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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, 2001
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, 03054
MERRIMACK, NEW HAMPSHIRE (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, (603) 423-2000
including area code
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 April 30, 2001 was 24,419,525.
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PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION ----
Item 1 Financial Statements:
Independent Accountants' Report.................................. 1
Condensed Consolidated Balance Sheets--March 31, 2001 and 2
December 31, 2000................................................
Condensed Consolidated Statements of Income--Three months ended
March 31, 2001 and 2000......................................... 3
Condensed Consolidated Statement of Changes in Stockholders'
Equity--Three months ended March 31, 2001....................... 4
Condensed Consolidated Statements of Cash Flows--Three months
ended March 31, 2001 and 2000................................... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2 Management's Discussion and Analysis of Financial Condition and 10
Results of Operations............................................
Item 3 Quantitative and Qualitative Disclosures About Market Risk....... 15
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................ 16
Item 2 Changes in Securities and Use of Proceeds........................ 16
Item 3 Defaults Upon Senior Securities.................................. 16
Item 4 Submission of Matters to a Vote of Security Holders.............. 16
Item 5 Other Information................................................ 16
Item 6 Exhibits and Reports on Form 8-K................................. 16
SIGNATURES....................................................... 17
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, 2001, and the
related condensed consolidated statements of income and cash flows for the
three-month periods ended March 31, 2001 and 2000 and the condensed statement
of changes in the stockholders' equity for the three month period ended March
31, 2001. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States
of America, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of PC
Connection, Inc. and subsidiaries as of December 31, 2000, 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 25,
2001, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2000 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, 2001
1
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
March 31, December 31,
2001 2000
----------- ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 49,394 $ 7,363
Accounts receivable, net............................ 116,577 139,644
Inventories--merchandise............................ 65,786 54,679
Deferred income taxes............................... 2,667 2,175
Income tax receivable............................... 1,372 4,882
Prepaid expenses and other current assets........... 2,390 3,064
-------- --------
Total current assets.............................. 238,186 211,807
Property and equipment, net........................... 29,374 28,665
Goodwill, net......................................... 9,334 9,509
Other assets.......................................... 281 432
-------- --------
Total assets...................................... $277,175 $250,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligation to
affiliate.......................................... $ 157 $ 153
Current maturities of long-term debt................ 1,500 1,000
Accounts payable.................................... 112,436 86,216
Accrued expenses and other liabilities.............. 10,267 12,769
-------- --------
Total current liabilities......................... 124,360 100,138
Long-term debt, less current maturities............... 500 1,000
Capital lease obligation to affiliate, less current
maturities........................................... 6,751 6,792
Deferred taxes........................................ 4,211 3,555
Other liabilities..................................... 197 241
-------- --------
Total liabilities................................. 136,019 111,726
======== ========
Stockholders' Equity:
Common stock........................................ 244 244
Additional paid-in capital.......................... 71,578 71,542
Retained earnings................................... 69,334 66,901
-------- --------
Total stockholders' equity........................ 141,156 138,687
-------- --------
Total liabilities and stockholders' equity........ $277,175 $250,413
======== ========
See accompanying notes to condensed consolidated financial statements.
2
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)
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Net sales................................................... $301,775 $333,799
Cost of sales .............................................. 266,450 293,169
-------- --------
Gross profit.............................................. 35,325 40,630
Selling, general and administrative expenses................ 30,463 29,007
Non-recurring charge........................................ 851 --
-------- --------
Income from operations.................................... 4,011 11,623
Interest expense............................................ (377) (340)
Other, net.................................................. 288 204
-------- --------
Income before taxes......................................... 3,922 11,487
Income taxes................................................ (1,489) (4,368)
-------- --------
Net income................................................ $ 2,433 $ 7,119
======== ========
Earnings per common share:
Basic..................................................... $ .10 $ 0.30
======== ========
Diluted................................................... $ .10 $ 0.29
======== ========
See accompanying notes to condensed consolidated financial statements.
3
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)
Common Stock Additional
------------- Paid In Retained
Shares Amount Capital Earnings Total
------ ------ ---------- -------- --------
Balance, December 31, 2000.......... 24,416 $244 $71,542 $66,901 $138,687
Exercise of stock options, including
income tax benefits................ 3 -- 36 -- 36
Net income.......................... -- -- -- 2,433 2,433
------ ---- ------- ------- --------
Balance, March 31, 2001............. 24,419 $244 $71,578 $69,334 $141,156
====== ==== ======= ======= ========
See accompanying notes to condensed consolidated financial statements.
4
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Cash Flows from Operating Activities:
Net income................................................ $ 2,433 $ 7,119
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization........................... 1,909 1,479
Deferred income taxes................................... 164 (297)
Compensation under nonstatutory stock option agreements. -- 48
Provision for doubtful accounts......................... 2,994 2,457
Gain on disposal of fixed assets........................ (20) (21)
Changes in assets and liabilities:
Accounts receivable..................................... 20,073 (11,018)
Inventories............................................. (11,107) 2,874
Prepaid expenses and other current assets............... 4,184 1,198
Other non-current assets................................ 151 (354)
Accounts payable........................................ 26,220 6,648
Income tax benefits from exercise of stock options...... 2 156
Accrued expenses and other liabilities.................. (2,502) 183
-------- --------
Net cash provided by operating activities................. 44,501 10,472
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment..................... (2,467) (1,976)
Proceeds from sale of property and equipment............ -- 74
Payment for acquisitions, net of cash acquired.......... -- (2,158)
-------- --------
Net cash used for investing activities.................. (2,467) (4,060)
-------- --------
Cash Flows from Financing Activities:
Proceeds from short-term borrowings..................... 45,385 77,741
Repayment of short-term borrowings...................... (45,385) (77,741)
Repayment of capital lease obligation to affiliate...... (37) (33)
Issuance of stock upon exercise of nonstatutory stock
options................................................ 34 228
-------- --------
Net cash provided by (used for) financing activities.... (3) 195
-------- --------
Increase in cash and cash equivalents................... 42,031 6,607
Cash and cash equivalents, beginning of period.......... 7,363 20,416
-------- --------
Cash and cash equivalents, end of period................ $ 49,394 $ 27,023
======== ========
Supplemental Cash Flow Information:
Interest paid........................................... $ 434 $ 181
Income taxes paid....................................... 240 4,197
See accompanying notes to condensed consolidated financial statements.
5
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1--Basis of Presentation
The accompanying condensed consolidated financial statements of PC
Connection, Inc. and Subsidiaries ("PCC" or the "Company") have been prepared
in accordance with accounting principles generally accepted in the United
States of America. Such principles were applied on a basis consistent with
those of the financial statements contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 filed with the Securities and
Exchange Commission ("SEC"). The accompanying condensed consolidated financial
statements should be read in conjunction with the financial statements
contained in the Company's Annual Report on Form 10-K. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation. The operating results for the
three months ended March 31, 2001 may not be indicative of the results expected
for any succeeding quarter or the entire year ending December 31, 2001.
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation. This includes a
reclassification made to the March 31, 2000 income statement to effect the
December, 2000 adoption by the Company of Emerging Issues Task Force Issue 00-
10, "Accounting for Shipping and Handling Fees and Costs". The Consensus
specifically stated that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earned for the
goods provided and should be classified as revenue. It was previously the
Company's policy to record such revenues as a reduction of cost of goods sold.
All net sales amounts and gross margin percentages reflect the reclassification
of amounts billed to customers in sales transactions related to shipping and
handling as revenue.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133 "Accounting for Derivative Instruments and Hedging Activities," effective
January 1, 2001. The adoption of SFAS No. 133 did not have any impact on either
the financial position or results of operations of the Company.
Revenue Recognition
Revenue on product sales is recognized at the point in time when persuasive
evidence of an arrangement exists, the price is fixed and final, delivery has
occurred and there is a reasonable assurance of collection of the sales
proceeds. The Company generally obtains oral or written purchase authorizations
from its customers for a specified amount of product at a specified price and
considers delivery to have occurred at the point of shipment. The Company
provides its customers with a limited thirty day right of return only for
defective merchandise. Revenue is recognized at shipment and a reserve for
sales returns is recorded. The Company has demonstrated the ability to make
reasonable and reliable estimates of product returns in accordance with SFAS
No. 48 based on significant historical experience.
Inventories--Merchandise
Inventories (all finished goods) consisting of software packages, computer
systems and peripheral equipment, are stated at cost (determined under the
first-in, first-out method) or market, whichever is lower. Provisions are made
currently for obsolete, slow moving and nonsalable inventory.
Note 2--Earnings Per Share
Basic earnings per common share is computed using the weighted average
number of shares outstanding. Diluted earnings per common share is computed
using the weighted average number of shares outstanding adjusted for the
incremental shares attributed to options outstanding to purchase common stock.
6
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item I--Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months
Ended March
31,
-------------
2001 2000
(amounts in thousands, except per share data) ------ ------
Numerator:
Net income................................................... $2,433 $7,119
====== ======
Denominator:
Denominator for basic earnings per share:
Weighted average shares.................................... 24,417 23,676
Dilutive effect of unexercised employee stock options:....... 514 1,203
------ ------
Denominator for diluted earnings per share..................... 24,931 24,879
====== ======
Earnings per share:
Basic...................................................... $ .10 $ .30
====== ======
Diluted.................................................... $ .10 $ .29
====== ======
The following unexercised stock options were excluded from the computation
of diluted earnings per share for the three months ended March 31, 2001 and
2000 because the effect of the options on the calculation would have been anti-
dilutive:
Three Months
Ended March 31,
----------------
2001 2000
(amounts in thousands) ------- -------
Anti-dilutive stock options................................ 685 267
======= =======
Note 3--Reporting Comprehensive Income
The Company has no other comprehensive income in any of the periods
presented. Accordingly, a separate statement of comprehensive income is not
presented.
Note 4--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 (Notebooks, Desktops and Servers, Storage
Devices, Software, Networking Communications, Printers, Video and Monitors,
Memory, and Accessories and Other).
7
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item I--Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Net sales by platform, sales channel and product mix are presented below:
Three Months
Ended March 31,
-----------------
2001 2000
-------- --------
(amounts in
thousands)
Platform
PC and Multi Platform................................... $273,424 $293,634
Mac..................................................... 28,351 40,165
-------- --------
Total................................................. $301,775 $333,799
======== ========
Sales Channel
Corporate Outbound...................................... $233,216 $240,719
Inbound Telesales....................................... 40,161 67,933
On-Line Internet........................................ 28,398 25,147
-------- --------
Total................................................. $301,775 $333,799
======== ========
Product Mix
Notebooks............................................... $ 70,721 $ 90,915
Desktop/Servers......................................... 38,829 48,705
Storage Devices......................................... 29,964 29,695
Software................................................ 37,018 35,889
Networking Communications............................... 26,985 23,953
Printers................................................ 23,910 24,565
Videos & Monitors....................................... 24,608 24,927
Memory.................................................. 10,092 12,274
Accessories/Other....................................... 39,648 42,876
-------- --------
Total................................................. $301,775 $333,799
======== ========
Substantially all of the Company's net sales for the quarters ended March
31, 2001 and 2000 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, 2001 and
December 31, 2000 were located in the United States. The Company's primary
target customers are small- to medium-size businesses ("SMBs") comprised of 20
to 1,000 employees, although its customers also include individual consumers,
larger companies, federal, state and local governmental agencies and
educational institutions. Except for the federal government, no single customer
accounted for more than 3% of total net sales in the three months ended March
31, 2001 and 2000. Sales to the federal government accounted for $24.1 million,
or 8.0% of total net sales for the three months ended March 31, 2001, and $24.7
million, or 7.4% of total net sales for the three months ended March 31, 2000.
8
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item I--Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 5--Non-recurring charge
On March 28, 2001, the Company announced the planned reduction of non-sales
staff by approximately 125 individuals, or 7.5% of the Company's work force.
This staff reduction was completed in early April 2001. The Company took a one-
time charge of approximately $851,000 in the first quarter to cover costs
related to this staff reduction. This is reflected under the caption "non-
recurring charge" on the condensed consolidated statements of income.
Note 6--Share Repurchase Authorization
The Company announced on March 28, 2001 that its Board of Directors
authorized the spending of up to $15.0 million to repurchase the Company's
common stock. Share purchases will be made in the open market from time to time
depending on market conditions. No shares had been repurchased as of the end of
the quarter ended March 31, 2001.
9
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 for the year ended
December 31, 2000 filed with the SEC, which is 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 the overall level of
economic activity and or level of business investment in information technology
products. 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 selected computer industry publications
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 compatible products.
Reliance on Mac product sales has decreased over the last four years, from 23%
of net sales for the year ended December 31, 1996 to 9% of net sales for the
three months ended March 31, 2001. The Company believes that sales attributable
to Mac products will continue to decrease as a percentage of net sales and may
decline in absolute dollar volume in 2001 and future years.
The weakness in demand for information technology products experienced by
the Company in the fourth quarter of 2000 continued through the first quarter
of 2001 resulting in overall conservative buying patterns, order deferrals and
longer sales cycles.
The Company has taken a number of actions to bring costs in line with the
lower sales volumes. Early in the quarter, restrictions on discretionary
spending were instituted. In addition, on March 28, 2001, the Company announced
the planned reduction of non-sales staff by approximately 125 individuals, or
7.5% of the Company's work force. This staff reduction was completed in early
April 2001. The Company took a one-time charge of approximately $851,000 in the
first quarter to cover costs related to this staff reduction.
10
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
The Company also announced on March 28, 2001 that its Board of Directors
authorized the spending of up to $15.0 million to repurchase the Company's
common stock. Share purchases will be made in the open market from time to time
depending on market conditions.
Results of Operations
Three Months Ended March 31, 2001 Compared with the Three Months Ended March
31, 2000.
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.
Three Months
Ended March 31,
----------------
2001 2000
------- -------
Net sales (in millions).................................... $ 301.8 $ 333.8
Net sales.................................................. 100.0% 100.0%
Gross profit............................................... 11.7 12.2
Selling, general and administrative expenses............... 10.1 8.7
Non-recurring charge....................................... 0.3 --
Income from operations..................................... 1.3 3.5
Interest expense........................................... (0.1) (0.1)
Income before income taxes................................. 1.3 3.4
Income taxes............................................... (0.5) (1.3)
Net income................................................. 0.8 2.1
The following table sets forth the Company's percentage of net sales by
platform, sales channel, and product mix:
Three Months
Ended March 31,
-----------------
2001 2000
------- -------
Platform
PC and Multi Platform.................................. 91% 88%
Mac.................................................... 9 12
------- -------
Total................................................ 100% 100%
Sales Channel
Corporate Outbound..................................... 77% 72%
Inbound Telesales...................................... 13 20
On-Line Internet....................................... 10 8
------- -------
Total................................................ 100% 100%
Product Mix
Notebooks.............................................. 24% 27%
Desktop/Servers........................................ 13 15
Storage Devices........................................ 10 9
Software............................................... 12 11
Networking Communications.............................. 9 7
Printers............................................... 8 7
Videos & Monitors...................................... 8 7
Memory................................................. 3 4
Accessories/Other...................................... 13 13
------- -------
Total................................................ 100% 100%
======= =======
11
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
Sales of enterprise server and networking products (included in the above
product mix) were 19.4% and 14.4% of net sales for the three months ended March
31, 2001 and March 31, 2000, respectively.
Net sales decreased $32.0 million, or 9.6%, to $301.8 million for the
quarter ended March 31, 2001 from $333.8 million for the comparable period in
2000 due to the recent weakness in demand for information technology products.
Outbound sales decreased by $7.5 million, or 3.1%, to $233.2 million for the
quarter ended March 31, 2001 from $240.7 million for the comparable period in
2000. On-line Internet sales increased by $3.3 million, or 13.1%, to $28.4
million for the three months ended March 31, 2001 from $25.1 million for the
same period in 2000. Inbound sales, which primarily serve the Company's
consumer and very small business customers, decreased by $27.7 million, or
40.8%, to $40.2 million for the quarter ended March 31, 2001 from $67.9 million
for the comparable period in 2000. The Company's sales to consumers and small
businesses have been more negatively impacted during the recent spending slow
down than have sales to its larger business customers, who generally purchase
through either the outbound or Internet channels. All product categories were
affected by the recent economic uncertainty, with first quarter 2001 sales of
notebooks declining by 22.2% to $70.7 million from $90.9 million for the
comparable period in 2000. Desktop/server sales declined by 20.3% to $38.8
million for the quarter ended March 31, 2001 from $48.7 million for the
comparable period in 2000.
Net sales of enterprise server and networking products increased 22.0% to
$58.7 million for the quarter ended March 31, 2001 from $48.1 million for the
comparable period in 2000. Management believes that while in the comparative
periods sales declined, these product categories will eventually grow
substantially as its customers further upgrade their network and communication
infrastructure. Enterprise server and networking products represented 19.4% of
overall net sales for the first quarter in 2001, up from 14.4% of net sales for
the comparable period in 2000. General economic conditions are likely to be the
key influencer of when such growth recommences.
Average order size rose $114, or 12.3%, to $1,040 for the quarter ended
March 31, 2001 from $926 in the first quarter of 2000. Average order size
through all channels were up year over year. However, sequentially, average
order size declined 5.6% from the $1,102 reported for the quarter ended
December 31, 2000.
Gross profit decreased $5.3 million, or 13.1%, to $35.3 million for the
quarter ended March 31, 2001 from $40.6 million for the comparable period in
2000, primarily due to the decrease in sales noted above. Gross profit margin
as a percentage of sales decreased to 11.7% of net sales in the first quarter
of 2001 from 12.2% for the comparable period in 2000. A more competitive
pricing environment and other market conditions during the first quarter of
2001 negatively impacted the Company's gross margin percentage. The Company's
profit margins are also influenced by the relative mix of inbound, outbound and
on-line Internet sales. Since outbound sales are typically to corporate
accounts that purchase at volume discounts, the gross margin percentage of such
sales is generally lower than inbound sales. However, the gross profit dollar
contribution per outbound sales order is generally higher as average order
sizes are usually larger. 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 $1.5 million, or
5.2%, to $30.5 million for the quarter ended March 31, 2001 from $29.0 million
for the first quarter in 2000. Selling, general and administrative expenses
(SG&A), as a percentage of sales, were 10.1% of net sales in the first quarter
of 2001, compared to 8.7% in the comparable period a year ago. Although volume
sensitive costs were lower than planned levels due to the decreased sales
volumes, increases related to the Company's continued recruitment of
12
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
outbound sales account managers, more than offset these savings. The Company
expects that its SG&A as a percentage of net sales may vary by quarter
depending on changes in sales volume, as well as the levels of continued
investments in key growth initiatives such as increases in the number of
outbound sales account managers.
Non-recurring charge was a one-time charge of $0.9 million, or $0.02 per
share in the first quarter related to the staffing reduction previously
discussed. This staff reduction will result in quarterly payroll savings of
$1.7 million.
Income from operations decreased $7.6 million, or 65.5%, to $4.0 million for
the quarter ended March 31, 2001, from $11.6 million for the comparable period
in 2000. Income from operations as a percentage of sales decreased from 3.5% in
the three months ended March 31, 2000 to 1.3% for the comparable period in 2001
for the reasons discussed above.
Interest expense increased $0.04 million, or 11.8%, to $0.38 million for the
quarter ended March 31, 2001 from $0.34 million for the comparable quarter in
2000.
Other, net, which is essentially comprised of interest income increased
$0.09 million, or 45%, to $0.29 million in the quarter ended March 31, 2001
from $0.20 million for the comparable period in 2000. This increase was due
primarily to higher interest income from investments.
Income taxes for the quarter ended March 31, 2001 were $1.5 million compared
to $4.4 million for the comparable quarter in 2000. The effective tax rate was
38% for both periods.
Net income for the quarter ended March 31, 2001 decreased $4.7 million, or
66.2%, to $2.4 million from $7.1 million for the comparable quarter in 2000, as
a result of the decrease in operating income.
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 2001. The
Company's ability to continue funding its planned growth is dependent upon its
ability to generate sufficient cash flow from operations or to obtain
additional funds through equity or debt financing, or from other sources of
financing, as may be required.
At March 31, 2001, the Company had cash and cash equivalents of $49.4
million and working capital of $113.8 million. At December 31, 2000, the
Company had cash and cash equivalents of $7.4 million and working capital of
$111.7 million.
The Company has an unsecured credit agreement with a bank providing for
short-term borrowings up to $70.0 million, which bears interest at various
rates ranging from the prime rate (8.00% at March 31, 2001) 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, 2001.
Net cash provided by operating activities was $44.5 million for the three
months ended March 31, 2001, as compared to $10.5 million provided by operating
activities in the comparable period in 2000. 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.
13
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
Capital expenditures were $2.5 million in the three months ended March 31,
2001 as compared to $2.0 million in the comparable period in 2000. The majority
of the capital expenditures for the respective 2001 and 2000 periods relate to
computer hardware and software for the Company's information systems. Total
capital expenditures for the year ending December 31, 2001 are estimated to be
$8.7 million.
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.
14
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. In
addition, the Company's unsecured credit agreement provides for borrowings
which bear interest at variable rates based on the prime rate. The Company had
no borrowings outstanding pursuant to its credit agreement as of March 31,
2001. 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.
15
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
------- -----------
15 Letter on unaudited interim financial information
(b) Reports on Form 8-K
None
16
PC CONNECTION, INC. AND SUBSIDIARIES
March 31, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PC Connection, Inc. and Subsidiaries
May 4, 2001 By: /s/ Wayne L. Wilson
----------------------------------
Wayne L. Wilson
President and Chief Operating
Officer
May 4, 2001 By: /s/ Mark A. Gavin
----------------------------------
Mark A. Gavin
Senior Vice President of Finance
and Chief Financial Officer
17