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 April 5, 1998
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 incorporation (IRS Employer
or organization) Identification No.)
1020 Petersburg Road, Hebron, KY 41048
(Address of principal executive offices)
______________________________________
(606) 586-0600
______________
(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 April 21,
1998 was 11,457,104.
POMEROY COMPUTER RESOURCES, INC.
TABLE OF CONTENTS
Part I. Financial
Information
Item 1. Financial Statements: Page
____
Consolidated Balance 3
Sheets as of January 5,
1998 and April 5, 1998
Consolidated Statements of 4
Income for the Quarters
Ended April 5, 1997 and
1998
Consolidated Statements of 5
Cash Flows for the
Quarters Ended April 5,
1997 and 1998
Notes to Consolidated 6
Financial Statements
Item 2. Management's Discussion 8
and Analysis of Financial
Condition and Results of
Operations
Part II. Other Information 10
SIGNATURE 14
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
( In thousands )
January 5, April 5,
1998 1998
________ ________
ASSETS
Current assets:
Cash $380 $932
Accounts and note receivable, less
allowance of $578 and $649 at January 5,
and April 5, 1998, respectively 99,707 124,718
Inventories 39,160 50,897
Other 816 1,031
________ ________
Total current assets 140,063 177,578
________ ________
Equipment and leasehold improvements 17,316 20,255
Less accumulated depreciation 6,770 7,611
________ ________
Net equipment and leasehold improvements 10,546 12,644
Other assets 16,655 26,895
________ ________
Total assets $167,264 $217,117
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Notes payable $2,077 $2,380
Accounts payable 40,038 60,535
Bank notes payable 22,611 47,051
Other current liabilities 12,309 9,359
________ ________
Total current liabilities 77,035 119,325
________ ________
Notes payable 1,434 3,939
Deferred income taxes 18 372
Equity:
Preferred stock ( no shares issued
or outstanding) - -
Common stock ( 11,402 and 11,438 shares
issued and outstanding at January 5
and April 5, 1998, respectively 114 114
Paid-in capital 60,226 60,653
Retained earnings 28,641 32,918
________ ________
88,981 93,685
Less treasury stock, at cost (21 shares at
January 5 and April 5, 1998, respectively) 204 204
________ ________
Total equity 88,777 93,481
________ ________
Total liabilities and equity $167,264 $217,117
<FN>
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
( In thousands, except per share amounts)
Quarter Ended
_____________________________
April 5, April 5,
1997 1998
__________ ________
Net sales and revenues $100,366 $135,198
Cost of sales and service 83,462 111,966
__________ ________
Gross profit 16,904 23,232
Operating expenses:
Selling, general and administrati 10,475 14,320
Rent 473 562
Depreciation 803 852
Amortization 212 309
__________ ________
Total operating expenses 11,963 16,043
__________ ________
Income from operations 4,941 7,189
Interest expense 367 423
Other income 48 23
__________ ________
Income before income tax 4,622 6,789
Income tax expense 1,664 2,512
__________ ________
Net income $2,958 $4,277
========== ========
Weighted average shares outstanding
Basic 10,336 11,392
Diluted 10,649 11,711
Earnings per common share
Basic $0.29 $0.38
Diluted $0.28 $0.37
<FN>
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
( In thousands )
Quarter Ended
___________________________
April 5, April 5,
1997 1998
__________ __________
Net cash flows used in operating activities ($9,692) ($11,253)
__________ __________
Cash flows used in investing activities:
Capital expenditures (954) (1,409)
Acquisition of resellers - (11,229)
__________ __________
Net investing activities (954) (12,638)
Cash flows provided by (used in)
financing activities:
Net borrowings (payments) on bank note (18,884) 24,441
Payments on notes payable (425) (425)
Proceeds from secondary offering 23,293 0
Proceeds from exercise of stock options 130 427
__________ __________
Net financing activities 4,114 24,443
__________ __________
Increase (decrease) in cash (6,532) 552
Cash:
Beginning of period 6,809 380
__________ __________
End of period $277 $932
========== ==========
<FN>
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
1.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, 1998. 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
three-month period ended April 5, 1998 are not necessarily
indicative of the results that may be expected for future
interim periods or for the year ending January 5, 1999.
2. Borrowing Arrangements
At January 5 and April 5, 1998, bank notes payable include
$6.5 million and $12.1 million, respectively, of overdrafts in
accounts with the Company's primary lender. These amounts were
subsequently funded through the normal course of business.
3. Earnings per Common Share
The following is a reconciliation of the number of shares used
in the basic EPS and diluted EPS computations:
(in thousands, except per share data)
Quarter ended April
__________________________________________
1997 1998
____________________ ____________________
Per Share Per Share
Shares Amount Shares Amount
________ _________ ________ _________
Basic EPS 10,336 $ 0.29 11,392 $ 0.38
Effect of dilutive
stock options 313 (0.01) 319 (0.01)
Contingent shares- - -
________ _________ ________ _________
Diluted EPS 10,649 $ 0.28 11,711 $ 0.37
======== ========= ======== ========
4.Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information
and non-cash investing and financing activities are as
follows:
Quarter Ended
____________________________
April 5, 1997 April 5, 1998
_____________ _____________
Interest paid $470 $425
==== ====
Income taxes paid $251 $4,112
==== ======
Business combinations
accounted for as purchases:
Assets acquired $31,804
Liabilities assumed 18,505
Notes payable 2,000
_______
Net cash paid $11,299
=======
5.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.
6.Subsequent Event
In April 1998, the Company amended its revolving credit
agreement under the same terms as its prior agreement. The
amended agreement provides for borrowings up to $45.0 million
at the bank's prime rate minus 1.25%.
Special Cautionary Notice Regarding Forward-Looking Statements
______________________________________________________________
Certain of the matters discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" contain certain forward looking statements regarding
future financial results of the Company. The words "expect,"
"estimate," "anticipate," "predict," and similar expressions are
intended to identify forward-looking statements. Such
statements are forward-looking statements for the
purposes of the Securities Act of 1933 and the Securities
Exchange Act of 1934, as amended, and as such may involve known
and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the
Company to be materially different from future results,
performance or achievements expressed or implied by such forward-
looking statements. Important factors that could cause the actual
results, performance or achievements of the Company to differ
materially from the Company's expectations are disclosed in this
document including, without limitation, those statements made in
conjunction with the forward-looking statements under
"Management's Discussion and Analysis of Financial Condition and
Results of Operations". All written or oral forward-looking
statements attributable to the Company are expressly qualified in
their entirety by such factors.
POMEROY COMPUTER RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TOTAL NET SALES AND REVENUES. Total net sales and revenues
increased $34.8 million, or 34.7%, to $135.2 million in the first
quarter of 1998 from $100.4 million in the first quarter of 1997.
This increase was attributable to an increase in sales to
existing and new customers and to acquisitions completed in
fiscal years 1998 and 1997. Excluding acquisitions completed in
fiscal years 1998 and 1997, total net sales and revenues
increased 26.9%. Sales of equipment and supplies increased $28.3
million, or 31.4%, to $118.5 million in the first quarter of
fiscal 1998 from $90.2 million in the first quarter of fiscal
1997. Excluding acquisitions completed in fiscal 1998 and 1997,
sales of equipment and supplies increased 24.0%. Service revenues
increased $6.5 million, or 63.7%, to $16.7 million in the first
quarter of fiscal 1998 from $10.2 million in the first quarter of
fiscal 1997. Excluding acquisitions completed in fiscal 1998 and
1997, service revenues increased 52.7%.
GROSS MARGINS. Gross margin was 17.2% in the first quarter of
fiscal 1998 compared to 16.8% in the first quarter of 1997. The
Company improved its gross margin by increasing the volume of
higher-margin service revenues which offset a decrease in
hardware gross margins and the growth in equipment sales. Service
and other revenues increased to 11.7% of total net sales and
revenues in the first quarter of fiscal 1998 compared to 10.1% of
total net sales and revenues in the first quarter of fiscal 1997.
Factors that may have an impact on gross margin in the future
include the percentage of equipment sales with lower-margin
customers and the ratio of service revenues to total net sales
and revenues.
OPERATING EXPENSES. Selling, general and administrative
expenses (including rent expense) expressed as a percentage of
total net sales and revenues increased to 11.0% in the first
quarter of fiscal 1998 from 10.9% in the first quarter of fiscal
1997. Excluding acquisitions completed in fiscal 1998 and 1997,
selling, general and administrative expenses expressed as a
percentage of total net sales and revenues would have been 10.1%.
Total operating expenses expressed as a percentage of total net
sales and revenues remained at 11.9% in the first quarter of
fiscal 1998 and 1997. Excluding acquisitions completed in fiscal
1998 and 1997, total operating expenses expressed as a percentage
of total net sales and revenues in the first quarter of fiscal
1998 would have been 11.4%
INCOME FROM OPERATIONS. Income from operations increased $2.3
million, or 46.9%, to $7.2 million in the first quarter of fiscal
1998 from $4.9 million in the first quarter of fiscal 1997. The
Company's operating margin increased to 5.3% in the first quarter
of fiscal 1998 from 4.9% in the first quarter of fiscal 1997
because of the increase in gross margin.
INTEREST EXPENSE. Interest expense was approximately $0.4
million in the first quarter of 1998 and 1997.
INCOME TAXES. The Company's effective tax rate was 37.0% in
the first quarter of fiscal 1998 compared to 36.0% in the first
quarter of fiscal 1997.
NET INCOME. Net income increased $1.3 million, or 44.6%, to
$4.3 million in the first quarter of fiscal 1998 from $3.0
million in the first quarter of fiscal 1997 due to the factors
described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $11.3 million in the
first quarter of 1998. Cash used in investing activities was
$11.2 million for the acquisition of resellers and $1.4 million
for capital expenditures. Cash provided by financing activities
included $24.4 million of net borrowings on bank notes payable,
$0.4 million from the exercise of stock options less $0.4 million
for a note repayment.
A significant part of the Company's inventories is financed by
floor plan arrangements with third parties. At April 5, 1998,
these lines of credit totaled $37.0 million, including $12.0
million with IBM Credit Corporation (``ICC'') and $25.0 million
with Deutsche Financial Services (``DFS''). Borrowings under the
ICC floor plan arrangement are made on sixty day notes, with one-
half of the note amount due in thirty days. Borrowings under the
DFS floor plan arrangement are made on thirty day notes. All such
borrowings are secured by the related inventory. Financing on
many of the arrangements is interest free due to subsidies by
manufacturers. The average rate on the plans overall is less than
1.0% per annum. The Company classifies amounts outstanding under
the floor plan arrangements as accounts payable.
The Company's financing of receivables is provided through its
Credit Facility, which was revised in January 1998, and permits
the Company to borrow up to the lesser of $40.0 million or an
amount based upon a formula of eligible trade receivables. The
revised Credit Facility, which expires May 31, 1998, carries a
variable interest rate based solely on the prime rate of Star
Bank less 125 basis points. At April 5, 1998, the amount
outstanding, which included $12.1 million of overdrafts in
accounts with the Company's primary lender, was $47.1 million at
an interest rate of 7.25%. Under the terms of the Credit
Facility, the Company is prohibited from paying any cash
dividends and is subject to various restrictive covenants.
Further, the Company expects to finalize a $120.0 million line of
credit during the second quarter of 1998, under terms similar to
the revised Credit Facility, with DFS including a participation
interest by Star Bank in the new Credit Facility. When finalized
this line of credit will replace the $40.0 million Credit
Facility with Star Bank and the $25.0 million line of credit with
DFS.
The Company believes that the anticipated cash flow from
operations and current financing arrangements will be sufficient
to satisfy the Company's capital requirements for the next 12
months.
OTHER
The Company is heavily dependent upon complex computer systems
for all phases of its operations, which include sales and
distribution. The Company began addressing the affect of the Year
2000 compliance issue in 1996.The Year 2000 date issue arises
from the fact that many computer programs use only two digits to
identify a year in a date field. The Company has completed an
assessment of its own systems and determined that its principle
systems are Year 2000 compliant. Management does not expect that
any costs associated with the Company becoming Year 2000
compliant will have a material adverse impact on the Company's
financial position, results of operations or cash flows. The
Company is continuing to assess the Year 2000 issue with respect
to its customers and suppliers. The Company could be adversely
impacted by the Year 2000 date issue if its suppliers, customers
and other businesses do not address this issue successfully.
Management continues to assess these risks in order to be able to
respond in a manner which would reduce any impact on the Company.
POMEROY COMPUTER RESOURCES, INC.
PART II - OTHER INFORMATION
Items 1 to 5
None
Item 6 Exhibits and Reports on Form 8-K
(a)
___
Exhibits
________
10(i) Material Agreements
(dd)(1) Asset Purchase
Agreement dated March
6, 1998 between the
Company and Commercial
Business Systems, Inc.
(dd)(2) Employment Agreement
dated March 6, 1998
between the Company and
Thomas Clayton
(dd)(3) Employment Agreement
dated March 6, 1998
between the Company and
Steven Shapiro
(dd)(4) Subordinated Promissory
Note dated March 6,
1998 between the
Company and Commercial
Business System, Inc.
(dd)(5) Subordination Agreement
dated March 6, 1998
between the Company and
Commercial Business
System, Inc.
(dd)(6) General Bill of Sales
and Assignment dated
March 6, 1998 between
the Company and
Commercial Business
System, Inc.
(dd)(7) Assumption of
Liabilities dated March
6, 1998 between the
Company and Commercial
Business System, Inc.PAGE>
(dd)(8) Power of Attorney
dated March 6, 1998
between the Company and
Commercial Business
System, Inc.
(dd)(9) Assignment and
Assumption Agreement
dated March 6, 1998
between the Company and
Commercial Business
System, Inc.
(dd)(10) Agreement dated March
6, 1998 between the
Company and Commercial
Business System, Inc.
(dd)(11) Assignment and
Assumption of Lease
Agreement dated March
6, 1998 between the
Company and Commercial
Business System, Inc.
(dd)(12) Assignment and
Assumption of Lease
Agreement dated March
6, 1998 between the
Company and Commercial
Business System, Inc.
(dd)(13) Covenant Not to Compete
Agreement dated March
6, 1998 between the
Company and Steve
Shapiro
(dd)(14) Covenant Not to Compete
Agreement dated March
6, 1998 between the
Company and Thomas
Clayton
(dd)(15) Covenant Not to Compete
Agreement dated March
6, 1998 between the
Company and Commercial
Business Systems, Inc.
(dd)(16) Consent for use of
Similar Name Agreement
dated March 6, 1998
between the Company and
Commercial Business
Systems, Inc.
(dd)(17) Agreement dated March
6, 1998 between the
Company and Commercial
Business Systems, Inc.
(ee)(1) Stock Purchase
Agreement dated
February 26, 1998
between J. Walter
Duncan Jr. , Nicholas
Duncan, James B. Kite,
O. Dean Higganbotham,
and Dale Higganbotham
and Pomeroy Computer
Resources, Inc.
(ee)(2) Non-Compete Agreement
dated February 26, 1998
between O. Dean
Higganbotham and
Pomeroy Computer
Resources, Inc.
(ee)(3) Non-Compete Agreement
dated February 26, 1998
between Dale
Higganbotham and
Pomeroy Computer
Resources, Inc.
(ee)(4) Non-Compete Agreement
dated February 26, 1998
between J. Walter
Duncan Jr. and Pomeroy
Computer Resources,
Inc.
(ee)(5) Non-Compete Agreement
dated February 26, 1998
between Nicholas V.
Duncan and Pomeroy
Computer Resources,
Inc.
(ee)(6) Non-Compete Agreement
dated February 26, 1998
between James B. Kite
and Pomeroy Computer
Resources, Inc.
(ee)(7) Employment Agreement
dated February 26, 1998
between O. Dean
Higganbotham, Global
Combined Technologies,
Inc. and Pomeroy
Computer Resources,
Inc.
(ee)(8) Employment Agreement
dated February 26, 1998
between Dale
Higganbotham, Global
Combined Technologies,
Inc. and Pomeroy
Computer Resources,
Inc.
(ee)(9) Termination of
Employment Agreement
dated March 17, 1998
between Nicholas V.
Duncan and Global
Combined Technologies,
Inc.
(ee)(10) Termination of
Employment Agreement
dated March 17, 1998
between O. Dean
Higganbotham and Global
Combined Technologies,
Inc.
(ee)(11) Termination of
Employment Agreement
dated March 17, 1998
between Dale
Higganbotham and Global
Combined Technologies,
Inc.
(ee)(12) Purchaser's Certificate
Dated March 17, 1998
between the Company and
Global Combined
Technologies, Inc.
(ee)(13) Incentive Deferred
Compensation Agreement
dated March 17, 1998
between Dale
Higganbotham and Global
Combined Technologies,
Inc.
(ee)(14) Subordination Agreement
dated March 17, 1998
between the Company,
Nicholas V. Duncan, and
Star Bank, N.A.
(ee)(15) Subordination Agreement
dated March 17, 1998
between the Company,
James B, Kite, and Star
Bank, N.A.
(ee)(16) Subordination Agreement
dated March 17, 1998
between the Company, O.
Dean Higganbotham, and
Star Bank, N.A.
(ee)(17) Subordination Agreement
dated March 17, 1998
between the Company,
Dale Higganbotham, and
Star Bank, N.A.
(ee)(18) Subordination Agreement
dated March 17, 1998
between the Company, J.
Walter Duncan Jr., and
Star Bank, N.A.
(ee)(19) Subordinated Promissary
Note dated March 17,
1998 between the
Company and James B,
Kite.
(ee)(20) Subordinated Promissary
Note dated March 17,
1998 between the
Company and Dean
Higganbotham
(ee)(21) Subordinated Promissary
Note dated March 17,
1998 between the
Company and Dale
Higganbotham
(ee)(22) Subordinated Promissary
Note dated March 17,
1998 between the
Company and , J.
Walter Duncan Jr
10(iii) Material Employment Contracts
(a)(13) Seventh Amendment to
the Employment Agreement
between the Company and
David B. Pomeroy
effective January 6,
1998.
(a)(14) Collateral Assignment
Split Dollar Agreement
between the Company,
James H. Smith III as
Trustee, and David B.
Pomeroy dated January
6, 1998.
11 (a)(23) Computation of Earnings
per Share
27 Financial Date
Schedules, Quarter
ended April 5, 1998 and
restated for quarters
ending April 5, 1997
and April 5, 1996.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated February 26, 1998
reporting the signing of a definitive agreement, subject to
regulatory approval, to purchase all of the stock of Global
Combined Technologies, Inc.
The Company filed a Form 8-K dated March 2, 1998 reporting a
Stockholders' Rights Agreement.
The Company filed a Form 8-K dated March 16, 1998 reporting
the signing on March 6, 1998 of a definitive agreement,
subject to regulatory approval, to purchase certain assets
and assume certain liabilities of Combined Business Systems,
Inc.
The Company filed a Form 8-K dated April 7, 1998 reporting
the completion of the acquisition of Global Combined
Technologies, Inc. on March 18, 1998.
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: May 5, 1998 By: /s/ Stephen E. Pomeroy
Stephen E. Pomeroy
Chief Financial Officer and
Chief
Accounting Officer