- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 August 6, 2002 was 24,559,013.
- --------------------------------------------------------------------------------
EXPLANATORY NOTE
Form 10-Q/A amends our quarterly report on Form 10-Q for the quarter ended June
30, 2002 and is being filed to reflect the restatement of our condensed
consolidated financial statements. We implemented Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" ("SAB 101") effective January
1, 1999. Subsequently, we have found that one provision of SAB 101 had been
incorrectly applied; specifically, despite title passing to the customer at the
point of initial shipment, our general practice has been to cover customer
losses that were incurred while the products were in transit. SAB 101, as
further interpreted by the SEC Staff, would dictate that it is inappropriate to
record revenue until delivery because our actions have created a "de facto"
title passage at the time of delivery. Therefore, we have concluded that revenue
should, and will, be recorded at the time of delivery rather than at the time of
shipment.
The significant effects of this restatement on the financial statements are
presented in Note 9 to the condensed consolidated financial statements.This
Amendment on Form 10-Q/A to PC Connection, Inc.'s Quarterly Report on Form 10-Q
for the period ended June 30, 2002 amends and restates the original filing as
follows:
The Financial Statements in Item 1.
Notes 1, 2, 4, 7 and 9 to the Financial Statements in Item 1.
The "Overview" section to Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 2.
The "Critical Accounting Policies" section to Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 2.
The "Results of Operations" section to Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 2.
The "Liquidity and Capital Resources" section to Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 2.
The risk factor "We have experienced rapid growth in recent years followed by a
decline in sales and there is no assurance that we will be able to regain such
growth" under the "Factors That May Affect Future Results and Financial
Condition" section to Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 2.
PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q/A
Amendment No. 1
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements:
Independent Accountants' Report.................................................... 1
Condensed Consolidated Balance Sheets - June 30, 2002
and December 31, 2001 (As Restated)............................................. 2
Condensed Consolidated Statements of Operations - Three
months ended June 30, 2002 and 2001;
Six months ended June 30, 2002 and 2001 (As Restated)........................... 3
Condensed Consolidated Statement of Changes in Stockholders' Equity - Six
months ended June 30, 2002 (As Restated)........................................ 4
Condensed Consolidated Statements of Cash Flows - Six months
ended June 30, 2002 and 2001 (As Restated)...................................... 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk......................... 27
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................................................. 28
Item 2 Changes in Securities and Use of Proceeds.......................................... 28
Item 3 Defaults Upon Senior Securities.................................................... 28
Item 4 Submission of Matters to a Vote of Security Holders................................ 28
Item 5 Other Information.................................................................. 28
Item 6 Exhibits and Reports on Form 8-K................................................... 29
SIGNATURES......................................................................... 30
CERTIFICATIONS..................................................................... 31
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
PC Connection, Inc.
Merrimack, New Hampshire
We have reviewed the accompanying condensed consolidated balance sheet of PC
Connection, Inc. and subsidiaries (the "Company") as of June 30, 2002, and the
related condensed consolidated statements of operations for the three-month and
six-month periods ended June 30, 2002 and 2001 and the condensed consolidated
statement of changes in stockholders' equity for the six-month period ended June
30, 2002, and the condensed consolidated statements of cash flows for the six-
month periods ended June 30, 2002 and 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, 2001, 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 24,
2002, (March 25, 2002 as to Note 15 and October 11, 2002 as to Note 16) we
expressed an unqualified opinion with an explanatory paragraph relating to the
restatement on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2001 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
As discussed in Note 9, the financial statements have been restated.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 17, 2002
October 11, 2002 as to Note 9
-1-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
- --------------------------------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
(unaudited)
(As Restated - See Note 9)
ASSETS
Current Assets:
Cash and cash equivalents $ 26,173 $ 35,605
Accounts receivable, net 111,584 107,163
Inventories-merchandise 43,798 57,456
Deferred income taxes 2,676 2,559
Income taxes receivable 3,874 1,312
Prepaid expenses and other current assets 2,820 3,013
----------- -----------
Total current assets 190,925 207,108
Property and equipment, net 28,591 27,472
Goodwill, net and other intangibles, net 26,826 8,807
Restricted cash 10,000 -
Other assets 349 258
----------- -----------
Total assets $ 256,691 $ 243,645
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligation to affiliate $ 180 $ 171
Current maturities of long-term debt 500 1,000
Accounts payable 89,413 75,399
Accrued expenses and other liabilities 11,365 10,096
----------- -----------
Total current liabilities 101,458 86,666
Capital lease obligation to affiliate, less current maturities 6,529 6,621
Deferred income taxes 3,736 3,523
Other liabilities 31 73
----------- -----------
Total liabilities 111,754 96,883
----------- -----------
Stockholders' Equity:
Common stock 248 247
Additional paid-in capital 74,838 74,393
Retained earnings 71,836 73,659
Treasury stock at cost (1,985) (1,537)
----------- -----------
Total stockholders' equity 144,937 146,762
----------- -----------
Total liabilities and stockholders' equity $ 256,691 $ 243,645
=========== ===========
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 OPERATIONS
(Unaudited)
(amounts in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
(As Restated - See Note 9) (As Restated - See Note 9)
Net sales $ 291,188 $ 296,386 $ 528,308 $ 599,696
Cost of sales 259,864 263,625 472,034 531,521
----------- ----------- ----------- -----------
Gross profit 31,324 32,761 56,274 68,175
Selling, general and administrative expenses 30,609 30,617 58,087 61,093
Restructuring costs and other special charges 105 - 918 851
----------- ----------- ----------- -----------
Income (loss) from operations 610 2,144 (2,731) 6,231
Interest expense (296) (277) (538) (654)
Other, net 132 396 327 684
----------- ---------- ----------- -----------
Income (loss) before taxes 446 2,263 (2,942) 6,261
Income tax (provision) credit (169) (861) 1,119 (2,379)
----------- ---------- ----------- -----------
Net income (loss) $ 277 $ 1,402 $ (1,823) $ 3,882
=========== ========== =========== ===========
Weighted average common shares outstanding:
Basic 24,553 24,422 24,552 24,419
=========== ========== =========== ============
Diluted 24,833 24,994 24,552 24,965
=========== ========== =========== ============
Earnings (loss) per common share:
Basic $ .01 $ .06 $ (.07) $ .16
=========== ========== =========== ============
Diluted $ .01 $ .06 $ (.07) $ .16
=========== ========== =========== ============
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
Six Months Ended June 30, 2002
(Unaudited)
(amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock Treasury Shares
------------ Additional Retained ---------------
Shares Amount Paid In Capital Earnings Shares Amount Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 2001 24,748 $ 247 $ 74,393 $ 73,659 (205) $(1,537) $ 146,762
Exercise of stock options, including
income tax benefits 18 - 133 - - - 133
Issuance of stock under employee
stock purchase plan 89 1 312 - - - 313
Repurchase of common stock
for treasury - - - - (91) (448) (448)
Net loss (As Restated - See Note 9) - - - (1,823) - - (1,823)
------- ------- --------- -------- ------- ------- ----------
Balance - June 30, 2002
(As Restated - See Note 9) 24,855 $ 248 $ 74,838 $ 71,836 (296) $(1,985) $ 144,937
======= ======= ========= ======== ======= ======= ==========
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)
- ---------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
(As Restated - (As Restated -
See Note 9) See Note 9)
Cash Flows from Operating Activities:
Net income (loss) $ (1,823) $ 3,882
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 3,787 3,820
Deferred income taxes 96 (72)
Provision for doubtful accounts 3,237 5,346
(Gain)/loss on disposal of fixed assets (2) 12
Changes in assets and liabilities:
Accounts receivable 21,253 20,388
Inventories 13,976 10,271
Prepaid expenses and other current assets (2,039) 5,056
Other non-current assets (63) (382)
Accounts payable (8,888) (4,768)
Income tax benefits from exercise of stock options 26 8
Accrued expenses and other liabilities (2,435) (4,109)
---------- ----------
Net cash provided by operating activities 27,125 39,452
---------- ----------
Cash Flows from Investing Activities:
Purchases of property and equipment (3,370) (4,237)
Proceeds from sale of property and equipment 9 12
Payments for acquisitions, net of cash acquired (22,585) -
Cash escrow funded for acquisition (10,000) -
---------- ----------
Net cash used for investing activities (35,946) (4,225)
---------- ----------
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 5,521 47,020
Repayment of short-term borrowings (5,521) (47,020)
Repayment of capital lease obligation to affiliate (83) (74)
Repayment of notes payable (500) -
Exercise of stock options 107 132
Issuance of stock under employee stock purchase plan 313 728
Purchase of treasury shares (448) -
---------- ----------
Net cash provided by (used for) financing activities (611) 786
---------- ----------
Increase (decrease) in cash and cash equivalents (9,432) 36,013
Cash and cash equivalents, beginning of period 35,605 7,363
---------- ----------
Cash and cash equivalents, end of period $ 26,173 $ 43,376
========== ==========
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") 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 our Annual Report on Form 10-K/A for the year ended December 31,
2001 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 our Annual Report on Form 10-K/A. 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 six months ended June 30, 2002 may not be indicative of the
results expected for any succeeding quarter or the entire year ending December
31, 2002. As described in Note 9 to these condensed consolidated financial
statements, the information contained herein has been restated to reflect a
change in revenue recognition policy.
In June 2001, we adopted Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations." The principles set forth in this standard were
applied to our acquisition of MoreDirect described in Note 7 to the condensed
consolidated financial statements. Previous business combinations had been
accounted for under Accounting Principles Board Opinion No. 16. There was no
effect on the financial statements when the standard was adopted. We also
adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1,
2002. SFAS No. 142 required, among other things, the discontinuance of the
amortization of goodwill and certain other identified intangibles. It also
required a January 1, 2002 reassessment of the recoverability of the goodwill
that was carried on our financial statements. We have ceased amortization of
goodwill in 2002. The following is a reconciliation of reported net income
(loss) to adjusted net income (loss) for the three and six months ended June 30,
2002 and 2001, taking into account the cessation of goodwill amortization:
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
- ------------------------------------------------------------------------------------------------------------------------------
June 30, (amounts in thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 277 $ 1,402 $ (1,823) $ 3,882
Add back goodwill amortization (net of taxes) - 109 - 218
-------- ------- -------- -------
Adjusted net income (loss) $ 277 $ 1,511 $ (1,823) $ 4,100
======== ======= ======== =======
Diluted earnings (loss) per share:
Net income (loss) $ .01 $ .06 $ (.07) $ .16
Add back goodwill amortization (net of taxes) - - - -
-------- ------- -------- -------
Adjusted net income (loss) $ .01 $ .06 $ (.07) $ .16
======== ======= ======== =======
SFAS No. 142 also 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. We have
completed the initial impairment review required by SFAS No. 142 and have
determined that our goodwill and intangible assets were not impaired.
We also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," on January 1, 2002. SFAS No. 144, among other things,
modifies and updates the methodology for recognizing impairment in long-lived
assets. The adoption of this standard did not have a significant impact on
either the balance sheet or the statement of operations.
-6-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Note 1-Basis of Presentation - Cont'd.
- --------------------------------------------------------------------------------
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. We generally obtain oral or written purchase authorizations from our
customers for a specified amount of product at a specified price. Because we
either (i) have a general practice of covering customer losses while products
are in transit despite title transferring to the customer at the point of
shipment or (ii) have FOB - destination specifically set out in our arrangements
with federal agencies, delivery is deemed to have occurred at the point in time
when the product is received by the customer. (Item (i) differs from our
previously stated policy and is explained further in Note 9 to these financial
statements.)
We provide our customers with a limited thirty day right of return generally
limited to defective merchandise. Revenue is recognized at delivery and a
reserve for sales returns is recorded. We have demonstrated the ability to make
reasonable and reliable estimates of product returns in accordance with
Statement of Financial Accounting Standards No. 48 ("SFAS No. 48"), "Revenue
Recognition When Right of Return Exists", based on significant historical
experience. Should such returns no longer prove estimable, we believe that the
impact on our financials would not necessarily be significant since the return
privilege expires 30 days after shipment.
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 have been
classified as "net sales." Costs related to such shipping and handling billings
are classified as "cost of sales."
Accounts Receivable
We perform ongoing credit evaluations of our customers, and adjust credit limits
as appropriate, based on payment history and customer credit-worthiness. We
maintain an allowance for estimated doubtful accounts based on our historical
experience and the customer credit issues identified. Collections are monitored
continuously, and the allowance is adjusted as necessary to recognize any
changes in credit exposure.
We enter into contracts with the Federal Government requiring fees to be paid on
certain sales. These fees are subject to audit by the Federal Government. As a
result of these audits, we may be required to pay additional fees.
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. Inventory quantities
on hand are reviewed regularly, and provisions are made for obsolete, slow
moving and nonsalable inventory, based on management's forecast of customer
demand for those products in inventory.
Restricted - Cash
In connection with the acquisition of MoreDirect, Inc. (see Note 7 - Acquisition
of MoreDirect, Inc.), a $10 million cash escrow was established to fund a
portion of the contingent consideration.
- --------------------------------------------------------------------------------
Note 2-Earnings (Loss) Per Share
- --------------------------------------------------------------------------------
Basic earnings (loss) per common share is computed using the weighted average
number of shares outstanding. Diluted earnings (loss) per common share are
computed using the weighted average number of shares outstanding adjusted for
the incremental shares attributed to options outstanding to purchase common
stock, if dilutive.
-7-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Note 2-Earnings (Loss) Per Share - Cont'd.
- --------------------------------------------------------------------------------
The following table sets forth the computation of basic and diluted earnings per
share:
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
- -------------------------------------------------------------------------------------------------------------------------------
June 30, (amounts in thousands, except per share data) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 277 $ 1,402 $ (1,823) $ 3,882
======== ======= ======== =========
Denominator:
Denominator for basic earnings per share:
Weighted average shares 24,553 24,422 24,552 24,419
Dilutive effect of unexercised
employee stock options: 280 572 - 546
-------- ------- -------- ---------
Denominator for diluted earnings per share 24,833 24,994 24,552 24,965
======== ======= ======== =========
Earnings per share:
Basic $ .01 $ .06 $ (.07) $ .16
======== ======= ======== =========
Diluted $ .01 $ .06 $ (.07) $ .16
======== ======= ======== =========
The following unexercised stock options were excluded from the computation of
diluted earnings per share for the three and six months ended June 30, 2002 and
2001 because the effect of the options on the calculation would have been
anti-dilutive:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, (amounts in thousands) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Anti-dilutive stock options 2,258 598 2,908 608
======== ======= ======= =======
- --------------------------------------------------------------------------------
Note 3-Reporting Comprehensive Income
- --------------------------------------------------------------------------------
We have 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.
In January 2002 we reorganized our operations to create two reportable operating
segments - the "Public Sector" segment, which serves federal, state and local
governmental organizations and educational institutions, and the "SMB" segment,
which serves small and medium-sized businesses, as well as consumers. In April
2002, we acquired MoreDirect, Inc. - the "Large Corporate Accounts" segment,
which serves medium-to-large corporations.
-8-
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.
- --------------------------------------------------------------------------------
Segment information applicable to our reportable operating segments for the
three and six months ended June 30, 2002 is shown below:
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002
- --------------------------------------------------------------------------------------------------------------------------
SMB Public Sector Large Corp.
(amounts in thousands) Segment Segment Accts. Segment Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Sales to external customers $ 173,635 $ 63,704 $ 53,849 $ - $ 291,188
Transfers between segments 49,489 - - (49,489) -
----------- ----------- ------------ ------------- -----------
Net sales $ 223,124 $ 63,704 $ 53,849 $ (49,489) $ 291,188
=========== =========== ============ ============= ===========
Operating income (loss) $ (207) $ (1,602) $ 2,419 $ - $ 610
Interest and other - net (192) 5 23 - (164)
----------- ----------- ------------ -------------- -----------
Income (loss) before taxes $ (399) $ (1,597) $ 2,442 $ - $ 446
=========== ============ ============ ============== ===========
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002
- --------------------------------------------------------------------------------------------------------------------------
SMB Public Sector Large Corp.
(amounts in thousands) Segment Segment Accts. Segment Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Sales to external customers $ 361,278 $ 113,181 $ 53,849 $ - $ 528,308
Transfers between segments 82,747 - - (82,747) -
----------- ----------- ------------ ------------ -----------
Net sales $ 444,025 $ 113,181 $ 53,849 $ (82,747) $ 528,308
=========== =========== ============ ============ ===========
Operating income (loss) $ (2,292) $ (2,858) $ 2,419 $ - $ (2,731)
Interest and other - net (255) 21 23 - (211)
----------- ----------- ------------ ------------ -----------
Income (loss) before taxes $ (2,547) $ (2,837) $ 2,442 $ - $ (2,942)
=========== =========== ============ ============ ===========
Total assets $ 171,945 $ 60,757 $ 54,670 $ (30,681) $ 256,691
=========== =========== ============ ============ ===========
- --------------------------------------------------------------------------------------------------------------------------
General and administrative expenses were charged to the reportable operating
segments, based on their estimated usage of the underlying functions. Interest
and other expense was charged to the segments, based on the actual costs
incurred by each segment, net of interest and other income generated. The amount
shown above representing total assets eliminated consists of inter-segment
receivables, resulting primarily from inter-segment sales and transfers reported
above and from inter-segment service charges.
In 2001 we had only one reportable operating segment. It is impractical for us
to restate prior year balances into the operating segments established in 2002.
Senior management monitored revenue in 2001 and 2002 by sales channel (Corporate
Outbound, Inbound Telesales and Online Internet) and product mix (Notebooks,
Desktops and Servers, Storage Devices, Software, Networking Communications,
Printers, Video and Monitors, Memory and Accessories and Other).
-9-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
Net sales by sales channel and product mix are presented below:
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- -------------------------------------------------------------------------------------------------------------------------
June 30, (amounts in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Sales Channel
Corporate Outbound $ 225,286 $ 232,779 $ 405,398 $ 467,223
Inbound Telesales 22,749 37,406 51,342 77,751
On-Line Internet 43,153 26,201 71,568 54,722
--------- ---------- ---------- ----------
Total $ 291,188 $ 296,386 $ 528,308 $ 599,696
========= ========== ========== ==========
Product Mix
Notebooks $ 46,443 $ 58,658 $ 83,412 $ 129,739
Desktop/Servers 42,988 37,589 77,582 76,616
Storage Devices 28,035 29,082 52,439 59,198
Software 40,513 39,331 74,182 76,537
Networking Communications 24,304 27,525 45,203 54,647
Printers 26,820 26,058 47,639 50,090
Videos & Monitors 27,703 29,107 50,482 53,840
Memory 10,242 9,151 17,717 19,294
Accessories/Other 44,140 39,885 79,652 79,735
--------- ---------- ---------- ----------
Total $ 291,188 $ 296,386 $ 528,308 $ 599,696
========= ========== ========== ==========
Included in the above product mix sales are enterprise networking product sales
of $66.9 million and $55.1 million for the three months ended June 30, 2002 and
2001, respectively, and $116.8 million and $114.1 million for the six months
ended June 30, 2002 and 2001, respectively.
Substantially all of our net sales for the quarters ended June 30, 2002 and 2001
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 our assets at June 30, 2002 and December 31, 2001 were located
in the United States. Except for the federal government, no single customer
accounted for more than 4% of total net sales in the six months ended June 30,
2002 and 2001. Sales to the federal government accounted for $50.1 million, or
9.5% of total net sales for the six months ended June 30, 2002, and $51.3
million, or 8.6% of total net sales for the six months ended June 30, 2001.
- --------------------------------------------------------------------------------
Note 5 - Credit Facility
- --------------------------------------------------------------------------------
In May 2002, we entered into a new $45 million credit facility that is secured
by substantially all of our business assets. In July 2002, an additional lender
committed to fund $10.0 million of the $45 million facility. Amounts outstanding
under this facility bear interest at the prime rate (4.75% at June 30, 2002).
The credit facility includes various customary financial and operating
covenants, minimum net worth and maximum funded debt ratio requirements
including restrictions on the payment of dividends, none of which we believe
significantly restricts our operations. No borrowings were outstanding under
this credit facility at June 30, 2002. The credit facility matures on June 30,
2004. Our former $70 million credit facility expired on May 31, 2002. Amounts
outstanding under our former facility, which terminated in May 2002 did not
exceed $6.3 million for the year ended December 31, 2001.
-10-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Note 6 - Restructuring Costs and Other Special Charges
- --------------------------------------------------------------------------------
On March 15, 2002, we announced that we had settled litigation commenced by
Microsoft Corporation involving alleged trademark and copyright infringement.
While denying the allegations, we agreed to pay Microsoft $625,000 to settle the
case. The settlement costs and related legal fees of approximately $125,000 were
included as a special charge in our first quarter 2002 financial results. We
also took a $63,000 charge in the first quarter of 2002 and a $105,000 charge in
the second quarter of 2002 related to staff reductions during each of the
respective periods.
A rollforward of restructuring costs and other special charges for the six
months ended June 30, 2002 is shown below:
- ---------------------------------------------------------------------------------------------------------------------------------
Beginning
Balance Liabilities at
(amounts in thousands) 12/31/02 Total Charges Cash Payments June 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Settlement of Microsoft litigation charges $ - $ 750 $ (716) $ 34
Workforce reduction 425 168 (527) 66
---------- ---------- --------- ----------
Total $ 425 $ 918 $ (1,243) $ 100
========== ========== =========- ==========
- --------------------------------------------------------------------------------
Note 7 - Acquisition of MoreDirect, Inc.
- --------------------------------------------------------------------------------
On April 5, 2002, we completed the acquisition of MoreDirect, Inc. (MoreDirect)
and it became a wholly-owned subsidiary of PC Connection, Inc. The acquisition
of MoreDirect provides PC Connection a premier e-procurement supplier of
information technology (IT) products for medium-to-large corporate and
government organizations nationwide. MoreDirect's Internet-based system enables
corporate and government customers to efficiently source, evaluate, purchase and
track a wide variety of IT products.
Under the terms of the agreement, all outstanding stock options of MoreDirect
were cashed out for approximately $4.1 million, which was funded by us, and we
paid the sole shareholder of MoreDirect approximately $18.0 million in cash at
closing. MoreDirect also distributed approximately $7.9 million to its sole
shareholder from available cash balances for previously taxed but undistributed
S Corporation earnings. In addition we will pay additional cash to the
MoreDirect shareholder based upon MoreDirect achieving targeted levels of annual
earnings before income taxes through December 31, 2004. We also escrowed $10.0
million in cash at closing to fund a portion of these contingent payments.
Acquisition costs of $0.6 million have been included in the purchase price.
The transaction was accounted for by the purchase method, and accordingly,
MoreDirect's results of operations are included in our consolidated financial
statements only for periods after April 5, 2002.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of the acquisition. The fair values of certain
intangible assets were determined through a third party valuation. The current
purchase price allocation is preliminary, and is subject to further adjustment
and review.
- --------------------------------------------------------------------------------
At April 5, 2002 (amounts in thousands)
- --------------------------------------------------------------------------------
Current assets........................................ $ 29,675
Property, plant and equipment and other assets........ 197
Intangible assets..................................... 5,400
Goodwill.............................................. 14,097
---------
Total acquired.................................. 49,369
Current liabilities................................... 26,669
---------
Net assets acquired................................... 22,700
Less cash acquired.................................... 115
---------
Purchase price for acquisition, net of cash acquired.. $ 22,585
=========
-11-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Note 7 - Acquisition of MoreDirect, Inc. - Cont'd.
- --------------------------------------------------------------------------------
Of the $5.4 million of acquired intangible assets, $1.2 million was assigned to
registered trademarks that are not subject to amortization. The remaining $4.2
million of acquired intangible assets include software/technology of $1.4
million (5 year weighted-average useful life) and $2.8 million of customer
relationships (8 year weighted average useful life).
The following unaudited pro forma information presents the results of our
operations as if the acquisition of MoreDirect had taken place as of the
beginning of the periods presented:
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, (amounts in thousands, except per share data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net revenue $ 294,440 $ 354,008 $ 582,818 $ 708,488
Net income (loss) 373 3,065 (149) 6,586
Earnings per share:
Basic $ .02 $ .13 $ .00 $ .27
========== ========== ========= =========
Diluted $ .02 $ .12 $ .00 $ .26
========== ========== ========= =========
- --------------------------------------------------------------------------------
Note 8 - Future Accounting Pronouncements
- --------------------------------------------------------------------------------
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and replaces Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." It requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred, rather than
at the date of a commitment to an exit or disposal plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with earlier application encouraged. The restructuring
activities undertaken by us prior to the issuance of this statement have been
appropriately accounted for under EITF 94-3. (See Note 6.)
- --------------------------------------------------------------------------------
Note 9 - Restatement of Financial Statements for Change in Revenue Recognition
Policy
- --------------------------------------------------------------------------------
Subsequent to the issuance of our condensed consolidated financial statements
for the quarter ended June 30, 2002, our management determined that a change in
the revenue recognition policy for sales of product should have been made as of
January 1, 1999 in order to comply with Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB 101"). Despite title passing
upon shipment to the customer, our general practice has been to cover customer
losses that were incurred while the products were in transit. SAB 101, as
interpreted by the SEC Staff, would dictate that it is inappropriate to record
revenue until delivery because our actions have created a "de facto" title
passage at the time of delivery. Therefore, we have concluded that revenue
should, and will, be recorded at the time of delivery rather than at the time of
shipment.
As a result, the condensed consolidated balance sheet as of June 30, 2002 has
been restated from amounts previously reported. Results of operations for the
quarters ended June 30, 2002 and 2001 have also been restated. A summary of
significant effects of the restatement is as follows:
-12-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Note 9 - Restatement of Financial Statements for Change in Revenue Recognition
Policy - Cont'd.
- --------------------------------------------------------------------------------
For the Quarters Ended
----------------------
June 30, 2002 June 30, 2001
------------- -------------
As As
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Net sales $ 292,188 $ 291,188 $ 297,338 $ 296,386
Cost of sales 260,738 259,864 264,486 263,625
Gross profit 31,450 31,324 32,852 32,761
Selling, general and administrative 30,652 30,609 30,653 30,617
Income tax provision (204) (169) (882) (861)
Net income 325 277 1,436 1,402
Earnings per common share:
Basic $ 0.01 $ 0.01 $ 0.06 $ 0.06
Diluted $ 0.01 $ 0.01 $ 0.06 $ 0.06
For the Six Months Ended
------------------------
June 30, 2002 June 30, 2001
------------- -------------
As As
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Net sales $ 528,348 $ 528,308 $ 599,113 $ 599,696
Cost of sales 471,917 472,034 530,936 531,521
Gross profit 56,431 56,274 68,177 68,175
Selling, general and administrative 58,141 58,087 61,116 61,093
Income tax (provision) credit 1,076 1,119 (2,371) (2,379)
Net income (loss) (1,763) (1,823) 3,869 3,882
Earnings (loss) per common share:
Basic $ (0.07) $ (0.07) $ 0.16 $ 0.16
Diluted $ (0.07) $ (0.07) $ 0.16 $ 0.16
-13-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Note 9 - Restatement of Financial Statements for Change in Revenue Recognition
Policy - Cont'd.
- --------------------------------------------------------------------------------
Balance Sheet As of June 30, 2002
---------------------------- ----
As As
Reported Restated
-------- --------
Accounts receivable, net $ 121,922 $ 111,584
Inventories - merchandise 34,462 43,798
Deferred income taxes 2,378 2,676
Total assets 257,395 256,691
Accrued expenses and other liabilities 11,595 11,365
Retained earnings 72,310 71,836
-14-
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 Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below reflects the restatement to previously issued
condensed financial statements for the three and six months ended June 30, 2002
and 2001. See Note 9 to the Condensed Consolidated Financial Statements for
further discussion of the matter.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that are subject to
risks and uncertainties, including, but not limited to, the impact of changes in
market demand and the overall level of economic activity, or in the level of
business investment in information technology products, competitive products and
pricing, product availability and market acceptance, new products, fluctuations
in operating results and other risks detailed under the caption, "Factors That
May Affect Future Results and Financial Condition" set forth below. 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. More specifically, the statements
in this report concerning our outlook for the balance of 2002 and the statements
concerning our gross margin percentage and selling and administrative costs and
other statements of a non-historical basis (including statements regarding
implementing strategies for future growth, our ability to regain our model of
profitable growth and the expected benefits of our electronic commerce strategy)
are forward-looking statements that involve certain risks and uncertainties.
Such risks and uncertainties include the ability to realize market demand for
and competitive pricing pressures on the products and services marketed by us,
the continued acceptance of our distribution channel by vendors and customers,
continuation of key vendor relationships and support programs and our ability to
hire and retain qualified sales account managers and other essential personnel.
Except as required by law, we undertake 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 we file from time to time with the SEC.
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
We were 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. We initially sought customers
through advertising in selected computer industry publications and the use of
inbound toll free telemarketing. Currently, we seek 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 our catalogs and other advertising and (iii) our Internet web site.
We offer both PC compatible products and Mac compatible products. Reliance on
Mac product sales has decreased over the last four years, from 19.4% of net
sales for the year ended December 31, 1998 to 9.5% of net sales for the six
months ended June 30, 2002. We believe that sales attributable to Mac products
will continue to decrease as a percentage of net sales and may decline in
absolute dollar volume in 2002 and future years.
The weakness in demand for information technology products experienced by us in
2001 continued through the second quarter of 2002 resulting in overall
conservative buying patterns, order deferrals and longer sales cycles.
- --------------------------------------------------------------------------------
Critical Accounting Policies
- --------------------------------------------------------------------------------
In our December 31, 2001 Form 10-K/A, under the caption "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
the Notes to the Consolidated Financial Statements, we disclosed what we
consider to be our critical accounting policies. We applied those same
accounting policies in the preparation of the accompanying condensed
consolidated financial statements, except for the adoption on January 1, 2002 of
SFAS Nos. 141, 142 and 144 and the corresponding cessation of goodwill
amortization. SFAS No. 142 required, among other things, the discontinuance of
the amortization of goodwill and certain other identified intangibles. It also
required a January 1, 2002 reassessment of the
-15-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Critical Accounting Policies - Cont'd.
- --------------------------------------------------------------------------------
recoverability of the goodwill that was carried on our financial statements. We
have ceased amortization of goodwill in 2002. SFAS No. 142 also 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. We have completed the initial
impairment review required by SFAS No. 142 and have determined that our goodwill
and intangible assets were not impaired.
We also adopted SFAS No. 144, which among other things, modifies and updates the
methodology for recognizing impairment in long-lived assets. The adoption of
this standard did not have a significant impact on either the balance sheet or
the statement of operations.
Our management determined that a change in the revenue recognition policy for
sales of product should have been made as of January 1, 1999 in order to comply
with Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" ("SAB 101"). Despite title passing upon shipment to the customer,
our general practice has been to cover customer losses that were incurred while
the products were in transit. SAB 101, as interpreted by the SEC Staff, would
dictate that it is inappropriate to record revenue until delivery because our
actions have created a "de facto" title passage to the customer at the time of
delivery. Therefore, we have concluded that revenue should, and will, be
recorded at the time of delivery rather than at the time of shipment.
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
Three Months and Six Months Ended June 30, 2002 Compared with the Three Months
and Six Months Ended June 30, 2001.
The following table sets forth for the periods indicated information derived
from our statements of operations expressed as a percentage of net sales.
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- -------------------------------------------------------------------------------------------------------------------------------
June 30, 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Net sales (in millions)........................... $ 291.2 $ 296.4 $ 528.3 $ 599.7
======= ======== ======= ========
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Gross profit...................................... 10.8 11.1 10.7 11.4
Selling, general and administrative expenses...... 10.5 10.3 11.0 10.2
Restructuring costs and other special charges..... - - 0.2 0.1
Income (loss) from operations..................... 0.2 0.7 (0.5) 1.0
-16-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Results of Operations - Cont'd.
- --------------------------------------------------------------------------------
The following table sets forth our percentage of net sales by sales channel and
product mix:
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- -------------------------------------------------------------------------------------------------------------------------------
June 30, 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Sales Channel
Corporate Outbound............................. 78% 78% 77% 78%
Inbound Telesales.............................. 8 13 10 13
On-Line Internet............................... 14 9 13 9
----- ------ ----- ------
Total........................................ 100% 100% 100% 100%
===== ====== ===== ======
Product Mix
Notebooks...................................... 16% 20% 16% 22%
Desktop/Servers................................ 15 13 15 13
Storage Devices................................ 10 10 10 10
Software....................................... 14 13 14 13
Networking Communications...................... 8 9 9 9
Printers....................................... 9 9 9 8
Videos & Monitors.............................. 9 10 9 9
Memory......................................... 4 3 3 3
Accessories/Other.............................. 15 13 15 13
----- ------ ----- ------
Total........................................ 100% 100% 100% 100%
===== ====== ===== ======
For the three months ended June 30, 2002, sales of enterprise server and
networking products (included in the above product mix) were 23.0% of net
sales, compared to 18.6% of net sales for the comparable period in 2001.
Sales of enterprise server and networking products (included in the above
product mix) were 22.1% and 19.0% of net sales for the six months ended
June 30, 2002 and June 30, 2001, respectively.
Net sales decreased $5.2 million, or 1.8%, to $291.2 million for the quarter
ended June 30, 2002 from $296.4 million for the comparable period in 2001 due to
the continued weakness in demand for information technology products. Net sales
for the six months ended June 30, 2002 decreased $71.4 million, or 11.9%, to
$528.3 million from $599.7 million in the comparable period in 2001. Outbound
channel sales decreased 3.2% to $225.3 million for the quarter ended June 30,
2002 over the comparable 2001 quarter and decreased 13.2%, to $405.4 million for
the six months ended June 30, 2002 compared to the corresponding 2001 period.
On-line Internet sales increased 64.7% to $43.2 million for the quarter ended
June 30, 2002 and increased 30.8% to $71.6 million for the six months ended June
30, 2002 compared to the corresponding prior year periods in 2001. Inbound
channel sales, which primarily serve our consumer and very small business
customers, decreased 39.2%, to $22.7 million for the quarter ended June 30,
2002, and decreased 34.0%, to $51.3 million for the six months ended June 30,
2002, compared to corresponding periods in 2001.
Excluding net sales for MoreDirect, second quarter 2002 net sales were $237.3
million, virtually flat compared to first quarter of 2002. Net sales for
MoreDirect, which comprises our Large Corporate Accounts segment, were $53.9
million for the quarter. Net sales for the small- and medium-sized business
(SMB) segment, were down sequentially by 7% to $173.6 million in the second
quarter of 2002. Net sales to the federal, state and local government
organizations and educational institutions (Public Sector) grew 29% sequentially
to $63.7 million during the second quarter of 2002.
Net sales of enterprise server and networking products increased 21.4% to $66.9
million for the quarter ended June 30, 2002 from $55.1 million for the
comparable period in 2001. Management believes that these product categories
will eventually grow substantially as our customers further upgrade their
network and communication infrastructure. If economic conditions do not improve
in the near term, the anticipated sales growth of these types of products will
not likely occur. Enterprise server and networking products represented 23.0% of
overall net sales for the second quarter in 2002, up from 18.6% of net sales for
the
-17-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Results of Operations - Cont'd.
- --------------------------------------------------------------------------------
comparable period in 2001. Sales of notebooks declined by 21.0% to $46.4 million
for the quarter ended June 30, 2002, from $58.7 million for the comparable
period in 2001. Desktop/server sales increased by 14.4% to $43.0 million for the
quarter ended June 30, 2002, from $37.6 million for the comparable period in
2001. The shift in product mix resulted primarily from the acquisition of
MoreDirect whose computer systems sales are concentrated more in the
desktop/server category.
Average order size increased $7, or 0.6%, to $1,127 for the quarter ended June
30, 2002 compared to the second quarter of 2001. Average order size increased
sequentially by 26.1% in the second quarter partly due to the MoreDirect
acquisition. The total number of orders received for the quarter declined by
3.4% from the first quarter of 2002, and by 3.8% year-over-year, compared to the
1.8% year-over-year decline in total net sales dollars. Average annualized sales
productivity per account manager for the quarter improved sequentially to $2.0
million from $1.8 million in the first quarter of 2002.
Gross profit decreased $1.5 million, or 4.6%, to $31.3 million for the quarter
ended June 30, 2002 from $32.8 million for the comparable period in 2001,
primarily due to the decrease in sales described above. Gross profit for the six
months ended June 30, 2002 decreased $11.9 million, or 17.4%, to $56.3 million
from $68.2 million for the comparable period in 2001. Gross profit margin as a
percentage of sales decreased to 10.8% of net sales in the second quarter of
2002 from 11.1% for the comparable period in 2001. Gross profit margin as a
percentage of sales decreased to 10.7% in the first six months of 2002 from
11.4% for the comparable period in 2001 but increased from 10.5% in the first
quarter of 2002. Excluding MoreDirect's results for the second quarter, our
gross profit margins were 10.8 %. MoreDirect's gross profit margin was 10.4%.
Gross profit margins in our small- and medium-sized business segment improved by
0.7% sequentially over the quarter ended March 31, 2002 to 11.6% in the quarter
ended June 30, 2002, primarily due to the improved attainment of vendor
incentive rebates.
A more competitive pricing environment and lower overall demand during the first
six months of 2002 negatively impacted our year-over-year gross margin
percentages. Our profit margins are also influenced by the relative mix of sales
to commercial, government, education and consumer customers and by the relative
mix of inbound, outbound and on-line Internet sales. Since outbound sales are
typically to corporate and government 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. We expect
that our 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 remained flat at $30.6 million for
the quarter ended June 30, 2002 as compared to the second quarter in 2001 but
increased sequentially by $3.1 million over the quarter ended March 31, 2002.
For the six months ended June 30, 2002, selling, general and administrative
expenses (SG&A) decreased $3.0 million, or 4.9%, to $58.1 million from $61.1
million for the comparable period in 2001. SG&A as a percentage of net sales
were 10.5% in the second quarter of 2002, compared to 10.3% in the comparable
period a year ago and 11.6% in the first quarter of 2002. For the six months
ended June 30, 2002, SG&A as a percentage of net sales increased to 11.0%
compared to 10.2% for the comparable period in 2001. Increases related to our
Web site initiatives were offset by decreases in volume sensitive costs, such as
variable compensation and credit card fees. We expect that our SG&A may vary
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 our new
Internet Web technology to support the sales organization. SG&A in each of the
first quarter and second quarter of 2001 included goodwill amortization of $176
thousand. There were no such charges in the corresponding 2002 quarters. Had the
$176 thousand not been amortized in each of the first two quarters of 2001,
earnings per share would not have been significantly affected.
Restructuring costs and other special charges totaling $0.10 million were
recorded in the second quarter of 2002. These charges were related to workforce
reductions. No restructuring costs or other special charges were recorded in the
comparable period in 2001. For the six-month periods ended June 30, 2002 and
2001, we recorded $0.92 million and $.85 million, respectively, in restructuring
costs and other special charges. On March 15, 2002, we announced that we had
settled litigation commenced by Microsoft Corporation involving alleged
trademark and copyright infringement. While denying these allegations, we
recorded $0.75 million in settlement costs and legal fees related to this
matter. We also took a $0.17 million charge and a $0.85 million charge related
to staff reductions for the six months ended June 30, 2002 and 2001,
respectively.
-18-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Results of Operations - Cont'd.
- --------------------------------------------------------------------------------
A rollforward of restructuring costs and other special charges for the six
months ended June 30, 2002, is shown below:
- ---------------------------------------------------------------------------------------------------------------------------------
Beginning Liabilities at
(amounts in thousands) Balance Total Charges Cash Payments June 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Settlement of Microsoft litigation charges $ - $ 750 $ (716) $ 34
Workforce reduction 425 168 (527) 66
---------- ---------- --------- ----------
Total $ 425 $ 918 $ (1,243) $ 100
========== ========== ========= ==========
Income (loss) from operations decreased $1.5 million, or 71.4%, to $0.6 million
for the quarter ended June 30, 2002, from $2.1 million for the comparable period
in 2001. Income from operations decreased $8.9 million, or 143.5%, to a loss of
$2.7 million for the six months ended June 30, 2002, compared to income of $6.2
million for the comparable period in 2001. Income from operations as a
percentage of sales decreased from 0.7% in the three months ended June 30, 2001
to 0.2% for the comparable period in 2002 for the reasons discussed above.
Income from operations as a percentage of sales decreased from 1.0% in the six
months ended June 30, 2001 to a loss of 0.5% for the comparable period in 2002.
Income from operations for the quarter ended June 30, 2002, excluding the
acquisition of MoreDirect, Inc. was a loss of $1.8 million. Our Public Sector
Segment (as described in Note 4 to our Condensed Consolidated Financial
Statements), incurred a loss of $1.6 million, and our SMB segment incurred a
loss of $0.2 million.
Interest expense remained flat at $0.3 million for the quarters ended June 30,
2002 and 2001. For the six months ended June 30, 2002, interest expense
decreased $0.2 million, or 28.6% to $0.5 million from $0.7 million for the
comparable period in 2001. This decrease in interest expense was attributed to
lower average borrowings in the first quarter in 2002 as compared to the first
quarter of 2001.
Other, net which is essentially comprised of interest income decreased $0.3
million, or 75.0%, to $0.1 million in the quarter ended June 30, 2002 from $0.4
million for the comparable period in 2001 due to lower interest rates and lower
investment levels. For the six months ended June 30, 2002, other, net decreased
$0.4 million, or 57.1%, to $0.3 million from $0.7 million for the comparable
period in 2001.
Income taxes for the quarter ended June 30, 2002 consisted of a $0.2 million tax
provision compared to a $0.9 million tax provision for the comparable quarter in
2001. The effective tax rate was 37.9% for the period ended June 30, 2002 and
38.0% for the period ended June 30, 2001. For the six months ended June 30,
2002, the provision for income taxes decreased $3.5 million, or 145.8%, to a
credit of $1.1 million from a provision of $2.4 million for the six months ended
June 30, 2001.
Net income (loss) for the quarter ended June 30, 2002 decreased $1.1 million, or
78.6%, to $0.3 million from net income of $1.4 million for the comparable
quarter in 2001, as a result of the decrease in income from operations. For the
six months ended June 30, 2002, net income decreased $5.7 million, or 146.2%, to
a loss of $1.8 million from income of $3.9 million for the six months ended June
30, 2001.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
We have historically financed our operations and capital expenditures through
cash flow from operations and bank borrowings. We believe that funds generated
from operations, together with available credit under our bank line of credit,
will be sufficient to finance our working capital and capital expenditure
requirements at least through the next twelve months. Our ability to continue
funding our planned growth is dependent upon our 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. If demand for
information technology products continues to decline, our cash flows from
operations may be substantially reduced.
-19-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Liquidity and Capital Resources - Cont'd.
- --------------------------------------------------------------------------------
At June 30, 2002, we had cash and cash equivalents of $26.2 million and working
capital of $89.5 million. At December 31, 2001, we had cash and cash equivalents
of $35.6 million and working capital of $120.4 million.
In May 2002, we entered into a $45 million credit facility secured by
substantially all of our business assets. In July 2002, an additional lender
committed to fund $10.0 million of this facility. Amounts outstanding under this
facility bear interest at the prime rate (4.75% at June 30, 2002). The credit
facility includes various customary financial and operating covenants, minimum
net worth and maximum funded debt ratio requirements, including restrictions on
the payment of dividends, none of which we believe significantly restricts our
operations. No borrowings were outstanding under this credit facility at June
30, 2002. The credit facility matures on June 30, 2004. Amounts outstanding
under our former facility, which terminated in May 2002, did not exceed $6.3
million for the year ended December 31, 2001.
Net cash provided by operating activities was $27.1 million for the six months
ended June 30, 2002, as compared to $39.5 million provided by operating
activities in the comparable period in 2001. The primary factors historically
affecting cash flows from operations are our net income and changes in the
levels of accounts receivable, inventories and accounts payable.
At June 30, 2002, we had $111.6 million in outstanding net accounts receivable.
During the second quarter of 2002, days sales outstanding improved sequentially
by 4 days to 48 days at June 30, 2002 from 52 days at March 31, 2002.
Inventories totaled $43.8 million at June 30, 2002, compared to $45.4 million at
March 31, 2002 and $57.5 million at December 31, 2001. Net sales of products
drop-shipped by distributors and other vendors directly to customers accounted
for 34% of net sales in the second quarter (19% excluding MoreDirect) compared
to 18% in the first quarter of 2002. Inventory turns improved to 22 turns,
partly due to the MoreDirect acquisition, compared to 16 turns in the first
quarter of 2002 and 16 turns in the second quarter of 2001.
At June 30, 2002, we had $89.4 million in outstanding accounts payable. Such
accounts are generally paid within 30 days of incurrence and will be financed by
cash flows from operations or, if necessary, short-term borrowings under the
line of credit. This amount includes $9.8 million payable to two financial
institutions under security agreements to facilitate the purchase of inventory.
Capital expenditures were $3.4 million in the six months ended June 30, 2002 as
compared to $4.2 million in the comparable period in 2001. The majority of the
capital expenditures for the respective 2002 and 2001 periods relate to computer
hardware and software purchases for our information systems. Total capital
expenditures for the year ending December 31, 2002 are estimated to be $6.8
million.
We have disclosed significant related party transactions and our future
commitments in our Form 10-K/A. There have been no substantial changes in those
disclosures since year-end.
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and replaces Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." It requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred, rather than
at the date of a commitment to an exit or disposal plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with earlier application encouraged. The restructuring
activities undertaken by us prior to the issuance of this statement have been
appropriately accounted for under EITF 94-3. (See Note 6).
-20-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Inflation
- --------------------------------------------------------------------------------
We have historically offset any inflation in operating costs by a combination of
increased productivity and price increases, where appropriate. We do not expect
inflation to have a significant impact on our business in the future.
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition
- --------------------------------------------------------------------------------
Our future results and financial condition are dependent on our ability to
continue to successfully market, sell and distribute information technology
products and services, including computers, hardware and software. Inherent in
this process are a number of factors that we must successfully manage in order
to achieve a favorable financial condition and favorable operating results.
Potential risks and uncertainties that could affect our future financial
condition and operating results include, without limitation, the following
factors:
There has been a recent decrease in demand throughout the industry for the
products we sell.
There has been a general decline in the economy over the past year and the
demand for personal computer products has decreased throughout the industry.
This decrease adversely affected our sales and results of operations in 2001,
and continues to adversely affect our sales and results of operations in 2002.
If our net sales do not increase in proportion to our operating expenses or if
we experience a decrease in net sales for an extended period of time, there
would be a material adverse effect on our results of operations in future
periods.
We have experienced rapid growth in recent years followed by a decline in sales
and there is no assurance that we will be able to regain such growth.
Our net sales grew from $749.9 million for the year ended December 31, 1998 to
$1.44 billion for the year ended December 31, 2000. In the year ended December
31, 2001, our net sales declined to $1.19 billion. Net sales for the six months
ended June 30, 2002 declined by 11.9% from the comparable 2001 period, despite
our acquisition of MoreDirect. Our growth in previous years placed increasing
demands on our administrative, operational, financial and other resources. Our
staffing levels and operating expenses increased substantially in recent years
due to our sales forecasts. If our revenues continue to decline, we may not be
able to reduce our staffing levels and operating expenses in a timely manner to
meet our needs. Moreover, we can provide no assurance that we will be able to
regain rapid growth in the near future.
We may also experience quarterly fluctuations and seasonality which could impact
our business.
Several factors have caused our sales and results of operations to fluctuate and
we expect these fluctuations to continue on a quarterly basis. Causes of these
fluctuations include:
o changes in the overall level of economic activity;
o changes in the level of business investment in information technology
products;
o the condition of the personal computer industry in general;
o shifts in customer demand for hardware and software products;
o industry shipments of new products or upgrades;
o the timing of new merchandise and catalog offerings;
o fluctuations in response rates;
o fluctuations in postage, paper, shipping and printing costs and in
merchandise returns;
o adverse weather conditions that affect response, distribution or
shipping;
o shifts in the timing of holidays;
o changes in our product offerings; and
o changes in consumer demand for information technology products.
We base our operating expenditures on sales forecasts. If revenues do not meet
expectations in any given quarter, our operating results could suffer.
-21-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition - Cont'd.
- --------------------------------------------------------------------------------
In addition, customer response rates for our catalogs and other marketing
vehicles are subject to variations. The first and last quarters of the year
generally have higher response rates while the two middle quarters typically
have lower response rates.
We are exposed to inventory obsolescence due to the rapid technological changes
occurring in the personal computer industry.
The market for personal computer products is characterized by rapid
technological change and the frequent introduction of new products and product
enhancements. Our success depends in large part on our ability to identify and
market products that meet the needs of customers in that marketplace. In order
to satisfy customer demand and to obtain favorable purchasing discounts, we may
in the future carry increased inventory levels of certain products. By so doing,
we are subject to the increased risk of inventory obsolescence. Also, in order
to implement our business strategy, we intend to continue, among other things,
to place larger than typical inventory stocking orders, and increase our
participation in first-to-market purchase opportunities. We may also participate
in end-of-life-cycle purchase opportunities and market products on a
private-label basis, which would increase the risk of inventory obsolescence. In
addition, we sometimes acquire special purchase products without return
privileges. There can be no assurance that we will be able to avoid losses
related to obsolete inventory. In addition, manufacturers are limiting return
rights and are also taking steps to reduce their inventory exposure by
supporting "build to order" programs authorizing distributors and resellers to
assemble computer hardware under the manufacturers' brands. These trends reduce
the costs to manufacturers and shift the burden of inventory risk to resellers
like us which could negatively impact our business.
We acquire products for resale from a limited number of vendors; the loss of any
one of these vendors could have a material adverse effect on our business.
We acquire products for resale both directly from manufacturers and indirectly
through distributors and other sources. The five vendors supplying the greatest
amount of goods to us constituted 66.4% and 64.1% of our total product purchases
in the six-month periods ended June 30, 2002 and 2001, respectively. Among these
five vendors, purchases from Ingram Micro, Inc. represented 27.9% and 25.0% of
our total product purchases and purchases from Tech Data Corporation comprised
15.2% and 16.4% of our total product purchases in the six-month periods ended
June 30, 2002 and 2001, respectively. Effective May 3, 2002, Compaq Computer
Corporation became a wholly-owned subsidiary of Hewlett Packard Company. Had
this merger been completed at the beginning of the periods presented, our
purchases made directly from Hewlett Packard, on a pro forma basis, would have
constituted 13.8% and 10.4% of our total product purchases in the six-month
periods ended June 30, 2002 and 2001, respectively. No other vendor supplied
more than 10% of our total product purchases in the six-month periods ended June
30, 2002 and 2001. If we were unable to acquire products from Ingram Micro, Tech
Data or Hewlett Packard, we could experience a short-term disruption in the
availability of products and such disruption could have a material adverse
effect on our results of operations and cash flows.
Substantially all of our contracts and arrangements with our vendors that supply
significant quantities of products are terminable by such vendors or us without
notice or upon short notice. Most of our product vendors provide us with trade
credit, of which the net amount outstanding at June 30, 2002 was $89.4 million.
Termination, interruption or contraction of relationships with our vendors,
including a reduction in the level of trade credit provided to us, could have a
material adverse effect on our financial position.
Some product manufacturers either do not permit us to sell the full line of
their products or limit the number of product units available to direct
marketers such as us. An element of our business strategy is to continue to
increase our participation in first-to-market purchase opportunities. The
availability of certain desired products, especially in the direct marketing
channel, has been constrained in the past. We could experience a material
adverse effect to our business if we are unable to source first-to-market
purchase or similar opportunities, or if we face the reemergence of significant
availability constraints.
-22-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition - Cont'd.
- --------------------------------------------------------------------------------
We may experience a reduction in the incentive programs offered to us by our
vendors.
Some product manufacturers and distributors provide us with incentives such as
supplier reimbursements, payment discounts, price protection, rebates and other
similar arrangements. The increasingly competitive computer hardware market has
already resulted in the following:
o reduction or elimination of some of these incentive programs;
o more restrictive price protection and other terms; and
o reduced advertising allowances and incentives, in some cases.
Most product manufacturers provide us with co-op advertising support and in
exchange we cover their products in our catalogs. This support significantly
defrays our catalog production expense. In the past, we have experienced a
decrease in the level of co-op advertising support available to us from certain
manufacturers. The level of co-op advertising support we receive from some
manufacturers may further decline in the future. Such a decline could increase
our selling, general and administrative expenses as a percentage of sales and
have a material adverse effect on our cash flows.
We face many competitive risks.
The direct marketing industry and the computer products retail business, in
particular, are highly competitive. We compete with consumer electronics and
computer retail stores, including superstores. We also compete with other direct
marketers of hardware and software and computer related products, including an
increasing number of Internet retailers. Certain hardware and software vendors
are selling their products directly through their own catalogs and over the
Internet. We compete not only for customers, but also for co-op advertising
support from personal computer product manufacturers. Some of our competitors
have greater financial, marketing and larger catalog circulations and customer
bases and other resources than we do. In addition, many of our competitors offer
a wider range of products and services than we do and may be able to respond
more quickly to new or changing opportunities, technologies and customer
requirements. Many current and potential competitors also have greater name
recognition, engage in more extensive promotional activities and adopt more
aggressive pricing policies than us. We expect competition to increase as
retailers and direct marketers who have not traditionally sold computers and
related products enter the industry.
We cannot assure you that we can continue to compete effectively against our
current or future competitors. In addition, price is an important competitive
factor in the personal computer hardware and software market and we cannot
assure you that we will not face increased price competition. If we encounter
new competition or fail to compete effectively against our competitors, our
business may be harmed.
In addition, product resellers and direct marketers are combining operations or
acquiring or merging with other resellers and direct marketers to increase
efficiency. Moreover, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products and services. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and acquire significant
market share.
We face and will continue to face significant price competition.
Generally, pricing is very aggressive in the personal computer industry and we
expect pricing pressures to continue. An increase in price competition could
result in a reduction of our profit margins. There can be no assurance that we
will be able to offset the effects of price reductions with an increase in the
number of customers, higher sales, cost reductions or otherwise. Also, our sales
of personal computer hardware products are generally producing lower profit
margins than those associated with software products. Such pricing pressures
could result in an erosion of our market share, reduced sales and reduced
operating margins, any of which could have a material adverse effect on our
business.
-23-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition - Cont'd.
- --------------------------------------------------------------------------------
The methods of distributing personal computers and related products are changing
and such changes may negatively impact us and our business.
The manner in which personal computers and related products are distributed and
sold is changing, and new methods of distribution and sale, such as on-line
shopping services, have emerged. Hardware and software manufacturers have sold,
and may intensify their efforts to sell, their products directly to end users.
From time to time, certain manufacturers have instituted programs for the direct
sales of large order quantities of hardware and software to certain major
corporate accounts. These types of programs may continue to be developed and
used by various manufacturers. Some of our vendors, including Apple, Compaq and
IBM, currently sell some of their products directly to end users and have stated
their intentions to increase the level of such direct sales. In addition,
manufacturers may attempt to increase the volume of software products
distributed electronically to end users. An increase in the volume of products
sold through or used by consumers of any of these competitive programs or
distributed electronically to end users could have a material adverse effect on
our results of operations.
We could experience system failures which would interfere with our ability to
process orders.
We depend on the accuracy and proper use of our management information systems
including our telephone system. Many of our key functions depend on the quality
and effective utilization of the information generated by our management
information systems, including:
o our ability to manage inventory and accounts receivable collection;
o our ability to purchase, sell and ship products efficiently and on a
timely basis; and
o our ability to maintain operations.
Interruptions could result from natural disasters as well as power loss,
telecommunications failure and similar events.
Our management information systems require continual upgrades to most
effectively manage our operations and customer database. Although we maintain
some redundant systems, with full data backup, a substantial interruption in
management information systems or in telephone communication systems would
substantially hinder our ability to process customer orders and thus could have
a material adverse effect on our business.
We rely on the continued development of electronic commerce and Internet
infrastructure development.
We have had an increasing amount of sales made over the Internet in part because
of the growing use and acceptance of the Internet by end-users. No one can be
certain that acceptance and use of the Internet will continue to develop or that
a sufficiently broad base of consumers will adopt and continue to use the
Internet and other online services as a medium of commerce. Sales of computer
products over the Internet do not currently represent a significant portion of
overall computer product sales. Growth of our Internet sales is dependent on
potential customers using the Internet in addition to traditional means of
commerce to purchase products. We cannot accurately predict the rate at which
they will do so.
Our success in growing our Internet business will depend in large part upon the
development of an infrastructure for providing Internet access and services. If
the number of Internet users or their use of Internet resources continues to
grow rapidly, such growth may overwhelm the existing Internet infrastructure.
Our ability to increase the speed with which we provide services to customers
and to increase the scope of such services ultimately is limited by and reliant
upon the speed and reliability of the networks operated by third parties and
these networks may not continue to be developed.
We depend heavily on third party shippers to deliver our products to customers.
In 2001, we shipped approximately 56% of our products to customers by Airborne
Freight Corporation D/B/A "Airborne Express", with the remainder being shipped
by United Parcel Service of America, Inc. and other overnight delivery and
surface services. A strike or other interruption in service by these shippers
could adversely affect our ability to market or deliver products to customers on
a timely basis.
-24-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition - Cont'd.
- --------------------------------------------------------------------------------
We may experience potential increases in shipping, paper and postage costs,
which may adversely affect our business if we are not able to pass such
increases on to our customers.
Shipping costs are a significant expense in the operation of our business.
Increases in postal or shipping rates and paper costs could significantly impact
the cost of producing and mailing our catalogs and shipping customer orders.
Postage prices and shipping rates increase periodically and we have no control
over future increases. We have a long-term contract with Airborne Express
whereby Airborne ships products to our customers. We believe that we have
negotiated favorable shipping rates with Airborne. We generally invoice
customers for shipping and handling charges. There can be no assurance that we
will be able to pass on to our customers the full cost, including any future
increases in the cost, of commercial delivery services such as Airborne.
We also incur substantial paper and postage costs related to our marketing
activities, including producing and mailing our catalogs. Paper prices
historically have been cyclical and we have experienced substantial increases in
the past. Significant increases in postal or shipping rates and paper costs
could adversely impact our business, financial condition and results of
operations, particularly if we cannot pass on such increases to our customers or
offset such increases by reducing other costs.
Privacy concerns with respect to list development and maintenance may materially
adversely affect our business.
We mail catalogs and send electronic messages to names in our proprietary
customer database and to potential customers whose names we obtain from rented
or exchanged mailing lists. World-wide public concern regarding personal privacy
has subjected the rental and use of customer mailing lists and other customer
information to increased scrutiny. Any domestic or foreign legislation enacted
limiting or prohibiting these practices could negatively affect our business.
We face many uncertainties relating to the collection of state sales or use tax.
Sales taxes are presently collected on sales of products by several of our sales
subsidiaries in as many as 25 states and the District of Columbia. Various
states have sought to impose on direct marketers the burden of collecting state
sales taxes on the sales of products shipped to their residents. In 1992, the
United States Supreme Court affirmed its position that it is unconstitutional
for a state to impose sales or use tax collection obligations on an out-of-state
mail order company whose only contacts with the state are limited to the
distribution of catalogs and other advertising materials through the mail and
the subsequent delivery of purchased goods by United States mail or by
interstate common carrier. However, legislation that would expand the ability of
states to impose sales tax collection obligations on direct marketers has been
introduced in Congress on many occasions. Due to its presence on various forms
of electronic media and other factors, our contact with many states may exceed
the contact involved in the Supreme Court case. We cannot predict the level of
contact that is sufficient to permit a state to impose on us a sales tax
collection obligation. If the Supreme Court changes its position or if
legislation is passed to overturn the Supreme Court's decision, the imposition
of a sales or use tax collection obligation on us in states to which we ship
products would result in additional administrative expenses to us, could result
in price increases to our customers, and could reduce demand for our product.
We are dependent on key personnel.
Our future performance will depend to a significant extent upon the efforts and
abilities of our senior executives. The competition for qualified management
personnel in the computer products industry is very intense, and the loss of
service of one or more of these persons could have an adverse effect on our
business. Our success and plans for future growth will also depend on our
ability to hire, train and retain skilled personnel in all areas of our
business, including sales account managers and technical support personnel.
There can be no assurance that we will be able to attract, train and retain
sufficient qualified personnel to achieve our business objectives.
-25-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition - Cont'd.
- --------------------------------------------------------------------------------
We are controlled by two principal stockholders.
Patricia Gallup and David Hall, our two principal stockholders, beneficially own
or control, in the aggregate, approximately 71% of the outstanding shares of our
common stock. Because of their beneficial stock ownership, these stockholders
can continue to elect the members of the Board of Directors and decide all
matters requiring stockholder approval at a meeting or by a written consent in
lieu of a meeting. Similarly, such stockholders can control decisions to adopt,
amend or repeal our charter and our bylaws, or take other actions requiring the
vote or consent of our stockholders and prevent a takeover of us by one or more
third parties, or sell or otherwise transfer their stock to a third party, which
could deprive our stockholders of a control premium that might otherwise be
realized by them in connection with an acquisition of us. Such control may
result in decisions that are not in the best interest of our public
stockholders. In connection with our initial public offering, the principal
stockholders placed substantially all shares of common stock beneficially owned
by them into a voting trust, pursuant to which they are required to agree as to
the manner of voting such shares in order for the shares to be voted. Such
provisions could discourage bids for our common stock at a premium as well as
have a negative impact on the market price of our common stock.
-26-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest cash balances in excess of operating requirements in short-term
securities, generally with maturities of 90 days or less. In addition, our
secured credit agreement provides for borrowings which bear interest based on
the prime rate. We had no borrowings outstanding pursuant to our credit
agreement as of June 30, 2002. We believe that the effect, if any, of reasonably
possible near-term changes in interest rates on our financial position, results
of operations and cash flows should not be material.
-27-
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
At the 2002 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") on June 18, 2002, the following matters were acted upon by
the stockholders of the Company:
1. the election of six Directors;
2. the approval to amend the Company's Employee Stock Purchase Plan
to increase the number of shares of Common Stock that may be
issued thereunder from 337,500 shares to 537,500 shares;
3. the ratification of the appointment of Deloitte & Touche LLP as
the Company's independent auditors for the current fiscal year.
The number of shares of Common Stock issued, outstanding and eligible
to vote as of the record date of May 15, 2002 was 24,559,895. The
results of the voting on each of the matters presented to stockholders
at the Annual Meeting are set forth below:
VOTES VOTES VOTES
FOR AGAINST ABSTAINED UNVOTED
1. Election of Directors:
Bruce Barone 23,141,353 22,972 N.A. N.A.
Joseph Baute 23,141,353 22,972 N.A. N.A.
Peter Baxter 23,141,353 22,972 N.A. N.A.
David Beffa-Negrini 23,029,853 134,472 N.A. N.A.
Patricia Gallup 23,056,153 108,172 N.A. N.A.
David Hall 23,056,153 108,172 N.A. N.A.
2. Amendment to the Company's
Employee Stock Purchase Plan 23,086,872 68,187 9,266 N.A.
3. Ratification of the Appointment
of Auditors 22,925,121 235,517 3,687 N.A.
Item 5 - Other Information
Not applicable.
-28-
PC CONNECTION, INC. AND SUBSIDIARIES
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
15 Letter on unaudited interim financial information.
99.1 Certification of the Company's Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Company's Senior Vice President of Finance
and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
(I) The Company filed a Current Report on Form 8-K on April 11, 2002
regarding the execution of the Merger Agreement by and between PC
Connection, Inc., MoreDirect, Inc. and the sole stockholder of
MoreDirect, Inc., dated as of April 5, 2002.
(II) The Company filed a Current Report on Form 8-K on May 9, 2002,
reporting pro forma information that was released at R. W. Baird's
Conference in Chicago, IL on May 10, 2002.
(III) The Company filed a Current Report on Form 8-K on June 5, 2002,
regarding the execution of an Amended and Restated Credit Facility
by and between the Company and Citizens Bank of Massachusetts, as
agent.
(IV) The Company filed a Current Report on Form 8-K/A Amendment No. 1
on June 18, 2002, to the Form 8-K filed on April 11, 2002
reporting the required financial statements relating to
MoreDirect, Inc.
-29-
PC CONNECTION, INC. AND SUBSIDIARIES
June 30, 2002
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 on Form 10-Q/A to be signed on
its behalf by the undersigned thereunto duly authorized.
PC CONNECTION, INC. AND SUBSIDIARIES
November 13, 2002 By: /s/ PATRICIA GALLUP
-------------------------------------
Patricia Gallup
Chairman and Chief Executive Officer
November 13, 2002 By: /s/ MARK GAVIN
-------------------------------------
Mark Gavin
Senior Vice President of Finance and
Chief Financial Officer
-30-
CERTIFICATIONS
I, Patricia Gallup, certify that:
1. I have reviewed this Amendment No. 1 to quarterly report on Form
10-Q/A of PC Connection, Inc.;
2. Based on my knowledge, this Amendment No. 1 to quarterly report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
Amendment No. 1 to quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this Amendment No. 1 to
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
Amendment No. 1 to quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Amendment No. 1 to quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Amendment No. 1 to quarterly report
(the "Evaluation Date"); and
c) presented in this Amendment No. 1 to quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Amendment No. 1 to quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ PATRICIA GALLUP
------------------------------------
Dated: November 13, 2002 Patricia Gallup
Chairman and Chief Executive Officer
-31-
I, Mark Gavin, certify that:
1. I have reviewed this Amendment No. 1 to quarterly report on Form
10-Q/A of PC Connection, Inc.;
2. Based on my knowledge, this Amendment No. 1 to quarterly report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
Amendment No. 1 to quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this Amendment No. 1 to
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
Amendment No. 1 to quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Amendment No. 1 to quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Amendment No. 1 to quarterly report
(the "Evaluation Date"); and
c) presented in this Amendment No. 1 to quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this Amendment No. 1 to quarterly report whether or not there
were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ MARK GAVIN
------------------------------------
Dated: November 13, 2002 Mark Gavin
Senior Vice President of Finance and
Chief Financial Officer
-32-