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 July 5, 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 0-20022
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 August 1, 2002 was
12,846,761
1 of 19
POMEROY COMPUTER RESOURCES, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of
January 5, 2002 and July 5, 2002 3
Consolidated Statements of Income for
The Three Months Ended July 5, 2001
and July 5, 2002 5
Consolidated Statements of Income for
the Six Months Ended July 5, 2001 and
2002 6
Consolidated Statements of Cash Flows
for the Six Months Ended July 5, 2001 and 2002 7
Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Part II. Other Information 18
SIGNATURE 19
2 of 19
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, July 5,
2002 2002
----------- --------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,875 $ 1,390
Accounts receivable:
Trade, less allowance of $627 and $1,145 at January 5, 2002
and July 5, 2002, respectively. . . . . . . . . . . . . . . 142,356 123,088
Vendor receivables, less allowance of $16,112 at both
January 5, 2002 and July 5, 2002. . . . . . . . . . . . . . 24,219 17,267
Net investment in leases . . . . . . . . . . . . . . . . . . 35,809 3,359
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,413 3,595
----------- --------
Total receivables. . . . . . . . . . . . . . . . . . . 207,797 147,309
----------- --------
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 20,876 20,961
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,468 9,765
----------- --------
Total current assets . . . . . . . . . . . . . . . . . 240,016 179,425
----------- --------
Equipment and leasehold improvements:
Furniture, fixtures and equipment . . . . . . . . . . . . . . 29,920 31,412
Leasehold improvements. . . . . . . . . . . . . . . . . . . . 5,700 5,772
----------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 35,620 37,184
Less accumulated depreciation . . . . . . . . . . . . . . . . 17,070 17,123
----------- --------
Net equipment and leasehold improvements. . . . . . . . . 18,550 20,061
----------- --------
Net investment in leases. . . . . . . . . . . . . . . . . . . . 22,438 1,620
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,454 60,109
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . 1,060 700
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 2,200 1,955
----------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 341,718 $263,870
=========== ========
See notes to consolidated financial statements.
3 of 19
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, July 5,
2002 2002
----------- --------
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable. . . . . . . . . . . . . . $ 27,190 $ 3,293
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 86,447 46,373
Bank notes payable. . . . . . . . . . . . . . . . . . . . . 11,882 -
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . 2,751 2,415
Other current liabilities . . . . . . . . . . . . . . . . . 11,908 10,026
----------- --------
Total current liabilities. . . . . . . . . . . . . . . . 140,178 62,107
----------- --------
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . 10,213 664
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . 565 -
Equity:
Preferred stock, $.01 par value; authorized 2,000 shares
(no shares issued or outstanding) . . . . . . . . . . . . . - -
Common stock, $.01 par value; authorized 20,000 shares
(12,759 and 12,847 shares issued at January 5, 2002 and
July 5, 2002, respectively. . . . . . . . . . . . . . . . . 128 128
Paid in capital . . . . . . . . . . . . . . . . . . . . . . 80,487 81,534
Retained earnings . . . . . . . . . . . . . . . . . . . . . 110,979 120,269
----------- --------
191,594 201,931
Less treasury stock, at cost (75 shares at January 5, 2002
and July 5, 2002). . . . . . . . . . . . . . . . . . . . . 832 832
----------- --------
Total equity. . . . . . . . . . . . . . . . . . . . . . . . 190,762 201,099
----------- --------
Total liabilities and equity. . . . . . . . . . . . . . . . $ 341,718 $263,870
=========== ========
See notes to consolidated financial statements.
4 of 19
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Three Months Ended
------------------------
July 5, July 5,
2001 2002
----------- -----------
Net sales and revenues:
Sales-equipment, supplies and leasing. $ 170,102 $ 162,923
Service. . . . . . . . . . . . . . . . 35,234 33,657
----------- -----------
Total net sales and revenues . . . . 205,336 196,580
----------- -----------
Cost of sales and service:
Sales-equipment, supplies and leasing. 154,706 149,342
Service. . . . . . . . . . . . . . . . 25,487 23,136
----------- -----------
Total cost of sales and service . . 180,193 172,478
----------- -----------
Gross margin . . . . . . . . . 25,143 24,102
----------- -----------
Operating expenses:
Selling, general and administrative . 14,244 13,111
Rent expense . . . . . . . . . . . . 891 849
Depreciation . . . . . . . . . . . . 1,181 1,151
Amortization . . . . . . . . . . . . 1,370 225
Provision for doubtful accounts . . . 60 500
Restructuring charge . . . . . . . . - 487
----------- -----------
Total operating expenses . . . 17,746 16,323
----------- -----------
Income from operations. . . . . . . . . 7,397 7,779
----------- -----------
Other expense (income):
Interest expense . . . . . . . . . . 484 199
Miscellaneous . . . . . . . . . . . . (42) (6)
----------- -----------
Net other expense. . . . . . . 442 193
----------- -----------
Income before income tax . . . . . . 6,955 7,586
Income tax expense . . . . . . . . . 2,712 2,959
----------- -----------
Net income . . . . . . . . . . . . . $ 4,243 $ 4,627
=========== ===========
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . 12,591 12,743
=========== ===========
Diluted . . . . . . . . . . . . . . . 12,673 12,872
=========== ===========
Earnings per common share:
Basic . . . . . . . . . . . . . . . . $ 0.34 $ 0.36
=========== ===========
Diluted . . . . . . . . . . . . . . . $ 0.33 $ 0.36
=========== ===========
See notes to consolidated financial statements.
5 of 19
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Six Months Ended
----------------------
July 5, July 5,
2001 2002
----------- ---------
Net sales and revenues:
Sales-equipment, supplies and leasing $ 332,076 $316,376
Service . . . . . . . . . . . . . . . 68,956 66,552
----------- ---------
Total net sales and revenues . . . 401,032 382,928
----------- ---------
Cost of sales and service:
Sales-equipment, supplies and leasing 300,645 289,178
Service . . . . . . . . . . . . . . . 50,496 45,828
----------- ---------
Total cost of sales and service . . 351,141 335,006
----------- ---------
Gross margin . . . . . . . . . 49,891 47,922
----------- ---------
Operating expenses:
Selling, general and administrative . 29,022 26,924
Rent expense . . . . . . . . . . . . 1,808 1,764
Depreciation . . . . . . . . . . . . 2,287 2,327
Amortization . . . . . . . . . . . . 2,716 496
Provision for doubtful accounts . . . 60 500
Litigation settlement . . . . . . . . 1,000 -
Restructuring charge . . . . . . . . - 487
----------- ---------
Total operating expenses . . . 36,893 32,498
----------- ---------
Income from operations. . . . . . . . . 12,998 15,424
----------- ---------
Other expense (income):
Interest expense . . . . . . . . . . 1,365 325
Miscellaneous . . . . . . . . . . . . (119) (8)
----------- ---------
Net other expense. . . . . . . 1,246 317
----------- ---------
Income before income tax . . . . . . 11,752 15,107
Income tax expense . . . . . . . . . 4,583 5,817
----------- ---------
Net income . . . . . . . . . . . . . $ 7,169 $ 9,290
=========== =========
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . 12,584 12,720
=========== =========
Diluted . . . . . . . . . . . . . . . 12,691 12,832
=========== =========
Earnings per common share:
Basic . . . . . . . . . . . . . . . . $ 0.57 $ 0.73
=========== =========
Diluted . . . . . . . . . . . . . . . $ 0.56 $ 0.72
=========== =========
See notes to consolidated financial statements.
6 of 19
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six Months Ended
----------------------
July 5, July 5,
2001 2002
---------- ----------
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . $ 7,169 $ 9,290
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation. . . . . . . . . . . . . . . . . . 3,577 2,841
Amortization. . . . . . . . . . . . . . . . . . 2,716 496
Deferred income taxes . . . . . . . . . . . . . (300) (1,251)
Loss on sale of fixed assets. . . . . . . . . . 1,217 597
Stock option extension. . . . . . . . . . . . . 265 -
Changes in working capital accounts, net of
effect of acquisitions/divestitures:
Receivables . . . . . . . . . . . . . . . . 22,911 25,307
Inventories . . . . . . . . . . . . . . . . 6,620 (391)
Prepaids. . . . . . . . . . . . . . . . . . 2,068 (1,686)
Net investment in leases. . . . . . . . . . 2,967 790
Accounts payable. . . . . . . . . . . . . . 3,896 (36,150)
Deferred revenue. . . . . . . . . . . . . . (4,395) (336)
Income tax payable. . . . . . . . . . . . . (1,648) (3,269)
Other, net. . . . . . . . . . . . . . . . . 1,399 1,425
---------- ----------
Net operating activities . . . . . . . . . . . . . 48,462 (2,337)
---------- ----------
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . . . (2,560) (6,130)
Proceeds from sale of fixed assets . . . . . . . - 434
Proceeds from sale of leasing segment. . . . . . - 21,716
Acquisition of subsidiary companies, net of
cash acquired and investment in intangibles . . (3,375) (848)
---------- ----------
Net investing activities . . . . . . . . . . . . . (5,935) 15,172
---------- ----------
Cash Flows from Financing Activities:
Payments under notes payable . . . . . . . . . . (12,469) (8,385)
Proceeds under notes payable . . . . . . . . . . 8,446 4,900
Net payments under bank notes payable. . . . . . (37,410) (11,883)
Proceeds from exercise of stock options. . . . . 262 810
Proceeds from employee stock purchase plan . . . 274 238
---------- ----------
Net financing activities . . . . . . . . . . . . (40,897) (14,320)
---------- ----------
Increase (decrease) in cash. . . . . . . . . . . . 1,630 (1,485)
Cash:
Beginning of period . . . . . . . . . . . . . . 1,097 2,875
---------- ----------
End of period . . . . . . . . . . . . . . . . . $ 2,727 $ 1,390
========== ==========
See notes to consolidated financial statements.
7 of 19
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, 2002. 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 six-month
period ended July 5, 2002 are not necessarily indicative of the results
that may be expected for future interim periods or for the year ending
January 5, 2003.
2. Cash and Bank Notes Payable
The Company maintains a sweep account with its bank whereby daily cash
receipts are automatically transferred as payment towards the Company's
credit facility. As of January 5, 2002, bank notes payable includes $3.4
million 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. 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 July 5,
---------------------------------------
2001 2002
------------------- ------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ ----------
Basic EPS 12,591 $ 0.34 12,743 $ 0.36
Effect of dilutive
Stock options 82 (0.01) 129 -
------ ----------- ------ ----------
Diluted EPS 12,673 $ 0.33 12,872 $ 0.36
====== =========== ====== ==========
Six Months Ended July 5,
---------------------------------------
2001 2002
------------------- ------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ ----------
Basic EPS 12,584 $ 0.57 12,720 $ 0.73
Effect of dilutive
Stock options 107 (0.01) 112 (0.01)
------ ----------- ------ ----------
Diluted EPS 12,691 $ 0.56 12,832 $ 0.72
====== =========== ====== ==========
4. Goodwill and Other Intangible Assets-Adoption of Statement 142
8 of 19
On July 20, 2001, the Financial Accounting Standards Board 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.
- 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.
The Company adopted SFAS 142 in the first quarter of fiscal 2002. The
Company has determined that all its intangible assets have definite lives
and will continue to amortize these assets over their estimated useful
lives. As a result, the Company has recognized no transitional impairment
loss in the first quarter of fiscal 2002 in connection with the adoption of
SFAS 142 for intangible assets with indefinite lives. For the first six
months of fiscal 2002, the Company no longer amortized goodwill in
accordance with SFAS 142. The Company has completed a transitional fair
value based impairment test of goodwill as of January 6, 2002 and has
determined no impairment loss in the carrying amount of its goodwill. As a
result, the Company has recognized no transitional impairment loss in the
first six months of fiscal 2002 in connection with the adoption of SFAS 142
for goodwill with indefinite lives. The Company will review its intangible
assets and goodwill for impairment in accordance with SFAS 144, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of".
Intangible assets consist of the following:
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
1/5/2002 1/5/2002 1/5/2002 7/5/2002 7/5/2002 7/5/2002
--------- ------------- --------- --------- ------------- ---------
Amortized intangible assets:
Covenants not to compete $ 1,171 $ 653 $ 518 $ 1,225 $ 884 $ 341
Customer lists 477 236 241 477 271 206
Intangibles 564 263 301 564 411 153
--------- ------------- --------- --------- ------------- ---------
Total amortized intangibles $ 2,212 $ 1,152 $ 1,060 $ 2,266 $ 1,566 $ 700
========= ============= ========= ========= ============= =========
9 of 19
Projected future amortization expense related to intangible assets with
definite lives are as follows:
(in thousands)
Fiscal Years:
2002 $ 315 July 6, 2002 - January 5, 2003
2003 234
2004 118
2005 33
2006 -
-------
Total $ 700
=======
For the quarter ended July 5, 2001, amortization expense related to
goodwill was $1,084 thousand. Amortization expense related to intangibles
assets was $171 thousand of which $74 thousand was reported under the
caption "cost of sales" or "selling, general and administrative" expenses.
Amortization expense associated with assets reported under the caption
"other current assets" was $189 thousand.
For the quarter ended July 5, 2002, there was no amortization expense
related to goodwill. Amortization expense related to intangibles assets was
$225 thousand.
For the six months ended July 5, 2001, amortization expense related to
goodwill was $2,144 thousand. Amortization expense related to intangibles
assets was $302 thousand of which $108 thousand was reported under the
caption "cost of sales" or "selling, general and administrative" expenses.
Amortization expense associated with assets reported under the caption
"other current assets" was $378 thousand.
For the six months ended July 5, 2002, there was no amortization expense
related to goodwill. Amortization expense related to intangibles assets was
$413 thousand of which $71 thousand was reported under the caption "cost of
sales" or "selling, general and administrative" expenses. Amortization
expense associated with assets reported under the caption "other current
assets" was $154 thousand.
The changes in the net carrying amount of goodwill for the six months ended
July 5, 2002 by segment are as follows:
(in thousands) Products Services Consolidated
--------- --------- -------------
Net carrying amount as of 1/5/02 $ 40,812 $ 16,642 $ 57,454
Goodwill recorded during first six months 1,347 1,308 2,655
--------- --------- -------------
Net carrying amount as of 7/5/02 $ 42,159 $ 17,950 $ 60,109
========= ========= =============
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Pro forma net income and net income per share exclusive of amortization expense
are as follows:
(in thousands, except per share data) Three Months Ended July 5,
-----------------------------
2001 2002
------------- --------------
Reported net income $ 4,243 $ 4,627
Add back: Goodwill amortization 661 -
------------- --------------
Adjusted net income $ 4,904 $ 4,627
============= ==============
Basic earnings per share:
Reported net income $ 0.34 $ 0.36
Goodwill amortization 0.05 -
------------- --------------
Adjusted net income $ 0.39 $ 0.36
============= ==============
Diluted earnings per share:
Reported net income $ 0.33 $ 0.36
Goodwill amortization 0.05 -
------------- --------------
Adjusted net income $ 0.38 $ 0.36
============= ==============
(in thousands, except per share data) Six Months Ended July 5,
---------------------------
2001 2002
----------- --------------
Reported net income $ 7,169 $ 9,290
Add back: Goodwill amortization 1,308 -
----------- --------------
Adjusted net income $ 8,477 $ 9,290
=========== ==============
Basic earnings per share:
Reported net income $ 0.57 $ 0.73
Goodwill amortization 0.10 -
----------- --------------
Adjusted net income $ 0.67 $ 0.73
=========== ==============
Diluted earnings per share:
Reported net income $ 0.56 $ 0.72
Goodwill amortization 0.10 -
----------- --------------
Adjusted net income $ 0.66 $ 0.72
=========== ==============
11 of 19
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)
Six Months Ended July 5,
---------------------------
2001 2002
----------- --------------
Interest paid $ 1,754 $ 297
=========== ==============
Income taxes paid $ 4,416 $ 10,336
=========== ==============
Adjustments to purchase price
of acquisition assets and intangibles $ 594 $ 1,861
=========== ==============
Business combinations accounted for
as purchases:
Assets acquired $ 3,375 $ -
Liabilities assumed - -
Notes payable - -
----------- --------------
Net cash paid $ 3,375 $ -
=========== ==============
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. (in thousands)
Three Months Ended July 5, 2001
--------------------------------------------------
Products Services Leasing Consolidated
--------- --------- ------------- -------------
Revenues $ 167,757 $ 35,234 $ 2,345 $ 205,336
Income from operations 4,423 2,493 481 7,397
Total assets 202,188 60,632 64,377 327,197
Capital expenditures 1,458 65 30 1,553
Depreciation and amortization 2,359 550 286 3,195
Three Months Ended July 5, 2002
--------------------------------------------------
Products Services Leasing Consolidated
--------- --------- ------------- -------------
Revenues $ 162,389 $ 33,657 $ 534 $ 196,580
Income from operations 3,041 4,407 331 7,779
Total assets 199,069 57,278 7,523 263,870
Capital expenditures 3,297 1,998 - 5,295
Depreciation and amortization 1,322 170 28 1,520
12 of 19
Six Months Ended July 5, 2002
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 327,132 $ 68,956 $ 4,944 $ 401,032
Income from operations 8,445 3,701 852 12,998
Total assets 202,188 60,632 64,377 327,197
Capital expenditures 2,208 121 231 2,560
Depreciation and amortization 4,586 1,089 618 6,293
Six Months Ended July 5, 2002
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 313,142 $ 66,552 $ 3,234 $ 382,928
Income from operations 5,734 8,375 1,315 15,424
Total assets 199,069 57,278 7,523 263,870
Capital expenditures 3,947 2,099 84 6,130
Depreciation and amortization 2,694 437 206 3,337
8. Assets Held For Sale
On February 28, 2002 the Company entered into a definitive purchase
agreement to sell substantially all of the net assets of its wholly owned
subsidiary - Technology Integration Financial Services, Inc. ("T.I.F.S.")
to Information Leasing Corporation ("ILC"), the leasing division of the
Provident Bank of Cincinnati, Ohio. On April 16, 2002 the Company closed
the sale of a majority of the assets of its wholly owned subsidiary
T.I.F.S. to ILC. Vincent D. Rinaldi, a Director of the Company, is the
President of ILC. ILC will pay the Company book value for the net assets of
T.I.F.S. as of April 16, 2002. The book value of the net assets of T.I.F.S.
as of April 16, 2002 were approximately $5.1 million. Accordingly, no gain
or loss was recognized on this transaction. In addition, ILC assumed and
liquidated at the time of the closing approximately $20.0 million of the
Company's debt related to leased assets owed by T.I.F.S as of April 16,
2002. As part of the transaction, the Company signed an exclusive
seven-year vendor agreement whereby the Company is appointed as an agent
for remarketing and reselling of the leased equipment sold. The Company
will be paid a commission on future lease transactions referred to and
accepted by ILC and will act as the remarketing and reselling agent for
such future leased equipment.
The following table identifies the assets and liabilities sold as of April
16, 2002:
(In thousands)
Cash $ (262)
Net investment in leases 54,924
Other 468
-----------
Total assets $ 55,130
===========
Current and long term notes payable $ 29,961
Intercompany debt 15,857
Other 4,176
-----------
Total liabilities $ 49,994
===========
See the Company's filing on Form 8-K dated May 1, 2002 for more information
on the sale.
13 of 19
9. Restructuring Charge
During the second quarter 2002, the Company recorded a restructuring charge
of $0.5 million. The restructuring charge is related to consolidation of
business operations.
10. Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, "Accounting for costs Associated with Exit or Disposal
Activities." This Statement requires recording costs associated with exit
or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before an
actual liability has been incurred. Adoption of the Statement is required
with disposal activities initiated after December 31, 2002. The Company
believes that the adoption of this Statement will not have an effect on the
Company's financial position or results of operation as the Company has not
presently identified any activities to be disposed.
11. Subsequent Events
On July 25, 2002, the Board of Directors authorized a program to repurchase
up to 150,000 shares of the Company's outstanding common stock, which
represents less than 1.2 % of its outstanding common stock, in open market
purchases made from time to time at the discretion of the Company's
management. The time and extent of the repurchases will depend on market
conditions. The acquired shares will be held in treasury or cancelled. The
Company anticipates financing the stock redemption program out of working
capital and the redemption program will be effectuated over the next 12
months.
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 $8.7
million, or 4.2%, to $196.6 million in the second quarter of fiscal 2002 from
$205.3 million in the second quarter of fiscal 2001. This decrease was a result
primarily of an industry-wide slowdown in technology spending, the decrease in
leasing revenue due to the sale of Technology Integration Financial Services,
Inc. (" T.I.F.S."), and the Company's decision to take a fee from manufacturers
related to certain sales transactions as opposed to recording top line revenues
of approximately $2.8 million. Excluding acquisitions completed in fiscal year
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2001, total net sales and revenues decreased 6.2%. Products and leasing sales
decreased $7.2 million, or 4.2% to $162.9 million in the second quarter of
fiscal 2002 from $170.1 million in the second quarter of fiscal 2001. Excluding
acquisitions completed in fiscal year 2001, products and leasing sales decreased
5.4%. Service revenues decreased $1.5 million, or 4.5%, to $33.7 million in the
second quarter of fiscal 2002 from $35.2 million in the second quarter of fiscal
year 2001. This net decrease was primarily a result of an industry-wide
slowdown in technology spending. Excluding acquisitions completed in fiscal
year 2001, service revenues decreased 10.2%.
Total net sales and revenues decreased $18.1 million, or 4.5%, to $382.9 million
in the first half of fiscal 2002 from $401.0 million in the first half of fiscal
2001. This decrease was attributable primarily to an industry-wide slowdown in
technology spending and the Company's decision to take a fee from manufacturers
related to certain sales transaction as opposed to recording top line revenues
of approximately $10.6 million. Excluding acquisitions completed in fiscal year
2001, total net sales and revenues decreased 6.6%. Products and leasing sales
decreased $15.7 million, or 4.7%, to $316.4 million in the first half of fiscal
2002 from $332.1 million in the first half of fiscal 2001. Excluding
acquisitions completed in fiscal year 2001, products and leasing sales decreased
5.9%. Service revenues decreased $2.4 million, or 3.5%, to $66.6 million in the
first half of fiscal 2002 from $69.0 million in the first half of fiscal year
2001 for the reasons stated in the preceding paragraph. Excluding acquisitions
completed in fiscal year 2001, service revenues decreased 9.6%.
GROSS MARGINS. Gross margin increased to 12.3% in the second quarter of fiscal
2002 as compared to 12.2% in the second quarter of fiscal 2001. This increase
in gross margin resulted primarily from the increase in service gross margin
associated with improved utilization of service personnel offset by the decrease
on hardware gross margin. Service gross margin increased to 43.7% of total
gross margin in the second quarter of fiscal 2002 from 38.8% in the second
quarter of fiscal 2001. This increase in gross margin is the result of
improved utilization of service personnel. Factors that may have an impact on
gross margin in the future include the change in personnel utilization rates,
the mix of products sold and services provided, a change in 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.
Gross margin increased to 12.5% in the first half of fiscal 2002 as compared to
12.4% in the first half of fiscal 2001. This increase in gross margin resulted
primarily from the increase in service gross margin associated with improved
utilization of service personnel offset by the decrease on hardware gross
margin. Service gross margin increased to 43.4% of total gross margin in the
first half of fiscal 2002 from 37.1% in the first half of fiscal 2001. This
increase in gross margin is the result of improved utilization of service
personnel. Factors that may have an impact on gross margin in the future
include the change in personnel utilization rates, the mix of products sold and
services provided, a change in 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 and provision for doubtful accounts) expressed as a percentage of
total net sales and revenues was 7.4% in the second quarter of fiscal 2002 and
2001. Total operating expenses expressed as a percentage of total net sales and
revenues decreased to 8.3% in the second quarter of fiscal 2002 from 8.6% in the
second quarter of fiscal 2001. This decrease is the result of the reduction in
selling and administrative staff during fiscal 2001 and the elimination of
amortization expense associated with the Company's goodwill offset by the
increase in the provision for doubtful accounts and the restructuring charge as
discussed below.
Selling, general and administrative expenses (including rent expense and
provision for doubtful accounts) expressed as a percentage of total net sales
and revenues decreased to 7.6% in the first half of fiscal 2002 from 7.7% in the
first half of fiscal 2001. The decrease is the result of the reduction in
selling and administrative staff during the first half of fiscal 2001 offset by
the increase in its reserve for doubtful accounts. Total operating expenses
expressed as a percentage of total net sales and revenues decreased to 8.5% in
the first half of fiscal 2002 from 9.2% in the first half of fiscal 2001 due the
decrease in selling, general and administrative expenses as discussed above, the
elimination of amortization expense associated with the Company's goodwill and
the elimination of the litigation settlement fees reported in the first quarter
of fiscal 2001 and offset by the restructuring charge as discussed 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.
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RESTRUCTURING CHARGE. During the second quarter 2002, the Company recorded a
restructuring charge of $0.5 million. The restructuring charge is related to
consolidation of business operations.
INCOME FROM OPERATIONS. Income from operations increased $0.4 million, or 5.4%,
to $7.8 million in the second quarter of fiscal 2002 from $7.4 million in the
second quarter of fiscal 2001. The Company's operating margin increased to 4.0%
in the second quarter of fiscal 2002 as compared to 3.6% in the second quarter
of fiscal 2001. This increase is primarily due to the decrease in operating
expenses and the increase in the Company's gross margin.
Income from operations increased $2.4 million, or 18.5%, to $15.4 million in the
first half of fiscal 2002 from $13.0 million in the first half of fiscal 2001.
The Company's operating margin increased to 4.0% in the first half of fiscal
2002 as compared to 3.2% in the first half of fiscal 2001. This increase is
primarily due to the decrease in operating expenses and the increase in the
Company's gross margin.
INTEREST EXPENSE. Interest expense decreased $0.3 million, or 60.0%, to $0.2
million in the second quarter of fiscal 2002 from $0.5 million in the second
quarter of fiscal 2001. This decrease was due to reduced borrowings as a result
of improved cash flow management, the sale of T.I.F.S. and a reduced interest
rate charged by the Company's lender.
Interest expense decreased $1.1 million, or 78.6%, to $0.3 million in the first
half of fiscal 2002 from $1.4 million in the first half of fiscal 2001. This
decrease was due to reduced borrowings as a result of improved cash flow
management, the sale of T.I.F.S. and a reduced interest rate charged by the
Company's lender.
INCOME TAXES. The Company's effective tax rate was 39.0% in the second quarter
of fiscal 2002 and fiscal 2001.
The Company's effective tax rate was 38.5% in the first half of fiscal 2002
compared to 39.0% in the first half of fiscal 2001. The decrease in the
Company's effective tax rate results from lower overall state income tax
liability and the change in goodwill amortization.
NET INCOME. Net income increased $0.4 million, or 9.5%, to $4.6 million in the
second quarter of fiscal 2002 from $4.2 million in the second quarter of fiscal
2001 due to the factors described above.
Net income increased $2.1 million, or 29.2%, to $9.3 million in the first half
of fiscal 2002 from $7.2 million in the first half of fiscal 2001 due to the
factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $2.3 million in the first half of fiscal
2002. Cash provided by investing activities was $15.2 million, which included
$6.1 million for capital expenditures, $0.8 million for prior year acquisitions
offset by $0.4 million for proceeds on sale of fixed assets and $21.7 million
for proceeds related to the sale of the leasing segment. Cash used in financing
activities was $14.3 million which included $3.5 million of net payments on
notes payable, $11.9 million of net payments on bank notes payable, and offset
by $1.1 million from the exercise of stock options and employee stock purchase
plan.
A significant part of the Company's inventories is financed by floor plan
arrangements with third parties. At July 5, 2002, 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.
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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 which is based upon accounts receivable financing, and a
cash-flow component in the form of a $24.0 million term loan, which is not
restricted to a borrowing base. 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, which was 4.6% as of July 5, 2002.
At July 5, 2002, the Company did not have a balance outstanding under this
facility. 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 and restricted from paying dividends.
On April 16, 2002, the Company closed the sale of a majority of the assets of
its wholly owned leasing subsidiary- Technology Integration Financial Services,
Inc. ("T.I.F.S."). ILC will pay the Company book value for the net assets of
T.I.F.S. as of April 16, 2002, which was approximately $5.1 million. In
addition, ILC assumed and liquidated at the time of the closing approximately
$20.0 million of the Company's debt related to leased assets owed by T.I.F.S as
of April 16, 2002.
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.
17 of 19
POMEROY COMPUTER RESOURCES, INC.
PART II - OTHER INFORMATION
Items 1 to 3 None
Item 4 Submission of Matters to a Vote of Security Holders
On June 13, 2002, the Company held its annual meeting of stockholders for the
following purposes:
1. To elect nine directors, and;
2. To approve the Company's 2002 Non-Qualified and Incentive
Stock Option Plan and;
3. To approve the Company's 2002 Outside Director's Stock
Option Plan.
The voting on the above matters by the stockholders was as follows:
Matter
------
Election of Directors: For Withheld
------------------------ --- --------
David B. Pomeroy, II 10,760,717 1,697,299
James H. Smith III 11,622,771 835,245
Michael E. Rohrkemper 11,637,808 820,208
Stephen E. Pomeroy 10,768,134 1,689,882
William H. Lomicka 11,651,873 806,143
Vincent D. Rinaldi 11,637,773 820,243
Kenneth R. Waters 11,641,971 816,045
Debra E. Tibey 11,650,273 807,743
Edward E. Faber 11,649,536 808,480
Approve the Company's 2002 Non-Qualified 6,481,827 ,891,236
and Incentive Stock Option Plan.
Holders of 82,595 shares abstained from voting and there were 3,002,358
shares of Broker Non-Votes on the forgoing proposal. The number of shares
voted in favor of the proposal was sufficient for its passage.
Approve the Company's 2002 Outside 7,891,264 1,480,696
Director's Stock Option Plan.
Holders of 83,698 shares abstained from voting and there were 3,002,358 shares
of Broker Non-Votes on the forgoing proposal. The Number of shares voted in
favor of the proposal was sufficient for its passage.
Item 5 None
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Item 6 Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
On May 1, 2002, the Company filed a current report on Form 8-K announcing the
closing of the sale of a majority of the assets of its wholly owned subsidiary -
Technology Integration Financial Services, Inc. ("T.I.F.S.") to Information
Leasing Corporation ("ILC"), the leasing division of the Provident Bank of
Cincinnati, Ohio.
(b) Exhibits
11 Computation of Earnings per Share
99.11 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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: August 13, 2002 By: /s/ Michael E. Rohrkemper
Michael E. Rohrkemper
-------------------------------------
Chief Financial Officer and
Chief Accounting Officer
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