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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted
[X] Definitive Proxy Statement by Rule 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
PC Connection, Inc.
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(Name of Registrant as Specified In Its Charter)
PC Connection, Inc.
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
PC CONNECTION, INC.
Route 101A
730 Milford Road
Merrimack, New Hampshire 03054
(603) 423-2000
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 26, 1999
----------------
The Annual Meeting of Stockholders of PC Connection, Inc., a Delaware
corporation (the "Company"), will be held at the Crowne Plaza Hotel, 2
Somerset Parkway (Exit 8 on Route 3), Nashua, New Hampshire on Wednesday, May
26, 1999 at 10:00 a.m., local time, to consider and act upon the following
matters:
1. To elect five directors to serve until the 2000 Annual Meeting of
Stockholders;
2. To approve (i) the continuance of the Company's 1997 Stock Incentive
Plan (the "1997 Plan") and (ii) the amendment and restatement of the
1997 Plan to increase the number of shares of Common Stock available
to grant under the 1997 Plan by 800,000 shares;
3. To ratify the selection of Deloitte & Touche LLP as the Company's
independent auditors for the current year; and
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Stockholders of record at the close of business on April 16, 1999 are
entitled to notice of, and to vote, at the meeting and at any adjournments
thereof. All stockholders are cordially invited to attend the meeting.
By Order of the Board of Directors,
Steven H. Markiewicz, Secretary
Merrimack, New Hampshire
May 6, 1999
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER
TO ASSURE REPRESENTATION OF YOUR SHARES AT THE MEETING. NO POSTAGE NEED BE
AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.
PC CONNECTION, INC.
Route 101A
730 Milford Road
Merrimack, New Hampshire 03054
----------------
PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
To Be Held On May 26, 1999
----------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of PC Connection, Inc., a Delaware
corporation (the "Company"), for the Annual Meeting of Stockholders of the
Company to be held on May 26, 1999 at 10:00 a.m. at the Crowne Plaza Hotel, 2
Somerset Parkway (Exit 8 on Route 3), Nashua, New Hampshire (the "Annual
Meeting") and at any adjournments of the Annual Meeting. All proxies will be
voted in accordance with the stockholders' instructions. If no choice is
specified, the proxies will be voted in favor of the matters set forth in the
accompanying Notice of Meeting. Any proxy may be revoked by a stockholder at
any time before its exercise by delivery of a written revocation or a
subsequently dated proxy to the Secretary of the Company or by voting in
person at the Annual Meeting.
The Notice of Meeting, this Proxy Statement, the enclosed proxy, the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 as
filed with the Securities and Exchange Commission (the "SEC"), and the
Company's Annual Report to Stockholders for the year ended December 31, 1998
are being mailed to stockholders on or about May 6, 1999.
Voting Securities and Votes Required
On April 16, 1999, the record date for the determination of stockholders
entitled to notice of and to vote at the Annual Meeting, there were
outstanding and entitled to vote an aggregate of 15,624,956 shares of Common
Stock of the Company, $.01 par value per share (the "Common Stock").
Stockholders are entitled to one vote per share.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Common Stock entitled to vote at the Annual Meeting
shall be necessary to constitute a quorum for the transaction of business.
Abstentions and broker non-votes will be considered as present for purposes of
determining whether a quorum is present.
The affirmative vote of the holders of a plurality of the votes cast by the
stockholders entitled to vote at the Annual Meeting is required for the
election of directors. The affirmative vote of the holders of a majority of
the shares of Common Stock present or represented by proxy and voting at the
Annual Meeting is required for the approval of the continuation and the
amendment and restatement and of the Company's 1997 Stock Incentive Plan (the
"1997 Plan") and the ratification of the selection of Deloitte & Touche LLP as
the Company's independent auditors.
Shares that abstain from voting in a particular matter, and shares held in
"street name" by brokers of nominees who indicate on their proxies that they
do not have discretionary authority to vote such shares as to a particular
matter, will not be counted as votes in favor of such matter and will also not
be counted as votes cast or shares voting on such matter. Accordingly,
abstentions and "broker non-votes" will have no effect on the voting on
matters, such as the ones presented for stockholder approval at this Annual
Meeting, that requires the affirmative vote of a certain percentage of the
shares voting on the matter.
1
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, as of January 31, 1999,
regarding the beneficial ownership of the Company's Common Stock by: (i)
persons known by the Company to own more than 5% of the outstanding shares of
Common Stock; (ii) each of the directors of the Company; (iii) each of the
executive officers of the Company named in the Summary Compensation Table
under the heading "Executive Compensation" below; and (iv) all directors and
executive officers of the Company as a group.
Shares of
Common Stock Common Stock
Name Beneficially Owned(1) Outstanding
- ---- --------------------- ------------
Patricia Gallup............................ 5,879,396(2) 37.6%
David Hall................................. 5,899,396(3) 37.8%
Wayne L. Wilson............................ 250,087(4) 1.6%
Robert F. Wilkins.......................... 164,075(5) 1.0%
R. Wayne Roland............................ -- *
David Beffa-Negrini........................ 235,975(6) 1.5%
Martin C. Murrer........................... 50,000(7) *
Peter J. Baxter............................ 14,722(8) *
All directors and executive officers as a
group (14 individuals).................... 12,633,816(9) 77.4%
- --------
* Less than 1% of the total number of outstanding shares of Common Stock of
the Company on January 31, 1999.
(1) The number of shares beneficially owned by each director or executive
officer is determined under rules of the SEC, and the information is not
necessarily indicative of beneficial ownership for any other purpose.
Under such rules, beneficial ownership includes any shares as to which the
individual has the sole or shared voting power or investment power and
also any shares which the individual has the right to acquire within 60
days of January 31, 1999 through the exercise of any stock option or other
right. Unless otherwise indicated, each person has sole investment and
voting power (or shares such power with his or her spouse) with respect to
the shares set forth in the following table. The inclusion herein of any
shares deemed beneficially owned does not constitute an admission of
beneficial ownership of such shares.
(2) Includes 5,849,396 shares of Common Stock held of record by the 1998 PC
Connection Voting Trust and 10,000 shares held by Ms. Gallup's spouse, as
to which Ms. Gallup disclaims beneficial ownership.
(3) Includes 5,879,396 shares of Common Stock held of record by the 1998 PC
Connection Voting Trust.
(4) Includes 249,087 shares of Common Stock issuable upon exercise of
outstanding stock options which Mr. Wilson has the right to acquire within
60 days after January 31, 1999.
(5) Includes 163,875 shares of Common Stock issuable upon exercise of
outstanding stock options which Mr. Wilkins has the right to acquire
within 60 days after January 31, 1999. Also includes 200 shares held of
record by Mr. Wilkins' children, as to which Mr. Wilkins disclaims
beneficial ownership.
(6) Includes 210,975 shares of Common Stock issuable upon exercise of
outstanding stock options which Mr. Beffa-Negrini has the right to acquire
within 60 days after January 31, 1999.
(7) Includes 40,000 shares of Common Stock issuable upon exercise of
outstanding stock options which Mr. Murrer has the right to acquire within
60 days after January 31, 1999.
(8) Includes 4,622 shares of Common Stock issuable upon exercise of
outstanding stock options which Mr. Baxter has the right to acquire within
60 days after January 31, 1999. Also includes 10,000 shares jointly owned
by Mr. Baxter and his spouse.
(9) Includes an aggregate of 693,224 shares of Common Stock issuable to the
directors and executive officers upon exercise of outstanding stock
options within 60 days of January 31, 1999.
2
ELECTION OF DIRECTORS
Directors are to be elected at the Annual Meeting. The Board of Directors is
currently fixed at five members. The Company's Bylaws provide that the
directors of the Company will be elected at each annual meeting of the
Company's stockholders to serve until the next annual meeting of stockholders
or until their successors are duly elected and qualified.
The persons named in the enclosed proxy (Patricia Gallup and David Hall)
will vote to elect the five nominees named below as directors of the Company
unless authority to vote for the election of any or all of the nominees is
withheld by marking the proxy to that effect. Each nominee is presently
serving as a member of the Board of Directors and has consented to being named
in this Proxy Statement and to serve if elected. If for any reason any nominee
should be unable to serve, the person acting under the proxy may vote the
proxy for the election of a substitute nominee designated by the Board of
Directors. It is not presently expected that any of the nominees will be
unavailable to serve, if elected.
The Board of Directors recommends a vote "FOR" the election of the nominees
described below.
Set forth below are the name, age and length of service as a director for
each member of the Board of Directors and the positions and offices held by
him or her, his or her principal occupation and business experience during the
past five years and the names of other publicly-held companies of which he or
she serves as a director. Information with respect to the number of shares of
Common Stock beneficially owned by each director, directly or indirectly, as
of January 31, 1999, appears under "Security Ownership of Certain Beneficial
Owners and Management."
Nominees for Election to the Board of Directors
Patricia Gallup, age 45, has served on the Company's Board of Directors
since 1983. Ms. Gallup is a co-founder of the Company and has served as
Chairman of the Board and Chief Executive Officer of the Company since January
1998. From September 1995 to January 1998, she served as the Chairman of the
Board, President and Chief Executive Officer of the Company. From September
1994 to September 1995, she served as Chairman of the Board and Chief
Executive Officer of the Company. From August 1990 to September 1994, Ms.
Gallup served as the Company's President and Chief Executive Officer.
David Hall, age 50, has served on the Company's Board of Directors since
1983. Mr. Hall is a co-founder of the Company and has served as Vice Chairman
of the Board since November 1997. From June 1997 to November 1997, he served
as the Vice Chairman of the Board, Executive Vice President and Treasurer of
the Company. From February 1995 to June 1997, Mr. Hall served as the Company's
Vice Chairman of the Board and Executive Vice President. From March 1991 to
February 1995, he served as the Executive Vice President of the Company.
David B. Beffa-Negrini, age 45, has served on the Company's Board of
Directors since September 1994 and as the Vice President of Media Development
of the Company since January 1998. From January 1992 to January 1998,
Mr. Beffa-Negrini served as the Company's Director of Merchandising.
Martin C. Murrer, age 41, has served on the Company's Board of Directors
since April 1995. Since January 1999, Mr. Murrer has served as a managing
director of AEA, Investor, Inc. From January 1997 to December 1998, Mr. Murrer
served as a managing director of Donaldson, Lufkin & Jenrette Securities
Corporation. From June 1995 to January 1997, Mr. Murrer was a Senior Vice
President of Donaldson, Lufkin & Jenrette Securities Corporation. From June
1990 to June 1995, Mr. Murrer was a Vice President of Goldman, Sachs & Co.
Peter J. Baxter, age 47, has served on the Company's Board of Directors
since September 1997. From April 1998 to March 1999, he was the Vice-Chairman
and Chief Operating Officer of People's Heritage Financial Group, a bank
holding company. From January 1989 to April 1998, Mr. Baxter served as
President, Chief Executive Officer and a director of CFX Corporation, a bank
holding company.
3
Board and Committee Meetings
The Company has a standing Audit Committee of the Board of Directors that
reviews the results and scope of the audit and other services provided by the
Company's independent auditors. The Audit Committee met three times during
fiscal 1998 to review the effectiveness of the Company's independent auditors
during the fiscal 1997 audit, to review the adequacy of the fiscal 1997
financial statement disclosures, to review the 1998 audit plan, to discuss the
Company's internal accounting control policies and procedures and to consider
and recommend the selection of the Company's independent auditors. The members
of the Audit Committee are Messrs. Murrer and Baxter.
The Company also has a standing Compensation Committee of the Board of
Directors that determines the Chief Executive Officer's salary and incentive
compensation and gives the Chief Executive Officer its advice and consent
regarding the compensation of other executive officers. The Compensation
Committee met twice during fiscal 1998. The members of the Compensation
Committee are Messrs. Murrer and Baxter. See "Report of the Compensation
Committee."
The Company does not have a nominating committee or a committee serving a
similar function. Nominations are made by and through the full Board of
Directors.
The Board of Directors held eight meetings during fiscal 1998. Each director
attended at least 75% of the meetings of the Board of Directors and all
committees of the Board on which he or she served.
Directors' Compensation
Messrs. Beffa-Negrini, Murrer and Baxter each receive a $15,000 annual
retainer and fees of $1,000 for each Board meeting attended and $500 for each
Board committee meeting attended on a day other than the day of the Board
meeting, as well as reimbursement for all reasonable expenses incurred in
attending Board and committee meetings. Mr. Murrer has waived payment of his
director's fees and in lieu thereof the Company has established a grant
program pursuant to which a donee selected by Mr. Murrer can purchase products
having a value equal to the amount of the waived fees.
Messrs. Beffa-Negrini, Murrer and Baxter are also eligible to participate in
the Company's 1997 Plan.
Certain Transactions
The Company currently has leases for a facility in Marlow, New Hampshire and
two facilities in Keene, New Hampshire with Gallup & Hall ("G&H"), a
partnership owned solely by Patricia Gallup and David Hall, the Company's
principal stockholders. The leases for the Keene, New Hampshire facilities
expire in April 2002 and July 2008 and require annual rental payments of
$144,600 (subject to annual adjustment for changes in the consumer price
index). The lease for the Marlow, New Hampshire facility expires in May 2007
and requires annual rental payments of $106,200 (subject to adjustment every
three years for changes in the consumer price index). These leases also
obligate the Company to pay certain real estate taxes and insurance premiums
on the premises. Rent expense under all such leases aggregated $279,200 for
the year ended December 31, 1998.
The Company also leases several other buildings from G&H on a month-to-month
basis. Rent expense under all such leases aggregated $47,500 for the year
ended December 31, 1998.
In November 1997, the Company entered into a fifteen-year lease for a new
114,000 square foot corporate headquarters in Merrimack, New Hampshire with
G&H Post, LLC, an entity owned solely by Patricia Gallup and David Hall. The
Company began occupying the new facility upon completion of construction in
late November 1998, and lease payments began in December 1998. Annual lease
payments under the terms of the lease are $911,400 for the first five years of
the lease, increasing to $1,025,350 for years six through ten and to
$1,139,400 for years 11 through 15. The lease requires the Company to pay its
proportionate share of real estate taxes and common area maintenance charges
as additional rent and also to pay insurance premiums for the leased property.
The Company has the option to renew the lease for two additional terms of five
years.
4
The Company purchased television advertising from an affiliated company
owned solely by Patricia Gallup and David Hall. Amounts paid to such company
totaled $2,460 for the year ended December 31, 1998.
S Corporation Distributions and Related Dividends Payable
The Company made accruals or distributions in lieu of Federal taxes on S
corporation earnings, accounted for as additional compensation expense, to its
stockholders prior to the reorganization of the Company in connection with its
initial public offering in March 1998. Such accruals and distributions
aggregated $2.4 million for the year ended December 31, 1998. Upon the
completion of the initial public offering, the Company made a distribution of
$33,036,620 to its stockholders, representing substantially all of the
previously undistributed S corporation earnings.
Voting Trust
In connection with the Company's initial public offering, Patricia Gallup
and David Hall placed all except 40,000 of the shares of Common Stock that
they beneficially owned immediately prior to the public offering into a Voting
Trust (the "Voting Trust") of which they serve as co-trustees. The terms of
the Voting Trust require that both of them, as co-trustees, must agree as to
the manner of voting the shares of Common Stock of the Company held by the
Voting Trust in order for the shares to be voted. In the event the co-trustees
are deadlocked with respect to the election of directors at a meeting of
stockholders, the Board of Directors may require the co-trustees to execute
and deliver to the Secretary of the Company a proxy representing all shares
issued and outstanding in the name of the Voting Trust and entitled to vote in
the election of directors. Such proxy shall confer upon the proxyholder
authority to attend the meeting for purposes of establishing a quorum and to
vote for the directors nominated by the Board of Directors, provided that such
nominees are incumbent directors elected with the consent of the co-trustees.
Each of Ms. Gallup and Mr. Hall may transfer shares of Common Stock for value
to unaffiliated third parties. Any shares so transferred will no longer be
subject to the Voting Trust and an equal number of the non-transferring co-
trustee's shares will be released from the Voting Trust. Transfers by either
of Ms. Gallup or Mr. Hall in excess of 50,000 shares in any 90-day period, or
that would decrease the shares held by the Voting Trust to less than a
majority of the outstanding shares, will be subject to a right of first
refusal to the other. The Voting Trust will terminate when it holds less than
10% of the outstanding shares of Common Stock of the Company or at the death
of both co-trustees. In addition, in the event of the death or incapacity of
either co-trustee, or when either of Ms. Gallup or Mr. Hall holds less than
25% of the beneficial interest held by the other in the Voting Trust, the
other will become the sole trustee of the Voting Trust with the right to vote
all the shares held by the Voting Trust.
5
Executive Compensation
Summary Compensation Table. The following table sets forth certain
compensation information for the years ended December 31, 1997 and 1998 for
the Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company whose salary and bonus exceeded
$100,000 during 1998 (collectively, the "Named Executive Officers").
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
--------------------------------- ------------
Other Annual Securities All Other
Name and Salary Bonus Compensation Underlying Compensation
Principal Position Year ($) ($)(1) ($)(2)(3) Options (#) ($)
------------------ ---- ------- ------- ------------ ------------ ------------
Patricia Gallup......... 1998 300,000 -- $1,180,448 -- $2,658(4)
Chairman of the Board 1997 240,000 -- 6,065,000 -- 2,658(5)
and Chief Executive
Officer
David Hall.............. 1998 300,000 -- 1,180,448 -- 2,946(4)
Vice Chairman of the 1997 240,000 -- 6,065,000 -- 2,946(5)
Board
Wayne L. Wilson......... 1998 350,000 120,000 -- 270,430 696(4)
President and Chief 1997 280,000 200,000 -- 65,549 696(5)
Operating Officer
Robert F. Wilkins....... 1998 275,000 100,000 -- 204,430 2,514(4)
Senior Vice President 1997 175,000 142,500 -- 78,659 2,514(5)
of Sales and Marketing
R. Wayne Roland(6)...... 1998 175,000 62,500 -- 4,500 3,402(4)
Former Vice President 1997 140,000 120,000 -- 39,329 2,946(5)
of Fulfillment
Operations
- --------
(1) Bonuses indicated as earned in any fiscal year were generally paid in
February of the following fiscal year.
(2) In accordance with the rules of the SEC, perquisites and other personal
benefits have been omitted in those instances where the aggregate amount
of such perquisites and other personal benefits constituted less than the
lesser of $50,000 or 10% of the total amount of annual salary and bonus
for the executive officer for the fiscal year indicated.
(3) Represents amounts accrued or distributed for Company related federal
income tax obligations payable by Ms. Gallup and Mr. Hall.
(4) Includes: (a) the Company's contributions for Ms. Gallup, Messrs. Hall,
Wilkins and Roland under the Company's 401(k) Plan in the amount of $2,250
per person, and (b) the taxable portion of group term life insurance
premiums paid by the Company for Ms. Gallup, Messrs. Hall, Wilson, Wilkins
and Roland in the amounts of $408, $696, $696, $264, and $696,
respectively.
(5) Includes: (a) the Company's contributions for Ms. Gallup, Messrs. Hall,
Wilkins and Roland under the Company's 401(k) Plan in the amount of $2,250
per person, and (b) the taxable portion of group term life insurance
premiums paid by the Company for Ms. Gallup, Messrs. Hall, Wilson, Wilkins
and Roland in the amounts of $408, $696, $696, $264 and $696,
respectively.
(6) Mr. Roland resigned on January 7, 1999.
Employment and Severance Agreements
The Company is a party to employment agreements with each of the Named
Executive Officers. Each employment agreement contains provisions for
establishing the annual base salary and bonus for each such executive officer.
Pursuant to the terms of the employment agreements, the 1999 annual base
salary for each of
6
Ms. Gallup, Messrs. Hall, Wilson and Wilkins has been established at $300,000,
$300,000, $375,000 and $325,000, respectively. In addition, the Named
Executive Officers are eligible to receive an annual bonus based upon the
achievement of individual and Company goals. The employment agreements may be
terminated by the Named Executive Officer or by the Company. Under the terms
of Mr. Wilson's and Mr. Wilkins' employment agreements, if the Company
terminates such executive's employment without cause (as defined therein), the
Company is required to pay to such executive severance payments at the
executive's base salary rate for a period of 12 months in the case of Mr.
Wilson and six months in the case of Mr. Wilkins. Under Mr. Wilson's and
Mr. Wilkins' employment agreements, the executive shall be bound by certain
non-compete obligations for two years after termination of employment.
R. Wayne Roland resigned as the Company's Vice President of Fulfillment
Operations on January 7, 1999. Under an agreement entered into between Mr.
Roland and the Company, Mr. Roland received $175,000, $13,462 for accrued but
unused vacation through the date of his resignation, continued receipt of
insurance, medical and health benefits through December 31, 1999 and
outplacement services for three months. As of January 7, 1999, Mr. Roland had
vested options to purchase 19,665 shares of the Company's Common Stock that he
exercised and sold on January 12, 1999.
Option Grant Table. The following table sets forth certain information
regarding stock options granted during the year ended December 31, 1998 by the
Company to the Named Executive Officers:
Option Grants in Last Year
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term(1)
------------------------------------------------------- ------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in or Base Price Expiration
Name Granted (#) Fiscal Year (%)(2) ($/Sh)(3) Date 5%($) 10%($)
- ---- ----------- ------------------ ------------- ---------- -------------- ---------------
Patricia Gallup......... -- -- -- -- -- --
David Hall.............. -- -- -- -- -- --
Wayne L. Wilson......... 170,430 21.8% $17.50 03/02/08 $ 1,875,694 $ 4,753,377
100,000 12.8 17.50 12/18/08 1,100,566 2,789,049
Robert F. Wilkins....... 104,880 13.4 17.50 03/02/08 1,154,273 2,925,155
100,000 12.8 17.50 12/18/08 1,100,566 2,789,049
R. Wayne Roland......... 4,500 0.6 17.50 03/02/08 49,525 125,507
- --------
(1) Potential realizable value is based on an assumption that the market price
of the stock will appreciate at the stated rate, compounded annually, from
the date of grant until the end of the option term. These values are
calculated based on rules promulgated by the SEC and do not reflect the
Company's estimate or projection of future stock prices. Actual gains, if
any, on stock option exercises will depend on the future performance of
the Common Stock on the date on which the stock options are exercised.
(2) Calculated based on an aggregate of 780,363 options granted under the 1993
Plan and 1997 Plan to employees during the fiscal year ended December 31,
1998.
(3) The exercise price is equal to the closing price of the Company's Common
Stock as reported by the Nasdaq National Market on the date of grant.
7
Option Exercises and Year-End Values. The following table sets forth certain
information regarding the aggregate number of shares of Common Stock acquired
upon stock option exercises by the Named Executive Officers and the value
realized upon such exercises during the year ended December 31, 1998, as well
as the number and value of unexercisable stock options held by the Named
Executive Officers as of December 31, 1998:
Aggregated Option Exercises in Last Fiscal Year and
Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at
Shares Options at Year-End (#) Year-End ($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
Patricia Gallup......... -- -- -- -- -- --
David Hill.............. -- -- -- -- -- --
Wayne L. Wilson......... -- -- 180,260 286,817 2,515,037 310,171
Robert F. Wilkins....... -- -- 101,602 234,375 1,406,057 460,548
R. Wayne Roland......... -- -- 19,665 24,164 234,112 234,662
- --------
(1) Represents the difference between the last reported sales price of the
Company's Common Stock as reported by the Nasdaq National Market on
December 31, 1998 ($17.63), the last trading day of 1998, and the exercise
price of the option, multiplied by the number of shares subject to the
option.
Report of the Compensation Committee
The Compensation Committee of the Company's Board of Directors, comprised of
two outside directors, is responsible for establishing compensation policies
with respect to Ms. Gallup, the Company's Chief Executive Officer. Ms. Gallup,
the Chief Executive Officer, makes such decisions with respect to the other
executive officers with the advice and consent of the Compensation Committee.
This report is submitted by the Compensation Committee and addresses the
Company's compensation policies for fiscal 1998 as they affected Ms. Gallup
and the Company's other executive officers.
The Compensation Committee, as well as Ms. Gallup in determining the
compensation of the other executive officers, seek to achieve three broad
goals in connection with the Company's compensation philosophy and decisions
regarding individual compensation. First, the Company is committed to
providing executive compensation designed to attract, retain and reward
executives who contribute to the long-term success of the Company and are
capable of leading the Company in achieving its business objectives in the
competitive and rapidly changing industry in which the Company operates.
Second, the Company wants to reward executives for the achievement of business
objectives of the Company and/or the individual executive's particular area of
responsibility. By tying compensation in part to achievement, the Company
believes that a performance-oriented environment is created for the Company's
executives. Finally, compensation is intended to provide executives with an
equity interest in the Company so as to link a meaningful portion of the
compensation of the Company's executives with the performance of the Company's
Common Stock.
Each executive's total compensation depends upon the executive's performance
against specific objectives assigned at the beginning of each year. These
objectives include both quantitative factors related to the Company's short-
term financial objectives and qualitative factors such as (a) demonstrated
leadership ability, (b) management development, (c) compliance with Company
policies and (d) anticipation of and response to changing market and economic
conditions, to enhance the Company's ability to operate profitably. Annual
compensation for the Company's executives generally consists of three
elements:
salary--levels are generally set by reviewing compensation for competitive
positions in the market and considers the executive's level of
responsibility, qualifications and experience, as well as the Company's
financial performance and the individual's performance;
8
bonus--generally based on executive's achievements as compared to the
executive's assigned objectives and the Company's performance goals for the
year; and
stock option grants--to provide long-term incentives to promote the
identity of long-term interests between the Company's employees and its
stockholders and to assist in the retention of executives.
In addition, executives are also eligible receive various benefits,
including medical, disability and life insurance plans, and may participat in
the Company's purchase plan and 401(k) qualified savings plan. All of these
benefits are generally available to all employees of the Company.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), generally disallows a tax deduction to public companies for
compensation over $1 million paid to its chief executive officer and its four
other most highly compensated executive officers. However, qualifying
performance-based compensation will not be subject to the deduction limit if
certain requirements are met. The Company generally intends to structure the
performance-based portion of the compensation of its executive officers (which
currently consists of stock option grants) in a manner that complies with
Section 162(m) of the Code so as to mitigate any disallowance of deductions.
Ms. Gallup's Compensation
Ms. Gallup's salary was as specified in her employment agreement with the
Company. Ms. Gallup's salary for 1998 increased from $240,000 to $300,000. She
did not receive a bonus for 1998 due to her receipt from the Company of the S
corporation dividend in connection with the initial public offering. In light
of Ms. Gallup's substantial current stock ownership, the Compensation
Committee determined not to recommend to the Board of Directors any award of
equity based compensation. The Compensation Committee believes that Ms.
Gallup's salary, bonus and equity based compensation has been set at a level
competitive with other companies in the industry.
Compensation Committee
Martin C. Murrer
Peter J. Baxter
Compensation Committee and Interlocks and Insider Participation
The members of the Compensation Committee are Messrs. Murrer and Baxter. No
member of the Compensation Committee was at any time during 1998, or formerly,
an officer or employee of the Company or any subsidiary of the Company. No
executive officer of the Company has served as a director or member of the
Compensation Committee (or other committee serving an equivalent function) of
any other entity, one of whose executive officers served as a director of or
member of the Compensation Committee of the Company. Ms. Gallup, the Company's
Chief Executive Officer, determined the compensation (including salary and
bonus) for all of the executive officers of the Company (other than herself)
during the year ended December 31, 1998. The Compensation Committee determined
the compensation for Ms. Gallup as Chief Executive Officer of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10% of the Company's Common Stock
to file with the SEC initial reports of ownership and reports of changes in
beneficial ownership of Common Stock of the Company. Based solely on its
review of copies of reports filed by individuals required to make filings
("Reporting Persons") pursuant to Section 16(a) of the Exchange Act or written
representations from certain Reporting Persons, the Company believes that all
such reports required to be filed under Section 16(a) of the Exchange Act for
the 1998 fiscal year were timely filed
9
with the exception of the following: a report on Form 3 (Initial Statement of
Beneficial Ownership) was filed late by Thomas Kennedy; a transaction in March
1998 by Patricia Gallup's spouse required to be reported on Form 4 (Statement
of Changes in Beneficial Ownership) was reported in September 1998;
transactions in March 1998 by Mark A. Gavin, R. Wayne Roland and Robert F.
Wilkins, respectively, required to be reported on Form 4 were reported in
September 1998; and a transaction in March 1998 by Patricia Gallup required to
be reported on Form 4 was reported in May 1999.
Stock Performance Graph
The following stock performance graph compares cumulative total stockholder
return on the Company's Common Stock for the period from March 3, 1998, the
date of the Company's initial public offering, through December 31, 1998 with
the cumulative total return for (i) the Russell 2000 Index and (ii) the
Company's Peer Group. This graph assumes the investment of $100 on March 3,
1998 in the Company's Common Stock (at the initial public offering price) the
Russell 2000 Index and the Company's Peer Group and assumes dividends are
reinvested. The Company's Peer Group consists of CDW Computer Centers,
Creative Computers, Inc., Global Direct Corp., Insight Enterprises, Inc.,
Micro Warehouse, and Multiple Zones International, Inc.
[GRAPH APPEARS HERE]
March 3, 1998 December 31, 1998
------------- -----------------
PC Connection, Inc.............................. $100 $100.71
Russell 2000 Index.............................. 100 92.23
Peer Group...................................... 100 165.01
10
APPROVAL OF THE CONTINUATION AND THE AMENDMENT AND
RESTATEMENT OF THE COMPANY'S 1997 STOCK INCENTIVE PLAN
Stock options are the principal vehicles used by the Company for the payment
of long-term compensation, to provide a stock-based incentive to improve the
Company's financial performance and to assist in the recruitment, retention
and motivation of professional, managerial and other personnel. Under the 1997
Plan, the Company is currently authorized to issue a total of 800,000 shares
of Common Stock (subject to adjustment for certain changes in the Company's
capitalization). As of April 1, 1999, there were no shares available for
future grant under the 1997 Plan. Accordingly, on April 30, 1999 the Board of
Directors adopted, subject to stockholder approval, an amendment to the 1997
Plan increasing the number of shares of Common Stock available for issuance
upon exercise of options granted under the 1997 Plan by 800,000 shares
(subject to adjustment for certain changes in the Company's capitalization).
Section 162(m) of the Code generally disallows a tax deduction to public
companies for compensation over $1 million paid to the Company's Chief
Executive Officer and four other most highly compensated executive officers.
Qualifying performance-based compensation is not subject to the deduction
limit if certain requirements are satisfied. In particular, income recognized
upon the exercise of a stock option is not subject to the deduction limit if
the option was issued under a plan approved by stockholders that provides a
limit to the number of shares that may be issued under the plan to any
individual. In order for options and restricted stock awarded under the 1997
Plan to comply with Section 162(m) after the Annual Meeting, the continuance
of the 1997 Plan must be approved by the stockholders. If the stockholders do
not vote to continue the 1997 Plan, the Company will not grant any further
options or make any further awards of restricted stock under the 1997 Plan.
The Board of Directors recommends a vote "FOR" approval of the continuation
and the amendment and restatement of the 1997 Plan.
Summary of the 1997 Plan
The following is a brief summary of the material provisions of the 1997
Plan, as amended and restated.
Administration
The 1997 Plan is administered by the Board of Directors. The Board of
Directors has the authority to, among other things, select the recipients of
Awards (as defined below) and determine (i) the number of shares of Common
Stock covered by options and the dates upon which such options become
exercisable, (ii) the exercise price of options, (iii) the duration of options
and (iv) the number of shares of Common Stock subject to any restricted stock
or other stock-based Awards and the terms and conditions of such Awards,
including conditions for repurchase, issue price and repurchase price. The
Board of Directors has delegated its authority to make awards under the 1997
Plan to employees of the Company who are not executive officers to the
Company's Chief Executive Officer, Patricia Gallup.
Description of Awards
The 1997 Plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Code, nonstatutory stock options, restricted
stock and other stock-based awards (collectively, "Awards").
Incentive Stock Options and Nonstatutory Stock Options. Optionees receive
the right to purchase a specified number of shares of Common Stock at a
specified option price and subject to such other terms and conditions as are
specified in connection with the option grant. Options may be granted at an
exercise price which may be less than, equal to or greater than the fair
market value of the Common Stock on the date of grant. Under present law,
however, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Code may not be
granted at an exercise price less than the fair market
11
value of the Common Stock on the date of grant (or less than 110% of the fair
market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power of the Company. The 1997 Plan
permits the Board of Directors to determine the manner of payment of the
exercise price of options, including through payment by cash, check or in
connection with a "cashless exercise" through a broker, by surrender to the
Company of shares of Common Stock, by delivery to the Company of a promissory
note, or by any other lawful means.
Restricted Stock Awards. Restricted stock awards entitle recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares from the recipient in the event that the
conditions specified in the applicable Award are not satisfied prior to the
end of the applicable restriction period established for such Award.
Other Stock-Based Awards. Under the 1997 Plan, the Board has the right to
grant other Awards having such terms and conditions as the Board may
determine, including the grant of long-term performance awards based on
performance objectives payable in cash or stock, the issuance of stock ("Stock
Grants") and the grant of stock appreciation rights.
General Provisions Applicable to Awards
The 1997 Plan authorizes the Board to provide for transferable Awards,
provided, however, that options intended to qualify as incentive stock options
may not be transferable other than by will or by the laws of descent and
distribution. In addition, if authorized by the Board, participants may
satisfy withholding tax requirements by delivery of shares of Common Stock,
including shares retained from the Award creating the tax obligation.
Eligibility to Receive Awards
All of the Company's employees, officers, directors, consultants and
advisors (and any individuals who have accepted an offer for employment) are
eligible to participate in the 1997 Plan. Under present law, however,
incentive stock options may only be granted to employees. The maximum number
of shares of Common Stock with respect to which an Award may be granted to any
Participant under the 1997 Plan shall be 250,000 per calendar year.
As of December 31, 1998, the Company had 1,046 employees. On April 16, 1999,
the closing sale price of the Company's Common Stock on the Nasdaq National
Market was $15.875.
The granting of Awards under the 1997 Plan is discretionary, and the Company
cannot now determine the number or type of Awards to be granted in the future
to any particular person or group.
Adjustments
The Board is required to make appropriate adjustments in connection with the
1997 Plan and any outstanding Awards to reflect stock dividends, stock splits
and certain other events.
Change in Control
The Board may also provide in any agreement representing an Award under the
1997 Plan that the vesting provisions applicable to the Award shall accelerate
or that the other restrictions applicable to the Award shall lapse upon a
Change in Control (as defined in the 1997 Plan) of the Company.
Amendment or Termination
The Board may at any time amend or terminate the 1997 Plan.
12
Federal Income Tax Consequences
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to Awards granted under
the 1997 Plan and with respect to the sale of Common Stock acquired under the
1997 Plan.
Tax Consequences to Participant
Incentive Stock Options. In general, a participant will not recognize
taxable income upon the grant or exercise of an incentive stock option.
Instead, a participant will recognize taxable income with respect to an
incentive stock option only upon the sale of Common Stock acquired through the
exercise of the option ("ISO Stock"). The exercise of an incentive stock
option, however, may subject the participant to the alternative minimum tax.
Generally, the tax consequences of selling ISO Stock will vary with the
length of time that the participant has owned the ISO Stock at the time it is
sold. If the participant sells ISO Stock after having owned it for at least
two years from the date the option was granted (the "Grant Date") and one year
from the date the option was exercised (the "Exercise Date"), then the
participant will recognize long-term capital gain in an amount equal to the
excess of the sale price of the ISO Stock over the exercise price.
If the participant sells ISO Stock for more than the exercise price prior to
having owned it for at least two years from the Grant Date and one year from
the Exercise Date (a "Disqualifying Disposition"), then all or a portion of
the gain recognized by the participant will be ordinary compensation income
and the remaining gain, if any, will be a capital gain. This capital gain will
be a long-term capital gain if the participant has held the ISO Stock for more
than one year prior to the date of sale.
If a participant sells ISO Stock for less than the exercise price, then the
participant will recognize capital loss equal to the excess of the exercise
price over the sale price of the ISO Stock. This capital loss will be a long-
term capital loss if the participant has held the ISO Stock for more than one
year prior to the date of sale.
Nonstatutory Stock Options. As in the case of an incentive stock option, a
participant will not recognize taxable income upon the grant of a nonstatutory
stock option. Unlike the case of an incentive stock option, however, a
participant who exercises a nonstatutory stock option generally will recognize
ordinary compensation income in an amount equal to the excess of the fair
market value of the Common Stock acquired through the exercise of the option
("NSO Stock") on the Exercise Date over the exercise price.
With respect to any NSO Stock, a participant will have a tax basis equal to
the exercise price plus any income recognized upon the exercise of the option.
Upon selling NSO Stock, a participant generally will recognize capital gain or
loss in an amount equal to the difference between the sale price of the NSO
Stock and the participant's tax basis in the NSO Stock. This capital gain or
loss will be a long-term capital gain or loss if the participant has held the
NSO Stock for more than one year prior to the date of the sale.
Restricted Stock Awards. A participant will not recognize taxable income
upon the grant of a Restricted stock award, unless the participant makes an
election under Section 83(b) of the Code (a "Section 83(b) Election"). If the
participant makes a Section 83(b) Election within 30 days of the date of the
grant, then the participant will recognize ordinary compensation income, for
the year in which the Award is granted, in an amount equal to the difference
between the fair market value of the Common Stock at the time the Award is
granted and the purchase price paid for the Common Stock. If a Section 83(b)
Election is not made, then the participant will recognize ordinary
compensation income, at the time that the forfeiture provisions or
restrictions on transfer lapse, in an amount equal to the difference between
the fair market value of the Common Stock at the time of such lapse and the
original purchase price paid for the Common Stock. The participant will have a
tax basis in the Common Stock acquired equal to the sum of the price paid and
the amount of ordinary compensation income recognized.
13
Upon the disposition of the Common Stock acquired pursuant to a Restricted
Stock Award, the participant will recognize a capital gain or loss in an
amount equal to the difference between the sale price of the Common Stock and
the participant's tax basis in the Common Stock. The gain or loss will be a
long-term capital gain or loss if the shares are held for more than one year.
For this purpose, the holding period shall begin just after the date on which
the forfeiture provisions or restrictions lapse if a Section 83(b) Election is
not made, or just after the Award is granted if a Section 83(b) Election is
made.
Other Stock-Based Awards. The tax consequences associated with any other
stock-based Award granted under the 1997 Plan will vary depending on the
specific terms of the Award. Among the relevant factors are whether or not the
Award has a readily ascertainable fair market value, whether or not the Award
is subject to forfeiture provisions or restrictions on transfer, the nature of
the property to be received by the participant under the Award, and the
participant's holding period and tax basis for the Award or underlying Common
Stock.
Tax Consequences to the Company
The grant of an Award under the 1997 Plan will have no tax consequences to
the Company. Moreover, in general, neither the exercise of an incentive stock
option nor the sale of any Common Stock acquired under the 1997 Plan will have
any tax consequences to the Company. The Company generally will be entitled to
a business-expense deduction, however, with respect to any ordinary
compensation income recognized by a participant under the 1997 Plan, including
as a result of the exercise of a nonstatutory stock option, a Disqualifying
Disposition, or a Section 83(b) Election. Any such deduction will be subject
to the limitations of Section 162(m) of the Code.
RATIFICATION OF THE SELECTION OF INDEPENDENT AUDITORS
The Board of Directors proposes that the firm of Deloitte & Touche LLP,
independent auditors, be appointed to serve as the Company's independent
auditors for the fiscal year ending December 31, 1999. The ratification of
this selection is not required under the laws of the State of Delaware, where
the Company is incorporated, but the results of this vote will be considered
by the Board of Directors in selecting the Company's independent auditors.
Deloitte & Touche LLP has served as the Company's independent auditors since
1984. It is expected that a member of Deloitte & Touche LLP will be present at
the meeting with the opportunity to make a statement if so desired and will be
available to respond to appropriate questions from stockholders.
The Board of Directors recommends a vote "FOR" the ratification of the
selection of Deloitte & Touche LLP as the Company's independent auditors.
OTHER INFORMATION
Matters to be Considered at the Annual Meeting
The Board of Directors does not know of any other matters which may come
before the Annual Meeting. However, if any other matters are properly
presented to the Annual Meeting, it is the intention of persons named in the
accompanying proxy to vote, or otherwise act, in accordance with their
judgment on such matters.
Solicitation of Proxies
All costs of solicitations of proxies will be borne by the Company. In
addition to solicitations by mail, the Company's directors, officers and
regular employees, without additional remuneration, may solicit proxies by
telephone, telegraph and personal interviews. The Company will also request
brokers, custodians and fiduciaries to forward proxy soliciting material to
the owners of stock held in their names, and the Company will reimburse them
for their out-of-pocket expenses in this connection.
14
Deadline for Submission of Stockholder Proposals
Proposals of stockholders intended to be presented at the 2000 Annual
Meeting of Stockholders must be received by the Company at its principal
office in Merrimack, New Hampshire not later than December 29, 1999 for
inclusion in the proxy statement for that meeting.
If a stockholder of the Company who holds less than 40% of the shares of
capital stock of the Company issued and outstanding and entitled to vote
wishes to present a proposal before the 2000 Annual Meeting but has not
complied with the requirements for inclusion of such proposal in the Company's
proxy materials pursuant to Rule 14a-8 under the Exchange Act, such
stockholder must give notice of such proposal to the Secretary of the Company
at the principal offices of the Company. The required notice must be made in
writing and delivered or mailed and received at the principal executive
offices of the Company not less than 60 days nor more than 90 days prior to
the 2000 Annual Meeting. Notwithstanding the foregoing, if the Company
provides less than 70 days notice or prior public disclosure of the date of
the meeting to the stockholders, notice by the stockholders must be received
by the Secretary not later than the close of business on the tenth day
following the date on which the notice of the meeting was mailed or such
public disclosure was made, whichever occurs first. The advance notice
provisions of the Company's bylaws supercede the notice requirements contained
in the recent amendments to Rule 14a-8 under the Exchange Act.
By Order of the Board of Directors,
Steven H. Markiewicz
May 6, 1999
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL
GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION WILL BE
APPRECIATED.
15
APPENDIX A
----------
PC CONNECTION, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
Annual Meeting of Stockholders - May 26, 1999
Those signing on the reverse side, revoking any prior proxies, hereby
appoint(s) Patricia Gallup or David Hall, or each of them with full power
of substitution, as proxies for those signing on the reverse side to act
and vote at the 1999 Annual Meeting of Stockholders of PC Connection, Inc.
and at any adjournments thereof as indicated upon all matters referred to
on the reverse side and described in the Proxy Statement for the Annual
Meeting, and, in their discretion, upon any other matters which may
properly come before the Annual Meeting.
This proxy when properly executed will be voted in the manner directed by the
undersigned stockholder(s). If no other indication is made, the proxies shall
vote "FOR" proposal numbers 1, 2, 3 and 4.
PLEASE VOTE, DATE, AND SIGN ON OTHER SIDE
AND RETURN PROMPTLY IN ENCLOSED ENVELOPE
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ------------------------------------ -------------------------------------
- ------------------------------------ -------------------------------------
- ------------------------------------ -------------------------------------
SEE REVERSE SIDE
[X] Please mark
votes as in
this example.
A vote FOR the director nominees and FOR proposal numbers 2, 3 and 4 is
recommended by the Board of Directors.
1. Election of Directors Nominees: FOR AGAINST ABSTAIN
Patricia Gallup 2. Approval of the continuation and [ ] [ ] [ ]
David Hall the amendment and restatement
David B. Beffa-Negrini of the Company's 1997 Stock Incentive
Martin C. Murrer Plan.
Peter J. Baxter
FOR all
nominees
(except as WITHHELD 3. Ratification of the selection [ ] [ ] [ ]
indicated to from all of Deloitte & Touche LLP
the contrary) nominees as the company's independent
[ ] [ ] auditors.
4. To transact such other businesses as [ ] [ ] [ ]
may properly come before the
meeting.
INSTRUCTIONS: To withhold authority to vote for MARK HERE FOR ADDRESS CHANGE OR
individual nominee(s) strike a line through each COMMENTS AND NOTE ON REVERSE SIDE [ ]
such nominee's name. Your shares will be voted
for the remaining nominee(s). MARK HERE IF YOU PLAN TO
ATTEND THE ANNUAL MEETING [ ]
Please sign this proxy exactly as your name appears hereon. Joint owners
should each sign personally. Trustees and other fiduciaries should indicate
the capacity in which they sign. If a corporation or partnership, this
signature should be that of an authorized officer who should state his or her
title.
Signature: Date: Signature: Date:
------------------------------- --------------------- ------------------------------- ---------------
APPENDIX B
----------
PC CONNECTION, INC.
AMENDED AND RESTATED 1997 STOCK INCENTIVE PLAN
----------------------------------------------
1. Purpose
-------
The purpose of this 1997 Stock Incentive Plan (the "Plan") of PC
Connection, Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance-based incentives and thereby better
aligning the interests of such persons with those of the Company's stockholders.
Except where the context otherwise requires, the term "Company" shall include
any present or future subsidiary corporations of PC Connection, Inc. as defined
in Section 424(f) of the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder (the "Code").
2. Eligibility
-----------
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other stock-
based awards (each, an "Award") under the Plan. Any person who has been granted
an Award under the Plan shall be deemed a "Participant".
3. Administration, Delegation
--------------------------
(a) Administration by Board of Directors. The Plan will be administered by
------------------------------------
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
(b) Delegation to Executive Officers. To the extent permitted by
--------------------------------
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board
may determine, provided that the Board shall fix the maximum number of shares
subject to Awards and the maximum number of shares for any one Participant to be
made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
-------------------------
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). If and when the
common stock, $0.01 par value per share, of the Company (the "Common Stock") is
registered under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Board shall appoint one such Committee of not less than two members,
each member of which shall be an "outside director" within the meaning of
Section 162(m) of the Code and a "non-employee director" as defined in Rule 16b-
3 promulgated under the Exchange Act. All references in the Plan to the "Board"
shall mean the Board or a Committee of the Board or the executive officer
referred to in Section 3(b) to the extent that the Board's powers or authority
under the Plan have been delegated to such Committee or executive officer.
4. Stock Available for Awards
--------------------------
(a) Number of Shares. Subject to adjustment under Section 4(c), Awards may
----------------
be made under the Plan for up to 1,600,000 shares of Common Stock. If any Award
expires or is terminated, surrendered or canceled without having been fully
exercised or is forfeited in whole or in part or results in any Common Stock not
being issued, the unused Common Stock covered by such Award shall again be
available for the grant of Awards under the Plan, subject, however, in the case
of Incentive Stock Options (as hereinafter defined), to any limitation required
under the Code. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 4(c), for
---------------------
Awards granted after the Common Stock is registered under the Exchange Act, the
maximum number of shares with respect to which an Award may be granted to any
Participant under the Plan shall be 250,000 per calendar year. The per-
participant limit described in this Section 4(b) shall be construed and applied
consistently with Section 162(m) of the Code.
(c) Adjustment to Common Stock. In the event of any stock split, stock
--------------------------
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under this Plan, (ii) the number and class of security and exercise price per
share subject to each outstanding Option, (iii) the repurchase price per
security subject to each outstanding Restricted Stock Award, and (iv) the terms
of each other outstanding stock-based Award shall
2
be appropriately adjusted by the Company (or substituted Awards may be made, if
applicable) to the extent the Board shall determine, in good faith, that such an
adjustment (or substitution) is necessary and appropriate. If this Section 4(c)
applies and Section 8(e)(1) also applies to any event, Section 8(e)(1) shall be
applicable to such event, and this Section 4(c) shall not be applicable.
5. Stock Options
-------------
(a) General. The Board may grant options to purchase Common Stock (each,
-------
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive
Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
-----------------------
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
--------------
time each Option is granted and specify it in the applicable option agreement.
(d) Duration of Options. Each Option shall be exercisable at such times
-------------------
and subject to such terms and conditions as the Board may specify in the
applicable option agreement. No Option will be granted for a term in excess of
10 years.
(e) Exercise of Option. Options may be exercised only by delivery to the
------------------
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
----------------------
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may otherwise provide in an Option Agreement,
delivery of an irrevocable and unconditional undertaking by a creditworthy
broker to deliver promptly to the Company sufficient funds to pay the
3
exercise price, or delivery by the Participant to the Company of a copy of
irrevocable and unconditional instructions to a creditworthy broker to deliver
promptly to the Company cash or a check sufficient to pay the exercise price;
(3) to the extent permitted by the Board and explicitly provided in an
Option Agreement (i) by delivery of shares of Common Stock owned by the
Participant valued at their fair market value as determined by the Board in good
faith ("Fair Market Value"), which Common Stock was owned by the Participant at
least six months prior to such delivery, (ii) by delivery of a promissory note
of the Participant to the Company on terms determined by the Board, or (iii) by
payment of such other lawful consideration as the Board may determine; or
(4) any combination of the above permitted forms of payment.
6. Restricted Stock
----------------
(a) Grants. The Board may grant Awards entitling recipients to acquire
------
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and
--------------------
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. Other Stock-Based Awards
------------------------
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.
4
8. General Provisions Applicable to Awards
---------------------------------------
(a) Transferability of Awards. Except as the Board may otherwise determine
-------------------------
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
(b) Documentation. Each Award under the Plan shall be evidenced by a
-------------
written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each type
----------------
of Award may be made alone or in addition or in relation to any other type of
Award. The terms of each type of Award need not be identical, and the Board
need not treat Participants uniformly.
(d) Termination of Status. The Board shall determine the effect on an
---------------------
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) Acquisition Events
------------------
(1) Consequences of Acquisition Events. Upon the occurrence of an
-----------------------------------
Acquisition Event (as defined below), or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall take any one or
more of the following actions with respect to then outstanding Awards: (i)
provide that outstanding Options shall be assumed, or equivalent Options shall
be substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), provided that any such Options substituted for Incentive Stock Options
shall satisfy, in the determination of the Board, the requirements of Section
424(a) of the Code; (ii) upon written notice to the Participants, provide that
all then unexercised Options will become exercisable in full as of a specified
time (the "Acceleration Time") prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Participants between the Acceleration Time and the
consummation of such Acquisition Event; (iii) in the event of an Acquisition
Event under the terms of which holders of Common Stock will receive upon
consummation thereof a cash payment for each share of Common Stock surrendered
pursuant to such Acquisition Event (the "Acquisition Price"), provide
5
that all outstanding Options shall terminate upon consummation of such
Acquisition Event and each Participant shall receive, in exchange therefor, a
cash payment equal to the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to such outstanding
Options (whether or not then exercisable), exceeds (B) the aggregate exercise
price of such Options; (iv) provide that all Restricted Stock Awards then
outstanding shall become free of all restrictions prior to the consummation of
the Acquisition Event; and (v) provide that any other stock-based Awards
outstanding (A) shall become exercisable, realizable or vested in full, or shall
be free of all conditions or restrictions, as applicable to each such Award,
prior to the consummation of the Acquisition Event, or (B), if applicable, shall
be assumed, or equivalent Awards shall be substituted, by the acquiring or
succeeding corporation (or an affiliate thereof).
An "Acquisition Event" shall mean: (a) any merger or consolidation which
results in the voting securities of the Company outstanding immediately prior
thereto representing immediately thereafter (either by remaining outstanding or
by being converted into voting securities of the surviving or acquiring entity)
less than 50% of the combined voting power of the voting securities of the
Company or such surviving or acquiring entity outstanding immediately after such
merger or consolidation; (b) any sale of all or substantially all of the assets
of the Company; or (c) the complete liquidation of the Company.
(2) Assumption of Options Upon Certain Events. The Board may grant
------------------------------------------
Awards under the Plan in substitution for stock and stock-based awards held by
employees of another corporation who become employees of the Company as a result
of a merger or consolidation of the employing corporation with the Company or
the acquisition by the Company of property or stock of the employing
corporation. The substitute Awards shall be granted on such terms and conditions
as the Board considers appropriate in the circumstances.
(f) Withholding. Each Participant shall pay to the Company, or make
-----------
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. The Board may allow Participants to
satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to a
Participant.
(g) Amendment of Award. The Board may amend, modify or terminate any
------------------
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board
6
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
(h) Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(i) Acceleration. The Board may at any time provide that any Options shall
------------
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of all restrictions or that any other stock-based Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
9. Miscellaneous
-------------
(a) No Right To Employment or Other Status. No person shall have any claim
--------------------------------------
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
------------------------
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
(c) Effective Date and Term of Plan. The Plan shall become effective on
-------------------------------
the date on which it is adopted by the Board, but no Award granted to a
Participant designated as subject to Section 162(m) by the Board shall become
exercisable, vested or realizable, as applicable to such Award, unless and until
the Plan has been approved by the Company's stockholders. No Awards shall be
granted under the Plan after the completion of ten years from the earlier of (i)
the date on which the Plan was adopted by the Board or (ii) the date the Plan
was approved by the Company's stockholders, but Awards previously granted may
extend beyond that date.
7
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
-----------------
or any portion thereof at any time, provided that no Award granted to a
Participant designated as subject to Section 162(m) by the Board after the date
of such amendment shall become exercisable, realizable or vested, as applicable
to such Award (to the extent that such amendment to the Plan was required to
grant such Award to a particular Participant), unless and until such amendment
shall have been approved by the Company's stockholders.
(e) Stockholder Approval. For purposes of this Plan, stockholder approval
--------------------
shall mean approval by a vote of the stockholders in accordance with the
requirements of Section 162(m) of the Code.
(f) Governing Law. The provisions of the Plan and all Awards made
-------------
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
8
HALE AND DORR LLP INCLUDES PROFESSIONAL CORPORATIONS
*BROBECK HALE AND DORR INTERNATIONAL (AN INDEPENDENT JOINT VENTURE LAW FIRM)
Counsellors at Law
60 State Street, Boston, Massachusetts 02109
617-526-6000 . fax 617-526-5000
Christina Nicolosi
617-526-6284
christina.nicolosi@haledorr.com
April 30, 1999
VIA ELECTRONIC TRANSMISSION
- ---------------------------
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: PC Connection, Inc.
File No. 0-23827
Definitive Proxy Materials
--------------------------
Ladies and Gentlemen:
Submitted herewith for filing on behalf of PC Connection, Inc., a Delaware
corporation (the "Company"), pursuant to Rule 14a-6(b) under the Securities
Exchange Act of 1934, as amended (the "Act"), and Regulation S-T, are definitive
copies of the Notice of Meeting, Proxy Statement and form of proxy relating to
the Company's 1999 Annual Meeting of Stockholders to be held on May 26, 1999
(the "Annual Meeting"). The Company expects to begin mailing such materials to
its stockholders on or about April 30, 1999.
In accordance with Rule 304(d) of Regulation S-T, the electronic filing
submitted herewith contains a description in tabular form of the stock
performance graph included in the Proxy Statement.
In accordance with Instruction 3 of Item 10 of Schedule 14A, one copy of
the Company's proposed Amended and Restated 1997 Stock Incentive Plan (the "1997
Plan") is being submitted herewith as an appendix to the Proxy Statement.
Subject to stockholder approval of the 1997 Plan, the Company plans to file as
soon as practicable following the Annual Meeting a Registration Statement on
Form S-8 covering the additional 800,000 shares of Common Stock issuable under
the 1997 Plan.
Securities and Exchange Commission
April 30, 1999
Page 2
In accordance with the requirements of Rule 14a-3(c) under the Act, seven
paper copies of the Company's Annual Report to Stockholders for the year ended
December 31, 1998, which is also scheduled to be mailed to stockholders, along
with the enclosed proxy materials, beginning on or about April 30, 1999, will be
mailed to the Securities and Exchange Commission for filing under separate
cover.
Please feel free to contact me if you have any questions regarding this
filing.
Very truly yours,
/s/ Christina Nicolosi
Christina Nicolosi
Enclosures
cc: Mr. Mark Gavin
Jay E. Bothwick, Esq.
