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, 2003
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 31-1227808
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 $76,476,618 as of March 18, 2003.
The number of shares outstanding of the Registrant's common stock as of March 1,
2003 was 12,870,169.
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 2003 Part III
Annual Meeting of Stockholders to be
Filed with the Securities and Exchange
Commission prior to May 05, 2003.
POMEROY COMPUTER RESOURCES, INC.
FORM 10-K
YEAR ENDED JANUARY 5, 2003
TABLE OF CONTENTS
PART I Page
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Item 1. Business 1
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 23
Item 9. Disagreements on Accounting and Financial
Disclosures 23
PART III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management 24
Item 13. Certain Relationships and Transactions 24
PART IV
Item 14. Controls and Procedures 24
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 25
SIGNATURES Chief Executive Officer, President, Chief Financial 32
Officer and Chief Accounting Officer
Directors 32
CERTIFICATIONS Chief Executive Officer 33
Chief Financial Officer 34
Report of Independent
Certified Public Accountants F-1
Financial Statements F-2 to F-23
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. is a Delaware corporation organized in February
1992. Pomeroy Computer Resources, Inc., collectively with its subsidiaries,
("Pomeroy" or the "Company") is a premier provider of enterprise-wide
information technology ("IT") solutions that leverage its comprehensive
portfolio of professional services to create long term relationships.
Pomeroy's mission is to offer its clients complete solutions that reduce their
clients overall IT costs. The strategy is to be the low cost provider of
complete IT solutions that are developed, integrated and managed for its
customers. These solutions are designed to maximize clients' financial and
operational success. Pomeroy's target markets include government and education,
Fortune 1000 and small and medium business ("SMB") clients. These clients fall
into government and education, financial services, health care and other
sectors. Pomeroy's clients are located throughout the United States with an
emphasis in the Southeast and Midwest regions.
Pomeroy's growth strategy is to gain share in existing markets, expand its
geographic coverage, increase the breadth and depth of its service offerings
while continuing its strategic acquisition model. Pomeroy believes by focusing
on higher margin services, continued operating expense control and maintaining a
strong balance sheet, it will be able to improve its earnings performance in the
future. The Company has experienced and expects continued pricing pressure in
its products segment due to industry consolidation and the efforts of
manufacturers to sell directly to Pomeroy's clients. In addition, the general
weakness in the U.S. economy has impacted Pomeroy's business. Any pricing
pressures, reduced margins or loss of market share resulting from the Company's
inability to compete effectively could have a material adverse effect on the
Company's operations and financial results.
During 2002, the Company operated in three industry segments: products, services
and leasing. See Note 20 of Notes to Consolidated Financial Statements for a
presentation of segment financial information. Pomeroy's product business is
comprised of the sale of a broad range of desktop computer equipment, including
servers, infrastructure and peripherals. Pomeroy's services business entails
providing information technology services which support such computer products.
The services segment can be classified into three components: enterprise
consulting, infrastructure solutions and client management services. The
Company also offers leasing solutions to its customers via an agency agreement
with a subsidiary of a Cincinnati-based regional bank. In 2002, this subsidiary
acquired the assets and intangibles of the Company's leasing subsidiary. See
Note 14 of Notes to Consolidated Financial Statements for information regarding
the sale of substantially all of the assets of Technology Integration Financial
Services, Inc. ("TIFS"), the Company's leasing subsidiary.
1
PRODUCTS SEGMENT
The Company's products segment is comprised of the sale of a broad range of
desktop computer equipment, including servers, infrastructure and peripherals.
Pomeroy is an authorized dealer or reseller for the products of over 30 major
vendors, some of which are listed:
3Com
Adaptec
APC (American Power Corporation)
Cisco Systems
Citrix
Computer Associates
EMC
Epson
GoldenRam
Hewlett Packard - Compaq
IBM
Iomega
Kingston Technology
Lexmark
Legato
Microsoft
Novell
Nec/Mitsubishi
Oracle
Okidata
Procom Technology
Palm
Panasonic USA
Sun
SurfControl
Pomeroy believes that its access to such vendors enables it to offer a wide
range of products to meet the diverse requirements of its clients as opposed to
original equipment manufacturers ("OEM's") which offer a limited range of
products. Additionally, Pomeroy's ability to bundle its products with its
services enables its clients to obtain the flexibility, expertise, and
conveniences of multiple clients from a single source provider of IT solutions.
The information technology needs of its clients are serviced by Pomeroy's ISO
9002 registered distribution and integration center located in Hebron, Kentucky.
This facility is approximately 161,000 square feet and distributes and
integrates products and technologies sold by the Company as well as products
supplied by its clients. Pomeroy also operates a service depot operation within
this centralized facility.
Purchasing products and/or services from Pomeroy assures that its clients
initiatives are being managed by highly skilled professionals who adhere to
world class quality standards. Since 1997, Pomeroy's Distribution Center has
been registered to the International Organization of Standardization ("ISO") ISO
9002 Quality Standard. The ISO Quality Standard has been accepted by the U.S.
and over eighty other countries around the world as the basis for a world class
Quality Management System ("QMS"). Pomeroy's QMS specifies the policies,
procedures and processes necessary to satisfy customer requirements and ensures
those processes are appropriately managed, controlled and continually improved.
Pomeroy is committed to becoming the supplier of choice for all its clients IT
solution needs by continually improving the effectiveness of its operations.
Part of its improvement process is an extensive corrective action and internal
audit program that not only identifies and solves quality issues but also
prevents their recurrence.
2
As a result of Pomeroy's ISO 9002 registration, Pomeroy's clients can be assured
that Pomeroy's QMS meets international standards. The Company's ISO
registration is backed up by documented procedures and records that demonstrate
its commitment to the very highest quality standards. Pomeroy is currently on
track to become registered in 2003 to the new version of ISO 9001:2000.
The Company believes that its distribution and integration center is adequately
designed to support its client's business and technology needs for the
foreseeable future. Pomeroy's distribution and integration center utilizes
state-of-the-art warehouse management and enterprise resource planning ("ERP")
systems in order to stock, pick and update the status and location of physical
and perpetual inventory. The radio-frequency based warehouse management system
controls and manages the flow of physical inventory from the earliest point of
demand generation, purchase order creation, to the final step in the supply
chain process, shipping to meet its client's delivery and integration needs.
The system controls re-order points and directs its fulfillment needs to the
product source who can deliver at the lowest possible capital cost while
maintaining the speed to market required by Pomeroy's clients. The warehouse
management system tracks the inventory in a real time mode, updating Pomeroy's
ERP system, which then in turn updates its clients' specific technology driven
supply chain management systems. The intelligence inherent with the system is
flexible, allowing customization to almost any specific communication standard
required by Pomeroy's diverse client base. Essentially, Pomeroy has the
ability to link its ERP and warehouse management systems to its clients' supply
chain management ("SCM") systems. As a result, the Company has been able to
provide its clients with product shipping information as well as the ability to
efficiently process orders while safeguarding its inventory.
Significant product supply shortages have resulted 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.
For fiscal years 2000, 2001 and 2002, sales of computer hardware, software, and
related products were approximately $775.3 million, $658.9 million, and $568.2
million respectively, and accounted for approximately 83.8%, 81.4%, and 80.9%
respectively, of the consolidated net sales and revenues of Pomeroy in such
years.
3
SERVICES SEGMENT
As a service solution provider, Pomeroy offers three groups of services:
enterprise consulting, infrastructure solutions, and client management services.
Enterprise Consulting
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The enterprise consulting group offerings consist of: e-solutions, business
intelligence solutions, business process re-engineering solutions, customer
relationship management ("CRM") solutions, and value chain management ("VCM")
solutions.
Pomeroy's e-solution center has the technical, business and creative expertise
to help its clients connect with customers, suppliers, partners and employees
using the latest internet technology. Pomeroy has the necessary skills for:
- e-solutions strategy
- technical and information architecture
- custom e-solutions development and site design for robust intranet
(B2E), extranet (B2B), and B2C applications
- content management systems
- e-package evaluations
- web-enabling of ERP systems
- wireless application development and enabling
Pomeroy has established strategic relationships with Oracle and Macromedia, two
well-known and trusted providers of technology solutions for e-solutions
development. Pomeroy is well versed in a wide range of e-solution tools and
technologies from vendors including Oracle, Macromedia, and Microsoft, and in
using languages such as Cold Fusion, Java, XML, WAP, and Flash. Additionally,
Pomeroy has expertise in a variety of disciplines including business strategic
planning, systems design, information architecture, and web interface design.
Pomeroy's business intelligence solution center has the functional and technical
expertise to evaluate and implement packaged business intelligence solutions, or
design, develop and implement business intelligence solutions. Pomeroy has the
necessary skills required for:
- packaged solutions
- CRM analysis
- ERP analysis
- e-business analytical applications
- website usage/click-stream analysis
- custom solutions
- reporting
- ad-hoc query
- on-line analytical processing
- data warehousing/data marts
- knowledge management
- enterprise information portals
Pomeroy uses business intelligence practice's Solution Definition Foundation
Services ("SDFS") methodology, which includes defined deliverables and
milestones. SDFS is a methodology and a set of services that Pomeroy developed
to provide its clients analysis and implementation of business intelligence
solutions.
The technical personnel in our business process re-engineering solution center
have the technical expertise and training to determine the optimal solution
ranging from pure process improvement to software package implementation to a
custom built solution. Pomeroy has the necessary skills required for:
- strategic information system plan
- organizational change management
- focused process improvement
4
- continuous improvement
- focused restructuring
- business process re-engineering
- requirements definition
- software package evaluation and selection
- project management
- implementation consulting
- end user training
- process modeling
- improvement portfolio development
- performance measurement
Pomeroy's CRM solution center assists clients in defining the strategy and
requirements necessary to package, evaluate, select and implement a CRM
solution. Our technical personnel are experienced and trained with the
necessary skills required for:
- project management
- business process re-engineering
- software evaluation
- technical assessment
- implementation consulting
- CRM strategy definition
- custom reporting solutions
- data migrations/conversions
- process documentation and system testing
- end-user training
Pomeroy's VCM solution center offers integrated solutions that streamline value
chains and deliver strategic advantages and cost reduction through collaborative
logistics. Our technical personnel have the necessary skills required for:
- supply chain management strategy development
- e-procurement strategy and implementation
- supplier enablement services
- strategic sourcing services
- collaborative, planning, forecasting and replenishment solutions
- transportation, distribution and warehousing management solutions
- VCM packaged-enabled re-engineering implementation support and systems
integration services
Pomeroy has established strategic relationships with Elogex, Oracle, and
Crossworlds, all well known providers of technology that facilitates VCM.
Infrastructure Solutions
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The infrastructure solutions group offerings consist of: internetworking,
wireless solutions, midrange platform, storage, thin client, and managed
services.
Pomeroy's Internetworking Solution Center has the technical expertise to design,
implement, and support complex networks and computing platforms for its clients.
Additionally, Pomeroy will provide direction in the integration of new
technologies into its clients' existing environments. Our technical personnel
have the necessary skills required for:
- network assessments
- converged network design for both the WAN and LAN
5
- next generation voice application assessment and deployment
- VOIP implementation
- customized support solutions
As a Cisco Gold Integrator, Pomeroy has invested in the required technical and
sales expertise to deliver the following specializations: Voice over IP,
Wireless, Network Management and Security solutions.
Pomeroy's wireless solution center provides expertise in building and
maintaining end-to-end wireless network connections throughout or between
buildings, without limitations of wires or cables. By providing the assessment,
design, and implementation services, Pomeroy is able to combine the mobility and
flexibility its clients want from a wireless LAN solution with the throughput
and security users demand from a business LAN.
Pomeroy has the expertise in internet and intranet services to provide its
clients with the services required to meet their business goals. Working with
its clients, Pomeroy designs and implements secure virtual private networks
("S-VPN's") as an extension of their enterprise.
Pomeroy's midrange platform solution center has the technical expertise to
service its clients who have mid-range computers as part of their daily IT
infrastructure. Pomeroy has the scope to cover HP, IBM, and SUN products.
Additionally, Pomeroy provides software solutions through Sun, Oracle, IBM, HP,
and Microsoft to supplement the hardware for a fully integrated solution.
Our Unix consultants assist customers with:
- server consolidation strategies
- high availability solutions - clustering
- assessments
- architecture and design
- implementation
- maintenance and support
Pomeroy's storage strategy center provides expertise that allows its clients to
manage, protect, and share their data. Pomeroy designs, integrates and supports
storage solutions for its clients. Pomeroy's portfolio includes many of the
industry leaders in the storage arena for hardware solutions such as: EMC, HP,
IBM, SUN and Storagetek. To provide a complete and scaled solution, Pomeroy has
established market software relationships with Computer Associates, Legato and
Veritas.
Our storage consultants assist customers with:
- server consolidation strategies
- back-up and recovery solutions
- assessments
- architecture and design
- implementation
- maintenance and support
Pomeroy's thin client center provides support in improving application
administration, installation, and security for thin client technology. These
services allow for the secure deployment of server-based applications over the
internet through a virtual private network solution.
Pomeroy's managed service center provides electronic interaction and commerce
through a single source. Our technical personnel have the necessary skills
required for:
- objectives and usage, network backbone, storage and security
consulting
- infrastructure platform consulting and implementation
- e-business application enablement
- web portal site design and development
- online ordering and tracking
- enterprise security services
6
Client Management Services
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Pomeroy's client management services group offers the following comprehensive
portfolio of services: technology refresh, contract support services,
contingency staffing, depot and end of life services, and lifecycle solutions.
Pomeroy's technology refresh offerings were developed around a proven, cost
effective project management and staffing model. Pomeroy utilizes standard
Project Management Institute ("PMI") methodologies as the foundation for all
projects. Pomeroy's experienced project management staff consistently deliver
projects on time and within budget. Combining industry best practices with
experienced and talented project management insures that every project becomes a
celebrated success story for its customers. Pomeroy offers the following
services under the technology refresh umbrella:
- platform selection
- procurement, configuration, and staging
- multi-site installations
- operating system ("O/S") upgrades/migrations
- asset removal/retirement
- project management
Pomeroy offers a wide range of contract support services that can be leveraged
individually or as a packaged life-cycle support offering. Through twenty years
of experience and thousands of successful engagements, Pomeroy leverages cost
effective best practices to successfully deliver the following contract support
service offerings:
- maintenance and repair
- help desk support
- desk side support
- installs, moves, adds, and changes ("IMAC")
Pomeroy offers contingency staffing services that provide its customers with
both short term and long term supplemental staffing alternatives. Pomeroy's
highly trained, certified, and experienced staff provide contingency staffing
support to its customers in the following areas:
- corporate projects/roll-outs
- repair and maintenance
- IMAC
- trouble shooting
- administrative support
- purchasing assistance
- physical inventory
- project management/implementation
- IT management
- help desk support
- desk side support
- network design, installation and support
Pomeroy's depot and end of life service offerings are designed to minimize its
clients downtime and service costs by utilizing effective repair exchange and
"Spare In The Air" programs. These offerings are designed to maximize its
customer's IT investment while improving customer satisfaction. Pomeroy offers
the following depot & end of life services:
- maintenance and repair
- "spare in the air program"
- asset tracking
- data recovery
- O/S restore
- equipment storage
- redeployment
- end of life/brokerage
7
By leveraging our proven leadership, years of experience, best practices, and
talented/certified technical staff, Pomeroy provides comprehensive life cycle
client management solutions. Pomeroy's life cycle management solutions provide
a bundled suite of services that dramatically improve customer service, while
helping its customers get the most out of their IT budget.
Pomeroy's technical personnel maintain some of the highest credentials.
Maintaining a knowledgeable and resourceful technical staff is an ideal that
Pomeroy cultivates through career development programs that promote education
and skills training. These certifications include:
CISCO: CCIE, CCNA, CCNP, CCDP, CCDA including IP Telephony and Wireless
Specializations
NOVELL: CNE, MCNE, CNA, and Certified GroupWise Engineer
MICROSOFT: MCP, MCSA, MCSE, MCSE+1, and MCDBA
IBM: xSeries Certified System Engineer, IBM Technical Specialist RS 6000 SP,
IBM Advanced Technical Expert RS 6000
HEWLETT PACKARD: HP Certified Professionals (NT, NetWare, Alpha/Unix, and
StorageWorks), HP Accredited Integration Specialist and Master Accredited
Systems Engineers - SAN Architect
COMPUTER ASSOCIATES: CUE
NORTEL: Networks Specialist, Nortel Networks Certified Support Expert
LOTUS: Notes Professional
COMPTIA: A+ Certified Technicians, Network+, IT Project+, and Server+
SUN: Storage Engineers
(ISC)2 Certified Information Systems Security Professional (CISSP)
ORACLE: Oracle Certified Professional (OCP)
Pomeroy'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 2000, 2001 and 2002, revenues from service and support
activities were approximately $139.4 million, $140.4 million, and $131.3 million
respectively, and accounted for approximately 15.1%, 17.4%, and 18.7%,
respectively, of the consolidated net sales and revenues of Pomeroy in such
years.
8
LEASING SEGMENT
The Company also offers leasing solutions to its customers via an agency
agreement with a subsidiary of a Cincinnati-based regional bank. In 2002, this
subsidiary acquired the assets and intangibles of the Company's leasing
subsidiary. See Note 14 of Notes to Consolidated Financial Statements for
information regarding the sale of substantially all of the assets of Technology
Integration Financial Services, Inc. ("TIFS"), the Company's leasing subsidiary.
For fiscal years 2000, 2001 and 2002, leasing revenues were approximately, $10.4
million, $9.9 million, and $3.3 million respectively, and accounted for
approximately 1.1%, 1.2%, and 0.5%, respectively, of the consolidated net sales
and revenues of Pomeroy.
BUSINESS STRATEGY
Pomeroy's strategy for building shareholder value is to provide comprehensive
solutions to improve the productivity of its clients' information technology
(IT) systems thus reducing their overall IT costs. Key elements of the Company's
strategy are: (1) to be the low cost provider of the complete solutions which
are developed, integrated and managed for its customers, (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.
Pomeroy's sales are generated primarily by its 182 person direct sales and sales
support personnel located in 26 regional offices in 13 states throughout the
Southeast and Midwest United States. Pomeroy's business strategy is to provide
its clients with a comprehensive portfolio of product and service offerings,
including, enterprise consulting services, complete infrastructure solutions and
client management services. The Company believes that its ability to combine
competitive pricing of computer hardware, software and related products with
comprehensive higher margin services allows it to compete effectively against a
variety of competitors, including independent dealers, superstores, mail order
and direct sales by manufacturers. With many businesses seeking assistance to
optimize their information technology investments, Pomeroy is using its
resources to assist clients in their decision-making, project implementation and
management of IT capital.
Most microcomputer products are sold pursuant to purchase orders. For larger
procurements, the Company may enter into written contracts with clients. These
contracts typically establish prices for certain equipment and services and
require short delivery dates for equipment and services ordered by the client.
These contracts do not require the client to purchase microcomputer products or
services exclusively from Pomeroy 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 client's
request for proposal. As of January 5, 2003, the Company has been awarded
contracts it estimates will result in an aggregate of approximately $97.8
million of net sales and revenues after January 5, 2003, $108.4 million in net
sales and revenues were generated in 2002 from these contracts. Of the
aggregate total, the Company estimates that approximately $86.9 million of net
sales and revenues will be generated in fiscal 2003. By comparison, as of
January 5, 2002, the Company had been awarded contracts that it estimated would
result in an aggregate of approximately $144.2 million of net sales and revenues
after January 5, 2002. Of this amount, the Company estimated that $100.7
million of net sales and revenues would be generated during fiscal 2002. 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.
Pomeroy 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 to continue performing warranty work for a particular manufacturer's
products is dependent upon the performance of Pomeroy under a dealer agreement
with that manufacturer.
Pomeroy provides its services to its clients 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 these service arrangements with its
clients. Pomeroy 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 Pomeroy believes it can clearly define the scope of
services to be provided and the cost of providing those services.
9
The Company has initiated a program known as the Pomeroy Preferred Partner
Program to better serve its clients. Through the program, Pomeroy has the
ability to focus on the group of manufacturers, which it has deemed "best in
class" through its research, client feedback, and its experience in the
industry. By focusing on these "preferred" manufacturers, Pomeroy is building
mutual business commitments that it believes will benefit its customers. Such
benefits include access to favorable pricing and key decision-makers, better
terms and conditions from the manufacturers and enhanced sales and technical
training.
Pomeroy 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 Pomeroy'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 Pomeroy's performance. Although Pomeroy has never lost a major
vendor/manufacturer, the loss of such a vendor/product line or the deterioration
of Pomeroy's relationship with such a vendor/manufacturer would have a material
adverse effect on Pomeroy.
COMPETITION
The microcomputer products and services 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, Pomeroy may face fewer but larger
competitors as a consequence of such consolidation. These competitors may have
access to greater financial resources than Pomeroy. 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 client base, which could have a material
adverse impact on Pomeroy's operations and financial results. While price is an
important competitive factor in Pomeroy's business, Pomeroy believes that its
sales are principally dependent upon its ability to provide comprehensive client
support services. Pomeroy'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 clients; (v) various financing alternatives;
and (vi) its ability to provide prompt responsiveness to clients services needs
and to build performance guarantees into services contracts.
Pomeroy competes for product sales directly with local and national distributors
and resellers. In addition, Pomeroy competes with microcomputer manufacturers
that sell product through their own direct sales forces and to distributors.
Although Pomeroy believes its prices and delivery terms are competitive, certain
competitors offer more aggressive hardware pricing to their clients.
Pomeroy'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 consulting firms. Pomeroy 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, Pomeroy 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 Pomeroy's failure to compete
effectively could have a material adverse effect on Pomeroy's operations and
financial results.
Pomeroy believes its services solutions segment competes successfully by
providing a comprehensive solution portfolio for its clients' information
technology asset management and networking services needs. Pomeroy delivers
cost-effective, flexible, consistent, reliable and comprehensive solutions to
meet clients' information technology infrastructure service requirements.
Pomeroy also believes that it distinguishes itself on the basis of its technical
expertise, competitive pricing and its ability to understand its clients' needs.
10
CERTAIN BUSINESS FACTORS
The following business factors, among others, are likely to affect Pomeroy's
operations and financial results and should be considered in evaluating
Pomeroy's outlook.
Growth and Future Acquisitions
- ---------------------------------
In the past, Pomeroy has grown both internally and through acquisitions. During
fiscal 2002, Pomeroy experienced a decline in the growth in the products due to
the continued downturn in the economy and a decline in the leasing segment due
to the sale of a portion of TIFS. Pomeroy's business strategy is to continue to
grow both internally and through acquisitions. There can be no assurance that,
in the future, Pomeroy will be successful in repeating the growth experienced in
prior years. Pomeroy expects future growth will result from acquisitions in
addition to organic growth. In fiscal 2002, Pomeroy completed one acquisition
and continues to evaluate expansion and acquisition opportunities that would
complement its ongoing operations. As part of Pomeroy's growth strategy, it
plans to continue to make investments in complementary companies, assets and
technologies, although there can be no assurance that Pomeroy will be able to
identify, acquire or profitably manage additional companies or successfully
integrate such additional companies into Pomeroy 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 Pomeroy'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 Pomeroy's operations and financial
results.
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 Pomeroy
could have a material adverse effect on Pomeroy's operations and financial
results. In particular, a reduction or elimination of rebates related to
government and educational customers could adversely affect Pomeroy's ability to
serve those clients profitably. In addition, there are specific risks, discussed
below, related to the individual components of vendor receivables that include
vendor rebates, manufacturer market development funds and warranty receivables.
During fiscal year 2001 and 2002, the Company recorded a $15 million and $3.3
million allowance, respectively, related to the collectibility of vendor
receivables resulting in a $9.1 million and $2.1 million, respectively,
reduction in net income. The determination of an appropriate allowance 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.
Vendor Rebates
- ---------------
The most significant component of vendor receivables is vendor rebates. Vendor
rebate programs are developed by OEM's allowing them to modify product pricing
on a case by case basis (generally determined by individual clients) to maintain
their competitive edge on specific transactions. Pomeroy contacts the OEM to
request a rebate, for a specific transaction, and if approved, the OEM provides
Pomeroy with a document authorizing a rebate to be paid to Pomeroy at a later
date when a claim is filed. If the business is won, Pomeroy records the sale
and the cost of the sale is reduced by the amount of the 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. In addition, sometimes a claim
is rejected altogether and no 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.) Pomeroy has made
substantial process and system enhancements geared towards minimizing refiling
rebate claims, but there is no assurance that Pomeroy will be able to
successfully claim all of the vendor rebates that were passed along to the
clients in a form of a reduction in sales price. Pomeroy has had to write off
vendor receivables in the past and may have to do so in the future.
Manufacturer Market Development Funds
- ----------------------------------------
Several manufacturers offer market development funds, cooperative advertising
and other promotional programs to distribution channel partners. Pomeroy
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.
11
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 Pomeroy by the OEM. It is the Company's responsibility to file
for and collect these claims. The inability of the Company to properly track
and document these claims could result in the loss of reimbursements.
Management Information System
- -------------------------------
Pomeroy 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, Pomeroy is
continually evaluating the adequacy of its existing systems and procedures.
Pomeroy selected the Siebel solution to provide a CRM and Professional Service
Management system. Pomeroy made this selection and acquired the software in the
third quarter of 2002 and will deploy the solution in phases throughout 2003.
Pomeroy anticipates that it will regularly need to make capital expenditures to
upgrade and modify its management information system, including software and
hardware, as Pomeroy grows and the needs of its business change. There can be no
assurance that Pomeroy will anticipate all of the demands which expanding
operations may place on its management information system. The occurrence of a
significant system failure or Pomeroy's failure to expand or successfully
implement its systems could have a material adverse effect on Pomeroy's
operations and financial results.
Dependence on Technical Employees
- ------------------------------------
The future success of Pomeroy'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 Pomeroy will be able
to attract and retain sufficient numbers of skilled technical employees. The
loss of a significant number of Pomeroy'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 Pomeroy is for
specific client orders, inventory devaluation or obsolescence could have a
material adverse effect on Pomeroy'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 Pomeroy in the future. In prior fiscal years, many manufacturers
reduced the number of days for which they provided price protection. During
fiscal 2002, 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, Pomeroy 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 Pomeroy'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, Pomeroy 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's current and future success depends, in part, on the relationships
with leading hardware and software vendors and on their status as an authorized
service provider. Pomeroy 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.
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. Since Pomeroy 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, authorization agreements with vendors include
termination provisions, some of which are immediate. The Company cannot assure
that vendors will continue to
12
authorize them as an approved service provider. In addition, the Company cannot
assure that vendors, which introduce new products, will authorize them as an
approved service provider for such new products.
Significant product supply shortages have resulted from time to time because
manufactures have been unable to produce sufficient quantities of certain
products to meet demand. The Company expects to experience some difficulty in
obtaining an adequate supply of products from its major vendors, which may
result in delays in completing sales.
The loss of any vendor relationship, product line, or product shortage could
reduce the supply and increase costs of products sold by Pomeroy and adversely
impact the Company's competitive position.
Pricing Pressures
- ------------------
Pomeroy believes its prices and delivery terms are competitive; however, certain
competitors may offer more aggressive pricing to their clients. The Company has
experienced and expects continued pricing pressure in its products segment due
to industry consolidation and the efforts of manufacturers to sell directly to
Pomeroy's clients. In addition, the general weakness in the U.S. economy has
impacted Pomeroy's business. In an attempt to stimulate sales to existing and
new customers, the Company believes that pricing pressures may increase in the
future, which could require the Company to reduce prices, which may have an
adverse impact on its operating results. Decreasing prices of Pomeroy's
products and services offerings will require the Company to sell a greater
number of products and services to achieve the same level of net sales and gross
profit.
Government Contracts
- ---------------------
A portion of Pomeroy'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 of the Company's government contracts have
no contractual limitation of liability for damages resulting from the provision
of services.
Dependence on Major Clients
- ------------------------------
During fiscal 2002, approximately 28.1% of Pomeroy's total net sales and
revenues were derived from its top 10 customers. No customer accounted for more
than 10% of Pomeroy's total net sales and revenues.
Dependence on Key Personnel
- ------------------------------
The success of Pomeroy 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 Pomeroy's
business. Pomeroy maintains $1.0 million in key man life insurance insuring the
life of David B. Pomeroy. In addition, Pomeroy maintains $700 thousand in key
man life insurance insuring the life of Stephen E. Pomeroy. Pomeroy has entered
into employment agreements with certain of its key personnel, including David B.
Pomeroy and Stephen E. Pomeroy. Pomeroy'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
- ------------
Pomeroy's stock price is affected by a number of factors, including quarterly
variations in revenue, gross profit and operating income, general economic and
market conditions, and estimates and projections by the investment community.
As a result, Pomeroy's common stock may fluctuate in market price.
EMPLOYEES
As of January 5, 2003, Pomeroy had 1,467 full-time employees consisting of the
following: 1,050 technical personnel; 182 direct sales representatives and sales
support personnel; 40 management personnel; and 195 administrative and
distribution personnel. Pomeroy offers its full-time employees the options to
participate in health and dental insurance, short and long term disability
insurance, life insurance, 401(k) plan and an employee stock purchase plan.
Pomeroy has no collective bargaining agreements and believes its relations with
its employees are good.
BACKLOG
Pomeroy does not have a significant backlog of business since it normally
delivers and installs products purchased by its clients within 10 days from the
date of order. Accordingly, backlog is not material to Pomeroy's business or
indicative of future sales. From time to time, Pomeroy 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 Pomeroy's results of operations.
13
PATENTS AND TRADEMARKS
The Company owns no trademarks or patents. Although Pomeroy'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. Pomeroy 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 Pomeroy'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 Pomeroy 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 2002, Pomeroy completed one acquisition. The total consideration
given consisted of $0.3 million in cash and subordinated notes of $0.2 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 is payable in one annual installment commencing on the
first anniversary of closing.
ITEM 2. PROPERTIES
Pomeroy'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.
Pomeroy also has non-cancelable operating leases for its regional offices,
expiring at various dates between 2002 and 2008. Pomeroy 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. Pomeroy does not own any real property.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions arising in the normal course of business have been brought
against Pomeroy. Management believes these matters will not have a material
adverse effect on Pomeroy's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
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.
2001 2002
-------------- --------------
High Low High Low
------ ------ ------ ------
First Quarter $18.25 $11.00 $17.30 $12.70
Second Quarter $16.60 $11.10 $17.35 $13.23
Third Quarter $16.60 $ 9.73 $14.23 $ 9.27
Fourth Quarter $16.50 $10.90 $13.20 $ 9.56
As of February 28, 2003, there were approximately 353 holders of record of
Pomeroy's common stock.
Dividends
- ---------
Pomeroy has not paid any cash dividends since its organization and the
completion of its initial public offering. Pomeroy has no plans to pay cash
dividends in the foreseeable future, and the payment of such dividends are
restricted under Pomeroy's current borrowing agreement.
15
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
For the Fiscal Years Ended January 5,
-------------------------------------------------------
1999 (1,2) 2000(3) 2001(4) 2002(5) 2003(6)
----------- --------- --------- --------- ---------
Consolidated Statement of Income Data:
Net sales and revenues. . . . . . . . . . . $ 627,928 $756,757 $925,138 $809,214 $702,800
Cost of sales and service .. . . . . . . . 543,764 652,503 801,788 705,937 615,135
----------- --------- --------- --------- ---------
Gross profit. . . . . . . . . . . . . . . . 84,164 104,254 123,350 103,277 87,665
Operating expenses:
Selling, general and administrative . . . . 43,689 52,216 61,135 61,640 55,369
Depreciation and amortization . . . . . . . 5,377 6,527 9,516 10,362 5,719
Litigation settlement and related costs (7) - - - 1,000 300
Provision for vendor receivables and
restructuring charge (8) . . . . . . . . . - - - 15,934 4,048
----------- --------- --------- --------- ---------
Total operating expenses. . . . . . . . . . 49,066 58,743 70,651 88,936 65,436
Income from operations. . . . . . . . . . . 35,098 45,511 52,699 14,341 22,229
Other expense (income):
Interest expense. . . . . . . . . . . . . . 2,670 3,858 4,352 1,768 541
Miscellaneous . . . . . . . . . . . . . . . (140) (93) (547) (229) (63)
----------- --------- --------- --------- ---------
Total other expense . . . . . . . . . . . . 2,530 3,765 3,805 1,539 478
Income before income taxes. . . . . . . . . 32,568 41,746 48,894 12,802 21,751
Income tax expense (9). . . . . . . . . . . 12,409 16,864 19,406 4,993 6,742
----------- --------- --------- --------- ---------
Net income. . . . . . . . . . . . . . . . . $ 20,159 $ 24,882 $ 29,488 $ 7,809 $ 15,009
=========== ========= ========= ========= =========
Earnings per common share (basic) . . . . . $ 1.76 $ 2.12 $ 2.42 $ 0.62 $ 1.18
Earnings per common share (diluted) . . . . $ 1.72 $ 2.11 $ 2.38 $ 0.61 $ 1.18
Consolidated Balance Sheet Data:
Working capital . . . . . . . . . . . . . . $ 71,364 $ 61,126 $ 89,449 $ 99,838 $123,334
Long-term debt, net of current maturities . 8,231 6,971 19,572 10,213 -
Equity. . . . . . . . . . . . . . . . . . . 112,989 140,221 181,705 190,762 203,674
Total assets. . . . . . . . . . . . . . . . 254,226 333,141 361,268 341,718 248,496
1) During fiscal 1998, Pomeroy acquired the assets of Commercial Business
Systems, Inc., Access Technologies, Inc. and all of the outstanding stock
of Global Combined Technologies, Inc.
2) During fiscal 1998, Pomeroy's results include an after tax charge of $681
($0.06 per diluted share) related to the uncollectibility of certain vendor
warranty claims.
3) During fiscal 1999, Pomeroy acquired certain assets of Systems Atlanta
Commercial Systems, Inc. and all the outstanding stock of Acme Data
Systems, Inc.
16
4) During fiscal 2000, Pomeroy 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 13 of Notes to Consolidated Financial
Statements.
5) During fiscal 2001, Pomeroy acquired certain assets of Osage Systems Group,
Inc., Ballantyne Consulting Group, Inc. and System 5 Technologies, Inc. See
Note 13 of Notes to Consolidated Financial Statements.
6) During fiscal 2002, Pomeroy acquired certain assets of Verity Solutions,
LLC. See Note 13 of Notes to Consolidated Financial Statements.
7) During fiscal 2001, Pomeroy'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. During fiscal 2002, Pomeroy's results include
an after tax charge of $186 ($0.01 per diluted share) related to the
litigation settlement of $300.
8) During fiscal 2001, Pomeroy'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.
During fiscal 2002, Pomeroy's results include an after tax charge of $2.5
million ($0.20 per diluted share) related to the Company recording an
increase in reserves and a restructuring charge totaling $4.0 million.
9) During fiscal 2002, Pomeroy's results include an income tax benefit due to
a tax accounting change of $1.6 million.
QUARTERLY RESULTS OF OPERATIONS - UNAUDITED (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 2002
-----------------------------------------------
First Second Third Fourth
Quarter Quarter(1) Quarter(2) Quarter(3)
-------- ----------- ----------- -----------
Net sales and revenues $186,348 $ 196,580 $ 170,921 $ 148,951
Gross Profit $ 23,820 $ 24,102 $ 21,452 $ 18,291
Net income (loss) $ 4,663 $ 4,627 $ 5,094 $ 625
Earnings (loss) per common share:
Basic $ 0.37 $ 0.36 $ 0.40 $ 0.05
Diluted $ 0.37 $ 0.36 $ 0.40 $ 0.05
Fiscal 2001
--------------------------------------------------
First Second Third Fourth
Quarter(4) Quarter(5) Quarter(6) Quarter(7)
----------- ----------- ----------- -----------
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)
1. During the second quarter of fiscal 2002, Pomeroy's results include an
after tax charge of $297 ($.02 per diluted share) related to the Company
recording a restructuring charge totaling $487. During second quarter of
fiscal 2002, Pomeroy acquired certain assets of Verity Solutions, LLC. See
Note 13 of Notes to Consolidated Financial Statements.
17
2. During the third quarter of fiscal 2002, Pomeroy's results include an after
tax charge of $327 and tax benefit of $1.6 million ($.10 per diluted share)
related to the Company recording a restructuring charge of $227, litigation
settlement of $300 and an income tax benefit due to a tax accounting change
of $1.6 million.
3. During the fourth quarter of fiscal 2002, Pomeroy's results include an
after tax charge of $2.1 million ($0.16 per diluted share) related to the
Company recording an increase in reserves totaling $3.3 million.
4. During the first quarter of fiscal 2001, Pomeroy's results include an after
tax charge of $610 ($0.05 per diluted share) related to the litigation
settlement with FTA Enterprises, Inc.
5. During the second quarter of fiscal 2001, Pomeroy acquired certain assets
of Osage Systems Group, Inc. See Note 13 of Notes to Consolidated Financial
Statements.
6. During the third quarter of fiscal 2001, Pomeroy acquired certain assets of
Ballantyne Consulting Group, Inc. and System 5 Technologies, Inc. See Note
13 of Notes to Consolidated Financial Statements.
7. During the fourth quarter of fiscal 2001, Pomeroy's results include an
after tax charge of $9.7 million ($0.77 per diluted share) related to
Pomeroy recording an increase in reserves and a restructuring charge of
$15.9 million.
18
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's results of operation and
financial position should be read in conjunction with its 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.
CRITICAL ACCOUNTING POLICIES
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. Management believes that it consistently applies judgments
and estimates and such consistent application results in financial statements
and accompanying notes that fairly represent all periods presented. However,
any errors in these judgments and estimates may have a material impact on the
Company's statement of operations and financial conditions. Critical accounting
policies, as defined by the Securities and Exchange Commission, are those that
are most important to the portrayal of the Company's financial condition and
results of operations and require management's most difficult and subjective
judgments and estimates of matters that are inherently uncertain. The Company
considers its critical accounting policies to be (1) vendor and trade receivable
allowances and (2) valuation of long-lived assets.
Vendor and trade receivable allowances
Pomeroy maintains allowances for doubtful accounts on both vendor and trade
receivables for estimated losses resulting from the inability of its customers
or vendors to make required payments. The determination of a proper allowance
for vendor receivables is based on an ongoing analysis as to the recoverability
of the Company's vendor receivable portfolio based primarily on account aging.
The determination of a proper allowance for trade receivables is based on an
ongoing analysis as to the credit quality and recoverability of the Company's
trade receivable portfolio. Factors considered are account aging, historical
bad debt experience, current economic trends and others. The analysis is
performed on both vendor and trade receivable portfolios. A separate allowance
account is maintained based on each analysis.
Valuation of long-lived assets
Long-lived assets, including property and equipment, goodwill and other
intangible assets are reviewed for impairment when events or changes in facts
and circumstances indicate that their carrying amount may not be recoverable.
Events or changes in facts and circumstances that Pomeroy considers as
impairment indicators include the following:
- Significant underperformance of the Company's operating results
relative to expected operating results;
- Net book value compared to its market capitalization;
- Significant adverse economic and industry trends;
- Significant decrease in the market value of the asset;
- Significant changes to the asset since the Company acquired it;
19
- And the extent that the Company may use an asset or changes in the
manner that the Company may use it.
When the Company determines that one or more impairment indicators are present
for its long-lived assets, excluding goodwill, Pomeroy compares the carrying
amount of the asset to the new future undiscounted cash flows that the asset is
expected to generate. If the carrying amount of the asset is greater than the
net future undiscounted cash flows that the asset is expected to generate,
Pomeroy would recognize an impairment loss. The impairment loss would be the
excess of the carrying amount of the asset over its fair value.
When the Company determines that one or more impairment indicators are present
for its goodwill, Pomeroy compares its reporting unit's carrying value to its
fair value. The Company has two reporting units for goodwill testing which are
a products reporting unit and a services reporting unit. As of January 5, 2003,
the Company had not recorded an impairment loss on its transitional testing of
goodwill in connection with SFAS 142. The Company has adopted January 6 as the
valuation date for the annual testing. Currently, the Company has engaged a
third-party valuation specialist to perform the annual goodwill impairment
testing as of January 6, 2003. An impairment loss, if any, would be reported in
the Company's future results of operations.
FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001
Total Net Sales and Revenues. Total net sales and revenues decreased $106.4
million, or 13.1%, to $702.8 million in fiscal 2002 from $809.2 million in
fiscal 2001. This decrease was a result primarily of a continued industry-wide
slowdown in technology spending due to the general weakness in the U.S. economy,
the decrease in leasing revenue due to the sale of Technology Integration
Financial Services, Inc. ("TIFS"). Further, the Company sometimes elects to
take a commission from the manufacturers for arranging sales transactions where
it judges the gross profit to be inadequate for its participation in the sales
transaction. In fiscal year 2002, Pomeroy elected to take such commissions on
transactions whose sales would otherwise have been $16.0 million.
Products and leasing sales decreased $97.2 million, or 14.5%, to $571.5 million
in fiscal 2002 from $668.7 million in fiscal 2001. Service revenues decreased
$9.2 million, or 6.5%, to $131.3 million in fiscal 2002 from $140.5 million in
fiscal 2001. These net decreases were primarily a result of an industry-wide
slowdown in technology spending due to the general weakness in the U.S. economy
and sale of TIFS.
Gross Profit. Gross profit margin was 12.5% in fiscal 2002 compared to 12.8% in
fiscal 2001. This decrease in gross margin resulted primarily from the
decrease in hardware and leasing gross margins due to the sale of TIFS offset by
the increase in service gross margin. The decrease in hardware gross margin is
primarily associated with the Company's strategic decision to aggressively price
its hardware business in order to maintain and capture market share and to the
weakened economic conditions of the IT industry. The increase in service gross
margin is primarily associated with the improved utilization of service
personnel. Service gross margins increased to 46.1% of total gross margin in
fiscal 2002 from 39.3% in fiscal 2001. On a forward looking basis, the Company
expects to continue its aggressive product pricing in order to gain existing
market share which will have a continued impact on product gross margin.
Additionally, the Company expects to continue increasing the breadth and depth
of its service offerings, which it expects, will have a continued impact on
service gross margin. Factors that may have an impact on gross margin in the
future include the continued changes in hardware margins, change in personnel
utilization rates, the mix of products sold and services provided, a change in
unit prices, the percentage of equipment or service sales with lower-margin
customers and the ratio of service revenues to total net sales and revenues.
Operating Expenses. Selling, general and administrative expenses (including
rent expense and provision for doubtful accounts) expressed as a percentage of
total net sales and revenues increased to 7.9% in fiscal 2002 from 7.6% for
fiscal 2001. This increase is primarily the result of lower than expected total
net sales and revenues and the increase in its allowance for doubtful accounts
offset by the reduction in the selling and administrative payroll costs. Total
operating expenses expressed as a percentage of total net sales and revenues
decreased to 9.3% in fiscal 2002 from 11.0% in fiscal 2001. This decrease is
due to the elimination of amortization expense associated with the Company's
goodwill, the reduction in the provision for vendor receivables, and the
reduction in payroll costs offset by the lower than expected total net sales and
revenues. On a forward-looking basis, the Company expects to continue
monitoring its selling, general and administrative expenses for strict cost
controls.
Litigation Settlement. Litigation settlement expense decreased $.7 million or
70% to $.3 million in fiscal 2002 from $1 million in fiscal 2001.
20
Increase in Allowances. Vendor allowances decreased $11.7 million or 78% to $3.3
million in fiscal 2002 from $15 million in fiscal 2001. Vendor allowances
expressed as a percentage of total net sales and revenues decreased to .5% in
fiscal 2002 from 1.9% for fiscal 2001. The vendor allowances are specifically
related to the collectibility of vendor receivables. The determination of an
appropriate allowance was based on the deterioration of the aging of the vendor
receivables, the expected resolution of the disputed vendor rebate claims and
the general posture of the OEM's regarding resolution.
Restructuring Charge. Restructuring expenses decreased $.2 million or 22.2% to
$.7 million in fiscal 2002 from $.9 million in fiscal 2001. Restructuring
expenses expressed as a percentage of total net sales and revenues remained at
0.1% for fiscal 2002 and 2001.
During fiscal 2002, the Company approved a plan to consolidate and relocate
operations in various geographical locations. The plan resulted in a pre-tax
restructuring charge of $714 thousand ($493 thousand after tax). The
restructuring costs consisted of $484 thousand in equipment and leasehold
improvement dispositions, $126 thousand in involuntary employee severance costs,
and $104 thousand in lease terminations. Under the plan, the Company eliminated
approximately 40 employees.
The execution of the plan began and was completed during fiscal 2002. As of
January 5, 2003, the Company had $41 thousand in accrued and unpaid
restructuring costs. The Company expects to pay substantially all of the
remaining accrued and unpaid costs by the end of fiscal 2003.
Income from Operations. Income from operations increased $7.9 million, or
55.2%, to $22.2 million in fiscal 2002 from $14.3 million in fiscal 2001. The
Company's operating margin increased to 3.7% in fiscal 2002 from 1.8% in fiscal
2001. This increase is primarily due to the decrease in operating expenses and
offset by the decrease in gross margin and the lower than expected total net
sales and revenues.
Interest Expense. Interest expense decreased $1.3 million, or 69.4%, to $0.5
million in fiscal 2002 from $1.8 million in fiscal 2001. This decrease was due
to reduced borrowings as a result of improved cash flow management, the sale of
TIFS and a reduced interest rate charged by the Company's lender.
Income Taxes. The Company's effective tax rate was 31.0% in fiscal 2002
compared to 39.0% in fiscal 2001. This decrease was related to a tax benefit
of $1.6 million associated with an increase in the tax basis of leased assets as
a result of an accounting method change for tax purposes, lower overall state
income tax liability and the change in goodwill amortization.
Net Income. Net income increased $7.2 million, or 92.3%, to $15.0 million in
fiscal 2002 from $7.8 million in fiscal 2001. The increase was a result of the
factors described above.
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.
21
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 revenues.
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%.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $34.9 million in fiscal 2002. Cash
provided from investing activities was $15.4 million, which included $24.4
million for proceeds related to the sale of the leasing segment and $0.5 million
for proceeds on sale of fixed assets offset by $1.7 million for acquisitions
completed in fiscal 2002 and prior years and $7.8 million for capital
expenditures. Cash used in financing activities was $20.7 million which included
$6.4 million of net payments on notes payable, $12.1 million of net payments on
bank notes payable, $3.4 million for the purchase of treasury stock, and was
offset by $0.8 million from the exercise of stock options and the related tax
benefit, and $0.4 million proceeds from the employee stock purchase plan.
A significant part of the Pomeroy's inventories is financed by floor plan
arrangements with third parties. At January 5, 2003, these lines of credit
totaled $84.0 million, including $72.0 million with GE Commercial Distribution
Finance ("GECDF") and $12.0 million with IBM Credit Corporation ("ICC").
Borrowings under the GECDF 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 nominal due to subsidies
by manufacturers. Overall, the average rate on these arrangements is less than
1.0%. Pomeroy classifies amounts outstanding under the floor plan arrangements
as accounts payable.
22
Pomeroy's financing of receivables is provided through a portion of its credit
facility with GECDF. The $240.0 million credit facility has a three year term
and includes $72.0 million for inventory financing as described above, $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 which was 4.13% as of January 5, 2003. At January 5, 2003, the
Company did not have a balance outstanding under this facility. The credit
facility is collateralized by substantially all of the assets of Pomeroy, except
those assets that collateralize certain other financing arrangements. Under the
terms of the credit facility, Pomeroy is subject to various financial covenants
and restricted from paying dividends. Currently, Pomeroy is not in violation of
any financial covenants.
On April 16, 2002, the Company closed the sale of substantially all of the
assets of its wholly owned leasing subsidiary- Technology Integration Financial
Services, Inc. ("TIFS"). ILC paid the Company book value for the net assets of
TIFS as of April 16, 2002, which was approximately $4.8 million. In addition,
ILC assumed and liquidated at the time of the closing approximately $20.0
million of the Company's debt related to leased assets owed by TIFS as of
April 16, 2002.
Pomeroy believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy Pomeroy's capital
requirements for the next twelve months. Historically, Pomeroy has financed
acquisitions using a combination of cash, earn outs, shares of its Common Stock
and seller financing. Pomeroy anticipates that future acquisitions will be
financed in a similar manner.
Aggregated Information about Contractual Obligations and Other Commitments
MORE THAN
TOTAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 5 YEARS
---------------------------------------------------------------
Acquisition note $ 541 $ 541 $ - $ - $ - $ - $ -
Operating leases 17,878 4,856 3,298 2,853 1,786 1,513 3,572
Bank notes payable - - - - - - -
Long term notes payable - - - - - - -
---------------------------------------------------------------
Total contractual cash obligations $18,419 $ 5,397 $ 3,298 $ 2,853 $ 1,786 $ 1,513 $ 3,572
===============================================================
On January 29, 2003, the Company's Board of Directors authorized a program to
repurchase up to an additional 100,000 shares of the Company's outstanding
common stock, which represents less than 1.0% of its outstanding common stock,
in open market purchases made from time to time at the discretion of the
Company's management. The time and extent of the repurchases will depend on
market conditions. The acquired shares will be held in treasury or cancelled.
The Company anticipates financing the stock redemption program out of working
capital and the redemption program will be effectuated over the next 12 months.
On February 21, 2003, the Company announced the completion of the acquisition
of Micrologic Business Systems of K.C., INC. ("Micrologic"), a Kansas City based
IT solutions and professional services provider. For the twelve months ended
December 31, 2002, Micrologic has recorded revenues of $32.0 million. Their
primary services include systems network integration, project management, and
telephony integration.
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
23
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 2003
Annual Meeting of shareholders, which will be filed, with the Commission prior
to May 5, 2003.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer evaluated the
Company's disclosure controls and procedures within the 90-day period prior to
the date of this report pursuant to Rule 13a-14(c ) and 15d-14(c ) of the
Securities Exchange Act of 1934. Their evaluation concluded that the disclosure
controls and procedures are effective in connection with the filing of this
annual report on Form 10-K for the year ended January 5, 2003.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any significant deficiencies or material
weaknesses of internal controls that would require corrective action.
24
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
2002 Form
10-K Page
-----------
1. Financial Statements:
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets,
January 5, 2002 and January 5, 2003 F-2 to F-3
For each of the three fiscal years in
the period ended January 5, 2003:
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-23
2. Financial Statement Schedules:
None
25
==========================================================================================================
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(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 Incorporation, Exhibit 3(i)(a)(2) of
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-
Resources, Inc. February 1998 Q filed Aug. 11, 2000
3(i)(a)4 Certificate of Amendment to Certificate of Incorporation, Exhibit 3(i)(a)(4) of
dated August 2000 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
4 Rights Agreement between the Company and The Fifth Exhibit 4 of
Third Bank, as Rights Agent dated as of February Company's Form 8-K
23,1998 filed February 23,
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-
the Company dated April 2, 1992 K filed 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-
dated July 7, 1993 K filed 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-
Corporation and the Company dated March 27, K filed 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-
the Company dated July 7, 1993 K filed April 7, 1994
==========================================================================================================
26
==========================================================================================================
(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-
Commercial Finance Corporation and the Company Q filed 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
Feaster, Carolyn Feaster, Victoria Feaster, trustee dated 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 and TCSS dated March 14, 1996 Company's 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, dated Company's Form S-1
September 3, 1991 filed Feb. 14. 1992
(e)(2) Schedule of Substantially Exhibit 10(i)(e)(2) of
Identical IBM Agreements for Authorized Dealers Company's Form S-1
And Industry Remarketers filed Feb. 14, 1992
(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-
Resources, Inc., Pomeroy Select Integration Solutions, Q filed
Inc., DataNet, Inc., DataNet Technical Services, LLC, November 10, 2000
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)
2001 by, between and among Pomeroy Computer of Company's Form
Resources, Inc., Pomeroy Select Integration Solutions, 10Q filed August 17,
Inc., Osage Systems Group, Inc., Osage Computer 2001
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)
dated February 28, 2001 by, between and among of Company's Form
Pomeroy Computer Resources, Inc., Pomeroy Select 10Q filed August 17,
Integration Solutions, Inc., Osage Systems Group, 2001
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.
==========================================================================================================
27
==========================================================================================================
(mm)(3) The Second Amendment to Asset Purchase Exhibit 10(l)(mm)(3)
Agreement dated April 6, 2001 by, between and of Company's Form
among Pomeroy Computer Resources, Inc., Pomeroy 10Q filed August 17,
Select Integration Solutions, Inc., Osage Systems 2001
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)
by, between, and among Deutsche Financial Services of Company's Form
Corporation, Firstar Bank, National Association, 10Q filed August 17,
Deutsche Financial Services Corporation and Firstar 2001
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., TIFS Advisory
Services, Inc., TheLinc, LLC, and Val Tech Computer
Systems, Inc. as borrowers.
(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)
among Pomeroy Select Integration Solutions, Inc., and of Company's Form
Ballantyne Consulting Group, Inc., Mark DeMeo, Joe 10Q filed November
Schmidt, Scott Schneider and Date Tweedy, dated 13, 2001
September 21, 2001
(mm)(8) The Asset Purchase Agreement by, between and Exhibit 10(l)(mm)(8)
among Pomeroy Computer Resources, Inc., Pomeroy of Company's Form
Select Integration Solutions, Inc., System 5 10Q filed November
Technologies, Inc., Dale Tweedy, Jill Tweedy and Phil 13, 2001
Tetreault, dated September 21, 2001
(mm)(9) Second Amendment to Credit Facilities and Waiver of Exhibit 10(I)(mm)(9)
Defaults of Company's Form
10K filed April 5, 2002
(mm)(10) Asset purchase agreement by, between and among Exhibit 10(I)(mm)(10)
Pomeroy Select Integration Solutions, Inc. and Verity of Company's Form
Solutions, LLC and John R. Blackburn, dated August 10Q filed May 20,
30, 2002 2002
(mm)(11) Covenant not to compete agreement between John R. Exhibit 10(I)(mm)(11)
Blackburn and Pomeroy Select Integration Solutions, of the Company's
Inc. Form 10Q filed May
20, 2002
==========================================================================================================
28
==========================================================================================================
(mm)(12) Third amendment and consent under credit facilities E 1 - E 8
agreement
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-
1993 K filed 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-
October 14, 1993 K filed 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-
Datago agreement by David B. Pomeroy and his K filed 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-
effective January 6, 1995 Q filed 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-
effective January 6, 1995 Q filed 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-
Trustee; and David B. Pomeroy dated June 28, Q filed November
1995 17,1995
(a)(8) Fourth Amendment to Employment Agreement Exhibit 10(iii)(a)(8) of
between the Company and David B. Pomeroy Company's Form
dated December 20, 1995, effective January 6, 10-Q filed May 17,
1995 1996
(a)(9) Fifth Amendment to Employment Agreement Exhibit 10(iii)(a)(9) of
between the Company and David B. Pomeroy Company's Form
effective January 6, 1996 10-Q filed May 17,
1996
(a)(10) Sixth Amendment to Employment Agreement Exhibit 10.10 of
between the Company and David B. Pomeroy Company's Form S-
effective January 6, 1997 3 filed January 3,
1997
(a)(11) Award Agreement between the Company and Exhibit 10.11 of
David B. Pomeroy effective January 6, 1997 Company's Form S-
3 filed January 3,
1997
(a)(12) Registration Rights Agreement between the Exhibit 10.12 of
Company and David B. Pomeroy effective January Company's Form S-
6, 1997 3 filed January 3,
1997
(a)(13) Seventh Amendment to Employment Agreement Exhibit 10)(iii)(a)(13)
between the Company and David B. Pomeroy of Company's Form
effective January 6, 1998 10-Q filed May 6,
1998
==========================================================================================================
29
==========================================================================================================
(a)(14) Collateral Assignment Split Dollar Agreement Exhibit 10)(iii)(a)(14)
between the Company, James H. Smith as Trustee, of Company's Form
and David B. Pomeroy dated January 6, 1998 10-Q filed May 6,
1998
(a)(15) Eight Amendment to Employment Agreement Exhibit 10(iii)(a)(15)
between the Company and David B. Pomeroy of the Company's
effective January 6, 1999 Form 10K filed
March 31, 2000
(a)(16) Ninth Amendment to Employment Agreement Exhibit 10(iii)(a)(16)
between the Company and David B. Pomeroy of the Company's
effective January 6, 2000 Form 10K filed
March 31, 2000
(a)(17) Tenth Amendment to Employment Agreement Exhibit 10(iii)(a)(17)
between the Company and David B. Pomeroy of the Company's
effective January 6, 2001 Form 10K filed April
5, 2001
(a) (18) Eleventh Amendment to Employment Agreement Exhibit 10(a)(18) of
between the Company and David B. Pomeroy the Company's Form
effective January 6, 2002 10K filed April 5,
2002
( a) (19) Twelfth Amendment to Employment Agreement E9-E12
Between the Company and David B. Pomeroy
Effective January 6, 2003
(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 2002 Non-Qualified and Incentive Exhibit A of the
Stock Option Plan, dated March 27, 2002 Company's
Definitive Schedule
14A filed May 3,
2002
(g) The Company's 2002 Outside Directors Exhibit B of the
Stock Option Plan, dated March 27, 2002 Company's
Definitive Schedule
14A filed May 3,
2002
(j)(1) Employment Agreement between the Company Exhibit 10.3 of
and Stephen E. Pomeroy dated November 13, Company's Form
1996 S-3 filed January 3,
1997
(j)(2) Incentive Deferred Compensation Agreement Exhibit 10.4 of
between the Company and Stephen E. Pomeroy Company's Form
dated November 13, 1996 S-3 filed January 3,
1997
(j)(3) Employment Agreement between Pomeroy Select Exhibit 10(iii)(j)(3)
Integration Solutions, Inc. and Stephen E. Pomeroy, of Company's Form
dated January 6, 1999 10-K filed April 5,
1999
==========================================================================================================
30
==========================================================================================================
(j)(4) First Amendment to Employment Agreement between Exhibit 10 (iii)(j) (4)
Pomeroy Select Integration Solutions, Inc. and of Company's Form
Stephen E. Pomeroy, dated September 1, 1999 10-K filed March
31, 2000.
(j)(5) Second Amendment to Employment Agreement Exhibit 10(iii)(j)(5)
between Pomeroy Computer Resources, Inc., of Company's Form
Pomeroy Select Integration Solutions, Inc. and 10-K filed April 5,
Stephen E. Pomeroy, dated January 6, 2001 2001.
(j)(6) Third Amendment to Employment Agreement between Exhibit 10(iii) (j)(6)
Pomeroy Computer Resources, Inc., Pomeroy Select of the Company's
Integration Solutions, Inc. and Stephen E. Pomeroy, Form 10K filed
dated January 6, 2002 April 5, 2002
(j)(7) Fourth Amendment to Employment Agreement E13-E17
between Pomeroy Computer Resources, Inc., and
Stephen E. Pomeroy, dated January 6, 2003
(k) The Company's 1998 Employee Stock Purchase Plan, Exhibit 4.3 of
Effective April 1, 1999 Company's Form
S-8 filed March 23,
1999
(m) Employment Agreement by and between Pomeroy Exhibit 10(iii)(m) of
Computer Resources, Inc. and Michael E. Rohrkemper the Company's
Form 10K filed April
5, 2002
(m)(1) First Amendment to Employment Agreement by and Exhibit 10(iii)(m)(1)
between Pomeroy Computer Resources, Inc. and of the Company's
Michael E. Rohrkemper, dated March 1, 2002 Form 10Q filed May
20, 2002
(m)(2) Second Amendment to Employment Agreement by E18-E20
and between Pomeroy Computer Resources, Inc. and
Michael E. Rohrkemper, dated March 5, 2003
(m)(3) Addendum to Second Amendment to Employment E21
Agreement by and between Pomeroy Computer
Resources, Inc. and Michael E. Rohrkemper, dated
March 11, 2003
11 Computation of Per Share Earnings E-22
21 Subsidiaries of the Company E-23
==========================================================================================================
(b) Reports on Form 8-K:
On January 6, 2003, the Company reported the resignation of Mr. Kenneth R.
Waters from the Board of Directors and Compensation Committee for medical
and other personal reasons.
31
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, II
-----------------------------------------------
David B. Pomeroy, II
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: March 31, 2003
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, II March 31, 2003
- -----------------------------------
David B. Pomeroy, II, Director
By: /s/ Stephen E. Pomeroy March 31, 2003
- -----------------------------------
Stephen E. Pomeroy, Director
By: /s/ James H. Smith III March 31, 2003
- -----------------------------------
James H. Smith III, Director
By: /s/ Michael E. Rohrkemper March 31, 2003
- -----------------------------------
Michael E. Rohrkemper, Director
By:
- -----------------------------------
Debra E. Tibey, Director
By:
- -----------------------------------
Edward E. Faber, Director
By:
- -----------------------------------
William H. Lomicka, Director
By: /s/ Vincent D. Rinaldi March 31, 2003
- -----------------------------------
Vincent D. Rinaldi, Director
32
CERTIFICATIONS
I, David B. Pomeroy, II, certify that:
1. I have reviewed this annual report on Form 10-K of Pomeroy Computer
Resources, Inc.;
2. Based on my knowledge, the financial statements, and other financial
information included in this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process summarize and report financial data have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ David B. Pomeroy, II
David B. Pomeroy, II
Chief Executive Officer
33
CERTIFICATIONS
I, Michael E. Rohrkemper, certify that:
7. I have reviewed this annual report on Form 10-K of Pomeroy Computer
Resources, Inc.;
8. Based on my knowledge, the financial statements, and other financial
information included in this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this annual report;
9. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
10. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
annual report (the "Evaluation Date"); and
f) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
11. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process summarize and report financial data have identified
for the registrant's auditors any material weaknesses in internal
controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
12. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Michael E. Rohrkemper
Michael E. Rohrkemper
Chief Financial Officer
34
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, 2002 and 2003, and the related consolidated
statements of income, equity, and cash flows for each of the three years in the
period ended January 5, 2003. 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, 2002 and 2003, and the consolidated results of
its operations and its consolidated cash flows for each of the three years in
the period ended January 5, 2003 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 6 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142) on January 6, 2002.
Grant Thornton LLP
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 7, 2003
F-1
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
2002 2003
----------- -----------
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,875 $ 32,505
Accounts receivable:
Trade, less allowance of $627 and $1,553 at January 5, 2002 and
2003, respectively . . . . . . . . . . . . . . . . . . . . . . 142,356 95,859
Vendor receivables, less allowance of $16,112 and $3,334
at January 5, 2002 and 2003, respectively . . . . . . . . . . 24,219 10,297
Net investment in leases. . . . . . . . . . . . . . . . . . . . . 35,809 1,966
Other.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,413 2,775
----------- -----------
Total receivables . . . . . . . . . . . . . . . . . . . . . 207,797 110,897
----------- -----------
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,876 11,238
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,468 10,198
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . . . 240,016 164,838
----------- -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . 29,920 28,741
Leasehold Improvements. . . . . . . . . . . . . . . . . . . . . . 5,700 5,951
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,620 34,692
----------- -----------
Less accumulated depreciation . . . . . . . . . . . . . . . . . . 17,070 15,393
----------- -----------
Net equipment and leasehold improvements. . . . . . . . . . 18,550 19,299
----------- -----------
Net investment in leases . . . . . . . . . . . . . . . . . . . . . . 22,438 1,889
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,454 60,635
Intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . 1,060 540
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200 1,295
----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 341,718 $ 248,496
=========== ===========
See notes to consolidated financial statements
F-2
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
2002 2003
----------- -----------
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable . . . . . . . . . . . . . . . $ 27,190 $ 541
----------- -----------
Accounts payable:
Floor plan financing. . . . . . . . . . . . . . . . . . . . 40,650 7,533
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,797 23,632
----------- -----------
Total accounts payable . . . . . . . . . . . . . . . . . 86,447 31,165
Bank notes payable . . . . . . . . . . . . . . . . . . . . . . 11,882 -
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 2,751 1,490
Accrued liabilities:
Employee compensation and benefits. . . . . . . . . . . . . 3,721 3,336
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . 3,854 322
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . 35 20
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 4,298 4,630
----------- -----------
Total current liabilities . . . . . . . . . . . . . . 140,178 41,504
----------- -----------
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 10,213 -
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . 565 3,318
Commitments and contingencies . . . . . . . . . . . . . . . .
Equity:
Preferred stock, $.01 par value; authorized 2,000 shares,
(no shares issued or outstanding). . . . . . . . . . . . - -
Common stock, $.01 par value; authorized 20,000 shares,
(12,759 and 12,869 shares issued at January 5, 2002 and
2003, respectively). . . . . . . . . . . . . . . . . . . 128 129
Paid in capital . . . . . . . . . . . . . . . . . . . . . . 80,487 81,740
Retained earnings . . . . . . . . . . . . . . . . . . . . . 110,979 125,988
----------- -----------
191,594 207,857
Less treasury stock, at cost (75 and 355 shares
at January 5, 2002 and 2003, respectively) . . . . . . . 832 4,183
----------- -----------
Total equity. . . . . . . . . . . . . . . . . . . . . 190,762 203,674
Total liabilities and equity. . . . . . . . . . . . . $ 341,718 $ 248,496
=========== ===========
See notes to consolidated financial statements
F-3
POMEROY COMPUTER RESOURCES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Fiscal Years Ended January 5,
-------------------------------
2001 2002 2003
--------- --------- ---------
Net sales and revenues:
Sales - equipment, supplies and leasing $785,694 $668,748 $571,507
Service . . . . . . . . . . . . . . . . 139,444 140,466 131,293
--------- --------- ---------
Total net sales and revenues. . . 925,138 809,214 702,800
--------- --------- ---------
Cost of sales and service:
Equipment, supplies and leasing . . . . 718,064 606,078 524,237
Service . . . . . . . . . . . . . . . . 83,724 99,859 90,898
--------- --------- ---------
Total cost of sales and service . 801,788 705,937 615,135
--------- --------- ---------
Gross profit. . . . . . . . . . . . . . 123,350 103,277 87,665
--------- --------- ---------
Operating expenses:
Selling, general and administrative . . 57,476 57,492 51,157
Rent. . . . . . . . . . . . . . . . . . 3,361 3,631 3,311
Depreciation. . . . . . . . . . . . . . 5,149 4,805 4,596
Amortization. . . . . . . . . . . . . . 4,367 5,557 1,124
Provision for doubtful accounts . . . . 298 517 900
Litigation settlement . . . . . . . . . - 1,000 300
Provision for vendor receivables
and restructuring charge . . . . . . . - 15,934 4,048
--------- --------- ---------
Total operating expenses. . . . . 70,651 88,936 65,436
--------- --------- ---------
Income from operations . . . . . . . . . . 52,699 14,341 22,229
--------- --------- ---------
Other expense (income):
Interest expense. . . . . . . . . . . . 4,352 1,768 541
Miscellaneous . . . . . . . . . . . . . (547) (229) (63)
--------- --------- ---------
Net other expense . . . . . . . . 3,805 1,539 478
--------- --------- ---------
Income before income tax. . . . . . . . 48,894 12,802 21,751
Income tax expense. . . . . . . . . . . 19,406 4,993 6,742
--------- --------- ---------
Net income. . . . . . . . . . . . . . . $ 29,488 $ 7,809 $ 15,009
========= ========= =========
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . 12,201 12,609 12,694
========= ========= =========
Diluted . . . . . . . . . . . . . . . . 12,411 12,702 12,755
========= ========= =========
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . $ 2.42 $ 0.62 $ 1.18
========= ========= =========
Diluted . . . . . . . . . . . . . . . . $ 2.38 $ 0.61 $ 1.18
========= ========= =========
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: 2001 2002 2003
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 29,488 $ 7,809 $ 15,009
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation . . . . . . . . . . . . . . . . 5,977 6,970 5,246
Amortization . . . . . . . . . . . . . . . . 4,367 5,557 1,124
Deferred income taxes. . . . . . . . . . . . 732 (4,213) 7,994
Loss(gain) on sale of fixed assets . . . . . (414) 756 1,008
Change in receivables allowances . . . . . . (2,142) 15,171 (12,267)
Other. . . . . . . . . . . . . . . . . . . . - 283 (283)
Changes in working capital accounts,
net of effects of acquisitions/divestitures:
Accounts receivable . . . . . . . . . . . 9,525 4,578 69,709
Inventories . . . . . . . . . . . . . . . 7,547 5,682 8,865
Prepaids. . . . . . . . . . . . . . . . . (2,126) 2,252 (10,717)
Net investment in leases. . . . . . . . . (22,643) 4,392 2,349
Floor plan financing. . . . . . . . . . . 7,265 (8,458) (33,117)
Trade payables. . . . . . . . . . . . . . (37,315) 25,356 (18,240)
Deferred revenue. . . . . . . . . . . . . 982 (4,374) (1,261)
Income tax payable. . . . . . . . . . . . (470) 3,428 (305)
Other, net. . . . . . . . . . . . . . . . (2,603) 1,311 (169)
--------- --------- ---------
Net operating activities . . . . . . . . . . (1,830) 66,500 34,945
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . (5,649) (5,251) (7,820)
Proceeds from sale of fixed assets . . . . . - - 470
Proceeds from sale of leasing segment assets - - 24,380
Acquisition of subsidiary companies, net
of cash acquired . . . . . . . . . . . . . (15,226) (7,971) (1,655)
--------- --------- ---------
Net investing activities . . . . . . . . . . (20,875) (13,222) 15,375
--------- --------- ---------
Cash Flows from Financing Activities:
Net proceeds(payments) under notes
payable . . . . . . . . . . . . . . . . . 23,633 (6,757) (6,475)
Net proceeds(payments) under bank notes
payable . . . . . . . . . . . . . . . . . (13,563) (45,991) (12,118)
Proceeds from exercise of stock options
and related tax benefit. . . . . . . . . . 11,570 1,188 813
Proceeds from employee stock
purchase plan. . . . . . . . . . . . . . . 425 570 441
Purchase of treasury stock . . . . . . . . . - (510) (3,351)
--------- --------- ---------
Net financing activities . . . . . . . . . . 22,065 (51,500) (20,690)
--------- --------- ---------
Increase (decrease) in cash . . . . . . . . . . (640) 1,778 29,630
Cash:
Beginning of period. . . . . . . . . . . . . 1,737 1,097 2,875
--------- --------- ---------
End of period. . . . . . . . . . . . . . . . $ 1,097 $ 2,875 $ 32,505
========= ========= =========
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, 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
Net income. . . . . . . . . . . . 15,009 15,009
Treasury stock purchased. . . . . (3,351) (3,351)
Stock options exercised and
related tax benefit . . . . . . . 1 812 813
40,511 common shares issued for
employee stock purchase plan 441 441
---------------------------------------------------
Balances at January 5, 2003. . . . . $ 129 $ 81,740 $ 125,988 $ (4,183) $203,674
===================================================
See notes to consolidated financial statements.
F-6
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 5, 2001, JANUARY 5, 2002, AND JANUARY 5, 2003
1. Company Description
Pomeroy Computer Resources, Inc. is a Delaware corporation organized in
February 1992. Pomeroy Computer Resources, Inc., collectively with its
subsidiaries, ("Pomeroy" or the "Company") is a premier provider of
enterprise-wide information technology ("IT") solutions that leverage its
comprehensive portfolio of professional services to create long term
relationships.
Pomeroy's mission is to offer its clients complete solutions that reduce
their clients' overall IT costs. The strategy is to be the low cost
provider of complete IT solutions that are developed, integrated and
managed for its customers. These solutions are designed to maximize
clients' financial and operational success and include product sales,
configuration, logistical deployment, integration and other professional
services. The Company's target markets include, Fortune 1000 and small and
medium business ("SMB") clients. These clients fall into government and
education, financial services, health care and other sectors. The Company's
clients are located throughout the United States with an emphasis in the
Southeast and Midwest regions. The Company grants credit to substantially
all customers in these areas.
During 2002, the Company operated in three industry segments: products,
services and leasing. See Note 14 of the Notes to Consolidated Financial
Statements for discussion of the sale of certain leasing segment assets.
See Note 20 of Notes to Consolidated Financial Statements for a
presentation of segment financial information.
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 2000, 2001 and 2002 are for the fiscal
years ended January 5, 2001, January 5, 2002 and January 5, 2003,
respectively.
Goodwill - Prior to fiscal 2002, goodwill was amortized using the
straight-line method over periods of fifteen to twenty-five years. As of
January 6, 2002, the Company adopted the new accounting pronouncement
related to goodwill (See Note 6). In lieu of amortization, the Company
tests goodwill for impairment annually or more frequently if certain
conditions exist.
Other Intangible Assets - Prior to fiscal 2002, other intangible assets
were amortized using the straight-line method over periods up to ten years.
As of January 6, 2002, the Company adopted the new accounting pronouncement
related to other intangible assets (See Note 6). The Company's other
intangible assets consist only of intangibles with definitive lives which
are amortized using the straight-line method over periods up to ten years.
Equipment and Leasehold Improvements - Equipment and leasehold improvements
are stated at cost. Depreciation on equipment is computed using the
straight-line method over estimated useful lives ranging from three to
seven years. Depreciation on leasehold improvements is computed using the
straight-line method over estimated useful lives or the term of the lease,
whichever is less, ranging from two to ten years. Depreciation expense
associated with the leasing segment'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. Expenditures related to the
acquisition or development of computer software to be utilized by the
Company are capitalized or expensed in accordance with Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The Company reviews equipment and
leasehold improvements in accordance with Statement of Financial Accounting
Standard (SFAS) 144, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" (See Note 6). 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.
F-7
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
rebate. Rebate programs involve complex sets 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. Pomeroy maintains an allowance for
doubtful accounts on vendor receivables for estimated losses resulting from
the inability of its vendors to make required payments. The determination
of a proper allowance for vendor receivables is based on an ongoing
analysis as to the recoverability of the Company's vendor receivable
portfolio based primarily on account aging. 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
anticipated funds to be received from manufacturers are offset directly
against the expense, thereby reducing selling, general and administrative
expenses and increasing net income. Advertising costs associated with these
programs are charged to expense as incurred and amounted to $410 thousand,
$97 thousand, and $24 thousand for the fiscal year 2002, 2001 and 2000,
respectively.
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 OEM reimbursement for warranty
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. Certain overhead costs are
capitalized as a component of inventory.
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. Revenue from products sold under logistical
deployment services arrangements is recognized upon completion of the
Company's contractual obligations, customer acceptance, title passing and
other conditions which may occur prior to product shipment. 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. See Recent Accounting Pronouncements later in
this note for new pronouncements affecting stock-based compensation.
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 2000, 2001
and 2002 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:
F-8
(in thousands, except per
share amounts) Fiscal 2000 Fiscal 2001 Fiscal 2002
------------ ------------ ------------
Net income - as reported $ 29,488 $ 7,809 $ 15,009
Stock-based compensation expense-net of tax 3,706 1,704 1,078
------------ ------------ ------------
Net income - pro forma $ 25,782 $ 6,105 $ 13,931
============ ============ ============
Net income per common share - as reported
Basic 2.42 0.62 1.18
Diluted 2.38 0.61 1.18
Net income per common share - pro forma
Basic 2.11 0.48 1.10
Diluted 2.08 0.48 1.09
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) ------------------------------------------------------------
2000 2001 2002
------------------- ------------------- ------------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ ----------- ------ ----------- ------ ----------
Basic EPS 12,201 $ 2.42 12,609 $ 0.62 12,694 $ 1.18
Effect of dilutive stock
options 210 (0.04) 93 (0.01) 61 -
------ ----------- ------ ----------- ------ ----------
Diluted EPS 12,411 $ 2.38 12,702 $ 0.61 12,755 $ 1.18
====== =========== ====== =========== ====== ==========
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. Pomeroy maintains allowances for doubtful accounts on both
vendor and trade receivables for estimated losses resulting from the
inability of its customers or vendors to make required payments. The
determination of a proper allowance for vendor receivables is based on an
ongoing analysis as to the recoverability of the Company's vendor
receivable portfolio based primarily on account aging. The determination of
a proper allowance for trade receivables is based on an ongoing analysis as
to the credit quality and recoverability of the Company's trade receivable
portfolio. Factors considered are account aging, historical bad debt
experience, current economic trends and others. The analysis is performed
on both vendor and trade receivable portfolios. A separate allowance
account is maintained based on each analysis. Actual results could differ
from those estimates.
Reclassifications - Certain reclassifications of prior years' amounts have
been made to conform to the current presentation.
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.
F-9
Recent Accounting Pronouncements- In June 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before an actual liability has been incurred. Adoption of the
Statement is required with disposal activities initiated after December 31,
2002. The Company believes that the adoption of this Statement will not
have an effect on the Company's financial position or results of operation
as the Company has not presently identified any activities to be exited or
disposed.
In December 2002, the FASB issued Statement of Financial Accounting
Standards Board SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." SFAS No. 148 amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based on method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The transition guidance and annual
disclosure provisions of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF No. 00-21 addresses certain aspects of the accounting
by a vendor for arrangements under which the vendor will perform multiple
revenue generating activities. EITF No. 00-21 is effective for fiscal years
beginning after June 15, 2003. The Company does not expect the adoption of
EITF No. 00-21 to have a material impact on its financial position and
results of operations.
In November 2002, FASB Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), was issued. FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement
provisions of the interpretation, to record a liability for the fair value
of the obligation undertaken in issuing the guarantee. The Company
previously did not record a liability when guaranteeing obligations unless
it became probable that the Company would have to perform under the
guarantee. FIN 45 applies prospectively to guarantees the Company issues or
modifies subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after December
15, 2002. The Company has historically issued guarantees only on a limited
basis and does not anticipate FIN 45 will have a material effect on its
fiscal 2003 financial statements.
In November 2002, the EITF reached a consensus opinion on EITF 02-16,
"Accounting by a Customer (including a reseller) for Certain Consideration
Received from a Vendor." EITF 02-16 requires that cash payments, credits,
or equity instruments received as consideration by a customer from a vendor
should be presumed to be a reduction of cost of sales when recognized by
the customer in the income statement. In certain situations, the
presumption could be overcome and the consideration recognized either as
revenue or a reduction of a specific cost incurred. The consensus should be
applied prospectively to new or modified arrangements entered into after
December 31, 2002. The Company has not yet determined the effects of EITF
02-16 on its financial statements.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. Fin 46 clarifies the
application of Accounting Research Bulletin 51, Consolidated Financial
Statements, for certain entities that do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not
have the characteristics of a controlling financial interest ("variable
interest entities"). Variable interest entities within the scope of FIN 46
will be required to be consolidated by their primary beneficiary. The
primary beneficiary of a variable interest entity is determined to be the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected returns or both. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company is
in the process of determining what impact, if any, the adoption of the
provisions of FIN 46 will have upon its financial condition or results of
operations. Certain transitional disclosures required by FIN 46 in all
financial statements initially issued after January 31, 2003 have been
included in the accompanying financial statements.
F-10
3. Accounts Receivable
The following table summarizes the activity in the allowance for doubtful
accounts for fiscal years 2000, 2001 and 2002:
(in thousands) Trade Vendor and Other
------- ------------------
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
Provision 2002 900 3,334
Accounts written-off (389) (16,112)
Recoveries 415 -
------- ------------------
Balance January 5, 2003 $1,553 $ 3,334
======= ==================
During fiscal 2001 and fiscal 2002, the Company recorded an increase in
reserves of $15.0 million and $3.3 million, respectively, 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 14 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 2001 and 2002:
(in thousands) 2001 2002
-------- -------
Minimum lease payments receivable $56,131 $2,513
Estimated residual value 7,027 1,588
Initial direct costs 171 12
Unearned income (5,082) (258)
-------- -------
Total $58,247 $3,855
======== =======
F-11
5. Inventories
Inventories consist of items held for resale and are comprised of the
following components as of the end of fiscal years 2001 and 2002:
(in thousands) 2001 2002
------- -------
Equipment and supplies $17,405 $ 8,378
Service parts 3,471 2,860
------- -------
Total $20,876 $11,238
======= =======
6. Goodwill and Other Intangible Assets
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 141, Business Combinations, and
SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective
for fiscal years beginning after December 15, 2001; however, certain
provisions of this Statement apply to goodwill and other intangible assets
acquired between July 1, 2001 and the effective date of SFAS 142. Major
provisions of these Statements and their effective dates for the Company
are as follows:
- All business combinations initiated after June 30, 2001 must use
the purchase method of accounting. The pooling of interest method
of accounting is prohibited except for transactions initiated
before July 1, 2001, of which there were none.
- Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual
or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged,
either individually or as part of a related contract, asset or
liability.
- Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
January 6, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject
to amortization.
- Effective January 6, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and
whenever there is an impairment indicator.
- All acquired goodwill must be assigned to reporting units for
purposes of impairment testing.
The Company adopted SFAS 142 in the first quarter of fiscal 2002. The
Company has determined that all its intangible assets other than goodwill
have definite lives and will continue to amortize these assets over their
estimated useful lives. As a result, the Company has recognized no
transitional impairment loss in the first quarter of fiscal 2002 in
connection with the adoption of SFAS 142. During fiscal 2002, the Company
no longer amortized goodwill in accordance with SFAS 142. The Company has
completed a transitional fair value based impairment test of goodwill as of
January 6, 2002 and has determined no impairment loss in the carrying
amount of its goodwill. As a result, the Company has recognized no
transitional impairment loss during fiscal 2002 in connection with the
adoption of SFAS 142 for goodwill. The Company reviews its intangible
assets with finite lives for impairment in accordance with SFAS 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". Management believes there are no impairments
under these pronouncements.
Long-lived assets, including property and equipment, goodwill and other
intangible assets are reviewed for impairment when events or changes in
facts and circumstances indicate that their carrying amount may not be
recoverable. Events or changes in facts and circumstances that Pomeroy
consider as impairment indicators include the following:
* Significant underperformance of the Company's operating results
relative to expected operating results;
* Net book value compared to its market capitalization;
* Significant adverse economic and industry trends;
* Significant decrease in the market value of the asset;
* Significant changes to the asset since the Company acquired it;
* And the extent that the Company may use an asset or changes in the
manner that the Company may use it.
When the Company determines that one or more impairment indicators are
present for its long-lived assets, excluding goodwill, Pomeroy compares the
carrying amount of the asset to the new future undiscounted cash flows that
the asset is expected to generate. If the carrying amount of the asset is
greater than the net future undiscounted cash flows that the asset is
expected to generate, Pomeroy would recognize an impairment loss. The
impairment loss would be the excess of the carrying amount of the asset
over its fair value.
F-12
When the Company determines that one or more impairment indicators are
present for its goodwill, Pomeroy compares its reporting unit's carrying
value to its fair value. The Company has two reporting units for goodwill
testing which are a products reporting unit and a services reporting unit.
As of January 5, 2003, the Company has not recorded an impairment loss on
its transitional testing of goodwill in connection with SFAS 142. The
Company has adopted January 6 as the valuation date for the annual testing.
Currently, the Company has engaged a third-party valuation specialist to
perform the annual goodwill impairment testing as of January 6, 2003. An
impairment loss, if any, would be reported in the Company's future results
of operations.
Intangible assets consist of the following:
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
1/5/2002 1/5/2002 1/5/2002 1/5/2003 1/5/2003 1/5/2003
--------- ------------- --------- --------- ------------- ---------
Amortized intangible assets:
Covenants not to compete $ 1,171 $ 653 $ 518 $ 1,694 $ 1,324 $ 370
Customer lists 477 236 241 477 307 170
Intangibles 564 263 301 564 564 -
--------- ------------- --------- --------- ------------- ---------
Total amortized intangibles $ 2,212 $ 1,152 $ 1,060 $ 2,735 $ 2,195 $ 540
========= ============= ========= ========= ============= =========
Projected future amortization expense related to intangible assets with
definite lives are as follows:
(in thousands)
Fiscal years:
2003 $ 389
2004 118
2005 33
2006 -
-------
Total $ 540
=======
For the year ended January 5, 2001, amortization expense related to
goodwill was $3,365 thousand. Amortization expense related to intangibles
assets was $267 thousand of which $22 thousand was reported under the
caption "cost of sales" or "selling, general and administrative" expenses.
Amortization expense associated with assets reported under the caption
"other current assets" was $757 thousand.
For the year ended January 5, 2002, amortization expense related to
goodwill was $4,413 thousand. Amortization expense related to intangibles
assets was $665 thousand of which $254 thousand was reported under the
caption "cost of sales" or "selling, general and administrative" expenses.
Amortization expense associated with assets reported under the caption
"other current assets" was $733 thousand.
For the year ended January 5, 2003, there was no amortization expense
related to goodwill. Amortization expense related to intangibles assets was
$1,041 thousand of which $71 thousand was reported under the caption "cost
of sales" or "selling, general and administrative" expenses. Amortization
expense associated with assets reported under the caption "other current
assets" was $154 thousand.
The changes in the net carrying amount of goodwill recorded from fiscal
2002 and prior year acquisitions for the year ended January 5, 2003 by
segment are as follows:
F-13
(in thousands) Products Services Consolidated
--------- --------- -------------
Net carrying amount as of 1/5/02 $ 40,812 $ 16,642 $ 57,454
Goodwill recorded during fiscal 2002 1,545 1,636 3,181
--------- --------- -------------
Net carrying amount as of 1/5/03 $ 42,357 $ 18,278 $ 60,635
========= ========= =============
Pro forma net income and net income per share exclusive of amortization
expense are as follows:
(in thousands, except per share data) For the Year ended January 5,
2001 2002 2003
------- ------- -------
Reported net income $29,488 $ 7,809 $15,009
Add back: Goodwill amortization (net of tax) 2,029 2,692 -
------- ------- -------
Adjusted net income $31,517 $10,501 $15,009
======= ======= =======
Basic earnings per share:
Reported net income $ 2.42 $ 0.62 $ 1.18
Goodwill amortization 0.17 0.21 -
------- ------- -------
Adjusted net income $ 2.59 $ 0.83 $ 1.18
======= ======= =======
Diluted earnings per share:
Reported net income $ 2.38 $ 0.61 $ 1.18
Goodwill amortization 0.16 0.21 -
------- ------- -------
Adjusted net income $ 2.54 $ 0.82 $ 1.18
======= ======= =======
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.
In fiscal 2002, the Company acquired certain assets of Verity Solutions,
LLC, a Cleveland, Ohio-based IT solutions and professional services
provider. Their primary services include IT solutions consulting,
enterprise network infrastructure solutions, network systems and
application solutions and project management. The Company recorded $0.6
million of goodwill in connection with this acquisition.
7. Borrowing Arrangements
Bank Notes Payable - Pomeroy's financing of receivables is provided through
a portion of its credit facility with GE Commercial Distribution Finance
("GECDF"), formerly with Deutsche Financial Services. 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 which was 4.13%
as of January 5, 2003. At January 5, 2003, the Company did not have a
balance outstanding under this facility. As of 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.
The credit facility is collateralized by substantially all of the assets of
Pomeroy, except those assets that collateralize certain other financing
arrangements. Under the terms of the credit facility, Pomeroy is subject to
various financial covenants and restricted from paying dividends. The
weighted average interest rate on the bank revolving credit agreements was
8.0%, 6.5% and 4.0% in fiscal 2000, 2001 and 2002, respectively. Currently,
Pomeroy is not in violation of any financial covenants.
F-14
Floor plan arrangements - A significant part of Pomeroy's inventories are
financed by floor plan arrangements with third parties. At January 5, 2003,
these lines of credit totaled $84.0 million, including $72.0 million with
GECDF and $12.0 million with IBM Credit Corporation ("ICC"). Borrowings
under the GECDF 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
nominal due to subsidies by manufacturers. Overall, the average rate on
these arrangements is less than 1.0%. Pomeroy classifies amounts
outstanding under the floor plan arrangements as accounts payable.
Notes payable - Notes payable consist of the following:
(in thousands) Fiscal Years
--------------
2001 2002
------- -----
Non-recourse notes payable to banks at various interest rates,
ranging from 4.3% to 11.4%. The notes related to the Company's
leasing segment, which was sold to ILC. See Note 14. $33,371 $ -
Acquisition notes payable at various interest rates, ranging from
4.75% to 6.0%, and unsecured. Principal payments are made in
equal annual installments, ranging from one to two years, through 2003. 3,925 541
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. 107 -
------- -----
Total notes payable 37,403 541
Less current maturities 27,190 541
------- -----
Long-term notes payable $10,213 $ -
======= =====
8. Restructuring Charge
During fiscal 2002, the Company approved a plan to consolidate and relocate
operations in various geographical locations and to abandon certain assets
associated with modification to strategic initiatives.
The plan resulted in a pre-tax restructuring charge of $714 thousand ($493
thousand after tax). The restructuring costs consist of $484 thousand of
losses on equipment and leasehold improvement dispositions, $126 thousand
in involuntary employee severance costs, and $104 thousand in lease
terminations. Under the plan, the Company eliminated approximately 40
employees.
The execution of the plan began and was completed during fiscal 2002. As of
January 5, 2003, the Company had $41 thousand in accrued and unpaid
restructuring costs. The Company expects to pay substantially all of the
remaining accrued and unpaid costs by the end of fiscal 2003.
9. Income Taxes
During fiscal 2002, the Company recorded an income tax benefit of $1.6
million associated with an increase in the tax basis of leased assets as a
result of an accounting method change for tax purposes. This amount is
reported in the caption "income tax expense/provision."
The provision for income taxes consists of the following:
F-15
(in thousands) Fiscal Years
---------------------------
2000 2001 2002
------- -------- --------
Current:
Federal $16,060 $ 7,932 $(1,219)
State 2,614 1,273 (33)
------- -------- --------
Total current 18,674 9,205 (1,252)
------- -------- --------
Deferred:
Federal 650 (3,899) 7,402
State 82 (313) 592
------- -------- --------
Total deferred 732 (4,212) 7,994
------- -------- --------
Total income tax provision $19,406 $ 4,993 $ 6,742
======= ======== ========
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax assets (liabilities) are:
(in thousands) Fiscal Years
------------------
2001 2002
-------- --------
Deferred Tax Assets:
Receivables allowances $ 6,023 $ 596
Depreciation 478 -
Leases 437 37
Deferred compensation 799 829
Non-compete agreement - 760
State net operating losses - 389
Other 141 147
-------- --------
Total deferred tax assets 7,878 2,758
-------- --------
Deferred Tax Liabilities:
Acquisition of lease residuals (167) (356)
Depreciation - (1,323)
Intangibles (1,925) (3,135)
Other (1,482) (1,634)
Total deferred tax liabilities (3,574) (6,448)
-------- --------
Net deferred tax assets $ 4,304 $(3,690)
======== ========
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
liabilities ($565) are presented as such on the balance sheet. For fiscal
2002, the Company's net short-term deferred tax liabilities ($372) are
included in miscellaneous accrued liabilities and the net long-term
deferred tax liabilities ($3,318) are presented as such on the balance
sheet.
The Company's effective income tax rate differs from the Federal statutory
rate as follows:
F-16
Fiscal Years
------------------
2000 2001 2002
----- ---- -----
Tax at federal statutory rate 35.0 35.0 35.0
State taxes 3.7 4.0 3.2
Kentucky relocation credits (0.1) - -
Change in tax accounting method - TIFS - - (7.4)
Other 1.1 - 0.2
----- ---- -----
Effective tax rate 39.7 39.0 31.0
===== ==== =====
10. 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 15 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, 2003, including the lease with the related party, are as
follows:
(in thousands)
Fiscal Year
- -----------------------------
2003 $ 4,856
2004 3,298
2005 2,853
2006 1,786
2007 1,513
Thereafter 3,572
-------
Total minimum lease payments $17,878
=======
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.
11. 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, 2001 and 2002 were
approximately $317 thousand, $418 thousand and $408 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.
12. Major Customers
During fiscal 2000, 2001, and 2002, no customer accounted for more than 10%
of the Company's total net sales and revenues.
F-17
13. Acquisitions
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.
During fiscal 2002, the Company completed one acquisition. The total
consideration given consisted of $0.3 million in cash and subordinated
notes of $0.2 million. Additionally, the purchase price will be adjusted
for any potential earn outs. The Company shall pay fifty percent of the net
profit before taxes ("NPBT") to the purchaser in excess of the NPBT
threshold for the applicable year, subject to a cumulative limitation of
one million dollars during such aggregate period as earn outs. Interest on
the subordinated notes is payable quarterly. Principal in the amount of
$0.2 million is payable in one annual installment commencing on the first
anniversary of closing. The acquisition was accounted for a purchase,
accordingly the purchase price was allocated to assets and liabilities
based on their estimated value as of the date of acquisition. The results
of operations of the acquisition are included in the consolidated statement
of income from the date of acquisition. If the 2002 acquisition had
occurred on January 6, 2002, the pro forma operations of the Company would
not have been materially different than that reported in the accompanying
consolidated statements of income.
14. Assets Held for Sale
On February 28, 2002 the Company entered into a definitive purchase
agreement to sell substantially all of the net assets of its wholly owned
subsidiary - Technology Integration Financial Services, Inc. ("TIFS") to
Information Leasing Corporation ("ILC"), the leasing division of the
Provident Bank of Cincinnati, Ohio. On April 16, 2002 the Company closed
the sale of a majority of the assets of its wholly owned subsidiary TIFS to
ILC. Vincent D. Rinaldi, a Director of the Company, is the President of
ILC. ILC paid the Company book value for the net assets of TIFS as of April
16, 2002. The book value of the net assets of TIFS as of April 16, 2002 was
approximately $4.8 million. Accordingly, no gain or loss was recognized on
this transaction. In addition, ILC assumed and liquidated at the time of
the closing approximately $20.0 million of the Company's debt related to
leased assets owed by TIFS as of April 16, 2002. As part of the
transaction, the Company signed an exclusive seven-year vendor agreement
whereby the Company is appointed as an agent for remarketing and reselling
of the leased equipment sold. The Company will be paid a commission on
future lease transactions referred to and accepted by ILC and will act as
the remarketing and reselling agent for such future leased equipment.
F-18
The following table identifies the assets and liabilities sold as of April
16, 2002:
(In thousands)
Cash $ (262)
Net investment in leases 54,629
Other 468
--------
Total assets $54,835
========
Current and long term notes payable $29,961
Trade payables 15,857
Other 4,176
--------
Total liabilities $49,994
========
15. 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 2000, 2001 and 2002 was
approximately $1.1, $1.2 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
other real estate that is owned by the Chief Executive Officer of the
Company. During fiscal years 2000, 2001 and 2002, the Company paid $95
thousand each year in connection with this real estate.
The lessor of the headquarters, distribution facility and national training
center may meet the conditions to be considered a variable interest entity
("VIE"). The Company does not currently consolidate the VIE because it is
not required under current accounting standards; however, the Company is
evaluating whether it may be required to consolidate the VIE after June 30,
2003. See Note 2 "Summary of Significant Accounting Policies, Recent
Accounting Pronouncements" for a discussion of the change in accounting
standards and the anticipated impact on the Company.
A director of the Company is President of Information Leasing Corporation
("ILC"). See Note 14 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 2000, 2001 and 2002 the Company sold equipment and related
support services to ILC, for lease to ILC's customers, in amounts of $2.8
million, $2.3 million and $32.6 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.
The Company signed an exclusive seven-year vendor agreement whereby the
Company is appointed as an agent for remarketing and reselling of the
leased equipment sold. The Company will be paid a commission on future
lease transactions referred to and accepted by ILC and will act as the
remarketing and reselling agent for such future leased equipment.
The carrying value of investments in lease residuals is $1.3 million and
$0.9 million as of January 5, 2002 and 2003, 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.
F-19
16. 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
----------------------------
2000 2001 2002
-------- -------- --------
Interest paid $ 4,341 $ 2,181 $ 556
======== ======== ========
Income taxes paid $20,206 $ 3,661 $10,623
======== ======== ========
Additions to goodwill for adjustments
to acquisition assets and intangibles $ 1,119 $ 1,788 $ 2,014
======== ======== ========
Business combinations accounted
for as purchases:
Assets acquired $28,602 $14,153 $ 2,099
Liabilities assumed (8,581) (4,854) (260)
Notes payable (4,795) (1,328) (184)
Stock issued - - -
======== ======== ========
Net cash paid $15,226 $ 7,971 $ 1,655
======== ======== ========
17. Treasury Stock
During fiscal 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 fiscal 2001, the Company repurchased 44,000 shares of
stock at a cost of $0.5 million.
During fiscal 2002, the Company's Board of Directors authorized a program
to repurchase up to 350,000 shares of the Company's outstanding common
stock at market price. During fiscal 2002, the Company repurchased 280,000
shares of stock at a cost of $3.4 million.
18. Stockholders' Equity and Stock Option Plans
During fiscal 2002, the Company's 1992 Non-Qualified and Incentive Stock
Option Plan was terminated per plan design. On March 27, 2002, the Company
adopted the 2002 Non-Qualified and Incentive Stock Option Plan and it was
approved by the shareholders on June 13, 2002. The Company's 2002
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. 3,410,905 shares of the common stock of the Company are reserved for
issuance under the plan. The plan will terminate ten years from the date of
adoption. Stock options granted under the plan are exercisable in
accordance with various terms as authorized by the Compensation Committee.
To the extent not exercised, options will expire not more than ten years
after the date of grant.
During fiscal 2002, the Company's 1992 Outside Directors' Stock Option Plan
was terminated per plan design. On March 27, 2002, the Company adopted the
2002 Outside Directors' Stock Option Plan and it was approved by the
shareholders on June 13, 2002. The Company's 2002 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. 106,356 shares of common
stock of the Company are reserved for issuance under the plan. The plan
will terminate ten years from the date of adoption. Pursuant to the plan,
an option to purchase 10,000 shares of common stock will automatically be
granted on the first day of the initial term of a director. An additional
2,500 shares of common stock will automatically 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-20
The following summarizes the stock option transactions under the plans for
the three fiscal years ended January 5, 2003:
Weighted Average
Shares Exercise price
---------- -----------------
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
Granted 345,305 13.98
Exercised (61,308) 13.61
Forfeitures (234,108) 14.79
----------
Options outstanding January 5, 2003 1,968,539 $ 14.43
==========
The following summarizes options outstanding and exercisable at January 5,
2003:
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 1/5/03 Contractual Life Exercise Price at 1/5/03 Exercise Price
- ---------------- ----------- ---------------- --------------- ----------- ---------------
$2.83 to $5.65 19,125 2.00 $ 4.54 19,125 $ 4.54
$5.66 to $8.48 22,500 3.60 $ 5.66 22,500 $ 5.66
$8.49 to $11.30 107,512 3.30 $ 10.58 80,443 $ 10.47
$11.31 to $14.13 722,360 3.00 $ 12.94 540,478 $ 13.09
$14.14 to $16.95 751,862 3.20 $ 14.91 295,803 $ 14.82
$16.96 to $19.78 251,680 4.20 $ 17.66 108,622 $ 17.65
$19.79 to $22.60 86,000 1.10 $ 21.78 86,000 $ 21.78
$22.61 to $25.43 5,000 0.30 $ 23.39 5,000 $ 23.39
$25.44 to $28.25 2,500 0.50 $ 26.50 2,500 $ 26.50
----------- -----------
1,968,539 1,160,471
=========== ===========
The weighted average fair value at date of grant for options granted during
fiscal 2000, 2001 and 2002 was $7.48, $6.05 and $4.56, 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 2000 Fiscal 2001 Fiscal 2002
------------ ------------ ------------
Expected life (years) 3.7 3.3 2.8
Risk free interest rate 4.7% 4.5% 2.9%
Volatility 62% 57% 46%
Dividend yield 0% 0% 0%
The unissued preferred stock carries certain voting rights and has
preferences with respect to dividends and liquidation proceeds.
F-21
19. Litigation
During fiscal 2001 and fiscal 2002, the Company made litigation settlement
payments of $1.0 million and $0.3 million, respectively.
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.
20. Segment Information and Concentrations
Segment Information - The Company operates in three industry segments:
products, services and leasing.
The products segment is comprised of the sale of a broad range of desktop
computer equipment, including servers, infrastructure and peripherals.
The services segment entails providing information technology services
which support such computer products. As a service solution provider, the
Company offers three groups of services: enterprise consulting,
infrastructure solutions, and client management services. The enterprise
consulting group offerings consist of: e-solutions, infrastructure
solutions, business intelligence solutions, business process re-engineering
solutions, customer relationship management solutions, and value chain
management solutions. The infrastructure solutions group offerings consist
of: internetworking, wireless solutions, midrange platform, storage, thin
client, and managed services. Pomeroy's client management services group
offers the following comprehensive portfolio of services: technology
refresh, contract support services, contingency staffing, depot and end of
life services, and lifecycle solutions.
The Company also offers leasing solutions to its customers via an agency
agreement with a Cincinnati based regional bank. This bank, in 2002,
acquired certain assets and liabilities of the Company's leasing
subsidiary. See Note 14 of Notes to Consolidated Financial Statements for
information regarding the sale of substantially all of the assets of
Technology Integration Financial Services, Inc. ("TIFS"), the Company's
leasing subsidiary.
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.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. (in thousands)
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
F-22
Fiscal 2002
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenue $ 568,194 $ 131,293 $ 3,313 $ 702,800
Income from operations $ 5,773 $ 15,116 $ 1,340 $ 22,229
Total assets $ 188,937 $ 52,424 $ 7,134 $ 248,495
Capital expenditures $ 5,379 $ 2,357 $ 84 $ 7,820
Depreciation and amortization $ 5,260 $ 881 $ 229 $ 6,370
Concentrations - During fiscal 2000, 2001 and 2002 approximately 29.6%,
24.1% and 28.1% respectively, of the Company's total net sales and revenues
were derived from its top ten customers. During fiscal 2000, MCI Worldcom
accounted for approximately 10.4% of the total net sales and revenues for
the products segment.
During fiscal 2001 and fiscal 2002, no customer accounted for more than 10%
of the Company's net sales and revenues for either the products or services
segments.
21. Subsequent Events
On January 29, 2003, the Company's Board of Directors authorized a program
to repurchase up to an additional 100,000 shares of the Company's
outstanding common stock, which represents less than 1.0% of its
outstanding common stock, in open market purchases made from time to time
at the discretion of the Company's management. The time and extent of the
repurchases will depend on market conditions. The acquired shares will be
held in treasury or cancelled. The Company anticipates financing the stock
redemption program out of working capital and the redemption program will
be effectuated over the next 12 months.
On February 21, 2003, the Company announced the completion of the
acquisition of Micrologic Business Systems of K.C., INC. ("Micrologic"), a
Kansas City based IT solutions and professional services provider. For the
twelve months ended December 31, 2002, Micrologic has recorded revenues of
$32.0 million. Their primary services include systems network integration,
project management, and telephony integration.
F-23