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 April 5, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20022
POMEROY COMPUTER RESOURCES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-1227808
- -------- ----------
(State or jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
1020 Petersburg Road, Hebron, KY 41048
--------------------------------------
(Address of principal executive offices)
(859) 586-0600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
--- ---
The number of shares of common stock outstanding as of April 30, 2003 was
12,396,491
1
POMEROY COMPUTER RESOURCES, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of
January 5, 2003 and April 5, 2003 3
Consolidated Statements of Income for
the Three Months Ended April 5, 2002
and 2003 5
Consolidated Statements of Cash Flows
for the Three Months Ended April 5, 2002
and 2003 6
Notes to Consolidated Financial
Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Item 2. Operations 13
Quantitative and Qualitative Disclosure
Item 3. about Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information 17
SIGNATURE
CERTIFICATIONS Chief Executive Officer 18
Chief Financial Officer 19
2
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) April 5, January 5,
2003 2003
--------- -----------
Unaudited
ASSETS
Current Assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,583 $ 32,505
Accounts receivable:
Trade, less allowance of $1,823 and $1,553 at April 5,
2003 and January 5, 2003, respectively. . . . . . . . 83,050 95,859
Vendor receivables, less allowance of $3,334 at
April 5, 2003 and January 5, 2003 . . . . . . . . . . 7,239 10,297
Net investment in leases . . . . . . . . . . . . . . . . 1,763 1,966
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 2,160 2,775
--------- -----------
Total receivables. . . . . . . . . . . . . . . . . 94,212 110,897
--------- -----------
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 10,056 11,238
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,574 10,198
--------- -----------
Total current assets . . . . . . . . . . . . . . . 168,425 164,838
--------- -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment. . . . . . . . . . . . 29,330 28,741
Leasehold Improvements . . . . . . . . . . . . . . . . . 6,448 5,951
--------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . 35,778 34,692
Less accumulated depreciation. . . . . . . . . . . . . . 16,753 15,393
--------- -----------
Net equipment and leasehold improvements . . . . . 19,025 19,299
--------- -----------
Net investment in leases. . . . . . . . . . . . . . . . . . 1,665 1,889
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . 64,581 60,635
Intangible assets . . . . . . . . . . . . . . . . . . . . . 617 540
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 1,308 1,295
--------- -----------
Total assets . . . . . . . . . . . . . . . . . . . $ 255,621 $ 248,496
========= ===========
See notes to consolidated financial statements.
3
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) April 5, January 5,
2003 2003
--------- -----------
(unaudited)
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 35,790 $ 31,165
Current portion of notes payable . . . . . . . . . . . . . . . 1,204 541
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 1,556 1,490
Other current liabilities. . . . . . . . . . . . . . . . . . . 8,823 8,308
--------- -----------
Total current liabilities . . . . . . . . . . . . . . . 47,373 41,504
--------- -----------
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 663 -
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . 3,141 3,318
Commitments and contingencies. . . . . . . . . . . . . . . . .
Equity:
Preferred stock, $.01 par value; authorized 2,000 shares,
(no shares issued or outstanding). . . . . . . . . . . . - -
Common stock, $.01 par value; authorized 20,000 shares,
(12,870 and 12,869 shares issued at April 5, 2003 and
January 5, 2003, respectively) . . . . . . . . . . . . . 129 129
Paid in capital . . . . . . . . . . . . . . . . . . . . . . 81,774 81,740
Retained earnings . . . . . . . . . . . . . . . . . . . . . 127,494 125,988
--------- -----------
209,397 207,857
Less treasury stock, at cost (436 and 355 shares
at April 5, 2003 and January 5, 2003, respectively). . . 4,953 4,183
--------- -----------
Total equity. . . . . . . . . . . . . . . . . . . . . 204,444 203,674
--------- -----------
Total liabilities and equity. . . . . . . . . . . . . $ 255,621 $ 248,496
========= ===========
See notes to consolidated financial statements.
4
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Three Months Ended
------------------------
April 5, April 5,
2003 2002
------------ ----------
(unaudited) (unaudited)
Net sales and revenues:
Sales-equipment, supplies and leasing. $ 99,986 $ 153,453
Service. . . . . . . . . . . . . . . . 29,992 32,895
------------ ----------
Total net sales and revenues. . . . 129,978 186,348
------------ ----------
Cost of sales and service:
Sales-equipment, supplies and leasing. 92,070 139,836
Service. . . . . . . . . . . . . . . . 21,531 22,692
------------ ----------
Total cost of sales and service . . 113,601 162,528
------------ ----------
Gross profit . . . . . . . . . 16,377 23,820
------------ ----------
Operating expenses:
Selling, general and administrative. 11,687 13,813
Rent expense . . . . . . . . . . . . 787 915
Depreciation . . . . . . . . . . . . 1,165 1,176
Amortization . . . . . . . . . . . . 224 271
------------ ----------
Total operating expenses . . . 13,863 16,175
------------ ----------
Income from operations. . . . . . . . . 2,514 7,645
------------ ----------
Other expense (income):
Interest expense . . . . . . . . . . 67 126
Miscellaneous. . . . . . . . . . . . (22) (2)
------------ ----------
Total other expense. . . . . . 45 124
------------ ----------
Income before income tax. . . . . . 2,469 7,521
Income tax expense . . . . . . . . . 963 2,858
------------ ----------
Net income . . . . . . . . . . . . . $ 1,506 $ 4,663
============ ==========
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . 12,451 12,698
============ ==========
Diluted. . . . . . . . . . . . . . . 12,465 12,789
============ ==========
Earnings per common share:
Basic. . . . . . . . . . . . . . . . $ 0.12 $ 0.37
============ ==========
Diluted. . . . . . . . . . . . . . . $ 0.12 $ 0.36
============ ==========
See notes to consolidated financial statements.
5
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
------------------------
April 5, April 5,
------------------------
2003 2002
------------ ----------
(unaudited) (unaudited)
Cash Flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . $ 1,506 $ 4,663
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 1,163 1,366
Amortization . . . . . . . . . . . . . . . . . . 224 343
Deferred income taxes. . . . . . . . . . . . . . (672) -
Loss on sale of fixed assets . . . . . . . . . . - 146
Changes in working capital accounts, net of
effects of acquisitions:
Receivables . . . . . . . . . . . . . . . . . 20,345 24,077
Inventories . . . . . . . . . . . . . . . . . 1,419 758
Prepaids. . . . . . . . . . . . . . . . . . . 4,887 (431)
Net investment in leases. . . . . . . . . . . 427 3,531
Accounts payable. . . . . . . . . . . . . . . 612 (20,251)
Deferred revenue. . . . . . . . . . . . . . . 66 (115)
Income tax payable. . . . . . . . . . . . . . - (972)
Other, net. . . . . . . . . . . . . . . . . . 808 154
------------ ----------
Net operating activities . . . . . . . . . . . . 30,785 13,269
------------ ----------
Cash Flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . (788) (870)
Proceeds from sale of fixed assets . . . . . . . 1 34
Acquisition of subsidiary companies, net of
cash acquired . . . . . . . . . . . . . . . . (3,184) (656)
------------ ----------
Net investing activities . . . . . . . . . . . . (3,971) (1,492)
------------ ----------
Cash Flows from financing activities:
Payments under notes payable . . . . . . . . . . - (8,440)
Proceeds under notes payable . . . . . . . . . . - 4,590
Net payments under bank notes payable. . . . . . - (11,174)
Proceeds from exercise of stock options. . . . . 34 384
Payment for treasury stock purchase. . . . . . . (770) -
------------ ----------
Net financing activities . . . . . . . . . . . . (736) (14,640)
------------ ----------
Increase (decrease) in cash . . . . . . . . . . . . 26,078 (2,863)
Cash:
Beginning of period. . . . . . . . . . . . . . . 32,505 2,875
------------ ----------
End of period. . . . . . . . . . . . . . . . . . $ 58,583 $ 12
============ ==========
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, 2003. 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, 2003 are not necessarily indicative of
the results that may be expected for future interim periods or for the year
ending January 5, 2004.
2. Cash and Bank Notes Payable
The Company maintains a sweep account with its bank whereby daily cash
receipts are automatically transferred as payment towards the Company's
credit facility. As of April 5, 2003 and January 5, 2003, the Company did
not have a balance outstanding under the Company's credit facility.
3. Treasury Stock
On January 29, 2003, the Board of Directors authorized a program to
repurchase up to 100,000 shares of the Company's outstanding common stock
at market price. During the first quarter 2003, the Company repurchased
81,000 shares of stock at a cost of $770 thousand.
4. Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation", in the fall of 1995. The statement
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value beginning in fiscal
1996. The Company elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's common stock at the date of grant
over the amount an employee must pay to acquire the stock. The Company
adopted SFAS No. 123 for disclosure purposes and for non-employee stock
options. See Recent Accounting Pronouncements later in this note for new
pronouncements affecting stock-based compensation.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards in first quarter 2002
and 2003 consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
7
(in thousands, except per Three Months Ended April 5,
share amounts) 2003 2002
------------- -------------
Net income - as reported $ 1,506 $ 4,663
Stock-based compensation expense-net of tax 552 502
------------- -------------
Net income - pro forma $ 954 $ 4,161
============= =============
Net income per common share - as reported
Basic $ 0.12 $ 0.37
============= =============
Diluted $ 0.12 $ 0.36
============= =============
Net income per common share - pro forma
Basic $ 0.08 $ 0.33
============= =============
Diluted $ 0.08 $ 0.33
============= =============
5. Earnings per Common Share
The following is a reconciliation of the number of shares used in the basic
EPS and diluted EPS computations: (in thousands, except per share data)
Three Months Ended April 5,
----------------------------------------
2003 2002
--------------------- -----------------
Per Share Per Share
Shares Amount Shares Amount
--------- ---------- ------ ---------
Basic EPS 12,451 $ 0.12 12,698 $ 0.37
Effect of dilutive
Stock options 14 - 91 (0.01)
--------- ---------- ------ ---------
Diluted EPS 12,465 $ 0.12 12,789 $ 0.36
========= ========== ====== =========
6. Goodwill and Long Lived Assets
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 141, Business Combinations, and
SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective
for fiscal years beginning after December 15, 2001; however, certain
provisions of this Statement apply to goodwill and other intangible assets
acquired between July 1, 2001 and the effective date of SFAS 142. Major
provisions of these Statements and their effective dates for the Company
are as follows:
- - All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of accounting
is prohibited except for transactions initiated before July 1, 2001, of
which there were none.
- - Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability.
- - Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 6, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
will no longer be subject to amortization.
- - Effective January 6, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator.
- - All acquired goodwill must be assigned to reporting units for purposes of
impairment testing.
8
The Company adopted SFAS 142 in the first quarter of fiscal 2002. The Company
has determined that all its intangible assets other than goodwill have definite
lives and will continue to amortize these assets over their estimated useful
lives. During fiscal 2002, the Company no longer amortized goodwill in
accordance with SFAS 142. The Company has completed a transitional fair value
based impairment test of goodwill as of January 6, 2002 and has determined no
impairment loss in the carrying amount of its goodwill. The Company reviews
its intangible assets with finite lives for impairment in accordance with SFAS
144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of".
Long-lived assets, including property and equipment, goodwill and other
intangible assets are reviewed for impairment when events or changes in facts
and circumstances indicate that their carrying amount may not be recoverable.
Events or changes in facts and circumstances that Pomeroy consider as impairment
indicators include the following:
* Significant underperformance of the Company's operating results relative to
expected operating results;
* Net book value compared to its market capitalization;
* Significant adverse economic and industry trends;
* Significant decrease in the market value of the asset;
* Significant changes to the asset since the Company acquired it; and
* The extent that the Company may use an asset or changes in the manner that
the Company may use it.
When the Company determines that one or more impairment indicators are present
for its long-lived assets, excluding goodwill, Pomeroy compares the carrying
amount of the asset to the new future undiscounted cash flows that the asset is
expected to generate. If the carrying amount of the asset is greater than the
net future undiscounted cash flows that the asset is expected to generate,
Pomeroy would recognize an impairment loss. The impairment loss would be the
excess of the carrying amount of the asset over its fair value.
When the Company determines that one or more impairment indicators are present
for its goodwill, Pomeroy compares its reporting unit's carrying value to its
fair value. The Company has two reporting units for goodwill testing which are
a products reporting unit and a services reporting unit. The Company has
adopted January 6 as the valuation date for the annual testing. In April 2003,
the Company engaged a third-party valuation specialist to perform the annual
goodwill impairment testing as of January 6, 2003. For goodwill, a two-step
impairment test is performed. The first step compares the fair value of a
reporting unit with its carrying amount, including goodwill. If the carrying
value of a reporting unit exceeds its fair value, then the second step of the
impairment test is performed to measure the amount of impairment loss. The
second step compares the implied fair value of the reporting unit goodwill with
the carrying amount of that goodwill. The implied fair value is determined by
allocating the fair value of a reporting unit to all the assets and liabilities
of that unit as if the reporting unit been acquired in a business combination.
The excess of the fair value of a reporting unit over the amounts assigned to
its assets and liabilities is the implied fair value of goodwill. If the
carrying amount of the reporting unit goodwill is in excess of the implied fair
value of that goodwill, then an impairment loss is recognized equal to that
excess. An impairment loss, if any, would be reported in the Company's future
results of operations.
As of the filing date, the Company had not completed the first step of its
annual impairment test. An impairment, if any, would be reported on completion
of the testing and recognized in a subsequent period.
9
Intangible assets consist of the following:
(in thousands) Gross Net Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
4/5/2003 4/5/2003 4/5/2003 1/5/2003 1/5/2003 1/5/2003
---------------------------------------------- ------------------------
Amortized intangible assets:
Covenants not to compete $ 1,844 $ 1,530 $ 314 $ 1,694 $ 1,324 $ 370
Customer lists 627 324 303 477 307 170
--------- ------------- --------- --------- ------------- ---------
Total amortized intangibles $ 2,471 $ 1,854 $ 617 $ 2,171 $ 1,631 $ 540
========= ============= ========= ========= ============= =========
Projected future amortization expense related to intangible assets with definite
lives are as follows:
(in thousands)
Fiscal Years:
2003 $181 April 6, 2003 - January 5, 2004
2004 138
2005 53
2006 20
2007 20
2008 and thereafter 205
----
Total $617
====
For the quarter ended April 5, 2003, there was no amortization expense related
to goodwill. Amortization expense related to intangibles assets was $224
thousand.
For the quarter ended April 5, 2002, there was no amortization expense related
to goodwill. Amortization expense related to intangibles assets was $189
thousand of which $72 thousand was reported under the caption "cost of sales" or
"selling, general and administrative" expenses. Amortization expense associated
with assets reported under the caption "other current assets" was $154 thousand.
During the first quarter of fiscal 2003, the Company changed the allocation of
goodwill by reporting unit. As a result of this evaluation process, the Company
reallocated approximately $10.3 million of goodwill to the services reporting
unit from the products reporting unit. This reallocation had no effect on the
result of any previous period's impairment testing. The reallocation is also
reflected in the segment information on Note 9.
The reallocation of the net carrying amount of goodwill for the three months
ended April 5, 2003 by segment are as follows:
(in thousands) Products Services Consolidated
---------- --------- -------------
Net carrying amount as of 1/5/03 $ 42,357 $ 18,278 $ 60,635
Reallocation of goodwill (10,284) 10,284 -
Goodwill recorded during first quarter 2,091 1,855 3,946
---------- --------- -------------
Net carrying amount as of 4/5/03 $ 34,164 $ 30,417 $ 64,581
========== ========= =============
10
7. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and non-cash
investing and financing activities are as follows: (in thousands)
Three Months Ended April 5,
-----------------------------
2003 2002
-------------- -------------
Interest paid $ 70 $ 115
============== =============
Income taxes paid $ 350 $ 3,830
============== =============
Adjustments to purchase price
of acquisition assets and intangibles $ 1,624 $ 516
============== =============
Business combinations accounted for
as purchases:
Assets acquired $ 7,258 $ -
Liabilities assumed (4,074)
-----------------------------
Net cash paid $ 3,184 $ -
=============================
8. Litigation
There are various other legal actions arising in the normal course of
business that have been brought against the Company. Management believes
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
9. Segment Information
During the first quarter of fiscal 2003, the Company revised its segment
methodologies for allocating operating expenses between segments to reflect
ongoing changes in the operating activities giving rise to such expenses.
This change resulted in a decrease of approximately $1.6 million of
allocated operating expenses to the product segment and a corresponding
increase by the same amount to the services segment. In addition, the
Company revised its allocation of assets between segments to reflect the
use of assets in those segments. The assets affected were principally
goodwill, tax-related assets and equipment and leasehold improvements.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. (in thousands)
Three Months Ended April 5, 2003
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 99,880 $ 29,992 $ 106 $ 129,978
Income from operations 1,270 1,143 101 2,514
Total assets 165,584 83,522 6,515 255,621
Capital expenditures 382 406 - 788
Depreciation and amortization 756 631 - 1,387
Three Months Ended April 5, 2002
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 150,753 $ 32,895 $ 2,700 $ 186,348
Income from operations 2,693 3,968 984 7,645
Total assets 195,002 54,209 60,960 310,171
Capital expenditures 685 101 84 870
Depreciation and amortization 1,264 267 178 1,709
11
10. Restructuring Charge
During fiscal 2002, the Company approved a plan to consolidate and relocate
operations in various geographical locations and to abandon certain assets
associated with modification to strategic initiatives.
The execution of the plan began and was completed during fiscal 2002. As of
April 5, 2003, the Company had $29 thousand in accrued and unpaid
restructuring costs. The Company expects to pay substantially all of the
remaining accrued and unpaid costs by the end of fiscal 2003.
11. Acquisitions
On February 21, 2003, the Company announced the completion of the
acquisition of Micrologic Business Systems of K.C., INC. ("Micrologic"), a
Kansas City based IT solutions and professional services provider. For the
twelve months ended December 31, 2002, Micrologic has recorded revenues of
$32.0 million. Their primary services include systems network integration,
project management, and telephony integration. The Company recorded $3.3
million of goodwill related to the acquisition.
12. Subsequent Events
On May 13, 2003, the Company announced that its Board of Directors has
authorized the addition of 1,000,000 shares to its stock repurchase
program. The additional shares to be repurchased represent approximately
8.0% of the Company's outstanding common stock and will be purchased in
open market purchases made from time to time at the discretion of the
Company's management. The time and extent of the repurchases will depend on
market conditions. The acquired shares will be held in treasury or
cancelled. The Company anticipates funding the stock redemption program out
of working capital and the redemption program will be effectuated over the
next 12 months.
12
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Cautionary Notice Regarding Forward-Looking Statements
--------------------------------------------------------------
Certain of the matters discussed under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contain certain
forward looking statements regarding future financial results of the Company.
The words "expect," "estimate," "anticipate," "predict," and similar expressions
are intended to identify forward-looking statements. Such statements are
forward-looking statements for purposes of the Securities Act of 1933 and the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause the actual
results, performance or achievements of the Company to differ materially from
the Company's expectations are disclosed in this document including, without
limitation, those statements made in conjunction with the forward-looking
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations". All written or oral forward-looking statements
attributable to the Company are expressly qualified in their entirety by such
factors.
POMEROY COMPUTER RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TOTAL NET SALES AND REVENUES. Total net sales and revenues decreased $56.3
million, or 30.2%, to $130.0 million in the first quarter of fiscal 2003 from
$186.3 million in the first quarter of fiscal 2002. This decrease was a result
primarily of a continued industry-wide slowdown in technology spending due to
the general weakness in the U.S. economy and the decrease in leasing revenue due
to the sale of substantially all the assets of Technology Integration Financial
Services, Inc. ("TIFS"). Further, the Company sometimes elects to take a
commission from the manufacturers for arranging sales transactions where it
judges the gross profit to be inadequate for its participation in the sales
transaction. During the first quarter of fiscal 2003, the Company elected to
take such commissions on transactions whose sales would otherwise have been $2.5
million. Excluding acquisitions completed in fiscal year 2003, total net sales
and revenues decreased 32.7%. Products and leasing sales decreased $53.5
million, or 34.9% to $100.0 million in the first quarter of fiscal 2003 from
$153.5 million in the first quarter of fiscal 2002. Excluding acquisitions
completed in fiscal year 2003, products and leasing sales decreased 37.6%.
Service revenues decreased $2.9 million, or 8.8%, to $30.0 million in the first
quarter of fiscal 2003 from $32.9 million in the first quarter of fiscal year
2002. Excluding acquisitions completed in fiscal year 2003, service revenues
decreased 10.0%.
GROSS PROFIT. Gross profit decreased to 12.6% in the first quarter of fiscal
2003 as compared to 12.8% in the first quarter of fiscal 2002. This decrease in
gross margin resulted primarily from the decrease in hardware and service
margins and offset by the higher proportion of service gross margin to total
gross margin associated with the improved utilization of service personnel. The
decrease in hardware gross margin is primarily associated with the Company's
strategic decision to aggressively price its hardware business in order to
maintain and capture market share and to the weakened economic conditions of the
IT industry. On a forward looking basis, the Company expects to continue its
aggressive product pricing in order to gain existing market share which will
have a continued impact on product gross margin. Additionally, the Company
expects to continue increasing the breadth and depth of its service offerings,
which will have a continued impact on service gross margin. Service revenues
increased to 23.1% of total net sales and revenues in the first quarter of
fiscal 2003 compared to 17.7% of total net sales and revenues in the first
quarter of fiscal 2002. Service gross margin increased to 51.8% of total gross
margin in the first quarter of fiscal 2003 from 42.8% in the first quarter of
fiscal 2002. Factors that may have an impact on gross margin in the future
include the continued changes in hardware margins, change in personnel
utilization rates, the mix of products sold and services provided, a change in
unit prices, the percentage of equipment or service sales with lower-margin
customers, the ratio of service revenues to total net sales and revenues, and
the Company's decision to aggressively price certain products and services.
13
OPERATING EXPENSES. Selling, general and administrative expenses (including
rent expense and provision for doubtful accounts) expressed as a percentage of
total net sales and revenues increased to 9.6% in the first quarter of fiscal
2003 from 7.9% in the first quarter of fiscal 2002. This increase is primarily a
result of lower than expected total net sales and revenues. Total operating
expenses expressed as a percentage of total net sales and revenues increased to
10.7% in the first quarter of fiscal 2003 from 8.7% in the first quarter of
fiscal 2002. This increase is primarily the result of lower than expected total
net sales and revenues. On a forward looking basis, the Company has initiated
operating costs reduction primarily in payroll and through payroll related costs
in order to reduce its future operating expenses.
INCOME FROM OPERATIONS. Income from operations decreased $5.1 million, or
67.1%, to $2.5 million in the first quarter of fiscal 2003 from $7.6 million in
the first quarter of fiscal 2002. The Company's operating margin decreased to
1.9% in the first quarter of fiscal 2003 as compared to 4.1% in the first
quarter of fiscal 2002. This decrease is primarily due to the increase in
operating expenses as a percentage of total net sales and revenues and the
decrease in the Company's gross margin.
INTEREST EXPENSE. Interest expense decreased $.03 million, or 30.0%, to $.07
million in the first quarter of fiscal 2003 from $0.1 million in the first
quarter of fiscal 2002. This decrease was due to reduced borrowings as a result
of improved cash flow management, the sale of certain T.I.F.S. assets and a
reduced interest rate charged by the Company's lender.
INCOME TAXES. The Company's effective tax rate was 39.0% in the three months of
fiscal 2003 compared to 38.0% in the first three months of fiscal 2002. This
increase relates to an expected increase in state tax liabilities.
NET INCOME. Net income decreased $3.2 million, or 68.1%, to $1.5 million in the
first three months of fiscal 2003 from $4.7 million in the first three months of
fiscal 2002 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $30.8 million in the first three
months of fiscal 2003. Cash used in investing activities was $4.0 million, which
included $3.2 million for an acquisition made in 2003 and prior year
acquisitions and $0.8 million for capital expenditures. Cash used in financing
activities was $0.7 million primarily for the purchase of treasury stock.
A significant part of the Company's inventories is financed by floor plan
arrangements with third parties. At April 5, 2003, these lines of credit totaled
$84.0 million, including $72.0 million with GE Commercial Distribution Finance
("GECDF") and $12.0 million with IBM Credit Corporation ("ICC"). Borrowings
under the GECDF floor plan arrangements are made on thirty-day notes.
Borrowings under the ICC floor plan arrangements are made on either thirty-day
or sixty-day notes. All such borrowings are secured by the related inventory.
Financing on substantially all of the arrangements is interest free due to
subsidies by manufacturers. Overall, the average rate on these arrangements is
less than 1.0%. The Company classifies amounts outstanding under the floor plan
arrangements as accounts payable.
The Company's financing of receivables is provided through a portion of its
credit facility with GECDF. The Company's $240.0 million credit facility with
GECDF has a three year term and includes $72.0 million for inventory financing
as described above, $144.0 million for working capital which is based upon
accounts receivable financing, and a cash-flow component in the form of a $24.0
million term loan, which is not restricted to a borrowing base. The accounts
receivable and term loan portion of the credit facility carry a variable
interest rate based on the London InterBank Offering Rate ("LIBOR") and a
pricing grid.
14
At April 5, 2003, the Company did not have a balance outstanding under this
facility. The credit facility is collateralized by substantially all of the
assets of the Company, except those assets that collateralize certain other
financing arrangements. Under the terms of the credit facility, the Company is
subject to various financial covenants and is restricted from paying dividends.
Currently, the Company is not in violation of any financial covenant.
The Company believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy the Company's capital
requirements for the next twelve months. Historically, the Company has financed
acquisitions using a combination of cash, earn outs, shares of its Common Stock
and seller financing. The Company anticipates that future acquisitions will be
financed in a similar manner.
Aggregated Information about Contractual Obligations and Other Commitments
TOTAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 MORE THAN 5 YEARS
------------------------------------------------------------------------
Acquisition note $ 1,204 $ 1,204 $ - $ - $ - $ - $ -
Operating leases 16,611 3,589 3,298 2,853 1,786 1,513 3,572
Long term notes payable 663 - 663 - - - -
------------------------------------------------------------------------
Total contractual cash obligations $18,478 $ 4,793 $ 3,961 $ 2,853 $ 1,786 $ 1,513 $ 3,572
========================================================================
On January 29, 2003, the Company's Board of Directors authorized a program to
repurchase up to an additional 100,000 shares of the Company's outstanding
common stock, which represents less than 1.0% of its outstanding common stock,
in open market purchases made from time to time at the discretion of the
Company's management. The time and extent of the repurchases will depend on
market conditions. The acquired shares will be held in treasury or cancelled.
The Company anticipates financing the stock redemption program out of working
capital and the redemption program will be effectuated over the next 12 months.
On February 21, 2003, the Company announced the completion of the acquisition
of Micrologic Business Systems of K.C., INC. ("Micrologic"), a Kansas City based
IT solutions and professional services provider. For the twelve months ended
December 31, 2002, Micrologic has recorded revenues of $32.0 million. Their
primary services include systems network integration, project management, and
telephony integration.
On May 13, 2003, the Company announced that its Board of Directors has
authorized the addition of 1,000,000 shares to its stock repurchase program. The
additional shares to be repurchased represent approximately 8.0% of the
Company's outstanding common stock and will be purchased in open market
purchases made from time to time at the discretion of the Company's management.
The time and extent of the repurchases will depend on market conditions. The
acquired shares will be held in treasury or cancelled. The Company anticipates
funding the stock redemption program out of working capital and the redemption
program will be effectuated over the next 12 months.
15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to interest rate risk primarily through its credit
facility with GECDF. Due to the Company's current cash position, the Company
did not experience a material impact from interest rate risk for the first
quarter of fiscal 2003.
Currently, the Company does not have any significant financial investments for
trading or other speculative purposes or to manage interest rate exposure.
Item 4 - Controls and Procedures
The Company's chief executive officer and chief financial officer evaluated the
Company's disclosure controls and procedures within the 90-day period prior to
the date of this report pursuant to Rule 13a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934. Their evaluation concluded that the disclosure
controls and procedures are effective in connection with the filing of this
quarterly report on Form 10-Q for the three months ended April 5, 2003.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any significant deficiencies or material
weaknesses of internal controls that would require corrective action.
16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
There are various other legal actions arising in the normal course of business
that have been brought against the Company. Management believes these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
Item 2 - Changes in Securities and Use of Proceeds . . . . . . . None
Item 3 - Defaults Upon Senior Securities. . . . . . . . . . . . . . None
Item 4 - Submission of Matters to a Vote of Security Holders . . . None
Item 5 - Other Information. . . . . . . . . . . . . . . . . . . . . . None
Item 6 - Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . None
(b) (b) Exhibits
10(i) Material Agreements
(nn)(1)
Stock purchase agreement by, between and among James
Hollander, trustee, Raymond Hays, trustee, David Yoka,
trustee and Matthew Cussigh and Pomeroy Computer Resources
Inc
11 Computation of earnings per share
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: May 20, 2003 By: /s/ Michael E. Rohrkemper
-------------------------------------
Michael E. Rohrkemper
Chief Financial Officer and
Chief Accounting Officer
17
CERTIFICATIONS
--------------
I, David B. Pomeroy, II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pomeroy Computer
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process summarize and report financial data have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 20, 2003
/s/ David B. Pomeroy, II
David B. Pomeroy, II
Chief Executive Officer
18
CERTIFICATIONS
--------------
I, Michael E. Rohrkemper, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pomeroy Computer
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process summarize and report financial data have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 20, 2003
/s/ Michael E. Rohrkemper
Michael E. Rohrkemper
Chief Financial Officer
19