UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 5, 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 incorporation (IRS Employer
or organization) Identification No.)
1020 Petersburg Road, Hebron, KY 41048
--------------------------------------
(Address of principal executive offices)
(606) 586-0600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X NO
--- ---
The number of shares of common stock outstanding as of April 30, 1999 was
11,725,121.
For the first quarter 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 to reflect the proper allocation of such
expenses for the products and services segments. See Note 7 of the Notes to
Consolidated Financial Statements for restated segment information. The
Company's consolidated net income and earnings per share were unchanged as a
result of these reclassifications.
Page 1 of 12
POMEROY COMPUTER RESOURCES, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of 3
January 5, 1999 and April 5, 1999
Consolidated Statements of Income for 4
the Quarters Ended April 5, 1998 and
1999
Consolidated Statements of Cash Flows 5
for the Quarters Ended April 5, 1998 and
1999
Notes to Consolidated Financial 6
Statements (restated as to Note 7 only)
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of
Operations
Part II.. Other Information 12
SIGNATURE 12
Page 2 of 12
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, April 5,
1999 1999
----------- ---------
ASSETS
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,962 $ 1,806
Accounts and note receivable, less allowance of $598 and $559 at
January 5, 1999 and April 5, 1999, respectively. . . . . . . . 164,991 162,460
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,333 38,965
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,084 2,786
----------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . . 204,370 206,017
----------- ---------
Equipment and leasehold improvements.. . . . . . . . . . . . . . . . 23,796 23,552
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . 10,323 10,475
----------- ---------
Net equipment and leasehold improvements. . . . . . . . . . 13,473 13,077
----------- ---------
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,383 38,113
----------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 254,226 $ 257,207
=========== =========
LIABILITIES & EQUITY
Current liabilities:
Current portion of notes payable. . . . . . . . . . . . . . . . . $ 5,028 $ 4,996
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 78,817 71,905
Bank notes payable. . . . . . . . . . . . . . . . . . . . . . . . 39,629 43,118
Other current liabilities . . . . . . . . . . . . . . . . . . . . 9,532 12,494
----------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . 133,006 132,513
----------- ---------
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,231 6,502
Equity:
Preferred stock (no shares issued or outstanding) . . . . . . . . - -
Common stock (11,707 and 11,751 shares issued and outstanding
at January 5, 1999 and April 5, 1999, respectively). . . . . . 117 117
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 64,394 63,488
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 48,800 54,909
----------- ---------
113,311 118,514
Less treasury stock, at cost (31 shares at January 5, 1999 and
April 5, 1999) . . . . . . . . . . . . . . . . . . . . . . . . 322 322
----------- ---------
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . 112,989 118,192
----------- ---------
Total liabilities and equity . . . . . . . . . . . . . . . . . $ 254,226 $ 257,207
=========== =========
See notes to consolidated financial statements.
Page 3 of 12
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Quarter Ended
---------------------
April 5, April 5,
---------------------
1998 1999
Net sales and revenues . . . . . . . . $ 135,198 $ 163,924
Cost of sales and service. . . . . . . 117,435 141,065
---------- ----------
Gross profit. . . . . . . . . 17,763 22,859
---------- ----------
Operating expenses:
Selling, general and administrative 8,851 11,363
Rent expense. . . . . . . . . . . . 562 706
Depreciation. . . . . . . . . . . . 852 1,095
Amortization. . . . . . . . . . . . 309 623
---------- ----------
Total operating expenses. . . 10,574 13,787
---------- ----------
Income from operations . . . . . . . . 7,189 9,072
---------- ----------
Other expense (income):
Interest expense. . . . . . . . . . 423 785
Miscellaneous . . . . . . . . . . . (23) (29)
---------- ----------
Total other expense . . . . . 400 756
---------- ----------
Income before income tax. . . . . . 6,789 8,316
Income tax expense. . . . . . . . . 2,512 3,248
---------- ----------
Net income. . . . . . . . . . . . . $ 4,277 $ 5,068
========== ==========
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . 11,392 11,692
========== ==========
Diluted . . . . . . . . . . . . . . 11,711 11,858
========== ==========
Earnings per common share:
Basic . . . . . . . . . . . . . . . $ 0.38 $ 0.43
========== ==========
Diluted . . . . . . . . . . . . . . $ 0.37 $ 0.43
========== ==========
See notes to consolidated financial statements.
Page 4 of 12
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Quarter Ended
---------------------------
April 5, April 5,
--------------- -----------
1998 1999
Cash Flows from Operating Activities:
Net cash flows used in operating activities. $ (11,253) $ (3,043)
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . (1,409) (956)
Acquisition of reseller assets, net of cash
acquired. . . . . . . . . . . . .. . . . (11,229) (52)
--------------- ----------
Net investing activities. . . . . . . . . . . . (12,638) (1,008)
--------------- ----------
Cash Flows from Financing Activities:
Net borrowings on bank note . . . . . . . . . . 24,441 3,489
Net payments on notes payable . . . . . . . . . (425) (1,729)
Proceeds from exercise of stock options . . . . 427 135
--------------- ----------
Net financing activities . . . . . . . . . . 24,443 1,895
--------------- ----------
Increase (decrease) in cash . . . . . . . . . . 552 (2,156)
Cash:
Beginning of period. . . . . . . . . . . . . 380 3,962
--------------- ----------
End of period. . . . . . . . . . . . . . . . $ 932 $ 1,806
=============== ==========
See notes to consolidated financial statements.
Page 5 of 12
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED AS TO NOTE 7 ONLY)
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 three-month period ended April 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 April 5, 1999, bank notes payable include $12.6
million and $8.8 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 April 5,
---------------------------------
1998 1999
---------------- ---------------
Per Share Per Share
---------------- ---------------
Shares Amount Shares Amount
------ -------- ------ -------
Basic EPS. . . . . 11,392 $ 0.38 11,692 $ 0.43
Effect of dilutive
stock options. . 319 (0.01) 166 -
------ -------- ------ -------
Diluted EPS. . . . 11,711 $ 0.37 11,858 $ 0.43
====== ======== ====== =======
Page 6 of 12
5. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and non-cash
investing and financing activities are as follows:
Quarter Ended April 5,
----------------------
1998 1999
----------- ---------
Interest paid . . . . . . . . $ 425 $ 793
========== =========
Income taxes paid . . . . . . $ 4,112 $ 589
========== =========
Adjustments to purchase
price of acquisition assets $ - $ 1,740
========== =========
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 (restated)
Summarized financial information concerning the Company's reportable segments is
shown in the following table. (in thousands)
Quarter Ended April 5, 1998
-----------------------------------
Products Services Consolidated
--------- --------- -------------
Revenue $ 120,411 $ 14,787 $ 135,198
Income from operation 5,295 1,894 7,189
Total assets 179,679 37,438 217,117
Capital expenditures 1,298 111 1,409
Depreciation and amortization 973 188 1,161
Quarter Ended April 5, 1999 (restated)
-----------------------------------
Products Services Consolidated
--------- --------- -------------
Revenue $ 141,669 $ 22,255 $ 163,924
Income from operation 4,225 4,847 9,072
Total assets 205,976 51,231 257,207
Capital expenditures 734 222 956
Depreciation and amortization 1,410 308 1,718
Page 7 of 12
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 $28.7
million, or 21.2%, to $163.9 million in the first quarter of fiscal 1999 from
$135.2 million in the first quarter of fiscal 1998. This increase was
attributable to an increase in sales to existing and new customers and to
acquisitions completed in fiscal 1998. Additionally, this increase reflects a
greater increase in sales volume as unit prices have declined as compared to the
first quarter of fiscal 1998. Excluding acquisitions completed in fiscal 1998,
total net sales and revenues increased 9.3%. Product sales increased $21.3
million, or 17.7%, to $141.7 million in the first quarter of fiscal 1999 from
$120.4 million in the first quarter of fiscal 1998. Excluding acquisitions
completed in fiscal 1998, product sales increased 6.8%. Service revenues
increased $7.5 million, or 50.7%, to $22.3 million in the first quarter of
fiscal 1999 from $14.8 million in the first quarter of fiscal 1998. Excluding
acquisitions completed in fiscal 1998, service revenues increased 29.2%.
GROSS MARGINS. Gross margin was 13.9% in the first quarter of fiscal 1999
compared to 13.1% in the first quarter of fiscal 1998. The Company improved its
gross margin by increasing the volume of higher-margin service revenues and
improving the gross margin of service revenues which offset a decrease in
product gross margins and the growth in equipment sales. Service revenues
increased to 13.6% of total net sales and revenues in the first quarter of
fiscal 1999 compared to 10.9% of total net sales and revenues in the first
quarter of fiscal 1998. Service gross margin increased to 43.9% of total gross
margin in the first quarter of fiscal 1999 from 37.1% in the first quarter of
fiscal 1998. This increase was primarily due to improved productivity of
technical personnel. Factors that may have an impact on gross margin in the
future include 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 increased to 7.4% in the first quarter of fiscal 1999 from 7.0% in the
first quarter of fiscal 1998. This increase is primarily attributable to
increased selling and administration payroll costs, including increased employee
retention and benefit costs. Total operating expenses expressed as a
percentage of total net sales and revenues increased to 8.4% in the first
Page 8 of 12
quarter of fiscal 1999 from 7.8% in the first quarter of fiscal 1998 for the
reason noted above and the increase in depreciation and amortization expense as
the result of acquisitions.
INCOME FROM OPERATIONS. Income from operations increased $1.9 million, or
26.4%, to $9.1 million in the first quarter of fiscal 1999 from $7.2 million in
the first quarter of fiscal 1998. The Company's operating margin increased to
5.5% in the first quarter of fiscal 1999 from 5.3% in the first quarter of
fiscal 1998 because the increase in gross margin was greater than the increase
in operating expenses
INTEREST EXPENSE. Interest expense was approximately $0.8 million in the
first quarter of fiscal 1999 compared to $0.4 million in the first quarter of
fiscal 1998. This increase is primarily due to the Company's increase in
overall debt borrowings.
INCOME TAXES. The Company's effective tax rate was 39.1% in the first
quarter of fiscal 1999 compared to 37.0% in the first quarter 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 $0.8 million, or 18.6%, to $5.1 million
in the first quarter of fiscal 1999 from $4.3 million in the first quarter of
fiscal 1998 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $3.0 million in the first quarter of
fiscal 1999. Cash used in investing activities was $1.0 million for capital
expenditures. Cash provided by financing activities included $3.5 million of net
borrowings on bank notes payable, $0.1 million from the exercise of stock
options less $1.7 million for a note repayment.
A significant part of the Company's inventories is financed by floor plan
arrangements with third parties. At April 5, 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 April 5, 1999, the
amount outstanding, which included $8.8 million of overdrafts in accounts with a
participant bank to the Company's credit facility, was $43.1 million at an
interest rate of 6.5%. 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.
Page 9 of 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 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 estimates that it will complete its
testing of its principal information technology systems by the end of the second
quarter of fiscal 1999. Upon completion of the testing of the Year 2000 versions
of its principal systems, the Company will convert all operations to the Year
2000 compliant system, which is estimated to be operational during the 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
Page 10 of 12
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.
Page 11 of 12
POMEROY COMPUTER RESOURCES, INC.
PART II - OTHER INFORMATION
Items 1 to 5 None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
- ------------
11 Computation of Earnings per Share
27.1 Financial Data Schedules
27.2 Financial Data Schedules
(b) Reports on Form 8-K Form 8-K, dated January 29, 1999
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, 23, 1999 By: /s/ Stephen E. Pomeroy
-------------------------------------
Stephen E. Pomeroy
-------------------------------------
Chief Financial Officer and Chief
Accounting Officer
Page 12 of 12