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, 1999
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 (IRS Employer
of incorporation 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 August 5, 1999 was
11,748,073.
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POMEROY COMPUTER RESOURCES, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of
January 5, 1999 and July 5, 1999 3
Consolidated Statements of Income for
the Quarters Ended July 5, 1998 and 1999 4
Consolidated Statements of Income for
the Six Months Ended July 5, 1998 and 1999 5
Consolidated Statements of Cash Flows
for the Six Months Ended July 5, 1998 and 1999 6
Notes to Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information 14
SIGNATURE 18
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POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, July 5,
1999 1999
----------- --------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,962 $ 5,146
Accounts and note receivable, less allowance of $598 and $1,097
at January 5, 1999 and July 5, 1999, respectively . . . . . . 164,991 178,209
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 33,333 38,249
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,084 3,263
----------- --------
Total current assets . . . . . . . . . . . . . . . . . . . 204,370 224,867
----------- --------
Equipment and leasehold improvements. . . . . . . . . . . . . . . . 23,796 24,356
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . 10,323 11,373
----------- --------
Net equipment and leasehold improvements . . . . . . . . . 13,473 12,983
----------- --------
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,383 39,273
----------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 254,226 $277,123
=========== ========
LIABILITIES & EQUITY
Current liabilities:
Current portion of notes payable . . . . . . . . . . . . . . . . $ 5,028 $ 4,512
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 78,817 74,718
Bank notes payable.. . . . . . . . . . . . . . . . . . . . . . . 39,629 57,087
Other current liabilities. . . . . . . . . . . . . . . . . . . . 9,532 12,675
----------- --------
Total current liabilities. . . . . . . . . . . . . . . . . 133,006 148,992
----------- --------
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,231 4,098
Equity:
Preferred stock (no shares issued or outstanding). . . . . . . . - -
Common stock (11,707 and 11,730 shares issued and outstanding
at January 5, 1999 and July 5, 1999, respectively). . . . . . 117 117
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 64,394 64,690
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . 48,800 59,548
----------- --------
113,311 124,355
Less treasury stock, at cost (31 shares at January 5, 1999 and
July 5, 1999) . . . . . . . . . . . . . . . . . . . . . . . . 322 322
----------- --------
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . 112,989 124,033
----------- --------
Total liabilities and equity. . . . . . . . . . . . . . . . . $ 254,226 $277,123
=========== ========
See notes to consolidated financial statements.
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POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Quarter Ended
--------------------------
July 5, July 5,
1998 1999
--------------- ---------
Net sales and revenues. . . . . . . . . $ 158,843 $186,848
Cost of sales and service . . . . . . . 138,065 163,140
--------------- ---------
Gross profit . . . . . . . . . 20,778 23,708
--------------- ---------
Operating expenses:
Selling, general and administrative. 9,953 11,258
Rent expense . . . . . . . . . . . . 626 696
Depreciation . . . . . . . . . . . . 954 702
Amortization . . . . . . . . . . . . 453 692
Provision for doubtful accounts. . . - 46
--------------- ---------
Total operating expenses . . . 11,986 13,394
--------------- ---------
Income from operations. . . . . . . . . 8,792 10,314
--------------- ---------
Other expense (income):
Interest expense . . . . . . . . . . 877 865
Miscellaneous. . . . . . . . . . . . (33) (16)
--------------- ---------
Total other expense. . . . . . 844 849
--------------- ---------
Income before income tax . . . . . . 7,948 9,465
Income tax expense . . . . . . . . . 2,940 3,785
--------------- ---------
Net income . . . . . . . . . . . . . $ 5,008 $ 5,680
=============== =========
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . 11,450 11,697
=============== =========
Diluted. . . . . . . . . . . . . . . 11,804 11,791
=============== =========
Earnings per common share:
Basic. . . . . . . . . . . . . . . . $ 0.44 $ 0.49
=============== =========
Diluted. . . . . . . . . . . . . . . $ 0.42 $ 0.48
=============== =========
See notes to consolidated financial statements.
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POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Six Months Ended
--------------------
July 5, July 5,
1998 1999
--------- ---------
Net sales and revenues. . . . . . . . $294,041 $350,772
Cost of sales and service . . . . . . 255,500 304,205
--------- ---------
Gross profit . . . . . . . . 38,541 46,567
--------- ---------
Operating expenses:
Selling, general and administrative 18,804 22,621
Rent expense. . . . . . . . . . . . 1,188 1,402
Depreciation. . . . . . . . . . . . 1,806 1,797
Amortization. . . . . . . . . . . . 762 1,315
Provision for doubtful accounts . . - 46
--------- ---------
Total operating expenses . . 22,560 27,181
--------- ---------
Income from operations. . . . . . . 15,981 19,386
--------- ---------
Other expense(income):
Interest expense. . . . . . . . . . 1,300 1,650
Miscellaneous . . . . . . . . . . . (56) (45)
--------- ---------
Total other expense. . . . . 1,244 1,605
--------- ---------
Income before income tax. . . . . . 14,737 17,781
Income tax expense. . . . . . . . . 5,452 7,033
--------- ---------
Net income. . . . . . . . . . . . . $ 9,285 $ 10,748
========= =========
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . 11,421 11,691
========= =========
Diluted . . . . . . . . . . . . . . 11,758 11,820
========= =========
Earnings per common share:
Basic . . . . . . . . . . . . . . . $ 0.81 $ 0.92
========= =========
Diluted . . . . . . . . . . . . . . $ 0.79 $ 0.91
========= =========
See notes to consolidated financial statements.
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POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six Months Ended
--------------------
July 5, July 5,
1998 1999
--------- ---------
Cash Flows from Operating Activities:
Net cash flows used in operating activities $ (4,622) $ (8,685)
Cash Flows from Investing Activities:
Capital expenditures. . . . . . . . . . . . (1,932) (1,489)
Acquisition of reseller assets, net of cash
acquired . . . . . . . . . . . . . . . . . . . (11,229) (1,082)
--------- ---------
Net investing activities . . . . . . . . . . . (13,161) (2,571)
--------- ---------
Cash Flows from Financing Activities:
Net borrowings on bank note. . . . . . . . . . 18,722 17,308
Net payments on notes payable. . . . . . . . . (696) (5,164)
Proceeds from exercise of stock options. . . . 1,395 296
--------- ---------
Net financing activities. . . . . . . . . . 19,421 12,440
--------- ---------
Increase (decrease) in cash. . . . . . . . . . 1,638 1,184
Cash:
Beginning of period . . . . . . . . . . . . 380 3,962
--------- ---------
End of period . . . . . . . . . . . . . . . $ 2,018 $ 5,146
========= =========
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, 1999. 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, 1999 are not necessarily
indicative of the results that may be expected for future interim periods or for
the year ending January 5, 2000.
2. Cost of sales and service
In the first quarter of 1999, the Company changed the manner in which services'
labor costs are reported. The Company now classifies direct costs of service
personnel in cost of sales and service; previously, such costs were included in
selling, general and administrative expenses. Prior periods have been
reclassified to conform with the current year's presentation.
3. Borrowing Arrangements
At January 5 and July 5, 1999, bank notes payable include $12.6
million and $18.7 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.
4. Earnings per Common Share
The following is a reconciliation of the number of shares used in the basic EPS
and diluted EPS computations:
Quarter Ended July 5,
---------------------------------------
1998 1999
------------------- -------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ -----------
Basic EPS. . . . . 11,450 $ 0.44 11,697 $ 0.49
Effect of dilutive
Stock options. . 354 (0.02) 94 (0.01)
------ ----------- ------ -----------
Diluted EPS. . . . 11,804 $ 0.42 11,791 $ 0.48
====== =========== ====== ===========
Six Months Ended July 5,
---------------------------------------
1998 1999
------------------- -------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ -----------
Basic EPS. . . . . 11,421 $ 0.81 11,691 $ 0.92
Effect of dilutive
Stock options. . 337 (0.02) 129 (0.01)
------ ----------- ------ -----------
Diluted EPS. . . . 11,758 $ 0.79 11,820 $ 0.91
====== =========== ====== ===========
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5. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and non-cash
investing and financing activities are as follows:
Six Months Ended July 5,
------------------------
1998 1999
------- ------
Interest paid . . . . . . . . . . . $ 1,045 $1,668
======= ======
Income taxes paid . . . . . . . . . $ 9,353 $5,558
======= ======
Adjustments to purchase
price of acquisition assets . . . $ - $1,740
======= ======
Business combinations accounted for
as purchases:
Assets acquired. . . . . . . . $31,734 $2,601
Liabilities assumed. . . . . . 18,505 973
Notes payable. . . . . . . . . 2,000 546
------- ------
Net cash paid. . . . . . . . . $11,229 $1,082
======= ======
6. Litigation
There are various legal actions arising in the normal course of business that
have been brought against the Company. Management believes these matters will
not have a material adverse effect on the Company's financial position or
results of operations.
7. Segment Information
Summarized financial information concerning the Company's reportable segments is
shown in the following table. (in thousands)
Quarter Ended July 5, 1998
-----------------------------------
Products Services Consolidated
--------- --------- -------------
Revenues. . . . . . . . . . . $ 142,062 $ 16,781 $ 158,843
Income from operations. . . . 6,603 2,189 8,792
Total assets. . . . . . . . . 169,267 39,409 208,676
Capital expenditures. . . . . 425 98 523
Depreciation and amortization 1,176 231 1,407
Quarter Ended July 5, 1999
-----------------------------------
Products Services Consoldiated
--------- --------- -------------
Revenues. . . . . . . . . . . $ 161,703 $ 25,145 $ 186,848
Income from operations. . . . 4,233 6,081 10,314
Total assets. . . . . . . . . 228,403 48,720 277,123
Capital expenditures. . . . . 293 240 533
Depreciation and amortization 1,065 329 1,394
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Six Months Ended July 5, 1998
-----------------------------------
Products Services Consolidated
--------- --------- -------------
Revenues. . . . . . . . . . . $ 262,473 $ 31,568 $ 294,041
Income from operations. . . . 11,898 4,083 15,981
Total assets. . . . . . . . . 169,267 39,409 208,676
Capital expenditures. . . . . 1,723 209 1,932
Depreciation and amortization 2,149 419 2,568
Six Months Ended July 5, 1999
-----------------------------------
Products Services Consoldiated
--------- --------- -------------
Revenues. . . . . . . . . . . $ 303,372 $ 47,400 $ 350,772
Income from operations. . . . 8,917 10,469 19,386
Total assets. . . . . . . . . 228,403 48,720 277,123
Capital expenditures. . . . . 1,027 462 1,489
Depreciation and amortization 2,475 637 3,112
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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
OVERVIEW. The Company's business is comprised of (1) the sale and leasing of a
broad range of computer equipment including hardware, software, and related
products, and (2) the provision of information technology (IT) services which
support such computer products. On January 6, 1999, the Company transferred the
assets, liabilities, business, operations and personnel comprising its IT
services business (excluding procurement and configuration services) in exchange
for 10 million shares of Class B common stock of Pomeroy Select Integration
Solutions, Inc., a wholly-owned subsidiary. The separation of the IT services
business is a part of the Company's ongoing strategy to expand its services
revenue. The Company now classifies the direct costs of service personnel in
cost of sales and service. See Notes 2 and 7 of the Notes to Consolidated
Financial Statements.
TOTAL NET SALES AND REVENUES. Total net sales and revenues increased $28
million, or 17.6%, to $186.8 million in the second quarter of fiscal 1999 from
$158.8 million in the second quarter of fiscal 1998. This increase was
attributable to an increase in sales to existing and new customers and to
acquisitions completed in fiscal years 1999 and 1998. Additionally, this
increase reflects a greater increase in sales volume as unit prices have
declined as compared to the second quarter of fiscal 1998. Excluding
acquisitions completed in fiscal years 1999 and 1998, total net sales and
revenues increased 9.8%. Product sales increased $19.6 million, or 13.8%, to
$161.7 million in the second quarter of fiscal 1999 from $142.1 million in the
second quarter of fiscal 1998. Excluding acquisitions completed in fiscal years
1999 and 1998, product sales increased 6.9%. Service revenues increased $8.4
million, or 49.8%, to $25.1 million in the second quarter of fiscal 1999 from
$16.8 million in the second quarter of fiscal years 1999 and 1998. Excluding
acquisitions completed in fiscal years 1999 and 1998, service revenues increased
34.4%.
Total net sales and revenues increased $56.7 million or 19.3%, to $350.8 million
in the first half of 1999 from $294.0 million in the first half of 1998.
Excluding acquisitions completed in fiscal years 1999 and 1998, total net sales
and revenues increased 9.6%. Product sales increased $40.9, or 15.6%, to $303.4
million in the first half of 1999 from $262.5 million in the first half of 1998.
Excluding acquisitions completed in fiscal years 1999 and 1998, product sales
increased 6.9%. Service revenues increased
$15.8 million, or 50.2%, to $47.4 million in the first half of 1999 from 31.6
million in the first half of 1998. Excluding acquisitions completed in fiscal
years 1999 and 1998, service revenues increased 31.9%.
GROSS MARGINS. Gross margin was 12.7% in the second quarter of fiscal 1999
compared to 13.1% in the second quarter of fiscal 1998. The decrease in gross
margin resulted primarily from the Company's strategic decision to obtain new
business and increase sales by aggressively pricing certain products. Service
revenues increased to 13.5% of total net sales and revenues in the second
quarter of fiscal 1999 compared to 10.6% of total net sales and revenues in the
second quarter of fiscal 1998. Service gross margin increased to 42.6% of total
gross margin in the second quarter of fiscal 1999 from 31.3% in the second
quarter of fiscal 1998. This increase in service gross margin was primarily due
to improved productivity of technical personnel. Factors that may have an impact
on gross margin in the future include the further decline of unit prices, the
percentage of equipment or service sales with lower-margin customers, the ratio
of service revenues to total net sales and revenues, and personnel utilization
rates.
10 of 18
Gross margin was 13.3% in the first half of fiscal 1999 compared to 13.1% in the
first half of fiscal 1998. This improved overall gross margin in the first half
of fiscal 1999 can be attributed to an increase in the volume of higher-margin
service revenues and improved gross margin of service revenues which were offset
by the decline in product gross margin and the growth in such lower-margin
product sales. Service revenues increased to 13.5% of total net sales and
revenues in the first half of fiscal 1999 compared to 10.7% of total net sales
and revenues in the first half of fiscal 1998. Service gross margin increased to
42.7% of total gross margin in the first half of fiscal 1999 from 31.1% in the
first half of fiscal 1998. This increase in service's gross margin was primarily
due to improved productivity of technical personnel. Factors that may have an
impact on gross margin in the future include the further decline of unit prices,
the percentage of equipment or service sales with lower-margin customers, the
ratio of service revenues to total net sales and revenues, and personnel
utilization rates.
OPERATING EXPENSES. Selling, general and administrative expenses (including
rent expense) expressed as a percentage of total net sales and revenues
decreased to 6.4% in the second quarter of fiscal 1999 from 6.7% in the second
quarter of fiscal 1998. This decrease is primarily due to the growth in net
sales and revenues exceeding the growth in selling, general and administrative
expenses. Excluding acquisitions completed in fiscal years 1999 and 1998,
selling, general and administrative expenses expressed as a percentage of total
net sales and revenues would have been 5.9% in the second quarter of fiscal
1999. Total operating expenses expressed as a percentage of total net sales
and revenues decreased to 7.2% in the second quarter of fiscal 1999 from 7.6% in
the second quarter of fiscal 1998 for the reason noted above. Excluding
acquisitions completed in fiscal years 1999 and 1998, total operating expenses
expressed as a percentage of total net sales and revenues would have been 6.7%
in the second quarter of fiscal 1999.
Selling, general and administrative expenses (including rent expense) expressed
as a percentage of total net sales and revenues increased to 6.9% in the first
half of fiscal 1999 from 6.8% in the first half of fiscal 1998. This increase
is primarily attributable to the increased selling and administrative payroll
costs experienced in the first quarter of fiscal 1999. Excluding acquisitions
completed in fiscal years 1999 and 1998, selling, general and administrative
expenses expressed as a percentage of total net sales and revenues would have
been 6.6% in the first half of fiscal 1999. Total operating expenses expressed
as a percentage of total net sales and revenues increased to 7.8% in the first
half of fiscal 1999 from 7.7% in the first half of fiscal 1998 for the reason
noted above and the increase in amortization expense as a result of
acquisitions. Excluding acquisitions completed in fiscal years 1999 and 1998,
total operating expenses expressed as a percentage of total net sales and
revenues would have been 7.8% in the second quarter of fiscal 1999.
INCOME FROM OPERATIONS. Income from operations increased $1.5 million, or
17.3%, to $10.3 million in the second quarter of fiscal 1999 from $8.8 million
in the second quarter of fiscal 1998. The Company's operating margin was 5.5% in
the second quarter of fiscal 1999 and fiscal 1998.
Income from operations increased $3.4 million, or 21.3%, to $19.4 million in the
first half of fiscal 1999 from $16.0 million in the first half of fiscal 1998.
The Company's operating margin increased to 5.5% in the first half of fiscal
1999 as compared to 5.4% in the first half of fiscal 1998 as the increase in
gross margin offset the increase in operating expenses as a percent of net sales
and revenues.
INTEREST EXPENSE. Interest expense was $0.9 million in the second quarter of
fiscal 1999 and 1998. Interest expense was $1.7 million in the first half of
fiscal 1999 as compared to $1.3 million in the first half of fiscal 1998.
This increase in interest expense in the first half of fiscal 1999 as compared
to the first half of fiscal 1998 is primarily due to the Company's increase in
overall debt borrowings in the first quarter of fiscal 1999 as compared to
the first quarter of fiscal
1998.
11 of 18
INCOME TAXES. The Company's effective tax rate was 40.0% in the second quarter
of fiscal 1999 compared to 37.0% in the second quarter of fiscal 1998. The
adjustment to the effective tax rate in the second quarter of fiscal 1999
resulted in an overall effective tax rate of 39.6% for the first half of fiscal
1999. For the first half of fiscal 1999, the Company's effective tax rate was
39.6% as compared to 37.0% for the first half of fiscal 1998. During fiscal
1998, the Company's effective tax rate was reduced due to the availability of
the Kentucky Jobs Development Act ("KJDA") credit pertaining to the initial
eligible start-up costs component of the credit. For fiscal 1999, the Company's
KJDA benefit will be reduced to the annual eligible lease payments component of
the credit plus any carryforward from prior years.
NET INCOME. Net income increased $0.7 million, or 13.4%, to $5.7 million in the
second quarter of fiscal 1999 from $5.0 million in the second quarter of fiscal
1998 due to the factors described above. Net income increased $1.5 million, or
15.8%, to $10.8 million in the first half of fiscal 1999 from $9.3 million in
the first half of fiscal 1998 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $8.7 million in the first half of fiscal
1999. Cash used in investing activities included $1.5 million for capital
expenditures and $1.1 million for acquisitions. Cash provided by financing
activities included $17.3 million of net borrowings on bank notes payable, $0.3
million from the exercise of stock options less $5.2 million for repayments on
notes payable.
A significant part of the Company's inventories is financed by floor plan
arrangements with third parties. At July 5, 1999, these lines of credit totaled
$72.0 million, including $60.0 million with Deutsche Financial Services ("DFS")
and $12.0 million with IBM Credit Corporation ("ICC"). Borrowings under both
floor plan arrangements 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
with DFS which permits the Company to borrow up to the lesser of $60.0 million
or an amount based upon a formula of eligible trade receivables. The Credit
Facility, which expires July 14, 2000, carries a variable interest rate based
solely on the prime rate less 125 basis points. At July 5, 1999, the amount
outstanding, which included $18.7 million of overdrafts in accounts with a
participant bank to the Company's credit facility, was $57.1 million at an
interest rate of 6.75%. Under the terms of the Credit Facility, the Company is
prohibited from paying any cash dividends and is subject to various restrictive
covenants.
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
Year 2000 Issues
Background. The following is a discussion of the Year 2000 date issue
("Year 2000 issue") as it affects the Company. Many computer programs and
embedded chips in other forms of technology use only the last two digits to
identify a year in a date field. As a result of this design decision, some of
these systems could fail to operate or fail to produce correct results if "00"
is interpreted to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches.
Assessment. The Company currently believes its potential exposure to
problems arising from the Year 2000 issue lies primarily in three areas:
(1) The Company's internal operating systems which may not be Year 2000
compliant;
(2) Potential Year 2000 non-compliance of systems of third parties with whom
the Company has a business relationship; and,
(3) Non-compliance of information technology products developed by third
parties on which the Company performs services.
12 of 18
The Company has completed an assessment of its principal internal systems.
However, it continues to assess its Year 2000 exposure with respect to third
parties. While the cost of these assessment efforts is not expected to be
material to the Company's financial position or results of operations, there is
no assurance that this will be the case.
Internal Operating Systems. The Company is dependent upon management
information systems for all phases of its operations and financial reporting.
The Company began addressing the affect of the Year 2000 issue in 1996. The
Company has acquired Year 2000 compliant versions for all of its principal
systems and modules. The Company is in the process of testing the Year 2000
compliant versions of all hardware and software components and applications
pertaining to its internal operating systems upon which the Company relies.
There may be some non-critical applications that are not Year 2000 compliant.
Third-Party Relationships. The failure of a supplier to deliver timely
Year 2000 compliant products to our customers could jeopardize the Company's
ability to meet obligations to customers. In addition, we may be liable for Year
2000 non-compliance of information technology products on which the Company
performs services. The Company is conducting a program to identify and resolve
Year 2000 exposure from third parties. Any failure of third parties with whom
the Company has a business relationship to resolve Year 2000 problems with their
products in a timely manner could materially adversely affect our business,
financial condition or results of operations. The Company is also dependent on
third party service providers, such as telephone companies, banks and insurance
carriers. The Company is not aware of any significant Year 2000 exposure,
however, we have not inquired or implemented any program to assure Year 2000
compliance by them.
State of Readiness. The Company has completed testing of its principal
information technology systems. The Company is now converting all operations
to the Year 2000 compliant system, which is estimated to be operational by the
end of third quarter of fiscal 1999.
Costs to Address Year 2000 Issues. Other than time spent by the
Company's own personnel, the Company has not incurred any significant costs in
identifying Year 2000 issues. The Company does not anticipate any significant
costs to make its internal systems Year 2000 compliant because no remediation is
expected to be required. Accordingly, the Company has not deferred other
information technology projects due to Year 2000 efforts.
Risks of Year 2000 Issues. The Company believes the most
reasonably likely worst case Year 2000 scenario would include a combination of
some or all of the following:
(1) Internal IT modules or systems may fail to operate or may give
erroneous information. Such failure could result in shipping delays, reduced
utilization of technical personnel, inability to timely generate financial
reports and statements, inability of the Company to communicate with its branch
offices, and computer network downtime resulting in numerous inefficiencies and
higher payroll expenses.
(2) Non-IT components in HVAC, lighting, telephone, security and similar
systems might fail and cause the entire system to fail.
(3) Communications with customers that depend upon IT or non-IT
technology, such as EDI (including automatic ordering by and for customers), and
obtaining current pricing from vendors, may fail or give erroneous information.
These types of problems could result in such difficulties as the inability to
receive or process customer orders, shipping delays, or sale of products at
erroneous prices.
(4) The unavailability of product as a result of Year 2000 problems
experienced by one or more key vendors of the Company, or as a result of changes
in inventory levels of aggregators, VARs and similar providers in response to an
anticipated Year 2000 problem or the inability of the Company to develop
alternative sources for products.
(5) Products sold to some of the Company's customers could fail to
perform some or all of their intended functions. In such a situation, the
Company's maximum obligation would be to repair or replace the defective
products to the extent the Company is required to do so under manufacturer
warranty.
Contingency Plans. The Company believes its plans for addressing the
Year 2000 issue are adequate. The Company does not believe it will incur a
material financial impact from system failures, or from the costs associated
with assessing the risks of failure, arising from Year 2000 problems.
Consequently, the Company does not intend to create a detailed contingency plan.
In the event the Company does not adequately identify and resolve Year 2000
issues, the absence of a detailed contingency plan may adversely affect its
business, financial condition and results of operations.
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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 9, 1999, the Company held its annual meeting of stockholders
for the following purposes:
1. To elect seven directors;
2. To approve an increase in the number of shares of common stock reserved
for issuance under the Company's 1992 Non-Qualified and Incentive Stock Option
Plan from 1,850,000 shares to 2,350,000.
The voting on the above matters by the stockholders was as follows:
Matter For Withheld
- ---------------------------------------- ---------- --------
Election of Directors:
- ----------------------------------------
David B. Pomeroy, II 10,225,563 626,494
Stephen E. Pomeroy 10,221,303 630,764
Dr. David Rosenthal 10,224,989 627,068
Michael Rohrkemper 10,229,291 622,766
James H. Smith, III 10,228,391 623,666
William H. Lomicka 10,227,066 624,991
Vincent Rinaldi 10,226,966 625,091
Approve an increase in the number of
Shares of common stock reserved for
issuance under the Company's 1992
Non-Qualified and Incentive Stock Option
Plan from 1,850,000 to 2,350,000 shares 8,434,860 332,256
Holders of 12,944 shares abstained from voting on the forgoeing proposal. The
number of shares voted in favor of the proposal was sufficient for its passage.
Item 5 None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
- -------------
10(i) Material Agreements
(hh)(1) The Asset Purchase Agreement dated
May 6, 1999 by, between and among
Pomeroy Computer Resources, Inc.,
Pomeroy Select Integration Solutions,
Inc., Systems Atlanta Commercial
Systems, Inc. and B. Scott Dobson,
Charley G. Dobson, Betty H. Dobson,
and Tyler H. Dobson
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(hh)(2) Employment Agreement by and
between Pomeroy Computer
Resources, Inc. and B. Scott Dobson,
dated May 6, 1999
(hh)(3) Subordinated Promissory Note issued
by Pomeroy Computer Resources,
Inc. to Systems Atlanta Commercial
Systems, Inc., dated May 6, 1999
(hh)(4) Subordinated Promissory Note issued
by Pomeroy Select Integration
Solutions, Inc. to Systems Atlanta
Commercial Systems, Inc., dated May
6, 1999
(hh)(5) General Bill of Sale and Assignment of
the Asset Purchase Agreement with
Pomeroy Computer Resources, Inc.
(hh)(6) General Bill of Sale and Assignment of
the Asset Purchase Agreement with
Pomeroy Select Integration Solutions,
Inc.
(hh)(7) Assignment and Assumption
Agreement by and between Systems
Atlanta Commercial Systems, Inc. and
Pomeroy Computer Resources, Inc.,
dated May 6, 1999
(hh)(8) Assignment and Assumption
Agreement by and between Systems
Atlanta Commercial Systems, Inc. and
Pomeroy Select Integration Solutions,
Inc.
(hh)(9) Assumption of Liabilities of the Asset
Purchase Agreement by and between
Systems Atlanta Commercial
Systems, Inc. and Pomeroy Computer
Resources, Inc., dated May 6, 1999
(hh)(10) Assumption of Liabilities of the Asset
Purchase Agreement by and between
Systems Atlanta Commercial
Systems, Inc. and Pomeroy Select
Integration Solutions, Inc.
(hh)(11) Letter Agreement regarding Contracts
by and between Systems Atlanta
Commercial Systems, Inc. and
Pomeroy Computer Resources, Inc.,
dated May 6, 1999
(hh)(12) Letter Agreement regarding Contracts
by and between Systems Atlanta
Commercial Systems, Inc. and
Pomeroy Select Integration Solutions,
Inc.
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(hh)(13) Power of Attorney issued to Pomeroy
Computer Resources, Inc. by Systems
Atlanta Commercial Systems, Inc.,
dated May 6, 1999
(hh)(14) Power of Attorney issued to Pomeroy
Select Integration Solutions, Inc. by
Systems Atlanta Commercial
Systems, Inc., dated May 6, 1999
(hh)(15) Consent for Use of Similar Name by
Systems Atlanta Commercial
Systems, Inc. to Pomeroy Computer
Resources, Inc., dated May 6, 1999
(hh)(16) Consent for Use of Similar Name by
Systems Atlanta Commercial
Systems, Inc. to Pomeroy Select
Integration Solutions, Inc., dated May
6, 1999
(hh)(17) Noncompetition Agreement by and
between Systems Atlanta Commercial
Systems, Inc. and Pomeroy Computer
Resources, Inc., dated May 6, 1999
(hh)(18) Noncompetition Agreement by and
between Systems Atlanta Commercial
Systems, Inc. and Pomeroy Select
Integration Solutions, Inc., dated May
6, 1999
(hh)(19) Noncompetition Agreement by and
between B. Scott Dobson and
Pomeroy Computer Resources, Inc.,
dated May 6, 1999
(hh)(20) Noncompetition Agreement by and
between B. Scott Dobson and
Pomeroy Select Integration Solutions,
Inc., dated May 6, 1999
(hh)(21) Employment Agreement by and
between Pomeroy Computer
Resources, Inc. and Tyler H. Dobson
(hh)(22) Award Agreement between Pomeroy
Computer Resources, Inc. and B.
Scott Dobson, dated May 6, 1999
(hh)(23) Award Agreement between Pomeroy
Computer Resources, Inc. and Tyler
H. Dobson, dated May 6, 1999
Incentive Deferred Compensation
(hh)(24) Agreement by and between Pomeroy
Computer Resources, Inc. and B.
Scott Dobson, dated May 6, 1999
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Incentive Deferred Compensation
(hh)(25) Agreement by and between Pomeroy
Computer Resources, Inc. and Tyler
H. Dobson, dated May 6, 1999
Noncompetition Agreement by and
(hh)(26) between Tyler H. Dobson and
Pomeroy Select Integration Solutions,
Inc., dated May 6, 1999
Noncompetition Agreement by and
(hh)(27) between Tyler H. Dobson and
Pomeroy Computer Resources,
Inc., dated May 6, 1999
Noncompetition Agreement by and
(hh)(28) between Charley G. Dobson and
Pomeroy Select Integration Solutions,
Inc., dated May 6, 1999
Noncompetition Agreement by and
(hh)(29) between Charley G. Dobson and
Pomeroy Computer Resources,
Inc., dated May 6, 1999
Noncompetition Agreement by and
(hh)(30) between Betty H. Dobson and
Pomeroy Computer Resources,
Inc., dated May 6, 1999
Noncompetition Agreement by and
(hh)(31) between Betty H. Dobson and
Pomeroy Select Integration Solutions,
Inc., dated May 6, 1999
General Bill of Saleand Assignment of
(hh)(32) the Asset Purchase Agreement
between Systems Atlanta Commercial
Systems, Inc. and Pomeroy Computer
Resources, Inc.
General Bill of Sale and Assignment of
(hh)(33) the Asset Purchase Agreement
between Systems Atlanta Commercial
Systems, Inc. and Pomeroy Select
Integration Solutions, Inc.
11 Computation of Earnings per Share
27 Financial Data Schedules
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(b) Reports on Form 8-K On June 10, 1999, the Company filed a current
report on Form 8-K announcing the execution
of a definitive agreement whereby the Company
would purchase the assets and assume certain
liabilities of Systems Atlanta Commercial
Systems, Inc.
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 12, 1999 By: /s/ Stephen E. Pomeroy
----------------------
Stephen E. Pomeroy
Chief Financial Officer and
Chief Accounting Officer
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