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, 2001
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)
(859) 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 November 07, 2001 was
12,677,848.
1 of 16
POMEROY COMPUTER RESOURCES, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of
January 5, 2001 and October 5, 2001 3
Consolidated Statements of Income for
The Three Months Ended October 5,
2000 and 2001 5
Consolidated Statements of Income for
the Nine Months Ended October 5, 2000
and 2001 6
Consolidated Statements of Cash Flows
for the Nine Months Ended October 5,
2000 and 2001 7
Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Part II. Other Information 15
SIGNATURE 16
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POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, October 5,
2001 2001
----------- -----------
ASSETS
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,097 $ 3,266
Accounts receivable:
Trade, less allowance of $586 and $602 at January 5, 2001
and October 5, 2001, respectively. . . . . . . . . . . . 137,252 136,238
Vendor receivables, less allowance of $1,892 and $1,112 at
January 5, 2001 and October 5, 2001, respectively. . . . 44,884 37,426
Net investment in leases. . . . . . . . . . . . . . . . . . 26,116 34,438
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,900 3,986
----------- -----------
Total receivables . . . . . . . . . . . . . . . . . . 213,152 212,088
----------- -----------
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 29,346 19,228
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,845 3,518
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . 249,440 238,100
----------- -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment. . . . . . . . . . . . . . 28,211 31,889
Leasehold improvements . . . . . . . . . . . . . . . . . . . 5,351 5,432
----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . 33,562 37,321
Less accumulated depreciation. . . . . . . . . . . . . . . . 14,916 16,801
----------- -----------
Net equipment and leasehold improvements . . . . . . . . 18,646 20,520
----------- -----------
Net investment in leases . . . . . . . . . . . . . . . . . . . 36,379 26,985
Goodwill and other intangible assets . . . . . . . . . . . . . 53,458 58,634
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 3,345 2,988
----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . . $ 361,268 $ 347,227
=========== ===========
See notes to consolidated financial statements.
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POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, October 5,
2001 2001
----------- -----------
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable. . . . . . . . . . . . . . $ 22,783 $ 24,479
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 67,298 79,010
Bank notes payable. . . . . . . . . . . . . . . . . . . . . 55,464 22,060
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . 7,124 2,805
Other current liabilities . . . . . . . . . . . . . . . . . 7,322 11,970
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . 159,991 140,324
----------- -----------
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . 19,572 12,560
Equity:
Preferred stock, $.01 par value; authorized 2,000 shares
(no shares issued or outstanding). . . . . . . . . . . . . - -
Common stock, $.01 par value; authorized 20,000 shares
(12,585 and 12,676 shares issued at January 5, 2001 and
October 5, 2001, respectively . . . . . . . . . . . . . . . 126 127
Paid in capital . . . . . . . . . . . . . . . . . . . . . . 78,731 79,417
Retained earnings . . . . . . . . . . . . . . . . . . . . . 103,170 115,483
----------- -----------
182,027 195,027
Less treasury stock, at cost (31 shares at January 5, 2001
and 64 shares at October 5, 2001) . . . . . . . . . . . . 322 684
----------- -----------
Total equity. . . . . . . . . . . . . . . . . . . . . . . . 181,705 194,343
----------- -----------
Total liabilities and equity. . . . . . . . . . . . . . . . $ 361,268 $ 347,227
=========== ===========
See notes to consolidated financial statements.
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POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Three Months Ended
--------------------------
October 5, October 5,
2000 2001
------------ ------------
Net sales and revenues:
Sales-equipment, supplies and leasing $ 208,244 $ 167,948
Service . . . . . . . . . . . . . . . 38,667 35,761
------------ ------------
Total net sales and revenues . . . 246,911 203,709
------------ ------------
Cost of sales and service:
Sales-equipment, supplies and leasing 189,690 152,393
Service . . . . . . . . . . . . . . . 23,148 24,755
------------ ------------
Total cost of sales and service. . 212,838 177,148
------------ ------------
Gross margin. . . . . . . . . 34,073 26,561
------------ ------------
Operating expenses:
Selling, general and administrative 15,588 14,455
Rent expense. . . . . . . . . . . . 891 936
Depreciation. . . . . . . . . . . . 1,331 1,149
Amortization. . . . . . . . . . . . 1,143 1,398
Provision for doubtful accounts . . 192 60
------------ ------------
Total operating expenses. . . 19,145 17,998
------------ ------------
Income from operations . . . . . . . . 14,928 8,563
------------ ------------
Other expense (income):
Interest expense. . . . . . . . . . 1,326 197
Miscellaneous . . . . . . . . . . . (8) (66)
------------ ------------
Total other expense . . . . . 1,318 131
------------ ------------
Income before income tax. . . . . . 13,610 8,432
Income tax expense. . . . . . . . . 5,423 3,288
------------ ------------
Net income. . . . . . . . . . . . . $ 8,187 $ 5,144
============ ============
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . 12,289 12,634
============ ============
Diluted . . . . . . . . . . . . . . 12,543 12,713
============ ============
Earnings per common share:
Basic . . . . . . . . . . . . . . . $ 0.67 $ 0.41
============ ============
Diluted . . . . . . . . . . . . . . $ 0.65 $ 0.40
============ ============
See notes to consolidated financial statements.
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POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Nine Months Ended
--------------------------
October 5, October 5,
2000 2001
------------ ------------
Net sales and revenues:
Sales-equipment, supplies and leasing $ 577,239 $ 500,024
Service . . . . . . . . . . . . . . . 102,160 104,717
------------ ------------
Total net sales and revenues . . . 679,399 604,741
------------ ------------
Cost of sales and service:
Sales-equipment, supplies and leasing 529,457 453,038
Service . . . . . . . . . . . . . . . 59,569 75,251
------------ ------------
Total cost of sales and service. . 589,026 528,289
------------ ------------
Gross margin. . . . . . . . . 90,373 76,452
------------ ------------
Operating expenses:
Selling, general and administrative 41,413 43,477
Rent expense. . . . . . . . . . . . 2,447 2,744
Depreciation. . . . . . . . . . . . 3,514 3,436
Amortization. . . . . . . . . . . . 3,072 4,114
Provision for doubtful accounts . . 292 120
Litigation settlement . . . . . . . - 1,000
------------ ------------
Total operating expenses. . . 50,738 54,891
------------ ------------
Income from operations . . . . . . . . 39,635 21,561
------------ ------------
Other expense (income):
Interest expense. . . . . . . . . . 3,157 1,563
Miscellaneous . . . . . . . . . . . (117) (185)
------------ ------------
Total other expense . . . . . 3,040 1,378
------------ ------------
Income before income tax. . . . . . 36,595 20,183
Income tax expense. . . . . . . . . 14,517 7,871
------------ ------------
Net income. . . . . . . . . . . . . $ 22,078 $ 12,312
============ ============
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . 12,084 12,600
============ ============
Diluted . . . . . . . . . . . . . . 12,304 12,700
============ ============
Earnings per common share:
Basic . . . . . . . . . . . . . . . $ 1.83 $ 0.98
============ ============
Diluted . . . . . . . . . . . . . . $ 1.79 $ 0.97
============ ============
See notes to consolidated financial statements.
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POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Nine Months Ended
--------------------------
October 5, October 5,
2000 2001
------------ ------------
Cash Flows from Operating Activities:
Net income. . . . . . . . . . . . . . . . . . . $ 22,078 $ 12,312
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation . . . . . . . . . . . . . . . . . 4,130 5,255
Amortization.. . . . . . . . . . . . . . . . . 3,072 4,114
Deferred income taxes. . . . . . . . . . . . . 1,888 (300)
Loss on sale of fixed assets . . . . . . . . . - 1,365
Stock option extension . . . . . . . . . . . . - 265
Changes in working capital accounts, net of
effect of acquisitions:
Receivables. . . . . . . . . . . . . . . . (3,423) 13,022
Inventories. . . . . . . . . . . . . . . . (3,087) 7,443
Prepaids . . . . . . . . . . . . . . . . . (921) 2,332
Net investment in leases . . . . . . . . . (12,985) 1,222
Accounts payable . . . . . . . . . . . . . (20,466) 9,471
Deferred revenue . . . . . . . . . . . . . (2,589) (4,320)
Income tax payable . . . . . . . . . . . . - 2,519
Other, net . . . . . . . . . . . . . . . . 485 2,028
------------ ------------
Net operating activities . . . . . . . . . . . . (11,818) 56,728
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures. . . . . . . . . . . . . (4,836) (4,274)
Acquisition of subsidiary companies, net of
cash acquired . . . . . . . . . . . . . . . . (12,230) (7,676)
------------ ------------
Net investing activities. . . . . . . . . . . . (17,066) (11,950)
------------ ------------
Cash Flows from Financing Activities:
Payments under notes payable. . . . . . . . . . (72) (20,495)
Proceeds under notes payable. . . . . . . . . . 18,301 13,374
Net payments under bank notes payable . . . . . - (35,812)
Proceeds from exercise of stock options . . . . 9,208 413
Proceeds from employee stock purchase plan. . . 164 274
Payment for treasury stock purchase . . . . . . - (363)
------------ ------------
Net financing activities. . . . . . . . . . . . 27,601 (42,609)
------------ ------------
Increase (decrease) in cash . . . . . . . . . . . (1,283) 2,169
Cash:
Beginning of period. . . . . . . . . . . . . . 1,737 1,097
------------ ------------
End of period. . . . . . . . . . . . . . . . . $ 454 $ 3,266
============ ============
See notes to consolidated financial statements.
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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, 2001. 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, 2001 are not necessarily indicative of the results
that may be expected for future interim periods or for the year ending
January 5, 2002.
2. Cash and Bank Notes Payable
During the year, the Company entered into a $240.0 million Credit Facility
Agreement with Deutsche Financial Services Corporation. The credit facility
has a three year term and its components include a $72.0 million component
for inventory financing, a $144.0 million component for working capital,
and a cash-flow component in the form of a $24.0 million term loan that is
not restricted to a borrowing base. At January 5, 2001 and October 5, 2001,
bank notes payable include $9.2 million and $4.5 million, respectively, of
overdrafts in accounts with a participant bank to the Company's credit
facility. These amounts were subsequently funded through the normal course
of business.
3. Treasury Stock
On September 19, 2001, the Company's Board of Directors authorized a
program to repurchase up to 100,000 shares of the Company's outstanding
stock at market price. During the third quarter 2001, the Company
repurchased 33,000 shares of stock at a cost of $0.4 million.
4. 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)
Three Months Ended October 5,
--------------------------------------
2000 2001
------------------- -----------------
Per Share Per Share
Shares Amount Shares Amount
--------- -------- ------ ---------
Basic EPS 12,289 $ 0.67 12,634 $ 0.41
Effect of dilutive
Stock options 254 (0.02) 79 (0.01)
--------- -------- ------ ---------
Diluted EPS 12,543 $ 0.65 12,713 $ 0.40
========= ======== ====== =========
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Nine Months Ended October 5,
----------------------------------------
2000 2001
------------------- -------------------
Per Share Per Share
Shares Amount Shares Amount
-------- --------- -------- ---------
Basic EPS 12,084 $ 1.83 12,600 $ 0.98
Effect of dilutive
Stock options 220 (0.04) 100 (0.01)
-------- --------- -------- ---------
Diluted EPS 12,304 $ 1.79 12,700 $ 0.97
======== ========= ======== =========
5. 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,
------------------
2000 2001
-------- --------
Interest paid $ 3,039 $ 1,955
======== ========
Income taxes paid $ 11,984 $ 3,537
======== ========
Adjustments to purchase price
of acquisition assets $ - $ 869
======== ========
Business combinations accounted for
as purchases:
Assets acquired $ 19,658 $ 13,858
Liabilities assumed 5,278 4,854
Notes payable 2,150 1,328
-------- --------
Net cash paid $ 12,230 $ 7,676
======== ========
6. Litigation
On April 13, 2001, the Company agreed to a settlement of the litigation
with FTA Enterprises, Inc. and expensed it in the first quarter of fiscal
2001. The settlement of $1.0 million was paid in cash in the second quarter
of fiscal 2001.
There are various other 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. Segment Information
Summarized financial information concerning the Company's reportable
segments is shown in the following table. For the nine months ended October
5, 2000, the depreciation and amortization reported under the leasing
segment has been adjusted to properly reflect depreciation and amortization
reported for the nine months ended October 5, 2000. (in thousands)
9 of 16
Three Months Ended October 5, 2000
--------------------------------------------------
Products Services Leasing Consolidated
--------- --------- ------------- -------------
Revenues $ 206,015 $ 38,667 $ 2,229 $ 246,911
Income from operations 6,834 7,496 598 14,928
Total assets 219,535 66,116 83,922 369,573
Capital expenditures 1,910 632 479 3,021
Depreciation and amortization 1,872 496 309 2,677
Three Months Ended October 5, 2001
--------------------------------------------------
Products Services Leasing Consolidated
--------- --------- ------------- -------------
Revenues $ 165,436 $ 35,761 $ 2,512 $ 203,709
Income from operations 3,755 4,117 691 8,563
Total assets 213,992 65,580 67,655 347,227
Capital expenditures 1,422 292 - 1,714
Depreciation and amortization 2,257 561 258 3,076
Nine Months Ended October 5, 2000
--------------------------------------------------
Products Services Leasing Consolidated
--------- --------- ------------- -------------
Revenues $ 569,759 $ 102,160 $ 7,480 $ 679,399
Income from operations 15,312 22,029 2,294 39,635
Total assets 219,535 66,116 83,922 369,573
Capital expenditures 3,526 831 479 4,836
Depreciation and amortization 5,068 1,247 887 7,202
Nine Months Ended October 5, 2001
--------------------------------------------------
Products Services Leasing Consolidated
--------- --------- ------------- -------------
Revenues $ 492,568 $ 104,717 $ 7,456 $ 604,741
Income from operations 12,200 7,818 1,543 21,561
Total assets 213,992 65,580 67,655 347,227
Capital expenditures 3,630 413 231 4,274
Depreciation and amortization 6,843 1,650 876 9,369
8. Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
effective for all business combinations completed after June 30, 2001. SFAS
142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of
SFAS 142. Major provisions of these Statements and their effective dates
for the Company are as follows:
- All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July
1, 2001.
- Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability.
- Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 6, 2002,
all previously recognized goodwill and intangible assets with
indefinite lives will no longer be subject to amortization.
10 of 16
- Effective January 6, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.
- All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
In accordance with SFAS 141, the Company has not amortized goodwill or
intangible assets with indefinite lives acquired after June 30, 2001. The
Company will continue to amortize goodwill and intangible assets recognized
prior to July 1, 2001, under its current method until January 5, 2002, at
which time goodwill amortization expense will no longer be recognized. At
this time, the Company has not estimated the financial impact that adoption
of the standard is expected to have on the financial statements. By April
5, 2002, the Company will have completed a transitional fair value based
impairment test of goodwill as of January 6, 2002. By January 5, 2003, the
Company will have completed a transitional impairment test of all
intangible assets with indefinite lives. Impairment losses, if any,
resulting from the transitional testing will be recognized in the quarter
ended April 5, 2002 as a cumulative effect of a change in accounting
principle.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement supercedes SFAS 121 and
Accounting Principles Board (APB) Opinion No. 30, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business (as previously defined in that Opinion). The
Statement is effective for fiscal years beginning after December 15, 2001.
This Statement retains the requirements of SFAS 121 related to long-lived
asset impairment loss recognition and measurement, but removes goodwill and
certain intangibles from its scope. The Statement also requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and broadens the
presentation of discontinued operations to include more disposal
transactions. Although it is still reviewing the provisions of this
Statement, management's preliminary assessment is that this Statement will
not have a material impact on the Company's financial position or results
of operations.
11 of 16
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 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 decreased $43.2
million, or 17.5%, to $203.7 million in the third quarter of fiscal 2001 from
$246.9 million in the third quarter of fiscal 2000. This was a result primarily
of the continued industry-wide slowdown in technology spending. Excluding
acquisitions completed in fiscal years 2000 and 2001, total net sales and
revenues decreased 18.3%. Products and leasing sales decreased $40.3 million,
or 19.4% to $167.9 million in the third quarter of fiscal 2001 from $208.2
million in the third quarter of fiscal 2000. Excluding acquisitions completed
in fiscal years 2000 and 2001, products and leasing sales decreased 20.1%.
Service revenues decreased $2.9 million, or 7.5%, to $35.8 million in the third
quarter of fiscal 2001 from $38.7 million in the third quarter of fiscal year
2000. This decrease in service revenues was primarily a result of the decrease
in technology spending. Excluding acquisitions completed in fiscal years 2000
and 2001, service revenues decreased 8.6%.
Total net sales and revenues decreased $74.7 million, or 11.0%, to $604.7
million in the first nine months of fiscal 2001 from $679.4 million in the first
nine months of fiscal 2000. This decrease was attributable primarily to the
continued industry-wide slowdown in technology spending and the weakened
economy. Excluding acquisitions completed in fiscal years 2000 and 2001, total
net sales and revenues decreased 12.3%. Products and leasing sales decreased
$77.2 million, or 13.4%, to $500.0 million in the first nine months of fiscal
2001 from $577.2 million in the first nine months of fiscal 2000. Excluding
acquisitions completed in fiscal years 2000 and 2001, products and leasing sales
decreased 14.6%. Service revenues increased $2.5 million, or 2.4%, to $104.7
million in the first nine months of fiscal 2001 from $102.2 million in the first
nine months of fiscal year 2000. This net increase is primarily the result of
sales to existing and new customers. Excluding acquisitions completed in fiscal
years 2000 and 2001, service revenues increased 0.9%.
GROSS MARGINS. Gross margin decreased to 13.1% in the third quarter of fiscal
2001 as compared to 13.8% in the third quarter of fiscal 2000. This decrease in
gross margin resulted primarily from a decrease in service gross margins.
Service gross margin decreased to 41.4% of total gross margin in the third
quarter of fiscal 2001 from 45.6% in the third quarter of fiscal 2000. This
decrease in gross margin is the result of lower margin service offerings.
Factors that may have an impact on gross margin in the future include the
decline of personnel utilization rates, the mix of products sold and services
provided, a further decline of unit prices, the percentage of equipment or
service sales with lower-margin customers and the ratio of service revenues to
total net sales and revenues.
12 of 16
Gross margin decreased to 12.7% in the first nine months of fiscal 2001 as
compared to 13.3% in the first nine months of fiscal 2000. Service gross margin
decreased to 38.4% of total gross margin in the first nine months of fiscal 2001
from 47.1% in the first nine months of fiscal 2000. This decrease in gross
margin is the result of lower margin service offerings and under-utilization of
service personnel as a result of lower than expected service billable hours from
our technical and systems engineer personnel. As a result of the decline in
personnel utilization, the Company reduced its technical and systems engineer's
staff and continues to monitor their utilization. Factors that may have an
impact on gross margin in the future include the further decline in personnel
utilization rates, the mix of products sold and services provided, a further
decline of unit prices, the percentage of equipment or service 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 7.6% in the third quarter of fiscal 2001 from 6.7% in the third
quarter of fiscal 2000. The increase is primarily the result of lower than
expected total net sales and revenues. Total operating expenses expressed as a
percentage of total net sales and revenues increased to 8.8% in the third
quarter of fiscal 2001 from 7.8% in the third quarter of fiscal 2000. This
increase is primarily the result of lower than expected total net sales and
revenues and the increase in amortization expense due to acquisitions completed
in fiscal 2001 and prior years.
Selling, general and administrative expenses (including rent expense) expressed
as a percentage of total net sales and revenues increased to 7.6% in the first
nine months of fiscal 2001 from 6.5% in the first nine months of fiscal 2000.
The increase is primarily the result of lower than expected total net sales and
revenues and an increase in payroll and related payroll costs. During the
first nine months of fiscal 2001, the Company reduced its selling and
administrative staff in order to reduce its operating expenses. Total operating
expenses expressed as a percentage of total net sales and revenues increased to
9.1% in the first nine months of fiscal 2001 from 7.5% in the first nine months
of fiscal 2000 due to an increase in payroll and related payroll costs during
the first half of the year, the increase in amortization expense due to
acquisitions completed in fiscal 2001 and prior years, and lower than expected
total net sales and revenues and the litigation settlement expenses as described
below.
LITIGATION SETTLEMENT. On April 13, 2001, the Company agreed to a settlement of
the litigation with FTA Enterprises, Inc. and expensed it in the first quarter
of fiscal 2001. The settlement of $1.0 million was paid in cash in the second
quarter of fiscal 2001.
INCOME FROM OPERATIONS. Income from operations decreased $6.3 million, or
42.3%, to $8.6 million in the third quarter of fiscal 2001 from $14.9 million in
the third quarter of fiscal 2000. The Company's operating margin decreased to
4.2% in the third quarter of fiscal 2001 as compared to 6.1% in the third
quarter of fiscal 2000. This decrease is due to the decrease in the Company's
gross margin and an increase in operating expenses as a percentage of total net
sales and revenues.
Income from operations decreased $18.0 million, or 45.5%, to $21.6 million in
the first nine months of fiscal 2001 from $39.6 million in the first nine months
of fiscal 2000. The Company's operating margin decreased to 3.6% in the first
nine months of fiscal 2001 as compared to 5.8% in the first nine months of
fiscal 2000. This decrease is due to the decrease in gross margin and an
increase in operating expenses as a percentage of total net sales and revenues.
INTEREST EXPENSE. Interest expense decreased $1.1 million, or 84.6%, to $0.2
million in the third quarter of fiscal 2001 from $1.3 million in the third
quarter of fiscal 2000. This decrease was due to reduced borrowings as a result
of improved cash flow management and a reduced interest rate charged by the
Company's lender.
Interest expense decreased $1.6 million, or 50.0%, to $1.6 million in the first
nine months of fiscal 2001 from $3.2 million in the first nine months of fiscal
2000. This decrease was due to reduced borrowings as a result of improved cash
flow management and a reduced interest rate charged by the Company's lender.
INCOME TAXES. The Company's effective tax rate was 39.0% in the third quarter
of fiscal 2001 compared to 39.8% in the third quarter of fiscal 2000. The
decrease in the Company's effective tax rate results from lower overall state
income tax liability.
The Company's effective tax rate was 39.1% in the first nine months of fiscal
2001 compared to 39.7% in the first nine months of fiscal 2000. The decrease
in the Company's effective tax rate results from lower overall state income tax
liability.
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NET INCOME. Net income decreased $3.1 million, or 37.8%, to $5.1million in the
third quarter of fiscal 2001 from $8.2 million in the third quarter of fiscal
2000 due to the factors described above.
Net income decreased $9.8 million, or 44.3%, to $12.3 million in the first nine
months of fiscal 2001 from $22.1 million in the first nine months of fiscal 2000
due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $56.7 million in the first nine months
of fiscal 2001. Cash used in investing activities was $12.0 million, which
included $4.3 million for capital expenditures and $7.7 million for acquisitions
completed in fiscal 2001 and prior years. Cash used in financing activities was
$42.6 million which included $7.1 million of net payments on notes payable,
$35.8 million of net payments on bank notes payable, $0.4 million for the
purchase of treasury stock, and offset by $0.7 million from the exercise of
stock options and employee stock purchase plan.
A significant part of the Company's inventory is financed by floor plan
arrangements with third parties. At October 5, 2001, these lines of credit
totaled $84.0 million, including $72.0 million with Deutsche Financial Services
("DFS") and $12.0 million with IBM Credit Corporation ("ICC"). Borrowings under
the DFS floor plan arrangements are made on thirty-day notes. Borrowings under
the ICC floor plan arrangements are made on either thirty-day or sixty-day
notes. All such borrowings are secured by the related inventory. Financing on
substantially all of the arrangements is interest free due to subsidies by
manufacturers. Overall, the average rate on these arrangements is less than
1.0%. The Company classifies amounts outstanding under the floor plan
arrangements as accounts payable.
The Company's financing of receivables is provided through a portion of its
credit facility with DFS. The $240.0 million credit facility has a three year
term and includes $72.0 million for inventory financing, $144.0 million for
working capital, and a cash-flow component in the form of a $24.0 million term
loan, which is not restricted to a borrowing base. Under the agreement, the
credit facility provides a credit line of $144.0 million for accounts receivable
financing. The accounts receivable and term loan portion of the credit facility
carry a variable interest rate based on the London InterBank Offering Rate
("LIBOR") and a pricing grid. At October 5, 2001, the amount outstanding was
$22.1 million, including $4.5 million of overdrafts on the Company's books in
accounts at a participant bank on the credit facility, which was at an interest
rate of 4.4%. The overdrafts were subsequently funded through the normal course
of business. The credit facility is collateralized by substantially all of the
assets of the Company, except those assets that collateralize certain other
financing arrangements. Under the terms of the credit facility, the Company is
subject to various financial covenants.
The funding of the Company's net investment in sales-type leases is provided by
various financial institutions primarily on a nonrecourse basis. Increases in
leasing operations could impact one or more of total net sales and revenues,
gross margin, operating income, net income, total debt and liquidity, depending
on the amount of leasing activity and the types of leasing transactions.
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 twelve months. Historically, the Company has financed
acquisitions using a combination of cash, earn outs, shares of its Common Stock
and seller financing. The Company anticipates that future acquisitions will be
financed in a similar manner.
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POMEROY COMPUTER RESOURCES, INC.
PART II - OTHER INFORMATION
Items 1 to 4 None
Item 5
On September 21, 2001, the Company acquired Charlotte based firms Ballantyne
Consulting Group and System 5 Technologies, Inc. The firms have been combined
to create an expanded IT services arm that provides end-to-end infrastructure
design and implementation and project management solutions for eBusiness
enablement, systems integration, package applications, CRM, ERP and data
warehousing. The acquisitions were not significant with respect to the
Company's consolidated financial statements. The results of operations from the
acquisitions will be included in the consolidated statement of income from date
of acquisition.
Item 6 Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K None
(b) Exhibits
10(I) Material Agreements
10(I) (mm)(5) First Consent to Credit Facilities E1 - E5
Agreement
(mm)(6) First Amendment to Credit Facilities E6 - E11
Agreement
(mm)(7) Asset Purchase Agreement by, E12 - E65
between and among Pomeroy Select
Integration Solutions, Inc. and
Ballantyne Consulting Group, Inc.,
Mark DeMeo, Joe Schmidt, Scott
Schneider and Dale Tweedy, dated
September 21, 2001
(mm)(8) Asset Purchase Agreement by, E66 - E111
between and among Pomeroy Computer
Resources, Inc., Pomeroy Select
Integration Solutions, Inc, System
5 Technologies, Inc., Dale Tweedy,
Jill Tweedy and Phil Tetreault
11 Computation of Earnings per Share
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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 13, 2001 By: /s/ Michael E. Rohrkemper
-----------------------------------
Michael E. Rohrkemper
Chief Financial Officer and
Chief Accounting Officer
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