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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 June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23827
PC CONNECTION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0513618
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
730 MILFORD ROAD,
MERRIMACK, NEW HAMPSHIRE 03054
(Address of principal (Zip Code)
executive offices)
(603) 423-2000
Registrant's telephone number, including area code
Indicate by check mark ((check mark)) 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__ (check mark)__ NO______
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's Common Stock, $.01 par
value, as of August 6, 2002 was 24,559,013.
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PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Independent Accountants' Report...................................................... 1
Condensed Consolidated Balance Sheets--June 30, 2002 and December 31, 2001........... 2
Condensed Consolidated Statements of Operations--Three months ended June 30, 2002 and
2001; Six months ended June 30, 2002 and 2001...................................... 3
Condensed Consolidated Statement of Changes in Stockholders' Equity--Six months ended
June 30, 2002...................................................................... 4
Condensed Consolidated Statements of Cash Flows--Six months ended June 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........................... 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..................................................... 28
SIGNATURES........................................................................... 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 June 30, 2002, and the
related condensed consolidated statements of operations for the three-month and
six-month periods ended June 30, 2002 and 2001 and the condensed consolidated
statement of changes in stockholders' equity for the six-month period ended
June 30, 2002, and the condensed consolidated statements of cash flows for the
six- month periods ended June 30, 2002 and 2001. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States
of America, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of PC
Connection, Inc. and subsidiaries as of December 31, 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated January 24,
2002, 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, 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
July 17, 2002
1
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 26,173 $ 35,605
Accounts receivable, net.................................... 121,922 117,461
Inventories--merchandise.................................... 34,462 48,003
Deferred income taxes....................................... 2,378 2,304
Income taxes receivable..................................... 3,874 1,312
Prepaid expenses and other current assets................... 2,820 3,013
-------- --------
Total current assets.................................... 191,629 207,698
Property and equipment, net.................................... 28,591 27,472
Goodwill, net and other intangibles, net....................... 26,826 8,807
Restricted cash................................................ 10,000 --
Other assets................................................... 349 258
-------- --------
Total assets............................................ $257,395 $244,235
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligation to affiliate. $ 180 $ 171
Current maturities of long-term debt........................ 500 1,000
Accounts payable............................................ 89,413 75,399
Accrued expenses and other liabilities...................... 11,595 10,272
-------- --------
Total current liabilities............................... 101,688 86,842
Capital lease obligation to affiliate, less current maturities. 6,529 6,621
Deferred income taxes.......................................... 3,736 3,523
Other liabilities.............................................. 31 73
-------- --------
Total liabilities....................................... 111,984 97,059
-------- --------
Stockholders' Equity:
Common stock................................................ 248 247
Additional paid-in capital.................................. 74,838 74,393
Retained earnings........................................... 72,310 74,073
Treasury stock at cost...................................... (1,985) (1,537)
-------- --------
Total stockholders' equity.............................. 145,411 147,176
-------- --------
Total liabilities and stockholders' equity.............. $257,395 $244,235
======== ========
See accompanying notes to condensed consolidated financial statements.
2
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales.................................... $292,188 $297,338 $528,348 $599,113
Cost of sales................................ 260,738 264,486 471,917 530,936
-------- -------- -------- --------
Gross profit.............................. 31,450 32,852 56,431 68,177
Selling, general and administrative expenses. 30,652 30,653 58,141 61,116
Restructuring costs and other special charges 105 -- 918 851
-------- -------- -------- --------
Income (loss) from operations............. 693 2,199 (2,628) 6,210
Interest expense............................. (296) (277) (538) (654)
Other, net................................... 132 396 327 684
-------- -------- -------- --------
Income (loss) before taxes................ 529 2,318 (2,839) 6,240
Income tax (provision) credit................ (204) (882) 1,076 (2,371)
-------- -------- -------- --------
Net income (loss)......................... $ 325 $ 1,436 $ (1,763) $ 3,869
======== ======== ======== ========
Weighted average common shares outstanding:
Basic....................................... 24,553 24,422 24,552 24,419
======== ======== ======== ========
Diluted..................................... 24,833 24,994 24,552 24,965
======== ======== ======== ========
Earnings (loss) per common share:
Basic....................................... $ .01 $ .06 $ (.07) $ .16
======== ======== ======== ========
Diluted..................................... $ .01 $ .06 $ (.07) $ .16
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 30, 2002
(Unaudited)
(amounts in thousands)
Common Stock Additional Treasury Shares
------------- Paid In Retained --------------
Shares Amount Capital Earnings Shares Amount Total
------ ------ ---------- -------- ------ ------- --------
Balance--December 31, 2001............ 24,748 $247 $74,393 $74,073 (205) $(1,537) $147,176
Exercise of stock options, including
income tax benefits................. 18 -- 133 -- -- -- 133
Issuance of stock under employee stock
purchase plan....................... 89 1 312 -- -- -- 313
Repurchase of common stock for
treasury............................ -- -- -- -- (91) (448) (448)
Net loss.............................. -- -- -- (1,763) -- -- (1,763)
------ ---- ------- ------- ---- ------- --------
Balance--June 30, 2002................ 24,855 $248 $74,838 $72,310 (296) $(1,985) $145,411
====== ==== ======= ======= ==== ======= ========
See accompanying notes to condensed consolidated financial statements.
4
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
Six Months Ended
June 30,
------------------
2002 2001
-------- --------
Cash Flows from Operating Activities:
Net income (loss)....................................................................... $ (1,763) $ 3,869
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization....................................................... 3,787 3,820
Deferred income taxes............................................................... 139 (80)
Provision for doubtful accounts..................................................... 3,237 5,346
(Gain)/loss on disposal of fixed assets............................................. (2) 12
Changes in assets and liabilities:
Accounts receivable................................................................. 21,213 20,971
Inventories......................................................................... 13,859 9,686
Prepaid expenses and other current assets........................................... (2,039) 5,056
Other non-current assets............................................................ (63) (382)
Accounts payable.................................................................... (8,888) (4,768)
Income tax benefits from exercise of stock options.................................. 26 8
Accrued expenses and other liabilities.............................................. (2,381) (4,086)
-------- --------
Net cash provided by operating activities............................................... 27,125 39,452
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment..................................................... (3,370) (4,237)
Proceeds from sale of property and equipment............................................ 9 12
Payments for acquisitions, net of cash acquired......................................... (22,585) --
Cash escrow funded for acquisition...................................................... (10,000) --
-------- --------
Net cash used for investing activities.................................................. (35,946) (4,225)
-------- --------
Cash Flows from Financing Activities:
Proceeds from short-term borrowings..................................................... 5,521 47,020
Repayment of short-term borrowings...................................................... (5,521) (47,020)
Repayment of capital lease obligation to affiliate...................................... (83) (74)
Repayment of notes payable.............................................................. (500) --
Exercise of stock options............................................................... 107 132
Issuance of stock under employee stock purchase plan.................................... 313 728
Purchase of treasury shares............................................................. (448) --
-------- --------
Net cash provided by (used for) financing activities.................................... (611) 786
-------- --------
Increase (decrease) in cash and cash equivalents........................................ (9,432) 36,013
Cash and cash equivalents, beginning of period.......................................... 35,605 7,363
-------- --------
Cash and cash equivalents, end of period................................................ $ 26,173 $ 43,376
======== ========
See accompanying notes to condensed consolidated financial statements.
5
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1--Basis of Presentation
The accompanying condensed consolidated financial statements of PC
Connection, Inc. and Subsidiaries ("PCC") have been prepared in accordance with
accounting principles generally accepted in the United States of America. Such
principles were applied on a basis consistent with those of the financial
statements contained in our Annual Report on Form 10-K 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. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation. The operating
results for the three and six months ended June 30, 2002 may not be indicative
of the results expected for any succeeding quarter or the entire year ending
December 31, 2002.
In January 2002, we adopted Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations." The principles set forth in this
standard were applied to our acquisition of MoreDirect described in Note 7 to
the condensed consolidated financial statements. Previous business combinations
had been accounted for under Accounting Principles Board Opinion No. 16. There
was no effect on the financial statements when the standard was adopted. We
also adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January
1, 2002. SFAS No. 142 required, among other things, the discontinuance of the
amortization of goodwill and certain other identified intangibles. It also
required a January 1, 2002 reassessment of the recoverability of the goodwill
that was carried on our financial statements. We have ceased amortization of
goodwill in 2002. The following is a reconciliation of reported net income
(loss) to adjusted net income (loss) for the three and six months ended June
30, 2002 and 2001, taking into account the cessation of goodwill amortization:
Three Months Six Months
Ended Ended
----------- ---------------
June 30, (amounts in thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------ ---- ------ ------- ------
Reported net income (loss)........................ $325 $1,436 $(1,763) $3,869
Add back goodwill amortization (net of taxes)..... -- 109 -- 218
---- ------ ------- ------
Adjusted net income (loss)........................ $325 $1,545 $(1,763) $4,087
==== ====== ======= ======
Diluted earnings (loss) per share:
Reported net income (loss)........................ $.01 $ .06 $ (.07) $ .16
Add back goodwill amortization (net of taxes)..... -- -- -- --
---- ------ ------- ------
Adjusted net income (loss)........................ $.01 $ .06 $ (.07) $ .16
==== ====== ======= ======
SFAS No. 142 also includes provisions for the reassessment of the value and
useful lives of existing recognized intangibles (including goodwill),
reclassification of certain intangibles both in and out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill and other intangibles. We have
completed the initial impairment review required by SFAS No. 142 and have
determined that our goodwill and intangible assets were not impaired.
We also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," on January 1, 2002. SFAS No. 144, among other things,
modifies and updates the methodology for recognizing impairment in long-lived
assets. The adoption of this standard did not have a significant impact on
either the balance sheet or the statement of operations.
6
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
Note 1--Basis of Presentation--Cont'd.
Revenue Recognition
Revenue on product sales is recognized at the point in time when persuasive
evidence of an arrangement exists, the price is fixed and final, delivery has
occurred and there is a reasonable assurance of collection of the sales
proceeds. We generally obtain oral or written purchase authorizations from our
customers for a specified amount of product at a specified price and consider
delivery to have occurred at the point of shipment, except for sales to federal
government agencies for which delivery occurs at destination. We provide our
customers with a limited thirty day right of return only for defective
merchandise. Revenue is recognized at delivery and a reserve for sales returns
is recorded. We have demonstrated the ability to make reasonable and reliable
estimates of product returns in accordance with SFAS No. 48, "Revenue
Recognition When Right of Return Exists," based on significant historical
experience.
The majority of our revenues relate to sales of physical products and are
recognized on a gross basis with the selling price to the customer recorded as
net sales and the acquisition cost of the product to us recorded as cost of
sales. Certain product sales, third party services and extended warranties sold
by us (for which we are not the primary obligor) are recognized on a net basis
in accordance with Staff Accounting Bulletin No. 101.
All amounts billed to a customer in a sales transaction relating to shipping
and handling, if any, represent revenues earned for the goods provided and have
been classified as "net sales." Costs related to such shipping and handling
billings are classified as "cost of sales."
Accounts Receivable
We perform ongoing credit evaluations of our customers, and adjust credit
limits as appropriate, based on payment history and customer credit-worthiness.
We maintain an allowance for estimated doubtful accounts based on our
historical experience and the customer credit issues identified. Collections
are monitored continuously, and the allowance is adjusted as necessary to
recognize any changes in credit exposure.
We enter into contracts with the Federal Government requiring fees to be
paid on certain sales. These fees are subject to audit by the Federal
Government. As a result of these audits, we may be required to pay additional
fees.
Inventories--Merchandise
Inventories (all finished goods) consisting of software packages, computer
systems and peripheral equipment, are stated at cost (determined under the
first-in, first-out method) or market, whichever is lower. Inventory quantities
on hand are reviewed regularly, and provisions are made for obsolete, slow
moving and nonsalable inventory, based on management's forecast of customer
demand for those products in inventory.
Restricted--Cash
In connection with the acquisition of MoreDirect, Inc. (see Note
7--Acquisition of MoreDirect, Inc.), a $10 million cash escrow was established
to fund a portion of the contingent consideration.
7
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
Note 2--Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed using the weighted
average number of shares outstanding. Diluted earnings (loss) per common share
are computed using the weighted average number of shares outstanding adjusted
for the incremental shares attributed to options outstanding to purchase common
stock, if dilutive.
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Six Months
Ended Ended
--------------- ----------------
June 30, (amounts in thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------ ------- ------- ------- -------
Numerator:
Net income............................................. $ 325 $ 1,436 $(1,763) $ 3,869
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share:
Weighted average shares............................ 24,553 24,422 24,552 24,419
Dilutive effect of unexercised employee stock options:. 280 572 -- 546
------- ------- ------- -------
Denominator for diluted earnings per share................ 24,833 24,994 24,552 24,965
======= ======= ======= =======
Earnings per share:
Basic.................................................. $ .01 $ .06 $ (.07) $ .16
======= ======= ======= =======
Diluted................................................ $ .01 $ .06 $ (.07) $ .16
======= ======= ======= =======
The following unexercised stock options were excluded from the computation
of diluted earnings per share for the three and six months ended June 30, 2002
and 2001 because the effect of the options on the calculation would have been
anti-dilutive:
Three Months Six Months
Ended Ended
------------ ----------
June 30, (amounts in thousands) 2002 2001 2002 2001
------------------------------- ----- ---- ----- ----
Anti-dilutive stock options.. 2,258 598 2,908 608
===== === ===== ===
Note 3--Reporting Comprehensive Income
We have no other comprehensive income in any of the periods presented.
Accordingly, a separate statement of comprehensive income is not presented.
Note 4--Segment and Related Disclosures
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires that public companies report profits and losses and
certain other information on its "reportable operating segments" in its annual
and interim financial statements.
In January 2002 we reorganized our operations to create two reportable
operating segments--the "Public Sector" segment, which serves federal, state
and local governmental organizations and educational institutions,
8
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
Note 4--Segment and Related Disclosures--Cont'd.
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 six months ended June 30, 2002 is shown below:
Three Months Ended June 30, 2002
---------------------------------------------------------------
SMB Public Sector Large Corp
Segment Segment Accts. Segment Eliminations Consolidated
(amounts in thousands) -------- ------------- -------------- ------------ ------------
Sales to external customers $173,871 $ 64,468 $53,849 $ -- $292,188
Transfers between segments. 49,489 -- -- (49,489) --
-------- -------- ------- -------- --------
Net sales.................. $223,360 $ 64,468 $53,849 $(49,489) $292,188
======== ======== ======= ======== ========
Operating income (loss).... $ (187) $ (1,539) $ 2,419 $ -- $ 693
Interest and other--net.... (192) 5 23 -- (164)
-------- -------- ------- -------- --------
Income (loss) before taxes. $ (379) $ (1,534) $ 2,442 $ -- $ 529
======== ======== ======= ======== ========
Six Months Ended June 30, 2002
---------------------------------------------------------------
SMB Public Sector Large Corp.
Segment Segment Accts. Segment Eliminations Consolidated
(amounts in thousands) -------- ------------- -------------- ------------ ------------
Sales to external customers $359,423 $115,076 $53,849 $ -- $528,348
Transfers between segments. 82,747 -- -- (82,747) --
-------- -------- ------- -------- --------
Net sales.................. $442,170 $115,076 $53,849 $(82,747) $528,348
======== ======== ======= ======== ========
Operating income (loss).... $ (2,335) $ (2,712) $ 2,419 $ -- $ (2,628)
Interest and other--net.... (255) 21 23 -- (211)
-------- -------- ------- -------- --------
Income (loss) before taxes. $ (2,590) $ (2,691) $ 2,442 $ -- $ (2,839)
======== ======== ======= ======== ========
Total assets............... $172,448 $ 60,958 $54,670 $(30,681) $257,395
======== ======== ======= ======== ========
General and administrative expenses were charged to the reportable operating
segments, based on their estimated usage of the underlying functions. Interest
and other expense was charged to the segments, based on the actual costs
incurred by each segment, net of interest and other income generated. The
amount shown above representing total assets eliminated consists of
inter-segment receivables, resulting primarily from inter-segment sales and
transfers reported above and from inter-segment service charges.
In 2001 we had only one reportable operating segment. It is impractical for
us to restate prior year balances into the operating segments established in
2002. Senior management monitored revenue in 2001 and 2002 by sales channel
(Corporate Outbound, Inbound Telesales and Online Internet) and product mix
(Notebooks, Desktops and Servers, Storage Devices, Software, Networking
Communications, Printers, Video and Monitors, Memory and Accessories and Other).
9
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
Note 4--Segment and Related Disclosures--Cont'd.
Net sales by sales channel and product mix are presented below:
Three Months Ended Six Months Ended
----------------- -----------------
June 30, (amounts in thousands) 2002 2001 2002 2001
------------------------------- -------- -------- -------- --------
Sales Channel
Corporate Outbound......... $226,816 $234,026 $406,122 $467,361
Inbound Telesales.......... 22,509 37,234 51,025 77,276
On-Line Internet........... 42,863 26,078 71,201 54,476
-------- -------- -------- --------
Total.................. $292,188 $297,338 $528,348 $599,113
======== ======== ======== ========
Product Mix
Notebooks.................. $ 44,240 $ 58,846 $ 80,903 $129,567
Desktop/Servers............ 45,250 37,710 79,627 76,539
Storage Devices............ 28,089 29,175 52,430 59,139
Software................... 41,115 39,457 75,007 76,475
Networking Communications... 24,530 27,613 45,514 54,598
Printers................... 27,122 26,142 47,924 50,052
Videos & Monitors.......... 27,887 29,200 50,587 53,808
Memory..................... 10,247 9,180 17,654 19,272
Accessories/Other.......... 43,708 40,015 78,702 79,663
-------- -------- -------- --------
Total.................. $292,188 $297,338 $528,348 $599,113
======== ======== ======== ========
Included in the above product mix sales are enterprise networking product
sales of $67.1 million and $55.3 million for the three months ended June 30,
2002 and 2001, respectively, and $116.8 million and $114.0 million for the six
months ended June 30, 2002 and 2001, respectively.
Substantially all of our net sales for the quarters ended June 30, 2002 and
2001 were made to customers located in the United States. Shipments to
customers located in foreign countries aggregated less than 2% in those
respective quarters. All of our assets at June 30, 2002 and December 31, 2001
were located in the United States. Except for the federal government, no single
customer accounted for more than 4% of total net sales in the six months ended
June 30, 2002 and 2001. Sales to the federal government accounted for $51.0
million, or 9.7% of total net sales for the six months ended June 30, 2002, and
$51.4 million, or 8.6% of total net sales for the six months ended June 30,
2001.
Note 5--Credit Facility
In May 2002, we entered into a new $45 million credit facility that is
secured by substantially all of our business assets. In July 2002, an
additional lender committed to fund $10.0 million of this facility. Amounts
outstanding under this facility bear interest at the prime rate (4.75% at June
30, 2002). The credit facility includes various customary financial and
operating covenants, minimum net worth and maximum funded debt ratio
requirements including restrictions on the payment of dividends, none of which
we believe significantly restricts our operations. No borrowings were
outstanding under this credit facility at June 30, 2002. The credit facility
matures on June 30, 2004. Our former $70 million credit facility expired on May
31, 2002. Amounts outstanding under our former facility, which terminated in
May 2002 did not exceed $6.3 million for the year ended December 31, 2001.
10
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 1--Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
Note 6--Restructuring Costs and Other Special Charges
On March 15, 2002, we announced that we had settled litigation commenced by
Microsoft Corporation involving alleged trademark and copyright infringement.
While denying the allegations, we agreed to pay Microsoft $625,000 to settle
the case. The settlement costs and related legal fees of approximately $125,000
were included as a special charge in our first quarter 2002 financial results.
We also took a $63,000 charge in the first quarter of 2002 and a $105,000
charge in the second quarter of 2002 related to staff reductions during each of
the respective periods.
A rollforward of restructuring costs and other special charges for the six
months ended June 30, 2002 is shown below:
Beginning Liabilities at
Balance Total Charges Cash Payments June 30, 2002
(amounts in thousands) --------- ------------- ------------- --------------
Settlement of Microsoft litigation charges $ -- $750 $ (716) $ 34
Workforce reduction....................... 425 168 (527) 66
---- ---- ------- ----
Total..................................... $425 $918 $(1,243) $100
==== ==== ======= ====
Note 7--Acquisition of MoreDirect, Inc.
On April 5, 2002, we completed the acquisition of MoreDirect, Inc.
(MoreDirect) and it became a wholly-owned subsidiary of PC Connection, Inc. The
acquisition of MoreDirect provides PC Connection a premier e-procurement
supplier of information technology (IT) products for medium-to-large corporate
and government organizations nationwide. MoreDirect's Internet-based system
enables corporate and government customers to efficiently source, evaluate,
purchase and track a wide variety of IT products.
Under the terms of the agreement, all outstanding stock options of
MoreDirect were cashed out for approximately $4.1 million, which was funded by
us, and we paid the sole shareholder of MoreDirect approximately $18.0 million
in cash at closing. MoreDirect also distributed approximately $7.9 million to
its sole shareholder from available cash balances for previously taxed but
undistributed S Corporation earnings. In addition we will pay additional cash
to the MoreDirect shareholder based upon MoreDirect achieving targeted levels
of annual earnings before income taxes through December 31, 2004. We also
escrowed $10.0 million in cash at closing to fund a portion of these contingent
payments. Acquisition costs of $0.6 million have been included in the purchase
price.
The transaction was accounted for by the purchase method, and accordingly,
MoreDirect's results of operations are included in our consolidated financial
statements only for periods after April 5, 2002.
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 Ended Six Months Ended
----------------- ------------------
June 30, (amounts in thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------ -------- -------- -------- --------
Net revenue.......................... $295,440 $354,960 $582,858 $707,905
Net income (loss).................... 424 3,098 (85) 6,573
Earnings per share:
Basic............................. $ .02 $ .13 $ .00 $ .27
======== ======== ======== ========
Diluted........................... $ .02 $ .12 $ .00 $ .26
======== ======== ======== ========
Note 8--Future Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No.
146 addresses financial accounting and reporting for costs associated with exit
or disposal activities and replaces Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." It requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred, rather
than at the date of a commitment to an exit or disposal plan. The provisions of
this Statement are effective for exit or disposal activities that are initiated
after December 31, 2002, with earlier application encouraged. The restructuring
activities undertaken by us prior to the issuance of this statement have been
appropriately accounted for under EITF 94-3. (See Note 6).
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 following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that are subject
to risks and uncertainties, including, but not limited to, the impact of
changes in market demand and the overall level of economic activity, or in the
level of business investment in information technology products, competitive
products and pricing, product availability and market acceptance, new products,
fluctuations in operating results and other risks detailed under the caption,
"Factors That May Affect Future Results and Financial Condition" set forth
below. All statements, trends, analyses and other information contained in this
report relative to trends in net sales, gross margin and anticipated expense
levels, as well as other statements, including words such as "anticipate,"
"believe," "plan," "estimate," "expect," and "intend" and other similar
expressions, constitute forward-looking statements. These forward-looking
statements involve risks and uncertainties, and actual results may differ
materially from those anticipated or expressed in such statements. More
specifically, the statements in this report concerning our outlook for the
balance of 2002 and the statements concerning our gross margin percentage and
selling and administrative costs and other statements of a non-historical basis
(including statements regarding implementing strategies for future growth, our
ability to regain our model of profitable growth and the expected benefits of
our electronic commerce strategy) are forward-looking statements that involve
certain risks and uncertainties. Such risks and uncertainties include the
ability to realize market demand for and competitive pricing pressures on the
products and services marketed by us, the continued acceptance of our
distribution channel by vendors and customers, continuation of key vendor
relationships and support programs and our ability to hire and retain qualified
sales account managers and other essential personnel. Except as required by
law, we undertake no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that we file from time to time with the SEC.
General
We were founded in 1982 as a mail-order business offering a broad range of
software and accessories for IBM and IBM-compatible personal computers ("PCs").
The founders' goal was to provide consumers with superior service and high
quality branded products at competitive prices. We initially sought customers
through advertising in selected computer industry publications and the use of
inbound toll free telemarketing. Currently, we seek to generate sales through
(i) outbound telemarketing by account managers focused on the business,
education and government markets, (ii) inbound calls from customers responding
to our catalogs and other advertising and (iii) our Internet web site.
We offer both PC compatible products and Mac compatible products. Reliance
on Mac product sales has decreased over the last four years, from 19.4% of net
sales for the year ended December 31, 1998 to 9.5% of net sales for the six
months ended June 30, 2002. We believe that sales attributable to Mac products
will continue to decrease as a percentage of net sales and may decline in
absolute dollar volume in 2002 and future years.
The weakness in demand for information technology products experienced by us
in 2001 continued through the second quarter of 2002 resulting in overall
conservative buying patterns, order deferrals and longer sales cycles.
Critical Accounting Policies
In our December 31, 2001 Form 10-K, 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
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)
disclosed what we consider to be our critical accounting policies. We applied
those same accounting policies in the preparation of the accompanying condensed
consolidated financial statements, except for the adoption on January 1, 2002
of SFAS Nos. 141, 142 and 144 and the corresponding cessation of goodwill
amortization.
Results of Operations
Three Months and Six Months Ended June 30, 2002 Compared with the Three
Months and Six Months Ended June 30, 2001.
The following table sets forth for the periods indicated information derived
from our statements of operations expressed as a percentage of net sales.
Three Months Ended Six Months Ended
----------------- --------------
June 30, 2002 2001 2002 2001
-------- ------ ------ ------ ------
Net sales (in millions)...................... $292.2 $297.3 $528.3 $599.1
====== ====== ====== ======
Net sales.................................... 100.0% 100.0% 100.0% 100.0%
Gross profit................................. 10.8 11.0 10.7 11.4
Selling, general and administrative expenses. 10.5 10.3 11.0 10.2
Restructuring costs and other special charges 0.1 -- 0.2 0.1
Income (loss) from operations................ 0.2 0.7 (0.5) 1.0
The following table sets forth our percentage of net sales by sales channel
and product mix:
Three Months Ended Six Months Ended
----------------- ---------------
June 30, 2002 2001 2002 2001
-------- ---- ---- ---- ----
Sales Channel
Corporate Outbound........ 78% 79% 77% 78%
Inbound Telesales......... 8 12 10 13
On-Line Internet.......... 14 9 13 9
--- --- --- ---
Total................. 100% 100% 100% 100%
=== === === ===
Product Mix
Notebooks................. 15% 20% 15% 22%
Desktop/Servers........... 15 13 15 13
Storage Devices........... 10 10 10 10
Software.................. 14 13 14 13
Networking Communications. 8 9 9 9
Printers.................. 9 9 9 8
Videos & Monitors......... 10 10 10 9
Memory.................... 4 3 3 3
Accessories/Other......... 15 13 15 13
--- --- --- ---
Total................. 100% 100% 100% 100%
=== === === ===
For the three months ended June 30, 2002, sales of enterprise server and
networking products (included in the above product mix) were 23.0% of net
sales, compared to 18.6% of net sales for the comparable period in 2001.
Sales of enterprise server and networking products (included in the above
product mix) were 22.1% and 19.0% of net sales for the six months ended June
30, 2002 and June 30, 2001, respectively.
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.
Net sales decreased $5.1 million, or 1.7%, to $292.2 million for the quarter
ended June 30, 2002 from $297.3 million for the comparable period in 2001 due
to the continued weakness in demand for information technology products. Net
sales for the six months ended June 30, 2002 decreased $70.8 million, or 11.8%,
to $528.3 million from $599.1 million in the comparable period in 2001.
Outbound channel sales decreased 3.1% to $226.8 million for the quarter ended
June 30, 2002 over the comparable 2001 quarter, and decreased 13.1% to
$406.1 million for the six months ended June 30, 2002 compared to the
corresponding 2001 period. On-line Internet sales increased 64.4% to
$42.9 million for the quarter ended June 30, 2002 and increased 30.7% to
$71.2 million for the six months ended June 30, 2002 compared to corresponding
periods in 2001. Excluding on-line Internet sales for MoreDirect, our newly
acquired subsidiary, on-line Internet sales increased 4.0% to $27.1 million for
the quarter ended June 30, 2002 and increased 1.8% to $55.5 million for the six
months ended June 30, 2002 compared to the corresponding prior year periods.
Inbound channel sales, which primarily serve our consumer and very small
business customers, decreased 39.5%, to $22.5 million for the quarter ended
June 30, 2002, and decreased 34.0%, to $51.0 million for the six months ended
June 30, 2002, compared to corresponding periods in 2001.
Excluding net sales for MoreDirect, second quarter 2002 net sales were
$238.3 million, virtually flat compared to first quarter of 2002. Net sales for
MoreDirect, which comprises our Large Corporate Accounts segment, were
$53.8 million for the quarter. Net sales for the small- and medium-sized
business (SMB) segment, were down sequentially by 6% to $173.9 million in the
second quarter of 2002. Net sales to the federal, state and local government
organizations and educational institutions (Public Sector) grew 27%
sequentially to $64.5 million during the second quarter of 2002.
Net sales of enterprise server and networking products increased 21.3% to
$67.1 million for the quarter ended June 30, 2002 from $55.3 million for the
comparable period in 2001. Management believes that these product categories
will eventually grow substantially as our customers further upgrade their
network and communication infrastructure. If economic conditions do not improve
in the near term, the anticipated sales growth of these types of products will
not likely occur. Enterprise server and networking products represented 23.0%
of overall net sales for the second quarter in 2002, up from 18.6% of net sales
for the comparable period in 2001. Sales of notebooks declined by 24.8% to
$44.2 million for the quarter ended June 30, 2002, from $58.8 million for the
comparable period in 2001. Desktop/server sales increased by 20.2% to
$45.3 million for the quarter ended June 30, 2002, from $37.7 million for the
comparable period in 2001. The shift in product mix resulted primarily from the
acquisition of MoreDirect whose computer systems sales are concentrated more in
the desktop/server category.
Average order size increased $7, or 0.6%, to $1,127 for the quarter ended
June 30, 2002 compared to the second quarter of 2001. Average order size
increased sequentially by 26.1% in the second quarter partly due to the
MoreDirect acquisition. The total number of orders received for the quarter
declined by 3.4% from the first quarter of 2002, and by 3.8% year-over-year,
compared to the 1.7% year-over-year decline in total net sales dollars. Average
annualized sales productivity per account manager for the quarter improved
sequentially to $2.0 million from $1.8 million in the first quarter of 2002.
Gross profit decreased $1.4 million, or 4.3%, to $31.5 million for the
quarter ended June 30, 2002 from $32.9 million for the comparable period in
2001, primarily due to the decrease in sales described above. Gross profit for
the six months ended June 30, 2002 decreased $11.8 million, or 17.3%, to
$56.4 million from $68.2 million for the comparable period in 2001. Gross
profit margin as a percentage of sales decreased to 10.8% of net sales in the
second quarter of 2002 from 11.0% for the comparable period in 2001. Gross
profit margin as a percentage of sales decreased to 10.7% in the first
six months of 2002 from 11.4% for the comparable period in
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.
2001 but increased from 10.6% in the first quarter of 2002. Excluding
MoreDirect's results for the second quarter, our gross profit margins were
10.9%. MoreDirect's gross profit margin was 10.4%. Gross profit margins in our
small- and medium-sized business segment improved by 0.6% sequentially over the
quarter ended March 31, 2002 to 11.6% in the quarter ended June 30, 2002,
primarily due to the improved attainment of vendor incentive rebates.
A more competitive pricing environment and lower overall demand during the
first six months of 2002 negatively impacted our year-over-year gross margin
percentages. Our profit margins are also influenced by the relative mix of
sales to commercial, government, education and consumer customers and by the
relative mix of inbound, outbound and on-line Internet sales. Since outbound
sales are typically to corporate and government accounts that purchase at
volume discounts, the gross margin percentage of such sales is generally lower
than inbound sales. However, the gross profit dollar contribution per outbound
sales order is generally higher as average order sizes are usually larger. We
expect that our gross margin, as a percentage of sales, may vary by quarter
based upon vendor support programs, product mix, pricing strategies, market
conditions and other factors.
Selling, general and administrative expenses remained flat at $30.7 million
for the quarter ended June 30, 2002 as compared to the second quarter in 2001
but increased sequentially by $3.2 million over the quarter ended March 31,
2002. For the six months ended June 30, 2002, selling, general and
administrative expenses (SG&A) decreased $3.0 million, or 4.9%, to $58.1
million from $61.1 million for the comparable period in 2001. SG&A as a
percentage of net sales were 10.5% in the second quarter of 2002, compared to
10.3% in the comparable period a year ago and 11.6% in the first quarter of
2002. For the six months ended June 30, 2002, SG&A as a percentage of net sales
increased to 11.0% compared to 10.2% for the comparable period in 2001.
Increases related to our Web site initiatives were offset by decreases in
volume sensitive costs, such as variable compensation and credit card fees. We
expect that our SG&A may vary depending on changes in sales volume, as well as
the levels of continued investments in key growth initiatives such as hiring
more experienced outbound sales account managers, improving marketing programs,
and deploying our new Internet Web technology to support the sales
organization. SG&A in each of the first quarter and second quarter of 2001
included goodwill amortization of $176 thousand. There were no such charges in
the corresponding 2002 quarters. Had the $176 thousand not been amortized in
each of the first two quarters of 2001, earnings per share would not have been
significantly affected.
Restructuring costs and other special charges totaling $0.10 million were
recorded in the second quarter of 2002. These charges were related to workforce
reductions. No restructuring costs or other special charges were recorded in
the comparable period in 2001. For the six-month periods ended June 30, 2002
and 2001, we recorded $0.92 million and $.85 million, respectively, in
restructuring costs and other special charges. On March 15, 2002, we announced
that we had settled litigation commenced by Microsoft Corporation involving
alleged trademark and copyright infringement. While denying these allegations,
we recorded $0.75 million in settlement costs and legal fees related to this
matter. We also took a $0.17 million charge and a $0.85 million charge related
to staff reductions for the six months ended June 30, 2002 and 2001,
respectively.
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.
A rollforward of restructuring costs and other special charges for the six
months ended June 30, 2002, is shown below:
Beginning Total Cash Liabilities at
Balance Charges Payments June 30, 2002
(amounts in thousands) --------- ------- -------- --------------
Settlement of Microsoft litigation charges $ -- $750 $ (716) $ 34
Workforce reduction....................... 425 168 (527) 66
---- ---- ------- ----
Total..................................... $425 $918 $(1,243) $100
==== ==== ======= ====
Income (loss) from operations decreased $1.5 million, or 68.2%, to $0.7
million for the quarter ended June 30, 2002, from $2.2 million for the
comparable period in 2001. Income from operations decreased $8.8 million, or
141.9%, to a loss of $2.6 million for the six months ended June 30, 2002,
compared to income of $6.2 million for the comparable period in 2001. Income
from operations as a percentage of sales decreased from 0.7% in the three
months ended June 30, 2001 to 0.2% for the comparable period in 2002 for the
reasons discussed above. Income from operations as a percentage of sales
decreased from 1.0% in the six months ended June 30, 2001 to a loss of 0.5% for
the comparable period in 2002.
Income from operations for the quarter ended June 30, 2002, excluding the
acquisition of MoreDirect, Inc. was a loss of $1.7 million. Our Public Sector
Segment (as described in Note 4 to our Condensed Consolidated Financial
Statements), incurred a loss of $1.5 million, and our SMB segment incurred a
loss of $0.2 million.
Interest expense remained flat at $0.3 million for the quarters ended June
30, 2002 and 2001. For the six months ended June 30, 2002, interest expense
decreased $0.2 million, or 28.6% to $0.5 million from $0.7 million for the
comparable period in 2001. This decrease in interest expense was attributed to
lower average borrowings in the first quarter in 2002 as compared to the first
quarter of 2001.
Other, net which is essentially comprised of interest income decreased $0.3
million, or 75.0%, to $0.1 million in the quarter ended June 30, 2002 from $0.4
million for the comparable period in 2001 due to lower interest rates and lower
investment levels. For the six months ended June 30, 2002, other, net decreased
$0.4 million, or 57.1%, to $0.3 million from $0.7 million for the comparable
period in 2001.
Income taxes for the quarter ended June 30, 2002 consisted of a $0.2 million
tax provision compared to a $0.9 million tax provision for the comparable
quarter in 2001. The effective tax rate was 38.5% for the period ended June 30,
2002 and 38.0% for the period ended June 30, 2001. For the six months ended
June 30, 2002, the provision for income taxes decreased $3.5 million, or
145.8%, to a credit of $1.1 million from a provision of $2.4 million for the
six months ended June 30, 2001.
Net income (loss) for the quarter ended June 30, 2002 decreased $1.1
million, or 78.6%, to $0.3 million from net income of $1.4 million for the
comparable quarter in 2001, as a result of the decrease in income from
operations. For the six months ended June 30, 2002, net income decreased $5.7
million, or 146.2%, to a loss of $1.8 million from income of $3.9 million for
the six months ended June 30, 2001.
Liquidity and Capital Resources
We have historically financed our operations and capital expenditures
through cash flow from operations and bank borrowings. We believe that funds
generated from operations, together with available credit under our
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)
Liquidity and Capital Resources--Cont'd.
bank line of credit, will be sufficient to finance our working capital and
capital expenditure requirements at least through the next twelve months. Our
ability to continue funding our planned growth is dependent upon our ability to
generate sufficient cash flow from operations or to obtain additional funds
through equity or debt financing, or from other sources of financing, as may be
required. If demand for information technology products continues to decline,
our cash flows from operations may be substantially reduced.
At June 30, 2002, we had cash and cash equivalents of $26.2 million and
working capital of $89.9 million. At December 31, 2001, we had cash and cash
equivalents of $35.6 million and working capital of $120.9 million.
In May 2002, we entered into a $45 million credit facility secured by
substantially all of our business assets. In July 2002, an additional lender
committed to fund $10.0 million of this facility. Amounts outstanding under
this facility bear interest at the prime rate (4.75% at June 30, 2002). The
credit facility includes various customary financial and operating covenants,
minimum net worth and maximum funded debt ratio requirements, including
restrictions on the payment of dividends, none of which we believe
significantly restricts our operations. No borrowings were outstanding under
this credit facility at June 30, 2002. The credit facility matures on June 30,
2004. Amounts outstanding under our former facility, which terminated in May
2002, did not exceed $6.3 million for the year ended December 31, 2001.
Net cash provided by operating activities was $27.1 million for the six
months ended June 30, 2002, as compared to $39.5 million provided by operating
activities in the comparable period in 2001. The primary factors historically
affecting cash flows from operations are our net income and changes in the
levels of accounts receivable, inventories and accounts payable.
At June 30, 2002, we had $121.9 million in outstanding net accounts
receivable. During the second quarter of 2002, days sales outstanding improved
sequentially by 6 days to 52 days at June 30, 2002 from 58 days at March 31,
2002.
Inventories totaled $34.5 million at June 30, 2002, compared to $37.0
million at March 31, 2002 and $48.0 million at December 31, 2001. Net sales of
products drop-shipped by distributors and other vendors directly to customers
accounted for 34% of net sales in the second quarter (19% excluding MoreDirect)
compared to 18% in the first quarter of 2002. Inventory turns improved to 27
turns, partly due to the MoreDirect acquisition, compared to 19 turns in the
first quarter of 2002 and 19 turns in the second quarter of 2001.
At June 30, 2002, we had $89.4 million in outstanding accounts payable. Such
accounts are generally paid within 30 days of incurrence and will be financed
by cash flows from operations or, if necessary, short-term borrowings under the
line of credit. This amount includes $9.8 million payable to two financial
institutions under security agreements to facilitate the purchase of inventory.
Capital expenditures were $3.4 million in the six months ended June 30, 2002
as compared to $4.2 million in the comparable period in 2001. The majority of
the capital expenditures for the respective 2002 and 2001 periods relate to
computer hardware and software purchases for our information systems. Total
capital expenditures for the year ending December 31, 2002 are estimated to be
$6.8 million.
We have disclosed significant related party transactions and our future
commitments in our Form 10-K. There have been no substantial changes in those
disclosures since year-end.
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)
Future Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities". SFAS No.
146 addresses financial accounting and reporting for costs associated with exit
or disposal activities and replaces Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." It requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred, rather
than at the date of a commitment to an exit or disposal plan. The provisions of
this Statement are effective for exit or disposal activities that are initiated
after December 31, 2002, with earlier application encouraged. The restructuring
activities undertaken by us prior to the issuance of this statement have been
appropriately accounted for under EITF 94-3. (See Note 6).
Inflation
We have historically offset any inflation in operating costs by a
combination of increased productivity and price increases, where appropriate.
We do not expect inflation to have a significant impact on our business in the
future.
Factors That May Affect Future Results and Financial Condition
Our future results and financial condition are dependent on our ability to
continue to successfully market, sell and distribute information technology
products and services, including computers, hardware and software. Inherent in
this process are a number of factors that we must successfully manage in order
to achieve a favorable financial condition and favorable operating results.
Potential risks and uncertainties that could affect our future financial
condition and operating results include, without limitation, the following
factors:
There has been a recent decrease in demand throughout the industry for the
products we sell.
There has been a general decline in the economy over the past year and the
demand for personal computer products has decreased throughout the industry.
This decrease adversely affected our sales and results of operations in 2001,
and continues to adversely affect our sales and results of operations in 2002.
If our net sales do not increase in proportion to our operating expenses or if
we experience a decrease in net sales for an extended period of time, there
would be a material adverse effect on our results of operations in future
periods.
We have experienced rapid growth in recent years followed by a decline in
sales and there is no assurance that we will be able to regain such growth.
Our net sales grew from $749.9 million for the year ended December 31, 1998
to $1.44 billion for the year ended December 31, 2000. In the year ended
December 31, 2001, our net sales declined to $1.18 billion. Net sales for the
six months ended June 30, 2002 declined by 11.8% from the comparable 2001
period, despite our acquisition of MoreDirect. Our growth in previous years
placed increasing demands on our administrative, operational, financial and
other resources. Our staffing levels and operating expenses increased
substantially in recent years due to our sales forecasts. If our revenues
continue to decline, we may not be able to reduce our staffing levels and
operating expenses in a timely manner to meet our needs. Moreover, we can
provide no assurance that we will be able to regain rapid growth in the near
future.
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--Cont'd.
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.
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
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.
supporting "build to order" programs authorizing distributors and resellers to
assemble computer hardware under the manufacturers' brands. These trends reduce
the costs to manufacturers and shift the burden of inventory risk to resellers
like us which could negatively impact our business.
We acquire products for resale from a limited number of vendors; the loss of
any one of these vendors could have a material adverse effect on our business.
We acquire products for resale both directly from manufacturers and
indirectly through distributors and other sources. The five vendors supplying
the greatest amount of goods to us constituted 66.4% and 64.1% of our total
product purchases in the six-month periods ended June 30, 2002 and 2001,
respectively. Among these five vendors, purchases from Ingram Micro, Inc.
represented 27.9% and 25.0% of our total product purchases and purchases from
Tech Data Corporation comprised 15.2% and 16.4% of our total product purchases
in the six-month periods ended June 30, 2002 and 2001, respectively. Effective
May 3, 2002, Compaq Computer Corporation became a wholly-owned subsidiary of
Hewlett Packard Company. Had this merger been completed at the beginning of the
periods presented, our purchases made directly from Hewlett Packard, on a pro
forma basis, would have constituted 13.8% and 10.4% of our total product
purchases in the six-month periods ended June 30, 2002 and 2001, respectively.
No other vendor supplied more than 10% of our total product purchases in the
six-month periods ended June 30, 2002 and 2001. If we were unable to acquire
products from Ingram Micro, Tech Data or Hewlett Packard, we could experience a
short-term disruption in the availability of products and such disruption could
have a material adverse effect on our results of operations and cash flows.
Substantially all of our contracts and arrangements with our vendors that
supply significant quantities of products are terminable by such vendors or us
without notice or upon short notice. Most of our product vendors provide us
with trade credit, of which the net amount outstanding at June 30, 2002 was
$89.4 million. Termination, interruption or contraction of relationships with
our vendors, including a reduction in the level of trade credit provided to us,
could have a material adverse effect on our financial position.
Some product manufacturers either do not permit us to sell the full line of
their products or limit the number of product units available to direct
marketers such as us. An element of our business strategy is to continue to
increase our participation in first-to-market purchase opportunities. The
availability of certain desired products, especially in the direct marketing
channel, has been constrained in the past. We could experience a material
adverse effect to our business if we are unable to source first-to-market
purchase or similar opportunities, or if we face the reemergence of significant
availability constraints.
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.
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
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.
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, such as on-line
shopping services, have emerged. Hardware and software
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.
manufacturers have sold, and may intensify their efforts to sell, their
products directly to end users. From time to time, certain manufacturers have
instituted programs for the direct sales of large order quantities of hardware
and software to certain major corporate accounts. These types of programs may
continue to be developed and used by various manufacturers. Some of our
vendors, including Apple, Compaq and IBM, currently sell some of their products
directly to end users and have stated their intentions to increase the level of
such direct sales. In addition, manufacturers may attempt to increase the
volume of software products distributed electronically to end users. An
increase in the volume of products sold through or used by consumers of any of
these competitive programs or distributed electronically to end users could
have a material adverse effect on our results of operations.
We could experience system failures which would interfere with our ability to
process orders.
We depend on the accuracy and proper use of our management information
systems including our telephone system. Many of our key functions depend on the
quality and effective utilization of the information generated by our
management information systems, including:
. 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.
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.
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.
Privacy concerns with respect to list development and maintenance may
materially adversely affect our business.
We mail catalogs and send electronic messages to names in our proprietary
customer database and to potential customers whose names we obtain from rented
or exchanged mailing lists. World-wide public concern regarding personal
privacy has subjected the rental and use of customer mailing lists and other
customer information to increased scrutiny. Any domestic or foreign legislation
enacted limiting or prohibiting these practices could negatively affect our
business.
We face many uncertainties relating to the collection of state sales or use
tax.
Sales taxes are presently collected on sales of products by several of our
sales subsidiaries in as many as 25 states and the District of Columbia.
Various states have sought to impose on direct marketers the burden of
collecting state sales taxes on the sales of products shipped to their
residents. In 1992, the United States Supreme Court affirmed its position that
it is unconstitutional for a state to impose sales or use tax collection
obligations on an out-of-state mail order company whose only contacts with the
state are limited to the distribution of catalogs and other advertising
materials through the mail and the subsequent delivery of purchased goods by
United States mail or by interstate common carrier. However, legislation that
would expand the ability of states to impose sales tax collection obligations
on direct marketers has been introduced in Congress on many occasions. Due to
its presence on various forms of electronic media and other factors, our
contact with many
24
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
Factors That May Affect Future Results and Financial Condition--Cont'd.
states may exceed the contact involved in the Supreme Court case. We cannot
predict the level of contact that is sufficient to permit a state to impose on
us a sales tax collection obligation. If the Supreme Court changes its position
or if legislation is passed to overturn the Supreme Court's decision, the
imposition of a sales or use tax collection obligation on us in states to which
we ship products would result in additional administrative expenses to us,
could result in price increases to our customers, and could reduce demand for
our product.
We are dependent on key personnel.
Our future performance will depend to a significant extent upon the efforts
and abilities of our senior executives. The competition for qualified
management personnel in the computer products industry is very intense, and the
loss of service of one or more of these persons could have an adverse effect on
our business. Our success and plans for future growth will also depend on our
ability to hire, train and retain skilled personnel in all areas of our
business, including sales account managers and technical support personnel.
There can be no assurance that we will be able to attract, train and retain
sufficient qualified personnel to achieve our business objectives.
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.
25
PC CONNECTION, INC. AND SUBSIDIARIES
Part I--Financial Information
Item 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest cash balances in excess of operating requirements in short-term
securities, generally with maturities of 90 days or less. In addition, our
secured credit agreement provides for borrowings which bear interest based on
the prime rate. We had no borrowings outstanding pursuant to our credit
agreement as of June 30, 2002. We believe that the effect, if any, of
reasonably possible near-term changes in interest rates on our financial
position, results of operations and cash flows should not be material.
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
At the 2002 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") on June 18, 2002, the following matters were acted upon by the
stockholders of the Company:
1. the election of six Directors;
2. the approval to amend the Company's Employee Stock Purchase Plan to
increase the number of shares of Common Stock that may be issued
thereunder from 337,500 shares to 537,500 shares;
3. the ratification of the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the current fiscal year.
The number of shares of Common Stock issued, outstanding and eligible to
vote as of the record date of May 15, 2002 was 24,559,895. The results of the
voting on each of the matters presented to stockholders at the Annual Meeting
are set forth below:
VOTES VOTES
VOTES FOR AGAINST ABSTAINED UNVOTED
---------- ------- --------- -------
1. Election of Directors:
Bruce Barone 23,141,353 22,972 N.A. N.A.
Joseph Baute 23,141,353 22,972 N.A. N.A.
Peter Baxter 23,141,353 22,972 N.A. N.A.
David Beffa-Negrini 23,029,853 134,472 N.A. N.A.
Patricia Gallup 23,056,153 108,172 N.A. N.A.
David Hall 23,056,153 108,172 N.A. N.A.
2. Amendment to the Company's
Employee Stock Purchase Plan 23,086,872 68,187 9,266 N.A.
3. Ratification of the Appointment of
Auditors 22,925,121 235,517 3,687 N.A.
Item 5--Other Information
Not applicable.
27
PC CONNECTION, INC. AND SUBSIDIARIES
Part II--Other Information
Item 6--Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
15 Letter on unaudited interim financial information.
99.1 Certification of the Company's Chief Executive Officer and Senior Vice President and
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
(I) The Company filed a Current Report on Form 8-K on April 11, 2002
regarding the execution of the Merger Agreement by and between PC
Connection, Inc., MoreDirect, Inc. and the sole stockholder of
MoreDirect, Inc., dated as of April 5, 2002.
(II) The Company filed a Current Report on Form 8-K on May 9, 2002,
reporting pro forma information that was released at R. W. Baird's
Conference in Chicago, IL on May 10, 2002.
(III) The Company filed a Current Report on Form 8-K on June 5, 2002,
regarding the execution of an Amended and Restated Credit Facility
by and between the Company and Citizens Bank of Massachusetts, as
agent.
(IV) The Company filed a Current Report on Form 8-K/A Amendment No. 1 on
June 18, 2002, to the Form 8-K filed on April 11, 2002 reporting the
required financial statements relating to MoreDirect, Inc.
28
PC CONNECTION, INC. AND SUBSIDIARIES
June 30, 2002
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PC CONNECTION, INC. AND SUBSIDIARIES
August 14, 2002 By: /s/ WAYNE WILSON
----------------------------------
Wayne Wilson
President and Chief Operating
Officer
August 14, 2002 By: /s/ MARK GAVIN
----------------------------------
Mark Gavin
Senior Vice President of Finance
and Chief Financial Officer
29