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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 5, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ________________
Commission file number 0-20022
POMEROY COMPUTER RESOURCES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-1227808
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1020 Petersburg Road, Hebron, Kentucky 41048
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (606) 586-0600
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
---------------------- --------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
----------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock of the Registrant held by non
affiliates was $182,747,000 as of March 11, 1999.
The number of shares outstanding of the Registrant's common stock as of March
11, 1999 was 11,718,934.
POMEROY COMPUTER RESOURCES, INC.
FORM 10-K
YEAR ENDED JANUARY 5, 1999
TABLE OF CONTENTS
PART I Page
-----------
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 13
Item 9. Disagreements on Accounting and Financial 13
Disclosures
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management 23
Item 13. Certain Relationships and Transactions 24
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 24
SIGNATURES Chief Executive Officer, Chief Financial Officer and
Chief Accounting Officer 40
Directors 40
Report of Independent
Certified Public Accountants F-1
Financial Statements F-2 to F-18
Exhibits
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
--------------------------------------------------------------
Certain of the matters discussed under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" may constitute forward-looking statements for purposes of the
Securities Act of 1933 and the Securities Exchange Act of 1934, as amended, and
as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. Important factors that
could cause the actual results, performance or achievements of the Company to
differ materially from the Company's expectations are disclosed in this document
and in documents incorporated herein by reference, including, without
limitation, those statements made in conjunction with the forward-looking
statements under "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the factors discussed under
"Business - Certain Business Factors.". All written or oral forward-looking
statements attributable to the Company are expressly qualified in their entirety
by such factors.
PART I
ITEM 1. BUSINESS
Pomeroy Computer Resources, Inc. (the "Company") is a Delaware Corporation
organized in February 1992 to consolidate and reorganize predecessor companies.
All of the predecessor companies were controlled by David B. Pomeroy, the
Company's Chairman of the Board, President and Chief Executive Officer.
The Company's business is comprised of (1) the sale and leasing of a broad range
of desktop computer equipment including hardware, software, and related
products, and (2) the provision of information technology (IT) services which
support such computer products. Prior to January 6, 1999, the Company
(including its wholly-owned subsidiaries Global Combined Technologies, Inc.,
Pomeroy Computer Resources of South Carolina, Inc. and Technology Integration
Financial Services, Inc.) operated the IT products and services business as a
single integrated business. In December, 1998, the Company formed a new
subsidiary, Pomeroy Select Integration Solutions, Inc. ("Pomeroy Select"), for
the purpose of operating independently the IT services business previously
operated by the Company other than procurement and configuration services which
are directly related to the sale of products. On January 6, 1999, the Company
transferred the assets, liabilities, business, operations and personnel
comprising its IT services business (excluding procurement and configuration
services) in exchange for 10 million shares of Class B common stock of Pomeroy
Select. The separation of the IT services business is a part of the Company's
ongoing strategy to expand its services revenue.
The Company now operates in two industry segments -- products and services. The
products segment is primarily engaged in the sale, distribution, and leasing of
computers, hardware, software and related products. The Company offers products
from an array of manufacturers including Compaq, Hewlett-Packard, IBM,
Microsoft, Nortel Networks, Novell and 3Com. The services segment offers three
categories of services: life cycle services, internetworking services and
customer support services. Life cycle services include warranty and
non-warranty repair and maintenance; a full range of install, move, add or
change services; redeployment and mobile systems management; evaluation and
tracking of information technology assets; and end-of-life services.
Internetworking services include project management; network design,
integration, management, migration and support; and cabling services. Customer
support services include customized help desk services, Internet-based training
on many popular software packages and video/teleconferencing services.
The Company provides products and services primarily to large and medium sized
corporate, health care, governmental, financial and educational customers. See
Note 17 of Notes to Consolidated Financial Statements for a presentation of
segment information.
The Company's strategy for building shareholder value is to provide
comprehensive solutions to improve the productivity of its clients' information
technology systems. Key elements of the Company's strategy are: (1) to leverage
client relationships to continue expanding higher-margin services revenues, (2)
to maintain and enhance technical expertise by hiring and training highly
qualified technicians and systems engineers, and (3) to expand offerings and
geographic coverage through strategic acquisitions.
Page 1
The Company is an authorized dealer or reseller for the products of over 35
major vendors. The Company believes that its access to major vendors enables it
to offer a wide range of products to meet the diverse requirements of its
customers. However, the increasing demand for microcomputers has resulted in
significant product supply shortages from time to time because manufacturers
have been unable to produce sufficient quantities of certain products to meet
demand. The Company has in the past and expects in the future to experience some
difficulty in obtaining an adequate supply of products from its major vendors
which has resulted, and may continue to result, in delays in completing sales.
These delays have not had, and are not anticipated to have, a material adverse
effect on the Company's results of operations. However, the failure to obtain
adequate product supply could have a material adverse effect on the Company's
results of operations.
The Company has entered into dealer agreements with its major
vendors/manufacturers. These agreements are typically subject to periodic
renewal and to termination on short notice. Substantially all of the Company's
dealer agreements may be terminated by the vendor without cause upon 30 to 90
days advance notice, or immediately upon the occurrence of certain events. A
vendor could also terminate an authorized dealer agreement for reasons unrelated
to the Company's performance. Although the Company has never lost a major
vendor/manufacturer, the loss of such a vendor/product line or the deterioration
of the Company's relationship with such a vendor/manufacturer would have a
material adverse effect on the Company.
The Company has been selected as a participant in the IBM channel assembly
program. Although this program has not generated significant revenues to date,
the Company does expect more significant revenues from this program during
fiscal 1999. The objective of channel assembly programs is to achieve cost
savings through lower finished goods inventory, higher inventory turns and lower
price protection requirements, while passing cost savings on to customers and
minimizing the direct marketers' pricing advantage.
The Company has also established relationships with industry leaders relating to
its services segment including the authorization to perform warranty and
non-warranty repair work. In some cases, the authorization of Pomeroy Select to
continue performing warranty work for a particular manufacturer's products is
dependent upon the performance of the Company under dealer agreement with that
manufacturer. The Company's technical personnel currently have an aggregate of
more than 200 Microsoft certifications, more than 300 Novell certifications, 33
Nortel Networks Specialist certifications, five Nortel Networks Expert
certifications, 17 IBM Professional Service Expert certifications, 19 Compaq
Accredited Systems Engineer certifications, 15 HP Network Technical Professional
certifications, nine Citrix Certified Administrator certifications, five Cisco
Internetworking Engineer certifications, four Computer Associates Certified
Unicenter Engineer certifications and various other certifications.
The Company's sales are generated primarily by its 253 person direct sales and
sales support personnel located in 30 regional offices in 14 states throughout
the Southeast and Midwest United States. The Company's business strategy is to
provide its customers with a complete package of advanced microcomputer
products, high level services and support, including designing and installing
systems, training system users, maintaining and repairing hardware and software
and brokering used equipment. The Company believes that its ability to combine
competitive pricing of computer hardware, software and related products with
higher margin sophisticated services and support allows it to compete
effectively against a variety of alternative microcomputer distribution
channels, including independent dealers, superstores, mail order and direct
sales by manufacturers. With many businesses seeking assistance to optimize
their information technology investments and control ongoing costs throughout
the life cycle of technology systems, the Company is using its resources to
assist customers in their decision-making, project implementation and equipment
management.
Most microcomputer products are sold pursuant to purchase orders. For larger
procurements, the Company may enter into written contracts with customers. These
contracts typically establish prices for certain equipment and services and
require short delivery dates for equipment and services ordered by the customer.
These contracts do not require the customer to purchase microcomputer products
or services exclusively from the Company and may be terminated without cause
upon 30 to 90 days' notice. Most contracts are for a term of 12 to 24 months
and, in order to be renewed, may require submission of a new bid in response to
the customer's request for proposal. As of January 5, 1999, the Company has been
awarded contracts which it estimates will result in an aggregate of
approximately $32.2 million of net sales and revenues in fiscal 1999.
Subsequent to January 5, 1999, the Company was awarded a contract which it
estimates will result in an aggregate of approximately $15.0 million of net
sales and revenues over a three year period. Of this amount, approximately
$19.0 million is expected to be generated in fiscal 1999. By comparison, as of
January 5, 1998, the Company had been awarded contracts which it estimated would
result in an aggregate of approximately $35.8 million of net sales and revenues
after January 5, 1998. Of this amount, the Company estimated that $29.5 million
of net sales and revenues would be generated during fiscal year 1998 and the
remainder would be generated after the end of fiscal year 1998. The estimates
of management could be materially less than stated as a result of factors which
would cause one or more of these customers to order less product or services
than is anticipated. Such factors include that the customer finds another
supplier for the desired products at a lower price or on better terms, the
internal business needs of the customer change causing the customer to require
less or different products and services, or a significant change in technology
or other industry conditions occurs which alters the customer's needs or timing
of purchases.
Page 2
The Company generally provides its services to its customers on a
time-and-materials basis and pursuant to written contracts or purchase orders.
The Company's arrangements with its customers generally can be terminated by
either party with limited or no advance notice. The Company also provides some
of its services under fixed-price contracts rather than contracts billed on a
time-and-materials basis. Fixed-price contracts are used when the Company
believes it can clearly define the scope of services to be provided and the cost
of providing those services.
For fiscal years 1996, 1997 and 1998, sales of computer hardware, software, and
related products accounted for approximately 91.2%, 89.7% and 87.0%
respectively, of the consolidated net sales and revenues of the Company. The
Company's revenues from its service and support activities have grown over the
last several years. For fiscal years 1996, 1997 and 1998, revenues from service
and support activities were approximately $29.6 million, $50.5 million, and
$81.6 million respectively, and accounted for approximately 8.8%, 10.3%, and
13.0% respectively, of the consolidated net sales and revenues of the Company.
COMPETITION
The microcomputer products and services market is highly competitive.
Distribution has evolved from manufacturers selling through direct sales forces
to sales by manufacturers to aggregators (wholesalers), resellers and
value-added resellers. Competition, in particular the pressure on pricing, has
resulted in industry consolidation. In the future, the Company may face fewer
but larger competitors as a consequence of such consolidation. These competitors
may have access to greater financial resources than the Company. In response to
continuing competitive pressures, including specific price pressure from the
direct telemarketing and mail order distribution channels, the microcomputer
distribution channel is currently undergoing segmentation into value-added
resellers who emphasize advanced systems together with service and support for
business networks, as compared to computer "superstores," who offer retail
purchasers a relatively low cost, low service alternative and direct-mail
suppliers which offer low cost and limited service. Certain superstores have
expanded their marketing efforts to target segments of the Company's customer
base, which could have a material adverse impact on the Company's operations and
financial results. While price is an important competitive factor in the
Company's business, the Company believes that its sales are principally
dependent upon its service, technical expertise, reputation and experience. The
Company's principal competitive strengths include: (i) quality assurance; (ii)
service and technical support; (iii) lower pricing of products through
alternative distribution sources; (iv) prompt delivery of products to customers;
and (v) various financing alternatives.
The Company competes for product sales directly with local, national and
international distributors and resellers. In addition, the Company competes with
microcomputer manufacturers that sell their product through their own direct
sales forces and to distributors. Although the Company believes its prices and
delivery terms are competitive, certain competitors offer more aggressive
hardware pricing to their customers.
The Company's services segment competes, directly and indirectly, with a variety
of national and regional service providers, including services organizations of
established computer product manufacturers, value-added resellers, systems
integrators, internal corporate management information systems and, to a lesser
extent, consulting firms, aggregators and distributors. The Company believes
that the principal competitive factors for information technology services
include technical expertise, the availability of skilled technical personnel,
breadth of service offerings reputation, financial stability and price. To be
competitive, the Company must respond promptly and effectively to the challenges
of technological change, evolving standards and its competitor's innovations by
continuing to enhance its service offerings and expand its sales channels. Any
pricing pressures, reduced margins or loss of market share resulting from the
Company's failure to compete effectively could materially adversely affect its
business.
The Company believes its services segment competes successfully by providing a
comprehensive solution for its customers' information technology asset
management and networking services needs. The Company delivers cost-effective,
flexible, consistent, reliable and comprehensive solutions to meet customers'
information technology infrastructure service requirements. The Company also
believes that it distinguishes itself on the basis of its technical expertise,
competitive pricing and its ability to understand its customers' needs.
CERTAIN BUSINESS FACTORS
Page 3
DEPENDENCE ON MAJOR CUSTOMERS
During fiscal 1998, approximately 30.2% of the Company's total net sales and
revenues were derived from its top 10 customers. No customer accounted for more
than 5.0% of the Company's total net sales and revenues in fiscal 1998.
In addition, no customer accounted for more than 5% of the net sales and
revenues for either the products or services segments in fiscal 1998.
RAPID GROWTH
The Company has grown rapidly both internally and through acquisitions, and the
Company intends to continue to pursue both types of growth opportunities as part
of its business strategy. There can be no assurance that the Company will be
successful in maintaining its rapid growth in the future. The Company expects
that more of its future growth will result from acquisitions. In fiscal 1998,
the Company completed several acquisitions and continues to evaluate expansion
and acquisition opportunities that would complement its ongoing operations.
There can be no assurance that the Company will be able to identify, acquire or
profitably manage additional companies or successfully integrate such additional
companies into the Company without substantial costs, delays or other problems.
In addition, there can be no assurance that companies acquired in the future
will be profitable at the time of their acquisition or will achieve levels of
profitability that justify the investment therein. Acquisitions may involve a
number of special risks, including, but not limited to, adverse short-term
effects on the Company's reported operating results, diversion of management's
attention, dependence on retaining, hiring and training key personnel, risks
associated with unanticipated problems or legal liabilities and amortization of
acquired intangible assets, some or all of which could have a material adverse
effect on the Company's operations and financial results.
VENDOR REBATES AND VOLUME DISCOUNTS
The Company's profitability has been favorably affected by its ability to obtain
rebates and volume discounts from manufacturers and through aggregators and
distributors. Any change in the level of rebates, volume discount schedules or
other marketing programs offered by manufacturers that results in the reduction
or elimination of rebates or discounts currently received by the Company could
have a material adverse effect on the Company's operations and financial
results. In particular, a reduction or elimination of rebates related to
government and educational customers could adversely affect the Company's
ability to serve those customers profitably.
MANUFACTURER MARKET DEVELOPMENT FUNDS
Several manufacturers offer market development funds, cooperative advertising
and other promotional programs to computer resellers such as the Company. The
Company utilizes these programs to fund some of its advertising and promotional
programs. The funds received from manufacturers are offset directly against the
expense, thereby reducing selling, general and administrative expenses and
increasing net income. While such programs have been available to the Company in
the past, there is no assurance that these programs will be continued. Any
discontinuance or material reduction of these programs could have an adverse
effect on the Company's operations and financial results.
MANAGEMENT INFORMATION SYSTEM
The Company relies upon the accuracy and proper utilization of its management
information system to provide timely distribution services, manage its inventory
and track its financial information. To manage its growth, the Company is
continually evaluating the adequacy of its existing systems and procedures
(including Year 2000 issues) and has recently implemented a new warehouse
management system and continues to integrate additional functions. The Company
anticipates that it will regularly need to make capital expenditures to upgrade
and modify its management information system, including software and hardware,
as the Company grows and the needs of its business change. There can be no
assurance that the Company will anticipate all of the demands which its
expanding operations will place on its management information system. The
occurrence of a significant system failure or the Company's failure to expand or
successfully implement its systems could have a material adverse effect on the
Company's operations and financial results.
In addition, the Company may realize exposure and risk if the systems, including
its management information system, on which it depends are not Year 2000
compliant. The Company also relies on the Year 2000 compliance of products of
third party manufacturers and developers. Potential areas of exposure include
the Year 2000 related failure of (1) the Company's internal systems, (2)
products or systems on which the Company has performed services and (3) systems
of third parties with whom the Company has a business relationship. If the
Company's present efforts to address the Year 2000 compliance issues are not
successful, or if the Company's suppliers, customers and other parties with whom
it conducts business do not successfully address such issues, the Company's
business, results of operations and financial condition could be materially and
adversely affected.
Page 4
DEPENDENCE ON TECHNICAL EMPLOYEES
The success of the Company's services business, in particular its network and
integration services, depends in large part upon the Company's ability to
attract and retain highly skilled technical employees in competitive labor
markets. There can be no assurance that the Company will be able to attract and
retain sufficient numbers of skilled technical employees. The loss of a
significant number of the Company's existing technical personnel or difficulty
in hiring or retaining technical personnel in the future could have a material
adverse effect on the Company's operations and financial results.
INVENTORY MANAGEMENT
The information technology industry is characterized by rapid product
improvement and technological change resulting in relatively short product life
cycles and rapid product obsolescence. While most of the inventory stocked by
the Company is for specific customer orders, inventory devaluation or
obsolescence could have a material adverse effect on the Company's operations
and financial results. Current industry practice among manufacturers is to
provide price protection intended to reduce the risk of inventory devaluation,
although such policies are subject to change at any time and there can be no
assurance that such price protection will be available to the Company in the
future. During fiscal 1998, many manufacturers reduced the number of days for
which they provided price protection. Also, the Company currently has the option
of returning inventory to certain manufacturers and distributors, subject to
certain limitations. The amount of inventory that can be returned to
manufacturers without a restocking fee varies under the Company's agreements and
such return policies may provide only limited protection against excess
inventory. There can be no assurance that new product developments will not have
a material adverse effect on the value of the Company's inventory or that the
Company will successfully manage its existing and future inventory. In addition,
the Company stocks parts inventory for its services business. Parts inventory is
more likely to experience a decrease in valuation as a result of technological
change and obsolescence and there are no price protection practices offered by
manufacturers with respect to parts.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent on the services of David B. Pomeroy, II,
its Chairman of the Board, President and Chief Executive Officer and other key
personnel. The Company maintains $1.0 million in key man life insurance insuring
the life of Mr. Pomeroy. The loss of the services of Mr. Pomeroy or other key
personnel could have a material adverse effect on the Company's business. The
Company has entered into employment agreements with certain of its key
personnel, including Mr. Pomeroy. The Company's success and plans for future
growth will also depend on its ability to attract and retain highly skilled
personnel in all areas of its business.
EMPLOYEES
As of January 5, 1999, the Company had 1,699 full-time employees consisting of
the following: 1,024 technical personnel; 253 direct sales representatives and
sales support personnel; 83 management personnel; and 339 administrative and
distribution personnel. The Company has no collective bargaining agreements and
believes its relations with its employees are good.
BACKLOG
The Company does not have a significant backlog of business since it normally
delivers and installs products purchased by its customers within 10 days from
the date of order. Accordingly, backlog is not material to the Company's
business or indicative of future sales. From time to time, the Company
experiences difficulty in obtaining products from its major vendors as a result
of general industry conditions. These delays have not had, and are not
anticipated to have, a material adverse effect on the Company's results of
operations.
PATENTS AND TRADEMARKS
The Company owns no trademarks or patents. Although the Company's various dealer
agreements do not generally allow the Company to use the trademarks and trade
names of these various manufacturers, the agreements do permit the Company to
refer to itself as an "authorized representative" or an "authorized service
provider" of the products of those manufacturers and to use their trademarks and
trade names for marketing purposes. The Company considers the use of these
trademarks and trade names in its marketing efforts to be important to its
business.
Page 5
ACQUISITIONS
Acquisitions have contributed significantly to the Company's growth. The Company
believes that acquisitions are one method of increasing its presence in existing
markets, expanding into new geographic markets, adding experienced service
personnel, gaining new product offerings and services, obtaining more
competitive pricing as a result of increased purchasing volumes of particular
products and improving operating efficiencies through economies of scale. In
recent years, there has been consolidation among providers of microcomputer
products and services and the Company believes that this consolidation will
continue, which, in turn, may present additional opportunities for the Company
to grow through acquisitions. The Company continually seeks to identify and
evaluate potential acquisition candidates. The Company is currently engaged in
preliminary discussions with potential acquisition candidates. Although it has
no binding commitments to acquire such candidates, management believes that the
Company may acquire one or more of these candidates in the future.
During fiscal 1998, the Company completed several acquisitions. The total
consideration given consisted of $21.2 million in cash, subordinated notes of
$3.3 million and 39,000 unregistered shares of the Company's common stock with
an approximate value of $0.8 million. Interest on the subordinated notes is
payable quarterly. Principal is payable in equal annual installments over a
period of two years.
ITEM 2. PROPERTIES
The Company's principal executive offices and distribution facility comprised of
approximately 36,000 and 111,000 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 May 2006. The lease agreement
provides for 2 five year renewal options.
The Company also has noncancelable operating leases for its regional offices,
expiring at various dates between 1999 and 2006. The Company believes there will
be no difficulty in negotiating the renewal of its real property leases as they
expire or in finding other satisfactory space. In the opinion of management, the
properties are in good condition and repair and are adequate for the particular
operations for which they are used. The Company does not own any real property.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions arising in the normal course of business have been brought
against the Company. Management believes these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Page 6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the periods indicated, the high and low
sales price for the Common Stock for the quarters indicated as reported on the
NASDAQ National Market. The following prices have been adjusted to reflect the
three-for-two stock split in the form of a stock dividend effected on October 6,
1997.
1997 1998
-------------- --------------
High Low High Low
------ ------ ------ ------
First Quarter $25.33 $12.17 $25.25 $15.25
Second Quarter $19.17 $12.50 $27.75 $20.38
Third Quarter $29.17 $16.67 $28.31 $11.00
Fourth Quarter $31.25 $14.00 $22.63 $10.88
As of March 11, 1999, there were approximately 330 holders of record of the
Company's common stock.
Dividends
- ---------
The Company has not paid any cash dividends since its organization and the
completion of its initial public offering. The Company has no plans to pay cash
dividends in the foreseeable future, and the payment of such dividends are
restricted under the Company's current borrowing agreement.
Page 7
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(In thousands, except per share data)
For the Fiscal Years Ended January 5,
-------------------------------------------------------
1995(1) 1996 1997(2) 1998(3) 1999 (5,6)
--------- --------- --------- --------- -----------
Consolidated Statement of Income Data:
Net sales and revenues. . . . . . . . . . . $144,575 $230,710 $336,358 $491,448 $ 627,928
Cost of sales and service . . . . . . . . . 120,901 197,174 281,753 410,063 517,506
--------- --------- --------- --------- -----------
Gross profit. . . . . . . . . . . . . . . . 23,674 33,536 54,605 81,385 110,422
Operating expenses:
Selling, general and administrative . . . . 17,231 23,247 35,175 50,597 69,947
Depreciation and amortization . . . . . . . 886 1,004 2,561 3,940 5,377
--------- --------- --------- --------- -----------
Total operating expenses. . . . . . . . . . 18,117 24,251 37,736 54,537 75,324
Income from operations. . . . . . . . . . . 5,557 9,285 16,869 26,848 35,098
Other expense (income):
Interest expense. . . . . . . . . . . . . . 1,031 1,999 2,170 974 2,670
Litigation settlement and related costs (4) - - 4,392 - -
Miscellaneous.. . . . . . . . . . . . . . . (57) (64) (221) 54 (140)
--------- --------- --------- --------- -----------
Total other expense . . . . . . . . . . . . 974 1,935 6,341 1,028 2,530
Income before income taxes. . . . . . . . . 4,583 7,350 10,528 25,820 32,568
Income tax expense. . . . . . . . . . . . . 1,856 2,983 4,296 9,507 12,409
--------- --------- --------- --------- -----------
Net income. . . . . . . . . . . . . . . . . $ 2,727 $ 4,367 $ 6,232 $ 16,313 $ 20,159
========= ========= ========= ========= ===========
Earnings per common share (diluted) . . . . $ 0.50 $ 0.73 $ 0.77 $ 1.44 $ 1.72
Consolidated Balance Sheet Data:
Working capital . . . . . . . . . . . . . . $ 6,556 $ 10,340 $ 27,203 $ 63,028 $ 71,364
Long-term debt, net of current maturities . 167 100 2,189 1,434 8,231
Equity. . . . . . . . . . . . . . . . . . . 13,130 19,200 46,593 88,777 112,989
Total assets. . . . . . . . . . . . . . . . 57,061 63,985 121,380 167,264 254,226
1) During fiscal 1994, the Company acquired all of the outstanding stock of
Xenas Communications Corp.
2) During fiscal 1996, the Company acquired the assets of The Computer
Supply Store and Communication Technology, Inc. See Note 12 of Notes to
Consolidated Financial Statements.
3) During fiscal 1997, the Company acquired the assets of Magic Box, Micro
Care and The Computer Store. See Note 12 of Notes to Consolidated Financial
Statements.
4) Fiscal year 1996 reflects the Vanstar litigation settlement and related
costs of $4,392. Without this charge, net income would have been $8,845 and
diluted earnings per common share would have been $1.09.
5) During Fiscal 1998, the Company acquired the assets of Commercial
Business Systems, Access Technologies, Inc. and all of the outstanding stock of
Global Combined Technologies, Inc. See Note 12 of Notes to Consolidated
Financial Statements.
6) During the fourth quarter of fiscal 1998, the Company's results include
an after tax charge of $681 thousand ($0.06 per diluted share) related to the
uncollectibility of certain vendor warranty claims. Exclusive of this charge,
diluted earnings per share for fiscal 1998 would have been $1.78.
Page 8
QUARTERLY RESULTS OF OPERATIONS (in thousands, except per share data)
The following table sets forth certain unaudited operating results of each of
the eight prior quarters. This information is unaudited, but in the opinion of
management includes all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the results of operations of such periods.
Fiscal 1998
------------------------------------------------
First Second Third Fourth
Quarter (1) Quarter Quarter Quarter (2,3)
------------ -------- -------- --------------
Net sales and revenues . . $ 135,198 $158,843 $163,790 $ 170,097
Gross Profit . . . . . . . 23,232 27,270 29,515 30,405
Net income . . . . . . . . $ 4,277 $ 5,008 $ 5,393 $ 5,481
Earnings per common share:
Basic. . . . . . . . . . . $ 0.38 $ 0.44 $ 0.47 $ 0.48
Diluted. . . . . . . . . . $ 0.37 $ 0.42 $ 0.46 $ 0.47
Fiscal 1997
--------------------------------------------------
First Second Third Fourth
Quarter Quarter (4) Quarter (5) Quarter (6)
-------- ------------ ------------ ------------
Net sales and revenues . . $100,366 $ 118,218 $ 130,729 $ 142,135
Gross Profit . . . . . . . 16,904 19,135 21,533 23,813
Net income . . . . . . . . $ 2,958 $ 3,969 $ 4,540 $ 4,846
Earnings per common share:
Basic. . . . . . . . . . . $ 0.29 $ 0.35 $ 0.40 $ 0.43
Diluted. . . . . . . . . . $ 0.28 $ 0.34 $ 0.39 $ 0.41
1) During the first quarter of fiscal 1998, the Company acquired certain
assets of Commercial Business Systems and all of the outstanding stock of Global
Combined Technologies, Inc. See Note 12 of Notes to Consolidated Financial
Statements.
2) During the fourth quarter of fiscal 1998, the Company acquired certain
assets of Access Technologies, Inc. See Note 12 of Notes to Consolidated
Financial Statements.
3) During the fourth quarter of fiscal 1998, the Company's results include
an after tax charge of $681 thousand ($0.06 per diluted share) related to the
uncollectibility of certain vendor warranty claims. Exclusive of this charge,
basic earnings per share and diluted earnings per share in the fourth quarter
would have been $0.54 and $0.53, respectively.
4) During the second quarter of fiscal 1997, the Company acquired
substantially all of the assets of Magic Box. See Note 12 of Notes to
Consolidated Financial Statements.
5) During the third quarter of fiscal 1997, the Company acquired certain
assets of Micro Care. See Note 12 of Notes to Consolidated Financial Statements.
6) During the fourth quarter of fiscal 1997, the Company acquired the
Computer Store, Inc. See Note 12 of Notes to Consolidated Financial Statements.
Page 9
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Total Net Sales and Revenues. Total net sales and revenues increased
$136.5 million, or 27.8%, to $627.9 million in fiscal 1998 from $491.4 million
in fiscal 1997. This increase was attributable to an increase in sales to
existing and new customers and to acquisitions completed in fiscal years 1998
and 1997. Excluding acquisitions completed in fiscal years 1998 and 1997, total
net sales and revenues increased 9.7%.
Products sales increased $105.5 million, or 23.9%, to $546.4 million in
fiscal 1998 from $440.9 million in fiscal 1997. On a comparable basis, as
described above, products sales increased 5.2%. Services revenues increased
$31.1 million, or 61.6%, to $81.6 million in fiscal 1998 from $50.5 million in
fiscal 1997. On a comparable basis, as described above, service revenues
increased 49.3%. Services revenues include all of the IT services transferred
to Pomeroy Select on January 6, 1999 plus the configuration services retained by
the Company.
Gross Profit. Gross profit margin was 17.6% in fiscal 1998 compared to
16.6% in fiscal 1997. The Company improved its gross margin by increasing the
volume of higher-margin services revenues which offset a decrease in products
gross margins, the growth in products sales and the write-off of $1.1 million of
vendor receivables related to parts returned and warranty work performed prior
to fiscal 1998. Services revenues increased to 13.0% of total net sales and
revenues in fiscal 1998 compared to 10.3% of total net sales and revenues in
fiscal 1997. The write-offs were primarily due to internal reporting and
tracking problems. Prior to fiscal 1998, the Company's tracking and control of
reimbursements due from vendors was performed manually. The Company's ability to
organize and retain the support documentation for warranty claims, as well as
its collection efforts, was hindered due to the manual nature of the reporting
and tracking processes. Beginning in January 1998, the Company automated its
processes for recording and tracking warranty claims, substantially reducing the
tracking and follow up issues which existed under the manual system. As a result
of the changes to these processes, the Company anticipates that the write-offs
pertaining to vendor receivables as a percentage of total vendor receivables
will decrease in the future. Factors that may have an impact on gross margin in
the future include the percentage of equipment sales with lower-margin customers
and the ratio of service revenues to total net sales and revenues.
Operating Expenses. Selling, general and administrative expenses
(including rent expense and provision for doubtful accounts) expressed as a
percentage of total net sales and revenues increased to 11.1% in fiscal 1998
from 10.3% for fiscal 1997. This increase is primarily attributable to the
investment made in technical personnel during the first nine months of fiscal
1998 to generate the increase in service revenues. This trend declined during
the fourth quarter of fiscal 1998 as the Company achieved greater billable
personnel utilization. Total operating expenses expressed as a percentage of
total net sales and revenues increased to 12.0% in fiscal 1998 from 11.1% in
fiscal 1997 due to the factor described above.
Income from Operations. Income from operations increased $8.3 million, or
31.0%, to $35.1 million in fiscal 1998 from $26.8 million in fiscal 1997. The
Company's operating margin increased to 5.6% in fiscal 1998 from 5.5% in fiscal
1997 as the increase in gross profit margin offset the increase in operating
expenses as a percentage of total net sales and revenues.
Interest Expense. Total interest expense increased $1.7 million, or
170.0%, to $2.7 million in fiscal 1998 from $1.0 million in fiscal 1997. This
increase is primarily related to higher average borrowings during fiscal 1998 as
a result of higher working capital requirements.
Income Taxes. The Company's effective tax rate was 38.1% in fiscal 1998
compared to 36.8% in fiscal 1997. This increase is the result of an increase
in taxable income in states which have higher tax rates.
Net Income. Net income increased $3.9 million, or 23.9%, to $20.2 million
in fiscal 1998 from $16.3 million in fiscal 1997. The increase was a result of
the factors described above.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Total Net Sales and Revenues. Total net sales and revenues increased
$155.0 million, or 46.1%, to $491.4 million in fiscal 1997 from $336.4 million
in fiscal 1996. This increase was attributable to an increase in sales to
existing and new customers and to acquisitions completed in fiscal years 1997
and 1996. Excluding acquisitions completed in fiscal years 1997 and 1996, total
net sales and revenues increased 35.8%.
Page 10
Sales of equipment and supplies increased $134.2 million, or 43.8%, to
$440.9 million in fiscal 1997 from $306.7 million in fiscal 1996. On a
comparable basis, as described above, sales of equipment and supplies increased
33.9%. Service and other revenues increased $20.8 million, or 70.0%, to $50.5
million in fiscal 1997 from $29.7 million in fiscal 1996. On a comparable basis,
as described above, service revenues increased 55.3%.
Gross Profit. Gross profit margin was 16.6% in fiscal 1997 compared to
16.2% in fiscal 1996. The Company improved its gross margin by increasing the
volume of higher-margin service revenues which offset a decrease in hardware
gross margins and the growth in equipment sales. Service and other revenues
increased to 10.3% of total net sales and revenues in fiscal 1997 compared to
8.8% of total net sales and revenues in fiscal 1996. Factors that may have an
impact on gross margin in the future include the percentage of equipment sales
with lower-margin customers and the ratio of service revenues to total net sales
and revenues.
Operating Expenses. Selling, general and administrative expenses
(including rent expense and provision for doubtful accounts) expressed as a
percentage of total net sales and revenues decreased to 10.3% in fiscal 1997
from 10.5% for fiscal 1996. This decrease is primarily attributable to the
increased productivity of technical personnel which contributed to the growth of
the Company's service business. Total operating expenses expressed as a
percentage of total net sales and revenues decreased to 11.1% in fiscal 1997
from 11.2% in fiscal 1996 due to the factor described above.
Income from Operations. Income from operations increased $9.9 million, or
58.6 %, to $26.8 million in fiscal 1997 from $16.9 million in fiscal 1996. The
Company's operating margin increased to 5.5% in fiscal 1997 from 5.0% in fiscal
1996 because of the increase in gross margin and the decrease in operating
expenses as a percentage of total net sales and revenues.
Interest Expense. Total interest expense decreased $1.2 million or 54.5%,
to $1.0 million in fiscal 1997 from $2.2 million in fiscal 1996. This decrease
is primarily related to lower average borrowings during fiscal 1997 as a result
of the secondary public offering in February 1997.
Income Taxes. The Company's effective tax rate was 36.8% in fiscal 1997
compared to 40.8% in fiscal 1996. This reduction is the result of Kentucky state
income tax credits earned in fiscal 1997.
Net Income. Net income increased $10.1 million, or 162.9%, to $16.3
million in fiscal 1997 from $6.2 million in fiscal 1996. The increase was a
result of the factors described above. Net income, excluding the impact of the
Vanstar settlement in fiscal 1996, increased $7.5 million, or 85.2%, in fiscal
1997 compared with $8.8 million in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash provided by operating activities was $3.5 million in fiscal 1998. Cash
used in investing activities included $21.2 million for acquisitions and $3.2
million for capital expenditures. Cash provided by financing activities included
$16.3 million of net proceeds from bank notes payable, $7.0 million of proceeds
under notes payable, $3.4 million from the exercise of stock options less $2.1
million of repayments on various notes payable.
A significant part of the Company's inventories is financed by floor plan
arrangements with third parties. At January 5, 1999, these lines of credit
totaled $72.0 million, including $60.0 million with Deutsche Financial Services
("DFS") and $12.0 million with IBM Credit Corporation ("ICC"). Borrowings under
the DFS and ICC floor plan arrangements are made on thirty day notes. All such
borrowings are secured by the related inventory. Financing on substantially all
of the arrangements is interest free due to subsidies by manufacturers. Overall,
the average rate on these arrangements is less than 1.0%. The Company classifies
amounts outstanding under the floor plan arrangements as accounts payable.
The Company's financing of receivables is provided through a portion of its
credit facility with DFS which was finalized on July 14, 1998. The credit
facility provides a credit line of $60.0 million for accounts receivable
financing. The accounts receivable portion of the credit facility carries a
variable interest rate based on the prime rate less 125 basis points. At January
5, 1999, the amount outstanding was $39.6 million, including $12.6 million of
overdrafts on the Company's books in accounts at a participant bank on the
credit facility, which was at an interest rate of 6.5%. The overdrafts were
subsequently funded through the normal course of business. The credit facility
is collateralized by substantially all of the assets of the Company, except
those assets that collateralize certain other financing arrangements. Under the
terms of the credit facility, the Company is subject to various financial
covenants.
Page 11
During fiscal 1998, the Company increased the leasing activity through its
wholly-owned leasing subsidiary, Technology Integration Financial Services, Inc.
("TIFS"). Through TIFS, the Company provides its customers with leasing
alternatives for the Company's products and services. The impact of this
increased leasing activity for fiscal 1998 was not material. However, further
increases in leasing operations could impact one or more of total net sales and
revenues, gross margin, operating income, net income, total debt and liquidity,
depending on the amount of leasing activity and the types of leasing
transactions. The funding of the Company's net investment in sales-type leases
is provided by various financial institutions primarily on a nonrecourse basis.
The Company believes that the anticipated cash flow from operations and
current financing arrangements will be sufficient to satisfy the Company's
capital requirements for the next twelve months. Historically, the Company has
financed acquisitions using a combination of cash, shares of its Common Stock
and seller financing. The Company anticipates that any future acquisitions will
be financed in a similar manner.
OTHER
Year 2000 Issues
Background. The following is a discussion of the Year 2000 date issue
("Year 2000 issue") as it affects the Company. Many computer programs and
embedded chips in other forms of technology use only the last two digits to
identify a year in a date field. As a result of this design decision, some of
these systems could fail to operate or fail to produce correct results if "00"
is interpreted to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches.
Assessment. The Company currently believes its potential exposure to
problems arising from the Year 2000 issue lies primarily in three areas:
(1) The Company's internal operating systems which may not be Year 2000
compliant;
(2) Potential Year 2000 non-compliance of systems of third parties with
whom the Company has a business relationship; and,
(3) Non-compliance of information technology products developed by third
parties on which the Company performs services.
The Company has completed an assessment of its principal internal systems.
However, it continues to assess its Year 2000 exposure with respect to third
parties. While the cost of these assessment efforts is not expected to be
material to the Company's financial position or results of operations, there is
no assurance that this will be the case.
Internal Operating Systems. The Company is dependent upon management
information systems for all phases of its operations and financial reporting.
The Company began addressing the affect of the Year 2000 issue in 1996. The
Company has acquired Year 2000 compliant versions for all of its principal
systems and modules. The Company is in the process of testing the Year 2000
compliant versions of all hardware and software components and applications
pertaining to its internal operating systems upon which the Company relies.
There may be some non-critical applications that are not Year 2000 compliant.
Third-Party Relationships. The failure of a supplier to deliver timely
Year 2000 compliant products to our customers could jeopardize the Company's
ability to meet obligations to customers. In addition, we may be liable for Year
2000 non-compliance of information technology products on which the Company
performs services. The Company is conducting a program to identify and resolve
Year 2000 exposure from third parties. Any failure of third parties with whom
the Company has a business relationship to resolve Year 2000 problems with their
products in a timely manner could materially adversely affect our business,
financial condition or results of operations. The Company is also dependent on
third party service providers, such as telephone companies, banks and insurance
carriers. The Company is not aware of any significant Year 2000 exposure,
however, we have not inquired or implemented any program to assure Year 2000
compliance by them.
State of Readiness. The Company estimates that it will complete its
testing of its principal information technology systems by the beginning of the
second quarter of fiscal 1999. Upon completion of the testing of the Year 2000
versions of its principal systems, the Company will convert all operations to
the Year 2000 compliant system, which is estimated to be operational during the
third quarter of fiscal 1999.
Costs to Address Year 2000 Issues. Other than time spent by the
Company's own personnel, the Company has not incurred any significant costs in
identifying Year 2000 issues. The Company does not anticipate any significant
costs to make its internal systems Year 2000 compliant because no remediation is
expected to be required. Accordingly, the Company has not deferred other
information technology projects due to Year 2000 efforts.
Page 12
Risks of Year 2000 Issues. The Company believes the most
reasonably likely worst case Year 2000 scenario would include a combination of
some or all of the following:
(1) Internal IT modules or systems may fail to operate or may give
erroneous information. Such failure could result in shipping delays, reduced
utilization of technical personnel, inability to timely generate financial
reports and statements, inability of the Company to communicate with its branch
offices, and computer network downtime resulting in numerous inefficiencies and
higher payroll expenses.
(2) Non-IT components in HVAC, lighting, telephone, security and similar
systems might fail and cause the entire system to fail.
(3) Communications with customers that depend upon IT or non-IT
technology, such as EDI (including automatic ordering by and for customers), and
obtaining current pricing from vendors, may fail or give erroneous information.
These types of problems could result in such difficulties as the inability to
receive or process customer orders, shipping delays, or sale of products at
erroneous prices.
(4) The unavailability of product as a result of Year 2000 problems
experienced by one or more key vendors of the Company, or as a result of changes
in inventory levels of aggregators, VARs and similar providers in response to an
anticipated Year 2000 problem or the inability of the Company to develop
alternative sources for products.
(5) Products sold to some of the Company's customers could fail to
perform some or all of their intended functions. In such a situation, the
Company's maximum obligation would be to repair or replace the defective
products to the extent the Company is required to do so under manufacturer
warranty.
Contingency Plans. The Company believes its plans for addressing the
Year 2000 issue are adequate. The Company does not believe it will incur a
material financial impact from system failures, or from the costs associated
with assessing the risks of failure, arising from Year 2000 problems.
Consequently, the Company does not intend to create a detailed contingency plan.
In the event the Company does not adequately identify and resolve Year 2000
issues, the absence of a detailed contingency plan may adversely affect its
business, financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Registrant hereby incorporates the financial statements required by this item by
reference to Item 14 hereof.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Page 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to each person
who is a director or executive officer of the Company:
NAME AGE POSITION
- --------------------- --- ------------------------------------------------------------
David B. Pomeroy, II 49 Chairman of the Board, President and Chief Executive Officer
Stephen E. Pomeroy 30 Director, Chief Financial Officer and Treasurer
James C. Eck 50 Vice President of Sales
Victor Eilau 40 President, Technology Integration Financial Services, Inc.
Richard C. Mills 43 Director, Chief Operating Officer
James H. Smith, III 48 Director
David W. Rosenthal 47 Director
Michael E. Rohrkemper 52 Director
Kenneth R. Waters 47 Director
William Lomicka 62 Director
David B. Pomeroy, II was a founder of the first of the Company's
predecessor businesses ("the Pomeroy Companies") in 1981. Mr. Pomeroy controlled
the Pomeroy Companies until their reorganization into Pomeroy Computer Resources
in 1992 and has served as Chairman of the Board, President and Chief Executive
Officer since 1992.
Stephen E. Pomeroy was named a Director and Secretary and Treasurer in
February, 1998, and Chief Financial Officer in May 1997. Mr. Pomeroy was the
Vice President of Marketing and Corporate Development from September 1996 to May
1997. Prior to that time, Mr. Pomeroy was the Director of New Market Development
of the Company from 1994 to September 1996 and Account Executive from 1991 to
1994. From 1985 to 1991, Mr. Pomeroy was employed by the Company on a part-time
basis. In December 1998, Mr. Pomeroy was named President and Chief Executive
Officer of Pomeroy Select Integration Solutions, Inc. (a wholly-owned
subsidiary of the Company).
Richard C. Mills was named a Director in February 1998 and Chief Operating
Officer in May 1997. Mr. Mills joined the Company in January 1993 and was Vice
President of Operations from July 1993 to May 1997. Prior to that time, Mr.
Mills was the founder and president of The Computer Store of Kentucky, Inc., a
Louisville-based retailer of computer products. Mr. Mills resigned as Chief
Operating Officer effective March 1, 1999.
James C. Eck joined the Company in September 1995 and was made Vice
President of Sales effective February 1996. From 1983 until 1995, Mr. Eck was
employed by Canon USA Incorporated, a New York-based manufacturer of digital and
analog office equipment, and served as the director and general manager of the
National Accounts Division Office Equipment Group for Canon since 1991.
Victor Eilau joined the Company in July 1997 and was made President of
Technology Integration Financial Services, Inc. (a wholly-owned subsidiary of
the Company). For the previous five years Mr. Eilau was a Vice President of
Comdisco, Inc.
James H. Smith, III has been a Director of the Company since April 1992.
Mr. Smith is a shareholder in the law firm of Lindhorst & Dreidame Co., L.P.A.,
Cincinnati, Ohio, where he has practiced law since 1979. Lindhorst & Dreidame
acts as outside general counsel to the Company.
Page 14
Dr. David W. Rosenthal has been a Director of the Company since April 1992.
Dr. Rosenthal is a Professor of Marketing at Miami University, Oxford, Ohio, a
position he has held for more than the last five years. Dr. Rosenthal has also
served as a consultant with Stratvertise, a marketing research and strategic
consulting firm since 1975.
Michael E. Rohrkemper has been a Director of the Company since July 1993.
Mr. Rohrkemper is a certified public accountant and has been a partner in the
accounting firm of Rohrkemper and Ossege Ltd. since January 1991.
Kenneth E. Waters has been a Director of the Company since April 1997 and
provides consulting services to the Company. Mr. Waters has worked in the
computer industry since 1977. Most recently, he has been an industry
consultant, serving as such from February 1995 until present as well as from
April 1993 to August 1993 and January 1991 to August 1992. From September 1993
to January 1995, Mr. Waters was the President of Micro, Inc., a computer
reseller. From September 1992, to March 1993, Mr. Waters was the President and
CEO of Power Up Software, a software manufacturer. From July 1978 to September
1988, Mr. Waters was employed by Vanstar (then known as ComputerLand), holding
various management positions, with his last position being CEO. Mr. Waters was
also a Director of Vanstar from September 1987 to July 1989. Mr. Waters
resigned as a Director effective January 5, 1999.
William H. Lomicka was elected to the Board of Directors effective January
7, 1999. Mr. Lomicka is president of Mayfair Capital, Inc., a private
investment firm, a position he has held since 1989.
Stephen E. Pomeroy is the son of David B. Pomeroy, II. There are no other
family relationships among the Company's directors and executive officers.
BOARD OF DIRECTORS
There were four meetings of the Board of Directors in 1998. Each member of
the Board of Directors attended at least seventy-five percent (75%) of the
aggregate of the total number of meetings of the Board and committees on which
he served.
Committees of the Board of Directors
------------------------------------
The Company has a standing audit committee, which held two meetings during
1998, composed of two non-employee directors, Messrs. Smith and Rohrkemper, and
Mr. Pomeroy, Chairman of the Board, President and Chief Executive Officer. The
audit committee consults with the independent auditors regarding their
examination of the financial statements of the Company and regarding the
adequacy of internal controls. It reports to the Board of Directors on these
matters and recommends the independent auditors to be designated for the ensuing
year.
The Company has a standing compensation committee, which held one meeting
during 1998, composed of three non-employee directors, Messrs. Smith, Rohrkemper
and Waters, and Mr. Pomeroy. This committee reviews the compensation paid by the
Company and makes recommendations on these matters to the Board of Directors.
Mr. Waters resigned from the Board effective January 5, 1999 and his position as
a compensation committee member has not been replaced.
The Company has a standing stock option committee, which held one meeting
during 1998, consisting of Messrs. Rosenthal, Rohrkemper and Smith. This
committee administers the 1992 Non-Qualified and Incentive Stock Option Plan.
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
During fiscal 1998, Mr. Stephen E. Pomeroy, Chief Financial Officer for Pomeroy
Computer Resources, Inc. failed to file one Form 4 with respect to the grant of
25,000 options to purchase shares of the Common Stock of the Company in August
1998. This transaction was subsequently reported on a Form 5 for December 1998.
During fiscal 1998, Mr. Richard C. Mills, Chief Operating Officer for Pomeroy
Computer Resources, Inc. failed to file one Form 4 with respect to the grant of
25,000 options to purchase shares of Common Stock of the Company in August 1998.
Page 15
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
----------------------------------------------
The following table is a summary for the fiscal years 1996, 1997 and 1998
of certain information concerning the compensation paid or accrued by the
Company to the Chief Executive Officer and to each person who at any time during
1998 was an executive officer of the Company and whose aggregate salary and
bonus exceeded $100,000 (collectively, the "Named Executive Officers").
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
------------------------------------- -------------------
Name and Principal Other Annual Stock Options
Position Year Salary (1) Bonus Compensation # (2)
- ----------------------- ---- ----------- -------- -------------- --------------
David B. Pomeroy 1998 $ 475,000 - (3) - 25,000 (4)
CEO . . . . . . . . . . 1997 $ 395,000 $720,000 - 25,000
1996 $ 395,000 $499,845 - 56,250
Richard C. Mills. . . . 1998 $ 250,000 $ 7,500 $ 98,953 (5) 30,000
Chief Operating Officer 1997 $ 185,000 $ 14,000 $ 61,833 (5) 35,000
1996 $ 156,967 $ 10,000 $ 56,220 (5) 54,000
Stephen E. Pomeroy. . . 1998 $ 125,000 $ 52,000 $ 38,504 (6) 45,000
CFO . . . . . . . . . . 1997 $ 115,000 $ 41,324 $ 18,500 (6) 30,000
1996 $ 100,000 $100,000 $ 21,762 (6) 29,250
James C. Eck. . . . . . 1998 $ 192,500 $ 16,000 $ 35,668 (7) 5,000
Vice President of . . . 1997 $ 175,000 $ 34,400 $ 31,067 (7) 10,000
Sales . . . . . . . . . 1996 $ 150,000 $ 75,000 $ 17,400 (7) -
Victor Eilau. . . . . . 1998 $ 294,665 $ 46,934 - 10,000
President, Technology . 1997 $ 124,800 $ 50,000 - 15,000
Integration Financial
Services, Inc.
(1) Includes amounts deferred at the direction of the executive officer
pursuant to the Company's 401(k) Retirement Plan.
(2) Unless otherwise noted, all stock options are awarded based on the fair
market value of the Company's common stock at the time of grant.
(3) Excludes $300,000 of incentive cash bonus that was forgone.
(4) Does not include options that were granted to Mr. Pomeroy after fiscal
1998.
(5) Includes commission of $37,616, $20,500 and $48,220 in 1998, 1997 and
1996, respectively. Includes accruals pursuant to deferred compensation
agreements of $61,337, $41,333 and $8,000 in 1998, 1997 and 1996,
respectively.
(6) Represents amounts accrued pursuant to deferred compensation agreements.
(7) Includes commissions of $19,000, $14,400 and $17,400 in 1998, 1997 and
1996, respectively. Includes amounts accrued pursuant to deferred
compensation agreements of $16,668 and $16,667 in 1998 and 1997,
respectively.
Page 16
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning the grant of
options to purchase Common Stock to any of the Named Executive Officers during
fiscal year 1998.
Individual Grants
- -----------------------------------------------------------------------------------------
Potential Realizable Value
No. of Shares of Percent of Total at Assumed Annual
Common Stock Options Granted to Exercise or Rates of Stock Price
Underlying Options Employees Base Price Expiration Appreciation for Option Term
----------------------------
Name Granted in Fiscal Year ($/Sh) Date 5% 10%
- -------------------- ------------------- ------------------- ------------- ---------- ------------- -------------
David B. Pomeroy, II 25,000 (1) 16.78% $ 17.50 01/06/03 $ 121,000 $ 267,000
Richard C. Mills . . 5,000 3.36% $ 17.50 01/06/00 $ 9,000 $ 18,000
25,000 16.78% $ 16.00 08/21/00 $ 41,000 $ 84,000
Stephen E. Pomeroy . 20,000 13.43% $ 17.50 01/06/00 $ 36,000 $ 74,000
25,000 16.78% $ 16.00 08/21/00 $ 41,000 $ 84,000
James C. Eck . . . . 5,000 3.36% $ 17.50 01/06/00 $ 9,000 $ 18,000
Victor Eilau . . . . 5,000 3.36% $ 17.50 01/06/00 $ 9,000 $ 18,000
5,000 3.36% $ 25.06 07/06/00 $ 13,000 $ 26,000
(1) Does not include options that were granted to Mr. Pomeroy after fiscal
1998.
AGGREGATE STOCK OPTION EXERCISES IN YEAR ENDED JANUARY 5, 1999
AND YEAR-END STOCK OPTION VALUES
The following table sets forth information concerning aggregated option
exercises in fiscal year 1998 and the number and value of unexercised options
held by each of the Named Executive Officers at January 5, 1999.
NO. OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT JANUARY 5, 1999 VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JANUARY 5, 1999 JANUARY 5, 1999
SHARES (#) ($)
--------------------------- -------------------------
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- -------------------- --------------- ------------- --------------------------- -------------------------
David B. Pomeroy, II 20,000 $ 318,245 123,375 / 0 $ 1,488,000 / $0
Richard C. Mills . . 120,866 $ 2,106,540 65,000 / 0 $ 368,000 / $0
Stephen E. Pomeroy . - $ - 116,625 / 0 $ 1,136,000 / $0
James C. Eck . . . . - $ - 15,000 / 0 $ 77,000 / $0
Victor Eilau . . . . - $ - 25,000 / 0 $ 92,000 / $0
Page 17
Submitted by Board of Directors
COMPENSATION OF THE BOARD OF DIRECTORS
Each director who is not an employee of the Company, except for Messrs.
Smith and Waters, receives a quarterly retainer of Two Thousand Dollars ($2,000)
plus Five Hundred Dollars ($500) for each Board of Directors meeting attended
(including as part of each such meeting any committee meetings held on the same
date), and Five Hundred Dollars ($500) for any committee meetings attended which
were not held on the same date as a Board of Directors meeting. Beginning with
the fourth quarter of fiscal 1993, the amount earned by such directors is
automatically deposited by the Company, on a quarterly basis, into a broker
account established for each such Director unless the Director requests receipt
of the cash instead. The broker is directed to utilize the funds deposited for
each Director to purchase shares of Common Stock of the Company on the open
market. Mr. Smith's law firm, Lindhorst & Dreidame Co., L.P.A., is compensated
for his time in attendance at Directors' Meetings based on his hourly rate. Mr.
Waters is paid a monthly consulting fee of $1,500 in lieu of the quarterly
retainer and the fee for meetings attended and for providing consulting.
EMPLOYMENT AGREEMENTS
David B. Pomeroy, II, the Chairman of the Board and Chief Executive Officer
of the Company, has an employment agreement with the Company for a term of three
years, which is extended on a daily basis resulting in a perpetual three year
term.
Effective January 6, 1998, Mr. Pomeroy entered into a Seventh Amendment to
the Employment Agreement with the Company (the "Seventh Amendment"). Mr.
Pomeroy's compensation under the Seventh Amendment consisted of a base salary
of $475,000 for fiscal 1998 and each subsequent fiscal year unless modified by
the Compensation Committee. Under the Seventh Amendment Mr. Pomeroy was entitled
to a cash bonus of up to a maximum of $400,000 and up to a maximum of 75,000
non-qualified stock options in fiscal 1998 based upon the Company's operating
income. Mr. Pomeroy has forgone a fiscal 1998 incentive cash bonus of $300,000.
Mr. Pomeroy may also be paid a discretionary bonus under any compensation,
benefit or management incentive plan. Fifty percent of any discretionary bonus
would be paid in cash and fifty percent would be treated as incentive
deferred compensation.
Under the amended Employment Agreement, the Company has agreed to pay all
premiums for a term life insurance policy with a death benefit equal to
$3,000,000 insuring the life of Mr. Pomeroy. The owner and beneficiary of this
term life insurance policy is a trust established by Mr. Pomeroy. The Company
and the trust entered into a split dollar arrangement whereunder the Company
will pay all premiums on a whole life insurance policy with a death benefit
equal to $2,000,000 insuring the life of Mr. Pomeroy, less the reportable
economic benefit to the trust.
Under the Seventh Amendment Mr. Pomeroy was granted an option to acquire
25,000 shares of Common Stock at a per share price equal to the fair market
value of a share of Common Stock on January 3, 1997. In addition, the Company
agreed to pay Mr. Pomeroy $5,000 per month during the term of the Agreement, for
the business use of real estate owned by Mr. Pomeroy in Arizona. In the event of
a change of control (as defined in the Agreement), the Company is required to
provide Mr. Pomeroy with 100 hours of flight time on a private air carrier for
business use per year for the term of the agreement. Currently the cost of one
hour of flight time ranges from $1,400 to $2,300 depending on various factors.
Mr. Mills has an employment agreement with the Company effective January 1,
1993. The term of Mr. Mills' agreement is three years and is extended annually
for additional one-year periods unless either party gives 60 days written notice
of termination. The agreement provides for a stated base salary, which was
$250,000 in fiscal 1998, and a discretionary bonus to be determined by the Board
of Directors. Effective March 1, 1999, Mr. Mills resigned as Chief Operating
Officer and his employment agreement was terminated as of that date by the
agreement of the parties.
Mr. Stephen E. Pomeroy's employment agreement with the Company was
terminated upon the execution of an employment agreement between Pomeroy Select
and Mr. Pomeroy effective January 6, 1999. Mr. Pomeroy's employment agreement
with Pomeroy Select has a term of three years, which is extended on a daily
basis resulting in a perpetual three year term. Mr. Pomeroy's employment
agreement provides for an annual base salary of $175,000 during the year ending
January 5, 2000 and for each subsequent year unless modified by the Compensation
Committee. Under the employment agreement, he may earn quarterly and annual
bonuses upon Pomeroy Select meeting certain predetermined goals. Mr. Pomeroy's
base salary was $125,000 in fiscal 1998. The amount of any annual bonus will be
paid 50% in cash and 50% as incentive deferred compensation.
Page 18
Mr. Eck has an employment agreement with the Company extending from
September 18, 1995 to January 5, 1999, which is extended annually for successive
one-year periods unless either party gives 30 days written notice of
termination. Mr. Eck's compensation under the agreement consists of a base
salary, which was $192,500 in fiscal 1998, annual and quarterly bonuses, monthly
commissions based on gross sales, and stock options. The amount of any annual
bonuses are determined on the basis of attainment of certain economic goals, and
are to be paid 50% in cash and 50% as incentive deferred compensation.
Mr. Eilau, President of Technology Integration Financial Services, Inc.
("TIFS"), a wholly-owned subsidiary of the Company, has an employment agreement
with the Company extending from July 6, 1997 to July 5, 2000, which is extended
annually for successive one-year periods unless either party gives 30 days
written notice of termination. Mr. Eilau's compensation under the agreement
consists of a base salary, which was $295,000 in fiscal 1998, deferred
compensation based on Company revenues and pre-tax income and cash bonuses based
on TIFS pre-tax income.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1998, the Compensation Committee consisted of David B. Pomeroy,
II, James H. Smith, III, Michael E. Rohrkemper and Kenneth R. Waters. Mr.
Pomeroy is the Chief Executive Officer of the Company. Mr. Waters resigned from
the Board of Directors effective January 5, 1999.
The Company's principal executive offices and distribution facility are
located in Hebron, Kentucky, comprised of approximately 36,000 and 111,000
square feet of space, respectively. These facilities are leased from Pomeroy
Investments, LLC ("Pomeroy Investments"), a Kentucky limited liability company
controlled by David B. Pomeroy, II, Chief Executive Officer of the Company,
under a ten year triple-net lease agreement which expires in May 2006. The lease
agreement provides for 2 five year renewal options.
The Company from time to time has made advances to Pomeroy Investments to
satisfy Pomeroy Investments' working capital needs.
James H. Smith, a director of the Company, is a stockholder in the law firm
of Lindhorst & Dreidame Co., L.P.A. Lindhorst & Dreidame Co. serves as general
counsel to the Company. The legal services provided by Lindhorst & Dreidame Co.
constituted less than 5% of the firm's business in 1998.
EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE
------------------------------------
The Compensation Committee of the Board of Directors is currently composed
of two (2) non-employee directors, Messrs. Smith and Rohrkemper, and Mr.
Pomeroy, Chairman of the Board, President and Chief Executive Officer. During
fiscal 1998, Mr. Waters was also a member of the compensation committee. Mr
Waters resigned from the Company's Board of Directors effective January 5, 1999.
The Committee is responsible for the establishment and oversight of the
Company's Executive Compensation Program. This program is designed to meet the
objectives of attracting, retaining and motivating executive employees and
providing a balance of short term and long term incentives that can recognize
individual contributions from an executive and the overall operating and
financial results of the Company. The Committee intends to review Executive
Compensation on a regular basis and to compare the competitiveness of the
Company's executive compensation and corporate performance with other
corporations comparable to the Company. The committee believes that the
significant equity interest in the Company held by the Company's management
aligns the interests of the shareholders and management. Through the programs
adopted by the Company a significant portion of Executive Compensation is linked
to individual and corporate performance and stock price appreciation.
The basic elements of the Company's Executive Compensation Program consist
primarily of base salary, potential for annual cash opportunities and stock
options. The Committee believes that incentives play an important role in
motivating executive performance and attempts to reward achievement of both
short and long term goals. However, the emphasis on using stock options as a
long term incentive is intended to insure a proper balance in the achievement of
long term business objectives which ties a significant portion of the
executive's compensation to factors which impact on the performance of the
Company's stock.
Compensation opportunities must be adequate to enable the Company to
compete effectively in the labor market for qualified executives. The elements
of the Executive Compensation Program are designed to meet these demands, and at
the same time encourage increases in shareholder value.
Page 19
BASE SALARIES
Base salaries for executives are initially determined by evaluating the
duties and responsibilities of the position to be held by the individual,
experience and the competitive marketplace for executive talent. The Company has
entered into Employment Agreements that establish salaries for certain executive
officers. Salaries for executives and other employees are reviewed periodically
and may be set at higher levels if the Company concludes that is appropriate in
light of that particular individual's responsibilities, experience and
performance.
ANNUAL CASH BONUSES
The Company's executives and other employees are eligible to receive annual
cash awards or bonuses at the discretion of the Committee with the approval of
the Board of Directors. In determining whether such discretionary awards should
be made, the Committee considers corporate performance measured by financial and
operating results including income, return on assets and management of expenses
and costs.
LONG TERM COMPENSATION
A. 1992 NON-QUALIFIED AND INCENTIVE STOCK OPTION PLAN
The Company's 1992 Non-Qualified and Incentive Stock Option Plan (the
"Option Plan") has presently reserved for issuance an aggregate of 1,850,000
common shares. The Option Plan was adopted to encourage ownership of common
shares by officers and key employees of the Company to encourage their continued
employment with the Company and to provide them with incentives to promote the
success of the Company. The Stock Option Committee of the Board of Directors
grants options under and otherwise administers the Option Plan. The exercise
price for options under the Option Plan must be at least one hundred percent
(100%) of the fair market value of the common shares on the date of grant;
provided, however, in the event that an incentive stock option is granted to an
employee who owns more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or, if applicable, a subsidiary or parent
corporation of the Company, the exercise price per share for such incentive
stock options cannot be less than one hundred ten percent (110%) of the fair
market value of the common shares on the date of grant. The exercise price of
options granted under the Option Plan is payable in cash or, at the discretion
of the Stock Option Committee in whole or in part, in common shares, valued at
their fair market value at the date of exercise. Each option granted under the
Option Plan expires on the date or dates set forth in the specific option award
as determined by the Stock Option Committee in its sole discretion, but not
later than ten (10) years from the date of grant. The Option Plan will terminate
on February 13, 2002, but such termination will not affect any outstanding
options previously granted.
The tax consequences of the granting and exercise of an option under the
Option Plan to the recipient of the option depend upon the type of option
granted. Taxable gain on a non-qualified stock option is determined on the date
of exercise of the option and is measured by the difference between the fair
market value of the common shares on the date of exercise and the exercise
price. Gain from the granting and exercise of incentive stock options is
deferred until the option holder sells the common shares received upon exercise
of the option. Generally, the amount of gain is measured by the difference
between the sales price of the common shares and the exercise price of the
option. In the case of a non-qualified stock option granted and exercised under
the Option Plan, the Company is entitled to a tax deduction equal to the amount
of income recognized by the option holder, subject to certain withholding and
reporting requirements. With respect to incentive stock options, the Company is
not entitled to a deduction in connection with the granting or exercise of such
an option or the sale of the common shares issued upon the exercise of the
option.
The Option Plan may be amended any time by the Board of Directors, but no
amendment can be made without the approval of the Company's shareholders if
shareholder approval is required under Section 422A of the Internal Revenue Code
of 1986 or Rule 16b-3 under the Securities Exchange Act of 1934. No amendment
may, however, impair the rights or obligations of the holder of any option
granted under the Option Plan without his or her consent.
B. 1992 OUTSIDE DIRECTORS' STOCK OPTION PLAN
The Company's 1992 Outside Directors' Stock Option Plan (the "Directors'
Plan") has reserved for issuance an aggregate of 262,500 common shares to
outside directors. The purpose of the plan is to encourage outside directors of
the Company to acquire or increase their ownership of common shares on
reasonable terms, to foster a strong incentive for outside directors to put
forth maximum effort for the continued success and growth of the Company, to aid
in retaining such individuals who put forth such efforts and to assist in
attracting the best available individuals to serve as directors of the Company
in the future. The Directors' Plan became effective February 13, 1992 and will
terminate ten (10) years from that date. Pursuant to the Directors' Plan, an
option to purchase 10,000 common shares is automatically granted on the first
Page 20
day of the initial term of an outside director. Thereafter, an option to
purchase an additional 2,500 common shares will automatically be granted upon
the first day of each consecutive year of service on the Board of Directors. The
exercise price of the options will be the fair market value of the shares on the
date the option is granted. The options may be exercised after one (1) year from
the date of grant for not more than one-third (1/3) of the shares subject to the
option and an additional one-third (1/3) of the shares subject to the option may
be exercised for each of the next two (2) years thereafter. To the extent not
exercised, options granted under the Directors' Plan will expire five (5) years
after the date of grant except upon termination of the director's service on the
Board, in which case the option may be exercised within three (3) months of the
date of such termination (but not beyond the term of the option) and, except
upon death of the director in which case the option may be exercised by the
deceased director's legatee, personal representative or distributee within one
(1) year of the date of death (but not beyond the term of the option).
C. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) savings plan which generally covers all
employees of the Company. Plan participants may contribute up to fifteen percent
(15%) of their annual base salary on a pre-tax basis, although contributions of
certain highly compensated employees may be limited under federal tax laws. In
fiscal 1998, the Company began making contributions to the plan based on a
participant's annual pay.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Pomeroy served as Chairman of the Board and Chief Executive Officer
throughout fiscal 1998. Mr. Pomeroy's compensation, which includes an annual
salary, bonuses and stock options, was determined in accordance with the terms
of the Seventh Amendment to his Employment Agreement. The Seventh Amendment,
which established the performance criteria for fiscal 1998, was adopted by the
Compensation Committee in December 1997. The terms of Mr. Pomeroy's Employment
Agreement and any amendments thereto are based on the factors described above
including a review of the compensation paid to executives of comparable
companies.
Submitted by the Compensation Committee
James H. Smith, III, Michael E. Rohrkemper and David B. Pomeroy, II
Page 21
PERFORMANCE GRAPH
The following Performance Graph compares the percentage of the cumulative
total shareholder return on the Company's common shares with the cumulative
total return assuming reinvestment of dividends of (i) the S&P 500 Stock Index
and (ii) the NASDAQ Industrial Index.
CUMULATIVE TOTAL RETURN
BASED ON REINVESTMENT OF $100 BEGINNING APRIL 10, 1992
[CUMULATIVE TOTAL RETURN GRAPH]
Pomeroy S&P500 NASDAQ Industrial
4/92 100 100 100
12/92 81.9 107.9 107.2
12/93 135.2 115.5 119.2
12/94 119.6 113.8 111.5
12/95 166 152.6 142.7
12/96 726.8 183.5 164.1
12/97 557 240.4 232.2
12/98 687.2 304.5 324.3
Page 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
---------------------------------------------------------------------
The following table sets forth certain information, as of March 11, 1999,
with respect to each person known to the Company to be the beneficial owner of
more than five percent (5%) of its outstanding common stock, and information
with respect to the beneficial ownership of its common stock by each Director,
each Named Executive Officer, and by the Directors and executive officers of the
Company as a group.
AMOUNT & NATURE OF
NAME BENEFICIAL OWNERSHIP (1) % OF CLASS
- --------------------------- ------------------------ -----------
David B. Pomeroy, II. . . . 2,458,425 (2) 20.64%
Richard C. Mills. . . . . . 185,866 (3) 1.58%
Stephen E. Pomeroy. . . . . 122,201 (4) 1.03%
James C. Eck. . . . . . . . 18,000 (5) *
Victor Eilau. . . . . . . . 25,000 (6) *
James H. Smith, III . . . . 14,798 (7) *
David W. Rosenthal . . . . 5,000 (8) *
Michael E. Rohrkemper . . . 15,688 (9) *
Kenneth R. Waters . . . . . 5,500 (10) *
William H. Lomicka . . . . - -
Directors and all Executive
Officers as a Group. . . . 2,850,478 (11) 23.43%
- ------------------------------------
* Less than one percent (1%)
(1) The "Beneficial Owner" of a security includes any person who shares
voting power or investment power with respect to such security or has
the right to acquire beneficial ownership of such security within 60
days based solely on information provided to the Company.
(2) Includes 22,636 shares owned by his spouse as to which Mr. Pomeroy
disclaims beneficial ownership. Also includes 193,375 shares issuable
upon exercise of stock options.
(3) Includes 65,000 shares of Common Stock issuable upon exercise of stock
options.
(4) Includes 116,625 shares of Common Stock issuable upon exercise of stock
options.
(5) Includes 15,000 shares of Common Stock issuable upon exercise of stock
options.
(6) Includes 25,000 shares of Common Stock issuable upon exercise of stock
options.
(7) Includes 11,187 shares issuable upon exercise of stock options.
(8) Includes 1,500 shares of Common Stock owned by his spouse and 3,000
shares issuable to his spouse upon the exercise of stock options, as to
which Dr. Rosenthal disclaims beneficial ownership.
(9) Includes 247 shares of Common Stock held by Rohrkemper & Ossege Ltd., a
partnership in which Mr. Rohrkemper has a 60% interest. Also includes
10,625 shares of Common Stock issuable upon exercise of stock options.
(10) Includes 5,000 shares of Common Stock issuable upon exercise of stock
options.
(11) Includes 446,559 shares of Common Stock issuable upon exercise of stock
options.
Page 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
James H. Smith, III, a director of the Company, is a shareholder in the law
firm of Lindhorst & Dreidame Co. L.P.A., which serves as general counsel to the
Company. See "Compensation Committee Interlocks and Insider Participation".
Mr. David B. Pomeroy, II the Chairman of the Board, President and Chief
Executive Officer of the Company, engaged in certain transactions with the
Company in the last fiscal year. See "Compensation Committee Interlocks and
Insider Participation" and "Employment Agreements."
Addie W. Rosenthal, the spouse of Dr. Rosenthal, a member of the Board of
Directors, serves as Vice President of Marketing and Investor Relations for the
Company.
Kenneth R. Waters, a director of the Company since April 1997, served as a
consultant to the Company from June 1996 through November 1996. Mr. Waters was
paid $1,500 per month for his services for a total of $9,000 during the term of
the consulting arrangement. In January 1997, the Company retained Mr. Waters to
provide additional consulting services to the Company on an on-going basis. Mr.
Waters is paid $1,500 per month which also includes his compensation as a member
of the Board of Directors. Mr. Waters resigned as a director effective January
5, 1999. He was elected to the Board of Directors of Pomeroy Select Integration
Solutions, Inc. (a wholly-owned subsidiary of the Company) in December 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1998 Form
10-K Page
---------
1. Financial Statements:
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets,
January 5, 1998 and January 5, 1999 F-2 to F-3
For each of the three fiscal years in
The period ended January 5, 1999:
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Equity F-6
Notes to Consolidated Financial Statements F-7 to F-18
2. Financial Statement Schedules:
None
Filed Herewith
(page #) or
Incorporated
3. Exhibits by Reference to:
-------- ----------------
3(a) Certificate of Incorporation of the Company Exhibit 3(a) of Company's
Form S-1 filed Feb. 14, 1992
3(b) Bylaws of the Company Exhibit 3(a) of Company's
Form S-1 filed Feb. 14, 1992
Page 24
4 Rights Agreement between the Company and The Fifth Exhibit 4 of Company's Form
Third Bank, as Rights Agent dated as of February 8-K filed February 23, 1998
23,1998
10(i) Material Agreements
(b)(1) Agreement for Wholesale Financing (Security Exhibit 10(i)(b)(1) of
Agreement) between IBM Credit Corporation and Company's Form 10-K filed
the Company dated April 2, 1992 April 7, 1994
(b)(2) Addendum to Agreement for Wholesale Financing Exhibit 10(i)(b)(2) of
between IBM Credit Corporation and the Company Company's Form 10-K filed
dated July 7, 1993 April 7, 1994
(c)(1) Agreement for Wholesale Financing (Security Exhibit 10(i)(c)(1) of
Agreement) between ITT Commercial Finance Company's Form 10-K filed
Corporation and the Company dated March 27, 1992 April 7, 1994
(c)(2) Addendum to Agreement for Wholesale Financing Exhibit 10(i)(c)(2) of
between ITT Commercial Finance Corporation and Company's Form 10-K filed
the Company dated July 7, 1993 April 7, 1994
(c)(3) Amendment to Agreement for Wholesale Financing Exhibit 10(i)(c)(3) of
between Deutsche Financial Services f/k/a ITT Company's Form 10-Q filed May
Commercial Finance Corporation and the Company 18, 1995
dated May 5, 1995.
(d)(1) Asset Purchase Agreement among the Company; Exhibit 10(i)(z) of Company's
TCSS; and Richard Feaster, Victoria Feaster, Form 8-K dated March 14, 1996
Harry Feaster, Carolyn Feaster, Victoria
Feaster, trustee of the Emily Patricia Feaster
Trust, and Victoria Feaster, as trustee of the
Nicole Ann Feaster Trust dated March 14, 1996
(d)(2) Lease between the Company and TCSS dated March Exhibit 10.48 of Company's
15, 1996 Form S-1 filed June 4, 1996
(d)(3) Lease between Arthur K. Jones Trust, Firststar Exhibit 10.49 of Company's
Bank Des Moines, N.A., and William A. Jones, Form S-1 filed June 4, 1996
Trustees, and The Computer Supply Store, Inc.
dated July 1, 1994 (assigned to the Company
effective as of March 14, 1996)
(d)(4) Registration Rights Agreement between the Exhibit 10.50 of Company's
Company and TCSS dated March 14, 1996 Form S-1 filed June 4, 1996
(d)(5) Employment Agreement between the Company and Exhibit 10.51 of Company's
Richard Feaster dated March 14, 1996 Form S-1 filed June 4, 1996
(d)(6) Employment Agreement between the Company and Exhibit 10.52 of Company's
Victoria Feaster dated March 14, 1996 Form S-1 filed June 4, 1996
(e)(1) IBM Agreement for Authorized Dealers Exhibit 10(i)(e)(1) of
and Industry Remarketers with the Company's Form S-1 filed
Company, dated September 3, 1991 Feb. 14, 1992
(e)(2) Schedule of Substantially Exhibit 10(i)(e)(2) of
Identical IBM Agreements for Company's Form S-1 filed
Authorized Dealers and Industry Feb. 14, 1992
Remarketers
Page 25
(f) Compaq Computer Corporation United Exhibit 10(i)(f) of Company's
States Dealer Agreement with the Form S-1 filed Feb. 14, 1992
Company, dated September 27, 1990
(g) Dealer Sales Agreement between Exhibit 10(i)(g) of Company's
Apple Computer, Inc. and the Form S-1 filed Feb. 14, 1992
Company, dated April 1, 1991
(i) Lease between F.G.&H. Partnership Exhibit 10(i)(i) of Company's
and the Company for 908 DuPont Road, Form S-1 filed Feb. 14, 1992
Louisville, KY, dated May 9, 1990
(j)(1) Purchase Agreement between the Company and Exhibit 10.86 of Company's
First of Michigan Corporation dated March 28, Form S-1 filed June 4, 1996
1996
(j)(2) Purchase Agreement between the Company and John Exhibit 10.87 of Company's
C. Donnelly dated March 28, 1996 Form S-1 filed June 4, 1996
(j)(3) Purchase Agreement between the Company and Dan Exhibit 10.88 of Company's
B. French dated March 28, 1996 Form S-1 filed June 4, 1996
(j)(4) Purchase Agreement between the Company and Exhibit 10.89 of Company's
James C. Penman dated March 28, 1996 Form S-1 filed June 4, 1996
(l) Covenant not to Compete between the Company and Exhibit 10(i)(l)(2) of
Richard C. Mills dated July 7, 1993 Company's Form 10-K filed
April 7, 1994
(m)(1) Asset Purchase Agreement among the Company, AA Exhibit 10.5 of Company's
Microsystems, Inc. and Stuart Raburn dated Form S-3 filed January 3, 1997
August 2, 1996
(m)(2) Promissory Note dated August 2, 1996 of the Exhibit 10.6 of Company's
Company in favor of AA Microsystems, Inc. Form S-3 filed January 3, 1997
(n)(1) Lease between Crown Development Group and the Exhibit 10(i)(n) of Company's
Company for 3740 St. Johns Bluff Road, Suite Form 10-K filed March 31, 1993
19, Jacksonville, FL dated September 17, 1992
(n)(2) Amendment to Lease between Crown Development Exhibit 10(i)(n)(2) of
Group and the Company for 3740 St. Johns Bluff Company's Form 10-K filed
Road, Suite 19, Jacksonville, FL dated December April 4, 1996
11, 1995
(p)(1) Remarketing and Agency Agreement (the Exhibit 10(i)(p)(1) of
"Remarketing Agreement") between Information Company's Form S-1 filed Feb.
Leasing Corporation and the Company dated 14, 1992
January 7, 1990
(p)(2) Amendment No. 1 to the Remarketing Agreement Exhibit 10(i)(p)(2) of
dated November 12, 1991 Company's Form S-1 filed Feb.
14, 1992
(p)(3) Letter, dated February 2, 1994, extending term Exhibit 10(i)(p)(3) of
of Remarketing Agreement to May 1, 1996 Company's Form 10-K filed
April 4, 1996
Page 26
(p)(4) Amendment No. 2 to the Remarketing Agreement Exhibit 10(i)(p)(4) of
dated October 10, 1995 Company's Form 10-K filed
April 4, 1996
(q) Lease between Athens Properties and the Company Exhibit 10(i)(q) of Company's
for Crosspark Drive, Knoxville, TN dated Form 10-K filed April 4, 1996
October 31, 1995
(r)(1) Asset Purchase Agreement among the Company, Exhibit 10.7 of Company's
Communications Technology, Inc. d/b/a DILAN and Form S-3 filed January 3, 1997
Robert Martin dated October 11, 1996
(r)(2) Subordinated Promissory Note dated October 11, Exhibit 10.8 of Company's
1996 of the Company in favor of Communications Form S-3 filed January 3, 1997
Technology, Inc.
(r)(3) Subordination Agreement among the Company, Exhibit 10.9 of Company's
Communications Technology, Inc. and Star Bank, Form S-3 filed January 3, 1997
N.A. dated October 11, 1996
(s) Services Agreement between the Company and Exhibit 10.13 of Company's
Nationwide Mutual Insurance and the Company Form S-3 filed January 3, 1997
dated December 11, 1996
(t1) Asset Purchase Agreement among the Company and Exhibit 10(i)(t)(1) of
Magic Box, Inc. dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(t)(2) Employment Agreement between the Company and Exhibit 10(i)(t)(2) of
Israel Fintz, dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(t)(3) Incentive Deferred Compensation Agreement Exhibit 10(i)(t)(3) of
between the Company and Israel Fintz, dated Company's Form 10-Q filed
June 26, 1997 August 11, 1997
(t)(4) Employment Agreement between the Company and Exhibit 10(i)(t)(4) of
Allison Sokol, dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(t)(5) Incentive Deferred Compensation Agreement Exhibit 10(i)(t)(5) of
between the Company and Allison Sokol, dated Company's Form 10-Q filed
June 26, 1997 August 11, 1997
(t)(6) Power of Attorney given to the Company by Magic Exhibit 10(i)(t)(6) of
Box, Inc. for the collection of Accounts Company's Form 10-Q filed
Receivable, dated June 26, 1997 August 11, 1997
(t)(7) Agreement for the Assumption of Liabilities Exhibit 10(i)(t)(7) of
between the Company and Magic Box, Inc. Company's Form 10-Q filed
August 11, 1997
(t)(8) Subordination Agreement by and among the Exhibit 10(i)(t)(8) of
Company, Magic Box, Inc. and Star Bank, N.A., Company's Form 10-Q filed
dated June 26, 1997 August 11, 1997
(t)(9) Subordinated Promissory Note between the Exhibit 10(i)(t)(9) of
Company and Israel Fintz, dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
Page 27
(t)(10) Subordinated Promissory Note between the Exhibit 10(i)(t)(10) of
Company and Allison Sokol, dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(t)(11) Subordinated Promissory Note between the Exhibit 10(i)(t)(11) of
Company and Marvin Rosen, dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(t)(12) Subordinated Promissory Note between the Exhibit 10(i)(t)(12) of
Company and M. Ronald Krongold, dated June 26, Company's Form 10-Q filed
1997 August 11, 1997
(t)(13) General Bill of Sale between the Company and Exhibit 10(i)(t)(13) of
Magic Box, Inc., dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(t)(14) Non Compete Agreement between the Company and Exhibit 10(i)(t)(14) of
Israel Fintz, dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(t)(15) Non Compete Agreement between the Company and Exhibit 10(i)(t)(15) of
Allison Sokol, dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(t)(16) Non Compete Agreement between the Company and Exhibit 10(i)(t)(16) of
Marvin Rosen, dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(t)(17) Non Compete Agreement between the Company and Exhibit 10(i)(t)(17) of
M. Ronald Krongold, dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(t)(18) Non Compete Agreement between the Company and Exhibit 10(i)(t)(18) of
Magic Box, Inc., dated June 26, 1997 Company's Form 10-Q filed
August 11, 1997
(u) Lease between NWI Airpark L.P. and the Company Exhibit 10(i)(u) of Company's
for 717 Airpark Center Drive, Nashville, TN Form 10-K filed April 4, 1995
dated February 24, 1994
(v)(1) Promissory Note dated May 30, 1997 by and among Exhibit 10(i)(v)(1) of
Star Bank, N.A., the Company and Pomeroy Company's Form 10-Q filed
Computer Leasing Company, Inc. August 11, 1997
(v)(2) Loan Agreement dated October 31,1997 between Exhibit 10(i)(v)(2) of
The Fifth Third Bank of Northern Kentucky, Inc. Company's Form 10-K filed
and Technology Integration Financial Services, April 5, 1998
Inc.
(v)(3) Guarantor Agreement dated October 31,1997 Exhibit 10(i)(v)(3) of
between Pomeroy Computer Resources, Inc and The Company's Form 10-K filed
Fifth Third Bank of Northern Kentucky, Inc. April 5, 1998
(v)(4) Addendum 1 to Guarantor Agreement dated October Exhibit 10(i)(v)(4) of
31,1997 between Pomeroy Computer Resources, Inc Company's Form 10-K filed
and The Fifth Third Bank of Northern Kentucky, April 5, 1998
Inc.
(v)(5) Assignment Agreement between dated October Exhibit 10(i)(v)(5) of
31,1997 between The Fifth Third Bank of Company's Form 10-K filed
Northern Kentucky, Inc. and Technology April 5, 1998
Integration Financial Services, Inc.
Page 28
(v)(6) Incumbency and Authorization Agreement dated Exhibit 10(i)(v)(6) of
October 31,1997 between The Fifth Third Bank of Company's Form 10-K filed
Northern Kentucky, Inc. and Technology April 5, 1998
Integration Financial Services, Inc.
(v)(7) Draw Facility Note dated October 31,1997 Exhibit 10(i)(v)(7) of
between The Fifth Third Bank of Northern Company's Form 10-K filed
Kentucky, Inc. and Technology Integration April 5, 1998
Financial Services, Inc.
(v)(8) Revolving Credit Note dated October 31,1997 Exhibit 10(i)(v)(8) of
between The Fifth Third Bank of Northern Company's Form 10-K filed
Kentucky, Inc. and Technology Integration April 5, 1998
Financial Services, Inc.
(v)(9) Security Agreement dated October 31,1997 Exhibit 10(i)(v)(9) of
between The Fifth Third Bank of Northern Company's Form 10-K filed
Kentucky, Inc. and Technology Integration April 5, 1998
Financial Services, Inc.
(w)(1) Non Compete Agreement between the Company and Exhibit 10(i)(w)(1) of
Microcare Computer Services, Inc., dated July Company's Form 10-Q filed
24, 1997 November 10, 1997
(w)(2) Non Compete Agreement between the Company and Exhibit 10(i)(w)(2) of
Microcare, Inc., dated July 24, 1997 Company's Form 10-Q filed
November 10, 1997
(w)(3) Assignment and Assumption Agreement between the Exhibit 10(i)(w)(3) of
Company, and Microcare Computer Services, Inc., Company's Form 10-Q filed
and Microcare Inc., dated July 24, 1997 November 10, 1997
(w)(4) Assumption of Liabilities Agreement between the Exhibit 10(i)(w)(4) of
Company, and Microcare Computer Services, Inc., Company's Form 10-Q filed
and Microcare Inc., dated July 24, 1997 November 10, 1997
(w)(5) Non Compete Agreement between the Company, and Exhibit 10(i)(w)(5) of
Robert L. Versprille, dated July 24, 1997 Company's Form 10-Q filed
November 10, 1997
(w)(6) Consent for Use of Similar Name between the Exhibit 10(i)(w)(6) of
Company and Microcare, Inc., dated July 24, 1997 Company's Form 10-Q filed
November 10, 1997
(w)(7) Subordination Agreement between the Company, Exhibit 10(i)(w)(7) of
and Microcare Computer Services, Inc., and Star Company's Form 10-Q filed
Bank, N.A., dated July 24, 1997 November 10, 1997
(w)(8) Subordinated Promissory Note between the Exhibit 10(i)(w)(8) of
Company and Microcare Computer Services, Inc., Company's Form 10-Q filed
dated July 24, 1997 November 10, 1997
(w)(9) Registration Rights Agreement between the Exhibit 10(i)(w)(9) of
Company and Microcare Computer Services, Inc., Company's Form 10-Q filed
dated July 24, 1997 November 10, 1997
(w)(10) General Bill of Sale and Assignment between the Exhibit 10(i)(w)(10) of
Company and Microcare Computer Services, Inc., Company's Form 10-Q filed
dated July 24, 1997 November 10, 1997
Page 29
(w)(11) General Bill of Sale and Assignment between the Exhibit 10(i)(w)(11) of
Company and Microcare, Inc., dated June 24, 1997 Company's Form 10-Q filed
November 10, 1997
(w)(12) Asset Purchase Agreement between the Company, Exhibit 10(i)(w)(12) of
and Microcare Computer Services, Inc., Company's Form 10-Q filed
Microcare Inc., and Robert L. Versprille dated November 10, 1997
July 24, 1997
(w)(13) Employment Agreement between the Company and Exhibit 10(i)(w)(13) of
Robert L. Versprille, dated July 24, 1997 Company's Form 10-Q filed
November 10, 1997
(x) Lease between the Company and Pomeroy Exhibit 10(i)(x) of Company's
Investments, LLC for buildings at Airpark Form 10-Q filed November 17,
International dated September 5, 1995 1995
(y) Lease between the Company and New England Exhibit 10(i)(y) of Company's
Mutual Life Insurance Company for building at Form 10-Q filed November 17,
Lexington Business Center dated October 4, 1995 1995
(z)(1) Asset Purchase Agreement between the Company Exhibit 10(i)(z)(1) of
and Cabling Unlimited, Inc. dated October 13, Company's Form 10-K filed
1995 April 4, 1996
(z)(2) Agreement between Cabling Unlimited, Inc. and Exhibit 10(i)(z)(2) of
the Company dated October 13, 1995 Company's Form 10-K filed
April 4, 1996
(z)(3) Agreement between Karen Epperson and the Exhibit 10(i)(z)(3) of
Company dated October 13, 1995 Company's Form 10-K filed
April 4, 1996
(z)(4) Employment Agreement between Karen Epperson and Exhibit 10(i)(z)(4) of
the Company dated October 13, 1995 Company's Form 10-K filed
April 4, 1996
(z)(5) Assumption of Liabilities between Cabling Exhibit 10(i)(z)(5) of
Unlimited, Inc. and the Company dated October Company's Form 10-K filed
13, 1995 April 4, 1996
(cc)(1) Plan of Reorganization dated October 17,1997 Exhibit (10)(i)(cc)(1) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina and The Computer Store, Inc. April 5,1998
(cc)(2) Plan of Merger dated October 17,1997 between Exhibit (10)(i)(cc)(2) of
Pomeroy Computer Resources of South Carolina Company's Form 10-K filed
and The Computer Store, Inc. April 5,1998
(cc)(3) Articles of Merger dated October 17,1997 Exhibit (10)(i)(cc)(3) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina and The Computer Store, Inc. April 5,1998
(cc)(4) Employment Agreement dated October 17,1997 Exhibit (10)(i)(cc)(4) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina, Inc. and Jeffrey F. Hipp April 5,1998
(cc)(5) Employment Agreement dated October 17,1997 Exhibit (10)(i)(cc)(5) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina, Inc. and Ronald D. Hildreth April 5,1998
Page 30
(cc)(6) Employment Agreement dated October 17,1997 Exhibit (10)(i)(cc)(6) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina, Inc. and Authur M. Cox April 5,1998
(cc)(7) Guaranty of Employment Agreement dated October Exhibit (10)(i)(cc)(7) of
17,1997 between Pomeroy Computer Resources of Company's Form 10-K filed
South Carolina, Inc. and Authur M. Cox April 5,1998
(cc)(8) Guaranty of Employment Agreement dated October Exhibit (10)(i)(cc)(8) of
17,1997 between Pomeroy Computer Resources of Company's Form 10-K filed
South Carolina, Inc. and Ronald D. Hildreth April 5,1998
(cc)(9) Guaranty of Employment Agreement dated October Exhibit (10)(i)(cc)(9) of
17,1997 between Pomeroy Computer Resources of Company's Form 10-K filed
South Carolina, Inc. and Jeffery F. Hipp April 5,1998
(cc)(10) Non-Compete Agreement dated October 17,1997 Exhibit (10)(i)(cc)(10) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina, Inc. and Authur M. Cox April 5,1998
(cc)(11) Non-Compete Agreement dated October 17,1997 Exhibit (10)(i)(cc)(11) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina, Inc. and Ronald D. Hildreth April 5,1998
(cc)(12) Non-Compete Agreement dated October 17,1997 Exhibit (10)(i)(cc)(12) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina, Inc. and Jeffrey F. Hipp April 5,1998
(cc)(13) Investor's Certificate dated October 17,1997 Exhibit (10)(i)(cc)(13) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina, Inc. and Jeffrey F. Hipp April 5,1998
(cc)(14) Investor's Certificate dated October 17,1997 Exhibit (10)(i)(cc)(14) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina, Inc. and Ronald D. Hildreth April 5,1998
(cc)(15) Investor's Certificate dated October 17,1997 Exhibit (10)(i)(cc)(15) of
between Pomeroy Computer Resources of South Company's Form 10-K filed
Carolina, Inc. and Authur M. Cox April 5,1998
(cc)(16) Escrow Agreement dated October 17,1997 between Exhibit (10)(i)(cc)(16) of
Pomeroy Computer Resources of South Carolina, Company's Form 10-K filed
Inc., Authur M. Cox, Ronald D. Hildreth, and April 5,1998
Jeffrey F. Hipp
(cc)(17) Opinion Letter on Plan of Merger dated October Exhibit (10)(i)(cc)(17) of
17,1997 between Pomeroy Computer Resources of Company's Form 10-K filed
South Carolina and The Computer Store, Inc. April 5,1998
(dd)(1) Asset Purchase Agreement dated March 6, 1998 Exhibit (10)(i)(dd)(1) of
between the Company and Commercial Business Company's Form 10-Q filed
Systems, Inc. May 6,1998
(dd)(2) Employment Agreement dated March 6, 1998 Exhibit (10)(i)(dd)(2) of
between the Company and Thomas Clayton Company's Form 10-Q filed
May 6,1998
Page 31
(dd)(3) Employment Agreement dated March 6, 1998 Exhibit (10)(i)(dd)(3) of
between the Company and Steven Shapiro Company's Form 10-Q filed
May 6,1998
(dd)(4) Subordinated Promissory Note dated March 6, Exhibit (10)(i)(dd)(4) of
1998 between the Company and Commercial Company's Form 10-Q filed
Business System, Inc. May 6,1998
(dd)(5) Subordination Agreement dated March 6, 1998 Exhibit (10)(i)(dd)(5) of
between the Company and Commercial Business Company's Form 10-Q filed
System, Inc. May 6,1998
(dd)(6) General Bill of Sales and Assignment dated Exhibit (10)(i)(dd)(6) of
March 6, 1998 between the Company and Company's Form 10-Q filed
Commercial Business System, Inc. May 6,1998
(dd)(7) Assumption of Liabilities dated March 6, 1998 Exhibit (10)(i)(dd)(7) of
between the Company and Commercial Business Company's Form 10-Q filed
System, Inc. May 6,1998
(dd)(8) Power of Attorney dated March 6, 1998 between Exhibit (10)(i)(dd)(8) of
the Company and Commercial Business System, Inc. Company's Form 10-Q filed
May 6,1998
(dd)(9) Assignment and Assumption Agreement dated March Exhibit (10)(i)(dd)(9) of
6, 1998 between the Company and Commercial Company's Form 10-Q filed
Business System, Inc. May 6,1998
(dd)(10) Agreement dated March 6, 1998 between the Exhibit (10)(i)(dd)(10) of
Company and Commercial Business System, Inc. Company's Form 10-Q filed
May 6,1998
(dd)(11) Assignment and Assumption of Lease Agreement Exhibit (10)(i)(dd)(11) of
dated March 6, 1998 between the Company and Company's Form 10-Q filed
Commercial Business System, Inc. May 6,1998
(dd)(12) Assignment and Assumption of Lease Agreement Exhibit (10)(i)(dd)(12) of
dated March 6, 1998 between the Company and Company's Form 10-Q filed
Commercial Business System, Inc. May 6,1998
(dd)(13) Covenant Not to Compete Agreement dated March Exhibit (10)(i)(dd)(13) of
6, 1998 between the Company and Steve Shapiro Company's Form 10-Q filed
May 6,1998
(dd)(14) Covenant Not to Compete Agreement dated March Exhibit (10)(i)(dd)(14) of
6, 1998 between the Company and Thomas Clayton Company's Form 10-Q filed
May 6,1998
(dd)(15) Covenant Not to Compete Agreement dated March Exhibit (10)(i)(dd)(15) of
6, 1998 between the Company and Commercial Company's Form 10-Q filed
Business Systems, Inc. May 6,1998
(dd)(16) Consent for use of Similar Name Agreement dated Exhibit (10)(i)(dd)(16) of
March 6, 1998 between the Company and Company's Form 10-Q filed
Commercial Business Systems, Inc. May 6,1998
(dd)(17) Agreement dated March 6, 1998 between the Exhibit (10)(i)(dd)(17) of
Company and Commercial Business Systems, Inc. Company's Form 10-Q filed
May 6,1998
Page 32
(ee)(1) Stock Purchase Agreement dated February 26, Exhibit (10)(i)(ee)(1) of
1998 between J. Walter Duncan Jr. , Nicholas Company's Form 10-Q filed
Duncan, James B. Kite, O. Dean Higganbotham, May 6,1998
and Dale Higganbotham and Pomeroy Computer
Resources, Inc.
(ee)(2) Non-Compete Agreement dated February 26, 1998 Exhibit (10)(i)(ee)(2) of
between O. Dean Higganbotham and Pomeroy Company's Form 10-Q filed
Computer Resources, Inc. May 6,1998
(ee)(3) Non-Compete Agreement dated February 26, 1998 Exhibit (10)(i)(ee)(3) of
between Dale Higganbotham and Pomeroy Computer Company's Form 10-Q filed
Resources, Inc. May 6,1998
(ee)(4) Non-Compete Agreement dated February 26, 1998 Exhibit (10)(i)(ee)(4) of
between J. Walter Duncan Jr. and Pomeroy Company's Form 10-Q filed
Computer Resources, Inc. May 6,1998
(ee)(5) Non-Compete Agreement dated February 26, 1998 Exhibit (10)(i)(ee)(5) of
between Nicholas V. Duncan and Pomeroy Computer Company's Form 10-Q filed
Resources, Inc. May 6,1998
(ee)(6) Non-Compete Agreement dated February 26, 1998 Exhibit (10)(i)(ee)(6) of
between James B. Kite and Pomeroy Computer Company's Form 10-Q filed
Resources, Inc. May 6,1998
(ee)(7) Employment Agreement dated February 26, 1998 Exhibit (10)(i)(ee)(7) of
between O. Dean Higganbotham, Global Combined Company's Form 10-Q filed
Technologies, Inc. and Pomeroy Computer May 6,1998
Resources, Inc.
(ee)(8) Employment Agreement dated February 26, 1998 Exhibit (10)(i)(ee)(8) of
between Dale Higganbotham, Global Combined Company's Form 10-Q filed
Technologies, Inc. and Pomeroy Computer May 6,1998
Resources, Inc.
(ee)(9) Termination of Employment Agreement dated March Exhibit (10)(i)(ee)(9) of
17, 1998 between Nicholas V. Duncan and Global Company's Form 10-Q filed
Combined Technologies, Inc. May 6,1998
(ee)(10) Termination of Employment Agreement dated March Exhibit (10)(i)(ee)(10) of
17, 1998 between O. Dean Higganbotham and Company's Form 10-Q filed
Global Combined Technologies, Inc. May 6,1998
(ee)(11) Termination of Employment Agreement dated March Exhibit (10)(i)(ee)(11) of
17, 1998 between Dale Higganbotham and Global Company's Form 10-Q filed
Combined Technologies, Inc. May 6,1998
(ee)(12) Purchaser's Certificate Dated March 17, 1998 Exhibit (10)(i)(ee)(12) of
between the Company and Global Combined Company's Form 10-Q filed
Technologies, Inc. May 6,1998
(ee)(13) Incentive Deferred Compensation Agreement dated Exhibit (10)(i)(ee)(13) of
March 17, 1998 between Dale Higganbotham and Company's Form 10-Q filed
Global Combined Technologies, Inc. May 6,1998
(ee)(14) Subordination Agreement dated March 17, 1998 Exhibit (10)(i)(ee)(14) of
between the Company, Nicholas V. Duncan, and Company's Form 10-Q filed
Star Bank, N.A. May 6,1998
Page 33
(ee)(15) Subordination Agreement dated March 17, 1998 Exhibit (10)(i)(ee)(15) of
between the Company, James B, Kite, and Star Company's Form 10-Q filed
Bank, N.A. May 6,1998
(ee)(16) Subordination Agreement dated March 17, 1998 Exhibit (10)(i)(ee)(16) of
between the Company, O. Dean Higganbotham, and Company's Form 10-Q filed
Star Bank, N.A. May 6,1998
(ee)(17) Subordination Agreement dated March 17, 1998 Exhibit (10)(i)(ee)(17) of
between the Company, Dale Higganbotham, and Company's Form 10-Q filed
Star Bank, N.A. May 6,1998
(ee)(18) Subordination Agreement dated March 17, 1998 Exhibit (10)(i)(ee)(18) of
between the Company, J. Walter Duncan Jr., and Company's Form 10-Q filed
Star Bank, N.A. May 6,1998
(ee)(19) Subordinated Promissory Note dated March 17, Exhibit (10)(i)(ee)(19) of
1998 between the Company and James B, Kite. Company's Form 10-Q filed
May 6,1998
(ee)(20) Subordinated Promissory Note dated March 17, Exhibit (10)(i)(ee)(20) of
1998 between the Company and Dean Higganbotham Company's Form 10-Q filed
May 6,1998
(ee)(21) Subordinated Promissory Note dated March 17, Exhibit (10)(i)(ee)(21) of
1998 between the Company and Dale Higganbotham Company's Form 10-Q filed
May 6,1998
(ee)(22) Subordinated Promissory Note dated March 17, Exhibit (10)(i)(ee)(22) of
1998 between the Company and J. Walter Duncan Company's Form 10-Q filed
Jr. May 6,1998
(ee)(23) Business Credit and Security Agreement among Exhibit (10)(i)(ee)(23) of
Pomeroy Computer Resources, Inc. and Deutsche Company's Form 10-Q filed
Financial Services Corporation, dated July 14, November 12,1998
1998
(ff)(1) The Asset Purchase Agreement dated December 9, E-1 TO E-54
1998, by, between and among the Company, Access
Technologies, Inc., Mark V. Putman, Paul
Bishop, and Dave Barthel
(ff)(2) Employment Agreement by and between the Company E-55 TO E-65
and Mark Putman, dated December 9, 1998
(ff)(3) Employment Agreement by and between the Company E-66 TO E-78
and Paul Bishop, dated December 9, 1998
(ff)(4) Employment Agreement by and between the Company E-79 TO E-90
and Greg Livingston, dated December 9, 1998
(ff)(5) Employment Agreement by and between the Company E-91 TO E-102
and Phillip Qualls, dated December 9, 1998
Page 34
(ff)(6) Exhibit G Excluded assets of the Asset Purchase E-103
Agreement
(ff)(7) General Bill of Sale and Assignment of the E-104 TO E-105
Asset Purchase agreement
(ff)(8) Assumption of Liabilities of the Asset Purchase E-106 TO E-108
Agreement
(ff)(9) Promissory Note between the Company and Access E-109 TO E-110
Technologies, Inc., dated December 9, 1998
(ff)(10) Consent for Use of Similar Name by Access E-111
Technologies, Inc., dated December 9, 1998
(ff)(11) Power of Attorney issued to the Company by E-112 TO E-113
Access Technologies, Inc., dated December 9,
1998
(ff)(12) Letter Agreement regarding Contracts by and E-114
between Access Technologies, Inc. and the
Company, dated December 9, 1998
(ff)(13) Assignment and Assumption Agreement by and E-115 TO E-117
between Access Technologies, Inc. and the
Company, dated December 9, 1998
(ff)(14) Subordination Agreement among the Company, E-118 TO E-133
Access Technologies, Inc. and Deutsche
Financial Services Company, dated December 9,
1998
(ff)(15) Subordinated Promissory Note issued by the E-134 TO E-137
Company to Access Technologies, Inc., dated
December 9, 1998
(ff)(16) Letter of Instructions to Fifth Third Bank E-138 TO E-140
issued by the Company pursuant to the Asset
Purchase Agreement, dated December 9, 1998
(ff)(17) Investor's Certificate between Access E-141 TO E-143
Technologies, Inc. (Investor) and the Company,
dated December 9, 1998
(ff)(18) Consent of Deutsche Financial Services Company E-144
to the Company on the purchase of substantially
all the operating assets of Access
Technologies, Inc.
(ff)(19) Sublease Agreement by and between Access E-145 TO E-148
Technologies, Inc. and the Company, dated
December 9, 1998
(ff)(20) Noncompetition Agreement by and between David E-149 TO E-153
Barthel and the Company, dated December 9, 1998
(ff)(21) Noncompetition Agreement by and between Paul E-154 TO E-158
Bishop and the Company, dated December 9, 1998
Page 35
(ff)(22) Noncompetition Agreement by and between Mark E-159 TO E-163
Putman and the Company, dated December 9, 1998
(ff)(23) Noncompetition Agreement by and between Access E-164 TO E-168
Technologies, Inc. and the Company, dated
December 9, 1998
(ff)(24) Noncompetition Agreement by and between Greg E-169 TO E-173
Livingston and the Company, dated December 9,
1998
(ff)(25) Noncompetition Agreement by and between Robert E-174 TO E-178
Hendry and the Company, dated December 9, 1998
(ff)(26) Assignment and Assumption Lease by and between E-179 TO E-181
Access Technologies, Inc. and the Company,
dated December 9, 1998
(gg)(1) Workstation Procurement and Support Service E-182 TO E-239
Agreement by and between the Procter and Gamble
Company and the Company, dated January 26, 1999
(gg)(2) Statement of Work to Workstation Procurement E-240 TO E-242
and Support Services Agreement by and between
the Procter and Gamble Company and the Company.
(gg)(3) Attachment A - P&G Sites of Statement of Work E-243 TO E-245
to Workstation Procurement and Support Services
Agreement
(gg)(4) Attachment B-1 - Procurement, Workstation E-246 TO E-252
Distribution and Workstation Disposal Services
of Statement of Work to Workstation Procurement
Services Agreement
(gg)(5) Attachment B-2 - Packaged Software Help Desk E-253 TO E-255
Services of Statement of Work to Workstation
Procurement Services Agreement
(gg)(6) Attachment B-3 - Deskside and Server Support E-256 TO E-258
Services of Statement of Work to Workstation
Procurement Services Agreement
(gg)(7) Attachment C - Transition Services of Statement E-259 TO E-260
of Work to Workstation Procurement Services
Agreement
(gg)(8) Attachment D - Termination and Decommissioning E-261 TO E-262
of Statement of Work to Workstation Procurement
Services Agreement
(gg)(9) Attachment E - Service Levels of Statement of E-263 TO E-273
Work to Workstation Procurement Services
Agreement
(gg)(10) Attachment F - Special Projects of Statement of E-274 TO E-276
Work to Workstation Procurement Services
Agreement
Page 36
(gg)(11) Attachment G - Resource Charges, Financial E-277 TO E-279
Responsibility and Pricing of Statement of Work
to Workstation Procurement Services Agreement
(gg)(12) Attachment H - Overall Management of Statement E-280 TO E-283
of Work to Workstation Procurement Services
Agreement
(gg)(13) Attachment I - Quality Processes of Statement E-284
of Work to Workstation Procurement Services
Agreement
(gg)(14) Exhibit G-1 of Attachment G of Statement of E-285 TO E-286
Work to Workstation Procurement Services
Agreement.
(gg)(15) Attachment E- Exhibit 1 of Statement of Work to E-287 TO E-290
Workstation Procurement Services Agreement.
10(iii) Material Employee Benefit and Other Agreements
(a)(1) Employment Agreement between the Company Exhibit 10(iii)(a) of
And David B. Pomeroy, dated March 12, 1992 Company's Form S-1 Filed
Feb. 14,1992
(a)(2) First Amendment to Employment Agreement between Exhibit 10(iii)(a)(2) of
the Company and David B. Pomeroy effective July Company's Form 10-K filed
6, 1993 April 7, 1994
(a)(3) Second Amendment to Employment Agreement Exhibit 10(iii)(a)(3) of
between the Company and David B. Pomeroy dated Company's Form 10-K filed
October 14, 1993 April 7, 1994
(a)(4) Agreement between the Company and David B. Exhibit 10(iii)(a)(4) of
Pomeroy related to the personal guarantee of Company's Form 10-K filed
the Datago agreement by David B. Pomeroy and April 7, 1994
his spouse effective July 6, 1993
(a)(5) Third Amendment to Employment Agreement Exhibit 10(iii)(a)(5) of
between the Company and David B. Pomeroy Company's Form 10-Q filed
effective January 6, 1995 November 17, 1995
(a)(6) Supplemental Executive Compensation Agreement Exhibit 10(iii)(a)(6) of
between the Company and David B. Pomeroy Company's Form 10-Q filed
effective January 6, 1995 November 17, 1995
(a)(7) Collateral Assignment Split Dollar Agreement Exhibit 10(iii)(a)(7) of
between the Company; Edwin S. Weinstein, as Company's Form 10-Q filed
Trustee; and David B. Pomeroy dated June 28, November 17,1995
1995
(a)(8) Fourth Amendment to Employment Agreement Exhibit 10(iii)(a)(8) of
between the Company and David B. Pomeroy dated Company's Form 10-Q filed May
December 20, 1995, effective January 6, 1995 17, 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 filed May
effective January 6, 1996 17, 1996
Page 37
(a)(10) Sixth Amendment to Employment Agreement Exhibit 10.10 of Company's
between the Company and David B. Pomeroy Form S-3 filed January 3, 1997
effective January 6, 1997
(a)(11) Award Agreement between the Company and David Exhibit 10.11 of Company's
B. Pomeroy effective January 6, 1997 Form S-3 filed January 3, 1997
(a)(12) Registration Rights Agreement between the Exhibit 10.12 of Company's
Company and David B. Pomeroy effective January Form S-3 filed January 3, 1997
6, 1997
(a)(13) Seventh Amendment to Employment Agreement Exhibit 10)(iii)(a)(13) of
between the Company and David B. Pomeroy Company's Form 10-Q filed May
effective January 6, 1998 6, 1998
(a)(14) Collateral Assignment Split Dollar Agreement Exhibit 10)(iii)(a)(14) of
between the Company, James H. Smith as Trustee, Company's Form 10-Q filed May
and David B. Pomeroy dated January 6, 1998 6, 1998
(c)(1) Employment Agreement between the Company and Exhibit 10(iii)(c)(1) of
Victor Eilau dated July 6, 1997 Company's Form 10-Q filed
August 11, 1997
(c)(2) Performance Share Right Agreement between the Exhibit 10(iii)(c)(2) of
Company and Victor Eilau dated July 6, 1997 Company's Form 10-Q filed
August 11, 1997
(d) The Company Savings 401(k) Plan, Exhibit 10(iii)(d) of
effective July 1, 1991 Company's Form S-1 filed Feb.
14, 1992
(f) The Company's 1992 Non-Qualified Exhibit 10(iii)(f) of
and Incentive Stock Option Plan, Company's
dated February 13, 1992 Form S-1 filed Feb. 14, 1992
(g) The Company's 1992 Outside Directors Exhibit 10(iii)(g) of
Stock Option Plan, dated February 13, Company's Form S-1 filed
1992 Feb. 14, 1992
(h) Employment Agreement between the Company and Exhibit 10(iii)(h) of
Richard C. Mills dated July 7, 1993 Company's Form 10-K filed
April 7, 1994
(I) Employment Agreement between the Company and Exhibit 10.64 of Company's
James Eck dated February 6, 1996, and effective Form S-1 filed June 4, 1996
as of September 18, 1995
(j)(1) Employment Agreement between the Company and Exhibit 10.3 of Company's
Stephen E. Pomeroy dated November 13, 1996 Form S-3 filed January 3, 1997
(j)(2) Incentive Deferred Compensation Agreement Exhibit 10.4 of Company's
between the Company and Stephen E. Pomeroy Form S-3 filed January 3, 1997
dated November 13, 1996
(j)(3) Employment Agreement between Pomeroy Select E-291 TO E-302
Integration Solutions, Inc. and Stephen E. Pomeroy,
dated January 6, 1999.
Page 38
11 Computation of Per Share Earnings E-1
21 Subsidiaries of the Company E-2
27 Financial Data Schedule E-3
(b) Reports on Form 8-K:
None.
Page 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Pomeroy Computer Resources, Inc.
By: /s/ David B. Pomeroy
--------------------------------------
David B. Pomeroy
Chairman of the Board, President and
Chief Executive Officer
By: /s/ Stephen E. Pomeroy
--------------------------------------
Stephen E. Pomeroy
Chief Financial Officer and Chief
Accounting Officer
Dated: April 5, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
Signature and Title Date
- -------------------------------------- --------------
By: /s/ David B. Pomeroy April 5, 1999
- --------------------------------------
David B. Pomeroy, Director
By: /s/ Stephen E. Pomeroy April 5, 1999
- --------------------------------------
Stephen E. Pomeroy, Director
By: /s/ James H. Smith III April 5, 1999
- --------------------------------------
James H. Smith III, Director
By:
- --------------------------------------
Dr. David W. Rosenthal, Director
By: /s/ Michael E. Rohrkemper April 5, 1999
- --------------------------------------
Michael E. Rohrkemper, Director
By:
- --------------------------------------
William H. Lomicka, Director
By:
- --------------------------------------
Richard C. Mills, Director
Page 40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Pomeroy Computer Resources, Inc.
We have audited the accompanying consolidated balance sheets of Pomeroy Computer
Resources, Inc. as of January 5, 1998 and 1999, and the related consolidated
statements of income, equity, and cash flows for each of the three years in the
period ended January 5, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pomeroy
Computer Resources, Inc. at January 5, 1998 and 1999, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended January 5, 1999 in conformity with generally accepted
accounting principles.
Grant Thornton LLP
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 16, 1999
F-1
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
1998 1999
----------- -----------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 380 $ 3,962
Accounts receivable:
Trade, less allowance of $355 and $279 at January 5, 1998 and
1999, respectively. . . . . . . . . . . . . . . . . . . . . . . 79,531 125,797
Vendor receivables, less allowance of $223 and $319 at January 5,
1998 and 1999, respectively . . . . . . . . . . . . . . . . . . 19,575 38,201
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601 993
----------- -----------
Total receivables. . . . . . . . . . . . . . . . . . . . . . 99,707 164,991
----------- -----------
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,160 33,333
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 816 2,084
----------- -----------
Total current assets.. . . . . . . . . . . . . . . . . . . . 140,063 204,370
----------- -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment. . . . . . . . . . . . . . . . . 12,174 17,593
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . 5,142 6,203
----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,316 23,796
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . 6,770 10,323
----------- -----------
Net equipment and leasehold improvements . . . . . . . . . . 10,546 13,473
----------- -----------
Investment in lease residuals . . . . . . . . . . . . . . . . . . . . 3,480 3,219
Goodwill and other intangible assets. . . . . . . . . . . . . . . . . 12,697 32,249
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478 915
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 167,264 $ 254,226
=========== ===========
See notes to consolidated financial statements.
F-2
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
1998 1999
----------- -----------
LIABILITIES & EQUITY
Current liabilities:
Current portion of notes payable . . . . . . . . . . . . . . . . . . . $ 2,077 $ 5,028
Accounts payable:
Floor plan financing. . . . . . . . . . . . . . . . . . . . . . . . 22,818 34,767
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,220 44,050
----------- -----------
Total accounts payable . . . . . . . . . . . . . . . . . . . . . 40,038 78,817
Bank notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 22,611 39,629
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,503 4,065
Accrued liabilities:
Employee compensation and benefits. . . . . . . . . . . . . . . . . 2,938 3,707
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,051 61
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 283
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . 741 1,416
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 77,035 133,006
----------- -----------
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,434 8,231
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 18 -
Equity:
Preferred stock (no shares issued or outstanding). . . . . . . . . . . - -
Common stock (11,402 and 11,707 shares issued and outstanding
at January 5, 1998 and 1999, respectively). . . . . . . . . . . . . 114 117
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,226 64,394
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 28,641 48,800
----------- -----------
88,981 113,311
Less treasury stock, at cost (21 and 31 shares at January 5, 1998 and
1999, respectively) . . . . . . . . . . . . . . . . . . . . . . . . 204 322
----------- -----------
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,777 112,989
----------- -----------
Total liabilities and equity. . . . . . . . . . . . . . . . . . . . $ 167,264 $ 254,226
=========== ===========
See notes to consolidated financial statements.
F-3
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Fiscal Years Ended January 5,
------------------------------
1997 1998 1999
--------- -------- ---------
Net sales and revenues:
Sales - equipment and supplies. . . . . $306,745 $440,983 $546,375
Service . . . . . . . . . . . . . . . . 29,613 50,465 81,553
--------- -------- ---------
Total net sales and revenues. . . 336,358 491,448 627,928
--------- -------- ---------
Cost of sales and service:
Equipment and supplies. . . . . . . . . 275,272 400,059 500,995
Service . . . . . . . . . . . . . . . . 6,481 10,004 16,511
--------- -------- ---------
Total cost of sales and service . 281,753 410,063 517,506
--------- -------- ---------
Gross profit. . . . . . . . . . . . . . 54,605 81,385 110,422
--------- -------- ---------
Operating expenses:
Selling, general and administrative . . 33,384 48,316 67,394
Rent expense. . . . . . . . . . . . . . 1,546 1,956 2,412
Depreciation. . . . . . . . . . . . . . 1,925 2,958 3,748
Amortization. . . . . . . . . . . . . . 636 982 1,629
Provision for doubtful accounts . . . . 245 325 141
--------- -------- ---------
Total operating expenses. . . . . 37,736 54,537 75,324
--------- -------- ---------
Income from operations . . . . . . . . . . 16,869 26,848 35,098
--------- -------- ---------
Other expense (income):
Interest expense. . . . . . . . . . . . 2,170 974 2,670
Litigation settlement and related costs 4,392 - -
Miscellaneous . . . . . . . . . . . . . (221) 54 (140)
--------- -------- ---------
Total other expense . . . . . . . 6,341 1,028 2,530
--------- -------- ---------
Income before income tax. . . . . . . . 10,528 25,820 32,568
Income tax expense. . . . . . . . . . . 4,296 9,507 12,409
--------- -------- ---------
Net income. . . . . . . . . . . . . . . $ 6,232 $ 16,313 $ 20,159
========= ======== =========
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . 7,834 11,052 11,466
========= ======== =========
Diluted . . . . . . . . . . . . . . . . 8,106 11,367 11,751
========= ======== =========
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . $ 0.80 $ 1.48 $ 1.76
========= ======== =========
Diluted . . . . . . . . . . . . . . . . $ 0.77 $ 1.44 $ 1.72
========= ======== =========
See notes to consolidated financial statements.
F-4
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Fiscal Years Ended January 5,
-------------------------------
1997 1998 1999
--------- --------- ---------
Cash Flows from Operating Activities:
Net income. . . . . . . . . . . . . . . . . . . $ 6,232 $ 16,313 $ 20,159
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . 1,925 2,958 3,748
Amortization . . . . . . . . . . . . . . . . . . . 636 982 1,629
Deferred income taxes. . . . . . . . . . . . . . . 57 (638) (331)
Net acquisition of lease residuals . . . . . . . . (273) (437) 261
Issuance of common shares for stock awards . . . . 40 65 -
Changes in working capital accounts, net of
effects of acquisitions:
Accounts receivable. . . . . . . . . . . . . . . . (24,007) (29,618) (41,639)
Inventories. . . . . . . . . . . . . . . . . . . . (1,959) (16,369) 8,062
Prepaids . . . . . . . . . . . . . . . . . . . . . (199) (71) (1,129)
Floor plan financing . . . . . . . . . . . . . . . 16,932 (11,791) 11,949
Trade payables . . . . . . . . . . . . . . . . . . (3,949) 10,321 6,111
Deferred revenue . . . . . . . . . . . . . . . . . (355) 1,031 366
Income tax payable . . . . . . . . . . . . . . . . 426 3,270 (4,766)
Other, net . . . . . . . . . . . . . . . . . . . . (392) 1,044 (912)
--------- --------- ---------
Net operating activities . . . . . . . . . . . . . (4,886) (22,940) 3,508
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures. . . . . . . . . . . . . . (3,459) (2,399) (3,181)
Acquisition of subsidiary companies, net of
cash acquired. . . . . . . . . . . . . . . . . . . - (509) (10,214)
Acquisition of reseller assets, net of cash
acquired . . . . . . . . . . . . . . . . . . . . . (9,934) (2,990) (10,999)
--------- --------- ---------
Net investing activities . . . . . . . . . . . . . (13,393) (5,898) (24,394)
--------- --------- ---------
Cash Flows from Financing Activities:
Payments under notes payable . . . . . . . . . . . (1,288) (843) (2,149)
Proceeds under notes payable . . . . . . . . . . . - - 6,995
Net proceeds of stock offering . . . . . . . . . . 17,924 23,256 -
Net proceeds (payments) under bank notes payable . 6,419 (1,535) 16,319
Proceeds from exercise of stock options. . . . . . 1,767 1,531 3,375
Purchase of treasury stock . . . . . . . . . . . . - - (118)
Other. . . . . . . . . . . . . . . . . . . . . . . - - 46
Retirement of stock warrants . . . . . . . . . . . (330) - -
--------- --------- ---------
Net financing activities. . . . . . . . . . . . 24,492 22,409 24,468
--------- --------- ---------
Increase (decrease) in cash. . . . . . . . . . . . 6,213 (6,429) 3,582
Cash:
Beginning of period . . . . . . . . . . . . . . 596 6,809 380
--------- --------- ---------
End of period . . . . . . . . . . . . . . . . . $ 6,809 $ 380 $ 3,962
========= ========= =========
See notes to consolidated financial statements.
F-5
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except for Common Paid-in Retained Treasury Total
share amounts) stock capital earnings stock equity
------- --------- ---------- ---------- ---------
Balances at January 5, 1996 . . . . $ 26 $ 13,279 $ 6,098 $ (204) $ 19,199
Net income . . . . . . . . . . . 6,232 6,232
3,076 common shares issued
for stock awards . . . . . . . . 40 40
113,316 common shares issued
for acquisitions . . . . . . . . 1 1,474 1,475
Stock options exercised and
related tax benefit. . . . . . . 4 2,049 2,053
Retirement of stock warrants . . (330) (330)
Effect of 3 for 2 stock split. . 20 (20) -
1,402,500 common shares
issued by public offering. . . . 14 17,910 17,924
------- --------- ---------- ---------- ---------
Balances at January 5, 1997 . . . . 65 34,402 12,330 (204) 46,593
Net income . . . . . . . . . . . 16,313 16,313
5,188 common shares issued
for stock awards . . . . . . . . 65 65
36,953 common shares issued
for acquisitions . . . . . . . . 1,021 1,021
Stock options exercised and
related tax benefit. . . . . . . 1 1,530 1,531
Effect of 3 for 2 stock split. . 38 (38) (2) (2)
1,020,000 common shares
issued by public offering. . . . 10 23,246 23,256
------- --------- ---------- ---------- ---------
Balances at January 5, 1998 . . . . 114 60,226 28,641 (204) 88,777
Net income . . . . . . . . . . . 20,159 20,159
38,885 common shares issued
for acquisitions . . . . . . . . 750 750
Stock options exercised and
related tax benefit. . . . . . . 3 3,372 3,375
Repayment of obligations under
Section 16(b) of the Securities
Exchange Act of 1934 . . . . . . 46 46
Purchase of treasury stock . . . (118) (118)
------- --------- ---------- ---------- ---------
Balances at January 5, 1999 . . . . $ 117 $ 64,394 $ 48,800 $ (322) $112,989
======= ========= ========== ========== =========
See notes to consolidated financial statements.
F-6
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 5, 1997, JANUARY 5, 1998 AND JANUARY 5, 1999
1. COMPANY DESCRIPTION
Pomeroy Computer Resources, Inc. (the "Company") was organized in February 1992
to consolidate and reorganize predecessor companies. The Company has 15 million
shares of $.01 par value common stock authorized, with 11.7 million shares
outstanding. The Company is also authorized to issue 2 million shares of $.01
par value preferred stock. In fiscal 1995 the Company formed a wholly-owned
subsidiary, Technology Integration Financial Services, Inc. ("TIFS") (f/k/a -
Pomeroy Computer Leasing Company, Inc. ("PCL")), for the purpose of leasing
computer equipment to the Company's customers. In fiscal 1997, the Company
formed a wholly-owned subsidiary, Pomeroy Computer Resources of South Carolina,
Inc. ("PCR-SC") for the purpose of acquiring The Computer Store ("TCS"), a
computer reseller and service provider located in Columbia, South Carolina. In
fiscal 1998, the Company formed a wholly-owned subsidiary, Pomeroy Select
Integration Solutions, Inc. ("Pomeroy Select"), to which the Company transferred
the assets, liabilities, business, operations and personnel comprising the
Company's information technology ("IT") services business on January 6, 1999.
The Company sells, installs and services microcomputers and microcomputer
equipment primarily for commercial, health care, governmental, financial and
educational customers. The Company also derives revenue from customer support
services, including network analysis and design, systems configuration, cabling,
custom installation, training, maintenance and repair. The Company has thirty
regional offices located in 14 states throughout the Southeast and Midwest
United States. The Company grants credit to substantially all customers in these
areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries Xenas
Communication Corp., TIFS, PCR-SC, Global Combined Technologies, Inc. and
Pomeroy Select. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to the
1997 financial statements included herein to conform with the presentation used
in fiscal 1998.
Fiscal Year - The Company's fiscal year is a 12- month period ending January 5.
References to fiscal 1996, 1997 and 1998 are for the fiscal years ended January
5, 1997, January 5, 1998 and January 5, 1999, respectively.
Goodwill and Other Intangible Assets - Goodwill is amortized using the
straight-line method over periods of fifteen to twenty-five years. In accordance
with SFAS No. 121, "Accounting for The Impairment of Long-Lived Assets", the
Company evaluates its goodwill on an ongoing basis to determine potential
impairment by comparing the carrying value to the undiscounted estimated
expected future cash flows of the related assets. Other intangible assets are
amortized using the straight-line method over periods up to ten years.
Equipment and Leasehold Improvements - Equipment and leasehold improvements are
stated at cost. Depreciation on equipment is computed using the straight-line
method over estimated useful lives. Depreciation on leasehold improvements is
computed using the straight-line method over estimated useful lives or the term
of the lease, whichever is less. Expenditures for repairs and maintenance are
charged to expense as incurred and additions and improvements that significantly
extend the lives of assets are capitalized. Upon sale or retirement of
depreciable property, the cost and accumulated depreciation are removed from the
related accounts and any gain or loss is reflected in the results of operations.
Income Taxes - Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-7
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Vendor Incentive Rebates - Certain vendors provide incentive rebates to perform
product training, advertising and other sales and market development activities.
The Company recognizes these rebates when it has completed its obligation to
perform under the specific incentive arrangement. Incentive rebates are recorded
as reductions of selling, general and administrative expense or, if volume
based, cost of sales.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined by the average cost method.
Revenue Recognition - The Company recognizes revenue on the sale of equipment
and supplies when the products are shipped. Service revenue is recognized when
the applicable services are provided.
Deferred Revenue - Revenues received on maintenance contracts are recognized
ratably over the lives of the contracts. Costs related to maintenance contracts
are recognized when incurred.
Stock-Based Compensation - The Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation", in the Fall of 1995. The
statement encourages, but does not require, companies to record compensation
cost for stock-based employee compensation plans at fair value beginning in
fiscal 1996. The Company elected to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted market price
of the Company's common stock at the date of grant over the amount an employee
must pay to acquire the stock. The Company adopted SFAS No. 123 for disclosure
purposes and for non-employee stock options. This had no material effect on the
results of operations or financial position of the Company.
Earnings per Common Share - The computation of basic earnings per common share
is based upon the weighted average number of common shares outstanding during
the period. Diluted earnings per common share is based upon the weighted average
number of common shares outstanding during the period plus, in periods in which
they have a dilutive effect, the effect of common shares contingently issuable,
primarily from stock options.
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 changed
the computation, presentation and disclosure requirements for earnings per share
("EPS") . Under SFAS 128, EPS is presented as basic earnings per share ("basic
EPS") and diluted earnings per share ("diluted EPS") and replaces the
presentation of primary EPS and fully diluted EPS. The adoption of SFAS 128
resulted in the restatement of earnings per share for all periods presented in
the Company's consolidated financial statements.
The following is a reconciliation of the number of shares used in the basic EPS
and diluted EPS computations:
(in thousands, except per Fiscal Years
-------------------------------------------------------------
share data) 1996 1997 1998
------------------- ------------------- -------------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ ----------- ------ ----------- ------ -----------
Basic EPS. . . . . . . . . . . . 7,834 $ 0.80 11,052 $ 1.48 11,466 $ 1.76
Effect of dilutive stock options 272 (0.03) 315 (0.04) 285 (0.04)
------ ----------- ------ ----------- ------ -----------
Diluted EPS. . . . . . . . . . . 8,106 $ 0.77 11,367 $ 1.44 11,751 $ 1.72
====== =========== ====== =========== ====== ===========
Use of Estimates in Financial Statements - In preparing financial statements in
conformity with generally accepted accounting principles, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value Disclosures - The fair value of financial instruments approximates
carrying value.
Comprehensive Income - The Company does not have any comprehensive income items
other than net income.
F-8
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
New Pronouncements - In February 1998, the Accounting Standards Executive
Committee issued SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 established the accounting for
costs of software developed or purchased for internal use, including when such
cost should be capitalized. The Company elected to early adopt SOP 98-1
beginning January 6, 1998. The Company does not expect SOP 98-1 to have a
material effect on the Company's financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting No. 133, Accounting for Derivative Instruments and Hedging
Activities, which requires entities to report all derivatives at fair value as
assets or liabilities in their statements of financial position. This statement
is effective for financial statements issued for fiscal periods beginning after
June 15,1999. The Company does not currently have any derivative instruments or
hedging activities to report under this standard.
3. ACCOUNTS RECEIVABLE
The following table summarizes the activity in the allowance for doubtful
accounts for fiscal years 1996, 1997 and 1998:
(in thousands) Trade Other
------- --------
Balance January 5, 1996. $ 201 $ 210
Provision 1996 . . . . . 250 31
Accounts written-off . . (249) (604)
Recoveries . . . . . . . 170 500
------- --------
Balance January 5, 1997. 372 137
Provision 1997 . . . . . 125 200
Accounts written-off . . (601) (415)
Recoveries . . . . . . . 459 301
------- --------
Balance January 5, 1998. 355 223
Provision 1998 . . . . . 193 1,100
Accounts written-off . . (444) (1,171)
Recoveries . . . . . . . 175 167
------- --------
Balance January 5, 1999. $ 279 $ 319
======= ========
4. INVENTORIES
Inventories consist of items held for resale and are comprised of the following
components as of the end of fiscal:
(in thousands) 1997 1998
------- -------
Equipment and supplies. $33,914 $28,081
Service parts . . . . . 5,246 5,252
------- -------
Total . . . . . . . . . $39,160 $33,333
======= =======
F-9
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following as of the end of
the fiscal year, net of accumulated amortization of $1,826 thousand (1997) and
$3,419 thousand (1998), respectively:
(in thousands) 1997 1998
------- -------
Goodwill . . . . . . . . . $12,159 $31,531
Convenants not to compete. 61 292
Customer lists . . . . . . 477 426
------- -------
$12,697 $32,249
======= =======
In fiscal 1996, the Company acquired certain assets of The Computer Supply
Store, Inc. ("TCSS") a privately held computer reseller located in Des Moines,
Iowa, AA Microsystems, Inc. ("AA Micro"), a network service provider located in
Birmingham, Alabama, and Communications Technology, Inc. ("DILAN"), a privately
held network integrator located in Hickory, North Carolina (See Note 12). The
Company recorded $5.7 million, $0.4 million and $2.5 million of goodwill in
connection with those acquisitions, respectively.
In fiscal 1997, the Company acquired certain assets of Magic Box, Inc. ("Magic
Box") , a privately held network integrator located in Miami, Florida, and Micro
Care, Inc. ("Micro Care"), a privately held systems integrator located in
Indianapolis, Indiana. A wholly-owned subsidiary of the Company, Pomeroy
Computer Resources of South Carolina, Inc., acquired all the assets and
liabilities of The Computer Store Inc., a network integrator located in
Columbia, South Carolina. The Company recorded $1.7 million, $1.9 million and
$0.4 million of goodwill in connection with those acquisitions, respectively.
In fiscal 1998, the Company acquired certain assets of Commercial Business
Systems, a privately held systems integrator in Richmond, Virginia, and Access
Technologies, Inc. ("Access"), a privately held telecommunications and computer
networking provider in Memphis, Tennessee. The Company recorded $1.9 million and
$8.9 million of goodwill in connection with those acquisitions, respectively. In
addition, the Company acquired through a stock purchase Global Combined
Technologies, Inc. a privately held systems integrator in Oklahoma City,
Oklahoma. The Company recorded $9.7 million of goodwill in connection with this
acquisition.
6. BORROWING ARRANGEMENTS
Prior to July 14, 1998, the Company had an available line of credit up to the
lesser of $20 million, or an amount based upon a formula of eligible trade
receivables, at an interest rate that varies based on the prime rate of the bank
or the LIBOR rate at the Company's election. At January 5, 1998, bank notes
payable include $6.5 million of overdrafts in accounts with the Company's
lender. These amounts were subsequently funded through the normal course of
business. The interest rate charged was 7.50% at January 5, 1998. The agreement,
which expired in June 1998, was collateralized by substantially all assets of
the Company, except those assets which collateralize certain other financing
arrangements. Under the revolving credit agreement, the Company could not make
any cash dividend payments.
On July 14, 1998, the Company finalized a $120 million credit facility with
Deutsche Financial Services Corp. ("DFS"). This credit facility provides a
credit line of $60.0 million for inventory financing and $60.0 million for
accounts receivable financing. The inventory financing portion of the credit
facility utilizes thirty day notes and provides interest free financing due to
subsidies by manufacturers. The credit facility can be amended, with proper
notification, if the thirty day interest free subsidies provided by
manufacturers are revised. At January 5, 1999, bank notes payable include $12.6
million of overdrafts in accounts with a participant bank to this credit
facility. These amounts were subsequently funded through the normal course of
business. The accounts receivable portion of the credit facility carries a
variable interest rate based on the prime rate less 125 basis points. The
interest rate charged was 6.5% at January 5, 1999. 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.
F-10
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The maximum amount outstanding and the average amount outstanding on bank note
payable were as follows:
(in thousands)
Maximum Amount Average Amount
Period Ending Outstanding Outstanding
- ---------------- --------------- ---------------
January 5, 1997. $ 26,687 $ 17,402
January 5, 1998. $ 25,800 $ 8,002
January 5, 1999. $ 51,600 $ 27,845
The above average amounts outstanding are calculated by dividing the sum of the
average daily balances for each month by the number of months in the period. The
weighted average interest rate on the bank revolving credit agreements was 8.2%,
7.3% and 7.6% in fiscal 1996, 1997 and 1998, respectively.
The Company finances inventory through floor plan arrangements with two finance
companies. As of January 5, 1999, the floor plan lines of credit were $60
million with DFS and $12 million with IBM Credit Corporation ("ICC"). Borrowings
under the ICC floor plan arrangement are made on sixty day notes, with one-half
of the note amount due in thirty days. Borrowings under both floor plan
arrangement are made on thirty day notes. Financing on many of the arrangements
which are subsidized by manufacturers is interest free. The average rate on the
plans overall is less than 1.0%.
The maximum amount outstanding and the average amount outstanding on each of the
floor plan arrangements were as follows:
(in thousands) ICC DFS
-------------------------------- --------------------------------
Maximum Amount Average Amount Maximum Amount Average Amount
Period Ending Outstanding Outstanding Outstanding Outstanding
- ---------------- --------------- --------------- --------------- ---------------
January 5, 1997. $ 9,045 $ 5,779 $ 27,349 $ 18,532
January 5, 1998. $ 19,985 $ 10,459 $ 39,092 $ 25,069
January 5, 1999. $ 27,779 $ 18,516 $ 38,097 $ 25,040
The average amount outstanding is calculated by dividing the sum of the
outstanding balances at the end of each month by the number of months in the
applicable period.
7. INCOME TAXES
The provision for income taxes consists of the following:
(in thousands) Fiscal Years
-------------------------
1996 1997 1998
------ ------- --------
Current:
Federal. . . . . . . . . . $3,205 $8,742 $11,430
State. . . . . . . . . . . 1,034 1,036 1,310
------ ------- --------
Total current. . . . . . . 4,239 9,778 12,740
------ ------- --------
Deferred:
Federal. . . . . . . . . . 46 (217) (311)
State. . . . . . . . . . . 11 (54) (20)
------ ------- --------
Total deferred . . . . . . 57 (271) (331)
------ ------- --------
Total income tax provision $4,296 $9,507 $12,409
====== ======= ========
F-11
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax assets (liabilities) are:
(in thousands) Fiscal Years
------------------
1997 1998
-------- --------
Deferred Tax Assets:
Bad debt provision . . . . . . . . $ 282 $ 353
Depreciation . . . . . . . . . . . 193 293
Deferred compensation. . . . . . . 409 584
-------- --------
Total deferred tax assets. . . . . 884 1,230
-------- --------
Deferred Tax Liabilities
Acquisition of lease residuals . . (620) (615)
Accounts Receivable. . . . . . . . (518) (388)
Other. . . . . . . . . . . . . . . - (119)
-------- --------
Total deferred tax liabilities . . (1,138) (1,122)
-------- --------
Net deferred tax asset (liability) $ (254) $ 108
======== ========
The Company's effective income tax rate differs from the Federal statutory rate
as follows:
Fiscal Years
------------------
1996 1997 1998
---- ----- -----
Tax at Federal statutory rate 34.0 35.0 35.0
State taxes . . . . . . . . . 6.6 4.7 4.4
Kentucky Relocation Credits . - (2.2) (1.9)
Other . . . . . . . . . . . . 0.2 (0.7) 0.6
---- ----- -----
Effective tax rate. . . . . . 40.8 36.8 38.1
==== ===== =====
8. OPERATING LEASES
The Company leases office and warehouse space, vehicles and certain office
equipment from various lessors. Lease terms vary in duration and include various
option periods. The leases generally require the Company to pay taxes and
insurance. Future minimum lease payments under noncancelable operating leases
with initial or remaining terms in excess of one year as of January 5, 1999 are
as follows:
(in thousands)
Fiscal Year
- -----------------------------
1999. . . . . . . . . . . . . $ 2,738
2000. . . . . . . . . . . . . 2,170
2001. . . . . . . . . . . . . 1,902
2002. . . . . . . . . . . . . 1,561
2003. . . . . . . . . . . . . 1,315
Thereafter. . . . . . . . . . 2,457
-------
Total minimum lease payments. $12,143
=======
9. 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 did not contribute to the plan in fiscal 1996 or
1997. Beginning January 6, 1998, the Company made contributions
F-12
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
to the plan based on a participant's annual pay. Contributions made by the
Company for fiscal 1998 were Approximately $169 thousand. During fiscal 1998,
the distribution of assets from the Employee Stock Ownership Plan was completed.
10. INVESTMENT IN LEASE RESIDUALS
The Company participates in a Remarketing and Agency Agreement ("Agreement")
with Information Leasing Corporation ("ILC") whereby the Company obtains rights
to 50% of lease residual values for services rendered in connection with
locating the lessee, selling the equipment to ILC and agreeing to assist in
remarketing the used equipment.
During fiscal 1996, 1997 and 1998 the Company sold equipment and related support
services to ILC, for lease to ILC's customers, in amounts of $15.2 million, $7.7
million, and $2.8 million, respectively. The Company also obtained rights to
lease residuals from ILC in the amount of $575 thousand, $562 thousand and $250
thousand in 1996, 1997, and 1998, respectively. Such amounts are recorded as a
reduction of the related cost of sales. Residuals acquired in this manner are
recorded at the estimated present value of the interest retained.
The Company also purchases residuals associated with separate leasing
arrangements entered into by ILC. Such transactions do not involve the sale of
equipment and related support services by the Company to ILC. Residuals acquired
in this manner are accounted for at cost.
The carrying value of investments in lease residuals is evaluated on a quarterly
basis, and is subject only to downward market adjustments until ultimately
realized through a sale or re-lease of the equipment.
11. MAJOR CUSTOMERS
Sales to a major customer were approximately $40.3 million for fiscal 1996.
Sales to a major customer were approximately $60.4 million for fiscal 1997.
There were no sales to a major customer for fiscal 1998.
12. ACQUISITIONS
During fiscal 1996, the Company completed several acquisitions. The total
consideration given consisted of $7.2 million in cash, subordinated notes of
$4.0 million and 170 thousand unregistered shares of the Company's common stock
with an approximate value of $1.5 million. Interest on the subordinated notes is
payable quarterly. Principal is payable in equal annual installments. The
acquisitions were accounted for as purchases, accordingly the purchase price was
allocated to assets and liabilities based on their estimated value as of the
dates of acquisition. The results of operations of the acquisitions are included
in the consolidated statement of income from the dates of acquisition.
The following table summarizes, on an unaudited pro forma basis, adjusted to
reflect a three-for-two splits of the Company's common stock in the form of a
stock dividends paid on October 4, 1996 and October 6, 1997, the estimated
combined results of the Company and the 1996 acquisitions assuming the
acquisitions had occurred on January 6, 1995. These results include certain
adjustments, primarily goodwill amortization and interest expense, and are not
necessarily indicative of what results would have been had the Company owned
these businesses during fiscal 1996:
Fiscal 1996
------------
(in thousands)
Net sales and revenues. . . . $ 364,005
Net income. . . . . . . . . . $ 6,250
Net income per common share:
Basic . . . . . . . . . . . . $ 0.80
Diluted . . . . . . . . . . . $ 0.77
During fiscal 1997, the Company completed several acquisitions. The total
consideration given consisted of $3.7 million in cash, subordinated notes of
$1.3 million and 37 thousand unregistered shares of the Company's common stock
with an approximate value of $1.0 million. Interest on the subordinated notes is
F-13
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
payable quarterly. Principal is payable in equal annual installments. The
acquisitions were accounted for as purchases, accordingly the purchase price
was allocated to assets and liabilities based on their estimated value as of the
dates of acquisition. The results of operations of the acquisitions are included
in the consolidated statement of income from the dates of acquisition. If the
1997 acquisitions had occurred on January 6, 1996, the pro forma operations of
the Company would not have been materially different than that reported in the
accompanying consolidated statements of income.
During fiscal 1998, the Company completed several acquisitions. The total
consideration given consisted of $21.2 million in cash, subordinated notes of
$3.3 million and 39 thousand unregistered shares of the Company's stock with an
approximate value of $0.8 million. Interest on the subordinated notes is payable
quarterly. Principal is payable in equal annual installments. The acquisitions
were accounted for as purchases, accordingly the purchase price was allocated to
assets and liabilities based on their estimated value as of the dates of
acquisition. The results of operations of the acquisitions are included in the
consolidated statement of income from the dates of acquisition. If the 1998
acquisitions had occurred on January 6, 1997, the pro forma operations of the
Company would not have been materially different than that reported in the
accompanying consolidated statements of income.
13. RELATED PARTIES
The Company leases its headquarters and distribution facility 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 2006. The base rental for 1998 was
$828 thousand. The annual rental for these properties was determined on the
basis of a fair market value rental opinion provided by an independent real
estate company.
14. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental disclosures with respect to cash flow information and non-cash
investing and financing activities are as follows:
(in thousands) Fiscal Years
-----------------------------
1996 1997 1998
-------- -------- ---------
Interest paid . . . . . . . . . $ 2,065 $ 1,045 $ 2,463
======== ======== =========
Income taxes paid . . . . . . . $ 3,813 $ 4,920 $ 17,432
======== ======== =========
Business combinations accounted
for as purchases:
Assets acquired . . . . . . . . $24,526 $ 7,358 $ 50,228
Liabilities assumed . . . . . . (9,121) (1,495) (25,015)
Note payable. . . . . . . . . . (3,996) (1,343) (3,250)
Stock issued. . . . . . . . . . (1,475) (1,021) (750)
-------- -------- ---------
Net cash paid . . . . . . . . . $ 9,934 $ 3,499 $ 21,213
======== ======== =========
15. STOCKHOLDERS' EQUITY AND STOCK OPTION PLANS
In July 1996, the Company completed a secondary public offering of 1.4 million
new shares of its common stock. The net proceeds of $17.9 million were used to
reduce amounts outstanding under the line of credit. If this secondary offering
had been completed as of January 6, 1996, pro forma basic and diluted earnings
per share would have been $0.77 and $0.75, respectively, for fiscal 1996. This
computation assumes no interest expense related to the credit line and the
issuance of only a sufficient number of shares to eliminate the credit line at
the beginning of fiscal 1996.
In February 1997, the Company completed a secondary public offering of 1.02
million shares of its common stock. The net proceeds of $23.3 million were used
to reduce amounts outstanding under the Company's line of credit. If this
secondary offering had been completed as of January 6, 1997, pro forma basic and
diluted earnings per share would have been $1.38 and $1.34 , respectively, for
fiscal 1997. This computation assumes no interest expense related to the credit
line and the issuance of only a sufficient number of shares to eliminate the
credit line at the beginning of fiscal 1997.
F-14
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On September 6, 1996, the Company's Board of Directors authorized a
three-for-two stock split in the form of a stock dividend payable October 4,
1996, to shareholders of record September 19, 1996. The split resulted in the
issuance of 2.1 million new shares of common stock. The stated par value of each
share was not changed from $0.01. A total of $20 thousand was reclassified from
the Company's additional paid in capital account to the Company's common stock
account. Accordingly, net income per common share, weighted average shares
outstanding and stock option plan information were restated to reflect the stock
split.
On September 8, 1997, the Company's Board of Directors authorized a
three-for-two stock split in the form of a stock dividend payable October 6,
1997, to shareholders of record September 22, 1997. The split resulted in the
issuance of 3.8 million new shares of common stock. The stated par value of each
share was not changed from $0.01. A total of $38 thousand was reclassified from
the Company's additional paid in capital account to the Company's common stock
account. Accordingly, net income per common share, weighted average shares
outstanding and stock option plan information were restated to reflect the stock
split.
In January 1998, the Board of Directors of the Company approved the repricing of
certain unexercised options granted under the 1992 Non-Qualified and Incentive
Stock Option Plan. As a result, 109,649 options granted during fiscal 1997 were
repriced to $16.63 per share from $34.19 per share. These amounts approved by
the Board of Directors do not give effect to the stock split approved after the
date of the original grant of the options.
The Company's 1992 Non-Qualified and Incentive Stock Option Plan provides
certain employees of the Company with options to purchase common stock of the
Company through options at an exercise price equal to the market value on the
date of grant. 990,000 shares of the common stock of the Company are reserved
for issuance under the plan. The plan will terminate ten years from the date of
adoption. Stock options granted under the plan are exercisable in accordance
with various terms as authorized by the Compensation Committee. To the extent
not exercised, options will expire not more than ten years after the date of
grant.
The Company's 1992 Outside Directors' Stock Option Plan provides outside
directors of the Company with options to purchase common stock of the Company at
an exercise price equal to the market value of the shares at the date of grant.
175,000 shares of common stock of the Company are reserved for issuance under
the plan. The plan will terminate ten years from the date of adoption. Pursuant
to the plan, an option to purchase 10,000 shares of common stock automatically
will be granted on the first day of the initial term of a director. An
additional 2,500 shares of common stock automatically will be granted to an
eligible director upon the first day of each consecutive year of service on the
board. Options may be exercised after one year from the date of grant for not
more than one-third of the shares subject to the option and an additional
one-third of the shares subject to the option may be exercised for each of the
next two years thereafter. To the extent not exercised, options will expire five
years after the date of grant.
F-15
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following summarizes the stock option transactions under the plans for the
three fiscal years ended January 5, 1999:
Weighted Average
Shares Exercise price
--------- -----------------
Options outstanding January 5, 1996 218,540 $ 8.32
Granted . . . . . . . . . . . . . . 149,600 13.83
Exercised . . . . . . . . . . . . . (197,047) 8.97
Stock split effect. . . . . . . . . 121,082 7.21
---------
Options outstanding January 5, 1997 292,175 7.27
Granted . . . . . . . . . . . . . . 216,328 30.10
Exercised . . . . . . . . . . . . . (95,260) 8.70
Forfeitures . . . . . . . . . . . . (4,700) 34.19
Stock split effect. . . . . . . . . 227,754 5.61
---------
Options outstanding January 5, 1998 636,297 12.01
Granted . . . . . . . . . . . . . . 278,953 17.75
Exercised . . . . . . . . . . . . . (264,990) 8.98
Forfeitures . . . . . . . . . . . . (7,175) 10.24
Repricing effect. . . . . . . . . . (54,826) 6.16
---------
Options outstanding January 5, 1999 588,259 $ 13.97
=========
The following summarizes options outstanding and exercisable at January 5, 1999:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------
Weighted Avg. Number
Range of Number Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 1/5/99 Contractual Life Exercise Price at 1/5/99 Exercise Price
- ---------------- ------------------ ---------------- --------------- ----------- ---------------
3.63 to $7.95 . 161,249 1.54 $ 5.53 134,417 $ 5.43
13.25 to $19.54 402,010 1.20 $ 16.70 393,260 $ 16.76
21.50 to $28.25 25,000 3.50 $ 24.45 25,000 $ 24.45
------------------ -----------
588,259 1.48 $ 13.97 552,677 $ 14.36
================== ===========
The weighted average fair value at date of grant for options granted during
fiscal 1997 and 1998 was $6.77 and $7.00, respectively. The fair value of
options at the date of grant was estimated using the Black-Scholes model with
the following weighted average assumptions:
Fiscal 1996 Fiscal 1997 Fiscal 1998
------------ ------------ ------------
Expected life (years) 1.7 1.8 2.0
Interest rate . . . . 5.8% 6.1% 5.3%
Volatility. . . . . . 55% 56% 69%
Dividend yield. . . . 0% 0% 0%
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date for awards in fiscal 1995 and 1996
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
F-16
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per
share amounts) Fiscal 1996 Fiscal 1997 Fiscal 1998
------------ ------------ ------------
Net income - as reported . . . . . . . . . $ 6,232 $ 16,313 $ 20,159
Net income - pro forma . . . . . . . . . . $ 5,777 $ 14,455 $ 18,929
Net income per common share - as reported
Basic. . . . . . . . . . . . . . . . . . 0.80 1.48 1.76
Diluted. . . . . . . . . . . . . . . . . 0.77 1.44 1.72
Net income per common share - pro forma
Basic. . . . . . . . . . . . . . . . . . 0.74 1.31 1.65
Diluted. . . . . . . . . . . . . . . . . 0.71 1.27 1.57
In fiscal 1996 and 1997, 3,076 and 544, respectively, shares of common stock
were awarded to officers of the Company. Compensation expense resulting from the
awards was $40 thousand in fiscal 1996 and $20 thousand in fiscal 1997.
16. LITIGATION
There are various legal actions arising in the normal course of business that
have been brought against the Company. Management believes these matters will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
17. SEGMENT INFORMATION AND CONCENTRATIONS
Segment Information - The Company operates in two industry segments: products
and services. The products segment is primarily engaged in the sale,
distribution and leasing of microcomputers and related products. The services
segment offers three categories of services: life cycle services;
internetworking services and customer support services. Life cycle services
include warranty and non warranty repair and maintenance; a full range of
install, move, add or change services; redeployment and mobile systems
management; evaluation and tracking of information technology assets; and
end-of-life services. Internetworking services include project management;
network design, integration, management, migration and support; and cabling
services. Customer support services include customized help desk services,
Internet-based training on many popular software packages and
video/teleconferencing services. The Company provides products and services
primarily to large and medium sized corporate, health care, governmental,
financial and educational customers located in the United States. 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. Certain reclassifications have been
made to conform to segment reporting. The Company evaluates performance based on
operating earnings of the respective business units. Intersegment sales and
transfers are not significant.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. (in thousands)
Fiscal 1996
--------------------------------------
Products Services Consolidated
--------- ------------ -------------
Revenue . . . . . . . . . . . $ 309,962 $ 26,396 $ 336,358
Income from operation . . . . $ 13,497 $ 3,372 $ 16,869
Total assets. . . . . . . . . $ 103,698 $ 17,682 $ 121,380
Capital expenditures . . . . . $ 3,205 $ 254 $ 3,459
Depreciation and amortization $ 2,223 $ 338 $ 2,561
F-17
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Fiscal 1997
--------------------------------------
Products Services Consolidated
--------- ------------ -------------
Revenue . . . . . . . . . . . $ 446,239 $ 45,209 $ 491,448
Income from operation . . . . $ 20,815 $ 6,033 $ 26,848
Total assets. . . . . . . . . $ 142,562 $ 24,702 $ 167,264
Capital expenditures . . . . . $ 1,444 $ 955 $ 2,399
Depreciation and amortization $ 3,358 $ 582 $ 3,940
Fiscal 1998
--------------------------------------
Products Services Consolidated
--------- ------------ -------------
Revenue . . . . . . . . . . . $ 555,433 $ 72,495 $ 627,928
Income from operation . . . . $ 23,118 $ 11,980 $ 35,098
Total assets. . . . . . . . . $ 212,027 $ 42,199 $ 254,226
Capital expenditures . . . . . $ 2,807 $ 374 $ 3,181
Depreciation and amortization $ 4,382 $ 995 $ 5,377
Concentrations - During fiscal 1998, approximately 30.2% of the Company's total
net sales and revenues were derived from its top ten customers.
Due to the demand for the products sold by the Company, significant product
shortages occur from time to time because manufacturers are unable to produce
certain products to meet increased demand. Failure to obtain adequate product
shipments could have a material adverse effect on the Company's operations and
financial results.
The Company is required to have authorizations from manufacturers in order to
sell their products. The loss of a significant vendor's authorization could have
a material adverse effect on the Company's business.
18. SUBSEQUENT EVENTS
Pomeroy Select Integration Solutions, Inc. On January 6, 1999, the Company
contributed the assets, liabilities, business, operations and personnel of its
IT services business to POMEROY SELECT in exchange for 10,000,000 shares of its
Class B Common Stock. Pomeroy Select's Board of Directors authorized management
to file a registration statement with the Securities and Exchange Commission
(the "SEC") with respect to an initial public offering of its Class A Common
Stock.
F-18