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, 1996
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.)
1840 Airport Exchange Blvd., Suite 240, Erlanger, KY 41018
__________________________________________________________
(Address of principal executive offices)
(606) 282-7111
______________
(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 May 14,
1996 was 2,752,643.
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
____
Consolidated Balance 3
Sheets as of April 5, 1996
and January 5, 1996
Consolidated Statements of 4
Income for the Quarters
Ended April 5, 1996 and
1995
Consolidated Statements of 5
Cash Flows for the
Quarters Ended April 5,
1996 and 1995
Notes to Consolidated 6
Financial Statements
Item 2. Management's Discussion 8
and Analysis of Financial
Condition and Results of
Operations
Part II. Other Information 9
SIGNATURE 10
<PAGE>
<TABLE>
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
( In thousands, except share and per share amounts )
<CAPTION>
January 5, April 5,
1996 1996
__________ __________
<S> <C> <C>
ASSETS
Current assets:
Cash $ 596 $ 1,099
Accounts and note receivable, less allowance of $411 and $243
at January 5, and April 5, 1996, respectively 34,320 44,931
Inventories 18,987 18,685
Other 487 529
_______ _______
Total current assets 54,390 65,244
_______ _______
Equipment and leasehold improvements 6,559 9,846
Less accumulated depreciation 1,968 3,261
_______ _______
Net equipment and leasehold improvements 4,591 6,585
Other assets 5,004 10,574
_______ _______
Total assets $63,985 $82,403
LIABILITIES AND EQUITY
Current liabilities:
Notes payable $ 409 $ 2,585
Accounts payable 21,644 32,094
Bank notes payable 16,877 20,267
Other current liabilities 5,120 5,632
_______ _______
Total current liabilities 44,050 60,578
_______ _______
Notes payable 100 2,240
Deferred income taxes 635 635
Equity:
Preferred stock ( no shares issued or outstanding)
Common stock ( 2,625,917 and 2,748,643 shares issued and
outstanding at January 5 and April 5, 1996, respectively) 26 27
Paid-in capital 13,280 14,384
Retained earnings 6,098 4,743
_______ _______
19,404 19,154
Less treasury stock, at cost (20,900 shares at January 5
and April 5, 1996, respectively) 204 204
_______ _______
Total equity 19,200 18,950
_______ _______
Total liabilities and equity $63,985 $82,403
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
( In thousands, except per share amounts )
<CAPTION>
Quarter Ended
_____________________
April 5, April 5,
1995 1996
_________ _________
<S> <C> <C>
Net sales and revenues $47,990 $63,224
Cost of sales and service 40,237 53,624
_________ _________
Gross profit 7,753 9,600
Operating expenses:
Selling, general and administrative 5,342 6,436
Other 423 707
_________ _________
Total operating expenses 5,765 7,143
_________ _________
Income from operations 1,988 2,457
Interest expense 490 435
Litigation settlement and related costs 4,392
Other income 8 93
_________ _________
Income (loss) before income tax 1,506 (2,277)
Income tax expense 600 (922)
_________ _________
Net income (loss) $906 ($1,355)
Weighted average shares outstanding:
Primary 2,534 2,745
Fully diluted 2,597 2,753
Net income (loss) per common share:
Primary $0.36 ($0.49)
Fully diluted $0.35 ($0.49)
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
( In thousands )
<CAPTION>
Quarter Ended
___________________
April 5, April 5,
1995 1996
________ ________
<S> <C> <C>
Net cash flows provided by operating activities $2,435 $4,688
Cash flows used in investing activities:
Capital expenditures (294) (968)
Acquisition of reseller - (4,460)
Payment for covenant not to compete (143) -
Other (19) -
________ ________
Net investing activities (456) (5,428)
________ ________
Cash flows provided by (used in) financing activities:
Net borrowings (payments) on bank note (1,873) 2,540
Payments on notes payable (72) (1,088)
Retirement of stock warrants - (330)
Proceeds from exercise of stock options - 121
________ ________
Net financing activities (1,945) 1,243
________ ________
Increase in cash 34 503
Cash:
Beginning of period 74 596
________ ________
End of period $108 $1,099
</TABLE>
<PAGE>
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, 1996. 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, 1996 are not necessarily
indicative of the results that may be expected for future
interim periods or for the year ending January 5, 1997.
2. 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, 1995 April 5, 1996
_____________ _____________
Interest paid $426 $405
____ ____
Income taxes paid $781 $572
____ ____
Business combination accounted for
as purchase:
Assets acquired $14,830
Liabilities assumed (6,395)
Note Payable (2,700)
Stock issued (1,275)
_______
Net cash paid $ 4,460
_______
Note issued and accrued liabilities
for litigation settlement $ 3,300
_______
3. Subsequent Event
On April 29, 1996, the Company and David B. and Catherine
Pomeroy (collectively "Pomeroy" ) entered into a Settlement
Agreement ( the "Agreement" ) with Vanstar Corporation
( "Vanstar" ), Merisel, Inc. and Merisel FAB, Inc. Vanstar
(f/k/a ComputerLand) was the Company's franchisor from 1981 to
1993, when the Company changed from a franchisee to a
"Datago" purchaser. In December 1994, Vanstar filed a
complaint against the Company alleging that the Company failed
to comply with the terms of the Datago Agreement. In January
1995, the Company filed a cross-complaint against Vanstar
alleging numerous breaches of the Datago Agreement. In
September 1995, Vanstar amended its complaint to add Pomeroy
as co-defendants because they had guaranteed the Company's
obligations under the Agreement. The Agreement settles any and
all claims between Vanstar, the Company and Pomeroy that were
raised or could have been raised in Vanstar's lawsuit against
the Company and Pomeroy and includes a mutual release among
all the parties.
The Company has agreed to pay to Vanstar $3.3 million
consisting of $1.65 million in cash and a promissory note in
the amount of $1.65 million. The note is due August 27, 1996
and bears interest at 0.25% below the prime rate of the
Company's bank as of April 29, 1996. The note is secured by
100,000 shares of common stock of the Company owned by
<PAGE>
Pomeroy. All agreements between the Company and Vanstar were
terminated as of the effective date of the Agreement. The
settlement agreement provides for forgiveness of any and all
claims or obligations of either party against the other,
resulting in a charge-off of $0.5 million of receivables from
Vanstar Corporation and additional expense of $0.5 million
for costs related to the litigation.
While the Company continues to believe that its counterclaim
against Vanstar was valid, it made a strategic decision to
settle the litigation. Vanstar was claiming damages of
approximately $10.0 million and Vanstar's claims, as well as
the Company's counterclaims were very complex. After nearly
three weeks of trial, including the benefit of observing the
jury and the evidence presented to it, and facing the
possibility of a mistrial which could have resulted in
prolonging the litigation, the Company determined that it was
unwise to place a matter of such substantial significance in
the hands of a California jury. A final resolution of this
matter allows the Company to concentrate on its business
operations and the future performance of the Company.
4..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.
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Revenues
______________________
Net sales and revenues of $63.2 million in the first quarter of
1996 increased $15.2 million, or 31.7%, from $48.0 million in the
first quarter of 1995. Of the increase, approximately $8.0
million resulted from the acquisition of The Computer Supply
Store, Inc. ( "TCSS" ) located in Des Moines, Iowa in March 1996
and $7.2 million resulted from sales to existing customers. Sales
of equipment and supplies of $57.3 million in the first quarter
of 1996 increased $13.7 million, or 31.5%, from $43.6 million in
the first quarter of 1995. Of the increase, approximately $5.8
million resulted from internal growth and $7.9 million was a
result of the acquisition of TCSS. Service revenues of $5.4
million in the first quarter of 1996 increased $1.4 million, or
33.3%, from $4.0 million in the first quarter of 1995. This
increase relates primarily to internal growth.
Gross Profit
____________
Gross profit margin was 15.2% in the first quarter of 1996
compared to 16.2% in the first quarter of 1995. This decrease was
primarily attributable to continued price competition. However,
the Company has improved its gross profit margin from the second
and third quarter results of 1995 when gross profit margins were
at 13.5%. Gross profit margins in those periods were adversely
affected by the Company's overall strategy to gain market share
in 1995 by more aggressively bidding on large volume projects
which increased the proportion of total volume derived from
relatively lower gross margin sales of equipment as compared to
relatively higher gross profit margin derived from services.
Improvement in this area is the result of purchasing through
lower cost alternative sources.
Operating Expenses
__________________
Selling, general and administrative expenses expressed as a
percentage of sales declined to 10.2% for the first quarter of
1996 from 11.1% in the first quarter of 1995, as the increase in
these costs slowed and sales increased. Total operating expenses
expressed as a percentage of sales declined to 11.3% in the first
quarter of 1996 from 12.0% in the first quarter of 1995 as the
increase in these costs slowed relative to the growth in sales.
Income from Operations
______________________
Income from operations increased $469,000, or 23.6%, to
$2,457,000 in the first quarter of 1996 from $1,988,000 in the
first quarter of 1995. The Company's operating margin declined to
3.9% in the first quarter of 1996 as compared to 4.1% in 1995 as
the decline in gross margin was not offset by the decline in
operating expenses as a percent of net sales and revenues.
Interest Expense
________________
Interest expense was $435,000 in the first quarter of 1996
compared with $490,000 in the first quarter of 1995. The average
levels of debt increased during the first quarter of 1996 as
compared to 1995 in order to support the increased levels of
accounts receivable and inventory. However, the effective
interest rate for the bank revolving credit agreement decreased
as the bank's prime rate dropped during 1995 and early 1996.
Income Taxes
____________
The Company's effective tax rate was 40.5% in the first quarter
of 1996 compared to 39.8% in the first quarter of 1995.
Litigation Settlement and Related Costs
_______________________________________
On April 29, 1996, the Company agreed to a settlement of the
litigation with Vanstar Corporation. The settlement of $3.3
million was satisfied by $1.65 million in cash and a $1.65
million note which is due August 27, 1996 and bears interest at
8.0%. The settlement agreement provides for the release of any
and all claims or obligations of either party against the other,
<PAGE>
resulting in a charge-off of $0.5 million of receivables from
Vanstar Corporation and additional expense of $0.5 million for
costs related to the litigation.
Liquidity and Capital Resources
_______________________________
Cash provided by operating activities was $4.7 million in the
first quarter of 1996. Cash used in investing activities included
$4.5 million for the acquisition of TCSS and $1.0 million for
capital expenditures. Cash provided by financing activities
included $2.5 million of net proceeds from bank notes payable
less $1.1 million of repayments on various notes payable and $0.3
million for the redemption of warrants.
It is expected that available credit under the Company's lending
arrangements along with internally generated funds 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, shares of its Common
Stock and seller financing. The Company anticipates that any
future acquisitions will be financed in a similar manner.
However, if an acquisition included a significant cash portion,
the Company may have to renegotiate its credit line or seek
alternative financing.
POMEROY COMPUTER RESOURCES, INC.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
In December 1994, Vanstar Corporation (formerly ComputerLand)
("Vanstar" ) filed a complaint against the Company in the
Superior Court of California, County of San Francisco, alleging
that the Company failed to comply with terms in the contract
between the Company and Vanstar, referred to as the Datago
Agreement. In January 1995 the Company filed a cross complaint
against Vanstar alleging numerous breaches of the Datago
Agreement. In September 1995, Vanstar amended its complaint to
add co-defendants David B. Pomeroy, II and his spouse who had
previously executed personal guarantees of the Company's
performance under the Datago Agreement. The Company and Vanstar
continued to negotiate a settlement as the trial began in April
1996. On April 29, 1996, the Company and Vanstar executed a
settlement agreement. The Company has agreed to pay to Vanstar
$3.3 million consisting of $1.65 million in cash and a promissory
note in the amount of $1.65 million. The note is due 120 days
from the effective date of the Agreement and bears interest at
0.25% below the prime rate of the Company's bank as of April 29,
1996. The note is secured by 100,000 shares of common stock of
the Company owned by David B. Pomeroy, II. All agreements between
the Company and Vanstar were terminated as of the effective date
of the Agreement.
Items 2 to 5 None
Item 6 Exhibits and Reports on Form 8-K
Filed Herewith
(page #) or
Incorporated
by Reference to:
(a) Exhibits
10(iii) Material Contracts
(a)(8) Fourth Amendment to E-1 to E-2
Employment Agreement
between the Company and
David B. Pomeroy dated
December 20, 1995,
effective January 6,
1995
(a)(9) Fifth Amendment to E-3 to E-4
Employment Agreement
between the Company and
David B. Pomeroy
effective January 6,
1996
<PAGE>
(b) Reports on Form 8-K
The Company filed a Form 8-K dated March 28, 1996 reporting
the acquisition of The Computer Supply Store as of March 14,
1996.
The Company filed a Form 8-K dated May 13, 1996 reporting the
settlement of the Vanstar Corporation litigation as of April
29, 1996.
The Company filed a Form 8-K/A dated May 13, 1996 reporting
the acquisition of The Computer Supply Store as of March 14,
1996.
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 17, 1996 By: /s/ Edwin S. Weinstein
________________________________
Edwin S. Weinstein,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT is made this 20th
day of December, effective for the fiscal year ending January 5,
1996, by and between POMEROY COMPUTER RESOURCES, INC., a Delaware
corporation, ("Company") and DAVID B. POMEROY, II (the
"Executive").
WHEREAS, on the 12th day of March, 1992, Company and Executive
executed an Employment Agreement ("Agreement") that became
effective on the date of the closing of the initial public
offering of Company (April 10, 1992); and
WHEREAS, Company and Executive entered into an Amendment to
Employment Agreement effective July 6, 1993; and
WHEREAS, Company and Executive entered into a Second Amendment to
Employment Agreement effective October 14, 1993;
WHEREAS, Company and Executive entered into a Third Amendment to
Employment Agreement effective January 6, 1995;
WHEREAS, Company and Executive desire to amend the Agreement, as
amended, to reflect certain changes agreed upon by Company and
Executive regarding compensation payable to Executive for the
1995 fiscal year and thereafter.
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual covenants hereinafter set forth, the parties hereto
covenant and agree as follows:
1. Section 5(b)(i) is amended commencing with the 1995 fiscal
year and for each year thereafter as follows:
(i) Executive shall be entitled to a bonus and incentive
deferred compensation for the 1995 fiscal year not to exceed the
applicable percentage set forth below of the income from
operations (as defined) of the Company for each year in excess of
the applicable target amount:
10% of income from operations of Company in excess of
$2,000,000.00 but less than or equal to $4,000,000.00 -
$200,000.00 maximum
A discretionary bonus to be determined pursuant to the
provisions of Sections 5(b)(ii) or 5(c).
In the event that Company would pay Executive any
discretionary amount pursuant to such provision(s), fifty percent
(50%) of any such bonus in excess of $150,000.00 would be payable
to Executive as a bonus and the remaining fifty percent (50%) of
the applicable dollar amount will constitute incentive deferred
compensation which shall be payable to Executive according to the
E-1
<PAGE>
terms of the Incentive Compensation Agreement and Trust
Agreement.
2. Section 5(b)(iii) is deleted in its entirety.
Except as modified above, the terms of the Employment Agreement,
as amended are hereby affirmed and ratified by the parties.
IN WITNESS WHEREOF, this Fourth Amendment to Employment Agreement
has been executed as of the day and year first above written.
WITNESSES: POMEROY COMPUTER RESOURCES, INC.
_________________________ By:
_______________________________
Edwin S. Weinstein, Vice-
President of Finance
_________________________
_________________________
__________________________________
DAVID B. POMEROY, II, Executive
_________________________
E-2
<PAGE>
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT is made effective
the 6th day of January, 1996, by and between POMEROY COMPUTER
RESOURCES, INC., a Delaware corporation ("Company") and DAVID B.
POMEROY, II (the "Executive").
WHEREAS, on the 12th day of March, 1992, Company and Executive
executed an Employment Agreement ("Agreement") that became
effective on the date of the closing of the initial public
offering of the Company (April 10, 1992); and
WHEREAS, Company and Executive entered into an Amendment to
Employment Agreement effective July 6, 1993; and
WHEREAS, Company and Executive entered into a Second Amendment to
Employment Agreement effective October 14, 1993;
WHEREAS, Company and Executive entered into a Third Amendment to
Employment Agreement effective January 6, 1995;
WHEREAS, Company and Executive entered into a Fourth Amendment to
Employment Agreement effective for the fiscal year ending January
6, 1996; and
WHEREAS, Company and Executive desire to amend the Agreement, as
amended, to reflect certain changes agreed upon by Company and
Executive regarding compensation payable to Executive for the
1996 fiscal year and thereafter.
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual covenants hereinafter set forth, the parties hereto
covenant and agree as follows:
1. Section 5(a)(iii) shall be amended as follows:
(iii) During the Company's 1996 fiscal year, Executive
shall be paid at the annual rate of Three Hundred Ninety Five
Thousand ($395,000.00) Dollars. This rate shall continue for
each subsequent year of the Agreement unless modified by the
Compensation Committee as provided in Section 5(a)(iv).
2. Section 5(b)(i) is amended commencing with the 1996 fiscal
year and for each year thereafter as follows:
(i) Executive shall be entitled to a bonus and incentive
deferred compensation for the 1996 fiscal year not to exceed the
applicable percentage set forth below of the income from
operations (as defined) of the Company for such year in excess of
the applicable target amount: <PAGE>
E-3
<PAGE>
10% of income from operations of Company in excess of
$2,000,000 but less than or equal to $4,000,000 - $200,000.00
maximum
5% of income from operations of Company in excess of
$4,000,000 but less than or equal to $8,000,000 - $200,000.00
maximum
In the event that Company would pay Executive any
discretionary bonus amount pursuant to the provisions of Section
5(b)(ii) and/or Section 5(c), fifty percent (50%) of such amount
would be payable to Executive as a bonus and the remaining fifty
percent (50%) of the applicable dollar amount will constitute
incentive deferred compensation which shall be payable to
Executive according to terms of the Incentive Compensation
Agreement and Trust Agreement.
3. Section 5(d) is deleted in its entirety and in lieu thereof,
the following Section 5(d) shall be inserted:
(d) During the term of this Agreement, Company shall
provide an expense allowance of $1,500.00 per month to Executive
to reimburse Executive for expenses incurred incident to the
business use of his home and second home phones, faxes,
computers, etc. Executive shall provide Company with
verification of said expenditures at its request. In addition,
during the term of Executive's employment hereunder, the
Executive shall be entitled to receive prompt reimbursement of
all other reasonable and customary travel and entertainment
expenses incurred by the Executive in fulfilling the Executive's
duties and responsibilities hereunder, including all expenses of
travel and living expenses while away from home on business or at
the request of and in the service of Company and car telephone
service expenses, provided that such expenses are incurred and
accounted for in accordance with the policies and procedures
established by the Company.
4. Section 19 shall be amended by adding at the end of the
Agreement the following language:
19. Executive shall be awarded effective January 6, 1996 an
option to acquire Twenty-Five Thousand (25,000) shares of the
common stock of Company at the fair market value of such shares
on January 5, 1996. Such shares shall be awarded to Executive by
Company pursuant to the terms of an Award Agreement which is
attached hereto and incorporated herein by reference as Exhibit
C.
Except as modified above, the terms of the Employment Agreement,
as amended, are hereby affirmed and ratified by the parties. <PAGE>
IN WITNESS WHEREOF, this Fifth Amendment to Employment Agreement
has been executed as of the day and year first above written.
WITNESSES: POMEROY COMPUTER RESOURCES, INC.
_______________________
_______________________ By:
_______________________________
Edwin S. Weinstein,
Vice President of Finance
_______________________
_______________________
__________________________________
DAVID B. POMEROY, II, Executive
E-4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-05-1997
<PERIOD-END> APR-05-1996
<CASH> 1,099
<SECURITIES> 0
<RECEIVABLES> 45,174
<ALLOWANCES> 243
<INVENTORY> 18,685
<CURRENT-ASSETS> 65,244
<PP&E> 9,846
<DEPRECIATION> 3,261
<TOTAL-ASSETS> 82,403
<CURRENT-LIABILITIES> 60,578
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 19,127
<TOTAL-LIABILITY-AND-EQUITY> 82,403
<SALES> 63,224
<TOTAL-REVENUES> 63,224
<CGS> 53,624
<TOTAL-COSTS> 53,624
<OTHER-EXPENSES> 4,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 435
<INCOME-PRETAX> (2,277)
<INCOME-TAX> (922)
<INCOME-CONTINUING> (1,355)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,355)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
