ITEM 1. BUSINESS Pomeroy Computer Resources, Inc. (the "Company" ) is a Delaware Corporation organized in February 1992 to consolidate and reorganize predecessor companies. All of the predecessor companies were controlled by David B. Pomeroy, the Company's Chairman of the Board, President and Chief Executive Officer.
The Company operates primarily in one industry segment -- sales and services of desktop computer products, configuration, network integration and technology support services to businesses nationwide -- and no separate industry segment information is presented.
The Company offers a broad range of microcomputers and related products and provides a comprehensive selection of integration and support services including network and system design, equipment selection and procurement, complex network configuration, integration, Internet and electronic commerce services, depot repair, on-site maintenance, staffing and network management. The Company provides products and services to large and medium sized commercial, health care, governmental, financial and educational customers.
The Company's strategy for building shareholder value is to provide comprehensive solutions to improve the productivity of its clients' information systems. Key elements of the Company strategy are: (1) to leverage client relationships to continue expanding higher-margin services revenues, (2) to capitalize on the trend toward build-to-order/configure-to-order systems, and
(3) to expand offerings and geographic coverage through strategic acquisitions.
The Company offers microcomputer products from an array of manufacturers including Compaq, Hewlett-Packard, IBM, Lexmark and Toshiba. The Company sells these products together with a broad selection of networking, integration and software products from manufacturers including 3Com, Bay Networks, Intel, Microsoft, and Novell. Services provided by the Company allow customers to outsource the selection, installation, integration and maintenance of their microcomputer systems.
The Company is an authorized dealer or reseller for the products of over 35 major vendors. The Company believes that its access to major vendors enables it to offer a wide range of products to meet the diverse requirements of its customers. However, the increasing demand for microcomputers has resulted in significant product supply shortages from time to time because manufacturers have been unable to produce sufficient quantities of certain products to meet demand. The Company has in the past and expects in the future to experience some difficulty in obtaining an adequate supply of products from its major vendors which has resulted, and may continue to result, in delays in completing sales. These delays have not had, and are not anticipated to have, a material adverse effect on the Company's results of operations, although failure to obtain adequate product supply could have a material adverse effect on the Company's results of operations.
The Company has entered into dealer agreements with its major vendors/manufacturers. These agreements are typically subject to periodic renewal and to termination on short notice. Substantially all of the Company's dealer agreements may be terminated by the vendor without cause upon 30 to 90 days advance notice, or immediately upon the occurrence of certain events. A vendor could also terminate an authorized dealer agreement for reasons unrelated to the Company's performance.
Although the Company has never lost a major vendor/manufacturer, the loss of such a vendor/product line or the deterioration of the Company's relationship with such a vendor/manufacturer would have a material adverse effect on the Company.
The Company is a participant in the IBM channel assembly program. To date, this program has not been utilized in a significant portion of the Company's shipments , but the Company expects this program to be utilized in a larger proportion of its shipments during fiscal 1998. The Company is in discussion with other major manufacturers regarding channel assembly. The objective of channel assembly programs is to achieve cost savings through lower finished goods inventory, higher inventory turns and lower price protection requirements and passing such cost savings on to the customer, minimizing the direct marketers' pricing advantage. The Company believes that being able to effectively utilize its vendors' channel assembly programs will play an important role in its competitiveness and future financial performance.
The Company's sales are generated primarily by its 217 person direct sales and sales support personnel located in 20 regional offices in Kentucky, Iowa, Tennessee, Florida, Alabama, Indiana, Ohio, West Virginia, North Carolina and South Carolina. The Company's business strategy is to provide its customers with a complete package of advanced microcomputer products, high level services and support, including designing and installing systems, training system users, maintaining and repairing hardware and software and brokering used equipment. The Company believes that its ability to combine competitive pricing of microcomputer hardware and related products with higher margin sophisticated services and support allows it to compete effectively against a variety of alternative microcomputer distribution channels, including independent dealers, superstores, mail order and direct sales by manufacturers. With many businesses seeking assistance to optimize their information technology investments and control ongoing costs throughout the life cycle of technology systems, the Company is using its resources to assist customers in their decision-making, project implementation and equipment management.
Most microcomputer products are sold pursuant to purchase orders. For larger procurements, the Company will enter into written contracts with customers. These contracts typically establish prices for certain equipment and services and require short delivery dates for equipment and services ordered by the customer. These contracts do not require the customer to purchase microcomputer products or services exclusively from the Company and may be terminated without cause upon 30 to 90 days' notice. Most contracts are for a term of 12 to 24 months and, in order to be renewed, may require submission of a new bid in response to the customer's request for proposal. As of January 5, 1998, the Company had been awarded contracts which it estimates will result in an aggregate of approximately $35.8 million of net sales and revenues after January 5, 1998. Of this amount, the Company estimates that $29.5 million of net sales and revenues will be generated during fiscal year 1998 and the remainder will be generated after the end of fiscal year 1998. As of January 5, 1997, the Company had been awarded contracts which it estimated would result in an aggregate of approximately $71.3 million of net sales and revenues after January 5, 1997. Of this amount, the Company estimated that $35.5 million of net sales and revenues will be generated during fiscal year 1997 and the remainder will be generated after the end of fiscal year 1997.The estimates of management could be materially less than stated as a result of factors which would cause one or more of these customers to order less product or services than is anticipated. Such factors include that the customer finds another supplier for the desired products at a lower price or on better terms, the internal business needs of the customer change causing the customer to require less or different products and services, or a significant change in technology or other industry conditions occurs which alters the customer's needs or timing of purchases. An estimate of the value of contracts awarded as of a comparable date in the preceding fiscal year is not available.
For fiscal years 1995, 1996 and 1997, sales of microcomputers, peripheral products, supplies and software accounted for approximately 91.5%, 91.2% and 89.7%, respectively, of the consolidated net sales and revenues of the Company. The Company's revenues from its service and support activities have also grown over the last several years. For fiscal years 1995, 1996 and 1997, revenues from service and support activities were approximately $19.6 million, $29.6 million and $50.5 million, respectively, and accounted for approximately 8.5%, 8.8% and 10.3%, respectively, of the consolidated net sales and revenues of the Company. Competition The microcomputer products and services market is highly competitive. Distribution has evolved from manufacturers selling through direct sales forces to sales by manufacturers to aggregators (wholesalers), resellers and value-added resellers. Competition, in particular the pressure on pricing, has resulted in industry consolidation. In the future the Company may face fewer but larger and better financed competitors as a consequence of such consolidation. In response to continuing competitive pressures, including specific price pressure from the direct telemarketing and mail order distribution channels, the microcomputer distribution channel is currently undergoing segmentation into value-added resellers who emphasize advanced systems together with service and support for business networks, as compared to computer "superstores," who offer retail purchasers a relatively low cost, low service alternative and direct-mail suppliers which offer low cost and limited service. Certain superstores have expanded their marketing efforts to target segments of the Company's customer base, which could have a material adverse impact on the Company's operations and financial results.
While price is an important competitive factor in the Company's business, the Company believes that its sales are principally dependent upon its service, technical expertise, reputation and experience. The Company's principal competitive strengths include: (i) quality assurance; (ii) service and technical support; (iii) lower pricing of products through alternative distribution sources; (iv) prompt delivery of products to customers; and (v) various financing alternatives.
The Company competes for product sales directly with local, national and international distributors and resellers. In addition, the Company competes with microcomputer manufacturers that sell their product through their own direct sales forces and to distributors. Although the Company believes its prices and delivery terms are competitive, certain competitors offer more aggressive hardware pricing to their customers.
CERTAIN BUSINESS FACTORS
DEPENDENCE ON MAJOR CUSTOMERS
During fiscal 1997, approximately 41.2% of the Company's total net sales and revenues were derived from its top 10 customers, including one customer which accounted for 12.3% of total net sales and revenues. This customer did not select the Company as its fiscal 1998 computer product supplier. The Company does not expect that this loss will have a near-term material impact on its financial condition or results of operations.
RAPID GROWTH
The Company has experienced rapid growth both internally and through acquisitions, and the Company intends to continue to pursue both types of growth opportunities as part of its business strategy. There can be no assurance that the Company will be successful in maintaining its rapid growth in the future. The Company expects that more of its future growth will result from acquisitions. In 1997, the Company completed several acquisitions and continues to evaluate expansion and acquisition opportunities that would complement its ongoing operations. There can be no assurance that the Company will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies into the Company without substantial costs, delays or other problems. In addition, there can be no assurance that companies acquired in the future will be profitable at the time of their acquisition or will achieve levels of profitability that justify the investment therein. Acquisitions may involve a number of special risks, including, but not limited to, adverse short-term effects on the Company's reported operating results, diversion of management's attention, dependence on retaining, hiring and training key personnel, risks associated with unanticipated problems or legal liabilities and amortization of acquired intangible assets, some or all of which could have a material adverse effect on the Company's operations and financial results.
VENDOR REBATES AND VOLUME DISCOUNTS
The Company's profitability has been favorably affected by its ability to obtain rebates and volume discounts from manufacturers and through aggregators and distributors. Any change in the level of rebates, volume discount schedules or other marketing programs offered by manufacturers that results in the reduction or elimination of rebates or discounts currently received by the Company could have a material adverse effect on the Company's operations and financial results. In particular, a reduction or elimination of rebates related to government and educational customers could adversely affect the Company's ability to serve those customers profitably.
MANUFACTURER MARKET DEVELOPMENT FUNDS
Several manufacturers offer market development funds, cooperative advertising and other promotional programs to computer resellers. These funds are accounted for as a reduction in selling, general and administrative expenses, thereby increasing net income. While such programs have been available to the Company in the past, there is no assurance that these programs will be continued. Any discontinuance or material reduction of these programs could have an adverse effect on the Company's operations and financial results.
MANAGEMENT INFORMATION SYSTEM
The Company relies upon the accuracy and proper utilization of its management information system to provide timely distribution services, manage its inventory and track its financial information. To manage its growth, the Company is continually evaluating the adequacy of its existing systems and procedures (including Year 2000 issues) and has recently implemented a new warehouse management system and continues to integrate additional functions. The Company anticipates that it will regularly need to make capital expenditures to upgrade and modify its management information system, including software and hardware, as the Company grows and the needs of its business change. There can be no assurance that the Company will anticipate all of the demands which its expanding operations will place on its management information system. The occurrence of a significant system failure or the Company's failure to expand or successfully implement its systems could have a material adverse effect on the Company's operations and financial results.
DEPENDENCE ON TECHNICAL EMPLOYEES
The success of the Company's services business, in particular its network and integration services, depends in large part upon the Company's ability to attract and retain highly skilled technical employees in competitive labor markets. There can be no assurance that the Company will be able to attract and retain sufficient numbers of skilled technical employees. The loss of a significant number of the Company's existing technical personnel or difficulty in hiring or retaining technical personnel in the future could have a material adverse effect on the Company's operations and financial results.
INVENTORY MANAGEMENT
The PC industry is characterized by rapid product improvement and technological change resulting in relatively short product life cycles and rapid product obsolescence. While most of the inventory stocked by the Company is for specific customer orders, inventory devaluation or obsolescence could have a material adverse effect on the Company's operations and financial results. Current industry practice among manufacturers is to provide price protection intended to reduce the risk of inventory devaluation, although such policies are subject to change at any time and there can be no assurance that such price protection will be available to the Company in the future. Many manufacturers have announced plans to reduce the number of days for which they will provide price protection. Also, the Company currently has the option of returning inventory to certain manufacturers and distributors, subject to certain limitations. The amount of inventory that can be returned to manufacturers without a restocking fee varies under the Company's agreements and such return policies may provide only limited protection against excess inventory. There can be no assurance that new product developments will not have a material adverse effect on the value of the Company's inventory or that the Company will successfully manage its existing and future inventory. In addition, the Company stocks parts inventory for its services business. Parts inventory is more likely to experience a decrease in valuation as a result of technological change and obsolescence and there are no price protection practices offered by manufacturers with respect to parts.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent on the services of David B. Pomeroy,II, its Chairman of the Board, President and Chief Executive Officer and other key personnel. The Company maintains $1.0 million in key man life insurance insuring the life of Mr. Pomeroy. The loss of the services of Mr. Pomeroy or other key personnel could have a material adverse effect on the Company's business. The Company has entered into employment agreements with certain of its key personnel, including Mr. Pomeroy. The Company's success and plans for future growth will also depend on its ability to attract and retain highly skilled personnel in all areas of its business.
Employees
As of January 5, 1998 the Company had 1,287 full-time employees consisting of the following: 685 service and technical personnel including 180 systems engineers; 217 direct sales representatives and sales support personnel; 63 management personnel; and 322 administrative and distribution personnel. The Company has no collective bargaining agreements and believes its relations with its employees are good.
Backlog
The Company does not have a significant backlog of business since it normally delivers and installs products purchased by its customers within 10 days from the date of order. Accordingly, backlog is not material to the Company's business or indicative of future sales. From time to time, the Company experiences difficulty in obtaining products from its major vendors as a result of general industry conditions. These delays have not had, and they are not anticipated to have, a material adverse effect on the Company's results of operations. Patents and Trademarks The Company owns no trademarks or patents. Although the Company's various dealer agreements do not generally allow the Company to use the trademarks and trade names of these various manufacturers, the agreements do permit the Company to refer to itself as an "authorized dealer" of the products of those manufacturers and to use their trademarks and trade names for marketing purposes. The Company considers the use of these trademarks and trade names in its marketing efforts to be important to its business.
Acquisitions
Acquisitions have contributed significantly to the Company's growth. The Company believes that acquisitions are one method of increasing its presence in existing markets, expanding into new geographic markets, adding experienced service personnel,
gaining new product offerings and services, obtaining more competitive pricing as a result of increased purchasing volumes of particular products and improving operating efficiencies through economies of scale. In recent years, there has been consolidation among providers of microcomputer products and services and the Company believes that this consolidation will continue, which, in turn, may present additional opportunities for the Company to grow through acquisitions. The Company continually seeks to identify and evaluate potential acquisition candidates. The Company is currently engaged in preliminary discussions with potential acquisition candidates. Although it has no binding commitments to acquire such candidates, management believes that the Company may acquire one or more of these candidates in the future.
During fiscal 1997, the Company completed several acquisitions. The total consideration given consisted of $3.7 million in cash, subordinated notes of $1.3 million and 37 thousand unregistered shares of the Company's common stock with an approximate value of $1.0 million. Interest on the subordinated notes is payable quarterly. Principal is payable in equal annual installments.
ITEM 2.
ITEM 2. Properties
The Company's principal executive offices and distribution facility are located in Hebron, Kentucky, comprised of approximately 36,000 and 161,000 square feet of space, respectively. These facilities are leased from Pomeroy Investments, LLC ( "Pomeroy Investments" ), a Kentucky limited liability company controlled by David B. Pomeroy, II, Chief Executive Officer of the Company, under a ten year triple-net lease agreement which expires in May 2006. The lease agreement provides for 2 five year renewal options. The Company expanded the distribution facility by 70,000 square feet in 1997 to include a new depot repair facility. Pomeroy Investments financed, purchased and owns the land and improvements necessary which accommodate the new depot repair facility. The Company leases the additional space from Pomeroy Investments at an annual lease rate no less favorable to the Company than can be obtained from unaffiliated third parties.
The Company also has noncancelable operating leases for its regional offices, expiring at various dates between 1997 and 2006. The Company believes there will be no difficulty in negotiating the renewal of its real property leases as they expire or in finding other satisfactory space. In the opinion of management, the properties are in good condition and repair and are adequate for the particular operations for which they are used. The Company does not own any real property.
ITEM 3.
ITEM 3. Legal Proceedings
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 consolidated financial position or results of operations.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders None PART II
ITEM 5.
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
The following table sets forth, for the periods indicated, the high and low sales price for the Common Stock for the quarters indicated as reported on the NASDAQ National Market. The following prices have been adjusted to reflect the three-for-two stock splits in the form of a stock dividend effected on October 4, 1996 and October 6, 1997, respectively.
1996 1997 _________________ ____________________ High Low High Low First quarter $7.00 $5.33 $25.33 $12.1 Second quarter $7.56 $5.67 $19.17 $12.5 Third quarter $14.67 $6.11 $29.17 $16.6 Fourth quarter $25.33 $13.58 $31.25 $14.0
As of March 30, 1998, there were approximately 289 holders of record of the Company's common stock. Dividends _________
The Company has not paid any cash dividends since its organization and the completion of its initial public offering. The Company has no plans to pay cash dividends in the foreseeable future, and the payment of such dividends are precluded under the Company's current borrowing agreement.
SELECTED FINANCIAL DATA (In Thousands Except Per Share Data For the Fiscal Years Ended January _____________________________________________ 1994 1995(1) 1996 1997(2) 1998(3)
Consolidated Statement of Income Data: Net sales and revenues $112,178 $144,575 $230,710 $336,358 $491,448 Cost of sales and service 94,151 120,901 197,174 281,753 410,063 ________ ________ ________ ________ ________ Gross profit 18,027 23,674 33,536 54,605 81,385 Operating expenses: Selling, general and administrative 12,969 17,231 23,247 35,175 50,597 Royalty expense 605 - - - - Depreciation and amortization 400 886 1,004 2,561 3,940 ________ ________ ________ ________ ________ Total operating expenses 13,974 18,117 24,251 37,736 54,537 Income from operations 4,053 5,557 9,285 16,869 26,848
Other expense (income): Interest expense 850 1,031 1,999 2,170 974 Litigation settlement and related costs - - - 4,392 - Miscellaneous (57) (57) (64) (221) 54 ________ ________ ________ ________ ________ Total other expense 793 974 1,935 6,341 1,028
Income before income taxes 3,260 4,583 7,350 10,528 25,820
Income tax expense 1,360 1,856 2,983 4,296 9,507 ________ ________ ________ ________ ________ Net income $1,900 $2,727 $4,367 $6,232 $16,313
Earnings per common share (diluted)(5) $0.35 $0.50 $0.73 $0.77 $1.44
Consolidated Balance Sheet Data: Working capital $6,339 $6,556 $10,340 $27,203 $63,028 Long-term debt, net of current maturities - 167 100 2,189 1,434 Equity 10,594 13,130 19,200 46,593 88,777 Total assets 34,086 57,061 63,985 121,380 167,264
(1) During fiscal 1994 the Company acquired the outstanding stock of Xenas Communications Corp. (2) In March 1996 and October 1996, the Company acquired the assets of TCSS and DILAN, respectively. See Note 12 of Notes to Consolidated Financial Statements. (3) In 1997 the Company acquired Magic Box, Micro Care and The Computer Store. See Note 12 of Notes to Consolidated Financial Statements. (4) Fiscal year 1996 reflects the Vanstar litigation settlement and related costs of $4,392. Without this charge, net income would have been $8,845 and diluted earnings per common share would have been $1.09. (5) Earnings per common share are calculated using weighted average shares outstanding adjusted for the three-for-two stock split in the form of a stock dividend effective on October 6, 1997.
QUARTERLY RESULTS OF OPERATIONS (in thousands, except per share da
The following table sets forth certain unaudited operating results This information is unaudited, but in the opinion of management in consisting of normal recurring adjustments, necessary for a fair p operations of such periods.
Fiscal 1997(1) __________________________________________ First Second Third Fourth Quarter Quarter(2) Quarter(3) Quarter __________ _________ _________ _________ Net sales and revenues $ 100,366 $ 118,218 $ 130,729 $ 142,135
Gross profit 16,904 19,135 21,533 23,813
Net income $ 2,958 $ 3,969 $ 4,540 $ 4,846
Earnings per common share: Basic $ 0.29 $ 0.35 $ 0.40 $ 0.43 Diluted $ 0.28 $ 0.34 $ 0.39 $ 0.41
Fiscal 1996(1) __________________________________________ First Second Third Fourth Quarter(5) Quarter Quarter Quarter(6) __________ _________ _________ _________ Net sales and revenues $ 63,224 $ 77,836 $ 92,975 $ 102,323
Gross profit 9,600 12,846 14,667 17,492
Net income(loss) $ (1,355) $ 1,853 2,619 $ 3,115
Earnings(loss) per common share: Basic $ (0.23) $ 0.30 $ 0.28 $ 0.32 Diluted $ (0.22) $ 0.28 $ 0.27 $ 0.31
(1) All per share amounts have been restated to reflect the stock split effected as a stock dividend in the fourth quarter of 1997 and the adoption of SFAS No. 128.
(2) During the second quarter of fiscal 1997 the Company acquired substantially all of the assets of Magic Box. See Note 12 of Notes to Consolidated Financial Statements.
(3) During the third quarter of fiscal 1997 the Company acquired certain assets of Micro Care. See Note 12 of Notes to Consolidated Financial Statements.
(4) During the fourth quarter of fiscal 1997 the Company acquired CSI. See Note 12 of Notes to Consolidated Financial Statements.
(5) During the first quarter of fiscal 1996, the Company acquired certain assets of TCSS. See Note 12 of Notes to Consolidated Financial Statements. The first quarter of 1996 also includes the effect of the Vanstar litigation settlement and related costs of $4.4 million. Without this charge, net income would have been $1.3 million and earnings per common share would have been $0.21.
(6) During the fourth quarter of fiscal 1996, the Company acquired certain assets of DILAN. See Note 12 of Notes to Consolidated Financial Statements.
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Total Net Sales and Revenues. Total net sales and revenues increased $155.0 million, or 46.1%, to $491.4 million in fiscal 1997 from $336.4 million in fiscal 1996. This increase was attributable to an increase in sales to existing and new customers and to acquisitions completed in fiscal years 1997 and 1996. Excluding acquisitions completed in fiscal years 1997 and 1996, total net sales and revenues increased 35.8%.
Sales of equipment and supplies increased $134.2 million, or 43.8%, to $440.9 million in fiscal 1997 from $306.7 million in fiscal 1996. On a comparable basis, as described above, sales of equipment and supplies increased 33.9%. Service and other revenues increased $20.8 million, or 70.0%, to $50.5 million in fiscal 1997 from $29.7 million in fiscal 1996. On a comparable basis, as described above, service revenues increased 55.3%.
Gross Profit. Gross profit margin was 16.6% in fiscal 1997 compared to 16.2% in fiscal 1996. The Company improved its gross margin by increasing the volume of higher-margin service revenues which offset a decrease in hardware gross margins and the growth in equipment sales. Service and other revenues increased to 10.3% of total net sales and revenues in fiscal 1997 compared to 8.8% of total net sales and revenues in fiscal 1996. Factors that may have an impact on gross margin in the future include the percentage of equipment 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 decreased to 10.3% in fiscal 1997 from 10.5% for fiscal 1996. This decrease is primarily attributable to the increased productivity of technical personnel which contributed to the growth of the Company's service business. Total operating expenses expressed as a percentage of total net sales and revenues decreased to 11.1% in fiscal 1997 from 11.2% in fiscal 1996 due to the factor described above.
Income from Operations. Income from operations increased $9.9 million, or 58.6 %, to $26.8 million in fiscal 1997 from $16.9 million in fiscal 1996. The Company's operating margin increased to 5.5% in fiscal 1997 from 5.0% in fiscal 1996 because of the increase in gross margin and the decrease in operating expenses as a percentage of total net sales and revenues.
Interest Expense. Total interest expense was $1.0 million in fiscal 1997 compared with $2.2 million in fiscal 1996. This decrease is primarily related to lower average borrowings during fiscal 1997 as a result of the secondary public offering in February 1997.
Income Taxes. The Company's effective tax rate was 36.8% in fiscal 1997 compared to 40.8% in fiscal 1996. This reduction is the result of Kentucky state income tax credits earned in fiscal 1997.
Net Income. Net income increased $10.1 million, or 162.9%, to $16.3 million in fiscal 1997 from $6.2 million in fiscal 1996. The increase was a result of the factors described above. Net income, excluding the impact of the Vanstar settlement in fiscal 1996, increased $7.5 million, or 85.2%, in fiscal 1997 compared with $8.8 million in fiscal 1996. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 Total Net Sales and Revenues. Total net sales and revenues increased $105.7 million, or 45.8%, to $336.4 million in fiscal 1996 from $230.7 million in fiscal 1995. This increase was attributable to the acquisitions in fiscal 1996 and increased sales to existing and new customers. Excluding acquisitions completed in fiscal 1996, total net sales and revenues increased 14.9%.
Sales of equipment and supplies increased $95.6 million, or 45.3%, to $306.7 million in fiscal 1996 from $211.1 million in fiscal 1995. On a comparable basis, as described above, sales of equipment and supplies increased 12.7%. Service and other revenues increased $10.0 million, or 51.0%, to $29.6 million in fiscal 1997 from $19.6 million in fiscal 1996. On a comparable basis, as described above, service revenues increased 39.6%.
Gross Profit. Gross profit margin was 16.2% in fiscal 1996 compared to 14.5% in fiscal 1995. This increase was primarily attributable to a lesser number of lower margin, high volume equipment roll-outs, larger vendor rebates and the increase in higher margin service revenues. Vendor rebates increased $3.7 million, or 78.9%, to $8.4 million in fiscal 1996 from $4.7 million in fiscal 1995. Provided there are no changes in rebate programs, the level of vendor rebates is expected to continue into fiscal 1997 as volume purchases with major manufacturers continue to increase.
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 10.5% in fiscal 1996 from 10.1% for fiscal 1995. This increase is primarily attributable to the addition of technical personnel as a result of the growth of the Company's service business. As the personnel reach full productivity, their costs as a percentage of services revenues are expected to decrease. In addition, market development funds, which reduce selling, general and administrative expenses, have declined as a percentage of total net sales and revenues during fiscal 1996 to 1.0% from 1.3% in fiscal 1995 primarily as a result of vendors shifting funds to rebates. Total operating expenses expressed as a percentage of total net sales and revenues increased to 11.2% in fiscal 1996 from 10.5% in fiscal 1995 due to the reduction of market development funds and the increase in depreciation related to the new headquarters and distribution facilities and amortization of goodwill related to the acquisitions of TCSS and DILAN.
Income from Operations. Income from operations increased $7.6 million, or 81.7 %, to $16.9 million in fiscal 1996 from $9.3 million in fiscal 1995. The Company's operating margin increased to 5.0% in fiscal 1996 from 4.0% in fiscal 1995 because the increase in gross margin more than offset the increase in operating expenses as a percentage of total net sales and revenues.
Interest Expense. Total interest expense was $2.2 million in fiscal 1996 compared with $2.0 million in fiscal 1995.
Income Taxes. The Company's effective tax rate was 40.8% in fiscal 1996 compared to 40.6% in fiscal 1995.
Litigation Settlement and Related Costs. On April 29, 1996, the Company agreed to a settlement of the litigation with Vanstar. The settlement of $3.3 million consisted of a payment made by the Company to Vanstar of $1.65 million in cash and a $1.65 million note which was paid on August 27, 1996. The settlement agreement also provided for mutual forgiveness of any and all claims or obligations of the parties, resulting in a write-off of $0.5 million of receivables from Vanstar and additional expenses of $0.5 million for costs related to the litigation.
Net Income. Net income increased $1.8 million, or 42.7%, to $6.2 million in fiscal 1996 from $4.4 million in fiscal 1995. The increase was a result of the factors described above. Excluding the impact of the Vanstar settlement, net income in fiscal 1996 would have been $8.8 million, an increase of 102.2% over the comparable period in 1995.
Liquidity and Capital Resources _______________________________
Cash used in operating activities was $22.9 million in fiscal 1997. Cash used in investing activities included $3.5 million for acquisitions and $2.4 million for capital expenditures. Cash provided by financing activities included $23.3 million of net proceeds from a stock offering, $1.5 million from the exercise of stock options less $1.5 million of net payments on bank notes payable and $0.8 million of repayments on various notes payable.
A significant part of the Company's inventories is financed by floor plan arrangements with third parties. At January 5, 1998, these lines of credit totaled $47.0 million, including $12.0 million with IBM Credit Corporation ( "ICC") and $35.0 million with Deutsche Financial Services ( "DFS"). Borrowings under the ICC floor plan arrangement are made on sixty day notes, with one-half of the note amount due in thirty days. Borrowings under the DFS floor plan arrangement are made on thirty day notes. All such borrowings are secured by the related inventory. Financing on substantially all of the arrangements is interest free due to subsidies by manufacturers. The average rate on the plans overall 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 its Credit Facility, which during fiscal 1997 permited the Company to borrow up to the lesser of $20.0 million or an amount based upon a formula of eligible trade receivables. The Credit Facility carries a variable interest rate based on (i) Star Bank's prime rate less the Incentive Pricing Spread or (ii) LIBOR plus the Incentive Pricing Spread, at the Company's election. The Incentive Pricing Spread is adjusted quarterly. At January 5, 1998, the amount outstanding was $22.6 million, including $6.5 million of overdrafts on the Company's books in accounts at Star Bank, which was at an interest rate of 7.5%. The overdrafts were subsequently funded through the normal course of business. 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 prohibited from paying any cash dividends and is subject to various financial covenants.
In January 1998 the Company revised its Credit Facility to borrow up to $40.0 million. The revised Credit Facility, which expires May 31, 1998, carries a variable interest rate based solely on the prime rate of Star Bank less 125 basis points. Further, the Company is in the process of finalizing a $ 120.0 million line of credit, under terms similar to the revised Credit Facility, with DFS and Star Bank is expected to have a participation interest in the new Credit Facility. When finalized this line of credit will replace the $40.0 million Credit Facility.
At the beginning of the third quarter of 1997, the Company hired a president for Technology Integration Financial Services, Inc. ( "TIFS"), a wholly-owned subsidiary of the Company (f/k/a Pomeroy Computer Leasing Company, Inc.), in an effort to increase its leasing business. Through TIFS, the Company can directly provide its customers with leasing alternatives. Increased leasing operations could impact one or more of total net sales and revenues, gross margin, operating income, net income, total debt and liquidity, depending on the amount of leasing activity and the types of leasing transactions. However, the impact of any increased leasing operations for fiscal 1997 was not material. On November 5, 1997, TIFS executed a $20.0 million collateral based recourse loan facility ( "Recourse Facility" ) with The Fifth Third Bank of Northern Kentucky, Inc. ( "Fifth Third" ). The loan, which is guaranteed by the Company, will be used to fund all lease transactions financed on a recourse basis and will expire on October 1, 1998. The Recourse Facility will carry a variable interest rate based on (i) Fifth Third's prime rate less an incentive pricing spread (the "Incentive Pricing Spread" ) or (ii) Treasury notes plus the Incentive Pricing Spread, at the Company's election.
The Company completed a secondary public offering of its stock on February 28, 1997. Net proceeds to the Company were approximately $23.3 million from the issuance of 1.02 million shares of common stock. The proceeds were used to reduce amounts outstanding under its line of credit.
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, shares of its Common Stock and seller financing. The Company anticipates that any future acquisitions will be financed in a similar manner.
OTHER
The Company is heavily dependent upon complex computer systems for all phases of its operations, which include sales and distribution. The Company began addressing the affect of the Year 2000 compliance issue in 1996.The Year 2000 date issue arises from the fact that many computer programs use only two digits to identify a year in a date field. The Company has completed an assessment of its own systems and determined that its principle systems are Year 2000 compliant. Management does not expect that any costs associated with the Company becoming Year 2000 compliant will have a material adverse impact on the Company's financial position, results of operations or cash flows. The Company is continuing to assess the Year 2000 issue with respect to its customers and suppliers. The Company could be adversely impacted by the Year 2000 date issue if its suppliers, customers and other businesses do not address this issue successfully. Management continues to assess these risks in order to be able to respond in a manner which would reduce any impact on the Company.
Item 8. Financial Statements and Supplementary Data Registrant hereby incorporates the financial information required by this item by reference to Item 14 hereof.
Item 9. Disagreements on Accounting and Financial Disclosure
None
PART III
Items 10-13.
The Registrant hereby incorporates the information required by Form 10-K, Items 10-13 by reference to the Company's definitive proxy statement for its 1998 Annual Meeting of shareholders which will be filed with the Commission prior to May 5, 1998. PART IV Item. 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K - Index
(a) The following documents are filed as a part of this report:
1997 Form 10-K Page _________ 1. Financial Statements:
Independent Auditor's Report
Consolidated Balance Sheets, January 5, 1997 and January 5, 1998 to
For each of the three fiscal years in the period ended January 5, 1998:
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to Consolidated Financial to F-xx Statements
2. Financial Statement Schedules:
None
Filed Herewith (page #) or Incorporated by Reference to: ________________
3. Exhibits ________ 3(a) Certificate of Incorporation Exhibit 3(a) of the Company of Company's Form S-1 filed Feb. 14, 1992
3(b) Bylaws of the Company Exhibit 3(b) of Company's Form S-1 filed Feb. 14, 1992
4 Rights Agreement between the Exhibit 4 of Company and The Fifth Third Company's Form Bank, as Rights Agent dated 8-K filed March as of February 23,1998 xx, xxxx
10(i) Material Agreements
(a)(1) Loan Agreement between Star Exhibit Bank, NA and the Company 10(i)(a)(1) of dated November 19, 1992 Company's Form 10-K filed March 31, 1993
(a)(2) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(2) of December 16, 1992 by and Company's Form among Star Bank, NA, the 10-K filed March Company and C&N Corp. 31, 1993
(a)(3) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(3) of March 12, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994
(a)(4) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(4) of April 30, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994
(a)(5) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(5) of June 30, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994
(a)(6) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(6) of August 5, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994
(a)(7) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(7) of November 29, 1993 by and Company's Form among Star Bank, N.A., the 10-K filed April Company and C&N Corp. 7, 1994
(a)(8) Amendment to Loan Agreement Exhibit by Letter Agreement dated May 10(i)(a)(8) of 6, 1994 by and among Star Company's Form Bank, N.A., the Company and 10-K filed April C&N Corp. 4, 1995
(a)(9) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(9) of November 3, 1994 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 4, 1995
(a)(10) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(10) of November 8, 1994 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 4, 1995 (a)(11) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(11) of November 30, 1994 by and Company's Form among Star Bank, N.A., the 10-K filed April Company and C&N Corp. 4, 1995
(a)(12) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(12) of January 30, 1995 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 4, 1995
(a)(13) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(13) of March 31, 1995 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed May C&N Corp. and Xenas 18, 1995 Communications Corp.
(a)(14) Amendment to Loan Agreement Exhibit by Letter Agreement date May 10(i)(a)(14) of 31, 1995 by and among Star Company's Form Bank, N.A., the Company, C&N 10-Q filed Corp. and Xenas August 18,1995 Communications Corp.
(a)(15) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(15) of October 19,1995 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed C&N Corp. and Xenas November 17, Communications Corp. 1995
(a)(16) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(16) of December 18,1995 by and among Company's Form Star Bank, N.A., the Company, 10-K filed April C&N Corp. and Xenas 4, 1996 Communications Corp. (a)(17) Amended and Restated Loan Exhibit Agreement dated March 14, 10(i)(a)(17) of 1996 by and between Star Company's Form Bank, N.A., the Company, C&N S-1 filed June Corp., Xenas Communications 4, 1996 Corp. and Pomeroy Computer Leasing Company, Inc.
(a)(18) Letter Agreement and Exhibit Promissory Note dated June 10(i)(a)(18) of 12, 1996 by and among Star Company's Form Bank, N.A., the Company, C&N 10-Q filed Corp. and Xenas August 15, 1996 Communications Corp.
(a)(19) Waiver Letter dated June 20, Exhibit 1996 by and among Star Bank, 10(i)(a)(19) of N.A., the Company, C&N Corp. Company's Form and Xenas Communications 10-Q filed Corp. August 15, 1996
(a)(20) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(20) of June 21, 1996 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed C&N Corp. and Xenas August 15, 1996 Communications Corp.
(a)(21) Amendment to Loan Agreement Exhibit 10.1 of by Letter Agreement dated Company's Form June 27, 1996 by and among S-3 filed Star Bank, N.A., the Company, January 3, 1997 C&N Corp. and Xenas Communications Corp.
(a)(22) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(22) of October 18, 1996 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed C&N Corp. and Xenas November 19, Communications Corp. 1996
(a)(23) Amendment to Loan Agreement Exhibit 10.2 of by Letter Agreement dated Company's Form December 20, 1996 by and S-3 filed among Star Bank, N.A., the January 3, 1997 Company, C&N Corp., Xenas Communications Corp. and Pomeroy Computer Leasing Company, Inc.
(a)(24) Promissory Note dated April Exhibit 30, 1997 by and among Star 10(i)(a)(24) of Bank, N.A., the Company, Company's Form Pomeroy Computer Leasing 10-Q filed Company, Inc. and Xenas August 11, 1997 Communications Corp.
(b)(1) Agreement for Wholesale Exhibit Financing (Security 10(i)(b)(1) of Agreement) between IBM Credit Company's Form Corporation and the Company 10-K filed April dated April 2, 1992 7, 1994
(b)(2) Addendum to Agreement for Exhibit Wholesale Financing between 10(i)(b)(2) of IBM Credit Corporation and Company's Form the Company dated July 7, 10-K filed April 1993 7, 1994
(c)(1) Agreement for Wholesale Exhibit Financing (Security 10(i)(c)(1) of Agreement) between ITT Company's Form Commercial Finance 10-K filed April Corporation and the Company 7, 1994 dated March 27, 1992
(c)(2) Addendum to Agreement for Exhibit Wholesale Financing between 10(i)(c)(2) of ITT Commercial Finance Company's Form Corporation and the Company 10-K filed April dated July 7, 1993 7, 1994
(c)(3) Amendment to Agreement for Exhibit Wholesale Financing between 10(i)(c)(3) of Deutsche Financial Services Company's Form f/k/a ITT Commercial Finance 10-Q filed May Corporation and the Company 18, 1995 dated May 5, 1995.
(d)(1) Asset Purchase Agreement Exhibit 10(i)(z) among the Company; TCSS; and of Company's Richard Feaster, Victoria Form 8-K dated Feaster, Harry Feaster, March 14, 1996 Carolyn Feaster, Victoria Feaster, trustee of the Emily Patricia Feaster Trust, and Victoria Feaster, as trustee of the Nicole Ann Feaster Trust dated March 14, 1996
(d)(2) Lease between the Company and Exhibit 10.48 of TCSS dated March 15, 1996 Company's Form S-1 filed June 4, 1996 (d)(3) Lease between Arthur K. Jones Exhibit 10.49 of Trust, Firststar Bank Des Company's Form Moines, N.A., and William A. S-1 filed June Jones, Trustees, and The 4, 1996 Computer Supply Store, Inc. dated July 1, 1994 (assigned to the Company effective as of March 14, 1996)
(d)(4) Registration Rights Agreement Exhibit 10.50 of between the Company and TCSS Company's Form dated March 14, 1996 S-1 filed June 4, 1996
(d)(5) Employment Agreement between Exhibit 10.51 of the Company and Richard Company's Form Feaster dated March 14, 1996 S-1 filed June 4, 1996 (d)(6) Employment Agreement between Exhibit 10.52 of the Company and Victoria Company's Form Feaster dated March 14, 1996 S-1 filed June 4, 1996
(e)(1) IBM Agreement for Authorized Exhibit Dealers 10(i)(e)(1) and Industry Remarketers with of Company's the Company, dated September 3, Form S-1 filed Feb. 14, 1992
(e)(2) Schedule of Substantially Exhibit 10(i)(e)(2) Identical IBM Agreements for of Company's Authorized Dealers and Form S-1 filed Industry Remarketers Feb. 14, 1992
(f) Compaq Computer Corporation Exhibit 10(i)(f) United States Dealer Agreement with of Company's the Company, dated September 27, Form S-1 filed Feb. 14, 1992
(g) Dealer Sales Agreement Exhibit 10(i)(g) between Apple Computer, Inc. and the of Company's Company, dated April 1, 1991 Form S-1 filed Feb. 14, 1992
(h) Lease between Sydney A. Warm Exhibit 10(i)(h) and the Company for 1021 West Eighth of Company's Street, Cincinnati, OH, dated May Form S-1 filed 15, 1990 Feb. 14, 1992
(i) Lease between F.G.&H. Exhibit 10(i)(i) Partnership and the Company for 908 of Company's DuPont Road, Louisville, KY, dated May 9, Form S-1 filed Feb. 14, 1992
(j)(1) Purchase Agreement between Exhibit 10.86 of the Company and First of Company's Form Michigan Corporation dated S-1 filed June March 28, 1996 4, 1996
(j)(2) Purchase Agreement between Exhibit 10.87 of the Company and John C. Company's Form Donnelly dated March 28, 1996 S-1 filed June 4, 1996
(j)(3) Purchase Agreement between Exhibit 10.88 of the Company and Dan B. French Company's Form dated March 28, 1996 S-1 filed June 4, 1996
(j)(4) Purchase Agreement between Exhibit 10.89 of the Company and James C. Company's Form Penman dated March 28, 1996 S-1 filed June 4, 1996
(k)(1) Lease between Industrial Exhibit Developments International, 10(i)(k)(1) of Inc., and the Company for Company's Form 1840 Airport Exchange Blvd., 10-K filed March Suite 240, Erlanger, KY dated 31, 1993 November 2, 1992
(k)(2) Amendment to lease between Exhibit Industrial Developments 10(i)(k)(2) of International, Inc., and the Company's Form Company for 1840 Airport 10-K filed March Exchange Blvd., Suite 240, 31, 1993 Erlanger, KY dated December 31, 1992
(k)(3) Lease between Industrial Exhibit Developments International, 10(i)(k)(3) of Inc., and the Company for Company's Form 1850 Airport Exchange Blvd., 10-K filed March Suite 600, Erlanger, KY dated 31, 1993 November 2, 1992
(k)(4) Amendment to lease between Exhibit Industrial Developments 10(i)(k)(4) of International, Inc., and the Company's Form Company for 1850 Airport 10-K filed March Exchange Blvd., Suite 600, 31, 1993 Erlanger, KY dated December 31, 1992
(l) Covenant not to Compete Exhibit between the Company and 10(i)(l)(2) of Richard C. Mills dated July Company's Form 7, 1993 10-K filed April 7, 1994
(m)(1) Asset Purchase Agreement Exhibit 10.5 of among the Company, AA Company's Form Microsystems, Inc. and Stuart S-3 filed Raburn dated August 2, 1996 January 3, 1997
(m)(2) Promissory Note dated August Exhibit 10.6 of 2, 1996 of the Company in Company's Form favor of AA Microsystems, S-3 filed Inc. January 3, 1997
(n)(1) Lease between Crown Exhibit 10(i)(n) Development Group and the of Company's Company for 3740 St. Johns Form 10-K filed Bluff Road, Suite 19, March 31, 1993 Jacksonville, FL dated September 17, 1992
(n)(2) Amendment to Lease between Exhibit Crown Development Group and 10(i)(n(2 of the Company for 3740 St. Company's Form Johns Bluff Road, Suite 19, 10-K filed April Jacksonville, FL dated 4, 1996 December 11, 1995
(o) Lease between Lincoln Exhibit 10(i)(o) National Investment of Company's Management Company and the Form 10-K filed Company for Suite 150F in the March 31, 1993 Terraces on Market Place Blvd., Knoxville, TN dated September 30, 1992
(p)(1) Remarketing and Agency Exhibit Agreement (the "Remarketing 10(i)(p)(1) of Agreement") between Company's Form Information Leasing S-1 filed Feb. Corporation and the Company 14, 1992 dated January 7, 1990
(p)(2) Amendment No. 1 to the Exhibit Remarketing Agreement dated 10(i)(p)(2) of November 12, 1991 Company's Form S-1 filed Feb. 14, 1992
(p)(3) Letter, dated February 2, Exhibit 1994, extending term of 10(i)(p)(3) of Remarketing Agreement to May Company's Form 1, 1996 10-K filed April 4, 1996
(p)(4) Amendment No. 2 to the Exhibit Remarketing Agreement dated 10(i)(p)(4) of October 10, 1995 Company's Form 10-K filed April 4, 1996
(q) Lease between Athens Exhibit 10(i)(q) Properties and the Company of Company's for Crosspark Drive, Form 10-K filed Knoxville, TN dated October April 4, 1996 31, 1995
(r)(1) Asset Purchase Agreement Exhibit 10.7 of among the Company, Company's Form Communications Technology, S-3 filed Inc. d/b/a DILAN and Robert January 3, 1997 Martin dated October 11, 1996
(r)(2) Subordinated Promissory Note Exhibit 10.8 of dated October 11, 1996 of the Company's Form Company in favor of S-3 filed Communications Technology, January 3, 1997 Inc.
(r)(3) Subordination Agreement among Exhibit 10.9 of the Company, Communications Company's Form Technology, Inc. and Star S-3 filed Bank, N.A. dated October 11, January 3, 1997
(s) Services Agreement between Exhibit 10.13 of the Company and Nationwide Company's Form Mutual Insurance and the S-3 filed Company dated December 11, January 3, 1997
(t1) Asset Purchase Agreement Exhibit among the Company and Magic 10(i)(t)(1) of Box, Inc. dared June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(2) Employment Agreement between Exhibit the Company and Israel Fintz, 10(i)(t)(2) of dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(3) Incentive Deferred Exhibit Compensation Agreement 10(i)(t)(3) of between the Company and Company's Form Israel Fintz, dated June 26, 10-Q filed 1997 August 11, 1997
(t)(4) Employment Agreement between Exhibit the Company and Allison 10(i)(t)(4) of Sokol, dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(5) Incentive Deferred Exhibit Compensation Agreement 10(i)(t)(5) of between the Company and Company's Form Allison Sokol, dated June 26, 10-Q filed 1997 August 11, 1997
(t)(6) Power of Attorney given to Exhibit the Company by Magic Box, 10(i)(t)(6) of Inc. for the collection of Company's Form Accounts Receivable, dated 10-Q filed June 26, 1997 August 11, 1997
(t)(7) Agreement for the Assumption Exhibit of Liabilities between the 10(i)(t)(7) of Company and Magic Box, Inc. Company's Form 10-Q filed August 11, 1997 (t)(8) Subordination Agreement by Exhibit and among the Company, Magic 10(i)(t)(8) of Box, Inc. and Star Bank, Company's Form N.A., dated June 26, 1997 10-Q filed August 11, 1997
(t)(9) Subordinated Promissory Note Exhibit between the Company and 10(i)(t)(9) of Israel Fintz, dated June 26, Company's Form 1997 10-Q filed August 11, 1997
(t)(10) Subordinated Promissory Note Exhibit between the Company and 10(i)(t)(10) of Allison Sokol, dated June 26, Company's Form 1997 10-Q filed August 11, 1997
(t)(11) Subordinated Promissory Note Exhibit between the Company and 10(i)(t)(11) of Marvin Rosen, dated June 26, Company's Form 1997 10-Q filed August 11, 1997
(t)(12) Subordinated Promissory Note Exhibit between the Company and M. 10(i)(t)(12) of Ronald Krongold, dated June Company's Form 26, 1997 10-Q filed August 11, 1997 (t)(13) General Bill of Sale between Exhibit the Company and Magic Box, 10(i)(t)(13) of Inc., dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(14) Non Compete Agreement between Exhibit the Company and Israel Fintz, 10(i)(t)(14) of dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(15) Non Compete Agreement between Exhibit the Company and Allison 10(i)(t)(15) of Sokol, dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(16) Non Compete Agreement between Exhibit the Company and Marvin Rosen, 10(i)(t)(16) of dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(17) Non Compete Agreement between Exhibit the Company and M. Ronald 10(i)(t)(17) of Krongold, dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(18) Non Compete Agreement between Exhibit the Company and Magic Box, 10(i)(t)(18) of Inc., dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(u) Lease between NWI Airpark Exhibit 10(i)(u) L.P. and the Company for 717 of Company's Airpark Center Drive, Form 10-K filed Nashville, TN dated February April 4, 1995 24, 1994
(v)(1) Promissory Note dated May 30, Exhibit 1997 by and among Star Bank, 10(i)(v)(1) of N.A., the Company and Pomeroy Company's Form Computer Leasing Company, 10-Q filed Inc. August 11, 1997
(v)(2) Loan Agreement dated October E-1 to E - 53 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc. (v)(3) Guarantor Agreement dated E-54 October 31,1997 between Pomeroy Computer Resoucres, Inc and The Fifth Third Bank of Northern Kentucky, Inc.
(v)(4) Addendum 1 to Guarantor E-55 to E-57 Agreement dated October 31,1997 between Pomeroy Computer Resoucres, Inc and The Fifth Third Bank of Northern Kentucky, Inc.
(v)(5) Assignment Agreement between E-58 to E-60 dated October 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc.
(v)(6) Incumbency and Authorization E-61 Agreement dated October 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc.
(v)(7) Draw Facility Note dated E-62 to E-67 October 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc.
(v)(8) Revolving Credit Note dated E-68 to E72 October 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc.
(v)(9) Security Agreement dated E-73 to E-95 October 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc.
(w)(1) Non Compete Agreement between Exhibit the Company and Microcare 10(i)(w)(1) of Computer Services, Inc., Company's Form dated July 24, 1997 10-Q filed November 10,
(w)(2) Non Compete Agreement between Exhibit the Company and Microcare, 10(i)(w)(2) of Inc., dated July 24, 1997 Company's Form 10-Q filed November 10,
(w)(3) Assignment and Assumption Exhibit Agreement between the 10(i)(w)(3) of Company, and Microcare Company's Form Computer Services, Inc., and 10-Q filed Microcare Inc., dated July November 10, 24, 1997 1997
(w)(4) Assumption of Liabilities Exhibit Agreement between the 10(i)(w)(4) of Company, and Microcare Company's Form Computer Services, Inc., and 10-Q filed Microcare Inc., dated July November 10, 24, 1997 1997
(w)(5) Non Compete Agreement between Exhibit the Company, and Robert L. 10(i)(w)(5) of Versprille, dated July 24, Company's Form 1997 10-Q filed November 10,
(w)(6) Consent for Use of Similar Exhibit Name between the Company and 10(i)(w)(6) of Microcare, Inc., dated July Company's Form 24, 1997 10-Q filed November 10,
(w)(7) Subordination Agreement Exhibit between the Company, and 10(i)(w)(7) of Microcare Computer Services, Company's Form Inc., and Star Bank, N.A., 10-Q filed dated July 24, 1997 November 10,
(w)(8) Subordinated Promissory Note Exhibit between the Company and 10(i)(w)(8) of Microcare Computer Services, Company's Form Inc., dated July 24, 1997 10-Q filed November 10,
(w)(9) Registration Rights Agreement Exhibit between the Company and 10(i)(w)(9) of Microcare Computer Services, Company's Form Inc., dated July 24, 1997 10-Q filed November 10,
(w)(10) General Bill of Sale and Exhibit Assignment between the 10(i)(w)(10) of Company and Microcare Company's Form Computer Services, Inc., 10-Q filed dated July 24, 1997 November 10,
(w)(11) General Bill of Sale and Exhibit Assignment between the 10(i)(w)(11) of Company and Microcare, Inc., Company's Form dated June 24, 1997 10-Q filed November 10,
(w)(12) Asset Purchase Agreement Exhibit between the Company, and 10(i)(w)(12) of Microcare Computer Services, Company's Form Inc., Microcare Inc., and 10-Q filed Robert L. Versprille dated November 10, July 24, 1997 1997
(w)(13) Employment Agreement between Exhibit the Company and Robert L. 10(i)(w)(13) of Versprille, dated July 24, Company's Form 1997 10-Q filed November 10,
(x) Lease between the Company and Exhibit 10(i)(x) Pomeroy Investments, LLC for of Company's buildings at Airpark Form 10-Q filed International dated September November 17, 5, 1995 1995
(y) Lease between the Company and Exhibit 10(i)(y) New England Mutual Life of Company's Insurance Company for Form 10-Q filed building at Lexington November 17, Business Center dated October 1995 4, 1995
(z)(1) Asset Purchase Agreement Exhibit between the Company and 10(i)(z)(1) of Cabling Unlimited, Inc. dated Company's Form October 13, 1995 10-K filed April 4, 1996
(z)(2) Agreement between Cabling Exhibit Unlimited, Inc. and the 10(i)(z)(2) of Company dated October 13, Company's Form 1995 10-K filed April 4, 1996
(z)(3) Agreement between Karen Exhibit Epperson and the Company 10(i)(z)(3) of dated October 13, 1995 Company's Form 10-K filed April 4, 1996
(z)(4) Employment Agreement between Exhibit Karen Epperson and the 10(i)(z)(4) of Company dated October 13, Company's Form 1995 10-K filed April 4, 1996
(z)(5) Assumption of Liabilities Exhibit between Cabling Unlimited, 10(i)(z)(5) of Inc. and the Company dated Company's Form October 13, 1995 10-K filed April 4, 1996
(aa) Lease between Gleeson, Inc. Exhibit and the Company for 115 10(i)(aa) of Wiltshire Ave., Louisville, Company's Form KY dated May 10, 1995 10-K filed April (assigned to the Company 4, 1996 effective October 13, 1995)
(bb) Columbia/HCA Agreement Exhibit between Columbia/HCA 10(i)(bb) of Information Services, Inc. Company's Form and the Company dated 10-K filed April December 12, 1995 4, 1996
(cc)(1) Plan of Reorganization dated E-96 to E-137 October 17,1997 between Pomeroy Computer Resources of South Carolina and The Computer Store, Inc.
(cc)(2) Plan of Merger dated October E-138 to E142 17,1997 between Pomeroy Computer Resources of South Carolina and The Computer Store, Inc.
(cc)(3) Articles of Merger dated E-143 to E-145 October 17,1997 between Pomeroy Computer Resources of South Carolina and The Computer Store, Inc.
(cc)(4) Employment Agreement dated E-146 to E-153 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Jeffrey F. Hipp
(cc)(5) Employment Agreement dated E-154 to E-163 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Ronald D. Hildreth
(cc)(6) Employment Agreement dated E-164 to E-172 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Authur M. Cox
(cc)(7) Guarnaty of Employment E-173 to E-175 Agreement dated October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Authur M. Cox
(cc)(8) Guarnaty of Employment E-176 to E-178 Agreement dated October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Ronald D. Hildreth
(cc)(9) Guarnaty of Employment E-179 to E-181 Agreement dated October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Jeffery F. Hipp
(cc)(10)Non-Compete Agreement dated E-182 to E-186 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Authur M. Cox
(cc)(11)Non-Compete Agreement dated E-187 to E-191 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Ronald D. Hildreth
(cc)(12)Non-Compete Agreement dated E-192 to E-196 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Jeffrey F. Hipp
(cc)(13)Investor's Certificate dated E-197 to E-199 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Jeffrey F. Hipp
(cc)(14)Investor's Certificate dated E-200 to E-202 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Ronald D. Hildreth
(cc)(15)Investor's Certificate dated E-203 to E-205 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Authur M. Cox
(cc)(16)Escrow Agreement dated E-206 to E-212 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc., Authur M. Cox, Ronald D. Hildreth, and Jeffrey F. Hipp
(cc)(17)Opinion Letter on Plan of E-213 to E-215 Merger dated October 17,1997 between Pomeroy Computer Resources of South Carolina and The Computer Store, Inc.
10(iii) Material Employee Benefit and Other Agreements
(a)(1) Employment Agreement between Exhibit the Company 10(iii)(a) and David B. Pomeroy, dated of Company's March 12, 1992 Form S-1 filed Feb. 14, 1992
(a)(2) First Amendment to Employment Exhibit Agreement between the Company 10(iii)(a)(2) of and David B. Pomeroy Company's Form effective July 6, 1993 10-K filed April 7, 1994
(a)(3) Second Amendment to Exhibit Employment Agreement between 10(iii)(a)(3) of the Company and David B. Company's Form Pomeroy dated October 14, 10-K filed April 1993 7, 1994
(a)(4) Agreement between the Company Exhibit and David B. Pomeroy related 10(iii)(a)(4) of to the personal guarantee of Company's Form the Datago agreement by David 10-K filed April B. Pomeroy and his spouse 7, 1994 effective July 6, 1993
(a)(5) Third Amendment to Exhibit Employment Agreement between 10(iii)(a)(5) of the Company and David B. Company's Form Pomeroy effective January 6, 10-Q filed 1995 November 17,
(a)(6) Supplemental Executive Exhibit Compensation Agreement 10(iii)(a)(6) of between the Company and David Company's Form B. Pomeroy effective January 10-Q filed 6, 1995 November 17,
(a)(7) Collateral Assignment Split Exhibit Dollar Agreement between the 10(iii)(a)(7) of Company; Edwin S. Weinstein, Company's Form as Trustee; and David B. 10-Q filed Pomeroy dated June 28, 1995 November 17,1995
(a)(8) Fourth Amendment to Exhibit Employment Agreement between 10(iii)(a)(8) of the Company and David B. Company's Form Pomeroy dated December 20, 10-Q filed May 1995, effective January 6, 17, 1996
(a)(9) Fifth Amendment to Exhibit Employment Agreement between 10(iii)(a)(9) of the Company and David B. Company's Form Pomeroy effective January 6, 10-Q filed May 1996 17, 1996
(a)(10) Sixth Amendment to Exhibit 10.10 of Employment Agreement between Company's Form the Company and David B. S-3 filed Pomeroy effective January 6, January 3, 1997
(a)(11) Award Agreement between the Exhibit 10.11 of Company and David B. Pomeroy Company's Form effective January 6, 1997 S-3 filed January 3, 1997
(a)(12) Registration Rights Agreement Exhibit 10.12 of between the Company and David Company's Form B. Pomeroy effective January S-3 filed 6, 1997 January 3, 1997
(b) Employment Agreement between Exhibit the Company and Edwin S. 10(iii)(c) of Weinstein dated February 13, Company's Form 1992 S-1 filed Feb. 14, 1992
(c)(1) Employment Agreement between Exhibit the Company and Victor Eilau 10(iii)(c)(1) of dated July 6, 1997 Company's Form 10-Q filed August 11, 1997
(c)(2) Performance Share Right Exhibit Agreement between the Company 10(iii)(c)(2) of and Victor Eilau dated July Company's Form 6, 1997 10-Q filed August 11, 1997
(d) The Company Savings 401(k) Exhibit Plan, 10(iii)(d) effective July 1, 1991 of Company's Form S-1 filed Feb. 14, 1992
(e) The Company's Employee Stock Exhibit Ownership Plan and Trust, 10(iii)(e) of effective July 1, 1992 Company's Form 10-K filed March 31, 1993
(f) The Company's 1992 Non- Exhibit Qualified 10(iii)(f) and Incentive Stock Option of Company's Plan, dated February 13, 1992 Form S-1 filed February 14,
(g) The Company's 1992 Outside Exhibit Directors 10(iii)(g) Stock Option Plan, dated of Company's February 13, 1992 Form S-1 filed Feb. 14, 1992
(h) Employment Agreement between Exhibit the Company and Richard C. 10(iii)(h) of Mills dated July 7, 1993 Company's Form 10-K filed April 7, 1994
(I) Employment Agreement between Exhibit 10.64 of the Company and James Eck Company's Form dated February 6, 1996, and S-1 filed June effective as of September 18, 4, 1996
(j)(1) Employment Agreement between Exhibit 10.3 of the Company and Stephen E. Company's Form Pomeroy dated November 13, S-3 filed 1996 January 3, 1997
(j)(2) Incentive Deferred Exhibit 10.4 of Compensation Agreement Company's Form between the Company and S-3 filed Stephen E. Pomeroy dated January 3, 1997 November 13, 1996
11 Computation of Per Share E-216 Earnings
21 Subsidiaries of the Company E-217
27 Financial Data Schedule E-218 to E-219
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ David B. Pomeroy
David B. Pomeroy Chairman of the Board, President and Chief Executive Officer
By: /s/ Stephen E. Pomeroy
Stephen E. Pomeroy Chief Financial Officer and Chief Accounting Officer
Dated: April 5, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature and Title Date ___________________ ____
By: /s/ David B. Pomery April 5, 1998 ___________________________
David B. Pomeroy, Director
By: /s/ Stephen E. Pomeroy April 5, 1998 ___________________________
Stephen E. Pomeroy, Director
By: /s/ James H. Smith April 5, 1998 ___________________________ James H. Smith III, Director By: ___________________________ Dr. David W. Rosenthal, Director
By: ___________________________ Michael E. Rohrkemper, Director
By: ___________________________ Kenneth E. Waters, Director
By: /s/ Richard C. Mills April 5, 1998 ___________________________ Richard C. Mills, Director
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders Pomeroy Computer Resources, Inc.
We have audited the accompanying consolidated balance sheets of Pomeroy Computer Resources, Inc. as of January 5, 1997 and 1998, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended January 5, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pomeroy Computer Resources, Inc. at January 5, 1997 and 1998, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended January 5, 1998 in conformity with generally accepted accounting principles.
Grant Thornton LLP
Cincinnati, Ohio February 6, 1998, except for Note 18 as to which the date is March 6, 1998
F - 2
F - 3
F - 4
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 5, 1996, JANUARY 5, 1997 AND JANUARY 5, 1998
1. Company Description Pomeroy Computer Resources, Inc. (the "Company" ) was organized in February 1992 to consolidate and reorganize predecessor companies. Since the owner of the Company and the predecessor businesses were the same, this transaction constituted a combination of the predecessor businesses under common control and was accounted for at historical cost in a manner similar to that followed for a pooling of interests. The Company has 15 million shares of $.01 par value common stock authorized, with 11.4 million shares outstanding. The Company is also authorized to issue 2 million shares of $.01 par value preferred stock. In fiscal 1995 the Company formed a wholly-owned subsidiary, Technology Integration Financial Services, Inc. ( "TIFS") (f/k/a - Pomeroy Computer Leasing Company, Inc. ( "PCL")), for the purpose of leasing computer equipment to the Company's customers. In fiscal 1997 the Company formed a wholly-owned subsidiary, Pomeroy Computer Resources of South Carolina, Inc. ( "PCR-SC") for the purpose of acquiring The Computer Store ( "TCS" ) , a computer reseller and service provider located in Columbia, South Carolina.
The Company sells, installs and services microcomputers and microcomputer equipment primarily for commercial, health care, governmental, financial and educational customers. The Company also derives revenue from customer support services, including network analysis and design, systems configuration, cabling, custom installation, training, maintenance and repair. The Company has twenty regional offices in Kentucky, Ohio, Indiana, Tennessee, Florida, Alabama, Iowa, West Virginia, North Carolina and South Carolina, and grants credit to substantially all customers in these areas.
2. Summary of Significant Accounting Policies Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Xenas Communication Corp., TIFS, and PCR-SC. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 1996 financial statements included herein to conform with the presentation used in 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Fiscal Year - The Company's fiscal year is a 12- month period ending January 5. References to fiscal 1995, 1996 and 1997 are for the fiscal years ended January 5, 1996, January 5, 1997 and January 5, 1998, respectively.
Goodwill and Other Intangible Assets - Goodwill is amortized using the straight-line method over periods of fifteen to twenty-five years. In accordance with SFAS No. 121, "Accounting for The Impairment of Long-Lived Assets", the Company evaluates its goodwill on an ongoing basis to determine potential impairment by comparing the carrying value to the undiscounted estimated expected future cash flows of the related assets. Other intangible assets are amortized using the straight-line method over periods up to ten years.
Equipment and Leasehold Improvements - Equipment and leasehold improvements are stated at cost. Depreciation on equipment is computed using the straight-line method over estimated useful lives. Depreciation on leasehold improvements is computed using the straight-line method over estimated useful lives or the term of the lease, whichever is less. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in the results of operations.
Income Taxes - Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Vendor Incentive Rebates - Certain vendors provide incentive rebates to perform product training, advertising and other sales and market development activities. The Company recognizes these rebates when it has completed its obligation to perform under the specific incentive arrangement. Incentive rebates are recorded as reductions of selling, general and administrative expense or, if volume based, cost of sales.
Inventories - Inventories are stated at the lower of cost or market. Cost is determined by the average cost method.
Revenue Recognition - The Company recognizes revenue on the sale of equipment and supplies when the products are shipped. Service revenue is recognized when the applicable services are provided.
Deferred Revenue - Revenues received on maintenance contracts are recognized ratably over the lives of the contracts. Costs related to maintenance contracts are recognized when incurred.
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. This had no material effect on the results of operations or financial position of the Company.
Earnings per Common Share - The computation of basic earnings per common share is based upon the weighted average number of common shares outstanding during the period. Diluted earnings per common share is based upon the weighted average number of common shares outstanding during the period plus, in periods in which they have a dilutive effect, the effect of common shares contingently issuable, primarily from stock options.
In the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 changed the computation, presentation and disclosure requirements for earnings per share ("EPS") . Under SFAS 128, EPS is presented as basic earnings per share ( "basic EPS" ) and diluted earnings per share ( "diluted EPS" ) and replaces the presentation of primary EPS and fully diluted EPS. The adoption of SFAS 128 resulted in the restatement of earnings per share for all periods presented in the Company's consolidated financial statements.
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) 1995 1996 1997 ______________ _____________ _____________ Per Share Per Share Per Share Shares Amount Shares Amount Shares Amount Basic EPS 5,660 $ 0.77 7,834 $ 0.80 11,052 $ 1.48 Effect of dilutive stock options 332 (0.44) 272 (0.03) 315 (0.04) Contingent shares 25 - - - - - ______ ______ _____ ______ ______ ______ Diluted EPS 6,007 $ 0.73 8,106 $ 0.77 11,367 $ 1.44
Use of Estimates in Financial Statements - In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value Disclosures - The fair value of financial instruments approximates carrying value.
New Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ( "SFAS No. 130" ) with an effective date for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting of comprehensive income in a company's financial statements. Comprehensive income includes all changes in a company's equity during the period that result from transactions and other economic events other than transactions with its stockholders.
In the fourth quarter of 1997, the Company elected to early adopt SFAS No. 130 retroactive to January 6, 1997. The adoption of SFAS No. 130 did not affect the financial reporting in the accompanying consolidated financial statements because the Company does not presently have any comprehensive income other than net income.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ( "SFAS No. 131" ) with an effective date for fiscal years beginning after December 15, 1997. A reportable segment, referred to as an operating segment, is a component of an entity about which separate financial information is produced internally, that is evaluated by the chief operating decision-maker to assess performance and allocate resources. The Company does not presently believe that it operates in more than one identifiable segment.
3. Accounts Receivable The following table summarizes the activity in the allowance for doubtful accounts for fiscal 1995, 1996 and (in thousands) Trade Other __________ __________ Balance January 5, 1995 $ 65 $ 225 Provision 1995 94 417 Accounts written-off (89) (444) Recoveries 131 12 __________ __________ Balance January 5, 1996 201 210 Provision 1996 250 31 Accounts written-off (249) (604) Recoveries 170 500 __________ __________ Balance January 5, 1997 372 137 Provision 1997 125 200 Accounts written-off (601) (415) Recoveries 459 301 __________ __________ Balance January 5, 1998 $ 355 $ 223
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. Inventories
Inventories consist of items held for resale and are comprised of the following components as of the end of fiscal:
(in thousands) 1996 1997 _________ _________ Equipment and supplies $ 21,730 $ 36,265 Service parts 1,696 2,895 _________ _________ Total $ 23,426 $ 39,160
5. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following as of the end of the fiscal year, net of accumulated amortization of $984 thousand (1996) and $1,826 thousand (1997), respectively:
(in thousands) 1996 1997 __________ ___________ Goodwill $ 8,698 $ 12,159 Covenants not to compete 208 61 Customer lists 529 477 __________ ___________ $ 9,435 $ 12,697
As a result of its litigation with Vanstar Corporation, the Company in fiscal 1994 wrote-off unamortized costs in the amount of $251 thousand related to its agreement with Vanstar which are included in amortization expense. On April 29, 1996 the Company and Vanstar entered into a settlement agreement which in effect terminated all agreements between the parties.
In 1993, the Company acquired certain assets, principally customer lists, of a computer reseller in Louisville, Kentucky. Also, the Company entered into a five year covenant not to compete with the reseller and its owners. Amounts paid to the reseller for these intangibles were $194 thousand for customer lists and $241 thousand for the covenant not to compete. The Company entered into an additional covenant not to compete with a former owner of the reseller whereby the Company paid a total of $277 thousand in two installments during 1994 and 1995.
In fiscal 1996, the Company acquired certain assets of The Computer Supply Store, Inc. ("TCSS") a privately held computer reseller located in Des Moines, Iowa, AA Microsystems, Inc. ("AA Micro"), a network service provider located in Birmingham, Alabama, and Communications Technology, Inc. ( "DILAN" ), a privately held network integrator located in Hickory, North Carolina (See Note 12). The Company recorded $5.7 million, $0.4 million and $2.5 million of goodwill in connection with those acquisitions, respectively.
In fiscal 1997, the Company acquired certain assets of Magic Box, Inc. ( "Magic Box" ) , a privately held network integrator located in Miami, Florida, and Micro Care, Inc. ( "Micro Care" ), a privately held systems integrator located in Indianapolis, Indiana. A wholly owned subsidiary of the Company, Pomeroy Computer Resources of South Carolina, Inc., acquired all the assets and liabilities of The Computer Store Inc., a network integrator located in Columbia, South Carolina. The Company recorded $1.7 million, $1.9 million and $0.4 million in connection with those acquisitions, respectively. 6. Borrowing Arrangements
The Company has an available line of credit up to the lesser of $20 million, or an amount based upon a formula of eligible trade receivables, at an interest rate that varies based on the prime rate of the bank or the LIBOR rate at the Company's election. At January 5, 1997 and 1998, bank notes payable include $2.2 million and $6.5 million, respectively, of overdrafts in accounts with the Company's primary lender. These amounts were subsequently funded through the normal course of business. The interest rate charged was 7.25% and 7.50% at January 5, 1997 and January 5, 1998 respectively. The agreement, which expires in June 1998, is collateralized by substantially all assets of the Company, except those assets which collateralize certain other financing arrangements. Under the revolving credit
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
agreement, the Company may not make any cash dividend payments.
The maximum amount outstanding and the average amount outstanding on bank revolving credit agreements were as follows:
(in thousands) Maximum Average Amount Amount Period Ending Outstanding Outstanding _______________ ___________ ___________ January 5, 1996 $ 19,000 $ 14,741 January 5, 1997 $ 26,687 $ 17,402 January 5, 1998 $ 25,800 $ 8,002
The above average amounts outstanding are calculated by dividing the sum of the average daily balances for each month by the number of months in the period. The weighted average interest rate on the bank revolving credit agreements was 8.7%, 8.2% and 7.3% in fiscal 1995, 1996 and 1997, respectively.
In November 1994 the Company exercised an option in its revolving credit agreement to borrow $500 thousand on a term note with interest at a rate 0.5% above the bank's prime rate. The interest rate was raised to the bank's prime rate in March, 1995. The term note matured July 31, 1996 and was paid off. The Company finances inventory through floor plan arrangements with two finance companies. As of January 5, 1998 the floor plan lines of credit were $12 million with IBM Credit Corporation ("ICC") and $35 million with Deutsche Financial Services ("DFS"). Borrowings under the ICC floor plan arrangement are made on sixty day notes, with one-half of the note amount due in thirty days. Borrowings under the DFS floor plan arrangement are made on thirty day notes. Financing on many of the arrangements which are subsidized by manufacturers is interest free. The average rate on the plans overall is less than 1.0%.
The maximum amount outstanding and the average amount outstanding on each of the floor plan arrangements were as follows:
(in thousands) ICC DFS __________________ ___________________ Maximum Average Maximum Average Amount Amount Amount Amount Period Ending Outstanding Outstanding _______________ ______ ______ _______ _______ January 5, 1996 $6,300 $4,191 $21,045 $15,979
January 5, 1997 $9,045 $5,779 $27,349 $18,532
January 5, 1998 $19,985 $10,459 $39,092 $25,069
The average amount outstanding is calculated by dividing the sum of the outstanding balances at the end of each month by the number of months in the applicable period.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. Income Taxes
The provision for income taxes consists of the following:
(in thousands) 1995 1996 1997 Current: Federal $ 2,071 $ 3,205 $ 8,742 State 654 1,034 1,036 ________ ________ ________ Total current 2,725 4,239 9,778 ________ ________ ________
Deferred: Federal 206 46 (21) State 52 11 (54) ________ ________ ________ Total deferred 258 57 (271) Total income tax provision $ 2,983 $ 4,296 $ 9,507
The approximate tax effect of the temporary differences giving rise to the Company's deferred income tax assets (liabilities) are:
(in thousands) 1996 1997 Deferred Tax Assets: Bad debt provision $208 $282 Depreciation - 193 Deferred compensation 210 409 _______ _______ Total deferred tax assets 418 884 _______ _______ Deferred Tax Liabilities: Acquisition of lease residuals (847) (620) Depreciation (96) - Accounts Receivable - (518) _______ ________ Total deferred tax liabilities (943) (1,138) _______ ________ Net deferred tax liability $ (525) $ (254) ======= ========
The Company's effective income tax rate differs from the Federal statutory rate as follows: 1995 1996 1997 _____ _____ _____ Tax at Federal statutory rate 34.0% 34.0% 35.0% State taxes 6.3 6.6 4.7 Kentucky Relocation Credits - - (2.2) Other 0.3 0.2 (0.7) _____ _____ _____ Effective tax rate 40.6% 40.8% 36.8% ===== ===== =====
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. Operating Leases The Company leases office and warehouse space, vehicles and certain office equipment from various lessors. Lease terms vary in duration and include various option periods. The leases generally require the Company to pay taxes and insurance. Future minimum lease payments under noncancelable operating leases with initial or remaining terms in excess of one year as of January 5, 1998 are as follows:
(in thousands) Fiscal Year 1998 $2,153 1999 1,741 2000 1,376 2001 1,019 2002 828 Thereafter 2,554 ________ Total minimum lease payments $ 9,671 =======
9. Employee Benefit Plans In the fourth quarter of 1997, the Company was in the process of terminating the Employee Stock Ownership Plan ("ESOP"). As of January 5, 1998, the ESOP held 72,661 shares of Company stock. No contributions were made or accrued in fiscal 1996 and 1997. The distribution to employees of the ESOP should be completed by the second quarter of 1998.
The Company also has a savings plan intended to qualify under sections 401(a) and 401(k) of the Internal Revenue Code. The plan covers substantially all employees of the Company. The Company did not contribute to the plan in 1996 or 1997. Beginning in fiscal 1998 the Company will make contributions to the plan based on a participant's annual pay.
10. Investment in Lease Residuals
The Company participates in a Remarketing and Agency Agreement ("Agreement") with Information Leasing Corporation ("ILC") whereby the Company obtains rights to 50% of lease residual values for services rendered in connection with locating the lessee, selling the equipment to ILC and agreeing to assist in remarketing the used equipment.
During fiscal 1995, 1996 and 1997, the Company sold equipment and related support services to ILC, for lease to ILC's customers, in amounts of $23.7 million, $15.2 million and $7.7 million, respectively. The Company also obtained rights to lease residuals from ILC in the amount of $875 thousand, $575 thousand and $562 thousand in 1995, 1996 and 1997, respectively. Such amounts are recorded as a reduction of the related cost of sales. Residuals acquired in this manner are recorded at the estimated present value of the interest retained.
The Company also purchases residuals associated with separate leasing arrangements entered into by ILC. Such transactions do not involve the sale of equipment and related support services by the Company to ILC. Residuals acquired in this manner are accounted for at cost.
The carrying value of investments in lease residuals is evaluated on a quarterly basis, and is subject only to downward market adjustments until ultimately realized through a sale or re-lease of the equipment.
11. Major Customers
Sales to a major customer were approximately $43.8 million for fiscal 1995. Sales to a major customer were approximately $40.3 million for fiscal 1996. Sales to a major customer were approximately $ 60.4 million for fiscal 1997.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
12. Acquisitions During fiscal 1996, the Company completed several acquisitions. The total consideration given consisted of $7.2 million in cash, subordinated notes of $4.0 million and 170 thousand unregistered shares of the Company's common stock with an approximate value of $1.5 million. Interest on the subordinated notes is payable quarterly. Principal is payable in equal annual installments. The acquisitions were accounted for as purchases, accordingly the purchase price was allocated to assets and liabilities based on their estimated value as of the dates of acquisition. The results of operations of the acquisitions are included in the consolidated statement of income from the dates of acquisition.
The following table summarizes, on an unaudited pro forma basis, adjusted to reflect a 10% stock dividend paid on May 22, 1995 and three-for-two splits of the Company's common stock in the form of a stock dividends paid on October 4, 1996 and October 6, 1997, the estimated combined results of the Company and the 1996 acquisitions assuming the acquisitions had occurred on January 6, 1995. These results include certain adjustments, primarily goodwill amortization and interest expense, and are not necessarily indicative of what results would have been had the Company owned these businesses during the periods presented:
(in thousands) Fiscal Year _________________ 1995 1996 __________ __________ Net sales and revenues $ 309,655 $ 364,005 Net income $ 4,630 $ 6,250 Net income per common share: Basic $ 0.80 $ 0.80 Diluted $ 0.75 $ 0.77
During fiscal 1997, the Company completed several acquisitions. The total consideration given consisted of $3.7 million in cash, subordinated notes of $1.3 million and 37 thousand unregistered shares of the Company's common stock with an approximate value of $1.0 million. Interest on the subordinated notes is payable quarterly. Principal is payable in equal annual installments. The acquisitions were accounted for as purchases, accordingly the purchase price was allocated to assets and liabilities based on their estimated value as of the dates of acquisition. The results of operations of the acquisitions are included in the consolidated statement of income from the dates of acquisition. If the 1997 acquisitions had occurred on January 6, 1996, the pro forma operations of the Company would not have been materially different than that reported in the accompanying consolidated statements of income.
13. Related Parties
During fiscal 1995 the Company entered into a ten year triple-net lease agreement commencing in 1996 for a new headquarters and distribution facility with a company that is controlled by the Chief Executive Officer of the Company. During fiscal 1997 the lease agreement was amended to include an expansion of the distribution facility. The base rental for 1997 on an annualized basis is $858 thousand. The annual rental for these properties was determined on the basis of a fair market value rental opinion provided by an independent real estate company.
During fiscal 1996, the Company made periodic advances to a company that is controlled by the Chief Executive Officer of the Company. No interest was charged on the advances which were repaid in December 1996.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
14. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and non-cash investing and financing activities are as follows:
(in thousands) 1995 1996 1997 Interest paid $2,037 $2,065 $1,045 Income taxes paid $2,658 $3,813 $4,920 Business combinations accounted for as purchases: Assets acquired $774 $24,526 $7,358 Liabilities assumed (24) (9,121) (1,495) Note payable (225) (3,996) (1,343) Stock issued (100) (1,475) (1,021) ________ _________ _________ Net cash paid $ 425 $ 9,934 $3,499
15. Stockholders' Equity and Stock Option Plans
In July 1996, the Company completed a secondary public offering of 1.4 million new shares of its common stock. The net proceeds of $17.9 million were used to reduce amounts outstanding under the line of credit. If this secondary offering had been completed as of January 6, 1996, pro forma basic and diluted earnings per share would have been $0.77 and $0.75, respectively, for fiscal 1996. This computation assumes no interest expense related to the credit line and the issuance of only a sufficient number of shares to eliminate the credit line at the beginning of fiscal 1996.
In February 1997, the Company completed a secondary public offering of 1.02 million shares of its common stock. The net proceeds of $23.3 million were used to reduce amounts outstanding under the Company's line of credit. If this secondary offering had been completed as of January 6, 1997, pro forma basic and diluted earnings per share would have been $1.38 and $1.34 , respectively, for fiscal 1997. This computation assumes no interest expense related to the credit line and the issuance of only a sufficient number of shares to eliminate the credit line at the beginning of fiscal 1997.
On September 6, 1996, the Company's Board of Directors authorized a three-for-two stock split in the form of a stock dividend payable October 4, 1996, to shareholders of record September 19, 1996. The split resulted in the issuance of 2.1 million new shares of common stock. The stated par value of each share was not changed from $0.01. A total of $20 thousand was reclassified from the Company's additional paid in capital account to the Company's common stock account. Accordingly, net income per common share, weighted average shares outstanding and stock option plan information have been restated to reflect the stock split.
On September 8, 1997, the Company's Board of Directors authorized a three-for-two stock split in the form of a stock dividend payable October 6, 1997, to shareholders of record September 22, 1997. The split resulted in the issuance of 3.8 million new shares of common stock. The stated par value of each share was not changed from $0.01. A total of $38 thousand was reclassified from the Company's additional paid in capital account to the Company's common stock account. Accordingly, net income per common share, weighted average shares outstanding and stock option plan information have been restated to reflect the stock split.
The Company's 1992 Non-Qualified and Incentive Stock Option Plan provides certain employees of the Company with options to purchase common stock of the Company through options at an exercise price equal to the market value on the date of grant. 990,000 shares of the common stock of the Company are reserved for issuance under the plan. The plan will terminate ten years from the date of adoption. Stock options granted under the plan are exercisable in accordance with various terms as authorized by the Compensation Committee. To the extent not exercised, options will expire not more than ten years after the date of grant.
The Company's 1992 Outside Directors' Stock Option Plan provides outside directors of the Company with options to purchase common stock of the Company at an exercise price equal to the market value of the shares at the date of grant. 175,000 shares of common stock of the Company are reserved for issuance under the plan. The plan will terminate ten years from the date of adoption. Pursuant to the
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
plan, an option to purchase 10,000 shares of common stock automatically will be granted on the first day of the initial term of a director. An additional 2,500 shares of common stock automatically will be granted to an eligible director upon the first day of each consecutive year of service on the board. Options may be exercised after one year from the date of grant for not more than one-third of the shares subject to the option and an additional one- third of the shares subject to the option may be exercised for each of the next two years thereafter. To the extent not exercised, options will expire five years after the date of grant.
The following summarizes the stock option transactions under the plans for the three fiscal years ended January 5, 1998:
Weighted Average Shares Exercise price _________ ________________ Options outstanding January 5, 1995 283,832 $8.69 Granted 66,300 10.95 Exercised (164,975) 8.27 Stock dividend effect 33,383 8.32 _________ ________________ Options outstanding January 5, 1996 218,540 8.32 Granted 149,600 13.83 Exercised (197,047) 8.97 Stock split effect 121,082 7.21 _________ ________________ Options outstanding January 5, 1997 292,175 7.27 Granted 216,328 30.10 Exercised (95,260) 8.70 Forfeitures (4,700) 34.19 Stock split effect 227,754 5.61 _________ ________________ Options outstanding January 5, 1998 636,297 $12.01 ========= ================
The following summarizes options outstanding and exercisable at January 5, 1998:
Options Outstanding Options Exercisable _________________________________________ __________________ Number Weighted Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise at 1/5/98 Contractual Exercise at 1/5/98 Exercise Prices Life Price Price ______________ ___________ _______________ ___________ __________ _________ $2.67 to $5.67 252,264 0.8 $4.38 220,616 $4.45 $6.33 to $16.50 165,000 2.1 $11.00 120,000 $11.31 $17.09 to $25.67 219,033 1.5 $21.56 215,283 $21.63 __________ __________ 636,297 1.6 $12.01 555,899 $12.58 ========== ==========
The weighted average fair value at date of grant for options granted during fiscal 1996 and 1997 was $2.75 and $6.77, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
Fiscal 1995 Fiscal 1996 Fiscal 1997 ___________ ___________ ___________ Expected life (years) 2.4 1.7 1.8 Interest rate 7.3% 5.8% 6.1% Volatility 50% 55% 56% Dividend yield 0% 0% 0%
Had compensation cost for the Company's stock option plans been determined based on the fair value
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
at the grant date for awards in fiscal 1995 and 1996 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:
(in thousands, except per share amounts) Fiscal 1995 Fiscal 1996 Fiscal 1997 ___________ ___________ ___________ Net income - as reported $4,367 $6,232 $16,313 Net income - pro forma $4,196 $5,777 $14,455 Net income per common share - as reported Basic $0.77 $0.80 $1.48 Diluted $0.73 $0.77 $1.44 Net income per common share - pro forma Basic $0.74 $0.74 $1.31 Diluted $0.70 $0.71 $1.27
In 1995, 1996 and 1997, 4,000, 3,076 and 544, respectively, shares of common stock were awarded to officers of the Company. Compensation expense resulting from the awards was $40 thousand in fiscal 1995 and 1996 and $20 thousand in fiscal 1997.
16. 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 consolidated financial position or results of operations.
17. Risk of Loss from Concentrations
During fiscal 1997, approximately 41.2% of the Company's total net sales and revenues were derived from its top ten customers, including one customer which accounted for 12.3% of total net sales and revenues. The Company was not selected as the fiscal 1998 product supplier by the largest customer. The Company does not expect that this loss will have a near-term material impact on its financial condition or results of operation.
Due to the demand for the products sold by the Company, significant product shortages occur from time to time because manufacturers are unable to produce certain products to meet increased demand. Failure to obtain adequate product shipments could have a material adverse effect on the Company's operations and financial results.
The Company is required to have authorizations from manufacturers in order to sell their products. The loss of a significant vendor's authorization could have a material adverse effect on the Company's business.
18. Subsequent Events
Stockholder Rights Plan. On February 18, 1998, the Company's Board of Directors declared a dividend of one preferred share purchase right (a "Right" ) for each outstanding share of common stock, par value $.01 per share (the "Common Share" ) on March 15, 1998 (the "Record Date" ) to the stockholders of record on that date. The Rights become exercisable only if a person or group (an "Acquiring Person" ) acquires, or makes a tender offer to acquire, beneficial ownership of 15% or more of the outstanding Common Shares of the Company. The Rights expire on March 1, 2008, unless extended or are earlier redeemed by the Company.
When the Rights become exercisable, the holder of each Right, other than the Acquiring Person, is entitled to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Shares" ), of the Company, at a price of $115.00 per one one-thousandth of a Preferred Share (the "Purchase Price" ), subject to adjustment. Alternatively, under certain circumstances each holder of a Right, other than Rights beneficially owned by the Acquiring Person, will thereafter have the right to receive upon exercise, in lieu of Preferred
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Shares, that number of Common Shares having a market value of two times the exercise price of the Right. In the event that, at any time after a Person becomes an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated
assets or earning power is sold, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right.
Acquisitions. In March 1998, the Company completed two acquisitions. The total consideration given consisted of $11.5 million in cash and subordinated notes of $2.0 million. Interest on the subordinated notes is payable quarterly while principal is payable in equal annual installments. The acquisitions will be accounted for as purchases, accordingly the purchase prices will be allocated to assets and liabilities based on their estimated values as of the dates of acquisition. The results of operations of the acquisitions will be included in the consolidated statement of income from the dates of acquisition. If these acquisitions had occurred on January 6, 1997, the pro forma operations of the Company would not have been materially different than that reported in the accompanying consolidated statements of income.
Amendment to Line of Credit. In January 1998, the Company amended its revolving credit agreement. The amended agreement provides for borrowings up to $40.0 million at the bank's prime rate minus 1.25%. A new financial covenant requires that the Company maintain trade accounts receivable less than ninety days old at a ratio greater than 1.25 to 1.0 to amounts outstanding under the revolving credit agreement at any time. The revolving credit agreement expires May 31, 1998.
Repricing of Stock Options. In January 1998, the Board of Directors of the Company approved the repricing of certain unexercised options granted under the 1992 Non-Qualified and Incentive Stock Option Plan. As a result, 109,649 options granted during fiscal 1997 will be repriced to $16.63 per share from $34.19 per share. These amounts approved by the Board of Directors do not give effect to the stock split approved after the date of the original grant of the options.
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Total Net Sales and Revenues. Total net sales and revenues increased $155.0 million, or 46.1%, to $491.4 million in fiscal 1997 from $336.4 million in fiscal 1996. This increase was attributable to an increase in sales to existing and new customers and to acquisitions completed in fiscal years 1997 and 1996. Excluding acquisitions completed in fiscal years 1997 and 1996, total net sales and revenues increased 35.8%.
Sales of equipment and supplies increased $134.2 million, or 43.8%, to $440.9 million in fiscal 1997 from $306.7 million in fiscal 1996. On a comparable basis, as described above, sales of equipment and supplies increased 33.9%. Service and other revenues increased $20.8 million, or 70.0%, to $50.5 million in fiscal 1997 from $29.7 million in fiscal 1996. On a comparable basis, as described above, service revenues increased 55.3%.
Gross Profit. Gross profit margin was 16.6% in fiscal 1997 compared to 16.2% in fiscal 1996. The Company improved its gross margin by increasing the volume of higher-margin service revenues which offset a decrease in hardware gross margins and the growth in equipment sales. Service and other revenues increased to 10.3% of total net sales and revenues in fiscal 1997 compared to 8.8% of total net sales and revenues in fiscal 1996. Factors that may have an impact on gross margin in the future include the percentage of equipment 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 decreased to 10.3% in fiscal 1997 from 10.5% for fiscal 1996. This decrease is primarily attributable to the increased productivity of technical personnel which contributed to the growth of the Company's service business. Total operating expenses expressed as a percentage of total net sales and revenues decreased to 11.1% in fiscal 1997 from 11.2% in fiscal 1996 due to the factor described above.
Income from Operations. Income from operations increased $9.9 million, or 58.6 %, to $26.8 million in fiscal 1997 from $16.9 million in fiscal 1996. The Company's operating margin increased to 5.5% in fiscal 1997 from 5.0% in fiscal 1996 because of the increase in gross margin and the decrease in operating expenses as a percentage of total net sales and revenues.
Interest Expense. Total interest expense was $1.0 million in fiscal 1997 compared with $2.2 million in fiscal 1996. This decrease is primarily related to lower average borrowings during fiscal 1997 as a result of the secondary public offering in February 1997.
Income Taxes. The Company's effective tax rate was 36.8% in fiscal 1997 compared to 40.8% in fiscal 1996. This reduction is the result of Kentucky state income tax credits earned in fiscal 1997.
Net Income. Net income increased $10.1 million, or 162.9%, to $16.3 million in fiscal 1997 from $6.2 million in fiscal 1996. The increase was a result of the factors described above. Net income, excluding the impact of the Vanstar settlement in fiscal 1996, increased $7.5 million, or 85.2%, in fiscal 1997 compared with $8.8 million in fiscal 1996. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 Total Net Sales and Revenues. Total net sales and revenues increased $105.7 million, or 45.8%, to $336.4 million in fiscal 1996 from $230.7 million in fiscal 1995. This increase was attributable to the acquisitions in fiscal 1996 and increased sales to existing and new customers. Excluding acquisitions completed in fiscal 1996, total net sales and revenues increased 14.9%.
Sales of equipment and supplies increased $95.6 million, or 45.3%, to $306.7 million in fiscal 1996 from $211.1 million in fiscal 1995. On a comparable basis, as described above, sales of equipment and supplies increased 12.7%. Service and other revenues increased $10.0 million, or 51.0%, to $29.6 million in fiscal 1997 from $19.6 million in fiscal 1996. On a comparable basis, as described above, service revenues increased 39.6%.
Gross Profit. Gross profit margin was 16.2% in fiscal 1996 compared to 14.5% in fiscal 1995. This increase was primarily attributable to a lesser number of lower margin, high volume equipment roll-outs, larger vendor rebates and the increase in higher margin service revenues. Vendor rebates increased $3.7 million, or 78.9%, to $8.4 million in fiscal 1996 from $4.7 million in fiscal 1995. Provided there are no changes in rebate programs, the level of vendor rebates is expected to continue into fiscal 1997 as volume purchases with major manufacturers continue to increase.
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 10.5% in fiscal 1996 from 10.1% for fiscal 1995. This increase is primarily attributable to the addition of technical personnel as a result of the growth of the Company's service business. As the personnel reach full productivity, their costs as a percentage of services revenues are expected to decrease. In addition, market development funds, which reduce selling, general and administrative expenses, have declined as a percentage of total net sales and revenues during fiscal 1996 to 1.0% from 1.3% in fiscal 1995 primarily as a result of vendors shifting funds to rebates. Total operating expenses expressed as a percentage of total net sales and revenues increased to 11.2% in fiscal 1996 from 10.5% in fiscal 1995 due to the reduction of market development funds and the increase in depreciation related to the new headquarters and distribution facilities and amortization of goodwill related to the acquisitions of TCSS and DILAN.
Income from Operations. Income from operations increased $7.6 million, or 81.7 %, to $16.9 million in fiscal 1996 from $9.3 million in fiscal 1995. The Company's operating margin increased to 5.0% in fiscal 1996 from 4.0% in fiscal 1995 because the increase in gross margin more than offset the increase in operating expenses as a percentage of total net sales and revenues.
Interest Expense. Total interest expense was $2.2 million in fiscal 1996 compared with $2.0 million in fiscal 1995.
Income Taxes. The Company's effective tax rate was 40.8% in fiscal 1996 compared to 40.6% in fiscal 1995.
Litigation Settlement and Related Costs. On April 29, 1996, the Company agreed to a settlement of the litigation with Vanstar. The settlement of $3.3 million consisted of a payment made by the Company to Vanstar of $1.65 million in cash and a $1.65 million note which was paid on August 27, 1996. The settlement agreement also provided for mutual forgiveness of any and all claims or obligations of the parties, resulting in a write-off of $0.5 million of receivables from Vanstar and additional expenses of $0.5 million for costs related to the litigation.
Net Income. Net income increased $1.8 million, or 42.7%, to $6.2 million in fiscal 1996 from $4.4 million in fiscal 1995. The increase was a result of the factors described above. Excluding the impact of the Vanstar settlement, net income in fiscal 1996 would have been $8.8 million, an increase of 102.2% over the comparable period in 1995.
Liquidity and Capital Resources _______________________________
Cash used in operating activities was $22.9 million in fiscal 1997. Cash used in investing activities included $3.5 million for acquisitions and $2.4 million for capital expenditures. Cash provided by financing activities included $23.3 million of net proceeds from a stock offering, $1.5 million from the exercise of stock options less $1.5 million of net payments on bank notes payable and $0.8 million of repayments on various notes payable.
A significant part of the Company's inventories is financed by floor plan arrangements with third parties. At January 5, 1998, these lines of credit totaled $47.0 million, including $12.0 million with IBM Credit Corporation ( "ICC") and $35.0 million with Deutsche Financial Services ( "DFS"). Borrowings under the ICC floor plan arrangement are made on sixty day notes, with one-half of the note amount due in thirty days. Borrowings under the DFS floor plan arrangement are made on thirty day notes. All such borrowings are secured by the related inventory. Financing on substantially all of the arrangements is interest free due to subsidies by manufacturers. The average rate on the plans overall 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 its Credit Facility, which during fiscal 1997 permited the Company to borrow up to the lesser of $20.0 million or an amount based upon a formula of eligible trade receivables. The Credit Facility carries a variable interest rate based on (i) Star Bank's prime rate less the Incentive Pricing Spread or (ii) LIBOR plus the Incentive Pricing Spread, at the Company's election. The Incentive Pricing Spread is adjusted quarterly. At January 5, 1998, the amount outstanding was $22.6 million, including $6.5 million of overdrafts on the Company's books in accounts at Star Bank, which was at an interest rate of 7.5%. The overdrafts were subsequently funded through the normal course of business. 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 prohibited from paying any cash dividends and is subject to various financial covenants.
In January 1998 the Company revised its Credit Facility to borrow up to $40.0 million. The revised Credit Facility, which expires May 31, 1998, carries a variable interest rate based solely on the prime rate of Star Bank less 125 basis points. Further, the Company is in the process of finalizing a $ 120.0 million line of credit, under terms similar to the revised Credit Facility, with DFS and Star Bank is expected to have a participation interest in the new Credit Facility. When finalized this line of credit will replace the $40.0 million Credit Facility.
At the beginning of the third quarter of 1997, the Company hired a president for Technology Integration Financial Services, Inc. ( "TIFS"), a wholly-owned subsidiary of the Company (f/k/a Pomeroy Computer Leasing Company, Inc.), in an effort to increase its leasing business. Through TIFS, the Company can directly provide its customers with leasing alternatives. Increased leasing operations could impact one or more of total net sales and revenues, gross margin, operating income, net income, total debt and liquidity, depending on the amount of leasing activity and the types of leasing transactions. However, the impact of any increased leasing operations for fiscal 1997 was not material. On November 5, 1997, TIFS executed a $20.0 million collateral based recourse loan facility ( "Recourse Facility" ) with The Fifth Third Bank of Northern Kentucky, Inc. ( "Fifth Third" ). The loan, which is guaranteed by the Company, will be used to fund all lease transactions financed on a recourse basis and will expire on October 1, 1998. The Recourse Facility will carry a variable interest rate based on (i) Fifth Third's prime rate less an incentive pricing spread (the "Incentive Pricing Spread" ) or (ii) Treasury notes plus the Incentive Pricing Spread, at the Company's election.
The Company completed a secondary public offering of its stock on February 28, 1997. Net proceeds to the Company were approximately $23.3 million from the issuance of 1.02 million shares of common stock. The proceeds were used to reduce amounts outstanding under its line of credit.
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, shares of its Common Stock and seller financing. The Company anticipates that any future acquisitions will be financed in a similar manner.
OTHER
The Company is heavily dependent upon complex computer systems for all phases of its operations, which include sales and distribution. The Company began addressing the affect of the Year 2000 compliance issue in 1996.The Year 2000 date issue arises from the fact that many computer programs use only two digits to identify a year in a date field. The Company has completed an assessment of its own systems and determined that its principle systems are Year 2000 compliant. Management does not expect that any costs associated with the Company becoming Year 2000 compliant will have a material adverse impact on the Company's financial position, results of operations or cash flows. The Company is continuing to assess the Year 2000 issue with respect to its customers and suppliers. The Company could be adversely impacted by the Year 2000 date issue if its suppliers, customers and other businesses do not address this issue successfully. Management continues to assess these risks in order to be able to respond in a manner which would reduce any impact on the Company.
Item 8.
Item 8. Financial Statements and Supplementary Data Registrant hereby incorporates the financial information required by this item by reference to Item 14 hereof.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure
None
PART III
Items 10-13.
The Registrant hereby incorporates the information required by Form 10-K, Items 10-13 by reference to the Company's definitive proxy statement for its 1998 Annual Meeting of shareholders which will be filed with the Commission prior to May 5, 1998. PART IV Item. 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K - Index
(a) The following documents are filed as a part of this report:
1997 Form 10-K Page _________ 1. Financial Statements:
Independent Auditor's Report
Consolidated Balance Sheets, January 5, 1997 and January 5, 1998 to
For each of the three fiscal years in the period ended January 5, 1998:
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to Consolidated Financial to F-xx Statements
2. Financial Statement Schedules:
None
Filed Herewith (page #) or Incorporated by Reference to: ________________
3. Exhibits ________ 3(a) Certificate of Incorporation Exhibit 3(a) of the Company of Company's Form S-1 filed Feb. 14, 1992
3(b) Bylaws of the Company Exhibit 3(b) of Company's Form S-1 filed Feb. 14, 1992
4 Rights Agreement between the Exhibit 4 of Company and The Fifth Third Company's Form Bank, as Rights Agent dated 8-K filed March as of February 23,1998 xx, xxxx
10(i) Material Agreements
(a)(1) Loan Agreement between Star Exhibit Bank, NA and the Company 10(i)(a)(1) of dated November 19, 1992 Company's Form 10-K filed March 31, 1993
(a)(2) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(2) of December 16, 1992 by and Company's Form among Star Bank, NA, the 10-K filed March Company and C&N Corp. 31, 1993
(a)(3) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(3) of March 12, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994
(a)(4) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(4) of April 30, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994
(a)(5) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(5) of June 30, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994
(a)(6) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(6) of August 5, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994
(a)(7) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(7) of November 29, 1993 by and Company's Form among Star Bank, N.A., the 10-K filed April Company and C&N Corp. 7, 1994
(a)(8) Amendment to Loan Agreement Exhibit by Letter Agreement dated May 10(i)(a)(8) of 6, 1994 by and among Star Company's Form Bank, N.A., the Company and 10-K filed April C&N Corp. 4, 1995
(a)(9) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(9) of November 3, 1994 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 4, 1995
(a)(10) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(10) of November 8, 1994 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 4, 1995 (a)(11) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(11) of November 30, 1994 by and Company's Form among Star Bank, N.A., the 10-K filed April Company and C&N Corp. 4, 1995
(a)(12) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(12) of January 30, 1995 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 4, 1995
(a)(13) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(13) of March 31, 1995 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed May C&N Corp. and Xenas 18, 1995 Communications Corp.
(a)(14) Amendment to Loan Agreement Exhibit by Letter Agreement date May 10(i)(a)(14) of 31, 1995 by and among Star Company's Form Bank, N.A., the Company, C&N 10-Q filed Corp. and Xenas August 18,1995 Communications Corp.
(a)(15) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(15) of October 19,1995 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed C&N Corp. and Xenas November 17, Communications Corp. 1995
(a)(16) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(16) of December 18,1995 by and among Company's Form Star Bank, N.A., the Company, 10-K filed April C&N Corp. and Xenas 4, 1996 Communications Corp. (a)(17) Amended and Restated Loan Exhibit Agreement dated March 14, 10(i)(a)(17) of 1996 by and between Star Company's Form Bank, N.A., the Company, C&N S-1 filed June Corp., Xenas Communications 4, 1996 Corp. and Pomeroy Computer Leasing Company, Inc.
(a)(18) Letter Agreement and Exhibit Promissory Note dated June 10(i)(a)(18) of 12, 1996 by and among Star Company's Form Bank, N.A., the Company, C&N 10-Q filed Corp. and Xenas August 15, 1996 Communications Corp.
(a)(19) Waiver Letter dated June 20, Exhibit 1996 by and among Star Bank, 10(i)(a)(19) of N.A., the Company, C&N Corp. Company's Form and Xenas Communications 10-Q filed Corp. August 15, 1996
(a)(20) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(20) of June 21, 1996 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed C&N Corp. and Xenas August 15, 1996 Communications Corp.
(a)(21) Amendment to Loan Agreement Exhibit 10.1 of by Letter Agreement dated Company's Form June 27, 1996 by and among S-3 filed Star Bank, N.A., the Company, January 3, 1997 C&N Corp. and Xenas Communications Corp.
(a)(22) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(22) of October 18, 1996 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed C&N Corp. and Xenas November 19, Communications Corp. 1996
(a)(23) Amendment to Loan Agreement Exhibit 10.2 of by Letter Agreement dated Company's Form December 20, 1996 by and S-3 filed among Star Bank, N.A., the January 3, 1997 Company, C&N Corp., Xenas Communications Corp. and Pomeroy Computer Leasing Company, Inc.
(a)(24) Promissory Note dated April Exhibit 30, 1997 by and among Star 10(i)(a)(24) of Bank, N.A., the Company, Company's Form Pomeroy Computer Leasing 10-Q filed Company, Inc. and Xenas August 11, 1997 Communications Corp.
(b)(1) Agreement for Wholesale Exhibit Financing (Security 10(i)(b)(1) of Agreement) between IBM Credit Company's Form Corporation and the Company 10-K filed April dated April 2, 1992 7, 1994
(b)(2) Addendum to Agreement for Exhibit Wholesale Financing between 10(i)(b)(2) of IBM Credit Corporation and Company's Form the Company dated July 7, 10-K filed April 1993 7, 1994
(c)(1) Agreement for Wholesale Exhibit Financing (Security 10(i)(c)(1) of Agreement) between ITT Company's Form Commercial Finance 10-K filed April Corporation and the Company 7, 1994 dated March 27, 1992
(c)(2) Addendum to Agreement for Exhibit Wholesale Financing between 10(i)(c)(2) of ITT Commercial Finance Company's Form Corporation and the Company 10-K filed April dated July 7, 1993 7, 1994
(c)(3) Amendment to Agreement for Exhibit Wholesale Financing between 10(i)(c)(3) of Deutsche Financial Services Company's Form f/k/a ITT Commercial Finance 10-Q filed May Corporation and the Company 18, 1995 dated May 5, 1995.
(d)(1) Asset Purchase Agreement Exhibit 10(i)(z) among the Company; TCSS; and of Company's Richard Feaster, Victoria Form 8-K dated Feaster, Harry Feaster, March 14, 1996 Carolyn Feaster, Victoria Feaster, trustee of the Emily Patricia Feaster Trust, and Victoria Feaster, as trustee of the Nicole Ann Feaster Trust dated March 14, 1996
(d)(2) Lease between the Company and Exhibit 10.48 of TCSS dated March 15, 1996 Company's Form S-1 filed June 4, 1996 (d)(3) Lease between Arthur K. Jones Exhibit 10.49 of Trust, Firststar Bank Des Company's Form Moines, N.A., and William A. S-1 filed June Jones, Trustees, and The 4, 1996 Computer Supply Store, Inc. dated July 1, 1994 (assigned to the Company effective as of March 14, 1996)
(d)(4) Registration Rights Agreement Exhibit 10.50 of between the Company and TCSS Company's Form dated March 14, 1996 S-1 filed June 4, 1996
(d)(5) Employment Agreement between Exhibit 10.51 of the Company and Richard Company's Form Feaster dated March 14, 1996 S-1 filed June 4, 1996 (d)(6) Employment Agreement between Exhibit 10.52 of the Company and Victoria Company's Form Feaster dated March 14, 1996 S-1 filed June 4, 1996
(e)(1) IBM Agreement for Authorized Exhibit Dealers 10(i)(e)(1) and Industry Remarketers with of Company's the Company, dated September 3, Form S-1 filed Feb. 14, 1992
(e)(2) Schedule of Substantially Exhibit 10(i)(e)(2) Identical IBM Agreements for of Company's Authorized Dealers and Form S-1 filed Industry Remarketers Feb. 14, 1992
(f) Compaq Computer Corporation Exhibit 10(i)(f) United States Dealer Agreement with of Company's the Company, dated September 27, Form S-1 filed Feb. 14, 1992
(g) Dealer Sales Agreement Exhibit 10(i)(g) between Apple Computer, Inc. and the of Company's Company, dated April 1, 1991 Form S-1 filed Feb. 14, 1992
(h) Lease between Sydney A. Warm Exhibit 10(i)(h) and the Company for 1021 West Eighth of Company's Street, Cincinnati, OH, dated May Form S-1 filed 15, 1990 Feb. 14, 1992
(i) Lease between F.G.&H. Exhibit 10(i)(i) Partnership and the Company for 908 of Company's DuPont Road, Louisville, KY, dated May 9, Form S-1 filed Feb. 14, 1992
(j)(1) Purchase Agreement between Exhibit 10.86 of the Company and First of Company's Form Michigan Corporation dated S-1 filed June March 28, 1996 4, 1996
(j)(2) Purchase Agreement between Exhibit 10.87 of the Company and John C. Company's Form Donnelly dated March 28, 1996 S-1 filed June 4, 1996
(j)(3) Purchase Agreement between Exhibit 10.88 of the Company and Dan B. French Company's Form dated March 28, 1996 S-1 filed June 4, 1996
(j)(4) Purchase Agreement between Exhibit 10.89 of the Company and James C. Company's Form Penman dated March 28, 1996 S-1 filed June 4, 1996
(k)(1) Lease between Industrial Exhibit Developments International, 10(i)(k)(1) of Inc., and the Company for Company's Form 1840 Airport Exchange Blvd., 10-K filed March Suite 240, Erlanger, KY dated 31, 1993 November 2, 1992
(k)(2) Amendment to lease between Exhibit Industrial Developments 10(i)(k)(2) of International, Inc., and the Company's Form Company for 1840 Airport 10-K filed March Exchange Blvd., Suite 240, 31, 1993 Erlanger, KY dated December 31, 1992
(k)(3) Lease between Industrial Exhibit Developments International, 10(i)(k)(3) of Inc., and the Company for Company's Form 1850 Airport Exchange Blvd., 10-K filed March Suite 600, Erlanger, KY dated 31, 1993 November 2, 1992
(k)(4) Amendment to lease between Exhibit Industrial Developments 10(i)(k)(4) of International, Inc., and the Company's Form Company for 1850 Airport 10-K filed March Exchange Blvd., Suite 600, 31, 1993 Erlanger, KY dated December 31, 1992
(l) Covenant not to Compete Exhibit between the Company and 10(i)(l)(2) of Richard C. Mills dated July Company's Form 7, 1993 10-K filed April 7, 1994
(m)(1) Asset Purchase Agreement Exhibit 10.5 of among the Company, AA Company's Form Microsystems, Inc. and Stuart S-3 filed Raburn dated August 2, 1996 January 3, 1997
(m)(2) Promissory Note dated August Exhibit 10.6 of 2, 1996 of the Company in Company's Form favor of AA Microsystems, S-3 filed Inc. January 3, 1997
(n)(1) Lease between Crown Exhibit 10(i)(n) Development Group and the of Company's Company for 3740 St. Johns Form 10-K filed Bluff Road, Suite 19, March 31, 1993 Jacksonville, FL dated September 17, 1992
(n)(2) Amendment to Lease between Exhibit Crown Development Group and 10(i)(n(2 of the Company for 3740 St. Company's Form Johns Bluff Road, Suite 19, 10-K filed April Jacksonville, FL dated 4, 1996 December 11, 1995
(o) Lease between Lincoln Exhibit 10(i)(o) National Investment of Company's Management Company and the Form 10-K filed Company for Suite 150F in the March 31, 1993 Terraces on Market Place Blvd., Knoxville, TN dated September 30, 1992
(p)(1) Remarketing and Agency Exhibit Agreement (the "Remarketing 10(i)(p)(1) of Agreement") between Company's Form Information Leasing S-1 filed Feb. Corporation and the Company 14, 1992 dated January 7, 1990
(p)(2) Amendment No. 1 to the Exhibit Remarketing Agreement dated 10(i)(p)(2) of November 12, 1991 Company's Form S-1 filed Feb. 14, 1992
(p)(3) Letter, dated February 2, Exhibit 1994, extending term of 10(i)(p)(3) of Remarketing Agreement to May Company's Form 1, 1996 10-K filed April 4, 1996
(p)(4) Amendment No. 2 to the Exhibit Remarketing Agreement dated 10(i)(p)(4) of October 10, 1995 Company's Form 10-K filed April 4, 1996
(q) Lease between Athens Exhibit 10(i)(q) Properties and the Company of Company's for Crosspark Drive, Form 10-K filed Knoxville, TN dated October April 4, 1996 31, 1995
(r)(1) Asset Purchase Agreement Exhibit 10.7 of among the Company, Company's Form Communications Technology, S-3 filed Inc. d/b/a DILAN and Robert January 3, 1997 Martin dated October 11, 1996
(r)(2) Subordinated Promissory Note Exhibit 10.8 of dated October 11, 1996 of the Company's Form Company in favor of S-3 filed Communications Technology, January 3, 1997 Inc.
(r)(3) Subordination Agreement among Exhibit 10.9 of the Company, Communications Company's Form Technology, Inc. and Star S-3 filed Bank, N.A. dated October 11, January 3, 1997
(s) Services Agreement between Exhibit 10.13 of the Company and Nationwide Company's Form Mutual Insurance and the S-3 filed Company dated December 11, January 3, 1997
(t1) Asset Purchase Agreement Exhibit among the Company and Magic 10(i)(t)(1) of Box, Inc. dared June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(2) Employment Agreement between Exhibit the Company and Israel Fintz, 10(i)(t)(2) of dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(3) Incentive Deferred Exhibit Compensation Agreement 10(i)(t)(3) of between the Company and Company's Form Israel Fintz, dated June 26, 10-Q filed 1997 August 11, 1997
(t)(4) Employment Agreement between Exhibit the Company and Allison 10(i)(t)(4) of Sokol, dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(5) Incentive Deferred Exhibit Compensation Agreement 10(i)(t)(5) of between the Company and Company's Form Allison Sokol, dated June 26, 10-Q filed 1997 August 11, 1997
(t)(6) Power of Attorney given to Exhibit the Company by Magic Box, 10(i)(t)(6) of Inc. for the collection of Company's Form Accounts Receivable, dated 10-Q filed June 26, 1997 August 11, 1997
(t)(7) Agreement for the Assumption Exhibit of Liabilities between the 10(i)(t)(7) of Company and Magic Box, Inc. Company's Form 10-Q filed August 11, 1997 (t)(8) Subordination Agreement by Exhibit and among the Company, Magic 10(i)(t)(8) of Box, Inc. and Star Bank, Company's Form N.A., dated June 26, 1997 10-Q filed August 11, 1997
(t)(9) Subordinated Promissory Note Exhibit between the Company and 10(i)(t)(9) of Israel Fintz, dated June 26, Company's Form 1997 10-Q filed August 11, 1997
(t)(10) Subordinated Promissory Note Exhibit between the Company and 10(i)(t)(10) of Allison Sokol, dated June 26, Company's Form 1997 10-Q filed August 11, 1997
(t)(11) Subordinated Promissory Note Exhibit between the Company and 10(i)(t)(11) of Marvin Rosen, dated June 26, Company's Form 1997 10-Q filed August 11, 1997
(t)(12) Subordinated Promissory Note Exhibit between the Company and M. 10(i)(t)(12) of Ronald Krongold, dated June Company's Form 26, 1997 10-Q filed August 11, 1997 (t)(13) General Bill of Sale between Exhibit the Company and Magic Box, 10(i)(t)(13) of Inc., dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(14) Non Compete Agreement between Exhibit the Company and Israel Fintz, 10(i)(t)(14) of dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(15) Non Compete Agreement between Exhibit the Company and Allison 10(i)(t)(15) of Sokol, dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(16) Non Compete Agreement between Exhibit the Company and Marvin Rosen, 10(i)(t)(16) of dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(17) Non Compete Agreement between Exhibit the Company and M. Ronald 10(i)(t)(17) of Krongold, dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(t)(18) Non Compete Agreement between Exhibit the Company and Magic Box, 10(i)(t)(18) of Inc., dated June 26, 1997 Company's Form 10-Q filed August 11, 1997
(u) Lease between NWI Airpark Exhibit 10(i)(u) L.P. and the Company for 717 of Company's Airpark Center Drive, Form 10-K filed Nashville, TN dated February April 4, 1995 24, 1994
(v)(1) Promissory Note dated May 30, Exhibit 1997 by and among Star Bank, 10(i)(v)(1) of N.A., the Company and Pomeroy Company's Form Computer Leasing Company, 10-Q filed Inc. August 11, 1997
(v)(2) Loan Agreement dated October E-1 to E - 53 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc. (v)(3) Guarantor Agreement dated E-54 October 31,1997 between Pomeroy Computer Resoucres, Inc and The Fifth Third Bank of Northern Kentucky, Inc.
(v)(4) Addendum 1 to Guarantor E-55 to E-57 Agreement dated October 31,1997 between Pomeroy Computer Resoucres, Inc and The Fifth Third Bank of Northern Kentucky, Inc.
(v)(5) Assignment Agreement between E-58 to E-60 dated October 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc.
(v)(6) Incumbency and Authorization E-61 Agreement dated October 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc.
(v)(7) Draw Facility Note dated E-62 to E-67 October 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc.
(v)(8) Revolving Credit Note dated E-68 to E72 October 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc.
(v)(9) Security Agreement dated E-73 to E-95 October 31,1997 between The Fifth Third Bank of Northern Kentucky, Inc. and Technology Integration Financial Services, Inc.
(w)(1) Non Compete Agreement between Exhibit the Company and Microcare 10(i)(w)(1) of Computer Services, Inc., Company's Form dated July 24, 1997 10-Q filed November 10,
(w)(2) Non Compete Agreement between Exhibit the Company and Microcare, 10(i)(w)(2) of Inc., dated July 24, 1997 Company's Form 10-Q filed November 10,
(w)(3) Assignment and Assumption Exhibit Agreement between the 10(i)(w)(3) of Company, and Microcare Company's Form Computer Services, Inc., and 10-Q filed Microcare Inc., dated July November 10, 24, 1997 1997
(w)(4) Assumption of Liabilities Exhibit Agreement between the 10(i)(w)(4) of Company, and Microcare Company's Form Computer Services, Inc., and 10-Q filed Microcare Inc., dated July November 10, 24, 1997 1997
(w)(5) Non Compete Agreement between Exhibit the Company, and Robert L. 10(i)(w)(5) of Versprille, dated July 24, Company's Form 1997 10-Q filed November 10,
(w)(6) Consent for Use of Similar Exhibit Name between the Company and 10(i)(w)(6) of Microcare, Inc., dated July Company's Form 24, 1997 10-Q filed November 10,
(w)(7) Subordination Agreement Exhibit between the Company, and 10(i)(w)(7) of Microcare Computer Services, Company's Form Inc., and Star Bank, N.A., 10-Q filed dated July 24, 1997 November 10,
(w)(8) Subordinated Promissory Note Exhibit between the Company and 10(i)(w)(8) of Microcare Computer Services, Company's Form Inc., dated July 24, 1997 10-Q filed November 10,
(w)(9) Registration Rights Agreement Exhibit between the Company and 10(i)(w)(9) of Microcare Computer Services, Company's Form Inc., dated July 24, 1997 10-Q filed November 10,
(w)(10) General Bill of Sale and Exhibit Assignment between the 10(i)(w)(10) of Company and Microcare Company's Form Computer Services, Inc., 10-Q filed dated July 24, 1997 November 10,
(w)(11) General Bill of Sale and Exhibit Assignment between the 10(i)(w)(11) of Company and Microcare, Inc., Company's Form dated June 24, 1997 10-Q filed November 10,
(w)(12) Asset Purchase Agreement Exhibit between the Company, and 10(i)(w)(12) of Microcare Computer Services, Company's Form Inc., Microcare Inc., and 10-Q filed Robert L. Versprille dated November 10, July 24, 1997 1997
(w)(13) Employment Agreement between Exhibit the Company and Robert L. 10(i)(w)(13) of Versprille, dated July 24, Company's Form 1997 10-Q filed November 10,
(x) Lease between the Company and Exhibit 10(i)(x) Pomeroy Investments, LLC for of Company's buildings at Airpark Form 10-Q filed International dated September November 17, 5, 1995 1995
(y) Lease between the Company and Exhibit 10(i)(y) New England Mutual Life of Company's Insurance Company for Form 10-Q filed building at Lexington November 17, Business Center dated October 1995 4, 1995
(z)(1) Asset Purchase Agreement Exhibit between the Company and 10(i)(z)(1) of Cabling Unlimited, Inc. dated Company's Form October 13, 1995 10-K filed April 4, 1996
(z)(2) Agreement between Cabling Exhibit Unlimited, Inc. and the 10(i)(z)(2) of Company dated October 13, Company's Form 1995 10-K filed April 4, 1996
(z)(3) Agreement between Karen Exhibit Epperson and the Company 10(i)(z)(3) of dated October 13, 1995 Company's Form 10-K filed April 4, 1996
(z)(4) Employment Agreement between Exhibit Karen Epperson and the 10(i)(z)(4) of Company dated October 13, Company's Form 1995 10-K filed April 4, 1996
(z)(5) Assumption of Liabilities Exhibit between Cabling Unlimited, 10(i)(z)(5) of Inc. and the Company dated Company's Form October 13, 1995 10-K filed April 4, 1996
(aa) Lease between Gleeson, Inc. Exhibit and the Company for 115 10(i)(aa) of Wiltshire Ave., Louisville, Company's Form KY dated May 10, 1995 10-K filed April (assigned to the Company 4, 1996 effective October 13, 1995)
(bb) Columbia/HCA Agreement Exhibit between Columbia/HCA 10(i)(bb) of Information Services, Inc. Company's Form and the Company dated 10-K filed April December 12, 1995 4, 1996
(cc)(1) Plan of Reorganization dated E-96 to E-137 October 17,1997 between Pomeroy Computer Resources of South Carolina and The Computer Store, Inc.
(cc)(2) Plan of Merger dated October E-138 to E142 17,1997 between Pomeroy Computer Resources of South Carolina and The Computer Store, Inc.
(cc)(3) Articles of Merger dated E-143 to E-145 October 17,1997 between Pomeroy Computer Resources of South Carolina and The Computer Store, Inc.
(cc)(4) Employment Agreement dated E-146 to E-153 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Jeffrey F. Hipp
(cc)(5) Employment Agreement dated E-154 to E-163 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Ronald D. Hildreth
(cc)(6) Employment Agreement dated E-164 to E-172 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Authur M. Cox
(cc)(7) Guarnaty of Employment E-173 to E-175 Agreement dated October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Authur M. Cox
(cc)(8) Guarnaty of Employment E-176 to E-178 Agreement dated October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Ronald D. Hildreth
(cc)(9) Guarnaty of Employment E-179 to E-181 Agreement dated October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Jeffery F. Hipp
(cc)(10)Non-Compete Agreement dated E-182 to E-186 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Authur M. Cox
(cc)(11)Non-Compete Agreement dated E-187 to E-191 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Ronald D. Hildreth
(cc)(12)Non-Compete Agreement dated E-192 to E-196 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Jeffrey F. Hipp
(cc)(13)Investor's Certificate dated E-197 to E-199 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Jeffrey F. Hipp
(cc)(14)Investor's Certificate dated E-200 to E-202 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Ronald D. Hildreth
(cc)(15)Investor's Certificate dated E-203 to E-205 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc. and Authur M. Cox
(cc)(16)Escrow Agreement dated E-206 to E-212 October 17,1997 between Pomeroy Computer Resources of South Carolina, Inc., Authur M. Cox, Ronald D. Hildreth, and Jeffrey F. Hipp
(cc)(17)Opinion Letter on Plan of E-213 to E-215 Merger dated October 17,1997 between Pomeroy Computer Resources of South Carolina and The Computer Store, Inc.
10(iii) Material Employee Benefit and Other Agreements
(a)(1) Employment Agreement between Exhibit the Company 10(iii)(a) and David B. Pomeroy, dated of Company's March 12, 1992 Form S-1 filed Feb. 14, 1992
(a)(2) First Amendment to Employment Exhibit Agreement between the Company 10(iii)(a)(2) of and David B. Pomeroy Company's Form effective July 6, 1993 10-K filed April 7, 1994
(a)(3) Second Amendment to Exhibit Employment Agreement between 10(iii)(a)(3) of the Company and David B. Company's Form Pomeroy dated October 14, 10-K filed April 1993 7, 1994
(a)(4) Agreement between the Company Exhibit and David B. Pomeroy related 10(iii)(a)(4) of to the personal guarantee of Company's Form the Datago agreement by David 10-K filed April B. Pomeroy and his spouse 7, 1994 effective July 6, 1993
(a)(5) Third Amendment to Exhibit Employment Agreement between 10(iii)(a)(5) of the Company and David B. Company's Form Pomeroy effective January 6, 10-Q filed 1995 November 17,
(a)(6) Supplemental Executive Exhibit Compensation Agreement 10(iii)(a)(6) of between the Company and David Company's Form B. Pomeroy effective January 10-Q filed 6, 1995 November 17,
(a)(7) Collateral Assignment Split Exhibit Dollar Agreement between the 10(iii)(a)(7) of Company; Edwin S. Weinstein, Company's Form as Trustee; and David B. 10-Q filed Pomeroy dated June 28, 1995 November 17,1995
(a)(8) Fourth Amendment to Exhibit Employment Agreement between 10(iii)(a)(8) of the Company and David B. Company's Form Pomeroy dated December 20, 10-Q filed May 1995, effective January 6, 17, 1996
(a)(9) Fifth Amendment to Exhibit Employment Agreement between 10(iii)(a)(9) of the Company and David B. Company's Form Pomeroy effective January 6, 10-Q filed May 1996 17, 1996
(a)(10) Sixth Amendment to Exhibit 10.10 of Employment Agreement between Company's Form the Company and David B. S-3 filed Pomeroy effective January 6, January 3, 1997
(a)(11) Award Agreement between the Exhibit 10.11 of Company and David B. Pomeroy Company's Form effective January 6, 1997 S-3 filed January 3, 1997
(a)(12) Registration Rights Agreement Exhibit 10.12 of between the Company and David Company's Form B. Pomeroy effective January S-3 filed 6, 1997 January 3, 1997
(b) Employment Agreement between Exhibit the Company and Edwin S. 10(iii)(c) of Weinstein dated February 13, Company's Form 1992 S-1 filed Feb. 14, 1992
(c)(1) Employment Agreement between Exhibit the Company and Victor Eilau 10(iii)(c)(1) of dated July 6, 1997 Company's Form 10-Q filed August 11, 1997
(c)(2) Performance Share Right Exhibit Agreement between the Company 10(iii)(c)(2) of and Victor Eilau dated July Company's Form 6, 1997 10-Q filed August 11, 1997
(d) The Company Savings 401(k) Exhibit Plan, 10(iii)(d) effective July 1, 1991 of Company's Form S-1 filed Feb. 14, 1992
(e) The Company's Employee Stock Exhibit Ownership Plan and Trust, 10(iii)(e) of effective July 1, 1992 Company's Form 10-K filed March 31, 1993
(f) The Company's 1992 Non- Exhibit Qualified 10(iii)(f) and Incentive Stock Option of Company's Plan, dated February 13, 1992 Form S-1 filed February 14,
(g) The Company's 1992 Outside Exhibit Directors 10(iii)(g) Stock Option Plan, dated of Company's February 13, 1992 Form S-1 filed Feb. 14, 1992
(h) Employment Agreement between Exhibit the Company and Richard C. 10(iii)(h) of Mills dated July 7, 1993 Company's Form 10-K filed April 7, 1994
(I) Employment Agreement between Exhibit 10.64 of the Company and James Eck Company's Form dated February 6, 1996, and S-1 filed June effective as of September 18, 4, 1996
(j)(1) Employment Agreement between Exhibit 10.3 of the Company and Stephen E. Company's Form Pomeroy dated November 13, S-3 filed 1996 January 3, 1997
(j)(2) Incentive Deferred Exhibit 10.4 of Compensation Agreement Company's Form between the Company and S-3 filed Stephen E. Pomeroy dated January 3, 1997 November 13, 1996
11 Computation of Per Share E-216 Earnings
21 Subsidiaries of the Company E-217
27 Financial Data Schedule E-218 to E-219
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ David B. Pomeroy
David B. Pomeroy Chairman of the Board, President and Chief Executive Officer
By: /s/ Stephen E. Pomeroy
Stephen E. Pomeroy Chief Financial Officer and Chief Accounting Officer
Dated: April 5, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature and Title Date ___________________ ____
By: /s/ David B. Pomery April 5, 1998 ___________________________
David B. Pomeroy, Director
By: /s/ Stephen E. Pomeroy April 5, 1998 ___________________________
Stephen E. Pomeroy, Director
By: /s/ James H. Smith April 5, 1998 ___________________________ James H. Smith III, Director By: ___________________________ Dr. David W. Rosenthal, Director
By: ___________________________ Michael E. Rohrkemper, Director
By: ___________________________ Kenneth E. Waters, Director
By: /s/ Richard C. Mills April 5, 1998 ___________________________ Richard C. Mills, Director
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders Pomeroy Computer Resources, Inc.
We have audited the accompanying consolidated balance sheets of Pomeroy Computer Resources, Inc. as of January 5, 1997 and 1998, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended January 5, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pomeroy Computer Resources, Inc. at January 5, 1997 and 1998, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended January 5, 1998 in conformity with generally accepted accounting principles.
Grant Thornton LLP
Cincinnati, Ohio February 6, 1998, except for Note 18 as to which the date is March 6, 1998
F - 2
F - 3
F - 4
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 5, 1996, JANUARY 5, 1997 AND JANUARY 5, 1998
1. Company Description Pomeroy Computer Resources, Inc. (the "Company" ) was organized in February 1992 to consolidate and reorganize predecessor companies. Since the owner of the Company and the predecessor businesses were the same, this transaction constituted a combination of the predecessor businesses under common control and was accounted for at historical cost in a manner similar to that followed for a pooling of interests. The Company has 15 million shares of $.01 par value common stock authorized, with 11.4 million shares outstanding. The Company is also authorized to issue 2 million shares of $.01 par value preferred stock. In fiscal 1995 the Company formed a wholly-owned subsidiary, Technology Integration Financial Services, Inc. ( "TIFS") (f/k/a - Pomeroy Computer Leasing Company, Inc. ( "PCL")), for the purpose of leasing computer equipment to the Company's customers. In fiscal 1997 the Company formed a wholly-owned subsidiary, Pomeroy Computer Resources of South Carolina, Inc. ( "PCR-SC") for the purpose of acquiring The Computer Store ( "TCS" ) , a computer reseller and service provider located in Columbia, South Carolina.
The Company sells, installs and services microcomputers and microcomputer equipment primarily for commercial, health care, governmental, financial and educational customers. The Company also derives revenue from customer support services, including network analysis and design, systems configuration, cabling, custom installation, training, maintenance and repair. The Company has twenty regional offices in Kentucky, Ohio, Indiana, Tennessee, Florida, Alabama, Iowa, West Virginia, North Carolina and South Carolina, and grants credit to substantially all customers in these areas.
2. Summary of Significant Accounting Policies Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Xenas Communication Corp., TIFS, and PCR-SC. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 1996 financial statements included herein to conform with the presentation used in 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Fiscal Year - The Company's fiscal year is a 12- month period ending January 5. References to fiscal 1995, 1996 and 1997 are for the fiscal years ended January 5, 1996, January 5, 1997 and January 5, 1998, respectively.
Goodwill and Other Intangible Assets - Goodwill is amortized using the straight-line method over periods of fifteen to twenty-five years. In accordance with SFAS No. 121, "Accounting for The Impairment of Long-Lived Assets", the Company evaluates its goodwill on an ongoing basis to determine potential impairment by comparing the carrying value to the undiscounted estimated expected future cash flows of the related assets. Other intangible assets are amortized using the straight-line method over periods up to ten years.
Equipment and Leasehold Improvements - Equipment and leasehold improvements are stated at cost. Depreciation on equipment is computed using the straight-line method over estimated useful lives. Depreciation on leasehold improvements is computed using the straight-line method over estimated useful lives or the term of the lease, whichever is less. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in the results of operations.
Income Taxes - Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Vendor Incentive Rebates - Certain vendors provide incentive rebates to perform product training, advertising and other sales and market development activities. The Company recognizes these rebates when it has completed its obligation to perform under the specific incentive arrangement. Incentive rebates are recorded as reductions of selling, general and administrative expense or, if volume based, cost of sales.
Inventories - Inventories are stated at the lower of cost or market. Cost is determined by the average cost method.
Revenue Recognition - The Company recognizes revenue on the sale of equipment and supplies when the products are shipped. Service revenue is recognized when the applicable services are provided.
Deferred Revenue - Revenues received on maintenance contracts are recognized ratably over the lives of the contracts. Costs related to maintenance contracts are recognized when incurred.
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. This had no material effect on the results of operations or financial position of the Company.
Earnings per Common Share - The computation of basic earnings per common share is based upon the weighted average number of common shares outstanding during the period. Diluted earnings per common share is based upon the weighted average number of common shares outstanding during the period plus, in periods in which they have a dilutive effect, the effect of common shares contingently issuable, primarily from stock options.
In the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 changed the computation, presentation and disclosure requirements for earnings per share ("EPS") . Under SFAS 128, EPS is presented as basic earnings per share ( "basic EPS" ) and diluted earnings per share ( "diluted EPS" ) and replaces the presentation of primary EPS and fully diluted EPS. The adoption of SFAS 128 resulted in the restatement of earnings per share for all periods presented in the Company's consolidated financial statements.
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) 1995 1996 1997 ______________ _____________ _____________ Per Share Per Share Per Share Shares Amount Shares Amount Shares Amount Basic EPS 5,660 $ 0.77 7,834 $ 0.80 11,052 $ 1.48 Effect of dilutive stock options 332 (0.44) 272 (0.03) 315 (0.04) Contingent shares 25 - - - - - ______ ______ _____ ______ ______ ______ Diluted EPS 6,007 $ 0.73 8,106 $ 0.77 11,367 $ 1.44
Use of Estimates in Financial Statements - In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value Disclosures - The fair value of financial instruments approximates carrying value.
New Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ( "SFAS No. 130" ) with an effective date for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting of comprehensive income in a company's financial statements. Comprehensive income includes all changes in a company's equity during the period that result from transactions and other economic events other than transactions with its stockholders.
In the fourth quarter of 1997, the Company elected to early adopt SFAS No. 130 retroactive to January 6, 1997. The adoption of SFAS No. 130 did not affect the financial reporting in the accompanying consolidated financial statements because the Company does not presently have any comprehensive income other than net income.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ( "SFAS No. 131" ) with an effective date for fiscal years beginning after December 15, 1997. A reportable segment, referred to as an operating segment, is a component of an entity about which separate financial information is produced internally, that is evaluated by the chief operating decision-maker to assess performance and allocate resources. The Company does not presently believe that it operates in more than one identifiable segment.
3. Accounts Receivable The following table summarizes the activity in the allowance for doubtful accounts for fiscal 1995, 1996 and (in thousands) Trade Other __________ __________ Balance January 5, 1995 $ 65 $ 225 Provision 1995 94 417 Accounts written-off (89) (444) Recoveries 131 12 __________ __________ Balance January 5, 1996 201 210 Provision 1996 250 31 Accounts written-off (249) (604) Recoveries 170 500 __________ __________ Balance January 5, 1997 372 137 Provision 1997 125 200 Accounts written-off (601) (415) Recoveries 459 301 __________ __________ Balance January 5, 1998 $ 355 $ 223
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. Inventories
Inventories consist of items held for resale and are comprised of the following components as of the end of fiscal:
(in thousands) 1996 1997 _________ _________ Equipment and supplies $ 21,730 $ 36,265 Service parts 1,696 2,895 _________ _________ Total $ 23,426 $ 39,160
5. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following as of the end of the fiscal year, net of accumulated amortization of $984 thousand (1996) and $1,826 thousand (1997), respectively:
(in thousands) 1996 1997 __________ ___________ Goodwill $ 8,698 $ 12,159 Covenants not to compete 208 61 Customer lists 529 477 __________ ___________ $ 9,435 $ 12,697
As a result of its litigation with Vanstar Corporation, the Company in fiscal 1994 wrote-off unamortized costs in the amount of $251 thousand related to its agreement with Vanstar which are included in amortization expense. On April 29, 1996 the Company and Vanstar entered into a settlement agreement which in effect terminated all agreements between the parties.
In 1993, the Company acquired certain assets, principally customer lists, of a computer reseller in Louisville, Kentucky. Also, the Company entered into a five year covenant not to compete with the reseller and its owners. Amounts paid to the reseller for these intangibles were $194 thousand for customer lists and $241 thousand for the covenant not to compete. The Company entered into an additional covenant not to compete with a former owner of the reseller whereby the Company paid a total of $277 thousand in two installments during 1994 and 1995.
In fiscal 1996, the Company acquired certain assets of The Computer Supply Store, Inc. ("TCSS") a privately held computer reseller located in Des Moines, Iowa, AA Microsystems, Inc. ("AA Micro"), a network service provider located in Birmingham, Alabama, and Communications Technology, Inc. ( "DILAN" ), a privately held network integrator located in Hickory, North Carolina (See Note 12). The Company recorded $5.7 million, $0.4 million and $2.5 million of goodwill in connection with those acquisitions, respectively.
In fiscal 1997, the Company acquired certain assets of Magic Box, Inc. ( "Magic Box" ) , a privately held network integrator located in Miami, Florida, and Micro Care, Inc. ( "Micro Care" ), a privately held systems integrator located in Indianapolis, Indiana. A wholly owned subsidiary of the Company, Pomeroy Computer Resources of South Carolina, Inc., acquired all the assets and liabilities of The Computer Store Inc., a network integrator located in Columbia, South Carolina. The Company recorded $1.7 million, $1.9 million and $0.4 million in connection with those acquisitions, respectively. 6. Borrowing Arrangements
The Company has an available line of credit up to the lesser of $20 million, or an amount based upon a formula of eligible trade receivables, at an interest rate that varies based on the prime rate of the bank or the LIBOR rate at the Company's election. At January 5, 1997 and 1998, bank notes payable include $2.2 million and $6.5 million, respectively, of overdrafts in accounts with the Company's primary lender. These amounts were subsequently funded through the normal course of business. The interest rate charged was 7.25% and 7.50% at January 5, 1997 and January 5, 1998 respectively. The agreement, which expires in June 1998, is collateralized by substantially all assets of the Company, except those assets which collateralize certain other financing arrangements. Under the revolving credit
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
agreement, the Company may not make any cash dividend payments.
The maximum amount outstanding and the average amount outstanding on bank revolving credit agreements were as follows:
(in thousands) Maximum Average Amount Amount Period Ending Outstanding Outstanding _______________ ___________ ___________ January 5, 1996 $ 19,000 $ 14,741 January 5, 1997 $ 26,687 $ 17,402 January 5, 1998 $ 25,800 $ 8,002
The above average amounts outstanding are calculated by dividing the sum of the average daily balances for each month by the number of months in the period. The weighted average interest rate on the bank revolving credit agreements was 8.7%, 8.2% and 7.3% in fiscal 1995, 1996 and 1997, respectively.
In November 1994 the Company exercised an option in its revolving credit agreement to borrow $500 thousand on a term note with interest at a rate 0.5% above the bank's prime rate. The interest rate was raised to the bank's prime rate in March, 1995. The term note matured July 31, 1996 and was paid off. The Company finances inventory through floor plan arrangements with two finance companies. As of January 5, 1998 the floor plan lines of credit were $12 million with IBM Credit Corporation ("ICC") and $35 million with Deutsche Financial Services ("DFS"). Borrowings under the ICC floor plan arrangement are made on sixty day notes, with one-half of the note amount due in thirty days. Borrowings under the DFS floor plan arrangement are made on thirty day notes. Financing on many of the arrangements which are subsidized by manufacturers is interest free. The average rate on the plans overall is less than 1.0%.
The maximum amount outstanding and the average amount outstanding on each of the floor plan arrangements were as follows:
(in thousands) ICC DFS __________________ ___________________ Maximum Average Maximum Average Amount Amount Amount Amount Period Ending Outstanding Outstanding _______________ ______ ______ _______ _______ January 5, 1996 $6,300 $4,191 $21,045 $15,979
January 5, 1997 $9,045 $5,779 $27,349 $18,532
January 5, 1998 $19,985 $10,459 $39,092 $25,069
The average amount outstanding is calculated by dividing the sum of the outstanding balances at the end of each month by the number of months in the applicable period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. Income Taxes
The provision for income taxes consists of the following:
(in thousands) 1995 1996 1997 Current: Federal $ 2,071 $ 3,205 $ 8,742 State 654 1,034 1,036 ________ ________ ________ Total current 2,725 4,239 9,778 ________ ________ ________
Deferred: Federal 206 46 (21) State 52 11 (54) ________ ________ ________ Total deferred 258 57 (271) Total income tax provision $ 2,983 $ 4,296 $ 9,507
The approximate tax effect of the temporary differences giving rise to the Company's deferred income tax assets (liabilities) are:
(in thousands) 1996 1997 Deferred Tax Assets: Bad debt provision $208 $282 Depreciation - 193 Deferred compensation 210 409 _______ _______ Total deferred tax assets 418 884 _______ _______ Deferred Tax Liabilities: Acquisition of lease residuals (847) (620) Depreciation (96) - Accounts Receivable - (518) _______ ________ Total deferred tax liabilities (943) (1,138) _______ ________ Net deferred tax liability $ (525) $ (254) ======= ========
The Company's effective income tax rate differs from the Federal statutory rate as follows: 1995 1996 1997 _____ _____ _____ Tax at Federal statutory rate 34.0% 34.0% 35.0% State taxes 6.3 6.6 4.7 Kentucky Relocation Credits - - (2.2) Other 0.3 0.2 (0.7) _____ _____ _____ Effective tax rate 40.6% 40.8% 36.8% ===== ===== =====
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. Operating Leases The Company leases office and warehouse space, vehicles and certain office equipment from various lessors. Lease terms vary in duration and include various option periods. The leases generally require the Company to pay taxes and insurance. Future minimum lease payments under noncancelable operating leases with initial or remaining terms in excess of one year as of January 5, 1998 are as follows:
(in thousands) Fiscal Year 1998 $2,153 1999 1,741 2000 1,376 2001 1,019 2002 828 Thereafter 2,554 ________ Total minimum lease payments $ 9,671 =======
9. Employee Benefit Plans In the fourth quarter of 1997, the Company was in the process of terminating the Employee Stock Ownership Plan ("ESOP"). As of January 5, 1998, the ESOP held 72,661 shares of Company stock. No contributions were made or accrued in fiscal 1996 and 1997. The distribution to employees of the ESOP should be completed by the second quarter of 1998.
The Company also has a savings plan intended to qualify under sections 401(a) and 401(k) of the Internal Revenue Code. The plan covers substantially all employees of the Company. The Company did not contribute to the plan in 1996 or 1997. Beginning in fiscal 1998 the Company will make contributions to the plan based on a participant's annual pay.
10. Investment in Lease Residuals
The Company participates in a Remarketing and Agency Agreement ("Agreement") with Information Leasing Corporation ("ILC") whereby the Company obtains rights to 50% of lease residual values for services rendered in connection with locating the lessee, selling the equipment to ILC and agreeing to assist in remarketing the used equipment.
During fiscal 1995, 1996 and 1997, the Company sold equipment and related support services to ILC, for lease to ILC's customers, in amounts of $23.7 million, $15.2 million and $7.7 million, respectively. The Company also obtained rights to lease residuals from ILC in the amount of $875 thousand, $575 thousand and $562 thousand in 1995, 1996 and 1997, respectively. Such amounts are recorded as a reduction of the related cost of sales. Residuals acquired in this manner are recorded at the estimated present value of the interest retained.
The Company also purchases residuals associated with separate leasing arrangements entered into by ILC. Such transactions do not involve the sale of equipment and related support services by the Company to ILC. Residuals acquired in this manner are accounted for at cost.
The carrying value of investments in lease residuals is evaluated on a quarterly basis, and is subject only to downward market adjustments until ultimately realized through a sale or re-lease of the equipment.
11. Major Customers
Sales to a major customer were approximately $43.8 million for fiscal 1995. Sales to a major customer were approximately $40.3 million for fiscal 1996. Sales to a major customer were approximately $ 60.4 million for fiscal 1997.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
12. Acquisitions During fiscal 1996, the Company completed several acquisitions. The total consideration given consisted of $7.2 million in cash, subordinated notes of $4.0 million and 170 thousand unregistered shares of the Company's common stock with an approximate value of $1.5 million. Interest on the subordinated notes is payable quarterly. Principal is payable in equal annual installments. The acquisitions were accounted for as purchases, accordingly the purchase price was allocated to assets and liabilities based on their estimated value as of the dates of acquisition. The results of operations of the acquisitions are included in the consolidated statement of income from the dates of acquisition.
The following table summarizes, on an unaudited pro forma basis, adjusted to reflect a 10% stock dividend paid on May 22, 1995 and three-for-two splits of the Company's common stock in the form of a stock dividends paid on October 4, 1996 and October 6, 1997, the estimated combined results of the Company and the 1996 acquisitions assuming the acquisitions had occurred on January 6, 1995. These results include certain adjustments, primarily goodwill amortization and interest expense, and are not necessarily indicative of what results would have been had the Company owned these businesses during the periods presented:
(in thousands) Fiscal Year _________________ 1995 1996 __________ __________ Net sales and revenues $ 309,655 $ 364,005 Net income $ 4,630 $ 6,250 Net income per common share: Basic $ 0.80 $ 0.80 Diluted $ 0.75 $ 0.77
During fiscal 1997, the Company completed several acquisitions. The total consideration given consisted of $3.7 million in cash, subordinated notes of $1.3 million and 37 thousand unregistered shares of the Company's common stock with an approximate value of $1.0 million. Interest on the subordinated notes is payable quarterly. Principal is payable in equal annual installments. The acquisitions were accounted for as purchases, accordingly the purchase price was allocated to assets and liabilities based on their estimated value as of the dates of acquisition. The results of operations of the acquisitions are included in the consolidated statement of income from the dates of acquisition. If the 1997 acquisitions had occurred on January 6, 1996, the pro forma operations of the Company would not have been materially different than that reported in the accompanying consolidated statements of income.
13. Related Parties
During fiscal 1995 the Company entered into a ten year triple-net lease agreement commencing in 1996 for a new headquarters and distribution facility with a company that is controlled by the Chief Executive Officer of the Company. During fiscal 1997 the lease agreement was amended to include an expansion of the distribution facility. The base rental for 1997 on an annualized basis is $858 thousand. The annual rental for these properties was determined on the basis of a fair market value rental opinion provided by an independent real estate company.
During fiscal 1996, the Company made periodic advances to a company that is controlled by the Chief Executive Officer of the Company. No interest was charged on the advances which were repaid in December 1996.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
14. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and non-cash investing and financing activities are as follows:
(in thousands) 1995 1996 1997 Interest paid $2,037 $2,065 $1,045 Income taxes paid $2,658 $3,813 $4,920 Business combinations accounted for as purchases: Assets acquired $774 $24,526 $7,358 Liabilities assumed (24) (9,121) (1,495) Note payable (225) (3,996) (1,343) Stock issued (100) (1,475) (1,021) ________ _________ _________ Net cash paid $ 425 $ 9,934 $3,499
15. Stockholders' Equity and Stock Option Plans
In July 1996, the Company completed a secondary public offering of 1.4 million new shares of its common stock. The net proceeds of $17.9 million were used to reduce amounts outstanding under the line of credit. If this secondary offering had been completed as of January 6, 1996, pro forma basic and diluted earnings per share would have been $0.77 and $0.75, respectively, for fiscal 1996. This computation assumes no interest expense related to the credit line and the issuance of only a sufficient number of shares to eliminate the credit line at the beginning of fiscal 1996.
In February 1997, the Company completed a secondary public offering of 1.02 million shares of its common stock. The net proceeds of $23.3 million were used to reduce amounts outstanding under the Company's line of credit. If this secondary offering had been completed as of January 6, 1997, pro forma basic and diluted earnings per share would have been $1.38 and $1.34 , respectively, for fiscal 1997. This computation assumes no interest expense related to the credit line and the issuance of only a sufficient number of shares to eliminate the credit line at the beginning of fiscal 1997.
On September 6, 1996, the Company's Board of Directors authorized a three-for-two stock split in the form of a stock dividend payable October 4, 1996, to shareholders of record September 19, 1996. The split resulted in the issuance of 2.1 million new shares of common stock. The stated par value of each share was not changed from $0.01. A total of $20 thousand was reclassified from the Company's additional paid in capital account to the Company's common stock account. Accordingly, net income per common share, weighted average shares outstanding and stock option plan information have been restated to reflect the stock split.
On September 8, 1997, the Company's Board of Directors authorized a three-for-two stock split in the form of a stock dividend payable October 6, 1997, to shareholders of record September 22, 1997. The split resulted in the issuance of 3.8 million new shares of common stock. The stated par value of each share was not changed from $0.01. A total of $38 thousand was reclassified from the Company's additional paid in capital account to the Company's common stock account. Accordingly, net income per common share, weighted average shares outstanding and stock option plan information have been restated to reflect the stock split.
The Company's 1992 Non-Qualified and Incentive Stock Option Plan provides certain employees of the Company with options to purchase common stock of the Company through options at an exercise price equal to the market value on the date of grant. 990,000 shares of the common stock of the Company are reserved for issuance under the plan. The plan will terminate ten years from the date of adoption. Stock options granted under the plan are exercisable in accordance with various terms as authorized by the Compensation Committee. To the extent not exercised, options will expire not more than ten years after the date of grant.
The Company's 1992 Outside Directors' Stock Option Plan provides outside directors of the Company with options to purchase common stock of the Company at an exercise price equal to the market value of the shares at the date of grant. 175,000 shares of common stock of the Company are reserved for issuance under the plan. The plan will terminate ten years from the date of adoption. Pursuant to the
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
plan, an option to purchase 10,000 shares of common stock automatically will be granted on the first day of the initial term of a director. An additional 2,500 shares of common stock automatically will be granted to an eligible director upon the first day of each consecutive year of service on the board. Options may be exercised after one year from the date of grant for not more than one-third of the shares subject to the option and an additional one- third of the shares subject to the option may be exercised for each of the next two years thereafter. To the extent not exercised, options will expire five years after the date of grant.
The following summarizes the stock option transactions under the plans for the three fiscal years ended January 5, 1998:
Weighted Average Shares Exercise price _________ ________________ Options outstanding January 5, 1995 283,832 $8.69 Granted 66,300 10.95 Exercised (164,975) 8.27 Stock dividend effect 33,383 8.32 _________ ________________ Options outstanding January 5, 1996 218,540 8.32 Granted 149,600 13.83 Exercised (197,047) 8.97 Stock split effect 121,082 7.21 _________ ________________ Options outstanding January 5, 1997 292,175 7.27 Granted 216,328 30.10 Exercised (95,260) 8.70 Forfeitures (4,700) 34.19 Stock split effect 227,754 5.61 _________ ________________ Options outstanding January 5, 1998 636,297 $12.01 ========= ================
The following summarizes options outstanding and exercisable at January 5, 1998:
Options Outstanding Options Exercisable _________________________________________ __________________ Number Weighted Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise at 1/5/98 Contractual Exercise at 1/5/98 Exercise Prices Life Price Price ______________ ___________ _______________ ___________ __________ _________ $2.67 to $5.67 252,264 0.8 $4.38 220,616 $4.45 $6.33 to $16.50 165,000 2.1 $11.00 120,000 $11.31 $17.09 to $25.67 219,033 1.5 $21.56 215,283 $21.63 __________ __________ 636,297 1.6 $12.01 555,899 $12.58 ========== ==========
The weighted average fair value at date of grant for options granted during fiscal 1996 and 1997 was $2.75 and $6.77, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
Fiscal 1995 Fiscal 1996 Fiscal 1997 ___________ ___________ ___________ Expected life (years) 2.4 1.7 1.8 Interest rate 7.3% 5.8% 6.1% Volatility 50% 55% 56% Dividend yield 0% 0% 0%
Had compensation cost for the Company's stock option plans been determined based on the fair value
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
at the grant date for awards in fiscal 1995 and 1996 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:
(in thousands, except per share amounts) Fiscal 1995 Fiscal 1996 Fiscal 1997 ___________ ___________ ___________ Net income - as reported $4,367 $6,232 $16,313 Net income - pro forma $4,196 $5,777 $14,455 Net income per common share - as reported Basic $0.77 $0.80 $1.48 Diluted $0.73 $0.77 $1.44 Net income per common share - pro forma Basic $0.74 $0.74 $1.31 Diluted $0.70 $0.71 $1.27
In 1995, 1996 and 1997, 4,000, 3,076 and 544, respectively, shares of common stock were awarded to officers of the Company. Compensation expense resulting from the awards was $40 thousand in fiscal 1995 and 1996 and $20 thousand in fiscal 1997.
16. 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 consolidated financial position or results of operations.
17. Risk of Loss from Concentrations
During fiscal 1997, approximately 41.2% of the Company's total net sales and revenues were derived from its top ten customers, including one customer which accounted for 12.3% of total net sales and revenues. The Company was not selected as the fiscal 1998 product supplier by the largest customer. The Company does not expect that this loss will have a near-term material impact on its financial condition or results of operation.
Due to the demand for the products sold by the Company, significant product shortages occur from time to time because manufacturers are unable to produce certain products to meet increased demand. Failure to obtain adequate product shipments could have a material adverse effect on the Company's operations and financial results.
The Company is required to have authorizations from manufacturers in order to sell their products. The loss of a significant vendor's authorization could have a material adverse effect on the Company's business.
18. Subsequent Events
Stockholder Rights Plan. On February 18, 1998, the Company's Board of Directors declared a dividend of one preferred share purchase right (a "Right" ) for each outstanding share of common stock, par value $.01 per share (the "Common Share" ) on March 15, 1998 (the "Record Date" ) to the stockholders of record on that date. The Rights become exercisable only if a person or group (an "Acquiring Person" ) acquires, or makes a tender offer to acquire, beneficial ownership of 15% or more of the outstanding Common Shares of the Company. The Rights expire on March 1, 2008, unless extended or are earlier redeemed by the Company.
When the Rights become exercisable, the holder of each Right, other than the Acquiring Person, is entitled to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Shares" ), of the Company, at a price of $115.00 per one one-thousandth of a Preferred Share (the "Purchase Price" ), subject to adjustment. Alternatively, under certain circumstances each holder of a Right, other than Rights beneficially owned by the Acquiring Person, will thereafter have the right to receive upon exercise, in lieu of Preferred
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Shares, that number of Common Shares having a market value of two times the exercise price of the Right. In the event that, at any time after a Person becomes an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated
assets or earning power is sold, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right.
Acquisitions. In March 1998, the Company completed two acquisitions. The total consideration given consisted of $11.5 million in cash and subordinated notes of $2.0 million. Interest on the subordinated notes is payable quarterly while principal is payable in equal annual installments. The acquisitions will be accounted for as purchases, accordingly the purchase prices will be allocated to assets and liabilities based on their estimated values as of the dates of acquisition. The results of operations of the acquisitions will be included in the consolidated statement of income from the dates of acquisition. If these acquisitions had occurred on January 6, 1997, the pro forma operations of the Company would not have been materially different than that reported in the accompanying consolidated statements of income.
Amendment to Line of Credit. In January 1998, the Company amended its revolving credit agreement. The amended agreement provides for borrowings up to $40.0 million at the bank's prime rate minus 1.25%. A new financial covenant requires that the Company maintain trade accounts receivable less than ninety days old at a ratio greater than 1.25 to 1.0 to amounts outstanding under the revolving credit agreement at any time. The revolving credit agreement expires May 31, 1998.
Repricing of Stock Options. In January 1998, the Board of Directors of the Company approved the repricing of certain unexercised options granted under the 1992 Non-Qualified and Incentive Stock Option Plan. As a result, 109,649 options granted during fiscal 1997 will be repriced to $16.63 per share from $34.19 per share. These amounts approved by the Board of Directors do not give effect to the stock split approved after the date of the original grant of the options.