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, 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 of (IRS Employer
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 November 5, 1999 was
11,806,711.
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 October 5, 1999 3
Consolidated Statements of Income for
the Quarters Ended October 5, 1998 and
1999 4
Consolidated Statements of Income for
the Nine Months Ended October 5, 1998
and 1999 5
Consolidated Statements of Cash Flows
for the Nine Months Ended October 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 15
SIGNATURE 16
2
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, October 5,
1999 1999
----------- -----------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,962 $ 5,386
Accounts and note receivable, less allowance of $598 and $2,350
at January 5, 1999 and October 5, 1999, respectively. . . . . 164,991 209,106
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 33,333 23,837
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,084 3,526
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . 204,370 241,855
----------- -----------
Equipment and leasehold improvements. . . . . . . . . . . . . . . . 23,796 25,223
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . 10,323 12,229
----------- -----------
Net equipment and leasehold improvements . . . . . . . . . 13,473 12,994
----------- -----------
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,383 44,920
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 254,226 $ 299,769
=========== ===========
LIABILITIES & EQUITY
Current liabilities:
Current portion of notes payable . . . . . . . . . . . . . . . . $ 5,028 $ 11,816
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 78,817 64,040
Bank notes payable . . . . . . . . . . . . . . . . . . . . . . . 39,629 72,371
Other current liabilities. . . . . . . . . . . . . . . . . . . . 9,532 13,860
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . 133,006 162,087
----------- -----------
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,231 5,455
Equity:
Preferred stock (no shares issued or outstanding). . . . . . . . - -
Common stock (11,707 and 11,807 shares issued and outstanding
at January 5, 1999 and October 5, 1999, respectively) . . . . 117 118
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 64,394 65,524
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . 48,800 66,907
----------- -----------
113,311 132,549
Less treasury stock, at cost (31 shares at January 5, 1999 and
October 5, 1999). . . . . . . . . . . . . . . . . . . . . . . 322 322
----------- -----------
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . 112,989 132,227
----------- -----------
Total liabilities and equity. . . . . . . . . . . . . . . . . $ 254,226 $ 299,769
=========== ===========
See notes to consolidated financial statements.
3
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Quarter Ended
-------------------------
October 5, October 5,
1998 1999
------------ -----------
Net sales and revenues . . . . . . . . $ 163,790 $ 197,090
Cost of sales and service. . . . . . . 141,493 170,035
------------ -----------
Gross profit. . . . . . . . . 22,297 27,055
------------ -----------
Operating expenses:
Selling, general and administrative 11,074 12,385
Rent expense. . . . . . . . . . . . 622 767
Depreciation. . . . . . . . . . . . 973 869
Amortization. . . . . . . . . . . . 433 771
Provision for doubtful accounts . . - -
------------ -----------
Total operating expenses. . . 13,102 14,792
------------ -----------
Income from operations . . . . . . . . 9,195 12,263
------------ -----------
Other expense (income):
Interest expense. . . . . . . . . . 711 1,182
Miscellaneous . . . . . . . . . . . (77) 1
------------ -----------
Total other expense . . . . . 634 1,183
------------ -----------
Income before income tax. . . . . . 8,561 11,080
Income tax expense. . . . . . . . . 3,168 4,548
------------ -----------
Net income. . . . . . . . . . . . . $ 5,393 $ 6,532
============ ===========
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . 11,505 11,744
============ ===========
Diluted . . . . . . . . . . . . . . 11,745 11,831
============ ===========
Earnings per common share:
Basic . . . . . . . . . . . . . . . $ 0.47 $ 0.56
============ ===========
Diluted . . . . . . . . . . . . . . $ 0.46 $ 0.55
============ ===========
See notes to consolidated financial statements.
4
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Nine Months Ended
--------------------------
October 5, October 5,
1998 1999
------------ ------------
Net sales and revenues. . . . . . . . $ 457,831 $ 547,862
Cost of sales and service . . . . . . 396,993 474,240
------------ ------------
Gross profit . . . . . . . . 60,838 73,622
------------ ------------
Operating expenses:
Selling, general and administrative 29,878 35,006
Rent expense. . . . . . . . . . . . 1,810 2,169
Depreciation. . . . . . . . . . . . 2,779 2,666
Amortization. . . . . . . . . . . . 1,195 2,086
Provision for doubtful accounts . . - 46
------------ ------------
Total operating expenses . . 35,662 41,973
------------ ------------
Income from operations. . . . . . . 25,176 31,649
------------ ------------
Other expense(income):
Interest expense. . . . . . . . . . 2,011 2,832
Miscellaneous . . . . . . . . . . . (133) (44)
------------ ------------
Total other expense. . . . . 1,878 2,788
------------ ------------
Income before income tax. . . . . . 23,298 28,861
Income tax expense. . . . . . . . . 8,620 11,581
------------ ------------
Net income. . . . . . . . . . . . . $ 14,678 $ 17,280
============ ============
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . 11,450 11,709
============ ============
Diluted.. . . . . . . . . . . . . . 11,754 11,824
============ ============
Earnings per common share:
Basic . . . . . . . . . . . . . . . $ 1.28 $ 1.48
============ ============
Diluted.. . . . . . . . . . . . . . $ 1.25 $ 1.46
============ ============
See notes to consolidated financial statements.
5
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Nine Months Ended
--------------------------
October 5, October 5,
1998 1999
------------ ------------
Cash Flows from Operating Activities:
Net cash flows used in operating activities. $ (2,312) $ (27,332)
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . (2,684) (2,172)
Acquisition of reseller assets, net of cash
acquired. . . . . . . . . . . . . . . . . . . . (11,229) (4,298)
------------ ------------
Net investing activities. . . . . . . . . . . . (13,913) (6,470)
------------ ------------
Cash Flows from Financing Activities:
Net borrowings on bank note . . . . . . . . . . 16,797 32,592
Net borrowings (payments) on notes payable. . . (1,030) 1,232
Purchase of treasury stock. . . . . . . . . . . (118) -
Proceeds from stock options related tax benefit - 827
Proceeds from exercise of stock options.. . . . 1,715 575
------------ ------------
Net financing activities . . . . . . . . . . 17,364 35,226
------------ ------------
Increase in cash. . . . . . . . . . . . . . . . 1,139 1,424
Cash:
Beginning of period. . . . . . . . . . . . . 380 3,962
------------ ------------
End of period. . . . . . . . . . . . . . . . $ 1,519 $ 5,386
============ ============
See notes to consolidated financial statements.
6
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 nine-month period ended October 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 October 5, 1999, bank notes payable include $12.6 million and
$4.9 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: (in thousands, except per share data)
Quarter Ended October 5,
----------------------------------------
1998 1999
------------------- -------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ -----------
Basic EPS. . . . . 11,505 $ 0.47 11,744 $ 0.56
Effect of dilutive
Stock options. . 240 (0.01) 87 (0.01)
------ ----------- ------ -----------
Diluted EPS. . . . 11,745 $ 0.46 11,831 $ 0.55
====== =========== ====== ===========
Nine Months Ended October 5,
----------------------------------------
1998 1999
------------------- -------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ -----------
Basic EPS. . . . . 11,450 $ 1.28 11,709 $ 1.48
Effect of dilutive
Stock options. . 304 (0.03) 115 (0.02)
------ ----------- ------ -----------
Diluted EPS. . . . 11,754 $ 1.25 11,824 $ 1.46
====== =========== ====== ===========
7
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,
----------------------------
1998 1999
------- -------
Interest paid . . . . . . . . . . . $ 1,834 $ 2,650
======= =======
Income taxes paid . . . . . . . . . $12,056 $12,496
======= =======
Adjustments to purchase
price of acquisition assets . . . $ - $ 1,740
======= =======
Business combinations accounted for
as purchases:
Assets acquired. . . . . . . . $31,734 $10,573
Liabilities assumed. . . . . . 18,505 5,022
Notes payable. . . . . . . . . 2,000 697
Stock issued . . . . . . . . . - 556
------- -------
Net cash paid. . . . . . . . . $11,229 $ 4,298
======= =======
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
For the first and second quarters of 1999, Pomeroy Select Integration Solutions,
Inc.'s, a wholly-owned subsidiary, pro rata share of the selling, general and
administrative expenses were not allocated in accordance with the administrative
services agreement between the Company and the subsidiary. Therefore,
reclassifications have been made in the third quarter of 1999 to reflect the
proper allocation of such expenses for the products and services segments for
the nine months ended October 5, 1999. For the three months ended April 5,
1999, this reclassification decreased product's and increased service's income
from operations by $459 thousand. For the three months ended July 5, 1999, this
reclassification increased product's and decreased service's income from
operations by $1.471 million. The Company's consolidated net income and
earnings per share were unchanged as a result of these reclassifications.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. (in thousands)
8
Quarter Ended October 5, 1998
-----------------------------------
Products Services Consolidated
--------- --------- -------------
Revenues. . . . . . . . . . . $ 143,957 $ 19,833 $ 163,790
Income from operations. . . . 5,686 3,509 9,195
Total assets. . . . . . . . . 184,065 37,185 221,250
Capital expenditures. . . . . 700 52 752
Depreciation and amortization 1,088 318 1,406
Quarter Ended October 5, 1999
-----------------------------------
Products Services Consolidated
--------- --------- -------------
Revenues. . . . . . . . . . . $ 170,031 $ 27,059 $ 197,090
Income from operations. . . . 7,093 5,170 12,263
Total assets. . . . . . . . . 238,872 60,897 299,769
Capital expenditures. . . . . 539 144 683
Depreciation and amortization 1,273 367 1,640
Nine Months Ended October 5, 1998
-----------------------------------
Products Services Consolidated
--------- --------- -------------
Revenues. . . . . . . . . . . $ 406,430 $ 51,401 $ 457,831
Income from operations. . . . 17,584 7,592 25,176
Total assets. . . . . . . . . 184,065 37,185 221,250
Capital expenditures. . . . . 2,423 261 2,684
Depreciation and amortization 3,237 737 3,974
Nine Months Ended October 5, 1999
-----------------------------------
Products Services Consolidated
--------- --------- -------------
Revenues. . . . . . . . . . . $ 473,403 $ 74,459 $ 547,862
Income from operations. . . . 17,022 14,627 31,649
Total assets. . . . . . . . . 238,872 60,897 299,769
Capital expenditures. . . . . 1,566 606 2,172
Depreciation and amortization 3,748 1,004 4,752
9
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 $33.3
million, or 20.3%, to $197.1 million in the third quarter of fiscal 1999 from
$163.8 million in the third 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. This increase also
reflects an increase in sales volume; however, unit prices have declined in the
third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998.
Excluding acquisitions completed in fiscal years 1999 and 1998, total net sales
and revenues increased 12.3%. Product sales increased $26.0 million, or 18.1%,
to $170.0 million in the third quarter of fiscal 1999 from $144.0 million in the
third quarter of fiscal 1998. Excluding acquisitions completed in fiscal years
1999 and 1998, product sales increased 11.2%. Service revenues increased $7.2
million, or 36.4%, to $27.0 million in the third quarter of fiscal 1999 from
$19.8 million in the third quarter of fiscal years 1999 and 1998. Excluding
acquisitions completed in fiscal years 1999 and 1998, service revenues increased
20.1%.
Total net sales and revenues increased $90.1 million or 19.7%, to $547.9 million
in the first nine months of 1999 from $457.8 million in the first nine
months of 1998. Excluding acquisitions completed in fiscal years 1999 and 1998,
total net sales and revenues increased 10.9%. Product sales increased $67.0
million, or 16.5%, to $473.4 million in the first nine months of 1999 from
$406.4 million in the first nine months of 1998. Excluding acquisitions
completed in fiscal years 1999 and 1998, product sales increased 8.8%. Service
revenues increased $23.1 million, or 44.9%, to $74.5 million in the first nine
months of 1999 from $51.4 million in the first nine months of 1998. Excluding
acquisitions completed in fiscal years 1999 and 1998, service revenues increased
27.8%.
GROSS MARGINS. Gross margin increased to 13.7% in the third quarter of fiscal
1999 as compared to 13.6% in the third quarter of fiscal 1998. This increase in
gross margin resulted primarily from the increase of higher margin hardware
sales. Service revenues increased to 13.7% of total net sales and revenues in
the third quarter of fiscal 1999 compared to 12.1% of total net sales and
revenues in the third quarter of fiscal 1998. Service gross margin decreased to
39.1% of total gross margin in the third quarter of fiscal 1999 from 39.3% in
the third quarter of fiscal 1998. This decrease in service gross margin was
primarily due to the Company's decision to obtain new business and increase
sales by aggressively pricing certain services. In addition, the Company
increased its technical staff for contracts which will generate revenue in
future periods. 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.
Gross margin increased to 13.4% in the first nine months of fiscal 1999 as
compared to 13.3% in the first nine months of fiscal 1998. This increase in
gross margin in the first nine months of fiscal 1999 is due to an increase in
the volume of higher-margin service revenues and improved gross margin of
service revenues which were offset somewhat by the decline in product gross
margin and the growth in such lower-margin product sales. Service revenues
increased to 13.6% of total net sales and revenues in the first nine months of
10
fiscal 1999 compared to 11.2% of total net sales and revenues in the first nine
months of fiscal 1998. Service gross margin increased to 41.4% of total gross
margin in the first nine months of fiscal 1999 from 34.1% in the first nine
months 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 6.7% in the third quarter of fiscal 1999 from 7.1% in the third
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 6.4% in the third quarter of fiscal 1999.
Total operating expenses expressed as a percentage of total net sales and
revenues decreased to 7.5% in the third quarter of fiscal 1999 from 8.0% in the
third quarter of fiscal 1998 for the reason noted above and offset by 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 7.3%
in the third quarter of fiscal 1999.
Selling, general and administrative expenses (including rent expense) expressed
as a percentage of total net sales and revenues decreased to 6.8% in the first
nine months of fiscal 1999 from 6.9% in the first nine months 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 6.4% in the first nine months of fiscal 1999. Total
operating expenses expressed as a percentage of total net sales and revenues
decreased to 7.7% in the first nine months of fiscal 1999 from 7.8% in the first
nine months of fiscal 1998 for the reason noted above and offset by 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 7.3% in the first
nine months of fiscal 1999.
INCOME FROM OPERATIONS. Income from operations increased $3.1 million, or
33.4%, to $12.3 million in the third quarter of fiscal 1999 from $9.2 million in
the third quarter of fiscal 1998. The Company's operating margin increased to
6.2% in the third quarter of fiscal 1999 as compared to 5.6% in the third
quarter of fiscal 1998. This increase is primarily due to the increase in the
Company's gross margin.
Income from operations increased $6.4 million, or 25.7%, to $31.6 million in the
first nine months of fiscal 1999 from $25.2 million in the first nine months of
fiscal 1998. The Company's operating margin increased to 5.8% in the first nine
months of fiscal 1999 as compared to 5.5% in the first nine months of fiscal
1998. This increase is primarily due to the increase in the Company's gross
margin.
INTEREST EXPENSE. Interest expense increased 66.2%, to $1.2 million in the
third quarter of fiscal 1999 from $0.7 million in the third quarter of fiscal
1998. This increase is primarily due to the Company's overall increase in debt
borrowings in the third quarter of fiscal 1999. Interest expense was $2.8
million in the first nine months of fiscal 1999 as compared to $2.0 million in
the first nine months of fiscal 1998. This increase in interest expense is
primarily due to the Company's increase in overall debt borrowings in the first
nine months of fiscal 1999.
11
INCOME TAXES. The Company's effective tax rate was 41.0% in the third quarter
of fiscal 1999 compared to 37.0% in the third quarter of fiscal 1998. The
adjustment to the effective tax rate in the third quarter of fiscal 1999
resulted in an overall effective tax rate of 40.1% for the first nine months of
fiscal 1999. For the first nine months of fiscal 1999, the Company's effective
tax rate was 40.1% as compared to 37.0% for the nine months 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 $1.1 million, or 21.1%, to $6.5 million in the
third quarter of fiscal 1999 from $5.4 million in the third quarter of fiscal
1998 due to the factors described above. Net income increased $2.6 million, or
17.7%, to $17.3 million in the first nine months of fiscal 1999 from $14.7
million in the first nine months of fiscal 1998 due to the factors described
above.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $27.3 million in the first nine months of
fiscal 1999. Cash used in investing activities included $2.2 million for capital
expenditures and $4.3 million for acquisitions. Cash provided by financing
activities included $32.6 million of net borrowings on bank notes payable, $1.4
million from the exercise of stock options and related tax benefit and $1.2
million of net borrowings on notes payable.
In September 1999, the Company amended its existing credit facilities with
Deutsche Financial Services Corp. ("DFS") to increase its consolidated borrowing
ability from $120 million to $140 million. This credit facility, which expires
July 14, 2000, provides a credit line for inventory financing and for accounts
receivable financing. $20 million of the DFS credit facility is used by Pomeroy
Select Integration Solutions, Inc., a wholly-owned subsidiary of the Company.
Under the terms of the credit facility, the Company is prohibited from paying
any cash dividends and is subject to various restrictive covenants. In addition,
the Company has available a $12 million inventory financing facility with IBM
Credit Corporation ("ICC").
Borrowings under the DFS and ICC floor plan arrangements are made on thirty 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. The average rate on these arrangements is less than 1.0%. The
Company classifies amounts outstanding under the floor plan arrangements as
accounts payable.
Borrowings under the DFS accounts receivable portion of the credit facility
carry a variable interest rate based on the prime rate less 125 basis points.
At October 5, 1999, the amount outstanding, which included $4.9 million of
overdrafts in accounts with a participant bank to the Company's credit facility,
was $72.4 million at an interest rate of $7.0%.
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.
12
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.
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 has completed a program to identify and resolve
Year 2000 exposures from third parties. The Company is not aware of any
significant Year 2000 exposure from a third party. 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.
State of Readiness. The Company has completed testing of its principal
information technology systems. The following is a list of all systems that
the Company believes are Year 2000 compliant: primary file servers and
applications; internal email servers and applications; internet email servers
and applications; internet and intranet servers and applications; wide area data
network components; sufficient workstation systems and applications at all
locations; and phone systems and voice mail systems. Year 2000 compliant
principal information technology systems were successfully installed in the
third quarter of fiscal 1999, and final testing and migrations are being
completed.
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.
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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.
14
POMEROY COMPUTER RESOURCES, INC.
PART II - OTHER INFORMATION
Items 1 to 3 None
Item 4 None
Item 5 None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
- -------------
10(i) Material Agreements
(ii)(1) Stock purchase agreement by,
between and among Thomas F.
Schneider and Rodney Leas and
Pomeroy Computer Resources, Inc.,
dated August 20, 1999.
(ii)(2) Subordinated Promissory Note issued
by Pomeroy Computer Resources,
Inc. to Thomas F. Schneider, dated
August 20, 1999.
(ii)(3) Subordinated Promissory Note issued
by Pomeroy Computer Resources,
Inc. to Rodney Leas, dated August 20,
1999.
(ii)(4) Agreement by and between Thomas
F. Schneider and Pomeroy Computer
Resources, Inc., dated August 20,
1999.
(ii)(5) Agreement by and between Rodney
Leas and Pomeroy Computer
Resources, Inc., dated August 20,
1999.
(ii)(6) Incentive Deferred Compensation Agreement by and between Pomeroy
Computer Resources, Inc. and
Thomas F. Schneider, dated August
20, 1999.
(ii)(7) Employment Agreement by and
between Pomeroy Computer
Resources, Inc. and Thomas F.
Schneider, dated August 20, 1999.
(ii)(8) Amendment to Business Credit and
Security Agreement by and among Deutsche Financial Services
Corporation, Pomeroy Computer
Resources, Inc. and Global
Technologies, Inc., dated September 1999.
15
(ii)(9) Business Credit and Security
Agreement between Pomeroy Select
Integration Solutions, Inc. and
Deutsche Financial Services
Corporation, dated January 6, 1999.
11 Computation of Earnings per Share
27 Financial Data Schedules
(b) Reports on Form 8-K On September 7, 1999, the Company filed a
current report on Form 8-K announcing
the execution of a definitive agreement
whereby the Company acquired all the
outstanding stock of Acme Data 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: November 12, 1999 By: /s/ Stephen E. Pomeroy
------------------------------
Stephen E. Pomeroy
Chief Financial Officer and
Chief Accounting Officer
16