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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, 2002
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
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1020 Petersburg Road, Hebron, Kentucky 41048
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (859) 586-0600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
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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
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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 $158,369,761 as of March 25, 2002.
The number of shares outstanding of the Registrant's common stock as of March
25, 2002 was 12,780,635.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which Portions of Documents
Document Are Incorporated
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Definitive Proxy Statement for the 2002 Part III
Annual Meeting of Stockholders to be
Filed with the Securities and Exchange
Commission prior to May 05, 2002.
POMEROY COMPUTER RESOURCES, INC.
FORM 10-K
YEAR ENDED JANUARY 5, 2002
TABLE OF CONTENTS
PART I Page
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Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 16
Item 9. Disagreements on Accounting and Financial
Disclosures 16
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management 17
Item 13. Certain Relationships and Transactions 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 17
SIGNATURES Chief Executive Officer, President, Chief Financial 23
Officer and Chief Accounting Officer
Directors 23
Report of Independent
Certified Public Accountants F-1
Financial Statements F-2 to F-19
Exhibits
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
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Certain of the matters discussed under the captions "Business", "Properties",
"Legal Proceedings", "Market for the Registrant's Common Stock and Related
Stockholder Matters" 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", "Properties",
"Legal Proceedings", "Market for the Registrant's Common Stock and Related
Stockholder Matters" 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 and Chief Executive Officer.
During 2001, the Company's business was comprised of (1) the sale of a broad
range of desktop computer equipment including hardware, software, and related
products, (2) the provision of information technology (IT) services which
support such computer products, and (3) the provision of in-house leasing
solutions for the Company's products and services customers. See Note 19 of
Notes to Consolidated Financial Statements for information regarding the sale of
substantially all of the assets of TIFS, the Company's leasing subsidiary.
Prior to January 6, 1999, the Company (including its wholly-owned subsidiaries
Global Combined Technologies, Inc., Pomeroy Computer Resources of South
Carolina, Inc. ("PCR-SC") and Technology Integration Financial Services, Inc.
("TIFS") operated the IT products and services business as a single integrated
business. In December, 1998, the Company formed a new subsidiary, Pomeroy
Select Integration Solutions, Inc. ("Pomeroy Select"), for the purpose of
operating independently the IT services business previously operated by the
Company other than procurement and configuration services which are directly
related to the sale of products. On January 6, 1999, the Company transferred
the assets, liabilities, business, operations and personnel comprising its IT
services business (excluding procurement and configuration services) in
exchange for 10 million shares of Class B common stock of Pomeroy Select. The
separation of the IT services business is a part of the Company's ongoing
strategy to expand its services revenue. In October 1999, the legal structure
of the Company was changed for the purpose of increasing efficiencies. The
Company formed the following wholly owned subsidiaries: Pomeroy Computer
Resources Holding Company, Inc. ("PCR Holding") and Pomeroy Computer Resources
Sales Company, Inc. ("PCR Sales"). In addition, the Company formed Pomeroy
Select Advisory Services, Inc. ("PSAS"), a wholly-owned subsidiary of Pomeroy
Select, Acme Data Services, LLC ("Acme Data"), a wholly-owned subsidiary of PCR
Sales, T.I.F.S. Advisory Services, Inc. ("TIFS Advisory"), a wholly-owned
subsidiary of TIFS, and Pomeroy Computer Resources LLP ("PCR Ops"), a
partnership between the Company and PCR Holding. PCR-SC and Global Combined
Technologies, Inc. were merged into PCR Sales. In fiscal 2000, the Company
and its wholly owned subsidiary Pomeroy Select acquired all the outstanding
stock of TheLinc Corporation ("TheLinc"), a network design, consulting and
systems engineering provider located in Birmingham, Alabama and Val Tech
Computer Systems, Inc. ("Val Tech"), a leasing company also located in
Birmingham, Alabama. In fiscal 2001, Acme Data Services, LLC, a Delaware
limited liability company was merged into PCR Sales. In fiscal 2001, TheLinc
Corporation ("TheLinc"), Nevada corporation, was merged into TheLinc
Corporation, a Delaware corporation, which resulted in the dissolution of the
Nevada corporation. Thereafter, the Delaware corporation was merged into
TheLinc LLC, a Delaware limited liability company, and effectively dissolved.
Pomeroy Computer Resources Sales Company is the sole member of TheLinc LLC.
Incident to the above referenced mergers, the services assets of TheLinc were
distributed to Pomeroy Select while the operating assets of TheLinc remain with
TheLinc LLC.
1
Prior to the sale of TIFS, the Company operated in three industry segments:
products, services and leasing. See Note 18 of Notes to Consolidated Financial
Statements for a presentation of segment financial information. The products
segment is primarily engaged in the sale and distribution of computers,
hardware, software and related products. The Company offers products from an
array of manufacturers including Cisco, Computer Associates, Sun, Oracle, EMC,
Compaq, Hewlett-Packard, IBM, Microsoft, Nortel Networks, Novell, Palm
Computing, Veritas, Symantec, Lexmark and Panasonic.
As a service solution provider, the Company offers three categories of service:
enterprise consulting services, complete infrastructure solutions and lifecycle
service offerings that are required to develop, deploy and support IT
strategies. Enterprise consulting services includes E-business application
development with infrastructure platform consulting, design and implementation.
It includes platforms such as Oracle, Sieble, Citrix, Crossworlds and IBM's
Websphere. Complete infrastructure solutions portfolio includes internet
infrastructure solutions, enterprise management services, network infrastructure
services and network integration solutions. Internet infrastructure solutions
include services to assist customers in implementing network and server
infrastructure components. Enterprise management services monitor the network
buildup and broadband implementation services. Network infrastructure services
include LAN/WAN/SAN/NAS implementation services. These services assist the
customer in installing and implementing an internal network infrastructure that
includes cabling, network equipment consulting, implementation and support;
internet protocol telephony services for maximizing voice/data circuits,
wireless LAN design and implementation and storage services that provide
consulting, design, installation and support on storage area networks and
network attached storage implementations. Network integration solutions provide
services to assist customers in implementing thin client/server based computing,
groupware design/implementation and system/application enablement. Lifecycle
service offerings consist of desktop management services that involves assisting
customers in project roll-outs, installation of personal computer systems,
peripherals and accessories; warranty and non-warranty repair and maintenance,
redeployment and end-of-life services. The Company has achieved Gold
Authorization from Cisco. The Company has also been awarded 2 specialization's
from Cisco; Voice Access and IP Telephony, which gives customers access/support
to specialized knowledge and expertise for consulting, design and implementation
converged voice and data telephony circuits and wireless LAN implementations.
The leasing segment primarily provides in-house leasing services to the
Company's products and services customers. The Company leases many types of
equipment with the predominant focus on notebook and desktop personal computers,
communication products and high-powered servers. The Company provides products
and services primarily to large and medium sized corporate, health care,
governmental, financial and educational customers. On February 28, 2002, the
Company announced the signing of a definitive purchase agreement to sell
substantially all of the net assets of its wholly owned subsidiary-TIFS to ILC,
the leasing division of The Provident Bank of Cincinnati, Ohio. ILC is paying
book value for net assets and liabilities approximating $3 million to $4
million. ILC is also immediately liquidating acquired debt, related to leased
assets, owed by TIFS to the Company in the approximate amount of $20.4 million.
The closing is expected to occur by April 16, 2002. As part of the transaction,
the Company has agreed to an exclusive seven-year vendor agreement, whereby the
Company will be commissioned on lease transactions referred to and accepted by
ILC.
The Company's strategy for building shareholder value is to provide
comprehensive solutions to improve the productivity of its clients' information
technology systems. Key elements of the Company's strategy are: (1) to generate
higher margin revenues by leveraging existing client relationships, (2) to
expand service offerings particularly in the higher end services and networking
areas, (3) to expand offerings and grow the customer base through strategic
acquisitions, and (4) to maintain and enhance technical expertise by hiring and
training highly qualified technicians and systems engineers.
The Company is an authorized dealer or reseller for the products of over 32
major vendors, which were included in the Pomeroy Preferred Partner Program. The
Company believes that its access to such 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. As in the
past, the Company expects to experience some difficulty in obtaining an adequate
supply of products from its major vendors. Historically, this 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. However, the failure to obtain adequate product supply
could have a material adverse effect on the Company's operations and financial
results.
2
The Company's sales are generated primarily by its 242 person direct sales and
sales support personnel located in 30 regional offices in 15 states throughout
the Southeast and Midwest United States. The Company's business strategy is to
provide its customers with a comprehensive portfolio of personal computers,
enterprise consulting services, complete infrastructure solutions and lifecycle
service offerings. In addition, the Company offers standard leasing services and
custom tailored leasing solutions for our customers. Leases generally range from
twelve to forty-eight months. Coupled with the products and services segments,
the Company has the ability to provide turnkey information technology solutions
with all components and necessary services all included in a periodic payment.
The Company believes that its ability to combine competitive pricing of computer
hardware, software and related products with sophisticated higher margin
services 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 and information management.
Most microcomputer products are sold pursuant to purchase orders. For larger
procurements, the Company may 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, 2002, the Company has been
awarded contracts it estimates will result in an aggregate of approximately
$144.2 million of net sales and revenues after January 5, 2002, $96.0 million in
net sales and revenues were generated in 2001 from these contracts. Of the
aggregate total, the Company estimates that approximately $100.7 million of net
sales and revenues will be generated in fiscal 2002. By comparison, as of
January 5, 2001, the Company had been awarded contracts that it estimated would
result in an aggregate of approximately $185.1 million of net sales and revenues
after January 5, 2001. Of this amount, the Company estimated that $121.3
million of net sales and revenues would be generated during fiscal 2001. 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 the customer finding
another supplier for the desired products at a lower price or on better terms, a
change in internal business needs of the customer causing the customer to
require less or different products and services, or the occurrence of a
significant change in technology or other industry conditions which alters the
customer's needs or timing of purchases.
The Company has also established relationships with industry leaders relating to
its services segment including the authorization to perform warranty and
non-warranty repair work for several vendors. In some cases, the authorization
of Pomeroy Select to continue performing warranty work for a particular
manufacturer's products is dependent upon the performance of the Company under a
dealer agreement with that manufacturer. The Company's technical personnel
currently have an aggregate of more than 300 Microsoft certifications, more than
300 Novell certifications, 30 Bay/Nortel Networks Specialist certifications, 19
IBM Professional Service Expert certifications, 48 Compaq Accredited Systems
Engineer certifications, 20 Hewlett-Packard Network Technical Professional
certifications, 15 Citrix Certified Administrator certifications, 1 Citrix
Certified Enterprise Administrator certification, 81 Cisco Certified Network
Associates certifications, 31 Cisco Certified Network Professional
certifications, 7 Cisco Certified Internetwork Expert certifications, 12 Cisco
Certified Design Associates certifications, 9 Cisco Certified Design
Professionals certifications, 7 Computer Associates Certified Unicenter
Engineer certifications and one of each of the following advanced
certifications: Protean Router, Network General Sniffer, Fore Systems and Oracle
Advanced SQL.
The Company provides its services to its customers on a time-and-materials basis
and pursuant to written contracts or purchase orders. Either party with limited
or no advance notice generally can terminate the Company's arrangements with its
customers. The Company also provides some of its services under fixed-price
contracts rather than contracts billed on a time-and-materials basis.
Fixed-price contracts are used when the Company believes it can clearly define
the scope of services to be provided and the cost of providing those services.
3
The Company has initiated a program known as the Pomeroy Preferred Partner
Program to better serve its customers. Through the program, the Company has the
ability to focus on the group of manufacturers, which it has deemed "best in
class" through its research, customer feedback, and its experience in the
industry. By focusing on these "preferred" manufacturers, the Company is
building mutual business commitments that it believes will benefit the Company's
customers. Such benefits include access to favorable pricing and key
decision-makers, better terms and conditions and enhanced sales and technical
training.
The Company has entered into dealer agreements with substantially all of 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.
For fiscal years 1999, 2000 and 2001, sales of computer hardware, software, and
related products were approximately $648.9 million, $775.3 million, and $658.9
million respectively, and accounted for approximately 85.8%, 83.8%, and 81.4%
respectively, of the consolidated net sales and revenues of the Company in such
years. The Company's revenues from its service and support activities have
grown, as a percentage of its consolidated net sales and revenues, over the last
several years. For fiscal years 1999, 2000 and 2001, revenues from service and
support activities were approximately $103.8 million, $139.4 million, and $140.4
million respectively, and accounted for approximately 13.7%, 15.1%, and 17.4%,
respectively, of the consolidated net sales and revenues of the Company in such
years. The Company's revenue from its leasing services has grown, as a
percentage of its consolidated net sales and revenues, since its inception in
1997. For fiscal years 1999, 2000 and 2001, leasing revenues were
approximately, $4.0 million, $10.4 million, and $9.9 million respectively, and
accounted for approximately 0.5%, 1.1%, and 1.2%, respectively, of the
consolidated net sales and revenues of the Company.
COMPETITION
The microcomputer products, services and leasing market is highly competitive.
Distribution has evolved from manufacturers selling directly to customers, to
manufacturers selling 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
competitors as a consequence of such consolidation. These competitors may have
access to greater financial resources than the Company. In response to
continuing competitive pressures, including specific price pressure from the
direct telemarketing, internet 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 direct response and
internet based fulfillment organizations 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 ability to provide
comprehensive customer support services. The Company's principal competitive
strengths include: (i) quality assurance; (ii) service and technical expertise,
reputation and experience; (iii) competitive pricing of products through
alternative distribution sources; (iv) prompt delivery of products to customers;
(v) various financing alternatives; and (vi) its ability to provide prompt
responsiveness to customers services needs and to build performance guarantees
into services contracts.
The Company competes for product sales directly with local and national
distributors and resellers. In addition, the Company competes with microcomputer
manufacturers that sell 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.
4
The Company's services solutions segment competes, directly and indirectly, with
a variety of national and regional service providers, including services
organizations of established computer product manufacturers, value-added
resellers, systems integrators, internal corporate management information
systems and, to a lesser extent, consulting firms. The Company believes that
the principal competitive factors for information technology services include
technical expertise, the availability of skilled technical personnel, breadth of
service offerings, reputation, financial stability and price. To be
competitive, the Company must respond promptly and effectively to the challenges
of technological change, evolving standards and its competitors' innovations by
continuing to enhance its service offerings and expand sales channels. Any
pricing pressures, reduced margins or loss of market share resulting from the
Company's failure to compete effectively could have a material adverse effect on
the Company's operations and financial results.
The Company believes its services solutions segment competes successfully by
providing a comprehensive solution portfolio for its customers' information
technology asset management and networking services needs. The Company delivers
cost-effective, flexible, consistent, reliable and comprehensive solutions to
meet customers' information technology infrastructure service requirements. The
Company also believes that it distinguishes itself on the basis of its technical
expertise, competitive pricing and its ability to understand its customers'
needs.
The Company's leasing segment competes directly and indirectly with various
lenders. Manufacturing competitors generally have their own leasing companies,
which include private label services provided by other organizations. In
addition, a number of independent finance companies have sales forces to
originate leases, as well as alignment with manufacturers and resellers to
provide private label leasing solutions. The leasing segment also competes with
bank leasing companies. The Company believes its leasing segment competes
successfully by providing flexible financing alternatives and offering turnkey
solutions. See Note 19 of Notes to Consolidated Financial Statements for
information regarding the sale of substantially all of the assets of TIFS.
CERTAIN BUSINESS FACTORS
The following business factors, among others, are likely to affect the Company's
operations and financial results and should be considered in evaluating the
Company's outlook.
Rapid Growth and Future Acquisitions
Prior to fiscal 2001, the Company has grown rapidly both internally and through
acquisitions. During fiscal 2001, the Company experienced a decline in the
growth in both the products and leasing segments due to the downturn in the
economy and the events of September 11, 2001. However, the Company experienced
a slight increase in growth during fiscal 2001 in the service segment. The
Company's business strategy is to continue to grow both internally and through
acquisitions. There can be no assurance that, in the future, the Company will be
successful in repeating the rapid growth experienced in prior years. The Company
expects future growth will result from acquisitions in addition to organic
growth. In fiscal 2001, the Company completed three acquisitions and continues
to evaluate expansion and acquisition opportunities that would complement its
ongoing operations. As part of the Company's growth strategy, it plans to
continue to make investments in complementary companies, assets and
technologies, although 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,
disrupting ongoing business and distracting management and employees, incurring
debt to finance acquisitions or issuing equity securities which could be
dilutive to existing stockholders, dependence on retaining, hiring and training
key personnel, incurring unanticipated problems or legal liabilities and
amortization of acquired intangible assets. Some or all of these special risks
could have a material adverse effect on the Company's operations and financial
results.
5
Vendor Receivables
Any change in the level of vendor rebates or manufacturer market development
funds offered by manufacturers that results in the reduction or elimination of
rebates or manufacturer market development funds 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. In addition, there are specific
risks, discussed below, related to the individual components of vendor
receivables which include vendor rebates, manufacturer market development funds
and warranty receivables.
Vendor Rebates
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The most significant component of vendor receivables is vendor rebates. Vendor
rebate programs are developed by original equipment manufacturers ("OEM")
allowing them to modify product pricing on a case by case basis (generally
determined by individual customers) to maintain their competitive edge on
specific transactions. The Company contacts the OEM to request a rebate, for a
specific transaction, and if approved, the OEM provides the Company with a
document authorizing a rebate to be paid to the Company at a later date when a
claim is filed. If the business is won, the Company records the sale and the
cost of the sale is reduced by the amount of the anticipated rebate, which is
recorded as a vendor receivable. Rebate programs involve a complex set of rules
varying by manufacturer. As a result of the rules and complexity of applying
the rules to each item sold, claims are often rejected and require multiple
submissions before credit is given resulting in longer aging of vendor
receivables than other types of receivables. Primary reasons for claims being
disallowed and corresponding re-files include serial number issues (missing,
incomplete, transposed, data base match-up discrepancies, etc.), pricing issues
(dispute in calculation of rebate amounts) and other missing or incomplete
documentation (bid letters, customer information, etc.) The Company has made
substantial process and system enhancements geared towards minimizing refiling
rebate claims, but there is no assurance that the company will be able to
successfully claim all of the vendor rebates that were passed to along to the
customers in a form of a reduction in sales price.
Manufacturer Market Development Funds
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Several manufacturers offer market development funds, cooperative advertising
and other promotional programs to distribution channel partners. The Company
utilizes these programs to fund some of its advertising and promotional
programs. The funds received from manufacturers are offset directly against the
expense, thereby reducing selling, general and administrative expenses and
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.
Warranty Receivable
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The Company performs warranty service work on behalf of the OEM on customer
product. Any labor cost or replacement parts needed to repair the product is
reimbursable to the Company by the OEM. It is the Company's responsibility to
file and collect these claims.
Vendor Receivables Reserve
- ----------------------------
During fiscal year 2001, the Company recorded a $15 million reserve,
specifically related to the collectibility of vendor receivables resulting in a
$9.1 million reduction in net income. The determination of an appropriate
reserve was based on the deterioration in the aging of the vendor receivables,
the expected resolution of the disallowed claims (see primary reasons for vendor
rebate claims being disallowed) and the general posture of the OEM's regarding
resolution.
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.
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.
6
Dependence on Technical Employees
The future success of the Company's services business 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
Rapid product improvement and technological change resulting in relatively short
product life cycles and rapid product obsolescence characterize the information
technology industry. 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. In prior fiscal
years, many manufacturers reduced the number of days for which they provided
price protection. During fiscal 2001, most of the reductions have stabilized,
however, current terms and conditions remain subject to change. In addition to
the price protection mentioned above, subject to certain limitations, the
Company currently has the option of returning inventory to certain manufacturers
and distributors. 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. Price protection practices are not ordinarily offered by
manufacturers with respect to service parts.
Dependence on Vendor Relationships
The Company may not be able to maintain, or attract new, relationships with the
computer hardware and software vendors that they believe are necessary for their
business. The Company's future success depends, in part, on the relationships
with leading hardware and software vendors and on their status as an authorized
service provider. The Company is currently authorized to service the products of
many industry-leading hardware, software and internetworking product vendors.
Without these relationships, the Company would be unable to provide current
range of services, principally warranty services. Since the Company utilizes
vendor relationships as a marketing tool, any negative change in these
relationships could adversely affect the financial condition and results of
operations while they seek to establish alternative relationships. In general,
the authorization agreements with vendors include termination provisions, some
of which are immediate. The Company cannot assure that vendors will continue to
authorize them as an approved service provider. In addition, the Company cannot
assure that companies which introduce new products will authorize them as an
approved service provider for such new products.
Government Contracts
A portion of the Company's revenue is derived from contracts with state and
local governments and government agencies. In the event of a dispute, the
Company would have limited recourse against the government or government agency.
Furthermore, future statutes and/or regulations may reduce the profitability of
such contracts. In addition, certain government contracts have no contractual
limitation of liability for damages resulting from the provision of services.
Dependence on Major Customers
During fiscal 2001, approximately 24.1% of the Company's total net sales and
revenues were derived from its top 10 customers. No customer accounted for more
than 10% of the Company's total net sales and revenues. During fiscal 2001,
Square D accounted for approximately 10.2% of the total net sales and revenues
for the leasing segment.
7
Dependence on Key Personnel
The success of the Company is dependent on the services of David B. Pomeroy, II,
the CEO and Chairman of the Board, Stephen E. Pomeroy, President and Chief
Operating Officer of the Company and Chief Executive Officer of Pomeroy Select,
and other key personnel. The loss of the services of David B. Pomeroy, Stephen
E. Pomeroy, or other key personnel could have a material adverse effect on the
Company's business. The Company maintains $1.0 million in key man life
insurance insuring the life of David B. Pomeroy. In addition, the company
maintains $700 thousand in key man life insurance insuring the life of Stephen
E. Pomeroy. The Company has entered into employment agreements with certain of
its key personnel, including David B. Pomeroy and Stephen E. 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.
Stock Price
The market price of the Company's common stock may fluctuate because the
Company's revenue, gross profit, operating income and net income may vary
substantially from quarter to quarter.
EMPLOYEES
As of January 5, 2002, the Company had 1,765 full-time employees consisting of
the following: 1,193 technical personnel; 242 direct sales representatives and
sales support personnel; 45 management personnel; and 285 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 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 representative" or an "authorized service
provider" 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.
During fiscal 2001, the Company completed three acquisitions. The total
consideration given consisted of $8.0 million in cash and subordinated notes of
$1.3 million. Interest on the subordinated notes is payable quarterly.
Principal in the amount of $1.3 million of principal is payable in equal annual
installments commencing on the first anniversary of closing.
8
ITEM 2. PROPERTIES
The Company's principal executive offices, distribution facility and national
training center comprised of approximately 36,000, 161,417 and 22,000 square
feet of space, respectively, are located in Hebron, Kentucky. 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 July 2010. The lease agreement provides for 2 five-year renewal
options.
The Company also has non-cancelable operating leases for its regional offices,
expiring at various dates between 2002 and 2008. 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
Various legal actions arising in the normal course of business 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
9
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.
2000 2001
-------------------- --------------------
High Low High Low
------ ------ ------ ------
First Quarter $21.75 $12.50 $18.25 $11.00
Second Quarter $18.25 $13.38 $16.60 $11.10
Third Quarter $30.13 $15.00 $16.60 $ 9.73
Fourth Quarter $19.50 $12.50 $16.50 $10.90
As of February 28, 2002, there were approximately 360 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
restricted under the Company's current borrowing agreement.
10
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
For the Fiscal Years Ended January 5,
-------------------------------------------------------
1998(1) 1999 (2,3) 2000(4) 2001(5) 2002(6)
--------- ----------- --------- --------- ---------
Consolidated Statement of Income Data:
Net sales and revenues. . . . . . . . . . . $491,448 $ 627,928 $756,757 $925,138 $809,214
Cost of sales and service . . . . . . . . . 426,742 543,764 652,503 801,788 705,937
--------- ----------- --------- --------- ---------
Gross profit. . . . . . . . . . . . . . . . 64,706 84,164 104,254 123,350 103,277
Operating expenses:
Selling, general and administrative . . . . 33,918 43,689 52,216 61,135 61,640
Depreciation and amortization . . . . . . . 3,940 5,377 6,527 9,516 10,362
Litigation settlement and related costs (7) - - - - 1,000
Provision for vendor receivables and
restructuring charge (8) . . . . . . . . . - - - - 15,934
--------- ----------- --------- --------- ---------
Total operating expenses. . . . . . . . . . 37,858 49,066 58,743 70,651 88,936
Income from operations. . . . . . . . . . . 26,848 35,098 45,511 52,699 14,341
Other expense (income):
Interest expense. . . . . . . . . . . . . . 974 2,670 3,858 4,352 1,768
Miscellaneous . . . . . . . . . . . . . . . 54 (140) (93) (547) (229)
--------- ----------- --------- --------- ---------
Total other expense . . . . . . . . . . . . 1,028 2,530 3,765 3,805 1,539
Income before income taxes. . . . . . . . . 25,820 32,568 41,746 48,894 12,802
Income tax expense. . . . . . . . . . . . . 9,507 12,409 16,864 19,406 4,993
--------- ----------- --------- --------- ---------
Net income. . . . . . . . . . . . . . . . . $ 16,313 $ 20,159 $ 24,882 $ 29,488 $ 7,809
========= =========== ========= ========= =========
Earnings per common share (diluted) . . . . $ 1.44 $ 1.72 $ 2.11 $ 2.38 $ 0.61
Consolidated Balance Sheet Data:
Working capital . . . . . . . . . . . . . . $ 63,028 $ 71,364 $ 61,126 $ 89,449 $ 99,838
Long-term debt, net of current maturities . 1,434 8,231 6,971 19,572 10,213
Equity. . . . . . . . . . . . . . . . . . . 88,777 112,989 140,221 181,705 190,762
Total assets. . . . . . . . . . . . . . . . 167,264 254,226 333,141 361,268 341,718
1) During fiscal 1997, the Company acquired the assets of Magic Box, Micro
Care and The Computer Store.
2) During fiscal 1998, the Company acquired the assets of Commercial Business
Systems, Inc., Access Technologies, Inc. and all of the outstanding stock
of Global Combined Technologies, Inc.
3) During the fourth quarter of fiscal 1998, the Company's results include an
after tax charge of $681 ($0.06 per diluted share) related to the
uncollectibility of certain vendor warranty claims.
4) During fiscal 1999, the Company acquired certain assets of Systems Atlanta
Commercial Systems, Inc. and all the outstanding stock of Acme Data
Systems, Inc. See Note 12 of Notes to Consolidated Financial Statements.
5) During fiscal 2000, the Company acquired certain assets of Datasource
Hagen, DataNet, Inc. and all the outstanding stock of The Linc Corporation
and Val Tech Computer Systems, Inc. See Note 12 of Notes to Consolidated
Financial Statements.
6) During fiscal 2001, the Company acquired certain assets of Osage Systems
Group, Inc., Ballantyne Consulting Group, Inc. and System 5 Technologies,
Inc. See Note 12 of Notes to Consolidated Financial Statements.
7) During the first quarter of fiscal 2001, the Company's results include an
after tax charge of $610 ($0.05 per diluted share) related to the
litigation settlement with FTA Enterprises, Inc. for $1,000.
8) During the fourth quarter of fiscal 2001, the Company's results include an
after tax charge of $9.7 million ($0.77 per diluted share) related to the
Company recording an increase in reserves and a restructuring charge
totaling $15.9 million.
11
QUARTERLY RESULTS OF OPERATIONS (in thousands, except per share data)
The following table sets forth certain unaudited operating results of each of
the eight prior quarters. This information is unaudited, but in the opinion of
management includes all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the results of operations of such periods.
Fiscal 2001
--------------------------------------------------
First Second Third Fourth
Quarter(1) Quarter(2) Quarter(3) Quarter(4)
----------- ----------- ----------- -----------
Net sales and revenues $ 195,696 $ 205,336 $ 203,709 $ 204,473
Gross Profit $ 24,748 $ 25,143 $ 26,561 $ 26,824
Net income (loss) $ 2,926 $ 4,243 $ 5,144 $ (4,503)
Earnings (loss) per common share:
Basic $ 0.23 $ 0.34 $ 0.41 $ (0.36)
Diluted $ 0.23 $ 0.33 $ 0.40 $ (0.35)
Fiscal 2000
--------------------------------------------------
First Second Third Fourth
Quarter Quarter(5) Quarter(6) Quarter(7)
----------- ----------- ----------- -----------
Net sales and revenues $ 211,578 $ 220,910 $ 246,911 $ 245,739
Gross Profit $ 26,777 $ 29,523 $ 34,073 $ 32,977
Net income $ 6,286 $ 7,605 $ 8,187 $ 7,410
Earnings per common (loss) share:
Basic $ 0.53 $ 0.63 $ 0.67 $ 0.59
Diluted $ 0.52 $ 0.62 $ 0.65 $ 0.58
1. During the first quarter of fiscal 2001, the Company's results include an
after tax charge of $610 ($0.05 per diluted share) related to the
litigation settlement with FTA Enterprises, Inc.
2. During the second quarter of fiscal 2001, the Company acquired certain
assets of Osage Systems Group, Inc. See Note 12 of Notes to Consolidated
Financial Statements.
3. During the third quarter of fiscal 2001, the Company acquired certain
assets of Ballantyne Consulting Group, Inc. and System 5 Technologies, Inc.
See Note 12 of Notes to Consolidated Financial Statements.
4. During the fourth quarter of fiscal 2001, the Company's results include an
after tax charge of $9.7 million ($0.77 per diluted share) related to the
Company recording an increase in reserves and a restructuring charge of
$15.9 million.
5. During the second quarter of fiscal 2000, the Company acquired certain
assets of Datasource Hagen. See Note 12 of Notes to Consolidated Financial
Statements.
6. During the third quarter of fiscal 2000, the Company acquired certain
assets of DataNet, Inc. See Note 12 of Notes to Consolidated Financial
Statements.
7. During the fourth quarter of fiscal 2000, the Company acquired all of the
outstanding stock of The Linc Corporation and Val Tech Computer Systems,
Inc. See Note 12 of Notes to Consolidated Financial Statements.
12
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operation and financial
position should be read in conjunction with our consolidated financial
statements included elsewhere in this report. In addition, the Certain Business
Factor's described under "Business" should be considered in evaluating the
Company's outlook.
Use of Estimates in Financial Statements. In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Accounting
estimates in these financial statements include reserves for trade accounts
receivable and vendor accounts receivable. Actual results could differ from
those estimates.
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
Total Net Sales and Revenues. Total net sales and revenues decreased $115.9
million, or 12.5%, to $809.2 million in fiscal 2001 from $925.1 million in
fiscal 2000. This decrease was a result primarily of the continued industry-wide
slowdown in technology spending and the weakened economy. Excluding acquisitions
completed in fiscal year 2001, total net sales and revenues decreased 13.6%.
Products and leasing sales decreased $117.0 million, or 14.9%, to $668.7 million
in fiscal 2001 from $785.7 million in fiscal 2000. Excluding acquisitions
completed in fiscal year 2001, products and leasing sales decreased 15.7%.
Service revenues increased $1.1 million, or 0.8%, to $140.5 million in fiscal
2001 from $139.4 million in fiscal 2000. Excluding acquisitions completed in
fiscal year 2001, service revenues decreased 1.5%.
Gross Profit. Gross profit margin was 12.8% in fiscal 2001 compared to 13.3% in
fiscal 2000. This decrease in gross margin resulted from lower margin service
offerings and under-utilization of service personnel as a result of lower than
expected service billable hours from its technical and systems engineer
personnel. Service gross margin decreased to 39.3% of total gross margin in
fiscal 2001 from 45.2% in fiscal 2000. As a result of the decline in personnel
utilization, the Company reduced its technical and systems engineer's staff and
continues to monitor their utilization. Factors that may have an impact on gross
margin in the future include the further decline in personnel utilization rates,
the mix of products sold and services provided, a further decline of unit
prices, the percentage of equipment or service sales with lower-margin customers
and the ratio of service revenues to total net sales and revenues.
Operating Expenses. Selling, general and administrative expenses (including
rent expense and provision for doubtful accounts) expressed as a percentage of
total net sales and revenues increased to 7.6% in fiscal 2001 from 6.6% for
fiscal 2000. This increase is primarily the result of lower than expected total
net sales and revenues. Total operating expenses expressed as a percentage of
total net sales and revenues increased to 11.0% in fiscal 2001 from 7.6% in
fiscal 2000 primarily due to the increase in reserves, restructuring charge and
the litigation settlement as discussed below and the lower than expected total
net sales and revenue.
Litigation Settlement. During fiscal 2001, the Company recorded a $1.0 million
settlement of the litigation with FTA Enterprises, Inc., which expressed as a
percentage of total net sales and revenues was 0.1%.
13
Increase in Reserves. During fiscal 2001, the Company recorded an increase in
reserves of $15.0 million specifically related to the collectibility of vendor
receivables, which expressed as a percentage of total net sales and revenues was
approximately 1.9%. The determination of an appropriate reserve was based on
the deterioration of the aging of the vendor receivables, the expected
resolution of the vendor rebate disallowed claims and the general posture of the
OEM's regarding resolution. The rules to claim vendor rebates and the complexity
of applying the rules to each item sold often results in rejection of claims and
multiple submissions before credit is given, which also results in longer aging
of vendor receivables than other types of receivables. Approximately, $7.8
million of the total vendor receivables that the Company believes are
collectible are over 360 days. Primary reasons for vendor rebate claims being
disallowed and corresponding re-files include serial number issues (missing,
incomplete, transposed, data base match-up discrepancies, etc.), pricing issues
(dispute in calculation of rebate amounts) and other missing or incomplete
documentation (bid letters, customer information, etc.). To enhance the
Company's future rebate management, the Company has made substantial process and
system enhancements. The Company anticipates that the collectibility of these
manufacturers' accounts receivable will improve in the future.
Restructuring Charge. During fiscal 2001, the Company recorded a restructuring
charge of $0.9 million, which expressed as a percentage of total net sales and
revenues was approximately 0.1%, respectively. The restructuring charge is
related to consolidation of locations and changes in manufacturers' programs.
Income from Operations. Income from operations decreased $38.4 million, or
72.9%, to $14.3 million in fiscal 2001 from $52.7 million in fiscal 2000. The
Company's operating margin decreased to 1.8% in fiscal 2001 from 5.7% in fiscal
2000. This decrease is due to the decrease in gross profit and an increase in
operating expenses.
Interest Expense. Total interest expense decreased $2.6 million, or 59.1%, to
$1.8 million in fiscal 2001 from $4.4 million in fiscal 2000. This decrease was
due to reduced borrowings as a result of improved cash flow management and a
reduced interest rate charged by the Company's lenders.
Income Taxes. The Company's effective tax rate was 39.0% in fiscal 2001
compared to 39.7% in fiscal 2000. The net decrease in the Company's effective
tax rate results from the elimination of other income taxes and offset by the
increase in state taxes in certain higher tax jurisdictions.
Net Income. Net income decreased $21.7 million, or 73.5%, to $7.8 million in
fiscal 2001 from $29.5 million in fiscal 2000. The decrease was a result of the
factors described above.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Total Net Sales and Revenues. Total net sales and revenues increased $168.3
million, or 22.2%, to $925.1 million in fiscal 2000 from $756.8 million in
fiscal 1999. This increase was attributable to an increase in sales to existing
and new customers and to acquisitions completed in fiscal year 2000. Excluding
acquisitions completed in fiscal year 2000, total net sales and revenues
increased 21.4%.
Products and leasing sales increased $132.7 million, or 20.3%, to $785.7 million
in fiscal 2000 from $653.0 million in fiscal 1999. Excluding acquisitions
completed in fiscal year 2000, products and leasing sales increased 19.6%.
Service revenues increased $35.6 million, or 34.3%, to $139.4 million in fiscal
2000 from $103.8 million in fiscal 1999. Excluding acquisitions completed in
fiscal year 2000, service revenues increased 32.9%.
Gross Profit. Gross profit margin was 13.3% in fiscal 2000 compared to 13.8% in
fiscal 1999. The Company's decrease in its gross margin resulted primarily from
the Company's decision to obtain new business and increase sales by aggressively
pricing certain products and services. Services revenues increased to 15.1% of
total net sales and revenues in fiscal 2000 compared to 13.7% of total net sales
and revenues in fiscal 1999. 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 6.6% in fiscal 2000 from 6.9% for
fiscal 1999. This decrease is primarily due to the growth in net sales and
revenues exceeding the growth in selling, general and administrative expenses.
Total operating expenses expressed as a percentage of total net sales and
revenues were 7.6% in fiscal 2000 and 7.8% in fiscal 1999.
14
Income from Operations. Income from operations increased $7.2 million, or
15.8%, to $52.7 million in fiscal 2000 from $45.5 million in fiscal 1999. The
Company's operating margin decreased to 5.7% in fiscal 2000 from 6.0% in fiscal
1999 due to the decrease in gross profit.
Interest Expense. Total interest expense increased $0.5 million, or 12.8%, to
$4.4 million in fiscal 2000 from $3.9 million in fiscal 1999. This increase is
primarily related to higher average borrowings during fiscal 2000 as a result of
higher working capital requirements.
Income Taxes. The Company's effective tax rate was 39.7% in fiscal 2000
compared to 40.4% in fiscal 1999. The decrease in the Company's effective tax
rate results from a lower overall state income tax liability.
Net Income. Net income increased $4.6 million, or 18.5%, to $29.5 million in
fiscal 2000 from $24.9 million in fiscal 1999. The increase was a result of the
factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $66.5 million in fiscal 2001. Cash
used in investing activities was $13.2 million, which included $8.0 million for
acquisitions completed in fiscal 2001 and prior years and $5.2 million for
capital expenditures. Cash used in financing activities was $51.5 million which
included $6.8 million of net payments on notes payable, $46.0 million of net
payments on bank notes payable, $0.5 million for the purchase of treasury stock,
and was offset by $1.2 million from the exercise of stock options and the
related tax benefit, and $0.6 million proceeds from the employee stock purchase
plan.
A significant part of the Company's inventories is financed by floor plan
arrangements with third parties. At January 5, 2002, these lines of credit
totaled $84.0 million, including $72.0 million with Deutsche Financial Services
("DFS") and $12.0 million with IBM Credit Corporation ("ICC"). Borrowings under
the DFS floor plan arrangements are made on thirty-day notes. Borrowings under
the ICC floor plan arrangements are made on either thirty-day or sixty-day
notes. All such borrowings are secured by the related inventory. Financing on
substantially all of the arrangements is interest free due to subsidies by
manufacturers. Overall, the average rate on these arrangements is less than
1.0%. The Company classifies amounts outstanding under the floor plan
arrangements as accounts payable.
The Company's financing of receivables is provided through a portion of its
credit facility with DFS. The $240.0 million credit facility has a three year
term and includes $72.0 million for inventory financing, $144.0 million for
working capital which is based upon accounts receivable financing, and a
cash-flow component in the form of a $24.0 million term loan, which is not
restricted to a borrowing base. Under the agreement, the credit facility
provides a credit line of $144.0 million for accounts receivable financing. The
accounts receivable and term loan portion of the credit facility carry a
variable interest rate based on the London InterBank Offering Rate ("LIBOR") and
a pricing grid. At January 5, 2002, the amount outstanding was $11.9 million,
including $3.4 million of overdrafts on the Company's books in accounts at a
participant bank on the credit facility, which was at an interest rate of 3.87%.
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 subject to
various financial covenants and restricted from paying dividends. As of January
5, 2002, the Company was in violation of a financial covenant, which has been
subsequently modified by the lender. Currently, the Company is not in violation
of any financial covenants.
The funding of the Company's net investment in sales-type leases is provided by
various financial institutions on a nonrecourse basis. Increases in 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. Upon the
anticipated closing of the sale of certain leasing assets of TIFS, the Company
is expecting approximately $23.9 million of additional liquidity. See Note 19
of Notes to Consolidated Financial Statements for information regarding the sale
of substantially all of the assets of TIFS.
The Company believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy the Company's capital
requirements for the next twelve months. Historically, the Company has financed
acquisitions using a combination of cash, earn outs, shares of its Common Stock
and seller financing. The Company anticipates that future acquisitions will be
financed in a similar manner.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Registrant hereby incorporates the financial statements required by this item by
reference to Item 14 hereof.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
16
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 2002
Annual Meeting of shareholders, which will be filed, with the Commission prior
to May 5, 2002
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
=============================================================================================================
2001 Form
- -------------------------------------------------------------------------------------------------------------
10-K Page
---------
1. Financial Statements:
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets,
January 5, 2001 and January 5, 2002 F-2 to F-3
For each of the three fiscal years in
The period ended January 5, 2002:
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Equity F-6
Notes to Consolidated Financial Statements F-7 to F-19
2. Financial Statement Schedules:
None
Filed Herewith
(page #) or
Incorporated
3. Exhibits by Reference to:
-------------- ----------------
3(a) Certificate of Incorporation, as amended Exhibit 3(a) of Company's
Form 10-Q filed Aug.11,
2000
3(b) Bylaws of the Company Exhibit 3(a) of Company's
Form S-1 filed Feb. 14, 1992
=============================================================================================================
17
===============================================================================================================
3(i)(a)1 Certificate of Incorporation of Pomeroy Computer Exhibit 3(i)(a)(1) of
Resources, dated February, 1992 Company's Form 10-Q filed
Aug. 11, 2000
3(i)(a)2 Certificate of Amendment to Certificate of Exhibit 3(i)(a)(2) of
Incorporation, dated July 1997 Company's Form 10-Q filed
Aug. 11, 2000
3(I)(a)3 Certificate of Designations of Series A Junior Exhibit 3(i)(a)(3) of
Participating Preferred Stock of Pomeroy Computer Company's Form 10-Q filed
Resources, Inc. February 1998 Aug. 11, 2000
3(I)(a)4 Certificate of Amendment to Certificate of Exhibit 3(i)(a)(4) of
Incorporation, dated August 2000 Company's Form 10-Q filed
Aug. 11, 2000
4 Rights Agreement between the Company and The Exhibit 4 of Company's
Fifth Third Bank, as Rights Agent dated as of February Form 8-K filed February 23,
23,1998 1998
10(i) Material Agreements
(b)(1) Agreement for Wholesale Financing (Security Exhibit 10(i)(b)(1) of
Agreement) between IBM Credit Corporation and Company's Form 10-K filed
the Company dated April 2, 1992 April 7, 1994
(b)(2) Addendum to Agreement for Wholesale Financing Exhibit 10(i)(b)(2) of
between IBM Credit Corporation and the Company Company's Form 10-K filed
dated July 7, 1993 April 7, 1994
(c)(1) Agreement for Wholesale Financing (Security Exhibit 10(i)(c)(1) of
Agreement) between ITT Commercial Finance Company's Form 10-K filed
Corporation and the Company dated March 27, April 7, 1994
1992
(c)(2) Addendum to Agreement for Wholesale Financing Exhibit 10(i)(c)(2) of
between ITT Commercial Finance Corporation and Company's Form 10-K filed
the Company dated July 7, 1993 April 7, 1994
(c)(3) Amendment to Agreement for Wholesale Financing Exhibit 10(i)(c)(3) of
between Deutsche Financial Services f/k/a ITT Company's Form 10-Q filed
Commercial Finance Corporation and the Company May 18, 1995
dated May 5, 1995
(d)(1) Asset Purchase Agreement among the Company; Exhibit 10(i)(z) of
TCSS; and Richard Feaster, Victoria Feaster, Harry Company's Form 8-K dated
Feaster, Carolyn Feaster, Victoria Feaster, trustee March 14, 1996
of the Emily Patricia Feaster Trust, and Victoria
Feaster, as trustee of the Nicole Ann Feaster Trust
dated March 14, 1996
(d)(4) Registration Rights Agreement between the Exhibit 10.50 of Company's
Company and TCSS dated March 14, 1996 Form S-1 filed June 4, 1996
(e)(1) IBM Agreement for Authorized Dealers Exhibit 10(i)(e)(1) of
and Industry Remarketers with the Company's Form S-1 filed
Company, dated September 3, 1991 Feb. 14, 1992
===============================================================================================================
18
===============================================================================================================
(e)(2) Schedule of Substantially Exhibit 10(i)(e)(2) of
Identical IBM Agreements for Company's Form S-1 filed
Authorized Dealers and Industry Feb. 14, 1992
Remarketers
(kk)(1) The Asset Purchase Agreement dated July 27, 2000 Exhibit 10)(i)(kk)(1)
by, between and among Pomeroy Computer Company's Form 10-Q filed
Resources, Inc., Pomeroy Select Integration Solutions, November 10, 2000
Inc., DataNet, Inc., DataNet Technical Services, LLC,
DataNet Tangible Products, LLC, DataNet
Programming, LLC, Richard Stitt, Gregory Stitt, Jeffrey
Eacho, and Richard Washington.
(mm)(1) The Asset purchase agreement dated February 9, Exhibit 10(l)(mm)(1) of
2001 by, between and among Pomeroy Computer Company's Form 10Q filed
Resources, Inc., Pomeroy Select Integration Solutions, August 17, 2001
Inc., Osage Systems Group, Inc., Osage Computer
Group, Inc., Solsource Computers Inc., H.V. Jones,
Inc., Open System Technologies, Inc., Open Business
Systems, Inc., and Osage Systems Group Minnesota,
Inc.
(mm)(2) The First Amendment to Asset purchase agreement Exhibit 10(l)(mm)(2) of
dated February 28, 2001 by, between and among Company's Form 10Q filed
Pomeroy Computer Resources, Inc., Pomeroy Select August 17, 2001
Integration Solutions, Inc., Osage Systems Group,
Inc., Osage Computer Group, Inc., Solsource
Computers Inc., H.V. Jones, Inc., Open System
Technologies, Inc., Open Business Systems, Inc., and
Osage Systems Group Minnesota, Inc. and Osage iXi
Inc.
(mm)(3) The Second Amendment to Asset purchase Exhibit 10(l)(mm)(3) of
agreement dated April 6, 2001 by, between and Company's Form 10Q filed
among Pomeroy Computer Resources, Inc., Pomeroy August 17, 2001
Select Integration Solutions, Inc., Osage Systems
Group, Inc., Osage Computer Group, Inc., Solsource
Computers Inc., H.V. Jones, Inc., Open System
Technologies, Inc., Open Business Systems, Inc., and
Osage Systems Group Minnesota, Inc. and Osage iXi
Inc.
(mm)(4) The Credit Facilities Agreement dated June 28, 2001 Exhibit 10(l)(mm)(4) of
by, between, and among Deutsche Financial Services Company's Form 10Q filed
Corporation, Firstar Bank, National Association, August 17, 2001
Deutsche Financial Services Corporation and Firstar
Bank, National Association, Other Lenders Hereto as
lenders, Pomeroy Computer Resources, Inc., Pomeroy
Select Integration Solutions Inc., Pomeroy Select
Advisory Services, Inc., Pomeroy Computer
Resources Sales Company, Inc., Pomeroy Computer
Resources Holding Company, Inc., Pomeroy
Computer Resources Operations LLP, Technology
Integration Financial Services, Inc., T.I.F.S. Advisory
Services, Inc., TheLinc, LLC, and Val Tech Computer
Systems, Inc. as borrowers.
===============================================================================================================
19
===============================================================================================================
(mm)(5) First Consent to Credit Facilities Agreement Exhibit 10(l)(mm)(5) of
Company's Form 10Q filed
November 13, 2001
(mm)(6) First Amendment to Credit Facilities Agreement Exhibit 10(l)(mm)(6) of
Company's Form 10Q filed
November 13, 2001
(mm)(7) The Asset Purchase Agreement by, between and Exhibit 10(l)(mm)(7) of
among Pomeroy Select Integration Solutions, Inc., and Company's Form 10Q filed
Ballantyne Consulting Group, Inc., Mark DeMeo, Joe November 13, 2001
Schmidt, Scott Schneider and Date Tweedy, dated
September 21, 2001
(mm)(8) The Asset Purchase Agreement by, between and Exhibit 10(l)(mm)(8) of
among Pomeroy Computer Resources, Inc., Pomeroy Company's Form 10Q filed
Select Integration Solutions, Inc., System 5 November 13, 2001
Technologies, Inc., Dale Tweedy, Jill Tweedy and Phil
Tetreault, dated September 21, 2001
(mm)(9) Second Amendment to Credit Facilities and Waiver of E1- E5
Defaults
10 (iii) Material Employee Benefit and Other Agreements
(a)(1) Employment Agreement between the Company Exhibit 10(iii)(a)of
and David B. Pomeroy, dated March 12, 1992 Company's Form S-1 Filed
Feb. 14, 1992
(a)(2) First Amendment to Employment Agreement between Exhibit 10(iii)(a)(2) of
the Company and David B. Pomeroy effective July 6, Company's Form 10-K filed
1993 April 7, 1994
(a)(3) Second Amendment to Employment Agreement Exhibit 10(iii)(a)(3) of
between the Company and David B. Pomeroy dated Company's Form 10-K filed
October 14, 1993 April 7, 1994
(a)(4) Agreement between the Company and David B. Exhibit 10(iii)(a)(4) of
Pomeroy related to the personal guarantee of the Company's Form 10-K filed
Datago agreement by David B. Pomeroy and his April 7, 1994
spouse effective July 6, 1993
(a)(5) Third Amendment to Employment Agreement Exhibit 10(iii)(a)(5) of
between the Company and David B. Pomeroy Company's Form 10-Q filed
effective January 6, 1995 November 17, 1995
(a)(6) Supplemental Executive Compensation Agreement Exhibit 10(iii)(a)(6) of
between the Company and David B. Pomeroy Company's Form 10-Q filed
effective January 6, 1995 November 17, 1995
(a)(7) Collateral Assignment Split Dollar Agreement Exhibit 10(iii)(a)(7) of
between the Company; Edwin S. Weinstein, as Company's Form 10-Q filed
Trustee; and David B. Pomeroy dated June 28, November 17,1995
1995
===============================================================================================================
20
===============================================================================================================
(a)(8) Fourth Amendment to Employment Agreement Exhibit 10(iii)(a)(8) of
between the Company and David B. Pomeroy Company's Form 10-Q filed
dated December 20, 1995, effective January 6, May 17, 1996
1995
(a)(9) Fifth Amendment to Employment Agreement Exhibit 10(iii)(a)(9) of
between the Company and David B. Pomeroy Company's Form 10-Q filed
effective January 6, 1996 May 17, 1996
(a)(10) Sixth Amendment to Employment Agreement Exhibit 10.10 of Company's
between the Company and David B. Pomeroy Form S-3 filed January 3,
effective January 6, 1997 1997
(a)(11) Award Agreement between the Company and Exhibit 10.11 of Company's
David B. Pomeroy effective January 6, 1997 Form S-3 filed January 3,
1997
(a)(12) Registration Rights Agreement between the Exhibit 10.12 of Company's
Company and David B. Pomeroy effective January Form S-3 filed January 3,
6, 1997 1997
(a)(13) Seventh Amendment to Employment Agreement Exhibit 10)(iii)(a)(13) of
between the Company and David B. Pomeroy Company's Form 10-Q filed
effective January 6, 1998 May 6, 1998
(a)(14) Collateral Assignment Split Dollar Agreement Exhibit 10)(iii)(a)(14) of
between the Company, James H. Smith as Trustee, Company's Form 10-Q filed
and David B. Pomeroy dated January 6, 1998 May 6, 1998
(a)(15) Eight Amendment to Employment Agreement Exhibit 10(iii)(a)(15) of the
between the Company and David B. Pomeroy Company's Form 10K filed
effective January 6, 1999 March 31, 2000
(a)(16) Ninth Amendment to Employment Agreement Exhibit 10(iii)(a)(16) of the
between the Company and David B. Pomeroy Company's Form 10K filed
effective January 6, 2000 March 31, 2000
(a)(17) Tenth Amendment to Employment Agreement Exhibit 10(iii)(a)(17) of the
between the Company and David B. Pomeroy Company's Form 10K filed
effective January 6, 2001 April 5, 2001
(a) (18) Eleventh Amendment to Employment Agreement E6 - E9
between the Company and David B. Pomeroy
effective January 6, 2002
(c)(1) Employment Agreement between the Company Exhibit 10(iii)(c)(1) of
and Victor Eilau dated July 6, 1997 Company's Form 10-Q filed
August 11, 1997
(c)(2) Performance Share Right Agreement between the Exhibit 10(iii)(c)(2) of
Company and Victor Eilau dated July 6, 1997 Company's Form 10-Q filed
August 11, 1997
(c)(3) First Amendment to Employment Agreement by E10 - E13
and between Technology Integration Financial
Services, Inc., and Vic Eilau
===============================================================================================================
21
===============================================================================================================
(d) The Company Savings 401(k) Plan, Exhibit 10(iii)(d) of
effective July 1, 1991 Company's Form S-1 filed
Feb. 14, 1992
(f) The Company's 1992 Non-Qualified and Incentive Exhibit 10(iii)(f) of the
Stock Option Plan, dated February 13, 1992 Company's Form S-1
(g) The Company's 1992 Outside Directors Exhibit 10(iii)(g) of
Stock Option Plan, dated February 13, Company's Form S-1 filed
1992 Feb. 14, 1992
(j)(1) Employment Agreement between the Company Exhibit 10.3 of Company's
and Stephen E. Pomeroy dated November 13, Form S-3 filed January 3,
1996 1997
(j)(2) Incentive Deferred Compensation Agreement Exhibit 10.4 of Company's
between the Company and Stephen E. Pomeroy Form S-3 filed January 3,
dated November 13, 1996 1997
(j)(3) Employment Agreement between Pomeroy Select Exhibit 10(iii)(j)(3) of
Integration Solutions, Inc. and Stephen E. Pomeroy, Company's Form 10-K filed
dated January 6, 1999 April 5, 1999
(j)(4) First Amendment to Employment Agreement between Exhibit 10 (iii)(j) (4) of
Pomeroy Select Integration Solutions, Inc. and Company's Form 10-K filed
Stephen E. Pomeroy, dated September 1, 1999 March 31, 2000.
(j)(5) Second Amendment to Employment Agreement Exhibit 10(iii)(j)(5) of
between Pomeroy Computer Resources, Inc., Company's Form 10-K filed
Pomeroy Select Integration Solutions, Inc. and April 5, 2001.
Stephen E. Pomeroy, dated January 6, 2001
(j)(6) Third Amendment to Employment Agreement between E14 - E17
Pomeroy Computer Resources, Inc., Pomeroy Select
Integration Solutions, Inc. and Stephen E. Pomeroy,
dated January 6, 2002
(k) The Company's 1998 Employee Stock Purchase Plan, Exhibit 4.3 of Company's
Effective April 1, 1999 Form S-8 filed March 23,
1999
(l) Employment Agreement by and between Pomeroy E18 - E28
Computer Resources, Inc. and Timothy E. Tonges
(m) Employment Agreement by and between Pomeroy E29 - E38
Computer Resources, Inc. and Michael E. Rohrkemper
11 Computation of Per Share Earnings E-1
21 Subsidiaries of the Company E-2
===============================================================================================================
(b) Reports on Form 8-K:
On February 27, 2002 the Company signed a definitive
purchase agreement to sell a majority of the net assets of
its wholly owned subsidiary - Technology Information
Financial Services, (T.I.F.S.) to Information Leasing
Corporation (ILC), the leasing division of the Provident
Bank of Cincinnati, Ohio.
22
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 and
Chief Executive Officer
By: /s/ Stephen E. Pomeroy
=============================================
Stephen E. Pomeroy
President and Chief Operating
Officer
By: /s/ Michael E. Rohrkemper
=============================================
Michael E. Rohrkemper
Chief Financial Officer and Chief
Accounting Officer
Dated: April 5, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
Signature and Title Date
------------------- ----
By: /s/ David B. Pomeroy April 5, 2002
=============================================
David B. Pomeroy, Director
By: /s/ Stephen E. Pomeroy April 5, 2002
=============================================
Stephen E. Pomeroy, Director
By: /s/ James H. Smith III April 5, 2002
=============================================
James H. Smith III, Director
By: /s/ Michael E. Rohrkemper April 5, 2002
=============================================
Michael E. Rohrkemper, Director
By:
=============================================
Kenneth R. Waters, Director
By:
=============================================
William H. Lomicka, Director
By:
=============================================
Vincent D. Rinaldi, Director
23
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, 2001 and 2002, and the related consolidated
statements of income, equity, and cash flows for each of the three years in the
period ended January 5, 2002. 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 auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pomeroy Computer
Resources, Inc. as of January 5, 2001 and 2002, and the consolidated results of
its operations and its consolidated cash flows for each of the three years in
the period ended January 5, 2002 in conformity with accounting principles
generally accepted in the United States of America.
Grant Thornton LLP
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 11, 2002, except for Note 19
as to which the date is April 2, 2002
F-1
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
2001 2002
----------- -----------
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,097 $ 2,875
Accounts receivable:
Trade, less allowance of $586 and $627 at January 5, 2001 and
2002, respectively.. . . . . . . . . . . . . . . . . . . . . 137,252 142,356
Vendor receivables, less allowance of $1,892 and $16,112
at January 5, 2001 and 2002, respectively . . . . . . . . . 44,884 24,219
Net investment in leases. . . . . . . . . . . . . . . . . . . . 26,116 35,809
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,900 5,413
----------- -----------
Total receivables . . . . . . . . . . . . . . . . . . . . 213,152 207,797
----------- -----------
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,346 20,876
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,845 8,468
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . . 249,440 240,016
----------- -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment . . . . . . . . . . . . . . . 28,211 29,920
Leasehold Improvements. . . . . . . . . . . . . . . . . . . . . 5,351 5,700
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 33,562 35,620
Less accumulated depreciation . . . . . . . . . . . . . . . . . 14,916 17,070
----------- -----------
Net equipment and leasehold improvements . . . . . . . . . 18,646 18,550
----------- -----------
Net investment in leases . . . . . . . . . . . . . . . . . . . . . 36,379 22,438
Goodwill and other intangible assets . . . . . . . . . . . . . . . 53,458 58,514
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,345 2,200
----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . $ 361,268 $ 341,718
=========== ===========
See notes to consolidated financial statements
F-2
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
2001 2002
----------- -----------
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable . . . . . . . . . . . . . . . $ 22,783 $ 27,190
Accounts payable:
Floor plan financing. . . . . . . . . . . . . . . . . . . . 49,108 40,650
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,190 45,797
----------- -----------
Total accounts payable . . . . . . . . . . . . . . . . . 67,298 86,447
Bank notes payable . . . . . . . . . . . . . . . . . . . . . . 55,464 11,882
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 7,124 2,751
Accrued liabilities:
Employee compensation and benefits. . . . . . . . . . . . . 3,841 3,721
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . 418 3,854
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . 449 35
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 2,614 4,298
----------- -----------
Total current liabilities . . . . . . . . . . . . . . 159,991 140,178
----------- -----------
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 19,572 10,213
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . - 565
Equity:
Preferred stock, $.01 par value; authorized 2,000 shares,
(no shares issued or outstanding). . . . . . . . . . . . - -
Common stock, $.01 par value; authorized 20,000 shares,
(12,585 and 12,759 shares issued at January 5, 2001 and
2002, respectively). . . . . . . . . . . . . . . . . . . 126 128
Paid in capital . . . . . . . . . . . . . . . . . . . . . . 78,731 80,487
Retained earnings . . . . . . . . . . . . . . . . . . . . . 103,170 110,979
----------- -----------
182,027 191,594
Less treasury stock, at cost (31 and 75 shares
at January 5, 2001 and 2002, respectively) . . . . . . . 322 832
----------- -----------
Total equity. . . . . . . . . . . . . . . . . . . . . 181,705 190,762
----------- -----------
Total liabilities and equity. . . . . . . . . . . . . $ 361,268 $ 341,718
=========== ===========
See notes to consolidated financial statements
F-3
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Fiscal Years Ended January 5,
-------------------------------
2000 2001 2002
--------- --------- ---------
Net sales and revenues:
Sales - equipment, supplies and leasing $652,936 $785,694 $668,748
Service . . . . . . . . . . . . . . . . 103,821 139,444 140,466
--------- --------- ---------
Total net sales and revenues. . . 756,757 925,138 809,214
--------- --------- ---------
Cost of sales and service:
Equipment, supplies and leasing.. . . . 591,119 718,064 606,078
Service . . . . . . . . . . . . . . . . 61,384 83,724 99,859
--------- --------- ---------
Total cost of sales and service . 652,503 801,788 705,937
--------- --------- ---------
Gross profit. . . . . . . . . . . . . . 104,254 123,350 103,277
--------- --------- ---------
Operating expenses:
Selling, general and administrative . . 48,930 57,476 57,492
Rent. . . . . . . . . . . . . . . . . . 2,940 3,361 3,631
Depreciation. . . . . . . . . . . . . . 3,572 5,149 4,805
Amortization. . . . . . . . . . . . . . 2,955 4,367 5,557
Provision for doubtful accounts . . . . 346 298 517
Litigation settlement . . . . . . . . . - - 1,000
Provision for vendor receivables
and restructuring charge . . . . . . . - - 15,934
--------- --------- ---------
Total operating expenses. . . . . 58,743 70,651 88,936
--------- --------- ---------
Income from operations . . . . . . . . . . 45,511 52,699 14,341
--------- --------- ---------
Other expense (income):
Interest expense. . . . . . . . . . . . 3,858 4,352 1,768
Miscellaneous . . . . . . . . . . . . . (93) (547) (229)
--------- --------- ---------
Total other expense . . . . . . . 3,765 3,805 1,539
--------- --------- ---------
Income before income tax. . . . . . . . 41,746 48,894 12,802
Income tax expense. . . . . . . . . . . 16,864 19,406 4,993
--------- --------- ---------
Net income. . . . . . . . . . . . . . . $ 24,882 $ 29,488 $ 7,809
========= ========= =========
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . 11,728 12,201 12,609
========= ========= =========
Diluted . . . . . . . . . . . . . . . . 11,815 12,411 12,702
========= ========= =========
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . $ 2.12 $ 2.42 $ 0.62
========= ========= =========
Diluted . . . . . . . . . . . . . . . . $ 2.11 $ 2.38 $ 0.61
========= ========= =========
See notes to consolidated financial statements
F-4
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Fiscal Years Ended January 5,
-------------------------------
Cash Flows from Operating Activities: 2000 2001 2002
--------- --------- ---------
Net income . . . . . . . . . . . . . . . $ 24,882 $ 29,488 $ 7,809
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation . . . . . . . . . . . . . . 4,558 5,977 6,970
Amortization . . . . . . . . . . . . . . 2,955 4,367 5,557
Deferred income taxes. . . . . . . . . . 715 732 (4,213)
Loss(gain) on sale of fixed assets . . . - (414) 756
Change in reserves . . . . . . . . . . . 1,195 (2,142) 15,171
Other. . . . . . . . . . . . . . . . . . - - 283
Changes in working capital accounts,
net of effects of acquisitions:
Accounts receivable . . . . . . . . . (39,023) 9,525 4,578
Inventories . . . . . . . . . . . . . (6,472) 7,547 5,682
Prepaids. . . . . . . . . . . . . . . (1,721) (2,126) 2,252
Net investment in leases. . . . . . . (26,058) (22,643) 4,392
Floor plan financing. . . . . . . . . 7,076 7,265 (8,458)
Trade payables. . . . . . . . . . . . 4,346 (37,315) 25,356
Deferred revenue. . . . . . . . . . . 1,825 982 (4,374)
Income tax payable. . . . . . . . . . (61) (470) 3,428
Other, net. . . . . . . . . . . . . . (882) (2,603) 1,311
--------- --------- ---------
Net operating activities . . . . . . . . (26,665) (1,830) 66,500
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . (4,649) (5,649) (5,251)
Acquisition of subsidiary companies, net
of cash acquired.. . . . . . . . . . . (4,222) (15,226) (7,971)
--------- --------- ---------
Net investing activities . . . . . . . . (8,871) (20,875) (13,222)
--------- --------- ---------
Cash Flows from Financing Activities:
Net proceeds(payments) under notes
payable . . . . . . . . . . . . . . . 2,269 23,633 (6,757)
Net proceeds(payments) under bank
payable . . . . . . . . . . . . . . . 29,248 (13,563) (45,991)
Proceeds from exercise of stock options
and related tax benefit. . . . . . . . 1,495 11,570 1,188
Proceeds from employee stock
purchase plan. . . . . . . . . . . . . 299 425 570
Purchase of treasury stock . . . . . . . - - (510)
--------- --------- ---------
Net financing activities . . . . . . . . 33,311 22,065 (51,500)
--------- --------- ---------
Increase (decrease) in cash . . . . . . . . (2,225) (640) 1,778
Cash:
Beginning of period. . . . . . . . . . . 3,962 1,737 1,097
--------- --------- ---------
End of period. . . . . . . . . . . . . . $ 1,737 $ 1,097 $ 2,875
========= ========= =========
See notes to consolidated financial statements
F-5
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except for share Common Paid-in Retained Treasury Total
amounts) stock capital earnings stock equity
------ -------- --------- ---------- ---------
Balances at January 5, 1999. . . . . 117 $ 64,394 $ 48,800 $ (322) $112,989
Net income. . . . . . . . . . . . 24,882 24,882
38,638 common shares issued
for acquisitions. . . . . . . . 556 556
Stock options exercised and
related tax benefit . . . . . . 1 1,494 1,495
26,113 common shares issued for
employee stock purchase plan 299 299
--------------------------------------------------
Balances at January 5, 2000. . . . . 118 66,743 73,682 (322) 140,221
Net income. . . . . . . . . . . . 29,488 29,488
Stock options exercised and
related tax benefit . . . . . . 8 11,563 11,571
35,092 common shares issued for
employee stock purchase plan 425 425
--------------------------------------------------
Balances at January 5, 2001. . . . . 126 78,731 103,170 (322) 181,705
Net income. . . . . . . . . . . . 7,809 7,809
Treasury stock purchased (510) (510)
Stock options exercised and
related tax benefit . . . . . . 2 1,186 1,188
47,284 common shares issued for
employee stock purchase plan 570 570
--------------------------------------------------
Balances at January 5, 2002. . . . . 128 $ 80,487 $ 110,979 $ (832) $190,762
====== ======== ========= ========== =========
See notes to consolidated financial statements
F-6
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 5, 2000, JANUARY 5, 2001, AND JANUARY 5, 2002
1. COMPANY DESCRIPTION
Pomeroy Computer Resources, Inc. (the "Company") was organized in February
1992 to consolidate and reorganize predecessor companies. In fiscal 1995
the Company formed its leasing segment and wholly-owned subsidiary,
Technology Integration Financial Services, Inc. ("TIFS"), for the purpose
of leasing computer equipment to the Company's customers. See Note 19 of
Notes to Consolidated Financial Statements for information regarding the
sale of substantially all of the assets of TIFS. In fiscal 1998, the
Company formed a wholly-owned subsidiary, Pomeroy Select Integration
Solutions, Inc. ("Pomeroy Select"), to which the Company transferred the
assets, liabilities, business, operations and personnel comprising the
Company's information technology ("IT") services business and segment on
January 6, 1999.
The Company sells, installs, services and leases microcomputers and
microcomputer equipment primarily for commercial, health care,
governmental, financial and educational customers. The Company also derives
revenue as a service solution provider of enterprise consulting services,
complete infrastructure solutions and lifecycle service offerings. The
Company has 30 regional offices located in 15 states throughout the
Southeast and Midwest United States. The Company 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. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Fiscal Year - The Company's fiscal year is a 12- month period ending
January 5. References to fiscal 1999, 2000 and 2001 are for the fiscal
years ended January 5, 2000, January 5, 2001 and January 5, 2002,
respectively.
Goodwill and Other Intangible Assets - Goodwill is amortized using the
straight-line method over periods of fifteen to twenty-five years. Other
intangible assets are amortized using the straight-line method over periods
up to ten years. In accordance with Statement of Financial Accounting
Standards (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.
See Recent Accounting Pronouncements later in this Note for new
pronouncements effecting goodwill, intangible assets, amortization and
impairment issues.
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. Depreciation
expense associated with TIFS's operating leases is classified under cost of
sales. 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 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 Rebates - The most significant component of vendor receivables is
vendor rebates. Vendor rebate programs are developed by original equipment
manufacturers ("OEM') allowing them to modify product pricing on a case by
case basis (generally determined by individual customers) to maintain their
competitive edge on specific transactions. The Company will contact the OEM
to request a rebate, for a specific transaction, and if approved, the OEM
will provide the Company with a document authorizing a rebate to be paid to
the Company at a later date when a claim is filed. At the time, the Company
records product sales the cost of sales is reduced by the amount of the
anticipated rebate. Rebate programs involve a complex set of rules
F-7
varying by manufacturer. As a result of the rules and complexity of
applying the rules to each item sold, claims are often rejected and require
multiple submissions before credit is given. Primary reasons for claims
being disallowed and corresponding re-files include serial number issues
(missing, incomplete, transposed, data base match-up discrepancies, etc.),
pricing issues (dispute in calculation of rebate amounts) and other missing
or incomplete documentation (bid letters, customer information, etc.).
Manufacturer Market Development Funds - Several OEM's offer market
development funds, cooperative advertising and other promotional programs
to distribution channel partners. The Company utilizes these programs to
fund some of its advertising and promotional programs. The Company
recognizes these anticipated funds as vendor receivables when it has
completed its obligation to perform under the specific arrangement. The
funds received from manufacturers are offset directly against the expense,
thereby reducing selling, general and administrative expenses and
increasing net income.
Warranty Receivable - The Company performs warranty service work on behalf
of the OEM on customer product. Any labor cost or replacement parts needed
to repair the product is reimbursable to the Company by the OEM. It is the
Company's responsibility to file and collect these claims. The Company
records the vendor receivables when it has completed its obligation to
perform under the specific arrangement. Any labor cost incurred is
recognized as revenue when the service is provided.
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 or equipment sold under sales-type leases when the
products are shipped. Service revenue is recognized when the applicable
services are provided or for service contracts, ratably over the lives of
the contracts. Leasing fee and financing revenue is recognized on a monthly
basis as fees accrue and from financing at level rates of return over the
term of the lease or receivable, which are primarily sales-type leases
ranging from one to three years.
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.
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.
The following is a reconciliation of the number of shares used in the basic
EPS and diluted EPS computations:
(in thousands, except per Fiscal Years
share data) -------------------------------------------------------------
1999 2000 2001
------------------- ------------------- -------------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ ----------- ------ ----------- ------ -----------
Basic EPS 11,728 $ 2.12 12,201 $ 2.42 12,609 $ 0.62
Effect of dilutive stock options 87 (0.01) 210 (0.04) 93 (0.01)
Diluted EPS 11,815 $ 2.11 12,411 $ 2.38 12,702 $ 0.61
====== =========== ====== =========== ====== ===========
Use of Estimates in Financial Statements - In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Accounting
estimates in these financial statements include reserves for trade accounts
receivable and vendor accounts receivable. Actual results could differ from
those estimates.
Reclassifications - Certain reclassifications of prior years' amounts have been
made to conform with the current presentation.
F-8
Fair Value Disclosures - The fair value of financial instruments
approximates carrying value.
Comprehensive Income - The Company does not have any comprehensive income
items other than net income.
Derivative Instruments and Hedging Activities - The Company does not
currently have any derivative instruments or hedging activities to report
under this standard.
Recent Accounting Pronouncements- On July 20, 2001, the Financial
Accounting Standards Board (FASB) issued SFAS 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective
for fiscal years beginning after December 15, 2001; however, certain
provisions of this Statement apply to goodwill and other intangible assets
acquired between July 1, 2001 and the effective date of SFAS 142. Major
provisions of these Statements and their effective dates for the Company
are as follows:
- All business combinations initiated after June 30, 2001 must use
the purchase method of accounting. The pooling of interest method
of accounting is prohibited except for transactions initiated
before July 1, 2001.
- Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual
or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged,
either individually or as part of a related contract, asset or
liability.
- Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
January 6, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject
to amortization.
- Effective January 6, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and
whenever there is an impairment indicator.
- All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
In accordance with SFAS 142, the Company has not amortized goodwill or
intangible assets with indefinite lives acquired after June 30, 2001. The
Company will continue to amortize goodwill and intangible assets with
indefinite lives recognized prior to July 1, 2001, under its current method
until January 6, 2002, at which time amortization expense of approximately
$4.4 million annually will no longer be recognized. By July 5, 2002, the
Company will have completed a transitional fair value based impairment test
of goodwill as of January 6, 2002. By April 5, 2002, the Company will have
completed a transitional impairment test of all intangible assets with
indefinite lives. Impairment losses, if any, resulting from the
transitional testing will be recognized as a cumulative effect of a change
in accounting principle. Management has not determined the impact on the
Company's financial position or results of operations under the
transitional testing for goodwill. Management has determined that there
will not be a material adverse impact on the Company's financial position
or results of operations under the transitional testing for intangible
assets with indefinite lives.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement supercedes SFAS 121 and
Accounting Principles Board (APB) Opinion No. 30, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business (as previously defined in that Opinion). The
Statement is effective for fiscal years beginning after December 15, 2001.
This Statement retains the requirements of SFAS 121 related to long-lived
asset impairment loss recognition and measurement, but removes goodwill and
certain intangibles from its scope as they are covered under SFAS 142. The
Statement also requires that long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, be measured at the
lower of its carrying amount or fair value less cost to sell. Therefore,
discontinued operations are no longer measured on a net realizable basis
and future operating losses are no longer recognized before they occur.
This Statement also broadens the presentation of discontinued operations to
include more disposal transactions. The Company will follow the provisions
of SFAS 144 for the sale transaction described in Note 19.
3. ACCOUNTS RECEIVABLE
The following table summarizes the activity in the allowance for doubtful
accounts for fiscal years 1999, 2000 and 2001:
F-9
(in thousands) Trade Other
--------- --------
Balance January 5,1999 $ 279 $ 319
Provision 1999 346 2,142
Accounts written-off (876) (824)
Recoveries 755 265
--------- --------
Balance January 5, 2000 504 1,902
Provision 2000 298 48
Accounts written-off (852) (58)
Recoveries 636 -
--------- --------
Balance January 5, 2001 586 1,892
Provision 2001 517 15,000
Accounts written-off (919) (780)
Recoveries 443 -
--------- --------
Balance January 5, 2002 $ 627 $16,112
========= ========
During fiscal 2001, the Company recorded an increase in reserves of $15.0
million specifically related to the collectibility of vendor receivables.
The determination of the increase in reserves was based on the
deterioration of the aging of the vendor receivables, the expected
resolution of the vendor rebate disallowed claims and the general posture
of the OEM's regarding resolution. Primary reasons for vendor rebate claims
being disallowed and corresponding re-files include serial number issues
(missing, incomplete, transposed, data base match-up discrepancies, etc.),
pricing issues (dispute in calculation of rebate amounts) and other missing
or incomplete documentation (bid letters, customer information, etc.).
4. NET INVESTMENT IN LEASES
The Company's net investment in leases principally includes sales type
leases. See Note 19 of Notes to Consolidated Financial Statements for
information regarding the sale of substantially all of the assets of TIFS.
The Company originates financing for customers in a variety of industries
and throughout the United States. The Company has a diversified portfolio
of capital equipment financing for end users.
Leases consist principally of notebook and desktop personal computers,
communication products and high-powered servers with terms generally from
one to three years. The components of the net investment in sales type
leases as of end of fiscal years 2000 and 2001:
(in thousands) 2000 2001
-------- --------
Minimum Lease Payments Receivable $62,095 $56,131
Estimated Residual Value 6,459 7,027
Initial Direct Costs 371 171
Unearned Income (6,430) (5,082)
-------- --------
Total $62,495 $58,247
======== ========
5. INVENTORIES
Inventories consist of items held for resale and are comprised of the
following components as of the end of fiscal:
F-10
(in thousands) 2000 2001
------- -------
Equipment and supplies $25,910 $17,405
Service parts 3,436 3,471
------- -------
Total $29,346 $20,876
======= =======
6. 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 $9,818 thousand
(2000) and $14,924 (2001), respectively:
(in thousands) 2000 2001
------- -------
Goodwill $51,862 $57,454
Covenants not to compete 702 519
Customer lists 312 241
Intangibles 582 300
------- -------
$53,458 $58,514
======= =======
In fiscal 2000, the Company acquired certain assets of Data Source - Hagen,
a Minneapolis, Minnesota-based network integrator. In addition, the Company
acquired Datanet, Inc., a Raleigh, North Carolina-based Information
Technology Company and The Linc, a Birmingham Alabama-based Cisco Silver
Partner whose primary focus is on network design, consulting, systems
engineering and maintenance in connection with Cisco products and Val Tech,
a Birmingham, Alabama leasing company. The Company recorded $1.2 million,
$8.9 million, and $4.0 million of goodwill in connection with those
acquisitions, respectively.
In fiscal 2001, the Company acquired certain assets of Osage Systems Group,
Inc., a Phoenix, Arizona based network integrator. In addition, the Company
acquired Charlotte based firms Ballantyne Consulting Group, Inc. and System
5 Technologies, Inc. The firms have been combined to create an expanded
Information Technology services arm that provides end-to-end infrastructure
design and implementation and project management solutions for eBusiness
enablement, systems integration, package applications, customer
relationship management, enterprise resource planning and data warehousing.
The Company recorded $1.7 million, $1.5 million, and $3.4 million of
goodwill in connection with those acquisitions, respectively.
7. BORROWING ARRANGEMENTS
Bank Notes Payable - The Company's financing of receivables is provided
through a portion of its revolving credit facility with Deutsche Financial
Services ("DFS"). The $240.0 million credit facility has a three year term
and includes $72.0 million for inventory financing (see floor plan
arrangements below), $144.0 million for working capital, and a cash-flow
component in the form of a $24.0 million term loan, which is not restricted
to a borrowing base. Under the agreement, the credit facility provides a
credit line of $144.0 million for working capital, which is based upon
accounts receivable financing. The accounts receivable and term loan
portion of the credit facility carry a variable interest rate based on the
London InterBank Offering Rate ("LIBOR") and a pricing grid. At January 5,
2002, the amount outstanding was $11.9 million, including $3.4 million of
overdrafts on the Company's books in accounts at a participant bank on the
credit facility, which was at an interest rate of 3.87%. The weighted
average interest rate on the bank revolving credit agreements was 7.0%,
8.0% and 6.5% in fiscal 1999, 2000 and 2001, respectively. 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
subject to various financial covenants and restricted from paying
dividends. As of January 5, 2002, the Company was in violation of a
financial covenant, which has been waived and subsequently modified by the
lender.
F-11
Floor plan arrangements - A significant part of the Company's inventories
is financed by floor plan arrangements with third parties. At January 5,
2002, these lines of credit totaled $84.0 million, including $72.0 million
with DFS and $12.0 million with IBM Credit Corporation ("ICC"). Borrowings
under the DFS floor plan arrangements are made on thirty-day notes.
Borrowings under the ICC floor plan arrangements are made on either
thirty-day or sixty-day notes. All such borrowings are secured by the
related inventory. Financing on substantially all of the arrangements is
interest free due to subsidies by manufacturers. Overall, the average rate
on these arrangements is less than 1.0%. The Company classifies amounts
outstanding under the floor plan arrangements as accounts payable.
Notes payable - Notes payable consist of the following:
(in thousands) Fiscal Years
----------------
2000 2001
------- -------
Non-recourse notes payable to banks at various interest rates,
ranging from 4.3% to 11.4%. The notes relate to the Company's
leasing segment and mature on various dates through 2005. $36,033 $33,371
Acquisition notes payable at various interest rates, ranging from 6%
to 9.5%, and unsecured. Principal payments are made in equal
annual installments, ranging from one to two years, through 2003. 5,599 3,925
Capital lease obligation at an imputed interest rate of 8.51%.
Principal and interest are payable in monthly installments of $55
thousand for a two year period through 2002. 723 107
------- -------
Total notes payable 42,355 37,403
Less current maturities 22,783 27,190
------- -------
Long-term notes payable $19,572 $10,213
======= =======
Payments on long-term debt and capital lease obligations are due as
follows:
(in thousands)
Fiscal Year
- --------------------------------------------------
2002 $27,190
2003 7,855
2004 2,042
2005 316
-------
$37,403
=======
F-12
8. INCOME TAXES
The provision for income taxes consists of the following:
(in thousands) Fiscal Years
---------------------------
1999 2000 2001
-------- ------- --------
Current:
Federal $14,275 $16,060 $ 7,932
State 3,304 2,614 1,273
-------- ------- --------
Total current 17,579 18,674 9,205
-------- ------- --------
Deferred:
Federal (618) 650 (3,899)
State (97) 82 (313)
-------- ------- --------
Total deferred (715) 732 (4,212)
-------- ------- --------
Total income tax provision $16,864 $19,406 $ 4,993
======== ======= ========
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax assets (liabilities) are:
(in thousands) Fiscal Years
------------------
2000 2001
-------- --------
Deferred Tax Assets:
Bad debt provision $ 246 $ 246
Depreciation 895 478
Leases 1,614 437
Deferred compensation 622 799
Vendor receivable accrual - 5,777
Other 72 141
-------- --------
Total deferred tax assets 3,449 7,878
-------- --------
Deferred Tax Liabilities:
Acquisition of lease residuals (278) (167)
Accounts receivable (664) -
Intangibles (1,611) (1,925)
Other (805) (1,482)
-------- --------
Total deferred tax liabilities (3,358) (3,574)
-------- --------
Net deferred tax assets $ 91 $ 4,304
======== ========
For fiscal 2000, the Company's net long-term deferred tax assets ($448) are
included in long-term other assets. The Company's net short-term deferred
liabilities ($357) are included in miscellaneous liabilities. For fiscal
2001, the Company's net short-term deferred tax assets ($4,869) are
included in other current assets and the net long-term deferred tax assets
($565) are presented as such on the balance sheet.
F-13
The Company's effective income tax rate differs from the Federal statutory
rate as follows:
Fiscal Years
------------------
1999 2000 2001
----- ----- ----
Tax at Federal statutory rate 35.0 35.0 35.0
State taxes 5.9 3.7 4.0
Kentucky Relocation Credits (0.9) (0.1) -
Other 0.4 1.1 0.0
----- ----- ----
Effective tax rate 40.4 39.7 39.0
===== ===== ====
9. OPERATING LEASES AND COMMITMENTS
Operating Leases- The Company leases office and warehouse space, vehicles
and certain office equipment from various lessors including a related
party. See Note 13 of Notes to Consolidated Financial Statements for
information regarding related parties. 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, 2002, including the lease with the related party, are as
follows:
(in thousands)
Fiscal Year
- -----------------------------
2002 $ 6,000
2003 5,108
2004 2,802
2005 2,240
Thereafter 740
-------
Total minimum lease payments $16,890
=======
Employment Agreements- The Company is party to employment agreements with
certain executives, which provide for compensation and certain other
benefits. The agreements also provide for severance payments under certain
circumstances.
10. EMPLOYEE BENEFIT PLANS
The Company 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. Beginning January 6, 1998, the Company made
contributions to the plan based on a participant's annual pay.
Contributions made by the Company for fiscal 2000 and 2001 were
approximately $317 thousand and $418 thousand, respectively.
The Company has a stock purchase plan (the "1998 plan") under Section 423
of the Internal Revenue Code of 1986, as amended. The 1998 plan provides
substantially all employees of the Company with an opportunity to purchase
through payroll deductions up to 2,000 shares of common stock of the
Company with a maximum market value of $25,000. The purchase price per
share is determined by whichever of two prices is lower: 85% of the closing
market price of the Company's common stock in the first trading date of an
offering period (grant date), or 85% of the closing market price of the
Company's common stock in the last trading date of an offering period
(exercise date). 200,000 shares of common stock of the Company are reserved
for issuance under the 1998 plan. The Board of Directors of the Company may
at any time terminate or amend the 1998 plan. The 1998 plan will terminate
twenty years from the effective date unless sooner terminated.
11. MAJOR CUSTOMERS
During fiscal 1999, 2000, and 2001, no customer accounted for more than 10%
of the Company's total net sales and revenues.
F-14
12. ACQUISITIONS
During fiscal 1999, the Company completed two acquisitions. The total
consideration given consisted of $4.2 million in cash, subordinated notes
of $2.6 million and 39 thousand unregistered shares of the Company's stock
with an approximate value of $0.6 million. Additionally, the purchase price
will be adjusted for any potential earn outs. Interest on the subordinated
notes is payable quarterly. Principal in the amount of $0.6 million is
payable in full on the anniversary date of closing and the $2.0 million of
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
1999 acquisitions had occurred on January 6, 1999, the pro forma operations
of the Company would not have been materially different than that reported
in the accompanying consolidated statements of income.
During fiscal 2000, the Company completed four acquisitions. The total
consideration given consisted of $15.2 million in cash, subordinated notes
of $4.8 million. Additionally, the purchase price will be adjusted for any
potential earn outs. Interest on the subordinated notes is payable
quarterly. Principal in the amount of $0.2 million was a 90 day note paid
in full in 2000, and the $4.6 million of principal is payable in equal
annual installments commencing on the first anniversary of closing. 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 2000 acquisitions had occurred on January 6,
2000, the pro forma operations of the Company would not have been
materially different than that reported in the accompanying consolidated
statements of income.
During fiscal 2001, the Company completed three acquisitions. The total
consideration given consisted of $8.0 million in cash, subordinated notes
of $1.3 million. Additionally, the purchase price will be adjusted for any
potential earn outs. Interest on the subordinated notes is payable
quarterly. Principal in the amount of $1.3 million is payable in equal
annual installments commencing on the first anniversary of closing. 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 2001 acquisitions had occurred on January 6,
2001, 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 PARTY TRANSACTIONS
Leases- The Company leases its headquarters, distribution facility and the
national training center from a company that is controlled by the Chief
Executive Officer of the Company. It is a triple net lease agreement, which
expires in the year 2010. Base rental for fiscal 1999, 2000 and 2001 was
approximately $0.9, $1.1 and $1.2 million, respectively. 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, which was
updated in 2000. In addition, the Company pays for the business use of real
estate that is owned by the Chief Executive Officer of the Company. During
fiscal years 1999, 2000 and 2001, the Company paid $95 thousand each year
in connection with this real estate.
A director of the Company is President of Information Leasing Corporation
("ILC"). In the first quarter of fiscal 2000, the Company sold certain
leases to ILC for $5.0 million. See Note 19 of Notes to Consolidated
Financial Statements for information regarding the sale of substantially
all of the assets of TIFS to ILC.
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 1999, 2000 and 2001 the Company sold equipment and related
support services to ILC, for lease to ILC's customers, in amounts of $0.6
million, $2.8 million and $2.3 million, respectively.
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.
F-15
The carrying value of investments in lease residuals is $2.3 million and
$1.3 million as of January 5, 2001 and 2002, respectively and is included
in long-term net investment in leases. Investments in lease residuals are
evaluated on a quarterly basis, and are subject only to downward market
adjustments until ultimately realized through a sale or re-lease of the
equipment.
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) Fiscal Years
----------------------------
1999 2000 2001
-------- -------- --------
Interest paid $ 3,704 $ 4,341 $ 2,181
======== ======== ========
Income taxes paid $17,799 $20,206 $ 3,661
======== ======== ========
Additions to goodwill for adjustments
to acquisition assets $ 3,147 $ 1,119 $ 1,788
======== ======== ========
Business combinations accounted
for as purchases:
Assets acquired $10,497 $28,602 $14,153
Liabilities assumed (3,166) (8,581) (4,854)
Notes payable (2,553) (4,795) (1,328)
Stock issued (556) - -
======== ======== ========
Net cash paid $ 4,222 $15,226 $ 7,971
======== ======== ========
15. TREASURY STOCK
On September 19, 2001, the Company's Board of Directors authorized a
program to repurchase up to 100,000 shares of the Company's outstanding
stock at market price. During the third quarter 2001, the Company
repurchased 33,000 shares of stock at a cost of $0.4 million. During the
fourth quarter 2001, the Company repurchased 11,000 shares of stock at a
cost of $0.1 million.
16. STOCKHOLDERS' EQUITY AND STOCK OPTION PLANS
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. 5,300,000 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. See Note 19 of Notes to Consolidated Financial
Statements for subsequent event disclosure on "Stock Option Plans." 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. 262,500 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. See Note 19 of Notes to Consolidated Financial Statements
for subsequent event disclosure on "Stock Option Plans." Pursuant to the
plan, an option to purchase 10,000 shares of common stock automatically
will be granted on the first day of the initial term of a director. An
additional 2,500 shares of common stock automatically will be granted to an
eligible director upon the first day of each consecutive year of service on
the board. Options may be exercised after one year from the date of grant
for not more than one-third of the shares subject to the option and an
additional one-third of the shares subject to the option may be exercised
for each of the next two years thereafter. To the extent not exercised,
options will expire five years after the date of grant.
F-16
The following summarizes the stock option transactions under the plans for
the three fiscal years ended January 5, 2002:
Weighted Average
Shares Exercise price
---------- -----------------
Options outstanding January 5, 1999 588,259 $ 13.97
Granted 811,852 16.02
Exercised (68,961) 7.98
Forfeitures (189,677) 17.74
----------
Options outstanding January 5, 2000 1,141,473 15.14
Granted 1,580,360 15.01
Exercised (726,867) 13.20
Forfeitures (359,572) 18.40
----------
Options outstanding January 5, 2001 1,635,394 15.16
Granted 821,576 13.76
Exercised (115,368) 10.33
Forfeitures (422,952) 15.79
----------
Options outstanding January 5, 2002 1,918,650 $ 14.64
==========
The following summarizes options outstanding and exercisable at January 5,
2002:
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 1/5/02 Contractual Life Exercise Price at 1/5/02 Exercise Price
- ---------------------------------------------------------------- ----------------------------
$ 2.83 to $5.65 19,125 3.00 $ 4.54 19,125 $ 4.54
$ 5.66 to $8.48 22,500 0.60 $ 5.66 22,500 $ 5.66
$ 8.49 to $11.30 73,001 3.50 $ 10.74 50,000 $ 10.69
$11.31 to $14.13 691,803 3.50 $ 12.60 444,165 $ 12.80
$14.14 to $16.95 635,040 4.30 $ 15.01 216,678 $ 15.17
$16.96 to $19.78 378,681 5.00 $ 17.63 109,061 $ 17.58
$19.79 to $22.60 86,000 2.10 $ 21.78 82,667 $ 21.78
$22.61 to $25.43 10,000 1.20 $ 23.56 10,000 $ 23.56
$25.44 to $28.25 2,500 1.50 $ 26.50 2,500 $ 26.50
----------- -----------
1,918,650 956,696
=========== ===========
The weighted average fair value at date of grant for options granted during
fiscal 1999, 2000 and 2001 was $5.79, $7.48 and $6.05, 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 1999 Fiscal 2000 Fiscal 2001
------------ ------------ ------------
Expected life (years) 2.0 3.7 3.3
Interest rate 6.4% 4.7% 4.5%
Volatility 60% 62% 57%
Dividend yield 0% 0% 0%
F-17
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards in fiscal 1999, 2000
and 2001 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 1999 Fiscal 2000 Fiscal 2001
------------ ------------ ------------
Net income - as reported $ 24,882 $ 29,488 $ 7,809
Net income - pro forma $ 20,854 $ 23,342 $ 5,015
Net income per common share - as reported
Basic 2.12 2.42 0.62
Diluted 2.11 2.38 0.61
Net income per common share - pro forma
Basic 1.78 1.91 0.40
Diluted 1.77 1.88 0.39
17. LITIGATION
On April 13, 2001, the Company recorded a settlement of the litigation with
FTA Enterprises, Inc. and expensed it in the first quarter of fiscal 2001.
The settlement of $1.0 million was paid in cash in the second quarter of
fiscal 2001.
There are various other legal actions arising in the normal course of
business that have been brought against the Company. Management believes
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
18. SEGMENT INFORMATION AND CONCENTRATIONS
Segment Information - The Company operates in three industry segments:
products, services and leasing. The products segment is primarily engaged
in the sale and distribution of computers, hardware, software and related
products. The Company offers products from an array of manufacturers
including Cisco, Computer Associates, Sun, Oracle, EMC, Compaq,
Hewlett-Packard, IBM, Microsoft, Nortel Networks, Novell, Palm Computing,
Veritas, Symantec, Lexmark and Panasonic. As a service solution provider,
the Company offers three categories of service: enterprise consulting
services, complete infrastructure solutions and lifecycle service offerings
that are required to develop, deploy and support IT strategies. Enterprise
consulting services includes E-business application development with
infrastructure platform consulting, design and implementation. It includes
platforms such as Oracle, Sieble, Citrix, Crossworlds and IBM's Websphere.
Complete infrastructure solutions portfolio includes internet
infrastructure solutions, enterprise management services, network
infrastructure services and network integration solutions. Internet
infrastructure solutions include services to assist customers in
implementing network and server infrastructure components. Enterprise
management services monitor the network buildup and broadband
implementation services. Network infrastructure services include
LAN/WAN/SAN/NAS implementation services. These services assist the customer
in installing and implementing an internal network infrastructure that
includes cabling, network equipment consulting, implementation and support;
internet protocol telephony services for maximizing voice/data circuits,
wireless LAN design and implementation and storage services that provide
consulting, design, installation and support on storage area networks and
network attached storage implementations. Network integration solutions
provide services to assist customers in implementing thin client/server
based computing, groupware design/implementation and system/application
enablement. Lifecycle service offerings consist of desktop management
services that involves assisting customers in project roll-outs,
installation of personal computer systems, peripherals and accessories;
warranty and non-warranty repair and maintenance, redeployment and
end-of-life services. The Company has achieved Gold Authorization from
Cisco. The Company has also been awarded 2 specializations from Cisco;
Voice Access and IP Telephony, which gives customers access to specialized
knowledge and expertise to consult, design and implement converged voice
and data telephony circuits and wireless LAN implementations. The leasing
segment primarily provides in-house leasing services to the Company's
products and services customers. See Note 19 of Notes to Consolidated
Financial Statements for information regarding the sale of substantially
all of the assets of TIFS. The Company leases many types of equipment with
the predominant focus on notebook and desktop personal computers,
communication products and high-powered servers. The Company provides
products and services primarily to large and medium sized corporate, health
care, governmental, financial and educational customers. The Company has no
operations outside the United States. The accounting policies of the
segments are the same as those discussed in the summary of significant
accounting policies. The Company evaluates performance based on operating
earnings of the respective business units. Intersegment sales and transfers
are not significant.
F-18
Summarized financial information concerning the Company's reportable
segments is shown in the following table. (in thousands)
Fiscal 1999
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenue $ 648,924 $ 103,821 $ 4,012 $ 756,757
Income from operations $ 22,954 $ 21,111 $ 1,446 $ 45,511
Total assets $ 229,903 $ 55,043 $ 48,195 $ 333,141
Capital expenditures $ 3,435 $ 492 $ 722 $ 4,649
Depreciation and amortization $ 4,986 $ 1,342 $ 1,185 $ 7,513
Fiscal 2000
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenue $ 775,299 $ 139,444 $ 10,395 $ 925,138
Income from operations $ 22,742 $ 26,622 $ 3,335 $ 52,699
Total assets $ 222,984 $ 69,652 $ 68,632 $ 361,268
Capital expenditures $ 3,967 $ 729 $ 953 $ 5,649
Depreciation and amortization $ 7,310 $ 1,749 $ 1,285 $ 10,344
Fiscal 2001
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenue $ 658,854 $ 140,466 $ 9,894 $ 809,214
Income from operations $ 3,481 $ 8,537 $ 2,323 $ 14,341
Total assets $ 215,181 $ 61,090 $ 65,447 $ 341,718
Capital expenditures $ 4,101 $ 610 $ 540 $ 5,251
Depreciation and amortization $ 9,322 $ 2,228 $ 977 $ 12,527
Concentrations - During fiscal 1999, 2000, and 2001 approximately 32.2%,
29.6% and 24.1% respectively, of the Company's total net sales and revenues
were derived from its top ten customers. During fiscal 1999 and fiscal
2001, no customer accounted for more than 10% of the Company's net sales
and revenues for either the products or services segments. During fiscal
2000, MCI Worldcom accounted for approximately 10.4% of the total net sales
and revenues for the products segment.
19. SUBSEQUENT EVENTS
Sale of substantially all of the assets of TIFS - On February 28, 2002, the
Company announced the signing of a definitive purchase agreement to sell
substantially all of the net assets of its wholly owned subsidiary-TIFS to
ILC, the leasing division of The Provident Bank of Cincinnati, Ohio. ILC is
paying book value for net assets and liabilities approximating $3 million
to $4 million. ILC is also immediately liquidating acquired debt, related
to leased assets, owed by TIFS to the Company in the approximate amount of
$20.4 million. The closing is expected to occur by April 16, 2002. As part
of the transaction, the Company has agreed to an exclusive seven-year
vendor agreement, whereby the Company will be commissioned on lease
transactions referred to and accepted by ILC.
Stock Option Plans- In April 2002, the Company's 1992 Non-Qualified and
Incentive Stock Option Plan and the Company's 1992 Outside Directors' Stock
Option Plan terminated. The Company intends to adopt a new 2002
Non-Qualified and Incentive Stock Option Plan and a new Outside Directors'
Stock Option Plan, which will be substantially similar in nature to the
1992 Option Plans, and submit same to the shareholders for approval.
F-19