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, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 0-20022
POMEROY IT SOLUTIONS, 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 incorporation (I.R.S. Employer
or organization) Identification No.)
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
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES X NO
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The aggregate market value of voting stock of the Registrant held by
non-affiliates was approximately $103,495,000 as of July 5, 2003.
As of February 27, 2004, the number of shares of common stock outstanding was
12,235,022.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which Portions
Document of Documents Are Incorporated
- ---------- -------------------------------------
Definitive Proxy Statement for the 2004 Part III
Annual Meeting of Stockholders to be
filed with the Securities and Exchange
Commission on or before May 4, 2004.
POMEROY IT SOLUTIONS, INC.
FORM 10-K
YEAR ENDED JANUARY 5, 2004
TABLE OF CONTENTS
PART I Page
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Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements With Accountants
On Accounting and Financial Disclosure 29
Item 9A Controls and Procedures 29
PART III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management 29
Item 13. Certain Relationships and Related Transactions 29
Item 14. Principal Accountant Fees and Services 29
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 30
SIGNATURES Chief Executive Officer, President, Chief Financial 38
Officer and Chief Accounting Officer
Directors 38
Reports of Independent
Auditors F-1
Financial Statements F-3
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 Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities" 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 Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities" 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 IT Solutions, Inc. is a Delaware corporation organized in February 1992.
Pomeroy IT Solutions, 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
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.
The Company operates in three industry segments: products, services and leasing.
See Note 21 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 IT
services which support such computer products. The services segment can be
classified into three components: enterprise consulting, infrastructure
solutions and lifecycle services. The Company also offers leasing solutions to
its customers via an agency agreement with a financial institution located in
Cincinnati.
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, including the following:
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 ("OEMs") 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
9001:2000 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
9001:2000 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 9001:2000 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.
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 2003, 2002 and 2001, sales of computer hardware, software, and
related products were approximately $470.3 million, $568.2 million and $658.9
million, respectively, and accounted for approximately 78.6%, 80.9%, and 81.4%,
respectively, of the consolidated net sales and revenues of Pomeroy in such
years.
3
SERVICES SEGMENT
As a national service solution provider, Pomeroy offers three groups of
services: enterprise consulting, infrastructure solutions, and lifecycle
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 technologies and package solutions. 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 Microsoft, Oracle and
Macromedia, three 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 Microsoft, Oracle and Macromedia,
and in using languages such as .NET, XML, Cold Fusion, Java, 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. Strategic
alliances with CrystalDecisions, Kingston Technologies, Data Junction and others
allow Pomeroy to craft individualized dynamic reporting solutions for both
internal and external use. Pomeroy has the necessary skills required for:
- Data Warehousing
- Data Analysis
- ERP analysis
- reporting
- ad-hoc query
- on-line analytical processing
- Data Marts
- knowledge management
- enterprise information portals
Pomeroy uses Business Intelligence Practice's Solution Definition Foundation
Services ("SDFS") methodology, which include 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
- continuous improvement
- focused restructuring
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- 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 customer relationship management ("CRM") solution center assists
clients in defining the strategy and requirements necessary to package,
evaluate, select and implement a CRM solution. Pomeroy has experience in
implementing Siebel, Clarify and MS-CRM solutions for clients, as well as the
ability to build custom solutions based on client requirements. 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 value chain management ("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
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
- next generation voice application assessment and deployment
- voice over internet protocol implementation ("VOIP")
- customized support solutions
As a Cisco Gold Integrator, Pomeroy has invested in the required technical and
sales expertise to deliver the following specializations: VOIP, Wireless,
Network Management and Security solutions.
5
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
Lifecycle Services
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Pomeroy's lifecycle services group offers the following comprehensive portfolio
of services: strategic sourcing, integration & distribution logistics,
implementation services, technical support services, and technology disposition.
6
Pomeroy's experienced Strategic Sourcing Group properly identifies computer
product needs and delivers reliable, quality procurement services for any IT
environment. Our Strategic Sourcing Group is very knowledgeable in Platform
Selection, Sourcing and Order Management, providing a cost effective means to
manage a customer's strategic sourcing requirements. The solutions we offer
under Strategic Sourcing include:
- platform selection
- technical evaluation
- price validation
- sourcing
- direct
- distribution
- spot buys
- order management
- pre-sales technical support
- online order management
- multi-sourcing
As a premier supplier of personal computers, we have learned to continually
adapt our integration skills for optimum computer systems configuration, setup,
and installation. Our ability to install software on multiple machines
simultaneously (400 systems at once) expedites system set up, ensures
consistency, and reduces support costs for the operating environment. At the
core of our distribution capabilities is our unique multi-point Distribution
Center with 161,000 square feet of space. The distribution, configuration,
purchasing and inventory control groups operate under ISO 9001:2000 standards.
The services we offer under Integration & Distribution Logistics includes:
- warehousing
- inventory management
- customer owned inventory(COI)
- off-site storage
- configuration
- hardware and software configuration
- image management/loads
- asset tagging and data capture
- product distribution
- staging
- packaging
- shipping
Pomeroy understands the business impact of successfully implementing technology.
When executing large-scale rollouts of desktop, mobile, servers, or network
infrastructure technologies, experienced project management and quality
execution are essential. Pomeroy has a strong track record of success with
large-scale rollouts throughout the U.S. Pomeroy leverages our low cost
operating model to deliver these high quality solutions in a cost effective
manner:
- project management methodology
- on-site installation
- data migration
- user level customization
- training
Industry changes have brought about distributed computing, integration of more
devices, and an increased demand on the IT Department of our clients. With
heavier workloads, fewer resources and limited budgets, many companies are
turning to a third party to supplement their company's technical support
services. By augmenting existing resources with targeted services from Pomeroy,
companies can be more responsive to their employees and customer's computing
needs without the worry of fixed overhead costs. Below is a list of the services
we provide:
7
- on-site support services
- on-site help desk
- shrink wrapped application support
- legacy application support
- call trend analysis
- hardware repair and maintenance (break/fix)
- desk-side application support
- moves, adds, changes (MACs)
- staff augmentation
- asset management
- centralized support services
- centralized help desk
- shrink wrapped application support
- legacy application support
- call trend analysis
- desktop management
- asset management
- software license monitoring
- software distribution
- national depot services
- repair and maintenance
- hot spares program
- system upgrades
- redeployment
Pomeroy strives to help customers maximize the life of their existing IT
equipment and offers options from redeployment to disposition of the equipment.
The life span of a computer is usually dictated by how it is being utilized. If
a customer finds that current computer equipment no longer meets their needs,
Pomeroy has several technology disposition options:
REDEPLOYMENT
If there are other departments within a customer's organization that could
use the equipment, Pomeroy can pickup, clean and test the equipment prior
to it being redeployed. If a customer needs the equipment imaged or
upgraded, Pomeroy can do that as well in our state of the art
configuration center.
BROKERAGE
A customer can offer employees the option to purchase the old computer
equipment. Based on the guidelines set forth by the customer, Pomeroy will
resell desktops, laptops, and monitors to the employees at a flat fee.
Pomeroy can also broker a customer's equipment. Pomeroy works with various
resellers around the U.S. to obtain the highest possible offer for our
customers. All equipment is sold AS IS Where IS, which relieves the
customer of any warranty liability after it is sold.
DONATIONS
A customer can donate the equipment to Schools, or Non-Profit
Organizations. Pomeroy will run each item through our Asset Management
process to secure erase drives, record serial numbers and show transfer of
ownership. Pomeroy will clean, test, and package the equipment slated for
donation if required by the customer. The equipment will then be invoiced
at zero dollars along with the serial numbers to show transfer of
ownership.
8
PROPER DISPOSAL
Most state and local agencies require companies to follow certain
guidelines when disposing of computer equipment. Equipment with no market
value, stripped, or defective, will be processed through our Asset
Management System. Secure erase will be performed on those systems that
are operational. Once equipment is processed, it will be sent to an
Environmental Protection Agency disposal company to be destroyed. All
serialized items are invoiced to show transfer of ownership, and
certificates are obtained and kept on file at Pomeroy.
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, CCSP, INFOSEC Professional including IP
Telephony, Wireless LAN, VPN Security and Network Management Specializations
NOVELL: CNE, MCNE, CNA, and Certified GroupWise Engineer
MICROSOFT: MCP, MCSA, MCSA Security Specialization, MCSE, MCSE+1, MCDBA and
CRM Professional
IBM: xSeries Certified System Engineer, IBM Technical Specialist RS 6000 SP,
IBM Advanced Technical Expert RS 6000, WebSphere System Expert
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+, Linux+, Server+,
i-Net+ and Security+
SUN: Storage Engineers, Solaris System and Network Administrator
(ISC)2 Certified Information Systems Security Professional (CISSP)
ORACLE: Oracle Certified Professional (OCP)
EMC: Master Operator and Builder
ALTIRIS: Certified Practitioner
ISACA: Certified Information Systems Auditor (CISA), Certified Information
Security Manager (CISM)
CITRIX: Certified Enterprise Administrator (CCEA), Certified Administrator (CCA)
F5 NETWORKS: Product Specialist
HELP DESK INSTITUTE: Helpdesk Manager and Helpdesk Analyst
QLOGIC: SAN Solution Certified
PMI: Project Management Professional (PMP)
SYMANTEC: Certified System Engineer, Certified Security Practitioner
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 2003, 2002 and 2001, revenues from service and support
activities were approximately $127.9 million, $131.3 million, and $140.5
million, respectively, and accounted for approximately 21.4%, 18.7%, and 17.4%,
respectively, of the consolidated net sales and revenues of Pomeroy in such
years.
LEASING SEGMENT
The Company also offers leasing solutions to its customers via an agency
agreement with a financial institution located in Cincinnati.
For fiscal years 2003, 2002 and 2001, leasing revenues were approximately, $0.2
million, $3.3 million, and $9.9 million, respectively, and accounted for
approximately 0.03%, 0.5%, and 1.2%, respectively, of the consolidated net sales
and revenues of Pomeroy.
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BUSINESS STRATEGY
Pomeroy's strategy for building shareholder value is to provide comprehensive
solutions to improve the productivity of its clients' 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 185 person direct sales and sales
support personnel located in 26 regional offices in 14 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
Lifecycle 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, 2004, the Company has been awarded
contracts it estimates will result in an aggregate of approximately $106.0
million of net sales and revenues after January 5, 2004. $104.2 million in net
sales and revenues were generated in 2003 from these contracts. Of the aggregate
total, the Company estimates that approximately $102.1 million of net sales and
revenues will be generated in fiscal 2004. By comparison, as of January 5, 2003,
the Company had been awarded contracts that it estimated would result in an
aggregate of approximately $97.8 million of net sales and revenues after January
5, 2003. Of this amount, the Company estimated that $86.9 million of net sales
and revenues would be generated during fiscal 2003. 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.
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.
10
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 to end users 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.
11
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 2003, Pomeroy experienced a decline in the growth in its products and
services segments due to the continued downturn in the economy and a decline in
the leasing segment due to the fiscal 2002 sale of a majority of the assets of
Technology Integration Financial Services, Inc. ("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 2003, Pomeroy
completed two acquisitions 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 in "Vendor Rebates" below) and the general
posture of the OEMs regarding resolution.
Vendor Rebates
---------------
The most significant component of vendor receivables is vendor rebates.
Vendor rebate programs are developed by OEMs 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.
12
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. While such programs have been available to the
Company in the past, there is no assurance that these programs will be
continued.
The Emerging Issues Task Force ("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 is applied prospectively to new or modified arrangements
entered into after December 31, 2002.
The Company had been participating in a vendor program that expired in
November of 2003. For those programs that were initiated prior to December
31, 2002, the Company had classified these vendor program payments as a
reduction in selling, general and administrative expenses. Under any new
agreements, the Company classifies these vendor program payments under
cost of sales in accordance with EITF 02-16.
Warranty Receivables
---------------------
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, track vendor receivables 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 deployed 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 2003, 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
13
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 its relationships
with leading hardware and software vendors and on its 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 its 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 its 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 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 2003, approximately 20.9% 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, II, Stephen E.
Pomeroy, or other key personnel could have a material adverse effect on
Pomeroy's business. Pomeroy has entered into employment agreements with certain
of its key personnel, including David B. Pomeroy, II 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.
14
EMPLOYEES
As of January 5, 2004, Pomeroy had 1,345 full-time employees consisting of the
following: 862 technical personnel; 185 direct sales representatives and sales
support personnel; 71 management personnel; and 227 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.
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 2003, the Company completed two acquisitions. The total
consideration paid consisted of $4.9 million in cash and subordinated notes of
$1.8 million. Additionally, each 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 $5.5 million during such
aggregate earn out period. Interest on the subordinated notes is payable
quarterly. Principal in the amount of $1.8 million is payable in two annual
installments commencing on the first anniversary of closing. The results of
operations of the acquisitions are included in the fiscal 2003 consolidated
statement of income from the respective dates of acquisition. If the fiscal
2003 acquisitions had occurred on January 6, 2003, the pro forma results of
operations of the Company would not have been materially different than those
reported in the accompanying fiscal 2003 consolidated statement of income.
ITEM 2. PROPERTIES
Pomeroy's principal executive offices, distribution facility and national
training center comprised of approximately 36,000, 161,000 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.
15
Pomeroy also has non-cancelable operating leases for its regional offices,
expiring at various dates between 2004 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
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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.
2003 2002
-------------- --------------
High Low High Low
------ ------ ------ ------
First Quarter $13.21 $ 6.50 $17.30 $12.70
Second Quarter $11.51 $ 6.44 $17.35 $13.23
Third Quarter $15.16 $11.19 $14.23 $ 9.27
Fourth Quarter $16.18 $12.85 $13.20 $ 9.56
As of February 28, 2004, there were approximately 337 holders of record of
Pomeroy's common stock.
Dividends
- ---------
On August 7, 2003, the Company paid a one-time cash dividend of $9.8 million, or
$0.80 per share, to shareholders of record as of July 28, 2003.
Securities authorized for issuance under equity compensation plans
- -------------------------------------------------------------------------
The following tables summarizes as of January 5, 2004 information regarding our
equity compensation plans.
- -------------------------------- --------------------- ---------------------- ---------------------
Number of Weighted-average Number of
securities to be exercise price of securities remaining
issued upon outstanding options, available for future
exercise of warrants and rights issuance under
Plan category outstanding options, equity
warrants and rights compensation
plans(excluding
securities reflected
in column (a))
(a) (b) (c )
- -------------------------------- --------------------- ---------------------- ---------------------
Equity compensation plans
approved by security holders 2,067,518 $ 13.41 1,333,229
- -------------------------------- --------------------- ---------------------- ---------------------
Equity compensation plans
not approved by security holders - - -
- -------------------------------- --------------------- ---------------------- ---------------------
Total 2,067,518 $ 13.41 1,333,229
- -------------------------------- --------------------- ---------------------- ---------------------
17
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
For the Fiscal Years Ended January 5,
----------------------------------------------------------
2004(1) 2003(2) 2002(3) 2001(4) 2000(5)
------------ --------- --------- --------- ----------
Consolidated Statement of Income Data:
Net sales and revenues . . . . . . . . . . $ 598,423 $702,800 $809,214 $925,138 $ 756,757
Cost of sales and service. . . . . . . . . 528,030 615,135 705,937 801,788 652,503
------------ --------- --------- --------- ----------
Gross profit . . . . . . . . . . . . . . . 70,393 87,665 103,277 123,350 104,254
------------ --------- --------- --------- ----------
Operating expenses:
Selling, general and administrative. . . . 50,118 55,368 61,640 61,135 52,216
Depreciation and amortization. . . . . . . 5,319 5,720 10,362 9,516 6,527
Litigation settlement (6) . . . . . . . . 150 300 1,000 - -
Provision for vendor receivables and
restructuring charge (7). . . . . . . . . - 4,048 15,934 - -
------------ --------- --------- --------- ----------
Total operating expenses . . . . . . . . . 55,587 65,436 88,936 70,651 58,743
------------ --------- --------- --------- ----------
Income from operations . . . . . . . . . . 14,806 22,229 14,341 52,699 45,511
------------ --------- --------- --------- ----------
Other expense (income):
Interest, net. . . . . . . . . . . . . . . (75) 541 1,768 4,352 3,858
Other. . . . . . . . . . . . . . . . . . . 11 (63) (229) (547) (93)
------------ --------- --------- --------- ----------
Net other expense (income) . . . . . . . . (64) 478 1,539 3,805 3,765
------------ --------- --------- --------- ----------
Income before income tax . . . . . . . . . 14,870 21,751 12,802 48,894 41,746
Income tax expense (8) . . . . . . . . . . 5,799 6,742 4,993 19,406 16,864
------------ --------- --------- --------- ----------
Net income . . . . . . . . . . . . . . . . $ 9,071 $ 15,009 $ 7,809 $ 29,488 $ 24,882
============ ========= ========= ========= ==========
Earnings per common share (basic). . . . . $ 0.74 $ 1.18 $ 0.62 $ 2.42 $ 2.12
Earnings per common share (diluted). . . . $ 0.73 $ 1.18 $ 0.61 $ 2.38 $ 2.11
Consolidated Balance Sheet Data:
Working capital. . . . . . . . . . . . . . $ 116,786 $123,334 $ 99,838 $ 89,449 $ 61,126
Long-term debt, net of current maturities. 913 - 10,213 19,572 6,971
Equity . . . . . . . . . . . . . . . . . . 199,797 203,674 190,762 181,705 140,221
Total assets . . . . . . . . . . . . . . . 269,199 248,496 341,718 361,268 333,141
1) During fiscal 2003, Pomeroy acquired all the outstanding common stock of
Micrologic Business Systems of K.C., Inc. and acquired certain assets of
eServ Solutions Group, LLC. See Notes 6 and 13 of Notes to Consolidated
Financial Statements.
2) During fiscal 2002, Pomeroy acquired certain assets of Verity Solutions,
LLC. See Notes 6 and 13 of Notes to Consolidated Financial Statements.
3) During fiscal 2001, Pomeroy acquired certain assets of Osage Systems
Group, Inc., Ballantyne Consulting Group, Inc. and System 5 Technologies,
Inc. See Notes 6 and 13 of Notes to Consolidated Financial Statements.
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.
18
5) During fiscal 1999, Pomeroy acquired certain assets of Systems Atlanta
Commercial Systems, Inc. and all the outstanding stock of Acme Data
Systems, Inc.
6) 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. During fiscal 2003, Pomeroy's results
include an after tax charge of $92 ($0.01 per diluted share) related to
the litigation settlement of $150.
7) 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.
8) During fiscal 2002, Pomeroy's results include an income tax benefit due to
a tax accounting change of $1.6 million ($0.13 per diluted share).
19
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 2003
-----------------------------------------------
First Second Third Fourth
Quarter(1) Quarter(2) Quarter Quarter(3)
----------- ----------- -------- -----------
Net sales and revenues $ 129,978 $ 147,352 $158,072 $ 163,021
Gross profit $ 16,377 $ 17,317 $ 17,635 $ 19,064
Net income $ 1,506 $ 2,013 $ 2,563 $ 2,989
Earnings per common share:
Basic $ 0.12 $ 0.16 $ 0.21 $ 0.25
Diluted $ 0.12 $ 0.16 $ 0.21 $ 0.24
Fiscal 2002
-----------------------------------------------
First Second Third Fourth
Quarter Quarter(4) Quarter(5) Quarter(6)
-------- ------------- ----------- -----------
Net sales and revenues $186,348 $ 196,580 $ 170,921 $ 148,951
Gross profit $ 23,820 $ 24,102 $ 21,452 $ 18,291
Net income $ 4,663 $ 4,627 $ 5,094 $ 625
Earnings per common share:
Basic $ 0.37 $ 0.36 $ 0.40 $ 0.05
Diluted $ 0.37 $ 0.36 $ 0.40 $ 0.05
1. During the first quarter of fiscal 2003, Pomeroy acquired all the
outstanding common stock of Micrologic Business Systems of K.C., Inc. See
Notes 6 and 13 of Notes to Consolidated Financial Statements.
2. During the second quarter of fiscal 2003, Pomeroy's results include an
after tax charge of $92 ($.01 per diluted share) related to the Company
recording a litigation settlement of $150.
3. During the fourth quarter of fiscal 2003, Pomeroy acquired certain assets
of eServ Solutions Group, LLC. See Notes 6 and 13 of Notes to Consolidated
Financial Statements.
4. 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 of $487. Also, during the second quarter
of fiscal 2002, Pomeroy acquired certain assets of Verity Solutions, LLC.
See Notes 6 and 13 of Notes to Consolidated Financial Statements.
5. 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, a
litigation settlement of $300 and an income tax benefit due to a tax
accounting change of $1.6 million.
6. 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 allowances for vendor receivables of $3.3
million.
20
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 condition. 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, (2) valuation of long-lived assets and (3) income taxes.
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;
- 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 net 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 to the extent the carrying value of
the asset exceeds its fair value. An impairment loss, if any, would be reported
in the Company's future results of operations.
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. The Company has adopted
January 6 as the valuation date for the annual testing.
21
Income taxes
Pomeroy is required to estimate income taxes in each of the jurisdictions in
which the Company operates. This process involves estimating the Company's
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within the Company's consolidated balance sheet. The Company must then
assess the likelihood that the deferred tax assets will be recovered from future
taxable income and to the extent that the Company believes recovery is not
likely, the Company must establish a valuation allowance. To the extent the
Company establishes a valuation allowance in a period, the Company must include
an expense within the tax provision in the statement of operations. Pomeroy has
not recorded a valuation allowance to reduce the carrying amount of recorded
deferred tax assets representing future deductions, as the Company believes it
will have sufficient taxable income in the future to realize these deductions.
Pomeroy considers future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance. In the
event Pomeroy were to determine that it would not be able to realize its
deferred tax assets in the future, an adjustment to the deferred tax asset would
decrease income in the period such determination was made.
22
RESULTS OF OPERATIONS
The following table sets forth for the periods presented information derived
from our consolidated statements of income expressed as a percentage of net
sales and revenues:
Percentage of Net Sales and Revenues
Financial Results Fiscal Years ended January 5,
- ------------------------------------- --------------------------------------------
2004 2003 2002
-------------- ------------- -------------
Net sales and revenues:
Equipment, supplies and leasing 78.6% 81.3% 82.6%
Service 21.4% 18.7% 17.4%
-------------- ------------- -------------
Total net sales and revenues 100.0% 100.0% 100.0%
============== ============= =============
Cost of sales and service:
Equipment, supplies and leasing 72.7% 74.6% 74.9%
Service 15.5% 12.9% 12.3%
-------------- ------------- -------------
Total cost of sales and service 88.2% 87.5% 87.2%
============== ============= =============
Gross profit:
Equipment, supplies and leasing 5.9% 6.7% 7.7%
Service 5.9% 5.8% 5.1%
-------------- ------------- -------------
Total gross profit 11.8% 12.5% 12.8%
============== ============= =============
Operating expenses:
Selling, general and administrative 7.9% 7.3% 7.1%
Rent 0.5% 0.5% 0.4%
Depreciation 0.8% 0.6% 0.6%
Amortization 0.1% 0.2% 0.7%
Provision for doubtful accounts 0.0% 0.1% 0.1%
Litigation settlement 0.0% 0.0% 0.1%
Provision for vendor receivables
and restructuring charge 0.0% 0.6% 2.0%
-------------- ------------- -------------
Total operating expenses 9.3% 9.3% 11.0%
============== ============= =============
Income from operations 2.5% 3.2% 1.8%
Net other expense 0.0% 0.1% 0.2%
Income before income tax 2.5% 3.1% 1.6%
Income tax expense 1.0% 1.0% 0.6%
-------------- ------------- -------------
Net income 1.5% 2.1% 1.0%
============== ============= =============
23
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
Total Net Sales and Revenues. Total net sales and revenues decreased $104.4
million, or 14.9%, to $598.4 million in fiscal 2003 from $702.8 million in
fiscal 2002. 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
and the decrease in leasing revenue due to the sale of TIFS during fiscal 2002.
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
2003, Pomeroy elected to take such commissions on transactions whose sales would
otherwise have been $10.6 million. Excluding acquisitions completed in fiscal
year 2003, total net sales and revenues decreased 19.3%
Products and leasing sales decreased $101 million, or 17.7%, to $470.5 million
in fiscal 2003 from $571.5 million in fiscal 2002. Excluding acquisitions
completed in fiscal year 2003, total product and leasing net sales and revenues
decreased 22.7%. Service revenues decreased $3.4 million, or 2.6%, to $127.9
million in fiscal 2003 from $131.3 million in fiscal 2002. Excluding
acquisitions completed in fiscal year 2003, total service net sales and revenues
decreased 4.6% 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 the sale of TIFS.
Gross Profit. Gross profit margin was 11.8% in fiscal 2003 compared to 12.5% in
fiscal 2002. This decrease in gross profit resulted primarily from the decrease
in hardware and service margins, but was offset somewhat by the adoption of EITF
02-16 and somewhat by the higher proportion of service gross margin to total
gross margin. The decrease in product and leasing 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, and offset somewhat by the
adoption of EITF 02-16. 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. The competitive
environment as well as less than maximum technical employee utilization rate has
also resulted in downward pressure on service margins. Additionally, the Company
expects to continue increasing the breadth and depth of its service offerings,
which will have a continued impact on service gross margin. Service gross margin
increased to 49.6% of total gross margin in fiscal 2003 from 46.1% in fiscal
2002. 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, the ratio
of service revenues to total net sales and revenues, and the Company's decision
to aggressively price certain products and services.
As a consequence of adopting EITF 02-16, the Company recorded approximately $324
thousand during fiscal 2003 of vendor considerations as a reduction of cost of
sales, which would previously have been recorded as a reduction of selling,
general and administrative expenses. Excluding the impact of EITF 02-16, and
therefore on a non-GAAP basis, the gross profit would have been 11.7% during
fiscal 2003 compared to 12.5% during fiscal 2002. The non-GAAP gross profit
margin is included in this discussion to provide meaningful comparison to prior
periods.
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 8.4% in fiscal 2003 from 7.9% for
fiscal 2002. This increase is the result of lower than expected total net sales
and revenues in fiscal 2003 as compared to fiscal 2002 and the adoption of EITF
02-16.
As a result of adopting EITF 02-16, the Company reclassified approximately $324
thousand of vendor consideration to a reduction of cost of sales, which would
previously have been recorded as a reduction of selling, general and
administrative expenses. Excluding the impact of EITF 02-16, and therefore on a
non-GAAP basis, selling, general and administrative expenses would have been
8.3% during fiscal 2003 as compared to 7.9% during fiscal 2002. This non-GAAP
measurement is included to provide a more meaningful comparison to prior
periods.
Total operating expenses expressed as a percentage of total net sales and
revenues remained the same for fiscal 2003 and fiscal 2002 at 9.3%. However,
the composition of the fiscal 2003 total operating expenses changed from fiscal
2002. With the exception of depreciation expense, all other operating expenses
decreased in fiscal 2003 as compared to fiscal 2002. Excluding the impact of
EITF 02-16, and therefore on a non-GAAP basis, total operating expenses would
have been 9.2% during fiscal 2003 as compared to 9.3% during fiscal 2002. This
non-GAAP measurement is included to provide a more meaningful comparison to
prior periods. 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 $0.1 million or
33.3% to $0.2 million in fiscal 2003 from $0.3 million in fiscal 2002. For both
fiscal 2003 and fiscal 2002, the litigation settlement relates to single
bankruptcy preference claims.
24
Provision for Vendor Receivables and Restructuring Charge. In fiscal 2002 the
Company expensed $3.3 million to increase the vendor receivable reserve 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
OEMs regarding resolution. In fiscal 2002 the Company also recorded
restructuring expenses of $.7 million to consolidate and relocate operations in
various geographical locations. No such expenses were recorded in fiscal 2003.
Income from Operations. Income from operations decreased $7.4 million, or
33.3%, to $14.8 million in fiscal 2003 from $22.2 million in fiscal 2002. The
Company's operating margin decreased to 2.5% in fiscal 2003 from 3.2% in fiscal
2002. This decrease is primarily due to the decrease in gross margin and the
lower than expected total net sales and revenues , offset by decrease in
operating expenses.
Interest Income/Expense, Net. Interest income was $0.08 million during fiscal
2003 as compared to interest expense of $0.5 million during fiscal 2002. This
change was due to reduced borrowings as a result of improved cash flow
management, the sale of certain TIFS assets and interest income earned on cash
balances.
Income Taxes. The Company's effective tax rate was 39.0% in fiscal 2003
compared to 31.0% in fiscal 2002. This increase was principally related to a
tax benefit of $1.6 million in fiscal 2002 associated with an increase in the
tax basis of leased assets as a result of an accounting method change for tax
purposes in fiscal 2002.
Net Income. Net income decreased $5.9 million, or 39.3%, to $9.1 million in
fiscal 2003 from $15.0 million in fiscal 2002. The increase was a result of the
factors described above.
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
and the decrease in leasing revenue due to the sale of 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.
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.
Litigation Settlement. Litigation settlement expense decreased $0.7 million or
70% to $0.3 million in fiscal 2002 from $1.0 million in fiscal 2001.
Increase in Allowances. Vendor allowances decreased $11.7 million or 78% to $3.3
million in fiscal 2002 from $15.0 million in fiscal 2001. Vendor allowances
expressed as a percentage of total net sales and revenues decreased to 0.5% in
fiscal 2002 from 1.9% for fiscal 2001. The determination of an appropriate
allowance was based on the
25
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 $0.2 million or 22.2% to
$0.7 million in fiscal 2002 from $0.9 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, which were paid in 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 3.2% 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 72.2%, 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.
26
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $28.7 miIlion in fiscal 2003. Cash
used in investing activities was $7.5 million, which included $5.9 million for
acquisitions completed in fiscal 2003 and prior years and $1.7 million for
capital expenditures. Cash used in financing activities was $13.5 million which
included $9.8 million for a dividend payment, $0.5 million of payments on notes
payable, $4.1 million for the purchase of treasury stock, and was offset by
$0.6 million from the exercise of stock options and the related tax benefit, and
$0.3 million proceeds from the employee stock purchase plan.
A significant part of Pomeroy's inventories is financed by floor plan
arrangements with third parties. At January 5, 2004, these lines of credit
totaled $84.0 million, including $72.0 million with GE Commercial Distribution
Finance ("GECDF"), formerly Deutsche Financial Services 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.
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. 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 1.12% as of
January 5, 2004. This credit facility expires June 28, 2004. The Company is
currently negotiating a new credit facility with terms sufficient for its
financing needs and does not anticipate any problems securing a new credit
facility before June 28, 2004.
At January 5, 2004, the Company did not have a balance outstanding under the
working capital and cash flow components 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.
Currently, Pomeroy is not in violation of any financial covenants.
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 the Company's contractual obligations and other off
balance sheet commitments as of January 5, 2004 are presented in the following
table:
More than
TOTAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 5 YEARS
--------------------------------------------------------------
Acquisition notes $ 1,825 $ 912 $ 913 $ - $ - $ - $ -
Operating leases 15,060 3,964 3,492 2,214 1,696 1,520 2,174
--------------------------------------------------------------
Total contractual cash obligations $16,885 $ 4,876 $ 4,405 $ 2,214 $ 1,696 $ 1,520 $ 2,174
==============================================================
The operating leases, shown above, are not recorded on the consolidated balance
sheet. Operating leases are utilized in the normal course of business.
27
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. On May 13, 2003, the Company announced that its Board of
Directors authorized the repurchase of an additional 1,000,000 shares through
its stock repurchase program. The additional shares to be repurchased represent
approximately 8.0% of the Company's outstanding common stock and will be
purchased 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 expires June 1, 2004.
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 recorded revenues of $32.0 million. Their primary
services include systems network integration, project management, and telephony
integration.
On July 18, 2003, the Company announced that it would pay a one-time cash
dividend of $9.8 million, or $0.80 per share, to shareholders of record as of
July 28, 2003. The cash dividend was paid on August 7, 2003.
On December 31, 2003, the Company announced the completion of the acquisition of
eServ Solutions Group, LLC ("eServ"), a Rock Island, Illinois based IT solutions
and professional services provider. For the ten months ended October 31, 2003,
eServ recorded revenues of approximately $6.0 million. eServ's primary service
offerings include network infrastructure, enterprise storage and server
solutions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its credit
facility with GECDF. Due to the Company's current cash position, the Company
did not experience a material impact from interest rate risk during fiscal 2003.
Currently, the Company does not have any significant financial instruments for
trading or other speculative purposes or to manage interest rate exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Registrant hereby incorporates the financial statements required by this item by
reference to Item 15 hereof.
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a)(i) Effective October 3, 2003, Pomeroy IT Solutions, Inc. (the "Company")
dismissed Grant Thornton LLP as the Company's independent accountants.
(ii) The reports of Grant Thornton LLP on the Company's consolidated
financial statements for the fiscal years ended January 5, 2003 and
2002 contained no adverse opinion or disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principle.
(iii) The Audit Committee and the Board of Directors approved the Company's
change in independent accountants.
(iv) In connection with the Company's audits for the two fiscal years
ending January 5, 2003 and 2002 and through October 7, 2003, the
Company has had no disagreements with Grant Thornton LLP on any matter
of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Grant Thornton LLP would have caused them to
make reference thereto in their report on the consolidated financial
statements of the Company for such years.
(v) During the Company's two fiscal years ending January 5, 2003 and 2002
and through October 7, 2003, the Company has had no reportable events
as defined in Item 304 (a) (1) (v) of Regulation S-K.
(vi) Grant Thornton LLP has furnished the Company with a letter addressed
to the Securities and Exchange Commission stating that it agrees with
the above statements. A copy of this letter, dated October 7, 2003,
was filed as Exhibit 16.1 to the Form 8-K, filed October 7, 2003.
(b)(i) The Company has engaged Crowe Chizek and Company LLC as its new
independent accountants effective October 3, 2003.
During the Company's two fiscal years ending January 5, 2003 and 2002
and through October 7, 2003, the Company has not consulted with Crowe
Chizek and Company LLC regarding either (i) the application of
accounting principles to a specified transaction, either completed or
proposed; or the type of audit opinion that might be rendered on the
Company's financial statements, and neither a written report nor oral
advice was provided to the Company that Crowe Chizek and Company LLC
concluded was an important factor considered by the Company in
reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was either the subject of a
disagreement, as that term is defined in Item 304(a)(1)(iv) of
Regulation S-K and the related instructions to Item 304 of Regulation
S-K, or a reportable event, as that term is defined in Item
304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
As of January 5, 2004, an evaluation was carried out under the supervision and
with the participation of the Company's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934). Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are, to the best
of their knowledge, effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
January 5, 2004, our Chief Executive Officer and Chief Financial Officer have
concluded that there were no significant changes in the Company's internal
controls or in other factors that could significantly affect our internal
controls.
PART III
ITEMS 10-14.
The Registrant hereby incorporates the information required by Form 10-K, Items
10-14 by reference to the Company's definitive proxy statement for its 2004
Annual Meeting of shareholders, which will be filed with the Commission on or
before May 4, 2004.
29
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
=========================================================================
2003 Form
- -------------------------------------------------------------------------
10-K Page
-----------
1. Financial Statements:
Reports of Independent Auditors F-1 to F-2
Consolidated Balance Sheets,
January 5, 2004 and January 5, 2003 F-3 to F-4
For each of the three fiscal years in
the period ended January 5, 2004:
Consolidated Statements of Income F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Equity F-7
Notes to Consolidated Financial Statements F-8 to F-23
2. Financial Statement Schedules:
None
=========================================================================
======================================================================================================
Filed Herewith
(page #) or
Incorporated
3. Exhibits by Reference to:
--------- ----------------
3(a) Certificate of Incorporation, as amended Exhibit 3(a) of
Company's
Form 10-Q filed
Aug.11, 2000
3(i)(a)1 Certificate of Incorporation of Pomeroy Computer Resources, Exhibit 3(i)(a)(1) of
dated February, 1992 Company's Form 10-
Q filed Aug. 11, 2000
3(i)(a)2 Certificate of Amendment to Certificate of Incorporation, dated Exhibit 3(i)(a)(2) of
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 Resources, Company's Form 10-Q
Inc. February 1998 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
======================================================================================================
30
===========================================================================================================================
3(i)(a)5 Certificate of Amendment to Certificate of Incorporation for Exhibit 3(I)(a)5 of
Pomeroy Computer Resources, Inc., dated June 19, 2003 Company's Form 10Q
filed August 19, 2003
(3)(i)(a)6 Certificate of Amendment to Certificate of Incorporation for Exhibit 3(I)(a)6 of
Pomeroy Computer Resources Sales Company, Inc., dated June Company's Form 10Q
filed August 19, 2003
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 Third Exhibit 4 of Company's
Bank, as Rights Agent dated as of February 23,1998 Form 8-K filed February
23, 1998
10(i) Material Agreements
(b)(1) Agreement for Wholesale Financing (Security Agreement) Exhibit 10(i)(b)(1) of
between IBM Credit Corporation and the Company dated April Company's Form 10-K
filed April 7, 1994
(b)(2) Addendum to Agreement for Wholesale Financing between Exhibit 10(i)(b)(2) of
IBM Credit Corporation and the Company dated July 7, 1993 Company's Form 10-K
filed April 7, 1994
(c)(1) Agreement for Wholesale Financing (Security Agreement) Exhibit 10(i)(c)(1) of
between ITT Commercial Finance Corporation and the Company's Form 10-K
Company dated March 27, 1992 filed April 7, 1994
(c)(2) Addendum to Agreement for Wholesale Financing between Exhibit 10(i)(c)(2) of
ITT Commercial Finance Corporation and the Company dated Company's Form 10-K
July 7, 1993 filed April 7, 1994
===========================================================================================================================
===========================================================================================================================
(c)(3) Amendment to Agreement for Wholesale Financing between Exhibit 10(i)(c)(3) of
Deutsche Financial Services f/k/a ITT Commercial Finance Company's Form 10-
Corporation and the Company dated May 5, 1995 Q filed May 18, 1995
(d)(1) Asset Purchase Agreement among the Company; TCSS; and Exhibit 10(i)(z) of
Richard Feaster, Victoria Feaster, Harry Feaster, Carolyn Company's Form 8-K
Feaster, Victoria Feaster, trustee of the Emily Patricia Feaster dated March 14, 1996
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
===========================================================================================================================
31
===============================================================================================================
(kk)(1) The Asset Purchase Agreement dated July 27, 2000 by, between Exhibit 10)(i)(kk)(1)
and among Pomeroy Computer Resources, Inc., Pomeroy Select Company's Form 10-
Integration Solutions, Inc., DataNet, Inc., DataNet Technical Q filed
Services, LLC, DataNet Tangible Products, LLC, DataNet November 10, 2000
Programming, LLC, Richard Stitt, Gregory Stitt, Jeffrey Eacho,
and Richard Washington.
(mm)(1) The Asset Purchase Agreement dated February 9, 2001 by, Exhibit 10(l)(mm)(1)
between and among Pomeroy Computer Resources, Inc., of Company's Form
Pomeroy Select Integration Solutions, Inc., Osage Systems 10Q filed August 17,
Group, Inc., Osage Computer Group, Inc., Solsource Computers 2001
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 dated Exhibit 10(l)(mm)(2)
February 28, 2001 by, between and among Pomeroy Computer of Company's Form
Resources, Inc., Pomeroy Select Integration Solutions, Inc., 10Q filed August 17,
Osage Systems Group, Inc., Osage Computer Group, Inc., 2001
Solsource Computers Inc., H.V. Jones, Inc., Open System
Technologies, Inc., Open Business Systems, Inc., and Osage
Systems Group Minnesota, Inc. and Osage iXi Inc.
(mm)(3) The Second Amendment to Asset Purchase Agreement dated April 6, Exhibit 10(l)(mm)(3) of
2001 by, between and among Pomeroy Computer Resources, Inc., Company's Form 10Q
Pomeroy Select Integration Solutions, Inc., Osage Systems Group, filed August 17, 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.
(mm)(4) The Credit Facilities Agreement dated June 28, 2001 by, Exhibit 10(l)(mm)(4) of
between, and among Deutsche Financial Services Corporation, Company's Form 10Q
Firstar Bank, National Association, Deutsche Financial Services filed August 17, 2001
Corporation and Firstar Bank, National Association, Other
Lenders Hereto as lenders, Pomeroy Computer Resources, Inc.,
Pomeroy Select Integration Solutions Inc., Pomeroy Select
Advisory Services, Inc., Pomeroy Computer Resources Sales
Company, Inc., Pomeroy Computer Resources Holding Company,
Inc., Pomeroy Computer Resources Operations LLP, Technology
Integration Financial Services, Inc., 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
===============================================================================================================
32
===============================================================================================================
(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 among Pomeroy Exhibit 10(l)(mm)(7) of
Select Integration Solutions, Inc., and Ballantyne Consulting Group, Company's Form 10Q
Inc., Mark DeMeo, Joe Schmidt, Scott Schneider and Date Tweedy, filed November 13, 2001
dated September 21, 2001
(mm)(8) The Asset Purchase Agreement by, between and among Pomeroy Exhibit 10(l)(mm)(8) of
Computer Resources, Inc., Pomeroy Select Integration Solutions, Company's Form 10Q
Inc., System 5 Technologies, Inc., Dale Tweedy, Jill Tweedy and Phil filed November 13, 2001
Tetreault, dated September 21, 2001
(mm)(9) Second Amendment to Credit Facilities and Waiver of Defaults Exhibit 10(I)(mm)(9) of
Company's Form 10K
filed April 5, 2002
(mm)(10) Asset purchase agreement by, between and among Pomeroy Select Exhibit 10(I)(mm)(10) of
Integration Solutions, Inc. and Verity Solutions, LLC and John R. Company's Form 10Q
Blackburn, dated August 30, 2002 filed May 20, 2002
(mm)(11) Covenant not to compete agreement between John R. Blackburn and Exhibit 10(I)(mm)(11) of
Pomeroy Select Integration Solutions, Inc. the Company's Form
10Q filed May 20, 2002
(mm)(12) Third amendment and consent under credit facilities agreement Exhibit (mm)(12) of the
Company's Form 10K
filed March 31, 2003
(mm)(13) Fourth amendment to credit facilities agreement Exhibit (mm)(13) of the
Company's Form 10Q
filed August 19, 2003
(mm)(14) Fifth amendment and consent to credit facilities agreement Exhibit (mm)(14) of the
Company's Form 10Q
filed August 19, 2003
(nn)(1) Stock purchase agreement by, between and among James Exhibit (nn)(1) of the
Hollander, trustee, Raymond Hays, trustee, David Yoka, trustee and Company's Form 10Q
Matthew Cussigh and Pomeroy Computer Resources, Inc. filed May 20, 2003
(nn)(2) Asset purchase agreement by, between and among Pomeroy IT E-1 - E-61
Solutions, Inc., Pomeroy Select Integration Solutions, Inc., eServe
Solutions Group, LLC, Tim Baldwin and Pat Sherman.
===============================================================================================================
33
================================================================================================
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-K
Datago agreement by David B. Pomeroy and his 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-Q
effective January 6, 1995 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-Q
effective January 6, 1995 filed November 17, 1995
(a)(7) Collateral Assignment Split Dollar Agreement
between the Company; Edwin S. Weinstein, as Exhibit 10(iii)(a)(7) of
Trustee; and David B. Pomeroy dated June 28, Company's Form 10-Q
1995 filed November 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 10-Q
effective January 6, 1996 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-3
effective January 6, 1997 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-3
6, 1997 filed January 3, 1997
(a)(13) Seventh Amendment to Employment Agreement Exhibit 10)(iii)(a)(13) of
between the Company and David B. Pomeroy Company's Form 10-Q
effective January 6, 1998 filed May 6, 1998
================================================================================================
34
================================================================================================
(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 Exhibit (a)(19) of the
Between the Company and David B. Pomeroy Company's Form 10K
Effective January 6, 2003 filed March 31,
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
================================================================================================
35
================================================================================================
(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 Exhibit (j)(7) of the
between Pomeroy Computer Resources, Inc., and Company's Form
Stephen E. Pomeroy, dated January 6, 2003 10K filed March 31,
2003
(j)(8) Amended and restated employment agreement by and Exhibit 10(iii)(j)(7)
between Pomeroy IT Solutions, Inc. fka Pomeroy of the Company's
Computer Resources, Inc. and Stephen E. Pomeroy, Form 10Q filed
dated November 3, 2003 November 19, 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 Exhibit (m)(2) of the
and between Pomeroy Computer Resources, Inc. and Company's Form 10K
Michael E. Rohrkemper, dated March 5, 2003 filed March 31, 2003
(m)(3) Addendum to Second Amendment to Employment Exhibit (m)(3) of the
Agreement by and between Pomeroy Computer Company's Form
Resources, Inc. and Michael E. Rohrkemper, dated 10K filed March 31,
March 11, 2003 2003
11 Computation of Per Share Earnings See Note 2 of Notes
to Consolidated
Financial Statements
21 Subsidiaries of the Company E-62
23.1 Consent of Crowe Chizek and Company LLC E-63
23.2 Consent of Grant Thornton LLP E-64
31.1 Section 302 CEO Certification E-65
================================================================================================
36
================================================================================================
31.2 Section 302 CFO Certification E-66
32.1 Section 906 CEO Certification E-67
32.2 Section 906 CFO Certification E-68
================================================================================================
(b) Reports on Form 8-K:
On December 31, 2003, the Company announced the acquisition of eServ Solutions
Group, LLC, a Rock Island, Illinois based IT solutions and professional services
provider.
37
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 IT Solutions, 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 19, 2004
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 19, 2004
- --------------------------------------
David B. Pomeroy, II Director
By: /s/ Stephen E. Pomeroy March 19, 2004
- --------------------------------------
Stephen E. Pomeroy, Director
By: /s/ James H. Smith III March 19, 2004
- --------------------------------------
James H. Smith III, Director
By: /s/ Michael E. Rohrkemper March 19, 2004
- --------------------------------------
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 19, 2004
- --------------------------------------
Vincent D. Rinaldi, Director
38
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Pomeroy IT Solutions, Inc.
We have audited the accompanying consolidated balance sheet of Pomeroy IT
Solutions, Inc. and subsidiaries as of January 5, 2004, and the related
consolidated statements of income, equity and cash flows for the year then
ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pomeroy
IT Solutions, Inc. and subsidiaries as of January 5, 2004, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
Crowe Chizek and Company LLC
/s/ Crowe Chizek and Company LLC
Louisville, Kentucky
February 11, 2004
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Pomeroy Computer Resources, Inc.
We have audited the accompanying consolidated balance sheet of Pomeroy IT
Solutions, Inc. (formerly Pomeroy Computer Resources, Inc.) as of January 5,
2003, and the related consolidated statements of income, equity, and cash flows
for each of the two 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 IT
Solutions, Inc. (formerly Pomeroy Computer Resources, Inc.) as of January 5,
2003, and the consolidated results of its operations and its consolidated cash
flows for each of the two 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-2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
2004 2003
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 40,200 $ 32,505
Accounts receivable:
Trade, less allowance of $2,556 and $1,553 at January 5,
2004 and 2003, respectively . . . . . . . . . . . . . . 111,324 95,859
Vendor receivables, less allowance of $100 and $3,334
at January 5, 2004 and 2003, respectively. . . . . . . 7,226 10,297
Net investment in leases. . . . . . . . . . . . . . . . . . . 2,056 1,966
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,043 2,775
----------- -----------
Total receivables. . . . . . . . . . . . . . . . . . 122,649 110,897
----------- -----------
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 12,453 11,238
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,193 10,198
----------- -----------
Total current assets.. . . . . . . . . . . . . . . . 180,495 164,838
----------- -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment. . . . . . . . . . . . . 29,517 28,741
Leasehold Improvements . . . . . . . . . . . . . . . . . . 6,438 5,951
----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . 35,955 34,692
Less accumulated depreciation. . . . . . . . . . . . . . . 19,696 15,393
----------- -----------
Net equipment and leasehold improvements . . . . . . 16,259 19,299
----------- -----------
Net investment in leases, net of current portion. . . . . . . 2,935 1,889
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . 67,664 60,635
Intangible assets, net. . . . . . . . . . . . . . . . . . . . 436 540
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,410 1,295
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . $ 269,199 $ 248,496
=========== ===========
See notes to consolidated financial statements
F-3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
2004 2003
----------- -----------
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable . . . . . . . . . . . . . . . $ 912 $ 541
----------- -----------
Accounts payable:
Floor plan financing. . . . . . . . . . . . . . . . . . . . 16,572 7,533
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,479 23,632
----------- -----------
Total accounts payable . . . . . . . . . . . . . . . . . 50,051 31,165
----------- -----------
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 3,988 1,490
Accrued liabilities:
Employee compensation and benefits. . . . . . . . . . . . . 2,425 3,336
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . 32 322
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . 5 20
Other accrued liabilities . . . . . . . . . . . . . . . . . 6,296 4,630
----------- -----------
Total current liabilities . . . . . . . . . . . . . . 63,709 41,504
----------- -----------
Notes payable, less current portion. . . . . . . . . . . . . . 913 -
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 4,780 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,
(12,943 and 12,869 shares issued at January 5, 2004 and
2003, respectively). . . . . . . . . . . . . . . . . . . 130 129
Paid in capital . . . . . . . . . . . . . . . . . . . . . . 82,696 81,740
Retained earnings . . . . . . . . . . . . . . . . . . . . . 125,250 125,988
----------- -----------
208,076 207,857
Less treasury stock, at cost (738 and 355 shares
at January 5, 2004 and 2003, respectively) . . . . . . . 8,279 4,183
----------- -----------
Total equity. . . . . . . . . . . . . . . . . . . . . 199,797 203,674
----------- -----------
Total liabilities and equity. . . . . . . . . . . . . $ 269,199 $ 248,496
=========== ===========
See notes to consolidated financial statements
F-4
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Fiscal Years Ended January 5,
-------------------------------
2004 2003 2002
--------- --------- ---------
Net sales and revenues:
Sales - equipment, supplies and leasing. $470,518 $571,507 $668,748
Service. . . . . . . . . . . . . . . . . 127,905 131,293 140,466
--------- --------- ---------
Total net sales and revenues . . . 598,423 702,800 809,214
--------- --------- ---------
Cost of sales and service:
Equipment, supplies and leasing. . . . . 435,048 524,237 606,078
Service. . . . . . . . . . . . . . . . . 92,982 90,898 99,859
--------- --------- ---------
Total cost of sales and service. . 528,030 615,135 705,937
--------- --------- ---------
Gross profit.. . . . . . . . . . . . . . 70,393 87,665 103,277
--------- --------- ---------
Operating expenses:
Selling, general and administrative. . . 46,769 51,157 57,492
Rent . . . . . . . . . . . . . . . . . . 3,149 3,311 3,631
Depreciation . . . . . . . . . . . . . . 4,915 4,596 4,805
Amortization . . . . . . . . . . . . . . 404 1,124 5,557
Provision for doubtful accounts. . . . . 200 900 517
Litigation settlement. . . . . . . . . . 150 300 1,000
Provision for vendor receivables
and restructuring charge. . . . . . . . - 4,048 15,934
--------- --------- ---------
Total operating expenses . . . . . 55,587 65,436 88,936
--------- --------- ---------
Income from operations. . . . . . . . . . 14,806 22,229 14,341
--------- --------- ---------
Other expense (income):
Interest, net. . . . . . . . . . . . . . (75) 541 1,768
Other. . . . . . . . . . . . . . . . . . 11 (63) (229)
--------- --------- ---------
Net other expense (income) . . . . (64) 478 1,539
--------- --------- ---------
Income before income tax . . . . . . . . 14,870 21,751 12,802
Income tax expense . . . . . . . . . . . 5,799 6,742 4,993
--------- --------- ---------
Net income.. . . . . . . . . . . . . . . $ 9,071 $ 15,009 $ 7,809
========= ========= =========
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . 12,305 12,694 12,609
========= ========= =========
Diluted. . . . . . . . . . . . . . . . . 12,375 12,755 12,702
========= ========= =========
Earnings per common share:
Basic. . . . . . . . . . . . . . . . . . $ 0.74 $ 1.18 $ 0.62
========= ========= =========
Diluted. . . . . . . . . . . . . . . . . $ 0.73 $ 1.18 $ 0.61
========= ========= =========
See notes to consolidated financial statements.
F-5
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Fiscal Years Ended January 5,
-----------------------------
Cash Flows from Operating Activities: 2004 2003 2002
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 9,071 $ 15,009 $ 7,809
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation . . . . . . . . . . . . . . . . 4,915 5,246 6,970
Amortization . . . . . . . . . . . . . . . . 404 1,124 5,557
Deferred income taxes. . . . . . . . . . . . 2,488 7,994 (4,213)
Loss on sale of fixed assets . . . . . . . . 84 1,008 756
Change in receivables allowances . . . . . . (4,005) (12,267) 15,171
Other. . . . . . . . . . . . . . . . . . . . - (283) 283
Changes in working capital accounts,
net of effects of acquisitions/divestitures:
Accounts receivable . . . . . . . . . . . (4,616) 69,709 4,578
Inventories . . . . . . . . . . . . . . . (1,097) 8,865 5,682
Prepaids. . . . . . . . . . . . . . . . . 5,146 (10,717) 2,252
Net investment in leases. . . . . . . . . 34 2,349 4,392
Floor plan financing. . . . . . . . . . . 9,040 (33,117) (8,458)
Trade payables. . . . . . . . . . . . . . 5,526 (18,240) 25,356
Deferred revenue. . . . . . . . . . . . . 2,499 (1,261) (4,374)
Income tax payable. . . . . . . . . . . . (292) (305) 3,428
Other, net. . . . . . . . . . . . . . . . (489) (169) 1,311
--------- --------- ---------
Net operating activities . . . . . . . . . . 28,708 34,945 66,500
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . (1,670) (7,820) (5,251)
Proceeds from sale of fixed assets . . . . . 4 470 -
Proceeds from sale of leasing segment assets - 24,380 -
Acquisitions of businesses, net
of cash acquired . . . . . . . . . . . . . (5,858) (1,655) (7,971)
--------- --------- ---------
Net investing activities . . . . . . . . . . (7,524) 15,375 (13,222)
--------- --------- ---------
Cash Flows from Financing Activities:
Payments under notes
payable . . . . . . . . . . . . . . . . . (541) (6,475) (6,757)
Net payments under bank notes
payable . . . . . . . . . . . . . . . . . - (12,118) (45,991)
Proceeds from exercise of stock options
and related tax benefit. . . . . . . . . . 608 813 1,188
Proceeds from issuance of common shares for
employee stock purchase plan . . . . . . . 349 441 570
Purchase of treasury stock . . . . . . . . . (4,096) (3,351) (510)
Payment of cash dividend . . . . . . . . . . (9,809) - -
--------- --------- ---------
Net financing activities . . . . . . . . . . (13,489) (20,690) (51,500)
--------- --------- ---------
Increase in cash and cash equivalents . . . . . 7,695 29,630 1,778
Cash and cash equivalents:
Beginning of year. . . . . . . . . . . . . . 32,505 2,875 1,097
--------- --------- ---------
End of year. . . . . . . . . . . . . . . . . $ 40,200 $ 32,505 $ 2,875
========= ========= =========
See notes to consolidated financial statements.
F-6
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in thousands, except per share amounts) Common Paid-in Retained Treasury Total
Stock Capital Earnings Stock Equity
------- -------- ---------- ---------- ---------
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
Net income. . . . . . . . . . . . . . . . . . 9,071 9,071
Treasury stock purchased. . . . . . . . . . . (4,096) (4,096)
Cash dividend ($0.80 per share) . . . . . . . (9,809) (9,809)
Stock options exercised and
related tax benefit . . . . . . . . . . . . . 1 607 608
37,091 common shares issued for
employee stock purchase plan. . . . . . . 349 349
------------------------------------------------------
Balances at January 5, 2004. . . . . . . . . . . $ 130 $ 82,696 $ 125,250 $ (8,279) $199,797
======================================================
See notes to consolidated financial statements.
F-7
POMEROY IT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 5, 2004, JANUARY 5, 2003, AND JANUARY 5, 2002
1. Company Description
Pomeroy IT Solutions, Inc. (formerly, Pomeroy Computer Resources, Inc.) is
a Delaware corporation organized in February 1992. Pomeroy IT Solutions,
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 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.
The Company operates in three industry segments: products, services and
leasing. See Note 14 of the Notes to Consolidated Financial Statements for
discussion of the 2002 sale of the majority of leasing segment net assets.
See Note 21 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 2003, 2002 and 2001 are for the fiscal years ended
January 5, 2004, January 5, 2003 and January 5, 2002, respectively.
Cash and Cash Equivalents - Cash and cash equivalents includes highly
liquid, temporary cash investments having original maturity dates of three
months or less.
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 fifteen
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 that are being amortized using the straight-line method
over periods up to fifteen 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". 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.
F-8
Income Taxes - Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Vendor Rebates - The most significant component of vendor receivables is
vendor rebates. Vendor rebate programs are developed by original equipment
manufacturers ("OEM') allowing them to modify product pricing on a case by
case basis (generally determined by individual customers) to maintain their
competitive edge on specific transactions. The Company will contact the OEM
to request a rebate, for a specific transaction, and if approved, the OEM
will provide the Company with a document authorizing a rebate to be paid to
the Company at a later date when a claim is filed. At the time the Company
records product sales, 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. In total advertising costs associated
with these programs are charged to expense as incurred and amounted to $22
thousand, $410 thousand, and $97 thousand for the fiscal years 2003, 2002
and 2001, 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. 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.
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 2003, 2002
and 2001 consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
F-9
(in thousands, except per
share amounts) Fiscal 2003 Fiscal 2002 Fiscal 2001
------------ ------------ ------------
Net income - as reported $ 9,071 $ 15,009 $ 7,809
Stock-based compensation expense-net of tax 1,622 1,078 1,704
------------ ------------ ------------
Net income - pro forma $ 7,449 $ 13,931 $ 6,105
============ ============ ============
Net income per common share - as reported
Basic $ 0.74 $ 1.18 $ 0.62
Diluted 0.73 1.18 0.61
Net income per common share - pro forma
Basic 0.61 1.10 0.48
Diluted 0.60 1.09 0.48
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
Fiscal 2003 Fiscal 2002 Fiscal 2001
------------ ------------ ------------
Expected life (years) 4.1 2.8 3.3
Risk free interest rate 2.4% 2.9% 4.5%
Volatility 51% 46% 57%
Dividend yield 0% 0% 0%
The total fair value of options granted are recognized as pro forma
stock-based compensation expense over each option's vesting period.
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 common shares used in
the basic and diluted EPS computations:
(in thousands, except per Fiscal Years
------------------------------------------------------------
share data) 2003 2002 2001
------------------- ------------------ -------------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ ----------- ------- ---------- ------ -----------
Basic EPS 12,305 $ 0.74 12,694 $ 1.18 12,609 $ 0.62
Effect of dilutive stock options 70 (0.01) 61 - 93 (0.01)
------ ----------- ------- ---------- ------ -----------
Diluted EPS 12,375 $ 0.73 12,755 $ 1.18 12,702 $ 0.61
====== =========== ======= ========== ====== ===========
Use of Estimates in Financial Statements - In preparing financial
statements in conformity with accounting principles generally accepted in
the United States of America, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during
the reporting period. Accounting estimates in these financial statements
include allowances 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.
F-10
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.
Recent Accounting Pronouncements - 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 will have a material impact
on its financial position and results of operations.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus 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 had been participating in a vendor program that expired in
November of 2003. Since this program was initiated prior to December 31,
2002, the Company has classified these vendor program payments as a
reduction in selling, general and administrative expenses. Under new
agreements, the Company has classified these vendor program payments under
cost of sales in accordance with EITF 02-16.
In January 2003, the Financial Accounting Standards Board ("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 December 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company has determined that
the adoption of the provisions of FIN 46 will not have an impact upon its
financial condition or results of operations.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS
149 amends and clarifies the financial accounting and reporting for
derivative instruments, including certain derivatives instruments embedded
in other contracts, and for hedging activities under SFAS 133. The Company
has adopted the provisions of SFAS 149 and they had no material impact on
our financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 clarifies the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
either debt or equity. The new Statement requires that those financial
instruments be classified as liabilities in statements of financial
position. The Company has adopted the provisions of SFAS 150 and they had
no material impact on our financial position or results of operations.
F-11
3. Accounts Receivable
The following table summarizes the activity in the allowance for doubtful
accounts for fiscal years 2003, 2002 and 2001:
(in thousands) Trade Vendor and Other
-------- ------------------
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
Provision 2003 200 -
Accounts written-off (971) (3,234)
Recoveries 1,774 -
-------- ------------------
Balance January 5, 2004 $ 2,556 $ 100
======== ==================
During fiscal 2001 and fiscal 2002, the Company recorded an increase in
allowances of $15.0 million and $3.3 million, respectively, specifically
related to the collectibility of vendor receivables. The determination of
the increase in allowances 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 following table summarizes the components of the
net investment in sales-type leases as of end of fiscal years 2003 and
2002:
(in thousands) 2003 2002
------- -------
Minimum lease payments receivable $3,770 $2,513
Estimated residual value 1,388 1,588
Initial direct costs 19 12
Unearned income (186) (258)
------- -------
Total $4,991 $3,855
======= =======
F-12
The future minimum lease payments for the net investment in leases, are as
follows:
(in thousands)
Fiscal Year
-----------------------------
2004 $2,056
2005 2,125
2006 726
2007 84
------
Total minimum lease payments $4,991
======
5. Inventories
Inventories consist of items held for resale and are comprised of the
following components as of the end of fiscal years 2003 and 2002:
(in thousands) 2003 2002
------- -------
Equipment and supplies $ 9,859 $ 8,378
Service parts 2,594 2,860
------- -------
Total $12,453 $11,238
======= =======
6. Goodwill and Other Intangible Assets
Intangible assets with definite lives are amortized over their estimated
useful lives. The following table provides a summary of the Company's
intangible assets with definite lives as of January 5, 2004 and January 5,
2003:
Intangible assets consist of the following:
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
1/5/2004 1/5/2004 1/5/2004 1/5/2003 1/5/2003 1/5/2003
--------- ------------- --------- --------- ------------- ---------
Amortized intangible assets:
Covenants not-to-compete $ 1,844 $ 1,650 $ 194 $ 1,694 $ 1,324 $ 370
Customer lists 627 385 242 477 307 170
--------- ------------- --------- --------- ------------- ---------
Total amortized intangibles $ 2,471 $ 2,035 $ 436 $ 2,171 $ 1,631 $ 540
========= ============= ========= ========= ============= =========
Amortized intangible assets are being amortized over periods ranging from 3
to 15 years for covenants not-to-compete and 10 to 15 years for customer
lists. The weighted average amortization period for all amortized
intangible assets acquired in fiscal 2003 is 15 years.
F-13
Projected future amortization expense related to intangible assets with
definite lives are as follows:
(in thousands)
Fiscal years:
2004 $ 138
2005 53
2006 20
2007 20
2008 20
2009+ 185
------
Total $ 436
======
For the year ended January 5, 2004, amortization expense related to
intangible assets was $404 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.
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.
The changes in the net carrying amount of goodwill for the years ended
January 5, 2004 and 2003 by segment are as follows:
(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
Reallocation of goodwill (10,284) 10,284 -
Goodwill recorded during fiscal 2003 3,789 3,240 7,029
---------- --------- -------------
Net carrying amount as of 1/5/04 $ 35,862 $ 31,802 $ 67,664
========== ========= =============
During the first quarter of fiscal 2003, the Company changed the allocation
of goodwill by reporting unit. As a result of this evaluation process, the
Company reallocated approximately $10.3 million of goodwill to the services
reporting unit from the products reporting unit. This reallocation had no
effect on the result of any previous period's impairment testing. The
reallocation is also reflected in the segment information in Note 21.
F-14
Net income and earnings per share exclusive of amortization expense are as
follows:
(in thousands, except per share data) For the Year ended
January 5,
2004 2003 2002
------ ------- -------
Reported net income $9,071 $15,009 $ 7,809
Add back: Goodwill amortization (net of tax) - - 2,692
------ ------- -------
Adjusted net income $9,071 $15,009 $10,501
====== ======= =======
Basic earnings per share:
Reported net income $ 0.74 $ 1.18 $ 0.62
Goodwill amortization - - 0.21
------ ------- -------
Adjusted net income $ 0.74 $ 1.18 $ 0.83
====== ======= =======
Diluted earnings per share:
Reported net income $ 0.73 $ 1.18 $ 0.61
Goodwill amortization - - 0.21
------ ------- -------
Adjusted net income $ 0.73 $ 1.18 $ 0.82
====== ======= =======
During fiscal 2003, the Company acquired all of the outstanding common
stock of Micrologic Business Systems of K.C., Inc. ("Micrologic"), a Kansas
City based IT solutions and professional services provider. Their primary
services include systems network integration, project management, and
telephony integration. The Company recorded $3.2 million of goodwill
related to the acquisition. In addition, the Company acquired certain
assets of eServ Solutions Group, LLC ("eServ"), a Rock Island, Illinois
based IT solutions and professional services provider. eServ's primary
service offerings include network infrastructure, enterprise storage and
server solutions. The Company recorded $1.1 million of goodwill related to
the acquisition. Also during fiscal 2003, the Company recorded $2.7 million
of goodwill associated with earn-out payments made in conjunction with
prior acquisitions.
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.
In fiscal 2001, the Company acquired certain assets of Osage Systems Group,
Inc., a Phoenix, Arizona based network integrator. In addition, the Company
acquired Charlotte based firms Ballantyne Consulting Group Inc. and System
5 Technologies, Inc. The firms have been combined to create an expanded
Information Technology services arm that provides end-to-end infrastructure
design and implementation and project management solutions for eBusiness
enablement, systems integration, package applications, customer
relationship management, enterprise resource planning and data warehousing.
The Company recorded $1.7 million, $1.5 million, and $3.4 million of
goodwill in connection with those acquisitions, respectively.
7. Borrowing Arrangements
Bank notes payable - The Company's financing of receivables is provided
through a portion of its credit facility with GE Commercial Distribution
Finance ("GECDF"), formerly with Deutsche Financial Services. The Company's
$240.0 million credit facility with GECDF 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. 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. This credit facility
expires June 28, 2004. The Company is currently negotiating a new credit
facility with terms sufficient for its financing needs and does not
anticipate any problems securing a new credit facility before June 28,
2004.
At January 5, 2004 and January 5, 2003, the Company did not have any
balance outstanding under the working capital and cash flow components
under this facility. The credit facility is collateralized by substantially
all of the assets of the Company, except those assets that collateralize
certain other financing arrangements. Under the terms of the credit
facility, the Company is subject to various financial covenants and
restricted from paying cash dividends without the prior approval of GECDF.
Currently, the Company is in compliance with all financial covenants.
F-15
Floor plan arrangements - A significant part of Pomeroy's inventories are
financed by floor plan arrangements with third parties. At January 5, 2004,
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 collateralized by
the related inventory. Financing on substantially all of the arrangements
is nominal due to subsidies by manufacturers. Overall, the average interest
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
---------------
2003 2002
------- ------
Acquisition notes payable at various interest rates, ranging
from 4.00% to 4.25%, and unsecured. Principal payments
are made in equal annual installments, ranging from one to
two years, through 2005 $ 1,825 $ 541
------- ------
Total notes payable 1,825 541
Less current maturities 912 541
------- ------
Long-term notes payable $ 913 $ -
======= ======
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. During fiscal 2003, the Company had paid all of the
accrued and unpaid restructuring costs.
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."
The provision for income taxes consists of the following:
(in thousands) Fiscal Years
----------------------------
2003 2002 2001
------ ---------- --------
Current:
Federal $2,623 $ (1,219) $ 7,932
State 688 (33) 1,273
------ ---------- --------
Total current 3,311 (1,252) 9,205
------ ---------- --------
Deferred:
Federal 2,197 7,402 (3,899)
State 291 592 (313)
------ ---------- --------
Total deferred 2,488 7,994 (4,212)
------ ---------- --------
Total income tax provision $5,799 $ 6,742 $ 4,993
====== ========== ========
F-16
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax assets (liabilities) are:
(in thousands) Fiscal Years
------------------
2003 2002
-------- --------
Deferred Tax Assets:
Receivables allowances $ 1,084 $ 596
Depreciation 83 -
Leases 240 37
Deferred compensation 321 829
Non-compete agreements 545 760
State net operating losses - 389
Other 124 147
-------- --------
Total deferred tax assets 2,397 2,758
-------- --------
Deferred Tax Liabilities:
Acquisition of lease residuals - (356)
Depreciation (1,517) (1,323)
Intangibles (5,249) (3,135)
Other (1,809) (1,634)
-------- --------
Total deferred tax liabilities (8,575) (6,448)
-------- --------
Net deferred tax liabilities $(6,178) $(3,690)
======== ========
For fiscal 2003, the Company's net short-term deferred tax liabilities
($1,398) are included in other accrued liabilities and the net long-term
deferred tax liabilities ($4,780) are presented as such on the balance
sheet. For fiscal 2002, the Company's net short-term deferred tax
liabilities ($372) are included in other 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:
Fiscal Years
--------------------
2003 2002 2001
----- ------- ----
Tax at federal statutory rate 35.0 35.0 35.0
State taxes 4.3 3.2 4.0
Change in tax accounting method - TIFS - (7.4) -
Other (0.3) 0.2 -
----- ------- ----
Effective tax rate 39.0 31.0 39.0
===== ======= ====
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, 2004, including the lease with the related party, are as
follows:
F-17
(in thousands)
Fiscal Year
- -----------------------------
2004 $ 3,964
2005 3,492
2006 2,214
2007 1,696
2008 1,520
Thereafter 2,174
-------
Total minimum lease payments $15,060
=======
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. The Company makes contributions to the plan based
on a participant's annual pay. Contributions made by the Company for fiscal
2003, 2002 and 2001 were approximately $136 thousand, $408 thousand and
$418 thousand, respectively.
The Company has a stock purchase plan (the "1998 plan") under Section 423
of the Internal Revenue Code of 1986, as amended. The 1998 plan provides
substantially all employees of the Company with an opportunity to purchase
through payroll deductions up to 2,000 shares of common stock of the
Company with a maximum market value of $25,000. The purchase price per
share is determined by whichever of two prices is lower: 85% of the closing
market price of the Company's common stock in the first trading date of an
offering period (grant date), or 85% of the closing market price of the
Company's common stock in the last trading date of an offering period
(exercise date). 200,000 shares of common stock of the Company are reserved
for issuance under the 1998 plan. The Board of Directors of the Company may
at any time terminate or amend the 1998 plan. The 1998 plan will terminate
twenty years from the effective date unless sooner terminated.
12. Major Customers
During fiscal 2003, 2002, and 2001, no customer accounted for more than 10%
of the Company's total net sales and revenues.
13. Acquisitions
During fiscal 2003, the Company completed two acquisitions. The total
consideration paid consisted of $4.9 million in cash and subordinated notes
of $1.8 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 $5.5 million
during such aggregate earn out period. Interest on the subordinated notes
is payable quarterly. Principal in the amount of $1.8 million is payable in
two annual installments commencing on the first anniversary of closing. The
results of operations of the acquisitions are included in the fiscal 2003
consolidated statement of income from the respective dates of acquisition.
If the fiscal 2003 acquisitions had occurred on January 6, 2003, the pro
forma results of operations of the Company would not have been materially
different than those reported in the accompanying fiscal 2003 consolidated
statement of income.
During fiscal 2002, the Company completed one acquisition. The total
consideration paid 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 $1.0 million
dollars during such aggregate period as earn outs. The acquisition was
accounted for as a purchase, accordingly the purchase price was allocated
to assets and liabilities based on their estimated value as of the date of
acquisition. The results of operations of the acquisition are included in
the fiscal 2002 consolidated statement of income from the date of
acquisition. If the fiscal 2002 acquisition had occurred on January 6,
2002, the pro forma results of operations of the Company would not have
been materially different than that reported in the accompanying fiscal
2002 consolidated statement of income.
F-18
During fiscal 2001, the Company completed three acquisitions. The total
consideration given consisted of $8.0 million in cash and subordinated
notes of $1.3 million. Additionally, the purchase price will be adjusted
for any potential earn outs. 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 respective dates of acquisition.
If the fiscal 2001 acquisitions had occurred on January 6, 2001, the pro
forma results of operations of the Company would not have been materially
different than that reported in the accompanying fiscal 2001 consolidated
statement of income.
14. Sale of Technology Integration Financial Services, Inc. ("TIFS")
In April 2002, the Company sold for book value 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. Vincent D.
Rinaldi, a Director of the Company, is the President of ILC. 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
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.
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 2003, 2002 and 2001 was
approximately $1.2 million each year. 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 2003, 2002 and 2001, the Company paid $95 thousand each year
in connection with this real estate.
The lessor of the headquarters, distribution facility and national training
center does not meet the conditions to be considered a variable interest
entity in accordance with FIN 46.
F-19
A director of the Company is President of 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 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 2003, 2002 and 2001, the Company sold equipment and related
support services to ILC, for lease to ILC's customers, in amounts of $19.5
million, $32.6 million and $2.3 million, respectively.
The Company also purchases residuals associated with separate leasing
arrangements entered into by ILC. Such transactions do not involve the sale
of equipment and related support services by the Company to ILC. Residuals
acquired in this manner are accounted for at cost.
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 $0.9 million as of
January 5, 2004 and 2003 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.
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
----------------------------------
2003 2002 2001
-------- -------------- --------
Interest paid $ 387 $ 556 $ 2,181
======== ============== ========
Income taxes paid $ 1,342 $ 10,623 $ 3,661
======== ============== ========
Additions to goodwill for adjustments
to acquisition assets and intangibles $ 322 $ 2,014 $ 1,788
======== ============== ========
Business combinations accounted
for as purchases:
Assets acquired $12,070 $ 2,099 $14,153
Liabilities assumed (4,387) (260) (4,854)
Notes payable issued (1,825) (184) (1,328)
-------- -------------- --------
Net cash paid $ 5,858 $ 1,655 $ 7,971
======== ============== ========
17. Treasury Stock
During fiscal 2003, the Company's Board of Directors authorized a program
to repurchase up to 1.1 million shares of the Company's outstanding common
stock at market price. During fiscal 2003, the Company repurchased 383,000
shares of common stock at a cost of $4.1 million. This repurchase program
expires June 1, 2004.
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 common stock at a cost of $3.4 million.
F-20
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
common stock at a cost of $0.5 million.
18. Dividends
On August 7, 2003, the Company paid a one-time cash dividend of $9.8
million or $0.80 per share to shareholders of record as of July 28, 2003.
19. Stockholders' Equity and Stock Option Plans
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. The maximum aggregate number of shares which may be
optioned and sold under the plan is 3,410,905. 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.
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. The maximum aggregate number of shares which may be optioned
and sold under the plan is 106,356. 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.
The following summarizes the stock option transactions under the plans for
the three fiscal years ended January 5, 2004:
Weighted Average
Shares Exercise price
---------- -----------------
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
Granted 537,360 9.75
Exercised (55,509) 8.54
Forfeitures (382,872) 14.47
----------
Options outstanding January 5, 2004 2,067,518 13.41
==========
F-21
The following summarizes options outstanding and exercisable at January 5,
2004:
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 1/5/04 Contractual Life Exercise Price at 1/5/04 Exercise Price
- --------------------------------------------------------------- ----------------------------
2.83 to $5.65 19,125 1.00 $ 4.54 19,125 $ 4.54
5.66 to $8.48 211,950 3.80 $ 6.93 39,050 $ 6.29
8.49 to $11.30 238,407 3.30 $ 10.17 188,813 $ 10.09
11.31 to $14.13 628,436 2.30 $ 12.99 525,362 $ 13.07
14.14 to $16.95 685,011 3.10 $ 14.89 461,360 $ 14.86
16.96 to $19.78 199,589 3.20 $ 17.67 126,891 $ 17.65
19.79 to $22.60 85,000 0.10 $ 21.78 85,000 $ 21.78
----------- -----------
2,067,518 1,445,601
=========== ===========
The weighted average fair value at date of grant for options granted during
fiscal 2003, 2002 and 2001 was $4.09, $4.56 and $6.05, respectively.
The unissued preferred stock carries certain voting rights and has
preferences with respect to dividends and liquidation proceeds.
20. Litigation
During fiscal 2003, 2002 and fiscal 2001, the Company made litigation
settlement payments of $ 0.2 million, $0.3 million and $1.0 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.
21. 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 lifecycle 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 lifecycle services group offers the following
comprehensive portfolio of services: strategic sourcing, integration and
distribution logistics, implementation services, technical support
services, and technology disposition.
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 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.
F-22
During the first quarter of fiscal 2003, the Company revised its segment
methodologies for allocating operating expenses between segments to reflect
ongoing changes in the operating activities giving rise to such expenses.
This change resulted in a decrease of approximately $6.0 million
year-to-date of allocated operating expenses to the product segment and a
corresponding increase by the same amount to the services segment. In
addition, the Company revised its allocation of assets between segments to
reflect the use of assets in those segments. The assets affected were
principally goodwill, tax-related assets and equipment and leasehold
improvements.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. (in thousands)
Fiscal 2003
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenue $ 470,336 $ 127,905 $ 182 $ 598,423
Income from operations $ 8,167 $ 6,512 $ 127 $ 14,806
Total assets $ 169,461 $ 92,211 $ 7,527 $ 269,199
Capital expenditures $ 833 $ 837 $ - $ 1,670
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
Fiscal 2001
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenue $ 658,854 $ 140,466 $ 9,894 $ 809,214
Income from operations $ 3,481 $ 8,537 $ 2,323 $ 14,341
Total assets $ 215,181 $ 61,090 $ 65,447 $ 341,718
Capital expenditures $ 4,101 $ 610 $ 540 $ 5,251
Depreciation and amortization $ 9,322 $ 2,228 $ 977 $ 12,527
Concentrations - During fiscal 2003, 2002 and 2001 approximately 20.9%,
28.1% and 24.1%, respectively, of the Company's total net sales and
revenues were derived from its top ten customers.
During fiscal 2003, 2002 and fiscal 2001, no customer accounted for more
than 10% of the Company's net sales and revenues for either the products or
services segments.
F-23