SEC Filing | PC Connection, Inc

View:

================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 November 11, 2002 was 24,584,548. ================================================================================

PC CONNECTION, INC. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS PART I FINANCIAL INFORMATION Page --------------------- ---- Item 1 Financial Statements: Independent Accountants' Report ...................................................... 1 Condensed Consolidated Balance Sheets - September 30, 2002 and December 31, 2001 ............................................................. 2 Condensed Consolidated Statements of Income - Three months ended September 30, 2002 and 2001; Nine months ended September 30, 2002 and 2001 ..................................... 3 Condensed Consolidated Statement of Changes in Stockholders' Equity - Nine months ended September 30, 2002 ................................................... 4 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2002 and 2001 ................................................. 5 Notes to Condensed Consolidated Financial Statements ................................. 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................... 13 Item 3 Quantitative and Qualitative Disclosures About Market Risk ........................... 25 Item 4 Controls and Procedures .............................................................. 26 PART II OTHER INFORMATION ----------------- Item 1 Legal Proceedings .................................................................... 27 Item 2 Changes in Securities and Use of Proceeds ............................................ 27 Item 3 Defaults Upon Senior Securities ...................................................... 27 Item 4 Submission of Matters to a Vote of Security Holders .................................. 27 Item 5 Other Information .................................................................... 27 Item 6 Exhibits and Reports on Form 8-K ..................................................... 27 SIGNATURES ........................................................................... 28 ---------- CERTIFICATIONS ....................................................................... 29 --------------

INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of PC Connection, Inc. Merrimack, New Hampshire We have reviewed the accompanying condensed consolidated balance sheet of PC Connection, Inc. and subsidiaries (the "Company") as of September 30, 2002, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2002 and 2001 and the condensed consolidated statement of changes in stockholders' equity for the nine-month period ended September 30, 2002, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2002 and 2001. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of PC Connection, Inc. and subsidiaries as of December 31, 2001, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2002 (March 25, 2002 as to Note 15 and October 11, 2002 as to Note 16), we expressed an unqualified opinion with an explanatory paragraph relating to the restatement on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Boston, Massachusetts October 24, 2002 -1-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS (amounts in thousands) - --------------------------------------------------------------------------------------------------------------- September 30, December 31, - --------------------------------------------------------------------------------------------------------------- 2002 2001 - --------------------------------------------------------------------------------------------------------------- (unaudited) ASSETS Current Assets: Cash and cash equivalents $ 13,862 $ 35,605 Accounts receivable, net 142,628 107,163 Inventories-merchandise 52,774 57,456 Deferred income taxes 3,203 2,559 Income taxes receivable 3,037 1,312 Prepaid expenses and other current assets 2,483 3,013 ----------- ----------- Total current assets 217,987 207,108 Property and equipment, net 27,464 27,472 Goodwill, net and other intangibles, net 26,738 8,807 Restricted cash 10,000 - Other assets 381 258 ----------- ----------- Total assets $ 282,570 $ 243,645 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of capital lease obligation to affiliate $ 185 $ 171 Current maturities of long-term debt - 1,000 Accounts payable 111,146 75,399 Accrued expenses and other liabilities 14,139 10,096 ----------- ----------- Total current liabilities 125,470 86,666 Capital lease obligation to affiliate, less current maturities 6,481 6,621 Deferred income taxes 3,643 3,523 Other liabilities 16 73 ----------- ----------- Total liabilities 135,610 96,883 ----------- ----------- Stockholders' Equity: Common stock 249 247 Additional paid-in capital 74,957 74,393 Retained earnings 74,042 73,659 Treasury stock at cost (2,288) (1,537) ----------- ----------- Total stockholders' equity 146,960 146,762 ----------- ----------- Total liabilities and stockholders' equity $ 282,570 $ 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 INCOME (Unaudited) (amounts in thousands, except per share data) - ------------------------------------------------------------------------------------------------------------------------------ Three Months Nine Months Ended Ended September 30, September 30, - ------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------ Net sales $ 341,039 $ 312,885 $ 869,347 $ 912,581 Cost of sales 303,869 279,352 775,903 810,873 ----------- ----------- ----------- ----------- Gross profit 37,170 33,533 93,444 101,708 Selling, general and administrative expenses 32,625 29,117 90,712 90,210 Restructuring costs and other special charges 718 1,200 1,636 2,051 ----------- ----------- ----------- ----------- Income from operations 3,827 3,216 1,096 9,447 Interest expense (297) (264) (835) (918) Other, net 94 357 421 1,041 Income tax provision (1,418) (1,257) (299) (3,636) ----------- ----------- ----------- ----------- Net income $ 2,206 $ 2,052 $ 383 $ 5,934 =========== =========== =========== =========== Weighted average common shares outstanding: Basic 24,533 24,506 24,546 24,449 =========== =========== =========== =========== Diluted 24,789 24,921 24,848 24,952 =========== =========== =========== =========== Earnings per common share: Basic $ .09 $ .08 $ .02 $ .24 =========== =========== =========== =========== Diluted $ .09 $ .08 $ .02 $ .24 =========== =========== =========== =========== 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 Nine months Ended September 30, 2002 (Unaudited) (amounts in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock Treasury Shares ------------ Additional Retained --------------- Shares Amount Paid In Capital Earnings Shares Amount Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2001 24,748 $ 247 $ 74,393 $ 73,659 (205) $ (1,537) $ 146,762 Exercise of stock options, including income tax benefits 78 1 252 - - - 253 Issuance of stock under employee stock purchase plan 89 1 312 - - - 313 Repurchase of common stock for treasury - - - - (156) (751) (751) Net income - - - 383 - - 383 ------- ------- --------- -------- ------ -------- --------- Balance - September 30, 2002 24,915 $ 249 $ 74,957 $ 74,042 (361) $ (2,288) $ 146,960 ======= ======= ========= ======== ====== ======== ========= See accompanying notes to condensed consolidated financial statements. -4-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (amounts in thousands) - ---------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, - ---------------------------------------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 383 $ 5,934 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,997 5,763 Deferred income taxes (524) 42 Provision for doubtful accounts 5,838 8,590 Loss on disposal of fixed assets - 9 Changes in assets and liabilities: Accounts receivable (12,392) 14,829 Inventories 5,000 18,082 Prepaid expenses and other current assets (865) 5,633 Other non-current assets (95) 191 Income tax benefits from exercise of stock options 118 156 Accounts payable 12,845 (5,692) Accrued expenses and other liabilities 378 (1,513) ---------- ---------- Net cash provided by operating activities 16,683 52,024 ---------- ---------- Cash Flows from Investing Activities: Purchases of property and equipment (4,428) (4,860) Proceeds from sale of property and equipment 16 16 Payments for acquisitions, net of cash acquired (22,585) - Cash escrow funded for acquisition (10,000) - ---------- ---------- Net cash used for investing activities (36,997) (4,844) ---------- ---------- Cash Flows from Financing Activities: Proceeds from short-term borrowings 19,568 67,952 Repayment of short-term borrowings (19,568) (67,952) Repayment of notes payable (1,000) (1,000) Repayment of capital lease obligation to affiliate (126) (113) Exercise of stock options 135 615 Issuance of stock under employee stock purchase plan 313 728 Purchase of treasury shares (751) (1,497) ---------- ---------- Net cash used for financing activities (1,429) (1,267) ---------- ---------- (Decrease)/increase in cash and cash equivalents (21,743) 45,913 Cash and cash equivalents, beginning of period 35,605 7,363 ---------- ---------- Cash and cash equivalents, end of period $ 13,862 $ 53,276 ========== ========== See accompanying notes to condensed consolidated financial statements. -5-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- Note 1-Basis of Presentation - -------------------------------------------------------------------------------- The accompanying condensed consolidated financial statements of PC Connection, Inc. and Subsidiaries ("PCC") have been prepared in accordance with accounting principles generally accepted in the United States of America. Such principles were applied on a basis consistent with those of the financial statements contained in our Annual Report on Form 10-K/A for the year ended December 31, 2001 filed with the Securities and Exchange Commission ("SEC"). The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements contained in our Annual Report on Form 10-K/A. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation. The operating results for the three and nine months ended September 30, 2002 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2002. In June 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." The principles set forth in this standard were applied to our acquisition of MoreDirect described in Note 7 to the condensed consolidated financial statements. Previous business combinations had been accounted for under Accounting Principles Board Opinion No. 16. There was no effect on the financial statements when the standard was adopted. We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. SFAS No. 142 required, among other things, the discontinuance of the amortization of goodwill and certain other identified intangibles. It also required a January 1, 2002 reassessment of the recoverability of the goodwill that was carried on our financial statements. 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 completed the initial impairment review required by SFAS No. 142 in June 2002 and have determined that our goodwill and intangible assets were not impaired. We intend to perform our annual impairment tests relative to goodwill on January 1 of each year. We have ceased amortization of goodwill in 2002. The following is a reconciliation of reported net income to adjusted net income for the three and nine months ended September 30, 2002 and 2001, taking into account the cessation of goodwill amortization: ------------------------------------------------------------------------------------------------------------------------- Three Months Nine Months Ended Ended ------------------------------------------------------------------------------------------------------------------------- September 30, (amounts in thousands, except per share data) 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------------- Reported net income $ 2,206 $ 2,052 $ 383 $ 5,934 Add back goodwill amortization (net of taxes) - 109 - 327 -------- ------- --------- ------- Adjusted net income $ 2,206 $ 2,161 $ 383 $ 6,261 ======== ======= ========= ======= Diluted earnings per share: Reported net income $ .09 $ .08 $ .02 $ .24 Add back goodwill amortization (net of taxes) - .01 - .01 -------- ------- --------- -------- Adjusted net income $ .09 $ .09 $ .02 $ .25 ======== ======= ========= ======== We also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," on January 1, 2002. SFAS No. 144, among other things, modifies and updates the methodology for recognizing impairment in long-lived assets. The adoption of this standard did not have a significant impact on either the balance sheet or the statement of operations. -6-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED (Unaudited) - -------------------------------------------------------------------------------- Note 1-Basis of Presentation - Cont'd. - -------------------------------------------------------------------------------- Intangible assets subject to amortization, consisting of customer lists were $2,644,000 and $0 at September 30, 2002 and December 31, 2001 (net of accumulated amortization of $176,000 and $0, respectively). Intangible assets not subject to amortization are as follows: (amounts in thousands) ---------------------------------------- September 30, 2002 December 31, 2001 ---------------------------------------- Goodwill ............... $22,905 $8,807(1) Trademarks ............. $ 1,190 $ 0 (1) Amortization of goodwill ceased with the adoption of SFAS No. 142 on January 1, 2002. For the three and nine months ended September 30, 2002, the Company recorded amortization expense of $88,000 and $176,000, respectively. For the three and nine months ended September 30, 2001, the Company recorded amortization expense of $189,000 and $553,000, respectively. The estimated amortization expense for each of the five succeeding years and thereafter is as follows: For the Year Ended December 31, ------------------------------- 2002 ................................... $ 88(A) 2003 ................................... 353 2004 ................................... 353 2005 ................................... 353 2006 ................................... 353 2007 and thereafter .................... 1,144 (A) Represents estimated amortization expense for the three months ending December 31, 2002. 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. 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. Management has demonstrated the ability to make reasonable and reliable estimates of product returns in accordance with Statement of Financial Accounting Standards No. 48 ("SFAS No. 48"), "Revenue Recognition When Right of Return Exists", based on significant historical experience. Should such returns no longer prove estimable, we believe that the impact on our financials would not necessarily be significant since the return privilege expires 30 days after shipment. All amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided and have been classified as "net sales." Costs related to such shipping and handling billings are classified as "cost of sales." Accounts Receivable We perform ongoing credit evaluations of our customers, and adjust credit limits as appropriate, based on payment history and customer creditworthiness. We maintain an allowance for estimated doubtful accounts based on our historical experience and the customer credit issues identified. Collections are monitored continuously, and the allowance is adjusted as necessary to recognize any changes in credit exposure. -7-

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. - -------------------------------------------------------------------------------- We enter into contracts with the Federal Government requiring fees to be paid on certain sales. These fees are subject to audit by the Federal Government. As a result of these audits, we may be required to pay additional fees. Inventories--Merchandise Inventories (all finished goods) consisting of software packages, computer systems and peripheral equipment, are stated at cost (determined under the first-in, first-out method) or market, whichever is lower. Inventory quantities on hand are reviewed regularly, and provisions are made for obsolete, slow moving and nonsalable inventory, based on management's forecast of customer demand for those products in inventory. Restricted - Cash In connection with the acquisition of MoreDirect, Inc. (see Note 7 - Acquisition of MoreDirect, Inc.), a $10 million cash escrow was established to fund a portion of the contingent consideration. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and revisions to estimates are included in our results for the period in which the actual amounts become known. - -------------------------------------------------------------------------------- Note 2-Earnings Per Share - -------------------------------------------------------------------------------- Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to options outstanding to purchase common stock, if dilutive. The following table sets forth the computation of basic and diluted earnings per share: - -------------------------------------------------------------------------------------------------------------------------- Three Months Nine Months Ended Ended - -------------------------------------------------------------------------------------------------------------------------- September 30, (amounts in thousands, except per share data) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- Numerator: Net income $ 2,206 $ 2,052 $ 383 $ 5,934 ======== ======= ======== ========= Denominator: Denominator for basic earnings per share: Weighted average shares 24,533 24,506 24,546 24,449 Dilutive effect of unexercised employee stock options: 256 415 302 503 -------- ------- -------- --------- Denominator for diluted earnings per share 24,789 24,921 24,848 24,952 ======== ======= ======== ========= Earnings per share: Basic $ .09 $ .08 $ .02 $ .24 ======== ======= ======== ========= Diluted $ .09 $ .08 $ .02 $ .24 ======== ======= ======== ========= -8-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED (Unaudited) - -------------------------------------------------------------------------------- Note 2-Earnings Per Share - Cont'd. - -------------------------------------------------------------------------------- The following unexercised stock options were excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2002 and 2001 because the exercise prices of these options were generally greater than the average market price of common shares during the respective periods: - ------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended - ------------------------------------------------------------------------------------------------------------------- September 30, (amounts in thousands) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------- Anti-dilutive stock options 2,485 2,036 2,479 826 ====== ======= ======= ====== - -------------------------------------------------------------------------------- Note 3-Reporting Comprehensive Income - -------------------------------------------------------------------------------- We have no other comprehensive income in any of the periods presented. Accordingly, a separate statement of comprehensive income is not presented. - -------------------------------------------------------------------------------- Note 4-Segment and Related Disclosures - -------------------------------------------------------------------------------- SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," requires that public companies report profits and losses and certain other information on its "reportable operating segments" in its annual and interim financial statements. In January 2002 we reorganized our operations to create two reportable operating segments - the "Public Sector" segment, which serves federal, state and local governmental organizations and educational institutions, and the "SMB" segment, which serves small and medium-sized businesses, as well as consumers. In April 2002, we acquired MoreDirect, Inc. - the "Large Corporate Accounts" segment, which serves medium-to-large corporations. Segment information applicable to our reportable operating segments for the three and nine months ended September 30, 2002 is shown below: - ----------------------------------------------------------------------------------------------------------------------- Three Months Ended September 30, 2002 - ----------------------------------------------------------------------------------------------------------------------- SMB Public Sector Large Corp. (amounts in thousands) Segment Segment Accts. Segment Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------- Sales to external customers $ 174,478 $ 96,265 $ 70,296 $ - $ 341,039 Transfers between segments 68,325 - - (68,325) - ----------- ----------- ------------ ------------ ----------- Net sales $ 242,803 $ 96,265 $ 70,296 $ (68,325) $ 341,039 =========== =========== ============ ============ =========== Operating income (loss) $ 1,228 $ (1,363) $ 3,962 $ - $ 3,827 Interest and other - net (196) (13) 6 - (203) ----------- ----------- ------------ ------------ ----------- Income (loss) before taxes $ 1,032 $ (1,376) $ 3,968 $ - $ 3,624 =========== =========== ============ ============ =========== - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, 2002 - ----------------------------------------------------------------------------------------------------------------------- SMB Public Sector Large Corp. (amounts in thousands) Segment Segment Accts. Segment Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------- Sales to external customers $ 535,756 $ 209,446 $ 124,145 $ - $ 869,347 Transfers between segments 151,072 - - (151,072) - ----------- ----------- ------------ ------------ ----------- Net sales $ 686,828 $ 209,446 $ 124,145 $ (151,072) $ 869,347 =========== =========== ============ ============ =========== Operating income (loss) $ (1,064) $ (4,221) $ 6,381 $ - $ 1,096 Interest and other - net (451) 8 29 - (414) ----------- ----------- ------------ ------------ ----------- Income (loss) before taxes $ (1,515) $ (4,213) $ 6,410 $ - $ 682 =========== =========== ============ ============ =========== Total assets $ 179,478 $ 86,048 $ 67,170 $ (50,126) $ 282,570 =========== =========== ============ ============ =========== Goodwill, net $ 1,173 $ 7,635 $ 14,097 $ - $ 22,905 =========== =========== ============ ============ =========== - ----------------------------------------------------------------------------------------------------------------------- -9-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED (Unaudited) - -------------------------------------------------------------------------------- Note 5 - Credit Facility - -------------------------------------------------------------------------------- In May 2002, we entered into a new $45 million credit facility that is secured by substantially all of our business assets. In July 2002, as required under the terms of the credit facility, an additional lender committed to fund $10.0 million of the $45 million facility. Amounts outstanding under this facility bear interest at the prime rate (4.75% at September 30, 2002). The credit facility includes various customary financial and operating covenants, minimum net worth and maximum funded debt ratio requirements including restrictions on the payment of dividends, none of which we believe significantly restricts our operations. No borrowings were outstanding under this credit facility at September 30, 2002. The credit facility matures on June 30, 2004, at which time amounts outstanding become due. - -------------------------------------------------------------------------------- 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 incurred charges of $718,000 and $886,000 for the three and nine month periods ending September 30, 2002 related to staff reductions during each of the respective periods. A rollforward of restructuring costs and other special charges for the nine months ended September 30, 2002 is shown below: ------------------------------------------------------------------------------------------------------------------- Beginning Liabilities at (amounts in thousands) Balance Total Charges Cash Payments September 30, 2002 ------------------------------------------------------------------------------------------------------------------- Settlement of Microsoft litigation charges $ - $ 750 $ (750) $ - Workforce reduction 425 886 (827) 484 ---------- ---------- --------- ---------- Total $ 425 $ 1,636 $ (1,577) $ 484 ========== ========== ========= ========== - -------------------------------------------------------------------------------- Note 7 - Acquisition of MoreDirect, Inc. - -------------------------------------------------------------------------------- On April 5, 2002, we completed the acquisition of MoreDirect, Inc. (MoreDirect) and it became a wholly-owned subsidiary of PC Connection, Inc. The acquisition of MoreDirect provides PC Connection a premier e-procurement supplier of information technology (IT) products for medium-to-large corporate and government organizations nationwide. MoreDirect's Internet-based system enables corporate and government customers to efficiently source, evaluate, purchase and track a wide variety of IT products. Under the terms of the agreement, all outstanding stock options of MoreDirect were cashed out for approximately $4.1 million, which was funded by us, and we paid the sole shareholder of MoreDirect approximately $18.0 million in cash at closing. MoreDirect also distributed approximately $7.9 million to its sole shareholder from available cash balances for previously taxed but undistributed S Corporation earnings. In addition we will pay additional cash to the MoreDirect shareholder based upon MoreDirect achieving targeted levels of annual earnings before income taxes through December 31, 2004. We also escrowed $10.0 million in cash at closing to fund a portion of these contingent payments. Acquisition costs of $0.6 million have been included in the purchase price. The transaction was accounted for by the purchase method, and accordingly, MoreDirect's results of operations are included in our consolidated financial statements only for periods after April 5, 2002. -11-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED (Unaudited) - -------------------------------------------------------------------------------- Note 7 - Acquisition of MoreDirect, Inc. - Cont'd. - -------------------------------------------------------------------------------- The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the acquisition. The fair values of certain intangible assets were determined through a third party valuation. The current purchase price allocation is preliminary, and is subject to further adjustment and review. --------------------------------------------------------------------------------- At April 5, 2002 (amounts in thousands) --------------------------------------------------------------------------------- Current assets ..................................................... $ 29,675 Property, plant and equipment and other assets ..................... 197 Intangible assets .................................................. 5,400 Goodwill ........................................................... 14,097 --------- Total acquired ............................................... 49,369 Current liabilities ................................................ 26,669 --------- Net assets acquired ................................................ 22,700 Less cash acquired ................................................. 115 --------- Purchase price for acquisition, net of cash acquired ............... $ 22,585 ========= Of the $5.4 million of acquired intangible assets, $1.2 million was assigned to registered trademarks that are not subject to amortization. The remaining $4.2 million of acquired intangible assets include software/technology of $1.4 million (5 year weighted-average useful life) and $2.8 million of customer relationships (8 year weighted-average useful life). The following unaudited pro forma information presents the results of our operations as if the acquisition of MoreDirect had taken place as of the beginning of the periods presented: ------------------------------------------------------------------------------------------------------------------------ Three Months Nine Months Ended Ended ------------------------------------------------------------------------------------------------------------------------ September 30, (amounts in thousands, except per share data) 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------------ Net revenue $ 341,039 $ 372,416 $ 923,857 $ 1,080,904 Net income 2,206 3,944 2,043 10,548 Earnings per share: Basic $ .09 $ .16 $ .08 $ .43 ========== ========== ========== =========== Diluted $ .09 $ .16 $ .08 $ .42 ========== ========== ========== =========== - -------------------------------------------------------------------------------- Note 8 - Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- In June 2002, the Financial Accounting Standards Board issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and replaces Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." It requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than at the date of a commitment to an exit or disposal plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with earlier application encouraged. The restructuring activities undertaken by us prior to the issuance of this statement have been appropriately accounted for under EITF 94-3. (See Note 6.) -12-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Overview - -------------------------------------------------------------------------------- The Management's Discussion and Analysis of Financial Condition and Results of Operations presented below reflects the restatement to previously issued consolidated financial statements for the three and nine month periods ending September 30, 2001. Recently our management determined that a change in our 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" ("SAB101"). 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. SAB101, 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, management has concluded that revenue should, and will, be recorded at the time of delivery rather than at the time of shipment. The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of changes in market demand and the overall level of economic activity, or in the level of business investment in information technology products, competitive products and pricing, product availability and market acceptance, new products, fluctuations in operating results and other risks detailed under the caption, "Factors That May Affect Future Results and Financial Condition" set forth below. All statements, trends, analyses and other information contained in this report relative to trends in net sales, gross margin and anticipated expense levels, as well as other statements, including words such as "anticipate," "believe," "plan," "estimate," "expect," and "intend" and other similar expressions, constitute forward-looking statements. These forward-looking statements involve risks and uncertainties, and actual results may differ materially from those anticipated or expressed in such statements. More specifically, the statements in this report concerning our outlook for the balance of 2002 and the statements concerning our gross margin percentage and selling and administrative costs and other statements of a non-historical basis (including statements regarding implementing strategies for future growth, our ability to regain our model of profitable growth and the expected benefits of our electronic commerce strategy) are forward-looking statements that involve certain risks and uncertainties. Such risks and uncertainties include the ability to realize market demand for and competitive pricing pressures on the products and services marketed by us, the continued acceptance of our distribution channel by vendors and customers, continuation of key vendor relationships and support programs and our ability to hire and retain qualified sales account managers and other essential personnel. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Readers, however, should carefully review the factors set forth in other reports or documents that we file from time to time with the SEC. - -------------------------------------------------------------------------------- General - -------------------------------------------------------------------------------- We were founded in 1982 as a mail-order business offering a broad range of software and accessories for IBM and IBM-compatible personal computers ("PCs"). The founders' goal was to provide consumers with superior service and high quality branded products at competitive prices. We initially sought customers through advertising in selected computer industry publications and the use of inbound toll free telemarketing. Currently, we seek to generate sales through (i) outbound telemarketing by account managers focused on the business, education and government markets, (ii) inbound calls from customers responding to our catalogs and other advertising and (iii) our Internet web site. We offer both PC compatible products and Mac compatible products. Reliance on Mac product sales has decreased over the last four years, from 19.4% of net sales for the year ended December 31, 1998 to 8.6% of net sales for the nine months ended September 30, 2002. We believe that sales attributable to Mac products will continue to decrease as a percentage of net sales and may decline in absolute dollar volume in 2002 and future years. The weakness in demand for information technology products experienced by us in 2001 continued through the third quarter of 2002 resulting in overall conservative buying patterns, order deferrals and longer sales cycles. - -------------------------------------------------------------------------------- Critical Accounting Policies - -------------------------------------------------------------------------------- In our December 31, 2001 Form 10-K/A, under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the Notes to the Consolidated Financial Statements, we disclosed what we consider to be our critical accounting policies. We applied those same accounting policies in the preparation of the accompanying condensed consolidated financial statements, except for the adoption on January 1, 2002 of SFAS Nos. 142 and 144 and the corresponding cessation of goodwill amortization. SFAS No. 142 required, among other things, the discontinuance of the amortization of goodwill and certain other identified intangibles. It also required a January 1, 2002 reassessment of the recover- ability of the goodwill that was carried on our financial statements. We have ceased amortization of goodwill in 2002. SFAS No. 142 also includes provisions for the reassessment of the value and useful lives of existing recognized intangibles (including goodwill), reclassification of certain intangibles both in and out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill and other intangibles. We have completed the initial impairment review required by SFAS No, 142 and have determined that our goodwill and intangible assets were not impaired. -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 - -------------------------------------------------------------------------------- Critical Accounting Policies - Cont'd. - -------------------------------------------------------------------------------- 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 income. - -------------------------------------------------------------------------------- Results of Operations - -------------------------------------------------------------------------------- Three Months and Nine Months Ended September 30, 2002 Compared with the Three Months and Nine Months Ended September 30, 2001. The following table sets forth for the periods indicated information derived from our statements of operations expressed as a percentage of net sales. ------------------------------------------------------------------------------------------------------------------ Three Months Ended Nine Months Ended ------------------------------------------------------------------------------------------------------------------ September 30, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------ Net sales (in millions) ............................ $ 341.0 $ 312.9 $ 869.3 $ 912.6 ======= ======== ======= ======== Net sales .......................................... 100.0% 100.0% 100.0% 100.0% Gross profit ....................................... 10.9 10.7 10.7 11.1 Selling, general and administrative expenses ....... 9.6 9.3 10.4 9.9 Restructuring costs and other special charges ...... 0.2 0.4 0.2 0.2 Income from operations ............................. 1.1 1.0 0.1 1.0 The following table sets forth our percentage of net sales by sales channel and product mix: ------------------------------------------------------------------------------------------------------------------ Three Months Ended Nine Months Ended ------------------------------------------------------------------------------------------------------------------ September 30, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------ Sales Channel ------------- Corporate Outbound ................................. 80% 82% 78% 79% Inbound Telesales .................................. 5 10 8 12 On-Line Internet ................................... 15 8 14 9 ---- ----- ---- ---- Total ............................................ 100% 100% 100% 100% ==== ===== ==== ==== Product Mix ----------- Notebooks .......................................... 16% 23% 16% 22% Desktop/Servers .................................... 15 12 15 13 Storage Devices .................................... 9 9 10 10 Software ........................................... 16 14 15 13 Networking Communications .......................... 8 9 8 9 Printers ........................................... 9 8 9 8 Videos & Monitors .................................. 10 9 10 9 Memory ............................................. 3 2 3 3 Accessories/Other .................................. 14 14 14 13 ---- ----- ---- ---- Total ............................................ 100% 100% 100% 100% ==== ===== ==== ==== For the three months ended September 30, 2002, sales of enterprise server and networking products (included in the above product mix) were 22% of net sales, compared to 19% of net sales for the comparable period in 2001. Sales of enterprise server and networking products (included in the above product mix) were 22% and 19% of net sales for the nine months ended September 30, 2002 and September 30, 2001, respectively. -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. - -------------------------------------------------------------------------------- Three Month Period Ended September 30, 2002 Compared to Three Month Period Ended September 30, 2002 Net sales increased $28.1 million, or 9.0%, to $341.0 million for the three months ended September 30, 2002 from $312.9 million for the three months ended September 30, 2001 due to our acquisition of MoreDirect in early April 2002. Outbound channel sales increased 5.8% to $272.8 million for the quarter ended September 30, 2002 over the comparable 2001 quarter. On-line Internet sales increased 123.5% to $51.9 million for the quarter ended September 30, 2002 compared to the comparable period in 2001. Inbound channel sales, which primarily serve our consumer and very small business customers, decreased 48.8%, to $16.3 million for the quarter ended September 30, 2002, compared to the comparable period in 2001. Excluding sales for MoreDirect, net sales for the three months ended September 30, 2002 decreased $42.2 million, or 13.5%, to $270.7 million from net sales of $312.9 million for the comparable period in 2001. On this basis, outbound channel net sales decreased by 12.3% for the quarter ended September 30, 2002 compared to the comparable period in 2001, and on-line Internet sales increased 21.7% to $28.3 million for the quarter ended September 30, 2002 compared to the comparable period in 2001. Sequentially, net sales increased $49.8 million, or 17.1%, to $341.0 million for the three months ended September 30, 2002 from $291.2 million for the three months ended June 30, 2002. Net sales for our Public Sector segment, which sells to federal, state and local government organizations and educational institutions, increased sequentially by 51.2% to $96.3 million for the three months ended September 30, 2002 compared to the three months ended June 30, 2002. As we have experienced in prior years, federal government purchases in the third quarter were up significantly from the second quarter. Net sales for the small - and medium-sized business (SMB) segment were $174.5 million, virtually level with net sales of $173.6 million for the three months ended June 30, 2002. Third quarter 2002 net sales for MoreDirect, which comprises our Large Corporate Accounts segment, increased by 30.7% to $70.3 million compared to the three months ended June 30, 2002 as large commercial customers continue to respond favorably to MoreDirect's efficient e-procurement model. Net sales of enterprise server and networking products increased 27.3% to $75.0 million for the quarter ended September 30, 2002 from $58.9 million for the comparable period in 2001. Enterprise server and networking products represented 22.0% of overall net sales for the third quarter in 2002, up from 18.8% of net sales for the comparable period in 2001. We believe that these product categories will continue to grow as our customers further upgrade their network and communication infrastructure. If economic conditions do not improve in the near term, the anticipated sales growth of these types of products will not likely occur. Sales of notebooks declined by 22.4% to $54.7 million for the quarter ended September 30, 2002, from the comparable period in 2001. Desktop/server sales increased by 34.6% to $50.6 million for the quarter ended September 30, 2002 over the comparable period in 2001. Software sales increased 24.5% to $53.9 million for the quarter ended September 30, 2002 from $43.3 million for the comparable period in 2001 partly due to the acceleration in 2002 sales attributed to the July 31 deadline for Microsoft's upgrade programs. Average order size increased $64, or 5.1%, to $1,323 for the quarter ended September 30, 2002 compared to the third quarter of 2001 partly due to the MoreDirect acquisition. In addition, average order size increased sequentially by 17.4% in the third quarter from the second quarter of 2002. The total number of orders received for the quarter increased by 3.1% over the second quarter of 2002 compared to the 17.1% quarter-over-quarter increase in total net sales dollars. The total number of orders increased by 5.8% year-over-year, compared to the 9.0% year-over-year increase in total net sales dollars. Average annualized sales productivity per account manager for the quarter improved sequentially by 9.5% to $2.3 million compared to $2.1 million in the second quarter of 2002. Gross profit increased $3.7 million, or 11.0%, to $37.2 million for the quarter ended September 30, 2002 from $33.5 million for the comparable period in 2001, primarily due to the increase in sales described above. Gross profit margin as a percentage of sales increased to 10.9% of net sales in the third quarter of 2002 from 10.7% for the comparable period in 2001 and improved sequentially by 0.1% from 10.8% for the quarter ended June 30, 2002. MoreDirect's gross profit margin for the three months ended September 30, 2002 increased to 10.8% from 10.4% for the second quarter 2002. Gross profit margins in our small- and medium-sized business segment improved by 0.7% over the quarter ended June 30, 2002 to 12.3% for the quarter ended September 30, 2002, primarily due to the improved attainment of vendor incentive rebates. Gross profit margins in our public sector segment decreased by 0.4% from the quarter ended June 30, 2002 to 8.4% for the quarter ended September 30, 2002. -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. - -------------------------------------------------------------------------------- Our gross profit margins are also influenced by the relative mix of sales to commercial, government, education and consumer customers and by the relative mix of inbound, outbound and on-line Internet sales. Since outbound sales are typically to corporate and government accounts that purchase at volume discounts, the gross profit 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 profit 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 increased $3.5 million, or 12.0% to $32.6 million for the quarter ended September 30, 2002 from $29.1 million for the third quarter in 2001, partly due to our acquisition of MoreDirect in April 2002. SG&A as a percentage of net sales were 9.6% in the third quarter of 2002, compared to 9.3% in the comparable period a year ago and 10.5% in the second quarter of 2002. Increases in our net advertising expense were partly offset by decreases in volume sensitive costs, such as bad debt expense 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 Internet Web technology to support the sales organization. SG&A in the third quarter of 2001 included goodwill amortization of $176 thousand. There were no such charges in the corresponding 2002 quarter. Had the $176 thousand not been amortized in the third quarter of 2001, earnings per share would not have been significantly affected. Restructuring costs and other special charges totaling $0.7 million were recorded in the third quarter of 2002. These charges were related to workforce reductions. Restructuring costs or other special charges totaled $1.2 million for the comparable period in 2001. These costs related to staff reductions of $0.5 million and $0.7 million of costs associated with proposed acquisitions abandoned during the third quarter of 2001. Income from operations increased $0.6 million, or 18.8%, to $3.8 million for the quarter ended September 30, 2002, from $3.2 million for the comparable period in 2001. Income from operations as a percentage of sales increased from 1.0% in the three months ended September 30, 2001 to 1.1% for the comparable period in 2002 for the reasons discussed above. Income (loss) from operations for the quarter ended September 30, 2002, excluding the acquisition of MoreDirect, was a loss of $0.1 million. Our Public Sector segment (as described in Note 4 to our Condensed Consolidated Financial Statements) incurred an operating loss of $1.3 million, and our SMB segment earned $1.2 million of operating income. Interest expense remained flat at $0.3 million for the quarters ended September 30, 2002 and 2001. Other, net which is essentially comprised of interest income decreased $0.3 million, or 75.0%, to $0.1 million for the quarter ended September 30, 2002 from $0.4 million for the comparable period in 2001 due to lower interest rates and lower investment levels. Income taxes for the quarter ended September 30, 2002 were $1.4 million compared to $1.3 million for the comparable quarter in 2001. The effective tax rate was 39.1% for the three months ended September 30, 2002 and 38.0% for the three months ended September 30, 2001. The increase was due to the impact on our state tax rate from the acquisition of More Direct. Net income for the quarter ended September 30, 2002 increased $0.1 million, or 4.8%, to $2.2 million from net income of $2.1 million for the comparable quarter in 2001, as a result of the increase in income from operations. -16-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED - -------------------------------------------------------------------------------- Results of Operations - Cont'd. - -------------------------------------------------------------------------------- Nine Month Period Ended September 30, 2002 Compared to Nine Month Period Ended September 30, 2001 Net sales decreased $43.3 million, or 4.7%, to $869.3 million for the nine months ended September 30, 2002 from $912.6 million for the comparable period in 2001 due to the continued weakness in demand for information technology products. Outbound channel sales decreased 6.5% to $678.2 million for the nine months ended September 30, 2002 over the comparable 2001 period. On-line Internet sales increased 58.4% to $123.5 million for the nine months ended September 30, 2002 compared to the corresponding prior year period in 2001. Inbound channel sales, which primarily serve our consumer and very small business customers, decreased 38.2%, to $67.7 million for the nine months ended September 30, 2002, compared to $109.6 million for the corresponding period in 2001. Excluding sales for MoreDirect, net sales for the nine months ended September 30, 2002 decreased $167.4 million, or 18.3%, to $745.2 million from $912.6 million for the comparable period in 2001. Excluding on-line Internet sales for MoreDirect, on-line Internet sales increased 7.8% to $84.1 million for the nine months ended September 30, 2002, compared to the nine months ended September 30, 2001. Net sales for our Public Sector segment, which sells to the federal, state and local government organizations and educational institutions, increased 3.7% to $209.4 million for the nine months ended September 30, 2002 from $202.0 million for the nine months ended September 30, 2001. Net sales for the small - and medium business (SMB) segment for the nine months ended September 30, 2002 were $535.8 million, a decrease of $174.7 million, or 24.6%, from net sales of $710.5 million for the SMB segment in the same period of 2001. MoreDirect, our large corporate account segment, has generated net sales of $124.1 million since our acquisition in April 2002 through September 30, 2002. Net sales of enterprise server and networking products increased 10.9% to $191.8 million for the nine months ended September 30, 2002 from $173.0 million for the comparable period in 2001. While we believe that these product categories will continue to grow as our customers further upgrade their network and communication infrastructure, if economic conditions do not improve in the near term, the level of sales growth will be limited. Enterprise server and networking products represented 22.1% of overall net sales for the nine months ended September 30, 2002, up from 19.0% of net sales for the comparable period in 2001. Sales of notebooks declined by 31.0% to $138.1 million for the nine months ended September 30, 2002, from $200.2 million for the comparable period in 2001. Desktop/server sales increased by 12.3% to $128.2 million for the nine months ended September 30, 2002, from $114.2 million for the comparable period in 2001. Gross profit for the nine months ended September 30, 2002 decreased $8.3 million, or 8.2%, to $93.4 million from $101.7 million for the comparable period in 2001. Gross profit margin as a percentage of net sales also decreased to 10.7% in the first nine months of 2002 from 11.1% for the comparable period in 2001. A more competitive pricing environment and lower overall demand during the first nine months of 2002 negatively impacted our year-over-year gross margin percentages. Our gross profit margins are also influenced by the relative mix of sales to commercial, government, education and consumer customers and by the relative mix of inbound, outbound and on-line Internet sales. Since outbound sales are typically to corporate and government accounts that purchase at volume discounts, the gross profit 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 profit 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 increased $0.5 million, or 0.6%, to $90.7 million for the nine months ended September 30, 2002 over the comparable period in 2001. SG&A as a percentage of net sales increased to 10.4% in 2002 compared to 9.9% for the comparable period in 2001. Increases related to our Web site initiatives were offset by decreases in volume sensitive costs, such as variable compensation and credit card fees. We expect that our SG&A may vary depending on changes in sales volume, as well as the levels of continued investments in key growth initiatives such as hiring more experienced outbound sales account managers, improving marketing programs, and deploying our Internet Web technology to support the sales organization. SG&A in each of the first three quarters of 2001 included goodwill amortization of $176 thousand. There were no such charges in the corresponding 2002 quarters. Had the $176 thousand not been amortized in each of the first three quarters of 2001, earnings per share would not have been significantly affected. -17-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED - -------------------------------------------------------------------------------- Results of Operations - Cont'd. - -------------------------------------------------------------------------------- Restructuring costs and other special charges for the nine-month periods ended September 30, 2002 and 2001, totaled $1.6 million and $2.1 million, respectively. On March 15, 2002, we announced that we had settled litigation commenced by Microsoft Corporation involving alleged trademark and copyright infringement. While denying these allegations, we recorded $0.8 million in settlement costs and legal fees related to this matter. We also took $0.9 million and $1.4 million charges related to staff reductions for the nine months ended September 30, 2002 and 2001, respectively. A rollforward of restructuring costs and other special charges for the nine months ended September 30, 2002, is shown below: - ----------------------------------------------------------------------------------------------------------------------------------- Beginning Liabilities at (amounts in thousands) Balance Total Charges Cash Payments September 30, 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Settlement of Microsoft litigation charges $ - $ 750 $ (750) $ - Workforce reduction 425 886 (827) 484 ---------- ---------- --------- ---------- Total $ 425 $ 1,636 $ (1,577) $ 484 ========== ========== ========= ========== Income from operations decreased $8.3 million, or 88.3%, to $1.1 million for the nine months ended September 30, 2002, compared to income of $9.4 million for the comparable period in 2001. As a percentage of net sales, income from operations decreased from 1.0% for the nine months ended September 30, 2001 to 0.1% for the nine months ended September 30, 2002. Interest expense decreased $0.1 million, or 11.1% to $0.8 million for the nine months ending September 30, 2002 from $0.9 million for the comparable period in 2001. This decrease in interest expense was attributed to lower average borrowings during the first nine months of 2002 as compared to the comparable period in 2001. Other, net which is essentially comprised of interest income decreased $0.6 million, or 60.0%, to $0.4 million for the nine months ended September 30, 2002, from $1.0 million for the comparable period in 2001, attributable to lower interest rates and lower investment levels. Income taxes for the nine months ended September 30, 2002, were $0.3 million compared to $3.6 million for the comparable period in 2001, consistent with the decrease in income from operations. Net income decreased $5.5 million, or 93.2%, to $0.4 million for the nine months ended September 30, 2002 from $5.9 million for the comparable 2001 period for the reasons described above. - -------------------------------------------------------------------------------- Seasonality - -------------------------------------------------------------------------------- Although we have historically experienced variability in the rates of sales growth, we have not historically experienced seasonality in our business as a whole. While sales in our Large Corporate Accounts and SMB segments, which serve business and consumer markets, have not historically experienced significant seasonality throughout the year, sales in our public sector segment have historically been higher in the third quarter than in other quarters due to the buying patterns of government and education customers. If sales to public sector customers continue to increase as a percentage of overall sales, the Company as a whole may experience increased seasonality in future periods. - -------------------------------------------------------------------------------- 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. -18-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED - -------------------------------------------------------------------------------- Liquidity and Capital Resources - Cont'd. - -------------------------------------------------------------------------------- At September 30, 2002, we had cash and cash equivalents of $13.9 million and working capital of $92.5 million. At December 31, 2001, we had cash and cash equivalents of $35.6 million and working capital of $120.4 million. This decrease in cash and cash equivalents is attributable to the approximate $22.6 million in cash used for the acquisition of MoreDirect. In May 2002, we entered into a $45 million credit facility secured by substantially all of our business assets. In July 2002, as required under the terms of the credit facility, an additional lender committed to fund $10.0 million of the $45 million facility. Amounts outstanding under this facility bear interest at the prime rate (4.75% at September 30, 2002). The credit facility includes various customary financial and operating covenants, minimum net worth and maximum funded debt ratio requirements, including restrictions on the payment of dividends, none of which we believe significantly restricts our operations. No borrowings were outstanding under this credit facility at September 30, 2002. The credit facility matures on June 30, 2004, at which time the amounts outstanding become due. Net cash provided by operating activities was $16.7 million for the nine months ended September 30, 2002, as compared to $52.0 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. In particular, accounts receivable has increased by $35.5 million in the nine months ended September 30, 2002, in part due to accounts receivable generated by MoreDirect. At September 30, 2002, we had $142.6 million in outstanding net accounts receivable. During the third quarter of 2002, days sales outstanding increased sequentially by 2 days to 50 days at September 30, 2002 from 48 days at June 30, 2002. Inventories totaled $52.8 million at September 30, 2002, compared to $43.8 million at June 30, 2002 and $57.5 million at December 31, 2001. During the third quarter of 2002, inventory turns improved sequentially to 24 turns at September 30, 2002 compared to 22 turns at June 30, 2002. Net sales of products drop-shipped by distributors and other vendors directly to customers accounted for 42.2% of net sales in the third quarter compared to 34.0% in the second quarter of 2002. At September 30, 2002, we had $111.1 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 $6.6 million payable to two financial institutions under security agreements to facilitate the purchase of inventory. Capital expenditures were $4.4 million in the nine months ended September 30, 2002 as compared to $4.9 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 $6.0 million. We have disclosed significant related party transactions and our future commitments in our Form 10-K/A. There have been no substantial changes in those disclosures since year-end. - -------------------------------------------------------------------------------- Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- In June 2002, the Financial Accounting Standards Board issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and replaces Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." It requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than at the date of a commitment to an exit or disposal plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with earlier application encouraged. The restructuring activities undertaken by us prior to the issuance of this statement have been appropriately accounted for under EITF 94-3. (See Note 6). - -------------------------------------------------------------------------------- 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. -19-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED - -------------------------------------------------------------------------------- Factors That May Affect Future Results and Financial Condition - -------------------------------------------------------------------------------- Our future results and financial condition are dependent on our ability to continue to successfully market, sell and distribute information technology products and services, including computers, hardware and software. Inherent in this process are a number of factors that we must successfully manage in order to achieve a favorable financial condition and favorable operating results. Potential risks and uncertainties that could affect our future financial condition and operating results include, without limitation, the following factors: There has been a recent decrease in demand throughout the industry for the products we sell. There has been a general decline in the economy over the past year and the demand for personal computer products has decreased throughout the industry. This decrease adversely affected our sales and results of operations in 2001, and continues to adversely affect our sales and results of operations in 2002. If our net sales do not increase in proportion to our operating expenses or if we experience a decrease in net sales for an extended period of time, there would be a material adverse effect on our results of operations in future periods. We have experienced rapid growth in recent years followed by a decline in sales and there is no assurance that we will be able to regain such growth. Our net sales grew from $749.9 million for the year ended December 31, 1998 to $1,440.2 million for the year ended December 31, 2000. In the year ended December 31, 2001, our net sales declined to $1,186.2 million. Net sales for the nine months ended September 30, 2002 declined by 4.7% from the comparable 2001 period, despite our acquisition of MoreDirect. Our growth in previous years placed increasing demands on our administrative, operational, financial and other resources. Our staffing levels and operating expenses increased substantially in recent years due to our sales forecasts. If our revenues continue to decline, we may not be able to reduce our staffing levels and operating expenses in a timely manner to maintain our operating margins. Moreover, we can provide no assurance that we will be able to sustain rapid growth in the near future. We may also experience quarterly fluctuations and seasonality which could impact our business. Several factors have caused our sales and results of operations to fluctuate and we expect these fluctuations to continue on a quarterly basis. Causes of these fluctuations include: . changes in the overall level of economic activity; . changes in the level of business investment in information technology products; . the condition of the personal computer industry in general; . shifts in customer demand for hardware and software products; . industry shipments of new products or upgrades; . the timing of new merchandise and catalog offerings; . fluctuations in response rates; . fluctuations in postage, paper, shipping and printing costs and in merchandise returns; . adverse weather conditions that affect response, distribution or shipping; . shifts in the timing of holidays; . changes in our product offerings; and . changes in consumer demand for information technology products. We base our operating expenditures on sales forecasts. If revenues do not meet expectations in any given quarter, our operating results could suffer. In addition, customer response rates for our catalogs and other marketing vehicles are subject to variations. The first and last quarters of the year generally have higher response rates while the two middle quarters typically have lower response rates. Lastly, sales in our public segment have historically been higher in the third quarter than in other quarters due to the buying patterns of government and education customers. -20-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED - -------------------------------------------------------------------------------- Factors That May Affect Future Results and Financial Condition - Cont'd. - -------------------------------------------------------------------------------- We are exposed to inventory obsolescence due to the rapid technological changes occurring in the personal computer industry. The market for personal computer products is characterized by rapid technological change and the frequent introduction of new products and product enhancements. Our success depends in large part on our ability to identify and market products that meet the needs of customers in that marketplace. In order to satisfy customer demand and to obtain favorable purchasing discounts, we may in the future carry increased inventory levels of certain products. By so doing, we are subject to the increased risk of inventory obsolescence. Also, in order to implement our business strategy, we intend to continue, among other things, to place larger than typical inventory stocking orders, and increase our participation in first-to-market purchase opportunities. We may also participate in end-of-life-cycle purchase opportunities and market products on a private-label basis, which would increase the risk of inventory obsolescence. In addition, we sometimes acquire special purchase products without return privileges. There can be no assurance that we will be able to avoid losses related to obsolete inventory. In addition, manufacturers are limiting return rights and are also taking steps to reduce their inventory exposure by supporting "build to order" programs authorizing distributors and resellers to assemble computer hardware under the manufacturers' brands. These trends reduce the costs to manufacturers and shift the burden of inventory risk to resellers like us which could negatively impact our business. We acquire products for resale from a limited number of vendors; the loss of any one of these vendors could have a material adverse effect on our business. We acquire products for resale both directly from manufacturers and indirectly through distributors and other sources. The five vendors supplying the greatest amount of goods to us constituted 71% and 60% of our total product purchases in the nine-month periods ended September 30, 2002 and 2001, respectively. Among these five vendors, purchases from Ingram Micro, Inc. represented 31% and 25% of our total product purchases and purchases from Tech Data Corporation comprised 15% and 16% of our total product purchases in the nine-month periods ended September 30, 2002 and 2001, respectively. Effective May 3, 2002, Compaq Computer Corporation became a wholly-owned subsidiary of Hewlett Packard Company. Had this merger been completed at the beginning of the periods presented, our purchases made directly from Hewlett Packard, on a pro forma basis, would have constituted 15% and 11% of our total product purchases in the nine-month periods ended September 30, 2002 and 2001, respectively. No other vendor supplied more than 7% of our total product purchases in the nine-month periods ended September 30, 2002 and 2001. If we were unable to acquire products from Ingram Micro, Tech Data or Hewlett Packard, we could experience a short-term disruption in the availability of products and such disruption could have a material adverse effect on our results of operations and cash flows. Substantially all of our contracts and arrangements with our vendors that supply significant quantities of products are terminable by such vendors or us without notice or upon short notice. Most of our product vendors provide us with trade credit, of which the net amount outstanding at September 30, 2002 was $111.1 million. Termination, interruption or contraction of relationships with our vendors, including a reduction in the level of trade credit provided to us, could have a material adverse effect on our financial position. Some product manufacturers either do not permit us to sell the full line of their products or limit the number of product units available to direct marketers such as us. An element of our business strategy is to continue to increase our participation in first-to-market purchase opportunities. The availability of certain desired products, especially in the direct marketing channel, has been constrained in the past. We could experience a material adverse effect to our business if we are unable to source first-to-market purchase or similar opportunities, or if we face the reemergence of significant availability constraints. We may experience a reduction in the incentive programs offered to us by our vendors. Some product manufacturers and distributors provide us with incentives such as supplier reimbursements, payment discounts, price protection, rebates and other similar arrangements. The increasingly competitive computer hardware market has already resulted in the following: . reduction or elimination of some of these incentive programs; . more restrictive price protection and other terms; and . reduced advertising allowances and incentives, in some cases. -21-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED - -------------------------------------------------------------------------------- Factors That May Affect Future Results and Financial Condition - Cont'd. - -------------------------------------------------------------------------------- Most product manufacturers provide us with co-op advertising support and in exchange we cover their products in our catalogs. This support significantly defrays our catalog production expense. In the past, we have experienced a decrease in the level of co-op advertising support available to us from certain manufacturers. The level of co-op advertising support we receive from some manufacturers may further decline in the future. Such a decline could increase our selling, general and administrative expenses as a percentage of sales and have a material adverse effect on our cash flows. We face many competitive risks. The direct marketing industry and the computer products retail business, in particular, are highly competitive. We compete with consumer electronics and computer retail stores, including superstores. We also compete with other direct marketers of hardware and software and computer related products, including an increasing number of Internet retailers. Certain hardware and software vendors are selling their products directly through their own catalogs and over the Internet. We compete not only for customers, but also for co-op advertising support from personal computer product manufacturers. Some of our competitors have greater financial, marketing and larger catalog circulations and customer bases and other resources than we do. In addition, many of our competitors offer a wider range of products and services than we do and may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Many current and potential competitors also have greater name recognition, engage in more extensive promotional activities and adopt more aggressive pricing policies than us. We expect competition to increase as retailers and direct marketers who have not traditionally sold computers and related products enter the industry. We cannot assure you that we can continue to compete effectively against our current or future competitors. In addition, price is an important competitive factor in the personal computer hardware and software market and we cannot assure you that we will not face increased price competition. If we encounter new competition or fail to compete effectively against our competitors, our business may be harmed. In addition, product resellers and direct marketers are combining operations or acquiring or merging with other resellers and direct marketers to increase efficiency. Moreover, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance their products and services. Accordingly, it is possible that new competitors or alliances among competitors may emerge and acquire significant market share. We face and will continue to face significant price competition. Generally, pricing is very aggressive in the personal computer industry and we expect pricing pressures to continue. An increase in price competition could result in a reduction of our profit margins. There can be no assurance that we will be able to offset the effects of price reductions with an increase in the number of customers, higher sales, cost reductions or otherwise. Also, our sales of personal computer hardware products are generally producing lower profit margins than those associated with software products. Such pricing pressures could result in an erosion of our market share, reduced sales and reduced operating margins, any of which could have a material adverse effect on our business. The methods of distributing personal computers and related products are changing and such changes may negatively impact us and our business. The manner in which personal computers and related products are distributed and sold is changing, and new methods of distribution and sale have emerged. Hardware and software manufacturers have sold, and may intensify their efforts to sell, their products directly to end users. From time to time, certain manufacturers have instituted programs for the direct sales of large order quantities of hardware and software to certain major corporate accounts. These types of programs may continue to be developed and used by various manufacturers. Some of our vendors, including Apple, Hewlett-Packard and IBM, currently sell some of their products directly to end users and have stated their intentions to increase the level of such direct sales. In addition, manufacturers may attempt to increase the volume of software products distributed electronically to end users. An increase in the volume of products sold through or used by consumers of any of these competitive programs or distributed electronically to end users could have a material adverse effect on our results of operations. -22-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED - -------------------------------------------------------------------------------- Factors That May Affect Future Results and Financial Condition - Cont'd. - -------------------------------------------------------------------------------- We could experience system failures which would interfere with our ability to process orders. We depend on the accuracy and proper use of our management information systems including our telephone system. Many of our key functions depend on the quality and effective utilization of the information generated by our management information systems, including: . our ability to manage inventory and accounts receivable collection; . our ability to purchase, sell and ship products efficiently and on a timely basis; and . our ability to maintain operations. Interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events. Our management information systems require continual upgrades to most effectively manage our operations and customer database. Although we maintain some redundant systems, with full data backup, a substantial interruption in management information systems or in telephone communication systems would substantially hinder our ability to process customer orders and thus could have a material adverse effect on our business. We rely on the continued development of electronic commerce and Internet infrastructure development. We have had an increasing amount of sales made over the Internet in part because of the growing use and acceptance of the Internet by end-users. No one can be certain that acceptance and use of the Internet will continue to develop or that a sufficiently broad base of consumers will adopt and continue to use the Internet and other online services as a medium of commerce. Sales of computer products over the Internet do not currently represent a significant portion of overall computer product sales. Growth of our Internet sales is dependent on potential customers using the Internet in addition to traditional means of commerce to purchase products. We cannot accurately predict the rate at which they will do so. Our success in growing our Internet business will depend in large part upon the development of an infrastructure for providing Internet access and services. If the number of Internet users or their use of Internet resources continues to grow rapidly, such growth may overwhelm the existing Internet infrastructure. Our ability to increase the speed with which we provide services to customers and to increase the scope of such services ultimately is limited by and reliant upon the speed and reliability of the networks operated by third parties and these networks may not continue to be developed. We depend heavily on third party shippers to deliver our products to customers. In 2001, we shipped approximately 56% of our products to customers by Airborne Freight Corporation D/B/A "Airborne Express", with the remainder being shipped by United Parcel Service of America, Inc. and other overnight delivery and surface services. A strike or other interruption in service by these shippers could adversely affect our ability to market or deliver products to customers on a timely basis. We may experience potential increases in shipping, paper and postage costs, which may adversely affect our business if we are not able to pass such increases on to our customers. Shipping costs are a significant expense in the operation of our business. Increases in postal or shipping rates and paper costs could significantly impact the cost of producing and mailing our catalogs and shipping customer orders. Postage prices and shipping rates increase periodically and we have no control over future increases. We have a long-term contract with Airborne Express whereby Airborne ships products to our customers. We believe that we have negotiated favorable shipping rates with Airborne. We generally invoice customers for shipping and handling charges. There can be no assurance that we will be able to pass on to our customers the full cost, including any future increases in the cost, of commercial delivery services such as Airborne. We also incur substantial paper and postage costs related to our marketing activities, including producing and mailing our catalogs. Paper prices historically have been cyclical and we have experienced substantial increases in the past. Significant increases in postal or shipping rates and paper costs could adversely impact our business, financial condition and results of operations, particularly if we cannot pass on such increases to our customers or offset such increases by reducing other costs. -23-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED - -------------------------------------------------------------------------------- Factors That May Affect Future Results and Financial Condition - Cont'd. - -------------------------------------------------------------------------------- Privacy concerns with respect to list development and maintenance may materially adversely affect our business. We mail catalogs and send electronic messages to names in our proprietary customer database and to potential customers whose names we obtain from rented or exchanged mailing lists. World-wide public concern regarding personal privacy has subjected the rental and use of customer mailing lists and other customer information to increased scrutiny. Any domestic or foreign legislation enacted limiting or prohibiting these practices could negatively affect our business. We face many uncertainties relating to the collection of state sales or use tax. Sales taxes are presently collected on sales of products by several of our sales subsidiaries in as many as 25 states and the District of Columbia. Various states have sought to impose on direct marketers the burden of collecting state sales taxes on the sales of products shipped to their residents. Moreover, certain states have sought to impose state sales taxes on vendors who drop ship goods. In 1992, the United States Supreme Court affirmed its position that it is unconstitutional for a state to impose sales or use tax collection obligations on an out-of-state mail order company whose only contacts with the state are limited to the distribution of catalogs and other advertising materials through the mail and the subsequent delivery of purchased goods by United States mail or by interstate common carrier. However, legislation that would expand the ability of states to impose sales tax collection obligations on direct marketers has been introduced in Congress on many occasions. Due to our presence on various forms of electronic media and other factors, our contact with many states may exceed the contact involved in the Supreme Court case. We cannot predict the level of contact that is sufficient to permit a state to impose on us a sales tax collection obligation. If the Supreme Court changes its position or if legislation is passed to overturn the Supreme Court's decision or if states impose state sales taxes on drop shipped goods, the imposition of a sales or use tax collection obligation on us in states to which we ship products would result in additional administrative expenses to us, could result in price increases to our customers, and could reduce demand for our product. We are dependent on key personnel. Our future performance will depend to a significant extent upon the efforts and abilities of our senior executives. The competition for qualified management personnel in the computer products industry is very intense, and the loss of service of one or more of these persons could have an adverse effect on our business. Our success and plans for future growth will also depend on our ability to hire, train and retain skilled personnel in all areas of our business, including sales account managers and technical support personnel. There can be no assurance that we will be able to attract, train and retain sufficient qualified personnel to achieve our business objectives. We are controlled by two principal stockholders. Patricia Gallup and David Hall, our two principal stockholders, beneficially own or control, in the aggregate, approximately 71% of the outstanding shares of our common stock. Because of their beneficial stock ownership, these stockholders can continue to elect the members of the Board of Directors and decide all matters requiring stockholder approval at a meeting or by a written consent in lieu of a meeting. Similarly, such stockholders can control decisions to adopt, amend or repeal our charter and our bylaws, or take other actions requiring the vote or consent of our stockholders and prevent a takeover of us by one or more third parties, or sell or otherwise transfer their stock to a third party, which could deprive our stockholders of a control premium that might otherwise be realized by them in connection with an acquisition of us. Such control may result in decisions that are not in the best interest of our public stockholders. In connection with our initial public offering, the principal stockholders placed substantially all shares of common stock beneficially owned by them into a voting trust, pursuant to which they are required to agree as to the manner of voting such shares in order for the shares to be voted. Such provisions could discourage bids for our common stock at a premium as well as have a negative impact on the market price of our common stock. -24-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We invest cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. In addition, our secured credit agreement provides for borrowings which bear interest based on the prime rate. We had no borrowings outstanding pursuant to our credit agreement as of September 30, 2002. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations and cash flows should not be material. -25-

PC CONNECTION, INC. AND SUBSIDIARIES Part I - Financial Information Item 4- CONTROLS AND PROCEDURES 1. Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a - 14 (c) and 15d - 14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner. 2. Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. -26-

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 ------ ----------- 10.52 Separation Agreement between Registrant and Wayne Wilson, dated September 19, 2002. 15 Letter on unaudited interim financial information. 99.1 Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Company's Senior Vice President of Finance and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K (I) The Company filed a Current Report on Form 8-K on September 17, 2002, reporting that the Company was planning to participate in various investor meetings and will be discussing various aspects of its business. (II) The Company filed a Current Report on Form 8-K on September 20, 2002 announcing that Wayne Wilson, President and Chief Operating Officer, would be retiring from PCC at the end of September and Kenneth Koppel, Chief Executive Officer, would assume title of President and Patricia Gallup will resume title of Chief Executive Officer. -27-

PC CONNECTION, INC. AND SUBSIDIARIES September 30, 2002 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PC CONNECTION, INC. AND SUBSIDIARIES November 14, 2002 By: /s/ PATRICIA GALLUP ------------------------------------- Patricia Gallup Chairman and Chief Executive Officer November 14, 2002 By: /s/ MARK GAVIN ------------------------------------- Mark Gavin Senior Vice President of Finance and Chief Financial Officer -28-

PC CONNECTION, INC. AND SUBSIDIARIES September 30, 2002 Certification I, Patricia Gallup, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PC Connection, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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 quarterly report (the "Evaluation Date"); and c) presented in this 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 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. Dated: November 14, 2002 /S/ PATRICIA GALLUP ---------------------------------------- Patricia Gallup Chairman and Chief Executive Officer -29-

I, Mark Gavin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PC Connection, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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 quarterly report (the "Evaluation Date"); and c) presented in this 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 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. Dated: November 14, 2002 /S/ MARK GAVIN ---------------------------------------- Mark Gavin Senior Vice President, Finance and Chief Financial Officer -30-

EXHIBIT 10.52 Separation Agreement This Agreement, with an effective date of September 30, 2002 (the "Effective Date") by and between PC Connection, Inc., a Delaware corporation with offices at 730 Milford Road, Merrimack, New Hampshire, 03054 ("PC Connection") and Wayne Wilson, residing at 64 Horace Greeley Road, Amherst NH 03031, ("Wilson" or "you"). WHEREAS, Wilson has been employed by PC Connection since August 16,1995 and currently holds the position of President and COO; WHEREAS, PC Connection and Wilson have mutually agreed to the termination of Wilson's employment at this time; and WHEREAS, Wilson and PC Connection desire to set forth severance and other terms related to said termination; NOW, THEREFORE, the parties hereby agree as follows: 1. Severance Benefits. (a) PC Connection will pay to Wilson an amount equal to his current annual base salary, Four Hundred Thousand Dollars ($400,000), at the time and in the manner set forth under paragraph 6(b) of that certain Employment Agreement by and between PC Connection and Wilson dated as of August 16, 1995 (Employment Agreement). In accordance with said paragraph, said payments shall be made on or before the thirtieth (30th), ninetieth (90th), one hundred eightieth (180th), two hundred seventieth (270th) and three hundred sixty-fifth (365th) day after the effective date hereof (the "Severance Period"). In addition, PC Connection will continue to provide you with medical and dental benefits covering you and your family for the Severance Period beginning on the effective date hereof; provided, however, such coverage shall terminate at such time as you become eligible for health insurance from another employer or you fail to elect COBRA coverage. You will be eligible for up to eighteen (18) months of COBRA coverage from September 30, 2002. Your portion of the COBRA cost for the Severance Period shall be equal to your normal payroll deduction for Medical and Dental coverage. You are responsible for the full COBRA amount for the remaining six (6) months. (b) PC Connection represents that you are currently vested in 476,346 stock options under the Company's 1993 Incentive and Non-Statutory Stock Option Plan and its 1997 Stock Incentive Plan (the "Plans") and various Stock Option Agreements pursuant thereto ("Option Agreements") with varying exercise prices. As provided in your Option Agreements, you shall have 30 days or 90 days, depending on the plan, in which to exercise the vested stock options.

(c) PC Connection represents that you are currently not vested in 95,002 additional stock options under the Option Agreements and these non-vested options will terminate. 2. Continuing Effect of Certain Provisions of Employment Agreement. You confirm that you remain bound under the terms of Sections 7, 8, 9, 11, 13, and 15 of the Employment Agreement. You agree to keep the terms of this Agreement confidential, except as required by law, provided that you may disclose the terms of this Agreement to your immediate family, attorneys and tax advisors who agree to keep the terms of this Agreement confidential. 3. Cooperation. During the one-year period following the Effective Date, Wilson shall provide reasonable cooperation to PC Connection relating to projects on which he was working or as to which he was involved prior to the termination of his employment, at its request. PC Connection shall reimburse Wilson for all reasonable out-of-pocket expenses incurred by him for such activities. Wilson agrees not to discuss past or present employment and business related issues concerning PC Connection with present or past employees of PC Connection except as may be reasonably requested or approved by the Chairman. 4. Complete Agreement; Release. (a) This Agreement together with the Employment Agreement (attached), and the Option Agreements constitute the parties' entire agreement with respect to its subject matter and supersedes all prior negotiations, discussions, and agreements with respect to the same subject matter. (b) You agree to accept this Agreement as a full and complete accord and satisfaction of all amounts, options, and other obligations owing to you by PC Connection or its affiliates or owners. Except for the obligations arising under this Agreement, you hereby release PC Connection from any and all liabilities, obligations, debts, demands, actions, torts, breaches, causes of action, suits, accounts, covenants, agreements, contingencies, promises, understandings, damages, expenses, compensation, or claims that you now have, may have or ever had, whether in law or in equity, or whether known or unknown, during all relevant time periods, including any claims under the Age Discrimination in Employment Act (ADEA) and the Older Workers Benefit Protection Act (OWBPA.) (c) You have been advised to seek legal counsel of your choice before entering into this Agreement, and have been further advised that you may take up to 21 days to do so. This agreement is a revision of the agreement presented to you on August 21, 2002. You acknowledge that you were so advised and that this revised Agreement was presented to you on September 9, 2002.

(d) You may revoke this Agreement in writing within seven (7) days of its execution, and this Agreement shall only become effective if you have not revoked this Agreement and the seven-day period has expired. IN WITNESS WHEREOF, PC Connection and Wayne Wilson have each caused this Agreement to be executed on the date set forth below. Agreed: PC Connection, Inc. By: /s/ Patricia Gallup /s/ Wayne Wilson ---------------------------- --------------------------- Patricia Gallup, Chairman Wayne Wilson September 19, 2002 September 19, 2002 - ------------------ --------------------- Date Date

October 24, 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 September 30, 2002 and 2001, as indicated in our report dated October 24, 2002; 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 September 30, 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 quarterly report on Form 10-Q of PC Connection, Inc. (the "Company") for the period ended September 30, 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 ---------------------------------------- Dated: November 14, 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 quarterly report on Form 10-Q of PC Connection, Inc. (the "Company") for the period ended September 30, 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 14, 2002 Mark Gavin Senior Vice President of Finance and Chief Financial Officer