<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE COMMISSION
Commission File Number 0-23827
PC CONNECTION, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0497006
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Rt. 101A, 730 Milford Road
Merrimack, New Hampshire 03054
------------------------ -----
(Address of principal executive offices) (Zip Code)
(603) 423-2000
--------------
Registrant's telephone number, including area code
------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant, based upon the closing price of the
Registrant's Common Stock as reported on the NASDAQ National Market on March 27,
2000, was $96,008,036. Although directors and executive officers of the
registrant were assumed to be "affiliates" of the registrant for the purposes of
this calculation, this classification is not to be interpreted as an admission
of such status.
The number of outstanding shares of the Registrant's Common Stock on March 27,
2000 was 15,794,298.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2000 Annual Meeting of
Shareholders for the fiscal year ended December 31, 1999, which is to be filed
within 120 days of the end of the Company's fiscal year, are incorporated by
reference into Part III of this Form 10-K. The incorporation by reference herein
of portions of the Proxy Statement shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a) (8) of
Regulation S-K.
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<PAGE>
PC CONNECTION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Management........................................................................................F-2
Independent Auditors' Report................................................................................F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998................................................F-4
Consolidated Statements of Income for the years ended December 31, 1999, 1998, and 1997.....................F-5
Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1999,
1998, and 1997......................................................................................F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997.................F-7
Notes to Consolidated Financial Statements..................................................................F-8
</TABLE>
F-1
<PAGE>
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity of the financial information
presented in this Annual Report on Form 10-K rests with PC Connection, Inc. and
subsidiary ("the Company") management. The accompanying financial statements
have been prepared in conformity with generally accepted accounting principles,
applying certain estimates and judgments as required.
The Company maintains an effective internal control structure. It consists, in
part, of an organization with clearly defined lines of responsibility and
delegation of authority, comprehensive systems and control procedures. We
believe this structure provides reasonable assurance that transactions are
executed in accordance with management authorization and generally accepted
accounting principles.
To assure the effective administration of internal control, we carefully select
and train our employees, develop and disseminate written policies and
procedures, provide appropriate communication channels and foster an environment
conducive to the effective functioning of controls. We believe that it is
essential for the Company to conduct its business affairs in accordance with the
highest ethical standards.
Deloitte & Touche LLP, independent auditors, is retained to audit the Company's
consolidated financial statements. Its accompanying report is based on an audit
conducted in accordance with auditing standards generally accepted in the United
States of America.
The Audit Committee of the Board of Directors is composed solely of outside
directors and is responsible for recommending to the Board of Directors the
independent accounting firm to be retained for the coming year. The Audit
Committee meets periodically and privately with the independent auditors, as
well as with Company management, to review accounting, auditing, internal
control structure and financial reporting matters.
Patricia Gallup Wayne L. Wilson Mark A. Gavin
Chairman and President and Chief Chief Financial Officer
Chief Executive Officer Operating Officer
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
PC Connection, Inc. and Subsidiary
Merrimack, New Hampshire
We have audited the accompanying consolidated balance sheets of PC Connection,
Inc. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed in Item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of PC Connection, Inc. and subsidiary
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Boston, Massachusetts
January 26, 2000
F-3
<PAGE>
PC CONNECTION, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
-------- --------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents .................................................... $ 20,416 $ 11,910
Accounts receivable, net ..................................................... 99,405 58,890
Inventories - merchandise .................................................... 64,348 63,425
Deferred income taxes ........................................................ 1,991 3,181
Prepaid expenses and other current assets .................................... 4,651 4,115
-------- --------
Total current assets ............................................... 190,811 141,521
Property and equipment, net ...................................................... 23,126 22,675
Deferred income taxes ............................................................ -- 314
Other assets ..................................................................... 169 --
Goodwill ......................................................................... 9,431 --
-------- --------
Total Assets ....................................................... $223,537 $164,510
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligation
to affiliate .............................................................. $ 137 $ 123
Current maturities of long-term debt ......................................... 1,000 --
Accounts payable ............................................................. 105,547 77,561
Accrued expenses and other liabilities ....................................... 11,877 10,069
-------- --------
Total current liabilities .......................................... 118,561 87,753
Notes payable, less current maturities ........................................... 2,000 --
Capital lease obligation to affiliate, less current maturities ................... 6,945 7,081
Deferred taxes ................................................................... 1,579 --
Other liabilities ................................................................ 229 --
-------- --------
Total Liabilities .................................................. 129,314 94,834
-------- --------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
Preferred Stock, $.01 par value, 7,500 shares authorized, 0 outstanding
at December 31, 1999 and December 31, 1998 ............................. -- --
Common Stock, $.01 par value, 30,000 shares authorized, 15,767
and 15,605 issued and outstanding at December 31, 1999
and December 31, 1998, respectively .................................... 158 156
Additional paid-in capital ................................................... 58,627 56,812
Retained earnings ............................................................ 35,438 12,708
-------- --------
Total Stockholders' Equity ............................................ 94,223 69,676
-------- --------
Total Liabilities and Stockholders' Equity ............................ $223,537 $164,510
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PC CONNECTION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ...................................... $ 1,056,704 $ 732,370 $ 550,575
Cost of sales .................................. 927,358 639,096 474,609
----------- ----------- -----------
Gross Profit ............................... 129,346 93,274 75,966
Selling, general and administrative expenses ... 91,405 68,521 56,596
Additional stockholder/officer compensation .... -- 2,354 12,130
----------- ----------- -----------
Income from operations .................... 37,941 22,399 7,240
Interest expense ............................... (1,392) (415) (1,355)
Other, net ..................................... 116 565 (42)
----------- ----------- -----------
Income before taxes ............................ 36,665 22,549 5,843
Income taxes ................................... (13,935) (3,905) (639)
----------- ----------- -----------
Net income ................................ $ 22,730 $ 18,644 $ 5,204
=========== =========== ===========
Earnings per common share:
Basic ..................................... $ 1.45
===========
Diluted ................................... $ 1.41
===========
Pro forma data:
Historical income before income taxes ....... $ 22,549 $ 5,843
Pro forma other adjustments ................. 2,354 12,010
----------- -----------
Pro forma income before income taxes ........ 24,903 17,853
Pro forma income taxes ...................... 9,631 6,963
----------- -----------
Pro forma net income ........................ $ 15,272 $ 10,890
=========== ===========
Pro forma basic net income per share ........ $ 1.01 $ .79
=========== ===========
Pro forma diluted net income per share ...... $ .98 $ .76
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PC CONNECTION, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(amounts in thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 .................... 11,799 $ 118 $ 3,224 $ 14,701 $ 18,043
Compensation under nonstatutory stock
option agreements ....................... -- -- 873 -- 873
Net Income .................................. -- -- -- 5,204 5,204
-------- -------- -------- -------- --------
Balance, December 31, 1997 .................. 11,799 118 4,097 19,905 24,120
-------- -------- -------- -------- --------
Net proceeds from initial public offering ... 3,594 36 57,217 -- 57,253
Dividend .................................... -- -- (7,196) (25,841) (33,037)
Exercise of stock options, including
income tax benefits ..................... 212 2 1,397 -- 1,399
Compensation under nonstatutory
stock option agreements ................. -- -- 1,297 -- 1,297
Net income .................................. -- -- -- 18,644 18,644
-------- -------- -------- -------- --------
Balance, December 31, 1998 .................. 15,605 156 56,812 12,708 69,676
-------- -------- -------- -------- --------
Exercise of stock options, including
income tax benefits ..................... 117 1 1,183 -- 1,184
Issuance of stock under employee
stock purchase plan ..................... 45 1 470 -- 471
Compensation under nonstatutory
stock option agreements ................. -- -- 162 -- 162
Net income .................................. -- -- -- 22,730 22,730
-------- -------- -------- -------- --------
Balance, December 31, 1999 .................. 15,767 $ 158 $ 58,627 $ 35,438 $ 94,223
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PC CONNECTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income .................................................... $ 22,730 $ 18,644 $ 5,204
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization ............................. 5,334 2,866 3,660
Deferred income taxes ..................................... 2,523 (1,945) (154)
Compensation under nonstatutory stock option agreements ... 162 1,297 873
Provision for doubtful accounts ........................... 6,821 6,296 3,339
Loss on disposal of fixed assets .......................... 159 -- 54
Changes in assets and liabilities:
Accounts receivable ....................................... (42,795) (35,265) (10,097)
Inventories ............................................... (305) 295 (19,301)
Prepaid expenses and other current assets ................. (504) (1,910) (483)
Accounts payable .......................................... 19,945 39,387 1,269
Amounts payable to stockholders ........................... -- (1,185) 1,185
Accrued expenses and other liabilities .................... 1,969 926 4,042
--------- --------- ---------
Net cash provided by (used for) operating activities .......... 16,039 29,406 (10,409)
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment ........................... (7,653) (9,922) (4,528)
Proceeds from sale of property and equipment .................. 2,155 58 22
Payment for purchase of ComTeq, net of cash acquired .......... (3,198) -- --
--------- --------- ---------
Net cash used for investing activities ........................ (8,696) (9,864) (4,506)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from short-term borrowings ........................... 442,731 160,098 178,362
Repayment of short-term borrowings ............................ (442,731) (188,416) (162,351)
Repayment of term loan ........................................ -- (4,500) (500)
Repayment of capital lease obligation to affiliate ............ (122) (11) --
Issuance of stock upon exercise of stock options .............. 814 223 --
Issuance of stock under Employee Stock Purchase Plan .......... 471 -- --
Net proceeds from initial public offering ..................... -- 57,253 --
Payment of dividend ........................................... -- (33,037) --
--------- --------- ---------
Net cash provided by (used for) financing activities .......... 1,163 (8,390) 15,511
--------- --------- ---------
Increase in cash and cash equivalents ......................... 8,506 11,152 596
Cash and cash equivalents, beginning of period ................ 11,910 758 162
--------- --------- ---------
Cash and cash equivalents, end of period ...................... $ 20,416 $ 11,910 $ 758
========= ========= =========
Supplemental Cash Flow Information:
Interest paid ................................................. $ 1,398 $ 497 $ 1,334
Income taxes paid ............................................. 9,374 7,275 550
Non-Cash Activities:
Issuance of notes payable in connection with
acquisition of subsidiary .................................. $ 3,000 $ -- $ --
Assets acquired under capital lease ........................... -- 7,215 --
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
PC CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PC Connection, Inc. and its subsidiary (the "Company") is a direct marketer of
brand-name personal computers and related peripherals, software, and networking
products to business, education, government, and consumer end users located
primarily in the United States. The following is a summary of significant
accounting policies.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of PC Connection,
Inc. and its wholly-owned subsidiary. Intercompany transactions and balances are
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the amounts reported in the accompanying
financial statements. Actual results could differ from those estimates.
Revenue Recognition
Revenue on product sales is recognized at the point of shipment. A reserve for
sales returns is recorded at the time of sale and has been established based
upon historical trends.
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. The carrying value of the
Company's cash equivalents approximates fair value.
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.
Advertising Costs and Revenues
Costs of producing and distributing catalogs are deferred and charged to expense
over the period that each catalog remains the most current selling vehicle
(generally one to two months). Other advertising costs are expensed as incurred.
Vendors have the ability to place advertisements in the catalogs for which the
Company receives advertising allowances and incentives. These revenues are
recognized on the same basis as the catalog costs.
Advertising costs charged to expense were $31,487, $32,498 and $27,859 for the
years ended December 31, 1999, 1998 and 1997, respectively. Deferred advertising
revenues at December 31, 1999 and 1998 exceeded deferred advertising costs of
$423 and $325 at those respective dates, and, accordingly, such net deferred
amounts are included in accrued expenses and other liabilities.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
provided for both financial and income tax reporting purposes over the estimated
useful lives of the assets ranging from three to seven years, computer software,
including licenses and internally developed software is capitalized and
amortized over lives ranging from three to five years. Depreciation is and has
been provided using accelerated methods for property acquired prior to 1996 and
on the straight-line method for property acquired thereafter. Leasehold
improvements and facilities under capital leases are amortized over the terms of
the related leases or their useful lives, whichever is shorter, whereas for
income tax reporting purposes, they are amortized over the applicable tax lives.
The Company periodically evaluates the carrying value of property and equipment
based upon current and anticipated undiscounted cash flows, and recognizes an
impairment when it is probable that such estimated future cash flows will be
less than the asset carrying value.
F-8
<PAGE>
Goodwill
Goodwill arises from certain purchase transactions and is amortized using the
straight-line method over appropriate periods not exceeding 15 years. The amount
charged to expense during 1999 was $324.
Tax Status and Income Taxes
For periods prior to March 6, 1998, the Company elected to be treated as an S
Corporation under Subchapter S of the Internal Revenue Code (the "Code"), and
applicable state laws. Effective with the consummation of the Company's initial
public offering of its common stock on March 6, 1998 (the "Offering"), the
Company's S Corporation election was automatically terminated and the Company
became subject to federal and state income taxes as a C Corporation from that
date forward.
Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax basis of assets and liabilities that will result
in taxable or deductible amounts in the future, based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount that is more likely than not to be realized.
"Income taxes" as presented on the Consolidated Statements of Income comprise
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Additional Stockholder/Officer Compensation
Additional stockholder/officer compensation represents amounts accrued or
distributed in excess of aggregate annual base salaries approved by the Board of
Directors (the "Board") and generally represents Company-related federal income
tax obligations payable by the stockholders for periods during which the Company
was an S Corporation.
Concentration of Credit Risk
Concentrations of credit risk with respect to trade account receivables are
limited due to the large number of customers comprising the Company's customer
base. Ongoing credit evaluations of customers' financial condition are
performed.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of
shares outstanding. Diluted earnings per share is computed using the weighted
average number of shares outstanding adjusted, when dilutive, for the
incremental shares attributed to outstanding options to purchase common stock.
The denominator pro forma basic earnings per share for all periods prior to
March 6, 1998 includes the weighted average shares required to pay the S
Corporation dividend (assuming a price per share of $17.50 for the year ended
December 31, 1998 and $16.00 for the year ended December 31, 1997).
The following table sets forth the computation of basis and diluted earnings per
share:
<TABLE>
<CAPTION>
Pro Forma
---------
(amounts in thousands, except per share data) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income ........................................................ $22,730 $15,272 $10,890
Denominator:
Denominator for basic earnings per share:
Weighted average shares ........................................ 15,650 14,849 11,799
Weighted average shares required to pay stockholder dividend ... -- 316 2,062
------- ------- -------
Denominator for basic earnings per share .......................... 15,650 15,165 13,861
------- ------- -------
Effect of dilutive securities:
Employee stock options ......................................... 461 504 383
------- ------- -------
Denominator for diluted earnings per share ........................... 16,111 15,669 14,244
======= ======= =======
Earnings per share:
Basic .............................................................. $ 1.45 $ 1.01 $ .79
======= ======= =======
Diluted ............................................................ $ 1.41 $ .98 $ .76
======= ======= =======
</TABLE>
The above pro forma adjustments have been made to the historical results of
operations for the period from January 1 through March 5, 1998 and the year
ended December 31, 1997 to make the pro forma presentation comparable to what
would have been reported had the Company operated as a C Corporation.
(i) Elimination of stockholder/officer compensation in excess of
aggregate annual base salaries of $600 that were in effect during
1998 in accordance with employment agreements; and
(ii) Computation of income tax expense assuming an effective tax rate of
approximately 39% (see Note9) and after adjusting
stockholder/officer compensation expense described in (i) above.
F-9
<PAGE>
The following stock options to purchase Common Stock were excluded from the
computation of diluted earnings per share for years ended December 31, 1999,
1998, and 1997 because the effect of the options on the calculation would have
been anti-dilutive:
1999 1998 1997
---- ---- ----
Anti-dilutive stock options -- 78 --
Stock-Based Compensation
Compensation expense associated with awards of stock or options to employees is
measured using the intrinsic value method in accordance with APB Opinion No. 25.
The Board estimated the fair value of the Company's stock for awards made prior
to the Offering using market valuations of comparable publicly traded companies,
among other factors.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires businesses to disclose comprehensive
income and its components in their general-purpose financial statements. The
Company has no other comprehensive income in any of the periods presented.
Accordingly, a separate statement of comprehensive income is not presented.
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, 1999. 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.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been reclassified
to conform to the 1999 presentation.
2. ACQUISITION OF SUBSIDIARY
On June 29, 1999, the Company acquired all of the outstanding stock of ComTeq
Federal, Inc., a supplier of computer equipment and services to federal
government agencies. The purchase price was $8.3 million, including acquisition
costs and consisted of cash of $5.3 million and promissory notes aggregating $3
million. Total cash paid for ComTeq Federal Inc., net of cash acquired, was $3.2
million. The transaction has been accounted for by the purchase method, and
accordingly, the results of operations for the period from June 29, 1999 are
included in the accompanying financial statements. The assets purchased and
liabilities assumed have been recorded at their fair value at the date of
acquisition. The excess of the purchase price, including acquisition costs, over
the fair value of the net liabilities assumed has been recorded as goodwill
(approximately $9.7 million). Such amount recorded at December 31, 1999 is
subject to change pending final valuation of the net assets acquired. Goodwill
will be amortized over a period of 15 years. The promissory notes are unsecured,
bear interest at the prime rate less 0.5% and are scheduled to be repaid over a
three year period. As of December 31, 1999, the short-term portion of the
promissory notes was $1 million and the long-term portion was $2 million.
Pro Forma Information
The following unaudited pro forma information presents the consolidated results
of operations of the Company as if the acquisition of ComTeq Federal, Inc. had
taken place as of the beginning of each of the periods presented.
Year Ended December 31,
(in thousands except per share data) 1999 1998
---- ----
Revenues $1,081,533 $769,567
Net income 23,350 14,647
Diluted earnings per share 1.45 .93
F-10
<PAGE>
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
December 31,
-----------------------
1999 1998
--------- ---------
Trade ............................................ $ 96,981 $ 47,667
Co-op advertising ................................ 2,965 6,131
Vendor returns, rebates and other ................ 7,109 14,243
--------- ---------
Total ................................... 107,055 68,041
Less allowances for:
Sales returns ........................... (3,717) (4,030)
Doubtful accounts ....................... (3,933) (5,121)
--------- ---------
Accounts receivable, net ......................... $ 99,405 $ 58,890
========= =========
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Facilities under capital lease ................................... $ 7,215 $ 7,215
Leasehold improvements ........................................... 5,337 5,225
Furniture and equipment .......................................... 22,923 22,484
Computer software, including licenses and internally-developed
software ..................................................... 10,749 7,873
Automobiles ...................................................... 224 192
-------- --------
Total ................................................... 46,448 42,989
Less accumulated depreciation and amortization ................... (23,322) (20,314)
-------- --------
Property and equipment, net ...................................... $ 23,126 $ 22,675
======== ========
</TABLE>
5. BANK BORROWINGS
At December 31, 1999, the Company has an unsecured credit agreement with a bank
providing for short-term borrowing up to $50 million which bears interest at
various rates ranging from the prime rate (8.50% at December 31, 1999) to prime
rate less 1% depending on the ratio of senior debt to EBITDA. The credit
agreement includes various customary financial and operating covenants,
including minimum net worth requirements, minimum net income requirements and
restrictions on the payment of dividends, none of which, in the opinion of
management, significantly restricts the Company's operations. No amounts were
outstanding under this facility at December 31, 1999. The credit agreement
matures on May 31, 2002.
Certain information with respect to short-term borrowings were as follows:
<TABLE>
<CAPTION>
Weighted Average Maximum Amount Average Amount
Interest Rate Outstanding Outstanding
------------- ----------- -----------
<S> <C> <C> <C>
Year ended December 31,
1999................................ 7.4% $ 29,543 $ 4,497
1998................................ 8.2 28,307 4,145
1997................................ 8.6 31,890 9,458
</TABLE>
6. TRADE CREDIT ARRANGEMENTS
At December 31, 1999 and 1998, the Company had security agreements with two
financial institutions to facilitate the purchase of inventory from various
suppliers under certain terms and conditions. The agreements allow a
collateralized position in inventory financed by the financial institutions up
to an aggregated amount of $54.5 million. The cost of such financing under these
agreements is borne by the suppliers. At December 31, 1999 and 1998, accounts
payable included $31,064 and $21,820, respectively owed to these financial
institutions.
F-11
<PAGE>
7. CAPITAL LEASE
In November 1997, the Company entered into a fifteen-year lease for a new
corporate headquarters with an affiliated company related to the Company through
common ownership. The Company occupied the facility upon completion of
construction in late November 1998, and the lease payments commenced in December
1998. Annual lease payments under the terms of the lease, as amended, will be
approximately $911 for the first five years of the lease, increasing to $1,025
for years six through ten and $1,139 for years eleven through fifteen. The lease
requires the Company to pay its proportionate share of real estate taxes and
common area maintenance charges as additional rent and also to pay insurance
premiums for the leased property. The Company has the option to renew the lease
for two additional terms of five years each.
In December 1998, the Company recorded the lease as a capital lease. The
recorded value of the asset (facilities under capital lease) and the related
liability (capital lease obligation to affiliate) was $7.2 million, and during
1999 and 1998, the Company made principal and interest payments under this lease
aggregating $911 thousand and $76 thousand, respectively.
Future aggregate minimum annual lease payments under this lease at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31 Payments
----------------------- ---------
<S> <C>
2000...................................................................... $ 911
2001...................................................................... 911
2002...................................................................... 911
2003...................................................................... 921
2004...................................................................... 1,025
2005 and thereafter....................................................... 9,714
---------
Total minimum payments (excluding taxes, maintenance and insurance)....... 14,393
Less amount representing interest......................................... (7,311)
---------
Present value of minimum lease payments................................... 7,082
Less current maturities................................................... (137)
---------
Long-term portion......................................................... $ 6,945
=========
</TABLE>
8. STOCKHOLDERS' EQUITY
Recapitalization and Reincorporation
On February 4, 1998, the Company amended its Articles of Incorporation to
increase the authorized shares of the Company's Series A Non-Voting Common
Stock, $.01 par value per share, and Series B Voting Common Stock, $.01 par
value per share to 22,500,000 and 7,500,000 shares, respectively. The Company
also, through a 1.310977-for-one stock split, increased the total number of
Series A Non-Voting and Series B Voting shares issued and outstanding to
8,849,095 shares and 2,949,698 shares, respectively.
Reincorporation of the Company
Contemporaneous with the consummation of the Company's initial public offering
(the"offering"), the Company was reincorporated in Delaware. All of the issued
and outstanding shares of Series A Non-Voting Common Stock, $0.1 par value per
share, and Series B Voting Common Stock, $.01 par value per share, of the New
Hampshire corporation were converted into 11,798,793 shares of Common Stock,
$.01 par value, of the Delaware corporation on a one-for-one basis, and the
Series A and Series B shares were canceled. The effect of the conversion has
been reflected in the Consolidated Statement of Changes in Stockholders' Equity
for all periods presented.
Preferred Stock
The Amended and Restated Certificate of Incorporation of the Delaware
Corporation (the "Restated Certificate") authorized the issuance of up to
7,500,000 shares of preferred stock, $.01 par value per share (the "Preferred
Stock"). Under the terms of the Restated Certificate, the Board is authorized,
subject to any limitations prescribed by law, without stockholder approval, to
issue by a unanimous vote such shares of Preferred Stock in one or more series.
Each such series of Preferred Stock shall have such rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
redemption privileges and liquidation preferences, as shall be determined by the
Board. There were no preferred shares outstanding at 1999 and 1998.
F-12
<PAGE>
Incentive and Non-Statutory Stock Option Plans
In December 1993, the Board adopted and the stockholders approved the 1993
Incentive and Non-Statutory Stock Option Plan (the "1993 Plan"). Under the terms
of the 1993 Plan, the Company is authorized to make awards of restricted stock
and to grant incentive and non-statutory options to employees of, and
consultants and advisors to, the Company to purchase shares of the Company's
stock. A total of 1,124,163 shares of the Company's Common Stock was authorized
for issuance upon exercise of options granted or awards made under the 1993
Plan. Options vest over varying periods up to four years and have contractual
lives up to ten years.
In November 1997, the Board adopted and the stockholders approved the 1997 Stock
Incentive Plan (the "1997 Plan"), which became effective on the closing of the
Offering, and 800,000 shares were reserved for issuance under the Plan. The
1997 Plan provides for the grant of incentive stock options, non-statutory stock
options, stock appreciation rights, performance shares and awards of restricted
stock and unrestricted stock. In April 1999, the Board adopted, and in May 1999
the stockholders approved, an additional 800,000 shares of Common Stock for
issuance under the 1997 Plan.
Information regarding the 1993 and 1997 Plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Option Exercise Average
Shares Price Fair Value
------ ----- ----------
<S> <C> <C> <C>
Outstanding, January 1, 1997................................. 589,940 1.89 4.22
Granted............................................. 504,070 4.97
Outstanding, December 31, 1997............................... 1,094,010 3.31
Granted............................................. 780,363 17.77 8.11
Exercised........................................... (212,648) 1.05
Forfeited........................................... (56,155) 7.66
-----------
Outstanding, December 31, 1998............................... 1,605,570 10.53
-----------
Granted............................................. 476,555 15.54 6.44
Exercised........................................... (117,269) 6.93
Forfeited........................................... (83,116) 13.53
-----------
Outstanding, December 31, 1999............................... 1,881,740 11.89
===========
</TABLE>
The weighted average exercise price and weighted average fair value of options
granted in 1999 whose exercise price is equal to the market price on the date of
grant is $14.61 and $6.68, respectively.
The weighted average exercise price and weighted average fair value of options
granted in 1999 whose exercise price is greater than the market price on the
date of grant is $17.50 and $5.92, respectively.
The following table summarizes the status of outstanding stock options as of
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Exercise No. of Remaining Average No. of Average
Price Range Shares Life (Years) Exercise Price Shares Exercise Price
----------- ------ ------------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$.76 278,798 4.64 $ .76 272,244 $ .76
$.76 - $3.81 177,485 6.61 3.12 170,931 3.10
$5.72 222,994 6.53 5.72 167,930 5.72
$13.38 275,525 9.73 13.38 0 0
$17.50 804,188 7.34 17.50 240,042 17.50
$17.75 - $19.38 65,250 8.47 18.68 11,375 18.47
$19.75 5,000 8.61 19.75 1,250 19.75
$22.00 27,500 9.03 22.00 0 0
$24.75 20,000 8.63 24.75 5,000 24.75
$30.50 5,000 9.98 30.50 0 0
----------- ---------- --------- ----------- ------------ -------
$.76 - $30.50 1,881,740 7.21 $ 11.89 868,772 $ 7.20
=============== ========== ========= =========== ============ =======
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, compensation expense for
options awarded under the Plans in 1999, 1998 and 1997, has been recognized
using the intrinsic value method.
The fair value of options granted prior to the consummation of the Offering was
estimated using the minimum value method and risk-free interest rates and
expected option lives of 6% and seven years, respectively. The minimum value
pricing method was designed to value stock options of non-public companies;
accordingly, the minimum value method assumed zero volatility.
F-13
<PAGE>
The Black-Scholes model was used to value options granted subsequent to the
Offering using a volatility factor of 50%, estimated option lives of four years,
and a risk-free interest rate of 6% for 1999 and 1998. Management believes that
the assumptions used and the models applied to value the awards yield a
reasonable estimate of the fair value of the grants made under the
circumstances, given the alternatives under SFAS No. 123.
Effective upon the consummation of the Offering, certain restrictions as to the
exercise of options granted under the Company's 1993 Plan expired. Prior to the
consummation of the Offering, the Company recorded compensation expense for
certain options granted at prices less than their fair market value ratably over
seven years from the dates granted, because such options were not exercisable
except upon the occurrence of certain events, including a public offering of the
Company's Common Stock. Effective upon the consummation of the Offering, the
Company recorded a one-time charge for stock-option compensation expense of
approximately $870, relating to the acceleration of the vesting period of
certain of the Company's stock options from seven to four years.
Compensation expense charged to operations using the intrinsic value method
totaled $162, $1,297 (including the one-time charge of $870 referred to above),
and $873 for the years ended December 31, 1999, 1998, and 1997, respectively.
Had the Company recorded compensation expense using the fair value method under
SFAS No. 123, pro forma net income and diluted net income per share for the
years ended December 31 would have been as follows:
<TABLE>
<CAPTION>
Pro Forma
---------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income, as reported $ 22,730 $ 15,272 $ 10,890
Net income, under SFAS No. 123 21,511 14,423 10,824
Diluted net income per share, as reported 1.41 .98 .76
Diluted net income, under SFAS No. 123 1.33 .93 .76
</TABLE>
1997 Employee Stock Purchase Plan
In November 1997, the Board adopted and the stockholders approved the 1997
Employee Stock Purchase Plan (the "Purchase Plan"), which became effective on
February 1, 1999. The Purchase Plan authorizes the issuance of Common Stock to
participating employees. Under the terms of the Purchase Plan, the purchase
price is an amount equal to 85% of the fair market value per share of the Common
Stock on either the first day or the last day of the offering period, whichever
is lower. An aggregate of 225,000 shares of Common Stock has been reserved for
issuance under the Purchase Plan.
9. INCOME TAXES
The provision for income taxes prior to March 6, 1998 was based on the state
income tax obligations of the Company as an S Corporation and was $639 for the
year ended December 31, 1997. Effective with the consummation of the Offering,
the Company's S Corporation election was terminated and the Company began to
account for income taxes as a C Corporation.
The 1999 and 1998 provision for income taxes and unaudited 1998 and 1997 pro
forma provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(Pro Forma) (Pro Forma)
1999 1998 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Paid or currently payable:
Federal ................................................. $ 10,373 $ 6,390 $ 7,706 $ 9,214
State ................................................... 1,409 842 766 793
-------- -------- -------- --------
Total current ........................................ 11,782 7,232 8,472 10,007
-------- -------- -------- --------
Deferred:
Recognition of deferred tax asset upon termination of
S Corporation election ............................... -- (4,200) -- --
Federal ................................................. 1,983 795 1,054 (2,890)
State ................................................... 170 78 105 (154)
-------- -------- -------- --------
Net deferred ......................................... 2,153 (3,327) 1,159 (3,044)
-------- -------- -------- --------
Net provision ........................................ $ 13,935 $ 3,905 $ 9,631 $ 6,963
======== ======== ======== ========
</TABLE>
F-14
<PAGE>
The components of the deferred taxes at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Current:
Provisions for doubtful accounts ........................... $ 1,456 $ 2,197
Inventory costs capitalized for tax purposes ............... 519 517
Inventory and sales returns reserves ....................... 1,221 1,365
Deductible expenses, primarily employee-benefit related .... 114 421
Other liabilities .......................................... (1,319) (1,319)
------- -------
Net deferred tax assets ................................. 1,991 3,181
------- -------
Non-Current:
Compensation under non-statutory stock option agreements ... 670 709
Accumulated depreciation ................................... (2,249) (395)
------- -------
Net deferred tax asset (liability) ...................... (1,579) 314
------- -------
Net deferred tax asset ..................................... $ 412 $ 3,495
======= =======
</TABLE>
The reconciliation of the Company's 1999 and 1998 income tax provision and its
1998 and 1997 unaudited pro forma income tax provision to the statutory federal
tax rate is as follows:
<TABLE>
<CAPTION>
(Pro Forma) (Pro Forma)
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory tax rate .............................................. 35.0% 35.0% 35.0% 35.0%
Recognition of deferred tax asset upon termination of
S Corporation election ...................................... -- (18.6) -- --
1998 S Corporation income not subject to federal income taxes ... -- (2.8) -- --
State income taxes, net of federal benefit ...................... 2.6 2.6 2.6 2.6
Nondeductible expenses .......................................... 0.2 0.2 0.2 0.2
Other - net ..................................................... 0.2 0.9 0.9 1.2
---- ---- ---- ----
Effective income tax rate .................................... 38.0% 17.3% 38.7% 39.0%
==== ==== ==== ====
</TABLE>
10. EMPLOYEE BENEFIT PLAN
The Company has a contributory profit-sharing and employee savings plan covering
all qualified employees. No contributions to the profit-sharing element of the
plan were made by the Company in 1999, 1998 or 1997. The Company made matching
contributions to the employee savings element of the plan of approximately $317
thousand, $361 thousand, and $171 thousand in 1999, 1998 and 1997, respectively.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain office facilities from its principal stockholders
under 20-year noncancelable operating leases. The lease agreement for one
facility requires the Company to pay all real estate taxes and insurance
premiums related thereto. The Company also leases several other buildings from
its principal stockholders on a month-to-month basis.
In addition, the Company leases office, warehouse facilities and equipment from
unrelated parties with remaining terms of one to four years.
Future aggregate minimum annual lease payments under these leases at December
31, 1999 are as follows:
Year Ending December 31 Related Parties Others Total
----------------------- --------------- ------ -----
2000.......................... $ 151 $ 2,490 $ 2,641
2001.......................... 151 1,700 1,851
2002.......................... 121 1,471 1,592
2003.......................... 106 155 261
2004.......................... 106 -- 106
2004 and thereafter........... 371 -- 371
Total rent expense aggregated $1,470, $1,521 and $1,398 for the years ended
December 31, 1999, 1998 and 1997, respectively, under the terms of the leases
described above. Such amounts included $189, $327 and $311 in 1999, 1998 and
1997, respectively, paid to related parties.
F-15
<PAGE>
Contingencies
The Company is subject to various legal proceedings and claims which have arisen
during the ordinary course of business. In the opinion of management, the
outcome of such matters is not expected to have a material effect on the
Company's financial position, results of operations and cash flows.
12. OTHER RELATED PARTY TRANSACTIONS
Other related-party transactions include the transactions summarized below.
Related parties consist primarily of affiliated companies related to the Company
through common ownership.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenue:
Sales of various products ........................ $ 1 $ 13 $ 38
Sales of services to affiliated companies ........ 332 -- --
Sales of property and equipment:
Net book value ................................ -- -- (14)
Proceeds ...................................... -- -- 16
Costs:
Purchase of services from affiliated companies ... 6 2 1,280
</TABLE>
13. 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 (Inbound Telesales, Corporate Outbound, 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:
Year Ended December 31,
-----------------------
1999 1998 1997
---------- ---------- ----------
Platform
PC and Multi Platform $ 895,412 $ 587,100 $ 439,286
Mac 161,292 145,270 111,289
---------- ---------- ----------
Total $1,056,704 $ 732,370 $ 550,575
========== ========== ==========
Sales Channel
Corporate Outbound $ 694,924 $ 390,922 $ 257,215
Inbound Telesales 303,707 312,356 288,113
On-Line Internet 58,073 29,092 5,247
---------- ---------- ----------
Total $1,056,704 $ 732,370 $ 550,575
========== ========== ==========
Product Mix
Computer Systems and Memory $ 502,530 $ 319,759 $ 232,343
Peripherals 356,216 252,966 188,847
Software 129,944 102,451 86,991
Networking and Communications 68,014 57,194 42,394
---------- ---------- ----------
Total $1,056,704 $ 732,370 $ 550,575
========== ========== ==========
Substantially, all of the Company's net sales in 1999, 1998 and 1997 were made
to customers located in the United States. Shipments to customers located in
foreign countries aggregated less than 2% in 1999, 1998 and 1997. All of the
Company's assets at December 31, 1999 and 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. No single customer other
than federal government accounted for more than 1% of total net sales in 1999.
Net sales to the federal government in 1999 were $81.4 million or 7.7% of total
net sales. No single customer (including the federal government) accounted for
more than 1% of total net sales in 1998 and 1997.
F-16
<PAGE>
14. SELECTED UNAUDITED QUARTERLY FINANCIAL RESULTS
The following table sets forth certain unaudited quarterly data of the Company
for each of the quarters since January 1998. This information has been prepared
on the same basis as the annual financial statements and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the selected quarterly information
when read in conjunction with the annual financial statements and the notes
thereto included elsewhere in this document. The quarterly operating results are
not necessarily indicative of future results of operations. See "Factors That
May Affect Future Results and Financial Condition - Historical Net Losses;
Variability of Quarterly Results."
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
---------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 224,979 $ 231,833 $ 282,103 $ 317,789
Cost of sales 197,913 204,034 247,651 277,760
--------- ---------- ---------- ----------
Gross profit 27,066 27,799 34,452 40,029
Selling, general and administrative expenses 19,763 20,040 24,333 27,269
--------- ---------- ---------- ----------
Income from operations 7,303 7,759 10,119 12,760
Interest expense (266) (276) (449) (401)
Other, net 94 47 32 (57)
--------- ---------- ---------- ----------
Income before income taxes 7,131 7,530 9,702 12,302
Income tax provision (1) (2,710) (2,862) (3,687) (4,676)
--------- ---------- ---------- ----------
Net Income $ 4,421 $ 4,668 $ 6,015 $ 7,626
========= ========== ========== ==========
Weighted average common shares outstanding:
Basic $ 15,622 15,627 15,651 15,697
========= ========== ========== ==========
Diluted $ 16,068 16,061 16,078 16,455
========= ========== ========== ==========
Earnings per common share:
Basic $ .28 $ .30 $ .39 $ .48
========= ========== ========== ==========
Diluted $ .28 $ .29 $ .37 $ .47
========= ========== ========== ==========
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
---------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 168,643 $ 174,349 $ 169,089 $ 220,289
Cost of sales 146,694 151,768 147,837 192,797
--------- ---------- ---------- ----------
Gross profit 21,949 22,581 21,252 27,492
Selling, general and administrative expenses 16,858 16,042 16,317 19,304
Additional stockholder/officer compensation 2,354 -- -- --
--------- ---------- --------- ---------
Income from operations 2,737 6,539 4,935 8,188
Interest expense (206) (51) (10) (148)
Other, net 86 213 233 33
--------- ---------- ---------- ----------
Income before income taxes 2,617 6,701 5,158 8,073
Income tax benefit (provision) (1) 3,788 (2,613) (2,012) (3,068)
--------- ---------- ---------- -----------
Net Income $ 6,405 $ 4,088 $ 3,146 $ 5,005
========= ========== ========== ==========
Weighted average common shares outstanding:
Basic 15,414 15,443 15,548
========== ========== ==========
Diluted 15,938 16,000 15,963
========== ========== ==========
Earnings per common share:
Basic $ .27 $ .20 $ .33
========== ========== ==========
Diluted $ .26 $ .20 $ .32
========== ========== ==========
Pro forma data:
Historical income before income taxes $ 2,617
Pro forma adjustment--stockholder/officer
compensation in excess of the aggregate
base salaries 2,354
---------
Pro forma income before taxes 4,971
Pro forma income taxes 1,938
---------
Pro forma net income (2) $ 3,033
=========
Pro forma weighted average shares outstanding:
Basic 14,236
=========
Diluted 14,835
=========
Pro forma earnings per share:
Basic $ .21
=========
Diluted $ .20
=========
</TABLE>
(1) For all periods prior to March 6, 1998 described herein, the Company
elected to be treated as an S Corporation under Subchapter S of the Code,
and applicable state laws. Effective March 6, 1998, the closing of the
Company's initial public offering, the Company's S Corporation election
was automatically terminated, and the Company became subject to federal
and state income taxes as a C Corporation from that date forward. For the
quarter ended March 31, 1998, the income tax provision includes a $4.2
million 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.
(2) Pro forma net income is determined by (i) eliminating stockholder/officer
compensation in excess of the aggregate base salaries ($600,000) per year
and (ii) by eliminating the actual income tax provision and adding a
provision for Federal and state income taxes that would have been payable
by the Company if taxed under Subchapter C of the Code for all periods
prior to March 6, 1998.
F-18
<PAGE>
15. SUBSEQUENT EVENTS
On January 1, 2000, the Company announced a new holding company structure to
support PC Connection's future growth and plans to expand its current business
lines through internal growth and potential acquisitions.
Outstanding shares of common stock representing interests in PC Connection prior
to the holding company formation were converted into shares of the new holding
company on a one-for-one basis through a non-taxable transaction. Common stock
shares of the new holding company were listed on the Nasdaq National Market
under the symbol, "PCCC", the same exchange and symbol used by the predecessor
company. The new shares hold the same voting power that shares of the
predecessor company held. No additional capital stock was issued as part of the
transaction. The directors and officers of the predecessor company serve as the
directors and officers of the new holding company.
On January 4, 2000, the Company acquired Merisel Americas, Inc. call Center
operation in Marlborough, Massachusetts for approximately $2.2 million. PC
Connection offered employment opportunities to more than 100 of Merisel's
highly-trained telesales account managers and support staff to join PC
Connection's corporate outbound sales organization. Substantially, all such
employees accepted employment with PC Connection.
F-19
<PAGE>
PC CONNECTION, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and Deductions- End of
Description of Period Expenses Write-Offs Period
----------- --------- -------- ---------- ------
<S> <C> <C> <C> <C>
Allowance for Sales Returns
Year Ended December 31, 1997...................... $ 867 $ 1,834 $ -- $ 2,701
Year Ended December 31, 1998...................... 2,701 1,329 -- 4,030
Year Ended December 31, 1999...................... 4,030 (313) -- 3,717
Allowance for Doubtful Accounts
Year Ended December 31, 1997...................... 1,284 3,339 (1,964) 2,659
Year Ended December 31, 1998...................... 2,659 6,296 (3,834) 5,121
Year Ended December 31, 1999...................... 5,121 6,821 (8,009) 3,933
Inventory Valuation Reserve
Year Ended December 31, 1997...................... 1,705 3,315 (3,124) 1,896
Year Ended December 31, 1998...................... 1,896 6,017 (5,323) 2,590
Year Ended December 31, 1999...................... 2,590 5,350 (6,099) 1,841
</TABLE>
S-1
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Registration Statements Nos.
333-69981, 333-50847, 333-50847, 333-50845, and 333-83943 of PC Connection, Inc.
on Form S-8 of our report dated January 26, 2000, appearing in the Annual Report
on Form 10-K of PC Connection, Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Company's annual
financial statements on Form 10-K and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 20,416
<SECURITIES> 0
<RECEIVABLES> 107,055
<ALLOWANCES> 7,650
<INVENTORY> 64,348
<CURRENT-ASSETS> 190,811
<PP&E> 46,448
<DEPRECIATION> 23,322
<TOTAL-ASSETS> 223,537
<CURRENT-LIABILITIES> 118,561
<BONDS> 0
0
0
<COMMON> 158
<OTHER-SE> 94,065
<TOTAL-LIABILITY-AND-EQUITY> 223,537
<SALES> 1,056,704
<TOTAL-REVENUES> 1,056,704
<CGS> 927,358
<TOTAL-COSTS> 927,358
<OTHER-EXPENSES> (116)
<LOSS-PROVISION> 6,821
<INTEREST-EXPENSE> 1,392
<INCOME-PRETAX> 36,665
<INCOME-TAX> 13,935
<INCOME-CONTINUING> 22,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,730
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.41
</TABLE>
