10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 5, 2002 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 ------- ---- The number of shares of common stock outstanding as of November 1, 2002 was 12,846,761 1 of 19

POMEROY COMPUTER RESOURCES, INC. TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements: Page ---- Consolidated Balance Sheets as of 3 January 5, 2002 and October 5, 2002 Consolidated Statements of Income for 5 the Three Months Ended October 5, 2001 and 2002 Consolidated Statements of Income for 6 the Nine Months Ended October 5, 2001 and 2002 Consolidated Statements of Cash Flows 7 for the Nine Months Ended October 5, 2001 and 2002 Notes to Consolidated Financial 8 Statements Item 2. Management's Discussion and Analysis of 15 Financial Condition and Results of Operations Part II. Other Information 18 SIGNATURE 19

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POMEROY COMPUTER RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (in thousands) January 5, October 5, 2002 2002 ------------ ----------- ASSETS (Unaudited) Current assets: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,875 $ 17,669 Accounts receivable: Trade, less allowance of $627 and $1,546 at January 5, 2002 and October 5, 2002, respectively . . . . . . . . . . . . 142,356 116,789 Vendor receivables, less allowance of $16,112 at both January 5, 2002 and October 5, 2002 . . . . . . . . . . . 24,219 12,720 Net investment in leases.. . . . . . . . . . . . . . . . . . 35,809 1,803 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,413 647 ------------ ----------- Total receivables. . . . . . . . . . . . . . . . . . . 207,797 131,959 ------------ ----------- Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 20,876 16,870 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,468 9,504 ------------ ----------- Total current assets . . . . . . . . . . . . . . . . . 240,016 176,002 ------------ ----------- Equipment and leasehold improvements: Furniture, fixtures and equipment . . . . . . . . . . . . . . 29,920 31,622 Leasehold improvements. . . . . . . . . . . . . . . . . . . . 5,700 6,353 ------------ ----------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 35,620 37,975 Less accumulated depreciation . . . . . . . . . . . . . . . . 17,070 17,901 ------------ ----------- Net equipment and leasehold improvements. . . . . . . . . 18,550 20,074 ------------ ----------- Net investment in leases. . . . . . . . . . . . . . . . . . . . 22,438 1,578 Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,454 60,528 Intangible assets . . . . . . . . . . . . . . . . . . . . . . . 1,060 840 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 2,200 3,107 ------------ ----------- Total assets . . . . . . . . . . . . . . . . . . . . . $ 341,718 $ 262,129 ============ ===========

See notes to consolidated financial statements. 3 of 19

POMEROY COMPUTER RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (in thousands) January 5, October 5, 2002 2002 ------------ ----------- LIABILITIES AND EQUITY (Unaudited) Current Liabilities: Current portion of notes payable . . . . . . . . . . . . . . . $ 27,190 $ 1,864 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 86,447 39,620 Bank notes payable . . . . . . . . . . . . . . . . . . . . . . 11,882 - Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 2,751 2,278 Other current liabilities. . . . . . . . . . . . . . . . . . . 11,908 10,349 ------------ ----------- Total current liabilities . . . . . . . . . . . . . . . . . 140,178 54,111 ------------ ----------- Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . 10,213 - Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . 565 2,714 Equity: Preferred stock, $.01 par value; authorized 2,000 shares (no shares issued or outstanding). . . . . . . . . . . . . . . - - Common stock, $.01 par value; authorized 20,000 shares (12,759 and 12,847 shares issued at January 5, 2002 and October 5, 2002, respectively) . . . . . . . . . . . . . . . . 128 128 Paid in capital. . . . . . . . . . . . . . . . . . . . . . . . 80,487 81,534 Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 110,979 125,363 ------------ ----------- 191,594 207,025 Less treasury stock, at cost (75 and 143 shares at January 5, 2002 and October 5, 2002, respectively) . . . . . . . . . . . 832 1,721 ------------ ----------- Total equity . . . . . . . . . . . . . . . . . . . . . . . . . 190,762 205,304 ------------ ----------- Total liabilities and equity . . . . . . . . . . . . . . . . . $ 341,718 $ 262,129 ============ ===========

See notes to consolidated financial statements. 4 of 19

POMEROY COMPUTER RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Three Months Ended -------------------------- October 5, October 5, 2001 2002 ------------ ------------ Net sales and revenues: (Unaudited) (Unaudited) Sales-equipment, supplies and leasing. $ 167,948 $ 136,976 Service. . . . . . . . . . . . . . . . 35,761 33,945 ------------ ------------ Total net sales and revenues. . . . 203,709 170,921 ------------ ------------ Cost of sales and service: Sales-equipment, supplies and leasing. 152,393 125,777 Service. . . . . . . . . . . . . . . . 24,755 23,692 ------------ ------------ Total cost of sales and service . . 177,148 149,469 ------------ ------------ Gross margin . . . . . . . . . 26,561 21,452 ------------ ------------ Operating expenses: Selling, general and administrative. 14,455 12,551 Rent expense . . . . . . . . . . . . 936 786 Depreciation . . . . . . . . . . . . 1,149 1,158 Amortization . . . . . . . . . . . . 1,398 328 Provision for doubtful accounts. . . 60 400 Litigation settlement. . . . . . . . - 300 Restructuring charge . . . . . . . . - 227 ------------ ------------ Total operating expenses . . . 17,998 15,750 ------------ ------------ Income from operations. . . . . . . . . 8,563 5,702 ------------ ------------ Other expense (income): Interest expense . . . . . . . . . . 197 112 Miscellaneous. . . . . . . . . . . . (66) (45) ------------ ------------ Net other expense. . . . . . . 131 67 ------------ ------------ Income before income tax . . . . . . 8,432 5,635 Net income tax expense . . . . . . . 3,288 541 ------------ ------------ Net income . . . . . . . . . . . . . $ 5,144 $ 5,094 ============ ============ Weighted average shares outstanding: Basic. . . . . . . . . . . . . . . . 12,634 12,745 ============ ============ Diluted. . . . . . . . . . . . . . . 12,713 12,772 ============ ============ Earnings per common share: Basic. . . . . . . . . . . . . . . . $ 0.41 $ 0.40 ============ ============ Diluted. . . . . . . . . . . . . . . $ 0.40 $ 0.40 ============ ============

See notes to consolidated financial statements. 5 of 19

POMEROY COMPUTER RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Nine Months Ended -------------------------- October 5, October 5, 2001 2002 ------------ ------------ Net sales and revenues: (Unaudited) (Unaudited) Sales-equipment, supplies and leasing. $ 500,024 $ 453,352 Service. . . . . . . . . . . . . . . . 104,717 100,497 ------------ ------------ Total net sales and revenues. . . . 604,741 553,849 ------------ ------------ Cost of sales and service: Sales-equipment, supplies and leasing. 453,038 414,955 Service. . . . . . . . . . . . . . . . 75,251 69,520 ------------ ------------ Total cost of sales and service . . 528,289 484,475 ------------ ------------ Gross margin . . . . . . . . . 76,452 69,374 ------------ ------------ Operating expenses: Selling, general and administrative. 43,477 39,475 Rent expense . . . . . . . . . . . . 2,744 2,550 Depreciation . . . . . . . . . . . . 3,436 3,485 Amortization.. . . . . . . . . . . . 4,114 824 Provision for doubtful accounts. . . 120 900 Litigation settlement. . . . . . . . 1,000 300 Restructuring charge . . . . . . . . - 714 ------------ ------------ Total operating expenses . . . 54,891 48,248 ------------ ------------ Income from operations. . . . . . . . . 21,561 21,126 ------------ ------------ Other expense (income): Interest expense . . . . . . . . . . 1,563 437 Miscellaneous. . . . . . . . . . . . (185) (53) ------------ ------------ Net other expense. . . . . . . 1,378 384 ------------ ------------ Income before income tax . . . . . . 20,183 20,742 Net income tax expense . . . . . . . 7,871 6,358 ------------ ------------ Net income . . . . . . . . . . . . . $ 12,312 $ 14,384 ============ ============ Weighted average shares outstanding: Basic. . . . . . . . . . . . . . . . 12,600 12,729 ============ ============ Diluted. . . . . . . . . . . . . . . 12,700 12,799 ============ ============ Earnings per common share: Basic. . . . . . . . . . . . . . . . $ 0.98 $ 1.13 ============ ============ Diluted. . . . . . . . . . . . . . . $ 0.97 $ 1.12 ============ ============

See notes to consolidated financial statements. 6 of 19

POMEROY COMPUTER RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Nine Months Ended -------------------------- October 5, October 5, 2001 2002 ------------ ------------ Cash Flows from Operating Activities: (unaudited) (unaudited) Net income. . . . . . . . . . . . . . . . . . . $ 12,312 $ 14,384 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation . . . . . . . . . . . . . . . . . 5,255 4,121 Amortization . . . . . . . . . . . . . . . . . 4,114 824 Deferred income taxes. . . . . . . . . . . . . (300) (1,251) Loss on sale of fixed assets . . . . . . . . . 1,365 652 Stock option extension . . . . . . . . . . . . 265 - Changes in working capital accounts, net of effect of acquisitions/divestitures: Receivables. . . . . . . . . . . . . . . . 13,022 36,224 Inventories. . . . . . . . . . . . . . . . 7,443 3,306 Prepaids . . . . . . . . . . . . . . . . . 2,332 (599) Net investment in leases . . . . . . . . . 1,222 2,823 Accounts payable . . . . . . . . . . . . . 9,471 (42,902) Deferred revenue . . . . . . . . . . . . . (4,320) (472) Income tax payable . . . . . . . . . . . . 2,519 (2,866) Other, net . . . . . . . . . . . . . . . . 2,028 1,557 ------------ ------------ Net operating activities. . . . . . . . . . . . . 56,728 15,801 ------------ ------------ Cash Flows from Investing Activities: Capital expenditures. . . . . . . . . . . . . (4,274) (7,113) Proceeds from sale of fixed assets. . . . . . - 469 Proceeds from sale of leasing segment . . . . - 24,374 Acquisition of subsidiary companies, net of cash acquired and investment in intangibles . (7,676) (1,625) ------------ ------------ Net investing activities. . . . . . . . . . . . (11,950) 16,105 ------------ ------------ Cash Flows from Financing Activities: Payments under notes payable. . . . . . . . . . (20,495) (10,053) Proceeds under notes payable. . . . . . . . . . 13,374 4,900 Net payments under bank notes payable . . . . . (35,812) (12,118) Proceeds from exercise of stock options . . . . 413 810 Proceeds from employee stock purchase plan. . . 274 238 Payment for treasury stock purchase . . . . . . (363) (889) ------------ ------------ Net financing activities. . . . . . . . . . . . (42,609) (17,112) ------------ ------------ Increase (decrease) in cash 2,169 14,794 Cash: Beginning of period. . . . . . . . . . . . . . 1,097 2,875 ------------ ------------ End of period. . . . . . . . . . . . . . . . . $ 3,266 $ 17,669 ============ ============

See notes to consolidated financial statements. 7 of 19 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, 2002. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the interim period have been made. The results of operations for the nine-month period ended October 5, 2002 are not necessarily indicative of the results that may be expected for future interim periods or for the year ending January 5, 2003. 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 January 5, 2002, bank notes payable includes $3.4 million 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. 3. Treasury Stock On September 19, 2001, the Company's Board of Directors authorized a program to repurchase up to 100,000 shares of the Company's outstanding stock at market price. During the third quarter 2001, the Company repurchased 33,000 shares of stock at a cost of $0.4 million. On July 25, 2002, the Board of Directors authorized a program to repurchase up to 150,000 shares of the Company's outstanding common stock at market price. During the third quarter 2002, the Company repurchased 68,000 shares of stock at a cost of $0.9 million. 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) Three Months Ended October 5, --------------------------------------------- 2001 2002 -------------------- --------------------- Per Share Per Share Shares Amount Shares Amount ------- ---------- ------- ---------- Basic EPS 12,634 $ 0.41 12,745 $ 0.40 Effect of dilutive Stock options 79 (0.01) 27 - ------- ---------- ------- ---------- Diluted EPS 12,713 $ 0.40 12,772 $ 0.40 ======= ========== ======= ========== 8 of 19 Nine Months Ended October 5, --------------------------------------------- 2001 2002 -------------------- --------------------- Per Share Per Share Shares Amount Shares Amount ------- ---------- ------- ---------- Basic EPS 12,600 $ 0.98 12,729 $ 1.13 Effect of dilutive Stock options 100 (0.01) 70 (0.01) ------- ---------- ------- ---------- Diluted EPS 12,700 $ 0.97 12,799 $ 1.12 ======= ========== ======= ========== 5. Goodwill and Other Intangible Assets-Adoption of Statement 142 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. - 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. The Company adopted SFAS 142 in the first quarter of fiscal 2002. The Company has determined that all its intangible assets have definite lives and will continue to amortize these assets over their estimated useful lives. As a result, the Company has recognized no transitional impairment loss in the first quarter of fiscal 2002 in connection with the adoption of SFAS 142 for intangible assets with indefinite lives. For the first nine months of 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. As a result, the Company has recognized no transitional impairment loss in the first nine months of fiscal 2002 in connection with the adoption of SFAS 142 for goodwill with indefinite lives. The Company will review its intangible assets and goodwill for impairment in accordance with SFAS 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". 9 of 19

Intangible assets consist of the following: (in thousands) Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount 1/5/2002 1/5/2002 1/5/2002 10/5/2002 10/5/2002 10/5/2002 --------- ------------- --------- ---------- ------------- ---------- Amortized intangible assets: Covenants not to compete $ 1,171 $ 653 $ 518 $ 1,694 $ 1,118 $ 576 Customer lists 477 236 241 477 289 188 Intangibles 564 263 301 564 488 76 --------- ------------- --------- ---------- ------------- ---------- Total amortized intangibles $ 2,212 $ 1,152 $ 1,060 $ 2,735 $ 1,895 $ 840 ========= ============= ========= ========== ============= ==========

Projected future amortization expense related to intangible assets with definite lives are as follows: (in thousands) Fiscal Years: 2002 $ 300 October 6, 2002 - January 5, 2003 2003 389 2004 118 2005 33 2006 - Total $ 840 ========== For the quarter ended October 5, 2001, amortization expense related to goodwill was $1,125 thousand. Amortization expense related to intangibles assets was $174 thousand of which $73 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 $172 thousand. For the quarter ended October 5, 2002, there was no amortization expense related to goodwill. Amortization expense related to intangible assets was $328 thousand. For the nine months ended October 5, 2001, amortization expense related to goodwill was $3,269 thousand. Amortization expense related to intangibles assets was $476 thousand of which $181 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 $550 thousand. For the nine months ended October 5, 2002, there was no amortization expense related to goodwill. Amortization expense related to intangibles assets was $741 thousand of which $71 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. 10 of 19 The changes in the net carrying amount of goodwill for the nine months ended October 5, 2002 by segment are as follows:

(in thousands) Products Services Consolidated --------- --------- ------------- Net carrying amount as of 1/5/02 $ 40,812 $ 16,642 $ 57,454 Goodwill recorded during first nine months 1,469 1,605 3,074 --------- --------- ------------- Net carrying amount as of 10/5/02 $ 42,281 $ 18,247 $ 60,528 ========= ========= =============

Pro forma net income and net income per share exclusive of amortization expense are as follows:

(in thousands, except per share data) Three Months Ended October 5, --------------------------------- 2001 2002 ---------------- --------------- Reported net income $ 5,144 $ 5,094 Add back: Goodwill amortization (net of tax) 686 - ---------------- --------------- Adjusted net income $ 5,830 $ 5,094 ================ =============== Basic earnings per share: Reported net income $ 0.41 $ 0.40 Goodwill amortization 0.05 - ---------------- --------------- Adjusted net income $ 0.46 $ 0.40 ================ =============== Diluted earnings per share: Reported net income $ 0.40 $ 0.40 Goodwill amortization 0.05 - ---------------- --------------- Adjusted net income $ 0.45 $ 0.40 ================ ===============

(in thousands, except per share data) Nine Months Ended October 5, -------------------------------- 2001 2002 --------------- --------------- Reported net income $ 12,312 $ 14,384 Add back: Goodwill amortization (net of tax) 1,994 - --------------- --------------- Adjusted net income $ 14,306 $ 14,384 =============== =============== Basic earnings per share: Reported net income $ 0.98 $ 1.13 Goodwill amortization 0.16 - --------------- --------------- Adjusted net income $ 1.14 $ 1.13 =============== =============== Diluted earnings per share: Reported net income $ 0.97 $ 1.12 Goodwill amortization 0.15 - --------------- --------------- Adjusted net income $ 1.12 $ 1.12 =============== ===============

11 of 19 6. Supplemental Cash Flow Disclosures Supplemental disclosures with respect to cash flow information and non-cash investing and financing activities are as follows: (in thousands)

Nine Months Ended October 5, -------------------------------- 2001 2002 --------------- --------------- Interest paid $ 1,955 $ 424 =============== =============== Income taxes paid $ 3,537 $ 10,474 =============== =============== Adjustments to purchase price of acquisition assets and intangibles $ 869 $ 1,936 =============== =============== Business combinations accounted for as purchases: Assets acquired $ 13,858 $ 2,069 Liabilities assumed 4,854 260 Notes payable 1,328 184 --------------- --------------- Net cash paid $ 7,676 $ 1,625 =============== ===============

7. Litigation On April 13, 2001, the Company agreed to a settlement of the litigation with FTA Enterprises, Inc. and expensed it in the first quarter of fiscal 2001. The settlement of $1.0 million was paid in cash in the second quarter of fiscal 2001. During the third quarter 2002, the Company made a litigation settlement payment of $0.3 million. The litigation settlement is related to a single bankruptcy preference claim. 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. 12 of 19 8. Segment Information Summarized financial information concerning the Company's reportable segments is shown in the following table. (in thousands)

Three Months Ended October 5, 2001 --------------------------------------------- Products Services Leasing Consolidated --------- --------- -------- ------------- Revenues $ 165,436 $ 35,761 $ 2,512 $ 203,709 Income from operations 3,755 4,117 691 8,563 Total assets 213,992 65,580 67,655 347,227 Capital expenditures 1,422 292 - 1,714 Depreciation and amortization 2,257 561 258 3,076 Three Months Ended October 5, 2002 --------------------------------------------- Products Services Leasing Consolidated --------- --------- -------- ------------- Revenues $ 136,722 $ 33,945 $ 254 $ 170,921 Income from operations 1,921 3,570 211 5,702 Total assets 193,990 61,490 6,649 262,129 Capital expenditures 961 22 - 983 Depreciation and amortization 852 227 14 1,093

Nine Months Ended October 5, 2001 --------------------------------------------- Products Services Leasing Consolidated --------- --------- -------- ------------- Revenues $ 492,568 $ 104,717 $ 7,456 $ 604,741 Income from operations 12,200 7,818 1,543 21,561 Total assets 213,992 65,580 67,655 347,227 Capital expenditures 3,630 413 231 4,274 Depreciation and amortization 6,843 1,650 876 9,369 Nine Months Ended October 5, 2002 --------------------------------------------- Products Services Leasing Consolidated --------- --------- -------- ------------- Revenues $ 449,864 $ 100,497 $ 3,488 $ 553,849 Income from operations 7,655 11,945 1,526 21,126 Total assets 193,990 61,490 6,649 262,129 Capital expenditures 4,908 2,121 84 7,113 Depreciation and amortization 4,061 664 220 4,945

9. Assets Held For Sale On February 28, 2002 the Company entered into a definitive purchase agreement to sell substantially all of the net assets of its wholly owned subsidiary - Technology Integration Financial Services, Inc. ("T.I.F.S.") to Information Leasing Corporation ("ILC"), the leasing division of the Provident Bank of Cincinnati, Ohio. On April 16, 2002 the Company closed the sale of a majority of the assets of its wholly owned subsidiary T.I.F.S. to ILC. Vincent D. Rinaldi, a Director of the Company, is the President of ILC. ILC will pay the Company book value for the net assets of T.I.F.S. as of April 16, 2002. The book value of the net assets of T.I.F.S. as of April 16, 2002 was approximately $4.6 million. Accordingly, no gain or loss was recognized on this transaction. In addition, ILC assumed and liquidated at the time of the closing approximately $20.0 million of the Company's debt related to leased assets owed by T.I.F.S as of April 16, 2002. As part of the transaction, the Company signed an exclusive seven-year vendor agreement whereby the Company is appointed as an agent for remarketing and reselling of the leased equipment sold. The Company will be paid a commission on future lease transactions referred to and accepted by ILC and will act as the remarketing and reselling agent for such future leased equipment. 13 of 19 The following table identifies the assets and liabilities sold as of April 16, 2002: (In thousands) Cash $ (262) Net investment in leases 54,364 Other 468 Total assets $ 54,570 ============ Current and long term notes payable $ 29,961 Trade payables 15,857 Other 4,176 Total liabilities $ 49,994 ============ See the Company's filing on Form 8-K dated May 1, 2002 for more information on the sale. 10. Restructuring Charge In the second quarter of 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 plan resulted in a pre-tax restructuring charge of $714 thousand ($438 thousand after tax) for the nine months ended October 5, 2002. The restructuring costs consist of $484 thousand in equipment and leasehold improvement dispositions, $126 thousand in involuntary employee severance costs, and $104 thousand in lease terminations. Under the plan, the Company eliminated approximately 40 employees. The execution of the plan began in the second quarter of fiscal 2002 and was completed in the third quarter of fiscal 2002. As of October 5, 2002, the Company had $110 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. Income Tax During the third quarter 2002, the Company recorded an income tax benefit of $1.6 million associated with an increase in the tax basis of leased assets as a result of an accounting method change for tax purposes. This amount is reported in the caption "net income tax expense." 12. Recent Accounting Pronouncements In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for costs Associated with Exit or Disposal Activities." This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of the Statement is required with disposal activities initiated after December 31, 2002. The Company believes that the adoption of this Statement will not have an effect on the Company's financial position or results of operation as the Company has not presently identified any activities to be disposed. 14 of 19 13. Subsequent Events On October 8, 2002, the Company's Board of Directors authorized a program to repurchase up to an additional 200,000 shares of the Company's outstanding common stock, which represents less than 1.6% 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. 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 $32.8 million, or 16.1%, to $170.9 million in the third quarter of fiscal 2002 from $203.7 million in the third quarter of fiscal 2001. This decrease was a result primarily of an industry-wide slowdown in technology spending, the decrease in leasing revenue due to the sale of Technology Integration Financial Services, Inc. (" T.I.F.S."), and the Company's decision to take a fee from manufacturers related to certain sales transactions as opposed to recording top line revenues of approximately $3.1 million. Products and leasing sales decreased $30.9 million, or 18.4% to $137.0 million in the third quarter of fiscal 2002 from $167.9 million in the third quarter of fiscal 2001. Service revenues decreased $1.9 million, or 5.3%, to $33.9 million in the third quarter of fiscal 2002 from $35.8 million in the third quarter of fiscal year 2001. This net decrease was primarily a result of an industry-wide slowdown in technology spending. Total net sales and revenues decreased $50.9 million, or 8.4%, to $553.8 million in the first nine months of fiscal 2002 from $604.7 million in the first nine months of fiscal 2001. This decrease was attributable primarily to an industry-wide slowdown in technology spending and the Company's decision to take a fee from manufacturers related to certain sales transaction as opposed to recording top line revenues of approximately $13.7 million. Excluding acquisitions completed in fiscal year 2001, total net sales and revenues decreased 10.1%. Products and leasing sales decreased $46.6 million, or 9.3%, to $453.4 million in the first nine months of fiscal 2002 from $500.0 million in the first nine months of fiscal 2001. Excluding acquisitions completed in fiscal year 2001, products and leasing sales decreased 10.1%. Service revenues decreased $4.2 million, or 4.0%, to $100.5 million in the first nine months of fiscal 2002 from $104.7 million in the first nine months of fiscal year 2001 for the reasons stated in the preceding paragraph. Excluding acquisitions completed in fiscal year 2001, service revenues decreased 9.8%. 15 of 19 GROSS MARGINS. Gross margin decreased to 12.6% in the third quarter of fiscal 2002 as compared to 13.0% in the third quarter of fiscal 2001. This decrease in gross margin resulted primarily from the decrease in hardware margins and decrease in leasing gross margins due to the sale of T.I.F.S. offset by the higher proportion of service gross margin to total gross margin associated with the improved utilization of service personnel. Service gross margin increased to 47.8% of total gross margin in the third quarter of fiscal 2002 from 41.4% in the third quarter of fiscal 2001. 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 and the ratio of service revenues to total net sales and revenues. Gross margin decreased to 12.5% in the first nine months of fiscal 2002 as compared to 12.7% in the first nine months of fiscal 2001. This decrease in gross margin resulted primarily from the decrease in hardware margins and decrease in leasing gross margins due to the sale of T.I.F.S. and offset by the increase in service gross margin associated with the improved utilization of service personnel. Service gross margin increased to 44.7% of total gross margin in the first nine months of fiscal 2002 from 38.5% in the first nine months of fiscal 2001. 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 and the ratio of service revenues to total net sales and revenues. 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 8.0% in the third quarter of fiscal 2002 from 7.6% in the third quarter of fiscal 2001. This increase is primarily a result of lower than expected total net sales and revenues and increase in reserve for doubtful accounts offset by the reduction in selling and administrative payroll and related costs. Total operating expenses expressed as a percentage of total net sales and revenues increased to 9.2% in the third quarter of fiscal 2002 from 8.8% in the third quarter of fiscal 2001. This increase is primarily the result of lower than expected total net sales and revenues, the increase in the provision for doubtful accounts, litigation settlement and the restructuring charge as discussed below and offset by the elimination of amortization expense associated with the Company's goodwill and reduction in payroll costs. 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 7.8% in the first nine months of fiscal 2002 from 7.7% in the first nine months of fiscal 2001. The increase is primarily a result of lower than expected total net sales and revenues and the increase in its reserve for doubtful accounts offset by the reduction in the selling and administrative payroll costs. Total operating expenses expressed as a percentage of total net sales and revenues decreased to 8.7% in the first nine months of fiscal 2002 from 9.1% in the first nine months of fiscal 2001 due to the elimination of amortization expense associated with the Company's goodwill and the reduction of the litigation settlement fees offset by the increase in selling, general and administrative expenses as a percentage of total net sales and revenues as discussed above and the restructuring charge as discussed below. LITIGATION SETTLEMENT. On April 13, 2001, the Company agreed to a settlement of the litigation with FTA Enterprises, Inc. and expensed it in the first quarter of fiscal 2001. The settlement of $1.0 million was paid in cash in the second quarter of fiscal 2001. During the third quarter 2002, the Company recorded a litigation settlement of $0.3 million. The litigation settlement is related to a single bankruptcy preference claim. RESTRUCTURING CHARGE. In the second quarter of 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. 16 of 19 The plan resulted in a pre-tax restructuring charge of $714 thousand ($438 thousand after tax) for the nine months ended October 5, 2002. The restructuring costs consist of $484 thousand in equipment and leasehold improvement dispositions, $126 thousand in involuntary employee severance costs, and $104 thousand in lease terminations. Under the plan, the Company eliminated approximately 40 employees. The execution of the plan began in the second quarter of fiscal 2002 and was completed in the third quarter of fiscal 2002. As of October 5, 2002, the Company had $110 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. INCOME FROM OPERATIONS. Income from operations decreased $2.9 million, or 33.7%, to $5.7 million in the third quarter of fiscal 2002 from $8.6 million in the third quarter of fiscal 2001. The Company's operating margin decreased to 3.3% in the third quarter of fiscal 2002 as compared to 4.2% in the third quarter of fiscal 2001. 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. Income from operations decreased $0.5 million, or 2.3%, to $21.1 million in the first nine months of fiscal 2002 from $21.6 million in the first nine months of fiscal 2001. The Company's operating margin increased to 3.8% in the first nine months of fiscal 2002 as compared to 3.6% in the first nine months of fiscal 2001. This increase is primarily due to the decrease in operating expenses and offset by the lower than expected total net sales and revenues. INTEREST EXPENSE. Interest expense decreased $0.1 million, or 50.0%, to $0.1 million in the third quarter of fiscal 2002 from $0.2 million in the third quarter of fiscal 2001. This decrease was due to reduced borrowings as a result of improved cash flow management, the sale of T.I.F.S. and a reduced interest rate charged by the Company's lender. Interest expense decreased $1.2 million, or 75.0%, to $0.4 million in the first nine months of fiscal 2002 from $1.6 million in the first nine months of fiscal 2001. This decrease was due to reduced borrowings as a result of improved cash flow management, the sale of T.I.F.S. and a reduced interest rate charged by the Company's lender. INCOME TAXES. The Company's effective tax rate was 9.6% in the third quarter of fiscal 2002 compared to 39.0% in the third quarter of fiscal 2001. This decrease was related to a tax benefit of $1.6 million associated with an increase in the tax basis of leased assets as a result of an accounting method change for tax purposes, lower overall state income tax liability and the change in goodwill amortization. The Company's effective tax rate was 30.7% in the first nine months of fiscal 2002 compared to 39.1% in the first nine months of fiscal 2001. This decrease was related to a tax benefit of $1.6 million associated with an increase in the tax basis of leased assets as a result of an accounting method change for tax purposes, lower overall state income tax liability and the change in goodwill amortization. NET INCOME. Net income remained constant at $5.1 million in the third quarter of fiscal 2002 and 2001. Net income increased $2.1 million, or 17.1%, to $14.4 million in the first nine months of fiscal 2002 from $12.3 million in the first nine months of fiscal 2001 due to the factors described above. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $15.8 million in the first nine months of fiscal 2002. Cash provided by investing activities was $16.1 million, which included $24.3 million for proceeds related to the sale of the leasing segment and $0.5 million for proceeds on sale of fixed assets offset by $7.1 million for capital expenditures and $1.6 million for prior year acquisitions. Cash used in financing activities was $17.1 million which included $5.1 million of net payments on notes payable, $12.1 million of net payments on bank notes payable, $0.9 million for purchase of treasury stock and offset by $1.0 million from the exercise of stock options and purchases of stock under the employee stock purchase plan. 17 of 19 A significant part of the Company's inventories is financed by floor plan arrangements with third parties. At October 5, 2002, these lines of credit totaled $84.0 million, including $72.0 million with Deutsche Financial Services ("DFS") and $12.0 million with IBM Credit Corporation ("ICC"). Borrowings under the DFS 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 DFS. The $240.0 million credit facility has a three year term and includes $72.0 million for inventory financing, $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, which was 4.6% as of October 5, 2002. At October 5, 2002, 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. On April 16, 2002, the Company closed the sale of a majority of the assets of its wholly owned leasing subsidiary- Technology Integration Financial Services, Inc. ("T.I.F.S."). ILC paid the Company book value for the net assets of T.I.F.S. as of April 16, 2002, which was approximately $4.6 million. In addition, ILC assumed and liquidated at the time of the closing approximately $20.0 million of the Company's debt related to leased assets owed by T.I.F.S as of April 16, 2002. 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. POMEROY COMPUTER RESOURCES, INC. PART II - OTHER INFORMATION Items 1 to 4 None Item 5 On August 30, 2002, the Company acquired Verity Solutions, LLC ("Verity"), a Cleveland, Ohio-based IT solutions and professional services provider. For the twelve months ended July 31, 2002, Verity had recorded revenues of $1.0 million. Their primary services include IT solutions consulting, enterprise network infrastructure solutions, network systems and application solutions and project management. Item 6 Exhibits and Reports on Form 8-K (a) Reports on Form 8-K None (b) Exhibits 10(I) Material Agreements 10(I) (mm)(10) Asset Purchase Agreement by, between and among Pomeroy Select Integration Solutions, Inc. and Verity Solutions, LLC and John R. Blackburn, dated August 30, 2002 18 of 19 (mm)(11) Covenant Not to Compete Agreement between John R. Blackburn and Pomeroy Select Integration Solutions, Inc. 11 Computation of Earnings per Share 99.12 David B. Pomeroy, Chief Executive Officer, Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.13 Michael E. Rohrkemper, Chief Financial Officer, Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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 13, 2002 By: /s/ Michael E. Rohrkemper Michael E. Rohrkemper ------------------------------- Chief Financial Officer and Chief Accounting Officer 19 of 19