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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year end January 5, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-20022
POMEROY COMPUTER RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1227808
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
1020 Petersburg Road, Hebron, Kentucky 41048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (606)586-0600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
___________________ ___________________
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
Title of Class
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained , to the best of the
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock of the Registrant
held by non affiliates was $125,361,000 as of March 24, 1997.
The number of shares outstanding of the Registrant's common
stock as of March 24, 1997 was 7,503,287.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are
Incorporated
__________________________ ____________________________
Definitive Proxy Statement Part III
for the 1997 Annual Meeting
of Stockholders to be Filed
with the Securities and
Exchange Commission prior to
May 5, 1997
POMEROY COMPUTER RESOURCES, INC.
FORM 10-K
YEAR ENDED JANUARY 5, 1997
TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a
Vote of Security Holders 4
PART II
Item 5. Market for the Registrant's
Common Stock and Related
Stockholder Matters 4
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 7
Item 8. Financial Statements and
Supplementary Data 9
Item 9. Disagreements on Accounting
and Financial Disclosures 9
PART III
Item 10. Directors and Executive
Officers of the Registrant 9
Item 11. Executive Compensation 9
Item 12. Security Ownership of
Certain Beneficial Owners
and Management 9
Item 13. Certain Relationships and
Transactions 9
PART IV
Item 14. Exhibits, Financial
Statement Schedules and
Reports on Form 8-K 9
SIGNATURES
Chief Executive Officer,
Chief Financial Officer and
Chief Accounting Officer 17
Directors 17
Independent Auditor's Report F-1
Financial Statements F-2 to F-17
Exhibits
Special Cautionary Notice Regarding Forward-Looking Statements
______________________________________________________________
Certain of the matters discussed under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" may constitute forward-looking statements for purposes of
the Securities Act of 1993 and The Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from future
results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause the
actual results, performance or achievements of the Company to differ
materially from the Company's expectations are disclosed in this
document, including, without limitation, those statements made in
conjunction with the forward-looking statements under "Business" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations." All written or oral forward-looking
statements attributable to the Company are expressly qualified in
their entirely by such factors.
PART I
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 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.
An important component of the Company's operating strategy is to
offer its customers a wide range of microcomputer systems and
related products and software at competitive prices. The
principal components of the microcomputer systems generally
supplied by the Company include microprocessor-based central
processing units, peripheral devices such as video displays,
keyboards, additional storage units, printers and software
packages.
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's sales are generated primarily by its 208 person
direct sales force and sales support personnel located in 15
regional offices in Kentucky, Iowa, Tennessee, Florida, Alabama,
Indiana, 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 the majority of businesses
considering how to "rightsize", the Company is using its
resources to assist customers in the appropriate decision-making
and project implementation.
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, 1997, the Company had been awarded contracts which it
estimates will result in an aggregate of approximately $71.3
million of net sales and revenues after January 5, 1997. Of this
amount, the Company estimates 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 1994, 1995 and 1996, sales of microcomputers,
peripheral products, supplies and software accounted for
approximately 90.1%, 91.5% and 91.2%, 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 1994,
1995 and 1996, revenues from service and support activities were
approximately $13.4 million, $17.9 million and $27.4 million,
respectively, and accounted for approximately 9.3%, 7.8% and
8.2%, 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 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) creative 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.
Employees
As of January 5, 1997, the Company had 923 full-time employees
consisting of the following: 470 service and technical personnel
including 115 systems engineers; 110 direct sales
representatives and 98 sales support personnel; 29 management
personnel; and 216 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, including a
signed letter of intent with a small network service provider in
Indiana. 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 year 1996, the Company completed three
acquisitions. The following is a description of these
acquisitions.
TCSS. In March 1996, the Company acquired certain assets of
The Computer Supply Store, Inc. (TCSS), a computer reseller
based in Des Moines, Iowa, whose primary geographic market area
is central Iowa. The operations acquired from TCSS now
constitute the Company's Des Moines branch office. The Des
Moines branch provides a broad range of microcomputer products
and related professional services to a variety of business and
other organizations. The purchase price consisted of
approximately $4.5 million in cash, $2.7 million in a
subordinated note, the assumption of certain liabilities and
150,000 unregistered shares of Common Stock. In addition, the
Company entered into 5-year employment agreements with key
employees of TCSS.
TCSS' service revenues have historically accounted for a
smaller percentage of total revenues than the percentage of
service revenues of the Company, thus affording the Company an
opportunity to provide additional value-added services to TCSS'
customers. As of January 5, 1997, the Des Moines branch had
approximately 134 service contracts in effect. As of January 5,
1997, the Des Moines branch had more than 4,800 customers, the
largest of which included Principal Mutual Life Insurance
Company, Pioneer HiBred International, Norwest Mortgage, Inc.,
Iowa Medical Center and Blue Cross/ Blue Shield of Iowa. As part
of its growth strategy, the Company recently opened a branch
office in Cedar Rapids, Iowa and intends to expand its presence
to the entire state of Iowa.
AA MICROSYSTEMS. In August 1996, the Company acquired
certain assets of AA Microsystems, Inc. (AA Micro), a
network service provider located in Birmingham, Alabama. This
acquisition enabled the Company to expand the operations of its
existing branch office in Birmingham and increase the number,
and enhance the expertise, of its technical and service
personnel. The purchase price consisted of $67 thousand in cash,
a $200 thousand note payable, and 19,974 unregistered shares of
Common Stock. In addition, the Company has entered into a three
year employment contract with the former president.
DILAN. In October 1996, the Company acquired certain assets
of Communications Technology, Inc. (DILAN), a network
integrator headquartered in Hickory, North Carolina. Through
this acquisition, the Company expanded into the North Carolina
and South Carolina markets, added Internet and electronic
commerce services capabilities and enhanced its technical
expertise, in particular WAN services and complex network
integration. Historically, DILAN's business focused on network
integration products and services with limited sales of
microcomputers. The Company believes there exists an opportunity
to expand sales of desktop and laptop PCs and related products
to DILAN's current customer base as well as other companies in
DILAN's markets. The purchase price consisted of approximately
$2.6 million in cash, a $1.1 million subordinated note and the
assumption of $5.5 million of liabilities. The purchase price is
subject to adjustment based on DILAN's operating income for the
fiscal year ending March 31, 1997. The Company has entered into
a three year employment agreement with one employee and a one
year employment agreement with another employee, both of whom
were key employees of DILAN.
ITEM 2. Properties
The Company's principal executive offices and distribution
facility are located in Hebron, Kentucky, comprised of
approximately 36,000 and 91,000 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 intends to
expand the distribution facility in 1997 to include a new depot
repair facility. Pomeroy Investments intends to finance,
purchase and own the land and improvements necessary to
accommodate the new depot repair facility. The Company will
lease 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. 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. Submission of Matters to a Vote of Security Holders
None
PART II
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 10% stock
dividend effected on May 22, 1995 and a three-for-two stock
split in the form of a stock dividend effected on October 4,
1996.
1995 1996
High Low High Low
First quarter $9.24 $5.61 $10.50 $8.00
Second quarter $12.67 $7.88 $11.33 $8.67
Third quarter $13.83 $10.50 $22.75 $9.17
Fourth quarter $12.33 $7.50 $38.00 $20.38
As of March 24, 1997, there were approximately 223 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.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(In Thousands Except Per Share Data)
Fiscal Years (1)
_____________________________________________________
1992(2) 1993 1994(3) 1995 1996(4)
Consolidated Statement of Income Data:
Net sales and revenues $61,389 $112,178 $144,575 $230,710 $336,358
Cost of sales and service 48,176 94,151 120,901 197,174 281,753
______ ______ _______ _______ _______
Gross profit 13,213 18,027 23,674 33,536 54,605
Operating expenses:
Selling, general and administrative 9,225 12,969 17,231 23,247 35,175
Royalty expense 1,732 605 - - -
Depreciation and amortization 203 400 886 1,004 2,561
______ ______ ______ ______ ______
Total operating expenses 11,160 13,974 18,117 24,251 37,736
Income from operations 2,053 4,053 5,557 9,285 16,869
Other expense (income):
Interest expense 604 850 1,031 1,999 2,170
Litigation settlement and related costs - - - - 4,392
Miscellaneous (54) (57) (57) (64) (221)
_______ _______ _______ _______ ______
Total other expense 550 793 974 1,935 6,341
Income from continuing operations
before income taxes(5) 1,503 3,260 4,583 7,350 10,528
Income tax expense 523 1,360 1,856 2,983 4,296
_______ _______ _______ ________ ______
Net income from continuing operations $980 $1,900 $2,727 $4,367 $6,232
======= ======= ======== ======== ======
Net income from continuing operations
per share (fully diluted)(6) $0.31 $0.52 $0.75 $1.08 $1.14
======= ======= ======== ======== ======
Pro forma income from continuing
operations(7) $917 $1,900 $2,727 $4,367 $6,232
Pro forma net income 702 1,900 2,727 4,367 6,232
Pro forma net income per share
(fully diluted)(6)(7) $0.22 $0.52 $0.75 $1.08 $1.14
Consolidated Balance Sheet Data:
Working capital $5,768 $6,339 $6,556 $10,340 $27,203
Long-term debt, net of current maturities - - 167 100 2,189
Equity 8,616 10,594 13,130 19,200 46,593
Total assets 26,813 34,086 57,061 63,985 121,380
(1) On December 30, 1992, the Company changed its fiscal year from a
52- or 53-week period ending on the first Saturday following December
31 to a 12-month period ending January 5.
(2) During fiscal 1992, the Company acquired the outstanding stock of
C&N Corp. and discontinued its retail operations.
(3) During fiscal 1994 the Company acquired the outstanding stock of
Xenas Communications Corp. See Note 12 of Notes to Consolidated
Financial Statements.
(4) 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.
(5) Fiscal year 1996 reflects the Vanstar litigation settlement and
related costs of $4,392. Without this charge, net income would have
been $8,832 and fully diluted net income per share would have been
$1.62.
(6) Net income per share from continuing operations and pro forma per
share amounts are calculated using pro forma weighted average shares
outstanding adjusted for the three-for-two stock split in the form of
a stock dividend effective on October 4, 1996.
(7) The pro forma data compares the net operating results of the
Company for fiscal year 1992 with the comparable results for fiscal
years 1993 through 1996 as if the Company had been taxed as a C
Corporation on all income in fiscal 1992 at an effective rate of 39%.
QUARTERLY RESULTS OF OPERATIONS (in thousands, except per share data)
The following table sets forth certain unaudited operating res
This information is unaudited, but in the opinion of managemen
consisting of normal recurring adjustments, necessary for a fa
operations of such periods.
1996(1)
________________________________________
First Second Third Fourth
Quarter(2) Quarter Quarter Quarter(3)
_________ ________ __________ _________
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
Net income (loss) per share
Primary $ (0.33) $ 0.43 $ 0.40 $ 0.47
Fully Diluted $ (0.33) $ 0.43 $ 0.40 $ 0.47
1995(1)
___________________________________________
First Second Third Fourth
Quarter Quarter Quarter Quarter
________ _________ __________ _________
Net sales and revenues $ 47,990 $ 58,487 $ 64,982 $ 59,252
Gross profit 7,753 7,882 8,765 9,137
Net income $ 906 $ 1,055 $ 1,088 $ 1,319
Net income per share
Primary $ 0.25 $ 0.27 $ 0.26 $ 0.32
Fully Diluted $ 0.24 $ 0.27 $ 0.26 $ 0.32
(1) All per share amounts prior to the third quarter of 1996 have
been restated to reflect the stock split effected as a stock dividend
in the third quarter of 1996.
(2) 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 net income per share would have been $0.30.
(3) 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 1996 COMPARED TO FISCAL YEAR 1995
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 of The Computer Supply Store, Inc. (TCSS) and
Communications Technology, Inc. ( DILAN ), and increased sales to
existing and new customers. After eliminating (i) fiscal 1995
revenues relating to the Kingsport, Tennessee branch which was
closed in September 1995, and The Procter & Gamble Company, which
ceased to purchase products and services from the Company in
September 1995, (ii) fiscal 1996 revenues from the acquisition of
TCSS which was acquired in March 1996 and (iii) fiscal 1996
revenues from the acquisition of DILAN which was acquired in
October 1996, total net sales and revenues increased 27.1%.
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. After elimination of the revenues described above,
sales of equipment and supplies increased 25.1%. Service revenues
increased $9.5 million, or 52.8%, to $27.4 million in fiscal 1996
from $17.9 million in fiscal 1995. After elimination of the
revenues described above, service revenues increased 50.4%.
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 (also 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.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Net Sales and Revenues. Total net sales and revenues increased
$86.1 million, or 59.6%, to $230.7 million in fiscal 1995 from
$144.6 million in fiscal 1994. Of the increase, approximately $82.3
million resulted from increased sales to existing customers,
including $35.6 million from one customer and $18.4 million from
two roll-out projects. The remainder of the increase, $3.8 million,
was attributable to the opening of a new branch office in
Birmingham, Alabama in January 1995, and the acquisition of Xenas
in November 1994.
Sales of equipment and supplies increased $80.9 million, or
62.1%, to $211.2 million in fiscal 1995 from $130.3 million in
fiscal 1994. Of the increase, approximately $77.5 million resulted
from internal growth and $3.4 million was attributable to the
opening of the new branch and acquisition described above. Service
revenues increased $4.5 million, or 33.8%, to $17.9 million in
fiscal 1995 from $13.4 million in fiscal 1994. Of this increase,
approximately $0.2 million resulted from the opening of the Alabama
branch, with the remainder due to internal growth. As part of an
overall strategy to gain market share in 1995, the Company
increased its hardware sales by more aggressively bidding on large
volume projects which resulted in an increase in the proportion of
equipment sales to total net sales and revenues in 1995 as compared
to 1994.
During the third quarter of 1995, the Company experienced a
decline in its sales of equipment to The Procter & Gamble Company
( P&G ). P&G discontinued using the Company as its primary
computer equipment supplier as part of P&G's program to select a
single international supplier. The Company continues to provide
minimal equipment to P&G as well as certain outsourcing services
pursuant to an arrangement with the international supplier. The
future impact on the Company of the loss of P&G as a significant
customer is uncertain. Additionally, the Company closed its
Kingsport, Tennessee location in an effort to focus on more
profitable business opportunities.
Gross Profit. Gross profit margin was 14.5% in fiscal 1995
compared to 16.4% in fiscal 1994. This decrease was attributable to
a combination of strong price competition and large volume
equipment roll-outs which increased the proportion of total
revenues derived from relatively lower gross margin sales of
product as compared to relatively higher gross margin revenues
derived from services.
Operating Expenses. Selling, general and administrative
expenses (also including rent expense and provision for doubtful
accounts) expressed as a percentage of total net sales and revenues
declined to 10.1% in fiscal 1995 from 11.9% for fiscal 1994. This
was attributable to the large volume increase in sales in 1995 and
continued emphasis on expense control. Another contributing factor
was the implementation of a new MIS system which has allowed the
Company to reduce overhead costs as a percentage of sales. Total
operating expenses expressed as a percentage of total net sales and
revenues declined to 10.5% in fiscal 1995 from 12.5% in fiscal 1994
as the increase in these costs slowed relative to the growth in
total net sales and revenues.
Income from Operations. Income from operations increased $3.7
million, or 67.1 %, to $9.3 million in fiscal 1995 from $5.6
million in fiscal 1994. The Company's operating margin was
essentially unchanged in 1995 as compared to 1994 as the decline in
gross margin was offset by a decline in total operating expenses as
a percent of total net sales and revenues.
Interest Expense. Total interest expense was $2.0 million in
fiscal 1995 compared with $1.0 million in fiscal 1994. The increase
was attributable to higher average levels of debt outstanding on
the bank line of credit and the floor plan financing arrangements
during fiscal 1995 as compared to fiscal 1994. At January 5, 1996,
the amounts outstanding on the bank line of credit and floor plan
lines of credit were $16.9 million and $17.7 million, respectively.
The additional levels of financing were necessary primarily to
support the increased levels of accounts receivable and inventory
needed to finance the higher sales and revenues. In addition, the
weighted average interest rate on bank borrowings increased to 8.7%
in fiscal 1995 compared with 7.1% in fiscal 1994, because of higher
interest rates in the first quarter of 1995.
Income Taxes. The Company's effective tax rate was 40.6% in
fiscal 1995 compared to 40.5% in fiscal 1994.
Net Income. Net income increased $1.6 million, or 59.3%, to
$4.4 million in fiscal 1995 from $2.7 million in fiscal 1994. The
increase was a result of the factors described above.
Liquidity and Capital Resources
Cash used in operating activities was $4.9 million in fiscal
1996. Cash used in investing activities included $9.9 million for
acquisitions and $3.5 million for capital expenditures. Cash
provided by financing activities included $17.9 million of net
proceeds from a stock offering, $6.4 million of net proceeds from
bank notes payable , $1.8 million from the exercise of stock
options and less $1.3 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, 1997,
these lines of credit totaled $37.0 million, including $12.0
million with IBM Credit Corporation ( ICC ) and $25.0 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 many
of the arrangements which are subsidized by manufacturers is
interest free. The average rate on the plans overall is less than
2.0%. 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 permits the Company to borrow up to the
lesser of $25.0 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, 1997, the amount outstanding was
$24.1 million of which $14.1 million was at an interest rate of
7.5%, and $10.0 million was at an interest rate of 7.25% based on
LIBOR rates. The Credit Facility expires in April 1997 and 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 restrictive covenants.
The Company completed a secondary public offering of its stock
on February 28, 1997. Net proceeds to the Company were
approximately $23.2 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 net proceeds from the above noted
offering, 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.
The Company moved to a new distribution facility in January 1996
and new executive offices in May 1996. The Company has executed a
ten year triple-net lease agreement for these facilities with
Pomeroy Investments, LLC, which is controlled by the Chief
Executive Officer of the Company. The base rental for 1996 on an
annualized basis is $583 thousand. In conjunction with the new
facilities, the Company has been approved for state tax credits of
approximately $4.0 million over 10 years by the Kentucky Economic
Development Finance Authority.
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 1997 Annual Meeting of shareholders
which will be filed with the Commission prior to May 5, 1997.
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:
1996 Form
10-K Page
__________
1. Financial Statements:
Independent Auditor's Report F-1
Consolidated Balance Sheets,
January 5, 1996 and January 5, 1997 F-2 to F-3
For each of the three fiscal years in
the period ended January 5, 1997:
Consolidated Statements of Income F-4
Consolidated Statements of Cash F-5
Flows
Consolidated Statements of Equity F-6
Notes to Consolidated Financial F-7 to F-17
Statements
2. Financial Statement Schedules:
None
Filed Herewith
(page #) or
Incorporated
3. Exhibits by Reference to:
________________
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
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.
(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 and Industry 10(i)(e)(1)
Remarketers with the Company, of Company's
dated September 3, 1991 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 of Company's
with the Company, dated Form S-1 filed
September 27, 1990 Feb. 14, 1992
(g) Dealer Sales Agreement Exhibit 10(i)(g)
between Apple Computer, Inc. of Company's
and the Company, dated Form S-1 filed
April 1, 1991 Feb. 14, 1992
(h) Lease between Sydney A. Warm Exhibit 10(i)(h)
and the Company for 1021 West of Company's
Eighth Street, Cincinnati, OH, Form S-1 filed
dated May 15, 1990 Feb. 14, 1992
(i) Lease between F.G.&H. Exhibit 10(i)(i)
Partnership and the Company of Company's
for 908 DuPont Road, Form S-1 filed
Louisville, KY, dated May 9, Feb. 14, 1992
1990
(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
1996
(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
1996
(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
(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
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,
1995
(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,
1995
(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
1995
(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
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
(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 and Incentive 10(iii)(f)
Stock Option Plan, of Company's
dated February 13, 1992 Form S-1 filed
February 14,
1992
(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
1995
(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
Earnings E-1
21 Subsidiaries of the Company E-2
27 Financial Data Schedule E-3
(b) Reports on Form 8-K:
On October 25, 1996, the Company filed a current
report on Form 8-K for the acquisition of
Communications Technology, Inc.
On January 3, 1997, the Company filed a current report
on Form 8-K to file audited financial statements for
the nine months ended October 5, 1996.
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/Edwin S. Weinstein
Edwin S. Weinstein
Chief Financial Officer and Chief
Accounting Officer
Dated: April 4, 1997
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. Pomeroy April 4, 1997
_____________________________________
David B. Pomeroy, Director
By: /s/Edwin S. Weinstein April 4, 1997
______________________________________
Edwin S. Weinstein, Director
By: /s/James H. Smith, III April 4, 1997
______________________________________
James H. Smith III, Director
By:
_______________________________________
Dr. David W. Rosenthal, Director
By:
_______________________________________
Michael E. Rohrkemper, 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, 1996 and
1997, and the related consolidated statements of income,
equity, and cash flows for each of the three years in the
period ended January 5, 1997. 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, 1996 and 1997, and the
consolidated results of its operations and its consolidated
cash flows for each of the three years in the period ended
January 5, 1997 in conformity with generally accepted
accounting principles.
Grant Thornton LLP
Cincinnati, Ohio
February 4, 1997, except for
Note 18 as to which the date is
February 28, 1997
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
January 5, January 5,
(in thousands) 1996 1997
____________ _____________
ASSETS
Current assets:
Cash.................................................... $ 596 $ 6,809
Accounts receivable:
Trade, less allowance of $201 and $372 at
January 5, 1996 and 1997, respectively.............. 27,098 53,374
Vendor product returns, less allowance of $210 and
$137 at January 5, 1996 and 1997, respectively...... 3,485 8,649
Vendor incentive rebates.............................. 3,142 5,762
Amount due from stockholder........................... 206 -
Other................................................. 389 309
Total receivables............................... 34,320 68,094
_______ ________
Inventories............................................. 18,987 23,426
Other................................................... 487 739
_______ ________
Total current assets............................ 54,390 99,068
Equipment and leasehold improvements:
Furniture, fixtures and equipment....................... 5,408 8,639
Leasehold improvements.................................. 1,151 4,437
_______ ________
Total........................................... 6,559 13,076
Less accumulated depreciation........................... 1,968 3,864
_______ ________
Net equipment and leasehold improvements......... 4,591 9,212
Investment in lease residuals.............................. 2,596 3,043
Goodwill and other intangible assets....................... 1,446 9,435
Other assets............................................... 962 622
_______ ________
Total assets..................................... $ 63,985 $ 121,380
======= ========
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
January 5, January 5,
(in thousands) 1996 1997
__________ ___________
LIABILITIES AND EQUITY
Current liabilities:
Current portion of notes payable..................... $ 409 $ 907
Accounts payable:
Floor plan financing............................... 17,677 34,609
Trade.............................................. 3,967 5,734
_______ ________
Total accounts payable....................... 21,644 40,343
Bank notes payable................................... 16,877 24,146
Deferred revenue..................................... 2,286 2,318
Accrued liabilities:
Employee compensation and benefits................. 801 2,016
Income taxes....................................... 1,118 1,544
Interest........................................... 42 147
Miscellaneous...................................... 874 444
_______ ________
Total current liabilities.................... 44,051 71,865
Notes Payable.......................................... 100 2,189
Deferred income taxes.................................. 635 733
Equity:
Preferred stock (no shares issued or outstanding).... - -
Common stock (2,626 and 6,469 shares issued and
outstanding at January 5, 1996 and 1997, respectively) 26 65
Paid-in capital...................................... 13,279 34,402
Retained earnings.................................... 6,098 12,330
_______ ________
19,403 46,797
Less treasury stock, at cost (21 shares at January 5,
1996 and 1997, respectively)....................... 204 204
_______ ________
Total equity.................................... 19,199 46,593
_______ ________
Total liabilities and equity.................... $ 63,985 $ 121,380
======= ========
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended January 5,
__________________________________
(in thousands, except per share data) 1995 1996 1997
________ ________ ________
Net sales and revenues:
Sales - equipment and supplies..................... $ 130,270 $ 211,149 $ 306,745
Service............................................ 13,410 17,940 27,419
Other.............................................. 895 1,621 2,194
________ _________ ________
Total net sales and revenues............... 144,575 230,710 336,358
Cost of sales and service:
Equipment and supplies............................. 117,594 192,839 275,272
Service............................................ 3,307 4,335 6,481
________ _________ ________
Total cost of sales and service............ 120,901 197,174 281,753
________ _________ ________
Gross profit....................................... 23,674 33,536 54,605
________ _________ ________
Operating expenses:
Selling, general and administrative................ 16,268 21,863 33,384
Rent expense....................................... 700 894 1,546
Depreciation....................................... 331 770 1,925
Amortization....................................... 555 234 636
Provision for doubtful accounts.................... 263 490 245
________ _________ ________
Total operating expenses................... 18,117 24,251 37,736
________ _________ ________
Income from operations............................... 5,557 9,285 16,869
________ _________ ________
Other expense (income):
Interest expense................................... 1,031 1,999 2,170
Litigation settlement and related costs............ - - 4,392
Miscellaneous...................................... (57) (64) (221)
________ _________ ________
Total other expense........................ 974 1,935 6,341
________ _________ ________
Income before income tax............................. 4,583 7,350 10,528
Income tax expense................................... 1,856 2,983 4,296
________ _________ ________
Net income........................................... $ 2,727 $ 4,367 $ 6,232
======== ========= ========
Weighted average shares outstanding:
Primary............................................ 3,644 4,005 5,404
======== ========= ========
Fully diluted...................................... 3,644 4,044 5,467
======== ========= ========
Net Income per common share:
Primary........................................... $0.75 $1.09 $1.15
======== ========= ========
Fully diluted...................................... $0.75 $1.08 $1.14
======== ========= ========
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended January 5,
____________________________________
(in thousands) 1995 1996 1997
Cash Flows from Operating Activities:
Net income........................................ $ 2,727 $ 4,367 $ 6,232
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation.................................... 331 771 1,925
Amortization.................................... 555 234 636
Deferred income taxes........................... 112 258 57
Net acquisition of lease residuals.............. (253) (1,294) (273)
Issuance of common shares for stock awards...... 40 40 40
Changes in working capital accounts, net of
effects of subsidiary company purchased:
Accounts receivable........................... (12,612) (2,130) (24,007)
Inventories................................... (8,619) (1,814) (1,959)
Floor plan financing.......................... 11,399 (1,298) 16,932
Trade payables................................ 458 (688) (3,949)
Deferred revenue.............................. 503 586 (355)
Income tax payable............................ 177 67 426
Other, net.................................... 166 486 (591)
________ _________ _________
Net operating activities.......................... (5,016) (415) (4,886)
________ _________ _________
Cash Flows from Investing Activities:
Capital expenditures.............................. (1,243) (1,070) (3,459)
Payments for covenants not to compete............. (219) (238) -
Acquisition of subsidiary companies, net of
cash acquired................................... (114) (20) -
Acquisition of reseller assets.................... _ (425) (9,934)
________ _________ _________
Net investing activities.......................... (1,576) (1,753) (13,393)
________ _________ _________
Cash Flows from Financing Activities:
Payments on notes payable......................... (58) (305) (1,288)
Net proceeds of stock offering.................... _ _ 17,924
Net proceeds under bank notes payable............. 6,303 1,435 6,419
Proceeds from note payable........................ 500 - -
Purchase of treasury stock........................ (204) _ _
Offering costs.................................... (169) _ _
Proceeds from exercise of stock options........... _ 1,560 1,767
Retirement of stock warrants...................... _ _ (330)
________ _________ _________
Net financing activities.......................... 6,372 2,690 24,492
________ _________ _________
Increase (decrease) in cash ........................ (220) 522 6,213
Cash:
Beginning of period............................... 294 74 596
________ _________ _________
End of period..................................... $ 74 $ 596 $ 6,809
======== ========= =========
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
Common Paid-in Retained Treasury Total
stock capital earnings stock equity
_______ _______ ________ ________ ________
(in thousands, except for share amounts)
Balances at January 5, 1994............ $ 22 $ 8,145 $ 2,426 $ - $ 10,593
Net income......................... 2,727 2,727
3,168 common shares issued
for stock awards................. 40 40
12,976 common shares issued
for acquisition of subsidiary.... 137 137
Purchases of treasury stock........ (204) (204)
Costs associated with initial
public offering.................. (169) (169)
Tax benefit of costs related to
initial public offering.......... 5 5
_______ _______ ________ ________ ________
Balances at January 5, 1995............. 22 8,158 5,153 (204) 13,129
Net income.......................... 4,367 4,367
4,000 common shares issued
for stock awards.................. 40 40
5,755 common shares issued
for acquisition .................. 100 100
Stock options exercised and
related tax benefit............... 2 1,558 1,560
Stock dividend...................... 2 3,420 (3,422) -
Tax benefit of costs related to
initial public offering........... 3 3
_______ _______ ________ ________ ________
Balances at January 5, 1996............. 26 13,279 6,098 (204) 19,199
Net income.......................... 6,232 6,232
3,076 common shares issued
for stock awards.................. 40 40
113,316 common shares issued
for acquisitions ................. 1 1,474 1,475
Stock options exercised and
related tax benefit............... 4 2,049 2,053
Retirement of stock warrants........ (330) (330)
Effect of 3 for 2 stock split....... 20 (20)
1,402,500 common shares
issued by public offering........ 14 17,910 17,924
_______ _______ ________ ________ ________
Balances at January 5, 1997............. $ 65 $34,402 $12,330 $ (204) $ 46,593
======= ======= ======== ======== ========
See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 5, 1995, JANUARY 5, 1996 AND JANUARY 5, 1997
1. Company Description
On February 13, 1992, Pomeroy Computer Resources, Inc. was
formed and on April 2, 1992 was merged with eight related
businesses ("predecessor businesses") (collectively the
"Company"), five of which owned and operated franchises of
ComputerLand Corporation ("ComputerLand") in Ohio and
Kentucky. The Company has 10 million shares of $.01 par
value common stock authorized, with 6.5 million shares
outstanding. The Company is also authorized to issue 2
million shares of $.01 par value preferred stock. 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
purchased C&N Corp. ("C&N") in fiscal 1992 and Xenas
Communications Corp. ( Xenas) in fiscal 1994 (see Note
12). In fiscal 1995 the Company formed a wholly-owned
subsidiary, Pomeroy Computer Leasing Company, Inc.
(PCL), for the purpose of leasing computer equipment
to the Company's customers. In 1996 C&N was merged into
the Company.
The Company sells, installs and services microcomputers
and microcomputer equipment primarily for business,
professional, educational and government 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 fifteen branch
offices in Kentucky, Indiana, Tennessee, Florida,
Alabama, Iowa, 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 and
PCL. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 1995
financial statements included herein to conform with the
presentation used in 1996.
Fiscal Year - The Company's fiscal year is a 12- month
period ending January 5. References to fiscal 1994, 1995
and 1996 are for the fiscal years ended January 5, 1995,
January 5, 1996 and January 5, 1997, 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 income tax liabilities and assets
are provided for temporary differences between the tax
basis and reported amounts of assets and liabilities that
will result in taxable or deductible amounts in future
years. The Company's temporary differences primarily
result from revenue from the acquisition of lease
residuals not taxable until received, the use of
accelerated depreciation for tax purposes and accrued
expenses not deductible for tax purposes until paid.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 has adopted SFAS No. 123 for disclosure purposes
and for non-employee stock options. This has no material
effect on the results of operations or financial position
of the Company.
Net Income per Share - The computation of primary
net income per common and common equivalent 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 and
warrants. Fully diluted net income per common share also
reflects dilution due to the use of the market price at
the end of the period, when higher than the average price
for the period.
In February 1997 the Financial Accounting Standards Board
issued SFAS No. 128, ``Earnings Per Share." The Company
will implement the statement in the fourth quarter of
1997, the effect of which has not yet been determined.
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 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.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
3. Accounts Receivable
The following table summarizes the activity in the
allowance for doubtful accounts for fiscal 1994, 1995
and 1996.
(in thousands) Trade Other
_______ ______
Balance January 5, 1994 $ 65 -
Provision 1994 38 $ 225
Accounts written-off (38) -
_______ _______
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
======== =======
4. Inventories
Inventories consist of items held for resale and are
comprised of the following components as of the end of
fiscal:
(in thousands) 1995 1996
Equipment and supplies $ 17,927 $ 21,730
Service parts 1,060 1,696
_______ _______
Total $ 18,987 $ 23,426
======= =======
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 $489 thousand (1995) and $984
thousand (1996), respectively:
(in thousands) 1995 1996
Goodwill $ 451 $ 8,698
Covenants not to compete 394 208
Customer lists 601 529
_____ ______
$ 1,446 $ 9,435
_____ ______
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.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
6. Borrowing Arrangements
The Company has an available line of credit up to the
lesser of $25 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, 1996 and
1997, bank notes payable include $0.6 million and $2.2
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 8.25% at January 5, 1996. At
January 5, 1997, the amount outstanding included $14.1
million at an interest rate of 7.5% and $10.0 million at
an interest rate of 7.25% based on LIBOR rates. The
agreement, which expires in April 1997, calls for the
payment of a .25% commitment fee based on the unused
portion of the line of credit. The revolving credit
agreement is collateralized by substantially all assets
of the Company, except those assets which collateralize
certain other financing arrangements. Under the revolving
credit 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, 1995 $ 15,442 $ 9,382
January 5, 1996 $ 19,000 $ 14,741
January 5, 1997 $ 26,687 $ 17,402
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 7.1%, 8.7% and 8.2% in fiscal 1994, 1995
and 1996, 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 of 0.5% above the
bank's prime rate. The interest rate on this term note
was revised 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,
1997 the floor plan lines of credit were $12 million with
IBM Credit Corporation ("ICC") and $25 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 2.0%.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The maximum amount outstanding and the average amount
outstanding on each of the floor plan arragements were
as follows (in thousands):
ICC DFS
______________________ ___________________
Maximum Average Maximum Average
Amount Amount Amount Amount
Period Ending Outstanding Outstanding Outstanding Outstanding
________________ ______________________ ___________________
January 5, 1995 $5,391 $3,579 $14,225 $7,703
January 5, 1996 $6,300 $4,191 $21,045 $15,979
January 5, 1997 $9,045 $5,779 $27,349 $18,532
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.
7. Income Taxes
The provision for income taxes consists of the following:
(in thousands) 1994 1995 1996
______ ______ ______
Current:
Federal $ 1,403 $ 2,071 $ 3,205
State 406 654 1,034
______ ______ _______
Total current 1,809 2,725 4,239
Deferred:
Federal 35 206 46
State 12 52 11
______ ______ _______
Total deferred 47 258 57
______ ______ _______
Total income tax provision $ 1,856 $ 2,983 $ 4,296
====== ====== =======
The approximate tax effect of the temporary differences
giving rise to the Company's deferred income tax assets
(liabilities) are:
(in thousands) 1995 1996
____ ____
Deferred Tax Assets:
Bad debt provision $ 167 $ 208
Deferred compensation 98 210
Other 24 -
_____ _____
Total deferred tax assets 289 418
_____ _____
Deferred Tax Liabilities:
Acquisition of lease residuals (609) (847)
Depreciation (148) (96)
_____ _____
Total deferred tax liabilities (757) (943)
_____ _____
Net deferred tax liability $(468) $(525)
===== =====
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company's effective income tax rate differs from the
Federal statutory rate as follows:
1994 1995 1996
______ _____ _____
Tax at Federal statutory rate 34.0% 34.0% 34.0%
State taxes 6.0 6.3 6.6
Other 0.5 0.3 0.2
_____ _____ _____
Effective tax rate 40.5% 40.6% 40.8%
===== ===== =====
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, 1997 are as
follows:
(in thousands)
Fiscal Year
1997 $ 2,015
1998 1,601
1999 1,258
2000 1,044
2001 742
Thereafter 2,430
______
Total minimum lease payments $ 9,090
======
9. Employee Benefit Plans
The Company has an Employee Stock Ownership Plan ("ESOP")
which covers substantially all employees. No less
than a majority and no more than 75% of the assets of the
ESOP will be invested in common stock of the Company
purchased on the open market. As of January 5, 1997, the
ESOP held 57,129 shares of Company stock. No
contributions were made or accrued in fiscal 1995 and
1996. A contribution of $100 thousand was accrued in
fiscal 1994. 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 does not contribute to the plan.
In December 1996, the Board of Directors took action to
initiate proceedings to terminate the ESOP, which is expected
to become effective during fiscal 1997.
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 1994, 1995 and 1996, the Company sold
equipment and related support services to ILC, for lease
to ILC's customers, in amounts of $4.2 million, $23.7
million and $15.2 million, respectively. The Company also
obtained rights to lease residuals from ILC in the amount
of $300 thousand, $875 thousand and $575 thousand in
1994, 1995 and 1996, 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 interest retained.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 totaled approximately $16.0
million for fiscal 1994. 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.
12. Acquisition
On November 14, 1994, the Company acquired all of the
outstanding stock of Xenas for approximately $546
thousand. The purchase price consisted of $273 thousand
in cash, notes payable in the amount of $136 thousand
with interest at the rate of 0.5% above the prime rate of
the Company's primary lender, and 12,976 unregistered
shares of the Company's common stock with a value of $137
thousand. The acquisition was accounted for as a
purchase, and accordingly the purchase price was
allocated to assets and liabilities based on their
estimated value as of the date of acquisition. The
results of Xenas's operations have been included in the
consolidated statements of income from the date of
acquisition. The acquisition agreement provides for the
payment of contingent consideration if certain levels of
net operating income, as defined in the agreement, are
achieved periodically from the date of acquisition
through fiscal 1997. Any future payments under this
provision would adjust the recorded cost in excess of
fair market value of net assets acquired. Had Xenas been
acquired at the beginning of fiscal 1993, the pro-forma
inclusion of its operating results would not have had a
significant effect on the reported consolidated net
income for the two years ended January 5, 1995.
On March 14, 1996, the Company acquired substantially all
of the assets and assumed substantially all of the
liabilities of TCSS, a privately held computer reseller
located in Des Moines, Iowa. The purchase price consisted
of $4.5 million in cash, a $2.7 million subordinated note
and 150 thousand unregistered shares of the Company's
common stock with an approximate value of $1.3 million.
Interest on the subordinated note, which is calculated at
prime plus 0.5%, is payable quarterly. Principal is
payable in four equal annual installments of $425
thousand after a payment of $1.0 million was made upon
the Company's successful completion of a secondary stock
offering in July 1996. The acquisition was accounted for
as a purchase, accordingly the purchase price was
allocated to assets and liabilities based on their
estimated value as of the date of the acquisition. The
results of TCSS's operations are included in the
consolidated statement of income from the date of
acquisition.
In August 1996, the Company acquired certain assets of AA
Micro, a network service provider located in Birmingham,
Alabama. The purchase price consisted of $67.5 thousand
in cash, a $200 thousand note payable and 19,974
unregistered shares of the Company's common stock with an
approximate value of $200 thousand. Interest on the note,
which is calculated at 8.25%, is payable quarterly and
principal is payable in three equal annual installments
of $66.7 thousand. In addition, the Company has entered
into a three-year employment contract with the former
president. The acquisition was accounted for as a
purchase, accordingly the purchase price was allocated to
assets based on their estimated value as of the date of
acquisition. The results of AA Micro's operations are
included in the consolidated statement of income from the
date of acquisition.
On October 11, 1996 the Company acquired substantially
all of the assets and assumed substantially all of the
liabilities of DILAN, a privately held network integrator
located in Hickory, North Carolina. The purchase price
consisted of $2.6 million in cash, a $1.1 million
subordinated note and $5.5 million of assumed
liabilities. Interest on the subordinated note, which is
calculated at 10% per annum, is payable quarterly and
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
principal is payable in three equal annual installments
of $365 thousand. The acquisition will be accounted for
as a purchase, accordingly the purchase price will be
allocated to assets and liabilities based on their
estimated value as of the date of the acquisition. The
results of DILAN's operations will be included in the
consolidated statement of income from the date of
acquisition.
The following table summarizes, on an unaudited pro forma
basis, adjusted to reflect a three-for-two split of the
Company's common stock in the form of a stock dividend
paid on October 4, 1996 and a 10% stock dividend paid on
May 22, 1995, the estimated combined results of the
Company, TCSS and DILAN 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 TCSS
and DILAN 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:
Primary $ 1.11 $ 1.15
Fully diluted $ 1.10 $ 1.14
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. The base rental for 1996 on an annualized basis
is $583 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 1992 the Company loaned $100 thousand to an
officer of the Company. This loan was evidenced by a
promissory note with an annual interest rate of 1% over
the prime rate. In addition, a total of $106 thousand was
advanced to the officer in fiscal years 1993 through
1995. The note plus accrued interest and the advance were
repaid during fiscal 1996.
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.
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) 1994 1995 1996
____ ____ ____
Interest paid $998 $2,037 $2,065
==== ====== ======
Income taxes paid $1,719 $2,658 $3,813
====== ====== ======
Business combination accounted
for as a purchase:
Assets acquired $680 $774 $24,526
Liabilities assumed (355) (24) (9,121)
Note payable (136) (225) (3,996)
Stock issued (137) (100) (1,475)
______ ______ _______
Net cash paid $52 $425 $9,934
====== ======= =======
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 primary and fully diluted earnings per
share would have been $1.05 and $1.04, 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.
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.
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. 600,000 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. 75,000 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 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.
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following summarized the stock option transactions
under the plans for the three fiscal years ended
January 5, 1997:
Weighted Average Option Price
Shares Exercise price Per Share ($)
________ _________________ ______________
Options outstanding January 5, 1994 179,332 $6.62 to $10.75
Granted 106,500 $8.00 to $10.57
Surrendered (2,000) $7.81 to $9.50
_______
Options outstanding January 5, 1995 283,832 $6.62 to $10.75
Granted 66,300 $10.95
Stock dividend effect 33,383 8.32
Exercised (164,975) 8.27
_______
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
=======
The following summarizes options outstanding and
exercisable at January 5, 1997:
Options Outstanding Options Exercisable
__________________________________________________ _____________________________
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 1/5/97 Contractual Life Exercise Price at 1/5/97 Exercise Price
______________ ___________ ________________ ________________ ___________ ________________
$4.01 to $5.99 128,872 1.3 $ 5.10 127,497 $ 5.10
$6.41 to $8.50 98,303 1.8 $ 7.89 85,002 $ 8.10
$9.50 to $11.92 65,000 3.6 $ 10.08 51,250 $ 9.95
___________ ____________
292,175 2.0 $ 7.27 263,749 $ 7.01
=========== ============
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The weighted average fair value at date of grant for
options granted during fiscal 1995 and 1996 was
$2.42 and $2.75, 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
___________ ___________
Expected life (years) 2.4 1.7
Interest rate 7.3% 5.8%
Volatility 50% 55%
Dividend yield 0% 0%
Had compensation cost for the Company's stock option
plans been determined based on the fair value 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
___________ ____________
Net income - as reported $4,367 $6,232
Net income - pro forma $4,196 $5,777
Net income per common share - as reported
Primary $1.09 $1.15
Fully diluted $1.08 $1.14
Net income per common share - pro forma
Primary $1.05 $1.07
Fully diluted $1.04 $1.06
The initial application of SFAS No. 123 for pro forma
disclosure may not be representative of the future
effects of applying the statement.
In 1994, 1995 and 1996, 3,168, 4,000 and 3,076,
respectively, shares of common stock were awarded to
officers of the Company. Compensation expense resulting
from the awards was $40 thousand in fiscal 1994, 1995 and
1996, respectively.
16. Litigation
There are various other legal actions arising in the
normal course of business that have been brought against
the Company. Management believes these matters will not
have a material adverse effect on the Company's
consolidated financial position or results of operations.
17. Risk of Loss from Concentrations
During fiscal 1996, approximately 38% of the Company's
total net sales and revenues were derived from its top
ten customers, including one customer which accounted for
12% of total net sales and revenues. A loss of one or
more of the Company's major customers could have a
material adverse effect on the Company.
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 Event
On February 28, 1997, the Company completed a secondary
public offering of 1.02 million shares of its common
stock. The net proceeds of $23.2 million were used to
reduce amounts outstanding under its line of credit.