- --------------------------------------------------------------------------------
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 March 31, 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 April 30, 2002 was 24,559,145.
- --------------------------------------------------------------------------------
EXPLANATORY NOTE
Form 10-Q/A amends our quarterly report on Form 10-Q for the quarter ended March
31, 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 8 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 March 31, 2002 amends and restates the original filing as
follows:
The Financial Statements in Item 1.
Notes 1, 2, 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.
i
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 - March 31, 2002
and December 31, 2001 (As Restated)............................................. 2
Condensed Consolidated Statements of Operations -
Three months ended March 31, 2002 and 2001 (As Restated)........................ 3
Condensed Consolidated Statement of Changes in Stockholders' Equity - Three
months ended March 31, 2002 (As Restated)....................................... 4
Condensed Consolidated Statements of Cash Flows - Three months
ended March 31, 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............................................. 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk......................... 18
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................................................. 19
Item 2 Changes in Securities and Use of Proceeds.......................................... 19
Item 3 Defaults Upon Senior Securities.................................................... 19
Item 4 Submission of Matters to a Vote of Security Holders................................ 19
Item 5 Other Information.................................................................. 19
Item 6 Exhibits and Reports on Form 8-K................................................... 19
SIGNATURES......................................................................... 20
CERTIFICATIONS..................................................................... 21
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
PC Connection, Inc. and Subsidiaries
Merrimack, New Hampshire
We have reviewed the accompanying condensed consolidated balance sheet of PC
Connection, Inc. and subsidiaries (the "Company") as of March 31, 2002, and the
related condensed consolidated statements of operations and cash flows for the
three-month periods ended March 31, 2002 and 2001 and the condensed statement of
changes in stockholders' equity for the three month period ended March 31, 2002.
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 8, the financial statements have been restated.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 18, 2002
October 11, 2002 as to Note 8
-1-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
- ------------------------------------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
(unaudited)
(As Restated - See Note 8)
ASSETS
Current Assets:
Cash and cash equivalents $ 41,895 $ 35,605
Accounts receivable, net 89,571 107,163
Inventories-merchandise 45,424 57,456
Deferred income taxes 2,547 2,559
Income taxes receivable 3,084 1,312
Prepaid expenses and other current assets 3,271 3,013
----------- -----------
Total current assets 185,792 207,108
Property and equipment, net 27,801 27,472
Goodwill, net 8,807 8,807
Other assets 594 258
----------- -----------
Total assets $ 222,994 $ 243,645
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligation to affiliate $ 176 $ 171
Current maturities of long-term debt 500 1,000
Accounts payable 59,193 75,399
Accrued expenses and other liabilities 8,032 10,096
----------- -----------
Total current liabilities 67,901 86,666
Capital lease obligation to affiliate, less current maturities 6,576 6,621
Deferred income taxes 3,711 3,523
Other liabilities 47 73
----------- -----------
Total liabilities 78,235 96,883
----------- -----------
Stockholders' Equity:
Common stock 248 247
Additional paid-in capital 74,489 74,393
Retained earnings 71,559 73,659
Treasury stock at cost (1,537) (1,537)
----------- -----------
Total stockholders' equity 144,759 146,762
----------- -----------
Total liabilities and stockholders' equity $ 222,994 $ 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
Ended
March 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
(As Restated - See Note 8) (As Restated - See Note 8)
Net sales $ 237,120 $ 303,310
Cost of sales 212,170 267,896
----------- ----------
Gross profit 24,950 35,414
Selling, general and administrative expenses 27,478 30,476
Restructuring costs and other special charges 813 851
----------- ----------
Income (loss) from operations (3,341) 4,087
Interest expense (242) (377)
Other, net 195 288
----------- ----------
Income (loss) before taxes (3,388) 3,998
Income tax (provision) credit 1,288 (1,518)
----------- ----------
Net income (loss) $ (2,100) $ 2,480
=========== ==========
Weighted average common shares outstanding:
Basic 24,551 24,417
=========== ==========
Diluted 24,551 24,931
=========== ==========
Earnings (loss) per common share:
Basic $ (.09) $ .10
=========== ==========
Diluted $ (.09) $ .10
============ ==========
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
Three Months Ended March 31, 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 12 1 96 - - - 97
Net loss (As Restated - See Note 8) - - - (2,100) - - (2,100)
------- -------- --------- -------- ------- ------- ----------
Balance - March 31, 2002
(As Restated - See Note 8) 24,760 $ 248 $ 74,489 $ 71,559 (205) $(1,537) $ 144,759
======= ======== ========= ======== ======= ======= ==========
See accompanying notes to condensed consolidated financial statements.
-4-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
(As Restated - (As Restated -
See Note 8) See Note 8)
Cash Flows from Operating Activities:
Net income (loss) $ (2,100) $ 2,480
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,703 1,865
Deferred income taxes 200 193
Provision for doubtful accounts 1,684 2,994
(Gain)/loss on disposal of fixed assets (3) 24
Changes in assets and liabilities:
Accounts receivable 15,908 18,538
Inventories 12,032 (9,661)
Prepaid expenses and other current assets (2,030) 4,184
Other non-current assets (336) 151
Accounts payable (16,206) 26,220
Income tax benefits from exercise of stock options 17 2
Accrued expenses and other liabilities (2,039) (2,489)
---------- ----------
Net cash provided by operating activities 8,830 44,501
---------- ----------
Cash Flows from Investing Activities:
Purchases of property and equipment (2,089) (2,467)
Proceeds from sale of property and equipment 9 -
---------- ----------
Net cash used for investing activities (2,080) (2,467)
---------- -----------
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 2,847 45,385
Repayment of short-term borrowings (2,847) (45,385)
Repayment of capital lease obligation to affiliate (40) (37)
Repayment of notes payable (500) -
Exercise of stock options 80 34
---------- ----------
Net cash used for financing activities (460) (3)
---------- ----------
Increase in cash and cash equivalents 6,290 42,031
Cash and cash equivalents, beginning of period 35,605 7,363
---------- ----------
Cash and cash equivalents, end of period $ 41,895 $ 49,394
========== ==========
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 months ended March 31, 2002 may not be indicative of the results
expected for any succeeding quarter or the entire year ending December 31, 2002.
As described in Note 8 to these condensed consolidated financial statements, the
information contained herein has been restated to reflect a change in revenue
recognition policy.
We adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" in June 2001. SFAS No. 142 requires,
among other things, the discontinuance of the amortization of goodwill and
certain other identified intangibles. We have ceased amortization of goodwill in
2002. The following is a reconciliation of reported net income to adjusted net
income for the three months ended, taking into account the cessation of goodwill
amortization:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, (amounts in thousands, except per share data) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (2,100) $ 2,480
Add back goodwill amortization (net of taxes) - 109
---------- ----------
Adjusted net income (loss) $ (2,100) $ 2,589
========== ==========
Basic and diluted earnings (loss) per share:
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income (loss) $ (.09) $ (0.9) $ .10 $ .10
Add back goodwill amortization (net of taxes) - - .01 -
-------- ------- -------- --------
Adjusted net income (loss) $ (.09) $ (0.9) $ .11 $ .10
======== ======= ======== ========
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 will finalize
our assessment under SFAS No. 142 during the second quarter of 2002, but do not
expect this assessment to have a significant impact on either the balance sheet
or the statement of operations.
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.
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 in Note 8 to these financial
statements.)
-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 - Cont'd.
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
Ongoing credit evaluations of our customers are performed, and credit limits are
adjusted, based on payment history and customer credit-worthiness. An allowance
for estimated doubtful accounts is maintained 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.
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.
- --------------------------------------------------------------------------------
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.
The following table sets forth the computation of basic and diluted earnings per
share:
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, (amounts in thousands, except per share data) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Numerator:
Net income (loss) $ (2,100) $ 2,480
========= ========
Denominator:
Denominator for basic earnings per share:
Weighted average shares 24,551 24,417
Dilutive effect of unexercised
employee stock options: - 514
--------- --------
Denominator for diluted earnings per share 24,551 24,931
========= ========
Earnings (loss) per share:
Basic $ (.09) $ .10
========= ========
Diluted $ (.09) $ .10
========= ========
-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 unexercised stock options were excluded from the computation of
diluted earnings per share for the three months ended March 31, 2002 and 2001
because the effect of the options on the calculation would have been
anti-dilutive:
---------------------------------------------------------------------------
Three Months Ended
---------------------------------------------------------------------------
March 31, (amounts in thousands) 2002 2001
---------------------------------------------------------------------------
Anti-dilutive stock options 2,883 685
======= =======
- --------------------------------------------------------------------------------
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 contains federal, state and local
governmental organizations and educational institutions, and the "Commercial"
segment, which contains corporations, partnerships and proprietorships as well
as consumers. Accordingly, beginning in 2002, financial information for each
reportable segment has been provided to and used by the "chief operating
decision maker" of the Company to allocate resources and assess our performance.
Segment information applicable to the Company's reportable operating segments
for the three months ended March 31, 2002 is shown below:
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial Public Sector
(amounts in thousands) Segment Segment Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Sales to external customers $ 187,643 $ 49,477 $ - $ 237,120
Transfers between segments 33,258 - (33,258) -
------------ ------------ ----------- -----------
Net sales $ 220,901 $ 49,477 $ (33,258) $ 237,120
============ ============ =========== ===========
Operating loss $ (2,085) $ (1,256) - $ (3,341)
Interest and other - net (63) 16 - (47)
------------ ------------ ------------ -----------
Loss before taxes $ (2,148) $ (1,240) $ - $ (3,388)
============ ============ ============ ===========
Total assets $ 199,092 $ 59,491 $ (35,589) $ 222,994
============ ============ =========== ============
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 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 two 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).
-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.
- --------------------------------------------------------------------------------
Net sales by sales channel and product mix are presented below:
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended
- --------------------------------------------------------------------------------------------------------------------
March 31, (amounts in thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Sales Channel
Corporate Outbound $ 180,112 $ 234,444
Inbound Telesales 28,593 40,345
On-Line Internet 28,415 28,521
----------- -----------
Total $ 237,120 $ 303,310
=========== ===========
Product Mix
Notebooks $ 36,969 $ 71,081
Desktop/Servers 34,594 39,027
Storage Devices 24,404 30,116
Software 33,669 37,206
Networking Communications 20,899 27,122
Printers 20,819 24,032
Videos & Monitors 22,779 24,733
Memory 7,475 10,143
Accessories/Other 35,512 39,850
----------- -----------
Total $ 237,120 $ 303,310
=========== ===========
Substantially all of our net sales for the quarters ended March 31, 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 March 31, 2002 and December 31, 2001 were located
in the United States. Our primary target customers are small- to medium-size
businesses ("SMBs") comprised of 20 to 1,000 employees, although our customers
also include individual consumers, larger companies, federal, state and local
governmental agencies and educational institutions. Except for the federal
government, no single customer accounted for more than 3% of total net sales in
the three months ended March 31, 2002 and 2001. Sales to the federal government
accounted for $23.8 million, or 10.0% of total net sales for the three months
ended March 31, 2002, and $24.1 million, or 8.0% of total net sales for the
three months ended March 31, 2001.
- --------------------------------------------------------------------------------
Note 5 - Credit Facility
- --------------------------------------------------------------------------------
We have modified our $70 million credit facility so that it is currently secured
by substantially all the business assets of PC Connection, Inc. Amounts
outstanding under this facility bear interest at various rates ranging from the
prime rate (4.75% at March 31, 2002) to prime less 1%, depending on the ratio of
senior debt to EBITDA (earnings before interest, taxes, depreciation and
amortization). The credit facility includes various customary financial and
operating covenants, 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 March 31, 2002. The credit facility
matures on May 31, 2002. Amounts outstanding under our existing facility did not
exceed $6.3 million for the year ended December 31, 2001.
We have received a firm commitment letter from two banks for a new $45 million
secured credit facility. This commitment letter provides that the new credit
facility may be reduced by $10 million if an additional lender does not commit
to fund $10 million of this new credit facility within 90 days of the date of
the commitment letter. The commitment letter provides that the new credit
facility will mature in two years. We are in the process of finalizing this new
facility, which we expect will occur on or about May 31, 2002.
-9-
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 related to staff reductions in the quarter ended
March 31, 2002.
A rollforward of restructuring costs and other special charges for the three
months ended March 31, 2002, is shown below:
- -----------------------------------------------------------------------------------------------------------------
Beginning Liabilities at
(amounts in thousands) Balance Total Charges Cash Payments March 31, 2002
- -----------------------------------------------------------------------------------------------------------------
Settlement of Microsoft litigation charges $ - $ 750 $ (678) $ 72
Workforce reduction 425 63 (338) 150
---------- ---------- ---------- ----------
Total $ 425 $ 813 $ (1,016) $ 222
========== ========== ========== ==========
- --------------------------------------------------------------------------------
Note 7 - Acquisition of MoreDirect, Inc.
- --------------------------------------------------------------------------------
On March 25, 2002, we signed a definitive agreement to acquire all of the
outstanding stock of MoreDirect, Inc., an e-procurement supplier of information
technology products for medium-to-large corporate and government organizations
nationwide. We completed the acquisition on April 5, 2002, and MoreDirect became
a wholly-owned subsidiary of PC Connection, Inc. Under the terms of the
agreement, all outstanding stock options of MoreDirect were cashed out for
approximately $4.1 million, which amount 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 the 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.
The transaction will be accounted for by the purchase method, and accordingly,
that MoreDirect's results of operations will be included in our consolidated
financial statements only for periods after the date of closing. MoreDirect
reported unaudited net sales and pre-tax income of $51.3 million and $2.7
million, respectively, for the three months ended March 31, 2002.
- --------------------------------------------------------------------------------
Note 8 - Restatement of Financial Statements for Change in Revenue Recognition
Policy
- --------------------------------------------------------------------------------
Subsequent to the issuance of our condensed consolidated financial statements
for the quarters ended March 31, 2002 and 2001, 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 March 31, 2002 has
been restated from amounts previously reported. Results of operations have also
been restated. A summary of significant effects of the restatement is as
follows:
-10-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Note 8 - Restatement of Financial Statements for Change in Revenue Recognition
Policy - Cont'd.
- --------------------------------------------------------------------------------
For the Quarters Ended
----------------------
March 31, 2002 March 31, 2001
-------------- --------------
As As
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Net sales $ 236,160 $ 237,120 $301,775 $303,310
Cost of sales 211,179 212,170 266,450 267,896
Gross profit 24,981 24,950 35,325 35,414
Selling, general and administrative 27,489 27,478 30,463 30,476
Income tax (provision) credit 1,280 1,288 (1,489) (1,518)
Net income (loss) (2,088) (2,100) 2,433 2,480
Earnings (loss) per common share:
Basic $ (0.09) $ (0.09) $ 0.10 $ 0.10
Diluted (0.09) (0.09) 0.10 0.10
Balance Sheet As of March 31, 2002
- ----------------------------------
As As
Previously Restated
Reported --------
--------
Accounts receivable, net $98,909 $89,571
Inventories - merchandise 36,962 45,424
Deferred income taxes 2,284 2,547
Total assets 223,607 222,994
Accrued expenses and other liabilities 8,219 8,032
Retained earnings 71,985 71,559
-11-
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 Discussion and Analysis of Financial Condition and Results of
Operations presented below reflects the restatement to previously issued
condensed consolidated financial statements for the quarters ended March 31,
2002 and 2001. See Note 8 to the Condensed Consolidated Financial Statements for
further discussion of this 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" in our 2001 Annual Report on
Form 10-K/A filed with the Securities and Exchange Commission for the year ended
December 31, 2001. 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 three years, from 19.4% of net
sales for the year ended December 31, 1998 to 10.9% of net sales for the three
months ended March 31, 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 first 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 Condensed 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. 142 and
-12-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Critical Accounting Policies - Cont'd.
- --------------------------------------------------------------------------------
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 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 will finalize our assessment
under SFAS No. 142 during the second quarter of 2002, but do not expect this
assessment to have a significant impact on either the balance sheet or statement
of operations.
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 Ended March 31, 2002 Compared with the Three Months Ended March 31,
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
- -----------------------------------------------------------------------------------------------
March 31, 2002 2001
- -----------------------------------------------------------------------------------------------
Net sales (in millions)............................ $ 237.1 $ 303.3
========= =========
Net sales.......................................... 100.0% 100.0%
Gross profit....................................... 10.5 11.7
Selling, general and administrative expenses....... 11.6 10.0
Non-recurring charge............................... 0.3 0.3
Income (loss) from operations...................... (1.4) 1.3
-13-
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Results of Operations - Cont'd.
- --------------------------------------------------------------------------------
The following table sets forth our percentage of net sales by sales channel and
product mix:
- --------------------------------------------------------------------------------
Three Months Ended
- --------------------------------------------------------------------------------
March 31, 2002 2001
- --------------------------------------------------------------------------------
Sales Channel
Corporate Outbound......................... 76% 77%
Inbound Telesales.......................... 12 13
On-Line Internet........................... 12 10
------ ------
Total...................................... 100% 100%
====== ======
Product Mix
Notebooks.................................. 15% 24%
Desktop/Servers............................ 15 13
Storage Devices............................ 10 10
Software................................... 14 12
Networking Communications.................. 9 9
Printers................................... 9 8
Videos & Monitors.......................... 10 8
Memory..................................... 3 3
Accessories/Other.......................... 15 13
------ ------
Total................................... 100% 100%
====== ======
Sales of enterprise server and networking products (included in the above
product mix) were 21.1% and 19.4% of net sales for the three months ended
March 31, 2002 and March 31, 2001, respectively.
Net sales decreased $66.2 million, or 21.8%, to $237.1 million for the quarter
ended March 31, 2002 from $303.3 million for the comparable period in 2001 due
to the continued weakness in demand for information technology products.
Outbound sales decreased by $54.3 million, or 23.2%, to $180.1 million for the
quarter ended March 31, 2002 from $234.4 million for the comparable period in
2001. On-line Internet sales decreased by $0.1 million, or 0.4%, to $28.4
million for the three months ended March 31, 2002 from $28.5 million for the
same period in 2001. Inbound sales, which primarily serve our consumer and very
small business customers, decreased by $11.7 million, or 29.0%, to $28.6 million
for the quarter ended March 31, 2002 from $40.3 million for the comparable
period in 2001. All product categories continue to be affected by the economic
slowdown, with first quarter 2002 sales of notebooks declining by 48.0% to $37.0
million, from $71.1 million for the comparable period in 2001. Desktop/server
sales declined by 11.3% to $34.6 million for the quarter ended March 31, 2002,
from $39.0 million for the comparable period in 2001. However, desktop/server
units and net sales volumes increased sequentially by 17.6% and 6.2%,
respectively. As desktop unit prices continue to decline, more business
customers are replacing notebooks with desktops when upgrading existing systems.
Net sales of enterprise server and networking products decreased 15.4% to $49.9
million for the quarter ended March 31, 2002 from $59.0 million for the
comparable period in 2001. Management believes that while in the comparative
periods sales declined, these product categories will eventually grow
substantially as our customers further upgrade their network and communication
infrastructure. Enterprise server and networking products represented 21.1% of
overall net sales for the first quarter in 2002, up from 19.4% of net sales for
the comparable period in 2001. If economic conditions do not improve in the near
term, the anticipated sales growth of these types of products will not likely
occur.
Average order size decreased $146, or 14.0%, to $894 for the quarter ended March
31, 2002 from $1,040 in the first quarter of 2001. Average order size declined
sequentially by 15.7% in the first quarter due to the seasonal decline in the
average order size of sales to our federal government customers. The total
number of orders received for the quarter actually increased 5.5%, compared to
the fourth quarter of 2001, and declined by 10.8% year-over-year, compared to
the 21.8% year-over-year decline in total net sales dollars.
-14-
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.
- --------------------------------------------------------------------------------
Gross profit decreased $10.4 million, or 29.4%, to $25.0 million for the quarter
ended March 31, 2002 from $35.4 million for the comparable period in 2001,
primarily due to the decrease in sales described above. Gross profit margin as a
percentage of sales decreased to 10.5% of net sales in the first quarter of 2002
from 11.7% for the comparable period in 2001. A more competitive pricing
environment and lower overall demand during the first quarter of 2002 negatively
impacted our gross margin percentage. Our profit margins are also influenced 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 decreased $3.0 million, or 9.8%, to
$27.5 million for the quarter ended March 31, 2002 from $30.5 million for the
first quarter in 2001. Selling, general and administrative expenses (SG&A), as a
percentage of sales, were 11.6% of net sales in the first quarter of 2002,
compared to 10.0% in the comparable period a year ago. 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 the first
quarter of 2001 also included goodwill amortization of $176 thousand. There were
no such charges in the corresponding 2002 quarter. Had the $176 thousand not
been amortized in 2001, earnings per share of $.10 would not have been
significantly impacted.
Restructuring costs and other special charges totaling $0.8 million were
recorded in the first quarter of 2002 compared to $0.9 million for the
comparable period in 2001. 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, PC Connection agreed to
pay Microsoft $0.63 million to settle the case. The settlement costs and related
legal fees of approximately $0.13 million were included as a special charge in
the first quarter of 2002. We also took a $0.06 million charge related to staff
reductions in the quarter ended March 31, 2002.
A rollforward of restructuring costs and other special charges for the three
months ended March 31, 2002, is shown below:
- ---------------------------------------------------------------------------------------------------------------------------------
Beginning Liabilities at
(amounts in thousands) Balance Total Charges Cash Payments March 31, 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Settlement of Microsoft litigation charges $ - $ 750 $ (678) $ 72
Workforce reduction 425 63 (338) 150
---------- ---------- ---------- ----------
Total $ 425 $ 813 $ (1,016) $ 222
========== ========== ========== ==========
Income (loss) from operations decreased $7.4 million, or 180.5%, to a loss of
$3.3 million for the quarter ended March 31, 2002, from income of $4.1 million
for the comparable period in 2001. Income from operations as a percentage of
sales decreased from income of 1.3% in the three months ended March 31, 2001 to
a loss of 1.4% for the comparable period in 2002 for the reasons discussed
above.
Interest expense decreased $0.2 million, or 50.0%, to $0.2 million for the
quarter ended March 31, 2002 from $0.4 million for the comparable quarter 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 $0.1
million, or 33.3%, to $0.2 million in the quarter ended March 31, 2002 from $0.3
million for the comparable period in 2001 due to lower interest rates and lower
investment levels.
-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
- --------------------------------------------------------------------------------
Results of Operations - Cont'd.
- --------------------------------------------------------------------------------
Income taxes for the quarter ended March 31, 2002 consisted of a $1.3 million
tax benefit compared to $1.5 million tax provision for the comparable quarter in
2001. The effective tax rate was 38% for both periods.
Net income (loss) for the quarter ended March 31, 2002 decreased $4.6 million,
or 184.0%, to a net loss of $2.1 million from net income of $2.5 million for the
comparable quarter in 2001, as a result of the decrease in income from
operations.
- --------------------------------------------------------------------------------
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.
At March 31, 2002, we had cash and cash equivalents of $41.9 million and working
capital of $117.9 million. At December 31, 2001, we had cash and cash
equivalents of $35.6 million and working capital of $120.4 million.
We have modified our $70 million credit facility so that it is currently secured
by substantially all the business assets of PC Connection, Inc. Amounts
outstanding under this facility bear interest at various rates ranging from the
prime rate (4.75% at March 31, 2002) to prime less 1%, depending on the ratio of
senior debt to EBITDA (earnings before interest, taxes, depreciation and
amortization). The credit facility includes various customary financial and
operating covenants, 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 March 31, 2002. The credit facility
matures on May 31, 2002. Amounts outstanding under our existing facility did not
exceed $6.3 million for the year ended December 31, 2001.
We have received a firm commitment letter from two banks for a new $45 million
secured credit facility. This commitment letter provides that the new credit
facility may be reduced by $10 million if an additional lender does not commit
to fund $10 million of this new credit facility within 90 days of the date of
the commitment letter. The commitment letter provides that the new credit
facility will mature in two years. We are in the process of finalizing this new
facility, which we expect will occur on or about May 31, 2002. If we are
unsuccessful in finalizing the new facility on or prior to May 31, 2002, we
believe we will have sufficient capital resources and liquidity to operate our
business at current levels, but our ability to grow our business would be
adversely affected.
Net cash provided by operating activities was $8.8 million for the three months
ended March 31, 2002, as compared to $44.5 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 March 31, 2002, we had $59.2 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 $5.6 million payable to two financial
institutions under security agreements to facilitate the purchase of inventory.
Capital expenditures were $2.1 million in the three months ended March 31, 2002
as compared to $2.5 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.
-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
- --------------------------------------------------------------------------------
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.
-17-
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
unsecured credit agreement provides for borrowings which bear interest at
variable rates based on the prime rate. We had no borrowings outstanding
pursuant to our credit agreement as of March 31, 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.
-18-
PC CONNECTION, INC. AND SUBSIDIARIES
Part II - Other Information
Item 1 - Legal Proceedings
Not applicable.
Item 2 - Changes in Securities and Use of Proceeds
Not applicable.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
15 Letter on unaudited interim financial information
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
None.
-19-
PC CONNECTION, INC. AND SUBSIDIARIES
March 31, 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
-20-
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
-21-
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
-22-
October 11, 2002 Exhibit 15
PC Connection, Inc.
730 Milford Road
Merrimack, New Hampshire
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of PC Connection, Inc. and subsidiaries for the periods ended March
31, 2002 and 2001, as indicated in our report dated April 18, 2002 (October 11
as to Note 8), which includes an explanatory paragraph relating to the
restatement; because we did not perform an audit, we expressed no opinion on
that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, is
incorporated by reference in Registration Statement Nos. 333-40172, 333-50845,
333-50847, 333-66450, 333-69981, 333-83943, and 333-91584 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 1 to quarterly report on Form 10-Q/A
of PC Connection, Inc. (the "Company") for the period ended March 31, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), the undersigned, Patricia Gallup, Chairman and Chief Executive
Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350,
that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ PATRICIA GALLUP
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Dated: November 13, 2002 Patricia Gallup
Chairman and Chief Executive Officer
Exhibit 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 1 to quarterly report on Form 10-Q/A
of PC Connection, Inc. (the "Company") for the period ended March 31, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), the undersigned, Mark Gavin, Senior Vice President of Finance and
Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C.
Section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ MARK GAVIN
------------------------------------
Dated: November 13, 2002 Mark Gavin
Senior Vice President of Finance and
Chief Financial Officer
