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 October 5, 1996
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 0-20022
POMEROY COMPUTER RESOURCES, INC.
________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 31-1227808
________ __________
(State or jurisdiction of (I.R.S. Employer
incorporation Employer Identification No.)
or organization)
1020 Petersburg Road Hebron, KY 41048
______________________________________
(Address of principal executive offices)
(606) 282-7111
(Registrant's telephone number, including area code)
Indicate by 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 requirements
for the past 90 days.
YES ___X___NO___
The number of shares of common stock outstanding as of November
6, 1996 was 6,419,546.
POMEROY COMPUTER RESOURCES, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
____
Consolidated Balance 3
Sheets as of October 5,
1996 and January 5, 1996
Consolidated Statements of 4
Income for the Quarters
Ended October 5, 1996 and
1995
Consolidated Statements of 5
Income for the Nine Months
Ended October 5, 1996 and
1995.
Consolidated Statements of 6
Cash Flows for the Nine
Months Ended October 5,
1996 and 1995
Notes to Consolidated 7
Financial Statements
Item 2. Management's Discussion 9
and Analysis of Financial
Condition and Results of
Operations
Part II. Other Information 11
SIGNATURE 12
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
( In thousands, except share and per share amounts )
January 5, October 5,
1996 1996
__________ _________
ASSETS
Current assets:
Cash $596 $3,168
Accounts and note receivable, less
allowance of $411 and $487 at January 5,
and October 5, 1996, respectively 34,320 61,551
Inventories 18,987 22,012
Other 487 736
_______ ________
Total current assets 54,390 87,467
_______ ________
Equipment and leasehold improvements 6,559 10,734
Less accumulated depreciation 1,968 3,229
_______ ________
Net equipment and leasehold improvements 4,591 7,505
Other assets 5,004 10,668
_______ ________
Total assets $63,985 $105,640
_______ ________
LIABILITIES AND EQUITY
Current liabilities:
Notes payable $409 $606
Accounts payable 21,644 36,474
Bank notes payable 16,877 16,581
Other current liabilities 5,120 7,131
_______ ________
Total current liabilities 44,050 60,792
Notes payable 100 1,524
Deferred income taxes 635 627
Equity:
Preferred stock (no shares issued
or outstanding)
Common stock (2,625,917 and 6,397,346
shares issued and outstanding at January 5
and October 5, 1996, respectively 26 64
Paid-in capital 13,280 33,622
Retained earnings 6,098 9,215
_______ ________
19,404 42,901
Less treasury stock, at cost (20,900
shares at January 5 and
October 5, 1996, respectively) 204 204
_______ ________
Total equity 19,200 42,697
_______ ________
Total liabilities and equity $63,985 $105,640
_______ ________
<FN>
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
( In thousands, except per share amounts )
Quarter Ended
_______________________
October 5, October 5,
1995 1996
__________ __________
Net sales and revenues $64,982 $92,975
Cost of sales and service 56,217 78,308
_______ _______
Gross profit 8,765 14,667
Operating expenses:
Selling, general and administrative 5,964 8,717
Rent expense 221 385
Depreciation 189 518
Amortization 59 156
_______ _______
Total operating expenses 6,433 9,776
_______ _______
Income from operations 2,332 4,891
Interest expense 512 500
Other income 6 16
_______ _______
Income before income tax 1,826 4,407
Income tax expense 738 1,788
_______ _______
Net income $1,088 $2,619
_______ _______
Weighted average shares outstanding:
Primary 4,121 6,475
Fully Diluted 4,121 6,550
Net income per common share:
Primary $0.26 $0.40
Fully Diluted $0.26 $0.40
<FN>
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
( In thousands, except per share amounts )
Nine Months Ended
______________________
October 5, October 5,
1995 1996
__________ __________
Net sales and revenues $171,458 $234,035
Cost of sales and service 147,059 196,922
________ ________
Gross profit 24,399 37,113
Operating expenses:
Selling, general and administrative 16,466 23,297
Rent expense 665 1,016
Depreciation 509 1,278
Amortization 164 425
________ ________
Total operating expenses 17,804 26,016
________ ________
Income from operations 6,595 11,097
Interest expense 1,507 1,594
Litigation settlement and related costs - 4,392
Other income 34 133
________ ________
Income before income tax 5,122 5,244
Income tax expense 2,074 2,127
________ ________
Net income $3,048 $3,117
________ ________
Weighted average shares outstanding:
Primary 3,972 4,985
Fully Diluted 4,019 5,086
Net income per common share:
Primary $0.77 $0.63
Fully Diluted $0.76 $0.61
<FN>
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
( In thousands )
Nine Months Ended
______________________
October 5, October 5,
1995 1996
__________ _________
Net cash flows used in operating activities ($812) ($4,849)
_______ ________
Cash flows used in investing activities:
Capital expenditures (744) (1,788)
Acquisition of resellers (75) (4,528)
Payment for covenant not to compete (143) -
Other (19) -
_______ ________
Net investing activities (981) (6,316)
_______ ________
Cash flows provided by (used in) financing activities:
Net payments on bank note 915 (1,146)
Payments of notes payable (214) (3,982)
Net proceeds of stock offering _ 17,924
Retirement of stock warrants _ (330)
Proceeds from exercise of stock options 1,332 1,271
______ _______
Net financing activities 2,033 13,737
______ _______
Increase in cash 240 2,572
Cash:
Beginning of period 74 596
______ _______
End of period $314 $3,168
______ _______
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Except as
disclosed herein, there has been no material change in the
information disclosed in the notes to consolidated financial
statements included in the Company's Annual Report on Form 10-
K for the year ended January 5, 1996. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the interim
period have been made. The results of operations for the nine-
month period ended October 5, 1996 are not necessarily
indicative of the results that may be expected for future
interim periods or for the year ending January 5, 1997.
2. Borrowing Arrangements
The Company amended its bank revolving credit agreement on
June 27, 1996. This change increased the maximum line of
credit to $25.0 million. At October 5, 1996, the outstanding
balance was $16.6 million. The interest rate charged will vary
based on the prime rate of the bank or the Company's election
to use the LIBOR rate. The rate used will be adjusted
quarterly based on attaining certain financial covenants. At
October 5, 1996, the interest rate charged was 7.5%. This rate
will be 7.5% during the fourth quarter of 1996.
3. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information
and non-cash investing and financing activities are as follows:
(In thousands) Nine Months Ended
_________________________________
October 5, 1995 October 5, 1996
_______________ _______________
Interest paid $1,495 $1,565
______ ______
Income taxes paid $2,085 $ 688
______ ______
Business combinations accounted for
as purchase:
Assets acquired $ 15,298
Liabilities assumed (6,395)
Note payable (2,900)
Stock issued (1,475)
________
Net cash paid $ 4,528
________
4. Legal Proceeding
On April 29, 1996, the Company and David B. Pomeroy and
Catherine Pomeroy (collectively Pomeroy) entered into a
Settlement Agreement (the Agreement) with Vanstar Corporation
(Vanstar), Merisel, Inc. and Merisel FAB, Inc. Vanstar (f/k/a
ComputerLand) was the Company's franchisor from
1981 to 1993, when the Company changed from a franchisee to a
Datago purchaser. In December 1994, Vanstar filed a
complaint against the Company alleging that the Company failed
to comply with the terms of the Datago Agreement. In January
1995, the Company filed a cross-complaint against Vanstar
alleging numerous breaches of the Datago Agreement. In
September 1995, Vanstar amended its complaint to add Pomeroy
as co- defendants because they had guaranteed the Company's
obligations under the Agreement. The Agreement settles any
and all claims between Vanstar, the Company and Pomeroy that
were raised or could have been raised in Vanstar's lawsuit
against the Company and Pomeroy and includes a mutual release
among all the parties.
The Company agreed to pay to Vanstar $3.3 million
consisting of $1.65 million in cash and a promissory
note in the amount of $1.65 million. The note was paid on
August 27, 1996 plus interest at 0.25% below the
prime rate of the Company's bank as of April 29, 1996. All
agreements between the Company and Vanstar were terminated as
of the effective date of the Agreement. The settlement
agreement provides for forgiveness of any and all claims or
obligations of either party against the other, resulting in a
charge-off of $0.5 million of receivables from Vanstar
Corporation and additional expense of $0.5 million for costs
related to the litigation.
5. Equity
On September 6, 1996, the Company's Board of Directors
authorized a three-for-two stock split in the form of a stock
dividend payable October 4, 1996, to shareholders of record
September 19, 1996. The split resulted in the issuance of
2,125,462 new shares of Common Stock. The stated par value of
each share was not changed from $0.01. A total of $21 thousand
was reclassified from the Company's additional paid in capital
account to the Company's common stock account. Accordingly,
net income per common share, weighted average shares
outstanding and stock option plan information have been
restated to reflect the stock split.
6. Litigation
There are various legal actions arising in the normal course
of business that have been brought against the Company.
Management believes these matters will not have a material
adverse effect on the Company's financial position or results
of operations.
7. Subsequent Event
On October 11, 1996 the Company acquired substantially all of
the assets and assumed substantially all of the
liabilities of Communications Technology, Inc., d/b/a DILAN
(DILAN), a privately held network integrator located in
Hickory, North Carolina. The purchase price consisted of $2.6
million in cash, a $1.1 million subordinated note and $5.2
million of assumed liabilities. Interest on the subordinated
note, which is calculated at 10% per annum, is payable
quarterly and principal is payable in three equal annual
installments of $365 thousand. The acquisition will be
accounted for as a purchase, accordingly the purchase price
will be allocated to assets and liabilities based on their
estimated value as of the date of the acquisition. The
results of DILAN'S operations will be included in the
consolidated statement of income from the date of acquisition.
POMEROY COMPUTER RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Revenues
______________________
Net sales and revenues of $93.0 million in the third quarter of
1996 increased $28.0 million, or 43.1%, from $65.0 million in the
third quarter of 1995. After eliminating fiscal 1995 revenues
from the now closed Kingsport branch and a major customer which
was lost in late 1995 and 1996 revenues from The Computer Supply
Store, Inc. ( TCSS ) which was acquired in March 1996,
comparable net sales and revenues increased 22.0%. Sales of
equipment and supplies of $85.8 million in the third quarter of
1996 increased $26.1 million, or 43.6%, from $59.7 million in the
third quarter of 1995. On a comparable basis, as described above,
sales of equipment and supplies increased 20.4%. Service and
other revenues of $7.2 million in the third quarter of 1996
increased $2.0 million, or 37.1%, from $5.2 million in the third
quarter of 1995. On a comparable basis, as described above,
service and other revenues increased 39.3%.
Net sales and revenues of $234.0 million in the first nine months
of 1996 increased $62.5 million, or 36.5%, from $171.5 million in
the first nine months of 1995. On a comparable basis, as
described above, net sales and revenues increased 25.2%. Sales of
equipment and supplies of $214.1 million in the first nine months
of 1996 increased $56.7 million, or 36.0% from $157.4 million. On
a comparable basis, as described above, sales of equipment and
supplies increased 22.9%. Service and other revenues of $19.9
million in the first nine months of 1996 increased $5.9 million,
or 42.1% from $14.0 million in the first nine months of 1995. On
a comparable basis, as described above, service and other
revenues increased 50.2%.
Gross Profit
____________
Gross profit as a percentage of sales was 15.8% in the third
quarter of 1996 compared to 13.5 % in the third quarter of 1995.
This increase in the third quarter of 1996 can be attributed to
less reliance on lower margin, high volume equipment rollouts,
larger vendor rebates and the increase in the margin for service
and other revenues. In the third quarter of 1995, the lower
margin was due to strong price competition and large volume
equipment rollouts that contributed significantly to lowering
gross profit as a percentage of sales. Provided there are no
changes in rebate programs, the level of vendor rebates is
expected to continue into the fourth quarter as volume purchases
with major manufacturers continue to increase.
Gross profit as a percentage of sales was 15.9% in the first nine
months of 1996 compared to 14.2% in the first nine months of
1995. This increase is attributed to the same factors as
described above.
Operating Expenses
__________________
Selling, general and administrative expenses expressed as a
percentage of sales increased to 9.4% and 10.0% for the third
quarter and first nine months of 1996, respectively, from 9.2%
and 9.6% in the third quarter and first nine months of 1995,
respectively. This increase is primarily attributable to the
addition of technical personnel to continue the growth of the
Company's service business. As these personnel reach full
productivity, their cost as a percent of revenues should
decrease. In addition, market development funds, which reduce
selling, general and administrative expenses, have declined
during the third quarter and first nine months of 1996 as a
percentage of net sales and revenues due to the fact that vendors
have shifted funds to rebates as described in Gross Profit above.
Total operating expenses expressed as a percentage of sales
increased to 10.5% and 11.1% in the third quarter and first nine
months of 1996, respectively, from 9.9% and 10.4% in the third
quarter and first nine months of 1995, respectively, due to the
items noted previously in selling, general and administrative
expenses, an increase in depreciation related to the new
headquarters and distribution facilities and amortization of
Goodwill related to the acquisition of TCSS.
Income from Operations
______________________
Income from operations of $4.9 million in the third quarter of
1996 increased $2.6 million, or 109.7%, from $2.3 million in the
third quarter of 1995. The Company's operating margin increased
to 5.3% in the third quarter of 1996 as compared to 3.6% in 1995
as the increase in gross margin offset the increase in operating
expenses as a percent of net sales and revenues.
Income from operations of $11.1 million in the first nine months
of 1996 increased $4.5 million, or 68.3%, from $6.6 million in
the first nine months of 1995. Operating margin increased to 4.7%
in the first nine months of 1996 as compared to 3.8% in 1995 as
the increase in gross margin offset the increase in operating
expenses as a percent of net sales and revenues.
Interest Expense
________________
Interest expense was $0.5 million and $1.6 million in the third
quarter and first nine months of 1996, respectively, compared
with $0.5 million and $1.5 million in the third quarter and
first nine months of 1995, respectively. The average level of
bank borrowings for the third quarter of 1996 were comparable to
the same period in 1995 but approximately 34% lower than the
average bank borrowings during the second quarter of 1996. This
decrease during the third quarter of 1996 is attributed to the
utilization of the net proceeds from the secondary stock offering
of $17.9 million in July 1996. In addition, the interest rate
charged on the line of credit was reduced to 7.5% since the
Company achieved certain financial ratios at the end of the
second quarter of 1996. While the average level of borrowings on
floor plans increased by 25%, interest expense decreased as more
purchases were made using vendor subsidized programs.
While interest expense related to accounts receivable and
inventory financing decreased for the reasons enumerated above,
total interest expense for the third quarter of 1996 remained
comparable to the same period in 1995. This is attributable to
the debt incurred for acquisitions.
Income Taxes
____________
The Company's effective tax rate was 40.6% in the third quarter
of 1996 compared to 40.4% in the third quarter of 1995. For the
nine months ended October 5, 1996 and 1995, the effective tax
rate was 40.6% and 40.5%, respectively.
Litigation Settlement and Related Costs
_______________________________________
On April 29, 1996, the Company agreed to a settlement of the
litigation with Vanstar Corporation. The settlement of $3.4
million was satisfied by $1.65 million in cash and a $1.65
million note which was paid on August 27, 1996 plus interest at
8.0%. The settlement agreement provided for the release of any
and all claims or obligations of either party against the other,
resulting in a charge-off of $0.5 million of receivables from
Vanstar Corporation and additional expense of $0.5 million for
costs related to the litigation.
Net Income
__________
Net income of $2.6 million in the third quarter of 1996 increased
$1.5 million, or 140.7%, from $1.1 million in the third quarter
of 1995. This increase was a result of the factors described
previously. Net income of $3.1 million in the first nine months
of 1996 was flat with the comparable period in 1995 primarily as
a result of the settlement with Vanstar. Excluding the impact of
the Vanstar settlement, net income would have been $5.7 million.
Liquidity and Capital Resources
_______________________________
Cash used in operating activities was $4.8 million in the first
nine months of 1996. Cash used in investing activities include
$4.5 million for acquisitions and $1.8 million for capital
expenditures. Cash provided by financing activities included
$17.9 million of net proceeds from a secondary stock offering of
1.4 million shares and $1.0 million from the exercise of stock
options less $1.1 million of net repayments on bank notes
payable, $4.0 million of repayments on various notes payable and
$0.3 million for the redemption of warrants.
During the second quarter of 1996 the line of credit under the
bank loan agreement was increased to $25 million through April
30, 1997.
It is expected that available credit under the Company's lending
arrangements along with internally generated funds will be
sufficient to finance its near-term growth.
On August 2, 1996 the Company acquired certain assets of a
service company in Birmingham, AL, which will be combined with
the Company's existing branch office, for approximately $0.5
million. On October 11, 1996, the Company acquired substantially
all of the assets and assumed substantially all of the
liabilities of Communications Technology, Inc., d/b/a DILAN
( DILAN ) a privately held network integrator headquartered in
Hickory, North Carolina. The purchase price consisted of $2.6
million in cash, a $1.1 million note and $5.2 million of assumed
liabilities. The cash used to acquire DILAN was provided by
short-term borrowings through the Company's revolving credit
agreement.
The Company regularly evaluates various expansion opportunities
including the acquisition of resellers or related businesses in
growing market areas and service and support companies that
complement its ongoing operations.
PART II - OTHER INFORMATION
Items 1 to 5 None
Item 6 Exhibits
Filed Herewith
(page #) or
Incorporated
Exhibits by Reference to:
________ ________________
10(iii) Material Contracts
(a)(22) Amendment to Loan E-1 to E-4
Agreement by Letter
Agreement dated October
18, 1996 by and among
Star Bank, N.A., the
Company, C&N Corp. and
Xenas Communications
Corp.
11 (a)(23) Computation of Earnings E-5
per Share
SIGNATURE
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.
POMEROY COMPUTER RESOURCES, INC.
________________________________
(Registrant)
Date: November 19, 1996 By: /s/ Edwin S. Weinstein
Edwin S. Weinstein,
Chief Financial Officer
(Principal Financial and
Accounting Officer)