the nine
months ended September 30, 1999 to 3.9% for the comparable period in 2000,
primarily due to gross margin improvement and as the result of the leveraging of
selling, general and administrative expenses over a larger sales base.
INTEREST EXPENSE decreased $0.01 million, or 2.2%, to $0.44 million for the
quarter ended September 30, 2000 from $0.45 million, for the comparable quarter
in 1999. Interest expense for the nine months ended September 30, 2000,
increased $0.12 million, or 12.1%, to $1.11 million from $0.99 million for the
comparable period in 1999. This increase in interest expense was primarily due
to debt associated with the June 1999 acquisition of Comteq Federal, Inc. Such
debt was not outstanding during the majority of the first nine months of fiscal
1999.
OTHER, NET, which is essentially comprised of interest income increased $0.09
million, or 300.0%, to $0.12 million in the quarter ended September 30, 2000
from $0.03 million, for the comparable period in 1999. Similarly, other, net for
the nine months ended September 30, 2000 increased $0.32 million or 188.2%, to
$0.49 million from $0.17 million in the comparable 1999 period. This increase
was due primarily to higher interest income from investments.
INCOME TAXES for the quarter ended September 30, 2000 were $6.3 million compared
to $3.7 million for the comparable quarter in 1999. Income taxes for the nine
months ended September 30, 2000 were $15.9 million compared to $9.3 million for
the comparable period in 1999. The effective tax rate was 38% for all periods.
NET INCOME for the quarter ended September 30, 2000 increased $4.3 million, or
71.7%, to $10.3 million from $6.0 million for the comparable quarter in 1999,
principally as a result of the increases in operating income as described above.
Net income increased $10.9 million, or 72.2%, to $26.0 million for the nine
months ended September 30, 2000 from $15.1 million for the comparable period in
1999.
-13-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital expenditures
through cash flow from operations and bank borrowings. The Company believes
that funds generated from operations, together with available credit under its
bank line of credit, will be sufficient to finance its working capital and
capital expenditure requirements at least through 2000. 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.
At September 30, 2000, the Company had cash and cash equivalents of $12.7
million and working capital of $104.2 million. At December 31, 1999, the Company
had cash and cash equivalents of $20.4 million and working capital of $72.3
million.
The Company has an unsecured credit agreement with a bank providing for short-
term borrowings up to $50.0 million, which bears interest at various rates
ranging from the prime rate (9.50% at September 30, 2000) to prime less 1%,
depending on the ratio of senior debt to EBITDA (earnings before interest,
taxes, depreciation and amortization). 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. Outstanding borrowings were $7.0 million at September 30, 2000.
Net cash used for operating activities was $7.8 million for the nine months
ended September 30, 2000, as compared to $7.9 million provided by operating
activities in the comparable period in 1999. 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 accounts receivable has 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.
Capital expenditures were $8.1 million in the nine months ended September 30,
2000 as compared to $4.9 million in the comparable period in 1999. The majority
of the capital expenditures for the respective 2000 and 1999 periods relate to
computer hardware and software for the Company's information systems. Total
capital expenditures for the year ended December 31, 2000 are estimated to be
$11.0 million.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133)
adjusted to be effective for fiscal years beginning after June 15, 2000. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS 133 certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The Company
intends to adopt SFAS 133 effective January 1, 2001. Management does not expect
the adoption of SFAS 133 to have a significant impact on the financial position
or results of operations of the Company because the Company does not have
significant derivative activity.
In December, 1999 the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB clarifies certain elements of revenue recognition. Since
December, the SEC has issued several amendments that have effectively postponed
the implementation date until the fourth quarter of fiscal 2000. Management
currently believes that the implementation of the SAB will not have a material
impact on the Company's financial statements.
In July, 2000 the Emerging Issues Task Force reached a consensus on Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs". The Consensus
specifically stated that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earned for the
goods provided and should be classified as revenue. It is currently the
Company's policy to record such revenues as a reduction of cost of goods sold.
Management is currently assessing the impact of Issue 00-10 on the financial
statements of the Company. The Company will adopt this Consensus in the fourth
quarter of fiscal 2000.
-14-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
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 SUBSIDIARIES
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 SUBSIDIARIES
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
------ -----------
10.43 Amendment to Employment Agreement between the Registrant and Robert
Wilkins dated December 23,1995.
10.44 Lease between Merrimack Services Corporation and White Knight
Realty Trust, dated October 19, 2000 for property located at 7
Route 101A, Amherst, New Hampshire.
15 Letter on unaudited interim financial information
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
-------------------
None
-17-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
September 30, 2000
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. AND SUBSIDIARIES
November 14, 2000 By: /s/ Wayne L. Wilson
---------------------------------
Wayne L. Wilson
President and Chief Operating Officer
November 14, 2000 By: /s/ Mark A. Gavin
----------------------------------
Mark A. Gavin
Senior Vice President of Finance and Chief
Financial Officer
-18-
