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, 2004
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 (State or other jurisdiction of incorporation or organization) |
02-0513618 (I.R.S. Employer Identification No.) | |
| 730 Milford Road, Merrimack, New Hampshire |
03054 (Zip Code) | |
| (Address of principal executive offices) | ||
(603) 683-2000
Registrant’s telephone number, including area code
Indicate by check mark (ü) 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 ¨
Indicate by check mark (ü) whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities and Exchange Act of 1934, as amended.
YES ¨ NO x
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer’s Common Stock, $.01 par value, as of September 30, 2004 was 25,049,973.
PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||
| PART I FINANCIAL INFORMATION | ||||
| ITEM 1 |
||||
| 1 | ||||
| Condensed Consolidated Balance Sheets – September 30, 2004 and December 31, 2003 |
2 | |||
| 3 | ||||
| 4 | ||||
| Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2004 and 2003 |
5 | |||
| 6 | ||||
| ITEM 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
14 | ||
| ITEM 3 |
32 | |||
| ITEM 4 |
32 | |||
| PART II OTHER INFORMATION | ||||
| ITEM 1 |
33 | |||
| ITEM 2 |
33 | |||
| ITEM 3 |
33 | |||
| ITEM 4 |
33 | |||
| ITEM 5 |
33 | |||
| ITEM 6 |
Exhibits | 34 | ||
| SIGNATURES | 35 | |||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2004 and 2003, and the condensed consolidated statement of changes in stockholders’ equity for the nine-month period ended September 30, 2004, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), 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 reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim 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 standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PC Connection, Inc. and subsidiaries as of December 31, 2003, 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 March 18, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
November 10, 2004
Boston, Massachusetts
1
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
| September 30, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | ||||||||
| ASSETS |
||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 7,367 | $ | 2,977 | ||||
| Restricted cash |
— | 5,000 | ||||||
| Accounts receivable, net |
123,503 | 144,337 | ||||||
| Inventories – merchandise |
77,414 | 80,140 | ||||||
| Deferred income taxes |
3,391 | 1,732 | ||||||
| Income taxes receivable |
1,047 | 2,190 | ||||||
| Prepaid expenses and other current assets |
3,629 | 3,649 | ||||||
| Total current assets |
216,351 | 240,025 | ||||||
| Property and equipment, net |
17,757 | 20,396 | ||||||
| Goodwill, net |
44,766 | 45,264 | ||||||
| Other intangibles, net |
3,129 | 3,393 | ||||||
| Other assets |
226 | 208 | ||||||
| Total assets |
$ | 282,229 | $ | 309,286 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current Liabilities: |
||||||||
| Current maturities of capital lease obligation to affiliate |
$ | 362 | $ | 334 | ||||
| Note payable – bank |
— | 5,614 | ||||||
| Accounts payable |
90,557 | 112,538 | ||||||
| Accrued expenses and other liabilities |
18,336 | 13,063 | ||||||
| Acquisition earn-out obligation |
— | 11,593 | ||||||
| Total current liabilities |
109,255 | 143,142 | ||||||
| Capital lease obligation to affiliate, less current maturities |
5,813 | 6,088 | ||||||
| Deferred income taxes |
3,370 | 2,867 | ||||||
| Total liabilities |
118,438 | 152,097 | ||||||
| Stockholders’ Equity: |
||||||||
| Common stock |
254 | 253 | ||||||
| Additional paid-in capital |
76,798 | 76,428 | ||||||
| Retained earnings |
89,025 | 82,794 | ||||||
| Treasury stock at cost |
(2,286 | ) | (2,286 | ) | ||||
| Total stockholders’ equity |
163,791 | 157,189 | ||||||
| Total liabilities and stockholders’ equity |
$ | 282,229 | $ | 309,286 | ||||
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 Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Net sales |
$ | 351,265 | $ | 349,420 | $ | 1,014,235 | $ | 954,515 | ||||||||
| Cost of sales |
311,859 | 313,494 | 904,742 | 853,157 | ||||||||||||
| Gross profit |
39,406 | 35,926 | 109,493 | 101,358 | ||||||||||||
| Selling, general, and administrative expenses |
32,765 | 32,059 | 94,938 | 91,716 | ||||||||||||
| Special charges |
1,800 | — | 3,583 | 397 | ||||||||||||
| Income from operations |
4,841 | 3,867 | 10,972 | 9,245 | ||||||||||||
| Interest expense |
(334 | ) | (270 | ) | (1,059 | ) | (849 | ) | ||||||||
| Other, net |
35 | 27 | 136 | 125 | ||||||||||||
| Income before taxes |
4,542 | 3,624 | 10,049 | 8,521 | ||||||||||||
| Income tax provision |
(1,725 | ) | (1,444 | ) | (3,818 | ) | (3,363 | ) | ||||||||
| Net income |
$ | 2,817 | $ | 2,180 | $ | 6,231 | $ | 5,158 | ||||||||
| Weighted average common shares outstanding: |
||||||||||||||||
| Basic |
25,047 | 24,741 | 25,018 | 24,686 | ||||||||||||
| Diluted |
25,215 | 25,322 | 25,271 | 25,058 | ||||||||||||
| Earnings per common share: |
||||||||||||||||
| Basic |
$ | .11 | $ | .09 | $ | .25 | $ | .21 | ||||||||
| Diluted |
$ | .11 | $ | .09 | $ | .25 | $ | .21 | ||||||||
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, 2004
(Unaudited)
(amounts in thousands)
| Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Treasury Shares |
Total | |||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
||||||||||||||||||
| Balance – December 31, 2003 |
25,342 | $ | 253 | $ | 76,428 | $ | 82,794 | (362 | ) | $ | (2,286 | ) | $ | 157,189 | |||||||
| Exercise of stock options, including income tax benefits |
33 | 1 | 165 | — | — | — | 166 | ||||||||||||||
| Issuance of stock under employee stock purchase plan |
37 | — | 205 | — | — | — | 205 | ||||||||||||||
| Net income |
— | — | — | 6,231 | — | — | 6,231 | ||||||||||||||
| Balance – September 30, 2004 |
25,412 | $ | 254 | $ | 76,798 | $ | 89,025 | (362 | ) | $ | (2,286 | ) | $ | 163,791 | |||||||
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, |
||||||||
| 2004 |
2003 |
|||||||
| Cash Flows from Operating Activities: |
||||||||
| Net income |
$ | 6,231 | $ | 5,158 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
5,340 | 6,500 | ||||||
| Deferred income taxes |
(1,156 | ) | (1,867 | ) | ||||
| Provision for doubtful accounts |
3,083 | 2,323 | ||||||
| Loss (gain) on disposal of fixed assets |
9 | (1 | ) | |||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
17,751 | (12,314 | ) | |||||
| Inventories |
2,726 | (19,995 | ) | |||||
| Prepaid expenses and other current assets |
1,163 | 250 | ||||||
| Other non | ||||||||