SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 5, 2002
-------------
PC CONNECTION, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-23827 02-0513618
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
Route 101A, 730 Milford Road, Merrimack, New Hampshire 03054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 423-2000
--------------
Not Applicable
(Former name or former address, if changed since last report)
Introductory Note
On April 5, 2002, PC Connection, Inc. (the "Company") completed the
acquisition of the outstanding capital stock of MoreDirect, Inc. (the
"Acquisition"). On April 11, 2002, the Company filed a Current Report on Form
8-K (the "Current Report") to report the Acquisition. The purpose of this
Amendment No. 1 to the Current Report is to file the financial statements of the
business acquired and the pro forma financial information required by Item 7.
The Company hereby amends and restates Item 7 of the Current Report to
read as follows:
Item 7. Financial Information, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
The required financial statements are included herein on pages 2
through 14.
(b) Pro Forma Financial Information.
The required pro forma financial information is included herein on
pages 15 through 23.
(c) Exhibits.
See Exhibit Index attached hereto.
Item 7(a). Financial Statements of Businesses Acquired
The financial statements of MoreDirect required by Regulation S-X,
Section 210.3-05(b)(2)(ii) consist of (1) audited financial statements as of and
for the year ended December 31, 2001 and (2) unaudited interim financial
statements as of March 31, 2002 and for the three months ended March 31, 2002
and 2001:
Audited Financial Statements Pages
Report of Independent Certified Public Accountants ............................... 2
Balance Sheet as of December 31, 2001 ............................................ 3
Statement of Income for the Year Ended December 31, 2001 ......................... 4
Statement of Changes in Shareholder's Equity for the Year
Ended December 31, 2001 ...................................................... 5
Statement of Cash Flows for the Year Ended December 31, 2001 ..................... 6
Notes to Financial Statements for the Year Ended December 31, 2001 ............... 7
Unaudited Condensed Interim Financial Statements
Condensed Balance Sheet as of March 31, 2002 ..................................... 15
Condensed Statements of Income for the Three Months Ended
March 31, 2002 and 2001 ...................................................... 16
Condensed Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 ...................................................... 17
Notes to Condensed Interim Financial Statements for the Three Months
Ended March 31, 2002 and 2001 ................................................ 18
1
Report of Independent Certified Public Accountants
To the Shareholder of
MoreDirect, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, of changes in shareholder's equity and of cash flows present fairly, in
all material respects, the financial position of MoreDirect, Inc., formerly
known as MoreDirect.com, Inc. (the "Company") at December 31, 2001 and the
results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PRICEWATERHOUSE COOPERS LLP
Miami, FL
February 14, 2002
2
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Balance Sheet (amounts in thousands, except per share amounts)
December 31,
------------
2001
------------
ASSETS
Current Assets:
Cash $ 11,196
Accounts receivable, less allowance of $813 25,995
Manufacturer rebates receivable, net 506
Inventory 186
Other current assets 471
--------
Total current assets 38,354
Property and equipment, net 260
Other assets 27
--------
Total assets $ 38,641
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 21,773
Accrued expenses 2,749
Unearned income 70
Distribution payable to sole shareholder 2,680
--------
Total current liabilities 27,272
--------
Shareholder's Equity:
Common stock, $.01 par value, 80,000 shares
authorized; 10,000 shares issued and outstanding 100
Additional paid-in capital 3,140
Unearned compensation (208)
Retained earnings 8,337
--------
Total shareholder's equity 11,369
--------
Total liabilities and shareholder's equity $ 38,641
========
The accompanying notes are an integral part of these financial statements.
3
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Statement of Income (amounts in thousands)
Year Ended December 31,
----------------------
2001
----------------------
Net sales $ 219,002
Cost of sales 195,632
-------------
Gross profit 23,370
-------------
Operating expenses:
Sales and marketing 2,499
Commissions expense (excluding stock-based
compensation expense) 5,439
General and administrative (excluding stock-based
compensation expense) 3,910
Stock-based compensation expense 2,181
-------------
Total operating expenses 14,029
-------------
Income from operations 9,341
Interest expense - net (198)
Other income 10
-------------
Earnings before state taxes 9,153
-------------
State taxes 509
-------------
Net income $ 8,644
=============
The accompanying notes are an integral part of these financial statements.
4
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Statement of Changes in Shareholder's Equity (amounts in thousands)
Common Stock Additional Unearned Retained
------------
Shares Amount Paid In Capital Compensation Earnings Total
------ ------ --------------- ------------ -------- -----
Balance - December 31, 2000 10,000 $ 100 $ 1,110 $ (359) $ 4,613 $ 5,464
Issuance of employee stock
options - - 2,030 - - 2,030
Distributions declared to
sole shareholder - - - - (4,920) (4,920)
Amortization of stock-based
compensation - - - 151 - 151
Net income - - - - 8,644 8,644
------- ------ ---------- ------- -------- --------
Balance - December 31, 2001 10,000 $ 100 $ 3,140 $ (208) $ 8,337 $ 11,369
======= ====== ========== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
5
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Statement of Cash Flows (amounts in thousands)
Year Ended December 31,
----------------------
2001
----------------------
Cash Flows from Operating Activities:
Net income $ 8,644
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 132
Provision for returns and doubtful accounts 402
Stock-based compensation expense 2,180
Loss on sale of property and equipment 6
Changes in assets and liabilities:
Accounts receivable 7,921
Manufacturer rebates receivable 2,963
Inventory (186)
Other assets (294)
Accounts payable (2,125)
Accrued expenses and other liabilities 53
Unearned income (4)
-----------
Net cash provided by operating activities 19,692
-----------
Cash Flows from Investing Activities:
Acquisition of property and equipment (144)
----------
Net cash used in investing activities (144)
----------
Cash Flows from Financing Activities:
Distribution payments to sole shareholder (4,741)
(Payments) borrowings on line of credit (3,611)
----------
Net cash used in financing activities (8,352)
----------
Net increase in cash 11,196
Cash and cash equivalents at beginning of year -
----------
Cash and cash equivalents at end of year $ 11,196
==========
Supplemental disclosure of cash flow information:
Cash paid for state taxes $ 516
==========
Cash paid for interest $ 257
==========
Distribution payable to shareholder but not paid current year $ 2,680
==========
The accompanying notes are an integral part of these financial statements.
6
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Notes to Financial Statements (amounts in thousands, except per share amounts)
1. Organization
MoreDirect, Inc., formerly known as MoreDirect.com, Inc., (the "Company") a
Florida Corporation, was incorporated on October 3, 1994 and changed its
name to MoreDirect, Inc. in June 2001. The Company markets and sells
products primarily in the United States. The Company's web-based solution
aggregates computer and related products available through multiple
wholesale distributors and manufacturers. The Company displays comparative
prices of the current inventories of the wholesale distributors and
manufacturers to create a price competitive online marketplace. The
Company's primary target customers are large and medium size corporations
and government entities.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of sales and expenses during the reporting periods. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company has
bank balances, including cash equivalents, which at times may exceed
federally insured limits.
Accounts Receivable
Accounts receivable are presented net of an allowance for doubtful accounts
which is charged to operations based on the Company's evaluation of
expected collections resulting from an analysis of current and past due
accounts, collection history and other relevant information.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable. Cash
is deposited with one financial institution in the United States.
To reduce credit risk related to accounts receivable, the Company performs
ongoing evaluations of its customers' financial condition but does not
generally require collateral. Management believes that the allowance for
doubtful accounts is adequate to cover potential credit risk losses.
7
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Notes to Financial Statements (amounts in thousands, except per share amounts)
2. Summary of Significant Accounting Policies, Continued
Concentrations of Credit Risk, Continued
The Company has a concentration of business activities with certain
customers and vendors. Sales to the two largest customers as a percentage
of net sales represented 12% and 11% in 2001. Accounts receivable related
to theses two customers as a percentage of net accounts receivable
represented 2% and 23% at December 31, 2001. Purchases from the two largest
suppliers as a percentage of net purchases represented 32% and 26% in 2001.
Accounts payable related to these two suppliers as a percentage of accounts
payable was 23% and 32% at December 31, 2001.
Property and Equipment
Property and equipment is stated as cost less accumulated depreciation and
is depreciated using the straight-line method over the estimated useful
lives of the assets ranging from 3 to 7 years. Maintenance and repairs are
charged to expense when incurred and improvements are capitalized. Upon
sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts and
the resulting gain or loss is included in earnings.
Distribution Payable to Sole Shareholder
Distribution payable to sole shareholder represents amount due to sole
shareholder which are payable on demand and as such have been reflected as
current liabilities.
Revenue Recognition
Net sales include revenues from product sales and gross shipping and
handling fees, net of discounts and provisions for sales returns. Net sales
from products are recognized by the Company when the units are delivered.
The Company is responsible for establishing prices, processing the orders,
and coordinating shipment from suppliers. The Company assumes credit and
gross margin risk and is responsible for collecting accounts receivable and
processing returns from customers. The Company provides for estimated
returns at the time of shipment based on historical data.
Cost of Sales
Cost of sales include the cost of products sold and shipping and handling
costs paid by the Company in the fulfillment of orders, less manufacturer
rebates.
Income Taxes
The Company has elected to be treated as a S corporation for income tax
purposes. Generally under this election, the shareholders are individually
responsible for reporting taxable income or loss and available credits.
Accordingly, no federal provision for income taxes has been recorded in the
accompanying historical financial statements. However, state provision for
income taxes has been recorded for those states that the Company meets the
state income tax nexus requirements.
8
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Notes to Financial Statements (amounts in thousands, except per share amounts)
2. Summary of Significant Accounting Policies, Continued
New Accounting Pronouncements
In October 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS 144 supersedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of", and requires (i) the recognition and measurement of the
impairment of long-lived assets to be held and used and (ii) the
measurement of long-lived assets to be disposed of by sale. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The Company
does not expect SFAS 144 to have a significant impact on the Company's
financial statements.
In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets", collectively "the
statements". The statements (i) require that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001; (ii) establish specific criteria for the recognition of intangible
assets separately from goodwill; and (iii) require unallocated negative
goodwill to be written off. SFAS 141 is effective for all business
combinations initiated after June 30, 2001 and SFAS 142 is effective for
all fiscal years beginning after December 15, 2001. The statements do not
effect the Company as the Company currently has no intangible assets.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations, in accounting for employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"). APB No. 25 provides that the compensation expense related
to the Company's employee stock options is measured based on the intrinsic
value of the stock option. SFAS No. 123 requires companies that continue to
follow APB No. 25 to provide pro forma disclosure of the impact of applying
the fair value method of SFAS No. 123. The Company recognizes compensation
expense for equity instruments granted to non-employees in accordance with
the provisions of SFAS No. 123 and the Emerging Issues Task Force consensus
Issue in 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
9
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Notes to Financial Statements (amounts in thousands, except per share amounts)
3. Property and Equipment
Property and equipment at December 31, 2001 consists of the following:
December 31,
2001
-----------
Computer equipment and software $ 500
Equipment, furniture and fixtures 98
----------
598
Less accumulated depreciation and amortization (338)
----------
Property and equipment, net $ 260
==========
4. Accrued Expenses
Accrued expenses at December 31, 2001 consist of the following:
December 31,
2001
------------
Accrued compensation and payroll taxes $ 1,380
Accrued sales tax 567
Accrued state taxes 199
Other accrued expenses 603
----------
$ 2,749
==========
5. Line of Credit
The Company has a $20,000 line of credit from Sun Trust Bank. The Company
may obtain advances under the line of credit in an amount equal to 85% of
the Company's accounts receivable subject to certain adjustments. Amounts
outstanding under the line of credit accrue interest at LIBOR plus 1.15% -
2.25% subject to certain financial ratios. The line of credit matures March
2004. The line of credit is collateralized by substantially all the assets
of the Company. The Company had no outstanding balance on the line of
credit at December 31, 2001. The line of credit contains covenants,
including maintenance of certain financial ratios and a requirement that
the Company obtain the consent of the lender before the Company incurs
debt, other than trade debt, pays dividends or distributions, and
consummates mergers or acquisitions. The Company has been in compliance
with such covenants as of December 31, 2001.
10
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Notes to Financial Statements (amounts in thousands, except per share amounts)
- --------------------------------------------------------------------------------
6. Commitments and Contingencies
On March 27, 2000, the Company entered into an operating lease for main
corporate office space with a lease term of five years expiring in 2005. On
January 31, 2001, the Company entered into a second operating lease for
additional corporate office space with a lease term of five years expiring
on 2005 with the same lessor. The lessor is a corporation of which the
Company's Chairman, Chief Executive Officer and President is a 50%
shareholder.
On December 19, 2000, the Company entered into an operating lease for a
sales office located in New York City with a lease term of two years
expiring in August 2002 with a lessor that is unrelated to the Company. On
December 31, 2001, the Company closed its sales office located in New York
City. The Company's financial statements as of December 31, 2001 reflect
the rent expense through the remainder of the lease. Future annual minimum
payments required under these operating leases are as follows:
Year ending December 31,
------------------------
2002 $ 131
2003 137
2004 144
2005 37
--------
$ 449
========
Rent expense recorded under the operating leases was approximately $271 for
the year ended December 31, 2001.
The Company may, from time to time, be involved in litigation arising out
of claims in the normal course of business. Based upon the information
presently available, management believes that there are no claims or
actions pending or threatened against the Company, the ultimate resolution
of which may have a material adverse effect on the Company's financial
position, liquidity or results of operations.
7. Stock Options
In October 1999, the Company adopted a qualified (incentive) and
non-qualified stock option plan (the "Plan") and reserved an aggregate of
1,000 shares of common stock for issuance pursuant to options granted under
the Plan. In November 2001, the Plan was amended to reserve an aggregate of
1,500 shares of common stock. The Plan provides for the granting of options
to directors, officers, employees, independent contractors, consultants and
sales representatives performing services for the Company. Options have a
ten-year term. Generally, granted options commence vesting over a
three-year period. The options are not exercisable until the earliest to
occur of the following: 1) the Company completes an Initial Public Offering
(IPO) of common stock, 2) there is a change in control of the Company, or
3) five years from the date such options were granted.
11
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Notes to Financial Statements (amounts in thousands, except per share amounts)
- --------------------------------------------------------------------------------
7. Stock Options, Continued
In November 2001, the Company granted 580 options to certain employees with
an exercise price of $0.50 with a corresponding estimated fair value of the
underlying stock of $4.00. These granted options were exercisable
immediately. The difference between the exercise price and the fair value
amounted to $2,030. In 2001, the Company recognized $2,030 of non-cash
compensation expense relating to the issuance of these options.
On August 15, 2000, the Company entered into agreements with employees to
replace 125 outstanding stock options with an exercise price of $9.50
provided that the employees remained employed by the Company through the
replacement date. On February 16, 2001, the Company replaced the 125
options at an exercise price of $3.50 which equaled the estimated fair
value of the underlying stock on the replacement date. The Company did not
recognize compensation expense related to the replacement of these options.
In August 2000, the Company contingently granted 184 options to employees.
These options will be considered granted and exercisable upon the
occurrence of the following events: 1) the Company completes an Initial
Public Offering of common stock, 2) there is a change in control of the
Company, or 3) five years from the date such options are granted, which
exercise price will equal the estimated fair value of the underlying stock
of the Company at such date. During the year ended December 31, 2001, 66 of
these options were forfeited.
In October 1999 and December 1999, the Company granted options with an
exercise price of $2.00 and $3.50 with a corresponding estimated fair value
of the underlying stock of $4.00 and $6.00, respectively. The difference
between the exercise price and the fair value amounted to approximately
$722. In 1999, the Company charged approximately $138 to non-cash
compensation expense and the remaining $584 to unearned compensation. The
unearned compensation will be amortized over the vesting period. The
Company charged approximately $150 to non-cash compensation expense related
to these grants during the year ended December 31, 2001.
A summary of the status of the Company's stock option plan as of December
31, 2001, and changes during the year is presented below:
Incentive Weighted-Average
Non-Qualified Qualified Exercise Price
------------- --------- --------------
Outstanding at December 31, 2000 34 345 $ 2.22
Granted 90 665 1.20
Forfeited - (30) 3.50
---- ------ ----------
Outstanding at December 31, 2001 124 980 $ 1.48
Exercisable at:
December 31, 2001 33 580 $ 0.62
12
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Notes to Financial Statements (amounts in thousands, except per share amounts)
- --------------------------------------------------------------------------------
7. Stock Options, Continued
Option groups outstanding at December 31, 2001 and related price and life
information follows:
Options Outstanding
----------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Prices Outstanding Price Life Exercisable Price
- -----------------------------------------------------------------------------------------
$0.50 580 $ 0.50 9.84 580 $0.50
$2.00 324 2.00 7.78 18 2.00
$3.50 200 3.50 9.02 15 3.50
----- ------ ---- ---- -----
1,104 $ 1.48 9.08 613 $0.62
===== ====== ==== ==== =====
The Company applies APB 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its plans. Under APB 25 in 2001,
compensation expense of $2,180 was charged for options whose exercise price
was less than the estimated fair value of the stock on the grant date. If
compensation costs for the Company's stock option plan had been determined
based on the fair value at the grant dates for awards under the plan
consistent with the method of SFAS No. 123, the Company's net income for
the year ended December 31, 2001 would have been reduced to the pro forma
amount below:
Year ended
December 31, 2001
-----------------
As reported results of operations:
Net income $ 8,644
Pro forma results of operations:
Net income $ 8,543
The weighted-average fair value per share as of the grant date ranged from
$0.77 to $3.59 for the Company's stock options granted in 2001. The
determination of the fair value of stock options granted in 2001 was based
on risk-free interest rate of 3.58% to 3.97%, expected option life of 5
years and no expected volatility. The stock options outstanding at December
31, 2001 had an exercise price of $1.48 per share and a weighted average
remaining life of 9 years.
In March 1999, the Company issued a warrant for common stock to an outside
consultant for services performed in 1999, to purchase 165 shares of common
stock at $1.75 per share, which was the fair value of the common stock on
the grant date. The warrant expires in March 2004. The warrant vested
immediately upon the date of grant. The warrant is exercisable on the
earlier of the following events: 1) the Company completes an IPO, 2) there
is a change in control of the Company, or 3) four and half years from the
date such warrant was granted.
13
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Notes to Financial Statements (amounts in thousands, except per share amounts)
- --------------------------------------------------------------------------------
8. Subsequent Events
In February 2002, the Company declared and paid a $3,000 distribution
to the sole shareholder.
14
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Unaudited Condensed Balance Sheet (amounts in thousands, except per share
amounts)
March 31, 2002
--------------
ASSETS
Current Assets:
Cash $ 7,238
Accounts receivable, less allowance of $873 30,325
Inventory 318
Other current assets 330
------------
Total current assets 38,211
Property and equipment, net 230
Other assets 28
------------
Total assets $ 38,469
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 24,710
Accrued expenses and other current liabilities 2,719
------------
Total current liabilities 27,429
------------
Stockholder's Equity:
Common stock, $.01 par value, 80,000 shares
Authorized; 10,000 shares issued and outstanding 100
Additional paid-in capital 3,140
Unearned compensation (194)
Retained earnings 7,994
------------
Total stockholder's equity 11,040
------------
Total liabilities and stockholder's equity $ 38,469
============
The accompanying notes are an integral part of these financial statements.
15
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Unaudited Condensed Statements of Income (amounts in thousands)
March 31,
--------------------
2002 2001
--------------------
Net sales $ 51,258 $ 51,170
Cost of sales 45,553 46,266
-------- --------
Gross profit 5,705 4,904
-------- --------
Operating expenses:
Sales and marketing 768 577
Commissions expense (excluding stock-based
compensation expense) 1,301 1,244
General and administrative (excluding stock-based
compensation expense) 955 1,011
Stock-based compensation expense 14 35
-------- --------
Total operating expenses 3,038 2,867
-------- --------
Income from operations 2,667 2,037
Interest expense (6) (156)
Interest and other income 35 4
-------- --------
Earnings before state taxes 2,696 1,885
State taxes 39 99
-------- --------
Net income $ 2,657 $ 1,786
======== ========
The accompanying notes are an integral part of these financial statements.
16
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Unaudited Condensed Statements of Cash Flows
March 31,
-------------------------
2002 2001
-------------------------
Cash Flows from Operating Activities:
Net income $ 2,657 $ 1,786
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 34 29
Provision for returns and doubtful accounts 80 80
Stock-based compensation expense 14 35
Changes in assets and liabilities:
Accounts receivable (3,723) (3,423)
Inventory (132) (270)
Other current assets (37) (14)
Accounts payable 2,937 313
Accrued expenses and other liabilities (105) (407)
--------- ---------
Net cash provided by (used in) operating activities 1,725 (1,871)
--------- ---------
Cash Flows from Investing Activities:
Acquisition of property and equipment (3) (127)
--------- ---------
Net cash used in investing activities (3) (127)
--------- ---------
Cash Flows from Financing Activities:
Distribution payments to sole shareholder (5,680) (2,500)
Borrowings on line of credit - 4,498
--------- ---------
Net cash provided by (used in) financing activities (5,680) 1,998
--------- ---------
Net decrease in cash (3,958) -
Cash and cash equivalents at beginning of year 11,196 -
---------- ---------
Cash and cash equivalents at end of year $ 7,238 $ -
========== =========
Supplemental disclosure of cash flow information:
Cash paid for state taxes $ 92 $ 31
=========== =========
Cash paid for interest $ - $ 174
=========== =========
The accompanying notes are an integral part of these financial statements
17
MoreDirect, Inc.
(formerly known as MoreDirect.com, Inc.)
Notes to Condensed Financial Statements (Unaudited) (amounts in thousands,
except per share amounts)
- --------------------------------------------------------------------------------
1. Basis of Presentation
The accompanying condensed financial statements of MoreDirect, Inc.
(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 for the year ended December 31, 2001, contained
elsewhere in this filing. The accompanying condensed financial
statements should be read in conjunction with those financial
statements. In the opinion of management, the accompanying unaudited
condensed 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, 2002 may not be indicative of the results expected for any
succeeding quarter or the entire year ending December 31, 2002.
Income Taxes
The Company has elected to be treated as a S corporation for income
tax purposes. Generally under this election, the shareholders are
individually responsible for reporting taxable income or loss and
available credits. Accordingly, no federal provision for income taxes
has been recorded in the accompanying historical financial statements.
However, state provision for income taxes has been recorded for those
states that the Company meets the state income tax nexus requirements.
2. Subsequent Event
On March 25, 2002, the Company and its sole shareholder signed a
definitive agreement with PC Connection, Inc. ("PCC") whereby the
Company would be acquired by and become a wholly-owned subsidiary of
PCC. The transaction was completed on April 5, 2002. Under the terms
of the agreement all outstanding stock options were cashed out by PCC,
and the Company distributed to the sole shareholder approximately
$7,950 from available cash balances for previously taxed but
undistributed S Corporation earnings.
Concurrent with the acquisition, the Company's line of credit with Sun
Trust Bank was terminated. No amounts were outstanding under the line
of credit as of March 31, 2002.
18
Item 7(b). Pro forma Financial Information
The pro forma financial information required by Regulation S-X, Section
210.11-02 consists of a pro forma condensed balance sheet as of March 31, 2002
and pro forma condensed statement of operations for the year ended December 31,
2001 and the three months ended March 31, 2002, as shown below. The pro forma
condensed balance sheet includes the historical condensed balance sheets of PCC
and MoreDirect, the pro forma adjustments required, and the pro forma condensed
consolidated balance sheet, based on the assumption that the acquisition of
MoreDirect was completed on the balance sheet date. The pro forma condensed
statements of operations for the respective periods include the historical
condensed statement of operations of PCC and MoreDirect, the pro forma
adjustments required, and the pro forma condensed consolidated statement of
operations, based on the assumption that the acquisition of MoreDirect was
completed at the beginning of each respective period.
19
PC Connection, Inc. and Subsidiaries
Pro Forma Consolidated Balance Sheet
March 31, 2002 (amounts in thousands)
- --------------------------------------------------------------------------------
Historical
-----------------------------------------
PC Connection, Inc. Pro Forma Consolidated
Assets & Subsidiaries MoreDirect, Inc. Adjustments Note Pro Forma
------ ------------------- ---------------- ----------- ---- ------------
Current Assets
Cash and cash equivalents $ 41,895 $ 7,238 $ (7,950) a $ 8,483
(22,700) b
(10,000) c
Accounts receivable, net 98,909 30,325 129,234
Inventories - merchandise 36,962 318 37,280
Deferred income taxes 2,284 2,284
Income taxes receivable 3,084 3,084
Prepaid expenses and other current assets 3,271 330 3,601
------------ ------------- ---------- -----------
Total Current Assets 186,405 38,211 (40,650) 183,966
Property and equipment, net 27,801 230 (60) b 27,971
Restricted cash 10,000 c 10,000
Other intangibles
Software 1,390 b 1,390
Customer relationships 2,820 b 2,820
Trademark/trade name 1,190 b 1,190
Other assets 594 28 622
Goodwill, net 8,807 14,270 b 23,077
------------ ------------- ---------- -----------
Total Assets $ 223,607 $ 38,469 $ (11,040) $ 251,036
============ ============= ========== ===========
Liabilities & Stockholders' Equity
----------------------------------
Current Liabilities:
Current maturities of capital lease
obligation to affiliate $ 176 $ - $ 176
Current maturities of long-term debt 500 - 500
Accounts payable 59,193 24,710 83,903
Accrued expenses and other liabilities 8,219 2,719 10,938
------------ ------------- -----------
Total Current Liabilities 68,088 27,429 95,517
Capital lease obligation to affiliate, less
current maturities 6,576 6,576
Deferred income taxes 3,711 3,711
Other liabilities 47 47
------------ ------------- -----------
Total Liabilities 78,422 27,429 105,851
------------ ------------- -----------
Stockholders' Equity:
Common stock 248 100 $ (100) d 248
Additional paid-in capital 74,489 3,140 (3,140) d 74,489
Unearned compensation (194) 194 b
Retained earnings 71,985 7,994 (7,950) a 71,985
(44) b
Treasury stock, at cost (1,537) (1,537)
------------ ------------- ---------- -----------
Total Stockholders' Equity 145,185 11,040 (11,040) 145,185
------------ ------------- ---------- -----------
Total Liabilities &
Shareholders' Equity $ 223,607 $ 38,469 $ (11,040) $ 251,036
============ ============= ========== ===========
20
PC Connection, Inc. and Subsidiaries
Pro Forma Consolidated Balance Sheet - Continued
March 31, 2002 (amounts in thousands)
- --------------------------------------------------------------------------------
Notes to Pro Forma Adjustments:
(a) To record the April 5, 2002 cash distribution of S Corporation Dividends to
sole stockholder of MoreDirect, Inc.
(b) To record the acquisition of MoreDirect, Inc. under Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations."
Total consideration:
Cash paid to acquire shares and buyout options $ 22,050
Acquisition expenses 650
---------
Total consideration $ 22,700
Assets acquired and liabilities assumed (at fair value):
Current assets 38,211
Less distribution of S Corporation dividends on April 5, 2002 (7,950)
Property and equipment 170
Other assets 28
Other identifiable intangibles 5,400
Current liabilities (27,429)
---------
Net assets acquired 8,430
-----------
Goodwill, based on the assumption that the transaction was completed on March 31, 2002 $ 14,270
===========
The allocation of the purchase price is preliminary. In addition, the
transaction provides for up to $10,000 in contingent consideration to be
earned based on achieving targeted levels of annual earnings before income
taxes through December 31, 2004. This contingent consideration will have no
effect on future earnings.
(c) To record the April 5, 2002 cash escrow that will fund a portion of the
contingent payments.
(d) To recognize the elimination entries necessary for consolidation.
21
PC Connection, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
Year Ended December 31, 2001 (amounts in thousands, except per share data)
Historical
---------------------------------------
PC Connection, Inc. Pro Forma Consolidated
& Subsidiaries MoreDirect, Inc. Adjustments Note Pro Forma
------------------- ---------------- ----------- ---- ------------
Net sales $ 1,180,951 $ 219,002 $ 1,399,953
Cost of sales 1,049,799 195,632 1,245,431
------------ ------------- -----------
Gross Profit 131,152 23,370 154,522
Selling, general and administrative expenses 117,508 14,029 630 a 132,167
Restructuring costs and other special charges 2,204 2,204
------------ ------------- -------- -----------
Income From Operations 11,440 9,341 (630) 20,151
Interest expense (1,179) (269) (1,448)
Other, net 1,307 81 1,388
------------ ------------- -------- -----------
Income Before Taxes 11,568 9,153 (630) 20,091
Income tax expense 4,396 509 2,729 b 7,634
------------ ------------- -------- -----------
Net Income $ 7,172 $ 8,644 $ (3,359) $ 12,457
============ ============= ======== ===========
Earnings per common share
Basic $ 0.29 $ 0.51
============ ===========
Diluted $ 0.29 $ 0.50
============ ===========
Shares used in computation of earnings
per common share
Basic 24,453 24,453
============ ===========
Diluted 24,947 24,947
============ ===========
Notes to Pro Forma Adjustments:
(a) To record the amortization of the additional identifiable amortizing
intangibles acquired upon purchase of MoreDirect, Inc. Such
intangibles will also be deductible for tax purposes and are being
amortized over a period of five to eight years. Goodwill was computed
under SFAS No. 141, and therefore no goodwill amortization has been
taken.
(b) To record (i) the income tax expenses for MoreDirect, Inc. as if it
were a C Corporation and (ii) income taxes (benefits) for the impact
of the pro forma adjustments.
22
PC Connection, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
Three Months Ended March 31, 2002 (amounts in thousands, except per share data)
Historical
---------------------------------------
PC Connection, Inc. Pro Forma Consolidated
& Subsidiaries MoreDirect, Inc. Adjustments Note Pro Forma
------------------- ---------------- ----------- ---- ------------
Net sales $ 236,160 $ 51,258 $ 287,418
Cost of sales 211,179 45,553 256,732
------------ ------------ -----------
Gross Profit 24,981 5,705 30,686
Selling, general and administrative expenses 27,489 3,038 158 c 30,685
Restructuring costs and other special charges 813 813
------------ ------------ -------- -----------
Income (Loss) From Operations (3,321) 2,667 (158) (812)
Interest expense (242) (6) (248)
Other, net 195 35 230
------------ ------------ -------- -----------
Income (Loss) Before Taxes (3,368) 2,696 (158) (830)
Income tax expense (benefit) (1,280) 39 926 d (315)
------------ ------------ -------- -----------
Net Income (Loss) $ (2,088) $ 2,657 $ (1,084) $ (515)
============ ============ ======== ===========
Loss per common share
Basic $ (0.09) $ (0.02)
============ ===========
Diluted $ (0.09) $ (0.02)
============ ===========
Shares used in computation of loss
per common share
Basic 24,551 24,551
============ ===========
Diluted 24,551 24,551
============ ===========
Notes to Pro Forma Adjustments:
(c) To record the amortization of the additional identifiable amortizing
intangibles acquired upon purchase of MoreDirect. Such intangibles
will also be deductible for tax purposes and are being amortized over
a period of five to eight years. Goodwill was computed under SFAS No.
141, and therefore no goodwill amortization has been taken.
(d) To record (i) the income tax expense for MoreDirect, Inc. as if it
were a C Corporation and (ii) income taxes (benefits) for the impact
of the pro forma adjustments assuming an effective tax rate of 38%.
23
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 hereunto duly authorized.
Date: June 18, 2002 PC CONNECTION, INC.
By: /s/ Mark A. Gavin
-------------------------------------------
Name: Mark A. Gavin
Title: Senior Vice President of Finance and
Chief Financial Officer
24
EXHIBIT INDEX
Exhibit Number Description
2.1* Agreement and Plan of Merger, dated March 25, 2002, by and
among PC Connection, Inc., and the stockholders of
MoreDirect, Inc. set forth on Schedule I, incorporated by
reference from Exhibit 10.51 to the Company's Annual Report
on Form 10-K, as amended, for the year ended December 31,
2001 initially filed with the Securities and Exchange
Commission on April 1, 2002. (1)
2.2* Amendment No. 1 to the Agreement and Plan of Merger, dated
April 5, 2002, by and among PC Connection, Inc., Boca
Acquisition Corp., MoreDirect, Inc., Russell Madris, the
sole stockholder of MoreDirect, Inc. and Michael Diamant,
James Garrity and Scott Modist, incorporated by reference
from Exhbit 2.2 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on April
11, 2002. (1)
99.1* Press release for consummation of the merger.
23.1 Consent of Pricewaterhouse Coopers, LLP.
_____________
* Previously filed.
(1) The exhibits and schedules to the Agreement and Amendment No. 1 to the
Agreement, have been omitted from this filing pursuant to Item 601 (b)(2)
of Regulation S-K. The Company will furnish copies of any of the exhibits
and schedules to the U.S. Securities and Exchange Commission upon request.
25