- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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,
MERRIMACK, NEW HAMPSHIRE 03054
- ------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 423-2000
--------------
Indicate by check mark (x) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of November 5, 2001 was 24,456,138.
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PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements:
Independent Accountants' Report.......................................... 1
Condensed Consolidated Balance Sheets - September 30, 2001
and December 31, 2000................................................... 2
Condensed Consolidated Statements of Income -
Three months ended September 30, 2001 and 2000;
Nine months ended September 30, 2001 and 2000........................... 3
Condensed Consolidated Statement of Changes in Stockholders' Equity - Nine
months ended September 30, 2001......................................... 4
Condensed Consolidated Statements of Cash Flows - Nine
months ended September 30, 2001 and 2000................................ 5
Notes to Condensed Consolidated Financial Statements..................... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 10
Item 3 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 September 30, 2001, the
related condensed consolidated statements of income for the three-month and
nine-month periods ended September 30, 2001 and 2000, condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 2001 and
2000, and condensed consolidated statement of changes in stockholders' equity
for the nine-month period ended September 30, 2001. All of these financial
statements are included on the Form 10-Q for the quarterly period ended
September 30, 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
October 18, 2001
-1-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
SEPTEMBER 30, DECEMBER 31,
2001 2000
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 53,276 $ 7,363
Accounts receivable, net 111,446 139,644
Inventories - merchandise 41,080 54,679
Deferred income taxes 2,292 2,175
Income tax receivable 29 4,882
Prepaid expenses and other current assets 2,284 3,064
-------- --------
TOTAL CURRENT ASSETS 210,407 211,807
Property and equipment, net 28,157 28,665
Goodwill, net 8,982 9,509
Other assets 214 432
-------- --------
TOTAL ASSETS $247,760 $250,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligation to affiliate $ 166 $ 153
Current maturities of long-term debt 1,000 1,000
Accounts payable 80,524 86,216
Accrued expenses and other liabilities 11,200 12,769
-------- --------
TOTAL CURRENT LIABILITIES 92,890 100,138
Long-term debt, less current maturities - 1,000
Capital lease obligation to affiliate, less current maturities 6,666 6,792
Deferred income taxes 3,623 3,555
Other liabilities 107 241
-------- --------
TOTAL LIABILITIES 103,286 111,726
-------- --------
Stockholders' Equity:
Common stock 246 244
Additional paid-in capital 73,039 71,542
Retained earnings 72,686 66,901
Treasury stock at cost (1,497) -
-------- --------
TOTAL STOCKHOLDERS' EQUITY 144,474 138,687
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $247,760 $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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
Net sales $308,689 $404,876 $907,802 $1,104,765
Cost of sales 275,454 355,146 806,390 969,460
-------- -------- -------- ----------
GROSS PROFIT 33,235 49,730 101,412 135,305
Selling, general and administrative expenses 29,038 32,872 90,154 92,782
Restructuring costs and other special charges 1,200 - 2,051 -
-------- -------- -------- ----------
INCOME FROM OPERATIONS 2,997 16,858 9,207 42,523
Interest expense (264) (440) (918) (1,114)
Other, net 357 121 1,041 490
-------- -------- -------- ----------
Income before taxes 3,090 16,539 9,330 41,899
Income taxes (1,174) (6,284) (3,545) (15,924)
-------- -------- -------- ----------
NET INCOME $ 1,916 $ 10,255 $ 5,785 $ 25,975
======== ======== ======== ==========
Earnings per common share:
Basic $0.08 $0.42 $0.24 $1.08
===== ===== ===== =====
Diluted $0.08 $0.40 $0.23 $1.02
===== ===== ===== =====
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 RETAINED TREASURY SHARES
SHARES AMOUNT PAID IN CAPITAL EARNINGS SHARES AMOUNT TOTAL
BALANCE, DECEMBER 31, 2000 24,416 $244 $71,542 $66,901 - $ - $138,687
Exercise of stock options, including
income tax benefits 142 1 770 - - - 771
Issuance of stock under employee stock
purchase plan 86 1 727 - - - 728
Net income - - - 5,785 - - 5,785
Repurchase of common stock for treasury - - - - (200) (1,497) (1,497)
------ ---- ------- ------- ---- ------- --------
BALANCE, SEPTEMBER 30, 2001 24,644 $246 $73,039 $72,686 (200) $(1,497) $144,474
====== ==== ======= ======= ==== ======= ========
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)
Nine Months Ended September 30,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,785 $ 25,975
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 5,897 4,719
Deferred income taxes (49) (422)
Compensation under nonstatutory stock option
agreements - 51
Provision for doubtful accounts 8,590 7,152
Gain on disposal of fixed assets (125) (5)
Changes in assets and liabilities:
Accounts receivable 19,608 (73,757)
Inventories 13,599 (18,725)
Prepaid expenses and other current assets 5,633 (1,868)
Other non-current assets 191 (304)
Income tax benefits from exercise of stock
options 156 8,182
Accounts payable (5,692) 39,711
Accrued expenses and other liabilities (1,569) 1,511
-------- ---------
Net cash provided by (used for) operating
activities 52,024 (7,780)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,860) (8,074)
Proceeds from sale of property and equipment 16 74
Payment for acquisitions, net of cash acquired - (2,158)
-------- ---------
Net cash used for investing activities (4,844) (10,158)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 67,952 399,774
Repayment of short-term borrowings (67,952) (392,747)
Repayment of notes payable (1,000) (1,000)
Repayment of capital lease obligation to affiliate (113) (74)
Exercise of stock options 615 3,819
Issuance of stock under employee stock purchase
plan 728 479
Purchase of treasury shares (1,497) -
-------- ---------
Net cash (used for) provided by financing
activities (1,267) 10,251
-------- ---------
Increase/(decrease) in cash and cash equivalents 45,913 (7,687)
Cash and cash equivalents, beginning of period 7,363 20,416
-------- ---------
Cash and cash equivalents, end of period $ 53,276 $ 12,729
======== =========
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 and nine months ended
September 30, 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 income statements for the three and nine months ended September 30, 2000
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 where such
options have a dilutive effect on earnings per share.
-6-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 2-EARNINGS PER SHARE - CONT'D.
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
Numerator:
Net income $ 1,916 $10,255 $ 5,785 $25,975
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share:
Weighted average shares 24,506 24,243 24,449 23,949
Dilutive effect of unexercised
employee stock options: 415 1,654 503 1,635
------- ------- ------- -------
Denominator for diluted earnings per share 24,921 25,897 24,952 25,584
======= ======= ======= =======
Earnings per share:
Basic $ .08 $ .42 $ .24 $ 1.08
======= ======= ======= =======
Diluted $ .08 $ .40 $ .23 $ 1.02
======= ======= ======= =======
The following unexercised stock options were excluded from the computation of
diluted earnings per share for the three and nine months ended September 30,
2001 and 2000 because the effect of the options on the calculation would have
been anti-dilutive:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, (AMOUNTS IN THOUSANDS) 2001 2000 2001 2000
Anti-dilutive stock options 2,036 - 826 76
===== ==== === ==
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 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 4-SEGMENT AND RELATED DISCLOSURES - CONT'D.
Net sales by platform, sales channel and product mix are presented below:
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, (AMOUNTS IN THOUSANDS) 2001 2000 2001 2000
Platform
PC and Multi Platform $274,214 $367,152 $813,098 $ 987,984
Mac 34,475 37,724 94,704 116,781
-------- -------- -------- ----------
Total $308,689 $404,876 $907,802 $1,104,765
======== ======== ======== ==========
Sales Channel
Corporate Outbound $253,510 $315,664 $720,871 $ 837,224
Inbound Telesales 31,939 57,464 109,215 185,104
On-Line Internet 23,240 31,748 77,716 82,437
-------- -------- -------- ----------
Total $308,689 $404,876 $907,802 $1,104,765
======== ======== ======== ==========
Product Mix
Notebooks $ 69,540 $101,132 $199,107 $ 288,115
Desktop/Servers 37,056 61,010 113,595 162,849
Storage Devices 28,288 40,147 87,427 102,300
Software 42,719 35,822 119,194 111,911
Networking Communications 28,995 31,798 83,593 84,694
Printers 25,792 29,447 75,844 78,535
Video & Monitors 26,763 33,772 80,571 87,706
Memory 7,680 17,161 26,952 43,952
Accessories/Other 41,856 54,587 121,519 144,703
-------- -------- -------- ----------
Total $308,689 $404,876 $907,802 $1,104,765
======== ======== ======== ==========
Substantially all of the Company's net sales for the three and nine months
ended September 30, 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 periods. All of the Company's assets at September 30,
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 6% of total net sales in the three and nine months ended
September 30, 2001 or 3% of total net sales in the three and nine months ended
September 30, 2000. Sales to the federal government accounted for $54.6 million,
or 17.7% of total net sales for the quarter ended September 30, 2001 and $42.4
million, or 10.5% of total net sales for the quarter ended September 30, 2000.
Sales to the federal government accounted for $106.0 million, or 11.7% of total
net sales for the nine months ended September 30, 2001 and $96.1 million or 8.7%
of total net sales for the nine months ended September 30, 2000.
NOTE 5-RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES
On March 28, 2001, the Company announced the reduction of non-sales staff by
approximately 125 individuals, or 7.5% of the Company's work force. The Company
took a charge of approximately $0.9 million in the first quarter of 2001 to
cover costs related to this staff reduction. This staff reduction was completed
in early April 2001. The Company took a charge in the third quarter of 2001 to
cover costs related to additional staff reductions of $0.5 million and to cover
$0.7 million of costs associated with proposed acquisitions abandoned during the
quarter. All third quarter staff reductions were completed by September 30,
2001. This is reflected under the caption, "restructuring costs and other
special charges" on the condensed consolidated statements of income for the
three and nine months ended September 30, 2001.
-8-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Note 5-Restructuring Costs and Other Special Charges- Cont'd.
A roll-forward of restructuring costs and other special charges for the nine
months ended September 30, 2001 is shown below. There were no changes in
estimates in the interim periods.
(amounts in thousands)
LIABILITIES AT
TOTAL CHARGES CASH PAYMENTS SEPTEMBER 30, 2001
Workforce Reduction $1,357 $ (1,110) $ 247
Cost Associated with Abandoned Acquisitions 694 (459) 235
------ --------- -----
$2,051 $ (1,569) $ 482
====== ========= =====
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. The Company has repurchased 200,000 shares for $1.5 million
as of September 30, 2001, which are reflected as treasury stock on the condensed
consolidated balance sheet.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which will be
effective for the Company on January 1, 2002. SFAS 142 requires, among other
things, the discontinuance of the amortization of goodwill and certain other
identified intangibles. In addition, the statement includes provisions for the
reassessment of the value and useful lives of existing recognized intangibles
(including goodwill), reclassification of certain intangibles both in and out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill and other
intangibles. The Company is currently assessing but has not yet determined the
impact of SFAS 142 on its financial position and results of operations.
-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 are
incorporated by reference herein. Particular attention should be paid to the
cautionary statements involving the industry's rapid technological change and
exposure to inventory obsolescence, availability and allocation of goods,
reliance on vendor support and relationships, competitive risks, pricing risks,
and the overall level of economic activity and the 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 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 five years, from 23.0%
of net sales for the year ended December 31, 1996 to 10.4% of net sales for the
nine months ended September 30, 2001. The Company believes that such sales will
continue to decrease as a percentage of net sales and may decline in absolute
dollar volume in 2001 and future periods.
The weakness in demand for technology products experienced by the Company in the
first two quarters of 2001 continued through the third quarter of 2001,
resulting in overall conservative buying patterns, order deferrals and longer
sales cycles.
RECENT DEVELOPMENTS
On September 4, 2001, the Company announced that it had terminated its Merger
Agreement with Cyberian Outpost, Inc., entered into on May 29, 2001, and all
other agreements between them, including the Stock Warrant Agreement giving the
Company the right to purchase shares of Cyberian Outpost, the Credit and Supply
Agreement providing Cyberian Outpost with working capital loans and an inventory
line of credit, the Security Agreement and the Note, each entered into on May
29, 2001. Pursuant to the Termination Agreement entered into on September 4,
2001 by and between PC Connection and Cyberian Outpost, Cyberian Outpost has
repaid PC Connection in full all amounts due under the terminated credit
facility. PC Connection also withdrew its registration statement previously
filed with the Securities and Exchange Commission due to the terminated merger
proposal.
-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
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, 2001 2000 2001 2000
Net sales (in millions)........................ $308.7 $404.9 $907.8 $1,104.8
Net sales...................................... 100.0% 100.0% 100.0% 100.0%
Gross profit................................... 10.8 12.3 11.2 12.3
Selling, general and administrative expenses... 9.4 8.1 9.9 8.4
Restructuring costs and other special charges.. 0.4 - 0.2 -
Income from operations......................... 1.0 4.2 1.0 3.9
Interest expense............................... (0.1) (0.1) (0.1) (0.1)
Other, net..................................... 0.1 - 0.1 -
Income before income taxes..................... 1.0 4.1 1.0 3.8
Income taxes................................... (0.4) (1.6) (0.4) (1.4)
Net income..................................... 0.6 2.5 0.6 2.4
-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
RESULTS OF OPERATIONS - GENERAL - CONT'D.
The following table sets forth the Company's percentage of net sales by
platform, sales channel, and product mix:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 2000 2001 2000
Platform
PC and Multi-Platform...... 89% 91% 90% 89%
Mac........................ 11 9 10 11
---- ---- ---- ----
Total..................... 100% 100% 100% 100%
==== ==== ==== ====
Sales Channel
Corporate Outbound......... 82% 78% 79% 76%
Inbound Telesales.......... 10 14 12 17
On-Line Internet........... 8 8 9 7
---- ---- ---- ----
Total..................... 100% 100% 100% 100%
==== ==== ==== ====
Product Mix
Notebooks.................. 23% 25% 22% 26%
Desktop/Servers............ 12 15 13 15
Storage Devices............ 9 10 10 9
Software................... 14 9 13 10
Networking Communications.. 9 8 9 8
Printers................... 8 7 8 7
Video & Monitors........... 9 8 9 8
Memory..................... 2 4 3 4
Accessories/Other.......... 14 14 13 13
---- ---- ---- ----
Total..................... 100% 100% 100% 100%
==== ==== ==== ====
NET SALES decreased $96.2 million, or 23.8%, to $308.7 million for the quarter
ended September 30, 2001 from $404.9 million for the comparable period in 2000
due to the weakness in demand for information technology products. Net sales for
the nine months ended September 30, 2001 decreased $197.0 million, or 17.8%, to
$907.8 million from $1,104.8 million for the comparable period in 2000. Outbound
sales decreased $62.2 million, or 19.7%, to $253.5 million in the three months
ended September 30, 2001 from $315.7 million in the three months ended September
30, 2000. Outbound sales decreased $116.3 million, or 13.9%, to $720.9 million
for the nine months ended September 30, 2001 from $837.2 million in the
comparable period in 2000. Inbound sales, which primarily serve the Company's
consumer and very small business customers, decreased $25.6 million, or 44.5%,
to $31.9 million in the quarter ended September 30, 2001 from $57.5 million in
the comparable period in 2000 and decreased $75.9 million, or 41.0%, to $109.2
million for the nine months ended September 30, 2001 from $185.1 million in the
comparable period in 2000. On-line Internet sales decreased $8.5 million, or
26.8%, to $23.2 million in the three months ended September 30, 2001 from $31.7
million in the comparable period in 2000 and decreased $4.7 million, or 5.7% to
$77.7 million for the nine months ended September 30, 2001, from $82.4 million
in 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 third quarter 2001 sales of
notebooks declining 31.3% to $69.5 million from $101.1 million for the
comparable period in 2000. Desktop/server sales declined 39.2% to $37.1 million
for the quarter ended September 30, 2001 from $61.0 million for the comparable
period in 2000.
-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
RESULTS OF OPERATIONS - GENERAL - CONT'D.
Net sales of enterprise server and networking products decreased 18.8% to $58.1
million for the quarter ended September 30, 2001 from $71.6 million for the
comparable period in 2000. While sales of these products declined in the
comparative periods, management believes these product categories will
eventually grow substantially as its customers further upgrade their network and
communication infrastructures. Enterprise server and networking products
represented 18.8% of overall net sales in the third quarter of 2001, up from
17.7% of net sales for the comparable period in 2000. Improvements in general
economic conditions are likely to be key factors in the recommencement of sales
growth.
Average order size decreased $13, or 1.0%, to $1,259 for the quarter ended
September 30, 2001 from $1,272 in the third quarter of 2000 and increased $139,
or 12.4% from $1,120 in the quarter ended June 30, 2001.
GROSS PROFIT decreased $16.5 million, or 33.2%, to $33.2 million for the quarter
ended September 30, 2001 from $49.7 million for the comparable period in 2000.
Gross profit for the nine months ended September 30, 2001 decreased $33.9
million, or 25.1%, to $101.4 million from $135.3 million for the comparable
period in 2000. Gross profit margin as a percentage of net sales decreased to
10.8% in the third quarter of 2001 from 12.3% for the comparable period in 2000.
Gross profit margin as a percentage of net sales decreased to 11.2% in the first
nine months of 2001 from 12.3% for the comparable period in 2000. A more
competitive pricing environment and other market conditions during the third
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 on such
sales is generally lower than inbound sales. The gross profit dollar
contribution per outbound sales order is generally higher as average sizes of
orders to corporate accounts 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 decreased $3.9 million, or 11.9%,
to $29.0 million for the quarter ended September 30, 2001 from $32.9 million for
the comparable quarter in 2000. Selling, general and administrative expenses
("SG&A") for the nine months ended September 30, 2001 decreased by $2.6 million,
or 2.8%, to $90.2 million from $92.8 million in the nine months ended September
30, 2000. 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 hiring more experienced
outbound sales account managers, improving marketing programs, and deploying
next generation Internet web technology to support the sales organization.
RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES totaling $1.2 million, or $0.03
per share, were recorded in the third quarter of 2001. These costs related to
staff reductions of $0.5 million and $0.7 million of costs associated with
proposed acquisitions abandoned during the quarter. For the nine months ended
September 30, 2001, the Company recorded restructuring costs and other special
charges totaling $2.1 million, or $0.05 per share.
INCOME FROM OPERATIONS decreased $13.9 million, or 82.2%, to $3.0 million for
the quarter ended September 30, 2001, from $16.9 million for the comparable
period in 2000. Income from operations as a percentage of sales decreased from
4.2% in the three months ended September 30, 2000 to 1.0% for the comparable
period in 2001 for the reasons discussed above. Similarly, income from
operations for the nine months ended September 30, 2001 decreased $33.3 million,
or 78.4%, to $9.2 million from $42.5 million for the comparable period in 2000.
Income from operations as a percentage of sales decreased from 3.9% for the nine
months ended September 30, 2000 to 1.0% for the comparable period in 2001.
INTEREST EXPENSE decreased $0.1 million, or 25.0%, to $0.3 million for the
quarter ended September 30, 2001 from $0.4 million for the comparable quarter in
2000. Similarly, interest expense for the nine months ended September 30, 2001
decreased $0.2 million, or 18.2%, to $0.9 million from $1.1 million for the
comparable period in 2000. This decrease in interest expense can be attributed
to lower average borrowings outstanding in the respective 2001 periods compared
to the 2000 periods.
-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
RESULTS OF OPERATIONS - GENERAL - CONT'D.
OTHER, NET, which is essentially comprised of interest income increased $0.3
million, or 300.0%, to $0.4 million in the quarter ended September 30, 2001 from
$0.1 million for the comparable period in 2000. Similarly, other, net for the
nine months ended September 30, 2001 increased $0.5 million, or 100.0%, to $1.0
million from $0.5 million for the comparable period in 2000. This increase was
due primarily to higher interest income from investments.
INCOME TAXES for the quarter ended September 30, 2001 were $1.2 million compared
to $6.3 million for the comparable quarter in 2000. Income taxes for the nine
months ended September 30, 2001 were $3.5 million, compared to $15.9 million for
the comparable period in 2000. The effective tax rate was 38% for all periods.
NET INCOME for the quarter ended September 30, 2001 decreased $8.4 million, or
81.6%, to $1.9 million from $10.3 million for the comparable quarter in 2000,
principally as a result of the decreases in operating income as described above.
Net income decreased $20.2 million, or 77.7%, to $5.8 million for the nine
months ended September 30, 2001 from $26.0 million for the comparable period in
2000.
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 the next twelve months. The
Company's ability to continue funding its planned growth is dependent upon its
ability to generate sufficient cash flow from operations or to obtain additional
funds through equity or debt financing, or from other sources of financing, as
may be required.
At September 30, 2001, the Company had cash and cash equivalents of $53.3
million and working capital of $117.5 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 (6.00% at September 30, 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 September 30, 2001.
Net cash provided by operating activities was $52.0 million for the nine months
ended September 30, 2001, as compared to $7.8 million used in operating
activities for 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. Since
accounts receivable and inventories have substantially decreased since December
31, 2000, cash levels have increased commensurately.
Capital expenditures were $4.9 million in the nine months ended September 30,
2001 as compared to $8.1 million for 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 ended December 31, 2001 are estimated to be
$5.5 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 September 30, 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
(i) The Company filed a Current Report on Form 8-K on September
4, 2001 for the termination of the Merger Agreement by and
between PC Connection, Inc. and Cyberian Outpost Inc., dated
as of May 29, 2001.
(ii) The Company filed a Current Report on Form 8-K on August 23,
2001 for the press release announcing PC Connection, Inc.
would not waive Cyberian Outpost, Inc.'s net worth condition
in the Merger Agreement.
-16-
PC CONNECTION, INC. AND SUBSIDIARIES
SEPTEMBER 30, 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
November 13, 2001 By: /s/ Wayne L. Wilson
----------------------
Wayne L. Wilson
President and Chief Operating Officer
November 13, 2001 By: /s/ Mark A. Gavin
----------------------
Mark A. Gavin
Senior Vice President of Finance and Chief
Financial Officer
-17-