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 MARCH 31, 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 (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 May 10, 2000 was 15,982,038.
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1 Financial Statements:
Independent Accountants' Report...............................1
Condensed Consolidated Balance Sheets -- March 31, 2000
and December 31, 1999.......................................2
Condensed Consolidated Statements of Income -- Three
months ended March 31, 2000 and 1999........................3
Condensed Consolidated Statement of Changes in
Stockholders' Equity -- Three months ended
March 31, 2000..............................................4
Condensed Consolidated Statement of Cash Flows -- Three
months ended March 31, 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...13
PART II OTHER INFORMATION
-----------------
Item 1 Legal Proceedings............................................14
Item 2 Changes in Securities and Use of Proceeds....................14
Item 3 Defaults Upon Senior Securities..............................14
Item 4 Submission of Matters to a Vote of Security Holders..........14
Item 5 Other Information............................................14
Item 6 Exhibits and Reports on Form 8-K.............................14
SIGNATURES...................................................15
----------
</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 March 31, 2000, and the
related condensed consolidated statements of income and cash flows for the
three-month periods ended March 31, 2000 and 1999. 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 the
Company 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
sheets 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
April 18, 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>
MARCH 31, December 31,
2000 1999
(UNAUDITED)
---------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 27,023 $20,416
Accounts receivable, net 108,466 99,405
Inventories-merchandise 61,474 64,348
Deferred income taxes 1,882 1,991
Prepaid expenses and other
current assets 3,454 4,651
------- -------
TOTAL CURRENT ASSETS 202,299 190,811
Property and equipment, net 24,523 23,126
Other assets 523 169
Goodwill 10,098 9,431
------- -------
TOTAL ASSETS $237,443 $223,537
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease
obligation to affiliate $ 140 $ 137
Notes payable, current maturities 1,000 1,000
Accounts payable 112,042 105,547
Accrued expenses and other liabilities 11,991 11,877
-------- --------
TOTAL CURRENT LIABILITIES 125,173 118,561
Notes payable, less current maturities 2,000 2,000
Capital lease obligation to affiliate 6,909 6,945
Deferred taxes 1,387 1,579
Other liabilities 200 229
-------- --------
TOTAL LIABILITIES 135,669 129,314
-------- --------
Stockholders' Equity:
Common stock 158 158
Additional paid-in capital 59,059 58,627
Retained earnings 42,557 35,438
-------- -------
TOTAL STOCKHOLDERS' EQUITY 101,774 94,223
-------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $237,443 $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 ENDED MARCH 31, 2000 1999
- ------------------------------ ----------- ----------
<S> <C> <C>
Net sales $326,092 $224,979
Cost of sales 285,462 197,913
------- -------
GROSS PROFIT 40,630 27,066
Selling, general and administrative expenses 29,007 19,763
------ ------
INCOME FROM OPERATIONS 11,623 7,303
Interest expense (340) (266)
Other, net 204 94
------ ------
Income before taxes 11,487 7,131
Income taxes (4,368) (2,710)
------- ------
NET INCOME $ 7,119 $ 4,421
======= =======
Earnings per common share:
Basic $ .45 $ .28
======= =======
Diluted $ .43 $ .28
======= =======
</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 15,767 $ 158 $58,627 $35,438 $ 94,223
Exercise of stock options, including
income tax benefits 30 - 384 - 384
Compensation under nonstatutory
stock option agreements - - 48 - 48
Net income - - - 7,119 7,119
------ ------ ------- ------- ------
BALANCE, MARCH 31, 2000 15,797 $ 158 $59,059 $42,557 $101,774
====== ====== ======= ======= ========
</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>
THREE MONTHS ENDED MARCH 31,
2000 1999
---------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,119 $4,421
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization 1,479 1,137
Deferred income taxes (141) 1,139
Compensation under nonstatutory
stock option agreements 48 48
Provision for doubtful accounts 2,457 1,509
(Gain) loss on disposal of fixed assets (21) 20
Changes in assets and liabilities:
Accounts receivable (11,018) (6,510)
Inventories 2,874 7,900
Prepaid expenses and other current
assets 1,198 (283)
Other non-current assets (354) -
Accounts payable 6,648 (8,820)
Accrued expenses and other liabilities 183 (2,550)
------- --------
Net cash provided by (used for)
operating activities 10,472 (1,989)
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,976) (1,428)
Proceeds from sale of property
and equipment 74 3
Purchase of a call center business (2,158) -
------- -------
Net cash used for investing activities (4,060) (1,425)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 77,741 142,420
Repayment of short-term borrowings (77,741) (142,420)
Repayment of capital lease obligation (33) (29)
Issuance of stock upon exercise of
nonstatutory stock options 228 112
-------- --------
Net cash provided by financing activities 195 83
-------- --------
Increase (decrease) in cash and
cash equivalents 6,607 (3,331)
Cash and cash equivalents,
beginning of period 20,416 11,910
-------- --------
Cash and cash equivalents, end of period $ 27,023 $ 8,579
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 181 $ 258
Income taxes paid $ 4,197 $ 268
</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. ("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/A for the year ended December 31, 1999 (the "10-K/A
Report") filed with the Securities and Exchange Commission ("SEC"). The
accompanying financial statements should be read in conjunction with the
financial statements contained in the Company's 10-K/A Report. In the opinion
of management, the accompanying unaudited financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation. The operating results for the three months ended March 31,
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.
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.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000 1999
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<S> <C> <C>
Numerator:
Net income $ 7,119 $ 4,421
======== ========
Denominator:
Denominator for basic earnings per share:
Weighted average shares 15,784 15,622
Effect of dilutive securities:
Employee stock options 802 446
-------- --------
Denominator for diluted earnings per share 16,586 16,068
======== ========
Earnings per share:
Basic $ .45 $ .28
======== ========
Diluted $ .43 $ .28
======== ========
</TABLE>
The following stock options to purchase Common Stock were excluded from the
computation of diluted earnings per share for the three months ended March 31,
2000 and 1999 because the effect of the options on the calculation would have
been anti-dilutive:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
MARCH 31, (AMOUNTS IN THOUSANDS) 2000 1999
- -------------------------------- -------------------
<S> <C> <C>
Anti-dilutive stock options 178 834
======= =======
</TABLE>
-6-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE 3-REPORTING COMPREHENSIVE INCOME
- -------------------------------------
SFAS No. 130, "Reporting Comprehensive Income" requires the reporting of
comprehensive income in addition to net income. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income. Based on the current financial structure and
operations of the Company, the Company had no other components to be included in
<PAGE>
comprehensive income. Therefore, comprehensive income is the same as net income
reported for the three months ended March 31, 2000 and 1999.
NOTE 4-RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
- -----------------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", 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 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 three months ended March 31, 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).
-7-
<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 MARCH 31,
(amounts in thousands) 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
Platform
--------
PC and Multi Platform $285,927 $182,458
Mac 40,165 42,521
-------- --------
Total $326,092 $224,979
======== ========
Sales Channel
-------------
Corporate Outbound $236,551 $128,677
Inbound Telesales 65,462 84,267
On-Line Internet 24,079 12,035
-------- --------
Total $326,092 $224,979
======== ========
Product Mix
-----------
Computer Systems and Memory $170,470 $106,351
Peripherals 95,383 75,646
Software 36,416 28,625
Networking and Communications 23,823 14,357
-------- --------
Total $326,092 $224,979
======== ========
</TABLE>
Substantially, all of the Company's net sales for the quarters ended March 31,
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 March 31, 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 2% of total net sales in the three months ended March 31, 2000 and
1999. Sales to the federal government accounted for $24.4 million, or 7.5% of
total net sales for the three months ended March 31, 2000 and $3.9 million
or 1.7% of total net sales for the three months ended March 31, 1999.
NOTE 7-SUBSEQUENT EVENTS
- ------------------------
PC Connection, Inc. announced on May 1, 2000 that the Board of Directors
approved a three-for-two common stock split to be effected in the form of a 50%
stock dividend. The dividend of one additional share of common stock for every
two shares currently held by stockholders will be distributed on or about May
23, 2000 to the stockholders of record as of the close of business on May 12,
2000.
The stock dividend will increase the number of outstanding shares of the
Company's common stock from 16.0 million to 23.9 million shares.
-8-
<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/A 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 in 1996 to 12.3% of net sales in the
quarter ended March 31, 2000. The Company believes sales attributable to Mac
products will continue to decrease as a percentage of net sales and may decline
in dollar volume in future periods.
-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-CONTINUED
RESULTS OF OPERATIONS
- ----------------------
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
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 MARCH 31, 2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Net sales (in millions) ......................... $326.1 $225.0
Net sales........................................ 100.0% 100.0%
Gross profit..................................... 12.5 12.0
Selling, general and administrative expenses..... 8.9 8.8
Income from operations........................... 3.6 3.3
Interest expense................................. 0.1 0.1
Income before income taxes....................... 3.5 3.2
Income taxes..................................... 1.3 1.2
Net income....................................... 2.2 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 MARCH 31, 2000 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
Platform
--------
PC and Multi-Platform........................... 88% 81%
Mac............................................. 12 19
--- ---
Total....................................... 100% 100%
=== ===
Sales Channel
-------------
Corporate Outbound.............................. 73% 57%
Inbound Telesales............................... 20 37
On-Line Internet................................ 7 6
--- ---
Total....................................... 100% 100%
=== ===
Product Mix
-----------
Computer Systems and Memory..................... 52% 47%
Peripherals..................................... 29 34
Software........................................ 11 13
Networking and Communications................... 8 6
--- ---
Total....................................... 100% 100%
=== ===
</TABLE>
NET SALES increased $101.1 million, or 45%, to $326.1 million for the quarter
ended March 31, 2000 from $225.0 million for the comparable period in 1999.
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 and
growth in the Company's Internet sales. Outbound sales increased $107.9 million,
or 84%, to $236.6 million in the quarter ended March 31, 2000 from $128.7
million in the comparable period in 1999, reflecting the above-mentioned
-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-CONT'D.
- -----------------------------
productivity increases in the outbound telemarketing group. Inbound sales
decreased $18.8 million, or 22.3%, to $65.5 million in the quarter ended March
31, 2000 from $84.3 million in the comparable period in 1999. This decrease in
inbound sales can be attributed to a shift in in-bound sales to those
categorized as "Internet sales". Internet sales increased $12.0 million or 100%,
to $24.1 million in the quarter ended March 31, 2000 from $12.0 million in the
comparable period in 1999.
All of the Company's product categories experienced strong growth in the quarter
ended March 31, 2000 over the comparable period in 1999, with sales of
networking and communications products representing the Company's fastest
growing product category with 66% growth in net sales over the first 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 continued to be the largest product
category. 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
$628 in the quarter ended March 31, 1999 to $926 in the quarter ended March 31,
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 $13.5 million, or 49.8%, to $40.6 million for the quarter
ended March 31, 2000 from $27.1 million for the comparable quarter in 1999.
Gross profit margin as a percentage of net sales increased to 12.5% in the first
quarter of 2000 from 12.0% in the first quarter of 1999. The margin improvement
resulted from a continuing focus on solutions 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. However, the gross profit dollar
contribution per order is generally higher as average order 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $9.2 million, or 46.5%,
to $29.0 million for the quarter ended March 31, 2000 from $19.8 million for the
comparable quarter in 1999, and increased as a percentage of sales from 8.8% in
the three months ended March 31, 1999 to 8.9% for the three months ended March
31, 2000. The percentage increase was primarily attributable to costs associated
with the January 2000 acquisition of Merisel's Marlboro, MA call center.
INCOME FROM OPERATIONS increased $4.3 million, or 58.9%, to $11.6 million for
the quarter ended March 31, 2000, from $7.3 million for the comparable period in
1999. Income from operations as a percentage of sales increased to 3.6% in the
quarter ended March 31, 2000 from 3.3% in the comparable period in 1999 for the
reasons discussed above.
INTEREST EXPENSE increased $74,000, or 27.8%, to $340,000 for the quarter ended
March 31, 2000 from $266,000 for the comparable period in 1999. This increase in
interest expense was due primarily to higher average outstanding borrowings in
the three months ended March 31, 2000.
OTHER, NET increased $110,000, or 117.0% for the quarter ended March 31, 2000,
from $94,000 for the comparable period in 1999. This increase was due primarily
to higher interest income from investments.
INCOME TAXES for the quarter ended March 31, 2000 were $4.4 million, compared to
$2.7 million for the comparable quarter in 1999. The effective tax rate was 38%
for both quarters presented. Management believes that the corporate
reorganization recently undertaken will not have a material impact on the
Company's effective tax rate in the future.
NET INCOME for the quarter ended March 31, 2000 increased $2.7 million, or
61.4%, to $7.1 million from $4.4 million for the comparable period in 1999,
principally as a result of the increase in operating income as described above.
-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
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, both internally and externally, 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 March 31, 2000, the Company had cash and cash equivalents of $27.0 million
and working capital of $77.1 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 (9.00% at March 31, 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. No borrowings were outstanding at March 31, 2000.
Net cash provided by operating activities was $10.5 million for the quarter
ended March 31, 2000, as compared to $2.0 million net cash used 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. Cash flows from operations have improved
in the period ended March 31, 2000 because of the Company's aggressive program
in managing its inventory levels.
Capital expenditures were $2.0 million in the quarter ended March 31, 2000, as
compared to $1.4 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 management information systems. Total
capital expenditures for the year ending December 31, 2000 are estimated to be
$16.6 million.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
- ----------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", 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.
-12-
<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.
-13-
<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
------ -----------
27 Financial Data Schedule
15 Letter on unaudited interim financial information
10.43 Amendment, dated January 1, 1999, to the Lease Agreement
between the Registrant and Gallup & Hall Partnership, dated
June 1, 1987, as amended, for property located in Marlow, New
Hampshire.
(b) REPORTS ON FORM 8-K
-------------------
(i) The Company filed a current report on Form 8-K on January 3,
2000, due to the reorganization of the Company.
(ii) The Company filed a current report on Form 8-K on May 8, 2000
due to the announcement of a three-for-two stock split of the
Company's outstanding shares of Common Stock.
-14-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
MARCH 31, 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.
May 12, 2000 By:/s/ Wayne L. Wilson
------------------------------------
Wayne L. Wilson
President and Chief Operating Officer
May 12, 2000 By:/s/ Mark A. Gavin
------------------------------------
Mark A. Gavin, Senior Vice President
of Finance and Chief Financial Officer
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 27,023
<SECURITIES> 0
<RECEIVABLES> 116,686
<ALLOWANCES> 8,220
<INVENTORY> 61,474
<CURRENT-ASSETS> 202,299
<PP&E> 48,254
<DEPRECIATION> 23,731
<TOTAL-ASSETS> 237,443
<CURRENT-LIABILITIES> 125,173
<BONDS> 0
0
0
<COMMON> 158
<OTHER-SE> 101,616
<TOTAL-LIABILITY-AND-EQUITY> 237,443
<SALES> 326,092
<TOTAL-REVENUES> 326,092
<CGS> 285,462
<TOTAL-COSTS> 285,462
<OTHER-EXPENSES> (204)
<LOSS-PROVISION> 2,457
<INTEREST-EXPENSE> 340
<INCOME-PRETAX> 11,487
<INCOME-TAX> 4,368
<INCOME-CONTINUING> 7,119
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,119
<EPS-BASIC> .45
<EPS-DILUTED> .43
</TABLE>
Exhibit 15
April 26, 2000
PC Connection, Inc. and subsidiaries
Merrimack, New Hampshire
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of PC Connection and subsidiaries for the period ended March 31,
2000, as indicated in our report dated April 26, 2000; because we did not
perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, is
incorporated by reference in Registration Statement Nos.333-69981, 333-50847,
333-50847, 333-50845, and 333-83943 of PC Connection, Inc. on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
EXHIBIT 10.43
AMENDMENT TO LEASE
This Amendment, with an effective date of January 1, 1999, modifies the Lease
entered into June 1, 1987, as previously amended from time to time by and
between Gallup & Hall Partnership with offices at 730 Milford Road, Merrimack,
New Hampshire (Landlord) and PC Connection, Inc., a Delaware corporation with
offices at 730 Milford Road, Merrimack, New Hampshire (Tenant) for premises
known as the Christmas Trees Inn, situated on Route 10 in Marlow, New Hampshire,
as follows:
Item Sec. Amend or Replace the Indicated Lease Section as follows:
- ---- ---- --------------------------------------------------------
1. 3 Delete and replace with: "Tenant shall pay as rent to the
Landlord, the sum of $500.00 per month, payable in advance,
during the term of this Lease."
All other provisions of the Lease shall continue in full force and effect.
Agreed: Gallup & Hall, LLP
By: /s/
------------------------------------
Patricia Gallup, Partner
PC Connection, Inc.
By: /s/
------------------------------------
Wayne Wilson, President
