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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
For the fiscal year ended January 5, 1998
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 (Zip Code)
offices)
Registrant's telephone number, including area (606)586-0600
code _____________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
___________________ 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 $200,508,000 as of March 30, 1998.
The number of shares outstanding of the Registrant's common
stock as of March 30, 1998 was 11,431,876.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K Into Which
________ Portions of
Documents are Incorporated
____________________________
Definitive Proxy Statement Part III
for the 1998Annual Meeting of
Stockholders to be Filed with
the Securities and Exchange
Commission prior to May 5,
1998
POMEROY COMPUTER RESOURCES, INC.
FORM 10-K
YEAR ENDED JANUARY 5, 1998
TABLE OF CONTENTS
PART I Page
____
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a
Vote of Security Holders 5
PART II
Item 5. Market for the Registrant's
Common Stock and Related 5
Stockholder Matters
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and
Analysis of Financial 8
Condition and Results of
Operations
Item 8. Financial Statements and 10
Supplementary Data
Item 9. Disagreements on Accounting
and Financial Disclosures 10
PART III
Item 10. Directors and Executive 10
Officers of the Registrant
Item 11. Executive Compensation 10
Item 12. Security Ownership of
Certain Beneficial Owners 10
and Management
Item 13. Certain Relationships and 10
Transactions
PART IV
Item 14. Exhibits, Financial
Statement Schedules and 11
Reports on Form 8-K
SIGNATURE
Chief Executive Officer,
Chief Financial Officer and 21
Chief Accounting Officer
Directors 21
Independent Auditor's Report F-1
Financial Statements F-2 to F-18
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 1933
and the Securities Exchange Act of 1934, as amended, and as such
may involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or
achievements of the Company to be materially different from
future results, performance or achievements expressed or implied
by such forward-looking statements. Important factors that could
cause the actual results, performance or achievements of the
Company to differ materially from the Company's expectations are
disclosed in this document and in documents incorporated herein
by reference, 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" and the factors
discussed under "Business - Certain Business Factors." . All
written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety 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 operates primarily in one industry segment -- sales
and services of desktop computer products, configuration,
network integration and technology support services to
businesses nationwide -- and no
separate industry segment information is presented.
The Company offers a broad range of microcomputers and related
products and provides a comprehensive selection of integration
and support services including network and system design,
equipment selection and procurement, complex network
configuration, integration, Internet and electronic commerce
services, depot repair, on-site maintenance, staffing and
network management. The Company provides products and services
to large and medium sized commercial, health care, governmental,
financial and educational customers.
The Company's strategy for building shareholder value is to
provide comprehensive solutions to improve the productivity of
its clients' information systems. Key elements of the Company
strategy are: (1) to leverage client relationships to continue
expanding higher-margin services revenues, (2) to capitalize on
the trend toward build-to-order/configure-to-order systems, and
(3) to expand offerings and geographic coverage through
strategic acquisitions.
The Company offers microcomputer products from an array of
manufacturers including Compaq, Hewlett-Packard, IBM, Lexmark
and Toshiba. The Company sells these products together with a
broad selection of networking, integration and software products
from manufacturers including 3Com, Bay Networks, Intel,
Microsoft, and Novell. Services provided by the Company allow
customers to outsource the selection, installation, integration
and maintenance of their microcomputer systems.
The Company is an authorized dealer or reseller for the products
of over 35 major vendors. The Company believes that its access
to major vendors enables it to offer a wide range of products to
meet the diverse requirements of its customers. However, the
increasing demand for microcomputers has resulted in significant
product supply shortages from time to time because manufacturers
have been unable to produce sufficient quantities of certain
products to meet demand. The Company has in the past and expects
in the future to experience some difficulty in obtaining an
adequate supply of products from its major vendors which has
resulted, and may continue to result, in delays in completing
sales. These delays have not had, and are not anticipated to
have, a material adverse effect on the Company's results of
operations, although failure to obtain adequate product supply
could have a material adverse effect on the Company's results of
operations.
The Company has entered into dealer agreements with its major
vendors/manufacturers. These agreements are typically subject to
periodic renewal and to termination on short notice.
Substantially all of the Company's dealer agreements may be
terminated by the vendor without cause upon 30 to 90 days
advance notice, or immediately upon the occurrence of certain
events. A vendor could also terminate an authorized dealer
agreement for reasons unrelated to the Company's performance.
Although the Company has never lost a major vendor/manufacturer,
the loss of such a vendor/product line or the deterioration of
the Company's relationship with such a vendor/manufacturer would
have a material adverse effect on the Company.
The Company is a participant in the IBM channel assembly program.
To date, this program has not been utilized in a significant
portion of the Company's shipments , but the Company expects
this program to be utilized in a larger proportion of its
shipments during fiscal 1998. The Company is in discussion with
other major manufacturers regarding channel assembly. The
objective of channel assembly programs is to achieve cost
savings through lower finished goods inventory, higher inventory
turns and lower price protection requirements and passing
such cost savings on to the customer, minimizing the direct
marketers' pricing advantage. The Company believes that being
able to effectively utilize its vendors' channel assembly
programs will play an important role in its competitiveness
and future financial performance.
The Company's sales are generated primarily by its 217 person
direct sales and sales support personnel located in 20 regional
offices in Kentucky, Iowa, Tennessee, Florida, Alabama, Indiana,
Ohio, West Virginia, North Carolina and South Carolina. The
Company's business strategy is to provide its customers with a
complete package of advanced microcomputer products, high level
services and support, including designing and installing
systems, training system users, maintaining and repairing
hardware and software and brokering used equipment. The Company
believes that its ability to combine competitive pricing of
microcomputer hardware and related products with higher margin
sophisticated services and support allows it to compete
effectively against a variety of alternative microcomputer
distribution channels, including independent dealers,
superstores, mail order and direct sales by manufacturers. With
many businesses seeking assistance to optimize their information
technology investments and control ongoing costs throughout the
life cycle of technology systems, the Company is using its
resources to assist customers in their decision-making, project
implementation and equipment management.
Most microcomputer products are sold pursuant to purchase
orders. For larger procurements, the Company will enter into
written contracts with customers. These contracts typically
establish prices for certain equipment and services and require
short delivery dates for equipment and services ordered by the
customer. These contracts do not require the customer to
purchase microcomputer products or services exclusively from the
Company and may be terminated without cause upon 30 to 90 days'
notice. Most contracts are for a term of 12 to 24 months and, in
order to be renewed, may require submission of a new bid in
response to the customer's request for proposal. As of January
5, 1998, the Company had been awarded contracts which it
estimates will result in an aggregate of approximately $35.8
million of net sales and revenues after January 5, 1998. Of this
amount, the Company estimates that $29.5 million of net sales
and revenues will be generated during fiscal year 1998 and the
remainder will be generated after the end of fiscal year 1998.
As of January 5, 1997, the Company had been awarded contracts
which it estimated would result in an aggregate of approximately
$71.3 million of net sales and revenues after January 5, 1997.
Of this amount, the Company estimated that $35.5 million of net
sales and revenues will be generated during fiscal year 1997 and
the remainder will be generated after the end of fiscal year
1997.The estimates of management could be materially less than
stated as a result of factors which would cause one or more of
these customers to order less product or services than is
anticipated. Such factors include that the customer finds
another supplier for the desired products at a lower price or on
better terms, the internal business needs of the customer change
causing the customer to require less or different products and
services, or a significant change in technology or other
industry conditions occurs which alters the customer's needs or
timing of purchases. An estimate of the value of contracts
awarded as of a comparable date in the preceding fiscal year is
not available.
For fiscal years 1995, 1996 and 1997, sales of microcomputers,
peripheral products, supplies and software accounted for
approximately 91.5%, 91.2% and 89.7%, respectively, of the
consolidated net sales and revenues of the Company. The
Company's revenues from its service and support activities have
also grown over the last several years. For fiscal years 1995,
1996 and 1997, revenues from service and support activities were
approximately $19.6 million, $29.6 million and $50.5 million,
respectively, and accounted for approximately 8.5%, 8.8% and
10.3%, respectively, of the consolidated net sales and revenues
of the Company.
Competition
The microcomputer products and services market is highly
competitive. Distribution has evolved from manufacturers selling
through direct sales forces to sales by manufacturers to
aggregators (wholesalers), resellers and value-added resellers.
Competition, in particular the pressure on pricing, has resulted
in industry consolidation. In the future the Company may face
fewer but larger and better financed competitors as a
consequence of such consolidation. In response to continuing
competitive pressures, including specific price pressure from
the direct telemarketing and mail order distribution channels,
the microcomputer distribution channel is currently undergoing
segmentation into value-added resellers who emphasize advanced
systems together with service and support for business networks,
as compared to computer "superstores," who offer retail
purchasers a relatively low cost, low service alternative and
direct-mail suppliers which offer low cost and limited service.
Certain superstores have expanded their marketing efforts to
target segments of the Company's customer base, which could have
a material adverse impact on the Company's operations and
financial results.
While price is an important competitive factor in the Company's
business, the Company believes that its sales are principally
dependent upon its service, technical expertise, reputation and
experience. The Company's principal competitive strengths
include: (i) quality assurance; (ii) service and technical
support; (iii) lower pricing of products through alternative
distribution sources; (iv) prompt delivery of products to
customers; and (v) various financing alternatives.
The Company competes for product sales directly with local,
national and international distributors and resellers. In
addition, the Company competes with microcomputer manufacturers
that sell their product through their own direct sales forces
and to distributors. Although the Company believes its prices
and delivery terms are competitive, certain competitors offer
more aggressive hardware pricing to their customers.
CERTAIN BUSINESS FACTORS
DEPENDENCE ON MAJOR CUSTOMERS
During fiscal 1997, approximately 41.2% of the Company's total
net sales and revenues were derived from its top 10 customers,
including one customer which accounted for 12.3% of total net
sales and revenues. This customer did not select the Company as
its fiscal 1998 computer product supplier. The Company does not
expect that this loss will have a near-term material impact on
its financial condition or results of operations.
RAPID GROWTH
The Company has experienced rapid growth both internally and
through acquisitions, and the Company intends to continue to
pursue both types of growth opportunities as part of its
business strategy. There can be no assurance that the Company
will be successful in maintaining its rapid growth in the
future. The Company expects that more of its future growth will
result from acquisitions. In 1997, the Company completed several
acquisitions and continues to evaluate expansion and acquisition
opportunities that would complement its ongoing operations.
There can be no assurance that the Company will be able to
identify, acquire or profitably manage additional companies or
successfully integrate such additional companies into the
Company without substantial costs, delays or other problems. In
addition, there can be no assurance that companies acquired in
the future will be profitable at the time of their acquisition
or will achieve levels of profitability that justify the
investment therein. Acquisitions may involve a number of special
risks, including, but not limited to, adverse short-term effects
on the Company's reported operating results, diversion of
management's attention, dependence on retaining, hiring and
training key personnel, risks associated with unanticipated
problems or legal liabilities and amortization of acquired
intangible assets, some or all of which could have a material
adverse effect on the Company's operations and financial
results.
VENDOR REBATES AND VOLUME DISCOUNTS
The Company's profitability has been favorably affected by its
ability to obtain rebates and volume discounts from
manufacturers and through aggregators and distributors. Any
change in the level of rebates, volume discount schedules or
other marketing programs offered by manufacturers that results
in the reduction or elimination of rebates or discounts
currently received by the Company could have a material adverse
effect on the Company's operations and financial results. In
particular, a reduction or elimination of rebates related to
government and educational customers could adversely affect the
Company's ability to serve those customers profitably.
MANUFACTURER MARKET DEVELOPMENT FUNDS
Several manufacturers offer market development funds,
cooperative advertising and other promotional programs to
computer resellers. These funds are accounted for as a reduction
in selling, general and administrative expenses, thereby
increasing net income. While such programs have been available
to the Company in the past, there is no assurance that these
programs will be continued. Any discontinuance or material
reduction of these programs could have an adverse effect on the
Company's operations and financial results.
MANAGEMENT INFORMATION SYSTEM
The Company relies upon the accuracy and proper utilization of
its management information system to provide timely distribution
services, manage its inventory and track its financial
information. To manage its growth, the Company is continually
evaluating the adequacy of its existing systems and procedures
(including Year 2000 issues) and has recently implemented a new
warehouse management system and continues to integrate
additional functions. The Company anticipates that it will
regularly need to make capital expenditures to upgrade and
modify its management information system, including software and
hardware, as the Company grows and the needs of its business
change. There can be no assurance that the Company will
anticipate all of the demands which its expanding operations
will place on its management information system. The occurrence
of a significant system failure or the Company's failure to
expand or successfully implement its systems could have a
material adverse effect on the Company's operations and
financial results.
DEPENDENCE ON TECHNICAL EMPLOYEES
The success of the Company's services business, in particular
its network and integration services, depends in large part upon
the Company's ability to attract and retain highly skilled
technical employees in competitive labor markets. There can be
no assurance that the Company will be able to attract and retain
sufficient numbers of skilled technical employees. The loss of a
significant number of the Company's existing technical personnel
or difficulty in hiring or retaining technical personnel in the
future could have a material adverse effect on the Company's
operations and financial results.
INVENTORY MANAGEMENT
The PC industry is characterized by rapid product improvement
and technological change resulting in relatively short product
life cycles and rapid product obsolescence. While most of the
inventory stocked by the Company is for specific customer
orders, inventory devaluation or obsolescence could have a
material adverse effect on the Company's operations and
financial results. Current industry practice among manufacturers
is to provide price protection intended to reduce the risk of
inventory devaluation, although such policies are subject to
change at any time and there can be no assurance that such price
protection will be available to the Company in the future. Many
manufacturers have announced plans to reduce the number of days
for which they will provide price protection. Also, the Company
currently has the option of returning inventory to certain
manufacturers and distributors, subject to certain limitations.
The amount of inventory that can be returned to manufacturers
without a restocking fee varies under the Company's agreements
and such return policies may provide only limited protection
against excess inventory. There can be no assurance that new
product developments will not have a material adverse effect on
the value of the Company's inventory or that the Company will
successfully manage its existing and future inventory. In
addition, the Company stocks parts inventory for its services
business. Parts inventory is more likely to experience a
decrease in valuation as a result of technological change and
obsolescence and there are no price protection practices offered
by manufacturers with respect to parts.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent on the services of David
B. Pomeroy,II, its Chairman of the Board, President and Chief
Executive Officer and other key personnel. The Company maintains
$1.0 million in key man life insurance insuring the life of Mr.
Pomeroy. The loss of the services of Mr. Pomeroy or other key
personnel could have a material adverse effect on the Company's
business. The Company has entered into employment agreements
with certain of its key personnel, including Mr. Pomeroy. The
Company's success and plans for future growth will also depend
on its ability to attract and retain highly skilled personnel in
all areas of its business.
Employees
As of January 5, 1998 the Company had 1,287 full-time employees
consisting of the following: 685 service and technical personnel
including 180 systems engineers; 217 direct sales
representatives and sales support personnel; 63 management
personnel; and 322 administrative and distribution personnel.
The Company has no collective bargaining agreements and believes
its relations with its employees are good.
Backlog
The Company does not have a significant backlog of business
since it normally delivers and installs products purchased by
its customers within 10 days from the date of order.
Accordingly, backlog is not material to the Company's business
or indicative of future sales. From time to time, the Company
experiences difficulty in obtaining products from its major
vendors as a result of general industry conditions. These delays
have not had, and they are not anticipated to have, a material
adverse effect on the Company's results of operations.
Patents and Trademarks
The Company owns no trademarks or patents. Although the
Company's various dealer agreements do not generally allow the
Company to use the trademarks and trade names of these various
manufacturers, the agreements do permit the Company to refer to
itself as an "authorized dealer" of the products of those
manufacturers and to use their trademarks and trade names for
marketing purposes. The Company considers the use of these
trademarks and trade names in its marketing efforts to be
important to its business.
Acquisitions
Acquisitions have contributed significantly to the Company's
growth. The Company believes that acquisitions are one method of
increasing its presence in existing markets, expanding into new
geographic markets, adding experienced service personnel,
gaining new product offerings and services, obtaining more
competitive pricing as a result of increased purchasing volumes
of particular products and improving operating efficiencies
through economies of scale. In recent years, there has been
consolidation among providers of microcomputer products and
services and the Company believes that this consolidation will
continue, which, in turn, may present additional opportunities
for the Company to grow through acquisitions. The Company
continually seeks to identify and evaluate potential acquisition
candidates. The Company is currently engaged in preliminary
discussions with potential acquisition candidates. Although it
has no binding commitments to acquire such candidates,
management believes that the Company may acquire one or more of
these candidates in the future.
During fiscal 1997, the Company completed several acquisitions.
The total consideration given consisted of $3.7 million in cash,
subordinated notes of $1.3 million and 37 thousand unregistered
shares of the Company's common stock with an approximate value
of $1.0 million. Interest on the subordinated notes is payable
quarterly. Principal is payable in equal annual installments.
ITEM 2. Properties
The Company's principal executive offices and distribution
facility are located in Hebron, Kentucky, comprised of
approximately 36,000 and 161,000 square feet of space,
respectively. These facilities are leased from Pomeroy
Investments, LLC ( "Pomeroy Investments" ), a Kentucky limited
liability company controlled by David B. Pomeroy, II, Chief
Executive Officer of the Company, under a ten year triple-net
lease agreement which expires in May 2006. The lease agreement
provides for 2 five year renewal options. The Company expanded
the distribution facility by 70,000 square feet in 1997 to
include a new depot repair facility. Pomeroy Investments
financed, purchased and owns the land and improvements necessary
which accommodate the new depot repair facility. The Company
leases the additional space from Pomeroy Investments at an
annual lease rate no less favorable to the Company than can be
obtained from unaffiliated third parties.
The Company also has noncancelable operating leases for its
regional offices, expiring at various dates between 1997 and
2006. The Company believes there will be no difficulty in
negotiating the renewal of its real property leases as they
expire or in finding other satisfactory space. In the opinion of
management, the properties are in good condition and repair and
are adequate for the particular operations for which they are
used. The Company does not own any real property.
ITEM 3. 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 three-for-two
stock splits in the form of a stock dividend effected on October
4, 1996 and October 6, 1997, respectively.
1996 1997
_________________ ____________________
High Low High Low
First quarter $7.00 $5.33 $25.33 $12.1
Second quarter $7.56 $5.67 $19.17 $12.5
Third quarter $14.67 $6.11 $29.17 $16.6
Fourth quarter $25.33 $13.58 $31.25 $14.0
As of March 30, 1998, there were approximately 289 holders of
record of the Company's common stock.
Dividends
_________
The Company has not paid any cash dividends since its
organization and the completion of its initial public offering.
The Company has no plans to pay cash dividends in the foreseeable
future, and the payment of such dividends are precluded under
the Company's current borrowing agreement.
SELECTED FINANCIAL DATA
(In Thousands Except Per Share Data
For the Fiscal Years Ended January
_____________________________________________
1994 1995(1) 1996 1997(2) 1998(3)
Consolidated Statement of Income Data:
Net sales and revenues $112,178 $144,575 $230,710 $336,358 $491,448
Cost of sales and service 94,151 120,901 197,174 281,753 410,063
________ ________ ________ ________ ________
Gross profit 18,027 23,674 33,536 54,605 81,385
Operating expenses:
Selling, general and
administrative 12,969 17,231 23,247 35,175 50,597
Royalty expense 605 - - - -
Depreciation and
amortization 400 886 1,004 2,561 3,940
________ ________ ________ ________ ________
Total operating expenses 13,974 18,117 24,251 37,736 54,537
Income from operations 4,053 5,557 9,285 16,869 26,848
Other expense (income):
Interest expense 850 1,031 1,999 2,170 974
Litigation settlement
and related costs - - - 4,392 -
Miscellaneous (57) (57) (64) (221) 54
________ ________ ________ ________ ________
Total other expense 793 974 1,935 6,341 1,028
Income before income taxes 3,260 4,583 7,350 10,528 25,820
Income tax expense 1,360 1,856 2,983 4,296 9,507
________ ________ ________ ________ ________
Net income $1,900 $2,727 $4,367 $6,232 $16,313
Earnings per common
share (diluted)(5) $0.35 $0.50 $0.73 $0.77 $1.44
Consolidated Balance Sheet Data:
Working capital $6,339 $6,556 $10,340 $27,203 $63,028
Long-term debt, net
of current maturities - 167 100 2,189 1,434
Equity 10,594 13,130 19,200 46,593 88,777
Total assets 34,086 57,061 63,985 121,380 167,264
(1) During fiscal 1994 the Company acquired the outstanding stock
of Xenas Communications Corp.
(2) In March 1996 and October 1996, the Company acquired the assets
of TCSS and DILAN, respectively. See Note 12 of Notes to
Consolidated Financial Statements.
(3) In 1997 the Company acquired Magic Box, Micro Care and The
Computer Store. See Note 12 of Notes to Consolidated Financial
Statements.
(4) Fiscal year 1996 reflects the Vanstar litigation settlement and
related costs of $4,392. Without this charge, net income would
have been $8,845 and diluted earnings per common share would have
been $1.09.
(5) Earnings per common share are calculated using weighted average
shares outstanding adjusted for the three-for-two stock split in
the form of a stock dividend effective on October 6, 1997.
QUARTERLY RESULTS OF OPERATIONS (in thousands, except per share da
The following table sets forth certain unaudited operating results
This information is unaudited, but in the opinion of management in
consisting of normal recurring adjustments, necessary for a fair p
operations of such periods.
Fiscal 1997(1)
__________________________________________
First Second Third Fourth
Quarter Quarter(2) Quarter(3) Quarter
__________ _________ _________ _________
Net sales and revenues $ 100,366 $ 118,218 $ 130,729 $ 142,135
Gross profit 16,904 19,135 21,533 23,813
Net income $ 2,958 $ 3,969 $ 4,540 $ 4,846
Earnings per common share:
Basic $ 0.29 $ 0.35 $ 0.40 $ 0.43
Diluted $ 0.28 $ 0.34 $ 0.39 $ 0.41
Fiscal 1996(1)
__________________________________________
First Second Third Fourth
Quarter(5) Quarter Quarter Quarter(6)
__________ _________ _________ _________
Net sales and revenues $ 63,224 $ 77,836 $ 92,975 $ 102,323
Gross profit 9,600 12,846 14,667 17,492
Net income(loss) $ (1,355) $ 1,853 2,619 $ 3,115
Earnings(loss) per common share:
Basic $ (0.23) $ 0.30 $ 0.28 $ 0.32
Diluted $ (0.22) $ 0.28 $ 0.27 $ 0.31
(1) All per share amounts have been restated to reflect the stock
split effected as a stock dividend in the fourth quarter of 1997
and the adoption of SFAS No. 128.
(2) During the second quarter of fiscal 1997 the Company acquired
substantially all of the assets of Magic Box. See Note 12 of Notes
to Consolidated Financial Statements.
(3) During the third quarter of fiscal 1997 the Company acquired
certain assets of Micro Care. See Note 12 of Notes to Consolidated
Financial Statements.
(4) During the fourth quarter of fiscal 1997 the Company acquired
CSI. See Note 12 of Notes to Consolidated Financial Statements.
(5) During the first quarter of fiscal 1996, the Company acquired
certain assets of TCSS. See Note 12 of Notes to Consolidated
Financial Statements. The first quarter of 1996 also includes the
effect of the Vanstar litigation settlement and related costs of
$4.4 million. Without this charge, net income would have been $1.3
million and earnings per common share would have been $0.21.
(6) During the fourth quarter of fiscal 1996, the Company acquired
certain assets of DILAN. See Note 12 of Notes to Consolidated
Financial Statements.
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Total Net Sales and Revenues. Total net sales and revenues
increased $155.0 million, or 46.1%, to $491.4 million in fiscal
1997 from $336.4 million in fiscal 1996. This increase was
attributable to an increase in sales to existing and new customers
and to acquisitions completed in fiscal years 1997 and 1996.
Excluding acquisitions completed in fiscal years 1997 and 1996,
total net sales and revenues increased 35.8%.
Sales of equipment and supplies increased $134.2 million, or
43.8%, to $440.9 million in fiscal 1997 from $306.7 million in
fiscal 1996. On a comparable basis, as described above, sales of
equipment and supplies increased 33.9%. Service and other revenues
increased $20.8 million, or 70.0%, to $50.5 million in fiscal 1997
from $29.7 million in fiscal 1996. On a comparable basis, as
described above, service revenues increased 55.3%.
Gross Profit. Gross profit margin was 16.6% in fiscal 1997
compared to 16.2% in fiscal 1996. The Company improved its gross
margin by increasing the volume of higher-margin service revenues
which offset a decrease in hardware gross margins and the growth in
equipment sales. Service and other revenues increased to 10.3% of
total net sales and revenues in fiscal 1997 compared to 8.8% of
total net sales and revenues in fiscal 1996. Factors that may have
an impact on gross margin in the future include the percentage of
equipment sales with lower-margin customers and the ratio of
service revenues to total net sales and revenues.
Operating Expenses. Selling, general and administrative
expenses (including rent expense and provision for doubtful
accounts) expressed as a percentage of total net sales and revenues
decreased to 10.3% in fiscal 1997 from 10.5% for fiscal 1996. This
decrease is primarily attributable to the increased productivity of
technical personnel which contributed to the growth of the
Company's service business. Total operating expenses expressed as a
percentage of total net sales and revenues decreased to 11.1% in
fiscal 1997 from 11.2% in fiscal 1996 due to the factor described
above.
Income from Operations. Income from operations increased $9.9
million, or 58.6 %, to $26.8 million in fiscal 1997 from $16.9
million in fiscal 1996. The Company's operating margin increased to
5.5% in fiscal 1997 from 5.0% in fiscal 1996 because of the
increase in gross margin and the decrease in operating expenses as
a percentage of total net sales and revenues.
Interest Expense. Total interest expense was $1.0 million in
fiscal 1997 compared with $2.2 million in fiscal 1996. This
decrease is primarily related to lower average borrowings during
fiscal 1997 as a result of the secondary public offering in
February 1997.
Income Taxes. The Company's effective tax rate was 36.8% in
fiscal 1997 compared to 40.8% in fiscal 1996. This reduction is the
result of Kentucky state income tax credits earned in fiscal 1997.
Net Income. Net income increased $10.1 million, or 162.9%, to
$16.3 million in fiscal 1997 from $6.2 million in fiscal 1996. The
increase was a result of the factors described above. Net income,
excluding the impact of the Vanstar settlement in fiscal 1996,
increased $7.5 million, or 85.2%, in fiscal 1997 compared with $8.8
million in fiscal 1996.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Total Net Sales and Revenues. Total net sales and revenues
increased $105.7 million, or 45.8%, to $336.4 million in fiscal
1996 from $230.7 million in fiscal 1995. This increase was
attributable to the acquisitions in fiscal 1996 and increased sales
to existing and new customers. Excluding acquisitions completed in
fiscal 1996, total net sales and revenues increased 14.9%.
Sales of equipment and supplies increased $95.6 million, or
45.3%, to $306.7 million in fiscal 1996 from $211.1 million in
fiscal 1995. On a comparable basis, as described above, sales of
equipment and supplies increased 12.7%. Service and other revenues
increased $10.0 million, or 51.0%, to $29.6 million in fiscal 1997
from $19.6 million in fiscal 1996. On a comparable basis, as
described above, service revenues increased 39.6%.
Gross Profit. Gross profit margin was 16.2% in fiscal 1996
compared to 14.5% in fiscal 1995. This increase was primarily
attributable to a lesser number of lower margin, high volume
equipment roll-outs, larger vendor rebates and the increase in
higher margin service revenues. Vendor rebates increased $3.7
million, or 78.9%, to $8.4 million in fiscal 1996 from $4.7 million
in fiscal 1995. Provided there are no changes in rebate programs,
the level of vendor rebates is expected to continue into fiscal
1997 as volume purchases with major manufacturers continue to
increase.
Operating Expenses. Selling, general and administrative
expenses (including rent expense and provision for doubtful
accounts) expressed as a percentage of total net sales and revenues
increased to 10.5% in fiscal 1996 from 10.1% for fiscal 1995. This
increase is primarily attributable to the addition of technical
personnel as a result of the growth of the Company's service
business. As the personnel reach full productivity, their costs as
a percentage of services revenues are expected to decrease. In
addition, market development funds, which reduce selling, general
and administrative expenses, have declined as a percentage of total
net sales and revenues during fiscal 1996 to 1.0% from 1.3% in
fiscal 1995 primarily as a result of vendors shifting funds to
rebates. Total operating expenses expressed as a percentage of
total net sales and revenues increased to 11.2% in fiscal 1996 from
10.5% in fiscal 1995 due to the reduction of market development
funds and the increase in depreciation related to the new
headquarters and distribution facilities and amortization of
goodwill related to the acquisitions of TCSS and DILAN.
Income from Operations. Income from operations increased $7.6
million, or 81.7 %, to $16.9 million in fiscal 1996 from $9.3
million in fiscal 1995. The Company's operating margin increased to
5.0% in fiscal 1996 from 4.0% in fiscal 1995 because the increase
in gross margin more than offset the increase in operating expenses
as a percentage of total net sales and revenues.
Interest Expense. Total interest expense was $2.2 million in
fiscal 1996 compared with $2.0 million in fiscal 1995.
Income Taxes. The Company's effective tax rate was 40.8% in
fiscal 1996 compared to 40.6% in fiscal 1995.
Litigation Settlement and Related Costs. On April 29, 1996, the
Company agreed to a settlement of the litigation with Vanstar. The
settlement of $3.3 million consisted of a payment made by the
Company to Vanstar of $1.65 million in cash and a $1.65 million
note which was paid on August 27, 1996. The settlement agreement
also provided for mutual forgiveness of any and all claims or
obligations of the parties, resulting in a write-off of $0.5
million of receivables from Vanstar and additional expenses of $0.5
million for costs related to the litigation.
Net Income. Net income increased $1.8 million, or 42.7%, to $6.2
million in fiscal 1996 from $4.4 million in fiscal 1995. The
increase was a result of the factors described above. Excluding the
impact of the Vanstar settlement, net income in fiscal 1996 would
have been $8.8 million, an increase of 102.2% over the comparable
period in 1995.
Liquidity and Capital Resources
_______________________________
Cash used in operating activities was $22.9 million in fiscal
1997. Cash used in investing activities included $3.5 million for
acquisitions and $2.4 million for capital expenditures. Cash
provided by financing activities included $23.3 million of net
proceeds from a stock offering, $1.5 million from the exercise of
stock options less $1.5 million of net payments on bank notes
payable and $0.8 million of repayments on various notes payable.
A significant part of the Company's inventories is financed by
floor plan arrangements with third parties. At January 5, 1998,
these lines of credit totaled $47.0 million, including $12.0
million with IBM Credit Corporation ( "ICC") and $35.0 million with
Deutsche Financial Services ( "DFS"). Borrowings under the ICC
floor plan arrangement are made on sixty day notes, with one-half
of the note amount due in thirty days. Borrowings under the DFS
floor plan arrangement are made on thirty day notes. All such
borrowings are secured by the related inventory. Financing on
substantially all of the arrangements is interest free due to
subsidies by manufacturers. The average rate on the plans overall
is less than 1.0%. The Company classifies amounts outstanding under
the floor plan arrangements as accounts payable.
The Company's financing of receivables is provided through its
Credit Facility, which during fiscal 1997 permited the Company to
borrow up to the lesser of $20.0 million or an amount based upon a
formula of eligible trade receivables. The Credit Facility carries
a variable interest rate based on (i) Star Bank's prime rate less
the Incentive Pricing Spread or (ii) LIBOR plus the Incentive
Pricing Spread, at the Company's election. The Incentive Pricing
Spread is adjusted quarterly. At January 5, 1998, the amount
outstanding was $22.6 million, including $6.5 million of overdrafts
on the Company's books in accounts at Star Bank, which was at an
interest rate of 7.5%. The overdrafts were subsequently funded
through the normal course of business. The Credit Facility is
collateralized by substantially all of the assets of the Company,
except those assets that collateralize certain other financing
arrangements. Under the terms of the Credit Facility, the Company
is prohibited from paying any cash dividends and is subject to
various financial covenants.
In January 1998 the Company revised its Credit Facility to
borrow up to $40.0 million. The revised Credit Facility, which
expires May 31, 1998, carries a variable interest rate based
solely on the prime rate of Star Bank less 125 basis points.
Further, the Company is in the process of finalizing a $ 120.0
million line of credit, under terms similar to the revised Credit
Facility, with DFS and Star Bank is expected to have a
participation interest in the new Credit Facility. When finalized
this line of credit will replace the $40.0 million Credit Facility.
At the beginning of the third quarter of 1997, the Company hired
a president for Technology Integration Financial Services, Inc.
( "TIFS"), a wholly-owned subsidiary of the Company (f/k/a Pomeroy
Computer Leasing Company, Inc.), in an effort to increase its
leasing business. Through TIFS, the Company can directly provide
its customers with leasing alternatives. Increased leasing
operations could impact one or more of total net sales and
revenues, gross margin, operating income, net income, total debt
and liquidity, depending on the amount of leasing activity and the
types of leasing transactions. However, the impact of any increased
leasing operations for fiscal 1997 was not material. On November 5,
1997, TIFS executed a $20.0 million collateral based recourse loan
facility ( "Recourse Facility" ) with The Fifth Third Bank of
Northern Kentucky, Inc. ( "Fifth Third" ). The loan, which is
guaranteed by the Company, will be used to fund all lease
transactions financed on a recourse basis and will expire on
October 1, 1998. The Recourse Facility will carry a variable
interest rate based on (i) Fifth Third's prime rate less an
incentive pricing spread (the "Incentive Pricing Spread" ) or (ii)
Treasury notes plus the Incentive Pricing Spread, at the Company's
election.
The Company completed a secondary public offering of its stock
on February 28, 1997. Net proceeds to the Company were
approximately $23.3 million from the issuance of 1.02 million
shares of common stock. The proceeds were used to reduce amounts
outstanding under its line of credit.
The Company believes that the anticipated cash flow from
operations and current financing arrangements will be sufficient to
satisfy the Company's capital requirements for the next twelve
months. Historically, the Company has financed acquisitions using a
combination of cash, shares of its Common Stock and seller
financing. The Company anticipates that any future acquisitions
will be financed in a similar manner.
OTHER
The Company is heavily dependent upon complex computer systems for
all phases of its operations, which include sales and distribution.
The Company began addressing the affect of the Year 2000 compliance
issue in 1996.The Year 2000 date issue arises from the fact that
many computer programs use only two digits to identify a year in a
date field. The Company has completed an assessment of its own
systems and determined that its principle systems are Year 2000
compliant. Management does not expect that any costs associated
with the Company becoming Year 2000 compliant will have a material
adverse impact on the Company's financial position, results of
operations or cash flows. The Company is continuing to assess the
Year 2000 issue with respect to its customers and suppliers. The
Company could be adversely impacted by the Year 2000 date issue if
its suppliers, customers and other businesses do not address this
issue successfully. Management continues to assess these risks in
order to be able to respond in a manner which would reduce any
impact on the Company.
Item 8. Financial Statements and Supplementary Data
Registrant hereby incorporates the financial information required
by this item by reference to Item 14 hereof.
Item 9. Disagreements on Accounting and Financial Disclosure
None
PART III
Items 10-13.
The Registrant hereby incorporates the information required by
Form 10-K, Items 10-13 by reference to the Company's definitive
proxy statement for its 1998 Annual Meeting of shareholders
which will be filed with the Commission prior to May 5, 1998.
PART IV
Item. 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K - Index
(a) The following documents are filed as a part of this report:
1997 Form
10-K Page
_________
1. Financial Statements:
Independent Auditor's Report F-1
Consolidated Balance Sheets,
January 5, 1997 and January 5, 1998 F-2 to F-3
For each of the three fiscal years in
the period ended January 5, 1998:
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-xx
Statements
2. Financial Statement Schedules:
None
Filed Herewith
(page #) or
Incorporated
by Reference to:
________________
3. Exhibits
________
3(a) Certificate of Incorporation Exhibit 3(a)
of the Company of Company's
Form S-1 filed
Feb. 14, 1992
3(b) Bylaws of the Company Exhibit 3(b)
of Company's
Form S-1 filed
Feb. 14, 1992
4 Rights Agreement between the Exhibit 4 of
Company and The Fifth Third Company's Form
Bank, as Rights Agent dated 8-K filed March
as of February 23,1998 xx, xxxx
10(i) Material Agreements
(a)(1) Loan Agreement between Star Exhibit
Bank, NA and the Company 10(i)(a)(1) of
dated November 19, 1992 Company's Form
10-K filed March
31, 1993
(a)(2) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(2) of
December 16, 1992 by and Company's Form
among Star Bank, NA, the 10-K filed March
Company and C&N Corp. 31, 1993
(a)(3) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(3) of
March 12, 1993 by and among Company's Form
Star Bank, N.A., the Company 10-K filed April
and C&N Corp. 7, 1994
(a)(4) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(4) of
April 30, 1993 by and among Company's Form
Star Bank, N.A., the Company 10-K filed April
and C&N Corp. 7, 1994
(a)(5) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(5) of
June 30, 1993 by and among Company's Form
Star Bank, N.A., the Company 10-K filed April
and C&N Corp. 7, 1994
(a)(6) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(6) of
August 5, 1993 by and among Company's Form
Star Bank, N.A., the Company 10-K filed April
and C&N Corp. 7, 1994
(a)(7) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(7) of
November 29, 1993 by and Company's Form
among Star Bank, N.A., the 10-K filed April
Company and C&N Corp. 7, 1994
(a)(8) Amendment to Loan Agreement Exhibit
by Letter Agreement dated May 10(i)(a)(8) of
6, 1994 by and among Star Company's Form
Bank, N.A., the Company and 10-K filed April
C&N Corp. 4, 1995
(a)(9) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(9) of
November 3, 1994 by and among Company's Form
Star Bank, N.A., the Company 10-K filed April
and C&N Corp. 4, 1995
(a)(10) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(10) of
November 8, 1994 by and among Company's Form
Star Bank, N.A., the Company 10-K filed April
and C&N Corp. 4, 1995
(a)(11) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(11) of
November 30, 1994 by and Company's Form
among Star Bank, N.A., the 10-K filed April
Company and C&N Corp. 4, 1995
(a)(12) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(12) of
January 30, 1995 by and among Company's Form
Star Bank, N.A., the Company 10-K filed April
and C&N Corp. 4, 1995
(a)(13) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(13) of
March 31, 1995 by and among Company's Form
Star Bank, N.A., the Company, 10-Q filed May
C&N Corp. and Xenas 18, 1995
Communications Corp.
(a)(14) Amendment to Loan Agreement Exhibit
by Letter Agreement date May 10(i)(a)(14) of
31, 1995 by and among Star Company's Form
Bank, N.A., the Company, C&N 10-Q filed
Corp. and Xenas August 18,1995
Communications Corp.
(a)(15) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(15) of
October 19,1995 by and among Company's Form
Star Bank, N.A., the Company, 10-Q filed
C&N Corp. and Xenas November 17,
Communications Corp. 1995
(a)(16) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(16) of
December 18,1995 by and among Company's Form
Star Bank, N.A., the Company, 10-K filed April
C&N Corp. and Xenas 4, 1996
Communications Corp.
(a)(17) Amended and Restated Loan Exhibit
Agreement dated March 14, 10(i)(a)(17) of
1996 by and between Star Company's Form
Bank, N.A., the Company, C&N S-1 filed June
Corp., Xenas Communications 4, 1996
Corp. and Pomeroy Computer
Leasing Company, Inc.
(a)(18) Letter Agreement and Exhibit
Promissory Note dated June 10(i)(a)(18) of
12, 1996 by and among Star Company's Form
Bank, N.A., the Company, C&N 10-Q filed
Corp. and Xenas August 15, 1996
Communications Corp.
(a)(19) Waiver Letter dated June 20, Exhibit
1996 by and among Star Bank, 10(i)(a)(19) of
N.A., the Company, C&N Corp. Company's Form
and Xenas Communications 10-Q filed
Corp. August 15, 1996
(a)(20) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(20) of
June 21, 1996 by and among Company's Form
Star Bank, N.A., the Company, 10-Q filed
C&N Corp. and Xenas August 15, 1996
Communications Corp.
(a)(21) Amendment to Loan Agreement Exhibit 10.1 of
by Letter Agreement dated Company's Form
June 27, 1996 by and among S-3 filed
Star Bank, N.A., the Company, January 3, 1997
C&N Corp. and Xenas
Communications Corp.
(a)(22) Amendment to Loan Agreement Exhibit
by Letter Agreement dated 10(i)(a)(22) of
October 18, 1996 by and among Company's Form
Star Bank, N.A., the Company, 10-Q filed
C&N Corp. and Xenas November 19,
Communications Corp. 1996
(a)(23) Amendment to Loan Agreement Exhibit 10.2 of
by Letter Agreement dated Company's Form
December 20, 1996 by and S-3 filed
among Star Bank, N.A., the January 3, 1997
Company, C&N Corp., Xenas
Communications Corp. and
Pomeroy Computer Leasing
Company, Inc.
(a)(24) Promissory Note dated April Exhibit
30, 1997 by and among Star 10(i)(a)(24) of
Bank, N.A., the Company, Company's Form
Pomeroy Computer Leasing 10-Q filed
Company, Inc. and Xenas August 11, 1997
Communications Corp.
(b)(1) Agreement for Wholesale Exhibit
Financing (Security 10(i)(b)(1) of
Agreement) between IBM Credit Company's Form
Corporation and the Company 10-K filed April
dated April 2, 1992 7, 1994
(b)(2) Addendum to Agreement for Exhibit
Wholesale Financing between 10(i)(b)(2) of
IBM Credit Corporation and Company's Form
the Company dated July 7, 10-K filed April
1993 7, 1994
(c)(1) Agreement for Wholesale Exhibit
Financing (Security 10(i)(c)(1) of
Agreement) between ITT Company's Form
Commercial Finance 10-K filed April
Corporation and the Company 7, 1994
dated March 27, 1992
(c)(2) Addendum to Agreement for Exhibit
Wholesale Financing between 10(i)(c)(2) of
ITT Commercial Finance Company's Form
Corporation and the Company 10-K filed April
dated July 7, 1993 7, 1994
(c)(3) Amendment to Agreement for Exhibit
Wholesale Financing between 10(i)(c)(3) of
Deutsche Financial Services Company's Form
f/k/a ITT Commercial Finance 10-Q filed May
Corporation and the Company 18, 1995
dated May 5, 1995.
(d)(1) Asset Purchase Agreement Exhibit 10(i)(z)
among the Company; TCSS; and of Company's
Richard Feaster, Victoria Form 8-K dated
Feaster, Harry Feaster, March 14, 1996
Carolyn Feaster, Victoria
Feaster, trustee of the Emily
Patricia Feaster Trust, and
Victoria Feaster, as trustee
of the Nicole Ann Feaster
Trust dated March 14, 1996
(d)(2) Lease between the Company and Exhibit 10.48 of
TCSS dated March 15, 1996 Company's Form
S-1 filed June
4, 1996
(d)(3) Lease between Arthur K. Jones Exhibit 10.49 of
Trust, Firststar Bank Des Company's Form
Moines, N.A., and William A. S-1 filed June
Jones, Trustees, and The 4, 1996
Computer Supply Store, Inc.
dated July 1, 1994 (assigned
to the Company effective as
of March 14, 1996)
(d)(4) Registration Rights Agreement Exhibit 10.50 of
between the Company and TCSS Company's Form
dated March 14, 1996 S-1 filed June
4, 1996
(d)(5) Employment Agreement between Exhibit 10.51 of
the Company and Richard Company's Form
Feaster dated March 14, 1996 S-1 filed June
4, 1996
(d)(6) Employment Agreement between Exhibit 10.52 of
the Company and Victoria Company's Form
Feaster dated March 14, 1996 S-1 filed June
4, 1996
(e)(1) IBM Agreement for Authorized Exhibit
Dealers 10(i)(e)(1)
and Industry Remarketers with of Company's
the
Company, dated September 3, Form S-1 filed
1991
Feb. 14, 1992
(e)(2) Schedule of Substantially Exhibit
10(i)(e)(2)
Identical IBM Agreements for of Company's
Authorized Dealers and Form S-1 filed
Industry
Remarketers Feb. 14, 1992
(f) Compaq Computer Corporation Exhibit 10(i)(f)
United
States Dealer Agreement with of Company's
the
Company, dated September 27, Form S-1 filed
1990
Feb. 14, 1992
(g) Dealer Sales Agreement Exhibit 10(i)(g)
between
Apple Computer, Inc. and the of Company's
Company, dated April 1, 1991 Form S-1 filed
Feb. 14, 1992
(h) Lease between Sydney A. Warm Exhibit 10(i)(h)
and the
Company for 1021 West Eighth of Company's
Street,
Cincinnati, OH, dated May Form S-1 filed
15, 1990
Feb. 14, 1992
(i) Lease between F.G.&H. Exhibit 10(i)(i)
Partnership
and the Company for 908 of Company's
DuPont Road,
Louisville, KY, dated May 9, Form S-1 filed
1990
Feb. 14, 1992
(j)(1) Purchase Agreement between Exhibit 10.86 of
the Company and First of Company's Form
Michigan Corporation dated S-1 filed June
March 28, 1996 4, 1996
(j)(2) Purchase Agreement between Exhibit 10.87 of
the Company and John C. Company's Form
Donnelly dated March 28, 1996 S-1 filed June
4, 1996
(j)(3) Purchase Agreement between Exhibit 10.88 of
the Company and Dan B. French Company's Form
dated March 28, 1996 S-1 filed June
4, 1996
(j)(4) Purchase Agreement between Exhibit 10.89 of
the Company and James C. Company's Form
Penman dated March 28, 1996 S-1 filed June
4, 1996
(k)(1) Lease between Industrial Exhibit
Developments International, 10(i)(k)(1) of
Inc., and the Company for Company's Form
1840 Airport Exchange Blvd., 10-K filed March
Suite 240, Erlanger, KY dated 31, 1993
November 2, 1992
(k)(2) Amendment to lease between Exhibit
Industrial Developments 10(i)(k)(2) of
International, Inc., and the Company's Form
Company for 1840 Airport 10-K filed March
Exchange Blvd., Suite 240, 31, 1993
Erlanger, KY dated December
31, 1992
(k)(3) Lease between Industrial Exhibit
Developments International, 10(i)(k)(3) of
Inc., and the Company for Company's Form
1850 Airport Exchange Blvd., 10-K filed March
Suite 600, Erlanger, KY dated 31, 1993
November 2, 1992
(k)(4) Amendment to lease between Exhibit
Industrial Developments 10(i)(k)(4) of
International, Inc., and the Company's Form
Company for 1850 Airport 10-K filed March
Exchange Blvd., Suite 600, 31, 1993
Erlanger, KY dated December
31, 1992
(l) Covenant not to Compete Exhibit
between the Company and 10(i)(l)(2) of
Richard C. Mills dated July Company's Form
7, 1993 10-K filed April
7, 1994
(m)(1) Asset Purchase Agreement Exhibit 10.5 of
among the Company, AA Company's Form
Microsystems, Inc. and Stuart S-3 filed
Raburn dated August 2, 1996 January 3, 1997
(m)(2) Promissory Note dated August Exhibit 10.6 of
2, 1996 of the Company in Company's Form
favor of AA Microsystems, S-3 filed
Inc. January 3, 1997
(n)(1) Lease between Crown Exhibit 10(i)(n)
Development Group and the of Company's
Company for 3740 St. Johns Form 10-K filed
Bluff Road, Suite 19, March 31, 1993
Jacksonville, FL dated
September 17, 1992
(n)(2) Amendment to Lease between Exhibit
Crown Development Group and 10(i)(n(2 of
the Company for 3740 St. Company's Form
Johns Bluff Road, Suite 19, 10-K filed April
Jacksonville, FL dated 4, 1996
December 11, 1995
(o) Lease between Lincoln Exhibit 10(i)(o)
National Investment of Company's
Management Company and the Form 10-K filed
Company for Suite 150F in the March 31, 1993
Terraces on Market Place
Blvd., Knoxville, TN dated
September 30, 1992
(p)(1) Remarketing and Agency Exhibit
Agreement (the "Remarketing 10(i)(p)(1) of
Agreement") between Company's Form
Information Leasing S-1 filed Feb.
Corporation and the Company 14, 1992
dated January 7, 1990
(p)(2) Amendment No. 1 to the Exhibit
Remarketing Agreement dated 10(i)(p)(2) of
November 12, 1991 Company's Form
S-1 filed Feb.
14, 1992
(p)(3) Letter, dated February 2, Exhibit
1994, extending term of 10(i)(p)(3) of
Remarketing Agreement to May Company's Form
1, 1996 10-K filed April
4, 1996
(p)(4) Amendment No. 2 to the Exhibit
Remarketing Agreement dated 10(i)(p)(4) of
October 10, 1995 Company's Form
10-K filed April
4, 1996
(q) Lease between Athens Exhibit 10(i)(q)
Properties and the Company of Company's
for Crosspark Drive, Form 10-K filed
Knoxville, TN dated October April 4, 1996
31, 1995
(r)(1) Asset Purchase Agreement Exhibit 10.7 of
among the Company, Company's Form
Communications Technology, S-3 filed
Inc. d/b/a DILAN and Robert January 3, 1997
Martin dated October 11, 1996
(r)(2) Subordinated Promissory Note Exhibit 10.8 of
dated October 11, 1996 of the Company's Form
Company in favor of S-3 filed
Communications Technology, January 3, 1997
Inc.
(r)(3) Subordination Agreement among Exhibit 10.9 of
the Company, Communications Company's Form
Technology, Inc. and Star S-3 filed
Bank, N.A. dated October 11, January 3, 1997
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
(t1) Asset Purchase Agreement Exhibit
among the Company and Magic 10(i)(t)(1) of
Box, Inc. dared June 26, 1997 Company's Form
10-Q filed
August 11, 1997
(t)(2) Employment Agreement between Exhibit
the Company and Israel Fintz, 10(i)(t)(2) of
dated June 26, 1997 Company's Form
10-Q filed
August 11, 1997
(t)(3) Incentive Deferred Exhibit
Compensation Agreement 10(i)(t)(3) of
between the Company and Company's Form
Israel Fintz, dated June 26, 10-Q filed
1997 August 11, 1997
(t)(4) Employment Agreement between Exhibit
the Company and Allison 10(i)(t)(4) of
Sokol, dated June 26, 1997 Company's Form
10-Q filed
August 11, 1997
(t)(5) Incentive Deferred Exhibit
Compensation Agreement 10(i)(t)(5) of
between the Company and Company's Form
Allison Sokol, dated June 26, 10-Q filed
1997 August 11, 1997
(t)(6) Power of Attorney given to Exhibit
the Company by Magic Box, 10(i)(t)(6) of
Inc. for the collection of Company's Form
Accounts Receivable, dated 10-Q filed
June 26, 1997 August 11, 1997
(t)(7) Agreement for the Assumption Exhibit
of Liabilities between the 10(i)(t)(7) of
Company and Magic Box, Inc. Company's Form
10-Q filed
August 11, 1997
(t)(8) Subordination Agreement by Exhibit
and among the Company, Magic 10(i)(t)(8) of
Box, Inc. and Star Bank, Company's Form
N.A., dated June 26, 1997 10-Q filed
August 11, 1997
(t)(9) Subordinated Promissory Note Exhibit
between the Company and 10(i)(t)(9) of
Israel Fintz, dated June 26, Company's Form
1997 10-Q filed
August 11, 1997
(t)(10) Subordinated Promissory Note Exhibit
between the Company and 10(i)(t)(10) of
Allison Sokol, dated June 26, Company's Form
1997 10-Q filed
August 11, 1997
(t)(11) Subordinated Promissory Note Exhibit
between the Company and 10(i)(t)(11) of
Marvin Rosen, dated June 26, Company's Form
1997 10-Q filed
August 11, 1997
(t)(12) Subordinated Promissory Note Exhibit
between the Company and M. 10(i)(t)(12) of
Ronald Krongold, dated June Company's Form
26, 1997 10-Q filed
August 11, 1997
(t)(13) General Bill of Sale between Exhibit
the Company and Magic Box, 10(i)(t)(13) of
Inc., dated June 26, 1997 Company's Form
10-Q filed
August 11, 1997
(t)(14) Non Compete Agreement between Exhibit
the Company and Israel Fintz, 10(i)(t)(14) of
dated June 26, 1997 Company's Form
10-Q filed
August 11, 1997
(t)(15) Non Compete Agreement between Exhibit
the Company and Allison 10(i)(t)(15) of
Sokol, dated June 26, 1997 Company's Form
10-Q filed
August 11, 1997
(t)(16) Non Compete Agreement between Exhibit
the Company and Marvin Rosen, 10(i)(t)(16) of
dated June 26, 1997 Company's Form
10-Q filed
August 11, 1997
(t)(17) Non Compete Agreement between Exhibit
the Company and M. Ronald 10(i)(t)(17) of
Krongold, dated June 26, 1997 Company's Form
10-Q filed
August 11, 1997
(t)(18) Non Compete Agreement between Exhibit
the Company and Magic Box, 10(i)(t)(18) of
Inc., dated June 26, 1997 Company's Form
10-Q filed
August 11, 1997
(u) Lease between NWI Airpark Exhibit 10(i)(u)
L.P. and the Company for 717 of Company's
Airpark Center Drive, Form 10-K filed
Nashville, TN dated February April 4, 1995
24, 1994
(v)(1) Promissory Note dated May 30, Exhibit
1997 by and among Star Bank, 10(i)(v)(1) of
N.A., the Company and Pomeroy Company's Form
Computer Leasing Company, 10-Q filed
Inc. August 11, 1997
(v)(2) Loan Agreement dated October E-1 to E - 53
31,1997 between The Fifth
Third Bank of Northern
Kentucky, Inc. and Technology
Integration Financial
Services, Inc.
(v)(3) Guarantor Agreement dated E-54
October 31,1997 between
Pomeroy Computer Resoucres,
Inc and The Fifth Third Bank
of Northern Kentucky, Inc.
(v)(4) Addendum 1 to Guarantor E-55 to E-57
Agreement dated October
31,1997 between Pomeroy
Computer Resoucres, Inc and
The Fifth Third Bank of
Northern Kentucky, Inc.
(v)(5) Assignment Agreement between E-58 to E-60
dated October 31,1997 between
The Fifth Third Bank of
Northern Kentucky, Inc. and
Technology Integration
Financial Services, Inc.
(v)(6) Incumbency and Authorization E-61
Agreement dated October
31,1997 between The Fifth
Third Bank of Northern
Kentucky, Inc. and Technology
Integration Financial
Services, Inc.
(v)(7) Draw Facility Note dated E-62 to E-67
October 31,1997 between The
Fifth Third Bank of Northern
Kentucky, Inc. and Technology
Integration Financial
Services, Inc.
(v)(8) Revolving Credit Note dated E-68 to E72
October 31,1997 between The
Fifth Third Bank of Northern
Kentucky, Inc. and Technology
Integration Financial
Services, Inc.
(v)(9) Security Agreement dated E-73 to E-95
October 31,1997 between The
Fifth Third Bank of Northern
Kentucky, Inc. and Technology
Integration Financial
Services, Inc.
(w)(1) Non Compete Agreement between Exhibit
the Company and Microcare 10(i)(w)(1) of
Computer Services, Inc., Company's Form
dated July 24, 1997 10-Q filed
November 10,
1997
(w)(2) Non Compete Agreement between Exhibit
the Company and Microcare, 10(i)(w)(2) of
Inc., dated July 24, 1997 Company's Form
10-Q filed
November 10,
1997
(w)(3) Assignment and Assumption Exhibit
Agreement between the 10(i)(w)(3) of
Company, and Microcare Company's Form
Computer Services, Inc., and 10-Q filed
Microcare Inc., dated July November 10,
24, 1997 1997
(w)(4) Assumption of Liabilities Exhibit
Agreement between the 10(i)(w)(4) of
Company, and Microcare Company's Form
Computer Services, Inc., and 10-Q filed
Microcare Inc., dated July November 10,
24, 1997 1997
(w)(5) Non Compete Agreement between Exhibit
the Company, and Robert L. 10(i)(w)(5) of
Versprille, dated July 24, Company's Form
1997 10-Q filed
November 10,
1997
(w)(6) Consent for Use of Similar Exhibit
Name between the Company and 10(i)(w)(6) of
Microcare, Inc., dated July Company's Form
24, 1997 10-Q filed
November 10,
1997
(w)(7) Subordination Agreement Exhibit
between the Company, and 10(i)(w)(7) of
Microcare Computer Services, Company's Form
Inc., and Star Bank, N.A., 10-Q filed
dated July 24, 1997 November 10,
1997
(w)(8) Subordinated Promissory Note Exhibit
between the Company and 10(i)(w)(8) of
Microcare Computer Services, Company's Form
Inc., dated July 24, 1997 10-Q filed
November 10,
1997
(w)(9) Registration Rights Agreement Exhibit
between the Company and 10(i)(w)(9) of
Microcare Computer Services, Company's Form
Inc., dated July 24, 1997 10-Q filed
November 10,
1997
(w)(10) General Bill of Sale and Exhibit
Assignment between the 10(i)(w)(10) of
Company and Microcare Company's Form
Computer Services, Inc., 10-Q filed
dated July 24, 1997 November 10,
1997
(w)(11) General Bill of Sale and Exhibit
Assignment between the 10(i)(w)(11) of
Company and Microcare, Inc., Company's Form
dated June 24, 1997 10-Q filed
November 10,
1997
(w)(12) Asset Purchase Agreement Exhibit
between the Company, and 10(i)(w)(12) of
Microcare Computer Services, Company's Form
Inc., Microcare Inc., and 10-Q filed
Robert L. Versprille dated November 10,
July 24, 1997 1997
(w)(13) Employment Agreement between Exhibit
the Company and Robert L. 10(i)(w)(13) of
Versprille, dated July 24, Company's Form
1997 10-Q filed
November 10,
1997
(x) Lease between the Company and Exhibit 10(i)(x)
Pomeroy Investments, LLC for of Company's
buildings at Airpark Form 10-Q filed
International dated September November 17,
5, 1995 1995
(y) Lease between the Company and Exhibit 10(i)(y)
New England Mutual Life of Company's
Insurance Company for Form 10-Q filed
building at Lexington November 17,
Business Center dated October 1995
4, 1995
(z)(1) Asset Purchase Agreement Exhibit
between the Company and 10(i)(z)(1) of
Cabling Unlimited, Inc. dated Company's Form
October 13, 1995 10-K filed April
4, 1996
(z)(2) Agreement between Cabling Exhibit
Unlimited, Inc. and the 10(i)(z)(2) of
Company dated October 13, Company's Form
1995 10-K filed April
4, 1996
(z)(3) Agreement between Karen Exhibit
Epperson and the Company 10(i)(z)(3) of
dated October 13, 1995 Company's Form
10-K filed April
4, 1996
(z)(4) Employment Agreement between Exhibit
Karen Epperson and the 10(i)(z)(4) of
Company dated October 13, Company's Form
1995 10-K filed April
4, 1996
(z)(5) Assumption of Liabilities Exhibit
between Cabling Unlimited, 10(i)(z)(5) of
Inc. and the Company dated Company's Form
October 13, 1995 10-K filed April
4, 1996
(aa) Lease between Gleeson, Inc. Exhibit
and the Company for 115 10(i)(aa) of
Wiltshire Ave., Louisville, Company's Form
KY dated May 10, 1995 10-K filed April
(assigned to the Company 4, 1996
effective October 13, 1995)
(bb) Columbia/HCA Agreement Exhibit
between Columbia/HCA 10(i)(bb) of
Information Services, Inc. Company's Form
and the Company dated 10-K filed April
December 12, 1995 4, 1996
(cc)(1) Plan of Reorganization dated E-96 to E-137
October 17,1997 between
Pomeroy Computer Resources of
South Carolina and The
Computer Store, Inc.
(cc)(2) Plan of Merger dated October E-138 to E142
17,1997 between Pomeroy
Computer Resources of South
Carolina and The Computer
Store, Inc.
(cc)(3) Articles of Merger dated E-143 to E-145
October 17,1997 between
Pomeroy Computer Resources of
South Carolina and The
Computer Store, Inc.
(cc)(4) Employment Agreement dated E-146 to E-153
October 17,1997 between
Pomeroy Computer Resources of
South Carolina, Inc. and
Jeffrey F. Hipp
(cc)(5) Employment Agreement dated E-154 to E-163
October 17,1997 between
Pomeroy Computer Resources of
South Carolina, Inc. and
Ronald D. Hildreth
(cc)(6) Employment Agreement dated E-164 to E-172
October 17,1997 between
Pomeroy Computer Resources of
South Carolina, Inc. and
Authur M. Cox
(cc)(7) Guarnaty of Employment E-173 to E-175
Agreement dated October
17,1997 between Pomeroy
Computer Resources of South
Carolina, Inc. and Authur M.
Cox
(cc)(8) Guarnaty of Employment E-176 to E-178
Agreement dated October
17,1997 between Pomeroy
Computer Resources of South
Carolina, Inc. and Ronald D.
Hildreth
(cc)(9) Guarnaty of Employment E-179 to E-181
Agreement dated October
17,1997 between Pomeroy
Computer Resources of South
Carolina, Inc. and Jeffery F.
Hipp
(cc)(10)Non-Compete Agreement dated E-182 to E-186
October 17,1997 between
Pomeroy Computer Resources of
South Carolina, Inc. and
Authur M. Cox
(cc)(11)Non-Compete Agreement dated E-187 to E-191
October 17,1997 between
Pomeroy Computer Resources of
South Carolina, Inc. and
Ronald D. Hildreth
(cc)(12)Non-Compete Agreement dated E-192 to E-196
October 17,1997 between
Pomeroy Computer Resources of
South Carolina, Inc. and
Jeffrey F. Hipp
(cc)(13)Investor's Certificate dated E-197 to E-199
October 17,1997 between
Pomeroy Computer Resources of
South Carolina, Inc. and
Jeffrey F. Hipp
(cc)(14)Investor's Certificate dated E-200 to E-202
October 17,1997 between
Pomeroy Computer Resources of
South Carolina, Inc. and
Ronald D. Hildreth
(cc)(15)Investor's Certificate dated E-203 to E-205
October 17,1997 between
Pomeroy Computer Resources of
South Carolina, Inc. and
Authur M. Cox
(cc)(16)Escrow Agreement dated E-206 to E-212
October 17,1997 between
Pomeroy Computer Resources of
South Carolina, Inc., Authur
M. Cox, Ronald D. Hildreth,
and Jeffrey F. Hipp
(cc)(17)Opinion Letter on Plan of E-213 to E-215
Merger dated October 17,1997
between Pomeroy Computer
Resources of South Carolina
and The Computer Store, Inc.
10(iii) Material Employee Benefit and
Other Agreements
(a)(1) Employment Agreement between Exhibit
the Company 10(iii)(a)
and David B. Pomeroy, dated of Company's
March 12, 1992 Form S-1 filed
Feb. 14, 1992
(a)(2) First Amendment to Employment Exhibit
Agreement between the Company 10(iii)(a)(2) of
and David B. Pomeroy Company's Form
effective July 6, 1993 10-K filed April
7, 1994
(a)(3) Second Amendment to Exhibit
Employment Agreement between 10(iii)(a)(3) of
the Company and David B. Company's Form
Pomeroy dated October 14, 10-K filed April
1993 7, 1994
(a)(4) Agreement between the Company Exhibit
and David B. Pomeroy related 10(iii)(a)(4) of
to the personal guarantee of Company's Form
the Datago agreement by David 10-K filed April
B. Pomeroy and his spouse 7, 1994
effective July 6, 1993
(a)(5) Third Amendment to Exhibit
Employment Agreement between 10(iii)(a)(5) of
the Company and David B. Company's Form
Pomeroy effective January 6, 10-Q filed
1995 November 17,
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
(c)(1) Employment Agreement between Exhibit
the Company and Victor Eilau 10(iii)(c)(1) of
dated July 6, 1997 Company's Form
10-Q filed
August 11, 1997
(c)(2) Performance Share Right Exhibit
Agreement between the Company 10(iii)(c)(2) of
and Victor Eilau dated July Company's Form
6, 1997 10-Q filed
August 11, 1997
(d) The Company Savings 401(k) Exhibit
Plan, 10(iii)(d)
effective July 1, 1991 of Company's
Form S-1 filed
Feb. 14, 1992
(e) The Company's Employee Stock Exhibit
Ownership Plan and Trust, 10(iii)(e) of
effective July 1, 1992 Company's Form
10-K filed March
31, 1993
(f) The Company's 1992 Non- Exhibit
Qualified 10(iii)(f)
and Incentive Stock Option of Company's
Plan,
dated February 13, 1992 Form S-1 filed
February 14,
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 E-216
Earnings
21 Subsidiaries of the Company E-217
27 Financial Data Schedule E-218 to E-219
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
Pomeroy Computer Resources, Inc.
By: /s/ David B. Pomeroy
David B. Pomeroy
Chairman of the Board, President and
Chief Executive Officer
By: /s/ Stephen E. Pomeroy
Stephen E. Pomeroy
Chief Financial Officer and Chief
Accounting Officer
Dated: April 5, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the date
indicated.
Signature and Title Date
___________________ ____
By: /s/ David B. Pomery April 5, 1998
___________________________
David B. Pomeroy, Director
By: /s/ Stephen E. Pomeroy April 5, 1998
___________________________
Stephen E. Pomeroy, Director
By: /s/ James H. Smith April 5, 1998
___________________________
James H. Smith III, Director
By:
___________________________
Dr. David W. Rosenthal, Director
By:
___________________________
Michael E. Rohrkemper, Director
By:
___________________________
Kenneth E. Waters, Director
By: /s/ Richard C. Mills April 5, 1998
___________________________
Richard C. Mills, Director
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Pomeroy Computer Resources, Inc.
We have audited the accompanying consolidated balance sheets
of Pomeroy Computer Resources, Inc. as of January 5, 1997 and
1998, and the related consolidated statements of income,
equity, and cash flows for each of the three years in the
period ended January 5, 1998. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the consolidated financial position of Pomeroy Computer
Resources, Inc. at January 5, 1997 and 1998, and the
consolidated results of its operations and its consolidated
cash flows for each of the three years in the period ended
January 5, 1998 in conformity with generally accepted
accounting principles.
Grant Thornton LLP
Cincinnati, Ohio
February 6, 1998, except for Note 18 as to which the date is
March 6, 1998
F-1
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 5, January 5,
1997 1998
__________ __________
ASSETS
Current assets:
Cash................................... $ 6,809 $ 380
Accounts receivable:
Trade, less allowance of $372
and $355 at January 5, 1997
and 1998, respectively............... 53,374 79,531
Vendor receivables, less allowance of
$137 and $223 at January 5, 1997
and 1998, respectively............... 14,411 19,575
Other................................ 309 601
__________ __________
Total receivables.............. 68,094 99,707
__________ __________
Inventories............................ 23,426 39,160
Other.................................. 739 816
__________ __________
Total current assets........... 99,068 140,063
__________ __________
Equipment and leasehold improvements:
Furniture, fixtures and equipment...... 8,639 12,174
Leasehold improvements................. 4,437 5,142
__________ __________
Total.......................... 13,076 17,316
Less accumulated depreciation.......... 3,864 6,770
__________ __________
Net equipment and
leasehold improvements......... 9,212 10,546
__________ __________
Investment in lease residuals............ 3,043 3,480
Goodwill and other intangible assets..... 9,435 12,697
Other assets............................. 622 478
__________ __________
Total assets................... $ 121,380 $ 167,264
========== ==========
See notes to consolidated financial statements.
F - 2
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
1997 1998
__________ __________
LIABILITIES AND EQUITY
Current liabilities:
Current portion of notes payable....... $ 907 $ 2,077
Accounts payable:
Floor plan financing................. 34,609 22,818
Trade................................ 5,734 17,220
__________ __________
Total accounts payable......... 40,343 40,038
Bank notes payable..................... 24,146 22,611
Deferred revenue....................... 2,318 3,503
Accrued liabilities:
Employee compensation and benefits... 2,016 2,938
Income taxes......................... 1,544 5,051
Interest............................. 147 76
Miscellaneous........................ 444 741
__________ __________
Total current liabilities...... 71,865 77,035
Notes payable............................ 2,189 1,434
Deferred income taxes.................... 733 18
Equity:
Preferred stock
(no shares issued or outstanding)...... - -
Common stock (6,469 and 11,402 shares
issued and outstanding at January 5,
1997 and 1998, respectively)........... 65 114
Paid-in capital........................ 34,402 60,226
Retained earnings...................... 12,330 28,641
__________ __________
46,797 88,981
Less treasury stock, at cost (21 shares
at January 5, 1997 and 1998,
respectively).......................... 204 204
__________ __________
Total equity................... 46,593 88,777
__________ __________
Total liabilities and equity... $ 121,380 $ 167,264
========== ==========
See notes to consolidated financial statements.
F - 3
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended January 5,
____________________________________
(in thousands, except per share data) 1996 1997 1998
__________ __________ __________
Net sales and revenues:
Sales - equipment and supplies....... $ 211,149 $ 306,745 $ 440,983
Service.............................. 19,561 29,613 50,465
__________ __________ __________
Total net sales and revenues. 230,710 336,358 491,448
__________ __________ __________
Cost of sales and service:
Equipment and supplies............... 192,839 275,272 400,059
Service.............................. 4,335 6,481 10,004
__________ __________ __________
Total cost of sales
and service.................. 197,174 281,753 410,063
__________ __________ __________
Gross profit......................... 33,536 54,605 81,385
__________ __________ __________
Operating expenses:
Selling, general and administrative.. 21,863 33,384 48,316
Rent expense......................... 894 1,546 1,956
Depreciation......................... 770 1,925 2,958
Amortization......................... 234 636 982
Provision for doubtful accounts...... 490 245 325
__________ __________ __________
Total operating expenses..... 24,251 37,736 54,537
__________ __________ __________
Income from operations................. 9,285 16,869 26,848
Other expense (income):
Interest expense..................... 1,999 2,170 974
Litigation settlement and related costs - 4,392 -
Miscellaneous........................ (64) (221) 54
__________ __________ __________
Total other expense................ 1,935 6,341 1,028
__________ __________ __________
Income before income tax............... 7,350 10,528 25,820
Income tax expense..................... 2,983 4,296 9,507
__________ __________ __________
Net income............................. $ 4,367 $ 6,232 $ 16,313
========== ========== ==========
Weighted average shares outstanding:
Basic................................ 5,660 7,834 11,052
========== ========== ==========
Diluted.............................. 6,007 8,106 11,367
========== ========== ==========
Earnings per common share:
Basic................................ $0.77 $0.80 $1.48
========== ========== ==========
Diluted.............................. $0.73 $0.7 7 $1.44
========== ========== ==========
See notes to consolidated financial statements.
F - 4
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended January 5,
___________________________________
(in thousands, except per share data) 1996 1997 1998
__________ __________ __________
Cash Flows from Operating Activities:
Net income........................ $ 4,367 $ 6,232 $ 16,313
Adjustments to reconcile net
income to net cash flows from
operating activities:
Depreciation.................... 771 1,925 2,958
Amortization.................... 234 636 982
Deferred income taxes........... 258 57 (638)
Net acquisition of
lease residuals................. (1,294) (273) (437)
Issuance of common shares for
stock awards.................... 40 40 65
Changes in working capital accounts,
net of effects of subsidiary
company purchased:
Accounts receivable........... (2,130) (24,007) (29,618)
Inventories................... (1,814) (1,959) (16,369)
Floor plan financing.......... (1,298) 16,932 (11,791)
Trade payables................ (688) (3,949) 10,321
Deferred revenue.............. 586 (355) 1,031
Income tax payable............ 67 426 3,270
Other, net.................... 486 (591) 973
__________ __________ __________
Net operating activities........... (415) (4,886) (22,940)
__________ __________ __________
Cash Flows from Investing Activities:
Capital expenditures.............. (1,070) (3,459) (2,399)
Payments for covenants
not to compete................... (238) - -
Acquisition of subsidiary companies,
net of cash acquired............. (20) - (509)
Acquisition of reseller assets.... (425) (9,934) (2,990)
__________ __________ __________
Net investing activities.......... (1,753) (13,393) (5,898)
__________ __________ __________
Cash Flows from Financing Activities:
Payments on notes payable......... (305) (1,288) (843)
Net proceeds of stock offering.... - 17,924 23,256
Net proceeds (payments) under
bank notes payable............... 1,435 6,419 (1,535)
Proceeds from exercise of
stock options.................... 1,560 1,767 1,531
Retirement of stock warrants...... - (330) -
__________ __________ __________
Net financing activities........ 2,690 24,492 22,409
__________ __________ __________
Increase (decrease) in cash ...... 522 6,213 (6,429)
Cash:
Beginning of period............. 74 596 6,809
__________ __________ __________
End of period................. $ 596 $ 6,809 $ 380
========== ========== ==========
See notes to consolidated financial statements.
F-5
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except for Common Paid-in Retained Treasury Total
share amounts) stock capital earnings stock equity
________ ________ ________ ________ ________
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
Net income........... 16,313 16,313
5,188 common shares issued
for stock awards... 65 65
36,953 common shares issued
for acquisitions .. 1,021 1,021
Stock options exercised and
related tax benefit 1 1,530 1,531
Effect of 3 for 2
stock split........ 38 (38) (2) (2)
1,020,000 common shares
issued by
public offering... 10 23,246 23,256
________ ________ ________ ________ ________
Balances at January 5, 1998.. $ 114 $ 60,226 $ 28,641 $ (204) $ 88,777
======== ======== ======== ======== ========
See notes to consolidated financial statements.
F-6
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 5, 1996, JANUARY 5, 1997 AND JANUARY
5, 1998
1. Company Description
Pomeroy Computer Resources, Inc. (the "Company" ) was
organized in February 1992 to consolidate and reorganize
predecessor companies. Since the owner of the Company and
the predecessor businesses were the same, this transaction
constituted a combination of the predecessor businesses
under common control and was accounted for at historical
cost in a manner similar to that followed for a pooling of
interests. The Company has 15 million shares of $.01 par
value common stock authorized, with 11.4 million shares
outstanding. The Company is also authorized to issue 2
million shares of $.01 par value preferred stock. In
fiscal 1995 the Company formed a wholly-owned subsidiary,
Technology Integration Financial Services, Inc. ( "TIFS")
(f/k/a - Pomeroy Computer Leasing Company, Inc. ( "PCL")),
for the purpose of leasing computer equipment to the
Company's customers. In fiscal 1997 the Company formed a
wholly-owned subsidiary, Pomeroy Computer Resources of
South Carolina, Inc. ( "PCR-SC") for the purpose of
acquiring The Computer Store ( "TCS" ) , a computer
reseller and service provider located in Columbia, South
Carolina.
The Company sells, installs and services microcomputers
and microcomputer equipment primarily for commercial,
health care, governmental, financial and educational
customers. The Company also derives revenue from customer
support services, including network analysis and design,
systems configuration, cabling, custom installation,
training, maintenance and repair. The Company has twenty
regional offices in Kentucky, Ohio, Indiana, Tennessee,
Florida, Alabama, Iowa, West Virginia, North Carolina and
South Carolina, and grants credit to substantially all
customers in these areas.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying
consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries Xenas
Communication Corp., TIFS, and PCR-SC. All significant
intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications
have been made to the 1996 financial statements included
herein to conform with the presentation used in 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Fiscal Year - The Company's fiscal year is a 12- month
period ending January 5. References to fiscal 1995, 1996
and 1997 are for the fiscal years ended January 5, 1996,
January 5, 1997 and January 5, 1998, respectively.
Goodwill and Other Intangible Assets - Goodwill is
amortized using the straight-line method over periods of
fifteen to twenty-five years. In accordance with SFAS No.
121, "Accounting for The Impairment of Long-Lived
Assets", the Company evaluates its goodwill on an ongoing
basis to determine potential impairment by comparing the
carrying value to the undiscounted estimated expected
future cash flows of the related assets. Other intangible
assets are amortized using the straight-line method over
periods up to ten years.
Equipment and Leasehold Improvements - Equipment and
leasehold improvements are stated at cost. Depreciation on
equipment is computed using the straight-line method over
estimated useful lives. Depreciation on leasehold
improvements is computed using the straight-line method
over estimated useful lives or the term of the lease,
whichever is less. Expenditures for repairs and
maintenance are charged to expense as incurred and
additions and improvements that significantly extend the
lives of assets are capitalized. Upon sale or retirement
of depreciable property, the cost and accumulated
depreciation are removed from the related accounts and any
gain or loss is reflected in the results of operations.
Income Taxes - Deferred tax assets and liabilities are
recognized for the estimated future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary
differences are expected to be
F-7
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Vendor Incentive Rebates - Certain vendors provide
incentive rebates to perform product training, advertising
and other sales and market development activities. The
Company recognizes these rebates when it has completed its
obligation to perform under the specific incentive
arrangement. Incentive rebates are recorded as reductions
of selling, general and administrative expense or, if
volume based, cost of sales.
Inventories - Inventories are stated at the lower of cost
or market. Cost is determined by the average cost method.
Revenue Recognition - The Company recognizes revenue on
the sale of equipment and supplies when the products are
shipped. Service revenue is recognized when the applicable
services are provided.
Deferred Revenue - Revenues received on maintenance
contracts are recognized ratably over the lives of the
contracts. Costs related to maintenance contracts are
recognized when incurred.
Stock-Based Compensation - The Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation" , in the Fall of 1995. The
statement encourages, but does not require, companies to
record compensation cost for stock-based employee
compensation plans at fair value beginning in fiscal 1996.
The Company elected to account for stock-based
compensation using the intrinsic value method prescribed
in "Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees" . Accordingly,
compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the
Company's common stock at the date of grant over the
amount an employee must pay to acquire the stock. The
Company adopted SFAS No. 123 for disclosure purposes and
for non-employee stock options. This had no material
effect on the results of operations or financial position
of the Company.
Earnings per Common Share - The computation of
basic earnings per common share is based upon the weighted
average number of common shares outstanding during the
period. Diluted earnings per common share is based upon
the weighted average number of common shares outstanding
during the period plus, in periods in which they have a
dilutive effect, the effect of common shares contingently
issuable, primarily from stock options.
In the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"). SFAS 128 changed the
computation, presentation and disclosure requirements for
earnings per share ("EPS") . Under SFAS 128, EPS is
presented as basic earnings per share ( "basic EPS" ) and
diluted earnings per share ( "diluted EPS" ) and replaces
the presentation of primary EPS and fully diluted EPS.
The adoption of SFAS 128 resulted in the restatement of
earnings per share for all periods presented in the
Company's consolidated financial statements.
The following is a reconciliation of the number of shares
used in the basic EPS and diluted EPS computations:
(in thousands, except per share data)
1995 1996 1997
______________ _____________ _____________
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
Basic EPS 5,660 $ 0.77 7,834 $ 0.80 11,052 $ 1.48
Effect of
dilutive
stock options 332 (0.44) 272 (0.03) 315 (0.04)
Contingent
shares 25 - - - - -
______ ______ _____ ______ ______ ______
Diluted EPS 6,007 $ 0.73 8,106 $ 0.77 11,367 $ 1.44
Use of Estimates in Financial Statements - In preparing
financial statements in conformity with generally accepted
accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and
liabilities at the
F-8
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value Disclosures - The fair value of financial
instruments approximates carrying value.
New Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ( "SFAS No. 130" )
with an effective date for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for
the reporting of comprehensive income in a company's
financial statements. Comprehensive income includes all
changes in a company's equity during the period that
result from transactions and other economic events other
than transactions with its stockholders.
In the fourth quarter of 1997, the Company elected to
early adopt SFAS No. 130 retroactive to January 6, 1997.
The adoption of SFAS No. 130 did not affect the financial
reporting in the accompanying consolidated financial
statements because the Company does not presently have any
comprehensive income other than net income.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and
Related Information ( "SFAS No. 131" ) with an effective
date for fiscal years beginning after December 15, 1997. A
reportable segment, referred to as an operating segment,
is a component of an entity about which separate financial
information is produced internally, that is evaluated by
the chief operating decision-maker to assess performance
and allocate resources. The Company does not presently
believe that it operates in more than one identifiable
segment.
3. Accounts Receivable
The following table summarizes the activity in the
allowance for doubtful accounts for fiscal 1995, 1996 and
1997
(in thousands) Trade Other
__________ __________
Balance January 5, 1995 $ 65 $ 225
Provision 1995 94 417
Accounts written-off (89) (444)
Recoveries 131 12
__________ __________
Balance January 5, 1996 201 210
Provision 1996 250 31
Accounts written-off (249) (604)
Recoveries 170 500
__________ __________
Balance January 5, 1997 372 137
Provision 1997 125 200
Accounts written-off (601) (415)
Recoveries 459 301
__________ __________
Balance January 5, 1998 $ 355 $ 223
F-9
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. Inventories
Inventories consist of items held for resale and are
comprised of the following components as of the end of
fiscal:
(in thousands) 1996 1997
_________ _________
Equipment and supplies $ 21,730 $ 36,265
Service parts 1,696 2,895
_________ _________
Total $ 23,426 $ 39,160
5. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the
following as of the end of the fiscal year, net of
accumulated amortization of $984 thousand (1996) and
$1,826 thousand (1997), respectively:
(in thousands) 1996 1997
__________ ___________
Goodwill $ 8,698 $ 12,159
Covenants not to compete 208 61
Customer lists 529 477
__________ ___________
$ 9,435 $ 12,697
As a result of its litigation with Vanstar Corporation,
the Company in fiscal 1994 wrote-off unamortized costs in
the amount of $251 thousand related to its agreement with
Vanstar which are included in amortization expense. On
April 29, 1996 the Company and Vanstar entered into a
settlement agreement which in effect terminated all
agreements between the parties.
In 1993, the Company acquired certain assets, principally
customer lists, of a computer reseller in Louisville,
Kentucky. Also, the Company entered into a five year
covenant not to compete with the reseller and its owners.
Amounts paid to the reseller for these intangibles were
$194 thousand for customer lists and $241 thousand for the
covenant not to compete. The Company entered into an
additional covenant not to compete with a former owner of
the reseller whereby the Company paid a total of $277
thousand in two installments during 1994 and 1995.
In fiscal 1996, the Company acquired certain assets of
The Computer Supply Store, Inc. ("TCSS") a privately held
computer reseller located in Des Moines, Iowa, AA
Microsystems, Inc. ("AA Micro"), a network service
provider located in Birmingham, Alabama, and
Communications Technology, Inc. ( "DILAN" ), a privately
held network integrator located in Hickory, North Carolina
(See Note 12). The Company recorded $5.7 million, $0.4
million and $2.5 million of goodwill in connection with
those acquisitions, respectively.
In fiscal 1997, the Company acquired certain assets of
Magic Box, Inc. ( "Magic Box" ) , a privately held network
integrator located in Miami, Florida, and Micro Care, Inc.
( "Micro Care" ), a privately held systems integrator
located in Indianapolis, Indiana. A wholly owned
subsidiary of the Company, Pomeroy Computer Resources of
South Carolina, Inc., acquired all the assets and
liabilities of The Computer Store Inc., a network
integrator located in Columbia, South Carolina. The
Company recorded $1.7 million, $1.9 million and $0.4
million in connection with those acquisitions,
respectively.
6. Borrowing Arrangements
The Company has an available line of credit up to the
lesser of $20 million, or an amount based upon a formula
of eligible trade receivables, at an interest rate that
varies based on the prime rate of the bank or the LIBOR
rate at the Company's election. At January 5, 1997 and
1998, bank notes payable include $2.2 million and $6.5
million, respectively, of overdrafts in accounts with the
Company's primary lender. These amounts were subsequently
funded through the normal course of business. The interest
rate charged was 7.25% and 7.50% at January 5, 1997 and
January 5, 1998 respectively. The agreement, which expires
in June 1998, is collateralized by substantially all
assets of the Company, except those assets which
collateralize certain other financing arrangements. Under
the revolving credit
F-10
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
agreement, the Company may not make any cash dividend
payments.
The maximum amount outstanding and the average amount
outstanding on bank revolving credit agreements were as
follows:
(in thousands) Maximum Average
Amount Amount
Period Ending Outstanding Outstanding
_______________ ___________ ___________
January 5, 1996 $ 19,000 $ 14,741
January 5, 1997 $ 26,687 $ 17,402
January 5, 1998 $ 25,800 $ 8,002
The above average amounts outstanding are calculated by
dividing the sum of the average daily balances for each
month by the number of months in the period. The weighted
average interest rate on the bank revolving credit
agreements was 8.7%, 8.2% and 7.3% in fiscal 1995, 1996
and 1997, respectively.
In November 1994 the Company exercised an option in its
revolving credit agreement to borrow $500 thousand on a
term note with interest at a rate 0.5% above the bank's
prime rate. The interest rate was raised to the bank's
prime rate in March, 1995. The term note matured July 31,
1996 and was paid off.
The Company finances inventory through floor plan
arrangements with two finance companies. As of January 5,
1998 the floor plan lines of credit were $12 million with
IBM Credit Corporation ("ICC") and $35 million with
Deutsche Financial Services ("DFS"). Borrowings under the
ICC floor plan arrangement are made on sixty day notes,
with one-half of the note amount due in thirty days.
Borrowings under the DFS floor plan arrangement are made
on thirty day notes. Financing on many of the
arrangements which are subsidized by manufacturers is
interest free. The average rate on the plans overall is
less than 1.0%.
The maximum amount outstanding and the average amount
outstanding on each of the floor plan arrangements were as
follows:
(in thousands) ICC DFS
__________________ ___________________
Maximum Average Maximum Average
Amount Amount Amount Amount
Period Ending Outstanding Outstanding
_______________ ______ ______ _______ _______
January 5, 1996 $6,300 $4,191 $21,045 $15,979
January 5, 1997 $9,045 $5,779 $27,349 $18,532
January 5, 1998 $19,985 $10,459 $39,092 $25,069
The average amount outstanding is calculated by dividing
the sum of the outstanding balances at the end of each
month by the number of months in the applicable period.
F-11
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. Income Taxes
The provision for income taxes consists of the following:
(in thousands) 1995 1996 1997
Current:
Federal $ 2,071 $ 3,205 $ 8,742
State 654 1,034 1,036
________ ________ ________
Total current 2,725 4,239 9,778
________ ________ ________
Deferred:
Federal 206 46 (21)
State 52 11 (54)
________ ________ ________
Total deferred 258 57 (271)
Total income
tax provision $ 2,983 $ 4,296 $ 9,507
The approximate tax effect of the temporary differences
giving rise to the Company's deferred income tax assets
(liabilities) are:
(in thousands) 1996 1997
Deferred Tax Assets:
Bad debt provision $208 $282
Depreciation - 193
Deferred compensation 210 409
_______ _______
Total deferred tax assets 418 884
_______ _______
Deferred Tax Liabilities:
Acquisition of
lease residuals (847) (620)
Depreciation (96) -
Accounts Receivable - (518)
_______ ________
Total deferred tax liabilities (943) (1,138)
_______ ________
Net deferred tax liability $ (525) $ (254)
======= ========
The Company's effective income tax rate differs from the
Federal statutory rate as follows:
1995 1996 1997
_____ _____ _____
Tax at Federal statutory rate 34.0% 34.0% 35.0%
State taxes 6.3 6.6 4.7
Kentucky Relocation Credits - - (2.2)
Other 0.3 0.2 (0.7)
_____ _____ _____
Effective tax rate 40.6% 40.8% 36.8%
===== ===== =====
F-12
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. Operating Leases
The Company leases office and warehouse space, vehicles
and certain office equipment from various lessors. Lease
terms vary in duration and include various option periods.
The leases generally require the Company to pay taxes and
insurance. Future minimum lease payments under
noncancelable operating leases with initial or remaining
terms in excess of one year as of January 5, 1998 are as
follows:
(in thousands)
Fiscal Year
1998 $2,153
1999 1,741
2000 1,376
2001 1,019
2002 828
Thereafter 2,554
________
Total minimum lease payments $ 9,671
=======
9. Employee Benefit Plans
In the fourth quarter of 1997, the Company was in the
process of terminating the Employee Stock Ownership Plan
("ESOP"). As of January 5, 1998, the ESOP held 72,661
shares of Company stock. No contributions were made or
accrued in fiscal 1996 and 1997. The distribution to
employees of the ESOP should be completed by the second
quarter of 1998.
The Company also has a savings plan intended to qualify
under sections 401(a) and 401(k) of the Internal Revenue
Code. The plan covers substantially all employees of the
Company. The Company did not contribute to the plan in
1996 or 1997. Beginning in fiscal 1998 the Company will
make contributions to the plan based on a participant's
annual pay.
10. Investment in Lease Residuals
The Company participates in a Remarketing and Agency
Agreement ("Agreement") with Information Leasing
Corporation ("ILC") whereby the Company obtains rights to
50% of lease residual values for services rendered in
connection with locating the lessee, selling the equipment
to ILC and agreeing to assist in remarketing the used
equipment.
During fiscal 1995, 1996 and 1997, the Company sold
equipment and related support services to ILC, for lease
to ILC's customers, in amounts of $23.7 million, $15.2
million and $7.7 million, respectively. The Company also
obtained rights to lease residuals from ILC in the amount
of $875 thousand, $575 thousand and $562 thousand in
1995, 1996 and 1997, respectively. Such amounts are
recorded as a reduction of the related cost of sales.
Residuals acquired in this manner are recorded at the
estimated present value of the interest retained.
The Company also purchases residuals associated with
separate leasing arrangements entered into by ILC. Such
transactions do not involve the sale of equipment and
related support services by the Company to ILC. Residuals
acquired in this manner are accounted for at cost.
The carrying value of investments in lease residuals is
evaluated on a quarterly basis, and is subject only to
downward market adjustments until ultimately realized
through a sale or re-lease of the equipment.
11. Major Customers
Sales to a major customer were approximately $43.8 million
for fiscal 1995. Sales to a major customer were
approximately $40.3 million for fiscal 1996. Sales to a
major customer were approximately $ 60.4 million for
fiscal 1997.
F-13
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
12. Acquisitions
During fiscal 1996, the Company completed several
acquisitions. The total consideration given consisted of
$7.2 million in cash, subordinated notes of $4.0 million
and 170 thousand unregistered shares of the Company's
common stock with an approximate value of $1.5 million.
Interest on the subordinated notes is payable quarterly.
Principal is payable in equal annual installments. The
acquisitions were accounted for as purchases, accordingly
the purchase price was allocated to assets and liabilities
based on their estimated value as of the dates of
acquisition. The results of operations of the acquisitions
are included in the consolidated statement of income from
the dates of acquisition.
The following table summarizes, on an unaudited pro forma
basis, adjusted to reflect a 10% stock dividend paid on
May 22, 1995 and three-for-two splits of the Company's
common stock in the form of a stock dividends paid on
October 4, 1996 and October 6, 1997, the estimated
combined results of the Company and the 1996 acquisitions
assuming the acquisitions had occurred on January 6, 1995.
These results include certain adjustments, primarily
goodwill amortization and interest expense, and are not
necessarily indicative of what results would have been had
the Company owned these businesses during the periods
presented:
(in thousands) Fiscal Year
_________________
1995 1996
__________ __________
Net sales and revenues $ 309,655 $ 364,005
Net income $ 4,630 $ 6,250
Net income per common share:
Basic $ 0.80 $ 0.80
Diluted $ 0.75 $ 0.77
During fiscal 1997, the Company completed several
acquisitions. The total consideration given consisted of
$3.7 million in cash, subordinated notes of $1.3 million
and 37 thousand unregistered shares of the Company's
common stock with an approximate value of $1.0 million.
Interest on the subordinated notes is payable quarterly.
Principal is payable in equal annual installments. The
acquisitions were accounted for as purchases, accordingly
the purchase price was allocated to assets and liabilities
based on their estimated value as of the dates of
acquisition. The results of operations of the acquisitions
are included in the consolidated statement of income from
the dates of acquisition. If the 1997 acquisitions had
occurred on January 6, 1996, the pro forma operations of
the Company would not have been materially different than
that reported in the accompanying consolidated statements
of income.
13. Related Parties
During fiscal 1995 the Company entered into a ten year
triple-net lease agreement commencing in 1996 for a new
headquarters and distribution facility with a company that
is controlled by the Chief Executive Officer of the
Company. During fiscal 1997 the lease agreement was
amended to include an expansion of the distribution
facility. The base rental for 1997 on an annualized basis
is $858 thousand. The annual rental for these properties
was determined on the basis of a fair market value rental
opinion provided by an independent real estate company.
During fiscal 1996, the Company made periodic advances to
a company that is controlled by the Chief Executive
Officer of the Company. No interest was charged on the
advances which were repaid in December 1996.
F-14
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
14. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow
information and non-cash investing and financing
activities are as follows:
(in thousands) 1995 1996 1997
Interest paid $2,037 $2,065 $1,045
Income taxes paid $2,658 $3,813 $4,920
Business combinations
accounted for as
purchases:
Assets acquired $774 $24,526 $7,358
Liabilities
assumed (24) (9,121) (1,495)
Note payable (225) (3,996) (1,343)
Stock issued (100) (1,475) (1,021)
________ _________ _________
Net cash paid $ 425 $ 9,934 $3,499
15. Stockholders' Equity and Stock Option Plans
In July 1996, the Company completed a secondary public
offering of 1.4 million new shares of its common stock.
The net proceeds of $17.9 million were used to reduce
amounts outstanding under the line of credit. If this
secondary offering had been completed as of January 6,
1996, pro forma basic and diluted earnings per share would
have been $0.77 and $0.75, respectively, for fiscal 1996.
This computation assumes no interest expense related to
the credit line and the issuance of only a sufficient
number of shares to eliminate the credit line at the
beginning of fiscal 1996.
In February 1997, the Company completed a secondary public
offering of 1.02 million shares of its common stock. The
net proceeds of $23.3 million were used to reduce amounts
outstanding under the Company's line of credit. If this
secondary offering had been completed as of January 6,
1997, pro forma basic and diluted earnings per share would
have been $1.38 and $1.34 , respectively, for fiscal 1997.
This computation assumes no interest expense related to
the credit line and the issuance of only a sufficient
number of shares to eliminate the credit line at the
beginning of fiscal 1997.
On September 6, 1996, the Company's Board of Directors
authorized a three-for-two stock split in the form of a
stock dividend payable October 4, 1996, to shareholders of
record September 19, 1996. The split resulted in the
issuance of 2.1 million new shares of common stock. The
stated par value of each share was not changed from $0.01.
A total of $20 thousand was reclassified from the
Company's additional paid in capital account to the
Company's common stock account. Accordingly, net income
per common share, weighted average shares outstanding and
stock option plan information have been restated to
reflect the stock split.
On September 8, 1997, the Company's Board of Directors
authorized a three-for-two stock split in the form of a
stock dividend payable October 6, 1997, to shareholders of
record September 22, 1997. The split resulted in the
issuance of 3.8 million new shares of common stock. The
stated par value of each share was not changed from $0.01.
A total of $38 thousand was reclassified from the
Company's additional paid in capital account to the
Company's common stock account. Accordingly, net income
per common share, weighted average shares outstanding and
stock option plan information have been restated to
reflect the stock split.
The Company's 1992 Non-Qualified and Incentive Stock
Option Plan provides certain employees of the Company with
options to purchase common stock of the Company through
options at an exercise price equal to the market value on
the date of grant. 990,000 shares of the common stock of
the Company are reserved for issuance under the plan. The
plan will terminate ten years from the date of adoption.
Stock options granted under the plan are exercisable in
accordance with various terms as authorized by the
Compensation Committee. To the extent not exercised,
options will expire not more than ten years after the date
of grant.
The Company's 1992 Outside Directors' Stock Option Plan
provides outside directors of the Company with options to
purchase common stock of the Company at an exercise price
equal to the market value of the shares at the date of
grant. 175,000 shares of common stock of the Company are
reserved for issuance under the plan. The plan will
terminate ten years from the date of adoption. Pursuant to
the
F-15
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
plan, an option to purchase 10,000 shares of common stock
automatically will be granted on the first day of the
initial term of a director. An additional 2,500 shares of
common stock automatically will be granted to an eligible
director upon the first day of each consecutive year of
service on the board. Options may be exercised after one
year from the date of grant for not more than one-third of
the shares subject to the option and an additional one-
third of the shares subject to the option may be exercised
for each of the next two years thereafter. To the extent
not exercised, options will expire five years after the
date of grant.
The following summarizes the stock option transactions
under the plans for the three fiscal
years ended January 5, 1998:
Weighted Average
Shares Exercise price
_________ ________________
Options outstanding January 5, 1995 283,832 $8.69
Granted 66,300 10.95
Exercised (164,975) 8.27
Stock dividend effect 33,383 8.32
_________ ________________
Options outstanding January 5, 1996 218,540 8.32
Granted 149,600 13.83
Exercised (197,047) 8.97
Stock split effect 121,082 7.21
_________ ________________
Options outstanding January 5, 1997 292,175 7.27
Granted 216,328 30.10
Exercised (95,260) 8.70
Forfeitures (4,700) 34.19
Stock split effect 227,754 5.61
_________ ________________
Options outstanding January 5, 1998 636,297 $12.01
========= ================
The following summarizes options outstanding and
exercisable at January 5, 1998:
Options Outstanding Options Exercisable
_________________________________________ __________________
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at 1/5/98 Contractual Exercise at 1/5/98 Exercise
Prices Life Price Price
______________ ___________ _______________ ___________ __________ _________
$2.67 to $5.67 252,264 0.8 $4.38 220,616 $4.45
$6.33 to $16.50 165,000 2.1 $11.00 120,000 $11.31
$17.09 to $25.67 219,033 1.5 $21.56 215,283 $21.63
__________ __________
636,297 1.6 $12.01 555,899 $12.58
========== ==========
The weighted average fair value at date of grant for
options granted during fiscal 1996 and 1997 was $2.75 and
$6.77, respectively. The fair value of options at the date
of grant was estimated using the Black-Scholes model with
the following weighted average assumptions:
Fiscal 1995 Fiscal 1996 Fiscal 1997
___________ ___________ ___________
Expected life (years) 2.4 1.7 1.8
Interest rate 7.3% 5.8% 6.1%
Volatility 50% 55% 56%
Dividend yield 0% 0% 0%
Had compensation cost for the Company's stock option plans
been determined based on the fair value
F-16
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
at the grant date for awards in fiscal 1995 and 1996
consistent with the provisions of SFAS No. 123, the
Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
(in thousands, except per
share amounts)
Fiscal 1995 Fiscal 1996 Fiscal 1997
___________ ___________ ___________
Net income - as reported $4,367 $6,232 $16,313
Net income - pro forma $4,196 $5,777 $14,455
Net income per common
share - as reported
Basic $0.77 $0.80 $1.48
Diluted $0.73 $0.77 $1.44
Net income per common
share - pro forma
Basic $0.74 $0.74 $1.31
Diluted $0.70 $0.71 $1.27
In 1995, 1996 and 1997, 4,000, 3,076 and 544,
respectively, shares of common stock were awarded to
officers of the Company. Compensation expense resulting
from the awards was $40 thousand in fiscal 1995 and 1996
and $20 thousand in fiscal 1997.
16. Litigation
There are various legal actions arising in the normal
course of business that have been brought against the
Company. Management believes these matters will not have a
material adverse effect on the Company's consolidated
financial position or results of operations.
17. Risk of Loss from Concentrations
During fiscal 1997, approximately 41.2% of the Company's
total net sales and revenues were derived from its top
ten customers, including one customer which accounted for
12.3% of total net sales and revenues. The Company was not
selected as the fiscal 1998 product supplier by the
largest customer. The Company does not expect that this
loss will have a near-term material impact on its
financial condition or results of operation.
Due to the demand for the products sold by the Company,
significant product shortages occur from time to time
because manufacturers are unable to produce certain
products to meet increased demand. Failure to obtain
adequate product shipments could have a material adverse
effect on the Company's operations and financial results.
The Company is required to have authorizations from
manufacturers in order to sell their products. The loss of
a significant vendor's authorization could have a material
adverse effect on the Company's business.
18. Subsequent Events
Stockholder Rights Plan. On February 18, 1998, the
Company's Board of Directors declared a dividend of one
preferred share purchase right (a "Right" ) for each
outstanding share of common stock, par value $.01 per
share (the "Common Share" ) on March 15, 1998 (the
"Record Date" ) to the stockholders of record on that
date. The Rights become exercisable only if a person or
group (an "Acquiring Person" ) acquires, or makes a
tender offer to acquire, beneficial ownership of 15% or
more of the outstanding Common Shares of the Company. The
Rights expire on March 1, 2008, unless extended or are
earlier redeemed by the Company.
When the Rights become exercisable, the holder of each
Right, other than the Acquiring Person, is entitled to
purchase from the Company one one-thousandth of a share of
Series A Junior Participating Preferred Stock, par value
$.01 per share (the "Preferred Shares" ), of the Company,
at a price of $115.00 per one one-thousandth of a
Preferred Share (the "Purchase Price" ), subject to
adjustment. Alternatively, under certain circumstances
each holder of a Right, other than Rights beneficially
owned by the Acquiring Person, will thereafter have the
right to receive upon exercise, in lieu of Preferred
F-17
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Shares, that number of Common Shares having a market value
of two times the exercise price of the Right. In the event
that, at any time after a Person becomes an Acquiring
Person, the Company is acquired in a merger or other
business combination transaction or 50% or more of its
consolidated
assets or earning power is sold, proper provision will be
made so that each holder of a Right will thereafter have
the right to receive, upon the exercise thereof at the
then current exercise price of the Right, that number of
shares of common stock of the acquiring company which at
the time of such transaction will have a market value of
two times the exercise price of the Right.
Acquisitions. In March 1998, the Company completed two
acquisitions. The total consideration given consisted of
$11.5 million in cash and subordinated notes of $2.0
million. Interest on the subordinated notes is payable
quarterly while principal is payable in equal annual
installments. The acquisitions will be accounted for as
purchases, accordingly the purchase prices will be
allocated to assets and liabilities based on their
estimated values as of the dates of acquisition. The
results of operations of the acquisitions will be included
in the consolidated statement of income from the dates of
acquisition. If these acquisitions had occurred on January
6, 1997, the pro forma operations of the Company would not
have been materially different than that reported in the
accompanying consolidated statements of income.
Amendment to Line of Credit. In January 1998, the Company
amended its revolving credit agreement. The amended
agreement provides for borrowings up to $40.0 million at
the bank's prime rate minus 1.25%. A new financial
covenant requires that the Company maintain trade accounts
receivable less than ninety days old at a ratio greater
than 1.25 to 1.0 to amounts outstanding under the
revolving credit agreement at any time. The revolving
credit agreement expires May 31, 1998.
Repricing of Stock Options. In January 1998, the Board of
Directors of the Company approved the repricing of certain
unexercised options granted under the 1992 Non-Qualified
and Incentive Stock Option Plan. As a result, 109,649
options granted during fiscal 1997 will be repriced to
$16.63 per share from $34.19 per share. These amounts
approved by the Board of Directors do not give effect to
the stock split approved after the date of the original
grant of the options.
F-18